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Archive for August, 2011

Chicago Architecture Boat Tour and the Great Depression

August 30, 2011 4 comments

The boat tour is wonderful.  It’s astonishing.

What’s even more astonishing is that my wife turned to me and said, “There must have been a huge real estate bubble in the late 1920’s because so many of these buildings were built in 1928, 1929, and 1930.”

I’d say a solid 1/4 of the buildings along the river were built in the years 1927-1931.

 

 

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Categories: Main

High Corporate Profits do not cause hiring. High demand causes hiring

August 30, 2011 1 comment

Last quarter, corporate profits were at an all time record as a percentage of GDP.    Yet, we still have high unemployment.

This isn’t a mystery – it’s historical fact.

Keep the meme alive!

Businesses hire when they are swamped with demand, not when they have high profits.   

The Useless Intertemporal Government Budget Constraint: Not Economics

August 30, 2011 11 comments

One of the amazing things about economics is that the major flaws are defined out of existence and then just ignored by most of the profession.

I’ve already went through many reasons why monetary policy sucks. These aren’t controversial statements.  Monetary policy is a bad way to try and influence an economy even if it works.

Then, one of the most common statements in economics, I = S, gets the accounting wrong.   This is the MMT view of I = S and of most of modern macroeconomics – that it gets the accounting wrong so it can’t get the economics right.

But probably the most egregious error in economics is the Inter-temporal Government Budget Constraint.

First, I think the no-Ponzi assumption is stupidly wrong.   It’s impossible to tell ever tell if it holds, and so people can make up anything they want about the IGBC and they might be right.

It turns out that Minnesota fed president Kocherlakota agrees with me, as I’ll show later in another post.

Second, I am  sure that even if it does hold, its worthless to use anything but what we know today about inflation to make decisions about it.

(Thanks again to Peter D for the excellent summary.)

So if the assumption is a boneheaded assumption, we shouldn’t use the IGBC.  But even if the assumption holds, then we must take primary market information seriously and only use inflation as our policy guide.

Now, I have a 3rd critique of the IGBC.  The IGBC isn’t economics.   Nick Rowe says that economics requires most models to contain elements of both supply and demand to be considered to be economics.

This is not a controversial statement.  It’s a common sense observation about what is and what isn’t economics.

And by this common sense observation, the IGBC isn’t economics.

Here is a link to the cannonical Walsh derivation of the IGBC.   Go to page 136.   You can get a similar derivation in Fullwiler’s “Interest Rates and Fiscal Sustainability“, pages 7-9.

Where is the demand for (G-T) in the IGBC?  There is none.

We know:

  1. G – T is the net financial assets issued by the government by identity.
  2. There is so much demand today for the assets generated by G -T that investors are willing to knowingly lose money over a period of 5 years just to have these assets.   We have negative real interest rates in the 5 year, as of August 29th, 2011, indicating massive real demand.  People hold over $14T worth of (G-T) in our real world – indicating massive nominal demand.
So the IGBC isn’t economics.  It can’t be economics, because there is no demand for G – T in the equation.
For this constraint to be economics, it needs to reflect the staggering demand for G -T.  We can call them “net financial assets” or “government borrowing” or something like that, but we know by identity that these equal G – T.
Yet, according to Walsh:
“In most traditional analyses, fiscal policy is assumed to adjust to ensure that the government’s inter-temporal budget is always in balance, while monetary policy is free to set the nominal money stock or the nominal rate of interest. “

We live in a world where the demand for (G -T) by the U.S. government has been high for the entire life of the country.  We live in a world where right now, today, this demand is so high that people are gladly losing money to purchase (G – T).

Yet, ‘most traditional analysis’ use a model that assumes zero supply or demand for G – T.

This isn’t economics.  It’s religion.

This is seeing the world through a stunted belief regime.  Enforcing this through deliberately hiding the truth of the matter though deliberately confusing non-experts and appeals to authority is anti-democratic.

Of course, the second you put demand into the IGBC, it becomes an equilibrium condition, not a constraint.  And then you get something very much like MMT, called the Fiscal Theory of the Price level.

 

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If Hyperinflation is coming, then we need to borrow much more

August 29, 2011 1 comment

Just a quick note today.

5 year real rates are nearly -1%.  But this assumes the U.S. actually sees the inflation that’s expected by the markets.

If we get hyperinflation of 10% per month or so – thats 200%+ per year –  the real rates of interest will be far more negative and far better for the U.S. government.

 

Categories: Main

I does not equal S

August 26, 2011 28 comments

One of the things about the world is that some facts are more fundamental than others.

Economists get these facts wrong all the time.

Specifically, many people think that I = S, or Investement = Savings

S does not equal I.  If you think S = I, you’re getting the accounting wrong. It’s a fundamental mistake that makes every thing that follows horribly misguided.

S can only equal I if we assume there is no government.

But we know:

  1. Governments are nearly always the institution that issues money.
  2. Governments can throw people in jail if they don’t pay their taxes in very specific ways with the money they issue.
By assuming the government out of the equation, you’re assuming that the most important and largest player in the world of money doesn’t exist.
I don’t know why you’d want to start from such a stunted version of the world.
If you assume the government away before you do the economics, you’re getting the accounting wrong.  
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Cutting Edge Monetary Policy: Pray for a Better Economy

August 26, 2011 9 comments

Dude, your beard does not have magical powers. It's pretty cool, but not that cool.

I’ve got a great idea.  I’ll start praying to Alan Greenspan for the economy to get better, and telling people I am praying for the economy to get better.

If they think I’m not serious about this prayer, I’ll show them the exact words of my prayer.   That will prove to them I’m really, really serious about this prayer.

Then when the people know I’m really serious, they will spend trillions.

Trillions!  Imagine of all the spending they will do – and the massive hiring spree that will take place!

All this economic activity from the power of a few words.  I thought printing money was nearly free, but this – this is even better.  It’s just a few breaths of air for Ben Bernanke.

Do not think this is a joke.  This idea is Cutting Edge Monetary Policy.  This is modern monetary policy.  Really it is.

The most prominent economists in the world tell us this is what we should do.

They think that Ben Bernanke a changing a few words in a speech will cause people to spend and lend trillions of dollars more than they would have otherwise.

They really think trillions of dollars of spending are being held up because Ben Bernanke is a bit too mild with his words.

I say: This is faith based economics.   It has nothing to do with the real world and would not help even a whit.

MMT has a better idea on how to fix the economy.  MMT will use direct action on getting the economy moving.

Attack the demand problem directly with a payroll tax cut and infrastructure spending.

Mosler’s Law: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Remember, Businesses hire when they are swamped with demand, not when corporate profits are high.

I’m just sick that this prayer for more economic activity is the best we can offer to the world right now.  Absolutely sick.

[Update:  Astonishing video footage from a recent conference on Monetary Policy. thx MA!]

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What’s the plan if BoA and Wells Fargo are insolvent?

August 24, 2011 10 comments

Does anyone know?  Is there any plan but a normal FDIC unwind?

The lack of discussion around this topic is disturbing.  Interfluidity says we cannot know if a bank is insolvent or not according to it’s public filings.    So it’s just a matter of guessing anyway.

But a bank as big as BoA going bust will have systemic impact.  That doesn’t include Wells Fargo going a few days or weeks later.

Plus, the politics are horrible – if it requires a bailout beyond the size of the FDIC fund, what’s going to happen?

I hope that the government goes all Swedish on BoA – but who can tell?

 

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