Archive for September, 2011

Remarkable Paul Krugman admission

September 29, 2011 10 comments

Remarkable admission from Paul Krugman.

First, he doesn’t like calling it a science.  This is understandable.
But look at his statements about models. They are a bit terrifying, because he is one of the top guys in the field.  He’s basically saying that the models they use are not that great, and they don’t map to the real world.
One of the core premises of MMT is that money accounting really matters.  In fact, it matter so much that all models need to take it into account.  Not only that, the models have to reflect how these flows happen in the real world, and where the stocks end up.
One of the very important things about the world is that to understand something, we need to be able to measure it first.  Economists try to deal with things we can’t measure accurately or even at all.  then they put things into the model that make it even more difficult to measure what’s going on in the world.
So how can we tell if something is working or not working?  We’ve got to measure it.
If you spend your time looking at things that can’t be measured, don’t be surprised if you spend 80 years talking about those things without coming to a conclusion.
Is there any field as important as economics that chooses to argue about stuff it can’t measure, see, or observe?
Update: Noahopinion comes to a similar conclusion and says it more diplomatically.   I was going to name names too, and specifically Scott Sumner on the exact same quote.  You don’t have to look far in the economics profession to find a “hold your nose” approach to both data and models that use measurable observations as their initial basis.
I’ve stated similar ideas  many times here at the TradersCrucible.  Measurement is extremely important.  Observation is extremely important.
It’s good to see someone like Noah get on this bandwagon…

In a few hours Sylvia Nasar and I will have an on-stage dialogue at the 92nd Street Y, centered around her new book The Grand Pursuit, which offers a set of fascinating portraits of the makers of economics. (Irving Fisher invented the Rolodex?) But as I was reading her book I have to admit that I found myself wondering whether there’s much to celebrate.

I’ve never liked the notion of talking about economic “science” — it’s much too raw and imperfect a discipline to be paired casually with things like chemistry or biology, and in general when someone talks about economics as a science I immediately suspect that I’m hearing someone who doesn’t know that models are only models. Still, when I was younger I firmly believed that economics was a field that progressed over time, that every generation knew more than the generation before.

The question now is whether that’s still true. In 1971 it was clear that economists knew a lot that they hadn’t known in 1931. Is that clear when we compare 2011 with 1971? I think you can actually make the case that in important ways the profession knew more in 1971 than it does now.

I’ve written a lot about the Dark Age of macroeconomics, of the way economists are recapitulating 80-year-old fallacies in the belief that they’re profound insights, because they’re ignorant of the hard-won insights of the past.

What I’d add to that is that at this point it seems to me that many economists aren’t even trying to get at the truth. When I look at a lot of what prominent economists have been writing in response to the ongoing economic crisis, I see no sign of intellectual discomfort, no sense that a disaster their models made no allowance for is troubling them; I see only blithe invention of stories to rationalize the disaster in a way that supports their side of the partisan divide. And no, it’s not symmetric: liberal economists by and large do seem to be genuinely wrestling with what has happened, but conservative economists don’t.

And all this makes me wonder what kind of an enterprise I’ve devoted my life to.

Categories: Main

Euro Sustainable as is means: The ECB is mean and perhaps slightly evil

September 27, 2011 4 comments

Warren has a great post up about how the current situation in the Euro can go on forever.   There does not need to be a new solution, a new program, or any voting.  What’s happening in the Eurozone now – the ECB writing checks to buy Sovereign debt whenever they feel like it – can happen forever.

Notice this means they could increase their purchases and drive down rates for Greece or any of the other countries to levels that put them much closer to a path to solvency.

They are choosing not to do this, because they are mean.  Even if they have political constraints, it’s way past the time where Trichet and the other ECB members should have held multiple press conferences on what they have the power to do.

They should be out there saying  “We can buy all of the debt we want in any quantities. We’re not going to do so right now to prevent inflation, but we could buy much, much more debt at the current time without much inflation impact.”

Lots of people are going through intense misery right now, all because the ECB won’t stand up and say the obvious.

The current estimates for 2012 GDP in Greece are about 1%.  Does anyone – anyone at all – really believe they are going to see positive growth?  And this is after 2 years of recession.


Categories: Main

MMT Modeling

September 26, 2011 Comments off

We crazy MMTers are always saying “You need to follow the accounting!” to professional economists.  They say they do.  But I don’t think they do.

In a very deep way, any economy is a totally closed system.  All of the books and numbers add up somehow. Every balance sheet can be reconciled with every other balance sheet in the economy, and every statement of cash flows, and every income statement – they can all be reconciled if you could just take the time to do it.

There aren’t any gaps.  It’s all filled in.

This premise drives MMT.  All of this money stuff adds up – so it can be cross referenced against other parts of the economy.  Something interesting to note is that it also adds up in the future too, and added up in the past.

The cool thing about this type of thinking is that you can create models of the economy using the “it all adds up” idea as an end point at any given moment, and then give a bit of an impluse to parts of the economy, and move forwards in time.

This kind of thinking is not really that new.  You can go and download simple predator/prey models, and find out what happens in closed economies over time.   There are lots of things like traffic modeling that has taken huge steps forward over the last decade.

All of this is due to thinking about systems as having inputs that impact the model, and there is an interaction between the parts that “adds up”.

In an MMT world, a Steve Keen world, a Wynne Godley world, this type of modeling is very possible.   We have computers that can keep track of lots of numbers, and are easily able to apply rules to how the numbers change, given inputs to the economy.

These models are pretty hard to make in some ways, but very easy to understand.   You know how the parts fit together and what they must add up to be.

The new MMT Blogger Fred Decker is creating models like this, and they seem to be pretty cool.  I don’t have the software to be able to use these models yet, or the time until probably next year.

But I am not surprised that these models are coming and being built.  And the great, great thing about these models is that many, many of the numbers that go into the models are observable and measurable in something like real time.

So we can see not just the inputs to what goes into the model, these models can also be calibrated against real world data in something like complete manner.


Categories: Main Tags:

Wow! Weeks!

September 24, 2011 2 comments

Hello everyone.  It’s been a few weeks.  I thought it would be a few days, but here we are.

Regularly scheduled programming will resume, if on a light schedule.


Categories: Main

Fraud as a Business Model

September 6, 2011 6 comments

These people knew exactly what they were doing.

“The Wall Street Journal reviewed data showing that a $38 million subprime-mortgage bond created in June 2006 was referenced in more than 30 debt pool causing around$280 million in losses to investors by 2008.”

Of course, Goldman wasn’t the only one.  Great catch by Tom Hickey on a Janet Takavoli article. Note that Janet Takavoli is semi-frequently on CNBC.

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Swiss Intervene – and it’s widely accepted they have unlimited capacity to sell CHF

September 6, 2011 9 comments

Can Central banks go broke?  I don’t think they can.

Todays action by the Swiss is different from other interventions we’ve seen.  Well not the action exactly, but the words.

“The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited

“Unlimited Quantities” .  Shocking words.

Still, not a peep by the analyst community that this will cause gigantic expansion of the SNB balance sheet, or unacceptable losses to the SNB.

It’s become widely accepted common knowledge that Central Banks can’t go broke.

Categories: Main Tags: ,

Monetary policy and Human misery

September 6, 2011 37 comments

Labor Share of income Plummets in the last Decade

Brad Delong tells good stories.  Here he tells a story about monetary policy and about how monetary policy is supposed to work.

Back before 1990 a typical recession involved the Federal Reserve fighting inflation by imposing a liquidity squeeze on the economy–raising interest rates, making a whole bunch of business models unprofitable, and so inducing businesses then fire their workers But after the excess supply in the labor market registered, wage increases stopped, and inflation expectations fell, the Federal Reserve would simply reverse course and return asset prices to their previous levels. Thus if you were a business it was easy to figure out what you should do after the macroeconomic storm had passed. Since asset prices and interest rates were back at their previous level, what you had been doing three years earlier before the recession would still be profitable. So all you had to do is reproduce your division of labor as it had been three years before.”

The bold’s mine. Monetary policy works by inducing misery on random people and businesses.  Note that his article is a long ode to fiscal policy.

Update: Here is the share of income for Labor from that well known communist columnist, David Frum.  Thx Beowulf!

Also if you need more grapics – go here check out how wonderful modern monetary policy (post Volker) is for workers wages.


[Update 11-2-2011: Welcome Zerohedgers! Feel free to walk around and find out how money works!  The red meat can be found here, but I write lots of offensive posts about why monetary policy sucks. Thanks el Veijo!  I used to know someone named oldman before he passed, and he was…worthy.  ]

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