Saturday, August 31, 2013

unlimited injections capacity suggests
the CB thru mediators could take over all payments not paid in cash
no more payables no more receivables
outside the  CB system

recall IOU credit systems are open ended theory
but subject to convulsive "phase change "

the wicked interconnectivity of the ad hoc  payments grid
is inherently unstable

replace it

Tuesday, August 27, 2013

mainly mealy anti bankster hegemony salvo

Banks, economists and politicians: just follow the money
"Economics rightly comes in for a lot of stick for failing to appreciate the possibility of a financial crash before 2007/8. However it is important to ask whether things would have been very different if it had. What has happened to financial regulation after the crash is a clear indication that it would have made very little difference.

There is one simple and straightforward measure that would go a long way to avoiding another global financial crisis, and that is to substantially increase the proportion of bank equity that banks are obliged to hold. This point is put forcibly, and in plain language, in a recent book by Admati and Hellwig: The Bankers New Clothes. (Here is a short NYT piece by Admati.) Admati and Hellwig suggest the proportion of the balance sheet that is backed by equity should be something like 25%, and other estimates for the optimal amount of bank equity come up with similar numbers. The numbers that regulators are intending to impose post-crisis are tiny in comparison.

It is worth quoting the first paragraph of a FT review by Martin Wolf of their book:

“The UK’s Independent Commission on Banking, of which I was a member, made a modest proposal: the proportion of the balance sheet of UK retail banks that has to be funded by equity, instead of debt, should be raised to 4 per cent. This would be just a percentage point above the figure suggested by the Basel Committee on Banking Supervision. The government rejected this, because of lobbying by the banks.”

Why are banks so reluctant to raise more equity capital? One reason is tax breaks that make finance using borrowing cheaper. But non-financial companies, that also have a choice between raising equity and borrowing to finance investment, typically use much more equity capital and less borrowing. If things go wrong, you can reduce dividends, but you still have to pay interest, so companies limit the amount of borrowing they do to reduce the risk of bankruptcy. But large banks are famously too big to fail. So someone else takes care of the bankruptcy risk - you and me. We effectively guarantee the borrowing that banks do. (If this is not clear, read chapter 9 of the book here.  The authors make a nice analogy with a rich aunt who offers to always guarantee your mortgage.)

The state guarantee is a huge, and ongoing, public subsidy to the banking sector. For large banks, it is of the same order of magnitude as the profits they make. We know where a large proportion of the profits go - into bonuses for those who work in those banks. The larger is the amount of equity capital that banks are forced to hold, the more the holders of that equity bear the cost of bank failure, and the less is the public subsidy. Seen in this way it becomes obvious why banks do not want to hold more equity capital - they rather like being subsidised by the state, so that the state can contribute to their bonuses. (Existing equity holders will also resist increasing equity capital, for reasons Carola Binder summarises based on the work of Admati and Hellwig and coauthors.)

This is why the argument is largely a no brainer for economists. [1] Most economists are instinctively against state subsidies, unless there are obvious externalities which they are countering. With banks the subsidy is not just an unwarranted transfer of resources, but it is also distorting the incentives for bankers to take risk, as we found out in 2007/8. Bankers make money when the risk pays off, and get bailed out by governments when it does not.

So why are economists being ignored by politicians? It is hardly because banks are popular with the public. The scale of the banking sector’s misdemeanours is incredible, as John Lanchester sets out here. I suspect many will think that banks are being treated lightly because politicians are concerned about choking off the recovery. Yet the argument that banks often make - holding equity capital represents money that is ‘tied up’ and so cannot be lent to firms and consumers - is simply nonsense. A more respectable argument is that holding much more equity capital would translate into greater costs for bank borrowers, but David Miles suggests the size of this effect would not be large. (See also Simon Johnson here, John Plender here and Thomas Hoenig here.) In any case, public subsidies are bound to be passed on to some extent, but that does not justify them. Politicians are busy trying to phase out public subsidies elsewhere, so why are banks so different?

There is one simple explanation. The power of the banking lobby (and the financial industry more generally) is immense, from campaign contributions to regulatory capture of various kinds. It would be nice to imagine that the UK was less vulnerable than the US in this respect, but there are good reasons to think otherwise. [2] As a result, the power and influence of banks and bankers within government has hardly suffered as a result of the Great Recession that they played a large part in creating.

So to return to my original question, would it really have made much difference if more mainstream economists had been fretting about the position of the financial sector before the crisis? I think they would have been ignored then even more than they are being ignored now. The single most effective way of avoiding another financial crisis is to reduce the political influence of the banking sector.       "

columbian strike over ruinous home market conditions produced by yankee trade pact

A nationwide strike in Colombia--which started as a rural peasant uprising and spread to miners, teachers, medical professionals, truckers, and students--reached its 7th day Sunday as at least 200,000 people blocked roads and launched protests against a U.S.-Colombia Free Trade Agreement and devastating policies of poverty and privatization pushed by US-backed right-wing President Juan Manuel Santos.
"[The strike is a condemnation] of the situation in which the Santos administration has put the country, as a consequence of its terrible, anti-union and dissatisfactory policies," declared the Central Unitaria de Trabajadores (CUT), the country's largest union, in a statement.
The protests and strikes, largely ignored in the English-language media, have been met with heavy crackdown from Colombia's feared police, with human rights organization Bayaca reporting shootings, torture, sexual assault, severe tear-gassing, arbitrary arrests, and other abuses on the part of state agents. Colombia's Defense Minister Juan Carlos Pinzon recently claimed that the striking workers are being controlled by the "terrorist" Revolutionary Armed Forces of Colombia (FARC), in a country known for using unverified claims of FARC connections as an excuse to launch severe violence against social movements.
"Violent clashes continue in rural areas where farmers and truck drivers have been setting up roadblocks since Monday, and the Santos administration has deployed 16,000 additional military personnel to 'control the situation,'" Neil Martin of the Colombia-based labor solidarity organization Paso International told Common Dreams Sunday. "There have not been deaths reported in relation to this violence, but human rights organizations and YouTube videos have documented military personnel beating protestors, stealing supplies, carrying out vandalism unwarranted arrests, and generally inciting violence."
Protesters are levying a broad range of concerns about public policies that devastate Colombia's workers, indegenous, and Afro-Colombian communities. The US-Colombia Free Trade Agreement has forced small farmers to compete with subsidized US products, made them more vulnerable to market fluctuations, and eroded their protections and social safety nets through the implementation of neoliberal policies domestically. Farmers are demanding more protections and services in a country beset with severe rural poverty.
Meanwhile, the Colombian government is handing out sweetheart deals to international mining companies while creating bans and roadblocks for Colombian miners. Likewise, the government is giving multinational food corporations access to land earmarked for poor Colombians. Healthcare workers are fighting a broad range of reforms aimed at gutting and privatizing Colombia's healthcare system. Truckers are demanding an end to low wages and high gas prices.
"This is the third or fourth large-scale non-military rural uprising this year," Martin told Common Dreams.
Colombian workers organizing to improve their lives are met with an onslaught of state violence: Colombia is the deadliest country in the world for union activists, according to the AFL-CIO Solidarity Center, and 37 activists were murdered in Colombia in the 1st half of 2013 alone, leading news weekly Semana reports.
Santos, who says he refuses to negotiate while the strikes are taking place, has so far been unsuccessful in his efforts to quell the swelling protests that are paralyzing much of the country, particularly in rural areas.
"[W]e just want solutions to our problems," Javier Correa Velez, the head of a coffee-growers association called Dignidad Cafetera, told the Miami Herald. "The strike is simply a symptom of an illness that the entire agriculture sector is suffering from

Monday, August 26, 2013

a great winner since THE GREAT HI FI CONVULSION..product price inflation

yup here's an easy forecast :

from now till whenever
 secular  PPI is not to be minimized even if stabilized
it might even go up to say 3% or 4%

opportunistic cyclical  contraction triggered inflation rate reductions
will  no longer  become the new target number

   secular rate  reductions are over

targets will now have memory de facto
and some bursts of higher PPI will get built into policy reaction functions

this is not to say PPI policy has arrived at full debt load control
with  cyclical bouts of serious financial "repression"

but knee jerk full court " PPI is a sin " ?

those days are over ...for now

% with annual zero wage rate change

Percentage of workers with zero wage change

Sunday, August 25, 2013

more farmer Farmer on animal spirits and the belief function : " model animal spirits with a new fundamental the belief function. "

"Central banks throughout the world predict inflation with new-Keynesian models"

"  after a shock, the unemployment rate returns to its so called “natural rate’."

" That assumption is called the Natural Rate Hypothesis (NRH)."

" a body of work, published over the last decade is critical of the NRH."

" the NRH does not hold in the data "

" an alternative paradigm  explains why it does not hold."

"replace the NRH with the assumption that the animal spirits of investors
 are a fundamental of the economy"
"  model animal spirits with a new fundamental  the belief function. "
" to operationalize that idea  construct an empirical model"

"compare performance to  the new-Keynesian Phillips curve"

"  model animal spirits with a new fundamental  the belief function. "

Thursday, August 22, 2013

back casting rates ...... breath taking gyro gear loose contrivance


"Regarding long-term real rates
 theory tells us that these should be related to potential GDP growth."

"comparing  an estimate of potential growth from the Congressional Budget Office
 with our twenty-year real rate backcast"

" with the exception of the mid-1970s they track closely "

good fit  ?
 maybe after the Volcker dammerung

forget the mid 70's
    notice the entire pre 83 interval

when reality gets interesting
   pin head technicians " synthetic devices " flop on their noses

expectations and reality

Monday, August 19, 2013

pk nk no ok

"Business cycle peaks are always times when the economy is operating at capacity; troughs are times when the economy is operating below capacity"

", but how far below varies from cycle to cycle."

"This is not at all what standard New Keynesian models say. In those models “potential output” is what the economy would produce if prices were perfectly flexible. "

(Leave on one side the question of whether flexible prices get you to full employment in a liquidity trap, especially with problems of debt overhang)."

" In the short run, however, prices are sticky,
 so we’re often not at potential;
 but the economy can run above as well as below potential
 and in fact
there would be no necessary reason why underemployment
should be more common than overemployment."

"Largely thanks to this theoretical conclusion,
 it has become standard to describe the job of monetary policy
 as one of “stabilization”, rather than the achievement of full employment"

"Like Fatas and Mihov, however,
 I don’t think this is right."

" Or more accurately, I don’t feel that it’s right."

" What lies behind that feeling?"

"Partly, I think, it’s the historical record:
booms are more similar than busts."

" To take the extreme case,
clearly we’ve never had a period when the economy
was as far above capacity as it was below capacity in the Great Depression."

" And even in the postwar record, if we look at unemployment rates,
troughs – local minima in the rate – are more closely clustered than peaks – local maxima:"

"This difference in spread would be even more pronounced, I believe, if we adjusted for changes in demography."

"There’s also the now very clear evidence
 that the old notion that wages are sticky downward in a way they’re not sticky upward
 is entirely true –"

" and downward nominal wage rigidity eliminates the symmetry
between over- and under-employment."

 Here’s the SF Fed data:

Percentage of workers with zero wage change
San Francisco Fed Percentage of workers with zero wage change
"Last but maybe not least,
 there’s the question of what’s supposed to be going on
when the economy is operating above capacity"

". How do you force people to work more than they would want to in equilibrium? "

"Now, NK models do have an answer of sorts:
 they’re always models characterized by imperfect competition,
so prices are above marginal cost,
and there’s a sense in which the economy is always
 operating with some excess capacity
 in the sense that people are willing to produce more at current prices."

" But my vague sense is that this only gives you a limited amount of wiggle room,
 and that really big upward deviations in output can’t happen,
   while really big downward deviations can."

"So, why should you care?
 Well, Fatas and Mihov have it right:
 if the business cycle is a matter of the economy falling below capacity,
   rather than fluctuating around potential output,
the costs of recessions are much bigger than often portrayed,
   and focusing on “stabilization”
             greatly understates the importance of good macro policy"

is FED policy all about anchoring "output price inflation expectations" or tar pit-ing job markets ?

"anchoring and re anchoring  inflation  expectations"

what a con job that is  eh comrades

these anchors look to be unable to hold  us in  place
                          even in the slightest of storm currents

but this anchor conceit
              a bum figure  anyway

its a drag not an anchor
a drag  where?
  in the calculator of  market pricing  deciders ?

 we have no model of price setting

luckily for our professors from OZ
 this is not a problem

up there in OZ

as if
 with angelic grace

  the OZIAN  hosts
  have self  atomized both  themselves
  their  N product and  M job markets

      making every agent into a complete  price taker

chains across the oceans

" the value of imported inputs
 as a percentage of total nonenergy inputs in manufacturing in the United States
          16.4 percent in 2010,
  up from
    12.5 percent in 1998
       6.2 percent in 1984"

conservatism must change over time as fast as progressivism

otherwise it would lose contact with social reality point...if any
conservative "thought" changes
traditional values change
even  the caboose of social thought must move forward eventually
the number of intervening freight cars
 between the most reactionary ie the clown caboose
 and the lead  engine
may vary over time
yes more cars can be added at the back end
  but prolly not too many

john stew on the 4 compelling whys of civil free expression

 if any opinion is compelled to silence, that opinion may, for aught we can certainly know, be true. To deny this is to assume our own infallibility."

       " Second,
 though the silenced opinion be an error, it may, and very commonly does, contain a portion of truth; and since the general or prevailing opinion on any subject is rarely or never the whole truth, it is only by the collision of adverse opinions that the remainder of the truth has any chance of being supplied. "

"     Third,
 even if the received opinion be not only true, but the whole truth; unless it is suffered to be, and actually is, vigorously and earnestly contested, it will, by most of those who receive it, be held in the manner of a prejudice, with little comprehension or feeling of its rational grounds"

" fourth ,
 the meaning of the doctrine itself will be in danger of being lost, or enfeebled, and deprived of its vital effect on the character and conduct: the dogma becoming a mere formal profession, inefficacious for good, but cumbering the ground, and preventing the growth of any real and heartfelt conviction, from reason or personal experience."

why I don't hat tip

who cares about my hat tip

of course quotes are necessary to indicate
" these ain't my words pard "

Sunday, August 18, 2013

the han party still lacks a coherent country wide Georgio-Marxist land policy

the foundation should be a national policy of ground rent extraction
above  the 90% line if plausible

existing  experiments  with local "property taxation look to be headed
                                                        way off  the correct course

                                               ---  or so it would seem ---

here's a few out takes
 from a recent Global  Parnassian  Press club take away :

"Efforts in China to broaden a pilot program that deploys property taxes
  aimed at taming the real-estate market
                                      are running into difficulties."

" for the past three years the party  instituted a number of property-market control

including property-tax pilot programs in Shanghai and Chongqing,"

"aiming to head off risks of a bubble bursting and to improve affordability."

bubble pre emption is critical
but long run
  affordability is a wrong headed goal.... of course it is !!!

"Proponents say a nationwide property tax
 would increase the cost of holding property"

this is fallacious
a pure ground rent tax  reduces  market prices
 reduces pre existing  re-sale values

" reduces  incentives for speculators to buy"

cutting out the capitalized ground rent everywhere simultaneously
 is perhaps operationalized in real land markets
 only on a wack a mole basis

yes mistakes and losses will pile up

a whole very considerable class of rentier income can be scotched
with no long run curb on development

a land tax indeed would
" providing a more-permanent solution than the government's current reliance on administrative measures. "

property tax is an ambiguous composite of a user fee
 a partial household wealth tax
and a ground rent tax
these three and what ever other objective  might get rolled into a property tax
needs to be mutually articulated and separated

"Such a nationwide tax could also fit into China's pledge to stamp out rampant corruption"

yes by reducing local discretionary sale and credit activity

"The eastern city of Hangzhou and the southern boomtown of Shenzhen could be the next cities to implement the property-tax trial"

 "The State Administration of Taxation  is studying the expansion of the property-tax trials."

"Shanghai levies a 0.4% to 0.6% tax on second-home purchases."

" Chongqing, the tax is levied on existing high-end homes and villas and ranges from 0.5% to 1.2%"

tallying up:
" the taxes are too low and too subject to a complex web of conditions to slow home-price appreciation."

"Shanghai's average new-home prices rose 11.9% in June compared with a year earlier,
while Chongqing's rose 6.8%"

trifles indeed !!!!

such that

"the existing pilot programs in Shanghai and Chongqing, begun in 2011,
 have proved ineffective in holding down costs. "
which a ground rent tax would do
if costs here are market price for lots

" widespread opposition from local governments, officials, property developers,
are barriers to reform. "

just the sign it needs doing  and pronto !!!!!

" increasingly vocal middle class are also a barriers to reform. "
then get it done NOW

"a key meeting of the Communist Party leaders in October"
since its already
" seen as an opportunity to roll out reforms."


spade  work ?

" The housing ministry is  working on a nationwide database
 of homeowner information that would aid the implementation of the tax."

alas not too encouraging so far

but but but

putting in the mere  forms of extraction is still  a first step ....

  one li of a .thousand li journey

key incentive point  to attack:

"Local governments prefer the lump sum revenue from land sales
 to the slim pickings of property-tax income"

optimal answer since its a national tax

 pay the local gub for the "right to inititiate a ground rent extraction"
and again each time rates increase

ie capital payments on  the stream of revenues as they develop

"For China's middle class, a new tax would add to burdens


threaten the value of an asset now  essential for their retirement saving."

add a burden ?
a ground rent tax ?
no not in the long run

but yes it threatens the market value of already owned lots

retirement savings

the answer there is of course the devilish details of an evolving
  national pension system

at any rate

better to strike now
 then later
 when the  massive minute vested interests
                        are onlygoing to get  larger and larger

Saturday, August 17, 2013

its confirmed Royal is dead

what the hell was he  doing in Paraguay
with three bullets in his head

snipet from solute to
" comrade paine "

" the world revolution has lost an asteroid "
                                                    central committee    Nepal people's party

Thursday, August 15, 2013

thoma times

simon lewis works his base line model
pretty hard here
in particular the neutrality assumption NA

" •Why the Pigou Effect does not get you out of a liquidity trap - mainly macro "

NA is yet another of many attempts to smuggle in the class consequences of pareto neutrality
here its infinite horizon
inter temporal government budget balancing
yes as a iron rule of government action
okay in the base line model
the balance occurs over the infinite horizon
and is
faced by an infinite lived single rep agent
sustained within the fairly short run horizon
of real taxpayers and debt holders
which may possibly mean
within two cycle
this neutrality
this rebalancing looks onerous
and lopsidedly stacked against
adequate counter cyclical state fiscal action
an excessive build up of nominal state obligations
--even or should I say in particular fully monetized--
to fund recovery rate enhancing state to citizen pay outs
to meet the pledged neutrality
leads to a full off set
thru an expected inflation tax
Pareto constraints are bunk
ie requiring that
everyone after implementing a policy program
ends up at least as well off as without said program
is a formula that favors the have class the exploiter class the corporate class in our set up
over the job class
class struggle is non Pareto optimal at all times
in other words
social reality in a class cloven society
is inherently non Pareto optimal
the neutral state favors the private exploiters

paine said in reply to paine ...
mealy macro here
using the classic narrow definition
of the pigou effect
is btw
not generalizing his thesis
to cover the various QE channels
beloved of our ski mobiler

paine said in reply to paine ...
once again
as when on one the duke of toon town
old nick rowe's
microscopic stick figure
geek-o-nomical diversions
think of legal tender money as just
uncle sam issued
zero coupon consoles

paine said in reply to paine ...
the console has no obligatory redemption
removing the formal basis for
inter temporal budget neutrality

bakho said...
The inflation everyone worries about is the wage-price spiral. This is kept in check by policy to suppress wages. IOW, the Fed creates a mild recession to put people out of work and take out upward pressure on wages.
In an economy with 7 percent unemployment and a global supply of cheap labor, there is No domestic wage inflation. No monetary policy will create domestic wage inflation. Domestic wage inflation can only arise if labor has strong bargaining positions. This demands that the economy be at full employment. Then the wages of domestic labor can be bid up, but not until then.
Wages will inflate only if Congress raises min wage or if labor is in a strong enough position to bargain upward the wages of the employed. When is the last time labor showed an ability to bargain up wages for large numbers of American workers? We have had "temporary wage inflation" with some of the tax cuts for workers and transfer payments. However, those are gone.
The Friedman focus on monetary policy left out the very important mechanisms that set and inflate wages.

samuel said in reply to bakho...
I agree. Do all these economists need to lose their jobs and then have to go out and find new jobs at current wages to figure this out?

paine said in reply to bakho...

Mark A. Sadowski said in reply to bakho...
"In an economy with 7 percent unemployment and a global supply of cheap labor, there is No domestic wage inflation. No monetary policy will create domestic wage inflation. Domestic wage inflation can only arise if labor has strong bargaining positions. This demands that the economy be at full employment. Then the wages of domestic labor can be bid up, but not until then.
Wages will inflate only if Congress raises min wage or if labor is in a strong enough position to bargain upward the wages of the employed. When is the last time labor showed an ability to bargain up wages for large numbers of American workers? We have had "temporary wage inflation" with some of the tax cuts for workers and transfer payments."
First of all the labor share of income has been falling everywhere (advanced, emerging and developing) for over 20 years so globalization is unlikely to be the problem.
When did we last have tight labor markets and wage inflation generated by those markets? In 1997-2001.
Here's the unemployment rate versus the natural rate of unemployment from 1993-2005:
This caused real hourly and weekly earnings to increase significantly:
(Note that there was a shift upward because of the recession but that is normal and is more due to the layoff of low earning employees and not an improvement in real earnings.)
The labor share of factor income surged and this was followed by an increase in core inflation:
Did minimum wages or unions play a role?
Minimum wages were increased from $4.25 an hour in 1996 to $5.15 an hour in 1998. As a percent of average hourly earnings they increased from 36.5% in 1996 to 39.6% in 1998 but they fell back down to 35.4% by 2001, so that is unlikely.
The unionization rate of wage and salary workers was 14.0% in 1996 and fell to 12.9% in 2001 (Appendix A, table A1):
So it would seem to have been the tighter labor markets and not labor market institutions that brought this about.
Did fiscal policy contribute?
The cyclically adjusted budget balance increased from (-0.8%) of potential GDP in FY 1996 to 1.2% in FY 2000:
This was later cut to 0.6% in FY 2001 largely because of the first phase of Bush's tax cuts. But this was too small and too late to explain the increase in aggregate demand that occured in the late 1990s.
So the 1997-2001 wage boom was largely caused by expansionary monetary policy.

Tom Shillock said in reply to Mark A. Sadowski...
"First of all the labor share of income has been falling everywhere (advanced, emerging and developing) for over 20 years so globalization is unlikely to be the problem."
That is when the USSR imploded and workers in Asia began to enter the global workforce in a major way. See the work of Richard Freeman, labor economist at Harvard.

Paine said in reply to Tom Shillock...
Mark ski
Has no truck with global effects only a set of national snap shots
If these various time tagged snap shots
look synchronized in some dimension or other
Like falling wage share that must be about synchronized
National monetary policies
No way could
Growing cross border profit arbitrage
In a world economy segmented into localized price markets and wage pools
increase the share of each nations corporate earnings
in total national income
It's not globalization
look else where friend
Look to the nominal dynamics and the yield curve

Mark A. Sadowski said in reply to Tom Shillock...
I think you may miss my point.
Freeman's hypothesis is that an enlargement of the "global" workforce may explain why the labor share of income in OECD nations is falling. But this does not explain why the labor share of income is falling in the BRIC countries and other emerging and developing economies as well.
Furthermore the downward trend in labor share of income in the advanced world dates all the way back to the 1970s. The downward trend in the emerging and developing economies may date back further than 20 years but we do not have very good data.
Moreover econometric evidence does not support the hypothesis that globalization is responsible for declining labor share:
Effects of Globalization on Labor’s Share in National Income
Anastasia Guscina
December 2006
"The past two decades have seen a decline in labor’s share of national income in several industrial countries. This paper analyzes the role of three factors in explaining movements in labor’s share––factor-biased technological progress, openness to trade, and changes in employment protection––using a panel of 18 industrial countries over 1960–2000. Since most studies suggest that globalization and rapid technological progress (associated with accelerated information technology development) began in the mid-1980s, the sample is split in 1985 into preglobalization/pre-IT revolution and postglobalization/post-IT revolution eras. The results suggest that the decline in labor’s share during the past few decades in the OECD member countries may have been largely an equilibrium, rather than a cyclical, phenomenon, as the distribution of national income between labor and capital adjusted to capital-augmenting technological progress and a more globalized world economy."
The results on page 20 (Table A2.1) are relevant. Trade openness has a significant positive effect on the level (but not rate of change) of labor share of income pre-1985 and a significant negative effect on the level of labor share of income post-1985. More importantly is the effect of trade with developing countries, which is significantly positive in levels pre-1985 and positive although insignificant post-1985.

bakho said in reply to Mark A. Sadowski...
You confuse correlation with cause and effect.
Tight labor domestic labor markets and highest in a long time employment rates indicated a tight domestic labor market. The tight market caused employers to bid up wages. Money supply was much more expansionary post 9/11 and post fiscal crisis without causing wages to boom. So expansionary monetary policy, by itself is not sufficient to cause wages to increase.

Paine said in reply to bakho...
For mark correlation is cause
That is once you sort true an incomplete distorted list of alternatives
Till only your nominated driver remains
Yes it's shooting fish in a barrel
Choose carefully five possible causes
asset they exhaust the possible suspects
One by one eliminate 4 for lack of correlation or whatever else looks black and white
Possible impact Size ...mechanism plausibility whatever
Now presto

The fifth must be
The cause

Mark A. Sadowski said in reply to bakho...
"Tight labor domestic labor markets and highest in a long time employment rates indicated a tight domestic labor market. The tight market caused employers to bid up wages."
That's my whole point. But what causes tight labor markets? Sufficient aggregate demand, which by definition is simply nominal GDP (NGDP).
"Money supply was much more expansionary post 9/11 and post fiscal crisis without causing wages to boom. So expansionary monetary policy, by itself is not sufficient to cause wages to increase."
There are two ways policymakers can increase NGDP: fiscal and monetary policy. Fiscal policy became very expansionary in FY 2001-2004 thanks to the Bush tax cuts with the cyclically adjusted budget balance falling from 1.2% of potential GDP in 2000 to (-3.2%) of potential GDP in 2004 (see CBO link above).
The velocity of money is unstable so judging monetary policy stance by it is questionable. However if we look at the year on year changes of MZM you will note a big increase in the rate of change in MZM from April 1995 to February 1999 which corresponds to the late 1990s wage boom:
There was another surge during 2001 but that coincided with a decline in velocity when the Fed was trying to counteract the recession. Note also that the rate of change in MZM fell steadily from early 2002 through late 2004 during the "jobloss" recovery.
More important is how NGDP behaved during this time period:
Note that NGDP was above trend in the late 1990s and below trend in the early 2000s. Put it alltogether and what you have is loose monetary policy coupled with tight fiscal policy in the late 1990s during the wage boom and tight monetary policy coupled with loose fiscal policy during the jobloss recovery.

Rune Lagman said in reply to Mark A. Sadowski...
"Sufficient aggregate demand, which by definition is simply nominal GDP (NGDP)."
NGDP-targeting, in this context, is monetarist-speak for, across-the-board, higher wages. Higher inflation expectations are supposed to induce workers to demand wages that keep up with inflation.
It might work in Europe, where unions are ever-present and relatively strong. Here, in the US, the average, non-union, American lack the market power to keep up with the higher inflation expectations. Current US policy is to prevent inflation by depressing wages.
You and Bakho are, more or less, saying the same thing: "higher wages is the solution".
Bakho just don't believe that higher inflation expectations (NGDP-targeting) will get us there.
I concur with Bakho. I believe, that fiscal policy is the only thing that will goose US labor market, sufficiently, to cause higher wages.

Mark A. Sadowski said in reply to Rune Lagman...
NGDP targeting will stabilize the level of NGDP which in turn will stabilize the (growing) level of real wages. It only promises to eliminate aggregate demand deficiencies, not necessarily to permanently increase labor share.
The biggest problem with the theory that the decline of unions are responsible for the decline in the labor share of national income is that the decline in labor share of national income was essentially universal throughout the advanced world, and yet union coverage rates have not declined everywhere. See Figure 10 on page 14:
Note that union coverage rates increased from 1980 to 2007 in Finland, France, Norway, Spain and Sweden and if you look at the table I posted below the labor share of income declined by 10.8 to 18.3 points in those countries. In fact I've regressed the change in labor income share for these same 18 OECD members against the change in union coverage rates, and the R-squared value is 0.0038 meaning that only 0.38% of the change in labor share of national income can be explained by the change in union coverage rates.
This is not to say that union coverage rates aren't an important factor in explaining changes in the *distribution of labor income*. It's just that they don't match up the data on changes in *labor share of ntional income* very well.
For example the peak year for unionization in the US was 1954 when 33.8% of all wage and salary workers were in a union (see Table A-1):
At that time the labor share of National Income was only 61.8%. By the time labor share of National Income peaked at 67.7% in 1980 union membership had already declined to 22.3%. By 2003 union membership had dropped to 12.4% and yet the labor share of National Income in 2011 was 62.1%, or higher than when union membership was at its peak.
I am as skeptical of fiscal stimulus as you are of monetary policy. Fiscal stimulus only works through changes in the cyclically adjusted budget balance. Thus it's theoretically impossible to maintain positive fiscal stimulus forever. If anyone has any doubts about the practical effectiveness of fiscal stimulus you have only to look at Japan where with the exception of 1997, 2001, and 2004-07 they have had expansionary fiscal policy for over two decades:
And yet nominal GDP is lower now than it was in 1994.
That's why the Japanese now have Abenomics, which despite all the misperceptions in the West, is really about combining monetary stimulus with fiscal austerity (the doubling of the consumption tax from 5% to 10%).

Paine said in reply to Mark A. Sadowski...
Your narrative is
Often Brittle
at turns pedantic and obvious
And it ends with a tautology ..for u
Of course it was
expansionary monetary policy
behind that graceful wage boom
For you there is no way past tight money to a phase of greater prosperity
Corporate and household spending are ever and always thrall to monetary policy
One might call it an unreal business cycle theory

Paine said in reply to Paine ...
The real problem
Mark ski thinks economics is about discovery the workings of a machine
When economics is fundamentally a historical science
All we have in his above narrative is one interval
And one proximate cause
A tighter job market
What in that instance ..the clinton miracle
...produced and sustained that tighter job market
Is specific to that interval
Fortunately if we know a few different ways to tighten job markets
And we do
--- hell Even mark ski knows many of them---
We can just set our goal and start an FDR like pragmatic scramble till we get there

chit chat about a natural rate of anything
Of course
Only helps retard an eclectic process of discovery
And fantasy panaceas deliverable by a fed
following a simple rule
Is bound to end in shambles even as it may be cheered as masterful
Both bens immediate priors had long lines of cheering nit wits
Both were monstrously indifferent to job class welfare
One butchered his way to wall streets notion of a brighter future
The other was that brighter future
And then came fall 08

Paine said in reply to Paine ...
Ah yes fall 08
Ben's time to shine

Mark A. Sadowski said in reply to bakho...
Michael Kalecki was probably the first to propose a theory of the aggregate income distribution hinging on the determinants of firms’ market power. In particular:
(1938): ”The Determinants of the Distribution of National Income”, Econometrica, 6, 97-112.
(1954): Theory of Economic Dynamics, George Allen and Unwin, London.
The literature on price determination shows that firms’ markups depend on factors like industry concentration, collusion, demand elasticity, and the potential entry of other firms into a market. Most changes in these variables are uncorrelated across industries. Nonetheless, they are simultaneously affected by the business cycle. Hence the business cycle is an important determinant of profit margins. Furthermore, markups also depend on labor’s bargaining power (see Kalecki, 1954). Since higher unemployment is likely to decrease both labor’s bargaining power and the substitutability of employment by wages, unemployment constitutes a significant determinant of markups. In particular, markups are a positive function of the unemployment rate. And in fact this is what the more recent literature on the subject concludes (Page 3):
“I begin with three well-known explanations of labor share or its inverse. The overhead labor-wages lag hypothesis long identified with Sherman (1972, 1997) makes labor share a function of capacity utilization. The depletion of the reserve army theory hypothesis closely identified with Boddy and Crotty (1975) makes labor share a function of unemployment. The markup theories of Goldstein (1986, 1996) make the inverse of labor share a function of unemployment and capacity utilization. Since Goldstein’s views on the impact of unemployment are along the lines of Boddy and Crotty, it is his theory on the impact of capacity utilization that is of concern here. I begin with Boddy and Crotty on the role of unemployment and then turn to the contributions of Goldstein and Sherman on the role of capacity utilization.
Unemployment and the Strength of Labor
Boddy and Crotty focused on the increase in labor share in the second part of the expansion as the outcome of the rising strength of labor. Declining rates of unemployment increase labor share by increasing product real wages for given levels of labor productivity. According to Boddy and Crotty the depletion of the reserve army can also directly affect labor productivity. Although Boddy and Crotty (1975) carried out the analysis in the Burns Mitchell NBER cyclical stages framework and not with econometrics, we argued—presciently for my purposes in the present paper– that the confidence of labor would depend both on the level of unemployment and on the change of unemployment. Most workers are not directly affected by bouts of unemployment. Their confidence should be high when the rate of unemployment is low but confidence should also be affected positively if the rate of unemployment is decreasing. Based on the above arguments, I assume that the change in labor share depends on both the rate of change of unemployment and its level. It is crucial to understand the implications of the inclusion of the level of unemployment as a determinant of the change in labor share. Suppose that the rate of unemployment is extremely low but unchanging. In the absence of the level of unemployment the prediction would be that labor share would remain constant. With the inclusion of the level of unemployment the prediction becomes that labor share would continue to rise.”
And should there be any doubt whether unemployment causes labor share, or labor share causes unemployment, it’s a relatively simple exercise, given an econometric software package, to confirm that the unemployment rate Granger Causes labor share of factor income, but labor share of factor income does not Granger Cause unemployment.

Paine said in reply to Mark A. Sadowski...
Even the devil quotes scripture

Paine said in reply to Paine ...
Call in The Texas grangers

Paine said in reply to Mark A. Sadowski...
An important distinction kalecki makes somewhere
Originally in polish of course
Mark up v net margin
The price slashing triggered by a realization crisis
Versus holding ones price
Must be distinguished
from the squeeze on net margins
as fixed costs are spread
Over a smaller then anticipated and or required
revenue aggregate

Mark A. Sadowski said in reply to bakho...
So the question then becomes, what determines unemployment?
Well the level of aggregate demand of course. By definition:
1) Aggregate demand (AD) is the total demand for final goods and services in the economy at a given time and price level.
2) Aggregate supply (AS) is the total amount of goods and services that firms are willing to sell at a given price level in an economy.
The AD-AS model is almost always represented graphically:
The intersection of AD and AS determines the price level and the level of real output. The level of employment is a function of the level of output. (Keynes repeatedly refers to the relationship between output and employment in The General Theory.) And the unemployment rate is simply the precentage of the labor force that is not employed.
Thus, as Adair Turner recently pointed out in his speech on Overt Monetary Finance (OMF) (see Slide 21):
1) Fiscal and monetary policy determine AD which is equal to nominal GDP or NGDP.
2) And AD determines prices and real output.

bakho said in reply to Mark A. Sadowski...
Yes and fiscal policy could increase demand directly. Monetary policy cannot increase demand (absent negative interest rates (which would really equal fiscal policy)) because the low demand has raised risk premiums above rate of return available at zero interest rate. Either investment would need to be subsidized or demand stimulated to reduce investment risk. The easiest and cheapest way is to simulate demand, which decreases investment risk and pushes the economy away from the ZLB where monetary policy can get traction.
Monetary policy, no matter how good, cannot compensate for bad or inadequate fiscal and regulatory policy.

Mark A. Sadowski said in reply to bakho...
The Traditional Interest Rate Channel is only one of the nine channels of the Monetary Transmission Mechanism (MTM) as enumerated by Frederic Mishkin.
The following paper by Mishkin gives an overview of the MTM:
You might find the following table, found in the author's best selling intermediate monetary economics textbook useful:
To understand what's been driving the recovery since 2009Q2 it might be useful to look at real GDP (RGDP):
Over the past 16 quarters RGDP has increased by $1291.8 billion in 2009 dollars at an annual rate. Net exports have subtracted $91.2 billion and government consumption and investment has subtracted $191.6 billion. Thus the other components of RGDP have grown by $1574.6 billion. Investment has contributed $594.1 billion (37.7%), consumption $567.8 billion (36.1%), durable goods $321.6 billion (20.4%) and residential investment $109.2 billion (6.9%). (It doesn't add up to 100% because of the residual.)
There are some immediate takeaways from this breakdown.
1) Given that there are only two ways policy makers can impact aggregate demand, fiscal and monetary policy, and that government consumption and investment has been an enourmous drag on the recovery, it's safe to say whatever recovery we have is due entirely to monetary policy.
2) Since net exports have been a net drag it's also safe to say that the Exchange Rate Channel has not contributed to the recovery. This is not surprising given the dollar's relative strength compared to many of the U.S.' trading partners, as well as relatively weak demand abroad.
3) Non-residential investment has contributed substantially to the recovery. But since so many channels impact it, it's difficult to say without further analysis what the relative contribution of each of the channels is.
4) Consumption's contribution to the recovery is also substantial, and this implies that the Wealth Effects Channel is probably the most important source of the recovery so far. This should not be too surprising in that household sector net worth has risen from about $48.7 trillion in 2009Q1 to $70.3 trillion in 2013Q1 according to the Federal Reserve Flow of Funds:
5) Durable goods have also contributed strongly to the recovery and this implies that the Traditional Interest Rate Effects Channel and the Household Liquidity Effects Channels have been important. (Note that the Household Liquidity Effects Channel is also asset price driven.)
6) Residential Investment so far has contributed relatively little, which tends to speak against the Bank Lending Channel's importance during this recovery, since mortgage lending accounts for three quarters of household sector debt. This shouldn't be too surprising given that the household sector's outstanding mortgage balance has shrunk by $1,083.1 billion since 2009Q2.

Mark A. Sadowski said in reply to bakho...
Compensation of Employees reached its peak share (67.7%) of National Income in 1980:
And that happens to be the peak year for inflation as well. Coincidence?
The labor share of income during the age of disinflation has declined pretty much everywhere in the advanced world.
Peak Core CPI Rate*, Peak and Recent Labor Share of Income (Total Economy) (*Except Portugal)
Nation------CPI-Year-- Peak-Year-Recent-Year-Change
New Zeal.—--17.2-1982-60.7---1975-49.0---2006-11.7
The international labor share data comes from the OECD and is not consistent with BEA data:
Select *Total Economy*.
Although there are many reasons for the increase in inequality that we have seen in the US and in other parts of the world (regressive taxation, weaker unions, lower minimum wages, globalization, Skills-Based-Technological-Change (SBTC) etc.) the leading hypothesis for why there has been such large scale declines in the labor share of factor income is disinflation (i.e. tight monetary policy).
Disinflation during the eighties and the nineties was accompanied by a significant rise in the profit share of national income in most OECD countries or, equivalently, by a reduction in the labor share. This suggests that changes in the rate of inflation are non-neutral with respect to the distribution of factor income. The consequences of inflation upon inequality thus may largely be the indirect result of the effects of inflation upon factor shares. The mechanism by which this comes about is fairly simple. Accelerating inflation is correlated to falling unemployment rates, falling unemployment rates lead to greater labor bargaining power, and greater labor bargaining power is correlated with lower markups. Furthermore, higher inflation rates create greater price dispersion leading to greater competition among producers to limit markups. This hypothesis was tested with a panel of 15 OECD countries over the period from 1960 to 2000 and a robust positive relationship between inflation and the labor share was obtained:
Inflation and Factor Shares
Francisco Alcalá and F. Israel Sanchoy
August 2000
Abstract: “We use results from the literature on the determinants of price-cost margins to derive an equation relating labor’s share of national income to the inflation rate (as well as to the output gap, the unemployment rate and the capital stock per worker). The equation is tested with a panel of 15 OECD countries. We obtain a robust positive relationship between inflation and the labor share. Our results suggest that disinflation is not distributively neutral, provide empirical support for the distinct concern about price stability shown by trade unions and employers’ organizations, and help explaining the negative impact of inflation on growth.”

Paine said in reply to Mark A. Sadowski...
Accelerating output price change
Is always correlated to falling unemployment ?

Paine said in reply to Paine ...
What marvels of torture by lag and lead might yield this iron law my friend ?

Mark A. Sadowski said in reply to Paine ...
Did I use the word "always"?
The Phillips Curve slopes downward, no?

paine said in reply to Mark A. Sadowski...
no u didn't
but if not then when not or when if its easier to include then exclude
I think you realize you left out
a few
contextualizing links
in your chain
I refuse to think about
the Phillips screw wages magic equations differential or otherwise
the conception is pure mind trap

samuel said...
No one expects the ... Zero Lower Bound!
But seriously, we need to start paying people more than what they made 10 years ago.

reason said in reply to samuel...
Easy - institute (an initially small) citizens basic income. No other changes necessary (but you could increase some taxes on the rich to help pay for it).

paine said in reply to reason...
I agree we need to use the tax or borrow to transfer system
to tighten domestic job markets and mobilize domestic productive factors to the max
but only if you use
the dollar forex aggressively
to keep trade in balance

since a plunging dollar
means relative prices on imports must rise
the forex fiddling
among other effects
jumps job class cost of living
and to this extent
tight job market's
net impact
on real wage rates
is partially off set

reason said in reply to paine ...
If you print enough money you kill the $ as a reserve currency. Even pigs eat their fill eventually.

Paine said in reply to reason...
What suggests to u the American job class over the longest haul
benefits by hosting the global reserve currency

pgl said...
Metzler was writing sensible things about QE when Japan went through this mess. Ah but now it is the US with a Democrat as President and Metzler is with the AEI. So now it is all different - somehow.

ilsm said in reply to pgl...
Reprised Upton Sinclair: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” Upton Sinclair

paine said in reply to pgl...
his absurdly reactionary
shadow fomc bull shit
glares out at us
from his record
he has a long history
trailing back decades
of reactionary anti job class macro Rx

paine said in reply to paine ...
when meltzers politics crash
into his understanding of money markets etc
his politics win every time

Generating inflation would be easy if people would stop believing in the Zero Lower Bound Myth:

reason said in reply to The PolyCapitalist...
Oh come on, what proportion of the population pays attention to Krugman, or to you for that matter. You're nuts, most people don't theorise about these things.
Besides your linked post talks about cutting nominal interest rates, not "creating inflation".

I am not an economist and I have not read any economic history recently. When was the US in the middle of an inflationary hot mess? Starting in the Nixon era and ending with the Reagan era, right? And while people want to blame monetary policy, there were other things going on - like the rise of OPEC, etc. I remember when "gas was running out." I was a wee one then, but wasn't there gas rationing? You could by gas on particular days only? I could be wrong...
When were the other major inflationary eras in US history?
And, as I understand it, no one outside of the C-suites and on Wall Street has gotten a raise since them. Gas has gone up quite a lot, but wages have remained stagnant. And inflation has remained low. And we keep obsessing about inflation?

Peter K. said in reply to Main Street Muse...
The 1970s were not that bad. Organized labor was strong enough to negotiate wage increases in their contracts which helped develop a wage-price spiral. Unfortunately they're not powerful enough today to repeat that.

Main Street Muse said in reply to Peter K....
They were very bad if you wanted to get a mortgage (interest rates being above 15%, I believe.)

Mark A. Sadowski said in reply to Main Street Muse...
Here’s a relatively simple way to frame this.
The following link is to a dynamic AD-AS diagram, and which can be found in “Modern Principles: Macroeconomics” by Tyler Cowen and Alex Tabarrok:
You’ll note that the rate of change in the aggregate demand (AD) curve is equal to the sum of the inflation rate and the rate of change in real GDP (RGDP), and so is precisely equal to the rate of change in nominal GDP (NGDP). The rate of change in NGDP is determined by both fiscal and monetary policy in the short run but in the long run the rate of change in NGDP is determined solely by monetary policy.
Note also the short run aggregate supply (SRAS/AS) curve and the Solow growth curve. The Solow growth curve is essentially the long run AS curve (LRAS). In the short run wages and prices are sticky causing the SRAS curve to be upwardly sloped. In the long run money is neutral and wages and prices are flexible so the Solow growth curve is vertical. Thus shifts in AD influence the rate of growth of RGDP in the short run, but not in the long run.
Similarly, shifts in AS influence the inflation rate in the short run, but in the long run the inflation rate is determined solely by AD (i.e. monetary policy).

Paine said in reply to Mark A. Sadowski...
Cowherd and tar box ?
Slumming it up ski

Paine said in reply to Paine ...
Soley by monetary policy
In the model only or also in reality ?

Paine said in reply to Paine ...
The notion of long run is extrapolative

Not in any sense an estimate of future reality
As Lerner sez
In the long run we are in another short run
The sinister smuggling in of neutrality conditions and the like
Make these models into a hustle

Mark A. Sadowski said in reply to Paine ...
Fiscal stimulus requires increases in the cyclically adjusted budget balance. This cannot be done indefinitely.

paine said in reply to Mark A. Sadowski...
ahh so you fall into the nominal rigidity trap
the nominal obligations of the state with a limitless money mine are paper shackles
we need a better term for debt management
then financial repression
don't you agree ?
something positive like
fully managed carry costs
you ngdp types oughta see
your magic target
onc u break fre of this silly fear
of some sort of inertial moment
in product price and wage inflation
once you get the hang of forward guidance
talk of ngdp slope change
is just the gimmick
for paving over
a slug of financial repression
paine said in reply to paine ...
to be perfectly fair
why would one require constantly increasing primary deficits
given the other macro levers
at no point would I dispense with any of them
fiscal first transfer first FFTF
is a job class welfare first
policy maxim
for obvious reasons I way too often reiterate
but the wind hollows out here in left field
and I shout to keep my head warm

Mark A. Sadowski said in reply to Paine ...
It's actually a pretty good textbook and the diagram is enormously useful (it's far less confusing to students than the usual ones).
Despite the fact Tyler Cowen has implied that I do not share his "mood affilitation" he has made posts out of my comments, so I now choose to be polite in return:

paine said in reply to Mark A. Sadowski...
very wise of you
play it suave and diplomatical
you are nothing
if not discretely sadistic
in fact
you're nothing but
discretely sadistic
paine said in reply to paine ...
these stars will gladly exploit your
boundless diligence
while retaining the there gathered habitual
they the ever vigilant axe to grind
hosters with the toasters
can burn you off the site's face
at any time
again get your own blog
make the mountain come to Mo-ham-ski

don said in reply to Mark A. Sadowski...
Thanks Mark. Can you show us one of inflation against the monetary base that goes back before 1929?

Mark A. Sadowski said in reply to don...
Here's the same graph with the monetary base added. Fred only has monetary base data back to 1918:
If the Fed is targeting inflation we expect the correlation to be negative, which over the 95 years of data, it frequently is.

BigBozat said in reply to Main Street Muse...
Main Street Muse asked:
"When were the other major inflationary eras in US history?"
Depends on how & what is measured (some statistical series don't go back all that far)...
Short version:
2 waves post-WW II, both relatively brief... One immediately after the war (removal of price controls) & second @ onset of Korean War @ late 1950...
WW II (late '41 ~ mid-late '43)
WW I & aftermath (1916 ~ 1920)
Standard series only goes back to 1913...
Before then:
Civil War... 'tho we subsequently went through an extended deflationary period after the war in order to bring bring the economy back onto a gold standard.
Prior to that: the War of 1812, and the Revolutionary War (think scrip).
Using wholesale commodity prices as surrogate for inflation measure see, e.g.:

Paine said in reply to BigBozat...
The long return to gold post 1865
Is quite a sage
A trail of tears in fact

Paine said in reply to Paine ...
I put doesn't like the word saga

bakho said in reply to Main Street Muse...
Yes. Oil demand was much greater than supply. Carter energy policy fixed this so that oil demand dropped by 22 percent from its peak in 1978 and 1983.
Monetarists claim victory and lionize Volcker, but Volcker would have been unsuccessful without Carter energy policy.

Charlie Baker said in reply to bakho...
I very much agree with this. The Carter energy policy reduced petroleum imports sharply, and were a major aid to recovery in the '80s.
The total amount of US imports did not surpass its 1977-79 peak until 1993.
Even today, we are a more fuel efficient country than we were in the '70s, so much that oil price shocks do not have the same impact now as then.

Paine said in reply to Charlie Baker...
The history in numbers
Of the energy share in GDP must be at anne's finger tips

Paine said in reply to Paine ...
But I must insist we give volcker credit

where goes the credit
also goes the blame
The horrifically un necessary butchery of the Volcker Carter Reagan double dipper
The second scoop deeper then the first by far of course

Mark A. Sadowski said in reply to Paine ...
"The history in numbers
Of the energy share in GDP must be at anne's finger tips"
Personal consumption expenditures on gasoline and other energy goods were 4.0% of personal consumption expenditures (PCE) in 2012:
By comparison they were above 4.0% of PCE in 1974-85 and peaked at 5.8% of PCE in 1980-81. Given the inherently volatile nature of energy prices this of course meant consumer prices were more volatile back then.

Mark A. Sadowski said in reply to bakho...
"Monetarists claim victory and lionize Volcker, but Volcker would have been unsuccessful without Carter energy policy."
I don't think it's a question of lionizing Volcker. I think its a question of recognizing reality.
Incidentally if the decline in inflation was purely the result of a positive energy shock how come unemployment went to 10.8% and the economy didn't completely recover until 1987?

Charlie Baker said in reply to Mark A. Sadowski...
"Incidentally if the decline in inflation was purely the result of a positive energy shock how come unemployment went to 10.8% and the economy didn't completely recover until 1987?"
Not to speak for bahko, but I don't think he nor I said it was "purely" the result of the positive oil shock. But if not for the Carter policy, it's likely 5.8% PCE would not have been the top. Note also that the larger share of the increase was going to imports rather than domestic producers, as was the case prior to 1970.
I think Volcker's actions inflicted too much pain, and the wage-price spiral might have been addressed by other means. His solution stuck was because it was politically supportable, and set the precedent for putting the Fed in the leading role as manager of economic policy.

Second Best said...
Also note the shift in blame from those who can't find inflation under a single overturned rock. Now it's about all that QE benefitting the rich by buying off bad debt that will destroy the economy when the Fed attempts to sell it back later, just when austerity was about to achieve full employment. LOL.

Peter K. said in reply to Second Best...
"Now it's about all that QE benefitting the rich by buying off bad debt that will destroy the economy when the Fed attempts to sell it back later, just when austerity was about to achieve full employment"
They're echoing left-wing trolls like Kervick.

Rune Lagman said in reply to Peter K....
"left-wing troll" = someone that refuse to apologize for corrupt Democrats.

Paine said in reply to Rune Lagman...
Peter has a legendary dedication
To the proposition
Lesser evilism protracted becomes a benignity

Perhaps a benignity without high honor but a benignity never the less

Peter K. said in reply to Paine ...
"Peter has a legendary dedication
To the proposition
Lesser evilism protracted becomes a benignity "
I can't be summed up in a proposition. The devil is in the details. Even Paine is a unique snowflake, no?
Two sayings I would favor: power corrupts and "don't make the perfect the enemy of the good."
But let's take a specific policy at a specific moment in history: QE2.
Republicans and conservative economists like Meltzer blast Bernanke and the Fed, as do export competitors Germany, China, South Korea, Brazil etc. As do people like Kervick who heroically - in his own mind - argues that fiscal policy would be better than QE2.
paine said in reply to Peter K....
fiscal poicy would be better much much better
if its
uncle credit card financed
transfer payments to job class households
rather then trying to squeeze out
more spending
from the portfolio class by pro temp
upping their paper wealth
but I agree why make a nugget of help into a bucket of hurt
QE annoyed me because it was measured out in relative tea spoons
the snail pace recovery was kept out of a double dip
anything more was deemed sub optimal
by the fed's inner circle crop
of corporate welfare fiends
paine said in reply to paine ...
I know you are more then a set of summary parts
I know you are on the side
of us earth angels with spiked tails
paine said in reply to paine ...
the only good guy I razz consistently is ski mobile
he not only needs it
his readers need it
on occasion he can marshal
some pretty persuasive pitter patter
and he always has a bag full of pre digested responses
hand carved supporting data included
too bad right now
he still the center of his mind
stuck up Sumner's pant leg

Dan Kervick said...
In order to increase the amount of bank lending for capital development, we need to increase the demand for capital development. And to do that we need to increase the demand for the goods and services that people consume, and that provides the incentive for firms to develop their capital in the first place.
The US government has extraordinary untapped potential to drive this demand, both by purchasing such consumer goods and services itself, and by setting and investing in the core infrastructure of a strategic national development plan that will give coherence and motivation to the path of US economic transformation over the next decade, and reduce risk and confusion in the private sector. Businesses need some conception of the national plan, so they know what long-term investments to make.
Economists of the present very conservative generation have been loath to take this step. Insofar as they support government spending at all, they conceive it in a very limited short-term way in terms of "stimulus". Now people like Krugman seem to want to give up and sulk and turn entirely toward things like macroprudential financial stabilization.
Seems to me we need a new breed of more adventurous thinkers who are willing to go bigger, not smaller.

paine said in reply to Dan Kervick...
the covert or at least implicit
"national plan"
we have today
isn't about development at liberty central
its about cash cow economics
think mitt Romney
vulture prince of the commonwealth
development corporate cosmo style
is for ..chindia and the other emergers

paine said in reply to paine ...
but of course your vision for a new overt national plan
and very practical ...technically

paine said in reply to paine ...
" adventurous thinkers who are willing to go bigger, not smaller."

yup kill the crackpot realists
and the rubinite bondsmen

Julio said in reply to paine ...
Nice double-meaning of "bondsmen".

Paine said in reply to Julio...
Thank u
To me it's all about the over tones

Charlie Baker said in reply to Paine ...
"rubinite bondsmen"
One of your best.

Peter K. said in reply to Dan Kervick...
"Economists of the present very conservative generation have been loath to take this step. Insofar as they support government spending at all, they conceive it in a very limited short-term way in terms of "stimulus". Now people like Krugman seem to want to give up and sulk and turn entirely toward things like macroprudential financial stabilization."
Pure ad hominem from the resident MMT troll.

Roger Gathman said in reply to Peter K....
Troll is a very stupid term for a commentator who has been writing here longer than you have. If you have a problem with Kervick's arguments, fine, but the troll thing - as though you were the superserious gatekeeper, instead of another commenting peon - is ludicrous. There's only one gatekeeper at this site, and it is Mark Thoma.

Peter K. said in reply to Roger Gathman...
Any proof he's been here longer than me? No? Just more MMT trolling on your part.
Even if so, so what?
Kervick acting like a gatekeeper criticing THOMA for linking Krugman:
"Now people like Krugman seem to want to give up and sulk and turn entirely toward things like macroprudential financial stabilization."
Can dish it out but can't take it, huh? Who are you anyway?

Paine said in reply to Peter K....
We agree on what we'd prefer
You just tolerate what we get
better then me and rog and Dan
Some might call you a realist
Others might bring up Essau

When Inflation Doves Cry
By Alan Metzler
"...The US Federal Reserve Board has pumped out trillions of dollars of reserves, but never have so many reserves produced so little monetary growth. Neither the hawks nor the doves (nor anyone else) expected that.
Monetarists insist that economies experience inflation when money-supply growth persistently exceeds output growth. That has not happened yet, so inflation has been postponed.
Instead of rejecting monetary theory and history, the army of Wall Street soothsayers should look beyond the Fed’s press releases and ask themselves: Does it make sense to throw out centuries of experience? Are we really so confident that the Fed has found a new way?
The Fed has printed new bank reserves with reckless abandon. But almost all of the reserves sit idle on commercial banks’ balance sheets. For the 12 months ending in July, the St. Louis Fed reports that bank reserves rose 31%. During the same period, a commonly used measure of monetary growth, M2, increased by only 6.8%. No sound monetarist thinks those numbers predict current inflation.
Indeed, almost all the reserves added in the second and third rounds of QE, more than 95%, are sitting in excess reserves, neither lent nor borrowed and never used to increase money in circulation..."
I'm not so troubled about Meltzer's contrary policy recommendations for Japan in 1999. That was two full years before Japan actually got around to doing QE, and at the time Japanese bank reserves were not elevated, which seems to be Meltzer's primary concern about the U.S. QEs. And in fact I can find no record at all of Meltzer commenting on Japanese excess bank reserves during their 2001-06 QE although they were quite large.
On the other hand Meltzer has written extensively about the Great Depression, so that's a logical place to find him contradicting himself.
In an act that was essentially the QE of its day, FDR took the U.S. off the gold standard in April 1933 and allowed the price of gold to rise from $20.67 an ounce to $35.00 an ounce by January 1934. This price was high enough to attract a large gold inflow from abroad which the Treasury monetized by issuing gold certificates to the Federal Reserve. As a consequence the monetary base skyrocketed upward.
Here's Friedman and Schwartz's M2 measure of money supply and bank reserves indexed to 100 in July 1933, as that was the month that the monetary base stopped decreasing after FDR became President:
Between July 1933 and July 1936, the month before reserve requirements were first increased, M2 increased by a total of 50.1% and bank reserves increased by 201.8%, or at an average annual rate of 14.5% and 44.5% respectively.
Now let's contrast that with the change in the modern measure of M2 and bank reserves since October 2010, the month before QE2 was officially announced.
M2 has increased by a total of 22.9% and bank reserves by 109.7%, or at an average annual rate of 7.8% and 30.9% respectively. I'm certain that MZM, a broader measure of money supply, has increased at a faster rate than M2 over the same time period.
So bank reserves increased at three times the rate as M2 in the recovery from the Great Depression and four times the rate of M2 in the Recovery from the Great Recession, not a great deal of difference.
What about the proportion of QE that has remained reserves? Or rather, what proportion has become currency in circulation?
Here is the monetary base and currency in circulation from FDR's inaugeration through the end of 1938:
The monetary base and currency in circulation increased by $4,408 million and $815 million respectively between July 1933 and July 1936, meaning 18.5% of the expansion in the monetary base became currency.
Here is the monetary base and currency in circulation since October 2010:
The monetary base and currency in circulation have increased by $1,328 billion and $236 billion respectively, meaning 17.8% of the expansion in the monetary base has become currency. This is almost exactly the same proportion as during the recovery from the Great Depression and nearly four times greater than the 5% proportion that Meltzer is claiming.
Now, what is Meltzer telling us that we should be doing today?
"...Instead of continuing along this futile path, the Fed should end its open-ended QE3 now...Most important, it should announce a strategy for eliminating the massive volume of such reserves..."
Now it should be noted that after the Fed increased reserves in August 1936, the U.S. started sterilizing gold inflows in December and underwent a second round of reserve increases in March and May 1937.
The U.S. entered recession in May 1937. Here's what Meltzer had to say about the monetary policy causes of the 1937 recession in 2001 (pages 6-7):
"...The National Bureau ranks the 1937-38 recession as the third most severe recession in the years after World War I. Real GNP fell 18% and industrial production 32% in the thirteen months from May 1937 to June 1938. Unemployment reached a peak of 20%, not very different from the 25% peak in 1932.
The probable causes of the recession include both fiscal and monetary actions. There is a very large reduction in the government deficit in 1937 and a very large reduction in growth of the monetary base..."
"...The most important monetary actions are the beginning of gold sterilization at the end of 1936 and the second and third increase in reserve requirement ratios in March and May 1937. These increases completed the doubling of reserve requirement ratios between August 1936 and May 1937..."
So Meltzer attributes the monetary policy causes of the 1937 recession to a very large reduction in the rate of growth in the monetary base, and the reduction in excess reserves due to the doubling of reserve requirements (which nevertheless remained nonbinding).
And yet today Meltzer is recommending stopping the growth in the monetary base and eliminating excess reserves.

Second Best said in reply to Mark A. Sadowski...
Then: It's about the velocity stupid.
Now: It's about the liquidity stupid.

Mark A. Sadowski said in reply to Second Best...
With respect to M2 velocity, it was relatively stable during the recovery from the Great Depression:
It stayed within the range of 1.85 to 2.15 and showed no real trend.
In contrast M2 velocity has been falling steadily since 2010Q4:
It's fallen from 1.74 to 1.58 as of 2013Q2.
So I would argue that if anything velocity is more of a problem now than it was then.
As for "liquidity" that means a lot of different things to a lot of different people. What do you mean by it?

Joe Smith said in reply to Mark A. Sadowski...
I assume that excess reserves on deposit with the Fed simply amounts to borrowing by the Federal government and gets spent like any other borrowing by the government.

Mark A. Sadowski said in reply to Joe Smith...
Bank reserves are banks' holdings of deposits in accounts with the Federal Reserve plus currency that is physically held in the bank's vault (vault cash). Bank reserves are a liability to the Federal Reserve.
The Treasury has no access to bank reserves, so no, the Federal government does not spend bank reserves.

Joe Smith said in reply to Mark A. Sadowski...
So what does the Fed "do" with those bank reserves which are on deposit with it? Use it to buy treasury paper?

Mark A. Sadowski said in reply to Joe Smith...
The Fed doesn't really "do" anything with them. (In fact it pays 0.25% interest on them.)
The Fed buys and sells Treasury and Agency securities (plus some other minor stuff). These securities form the bulk of the assets on the Fed's balance sheet.
The liabilities side of the Fed's balance sheet mostly (about 91-93%) consists of bank reserves and currency in circulation (i.e. the "monetary base").

Paine said in reply to Mark A. Sadowski...
Here you turn honest narrator and deadly prosecutor

Tom Shillock said...
Does Allan Meltzer still have a job as an economist? If so, why? More generally, what is the unemployment rate for economists? Unlike at least a few other forms of employment incompetence seems no bar in economics. They would seem to share that blessing with CEOs, financial analysts and brokers, politicians and too many others especially those in professions. Perhaps that is the purpose of professions for those who are in them?

don said...
I am not convinced that we will not have inflation until we reach full employment and the labor market tightens - we have had "stagflation" before. I do not believe that the interest on excess reserves is responsible for their size, but I am also not convinced that it will prove the invincible weapon against future excess inflation.

Paine said in reply to don...
The late 70's and now
Make a nice comparison
One concern ski likes to squash like he likes to squash the liquidity trap
Is the pricing momentum bug a boo
The notion price setters get into more then just an adapters gig
More then just a response
They get out ahead of themselves
by looking hard
into the masked faces of an uncertain future
Where prices on their relevant markets
both input and output
Become self fulfilling conjectures
Rat ex really looks like a white hat here
Ask ski
If the fed communicates effectively expectations of price and wage setters can change in a flash
The paradigm shift
FDR in 33 busting the gold dollar price ceiling
Ben this past late spring toting with the termination of QE
One big one trivial
But they both demonstrate price setters and wage makers hardly need a long strangulation by a Paul volcker
To wise up at least not since tall Paul showed the fed had big hairy ones at any rate
Now inflation fighting is believed in
Too much?
Now trying to hint at higher future inflation gets missed
Ahh the irony

Paine said in reply to Paine ...
It's a shame we will exit the QE interval
Without a broad consensus up or down on it's efficacy
But then the long since " proven efficacy "
of fiscal activism ...un countered by the fed at least
And At the zero bound
Was so muddied up
By the stimulus package
and the turn toward the long view
And the rigors of budgetary prudence
Lots of decent people now wonder about Keynesian remedies
Even as they take fiscal austerity in the chops

Making the portfolio class wealthier on paper
by buying into the asset markets
Sure looked like an excellent adventure

darrell said in reply to don...
Stagflation was short-term, cost push based on oil embargo.

Paine said in reply to darrell...
Cut short
The prolonged taper we might have seen
With no second contraction etc etc
Might have
Eft us thinking inflationary intervals are stubbornly resistant to remedy
The beauty of the evil tittle named volcker
He proved inflation can be forced into retreat
by a remorseless throttling of credit

The delta of p was tamed
By a tsunami of layoffs
It's as if the irrigation system was shut down to prevent an accelerating secular glut
of corn

darrell said...
No one expected it? Really? I expected it!!!

Making it possible for the banks to make more loans to willing and qualified borrows, in no way creates more willing and qualified borrowers.

Everyone willing to go into debt is already in debt up to their eye balls.
Those few qualified borrowers that remain are the ones that have no interest in going into debt.

Paine said in reply to darrell...
When its a tale of systemic irrationality
Sometimes exaggeration gets closer to the truth then the bare facts