Tuesday, January 23, 2018

You wanna count what?

Somebody once explained to me that the growth of debt (back then) was probably due to the increase of women in the workforce. When women were not working they couldn't even get credit. When they went to work they could and did borrow, could and did accumulate debt. Thus the increase in debt.

So: More people in the economy, working, and more people in the family, working, and still people had to take on more debt? I did not find "women in the workforce" to be a satisfactory explanation of debt growth.

It should be obvious that if there is debt, somebody must have borrowed it. You can take the "somebody" and give it a penis or not, if that's your thing. But if there is debt, I know that somebody must have borrowed it. For me the important thing is how much debt is out there and how much it costs the economy. Not whether the borrower has a penis.

When Keynes wrote his General Theory, the first of "three perplexities which most impeded [his] progress in writing" was "the choice of the units of quantity appropriate to the problems of the economic system as a whole."

Let me repeat that: The choice of units appropriate to the problem of the economic system as a whole.

After some preliminary thoughts, he said:

In dealing with the theory of employment I propose, therefore, to make use of only two fundamental units of quantity, namely, quantities of money-value and quantities of employment... It is my belief that much unnecessary perplexity can be avoided if we limit ourselves strictly to the two units, money and labour, when we are dealing with the behaviour of the economic system as a whole...

Money and labor. Not genitalia.

You could make the argument that not all genders receive equal pay for equal work, and that not all races have equal unemployment rates. I would accept these arguments as true. But the problem is not solved by making unemployment equal and high. The problem is not solved by making pay equal and low.

It will be easier to solve the economic problems of non-economic subsets of the economy if the problems of the economy as a whole can be solved. If we fail to solve the problem of larger scope, when historians one day look back at us, some will surely think it was "equal pay for equal work" that caused the fall of our civilization

Monday, January 22, 2018

My, how the story has changed!

Andy Kiersz, Business Insider, 2 June 2017:
Since about the turn of the millennium, the labor-force participation rate, or the share of American civilians over the age of 16 who are working or looking for a job, has dropped pretty dramatically, with an acceleration in that drop taking place after the 2008 financial crisis and the ensuing Great Recession.

There are several causes for that drop. An August 2015 analysis by the President's Council of Economic Advisers suggests that about half of the drop comes from structural, demographic factors: the baby boomers, an immensely large cohort of Americans, are getting older and starting to retire.
David P. Goldman, Asia Times, 11 Jan 2018:
As Professor Edmund Phelps suggests, an aging workforce is more concerned about job security than about wage gains. Americans are retiring later because they are healthier and because they can’t afford to retire, so that the available pool of labor is greater.

Sunday, January 21, 2018

Interest Cost by Sector

The first graph shows the distribution of interest costs among sectors of the economy.

I want to point out that it's a stacked graph. That means, for example, that the purple sits above the blue, not behind it. And the visible green (the very thin strip located between purple and red) is all there is of the green.

Working from the bottom up: blue shows all government (Federal, state and local) interest cost; purple shows household interest cost; green shows nonprofit institutions; and red shows domestic US business. The unused area above the red shows "other" sectors. Adding that in brings the total up to 100%, all interest paid.

Graph #1: Shares of Total Interest Paid, by Sector
In 1960, where the graph starts, total government share of interest cost (blue) is 22.6%. The household share runs from there up to a little over 50%, so about 30% of the total. The share paid by nonprofit institutions (green) is essentially zero. The share paid by domestic business runs from a little over 50% to a little below 100%, so almost 50% of the total. And "other" starts out in 1960 at around 2% of the total.

FRED calls it "monetary" interest paid in order to distinguish it from "imputed" interest.

At a glance, the dividing lines between sectors run fairly flat. This means that each sector's share of the total is roughly constant. By no means perfectly constant, but roughly. When you think of government debt, you picture it going up, up and insanely up, but you don't see that on this graph.

You don't see government sector interest cost going up up up on this graph, because all the sectors had debt and interest going up up and up. So the shares are roughly constant.

In other words, it is not the debt and interest cost of government that created our economic problems. Nor is it the debt and interest cost of households or nonprofits or domestic businesses (or "other") that created those problems. Rather, it is debt and interest cost in the economy as a whole, rising to too high a level, which created our economic problems.

The second graph shows the interest paid by the same four sectors (omitting "other"), but this time each sector's share is shown as a percent of GDP. Since the 1960s, perhaps earlier, financial cost increases until it makes recession inevitable, then falls for a time, and then increases until it makes the next recession inevitable:

Graph #2: Interest Paid by Sector, as Percent of GDP
Blue is total government, purple is households, and red is domestic US business.

Old Rubber Stamp font by Rebecca Simpson.

Saturday, January 20, 2018

Dolts for Better Theory

So let us not talk falsely now, The hour is getting late.

The Washington Post: A black hole for our best and brightest, Jim Tankersley, 2014.

Subtitle/Topic: "Wall Street is expanding, and the economy is worse off for it."

Wall Street is bigger and richer than ever, the research shows, and the economy and the middle class are worse off for it.

Yes. But get a load of the next few sentences:

There’s a prominent theory among some economists and policymakers that says the big problem with the American economy is that a lot of Americans don’t have the talent to compete in today’s global marketplace...

Wait a minute -- That's damned insulting! We don't have the talent? We're dolts?

While it’s true that the country would be better off if more workers had more training — particularly low-skilled, low-income workers — that theory misses a crucial, damaging development of the past several decades.

It misses how much the economy has suffered at the hands of some of its most skilled, most talented workers, who followed escalating pay onto Wall Street — and away from more economically and socially valuable uses of their talents.

It's not that America has no talent, they argue. America has a lot of talented people, but they all went into finance.

Wow. That's just as insulting as the "prominent" theory. I'm a dolt either way.

The non-prominent theory is that talent was drained away from "more economically and socially valuable uses", and absorbed into finance. Really? Morality in hindsight? That's all they got?

And who gets to decide what's "economically and socially valuable"? Then, who gets to decide how the decision-makers are doing? And who watches the watchers? It's all nonsense and drivel and moralistic crap. Worse, it reeks of Big Brother.

The problem is that the demand for finance is overstimulated, largely by policy. The dolts who went into finance made a lot more money than the dolts who didn't. But if the problem is excessive finance, then the dolts who did are part of the problem. And the dolts who didn't, aren't.

But now we revere the finance guys, who made their money by screwing the rest of us. I guess we really are dolts.

The financial industry has doubled in size as a share of the economy in the past 50 years, but it hasn’t gotten any better at its core job: getting money from investors who have it to companies that will use it to generate growth, profit and jobs.

The focus is wrong. I've heard before that finance has doubled in size, and I think that's right. But I think the assertion is wrong, that finance "hasn’t gotten any better at its core job".

My god man, do they really want finance to get better at its job than it already is? Wouldn't it be better to shrink finance back down to the size it was 50 years ago? Of course finance got "better" at its job over the past 50 years. Of course it did. The WaPo article is nonsense.

Why is it hard to understand that simply "being too big" can be a problem? The baby boom is said to have created many problems for the economy. And you can't turn a page these days without reading that increasing the minimum wage creates problems for the economy. But finance? The problem is not that finance is too big, WaPo says, but that it "hasn’t gotten any better". It's a crock.

In 2012, economists at the International Monetary Fund analyzed data across years and countries and concluded that in some countries, including America, the financial sector had grown so large that it was slowing economic growth.

See? Finance is too big. And it's Big Finance that says it. WaPo repeats it, but doesn't listen to itself.

And this:

It’s not that finance is inherently bad — on the contrary, a well-functioning financial system is critical to a market economy. The problem is, America’s financial system has grown much larger than it should have, based on how well the industry performs.

"Not inherently bad". That's morality again. Moral superiority. We're trying to do econ here. Stop wagging your finger and start thinking about cost.

"A well-functioning financial system is critical to a market economy." The bleedin' obvious, Basil Fawlty would say.

"The problem is, America’s financial system has grown much larger than it should have". Yes, that's it exactly. And they should end the thought right there. But no; they put a condition on it:

"... larger than it should have, based on how well the industry performs."

Based on how well the financial industry performs ?

How about, based on how well the economy performs. Finance isn't free. Everything they do has a cost, regardless of how well the financial industry performs. Assume a best-case scenario: everything finance does is top-notch. It still has a cost. And the more finance does, the more is the cost of finance.

Here, let me dumb it down for you:

If finance has grown faster than GDP -- and the article says it has -- then the cost of finance has grown, relative to output. In other words, finance pushed prices up.

Holy crap: Cost-push inflation! And they said it couldn't happen.

Friday, January 19, 2018

Keynes on Excessive Finance

From Chapter 8, Section IV of the General Theory:

We cannot, as a community, provide for future consumption by financial expedients but only by current physical output. In so far as our social and business organisation separates financial provision for the future from physical provision for the future so that efforts to secure the former do not necessarily carry the latter with them, financial prudence will be liable to diminish aggregate demand and thus impair well-being ...

Thursday, January 18, 2018

"Non-financial" in name only

Nonfinancial corporate businesses -- the ones that produce and service real output -- own financial as well as non-financial assets. Back in the 1950s and '60s, their financial assets were a bit less than a quarter of all their assets. Today, financial assets are a bit less than half their assets. The financial share has doubled.

Graph #1: Financial Assets as a Percent of Total Assets, for Non-Financial Corporations
The financial share of assets ran low in the 1950s, then increased gradually until the early 1980s. Thereafter, the financial share increased rapidly until the 2001 recession, when it appears to have hit a hard upper limit.

The change from slow increase to rapid increase suggests that the change was induced by a change in policy, perhaps tax policy, in the early 1980s.

The fact that the graph shows unrelenting increase suggests that the asset holders prefer financial to non-financial assets. Perhaps the returns are higher for financial assets. Perhaps the returns are lower but the convenience of not having to produce physical output adds value to returns from financial assets. Either way, as the graph shows, financial assets have increased as a share of all assets of nonfinancial corporate business.

Dirk Bezemer and Michael Hudson:
The financial sector does not produce goods or even “real” wealth. And to the extent that it produces services, much of this serves to redirect revenues to rentiers, not to generate wages and profits.

Like the financial sector, the financial assets of non-financial corporations do not produce goods or "real" wealth, and largely serve to redirect revenues away from wages and profits.

Wednesday, January 17, 2018

Repetition helps

Household debt: recent developments and challenges (PDF) by Anna Zabai of BIS.

From the abstract:
In a high-debt economy, interest rate hikes could be more contractionary than cuts are expansionary.

From the main text:
Monetary policy is likely to have asymmetrical effects in a high-debt economy, meaning that interest rate hikes cause aggregate expenditure to contract more than cuts would cause it to expand (Sufi (2015)).

From the conclusion:
Monetary policy could have asymmetrical effects in an economy with high levels of household debt, meaning that an interest rate hike would be more contractionary than an equally sized rate cut would be expansionary.

When I was reading the conclusion of the paper, the concept finally hit home:

To get equal upward and downward effects from changes in rates, you need smaller rate hikes and bigger rate cuts. In short, high levels of debt push interest rates down.

Tuesday, January 16, 2018

Anna Zabai of BIS on Household Debt



Household debt: recent developments and challenges (PDF) by Anna Zabai of BIS. From the abstract:

Financial institutions can suffer balance sheet distress from both direct and indirect exposure to the household sector... In a high-debt economy, interest rate hikes could be more contractionary than cuts are expansionary.

The second part of that excerpt is interesting: asymmetry in monetary policy. Also, by implication, in a low-debt economy interest rate hikes could be less contractionary than cuts are expansionary. This could perhaps mean that there is a middle ground where hikes and cuts are symmetrical. In other words, a Laffer curve for debt and growth, again.

The first part of the excerpt exposes the paper's focus on household debt. This is myopia. In our most recent crisis, household debt was the problem (let's say). Therefore, household debt is always and everywhere the problem, and is the only private-sector debt problem worthy of discussion.


Debt lets households smooth shocks and invest in high-return assets such as housing or education, raising average consumption over their lifetimes. However, high household debt can make the economy more vulnerable to disruptions, potentially harming growth.

Here's the thing: The cost of debt is potentially harmful to growth. Therefore, debt is potentially harmful to growth. Therefore, household debt is potentially harmful to growth. I don't have a problem with saying household debt is potentially harmful to growth. But I have a serious problem with a failure to say that not only household debt is potentially harmful to growth. And it should be obvious that the problem is cost. But it doesn't seem to be obvious -- and not only in this BIS paper.

In order to assess the implications of elevated household debt levels, it is crucial to have a sense of whether households can bear the resulting debt burdens without resorting to large adjustments in consumption should circumstances worsen.

Good sentence.

One might add that the implications of elevated business debt levels can be assessed by its effect on the cost of value added, and probably on the price of traded shares of stock.

One might add also that the implications of elevated financial business debt can be assessed by the risk of onset of financial crisis.

One might add a word on public debt also. Because public debt has a cost, too. However, public debt growth (at least since Keynes) is generally a response to problems arising from private debt. The notion that the economy can be improved by reducing public debt (while ignoring private debt) is most foolish.

If all the noise about the Federal debt was redirected to the concept of reducing the need for Federal debt by reducing the amount of private debt, our economic problems could be solved in a matter of minutes.

Aggregate Demand & Irony:

From an aggregate demand perspective, the distribution of debt across households can amplify any drop in consumption. Notable examples include high debt concentration among households with limited access to credit...

Without limited access to credit, the high debt concentration would get even higher. Therefore, increasing access to credit is not a solution to this problem. Unfortunately, increasing access to credit is a standard tool of policy. That's what got us in trouble in the first place. Isn't it obvious?

Pure Irony:

Monetary policy is likely to have asymmetrical effects in a high-debt economy, meaning that interest rate hikes cause aggregate expenditure to contract more than cuts would cause it to expand (Sufi (2015)). This is because credit-constrained borrowers cut consumption a lot in response to interest rate hikes, as their debt service burdens increase. However, they do not expand it as much in response to cuts of equal magnitude. They prefer to save an important fraction of their gains so as to avoid being credit-constrained again in the future...

(Bold added. Irony in the original.)

A little something for the supply side guys:

From an aggregate supply perspective, an economy’s ability to adjust via labour reallocation across different regions can weaken if household leverage grows over time.

Here ya go:

A growing body of evidence points to the existence of a “boom and bust” pattern in the relationship between household debt and GDP growth (Mian et al (2017), Lombardi et al (2017), IMF (2017)). An increase in credit predicts higher growth in the near term but lower growth in the medium term.

Of course! And regarding the second sentence there, note that "An increase in credit" is an addition to debt. The reason you get "higher growth in the near term" is that the increase in credit translates into extra spending (in the near term). The reason you get "lower growth in the medium term" is that the extra spending has dissipated by then, and you're just left with the extra cost of the additional debt. Isn't it obvious?

This boom-bust pattern appears to be robust across different samples. Table 2, following Mian et al (2017), takes a first stab at exploring the relationship between household debt and GDP growth by looking at correlations.

A first stab? Maybe it isn't obvious.

The first row confirms the existence of a boom-bust pattern. Higher debt boosts growth in the near term but reduces it over a longer horizon.

Is it obvious now?

Elevated levels of household debt could pose a threat to financial stability, defined here as distress among financial institutions.

Just a reminder: Our recent crisis was related to household debt (let us assume). But that does not mean that other private sector debt is not also a problem.

Their thought continues:

In most jurisdictions, this is chiefly because of sizeable bank exposures. These exposures relate not only to direct and indirect credit risks, but also to funding risks.

The problem arises, in other words, not only from the risk of household defaults, but also from problems with the banks' own funding. So you can blame the households for borrowing too much. But you must blame the lenders for putting themselves at risk. And you must blame policy, for putting our economy at risk.

Irony, again:

Financial stability may also be threatened by funding risks (Table 1, column 7). In Sweden (as in much of the euro area), banks fund mortgages by issuing covered bonds, which are held primarily by Swedish insurance companies and other banks. This network of counterparty relationships could become a channel for the transmission of stress, as any decline in the value of one bank’s cover pool could rapidly affect that of all the others.

So it goes.

Okay. We finally get to private debt other than household:

This discussion suggests that household-based credit measures could be good predictors of systemic banking distress, much like broader credit measures (eg Borio and Lowe (2002), Drehmann and Juselius (2014), Jordà et al (2016)).

Borio. Borio is my buddy. (I don't think he knows it, though.)

The next sentences are worth repeating:

Among these [credit measures], the credit gap – defined as the difference between total credit to GDP and its long-term backward-looking trend – and the total DSR are of special interest. While the credit gap is typically found to be the best leading indicator of distress at long horizons (eg Borio and Drehmann (2009), Detken et al (2014)), the total DSR provides a more accurate early warning signal closer to the occurrence of a crisis (Drehmann and Juselius (2014)). Going forward, establishing the predictive performance of an appropriately defined “household credit gap” and of the household DSR seems especially relevant.

The "credit gap" is an interesting concept. Expect to see more on that, on this blog.

The conclusion of the paper is not satisfying. Well, I take that back. This part is interesting:

Monetary policy could have asymmetrical effects in an economy with high levels of household debt, meaning that an interest rate hike would be more contractionary than an equally sized rate cut would be expansionary.

I missed it before: To get equal up- and down-effects from changes in rates, you need smaller rate hikes and bigger rate cuts. What they are saying is that high levels of debt push interest rates down. High debt levels may also reduce the "natural" rate of interest, if there is such a thing.

That's interesting.

The rest of the conclusion, maybe not so much:

Central banks and other authorities need to monitor developments in household debt...

Macroprudential instruments such as loan-to-value caps (on the borrower side) or credit growth caps (on the lender side) are designed to force borrowers and lenders to internalise the impact of large credit expansions on the probability of a systemic crisis, thereby aligning private and social incentives. If these measures do succeed in stemming household credit growth, thus containing debt levels, they would also afford central banks greater future room for manoeuvre in setting monetary policy.

With apologies to Anna Zabai: Too intent a focus on household debt. Not enough concern with the "broader credit measures". I understand that the paper is specifically about household debt. And if the lessons learned here are woven into a tapestry of concern for debt in general, there is much of value here. But please don't forget about the rest of the debt.

Please don't forget about the rest of the debt.

Monday, January 15, 2018

US Population back to 1929

POP, FRED's number for Total US Population, only goes back to 1952. But FRED does show both Real disposable personal income and Real Disposable Personal Income: Per Capita, annual data, going back to 1929.

Divide the one by the other. Multiply by a million to make the units match POP. Now you've got US Population all the way back to 1929:

Graph #1: US Population back to 1952 (red) and back to 1929 (blue)
It's not perfect. Usually on "comparison" graphs like this, the red line is centered on the blue. In this case, the bottom edges of the lines are aligned. FRED's POP number is ever so slightly less than my number. Rounding, maybe. But hey, it's close enough for me. For now.

Show it as "percent change from year ago" values, and there is the baby boom! Wow:

Graph #2: Growth Rate of US Population since 1930; Baby Boom highlighted
The growth of RGDP relative to RGDP per Capita shows a similar pattern, but only starts between Batman's ears. You don't get the full effect.