Wednesday, October 31, 2012

Some call it innovation (2)

Steve Keen's recent Business Spectator post linked to noted "an excellent discussion paper from Federal Reserve economists Carpenter and Demiralp, entitled 'Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?'."

On page 5 of that paper we read:

Required reserves, however, fell dramatically just after 1990 following the reduction in required reserve ratios and trended down through 2000, largely as retail sweep programs allowed depository institutions to reduce their reserve requirements.

So that is some of the "rapid financial innovation" of the 1990s, that Mankiw points out, as quoted in the earlier post today.

Some call it innovation

From Macroeconomics, Mankiw, fourth edition, 2000:

In part because of deregulation of banks and other financial institutions, and in part because of improved computer technology, the past decade has seen rapid financial innovation.

So, rapid financial innovation in the 1990s.

But then Robert Schenk refers to

a period of rapid financial change... the late 1970s and early 1980s

So rapid financial change spans three decades at least.

And we know that the first decade of the 2000s ended with some rapid financial changes, too. I call that one the result.

Tuesday, October 30, 2012

Keen Disappointment

At Business Spectator, Steve Keen considers The myth of the money multiplier. He begins by reviewing "The standard story about how banks create money, and how reserves work". Of that story, Keen writes

to anyone who’s done empirical research, it’s a myth.

The most recent proof of this is in an excellent discussion paper from Federal Reserve economists Carpenter and Demiralp, entitled “Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?”. The first clue that it doesn’t exist is given by their abstract, which notes that, “before the financial crisis, reserve balances were roughly $20 billion”. If the textbook model were correct, the total stock of money in the USA would be $200 billion, versus the multi-trillion dollar level of even a narrow definition of the money stock. As the authors note, this makes a mockery of the textbook “Money Multiplier” model

The impression arising from Keen's numbers is that the standard story must be wrong. The numbers are way off, so the money multiplier story must be wrong. Okay, except for one thing: It is Keen's story that is wrong.

If the reserve requirement is "say 10 percent" as in Keen's example, the $20 billion reserve balance is 10% of $200 billion money, and everything works out fine. But the money supply is much, much more than $200 billion, and it doesn't work with the 10% number. So what is wrong?

The 10% is wrong. Keen uses 10% as an example in the setup. But in the denouement he lets us think that 10% is a valid number, and he takes advantage of our confusion to convince us that the money multiplier story is false.

It is Keen's 10% that is false. Only a very small part of U.S. money must abide by the 10% requirement. For most of that money, there is no reserve requirement at all.

If I have it right, for money in circulation the reserve requirement is 10%. And for money in savings the reserve requirement is zero. A reserve requirement of zero means there is no limit to how much bank money can be issued upon each dollar. With a reserve requirement of zero, the money multiplier could easily produce multi-trillion dollars of money. As, in fact, it has.

But I could be wrong. Keen lays out the requirement differently in his post. He says the reserve requirement is "10 per cent of household deposits only in the USA – there is no reserve requirement for corporate deposits". But again, if there is no reserve requirement on some of the money, then there is no limit to how much bank money can be issued upon each dollar of that money.

Either way, the result is that we end up with trillions of dollars of debt, trillions of dollars of money, and an infinitesimal, tiny fraction of the money in reserve.

The impression Keen gives with his numbers is that the story is wrong because the numbers don't work. The numbers do work. The reserve requirement is not universally applied, but the numbers work. The standard story is not wrong.

Steve Keen wants to convince his readers, even if he has to fudge the story to do it. I am frankly disappointed in him.

Oh, and I searched the PDF for the words "mockery" and "mock". The PDF does not contain those words. It is Keen who says "this makes a mockery of the textbook 'Money Multiplier' model". Not the Federal Reserve guys.

Monday, October 29, 2012

I get it now

What is the Money Multiplier? It is a concept, a way to understand that money is created by the banking system: A way to understand that money is created, not how it is created. Or at least it was in 1977, when I took Macro.

"Each dollar of the monetary base produces m dollars of money" - Mankiw

Since 1977, evidently, there has been a dumbing down of the concept.

Offering a Mankiw quote similar to mine, Lars P Syll opens thus:

The neoclassical textbook concept of money multiplier assumes that banks automatically expand the credit money supply to a multiple of their aggregate reserves.

Earlier today, I would have berated Syll for exaggeration. But after I found Syll's post, I went back and read Mankiw's whole chapter. Sad to say, Syll is right.

Granted, Mankiw's chapter is about Money Supply and Money Demand. Granted, his statement quoted above is only part of his exposition on the Supply of money. Granted, Mankiw says the money supply depends on three variables: the currency-deposit ratio, the reserve-deposit ratio, and the monetary base. But then he combines the two ratios into what he calls the money multiplier (m) and writes

Standing firmly on that wisp, Mankiw makes the following announcements:

  •  "Each dollar of the monetary base produces m dollars of money."
  •  "The money supply is proportional to the monetary base. Thus, an increase in the monetary base increases the money supply by the same percentage."
  •  "The system of fractional-reserve banking creates money, because each dollar of reserves generates many dollars of demand deposits."
  •  "An increase in the monetary base leads to a proportionate increase in the money supply."

In the same chapter, Mankiw considers the 28% fall of the money supply during the Great Depression, when, "in fact, the monetary base rose 18 percent". But then he goes on a tangent disguised as an explanation, and never confronts the discrepancy between his facts and his generalization.

At Syll's, the second comment (Woj's comment) makes more sense to me now.

At Woj's, Ramanan remarked

There are various levels in which people understand this

Yeah. Maybe the various levels have to do with when you learned about it. I have objected vigorously and often to the notion that because of the multiplier an increase in base money leads to an increase in the money supply. It's so obvious: You can't push on a string. Why do we need any discussion? But now I see, not everybody learned it the way I learned it. You see how Mankiw teaches the money multiplier.

The third comment at Syll's, by Pontus, expresses what I was thinking:

The weird thing is that the money multiplier is not a causal relationship. How did the “heterodox” get this so wrong? The idea behind the money multiplier is that there are a hell of a lot of more money out there than the coins and bills people hold in their wallets. And the money multiplier tells you how that can happen.

Yeah, to my mind the multiplier did not cause increases in the quantity of money. It simply explained the process well enough that you could believe that bank loans increase the quantity of money. Explained it well enough that I could believe it, way back in 1977.

But in the years since 1977 the story changed. Mankiw says nothing about bank loans. And in the fourth comment at Syll's, Dilletaunted's reply to Pontus, we read:

I teach introductory macro, and yes, the money multiplier is presented as a causal relationship.

I would bet that Pontus learned his macro back when I did, and Dilletaunted learned it much later -- or, maybe, Dilletaunted just keeps more current.

In any event, there was most certainly a change in the way people think of the money multiplier. And it is the more recent thinking, the multiplier-as-cause thinking, that is now rejected repeatedly by Syll and Woj and Keen and many, many others. Correctly rejected.

I get it now.

// This post makes use of the Codecogs LaTeX editor

Sunday, October 28, 2012

Seeing Blue

In McConnell 1975: How Banks Create Money I quoted from an old Steve Keen post, where he said that if the conventional model told the whole story, "changes in M0 should precede changes in M2." I thought that might be an easy thing to graph, so I looked at it.

I didn't yet find what Keen was talking about, but I did find something that I have talked about before.

The graph shows the monetary base (blue) and M2 money (red). Percent change from year ago, for both. It's a bar graph, with the bars so close together it looks like solid fill. The blue is mostly hidden. Except for a good chunk of the 1990s:

Graph #1: Base Money (blue) and M2 Money (red) -- Percent Change from Year Ago
Here, I zoomed in a little on that blue patch:

Graph #2: Same Data, but starting at 1986
So from 1990 to 1995 or '96, base money grew unusually fast as compared to M2 money.

Then I wanted to add one more series to the graph: Gross Federal Debt. On the graphs above, the numbers are monthly. The Gross Federal Debt series (GFDEBT) is quarterly. FRED wants all the series for a bar graph to have the same frequency, so I changed the Base money and M2 money series to Quarterly. Still didn't work, because it turns out that the Gross Federal Debt series is Quarterly, End of Period. FRED still would not let me do a bar graph, but it was okay with a line graph:

Graph #3:Base Money (blue), M2 Money (red) and Gross Federal Debt (green)
Percent Change from Year Ago for each
The red and blue follow the same patterns as on Graph #2. Blue is high at a bit over 10% in the 1990s while red is low, on Graph #3 just as on Graph #2. But now I have added the Gross Federal Debt (green). Same years. Same units: percent change from year ago. Changes in the Federal Debt are as high or higher than changes in the Base money. Now I want to look at that.

I got rid of the red line, to better compare the other two. And this time, instead of looking at percent change, I looked at change in billions of dollars for base money and the Federal debt:

Graph #4:  Change in Billions, Base Money (blue) and Gross Federal Debt (green)
There's no comparison. The blue line has shrunk down to almost nothing, while the Federal deficits fill the plot area. So which put more money into circulation, blue Base money or green Federal debt?

The gross Federal debt, no question.

And the 1990s were years of especially low inflation, and especially high productivity, so that incomes went up, output went up, and the Federal budget got balanced.

Thanks again, Clonal

Saturday, October 27, 2012

McConnell 1975: How Banks Create Money

Excerpts from and commentary on Chapter 15: How banks Create Money, from Economics by Campbell McConnell, sixth edition, 1975:
In Chapter 14 we saw that the Federal Reserve Banks are the primary source of the economy's paper money. However, we shall find in the present chapter that commercial banks are the fountainhead of the major component of the money system -- demand deposits.

More specifically, in this chapter we want to explain and compare the money-creating abilities of:
1. A single commercial bank which is part of a multibank system
2. A monopoly bank
3. The commercial banking system as a whole

It will be convenient for us to seek these objectives through the commercial bank's balance sheet.

Next, a bit about balance sheets (for my benefit):
The Balance Sheet of a Commercial Bank

What is a balance sheet? It is merely a statement of assets and claims which portrays or summarizes the financial position of a firm -- in this case a commercial bank -- at some specific point in time. Every balance sheet has one overriding virtue: By definition, it must balance. Why? Because each and every known asset, being something of economic value, will be claimed by someone.

A balance sheet balances because assets equal claims. The claims shown on a balance sheet are divided into two groups: the claims of the owners of a firm against the firm's assets, called net worth, and the claims of nonowners, called liabilities.

Assets = liabilities + net worth

Off-topic, but I will point it out now anyway: If there is a weakness in thinking in terms of balance sheets, it is that a balance sheet is a picture "at some specific point in time." A balance sheet is a snapshot. A static image. It cannot show growth. It cannot show change. It cannot show the development of imbalances in the economy.
A Single Commercial Bank in a Banking System

Let us start from scratch. Suppose some farsighted citizens of the metropolis of Wahoo, Nebraska, decide that their town is in need of a new commercial bank... Assuming these enterprising individuals are able to secure a state charter for their bank, they then turn to the task of selling, say, $250,000 worth of capital stock...

The cash held by a bank is sometimes dubbed vault cash...

Now remember, these excerpts are from the 1975 edition of McConnell's book. The excerpt below says state banks "have the option of joining or not joining the Federal Reserve System." I'm not sure that's still an option.
Being a state bank, the Merchants and Farmers Bank of Wahoo will have the option of joining or not joining the Federal Reserve System. Suppose the directors of the bank decide in favor of joining. To accomplish this, the bank must meet a very specific requirement: It must keep a legal reserve deposit in the Federal Reserve Bank of its particular district.

This legal reserve deposit is an amount of cash equal to a specified percentage of its own deposit liabilities which a member bank must keep on deposit with the Federal Reserve Bank in its district. Since 1960, banks have been permitted to count vault cash as a part of reserves. As a matter of banking practice, however, the vast bulk of bank reserves are in the form of deposits in the Federal Reserve Banks.

Vault cash as part of reserves. Related post: Bank Error in Your Favor??? See also Footnote 1 on Robert Schenk's The Federal Reserve and Monetary Policy page.

McConnell says that to simplify the presentation he will assume that all reserves are kept as deposits at the Fed. He continues:
The "specified percentage" of its deposit liabilities which the commercial bank must deposit in the central bank is known as the reserve ratio... Hence, if the reserve ratio were 10 percent, our bank, having accepted $100,000 in deposits from the public, would be obligated to keep $10,000 as a deposit, or reserve, in the Federal Reserve Bank in Kansas City...

How is the exact size of the reserve ratio determined? Congress has the responsibility for setting the upper and lower limits within which the ratio may vary... The Board of Governors can vary the ratio at its discretion within these limits.

To avoid a lot of tedious computations, we shall suppose that the reserve ratio for all banks is 20 percent. This is a nice round figure and is reasonably close to reality. It is to be emphasized that reserve requirements are fractional, that is, less than 100 percent.
McConnell's 20% as "reasonably close to reality" is again a reminder that these excerpts are from the 1975 edition of his book.

The fact that Congress establishes the limits within which the Federal Reserve can vary the ratio is one reason I say it is Congress, not the Fed, that is ultimately to blame for our economy going bad.

One might think that the basic purpose of reserves is to enhance the liquidity of a bank and thereby protect commercial bank depositors from losses... But this reasoning does not hold up... In practice, legal reserves are not an available pool of liquid funds upon which commercial banks can rely in times of emergency. As a matter of fact, even if legal reserves were accessible to commercial banks, they would not be sufficient to meet a serious "run" on a bank. Why? Because, as we shall soon discover, demand deposits may be three, four, or five times as large as a bank's required reserves.

McConnell points out that most deposits are FDIC-insured "up to a maximum of $20,000". 1975, remember.

If the purpose of reserves is not to provide for commercial bank liquidity, what is their function? Control is the basic answer. Legal reserves are a means by which the Board of Governors can influence the lending ability of commercial banks.

"Control is the basic answer. Legal reserves are a means by which the Board of Governors can influence the lending ability of commercial banks."

The object is to prevent banks from overextending or underextending bank credit. To the degree that these policies are successful in influencing the volume of commercial bank credit, the Board of Governors can help the economy avoid the business fluctuations which give rise to bank runs, bank failures, and collapse of the monetary system. It is in this indirect way -- as a means of controlling commercial bank credit -- that reserves protect depositors...
The economy is a kite in the sky. Bank credit is the string. The Federal Reserve is the little boy holding the kite string.

The wind blows. The kite wants to go up. The boy decides whether or not to let out more string. The boy has control.

The wind stops. The kite wants to fall. It does not matter how much string the boy lets out, now. You can't push on a string.

Isn't it simple?

In The Ratio of Debt to Money I looked at Steve Keen's The Roving Cavaliers of Credit from January '09. Keen looked at the "conventional model" of the money multiplier:

Every macroeconomics textbook has an explanation of how credit money is created by the system of fractional banking that goes something like this:

   •  Banks are required to retain a certain percentage of any deposit as a reserve, known as the “reserve requirement”; for simplicity, let’s say this fraction is 10%.

   •  When customer Sue deposits say 100 newly printed government $10 notes at her bank, it is then obliged to hang on to ten of them—or $100—but it is allowed to lend out the rest.

   •  The bank then lends $900 to its customer Fred, who then deposits it in his bank—which is now required to hang on to 9 of the bills—or $90—and can lend out the rest. It then lends $810 to its customer Kim.

   •  Kim then deposits this $810 in her bank. It keeps $81 of the deposit, and lends the remaining $729 to its customer Kevin.

   •  And on this iterative process goes.

There is nothing wrong with that description. As Keen points out, after a new deposit is made, the bank is allowed to lend out most of it. After that loan is deposited, the bank can lend out most of the new deposit. And after that loan is deposited, the bank can lend out most of it as well -- but now Keen omits the word "can" and instead says the bank "lends" it out.

Keen does not mean to suggest that after the second relending (or, ever), that the bank is "forced" to lend out the money. He continues to mean that the bank is "allowed" to do so. Keen simply dropped a word to make the reading easier. That's what I would have done, anyhow.

The bank is never forced to lend money that is not tucked away as required reserves. Ordinarily, the bank wants to lend that money out.

Keen by the way, says simply that the conventional model is "completely inadequate as an explanation of the actual data on money and debt."

In other words it remains true that one dollar, newly deposited, is partially re-lent over and over (or, for those who object to that sentence structure, that the one dollar will serve as reserves for several dollars of money created "from nothing" by new lending) but Keen has numbers that show something else is going on as well.

If the conventional model told the whole story, Keen says, "changes in M0 should precede changes in M2." But the "empirical conclusion was just the opposite: rather than fiat money being created first and credit money following with a lag, the sequence was reversed: credit money was created first, and fiat money was then created about a year later".

Okay. I can live with that. If banks have reserves to use, they will use them. As long as they want to lend more. But if they want to lend more and they do not have the reserves, they do what comes natural: They lend anyway, then get the reserves they need to meet the reserve requirement.

This is not at all what most people say, who object to the conventional money multiplier model. But it answers a question I have asked:

So, what do banks DO with deposits? Are you saying they refuse to lend them out? It seems to me a piece of the story is missing.

I don't mind if you want to add to the story and say that reserves, as a control on lending, don't work very well. I have to object if you say banks don't base loans on existing reserves, because then existing reserves would go into limbo and new reserves would have to be obtained before (or soon after) new loans are made. And the limbo thing doesn't make any sense.

But I don't mind if you want to take the conventional model and build on it. I think Keen shows that we have to do that. As McConnell said,

The object [of reserves] is to prevent banks from overextending or underextending bank credit.

If it doesn't work, if it has worked less and less well since, oh, the time of Reagan, well, remember that Robert Schenk describes the late 1970s and early 1980s as "a period of rapid financial change".

And if things have only gotten worse since that time, then perhaps all of the financial innovation has something to do with it.

At the conclusion of his Chapter 15, McConnell writes
Willingness Versus Ability to Lend

It is only fair to emphasize that our illustration of the banking system's ability to create money rests upon the supposition that commercial banks are willing to exercise their abilities to create money by lending and that households and businesses are willing to borrow. In practice, this need not be the case.

Obviously, if the amount actually loaned by each commercial bank falls short of its excess reserves, the resulting multiple expansion of credit will be curtailed.

Friday, October 26, 2012

Which increased faster, prices or reserves?

From the early 1970s to the crisis of 2008, prices increased faster than reserves.

Q: What was it that pushed prices up?
A: Obviously not reserves.

Thursday, October 25, 2012

Reserves before the Crisis

Total Reserves relative to GDP:

Graph #1: Total Reserves as a Percent of GDP

Falling. From about 3¾ cents per dollar's worth of GDP in the late 1950s, to less than half a cent in the 2000s. After that came the big spike that was the Fed's response to the financial crisis. (Only the very beginning of that spike is shown on this graph.)

I want to point out a slight high spot in the downtrend, a double-hump that is over and done with by 1975. Nothing to do with Paul Volcker.

And I want to point out the hump after 1985 and another one, crossing 1995. These two humps I have discussed before.

(The humps are not part of the current topic.)

Same graph, multiplied by prices instead of by 100:

Graph #2: Start with Graph #1 and Multiply by the Price Level
Graph #1 is all downhill. Graph #2 is a lot more horizontal, until 1995 anyhow. Almost looks like the Fed could have been using Graph #2 as a guide to keep reserves in a target window.

But Graph #2 is of course identical to Graph #3, where instead of dividing by GDP and multiplying by prices, we reduce two steps to one and divide by so-called "real" GDP:

Graph #3: Total Reserves as a Percent of Inflation-Adjusted GDP
Because inflation remains in the numerator but is removed from the denominator, the plotted line is reluctant to fall. The inflation remaining in the numerator on Graph #3 pushes the line up. The only difference between Graph #1 and Graph #3 is that Graph #3 has inflation removed from the denominator.

If the Federal Reserve was using one of these three graphs as a guide for setting the growth of Reserves, it would have been Graph #3, where the victim is divided by a denominator that has inflation stripped away, so that the inflation which remains in the numerator distorts the resulting values by pushing them up.

In the case of Graph #3, the distortion pushes the Graph #1 values up just enough to keep the plotted line relatively flat until 1995 -- and again, from 2000 to the crisis.

But let me ask a question.

I don't know what is the "best" level of reserves. But there must be such a level. For the sake of argument let's say the "best" level is the first value shown on the graphs.

You could pick any level. For me, the first value is the easiest to think about. And it is the same amount of reserves at the start, no matter which graph we look at. The same amount at any moment, no matter which graph: The y-axis numbers are different, and the plots are different, because we're dividing by different things. But the amount of reserves is the same on all these graphs no matter what the reserves are divided by.

So here's the question: What is the right thing to divide by?

We want a level of reserves that stays more or less in proportion to the quantity of money, and a quantity of money that stays more or less in proportion to GDP. So reserves should stay more or less in proportion to GDP. But which GDP? Nominal or Real? Actual-price GDP, or inflation-adjusted?

The denominator should be actual-price GDP, like Graph #1. Why? Because the amount of money we need depends on the actual purchase price of GDP. If prices go up, then we need more money to buy the stuff. This is true, no matter the cause of inflation.

Reserves must remain in proportion to actual price GDP.

Graph #1 shows a long-term decline in reserves, as total reserves increased more slowly than actual-price GDP. For all that time the quantity of money was restricted: Reserves were restricted to fight inflation. For all that time, actual-price GDP increased faster than reserves, forcing the line down. The result was we had less and less money to buy the stuff we were producing.

If inflation was the result of too much money -- or too much reserves -- the decline of reserves would eventually have stopped inflation. Somewhere along the path from almost 4% of GDP to 2% of GDP to 1% of GDP to less than half a percent of GDP, the decline of reserves would have brought inflation to a halt.

But inflation never did come to a halt. The quantity of reserves continued to decline relative to GDP until the crisis, but the decline never brought inflation to a halt.

If "too much money chasing too few goods" was the problem -- if too much reserves was the problem -- then the decline of the line shown on Graph #1 would have fixed the problem, and eventually the line would have gone flat.

The line never went flat.

Here's another look at reserves as a percent of actual-price GDP, like Graph #1. But this time the graph also shows the Fed's response to the financial crisis:

Graph #4: Total Reserves as a Percent of GDP (thru September 1, 2012)
From the 1950s to the crisis of 2008, the Federal Reserve responded to inflation by reducing reserves relative to GDP. The Fed did this continually, repeatedly, over and over, no matter how low the level of reserves fell.

But then there was the financial crisis, and suddenly they changed their mind.

Here's the thing: If the quantity of reserves (or the quantity of money) was the true cause of inflation, then reducing reserves relative to GDP (as on Graph #4 before 2008) would have been the right thing to do. It would have worked. Sooner or later, it would have stopped inflation.

But it didn't work. And now we no longer even try to stop inflation. We just try to keep inflation stable. This is an extraordinary failure of policy. The failure shows that the quantity of money and reserves was not the true cause of inflation.

The Federal Reserve reduced reserves continuously relative to GDP for half a century. The policy did not stop inflation. It only stopped the economy.

Wednesday, October 24, 2012

The Employment-Population Ratio


The rate currently stands at 58.7%. While it jumps around slightly from month to month, it has essentially been stuck there for three years -- close to the lowest level since the 1980s.

Ultimately, the measure is really showing just how engaged the American population is in wage-earning jobs, arguably a better gauge of economy than the unemployment rate.

"The ratio expresses more clearly how many people find working to be a 'good or attractive deal,'" said Tyler Cowen...

"The ratio makes the employment problem look worse, and in that sense is bad for Obama," Cowen said. "A deeper look, however, shows the ratio has been declining for many years, and that its ongoing decline predates Obama and most likely represents longer-run trends about the world of work.

The world of work??? Nah. Think bigger.

Anyway, for how many years has the ratio been declining? Depends how you look at it.

As raw percentage, since the year 2000:

Graph #1: The Employment-Population Ratio

As percent change, since the early 1980s:

Graph #2: Percent Change from Year Ago in the Employment-Population Ratio

Tuesday, October 23, 2012

Calculating (2): Consequences

If we insist on having two measures of inflation, "headline" and "core" inflation, high and low inflation, then we must also have two measures of RGDP, low and high.


If inflation is a little more than we say, real output must be a lot less than we think.

I set up a little example in a spreadsheet, a ten-year test run to answer the question, What happens to "real GDP" if inflation is a little more than we say it is?

Here's the thing: NGDP is actual GDP, valued at actual prices. But then they take NGDP and split it into two parts1 -- RGDP, the real stuff that was produced, and P, the change in the price of all that stuff.

So, NGDP being what it is, if they underestimate the real stuff, they must overstate the price change to make the numbers work. If they overestimate the real stuff, they have to understate the price change to make the numbers work.

It works out great if they overestimate the real stuff, if that's the way it works out, because it makes output look bigger, and prices more stable. Whether that is actually what is going on, is another question -- one that I do not ask.

The important thing to notice is that the real output number and the price level number move in opposite directions. Again: NGDP being what it is, if we assume a bigger RGDP then we must assume a smaller P. If we assume a smaller RGDP then we must assume a bigger P.

But how much bigger? How much smaller? These are the questions I want to ask.

Lately, the Fed has been using a 2% inflation target.2  Some people say 2% is too low and we ought to have 4% inflation.3 4  Meanwhile, other people have been talking about 5% NGDP growth.5

I set up my example with ten years of 5% NGDP growth and 2% inflation, to see what happens after ten years. And for comparison, I set up another example using the same 5% NGDP growth, with 4% inflation.

The numbers on yellow background are the constant growth rates for NGDP and the two inflation rate tests.

All values start at 100 in year 1. Year 2 and later values for NGDP and the PRICE columns are calculated from the constant growth rates. Values for RGDP are calculated by dividing the NGDP number by the price index.

Base year for the RGDP columns is Year 1.

After ten years of 2% inflation, prices have gone up 19.5%. After ten years of 4% inflation, prices have gone up 42.3%.

After ten years of lower inflation, RGDP has increased 29.8%. For the higher inflation, RGDP has increased by 9%.

In this example:
• After 10 years of 2% inflation, prices are up about 20% and output about 30%.
• After 10 years of 4% inflation, prices are up over 40%, and output less than 10%.

So if inflation is a little more than we say, real output must be a lot less than we think.

1. Statistics Canada, Chain Fisher volume index - Methodology:

Growth in the gross domestic product (GDP) or any other nominal value aggregate can be decomposed into two elements: a "price effect", or the part of the growth linked to inflation, and a "volume effect", which covers the change in quantities, quality and composition of the aggregate. The volume effect is presented in the National Accounts by what is referred to as the "real" series (such as the real GDP).

Note that StatCan refers to "GDP" and "real GDP". The former is actual GDP, valued at actual prices; this is commonly called "nominal GDP" or "NGDP". However, standard usage equates GDP with NGDP, because both refer to actual GDP.

The latter -- "real GDP" -- is often abbreviated RGDP. This is the value of NGDP that remains after stripping away the changes in value due to changing prices.

2. James Bullard, Inflation Targeting in the USA (PDF), 6 Feb 2012:

At the January meeting, the Federal Open Market Committee (FOMC) took an important step forward by naming an explicit, numerical inflation target for the U.S. of 2 percent, as measured by the personal consumption expenditures (PCE) price index.

3. Char Weise at Creative Destruction, in comments:

I'm not ashamed to call for more inflation... An inflation rate of 3-4% would not have significant harmful economic effects relative to the current 2%.

4. Tim Duy, The Disingenuous James Bullard:

If Bullard wants to take a hard line against higher inflation, so be it. In reality, that hard line has been adopted by the vast majority of Fed officials. They aren't inclined to touch the inflation option for fear, I think, that it would work.

5. At The Money Illusion: George Soros endorses a 5% NGDP target, quoting Soros:

...and aiming at nominal GDP growth of up to 5%, so that Europe could grow its way out of excessive indebtedness.

Monday, October 22, 2012

Dating the Collapse of the Nation-State

From Chapter 3 of 3001: The Final Odyssey by Arthur C. Clarke (1997):
"Mr. Poole," she began, in a very businesslike voice, "I've been appointed your official guide and -- let's say -- mentor. My qualifications -- I've specialized in your period -- my thesis was 'The Collapse of the Nation-State, 2000-50.'"

Bruce Bartlett: Romney’s Tax Plan and Economic Growth

Mike Kimel and Jazzbumpa recently looked at the effect of the 1964 tax cut on growth, and found nothing there.

Bruce Bartlett looks at the tax code changes of 1986, and reaches a similar conclusion:

Real gross domestic product growth was about the same after the 1986 act took effect in 1987 as it was before, and tax reform obviously did nothing to forestall the 1990-91 recession. Unemployment fell, but it had been trending downward before tax reform, and the 1986 act probably had nothing to do with it. Within a couple of years it was trending upward again.

By the mid-1990s, it was the consensus view of economists that the Tax Reform Act of 1986 had little, if any, impact on growth.

Bartlett continues:

In a comprehensive review of the economic effects of the 1986 tax reform act, in the June 1997 issue of the Journal of Economic Literature, Alan Auerbach of the University of California, Berkeley, and Joel Slemrod, the University of Michigan economist, also found that the primary impact was on the shifting composition of income. They could find no significant growth effects. They concluded, “The aggregate values of labor supply and saving apparently responded very little.”

"The primary impact was on the shifting composition of income." Like this, maybe: Less productive-sector income, and more financial sector income.


More Bartlett, from June 2011:

Unfortunately, there’s no evidence that the 2003 tax cut did anything to stimulate corporate investment.

Sunday, October 21, 2012


From mine of 3 August 2011:

Keynes died.

End of story. Samuelson and the rest of 'em came along then, and started making things up and calling them Keynesian things. But they were not Keynesian things. They were Samuelsonian things, and like that. The economy was in a golden age in those years after Keynes died, the years after World War II, and no matter what Samuelson and the rest of them did, it worked. It wasn't that they were good. They were just lucky.

After a while their luck ran out...

At Economist's View: 'Ultimately Everything is Attributable to Luck', James Kwak writes:

A friend forwarded me Posner’s latest blog post, “Luck, Wealth, and Implications for Policy,” parts of which sound vaguely like a post I wrote three years ago, “Do Smart, Hard-Working People Deserve To Make More Money?“ ... In that post, I argued that even if differences in incomes are due to things that people ordinarily think of as “merit,” like intelligence and hard work, that doesn’t mean that rich people have a moral entitlement to their wealth, because they didn’t do anything to deserve their intelligence or their propensity to work hard. In summary, “I have little patience for the idea that rich people deserve what they have because they worked for it. It’s just a question of how far back you are willing to acknowledge that chance enters the equation.”
Kwak is arguing that there is no moral basis for the inequality of wealth and/or income. (He is also equating wealth and income, which is incorrect.)

No moral basis for inequality? Myself, I always go for what I think is the strongest argument. Kwak's argument ain't it.

The strong argument is that inequality (as economic policy) is unsustainable. Let me rephrase that:

Graph #1, from Emmanuel Saez. (I eyeballed-in the red lines)

If the distribution of income is stable (1943-1978 on the graph), and the economy is still working, then that's sustainable. But if the distribution of income is unstable (after 1978 on the graph; also the 1920s), the trend cannot continue forever. Something has to give. The trend is unsustainable.

You can argue about the moral basis of things, forever. But you cannot keep increasing inequality forever. You cannot go beyond 100%. On the graph, it looks as if we cannot even go beyond 50%. In any case, there is most definitely a limit.

Always go for the strong argument.

On the notion "that rich people deserve what they have because they worked for it", I have two thoughts.

1. Somebody always wins the Superbowl, and only one team wins. The discussion can go on, forever, regarding the reasons why the winning team won. But when all is said and done, the fact remains that there had to be one winner, and only one.

2. In an attempt to favor growth, the U.S. tax code favors bigness. The tax code is not set up like "parity" in football. There are no limits to how much any one "team" can spend, and pretty much all of it is tax-deductible. Luck has nothing to do with that.

James Kwak quotes Richard Posner:
Posner now goes even further than I did: “I think that ultimately everything is attributable to luck, good or bad,” he writes, including the propensity for working hard, a low discount rate, and so on. “In short, I do not believe in free will. I think that everything that a person does is caused by something. . . . If this is right, a brilliant wealthy person like Bill Gates is not ‘entitled’ to his wealth in some moral, Ayn Randian sense.”

Snort. Bill Gates did really well. But he had a lot of help from the tax system. And the bigger he got, the more help he got from the tax code. We need to worry less about morality and other people's money, and worry more about harmful and unsustainable economic policies.

The 1920s was a decade of excessive financialization that led directly to the Great Depression. In the 1930s, people made the best of things but the best wasn't very good. In the 1940s, there was the war. The war employed people. But there wasn't a lot to spend money on, because of the war; and anyway after ten years of Depression people had gotten used to not spending much money.

Meanwhile, people had been paying down debt and defaulting on debt, so that by the end of the war there was not a lot of debt other than government debt.

After the war, people had a lot of money and not a lot of debt. And we had a whole wartime industry that was looking for something to do. And people had near 20 years of scrimping, and it was time to get new stuff.

These are the reasons that the U.S. economy experienced a "golden age" after the Second World War. It had nothing to do with Phillips Curves or Okun's Laws or Full Employment Budgets or any of the newly invented stuff that was called "Keynesian". It had to do with conditions. It had to do with the economic environment.

The one thing a business needs is customers willing to spend.

If you are looking at current conditions, and not at the big picture, then you are going to see a lot of things that look like luck. Like what Posner and Kwak see.

It doesn't depend on luck. It depends on conditions. This is what Keynes saw:

Hitherto the increment of the world’s wealth has fallen short of the aggregate of positive individual savings; and the difference has been made up by the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune. But if effective demand is adequate, average skill and average good fortune will be enough.

It's not just luck.

Saturday, October 20, 2012

Bullard on NGDP Targeting

From James Bullard's PDF Inflation Targeting in the USA (6 Feb 2012):
Inflation targeting emphasizes control over inflation as the key long-term goal of monetary policy. This makes sense because the central bank can only influence inflation and not any real macroeconomic variable in the long run.
Bullard is President and C.E.O. of the St. Louis Fed.

The pointlessness of looking closer

From Wikipedia:

Friday, October 19, 2012

Leuchtenburg: FDR and the New Deal

According to one account, Herbert Hoover, when queried a short time after he left office if there was anything he should have done while President that he had not done, replied: "Repudiate all debts."
From Franklin D. Roosevelt and the New Deal, 1932-1940 by William E. Leuchtenburg
Harper Torchbooks, The University Library, Harper & Row, Publishers, New York, 1963
Chapter 3: The Hundred Days' War, page 53

Yes and Noah


Out here in the blogosphere, it is common to hear things like the following:

1. "Economics doesn't work; it has no practical applications."

2. "Economic will never discover any stable scientific laws, because human behavior changes."

3. "Economics shouldn't use math, because math can't describe human behavior."

4. "Economics is not a science."

Yeah, but you won't hear that from me.


RELATED POST: Tom at Mike Norman Economics.

Thursday, October 18, 2012

After the Bubble is Gone...

...the Debt Remains.

Okay, so it took eight months to get around to this.

Back in February, in a PDF titled Inflation Targeting in the USA, James Bullard of the St. Louis Fed wrote:

A better interpretation of the behavior of U.S. real GDP over the last five years may be that the economy was disrupted by a permanent, one-time shock to wealth.4  In particular, the perceived value of U.S. real estate fell substantially with the 30 percent decline in housing prices after 2006. This shaved trillions of dollars off of the wealth of the nation. Since housing prices are not expected to rebound to the previous peak anytime soon, that wealth is simply gone for now. This has lowered consumption and output, and lower levels of production have caused a significant disruption in U.S. labor markets.

Bullard's footnote 4:

Macroeconomists like me often use the word “permanent,” even though nothing is really permanent. Think of permanent as “exceptionally persistent.”

Paul Krugman responded, suggesting that Bullard was

confusing supply with demand... But Bullard goes even further, seeming to say that a drop in asset prices is itself a destruction of output capacity. What?

I remember, because Krugman's critique impressed me. I wrote of it at the time.

But I didn't go back and check what Bullard had said, the excerpt above. Until now.

Here's what I think.

In the footnote, Bullard says he uses the word "permanent" to mean "exceptionally persistent". If you know that meaning, the word is reasonable, surely. If you don't know that meaning, the word "permanent" could make you doubt the statement.

The writer depends on the reader to make the effort to understand.

In the main excerpt, Bullard says housing prices fell, and are not expected to rebound soon. "This has lowered consumption and output," he says, increasing unemployment.

Let's just say that it "lowered consumption". Because with consumption down, output will fall and unemployment will rise. Conceptually, it's all one piece.

So, why is consumption down? Housing prices fell. Bullard says, "that wealth is simply gone for now".

A lot of people took that statement and turned it into a "wealth effect" story. Tim Duy, for example:

Simply put, Bullard simply moves from the wealth effect to a drop in consumption

But what was happening, really?

People were buying houses and "flipping" them, and making some money by it. That's income, not wealth. There may have been wealth effects, too, based on confidence and expectations and "perceived" wealth rather than on reality. That can't be helped. But the real part of it all -- the effectual part, as Adam Smith would say -- was the actual income generated within the bubble.

That's why it was a bubble: Because there was more actual income being generated. Otherwise, there would be nothing to inflate the bubble.

So I think that when Jim Bullard said all that about the disappearance of wealth as the cause of reduced consumption and reduced output and reduced employment, I think he was saying that falling housing prices made it impossible for people to continue gaining income by flipping houses.1  That deflated the income bubble, which reduced consumption and output and employment.

But, saying it in fewer words, Bullard said something that got misinterpreted as a "wealth effect" story.

Maybe he should have clarified it in a footnote.

Note 1: The building of new homes suffered the same squeeze as flipping homes.

Interestingly, Bullard does not use the phrase "wealth effect" in the PDF. Nor did he use it in his response to Tim Duy.

The writer depends on the reader to make the effort to understand.

Wednesday, October 17, 2012

Just Looking: Reserves and Money

Blue line: Required Reserves. Left scale.
Red line: Varies. Money relative to Base. Right scale.

Graph #1: Reserves

Graph #2: Reserves and M1 as a Multiple of Base Money

Graph #3: Reserves and M2 as a Multiple of Base Money

Graph #4: Reserves and MZM as a Multiple of Base Money

Graph #5: Reserves and Total Credit Market Debt as a Multiple of Base Money

"I consider this my hobby..."

Gene Hayward:

However, as of late there are some blogs I just cannot bring myself to click on anymore. Not that they don't have pertinent or useful information, but because of the caustic, partisan nature in which they present their ideas or policy analysis. It is difficult to know what is valid and not valid when information is filtered through such a clouded lens.

Excess Reserves: Increasing Since 1980

This, you know:

Graph #1: Excess Reserves
The FRED page Excess Reserves of Depository Institutions says

Excess reserves equals total reserves less required reserves.

So instead of looking at the excess, I switched it around to see the NOT-excess part as a percent of total reserves:

Graph #2: The part of Reserves that's NOT excess
Above the blue line, up to 100%, is Excess Reserves. Below the blue line is Required Reserves. Almost binary, isn't it? Switching, like a transistor. Before the financial crisis it was on. Now it's off.

I want to look at the "on" part.

I cropped the graph at 2008 to remove the explosive increase in reserves. But the downspike of the 2001 recession still pushed earlier-year reserves way up to the top of the graph. So I cropped it back to 2000. FRED left a blank spot at the end of the plot area. FRED likes to work in decades or something. 1959-1999 filled the plot area nicely:

Graph #3: Required Reserves as a Percent of Total Reserves, 1 January 1959 thru 31 January 1999
General increase from 1959 to 1970. Then it runs flat at ninety-nine and one-half out of a hundred until 1980. Then it starts to come down.

There is a significant down-spike during the 1990 recession. It is visible, barely, on Graph #2. Well look at that! There are significant downspikes in the last THREE recessions shown on Graph #2. And, come to think of it, there are a couple tremors there, between the 2001 and 2008 downspikes.

Tuesday, October 16, 2012

Financial Development and Growth

From Reassessing the impact of finance on growth (PDF 21 pages) by Stephen G Cecchetti and Enisse Kharroubi:
A simple scatter plot of five-year non-overlapping averages for 50 advanced and emerging countries over the 1980–2009 period – some 300 data points in all – allows us to construct Graph 1. More specifically, we plot five-year average GDP-per-worker growth (our measure of productivity growth) on the vertical axis against five-year average private credit to GDP (our measure of financial development) on the horizontal axis, both as deviations from their country-specific means.

The relationship is clearly not monotonic. That is, at low levels of credit, more credit is good for growth. But there comes a point where the additional lending and a bigger financial system become a drag on growth.

You're not surprised, are you?

Things Left Out

Mike Kimel shows Percent Change in Real Growth

Graph #1: Kimel's Graph

Kimel writes:

The so-called Kennedy tax cuts occurred in 1964, the year following JFK's assassination, and were pushed through by Lyndon Johnson. Now take a look at 1964, and consider the likely outcomes when people who think events in 1964 "increased growth" determine tax policy.

Jazzbumpa evaluates:

[I]nflation adjusted GDP growth quickly peaked after the Kennedy-Johnson tax cut, reaching a maximum value of 8.5% in Q4 of '65 and Q1 of '66. It then dropped dramatically for the next four years.

If tax cuts were good for the economy, then GDP growth would be increasing... The data is not consistent with this notion.

But I'm thinkin, there might be other things going on. There might be reasons that growth dropped off. There might be things interfering, so that the graph does not show the "natural" response of the economy to a tax cut (whatever that may be).

In 1967, there was almost a recession. In 1971, Rowland Evans and Robert D. Novak wrote:

The recond of the Federal Reserve Board in controlling the nation's money supply in the second half of the 1960s was a sorry one. Having choked off the money supply as an anti-inflation device in 1966 so tightly that it produced a serious slump in housing and construction (called by some a "mini-recession"), the central bank started pouring out money too quickly and generously in 1967 and thereby spoon-fed a new inflation.

I'm not impressed that Evans and Novak blame the Fed for everything. They leave out all the economic effects of Congressional policy, like the Kennedy-Johnson tax cuts. From the Evans and Novak quote, take this: The Fed, concerned about inflation in 1966, reacted so strongly that it almost created a recession.

Graph #2: Kimel's graph (blue) and Inflation (red)

So if the Kennedy-Johnson tax cut did not boost real growth, as Kimel's graph shows, perhaps the reason is that the Fed undermined growth.

Stop. Before you curse the Fed for doing that: It was the Fed's job to do that. Still is.

The problem is not that the Fed was doing its job. The problem is that what Congress was doing, with its tax cuts and all, created a situation that forced the Fed to respond. The policies were in conflict. Still are.

That's a pretty big thing to leave out of the picture.

Blueberries on a String

From Jerry's recent comment:

One thing that jumps out at me is - i think you guys're looking at rates-of-change (is the "YoY" year-on-year change?). So, really, you are seeing correlation between deficit and growth. Not debt and growth. But you could also look at debt (normalized somehow - tcmdo/gdp?) versus gdp growth (or something), right?

I liked that idea -- GDP growth versus the change in debt-relative-to-GDP. I set that up with real GDP on the vertical scale, and a ratio of nominals on the horizontal.

Graph #1: Change in Real GDP (left) vs Change in the Debt/GDP Ratio (bottom)
Click graph for FRED source page, Graph #bLT
I didn't put any trend line on it. And you may see errors in my thinking. But it seems pretty clear to me that the trend line would go from upper-left to lower-right. Same general direction shown by most of the connecting lines between the blueberries on the graph.

Upper left is a big increase in real output, and a small increase (or an actual decrease) in the ratio of total debt to GDP. Lower right is a small increase (or a decrease) in real output, and a big increase in the debt/GDP ratio.

The imaginary trend line suggests that large increases in debt (relative to GDP) hinder growth, and that small increases in debt (relative to GDP) are good for growth.

Jazzbumpa considers the possibility that "YoY TCMDO is a function of GDP, rather than the other way around". I would have a hard time getting to that view. But I can take the causality out of the previous paragraph, and say:

The imaginary trend line suggests that large increases in debt/GDP are associated with small increases in GDP, and that small increases in debt/GDP are associated with large increases in GDP.

Please be aware that the "debt" under discussion is Total Credit Market Debt. Not only public debt.

Related Posts:

8 Oct 2012: Three Decades (and an Update). Also: Three Decades (2)

11 Oct 2012: JzB's Debt and Growth, at Retirement Blues and Angry Bear.

12 Oct 2012: JzB, meet bJZ, named in part for a FRED graph.

Monday, October 15, 2012

Gross Federal Debt relative to Total Debt

Dean Baker and John Schmitt identify the good years: 1947-1973 and 1995-2004.

5498 Series from the Penn World Table Added to FRED

Here are two of 'em:

Click graph for FRED's Penn World Table page

Even when you don't know what the numbers are, some changes are obvious.

Woolsey 187757 at Sumner 16486 (2): Neutrality of money

In the same comment on the same Sumner post, the same Bill Woolsey writes:

A regime shift might cause a bubble as people learn the new regime.

But the inflationary trend ends up with real credit demand, real credit supply, the real interest rate, the relative prices of assets, and the real quantity of money all approximately the same.

What bothers me? The objections and the rebuttals, all approximately the same as they have been for too long now.

It would have been so easy for Bill Woolsey to consider the ratio of debt-to-money in that "new regime" of faster money growth. But Woolsey didn't.

It's what Daron Acemoglu and James Robinson were talking about. On the blogs, commentary often boils down to "well-understood and broadly-accepted notions".

Woolsey 187757 at Sumner 16486 (1): Wrong Focus

That Sumner post is a gold mine. This is from a comment by Bill Woolsey:

Where a 1% growth path for nominal GDP and 2% trend deflation is workable, so is a 3% growth path for nominal GDP and a stable price level. As well as a 5% growth path with 2% trend inflation.

GYAH! The problem is not to pick the level of inflation that we're happy with. The problem is to get real GDP to grow faster.

Sunday, October 14, 2012

Epicuro Samos: "Forget Market Rules"

At Mike Norman's, Tom Hickey links to Andrew Sheng and Xiao Geng — Micro, Macro, Meso, and Meta Economics. I had a look.

Given the crisis weighing down the world economy and financial markets, it is not surprising that a substantive reconsideration of the principles of modern economics is underway.

Nice opening!

Nobel laureate Ronald H. Coase has complained that microeconomics is filled with black-box models that fail to study the actual contractual relations between firms and markets...

Another Nobel laureate, Paul Krugman... argues that economists became blind to catastrophic macro failure because they mistook the beauty or elegance of theoretical models for truth.

Both Coase and Krugman bemoan the neglect of their profession’s patrimony – a tradition dating at least to Adam Smith – that valued grand and unifying theories of political economy and moral philosophy.

Oh, I like that. Grand and unifying theories. What it's all about. This'll sound petty, but it bothers me that our understanding of economics today is founded on a seemingly endless train of individual discoveries made by different economists over the last forty years. The think is a patchwork quilt. Where is the overriding theory?

It doesn't feel like a theory. It feels like an agenda. If you have an idea that serves the agenda, your idea gets added to the quilt. But even before the first two pieces were stitched together, the overall design of the quilt was known.

I know it's probably not like that. It's probably the same for them as it is for me: I am always on the lookout for the best explanation that makes the most sense, that fits or forces adjustment in my own understanding of the world we call the economy.

So long as everyone is willing and able to adjust their understanding when adjustment is needed, there is no quilt, no agenda.

Oh, and the grand and unifying theory? You don't start with that. You just go looking for it. Keynes developed of one. Adam Smith developed of one. Marx, maybe, and others I have not read. But -- forgive me -- most economists seem not to have anything of their own like that. Most economists seem not to have such thoughts. Most economists seem to identify themselves with somebody else's theory or somebody else's patchwork quilt.

Andrew Sheng and Xiao Geng wrap up their intro, saying "today’s mainstream micro- and macroeconomic models are insufficient". They offer two additional approaches for model builders, a total of four:

• Macroeconomics, "the study of economic performance, structure, behavior, and decision-making at the national, regional, or global level".
• Microeconomics, "the study of resource allocation by households and firms".
• Meso-economics, the study of "the institutional aspects of the economy that are not captured by micro or macroeconomics... The most important feature of a meso-economic framework is to study the actual web of contracts..."
• Meta-economics, the study of "deeper functional aspects of the economy, understood as a complex, interactive, and holistic living system... The British economist Fritz Schumacher ... defined meta-economics as the humanizing of economics by accounting for the imperative of a sustainable environment..."

Sheng and Xiao Geng consider the four approaches together "a particularly useful framework".

I would go the other way.

Sure, it's probably all useful stuff. But it depends what you're trying to accomplish, doesn't it.

I only know a bit of macro, none of micro, and nothing of the other two. But I know that economics results from human behavior, and I know also that economics is not the study of human behavior. I know it comes down to money.

Economics is the study of changes in the balances of wealth and money over time. The economy is different when half the money is in the spending stream, than it is when only ten percent of the money is in the spending stream. The economy is different when public debt is high and private debt is low, than it is when public debt is low and private debt is high. It's all balances.

When balances wander too much in one direction or another, they lead to problems in the economy, seemingly insoluble problems. So I say balances and imbalances.

Economists never seem to speak of such things. And now, with meso and meta, they'll have twice as many other things to think about, other than the things that must be thought about if we are to solve the economic problem.

I was not so very happy with the post. Interesting, but it goes to the wrong place. But then, the first comment I read had me almost jumping up and down for joy.

The comment is from Epicuro Samos. I would guess that English is not Epicuro's first language, so go easy on the guy's grammar:
Is useless give new names to that you don't understand. Economy still economy, like physics still always physics. The point is that market is not economy. Market is a game to get power, not to get economy. Market is a game like war, with same objectives: power over the others. Market has no economic basis like reality shows. For example, by market rules rich people can spend what ever they want. By economy rules nobody can spend in excess. By economy rules nobody can spend excessively no matter if he is good or bad in market game. So market has market rules, and not economy rules. And because market rules are not the economy rules, market has no economic sustainability. So market will always collapse like a motor that didn't obey to physics rules.

Economy is not something you can invent. You never will understand economy if you look with market point of view. Because is the same that observe physics under the rules of a dysfunctional motor. By the rules of a dysfunctional motor physics have no sense. The reality is the opposite: physics are not wrong, it is the motor that is wrong. So is not the economy that is wrong or have problems (economy never have problems, like physics never have problems), it is the market that have problems because is a wrong behavior. So is better forget those offer demand game, forget market rules, because this is not economy, no matter the name you gave it.

And no matter the way you try to play it he will always collapse because is do not respect the basis of economy. A dysfunctional motor moves but never lasts, like markets (free market, planed market, you name it, it will never lasts because market did not respect economy rules).

Sorry, where is "And no matter the way you try to play it he will always collapse because is do not respect the basis of economy." should be "And no matter the way you try to play market, he will always collapse, because market do not respect the economy rules".

Reality has his own rules, so economy has is own rules. Market did not respect the economy rules so collapse always. Reality is sovereign, economy has is own rules and did not obey to the rules invented by market agents. So is time to learn the reality rules, forget market game bullshits.

Here's what I take from Epicuro:

• He distinguishes between "markets" and "the economy", saying they operate by different rules.
• The rules of the economy are not of human invention. More like laws of nature.
• It is never the economy that is wrong or has problems. It can only be the markets that have problems.
• The market is not the economy.
• The economy does not obey the rules of the market.

I buy all of that. I sometimes say "the economy wants" this or "the economy wants" that. The economy has its own rules which we did not invent and -- if we want the economy to do what we want -- we must respect those rules.

I sometimes say "the economy does not care" about inflation or unemployment. Those are not problems for the economy. They are problems for people. For the economy, they are simply ways to correct imbalances.

Bravo Epicuro!

What is needed is not "a substantive reconsideration of the principles of modern economics" but rather a reconsideration of the way economic principles have been misconstrued. You never will understand the economy if you look with a market point of view.