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"This is a horrible research program."
Understatement of the week.
**Should-Read**: What Noah Smith does not say is:...
**Should-Read**: What Noah Smith does not say is: this is a horrible research program. Taking your residual, putting it on the right hand side, and calling it a "productivity" shock may allow you to _fit_ some things, but it doesn't allow you to _explain_ or _understand. And there is no theory an...
The inferiority complex with respect to DSGE is amazing. A good way to get over it is to understand that General Equilibrium theory and Marshallian demand analysis amount to the same thing. Marshallian demand analysis is not partial equilibrium analysis; it is just as general as "General Equilibrium" theory though this does not mean that either is general equilibrium.
I have written about it in the link below. It's a very long read with lots of math. But it is mathy only to show that General Equilibrium math is rubbish.
http://www.philipji.com/holes-in-general-equilibrium/
**Must-Read:** Very smart from the extremely sharp...
**Must-Read:** Very smart from the extremely sharp Olivier Blanchard. But, as he knows well, I disagree. I am very impressed by the fact that the further an economist was from the gravitational pulls of the influence of Prescott, Lucas, and even Friedman, the fewer stupid and the more smart thing...
Greenspan was not a coward. But it is not fair to say that he made a bad call either. If he made an error it was an error for which all of economics should take the blame, not he alone He simply did not have the theoretical infrastructure to make the right call.
To begin with he did not have a proper measure of money. But even if he had one it is unlikely that he would have made the correct decision. The measure of money that I use shows money supply rising continuously for the period from 1995 to the end of 2005 with brief periods of levelling off (for instance, around the time of the 2001 recession). But this was not more steep than the rise from 1985 to October 1987.
The difference was interest rates. The much lower interest rates during the early 2000s permitted an asset market boom.
What brought about the crash of course was that money supply dipped slightly in 2006 and then was held rock steady from the beginning of 2006 to the end of 2009. In real terms this amounted to a severe squeeze.
Alan Greenspan Misjudged the Risks in the Mid-2000s; Alan Greenspan Was Not a Coward
The standard explanations I have heard for Alan Greenspan's policy of "benign neglect" toward the mid-2000s housing bubble--why he turned down the advice of Ned Gramlich and others to use his regulatory and jawboning powers against it--see Greenspan as motivated by three considerations: 1. Leas...
The problems of DSGE lie in GE. To attack DSGE you need to first point out the problems in General Equilibrium Theory.
In http://www.philipji.com/holes-in-general-equilibrium/ (which is a work in progress) I show that the principal claim of GE, viz. that it represents an advance over Marshallian demand analysis, is without basis.
DSGE is of course lost when it comes to understanding money. But even before that it fails to understand involuntary unemployment. I have shown that Keynes was right in saying that flexible wages cannot lower unemployment during severe recessions. The whole argument, which is basically "classical", can be seen at http://www.philipji.com/involuntary-unemployment/
**Must-Read:** Paul Romer observes--I believe...
**Must-Read:** Paul Romer observes--I believe indisputably--that the now 40-year tool-building exercise creating Dynamic Stochastic General Equilibrium models based on representative agents and rational expectations has produced neither estimates nor insights. He further ventures the guess--which...
1. "It is misleading to think of the demand for money."
That is correct. People complain that food is going waste although there is so much unfulfilled demand (people starving, etc). But of course when economists talk of demand for food they mean the willingness and capability to exchange food for money. Therefore, the demand for money would mean the willingness and capability to exchange money for money, which makes no sense for all.
Imagine a couple of decades wasted during the sixties and seventies when tomes were written about "the demand for money".
2. "If individuals want to save in the form of money, they won't collectively be able to if the stock of money does not increase."
Completely incorrect. In order to save more in the form of money all individuals need to do is cut consumption. This automatically means less money is used as a medium of exchange and more money is converted into asset.
Money in M1 deposits (barring, importantly, precautionary balances) is medium of exchange. Money in non-M1 M2 deposits is an asset. One can be transformed into the other.
My book "Macroeconomics Redefined" http://www.amazon.com/dp/B00ZX9O5XQ has more details.
This also means that the velocity of money has nothing to do with time. It is a ratio of two stocks, which is why the velocity of money is an exact function of interest rates. See http://www.philipji.com/item/2014-04-02/the-velocity-of-money-is-a-function-of-interest-rates
Money stocks and flows
Because "stock-flow consistency" makes me think of money. [Here's Simon Wren-Lewis' and Jo Michell's good posts, but I've got a one-track mind.] 1. If you want to increase the stock of land in your portfolio, there's only one way to do it. You must increase the flow of land into your portfolio, ...
The problems of classical macroeconomics have their roots in classical microeconomics.
Who would guess, for instance, that the linear demand curve for a single market actually assumes constant aggregate demand? But it does. So the classical argument that involuntary unemployment is impossible is actually a circular argument. There is only one demand curve that does not assume constant aggregate demand, and that is the rectangular hyperbola. An analysis taking the rectangular hyperbola as the general form of the demand curve yields involuntary unemployment as a natural result.
See http://www.philipji.com/involuntary-unemployment for the complete argument
Be prepared to abandon some fundamental assumptions.
**Comment of the Day: Charles Steindel**:...
**Comment of the Day: Charles Steindel**: _[Olivier Blanchard on Role of DSGE][]_: >On the whole, as one would expect, Olivier's exposition was masterful. The rub is, as you say, at the end... [Olivier Blanchard on Role of DSGE]: http://www.bradford-delong.com/2016/08/must-read-the-thing-about-th...
I compared YoY changes in the labor participation rate with YoY changes in real median household income (as a proxy for wages). The relationship appears to be a close one. Apparently, the idea of opportunity cost is a major part of the explanation for changes in the labor participation rate.
See http://www.philipji.com/item/2016-04-16/what-explains-changes-in-the-labour-participation-rate
Labor Force Participation: Aging Is Only Half of the Story
The labor force participation rate (LFPR) is an important ingredient in projecting employment growth and the unemployment rate. However, predicting the LFPR has proven difficult. For example, in 2011 the Congressional Budget Office (CBO) projected that the LFPR in 2015 would be about 64.3 percen...
As a homework assignment your students might want to figure out what is wrong with the following post that argues the Keynesian multiplier is negative during recessions.
It involves only elementary arithmetic.
http://www.philipji.com/item/2015-06-20/the-keynesian-multiplier-is-negative-during-recessions
By the way, Joe Stiglitz had something to say about negative rates yesterday on Project Syndicate: https://www.project-syndicate.org/commentary/negative-rates-flawed-economic-model-by-joseph-e--stiglitz-2016-04
We Are so S---ed. Econ 1-Level Edition
[**Over at Equitable Growth**](http://equitablegrowth.org/?p=25147): As I told my undergraduates yesterday: Y = μ[co + Io + NX] + μG - μIrr where: * Y is real GDP * μ = 1/(1-cy) is the Keynesian multiplier * co is consumer confidence * cy is the marginal propensity to consume * C = co + cyY is th...
If the mistakes on both sides are corrected Keynesianism and Monetarism are indeed the same thing. From a common sense point of view this follows from the fact that to get $1 of aggregate demand you need to spend $1 of money.
This can be seen by comparing the graph of YoY changes in Corrected Money Supply (my measure) on http://www.philipji.com/item/2016-03-05/a-major-crash-is-on-the-cards-this-year with the graph of YoY change in Real Personal Consumption Expenditure at https://research.stlouisfed.org/fred2/graph/?g=48Dx
Both graphs indicate that by the end of this year we are in for a major market crash followed by a recession.
The Disappearance of Monetarism
**[Over at Equitable Growth][4]**: I just hoisted [a piece I wrote fifteen years ago[1]—a follow-up to my [“Triumph of Monetarism”][2] that I published in the _Journal of Economic Perspectives_. I think of it as my equivalent of Olivier Blanchard's [“The state of macro is good" piece…][3] **[Rea...
The paper explores the effect inequality has on real interest rates. It seems to me that it is very low interest rates that have exacerbated inequality. See https://research.stlouisfed.org/fred2/graph/?g=46rB
In the 1950s and 1960s labor share of income was high despite lows interest rates. But this was because in those days very few people (if any) were being paid in stock options. Now low interest rates boost the financial industry because it makes cheap leverage possible. So it increases both wealth and income inequality.
See also http://www.philipji.com/item/2016-04-05/who-benefits-from-low-interest-rates
Inequality and Aggregate Demand
Next paper at the conference: Inequality and Aggregate Demand, by with Adrien Auclert and Mathew Rognile: Abstract: We explore the quantitative effects of transitory and persistent increases in income inequality on equilibrium interest rates and output. Our starting point is a Bewley-Huggett-Ai...
You are completely right in reiterating that the demand curve for loans is always downward sloping.
So why does the graph of Industrial and Commercial Loans vs the Effective Federal Funds Rate seem to point in the opposite direction? See https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=3I8H
It clearly shows that whenever the Fed raises interest rates from close to zero levels the quantum of industrial and commercial loans goes up, not down.
The reason is that in your entire argument you have ignored the supply side of the equation.
Very low interest rates make it possible for players in the financial asset markets to earn high returns by using high leverage. When interest rates are raised leverage becomes expensive and returns fall drastically. So financial companies are forced to look at alternative places to deploy their money. This is why loans to the real side of the economy increase when rates are raised from very low levels.
I wrote about this five years ago at http://www.philipji.com/item/2011-07-24/why-banks-do-not-lend-at-near-zero-interest-rates
At that time I was still groping for the correct model of money which I have since written about in my book "Macroeconomics Redefined" http://www.amazon.com/dp/B00ZX9O5XQ
Incidentally, the book predicts a massive crash by the end of this year.
The Neo-Fisherian Counterfeiter
Just a thought-experiment that's been running through my head. You are a saver and lender. You take some of the money you have earned as income, that you don't want to spend yourself, and lend it to people who want to borrow so they can spend it instead of you. Suppose you want to lend more than...
"However, this relationship struggles to explain the 1995-96 and 2012-15 periods, with the latter being one of stable global growth and steep commodity price declines in both 2012 and 2015."
You might want to take a look at another variable which is Corrected Money Supply for the US. A graph can be seen at http://www.philipji.com/item/2016-03-05/a-major-crash-is-on-the-cards-this-year. For your convenience I have uploaded a graph for the period from 1990 to 2016 which is at http://www.philipji.com/CMS-1990-2016-libertystreeteconomics.png
This agrees much better with commodity prices for 1995-96 and 2012-15.
I also venture to predict that because Corrected Money Supply Growth is approaching the 0% level, commodity prices will either continue to be low or there will be a major crash.
What Tracks Commodity Prices?
Thomas Klitgaard and Harry Wheeler Various news reports have asserted that the slowdown in China was a key factor driving down commodity prices in 2015. It is true that China’s growth eased last year and, owing to its manufacturing-intensive economy, that slackening could reasonably have ha...
The Fed has increased rates a little and hints at more increases this year. The ECB has reduced rates and promised to keep them low for very long.
It would be interesting to see where inflation rises more.
**Must-Read: Larry Summers**: [A World Stumped by...
**Must-Read: Larry Summers**: [A World Stumped by Stubbornly Low Inflation](http://equitablegrowth.org/must-read-larry-summers-2/): "[The 1970s taught us that] allowing not just a temporary increase in inflation but a shift to above-target inflation expectations could be very costly... >...At pre...
This carries on the error of a previous chapter where Keynes hazards a guess that the failure to invest is because firms have set aside depreciation allowances much higher than the actual depreciation required.
Two gargantuan omissions stand out in The General Theory. The first is the absence of any mention of the 1929 stock market collapse (a blunder continued by modern Keynesians who see no pattern in the fact that the Great Depression, the Great Recession and Japan's Lost Decade were all preceded by massive asset market collapses). The second is the total absence of any reference to banks and bank failures.
After the coming market crash it is to be hoped that the ideas of The General Theory will be given a decent burial while retaining the Keynesian method which is substantially correct.
**Must-Read: John Maynard Keynes** (1936):...
**Must-Read: John Maynard Keynes** (1936): _General Theory_, chapter 23: ["Notes on Mercantilism, the Usury Laws, Stamped Money and Theories of Under-consumption"](http://equitablegrowth.org/must-read-john-maynard-keynes-1936/): "It is impossible to study the notions to which the mercantilists we...
"We are barking up the wrong tree: there is something we have missed, and the models that we think are good first-order approximations to reality are not, in fact, so."
Questioning is the first step towards progress.
Quantitative Easing: Walking the Walk without Talking the Talk?
The extremely-sharp Joe Gagnon is approaching the edge of shrillness: he seeks to praise the Bank of Japan for what it has done, and yet stress and stress again that what it has done is far too little than it should and needs to do: **Joe Gagnon**: [The Bank of Japan Is Moving Too Slowly in the R...
Duy,
The scenario five and Yellen testimony links in your post are not working.
Fed Yet To Fully Embrace A New Policy Path
The Fed will take a pause on rate hikes. An indefinite pause. The sooner they admit this, the better off we will all be. Indeed, the sooner they admit this, the sooner financial markets will calm and the the sooner they would be able to resume hiking rates. Federal Reserve Chair Janet Yellen had...
"In sum, a key factor in keeping the US economy on the rails is acknowledging that tightening financial conditions via the dollar obviates the need to tightening conditions via monetary policy."
But monetary conditions have been tightening since January 2014 as the graph on http://www.philipji.com/item/2015-12-05/the-fed-is-set-to-squeeze-during-a-monetary-contraction shows. The fall in commodity and equity prices is only a reflection of that.
The Fed is doing exactly what it did the last time around. It first created asset bubbles and then burst them by contracting money. The YoY growth rate of money supply (my measure) was around 2.4% on 1 December 2015 (before the Fed raised the Funds rate). It is probably close to zero at present.
If another QE is not carried out, I expect a massive crash in one or more asset markets before the end of the year. I don't see too many economists predicting this. Of course after it happens many of them will claim to have seen it coming.
Fed Yet To Fully Embrace A New Policy Path
The Fed will take a pause on rate hikes. An indefinite pause. The sooner they admit this, the better off we will all be. Indeed, the sooner they admit this, the sooner financial markets will calm and the the sooner they would be able to resume hiking rates. Federal Reserve Chair Janet Yellen had...
When I look at your graph of share prices and production index, it seems apparent that the bottom of the share price line precedes the bottom of the production index. (You can see it in 2008-09 as well as in 2012-13)
The reason is that asset market crashes cause recessions. Surely it is not an accident that the Great Depression, Japan's Lost Decade, and the Great Recession all followed huge asset market crashes.
The arrow of causation is simple. Huge asset market crashes cause huge contractions in net worth of a large part of the population. They respond by cutting consumption in a bid to recoup the net worth. In turn companies respond by cutting output.
The larger the crash, the larger the cut in consumption and the more prolonged the cut. In the 2008-09 crash, for instance, the median US family lost 18 years of net worth. It would have to double its saving rate for 18 years in order to regain the lost net worth. That is why recoveries following asset market crashes are so long-drawn-out.
If you see the graph on http://www.philipji.com/item/2015-10-04/us-recessions-and-recoveries-over-55-years you will see an almost vertical drop in real consumption at roughly the start of every recession.
Are recessions predictable?
Amidst all the talk of a recession, this chart presents something of a puzzle. It shows that there’s a decent correlation (0.57) between annual changes in the All-share index and in UK industrial production*. The puzzle is that this correlation is contemporaneous. If stock markets anticipated ...
The Great Depression, Japan's "Lost Decade" and the Great Recession all followed an extended period of very loose monetary policy. The Fed's QEs (and current monetary contraction) will soon be causing the next great market crash followed by a recession that will probably turn out to be worse than the Great Recession.
But Prof DeLong is right. According to the Keynesian model, loose monetary policy cannot cause higher asset prices. That is because Keynesian economics (like Friedman's monetarism) goes by the portfolio theory of money. Money is just one of many financial assets. So if demand for money is high it follows that demand for other financial assets must be low. And if demand for those financial assets is low, how can their price go up?
This theory obviously violates practical experience. And yet it is a truth universally acknowledged that we cannot see the world except through the lens of our theories.
In the right theory, where money is a medium of exchange and not an asset, more money results in higher demand for real goods and services as well as for financial assets. Lower interest rates automatically skews the demand in favour of financial assets. That is what has been happening.
The simple model which predicts the next crash as well as the reason for the failure of central banks and governments to boost economic growth since 2008 can be found in my book "Macroeconomics Redefined" http://www.amazon.com/dp/B00ZX9O5XQ
But for people weaned on IS-LM diagrams, liquidity preference and an erroneous conception of money, it is difficult to let go of phlogiston and epicycle theories.
We can only hope that another severe recession will finally put an end to discredited theories. But the experience of the past seven years does not fill one with optimism. Perhaps Max Planck was right: "A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it."
Skidelsky on: The Two Big Economic Policy Failures That John Maynard Keynes Would Be Disappointed by Today
I missed this six months ago: **Julie Verhage**: [The Two Big Economic Policy Failures That John Maynard Keynes Would Be Disappointed by Today](http://www.bloomberg.com/news/articles/2015-08-13/the-two-big-economic-policy-failures-that-john-maynard-keynes-would-be-disappointed-by-today): "The fam...
How many recessions does it take to change economists' models?
Comment at the URPE-AEA Session: Causes of the Great Recession and the Prospects for Recovery
Notes for My Comment at the URPE-AEA Session: [Causes of the Great Recession and the Prospects for Recovery][a] * Presiding: Fred Moseley * David M. Kotz and Deepankar Basu: Stagnation and Institutional Structures * Robert McKee [Michael Roberts]: Recessions, Depressions, and the Rate of Profit *...
For information on sweeps see https://research.stlouisfed.org/aggreg/swdata.html
Data are available in the link saying Excel format
'Market Bubbles: What Goes Up Doesn't Always Come Down'
I wonder if conditioning on the type of bubble (e.g. driven by housing) would make a difference (though not sure it would be possible to fit them into tidy categories). I guess another way to ask the question is whether the cases of a "dramatic market rise followed by an equally spectacular fall...
Corrected Money Supply = M1 - 12 months personal saving + sweeps. For the rationale behind it you will have to read my book "Macroeconomics Redefined"
'Market Bubbles: What Goes Up Doesn't Always Come Down'
I wonder if conditioning on the type of bubble (e.g. driven by housing) would make a difference (though not sure it would be possible to fit them into tidy categories). I guess another way to ask the question is whether the cases of a "dramatic market rise followed by an equally spectacular fall...
Not at all. As the graph shows, the Great Recession was accompanied by a drop in money supply.
'Market Bubbles: What Goes Up Doesn't Always Come Down'
I wonder if conditioning on the type of bubble (e.g. driven by housing) would make a difference (though not sure it would be possible to fit them into tidy categories). I guess another way to ask the question is whether the cases of a "dramatic market rise followed by an equally spectacular fall...
The Volcker recessions were different from the Great Recession. In those recessions there was no major asset market crash. So consumers did not lose any part of their accumulated saving. As soon as the Fed loosened the taps and firms got access to money the economy swiftly got back to normal. Recoveries following asset market crashes are necessarily long-drawn-out because consumers raise their saving rate for an extended period to recover their lost net worth.
The Japanese experience was different. In the Japanese asset market crashes consumers lost very little. The big losers were firms who found themselves very short of money to carry on business. They might have borrowed from banks but banks too had lost money in a big way. Unlike in the US, Japanese consumers cut their saving rate which has moved from very high levels to nearly zero.
The Fed did do a lot to counter the contraction in 2009-10. That is why the Great Recession did not become a depression. The expansion thereafter only served to create asset bubbles that are now in the process of being popped.
'Market Bubbles: What Goes Up Doesn't Always Come Down'
I wonder if conditioning on the type of bubble (e.g. driven by housing) would make a difference (though not sure it would be possible to fit them into tidy categories). I guess another way to ask the question is whether the cases of a "dramatic market rise followed by an equally spectacular fall...
I will be very happy if you can point out anything wrong in the arithmetic of http://www.philipji.com/item/2015-06-20/the-keynesian-multiplier-is-negative-during-recessions
The book itself points out the important role of banks and other lending institutions. In textbooks banks intermediate between saving and investment. This would be about 5% of GDP. In reality bank lending amounts to about 60% of GDP.
Over at Huffington World Post: Future Economists Will Probably Call This Decade the 'Longest Depression'
**[Over at Huffington World Post][a]**: Future Economists Will Probably Call This Decade the 'Longest Depression': Posted: 01/08/2016 9:28 am EST Updated: 49 minutes ago: Economist Joe Stiglitz warned back in 2010 that the world risked sliding into a 'Great Malaise.' This week, he followed up on ...
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