tag:blogger.com,1999:blog-8764541874043694159.post3665235210872255770..comments2024-03-29T10:48:38.142+00:00Comments on Coppola Comment: Three silly chartsFrances Coppolahttp://www.blogger.com/profile/09399390283774592713noreply@blogger.comBlogger54125tag:blogger.com,1999:blog-8764541874043694159.post-12318147531397500582013-10-30T10:13:36.845+00:002013-10-30T10:13:36.845+00:00It's not just a question of the balance of tr...It's not just a question of the balance of transfers between public and private sector it is a transfer to the recipients of goverment spending from future tax payersDinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-53705146981933998592013-10-29T21:38:50.749+00:002013-10-29T21:38:50.749+00:00There was a comment earlier about the difference b...There was a comment earlier about the difference between ONS figures for UK deficit and debt and Maastricht numbers.<br /><br />In fact, the ONS publish both sets of numbers, and under the Maastricht definition UK government gross consolidate stands at 88.3% of GDP up from 85.0%.<br /><br />Incidentally, although I am pointing this out, I don't think it is in the least important. What should concern us is the direction and pace of fiscal consolidation in the UK, not comparisons with Europe.<br /><br />In fact, having, or supposedly having, lower debt levels than Europe isn't a matter of being "better off" at all. It's just a question of the balance of transfers between public and private sector, or vice versa.<br /><br />And there is a much better argument than debt comparisons that we are better off than Europe, and it is that we have our own currency and are not subject to misguided eurozone austerity policies.jon liveseynoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-68555917345449531892013-10-29T20:22:56.541+00:002013-10-29T20:22:56.541+00:00Stock-to-flow ratios aren't per se silly or me...Stock-to-flow ratios aren't per se silly or meaningless - return on capital is a ratio of stock to flow, as is labour productivity. But comparing stocks to flows is a dangerous business, because if you don't know what you're doing (as Nelson doesn't), you're always in danger of making the mistake that he has actually made in Chart 1, which is to compare a <i>change</i> in a stock to a flow. <br /><br />This is a bit of a quibble as the key point here is the one you make - if you're borrowing £2 of "debt" for every £1 of "growth" then you're almost certainly doing very well, because the debt stays at £2 until you pay it back, but the growth gives you a new £1 every year (making the correct stock/flow division would tell you that the UK was getting a 50% return on marginal borrowing, which anyone can see is a pretty fantastic return on investment to be getting. This would still be dumb economics because it's wrongly aggregated, but at least the division would be giving you something at least potentially meaningful).<br /><br />As I say more of a quibble than anything - I just worried that people might get the impression that comparing a stock with a flow was always wrong, rather than something like starting a sentence with a preposition - probably best avoided but sometimes necessary.Dan Daviesnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-37206635544787102302013-10-29T12:07:44.086+00:002013-10-29T12:07:44.086+00:00Dear Alex,
Although I find some genuine interest ...Dear Alex,<br /><br />Although I find some genuine interest in exchanging and debating with Frances and Ralph, I must admit I have a hard time enjoying debating with you to be brutally honest. Take for instance your latest reply, I find it very confusing and for me it is very difficult to grasp the point you are trying to make. So I guess I am not "intelligent"enough to pursue debating with you and I will call it a day.<br /><br />Have a nice day,<br />Best,<br /><br />MartinAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-25663790644036755802013-10-29T10:36:39.844+00:002013-10-29T10:36:39.844+00:00I wonder then why people doing basic finance mathe...<em>I wonder then why people doing basic finance mathematics compute IRR on their HP12 calculator.</em><br /><br />Because you've missed the point. Consider two similarly sized investments with similar returns (and hence, risks). Whether the interest rate is 3% or 5% shouldn't change my decision to allocate investment between them. How could it? It might well change my decision to invest at all - but then that's just a statement that monetary policy can affect the economy.<br /><br />If changing the interest rate doesn't affect allocation between sectors, it doesn't lead to misallocation. (It might have interesting effects on allocation between asset-classes, but that's beside the point.)<br /><br /><em>Subprime? Does it works for you?</em><br /><br />Depression; does it work for you? As I say, the really weird issue is that it's apparently only a problem in so far as somebody might get a pay rise. The core assumption is that it's only inflation that causes misallocation. Deflation is always good, and the only arguments I can see for that is either a) that it's not really an argument, rather a general aesthetic/emotional question of taste or b) that deflation is a fundamentally conservative force in society and that's what's actually doing the work in the whole project of Austrian economics.<br /><br />After all, the notion of a structural misallocation towards investment in general is a fundamentally odd one. It's not a belief in saving, because what is saved is after all invested and the same people who will tell you this are also the most committed to perfect markets and Say's law. Is it a suspicion of growth in general? Actually, I think it's a belief that both growth and inflation are forces for change in society and that this is a bad thing.<br /><br />I could go on to argue that this is the trauma of the end of the dual monarchy, and a sort of guilt complex working itself out on the part of people who would have laughed themselves hoarse at the reactionaries who thought the emperor was God's anointed and who now didn't like the future one little bit - especially as those reactionaries would have despised most of the gang for being Jewish. <br /><br />I think you can trace a history of ordoliberal thinking that goes "things were OK under the kaiser, so the problem must be that we got rid of the authoritarian state and the socialists unleashed the smelly mob, so clearly an authoritarian economic order is a prerequisite for a liberal society such as I myself want to live in".<br /><br />The Keynesian political worldview is the opposite - if society does not respond to the economic aspirations of the masses and specifically their entirely justified desire for security, the masses will damn well make it do so, and you might not like the other options (communism, fascism, development dictatorship, Maoism), especially if you're a deeply Europeanised, arty farty gay professor from Cambridge on first name terms with most of the cabinet and therefore not exactly a great life insurance risk in a revolutionary situation either.Alexhttps://www.blogger.com/profile/17153530634675543954noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-83026107897396173382013-10-29T09:37:12.754+00:002013-10-29T09:37:12.754+00:00analyzing stock and flow at the same time , a ban...analyzing stock and flow at the same time , a bank manager does that when they compare a salary with a principle in a mortgage. Also Frances has an example of a mortgage in the post.Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-1924736446501904752013-10-29T08:53:44.726+00:002013-10-29T08:53:44.726+00:00Government spending borrowed money is included as...Government spending borrowed money is included as a component in the GDP calculation, which makes the chart even more remarkable. If government claims to be borrowing to invest then I agree the returns, growth in GDP, would not necessarily happen in the same year.Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-82684790121424673372013-10-29T06:39:50.095+00:002013-10-29T06:39:50.095+00:00Dear Alex,
"The Cantillon effect is an ideol...Dear Alex,<br /><br />"The Cantillon effect is an ideological statement."<br />If that is the way you are arguing without using facts to disprove it, then Alex, you are indeed on a good start.<br /><br />"For a start, I'm not convinced that the decision between two similar investments is very much different at 5% as it is at 3% or at 0%."<br />I wonder then why people doing basic finance mathematics compute IRR on their HP12 calculator.<br />Nota bene: The internal rate of return (IRR) or economic rate of return (ERR) is a rate of return used in capital budgeting to measure and compare the profitability of investments. It is also called the discounted cash flow rate of return (DCFROR) or the rate of return (ROR). <br />So yes why bother?<br /><br />"how do low interest rates cause misallocation between sectors?"<br />Please read again Keynes, he knew a thing or two about "speculation" and the famous "animal spirits". Or what about carry trades? Credit growth has been contracting at a rapide pace in Southern Europe while "whatever it takes" from Draghi has led to peripheral banks adding $360 billion of government bonds to their balance sheet for the "nice carry".<br /><br />"But, apparently, good ones are never killed because credit is too tight."<br />Do you have facts on that? Or that's just hearsay?<br /><br />"But the Cantillon effect is a statement that changes in the availability of credit have large and very different and non-obviously distributed effects across sectors, whose net effect is always and everywhere disastrous,"<br />It is not disastrous, it is simply called a credit cycle, just watch the video from Ray Dalio, about how the economy works. By the way Ray Dalio just manages $150 billion with a "decent" track record, so I guess the guy understands a little bit credit cycle, "cantillon effect" and the economy.<br /><br />"Cantillon believers hold that it is possible to be granted a bank loan mistakenly but not to be refused credit mistakenly."<br />Subprime? Does it works for you?<br /><br />"errors in the direction of the rentier interest do not exist."<br />Wow, that's a bold statement, can you expand on this please.<br /><br />" I think this points at the clown here."<br />I agree you can disagree but, that doesn't give you the right to be insulting, that really reflects poorly on your arguments and put you in a difficult position of invalidating most of your well constructed arguments (this is called irony and is much more subtile).<br /><br />Best,<br /><br />Martin<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-46773074285821097362013-10-28T21:37:03.778+00:002013-10-28T21:37:03.778+00:00The Cantillon effect is an ideological statement. ...The Cantillon effect is an ideological statement. For a start, I'm not convinced that the decision between two similar investments is very much different at 5% as it is at 3% or at 0%. You ought to be indifferent between two projects with similar profitability with regard to the cost of capital. If you're not, you don't believe their profitability is similar. Therefore, how do low interest rates cause misallocation between sectors?<br /><br />Secondly, a Cantillon effect requires that some "bad" projects get greenlit just because the capital is available. This I can believe - it's blindingly obvious. Every property bubble etches it on the landscape. <br /><br />Somehow, though, the effect only works in one direction. Bad projects get cleared because credit is too loose. But, apparently, good ones are never killed because credit is too tight. This was, in fact, the normal operating mode of the gold standard, which Cantillon-ists want to go back to. It was also the normal operating mode of the neoliberal central bank up to September 2007 - it wasn't that long ago that central banks were primarily credit-restricting institutions. <br /><br />The statement that changes in credit availability have effects on the real economy is, I think, so true it takes a greatly respected economics professor to deny it. It is worth pointing out, though, that believers in Cantillon effects argue that they do not, except when they want them to. <br /><br />The statement that changes in credit availability might have effects on all kinds of sectors of the economy, without distinction, seems obvious. The statement that changes in credit availability might have effects that are very different on different sectors, for exogenous reasons, seems sensible. <br /><br />But the Cantillon effect is a statement that changes in the availability of credit have large and very different and non-obviously distributed effects across sectors, whose net effect is always and everywhere disastrous, but only when the changes are positive. Cantillon believers hold that it is possible to be granted a bank loan mistakenly but not to be refused credit mistakenly.<br /><br />To put it another way, errors in the direction of the rentier interest do not exist. Errors in the opposite sense do. Now, you can set up a straw-man argument and say "well, what do you want?" but then this is only a straw man. Empiricists are aware that error is possible in both directions, and I would point out that I've not heard of anyone who thinks credit cannot overexpand. I think this points at the clown here.Alexhttps://www.blogger.com/profile/17153530634675543954noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-59715355736151623472013-10-28T20:15:24.519+00:002013-10-28T20:15:24.519+00:00The thing that bugs me about stuff like this is th...The thing that bugs me about stuff like this is that when people like Fraser Nelson exploit the public's poor level of understanding about the economy and fiscal matters, they also help to perpetuate it. When ordinary people see tweets like this, they are reassured that their own primitive intuitive notions about economics are shared by what Krugman calls "Serious People".<br /><br />I'm a Briton living in the US and when I see Internet comments I am embarrassed that fellow Britons embrace economic errors, such as the Household fallacy, or a confusion of levels and gradients, as obvious truth. In the US, you have to go to the Tea Party and the Gold Nuts to find the kind of Economic ignorance that is everyday fare in the UK.jon liveseynoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-57119249389521210422013-10-28T15:16:16.383+00:002013-10-28T15:16:16.383+00:00Dear Ralph,
Volcker knew it was stupid to target ...Dear Ralph,<br /><br />Volcker knew it was stupid to target both and he chose not too although it was in his remit since 1978. NAIRU is the lowest unemployment rate an economy can sustain without spurring inflation.Do we agree on that or not?<br />The NAIRU analysis is especially problematic if the Phillips curve displays hysteresis, that is, if episodes of high unemployment raise the NAIRU. This happens when unemployed workers lose skills so that employers prefer to bid up of the wages of existing workers when demand increases, rather than hiring the unemployed.<br />So please explain me how on earth can the Fed maximise employment with hysterisis being a strong headwind?<br /><br />The Fed is continuing on a "wrong" path and ignoring basic relationship such as Okun's law and the prolonged negative effects of ZIRP on the labor force (capital being mis-priced, it is mis-allocated to speculative purposes rather than productive purposes), so capital is hoarded and not deployed. <br />Okun's law (named after Arthur Melvin Okun, who proposed the relationship in 1962.is an empirically observed relationship relating unemployment to losses in a country's production.<br />No inflation is not with us all the time, this is complete nonsense and you are not backing up your argument with any examples. Capitalism is by definition deflationary due to productivity gains à la Schumpeter. On that subject I recommend you read Jean Fourastié - Pourquoi les prix baissent, 1984 (unfortunately in French).<br />Changes in the money supply and credit have important impacts on the economy and prices and that is very basic. I suggest you have a look at Ray Dalio's video on how the economy works on youtube.com.<br /><br />“the Cantillon effect”. That idea is flatly contradicted by the experience of the last few years."<br />Oh yeah? Please explain or prove your assertion.<br />I don't know if you are familiar with Didier Sornette's work but, maybe you just want to have a look at his work.<br /><br />Regards,<br /><br />MartinAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-20103187112292211742013-10-28T13:39:28.237+00:002013-10-28T13:39:28.237+00:00Martin T,
You claim the Fed cannot target inflati...Martin T,<br /><br />You claim the Fed cannot target inflation and unemployment. Why on Earth not? If the Fed (or those implementing fiscal stimulus come to that) aim to maximise numbers employed in as far as that’s compatible with acceptable inflation, then they are ipso fact targeting “both”.<br /><br />Next, you claim that negative interest rates (I assume you mean negative REAL interest rates) “have always lead to” . . “the Cantillon effect”. That idea is flatly contradicted by the experience of the last few years.<br /><br />That is, we’ve had negative real rates for some years now, and the excess inflation that is part and parcel of any excess Cantillon effect is nowhere to be seen.<br /><br />I use the word “excess” because the Cantillon effect exists ALL THE TIME, in that inflation is with us pretty much all the time. So just to be accurate, it’s “excess Cantillon effect” we are talking about here, rather than “Cantillon effect”.<br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-16721594757106268282013-10-28T11:42:22.793+00:002013-10-28T11:42:22.793+00:00But you are still comparing a stock with a flow. G...But you are still comparing a stock with a flow. GDP is never a stock, but debt increase becomes a stock. It's not remotely meaningful to compare them in this way. If you produced a chart showing the change in the DEFICIT versus change in GDP year-on-year, that would be a meaningful comparison. But comparing change in GDP with the cumulative increase in debt is comparing apples and pears. Essentially, this chart confuses debt (a stock) with deficit (a flow). Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-25942199973661261502013-10-28T11:27:49.246+00:002013-10-28T11:27:49.246+00:00In this context a stock would be the past tense &q...In this context a stock would be the past tense "accumulated debt"<br />but here the focus is different and plural "cumulative <i> increases </i> in debt - a flow of increases .<br />Agreed the wording is unclear especially the "cumulative increases in Gdp" bit, but the topic is the flow of increases , the annual borrowing itself - a flow.<br />Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-33618673212346805262013-10-28T11:12:37.068+00:002013-10-28T11:12:37.068+00:00Fair enough. But core PCE in the US is currently 1...Fair enough. But core PCE in the US is currently 1.2% against a target of 2%, and other measures are below target too. So even if you ignore 7.8% unemployment, there is still no justification for interest rate rises at the moment. If anything, such low inflation suggests that interest rates are too high. <br /><br />I like the idea of countercyclical capital buffers too. But note they are CAPITAL buffers, which is not the same as "setting money aside". Bank capital is shareholders' funds, principally. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-31859179752876764282013-10-28T10:55:46.535+00:002013-10-28T10:55:46.535+00:00Hi Frances, the Fed's mandate should be what t...Hi Frances, the Fed's mandate should be what the one of price stability. Adding full employment to its mandate in 1978 was a political stunt to make the Fed much more a political tool. Volcker did not fall prey to this trap which had been set up by the Congress. Furthermore, I quite like the introduction of macro prudential measures within a mandate of a central bank such as the ones the Central Bank of Sweden is thinking of. Countercyclical measures such as forcing banks to put more money aside in the good times of the credit cycle are in my own opinion highly interesting.<br /><br />Best regards,<br /><br />MartinAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-87642969612596915402013-10-28T10:34:25.489+00:002013-10-28T10:34:25.489+00:00No, Dinero. A CUMULATIVE increase is a stock. If y...No, Dinero. A CUMULATIVE increase is a stock. If you want a flow, you need an annualised increase (assuming that you are using annual GDP). Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-52807144084657607512013-10-28T08:33:30.665+00:002013-10-28T08:33:30.665+00:00Graph 1 is not a stock of money, it is a flow of m...Graph 1 is not a stock of money, it is a flow of money through the treasury.<br />It is labelled "cumulative increases in ... public debt" .<br />The subject is not the outstanding debt , the subject is the act of and the size of, the ongoing act of borrowing.Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-59798406065803237172013-10-28T08:30:21.031+00:002013-10-28T08:30:21.031+00:00This comment has been removed by the author.Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-29688171444537601152013-10-28T08:10:41.494+00:002013-10-28T08:10:41.494+00:00Frances, thanks now I understand what you are refe...Frances, thanks now I understand what you are referring to.<br /><br />Essentially only institutions without reserve deposit facilities (those guys will be getting the 0.5% interest) will be using the Operational Standing Facilities to allow friction free settlement.<br /><br />From the BoE website it does appear that OSF has not had any use since 0.5% was paid on reserves in March 2009.<br /><br />http://www.bankofengland.co.uk/boeapps/iadb/fromshowcolumns.asp?Travel=NIxSTxTDxSUx&FromSeries=1&ToSeries=50&DAT=RNG&FD=1&FM=Jan&FY=2000&TD=28&TM=Oct&TY=2013&VFD=Y&html.x=21&html.y=13&CSVF=TT&C=JOW&C=JOY&Filter=N<br /><br />BobAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-37665757254046408072013-10-28T07:34:15.717+00:002013-10-28T07:34:15.717+00:00Yes, that's what I said. The Bank of England p...Yes, that's what I said. The Bank of England pays bank rate on voluntary reserves. But it pays zero on deposit balances. See paragraph 58 here:<br /><br />http://www.bankofengland.co.uk/markets/Documents/money/publications/redbookosf.pdfFrances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-87968200065652110872013-10-28T02:28:51.134+00:002013-10-28T02:28:51.134+00:00Ok Martin, I've read your own post on this now...Ok Martin, I've read your own post on this now. <br /><br />Forward tax receipts are of course fiscal policy, not monetary - if they are issued by the Fed then they are monetization of government debt. This doesn't cause me a problem - I'm generally a fan of fiscal policy as a solution to deflation (which we would have if the Fed wasn't propping everything up). But it would be extremely difficult to implement given the present state of US politics. I can't see a Republican-dominated Congress agreeing to this in a million years, can you?<br /><br />It still doesn't answer my question as to what you think the Fed's mandate should be, though. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-71622293406260849622013-10-28T02:26:33.294+00:002013-10-28T02:26:33.294+00:00Frances
http://www.bankofengland.co.uk/publicatio...Frances<br /><br />http://www.bankofengland.co.uk/publications/Pages/news/2013/010.aspx<br /><br />"The Bank of England's Monetary Policy Committee at its meeting on 9 October (2013) voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%."<br /><br />I did not notice any announcement in the last 10 days to change that to zero.<br /><br />Bob.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-167921582098209192013-10-27T22:40:55.778+00:002013-10-27T22:40:55.778+00:00No i am not suggesting NGDP targeting either. Did ...No i am not suggesting NGDP targeting either. Did I wrote this? No. What would I have as alternative as the Fed is dangerously flirting with deflation is Fisher's solution. Forward Tax Receipts. <br />Best,<br /><br />MartinAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-61447456659924105542013-10-27T22:03:01.752+00:002013-10-27T22:03:01.752+00:00Martin,
I'm not going to discuss here exactly...Martin,<br /><br />I'm not going to discuss here exactly why I think QE is damaging. I've written about it extensively myself and collected contributions from others on the sub-site "The QE Debate", the link for which is at the top of this screen. Suffice it to say that the effects of QE are poorly understood. It appears to be effective as a crisis measure to prop up asset prices, but far less effective as a measure to counter economic stagnation and fiscal contraction. And it has unintended and possibly damaging consequences in financial markets, emerging markets and the wider economy. <br /><br />You are clearly not impressed with the dual mandate and the Taylor rule, but you have not explained what you would have as an alternative. Are you suggesting that the Fed should adopt NGDP targeting?Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.com