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jmherbener
ParticipantAt the end of 2012, the Federal debt is $16.4 trillion, but the debt held by the public was $11.5 trillion. The Interest paid on treasuries held by the Fed go to the expenses of the Fed and any surplus is remitted back to the Treasury.
The interest paid on the federal debt in 2012 was $220 billion. Federal expenditures in 2012 were $3.6 trillion. So interest made up 6 percent of the Federal budget. Interest rates could double or even triple without initiating a nightmare scenario on the Federal budget.
Arbitrage does not eliminate the difference in interest rates between high-yield securities and AAA. So if Treasuries are further downgraded and command higher interest rates to entice lenders to buy them, then there will be no arbitrage between the higher interest rate Treasuries and higher rated securities.
ParticipantI’m assuming that by “number” you mean the CPI increased in the last quarter at an annualized rate of, say 2 percent. And by “trend” you mean, the CPI trended upward as it increased last year by 2 percent and this year it has increased by 5 percent at an annualized rate.
Because the CPI is a political football, the number matters. Imagine how different the political treatment of monetary policy would be if the official CPI numbers were as Shadowstats calculates them.
ParticipantEach government issued fiduciary media, holding only a fraction of gold money against its currency issue. International currency traders could, then, devalue any currency in exchange for another that they thought over inflated to the point of impending official devaluation .
ParticipantRomer is a New Keynesian. So, the dispute you’re discussing is between Old Keynesians and New Keynesians.
Take a look at Mankiw on the New Keynesians and the macroeconnomic synthesis:
http://www.econlib.org/library/Enc/NewKeynesianEconomics.html
The literature has moved on from the monetarist-Keynesian debate.
ParticipantDemand and supply analysis is done to explain the level of and changes in the price of a good. For this reason, the graph of demand (supply) is drawn to depict a person’s choice to buy (sell) a particular amount of a good at each of a series of prices. The law of demand (supply) states that at a lower price a person will buy (sell) not less (not more) of a good if all the other factors that affect his buying (selling) are kept the same. Because of the laws of demand and supply, the market will clear only at one price or a limited range of prices. The price of a good will be at the level that clears the market because doing so generates the greatest possible benefits to the traders. So to analyze the level of price, the economists holds all the factors affecting buying and selling the same except the price itself.
To analyze changes in the price of a good, the economist conjectures a change in one or more of the non-price factors affecting buying and selling. Let’s suppose the preferences of gun owners to buy 9mm ammunition increases, meaning they are willing to buy more ammunition at the current level of price. Then the entire demand curve will shift to the right. If the level of price fails to rise, the market will not clear, instead there will be excess demand. Sellers raise price in response to the increase demand and because the price is higher, they increase the quantity they supply. The market will then clear at a higher price.
ParticipantDon’t make too much of the seeming emphasis of fiscal policy to Keynesians and monetary policy to Monetarists, Both agree on the importance of aggregate spending in determining the macro economy. Only in the special case of a liquidity trap, do Keynesians claim monetary policy is ineffective. Romer’s article focuses on monetary stimulus, not in contrast to fiscal, but in contrast to “self-correction” of the market.
ParticipantThe BEA has not yet changed the calculation of GDP.
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
Here is there press release on the change.
http://www.bea.gov/scb/pdf/2013/03%20March/0313_nipa_comprehensive_revision_preview.pdf
The major changes are including R&D expenditures in GDP. According to the BEA this would have added $300 billion to the $14 trillion GDP in 2007.
Capitalizaton of entertainment and literary products. BEA estimates this would have added $70 billion to GDP in 2007.
Capitalization of ownership transfer costs of residential fixed assets. BEA estimates this would have added another $60 billion to 2007 GDP.
Switch from cash to accrual account of pensions. BEA estimates this would have added another $30 billion to 2007 GDP.
So, the $14 trillion GDP would have been $460 billion, 3.3 percent, larger in 2007. Because the BEA plans to revise the figures back to 1929, I don’t think the changes will drastically affect measured growth rates.
The BEA methodology has always been littered with difficulties such as those highlighted by the changes it plans to make.
ParticipantMoney is the general medium of exchange. It is the most widely-traded good in the economy. Because of this, economic calculation, i.e., accounting, is done in money. Bitcoins, then, are not money.
Money substitutes are at par, on demand redemption claims for money. Banks that issue checking accounts will redeem them at par (i.e., at the fixed, face value of the claim), on demand for cash. That’s why merchants throughout the economy accept them in lieu of money itself. Bitcoins, then, are not money substitutes.
In a market economy, people are free to try new mediums of exchange, If BTC is such an attempt, it is not the first and, presumably, will not be the last. Here are few articles giving economic analyses of bitcoins:
http://mises.org/daily/6399/The-Moneyness-of-Bitcoins
http://mises.org/daily/6401/Bitcoin-Money-of-the-Future-or-OldFashioned-Bubble
ParticipantNeoclassicals would advise the government on ways to improve the “efficiency” of the their micro-economic policies. For example, if the government nationalized the railroads during the war, neoclassicals might build models to find out the minimum distance trains can travel and deliver all their cargo.
The Rand Corporation had neoclassicals construct game theory models to learn about negotiation strategies during the war.
http://www.indepthinfo.com/rand/game-theory.htm
Perhaps the most famous example from WWII is Milton Friedman advising the Treasury department to institute income tax withholding to improve the efficiency of tax collection.
ParticipantThe proper distinction is between business fluctuations and business cycles.
Business fluctuations are caused by the normal changing of the pattern of consumer demands. The distinguishing characteristic of such fluctuations is that increases in demands for some goods must be counterbalanced by decreased demands for other goods. Changes in production that meet these changing demands earn profit and those that fail to meet them suffer losses. The additional resources needed to meet the increasing demands are balanced by resources being released where demands are falling. Entrepreneurial error can lead to mis-allocation of resources or mal-investments of capital funding, but these suffer losses and destroy equity and therefore, are not self re-enforcing. That is, other entrepreneurs do not make the same errors and those who have made mistakes correct them.
Business cycles are generated by monetary inflation and credit expansion. The additional money permits demands to increase for goods purchased with borrowed money without decreasing demand for goods bought without borrowed money. The distinguishing characteristic of business cycles is the clustering of entrepreneurial errors. Most auto companies mal-invest in their capital capacity during the boom. Most construction companies do the same. Because the changes in the pattern of demands are artificially induced by monetary inflation and credit expansion, they prove to be unsustainable. The proportion of their income that people prefer to save and invest is smaller than that made possible by credit expansion. But the build up of the capital structure during the boom is based on the greater apparent saving and investing made possible by credit expansion.
Asset price bubbles are a secondary feature of the boom and bust. Journalists focus on them because they are sensational and they can’t understand or think that their readers can’t understand the primary feature of the boom and bust. One problem of this focus is highlighted by your question: Can’t every instance of entrepreneurial mal-investment be interpreted, in retrospect, as an asset price bubble? If so, then the distinction between business fluctuations and business cycles is unnecessarily blurred.
ParticipantThere was dis-inflation, but not deflation. Here are more data:
ParticipantThe Fed tripled the monetary base:
http://research.stlouisfed.org/fred2/series/BASE?cid=124
It did this by buying securities from banks. Banks, in turn, have held most of this additional monetary base as reserves:
http://research.stlouisfed.org/fred2/series/ADJRES?cid=123
Most of this increase in reserves is nothing more than checking account balances that banks hold at the Federal Reserve.
As a consequence of most of the increase in the monetary base being held by banks as reserves, the money stock has increased relatively modestly:
http://research.stlouisfed.org/fred2/series/MZM?cid=30
Even this increase in the money stock has not generated much price inflation, because the demand to hold money increased in the wake of the financial crisis:
None of these monetary shenanigans by the Fed has averted recession:
http://www.bloomberg.com/news/2012-04-02/five-years-after-crisis-no-normal-recovery.html
ParticipantHere is a conventional, economic history of WWII:
http://eh.net/encyclopedia/article/tassava.WWII
It stresses micro-economic analysis instead of macro. Take a look at the citations for more sources.
ParticipantInterest rates are not determined by supply conditions alone, but by demand and supply. Demand for credit has collapsed in the wake of the over-indebtedness of the boom. Both consumers and entrepreneurs are paying down debt.
(As an aside, the same analysis applies to price inflation. The purchasing power of money is determined by both the demand to hold money and the money stock, not the money stock alone. Thus, even though the money stock has been increasing, there has been little price inflation because people’s demand to hold money has increased, as it typically does in a downturn.)
Furthermore, “money printing” by the central bank does not mechanistically expand the supply of credit. The Fed has purchased around $1 trillion of assets from banks and paid with newly issued base money. But, banks must decide to issue fiduciary media on top of theses reserves to expand credit. They haven’t been doing this. Instead, they are holding the additional base money created by the Fed as excess reserves to shore up their balance sheets.
In normal times, the Fed influences market interest rates by stimulating banks to produce credit expansion. Lowering the discount rate can be a technique to do this, but the main method it uses is buying assets from banks. With the larger reserves, the banks then expand the supply of credit by issuing fiduciary media. The increased supply of credit lowers interest rates.
Interest rates will rise to normal levels when the demand side of the time market returns to normal. Normalcy will return when the pay down of debt is complete and the conditions for investment improve.
April 18, 2013 at 11:04 am in reply to: What happens to Money when it's spent outside its country of origin? #17784ParticipantForeigners can either hold the dollars overseas or spend them back in the U.S. If spent in the U.S., foreigners can either buy goods and services or make financial investments. As you say, the balance of payments accounts record the consequences of theses actions and are designed to always balance.
Of all the dollar currency in circulation, approximately two-thirds is held by foreigners overseas. They do this for buying goods which are bought and sold in dollars, as you suggest, and as a safe-haven asset.
http://www.federalreserve.gov/pubs/ifdp/2012/1058/ifdp1058.pdf
A given money, like the dollar, moves from one place to another based on differences in its market value, i.e., its purchasing power. If the purchasing power of the dollar were lower in New York City than in Denver, people would shift their demands to Denver until no difference remained. If the purchasing power of the dollar were lower in New York City than in Paris, people would shift their demands to Paris. To do so, they would sell dollars to buy Euros pushing the exchange rate of the dollar down until its purchasing power was the same in both places. The balance of payments accounts simply record the results of people’s actions which are determined by their preferences.
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