CBO report on GDP gap
The GDP gap is a measurement of what the GDP should be at if our country was operating at full employment. It is typically a conservative assesment of this gap as well, and is measure by the CBO, http://www.cbo.gov/.
Right now we are operating at about $800 billion under what we should be, here is a graph that shows where we should be at:
“That massive US output gap (probably closer to 8 or 9 per cent) represents a massive daily income loss for the American people. They will never regain the income that is lost every day. It represents better nutrition, better housing, better education, better cars, better recreational facilities, better of everything that the $US can buy – public or private.
The first thing any government should attend to is the minimisation of these foregone national income opportunities. The only way that they can be minimised is if there is sufficient spending – whether public or private. If the non-government sector is not spending sufficiently to minimise the output gap then there is only one sector left to do the job – the government sector.
This is not rocket science – but it is basic macroeconomics.”
http://bilbo.economicoutlook.net/blog/?p=15871
If we were to scrap unemployment insurance and welfare programs, we could institute a “make work program” to hire anyone willing to work at a socially acceptable minimum wage.
The costs for this program would cost a similar amount to both of the programs combined (possibly higher), and would give the American people an actual benefit to when the government spends on the unemployed. As the economy begins to recover this program will reduce in size as people leave the “make work program” and re enter the private sector.
MMT – an accounting-consistent, operationally-sound theoretical approach
In order to understand it conceptually you have to go back to day one of a monetary system:
“How do the private sector pay their taxes or buy government bonds in the new currency which they do not issue? The answer is incredibly simple. The government has to spend first and put the currency into the hands of the non-government sector.
The government doesn’t need to draw on any non-government saving in order to spend. And when it spends it boosts income and private saving is always a function of national income.”
http://bilbo.economicoutlook.net/blog/?p=15842
The problem with mainstream economic theories (Keynesians and Austrians) is that they base it off of incorrect understandings of how the government operates.
It is incredibly important to realize this fundamental fact about a monetarily sovereign government. Because it then leads to the understanding that the government is not revenue constrained, meaning it doesn’t have to collect taxes in order to spend first. It spends first then collects taxes.
Which also fundamentally changes the reason of WHY we collect taxes? Our current legislators set up policies to collect taxes in order to attempt to match government spending, because they all believe the government is revenue constrained. The only thing that tax collections do is remove wealth from the private sector and slows down the recovery of the private sector in a recession. And in a bubble/booming economy taxes would function as a way to slow down the economy so we don’t get the large recessions we see at times.
Imagine if our legislators were aware of this? We could actually form a tax policy that would keep more wealth in the prviate sector!
This is just s little snippet of how MMT explains government accounting but to fully understand it requires a lot more reading and if you do want to read more about it you can here:
The credit downgrade scare.
As expected with this country people are going to overreact to the news that S & P downgraded the United States credit rating. But we need to take a step back and understand the history of credit rating agencies.
Standard and Poor was one of the credit rating agencies that helped in the crash of the housing market by giving credit default swaps an “A” rating. And as we know it was that market of CDS’s that caused the bubble and the crash. So in just the last 3 years we have history and evidence that S & P is both clueless and immoral. It is a shock that they are actually still around and able to even have an influence on our credit ratings.
It is also important to note what happened to another monetarily sovereign country like the United States that also received TWO credit downgrades in recent history. I am referring to Japan, who has a deficit to GDP ratio of 200%. The media back then kept reporting that it would hurt Japan’s ability to borrow and raise their interest rates. But history now tells us that just the opposite happened. Japan’s interest rates kept decreasing.
So now we have unraveled that the credit rating agencies are both suspect and immoral, and that when they do downgrade credit ratings it has no effect on interest rates or the ability to borrow. Let’s not forget the fact that the U.S. has no need to borrow!
In the end, we shouldn’t be worried, and we shouldn’t be scared. What we should be concentrating on is getting proper credit reform, and getting a better and more efficient legislative branch in office.
Sectoral Balances of the U.S.
The first question is what is the sectoral balance of the United States? The easy answer is Private Sector Balance (Investments minus Savings) + Government Sector Balance (Government Spending minus Taxes Collected) + the Foreign Sector Balance (Exports minus imports). In economic algebra: (I – S) + (G – T) + (X – M) = 0.
So let’s do a quick example with math here, and I am just going to use easy numbers to make it easy. So if the Private Sector Balance is at “0”, and the Foreign Sector Balance is at $500 billion (a number close to its yearly average), then that means in order to make things balance the government sector had to be in a deficit of $500 billion.
Now for cool graphs that show that they ALWAYS balance.
This is my econ 101 for people taught on the defunct “gold standard”.
Economists at the federal reserve = clueless.
The reason why I have changed my economic views to Modern Monetary Theory, is because I had noticed that our mainstrean economists were consistently wrong. I read a blog today that showed another case that I am going to highlight.
This is another one about how inflation works. Our textbooks tell us that when the banks receive more money then we will start to see inflation, that is most defintiely not the case. Below is a graph that shows total bank reserves:
The federal reserve wrote a paper today that is rather enlightening and hopeful. Some economists are aparently starting to get it:
“These results are important because several economists and financial market participants claim that large levels of bank reserves will lead to overly expansive bank lending. Despite such concerns, little formal analysis has been conducted to show such an effect under the current banking system. It is incumbent on commentators claiming otherwise to specify how large reserves would lead to excessive lending.”
http://www.newyorkfed.org/research/staff_reports/sr497.pdf
It seems very easy to visualize this and how this works. In a time when banks are scared of lending, giving them more money to lend won’t work because they are afraid to lend. In economic terms, monetary policy and QE will not work to stimulate the economy in a time of a recession. Why? Because the private sector (commercial banks) simply won’t spend enough to combat the decreased demand.
So what is going to happen when the economy does recover and the banks decide to lend again? It is my educated guess that what we will see is another attempt by the banks to help the housing market, which will most likely create another housing bubble, and another recession.
The good and the bad of subsidies….
The libertarians will claim that subsidies are bad because they go against the “free market”, and hurt companies that would otherwise be succesful if not for government interference. In some cases they are right (American agriculture and Big Oil), but in most (anything technological) they are wrong here. And I will explain how each harms and helps the U.S.
The bad subsidies include agriculture and oil. Farmers receive close to $20 billion in subsidies per year. The farmers that receive the most are actually livestock farmers for feed purposes http://www.ers.usda.gov/Publications/AP/AP022/. So all that meat we buy is cheaper because we pay for the food to feed the livestock. Makes one wonder why the grass fed beef is more expensive?
And below is the section of the U.S. that receives the large majority of this money
And what type of farms get all this money and how large are they?
It’s amazing! The south and the largest farms get the large majority of the subsidies! Not good! considering this kills any chance of competition.
http://www.ers.usda.gov/briefing/farmincome/govtpaybyfarmtype.htm
Oil on the other hand is a bit more different. And even the libertarians have studies this and found oil to be incredibly expensive when you factor in their subsidies:
Hidden Oil Subsidies
The real price of gasoline is what people actually pay for it, not just what they pay for it at the pump. That might seem subtle, but there’s a big difference.
The Cato Institute, a libertarian think-thank, did a study on the subject. What they found is simply mind-boggling. They calculated that the US spent between $30 to $60 billion (with a ‘b’) a year safeguarding oil supplies in the Middle East during the 1990s, even though its imports from that region totaled only about $10 billion a year during that period. A more comprehensive study that includes the Strategic Petroleum Reserve and other oil protection services (the coast guard is clearing shipping lanes and doing navigational support to oil tankers, etc) shows that actual subsidies to Big Oil are between $78 to $158 billion (again, with a ‘b’) per year.
So the real cost of gas for someone living in the US is the pump price plus the taxes it pays that are used to subsidize the oil industry. Suddenly, oil is not as cheap, and just like with corn-ethanol, these taxpayers dollars are making fossil fuels artificially more competitive and keeping cleaner alternatives down.
http://www.huffingtonpost.com/2008/07/03/price-of-oil-hidden-oil-s_n_110606.html
http://www.cato.org/pubs/handbook/hb111/hb111-52.pdf
Now for the successes of subsidies:
For some I have to refer to Wiki, because of how long ago some occured. The first that comes to mind are the railways and telegraph, which lead to our current phone lines:
http://en.wikipedia.org/wiki/Pacific_Railway_Act
There is also the interstate highway system:
http://en.wikipedia.org/wiki/Interstate_Highway_System
The internet:
http://www.walthowe.com/navnet/history.html
NASA has 6300 patents of items we use:
http://curiosity.discovery.com/topic/transportation-science/ten-nasa-inventions.htm
And a very cool interactive of what NASA has created that you use in everyday home and business, really you will like this:
What is inflation?
Inflation is generally defined as the rate at which the general price level increases over a period of time and subsequently purchasing power falling. It is important to understand what inflation is because many politicians and economists will mischaracterize rising prices as inflation, and completely ignore the second part of the definition which clearly states it also results in lessening purchasing power. In other words inflation is bad only if wages are not rising with prices as well. The following will teach you when to know when a politician or an economist is full of it.
The cause of inflation could happen in many ways. The most common being commodity prices (oil mainly) or printing too much currency (Zimbabwe and the Weimar Republic). The question is when do we know when we have printed too much currency? The easiest way to answer this is by measuring our ability to purchase products. If we have printed too much currency then we will see a rise in exports and a decrease in imports. So if we started to experience a shift in our trading imbalance then we would know that we have probably printed too much currency.
Certain economists and politicians will tell us that any kind of government spending or currency printing will cause inflation. If it was only as simple as that. Below are two graphs that show that commercial banks create close to $7 trillion a year and our government creates about another trillion per year, and yet no inflation:
The above graph is money creation because bank loans are currency created by the commercial banks. Commercial banks make loans and then get the money from the federal reserve at a very low interest rate.
The above graph is important because it shows that inflation predates government spending increases. Meaning that inflation acts in the exact opposite way from what many economists portay it should act.
It really make you wonder what kind of education our schools are putting out there?
So what causes infaltion then? Well inflation still happens from introducing new money into the economy, but it must happen at a pace that outpaces the supply of our production, and it must go towards consumer spending. And that currency also has to be given to everyone. If the currency just goes to someone who won’t spend it then it just sits in a bank account (increases savings), and if it sits idle then it doesn’t increase demand and so prices don’t increase. Which is why quantiative easing is non-inflationary in a recession, because banks aren’t going to lend it.
It is also telling that when banks lent more and more money out for home mortgages that only prices for homes inscreased, which follows the theoritcal model that priting money to the point of increasing demand will cause rising prices. So it depends on the policy and where that money is being spent. The policies of the federal government and those of banks were to get Americans to become homeowners. So the money that was created HAD to be spent on homes and thus the price of home skyrocketed.
Why are we not experiencing inflation now (some prices are up because of oil)? Well it is because we have very high unemployment. When there is high unemployment there is idle demand in the market. In laymen terms it means that there are plenty of goods and servies to be bought but not enough money to buy them because people are jobless. So we are not experiencing inflation because people simply don’t have the money to buy things. When our economy is not operating at full production it is very difficult to experience inflation because a large part of the population simply can’t demand products because of their lack of currency.
The Bulls Offseason
Yes it only took me a day to forget yesterday and think positively about next year!
We know we have 3 solid positions filled with Deng, Rose and Noah. What we need to figure out is how to get Boozer in shape and play like he did 3 years ago, or try to get rid of his contract and start Taj. And we also need to figure out who we can sign at shoooting guard.
For shooting guard I don’t want to go after defense because Thibs could simply infuse people with that, I hope. The guys on my list are Mayo, Richardson, Butler, Allen, Crawford and Afflalo. I would like to get Allen because he would be a 1 year deal which gives us flexibility in a trade.
Who could we trade for? The obvious answer is Dwight Howard. What would we have to give up? My answer is anyone but Rose.
If we could go into the season with Noah, Boozer/Gibson, Deng, Allen and Rose, I will be a happy fan. I think this would put us over the top to beat Miami, but we shouldn’t rest on those laurels because if Howard becomes available we have to consider blowing up the team to team up Rose and Howard, we have to.
The good and the bad of GMO’s
There are people who in general believe all GMO’s are bad and those that believe that GMO’s can’t effect us. Both sides, because they are extreme, are incorrect based on what GMO’s one is referring to. The bad GMO’s are the ones that are altered to resist herbicides, pesticides, and fungicides, and ones injected with genetically altered growth hormones (http://www.raw-wisdom.com/50harmful), realize that there is a difference between genetically altered hormones and genetically altered plants and animals. Some people will site that this alteration could cause alterations in our DNA but I have yet to see a peer reviewd study to make me believe this is true (if someone could show me a peer reviewd study I will alter this view). To show why ingesting a GMO can’t alter DNA I have posted how food is broken down in our stomach: Genes code for the production of specific proteins. All proteins consist of amino acids. Proteins differ from one another based on the sequence of the amino acids. When humans consume a GMO that has had a gene spliced into its genetic structure, we are then consuming that protein. Once we have ingested the protein, the genetically modified organism digests in the same way every other protein we consume. When it reaches the stomach, the stomach acid straightens and unwinds the protein. Concurrently, the stomach acid activates pepsin, which is an enzyme that breaks the protein apart into smaller amino acid sequences. The partially broken down protein then enters the small intestines where it is broken down to smaller peptides by the enzymes, trypsin, chymotrypsin, and carboxypeptidases A & B. Finally, the peptides are cleaved into individual amino acids by aminopeptidases when they come in contact with the cells that line the intestines. The body then takes up the amino acids. The body, in effect, breaks down all bonds and subsequently uses the amino acids. The human body cells cannot discern what is a gene from a “natural” or genetically modified organism because they are completely unbound from the original plant. (http://ohioline.osu.edu/hyg-fact/5000/5058.html) What makes these alterations dangerous are what companies use to spray on them. If a crop is resistant to chemicals then that company will spray as many chemicals as necessary to keep their crops safe. So it is the chemicals sprayed onto the crops that are dangerous, not the actual GMO’s. Another thing that makes them dangerous is that the gene alteration could produce a protein that someone is allergic too. There is also the myth that altering genes of things we ingest can alter our DNA, this is literally impossible. If what we consumed altered our DNA then I would be a mixture of cow, pig, fruits and vegetable genes. You could see how silly that is right? Now what could happen is that the chemicals on your consumed items could cause cells to become cancerous, through genetic mutations. There are GMO’s that are very beneficial to humans, an example is “Golden Rice”, which is altered to increase vitamin A and iron (http://ohioline.osu.edu/hyg-fact/5000/5058.html). Benefits to Producers: GMOs can have many benefits for food producers. Plants can be designed to be insect-resistant, heartier or to grow under more extreme conditions. Animals can be modified to give more meat or milk, or to grow faster. This results in higher yields for farmers and better products. One example is slow-ripening tomatoes, which can be stored longer, hold up better to transportation and still provide superior taste and texture for consumers and manufacturers
. Benefits to Humans:
In places where food is scarce or difficult to grow, plants and animals can be modified to provide more nutrients and grow better under harsh conditions. Scientists have added vitamins and minerals to staples like rice and corn to fight malnourishment in underdeveloped countries. Plants are more drought-resistant and easier to grow. Many plants are designed to use less pesticides and chemicals to grow, which means less exposure to these potentially toxic substances for farmers and consumers.
Benefits to the Environment:
Many GMOs are tailored for specific environmental conditions, which means saving water in drought-prone areas and less use of chemicals. Higher yields and more efficient growth mean that the same amount of food is produced on less land, using fewer natural resources. Plants and animals become resistant to certain environmentally specific pathogens and insects, which reduces the chance of losing a crop to disease.
So as you can see there are dangers and there are benefits to GMO’s. The errors seem to be a few cases of where coroporations didn’t properly test their new products before releasing them on the market. GMO’s should be labelled and researched more, that is for certain.
Ron Paul is essentially clueless on the economy
The Austrians, in particular, as continually warning that the monetary base expansion in the US will cause hyperinflation. They consider the quantitative easing which has seen the balance sheets of the central banks in Britain, the US and Japan.
His views (Austrian extremist) and those of the mainstream of my profession share common ground which is now the base upon which macroeconomic policy is being made. The common ground is:
- Persistent budget deficits will stifle growth because they push interest rates up and crowd out private enterprise.
- Persistent budget deficits and quantitative easing will lead to inflation with a risk of hyperinflation.
- Persistent budget deficits ultimately lead to government insolvency where debt holders are left stranded.
They also raise issues of inefficient use of resources when deployed by the government and loss of incentive to private enterprise through taxes etc. which I will leave alone today.
Japan (among others) expanded significantly in recent years to be the source of an impending disaster.
As Mahe points out these central bank measures are just an:
“an asset swap” in investors’ balance sheets between bonds and cash, which end up in the Fed in the form of surplus reserves. In any case, these reserves are useless for commercial banks and do not create more lending (“loans create deposits”!). For that to occur, there needs to be “real credit demand”, which meet the credit requirements stiffened considerably since 2007.
Austerity programs by national governments, which will surely worsen the already excessive unemployment, have no authority. They have convinced us that that quantitative easing in some way puts more spending power into the hands of consumers and thus fuels inflation. An asset swap among savers is not inflationary.
The black line is a simple linear regression. If anything the relationship is negative – when the base expands, annual inflation falls although I wouldn’t want to hang anything on a simple linear regression. I could draw the same graph using lags and leads of the variables (to take into account the argument that the inflation pressure builds up over time) with the same result.
The reasonable conclusion based on the body of evidence is that there is no systematic relationship between the monetary base and the annual inflation rate in the US. I could also draw all the graphs I present here for other advanced nations with similar outcome.
So for mainstream economists and Austrians who are locked in to the Quantity Theory of Money and the money multiplier there is no evidence to support these theoretical “beliefs”. They are artifacts of religious doctrine only.
The next graph considers the relationship between the budget deficit (as a per cent of GDP) and the annual inflation rate in the US from 1931 to 2010. The annual CPI data comes from the US Bureau of Labor Statistics (it is their annual series equivalent of the quarterly data used in the previous graph) and the The US Office of Management and Budget provide historical budget data back to 1930.
The black line is a simple regression (indicating a slightly negative relationship – higher deficit, lower inflation) although I don’t wish to push the authority of that regression. It is just an indicator that has to be considered.
Again, I could lag the data to the same effect. I would get the same result for other advanced nations.
Here is also some graphs showing the relationship between bond yields and deficit spending:
The reasonable conclusion based on the body of evidence is that there is no systematic relationship between the US federal deficit and the long-term bond yields in the US. I could also draw all the graphs I present here for other advanced nations with similar outcome.
http://bilbo.economicoutlook.net/blog/?p=14511
It really isn’t just Ron Paul that doesn’t know macroeconomic policy, but it is the entire body of Austrian economists that are clueless on American macroeconomics.
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