Saturday, March 25, 2023

Hotson and Wilmeth, 1982

The Future of Monetary Policy: 1982 Hearings of the Joint Economic Committee, a Google Book

From the statement by Harvey D. Wilmeth of Northwestern Mutual Life Insurance Co., Milwaukee, Wisconsin; page 196:

A money and credit system does not manage itself. Either the Government or the invisible hand of market forces will provide the ultimate unavoidable discipline. We have chosen to let market forces provide the bulk of that discipline, but we don't like the consequences. Inflation, stagnation, and depression are all a part of that discipline. This is an extraordinarily inefficient way to manage the financial structure of a modern economy.

I have tried to say something like that:

Jobs? You think jobs is the problem?? Okay. But it's our problem. A problem for people. It's not a problem for the economy. If you want jobs from the economy, you have to give the economy what *it* wants.


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.

And again:

Here's how it works: A man lives for a while, and then dies. A nation lives for a while, and then dies. A civilization lives for a while, and then dies.

If you want your civilization to live, not die on your watch, then economics must be nothing more or less than the effort to get the right answer.

The right answer does not depend on what you or I want. It depends on what the economy wants and how the economy works. Our task is to understand these.

I don't know. Maybe Wilmeth says it better. But for me, finding economists who say what I say validates what I do.

Again, this is from the 1982 hearings. From the statement by John H. Hotson, professor of economics at Waterloo University, Waterloo, Ontario; page 215:

The administration thinks the problem is inflation and that high interest rates are the solution. But as Mr. Wilmeth has been saying, overindebtedness and imbalances in the economy are really the basic problem and high interest rates only make these basic problems worse. It's the overindebtedness of the private sector I'm talking about rather than the public sector.

Under the heading "The Rapid Growth of Interest Payments", Hotson adds:

Since World War II, the private sector has increased its indebtedness four times as fast as real GNP has increased; it's increased its indebtedness twice as fast as the nominal GNP has increased; it's increased its interest payments twenty-six times as fast as real GNP has increased; and it's increased its interest payments 6 times as fast as even nominal GNP has increased. 

It's this rapid run-up of interest payments and new borrowings, where both have increased as a percentage of GNP, which has made the financial system of the economy -- and not just of this country -- so fragile.

It's simple: cost is a problem. 

And please do notice that Hotson's concern is interest payments, not interest rates. Interest payments depend on interest rates and on the accumulation of debt on which interest must be paid.

My concern, like Hotson's, is the cost problem, the cost of finance.

For more on Harvey Wilmeth see The Wilmeth Brothers after Purdue.

John Hotson has apparently been expunged from the Waterloo University site.

Thursday, March 23, 2023

Veblen & Financialization in the 19th Century

From Michael Hudson in Rentier Capitalism – Veblen in the 21st century:

Veblen’s ideas threatened what he called the “vested interests.” What made his analysis so disturbing was what he retained from the past. Classical political economy had used the labor theory of value to isolate the elements of price that had no counterpart in necessary costs of production. Economic rent – the excess of price over this “real cost” – is unearned income. It is an overhead charge for access to land, minerals or other natural resources, bank credit or other basic needs that are monopolized.

This concept of unearned income as an unnecessary element of price led Veblen to focus on what now is called financial engineering, speculation and debt leveraging.


Thorstein Veblen, 1857-1929. Again, Veblen focused on "what now is called financial engineering, speculation and debt leveraging." And according to Hudson's article, Veblen "began to publish in the 1890s".

Sunday, March 19, 2023

The ABCs of inflation

Different types of inflation have different characteristics:

  1. Demand-Pull Inflation, where spending drives prices up:
    • There is more than a normal amount of money in the economy.
    • It is easy to pay the bills. Times are good.
    • We buy more than normal.
    • The economy grows more than normal.

  2. Cost-Push Inflation, where cost drives prices up:
    • There is more than a normal amount of cost in the economy.
    • It is hard to pay the bills. Times are hard.
    • We buy less than normal.
    • The economy grows less than normal.

  3. Is it cost-push or demand-pull?
    • At the macro-economic level the economy grows less, or grows more.
    • At the micro-economic level times are hard, or times are good.

  4. What about the current inflation?
    • Important to remember that the current inflation followed three years of covid insanity, which followed the decade of rigor mortis that came after the financial crisis, and that the crisis was the result of six decades (1947-2007) of Increasing Reliance on Credit (IROC) that was created and encouraged by insane policy.
    • Other than that, I'm currently looking at Excuseflation by Cory Doctorow, The Physical Capacity Shortage View of Inflation by Alex Williams, and Expecting Inflation: The Case of the 1950s by Alex Williams and others. I want to see how current thinking fits in with what I know of 1947-2007.
    • With thanks to Lorraine Lee for the Doctorow link.

Wednesday, March 15, 2023

"Decline of a lifetime" follow-up

Following-up on mine of 12 March 2023

I have one more graph to show you: my debt-per-dollar graph. It shows dollars of total (public and private) debt, per dollar of money in circulation (M1). Based on the Bicentennial Edition of the Historical Statistics, this old graph runs from 1916 to 1970. It ends with debt already higher in 1970 than it was at the worst of the Great Depression:

Graph #6: Debt per Dollar, 1916-1970

Graph #6 shows just two turning points -- the same two turning points shown by my graph #3 in the previous post; and the same two turning points shown by Philippon's finance graph. The turning points again fall into place, the one at the 1933 bottom of the Great Depression, the other just around 1950. 

With graph #6, as with Philippon's (#4 in the previous post), financial cost goes up when the line goes up. When financial cost goes up, economic growth goes down.

The graph measures credit in use -- money borrowed and not yet repaid -- relative to "just plain" money in the economy. Just plain money, by the way, mostly comes to us as income; this is where we need the increase.

The graph shows that by 1970 the debt-per-dollar ratio was already higher than it was at the bottom of the Great Depression. What it doesn't show is that after 1970 the ratio just kept going up until it created the financial crisis of 2008.

Sunday, March 12, 2023

The economic decline of a lifetime

When I google long-term economic decline, most of the results focus on recession. A few focus on depression. After three sittings, I found one search result that actually considers long-term decline:

"Recessions are difficult, but stagnant growth could prove more challenging, Stanford economist warns", by Melissa De Witte, dated 7 December 2022. Almost current. From Stanford News. The article is an interview with John Cochrane. I know of him from The Grumpy Economist.

De Witte's opening:

While recessions are painful, they are only temporary interruptions to the economy, says John Cochrane, an economist at Stanford’s Hoover Institution, arguing that people should be paying more attention to long-term economic growth, which in the U.S. is currently stagnating.

Yeah. But I wouldn't say "stagnating". I'd say declining. And not just "currently".

But wait, this is a good observation:

Rather than focus on quarterly changes to growth rate, which is how recessions are currently gauged, the long-run growth of the economy matters more.

Most. Definitely. Yes. Long-run economic decline is like a weak, permanent recession that slowly gets worse and only gets worse.


Here's something. Cochrane says:

Currently, stagnant growth is our big problem. Long-run growth of the economy matters much more than year-to-year growth rates. Recessions are painful interruptions, but we should be paying much more attention to long-run growth.

"Currently" again? What does he mean to say? Only just now? Or for quite some time? For how long? Dunno, dunno, dunno. Plus, Cochrane needs more emphasis on "big problem".

But hey: If long-run growth is what matters, then maybe long-run growth is what we should look at. Let me start with a quick look at three graphs. We can dwell on the third one.

Graph #1: Up, Up, and Away! (Or so it appears)

Graph #1 shows Real GDP for the US in dollars, millions of dollars, from 1790 to 2021. Data from MeasuringWorth. "Real" means inflation has been taken out of the numbers, so we see the growth of output without the increase of prices.

Graph #2: The same data. A different glance.

Graph #2 shows "percent change" from the year before, for each year. Cochrane calls it the "year-to-year growth rates". The plotted line is jiggy as can be. And I don't see any definite pattern in it, so I don't know what the graph is telling me.

Graph #3: Again, the same data, but 20-year averages

Now we are looking at long-run growth. This graph shows long-term (20-year) average growth rates. Each point on the graph shows the average for the 20-year period that ends at that point.

A pattern begins to emerge in the third graph: 

  • Increasing growth from 1820 to 1863
  • Decreasing growth from 1890 to 1933
  • Increasing growth from 1933 to 1954
  • Decreasing growth from 1954 to 2020

Consider the decrease that ends in 1933. I am reminded of Milton Friedman in Free to Choose, saying "the economy hit bottom in 1933." Graph #3 shows long-term growth hitting bottom the same year, 1933. Coincidence, you think? Not entirely.

The graph shows sharp increase after 1933, rising to a peak in 1954. Recovery from the Great Depression feeds into that sharp increase. So does the second World War.

After the 1954 peak the graph shows persistent decline, from more than 6% growth to less than 2%. What was it Cochrane said?

Long-run growth of the economy matters much more than year-to-year growth rates. Recessions are painful interruptions, but we should be paying much more attention to long-run growth.

Cochrane said, and I can only agree that

Currently, stagnant growth is our big problem. 

But the problem is bigger than we think. If nobody's happy with our economy currently, maybe it is because long-run growth has been in decline now for seven decades.

Seven decades. It's a lifetime.

Why the long decline? Finance is the problem. Excessive finance. This graph is from Thomas Philippon:

Graph #4: from "Has the U.S. Finance Industry Become Less Efficient?"
by Thomas Philippon (2011)

Philippon's high points match up with the lows on Graph #3, and Philippon's low points correspond to the highs on Graph #3. I'm not comparing the years before 1890. But since 1890, Philippon's graph goes up, down, up while my graph goes down, up, down. Since 1890.

Finance goes up-down-up while Real GDP growth goes down-up-down. Economists might call that a negative correlation. You might think they would want to spend more time looking into excessive-finance-as-the-cause-of-slow-growth. Cochrane in the interview, for example, fails to mention finance as a possible cause of the stagnation.

Philippon describes his graph:

The cost of intermediation grows from 2% to 6% from 1870 to 1930. It shrinks to less than 4% in 1950, grows slowly to 5% in 1980, and then increases rapidly to almost 9% in 2010.

His turning points: 1930, 1950, 2010. My turning points: 1933, 1954, 2020. The big discrepancy, 2010 versus 2020, arises only because I'm using Philippon's ten-year-old graph. The other differences are rounding errors.

His graph shows two reversals of trend. My graph (again, since 1890) also shows two reversals of trend. There are only two reversals in 130+ years, and those reversals are almost simultaneous on the two graphs. That's gotta be significant!

I took Philippon's graph and erased the background, then "flipped" the graph to make the low points high and the high points low. Then I overlaid it on my Graph #3 and fitted his graph to mine to make the dates line up. Now we can look at the pattern since 1890 and see how the growth of finance compares to long-run economic growth:

Graph #5: Philippon's graph overlaid on my Graph #3
with dates aligned (note alignment at 1880 and 1980)

Remember: finance is flipped for figure five.

  • From 1890 to the early 1930s, 20-year average RGDP growth shows decline. So does flipped finance.
  • From the early 1930s to 1950 or so, 20-year average RGDP growth shows increase. So does flipped finance.
  • From 1954 to end-of-data, 20-year average RGDP growth shows decline. So does flipped finance.

Flipping Philippon's graph makes it easy to see the similar pattern in the two graphs.

Philippon's original, un-flipped graph shows that the size of finance runs opposite the long-term growth of Real GDP. The more finance we have, the less economic growth we get. The less finance we have, the more economic growth we get. Since the late 1800s this is true. The graph shows it.

"Long-run growth of the economy matters much more than year-to-year growth rates," Cochrane says, and "we should be paying much more attention to long-run growth." Indeed it does, and yes we should.

Since 1890, as finance increases in size, Real GDP grows less. Why? Because finance is a cost, and more finance means more cost.

Hey -- We need finance for growth, yes. But we shouldn't be using finance for everything. We need just plain money -- money that doesn't cost money -- to maintain our existing economy at its existing level. 

We can use credit for growth. That's fine. But after the economy grows, the economy is bigger. So then, instead of the credit, we need more "money that doesn't cost money" to maintain the bigger economy. This solution, obvious as it may be, is not part of economic policy.

Under existing policy, old, well-used credit continues to exist as debt, public and private. The financial cost of debt interferes with the cost of living. As Vladimir Simkhovitch said of ancient Rome, things eventually get to the point where labor cannot support life. This is where we are today: Labor can no longer support life. So we live on credit, and our debt just grows and grows. This cannot end well. Policy must change.

Central bankers don't see anything wrong with the cost of finance, probably because the cost of finance is income for bankers. For the rest of us, the cost of finance is a cost. 

As long as economic policy continues to promote credit use and the accumulation of debt, we will continue to see the decline of long-run economic growth. 


The comparison of Finance to long-term Real GDP growth is not a good match before 1890. I did not research this discrepancy. But finance was small before 1890. Perhaps it was small enough, then, that finance was still beneficial, rather than harmful to growth. If so, the discrepancy is further evidence that excessive finance is harmful -- and that finance has been excessive since 1890.

Friday, March 3, 2023

On the cause of long-term decline

This item turned up first on my FRED Search results for components of GDP. It looks like long-term decline to me:

Graph #1: Long-term decline of GDP Growth

Long-term decline in the modern economy is the result of cost-push inflation, with the cost pressure provided by the growth of finance.

For the "no-such-thing-as-cost-push-inflation" people:

Yes, inflation of the quantity of money causes inflation of prices. Yes. But there is a causal relationship there: the increase in money causes the increase in prices. Oh, and I wish you would stop using the word "inflation" to mean monetary increase, and use it instead to mean the increase of prices.

We can as a rule say that the increase of prices always has a cause, and that this cause always is increase in the quantity of money. In the case of a war like World War II, a big one, there is a big increase in the quantity of money during the war. The resulting increase in spending causes prices to rise. Prices continue to rise until they absorb all the "excess" money. Then prices can stabilize again.

So now I see a chain of causality: 

  • war (for example) leads to printing money
  • the increase in money leads to an increase in spending
  • the increase in spending leads to an increase in prices.

This chain of causality describes the process that is called "demand-pull" inflation.

With cost-push inflation there is a different chain of causality:

  • costs increase
  • wages and/or prices rise to cover costs
  • prices and/or wages rise to cover those costs...
  • the quantity of money is forced to increase, to cover the increased spending.

This is just a rough approximation, and the cost pressures may vary. However, with cost-push inflation, the initial problem is rising cost. That is why the inflation is identified as "cost-push" inflation.

People who say "there's no such thing as cost-push inflation" insist that price inflation can only be caused by the increase in money. I have no problem admitting that they are right about that. However, just as I use the word "inflation" to mean "rising prices", I use the term "cost-push inflation" to refer to inflation that is driven by rising cost (as opposed to inflation that is driven by "excess" money). That's just the way it is.

Again: It doesn't mean prices can rise without the increase in the money supply. It is simply a term used to refer to inflation where the initial cause is rising cost and the response creates excess money. Sometimes it does happen that the monetary authority creates money in response to a cost problem. When the prices go up, then, it is cost-push inflation.

The "no such thing" people have to stop interrupting the conversation at the definition-of-terms level or we will never solve the problem of long-term economic decline. From this moment forward, the people who say "there's no such thing" deserve all the blame for allowing economic decline to continue.

Demand-pull inflation is driven by excess money. When people have excess money, times are pretty good: Except for the inflation, times are pretty good.

Cost-push inflation is driven by excess cost. When people have excess cost, times are hard.

Now let me separate "cost-push inflation" into two parts: the cost pressure, and the results. The resulting inflation, again, is due to increase in the quantity of money. I'm not arguing that point. But that's not the problem; it is the response. The increase in the quantity of money is a response to the cost pressure. The cost pressure is the problem. In "Inflation in One Page", Henry Hazlitt explains:

If, without an increase in the stock of money, wages or other costs are forced up, and producers try to pass these costs along by raising their selling prices, most of them will merely sell fewer goods. The result will be reduced output and loss of jobs.

When costs rise, and the quantity of money does not increase enough to meet the rising costs, the result is "reduced output and loss of jobs." And that's according to Henry Hazlitt.

Because the continuing growth of finance creates continuing cost pressure throughout the economy, the "reduced output" noted by Hazlitt has become long-term economic decline. A continuing-cost problem will result in either slowing growth or cost-push inflation, or some combination of the two, depending on the level of "accommodation" provided by economic policy.

Why has there been a long-term decline of economic growth? Because of the cost pressure. Cost pressure leads to reduced output and loss of jobs. And again, in our era the cost pressure is created by finance. 

This is the Arthurian argument.

Wednesday, March 1, 2023

Long-term Decline

This item turned up first in my FRED Search results for components of GDP:

Graph #1