Wow. Just Wow.

Writing a new post. Going thru old stuff on my old blog. I came across Creatures of habit from 9 October 2016:

At my old job, before I retired, we did a lot out of habit. Whenever we got a new project to work on, the first question was always "What similar project did we do before?" We relied on previous projects to answer "How did we solve that problem?" questions for new projects.

And:

Sometimes I wonder if the Federal Reserve makes decisions out of habit. When a problem arises do they ask "How did we solve that problem before"? It sure looks that way: Need to promote growth? Lower interest rates. Need to fight inflation? Raise interest rates. Need to promote growth? What'd we do last time? Lower interest rates. Already at the zero bound? Lower rates anyway ...

It also shows this graph, with my markups:

Graph #1: Growth Rate of the Monetary Base

The graph shows the growth of base money, the thing that the Fed was created to manage. It sure looks to me like the policymakers at the Fed are creatures of habit.

I like that old graph. But not enough to interrupt myself to write about it. I kept going thru my old stuff, looking for what I was looking for, some statement from Bernanke on policy. And that's when I came across AMBSL goes back to 1918 from 11 October 2011. 

AMBSL is one of FRED's measures of base money, the same shown in Graph #1 above. In the 2011 post I show a couple "base money" graphs, and describe the log view:

Slow growth until 1930. Rapid growth from 1930 to 1945. Slow from 1945 to 1962. Moderate growth from 1962 to 2007 (with a little droop at the end of it). And then, more-than-rapid growth after 2007, the Bernanke fix.

So I'm thinkin... Suppose the kink at 2007 is like the kink at 1930, the start of a Depression. And suppose the 1930-1945 money growth was the solution to the Depression. The question, then, is: How much more will the Bernanke fix have to increase Base Money, if a proportional increase is required now?

In other words: Assuming we had the same problem after 2007 that we had after 1929, and assuming we do the same thing, where will the numbers go? (Note that this question can be seen as a "creatures of habit" question. It wasn't. I had nothing else to go on except comparison to what happened before, so that's what I went with.)

The 2011 post continues:

We know from experience that there was a large increase in the quantity of base money and we (Ben Bernanke and I) think we know that the increase of base money was what fixed the economy and ended the Depression. So Ben is orchestrating a comparable increase of base money now. I want to know what will happen to the money supply if it increases by the same multiple now as it did during the Great Depression.

You with me?

In 1930, the level of base money was $5.879 billion. In 1945, it was $31.685 billion. That's more than a five-fold increase. The multiple is 5.39.

So. Suppose we take our base money from 2007 and multiply it by 5.39. That will give us an increase comparable to the increase we think fixed the Great Depression.

In 2007, FRED has base money at $850.529 billion. That's before the quantitative easings began. Now, take that number and multiply by 5.39 to see how much base money we might need to end this Depression: $4584.35 billion.

Obviously, I had to stop what I was doing and quote that last number, because it is pretty damn close to how things turned out. The graph at FRED shows AMBSL stopped climbing and leveled off at the 4000 billion level, or 4.7 times the 2007 number and only a little shy of my guess.

In October 2011 when I wrote the post, actually from mid-2011 to the end of 2012, AMBSL was hovering around the 2600 level.

Total assets held by Federal Reserve banks, a related number, leveled off at 4500 billion in 2015. 

These numbers are close enough to my uneducated guess that I have to wonder if policymakers have a plan, or if they have nothing else to go on except comparison to what happened before, so that's what they go with. Like creatures of habit.

A Clockwork Toynbee

How long is a business cycle? It varies. But I hear tell, on average 5½ years.

How long is the Kondratieff wave? It varies, but "about 40 to 60 years" according to Google.

How long does a civilization last? "340 years," Google reports boldly. That's not what I was thinking. I tried one of the search results, from Larry Freeman at owlcation:

Recently, I was talking with a colleague at work and I mentioned that civilizations usually only last 500 years. The only problem was that I couldn't remember where I had heard that. In fact, I wasn't all that sure that I was right. I know that the Roman Empire lasted roughly 500 years but how about the Egyptians, the Chinese, the Ottomons, etc...

Yeah, no, without looking I'll say the Roman empire lasted near 500 years. The Roman civilization lasted much longer. The Roman empire was the "universal state" phase of the Roman civilization. Just a phase. If I remember right.

To be fair, the title of Freeman's post mentions "the empires of ancient civilizations" and so does the text of the link address. But let's not confuse empires with civilizations.

One more search result: Luke Kemp's The lifespans of ancient civilisations at BBC Future. According to his graphic, "The average lifespan of a civilisation is 336 years". Maybe they're short like that if you spell it with an "s"...?

"In the graphic," Kemp writes, 

I have compared the lifespan of various civilisations, which I define as a society with agriculture, multiple cities, military dominance in its geographical region and a continuous political structure.

There it is. I bolded it: "a continuous political structure". In other words, Kemp sees the Roman Monarchy, the Roman Republic, and the Roman Empire as three separate civilizations. Good grief.

Hey, figure it however you want. But don't ignore Arnold J Toynbee who said, as I remember it, that civilizations rise out of a Dark Age, and fall into the next Dark Age. Doing it Toynbee's way you can get civilizations lasting 2000 years. That's a big difference from 336 or 340.

Monarchy, republic, and empire are different stages in the government of civilization. Plato said something like that too, I hear:

From The Lessons of History by Will and Ariel Durant

 
I read something one time where the General asked for a long-term weather forecast so that he could plan his military strategy. The weather people told the General that a long term forecast would be too unreliable to be useful. The General acknowledged this, but said "I need it anyway, to plan my strategy." Sorry, can't remember where that story comes from.

Stephen Blaha has studied Toynbee's Study enough to be able to develop a sort of mathematical approximation of the pattern of civilization described by Toynbee.

I'm not totally comfortable with the idea of setting Toynbee to music like that (though others -- Peter Turchin comes to mind -- similarly set civilization to music). But I figured Blaha's summaries of Toynbee's descriptions should be quite excellent. So here we are, at the Google Books version of Blaha's The Life Cycle of Civilizations, which includes links to the text of several chapters.

I took the link to Chapter 8: General Considerations on the Theory of Civilizations, where under the subheading "The Length of a Cycle" we read:

Our initial selection of 267 years as the approximate period of oscillation was based on Toynbee's observations that the time of troubles of a civilization was roughly 400 years as was the time interval of the universal state that typically followed a time of troubles. Toynbee also pointed out that in this 800 year time interval there were oscillations normally amounting to three and a half beats. The time of troubles was not entirely a downward move. It usually had a rally within it. The universal state was most often not just a rally. It often had a rout within it. Consequently Toynbee's basic picture of a time of troubles was rout-rally-rout, and of a universal state as rally-rout-rally...

Just one stage of civilization as described by Toynbee, the Time of Troubles, lasts longer than the 336 to 340 years that I find on the internet. So does the stage that comes next, the Universal State. So does the Dark Age that follows the Universal State, I want to say; but now we're treading on the thin ice of my memory.

I have no use for definitions that treat the different governments of a people as different civilizations. It's like killing an animal so you can study it.

It's like taking our unsustainably massive public and private debt, breaking it up into a bunch of small pieces -- household debt, nonfinancial business debt, financial business debt, the federal debt, and state and local government debt -- and saying "Where's the problem?"

Everywhere, apparently.

 

I use the numbers, Blaha's and Toynbee's both, as examples that allow me to think through the pattern of civilization, somewhat like the General's use of a long-term weather forecast.

Where I've been and where I'm going

The last time I had a Sunday post it was Cost Pressure and Long-Term Decline. In that post I said the following:

• Cost-push is just like demand-pull except that cost pressure exists.
• Cost pressure need not be short-lived.
• Finance causes long-term cost pressure and the decline of economic growth.

I also categorized the post as "Cost Pressure and the Decline of Civilization" to make clear what I meant by "Long-Term" in the title.

I summarize that post because brief is good and briefer is better. I summarize it because the idea -- that the cost pressure created by finance may be responsible for the long-term decline of economic growth -- is important if true, to say the very least. And I summarize it because I've never seen anyone else tie finance to economic decline through a cost-push mechanism. So, now you've seen it twice.

And yes, I get the same impression proofreading the above that I got from reading the earlier post: I describe a couple properties of cost-push (or "cost pressure" as I call it) and then out of the blue I'm blaming finance for creating the problem. Maybe I need a smoother transition there.

This post is me skirting the foothills of that problem.

In the long run we are all dead

 Search: "long term" meaning (econ)

Long term refers to the extended period of time that an asset is held. Depending on the type of security, a long-term asset can be held for as little as one year or for as long as 30 years or more. Apr 7, 2020

Long Term Definition & Example - Investopedia

 //

The long-run is a period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all costs, whereas, in the short run, firms are only able to influence prices through adjustments made to production levels. May 14, 2019

Long Run: Overview - Investopedia

//

Short run – where one factor of production (e.g. capital) is fixed. This is a time period of fewer than four-six months. Long run – where all factors of production of a firm are variable (e.g. a firm can build a bigger factory) A time period of greater than four-six months/one year.

Short-run, long-run, very long-run - Economics Help

//

Short term growth is, as the name suggests, growth in the output of a country in terms of GDP over a given (short, usually a year) period of time. ... Long term growth however is when the country's productive potential is increased, the potential of the country's GDP is increased.

Explain the difference between short term growth and long ...

//

The long run is generally anything from 5 to 25 miles and sometimes beyond. Typically if you are training for a marathon your long run may be up to 20 miles. If you're training for a half it may be 10 miles, and 5 miles for a 10k. Oct 18, 2019

The Long Run - How Long is Long? | Zwift

 //

Long run costs are accumulated when firms change production levels over time in response to expected economic profits or losses. In the long run there are no fixed factors of production. The land, labor, capital goods, and entrepreneurship all vary to reach the the long run cost of producing a good or service.

Production Cost | Boundless Economics - Lumen Learning

For my purposes...

• The long term is not so vague as "as little as one year or for as long as 30 years or more."
• It is "a period of time", but more specific.
• It is definitely greater than four-to-six months or a year.
• But it is not "when" anything.
• And it is not measured in miles.

Boundless Economics is pretty good, saying "In the long run there are no fixed factors of production." I think the idea of the short run is that it allows us to say "ceteris paribus, nothing else changes" except the change we happen to be considering, and the consequences of that change. By contrast, in the long run anything and everything may change. 

But that's not what Keynes had in mind when he said "In the long run we are all dead."

If "we" is a few old timers sitting around playing cards and bitchin, then "the long run" might be only a few years. But if "we" is "all" of us, as Keynes explicitly specified, then you have to count even newborn babies, some of whom may live near 100 years. So the long run might be a hundred years. 

But surely you also have to count their offspring.

Somebody once said that for economists the "long run" is 10 years. Okay, ordinarily. But for one moment, in one infamous sentence, Keynes didn't mean ten years. He meant a hundred years easy, and more. 

And maybe by "we ... all" he meant not only those not yet dead at the moment, but those, present and future, who make up this civilization. Or the civilization itself. 

For my purposes, this is the "long run" after which we are all dead: the run of civilization. 

 

Keynes was not a short-term thinker:

Asked whether there had ever been anything like the Great Depression before, John Maynard Keynes replied, "Yes, it was called the Dark Ages, and it lasted 400 years."
 -- Jon Meacham

An Arthurian Plan

You might want to click this graph to see it bigger, and print out a copy to look at while you read. C'mon, do it for me. Print it out, mark it up, make it your own.

Debt Other Than Federal relative to the
Funds Readily Available for Spending

"Funds readily available for spending" is the money we ordinarily use to pay the bills. If you take money out of an IRA, for example, you have to pay a "penalty"; that makes IRA money less readily available for spending.

"Debt other than Federal" is the bills we pay.

When the line on the graph goes up, there is more debt for every dollar of money in the "readily available" money supply. In 1960 there was less than $5 of debt for every dollar of that money. Because money circulates, debt at that level was not much of a problem.

In 1960 the "velocity" of readily available money was something less than 4. On average, a dollar was spent between 3 and 4 times that year. That was not enough to pay off all of the debt we owed. (Remember, this is all of our debt except the Federal debt.) 

Fortunately, not all of that debt came due in 1960. If we paid off 10% of it, that's probably a lot. Back then, our debt wasn't so much of a problem.

The blue line declined noticeably in the early 1990s. After this decline, each readily accessible dollar had less debt to pay. It was like we had more money to spend. With our debt burden lighter, the economy picked up. The "tech bubble" gets all the credit for the good years of the latter 1990s, but it was the decline of the blue line that made those good years possible.

By the end of the year 2000, the blue line had returned to its pre-1990s trend, and that put an end to the vigor.

In 2008 the blue line peaked at almost $35 debt per dollar of readily available money. Money had to move damn fast, and we had to juggle the bills. But it was too much. The economy could no longer support the debt, and the house of cards fell. Remember John McCain putting his presidential campaign on hold and returning to Congress to deal with the crisis?

By the end of 2017, the blue line had fallen to below $15 debt per dollar of money. However, this was evidently not low enough to boost the economy as it had in the mid-90s. Instead, we had media people saying "2% growth is good growth". Those people are assholes.

At the extreme right side of the graph, during 2020, we see the blue line falling in response to covid conditions. I'm writing today to point out that this drop, from above 14 to below 11, is a bigger drop than we saw in the early 1990s. The current decline takes us from above the 1991 high to below the 1994 low.

With some luck, and perhaps if there is a "magic number" below which the debt-per-dollar ratio allows people to feel that they can again take on more debt, then when this covid thing is over we could find ourselves with a surprisingly vigorous economy.

I'm not predicting it (this time). I'm just pointing out the possibility.

Even if we do get surprising vigor, if the vigor is built upon the increase of our debt, then it won't last very long. After the second World War, the economy was vigorous for 20 years or more. But we started with debt-other-than-federal at a very low level, and when that debt got to a high level it brought the vigor to an end.

Also, this policy of reducing the debt-per-dollar ratio by just printing money makes me nervous. At some point -- like if the economy ever comes back from the dead -- inflation is gonna be a problem. The better solution is not to print more money, but to accumulate less debt. We need to pay down debt faster than we do. And we need policy to make it happen.

As you may recall from the time of the financial crisis and recession, paying down debt can bring on deflation because demand goes low. We don't want that because deflation drives incomes down and makes existing debt harder to pay. What we want is accelerated debt repayment, but not so much that it causes deflation. Plus we want to boost the quantity of money readily accessible for spending, just enough to balance out against the deflation and keep prices stable. Sort of like what happened in the 1990s... except we need to be paying down debt more quickly.

The blue line on the graph comes down when the Fed prints money. But that money doesn't necessarily end up in the hands of spenders. It didn't, for example, during the Quantitative Easing. That's why there was no massive increase in consumer prices, but a lot of "asset inflation".

The money has to actually be readily available for spending, meaning in the hands of people who are willing to do the kind of spending that happens in a normal economy. Not just "asset inflation" spending.

In the hands of consumers, the extra money would mean extra spending and greater demand. In the hands of business people it could mean an investment boom, job creation, and economic growth. Or it could mean only more asset inflation. I can't guess how it will go.

What we need, I think, is a policy more accepting of wage increases than we've had for 40 years. Bringing home more pay, workers become consumers who need to do less borrowing. Many people say we need less borrowing in the household sector and more in the business sector. This is a step in that direction. But the long-term goal is less debt everywhere.

By the way, when reducing the level of debt-other-than-federal improves economic vigor, there will be less need for some costly government social programs. And better economic growth will boost tax revenues. So it will be easier to reduce the Federal debt.

One final note: The label "funds readily available for spending" -- the description of M1 money at FRED -- no longer applies specifically to M1 money, due to a change in Federal Reserve regulations. (See mine of 12 January.) But for all the years before 2020, the above analysis is good.

Hayek, politics, and the economy

In regard to the events of January sixth, I can only say that conditions are evidently much worse than I thought.

In regard to solving this problem, I repeat what I always say: Most of our problems are economic in nature. Not political. 

I don't forget what Hayek said:

Most planners who have seriously considered the practical aspects of their task have little doubt that a directed economy must be run on more or less dictatorial lines... The consolation our planners offer us is that this authoritarian direction will apply "only" to economic matters... Such assurances are usually accompanied by the suggestion that, by giving up freedom in what are, or ought to be, the less important aspects of our lives, we shall obtain greater freedom in the pursuit of higher values...

Unfortunately, the assurance people derive from this belief that the power which is exercised over economic life is a power over matters of secondary importance only, and which makes them take lightly the threat to the freedom of our economic pursuits, is altogether unwarranted. It is largely a consequence of the erroneous belief that there are purely economic ends separate from the other ends of life...

That's from The Road to Serfdom, Chapter 7: "Economic Control and Totalitarianism". 

I quote those words from Hayek for his view of the economy, his view that people sometimes think, or are sometimes led to believe, that economic matters are "matters of secondary importance only". Hayek strongly disagrees with that. So do I.

As I have noted before, Hayek's chapter is about totalitarianism, but his argument is about the often-overlooked importance of economic matters. From Hayek I learned the great importance of the economy: Other people say the world is driven by politics. I say politics is driven by economic forces and economic conditions.

By the morning of the presidential election of 2016, half the world was politicized. Both halves were politicized by the next morning. All of those people think the world is driven by politics.

They're running down a blind alley, all of em. Economic problems require economic solutions, not political solutions. Because we persist in applying political solutions, conditions never improve. Because conditions never improve, each side blames the other for things getting worse. Because each side blames the other, politics becomes ever more polarized. Because politics becomes ever more polarized, the chances of actually solving the problem become ever more remote.

Economic problems require economic solutions.

 
The above started as the opening to a long and still unfinished post. It came back to life suddenly while I was reading Interview with Benjamin Friedman on Religion, Economic Growth, and Much Else at Conversable Economist. Here, Ben Friedman is exactly right:

... no matter how rich our society is, if we get into a situation in which large numbers of people feel that they no longer have a sense of forward progress in their material lives, and they don’t see that turning around anytime soon, and they don’t have optimism either that their children will face a better economic future, that’s the circumstance under which people turn away from these small-l liberal, small-d democratic values, like tolerance and respect for diversity, generosity, openness of opportunity, even respect for democratic political institutions.

No. He's right, but I don't know about "exactly". I don't know about "small-l liberal, small-d democratic values, like tolerance and respect for diversity, generosity" and all that crap. That's a political view.

Here's what I know: Hayek says failing to notice the significance of economic matters will lead to bad political decisions. Benjamin Friedman says a bad economy makes the political situation worse. I agree with both of them.

Set politics aside. Use your free time to study the economy. 

The problem is cost. That's most of what you need to know, right there. And you already knew it.

I don't have a good ending for this post, so I'll just quote the historian Rostovtzeff again, on the Fall of Rome:

What happened was a slow and gradual change, a shifting of values in the consciousness of men. What seemed to be all-important to a Greek of the classical or Hellenistic period, or to an educated Roman of the time of the Republic and of the Early Empire, was no longer regarded as vital by the majority of men who lived in the late Roman Empire and the Early Middle Ages.

We can have another Fall, or we can fix the economy. It's our choice. 

But remember what Toynbee said: civilizations die by suicide.

The Fallacy of Composition

I have described the Fallacy of Composition: 

"Composition" is the notion that what's good for the goose is good for the whole damn flock. The "fallacy" is that it's not always true. Sometimes, what applies to the individual does not apply to society as a whole.

 

Wikipedia quotes the Bible:

There is that scattereth, and yet increaseth; and there is that withholdeth more than is meet, but it tendeth to poverty.
 — Proverbs 11:24

J.S. Mill described the fallacy:

All funds from which the possessor derives an income … are to him equivalent to capital. But to transfer hastily and inconsiderately to the general point of view, propositions which are true of the individual, has been a source of innumerable errors in political economy.

 

Milton Friedman described it as

the contrast between the way things appear to the individual and the way they are to the community. If you go to the market to buy some strawberries, you will be able to buy as many as you wish at the posted price, subject only to the dealer's stock. To you, the price is fixed, the quantity variable.

But suppose everyone suddenly got a yen for strawberries. For the community at large, the total amount of strawberries available at a given time is a fixed amount. A sudden increase in the quantity demanded at the initial price could be met only by a rise in price sufficient to reduce the quantity demanded to the amount available.

For the community at large, the quantity is fixed, the price variable -- just the opposite of what is true for the individual.

Kurt Richebacher described it in terms of profits:

The widespread measures that individual firms take to improve their own profits have, in the aggregate, the opposite effect on the profits of other firms. Business spending is the key source of business revenues, not consumer spending. A retrenchment in business spending cuts business revenues. Higher profits and higher prosperity cannot possibly come out of general cost cutting.

John Maynard Keynes described it in terms of saving:

... the apparent “free-will” of the individual to save what he chooses irrespective of what he or others may be investing, essentially depends on saving being, like spending, a two-sided affair. For although the amount of his own saving is unlikely to have any significant influence on his own income, the reactions of the amount of his consumption on the incomes of others makes it impossible for all individuals simultaneously to save any given sums. Every such attempt to save more by reducing consumption will so affect incomes that the attempt necessarily defeats itself.

 

Note that Richebacher's last two sentences make the same argument regarding producers that Keynes makes regarding consumers: A retrenchment in spending cuts revenues. Richebacher agrees with Keynes that Say's law -- "Supply creates its own demand" -- does not apply without fail.