Secular Cycles: "fiscal flows in real terms"

Secular Cycles by Peter Turchin and Sergey A. Nefedov

As I have noted, the authors use the language of our time to describe patterns that exist outside of time. They use economic and business cycle terminology to describe "secular" cycles that last perhaps 300 years: expansion and stagflation and crisis and depression. They also describe in modern terms problems that occur and recur over the past thousand years and more. For example:

 ... states have no choice but to seek to expand taxation, despite resistance from the elites and the general populace. Yet the amount of surplus production declines (as discussed in the previous section), and the state must compete for this shrinking surplus with increasingly desperate elites. As a result, attempts to increase revenues cannot offset the spiraling state expenses, and even though the state is rapidly raising taxes, it is still headed for fiscal crisis.

It is written as though it describes us and our time. It is not. The cases identified in the table of Contents include Russia since the 15th century, France and England since the 12th, and Rome before the time of Christ. The authors' style makes secular cycles more real for today's reader; and it suggests that the same things may be happening again, this time to us. It is almost deceptive.

But it is not deceptive. That the same patterns may be visible in our time is precisely the point of the book. Anyway, I think that if we were in the "expansion"phase of a secular cycle, the things they describe would sound great, and we wouldn't be at all troubled by their description. We are only troubled by it because Turchin and Nefedov seem to want to locate us in the midst of a troubled time.

Maybe the word "elites" doesn't seem quite right, but then maybe we're not quite as far along in the cycle as the description that I quoted.

As I see it, the book describes us and our time. We are indeed living through another of Turchin's secular cycles. History repeats itself. Or it doesn't repeat itself, but it rhymes -- as Mark Twain supposedly said. And the authors have found a perfect way to present their cycles in a way that makes us feel, for better or worse, it is now our turn at the wheel.

 

I was initially tempted to say that Secular Cycles is deceptively convincing because it is written in the language of our time, as an explanation of the problems of our time. But then I remembered a criticism of the great historian Rostovtzeff, by N. H. Baynes in "The Decline of the Roman Empire in Western Europe: Some Modern Explanations". Baynes summarized Rostovtzeff's argument and objected to it:

"The peasant of the army made common cause with the peasant of the countryside and both waged a war of extermination against their oppressors of the city. The explanation of the downfall of the aristocracy and with them of the ancient civilization is thus to be found in a class-conscious alliance between the soldier and the worker on the land. Professor Rostovtzeff, it must be remembered, has seen in his native country an aristocratic regime overthrown by a similar alliance."

 - In Decline and Fall of the Roman Empire, Donald Kagan, editor; page 83

Baynes, it seems, objected to Rostovtzeff's story of ancient Rome because the same story could be told of more recent times. But of course, that is the sort of thing one must describe, if one is describing a recurring cycle in history!

The next sentence, after the above quote from Turchin and Nefedov is this:

Note that declining real revenues may be masked by persistent price inflation, and it is therefore important to express all fiscal flows in real terms.

"In real terms" means "measured in prices that are unchanged by inflation" or measured in dollars of constant value, constant dollars we might say. Good idea. I hadn't thought of looking at federal spending in real terms.

Graph #1: Federal government Receipts 1929-2020
Blue = As Reported ... Red = Adjusted for Inflation

Note that the red line shows federal receipts "in real terms" running flat or slightly downhill since 2015. This is "masked by persistent price inflation" as the blue line shows.

Yes, indeed. Thumbs up for the Secular Cycles book.

Turchin and Nefedov: Secular Cycles

The book, a gift from my son Jerry, a covid-delayed christmas present.

From the Table of Contents -- partial and in brief. I added "subchapters include":

Chapter 1: Intro

Chapter 2: Medieval England; subchapters include:

• The Expansion Phase
• Stagflation
• Crisis
• Depression

Chapter 3: Early Modern England; subchapters include:

• Expansion
• Stagflation
• Crisis
• Depression

Chapter 4: Medieval France; subchapters include:

• Expansion
• Stagflation
• Crisis
• Depression

 

You get the idea.

I'm in. I like the authors' use of the word "stagflation" to make our time and these earlier times thoughtfully similar. I like the repeating, four-stage business cycle format. I like these Turchin cycles, uh secular cycles I guess, obviously far longer than a business cycle or a kondratieff, but shorter than a Toynbee (two thousand year) cycle. Turchin's secular cycles fill a hole in my picture of cycles within cycles within cycles.

I'm in.

Hayek and the "line of demarcation"

F. A. Hayek on the quantity theory, from How to deal with inflation:

I will admit that in its classic form, as now revived by my friend, Milton Friedman, this theory grossly oversimplifies things by making it all an issue of statistical aggregates and averages. Unfortunately the quantity of money is not a measurable homogenous magnitude but consists of a wide range of mutually more or less substitutable things of varying degrees of liquidity.

 

Reminds me of Hayek in A discussion with Friedrich von Hayek: 

I wish I could, at this point, go along with my friend, Milton Friedman, who believes he can solve the problem by fixing the annual rate of increase of Ml or M2 or M3 so that the discretion of the monetary authorities would be strictly limited. I believe that, in this case, a very eminent scholar has again been misled by the preoccupa­tion with statistics, that is, by the fact that, for statistical reasons, he has to draw a sharp line of demarcation between what he calls money and what he calls near-money or credit.

If such a clear line could be drawn, something might be said for strictly limiting what would be money under that definition.

 

The clear line can be drawn without effort. The difference between "money" and "credit" is the cost of interest. If you pay  interest on it, it's credit. (Or if you have to pay it back, it's credit.)

When you earn money, you do something of value for someone, and they give you money in exchange. They give it to you.

When you borrow, you promise to do something of value for someone, and they lend you money. They lend it to you. It is credit, not money.

When you earn money, it is yours free and clear. When you borrow, the only thing that's yours is the obligation to pay it back with interest.

The difference between money and credit is the cost of interest. Credit comes at the cost of interest. Money does not.

And it matters. It matters because as time goes by, policy, financial innovation, and natural inclination mean that more and more of our spending is the spending of credit rather than money. As time goes by, therefore, more and more of our transactions involve interest costs which must be paid, above and beyond the exchange of output for income. Slowly but surely, financial cost becomes unsustainable:

The graph shows the quantity of money we have borrowed
but not yet repaid, on which we pay interest,
relative to the quantity of money in the spending stream

As time goes by, an ever-growing share of our expenses goes to pay the interest on the money we borrowed to buy the things we bought. Not to pay for the things themselves, but to pay the interest on the borrowed money -- and to pay the sellers' interest costs, which are embedded in the things we buy.

 

Hayek is in error when he says

If such a clear line could be drawn, something might be said for strictly limiting what would be money under that definition.

The line is easily drawn; its essential purpose is to let us distinguish money that costs money to use, from money that does not. Furthermore, in order to prevent the financial cost of money from growing until it makes our economy an unsustainable system -- as it did in 2008 -- it is credit, not money, which must be strictly limited.

If and when policy limits the amount of credit use that can be constructed upon a dollar of money, the quantity of money can be increased without causing inflation. If we cut credit use from $35 per circulating dollar to half that figure, the quantity of money can be doubled, more or less, and these changes will permit roughly the same level of moneyandcredit spending as before, but at half the interest cost.

 

In addition, there must be some level of the credit-to-money ratio that is best for our economy, in that it best promotes economic growth. Our plan must be to reduce credit-use and increase the quantity of money until we get to that level, and then to remain at that level. If we think this gives us too much growth we can work less, and find other ways to amuse ourselves.

Based on past data for the US, the optimum ratio may be in the neighborhood of $6 of debt (or credit in use) per dollar of M1 money -- based on the pre-2020 definition of M1 etc. etc. etc.

Hayek vs Schultze: Inflation without money increase

F. A. Hayek, in How to deal with inflation:

I have no doubt that inflation is caused solely by an undue increase in the quantity of money and that it can be and must be prevented under the prevailing arrangements only by the restriction of the basic money supplied by the central bank.

 

Charles L. Schultze, in Recent Inflation in the United States:

Prices and wages have a dual nature when considered in the aggregate: they are costs to buyers and incomes to sellers. Thus an increase in the general level of prices does not automatically mean a reduction in the quantity of goods and services demanded as it normally would in the case of a single commodity.

Hayek vs Keynes: Two distinctly different directions

Hayek, from the prize lecture, 1974:

... the still recent establishment of the Nobel Memorial Prize in Economic Science marks a significant step in the process by which, in the opinion of the general public, economics has been conceded some of the dignity and prestige of the physical sciences.

 

Keynes, from Economic Possibilities for our Grandchildren, 1930:

... do not let us overestimate the importance of the economic problem, or sacrifice to its supposed necessities other matters of greater and more permanent significance. It should be a matter for specialists—like dentistry. If economists could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid!

Estimates of Potential GDP 2007-2021

From Brookings:

Source: What is potential GDP, and why is it so controversial right now?

Richard Vague takes debt back to 1800

From PrivateDebtProject:
Toward a New Theory of Money and Debt (PDF, 66 pages) by Richard Vague, 3/1/2020

Quick look: I don't see a source for data.

At the PrivateDebtProject: the Inflation Study Data page offers two Excel files for download. The "Test Inflation Data II" option ("US 1837 Crisis Audit") offers data from 1816 to 1845 on GDP, public debt and private debt.