Monday, January 7, 2013

St. Louis Fed Lies to Students, Says We Must Have an Output Gap

commentary by Roger Erickson

So it's NOT a fiat Output Gap, and things HAVE to be this way? So says the St. Louis Fed!

Prepared by Scott A. Wolla
Economic Education Group of the Federal Reserve Bank of St. Louis

excerpt

At the end of the third quarter of 2012 (August 31), total consumer debt stood at $11.31 trillion (see first chart). [at link]

Government Spending
In many ways, the government faces these same choices. Citizens have collective wants and the government attempts to satisfy these wants through its spending. Social Security, health care programs such as Medicare and Medicaid, and national defense are among the top federal spending categories. But the ability to satisfy our society’s wants is constrained by the level of government income, which is generated primarily by taxing workers and companies. Just like individuals who make spending choices, when the government chooses, there is an opportunity cost. If more money is spent on national security, the result might be less spending on health care. It is possible to raise taxes to provide additional income for the government to allocate, but that imposes further budget constraints on workers and companies who pay taxes—so, this policy choice also has opportunity costs. Of course, the government’s spending is not limited to tax revenue. Just as families can, the government can use debt to pay for some of its goods and services. At the end of the third quarter of 2012 (August 31), total federal debt stood at $16.07 trillion (see second chart).

What is the downside of government debt? 
Using debt to buy goods and services today means the government is borrowing future income (that is, tax revenue)—which means less income in the future for buying goods and services then. In addition, there is a limit to how much credit lenders (or investors) will extend to a country; they will avoid lending beyond the government’s ability or willingness to repay the loan or will do so only at very high interest rates.

[Wow! This author wouldn't know an option if it exploded inside what passes for his brain! In any other profession, the Fed could be sued for either fraud, for lying to the public, or for libel (insinuating that the electorate is as freaking dumb as the St.L-Fed implies) I can't wait to hear Scott Wolla's explanation for why we must saddle the current crop of college students with $1Trillon in debt, just to take their "proper" place in society.]


30 comments:

Adam1 said...

"In addition, there is a limit to how much credit lenders (or investors) will extend to a country; they will avoid lending beyond the government’s ability or willingness to repay the loan or will do so only at very high interest rates."

So if we assumed debt to GDP was a marker for one ability to pay then we would expect a positive and strong correlation between debt to GDP and interest rate (10 year treasuries for example) if this was true. Yet since 1955 the correlation is actually NEGATIVE .50.

The strong positive correlation we actually do find is between 10 year treasuries and the Federal Funds Rate (.89). Seem's like I read somewhere here recently that the intrest rate on treasuries was actually a policy variable. Hmmm... Maybe Mr Wolla should broaden his reading list.

Ralph Musgrave said...

Nice to see Bob Roddis the simpleton here again. As regards his state created "funny money" if Bob had studied the history of money he'd discover that money has almost always been a state created device, not a free market device. Although in the last two hundred years the private sector and market have played a bigger role.

As regards his idea that money creation by the state equals theft, that's true to the extent that serious inflation ensues. But if inflation is moderate, then the inflation just amounts to a tax on those with more than the usual amount of money sitting around doing nothing. There is no such thing as a perfect tax, but I don't have much objection to the latter tax.

Ralph Musgrave said...

As to Scott Wolla, I never seen such rubbish. I just sent him an email saying so. To send him one, go here:

http://research.stlouisfed.org/contactus/

Roger Erickson said...

Thanks Ralph,
Hope your note to Scott Wolla was more educational than his note to students.

It would be even better to send feedback & questions to his superiors up & down the Fed Education Dept.

Roger Erickson said...

Bob,
Yes, growth of the currency supply devalues the value of yesterday's liquidity trap, but at the same time, providing equal liquidity to a growing population with rapidly increasing options is MORE THAN WORTH IT!

For a billion years, social species have found that the dynamic return-on-coordination far outweighs the static value of fixed assets. It boils down to comparing hoarding of fixed assets vs generating compound options for ourselves & our descendants. We can't pursue our growing options without maintaining adequate liquidity.

What's your gripe against that reality?

http://econintersect.com/b2evolution/blog2.php/2012/12/16/redefining-fiscal-policy-outcomes-so-that-our-definition-of-successful-investing-isn-t-depriving-our-grandchildren-of-options

Anonymous said...

The money just gets more valuable over time. Bob Roddis

That's a logical fallacy there. Progress requires taking risks but a monopoly money supply that gains purchasing power rewards risk-free money hoarding. Read "The Parable of the Talents" (Matthew 25:14-30 ) to see what the Lord thinks of not putting money to use.

Roger Erickson said...

Bob Roddis,
You can't FULLY maintain & increase liquidity by freezing the arbitrary value of the unit of account.

To allow ANY and all, novel transaction chains to be quickly & efficiently denominated, requires a constant, bottom-up re-mapping of the smallest REAL value to the smallest liquidity unit. There is always a demand for some lowest real option to correspond to whatever the lowest unit of account.

It's far easier to try to maintain full liquidity by letting threshold net-buying-power (income) rise, rather than trying to freeze the buying power of a single unit of account.

Ask yourself this: what's a better strategy, long term?
a) optimize ability to explore any & all, unpredictable options, or
b) hoard a static asset (try to freeze unit buying power) at the expense of losing flexibility in exploring REAL options?

Why are you fixated on the fixed buying power of a nominal unit-of-account? Why not a greater interest in agile explorating of steadily increasing REAL, not nominal, options?

Tom Hickey said...

The "bond vigilantes" again. What a bozo.

Anonymous said...

There was theft. There had to be. Bobby R

No. What you silly Austrians fail to realize is that theft by deflation also occurs. Thus preventing deflation in a government enforced monopoly money supply is just justice.

Unknown said...

"fatally distorts the price, investment and capital structure"

Bob likes to repeat this phrase because he thinks it makes him sound like he knows something about economics.

The guy is completely deluded.

Anonymous said...

Due to the "knowledge problem", government bureaucrats backed by SWAT teams do not and cannot possess such dispersed knowledge. Bob R

They don't have to! Deflation is such a serious problem when the counterfeiting cartel (the banks) slows lending (since net credit repayment shrinks the money supply) that shoveling money out of helicopters is preferable to doing nothing.

Anonymous said...

Every penny of additional government spending will have to be collected from precisely those people who hitherto have been intent upon shifting the main burden to other groups. von Mises via Bob R

Ah, so Mises did not understand that credit repayment destroys deposits? And that government money creation could balance that destruction with no loss in purchasing power?

Or was Mises attempting to protect unjust deflationary gains in purchasing power?

The latter, I'd bet, since Austrians see deflation as good, to "purge the malinvestments."

Mises was also in favor of a government enforced gold standard which is the same as advocating government priviledges for special interests.

miller B said...

The money just gets more valuable over time

this is theft of the production of others. Being able to gain purchasing power by sitting on money while not doing anything at all is welfare for the unproductive. Why produce or invest when you can get a risk free return.

Paying a few people a tribute to use their money (gold) when it could be created at no cost is not much different than feudalism.


Now Lets say newly printed funny money was used to educate those who would otherwise not get one. A few of these newly educated invent a cheaper form of energy and reduces energy costs by half. A net gain to purchasing power for every one.

" printing money always steals purchasing power"
Such a low level 5th grade analysis it doesn't surprise me it is repeated to death by libertarians

JK said...

Bob,

Can please explain the 'money system' that you prefer?...

What is money?
Where does it come from?
Does the amount that exists ever change?

miller B said...

4. What is the basis for assuming a priori that the bureaucrats backed by SWAT teams you have imagined to impose your diktat are wise and benevolent as opposed to blood thirsty mass murderers??

yes, of course, anytime government is involved (even though most would like an education) they must do it at gun point.

How many "SWATS" do you see on an average day? If it's more than 0 you should seek help

JK said...

Thanks for the response, Bob.

Predictable.

You like to complain all day about modern "funny money" and MMT, but you won't (or can't) describe the monetary system you envision.

Come on, Bob! In your world...

What is money? Where does it come from? Does the amount that exists ever change?

Anonymous said...


"...informed judgement..."

Oh, look! It's the Informed Judgement Unicorn!! And it's humping the Expansionary Austerity Unicorn in the middle of the road! Isn't it wonderful?

Unknown said...

"I guess you are not familiar with "the problem of knowledge in society".

I guess you don't have a clue what you're talking about you imbecile.

JK said...

Sometimes I dream all day 'bout being Mrs. Hayek…

http://www.youtube.com/watch?v=psosLpDALuA

Ryan Harris said...

Not Using debt to buy goods and services today means the government is wasting human labor. (that is, tax revenue and real goods)—which means less income in the future for buying goods and services then. In addition, there is a limit to how much time employees (or companies) will wait for government spending; they too will avoid spending beyond their ability or willingness to pay or will do so only at very low interest rates.

Anonymous said...

"Read "The Parable of the Talents" (Matthew 25:14-30 ) to see what the Lord thinks of not putting money to use."

Sorry, but that passage isn't even close to being a "lesson in economics" or even remotely applicable to what's being discussed here. That pretty much eradicates any credibility you may or may not have had on the matter.

paul meli said...

"Not Using debt to buy goods and services today means the government is wasting human labor." - Ryan Harris

Poor framing. I thought we were trying to rid ourselves of these misperceptions.

This is an instance where one both needs to distinguish between government and private debt and be more specific about what government debt really is, i.e. net money creation that is mandatory for the normal functioning of a monetary economy.

Withholding the influx of liquidity starves a system where money avilable for spending is always leaking away…for all practical purposes, only money not saved circulates.

When one classifies net govt. spending as debt it implies it is being supplied from some source that must be repaid, instead of being "obligated" to make nominal interest payments that can always be made.

Funding a monetary economy with "debt" in the usual sense is unsustainable mathematically.

Roger Erickson said...

"Withholding the influx of liquidity starves a system ... "

Thank you, Paul, for bringing the discussion back to this point that nearly everyone seems to be desperate to avoid facing.

"When one classifies net govt. spending as debt it implies it is being supplied from some source that must be repaid"

Thanks you again. This point about misusing reusable semantics confuses even most of the MMT community, who won't take a stand on it.

"Funding a monetary economy with 'debt' in the usual sense is unsustainable mathematically."

Thank you yet again. Ya think? After that, what else is left to talk about?

Roger Erickson said...

I'd like a history of Bob Roddis's ball collection. As a kid, every single time he got invited to a team ball game, what happened? As soon as the ball came to Bob, did he calculate that he could add it to his collection? "It's my ball now, so I'm taking it home with me."

No wonder he never even caught on to the concept of teamwork. His calculations never got past the stage of personally hoarding static assets.

Bob, social species like termites got past that over 150 million years ago (others long before that). My calculations indicate that you're just a tad behind the times.
http://en.wikipedia.org/wiki/Termite#Evolutionary_history

Definition of a cockroach? A termite still suffering from OCD.

Definition of a gold bug? I'll leave it to your calculations.

Unknown said...

"be more specific about what government debt really is"

Hudson's started describing govt-issued money as a form of equity.

paul meli said...

"Hudson's started describing govt-issued money as a form of equity." - y

Well, it's a start at changing the framing but unfortunately even this will result in blank stares 99% of the time.

Tom Hickey said...

Hudson's started describing govt-issued money as a form of equity.

Accounting-wise, it has to appear on the RHS of the govt's book. That means either under liabilities or equity. Just book it as equity.

Roger Erickson said...

And your calculation concludes that violence & swat teams never appeared until there was a preceding swat team to organize them?

Methinks your calculating loop redirects back to null, Bob.

Unknown said...

Bob you're an idiot.

Nothing you have to say is of any value.

Fuck off.

Unknown said...

I don't suppose you noticed Roddis' brainless insults, which he hurls at people here on a regular basis.

The tedious, idiotic, pretentious, and offensive nonsense he endlessly repeats ad nauseam is simply beneath contempt.