Recent Posts

Sunday, October 19, 2014

Secular Stagnation Is Not Particularly New

In this article, I will review some economic history for the United States since the early 1990s. The objective is to argue that "secular stagnation" - which is generally viewed as a new thing which has popped up since the financial crisis for some reason or another - is really just an extension of existing trends that have been in place for at least 20 years. It's just that abnormal cyclical factors disguised underlying disappointing economic outcomes. The implications of this view is true are mixed. It is not impossible to revert to what is viewed as "normal" growth during an expansion, but we can expect that the economy will get stuck in the mud when recessions inevitably occur.

Thursday, October 16, 2014

Markets Panic In October (Again)

Chart: 30-Year U.S. Treasury Bond Yield
The panic in risk asset markets - and rally in good quality government bonds - may be the result of investors being poorly positioned going into year end. That said, economic developments outside the United States are poor, and so there are fundamental reasons for weakness in those markets. The drop in oil prices, normally a boon for the United States economy, will now have a mixed impact, courtesy of the boom in drilling.

Wednesday, October 15, 2014

Using Stock-Flow Norms To Explain Secular Stagnation (Part 2)

Having looked at the increasing demand for financial assets in the first part of this essay, we now turn to look at the supply of financial assets. The business sector is unable to supply the required amount of financial assets, leaving balancing supply and demand to the government and household sectors. Once the housing bubble burst, the government sector was put into the position of being the key source of supply. This can only be accomplished by large fiscal deficits, which implies slow growth. Since this slow growth was the result of policies that were aimed at increasing growth, it is unlikely that this structural situation will be easily changed.

Sunday, October 12, 2014

Using Stock-Flow Norms To Explain Secular Stagnation (Part 1)

Stock-Flow norms are a critical component of stock-flow consistent (SFC) modelling. Using this concept, we can see why economic growth has become slower in recent economic cycles, in particular the latest one. Unfortunately, this analysis indicates that the current slow growth - often referred to as secular stagnation - is structural, and not easily remedied. The reason is that there is considerable demand for savings, and the only way of generating those savings is via government deficits, which only appear if nominal GDP growth is slow. Finally, the fact that the rise of government debt outstanding was the consequence of policies that were aimed at increasing growth rates has the consequence that there is little chance of "fixing the debt", as those other policies would have to reversed.

Due to the length of this essay, I have split it into two parts. (Link to Part 2.)

Thursday, October 9, 2014

Why Is Breakeven Inflation Disrespecting The Fed Hawks?

Inflation breakeven rates are falling, despite the worries of hawks at the Fed about "too loose" monetary policy stoking inflation risks. This has raised some eyebrows amongst some analysts (thanks to Leo Kolivakis for the heads up about one such article). Although some of this is certainly due to falling oil prices, forward breakevens - which theoretically should be immune to what happens to spot oil prices - are also dropping. My feeling is that this is the result of directionality in the bond market - breakeven rates move in the same direction of bond yields. It is unclear whether these moves make fundamental sense.

Wednesday, October 8, 2014

Energy Limits To Growth: Krugman Vs. Buchanan

In "Slow Steaming and the Supposed Limits to Growth", Paul Krugman slams the article "Economists are Blind to the Limits to Growth", by Mark Buchanan, a physicist who writes commentary for Bloomberg. Krugman complains that Buchanan is following a view that is common in the hard sciences - that physicists know more about economics than economists. Although I am no fan of mainstream economics, I think this complaint is largely valid - most business cycle economists can get away without obsessing about the "limits to growth" imposed by physics. That said, based on the analysis laid out in Sustained Growth On A Finite Planet, I show why I disagree with both sides of the dispute.

Sunday, October 5, 2014

Primer: When Does The Quantity Theory Of Money Make Sense?

In this post, I give a quick overview of the Quantity Theory of Money, and I look at the empirical evidence in post-World War II North America. A weak form of the theory can be arrived at in a number of ways, and one could argue that it holds "in the long run". But as my empirical evidence shows, the "long run" may be far too long to be of any use for analysis. I tend to ignore the theory for this reason, which appears to be a consensus view amongst fixed income analysts.