Clefs & Accidentals: The score from the past week

How’d that trickle-down thing work out?

Jared Bernstein via Mark Thoma takes a swipe at supply-side economics with this chart with this amusing comment:


I prefer trickle-up policies. Give working class households more money — tax cuts, helicopter drops, whatever — and then let the rich compete for it by offering quality, innovative products at a decent price.

At this juncture, I concur.  View the labour share of income over time:


We’ve done everything we possibly could have to stuff the supply-side full of cash:  re-capitalised the banks, stuffed them full of reserves, liberalisation of trade, competition and labour policy, and dropped income taxes to generational lows.

Now we have very high productivity, corporate profits, corporate balance sheets, and an ailing consumer.  Corporations have all of the dry powder, but won’t spend the estimated $2T of retained earnings until they start seeing order flows pick up.

At the same time, Obama’s jobs bill (which, I think will certainly help – anything will help at this point) blows half its wad on more supply-side stuffing — as if increasing the pile of cash they are sitting on from $2T to $2.5T would somehow be a new incentive to invest.

These arguments stem from Jean-Baptiste Say’s 1803 postulation that deep imbalance in supply & demand can only occur with a mis-configured supply.  The Great Depression, Japanese financial crisis & US financial crisis has taught us that this holds true perhaps 90% of the time.  The other 10% requires different medicine.  Keynes summarised Say’s law:

The classical economists have taught that supply creates it own demand, meaning by this in some significant, but not clearly defined, sense that the whole of the costs of production must necessarily be spent in the aggregate, directly or indirectly, on purchasing the product.”

 So, the assumption that cost of production will be spent in aggregate purchasing the product is clearly untrue on the basis of mounting uninvested profits.  This undermines the intellectual credibility of the entire supply-side complex.  What’s correct most of the time isn’t what’s correct all of the time.

Macro Man: Scrap Silver

The self-styled TMM thinks silver is still profoundly over-priced:

Which leaves us with one metal left and that’s silver which TMM thinks is still profoundly overpriced even 40% down from the highs of this year.

Much like PGMs silver is a pseudo precious metal. Gold gets a bid from any or all of: central banks, Congolese warlords, Chinese retail, Indian weddings and The Illuminati, with industrial uses not really being that big a part of the picture. Any sort of analysis of demand misses the point as soon as you are above marginal cash costs, which in for gold are now above $1000 for higher cash cost operations.

TMM suggests that we are 80% away from cash costs, and that 214 million ounces of investment demand will be required to maintain prices.  Yikes!


It’s a dual mandate

As per Modeled Behavior:


Just shut up, ok. You had me at disinflation.”


Crack Spread Normalisation Could Be 1.5% of GDP Stimulus

One of our new favourite blogs, Traders Crucible, suggests that if the crack spread were a little more normal, we could get $169B of relief at the pumps.  Slap a 1.3x multiple on that, and we’ve got $220B, or an extra 1.5% of GDP:

Usually, it’s about 1.4bn added to consumer spending for every $.01 drop in gasoline prices.  Prices peaked at around 3.96 nationwide, and they could fall to $2.75.     This means we could add as much as 121 * 1.4 = $169bn in stimulus when gas prices fall.

This spending is most likely subject to a multiplier of probably 1.3, so we’re going to see something like $220bn in spending, or 1.5% of GDP

We’re growing at about 1.3% for the last quarter.  1.3 + 1.5 = 2.8%

That’s not bad growth.  2.8% is near the rate necessary to make a good impact on unemployment.

We agree in principle.  This is an under-rated growth factor for 4Q11 and 1Q12.

Option Adjusted Yield Curves

As per the FT article:


We have often heard that the rates market is not priced for a recession yet because the curve remains historically steep. However, this argument ignores the fact that the Fed is at a zero bound. Because the policy rate cannot go negative, plausible paths of the future rate are either flat (Fed on hold) or rising (Fed hikes). As a result, the curve must be structurally steep relative to historical experience when the Fed had room to cut.

So Bikbov and his colleagues have created an adjusted curve, which is flatter than a pancake and flashing recession.

Because of the embedded optionality, the curve is steeper relative to what it could be if the policy rate were not already at zero. We constructed an adjusted curve by subtracting an embedded option premium from each forward rate. The curve adjusted in this way is the curve that could be observed today if the Fed were not at zero bound. As a result, the adjusted curve can be directly compared to historical experience and therefore is likely to be a better recession indicator than the unadjusted curve.

Nicely done.

Monetary Policy: Targeting more effective than acting

As per Brad Delong:

Larry Summers asked an audience a question a couple of weeks ago: Which alternative, he asked, would require the Swiss National Bank to print more money to lower the value of the Swiss franc:

  • An announcement that they would print whatever it takes in order to get the franc to where they wanted it, or
  • An announcement that they would print X francs, and then reassess the situation


You want to get the speculators on your side–you want them to think that there is money to be made by betting that your policy will be carried out, rather than that there is money to be made by betting that your policy will break down. Thus the costs of deciding to do whatever it takes and of standing ready to do whatever it takes and announcing that you are going to do whatever it takes will probably, probably be surprisingly low.

Let’s bring this home:  do you think capital formation would be so slow right now if the Fed announced that they were going to start buying duration & risk until inflation expectations stopped collapsing?

Fiscal policy also makes an impact here here.  Low taxes don’t incentivise capital owners to re-invest their profit.

Really, both fiscal and monetary policy makers could make some small tweaks to expectations here to very effectively turn the incentives toward turning capital formation back on track.

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One Response to Clefs & Accidentals: The score from the past week

  1. TC says:

    Well, I thought we’ would be seeing much lower gasoline prices by now. We’re still above 3.30. Nice work here – I just started looking though and there is lots of great stuff here. I’ve always said the MMT revolution would come from traders.

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