20 December 2016

Update on money supply growth

The graph below shows growth in Corrected Money Supply (my version of money supply) from January 2005 to October 2016.

From January 2014 it fell continuously and showed every sign of falling below the zero mark. But the plunge stabilised in January 2016 and has been mostly growing steadily since April. In October, the latest for which data can be calculated, the growth rate stood at 7.8%.

The reversal looks similar to that which took place in 2013 but that was owing to the Fed's QE. This time there is no QE and in fact the Fed is slowly winding down its balance sheet.

The proper comparison may be with the reversal in growth that took place from the start of 2007 and went on until the recession began. In that episode the growth in money supply may have been because of money exiting the housing market and waiting to be invested in other asset markets. This time too the growth of money supply may be caused by money exiting some asset market (possibly bonds) and being invested elsewhere. Will a crash follow soon?

Category: Economics

05 October 2016

The equivalence of Marshallian economics and General Equilibrium

Attacks on New Classical Economics, Dynamic Stochastic General Equilibrium (DSGE) or Real Business Cycle theory usually focus on their poor record in forecasting or on issues like identification and parameterization. Here, we take a different tack, choosing instead to study the root of New Classical Economics which is General Equilibrium (GE) theory.

We show that (a) Marshallian demand analysis is not any less general than GE theory, and (b) that the unstated assumption of GE theory is that aggregate demand is constant. Together, these two results amount to saying that, shorn of the complicated math, GE theory is equivalent to Marshallian demand analysis. It also explains why the two arrive at identical results on subjects like involuntary unemployment.

Read more at The mathematical equivalence of Marshallian analysis and General Equilibrium theory

A revised version of this paper is available in the December 2016 issue of Real-World Economics Review. See The mathematical equivalence of Marshallian analysis and "General Equilibrium" theory

Category: Economics

01 August 2016

The US private investment rate is falling

The ratio of US net private domestic investment to gross domestic product seems to be a pretty good indicator of approaching recessions. And it is falling at the moment, as the graph below shows, from a level that is already low.

Category: Economics

22 July 2016

The riddle of involuntary unemployment

For decades most economists, except for a minuscule minority, have believed that it is impossible to explain large-scale unemployment except through the device of sticky wages.

Here we show that the failure of macroeconomics to explain involuntary unemployment lies in the assumptions of microeconomics. We prove that Keynes was indeed right in asserting that there is such a thing as involuntary unemployment and that it cannot be explained by rigid wages.

Read more at Why is there involuntary unemployment?

Category: Economics

09 July 2016

The fall in US money growth reverses after two years

For two years since January 2014 the YoY growth rate of Corrected Money Supply had been falling steadily. It plunged from a high of 23.8% in December 2013 to 1.8% on 1 February 2016 and showed every sign of proceeding to fall into negative territory.

However, since then the growth rate has risen steadily for three months, and on 1 May 2016 stood at 5.1%.

If it continues at this level or a little higher, the Fed can afford to raise interest rates without serious consequences. Higher rates would slowly puncture the asset bubble which had been building for half a decade since 2009 and divert money to the real economy.

Category: Economics

Philip George
Debunker of Keynesian, monetarist and Austrian economics

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