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So these are the three largest components of GDP, all indexed to 1960:


Clearly one of these is not like the others, but the well-known fact that investment, not consumption or government spending, is mostly what fluctuates with the business cycle is very visible. I wanted to dig a little deeper, though, especially to compare the current recession to priors. So I made this graph:

sum gpdi nosmooth

Bars are unbroken periods of percent change in GPDI; their height is the total percent change in the period, their width is the length.

Here it is smoothed a bit using a highly-advanced method called “arbitrary eyeballing”:

sum gpdi smooth1

And this time with feeling:

sum gpdi smooth2

While none of these three graphs is perfect, looking at all of them the various recessions we’ve experienced and their depth and breadth become quite clear. And it seems striking that our current mess represents a vastly larger and longer decline in private investment then any prior recession since WWII.

So let’s break down GPDI; the biggest component is the broad heading of “fixed non-residential investment:”


Looking at the log (which is quite often a good idea, see James Hamilton for more) you can see that this recessions seems notably but not dramatically more severe than past downturns, and that we are on a decent track for recovery.

But here’s residential structures:


Wowzers. Two facts worth noting: residential investment has fallen off a cliff and is nowhere near recovering; the so-called “housing boom” is barely visible.

That becomes a little clearer, though, when you look at single-family construction vs. multifamily and “other” (dorms, trailers, etc):




Single-family construction clearly gets a little wacky during the mid-aughties, whereas multifamily is catching up from slacking on trend; since then, multi-family is rebounding while other is wishy-washy and single-family is really terrible.

What’s remarkable about all this, though, is that you can with some confidence say non-causally that recessions are, for all intents and purposes, fluctuation in housing construction.

In the past, we’ve had recessions, interest rates are cut, recession over. Now, interest rates can’t be cut, and we’re not building enough housing, and therefore there’s too much unemployment (especially among the young who are largely the building class):


In fact, relative to older folks, this is the worst the young have had it since the 70s:


Now, why does lowering interest rates reverse recessions? There are many good reasons, but to some extent they’re all about setting expectations. When the Fed “cuts rates,” what is doing is what its doing is just buying lots of government securities, which is what “quantitative easing” is; the difference between the former and the latter is the ends, not the means. The former is a kind of credible expectation setting of broader outcomes – “we will buy bonds until interest rates are where we say they should be, dammit.” The latter sets a much narrower expectation that doesn’t necessarily imply broader changes in the economy.

Now, there is an idea out there that Paul Krugman calls “the confidence fairy,” which he belittles…and he’s right (at least in practice)! As it is formulated by conservative pols and pundits as a partisan cudgel, it basically amounts to a non-sequitur; recessions, ergo, implement the tangential policies we support regardless of economic conditions (derp).

But I’m not sure the confidence fairy is entirely a fiction. In what I think is a bit of a cousin to Steve Waldman’s story of finance as the world’s most important confidence game, it seems like in the past recessions have been alleviated because the Fed creates self-fulfilling prophecies – by buying bonds to depress interest rates, they incentivize individuals to invest based on an implicit assumption about future growth dependent on their investment. And it all worked rather nicely until we hit the ZLB:

The thing that the Fed has fundamentally failed to do is pull their usual trick; they haven’t convinced anyone that the economy will be better tomorrow, so they’re not doing the things today that will create that improvement.

This, in a roundabout way, is where I get to responding to Ryan Cooper’s terrific article making the case for helicopter money. Helicopter money is a good idea. I like it. I support it. It is a humane, fair, and efficient way to help everyone get through hard times. But my gut tells me its not, on its own, enough to kickstart us out of the funk our economy is in. While the biggest reason the 2008 tax rebate didn’t help the economy was its puniness relatively to the impending crisis, it was doubly hobbled by the fact that it was a one-off with no guarantee of being repeated (which it hasn’t, though the payroll tax cut was it’s cousin). Ryan supports giving the Fed the power to mail checks unilaterally, not by implicitly supporting a fiscal-side program, which is a great idea – coordinating the king and the wizard can be a tricky game. But even then, a $2000 check can be extraordinarily helpful in the medium term to people in need, but it in-and-of-itself does not a housing construction recovery make. Helicopter money works best, and may work only, as the whip hand of a credible promise by the Fed of meeting a broader economic target; it can, though, be a very persuasive whip.


Inline image 1

Ryan Cooper says this about Bitcoin:

…there is no human judgment whatsoever on the size of the bitcoin money supply, because it is all determined by prearranged mathematical formulas. This solves the problem of the currency being destroyed by the government, but at the cost of an inherent vulnerability to deflation and boom-and-bust panics, as we’re seeing today. (I strongly suspect some Wall Street types are making out like bandits at this very moment.) The only way to solve the panic problem is with a trusted central bank that credibly promises to intervene to prevent excessive inflation or deflation, thereby short-circuiting the self-fulfilling cycle. Again, this is impossible with Bitcoin.

Which is correct! But asks the question – what is the point of Bitcoin?

Money is three things – a medium of account, a medium of exchange, and a store of value. Let’s say USD:BTC is a random walk with unknown parameters. Is Bitcoin money?

The fact that, at any given moment, the USD:BTC has deviated stochastically from its prior value should not impact Bitcoin’s usefulness as a medium of exchange. Much has been written about the cleverness of Bitcoin’s code and structure; this makes it a very useful way to make secure exchanges.

But what about a medium of account? If Bitcoin’s value is random (and, presumably, fluctuating quite wildly), that doesn’t mean it can’t be a medium of account; it just won’t be a very useful one. Something that was 3BTC today will be 30BTC tomorrow and 0.000003 BTC next week. You could certainly keep track of USD:BTC and "translate" a Bitcoin ledger into dollars, but that only goes to prove that usefulness as a long-term medium of account has something to do with…

"Store of value." The thing about Bitcoin is that it is not solely a platform for secure exchange; once an exchange is made, one party or another is holding some number of Bitcoins. In fact, since there is no Bitcoin finance, at any given point individuals are holding all the Bitcoins in the world. And, if the price can fluctuate wildly between exchanges, it is a terrible store of value. Something you sold for 5 BTC yesterday could be worth 50 or 0.5 BTC today, and you haven’t had a chance to change your BTC for something more stable – or, if you have, the next guy got screwed.

So, to be money-er, Bitcoin really could use some sort of exchange rage regulation. The problem is…who? Even in the Cryptonomicon scenario, you’d have to trust the authority regulating the currency. And why would you? They may not have any power to buy back the currency if inflation is overheating, and no power to inject new money unless there is demand for it. The central bank of a country, back by laws and institutions and police and armies, have the power to compel money demand chartally; they have regulated banks that must maintain reserves at the central bank; they have deposit insurance; they have foreign reserves; they have gold; they have all kinds of things that allow them to back currency with trust, because they back trust with the state.

Point being, that in this modern age non-state currencies without intrinsic value are destined to either fail or be severly limited in their broader utility, especially to folks who want to engage in legal transcations.

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