Searching for the pop price deflator.
via the excellent ChinaDigitalTimes,
As a prisoner at the Jixi labour camp, Liu Dali would slog through tough days breaking rocks and digging trenches in the open cast coalmines of north-east China. By night, he would slay demons, battle goblins and cast spells.
Brad DeLong asks “Where are the stabilizing speculators?”
We know why people don’t turn around and become suppliers of liquid cash money when the money stock contracts: they can’t, for nobody else’s liabilities are good as payment for transactions in currently-produced goods and services. But surely Berkshire Hathaway or Microsoft or Northrup-Grumman could have sold lots of bonds at attractive values. Why didn’t they?
My answer: Microsoft is not a financial corporation. They do not borrow in order to lend again, they borrow in order to purchase productive capital. Assuming that Microsoft has purchased all the capital it needs, the question becomes one of leverage, or debt to equity ratios.
I’ve been struggling with putting together quarterly net operating surplus data for non-fianncial businesses. I have non-financial corporate businesses, but this excludes proprietors. Frustrating.
But I’ve been encouraged by some similar arguments I found poking about the web:
This is a post in response to some of the issues raised by SRW.
I appreciate the feedback.
First, I consolidated leverage by industry (e.g. 5 digit NAICS industry). Next, I looked only at downward deviations in price — e.g. I computed stddev( .5abs(x) – .5x), where x was the the month over month percent change in price for each BLS 5 digit price index.
Therefore now we have mappings between industry leverage, and the downward standard deviation of percent changes in price.
Finally, I weighted everything by equity, so that small industries (often with high leverage) do not contribute so much.
SRW has argued that leveraged firms are less likely to lower prices as they need to make debt payments, and this can cause price stickiness.
I think this is a rabbit hole.
Whenever someone starts blubbering on about marginal productivity, the minimum wage, or anything else, keep the following in mind:
average hourly earnings for production and non-supervisory employees, all private sector.
The BEA publishes data on the fixed assets (structures, equipment and software). I took the ratio of the current value private fixed asset series, divided by the chained quantity index to get a time series proxy for changing capital values that is more stable than measures of stock market prices.
Economics is the science of confusing stocks with flows.
What is the market of loanable funds? It is supposed to be the market that equilibrates the demand for savings with the demand for investment. But if such a market existed, it would be a market for flows, not stocks.
However the bond market is a market of stocks. The capital market is a market for stocks. Both bonds and capital persist across periods and can be re-sold. Everyone who owns a bond (or who owns capital) is a potential supplier of bonds or capital at some rate. Everyone is also a potential demander of bonds or capital at some rate.
As the interest rate changes, some suppliers become demanders, so that at equilibrium, supply (of the stock) is equal to the demand (for the stock). This is the equilibrating process for stocks that can be re-sold by their current owner in any period.
But lending and investment are the derivatives of these quantities with respect to time — they are flows.
Can the interest rate equilibrate both flows and stocks?
Continue reading “Stocks, Flows and Loanable Funds”