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.