Deficits in the Viet Nam Era

One of the remarkable things about the Viet Nam war was that it did not bust the budget.  WW's I and II led to big deficits, as have our excursions into Iraq and Afghanistan.  To make the point, here is a graph of deficit as a percentage of GDP.  To provide some context, dates from 1950 through 1980 are included.

Despite Ike getting us established as early as 1955, the bulk of U. S. involvement came from Johnson's escalation in late 1963 through the end of the war in 1975.  These years are highlighted in red on the graph, or you'd never be able to pick them out.  Except for two specific years, 1968 and 1975, the period was actually quite frugal.  For context,  I've thrown on 3, 5, and 8 year moving averages, as well as the best fitting straight line in dark green.

The most striking feature of Viet Nam era deficits is that they are so remarkably unremarkable.  Why?  It's simple.  Revenues grew at about the same rate as expenses.

.

What The Hell?!? Friday - - Pt 2. Music Blogging Edition

Maybe it's high time for a little break with tradition.  We'll have that now, and a H/T to nanute for his comment on today's original WTH?!? here, which reminded me of this song.

I'm up in the air about one more mystery of the universe:  what does anybody gain by disabling the embed function of a YouTube video?  Really - What the Hell is up (and I mean UP) with that?!?

Well, since you can't see it here, I recommend you click through and see it OVER there.

It's solid gold - not elevator music - and really quite uplifting.

.

What The Hell?!? Friday - - What the Hell is up with Gold ?!? Edition

Ever since Auric Goldfinger we've wondered who put the Au in the Aura of GOLD.

Certain varieties of Neanderthal consider the barbarous relic to be REAL MONEY.  Well - remember the functions of money.  It operates as -

A medium of exchange
A unit of account
A store of value
A standard of deferred payment

If you think we live in a Lepriconomy where gold functions as money, try to pay for your next trip to the grocery store with a chunk of bullion, or a shiny American Eagle.

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
Gold Faithful - Ron Paul & David Leonhardt<a>
www.colbertnation.com
Colbert Report Full Episodes Political Humor & Satire Blog</a> March to Keep Fear Alive

One might reasonably consider gold to be a store of value, but it is inadequate in fulfilling the other functions of money.   It's more reasonable to think of gold as what it actually is - a physical asset with uses in industrial applications and as jewelry.  Gold is a great thing to hold onto during inflation, and especially hyper-inflation.  Other times it's usually as dead as any other rock.  Right now, we're on the edge of deflation, and holding gold will make little sense.

Of Fairies, Republicans, and Being 4

An amusing -- ah . . . human* interest story from James Kwak.
 ____________________________________
* Yeah, that's the ticket.
.

Bowl Game Theology

My theory that the twin humiliating losses suffered by Michigan and Michigan State in their respective bowl games was the almighty sky-deity punishing us for electing a Republican governor was put to a severe test in last night's Sugar Bowl.  (OK - if you contend that U of M has no business even being in a bowl game, you'll get no argument from me, but -- that State game -- OUCH!)

You see, Ohio also voted in a new Republican governor.  And not just any old Rethug - this is former congressman John Kasich, who spent his years nominally outside of government as a Faux Noise commentator, and from 2001-2008 was "employed by Lehman Brothers, the investment firm whose collapse precipitated the financial system collapse of 2008."   The exploits of job-exporting Rick Snyder pale in comparison.

You'd think that if anything deserves a 52-14 smack-down at the cloven hooves of an SEC opponent, this would be it.   But in the end the Buckeyes managed to cling to a razor(back) thin 31-26 victory.


In attempting to rationalize this outcome, I've come up with two not-mutually-exclusive theories.

1)  The sequence of early success and later dismay, followed by something close to despair and then near-cardiac arrest, watching the Razorbacks bore their way out of a 28-7 trough; coupled with the knowledge that 4 offensive stars plus the unlikely last-minute defensive hero of last night's game face suspension for committing the crime of free-market capitalism was punishment enough.   (Lesson: either graduate or lose academic eligibility first, sell the gold pants later.)

2)  This one to me is more convincing.  Consider the nature of the Arkansas loss - falling less than a touchdown short after a courageous second-half regrouping, with the prospect of a heroic come-from-behind victory tantalizingly dangled before their collective snout, then snatched away Lucy-like as they ultimately fell on their (razor)backs to defeat and disappointment.  

How can this be?  Not only did Ohio elect a particularly vile and heinous Rethug, Arkansas retained its incumbent Democratic Governor, Mike Beebe.  OTOH, they did split the ticket by electing Rethug Mark Darr as lieutenant governor.  But that can't possibly be enough.

Something must be truly rotten in the State of Arkansas to have pissed god off to this extent.  Could it be general corruption,  small town corruption,  police corruption, or public corruption?

We'll probably never know for sure.  The Lord moves in mysterious ways.  Not only did he allow the slaughter of the Arkansas hog, he's klling their birds and fish.
 .

Taking Stock

Mish has screwed up political views, which also screw up his political economic views.  But when politics is out of the picture, such as in a  pure view of the stock market, his native intelligence and savvy analytical skills are able to operate unimpeded.

Here is a great example.

Bottom line: 

In spite of what most cheerleaders suggest, this is one strenuously overvalued market.

And this is based on P/E, as reported.  For reasons that Mish talks about, earnings, despite some feeble attempts at reforms in the post-Enron era, are wildly inflated, at least in the financial sector.

Is you favorite analyst taking a positive view?  It's what they do. Look it up.  Sorry, I'm nor registered either, but Mish provides a very telling graphic.   And this quote:

To better understand their accuracy, we undertook research nearly a decade ago that produced sobering results. Analysts, we found, were typically overoptimistic, slow to revise their forecasts to reflect new economic conditions, and prone to making increasingly inaccurate forecasts when economic growth declined.

Mish's conclusion:

On that basis, the market (and forward estimates) are both far frothier than the opening chart implies.

I have to agree.
.

Of Deficits and Inflation - Part 3

I'm going to let the cat out of the bag right up front.  Looking at 100 years of data has convinced me that over that span there is no meaningful correlation between Federal budget deficits and inflation.  To be clear, this doesn't just mean the absence of cause and effect - it means no correlation at all!

Here are the the variables we're looking at.  First, Federal Deficits, as percentage of GDP.

And CPI Inflation.  Data from the Bureau of Labor Statistics.

So far, in parts 1 and 2, we've looked at the post WW II period.  We'll get a somewhat longer view in this post.  And use a different, but related methodology.

In part 2 we saw the dramatic difference between the two periods before and after 1980, illustrated by taking the two periods as different data sets and doing some simple math - determining the slope of inflation apparently resulting from the deficit, with a defined time lag; and the correlation coefficient.   That gave us two data sets of over 20 points each, before and after the eyeballed date of 1980.   

To determine what is happening over time at a more detailed level, I took data chunks of 8, 13, and 21 years duration and swept them across the entire data set.

Here, we'll look at the slope of CPI per Deficit/GDP from 1940 on, for the 8, 13, and 21 year chunks, plotted as a function of the last year of the chunk.  The longer time periods yield smoother lines and generally later responses to changes.

Full disclosure: I also looked at the slope of a 5 year chunk, as you can see from the faint dashed pink line.  It's jumpy, makes the chart busier, and doesn't seem to add much useful knowledge, so we'll ignore it.

Sure enough, this confirms that something dramatic happened right around 1980, as all three lines took a nose dive, just about in concert.  Also note that the 8 and 13 yr lines peaked in 1971, almost a full decade earlier, and slumped though the 70's before the big 1980 fall.

What occurred next was an actual reversal.  For several years, deficits led to decreases in inflation.  Here, "led to" simply means "preceded," and not "was the cause of."  It's very hard for me to believe that there is any credible line of reasoning that would justify a negative cause and effect relationship between deficits and inflation.   Then, another reversal occurred as all the lines work their way back toward zero.  I believe these reversals to simply be secondary data artifacts, resulting from the collapse of apparent correlation through the 60's and 70's (the primary data artifact.)

Let's look at the other parts of the graph: 1940 to the early 60's and from the late 90's on.  We don't find much there: mostly flat lines, close to and roughly parallel to the horizontal axis.  There is some irregularity in the 50's, as the brief, steep post-WW II deflationary event manifests itself in the data sets.

For the sake of completion, here is the same data presented without the 3-year lag - the slope of inflation in the current year as the deficit.

What can we make of this kind of relationship?  Through the 40's, when deficits and inflation were both at extremely high levels, there was no recognizable correlation between deficits and inflation.  Over the most recent decade, when deficits have soared to Reagan era levels and beyond, and inflation was fairly steady at a relatively low level - before stumbling face-down on deflation's doorstep - there was no recognizable relationship.  Also, except for the 60's and 70's, the time lag doesn't seem to be very important.

In between, the slope went from strongly positive to strongly negative.  Here's my take.  A pair of variables that exhibit that kind of relationship, vacillating among positive, negative and  next to nothing, have no fundamental correlation.  They can exhibit, in limited time frames, some apparent temporary relationship, whether due to common cause or some exogenous environmental effect - basically, a rising tide lifting different boats.  I call this kind of ephemeral relationship "coincident correlation."   If you only looked at the 50's through the 80's, you could easily believe that deficits caused inflation.  I think that is the primary data artifact, due to coincidentally simultaneous rises in both.

Hence my conclusion: there is no stable, meaningful correlation between deficits and inflation.

But - whatever was going on in the first part of the post war period apparently slowed in the 70's and stopped around 1980.   That was a time of secular inflation, which has since passed.  It's origins now seem mysterious.

What do you think?

.

Mellow Yellow Monday - SHARK BAIT!

Could this be shark bait,

A minnow strainer, or a

Mouthful of cousins?

August 9, 2010

Ripley's Aquarium of The Smokies

Gatlinburg, TN

.

Shadow Shot Sunday - 1/02

On a treck through the

Hills, on a steep rock-strewn path,

You might find these boys 

Great Smoky Mountains National Park

August 8, 2010


Photo by Amanda

.

Sunday Music Blogging 1/02

I never heard of Alec Templeton, but he showed up as 21D in last Thursday's X-word, and Al found this wonderful YouTube link.  So H/T's to Kelsey Blakely and Al at the Corner.

Quote of the day - Wise Choice

More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly.
–Woody Allen

My general feeling of despair when I look at the condition of the world, coupled with that Woody Allen quote reminds me that human history is a bit like a pendulum swing.  Not a well behaved pendulum that you might see in an old clock, mind you, but an unbalanced pendulum on an eccentric set of badly worn gimbles mounted on the bias in a crumbling tower exposed to high and variable winds.  After the apex has been reached, it's down, down, down – not on a smooth arc, but an ugly, jarring tail-spin - for an agonizingly long time.

There were major turning points, economically, politically and culturally – all reached in the U.S. from the late 60's through the early 80's. The utter stagnation of median income over 40 years is one bit of evidence. Ditto disco, the demise of unions, globalization, Reagan Democrats (ass holes!) and the disappearance of the miniskirt (that latter not in a good way.)

Though we've been in decline for decades, a great deal of it has been behind the scenes, and most of it so gradual, it's as easily overlooked as erosion.   It's a long way down from here, folks. The bad times are just beginning.

Welcome to the new dark ages. Only in such a time could John of Orange - aka "The Boner," Turtle McConnell, Sarah Palin, Christine O'Donnell, Glen Beck and the tea-baggers be looked upon as anything other than as sources of sour humor.  And remember, the last dark age was known as "the thousand years without a bath."  For now, at least, we still have indoor plumbing.  Beyond that -  we are well and truly screwed.
.

Six Word Saturday 1/01

Happy New Year, My Virtual Friends!


Not a friend?  Be happy anyway! 

Maybe you'll try it Krugman's way. 

Or worse yet -- Hippy Nude Beer

.