In 1930 the Fed raised rates from 6% to 2.5%
No, that’s not a typo. In October 1929 the discount rate was 6%, and by October 1930 the discount rate was 2.5%. So how can I say the Fed raised rates? Because interest rates are the price of credit, determined in the market for credit. And free market forces depressed the interest rate even more sharply than the 3.5% drop that actually occurred. Thus in a sense the Fed had to raise rates with a tight money policy, in order to prevent them from being much lower than 2.5% in October 1930.
Of course the discount rate is actually a non-market rate set by the Fed. But market rates such as T-bill yields fell by a similar amount in 1930.
A commenter of the Austrian persuasion recently argued that the Fed made a mistake by driving rates so low during the Great Contraction, and that if they hadn’t done so, market forces would have weeded out the weaker and less efficient firms, laying the groundwork for a more sustainable recovery (I hope I got that right John.)
But his entire argument is based on a misconception, that the Fed adopted an easy money policy in 1930. In fact, the Fed did just the opposite. In October 1929 the monetary base was $7.345 billion, and by October 1930 it was $6.817 billion. That’s a drop of over 7%, one of the largest declines in the 20th century. And the monetary base is the type of money directly controlled by the Fed. When people talk about the government “printing money” they are generally referring to the monetary base. So by that definition money was very tight. If money was not tight in October 1930, then the low credit demand of the Great Depression would have meant even lower interest rates; perhaps the 1% we saw in 2003, which prevented another Great Depression.
Now for a curve ball. So far I’ve assumed the Great Depression just happened for mysterious reasons, and that the Fed responded with tight money, thus preventing interest rates from falling as far as market forces would have taken them (assuming a stable monetary base.)
But why did the Depression happen in the first place? It’s very likely that the Fed’s decision to reduce the monetary base by 7% was a major cause of the sharp contraction of 1929-30 (after October 1930 the base rose, as the Fed partially accommodated higher currency demand during the bank panics.) So if tight money caused the Depression, why did rates fall? First we need to recall that monetary policy affects rates in various ways:
1. Liquidity effect; tight money raises rates
2. Income effect; tight money reduces RGDP, investment, credit demand, and real interest rates
3. Inflation effect; tight money reduces expected inflation and thus nominal interest rates
Note that the effect everyone focuses on (the liquidity effect) is actually the outlier, and is also a very short term effect. Indeed I’ve seen the “long run” effects overwhelm the short run liquidity effect in a period less than three months! Thus most of the movements in interest rates that we observe are not the Fed moving rates around via easy and tight money (as most people assume) but rather the market forces moving rates around.
Indeed 1929 is a great example. The Fed only had raised rates to 6% for about three months in 1929, after which the economy started plunging so fast that the interest rates began falling sharply, even without any “easing,” without any increase in the monetary base.
Obviously all this has important implications for how 90% of our profession (and I’m being generous) badly misinterpreted the stance of monetary policy in 2008.
One final point. I used the monetary base as the benchmark of policy, of the Fed “doing nothing.” But of course a modern inflation targeting or dual mandate central bank is not instructed to target the monetary base or interest rates; they are instructed to produce stable macroeconomic conditions. Under this regime, the only sensible way of thinking about whether money is easy or tight is relative to the goals of the central banks. But that standard, monetary policy was disastrously tight in 2008-09.
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21. July 2011 at 06:36
So are you calling the Fed guys stupid? why aren’t they easing more?
I don’t really hear ANYONE serious arguing for tightening. I hear some arguing for ending the Fed and ending the government backstop to fractional reserve banking….ending the government monopoly of currency and ending the unfavorable tax treatment for other free market currencies with thousands of years of hisory. I hear many criticizing the methods by which currency is created, e.g. in ways that are favorable to people and institutions with close connections to the primary dealers and Too Big To Fail Banks.
AND then I hear many more mainstream economist arguing for a much looser monetary policy. From Bernanke’s past writings, to Krugman, to Delong to Sumner to a broad spectrum of Keynes and Milton Friedman and followers.
So why is the Fed tight? They all of a sudden have loads of respect for the non-existent economic PHDs who are primarily concerned with keeping the monetary system as it is, but just having a tighter monetary policy?
21. July 2011 at 07:46
The tight money case for the Great Depression is inherently flawed. If money was tight in 1930, what was it in 1921, 1908, 1894, or 1873? The first time the (New York) Federal Reserve used their policy tools to try and provide liquidity, the economy collapses. It’s like a doctor who used the “classical” treatment and the patient always got better in a few weeks trying some new treatment. This time the patient almost dies, then the doctor says, “It’s a good thing I used the new treatment, can you imagine how bad it would have been if I had used the old one?”
I stick with the thesis that the fall in money supply which is associated with tighter credit market conditions is a necessary part of the economic adjustment process following an inflationary bubble. Lending at a high rate of discount forces companies to be honest. Companies in solid positions but constrained by liquidity can take out high interest loans while unsound firms go out of business, freeing capital and labor for more productive purposes.
I want to make a 3rd point, in the face of an increase in the demand for money, like the one we see now, spurring lending through policies like penalty rates on excess reserves would have unintended consequences. There is a reason that banks are holding on to money; and manipulating monetary policy to force lending would be likely to result in money flowing into a great variety of unproductive channels and momentary market fads (aka a bubble). It would be a much better policy to fix our current economic distortions by rolling back government involvement in a variety of markets and by having the government provide some measure of stability. If the government did this, I suspect monetary “tightness” would disappear and the Fed would have to aggressively suck up liquidity. If it doesn’t happen, money will continue to appear “tight”.
21. July 2011 at 07:55
Gabe, You are wrong. A recent survey of 38 economists found that 36 opposed easing. Indeed there are people at the Fed who want to tighten right now. (Hoenig, Fisher, etc.) They’ve publicly admitted that one reason they are reluctant to ease is that they are getting so much criticism for QE2.
John, You said;
“The tight money case for the Great Depression is inherently flawed. If money was tight in 1930, what was it in 1921, 1908, 1894, or 1873?”
Tight.
Bank lending has nothing to do with my argument. It’s endogenous. It goes with the economy.
You said;
“I want to make a 3rd point, in the face of an increase in the demand for money, like the one we see now, spurring lending through policies like penalty rates on excess reserves would have unintended consequences.”
I’ve never advocated spurring lending via negative IORs. I favor steady growth in NGDP. That’s when the economy does best. Highly unstable NGDP growth almost always leads to problems. The early 1930s are a good example–NGDP fell in half. How can we have a health economy when national income falls in half?
21. July 2011 at 08:06
I get the basic argument that in the Great Depression and the Great Contraction, the Fed didn’t follow the natural rates of interest down, causing a de facto tightening. But asking what the Fed should have done is like asking how many cars Soviet planners should have built in 1980. The answer would be whatever a market system would have provided but the existence of a Gosplan or Federal Reserve changes the equation automatically. The best policy is for them to shut down, the second best policy? There is no second best policy.
In 1921, when the United States endured a much worse crash than any single year of the Great Depression, the Federal Reserve, before they used open market operations, had the discount rate at the highest level (c. 7%) between the years 1913-1932. The lowest rate? 1.5% in 1931. The money was tighter argument in 1931 argument doesn’t work either as 1921 saw larger deflation than any single year of the Great Depression. To summarize, just 10 years before 1931, money had been much tighter by any measure (base, money supply, deflation, interest rates) and the fall in economic activity greater, yet the economy recovered vigorously. The empirical results and Austrian economic theory make it look like monetary “solutions” are really a part of the problem.
21. July 2011 at 08:17
“monetary policy was disastrously tight in 2008-09”
Exactly. Monetary flows (the proxy for real-output), fell from a positive 14% (at the end of 1929), to a negative (-)11% in just 9 short months. The proxy for inflation (Mvt) continued to accelerate downward bottoming in June 1932 @ -21%.
21. July 2011 at 08:20
I know it is not fair, but I always imagine fellows in the Austrian School as wearing funny little mustaches with dueling scars, with shiny knee-high boots under the jodhpurs. I won’t mention the involuntary arm spasms when martial music is played.
Crickey-almighty, tighter money and credit would have helped wipe out businesses in the 1930s, ending the depression sooner? And let’s put leeches on anemia patients.
Gold? Gold is a metal. A shiney bauble! Can we forget about gold?
And I was embarrassed to use my rotary-dial phone…I am a fount of modernity next to these economic Neanderthals lumbering around in our midst.
.
21. July 2011 at 08:22
“They’ve publicly admitted that one reason they are reluctant to ease is that they are getting so much criticism for QE2.”
So they think loose is the right policy, but won’t do it out of a claimed fear of criticism?
That would fit with what we can piece together about Bernanke.
That is completely different than being actually against loosening. I don’t know what the wording of the survey is…or the options presented. So the survey means little to me.
So it sounds to me like the curent policy is “create enough suffering with tight policy, blame it on boogey man gold standard people who have absolutely no power and who we always disregard with respect to other policy reccomendations, then we can do the policy we really want, but we can surprise people with it”
21. July 2011 at 08:26
If you concede that money was tight in the years I mentioned, your conceding the debate. Unless your arguing that money was much tighter in the 1930s. If it was tighter, it doesn’t seem like that was something that the Federal Reserve could control (at least at the time) because they used their conventional policy tools to try to cushion the blow. It might be too bad that they didn’t have you to advise them back then, but the fact remains that monetary contractions had happened before, which little or no attempt had been made to fight, that didn’t create a Great Depression. It actually appears that the Fed’s use of conventional policy tools to try and stop deflation blew up in their faces in the years between 1929-31.
21. July 2011 at 08:56
Ben, be nice to the Austrians. After all neither Hayek nor Mises is to blame for some of the “economics” which is today being marketed as “Austrian economics”. I still think that Mises’ “Human Actions” is one of the best books (if not the best) ever written on economics.
The problem is that the Austrian school today is represented by people with very little formal education in economics and very little inside into real world problems. That is too bad because traditional Austrian economics still has a lot to offer. An example is for example Hayek’s writings on the use of knowledge in society extremely insideful and should be read by anybody who thinks that politicians and bureaucrats can solve all kind of “problems”.
That said, I think the Austrian business cycle theory is mostly flawed – and in fact not very “Austrian”. The obsession among Austrians about how money is “injected” into the economy for example is based on historical institutional observations rather than on what the Austrians called praxeology.
21. July 2011 at 09:01
here is Larry Summers:
“I think the biggest problem the country has right now is not the budget deficit. The biggest problem the country has right now is the jobs deficit. Yes, there’s a risk that we will misplay things and make the mistakes of the 1970″²s, and have inflation and have excessive borrowing.
But far and away the larger risk is that we will make the mistakes of 1937, and that we will not have a recovery that is sustained, that we will make the mistakes that Japan made, and that we will have a decade or two of stagnation. The right question to be focused on is how to stimulate demand.”
So we have Krugman, Larry Summers, Scott Sumner and many other well known economist plublicly arguing for more easing. there arguments all seem to fit with the conventional views of Keynes and Friedman who have dominated the past 60 years. All of Bernanke’s past writings indicating that we should err on the side of looseness. He is widely hailed by the “experts” as being the biggest expert on the errors of the Great Depression.
Where are the 36 masked economist who are arguing for tightening and how are they able to control the Fed?
If this survey you point too is so important in determining the monetary policy then perhaps we should have more of the surveys and pay greater attention to them.
21. July 2011 at 09:09
Ben,
Not sure if you are being sarcastic, but I am not arguing for a gold standard. I’m simply questioning why it is the Fed doesn’t loosen up on monetary policy. I would love to see the results of the experiment. I se no reason to stagnate along the current path. It seems most of the mainstream economist influenced by Keynes and Milton agree that we should try massive quantitative easing to avoid the lost decades of Japan or 1930’s USA… I do see some alternative economists arguing for radical more fundamental changes to the governemnt’s economic central planning…but I dont’ see any consensus being formed in their favor unless we encourage the mainstream economist to finally give a good solid tests of their ideas. That is why I hope to see large scale quantitative easing in the near future.
Our theories will never progress if the ideas behind them are not tested.
It seems many here are more in favor of making excuses for the people executing our monetary policy, allowing them to endlessly get away with being wrong about everything just because they seem like nice guys in person.
21. July 2011 at 09:17
“The obsession among Austrians about how money is “injected” into the economy for example is based on historical institutional observations rather than on what the Austrians called praxeology.”
This: “historical institutional observations”…is funny.
What is wrong with looking at the empirical data? are you against facts? I don’t care what label you put on it, but it is a interesting that the mainstream economist do not care in the least how money is injected into a system nor who gets to spend it first before it is devalued.
21. July 2011 at 09:25
I don’t really hear ANYONE serious arguing for tightening.
Bloomberg, yesterday:
“Federal Reserve Bank of Kansas City President Thomas Hoenig …repeated his criticism of the central bank’s near- zero interest-rate policy…
“Hoenig, who doesn’t vote on monetary policy this year, has repeatedly urged the central bank to tighten monetary policy to limit inflation…”
He’s somebody, and he’s far from the only one.
21. July 2011 at 09:35
Gabe, that is exactly my point. Many Austrians seem to think that money ONLY can be injected into the economy via the banking sector. Mises obviously acknowledges that don’t have to be the case, but most “modern” Austrians keep on talking about a world which is 150 years old. Furthermore, I find it extremely hard to see how because interests have been maybe maybe 100-150bp too low for a couple of years should triggered a recession of the size we are in.
Anyway, Bryan Caplan said it better than I could: http://econfaculty.gmu.edu/bcaplan/whyaust.htm
21. July 2011 at 10:42
“In October 1929 the MONETARY BASE was $7.345 billion, and by October 1930 it was $6.817 billion”
You have to stop doing that.
21. July 2011 at 10:43
Gabe,
You can’t solve debates in economics using just empirical data. If you could Marxists/Socialists wouldn’t exist anymore. The problem is that the causal links are way too dense in the social sciences to extract conclusions from data, you can’t run controlled experiments, and in order to even select relevant data requires a prior theory. That’s why Mises argued that economics was an a priori science like geometry and to attack arguments, you had to show flaws in their reasoning rather than pointing at numbers or graphs. Check out Jim Manzi’s blog, he’s not an Austrian, but he’s done a good job pointing out the flaws with treating social sciences like natural sciences.
21. July 2011 at 10:55
How about viewing the entire issue from a supply-side perspective.
Money is necessary to facilitate business. Everyone would agree that there is an amount of money that is too small. Even Austrians could clearly see that 10 bucks is not enough for the monetary supply of the United States. So, how much is enough?
Well, if we had a free market in money creating maybe we would know. But unfortunately, government has reserved a monopoly for itself on creating currency. So, we must rely on the government to rightly know when to create more money and when to reduce the money supply.
(It’s pretty presumptuous of people who believe in free markets to KNOW for a fact that the goverment produced too much money. How do you know? Do you know what the exact demand for money was? I thought you believe in the free market and realize that no one person can know what the right amount of some good to produce is)
The supply-side argument would be that during the crisis of 2008, lots of people wanted to liquidate their investments and transfer into cash holdings. Unfortunately, government did not see this as a reason to create enough more cash. This caused problems hence the economic crash.
21. July 2011 at 11:12
Scott — Great post. Agree on 1930. However, the monetary base was down 4.1% y/y in March 1937 (two months before the cycle peak) after having expanded at a 12% per annum pace beteween 1934-1938. The decline in the base in early 1937 followed two hikes in reserve requirments; base growth troughed at -14.3% y/y in July 1937 after the third rise in May, well before the cycle trough. By the summer of 1938 (after the Fed had reversed course), the base was growing at more than a 20% annual rate. The second V-shaped recovery during the 1930s was on the way, four years before the war spending the Keynesians credit for “ending the Depression” came on line. I know you attribute the 1937-1938 “recession within a Depression” to a spike in the real demand for gold. However, it’s hard not to think the Fed’s ham-handed RR hikes didn’t play an important role. The Plossers, Fishers and Hoenigs of the 1930s were all very eager to wall off the excess reserves in the system then for fear of stock market speculation and/or inflation via bank credit expansion. They got their wish, and disaster followed.
21. July 2011 at 11:17
John, You said:
“The best policy is for them to shut down, the second best policy? There is no second best policy.”
I agree that the US would have been better off is the Fed hadn’t been created in 1913. But consider this analogy:
“The best policy is to no have a machine gun in your house. The second best policy? Ther eis none; spraying the neignbors with bullits, keeping in your 8 year old sons room, keeping under lock and key–do difference at all.”
So you claim that a Fed that delivers 5% steady NGDP growth is no better or worse than a hyperinflationary or hyperdeflationary Fed?
And 1921 is very easy to explain. We had one year of deflation, and one year of steep recession. In 1929-32 we had 3 and 1/2 years of steep deflation, and 3 and 1/2 years of steep contraction. Where’s the mystery? BTW, there were other differences, like Hoover’s high wage policy, and his big tax increases. But we don’t even need those.
flow5, Glad you agree.
Benjamin, Yeah, it’s probably not fair. Bob Murphy, for instance, has a great sense of humor.
Gabe; You said;
“So they think loose is the right policy, but won’t do it out of a claimed fear of criticism?”
Within the last month I did a post that quoted the Boston Fed president, who sort of implied that (you can judge for yourself-try googling moneyillusion and Boston Fed.)
Lars, I agree about theories that dwell on where the money is injected. Those make no sense, as the new money is sold at market prices, and quickly moves away from the original recipient. I can’t imagine why it would make any difference whether the Fed buys a bond from a bank, or Bill Gates. Gates is just going to put the money in the bank anyway.
Gabe, You said;
“So we have Krugman, Larry Summers, Scott Sumner and many other well known economist plublicly arguing for more easing.”
Far from contradicting me, that proves my point. You assume Summers advocated easing. Read it again, he never mentions monetary policy. I completely disagree with Summers; he favors deficit spending. Why do you lump us together? Indeed it’s because he was Obama’s adviser that Obama left those Fed seats empty.
flow5, You said;
“You have to stop doing that.”
Doing what?
Liberal Roman, Exactly right.
21. July 2011 at 11:20
MTD, Yes, RRs may have played a role. Actually the wage shock also played a huge role. Neither the wage shock nor the deflationary shock would have produced a depression on their own (just a recession) together they produced a depression.
21. July 2011 at 11:33
Summer wants fiscal easing, Sumner wants quantitivate easing.
Lots of agreement between you guys. Bernanke always wrote about easing in these situations…you cite the Boston Fed guy as well…we know there are others.
It seems you agree that they are being tight for political reasons…not based on economic reasons. Is this the ideal way for policy to be made? you think that is ok? at what pointdoes it amount to “creating a crisis” in order to implement some other policy?
Hoenig = not voting = not that big a deal…less of an influence that DeKrugman.
21. July 2011 at 11:40
Liberal Roman,
“Everyone would agree that there is an amount of money that is too small. Even Austrians could clearly see that 10 bucks is not enough for the monetary supply of the United States. So, how much is enough?”
While a cogent point, I have learned the hard way to not underestimate how many people believe wages and prices are infinitely flexible. It’s the ultimate faith in markets taken to its extreme.
21. July 2011 at 11:41
Gabe,
From your latest comment it sounds like you might not be sufficiently distinguishing between positive and normative statements.
21. July 2011 at 11:42
John,
I like using logic and empirical data. You don’t have to convince me of the value of using logic. Logic tells me that the power to create money will be sought after by the most power hungry and devious of humans. Empirical historical analysis shows that is true as well.
Tools, useful idiots and those who wish to be court economist often defend the printing press powers of a secretive group as being a smart policy. When monetary policy causes problems in the economy, the blame is deflected onto others(foreigners, speculators, hoarders, gold fetishists, dog-eat-dog competition, free-markets etc).
21. July 2011 at 11:43
“So are you calling the Fed guys stupid? why aren’t they easing more?”
~~~~
I’m simply questioning why it is the Fed doesn’t loosen up on monetary policy. I would love to see the results of the experiment. I se no reason to stagnate along the current path.
Remember that there are millions of Americans, maybe (probably?) a solid majority, who benefit from the current path — their situation *isn’t* stagnating — and they don’t want anybody “experimenting” with their welfare.
If a recession increases unemployment from 5% to 10% we say that post-1930s worst is *terrible*. And it is for the newly unemployed — but they are only 5% of the workforce, while 90% remain employed. Some of the employed suffer somewhat also, more or less, too. But the *average* people among the 90% are doing as well as ever — which means even *better than before* if …
[] They are paid under contract/government job/university tenure pay policies assuming 3% inflation and inflation drops to 1%, giving them a raise.
[] The price of gasoline drops by $1.50/gallon from the start of the recession.
[] They can refinance their home loans at a historic low 4%.
[] The price of hotel rooms, air fares, vacation trips to Disney World etc, all drop, making vacations cheap.
[] The value of the dollar zooms up against the Euro, making vacation trips to Europe even cheaper!
[] They bought bonds pre-recession, and their market value has zoomed do to fallen interest rates.
[] They want to buy a nice house (or second home) as opposed to sell, since bargain prices abound with record-low financing cost!
[] They can borrow at cheaper rates than they’ve ever seen in their lives.
[] Etc, etc, etc.
For millions of people who are as secure now as they were before the start of the recession, it brings many good things!
Now how many of these people want to see “radical new Fed policy, vastly increasing the money supply, with unknown consequences”??
Hey, don’t they sort of remember Milton Friedman himself, back in the 1980s, in Free to Choose (and all the clips of it at Youtube) warning “Printing money causes inflation!” ??? Isn’t that just common sense?
“Experiment” with the dollar? NO!! “Don’t debase our dollars! Don’t debase the dollar! Burn Bernanke’s printing presses!”
Krugman kinda touched on this with his “damn the rentiers” columns, but he missed the main point thanks to his usual obsession with hunting malignant villians.
The “special interests” who benefit from all the above aren’t just his parasite coupon-clippers. They include pretty much every upper-middle-class American retiree with a decent pension and Social Security benefits. Those people lobby and vote!
If you don’t think there is *serious* public political opposition to “Bernanke’s inflationary money printing” (series of explitatives attached!) go to discussion groups like at Reddit, or the AARP message boards.
Now add the reported serious pressure from the Chinese, who don’t want to see the value of the dollars and US bonds they hold fall — and, in the small world of professional economists, the significant number of them who think the economy’s problems are “real” so increasing NGDP won’t help and may only make things worse (Cochrane, the Arnold Klings, etc.) including some inside the Fed itself (Hoenig).
And there you have a really influential, significant coalition that doesn’t want anything to do with QE3, and not surprisingly has been able to put the brakes on it.
And, no, these people aren’t stupid.
21. July 2011 at 12:32
Well said, Liberal Roman. Is there a simple way to recast NGDP targeting as ‘free market monetary base targeting’ in a way that doesn’t cause the hawks to fret about trying to inflate our way to prosperity? Then maybe we could get them on our side.
21. July 2011 at 13:00
Gabe, Lars, Scott-
Okay, I will try to ease my bias against self-professed Austrians.
Still, when you get Austrians who zealously and reverently talk about money and gold…and who talk in hushed tones about the value of gold…who get doe-eyed about the history of gold and the magical properties of the metal…I begin to think it is koo-koo time.
Austrian: “No, we are not atheists. We worship gold.”
The last thing we need now is some gold nuts or anal bean-counters to influence Fed policy. The Bank of Japan has proved that for 20 straight years.
We need to blow the roof off of this economy with a flood of money. Yes, I want inflation, we need inflation, even up to 5 percent annually for a few years.
You know what: As capital, labor, goods and services easily cross borders (save lately on labor) I don’t think even an oversize slug of money will cause much inflation. If the price of goods go up, the containers come in. Thanks to the web, they can offshore call centesr and all sorts of services, probably even income tax preparation and coming soon architectural renderings in 3D.
Money flows in a blink of the eye, and we have global capital gluts.
Crikey, Almighty will these dunderhead Austrians shut up?
Dallas Fred Top-Poop Richard Fisher is a bona-fide menace to US prosperity and security.
21. July 2011 at 13:14
Gabe,
This is the most direct response I’ve seen Bernanke give to Sumner’s critique. I bolded the Cliff’s note version.
http://www.bloomberg.com/news/2010-08-27/fed-s-bernanke-outlines-steps-should-growth-slow-jackson-hole-full-text.html
“A third option for further monetary policy easing is to lower the rate of interest that the Fed pays banks on the reserves they hold with the Federal Reserve System. Inside the Fed this rate is known as the IOER rate, the “interest on excess reserves” rate. The IOER rate, currently set at 25 basis points, could be reduced to, say, 10 basis points or even to zero. On the margin, a reduction in the IOER rate would provide banks with an incentive to increase their lending to nonfinancial borrowers or to participants in short-term money markets, reducing short-term interest rates further and possibly leading to some expansion in money and credit aggregates. However, under current circumstances, the effect of reducing the IOER rate on financial conditions in isolation would likely be relatively small. The federal funds rate is currently averaging between 15 and 20 basis points and would almost certainly remain positive after the reduction in the IOER rate. Cutting the IOER rate even to zero would be unlikely therefore to reduce the federal funds rate by more than 10 to 15 basis points. The effect on longer-term rates would probably be even less, although that effect would depend in part on the signal that market participants took from the action about the likely future course of policy. Moreover, such an action could disrupt some key financial markets and institutions. Importantly for the Fed’s purposes, a further reduction in very short-term interest rates could lead short-term money markets such as the federal funds market to become much less liquid, as near-zero returns might induce many participants and market-makers to exit. In normal times the Fed relies heavily on a well-functioning federal funds market to implement monetary policy, so we would want to be careful not to do permanent damage to that market.
A rather different type of policy option, which has been proposed by a number of economists, would have the Committee increase its medium-term inflation goals above levels consistent with price stability. I see no support for this option on the FOMC. Conceivably, such a step might make sense in a situation in which a prolonged period of deflation had greatly weakened the confidence of the public in the ability of the central bank to achieve price stability, so that drastic measures were required to shift expectations. Also, in such a situation, higher inflation for a time, by compensating for the prior period of deflation, could help return the price level to what was expected by people who signed long-term contracts, such as debt contracts, before the deflation began.
However, such a strategy is inappropriate for the United States in current circumstances. Inflation expectations appear reasonably well-anchored, and both inflation expectations and actual inflation remain within a range consistent with price stability. In this context, raising the inflation objective would likely entail much greater costs than benefits. Inflation would be higher and probably more volatile under such a policy, undermining confidence and the ability of firms and households to make longer-term plans, while squandering the Fed’s hard-won inflation credibility. Inflation expectations would also likely become significantly less stable, and risk premiums in asset markets–including inflation risk premiums–would rise. The combination of increased uncertainty for households and businesses, higher risk premiums in financial markets, and the potential for destabilizing movements in commodity and currency markets would likely overwhelm any benefits arising from this strategy.“
21. July 2011 at 13:21
I think this response to Brad Delon’s question in December 2009 (9 months prior) displays similar reasoning.
http://blogs.wsj.com/economics/2009/12/17/sen-vitter-presents-end-of-term-exam-for-bernanke/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+wsj%2Feconomics%2Ffeed+%28WSJ.com%3A+Real+Time+Economics+Blog%29&utm_content=Google+Reader
“D. Brad Delong, University of California at Berkeley and blogger: Why haven’t you adopted a 3% per year inflation target?”
Bernanke: “The public’s understanding of the Federal Reserve’s commitment to price stability helps to anchor inflation expectations and enhances the effectiveness of monetary policy, thereby contributing to stability in both prices and economic activity. Indeed, the longer-run inflation expectations of households and businesses have remained very stable over recent years. The Federal Reserve has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates and so stimulate spending and output. However, that theoretical argument ignores the risk that such a policy could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward. The anchoring of inflation expectations is a hard-won success that has been achieved over the course of three decades, and this stability cannot be taken for granted. Therefore, the Federal Reserve’s policy actions as well as its communications have been aimed at keeping inflation expectations firmly anchored.”
21. July 2011 at 13:34
Scott,
The mystery I was pointing to is why the 1921 recession didn’t lead to a great depression. Money was “tight” in both years, indicating that the Friedman-Schwartz theory of the Great Depression needs some modification. I’m aware of all the government interventions during the Depression, but the fact remains that the first time the Federal Reserve made an effort to fight off a contraction, it ended up being the worst contraction ever. The same thing is happening today with the Fed being as active as they have ever been in our history and the economy being in the toilet.
As far as a 5% NGDP fed being better than a hyperinflationary one, if you phrase it that way, of course. But monetary policy can be a crude tool, trying to prevent a contraction through monetary policy alone could end up undermining the currency. Furthermore, a gold standard monetary policy forces accountability from politicians and balances international trade, something fiat money does not.
21. July 2011 at 13:38
Ben Cole,
Austrians are just as frustrated with people like you who believe that prosperity comes from a printing press as you are with people who believe in the virtues of gold as money.
21. July 2011 at 13:47
Ben,
I find it odd defending the Austrians, but the fact is there is a lot of good economics in traditional Austrian economic theory. Just read Mises, Hayek and Rothbard for that matter – and then forget about the crackpots.
And yes, there is a lot of weirdos out there talking gold, gold, gold without any real understanding of understanding of economics.
All that said, we are in interesting time in terms of pro-market economists. Never have the difference between monetarists and Austrians…
21. July 2011 at 13:58
Ben again…the US economy does not “need” inflation. The economy needs a nominal anchor – like for example what Scott is arguing in terms of a NGDP target, but there is certainly a difference between monetarists and keynesians. There is no permanent trade-off between inflation and unemployment so higher inflation in itself will not reduce unemployment as long there is a monetary equilibrium in the economy.
Therefore the problem at the moment is that there is excess demand for money. That needs to be eliminated and then you should not worry about creating inflation. I feel pretty sure that if the Fed announced a 5% NGDP path level target then the US economy would relatively fast pick up (as the excess demand for money eased) – as it did in 1933 and most of that NGDP growth would probably be real GDP growth rather than inflation. So no, the economy certainly do not need inflation – and it is exactly the call for “inflation” and “stimulus” which scares a lot of pro-market economists away from NGDP targeting. So Ben, I am sure we want the want the same, but calling for inflation to solve a growth problem to me sounds awfully Keynesian (70ties style…).
21. July 2011 at 14:20
@John
“I’m aware of all the government interventions…”
I think that sentence fragment right there is the problem. The Fed doing something unusual is seen as “government intervention” and then it must be bad says the Austrian/conservative mind.
Like I said in my previous post, the way to view this is to keep in mind the government ALWAYS controls the monetary supply. So, I hate it when people say QE was some sort of extra ordinary government intervention. No it wasn’t. Government always controls the monetary supply. So, if it increases rates, lowers rates or does QE, it’s all “government intervention”.
21. July 2011 at 14:28
Liberal Roman,
Indeed — more to the point, even if the government does not touch the money supply, that still constitutes government intervention, as long as the government holds a monopoly on the issue of legal tender. Those who seek a return to the gold standard are just calling for a different form of government intervention.
21. July 2011 at 14:38
Lars-
Frankly, I am not a fine tuner. I say pour lots of money into the economy, even if we have to run a national lottery that pays out more than it pays in.
The goal is to get demand up, when we have 10 percent un-used capacity, and almost unlimited capacity to import goods, labor, capital and services.
John- Sure, printing money does not create wealth. However, if I successfully counterfeit Ben Franklins, and hire guys to build furniture, our nation’s wealth is expanded, and in this market, with zilcho inflation. Wealth is created by the response of management and labor to the slip of paper–the ben Franklin–that give you a claim on other people’s output.
Print too much money, and you get inflation, we know that. Print too little, and you get Japan. We are printing too little.
I have issued clarion calls to all drug lords to re-patriot the $800 billion or so US dollars (Ben Franklins) circulating offshore.
As to 5 percent inflation, yes I want real growth of roughly equal that for a few years. If we can run some moderate inflation, we will de-leverage US debts (we pay off debts in dollar) and hopefully flood the world with enough dollars to get other economies going too.
Inflation would raise values of real estate, helping out the banks, and all property owners. It would even help businesses through wage money illusion.
Dudes, cooling inflation off is easy; Volcker proved that. And I not talking about 15 percent inflation, only 5 percent.
As for the hyper0inflation fearmongering, that is just silly.
So what the Austrians are really saying is that to avoid 5 percent inflation, we all have to suffer for a few decades. Like Japan.
21. July 2011 at 16:03
@ Liberal Roman
I wasn’t talking about Fed policy there. That sentence referred to propping up wages, Smoot-Hawley, public works programs, increased government spending, etc. I still believe it poses a problem for the monetarists/keynesians that the 1st time the Fed used its powers to try and prevent a recession, that recession was the worst ever.
21. July 2011 at 16:07
@ Ben Cole
You’re missing a critical point here. By printing money you are redirecting resources towards you and the people who sell to you. That’s why counterfeiting is illegal, it’s stealing through the money system. The guy who gets his hands on the newly created money later has to pay higher prices ceteris paribus whether that shows up as inflation or not.
21. July 2011 at 16:17
John-
First of all, if there there are unused resources (labor, a mine not being operated), and I print up money and get it going, then I do not re-direct resources to me, except those unused.
Well, what if I succeed in re-patrioting the $800 billion or so Ben Franklins thought to be circulating offshore in drug land?
So let’s say I come across a drug kingpin and get him to convert to Jesus, and he gives me $200 million.
I bring it back home and start spending it. This will stimulate the economy too, and every dollar spent gets re-spent etc. I take it you have no qualms against me converting the drug lord to Jesus and spending all his money when I get home.
So what is the effing difference if I print up the money and spend it, versus it staying in a suitcase in drug-land, unless I retrieve it and spend it?
21. July 2011 at 17:17
It seems like you’re arguing that stealing is good if it taps into unused resources or stimulates the economy. Ignoring that side of the argument, you are wrong that you’re not redirecting resources to you. You get to use whatever you bought with your new money. Those things weren’t gonna be sitting their forever, whoever invested in those idle resources made a forecasting error and needs to find a use for them, usually by slashing prices and taking a loss. That’s how a market system works, bad investments of capital and labor waste resources and create losses forcing those who forecasted incorrectly to go out of business; clearing the way for other people to put them to a better use. Printing money and giving yourself purchasing power just prevents the process I’ve just laid out.
The difference between printing the money and stealing it from a drug lord is that by printing money you’ll be bidding up prices further. The drug dealers are gonna spend the money eventually “stimulating the economy”, after all why make money if not to spend or invest it at a later date.
21. July 2011 at 18:32
“whoever invested in those idle resources made a forecasting error and needs to find a use for them, usually by slashing prices and taking a loss”
If people are entirely rational beings this is fine. The problem, as any graph of wage changes might show you, is that people aren’t. Wages in particular are highly inflexible downwards, causing people to be laid off rather than take wage cuts.
21. July 2011 at 21:23
The idea of sticky wages was invented by Keynes at a time when wage rates were deliberately propped up by the government in order to preserve “purchasing power”. Prior to that, for example 1921, wages had declined as rapidly as deflation. While wages are intrinsically less flexible than say commodity prices, this is a good thing and it’s hard to know how flexible they would be without government interference. I think most people would rather negotiate for pay cuts instead of losing their jobs, don’t you?
22. July 2011 at 05:16
Good points Mr Glass.
22. July 2011 at 06:47
Gabe, There is more than one voting member who want to raise rates. And there’s a huge difference between more fiscal stimulus and more monetary stimulus. Other than our names, there’s nothing similar about Summers and I.
Jim Glass, Those are very good points, but nowhere near 90% benefit from deflation. I suffered in the downturn because my stocks fell so sharply–more than offsetting the lower cost of living. DeLong recently shot down Krugman’s rentier argument. When 10% are unemployed, far more have temporary bouts of unemployment. And many small businesses keep working, but see much lower profits.
Benjamin, In all these schools of thought (Austrian, Keynesian, monetarist) you have good and bad. The loudest voices on the internet aren’t always the best Except me of course. 🙂
Charlie, Those are good quotes, and I’ve blogged on them before. The bottom line is that Bernanke did eventually decide the core inflation rate was too low, and launched QE2. I think his mistake was assuming that level targeting was appropriate for Japan, but not the US. It’s appropriate for any country up against the zero rate bound.
John, You said;
“The mystery I was pointing to is why the 1921 recession didn’t lead to a great depression. Money was “tight” in both years, indicating that the Friedman-Schwartz theory of the Great Depression needs some modification.”
There is no mystery at all, in 1921 you had one year of deflation, in 1929-33, you had 3 1/2. In one case NGDP fell about 20%, in the other it fell about 50%. There were other factors like wage fixing as well, but the deflationary shock in 1929-33 was much bigger.
You said;
“I’m aware of all the government interventions during the Depression, but the fact remains that the first time the Federal Reserve made an effort to fight off a contraction, it ended up being the worst contraction ever.”
You’ve got his exactly backward. Under Gov Strong the Fed successfully tried to soften recessions, and it worked. When he died in 1929 they went to a more laissez-faire policy, and simply let the economy collapse in 1930. There was no attempt to prop it up until 1932.
You said;
“But monetary policy can be a crude tool, trying to prevent a contraction through monetary policy alone could end up undermining the currency.”
I’m not calling for the fed do do anything different during recessions. I want them to aim for 5% NGDP growth, level targeting, regardless of whether we are in a recession or not. So there is no risk of undermining the currency.
John, You said;
“Furthermore, a gold standard monetary policy forces accountability from politicians and balances international trade, something fiat money does not.”
It does neither. Trade deficits often occurred under gold standards, the two issues are completely unrelated.
John, You said;
“The idea of sticky wages was invented by Keynes at a time when wage rates were deliberately propped up by the government in order to preserve “purchasing power”.”
Completely false. The sticky wage theory was the standard view of recessions before Keynes. It’s the theory he attacks in the General Theory.
22. July 2011 at 08:15
john-
I don’t know if you are still reading, but answer me this:
Okay, let’s suppose drug lords, for whatever reason, decide to migrate to the US, bring the $800 billion in suitcases with them. Let’s say some sort of amnesty-money repatriatism program is successful.
They take their money out of the suitcases and start spending it (and we have 9 percent unemployment and at least 10 percent unused capacity, and also we can easily import capital, labor, services and goods).
What will be the result of the huge re-patriatism of $800 billion in Ben Franklins?
22. July 2011 at 08:38
[…] Scott Sumner (SS) replies to one of his comments on his blog about the Austrian perspective on the Great Depression. Jumping right into the middle of his explanation SS says Now for a curve ball. So far I’ve assumed the Great Depression just happened for mysterious reasons, and that the Fed responded with tight money, thus preventing interest rates from falling as far as market forces would have taken them (assuming a stable monetary base.) But why did the Depression happen in the first place? It’s very likely that the Fed’s decision to reduce the monetary base by 7% was a major cause of the sharp contraction of 1929-30 (after October 1930 the base rose, as the Fed partially accommodated higher currency demand during the bank panics.) […]
22. July 2011 at 08:39
A brief reply here Mr Sumner
http://www.macro-investing.com/?p=127
“Assuming the Fed doesn’t pick policy by flipping coins they then supposedly had a reason for their actions that lead to the Great Depression. The Austrian position is that the Feds actions during the 1920s had created systematic mal-investment and that mal-investment is the fuel for the crash.”
22. July 2011 at 14:12
@ Ben Cole
I hope your still reading too. The 800 billionin new spending would not be equivalent to printing the same amount because people chose to consume drugs instead of other products causing the prices of the products they forewent to drop and the prices of drugs to rise (other things equal). If the drug dealers suddenly all decided to spend the money at the same time, it would have a confusing effect on the economy. If entrepreneurs were able to figure out that this was a one time shot of spending, it would give the economy a temporary boost. If they forecast incorrectly and thought the spending was a permanent change, there would be a great deal of resources directed into eventually money-losing projects with the aim of expanding capacity.
It seems that you want me to acknowledge that spending drives an economy. I believe that’s too simple. Economic activity involves a complex structure of production where investments and capital goods have to dovetail perfectly with consumer preferences. Correct price signals and entrepreneurship drive the economy not spending. Chronic unemployment comes from a disharmony between production and consumer preferences not a lack of aggregate demand.
22. July 2011 at 14:25
Tom, I don’t agree, there was no inflation in the 1920s.
22. July 2011 at 14:32
Scott,
As I’m sure your aware, in the Austrian view, Strong’s attempts to prevent a contraction by easing during the 1920s fueled the stock market bubble and madethe final crash and subsequent decline in business activity much worse than it would have been otherwise. Hoover deserves the lion’s share for turning it into a depression though. I still think you haven’t addressed my point that in the past, even when monetary policy was constrained by the gold standard, the economy managed to recover from panics without a great depression. At the very least, monetary tightness isn’t a sole cause.
You say there were trade deficits on the gold standard but today trade imbalances and government fiscal deficits are more persistent and represent larger %s of GDP than they did for gold standard countries. I’m sure I could dig up the data if you wanted.
22. July 2011 at 14:35
Tom Cullis wrote at Macro Investing:
“Usually this image is taken to show that a build up in debt caused the GD- the reality is that the spike in the graph happens in 1931-1933. SS says that there was “low credit demand” during the GD however dbt/GDP jumps from ~160% to ~260%. Some of this jump was caused by the ~25% drop in GDP, but that would only have driven the debt/GDP ratio up to ~ 223%. In other words there was credit created in the amount of 30-40% of GDP from 1930-1932. How does this reconcile with the view that there was “low credit demand” during the GD?”
I responded:
“This post demonstrates a breathtaking amount of innumeracy. NGDP was $91.2 billion in 1930. 160% of $ 91.2 billion is $145.9 billion. NGDP was $56.4 billion in 1933. 260% of of $56.4 billion is about $146.6 billion. In short there was absolutely no expansion of credit in 1931-1933.
http://www.macro-investing.com/?p=127
P.S. I have no idea where you are getting the 223% figure.”
22. July 2011 at 16:23
“Tom, I don’t agree, there was no inflation in the 1920s.”
Scott-
If I understand what you are getting at my responses would be-
1. In general the Fed doesn’t view inflation as something to fight after it impacts the economy, rather something to start fighting as soon as precursors to inflation arise.
2. There wasn’t any inflation from 2001-2006 and yet low interest rates contributed to the housing bubble.
22. July 2011 at 17:44
John, Which decade of the 20th century had less expansionary monetary policy that the 1920s? And why?
I’ve argued that the tight money of 1929-33 caused the Great Contraction, and FDR’s New deal policies caused the slow recovery. I wrote a whole book on it in fact, which may even be published someday.
I still don’t see any link between gold and deficits. The US ran big deficits in the 1800s.
Thanks Mark, BTW, a better term than “credit demand” would be investment demand. We can loan each other a quadrillion dollars, and lots of “credit” is created. But not much investment. I need to be careful about that.
Tom, Low interest rates don’t mean easy money. Precisely what evidence do we have that money was easy in the 1920s?
22. July 2011 at 21:14
@ Scott
I wanna thank you for taking the time to address my arguments becaue I’m pretty sure you think I’m an idiot. Which is fine because we’re usually talking a different econ language.
I believe, although I don’t have figures, that the 1910s had lower levels of inflation (in the way I defined it). The 1920s saw a Florida real estate bubble which quickly transitioned into a stock market bubble. This bubble activity indicates below market interest rates in the Austrian view because in a free banking system, loans into fads like real estate or stocks would deplete bank reserves causing interest rates to rise, chocking off the speculative, frothy, activity in the crib. Basically, like the maestro 80 years later, Strong was able to use monetary policy to prevent necessary adjustment and preserve the illusion of prosperity while creating unsound conditions that America had to pay for later.
Also, inflation in the 1920s showed up in rising stock prices and speculation. Inflation is the mother’s milk of finance, without rising prices it’s difficult to make profits. The presence of these real estate (1926) and 1929 stock market crash were directly attributable to easy money. Monetary policy is a drug, you get a short term kick and a vicious hangover.
As far as gold and deficits, on a gold standard, crowding out is a real concern. Without a fed to provide liquidity and control the fed funds and discount rate, interest rates would rise in the face of large government borrowing. People would have to actually pay for government services with taxes (in general). In international trade, if the trade deficit grew in America, the dollar would devalue and reach the gold export point where they’d exchange gold abroad in their currency and use their currency to buy gold from Americans. Since the dollar was undervalued related to gold, this offered a substantial arbitrage opportunity which tended to keep exchange rates, and hence balances of payments fairly contrained. Because of this same gold export point, inflation (in the form of newly added money substitutes) would cause gold to leave, lowering prices and boosting exports.
On an empirical note, any graph on the matter will tell you that inflation has soared since leaving the gold standard along with fiscal deficits we haven’t since we went off gold in world war II. These fiscal debts are especially pernicious because there will be no dramatic spending cuts in the future like there were at the end of WWII.
I enjoy our converstaions and it’s interesting to hear from such an alien viewpoint to what I’ve read, so thanks again. See if you can get Bob Murphy over here, I think he’d spice things up and it would be nice to have another Austrian on the sight.
22. July 2011 at 21:24
Jim Glass, Those are very good points, but nowhere near 90% benefit from deflation.
Not “90% benefit” but perhaps a majority of the 90%. That is a very big interest group.
Personal experience: During the big 1981 recession with its double-digit interest rates and unemployment (higher than in the current recession, though for not as long) I was a young guy with a good job as an employee at a young, fast-growing company, and made out great. I locked in double-digit returns on my investments that ran years after Volcker busted inflation, etc. All that 11% unemployment sailed right by me.
I still remember the farmers running their tractors in front of the Fed building protesting high interest rates. My attitude was: “It’s tough for them but we have to do what is right in the long, and if it takes 20% interest rates to kill this inflation for good right now, then that’s what we must do. Yes, up to 20%!! Now I’m going to go buy another 14% seven-year CD for my IRA…”
I.e., my opinion was intellectually quite sound — apparently the same as Volcker’s — but it was also very much in my own personal interest.
Now this time, as a self-employed professional trying to run a business, well, the recession has been … not so kind to me. Giving me a personal reason to be very open-minded to your arguments, which I find quite convincing, putting me in solidly in the “Support of QE3! Support NGDP targeting *now*!” camp.
Which again I believe is intellectually correct, while only coincidentally also in my own self interest.
Self-interest motivates … well, influences, the policy positions of even people like me who have — really, genuinely, truly — *only* the interests of the larger general public at heart.
As to those “36 of 38” economists who oppose any more monetary sitimulus, I’d wager that 35 of 38 of them are in positions like I was in 1981 (tenured, or very secure in the private sector, etc.,) and they genuinely believe that:
“Hey, getting inflation down to *under* 2% for the long run is very *good*. If we get 3% growth from here on starting soon that’ll be fine too. Eventually the 9+% plus unemployment will start declining naturally, and in the end everything will be fine. Sure that 9+% unemployment is tough on the 9+%, but taking radical unproven steps to reduce that rate quickly risks blowing things up and making them worse. We really shouldn’t take *any* risk of gambling the long-run away for an “iffy” short-term fix. Besides, a lot of the current problem may well be structural, in which case we’ll *only* get higher inflation — and needlessly give away the one good thing we’ve gotten out of this whole painful episode…”
It’s a perfectly defensible intellectual position. And it also probably fits the personal self-interest of all of them.
OTOH, if 24 of the 38 were self-employed in businesses that had taken big hits in 2008 and weren’t recovering any faster than the 9+ unemplopyment rate, I’d wager that a lot more of than two of them would be a sympathetic to “more monetary stimulus is needed” policy presciption. IMHO.
22. July 2011 at 21:25
P.S.
US trade deficits were usually importations of capital goods for private companies who would upgrade their industrial capacity allowing them to pay off the loans. Furthermore foreingners were eager to invest in American industry meaning they had to send us goodies to balance the balance of payments. Today foreigners invest in treasuries in exchange for consumer goods. This pattern of trade deficit is unsustainable and adds to our debt without improving our ability to pay it back (without huge inflation). Basically to win this argument, your gonna have to explain why Hume’s species flow mechanism didn’t work.
Nowadays, the mercantilists in Asian are accumulating stockpiles of dollars. This is something Milton Friedman failed to anticipate.
22. July 2011 at 21:51
Jim Glass,
You wrote:
“I locked in double-digit returns on my investments that ran years after Volcker busted inflation, etc.”
What’s odd, is in a way, I benefited from the runup in inflation rates just as you benefited from their rundown. My father bought my house and land in stages in 1967-1970 at about 6%. He was able to save money more easily as inflation surged past his mortgage rate. My parents were frugal and my brother and I split the estate in 2007 when my mother died. Now I’m property rich and income poor (although the income part may soon change).
23. July 2011 at 11:32
John, You said;
“I believe, although I don’t have figures, that the 1910s had lower levels of inflation (in the way I defined it).”
No, the 1920s had far lower inflation, however you define it. (price increase, money increase, whatever.) Indeed it’s not even close.
I don’t think you are an idiot, rather like almost all the Austrians who comment here you haven’t studied the data you need to study to evaluate your hypothesis.
You said;
“Without a fed to provide liquidity and control the fed funds and discount rate, interest rates would rise in the face of large government borrowing.”
I can’t imagine how you could make that claim, after reading this post. Do you think I just make up the numbers? The Fed actually reduced the money supply in 1930. With no Fed, money would have been easier, despite the deficit.
Regarding Bob Murphy, I agree he’s a great guy. He used to come over here and tell me we’d have high inflation by 2010. Haven’t heard from him much recently.
You really need to stop thinking that low interest rates mean easy money, that has things exactly backwards.
Jim Glass. Those are good observations, and I think you were right in both cases.
I’m still surprised by the poll of economists, as most economists vote Democratic.
John, Hume’s theory has nothing to do with trade deficits, it’s a theory of balance of payments deficits in a world with a common money (gold.) We don’t have that today.
You said;
“Nowadays, the mercantilists in Asian are accumulating stockpiles of dollars. This is something Milton Friedman failed to anticipate.”
Not only did Milton Friedman anticipate it, he celebrated it. Unfortunately, they aren’t accumulating many dollars, it’s mostly dollar debt. Friedman also anticipated that, as it’s been going on his entire lifetime.
The US benefits from Asian exports.
24. July 2011 at 17:06
Mark-
“This post demonstrates a breathtaking amount of innumeracy. NGDP was $91.2 billion in 1930. 160% of $ 91.2 billion is $145.9 billion. NGDP was $56.4 billion in 1933. 260% of of $56.4 billion is about $146.6 billion. In short there was absolutely no expansion of credit in 1931-1933. ”
Your using NGDP which doesn’t’ make sense. Real GDP is what you want have to use when looking at debt to GDP ratios. In terms of real GDP the debt burden jumped up by 30-40% of GDP from 1030-32 and this leap if far more likely an explanation for the lack of loan growth during this period not the claim that money was artificially tight by the fed.
7. December 2015 at 21:32
[…] Speaking of Scott Sumner, remember when I tried to take his thermostat analogy seriously? Well, it also requires saying things like, “Jim turned the thermostat DOWN from 60 degrees to 70 degrees.” […]
17. January 2020 at 18:00
In the course of researching a commentary on Federal Reserve policy, I came upon the exchanges above on January 17, 2020. I was struck by the apparent coincidence that all except the very last comment were posted during July, 2011 – the very month my book titled The Fruits of Graft – Great Depressions Then and Now (Launfal Press, Los Angeles: 2011) was published in hardback.
Very briefly, my research concluded that actions permitted by Hoover (hyper fraud on Wall Street, Smoot-Hawley tariffs and the monster tax hikes of 1932) got the Great Depression underway, and then deliberate actions by FDR were carefully designed to make it much deeper and much worse. For example, FDR carefully designed the dollar devaluation to add not a single dollar to the economy while reducing purchasing power of the dollar in international trade by at least 40%. The “gain” on gold seized by FDR’s order (about 70% over cost) was transferred to the super-secret slush fund called the Exchange Stabilization Fund. By then, FDR had already begun buying gold on foreign exchange, using tax revenues and funds from sale of U. S. bonds into the domestic economy. In his first eight years in office, FDR bought 13,185.3 metric tons of gold – more than three times the amount of gold accumulated by the US in its entire history up to 1930. These and other actions by FDR created hyper-deflation so severe “nobody has any money” was the description of the era, except of course the barons of Wall Street and the wealthy could buy any asset desired for five cents or less on the dollar. In the process, the only social studies available indicate three to six million Americans died of starvation. Please feel welcome to examine my book with full references. Thank you for your interest.