Did Apple ease monetary policy?

Matt Yglesias seems to think the answer is yes:

When nominal interest rates on the safest forms of debt hit zero, extra savings can’t push rates any lower to spur new borrowing. They can’t, at least, unless the Federal Reserve is willing to take some risks rather than stick with its current policy of guaranteed mass unemployment as preferable to the risk of embarrassing itself by trying something new. That means that when extra cash ends up in an already stocked corporate treasury, it does just pile up pointlessly. The same thing happens when oil exporting countries recycle their earnings from higher gas prices into American sovereign debt. During this anomalous period of zero interest rates, corporate cash stockpiling really does hurt the broader economy. And Apple is far and away the king of the cash stockpile, representing fully 36 percent of the $179 billion increase in U.S. corporate cash that we’ve seen since 2009. In fact, in 2011 the non-Apple part of corporate America stopped stockpiling and reduced its cash holdings by $6 billion. This was, however, more than offset by Apple’s addition of $46 billion to its own stockpile.

In other words, every decision to buy an iPad rather than a sofa has been hurting the American economy. The $10 billion in share buybacks and $10 billion per year in dividends announced today is good news for the American economy.

This seems mostly wrong to me.  I certainly approve of the cash dispersion, as the principle-agent principal-agent problem suggests that highly successful corporations will be tempted to waste their cash hoards on boondoggle investments.  So it may be good for the economy.  But I don’t see how it does much for the zero bound problem.  At least I don’t see any first order effects.  If Apple saves less I’d expect the recipients of this money to increase their saving my an equal amount.  After all, if an Apple-owner wanted to get their money back they always could sell 2% of their stock each year, and increase consumption.  Perhaps dividends are slightly more liquid, but many people own mutual funds that automatically re-invest the dividends.  Those rich enough to own individual shares often have brokerage accounts where the dividends automatically spill into a money market mutual fund.  If at the end of the month you have a tiny bit more in the MMMF, and a tiny bit less in Apple stock, but the total of the all assets remains exactly at say, $857,000, are you really going to spend more on consumption?  I don’t see it.

That’s not to say Yglesias is completely wrong, anything that makes our economy more efficient will tend to slightly speed up the time when we exit the zero rate bound on interest rates.  I just don’t think the Keynesian “savings” framework is a useful way to think about the issue.

PS. I just returned home and will get to the old comments by tomorrow.


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64 Responses to “Did Apple ease monetary policy?”

  1. Gravatar of FQN FQN
    21. March 2012 at 05:21

    I think the argument would be that the transfer in apple stockholders’ savings from stock price to cash, money markets, other equities, corp debt etc will create investment by other companies or individuals which, unlike apple, are currently cash constrained.

  2. Gravatar of Cthorm Cthorm
    21. March 2012 at 05:23

    Off Topic – on my Bloomberg feed this morning, in bold red:
    “OSBORNE INTRODUCES STAMP DUTY ON HOMES OVER £2M”

    Well that sounds like a difficult to avoid luxury tax.

  3. Gravatar of Morgan Warstler Morgan Warstler
    21. March 2012 at 05:45

    Right now, I just want Ezra to stop saying that the poor pay for things:

    http://www.washingtonpost.com/blogs/ezra-klein/post/wonkbook-why-the-republican-budgets-make-the-poor-pay/2012/03/21/gIQA9qLURS_blog.html

  4. Gravatar of Becky Hargrove Becky Hargrove
    21. March 2012 at 05:57

    Morgan,
    As long as the poor only have the same basket of goods as the rich how is it possibly going to be any different??

  5. Gravatar of dwb dwb
    21. March 2012 at 06:01

    its an interesting idea.

    Apple shares have always been a “retail” product – meaning the shareholders are not confined to the “rich” people (and the causation might be backwards there too, if you bought shares a lot time ago). Still, i agree that at the margin the consumption impact might be small.

    I think at the end of the day, its more about growth expectations than anything else, so its a signal of boom times ahead for Apple (and by extension, a lot of people have disposable income to spend $700 on an ipad). Apple’s *outlook* bleeds into IT departments worldwide (and economics blogs!), even if the shares are not directly owned.

    higher expectations for consumer spending i guess are a form of easing.

    I dont agree that the purchase of iPads hinders the economy because they are not buying sofas. Its all in AD.

  6. Gravatar of dtoh dtoh
    21. March 2012 at 06:35

    But what about the money that Apple is printing….iTunes Cards.

  7. Gravatar of Major_Freedom Major_Freedom
    21. March 2012 at 06:36

    That means that when extra cash ends up in an already stocked corporate treasury, it does just pile up pointlessly.

    Leave it to a Keynesian to attack and hate cash balances of all things, as if money is somehow not a commodity that people naturally value in large part because of its store of value capability. If holding cash for a year is “pointless”, then logically so would holding cash for half a year, and also one month, and one week, and one day, even one second. If holding cash is pointless, then the only way to avoid that “pointlessness” would be if nobody ever held any cash for any period of time. By reductio ad absurdum we can easily see that money would cease being money because nobody could accept it lest they engage in a “pointless” action. We can therefore easily rule out this “pointlessness” charge as flawed. There is in fact an INCREDIBLY IMPORTANT POINT in cash being held as a store of value.

    Do Keynesians attack and hate companies who hold inventory for a period of time? Do they say “It’s pointless for Apple to hold iPhones and other commodities in their warehouses, in trucks, and on retail shelves”? They don’t right? Well, money is just the most marketable commodity, so what in the world is the problem with money owners holding cash on their “shelves” for a period of time? It’s not like this cash is never going to be sold. It’s just going to be sold at a later time. The problem with the Keynesian view is that they completely abstract away from time, and consider time a burden rather than a necessary component of individual action that must be embraced. Instead of the destructive “In the long run we’re all dead” view on time, they should instead have the “Humans plan not only in the short run, but in the long run as well.” It’s not surprising that Keynesianism became so popular with democratic states around the world, since elected politicians are very myopic and short term oriented. Their incentive is to maximally loot the country while they’re in office. Short term thinking WELCOMES short term economics.

    During this anomalous period of zero interest rates, corporate cash stockpiling really does hurt the broader economy.

    Notice the unsolicited “really does” plea, almost as if he is trying to convince himself more than others.

    This blogger is just presupposing the theory “cash holding is evil”. If “corporate cash stockpiling”, i.e. cash holdings, really did “harm the broader economy”, then the optimal solution to “help the economy” (as if it’s an individual’s responsibility to sacrifice himself for the sake of others), would be for all corporations to hold exactly zero cash balances. That would be optimal, because there would be zero cash holdings. But then of course we can immediately see that to be a bunch of nonsense, because the monetary system would break down, as nobody would accept money at all, lest they become evil destructive cash stockpilers.

    What’s that? It’s OK to hold cash for one second? OK, then because there is no logic against 2 seconds, there is no logic against 2 years, or 2 decades, or ANY length of time. What’s that? There is a “limit” to “permitted” cash holding? And what time would that be, EXACTLY? 3.141592654 months? Or how about Pi/0.05 weeks? Of course Keynesians don’t bother with this necessity, because their true practical purpose, intentional or not, is just to get the state involved in the economy on the most shaky of grounds. It’s whenever the Keynesian or state feels like people are holding cash for “too long”. Keynesianism is an emotional tribal pitchfork carrying mob mentality. It’s not economics. They just rabble rouse and more and more attack cash holding, until there is “consensus” that cash holding is a “problem”. Then they say the state has to print and spend money.

    It’s sad and pathetic. No rigorous explanations or logic. There’s “cash holding in the short term is OK” and “cash holding in the long term is not OK”, and that’s it. “One second is OK, but one decade is not OK”. The middle of course is fuzzy and undefined, because they need to reserve for themselves the power of choice of when to get the state to print and spend money. No definitions for what constitutes short and long term. No times given. Just rabble rouse the state when enough Keynesians are carrying pitchforks. Each Keynesian falling over themselves and others to get to the front of the line in praising the almighty counterfeiters and spenders.

    So absurd, that it is not surprising it finally leads to this outrageous and vicious attack on consumers:

    In other words, every decision to buy an iPad rather than a sofa has been hurting the American economy.

    See that? De Long is attacking the SOVEREIGN CONSUMER. And for what? For buying the products they want from the producers they want. This is solely due to the FALSE Keynesian notion that cash holding is evil and destructive.

    Oh how often we see ignorance eventually leading into hate. Just like ignorance of race leads people to hating people on the basis of race, so does ignorance of money lead to hating people on the basis of their money preferences.

    Ignorance and hatred of this magnitude just reiterates how utterly deranged Keynesianism really is.

  8. Gravatar of Major_Freedom Major_Freedom
    21. March 2012 at 06:42

    You won’t see monetarists calling out Keynesians like this because they unfortunately have an AFFINITY with them regarding cash balances. Monetarists are also subjected to having to be antagonistic towards cash holdings, because cash holdings counter-act inflation and “NGDP targeting”. So rather than slamming the door in the moron Keynesian’s face, they keep the door open and accept their fundamental premise.

    It’s rather ironic that monetarists are called monetarists, since they too don’t understand money. Actually, maybe it’s apt, like “astrologers” and “alchemists.”

  9. Gravatar of Major_Freedom Major_Freedom
    21. March 2012 at 06:43

    Sorry, not De Long, Yglesias. They’re like the same to me.

  10. Gravatar of Josh Josh
    21. March 2012 at 07:12

    This is wrong because Apple is not stockpiling currency. What is called cash on their balance sheet is actually very safe investments, such as (perhaps) Treasury bonds. If Tim Cook were swimming in a vault of cash, Scrooge McDuck-style, and decided to remove it from the vault and give it to shareholders, this would have some real effect. But bear in mind, this is $20 billion. To what extent would we even notice this? That is a rounding error in a $13.5 trillion economy.

  11. Gravatar of Benjamin Cole Benjamin Cole
    21. March 2012 at 07:19

    I agree with Josh. This is a non-issue.

    The Fed should print more money if it wants to stimulate growth. It is a great time to print more money, as inflation is nearly dead. I suggest QE at $50 billion a month, as part of a clear NGDP targeting plan. Sustained QE until results are obtained.

    Monetizing the debt through QE offers many, many benefits.

  12. Gravatar of Matt Steele Matt Steele
    21. March 2012 at 07:40

    Scott, you seem to be assuming that a dividend disbursement of $x reduces the market cap of Apple by $x compared to what it would have been if they didn’t do the dividend. But I don’t think that’s true. I actually think that Apple’s dividend announcement increased their market cap (sure it will go down on the days dividends are distributed, but not by as much as the increase since the announcement).

    So I believe Apple’s announcement on net boosted asset prices in the economy, which is stimulative via wealth effects.

  13. Gravatar of Major_Freedom Major_Freedom
    21. March 2012 at 07:48

    Josh:

    If Tim Cook were swimming in a vault of cash, Scrooge McDuck-style, and decided to remove it from the vault and give it to shareholders, this would have some real effect.

    It also has a “real effect” by staying in the vault. Prices and costs throughout the economy would be lower, and to the extent that the money would have otherwise been declared a dividend and consumed, it has had the real effect of keeping the economy more capital intensive, rather than less which would have been brought about by an increase in consumption all else equal.

    Benjamin Cole:

    The Fed should print more money if it wants to stimulate growth. It is a great time to print more money, as inflation is nearly dead. I suggest QE at $50 billion a month, as part of a clear NGDP targeting plan. Sustained QE until results are obtained.

    Results? You mean another unsustainable inflation induced boom and yet another inevitable crash?

    Do you know how Einstein defined insanity?

  14. Gravatar of Jon Jon
    21. March 2012 at 08:06

    Apple does not hoard currency.

    It is sad when esteemed professors such as Yglesias do not realize that news stories that mention a cash pile are speaking figuratively.

    It’s not even clear apple principally has it’s funds in treasuries.

  15. Gravatar of Il Gattopardo Il Gattopardo
    21. March 2012 at 08:15

    Josh, thanks for your point. It reminds me how often bloggers write nonsense posts as if they had to fill a quota per day to stay in business. In this particular case it is a shame that Scott did not make clear the point you make.

    I’m not surprised, however. Monetarists like Scott prefer not to commit themselves to a particular definition of money because they know that there is no definition to which their view of an effective monetary policy can apply anywhere, anytime –that was Friedman’s mistake and no monetarist can recognize it. They fail to realize that although the monopolist supplier of a fiat currency can cause inflation (usually as collateral damage of financing government), it can neither prevent all variations in broad price indexes nor counteract variations in employment and output. Monetarists have usually favored some rule over discretion ignoring first that rules cannot deliver particular outcomes and second that there will always be situations that call for discretion. Indeed, the Fed’s policy experience in the past five years has little to do with anything monetarists discussed in the past 70 years, but a lot with the need to bail out all sorts of financial intermediaries.

  16. Gravatar of Master of None Master of None
    21. March 2012 at 08:20

    “mutual funds that automatically re-invest the dividends”

    I think that is the key.

    Most of AAPL shares are held by institutional investors that have strict levels of cash that they are allowed to hold (typically low single digit percentages).

    So you can assume a first order effect of: ~60% of cash returned will be invested in other risky assets, and 40% will remain cash.

    That is still a net increase in demand for risky financial assets… sounds like QE to me!

  17. Gravatar of Morgan Warstler Morgan Warstler
    21. March 2012 at 08:24

    Becky, please no word salad. They get free things, they do not pay for things.

  18. Gravatar of Morgan Warstler Morgan Warstler
    21. March 2012 at 08:34

    The bigger issue with Matty et al, is the very problem with the supposition that EVERYONE COUNTS.

    Not everyone counts. Apples shareholders are under no civic obligations that are up for debate with worthless “public thinkers.”

    The proper discussion is: Why doesn’t Matty start a company, hire employees, sell a product, serve the consumer?

    If MAtty wants to count, he has to turn being a “public thinker” into being a employer.

    When he starts Huffington Post, TechCrunch, DrudgeReport, etc. he will be doing his part.

    He’s obviously hurting NGDP with his hording of productivity gains, and with this post, he admits he has a moral obligation to do AS MUCH AS POSSIBLE and fromt here the only interesting discussion is not what MAatty thinks about Apple, but when he can expect Matty to actually become a legitiamte owner in society.

  19. Gravatar of Bill Woolsey Bill Woolsey
    21. March 2012 at 08:43

    Scott:

    Consumption has nothing to do with it.

    All that matters is that the demand for money is falling.

    If those who receive these dividends leave them in their checking account, then the result would probably be worse.

    If they purchase a vareity of short and safe money market instruments, there is no difference.

    If they take the dividends and use it to purchase other stocks, (even Apple,) then the result is a decrease in the demand for money. Purchases of long term bonds, risky bonds, real estatate, capital goods (for firms owning Apple stock,) or yes, consumer goods, would relieve the excess demand for money.

    Really Scott, confusing spending money balances with consumption? Who is being Keynesian?

    Josh:

    Of course, short and safe assets aren’t exactly the same thing as money, and usually, they aren’t even close. But with the interest rate on many of them very near the interest rate paid on money, (and particularly, reserve balances at the Fed,) then this is an issue.

  20. Gravatar of Ricardo Urdaneta Ricardo Urdaneta
    21. March 2012 at 08:50

    I don´t see any difference whether the cash is held by Apple or its shareholders from the supply of money point of view… I´m not certain either the shareholders will make better use of the cash than Apple: it might buy Microsoft, adapt Office for the iPad and throw away the rest!

    What seems most dubious is that the Fed should take risks rather than embarrass itself: when the central bank embarrasses itself it looses credibility and hurts the whole system. It’s an extreme case of “what will they think”. What the Fed could do is evolve towards evident improvements in economical thinking that don´t take too much exertion to understand, like level targeting NGDP. In other word, it should be afraid to embarrass itself with consumers, but not with mainstream economists.

  21. Gravatar of Matt Rognlie Matt Rognlie
    21. March 2012 at 08:54

    This is a tough issue. If you believe Modigliani-Miller irrelevance results, then Apple’s decision makes no difference. The logic is simple and compelling—Apple’s decision to hand back the cash slightly alters the return characteristics of Apple stock, and investors will make offsetting changes to their portfolio to compensate. You are (I presume intentionally) using this logic in the post.

    But such results are troublesome for monetary economists, especially those of your persuasion. Suppose that every asset except base money fits is priced in the way we learn in intro finance class: the value is the expected product of the return and the stochastic discount factor in each state of the world. Then there really isn’t much room for treating “money” (except base money) as special. An asset with zero default risk isn’t much better than a portfolio of Baa bonds with very low aggregate default risk, unless you are really hung up on the one state of the world where the Baa corporations default.

    For monetary economics to recognize forms of “money” other than base money, such money must have liquidity (or other) features that give it value beyond what you’d find in a classic asset pricing framework. And once we dispense with this framework, Modigliani-Miller irrelevance results pretty much all go out the window. If Apple doesn’t need the expensive liquidity benefits of its stockpile of cash, then it is increasing the amount of liquidity available elsewhere in the economy by returning it to shareholders. This is helpful whenever the shadow value of liquidity is positive (i.e. we’re not swimming in liquid assets), but it’s particularly helpful at the zero lower bound, where the cost of liquidity is a key spread that you must add to the zero interest rate to learn the effective cost of capital.

  22. Gravatar of Mike Sax Mike Sax
    21. March 2012 at 08:58

    Yes I think Bill Woolsey nails it. We are finally seeing signs that the demand fo rmoney/treasuries is dropping a little. The fact that you finallly see some stock buybacks and didvidens is another “green shoot” that suggests that risk appetite is returning a little.

    Kind of like Scott is always saying that low interest rates is a sign of tight money-we finally see interest rates rising a little.

  23. Gravatar of Major_Freedom Major_Freedom
    21. March 2012 at 09:19

    Mike Sax:

    As long as you understand the “green shoots” are a false recovery that cannot last without accelerating inflation and thus eventual hyperinflation, or reducing inflation and thus revealing the green shoots to be uneconomic and unprofitable once again.

    Seeing your enthusiasm…it’s like 2001-2007 never happened.

  24. Gravatar of Major_Freedom Major_Freedom
    21. March 2012 at 09:24

    Bill Woolsey:

    All that matters is that the demand for money is falling.

    All that matters for a sustainable productive economy is that investors and consumers coordinate their behaviors, both cross sectionally and throughout time, which they can’t do very well as long as money and interest rates are being manipulated by the Fed.

    All that matters in the “spending” worldview is that the demand for money falls.

    These are two different things.

    And what are you talking about accusing Sumner of saying the only thing that matters is consumption? Sumner mentioned both consumption spending and reinvestment spending.

  25. Gravatar of bill woolsey bill woolsey
    21. March 2012 at 09:44

    Major Freedom:

    The degree of coordination you imagine cannot be obtained. I don’t favor having the Fed manipulate interest rates, but the fact that they do is a drop in the bucket of the uncertainty created due to creative destruction.

    Thinking about how disequilibrium interest rates impact the evenly rotating economy has next to know relevance to understanding the real world.

    Or rather, all it tells us is that efforts to abolish interest income by creating an excess supply of money are impossible.

    Fortunately, approximately no one wants to try this. However, as long as Austrians imagine that monetary policy is about trying to abolish interest income, they will never be able to understand what is happening.

    By the way, adjusting the quantity of money to the demand to hold it aids in coordinating the decisions of savers and investors. It keeps the market rate equal to the natural interest rate. And, at the same time, it keeps money expendituers on output growing with productive capacity.

    What is the impact of Apple reducing its holdings of what it calls “cash?” This has nothing to do with some claim that Apple should’t hold cash.

    Market monetarists don’t want to prevent people from holding more money. We want a system that adjusts the quantity of money to the amount they want to hold. As I already explaiend, this both keeps spending on output growing at a slow steady rate and it coordinates saving and investment.

  26. Gravatar of Becky Hargrove Becky Hargrove
    21. March 2012 at 09:52

    Morgan,
    You picked a bad day to step on the nerve I still had left. You are a proponent of labor below minimum wage. Do you think about the reality of what these below minimum wage people can buy and how it might keep them alive to work? Distinguish between political mumbo-jumbo and the world you actually would desire, please.

  27. Gravatar of Lee Kelly Lee Kelly
    21. March 2012 at 10:29

    Bill,

    Major Freedom doesn’t count cash balances as savings. In other words, income is not equal to saving plus consumption.

    So far as Major Freedom is concerned, an attempt to increase average cash balances decreases the proportion of income spent on consumer and capital goods. This is what people want; this is the market at work. Increasing the money supply to satisfy the increased money demand at the prevailing level of prices just interferes with the market. Only that part of income explicitly invested by the purchase capital goods (or what amounts to the same thing by purchasing financial assets) is counted toward the natural interest rate–money balances are something else altogether.

    Objecting that money is a financial asset in our present monetary system is irrelevant, because fractional reserve banking is fraudulent: it creates multiple claims to the same property. It is part of the problem, because it systematically pushes the market interest rate below the natural rate, causing an endless cycle of malinvestment booms and busts.

    In other words, unless you really want to explain why all that is nonsense to a rabid Rothbardian, then just ignore Major Freedom–it’s what most everyone else does.

  28. Gravatar of bill woolsey bill woolsey
    21. March 2012 at 11:20

    Lee:

    Money is always an asset, even with a 100% gold reserve system.

    If less is consumed out of a given income, that is saving, whether money is accumulated or financial assets purchased.

    If the money is gold, it is still saving. If someone reduces consumption and buys oil and puts it into a tank in the back yard, it is saving.

    A shift from financial assets or capital goods to money does not effect saving, but is a shift in the form of wealth.

    If someone sells a factory and accumulate gold, there hasn’t been a decrease in the desire to hold wealth just a change in the form. If someones sells a factory and fills a tank with oil, there is no decrease in the desire to hold wealth, just a change in form.

    If the quantity of money is fixed, then the price level adjusts so that the real quantity of money adjusts to the demand. The real capital gain to money holders usually lead to lower real interest rates and more investment. Consumption might expand too.

    But then, if people save by acccumulating finacial assets, the lower interest rate results in both more consumption and more investment.

    If people shift the assets, say from stocks to bonds, the lower interest rate on bonds might result in more consumption.

    The effects aren’t necessarility the same, but there is no major qualitative difference except that with a gold standard, gold mining becomes more profitable if the demand for gold rises.

  29. Gravatar of Lee Kelly Lee Kelly
    21. March 2012 at 11:52

    Bill,

    I totally agree. I was just trying to explain why Major Freedom will write a really long post attempting to rebut everything you said.

    My comment about money being a financial asset (like liabilities of a fractional reserve bank) was about the natural tendency of such institutions to adjust the supply of money to meet demand at the prevailing level of prices. Well, for Major Freedom, there is nothing natural about it; it’s a perversion of property rights; it’s antithetical to a free market.

  30. Gravatar of Morgan Warstler Morgan Warstler
    21. March 2012 at 12:06

    Becky,

    Good lord woman, that’s just outright false.

    I am a proponent of a Guaranteed Income paid by gvt. to ANYONE who wants to work.

    I am also in favor of the gvt. auctioning that labor off to the private sector as a resource to be exploited for profit.

    You keep half of bid too. Other half recvover gvt. losses.

    So gvt. gives you $240, your labor gets sold for $150 and you live on $240+$75 = $315.

    But now:

    1. someone makes a profit off your labor – instead of you being unemployed.

    2. you get signals about what is worth $200 to employers instead of $150.

    3. costs in poor neighborhoods drop dramatically. $50 a week daycare!

    4. everybody works for a profit driven boss, so society at large feels more charitable

  31. Gravatar of Jim Glass Jim Glass
    21. March 2012 at 12:10

    Don’t be Fooled by The Money Illusion

    Not entirely on topic, but the headline grabbed me.

    (Coincidentally, I knew and worked with the author of the piece about 20 years ago.)

  32. Gravatar of Major_Freedom Major_Freedom
    21. March 2012 at 14:26

    Bill Woolsey:

    The degree of coordination you imagine cannot be obtained.

    And what degree are you insinuating I am imagining, Bill? Don’t say pure and perfect competition and pricing.

    If instead you say coordination that minimizes the boom bust cycle to its practical minimum, then it can in fact be obtained.

    I don’t favor having the Fed manipulate interest rates, but the fact that they do is a drop in the bucket of the uncertainty created due to creative destruction.

    It’s the exact opposite. Any uncertainty in creative destruction in a non-manipulated economy is dwarfed by the instability unleashed by central banking. Creative destruction is isolated to specific firms, projects, and industries. Central banking affects the entire economy.

    Thinking about how disequilibrium interest rates impact the evenly rotating economy has next to know relevance to understanding the real world.

    It has a tremendous amount of relevance. It is the only explanation for economic booms and busts in central bank economies!

    Or rather, all it tells us is that efforts to abolish interest income by creating an excess supply of money are impossible.

    It tells us a lot more than that.

    Fortunately, approximately no one wants to try this.

    You mean UNfortunately. See the real world for evidence.

    However, as long as Austrians imagine that monetary policy is about trying to abolish interest income, they will never be able to understand what is happening.

    That is not the only thing they are thinking about.

    As long as monetarists ignore economic calculation and intertemporal discoordination, they will never be able to understand what is happening in the world around them.

    By the way, adjusting the quantity of money to the demand to hold it aids in coordinating the decisions of savers and investors.

    It does the exact opposite. When people want to hold more money, what they are looking for is higher purchasing power. Creating new money to offset this increase in money demand reduces people’s purchasing power and is therefore literally attacking the very reason why people are attempting to hold more cash. It distorts coordinating the decisions of savers and investors. It does not aid in it.

    When consumers lower their consumer spending and want to hold more cash for example, then without inflation, it will send signals to investors that investing in capital goods is relatively more profitable, and scarce resources will tend to shift away from consumer goods and into capital goods. That is what consumers WANT. They want less current consumption and more future consumption (since they aren’t burning their money). WITH inflation, that signal is jammed, and thus attacks coordination between investors and consumers.

    When investors lower their investment spending and want to hold more cash, then without inflation, that sends signals to other investors that consumer goods production is relatively more profitable, and so more scarce resources go into present consumption and less into future consumption. That is what investors want, because their ratio of consumption to investment has increased. WITH inflation, that signal is jammed.

    It keeps the market rate equal to the natural interest rate.

    Absolutely false. Inflation into the banking system (temporarily) lowers nominal interest rates BELOW the natural rate, meaning the rates that would otherwise have existed.

    And, at the same time, it keeps money expendituers on output growing with productive capacity.

    It is a fallacy to believe that money production has to increase along with real goods production.

    What is the impact of Apple reducing its holdings of what it calls “cash?” This has nothing to do with some claim that Apple should’t hold cash.

    Except Yglesias is clearly insinuating that consumers of Apple are acting destructively, when in reality they are not. That has normative implications.

    Market monetarists don’t want to prevent people from holding more money.

    No, you’ll take their purchasing power away indirectly through inflation of the money supply to some favored people’s bank accounts. You won’t take it directly at gunpoint.

    We want a system that adjusts the quantity of money to the amount they want to hold.

    People don’t want to hold arbitrary quantities of cash totally divorced from its purchasing power. You’re making no sense. People always want to have more money, the key is that they want more of a lot of other things too. If people want to hold more cash, that isn’t a request for counterfeiters to create more dollars. It is a request for more purchasing power, which they would have otherwise gotten without inflation of the money supply.

    The only true test for people’s desire to increase the quantity of money in the economy is if they are free to invest in the production of and use any money they want. You cannot infer it from observing people attempting to hold more cash balances.

    As I already explaiend, this both keeps spending on output growing at a slow steady rate and it coordinates saving and investment.

    Steady growth in nominal spending is not what coordinates saving and investment. Inflation attacks coordination because it brings about more nominal investing than there is voluntary saving, and that discoordinates production, it doesn’t coordinate it.

    It is incredible to see how wrong you are about money. You can only be described as a monetary crank.

  33. Gravatar of Major_Freedom Major_Freedom
    21. March 2012 at 14:32

    Lee Kelly:

    Major Freedom doesn’t count cash balances as savings. In other words, income is not equal to saving plus consumption.

    I hold nominal income to be investment spending plus consumption spending.

    If cash balances are saving, then it would make everyone in the economy savers, and it would make everything with a price, financed by savings. It would even make consumption spending financed by savings. But saving is abstaining from consumption, so there’s something wrong there.

    So far as Major Freedom is concerned, an attempt to increase average cash balances decreases the proportion of income spent on consumer and capital goods. This is what people want; this is the market at work. Increasing the money supply to satisfy the increased money demand at the prevailing level of prices just interferes with the market. Only that part of income explicitly invested by the purchase capital goods (or what amounts to the same thing by purchasing financial assets) is counted toward the natural interest rate–money balances are something else altogether.

    Mostly right. The natural interest rates I consider to be the spread between demand for output and demand for input, in money terms.

    Objecting that money is a financial asset in our present monetary system is irrelevant, because fractional reserve banking is fraudulent: it creates multiple claims to the same property. It is part of the problem, because it systematically pushes the market interest rate below the natural rate, causing an endless cycle of malinvestment booms and busts.

    In other words, unless you really want to explain why all that is nonsense to a rabid Rothbardian, then just ignore Major Freedom–it’s what most everyone else does.

    It’s easy to claim it’s “all nonsense”, much more difficult to show, oh rabid Keynesian.

  34. Gravatar of Benjamin Cole Benjamin Cole
    21. March 2012 at 14:50

    Major Freeman:

    I am advocating grwoth, and if it costs moderate inflation, big whoop.

    The USA flourished from 1982 to 2008, with inflation rates between 2 percent and 6 percent. That is not a theory, that is a historic artifact. inflation is just not that important.

    Meanwhile, from 1992 to present, the Japan economy hardly grew at all (if it did), wages fell by 15 percent, industrial output fell by 20 percent, and property fell by 80percent. Stocks down 75 percent.

    Moreover, if money becomes a store of value, your economy will implode. People will store money in suitcases, and when deflation sets in, banks will squeeze lending–an unvirtuous cycle will entrench itself. See Japan. Why invest, when it will be chapter to buy assets year by year–a self-fulfilling prophesy.

    If your argument is that the USA is over leveraged, I may agree with that. That is a problem of the federal government, a tax code that rewards borrowing and not equity investing, and possibly weak underwriting standards on commercial and residential property.

    To magnify the over-leverage problems mentioned above by a suffocating monetary policy is lunacy.

  35. Gravatar of Major_Freedom Major_Freedom
    21. March 2012 at 14:52

    Bill Woolsey:

    Money is always an asset, even with a 100% gold reserve system.

    More specifically, money is the most widely accepted, most marketable asset.

    If less is consumed out of a given income, that is saving, whether money is accumulated or financial assets purchased.

    Consumption is a stock concept, income is a flow concept. By saying accumulating cash is “saving”, then you are calling every earner of money a saver, and you’re saying all expenditures for everything is financed by savings. In other words, non-savers would be an impossibility, and financing expenditures not from savings would be an impossibility.

    If the money is gold, it is still saving. If someone reduces consumption and buys oil and puts it into a tank in the back yard, it is saving.

    Saving is abstaining from consumption. Saving is not cash holding. If increasing one’s cash were saving, than wage earning would be saving, selling goods would be saving, and selling investments for cash would be saving.

    A shift from financial assets or capital goods to money does not effect saving, but is a shift in the form of wealth.

    That contradicts your prior claim that increasing cash is saving.

    If the quantity of money is fixed, then the price level adjusts so that the real quantity of money adjusts to the demand. The real capital gain to money holders usually lead to lower real interest rates and more investment. Consumption might expand too.

    No, capital accumulation does not decrease interest rates. More saving and more investment decreases interest rates. With a high enough rate of saving, capital accumulation can continue on, on the basis of falling capital goods prices, and no further reduction in interest rates follows. The nominal demand for factors and for output would not keep getting closer and closer together just because there is more real capital.

    But then, if people save by acccumulating finacial assets, the lower interest rate results in both more consumption and more investment.

    After some time, yes.

    If people shift the assets, say from stocks to bonds, the lower interest rate on bonds might result in more consumption.

    Only if there is a shift from productive loans to consumer loans.

    The effects aren’t necessarility the same, but there is no major qualitative difference except that with a gold standard, gold mining becomes more profitable if the demand for gold rises.

    More accurately, gold production becomes relatively more profitable if the costs of gold mining fall relative to gold output, which can be founded upon a higher demand for gold holding, OR an increase in capital accumulation, and thus lower costs of mining in general, and gold extraction in particular.

    Lee Kelly:

    Bill,

    I totally agree. I was just trying to explain why Major Freedom will write a really long post attempting to rebut everything you said.

    Attempting? More like succeeding.

    My comment about money being a financial asset (like liabilities of a fractional reserve bank) was about the natural tendency of such institutions to adjust the supply of money to meet demand at the prevailing level of prices. Well, for Major Freedom, there is nothing natural about it; it’s a perversion of property rights; it’s antithetical to a free market.

    Anything that rests on initiations of violence or the threat thereof, which is certainly the case for state imposed fiat money regimes, via legal tender and taxation laws, directly implied that the free market process is being abandoned.

    You’re comparing apples and oranges.

  36. Gravatar of Benjamin Cole Benjamin Cole
    21. March 2012 at 14:52

    Major Freeman:

    I am advocating growth, and if it costs moderate inflation, big whoop.

    The USA flourished from 1982 to 2008, with inflation rates between 2 percent and 6 percent. That is not a theory, that is a historic artifact. inflation is just not that important.

    Meanwhile, from 1992 to present, the Japan economy hardly grew at all (if it did), wages fell by 15 percent, industrial output fell by 20 percent, and property fell by 80percent. Stocks down 75 percent.

    Moreover, if money becomes a store of value, your economy will implode. People will store money in suitcases, and when deflation sets in, banks will squeeze lending–an unvirtuous cycle will entrench itself. See Japan. Why invest, when it will be chapter to buy assets year by year–a self-fulfilling prophesy.

    If your argument is that the USA is over leveraged, I may agree with that. That is a problem of the federal government, a tax code that rewards borrowing and not equity investing, and possibly weak underwriting standards on commercial and residential property.

    To magnify the over-leverage problems mentioned above by a suffocating monetary policy is lunacy.

  37. Gravatar of Major_Freedom Major_Freedom
    21. March 2012 at 15:30

    Benjamin Cole:

    I am advocating grwoth, and if it costs moderate inflation, big whoop.

    Growth is not founded on inflation. It is founded on saving and investment, by entrepreneurs who take into account price SPREADS, expected prices of output and prices of input.

    Does printing more pieces of toilet paper increase the supply of real goods? No? Well neither does printing more government paper money. Increasing the supply of money only redistributes wealth and changes relative prices by increasing some prices more than others.

    The USA flourished from 1982 to 2008, with inflation rates between 2 percent and 6 percent. That is not a theory, that is a historic artifact. inflation is just not that important.

    Sure, if we ignore the depression of 1981, the S&L crisis, the recession of 1991, and the crash of 2008, then sure, everything went awesomely smooth.

    Meanwhile, from 1992 to present, the Japan economy hardly grew at all (if it did), wages fell by 15 percent, industrial output fell by 20 percent, and property fell by 80percent. Stocks down 75 percent.

    The Japanese lost decades is a myth. Only if you look at nominal metrics does Japan show no growth.

    Japan’s GDP per capita at PPP has increased consistently from about $16k in 1989, to about $34k in 2010.

    Moreover, if money becomes a store of value, your economy will implode. People will store money in suitcases, and when deflation sets in, banks will squeeze lending–an unvirtuous cycle will entrench itself. See Japan. Why invest, when it will be chapter to buy assets year by year–a self-fulfilling prophesy.

    What nonsense. If money didn’t have a store of value, it couldn’t even function as money. There would be total rejection of the money.

    If your argument is that the USA is over leveraged, I may agree with that. That is a problem of the federal government, a tax code that rewards borrowing and not equity investing, and possibly weak underwriting standards on commercial and residential property.

    It’s primarily a result of the MONETARY system.

    To magnify the over-leverage problems mentioned above by a suffocating monetary policy is lunacy.

    No, it’s healthy. Trying to solve the problem of debt with more of the traditional credit expansion is what is lunacy.

  38. Gravatar of Josh Josh
    21. March 2012 at 17:10

    Major Freedom wrote:

    It also has a “real effect” by staying in the vault.

    Yes. That is true. But I’m assuming that we are starting in equilibrium. It makes the analysis easier.

    Bill,

    Is Apple holding 3-month Treasuries? I suspect not. They are likely holding longer terms that are paying some non-zero interest rate, especially given Apple’s proclivity for using balance sheet “cash” for future investments. I don’t think the zero bound is an issue.

  39. Gravatar of ssumner ssumner
    21. March 2012 at 17:57

    FQN, That’s an illusion–there is no transfer at all.

    Cthorm, That’s great news–probably a precursor to an income tax cut.

    Dwb, I agree.

    MF, Didn’t I just call out Yglesias for falsely claiming that Apple was hurting the economy?

    Josh, I agree.

    Matt, You said;

    “Scott, you seem to be assuming that a dividend disbursement of $x reduces the market cap of Apple by $x compared to what it would have been if they didn’t do the dividend. But I don’t think that’s true. I actually think that Apple’s dividend announcement increased their market cap”

    I must not have expressed myself very well, as I totally agree with you.

    Jon, Yglesias is smart, he knows the money is in the bank or T-bills, not literally currency.

    Master of None, Yes, there might be some second order effects, as I indicated.

    Bill, I agree that it’s the demand for money that matters. But I was trying to address the Keynesian argument that more saving is bad in a liquidity trap. I argued there’s not even any reason to assume there’d be less saving because of the Apple move.

    Saving could lead to more money demand, if you make certain assumptions, but that wasn’t the topic of my post.

    Ricardo, I agree.

    Matt Rognlie, No, I wasn’t assuming MM necessarily holds (although one comment might have given that impression), indeed I tried to indicate that there might be some second order effects. Rather I was arguing on pragmatic grounds that the national saving rate is unlikely to change very much. Apple has a few billion less in the bank, and Apple shareholders have a few billion more in the bank. If this makes the economy more efficient (and I agree that is likely), the effect is expansionary for that reason, as I tried to indicate. I just don’t think many Apple shareholders are holding back because of a lack of liquidity. I’m not saying the effect Matt proposes is zero, just very very small.

    Jim Glass, Thanks for the link.

  40. Gravatar of Major_Freedom Major_Freedom
    21. March 2012 at 18:21

    Sumner, what do you think of this article:

    http://www.zerohedge.com/news/antal-fekete-responds-ben-bernanke-gold-standard

  41. Gravatar of Morgan Warstler Morgan Warstler
    21. March 2012 at 20:24

    “Didn’t I just call out Yglesias for falsely claiming that Apple was hurting the economy?”

    Scott, you are such a nice person. To you, that was kicking sand in his face, huh?

    Seeing through other people’s eyes… super hard.

  42. Gravatar of Lorenzo from Oz Lorenzo from Oz
    21. March 2012 at 20:28

    I am aware of the principal-agent problem. Is the principle-agent problem when your agent won’t stick to your principles or is it when they don’t pay back the money they borrowed? ;)

  43. Gravatar of Lorenzo from Oz Lorenzo from Oz
    21. March 2012 at 20:43

    The second being the problem in being unprincipled in not paying back the principal :)

  44. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. March 2012 at 21:48

    “If Apple saves less I’d expect the recipients of this money to increase their saving my an equal amount.”

    Not when Apple represents nearly 10% of all the hoarded national corporate cash.

    This is a not your standard market economics Scott.

  45. Gravatar of Britmouse Britmouse
    22. March 2012 at 00:52

    Off-topics: Simon Wren-Lewis bought into NGDP targeting (in unspecified form), in case you hadn’t seen that.

    http://mainlymacro.blogspot.co.uk/2012/03/what-should-be-in-2012-budget.html

    Osborne did cut the 50% rate, but only to 45%, which still leaves us with Scandinavian top marginal rates (including national insurance) a little above 50%. And the British press has universally condemned him because he is not uprating special tax deductions for pensioners in line with inflation for a couple of years. Politics is weird.

  46. Gravatar of Tom Tom
    22. March 2012 at 01:08

    Mark beat me to it:

    Apple is far and away the king of the cash stockpile, representing fully 36 percent of the $179 billion increase in U.S. corporate cash that we’ve seen since 2009. In fact, in 2011 the non-Apple part of corporate America stopped stockpiling and reduced its cash holdings by $6 billion. This was, however, more than offset by Apple’s addition of $46 billion to its own stockpile.

    Insofar as “corporate cash holdings” of $179 bil are an economic issue, Apple’s return of $20 bil is more than 10%, certainly significant.

    There’s also an implicit political aspect — with Apple having less cash, total cash of all corporations, will be lower, and arguments about how “rich” corporations are will be weaker.

    I think Matt is more likely to be more correct, that Apple’s actions, because they are well timed (at the bottom), are likely to have maximal positive impact.

    (Maybe enough to get Obama re-elected! But I think that is still only a 45% likelihood.)

  47. Gravatar of Bill Woolsey Bill Woolsey
    22. March 2012 at 04:01

    tom:

    The quantitative significance of $20 billion, when the quantity of money is at least $10,000 billion, is small. Since most of this “cash” isn’t really zero maturity stuff, you would need to use divisia weighting (relatively low.) While remarkably big for a single firm’s decision, it is still pretty small compared to over all state of monetary equilibrium.

  48. Gravatar of Major_Freedom Major_Freedom
    22. March 2012 at 04:04

    ssumer:

    MF, Didn’t I just call out Yglesias for falsely claiming that Apple was hurting the economy?

    Yes, but for different reasons. I said you won’t see monetarists calling out Keynesians “like this”, meaning in the way I described. You still share with Yglesias the underlying position of attacking cash holding, believing “spending” to be the primary driver, etc.

  49. Gravatar of Bill Woolsey Bill Woolsey
    22. March 2012 at 04:21

    Major Freedom:

    Consumption is a flow concept.

    How much does someone spend on consumer goods and services over a period of time.

    Income is a flow concept. How much does someone earn in exchange for contributions to production during a period of time.

    Saving is also a flow concept–the difference between income and consumption.

    Net worth, or wealth, is a stock concept. Assets less liabilities at a point in time.

    The relationship between the flow of saving and the stock of wealth is that the flow of saving creates a change in the stock of wealth over time.

    If someone earns income by being paid money (the normal situtation,) and then they spend it all on consumer goods and services during the same period, then there was no saving.

    I think you are using the term “saving” to mean “savings” which you seem to be using to mean “assets held.”

    That isn’t what saving means.

    Anyway, if someone is paid in the form of money, then their assets held increase. Then, when they spend the money on consumer goods, the assets held decrease. Assets held are back to where they started at the beginning. There was no saving, and no increase in assets held over the entire period, but rather a fluctuation in assets held.

    Rather than discuss “savings” or assets held, it is usual to describe this as wealth, which is assets minus liabilities. And so, “net worth” or “wealth” changes just like “assets held” in this thought experiment.

  50. Gravatar of Major_Freedom Major_Freedom
    22. March 2012 at 07:19

    Bill Woolsey:

    Consumption is a flow concept.

    I treat consumption as a stock concept. Consumption is the act of buying a consumer good or service. I treat consumer spending over a period of time as a flow concept.

    How much does someone spend on consumer goods and services over a period of time.

    Suppose someone buys a watch for $1000. This is all the information you have. Are you saying that you cannot know what the consumption is, until I give you an arbitrary period time that surrounds this consumer purchase?

    Income is a flow concept. How much does someone earn in exchange for contributions to production during a period of time.

    Yes.

    Saving is also a flow concept–the difference between income and consumption.

    Consumption over time is a flow concept. Consumption is a stock concept.

    By saying saving is income less consumption, you are compelled to label every earner of money a “saver”, because as soon as they receive the money, they become owners of money and at that moment, their income exceeds their consumption.

    To avoid calling every single earner of money a saver, which would makes the concepts of “saving” and “saver” meaningless, I instead call savers only those who USE their money in exchanges for purposes other than consumption, and I call saving the act of USING money in an exchange for purposes other than consumption, or, the act of abstaining from consumption.

    You’re defining saving to be the mere holding of money. I just call that cash holding. I do not call those who hold cash as “savers”, because then I would have to call those who ONLY buy consumer goods and never make any investments, I would have to call these people “savers”, merely because they own cash, and I would have to say that they are financing their consumer purchases out of savings.

    Savings in your treatment is just cash.

    Everyone who owns cash at a particular point in time, earned an income and spent money in the past. By your logic, they are savers even if they only ever use their cash for consumption, even those who live paycheck to paycheck and consume as soon as practically possible after receiving their earnings. You’d have to call these people “savers” solely because they are always holding cash.

    Net worth, or wealth, is a stock concept. Assets less liabilities at a point in time.

    Yes.

    The relationship between the flow of saving and the stock of wealth is that the flow of saving creates a change in the stock of wealth over time.

    In this conception, not in the aggregate. In this conception, only the individual can save more in the form of cash.

    In the aggregate, and abstracting away from inflation of the money supply for a moment, total cash savings cannot increase by way of exchanges and incomes. In the aggregate, since total cash “savings” cannot increase, then it must be the case that savings can only increase on the side of increased capital and assets other than cash.

    Understanding this enables you to then understand that if everyone attempted to save more in the form of cash, then total savings in the economy will actually FALL. This is because while total cash balances remain the same as before, and thus total cash “savings” remains the same, the market values of capital, assets, and other non-cash savings, will FALL.

    Thus, it should be obvious that cash holding is not only not the same thing as saving, but it actually operates to REDUCE the total of what
    has been saved.

    Now, I don’t know about you, but if someone told me that a situation in which total savings falls is somehow consistent with a desire on the part of consumers to save more, I would say they’re wrong.

    The desire to hold more cash on a wide-scale basis is, then, not even something that originates with consumers. It is something that originates in business firms who are looking to become more liquid.

    All these reasons strongly suggest it is wrong to treat cash hoarding as saving.

    If someone earns income by being paid money (the normal situtation,) and then they spend it all on consumer goods and services during the same period, then there was no saving.

    What about just prior to them spending the money on consumption? They must have been “saving” then, and they must be considered “savers”, right? Indeed, anyone who earns money for any reason must immediately be considered as savers and to be saving.

    I think you are using the term “saving” to mean “savings” which you seem to be using to mean “assets held.”

    No, I am not. I use the term saving as an action, and the term savings as material objects.

    Anyway, if someone is paid in the form of money, then their assets held increase. Then, when they spend the money on consumer goods, the assets held decrease. Assets held are back to where they started at the beginning. There was no saving, and no increase in assets held over the entire period, but rather a fluctuation in assets held.

    This is false. If someone is paid in the form of money, it is NOT necessarily true that their assets held increased. For they might have sold an asset for cash.

  51. Gravatar of Major_Freedom Major_Freedom
    22. March 2012 at 08:53

    Ah, both Morgan and Greg are thinking the same thing as me.

    Here’s another thing that makes no sense with the market monetarists:

    If the market monetarist position is really that you don’t care what happens to the “real” side of the economy, in terms of output or employment, then why in the world are you saying the Fed should change its policy in the first place?

    By advocating that the Fed change its policy, it means you obviously do care about “improving” the real side of the economy in some way. How can this possibly be reconciled with such statements as “I don’t care if inflation is 20% or -20%” and “I don’t care if half the country becomes unemployed”?

    If you don’t give a rat’s ass about output or unemployment, then why aren’t you just sitting back and not caring WHAT the Fed does?

    Either you’re completely confused about why you are even advocating for 5% NGDP in the first place, or you are lying when you say you don’t care about output or unemployment.

  52. Gravatar of D R D R
    22. March 2012 at 09:24

    “at that moment, their income exceeds their consumption”

    Why are you comparing a flow and a stock? *snort*

    Obviously, in the nanosecond I get paid, my income exceeds my consumption. And in the nanosecond I buy my lunch, my consumption exceeds my income. So what?

  53. Gravatar of Mike Sax Mike Sax
    23. March 2012 at 03:47

    Major Freedom you said:

    “As long as you understand the “green shoots” are a false recovery that cannot last without accelerating inflation and thus eventual hyperinflation, or reducing inflation and thus revealing the green shoots to be uneconomic and unprofitable once again”

    I can’t deny I find you inflation hawks as tremendously alarmist. I would expect inflation to rise somewhat as it has been so low during the crisis. A little inflation would be a good development.

    But this talk of “hyperiinflation” shows how overwrought your worries are. Do you understand that there has never been “hyperinflation” in the whole history of the US? The 70s were a little higher than you want but even a 14% inflation rate is far from “hyperinflation.”

  54. Gravatar of Major_Freedom Major_Freedom
    23. March 2012 at 05:43

    D R:

    “at that moment, their income exceeds their consumption”

    Why are you comparing a flow and a stock?

    I was using consumption in his terms to make a point he could understand.

    Obviously, in the nanosecond I get paid, my income exceeds my consumption. And in the nanosecond I buy my lunch, my consumption exceeds my income. So what?

    So it means that by calling cash holding “saving”, it is impossible for people NOT to be savers and it is impossible for people NOT to save. Even people who ONLY consume, and never invest, would have to be called “savers” and they would have to be considered to be “saving”. Even their consumer purchases would have to be considered as financed out of savings.

    If it is impossible for people NOT to save, if it is impossible for people to not buy anything out of savings, the whole meaning of saver and saving is lost. It just collapses down to people who hold cash and those who finance their purchases out of cash.

    Mike Sax:

    I can’t deny I find you inflation hawks as tremendously alarmist. I would expect inflation to rise somewhat as it has been so low during the crisis. A little inflation would be a good development.

    Admitting that you can’t deny a particular conviction you have of those with different economic views than you, isn’t really significant.

    You only expect what you expect because you have nothing but historical extrapolations.

    Would you have called those in spring/summer 2008, who said the US economy is going to soon go into deep recession, “alarmists”? If so, then I would be honored to be called an “alarmist.”

    Being an alarmist is justified when the convictions are correct.

    But this talk of “hyperiinflation” shows how overwrought your worries are.

    I said hyperinflation OR a reduction in inflation and hence exposing of malinvestments and recession. Can’t you read? I did not predict only one thing to occur. I said only one of two things are possible.

    What actually happens depends on future human choices.

    Do you understand that there has never been “hyperinflation” in the whole history of the US?

    Historicist nonsense. You might as well say to someone who predicted the Great Depression that there has never been a Great Depression in the whole history of the US, before the Great Depression.

    The 70s were a little higher than you want but even a 14% inflation rate is far from “hyperinflation.”

    I didn’t call the 1970s a period of hyperinflation.

    I did not predict hyperinflation. I said EITHER hyperinflation to maintain the boom and collapse the currency, or deflation to maintain the currency and collapse the economy.

    The basis for this is that I do not consider each new dollar created as equally serviceable as the last. It is not just a linear phenomena of steady real growth and equally steady growth of the money supply. No, since inflation has REAL effects on the economy, inflation of the money supply has to ACCELERATE in order for the new, distorted real economy to be sustained over time. A linear growth in the money supply will not sustain an economy distorted by inflation.

    This is why we see today a universal tendency around the world of exponentially increasing aggregate money stocks. Look at any currency, and its respective aggregate money stock. All this “steady” real growth around the world, requires an accelerating money stock to be sustained. The addition of each new dollar then (or Euro, or Yen, or Yuan, etc) has an exponentially DECLINING serviceability in maintaining the productive structures of economies around the world.

    Some economists “alarmed” the world prior to the 2008 collapse, and they were proven right. Jealous and resentful economists who can’t predict worth squat want to believe that it was all an illusion. Well I don’t care what you call me, call me crazy alarmist psycho weirdo, but I will still you that the inevitable future of an inflationary monetary economy, because of economic laws that cannot be eradicated by any army, the inevitable future will be either breakdown of the currency, hyperinflation (BOO!) and possible price controls and thus socialism, or, if those in control of the money want to maintain control over the money, they will have to abandon the policy of accelerating aggregate money stock growth, and thus bring about a correction, which we observe as recession/depression. There is no other alternative.

    Back in 2007, since the acceleration in aggregate money stock growth was not yet vertical, since it was still in the safe zone, the Fed and the world’s central banks were able to stave off a worldwide depression by merely continuing the trend of accelerating aggregate money stock growth.

    I look at the charts now, and I can tell you that we’ve passed the inflection point, and are now approaching the vertical asymptotically. While you and all the other economically illiterate monetarists and Keynesians are all doped up on the inflation drug, numb to the world around you, I want to say that you CANNOT give any excuse that the knowledge just wasn’t available yet, or that you just couldn’t know until you had past data to observe and “make sure”, just like the physicists. You were warned, you were told, you had every opportunity to know.

  55. Gravatar of D R D R
    23. March 2012 at 07:14

    “So it means that by calling cash holding ‘saving’, it is impossible for people NOT to be savers and it is impossible for people NOT to save.”

    Totally false. In the nanosecond when I buy my lunch, I am not saving. I am DISSAVING. Sure, everyone saves in some nanoseconds and dissaves in others. Big whoop.

    “Even people who ONLY consume, and never invest, would have to be called ‘savers’ and they would have to be considered to be ‘saving’. Even their consumer purchases would have to be considered as financed out of savings.”

    Suppose I am initially penniless and you loan me $5 so I can buy my lunch, and I do so. Am I financing my consumption out of savings? In the sense that I am dissaving, yes. In the sense that I had cash to begin with, then no. You traded me $5 for an IOU, so my income is unchanged in this scenario.

  56. Gravatar of Mike Sax Mike Sax
    23. March 2012 at 13:46

    Major Freedom you said:

    “Would you have called those in spring/summer 2008, who said the US economy is going to soon go into deep recession, “alarmists”? If so, then I would be honored to be called an “alarmist.”

    I wouldn’t have said that, and didn’t at the time-I knew those who talked about recession were right. So it’s not comparable. On inflation though yes, you inflation hawks have cried wolf once too many times for your alarmism to be credible.

    Certainly history is a guide to expectations. To try to pretend it has no part in plausibly discussing the future is wrong. Up until now, donkey’s don’t fly. Is it overly historicist to say they never will either?

    Your cries about hyperinflation are about as credible. Nor is this new. Inflation hawks were also alarmist during the Depression about FDR and the gold standard and also the new deal programs. What’s clear is that inflation never raised it’s head.

    “I did not predict hyperinflation. I said EITHER hyperinflation to maintain the boom and collapse the currency, or deflation to maintain the currency and collapse the economy.”

    You want the latter-let’s collapse the economy to “maintain” the currency. Again you are as credible as those who worry that our borrowing costs are about to go through the roof. We keep hearing about it and your always wrong. All you can say is “one day I could be right”

    I don’t think that’s the choice. There is no risk of hyperinflation. Hyerinflation is what happens when a nation’s currency is no longer accepted-right now clealry the US dollar remains the world’s reserve currency and there is no sign at all of its peril.

    “I will still you that the inevitable future of an inflationary monetary economy, because of economic laws that cannot be eradicated by any army, the inevitable future will be either breakdown of the currency, hyperinflation (BOO!) and possible price controls and thus socialism, or, if those in control of the money want to maintain control over the money, they will have to abandon the policy of accelerating aggregate money stock growth, and thus bring about a correction, which we observe as recession/depression. There is no other alternative”

    Fiirst of all, you ought to run for office with your cheery outlook. I want to see the campaing that runs on “let’s cause a depression to protect against inflation.” Yeah, let’s bring on a recession/depression to “protect” the currency.

    Secondly, happily we face no such choice. A Depression has been taken off the table. Nor is there any specter of hyperinlfiation. None. Inflation and hyeprinflation are two very different things.

    If our current monetary regimes are so perilous then why has none of this happened yet? If you believe Nixon closing the gold window was some travesty why since the 80s has there been no big problem about inflation?

  57. Gravatar of Mike Sax Mike Sax
    23. March 2012 at 13:52

    Major, I find reading you entertaining I admit-much like watching the Jets tell us how the Tebow and Sanchez are going to workout seamlessly.

    “I look at the charts now, and I can tell you that we’ve passed the inflection point, and are now approaching the vertical asymptotically. While you and all the other economically illiterate monetarists and Keynesians are all doped up on the inflation drug, numb to the world around you, I want to say that you CANNOT give any excuse that the knowledge just wasn’t available yet, or that you just couldn’t know until you had past data to observe and “make sure”, just like the physicists. You were warned, you were told, you had every opportunity to know.”

    Ok, so fire and brimstone. When might this start? I mean when will we start paying for our sins with hyperinflation? I mean you know what Keynes said about teh long run. Give us some horizon when we’ll pay for passing this “inflection point?”

    Will it be this year before the election? 2013, 2014? Again, just like death and taxes are inevitable, inflation hawks always see hyperinflation or “stagfaltion” around the corner. They are always wrong so you decry “historicism” one day the could be right! And one day unicorns may be real.

  58. Gravatar of dwb dwb
    23. March 2012 at 14:50

    @Major F-
    what he said, above. Please give me a date for the implosion. I’ll need to stock up on dried food, canned goods, and ammo.

  59. Gravatar of Major_Freedom Major_Freedom
    23. March 2012 at 20:33

    D R

    “So it means that by calling cash holding ’saving’, it is impossible for people NOT to be savers and it is impossible for people NOT to save.”

    Totally false. In the nanosecond when I buy my lunch, I am not saving. I am DISSAVING. Sure, everyone saves in some nanoseconds and dissaves in others. Big whoop.

    Pay attention D R. I was referring to the nanosecond after you EARN money. Not when you spend money. During that time, and thereafter with you owning money, you are in your worldview, a “saver.” You are a saver even if you never invest, and you only spend your money on consumption.

    If you want to talk about spending money, then the nanosecond after you spend money on lunch, the seller immediately becomes a “saver”, despite the seller not purposefully abstaining from consumption at that time.

    “Even people who ONLY consume, and never invest, would have to be called ’savers’ and they would have to be considered to be ’saving’. Even their consumer purchases would have to be considered as financed out of savings.”

    Suppose I am initially penniless and you loan me $5 so I can buy my lunch, and I do so. Am I financing my consumption out of savings? In the sense that I am dissaving, yes. In the sense that I had cash to begin with, then no. You traded me $5 for an IOU, so my income is unchanged in this scenario.

    That’s false. In the sense of having cash to begin with? You did have cash. You had $5 that I loaned to you. Just because I own an IOU that you owe me $5, that doesn’t mean the $5 you used to buy lunch isn’t cash.

    Mike Sax

    “Would you have called those in spring/summer 2008, who said the US economy is going to soon go into deep recession, “alarmists”? If so, then I would be honored to be called an “alarmist.”

    I wouldn’t have said that, and didn’t at the time-I knew those who talked about recession were right. So it’s not comparable.

    It’s not comparable? Why not? Why isn’t saying “a recession will arrive” in mid-2008, not comparable to saying “a recession will hit in mid-2012″?

    I am not making an indeterminate prediction for this. I look at the aggregate money stock. Right now it’s growing at around 9% annualized. If it falls to say 1 or 2%, and stays there for a length of time that leads to certain other statistics to change in a certain way, then we can get a very firm grasp on whether or not a crash is imminent.

    On inflation though yes, you inflation hawks have cried wolf once too many times for your alarmism to be credible.

    “You inflation hawks”? Don’t lump me in with them. For me, it depends on the time frame given for predictions of inflation. For those who said 2009-2010, they were wrong. For those like me who take a more long term outlook, and are careful in realizing that all future decisions are based on choices, yet knowing that even in this sphere, certain past actions will have necessary trends for an indeterminate future, we refrain from saying things like “inflation of over 10% next year.”

    Certainly history is a guide to expectations. To try to pretend it has no part in plausibly discussing the future is wrong. Up until now, donkey’s don’t fly. Is it overly historicist to say they never will either?

    History is only a valid guide for phenomena that can coherently be regarded as past causally determined. I do not hold that to be the case for human actions, so I don’t consider history a valid guide to the future.

    Your cries about hyperinflation are about as credible.

    Again, I am not “crying” hyperinflation. I am saying hyperinflation and crashes are the only two possible outcomes of an inflationary economy, with hyperinflation being the inevitable outcome for an inflationary economy that is controlled by those who use inflation to stave off correction and depression, as the Fed has done since at least 1929.

    Nor is this new. Inflation hawks were also alarmist during the Depression about FDR and the gold standard and also the new deal programs. What’s clear is that inflation never raised it’s head.

    I think you’re arguing with demons in your head more than me.

    You say inflation never raised its head? It never raised its head in Weimar Germany, or Zimbabwe, prior to it happening there.

    Humans are not chained to history. You cannot say that because it’s never happened, it never will happen. That’s the fallacy of induction. You know, the whole black swan thing.

    “I did not predict hyperinflation. I said EITHER hyperinflation to maintain the boom and collapse the currency, or deflation to maintain the currency and collapse the economy.”

    You want the latter-let’s collapse the economy to “maintain” the currency.

    I don’t “want” the latter. Saying either of these things will happen is not an endorsement. Good lord.

    Again you are as credible as those who worry that our borrowing costs are about to go through the roof.

    Credibility? My record is better than yours and the owner of this blog. Again, you’re talking to your demons, not me. You’re straw manning me to no end.

    We keep hearing about it and your always wrong. All you can say is “one day I could be right”

    I’m always wrong? About what? With the argument that we either get hyperinflation or recession/depression? I have a 100% success rate. I don’t make time based predictions.

    I don’t think that’s the choice. There is no risk of hyperinflation.

    Based on what premises? Have you even looked at the exponentially rising aggregate money stocks at all?

    Hyerinflation is what happens when a nation’s currency is no longer accepted-right now clealry the US dollar remains the world’s reserve currency and there is no sign at all of its peril.

    Hyperinflation happens very quickly. It’s something that often catches people off guard.

    You’re telling me right now the US dollar is the reserve currency? Yes, of course. But I am not making any statements contrary to the present situation. I am telling you what the inevitable outcome of a policy of inflation is. We’ve only had pure fiat since 1971, and if you want to utilize the inherently contradictory historicism worldview, then I can tell you that fiat money has never lasted for more than a generation or so. In my view, 2008 was the year fiat money came to an end in its ability to maintain an economy distorted by inflation. The next collapse is going to be focused in sovereign debt, and when that goes pop, you can say goodnight. And don’t say you weren’t warned.

    “I will still you that the inevitable future of an inflationary monetary economy, because of economic laws that cannot be eradicated by any army, the inevitable future will be either breakdown of the currency, hyperinflation (BOO!) and possible price controls and thus socialism, or, if those in control of the money want to maintain control over the money, they will have to abandon the policy of accelerating aggregate money stock growth, and thus bring about a correction, which we observe as recession/depression. There is no other alternative”

    Fiirst of all, you ought to run for office with your cheery outlook.

    This isn’t about emotions. This is about facts and theory. Economic laws don’t change just because you have a different emotional demeanor.

    I want to see the campaing that runs on “let’s cause a depression to protect against inflation.” Yeah, let’s bring on a recession/depression to “protect” the currency.

    You might not have realized it, but you just aptly summarized exactly why inflation tends to accelerate. It’s politically difficult for the voters to elect politicians who are considered willing to bring about a recession to save the currency. It’s exactly why the national debt is going up too.

    Why do you care what it would be like to consider oneself running for office with one’s ideas? Are you really so statified, so corrupted, that you refuse to elicit ideas that are politically unpopular? That you won’t say anything that you believe isn’t going to be given a stamp of approval from the state? Find some integrity you sap. Start focusing on ideas and the truth, instead of what you believe your masters want you to hear.

    Secondly, happily we face no such choice. A Depression has been taken off the table. Nor is there any specter of hyperinlfiation. None. Inflation and hyeprinflation are two very different things.

    Depression has been taken off the table at the expense of an acceleration in the rate of inflation of the money supply. It’s just one step closer to hyperinflation. Just look at aggregate money charts. It’s growing exponentially.

    You do realize that an exponentially growing money supply function tends towards vertical growth vis a vis the independent variable (time), don’t you?

    If our current monetary regimes are so perilous then why has none of this happened yet?

    It is in the process of happening right before your eyes.

    If you believe Nixon closing the gold window was some travesty why since the 80s has there been no big problem about inflation?

    Are you kidding? There has been a huge problem about inflation. Stagnant real wages, massive growth in government, multiple recessions, the biggest collapse since the Great Depression, invading oil rich “unfriendly” countries and fighting wars to preserve the petro-dollar, crazy trade deficits (that are not a result of growth inducing investment), the list goes on and on.

    Maybe your standard for what constitutes “problems” is a lot lower than mine, but I think we can do a lot better, and that what we have IS full of problems.

    Mike Sax

    Major, I find reading you entertaining I admit-much like watching the Jets tell us how the Tebow and Sanchez are going to workout seamlessly.

    BURN!!!

    “I look at the charts now, and I can tell you that we’ve passed the inflection point, and are now approaching the vertical asymptotically. While you and all the other economically illiterate monetarists and Keynesians are all doped up on the inflation drug, numb to the world around you, I want to say that you CANNOT give any excuse that the knowledge just wasn’t available yet, or that you just couldn’t know until you had past data to observe and “make sure”, just like the physicists. You were warned, you were told, you had every opportunity to know.”

    Ok, so fire and brimstone. When might this start? I mean when will we start paying for our sins with hyperinflation? I mean you know what Keynes said about teh long run. Give us some horizon when we’ll pay for passing this “inflection point?”

    I DON’T GIVE TIME BASED PREDICTIONS.

    Economic events are primarily predicated on human learning, choice, and actions. These are ex ante unknowable. I am not going to lie to you or to myself in claiming to have some crystal ball in being able to know what people will learn in the future and what they will choose to do in the future. If I could do that, I’d be a multi-billionaire. If economists could do that, they’d be making a ton in the market as well.

    Will it be this year before the election? 2013, 2014? Again, just like death and taxes are inevitable, inflation hawks always see hyperinflation or “stagfaltion” around the corner. They are always wrong so you decry “historicism” one day the could be right! And one day unicorns may be real.

    They are NOT always wrong. What are you talking about? If the choice is either hyperinflation or crash, and we see a crash happen, then they were not wrong. If we hyperinflation, then they were not wrong then either.

    You might think this prediction is useless, but it isn’t. It can allow us to stop inflation before it’s too late. Historicists like you need to see things happen before you know for sure, as if you need to see minimum wage laws of $100 billion an hour above the market rate before you can know whether or not employment will go up or down, or that we need to see worldwide communism before you can know whether or not there can be a price system for the means of production.

    dwb

    what he said, above. Please give me a date for the implosion. I’ll need to stock up on dried food, canned goods, and ammo.

    Like I said above, I don’t do time based predictions.

    I can tell you right now that aggregate money production is running at around a 9% clip. As long as that persists, we will eventually see very high consumer price inflation. The Fed currently targets consumer prices. If that keeps up in the future, then at some point they’re going to have to reduce the extent of money creation. Depending on how much they slow down, they could bring about a mild or deep crash. I’ll keep all of you posted on this blog, so that you can get out of the market in time. I saved the portfolios of something like 20 people in 2008, by watching aggregate money stocks. Of course you can watch them too, and advise your friends and family.

  60. Gravatar of StatsGuy StatsGuy
    24. March 2012 at 05:01

    Possibly… see this

    http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/03/20120323_corr1.png

    % of money accumulated by corporates – huge spike post 2009, corps basically sitting on piles of cash. “Fortress-like balance sheets” is spot on.

    It’s important to note that this behavior was CAUSED by the Fed. The Fed had implicitly promised to keep the economy going at a certain NGDP growth rate. It broke that promise because it did not want to use certain tools it had promised to use. In the process, short term money markets nearly collapsed, and corps dependent on very cheap short money no longer trusted the Fed to hold to its end of the bargain – so they’re holding onto a large mass of cash.

    Pushing out that cash, either through investments, incentives, buybacks, etc. (which allow individuals to reinvest or spend) is generally expansionary, so long as it does not create investment constraints and/or trigger perceptions of weakness and capital flight from equities.

    So I agree with Yglesias, but largely because the Fed caused this problem in the first place. I would think you would agree too if you consider it from this angle.

  61. Gravatar of D R D R
    24. March 2012 at 07:26

    “Pay attention D R. I was referring to the nanosecond after you EARN money.”

    Right. I agree with you. I see nothing wrong with that. My point is, they are still savers in that nanosecond, just as they are dissavers in other nanoseconds. SO WHAT? The fact is that at those precise moments they either do or do not save.

    “If you want to talk about spending money, then the nanosecond after you spend money on lunch, the seller immediately becomes a ‘saver’, despite the seller not purposefully abstaining from consumption at that time.”

    Nope. I have no income in that nanosecond, and so I cannot save no matter how much I abstain from consumption. It is true that my consumption fell from one nanosecond to the next, but I merely went from having a negative savings rate to having a savings rate of zero.

    “That’s false. In the sense of having cash to begin with? You did have cash. You had $5 that I loaned to you. Just because I own an IOU that you owe me $5, that doesn’t mean the $5 you used to buy lunch isn’t cash.”

    Right…. that’s what I meant by “to begin with”– I *started* with no cash. I did obtain cash, but I did not obtain it through an act of saving. Nor did I obtain the cash through any prior act of saving on my part.

  62. Gravatar of ssumner ssumner
    24. March 2012 at 07:48

    MF, I have no interest in that sort of thing–he lost me in the first paragraph.

    Lorenzo, What was I thinking?

    Mark, But that 10% figure doesn’t matter, what matters is the amount returned to the public, which is far smaller. I still don’t see why people would consume more just because the composition of their assets change, but not the total amount.

    Britmouse, Thanks, for some reason I can’t get the Wren-Lewis link to work.

    I have a question about UK taxes. Is the payroll tax you mention on wage income only, or does it include investment income? Does it go to infinity? And at what rate? (combined rate, if both employee and employers pay.)

    Tom, I agree with Bill Woolsey.

    MF, You said;

    “You still share with Yglesias the underlying position of attacking cash holding, believing “spending” to be the primary driver, etc.”

    This is silly—some of my best friends are cash holders. And what does “spending” drive?

    Statsguy, I certainly agree that Fed policy plays a role in how much cash corporations decide to hold. But that’s very different from arguing that a decision to pay dividends is an expansionary monetary policy.

  63. Gravatar of Major_Freedom Major_Freedom
    28. March 2012 at 22:06

    D R:

    Right. I agree with you. I see nothing wrong with that. My point is, they are still savers in that nanosecond, just as they are dissavers in other nanoseconds. SO WHAT? The fact is that at those precise moments they either do or do not save.

    Saving requires at least an intention on the part of the individual to abstain from consumption. If an individual never intends to save, but cannot help but hold cash for at least a nanosecond in between earning the money and spending it on consumption, due to the reality of living IN time and having to make decisions and actions in time, don’t you think it’s a little strange to call people who don’t even intend to save, “savers”?

    It would be like calling every money earner on the planet “cash hoarders” because every single person who earns money holds it for at least a positive amount of time.

    Nope. I have no income in that nanosecond, and so I cannot save no matter how much I abstain from consumption. It is true that my consumption fell from one nanosecond to the next, but I merely went from having a negative savings rate to having a savings rate of zero.

    But you are holding cash for that nanosecond, so by your logic, you must be saving for that nanosecond.

  64. Gravatar of D R D R
    29. March 2012 at 02:45

    Major,

    “It would be like calling every money earner on the planet ‘cash hoarders’ because every single person who earns money holds it for at least a positive amount of time.”

    I don’t know why you’re that hung up on labels. I’m interested in describing what they do, not what you call them for what they do.

    If you want to say that anyone who has saved in at least one instant of their life is “a saver” then that is fine as long as you recognize that they are probably “a dissaver” as well. I have no problem applying both labels to the same person in this sense.

    On the other hand, I also agree that it’s probably not useful label them as such. It’s more meaningful to say that the person is “saves” at certain times and “dissaves” at other times.

    That is, if you want to label, then label conditionally based on the period of interest. That way, within any finite period, every actor will have saved or not, and dissaved or not.

    “But you are holding cash for that nanosecond, so by your logic, you must be saving for that nanosecond.”

    No. If in that nanosecond my income is zero, and my consumption is zero, then my saving is ZERO. If in that nanosecond my income is zero and my consumption is positive, then my saving is NEGATIVE. Consumption cannot be negative. Therefore, if in that nanosecond my income is zero, I am not saving IN THAT NANOSECOND.

    I may or may not continue to “have savings”– an accumulation resulting from previous periods during which I had saved. But if my income is zero in any period of time, then I am not saving in that period of time.

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