Instruments, indicators, targets, transmission mechanisms and goal variables (my pathetic attempt at a general theory of monetary policy)

Macroeconomists disagree about everything.  We can’t agree on the proper goal variable of monetary policy, or indeed even the criteria you would use to determine the optimal goal variable.  We have proposed dozens of transmission mechanisms, with no general consensus emerging.  We don’t agree on the proper intermediate targets; should it be interest rates, M2, exchange rates, or NGDP futures?  Even worse, we don’t even agree on what the term ‘target’ means.  Are interest rates an instrument of policy or a target?  Is inflation a target or a goal variable?  But it’s even worse than that.  Even if we can agree on interest rates being a target, we don’t even agree on whether high interest rates mean easy money or tight money.  In other words we completely disagree on what constitutes an indicator of the stance of monetary policy.  And we even disagree about policy instruments, the most basic question of all.  What does the central bank actually do?  Does it directly control short term interest rates or does it control the monetary base?  It’s no surprise that people debating monetary policy find it hard to even communicate with each other.

Physicists are always trying to unify the basic forces of nature, to develop a simpler and more elegant model.  I’m going to suggest dropping the transmission mechanism, and combining indicators and targets.  I’ll end up with a three stage process; the monetary base plus IOR as dual policy instruments (with very different purposes), NGDP futures as a policy target, and actual NGDP as the policy goal.  This post will be a sort of comment on some excellent posts by Paul Krugman and Nick Rowe.  It will be too long (like my early posts) but will also contain some new ideas (unlike my recent posts.)  I’ll work backwards, from goals to instruments.

I’m just going to assume an NGDP policy goal; the post will be too long to waste time defending it.  (I defend it in this National Affairs article.)  It seems logical that you would want to adopt a policy that is expected to succeed.  Thus monetary policy should be set in such a way that the expected growth in NGDP is equal to the desired growth in NGDP.  That means (according to Lars Svensson) that policy should target he forecast, i.e. that the optimal policy target is expected NGDP growth.  Svensson prefers to target the internal central bank forecast (presumably because he worries about a circularity problem with targeting market forecasts.)  However there are at least two NGDP targeting proposals that use market forecasts and avoid the circularity problem.  Hence I’ll assume NGDP futures prices are the optimal policy target, as they are much more closely correlated with expected future NGDP than are any of the other proposed targets (interest rates, exchange rates, M2, etc.)

What about transmission mechanisms?  Mishkin argues that certain market prices are good indicators of policy because they are important parts of the monetary policy transmission mechanism:

Other asset prices besides those on short-term debt instruments contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms.

I slightly disagree, and would like use dimes and M2 as a counterexample.  I think almost everyone would agree that dimes are not a very important part of the monetary policy transmission mechanism, certainly less important than M2.  After all, if you don’t have any dimes in your pocket, that won’t have much impact on your expenditures, you’ll use nickels or quarters instead.  And yet, dimes have recently been a better monetary policy indicator than M2.  Why is that?

Coin production is very cyclical.  Because coins are durable, the production of new coins is highly correlated with changes in the total stock of coins.  Hence during recessions (when transactions fall) the stock of coins rises much more slowly, and new coin production falls sharply.  Coins made during recession years tend to be “rare” and valuable to collectors.  But if the dime-making machine broke down and the US Mint made fewer dimes during a given year, it wouldn’t cause a recession—people would make do somehow.  Indeed something like that happened in 1964-65 when silver coins were hoarded due to the rising price of silver, and there was a coin shortage.  And of course 1964-65 was right in the middle of a long boom.

Now consider M2 by comparison.  Suppose that M2 velocity is quite erratic, due to financial innovation and changes in interest rates.  But also assume that M2 velocity is uncorrelated with changes in the stock of M2.  In that case M2 might be a lousy indicator of money policy, but still an important part of the transmission mechanism.  That is, more M2 would cause more NGDP, given the level of velocity (which is determined independently.)  BTW, I don’t wish to argue that M2 is in fact an important part of the transmission mechanism (nor am I convinced that M2 and M2 velocity are independent) just that one can make a more plausible argument for M2 than for dimes, even if dimes are a more reliable indicator of tight money.

This link shows that coin production plummeted about 80% between 2007 and 2009.  And this link shows M2 growth accelerated during the recession.  Some might object that the Fed can’t control coin production, that it is “demand determined.”  You are not thinking outside the box.  The Fed can control NGDP, and thus could have prevented the recession, or at least made it milder.  If they had done so, then US Mint coin production would have fallen much less sharply.  Coins really are a pretty good indicator that money is too tight (albeit not perfect, it would be less informative during hyperinflation.)

We should abandon attempts to find a monetary policy transmission mechanism.  It’s too complicated.  We know (intuitively) that 100 to 1 monetary reforms immediately lower all nominal aggregates in proportion; both the price level and NGDP immediately fall by 99%.  How is it different if monetary policymakers suddenly double the monetary base, as in Hume’s thought experiment?  One difference is wages and prices and debt are sticky during money supply changes, but not during monetary reforms.  The other is that monetary reforms are expected to be permanent, whereas a doubling of the money supply might be reversed in the future.  Recent NK models treat money as a financial asset, where its real value is very sensitive to changes in its expected future real value.  So that makes the monetary transmission mechanism even more complicated.  We need to deal with some wages and prices being sticky, some being flexible, and also with asset prices that are strongly impacted by future expected NGDP.  There are a million transmission mechanisms; better to keep them inside the black box and focus on what we can measure and control.

Elsewhere I’ve argued that the terms ‘easy money’ and ‘tight money’ have no meaning in absolute terms, but only relative to the policy objectives.  This suggests that policy indicators and targets are one and that same.  If the NGDP futures price is above the Fed’s target then policy is too expansionary, and vice versa.

Finally we arrive at policy instruments.  I’m sympathetic to Nicks Rowe’s argument that changes in the monetary base are what the central bank “really really” controls.  But now they also directly control the interest rate on reserves.  I hate IOR for two reasons:

1.  It makes monetary policy even more complicated.

2.  MMTers seem to like interest on reserves.

But if it’s going to be a permanent feature of our system, then I suppose we need to deal with it.  I’ll argue that the monetary base can be used to control both the level of NGDP, and its trend growth rate.  In contrast, IOR can only be used to change the level of NGDP (which makes it similar to fiscal stimulus–a policy that also is limited to generating one-time changes in base velocity.)

The Fed can stimulate the economy by lowering IOR, but it will soon run up against a “zero lower bound” problem.  Not necessarily a zero IOR, that rate could be negative, but rather a zero level of excess reserves.  At that point ERs can fall no further, and the monetary base is dominated by currency.  Further increases in NGDP then require growth in the monetary base; IOR can only do so much.

We should think of IOR as a tool that allows the Fed to hit two targets, a trend rate of NGDP growth (achieved by long run increases in the monetary base at roughly the desired rate) and an optimal ratio of base money to GDP.  For the US, the base to GDP ratio is normally about 6% (when nominal rates are above zero and there is no IOR.)  But at zero rates and/or positive IOR you can achieve much higher base to GDP ratios.  Milton Friedman dreamed of an economy saturated with liquidity, which is costless to produce.  But that was thought to require mild deflation (as in Japan) and runs up against downward wage stickiness near the zero bound of wage increases.  More zero bounds!  (George Selgin correctly notes that aggregate nominal wage cuts would not be required, but I’m more worried than he is about wage flexibility in declining industries.)  With IOR the central bank can have its cake and eat it too.  It can have high levels of liquidity (at least within the banking system) and Argentine levels of inflation.  Indeed with electronic currency approaching rapidly, we can foresee even greater gains from a policy of paying interest on all base money.

So the Fed could adopt an IOR that saturates the economy with the optimal base/GDP ratio, and then use the monetary base to control the trend growth rate of NGDP.  The best way to understand the difference between one-time changes in NGDP and permanent changes in NGDP growth rates is to look at the following random selection of data from an old Robert Barro textbook:

Country  Money growth  RGDP growth  Inflation  NGDP growth  Time period

Brazil               77.4%               5.6%           77.8%            83.4%           1963-90

Argentina        72.8%               2.1%           76.0%            78.1%           1952-90

Chile               47.3%               3.1%           42.2%            45.3%            1960-90

Israel               31.0%               6.7%         29.4%            36.1%            1950-90

S. Korea         22.1%                7.6%          12.8%            20.4%            1953-90

Iceland           18.4%                4.3%          18.8%           23.1%             1950-90

Portugal          11.5%               4.7%             9.9%           14.6%             1953-86

Britain               6.4%               2.4%             6.5%            8.9%              1951-90

U.S.                   5.7%               3.1%             4.2%            7.3%              1950-90

Switzerland       4.6%               3.1%             3.2%           6.3%              1950-90

In my view the sine qua non of monetary economics is to explain these correlations, and I just don’t see how interest rate-oriented monetary economics can do that.  The more “old Keynesian” the model, the more it focuses on explaining one-time changes.  Any force capable of generating these persistent inflation rates is ipso facto also capable of explaining one-time changes.  But alas, the opposite is not true; changes in fiscal policy or IOR can generate one time changes in P or NGDP, but not persistent changes.  People get confused about this because at a given point in time a one-time change looks a lot like a growth rate change.  (The longest journey begins with a single step.)  But they are conceptually very different.

So a policy of IOR might raise the steady state base/GDP ratio from 6% to 60%.  But from that point forward you generate your 5% NGDP growth by raising the base by roughly 5% (on average) each year.  Peter Ireland made a similar argument in this paper.

So that’s my grand theory of monetary economics.  Use the base to target NGDP futures prices, with the hope of maintaining steady growth in actual NGDP.  If you also wish to saturate the economy with liquidity, do so with a positive IOR.  Choose the optimal NGDP growth rate to minimize the combined losses from excess taxation on capital (when NGDP growth is too high) and excess labor market inefficiency (when NGDP growth is too low.)

Robert Hall liked to publish papers with a “perfect monetary system” back in the 1980s; at least they were perfect until his next iteration.  I think that’s way too modest; I’d like to shoot for this blog post representing “the end of macro.”  At least until another wacky idea pops into my head.

PS.  If you think those high trend inflation rates require fiscal stimulus, you are wrong.  The Fed can buy anything, it doesn’t have to be US government bonds.  But even if restricted to government bonds, a deficit of just 2% to 3% of GDP would probably be enough for the Fed to run 100% trend inflation, without ever running out of T-securities to buy.  (This is based on the very conservative assumption that base demand would fall to no more than 2% or 3% of GDP if we had 100% inflation.)


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121 Responses to “Instruments, indicators, targets, transmission mechanisms and goal variables (my pathetic attempt at a general theory of monetary policy)”

  1. Gravatar of Cthorm Cthorm
    3. April 2012 at 07:58

    Before I even read this…you are so un-Keynesian.
    If Keynes wrote something similar (wait a second…) he would have considered calling it the “General Theory of Employment, Interest, Money and Everything”, but opted for the more modest “General Theory of Employment, Interest, and Money”. If the last 80 years of economics has taught us anything, it’s that the marginal value of pizzazz approached infinity at the zero lower bound.

  2. Gravatar of Morgan Warstler Morgan Warstler
    3. April 2012 at 08:30

    I think you once a month should rewite this, and try to turn it into a script for animation.

    Imagine what you want drawn / sketched, and then use words the avg. listener can understand.

    Get it really nice and tight, clear as bell, and then we’ll get it done right.

  3. Gravatar of Greg Ransom Greg Ransom
    3. April 2012 at 08:56

    You are offering a cross your fingers / flying blind technology “who knows why it works but lets hope this time the newest thing does work.”

    You are not offering explantations or a scientific enterprise.

    It’s all alchemy, all of the time.

  4. Gravatar of Major_Freedom Major_Freedom
    3. April 2012 at 09:11

    Now this is a post I’ve been looking forward to for a very long time. A single self-contained (mini) treatise of your economic worldview.

    Here’s some of my thoughts/reactions:

    1. “Coin production is very cyclical. Because coins are durable, the production of new coins is highly correlated with changes in the total stock of coins. Hence during recessions (when transactions fall) the stock of coins rises much more slowly, and new coin production falls sharply.”

    Don’t look now but you just made a fantastic argument for the efficiency of a precious metals monetary standard. During times of increasing general productivity, the productivity of commodity money goes up, and during recessions, the productivity of commodity goes down. This is highly efficient.

    A common myth believed is that during recessions, money production “should” INCREASE, and the thinking goes that printing money is “necessary” to offset the fall in money that would otherwise have been exchanged in transactions, on the basis that nominal spending should never fall from where it was prior or from some mechanistic constant “trend”, regardless of individual choice in the market. This is highly inefficient.

    Recessions are just periods of time in which investment errors that have been made in the past are exposed as uneconomic in real terms at their current prices by individual owners and buyers.

    Now, if NGDP targeting were completely neutral, if it consisted of every individual receiving free checks from the Fed, and all prices rose exactly in the same proportions as before such that relative prices are unaffected by monetary policy, then NGDP targeting would not be a hindrance to economic recovery.

    But NGDP targeting, even if it targets only a single aggregate statistic that leaves no room for relative price and spending analysis, even if it just a program of affecting “total”, or “aggregate” nominal spending, even if it is not a program that intentionally affects relative prices, even if the goal is to just raise “total spending”, and not change relative prices or relative spending in any way, then the bitter pill that NGDP advocates MUST swallow is that NGDP targeting is by its very nature a program that affects relative prices and relative spending away from where individuals in the free market would generate according to free exchange of private property.

    It affects relative prices because NGDP targeting is NOT carried out by way of the Fed sending checks to everyone, and thus it does NOT increase everyone’s bank balances all at the same time, all nice and equal and smooth, and thus it does NOT steer clear of effecting relative prices and spending, the way NGDP advocates seem to imagine is the case.

    No, in the real world, new money enters the economy only at distinct points, and initially given to distinct individuals before all others. In a division of labor society, where each individual is in control of at most only a small portion of the totality of all means of production and resources, what invariably ends up happening is that relative prices and relative spending in relation to all the heterogeneous goods and services individually owned across the economy, are affected. These relative prices and spending are affected NOT because of any change in relative valuation of goods and services by individual market actors, but solely because of certain individuals and certain individual owners of certain means of production and resources, come into ownership of new money before all others, and thus their spending brings about a revolution in the structure of relative prices, and with a revolution in the structure of relative prices, the quest to seek profits and avoid losses, leads individual disparate investors to revolutionize the structure of real production in the division of labor and separate ownership.

    You see, a division of labor economy is not like a household. In a household, the owner can manage his house by way of exercising his ownership rights and making decisions for his own property. But in a division of labor, where means of production are independently owned, there is no way that the millions of different owners can coordinate their economic plans without referring to the price system.

    The price system would, in a free market without legalized counterfeiters, regulate the allocation of the totality of all means of production and resources, via relative marginal utility and the concomitant relative pricing structure.

    NGDP targeting, because it positively does affect relative pricing due to it entering the economy at only distinct points, and thus increasing the cash of only a distinct group of people, and thus revolutionizes the structure of production away from market exchanges, hampers the pricing system’s ability to regulate the allocation of means of production so that all the pieces fit together like a puzzle.

    NGDP targeting in the real world is inimical to efficient relative pricing and spending throughout the economy. As mentioned, maybe if the Fed sent free checks to everyone, such that relative prices and spending remain unaffected, will NGDP targeting be less burdensome, but that’s not how the real world works. The Fed only sends checks to specific individuals in the market, individuals who have control over only a portion of the totality of means of production. Their changed spending brings about a change in relative prices totally apart from the market.

    So what kinds of things do the individuals who typically receive the new money first spend their money on? Well, new money tends to enter the banking system first, so what kinds of things do bankers spend most of their money on? Loans, securities, and assets. And wouldn’t you know it? It is precisely these types of spending that are most volatile during economic booms and busts. When the Fed loosens, asset prices typically rise more than all other prices. That is a relative pricing change. This is why you can see the stock market booming 61%, and yet consumer prices (for the time being) remain more “stable.”

    Imagine the Fed sending checks not to banks, but to the Joe Plumbers and Joe Sixpacks across the country. If they did that, then the kinds of things the Joes spend most of their money on, consumer goods, will increase in price faster than other prices. That will bring about a revolution in the relative pricing structure.

    Or, imagine what actually happened 2001-2007, where the Fed sent checks to the banks, and the banks then sent checks to home builders all over the country. That brought about a revolution in the relative pricing structure, as home prices increased far faster than other prices.

    Or, imagine what actually happened throughout the 1990s, where the Fed sent checks to the banks, the banks sent checks to investors, and investors sent checks to all manner of dot coms.

    Monetary policy in this country and in all other countries, is a system that absolutely 100% affects relative prices beyond what is generated by real consumer preference changes.

    You see, when new money floods into housing, or dot coms, or the stock market, or commodities, that itself leads individual factor owners to alter their investment allocation decisions. They rationally chase higher profits and avoid lower profits. Well, with new money changing relative prices via supply and demand, that changes the structure of production. Primary resources and complimentary resources get pulled away from other deployment, to be used in the “booming” sectors being goosed by monetary inflation entering those sectors first.

    Consumers however are maintaining their consumption behavior. They are not reducing their consumer spending in other places, which would have otherwise released the needed scarce resources that the new booming projects require. Instead of consumers reducing their spending in office buildings, say, thus freeing up the factors of production (like construction equipment) necessary to complete all the new housing projects, those factors are tied up in their current deployments instead. At some point then, the home builders are going to run into a real goods “shortage”, and prices for those factors will eventually rise. As they rise, the home building projects become no longer profitable. A bust ensues. If the Fed reacts by inflating more, then they will just exacerbate the problem of misallocated resources by the same relative pricing structure and hence production structure revolution.

    All the crap the Fed has prevented from being corrected, has piled up and now those in control of the Fed believe they have to keep interest rates at zero for the foreseeable future. The market is screaming to let market forces take over the power to adjust relative prices to lead to factors being allocated to where consumers are willing to sustain them, cross sectionally and temporally. But people like Sumner and other inflationists believe “it’s a demand problem.” They only believe that because they are starting with the fallacious notion that total spending cannot fall.

    No individual gives a rat’s ass about aggregate spending. I defy anyone to claim that they will change their relative investment decisions and relative consumer preferences based not on their own situations, the prices and profitability that affect them directly, but rather on “NGDP” instead. The truth is that nobody, despite their claims made in order to defend NGDP, will change their mind if they expect their future to be independent from NGDP changes. For example, if an individual expects their own profitability to rise 10% over the next 5 years, then it won’t make any difference if NGDP is predicted by “experts” to rise 50% or fall 50% over that same time period.

    No individual investor, no individual seller, no individual buyer, that I have ever come across, directly or indirectly, has ever, EVER changed their mind due to NGDP expectations APART from their own individual expectations of their own individual circumstances.

    The typical response of NGDP advocates to this criticism is to make up the silly story that “NGDP changes may affect their personal circumstances and thus NGDP expectations do play a role after all.” Bollocks. There is no cause and effect mechanism between NGDP changes and its alleged effect on individual market exchanges. The causality is the other way around. It is individual market exchanges that determine NGDP. NGDP will only go up or down if and only if individual market actors put forward less or more money in their exchanges.

    Each individual decides their spending and pricing patterns according to their own circumstances with only a few other market actors. If you’re a typical wage earner, then the only prices that will affect you are your daily variable expenses, your fixed expenses, your investments, and that’s it. Every other price in the economy can go up a zillion percent or down 100%, and the only prices that matter to you are the prices in your own circumstance.

    Now, if you want to argue that the changes in other prices affects the prices of your individual circumstances, then of course that’s true, but that would again only be a specific subset of prices, not all prices to which “NGDP” relates. The slight of hand NGDP advocates make is to continue to blur the line between micro and macro, until macro dominates and is believed to be a causal force that determines micro. No. Micro is where ALL market process take place. Even “macro” inflation targeting or NGDP targeting is a “micro” policy, because, as said many times, it does not affect everyone and all prices equally. It affects certain people’s bank balances, and therefore affects certain prices, before other bank accounts and other prices.

    NGDP targeting is in reality just a micro based legalized counterfeiting operation that continually revolutionizes the relative pricing structure of society and hence continually revolutionizes the structure of production. Investors will continually fail to distinguish between relative pricing changes brought about by money inflation, and relative pricing changes brought about by consumer preference changes.

  5. Gravatar of catbert catbert
    3. April 2012 at 09:12

    This is not general enough, I think.

    How about the countries with exchange rate targeting?

  6. Gravatar of Benjamin Cole Benjamin Cole
    3. April 2012 at 10:02

    Interesting post.
    BTW, Krugman posts today on Fed paper showing classic wage stickiness in the USA.
    Market Monetarism is the answer!

  7. Gravatar of Becky Hargrove Becky Hargrove
    3. April 2012 at 10:16

    Here’s my really really simple version of AS/AD, seeing as how everyone is throwing darts! Assume each citizen in a community as involved in economic relations through the course of their lifetimes – work and education are interlinked. Wherever monetary links are possible, we build a base upon which we can carry out the services that others need and that we actually want to provide. We optimize the (single point) monetary productivity of the world when we do this by purchasing the most important elements first. Ouch, our government discouraged voluntary services early on in the twentieth century, so some negotiation would be involved. Why don’t governments like simplicity?

  8. Gravatar of 123 123
    3. April 2012 at 10:19

    My recent tweet:
    “Use IOR to lean against NGDP cycle. Use size of MB to lean against Minsky cycle. NGDP expectations anchored if both are used”
    in reply to @AndyHarless who tweeted “”large” size vs. “large” role. The role of MB in determining FFR is not large if the MB is kept large in size at all times.”

  9. Gravatar of 123 123
    3. April 2012 at 10:20

    I also tweeted “Targets vs. instruments. Size of MB and IOR both needed to anchor NGDP expectations. FFR useless..” to @AndyHarless

  10. Gravatar of Saturos Saturos
    3. April 2012 at 10:25

    “How is it different if monetary policymakers suddenly double the monetary base, as in Hume’s thought experiment?”

    I think another difference is that whilst Hume was imagining what we would today call a “helicopter drop”, when a central bank expands the money supply it withdraws other assets from the economy in exchange. Thus while a helicopter doubling of money (in the simple case of a full-money portfolio) will also ipso-facto double income*prices (no “hot potato effect”, the money drop itself *is* the increase in income) for the same reason that income*prices -isn’t- half what it is today, an OMO raises the money supply without raising money demand as well, leading to a disequilibrium which resolves itself in the hot-potato effect, driving up prices and real income.

    So in Hume’s case, the M/P curve shifts to the right by 100%, and so does the L curve. Then the excess spending on scarce goods drives up P, shifting the M curve back in, and corrects real income, pulling back L. But the new equilibrium is further to the right in the short run, reflecting higher income and spending because SRAS slopes upwards.

    On the other hand an OMO which doubled the money supply would at first leave demand unchanged (because assets of equal value are removed from the economy, so income doesn’t change immediately), producing a disequilibrium. The excess cash balances mechanism operates, increasing V in addition to the rise in M. Not only is the injection spent (higher spending due to higher M), but money holdings of the initial recipients fail to rise with the injection (raising V) – so their spending increases by even more than with a pure helicopter drop, and NGDP rises more as well.

    I guess what I’m trying to say is that the very concept of a transmission mechanism often largely makes no sense at all. In Hume there is no “transmission mechanism” – people have more money, so there is more spending and higher prices and output. The “income effect” shifts all demand curves up proportionately. Only with eg. an OMO or a change in the Wicksellian rate is there a disequilibrium excess balances story.

    It’s funny – I was reading old posts today, and I was thinking about the difference between instruments, mechanisms, targets and indicators, and what New Keynesians and Market Monetarists respectively would choose for each. I’m not sure I understood your distinction between “targets” and “goal variables”. Could you please define all the terms, as you see their meaning? I thought you would have said that the monetary base was the instrument, NGDP the target, and NGDP futures both the mechanism and the indicator, superseding short-term nominal interest rates under Keynesianism. That’s what I got based on my reading of this post {http://www.themoneyillusion.com/?p=11586} of yours, which is my favorite. But clearly I didn’t get it.

  11. Gravatar of AFG AFG
    3. April 2012 at 10:47

    Scott,

    The more I read it, the more I find this whole MMT/Krugman/Market Monetarism debate to be boring. None of you disagree on the substantive theoretical economic issue, you disagree on DEFINITIONAL and POLITICAL ISSUES.

    First though, you’re own theory only allows you to ignore talking about the Best transmission mechanism once you have identified a single POSSIBLE transmission mechanism. Chuck Norris doesn’t have to fight because everyone knows he will win. But if his arms were amputated, his threats would lose credibility.

    Likewise, you’re PS thrown in at the end is the most important part. The Fed doesn’t have to say what it will buy to reach a stated NGDP target, because people know it can buy SOMETHING, so it never has to prove it. But if there were legal or conceptual restrictions on what the Fed could buy? Then any target wouldn’t be credible.

    There is no point in arguing about whether buying T-bonds would be sufficient. As you most clearly know, the effectiveness of that T-bond purchase is highly dependent upon expectations of future actions. The same T-bond purchase will be less effective in a world that everyone knows that the Fed is not willing to eventually start buying bridges to reach it’s target. Just note that it is a linear problem.

    If indebtedness has no theoretical limit, then NGDP growth must be infinitely high to counteract the worst possible recession. To create infinite NGDP growth through T-bond purchase, there must be infinite T-Bonds. QED NGDP can’t work in all cases without the credible POSSIBILITY of buying things beyond T-bonds, although I am not informed enough to know if it is likely to work in all realistic cases (since indebtedness will never reach negative infinity).

    This is why I say the real issue is definitional and political. MMTers don’t deny that a Fed that was willing (even if it doesn’t actually) to buy bridges, food, whatever will reach any NGDP target. They deny that these things constitute “monetary policy,” which is generally defined like “changing the price of credit” (See here: http://www.winterspeak.com/2011/08/unconventional-monetary-policy.html). They define those things as fiscal policy and, tautologically, monetary policy must therefore fail. This issue is why they see the separation of the two issues as arbitrary (the government as a whole should control unemployment, NGDP, inflation all like one giant thermostat).

    The flaw in their approach is that while it is a true description of how the monetary/credit/banking transmission mechanism works, it is not how people generally THINK that it work. Hence all the confusion over what they are saying. Our conceptual categories between “monetary” and “fiscal” policy does matter for political reasons. There may be a reason to allocate the potential “bridge buying” NGDP-increasing tactics under the purview of the Fed. Perhaps not knowing whether the Fed will buy bridges, bonds, dogs, or cookies allows it to have less of an effect on the relative price structure. On the other hand, why doesn’t the Fed’s preference for buying bonds first artificially lower the price of financial assets?

    That’s a serious question. I’d like to see you do more posts on why “monetary policy” distorts relative prices less than “fiscal policy.” It is taken as a given on your side of the debate, but I really think it is the key point of contention. Why is the political decision to organize these functions under the structure of the Fed good?

    -AFG
    Afoolsgame.com

  12. Gravatar of W. Peden W. Peden
    3. April 2012 at 11:08

    AFG,

    What if the Fed bought things that were neither t-bonds nor non-financial assets?

  13. Gravatar of genauer genauer
    3. April 2012 at 11:34

    LOL,

    either we have here some colossal misunderstanding, or ….
    your Robert Barro data show that NGDP targeting does not help real growth, but only induces inflation:

    http://www.slideshare.net/genauer/ngdp-real-growth-ca-surplus

  14. Gravatar of W. Peden W. Peden
    3. April 2012 at 11:48

    Genauer,

    “we have here some colossal misunderstanding”

    Probably. Market Monetarists are some of the most eager people to assert that, if you have 80% NGDP growth, it’s going to be mostly inflation (assuming anything like a realistic view of productive capacity).

    None of the three claims you put above that data actually follow from it, unless you have some argument you think is very obvious.

  15. Gravatar of dtoh dtoh
    3. April 2012 at 12:01

    Scott,
    A couple of observations.

    1. I don’t think the hot potato effect works like you think it does. The amount of money people hold does not influence how much they spend. I think you may have the causality reversed

    2. People hold the amount of money that they need in order to spend what they want to spend.

    3. The amount that people spend is influenced by the price of financial assets (i.e. the expected real return). The higher the price of financial assets, the more likely people are to exchange financial assets for real assets (e.g. factories, hamburgers, new cars, raw material inventory, etc).

    4. If nominal interest rates are significantly positive, then people will have a preference to hold other financial assets rather than currency. With positive nominal interest rates, the amount of currency is a good indicator of spending and the velocity (of currency) remains relatively constant.

    5. If nominal rates on financial assets are zero or close to zero, people become indifferent as to whether to hold currency or to hold other financial assets. When this happens, velocity drops and currency ceases to be a good indicator of spending.

    6. Increasing the money supply per se does not increase spending.

    7. The mechanism by which the Fed increases spending (NGDP) is through the price of (and expected return on) financial assets. When the price of financial assets go up, people will exchange them for real assets, goods and services.

    8. The mechanism works in two ways. The first is by pushing up the price of financial assets through OMP. The second is by decreasing expected real returns via higher inflation expectations.

    9. Credit plays an important role as well, but borrowing is really nothing more than just holding less (i.e. a negative amount of) financial assets.

  16. Gravatar of Morgan Warstler Morgan Warstler
    3. April 2012 at 12:03

    genauer

    HUH?

  17. Gravatar of W. Peden W. Peden
    3. April 2012 at 12:05

    Morgan Warstler,

    In three letters, you manage to say what I said in two paragraphs.

  18. Gravatar of AFG AFG
    3. April 2012 at 13:08

    W. Peden,

    I am confused by the implication of your question. My point is that this Scott/Krugman/MMT debate is mostly a non-debate. They agree that if the Fed was willing/able to buy anything, NGDP targeting would work. But they define “monetary policy” as setting the price on credit, which is generally met by buying all necessary credit instruments. Therefore, the FED can do NGDP targeting by buying other things, but then the fed is simply doing FISCAL not monetary policy.

    I am posing basically your same question to market monetarists. Scott says transmission mechanism (what they buy) “doesn’t matter.” I don’t understand the theory behind that. If (as his postscript and history suggests) the Fed will generally try to meet it’s target by buying T-bonds and MBSs, wouldn’t the expectation of that cause the relative price of those financial assets to rise?

    That’s not rhetorical, I’m legitimately curious to read some theoretical literature on the issue. It doesn’t seem like an original point, so I’m sure it exists.

    -AFG
    Afoolsgame.com

  19. Gravatar of marcus nunes marcus nunes
    3. April 2012 at 13:21

    Scott – Ballpark figures
    Brazil: 1980: Inflation 100% per annunm. B/GDP = 1.9%
    Late 1993 Inflation 50% per month! B/GDP = 0,4%

  20. Gravatar of dwb dwb
    3. April 2012 at 13:27

    I agree with most, of course. I’ve never really been clear regarding this money-vs-interest rates issue, honestly.

    First, most of the effect of either is signalling IMO, they could just as well put up a green-yellow-red sign.

    Now, *unexpected* events will happen which will force them to shift the balance sheet around. I am sympathetic to the arguments @dtoh makes, that real rates (at the 5-10 maturity tenor, not fed funds) drive investment/consumption demand (having worked on a lot of project finance). on the other hand it seems to me that with an ngdp target (which i think also implies a relatively stable, low, average inflation rate), the real rate of interest is endogenous . If the bank increases the money supply due to (say) an unexpected productivity shock, bank liability cost decline, and so do interest rates. On the other hand, a given money growth rule implies a certain real rate of interest, and therefore nominal rates. (again, i am assuming here that a given ngdp growth path implies a low but relatively stable over time inflation rate, which i think is correct).

    So it seems to me 6 vs half dozen. Now MS target critics will complain that it makes interest rates highly volatile, and there are operational difficulties (lags in accounting for example). There are lots of of near-money substitutes, esp when the economy really gets going. Interest rates are highly visible to all agents and send straigtforward signals (for example via investment project IRR discounting). But the Fed targets fed funds (which drive ZERO economic decision making) and smooths them, making Fed policy very opaque! I dismiss the ZLB criticism because well, we hit that because the Fed was inflation targeting lets face it.

    Anyway, I am not sure debate about the instruments is a big issue (is it?). If the Fed is targeting the forecast or ngdp futures, then the instruments are probably only for signalling (we can hang a sign on the FOMC website) or for leaning against unexpected events. So, I do not know that I would personally rule any of them out (including some not mentioned, like currency depreciation). It might depend on the nature of the unexpected event.

  21. Gravatar of dwb dwb
    3. April 2012 at 13:48

    @AFG:

    I find this whole MMT/Krugman/Market Monetarism debate to be boring…. My point is that this Scott/Krugman/MMT debate is mostly a non-debate. …None of you disagree on the substantive theoretical economic issue

    No i completely disagree, here are some big ones as i see it, FWIW:
    1. MMTers (or excuse me, “Post Keynsians”) DENY that reserves constrain lending. It took about 275 posts on Nick Rowes blog to get to the heart of the issue: MMTs think that the fed elastically supplies reserves at the target rate (true for only about 6 weeks). What happens when the Fed no longer targets interest rates but targets MS, or when the Fed changes IR targets after 6 weeks… well, I am still a little unclear on because I get responses like “well, then the CB is doing fiscal policy”. what? I am leaving out all the REALLY fringe stuff on Keen’s blog. Some MMTers think IOR is *good* and some pointless (because reserves do not constrain lending). I am not even sure MMTers understand the implications of their own theory.

    2. Krugman/DeLong: The line of thought here goes either the Fed is unwilling (FOMC members are boneheads), or unable to steer the economy (esp at the ZLB, for example, because the real rate of interest is negative and they cannot push inflation high enough). Fiscal policy is only effective when “not offset by monetary policy”. Krugman/DeLong like to build roads and stuff, but mainly because the see the FOMC as impotent at the ZLB.

    3. Market monetarists: read Scott’s above post. monetary policy works, (most) FOMC members are boneheads (ok i added that last part). They picked the wrong goal and keep moving the goalposts. If we try fiscal policy then the Fed will just tighten so it wont work. (Fisher was out jawboning the 2014 rate promise again this week i saw, and the minutes say the 2014 rate promise is conditional on the economy, so people who think they cannot take that away…).

    The economics debate between 1, 2, and 3 is very fundamental.

  22. Gravatar of AFG AFG
    3. April 2012 at 14:45

    Dwb,

    Meh…call me underwhelmed about the differences you identified.

    Yes, MMT denies that the amount reserves determines the demand for currency or lending. But to a large extent so do both Market Monetarism and Krugman. Didn’t Sumner just write a post about how the monetary base is a terrible indicator of how loose or tight monetary policy is? Didn’t he say that an effective communication strategy will result in LESS reserves and MORE lending, because the Fed won’t have to do anything.

    More importantly MMTs do NOT deny that the Fed can affect the amount of lending. Yes, seriously. See:

    The monetary base…”can only affect the loan decision by influencing the profitability of the loan—a price effect of monetary policy, at best—and similarly the borrower’s decision can be affected by the fed funds rate set by the Fed (and the rate the bank charges as a markup over this), which is another price effect.” (http://www.nakedcapitalism.com/2012/04/scott-fullwiler-krugmans-flashing-neon-sign.html)

    Or from Winterspeak:
    “Road repair services” and “bridge building services” are very unconventional monetary policy instruments indeed — but they are utterly conventional fiscal policy instruments. …
    So Scott is advocating what most of us think as “fiscal policy” but renaming it “unconventional monetary policy”. Why?”
    ” I don’t know how happy people would be if the Fed starts engaging in fiscal policy…there’s no reason the Fed cannot use this same ability and move Congressional spending “off balance sheet” in the same way if it so chose.”

    From billy mitchell:
    “The reason they consider bank reserves to be “special” lies in their operational significance for monetary policy. The central bank clearly sets the interest rate and generally aims to ensure that the overnight (interbank) rate is equal to it. In this context, bank reserves are:
    … powerful and unique … [and] … obliges the central bank to meet the small demand for (excess) reserves very precisely, in order to avoid unwarranted extreme volatility in the rate”

    So it’s not that reserves are irrelevant. They are the transmission mechanism for the only thing the Fed can control – short term interest rates. Krugman wants the Fed to control long-term interest rates through inflation expectations. Sumner want the Fed to forget about that and control the trajectory (into the long term) NGDP.

    MMTs agree that the Fed as an institution is perfectly capable of doing it. But in order to do it, the fed is no longer doing “monetary policy.” Hence it is a semantic problem.

  23. Gravatar of W. Peden W. Peden
    3. April 2012 at 15:40

    AFG,

    The point of my question is that there may be a middle ground where central banks do not buy bridges and such, but do buy, say, corporate bonds. As far as I know, central banks do not, nor have they for a long time, and perhaps never have, confined themselves to t-bills.

    “If (as his postscript and history suggests) the Fed will generally try to meet it’s target by buying T-bonds and MBSs, wouldn’t the expectation of that cause the relative price of those financial assets to rise?”

    Yes and I’d go further: it would also cause the relative price of all financial assets other than base money to rise. So, for instance, we would see links between (expected and fulfilled) QE operations and asset prices in general. The most important part of QE is how it makes base money cheaper and financial assets like bonds rarer. Otherwise, asset prices wouldn’t respond to monetary policy at all.

    Underfunding public sector borrowing has a very similar effect: the ratio of cash to financial assets has been altered. In both cases, changing the price of financial assets is a necessary part of the operation succeeding IMO.

    I agree that a lot of this is sematics: the grey area, which may not be semantics, is “whether (for example) the Fed buying up a huge quantity of high-quality financial assets other than t-bills would be sufficient to target NGDP?” and “whether this would constitute monetary policy under an MMT definition or indeed just about any plausible definition of monetary policy?” My suspicion is that the correct answer to both questions is “yes”.

  24. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    3. April 2012 at 15:48

    ‘I am leaving out all the REALLY fringe stuff on Keen’s blog. Some MMTers think IOR is *good* and some pointless (because reserves do not constrain lending). I am not even sure MMTers understand the implications of their own theory.’

    Certainly Steve Keen doesn’t understand the implications of his own writings. I speak from personal experience. Greg Ransom invited Keen to discuss his ‘Debunking Economics’ on EH.Net, circa 2002.

    What a debacle that was! Mostly due to the efforts of U of Calgary’s Chris Auld demonstrating that Keen didn’t understand algebra. Chris had Keen so confused that he transformed before our very eyes from a Post-Keynesian to an even more radical advocate of laissez-faire than Milton Friedman.

    Twas a sight to behold, but unfortunately the archives from EH.Net have disappeared. Krugman would kill to have had access to Keen’s performance then.

  25. Gravatar of Peter N Peter N
    3. April 2012 at 16:37

    Krugman doesn’t seem to be paying much attention to what his critics are saying. His post is a mess.

    “Leave aside the continuing confusion between the argument that banks can create inside money — which nobody denies — and the claim that they can create unlimited amounts of inside money, never mind the size of the monetary base, which is what is at issue”

    Here he conflates 3 different questions.

    1) Can banks create inside money?
    Yes
    2) Can they create unlimited amounts of inside money?
    Of course not
    3) If there is a limit, is due to the monetary base?
    No it’s due to capital requirements. Pimarily a tier 1 capital to risk weighted assets ratio. Tier 1 capital is mostly stockholders’ equity excluding goodwill (and, of course profitable lending opportunities which depend, among other things, on interest rates, real and nominal.

    Then we get:
    Nick Rowe gets to the heart of it: when you push this argument, it always ends up with an appeal to the notion that the central bank will always supply as much monetary base as the markets demand, at a fixed interest rate.

    So we have more issues:

    4) Will the Fed supply unlimited reserves on demand?
    Yes, but they control the rate at which they will lend, just not the quantity.

    5)Does the use the interest rate it charges for reserves as a monetary policy instrument?
    Yes

    6)Does it matter that the rate stays fixed between meetings?

    It has no effect on the theory of how control is exerted.
    It does increase short term predictability, which makes the system more stable.

    “It all depends on what the CB targets; this says nothing at all about how much traction monetary policy has on the economy at large.”

    7)How much traction does monetary policy have?
    A good question. It has nothing to do with what his critics were complaining about.

    He seems to have forgotten that he originally misspoke about how banks actually function, which provoked this blog storm.

    For the record, there are central banks which exert more direct control over reserves as a way of restraining lending. They do it by changing the reserve to deposit ratio. Believe it or not banks have found ways around even this.

    It’s damned hard to restrict lending when it’s profitable and in demand.

    He clearly either doesn’t understand what’s bothering people. He’s attributing to critics positions that they don’t hold and then refuting these straw men.

    This mess is not to his credit. Nick Rowe does vastly better.

  26. Gravatar of dwb dwb
    3. April 2012 at 16:49

    @AFG
    They are the transmission mechanism for the only thing the Fed can control – short term interest rates…

    The Fed does not need to control rates, thats a policy choice. It can control the base. It also has a more powerful weapon than both (the “jawbone”).

    MMTs agree that the Fed as an institution is perfectly capable of doing it. But in order to do it, the fed is no longer doing “monetary policy.” Hence it is a semantic problem.

    I can call a tail a leg, its still a tail. expanding the base, and by consequence lending, to effect an NGDP target is not fiscal policy. fiscal policy is taxing and spending (these days, not in that order). during normal times reserves and capital are lending contraints, so increasing them increases the supply of loans. i dunno why anyone would call that fiscal policy.

  27. Gravatar of ssumner ssumner
    3. April 2012 at 16:58

    Cthorm, Thanks.

    Morgan, Be my guest–animate away.

    MF, If the Fed increases the money supply by giving money away, how do they later reduce it?

    catbert, Exchange rate targeting is not a good idea.

    Ben, I linked to that Krugman post.

    Becky, I wish they would be more simple.

    123, I’m not sure I follow that. You don’t need IOR to control NGDP, the base will do fine.

    Saturos, You are right that Hume’s experiment is a helicopter drop, but I don’t see that difference as being that important. When the Fed does an OMP, the increase in money is 10 times more important than the decrease in bonds.

    You said;

    “I’m not sure I understood your distinction between “targets” and “goal variables”. Could you please define all the terms, as you see their meaning? I thought you would have said that the monetary base was the instrument, NGDP the target, and NGDP futures both the mechanism and the indicator, superseding short-term nominal interest rates under Keynesianism.”

    I meant “intermediate targets” a variable you can control easily, which you hope will allow you to influence the variables you really care about (such as NGDP.)

    You are right that NGDP futures replace short term interest rates in my setup.

    AFG, You said;

    “This is why I say the real issue is definitional and political. MMTers don’t deny that a Fed that was willing (even if it doesn’t actually) to buy bridges, food, whatever will reach any NGDP target. They deny that these things constitute “monetary policy,” which is generally defined like “changing the price of credit””

    1. I certainly oppose having the Fed buy bridges, I think they should buy T-securities. I agree that buying bridges is more than monetary policy, it’s monetary policy plus. But I oppose that, I want simple monetary policy. As simple as possible.

    2. I don’t think the price of credit has much to do with monetary policy—which I see as being about the price of money, not the price of credit.

    Fiscal policy involves deficit spending, which imposes deadweight costs on the economy. Monetary policy doesn’t. But it makes no sense to talk about supporting or opposing monetary policy. Unless someone favors a pure barter economy, they support monetary policy. The only question then is which monetary policy does the least harm to the economy. I think it is NGDP futures targeting. Then if you do that, what role does fiscal policy play? The answer is none.

    I can’t really comment on MMTers, as whenever I think I understand their views they tell me I have it completely wrong. You’ll have to ask them if they agree with me that open market purchases of T-securities are expansionary regardless of whether rates rise or fall as a result.

    genauer, You said;

    “either we have here some colossal misunderstanding, or ….
    your Robert Barro data show that NGDP targeting does not help real growth, but only induces inflation:”

    No misunderstanding; NGDP targeting has almost no impact on trend growth, only the cycle.

    dtoh, You said;

    “1. I don’t think the hot potato effect works like you think it does. The amount of money people hold does not influence how much they spend. I think you may have the causality reversed
    2. People hold the amount of money that they need in order to spend what they want to spend.”

    I think in your first comment you are confusing spending and consumption, or perhaps nominal and real variables. I’m not claiming that people will consume more if they have more money in their pockets. They might save it (i.e. spend it on investment goods.)

    I completely agree with the second point, which is what underlies the hot potato effect. The HPE is based on the notion that each person controls their real cash balances, and the Fed controls the aggregate nominal money stock.

    You said;

    “3. The amount that people spend is influenced by the price of financial assets (i.e. the expected real return). The higher the price of financial assets, the more likely people are to exchange financial assets for real assets (e.g. factories, hamburgers, new cars, raw material inventory, etc).”

    In aggregate, the public never exchanges financial assets for real assets. Financial assets are claims to real assets. If you exchange them, one person’s gain is the others loss.

    Also, never reason from a price change. A change in interest rates has an unclear impact on the economy. It depends why rates change.

    You said;

    “5. If nominal rates on financial assets are zero or close to zero, people become indifferent as to whether to hold currency or to hold other financial assets. When this happens, velocity drops and currency ceases to be a good indicator of spending.”

    Yes, I’ve made this point many times.

    You said;

    “6. Increasing the money supply per se does not increase spending.”

    A permanent increase in the money supply increases current nominal spending, regardless of the level of nominal interest rates.

    You said;

    “7. The mechanism by which the Fed increases spending (NGDP) is through the price of (and expected return on) financial assets. When the price of financial assets go up, people will exchange them for real assets, goods and services.”

    Again, never reason from a price change. During booms the price of Treasury bonds usually falls, not rises.

    Marcus, Thanks, I guessed pretty well on that one. I thought 2% to 3% maximum was a conservative estimate, and I was right, it’s even a bit below 2%. Even with small deficits the Fed could run 100% annual inflation forever, never buying anything other than T-bonds.

    dwb, I agree that 10 year real rates have an impact on investment decisions, but monetary policy doesn’t determine 10 year real rates, at least not via the liquidity effect (maybe the income effect.)

    You said;

    “Anyway, I am not sure debate about the instruments is a big issue (is it?).”

    I’m just pointing out that you can’t use IOR to control trend NGDP or inflation, only the ratio of base money to GDP (and hence one-time changes in P or NGDP.)

    AFG, You said;

    “Didn’t Sumner just write a post about how the monetary base is a terrible indicator of how loose or tight monetary policy is? Didn’t he say that an effective communication strategy will result in LESS reserves and MORE lending, because the Fed won’t have to do anything.”

    Yes, but I’m trying to make a subtle distinction between one-time changes in levels, and changes in growth rates. Tight money causes interest rates to fall to zero which makes demand for base money soar–but one time only. From that point forward higher trend base growth will lead to higher trend NGDP growth. It’s the difference between changes in levels and changes in growth rates.

  28. Gravatar of Instruments, indicators, targets, transmission mechanisms and goal variables « Economics Info Instruments, indicators, targets, transmission mechanisms and goal variables « Economics Info
    3. April 2012 at 17:00

    [...] Source [...]

  29. Gravatar of AFG AFG
    3. April 2012 at 17:07

    W. Peden,

    You’ve lost me.

    “The most important part of QE is how it makes base money cheaper and financial assets like bonds rarer.”

    Base money can only become cheaper relative to the goods it purchases. Is money cheaper (is there inflation) if the only the price of financial assets rise? Money won’t necessarily be cheaper vs. food, houses, and whatever else is constraining the budgets of households.

    Yes, I understand the wealth effect. But the transmission mechanism between that and overall NGDP is likely less than one.

    More importantly, why would we prefer this over fiscal policy? As I understand it, monetary policy is supposed to be preferred because it DOESN’T affect relative prices. Would we want a NGDP target where a disproportionate amount of the nominal growth comes from asset prices increasing?

    -AFG
    Afoolsgame.com

  30. Gravatar of Morgan Warstler Morgan Warstler
    3. April 2012 at 17:09

    ARRRGGGGGHHHH,

    I hate MMT. Dirty hippies don’t own any stuff and still want to count. NO! No sir!

    Money is a construct established by the people who matter, the ones who own property and create things, and employ people etc.

    Money is a not a social good. It is not an instrument of Democracy.

    Next fact:

    Govt is a construct BY THE SAME PEOPLE.

    Take the top 20%. They are the boss, they set up the govt., they pay the govt., the first rule of all of it is DO NO HARM TO THEM.

    —–

    Dirty hippies stumble upon the system they didn’t create and think “Yowza!”

    “Hey there is a CB that can print money and the GVT can tax and blah blah blah.”

    No, we set the system up to protect out private property from the 80% and the dirty hippies that might try to roust them up.

    In the event of discord, we own all the guns (200M in fact), we pay all the taxes, and we have a Constitution set up that (as we learn over and over) makes it VERY VERY hard to even call it a Democracy.

    MMTers day dream that they will get to direct the “excess capacity” with money they print, and keep inflation from happening by choosing which people fork over taxes.

    If this thing ever got off the ground, the 20% would just round the MMTers up and shoot them.

    —-

    This same kind of stupid drivel comes out of DeKrugman’s mouth when they talk about bridges and roads.

    Infrastructure is waved as a flag that sometimes govt. itself matters past just protecting the private property of the 20%.

    Its not such a flag.

    If roads and bridges and damns got built today the way they got built today, the rich would have built all the roads and bridges privately and that would be that.

    Even today we are seeing the problems arise when the govt. workers who used to work cheap and do whatever they were told by the 20% to get the roads built cheap, are dragging the fat feet.

    No MMT ever wants to admit that Money and Monetary policy and Govt. itself is not built FOR THEM.

    It makes having a conversation with them very very hard.

  31. Gravatar of ssumner ssumner
    3. April 2012 at 17:13

    Patrick, Too bad that’s lost.

    Peter, It seems to me you are mixing up real and nominal variables. Monetary policy controls nominal aggregates, including nominal spending on toasters and nominal bank loans. Capital requirements control real bank loans, and demand for toast determines real spending on toasters. (I mention toasters merely to illustrate the general concept, which has nothing to do with banks per se.)

    I agree that Nick’s comments were more nuanced and carefully considered, but there’s no doubt that he and Krugman see eye to eye on this issue. I think the mess was created by the unfortunate decision years ago (made by the profession) to describe monetary policy in terms of interest rates. This created the impression that low interest rates are easy money and high interest rates are tight money. It would have been better to argue that easy money is an increase in the money supply, and that an increase in the money supply could cause rates to either fall or rise, depending on expectations of future policy. (Still better would have been defining easy money in terms of a target like NGDP expectations.)

    Because we talk of monetary policy is if it’s changes in interest rates, it makes it seem like rates are exogenous and everything else is endogenous. But that’s a cognitive illusion, as it would leave the price level unanchored.

    At a deeper level I suspect (although I can’t be sure) that Krugman, Rowe, and I interpret Barro’s high inflation table differently than their critics. We all remember that period, and we recall that it ended when central banks started controlling the money supply, not when we reduced budget deficits (indeed US deficits soared in the 1980s in America, even as inflation plummeted.) Our memory of the Great Inflation makes us very skeptical of models that view the money stock as an endogenous variable with no causal role.

  32. Gravatar of dwb dwb
    3. April 2012 at 17:38

    I can’t really comment on MMTers, as whenever I think I understand their views they tell me I have it completely wrong. You’ll have to ask them if they agree with me.

    or worse, tell me “thats fiscal policy”

    ARRRGGGGGHHHH, I hate MMT.

    rant mode on.

    it makes my brain hurt to debate or read MMT. now, I think i am a pretty open minded and intellectually curious person however, ARRGH. First, dont adopt names for things that people use for OTHER things, and then resort to “Mosler ran a bank he knows what hes talking about” or bloody T-accounts. Fine, have a theory. Make it accessible to the unwashed masses.

    But: it all sounds like obfuscation to me. I feel some of these MMT debates become a “whos on first” routine. (can the CB target NGDP. Yes but thats fiscal policy!). It’s the Dianetics or Scientology of the econosphere and of COURSE I cannot be saved because I am trying to frame it in orthodox economics. ARGH! talk about throw a brick at the screen!

    rant mode off.

  33. Gravatar of AFG AFG
    3. April 2012 at 18:49

    Scott,

    —”Fiscal policy involves deficit spending, which imposes deadweight costs on the economy.”

    Deadweight costs come from relative change in prices. Why does purchasing T-securities and MBSs not change relative prices? Financial assets may be claims on real assets, but the portfolio of the Fed is nowhere near a market portfolio. Is it just that

    What if instead of QE, the Treasury just issued fewer T-bills for the same amount of spending? MMTers often describe these as equivalent. Is that fiscal or monetary policy?

    —”But it makes no sense to talk about supporting or opposing monetary policy. Unless someone favors a pure barter economy, they support monetary policy.”

    What if we had one institution that determined both fiscal and monetary policy. This institution set a NGDP level target, and vaguely promised to meet that target by all available means? You often say that fiscal and monetary policy are just two different ways of affecting aggregate demand.

    It makes no sense to talk about support or opposing fiscal policy. Unless someone favors an economy with purely private choices over which resources to consume, they support fiscal policy.

    MMTers, MMers, and Keynesians all agree that we should hold the rudder on the ship in a steady direction. The disagree on which mechanism to use to affect that.

  34. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. April 2012 at 18:55

    Scott,
    I’m a little tired after the Krugman-Keen with Rowe sideline debate.

    But quickly scanning this long post let me say the following.

    1) “We have proposed dozens of transmission mechanisms, with no general consensus emerging”

    I disagree. There are several MTMs and their importance depends greatly on the particular nation involved.

    2) “We don’t agree on the proper intermediate targets; should it be interest rates, M2, exchange rates, or NGDP futures?”

    That’s only because we havn’t had enough practice. We know aggregates don’t work because of their failure under Volcker and with the BOE. Interest rates seemed to work well enough until they didn’t. We now need to try something different (NGDP futures?).

    3) “Even worse, we don’t even agree on what the term ‘target’ means. Are interest rates an instrument of policy or a target?”

    This was a major point of disagreement over at Nick’s post. IMO interest rates were the target under Greenspan. Who knows how they picked a certain rate? Taylor Rule? Maybe. But you can’t argue a target is an instrument unless you have some evidence that that was not the institution’s ultimate goal.

  35. Gravatar of Morgan Warstler Morgan Warstler
    3. April 2012 at 19:15

    “It makes no sense to talk about support or opposing fiscal policy. Unless someone favors an economy with purely private choices over which resources to consume, they support fiscal policy.”

    Gotcha!

    That’s pure foolishness.

    The correct answer is: the people who matter favor an economy with as much private choice over which resources to consume as possible.

    Fiscal is just to keep the pleebs from rioting. The goal is to do the least amount of Fiscal (and Monetary) as possible.

    Your problem really is you want the unemployed to count in the equation far more than they really do.

    The jobless are the least productive. Pretending we are missing giant growth gains from them being sidelined is not economics. It isn’t when DeKrugman does it, it isn’t when Mosler does it.

    We can employ everyone, we just need to do my Guaranteed Income plan and auction everyone.

    Everyday the world becomes a little more libertarian. Even the world of MMT.

    Accept your medicine.

  36. Gravatar of Major_Freedom Major_Freedom
    3. April 2012 at 19:48

    MF, If the Fed increases the money supply by giving money away, how do they later reduce it?

    The same way any counterfeiter of money and artificial market maker for moldy hamburgers would do it. They would buy moldy hamburgers for a higher than market price, thus creating an artificial market for them, and then, if they wanted, they can sell the moldy hamburgers they previously purchased back to those who tend to be the initial receivers of new money when the Fed buys moldy hamburgers to increase the money supply.

    The money the Fed gives to the initial receivers is money the initial receivers would not have gotten, if they instead had to sell their moldy hamburgers in the market of individuals who can’t create their own money.

    Or, the Fed could also just sit back and not create any new money when moldy hamburger backed money (credit expansion) from the banking system goes into default after an inflationary boom, thus the aggregate money stock declines.

    It is an absurd and silly belief to suggest that just because the initial receivers are sending “something” to the Fed, that somehow the Fed is not “giving” away money to those initial receivers. By that silly logic, you should not consider me to be giving any money away to anyone if I printed money in my basement and then bought your dirty socks for $1 million a pair. “Oh, you can’t accuse me of giving money away! The people are selling me their dirty socks! They have to give something up to get the money!”

  37. Gravatar of Major_Freedom Major_Freedom
    3. April 2012 at 19:54

    ssumner:

    Oh, and way to do the oh so expected response of ignoring the substantive points I made about inflation affecting relative prices and thus affecting the real productive structure of the economy, and instead focusing on a completely tangential point about whether or not we should consider the Fed to be “giving away” money to the initial receivers.

    If I purchase your dirty socks for $1 million of newly created money, then my actions and your subsequent spending are bringing about a change in relative prices and spending, and leads investors to reallocating capital for purely monetary reasons, and not consumer preference change reasons.

    That’s the substantive point.

  38. Gravatar of Jim Glass Jim Glass
    3. April 2012 at 23:00

    @dwb

    No i completely disagree, here are some big ones as i see it, FWIW:

    1. MMTers … DENY that reserves constrain lending. It took about 275 posts on Nick Rowes blog to get to the heart of the issue: MMTs think that the fed elastically supplies reserves at the target rate (true for only about 6 weeks). What happens when the Fed no longer targets interest rates but targets MS, or when the Fed changes IR targets after 6 weeks… well, I am still a little unclear on because I get responses like “well, then the CB is doing fiscal policy”. what? …

    Yes. I had Mosler, personally, & his Minions beat me about the head and neck with this 15 years ago on usenet, back when they were calling themselves New Chartalists. (Boy, rarely has a name change produced such marketing benefits.) “The supply curve for money is horizontal” they told me. I still have the messages saying that in my files. Whatever is needed money-wise arrives at the interest rate. Their reaction to questions about what happens when the Fed changes interest rates was just as you describe.

    In the same vein, on Reddit I just had a self-proclaimed MMTer repeatedly, carefully explain to me that the increase in the growth rate of the Zimbabwean money supply during 2008 from 81,143% to 658 billion percent, and the resulting inflation rate of 6.5 x 10^108% (!), were “symptoms” (he insisted on this word) of the economy’s demand for money pulling this much into existence. Because that’s where money comes from. Production collapsed, demand remained the same (?), thus prices went up as demand exceeded production, thus the additional money had to appear as a symptom of the real economic problems. (“Perspective” did not impress in this discussion: production falls by 50%, money supply increases by 658 billion percent??)

    Now this guy was loopy by anyone’s standards, but lots of other Reddit-quality MMTers make the same argument, and they cite more sophisticated MMT web pages that make not such a different argument with a lot of more sophisticated sounding words. By their most loopy disciples one can get a sense of the direction of the fundamental concepts of the prophets.

    But like I said, as I got this from Mosler himself at the beginning, back in the last century, I didn’t need the 275 posts at Rowe’s to grasp the notion.

    I am looking for a way to get the Reddit-MMTers together with the Reddit-Austrians. That’s a meeting I’d enjoy witnessing. :-)

  39. Gravatar of Jim Glass Jim Glass
    3. April 2012 at 23:05

    @dwb

    I can call a tail a leg, its still a tail.

    I had another MMTer of some repute explain to me that the government does not borrow, it creates money by spending and destroys money upon receiving it (via taxes or borrowing). I noted that the law requires non-tax financed spending (deficit financed spending) to equal borrowing. He said yes. I said, that is exactly equal to the situation that the rest of the world calls “spending borrowed money”. He said yes, but really it is destroying money and creating money.

    I said: Why don’t we just call it the ‘death and resurrection’ of the same money?

    He said: “I like that!”
    ~~~

    Re your MMT rant:

    “Mosler ran a bank he knows what hes talking about”

    Mosler deduced that it was impossible for a fiat currency nation to default on its debt. Then $850 million of investments he managed went “oops” when Russia defaulted. And to quote WaPo, he still today “insists that if it [Russia] had only acted like a country with its own currency, default could have been avoided.” Of course, it acted exactly like a country with its own currency.

    To me, new chartalism, er MMT, in a nutshell has always been Mosler’s crowing about how he had to take it upon himself to teach an incredulous Larry Summers about the Paradox of Thrift, quote:
    ~~~
    Asst. Treasury Secretary Lawrence Summers didn’t understand reserve accounting? Sad but true.

    So I spend the next twenty minutes explaining the ‘paradox of thrift’ step by step, which he sort of got it right when he finally responded “Ah, so we need more investment which will show up as savings?” I responded with a friendly ‘yes’ after giving this first year economics lesson to the good Harvard professor and ended the meeting.
    ~~~~~

    See, it is posing. That’s why they change the meanings of words; why, as our host says, when you cite one of them as saying something others say ‘no, no, no’; it “sounds like obfuscation” to you; and it gives you a headache when you try to take it seriously.

    It doesn’t give me a headache at all. I enjoy watching the poses.

  40. Gravatar of Jim Glass Jim Glass
    3. April 2012 at 23:15

    If I purchase your dirty socks for $1 million of newly created money, then my actions and your subsequent spending are bringing about a change in relative prices and spending

    MF, would you be interested in coming over to Reddit.com and saying hello to some people I know? :-)

  41. Gravatar of James in London James in London
    3. April 2012 at 23:25

    Unbelievable. Monetary economics is one thing but political freedom and social stability another. I can’t rely beleive you and your commenters can’t spot the truly massive correlation.

    Go to Wikipedia and read about the political history of the top three countries in your table during those years and the bottom three. Give me freedom or give me death. Liberal democracy or dicatorship?

    The negative political consequences of high inflation are a real cost in terms of human happiness. What about the emotional and psycological costs from the fear, insecurity and death from those dictatorships?

  42. Gravatar of W. Peden W. Peden
    3. April 2012 at 23:55

    AFG,

    “Base money can only become cheaper relative to the goods it purchases. Is money cheaper (is there inflation) if the only the price of financial assets rise? Money won’t necessarily be cheaper vs. food, houses, and whatever else is constraining the budgets of households.”

    (1) The first sentence is correct. The important type of good that base money is purchasing, at the first stage here, are financial assets.

    (2) Increased financial asset prices make it easier for borrowers to borrow and for banks to finance their borrowing.

    (3) This money creation increases the BROAD money stock.

    (4) Goods are now cheaper in relation to the broadly defined money stock, creating an expansionary disequilibrium (and/or righting a contractionary disequilibrium). As private sector agents possess excess broad money holdings, they get into a dance of the dollar until the nominal value of goods and broad money matches up.

    (5) The above process entails nominal spending returning to its pre-recession trend.

    “More importantly, why would we prefer this over fiscal policy? As I understand it, monetary policy is supposed to be preferred because it DOESN’T affect relative prices.”

    I’ve never actually heard this argument before you mentioned it. My main preference for monetary policy over fiscal policy due to the facts that (a) fiscal policy already has more than enough jobs to do & therefore fiscal stimulus shouldn’t be used unless somehow essential, (b) fiscal policy is either going to consist of politically hard-to-reverse tax cuts or increasing government spending which changes the size of government relative to the private sector, and (c) apart from funding policy which is politically very hard to use for stimulus, fiscal policy is much, MUCH less flexible and responsive than monetary policy.

    “Would we want a NGDP target where a disproportionate amount of the nominal growth comes from asset prices increasing?”

    Let’s distinguish two things: NGDP targeting as a policy over the long-term and NGDP targeting in our present post (we hope) recessionary environment. Given what has happened to asset prices over the last four years, I think that any NGDP targeting at a higher level than we currently have is going to require increasing asset prices. A successful fiscal stimulus will produce that result just as surely as a successful monetary stimulus. Even a straightforward underfunding policy is going to work largely by increasing the prices of government bonds (and all financial assets in proportion to the degree to which they are substitutes- quite a mouthful!) as the government sells fewer bonds and creates money.

    That’s quite different from whether NGDP targeting by the central bank as a policy over the long-term causes “disproportionate” increases in asset prices. The main counter-question there is: relative to what?

  43. Gravatar of Peter N Peter N
    4. April 2012 at 00:04

    “A second issue involves the effect of the large volume of reserves created as we buy assets. [. . .] The huge quantity of bank reserves that were created has been seen largely as a byproduct of the purchases that would be unlikely to have a significant independent effect on financial markets and the economy. This view is not consistent with the simple models in many textbooks or the monetarist tradition in monetary policy, which emphasizes a line of causation from reserves to the money supply to economic activity and inflation. . . . [W]e will need to watch and study this channel carefully.”

    Donald L. Kohn, Vice Chairman of the Federal Reserve Board, March 24, 2010

    as quoted in an FRB discussion paper which also contained this:

    “Casual empirical evidence points away from a standard money multiplier and away from a story in which monetary policy has a direct effect on broader monetary aggregates. The explanation lies in the institutional structure in the United States, especially after 1990. First, there is no direct link between reserves and money–as defined as M2. Following a change in required reserves ratios in early 1990s, reserve requirements are assessed on only about one-tenth of M2.4 Second, there is no direct link between money–defined as M2–and bank lending. Banks have access to non-deposit funding (and such liabilities would also not be reservable), so the narrow bank lending channel breaks down in theory. Notably, large time deposits, a liability that banks are able to manage more directly to fund loans, are not reservable and not included in M2. Banks’ ability to issue managed liabilities increased substantially in the period after 1990, following the developments and increased liquidity in the markets for bank liabilities. Furthermore, the removal of interest rate ceilings through Regulation Q significantly improved the ability of banks to generate non-reservable liabilities by offering competitive rates on large time deposits. Additionally, money market mutual funds account for about one-fifth of M2, but are not on bank balance sheets, and thus they cannot be used to fund lending. These facts imply that the tight link suggested by the multiplier between reserves and money and bank lending does not exist.

    Finally, the assumed link in the textbook version of the money multiplier between the creation of loans and the creation of demand deposits is dubious. According to the standard multiplier theory, an increase in bank lending is associated with an increase in demand deposits. The data as discussed below do not reflect any such link.”

    After which comes a ton of mind numbing data crunching.

    http://www.federalreserve.gov/pubs/feds/2010/201041/

    lead author is:

    Seth B. Carpenter
    Assistant Director
    Division of Monetary Affairs
    Chief, Monetary and Reserve Analysis Section
    Contact Information
    202-452-2385
    seth.b.carpenter@frb.gov
    Fields of Interest
    Monetary Policy
    Financial Markets
    Education
    Ph.D., Economics, Princeton University, 1997
    M.A., Economics, Princeton University, 1994
    B.A., French and Economics, The College of William and Mary, 1992
    Professional Experience
    Board of Governors of the Federal Reserve System, 1999-present

  44. Gravatar of James in London James in London
    4. April 2012 at 00:13

    Also, very strange movements in the 10yr US Treasury last night on “no QE3 for now” message from the FOMC minutes. Most charitable views is that the market is confused by the Fed. The intitial reaction was to strongly sell the 10yr as they believe the Fed’s (not very) newly-revealed view that the economy doesn’t really need QE3 at the moment? Equities fell at first, thinking they actually need QE3. But then equities saw the bond market reaction and went up? Today the 10yr Treasury move is being reversed. Well done, Ben!

  45. Gravatar of W. Peden W. Peden
    4. April 2012 at 00:24

    James in London,

    “Most charitable views is that the market is confused by the Fed.”

    I wouldn’t blame them.

    PS. Does the Big Society Bank remind anyone else in the UK of 1920s liberalism? “Public-private partnerships” bringing us into a new era of prosperity and all that stuff. Of course, in practice these partnerships seem to have the democratic accountability of the private sector combined with the efficiency of the public sector…

  46. Gravatar of Bonnie Bonnie
    4. April 2012 at 00:24

    “Take the top 20%. They are the boss, they set up the govt., they pay the govt., the first rule of all of it is DO NO HARM TO THEM.”

    “No, we set the system up to protect out private property from the 80% and the dirty hippies that might try to roust them up.”

    Wow, just wow. Is this why we have a gazillion Federal agencies trouncing on the 4th and 5th Amendments on a constant basis? The problem is that your so called 20% has been caught with its hands in other peoples’ cookie jars, some that have only crumbs and others that are half full, via said crony, kleptocratic government and come to find out, they’ve done it until theirs are so stuffed they can’t even put the lid on it. That isn’t libertarianism.

  47. Gravatar of Peter N Peter N
    4. April 2012 at 00:39

    “Peter, It seems to me you are mixing up real and nominal variables. Monetary policy controls nominal aggregates, including nominal spending on toasters and nominal bank loans. Capital requirements control real bank loans, and demand for toast determines real spending on toasters. (I mention toasters merely to illustrate the general concept, which has nothing to do with banks per se.)

    Capital requirements are enforced by the FDIC. They apply to the kind of dollars banks hold – nominal. AFAIK only the FED will deal with you in real dollars, and that’s in borrowing not lending.

    One of the great fears of deflation is the dynamics of nominal debt.

    Banks have risk weighted asset to capital ratios they must meet. If they’re over the limit and can’t get back under, the FDIC will liquidate them. As of a few years ago 40% of bank lending was right up to the limit 10% IIR, Pretty much all the rest was 13% or under. There’s wasn’t a lot of room for additional lending.

    Which aggregates do you mean? Control of M1 and M2 appears to be different. Part of the problem, of course, is that M1 and M2 aren’t Divisia aggregates. The Fed apparently calculates these for internal use but doesn’t release them. I suspect it’s just a coincidence that they make the results of Fed policy look worse.

    Then there’s the late lamented M3. I don’t believe Barnett has posted the charts in his book to the net, so you’ll have to buy the book to see Divisia M1 and M2. It’s a good book.

    The Divisia aggregates look to be a lot more useful for monetary policy.

  48. Gravatar of James in London James in London
    4. April 2012 at 00:48

    W Peden
    “Big Society Bank”: I think it’s just a farce, designed to show the government is “doing something”. It might be tragedy, a “Big Society” need a “Big Brother” to enforce all that altruism. More likely it is just more farce as our government is too hopeless and society too free to have it meaningfully enforced.

    Meanwhile let’s just do more of the party now/pay later policies like the Royal Mail pension scheme privatisation “gains”.

  49. Gravatar of dtoh dtoh
    4. April 2012 at 03:45

    Scott,
    You said; “I think in your first comment you are confusing spending and consumption, or perhaps nominal and real variables. I’m not claiming that people will consume more if they have more money in their pockets. They might save it (i.e. spend it on investment goods.)”

    No. I’m using “spending” very carefully. If I hold a Tbill and you are willing pay me a higher price for the Tbill than what I could get until now, I may be content to hold money instead of the Tbill. You now hold the Tbill, I hold the money. There is no increase in spending (either consumption or investment goods). However, because the return on the Tbill is lower (higher price), people are now inclined to exchange Tbills for real goods (assets, hamburger, etc). We may just be arguing about semantics, but in fact the mechanism is quite different.

    You said; “In aggregate, the public never exchanges financial assets for real assets. Financial assets are claims to real assets. If you exchange them, one person’s gain is the others loss.”

    Sure, and on a net basis there are no financial assets because everyone’s asset is someone’s else liability. However, the creation or elimination of that aggregate asset/liability often is the result an exchange of real goods. If the cost of credit goes down (financial asset prices go up), then people spend (consume/save) more on real goods.

    You said; “A change in interest rates has an unclear impact on the economy. It depends why rates change.”

    Yes but ceteris paribus, a decrease in real rates (i.e. a real price increase) of fixed income assets will induce an increase in spending.

    You said; “A permanent increase in the money supply increases current nominal spending, regardless of the level of nominal interest rates.”

    Not necessarily true. Only if the drop in V is less than the increase in M. If nominal rates are very low or zero, the drop in V could be larger.

    You said; “Again, never reason from a price change. During booms the price of Treasury bonds usually falls, not rises.”

    Yes. Precisely because they are exchanging (selling bonds) to buy real assets/goods. As soon as investors anticipate a slow down, bond prices will start to rise. Or you can do it the other way around. The Fed sells bonds, which drives their price down and people spend less and buy more financial assets.

    Scott, I think your conclusions are right, but unless you provide a concise and accurate explanation of the mechanism, there are a lot of people who will remain unconvinced.

  50. Gravatar of dwb dwb
    4. April 2012 at 04:02

    @Jim Glass

    I am looking for a way to get the Reddit-MMTers together with the Reddit-Austrians. That’s a meeting I’d enjoy witnessing.

    putting a particle and anti-particle in the same space: they’ll annihilate each other (and leave 1 oz of gold?). sounds like fun.

  51. Gravatar of Morgan Warstler Morgan Warstler
    4. April 2012 at 04:52

    Bonnie, before there is fiat money and before there is govt. there is a guy with a big pile of stuff, and he wants to make sure he keeps his stuff.

    So he hires a bunch of big guys to protect his stuff.

    Yep property rights come from force / guns etc.

    This is where govt. comes from. It’s purpose at its very base is to protect the property rights of those who are creating value.

    It doesn’t come from “everybody” getting together voting to share property with one another.

    GOVT. doesn’t strong arm its way into existence, it goes around with hat in hand to those guys with property and promises to do a really good job quickly building roads all the while making sure to keep protecting their property.

    This is just the facts of life.

    That document you are talking about was created by and for the Interests of property holders. They we so biased they didn’t even really imagine more than half the adults alive mattered at all.

    A far more recent example of this comes from the fall of USSR. No currency. No Govt. But there absolutely were guys with piles of stuff and they were paying big guys to stand around and kill anyone who touched their stuff.

    And those guys got together and formed the new govt.

    —–

    Look, our life doesn’t have to be this mean, day to day, BUT… when MMTers start talking like:

    GVT. can do whatever it wants.

    The fact is no it can’t. Its roots, it’s foundation, it keystone is based on the not just individuals, but the KIND OF individuals who formed it in the first place.

    And MMT wants to grabs the reins of govt. and use it in ways that do harm to the very people who are the foundation, the keystone, etc.

    It’d be like saying the National Organization of Women’s first focus from now on was going to be goat herding.

    What this country is, who we are, has protein deep genetic code written into our founding documents that absolutely favors distributed localized power which means millions of big fish in small ponds who are more than comfy if push comes to shove, hiring big guys with guns to stand around and protect their property.

    MMT is offensive in sight and smell.

    And if egghead economists find it logically impossible, that nice and all, but the deeper truth is the one that matters most:

    Money, monetary policy, govt. itself does not exist in a vacuum – it must be nodded into existence and certain folks have much heavier heads for nodding than others.

  52. Gravatar of J.V. Dubois J.V. Dubois
    4. April 2012 at 04:58

    Very nice post. I would just add another thing that may somehow explain the MMT position. The key really lies in realizing that banks are really “capital constrained”, which means that banks need to have enough capital (such as shareholder equity) in proportion to risk-weighted assets. Government bonds and cash reserves (from client deposits) at CB carry zero risk for a bank, mortgages and other commercial loans carry some risk.
    So how does CB comes into the picture? What is the “transmission mechanism” if banks really, really do not need reserves (just capital) to create “money”? The CB has huge weapon – they can print money and buy instruments that compose the capital reserve requirements. Government bonds are obvious, but lately we found out that CB is willing to buy residential mortgages too and maybe if things would really go south they could buy just about any debt that banks have. And this is what I think is what I think MMTers mean by “monetary – fiscal” policy. The point is that if CB buys bonds from commercial banks, nothing changes from capital adequacy point of view. Banks just exchanged one zero risk asset (government bond) for another zero risk asset (cash). The only thing that can change bank’s capital adequacy is if CB is willing to offer cash in exchange for higher risk weighted assets (such as mortgages or commercial paper). This is where banks suddenly start to feel healthy and can start offering loans.
    But if CB buys risky loans from commercial banks, it just means subsidy in case loans are riskier than what CB paid for them (and what is the only case that such purchase would increase capital adequacy of the given banks). Subsidy is surely domain of fiscal policy as it carries political consequences. That is why I think that monetary transmission mechanism is important. It is all and well for CB to intervene in NGDP futures market. But what if something happens so that CB did not reach the target NGDP level? Surely they can promise to print more money – but then what? What are they supposed to buy by this money? Government debt held by banks? Sorry, this will not work out as it will not change capital adequacy for banks. Will they start buying mortgages, Dow Jones indexed stocks or will they send out cheques for $1000 to every citizen? Sorry, this is really very close to a fiscal policy.

  53. Gravatar of dwb dwb
    4. April 2012 at 05:10

    @dtoh

    unless you provide a concise and accurate explanation of the mechanism

    mechanism for what?

  54. Gravatar of ssumner ssumner
    4. April 2012 at 06:12

    AFG, What is the deadweight loss of buying a tiny amount of T-bills? If you don’t want monetary policy to stabilize NGDP, what do you want it to do? What should it target?

    If we had done monetary stimulus back in 2008 the Fed would have ended up buying far fewer T–securities than it has actually bought. Hence if you are worried that purchases of T-securities distorts markets (I’m not) then you should favor more monetary stimulus.

    I see no reason to put both policies under one roof. But if we do, monetary policy should try to target NGDP, and fiscal decisions should be based on standard cost-benefit analysis, under the assumption that the multiplier is zero.

    Mark, You said;

    “That’s only because we haven’t had enough practice. We know aggregates don’t work because of their failure under Volcker”

    I strongly disagree. Volcker succeeded in bringing inflation down from 12% to 4% with money supply targeting. That’s a big win. I don’t favor money supply targeting, but I’d vastly prefer it to interest rate targeting.

    It seems like your reply to my first point is agreement, not disagreement.

    MF, Steady NGDP growth doesn’t affect relative prices, unstable NGDP growth does.

    James of London, Ummm, you do realize I oppose those high inflation policies, don’t you? My policy would deliver inflation rates lower than any country on that list.

    Peter N. None of the analysis in this entire blog refers to the money multiplier analysis. I don’t regard the multiplier as being right or wrong, but rather a concept that is not useful.

    dtoh, You said;

    “Yes but ceteris paribus, a decrease in real rates (i.e. a real price increase) of fixed income assets will induce an increase in spending.”

    I strongly disagree. Ceteris paribus prices never change. If prices change, then ceteris isn’t paribus. Something caused that change in interest rates. How it affects the economy will depend on what caused the change. If rates fall due to bearish business prospects, investment will fall. If rates fall due to easy money, investment will rise.

    You said;

    “Not necessarily true. Only if the drop in V is less than the increase in M. If nominal rates are very low or zero, the drop in V could be larger.”

    That’s obvious, you are just restating a lack of increase in NGDP in different words. But I’m making a behavioral claim. I claim more money will boost spending, because people are rational utility maximizers. I’m not claiming it’s a tautology.

    The mechanism is “the expected hot potato effect.” Surely that’s “concise and accurate”. Normally in economics we assume that if someone decide to (exogenously) produce more of a good or asset, its value falls. That’s all I’m assuming. The burden of proof is on those who think you can permanently flood the economy with worthless fiat money, and not get inflation.

    JV, The Fed has never run out of government bonds to buy, and it never will. If it does, then just cut the IOR.

    This post isn’t aimed at MMTers, a philosophy I’ve never been able to understand. I don’t discuss banking, because unlike MMTers I don’t think banking system intermediation plays an important role in the money supply process. I focus on the supply and demand for base money–now that we have IOR, currency is the key.

  55. Gravatar of James in London James in London
    4. April 2012 at 06:48

    “James of London, Ummm, you do realize I oppose those high inflation policies, don’t you? My policy would deliver inflation rates lower than any country on that list.”

    Good to hear. Motherhood and apple pie. No one wants those high inflation rates. No central banker sets out to achieve those high inflation rates.

    “Events, my dear boy, events” can overtake the best central bankers. Politicians (and generals) can and do get addicted to QE, as your table proves, and then they don’t deliver on their fiscal responsibilities.

    I have read your blog for a few years now and do sympathise with your views, but US politicians are so dysfunctional at the moment that it is a big gamble to think they will sober up if the NGDP starts growing nicely. They are more likely to carry on cutting taxes for the rich and increasing spending on the poor, just like they have for the last thirty years.

  56. Gravatar of Major_Freedom Major_Freedom
    4. April 2012 at 06:57

    ssumner:

    MF, Steady NGDP growth doesn’t affect relative prices, unstable NGDP growth does.

    No that’s false. You’re still fallaciously imagining inflation to be dropped from helicopters into everyone’s bank accounts equally.

    NGDP rising at a steady rate does not mean every individual’s spending is rising the same! Money is still entering the economy at only distinct points and to specific people first!

    The relative price and spending changes occur due to the physical mechanics of inflated money entering the economy at only distinct points; to certain people first before all others. The changes are not due to a minimum rate of money inflation being “breached.”

    If I merely alter the rate at which I print money in my basement, before giving it to only a particular person or group of people first, it still won’t change the fact that relative spending and prices are being altered by my printing and spending. They MUST be altered due to the fact that only some people are getting the new money first and spending it before all others.

    One person or group of people getting new money first before all others, and the resulting change in relative spending and prices, is fully consistent with “steady NGDP growth”.

    Serious question: Do you actually believe that in our monetary system, newly created money increases every individual’s cash balances and their spending equally across the board, right after the new money is created and spent? That if the Fed gives the banking system newly created money, every cash account holder in the country will see an equal boost in their cash holdings? No? Then you MUST admit that inflation kn our monetary system alters relative spending and prices.

  57. Gravatar of Bonnie Bonnie
    4. April 2012 at 06:58

    Morgan:

    I understand your point, but the Federal agencies that break our basic law every day are not intended to operate on the people who, as you say, don’t matter. They operate on the marginal, the people in the middle, mom and pop joints, and ambitious upstarts. They are nothing more than the National Recovery Administration broken up into millions of little pieces, and are not used only to protect property of the big guys, but for more sinister things like deprivation of opportunity and free use of private property by those who threaten them on honest terms. The corporate safety net is a big problem too, when everyone is taxed to save these big guys from the market effects of their own behavior.

    The history of the United States from 1783-1815 is full of struggles against the big guys trying monopolize commerce. It’s why there are the states of Kentucky and Vermont. It’s why the Whiskey Rebellion happened. It why the War of 1812, the Louisiana purchase, and Erie Canal happened. It’s all because the guys in the middle do matter, yet get treated like slaves to an unspoken aristocracy.

  58. Gravatar of bill woolsey bill woolsey
    4. April 2012 at 07:05

    JV. Dubois:

    The “real” problem with MMT is a confusing of money and credit.

    They are explaining the supply of bank loans.

    Market Monetarists aren’t trying to explain the quantity of bank loans. Instead, we argue that the quantity of money, which includes bank deposits, impacts spending on output. Whether banks make loans or not is of little direct interest.

    Sumner is confusing on this matter because he focuses (for good reason) on the quantity of base money. That is hand to hand currency plus the bank’s reserve balances at the Fed. Sumner want’s to abstract away from all of the bank deposits that serve as money for businesses and households. The price of a one dollar deposit is one dollar of base money, which is enforced by redeemability. Any bank must stand ready to pay off its deposits with base money. And so, for Sumner, bank deposits can be ignored.

    I have my doubts about whether ignoring bank deposits is a good idea, but the problem with these MMT people is that their favorite subject appears to be the relationship between base money and bank loans (or lack of such a relationship.)

    This is beside the point for Market Monetarists because we aren’t trying to explain the quantity of bank loans.

    Perhaps bank loans are contrained by capital requirements, but the amount of bank deposits are not limited by capital requirements.

  59. Gravatar of Negation of Ideology Negation of Ideology
    4. April 2012 at 07:18

    Scott,

    Let me just say this is my favorite blog post from you so far. You provide a lot of insight into your thinking.

    “We should think of IOR as a tool that allows the Fed to hit two targets, a trend rate of NGDP growth (achieved by long run increases in the monetary base at roughly the desired rate) and an optimal ratio of base money to GDP.”

    I’d like to suggest that the optimal ratio of base money to GDP is the one that maximizes seigniorage profit for the government and thus the taxpayers (assuming the same trend growth of NGDP). That’s not necessarily the highest possible ratio, because a higher ratio implies higher IOR payouts. I do think it would be much higher than 6% of GDP though.

    “Milton Friedman dreamed of an economy saturated with liquidity, which is costless to produce.” Sounds good to me.

  60. Gravatar of dwb dwb
    4. April 2012 at 07:30

    @MF
    One person or group of people getting new money first before all others, and the resulting change in relative spending and prices

    no: if banks get more base they do not “dole it out.” Mechanically, their funding costs decrease so they make loans to fund investment projects (more of which are profitabe with lower financing costs). But I do not think the details of the transmission mechanism are all that important.

    There is no “inflation” promise under ngdp targeting, quite the opposite. prices and output are *more* stable because the Fed also promises that any “above trend” growth is borrowed from the future, and vice versa.

    Now, i really dont see anything in your argument that does not apply to (say) a gold standard. under a gold stanard, somebody (a miner) discovers gold and they spend it first, putting it into the bank. plenty of big inflations under the gold standard during gold rushes.

    If you replace “fiat money” with gold and ensured that the gold supply would increase (say) 4.5% per year (and no country would hoard it etc, all-internal supply) you would essentially have 4.5% NGDP growth.

  61. Gravatar of Cthorm Cthorm
    4. April 2012 at 07:55

    Scott -

    Off topic a bit again. But Salman Khan (of KhanAcademy fame) has a great video about the CPI index and covers a lot of the issues you’ve talked about in the past. He even points out how the housing numbers imply an inflation overshoot around 2003-2006 and then a deep deflation from 2008-2009 (the video is from 2009).

    CPI Index

  62. Gravatar of J.V. Dubois J.V. Dubois
    4. April 2012 at 08:41

    Bill: “Perhaps bank loans are contrained by capital requirements, but the amount of bank deposits are not limited by capital requirements”

    I think this is incorrect. Let’s assume that there are no reserve requirements (in practice banks are able to switch money from checking accounts that require reserves to saving accounts that do not require any reserves and report them as such to FED). Let’s assume this extreme scenario – all bank loans are spent to buy shares in banks. In this situation the “money in circulation” (meaning money deposits) can increase to infinite. If banks have capital requirements (for risk-weighted assets) of 6%, and since deposits have 0 risk, that means that every dollar of capital (e.g. value of bank stocks) can “create” new 16 dollars of (100% risk commercial) loans – of course if banks wish to make these loans. This is similar mechanism to that of the money multiplier. In some countries banks do not have to hold any “reserves” in CB money to back-up redeemability of customer’s deposits. Reserves are there just to clear interbank money operations.

    So now the point is, that if CB buys assets from banks, from capital requirements point of view this really is only switch from one zero risk assets to another. The point is that banks are not subject to “hot potato effect” since for banks, money itself is just a form of “capital” that is required by law (of capital adequacy) to do their business – which is offering loans. For banks, money (or bonds, or other zero risk financial assets) is the same as fire medical kits are for other companies – they are there just to comply with government regulation.

    And now I hear yours and Scott’s argument that it is not possible to have permanently growing “money base” without inflation and all that. But nobody argues that. It is completely sufficient to have such situation for like 2 years for recession to happen. In the end, we are talking about business cycles, so I could say that there cannot be “permanent” demand driven recession (as even sticky prices will adjust in time etc.), but that does not mean that we are not supposed to deal with short or medium term situations.

    Just to conclude, this is where fears of Nick’s people of “concrete steppes” come in. Your theory of CB as expectation driven (and expectations forming) Chuck Norris preventing recession just by being there seems to be logical and correct – until it is not. And then we have to come with concrete steps of how to do things – should Chuck use his punch or roundabout kick to put people in line? What? Chuck has his hands and legs tied? Then we are in trouble again.

  63. Gravatar of david stinson david stinson
    4. April 2012 at 08:48

    ” We should think of IOR as a tool that allows the Fed to hit two targets, a trend rate of NGDP growth (achieved by long run increases in the monetary base at roughly the desired rate) and an optimal ratio of base money to GDP. For the US, the base to GDP ratio is normally about 6% (when nominal rates are above zero and there is no IOR.) ”

    Hi Scott. Up until now, I have thought of your preferred policy as the Fed targeting NGDP futures via fairly mechanical open market operations. In that scenario, I would have thought that the base simply falls out of the Fed’s OMO. The base/NGDP ratio (and money stock) would fall out of NGDP growth expectations and market interest rates (which also effectively fall out of NGDP growth expectations). The IOR is determined along with market interest rates and the interbank/overnight market. The notion of the Fed trying to maintain an optimal base to GDP ratio and fuss with setting the IOR as a separate tool seems arbitrary and potentially prone to things working at cross purposes (doesn’t it?). How would they know what the optimal base to NGDP ratio was? History seems a bad indicator unless you think monetary policy was on average optimal over the past century (laughs maniacally).

  64. Gravatar of D R D R
    4. April 2012 at 09:47

    Cthorm,

    There’s nothing weird at all about what BLS wrote. The CPI includes in its basket shelter services. If the cost of producing such services doubles, this should be reflected in the CPI only if the price of shelter services actually doubles.

  65. Gravatar of 123 123
    4. April 2012 at 09:51

    “123, I’m not sure I follow that. You don’t need IOR to control NGDP, the base will do fine.”

    Monetary policy should anchor NGDP expectations. This means that there are two targets – level of NGDP expectations should be right and risk premium on NGDP expectations should be low.

    Because there are two targets, two instruments are needed. Bernanke knew he needed the second instrument.

    IOR should reward holders of base money if NGDP comes above the path, and it should penalize them if it comes below.

    Size of the monetary base should keep the risk premium on NGDP expectations at the socially optimal level.

  66. Gravatar of dwb dwb
    4. April 2012 at 12:03

    @J.V. Dubois

    …CB buys assets from banks, from capital requirements point of view this really is only switch from one zero risk assets to another.

    Your theory of CB as expectation driven (and expectations forming) Chuck Norris preventing recession just by being there seems to be logical and correct – until it is not.

    Your analysis is incomplete because liquidity flooding the markets is changing interest rates, altering the consumption/investment decision. First, capital is not static (banks can raise capital or adjust their capital plan in response to changes in the cost of capital & liabilites). Second, lets say you are right, loan production does not increase. so what? the interest on riskier assets declines and people consume more. No one is trying to claim that loan production is the ONLY (or even most relevant) mechanism for monetary transmission.

    On the expectations: you are right, you have to have a back-up plan for the unexpected. see above.

  67. Gravatar of Cthorm Cthorm
    4. April 2012 at 12:19

    DR,

    What the BLS wrote might make sense for shelter services. But it makes absolutely no sense for owner-occupied housing! If you think the right decision is to emphasize consistency on shelter services rather than consistency on owner-occupied housing, I think it’s time to layoff the mushrooms.

  68. Gravatar of bill woolsey bill woolsey
    4. April 2012 at 12:20

    Dubois:

    Deposits aren’t assets at all.

    If the central bank buys government bonds from a bond dealer, the bond dealer’s deposit account is increased by the amount of the bond puchase. The bond deal replenishes its inventory by purchasing bonds from firms or households. The deposits are shifted from the bond dealer to the firms or households.

    Members of the nonbanking public now have deposits. No bank loans were made.

    The central bank credits funds the banks’ reserve deposit accounts. There are no capital requirements on these reserve balances.

    The banks have more reserves as assets and more checkable deposits as liabilities.

    The households and firms have more checkable deposits and less government bonds.

    The central bank has more government bonds as assets and more reserve balances held by banks as liabilities.

    The banks can, if they want, purchase government bonds as well. These have no capital requirements from there perspective.

    When they buy them from the dealer, they buy some of them from households and firms. The households and firms have more money in their checking accounts.

    The households have more checkable deposis and less government bonds.

    The banks have more checkable deposits as liabilities and more government bonds as assets. (This is the money multiplier working without bank “loans” or requirements for additinal capital.)

    The limit on the issue of deposits is that a dollar of deposit is redeemable for a dollar of base money. So, I don’t think that an infinite quantity of deposits can be issued.

  69. Gravatar of bill woolsey bill woolsey
    4. April 2012 at 12:32

    I don’t believe that the simple money multiplier account of changes in the quantity of base money is realistic. It provides insight.

    The point, however, is to see what happens to the quantity of money, not the quantity of bank loans.

    If banks use excess reserves to purchase already existing government bonds, then the quantity of money changes just like it would if the banks make loans.

    And that is the point. Not what determines bank loans, but rather, have banks create money.

    I am quite aware that central banks target short term interest rates. However, the way they do it is by adjusting the quantity of base money. I don’t mean that they first change the quantity of base money. I mean it is their ability to create and destroy base money that gives them the ability to impact interest rates at all.

  70. Gravatar of D R D R
    4. April 2012 at 12:33

    Cthorm,

    It’s a CONSUMER price index. You know, an index which is supposed to measure the price of a basket of goods and services consumed.

    I know we’ve been over this in comments on this site, but houses are capital goods. Period. If you wish to consume the services produced by capital goods you own, then that’s your business. But the price of the capital isn’t directly meaningful in terms of the market price of those services.

  71. Gravatar of Cthorm Cthorm
    4. April 2012 at 13:18

    DR,

    The fact that homes are capital goods is totally irrelevant. The cost of automobiles is included in the CPI, but I can’t eat it, and I wouldn’t advise burning it. How do they calculate the cost for the CPI for cars? That payment includes amortization too. It’s not substantially different from a mortgage. What the BLS does is like saying the price from Hertz Rent-a-Car is the cost of owning a car.

  72. Gravatar of J.V. Dubois J.V. Dubois
    4. April 2012 at 14:33

    Bill: Sure, if CB buys government bonds held by nonbank private sector, it directly increases the money in circulation. Such CB will lose effectiveness of money creation by commercial banks, but sure – if CB wants to change all government debt into money, they definitely could.

    The point here is – what if it would not work. Imagine that private sector would be really stubborn and they would refuse to spend that money on newly created goods and services. Everyone who sold bonds would just let the money sit in their bank accounts, and banks would just let that money sit as excess reserves. Let’s imagine that CB already bought so much bonds, that it is not consistent with the ammount of money that would be expected even if economy hit NGDP level target. Since everybody knows that CB is bound by NGDP level target, everybody knows that at some point in the future the CB will have to sell those government bonds back to the public. Such central bank by sticking to NGDP target would just have too much credibility to have any impact at all. Or in other words, Chuck Norris will lose his power.

    So my point is, that I generally agree with Scott (or was it Nick?) who said that there was never any case in history when CB wanted to reflate and it couldn’t. What could be argued is if it is possible to have CB that could only buy government bonds and that could fail to reflate. For sure the risk of failure is much higher than for CB that is able to buy not only government bonds, but also commercial bonds, stocks, land or that could directly invest in sovereign fund – just to reach their target. But than, such monetary policy starts to look like fiscal policy to me.

    PS: I am now playing devil’s advocate here. I do not believe that any of this will actually happen, but this is the closest that I got to understand MMT guys position.

  73. Gravatar of Major_Freedom Major_Freedom
    4. April 2012 at 14:34

    dwb:

    “One person or group of people getting new money first before all others, and the resulting change in relative spending and prices”

    if banks get more base they do not “dole it out.”

    Mechanically, yes, they do dole money out. They create new money that did not exist before, which is by nature unearned.

    Mechanically, their funding costs decrease so they make loans to fund investment projects (more of which are profitabe with lower financing costs).

    Mechanically, new money is entering the economy at only distinct points and to only certain people first. Their individual spending is what brings about a revolution in the structure of relative spending and prices.

    But I do not think the details of the transmission mechanism are all that important.

    Why, because Sumner doesn’t believe so?

    In truth, transmission is crucial to this point. It is precisely in transmission that relative price and spending changes occur on account of inflation.

    As long as money is not dropped from helicopters into every individual’s bank account equally, there is a transmission mechanism that brings along with it a change in relative spending and prices.

    There is no “inflation” promise under ngdp targeting, quite the opposite. prices and output are *more* stable because the Fed also promises that any “above trend” growth is borrowed from the future, and vice versa.

    Who cares. The point is that NGDP targeting is mechanistically identical to price inflation targeting when it comes to transmission and the resulting relative spending and price changes it brings about.

    Now, i really dont see anything in your argument that does not apply to (say) a gold standard. under a gold stanard, somebody (a miner) discovers gold and they spend it first, putting it into the bank. plenty of big inflations under the gold standard during gold rushes.

    EXACTLY. I am glad you brought up this oh so expected response of “the same thing happens in a gold standard!” Quite right, it does “also” happen in a gold standard. But then you are implicitly admitting it happens in an NGDP targeting fiat standard as well. I rest my case.

    Now, we can go further than simply saying the same thing happens in a gold standard. We can go further and say that unlike a fiat standard, ANYONE can dig up gold money in principle. They don’t need government permission. They don’t need to be a member bank. They don’t need to be in control of the Federal Reserve. That alone makes the comparison moot and shows the superiority of gold. It would be like saying “The state should not hold a monopoly on food production. Anyone should be free to produce their own food using their own property.”

    More importantly however, is that under a gold standard, there is far, far, far less wealth transfer and relative price and spending changes brought about by gold entering the economy at only distinct points. You say “plenty of inflations” but that’s incredibly misleading. Gold is not susceptible to inflation the way fiat money is suspectible to it. Sure, there might be a large gold discovery, but historically, the rate of gold production has been far more stable than the rate of fiat money production, and almost certainly will be far more stable in the future.

    If you replace “fiat money” with gold and ensured that the gold supply would increase (say) 4.5% per year (and no country would hoard it etc, all-internal supply) you would essentially have 4.5% NGDP growth.

    Sure, but then the causality would be going the right way, instead of in reverse as it is with fiat money targeting NGDP.

    With stable gold production, NGDP tends to be stable. But with fiat currency, NGDP can only be stable at the expense of an unstable currency, since whatever NGDP rate of spending is selected and then imposed, it won’t be the free market rate of spending, and hence will distort the real economy, which will then compel the inflationists to make the currency unstable in order to to force NGDP to be stable. This is what you see in Australia. The Australian central bank is forcing stable NGDP at the expense of an unstable currency (exponentially rising aggregate money supply). The Australian central bankers have no clue what the free market NGDP should be, so they pick an arbitrary number out of their asses, much like market monetarists in this country, and that overrules individual economic calculation that would have otherwise led to changes in NGDP, or a different NGDP rate of growth.

    The problem is not ensuring that NGDP grows at a stable rate, the problem is that central bankers cannot replicate the free market rates of NGDP growth, which can be higher or lower than the arbitrarily chosen one, or can even be naturally non-constant in the first place.

    It is nothing but “I believe in God” when market monetarists say “I believe NGDP should be 5% per year.” It is simply pronounced and everyone’s supposed to accept it at face value. It is window dressed as being grounded in some objective truth, such as consistency with some crude long term averages of inflation and real GDP throughout history, but this reasoning is flawed because the 2% inflation and 3% real GDP are themselves a reflection, a result, of monetary policy.

    It would be like a group of murderers looking back on their previous murders, and saying “We should target a murder rate of 2% growth per year going forward, since that is the average of what it seems to have historically been up to this point.” Or, more relevantly, a counterfeiting syndicate that inflated on average 2% per year for 80 years, tries to justify continuing 2% inflation going forward on the basis that inflation was 2% in the past. Or, a counterfeiting syndicate that brought about large imbalances and correction (recession) periods throughout history, thus bringing the rate of real growth down to 3% on average per year, and then saying they should inflate by at least 3% in addition to the 2%, because that’s what real growth has historically been.

    There are so many endogeneity problems with selecting a “proper” NGDP target that it seems to be overwhelming its advocates.

  74. Gravatar of Major_Freedom Major_Freedom
    4. April 2012 at 14:38

    Bill Woolsey:

    Deposits aren’t assets at all.

    Deposits are assets. It’s why firms account for cash (which is held in demand deposits) as an asset on their balance sheets.

  75. Gravatar of dwb dwb
    4. April 2012 at 15:01

    @MF:
    first, deposits are both assets AND liabilities, depending on perspective.

    second, the above post is very illogical. And, actually you can’t dig up gold or any mineral these days without a significant investment (watch Gold Rush or Bering Sea Gold) of time and equipment.

    so lets find something:
    1. uniformly distributed through the earths crust so everyone has a chance to get it, but
    2. whose supply is controlled to only increase at a 4.5% rate per year (otherwise we’ll get a big inflation each time a big deposit is discovered), and
    3. can’t run out of it and,
    4. without significant harvesting/digging environmental liabilities (i dont want to hear about no fracking fracking, got it? ;) ).

    here are some ideas of things that are harvestable at a nice even rate, that everyone in the U.S. has equal access to, and we probably wont run out of:

    pigeons.

    i hate pigeons, so sounds good to me.

  76. Gravatar of bill woolsey bill woolsey
    4. April 2012 at 16:17

    MF:

    Deposits aren’t assets to the banks that issue them.

    Dubois:

    I think that the central bank should be able and willing to expand the quantity of money however much is necessary to get inominal GDP to target. I don’t think that it is a problem if some people think that the current quantity of money will fall in the future. I don’t favor setting a quantity of money at some level and then waiting until the economy has adjusted to that given level.

    I don’t think having people look at the quantity of money and use that quantity to base expectations is desirable.

    The expectations should be set based upon the target for nominal GDP.

    If the Fed has an explicit target for nominal GDP, and it has bought the entire national debt, and still nominal GDP is below target, then get back with me.

    I do have ideas of how to handle the situation, but I don’t think it is worth worrying about to much.

  77. Gravatar of AFG AFG
    4. April 2012 at 16:48

    Scott,

    “What is the deadweight loss of buying a tiny amount of T-bills?”

    This seems silly. The Fed only makes a tiny number of purchases, because of expectations. Private sector actors make all the purchases they expect the Fed (or what they reason the rest of the world expect they Fed) to have purchased. If in an “expectation-less” world, the Fed would have had to buy 5 trillion T-bonds to meet a given NGDP target, wouldn’t expectations produce the exact same result?

  78. Gravatar of A General Theory of Monetary Policy from Scott Sumner – Tyler’s AM Reads – April 5, 2012 « Blog of Rivals A General Theory of Monetary Policy from Scott Sumner – Tyler’s AM Reads – April 5, 2012 « Blog of Rivals
    5. April 2012 at 04:03

    [...] Scott Sumner writes a “General Theory of Monetary Policy” (this is very wonkish). [...]

  79. Gravatar of D R D R
    5. April 2012 at 05:48

    Cthorm,

    Automobiles are included in consumption, not investment.

  80. Gravatar of Major_Freedom Major_Freedom
    5. April 2012 at 05:51

    Bill Woolsey:

    Deposits aren’t assets to the banks that issue them.

    Sure, but you said “Members of the nonbanking public now have deposits. No bank loans were made.”

    To me that sounds like it is from the perspective of the non-bank public.

    dwb

    first, deposits are both assets AND liabilities, depending on perspective.

    Agreed.

    second, the above post is very illogical.

    And, actually you can’t dig up gold or any mineral these days without a significant investment (watch Gold Rush or Bering Sea Gold) of time and equipment.

    That’s exactly one of the things that makes it optimal. People won’t create more gold money unless there is enough capital available to produce more gold rather than something else that people want.

    If people want more of other non-gold commodities relative to gold, then they will profitably cover more non-gold commodity production and not profitably cover more gold production. If people want more gold money relative to non-gold commodities, then they will be willing to profitably cover more gold production and not profitably cover more non-gold commodity production.

    There is an inherent balancing act here that cannot be replicated by a central bank that lacks the knowledge of what people want and when they want them, the way people can coordinate their plans via the unhampered price system.

    so lets find something:

    1. uniformly distributed through the earths crust so everyone has a chance to get it, but

    2. whose supply is controlled to only increase at a 4.5% rate per year (otherwise we’ll get a big inflation each time a big deposit is discovered), and

    Right there that is false. In a free market, supply is not controlled to an arbitrary percentage growth. You’re just introducing an ex cathedra pronouncement “Growth in supply of gold and the concomitant growth in nominal gold spending is conveniently identical to the growth in fiat money that I say the Fed should target.”

    Here’s a thought: Let the individuals decide how much to produce, where, and in what quantity. Yes, it’s hard to let go thinking you have power over people, isn’t it? But you do it for computers and potatoes. Why not gold and money as well?

    3. can’t run out of it and,

    4. without significant harvesting/digging environmental liabilities (i dont want to hear about no fracking fracking, got it? ).

    here are some ideas of things that are harvestable at a nice even rate, that everyone in the U.S. has equal access to, and we probably wont run out of:

    pigeons.

    i hate pigeons, so sounds good to me.

    Pigeons are not durable the way gold is durable. Gold wins.

    Sounds to me that you hate free market money.

  81. Gravatar of dwb dwb
    5. April 2012 at 06:22

    @MF,
    sounds great: you currently have the freedom to move to the Klondike and mine gold while its at near-record highs. Send us a video with your first 100 oz. You are young and retired, nothing holding you back! Maybe you can also ponder whether 9-11 was a controlled demolition. And when you get back, reconcile your previous statements on how the FOMC has engineered higher employment without inflation.

  82. Gravatar of Major_Freedom Major_Freedom
    5. April 2012 at 07:27

    dwb:

    It’s telling that you had to relegate yourself to this mindless antagonism and sarcasm. It clearly shows your immaturity.

    sounds great: you currently have the freedom to move to the Klondike and mine gold while its at near-record highs. Send us a video with your first 100 oz. You are young and retired, nothing holding you back!

    If I tried to use this gold as money, then the FBI will confiscate it, just like they did with the Liberty Dollars.

    Sorry, we’re not living in the society you believe we’re living in. You’re mind is that of a small child who believes the state is all sunshine and lollipops.

    Maybe you can also ponder whether 9-11 was a controlled demolition.

    The science shows it was. Thousands of professional architects, engineers and physicists agree with me. Whoever “pulled” the buildings, were keenly aware that sheep like you will believe in big lies and support whatever the desired response would be. The same thing happened with the Gulf of Tonkin lie.

    And when you get back, reconcile your previous statements on how the FOMC has engineered higher employment without inflation.

    They engineer unemployment by way of distorting the real economy via past inflation.

    By not inflating after inflating, the people bring about unemployment themselves which is a necessary component of correcting all the bad investments. Once the errors are corrected, unemployment comes back down.

    If you love fiat money so much, then maybe you can help the Fed and Treasury out by picking more cotton for them. That’s where your mind is, why not act on it?

  83. Gravatar of Major_Freedom Major_Freedom
    5. April 2012 at 07:36

    Bill Woolsey:

    I don’t think having people look at the quantity of money and use that quantity to base expectations is desirable.

    And that’s exactly why you and everyone else who ignores it will always fail to anticipate major market movements like depressions and booms. You’re looking at the wrong information.

    The Fed seems to have ignored M2, the growth of which collapsed to a crawl during mid to late 2008, after being in double digits previously. I got out of the market in August 2008 because of this fact. I saved my portfolio.

    Meanwhile, the Fed recently admitted they had no clue even as late as September 2008. The world’s largest financial institutions lost huge.

    Here are ivy league PhD economists, in charge of the world’s most powerful institution, being outwitted by an anonymous internet Austrian, in charge of just a beat up car and a paid off house. Funny, isn’t it?

  84. Gravatar of Mike Sax Mike Sax
    5. April 2012 at 07:51

    Just what I was looking for a MMT-MM smackdown

    Dan Kervick on Scott Sumner http://diaryofarepublicanhater.blogspot.com/2012/04/dan-kervick-on-scott-sumner.html

  85. Gravatar of dwb dwb
    5. April 2012 at 08:03

    If I tried to use this gold as money the FBI would confiscate it.

    wrong: Contracts are allowed to include Gold clauses as long as they are entered into after 1977. there are specific laws that prevent *some* businesses from trading in gold and/or force them register all gold transactions (pawn shops: due to theft, for example in MD all jewelry must be entered into law-enforcement database), but this is state specific.

  86. Gravatar of dwb dwb
    5. April 2012 at 11:19

    @MF:
    yes, i have resorted to reductio ad absurdium. Woolsey, Sumner, and Rowe all have excellent and thoughtful posts on the subject. your arguments are full of holes.

  87. Gravatar of ssumner ssumner
    5. April 2012 at 11:38

    James in London, But bad policy vis-a-vis NGDP makes the budget deficit even bigger than with good policy.

    MF, No, I oppose having the Fed “give” money to the banks.

    Negation of Ideology. Thanks. At a basic level seignorage is maximized during hyperinflation. But I think you mean that we should maximize seignorage given the Fed is targeting 5% NGDP growth. Maybe, I’d have to give that more thought. The welfare gains from more liquidity is not really my area of expertise.

    Cthorm, Thanks, I’ll take a look.

    David Stinson, Notice I said I actually opposed IOR, but took it as a given that the Fed was going that way. So if we must have it, one option would be to have it target the optimal amount of liquidity. But on the whole I’d prefer zero IOR, at least until we solve our other problems.

    DR, One way of reconciling the two views of the CPI, is to say the CPI is OK (although it has all sorts of other problems), but the Fed should care about the GDP deflator, which includes the prices of newly constructed homes.

    123, Maybe, But I’m not convinced the risk premium on NGDP futures would be statistically significant. I don’t even know which way it would bias futures prices.

    AFG, What’s the distortion if the private sector holds most of the T-bills?

  88. Gravatar of 123 123
    5. April 2012 at 11:58

    Scott,

    here is a version that should be more persuasive:

    Monetary policy should anchor NGDP expectations. This means that there are two targets – level of NGDP expectations should be right and the expected volatility of NGDP expectations should be low.

    Because there are two targets, two instruments are needed. Bernanke knew he needed the second instrument.

    IOR is used to control the level of the NGDP expectations, size of the base is used to control the expected volatility of NGDP expectations.

  89. Gravatar of D R D R
    5. April 2012 at 12:23

    “One way of reconciling the two views of the CPI…”

    My problem here is with the BLS-bashing, not the choice of indices.

  90. Gravatar of Saturos Saturos
    5. April 2012 at 14:01

    Scott,
    Thanks for responding to my post. (I’m still trying to get Bryan Caplan – my other favorite blogger – to respond.) I’m going to ignore the other threads of discussion, some interesting, some inane, and press on with my tangential statements about h-drops vs OMOs, and what the difference implies to me.

    The slight difference in the way that I’m thinking about monetary injections is that, while the excess cash balances mechanism is a way of attaining a monetary stock equilibrium, where velocity rises by “as much as necessary” until nominal income rises enough that people in the aggregate will hold all the money – I like to think about the impact of injections on monetary flows, to calculate how much is necessary. Helicopter drops shift both supply and demand for money, with no disequilibrium in stocks, and hence no hot potato effect. The change comes through the circular flow, which is simply that a greater quantity of dollars is spent at the same velocity. Holding k constant, we have an initial rise in first-round income due to more money existing, and further rounds of spending { = (received income) * (1 – k)} boost income proportionately more than they otherwise would have. Total final nominal income increases by delta M * constant V. And there is no “transmission mechanism” to speak of.

    Whereas an OMO will also increase velocity – in fact the hot potato effect is, in flow terms, the rise in velocity. Because the removal of bonds means that first-round nominal income stays constant, it follows that even if we hold k constant, the first round of nominal spending will be higher than with a helicopter drop (by k * delta M). No part of the injection is hoarded, because it is not counted as an addition to income, and so becomes an “excess cash balance”. The spending becomes income to those who ultimately receive it, who now hoard the normal fraction (k) of money received. Total final nominal income rises by (delta M * [old V + 1]), and V rises by (delta M/[M + delta M]). (You are right that the bonds effect is small compared to the injection effect: delta M * old V > delta M.) Now the “transmission mechanism” matters, but only because we have to get from no rise in nominal income initially, to a big final rise in nominal income over the period.

    So in a “liquidity trap”, a helicopter drop would obviously work, as Brad DeLong conceded. The injection boosts first round income, and though a fraction of it is hoarded (k), the rest boosts spending immediately. (People will spend more when they have more nominal income.) Total income rises and the ISLM meta-equilibrium moves to the right. A policy which relies on delta M alone will work.

    Less obvious to Keynesians is that OMOs can still work as well, *in the long run*. Here is where my point about removal of bonds becomes relevant. Because first-round nominal income does not rise with an OMO, it is possible to argue that the entire injection will be hoarded – as it simply displaces other savings. Then, apparently, monetary injections are ineffective. Not because the interest rate can’t fall (as we saw with the helicopter drop, a spent injection would shift both IS and LM to the right) but because LM can’t shift. The increase in supply simultanaeously decreases the supply of bonds, which are now perfect substitutes for money as stores of value, which causes the quantity demanded of money (for a store of value) to expand by as much as the supply does. Hence the LM doesn’t shift, either through higher income straightaway or through an L-M disequilibrium corrected by rising income (hot potato effect). Equivalently, instead of V rising because of excess cash balances, it falls to offset delta M. Thus monetary injections are ineffective – as far as a Keynesian is concerned.

    What they are forgetting in their myopic view of the policy mechanism is that “… everyone holds inventories of money. We buy money only in order to sell it again. In a monetary exchange economy we buy money when we sell any other goods, but that does not mean we plan to hold the money we buy [forever]“. (If we did then clearly we aren’t even interested in escaping the recession). “We accept it only because we know someone will want to accept it from us. I might buy a fridge even if I could never sell it again. I would never buy money if I could never sell it again … We would never accept [money] if we had to hold it forever, even if we could get it for next to nothing.” (Nick Rowe).

    Another way of putting this is that the long-run velocity of a dollar can never be zero. Very small positive, perhaps, but never </= 0. Hoarded money is spent eventually. Monetary injections boost NGDP at some future date. And rational expectations-efficient markets will translate this into a boost in nominal spending today. If future NGDP trend is expected to be higher, then consumption and investment rise today, and the extreme liquidity preference subsides – because monetary policy is expected to be effective eventually, and thus is effective today. Which is what you've been saying all along.

  91. Gravatar of Saturos Saturos
    5. April 2012 at 14:01

    I just noticed that Mishkin has a cute picture in chapter 18 which covers precisely my question on goals vs targets: he has the successive stages of a space shuttle launch labelled: Tools (OMO, discount rate, rr) Instrument Targets (funds rate, reserve aggregates) Intermediate Target (interest rates, money aggregates) and goals (price stability, high employment, financial stability). Although, this is in the context of a Fed that only implicitly follows an “inflation target”. I am inclined to say that a central bank’s real “tool” is always its own balance sheet, and its “instrument” above all the money supply. If the Fed ultimately targets trend levels of NGDP, then its intermediate target is the NGDP futures market, or the Svensson forecast. Although, I think Mishkin would use the term “policy instrument” quite differently. And I don’t see the point of going to such great length to produce and teach such contrived terminology (in the textbook) when it’s unclear whether there’s even a consensus within the profession on its use – it seems to me that economists reporting on monetary policy conflate all three meanings of the term “target” without a second thought. Then again, no reader of you or Nick Rowe would think much of the economics profession’s “construction” of the methods of monetary policy, or its “communications strategy”, which seems to be what you have when the markets don’t understand your real “target”.

  92. Gravatar of Major_Freedom Major_Freedom
    5. April 2012 at 16:04

    ssumner:

    MF, No, I oppose having the Fed “give” money to the banks.

    Then you oppose having a Fed.

    When the Fed creates money out of thin air, and then uses that money to “buy” assets and securities from banks, then the Fed is in fact “giving” the banks money, because the banks are getting more money than they otherwise could have gotten from selling those assets and securities in the open market from those who EARNED their money.

    If I have a money printing machine in my basement, and I buy moldy cheese from you for $1 million an ounce, then sorry, but I am in fact “giving” you money, despite the fact that you are giving me something tangible. If you had to sell that moldy cheese in the open market, you would not have gotten $1 million an ounce.

    Any money counterfeiter no matter who they are, will invariably end up “giving” money to others.

  93. Gravatar of Major_Freedom Major_Freedom
    5. April 2012 at 16:07

    ssumner:

    And once again, for the millionth time, you completely ignore the substantive points of my post, and instead you ONLY quibble over a tangential point. How utterly unsurprising.

  94. Gravatar of Major_Freedom Major_Freedom
    5. April 2012 at 17:35

    dwb:

    “If I tried to use this gold as money the FBI would confiscate it.”

    wrong

    No, it’s right. See the Liberty Dollar raid.

    Contracts are allowed to include Gold clauses as long as they are entered into after 1977.

    You’ll owe US dollar taxes on the gold you earn, which means you can’t use gold as money, you are coerced into the US dollar standard.

    there are specific laws that prevent *some* businesses from trading in gold and/or force them register all gold transactions (pawn shops: due to theft, for example in MD all jewelry must be entered into law-enforcement database), but this is state specific.

    There is also taxes on gold earnings.

    yes, i have resorted to reductio ad absurdium. Woolsey, Sumner, and Rowe all have excellent and thoughtful posts on the subject. your arguments are full of holes.

    You haven’t shown any holes in my arguments. It’s funny how you feel resorted to saying Sumner, Woolsey and Rowe having “excellent and thoughtful” posts, as if you’re overcompensating for something.

  95. Gravatar of dwb dwb
    5. April 2012 at 18:36

    @MF,
    sorry i thought you meant bartering or trade. Sure, if you hang a shingle up minting coins that look like real currency with a big sign saying that your business model is to make money by actively subverting the government and the IRS, yes, I would expect a knock from the FBI.

  96. Gravatar of Jim Glass Jim Glass
    5. April 2012 at 19:50

    Private money is perfectly legal in the USA.

    The Fed even has a free publication on how to set up your own, with illustrations of a number of successfully working examples: Private Money, Everything Old is New Again.(.pdf)

    Alas, the right to create and use money other than the government’s is not a right to avoid taxes, which is the way a lot of enthusiasts for creating their own money take it. (And actually seems their primary motivation in a lot of cases.)

  97. Gravatar of Mark A. Sadowski Mark A. Sadowski
    5. April 2012 at 20:09

    Jim,

    “The Fed even has a free publication on how to set up your own, with illustrations of a number of successfully working examples: Private Money, Everything Old is New Again.(.pdf)”

    Shhh.

    THe Feds will hear my printing press.

  98. Gravatar of Saturos Saturos
    5. April 2012 at 23:17

    Major_Freedom,
    Yes, you’re right that Fed intervention in markets makes their counterparties better off than they otherwise would be. Still, if you believe, along with Ron Paul, that the Fed just hands out free money (“Why are they handing out billions of dollars to the banks? Why not the middle class?”), then that’s just silly. Of course, why the authorities have focused on bailing out rich creditors instead of poorer debtors is a separate debate.

  99. Gravatar of Saturos Saturos
    5. April 2012 at 23:32

    Major_Freedom:

    “ssumner:

    And once again, for the millionth time, you completely ignore the substantive points of my post, and instead you ONLY quibble over a tangential point. How utterly unsurprising.”

    And yet you keep coming back here to post, for the millionth time. Clearly he’s doing something right ;)

  100. Gravatar of dwb dwb
    6. April 2012 at 04:49

    @saturos:
    Yes, you’re right that Fed intervention in markets makes their counterparties better off than they otherwise would be.

    explain that: the Fed primarily either enters into repos or buys/sells bonds (which the banks would be selling/buying anyway). the banks pass-through the funding costs and liquidity to money market funds, bond funds, or make outright loans. They are mere intermediaries, so how does any “benefit” at all accrue to them?

  101. Gravatar of Major_Freedom Major_Freedom
    6. April 2012 at 04:58

    Saturos:

    Yes, you’re right that Fed intervention in markets makes their counterparties better off than they otherwise would be. Still, if you believe, along with Ron Paul, that the Fed just hands out free money (“Why are they handing out billions of dollars to the banks? Why not the middle class?”), then that’s just silly. Of course, why the authorities have focused on bailing out rich creditors instead of poorer debtors is a separate debate.

    You know, everyone who disagrees with me on this point about doling out newly created money, all they do is deny it, without showing exactly where or how it is wrong. You say “it’s just silly.” Why is it “just silly”? Is it because the banks are giving something back to the Fed, like government debt they no longer want, at prices above what they otherwise could have gotten in the open market without the Fed?

    You say the Fed focused on bailing out rich creditors rather than poor debtors. Well, inflation does benefit debtors at the expense of creditors, so maybe they bailed out the creditors specifically to offset it, who knows.

    And yet you keep coming back here to post, for the millionth time. Clearly he’s doing something right

    That is almost certainly not why he does it.

    dwb:

    sorry i thought you meant bartering or trade. Sure, if you hang a shingle up minting coins that look like real currency with a big sign saying that your business model is to make money by actively subverting the government and the IRS, yes, I would expect a knock from the FBI.

    See now you’re just apologizing for the state enforcing a fiat standard, and demonizing people who have done nothing wrong except try to do what you say they can do, which is use any money they want. “Real” currency? That’s funny, Liberty Dollars were “real”, because no coercion was necessary for people to accept them. The US Mint’s currency is what is not real, because coercion is necessary.

    If people accepting their own money in their own affairs, is going to be labelled as “a business model that is trying to subvert the government”, then congrats, you just admitted that people cannot choose their own money, lest they be branded as “subverters of the state” and thrown into a cage.

    Jim Glass

    Private money is perfectly legal in the USA.

    No, it isn’t. Liberty Dollars were a private money, and they were raided by the FBI. The state does not allow real competition in money.

    The Fed even has a free publication on how to set up your own, with illustrations of a number of successfully working examples: Private Money, Everything Old is New Again.(.pdf)

    These are not money, these are localized barter commodities. They are bought and sold against dollars. They cannot be used to pay taxes. They are not universally accepted.

    Alas, the right to create and use money other than the government’s is not a right to avoid taxes, which is the way a lot of enthusiasts for creating their own money take it.

    It’s inevitable that free competition in money will lead to the state no longer being able to tax people. You just hit upon the stark truth that it is taxes which ultimately underlies the demand for US dollars.

    (And actually seems their primary motivation in a lot of cases.)

    GOOD. If the people can’t tax those in the state, then those in the state shouldn’t tax the people.

  102. Gravatar of ssumner ssumner
    6. April 2012 at 05:48

    DR, There are plenty of reasons to bash the BLS.

    123, I don’t see how IOR can reduce NGDP volatility.

    Saturos, You might google my post on “helicopter drops”, it’s not obvious to me that they will “work” (consider Japan.) The monetary injection via helicopter must be expected to be permanent. But that’s the same as an ordinary OMO.

    I don’t understand why you say a helicopter drop would increase money supply and demand equally, creating no HPE. And the HPE assumes constant V, not a change in V.

    I agree with most of your comments, however, especially those relating to expectations.

    MF. The Fed buys bonds at market prices.

    I didn’t know your comments had “substantive points,” and how would I ever find them in 1000 page long dissertations?

  103. Gravatar of D R D R
    6. April 2012 at 06:09

    “DR, There are plenty of reasons to bash the BLS.”

    Oh? Well pardon me, then.

  104. Gravatar of dwb dwb
    6. April 2012 at 06:19

    @MF:
    That’s funny, Liberty Dollars were “real”, because no coercion was necessary for people to accept them. The US Mint’s currency is what is not real, because coercion is necessary.

    no, actually you are completely wrong on the law and the facts here. There are in fact lots of local currencies circulating in the US (ht: Jim Glass, see above). Moreover, states have the power to make gold and silver coins legal tender under the constitution (and some have).

    On the Liberty Dollar, NORFED minted coins with so many similarities to US coins that the mint felt people were confused and that there was intent to counterfeit or fool people into believing they were real money. Then NORFED encouraged substitution of NORFED coins for US money, which 13 jurors agreed was intent to defraud. The $10 coin had less than $10 of actual silver, and when silver went up they recalled the coins and recast them as $20 coins.

    They did not even actually need to mint any coins because there are many already minted: this was nothing more than a scheme to make money through seniorage and not pay taxes (oh and what does NORFED stand for??). they were WARNED to stop in 2006 to stop but instead they obnoxiously snubbed their nose.

    you can barter and trade for just about anything. If you can get a car dealership to accept a few Canadian Maple leaf or American Eagle coins or ACTUAL liberty $$ coins, or gold bars, thats not going to get you into trouble. Heck, you could barter for chocolate bars, if you can get them to agree to it. And in several states gold coins (American Eagle, i think) coins are already legal tender.

    But with all the Liberty Dollar similarities to us coins, and the fact that there was less metal than market value, the US govt felt this was nothing more than a sophisticated tax-evasion counterfeit scheme, and I agree (they were making a heck of a lot of money). This had absolutely nothing to do with “liberty” (and you are frankly pretty naive and gullible if you really think so). OJ claimed he was innocent too.

  105. Gravatar of Major_Freedom Major_Freedom
    6. April 2012 at 06:59

    dwb:

    no, actually you are completely wrong on the law and the facts here.

    No dwb, it is you who is completely wrong on the law and of the facts.

    There are in fact lots of local currencies circulating in the US (ht: Jim Glass, see above).

    Those are barter commodities, not money.

    Moreover, states have the power to make gold and silver coins legal tender under the constitution (and some have).

    The Feds overrule this by making federal taxation in US dollars mandatory.

    On the Liberty Dollar, NORFED minted coins with so many similarities to US coins that the mint felt people were confused and that there was intent to counterfeit or fool people into believing they were real money. Then NORFED encouraged substitution of NORFED coins for US money, which 13 jurors agreed was intent to defraud. The $10 coin had less than $10 of actual silver, and when silver went up they recalled the coins and recast them as $20 coins.

    Absolutely false. The Liberty Dollars were clearly labelled as such. Any gold coin with a label stamp can be quibbled by the state to be intentional counterfeit. It’s bogus. Liberty Dollars were not intended to copy, nor did they copy, US Mint coins.

    Regardless of NORFED’s actions, it has no bearing on the actions of individuals who wanted to use the Liberty Dollars in their transactions. You’re spoiling the well.

    They did not even actually need to mint any coins because there are many already minted: this was nothing more than a scheme to make money through seniorage and not pay taxes (oh and what does NORFED stand for??).

    You do not decide when people need and do not need coins. The individual decides for himself. Your logic can be used against you. One can just as easily ex cathedra pronounce that there are enough US dollars in circulation, and that monetary policy is nothing more than a scheme to make money through seigniorage.

    In truth, the Liberty Dollars were not a seigniorage scheme, and even if it were, that is up to the people to decide whether they will continue to accept them or not, not you, and not the state.

    they were WARNED to stop in 2006 to stop but instead they obnoxiously snubbed their nose.

    Oooooh, a “warning” from obnoxious government agents who snubbed their noses at Liberty Dollars.

    It’s not obnoxious to stand up for what’s right. It’s telling how you feel so compelled to demonize a perfectly legitimate operation. It’s proof that you are only trying to justify something immoral. That’s what typically happens. Those who apologize for and justify immoral behavior, like to blame the victim and demonize them. To make them guilty of some foul deed.

    you can barter and trade for just about anything. If you can get a car dealership to accept a few Canadian Maple leaf or American Eagle coins or ACTUAL liberty $$ coins, or gold bars, thats not going to get you into trouble. Heck, you could barter for chocolate bars, if you can get them to agree to it. And in several states gold coins (American Eagle, i think) coins are already legal tender.

    You’ll be taxed in US dollars, which means you have to participate in the US dollar standard, which refutes your claim that people can participate in their own currency standards. It’s a fallacy to claim that people can use whatever money they want, so long as they use US dollars.

    But with all the Liberty Dollar similarities to us coins, and the fact that there was less metal than market value, the US govt felt this was nothing more than a sophisticated tax-evasion counterfeit scheme, and I agree (they were making a heck of a lot of money).

    There will always be similarities between gold coins. That is not a valid criticism. They were clearly marked as Liberty Dollars, and NOT US dollars. That should be enough.

    Was it a scheme to avoid paying taxes? That may be the case, but it cannot be used as an argument against its practise, because then all you would be doing is admitting that the US dollar standard is ultimately backed by violence, i.e. taxation, and not consent.

    You would be admitting that people cannot actually use their own money, because if they do, then they’ll necessarily won’t be paying taxes in US dollars, and will hence be considered tax avoiders by the IRS. In other words, people who want to use their own money, are going to be initiated with force in some way, using some excuse or another. If it’s not counterfeiting, it’s tax evasion. If it’s not tax evasion, it’s Seigniorage. The funny part about Seigniorage is that the central bank is nothing but an agency that engages in perpetual Seigniorage. What you call monetary policy is nothing but a legalized Seigniorage operation.

    This had absolutely nothing to do with “liberty” (and you are frankly pretty naive and gullible if you really think so). OJ claimed he was innocent too.

    It has everything to do with liberty, and you are very naive and sheep-like if you deny it. The Fed claimed it was innocent too.

  106. Gravatar of Negation of Ideology Negation of Ideology
    6. April 2012 at 07:10

    scott,

    “But I think you mean that we should maximize seignorage given the Fed is targeting 5% NGDP growth.”

    Yes, you’re right, that’s what I meant. I also probably should have said “maximize risk free seignorage” or something like that to make clear I’m not talking about the Fed running a hedge fund or something – just buying Treasuries as you also advocate. But I think you correctly assumed I meant that too.

  107. Gravatar of Major_Freedom Major_Freedom
    6. April 2012 at 07:16

    ssumner:

    MF. The Fed buys bonds at market prices.

    No, they most certainly do not. The nominal “market” prices that exist are prices GIVEN the anti-market Fed exists, prints money, and buys bonds.

    It would be like calling the $1 million an ounce inflation financed price I pay for your moldy cheese “the market price” simply because others are buying it at $999,900 an ounce because they know they can sell it to me for $1 million an ounce right after.

    The “market” prices that exist TAKE INTO ACCOUNT the anti-market Fed printing money. Market prices would be prices that do not have a systematic violator of property rights, such as a central bank, buying anything. Market prices would be a reflection of respect for private property rights and exchange of private property.

    Money production is communist in this country and in virtually every other country. Government bond prices are not a reflection of respect for private property rights nor exchange of private property. They are a reflection of the very anti-market Fed standing ready to print whatever sum of money they want. If you want to call those prices “market prices”, then you’d only be misleading yourself and others.

    Would you call the $1 million per ounce of moldy cheese “the market price”, if I created an artificial market for it through my inflating money in my basement and buying it from others at $1 million an ounce, which will of course have the inevitable side effect of other people starting to pay high prices for it, to then flip the moldy cheese to me at a profit?

    The Fed pays prices in a world where the anti-market Fed prints money.

    There are no real market prices in our economy. There are Fed inflation distorted nominal prices.

    The Fed buys government debt from sellers who would have otherwise gotten lower prices had the Fed not been inflating and buying debt, and had the sellers sold that debt in the market.

    I didn’t know your comments had “substantive points,” and how would I ever find them in 1000 page long dissertations?

    Hone up on your reading skills?

  108. Gravatar of Major_Freedom Major_Freedom
    6. April 2012 at 07:20

    Propagation of Ideology:

    I also probably should have said “maximize risk free seignorage” or something like that to make clear I’m not talking about the Fed running a hedge fund or something – just buying Treasuries as you also advocate.

    Now that’s funny. “Not a hedge fund, just buying US debt.”

    When the sovereign debt bubble bursts, every financial institution in the country that holds US debt will be indistinguishable from your run of the mill high risk hedge fund.

  109. Gravatar of dwb dwb
    6. April 2012 at 08:07

    Was it a scheme to avoid paying taxes? That may be the case, but it cannot be used as an argument against its practise,

    look down: you just went off the deep end and theres nothing there.

  110. Gravatar of 123 123
    6. April 2012 at 08:41

    Scott,

    Do you agree that the anchoring of NGDP expectations is two targets that require two instruments?

    “I don’t see how IOR can reduce NGDP volatility.”
    IOR was used to target CPI by Norges bank since ~2000.

    One interesting approach would be to use a mechanical Taylor-like rule that sets IOR according to the difference between the target NGDP path and the actual NGDP.

    “But I’m not convinced the risk premium on NGDP futures would be statistically significant. I don’t even know which way it would bias futures prices.”

    It is interesting that all the recent central bank literature that discusses inflation risk premiums contains charts that stop in 2008. Here is an example (it makes the wront arbitrage-free assumption) :”in this paper we study the term structure of real interest rates, expected inflation and inflation risk premia using data on prices of Treasury Inflation Protected Securities (TIPS) over the period 2000-2008. The approach we use to estimate inflation risk premium is arbitrage free, largely model free, and easy to implement. We also make distinction between TIPS yields and real yields and take into account explicitly the three-month indexation lag of TIPS in the analysis. In addition, we propose a new liquidity measure based on TIPS prices. Accounting for it, we find that the inflation risk premium is time-varying: it is negative (positive) in the first (second) half of the sample period”

    Also a chart on the page 24 is interesting here:
    papers.ssrn.com/sol3/papers.cfm?abstract_id=1946950

  111. Gravatar of Negation of Ideology Negation of Ideology
    6. April 2012 at 10:35

    Major –

    Buying back government debt is risk free from the government’s perspective. Just like you buying back your debt is risk free from your perspective.

  112. Gravatar of Major_Freedom Major_Freedom
    6. April 2012 at 10:40

    Buying back government debt is risk free from the government’s perspective. Just like you buying back your debt is risk free from your perspective.

    I was talking about non-government financial institutions that own government debt.

  113. Gravatar of ssumner ssumner
    6. April 2012 at 14:54

    123, You aren’t providing any evidence it helped, just making assertions. At a minimum I’d expect you to compare inflation volatility in Norway to Sweden and Denmark. It wouldn’t prove anything either way, but at least it would be evidence.

    I’m not surprised the risk premium could be positive or negative on inflation, I’ve made the same argument myself.

  114. Gravatar of 123 123
    6. April 2012 at 15:04

    Scott, I think all of these three countries pay interest on overnight deposits.

    Do you agree that one of the goals of monetary policy should be to prevent the wild swings in the inflation risk premium?

  115. Gravatar of 123 123
    6. April 2012 at 15:33

    “You aren’t providing any evidence it helped, just making assertions.”
    One more assertion. In effect you have argued that it is not enough to have one instrument – the quantity of zero IOR CB liabilities. It helps to have another instrument – the quantity of short NGDP future liabilities. If you need two instruments, perhaps you have two targets?

  116. Gravatar of ssumner ssumner
    7. April 2012 at 11:46

    123, No, I don’t care about the inflation risk premium, and I see no theoretical or empirical evidence that IOR has any impact on the inflation risk premium.

    123, I’m not sure what your second question is referring to–perhaps a proposal to reduce central bank risk?

  117. Gravatar of 123 123
    8. April 2012 at 01:12

    Scott,
    I am 99% sure that you care about the standard deviation of NGDP growth rate. While the level targeting to a large extent mitigates the damage caused by the volatility of NGDP growth rates, I am pretty sure that you would prefer an economy where the NGDP growth follows the pattern of 4%, 6%, 4%, 6%, 4%, 6%… to an economy where the the NGDP growth follows the pattern of 3%, 7%, 3%, 7%, 3%, 7%… .

    And I am certain that labor contracts are easier to negotiate and the unemployment is lower when the expected standard deviation of NGDP growth rate is lower.

    It is not possible to reduce the expected standard deviation of NGDP growth rate to zero without causing the bankruptcy of the central bank. In addition to targeting NGDP expectations along the NGDP path, central banks should stabilize the expected standard deviation of NGDP growth rate at the socially optimal level.

    So monetary policy should have two targets, accordingly two instruments are needed. During the great moderation, these two instruments were the quantity of base money and bailouts. This was not OK. A different set of instruments is needed. Quantity of base money and NGDP futures. Or quantity of base money and IOR.

  118. Gravatar of ssumner ssumner
    8. April 2012 at 14:40

    123, Central banks are highly profitable, I doubt that stabilizing NGDP would bankrupt them. The Fed would not have significant money at risk, they’d just be middlemen in the NGDP market. And the market would be tiny, compared to the size of the monetary base. So I don’t see where these losses come from.

    I see no way of reducing NGDP volatility above and beyond a level targeting regime. If you target NGDP at 5% growth, level targeting, that’s the best you can do in terms or reducing volatility.

  119. Gravatar of 123 123
    9. April 2012 at 02:40

    Scott,
    Suppose the Fed is the middleman in the NGDP market, and the market is tiny. Expected losses are virtually zero. Suppose you would like to reduce the expected volatility of NGDP with a hope that the ex-post volatility of NGDP will fall too. It is quite simple – you should increase the NGDP market. Narrow the bid-ask spread. Relax the margin requirements. Accept riskier bonds as a margin collateral. The NGDP market would expand, Fed’s losses would be more likely, but if a separate NGDP volatility futures market existed, you would see that as a result the expected NGDP volatility would be lower.

  120. Gravatar of On the Lousy Reasoning Behind NGDP Targeting « Unlearning Economics On the Lousy Reasoning Behind NGDP Targeting « Unlearning Economics
    8. May 2012 at 07:07

    [...] example of the lack of concrete justification for NGDP targeting is its proponents completely refusal to discuss transmission mechanisms at the zero bound. As we know, government bond yields across the [...]

  121. Gravatar of Pieria Article Against NGDP Targeting | Unlearning Economics Pieria Article Against NGDP Targeting | Unlearning Economics
    9. August 2013 at 02:53

    [...] a reflection of the actual behaviour of the economy. Scott Sumner in particular refuses to discuss transmission mechanisms or engage the Lucas Critique, and seems to be more concerned with making out he is an oppressed [...]

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