“Obviously” the Fed will never run out of ammunition

Here’s Ben Bernanke in 1999:

The important question, of course, is whether a determined Bank of Japan would be able to depreciate the yen. I am not aware of any previous historical episode, including the periods of very low interest rates of the 1930s, in which a central bank has been unable to devalue its currency. Be that as it may, there are those who claim that the BOJ is impotent to affect the exchange rate, arguing along the following lines: Since (it is claimed) domestic monetary expansion has been made impossible by the liquidity trap, BOJ intervention in foreign exchange markets would amount, for all practical purposes, to a sterilized intervention. Empirical studies have often found that sterilized interventions cannot create sustained appreciations or depreciations. Therefore the BOJ cannot affect the value of the yen, except perhaps modestly and temporarily.

To rebut this view, one can apply a reductio ad absurdum argument, based on my earlier observation that money issuance must affect prices, else printing money will create infinite purchasing power. Suppose the Bank of Japan prints yen and uses them to acquire foreign assets. If the yen did not depreciate as a result, and if there were no reciprocal demand for Japanese goods or assets (which would drive up domestic prices), what in principle would prevent the BOJ from acquiring infinite quantities of foreign assets, leaving foreigners nothing to hold but idle yen balances? Obviously this will not happen in equilibrium.

Liquidity trap?  Don’t make me laugh.

And here’s Bernanke today:

“If no action were to be taken by the fiscal authorities, the size of the fiscal cliff is” so large that there’s “absolutely no chance that the Federal Reserve would have any ability whatsoever to offset that effect on the economy,” Bernanke said.

Theories?

1.  Brainwashed by the FedBorg?

2.  He’s actually saying; “Of course if I were monetary dictator I could keep core inflation at 2%, but there’s no way in hell my colleagues at the Fed will let me do what it takes.”  Thus a white lie.

3.  He’s actually saying “We’d rather you guys take the heat for stimulus, but we’ll do it if we have to.”

4.  A bit of all of the above.

And what are the odds that someone in the Congress would ask him the obvious question?  After all, isn’t the Congress full of Republicans who think Bernanke’s pursuing an inflationary policy?  Do they become born-again post-Keynesians the minute Bernanke walks into the room?  Does the GOP now believe in liquidity traps?  Or is this sort of exercise as silly as trying to decipher what an orangutan is “really thinking” when playing with an iPad?

HT:  Daniel

PS. I have a post at the New York Times!


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88 Responses to ““Obviously” the Fed will never run out of ammunition”

  1. Gravatar of anon anon
    12. May 2012 at 05:02

    If the Fed thinks it’s close to “running out of ammunition” due to the cost of unconventional policy at the ZLB, doesn’t it make sense to use a combination of taxes and subsidies in order to push nominal rates up?

  2. Gravatar of Becky Hargrove Becky Hargrove
    12. May 2012 at 05:31

    Good post at the NYT!

  3. Gravatar of dwb dwb
    12. May 2012 at 06:14

    good post. I hope getting an article in the NYT did not damage your conservative credentials too much.

    OT, on the topic of consensus economist views:
    i thought this was interesting. The Philly Fed Survey asked a special question about long run inflation expectations. 25% thought the Fed would miss its goal to the high side. reasons:

    Some thought the FOMC would be too slow to tighten monetary policy at the appropriate time. They worried about the political pressure the FOMC would face as the time approaches for tighter monetary policy. Others worried that some members of the FOMC have a bias toward higher inflation or asymmetric preferences for inflation above and below target and would thus be reluctant to vote for tighter monetary policy in the face of future adverse supply shocks. One panelist questioned the credibility of the FOMC’s inflation target and pointed to the U.S. inflation experience of the 1970s as a source for concern.

    Sounds familiar. now 25% of the FOMC committee is about 4 members. So to your points, the FOMC is just a slice of consensus economists.

    Now, one person misinterpreted the question (!), and the average among those who thought the Fed would miss was about 2.5%. Sounds like that 25% is a tempest in a teapot.

    http://www.phil.frb.org/research-and-data/real-time-center/survey-of-professional-forecasters/2012/survq212.cfm

  4. Gravatar of Dan Kervick Dan Kervick
    12. May 2012 at 06:25

    It appears Bernanke has actually learned something int the past 13 years.

  5. Gravatar of RebelEconomist RebelEconomist
    12. May 2012 at 06:43

    Bernanke in 1999 was showing the naivite of an academic (I recall listening to Krugman saying similar things then), whereas he now has to consider the wider ramifications of monetary policy. Yes, in theory Japan might have been able to escape its slump in the 1990s by massive unsterlised intervention against the yen. In practice, Japan’s “friendly” advisers in the US would have resorted to protectionist measures to the extent that Japan’s recovery succeeded at the expense of American jobs, as they did in 1995 with their tariff on Japanese luxury car imports.

  6. Gravatar of Benjamin Cole Benjamin Cole
    12. May 2012 at 06:49

    Right on, right on, right on.

    I ask the same question: If in the USA, a Fed program of heavy QE will “do nothing” then why not have the Fed keeping buying Treasuries until we have traded cash for all outstanding federal debt?

    We will then hand to our children a completely deleveraged nation.

    More likely, three really good result will happen: We will in fact wipe out some federal debt; asset values will rise; and people will spend more.

    Inflation? So far, $2.7 trillion of QE and we are still under 2 percent CPI, not that I regard 2 percent as sacred.

    I am still trying to find the bad result from sustained QE in this time frame.

  7. Gravatar of Mike Sax Mike Sax
    12. May 2012 at 07:24

    Congratulations in writing for the Paper of Record joining my favorite columnist-Krugman-and my least favorite-David Brooks.

    Interesting that the NYT gave you a shot before the Wall Street Journal. They really must be convinced hard money guys there now. We’ll see-in the unlikely case that-Romney wins if that changes.

    So Bernanke is basically telling Congress to do fiscal stimulus. Doesn’t this mean that under Bernanke 2012 at least, the fiscal stimulus is roughly someting greater than zero?

    Admittedly the GOP will never do stimulus. So it’s kind of chicken and the egg-where is the failure, on the monetary fiscal side? Both refuse to even try doing more.

  8. Gravatar of Mike Sax Mike Sax
    12. May 2012 at 07:25

    Dan Kervick I gotta remember where I was when I heard you say Bernanke got someting right-LOL

  9. Gravatar of marcus nunes marcus nunes
    12. May 2012 at 07:32

    Scott – I´ve reached the conclusion that Bernanke is so “multifaceted” that a group of ten psychologists would come up with 11 different conclusions about him!

  10. Gravatar of Mike Sax Mike Sax
    12. May 2012 at 07:43

    Bernanke for MMT?!

    http://diaryofarepublicanhater.blogspot.com/2012/05/bernanke-no-market-monetarist-but-for.html

  11. Gravatar of Morgan Warstler Morgan Warstler
    12. May 2012 at 07:47

    He’s saying the hit to GDP will be large and he will NOT BE ALLOWED to create the kind of inflation necessary for it.

    IMPORTANT NOTE:

    Ben is not concerned with cuts in govt. spending, those we can always pay for with inflation if need be…

    Ben is only concerned with the increase in taxes, the Fed will never use the printing press to make the seem OK.

    But you guys all know that… the question is why everyone speaks as if it is an unknown.

  12. Gravatar of Saturos Saturos
    12. May 2012 at 07:47

    “what in principle would prevent the BOJ from acquiring infinite quantities of foreign assets, leaving foreigners nothing to hold but idle yen balances?”

    Suppose people for some reason expected near zero returns on capital assets forever. Then buying assets with printed money swaps one zero-yielding asset for another in the portfolios held by members of the public. The “foreigners” are no worse off being left with those idle money balances than if they held the claims on the income of firms. Of course this means we could monetize the federal debt at no cost. But still, we don’t see a recovery in the price level and output.

    Of course, if we manage to remember that we live in a monetary exchange economy (http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/06/in-praise-of-mvpy.html) and that people hold inventories of money which they wish to sell eventually, then we realize that all money balances must someday be spent. And unlike selling bonds, when we sell money we affect the general price of goods and services, because money is special – it is the medium of exchange. All markets are money markets. MV = PY. All money demand is temporary – the velocity of a monetary injection cannot remain at zero forever. That is the true reductio ad absurdum – the notion of increased nominal money balances being collectively held forever.

  13. Gravatar of Jon Jon
    12. May 2012 at 07:58

    I agree with Morgan. The fiscal cliff referred here is the massive tax increases. Those are not just an AD issue as this is trading bonds for taxes. The affects will mainly be felt via AS

  14. Gravatar of Full Employment Hawk Full Employment Hawk
    12. May 2012 at 08:01

    Hopefully the New York Times will add you to their list of regular, scheduled columnists.

  15. Gravatar of Full Employment Hawk Full Employment Hawk
    12. May 2012 at 08:35

    The economy is obviously not in a liquidity trap. In order for the economy to be in a liquidity trap THE INTEREST RATE has to have reached a floor, not neccessarily at zero, below which it will not go.

    In an economy with many different interest rates, a liquity trap requires that ALL interest rates that have a RELEVANT EFFECT ON the expenditures that constitute aggregate demand have reached a floor below which they will not go (for any given level of expectations about NGDP growth.)

    First, and most obviously, the fact that the very important short-term interest rate on excess reserves can go down and even be made negative is sufficient to demonstate that we are not in a liquidity trap.

    But, in addition, the interst rates that are most relevant in affecting expenditures, the long-term rates, and mortgage interest rates, are significantly above zero and (for any given level of expectations about NGDP growth) can be brought down.

  16. Gravatar of Full Employment Hawk Full Employment Hawk
    12. May 2012 at 08:35

    The economy is obviously not in a liquidity trap. In order for the economy to be in a liquidity trap THE INTEREST RATE has to have reached a floor, not neccessarily at zero, below which it will not go.

    In an economy with many different interest rates, a liquity trap requires that ALL interest rates that have a RELEVANT EFFECT ON the expenditures that constitute aggregate demand have reached a floor below which they will not go (for any given level of expectations about NGDP growth.)

    First, and most obviously, the fact that the very important short-term interest rate on excess reserves can go down and even be made negative is sufficient to demonstate that we are not in a liquidity trap.

    But, in addition, the interst rates that are most relevant in affecting expenditures, the long-term rates, and mortgage interest rates, are significantly above zero and (for any given level of expectations about NGDP growth) can be brought down.

  17. Gravatar of Full Employment Hawk Full Employment Hawk
    12. May 2012 at 08:49

    Since inflation is low and unemployment is, and remains, high the Fed’s twin mandate calls for a tilt toward more stimulus. But clearly the Fed is not going to do this. Therefore some inconvenient questions need to be asked at this point about what the Fed is doing and why it is doing it.

    1. When Reagan was running for reelection the FOMC took its foot of the monetary brake and stepped on the monetary pedal when inflation had come down to 4% and made no further efforts to bring it down below that.

    1a. If the Fed had followed the current strategy of trying to hold the inflation BELOW 2% would Reagan have lost?

    1b. Was the decision to stimulate at 4% done in order to help Reagan be reelected?

    2. Would the Fed be following a more expansionary monetary policy if McCain were up for reelection?

    3. Is a majority of the FOMC trying do as much as it can to heip Romney win the election without causing people to suspect that this is what they are trying to do? And what is Bernake’s role in this?

  18. Gravatar of Greg Ransom Greg Ransom
    12. May 2012 at 09:00

    Yes. The Weimar Solution. Always a terrific option.

    Or, if you can’t stomach that, stagflation is another terrific choice.

  19. Gravatar of Saturos Saturos
    12. May 2012 at 09:08

    Marcus – unless one of them was Lord Keynes, in which case we would have thirteen.

  20. Gravatar of Becky Hargrove Becky Hargrove
    12. May 2012 at 09:17

    Greg,
    If we have malinvestment, why aren’t we building or otherwise creating the products people would buy right now? I can think of a potential list as long as my arm…and don’t tell me you can’t imagine what they would be. Just go ask anyone who doesn’t want to buy what is already being offered, what they would buy were it being offered, or what they would produce for that matter, if they had the money or right to do so. Just sayin, it is more effective to ask potential consumers all over the country what they REALLY want, than to pretend no one wants anything.

  21. Gravatar of CA CA
    12. May 2012 at 09:26

    Greg, the yield on the ten year note is under 2 percent. Why aren’t investors around the world pricing in the inflation you are so concerned about? (btw, that’s a serious question, I’m not trying to start a flame war.)

  22. Gravatar of Mike Sax Mike Sax
    12. May 2012 at 09:30

    No Morgan, he didn’t only mention the Bush tax cuts but also Obama’s payroll tax cut and even Unemployment Benefits and it’s fingers on the blackboard for any Market Monetarist to hear this line:

    “If no action were to be taken by the fiscal authorities, the size of the fiscal cliff is” so large that there’s “absolutely no chance that the Federal Reserve would have any ability whatsoever to offset that effect on the economy,” Bernanke said.

    http://www.bloomberg.com/news/2012-05-10/bernanke-speaks-about-risks-from-end-of-pro-growth-plans.html

    A Market Monetarist doesn’t believe that tax cuts or spending raises are as important as NGDP targeting.

  23. Gravatar of Morgan Warstler Morgan Warstler
    12. May 2012 at 09:43

    I AM THE FULL EMPLOYMENT HAWK!!!!

    http://pegobry.tumblr.com/post/21427545322/morgan-warstler-via-steve-randy-waldman

    It is super charming watching lefties hide from my Guaranteed Income plan.

    Any thinking being immediately knows it is a good idea, the difference if liberals refuse to discuss it, they go radio silent.

    The entire left side of economics has had it in their face, MMT has had it in their face, and there’s been not a single response.

    It is your future, FEH. When you adopt it, you can have your name back/

    ——

    Again, there is ONE VALID interpretation for Ben:

    1. He is FINE with cuts in Govt. Spending, those he can always print money to keep us from feeling.

    2. He is NOT FINE with increases in taxes, those he will not be able to print money to keep us from feeling.

    These are FACTS.

    So, now that we know what Ben is saying, we understand the difference, when he spoke about Japan he wasn’t concerned with the difference between raising taxes and cutting spending.

    Now he is concerned, because America’s ADVANTAGE is not being Japan… our govt. is the bitch of businessmen.

    When Ben spoke of Japan, the underlying message was…

    “Since you people are so totally screwed up with a state run economy…. I don’t mind telling you how to run a more socialistic Monetary policy.”

    Can you all please just admit I’m right???

    It drives me crazy when you intentionally delude yourselves.

    What was “good for Japan” is not what is “good for America” because Japan was already screwed up.

  24. Gravatar of Jim Glass Jim Glass
    12. May 2012 at 09:44

    To quantify, this is the scale of the fiscal effect Bernanke says the Fed would have absolutely no chance to offset, again as per the Tax Policy Center:
    ~~~~

    Allow the 2001/2003/2010 tax cuts to expire as scheduled in eight months, let the automatic spending cuts enacted in 2011 kick in as planned and, voila, the short-term fiscal problem is pretty much resolved…

    Taxes would increase by 2.5 percent of Gross Domestic Product in a single year, the Congressional Budget Office estimates. Nominal spending would fall for the first time since 1955…

    The deficit would fall, all right. The Congressional Budget Office figures the deficit would decline from 7 percent of GDP this year to 3.7 percent in 2013 and to a very manageable 1.5 percent by 2015.

    It would, that is, if the economy didn’t collapse.
    ~~~~~

    So fiscal policy on its face would be contractionary by about 3.3 points of GDP in one year, 5.5 points in three years.

    ISTM that Ben-the-academic-theoretician believed that in principle Japan could print enough yen to buy all the assets in Europe, but Ben-the-practical-DC-operative believes that in reality politics (from national to Fed-internal) makes it impossible for the Fed to do much more than it has, which hasn’t even been enough to date. Much less offset another 5.5 points of fall of GDP, which is not a trivial amount.

  25. Gravatar of Becky Hargrove Becky Hargrove
    12. May 2012 at 09:52

    CA,
    Normally I defend Greg, what can I say. I just don’t want austerity.

  26. Gravatar of CA CA
    12. May 2012 at 10:08

    I don’t want austerity either. But if money is too loose and inflation is right around the corner, as Austrians insist, then why are yields on T bills so low?

  27. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. May 2012 at 10:09

    I keep hearing people cite the legal contraints on the Federal Reserve’s ability to buy assets so I thought I would try and do an actual accounting of what the Fed can buy without Congressional approval.

    Section 14 of the Federal Reserve Act sets out the rules governing Fed asset purchases. According to Section 14.1 the Fed may purchase gold, treasury debt, agency debt and agency guaranteed debt. The open market stipulation prevents the Fed from purchasing treasury or agency debt directly (that would be “monetizing the debt”) so it must buy that debt in the secondary markets. This of course has not proved to be much of an impediment.

    The Fed is also permitted to purchase bankers acceptances and bills of exchange in the open market. These are privately issued assets but few American institutions use much of them anymore.

    The Fed is also allowed to purchase state and municipal debt
    and foreign government issued and guaranteed assets, as well as those of their agencies with a term not exceeding six months. The term constraint is important since about 99% of state and municipal bonds, and something like 88% of foreign bonds are of longer term.

    So what’s eligible for purchase? Roughly…

    Federal government treasuries – $10.2 trillion
    Agency bonds – $2.3 trillion
    Agency guaranteed securities – $5.6 trillion
    Bankers acceptances – zilch
    Gold – $8.4 trillion
    State and municipal bonds – zilch
    Foreign bonds – $5 trillion

    This comes to about $31.6 trillion dollars. Now, the Federal Reserve currently holds about $2.7 trillion in such assets so that leaves about $28.9 trillion in assets that they still haven’t bought.

    (And I suppose they can buy up all the world’s foreign currency and overnight deposits which ought to be worth at least a few trillion dollars but let’s not get crazy!)

    And I haven’t even touched on section 13.3 of the FRA. Section 13.3 allows the Fed to lend to any individual (even you), partnership, or corporation upon any collateral the Fed deems satisfactory. That’s the Section that allowed the Fed to create Maiden Lane I, II, and III, the Commercial Paper Funding Facility (CPFF), and the Term Auction Lending Facility (TALF) during the financial crisis. Approximately $30 billion is still currently lent out under Section 13.3 (through Maiden Lane and TALF).

    In theory under Section 13.3 private label MBS, CDOs, stocks or corporate bonds are all eligible collateral so the sky is the limit. In practice section 13.3 only allows loans under “unusual and exigent circumstances.” But guess who gets to decide what consitutes “unusual and exigent circumstances?”

    So yes, the Fed is legally prohibited from sending you a bankroll in the mail with no strings attached, or from buying up the global supply of cheese. But this accounting suggests there’s still plenty of room to print money if the Fed only showed the will.

  28. Gravatar of Morgan Warstler Morgan Warstler
    12. May 2012 at 10:48

    Mark, I’ve asked this before, but no one took it seriously…

    Politically, I’d say the Fed buying GOLD would be the most acceptable.

    1. It pays off the gold bugs, makes them feel richer and smarter.

    2. It lets conservatives crow that even the Fed prefers Gold.

    3. It makes those others assets seem kind of questionable, maybe it forces the Govt. to get serious about cuts.

  29. Gravatar of Morgan Warstler Morgan Warstler
    12. May 2012 at 10:50

    Mark, are you sure that the Fed buying gold actually acts like QE?

    :)

  30. Gravatar of Brito Brito
    12. May 2012 at 10:57

    Not if the purchases of gold are sterilised, then its effectively contrationary policy.

  31. Gravatar of Negation of Ideology Negation of Ideology
    12. May 2012 at 11:37

    Mark,

    If the Fed announced it will start buying state bonds with less than 6 months term, then wouldn’t the states start issuing short term bonds? Or could the Fed just buy short term directly from the states? It sounds like there’s no restriction against that.

    It seems to me that lending money to the states is the fairest wat to go, the federal government is an organization of states. The states give up their authority to issue money the to the Federal government, so it makes sense to use the money power that way. The collateral could be future federal aid so there would be no risk of default.

  32. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. May 2012 at 11:52

    @Morgan,
    Are you suggesting that QE that makes gold bugs and conservatives happy isn’t really QE? That it’s just sound monetary policy? :)

    @Brito,
    But isn’t that more or less true of any sterilized asset purchase?

    That’s why when I hear the term “sterilized QE” it makes my head hurt. It’s sort of like decaffinated coffee, fat free potato chips or alcohol free beer. What’s the point?

    @Negation of Ideology,
    It’s my understanding that the Fed has recently actually considered buying state and municipal bonds. If they started buying them I’m certina states would issue much more short term debt. And the FRA does not prohibit the Fed from buying from states directly, unlike the Federal government.

    And this brings up a good point. If the Fed started excercising all of their asset purchase options the $28.9 trillion figure would surely explode as more of those kinds of debt are issued to take advantage of the fact, and as gold, which has a relatively inelastic supply, is driven up in price.

  33. Gravatar of dwb dwb
    12. May 2012 at 13:00

    i have come to peace with “sterilized QE”. it no longer makes my head hurt. theres a theory out there that there’s a shortage of safe short term assets. theres a theory that every 100 Bn lowers treasury rates 3-5 basis points. i myself think signalling is more important. as a signal, its fine and sounds vaguely bazooka like. BOO! we’ll UNSTERLIZE IT! it keeps the hawks from crying “Auchtung! Weimar!”

    if the fed bought gold, it would be a riot-the bad kind. instant no-confidence in the dollar. i think markets would tank, dollar would tank, treasuries would skyrocket – it would be a signal we were going Weimar imminently.

  34. Gravatar of Morgan Warstler Morgan Warstler
    12. May 2012 at 13:03

    Mark, I’m suggesting that if you want it you should PAY OFF the opposition.

    Second, I’m asking what the effect is if the Fed buys gold, not politically but to the value of the dollar.

    Price of gold goes up, right? New dollars are out in market, value of dollar falls… but if you buy that real inflation is really measured in the price of gold (like gold standard guys do)….

    The Fed might so freak people out, that they only need to buy a very small amount of gold.

    Am I off here? If the Fed said, we think the dollar is worth $2100 in Gold and we’re going to buy it until it is worth $2100, that happens like immediately right?

  35. Gravatar of Morgan Warstler Morgan Warstler
    12. May 2012 at 13:08

    This I think leads to a VERY INTERESTING post by Sumner…

    “Why Can’t The Fed Buy Gold?”

  36. Gravatar of Morgan Warstler Morgan Warstler
    12. May 2012 at 13:11

    I mean, if goldbugs are just cranks, just periphery, then the Fed Buying Gold is smart, you just buy a little and BANG you get inflation.

    BUT, if Goldbugs aren’t just a little edge group, then you people ought to be paying more attention to their thoughts and feeling than your pretend to, no?

  37. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. May 2012 at 13:20

    Morgan and dwb,
    I don’t think gold purchases would be any more or less effective than other kinds of asset purchases.

    But let’s try it and see what happens. I think there’s potentially far more upside to this than downside.

  38. Gravatar of dwb dwb
    12. May 2012 at 13:56

    @mark:
    no. no. no. a thousand times no.

    at least 50% of QE works through expectations. the fed buying gold would tell the markets disaster was imminent. gold is mostly psychology. buy gold, bad bad karma.

  39. Gravatar of dwb dwb
    12. May 2012 at 13:58

    let me put it this eay: the day the fed announces large gold purchases, i fill my garage with .308 ammo and water bottles.

  40. Gravatar of Morgan Warstler Morgan Warstler
    12. May 2012 at 14:02

    #interestingdiscussion

  41. Gravatar of Negation of Ideology Negation of Ideology
    12. May 2012 at 14:20

    You’re right, it would be buying off the gold bugs, but it would also be buying off gold mining corporations and foreign governments like Russia and South Africa. I have nothing against those countries, but if we want to give them foreign aid we should do it openly, not through monetary policy. The same goes for gold bugs – if we want to create a welfare program for gold bugs than do it openly through Congressional Appropriation.

    We should really be going the other way and sell off all of our gold over a reasonable amount of time and get out of the gold business. The free market does a much better job allocating goods and services and setting prices than the government.

    In the 1800′s the battle was between the East Coast banks who owned gold, and the Western mining companies who owned silver mines. JP Morgan even testified that gold is money, because it was in his interest for the government to subsidize gold. We don’t need to go back to that special interest favor seeking.

  42. Gravatar of Steve Steve
    12. May 2012 at 14:21

    Fed buying gold?

    What happens is Russians, South Africans, and various tinhorn dictators get rich, while Americans get poorer.

  43. Gravatar of anon anon
    12. May 2012 at 14:48

    A severe problem with the Fed buying gold is that it has negative beta wrt. the broader market. So the Fed would have to take a loss on their balance sheet when exiting QE as the economy recovers.

  44. Gravatar of John Papola John Papola
    12. May 2012 at 14:56

    I whole-heartedly endorse Morgan Warstler’s guaranteed income / labor auction proposal as replacement to the current social safety nets which are currently helping to create Eurosclerosis here. Perhaps Morgan is the true heir to Milton Friedman insofar as his calls for a negative income tax approach were never progressed in a practical way… until now.

    As for the monetary economics… it seems pretty clear that so-called “liquidity traps” are not an economic phenomenon at all, as the keynesians claim them to be, but simply yet another policy failure of central bankers. Add it to the list.

    The hope/expectation that central bank policy will be executed according to a macro-theoretic ideal seems about as dubious as the intellectual honesty of Federal Reserve bank stress tests. With political incentives, discretion is a joke. Perhaps the dials they’re twisting are mainly mirrors and smoke.

    Bernanke is responding to incentives, not theory. There’s an theory that talks about why that happens, I think…

    Question for the group: why is everyone so confident that current NGDP metrics are actually a good target? The fact that it doesn’t include intermediate goods purchases (due to so-called “double counting”) seems to mean that the majority of the structure of production is not represented in this “flow” variable. Why not something like “Gross Output”?

  45. Gravatar of Full Employment Hawk Full Employment Hawk
    12. May 2012 at 15:23

    The Fed buying government securities reduces the government deficit. Buying gold does not. So deficit hawks should definitely favor buying the government bonds over buying gold.

  46. Gravatar of dwb dwb
    12. May 2012 at 15:38

    What happens is Russians, South Africans, and various tinhorn dictators get rich, while Americans get poorer.

    three months after the fed starts buying (ahem hoarding) gold we are probably invading countries with large stocks of it. think military dictatorship.

    seriously, it would be an irrevocable no confidence vote in the dollar.

  47. Gravatar of Jim Glass Jim Glass
    12. May 2012 at 16:03

    So what’s eligible for purchase? Roughly … $28.9 trillion in assets that they still haven’t bought … [plus] in theory under Section 13.3 private label MBS, CDOs, stocks or corporate bonds are all eligible collateral so the sky is the limit…

    Wouldn’t it be simpler for them just to announce they’ll keep the Fed Funds rate at 0.25% until at least the year 2035, and be done with it?

  48. Gravatar of W. Peden W. Peden
    12. May 2012 at 16:28

    Steve,

    “What happens is Russians, South Africans, and various tinhorn dictators get rich, while Americans get poorer.”

    It would be good for American gold-bugs.

  49. Gravatar of W. Peden W. Peden
    12. May 2012 at 16:33

    Jim Glass,

    Would anyone believe that the natural rate of interest will be below/at 0.25% until 2035?

    However, all this talk is simply technical speculation about a credibility situation that doesn’t exist. As Prof. Sumner has pointed out on several occasions, if the Fed announced an inflationary nominal target then they would probably have to SHRINK their asset sheet in the very near future.

    Since Lucas, we should all be in the habit of comparing policy regimes rather than policies per se. The technical aspect is only important if one doubts the feasibility of stimulative policy under current circumstances. For everyone who isn’t an Old/Post Keynesian and who believes that monetary policy can always increase demand (i.e. most people) the debate about means is basically a waste of time.

    The practical questions are “What?” and “When?”, not “How?”.

  50. Gravatar of ssumner ssumner
    12. May 2012 at 17:50

    anon, I favor a cut in the employer-side of the payroll tax. That’s the only effective policy when a central bank inflation targets.

    Thanks Becky.

    dwb, Thanks. And is there anything more horrible than 2.5% inflation (the average of the 1990-2008 period?)

    Dan, He may have learned something, but he’s not showing it in these press conferences.

    Rebeleconomist. That confuses real and nominal exchange rates.

    And are you seriously arguing that Japan endured 20 years of deflation and falling NGDP to please Washington, while watching China thumb their nose at Washington with complete impunity? I don’t think so. Why do you think the Japanese government is trying to force the BOJ to inflate? After the tsunami the Western powers told the BOJ they were free to inflate, and they still didn’t do so!!!

    Mike, You said;

    “So Bernanke is basically telling Congress to do fiscal stimulus.”

    Absolutely not. Bernanke has made it very clear that AD is right on target. He’s asking them to avoid deep cuts, not to do stimulus.

    Marcus, I agree.

    Morgan, It doesn’t take any extra inflation to offset fiscal cuts. Just keep inflation where it is.

    Saturos, Yes, but that possibility is so far-fetched it’s not even worth thinking about.

    FEH, I agree.

    Mark, Even more leeway, as they could end IOR, and even go negative. That would immediately drop the base to $1 trillion. So they could increase the base thirty-fold. The average American would hold $100,000 in $20 dollar bills in their wallets. Every man women and child, including babies. Raise your hand anyone who thinks that will happen w/o inflation.

  51. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. May 2012 at 18:07

    I had no idea so many people were against Fed purchases of gold. This probably means it is a good idea. :)

    @John Papola,
    When you buy the car you buy the steel that went into the car. There’s no need to count it twice.

    @Jim Glass,
    Saying you’ll hold the fed funds rate to specific rate for a specified period of time is so Bernanke menu 2012 when we need something more along the lines of the old Bernanke menu 1999. Such a commitment is almost a confession that the economy won’t recover for a generation.

    @W. Peden,
    You wrote:
    “However, all this talk is simply technical speculation about a credibility situation that doesn’t exist. As Prof. Sumner has pointed out on several occasions, if the Fed announced an inflationary nominal target then they would probably have to SHRINK their asset sheet in the very near future.”

    I totally agree. But sometimes it’s worth remembering just how much the Fed could buy if it wanted to. And who knows, a small amount of unsterilized purchases of bankers acceptances, gold, state and municipal bonds and foreign bonds just might remind the markets how much ammunition (nuclear bombs) it still has at its disposal.

  52. Gravatar of Jim Glass Jim Glass
    12. May 2012 at 18:12

    Jim Glass, Would anyone believe that the natural rate of interest will be below/at 0.25% until 2035?

    Well, I mean if the alternative was buying up that $28.9 trillion…

    But it wouldn’t work anyhow. Kocherlakota would destroy their credibility by telling everyone the rate would have to go up in the 2020s.

  53. Gravatar of RebelEconomist RebelEconomist
    13. May 2012 at 01:22

    “Rebeleconomist. That confuses real and nominal exchange rates.”

    Compared with fluctuations in nominal exchange rates – eg from 150ish yen/dollar in 1990 to 80ish in 1995 to 140ish in 1998 – changes in real exchange rates are small.

    “And are you seriously arguing that Japan endured 20 years of deflation and falling NGDP to please Washington, while watching China thumb their nose at Washington with complete impunity?”

    Absolutely! Actually, “to please Washington” is putting it a bit strongly, but the US (not to mention the EU) reaction (as I say, look at the US authorities’ actions in 1995, despite Japanese exporters reeling from a sub-100 yen at the time) is part of the calculation. China has only become a significant US concern in the last decade or so, and they have a more adversarial relationship with the US.

  54. Gravatar of Saturos Saturos
    13. May 2012 at 01:29

    John Papola, you said,

    “The hope/expectation that central bank policy will be executed according to a macro-theoretic ideal seems about as dubious as the intellectual honesty of Federal Reserve bank stress tests. With political incentives, discretion is a joke.

    Bernanke is responding to incentives, not theory. There’s an theory that talks about why that happens, I think…”

    I think you would be interested in these posts by Lars Christensen:

    http://marketmonetarist.com/2012/04/05/scott-its-not-stupidity-when-central-banks-fail/
    http://marketmonetarist.com/2012/02/16/what-can-niskanan-teach-us-about-central-bank-bureaucrats/
    http://marketmonetarist.com/2012/02/11/boettkes-important-political-economy-questions-for-market-monetarists/
    http://marketmonetarist.com/2012/03/30/boettke-and-smith-on-why-we-are-wasting-our-time/

  55. Gravatar of ssumner ssumner
    13. May 2012 at 06:20

    Rebeleconomist. I’m sorry but you are completely wrong. I recall when the yen fell to about 115 a few years back, and the US didn’t make an issue of it at all. The current level of 80 is all on the BOJ, it has nothing to do with pressure from the US. Your hypothesis is just not plausible at all. Recently we encouraged the BOJ to inflate, and they still did nothing. How much more evidence do we need that the BOJ is ultra-conservative?

    And as far as the real exchange rate is concerned, over the long run that’s what monetary policy determines. Any gains to the US from a strong yen have been more than offset by Japanese deflation. Of course on a year to year basis they can move in different directions due to non-monetary factors.
    The 3% inflation differential adds up to more than 50% over 14 years. The 140 in 1998 that you mention is roughly where we are today in real terms.

    As an aside none of this has any bearing on my post, which was dismissing the idea of a “liquidity trap.” Even if you were right, the BOJ could have easily inflated, they simply would have faced a couple more trade barriers in a country that probably gets about 20% of their exports. I’d take that over 20 years of misery!!

  56. Gravatar of John Papola John Papola
    13. May 2012 at 06:23

    Mark,

    Why does the double counting matter? Sure, when you by the car, you buy the steal. The same goes for my macs. But funny thing. When you buy my video services, you buy a part of my macs, my car, my rent and all the rest. The distinction here between “final goods” and “intermediate goods” is a false one.

    The double counting would matter if we’re looking to measure the stock of wealth at a point in time. But GDP doesn’t do that, or it would sum all asset values. Rather, GDP is a time-based flow of spending. And in that form, as in it’s use in a market monetarist targeting regime, it would appear to me that we should try to approximate all transactions.

    Doing so also has the merit of more accurately describing the reality of our economy. No Robert Reich, “consumer spending” is not 70% of the economy. Such an economy would consume itself into starvation quite rapidly. No, government spending does no match or exceed private investment. A gross output / gross receipts approach would restore the real balance to our big metric and allow people to appreciate the centrality of production in economic activity. Is Say’s Law.

    GDP sucks.

  57. Gravatar of Morgan Warstler Morgan Warstler
    13. May 2012 at 06:54

    “Morgan, It doesn’t take any extra inflation to offset fiscal cuts. Just keep inflation where it is.”

    Scott you misunderstood.

    Under NGDPLT if there are giant Fiscal cuts, we have no concern trolls worrying about the eocnomy slowing down.

    That is all.

  58. Gravatar of “Obviously” the Fed will never run out of ammunition « Economics Info “Obviously” the Fed will never run out of ammunition « Economics Info
    13. May 2012 at 07:01

    [...] Source [...]

  59. Gravatar of Saturos Saturos
    13. May 2012 at 07:34

    Scott, regarding you “BOJ’s deflationary intent” hypothesis, my problem is that you have never satisfactorily explained why the Japanese central bankers want to act that way. Can you put that down to insufficient economic understanding as well, despite Bernanke’s famous castigation in at least two speeches as well as that paper? Or will you accept that political incentives are often what is chiefly responsible for monetary policy failure? What does Hetzel say?

  60. Gravatar of Saturos Saturos
    13. May 2012 at 07:35

    Scott, regarding your “BOJ’s deflationary intent” hypothesis, my problem is that you have never satisfactorily explained why the Japanese central bankers want to act that way. Can you put that down to insufficient economic understanding as well, despite Bernanke’s famous castigation in at least two speeches as well as that paper? Or will you accept that political incentives are often what is chiefly responsible for monetary policy failure? What does Hetzel say?

  61. Gravatar of Mark A. Sadowski Mark A. Sadowski
    13. May 2012 at 08:52

    John,
    The distinction between intermediate and final goods is made because everyone’s income is another person’s spending.

    For example suppose you have a two person economy, say a desert island consisting of Robinson Crusoe and Friday. Robinson Crusoe fishes and Friday gathers coconuts. In order fish Robinson Crusoe needs to eat coconuts (for energy) and in order for Friday to gather coconuts Friday needs to eat fish. Each day Friday gathers one coconut and Robinson crusoe catches one fish.

    In this economy fish and coconuts are both an intermediate good and a final good. Friday eats a fish and then gathers a coconut. If Crusoe buys a coconut from Friday with a fish he is effectively also buying the fish Friday consumed in order to have the energy to gather the cocnut. There’s no need to count the fish twice.

    But if accounting for double counting makes you feel uncomfortable then I have a suggestion. Just take the NIPA figure for GDP and multiply it by two. Problem solved.

  62. Gravatar of RebelEconomist RebelEconomist
    13. May 2012 at 10:27

    Scott, correct me if I am wrong, but your post seems to be asking why did Bernanke say different things about JAPAN in 1999 (ie that the central bank could not run out of ammunition) than he is saying about the UNITED STATES now. I am suggesting that the answer is that he was politically naive in 1999, but is not now.

    I am arguing that in 1999 Bernanke was being politically naive to ask “what in principle would prevent the BOJ from acquiring infinite quantities of foreign assets?”. But his comments NOW are not concerned with Japan; they are about the US. Now it is politically naive to argue that the central bank cannot run out of ammunition because that would be to overlook the concern of many Americans with the potential for inflation. You can argue that inflation is not a real concern, or that unemployment matters more, but many Americans, including many in the Fed, will disagree, and unlike you, Bernanke has to take their views into account.

  63. Gravatar of Morgan Warstler Morgan Warstler
    13. May 2012 at 11:45

    Rebel, I already gave the right answer…

    And Scott will admit it.

    In the US, Ben thinks like an American. In which policies that may build up the state, he thinks are BAD.

    In Japan he doesn’t care, or he is willing to fiat into t heir morality.

    Scott, wants to PRETEND through WILLFUL NAIVETE that Ben might think the state grows during bad times… it doesn’t.

    The answer is as simple as Fisher’s – we don’t want to make it easy for the govt. to make bad fiscal policy.

    Everyone, repeat after me… Monetary policy might be used to reward good fiscal behavior, but it WILL NOT be used to cover up bad fiscal behavior.

    And Obama is BAD. BAD, BAD, BAD, BAD, BAD.

  64. Gravatar of Daniel Daniel
    13. May 2012 at 15:22

    For some reason seeing my name on one of scott’s posts just made my day, thanks dude.

  65. Gravatar of Morgan Warstler Morgan Warstler
    13. May 2012 at 16:21

    See my name at the front of Scott’s book is going to make my decade, well the next 8 years or so.

  66. Gravatar of Jim Glass Jim Glass
    13. May 2012 at 20:48

    “Scott, regarding you “BOJ’s deflationary intent” hypothesis, my problem is that you have never satisfactorily explained why the Japanese central bankers want to act that way. Can you put that down to insufficient economic understanding as well…”

    Saturos, the Christensen posts you point to are on point.

    North and Acemoglu both emphasize in their separate work on economic development that bad policies set by national leaders never result from stupidity or ignorance. National leaders don’t get their jobs by being stupid and ignorant. And they always have plenty of smart advisers from the IMF and World Bank and so on telling them what good policy is. They know full well the cost of the bad policies they embrace, and do so nonetheless because of incentives, the necessities of the situation as they see it.

    Look at the list of countries from Argentina to Zimbabwe, that’s a whole lot of witting bad policies out there. The Fed is the least of them … but for it too the issue is right on point.

  67. Gravatar of Saturos Saturos
    13. May 2012 at 21:53

    Well Scott would argue that the central bank does and always has done what a consensus of economists believed they should do. But that doesn’t explain Japan – surely a consensus of Japanese economists don’t believe that deflation is a good thing.

  68. Gravatar of Daniel Daniel
    13. May 2012 at 23:27

    really… is he going to call his book warstlernomics

  69. Gravatar of Major_Freedom Major_Freedom
    14. May 2012 at 08:10

    Becky:

    If we have malinvestment, why aren’t we building or otherwise creating the products people would buy right now?

    We are. The question is whether the investments are physically sustainable.

    To which intertemporal projection would you have investors allocate their capital? The Fed is altering interest rates and so investors cannot even observe unhampered interest rates that would enable them to invest in coordination with the true rates of consumption and saving.

  70. Gravatar of Saturos Saturos
    14. May 2012 at 09:12

    ‘To which intertemporal projection would you have investors allocate their capital?’

    Any that has positive NPV and is consistent with (weak) rational expectations.

  71. Gravatar of TravisA TravisA
    14. May 2012 at 09:50

    Congrats on the NYT post. You need a new picture, though. Your dour mug might dissuade people from clicking on your articles. Your writing is funny and optimistic, but one wouldn’t know it from your picture!

  72. Gravatar of Major_Freedom Major_Freedom
    14. May 2012 at 10:01

    Saturos:

    Any that has positive NPV and is consistent with (weak) rational expectations.

    Positive NPV using what discount rate(s)? The observable rates that the Fed influences, or the non-Fed influenced rates that cannot be observed?

  73. Gravatar of Becky Hargrove Becky Hargrove
    14. May 2012 at 10:21

    Major Freedom,
    Please forgive me, (for I have teased about this) because today it is my turn to say, oh, a debate with Major Freedom…fun! First, I do not like passive aggressive behavior. Don’t get me wrong, I do not accuse you of it. But I have defended structuralists for some time, only to realize that a few of them would rather wealth fall away, than actually do their part to preserve it. Let’s at least be honest if we say we don’t want NGDPLT, as what our reasons really are. Some internet Austrians just want to wait to print money till the obvious business opportunity comes along, (and the present generation has given up hope) just as the Post Keynesian would want to jump on the project implications that might imply. I don’t like the devils deal those folks would make if they had the chance. Why not adjust to the marketplace as it actually exists, i.e. people who need to live more simply and – to the post Keynesian – also need to be able to use knowledge in simpler ways than presently allowed.

    The Fed and interest rates are not what this is really all about. Rather, capitalists have been reluctant to serve markets that exists at lower to middle income levels. In the long run this is a huge mistake, because poorly structured lower to middle classes is a big part of what leads to war and social unrest in the first place.

    So how might this be remedied? Very simply, in four words. THINK LIKE A GERM. Not stupid germs that kill their host, mind you, but germs like the common cold that does no harm to the host, that way it can come back time and again and replicate itself. There are many ways to do that in the marketplace but here I’ll stick with some of the obvious ones:

    Mobile and flexible hi tech housing options that owners can purchase a unit at a time (starting with hi tech plumbing units) on rented property. This way ownership can be experienced without impossible commitments…or the owner is not ‘killed’ by a mortgage bigger than a paycheck. Still, the positive ownership mentality affects one’s attitude and commitment towards community.

    Options for the homeless to have some self respect, especially the ones with jobs and no money for apartments. The capitalist gets real with communities about the need to take care of these things and adjusts zoning and regulations accordingly, just as in mobile and small housing units. For the homeless, for profit options might include showers, small storage lockers for things the homeless should not have to part with and places where they might be allowed to pitch a tent for at least a couple of nights. Whatever it takes. These things can be offered for a reasonable charge for people who are willing to be responsible and do not presently have a way to do so.

    No one need think all of society would be reduced with such an approach. When the ‘host’ is not killed, they will grow and continue the process of creating wealth by purchasing more assets as they can. As to knowledge wealth, lower to middle income start simply with knowledge but when they do not have to worry constantly about survival, they too build on knowledge and gain a better appreciation for it.

    There is no need to knock down vast portions of wealth. We only need to allow it to exist in achievable terms for the poor, so that the poor need not drag down the rest of society in their own attempt to survive.

  74. Gravatar of Major_Freedom Major_Freedom
    14. May 2012 at 11:16

    Becky:

    Please forgive me, (for I have teased about this) because today it is my turn to say, oh, a debate with Major Freedom…fun!

    Yay! You’re one of my favorites.

    First, I do not like passive aggressive behavior. Don’t get me wrong, I do not accuse you of it. But I have defended structuralists for some time, only to realize that a few of them would rather wealth fall away, than actually do their part to preserve it.

    I don’t want to “preserve” a housing project whose builder believes he has 50,000 bricks when he only has 40,000 bricks. I would rather him stop what he’s doing, reassess, and if that means he has to lay off workers now, if that means he has to stop buying bricks now, then I welcome it. It’s better to build the right things, than to build just any old thing on the basis that it makes sterile statistics like “output” and “labor hours” appear all nice on paper.

    Let’s at least be honest if we say we don’t want NGDPLT, as what our reasons really are. Some internet Austrians just want to wait to print money till the obvious business opportunity comes along, (and the present generation has given up hope) just as the Post Keynesian would want to jump on the project implications that might imply. I don’t like the devils deal those folks would make if they had the chance. Why not adjust to the marketplace as it actually exists, i.e. people who need to live more simply and – to the post Keynesian – also need to be able to use knowledge in simpler ways than presently allowed.

    I consider your deal to be just another devils deal. I consider inflation that temporarily eases economic hardship, in exchange for worse economic hardship down the road, through deluding investors into prolonging and introducing new malinvestments instead of correcting and avoiding them, to be highly destructive and immoral.

    I have been honest about why I don’t want NGDPLT. I don’t want it because it harms innocent people’s lives in a division of labor monetary economy where individual economic self-interest can result in coordination of saving and investment via profit and loss; via the price system.

    You have presented yourself on many occasions to me as some sort of moralistic hero, who is only looking out for the weak and infirm. I have shown you on many occasions that you are conflating good intentions with good results. There is a HUGE difference. You can get a gauge of how your intentions lead to bad results by realizing how you view other people, as incapable idiots, or as capable actors. You view adult humans as child-like, who cannot help but engage in self-destructive behavior without a mommy and daddy state to look after everyone. As long as the children get an allowance, enough toilet paper money, then they will be able to fend for themselves in the harsh cruel world. That is the source for why your advocacy hurts innocent people.

    The Fed and interest rates are not what this is really all about. Rather, capitalists have been reluctant to serve markets that exists at lower to middle income levels.

    Nonsense. The world’s largest most profitable companies serve the lower to middle class. Wal-Mart is the world’s largest company, and its main customers are poor people. You have no idea what you are talking about. You actually believe in the ancient myth that capitalism only serves the wealthy. In reality of course, capitalism allows people to BECOME wealthy.

    Furthermore, and this is what is truly tragic, your advocacy of inflation is the very thing that hurts the poor the most. Not just through the business cycle which is generated by inflation, which hurts the most vulnerable the most, the people who can least afford to go without income for stretches of time, but also through the mechanics of inflation as well. Inflation almost always enters the economy via the banks, and Wall Street first. Inflation hurts the interests of those who “save” in the form of cash holders, typically poor people. It benefits equity holders, typically wealthy people. Inflation transfers wealth from poor to the wealthy. Poor people are almost never the initial receivers of new inflation money. It’s almost always the JP Morgans, the Citigroups, and Goldman Sach’s.

    Speaking for myself, it IS very much about the Fed and interest rates.

    You said “rather, capitalists have been reluctant to serve markets at lower to middle income levels.” This is, quite frankly, the ravings of an economically illiterate person who doesn’t understand how markets work.

    In the long run this is a huge mistake, because poorly structured lower to middle classes is a big part of what leads to war and social unrest in the first place.

    Oh, so you have the fantastical belief that printing money will protect you from a socialist uprising? That’s rather amusing, considering how our monetary system IS socialist, since it is a means of production owned by the state. But aside from that, inflation is not a system whereby poor people get free money with which they use to buy goods from capitalists who are otherwise too greedy and stingy to invest for their benefit. Capitalism LOWERS prices over time. It is precisely because of inflation that poor people are kept down further than they otherwise would have been. All the greedy capitalists in the electronics industry, who are so productive that they can even outrun Bernanke’s printing press, these capitalists serve the lower to middle class by providing them with low cost goods that keep getting cheaper. Almost every capitalist, save the ones who want to go bust, don’t care if they earn profits serving wealthy people or if they earn profits serving poor people. They will sell what’s profitable, and poor people can and do provide more than enough “spending” to make investing for their benefit a profitable venture.

    If Berbanke stopped messing with interest rates, and stopped inflating, then not only will prices fall for the poor person’s benefit, but his job will be better protected because his investor employers will be investing in projects that tend to be sustainable as, dun dun duuuun, prevailing interest rates will be driven by actual saving, not the money printing press.

    So how might this be remedied? Very simply, in four words. THINK LIKE A GERM. Not stupid germs that kill their host, mind you, but germs like the common cold that does no harm to the host, that way it can come back time and again and replicate itself. There are many ways to do that in the marketplace but here I’ll stick with some of the obvious ones:

    Mobile and flexible hi tech housing options that owners can purchase a unit at a time (starting with hi tech plumbing units) on rented property. This way ownership can be experienced without impossible commitments…or the owner is not ‘killed’ by a mortgage bigger than a paycheck. Still, the positive ownership mentality affects one’s attitude and commitment towards community.

    Options for the homeless to have some self respect, especially the ones with jobs and no money for apartments. The capitalist gets real with communities about the need to take care of these things and adjusts zoning and regulations accordingly, just as in mobile and small housing units. For the homeless, for profit options might include showers, small storage lockers for things the homeless should not have to part with and places where they might be allowed to pitch a tent for at least a couple of nights. Whatever it takes. These things can be offered for a reasonable charge for people who are willing to be responsible and do not presently have a way to do so.

    No one need think all of society would be reduced with such an approach. When the ‘host’ is not killed, they will grow and continue the process of creating wealth by purchasing more assets as they can. As to knowledge wealth, lower to middle income start simply with knowledge but when they do not have to worry constantly about survival, they too build on knowledge and gain a better appreciation for it.

    This is thinking not like a germ, but like a central planner. That’s your problem. Instead of looking at other individuals as capable actors with their own preferences, tastes, desires, and lives to live, you look at them as mere tools for the sake of some spiritual world concept that is enshrined in sterile statistics like NGDPLT.

    There is no need to knock down vast portions of wealth. We only need to allow it to exist in achievable terms for the poor, so that the poor need not drag down the rest of society in their own attempt to survive.

    There IS a need to knock down a partially constructed house that requires 50,000 bricks, but there are only 40,000 available. The optimal solution is to knock that unfinished house ASAP, so that poor people can be benefited from the scarce resources in useable goods, rather than wasted capitalthat shows up as “idle resources” that don’t benefit any poor person.

    The problem of economic life is not how to ensure there is enough demand for the products of producers. The problem of economic life is how to maximize the production of useable wealth given that there is only a scarce supply of resources available.

    You want whatever projects that were started, to be maintained, no matter how wasteful they are, because the short term alternative is economic hardship. You would rather trade off short term economic hardship for longer term harsher economic hardship. You want people to stay drunk, so that they don’t become clear minded enough to change their unsustainable courses of action.

    You are afraid of poor people rioting in capitalism? How in the world is the solution to that giving a select few wealthy people free money from the printing press, and giving poor people a foreclosure notice and a pink slip during the bust phase after the prior inflation? You might as well say you’re afraid of dying from cancer, so why not drink arsenic.

    Capitalism is, contrary to your ancient superstitions to the contrary, the poor man’s best available alternative to getting himself out of poverty. It protects the poor’s man’s modest income from the ravages of inflation, and it protects the poor man’s career from the ravages of the business cycle which is the result of inflation. In capitalism, in an economy with sound money, poor people can “save” in the form of cash, and they can earn a positive return. And what’s incredibly jaw dropping is that while you inflationists talk out of one side of your mouth about capitalism not helping the poor on Monday, on Tuesday you complain that capitalism will give poor people a free real return for holding cash. You blather on condemning capitalism for both helping and hurting the poor, whatever serves the interests of the inflationista at the time.

    You are HURTING the poor by advocating for inflation, even NGDPLT inflation. Stop advocating for hurting people, and start respecting people as capable of serving their own interests in a world without a manipulated price system that hurts them the most.

  75. Gravatar of ssumner ssumner
    14. May 2012 at 17:20

    Morgan, OK.

    Saturos. I’m not a mind reader, and I know very little about Japanese economic thinking. Indeed I’ve never met an American who knows much about the views of Japanese economists. All I can tell you is that they behave exactly like a central bank that was aiming for about -0.3% CPI inflation every year. Japan’s had the most stable price level in the world during recent decades, indeed one of the most stable price levels in all of world history. So it’s not really a “failed policy,” just a rather weird target.

    Rebeleconomist, Your hypothesis is inconsistent with the facts. The Fed was cutting rates in 2007, when inflation was much higher than today. The reason they aren’t doing more today is not because inflation is too high, indeed since mid-2008 inflation has been the lowest since the mid-1950s. I’m not asking for high inflation, I’d be happy if they responded to the fiscal cliff by simply keeping inflation at 2%. But Bernanke seems to suggest even that is impossible. But why? My hunch is that he faces opposition at the Fed. You seem to agree on that part of my hypothesis.

    Daniel, I try to remember all the tips, but inevitably forget some. Glad you were pleased.

    Morgan, You said;

    “See my name at the front of Scott’s book is going to make my decade, well the next 8 years or so.”

    You seem like a pretty rich guy. And I’m a little bit corrupt. Maybe . . .

    Jim Glass, Interestingly, the Fed itself doesn’t agree. the Fed says they’ve made lots of mistakes (1930-33) (1966-81) etc.

    Thanks Travis A, I don’t think there are any good pictures of me–perhaps I need a new face, not a new picture.

  76. Gravatar of Saturos Saturos
    14. May 2012 at 18:27

    “Positive NPV using what discount rate(s)? The observable rates that the Fed influences, or the non-Fed influenced rates that cannot be observed?”

    Their own rate of time-preference, or whatever opportunity cost is consistent with (weak) rational expectations.

  77. Gravatar of Full Employment Hawk Full Employment Hawk
    14. May 2012 at 20:27

    “The answer is as simple as Fisher’s – we don’t want to make it easy for the govt. to make bad fiscal policy. Everyone, repeat after me… Monetary policy might be used to reward good fiscal behavior, but it WILL NOT be used to cover up bad fiscal behavior.

    Morgan:

    In other words, you are arguing that the FOMC is deliberately following a monetary policy intended to undermine Obama because they disagree with his agenda. I agree that this is what they appear to be doing. But you are one of the few people willing to openly admit it. Everybody else seems to be wilfully ignoring what is going on.
    The emporer is naked and everybody is pretending not to notice.

  78. Gravatar of Full Employment Hawk Full Employment Hawk
    14. May 2012 at 20:29

    “I’d be happy if they responded to the fiscal cliff by simply keeping inflation at 2%. But Bernanke seems to suggest even that is impossible. But why? My hunch is that he faces opposition at the Fed.”

    My hunch is that he is a Republican who wants Romney to defeat Obama.

  79. Gravatar of The Most Powerful Force in the Universe is the Central Bank Press Release « uneconomical The Most Powerful Force in the Universe is the Central Bank Press Release « uneconomical
    15. May 2012 at 15:15

    [...] Of course I should not post on return from holiday without catching up with other blogs first.  Scott Sumner on Ben Bernanke says: Liquidity trap?  Don’t make me [...]

  80. Gravatar of ssumner ssumner
    15. May 2012 at 18:33

    FEH, Then why give Congress a warning?

  81. Gravatar of Full Employment Hawk Full Employment Hawk
    15. May 2012 at 20:00

    Scott:

    I don’t understand your question. The fact that the FOMC is blatently ignoring its congressional mandate and instead trying to undermine the economic policies of the President who the people have elected, especially when half of the members of the FOMC at the present time have largely been chosen by bankers, should be a national scandal. And even more so if they are deliberately trying to use monetary policy to affect the outcome of the election.

  82. Gravatar of Major_Freedom Major_Freedom
    15. May 2012 at 21:36

    FEH:

    Why are Obama’s fans always claiming conspiracies against him?

    Is it to absolve Obama of all responsibility for the sagging economy or what?

    The FOMC is “blatantly ignoring its congressional mandate”? They are always failing in that respect.

  83. Gravatar of Full Employment Hawk Full Employment Hawk
    16. May 2012 at 05:55

    “Is it to absolve Obama of all responsibility for the sagging economy or what?”

    I am certainly not obsolving him. Obama made serious mistakes in his handling of economic policy. His biggest mistake in the area of economic policy is that he did not promptly fill the vacancies on the BOG with people who would take the Fed’s mandate to achieve maximum employment seriously. And for not using recess appointments to fill the positions once it became clear that the Republicans were not going to let the vacancies be filled.

    Probably an even bigger mistake was to reappoint a Republican who had been chair of Bush’s council of economic advisors as head of the Fed. But I cannot really blame him for this since I was in favor of this.

    In the area of fiscal policy he also made serious mistakes. The initial stimulus was too small and he should have used reconciliation to make it bigger. A much more serious blunder was the switch from stimulus to deficit reduction in 2010 even though the economy was not recovering adequately. And then he doubled down on this mistake after the 2010 election when he made Daley chief of staff.

    More generally Obama and his administration never understood that getting the unemployment rate down as quickly as possible had to be the overriding priority of his administration and he had to do everything he could to bring this about, even if it meant doing things that were initially unpopular.

    However, Obama did much better on the economy than McCain would have done, and will do much better that Romney would do, which is why he has my support.

  84. Gravatar of Full Employment Hawk Full Employment Hawk
    16. May 2012 at 06:15

    “Why are Obama’s fans always claiming conspiracies against him?”

    Just because you are paronoid dosn’t mean that there aren’t people out to get you.

    We now know from Robert Draper’s new book “Do Not Ask What Good We Do” that on the same day that Obama was inaugurated Congressional Republican leaders held a secret meeting where they agreed to oppose President Obama on every economic proposal. And they did. They even opposed him on things that had been their policies previously. For example, cap and trade had been McCain’s policy for dealing with global warming in the 2008 election.

  85. Gravatar of Mike Sax Mike Sax
    16. May 2012 at 06:54

    Full Employment I agree he made mistakes but I also think they have been greatly exaggerated by some supposed liberals as well. Last Summer I spent a lot of time at Firedoglake-till they banned me, LOL-and they were all certain that Obama wanted to end Medicare if anything more than Paul Ryan, they certainly thought he wanted to end it more than Mitch McConnell who they saw even as some sort of hero.

    The FDLers hated Laurence O’Donnell more than anyone for pointing out that Obama was actually playing the whole game very well-of course this outraged them “this isn’t a game! It’s much more serious than a game”

    But a year later, read David Corn’s book “Showdown: the Inside Story of How Obama Fought Back Against Boehner, Cantor and the Tea Party.”

    Clearly Obama does play a pretty cool hand of “eleven dimensional chess.”

    Notice how austerity hasn’t happened in the US but it has in the EU-and even more idiotically in the UK? If you want to know why EU is having a double dip and we continue to grow Obama as the last line of defense is a big part of it.

  86. Gravatar of Full Employment Hawk Full Employment Hawk
    16. May 2012 at 20:20

    Mike:

    Obama has been much better for working people than McCain would have been and will, if he wins, be much better for working people that the corporate plutocrat the Republicans are running. But that does not change the fact that on economic policy Obama has made a very serious mistakes in not making bringing the unemployment rate down his overriding priority.And the most important aspect of that would have been filling the vacancies on the BOG with people who would have taken the congressional mandate to achieve maximum employment seriously.

    The reason that the U.S. economy is growing, though too slowly to make an acceptable dent in the unemployment rate, while the economies of Great Britain and about half of the members of the Eurozone are in a second recession is that the U.S. has had LESS austerity than those countries. Fiscal policy at the Federal level has turned contractionary, and at the state and local level is very contractionary. But the main reason for the low growth in the U.S. economy is that the Fed is engaging in a contractionary monetary policy.

    The failure of the Obama administration to do everything possible to make the unemployment rate come down as rapidly as possible caused the Democrats control of Congress in 2010 and may well cause Obama to be defeated in 2012.

  87. Gravatar of ssumner ssumner
    17. May 2012 at 09:10

    FEH, You are preaching to the converted. I want an NGDP mandate and I want bankers off the Fed.

    But the Fed screwed McCain in 2008, so I very much doubt this is all partisan. Part of it may be, perhaps the people involved don’t even know their own subconscious motives.

  88. Gravatar of What was the Fiscal Multiplier in 2008? « uneconomical What was the Fiscal Multiplier in 2008? « uneconomical
    18. May 2012 at 02:04

    [...] are different now because of the “zero lower bound” on monetary policy, based on the bizarre proposition that it becomes impossible to raise NGDP (or inflation, or whatever) when interest rates get near [...]

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