The question is not “why doesn’t the Fed do more?”

Rather it’s how has the Fed been able to get so far ahead of the profession:

SINCE the crisis hit in 2008, there has been a sharp divide between those who believe that the monetary authorities have been insufficiently aggressive and those who believe that central banks have done everything possible given that households and businesses have no interest in taking on new debts. For what it’s worth, a poll of more than 300 research associates at America’s National Bureau of Economic Research conducted for an upcoming article in the print edition reveals that the overwhelming majority (76%) believe that monetary policy has not been too tight. Nearly half believe that fiscal rectitude has been a principal cause of the slow recovery.

Previously I’ve cited polls of business economists, who may be more conservative that average.  But even academic economists appear to be overwhelmingly opposed to QE3 (assuming they held these attitudes before QE3 was announced, which seems likely.)

I don’t have any problem with people who question the need for monetary stimulus, some of them are better economists than I am.  But I am bemused that so many apparently believe we have a demand problem, and yet still don’t think money is too tight.  How is that even possible?  The quotation above was taken from a Free Exchange post that quotes Larry Summers:

As Larry Summers wrote a few months ago:

“One has to wonder how much investment businesses are unwilling to undertake at extraordinarily low interest rates that they would be willing to with rates reduced by yet another 25 or 50 basis points. It is also worth querying the quality of projects that businesses judge unprofitable at a -60 basis point real interest rate but choose to undertake at a still more negative real interest rate.”

This is like some sort of weird mirror image of the 1970s.  Imagine the following conversation, around 1978:

“One has to wonder how much investment businesses are willing to undertake at extraordinarily high interest rates that they would be willing to forego with rates raised by yet another 25 or 50 basis points. It is also worth querying the quality of projects that businesses judge profitable at a 12% interest rate but choose not to undertake at a still higher rate.  Might we forego some really useful projects?”

Summers seems to assume that money is already easy, and it hasn’t helped much, hence even easier monetary would be unlikely to help.  He should read Ben Bernanke, who points out that only NGDP growth and inflation are reliable indicators of the stance of monetary policy.  Money is tight.  The Fed seems satisfied with 2% NGDP growth over past 4 years.  No make-up NGDP growth is being contemplated.

Milton Friedman said that ultra-low rates mean money has been very tight.  The question is not whether shifting from highly accommodative to even more accommodative policy would help.  It is whether shifting from the tightest policy since the Hoover administration to a more neutral policy would help.   It would.

The Free Exchange post also has lots of discussion confusing credit with money, and confusing low interest rates with easy money.  Interested readers might want to take a look at how 25% of economists (or more) think about our current predicament—they believe we need more demand, but money’s not too tight.

HT:  Bill Woolsey


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65 Responses to “The question is not “why doesn’t the Fed do more?””

  1. Gravatar of Arthur Arthur
    3. October 2012 at 11:51

    Pretty sure you misspelled the NGDP growth in the last 4 years:

    “Money is tight. The Fed seems satisfied with 2% NGDP growth over past 4 years. “

  2. Gravatar of marcus nunes marcus nunes
    3. October 2012 at 12:13

    Arthur
    There´s no misspelling. Average NGDP growth since Q208 is 2.017%
    Scott
    Free Exchange is really “multicultural”. On one hand they have Ryan Avent, on the other his opposite M.C.K.
    I liked this phrase in the next to last paragraph:
    “None of this is to say that asset purchases, statements about the future path of inflation and nominal income, or interventions in the foreign exchange markets will have literally no effect. However, it seems clear that current circumstances are causing these monetary policy actions to be far less effective than they otherwise would be.”
    Ryan Avent could have told him why that´s so!

  3. Gravatar of M.C.K. M.C.K.
    3. October 2012 at 12:32

    I think it is you who are confused about credit and money. Most of what we typically think of as money is actually debt created by banks when they make loans. The only consistent definition for what counts as money is that it is what we use to settle our debts. See David Graeber.

    Physical dollar bills only have value relative to dollar-denominated liabilities, hence the inscription: “This note is legal tender for all debts, public and private.” Anyone who accepts physical dollars in exchange for a good or service is doing so because he believes that the pieces of paper will be accepted by other people in the future in exchange for goods and services. So even that is a form of credit. The state is liable for ensuring that my pieces of paper are accepted as payments.

  4. Gravatar of Bob Murphy Bob Murphy
    3. October 2012 at 12:38

    The best thing Summers has said since his decision to not harass the Facebook founder.

  5. Gravatar of Asdasdasd Asdasdasd
    3. October 2012 at 12:39

    Any thoughts Gavyn Davies’ latest post and paper on NGDP targeting?

    http://blogs.ft.com/gavyndavies/2012/10/03/professor-woodford-and-the-fed/

  6. Gravatar of marcus nunes marcus nunes
    3. October 2012 at 13:00

    @ Asdasdasd
    My views:
    1.As usual, people mess up when they start talking about inflation.
    2. The problem is to define the trend level appropriate for today. The original trend is out of the question, in good measure because the economy was “deprived of an adequate supply of oxigen for too long”.

  7. Gravatar of Major_Freedom Major_Freedom
    3. October 2012 at 13:03

    Money is loose. Highly loose. The proper standard is not NGDP, regardless of what a contradictory and error-prone Bernanke said 10 years ago.

    If the market process “wants” NGDP to fall to a particular level, but the Fed won’t let it, then it can only cause more harm than good, if by good we mean directing productive activity towards actual consumer preferences (cross-sectional and inter-temporal), rather than unproductive money printers who cause unemployment and then claim to be the cure.

  8. Gravatar of Major_Freedom Major_Freedom
    3. October 2012 at 13:13

    It’s just that the credit (shadow banking) contradiction is making it appear money is tight.

  9. Gravatar of Tommy Dorsett Tommy Dorsett
    3. October 2012 at 13:13

    If you take the extrapolated trend from cycle peak to cycle peak (90-07), the price-level is below the trend level now on a pce and GDP deflator basis, contrary to what Davies argues. In any event, I remember Davies defending/egging on on the ECB’s disastrous, I’ll-timed decision to tighten policy last year. Thus, I have a hard time taking him seriously on monetary matters now. And nothing in his latest FT missive changed my mind on that score.

  10. Gravatar of Philo Philo
    3. October 2012 at 13:26

    The relative terms ‘looser’ (‘more accommodative’) and ‘tighter’, as applied to monetary policy, are probably clear enough. But it is misguided to speak, as people do, about ‘loose’ (‘accommodative’) and ‘tight’ monetary policy—i.e., to use *absolute* terms–without first specifying a baseline: a policy stance that would be neither loose nor tight, but in between. Those who deploy the absolute terms probably have it in mind that the neutral policy corresponds to the Fed’s (a) “doing nothing,” or (b) “doing what it has done on average over the last n years” for some value of ‘n’. But these ideas are unusably vague, inasmuch as (a) the Fed is *always* doing *something*, and (b) the different ways of describing what the Fed is doing–with respect to interest rates, or to the money supply, or to NGDP, etc., etc.–lead to different specifications of *average* policy. The best linguistic convention would probably be to set the baseline at *the ideal*–the policy the Fed had *best* be pursuing (‘loose’ would mean the same as ‘too loose’, etc.). I suppose that would be considered a *revision* of current usage, but current usage cries out for revision!

  11. Gravatar of Matt Waters Matt Waters
    3. October 2012 at 13:29

    “Money is loose. Highly loose. The proper standard is not NGDP, regardless of what a contradictory and error-prone Bernanke said 10 years ago.

    If the market process “wants” NGDP to fall to a particular level, but the Fed won’t let it, then it can only cause more harm than good, if by good we mean directing productive activity towards actual consumer preferences (cross-sectional and inter-temporal), rather than unproductive money printers who cause unemployment and then claim to be the cure.”

    I guess it’s redundant, but there is not a single stitch of evidence. There is barely even a logical argument. Just statements assumed as self-evidently true.

    Let me state a simple, logically correct argument.

    1. The government controls the printing presses.
    2. Therefore, the government, not the market, controls the value of a dollar.
    3. Therefore, the value of the dollar does not necessarily have an absolutely correct, market-set value. Instead, the value of the dollar is set according to what brings the greatest good for the greatest number.

    The market has zero to do with the value of a government-printed currency. Nothing! It’s like saying the market determines the number of troops in Afghanistan.

    So if you create a goal of 2% inflation, inflation above that is “loose” and inflation below that is “tight.” By any way of looking at inflation, money has been far too tight since 2008.

    You could argue that the correct goal is 0% inflation of one barely used commodity, but why is that more correct than 2% inflation of a wide basket of goods?

  12. Gravatar of Max Max
    3. October 2012 at 13:38

    It’s not totally clear whether Summers believes that no theoretically possible monetary policy would work, or if he’s just saying that the current monetary policy (and minor variations, e.g. more QE or lowering FF by 0.25%) probably won’t be enough.

  13. Gravatar of Matt Waters Matt Waters
    3. October 2012 at 13:53

    “Any thoughts Gavyn Davies’ latest post and paper on NGDP targeting?”

    I will say that he makes a good point that I have been recently contemplating. An NGDP target that is reasonably close to the long-term average will likely produce higher than 2% inflation due to less RGDP growth. Therefore, a 2% inflation target is likely below what’s necessary to close the output gap.

    Otherwise, the piece does make some fundamental errors. Here is the biggest one:

    “High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://blogs.ft.com/gavyndavies/2012/10/03/professor-woodford-and-the-fed/#ixzz28H3sax5e

    However, there is one obvious reason why the Fed might feel uncomfortable with some aspects of the Woodford approach: it might unhinge inflation expectations from the 2 per cent anchor which has been in place for more than a decade, and which was so costly to establish in the 1980s and 1990s. A rise in inflation expectations could raise nominal bond yields, undermining another key objective of Fed policy. And greater uncertainty about the future rate of inflation could damage the real economy.”

    This paragraph shows how confused things can get for critics of NGDP targeting. For one thing, the “unhinging inflation expectations” argument has never made any sense. The only limit to the Fed’s inflation-fighting abilities is if they sold off every last asset on their balance sheet. To say that we should have 1% inflation when the target is 2% inflation because the Fed couldn’t keep inflation at 2% inflation makes no sense.

    Then there’s the fear that somehow “nominal bond yields” would be raised. Nominal bond yields would be raised by effective NGDP targeting since inflation expectations will go up in the future. But that’s not what he is saying here. He is saying that the Fed would not have the ability to lower nominal bond yields if they really wanted to. Actually, if they really wanted to, they could make the yields on all Treasuries zero by exchanging money for all Treasuries. As with reducing inflation, there are no limits in the Fed’s ability to lower nominal yields.

    The rest of the articles harps on that inflation could be higher than 2%. It’s a true point that NGDP targeting could lead to inflation higher than 2%, but is it really optimal to stick to a 2% inflation target when the output gap could be closed with 3% inflation? Leaving an inflation target with supply-side issues is a feature, not a bug.

  14. Gravatar of Adam Adam
    3. October 2012 at 14:19

    A problem I’m having in discussions with friends is that some people really, really believe that we’ve been dealing with significant inflation. Some of those are nut jobs with psuedo-Austrian views, but some are serious people who really believe that costs of “essentials” have been perniciously rising.

    A slightly more sophisticated view is that even if the inflation hasn’t been pernicious, it’s been continual, while wages have been stagnant. Thus stagnant wages plus inflation means declining real consumption, and thus inadequate demand.

    You’d be surprised how hard it is for a lay person to convince people that the problem there is stagnant wages, which looser money would help, and not inflation, which tighter money will not.

  15. Gravatar of Major_Freedom Major_Freedom
    3. October 2012 at 15:30

    Matt Waters:

    I guess it’s redundant, but there is not a single stitch of evidence. There is barely even a logical argument. Just statements assumed as self-evidently true.

    There is a cornucopia of evidence, and it is a logical argument.

    Let me state a simple, logically correct argument.

    1. The government controls the printing presses.

    2. Therefore, the government, not the market, controls the value of a dollar.

    3. Therefore, the value of the dollar does not necessarily have an absolutely correct, market-set value. Instead, the value of the dollar is set according to what brings the greatest good for the greatest number.

    This “syllogism” (I use that term solely to denote what I am referring to, not to actually identify it as one) suffers from many flaws.

    One, it presumes that there are no market forces constantly acting independently of the Federal Reserve System, when it comes to money and spending. It is one thing to assert that the Fed has a monopoly over the dollar, but it quite another to assert that the Fed controls the value of the dollar. The Fed does not have a monopoly over valuations of the dollar. Millions of market actors who use the dollar are each valuing the dollar in accordance with their subjective prferences. You are fallaciously asserting the chartelist theory of money and omnipotent government. Money is ultimately valued by the market, not the state. If Apple has a monooly over iPhones, that doesn’t mean Apple controls the value of iPhones. That is flawed economic logic.

    Two, and speaking of claims without a stitch of evidence or logic, the value of the dollar is not “set according to what brings the greatest good to the greatest number”. You just made that up. The Fed prints at a pace that enables it to retain money monopoly and benefit the banks and politicians. If the Fed really did inflate in accordance with the utilitarian mantra you chanted, then they would be sending checks to the greatest number of people, rather than just bankers and the Treasury all the time.

    Three, the utilitarian mantra is a non-sequitur in your “syllogism”.

    The market has zero to do with the value of a government-printed currency. Nothing!

    Absolutely, unequivocally false. Value is not some Platonic, abstract ideal type divorced from real world subjective valuations. Market actors are making valuations of the dollar on a daily basis, in the amount of billions traded a day. The Fed is not controlling the value of the dollar. The market is.

    It’s like saying the market determines the number of troops in Afghanistan.

    Except market actors own dollars in their accounts. They don’t own soldiers. Your analogy is moot.

    So if you create a goal of 2% inflation, inflation above that is “loose” and inflation below that is “tight.”

    Who is this “you” you are referring to? The Fed? I am not the Fed. I have my own standard. You can play make believe.

    By any way of looking at inflation, money has been far too tight since 2008.

    Again, false. By SOME measures, money has been tight. By OTHER measures, money has been loose.

    You could argue that the correct goal is 0% inflation of one barely used commodity, but why is that more correct than 2% inflation of a wide basket of goods?

    You could argue anything, the key is whether it is right.

    I could argue that the correct rate of inflation is whatever rate would prevail in a free market of money production. Since in a free market money would almost certainly be precious metals like gold and silver, then I can say that because the increase in the quantity of dollars has VASTLY exceeded the increase in gold and silver, I can legitimately argue money has been loose.

    It is not a valid argument against this to merely identify the trivial fact that we don’t have a free market in money. You alluded to “goals” above. Well, my goal is to legalize currency competition. According to that standard, any money created by the Fed that exceeds this is “loose”, and any money created by the Fed that falls short of this is “tight”.

  16. Gravatar of Doug M Doug M
    3. October 2012 at 15:40

    “It’s just that the credit (shadow banking) contradiction is making it appear money is tight.”

    Money is credit!

    And as long as open market operations is turning into excess reserves, and not turning into credit and new loans, than no amount of QE is going to get this economy moving.

  17. Gravatar of Major_Freedom Major_Freedom
    3. October 2012 at 15:55

    Adam:

    A problem I’m having in discussions with friends is that some people really, really believe that we’ve been dealing with significant inflation. Some of those are nut jobs with psuedo-Austrian views, but some are serious people who really believe that costs of “essentials” have been perniciously rising.

    A slightly more sophisticated view is that even if the inflation hasn’t been pernicious, it’s been continual, while wages have been stagnant. Thus stagnant wages plus inflation means declining real consumption, and thus inadequate demand.

    You’d be surprised how hard it is for a lay person to convince people that the problem there is stagnant wages, which looser money would help, and not inflation, which tighter money will not.

    This is not sophisticated, this is base and self-contradictory. If you say that inflation has taken the form of rising prices instead of rising wages, then it is absurd to claim that more inflation can help wage earners, since, presumably, more inflation would take the form of even higher prices in the face of stagnant wages.

    By your crazy worldview, the problem isn’t the flying bullets, but rather the stagnant bodily movements, which firing more bullets should help “cure.”

    If inflations is raising prices and not wages, then, presumably, lower inflation will help, because wage earners will be able to buy more goods with their wages.

    For me it is not at all difficult to have discussions with inflationists, some of whom are nut-jobs partial to market monetarism, because the entire inflationary system is based on naked aggression, and therefore has no intellectual foundation. Thus, every single mental paradigm of inflationism necessarily contains either missing premises and hence arbitrary assumptions, or, what is more typical, outright contradictory premises. Oftentimes the missing premises are covered with intimidating rhetoric, such as “We have central banks…DEAL WITH IT”, as if this is an intellectual argument appealing to other people’s reason, as opposed to their emotions of fear and obedience.

    Look at a historical chart of hourly real wage rates, from the St. louis FRED website. You will notice a distinct “kink” starting around the early 1970s, and followed by a reduced rate of increase from prior years. Pop quiz: Do you know what major event took place in the early 1970s, related to money and spending? Nah, forget it, you’re not sophisticated enough to understand.

  18. Gravatar of Luis Luis
    3. October 2012 at 15:58

    NGDP growth SINCE 2008 III is not 2% year.
    http://research.stlouisfed.org/fredgraph.png?g=bm4

  19. Gravatar of Major_Freedom Major_Freedom
    3. October 2012 at 16:00

    Doug M:

    Money is credit!

    I think you mean credit is money, and yes, I agree, however the credit contraction is a force that this acting against the Fed, so I treat money inflation from the Fed as loose, and the credit contraction from the market as clouding that fact when we look only at aggregates.

    And as long as open market operations is turning into excess reserves, and not turning into credit and new loans, than no amount of QE is going to get this economy moving.

    Money “spending” doesn’t move economies in a sustainable fashion. Monetary calculation does. The Fed increases the former at the expense of the latter.

  20. Gravatar of Luis Luis
    3. October 2012 at 16:00

    http://research.stlouisfed.org/fredgraph.png?g=bm5

  21. Gravatar of Major_Freedom Major_Freedom
    3. October 2012 at 16:02

    Louis,

    Yes, it has been 2% since q3 2008. Don’t look at annual change. Look at the index at 2008q3, then look at the latest, and then calculate yearly rate. It’s around 2%

  22. Gravatar of Luis Luis
    3. October 2012 at 16:17

    Another interesting figure, where we see NGFP taking its old trend

    http://research.stlouisfed.org/fredgraph.png?g=bm7

    There is a lot of questions not answered in this history of NGDP. A lot of holes that MM cannot replenish.
    I’m not against NGDP as final objective of the FEd, but it is inevitable to count with some instrumental variables to obtain it. variables that could very well be inflation an unemployment… The FED has a double mandate in this sense, and I don’t considere so distant the result would have declared it aNGDP objective.

  23. Gravatar of Luis Luis
    3. October 2012 at 16:19

    Another interesting figure, where we see NGFP taking its old trend

    http://research.stlouisfed.org/fredgraph.png?g=bm7

    There is a lot of questions not answered in this history of NGDP. A lot of holes that MM cannot replenish.
    I’m not against NGDP as final objective of the FEd, but it is inevitable to count with some instrumental variables to obtain it. variables that could very well be inflation an unemployment… The FED has a double mandate in this sense, and I don’t considere so distant the result would have declared it a NGDP objective.

  24. Gravatar of Luis Luis
    3. October 2012 at 16:46

    Sorry, 11.9% of total growth between 11 quarters (four Q/year) that is 4,25% year per year.
    I think is not correct to take as references the recent pick before the crisis, because is a figure based on a strong and disequibrum. You must take the lower point of recession (qIII 2009). All you make is plaint of prejudice.
    In any case these tricks are not necessary to defend MM an its NGDP.
    To say that Bernanke is responsible of the crisis is absurd. Bernanke reactioned too late, but he is not the cause of the crisis. In any case, in spite of reactioning too late, he has got a good job.

  25. Gravatar of Negation of Ideology Negation of Ideology
    3. October 2012 at 16:50

    Matt Waters – Excellent comment, especially:

    “The market has zero to do with the value of a government-printed currency. Nothing!”

    It’s funny that gold bugs never question that the government can set the nominal price of gold (NG), but somehow they think the government can’t set the nominal price GDP (NGDP). Either way, it’s the government tying the dollar to some value. The monetary base varies up or down as necessary to achieve that value.

    Of course, those of us who believe in the free market think the government should be neutral (not favor any producer or consumer over any other), therefore we should base the dollar on the whole economy (GDP) rather than one shiny metal.

  26. Gravatar of Major_Freedom Major_Freedom
    3. October 2012 at 17:41

    Negation of Ideology:

    Matt Waters – Excellent comment, especially:

    “The market has zero to do with the value of a government-printed currency. Nothing!”

    I guess I shouldn’t be surprised that you would actually agree with Matt Water’s incorrect assertion regarding value.

    The very fact that coercion from the state is required to enforce the fiat monetary system on market actors, which proves that the market actors do make value judgments, specifically, they do not value dollars as high as alternative currencies, should have been sufficient evidence that contradicts Waters’ claim, but I guess these things need to be constantly pointed out to fiat bugs who tend not to think past one step.

    It’s funny that gold bugs never question that the government can set the nominal price of gold (NG), but somehow they think the government can’t set the nominal price GDP (NGDP).

    It’s even funnier that you believe anyone who isn’t a fiat bug, must necessarily be a gold bug. As a free market in money bug, I consider both inflation affecting the dollar price of gold, and inflation affecting NGDP. These considerations however are independent from the concept of the value of money. I will disregard the sloppy manner in which you call the total sum of expenditures of products from millions of independent market actors a “price”. I recommend that younread Mises’ critique of treating the total sum of expenditures as a singular concept of value of all products.

    Either way, it’s the government tying the dollar to some value. The monetary base varies up or down as necessary to achieve that value.

    Can you not notice that your statement implicitly assumes that the Fed depends on others to manifest a particular value? The very fact that the Fed has to change people’s cash balances to later on result in a particular nominal statistical outcome (not a “value” by the way), implies that the valuations are actually originating from market actors.

    Of course, those of us who believe in the free market think the government should be neutral (not favor any producer or consumer over any other), therefore we should base the dollar on the whole economy (GDP) rather than one shiny metal.

    1. You don’t favor a free market, and you don’t think the government should be neutral. You favor central economic planning in money production, and you want the government to impose toilet paper currency on everyone.

    2. Fiat inflation that targets NGDP does not mean the dollar is “based” on GDP. The fiat dollar is actually based on naked aggression from the state. Without this aggression, virtually nobody would accept the toilet paper any longer over other now free to compete currencies that are superior in terms of being valued as a medium of exchange. In the sense of voluntary valuations, fiat toilet paper is essentially valueless. They would probably be worth less than the cotton and linen commodities that go into the bills in your wallet, since what good are pieces of paper defaced with pictures of past tyrants?

    It’s always amusing reading fiat bug “critiques” of free market money. One of the more popular knee slappers is when the criticisms are in fact criticisms of fiat money itself. They often say things like “You gold bugs want the state to impose a single commodity on everyone by force!”, totally ignoring the blatantly obvious truth that this is exactly what describes fiat currency, only instead of a “shiny metal” it is instead a dull textile used to make shirts and pillow cases. Hilarious.

  27. Gravatar of Saturos Saturos
    3. October 2012 at 18:39

    M.C.K.,

    So if I live in a barter economy, where I trade sheep for cows, but also for potatoes, then my sheep are money? What if I then trade the potatoes for cows?

    Here’s another question for you. Suppose the central bank of a closed economy abolishes reserve requirements (but does everything else conventionally). Will the quantity of “money” as you define it tend to infinity? Why or why not? (Why are there no reserve requirements for CDs?)

    And frankly I’m not too inspired by your citation of David Graeber as an authority on macroeconomics. Your article starts to go downhill when you argue invalidly that “Nominal spending generally increases when the world’s gross balance sheet gets bigger and contracts when it gets smaller. Therefore, when one group tries to reduce its liabilities, the only way to maintain a given level of spending is if another group compensates by increasing its liabilities.” It then completely goes down the toilet whe you say this: “Instead, the quantity of money is determined by things like people’s willingness to borrow and banks’ perceptions of creditworthiness.” (The statement is actually somewhat defensible under a certain interpretation, but not the way you were using it.) I recommend you read these posts to see where you are going wrong: http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/03/banking-mysticism-and-the-hot-potato.html
    http://www.freebanking.org/2012/07/17/100-reserves-confusion-about-%e2%80%9cmoney%e2%80%9d/
    http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/04/the-supply-of-money-is-demand-determined.html

    Scott, this guy is the author of the article, you should give him a fuller response.

    “But I am bemused that so many apparently believe we have a demand problem, and yet still don’t think money is too tight. How is that even possible?”

    Easy, they believe in liquidity traps, which they interpret not as “the inability to loosen money” but rather “the ineffectiveness of loosening money”. It helps if you think of “demand” as some kind of “real” force which monetary policy can only raise by lowering the market discount rate – the extreme case being Mr. M.C.K.. If you know anything about the way economics is taught in most schools then this shouldn’t surprise you at all. I feel sorry for these people – when eventually it becomes obvious even to them that they are wrong, then they will have to completely ditch their mental models of the economy. (Unless they are blatantly irrational like MF of course, then they go on believing whatever it is they want to believe. Or perhaps they’ll consult their introspection or something.)

  28. Gravatar of Saturos Saturos
    3. October 2012 at 18:40

    M.C.K.,

    So if I live in a barter economy, where I trade sheep for cows, but also for potatoes, then my sheep are money? What if I then trade the potatoes for cows?

    Here’s another question for you. Suppose the central bank of a closed economy abolishes reserve requirements (but does everything else conventionally). Will the quantity of “money” as you define it tend to infinity? Why or why not? (Why are there no reserve requirements for CDs?)

    And frankly I’m not too inspired by your citation of David Graeber as an authority on macroeconomics. Your article starts to go downhill when you argue invalidly that “Nominal spending generally increases when the world’s gross balance sheet gets bigger and contracts when it gets smaller. Therefore, when one group tries to reduce its liabilities, the only way to maintain a given level of spending is if another group compensates by increasing its liabilities.” It then completely goes down the toilet whe you say this: “Instead, the quantity of money is determined by things like people’s willingness to borrow and banks’ perceptions of creditworthiness.” (The statement is actually somewhat defensible under a certain interpretation, but not the way you were using it.) [links omitted]

    Scott, this guy is the author of the article, you should give him a fuller response.

    “But I am bemused that so many apparently believe we have a demand problem, and yet still don’t think money is too tight. How is that even possible?”

    Easy, they believe in liquidity traps, which they interpret not as “the inability to loosen money” but rather “the ineffectiveness of loosening money”. It helps if you think of “demand” as some kind of “real” force which monetary policy can only raise by lowering the market discount rate – the extreme case being Mr. M.C.K.. If you know anything about the way economics is taught in most schools then this shouldn’t surprise you at all. I feel sorry for these people – when eventually it becomes obvious even to them that they are wrong, then they will have to completely ditch their mental models of the economy. (Unless they are blatantly irrational like MF of course, then they go on believing whatever it is they want to believe. Or perhaps they’ll consult their introspection or something.)

  29. Gravatar of Saturos Saturos
    3. October 2012 at 18:44

    I forgot to add, note than in my barter economy example I could have been purchasing those cows on credit – it makes no difference.

  30. Gravatar of Rademaker Rademaker
    3. October 2012 at 19:52

    Dr Sumner, wouldn’t it be more clear to say that money is loose in absolute terms, but tight relative to the needs of the economy judging by the lack of NGDP growth said policy has produced. I think your designation of policy as loose on the basis of NGDP alone leaves the issue of why the economy needs such low interest rates to keep growing largely ignored.

    I would propose a number of influences as reasons for the need for unusually low interest rates:
    - foreign currency manipulation, conferring a suppressing influence on the yield of fixed income assets such as treasuries that are bought to weaken the foreign currency in question and conferring a disinflationary effect on the consumer market due to an inflow in imported goods.
    - the rise of income inequality, causing an increase in debtor-creditor arrangements (see Krugman’s explanation of the excess leverage problem)
    - an overhang of private debt that has been built up during the bubble years as a result of unproductive borrowing and asset-market speculation, causing income to be divested from consumption to debt-service among the high consumption classes (this thesis is most defensible from an endogenous money view of banking)

    Could we perhaps have your view on what makes policy “appear” so loose to the common observer? Is this just the result of momentary lack of loose policy when it was necessary (as per Friedman’s “low interest rates are an indication that money has been tight”), or is there a more lasting influence suppressing the required rate?

  31. Gravatar of Edward Edward
    3. October 2012 at 20:06

    “Two, and speaking of claims without a stitch of evidence or logic, the value of the dollar is not “set according to what brings the greatest good to the greatest number”. You just made that up. The Fed prints at a pace that enables it to retain money monopoly and benefit the banks and politicians. If the Fed really did inflate in accordance with the utilitarian mantra you chanted, then they would be sending checks to the greatest number of people, rather than just bankers and the Treasury all the time”

    Thats what they should do, and use the NGDP futures market as a crystal ball, rather than a repeat system of the primary dealers we have now. I disagree with Sumner here

  32. Gravatar of Edward Edward
    3. October 2012 at 20:31

    “I could argue that the correct rate of inflation is whatever rate would prevail in a free market of money production. Since in a free market money would almost certainly be precious metals like gold and silver, then I can say that because the increase in the quantity of dollars has VASTLY exceeded the increase in gold and silver, I can legitimately argue money has been loose.”

    So you admit that in an F.M.MP. (free market in money production) that SOME inflation will occur. Fantastic! I was beginning to think you were suffering from some type of mental deformity. Now its clear you’re just a fanatic. For if you admit that SOME people, wouldn’t like gold, and that they’re preferences would favor the more abundant precious metals like silver and copper, than it follows that SOME inflation. will exist in an FMMP- read the history of silverites in the nineteenth century U.S. They favored silver because of INFLATION. This was a market choice, and government de-tenderized silver in the crime of 73. It was one of the the first things that alerted me to the idiotic, insane ludicrousness of conflating a gold standard, imposed by force with an FMMP. . And yes, fiat money is also imposed by force, but if we have fiat money as it exists for the moment, it is the LESSER of the two evils because it enables the Fed to mimic what the market wants.
    When NGDP slows, and people hoard cash all around, that is not primarily a sign that production is rebalancing towards consumer wants, nor is it a sign that people want to increase their purchasing power. (They can do that by investing and increasing their quantity of dollars above and over their dilution rate) that is a sign that the market wants more money flowing. In a FMMP, what would happen is quite simply, if a precious metal gets even dearer due to a metal or liquidity shortage, what will most likely happen is not primarily prices falling in said metal, but a SUBSTITUTION towards cheaper metals.
    NGDP level targeting mimics this by working best in a bad situation. It does what the market wants. It puts millions of people back to work, in a sustainable capital configuration, it has a less coercion that Keynesian discretionary fiscal policy. It moderates extremist responses to hard money orthodoxy,as scott has mentioned when he said countries that institute. hard money end up being taken over by left wingers. (i would add a modifier, even more dangerous rogues like Adolf Hitler who rose in the wake of Chancellor Bruning’s policies.)

    In short, if an FMMP regime and and NGDP level targeting regime were competing in the Olympics, FMMP would get the gold medal and NGDPLT would get the silver

  33. Gravatar of Saturos Saturos
    3. October 2012 at 22:42

    Rademaker, Scott has done like a zillion posts on those themes already. See practically the rest of this blog, especially earlier this year, and in previous years. (It would of course be much more helpful if Scott used a platform that allowed him to tag his posts, so that we could find the ones we wanted by searching for the tags.)

    Edward, the Fed doesn’t influence people’s wealth with its open-market operations except for a brief period whilst prices are still sticky. Its job is to change the quantity of money, not send checks to people. See like a zillion speeches by Ben Bernanke on this point. Of course Bernanke is a New Keynesian, which means he is unable to bring himself to talk about the quantity of the base, let alone the demand for holding it; instead everything has to be explained obliquely via short-run effects on interest rates.

  34. Gravatar of Edward Edward
    3. October 2012 at 23:20

    Saturos,

    I know that, but the Fed is still involved in the primary dealers system. It’s still something of unfair system , although not as big a deal as MF is making it out to be. I absolutely hate agreeing with MF on this issue, but it would be better if its procedural function were to send checks to people directly on a per capita basis to target wages and ngdp per capita and contract NGDP per capita when it flies massively above the Fed and the markets target level, by raising the rate the Fed pays on reserves banks keep there. It shouldn’t be influencing the short rate AT ALL.

  35. Gravatar of Saturos Saturos
    3. October 2012 at 23:51

    Edward, you sound like Steve Waldman. I have to respectfully disagree with you, the last thing we want is for the public to derive financial income from the central bank. It should exchange assets for assets at the market price (of course sellers are always getting some seller’s surplus, but that’s just the utility of being able to liquidate your assets.) And there is no way that you can change the quantity of money over time, which is what you have to do in order to target any NGDP level path, without creating interest rate fluctuations in the short run as people rebalance their portfolios as they temporarily have too much real money balances in the aggregate. And those interest rate changes also affect the incentives for individuals and firms to change their own aggregate nominal spending, setting off the hot-potato process for real output.

  36. Gravatar of Edward Edward
    4. October 2012 at 00:09

    “I have to respectfully disagree with you, the last thing we want is for the public to derive financial income from the central bank.”

    No worries, Saturos :-) I can live with your vision. And yes, interest rate fluctuations do occur, but this is different from the Fed officially targeting the short term rate

  37. Gravatar of Saturos Saturos
    4. October 2012 at 00:42

    Edward, don’t fall into the trap of most economists’ thinking, “setting interest-rates is what central banks really really do.” Perhaps you should read this post too: http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/04/the-supply-of-money-is-demand-determined.html

    And isn’t it annoying how the smileys always show up on the left? Another reason for Scott to upgrade his platform.

  38. Gravatar of Saturos Saturos
    4. October 2012 at 01:07

    M.C.K., you said:

    “Anyone who accepts physical dollars in exchange for a good or service is doing so because he believes that the pieces of paper will be accepted by other people in the future in exchange for goods and services. So even that is a form of credit.”

    Another non-sequitur. You have defined money there, not credit. You will never be able to force redemption from me with the dollars I have paid you. You will not be able to force redemption from anyone else, either – but you still expect them to accept it, because they expect others to accept it, because … well, basically for the same reason that everyone uses Facebook. But initially perhaps because it is needed to pay taxes.

    I might use an IOU someone issued me to make a purchase from a third party, but it is not money unless I think everyone will be willing to sell their real commodities for it already, just to hold the IOUs of that one issuers; ie unless it is a focal point for barter (eliminating “barter”). So if I make a purchase with an IOU, while the person receiving it expects to be able to use it to make purchases, because people selling to him expect to be able to use it to make purchases, because people selling to them expect to be able to use it to make purchases, etc… – then it’s money. But then it doesn’t have to be an IOU – central bank money isn’t really an IOU, and gold certainly wasn’t.

    We can imagine a giant market which clears in a single day, with people intermediating exchanges with money to save computation (or as the most efficient computation device) on coincidence of wants. That’s not credit at all, no one is really trying to make an intertemporal exchange, just that solving the problem of exchange takes time.

    “The state is liable for ensuring that my pieces of paper are accepted as payments.”

    Actually, there is no legal barrier to me holding a garage sale whilst demanding to be paid in commodities. Or setting up book exchanges, the like, etc. But it is required for making payments to the state. And if a debt-collector comes to me demanding to be repaid (and is so entitled) then Ben Franklins (or a claim on Ben Franklins) will count as having discharged my obligations in the eyes of a court. But there we go confusing money and credit again…

  39. Gravatar of Saturos Saturos
    4. October 2012 at 01:11

    It’s not that the piece of paper guarantees receipt of goods form the person giving it to you (by embodying a promise), but that it guarantees receipt of goods from everybody else (by symmetry of needs). It could be something like salt, for instance, which the innovator of the money calculates that everyone is going to need – and then others catch on, realizing that everyone will now want salt all the more now that there is even more willingness to buy it…

  40. Gravatar of Saturos Saturos
    4. October 2012 at 01:13

    To be clear, the “guarantee” of money is not a guarantee backed by a formal commitment, but rather the equilibrium solution to a giant coordination problem.

  41. Gravatar of Lorenzo from Oz Lorenzo from Oz
    4. October 2012 at 02:58

    If money is credit, what is an actual money loan? (Credit used for credit?)

    And citing David Graeber on economics is not encouraging, seem my post on the fight over money here:
    http://skepticlawyer.com.au/2012/09/10/a-fight-over-money/

  42. Gravatar of Major_Freedom Major_Freedom
    4. October 2012 at 05:05

    Lorenzo from Oz:

    Those who are leaping to join in with anything that would constitute an attack on the Smith/Menger theory of money (and thus hopefully going a step towards the “state creates money and is hence primary” theory, are making the general assertion that because there have been periods in which credit transactions preceded spot barter transactions, it allegedly deals a decisive blow to the theory.

    It only needs to be said that the barter-to-money theory of money as developed by Menger is not refuted by instances of barter trades being completed over a period of 1 year, rather than 1 second. Barter trades only imply goods for other goods. It doesn’t imply goods for other goods within a time frame X.

    The credit transactions of which Graeber relates are in fact barter trades. They are trades constituted by goods for other goods, rather than goods for money. The fact that these barter trades were completed over what can be argued as long periods of time, does not in any way constitute an empirical refutation of the barter-to-money theory of money. It’s still barter!

    The problem here is that the critics of the Smith/Menger theory are not appreciating the concept of time, and how time is always passing even with barter trades that most would consider to be “spot”. In reality, there is no such thing as a true spot trade. We just call it spot for practical convenience, but all trades, even when you go to the grocery store and pay by cash, the trade is in fact a credit transaction, because the trade takes time to complete, and during that time, one party or the other must rely on the trustworthiness of the other party.

    Just think about it. You go to the grocery store check-out, and the clerk puts your groceries in bags. Theoretically, the clerk is trusting that you will not rush out of the store without paying. There is a time frame where you have possession of the goods, and the store does not have possession of your money. That’s a credit transaction technically speaking.

    Going even further, if we suppose one individual uses a supercomputer to make a transaction with another individual who is using a supercomputer, then it may be 1 millisecond, or whatever, but the transaction does take time to complete, and so the one party has to rely on the trustworthiness of the other party, even if for only that 1 millisecond or whatever.

    What most people call credit transactions are, at the end of the day, actually just like every other transaction, except the positive time frame of completion, instead of being dealt with like a law of nature and informally utilized by habit, is consciously considered and planned for, typically in a formal, contractual manner.

    But make no mistake, the presence of credit BARTER transactions as preceding “spot” or “credit” monetary transactions is PERFECTLY consistent with the intuition of the Smith/Menger theory of money. It is not correctly considered as a refutation.

  43. Gravatar of Major_Freedom Major_Freedom
    4. October 2012 at 05:14

    Saturos:

    It should exchange assets for assets at the market price (of course sellers are always getting some seller’s surplus, but that’s just the utility of being able to liquidate your assets.)

    It is impossible for a central bank to purchase assets at market prices, because the monetary system itself is not market driven. A state enforced monopolist of money, when it inflates, pays prices that are higher than what they would be in a market, for it is adding a non-market nominal demand component to the supply and demand relation that forms prices.

    I have to respectfully disagree with you, the last thing we want is for the public to derive financial income from the central bank.

    If two people respectfully disagree with each other, then how are these two people’s differing desires going to be reconciled? What is the fair, just, ethical outcome here? When you remain in the “respectfully disagree” stage, no reconciliation is possible, unless both of you ACT on your disagreement in some way. Well, what does that look like? If Edward acts on his desire, and you act on your desire, what would happen? Well, Edward would go to jail, and you would be out of jail, because as of now, the state enforces a system where the central bank purchases assets from a select few people, rather than sending out income checks to everyone, and so if Edward acted upon his desire, he would be breaking the “rules”.

    So really what’s going on here is that your disagreement, or more accurately your position, is backed not by the rules you set for your own property, in which case enforcing that position would be a defense of your property, but rather, it is ultimately backed by the state using force to throw Edward into a cage.

    Because of this, I trust that you are aware that you “respectfully disagreeing” with others as to who the Fed should send their checks to, and for what, is not intellectually based, but physical force based. Just thought I’d let you know.

    PS Edward’s proposal is more fair than yours, because nobody will be forced to pay any inflation tax, since incomes and prices rise together for each individual, rather than the system we have now, which is where some individuals experience inflation as a rise in their incomes before general prices rise, while others experience inflation as a rise in prices before their incomes.

  44. Gravatar of ssumner ssumner
    4. October 2012 at 05:33

    M.C.K. The medium of account (whether gold or cash) is not credit. I define money as the medium of account, cash in our economy, gold prior to 1933. The government does not guarantee that cash will have any particular purchasing power, just as it did not guarantee gold would have any purchasing power. Its purchasing power is determined by the supply and demand for the medium of account.

    Asdasdasd, Marcus and Tommy, I agree that the inflation trend line is misleading, and that we are below trend. However I sympathize with his claim that Woodfrod’s policy calls for too much catch up at this point. A 14% catch up is both unnecessary and undesirable at this point.

    Luis, I looked back 12 quarters.

  45. Gravatar of Saturos Saturos
    4. October 2012 at 06:25

    Lorenzo, you seemed pretty equivocal on that article on Graeber… There are several good critiques of mainstream economics, Graeber isn’t one of them.

  46. Gravatar of Doug M Doug M
    4. October 2012 at 07:18

    “Here’s another question for you. Suppose the central bank of a closed economy abolishes reserve requirements (but does everything else conventionally). Will the quantity of “money” as you define it tend to infinity? Why or why not?”

    This one is easy. There is a degree of leverage for which increasing leverage decreases your long run returns. The formula for the degree of leverage that maximises returns is the “Kelly criterion.”

  47. Gravatar of Saturos Saturos
    4. October 2012 at 07:38

    Doug, I’m talking about commercial bank lending, not commercial bank borrowing. Why shouldn’t they issue as many liabilities as they please?

  48. Gravatar of Saturos Saturos
    4. October 2012 at 07:39

    (To those borrowing from them, I mean.)

  49. Gravatar of Arthur Arthur
    4. October 2012 at 07:39

    Marcus,
    Sorry, my mistake, I though it was to little to be possible, but i did the math now. Quite impressive.

    Actually i reach a little bit smaller figure of 1,97%. But’s probably some small rounding, base year or sa difference.

  50. Gravatar of Matt Waters Matt Waters
    4. October 2012 at 08:44

    Negation, thanks for the compliment.

    After thinking about it some more, I believe the hard Austrian types like MF are really longing for some anarcho-capitalist society with money determined by free banking. If every single evil is explained as government interference, then the logical thing is to have no government.

    In a realistic world, though, it is quite expedient to have a well-functioning, democratic government to do things like police the streets, provide national defense and…provide a common currency. We had free banking for a few decades in the 1800′s and it was a disaster. Imagine if, instead of dollars, you had certificates in your wallet from Washington Mutual or Lehman Brothers, which may or may not have gold backing.

    A government also has theoretically unfettered ability to levy taxes. For example, Iran’s currency is apparently losing 50% of its value per month. MF might say the market in Iran has determined that their currency is worthless. But in fact, Iran’s central bank could purchase rials with their assets, such as dollars. Iran’s government could also levy taxes to take more rials out of circulation. In every case, the government ultimately determines the value of a currency issued by that government.

  51. Gravatar of Major_Freedom Major_Freedom
    4. October 2012 at 08:57

    Matt Waters:

    After thinking about it some more, I believe the hard Austrian types like MF are really longing for some anarcho-capitalist society with money determined by free banking. If every single evil is explained as government interference, then the logical thing is to have no government.

    This is a stretch. It is more accurate to say hard Austrian types who think that problem X is caused by the state, then it is logical to remove state action if one wants to eliminate problem X.

    Not every evil is caused by the state.

    In a realistic world, though, it is quite expedient to have a well-functioning, democratic government to do things like police the streets, provide national defense and…provide a common currency. We had free banking for a few decades in the 1800′s and it was a disaster. Imagine if, instead of dollars, you had certificates in your wallet from Washington Mutual or Lehman Brothers, which may or may not have gold backing.

    We didn’t have free banking in the 1800s and it was a disaster. We had some free banking and plenty of government intervention. See Selgin.

    A government also has theoretically unfettered ability to levy taxes. For example, Iran’s currency is apparently losing 50% of its value per month. MF might say the market in Iran has determined that their currency is worthless. But in fact, Iran’s central bank could purchase rials with their assets, such as dollars. Iran’s government could also levy taxes to take more rials out of circulation. In every case, the government ultimately determines the value of a currency issued by that government.

    If Iran’s central bank has to reduce the quantity of rials to make them more valuable (by whom?), then that is telling you the market’s valuations of the existing quantity.

    If you ask me, I think Iran’s central bank is purposefully doing this so as to foment social unrest and political agitation, after which someone will do something stupid, which can then be used as a context for you know you to invade the country and do yet another “regime change”. I don’t think Iran’s central bank is “independent”. I think they are cowtowing to the main power of the central banking cartel.

    If you ask me, the best real world examples of the prisoner’s dilemma, of game theory, of the economics of oligopoly and defection/non-defection, are the world’s central banks.

  52. Gravatar of Matt Waters Matt Waters
    4. October 2012 at 10:29

    So is or is not Iran’s government ultimately responsible for the devaluation on the rial?

    How people react to Iran’s hyperinflation is an interesting acid test of whether they still hold 70′s economist views on inflation. The view then was that government was at the mercy of the market. It was oil prices or unions or whatever. Then Volker showed that if a central bank really wanted to, it could stop inflation.

    Now people are talking about Iranian hyperinflation in similar terms, such as the people losing confidence and running on the currency. But as far as I know, the central bank still has considerable assets it could sell. It’s not selling them because the government likes to have dollars around for its plutocracy or whatever, but the fact remains it could sell its dollars and other assets.

    But if the market has, uh, expectations that it won’t sell assets, then there would be a run on the rial. Their monetary policy and our monetary policy are just two sides of the same coin, and in either case the government controls the value of the currency it issues.

  53. Gravatar of Doug M Doug M
    4. October 2012 at 10:46

    Saturos,

    CDs are commercial bank borrowing. Every CD the bank sells levers the bank’s balance sheet. And, reserve requirement or not, there is a maximal desirable degree of leverage.

    Banks issue short term liabilities (CDs) and buy long term assets (loans and securities). They then plege those assets as collateral to borrow more money (REPO). The bank needs to constantly roll over this portfolio of short-term liabilities to stay afloat. When the need to by CDs gets to be too high (the bank is over-levered), and investors become concerned that the bank will not be able to continue to roll over their short term liabilities, counterparties refuse to buy more CDs or engage in REPOs with the bank. This is the modern incarnation of the old-fashion bank run.

    However, this measure of maximal leverage is higher than what is rational for a bank to do. The long run expected return to the bank equal the product of (1+leverage*periodic return on assets) over all periods. To maximize the long run expected return leverage < expected return / expected risk^2.

    Of course, the bank may under estimate the risk of find that they are unable to unwind their book quickly enough and find themselves over-levered, on the brink of collapse or in fact bankrupt.

  54. Gravatar of Major_Freedom Major_Freedom
    4. October 2012 at 10:53

    Matt Waters:

    So is or is not Iran’s government ultimately responsible for the devaluation on the rial?

    Without the market, there can be no higher or lower valuation of any rials. It takes two to tango with fiat money.

    With free market money, no state is needed to input its values, because the market process does it all, including the manifestation of aggregate statistics.

    How people react to Iran’s hyperinflation is an interesting acid test of whether they still hold 70′s economist views on inflation. The view then was that government was at the mercy of the market. It was oil prices or unions or whatever. Then Volker showed that if a central bank really wanted to, it could stop inflation.

    Sure, but even that required the market to keep using the dollars such that you can even observe a rise in its foreign exchange value, and rise in purchasing power.

    Now people are talking about Iranian hyperinflation in similar terms, such as the people losing confidence and running on the currency. But as far as I know, the central bank still has considerable assets it could sell. It’s not selling them because the government likes to have dollars around for its plutocracy or whatever, but the fact remains it could sell its dollars and other assets.

    I wonder just how big their balance sheet is. Aren’t they selling oil in Euros and gold now, which is one of the main reasons the west wants to invade?

    But if the market has, uh, expectations that it won’t sell assets, then there would be a run on the rial.

    Isn’t that what is happening now?

    http://www.forexticket.com/en/currency/converter-USD-IRR

    Their monetary policy and our monetary policy are just two sides of the same coin, and in either case the government controls the value of the currency it issues.

    No, the market controls the value. The central banks control the supply. Value is not synonymous with supply. They are inter-related.

  55. Gravatar of Matt Waters Matt Waters
    4. October 2012 at 12:02

    “The central banks control the supply. Value is not synonymous with supply. They are inter-related.”

    This is actually quite correct and in fact the base of a market monetarist expectations argument. At some extreme, it is possible that the Iranian currency will become demanded by absolutely nobody. Therefore, even if the supply goes to zero, the value will remain at zero. This happened in Zimbabwe, when the country eventually gave up and dollarized its economy.

    But assuming the currency is still required for taxes, it will retain some value as the central bank takes currency out of circulation and the government requires taxes in the currency. Again, if the government wanted to, it could sell its assets (dollars, euros, gold, whatever) until the value stabilized. This will punish those who cashed in their currency for other assets. In other words, the Chuck Norris effect.

    It is interesting how the expectations argument works both ways, for lowering or increasing inflation. In either case, the government has to really want to do whatever it should be doing. And an NGDP target helps outline specifically what the government’s target is.

  56. Gravatar of Major_Freedom Major_Freedom
    4. October 2012 at 12:54

    Matt Waters:

    But assuming the currency is still required for taxes, it will retain some value as the central bank takes currency out of circulation and the government requires taxes in the currency.

    This is right, and is actually the base of the libertarian critique. If the aggression that is behind taxation ceased, and people did not have to go out and acquire federal reserve notes in order to avoid being thrown into a cage, then the seeming “value” relating to the notes would all but disappear, and people would almost certainly begin to utilize a different store of value and medium of exchange, and the fed notes would become kindling, or wallpaper.

    It is interesting how the expectations argument works both ways, for lowering or increasing inflation. In either case, the government has to really want to do whatever it should be doing. And an NGDP target helps outline specifically what the government’s target is.

    The question of what the government should be doing should have been put to rest a long time ago, but too many humans are still too dependent, and so there remains an opening for personal gains to be made at their expense, such as the NGDP targeting “rule” you suggest.

  57. Gravatar of Matt Waters Matt Waters
    4. October 2012 at 14:45

    “If the aggression that is behind taxation ceased”

    And that goes back to my original point that, even if they don’t know it, Austrians are basically longing for some Anarcho-Capitalist system. Any kind of state, for it to be a state, must have the force of law behind it. It must wield the sword or otherwise it’s just a contract, not a state.

    Ideally, we could just go along with everything as a contract, but things like policing and defense and roads have either free rider problems or natural monopoly problems. To not have free riders, everybody has to collectively enforce that there are no free riders, using force if necessary.

    The power to force people to do things they don’t want to do, like pay taxes, should not be wielded lightly. That is why a democracy, within specific bounds is ideal. Then the bounds can only be stretched with things like supermajorities. Ideally, in a contract society, the 80% could not force the 20% to pay for something like national defense. But the market failures do not leave that as an option.

    As far as money goes, nearly all civilized countries have adopted some form of a universal medium of exchange. The reason for money ties into the reason for things like the FDIC. Having private money is similar to having uninsured bank accounts. Theoretically, a rational market would immediately value the private money or the bank’s balance sheet in real time. But in the real world, there are significant principal-agent issues which preclude any one private actor from really knowing the solvency of, say, complex bank assets. Even if a bank is fundamentally solvent, a bank run for any reason causes losses for bank debtors. See Gary Gorton for more on information-sensitive vs. information-insensitive.

    Deep down, at the root of it all, that’s the real issue for hard money, ZeroHedge types. Government responsive to democratic elections can in fact do some things better than a completely free market. They generally say that there is no way in hell that government can help, but without any sort of evidence. Unfortunately, the evidence does say government can sometimes help significantly.

  58. Gravatar of Major_Freedom Major_Freedom
    4. October 2012 at 18:27

    Matt Waters:

    It is a non sequitur to assert that because anarcho-capitalism (allegedly) contains “free riding” or “natural monopolies”, that statism is therefore justified. For it rests on a few unstated assumptions.

    1. It assumes statism does not contain free riding or natural monopolies. That assumption is clearly false because the state itself is a geographical monopoly of final jurisdiction over security and protection matters. It is silly to think that if you want to eliminate monopolies, that creating a massive monopoly is the solution. As for free riding, statism is steeped in it. The welfare system is free riding. The politicians who confiscate other people’s money without consent are free riding. There is free riding everywhere in statism.

    2. It assumes that the good or service in question under which there is allegedly free riding, is a good or service that is actually valued by freely cooperating individuals. Typically, statists make the assertion that because the market won’t produce X, that this means the state is justified. The market is not only a system of production, but also a system of rejecting wasteful and lowly valued productions. Not every cockamamie project should be undertaken, even those proposed by those who can’t get it done within a peaceful interaction framework.

    3. It assumes that natural monopolies in competition are inherently an evil, when in reality they are not. If consumers value a good or service from only a single producer in competition, because that producer is just too good, then consumers would incur losses should a coercive institution break that company up to make the world look closer to the absurd “pure and perfect competition” ideal. If I only buy phones from Apple because I think they are the best, and if the situation ever arises that everyone else agrees with me, such that Apple is the only phone producer, then this is an optimal solution from the consumer’s perspective, since they are getting what they want from who they want. Moreover, the whole concept of monopoly rests on a shaky foundation, because every producer can be viewed as a monopoly, if we drill down on the products themselves and observe that the same “type” of product sold by different sellers, can be viewed as in fact different from each other. Only McDonalds makes Big Macs, and hence they have a monopoly over that particular good. Only Toyota produces and sells the Camry. And so on. Are these companies exploiting the consumers because they are the only producers of such products? Hardly.

    You said:

    “The power to force people to do things they don’t want to do, like pay taxes, should not be wielded lightly. That is why a democracy, within specific bounds is ideal.”

    This is just another non sequitur. The fact that the use of force “should not be wielded lightly”, does not imply that democracy is ideal. Democracy is the ideology that whatever 50% plus 1 agree to, that agreement is justified. That’s it. Nobody actually believes in democracy except for a few sociopaths in society. Democracy is a sham. It says nothing more than the majority can use force against the minority if it wants.

    Anything else you believe in, ethics-wise, that goes beyond the above, is NOT democracy. If you believe the majority does not have the right to murder the minority just because they desire it, then you are not using democratic principles, but something else, something akin to what I believe in.

    Democracy is a watered down version of communism. The only difference is that instead of a communist party having the self-professed right to loot and pillage other people and their property, that self-professed right goes into the hands of 50% plus 1. No property is safe in democracy, because it can always be voted away by the majority.

    The US was not even intended to be a democracy. The founders loathed it because they knew that it is a tyrannical ethic. That is why they designed this country to be a constitutional republic (even though that too was error-ridden).

    Democracy is also not sustainable. It encourages laziness, sloth, sense of entitlement, and cultural corruption, precisely because it systematically breaks down the culture built on individual private property. Europe is the ideal democracy, and that region is collapsing before our eyes (no, it’s not because NGDP isn’t high enough).

    It is not a “market failure” that 80% would pay for defense while 20% do not. You smuggled in the word “national” in national defense, as if in a contract society there is something other that private property, and defense of whoever agrees to private defense contracts. There is no such thing as “national” defense. If 80% pay for defense, and 20% do not, then the 20% are left undefended. That is there choice. If you say the 20% should have defense, so a state is needed to loot from the 80% to pay for the 20%, then you just codified free riding.

    Regarding money. It does not follow from the fact that modern industrial societies adopt a universal medium of exchange, that this means the state has to control it. The market has historically, and will again if given the freedom, adopt a universal medium of exchange voluntarily. Gold and silver arose as universal mediums of exchange without a single state decree, in places all over the world, from thousands of years ago to today. If in monetary freedom there is more than one commodity used as money, then you must understand that to mean individuals have not determined there to be gains that can be made by adopting a more popular currency at that time. Furthermore, the free market would almost certainly result in far fewer currencies than what exist today under central banking. There are over one hundred fiat currencies used throughout the world today. It is very likely that if central banking worldwide was faced with legalized competition, then very soon, the entire world would adopt precious metals as money and shrink the number of currencies down to a handful. You want more civilized money? Abolish the coercive monetary monopolies, the very concept of monopoly that you are complaining about when thinking about the market!

    For FDIC, the only reason it exists is to maintain fractional reserve banking and externalize the costs on everyone when banks cannot make good on their demand deposit withdrawals. It is not true insurance, because when banks go bankrupt, the deposits are insured by inflation, which dilutes the value of everyone else’s money. These negative externalities do not exist with private money. With private money, if a bank goes bankrupt, then the costs are localized to the customers of that bank, not other parties who have nothing to do with it.

    And what is this about principle agent issues? That exists in statism, because we have literally zero clue what goes on behind closed doors at politician-banker meetings. We still do not know all the details of what happened in 2008. The people are being kept in the dark, and you think that banks that can no longer depend on FDIC would be MORE secretive? Please. Do you honestly believe the average Joe Schmo knows what his bank does with his money today? A recent study found that over 70% of the people in the UK have no clue about the contract rights of their demand deposits. A free banking system would increase the incentives bankers have in keeping their client’s money safe, because the people will be far more skeptical and prudent when choosing banks. Right now, people do very little research in the area of banking.

    The average person does more research with computers and cars than they do with banking.

    If a bank is solvent, then a bank run should not cause it to go bankrupt, because presumably it would have sufficient reserves. If it doesn’t, then that will teach people not to use that bank. Better bankers would expand, and bad bankers would contract.

    You claim that a government responsive to elections can do some things better than a competitive market. And what pray tell are these some things? You haven’t presented any evidence for that claim. The evidence does not say the government can help. You are almost certainly ignoring the costs, the FULL costs.

  59. Gravatar of Matt Waters Matt Waters
    4. October 2012 at 21:06

    So if I understand you correctly, your ideal America would have all power to tax dissolved and thus all government dissolved? That is anarcho-capitalism.

    By the fact that nearly every human being today is actually under some sort of collective government, it shows that a stateless society is simply not sustainable. Governments weren’t planted down by evil Keynesians, but were natural outgrowths of how societies organized themselves due to either invasions by others or to protect themselves from invasions.

    Saying that 20% could just be “undefended” shows you have not put any thought at all into what the free rider problem is. If, say, the Soviets launched a nuke at us, it would not just hit the 20% who didn’t pay for a missile defense system. Either 0% of the people are protected of 100%. If it is optional to pay for defense, then it is in everybody’s best interest not to pay. We saw this under the Articles of Confederacy, when the federal government could not levy taxes and that left the infant country very weak against foreign attack.

    If you cannot understand this basic point, then you are even more misguided than I thought before. However much you tie yourself to anarcho-capitalist dogma, the weight of history stands against you.

  60. Gravatar of Major_Freedom Major_Freedom
    5. October 2012 at 03:55

    So if I understand you correctly, your ideal America would have all power to tax dissolved and thus all government dissolved? That is anarcho-capitalism.

    My ideal is separate from freeing up the monetary system.

    By the fact that nearly every human being today is actually under some sort of collective government, it shows that a stateless society is simply not sustainable

    Bad logic. Slavery existed for thousands of years, until it didn’t. There are many social behaviors that are new. Humans can learn and change their ways. We are not condemned to repeating the past over and over.

    Governments weren’t planted down by evil Keynesians, but were natural outgrowths of how societies organized themselves due to either invasions by others or to protect themselves from invasions.

    Governments aren’t natural as if they are laws of nature. They are choices. If there were still monarchies all over the world, would you have said that Kings and Queens are natural?

    Saying that 20% could just be “undefended” shows you have not put any thought at all into what the free rider problem is.

    No, it shows you have not put any thought into what private property means.

    If, say, the Soviets launched a nuke at us, it would not just hit the 20% who didn’t pay for a missile defense system.

    The 20% are not members of the same collective as the 80%.

    Either 0% of the people are protected of 100%. If it is optional to pay for defense, then it is in everybody’s best interest not to pay.

    Then nobody pays. If nobody wants to pay, they should not be forced to pay.

    We saw this under the Articles of Confederacy, when the federal government could not levy taxes and that left the infant country very weak against foreign attack.

    It is not justified to rob from A so that B can be prevented from being robbed by C.

    If you cannot understand this basic point, then you are even more misguided than I thought before.

    I understand the point, my problem is that I don’t think you understand mine.

    However much you tie yourself to anarcho-capitalist dogma, the weight of history stands against you.

    It isn’t dogma. History is not chains.

  61. Gravatar of Major_Freedom Major_Freedom
    5. October 2012 at 03:56

    Your responses are contradictory.

  62. Gravatar of Major_Freedom Major_Freedom
    5. October 2012 at 04:03

    Matt:

    Since you are having trouble understanding freedom, I’ll put the same idea in words you can understand.

    Suppose we assume the real world countries that exist today. Suppose the Soviets threaten to invade “North America.” Suppose the US pays for adequate defense, but the Canadians do not. They rely on us.

    Does that mean we have a right to force Canadians to pay for North American defense?

    If you say no, then you get my point.

  63. Gravatar of Major_Freedom Major_Freedom
    5. October 2012 at 04:38

    Or, suppose there is a neighborhood, where 90% of the inhabitants improve the quality and appearance of their front yards and the general area surrounding their homes. If the 10% do nothing, and let weeds grow and garbage collect on their properties, their property values will nevertheless increase on account of what the 90% did. Does this mean that the 90% have a right to enslave the 10% and force them to perform labor to improve their properties? If not, then you tolerate free riding.

    PS I should have said Russians.

  64. Gravatar of Matt Waters Matt Waters
    5. October 2012 at 14:39

    You are making my point for me. You don’t typically find countries with very disjoint geographies. You find borders like the Rio Grande or the US/Canadian border. With continuous geographic divisions, it allows things like Russians to invade Canada without allowing them to invade the US.

    There is a big difference between US and Canada having separate defense forces and, say, some homes in San Diego paying for defense against Mexican invasion and some homes not paying for defense.

    In defending the hypothetical invasion of San Diego, the private San Diego defense force could not just defend the territory of those who paid and leave the Mexicans to take over the rest. It would be far more efficient to put up a united front against invasion.

    Every individual San Diego resident would therefore have an incentive to not pay. Again, this is not completely theoretical. For one example, the original colonies had essentially no central government, but then they figured out they couldn’t have things like a strong Navy without a central government.

    As far as weeds and garbage collecting, you have never heard of HOA associations? That’s not really a free rider issue, but more the issue of externalities. You can go to China or 1970′s LA, to see places which don’t care about externalities. In real life, you don’t get a Coasean paradise where five million car drivers enter a contract with each other to not pollute. The transaction costs to eliminate welfare-reducing externalities are just too high and government intervention is far more efficient and leads to better welfare than simply not regulating pollution at all.

    Basically, you are absolutely blind to how any market failures could ever occur, in any circumstance, such as free rider problems, natural monopolies or externalities. This blindness is convenient for being compatible with a world without government, but it is not compatible with the world as it actually exists. For those who actually suffer through things like Chinese pollution or the threat of mongol invaders to their village, the need for some kind of enforcement of collective contribution is clear.

  65. Gravatar of Razer Razer
    5. October 2012 at 15:15

    Matt,

    Study up on private property rights before you embarrass yourself any further. The State is responsible for more deaths than wars have claimed. You think the state has done a wonderful job with pollution in, say, Russia (Chernobyl) or in China? You think the state has a handle on externalities? Please.

    How about when a state goes on a war mongering spree and forces its citizens to pay for it, even the ones who are against wars. Are you for coercing citizens to pay for things they are morally against?

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