When you are in a Keynesian world . . .
. . . the appropriate policy is not “Keynesian.” The appropriate policy is to exit the Keynesian world. How do we know we are in a Keynesian world? Just think back to the 1930s:
1. Lots of talk about how millions of workers will be permanently unemployment by technological progress. (Sound familiar?) In the 1930s this actually was slightly excusable, as productivity growth was fast. Now we have very slow productivity growth (Great Stagnation), so the technological unemployment argument is just silly—made by people who don’t understand AD shocks.
2. Ultra-low long term interest rates.
3. Lots of worry about inflation even though inflation is the lowest in decades.
4. Worry that companies need to be bailed out, or else unemployment will rise.
5. Calls for fiscal stimulus to generate jobs.
6. Claims that monetary policy is ineffective because rates are near zero.
Note that none of those things occurred during the 1990s, despite even higher inflation, and even higher productivity growth. It’s all about misdiagnosis.
What conservatives don’t realize is that the solution to being in a Keynesian world is to return to the classical world ASAP. Was QE3 intended to do that? Bernanke probably hopes so, but it’s quite possible that the Fed as a whole is merely treading water. Why are people like Kocherlakota now more sympathetic to stimulus? Why did the Fed “move” more than expected a few weeks back? Perhaps because they are simply trying to maintain the status quo. Not Bernanke, who probably really does want to do more, but the institution a a whole.
It’s likely that with the recession in Europe, sharply slower growth in developing countries, and the oncoming fiscal cliff, there would have been a slowdown in 2013 without QE3, which would have put the Fed in a really difficult spot. Here’s Jan Hatzius:
We are surprised that neither party has seriously challenged the case for near-term fiscal retrenchment. In particular, the expiration of the $126bn payroll tax cut (1% of disposable income) is almost universally accepted. This expiration alone is likely to shave 0.6 percentage point from 2012 growth on a Q4/Q4 basis””the same order of magnitude as the estimated boost from QE3″”at a time when investors are lining up to finance
US government expenditure at a real 10-year yield of -0.8%. While we agree that the US government will ultimately need to tighten its belt, a big move in a restrictive direction still looks decidedly premature to us.
Bernanke explicitly indicated that the Fed had to take fiscal policy into account when deciding how best to hit their targets. That’s fiscal offset, which reduces the fiscal multiplier. Of course the Fed doesn’t know exactly what Congress will do, so my hunch is the Fed is reacting to the most likely scenario. Hatzius seems to feel they provided just enough to offset the most like fiscal retrenchment.
Don’t get me wrong, I think the Fed would have done some sort of QE3 even without the fiscal cliff, but I also believe this looming cliff helps explain why the move was more aggressive than forecast. NGDP growth dropped to 2.77% in the second quarter, and it seems like the Fed wants to get it back up over 4%. Eventually they’ll succeed, but it will be a limited “success.” We’ll still be in a Keynesian world for many years. And we’ll react to that fact not by getting out of the Keynesian world, as we should, but rather by continuing to run big deficits and bailing out firms that are failing.
As far as I know there have been only two previous zero interest rate policies, the US during 1932-51, and Japan since the mid-1990s (and still counting.) There’s no reason to believe that rates are going to rise anytime soon. The Fed still needs a higher NGDP target. A few weeks ago they took some baby steps in the right direction. Now it’s time to follow-up with even more specificity. Where exactly does the Fed want to go? And how badly do they want to get there?
I won’t sleep comfortably until the 10 year T-bond yield is back up over 3% (or the Fed abandons interest rate targeting.)
Which means I might not sleep well for the rest of my life . . .
Tags:
11. October 2012 at 06:12
This is another very point-blank post, love these.
Yes, fiscal cliff is probably the best explanation for new Fed policy.
11. October 2012 at 06:33
Probably off-topic (I haven’t read this post yet), but wanted to point out a speech happening right now by Jeremy Stein:
http://www.c-span.org/Events/Federal-Reserve-Governor-Speaks-at-the-Brookings-Institution/10737434900-1/
And the text:
http://www.federalreserve.gov/newsevents/speech/stein20121011a.htm
Would be useful to get an understanding of his views on monetary policy, discussion of which seemed to be absent during the confirmation period.
11. October 2012 at 07:09
wow, I love the point of higher NGDP target. But I am confusing on what will happen if it;s in a Keynesian world. All the conclusions listed above are fair enough, but why creating positions through fiscal policy is a bad idea? at least it is effective.
11. October 2012 at 07:11
Classic moment on TV here in Australia tonight – Alan Kohler reported that the AUD appreciated on the news of the RBA’s rate cut, ostensible in response to rising unemployment figures, and for once confessed that he had “no clue why that happened”. I’m guessing that in fact it was because the RBA was effectively tightening policy, as it has been for the past year (NGDP is dipping below trend this year). The unemployment is mostly due to rising labor force participation this year, as the extra immigration over the past five years is finally getting a chance to feed into the labor force, as RGDP growth is picking back up – but also due to monetary tightening. The market sees that NGDP growth will be insufficient this year, the natural real rate has fallen (I’m guessing), and the RBA isn’t even lowering enough to keep up with that, so rates are going to be above equilibrium and hence the currency has appreciated. RGDP growth is dipping down from 4.3% in Q2 to 3.7% in Q3, even though it should be at 5% by now.
And that’s my analysis of where the Australian economy is at right now. ;P Feel free to correct.
11. October 2012 at 07:11
Scott,
“I won’t sleep comfortably until the 10 year T-bond yield is back up over 3%”
Agree 100%…
“(or the Fed abandons interest rate targeting.)”
I don’t even know what that means. It’s easy to throw statements like that around, but I think you really owe it to the world to describe the mechanics of a remotely functional and efficient system for clearing interbank settlements in a fractional reserve banking system, that *doesn’t* have the CB setting the interbank rate when that rate differs from IOR. The fact is, the interbank settlement market will completely fail (or the rate will go to zero) the moment you try to directly control the quantity of excess reserves. The *only* excess reserve policy that is coherent *at all* is a rate policy.
Also, the rate is not a “target,” it’s an instrument. As you know, the current target is inflation. The CB can’t control two targets at the same time.
11. October 2012 at 07:47
The world academic macroeconomists refuse to live in is the world were there is a choice between longer or shorter production processes and superior or inferior output and money substitute assets of changing liquidity, risk & value – a world were there is a massive, stretching, twisting net of relative price relations between all element in the economic system, involving heterogeneous production processes, heterogeneous labor inputs, heterogeneous entrepreneurial learners, and heterogeneous consuming choosers, etc.
Even the 19th century ‘classicals’ didn’t didn’t attempt to explain the world using Keynes’ fraudulent ‘classical’ invention (which was simply Keynes’ bogus & error-ridden re-construction of Pigou, as Keynes admits), and the “Keynesian world” used by modern macroeconomists is as fraudulent and bogus as is Keynes’ made up “classical” world.
11. October 2012 at 07:59
K, why would they control excess reserves, Fed simply controls total base money and leaves rest to private actors. Money supply targeting is an entirely coherent policy which has been tried elsewhere. So has the gold standard. What’s wrong with pegging money supply adjustments to an NGDP futures contract?
11. October 2012 at 08:02
Saturos, Thanks for the info on Australia. I wish we had your problems.
Thanks Jason.
Ning, Fiscal policy is pretty weak, unless the central bank in incompetent. But if the central bank is incompetent the solution is to make it more competent, not to engage in fiscal stimulus in the hope that the Fed is incompetent.
K, The Fed stopped targeting the fed funds rate in the early 1980s, and the rate was far different from the IOR (which was zero, as it should be.)
The fed funds market is a market. It can find an equilibrium rate regardless of whether the Fed targets the rate.
The Fed should totally ignore the banking system and abolish member bank deposts at the Fed. Just make the base 100% currency, and adjust the currency stock to keep NGDP expectations on target. Let the financial markets take care of themselves.
If they keep NGDP expectations growing at a healthy clip, 10 year bond yields will probably rise above 10% pretty quickly.
11. October 2012 at 08:15
Now we have very slow productivity growth (Great Stagnation), so the technological unemployment argument is just silly””made by people who don’t understand AD shocks.
Or maybe they read this article and were led (misled?) into believing that since stagnating productivity (real wages) since the early 1970s was allegedly caused by a sudden collapse in technological innovation, that they would believe very slow productivity growth (Great Stagnation) is due to the same reason.
Have we had insufficient money printing since the early 1970s? Do we need to go back to tying the dollar to gold so that more dollars will be printed? Did Nixon and the bankers drop the gold redemption clause in 1971 because they wanted there to be fewer dollars in circulation?
—————
Was QE3 intended to do that? Bernanke probably hopes so, but it’s quite possible that the Fed as a whole is merely treading water. Why are people like Kocherlakota now more sympathetic to stimulus? Why did the Fed “move” more than expected a few weeks back?
The Federal Reserve Cartel was created by the banks, and for the banks. Just like one can better understand OPEC’s actions when viewed as a legalized oil cartel, so too can one better understand the Fed’s actions when viewed as a legalized banking cartel.
The Fed’s sole purpose is to ensure the banking cartel remains solvent, so that the banks can continue to lend money into existence and earn interest. To avoid runaway inflation and to avoid individual bank failures, they designed the central bank to facilitate a general credit expansion tendency among all banks in the cartel, so that inter-bank transfers don’t collapse member banks.
All your questions can be answered if you understand the Fed as a banking cartel. QE3 was intended to benefit the banks who still have worthless MBS on their balance sheets. The Fed “moved” more than expected a few weeks back…to benefit the banks in a sluggish economy with few interest earning opportunities (very high excess reserves are held dormant).
The view market monetarists have of the Fed is, quite frankly, incredibly naive. Maybe it is the influence of Milton Friedman, who devoted all of 11 pages in his magnum opus on the who’s who of the Fed’s creation, and who argued on more than one occasion that the purpose of the Fed was altruistic, to benefit the common good. Whatever the reason, the approach you guys are taking is like an oil analyst who tries to understand everything OPEC does by assuming OPEC was created and remains legally protected in order to help oil consumers and to benefit the common good. And then, the oil analyst asks “How does this benefit the common good?” every time OPEC does something, and then they believe they have found the actual purpose of the OPEC action.
—————-
I won’t sleep comfortably until the 10 year T-bond yield is back up over 3% (or the Fed abandons interest rate targeting.)
As long as the banking cartel is BUYING 10 year T-bonds, and thus boosting their market prices through the mechanism of “front running”, prepare for no comfortable sleep for the foreseeable future.
11. October 2012 at 08:15
Until we realize that this is a debt-based crisis–we won’t be out. This crisis will not disappear until the debt burden is near sustainable levels. There’s a reason why ancient societies used to have years where debts were forgiven–in the Bible, it was called the year of the Jubilee. Other ancient societies did the same things. Ray Dalio of Bridgewater Associates studied this extensively and wrote several very good papers on it.
The great thing about NGDP targeting is that you can set a NGDP target of 5-6% and grow your way out of debt. It’s a much better option than targeting inflation–which really doesn’t make sense to target since money is not neutral in the short/medium term.
11. October 2012 at 08:17
Note that the papers from Bridgewater I refer to are papers on deleveragings and the role of credit.
http://www.bwater.com/Uploads/FileManager/research/how-the-economic-machine-works/How-the-Economic-Machine%20Works–A-Template-for-Understanding-What-is-Happening-Now-Ray-Dalio-Bridgewater.pdf
http://www.bwater.com/Uploads/FileManager/research/deleveraging/an-in-depth-look-at-deleveragings–ray-dalio-bridgewater.pdf
11. October 2012 at 08:20
Suvy
Until we realize that this is a debt-based crisis-we won’t be out. This crisis will not disappear until the debt burden is near sustainable levels.
Debt contraction requires income contraction. Income contraction will expose malinvestments and increase short term unemployment and idle resources. That will collapse interest earning opportunities by the banks, and so the Fed, who works for the banks, won’t let that happen.
They want debt to remain high because debt is what earns them interest income.
11. October 2012 at 08:25
Garett Jones has a new EconTalk about Fisher’s debt-deflation theory, anyone heard it yet?
Scott, I wish you had our problems too. (Instead of the ones you have now, I mean.) Instead of a paralysing fiscal cliff, our parliament has been hung up on a petty sexting-scandal, which led to the Speaker stepping down.
11. October 2012 at 08:26
MF, yeah, ’cause the last thing the Fed would ever do is let income contract…
11. October 2012 at 08:32
Chinese guy just won the Nobel for Literature. According to the Guardian, he wrote “hallucinatory realism”. (Put that in your pipe and smoke it.)
11. October 2012 at 08:42
MF
“Debt contraction requires income contraction.”
This is only true if you don’t have inflation. You can still have the level of nominal debt increasing while the debt/income ratio goes down. The key thing is to make sure nominal incomes rise faster than nominal debts. With NGDP targeting, you set a NGDP target of 6%–so either the real growth of the economy or inflation will wipe out the real value of the debt. Inflation is a solution to a debt-based crisis, the important thing is to make sure it doesn’t get out of control.
The problem is if you let the people go bankrupt, one person’s liability is another person’s asset–so asset prices plunge. Therefore, all of those pension funds that hold those mortgage backed securities and all of those companies and retirement funds that hold assets could collapse–this is painful and deflationary. You’ll end up being stuck in a debt deflation where nominal debts fall, but nominal incomes fall faster–so the real debt burden increases. You’ll end up in the situation you had from 1929-1933 where debts fell, but incomes fell faster–unemployment shoots up, etc etc. The last thing you want with a high level of debt is deflation.
11. October 2012 at 09:08
Saturos:
MF, yeah, ’cause the last thing the Fed would ever do is let income contract…
Nobody said the Fed had perfect foresight. I was talking about intentions, not actual outcomes.
The most important incomes for the cartel are the incomes of those parties who owe the banks the most money. That’s why during 2008 the Fed loaned and bailed out GE, Caterpillar, financial institutions with MBS, the Treasury, and so on, rather than Joe the local car mechanic and the neighborhood dry cleaners. The incomes of the latter can collapse, and the cartel’s profits are not as threatened. But if a financial institution with lots of debt from a member bank goes bankrupt, that’s when we hear “too big to fail” and “we want to save the economy.”
If the Fed cartel truly cared about “the economy”, then they would be sending checks to “the economy”, rather than “a select few parties” all the time.
——————–
Suvy:
This is only true if you don’t have inflation.
Actually not quite, because in our monetary system, inflation is generated through debt expansion. Inflation is not just rising prices and growing nominal incomes. If inflation enters the economy as debt, then the rise in prices and incomes will be accompanied by a rise in debt, thus nullifying our context that sees a contracting of the debt.
You can still have the level of nominal debt increasing while the debt/income ratio goes down. The key thing is to make sure nominal incomes rise faster than nominal debts.
The only way to do that is if the Fed sends their checks to parties that are not in the business of lending. That is, if as a matter of permanent policy, the Fed sends checks to non-banker parties. Good luck convincing the cartel to do that.
With NGDP targeting, you set a NGDP target of 6%-so either the real growth of the economy or inflation will wipe out the real value of the debt. Inflation is a solution to a debt-based crisis, the important thing is to make sure it doesn’t get out of control.
NGDP targeting that is based on credit expansion cannot wipe out credit.
The problem is if you let the people go bankrupt, one person’s liability is another person’s asset-so asset prices plunge.
Which people? Not me, I don’t have outstanding debt. Why should my cash and income be devalued for the sake of bailing out some spendthrift borrower?
Therefore, all of those pension funds that hold those mortgage backed securities and all of those companies and retirement funds that hold assets could collapse-this is painful and deflationary.
They should never have been blown up in the first place. THAT is where the real “pain” resides. It just doesn’t FEEL like pain. The contraction is the cure.
You’ll end up being stuck in a debt deflation where nominal debts fall, but nominal incomes fall faster-so the real debt burden increases. You’ll end up in the situation you had from 1929-1933 where debts fell, but incomes fell faster-unemployment shoots up, etc etc. The last thing you want with a high level of debt is deflation.
The first thing I want after inflation is deflation. Nominal debts falling, nominal incomes falling, everything falling until there is a REAL desire to spend money and invest/consume, rather than spending and investing being goosed by inflation, which distorts economic calculation and causes the sudden drop in incomes in the first place.
11. October 2012 at 09:35
“Inflation is generated through debt expansion”
This doesn’t have to be true at all. You can literally print money to pay off debts. In a way, that’s what the Fed is doing with by buying MBS.
You can literally print money to wipe out debt. It’s called debt monetization and it’s been done before. You would’ve known this if you actually bothered to even take a look at the papers I posted.
You want “a real desire to spend money and consume”. What the hell is a “real desire”? There’s no such thing, you either consume or you don’t.
MF, you’re not even thinking about the demand side. Capitalism is an inherently unstable system–that’s what creates the good and bad aspects of it. The instability and dynamism of capitalism leads to innovation, but it can also lead to violent blowups.
“The contraction is the cure.”
This is just complete nonsense. If you leave it to capitalism, it’ll collapse in on itself. Capitalism doesn’t “cure itself”, it’ll destroy itself. It’s called a debt deflation.
“inflation, which distorts economic calculation…”
That’s complete garbage. Markets are not efficient and never will be. They’re highly unstable, wild, and unpredictable because that’s how people are. The way we behave with each other is correlated.
Granted, there is a good argument that fractional reserve banking and a central bank do create instability because of the creation of debt; however, debt does play a positive role in society. If you want to get rid of fractional reserve and return to a currency 100% backed by gold, you’re making it a lot harder for people to get loans. You’re making it harder for people to start businesses, etc etc. Not to mention that returning to a currency backed by gold is really not practical because the price of gold depends on things that no one can control(like what goes on in mines in South Africa).
Also, what stops people from issuing gold certificates(which would be a form of debt)?
MF, you’re using a lot of jargon and assumptions that really don’t make sense if you look at the data.
11. October 2012 at 09:41
“I won’t sleep comfortably until the 10 year T-bond yield is back up over 3% (or the Fed abandons interest rate targeting.)”
Did you mean to say inflation rate targeting?
11. October 2012 at 10:16
Suvy:
“Inflation is generated through debt expansion”
This doesn’t have to be true at all.
I know it doesn’t have to be true, but that is how it is done now. The Fed sends checks to the banks, the banks expand credit, the Fed sends more checks to the banks, and so on.
What exactly do you suggest?
You can literally print money to pay off debts.
Whose debts? How will those people receive the newly created money? If I have outstanding debt, does this mean I will receive a check from the Fed in exchange for something, or nothing?
In a way, that’s what the Fed is doing with by buying MBS.
From who? Are they buying the MBS I own? No, they’re buying them from banks.
You can literally print money to wipe out debt. It’s called debt monetization and it’s been done before. You would’ve known this if you actually bothered to even take a look at the papers I posted.
Oh please. Spare me with the patronization. I know all about debt monetization. I use the phrase at least once a week.
When the Fed monetizes debt, they tend to monetize treasury debt, which means the treasury is able to borrow and the costs of that borrowing get externalized onto everyone else who owns depreciated dollars. When people talk about “too much debt in the economy” however, they don’t just mean federal debt, they mean debt within the market. This debt tends not to be monetized by the Fed.
You want “a real desire to spend money and consume”. What the hell is a “real desire”? There’s no such thing, you either consume or you don’t.
By “real” I mean via unhampered price signals, so that each individual’s desire is constrained by every other individual’s desire via the price system of profit and loss. With a central bank, these signals become distorted, and each individual’s desire is NOT so constrained, and what happens is that physical resource scarcity is manifested in a painful way through crises and recessions, rather than through daily profit and loss calculations.
MF, you’re not even thinking about the demand side.
Suvy, you’re not even thinking of the real side.
Capitalism is an inherently unstable system-that’s what creates the good and bad aspects of it.
This claim is not based on empirical data, because we don’t have capitalism, but a state hampered market economy.
So your claim must be based on theoretical considerations. Since theoretical considerations actually lead to the conclusion that capitalism is very stable, in fact the most stable social ethic of any other so far discovered, it must mean that you are a believer of one or more contradictory pairs of premises.
Central banking is what is inherently destabilizing, because it distorts the stabilizing pricing signals that are needed for a division of labor economy to be in coordination at the individual level.
The instability and dynamism of capitalism leads to innovation, but it can also lead to violent blowups.
You are not talking about capitalism. The Federal Reserve cartel is not a capitalist institution. it is a socialist institution.
“The contraction is the cure.”
This is just complete nonsense.
Denying it is just complete nonsense.
If you leave it to capitalism, it’ll collapse in on itself. Capitalism doesn’t “cure itself”, it’ll destroy itself. It’s called a debt deflation.
There is no inherent debt deflation in capitalism, because there is no inherent debt inflation in capitalism. Debt in capitalism is constrained to that which is first saved. With credit expansion inherent in the banking cartel system, it increases debt beyond that which is first saved, which has the inevitable outcome of debt deflation in the future.
Capitalism doesn’t collapse in on itself. That is just insane.
Capitalism is the cure for what ails us. Not all of us are practising capitalism, and that is why there is instability. If you get the individuals controlling the banking cartel to abolish it, then you will remove a major destabilizing force that plagues our society, which you ignorantly call capitalism.
“inflation, which distorts economic calculation…”
That’s complete garbage.
Denying it is complete garbage.
Markets are not efficient and never will be.
That’s exactly why inflation distorts economic calculation, genius. It is precisely because individuals are not omniscient Gods who can discern from the pricing signals that which is due to actual individual market actor behavior, and that which is due to the central banking cartel’s influence. You are making my point for me.
Governments are not efficient and never will be. Cartels are not efficient and never will be.
You are tacitly insinuating that because individuals are not perfect, governments…made of PEOPLE…can perfect imperfect people. Your whole worldview is a contradiction.
They’re highly unstable, wild, and unpredictable because that’s how people are. The way we behave with each other is correlated.
If people are highly unstable, wild, and unpredictable, then so is the state and the banking cartel, because after all, they too are people. You are not making an argument against capitalism or free markets, you are taking a giant dump on humanity itself.
Granted, there is a good argument that fractional reserve banking and a central bank do create instability because of the creation of debt; however, debt does play a positive role in society.
One does not need to support the abolition of all debt if one is to support the abolition/minimization of credit expansion via fractional reserve.
If you want to get rid of fractional reserve and return to a currency 100% backed by gold, you’re making it a lot harder for people to get loans.
More loans do not make people wealthier. It just makes each loan worth less. Yes, it would be harder for people to get loans, but isn’t debt reduction the whole goal here? Isn’t that what you said you wanted to see happen?
You’re a strange bird. On the one hand, you want to reduce debt. On the other hand, when you are presented with the very solution to reducing debt, you say “Oh no! That would make it harder for people to increase debt!”
Can you not read yourself? You are contradicting yourself on multiple levels here.
You’re making it harder for people to start businesses, etc etc.
False. A reduction in the nominal quantity of loans will put downward pressure on input prices, since after all credit expansion adds to the money supply and raises prices.
With less credit expansion, prices will be lower and the marginal business start up will be in no more of a difficult position to acquire venture capital or sufficient sized loans from banks.
If credit expansion halves, and this results in input prices falling by half, then the resulting lower quantity of loans will be as valuable as before. Instead of new start ups needing a $500k loan, say, they will only need $250k, say.
A reduction in the nominal quantity of loans does not mean it is harder for people to get loans. You are fallaciously holding prices constant, when in reality prices would be lower and would thus require lower sized loans to start new businesses.
Not to mention that returning to a currency backed by gold is really not practical because the price of gold depends on things that no one can control(like what goes on in mines in South Africa).
Gold mines are controlled. They are controlled by owners of gold mines. They are regulated by the profit and loss system, which balances each industry to be in proportion with every other in accordance with consumer spending and abstentions from spending.
The lack of state control does not mean there is no control whatever. How in the world can you actually believe “no one can control” something if it isn’t state controlled?
Do you understand action, control, purpose, desire, as ONLY the actions, controlling, purposes and desires of politicians? If not, then your statement makes no sense. If so, then you’re insane.
What, would you say that cars, foods, clothings, books, computers and wines production are all “controlled by nobody”, because the state does not have a monopoly over these things?
Serious question: Are you a communist? Every argument you are making is exactly what a communist would say.
Also, what stops people from issuing gold certificates(which would be a form of debt)?
That isn’t necessarily debt. If the gold ownership rights are held by the depositor, as is the case with demand deposits, then gold certificates are transferable claims to one’s property. Warehouse receipts.
MF, you’re using a lot of jargon and assumptions that really don’t make sense if you look at the data.
Empty rhetoric. I could say the same thing to you with the same quantity and quality of premises (zero).
11. October 2012 at 10:42
Scott,
“The Fed stopped targeting the fed funds rate in the early 1980s, and the rate was far different from the IOR (which was zero, as it should be.)”
Agreed. That’s why I objected to calling the funds rate a “target”
“The fed funds market is a market. It can find an equilibrium rate regardless of whether the Fed targets the rate. The Fed should totally ignore the banking system and abolish member bank deposts at the Fed. Just make the base 100% currency, and adjust the currency stock to keep NGDP expectations on target. Let the financial markets take care of themselves.”
OK, I get it. Abolish the lender of last resort (including the discount window). If you are going to do that credibly, you may have to eliminate deposit insurance also. Bank holdings of reserves (in the form of currency) would massively increase in order to cover any possible depositor liquidity demands. But given the unpredictability of sentiments, and the instability of the bank run dynamic (no cost of getting out first, lose everything if you are last in line), you might expect the size of an adequate reserve buffer to be extremely unstable. So I still don’t think that targeting any given quantity of currency would give anything like a stable short rate. In effect you’d have to readjust your currency target in order to achieve a workable short rate, i.e. you’d still be targeting the short rate. The alternative of ignoring the short rate doesn’t seem reasonable given that
a) the short rate adjusts instantly to changes in demand for currency
b) NGDP takes much longer than the short rate to respond but *will* respond strongly to whether the short rate is 0% or 20%. Knowing the short rate is *really* important for determining the NGDP outlook. There is no other instantaneous way to know if a sudden change in the demand for currency has occurred.
c) conditional on knowing expectations for the short rate (the yield curve), there is no additional information in knowing the quantity of reserves.
In the end you are just back to rate policy (spot and forward) to achieve your target. I.e. given the instability of currency demand, the relative level of the short rate and NGDP is a much stronger predictor of NGDP growth than changes in the quantity of currency (especially when reserves are currency).
“If they keep NGDP expectations growing at a healthy clip, 10 year bond yields will probably rise above 10% pretty quickly.”
Agreed.
11. October 2012 at 10:47
MF,
If the Fed monetizes Treasury debt, that’s a way to wipe out private debt. You could run massive deficits to wipe out the private debts(essentially converting the private debt to public debt) and then inflate it away. Not only would you be doing that, but you would also wipe out the real value of all of the other debts as well.
“‘real’ means unhampered via price signals”
Price signals aren’t ever perfect in the first place. Again, you don’t have a world where everyone knows everything going on in the market. There’s no such thing as a real desire. Markets are not self correcting. On the contrary, you see cases where the entire economy goes into a black hole(1929-1933).
As for the idea of “true capitalism”. You do recognize that the reason money was first created is because the state wanted to increase commerce and collect taxes from it. Capitalism and markets are a creation of the government and the state. This is well understood by anthropologists. If you can’t see the importance of government in a properly functioning economy; then you’re blinding yourself.
As for how “[gold mines] are regulated by a profit and loss system”. Do you not see the assumptions you’re making. The assumption you’re making is that everything works in the certain methodology and mechanism of a priori logic that you use. You’re using a certain model to describe the world and not recognizing that it is a model with massive simplifications.
You simply don’t realize the limitations of the model you’re using. That’s the biggest problem I have with Austrian work. This is a quote from Ludwig von Mises,
“Our statements and verifications are not derived from experience. They are not subject to verification or falsification on the grounds of experience or facts.”
That’s the effective logic that you’re using. You simply can’t do that, it’s a horrible, horrible methodology because you’re essentially saying that no matter what happens, we’ll always be right. What you’re saying and the logic you’re using isn’t science, it’s dogma.
As for loans destroying the amount the other loans are worth, that’s not entirely true. It depends on what the loans are used for. If they’re used to create new things, that’s new money used to create something new–therefore, the value of money doesn’t fall. If it’s used for something useless, then yes, the value of money does fall.
You’re talking about how prices adjust for whatever happens(like credit expansion), but you forget that prices are sticky. They don’t respond immediately, they take time to respond.
Also, you completely forget that a growing economy needs rising debt because for an economy to grow future AD must be higher than current AD(this was acknowledged by both Schumpeter and Minsky). Again, you completely forget about the demand side.
You can label me and everyone else as a communist, I don’t care. To me, that’s just a useless label that means nothing.
Gold certificates are absolutely debt. Even if you get rid of fractional reserve, debt will still exist–it would just have to come only from savings.
What I’m primarily attacking is your methodology. It’s the assumptions you make while not even recognizing the assumptions you make. You say that we’ve “never had true capitalism”; the same people on the other side say “we’ve never had true socialism”. Also, you refuse to actually test your ideas against the data and what happened. You make up certain reasons of how the conditions weren’t perfect. That’s entirely flawed. If you want to be taken seriously, I strongly suggest that you use a new methodology and way of thinking. The whole idea of science derives from falsification. Granted, economics is not a hard science so we can’t do 5000 controlled experiments, but if the ideas you’re speaking of can’t be falsified at all; you shouldn’t be taken seriously.
11. October 2012 at 11:17
K: “the relative level of the short rate and NGDP is a much stronger predictor of NGDP growth than changes in the quantity of currency”
Oops, that was unclear. What I should have said was…
“the difference between the short rate and the rate of NGDP growth predicts NGDP growth much more strongly than does changes in the quantity of currency”
11. October 2012 at 12:23
Suvy:
If the Fed monetizes Treasury debt, that’s a way to wipe out private debt. You could run massive deficits to wipe out the private debts(essentially converting the private debt to public debt) and then inflate it away. Not only would you be doing that, but you would also wipe out the real value of all of the other debts as well.
That massive deficit spending results in increased reserves at banks, since receivers of government spending tend to keep their money in banks. Those reserves then encourage the banks to lend more.
I know what you are saying, but you have to be careful about the mechanics of how our monetary system actually works, as opposed to how you think it would ideally work.
“‘real’ means unhampered via price signals”
No, I didn’t say that. I said “By “real” I mean via unhampered price signals.”
Price signals aren’t ever perfect in the first place.
Perfect in relation to what? I am not arguing they are “perfect”. Unhampered means free market driven, however imperfect or perfect it happens to be, whereby the pricing signals that do result, are a function of individual market actor behaviors, rather than non-market behaviors from those who utilize non-market means.
Again, you don’t have a world where everyone knows everything going on in the market.
That is precisely why inflation is capable of misleading investors and consumers as to the true state of savings and capital.
There’s no such thing as a real desire.
Yes, there is.
Markets are not self correcting.
Yes, they are.
On the contrary, you see cases where the entire economy goes into a black hole(1929-1933).
That wasn’t a free market. That was a market with heavy government intervention, both in terms of regulations, and in terms of central bank interventions.
As for the idea of “true capitalism”. You do recognize that the reason money was first created is because the state wanted to increase commerce and collect taxes from it.
Money is created by the market process. Money is not created by states. States can only wait for money to exist, then monopolize it via coercion thereafter.
You do realize that because money affords individuals new opportunities for making gains that do not exist with barter, that money naturally arises in the market process of exchange, right?
Not only is your economics off, but so is your history.
Capitalism and markets are a creation of the government and the state.
No, markets are the creations of free individuals whose property rights are protected, by themselves, or private security, or states.
Markets are a process of interaction. Individuals who produce resources from the Earth, and then trade those resources amongst each other, is not a state creation. States are subsidiary to markets. States cannot be established unless there is wealth already there to loot.
This is well understood by anthropologists.
No, it isn’t. You are wrong.
If you can’t see the importance of government in a properly functioning economy; then you’re blinding yourself.
If you believe states are required for markets to exist, you’re blinding yourself. There are many instances of stateless markets throughout world history.
As for how “[gold mines] are regulated by a profit and loss system”. Do you not see the assumptions you’re making. The assumption you’re making is that everything works in the certain methodology and mechanism of a priori logic that you use.
Profit and loss isn’t a mere assumption. It is a logically irrefutable category of action. Humans act to improve their situations. They utilize scarce means to achieve their ends. Their chosen means can either successfully achieve their ends, or not. When they succeed, there is a profit. When they don’t, there is a loss.
To deny this is to deny your very self.
You’re using a certain model to describe the world and not recognizing that it is a model with massive simplifications.
I should say the exact same thing about your worldview.
You simply don’t realize the limitations of the model you’re using.
I fully realize the limitations of what I am saying. It’s why you don’t see me making absurd leaps of faith the way you are making.
That’s the biggest problem I have with Austrian work.
You must first understand it if your claims against it are to be credible. So far you have not shown this.
Speaking of limitations, you don’t seem to grasp the limitations of states. You think states are so powerful that they create the market. You don’t get that the state is constrained by the market, not the other way around. Without a market, a state cannot form because there is nothing to tax. States depend on taxation, and without prior production that precedes states, the onset of states is impossible.
This is a quote from Ludwig von Mises:
“Our statements and verifications are not derived from experience. They are not subject to verification or falsification on the grounds of experience or facts.”
This quote is taken out of context. What Mises was referring to were the small quantity of economic laws that are based on verstehen, on self-reflective cognition of being an actor. These laws include such things as the law of marginal utility, the quantity theory of money (properly stated and understood), and the law of supply and demand.
He wasn’t referring to all knowledge. The “statements and verifications” Mises referred to are only economic statements like the ones I just mentioned.
That’s the effective logic that you’re using. You simply can’t do that, it’s a horrible, horrible methodology because you’re essentially saying that no matter what happens, we’ll always be right.
No, you are misunderstanding the meaning of that statement. It’s not that whatever happens, Mises is right. It’s that Mises held that economic statements are not empirical statements subject to falsification. They are more akin to mathematical laws and logical laws. For example, the logical law of non-contradiction is not an empirical hypothesis, subject to falsification. It is a law grounded in rationalism. The very meaning of “falsification” rests on the law of non-contradiction. Without it, falsification is incoherent.
What you’re saying and the logic you’re using isn’t science, it’s dogma.
What you are saying and the logic you are using isn’t science, it’s dogma.
Hey cool, this game is fun. Say something else that is utterly devoid of substantive documentation!
As for loans destroying the amount the other loans are worth, that’s not entirely true.
If it is loans created out of nothing, yes it is true. Loans created out of nothing add a nominal component without an underlying real component. In other words, banks that expand credit ex nihilo are not expanding capital or consumer goods ex nihilo. They are adding a purely monetary component, and in the process, devaluing the exchange value of the remaining nominal money and loans.
It depends on what the loans are used for. If they’re used to create new things, that’s new money used to create something new-therefore, the value of money doesn’t fall.
New loans aren’t required to make new things. The same quantity of loans can keep making new things as prices fall. You are conflating value and riches, an error mind you, that even the classical economists hundreds of years ago warned about.
Even if a bank loan goes to some productive process, that doesn’t mean the loan caused the production process. All the loan did was raise the prices of that which the loan goes to from what it otherwise would have been. Loans aren’t real goods.
If it’s used for something useless, then yes, the value of money does fall.
Uselessness is a subjective category. What is useless to you may be useful to someone else, and vice versa. Your foundation is shakier than a house of cards, because you are trying to arrogate your conception of usefulness over everyone else’s. I on the other hand do not want you, myself, the state, nor anyone else, to arrogate their conception of usefulness over everyone else’s. I want each individual to be free to pursue his own conception of usefulness, undisturbed by initiators of violence and coercion.
You’re talking about how prices adjust for whatever happens(like credit expansion), but you forget that prices are sticky.
Sticky as compared to what? A non-existent dogmatic realm of instantaneous price adjustments, with no learning processes, no time taken, and omniscience?
Or sticky from some arbitrary standard that you decide, below which is non-sticky and above which is sticky?
To the extent that prices do not adjust downward as quickly as would result in full resource utilization, inflation exacerbates this, because when people are faced with constantly rising prices all the time, they will be psychologically more predisposed to refusing to cut prices when existing monetary conditions would require them to fall in order to clear the market.
But people aren’t so stupid so as to refuse to adjust prices until they starve. Prices WILL adjust eventually.
They don’t respond immediately, they take time to respond.
That’s a good thing.
Also, you completely forget that a growing economy needs rising debt because for an economy to grow future AD must be higher than current AD(this was acknowledged by both Schumpeter and Minsky).
This cannot be something I forgot to mention, because it is something that I regard as false.
A growing economy does not need a growing supply of money, or debt, or anything on the nominal demand side. An economy can grow indefinitely on the basis of a fixed money supply, a fixed nominal quantity of loan money, and falling prices (and costs!) as output and the labor force expands. The same quantity of spending can cover the purchase of a practically limitless supply of everything.
If people can get used to gradually increasing prices, then they can get used to a gradually decreasing prices.
Again, you completely forget about the demand side.
Again, you completely forget about the real side!
You can label me and everyone else as a communist, I don’t care. To me, that’s just a useless label that means nothing.
I was asking you that because your arguments sound exactly like that of a communist. Well, do you consider yourself one, or do you just take dumps on free markets and promote statism by coincidence?
Gold certificates are absolutely debt. Even if you get rid of fractional reserve, debt will still exist-it would just have to come only from savings.
Again, gold certificates are not debt, provided that the certificates are warehouse receipts, rather than property owner transfer documents. It would be like you retaining ownership of your car the whole time I agree to let you keep it in my garage. I possess it, but you are the owner of it. I can give you a note saying I promise to give you your car whenever you want it, but that doesn’t mean that note is a debt claim.
A debt claim requires property title to transfer. In a gold standard, since title ownership to gold does not necessarily transfer from client to bank, it means the gold certificates are not debts at all.
You just want to make it seem like gold certificates are debts, so that you can sic your Minsky “debt is the problem” worldview on capitalism so as to jealously protect your claim that capitalism is inherently unstable. Sorry, that won’t work.
What I’m primarily attacking is your methodology.
You don’t even know my methodology!
It’s the assumptions you make while not even recognizing the assumptions you make.
Which assumptions? All I see are you making straw man attacks against me, insisting that I am forgetting things and assuming things that I am neither forgetting nor assuming.
You say that we’ve “never had true capitalism”; the same people on the other side say “we’ve never had true socialism”.
I never said “we never had true capitalism”. That is another straw man. I said that the specific time periods you are claiming were capitalism, were not in fact capitalism.
True capitalism has existed in parts of the world throughout history. It got very close to being universal with pre-1776 United States.
Those who said we never had true socialism are wrong, because we have had true socialism. Socialism is government ownership and/or control of the means of production. We have had that in history in such places as the Soviet Union, Nazi Germany, and present day North Korea.
Also, you refuse to actually test your ideas against the data and what happened.
What ideas? I am making both non-empirical and empirical statements. My non-empirical statements are not subject to any testing against any data. That would contradict the very logical status of the non-empirical statements. My empirical statements are subject to data, and as far as I can see, my statements are confirmed by the data. If you think I am wrong, then be specific. Identify which empirical claims I have made, and then identify which empirical data falsifies those claims. So far, all you’re doing is making claims against me without any substance.
You make up certain reasons of how the conditions weren’t perfect.
No, I didn’t give certain reasons why conditions weren’t perfect. I gave certain reasons why we didn’t have the system you claimed we had, during the times you claimed we had it.
That’s entirely flawed. If you want to be taken seriously, I strongly suggest that you use a new methodology and way of thinking.
You are no authority over being taken seriously. If you don’t take me seriously, then trust me when I say that I am not worried. In fact, considering the flaws in your arguments, I am more prone to being reassured that I am on the right track.
The whole idea of science derives from falsification.
No, that’s the whole idea of methodological positivism, which certainly does not have a monopoly over knowledge acquisition.
For what about that statement you just made? If you make the claim that valid knowledge comes only from proposing and then testing falsifiable statements, then what about THAT claim itself? Is the statement “all statements must be falsifiable for them to be valid knowledge” a falsifiable statement? Or is it what it seems to be, an a priori statement that is not falsifiable?
If you say it is not falsifiable, then your methodology contradicts itself.
If you say it is falsifiable, than at best, the claim is but a hypothesis, which can be wrong, because it is subject to testing, and you would then be obligated to consider alternative methodologies that may potentially falsify your claim. Well, with your attitude, you are not even following your own methodology. You want me to drop my a priorism, and adopt your a priorism.
Granted, economics is not a hard science so we can’t do 5000 controlled experiments, but if the ideas you’re speaking of can’t be falsified at all; you shouldn’t be taken seriously.
You shouldn’t be taken seriously if you don’t understand that economic propositions are not falsifiable propositions, but rather they are a priori logically true propositions.
My worldview does not contradict itself. Yours does. I’ll stick with my methodology for now.
11. October 2012 at 12:39
Scott,
This is all well and good, but what do you think about the Literature Nobel?
11. October 2012 at 13:26
Major Freedom,
“Those who said we never had true socialism are wrong, because we have had true socialism. Socialism is government ownership and/or control of the means of production.”
Under that definition of socialism, we have had socialism. Under the definition that Mises used (collective ownership & production for use with no use of a proper price mechanism for calculation) socialism has not existed, and if it did exist then we would regress to total savagery. Civilization is not compatible with socialism.
A pedantic point, but it does ward off a wrong-headed rhetort that someone who’d actually read a bit of Mises might give you i.e. “But Mises said that socialism was impossible!”
11. October 2012 at 13:28
I think The Economist did us all a disservice by promoting the idea of arguing with M_F. It’s Sisyphean in a way that would shock Sisyphus.
11. October 2012 at 15:56
W. Peden:
“Those who said we never had true socialism are wrong, because we have had true socialism. Socialism is government ownership and/or control of the means of production.”
Under that definition of socialism, we have had socialism. Under the definition that Mises used (collective ownership & production for use with no use of a proper price mechanism for calculation) socialism has not existed, and if it did exist then we would regress to total savagery. Civilization is not compatible with socialism.
Actually by “collective ownership” Mises meant government ownership. Collective ownership implies and requires a central authoritative body that enforces a universal ban on private ownership of thr means of production.
You’re right about regresing to total savagery. The only reason why the Soviet Union was only 90% savagery (cannibalism, genocide, etc) is because there existed capitalist economies elsewhere in the world the price systems of which the Soviet central planners could observe and crudely copy to make their own economies less than 100% savagery.
A pedantic point, but it does ward off a wrong-headed rhetort that someone who’d actually read a bit of Mises might give you i.e. “But Mises said that socialism was impossible!”
Actually, what Mises argued was that cost accounting in socialism is impossible. When Mises made that comment, he was thinking of a universal socialist system with no capitalist economies with which to defer to for prices of commodities. When socialism is made universal, central planners are “groping in the dark”. That is when production becomes so chaotic that no semblence of any “economy” is present.
But at any rate, to Mises, collective = government.
david:
I think The Economist did us all a disservice by promoting the idea of arguing with M_F. It’s Sisyphean in a way that would shock Sisyphus.
I understand your frustration, but please understand that the more you feel a resistence against you, it necessarily means the more resistence you are applying yourself. The wall may feel like it won’t move, but that is just because you won’t remove your own equal and opposite pressure. Stop pushing and you won’t feel any more resistence.
You are trying to make it appear as though I am stubborn, but your refusal to accept what I am arguing makes you no less stubborn. You can avoid feeling like Sisyphus by simply changing your mind to match mine, the way you want me to change my mind to match yours. You can’t blame me for refusing to change my mind when you won’t change your mind either.
The difference between you and I is that whereas my solution to disagreements sees the aggressor walk away, your solution sees he who is aggressed having to make way. You might not grasp this point as of yet, but I promise that if you keep poking and prodding, you will eventually learn that your position rests on being the aggressor.
11. October 2012 at 16:31
I find it amusing when Austrian talk of “real saving” versus false saving. Its as if they think savings are some fixed lump forevermore. The “funny money” [ :-)] created by the central bank COULD be used on wasteful projects, OR it could be used on businesses that would have been successful, speeding up a process that would have just taken longer without the monetary inflation. There is no grounds to believe, without a shred of evidence, that prosperity is false without some indicator of falsifiablity. In that sense, you are right Suvy. Also notice how MF didn’t even address how economies eventually GET out of debt deflation. All he said was to avoid the situation in the first place. Not much help.MF is like a doctor who won’t feed ten men, nine of which are starving, because one is obese, and he doesn’t want to encourage moral hazard!
11. October 2012 at 16:40
Also, MF has zero imagination.
He is unable to consider a situation secondary, but still close. to his utopian ideal. NO! It must be perfection, ( FMMP) or else! Anything less is a betrayal, EVEN IF IT MOVES IN THE RIGHT DIRECTION.
Just to give you an example, I supported NGDP level targeting with a twist, have the Fed send NGDP per capita checks to everyone directly, and only use the NGDP futures market a a crystal ball, NOT as a pipe or a distribution mechanism, as we do with the primary dealers system now. That would encourage spending and income creation without debt, and avoid the Cantillon effects that MF so whines about. I would guess though, that he would oppose this as well.
11. October 2012 at 16:53
Edward:
I find it amusing when Austrian talk of “real saving” versus false saving. Its as if they think savings are some fixed lump forevermore.
It’s even more amusing that you have been corrected on this false “lump sum” accusation on more than one occasion, and yet you continue to repeat it as if you have not been corrected.
Once again, no, Austrians do not hold that savings are a fixed lump sum. What Austrians do hod is that savings, whatever they are, and whatever the rate of growth will be, must be sufficient to facilitate completion of projects started, and projects going forward.
It is not true that inflation can increase the quantity of real savings later on such that they can juuuust supply all the given projects with sufficient resources to complete the projects started. Belief otherwise is a gross misunderstanding of not only Austrian theory, but of markes in general.
The “funny money” [ ] created by the central bank COULD be used on wasteful projects, OR it could be used on businesses that would have been successful, speeding up a process that would have just taken longer without the monetary inflation.
Inflation does not work that way. The Fed doesn’t finance projects directly. They buy assets, change nominal interest rates, and change relative spending and prices. Market actors are MISLED by “funny money” and investors and consumers behave in ways that requires more real savings that actually exists, and will exist.
It is not good enough that inflation is used on “production” as opposed to “wasteful spending”. You need to grasp that not all “production” is sustainable. Production must therefore be separated into sustainable and unsustainable production.
Inflation encourages the latter due the distorting relative pricing signals, especialy interest rate signals.
There is no grounds to believe, without a shred of evidence, that prosperity is false without some indicator of falsifiablity.
Not true. I don’t need to actually observe someone failing to complete a 50,000 brick house with only 40,000 bricks, before I can know that one cannot complete a 50,000 brick house with only 40,000 bricks.
There is no grounds to believe, without a shred of logic, that the only knowledge that exists is derived from positivist methodology.
In that sense, you are right Suvy.
No, he is wrong, as I showed.
Also notice how MF didn’t even address how economies eventually GET out of debt deflation.
Notice I did: letting the market process work unimpeded. Notice how Suvy hates the market and wants social planning. Notice why you would agree with him.
All he said was to avoid the situation in the first place.
That’s the best way. Second beat way is to use painful, bad tasting medicine that you hate because it doesn’t include state action.
Not much help.MF is like a doctor who won’t feed ten men, nine of which are starving, because one is obese, and he doesn’t want to encourage moral hazard!
you’re like someone who doesn’t read.
11. October 2012 at 17:39
Major Freedom,
You have a lot of factual inaccuracies.
Let’s start with them shall we:
For the government spending, if the government gives everyone a tax cut of say, $10000 per person financed by printing money or if the government builds infrastructure, or something of the sort; you wouldn’t be pumping bank reserves at all.
As for a “real” desire. What exactly is a real desire? There really is no such thing. You either have a desire or you don’t; there’s no such thing as a “real” desire vs a fake desire–a desire is a desire.
“‘Markets are not self correcting.’ Yes they are”
NO, they’re not. The economy is a nonlinear, dynamical system that behaves in very weird ways–like most complex, real-world systems. It has multiple equilibria, some good and some bad, some of which are stable, some of which are unstable. The economy doesn’t have to go to the good equilibrium naturally. In fact, it could go to the bad equilibrium naturally and the government has to act as a stabilizing force. Most, if not almost all, real-world (complex) systems are like that. Just look at the behavior of things in physics; now add another layer of unpredictability and uncertainty in that because you’re dealing with human behavior as well as all the other moving parts. There’s no reason markets have to be self-correcting. You’re flat-out wrong on that.
“That wasn’t a free market. That was a market with heavy government intervention, both in terms of regulations, and in terms of central bank interventions.”
Again, the idea that the world just wasn’t perfect enough. It wasn’t the exact same as what it should be which is why things worked out like that. Come on man. The world will never be as perfect as you draw it up.
“Money is created by a market process.”
HAHAHAHAHAHHAAHHA. You’re talking about Carl Menger’s theory about how money originated. It works for informal currency that was used by prisoners, but it doesn’t explain how regular currency developed. The reason is because hard money was always distributed in coins rather than in lumps. It was always minted with a certain regulated amount. It wasn’t private mints minting money either, it was governments. Governments were the ones that really pushed metals to be used as money. Remember that governments have a huge advantage to push an economy away from barter. It creates more commerce and commerce can be taxed because money and transactions can now be measured.
“No it isn’t. You are wrong.”
I’m afraid you’re the wrong one here. The Austrian(Menger) theory of money just doesn’t make sense here.
As for the Mises quote. Understand that I knew exactly what he meant by it. You interpretation is exactly what I was getting at.
Also, I don’t really know about how much Austrian theory you know. I used to be an Austrian, but I just don’t agree with their methodology. I think it’s completely flawed. They don’t use any sort of empiricism. There’s a difference between abusing it(the way it is in mainstream economics) and doing the opposite by completely rejecting it.
Also, gold certificates are debt. A debt is an IOU. Any IOU is debt. Also, do you actually think it’s practical and possible to completely enforce only full-reserve banking. I don’t, I think it’ll actually push a lot of the borrowing to an underground market and it’s very difficult to enforce simply because debt is an IOU–that’s all it is.
“You don’t even know my methodology”
I’ve read a good bit of the Austrian works. I’ve read a lot of Hayek, Friedman(who isn’t Austrian, but still belongs in that camp/style of thinking), some Rothbard, Mises, Rand, and Menger. I think they’re methodology and approach is completely off base.
“An economy can grow indefinitely on the basis of a fixed money supply, a fixed nominal quantity of loan money, and falling prices (and costs!) as output and the labor force expands.”
This statement is true if everything adjusts exactly the way you’re saying it will in your model. There’s absolutely no reason why it has to in a real economy. Again, you’re making this assumption that everything goes to this good equilibrium. There could be multiple equilibria(some of which are unstable, others that are horribly bad) or it could be dynamic in its movement.
I certainly don’t think of the market as a process. I think that’s a flawed way of looking at it.
You keep making assumptions without realizing it.
I could go on further about more incorrect things you said, but I’ve written enough for now.
By the way, I’ll end with this quote from Hayek.
“There is more danger in untimely fears of deflation than in the possibility of our not taking necessary counter-measures.”
11. October 2012 at 18:23
Max, No, I meant interest rate targeting.
Saturos, I saw a video of your PM calling the opposition leader a sexist. Quite a scolding!
K, Target NGDP futures prices and ignore the short rate.
Josiah, Never read him (but I did see the movie–Red Sorghum.)
David, Hang in there a bit longer. I have a plan for MF. I’m just waiting for my tech support to implement it.
11. October 2012 at 20:16
“The Fed should totally ignore the banking system and abolish member bank deposts at the Fed. Just make the base 100% currency, and adjust the currency stock to keep NGDP expectations on target. Let the financial markets take care of themselves.”
This is a pretty interesting idea which I hadn’t seen before here. The logistics would be much more complicated though than the current FedWire system. For the base to not be completely paper currency, the banks would probably need to immobilize the currency in a central place like was done for stock certificates. Stock certificates were eventually destroyed, but if the base is 100% currency, private actors couldn’t convert it to electronic records. Only the Fed can make electronic deposits worth something by converting them to cash.
As far as interest rate targeting goes, I still thin the irrational interest rate mechanisms gets too little credit around here. There is a very tempting strain of EMH thought that actions will implement new information instantly, but the market can be irrational and if most of the market is irrational in not believing the Fed, then the rational players won’t bet against the irrational players. I still read a bunch of irrational stuff from people managing significant amounts of money. They say QE pushes on a string and fiscal policy is necessary. I actually see very little true market monetarist thought with market actors.
If the market is overwhelmingly irrational in thinking the Fed can’t do anything, then interest rates could play a role. Instead of straight QE to raise demand expectations, I could see something like this:
1. The Fed sets NGDP or inflation expectation, or a mixed inflation/unemployment objective. If market does not meet that expectation, or unemployment/inflation falls out of guidelines, start purchasing T-bills.
2. If outside the zero-bound, reduce t-bill rates until the variable comes back in line or until you hit zero.
3. If shortest maturity hits zero, go to next maturity. Keep purchasing those until they hit zero or variable comes back in line.
3. Keep going up through maturities until 30 years pay 0% and the variable is still not in line. Also pay zero interest on reserves. Then the Fed can say it has run out of ordinary bond purchases for loosening policy. There are still other things, such as negative IOR and Agency MBS purchases, but that is based what’s considered typical bond purchases.
Of course, if the Fed truly implemented such a policy, it would probably come nowhere close to 30 year rates of zero. The big issue is that people have lived so long outside the zero bound and so possible things like mortgage rates of 1% are just outside their thinking of possibilities. Such a clear announcement that crazy things like that are theoretically possible will shock the market out of its stupor. Dare I say, it would work better than a vague NGDP target with vague ways of getting to said target?
11. October 2012 at 22:56
Suvy:
This ought to be fun…
This is wrong. If the government gave everyone a tax cut, then this does not imply nor require any financing, let alone printing of any money. A tax cut of $10,000 per person would consist of people earning money and paying $10,000 less to the IRS, which means each person can spend $10,000 more.
Whether or not the state spends the same as they did before, such that the reduction in tax revenues is offset by some other financing, is an entirely separate choice and issue.
To address your other point about reserves, if the state does print and spend the equivalent of $10,000 per person, then this will indeed “pump reserves” as soon as the receivers of said money deposit it into their banks.
I already addressed this above, and yet you are asking the same question again. Once again, by real desire I mean desires constrained by the desires of every other market actor, in a context of private property and hence unhampered pricing signals. This is to be distinguished from desires unconstrained due to hampered pricing signals. I don’t mean to imply that there is such a thing as a “fake” desire. The word “real” as used in economics has a slightly different definition that the one you are probably thinking of. When economists talk of the “real side of the economy”, they don’t intend to imply that there is such a thing as a “fake side of thr economy.”
YES, THEY ARE.
Absolutely false. The market process is neither linear nor non-linear. It isn’t accurately represented by mathematical expressions. Humans are not robots. They are purpose directed. There is no “multiple equilibria” in the market process either. There is a total absence of equilibrium. Thus, your claim that there exists “bad” equilibria is false, and your extremely crude faith based claim that the state acts as a “stabilizing force” is a non sequitur based on a false a premise.
Your reference to “most real world systems” is irrelevant to the unique market process.
You tell me to look at systems described by physics, and yet human action is not describable in terms of physics.
You again contradict yourself. You say we’re “dealing with human behavior” and yet you seem to not even grasp the trivial fact that the state is COMPOSED of humans, so when you take a dump on humanity, and say it is complex, uncertain, chaotic, unpredictable, and so on, you are equivalently saying that the state, which you claimed is a “stabilizing force”, must ALSO be complex, uncertain, chaotic, unpredictable, and so on. You can’t say that human life is inherently uncertain and unoredictable and then claim that human institutions are stabilizing.
You are making a very strong assumption that those with state power are introducing a “stabilizing force”. You claim that humans with guns, and 50% plus one support, introduce a stabilizing force in human life. What is the benefit of stabilization? Human life is inherently dynamic. Stabilization is a chimera and a false Utopia. It is not who we are. Humans naturally seek to change the world for what they believe is the better. Change makes stability impossible. Stability is had in death, not life.
“That wasn’t a free market. That was a market with heavy government intervention, both in terms of regulations, and in terms of central bank interventions.”
Again, it’s not about perfection or imperfection. It is about the empirical fact that contrary to your claim, capitalism did not exist during 1929-1932.
If you claim that perfection is impossible, then I will agree with that trivial point. What I will not agree with is you calling 1929-1932 a period of capitalism solely because you want to discredit it and can’t find an actual empirical example of it, so pick the one time period that had the most crippling depression in US history, and call that capitalism. You are engaging in intellectual fraud. Your agenda is crystal clear.
I didn’t claim nor implied nor presumed that perfection is possible. Your problem is not with capitalism, it’s with humans. You have a very negative view of humanity, and thus yourself, and so you have adopted the religion of statism, to save you from the torment of being alive. The nonsense about capitalism is just a front, to serve as a pretext for wanting to promote your religion.
Boy, did David Graeber ever do a serious disservice to economics with his ideological book masquerading as a disinterested, value free archeological survey. Every yahoo is coming out of the woodwork believing they have a trump card regarding money. He ought to be ashamed of himself.
I have read Greaber’s book, and his thesis does not contradict the barter theory of money. In fact, it supports it. He showed that credit transactions, BARTER credit ransactions, temporally preceded money. He also showed that Kings of temples who imposed a commodity as a unit of account, imposed a commodity that already had subjective value and was traded via barter. Kings came to know that one commodity was better than others by realizing that commodity to already be valued…in exchanges.
Sure it does. It shows that a commodity arises to the status of money by being the most marketable and sought after commodity by market participants. That’s all a money is. The other uses of money, as unit of account for example, are but subsidiary purposes to money’s main function as a medium of exchange. No King or tribal warlord had to force people to use gold and silver in the western world, or salt in Abyssinia, or nails in Scotland, as money. People did so on their own.
Please note that the barter theory of money is a logical necessity. A King cannot spend a commodity into a society and impose it as a money, without first acquiring it from others, who must necessarily have acquired it through some means other than from the King who spent it and then demanded it in taxes later on.
Since you are inclined to socialism, imagine you had the biggest weapons and everyone obeyed you. You could not impose your own money on people. They would ot accept what you want as money unless they first value it. You could not demand taxes in anything other than what has already been produced and valued without your input.
This is empirically false. There have on many occasions throughout history been private minters and coiners, who were trusted by enough people to make these coins generally accepted. States are not necessary for authenticating money (nor sufficient I might add)
You are speaking as if human history consisted of zero diversity, as if the entire human popularion could only have been private or state, and nothing else.
Whe you say “it wasn’t”, what the heck are referring to? It is a fact that private minters existed, and still exist to this day.
This is false. Governments didn’t “push” metals. They took it over. Kings were able to tax in gold, because people were already using gold as money.
The fact that a particular party benefitted from a revolution, it doesn’t necessarily mean they caused the revolution.
I am not afraid that you are wrong here.
Sure it does. The very fact that using money over barter provides people with gains, makes it easy to understand how it would be possible for people to spontaneously generate a monetary order without any state decree. The barter theory of money tells why it must be so.
That makes no sense. You disputed my definition that socialism is government ownership and/or control of the means of production, by saying that if we used Mises’ definition of “collective ownership” instead, then my argument that there has been instances of socialism, is not true. Nothwithstanding the fact that Mises used collective and state interchangeably, which by itself refutes your claim as to what definition Mises actually used, but your prior response suggested quite clearly that by collective, you thought Mises meant something other than government, which means your recent statement that you “knew exactly what he meant” is way off base.
No offense, but I don’t believe you ever were an Austrian.
Sure they do. Virtually every Austrian economist textbook contains empirical discussions.
What Auatrians reject is the claim that historical economic data is the ultimate foundation for economic laws. There are many extremely convincing texts that show very clearly why methodological dualism is the only rationally defensible approach to epistemology, and why the tacit assumptions that underlie methodological positivism cannot be assumed as valid in the fields of human learning and action.
I can prove this to you if you’d like, but you seem far too prejudicial and closed minded to make it possible for you to learn. If you are willing to at least consider what I will say, then I can show you.
And what differeence is that? Be specific. Use examples. Then I will know if your claims are based on knowledge, rather than prejudice.
Again, no they are not necessarily debt. A debt entails a property title transfer, not just a possession transfer.
Not all IOUs are debt. If you promise to babysit your neighbor’s child, by taking him out to the park, this is an IOU for one child, but it is not a debt agreement.
You’re right. It’s not practical nor possible to completely eliminate murder and rape. Therefore, we should allow for a particular rate of murder and rape, controlled by the state of course, because nobody is perfect, and a state of imperfect people will stabilize society by making sure that a particular number of murders and rapes take place each month.
Why? Bear in mind that so far you have only just said you reject it, without showing why you reject it.
11. October 2012 at 23:02
ssumner:
David, Hang in there a bit longer. I have a plan for MF. I’m just waiting for my tech support to implement it.
Well isn’t this interesting. When you can’t beat ’em, censor ’em. I look forward to being proof that real criticism is unwanted in inflationist land. Pretend it doesn’t exist.
It is like the 1930s all over again.
12. October 2012 at 00:00
Edward:
Also, MF has zero imagination.
Aw, that isn’t very nice.
He is unable to consider a situation secondary, but still close. to his utopian ideal. NO! It must be perfection, ( FMMP) or else! Anything less is a betrayal, EVEN IF IT MOVES IN THE RIGHT DIRECTION.
NGDP TARGETING ISN’T A MOVE TOWARDS FREE MARKETS.
In a free market, the massive US trade deficits would have seen a fall in US NGDP, and an equivalent rise in NGDP elsewhere. NGDP targeting is merely another rate at which the banking cartel hits CTRL+P for their friends. That’s it.
I am not unwilling to move towards freedom in steps, but we can’t take steps unless there are people who continue to remind everyone where the goal is. Without guideposts, you’d all be lost, and you know it. Maybe that’s the real reason you resent people like me.
Just so you know, I am not going to ever feel guilty for wanting what you believe is dogmatic.
Just to give you an example, I supported NGDP level targeting with a twist, have the Fed send NGDP per capita checks to everyone directly, and only use the NGDP futures market a a crystal ball, NOT as a pipe or a distribution mechanism, as we do with the primary dealers system now. That would encourage spending and income creation without debt, and avoid the Cantillon effects that MF so whines about. I would guess though, that he would oppose this as well.
Damn right. I aim to eliminate parasitism, not universalize it and hope it all offsets.
However, in the interests of discussion…
Your idea would finally show as clearly as possible the utter futility of the cartel as being alleged stabilizers and helpers of the general population. In this sense, I may get behind it.
If everyone receives checks, even those not working, then many things may/will happen:
1. The prices of everything would rise together the way market monetarists and most other economists assume happens with the primary dealer system. Each person would get checks that increase their cash accounts, but prices of everything would rise, and so after some time of people receiving the checks, they would eventually probably complain that the check sums aren’t large enough. So they’ll yammer at the Fed to increase the sizes of the checks. If the checks do increase, then the “problem” obvously won’t go away, and eventually people will learn that the main problem of economic life isn’t a lack of money, it’s a lack of production. Then the Fed may be seen as useless by a large enough section of the population, and then monetarists and Keynesians will have to find new careers. I doubt that such economists would willingly publish themselves out of a job, so it will have fo be a grassroots movement.
2. It would increase social ostracism of those who recieve checks but don’t work, or work but do a crappy job. That would put a pressure against parasites that doesn’t exist as much today due to the fact that Wall Street parasites tend to currently receive the new money first, and not everyone can live in NY. But if the parasites are everywhere, it’s a different story.
3. It may reduce the extent of the boom bust cycle, since more people than just lenders would receive the checks.
4. It would not stop backdoor money printing bailouts for “friends”, because of heavy information asymmetry between the state and the people. To this extent, the boom bust cycle would remain.
5. It would not stop money printed and exported abroad to fight unpopular wars, since hardly anybody in the US would care if price inflation is 20% in some backward oil rich nation.
6. It would eliminate Cantillon Effect like you say, PROVIDED that there are no backdoor schemes, which is highly unlikely. But the silver lining is that if the boom bust cycle remains in full force, it would be obvious that there is “cheating” going on.
The biggest problem with your idea is it is even less likely to occur than outright abolition of the cartel. I don’t see the cartel working day in and day out if it didn’t privilege them in some way. I would expect to see a sociopath go to prison first before they become a charity giving peace advocate.
The sole purpose of it is to benefit the banks and the state. If they start sending checks to everyone, then it would defeat the purpose. Is your idea not Utopian?
12. October 2012 at 00:19
Major Freedom,
Agreed. The quickest summary of Mises’s argument I know is, “You cannot calculate without measurement; there is no basis of rational measurement of economic value in a socialist economy; therefore, there can be no rational economic value calculations in a socialist society.”
Perhaps the single most useful deductively sound argument in economics.
12. October 2012 at 01:34
Scott said:
“The Fed should totally ignore the banking system and abolish member bank deposts at the Fed. Just make the base 100% currency, and adjust the currency stock to keep NGDP expectations on target. Let the financial markets take care of themselves.”
In my opinion, this idea is completely insane, and completely divorced from reality. I have the feeling that Scott does not want to understand how the Fed and the banking system work, so he proposes to abolish them to save himself the work of learning this and to make his crayz ideas work.
First of all, the Fed is a clearing house for interbank payments. If you abolish reserve deposits, all interbank payments would have to be made in cash, which would have to be shipped around. No more electronic payment system, unless you pay to someone who has an account at the same commercial bank. You would also need trillions of physical currency to settle all interbank payments, much more than the current amount of overnight reserves, since much more is needed during the working day.
Economic activity would grind to a halt. It would be a disaster. Our business system would have to be completely redesigned.
If you do not prevent this by law, of course the banks would just make a pool where they put all their physical currency reserves, establish by mutual contract a clearing house to administer ownership, and make electronic payments that simply shift ownership of the reserves inside the pool. Oh, and if any bank is illiquid, but not insolvent, they could loan each other reserves or agree to let the clearinghouse extend a credit to the illiquid bank as a “lender of last resort”. Perhaps they could call the clearing house “Federal cash reserve” or something like it.
Seriously, I mean, the Fed has a really important function for the interbank payment system, if there are no reserve deposits to clear interbank payments, this would completely change our economic structure. (I mean, for one thing, no more checks and credit cards.) This function has to be performed by *somebody*, and if you are going to abolish the Fed, something else is going to spring up in its place.
12. October 2012 at 02:01
Matt Waters:
“(Scott:)”The Fed should totally ignore the banking system and abolish member bank deposts at the Fed. Just make the base 100% currency, and adjust the currency stock to keep NGDP expectations on target. Let the financial markets take care of themselves.”
This is a pretty interesting idea which I hadn’t seen before here. The logistics would be much more complicated though than the current FedWire system. For the base to not be completely paper currency, the banks would probably need to immobilize the currency in a central place like was done for stock certificates.”
I’ll say. Quite an understatement, “pretty interesting” is not what I would call it. But I agree, the logistics would be “much more complicated” (I’d say, a complete nightmare), and yes, I think the only way to do this would be to put the currency in a central deposit, and administer ownership centrally.
I simply do not understand this fixation on currency. I mean, Scott likes to say that he “likes to forget about the banking system”, and that he likes to “define money as the monetary base, i.e. currency”, but this is obviously not sufficient to think about the modern monetary system and the world we got, which does have banks, and electronic deposits, and the Fed as a central clearinghouse for bank payments. You cannot simply ignore this and go back to some romantic idea of money as currency. The actual structures you try to impose have to reflect the development to electronic payment systems.
I would say, if the Fed really did try that, it would become (almost) irrelevant and be replaced by whatever clearing mechanism the banks came up with. In consequence, the Fed would loose control of the money supply, since the clearinghouse could start to extend credit to banks (as the banks’ bank, which the Fed is now).
I would really recommend to take a look at the history of central banks. I mean, this should not be a new idea to a monetary economist?
12. October 2012 at 05:02
[…] Source […]
12. October 2012 at 06:13
Shining Raven, The system you say could not work used to work fine. They used ultra-large denomination currency notes. And yes, obviously there could be a large clearing house for interbank transactions. But that institution need not have any relationship to the Fed.
12. October 2012 at 06:17
Shining Raven, And I have no objection to that non-Fed central clearing house extending credit. But keep the Fed in charge of the currency stock. Right now the Fed lets the currency stock be determined endogenously, given the monetary base (determined exogenously by the Fed.)
12. October 2012 at 06:21
Shining Raven, I.e. have one instititution charged with controlling monetary policy–the track of NGDP over time. And the other institution charged with preventing massive liquidity crunches and helping the banking system work more efficiently. I don’t know if that latter entity needs to be government-run.
12. October 2012 at 06:27
Hi Scott, thanks for your answer.
Say, when exactly did this system work? Let me guess, probably a bit over a hundred years ago. I would claim that things have changed considerably since then, and it would be very complicated and costly to implement it again. Which is my point.
And yes, obviously the system would not have to have a relation to the existing Fed, but why would you want to abolish the existing system, only to have a new, similar or identical system spring up in its place?
My main problem with the proposal: I do not see how it is feasible nowadays to restrict banks to settle interbank payments with physical currency.
You could try to legislate this, but I am pretty sure the banks would find ways around that.
Any clearinghouse that springs up will take over the functions that the Fed now provides. As soon as the banks that hold a stake in the clearinghouse allow this, this banks’ bank will extend credit and act as a lender of last resort to illiquid member banks, and you have the Fed again, including money creation. Even before, it will allow member banks to loan each other cash reserves and thus set the interbank rate.
The original Fed has then lost all control of the money supply, except for currency, which is of course only a small part of the payments made each day.
Really, how could you prevent this?
12. October 2012 at 06:32
Hi Scott, thanks for the answers.
I see what you mean, but I do not think that you can separate these functions. As I said, as soon as the clearinghouse extends credit, I believe that this clearinghouse for all intents and purposes becomes the Fed, that and your other NGDP-controlling entity (how would it do this?) becomes meaningless.
If the clearinghouse extends credit to banks, currency no longer controls the amount of “money” in the system, since then the payments among the banks no longer have to be currency-backed. So you would absolutely have to exclude this, I believe, but this seems unworkable to me.
12. October 2012 at 06:41
W. Peden:
Agreed. The quickest summary of Mises’s argument I know is, “You cannot calculate without measurement; there is no basis of rational measurement of economic value in a socialist economy; therefore, there can be no rational economic value calculations in a socialist society.”
Perhaps the single most useful deductively sound argument in economics.
Another, perhaps even more useful argument that applies to today, which derives from the argument above, is that even if there is predominantly private ownership of the means of production, such that there is predominantly rational measurement of economic value, the core principle of “price system -> rational measurement” is still implicated in a predominantly capitalist society that contains a state that owns the means of producing money. In this situation, while rational measurement of economic value is present, it is significantly affected (undermined, if you will).
There is a scale of “quality” of rational measurement. It is a serious error to believe that if we don’t have full fledged socialism, but something less, that rational measurement of economic value is fully expressed anyway. It is more accurate to understand this idea as a sliding scale.
At one extreme, i.e. socialism, there is no rational measurement whatsoever. That is Mises’ argument. That is what you cited. Below this extreme to a middle range, i.e. what we have now, there is fuzzy and clouded rational measurement. Below this middle range to the other extreme, i.e. free market in money and spending, there is predominantly rational measurement.
The principle of Mises’ argument applies to central bank, predominantly capitalist economies, no less than full fledged socialist economies. In our society, while capitalists and entrepreneurs are able to price capital goods, their efforts are being systematically affected (undermined) by the fact that the monetary system is non-capitalist and state owned and controlled. There is no rational economic measurement of money production itself. No profit and loss exists in money production. No price system for the means of producing money exists. The state decides, and everyone must live with it through law.
Our monetary system is socialist. This fact should be identified and accepted, however difficult it may be. A socialist monetary system, combined with a capitalist “other than money” system, results in a mixture system, that while calculation and production seem to go on as if we had capitalism, the rational measurements of money production are absent, and measurements of “other than money” capital goods are systematically in error.
It is not true that you, or myself, or Sumner, or Bernanke, or any other mortal individual, can know which “rule(s)” of socialist money planning are able to substitute for the market process of money production, and have non-negative repercussions on production and employment. Price targeting rules, interest rate targeting rules, aggregate spending targeting rules, all of these socialist rules undermine rational economic calculation that needs market based “rules” of money production.
12. October 2012 at 07:27
And Mises’ fallacy was the same as the socialists’: the notion that socialism necessarily entailed the abandonment of markets. Nothing about equality of access to resources requires that they be withheld from individual control, or forbidden from private transfer – any more than government transfer payments require a lack of market behavior.
12. October 2012 at 07:27
(Let the second flamewar begin.)
12. October 2012 at 09:05
Major Freedom,
Let me explain to you something. The first 2 economics books I ever read were The Road to Serfdom and Capitalism and Freedom. I’ve read a lot of Hayek, a little bit of the others(mostly their papers, I think a few of their books).
Also, you understand very little about what I mean when I talk about systems. I DO NOT VIEW THE MARKET AS A PROCESS, I VIEW THE MARKET AS A COMPLEX SYSTEM. Just like every other system that shows up in the world. You’re speak about how I’m “taking a dump on humanity”; I’m doing no such thing. That’s the way the real-world works. Study physics, or chemistry or go ask any engineer about how dynamic the world is. The Austrian methodology cannot be used to understand these things. You can consider the fact that I think the world is unpredictable and complex as a bad thing on humanity, I don’t. In fact, I think it’s a great thing. The dynamism is what allows innovation to happen. Do you think that a simple system has people come up with inventions like the computer and internet? No, it doesn’t.
Let me explain to you the problem about nonlinear, dynamical systems. The problem with them is that small changes have large impacts(like in the real world). To use a praxeological method to deal with them won’t work because of the fact that small changes cause large deviations. A small movement in your initial conditions causes a complete change in the behavior of your system. At this stage, we’re not even using math to describe a system. We’re saying it’s very difficult to quantify the system because it is so complex. This is every real world system; I don’t know how much (higher level) physics and other dynamical systems you’ve encountered(it seems like not very much), but every real-world system is that way. You may not like it and you may think that I’m “taking a dump on humanity”, but that’s the way it is. Ask engineers and physicists that deal with this stuff. Now you’re making the system more complex with a human element. You’re saying that me saying there’s extra complexity implies I’m taking a “dump on humanity. I think complexity is a wonderful thing; I think uncertainty is a great thing. However, I think there are downsides to complexity and uncertainty. If you go back and read Keynes’s work on probability, Keynes felt much the same way.
You still say the market is a process. IT IS NOT A PROCESS, IT IS A SYSTEM. When we view the market as a system, we (empirically) notice that there are some variables and areas that destabilize a system(like debt, which is what Austrian theory certainly acknowledges). I actually think that one of the places that a market system can go is to a position of infinite debt where the system actually blows up and employment heads towards 0–I think without government, this is a real possibility.
The Austrian response is to say, let’s remove the destabilizing factor of capitalism(debt) by removing the ability to print money by both the public sector(printing money by Central Bank) and the private sector(fractional-reserve). By doing this, you’re limiting debt to the amount of savings. I don’t think this is practical or enforceable. Not only that, but I think that instability, dynamism, and unpredictability is a great thing. You think I’m taking a dump on humanity by saying those things, I think I’m praising humanity by saying those things. Those are the major factors that lead to innovation. This is why I agree with Schumpeter and Minsky on fractional-reserve.
“[The market process] isn’t accurately represented by mathematical expressions”
You just expressed one of the biggest inconsistencies in Austrian thinking. The Austrians use just as much math as the Post-Keynesians. Their praexeological approach is just as mathematical as using differential equations to deal with a system. The Austrians clarify the market as a process and say debt is the destabilizing factor(assumptions). Then, they use a logical and deductive approach to come to certain conclusions. That’s a highly mathematical approach. They’re using mathematical expressions while simultaneously not recognizing it. Your understand of mathematics is downright horrible, mathematics is a way of thinking. Mathematics is used to simplify things, the Austrians take this to an extreme. The Austrians say they use no math, but they actually use far more math and far more simplification than any other school of economics out there.
Let me explain by what I mean when I say the government is a stabilizing force. When we see a system where debt is starting to blow up, unemployment is rising, the amount money(and the turnover of money) is falling, etc–a debt induced breakdown; the government can step in and inject money, increase the turnover of money, and use the money to pay off debts as a solution. This is based from observation and using mathematics as a way to qualitatively observe a system. The purpose of mathematics is to observe the world, not to predict it(mainstream economists fail at this completely). Any use of mathematics to forecast a situation is a bad use of mathematics(with certain exceptions like forecasting weather, etc).
One important thing that I will give the Austrians credit for is that they didn’t have access to the level of computation and much of the mathematics that we have now. During the 18th and most of the 19th century, the Post-Keynesian approach to economics would not have been possible because of technology. However, with modern technology, the Austrian approach and methodology is pretty much useless.
Also, I wasn’t referring to David Graeber’s book. I was referring to the Cartalist Theory by Charles Goodhart. I haven’t read David Graeber’s book, but I really need to. It’s one of the books on my reading list.
12. October 2012 at 09:06
I’ve got work to do, but I’ll make some more comments in a little bit.
12. October 2012 at 09:37
Scott,
“Target NGDP futures prices and ignore the short rate”
Yup. Definitely need that futures market. The short reason is that *if* Wallace irrelevance fails, the Fed can use positive beta assets (like NGDP futures) to circumvent the ZLB. I think that’s good, but note that to invalidate Wallace irrelevance, you need to assume some kind of significant market *inefficiency*. It’s a higher hurdle to clear than non-monetary super-neutrality, which is all that’s required for short rate policy to be effective. What’s really required now is for Market Monetarists to clarify *which* inefficiencies they think are operative in invalidating Wallace neutrality since it is precisely through the channel of those inefficiencies that asset purchases can have effect. I.e. it is only to the extent that “monetary policy” is inefficient that it can clear the liquidity trap (barring negative rates – i.e. cancellation of currency). Which leaves you with the not-insignificant burden of demonstrating that your preferred inefficiencies are more efficient than others (e.g. govt spending, heli drops, etc).
Also, I think you muddle things a bit when you say things like “we need to stop targeting rates,” when what you really mean is “central banks need to get out of banking.” Do you do this for political reasons (i.e. you don’t want to sound like a radical)? I think it hinders understanding, because given the current operational framework, it’s very hard to see how *any* policy, no matter how it’s framed, isn’t either equivalent to a short rate policy or inconsistent with it.
Shining Raven,
I don’t think you are seeing how Scott’s proposal would work in practice. The way I see it, there is no need for an independent clearing house to hold currency. They could just hold t-bills, for example, which is way more efficient (when not at the ZLB). In our current system, people are allowed to return their currency to the banks who can exchange them for reserves at the Fed. But the Fed controls the total quantity of the base (currently it uses that power to control the fed funds market). Similarly, if the Fed is going to *control* monetary policy in a world without reserves, they can’t permit the base (which is now just currency) to be redeemable. So the Fed, at its sole discretion, conducts open market operations, exchanging large paper bills for bonds (and NGDP futures settlements!). More non-interest bearing money = higher prices at equilibrium (so long as rates don’t drop to zero). It doesn’t get you around the ZLB though (since you are still exchanging currency for t-bills), but buying NGDP futures might (as discussed above).
12. October 2012 at 10:03
Suvy,
If I may interject, I think MF is making a strong argument here. I’m not sure if you’re adequately addressing the points he is raising. I’m no professional or PhD economist, but if I may comment on a few things:
“Study physics, or chemistry or go ask any engineer about how dynamic the world is. The Austrian methodology cannot be used to understand these things.”
>> It’s not meant to be, just as there is no other methodology within the field of economics that can build the same type of reliable models as in the physical or chemical sciences, because there are no constants. As I understand, that is one of the fundamental tenants of Austrian economics.
“The Austrian response is to say, let’s remove the destabilizing factor of capitalism(debt) by removing the ability to print money by both the public sector(printing money by Central Bank) and the private sector(fractional-reserve).”
>> I don’t think that’s the Austrian response at all. Certainly the Rothbardian view would assert a 100% reserve standard. But from what I understand, there is not Austrian response to “remove the destabilizing factor of capitalism,” but rather to actually reinstitute capitalism by holding the stewards and owners of private enterprise fully accountable for profit and loss. In money production, this profit/loss test has been completely eradicated in our current monetary system.
“By doing this, you’re limiting debt to the amount of savings.”
>> Not necessarily when distinguishing between demand and time deposits for instance.
” When we see a system where debt is starting to blow up, unemployment is rising, the amount money(and the turnover of money) is falling, etc-a debt induced breakdown; the government can step in and inject money, increase the turnover of money, and use the money to pay off debts as a solution.”
>> Ok, but are you at least willing to consider that one of the primary causes, or at the very least, reasons for exacerbating these problems may be due to public policy? This is where the Austrians make one of their major contributions to business cycle theory. This has to be considered in your analysis before suggesting that the only solution is public policy, when it may very well be that public policy causes such imbalances.
“The purpose of mathematics is to observe the world, not to predict it…. Any use of mathematics to forecast a situation is a bad use of mathematics”
>> So what is the purpose of public policy then? Is one of its purposes not to effectuate certain desirable macroeconomic outcomes? Isn’t that the purpose of targeting NGDP? interest rates? inflation? employment? or whatever else? There’s no predictive objectives built in there? If not, then how is this not anything more than relegating individuals to a bunch of lab rats in a grand experiment? If you can’t forecast what will happen (I agree), then what is the ultimate goal of public policy interjecting itself into private markets? You say it’s a stabilizing factor, but then say we can’t predict what will happen. I’m not sure how this solidifies your argument.
“However, with modern technology, the Austrian approach and methodology is pretty much useless.”
>> Doesn’t this then presuppose that all individuals are more or less automatons? That individuals don’t have a varying degree and composition of preferences, needs, wants, risk tolerance, circumstances, etc?
12. October 2012 at 10:11
Shining, I don’t understand the point of Scott’s currency idea – unless it is to increase seigniorage revenue (at the cost of more frequent financial crises)?
But I *think* it could work. The Fed doesn’t have to be in the check clearing business (though I don’t see how it hurts that it is). The Fed doesn’t clear stock trades, and yet those go smoothly, right?
12. October 2012 at 10:50
“If I may interject, I think MF is making a strong argument here.”
You are almost certainly wrong.
12. October 2012 at 11:15
K, I don’t see how you could get around having a clearing house for interbank payments. Unless all banks start to settle payments by bilaterally shuttling around currency in large amounts. Consequently it would take much longer (days) for their customers’ payments to clear. This appears to me to be unacceptably complicated and cumbersome.
Max, I think the point of Scott’s idea is to only have currency, that the Fed controls directly, and not any reserves where you have to think about how one has to conduct monetary policy with non-physical base money, which is more complicated. This certainly would increase the Fed’s control of the monetary base, but it would also break the payment mechanism.
The Fed is first of all the banks’ bank, where the banks hold accounts to settle payments, i.e. when their customers want to send each other money from their deposits. If the Fed does not do this, then somebody else must provide this service. However, that somebody (clearing house) else would be also then be a bank to all the participating banks.
Banks would then certainly also begin to loan out their surplus deposits to one another, and an interbank market would spring up, but it would no longer be under the control of the original “Fed”, which would loose control of the interbank lending rate.
As soon as the clearing house extends credit to any of the banks, if would fully assume the role of the Fed, which would then become (almost) powerless. I do not see how you can avoid this. Yes, I think whoever is in the “check clearing business” between banks becomes for all practical purposes the central bank!
It is not so much that the check clearing would not go smoothly without the Fed, it’s just that the Fed needs to be at this nexus of the banking system if it wants to exert control!
12. October 2012 at 11:15
Saturos,
“”If I may interject, I think MF is making a strong argument here.”
You are almost certainly wrong.”
>> How so? I visit this blog from time to time as there is some interesting discussion that takes place here. However, I find it rather odd (or perhaps it’s just a common human reaction?) when others seem so quick to dismiss or ignore those who happen to challenge the underlying premise of someone’s work while only tolerating arguments around the edges.
12. October 2012 at 11:45
Max,
I assume Scott’s point is to
1) Get the government out of an economic sector in which it is producing a massive distortion
2) Unhitch monetary policy from rates. Interbank clearing is crucially about rates, but those markets can clear by themselves (as you correctly point out).
I think Scott believes that the ZLB is a framing problem caused by the association of monetary policy with the interbank market. I don’t think that’s exactly right, but I think he may be close to something. What is sure is that you can’t drive rates below zero by offering to lend currency at negative rates (instead you just explode the supply of currency). *But*, if instead you fix the supply of currency, there is nothing, as far as I can tell, that prevents the market-clearing inter-bank rate from going negative. All that would happen, is that the value of currency would rise above the value of interest bearing money (M1-M3), and would presumably start to disappear from circulation.
So the reason for the existence of the ZLB is, in fact, closely related to the mechanics of existing central bank operations, and separating the monetary policy and clearing functions of the CB (ending convertibility of reserves to currency) is one way to make it go away. So Scott’s proposal might just work *because* it permits negative rates, and not because rates are some sort of irrelevant framing. You don’t need to separate the two CB functions in order to end convertibility of reserves to currency, though. We ought to be able to achieve that quite easily and then we could just go back to good old fashion (negative) rates policy.
Shining Raven,
I’m pretty sure I didn’t say you wouldn’t need clearing. I just said the banks might organize a cost efficient, t-bill backed, rather than currency backed system.
12. October 2012 at 11:54
Mike T,
I want to make this clear, I agree that the social sciences are different from the hard sciences. In the social sciences, the models cannot be used for prediction because of human behavior. Instead, I want to use the models to qualitatively understand the behavior of the system we’re dealing with. The great thing about models is that you can find out certain thing about the system based on the assumptions made. I want to use models the same way Hyman Minsky and Steve Keen use them. The Austrians use a mathematical model too, they just don’t use differential equations.
As for your second point, not all Austrians want to return to a 100% reserve standard(you’re right). However, I don’t necessarily think that profit/loss is the best way to do it. What about certain things like the environment and air. It’s very difficult to define property rights for air and for many environmental issues. The profit/loss mechanism of the market doesn’t work very well.
Also, there is no doubt that policy was partially to blame for the cause of the crisis. In the economy before 1913, you had deleveragings every 20 years or so because every bubble basically created a deleveraging and excessive debt wasn’t allowed to really build up because there was no Fed to intervene and begin credit expansion again(for example, the Panic of 1907 had a deleveraging, but the economy wasn’t allowed to relever because there was no Federal Reserve to restart credit expansion by lowering interest rates. I’m actually quite sympathetic to getting rid of a central bank, but what are you going to replace it with? A gold standard? I think floating exchange rates are absolutely necessary in today’s world in order to fix trade balances. I don’t think returning to a fixed exchange rate is a solution, I think it’ll create more problems. I actually think the fixed exchange rate in Europe(the Euro) is one of the primary reasons why Europe is in such bad shape. I don’t think any alternative is practical.
The purpose of mathematics is to observe the world. Forecasting has a lot of problems because accurate forecasting requires us to know parts of the future. I’ll give you an example. When Medicare was passed in the 1960’s, the life expectancy was around 69(I think); therefore, the costs were understated because people got Medicare at 65. Now, the life expectancy is much higher(there are other things that weren’t forecasted, I’m just using life expectancy to give you an easy idea); the costs are much higher, but to know that in the 1960’s, you have to know a part of the future(the life expectancy in the future). That’s why I don’t like forecasting.
However, one thing that is relatively easy to measure is fragility and sensitivity. When you have a society/economy with a total debt/GDP ratio of 380%, that’s a fragile society because a small shift creates a huge impact due to the leverage(a normal move/shift/shock has much larger consequences because the impacts cause further impacts due to the leverage and debt). Take a firm that’s levered 30:1 vs a firm that’s levered 5:1. The firm that’s levered 30:1 gets wiped out by a 4% move in their assets while the other firm can withstand a 20% move in the price of it’s assets. The first firm is far more fragile. Same thing with sensitivity. You can use mathematics to measure sensitivity and fragility very well because you’re observing something. You can’t use it to forecast and the longer the forecast the worse the prediction.
The purpose of public policy should not include removal of volatility, but removal of fragility. Every natural system needs (and even gains from) volatility–I refer to a lot of work by Nassim Taleb on this(I think his ideas and concepts of fragility vs antifragility is very important same with a lot of his ideas about uncertainty as well).
I want a economy/society that benefits from change and is constantly changing. The Austrian methodology worked very well in the past, but with the measurement tools we have now–I don’t think that their methodology is the best anymore. I think the Post-Keynesian methodology is superior(I also think that the Post-Keynesian work also is the work that explains Keynes ideas and approach the best).
From a public policy standpoint, I think that we should have central banks target debt levels and credit growth along with NGDP and unemployment. Inflation makes no sense to target because different goods and services respond differently to inflation(commodities respond differently than assets which respond differently than consumer prices, etc). I just don’t want an economy to become too fragile so I think an approach where we say that a private debt/GDP ratio of higher than say 170% means that we send the economy into recession to prevent any increase in credit and automatically start restructuring debt(either by systematic cancellation or by conversion of debt to equity, or by other methods). I’m still not quite sure how this would work, but I think that large credit expansion is far more dangerous than slightly higher consumer price inflation.
12. October 2012 at 11:56
Come to think of it… forget it. Shining Raven is right. Whoever clears checks controls money, controls the economy. A CB unhitched from banks controls a puny, irrelevant quantity of currency. What I said about ending convertibility of reserves to currency still stands though. Negative rates are a good idea. But the CB needs to control reserves.
12. October 2012 at 12:02
K, sorry if I misunderstood you. But I have to admit that I don’t understand how a T-bill backed system would work. This appears to me to be not liquid enough for a clearing system – after all, you might need these deposits as a bank to make payments to customers.
But this idea would essentially mean that banks would use T-Bills for interbank payments – in my opinion this would again mean that there are “reserve deposits” that the Fed would no longer control, and it would be out of the picture for the purposes of the majority payment which are settled without cash.
I don’t think it would give the Fed *better* control, on the contrary.
And I still don’t see how you can separate the clearing function from the monetary policy function. My understanding is that the control the CB in fact has over the banking system stems from the fact that it controls the deposits used for clearing purposes.
If you end convertibility of cash to reserves, you simply *must* ship currency around for interbank payments. Or invent your own clearing house that converts cash into a deposit for you (and keeps the cash in a vault), but then again, there is your new central bank…
12. October 2012 at 12:03
K, thanks, did not see your last post before posting myself.
12. October 2012 at 13:29
Well, another way of thinking about it is that dollar bills are zero maturity t-bills. It’s a fiat currency, so they’re paid back with themselves. For real t-bills to replace currency, it would basically mean a severe reduction in the monetary base.
I guess the system that Scott is thinking of is how money worked before the creation of the federal reserve. We went from free banking in the mid-1800’s, with private banknotes that may or may not be backed by gold or silver, to a central currency in the late-1800’s. At that point, all of bank reserves were central currency and there were central clearinghouses instead of banks taking around bags of money to each other for every transaction.
When the Fed started, instead of central currency deposits, the banks could have reserves at their local Federal Reserve bank. The reserves were the only paper accounts which could be translated on demand to physical currency. I have to agree with Shining Raven that the centralized FedWire system is much more efficient than printing roughly 2 trillion dollars in literal cash and keeping it somewhere. I see putting 2 trillion dollars in private hands as something akin to free banking in the 1800’s, where the regular American may not really know that their bank accounts are convertible to dollars. If a central clearinghouse with many $100,000 notes were to somehow have a security breach, who would know what would happen. True, banks are robbed all the time of their currency on hand but that currency on hand is much smaller than the current Fed deposits.
Depositors can also be unsure like they were in the free banking era if we do away with required reserves, which Scott also seems to be proposing. Theoretically the free market for bank deposits would ensure appropriate reserves, capital and asset quality, but there’s a big problem with the free market and “information-insensitive” accounts.
The answer with information-insensitive markets is not, IMO, to somehow make every person with demand deposits to be an expert on their bank’s asset quality. It’s not just unrealistic to expect every Bank of America or JP Morgan depositor to thoroughly know their bank’s balance sheet. It would also be very inefficient if every depositor did in fact do hours and hours of due diligence on their bank.
12. October 2012 at 13:33
Shining Raven,
Rethinking this some more…
Logically, you can definitely separate the two. Assuming the clearing unit is backed by t-bills doesn’t imply that the banks are settling claims via t-bills. As usual, they use the liabilities of the clearing unit (reserves) which are going to earn the same as the rate on t-bills. *Or* they could just exchange t-bills using the normal DTCC clearing mechanism. Would that really be a big deal?
The next question is: can the CB control inflation (NGDP, whatever) if it doesn’t control clearing? I think maybe it could. Lets say the CB exchanges currency for t-bills using OMOs at the CB’s discretion. T-bills pay off in currency.
First assume rates are above zero. If the CB increases the quantity of currency (by buying t-bills) this will cause t-bill (and deposit and lending) rates to fall until the nominal rate equilibrates liquidity demand with the new currency supply (IS will equilibrate more slowly). Even if the ratio of M2/M0 is huge (as it typically is), this will still work, though it doesn’t work in the way the monetarists typically imagine. I.e. lets imagine a doubling of the typical amount of cash in everyone’s wallet. In Hume’s thought experiment all prices would double, which can’t be true since all prices would definitely double in the case where we doubled *all* nominal instruments and it can’t be true in both cases since prices are enormously influenced by the wealth distribution effected by nominal debts. But it *would* cause an attempt to lend the cash which would decrease the nominal rate to a new equilibrium, which in turn will have inflation implications. So rather than directly controlling the deposits used for clearing purposes, *this* system essentially performs its macro control function via a seignorage tax. It’s not a good system, but I think it works. One way we can see the inefficiency, is that it’s easy to imagine a world where the *efficient* equilibrium would have a negative nominal rate, but it’s clear that our (IS/LM-like) equilibrium cannot achieve this. In an efficient world we would use interest-bearing instruments (or capital assets) as the medium of exchange.
So at least for the case of positive rates I’m going back to my original position. I think Scott’s system works. I’m going to think more about the negative rate scenario.
12. October 2012 at 13:33
Suvy,
Interesting to see you invoke NNT. In an earlier post you suggested that governments create stability. Based on my readings of NNT, I have came to the opposite conclusion: governments create fragility. Bail-outs, Too-Big-To-Fail, the “Greenspan Put”, PIIGS…When governments try to prevent small failures, such as guaranteeing the debts of another entity, or becomes too large of an influence on one sector of the economy, such as Fannie Mae, (or just too large of an influence in general) the whole system becomes subject to a catastrophic failure.
another comment on an earlier post of yours… you said:
“Markets are not efficient and never will be. They’re highly unstable, wild, and unpredictable because that’s how people are.”
Unpredictable is the very definition of efficient in the context of the EMH.
12. October 2012 at 14:13
K: I am not 100% sure that I follow the mechanics, but I am willing to grant that this might work. I think the crucial point is that in this idea, the clearing house is t-bill-backed, and thus the “deposits” are not convertible to currency *without the Fed intervening*. This would keep it indeed in control.
I am not really sure if this could work in practice without constantly running into liquidity problems, though, since the settlement uses something that is not instantly convertible into currency. So in payment, one would transfer assets that cannot really be used to cancel the liability without the Fed converting the t-bill to cash, which it could in principle refuse to do.
Matt, I agree that “dollar bills are zero maturity t-bills”, but only as long as t-bills are instantly convertible. In Scott’s system (or in K’s proposed system), conversion would be at the discretion of the Fed. It seems to me that this could lead to liquidity problems, if the Fed really wants to effect policy in this way and does not mechanically provide dollars for t-bills whenever requested.
12. October 2012 at 14:13
Saturos:
Mike T: “If I may interject, I think MF is making a strong argument here.”
You are almost certainly wrong.
Those are your emotions talking. How does it feel? Anger? Frustration? Embarrassment? Hatred?
———————–
Suvy:
You have to be careful. If the models you use presuppose constancy in the concatenation of social events, that is, if the models presuppose constantly operating causes, then they are models that contradict the very nature of human action, which is not based on constantly operating causes.
The statement you made that social sciences are different from the hard sciences is a good start, but you have to understand the exact reason why they are different. To remain at the “they are different” stage, is insufficient for engaging Austrian theory from an informed perspective.
It’s easy for money. How is the fact that property rights may be difficult for air a justification for denying profit and loss for money? There is no connection. One could very well say they are against profit and loss in food and shelter and medicine production, because it’s difficult to do this for air, and then they believe they have justified a type of socialism.
Money is tangible. It is easily owned and possessed. It has been done for thousands of years. You have to dig deep into your psyche on why you are against profit and loss in money production, yet you are not against profit and loss in food production, which is arguably far more important than money.
Is it because you want an additional source of money other than working for it by convincing some greedy capitalist to pay you for your labor? Is it a question of wanting the state to do more than what only taxation and borrowing would allow for? Is it a question of hating cash hoarders and wanting to give it to them good and hard to satisfy your hatred?
The antagonism against profit and loss in the field of money production is an irrational one, founded upon what is almost certainly one or more fallacious beliefs, masked and covered over by some form of emotional resentment.
“Relevering” is not necessary for healthy economic growth. Credit expansion is not an engine of economic growth. With less nominal debt, there is lower prices and thus new business start ups don’t need as high size of a loan. Imagine every unit of currency (dollar bill, 5, 10, 20, etc) being divided by ten. Would this supply of money all of a sudden be insufficient? Of course not. Revenues and costs, incomes and expenses, loans and borrowing, every nominal statistic would be lower by on average a factor of ten. The real side would not be ten times smaller, because factories don’t disappear simply because there are more zeros on the money bills used to finance and purchase them.
Debt that is financed by savings, rather than the printing press, is capable of financing the entirety of all investments. Each loan would just have fewer zeros than now. Big deal!
How about a free market standard? Are you seriously entertaining the thought that a free market in food, clothing, shelter, medicine, cars, computers, books, office spaces, everything in your home or office, is practical in a free market, but for some reason, a good that is used as a medium of exchange, is not practical? Don’t you think it’s a little strange that you do a 180 when it comes to money? Don’t you think that maybe the issue isn’t with money, but your conception of it?
To Austrians, forecasting is fine, indeed it is crucial, provided that forecasts are constrained by the a priori knowledge of economics. For example, the quantity theory of money is a priori. It says that when the supply of money increases, then provided the demand for money does not change, then the marginal value of dollars will be lower than it otherwise would have been. This is a statement that cannot predict what the actual marginal value of dollars will be in the future, for we can’t know what cash preferences or the supply of money will actually be in the future. But we can know the logical form that these concepts will take.
Those who integrate such a priori knowledge into their forecasts will on average fare better than those who do not, given equal investment ability otherwise.
Austrian economics doesn’t provide for empirical predictions, but Austrians occasionally make empirical predictions.
What if public policy introduces fragility?
What measurement tools? Has human action become one of constantly operating causes? If not, Austrian theory is still relevant, and will always be relevant to the extent that humans are purposeful entities.
If it is a logical necessity that human action is not past causally determined according to constancy in relations, then no amount of measurement of historical events, no increase in the quality of measurement, can overcome this.
In what way exactly?
How do central bankers know what the right amount of debt ought to be, what NGDP ought to be, and what unemployment ought to be?
Bear in mind that you can’t target all of these things at the same time. If you target NGDP, you sacrifice debt and unemployment targeting. Same with the others.
The same is true for debt.
Why 170%? Why not 171%?
If you’re not sure, then shouldn’t the default be a free market where individuals can try things out using their own property, and if improvements have to be made, they can be made?
12. October 2012 at 14:46
For the system of banking and monetary transactions to be t-bill backed, t-bills would would need to have their principal paid back with t-bills. For that matter, when the Treasury Department issues T-bills, they would take T-bills in exchange for the new T-bills issued. It all seems weird and roundabout and I don’t see any benefits compared to just having fiat currency.
Considering all of monetary and banking history, I just see a big role in government for stabilizing the value of demand deposits and currency. The free market generally does a very good job with fluctuating assets, but it can do a terrible job with assets with extreme negative skewness. By that, I mean things like uninsured deposits in the 20’s or repo agreements with banks in 2008 backed with asset-backed securities. These assets generally don’t fluctuate with a nice curve like stocks. They either pay 1% or -100%. The free market historically does a terrible job managing those assets and the free market cyclically went back to those assets after every banking panic.
NGDP targeting may alleviate the pure AD effects of those old banking panics. But even with constant NGDP growth, RGDP could suffer through information-insensitive deposits being misallocated, as we saw 2003-07. Such capital misallocation could explain a big part of the Great Stagnation, as well as how RGDP growth was apparently lower in the 1800’s and pre-Depression 1900’s than the 50’s and 60’s.
12. October 2012 at 14:57
“If it is a logical necessity that human action is not past causally determined according to constancy in relations, then no amount of measurement of historical events, no increase in the quality of measurement, can overcome this.”
If people liked money yesterday, is it a safe assumption they will like money tomorrow? According to this, there is no way to know that people will not, in fact, just start burning piles of money tomorrow like the Joker did in the Dark Knight.
Outside of this bizarro world, people do respond predictably to incentives. They like more money vs. less. Managers also like laying off employees vs. cutting wages and in industrialized societies, economies of scale prevent laid off employees from competing with incumbents if all of them lay off instead of cut wages.
Or we could stop punishing murder, because we cannot know that incarceration would deter crimes in this bizarro world. We could have 99% tax rates on income above $50,000 and give it all to people with last names starting with Q, and we couldn’t know whether people would have less incentives to work.
Your posts, MF, have at least convinced me of Karl Popper’s work on falsifiability. The only assumption there is that every effect has a cause. Even stochastic quantum mechanical measurements have an ultimate cause of probability distributions which are in fact falsifiable. If your beliefs leads you to argue that there is no cause and effect and no way to falsify it, then it’s a pretty good indication that your beliefs are either trivial and useless or, in your case, wrong.
12. October 2012 at 15:04
Major Freedom,
You still don’t understand my view of models. Models are a tool in the toolbox. They’re not the end-all-be-all, I never said they were. They obviously break down under certain circumstances, I understand this. One thing models can show us is how certain outputs behave based on certain assumptions and inputs–that’s all they do; however, this is also a very powerful tool.
“Credit expansion is not an engine of economic growth.”
You’re right, it’s not an engine of economic growth, but in order to have growth, you must have credit expansion. There was empirical work done on this(I can’t remember the paper), but it showed that the business cycle is actually led by credit growth. Kindleberger (and even Minsky) talk about how credit must be increasing for an economy to grow because future aggregate demand must be higher than current aggregate demand. What I want is robust growth, not fragile growth.
“How about a free market standard?”
There’s absolutely no precedent for this. There was an era of free banking in the US that led to many banking panics(Panic of 1937, Panic of 1839, Panic of 1857). Before the creation of the Fed, banking panics would occur around every 5-10 years–this is not desirable. You could argue that there was still regulation and this was not a “true free market”. I compare that argument to the Marxists that say “we’ve never had a true Marxist society”. It’s a garbage argument. There were times in US history where the Eastern side of the US wouldn’t accept currencies from the Western side of the US because of various things going on. I couldn’t even imagine that on a large scale.
As for a profit/loss mechanism. There are such things as market failures. The market is not perfect for 100% of things. It’s a good tool for allocating resources in most situations, but certainly not all(not even close). There are things that governments can do better–like national defense.
Major Freedom, I’m a pragmatist and I care very little for idealism.
“What measurement tools?”
Like measuring sensitivity. We can measure sensitivity of certain variables to events and things. We need to use more sensitivity and fragility analysis rather than more forecasting.
As for setting the NGDP target, debt level maximum, etc. It’s somewhat arbitrary. I just look at historical levels and say this is what it’s been in the past, this is what’s going on right now, so this is the target. I just think that those things are easier to target than what we target now.
Again, anything that you say about anything derived from a priori assumptions calculated by a deductive logic needs to be thrown out the window. This isn’t pure mathematics(that methodology is what’s used for proofs in mathematics), this is the real world. Mathematics is used as a tool for measuring things, the proof methods in mathematics should not be used to forecast or predict and should certainly not be used in science(whether social or hard). That’s my primary argument to Austrian economics. Anything ideas and conclusions that come from that methodology should be relegated to a pure mathematics class.
“What if public policy creates fragility?”
That’s what I want to get rid of. Instead of focusing on trying to get rid of volatility(low inflation+unemployment), fragility also needs to be a focus as well.
Doug M,
If you don’t have (some) of the government interventions, I think we would’ve been in a debt-induced collapse(like the one from 1929-1933). I also do use a lot of ideas from MMT. Also, the efficient markets hypothesis say a lot of other stuff(like how information is always priced into the market). The idea of using a random walk(although this isn’t EMH) is complete garbage. The EMH is completely discredited(Mandelbrot went through this in the 1960s and further). There was also empirical work by Robert Shiller that showed that companies with low P/E ratios actually beat the ones with high P/E ratios consistently.
I also have problems with the rational expectations theory as well(that was the kind of thinking that Keynes riled against for years).
A much better alternative to the EMH would be the Fractal Market Hypothesis that is described by Edward Peters.
I have to leave, but I’ll continue with more stuff later.
12. October 2012 at 15:30
Matt Waters,
“It all seems weird and roundabout and I don’t see any benefits compared to just having fiat currency.”
There’s no difference if the currency pays interest. Otherwise the issuing monopoly gets to extract some rents from people’s liquidity preference which will effect the equilibrium (a bit).
I see no reason why T-bills couldn’t pay off in currency.
Shining Raven,
“I think the crucial point is that in this idea, the clearing house is t-bill-backed, and thus the “deposits” are not convertible to currency *without the Fed intervening*.”
It’s not really different from the current system pre-IOR. It’s always at the discretion of the Fed to provide reserves. It’s just that they *decide* to do so at a fixed price (the target). Under Scott’s system they could do the same thing, ie. decide to make a market in T-bills at a fixed yield. Scott says that’s not the policy. Instead they buy/sell T-bills to achieve an NGDP futures target. Seems fine to me.
12. October 2012 at 15:56
K,
I’m still unsure about the whole t-bill thing, or what exactly you are proposing. If currency still exists, then how is what you’re proposing different from the system we have now? Somebody has to hold the currency that the government pays back T-bills with.
Are you arguing for significantly reduced currency, with most current bank reserves being T-bills instead? That would be EXTREMELY tight monetary policy. The T-bills would need to be paid back in currency, and so unless it prints money to pay them back, the government would have to bid up the price of money to get money to pay back the T-bills. So, T-bills or no T-bills, the basic monetary premise holds that a decrease in M2 means high deflation.
The issue with straight monetarism is of course velocity. Japan shows that even with printing tons of money, individual market actors won’t spend the money (increase velocity) unless they know everybody else will spend the money. This prisoner’s dilemma is at the root of the issues of monetary policy at the ZLB and CB announcements may or may not move the equlibrium to the top left. That’s why some concrete steppes like I outlined above are probably needed as well.
12. October 2012 at 16:13
K: “It’s always at the discretion of the Fed to provide reserves.”
Well yes, but they’d better do that if they want to keep the payment mechanism functional. If the banking system is short, the Fed *needs* to provide reserves in order to enable payments.
That is the problem I have with the t-bill idea: It is supposed to give the Fed better control, isn’t it? But if the Fed does not buy up the t-bills in the settlement mechanism when the banks need cash, then the payment mechanism breaks. So the Fed does not in fact have much discretion in what to do if it want to keep the banking system working. As you said, not much of a difference to the system we have now.
12. October 2012 at 16:33
“The EMH is completely discredited(Mandelbrot went through this in the 1960s and further)”
If you can point me to papers, I would apreciate it. For the most part, when people say something to the effect that the efficient market has been discreteded, they then go onto show that they do not understand what EMH says at the most basic level.
There is nothing about “excess volatility” or non-normal distributions — the arguements that most people use to disprove EMH — has anything to do with informational effiecency.
“Robert Shiller that showed that companies with low P/E ratios actually beat the ones with high P/E ratios consistently.”
Actually, Eugene Fama demonstated it before Shiller… And, Fama is the father of EMH.
I actualy saw Professor Shiller the just the day before yesterday. He doesn’t actually say that low CAPE (cyclily adjusted price to earnings) stocks outperform. CAPE is not a reliable indicator at the company level. He does say that low CAPE industries outperform. But even that has a caveat — tech is always high CAPE. So, some industries can only be compared to their on history.
12. October 2012 at 18:24
Shining Raven,
Yup. The problem with Scott’s system is that because of his desire not to pay interest on reserves (required to justify the monetarist logic), his system drives people into interest-earning bank deposits, which mixes up the payment system and the credit intermediation system which is the road to hell. If we want a system that is efficient *and* safe it’s not enough to set up banks and base money separately by construction; we need to design it so that money and credit will remain separate *at equilibrium*. The way to do that is to open the money clearing system up to all agents in the economy (give everyone a Fed Wire account) and pay the equilibrium rate of interest on balances to make sure people don’t flee to private payment systems (unless they are trying to evade taxes, commit crimes or whatever, in which case they can go to hell when the private systems implode).
That way banks can go about their business (intermediating credit) like any other sector of the economy, i.e. by raising capital in the debt and equity markets and lending it to people. Don’t let anyone tell you that society needs to subsidize maturity transformation.
12. October 2012 at 18:30
Shining Raven, Check out Fama’s 1983 proposal in the JME, it’s bascially what I’m proposing. I’ll do a post explaining it in a few days when I have time.
K, I’ve addressed the liquidity trap many times. There are two issues:
1. What is the demand for base money with a 5% NGDP target? Almost certainly less than the stock of T-securities outstanding. Hence no problem.
2. But if it’s greater, then you have two choices. Either raise the NGDP target, or let the central bank buy riskier assets.
12. October 2012 at 18:53
Matt,
“If currency still exists, then how is what you’re proposing different from the system we have now?”
I basically agree with you. In Scott’s system (if I understand it correctly) the only difference is that we revoke deposit insurance and the discount window, which would increase currency holdings and bank reserves. And then we swear “no more bailouts!” But as you say, we still have all the same instruments, and whether we say we control rates or we control the currency supply is really just a matter of framing. The only other difference is that the Fed can use the NGDP futures as an instrument. This is potentially significant because unlike treasury bonds, NGDP futures are a positive beta instrument, so to the extent that portfolio balance effects are real, the impact of purchases will actually be positive and may help us escape the ZLB. If that channel is significant, it would enhance the credibility of the commitment not to bail out banks since the Fed would have the power to regulate the economy despite the banks. That’s a *potentially* positive feature.
12. October 2012 at 19:19
Scott,
“What is the demand for base money with a 5% NGDP target? ”
*If* you are on target then the equilibrium nominal rate will be well above zero and you will have no trouble maintaining your target – *via short rate policy*. The question is *whether* you can achieve your target. Assuming e.g. a flat -2% natural rate, flat 1% expected inflation, a zero lower bound, and Wallace neutrality, then you can’t hit your target, even with access to an NGDP futures market. It doesn’t matter if we are in your proposed monetary system or the one we live in.
An NGDP target is a great policy for keeping you away from the ZLB. But if you are already there, the only effect from changing the target is via a Krugman/Woodford style commitment to future short rate recklessness. As I discussed above, any benefit of using an NGDP futures instrument results from some sort of market inefficiency and is *effected* through the channel of that inefficiency, in which case you have a significant burden of proof vs fiscal policy. (The only clearly dominant solution is to restructure the monetary system to permit negative rates.)
I do see some possible quantitative benefits of your system vs the current system as discussed in my response to Matt. But nothing fundamentally different. But I really look forward to your post. It seems really important to me to discuss what we consider to be the critical elements of an efficient monetary system. Maybe it will contribute to a real convergence of understanding.
13. October 2012 at 04:26
Doug M,
Mandelbrot’s book “The Misbehavior of Markets” attacks the EMH pretty well. I highly recommend it(it’s a very good book). Mandelbrot also has a textbook(which is a collection of his papers) called Fractals and Scaling in Finance(which I actually have on my nightstand). Edward Peters’ Fractal Market Analysis is also very good.
Mandelbrot actually did a lot of his work with Eugene Fama on many of his academic papers. I really think Edward Peters’ Fractal Market Hypothesis is critical because he makes one important comment. His idea is that the markets consist of many different investors/traders/speculators working on different time frames with different goals(which is what he calls the structure of the market). In situations where (for whatever reason) a certain set of investors(usually longer term investors) drop out of the market(usually due to a situation where long term information becomes useless), you see cascades and crashes because the market loses its structure(usually when long-term investors drop out of the market because long-term information becomes useless, i.e. 2008). So, in my view, it becomes difficult for the market to even have a “correct” price for assets because different traders will respond to a different price and movements in price differently(what is a must sell for one investor might be a buying opportunity for another).
13. October 2012 at 05:37
Suvy, The debate over whether the EMH is “true” is a stupid argument. The theory is false, as are almost all economic theories, including supply and demand. But it’s a good enough approximation of reality to be a highly useful theory, one of the most important in all of economics.
13. October 2012 at 05:40
K, They only get that result by defining hitting a level target as “reckless”. But that’s a very weird characterization of hitting your policy target.
13. October 2012 at 07:21
The idea of having the Fed only issue paper money is interesting, but I think we should do the opposite. We should recognize that money is a legal term. Just as it doesn’t matter whether the deed to your house or a stock certificate is in paper or electronic form, it should not matter for U.S. Dollars. Anyone should be able to open a 100% reserve dollar account at any member bank, and the Fed should also issue 100% debit cards – it’s no different than offering paper Federal Reserve Notes. Then if you want money guaranteed by the government, you can keep it on your Fed debit card, or your Fed member bank, or you can keep it in paper form in your house if you prefer. All you’re doing when you spend money is tranfering a claim of Central Bank credit to someone else.
Then if you want to lend your money out and earn interest, that’s fine, but you accept the risk of default or temporary loss of liquidity, not the government. It is not necessary, nor desirable to ban fractional reserve banking or any other private contract. Of course, this is basically a modern version of Milton Friedman’s Program for Monetary Stabilty, and Irving Fisher’s book “100% Money”.
And of course, the Fed should simply use the base to target NGDP.
13. October 2012 at 10:20
Scott,
“reckless” wasn’t the point. The point was “state contingent *interest rate policy*”. It’s still just interest rate policy.
You’re focusing on the irrelevant bit of my argument. The important thing is that for asset purchases to work
1) Wallace irrelevance must fail because of some kind of market failure
2) the effect of the asset purchase is *via* the market failure
3) therefore you carry the burden of demonstrating that your market inefficiency is better than others’.
As I said, very much looking forward to your post on the right framework for the banking system.
14. October 2012 at 13:24
K, If you make the assumption that cash and T-securities are perfect substitutes at zero rates, and that monetary policy consists of buying Treasury securities and nothing else, and monetary injections are not expected to be permanent, then yes, monetary stimulus has no effect.
But why would someone want to make those assumptions?