There are days when I think market monetarism is making progress . . .

.  .  .  and then there are days where I read something like this (from the FT):

The debate about the effectiveness of unconventional monetary policy measures such as quantitative easing remains perennially inconclusive. Yet the experience of Japan suggests there is one clear negative outcome from ultra loose monetary policy: it does structural damage to the economy.

PS.  I suppose if one is looking for examples of “ultra loose” monetary policy causing damage to an economy, then the US during the 1930s could also be cited.

HT:  John S.


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8 Responses to “There are days when I think market monetarism is making progress . . .”

  1. Gravatar of Major_Freedom Major_Freedom
    22. November 2012 at 13:37

    I suppose if one is looking for examples of “ultra loose” monetary policy causing damage to an economy, then the US during the 1930s could also be cited.

    The 1930s was a time of “ultra loose” BASE money.

    It is not clear why the base has to rise to offset declines in other indicators. Why should the mere desire for more base money on the part of some individuals necessarily be accommodated by a central bank? There is no there, there. If some people suddenly desired more toilet paper, then does that mean the state has to make sure that those people get the quantity they desire?

    Of course, these sorts of questions drive monetarists nuts, because they do not have recourse to any market process in money production, so their position invariably boils down to a hostile argument by assertion: “The Fed is going to target X and you shall submit or else!”

    With houses and cars, it’s a little easier to know how many should be produced, despite the fact that the desire for more houses and cars always outstrips the ability to produce them. We know that in the market, the houses and cars that should be produced are those that market consumers are willing to enable the production of through their savings in conjunction with relative marginal utilities in a context of resource scarcity. Scarce resources are used to satisfy competing alternative ends, and if the relative value of cars goes up (and the relative value of monetarist universities goes down), then scarce resources will be redirected away from the production of universities, and into the production of cars. That is how much of each should be produced.

    But with money, there is no market process. There is a monopoly. So the monetarists come armed not with the mind, but with intimidation, ad hominems, and vitriol. Happens every time.

  2. Gravatar of Matt Waters Matt Waters
    22. November 2012 at 16:45

    MF,

    Once again, the big issue with your arguments (and arguments from other hard money Austrians) is treating money like “toilet paper,” “cars,” or “houses.” Money is an arbitrary tool to make exchange of goods and services easier. It has no innate value, similar to how gold has no innate value if it used only as a medium of account/unit of exchange. Get over it.

    Also, in every case going back in history, it was far more efficient to have people agree on a common medium of exchange than trying to some form of competing private currencies. It is not efficient to have 300 million people in the US making 300 million different decisions every day concerning which medium of exchange and unit of account they should hold. A breadmaker needs to focus on making bread, not on calculating the proper discount to give Bank of America dollars vs. JP Morgan dollars. The evidence is not on your side. Deal with it.

    And if you don’t want free banking and private currencies, then the question becomes merely what the government should do with its currency. The traditional answer is to set it to gold, but that makes little sense because gold is an extremely tiny part of any economy. Having a stable value with predictable inflation in terms of what Americans buy makes more sense, both to have lower menu costs and to allow lenders and borrowers to have predictable future real cash flows. Furthermore, due to the market imperfection of sticky wages, a small, positive and predictable inflation rate creates an ideal situation.

    I understand where you’re coming from MF, because I was the same way. No matter the evidence, I would be convinced that government in any and every form was always the problem and never the solution. I would callous myself to any and all evidence, until eventually I gave myself over to evidence and reason. The Austrians and anarcho-capitalists that remain after the crisis are those who have chosen not to look at evidence or reason and who create absolutely contortionary epistemological arguments to ignore the evidence.

  3. Gravatar of Benjamin Cole Benjamin Cole
    23. November 2012 at 03:51

    Japan, ultra-loose?

    So “ultra-loose” monetary policy leads to deflation? Say again?

    The strength of the yen could be relative, but in this case it is informative. Rising for decades.

    As to those with a peevish fixation on inflation: Go get juiced, really hard. Inflation just ain’t that important. What is important is real economic growth.

    A mild rate of inflation is probably the best we can do. And that is a a side-effect of a solid NGSP targeting monetary policy.

    Japan has tried the zero-inflation approach. Losers. For 20 years and counting.

    There are far more important issues to worry about than microscopic rates of inflation.

  4. Gravatar of Major_Freedom Major_Freedom
    23. November 2012 at 07:00

    Matt Waters:

    Once again, the big issue with your arguments (and arguments from other hard money Austrians) is treating money like “toilet paper,” “cars,” or “houses.” Money is an arbitrary tool to make exchange of goods and services easier.

    Once again, money is a commodity Money is not an arbitrary tool. Money is a commodity that is useful as a store of value, and for making exchanges since it is relatively highly sought after for, ultimately, being valued as a commodity in itself. State impositions of monopoly over money never erases the valuations of the money commodity in itself. This is why constant, perpetual coercion from the state (in the form of taxation, and legal tender laws) is necessary to maintain the artificial demand for the state’s toilet paper to make it function as a general medium of exchange. For if this coercion were eliminated (think what would happen if tomorrow the state ceased using coercion in the sphere of money, ceased taxing in dollars and ceased enforcing legal tender laws in dollars). The valuations of the dollars, from the cotton and linen in the paper notes, to the digital bytes at banks, and so on, would all collapse down to the usefulness of the dollars in and of themselves.

    A $20 bill for example would collapse in value to whatever the value is for a defaced piece of cotton and linen. The same is true for the digital component, and the other components of the US dollar money supply. These subjective valuations never were eradicated, and the removal of the coercion would simply allow the true value of the state’s paper to be manifested in exchanges.

    It has no innate value, similar to how gold has no innate value if it used only as a medium of account/unit of exchange. Get over it.

    Nobody is arguing for “innate” value of money. Austrians vehemently reject the doctrine of intrinsic (objective) value. It is precisely the Austrian school that originated (independently of Jevons and Walras) subjective value, which solved the paradoxes of objective value theory (diamond-water, etc).

    Money is valued not because it has intrinsic value, but because it is, ultimately, subjectively valued as a commodity in itself. The difference is subtle, but it’s there.

    If we had a free market in money, where individual subjective valuations were free to be manifested in exchanges, rather than suppressed as they are now, then should gold become money, then gold would be valued as a money, ultimately, because of the value of gold as not money, as a commodity in itself, for direct or indirect utility. It would be valued as a money, because the valuations of a good money over a bad money would favor gold over other commodities due to gold’s physical characteristics. (BTW, that point was not an intrinsic value argument). A good money is durable, homogeneous, divisible, and rare enough to be relatively highly valued.

    You have a false theory of money. You may not realize this, but you believe that money becomes subjectively valued by arbitrary decree of law. You adhere to an acatallactic theory of money. Your theory of money cannot be integrated into exchanges.

    Also, in every case going back in history, it was far more efficient to have people agree on a common medium of exchange than trying to some form of competing private currencies.

    Competing private currencies does NOT imply many different currencies. In fact, if the world were to contain universal private competition in money, then there would almost certainly be fewer currencies than there are now. How many different currencies are there today? A couple of hundred? If private property rights were instead respected and protected in the sphere of money, then it would be highly, highly, highly unlikely that more mediums of exchange would arise on the market.

    Before central banking, the world had far fewer mediums of exchange. Gold and silver were dominant over almost the entire world. Going back into history, various things like copper, salt, and other commodities were also used.

    Today, if I asked you what would people tend to willingly accept from others, in other words, if people were free to seek out commodities that provided the services of durability, homogeneity, divisibility, and rarity, what commodity or commodities do you think will “win”? Only a fool would deny that the overwhelming majority of the world would almost certainly adopt some form of precious metals based money. The central banks all over the world still store the stuff. The central banks aren’t storing cotton or linen. No, they’re storing gold. Why do you suppose that is? Why would the world’s legalized counterfeiters find it useful to store vast quantities of gold, and then, ridicule those who say gold could beat those central bank notes in open competition? It’s total hypocrisy.

    It is not efficient to have 300 million people in the US making 300 million different decisions every day concerning which medium of exchange and unit of account they should hold.

    What a ridiculously uninformed comment. We have somewhat of a semblance of a market in jewelry today. Are 300 million people in the US making 300 million different decisions everyday concerning what precious metal should go into the jewelry that is produced and sold?

    A free market does not mean as many different products as their are individuals. Just look at everything else that is made. Ever heard of mass production? Check it out. It’s crazy.

    A breadmaker needs to focus on making bread, not on calculating the proper discount to give Bank of America dollars vs. JP Morgan dollars. The evidence is not on your side. Deal with it.

    No you deal with it. The evidence is on my side. A breadmaker won’t have to worry about the proper discount to give Bank of America dollars vs JP Morgan dollars. For those institutions would almost certainly be using the same commodity as money between them. Why would Bank of America owners accept JP Morgan dollars, and why would JP Morgan accept Bank of America dollars? Why would anyone accept the paper notes these firms are thinking of issuing? What would people want those notes for? If you have labor or goods to offer, why in the world would you want to exchange those things for wood pulp, or cotton, or linen?

    See, your problem is that you are choosing not to, or you are unable to, think outside the fiat box. Your mind is dominated by paper money, so you believe that if we had a free market in money, then somehow there would be 300 million different paper notes.

    Ask yourself this. In a free market of money, where you are not coerced into acquiring EITHER paper made from trees with JP Morgan faces on them, nor Bank of America paper made from trees with Bank of American faces on them, WHY would you accept either paper, and if you did want to work all day to acquire nothing but paper, why would you accept one over the other? Look around in your office. Look at the different pieces of paper you have lying around. Are you telling me that one is really so much more valuable than the other? Of course not.

    Same thing with Bank of America and JP Morgan. It is almost a guarantee that in a free market of money would see Bank of America and JP Morgan be the first to burn all their paper notes, and seek more valuable commodities for the purposes of storing value, durability, homogeneity, divisibility, and rarity.

    Seriously, how abundant would paper be? Paper would lose out to more rare commodities in competition.

    And if you don’t want free banking and private currencies, then the question becomes merely what the government should do with its currency. The traditional answer is to set it to gold, but that makes little sense because gold is an extremely tiny part of any economy.

    Another bad argument, this one on two levels.

    One, it does not make little sense that the exchange ratio between dollars and gold would be as high as whatever the quantity of dollars are, relative to gold. If there are $20 trillion in total dollars, and 20 billion ounces of gold in the world, then the exchange ratio can be $1000 paper dollars to 1 ounce of gold. Each person would get ownership of however many ounces of gold that their money balances can buy. After that, those who bought gold would be able to use gold as a medium of exchange thereafter.

    Two, you are again not thinking outside the fiat money box when you say “gold is an extremely tiny part of any economy.” Gold is the size it is BECAUSE gold is not allowed to be used as freely competing money (because the state taxes gold transactions in paper DOLLARS, and enforces legal tender laws in paper DOLLARS). If gold were money, gold would NOT remain a small part of the economy. It would become a very large part of the economy since lots of people would prefer gold as as money and seek it out in their exchanges.

    Your comment would be like someone claiming in 1800 AD that oil would be a crappy commodity for energy purposes, since oil makes up such a small part of the economy in 1800 AD.

    Having a stable value with predictable inflation in terms of what Americans buy makes more sense, both to have lower menu costs and to allow lenders and borrowers to have predictable future real cash flows.

    Let the market process decide. If you’re right, then whatever commodity wins, would be valued for those purposes.

    Furthermore, due to the market imperfection of sticky wages, a small, positive and predictable inflation rate creates an ideal situation.

    Wages are sticky in large part BECAUSE of the persistent inflation in fiat money makes prices keep rising, and wage earners and wage payers are less reluctant to reduce wages because they have been conditioned to expect rising prices even during periods of deflation.

    If there was gradual price deflation, then wage earners would be much more willing to accept pay cuts, because they have been conditioned to understand that prices will be lower in the future. In a free market of money, you would probably see the phenomena of “sticky upward” wages arise, especially during the rare significantly large gold discovery, where the market clearing wage is higher than what prevails in the market, but people have been conditioned to expect lower prices in the future. In these times, the gold discovery would be akin to the inflation we have now, where many people don’t know what central bankers are going to do next, because they don’t pay attention to monetary economics, and so they will experience inflation as sudden income increases, or sudden price increases.

    I understand where you’re coming from MF, because I was the same way. No matter the evidence, I would be convinced that government in any and every form was always the problem and never the solution. I would callous myself to any and all evidence, until eventually I gave myself over to evidence and reason. The Austrians and anarcho-capitalists that remain after the crisis are those who have chosen not to look at evidence or reason and who create absolutely contortionary epistemological arguments to ignore the evidence.

    The truth is literally the exact opposite. The evidence and reason, the epistemological arguments, all of these point towards a free market in money. You claim the evidence is consistent with your economics theory. Not only is it not, but the evidence is definitely consistent with my economics theory.

    History does not prove one economics theory over another. History does so in physics and chemistry, but in economics it is the other way around. This is because humans are actors. The subject matter of physics and chemistry is non-action. History can confirm and falsify various theories in physics and chemistry because we logically understand such phenomena to behave according to constancies in causality, whereas in economics, theory confirms or falsifies various historical interpretations because we logically understand people to be purposeful entities. Even by denying this point, you are practically confirming it, because you yourself would be trying to correct me, to change my mind, to make me choose to adhere to a different theory. You are assuming I am an actor when you are denying I am an actor. That would mean you’re contradicting yourself.

    Moreoever, evidence and reason have shown that private property rights is the foundation of prosperous civilizations. Money in our economy has been imposed by violations of private property rights. Hence, to make us more prosperous, people should be free to use whatever money they want, consistent with respecting other people’s property rights.

    Your entire explanation is nothing but an underhanded attempt to impose coercion on property owners through the state, and you dress up this coercion with “efficiency” arguments that are actually wrong.

    I used to think like you. I was also against freedom and competition in money. But I have since given over to evidence and reason. Evidence and reason points towards capitalism, not socialism. You want socialism in money. I want capitalism in money. You are anti-capitalist. I am pro-capitalist.

  5. Gravatar of RebelEconomist RebelEconomist
    23. November 2012 at 08:53

    And there are days when I think that people might be beginning to realise that monetary make-believe does not help. Another fine example from the FT was this letter from an entrepreneur: http://www.ft.com/cms/s/0/509fea7e-331c-11e2-aabc-00144feabdc0.html#axzz2D4529WVW

    MF: you cannot seriously expect such a long comment to be read?

  6. Gravatar of ssumner ssumner
    23. November 2012 at 09:19

    Rebeleconomist, Only a fool would read even his shorter comments.

  7. Gravatar of David S. David S.
    24. November 2012 at 19:56

    Something that I’ve been noticing gets short shrift in most descriptions of Japanese deflation is financial repression (which used to be foreign reserve sterilization, and is now used for other purposes.) Everybody notices the top-line number of how much money the central bank pumps into the economy, but it seems much fewer notice the amount that gets drained out at the bottom through forced savings. I’d like to understand how big a role this plays myself. I’m not sure how much of this is due to my own ignorance; I think a big part of it is the inherent opacity of Japanese accounting (in other words, I think some of the money ends up on company balance sheets disguised in some manner.)

    I imagine this can explain a lot of the structural damage alluded to above.

  8. Gravatar of Doug M Doug M
    26. November 2012 at 09:56

    David S.

    Savings doesn’t drain money out of the economy.

    You can argue that increases in savings retard demand — it is a central premise to the Keynsian model. But, that is a bit of a diffent point.

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