With apologies to Tyler Cowen . . .

This post was triggered by Tyler’s new post:

With apologies to Scott Sumner, I say Bitcoin is a bubble.

Here’s a Tyler Cowen post from April 26, 2011:

Jerry Brito reports:

“The arrow notes the date my column on the virtual currency was published in TIME.com. The day after that piece was published, the Bitcoin exchange rate reached an all time high at $1.19. Yesterday, just over a week later, it was pushing $2.”

Via Chris F. Masse, Reuben Grinberg (in a useful paper) reports:

“In late April, 2011, one bitcoin is approximately at parity with the US Dollar — a 2000% percent appreciation against the Dollar in less than a year.”

Of course, that’s the appreciation you might expect from a highly successful private asset!  Or you can take that as a sign of the dependence of the Bitcoin upon expectations, and a sign of its bubbly nature.  Just think how hard it is for a major country to establish credibility for its currency, and then ask how much of the Bitcoin value is expectations-dependent and multiple-equilibria dependent.  What will be the rate of Bitcoin appreciation five years from now?  I guess it will be falling.

If I read that correctly, Bitcoins started at a nickel and had reached $2 by April 2011.  That sure looks like a bubble—even to me.   But, what does the term ‘bubble’ actually mean?  One definition has to do with prices not equalling a rational expectation of fundamental values.  But there’s really no way of testing that definition.  If you say you don’t think the price is right, you’ve basically assumed the answer.  The question is; how do we test whether the bubble proponents are right?

In my view a bubble claim must be regarded as a sort of implied prediction about the future path of prices. More specifically, that prices will be substantially lower at some point in the not-so-distant future.  And I think one really ought to give a date, as a random walk with no trend is exceedingly likely to fall below current levels if you wait long enough.  So it’s good that Tyler gives a date—5 years.

As an aside, unlike Tyler many bubble proponents don’t realize this and they give no date.  Then when prices rise after their prediction they brush it off, saying prices will later fall.  If prices later fall they say it proves they were right, even if the later decline leaves prices higher that when the bubble prediction was made.  This false gloating will probably happen soon in Australian housing.  I once did a post accusing The Economist magazine of making exactly that error, in an ad touting their accurate prediction that housing was a bubble (which was actually wrong in 5 out of the 6 countries they referred to.)

Unfortunately the wording used by Tyler is a little vague, so I’m not quite sure he was calling a bubble back in 2011.  He refers to a prediction that prices will be falling in 5 years, not lower than today.  But let’s assume he was.

In any case, in today’s post Tyler links to a report of spectacular price appreciation, and then comments:

The Bitcoin price has just broken the all-time high of $31.9099 that it set on June 9, 2011 on MtGox. After a persistent, one-and-a-half month rally from $13 to $28, followed by nearly two weeks of bumping up against $30 and then hovering around the $28-$31.5 range, the bulls have finally won…

With apologies to Scott Sumner, I say Bitcoin is a bubble.  Outside of war and rebellion, do “normal” new currencies behave this way?

I’m too cowardly to go out on a limb with price predictions for such a volatile asset.  Notice that it soared to $31 dollars soon after Tyler’s April 2011 post, then collapsed, and has again soared to $31.  For those keeping score, here’s what I’d suggest:

Assume the price drops to $3 in 2016 (5 years after 2011.)  Should we give Tyler credit?  I say we should say he’s batting .500, which is excellent in baseball but only so-so in terms of binary choice predictions.  That’s because if it drops to $3 his current post will be prescient, but the earlier post will be inaccurate–bitcoins were not overvalued at $2.  In fairness to Tyler he didn’t quite say that in 2011, I’m cheating a bit by referring to the inference most readers would have taken from the earlier post.

I am able to state with complete assurance that Tyler made one inaccurate prediction in his April 2011 post:

Last post on this topic!

He’s done 19 posts since (although in fairness most were merely links.)  Given how much smarter he is than me, I find it reassuring that he’s not much better at predicting his future behavior than I am.

PS.  I actually agree with Tyler that the price path in his graph looks fishy.  What do my finance readers think?  Do random walks have such long swings that look serially correlated?  Or are my eyes fooling me?  Doesn’t it look like a momentum trader could profit?

PPS.  Tyler has put a crushing burden on my shoulders.  By singling me out as the bubble denier (and why not Fama?), I face the unhappy prospect of being taunted by commenters every time an asset price moves in a way that to all the world looks like a bubble and crash.  Imagine I had started blogging in 2006.  The Great Housing crash would have (unfairly) ruined my reputation just as surely as the 1929 stock market crash (unfairly) ruined Fisher’s reputation.  Fisher was never taken seriously again, even though he had the right prescription for ending the Depression–reflation via devaluation.  In contrast I started blogging in early 2009 and have been mostly able to avoid big asset price crashes—so far.  Thus my reputation is not ruined and people are willing to at least listen to my NGDP targeting ideas.  I’m very lucky.

PPPS.  Because low interest rates are the new normal, higher P/E ratios are the new normal.  Thus the US stock prices “have reached what looks like a permanently high plateau.”  :)


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65 Responses to “With apologies to Tyler Cowen . . .”

  1. Gravatar of J J
    3. March 2013 at 08:13

    Sort of a technicality, but an important one: when considering whether the price of an asset has fallen from, say, 2011 to 2016, shouldn’t you discount future values by an average nominal interest rate over that period, i.e. the opportunity cost? If the price of an asset is $2.50 in 2016, then I might call it overvalued at $2.00 in 2011. Does that mean there was a bubble? Maybe not.

  2. Gravatar of J J
    3. March 2013 at 08:16

    Also, I wouldn’t worry about bubbles affecting your reputation. In a few years, whether in the UK, the US, or Japan, we will probably have seen some test of your ideas on NGDP targeting/more aggressive monetary policy. I predict that you will either be a very popular or a very unpopular economist based on the results.

  3. Gravatar of Eliezer Yudkowsky Eliezer Yudkowsky
    3. March 2013 at 08:44

    Isn’t Bitcoin sort of obviously the worst currency ever in the history of ever, from a macroeconomic commons perspective, and yet amazingly convenient to each individual? And doesn’t Finagle’s Law imply that therefore Bitcoin should win? I mean, we finally got the whole NGDPLT thing worked out theoretically. Logically, it should begin to be adopted by central banks just as people abandon physical currency for Bitcoin and *completely* screw over the economy.

  4. Gravatar of Jim Glass Jim Glass
    3. March 2013 at 09:15

    Bitcoin is quite interesting, but not as a “money” or a “currency”.

    Bitcion is a commodity. Like wheat or orange juice or copper or platinum, it exists in a finite amount, and its price goes up and down in response to change in demand for it. The price is volatile because there is no supply response to changes in demand to mitigate price moves, so all change in demand goes right into the price. All textbook.

    Except it is a “virtual commodity” that consists of nothing — a nothing that exists in fixed amount the supply of which grows by a set, known rule. There is no “use value” for the commodity as there is for orange juice and platinum (and as there is for gold which supposedly creates its value as money) because this commodity doesn’t exist. Only its quantity exists.

    I find this very interesting. Bitcoin is an experiment in the value of “pure limited supply”, of nothing!

    There are market prices for all kinds of things that one would think would have *no* value — such as canned automobile exhaust fumes — provided they exist in sufficiently limited amount.

    Now we see that demand creates a market price even for nothing as long as it exists in a limited amount.

    Bitcoin demonstrates the use value of scarcity itself — scarcity in its purest form, the scarcity of nothing!

  5. Gravatar of ssumner ssumner
    3. March 2013 at 09:33

    J, I picked 3 dollars because with the current low interest rates a 50% rise over 5 years is an excess return. I don’t worry about my reputation. If NGDP is unstable then I can say they never did it. If it’s stable, I’d expect RGDP will be pretty stable. Either it won’t be tried, or it will work.

    Eliezer, Well I expect the US dollar still has a pretty long run ahead of it. We’ll see.

    Jim Glass, Are internet products priced in terms of bitcoin?

  6. Gravatar of Geoff Geoff
    3. March 2013 at 09:48

    In my view, bubbles ought not be defined as the prices themselves, divorced from human grounding and real economic activity.

    Yes, bubbles are often characterized as run ups in price. But economists should understand bubbles differently than the movements of prices.

    I firmly believe that bubbles ought to be understood as being composed in “real” concepts, not “nominal” concepts like prices and spending.

    Suppose a housebuilder embarks on a plan to build a house that requires 50,000 bricks. Suppose that while believes he has 50,000 bricks, he really only has 40,000 bricks. I would call this a “bubble”. Now, we can imagine that the prices he agreed to pay for the bricks is greater than what he otherwise would have paid, had he known that his plan is inevitable going to be realized as a problem. I submit that I cannot predict when he will realize this, and I will insist that this does not suggest that I am being a sneaky, attention garnering predictor. I really do not know when the builder will realize his error, but I do know that this plan of his is in error.

    Going further back, I also submit that I cannot predict when such error filled plans will take place, and I also cannot know if there is an error filled 40,000 brick plan right now as we speak.

    Be that as it may, I can still make an educated guess that the housebuilder’s plan does contain errors, if I can figure out if he was misled in some way in his planning process. For example, if I knew that the electronic inventory he used was systematically interfered with by signal jamming, a jamming that consistently over-reports the number of bricks available to the housebuilder, then I can be more certain than less certain that there is some error in his plan and that he is probably embarking on a plan that requires more bricks than he actually has available.

    Are the prices he agreed to pay “too high relative the “fundamentals” in some way”? Yes.

    Am I obligated to give the person I am trying to convince of there being a “bubble”, a predicted time frame for when the builder will realize his error? No.

    Does my inability to make a prediction regarding when the builder will realize his error, suggestive of any meaninglessness or dubiousness of housebuilder plan “bubbles”? No again.

    Is it possible that the prices of bricks he will agree to pay after he realizes his error, will not fall from the current price he agrees to pay? Yes. He could agree to pay the same or higher price. Suppose that the price he agrees to pay after his realization of errors, falls, but only a little bit, and then rises after that, for a couple weeks? Is it wrong to say that his plan was still in a “bubble”, and that the prices he otherwise would have paid at the time would have been lower? No.

    Bubbles ought not be defined or understood solely as price movements. That isn’t what bubbles are.

    Bubbles are economic over-estimations of available capital, which are typically, but not always, characterized historically by increases and subsequent declines in prices.

  7. Gravatar of Geoff Geoff
    3. March 2013 at 10:11

    The economy during the 1920s was in a “bubble”, because there was a wide-spread series of over-estimations of capital. This decade was one of those “not always” times when there was a bubble, but prices did not significantly increase.

    Hayek and Mises argued that there was a bubble despite the lack of significant price increases, because they were working with the theory that systematic intervention by the central bank sends the same sort of “over-reporting of capital” jamming signals as in my housebuilder example, and they thought that there would be a crash later on, but they didn’t know when either. Does this mean that their prediction were flukes? That they got lucky? No. It wasn’t a fluke, because they really did understand that wide-spread over-estimations of capital will be followed by corrections later on once people realize how much capital is actually available.

    The notion that Hayek and Mises had to announce time frames for when they believed other people will learn there are errors in previous estimations is not only unfair, but indicative of a misunderstanding of what bubbles are and how people come to know them.

    Bubbles are economic phenomena, not natural science phenomena like the tides, lunar cycles, or vibrations of energized atoms. It is wrong wrong wrong wrong (did I say wrong?) to understand bubbles in a positivistic, scientistic, empirical prediction fashion.

    You will get nowhere, and you’ll just make yourself believe that they are nothing but astrology seeking, chest thumping games of rhetoric.

    The reason why many people don’t “get” bubbles is because their a priori theory to understand economic life is more suited to physics and chemistry. I don’t expect anyone to change their epistemology overnight, because virtually the entire economics establishment is scientistic and empirical. One will appear “kooky” to one’s scientistic, data munching peers if one actually used economic principles grounded in categories of thought.

    But that doesn’t mean that one can’t learn the proper epistemology of economics in private, and then slowly come around to talking about bubbles in a way other than disdain, mistrust, and head in the sand denials.

  8. Gravatar of Brett Brett
    3. March 2013 at 10:33

    Jim Glass, Are internet products priced in terms of bitcoin?

    Not many of them, unfortunately. It’s mostly accepted by Gambling Websites and the Silk Road black market in the TOR Network on the web.

  9. Gravatar of J.V. Dubois J.V. Dubois
    3. March 2013 at 10:40

    scott: Bitcoin is an alternative currency that is either used for speculation, but it is also used for anonymous transaction. The technology that enables existence of Bitcoins makes it impossible to shut-down by governments, it is annonymous and and its virtual nature makes it ideal for internet transactions – especially the dubious ones such as purchases of “cybercrime services” (spams, ddos attacks, virtual identities etc.), or internet purchases of drugs, weapons and other shady stuff.

    So unlike Tyler Cowen I do not think that Bitcoin is pure bubble. There are people that really need to use a safe methods of payment and who were burned by using alternatives such as egold, or paypal (that can be shutdown by authorities).

    My opinion is that the volatility of bitcoin price has more to do with a lot of different possible equilibira. There exists a possibility where bitcoin will be embraced in future as true currency – and given its limited supply the price would be much higher than it is now. Another alternative is that people will stop using it for various reasons – even due to too much speculation that will increase transaction costs of people who use it as medium of exchange. So in short, bitcoin price is volatile because its future is volatile. Claiming that it is automatically a bubble by comparing it to other currencies with much clearer future seems too cheap a shot to me.

  10. Gravatar of Geoff Geoff
    3. March 2013 at 10:41

    Consider the treasury bond market. I am one of those kooks who believes that it is likely in a “bubble.”

    What does that mean? Well, going by my previous discussion, it means that there is a wide-spread “over-estimation of capital”. But wait, how does that make sense? Talking about “capital” with government is weird. Well not really. One can say that the “bubble” here means that investors in government bonds are “valuing” the US government “too high relative to its fundamentals.” Investors are banking on the US government to be as valuable as the bond prices suggest.

    A government that prints less (more) money is more (less) valuable, in government money. This follows from the law of marginal utility. Additional units of a good are valued lower at the margin. More dollars means each dollar is worth less. That’s why bond investors want more dollars back from the government if the government prints more dollars.

    This is why we cannot look at the government bond prices only and conclude that government bonds are in a bubble. We have to think in terms of over-estimations of capital. The only “capital”, if we can even call it capital, that the government has is power. Power is valuable. An institution that has the power to receive revenues by force, is valued by investors.

    My argument that government bonds are in a “bubble” rests not on their high prices (low interest rates). It rests on what I believe is a widespread series of over-estimations of what power the government really has. The power to educate, give healthcare, support people in retirement, be policeman of the world, etc, etc, etc.

    I think even Dr. Sumner would agree that there are lots of people, even “bond vigilantes”, who are over-estimating the “power capital” the US government has. Do 30 year bond investors really believe that the government is going to be fiscally sound even 10 years from now that would justify the 30 year bond price? It is a mathematical certainty that the government is either going to default on its liabilities, or print so much money that the value of it in dollar terms declines (bond prices fall, interest rates rise). Those investing in 30 year bonds at present prices are banking on finding the greater fool before maturity.

    When these errors (and I submit there are errors, agreeing to the possibility that my prediction may turn out wrong) will be realized depends on the preferences and knowledge of people in the future, which I cannot scientifically predict. But I still believe that government debt is way overvalued. I am also taking into account the fact that investors flooded into government bonds because of the horrible market conditions. Going from one bond market to another doesn’t mean that other market is inherently any better. It could mean it is just less worse. That there is nothing else risk averse bond investors can invest in, so they agree to pay the high government bond prices, because it’s better to lose small than lose big.

    I don’t reason from prices, so I don’t conclude that the low interest rates (high bond prices) are indicative of a particular monetary policy over another. Money can be “loose” AND interest rates can be low. Or the opposite. It isn’t a mechanistic relationship that some MMs make it out to be.

  11. Gravatar of Edward Edward
    3. March 2013 at 11:47

    I happen to believe that Bitcoin is a bubble. But who cares? its a localized market, thinly traded, with no discernible impact on U.S. NGDP.
    So my position is a sort of combo between Scott Sumner and the behaviorist model I don’t believe in the EMH in the short run, but in the long run, prices tend to converge to fundamental values. If this weren’t the case, than even value investors wouldn’t profit.

    Totally separate question though, Scott. [I know, I tend to do this! :-) ] What do you think of Paul Krugman’s recent minimum wage article? I happen to be against the MW, but how do you explain studies that show no discernible impact when states tend to raise it? Is it because the MW isn’t indexed to inflation, so the real MW doesn’t rise, and businesses just pass it on as an increase in prices? What’s going on? Also, if we were to abolish the MW, what would be the effect? Especially in an economy where the Fed targets the inflation rate, and thus will not allow teenage workers and that labor market to benefit from “good deflation.”

    P.S. Geoff, are you Major Freedom? You sound suspiciously like him

  12. Gravatar of Edward Edward
    3. March 2013 at 11:50

    I happen to believe that Bitcoin is a bubble. But who cares? its a localized market, thinly traded, with no discernible impact on U.S. NGDP.
    So my position is a sort of combo between Scott Sumner and the behaviorist model I don’t believe in the EMH in the short run, but in the long run, prices tend to converge to fundamental values. If this weren’t the case, than even value investors wouldn’t profit.

    Totally separate question though, Scott. [I know, I tend to do this! :-) ] What do you think of Paul Krugman do you explain studies that show no discernible impact when states tend to raise it? Is it because the MW isn’t indexed to inflation, so the real MW doesn’t rise, and businesses just pass it on as an increase in prices? What’s going on? Also, if we I happen to believe that Bitcoin is a bubble. But who cares? its a localized market, thinly traded, with no discernible impact on U.S. NGDP.
    So my position is a sort of combo between Scott Sumner and the behaviorist model I don’t believe in the EMH in the short run, but in the long run, prices tend to converge to fundamental values. If this weren’t the case, than even value investors wouldn’t profit.

    Totally separate question though, Scott. [I know, I tend to do this! :-) ] What do you think of Paul Krugman’s recent minimum wage article? I happen to be against the MW, but how do you explain studies that show no discernible impact when states tend to raise it? Is it because the MW isn’t indexed to inflation, so the real MW doesn’t rise, and businesses just pass it on as an increase in prices? What’s going on? Also, if we were to abolish the MW, what would be the effect? Especially in an economy where the Fed targets the inflation rate, and thus will not allow teenage workers and that labor market to benefit from “good deflation.”

    P.S. Geoff, are you Major Freedom? You sound suspiciously like him

  13. Gravatar of Edward Edward
    3. March 2013 at 11:52

    I happen to believe that Bitcoin is a bubble. But who cares? its a localized market, thinly traded, with no discernible impact on U.S. NGDP.
    So my position is a sort of combo between Scott Sumner and the behaviorist model I don’t believe in the EMH in the short run, but in the long run, prices tend to converge to fundamental values. If this weren’t the case, than even value investors wouldn’t profit.

    Totally separate question though, Scott. [I know, I tend to do this! :-) ] What do you think of Paul Krugman’s recent minimum wage article? I happen to be against the MW, but how do you explain studies that show no discernible impact when states tend to raise it? Is it because the MW isn’t indexed to inflation, so the real MW doesn’t rise, and businesses just pass it on as an increase in prices? What’s going on? Also, if we were to abolish the MW, what would be the effect? Especially in an economy where the Fed targets the inflation rate, and thus will not allow teenage workers and that labor market to benefit from “good deflation.”

    P.S. Geoff, are you Major Freedom? You sound suspiciously like him

  14. Gravatar of Edward Edward
    3. March 2013 at 11:59

    yikes!!!! i must have pressed submit too often! Sorry guys!

  15. Gravatar of Edward Edward
    3. March 2013 at 12:01

    yikes!!!! i must have pressed submit too often! Sorry guys!
    P.S.
    Scott, there might be something wrong with your site.

  16. Gravatar of JP Koning JP Koning
    3. March 2013 at 12:27

    “I actually agree with Tyler that the price path in his graph looks fishy. What do my finance readers think? Do random walks have such long swings that look serially correlated? Or are my eyes fooling me? Doesn’t it look like a momentum trader could profit?”

    Your timing on this post demonstrates the behavioral biases of the market. There’s nothing unique about bitcoin rising above 31.9099. It just so happens that that was the highest point BTC reached back in 2011. Even though 31.9099 is just a number it has spawned a raft of new bitcoin posts like yours. If bitcoin was still only at 30.9099, you wouldn’t never have written it. As humans we put importance on new highs and lows, we focus on unique round numbers, and are keyed to events like anniversaries. If we were purely rational we wouldn’t.

  17. Gravatar of Geoff Geoff
    3. March 2013 at 13:20

    Edward:

    You have to be more patient when submitting. Click submit once, then let it do its thing. It may take a while.

    No, I’m not “Major Freedom.” But you’re probably the 3rd or 4th person to ask me that, which is really weird. Maybe some people just have similar “isms” for whatever reason.

  18. Gravatar of Don Geddis Don Geddis
    3. March 2013 at 14:16

    @Geoff: “Money can be “loose” AND interest rates can be low. Or the opposite. It isn’t a mechanistic relationship that some MMs make it out to be.

    I’m sorry, but exactly which Market Monetarist was it, that you believe claimed that the current interest rate indicated the current “tightness” of monetary policy? Can you name even one?

    Or, instead, are you simply ignorant of MM theory, and are just talking out of your ass again?

  19. Gravatar of Geoff Geoff
    3. March 2013 at 14:26

    Don Geddis:

    “I’m sorry, but exactly which Market Monetarist was it, that you believe claimed that the current interest rate indicated the current “tightness” of monetary policy? Can you name even one?”

    Wow. I don’t…I mean…what?

    I guess you haven’t heard of Dr. Sumner, you know, the administrator of this blog who has made that argument countless times?

    I could point to probably a dozen times that the argument of the form “As Milton Friedman suggested, low interest rates is usually a signal that money has been tight” was made on this blog.

    Please tell me that you misread what I said.

    “Or, instead, are you simply ignorant of MM theory, and are just talking out of your ass again?”

    Again? Wouldn’t that imply that you have shown this a first time? Do you still beat your wife?

  20. Gravatar of Geoff Geoff
    3. March 2013 at 14:34

    Don Geddis:

    “I’m sorry, but exactly which Market Monetarist was it, that you believe claimed that the current interest rate indicated the current “tightness” of monetary policy? Can you name even one?”

    I’m sorry, but where did I imply that my argument was constrained to “current” interest rates and “current” monetary policy only? I didn’t even mention “current”.

    My position is that all observable monetary policy and all observable interest rate events are “historical”. They are not “current”. What Bernanke is doing right now, immediately becomes historical as soon as it is observed. Time always goes forward. My argument above includes both “current” interest rates and “current” monetary policy in the way you understand it, as well as “current” interest rates and “historical” monetary policy, and “historical” interest rates and “current” monetary policy.

    The mechanistic relationship claim that I am criticizing is “Low interest rates now means money has been tight in the past”, and all of the other variants that substitute “historical” and “current”.

    “Or, instead, are you simply ignorant of MM theory, and are just talking out of your ass again?”

    Again? Wouldn’t that imply you have shown that a first time? I’m just curious.

  21. Gravatar of Geoff Geoff
    3. March 2013 at 14:35

    Don Geddis:

    I think the second response to you is more accurate. I don’t like what I said in the first one, because I didn’t convey what I meant above well enough.

  22. Gravatar of Don Geddis Don Geddis
    3. March 2013 at 14:47

    Geoff: You’ve missed a critical part of the discussion. Other people (e.g. mainstream media) sometimes claim that “Money is very loose right now! Look at how low the interest rates are!” It is in fact the Market Monetarists who are countering this naive assumption, and instead strongly claim that it is possible for interest rates to be low, and for money still to be tight. (Or loose, of course.)

    The problem, of course, is that the naive assumption is compelling. For it is certainly true that, whatever the current interest rates, if they are forcibly lowered, then money gets easier, while if they are forcibly raised, then money gets tighter. So it sure seems reasonable to assume, that if rates are at historic lows (as they are), then it seems a good (but wrong!) guess that money must also be very very loose.

    But it’s so funny when you write that “it isn’t a mechanistic relationship” between tight/loose money and low interest rates … since this is one of the primary points that MMs themselves have been trying to convince the rest of the macroeconomics profession about! And then you write it, as though not only is this your special insight, but somehow you’re going to teach the MMs something. I love how you manage to combine ignorance with strident lecturing. It’s a delightful treat to have them paired together.

    As for the quote you noticed, “As Milton Friedman suggested, low interest rates is usually a signal that money has been tight”, you seem to have completely overlooked the past tense of “has been”. The whole point of the quote, is that if interest rates are low now, that does not mean that money is loose now; instead, it means that money was tight in the past. But in fact (claim the MMs), it tells you nothing about the current stance of monetary policy.

    So ironic, that you cite the very quote that MMs give, in order to make essentially the same claim that you seem to think is your new special insight.

  23. Gravatar of ssumner ssumner
    3. March 2013 at 15:02

    Jim, You said;

    “Does my inability to make a prediction regarding when the builder will realize his error, suggestive of any meaninglessness or dubiousness of housebuilder plan “bubbles”? No again.”

    I strongly disagree. If the builder is able to finish his house without noticing a brick bubble, I say a brick bubble is a useless concept.

    Thanks JV.

    Edward, My own reserach suggests that minimum wages do create unemployment. Those state level studies don’t take into account the monetary offset problem. Otherwise I’m not qualified to evaluate the studies. I know that one finds studies on both sides of the issue. I’m more interested in macro data–such as my recent Germany post–than state level data.

    JP, I’m afraid you are wrong. I didn’t do this post because of the price of bitcoins, which I don’t follow–I did it to respond to Tyler Cowen. So you haven’t addressed my question.

    Geoff, I agree that money can be loose and interest rates can be low.

  24. Gravatar of Geoff Geoff
    3. March 2013 at 15:25

    Don Geddis:

    “Geoff: You’ve missed a critical part of the discussion. Other people (e.g. mainstream media) sometimes claim that “Money is very loose right now! Look at how low the interest rates are!” It is in fact the Market Monetarists who are countering this naive assumption, and instead strongly claim that it is possible for interest rates to be low, and for money still to be tight. (Or loose, of course.)”

    I see many discussions here, not just “the” discussion that we all have to adhere to.

    This blog post for example is about “bubbles”.

    “The problem, of course, is that the naive assumption is compelling. For it is certainly true that, whatever the current interest rates, if they are forcibly lowered, then money gets easier, while if they are forcibly raised, then money gets tighter.”

    I think you have the causation backwards. The Fed cannot force interest rates higher or lower unless they engage in loosening or tightening of money, and, to a more limited extent, by promising to do so in the future. Money does not become looser or tighter on the basis of interest rate changes.

    “So it sure seems reasonable to assume, that if rates are at historic lows (as they are), then it seems a good (but wrong!) guess that money must also be very very loose.”

    It depends on how you DEFINE tightness and looseness!!!!

    If I define money tightness and looseness in terms of M2 or M3, and rates of growth greater than a particular baseline rate means “loose”, and rates of growth below that same particular baseline rate means “tight”, then you are not refuting me or contradicting me by saying “No, money is loose or tight based on NGDP growth!” You’d just be telling me your definition, not an objective fact.

    “But it’s so funny when you write that “it isn’t a mechanistic relationship” between tight/loose money and low interest rates … since this is one of the primary points that MMs themselves have been trying to convince the rest of the macroeconomics profession about!”

    It’s even funnier that you say that, given that MMs such as Dr. Sumner have said on many occasions the mechanistic statement of the form “Low interest rates today means money has been tight.”

    How can you possibly claim that MMs are trying to remove such mechanistic thinking, when there are MMs adding to the existing supply?

    “And then you write it, as though not only is this your special insight, but somehow you’re going to teach the MMs something. I love how you manage to combine ignorance with strident lecturing. It’s a delightful treat to have them paired together.”

    Hahaha, I love it how you have such zingers in the back of your mind, just itching to find an excuse to use them, to get your psychological fix, totally oblivious to the fact that what I said in no way justifies its use.

    I see that a lot, not so much on this blog though. People have these basic forms of one liners against what they perceive as false statements (justified or not), and they use them whenever they so much as whiff someone appearing to make an alarm bell argument.

    You’re funny.

    “As for the quote you noticed, “As Milton Friedman suggested, low interest rates is usually a signal that money has been tight”, you seem to have completely overlooked the past tense of “has been”. The whole point of the quote, is that if interest rates are low now, that does not mean that money is loose now; instead, it means that money was tight in the past. But in fact (claim the MMs), it tells you nothing about the current stance of monetary policy.”

    Do you actually believe that adding “has been” precludes that statement as being “mechanistic”? Don’t make me laugh. It is precisely such mechanistic thinking that I am saying MMs too often fall prey to, and yet here you are claiming that I am wrong and that MM is all about removing such mechanistic thinking! This is the mother of all irony.

    “So ironic, that you cite the very quote that MMs give, in order to make essentially the same claim that you seem to think is your new special insight.”

    Haha!

  25. Gravatar of Geoff Geoff
    3. March 2013 at 15:26

    Dr. Sumner:

    “Geoff, I agree that money can be loose and interest rates can be low.”

    Can interest rates be low now, while money “has been” loose? Ever?

  26. Gravatar of Eliezer Yudkowsky Eliezer Yudkowsky
    3. March 2013 at 16:26

    BTW, doesn’t the impossibility of shorting bitcoins mean that you’re under no obligation to claim the market is even approximately efficient? Hypothetical rational agents who believe the price is too high have no way to profit by lowering it.

  27. Gravatar of J J
    3. March 2013 at 16:45

    Eliezer: Although, if there were enough profit to be made by shorting bitcoins, wouldn’t someone find a way to short sell them? Even if that is restricted, presumably someone could create an option market on intrade or something like that.

  28. Gravatar of Geoff Geoff
    3. March 2013 at 16:52

    Elizier:

    “BTW, doesn’t the impossibility of shorting bitcoins mean that you’re under no obligation to claim the market is even approximately efficient? Hypothetical rational agents who believe the price is too high have no way to profit by lowering it.”

    I don’t think “market efficiency” means that any trade anybody wants to make can be made because there is always going to be a supplier for every conceivable demand.

    Market efficiency has more to do with information, and whether or not, and/or to what extent, prices reflect relevant price impacting information.

  29. Gravatar of Don Geddis Don Geddis
    3. March 2013 at 16:54

    Geoff: “the mechanistic statement of the form ‘Low interest rates today means money has been tight.’

    You still seem to be missing the critical difference. Ordinary media accounts say things like “money is tight because nominal rates are low.” MM’s say that one source (but not the only one!) of pressure for low nominal rates today, is tight money in the past. But obviously, since time only flows one way, they are rejecting the causal claim. It would be foolish to say “low rates today caused tight money in the past”. Nobody is making that claim.

    There’s a huge, huge difference, between the naive causal claim, and the MM observation of partial influence (in the other direction!).

  30. Gravatar of Jim Glass Jim Glass
    3. March 2013 at 16:55

    Jim, You said; “Does my inability to make a prediction regarding…

    Geoff, not Jim. Presuming to speak for both of us, blog commenters are unreasonably possessive and sensitive about the positions our names get associated with. At least one of us is!

  31. Gravatar of JP Koning JP Koning
    3. March 2013 at 16:57

    “I’m afraid you are wrong. I didn’t do this post because of the price of bitcoins, which I don’t follow–I did it to respond to Tyler Cowen. So you haven’t addressed my question.”

    …and why do you think Cowen wrote about BTC? Knee-jerk like, he’s joining the storm of attention about BTC passing its old record — an irrational behavioral quirk of our species. With your post, you’re the last one to the party, Scott. Your behavior is why momentum in markets exists… people join a trend in a cascade-like fashion, some faster some slower, often for reasons they are not aware of [cue your post]. Trend followers thereby contribute to the perpetuation of the original trend.

  32. Gravatar of Don Geddis Don Geddis
    3. March 2013 at 17:04

    Geoff: “It depends on how you DEFINE tightness and looseness

    You’ve got this one backwards too. You seem to think this is completely arbitrary, and people can make up whatever “definition” they want. That’s not what is going on.

    Instead, pretty much everybody (except perhaps you), already agrees on what “tight” or “loose” monetary policy means. What they’re arguing about, is what easily-observed variables today, are good indicators of whether money is tight or loose.

    You’re trying to make up your own definition of some concept, and then overload the words “tight” and “loose” for your arbitrary definition. But the words already have an agreed definition! If you want to make up a new concept, you should use different terms to label it.

    (Since your next question is likely, “well, what do the words mean then”, then answer is: people generally agree that the central bank cannot control real variables [RGDP growth, unemployment] but only nominal variables. They agree that an economy in equilibrium will grow at some “natural rate”, and unemployment will be at some “natural rate”. They agree that bad central bank policy can cause harm: too tight money results in unnecessary high unemployment and lower real output. They agree that too loose money is unable to raise output or employment beyond the natural rate; instead, the extra money shows up as inflation. So the goal of central bank policy is to provide money at “the right” growth rate, so that the economy [output, employment] is at the “natural rate”, on the production-possibility frontier, rather than below that rate. Thus the remaining debate is: right now, if the Fed made money looser than it is, would that result in sustainable higher output and employment than today? Or instead, is current unemployment structural, and looser money would only cause higher inflation? That’s the debate, and the only question is, what evidence do we have about whether money is tight or loose right now? But you have confused this with a non-existent debate, only in your own mind, about what tight/loose money even means.)

  33. Gravatar of Geoff Geoff
    3. March 2013 at 17:09

    Don Geddis:

    It isn’t a “critical” difference, Don. It’s the same category of mechanistic statements that I am saying is problematic. I am not concerned about “the media” or what they are portraying. There are comments on both sides, right and wrong, from “the media.”

    “It would be foolish to say “low rates today caused tight money in the past”. Nobody is making that claim.”

    I didn’t say anybody made that claim.

    I am talking about the mechanistic claim “Low interest rates today means money has been tight.”

    “There’s a huge, huge difference, between the naive causal claim, and the MM observation of partial influence (in the other direction!).”

    I am not concerned with that difference. I am concerned about the same mechanistic thinking that underlies both “Low interest rates means money is tight” AND “Low interest rates means money has been tight.”

  34. Gravatar of Geoff Geoff
    3. March 2013 at 17:13

    Don Geddis:

    ““It depends on how you DEFINE tightness and looseness””

    “You’ve got this one backwards too.”

    I don’t know what you mean by “too” there.

    “You seem to think this is completely arbitrary, and people can make up whatever “definition” they want. That’s not what is going on.”

    No, I am not thinking that. I am saying that saying money is loose or tight depends on how one defines tight and loose money!

    “Instead, pretty much everybody (except perhaps you), already agrees on what “tight” or “loose” monetary policy means.”

    Don’t be ridiculous. Nowhere close to the majority of people define tight and loose money according to NGDP. That’s why Sumner considers himself in a (growing minority in this respect.

    “What they’re arguing about, is what easily-observed variables today, are good indicators of whether money is tight or loose.”

    WHAT VARIABLES?!?!

    “You’re trying to make up your own definition of some concept, and then overload the words “tight” and “loose” for your arbitrary definition.”

    No, I am saying that if one says money is loose or tight depends on their own definition of tight and loose money.

    All definitions are “made up” by people. They’re not objective statements.

    “But the words already have an agreed definition! If you want to make up a new concept, you should use different terms to label it.”

    Agreed to by WHOM? Certainly not the majority of economists. Most still define it in terms of M2, or interest rates, or prices.

    “(Since your next question is likely, “well, what do the words mean then”, then answer is: people generally agree that the central bank cannot control real variables [RGDP growth, unemployment] but only nominal variables. They agree that an economy in equilibrium will grow at some “natural rate”, and unemployment will be at some “natural rate”. They agree that bad central bank policy can cause harm: too tight money results in unnecessary high unemployment and lower real output. They agree that too loose money is unable to raise output or employment beyond the natural rate; instead, the extra money shows up as inflation. So the goal of central bank policy is to provide money at “the right” growth rate, so that the economy [output, employment] is at the “natural rate”, on the production-possibility frontier, rather than below that rate. Thus the remaining debate is: right now, if the Fed made money looser than it is, would that result in sustainable higher output and employment than today? Or instead, is current unemployment structural, and looser money would only cause higher inflation? That’s the debate, and the only question is, what evidence do we have about whether money is tight or loose right now? But you have confused this with a non-existent debate, only in your own mind, about what tight/loose money even means.)”

    Blah blah blah, that wasn’t going to be my next “question”, and this is all totally besides the point I am making.

  35. Gravatar of Geoff Geoff
    3. March 2013 at 17:15

    Dr. Sumner:

    “I strongly disagree. If the builder is able to finish his house without noticing a brick bubble, I say a brick bubble is a useless concept.”

    My scenario was the builder trying to finish a house that requires 50,000 bricks, with only 40,000 bricks available.

    Given THIS information, I would call it a bubble.

  36. Gravatar of Don Geddis Don Geddis
    3. March 2013 at 19:30

    Geoff: Sadly, my comment on tight/loose money seems to have gone completely over your head. You don’t seem to have understood the distinction I made between a “definition” and an “indicator” (or “variable”).

    define tight and loose money according to NGDP

    I defined it in the final paragraph. The definition has nothing to do with NGDP.

    WHAT VARIABLES?!?!

    Why, the very ones you mention yourself: NGDP, along with “M2, or interest rates, or prices“. Those are not definitions, they are indicators.

  37. Gravatar of Geoff Geoff
    3. March 2013 at 19:58

    Don Geddis:

    “Sadly, my comment on tight/loose money seems to have gone completely over your head. You don’t seem to have understood the distinction I made between a “definition” and an “indicator” (or “variable”).”

    No, what I said went completely over your head. You don’t seem to grasp the meaning of definitions, nor do you seem to grasp the fact that making an argument based on a definition, necessarily requires the existence of a definition for that basis.

    I am really not interested in what you believe you’re trying to say, or say but believe is “going over my head”.

    “define tight and loose money according to NGDP”

    “I defined it in the final paragraph. The definition has nothing to do with NGDP.”

    No, you did not define it in the last paragraph. You only said that too tight money and too loose money move unemployment and output away from a non-existent “natural rate”. This is not a definition, this is what an unstated definition allegedly causes.

    “WHAT VARIABLES?!?!”

    “Why, the very ones you mention yourself: NGDP, along with “M2, or interest rates, or prices“. Those are not definitions, they are indicators.”

    Those are all different variables.

    You’re still failing to grasp the point of my argument.

  38. Gravatar of Geoff Geoff
    3. March 2013 at 20:23

    Don Geddis:

    I really don’t understand what is so controversial or problematic with my argument that if someone says “Money right now is too tight”, that this depends on what definition for “tight money” the person is using.

    A could say “Money right now is too tight” while B could say “Money right now is too loose”, and both could be right, if both are using different definitions. A could be defining it in terms of aggregate spending, while B could be defining it in terms of money supply, along with baseline standards for each below and above which justify “tight” and “loose”.

    It is vain to claim that someone else is “wrong” to say money is “too tight” or “too loose”, without making explicit the definition one is using to come to that conclusion.

    Often I have seen Dr. Sumner basically define on behalf of others, as if it’s their job to gradually come to some realization that they somehow always used that definition. Bernanke made one comment in 2003 and now we’re supposed to believe that’s “Bernanke’s definition”, despite comments before and after that contradict that definition.

    All I am saying in this respect is that when someone else other than you says that money is “too tight” or “too loose”, then one ought to first establish which definition they are using, and then attack them with accusations that they are crazy/wrong/confused/etc. Declaring initially that they are crazy, because of the unstated assumption they aren’t using the same definition as you, is quite frankly an anti-intellectual approach.

    This is not ME arguing over definitions. This is me identifying that some MMs are doing so.

  39. Gravatar of Stuart Blair Stuart Blair
    3. March 2013 at 22:10

    @Jim Glass – I was considering your view that, in contrast to more conventional commodities, Bitcoin has no use value and so its price simply reflects its scarcity.

    While its true that there is no alternative use for Bitcoins; they can’t be melted down and used in electronics, or used as an ingredient in food products, I think there’s still some value to Bitcoin that goes beyond their scarcity.

    It occurs to me that since Bitcoin is not just a store of value but is also an electronic transfer system with low transaction costs across any border. This in itself has value to people.

    If such utility weren’t valuable, why would I bother to pay my bank $50 per international wire transfer, why does my elderly uncle pay extra for travelers checks?

    I think Bitcoin’s value (beyond the scarcity) is in the transfer mechanism and its decentralized nature which aligns well with an increasingly internet-based world population.

  40. Gravatar of Don Geddis Don Geddis
    3. March 2013 at 22:27

    Geoff: I’m not sure whether you’re seriously trying to understand, or just to score debating points, but I’ll try one more time.

    You are confusing a definition of tight/loose money, with evidence about whether money is tight or loose. The definition (of everybody, except perhaps you) rests on a hypothetical, about whether slightly looser money right now would result in primarily more employment and output (in which case money is “too tight” right now), or else mostly more inflation (in which case money is either just right [if inflation is low], or already “too loose” [otherwise]).

    That’s the definition. People (aside from you) are not arguing about that.

    What people are doing, are citing different pieces of evidence, in order to argue their case that money is either too tight, or too loose.

    In your framework, all definitions are equally valid, and equally arbitrary. Since your definitions aren’t grounded in anything, one would have no choice but to take the approach you suggest, to accept the other person’s definition, and then argue from there.

    But that is not the actual situation. Tight/loose has an agreed meaning, first. And when someone proposes a particular piece of evidence (e.g. “nominal interest rates below 5% mean money is loose”) we don’t have to just accept it. We can actually evaluate the evidence they present, and check how it compares historically with the actual future path of the real economy, which is the gold standard about whether money in fact was too tight or too loose.

    Does that make it more clear? The choice of M2 or rates or NGDP is not arbitrary, and we do not have to just accept it. We can analyze these variables, to see whether historically they have in fact been good indicators of the actual tightness of monetary policy (or not).

    My whole point is that MMs are not “arguing over definitions”, as you suggest. (If they were, it would only be a trivial matter of terminology and labels.) Instead, they are arguing that the evidence others are citing, are not good predictors about whether money is, in fact tight.

    But the definition of whether money is tight, is not something that people are actually arguing about. Which is why the things they are arguing about, are not arbitrary, and are not “definitions”, and do not have to be accepted just because the other side asserts them.

    You’ve mistaken what the controversy is about.

  41. Gravatar of Rajat Rajat
    3. March 2013 at 23:13

    Australian house prices bottomed in mid-2012 and are on the rise again!

  42. Gravatar of Yona Yona
    4. March 2013 at 04:21

    Bitcoin has soared recently because it started being accepted on betting sites in the US. Americans cannot use $$$ to gamble, but as bitcoin is not a “real” currency betting houses figured nobody could forbid them from allowing users to bet with that. Instead of using intergalactic credits on your latest space universe simulator, you play with bitcoins on a virtual roulette. Adult websites and hackers also like to use bitcoins as they leave no trace. Buy some with your visa on an exchange and then use them for your latest fancy, no track on your bank account. That said, the appreciation of Bitcoins has been too fast because of the little liquidity of the $$$/bitcoin exchanges. Why would I, for instance, bet my bitcoins on an online poker game if they go up 5% each day!

  43. Gravatar of With apologies to Tyler Cowen . . . | Fifth Estate With apologies to Tyler Cowen . . . | Fifth Estate
    4. March 2013 at 04:23

    [...] See full story on themoneyillusion.com [...]

  44. Gravatar of J Mann J Mann
    4. March 2013 at 06:36

    Geoff,

    I think the brick example is a systematic error. If on average, the market is wrong about a fact, that can obviously happen. Let’s say the best estimate of the world wide supply of practicably available platinum is 130 tons. Then one day, someone finds another 130 easily available tons of platinum, and the price crashes. Was that a “bubble?” I think Scott has to say no, because otherwise he has to concede that bubbles exist but are not interesting.

    So a bubble is when publicly available information makes it obvious that a price is “wrong,” but the market runs the price up anyway, presumably either because everyone trusts the market price instead of their own eyes, or because they hope to sell to the next sucker before the crash comes.

    The brick example isn’t helpful for this because we don’t have a market. Our builder doesn’t know that he is going to need 50K bricks, but that’s just an error. Without a market in the price of bricks, I don’t see how we establish a bubble in bricks.

  45. Gravatar of J Mann J Mann
    4. March 2013 at 06:37

    “I think the brick example is a systematic error”

    To clarify, I mean to say that it’s an example of a systematic error (rather than a bubble), not to say that there is an error in your example. Sorry!

  46. Gravatar of Josh Josh
    4. March 2013 at 06:52

    Fisher might have actually been correct in his prediction given the data at the time. See this: http://www.minneapolisfed.org/research/sr/sr294.pdf

    I would note that if that analysis is correct, it further lends support to the EMH.

  47. Gravatar of Josh Josh
    4. March 2013 at 06:52

    Fisher might have actually been correct in his prediction given the data at the time. See this: http://www.minneapolisfed.org/research/sr/sr294.pdf

    I would note that if that analysis is correct, it further lends support to the EMH.

  48. Gravatar of Geoff Geoff
    4. March 2013 at 07:05

    J Mann:

    “I think the brick example is a systematic error. If on average, the market is wrong about a fact, that can obviously happen. Let’s say the best estimate of the world wide supply of practicably available platinum is 130 tons. Then one day, someone finds another 130 easily available tons of platinum, and the price crashes. Was that a “bubble?” I think Scott has to say no, because otherwise he has to concede that bubbles exist but are not interesting.”

    Suppose the best market estimates of the supply of platinum is 130 tons, but there is only actually 120 tons. Now consider all the projects started, but not yet completed, that require platinum, where the business planners believe that there is 130 tons available.

    Would you call the market that requires platinum as capital, a “bubble”? I would. What about prices? This is where it gets tricky. At a first blush, it would seem that the prices, given an estimate of 130 tons, should be lower, not higher, than they would be if everyone knew there was only 100 tons. After all, more platinum means more supply, and more supply means lower prices, ceteris paribus. Once the error is realized, and people come to know that there is only 100 tons, the price would probably rise. Historically then, we would observe a spike in prices. So it would seem to be absurd to call the market in a “bubble”, right before price of platinum rose!

    But hold on. Prices are also connected to business plans. Those business plans are valued they way they are valued, and hence priced the way they are priced, because of a perceived availability of sufficient capital that would enable the plans to be completed. If suddenly the planners realized they are all trying to complete unsustainable projects, they would almost certainly think that the prices they are paying considering those projects is far too high. For wouldn’t people only want to start a project that cannot be completed if the prices they paid for materials and other inputs were at bottom barrel levels? Of course.

    So we have to think of what prices otherwise would have existed given these projects, had the planners known about their errors. We ought not observe the price of platinum historically, because that would include all of the new projects started since the error realization!

    So we may see the price of platinum rise over time, despite the fact that the prices of the platinum projects begun were much higher than they otherwise would have been, had the planners known the true supply of platinum.

    Bubbles ought not be understood as price trends. They ought to be understood in real terms, and if prices are going to be considered, they have to be contemporaneous counter-factual considerations of what prices otherwise would have existed given those projects, and given the planners know their projects are unsustainable.

    “So a bubble is when publicly available information makes it obvious that a price is “wrong,” but the market runs the price up anyway, presumably either because everyone trusts the market price instead of their own eyes, or because they hope to sell to the next sucker before the crash comes.”

    I don’t understand bubbles in terms of price trends. Prices can be “stable” even though many projects started are unsustainable due to incorrect forecasts of available capital.

    “The brick example isn’t helpful for this because we don’t have a market. Our builder doesn’t know that he is going to need 50K bricks, but that’s just an error. Without a market in the price of bricks, I don’t see how we establish a bubble in bricks.”

    Again, if you don’t understand bubbles in terms of prices, but in terms of real capital, and planning, then the lack of sufficient price information of bricks would not serve to undercut the helpfulness of understanding bubbles in real terms.

    Bubbles are typically caused by monetary factors, or encouraged by monetary factors, but the bubble itself is comprised of real things. Bubbles are not nominal trends. Nominal trends are the effect of real trends (including activity from central banks that requires real resources to function). Without real resources devoted to central banking, central banks cannot inflate and change nominal variables. Without real resources devoted to private banks, private banks cannot issue new credit and change nominal variables.

    Real factors should be considered BEFORE nominal variables, as much as that makes some of the folks here want to pull their hair out. Starting with monetary considerations is essentially just ignoring the real factors that not only make central banking possible, but allow us to better understand relative real resource allocations, which are the actual stuff that raises our standard of living, grows the economy, and so on.

    It is literally anti-economic thinking to start with central banking in any economic analysis. Starting with central banking is pro-political, not pro-economic, thinking.

    Economists ought to consider what makes central banking physically possible. Then and only then does it make sense to talk about any nominal variables that the central bank changes. Suppose running a central bank required 99% of an economy’s real capital pool. Crazy unrealistic yes, but at least I wouldn’t be clueless as to why the economy there is dirt poor despite the central bank practising “perfect” monetary policy. MMs would be left scratching their heads, for they would start with the nominal, see it’s OK, and only then wonder where all the real wealth is. Those who start with the real would never get to the head scratching phase.

  49. Gravatar of Geoff Geoff
    4. March 2013 at 07:06

    J Mann:

    “To clarify, I mean to say that it’s an example of a systematic error (rather than a bubble), not to say that there is an error in your example.”

    What do you mean by “systematic” here? That is is consistently taking place over time? But it’s only a single example of an erroneous project. I don’t see what’s “systematic” about it. It’s a forecasting error of available capital.

  50. Gravatar of Geoff Geoff
    4. March 2013 at 07:07

    Josh:

    “Fisher might have actually been correct in his prediction given the data at the time.”

    This is like saying someone who jumps off a 100 story building, and passes the 50th floor, who says “Everything is fine!”, is “correct in his prediction given the data at the time.”

  51. Gravatar of J Mann J Mann
    4. March 2013 at 07:39

    Geoff,

    I made up “systematic error” – I meant to say that the market had internalized public information that later turned out to be incorrect.

    What I’m trying say is that everybody agrees that market prices can change in response to new information – if the best estimate of practicably available world platinum is 130 tons, and then new information emerges that drops that estimate to 100 tons, I would normally expect to see the price of platinum increase. This could then lead to crashes in some projects that had anticipated platinum availability at the old price and hadn’t hedged the risk.

    I don’t think any of those are “bubbles” as the term is commonly used. Everything was “accurately” priced given the knowledge available at the time.

  52. Gravatar of DF DF
    4. March 2013 at 07:48

    Dr. Sumner, I’m not keen on defining bubbles based on price action alone. Although they are related, returns are what investors seek, not price levels. Depending on how investments are financed, there are several different natural ways one can define a “return”. Hence, talking about “bubbles” without mentioning the volume history and financing is useless.

  53. Gravatar of ssumner ssumner
    4. March 2013 at 07:50

    Geoff, Anything is possible.

    Eliezer, I’ve always seen market efficiency as a matter of degree. But even without short selling I’d expect the EMH to predict a fair degree of rationality.

    JP, I have no idea what you are talking about. The fact that the current price equals a peak a few years back is utterly meaningless. And I’m not investing in Bitcoins. So what is your point?

    Josh, I agree.

  54. Gravatar of Geoff Geoff
    4. March 2013 at 08:29

    Don Geddis:

    “I’m not sure whether you’re seriously trying to understand, or just to score debating points, but I’ll try one more time.”

    Thanks for admitting your real intention, I guess?

    “You are confusing a definition of tight/loose money, with evidence about whether money is tight or loose.”

    No, I’m not confusing that at all. Again, I am saying that IF you are going to argue money is tight or loose, then it depends on what definition of tight and loose you are using.

    How can you possibly disagree with that?

    “The definition (of everybody, except perhaps you) rests on a hypothetical, about whether slightly looser money right now would result in primarily more employment and output (in which case money is “too tight” right now), or else mostly more inflation (in which case money is either just right [if inflation is low], or already “too loose” [otherwise]).”

    Everybody certainly does not define tightness and looseness that way. You are deeply mistaken. You define it that way. Some others define it that way. But everyone except me? What, did you ask 7 billion people and they all told you that definition, except me? Don’t be ridiculous. You’re making claims that are crazy.

    “That’s the definition. People (aside from you) are not arguing about that.”

    Which “people” are defining tight and loose money in that way again?

    “What people are doing, are citing different pieces of evidence, in order to argue their case that money is either too tight, or too loose.”

    Haha, you’re not escaping the fact that this “evidence” requires a definition in order for you to conclude that the data shows money is too tight or too loose.

    You aren’t scoring any points with me by telling me ad populum fallacies like “Everyone agrees, except you.” That would only reinforce my desire to distance myself away from what you are saying. I don’t respond positively to argumentative fallacies.

    “In your framework, all definitions are equally valid, and equally arbitrary. Since your definitions aren’t grounded in anything, one would have no choice but to take the approach you suggest, to accept the other person’s definition, and then argue from there.”

    No, I didn’t say that at all, nor did I imply it. I do not think that all definitions are “arbitrary”, nor do I think that all definitions are “equally valid.”

    It’s clear what you are doing. You are just trying to jealously guard your definition of tight and loose money by pretending that it is scientifically objective, and that should anyone point out the fact that “tight” and “loose” money statements depend on the definition of tight and loose money, not on “evidence” apart from the definition, are somehow themselves playing a game of definitional semantics, that they are somehow implying all definitions are equally valid and arbitrary.

    You’re straw manning me because your position is shaky and you know it. Why else would you go down the “Everyone agrees with me, except you” nonsense road? Is that supposed to intimidate me into accepting what you say?

    “But that is not the actual situation. Tight/loose has an agreed meaning, first.”

    Agreed to by WHOM? I don’t agree with your meaning. I know others who don’t agree with your meaning. Stop pretending that your definition is “the” scientific, objective one.

    I do in fact rank definitions, and I put your definition below another, superior definition for tight and loose money, which is what a free market process would have otherwise produced.

    This definition is superior than yours, despite the number of people who agree or disagree, for the same reason that “too few” and “too many” computers, potatoes, cars, office buildings, food, clothing, and every other good is best defined in terms of the valuations of and production from individuals in a free market, despite the number of people who agree or disagree.

    “And when someone proposes a particular piece of evidence (e.g. “nominal interest rates below 5% mean money is loose”) we don’t have to just accept it.”

    No, I don’t accept your definition. I accept the fact that if you define tight and loose money in the way you do, then you’ll interpret the data as confirming or falsifying your theory based on that definition.

    The evidence isn’t creating the definition. You are interpreting the evidence in light of your chosen definition. The basis for you using that definition, as far as I can tell, is a silly and false belief that “everyone else is using it too.”

    Well, if people believed the world is flat, would you claim that it is unscientific for someone to define the world differently, and to say that they disagree with your definition, despite your definition leading you to make confirming or falsifying statements about the world, apart from its shape?

    “We can actually evaluate the evidence they present, and check how it compares historically with the actual future path of the real economy, which is the gold standard about whether money in fact was too tight or too loose.”

    See that? You believe defining tight and loose in terms of real activity is “the gold standard”…without explaining a rational basis for that choice. You’re just believing you’re following what everyone else is using and that I am the odd man out, as if that is how true and false statements, and useful and not useful definitions, are grounded.

    “Does that make it more clear? The choice of M2 or rates or NGDP is not arbitrary, and we do not have to just accept it. We can analyze these variables, to see whether historically they have in fact been good indicators of the actual tightness of monetary policy (or not).”

    Indicators of the tightness and looseness of monetary policy…defined as real activity.

    Another problem with your definition is that if loose monetary policy is in some way responsible for sluggish growth, your definition would lead you to claim that money is too tight, which of course is an implicit call for looser money, which would only make the problem worse.

    “My whole point is that MMs are not “arguing over definitions”, as you suggest.”

    Except that is exactly what you just did with me. You’re arguing over definitions. That is precisely why you resorted to ad populum, democratic intimidation, unnecessarily excessive verbiage like “gold standard”, inaccurate and silly “Everyone agrees with this except you”, and a host of other diversions and desperate hand wavings.

    “(If they were, it would only be a trivial matter of terminology and labels.) Instead, they are arguing that the evidence others are citing, are not good predictors about whether money is, in fact tight.”

    The evidence only shows tight and loose money if you DEFINE tight and loose money in terms of the data of which the evidence is collected!

    “But the definition of whether money is tight, is not something that people are actually arguing about. Which is why the things they are arguing about, are not arbitrary, and are not “definitions”, and do not have to be accepted just because the other side asserts them.”

    You’re arguing about it!

    Look what you just did. You just said that you don’t have to accept “the other side’s definition.” Well, they don’t have to accept yours! So who is right and who is wrong? Here is where you get lost and confused, and here is where you resort to “You’re just playing definitional games” accusations.

    In reality, I am showing you what you are in fact doing. You’re not being “scientific” here. You’re first defining tight and loose in terms of real activity, and then, and only then, are you concluding that the evidence proves you right and wrong. But it only confirms the theory based on your chosen definition as right or wrong. It doesn’t confirm your definition as somehow scientifically correct.

    “You’ve mistaken what the controversy is about.”

    No, you’ve mistaken what I am saying, and, as is now clear, what even you yourself are saying.

  55. Gravatar of Geoff Geoff
    4. March 2013 at 08:34

    Dr. Sumner:

    “Can interest rates be low now, while money “has been” loose? Ever?”

    “Geoff, Anything is possible.”

    I don’t think ANYTHING is possible, for example square circles.

    But I guess you mean that my hypothetical scenario is possible.

    Given that you agree it is possible, wouldn’t that mean that every time you have said that money has been tight because interest rates are low, is not right? That money could have been loose while interest rates now are low, in the US for example? Or maybe Japan? For periods longer than originally assumed possible?

    How can we know for sure one way or the other? If we can’t know, then all the people you have called morons and idiots, may not be after all.

  56. Gravatar of Doug M Doug M
    4. March 2013 at 08:56

    What gives the bitcoin value? What separates it from vapor?

  57. Gravatar of Don Geddis Don Geddis
    4. March 2013 at 12:32

    Geoff: Ah, I see. You’re not trying to understand, after all. Your interest is in “winning” some kind of “internet debate”. Well, I shouldn’t encourage a troll by responding, so I’ll stop. Please don’t interpret my future silence as though you have made any valid points. You have merely worn me down with your non-constructive attitude.

  58. Gravatar of JP Koning JP Koning
    4. March 2013 at 13:03

    “I have no idea what you are talking about. The fact that the current price equals a peak a few years back is utterly meaningless. And I’m not investing in Bitcoins. So what is your point?”

    Lol, I have no idea what you’re talking about either. Maybe next time.

  59. Gravatar of Geoff Geoff
    4. March 2013 at 13:43

    Don Geddis:

    “Geoff: Ah, I see. You’re not trying to understand, after all. Your interest is in “winning” some kind of “internet debate”. Well, I shouldn’t encourage a troll by responding, so I’ll stop. Please don’t interpret my future silence as though you have made any valid points. You have merely worn me down with your non-constructive attitude.”

    Yes, it’s better to retreat when you realize you were wrong, and color it in a way that suggests I am being intellectually dishonest.

    Stay classy.

  60. Gravatar of JVM JVM
    4. March 2013 at 15:48

    @Eliezer, regarding shorting, even though the protocol does not facilitate short selling, there are market places where you can buy PUT options which have the same effect: http://wiki.bitcoin-otc.com/wiki/Option_orders

  61. Gravatar of Countparties: The Fed’s unemployment crusader | Felix Salmon Countparties: The Fed’s unemployment crusader | Felix Salmon
    4. March 2013 at 15:56

    [...] Wonks Bernanke recently gave some very indirect hints about the consequences of higher rates – Econobrowser Is there a Bitcoin bubble? – Scott Sumner [...]

  62. Gravatar of XBT XBT
    5. March 2013 at 01:02

    While everyone has been arguing about whether or not bitcoin is money, is a commodity, has value, etc., in December I traded in half of the bitcoins I bought two years for a hefty piece of gold.

    The fact is, anything is better than fiat at this point. Quit arguing and just get the hell out of fiat now.

  63. Gravatar of Federico S Federico S
    5. March 2013 at 07:42

    Hi Scott,

    can you elaborate what you mean by this: “Because low interest rates are the new normal”? Are you making a demographic related argument, an argument about CBs permanently targeting lower NGDP growth, or just something entirely different? Thanks!

  64. Gravatar of Josh Josh
    5. March 2013 at 10:15

    Geoff said,

    “This is like saying someone who jumps off a 100 story building, and passes the 50th floor, who says “Everything is fine!”, is “correct in his prediction given the data at the time.”” Nope. It is not at all like that because everything is clearly not fine. A better description, to amend your analogy, would be for the person to say “Everything is fine, I packed a parachute” only to find that the parachute was removed. Unless of course we are to believe that Fisher should have been able to predict the severity of bad monetary policy that was about to take place.

  65. Gravatar of Geoff Geoff
    5. March 2013 at 11:06

    Josh:

    “Geoff said,

    “This is like saying someone who jumps off a 100 story building, and passes the 50th floor, who says “Everything is fine!”, is “correct in his prediction given the data at the time.””

    “Nope. It is not at all like that because everything is clearly not fine.”

    But you said Fisher was correct, given the data at the time. So you can’t now say that you really meant everything was not fine, because that would mean Fisher was incorrect given the data at the time. If you say he couldn’t have known, then you can’t be saying my analogy was off.

    My analogy, and “given the data at the time” comment you made, were both statements that everything was indeed fine…at the time in question, i.e. the time at the 50th floor, and the time before the Fed deflated.

    “A better description, to amend your analogy, would be for the person to say “Everything is fine, I packed a parachute” only to find that the parachute was removed. Unless of course we are to believe that Fisher should have been able to predict the severity of bad monetary policy that was about to take place.”

    You’re saying Fisher did not take into account monetary policy when he made his prediction? How is that a rescue of Fisher’s disastrous prediction? That would make it even worse, IMO.

    My analogy was used to show that you saying that Fisher was “correct, given the data at the time” is tantamount to boasting that he ignored potential future data, such as potential future deflation. Your analogy, however, takes into account future data, which is realizing the jumper didn’t pack a parachute (analogy for bad future monetary policy).

    Your analogy loses the point I intended to make via my original analogy, and introduces a new analogy, the meaning of which is not consistent with your original comment of which I replied.

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