David Glasner on the “natural rate.”

David Glasner makes an interesting observation:

So, if the ability of the central bank to use its power over the nominal rate to control the real rate of interest is as limited as the conventional interpretation of the Fisher equation suggests, here’s my question: When critics of monetary stimulus accuse the Fed of rigging interest rates, using the Fed’s power to keep interest rates “artificially low,” taking bread out of the mouths of widows, orphans and millionaires, what exactly are they talking about? The Fed has no legal power to set interest rates; it can only announce what interest rate it will lend, at and it can buy and sell assets in the market. It has an advantage because it can create the money with which to buy assets. But if you believe that the Fed cannot reduce the rate of unemployment below the “natural rate of unemployment” by printing money, why would you believe that the Fed can reduce the real rate of interest below the “natural rate of interest” by printing money? Martin Feldstein and the Wall Street Journal believe that the Fed is unable to do one, but perfectly able to do the other. Sorry, but I just don’t get it.

Some of my commenters will insist that monetary stimulus can cause all sorts of distortions in the economy, misallocation of capital, etc.  But monetary contraction would be just fine (they say) if only the government would keep out of the way.  After all, wages can be quickly reduced to restore equilibrium.  Easy money badly distorts an economy, but not tight money.  Go figure.


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34 Responses to “David Glasner on the “natural rate.””

  1. Gravatar of 123 123
    5. July 2013 at 08:44

    Bernanke’s last conference is a perfect example how tight money can distort the economy too. Bond prices that are lower than the unbiased interest rate forecast would indicate represent a very serious distortion.

  2. Gravatar of Russ Anderson Russ Anderson
    5. July 2013 at 09:09

    1) You are right. Thanks for pointing out the contradiction.

    2) You are assuming a scientific analysis where facts and logic lead to conclusions. If you take a religious view where you start with a truth (such as “government intervention always hurts the economy”) and that data that support the truth are called “facts” and data that does not support the truth are “lies”, then they are perfectly consistent (in accepting data that supports their belief and rejecting data that does not support their belief).

    3) For Martin Feldstein (and other political conservatives) to admit you are correct, it would mean admitting that government intervention (in this case Monetary Policy) can help the economy, which is to admit that one of their fundamental beliefs is not true. Worse yet, that Liberals (at least the ones supporting Monetary easing) are correct. You may look at this issue as a simple case of drawing a logical conclusion based on the facts, but for political conservatives it is admitting that their world view is wrong. That is why you will never convince them that there is a contradiction in their belief.

  3. Gravatar of Andy Harless Andy Harless
    5. July 2013 at 12:19

    If the SRAS curve has a flat section (which is likely if nominal wages are sticky downward and the inflation rate is low), then the Fed can keep the interest rate above the natural rate for a long time by refusing to print enough money. Indeed, if the Fed had asymmetric inflation preferences, it might choose to do so, given its inevitable uncertainty about what exactly the level of the natural interest rate (or the natural unemployment rate) is. Not sure what Feldstein et. al. are arguing, but perhaps they do have asymmetric inflation preferences, believe the SRAS curve has a flat section, and would prefer that the interest rate be above the natural rate. So, from their point of view, there is an “optimal” interest rate that is higher than the natural rate, and the Fed can, by printing money, push the interest rate below the optimal rate.

  4. Gravatar of Andy Harless Andy Harless
    5. July 2013 at 12:30

    Note: My previous comment is motivated in part by the “convex Phillips curve” literature (e.g. Laxton & Rose, but I don’t have the reference offhand), which argues that the “natural unemployment rate” is not the same as the “NAIRU.” I forget which is which, but one is the one that would be associated with the natural interest rate, and the other is the average unemployment rate that would actually be associated with a stable inflation rate given that the Phillips curve is convex and there will always be errors in Fed policy that push the unemployment rate temporarily above or below the target. If the Fed makes big errors, it’s going to get occasional unintended bouts of inflation, for which it will have to compensate with large increases in the unemployment rate, since the Phillips curve is fairly flat on the right side. Anyhow, if the natural unemployment rate is different from the NAIRU, then the natural interest rate is also different from the…NAIRI?

  5. Gravatar of Geoff Geoff
    5. July 2013 at 14:44

    David Glasner:

    “When critics of monetary stimulus accuse the Fed of rigging interest rates, using the Fed’s power to keep interest rates “artificially low,” taking bread out of the mouths of widows, orphans and millionaires, what exactly are they talking about? The Fed has no legal power to set interest rates; it can only announce what interest rate it will lend, at and it can buy and sell assets in the market.”

    I recommend Glasner read the source material from which this idea originates. It’s all in English, so it shouldn’t be too hard to understand.

    In short, the way the Fed affects interest rates is not, as he pointed out, through legally enforcing a particular interest rate. But Glasner has it only partially correct. The Fed affects interest rates, on purpose, not only by lending through the discount window. It also raises and lowers the overnight interest rate (fed funds rate) through adding and subtracting from bank reserves.

    If the Fed wants to lower the fed funds rate, it typically does so by increasing the quantity of reserves at a higher rate. The banks actually decide to lower the rates, but the reason they decide to lower the rate is because they have more reserves on hand, and with a higher quantity of loanable funds, the lower the rate tends to be. By the same token, if the Fed wants to raise the fed funds rate, it typically does so by increasing the quantity of reserves at a lower rate. And again, the banks actually decide to increase the rates, but the reason they decide to increase the rate is because they have fewer reserves on hand, and with a lower quantity of loanable funds, the higher the rate tends to be.

    This is how the Fed changes the fed funds rate. It is able to have a high degree of control over this rate, because they know the liquidity effect dominates in the overnight lending market.

    When people complain about widows and orphans and such earning less interest, what they are referring to is the fact that the Fed also affects interest rates other than the discount window, or fed funds rate. For example, by increasing bank reserves at a higher rate, what typically happens in the short run is that banks have much more reserves. With more reserves on hand, banks are more willing to issue new credit of all maturities, and with more credit of all maturities issued on the market, it is necessary that in order to find willing borrowers, in order to tend towards market clearing, this additional credit is priced at lower rates.

    For those of the working population on relatively fixed incomes, such as wages, with lower interest rates that abound in the market, the lower the return they are able to earn, ceteris paribus. Now, to be accurate, things are never ceteris paribus, but it is indeed possible, and it happens quite often for many people, for the Fed to reduce the rate of return that some folks might otherwise have gotten had the Fed not lowered those rates.

    This isn’t really that difficult to understand. My sneaking suspicion is that monetarists like Glasner are, at least subconsciously, purposefully trying to remain clouded on this issue, because they would rather not address the implications of their own worldview, because it is too difficult, professionally and psychologically. We all know there is a strong incentive for a person NOT to understand something that might hinder one’s own interests, be it career, or intellectual investment, or just plain laziness. I make my money in the financial industry, and so I suspect I may have a bias against any argument, from folks like Krugman, who make assertions of the unproductiveness of some aspects of finance.

  6. Gravatar of Geoff Geoff
    5. July 2013 at 14:54

    Dr. Sumner:

    “Some of my commenters will insist that monetary stimulus can cause all sorts of distortions in the economy, misallocation of capital, etc. But monetary contraction would be just fine (they say) if only the government would keep out of the way. After all, wages can be quickly reduced to restore equilibrium. Easy money badly distorts an economy, but not tight money. Go figure.”

    The reason you believe you perceive an inconsistent position here is that you are unable, or unwilling, to think outside the central banking box. Monetarists tend to believe that in a central banking world, one MUST think like a central banker and only a central banker. Everything else is armchair posturing, idealistic vanity. That the only valid data that can be observed, is data that is controlled, to whatever degree, by the central bank.

    Ergo, allegedly we can only understand money as “tight” or “loose”, which of course compels us to choose arbitrary criteria for what constitutes tight and loose money, by that arbitrary standard. Monetary figures below this arbitrary standard, for example price inflation, or aggregate spending, these are instances of “tight” money, whereas monetary figures above this arbitrary standard, these are instances of “loose” money.

    When you read commenters on this blog seemingly suggesting that loose money is the worst, and tha tight money is the best, what you are actually reading is the idea that money closer to a free market in money, is better than money further away from a free market in money.

    Now, a crucial, extremely important point here is that just because we don’t have a free market in money, it does not mean we cannot *infer* from observable facts which monetary events are tending towards a free market, and which are tending away from it. Why is this? The reason is that free market *forces*, namely, individual subjective preferences manifesting themselves in activity, which affects observable statistics like price inflation, aggregate spending, and so on, are always, always, always “on”. They are constantly, at all times, putting counter-pressure on all forms of central planning, including central banking.

    The understanding of this can be elusive, but very easy to grasp once the intuition is understood. To wit, and this is key: the only reason why the Fed finds itself having to keep acting all the time, the reason why regulators need to keep interfering, the reason why constant political pressure has to be applied in the economy, is because free market forces are constantly putting counter-pressure on those central planning activities!

    Individuals, regardless of what the political structure happens to be, are always acting to better their own situations. These activities are primordial and the datum by which all that we know of “the economy” derives. These forces will manifest in a particular, unique set of observable outcomes that of course do not match the observable outcomes with central planning included.

    So, to connect this back to Dr. Sumner’s claim of inconsistency, if the Fed were to “do nothing” for a period of say one year, then despite the fact that the executive branch of the state will continue to enforce the monetary monopoly, such that the Fed is still “in control”, and so still “doing something” in a sense, the resulting monetary statistics such as price deflation, as well as aggregate spending decreasing, credit contractions, increased cash holding, etc, everything on the side of money, will be a result of free market forces to the extent that they are able to punch through the holes in the whole central planning matrix.

    If the Fed isn’t actively changing bank reserve through any OMOs, then whatever happens to the money supply and spending, will be a function of free market forces in those particular statistics. They won’t, of course, keep decreasing forever. At some point, the deflation will end, and the market will continue on with a new money supply and new aggregate spending trajectory. Whatever happens to the money supply, will be closer to a free market….UNTIL we get to a point where a totally free market in money would have generated more money and spending than what otherwise exists in a contect of Fed monopoly, but zero OMOs. But we are nowhere even close to that point, so practically speaking, deflation advocacy is a reasonable, free market position to take. In fact, if the Fed were ever to “do nothing” for an extended period of time, then we don’t have to worry all that much, because at some point, the desire for money will grow to such an extent that alternative monies will arise in the market. Of course, we can likely expect monetarists to support the jailing and persecution of alternative money producers, right?

    So when you see commenters “cheering tight money”, and lampooning loose money, what they are doing is supporting the specific outcomes that are a result of coordinating free market forces, in a context of recent inflation, even if those market forces manifest in monetary deflation when the Fed does nothing for a time.

    Remember, during “normal times”, the Fed is actually expanding monetary statistics far greater than what otherwise would have transpired on a totally open free market in money. During this time, the coordinating monetary forces are hindered, if not suppressed. The only cure for the distortions that result from this, is monetary forces that are closer to a free market, which in this case happens to mean deflation. Deflation is not distorting, when such deflation is due to free market forces generating increased cash holding times, or decreased spending, and so on.

    There is actually no inconsistency in supporting deflation and attacking inflation, when we are at a point of inflation distorted capital structure. We can know money is too loose by the fact that the Fed has to keep acting all the time. The fact that they have to keep inflating to counter-act deflation, is proof that free market forces “want” deflation.

    If I had to keep ironing my clothes to keep them crisp and smooth, it’s because “external to ironing” forces are constantly counter-acting my ironing activity.

    Similarly, if the Fed has to keep increasing bank reserves, to counter-act deflation, it’s because “external to the Fed”, i.e. free market, forces are constantly counter-acting the Fed’s activity.

    Now, does all this mean that we should ALWAYS welcome deflation? Well, it depends on the context. In a central banking world of constant central bank activity, i.e. constant inflation, it is not unreasonable for a free market advocate to always want deflation. To want monetary outcomes to be closer to that generated by free market forces, which as mentioned, are always “on”, despite being seemingly observationally suppressed by central bank activity, is the same thing as wanting deflation in a central bank induced inflationary world.

    In other words, because the central bank is constantly distorting the capital structure with inflation, then if one wants to remove such distortions, if one wants more economic coordination in the division of labor, then one must always want deflation from the status quo.

  7. Gravatar of ssumner ssumner
    5. July 2013 at 15:57

    123, Maybe, But I’ll defer judgment on that.

    Russ, You said;

    For Martin Feldstein (and other political conservatives) to admit you are correct, it would mean admitting that government intervention (in this case Monetary Policy) can help the economy, which is to admit that one of their fundamental beliefs is not true.”

    But my proposed policy is not one iota more interventionist that Feldstein’s proposed policy, indeed arguably less interventionist (more automatic, more rule bound.)

    Andy, Maybe, but I don’t see that group offering coherent explanations for their policy recommendations.

  8. Gravatar of Benjamin Cole Benjamin Cole
    5. July 2013 at 18:41

    Kudos!

    Yes, what is an “activist” policy, when it comes to the Fed?

    Is the Fed being “tight” when inflation sinks to 0.7 percent? Or “loose?”

    Was the BoJ “loose” from 1992 to present, as interest rates were at zero? The yen soared, btw.

    Baseball analogy: Suppose a pitcher is getting bombed. Inning after inning, Pete Rose the manager keeps him in. Is the manager being “passive?” Or actively helping certain bets on the outcome of the game?

    When the Fed does not do QE, is it just as much affecting an outcome as when it does QE?

  9. Gravatar of Geoff Geoff
    5. July 2013 at 20:08

    Benjamin Cole:

    “Baseball analogy: Suppose a pitcher is getting bombed. Inning after inning, Pete Rose the manager keeps him in. Is the manager being “passive?” Or actively helping certain bets on the outcome of the game?”

    Does Pete Rose impose a coercive monopoly on who gets to pitch in the major leagues? If not, then it’s not really a good analogy.

    A better analogy would at least have a coercive monopoly associated with it.

  10. Gravatar of 123 123
    6. July 2013 at 00:15

    Scott, note the assymetry. When negative interest rates are unavailable, creating asset bubbles via easy money may be the optimal second best. However, it is never optimal to drive the asset prices below their fundamental values via tight money when ZLB binds.

  11. Gravatar of George Selgin George Selgin
    6. July 2013 at 03:13

    Glasner: “But if you believe that the Fed cannot reduce the rate of unemployment below the “natural rate of unemployment” by printing money, why would you believe that the Fed can reduce the real rate of interest below the “natural rate of interest” by printing money?”

    I must say, Scott, that this supposedly rhetorical question by David really surprises me, as does your claim that he makes an interesting point with it. Surely it is widely understood by those who hold to the natural rate framework that central banks can reduce U below its “natural rate.” But, they insist, it can do so only temporarily and, according to more sophisticated versions of the theory, not without causing some serious distortions. The theory is thus perfectly consistent with Wicksell’s own natural rate framework, which depends on the same distinctions between short-run and long-run effects of policy. Indeed, the fact that the very same monetary stimulus that succeeds in temporarily boosting employment may also drive interest rates temporarily below their natural levels is one reason for fearing that the boost will involve distortions beyond the mere disappointment of wage-setting agents’ real wage targets.

    These observations don’t of course imply that there is never any role for M expansion in combating unemployment. There is such a role, but it arises when unemployment is traceable to a monetary shortage, that is, when U is > U(n) to begin with.

    I personally find it hard to envision a sound approach to monetary economics that denies the merit of such a natural rate perspective. I find it even harder to understand how it could warrant the label “monetarist.”

  12. Gravatar of Bogwood Bogwood
    6. July 2013 at 03:54

    Henry Ford strongly resisted the idea of borrowing to buy a car. Most cars then and now are not an investment,not productive and waste critical resources and natural ecological sinks. Other forms of transportation, or no transportation are economically more logical. The median 50,000$ household cannot really afford two 8000 dollar a year cars (Triple A figure). The recent interest in pickup trucks gives the illusion of productivity without much real productivity. Buyers know they are getting a bad deal but it’s an arms race, a display,a bundle of unfunded mandates, and it has low monthly payments. Almost every job building a standard car is another nail in the economic coffin.

    So yes, I’ll bite on the misallocation cliche. No more car loans without a positive cash flow, or at least fewer sub-prime car loans. “Easy” money takes my grandchildren’s resources and evaporates them for no useful purpose. Sure,that’s subjective but more market based than the current loan policy. The same is true for most housing. No cash, no car.

  13. Gravatar of Benjamin Cole Benjamin Cole
    6. July 2013 at 04:03

    Geoff:

    A baseball fan you are not.

    Yes, Pete Rose had discretion, or monopoly power, over who pitched for his team in a particular game, when he was manager of a Cincinnati Reds.

    A manager determines who is the pitcher on his team. He can remove or leave a pitcher in, on any pitch, let alone batter, or inning.

    Pete Rose was found guilty of wagering on Reds games, when he was a manager. So, if he had bet his team to lose, he could just “passively” leave a pitcher in the game, who was getting bombed. Of course, it would be an “activist” policy, if one knew the backstory.

    So, I contend, when the Fed does not engage in QE, it might be as “active” or more so, than not doing some QE. Especially if a “no QE” stance craters the economy. Like Pete Rose.

    Baseball is a fun game to know about btw.

  14. Gravatar of ssumner ssumner
    6. July 2013 at 04:54

    123, I’m confused. Negative real rates are always available. And why would easy money create an asset bubble?

    George. I agree with your view of “sound economics,” but I come across lots of people who are contemptuous of the notion that you can lower unemployment by “printing money.” More generally they seem obsessed with the costs of easy money, but blind to the costs of tight money.

    I should say that in the 1970s I also saw lots of Keynesians with the opposite asymmetry, but fewer today.

    I didn’t notice David used the term ‘monetarist’. Certainly Martin Feldstein is no monetarist. And Friedman was not guilty of the asymmetry observed by David.

  15. Gravatar of 123 123
    6. July 2013 at 06:48

    Scott:
    “Negative real rates are always available”
    ZLB can sometimes be a problem under any fixed policy framework. Negative real rates can be not negative enough.
    Easy money can cause bubbles if central bank buys lot of overpriced assets.
    Fed is was concerned about the bond bubble.

  16. Gravatar of Russ Anderson Russ Anderson
    6. July 2013 at 07:15

    Benjamin Cole wrote: “Pete Rose was found guilty of wagering on Reds games, when he was a manager. So, if he had bet his team to lose, he could just “passively” leave a pitcher in the game, who was getting bombed.”

    For the record, Pete Rose never bet on his team to lose. He has never been accused by MLB of betting on his team to lose and there is no evidence that he bet on his team to lose. Pete Rose did bet on his team to win. Yes, I am a baseball fan.

    Since baseball was brought up as an analogy for monetary policy, in the same context I’ll offer up the words of the great philosopher Neil Peart[1], “If you chose not to decide, you still have made a choice.” That, I believe, was Benjamin’s point about the Fed and QE.

    [1] Drummer for Rush.

  17. Gravatar of George Selgin George Selgin
    6. July 2013 at 09:12

    I should have explained, Scott, that my “monetarist” remark was actually in response to Geoff, who refers in one of his comments to “Monetarists like Glasner.”

    Also, although the inconsistency in question certainly can’t be generally attributed to monetarists, it is one of which the Rothbard-style Austrians are fully guilty: M expansion, in their view, always causes booms, with interest rates driven below their natural levels. But M contraction (or an uncompensated increase in V) has no corresponding short-run consequences.

    I also think it very important not to conflate the “natural rate” of unemployment with the NAIRU. The first is, simply, the rate that will prevail in the absence of any excess demand for real balances. The definition itself points to the futility, and potential adverse consequences, of attempts to “cure” natural unemployment by means of more aggressive M expansion. The NAIRU, in contrast, is equivalent to the natural rate only assuming that people have static inflation expectations. If, for example, people expect inflation to accelerate, but it fails to do so, the NAIRU will rise above U(n). That of course is what happened in a big way in 1980.

  18. Gravatar of W. Peden W. Peden
    6. July 2013 at 09:44

    George Selgin,

    Thank you for clarifying the difference between the natural rate of unemployment and the NAIRU. I had assumed, based on what many people say, that they are different names for the same thing.

  19. Gravatar of ssumner ssumner
    6. July 2013 at 16:25

    123, I’ve never been convinced that bubbles exist, but that’s another debate. check out the Andy Harless post that someone links to in my newest post.

    George, Yes, you are completely right about the NRH and the NAIRU.

  20. Gravatar of Benjamin Cole Benjamin Cole
    6. July 2013 at 19:42

    Russ Anderson:

    I was afraid someone would bring up your point about Rose only betting to win (that was what Rose said, anyway). Congrats, you have a good memory.

    I did not want to create a more-complicated story, but Rose could let his team lose by keeping a lousy pitcher in, as he was saving relievers for the next game, on which he bet to win.

    But as i was trying to instruct Geoff, who evidently had never seen a baseball game in his life, I kept the storyline simple.

    And we agree on the big point: What is, or is not. an activist Fed policy is open to debate. I contend the Fed right now is actively following a tight money policy.

    Worse, it is ever talking about further tightening, not about possibly more loosening. Bernanke always talks about tapering down, never tapering up.

  21. Gravatar of 123 123
    7. July 2013 at 00:02

    Scott, I can use the EMH too. In this case I will say that the switch from easy money to hard money has sharply increased the bond market risk premium.

  22. Gravatar of The Fed, Interest Rates, and Inflation | askblog The Fed, Interest Rates, and Inflation | askblog
    7. July 2013 at 07:12

    […] Scott Sumner points to David Glasner, who writes, […]

  23. Gravatar of Cory Cory
    7. July 2013 at 07:50

    Geoff,

    Why is it a coercive monopoly when the people who formed our general government freely gave up their natural liberty to create currency to the Congress they elect in the Constitution…at least in this currency zone?

  24. Gravatar of Geoff Geoff
    7. July 2013 at 12:54

    Cory,

    1. “The people” is not some monolithic entity that says yay or nay. SOME people consented, but others did not. To the extent they did not, it’s coercive.

    2. The “people” you’re referring to are dead. It is unreasonable to suggest that A and B can sign a contract that is to be held over the heads of the unborn.

    Since your question makes (false) implicit assumptions, it is unanswerable in the way you believe it is.

  25. Gravatar of Geoff Geoff
    7. July 2013 at 13:01

    Benjamin Cole:

    “Yes, Pete Rose had discretion, or monopoly power, over who pitched for his team in a particular game, when he was manager of a Cincinnati Reds.”

    No he didn’t. If a pitcher did not want to pitch, Pete Rose could not force him into the game.

    If I don’t want in on the dollar monopoly game, I am still forced by law to pay taxes in it, which means I can’t sit the game out like a pitcher could.

    “A manager determines who is the pitcher on his team. He can remove or leave a pitcher in, on any pitch, let alone batter, or inning.”

    Do you not understand the difference between A doing something because he wants to obey the commands of B, for mutual gain, and A doing something because if he doesn’t, he’ll get physically harassed by B, which exploits A?

    “So, I contend, when the Fed does not engage in QE, it might be as “active” or more so, than not doing some QE. Especially if a “no QE” stance craters the economy. Like Pete Rose.”

    I contend? Is that where it all ends? Yikes.

  26. Gravatar of Geoff Geoff
    7. July 2013 at 13:43

    George Selgin:

    “Also, although the inconsistency in question certainly can’t be generally attributed to monetarists, it is one of which the Rothbard-style Austrians are fully guilty: M expansion, in their view, always causes booms, with interest rates driven below their natural levels. But M contraction (or an uncompensated increase in V) has no corresponding short-run consequences.”

    That is not only untrue, but surprising to read coming from someone who is supposed to be somewhat versed in Austrian literature.

    Anyone who is familiar with Austrian literature knows full well that Austrians hold that there are indeed “consequences” from contractions in M. In fact, it is precisely the Austrian’s conviction that there are “consequences” from contractions in M that you see them advocate for less/no inflation during recessions! Specifically, they regard a cessation of inflation, credit expansion reversal, etc, as cures for the problems created by previous inflation.

    Also, they don’t think that “M expansion always causes booms” either. They believe that M expansion does not cause a boom when: there is a rise in voluntary real savings that lead to an increase in capital invested per worker, which raises the productivity of labor in general, and increases the production of money in particular. This would not cause a boom because the production of money is market-driven, and so profit and loss signals, interest rate signals, relative price signals, and other “monetary” signals, would tend to be an accurate reflection of actual (revealed) individual preferences (temporal and inter-industrial) in the division of labor.

    With central banking on the other hand, monetary signals tend to deviate away from these preferences, which misleads investors into expanding projects that are not sustainable due to the fact that no actual rise in real savings took place.

    Perhaps you are just lampooning Rothbard so as to make it clear that you’re not a Rothbardian, but at least try to avoid misleading people as to what Austrians think about contractions of money and expansions of money.

    ————————-

    To clear up any confusions and/or misconceptions for the readers of this blog:

    Rothbardian Austrians think that (market-driven) contractions in M are a “good thing” when we are in a world of structural problems having been created by past increases in M, specifically, past non-market increases in M.

    Note that this is not a blanket belief that all contractions in M are always and everywhere innocuous. For example, a non-market driven (politically forced) contraction in M would be regarded as harmful, because here individuals are forced to do what they otherwise do not want to do, which of course is to give up ownership of their money against their will (after which time the money is destroyed I suppose, to make the example consistent with “a contraction in M”).

    As I wrote in my first post above, IF one is a free market advocate, THEN it would be reasonable to support market-driven contractions in M, that is to say, contractions in M that, for example, derive from individual market actors deflating the level of fiduciary credit using the market process. These market forces are always operating against the central bankers, which is why the central bankers have to constantly and consciously act to bring about its desired goal(s) in the first place. If they did not act, the resulting monetary statistic outcomes would move towards a free market driven outcome, to the extent it is allowed to function.

  27. Gravatar of ssumner ssumner
    8. July 2013 at 13:34

    123 , But was money previously easy?

  28. Gravatar of 123 123
    9. July 2013 at 01:09

    Scott, on the relevant dimension it was easy.

  29. Gravatar of Greg Ransom Greg Ransom
    9. July 2013 at 20:52

    Who says this? Not Lawrence White, not Steve Horwitz, not Friedrich Hayek, not George Selgin. Another completely fabricated straw man existing nowhere but in Scott’s mind?

    Scott Sumner writes,

    “Some of my commenters will insist that monetary stimulus can cause all sorts of distortions in the economy, misallocation of capital, etc. But monetary contraction would be just fine (they say) if only the government would keep out of the way. After all, wages can be quickly reduced to restore equilibrium. Easy money badly distorts an economy, but not tight money.”

  30. Gravatar of W. Peden W. Peden
    10. July 2013 at 01:23

    Greg Ransom,

    I don’t think that Scott was claiming that Friedrich Hayek comments on his blog and says such things.

  31. Gravatar of ssumner ssumner
    10. July 2013 at 03:14

    123, In my view it was tight on the relevant dimension.

    Greg, Glad to hear they didn’t say that, but how is that fact related to this post?

  32. Gravatar of 123 123
    10. July 2013 at 03:44

    Scott, on the interest rate rule dimension the Evans Rule policy was tight and remains tight. On the balance sheet size dimension the policy was easy, and is tight now.

  33. Gravatar of Greg Ransom Greg Ransom
    10. July 2013 at 12:43

    When you are attempting to discredit people who suggest there is a causal relation between credit price signals, changing demand and supply of money, and capital allocation you can hardly being doing anything else but trying to take a shot at Austrians.

    Don’t put on a false play of innocence.

    Scott writes,

    “Greg, Glad to hear they didn’t say that, but how is that fact related to this post?”

  34. Gravatar of ssumner ssumner
    11. July 2013 at 04:40

    123, But the balance sheet dimension is no a useful indicator. Big balance sheets usually mean tight money.

    Greg, Bizarre Logic. I must have been attacking them because that’s what they say, except that’s not what they say. Your logic makes my head spin.

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