The Eurozone Great Depression

The eurozone is currently experiencing a smaller version of the Great Depression of the 1930s.  I’m not too interested in the statistical similarities (obviously the 1930s depression was more severe) but rather the intellectual similarities:

1.  On both occasions the conventional wisdom was that money was very easy, and hence monetary policy had nothing to do with what was happening.  Here’s Buttonwood from The Economist expressing the conventional wisdom:

It seems likely that central banks will maintain their very loose monetary policy; they can justifiably claim that, with inflation under control, they can focus on unemployment.

Why pick on Buttonwood?  Because this post is dramatically better than almost anything you will read in the media.  So if the best is screwing up this badly on the stance of monetary policy then you know everyone else is as well.  Milton Friedman pointed out that money was quite tight during the early 1930s, despite the massive QE and near zero rates. Eventually Friedman convinced the rest of the profession, but no one has done that for the current crisis. When I express views that all well-informed economists seemed to accept as recently as 2007 (lots of QE and zero rates don’t mean easy money), people look at me like I’m mentally ill.

2.  In both cases central banks faced an important constraint in their ability to stimulate demand and reduce unemployment.  In the 1930s you had the gold peg, and in the current depression you have the inflation target.  But, and this is very important, in both cases the constraint was entirely in the imagination of the policymakers, pundits and economists.  It was not binding.  During the late 1920s and early 1930 the world’s central banks actually increased their gold/currency ratios, indeed fairly sharply. Thus not only was the gold standard not a constraint, major central banks actually had a much tighter policy than you’d get from a sort of neutral “rules of the game” approach, by which I mean passively adjusting the monetary base in proportion to gold flows.  The same is true today:

THERE was striking news from the euro zone yesterday, the inflation rate fell to 0.7% in October, the lowest for almost four years. There is much speculation now that the ECB will have to ease monetary policy further. And the EU is not alone. Figures from the Conference Board show that the growth rate of the harmonised index of consumer prices (HICP), an internationally comparable measure, was 0.8% in the US in September this year, compared with 2.1% a year earlier. Japan and Switzerland are exceptions to the rule; they have edged out of outright deflation but only into very mild inflationary territory.

There’s a sort of unspoken assumption that there are two policy options, a hawkish single-minded focus on inflation, and a dovish dual mandate approach, which focuses on inflation and growth. Yet the European Central Bank has adopted a policy that is more hawkish than even a single-minded focus on inflation would entail. That’s exactly analogous to the interwar central banks adopting much tighter monetary policy than the rules of the game called for during the early 1930s. And yet, although this fact is right out in the open, almost nobody important seems to understand what is happening, just as almost no one important seemed to understand what was going on in the 1930s.  We’ve learned nothing.

I have sources in Europe that are well connected with European policymakers. They describe an almost total ignorance of monetary policy, nominal GDP, aggregate demand, and all the other things that we learned about from Friedman and Schwartz.  To the extent that there is a debate in Europe, it’s about the relative importance of structural reforms and fiscal policy. Even worse, Europeans can’t even use the zero bound excuse. At no time during the last five years has the ECB been at the zero bound, and in many cases they been both well above it and raising short term interest rates.  This is an active monetary policy; this is the ECB explicitly steering eurozone NGDP into a depression.

In the past I’ve blamed economists as a group for the Great Recession. After all, central banks pretty much follow the consensus view of economists. But perhaps we should distinguish between economists who understand monetary economics, the zero bound problem, the history of the Great Depression, etc., with the much larger group that do not. So it’s sort of a matter of degree. Those central banks managed by completely ignorant economists, such as the ECB or the Bank of Japan prior to this year, produce appallingly bad monetary policy. Those managed by people with knowledge of monetary economics, such as Ben Bernanke, produced somewhat better monetary policy, but nonetheless are constrained by the much larger mass of economists that simply don’t understand what’s going on.

PS.  The Buttonwood post mentions that inflation is rising in Japan and Switzerland. Of course those are the two countries that recently decided to depreciate their currencies. They succeeded in depreciating their currencies, despite the fact that the Keynesian liquidity trap model implies that cannot be done when rates are zero.

PPS.  Just to be clear, I’m not saying that there is no respectable argument for near-zero NGDP growth rates.  I’m saying that there is no respectable argument for suddenly reducing NGDP growth from a 4.5% trend to near zero (since 2008) in the midst of the Mother of All Debt Crises and a period of very high eurozone unemployment and 0.7% inflation.  Or if there is, I’d love to hear it.

PPPS.  There’s a recent debate over the US report criticizing the German current account surplus.  Of course the report is silly; the Germans should be criticized for favoring tight money, and the Germans should be praised for their other policies.

PPPPS.  Saturos sent me an interesting article where Jan Hatzius predicts the Fed will lower the unemployment threshold from 6.5% to 6.0%.  A good first step—I recently advocated eliminating it entirely.

Nicolas Goetzmann sent me an interesting article on Janet Yellen’s views on monetary policy—which suggests a target the forecast approach.


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43 Responses to “The Eurozone Great Depression”

  1. Gravatar of Saturos Saturos
    5. November 2013 at 06:57

    What we need to change is the situation where the “fear of failure” of central bankers is exclusively concentrated on accidentally letting money too loose, with little appreciation of the dangers of letting it run too tight.

  2. Gravatar of Saturos Saturos
    5. November 2013 at 06:58

    Didn’t Evan Soltas do a post on optimal control already?

  3. Gravatar of benjamin cole benjamin cole
    5. November 2013 at 07:08

    The premise that “independent” central banks is a good idea grows weaker and weaker…the voting public may not understand monetary policy (but then, does Richard Fisher?) but the public understands prosperity or the lack of it…
    If a central bank is unsuccessful, should not the public vote bank leaders out?
    Who defines success–a sinecured gnome in the ECB or the public?

  4. Gravatar of Mark A. Sadowski Mark A. Sadowski
    5. November 2013 at 07:16

    Saturos,
    Evan Soltas did a post on Optimal Control Policy in late September:

    http://esoltas.blogspot.com.au/2013/09/a-new-strategy-for-fed.html

    Incidentally, I discussed Optimal Control Policy extensively in a post on James Bullard and Monotonic vs Oscillatory Convergence in June:

    http://andolfatto.blogspot.com/2013/06/sadowski-on-bullard-guest-post.html

  5. Gravatar of JimP JimP
    5. November 2013 at 07:39

    I have said this before – but to repeat:

    I dont think it is a matter of ignorance. If one looks at the deflationists here – the tea party – Santelli, Kudlow, – etc. one sees pure malice. They love the idea of poverty and suffering – so long as it is someone else’s poverty – and they want more of it. It is sadism.

    It is a sadism of continuing the present income or wealth advantages. Rapid growth narrows wealth advantages. Deflation widens them, because deflation utterly destroys the lives of the people on the bottom. The Santellies of the world enjoy this.

    No-one could possibly be so stupid as to continue the present policies, here or in Europe, without wanting the results that we are now getting.

    Of course, it is also Obama’s stupidity and ignorance. He could try to do something about this – he just doesn’t feel like doing so.

  6. Gravatar of James in London James in London
    5. November 2013 at 07:51

    For the Germans, money isn’t tight. The question is: are they Europeans more than the are Germans?

  7. Gravatar of Michael Michael
    5. November 2013 at 08:23

    Not really fair to call Kudlow a “deflationist”.

  8. Gravatar of Jim Crow Jim Crow
    5. November 2013 at 09:07

    I think the efficacy of inflation targeting has been utterly discredited by the evidence these last five or so years. And the same must be said for discretionary Central Bank policy. That the ECB mandate is so inadequate is unfortunate but at least it can be forgiven. It seemed reasonable for a generation. And laws are rarely quick to change even when the need is obvious to everyone, much less when substantial disagreement abounds. But, the fact that they can’t be relied upon or even held accountable for failing to meet their mandate? To treat the undershooting of inflation as anything less than complete and utter failure of their jobs and responsibility? By a magnitude that’s leading to such easily documented misery? To me that’s just damning beyond words. For all my irritation with the Fed, I’m completely gobsmacked by what’s happening in Europe.

  9. Gravatar of TallDave TallDave
    5. November 2013 at 09:53

    I’m becoming cautiously optimistic on Yellen. There seems to be a fair chance she has a good understanding of what’s going on.

  10. Gravatar of The anti-Fed: “The ECB is explicitly steering eurozone NGDP into a depression” | AEIdeas The anti-Fed: “The ECB is explicitly steering eurozone NGDP into a depression” | AEIdeas
    5. November 2013 at 10:03

    [...] Now as Scott Sumner points out, the ECB has taken the single-madate’s inflation obsession even further: [...]

  11. Gravatar of jknarr jknarr
    5. November 2013 at 10:18

    “Ignorance!” and “Oh, the good Tsar doesn’t know, he is surrounded by bad advisors” are very, very, poor arguments: pure bone-headed-ness to the rotten core.

    You’ll get at reality and the truth if you look at outcomes and ask: cui bono?

    Europe is in the midst of a massive, world-historical, political project, lest you forget: the destruction of the nation-state!

    You cannot ever hope to understand anything about supranational institutional behavior in Europe if you exclude that basic fact from the analysis:

    Policy is not all about optimum equilibrium monetary economics. Surprise! In Europe, it’s also about destroying the nation-state.

    You’re a drunk looking under the monetary lamppost for your policies, because that’s where your analytical light is.

  12. Gravatar of Doug M Doug M
    5. November 2013 at 10:28

    The Treasury was recently chiding Germany on their surpluses.

    This is a related issue. It is also the same issue that drives the Greek problems.

    Germany is more productive than its neighbors. This is a great thing for Germany. High productivity is generally good for Germany’s trading partners, too.

    But if Germany is more productive than Greece, and the relative waged do not reflect that productivity differential, there is going to be an imbalance. In the pre-Euro days, that F/X fluctuations would correct that imbalance. But, now that they are wedded via the Euro, the imbalance must be corrected via wages.

    Germany should let wages rise, and Greece should let wages fall. The least painful solution is inflation. But, the institutional powers are not going to allow that to happen.
    The Germans and the ECB don’t want to see inflation in Germany. This leaves it to the Greeks to futher cut wages and pensions, but they don’t want to do that either, and the crisis drags on for as far as the eye can see.

  13. Gravatar of Oy. Oy.
    5. November 2013 at 11:01

    In today’s Money and Banking lecture at – wait for it – UW-Madison, the professor said that Milton Friedman would be rolling in his grave over the current low interest rate because it would lead to high inflation. My notes: http://i.imgur.com/b7IkasZ.jpg

  14. Gravatar of mpowell mpowell
    5. November 2013 at 11:07

    JimP – Talk to some Europeans or try to follow their news a bit. Things are different over there and it is certainly not about malice for at least 90% of both the public and the officials. How an entire continent achieved such a state of complete ignorance on monetary policy is an interesting question, but that they did so is quite clear at this point.

  15. Gravatar of Don Geddis Don Geddis
    5. November 2013 at 11:39

    more hawkish than even a single-minded focus on inflation would entail

    I think the problem actually is pretty easy to understand. You’re suggesting that people (non-monetary economists, or even non-economist lay people) have no idea about monetary policy, but the truth is more disturbing: they have strong ideas, they’re just wrong.

    Isn’t it obvious what their theory is? Their theory is: inflation is only a bad thing. The job of a central bank is to limit the damage caused by high inflation. If a central bank keeps inflation BELOW 2%, then they’re doing a great job.

    You view inflation targeting as symmetric. But most people (and, apparently, most central bankers) don’t. It’s only the tiny minority of monetary economists who say, “hey, there is economic damage from too little inflation too!” But who supports that story?

    I think it’s pretty clear that “hawk” means, “any inflation is bad, the lower the better”, and “dove” means “we might tolerate a little inflation, if it helps improve unemployment”.

    Can you find even a single example of an inflation hawk, who focuses like a laser only on inflation and doesn’t care about unemployment, who is concerned because inflation is below the 2% target? There aren’t any such people. Those who “care about inflation”, only care to lower it.

  16. Gravatar of Mark A. Sadowski Mark A. Sadowski
    5. November 2013 at 12:30

    Don Geddis,
    “Can you find even a single example of an inflation hawk, who focuses like a laser only on inflation and doesn’t care about unemployment, who is concerned because inflation is below the 2% target? There aren’t any such people. Those who “care about inflation”, only care to lower it.”

    James Bullard. But you’re right, James Bullard is a novelty.

  17. Gravatar of ssumner ssumner
    5. November 2013 at 12:37

    JimP, You said;

    “I don’t think it is a matter of ignorance. If one looks at the deflationists here – the tea party – Santelli, Kudlow, – etc. one sees pure malice.”

    You’ve just proved my point. If you were right then Kudlow would not change his views, even after being exposed to market monetarist arguments. But he has recently changed his views, in the direction of market monetarism.

    James, Yes, but it’s not really loose in Germany either. Unless I’m mistaken both inflation and NGDP growth in Germany have been very low in recent years. But I see your point.

    Doug, The sad thing is that they don’t even need inflation, steady NGDP growth would have been fine.

    Oy, I see the UW hasn’t improved in the last 40 years. When I was there I was taught that the fact that V fluctuates disproved monetarism!

    Don, You said;

    “Isn’t it obvious what their theory is? Their theory is: inflation is only a bad thing. The job of a central bank is to limit the damage caused by high inflation. If a central bank keeps inflation BELOW 2%, then they’re doing a great job.”

    I see why people are attracted to this theory but it’s false. Prior to 2008 inflation often ran above 2%, and central banks show no sign of thinking it would be a good idea to drive inflation lower. You can even find cases of central banks cutting rates in 2007 when inflation was above 2%. They did care about unemployment too, it really is mass ignorance, they simply don’t know what they are doing.

    You need more than one data point for a theory. Your theory does fine post-2008, but not before.

  18. Gravatar of James in London James in London
    5. November 2013 at 13:57

    German NGDP growth may be a bit low, but the great Marcus Nunes’ charts show it is very much on trend.
    http://thefaintofheart.wordpress.com/2013/10/24/screw-your-courage-to-the-sticking-plate/

  19. Gravatar of TravisV TravisV
    5. November 2013 at 15:10

    Prof. Sumner,

    You’ll be very excited to see this analysis based on Christina Romer’s work:

    “Did the Fed’s QE bond buying prevent a deep 2013 recession in the US?”

    http://www.aei-ideas.org/2013/11/did-the-feds-qe-bond-buying-prevent-a-deep-2013-recession-in-the-us

  20. Gravatar of "At no time during the last five years has the ECB been at the zero bound, and in many cases they been both well above it and raising short term interest rates. This is an active monetary policy; this is the ECB explicitly steering eurozone NGDP into "At no time during the last five years has the ECB been at the zero bound, and in many cases they been both well above it and raising short term interest rates. This is an active monetary policy; this is the ECB explicitly steering eurozone NGDP into
    5. November 2013 at 16:00

    [...] Source [...]

  21. Gravatar of Geoff Geoff
    5. November 2013 at 16:48

    “Milton Friedman pointed out that money was quite tight during the early 1930s, despite the massive QE and near zero rates.”

    This depends on how one defines “tight” and “loose.”

    Friedman defined it in terms of total money supply. Since you don’t agree with that definition, why pimp out Friedman on this score, as if you and him agreed?

    The money supply actually contracted significantly during the early 1930s, as credit expansion turned into credit default. This of course would not have happened if FR banks were not constantly propped up by a central bank which enabled and encouraged them to expand credit by more than otherwise.

    Post 2008, the total money supply again contracted, as there was a period of negative growth. This understanding should be tempered with the realization that prior to that, the money supply grew by likely far more than a free market would have generated.

    Market monetarists should learn that central banking enables money supply and spending deflation, the very deflation they fear, whereas a free market in money would work to prevent it, since once a free market commodity money comes into existence, it tends to stay in existence. Deflation will not occur due to debt default, the way it occurs now.

  22. Gravatar of Geoff Geoff
    5. November 2013 at 17:15

    Sumner:

    “I’m saying that there is no respectable argument for suddenly reducing NGDP growth from a 4.5% trend to near zero (since 2008) in the midst of the Mother of All Debt Crises and a period of very high eurozone unemployment and 0.7% inflation. Or if there is, I’d love to hear it.”

    Suppose a 4.5% NGDP growth is “unnatural”, in the sense that a healthy, sustainable, free market in money (and everything else) would have generated a 1% NGDP growth.

    Suppose that a 4.5% NGDP growth is one of a series of consequences of non-market, monopoly control in money.

    Suppose another consequence is undue credit expansion, which cannot be sustained unless money inflation accelerates.

    Suppose another consequence is an undue expansion in particular temporal stages of production, which brings about a physical unsustainable capital configuration.

    Suppose continued 4.5% NGDP growth will prevent all the above problems from being solved, and the cost of them not being solved is slow growth, continued acceleration in the money supply, and eventual monetary and economic breakdown in the long run.

    Given all the above, a sudden decline in NGDP growth from the “unnatural” 4.5% to a less “unnatural” 0% NGDP growth (not necessarily permanently), would indeed be a good idea, if one values sustainable growth and avoidance of monetary and economic breakdown.

  23. Gravatar of Mark A. Sadowski Mark A. Sadowski
    5. November 2013 at 17:52

    “Yet the European Central Bank has adopted a policy that is more hawkish than even a single-minded focus on inflation would entail.”

    Recall back in March 2011 David Beckworth suggested that the ECB was targeting the monetary base:

    http://macromarketmusings.blogspot.com/2011/03/is-ecb-actually-targeting-monetary-base.html

    The interesting thing was the monetary base seemed to be increasing arithmetically rather than geometrically. Here’s the monetary base today:

    http://sdw.ecb.europa.eu/quickview.do?node=2018802&SERIES_KEY=123.ILM.M.U2.C.LT01.Z5.EUR

    Between April 2002 and September 2008 the monetary base increased at an average rate of 6,345 million euro per month. It fell as much as 4.1% below trend in June 2011, during the time the ECB raised the MRO rate (twice). It surged as much as 49.5% above trend in April 2012, when the 3-year LTROs were issued. It fell below trend again in August 2013, and as of October was 3.2% below trend.

    This stands in stark contrast to the US, Japan and the UK.

  24. Gravatar of Michael Michael
    5. November 2013 at 18:46

    Here’s Steve Waldman:

    http://www.interfluidity.com/v2/4816.html#comments

    “And it will never function, as long as the Fed always pays interest comparable to Treasuries on base money. There is nothing special about zero, or 25 bps. What makes a liquidity trap is that the rate of interest paid on money is greater than or comparable to the rate of interest paid on Treasury bonds. So long as that is true, whatever the level of interest rates of interest, macroeconomic outcomes will be much less sensitive to changes in the quantity of money than in once-ordinary times. That is not to say, full-stop, that monetary policy is impotent. Those squishy expectations and institutional quirks may matter. But post-2008, we live in a world where insufficiently expansionary monetary policy has meant tripling the monetary base. Pre-2008, tiny changes in the quantity of base were sufficient to halt an expansion or risk an inflation. The relative impotence of changes in the monetary base is not a function of the zero-lower-bound. It is a function of the spread between base money and risk-free debt, a spread which may well be gone forever.”

  25. Gravatar of JimP JimP
    5. November 2013 at 18:55

    I don’t agree Scott. Above all he is a Republican deflationist thug.

    He has a stock market show – true – so he has to pretend. But what he really is is a Santelli bond market guy. And like all creditors (think Germany) he wants to be paid back in harder currency than he lent out.

  26. Gravatar of Geoff Geoff
    5. November 2013 at 19:08

    JimP:

    Yeah, it would be better if he were a borrower, so that he would have an incentive to want to pay back a loan in softer currency than he lent out. Then his bias would be in your favor.

  27. Gravatar of TravisV TravisV
    5. November 2013 at 19:08

    JimP,

    Like you, I’ve historically disliked Kudlow’s dogmatism.

    However, WOW, am I impressed that he’s changed his mind about gold lately!!! Great job Prof. Sumner and Pethokoukis! See below:

    http://www.businessinsider.com/larry-kudlow-says-bernanke-may-have-gotten-it-right-2013-3

    http://www.businessinsider.com/peter-schiff-vs-scott-sumner-on-larry-kudlows-show-2013-7

  28. Gravatar of Geoff Geoff
    5. November 2013 at 19:26

    TravisV:

    I wonder how open Joe Weisenthal is to changing his mind. Something tells me he only appreciates it when people change their mind in such a way as to end up agreeing more with him, and less with his ideological enemies.

  29. Gravatar of Saturos Saturos
    5. November 2013 at 20:44

    Off topic: just thought of another test of the MoE/MoA dispute. Scott’s position is that MoE doesn’t ultimately matter, because even when the supply dries up, when there is a separate MoA the value of the MoE stock rises against the MoA, so there is no effective shortage of money. Only MoA therefore truly “causes” demand shocks. But as Alex Tabarrok reminds us today on Twitter, US$ are vital MoE in many places around the world, even where they are not MoA. And yet the supply of US$ there are small compared to the total global stock. Hence, a shock to the local supply of US$ MoE should, to those who see that money shocks matter because money is needed to “demand” transactions of GDP output, cause a visible shock to parts of local GDP that rely on the dollar to be traded. Because the world price of dollars against the domestic currency (MoA) wouldn’t change much, in response to a local dollar shortage. So there’s still a shortage of MoE needed to make final transactions, at the domestic price level. (Is this correct?)

  30. Gravatar of Suvy Suvy
    5. November 2013 at 20:49

    The problem is that people don’t recognize that just because monetary policy doesn’t work in the same manner it did in other interest rate environments, people assume it doesn’t work at all. In this interest rate environment, there is no demand for money.

  31. Gravatar of paul Einzig paul Einzig
    5. November 2013 at 23:15

    “They describe an almost total ignorance of monetary policy”

    “central banks managed by completely ignorant economists, such as the ECB”

    I’m reading Adam Lebors new book on the history of the BIS and he quotes a living former head of a European central bank as saying that what the central bankers really talk about when they get together is in, order of importance, restaurants, wine and how annoying finance ministers are. But the real sine qua non for being able to fit in….. is knowledge of wine, wine collecting etc….

    I must be crazy, I assumed central bankers would sit around talking about , oh I don’t know……economics

  32. Gravatar of phil_20686 phil_20686
    6. November 2013 at 02:17

    Germany’s surplus is connected to tight money in the EZ, because looser money would naturally drive up German wages – i.e. the extra NGDP would not be evenly distributed across the Eurozone, but would be affected by the economy’s tendency to try to equalise unit labour costs.

    Tight money, combined with sticky wages, has allowed Germany to hold down wage growth, and force the rebalancing onto the periphery at the cost of massive unemployment and deflation.

  33. Gravatar of ssumner ssumner
    6. November 2013 at 06:06

    James, It depends where one draws the trend line, which is more an art than a science.

    Mark, Why would the ECB be targeting the monetary base?

    Michael, Even if that were true it doesn’t mean that monetary policy is impotent, nor does it mean the QTM does not hold.

    Saturos, I’m not saying the MoE never matters, but rather that it only matters to the extent it affects the demand for MoA. If the US cuts the supply of dollars by 90%, the value of the dollar in forex markets rises 10 fold. So even though overseas dollar holdings fall by 90% in dollar terms, they remain unchanged in local currency terms.

    Paul, That explains a lot.

    phil, Easier money and a weaker euro would reduce Germany’s surplus? Not sure I follow that.

  34. Gravatar of phil_20686 phil_20686
    6. November 2013 at 07:13

    HI Scott,

    Its the terms of trade between germany and other EZ countries which are driving the huge surplus, so a weaker Euro would not benefit DE as much as it would, say, Japan. Looser monetary policy would drive wages higher in germany, while in the periphery high unemployment would hold down price rises. Thus looser monetary policy would changer the german terms of trade with the EZ by raising their unit labour costs towards the EZ average, and reducing the tension between labour costs in the periphery and the core without the need for painful mass unemployment in the periphery.

    Basically, the EZ can’t be happy until unit labour costs are similar across the EZ, and looser monetary policy would help achieve that, and if you could achieve that, there would be no reason for Germany to have such a large surplus, since that is the fruit of the imbalance in unit labour costs.

  35. Gravatar of Saturos Saturos
    6. November 2013 at 07:24

    Scott, sorry forgot to clarify, I meant a shock to the local supply which was *not* also a shock to the global supply. So say that the dollars only disappear from the local economy, with the global supply practically unchanged. Then fluctuations in the local MoE supply are causing recessions, since the local share of global supply isn’t large enough to affect the nominal value of this MoE on the world market.

  36. Gravatar of Mark A. Sadowski Mark A. Sadowski
    6. November 2013 at 09:34

    Scott,
    “Why would the ECB be targeting the monetary base?”

    I’m not saying that they are.

    If you read the comment section in David Beckworth’s post I was deeply skeptical at the time, and both Nick Rowe and David tried very hard to persuade me otherwise.

    But it is weird how the monetary base follows such a straight line from 2002-08, and despite large deviations from that line since, then it keeps coming back to it.

    Now if the ECB is doing that, then it is of course monumentally stupid, which I take to be one of the points of your post.

  37. Gravatar of Jason Jason
    6. November 2013 at 09:59

    I will venture a prediction that the EU CPI will enter a Japanese “lost decade” period of deflation.

    http://informationtransfereconomics.blogspot.com/2013/09/analyzing-eu-with-information-transfer.html

    The EU doesn’t need to be at the zero bound to experience a liquidity trap (Keynes originally argued it could happen at positive interest rates). The EU is basically just entering the same situation Japan entered in the 1990s:

    http://informationtransfereconomics.blogspot.com/2013/09/japan-interest-rates-and-liquidity-trap.html

  38. Gravatar of Negation of Ideology Negation of Ideology
    6. November 2013 at 15:01

    Geoff -

    “Suppose a 4.5% NGDP growth is “unnatural”, in the sense that a healthy, sustainable, free market in money (and everything else) would have generated a 1% NGDP growth.”

    There’s a problem with your supposition. In your “free market” in money, there could be transactions in several different currencies. For example, if there were 1 Billion ounces of gold GDP, plus 100 billion ounces of silver GDP, plus 1 billion ounces of platinum GDP then what is NGDP? If you convert it into any one of those, the growth rate might be 1% in one of them but not all (unless the relative prices between them never change).

    If you convert it into the MOA of the currency that the government uses for revenues, expenditures and government bonds, you are right back to the government deciding NGDP. A better way to put it is the opposite way – the government doesn’t decide GDP, but it does decide what its unit of account is in terms of GDP.

  39. Gravatar of Geoff Geoff
    6. November 2013 at 15:44

    Negation of Ideology:

    ““Suppose a 4.5% NGDP growth is “unnatural”, in the sense that a healthy, sustainable, free market in money (and everything else) would have generated a 1% NGDP growth.””

    “There’s a problem with your supposition. In your “free market” in money, there could be transactions in several different currencies. For example, if there were 1 Billion ounces of gold GDP, plus 100 billion ounces of silver GDP, plus 1 billion ounces of platinum GDP then what is NGDP?”

    You just said what NGDP is in your example. NGDP is 1 billion gold + 100 billion silver + 1 billion platinum.

    There is no justification in insisting that NGDP must be composed of a single dimension. That is arbitrary. Even in your statist money society ideal, there are barter exchanges, and there are exchanges in foreign currencies. So technically speaking, “NGDP” in the US would not be a single dollar statistic as you seem to believe.

    But this is all besides the point. You didn’t address the argument I’m making about answering Sumner’s question on how it could be a “good thing” for NGDP growth to suddenly fall to 0%.

    I gave reasons why it could be a good thing, and your response is to act like a socialist dictator and question the very assumption of a free market, as if communicating your hatred for free markets somehow constitutes a substantive response about the topic at hand.

    I have no problems with addressing your arguments head on. Thus, to directly address your concern over multiple currencies in use in a free market (as if the voluntary choices of individual people to transact in the currency they want, the result of which is more than one currency in use, somehow poses a problem that requires violence to solve!): Even if there were multiple currencies in use, for example gold, silver and platinum, then we can just translate Sumner’s question such that each of the three currency spending amounts fall to 0% growth. Then we can ask the same question: Could this ever be a good thing? I don’t see how introducing more than one currency prevents us from asking whether it is ever a good thing if spending as such suddenly falls.

    “If you convert it into any one of those, the growth rate might be 1% in one of them but not all (unless the relative prices between them never change).”

    And? If spending in silver falls, say, and the market price of silver in gold is, say, 50 ounces of silver to 1 ounce of gold, then we can say that spending fell by the equivalent of X% gold.

    “If you convert it into the MOA of the currency that the government uses for revenues, expenditures and government bonds, you are right back to the government deciding NGDP. A better way to put it is the opposite way – the government doesn’t decide GDP, but it does decide what its unit of account is in terms of GDP.”

    This is a circular argument. You’re a priori claiming, without justification, that there is an inherent problem with individuals voluntarily deciding to use multiple currencies. If you instead respected other people’s decisions, instead of viewing them as but means of control, then you would realize that if the free market process results in more than one currency being used in a particular territory, then this proves that it is optimal. It is optimal for individual to be able to use the currency they want in their exchanges.

    But you’re not concerned with individual choice. You don’t care about this. What you are concerned about is how your mommy and daddy government will conduct its finances, as if the problem of my life, and everyone else’s lives, is how to ensure the government efficiently extracts wealth from their rightful owners.

    So you concoct in your mind the depraved notion that because multiple currencies will prove to be a burden on the government, that this in and of itself is sufficient reason for “someone” (namely those in the state) to initiate force against innocent people throughout the territory you call the US, just so that the government can easily tax people in a medium of exchange of the government’s choice, not the individual people’s choices.

    Remind me again why on Earth would I, or should I, ever worry about how a coercive monopoly on protection and security can most efficiently finance its operations? Really, it’s like you have blinders on. Let me choose what kind of juice I buy. Oh thank you for that Mr. Civility. But don’t I dare seek to be free to use the currency I want, with other voluntary traders. Oh the horror. For how can the government make use of that commodity? They have to rip me off in some way. Better that I be forced, right? Better that I use dollars, the same dollars the state prints. How convenient…

  40. Gravatar of Geoff Geoff
    6. November 2013 at 15:48

    Negation:

    I find your username the epitome of irony. Your beliefs about money is clearly a statist/collectivist ideology.

    Your ideology is anti-market-ideology (at least in money).

    Negation of ideology, properly speaking, would require you to be a nihilist. But clearly you’re not, because you’re fighting FOR an ideology that prevents a free market in money.

  41. Gravatar of Negation of Ideology Negation of Ideology
    6. November 2013 at 16:12

    Geoff -

    “This is a circular argument. You’re a priori claiming, without justification, that there is an inherent problem with individuals voluntarily deciding to use multiple currencies. ”

    Hold on there – I never said there is a problem with people using multiple currencies, I said there is a problem with your supposition because you gave an example of 1% NGDP growth without specifying what units you were using (you’ve since responded in terms of the absolute, but not the growth rate). I have no problem with people using alternate currencies – “it neither picks my pocket nor breaks my leg”. I’m not sure why you keep insisting that I do.

    I’m aware that your position is that the government shouldn’t exist, and your preference is that if the government does exist it should tax people in the currencies that they use so they don’t have to convert to dollars to pay their taxes. I’m not even opposed to your second choice, but I suspect it will change things far less than you think. Almost everyone would continue to do business just as they do now. There may be a handful of people who want to use alternative currencies but are too lazy to convert once a quarter to pay taxes, but I doubt it’s more than 100 people in the US, and not a single large business.

    And the government would still need to convert into US dollars to pay its employees, etc., and decide which unit of account to use.

    As for my username, I chose it from the famous Russell Kirk quote “Conservatism is the negation of ideology.” I wouldn’t make too much of it – I just like the quote.

  42. Gravatar of Geoff Geoff
    6. November 2013 at 16:55

    Negation of Ideology:

    “I said there is a problem with your supposition because you gave an example of 1% NGDP growth without specifying what units you were using (you’ve since responded in terms of the absolute, but not the growth rate).”

    I don’t get how this is a “problem”. I don’t see how it is a problem to say that 4.5% money spending growth rate is “bad”, because it is higher than the money spending growth rate that would occur in a free market. We can give meaning to a 0% growth rate of multiple currencies. We just have to look at the exchange prices between gold and silver, silver and platinum, and platinum and gold (if those were the currencies in use). We can consider a singular NGDP statistic in terms of any one of the three separate currencies.

    If gold spending fell, and silver spending rose (and platinum was constant), then we can identify NGDP growth in gold equivalent, or silver equivalent.

    NGDP is just an abstract statistic anyway. It is economically vacuous. If you imagine a depression arising by virtue of a collapse in “spending”, then I would direct your attention not to “spending” as such, but to the prevalence of separate instances of a difference between input demand and output demand not being what they each were expected to be.

    I do not consider this the responsibility of a central bank. It is the responsibility of individual investors. If they underestimated the length of time that their potential customers hold onto their earnings, then I will not look to the central bank “failing” to make the consequences of these mistakes to go away. I would ask why there arose a sudden widespread increase in average cash holding times throughout the economy. The cause of this phenomena is the correct path towards solving the applicable problems.

    NGDP targeting is a method of rewarding mistakes in investor judgment. This is easily seen with single firm spending targeting. It is still easy to see with city level NGDP targeting. It should be easy to see with country level NGDP targeting. What NGDP targeting does is make average profitability positive no matter what average investments are made, no matter how “boondogglish” they are, and no matter how physically unsustainable the whole capital structure happens to be. NGDP growth rigidity will lock in average profitability of the economy even if the economy is unhealthy and only correctable through market determined relative spending, and hence market determined NGDP.

    But again, this is all besides the point. The point is Sumner’s question for why or how NGDP suddenly falling could ever be a good thing. Contrary to my “supposition” of a free market reference making my entire argument moot, it is still standing without any solid criticism. I don’t expect it to be seriously addressed anyway. The knowledge required to understand it is incompatible with market monetarist assumptions. Market monetarists don’t understand economic calculation. They look at money like a hungry person looks at food. They don’t grasp the fact that money is a tool of calculation. It is not necessary for it to be controlled by a monopoly. Market forces acting upon money production are more than enough to allow investors and consumers to largely rationally calculate gainful versus wasteful activity in terms of money in such a way that the sum total of capital investment is sustainable over the long run.

    Non-market money prevents these market forces, and thus leaves investors and consumers at a total loss of market information on the value of money. Nobody knows with certainty if the current rate of dollar inflation represents too much or too little, because there is no profit and loss in money production. It is politically driven, not consumer driven. So we must make educated guesses. But we can make very accurate assumptions, I think: If is true that the whole purpose of monopolizing money is to bring about more units of money than a free market would have generated, then we can safely conclude that dollar inflation is always “too much”. Yes, even if NGDP suddenly falls to 0%. For this does not imply that dollar production falls to zero over the long run. It means a temporary change in the value of money. Money as a medium of exchange is valued differently solely due to real goods and labor being valued differently than they were in the recent past.

    I fail to see how a changed valuation of goods and labor somehow constitutes justification for arbitrary inflation to meet some arbitrary statistic that no individual investor even takes into account when making profit and loss calculations for his own direct activity.

  43. Gravatar of ssumner ssumner
    7. November 2013 at 19:02

    Phil, There’s certainly some truth to the claim that easier money will help the eurozone achieve wage equilibrium more quickly, I agree with you there.

    Saturos, Sure, but that’s also an increase in the demand for MoA.

    Mark, OK, I’ll keep an open mind.

    Jason. Yes, the Japan scenario is possible.

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