Diogenes never met Joe Weisenthal

Over at Econlog I did a post criticizing Mike Konczal for not conceding that monetary offset worked, just as the market monetarists predicted.  David Beckworth sent me a very different post by Joe Weisenthal:

I’m really in favor of the practice of writers issuing Mea Culpas at the end of the year. It’s good for crushing one’s own ego, and it’s just good for accountability in general.

I actually already wrote one for the year, wherein I changed my mind about Bitcoin from being extremely negative to being more neutral and open minded.

But now I’m doing another one: I was wrong about the Fed!

Specifically: I underestimated the Fed’s power to boost the economy under current conditions.

For the past several years, I’ve been supportive of the Fed doing whatever it could to boost the economy, but mostly I’ve subscribed to the view of Richard Koo, the Japanese economist who has pushed the notion of a “balance sheet recession.” Koo’s view has been that in a period when the private sector was inclined to reduce debt (deleverage) that monetary policy is ineffective, and that the solution is fiscal stimulus and more fiscal stimulus. Basically, the public sector must engage in deeper deficits in order to replenish private sector balance sheets, so that businesses and households wouldn’t have such a strong inclination to want to reduce debt.

There’s a lot to be said for this view, that when interest rates drop to 0%, and people are paying down debt, that fiscal stimulus must be a huge part of the mix and that monetary policy loses its effectiveness.

.   .   .

In April, Mike Konczal wrote for Wonkblog on The great economic experiment of 2013: Ben Bernanke vs. austerity.

As 2013 wraps up, you have to say that Bernanke did pretty well for himself! The economy is operating at its best level since the crisis. The deleveraging has come to an end, and the pace of job creation has kicked into a new, higher gear.

One year of course isn’t definitive (there were already signs of the deleveraging coming to an end last year, and a lot of the austerity in 2013 was front-loaded, so the experiment wasn’t that clean to begin with). But the economy has clearly done better than I and a lot of other people would have guessed given the austerity, and it seems likely that the Fed played a role.

.  .  .

And it’s not just in the U.S. that those who believe in the power of the central bank have done well. Japan may be turning a corner economically thanks to Abenomics, which involves aggressive monetary easing. The U.K. is turning around. And Europe’s efforts to repair its banking system have helped stem the crisis (although the Eurozone is such a disaster for so many reasons that it’s hard to pin the crash or the stability on any one thing).

Bottom line though is that as 2013 comes to an end, I’m more monetarist than I was at the beginning of 2013.

Now of course a Mea Culpa isn’t very compelling unless you go back and identify where you said something specifically wrong, otherwise it’s just blather for the sake of faux humility. But I’m too lazy to find all of my exact wording on all these issues.

But I do remember one post from 2011 where I called out conservative pundit Ramesh Ponnuru and economist David Beckworth for being too confident that monetary policy could revive the economy (if done right). I still think that fiscal stimulus is an important part of the mix (or at least that the austerity we’ve seen has been disastrous), but I don’t think the Fed is as ineffective as I used to think.

Great stuff.  I’d add that it’s actually easy to understand what went wrong with the eurozone.  They tightened monetary policy sharply in 2011 and the Fed did not.  I presume that even zero bound obsessed Keynesians would concede that raising the interest rate target in 2011 was a really bad idea.

After reading this I feel like I should admit my own failings.  At the risk of sounding like a complete jerk, I don’t see many problems for 2013.  It was an absolutely spectacular year for market monetarism on all sorts of fronts, all over the world.  Ditto for anti-bubble ideology.  I’ll do a post when all the data is in. But I was somewhat wrong about tapering.  I would have expected rumors of tapering to slightly reduce long term nominal bond yields, and the rumors seem to have slightly boosted those yields (judging from the roughly 10 to 20 basis point drop in yields when tapering was unexpectedly delayed in September.) Not sure if it was because the liquidity effect outweighed the income/inflation effects, or because of some sort of market segmentation story (the purchases were pretty large.)

We know that tight money surprises sometimes raise long term yields, and we know that tight money surprises sometimes lower long term yields.  My inability to figure out why is one of my greatest frustrations.


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53 Responses to “Diogenes never met Joe Weisenthal”

  1. Gravatar of Morgan Warstler Morgan Warstler
    3. January 2014 at 08:01

    The A/B test I wish i could run is Joe running BI during a GOP admin.

    I’m conflicted on whether or not he’d be a straight market growth cheerleader or not. Wil he still #eyetwitch in eager hopes that the jobs #’s came in right, as the nation adopts North Carolina’s unemployment policies?

    The pleasant silver lining for Joe as a market cheerleader under Obama, is that he is forced to admit the market doesn’t need Fiscal if Fed does its job.

    What I really want to see is Joe begin to rely on the Fed saying “WAIT, this means we can do radical restructuring of govt. and the Fed can keep us on track!”

    And I don’t think we’re close enough to that… yet.

  2. Gravatar of Ralph Musgrave Ralph Musgrave
    3. January 2014 at 11:20

    I believe in free markets. I fail to see the sense in using public money to artificially cut interest rates to below their free market level so as to escape a recession, any more than there is sense in artificially cutting the price of cars, restaurant meals and PCs so as to escape a recession. I.e. to escape a recession, government purchases, and the private sector’s power to purchase ALL GOODS AND SERVICES (including investment goods) should be boosted.

  3. Gravatar of Tom M. Tom M.
    3. January 2014 at 12:44

    Morgan,

    Although I feel bad for those who are losing their unemployment, the political implications are great for Dems heading in to the 2014 elections. The effect of “adopting North Carolina’s unemployment policies” will be a decline in labor force participation and a nice drop in the headline unemployment rate. After the schooling Ryan took in the budget deal, government should be a net positive for job creation this year and I wouldn’t be surprised if we have the best job numbers since the 90′s. Led by California of course. Good time to be a Democrat.

  4. Gravatar of Mike Freimuth Mike Freimuth
    3. January 2014 at 12:56

    Ralph,

    I believe in free markets too (and I mean really believe not George W. Bush “I’m a free market guy until” believe) but we have a central authority that “manages” the money supply and interest rates and has for a hundred years. Without a free-market money supply, it’s not at all clear what the “free-market level” of interest rates means. If you want to get rid of the Fed and let money be created in a decentralized way, then I’m with you but when interest rates (high or low) are determined by Fed policy, it makes no sense to claim that higher rates are more free market than lower rates.

  5. Gravatar of Ralph Musgrave Ralph Musgrave
    3. January 2014 at 13:21

    Mike Freimuth,

    I agree that I can’t tell you what the free market rate of interest for near risk free loans would be, absent manipulation of those rates by the Fed. But the mere fact that central banks do manipulate interest rates means the rate cannot be equal to the free market rate all the time. So I’m saying that if government / central bank wants to raise demand, it should ideally do it in a way that is not biased towards any particular type of spending.

  6. Gravatar of Mike Freimuth Mike Freimuth
    3. January 2014 at 13:42

    Ralph,

    But my point is that interest rates depend on the quantity of money and expectations about future quantities of money. These are determined entirely by the Fed. There’s no way to have a Fed without it “manipulating” interest rates. That’s the only thing the Fed does. It’s not just that we can’t tell what a “free-market” interest rate would be, it’s that no interest rate is any less the result of Fed “manipulation” than any other rate. The only way for such a thing as a free-market interest rate to exist is to have a free-market money supply.

  7. Gravatar of dtoh dtoh
    3. January 2014 at 14:50

    Scott,

    You said; “My inability to figure out why is one of my greatest frustrations.”

    It’s not hard to figure our why. Higher supply of credit (demand for financial assets) will lower rates. However, for higher expected NGDP (Wickesellian rates) the demand and supply curves for credit shift (higher supply and demand at the same rate). The two effects are in the opposite direction. Actual rate movement depends on which effect is stronger.

  8. Gravatar of ssumner ssumner
    3. January 2014 at 15:22

    Ralph, You said;

    “I believe in free markets. I fail to see the sense in using public money to artificially cut interest rates to below their free market level so as to escape a recession”

    I completely agree.

    dtoh, I know that, but it doesn’t tell me why one force is stronger in one case and the other force in the other case.

  9. Gravatar of dtoh dtoh
    3. January 2014 at 15:28

    Scott, your question was why. Not… how much?

    Knowing it’s cold outside and knowing the temperature are two different things. If you want to know the temperature, keep pushing for an NGDP futures market.

  10. Gravatar of Geoff Geoff
    3. January 2014 at 15:36

    “Ditto for anti-bubble ideology.”

    Bubble ideology isn’t refuted in a particular year just because it didn’t pop in that same particular year.

    Bubble ideology, properly understood, had a very “good year.” Bernanke “succeeded” in blowing up the biggest economic bubble the world has ever seen. Bernanke has added froth on top of an already existing bubble left over from Greenspan, but unfortunately for Bernanke, there was no one private market segment to carry the brunt of the malinvestment. Greenspan had the Nasdaq and housing markets. Bernanke had to take all the malinvestments left to him, and transfer the costs to the government’s balance sheet. So now we have what you can call a sovereign debt bubble.

    This is the inevitable bubble for a central banking system. All fiat money experiments crash. The end point is either socialism, or hyperinflation, or worse, both.

    Human knowledge and actions cannot be scientifically predicted, so bubbles cannot be predicted as rising or collapsing on specific dates. However, we can say that A causes B.

    All of you who have been, and continue to be, misled into thinking inflation has not recently or currently too loose, on the basis of a misguided focus on price levels or aggregate spending or interest rates, are going to be proven wrong once again, similar to how many economists during the 1920s, who believed inflation wasn’t too loose because prices were tamed, were proven wrong. The only difference is that their God was prices, and your God is prices times output (spending).

  11. Gravatar of Geoff Geoff
    3. January 2014 at 15:59

    “We know that tight money surprises sometimes raise long term yields, and we know that tight money surprises sometimes lower long term yields. My inability to figure out why is one of my greatest frustrations.”

    I think you are able to understand why.

    The answer is that there are no constants in human action.

    In the natural sciences, there are scientific constants to be sure, but this is because the subject matter of the natural sciences does not learn from past experiences. We humans on the other hand (the subject matter of economics), do learn. So all constant causal prediction bets are off.

    We can’t regard ourselves as past causally determined. Doing so leads invariably to a contradiction. What is this contradiction? If actions could indeed be conceived of as governed by time-invariant causes, then it is only fair to ask: OK, then what about causally predicting the predictor’s actions? They are, after all, the people who carry on the very process of creating hypotheses (e.g. borrowers and lenders agree to higher rates when there is a surprise tight money accouncement) and of confirmation and falsification (e.g. yes, yields rose; or no, yields did not rise).

    In order for Sumner to assimilate confirming or falsifying experiences — to replace old hypotheses with new ones — he must be able to learn from such experiences. Sumner is of course compelled to admit this, otherwise why would he engage in any such research at all?

    But if Sumner can learn from experience in as yet unknown ways, then he must admit that he cannot know at any given time what he will know at a later time and, accordingly, how he will act on the basis of this knowledge. He can only reconstruct the causes of his actions after the event, just like he can explain his knowledge only after he already possesses it.

    What is true for Sumner is true for everyone else. Nobody can what they will know and do 10 years from now on the basis of the Fed tightening up now, today. So of course long term rates won’t always rise and they won’t always fall. These rates are being subjected to a constant flux of changing knowledge and preferences. That is why we observe rates sometimes falling after a particular event, while other times we observe them rising after that same class of event.

  12. Gravatar of Daniel Daniel
    3. January 2014 at 16:14

    The end point is either socialism, or hyperinflation, or worse, both.

    And what exactly is the difference between you and a doomsday preacher ?

  13. Gravatar of benjamin cole benjamin cole
    3. January 2014 at 16:22

    I hope John Cochrane reads this post.

  14. Gravatar of Geoff Geoff
    3. January 2014 at 16:25

    Hey Ralph, you said:

    “I believe in free markets. I fail to see the sense in using public money to artificially cut interest rates to below their free market level so as to escape a recession”

    Sumner replied: “I completely agree.”

    Now, say the same thing, but instead of saying “cut interest rates to below”, say “raise aggregate spending above”.

  15. Gravatar of Geoff Geoff
    3. January 2014 at 16:29

    If you do, expect free market Sumner to turn into socialist Sumner. It’s truly a sight to behold.

  16. Gravatar of Daniel Daniel
    3. January 2014 at 16:32

    I suppose “Human Action” comes with a magic crystal ball enabling its owner to know exactly what the level of “free market aggregate spending” would be.

    So please Geoff, don’t be so selfish. Let us know what it is.

  17. Gravatar of Tommy Dorsett Tommy Dorsett
    3. January 2014 at 20:08

    Scott,

    Tips spreads, the yield curve, bond rates and stock prices all rose post taper. This is consistent with faster expected NGDP growth.

    So, either 1) the expansionary effect of forward guidance outweighed the contractory effect of the taper or 2) velocity is rising/falling more slowly than the taper is reducing/slowing the growth rare of M.

  18. Gravatar of Jim Glass Jim Glass
    3. January 2014 at 20:13

    I suppose “Human Action” comes with a magic crystal ball enabling its owner to know exactly what the level of “free market aggregate spending” would be. So please Geoff, don’t be so selfish. Let us know what it is.

    Low enough to punish the evil, be assured, however low that takes.

  19. Gravatar of TravisV TravisV
    3. January 2014 at 20:41

    Prof. Sumner,

    Do you agree with George Soros about the following? :)

    http://seekingalpha.com/currents/post/1491041

    http://bit.ly/1lCp5sN

    Soros: China “major” risk for global economy

    “The growth model responsible for [China's] rapid rise has run out of steam,” says George Soros, calling the country a “major” source of uncertainty for the global economy.

    The PBOC tried to rein things in in 2012, says Soros, but – with the economy is “real distress” – Beijing quickly ordered industry to ramp up and bankers to ease credit. The result has been an improvement not just in China, but the entire global outlook.

    “The Chinese leadership was right to give precedence to economic growth over structural reforms … But there is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years.’

    “How and when this contradiction will be resolved will have profound consequences for China and the world.”

  20. Gravatar of TravisV TravisV
    3. January 2014 at 21:27

    http://qz.com/163307/george-soros-just-said-something-very-worrying-about-chinas-debt-dilemma

    Patrick Chovanec: http://www.bloomberg.com/news/2014-01-02/china-s-runaway-train-is-running-out-of-track.html

  21. Gravatar of Ralph Musgrave Ralph Musgrave
    3. January 2014 at 23:18

    Mike F.,

    I don’t agree that the “only way for such a thing as a free-market interest rate to exist is to have a free-market money supply.” If stimulus was not weighted in any particular direction (as distinct from being directed SPECIFICALLY at interest rates) then there’d be a minimal interference with the market forces that determined interest rates.

    Scott,

    You agree that we shouldn’t interfere with the market forces that determine interest rates. But surely if the government / central bank machine implements stimulus JUST BY altering interest rates, as opposed to combining that with other measures like raising government spending, cutting payroll taxes, etc, then interest rates are being manipulated.

    Geoff,

    I’m probably being stupid, but I don’t get your point. Re Scott becoming a socialist, making stimulus more fiscal and less monetary does not necessitate socialism, since fiscal stimulus can take the form of tax cuts rather than public spending increases (if that’s relevant to your point, and I’m not sure if it is).

  22. Gravatar of Kenneth Duda Kenneth Duda
    3. January 2014 at 23:40

    Scott, this is totally off topic, but I was hoping you would help me understand your idea of defining the dollar as a given fraction of 12- or 24-month forward nominal GDP, making dollars convertible into futures contracts at the target price. I’m just being dense. I can’t figure out the terms of the contract or how they are priced or who is allowed to sell newly-written contracts to the Fed (which seems to be needed to expand the money supply).

    So, suppose I think NGDP is going to come in way above target. I’d like to make some money. So, I take my dollar (which I think is going to get inflated away) and buy one NGDP future contract. At the end of the year, say I’m right. Instead of NGDP growing 5% over the year, it grew 25%. The contract pays me what, $1.25? or $1.20? But there was like 22% inflation. So I’m not really making much money here in real terms… and then I pay taxes on my non-earnings… yikes. NGDP futures aren’t even a very good inflation hedge (because of the annual tax), and I sure don’t see how to get rich this way. So there’s not much incentive to play this game.

    And if NGDP had nailed the Fed’s target of 5% nominal growth, how much would my contract pay out? $1 or $1.05? If it pays $1, I’m pretty sad because I’d get the same -2% ROI for holding cash (assuming 2% inflation and 3% real growth). If it pays $1.05, then it’s looking like a pretty reasonable investment.

    I’m also confused on the other direction. Say I think NGDP is going to contract 25%. I would like to sell NGDP futures to the Fed to make money. But naturally I don’t own any. So I need to short them? So I short one and get $1 today, and then at the end of the year, if I’m right and NGDP drops by 25% instead of hitting the +5% target, I pay the Fed how much? $0.75? or $0.70? And if I can’t pay, I guess I had to put up some collateral, I guess as you do with any short arrangement?

    Anyway, if you have anything written up on the details of NGDP Futures for options idiots like me, I would be very interested.

    Thanks,
    -Ken

    Kenneth Duda
    Menlo Park, CA
    kjd@duda.org

  23. Gravatar of Kenneth Duda Kenneth Duda
    3. January 2014 at 23:56

    Sorry Scott, let me go through http://monetaryfreedom-billwoolsey.blogspot.com/2010/12/sumner-and-delong.html before I bug you any more about this. It’s dense but will be a good weekend project.

    (Of course, if you’ve already written up the details, then a link would still be great.)

    -Ken

  24. Gravatar of Daniel Daniel
    4. January 2014 at 01:41

    Ralph Musgrave,

    You do realize this is Scott’s position, right ? Target NGDP directly and let interest rate go wherever it leads them.

  25. Gravatar of Ralph Musgrave Ralph Musgrave
    4. January 2014 at 04:52

    Daniel,

    Yes, but what’s the ACTUAL MECHANISM that Scott advocates to adjust NGDP? It’s monetary measures of one sort or another: interest rate adjustments, having central banks buy government debt and sundry private assets, etc. Hope I’m not misrepresenting Scott.

  26. Gravatar of ssumner ssumner
    4. January 2014 at 06:33

    Tommy, You said:

    “So, either 1) the expansionary effect of forward guidance outweighed the contractory effect of the taper”

    You can stop right there, that was certainly the explanation.

    Travis, I’d prefer to say “It’s running out of steam.” There’s still lots of growth in the interior, but the model is gradually running out of steam, which is why China will do more reforms.

    Ralph, You said;

    “You agree that we shouldn’t interfere with the market forces that determine interest rates. But surely if the government / central bank machine implements stimulus JUST BY altering interest rates,”

    I’ve never advocated interest rate targeting. I favor targeting NGDP growth expectations, and letting the market set interest rates. I favor a free market credit market.

    As an analogy, monetary policy impacts the price of bananas, but I favor a 100% free market in bananas.

    Kenneth, I have a paper in the right column, but the short answer is that you put 10% down, and earn market rates on the margin account. If NGDP rises an extra 20% above target, your return on the margin account is 200%, plus the market rate of interest—say 205% or so.

  27. Gravatar of Ralph Musgrave Ralph Musgrave
    4. January 2014 at 08:56

    Scott,

    OK, so you favour adjusting NGDP by various monetary measures which if I’ve got you right consist mainly of having the central bank buy/sell government debt and perhaps private sector assets. That will inevitably influence interest rates even if you aren’t specifically targeting interest rates: I mean how do central banks cut interest rates? They print money and buy government debt amongst other things.

    So my original objection to monetary policy (2nd comment above) still stands. That is, I don’t see the merit in effecting stimulus just by feeding cash into the pockets of the asset rich, as distinct from increasing spending by other entities: e.g. government, the asset poor, etc.

  28. Gravatar of Mike Freimuth Mike Freimuth
    4. January 2014 at 10:57

    Ralph,

    Is your only complaint about Fed stimulus that they do it by buying financial assets rather than giving the money to the poor or to government? If so I mistook you for someone else.

    Regarding this: “That will inevitably influence interest rates even if you aren’t specifically targeting interest rates: I mean how do central banks cut interest rates? They print money and buy government debt amongst other things.”

    Yes, interest rates depend on the size of the money base and expectations about the future size of the money base. The Fed controls the size of the money base. So how is it possible for the Fed to not influence interest rates?

    If you could have the Fed do anything you want, what would that be?

  29. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. January 2014 at 11:50

    Scott,
    Here’s Krugman’s latest claim:

    “…Incidentally, these other factors are why I don’t take seriously the claims of market monetarists that the failure of growth to collapse in 2013 somehow showed that fiscal policy doesn’t matter. US austerity, although a really bad thing, wasn’t nearly as intense as what happened in southern Europe; it was small enough that it could be, and I’d argue was, more or less offset by other stuff over the course of a single year…”

    http://krugman.blogs.nytimes.com/2014/01/04/happy-new-year/

    I think it’s pretty clear by the context and the title of the post he’s specifically talking about fiscal austerity in 2013.

    Using one of Krugman’s favorite measures of fiscal austerity, the change in the cyclically adjusted primary balance (CAPB) from the IMF Fiscal Monitor, we see that the CAPB increased by 2.3% of potential GDP in the US in 2013. This compares with 2.2%, 0.5%, 1.4% and 1.2% of potential GDP in Greece, Italy, Portugal and Spain respectively. So the US did more fiscal austerity than any of the GIPS in 2013.

    Perhaps Krugman meant over a longer period of time. Well between 2010 and 2013 the CAPB increased by 4.4% of potential GDP in the US. Certainly this is a lot less than the 10.4% and 7.6% of potential GDP in Greece and Portugal respectively. But it is not significantly different from the 3.5% and 5.2% of potential GDP in Italy and Spain respectively, and Italy and Spain constitute 88% of the GDP of the GIPS.

    In fact the change in CAPB between 2010 and 2013 in the GIPS weighted by GDP produces a value of 4.8% of potential GDP, only slightly more than the 4.4% of potential GDP for the US.

    P.S. in a subsequent post Krugman quotes himself as saying the following in 2009:

    “In the long run, we will have a spontaneous economic recovery, even if all current policy initiatives fail.”

    http://krugman.blogs.nytimes.com/2014/01/04/what-a-good-year-wont-prove/

    “Spontaneous recovery” sounds a lot like Adam Tooze talking about the “natural recovery” in Germany in 1933, although it followed almost immediately after more expansionary monetary policy was instituted by the Reichsbank in the summer of 1932. I guess unless an economic recovery is directly attributable to fiscal policy, it just sort of happens for apparently no reason at all.

  30. Gravatar of Geoff Geoff
    4. January 2014 at 12:10

    Daniel:

    “The end point is either socialism, or hyperinflation, or worse, both.”

    “And what exactly is the difference between you and a doomsday preacher ?”

    The difference is that I do not hold that doomsday is inevitable. I do not hold that central banking is inevitable, and so my argument concerning the outcome of central banking is not on the same plane at all.

    Just consider me to be saying something similar to this: the outcome of driving towards a cliff is to fall over the cliff in a crash. Would you tell me that I am giving you a doomsday scenario akin to the preacher? I hope not, because we can definitely think of the car driver as changing direction to avoid driving over. Same thing with the Fed. We can choose to change directions so that we don’t drive over the cliff.

    “I suppose “Human Action” comes with a magic crystal ball enabling its owner to know exactly what the level of “free market aggregate spending” would be.”

    Hahahahaha, that exactly describes YOUR worldview about NGDPLT sucker! You are claiming to have a crystal ball in knowing that NGDP should grow by exactly 4.5%, or whatever other arbitrary number you have in your mind.

    For me, it’s precisely the opposite. I admit that I don’t know how many money units should be produced, or how many money units should be exchanged over a period of time. I want to allow you and everyone else to decide that in accordance with peaceful production and exchange based on individual interests.

    You see, it is YOU who is taking YOUR central planner conception of the world, and demanding that aggregate spending be controlled by a single consciousness. You’re thinking just like a central planner. You have such a strong central planning worldview that you cannot help but understand me to be doing the same thing in everything I say. Thus, if I don’t tell you how many cars should be produced in a free market, or how many dollars should be produced in a free market, or how many dollars should be exchanged over a period of time, then that somehow means I am holding back from you my belief that I secretly know how many cars or dollars should be produced according to some model of my own, controlled by me or some other centralized mechanism. What you call a “crystal ball.”

    “So please Geoff, don’t be so selfish. Let us know what it is.”

    I DON’T KNOW WHAT IT IS. Just like I can’t scientifically predict how many computers should be produced and exchanged in the aggregate. This should be determined by the market process of exchange. Peace should decide it, not violence. I know you are having a horrendously difficult problem grasping the thought of allowing your friends, colleagues and family members to decide whether they should compete in the production of money, to be guided by profit and loss, as well as supply and demand, instead of pointing guns at people and imposing what you believe is “best” on them by force. And if they should ever dare question the life you have decided for them (you SHALL be subject to violence if you compete with the government in money in a context of economic freedom and private property rights), then what you do is exactly what you just accused me of doing, using a crystal ball to “just know” that total spending on everything, no matter what it is, should grow at 4.5%.

    You’re hilarious. You’re so typical of a socialistic minded person. You can’t even think of how a free market works, and so everything other people say has to have some singular consciousness controlling everything as well.

  31. Gravatar of Daniel Daniel
    4. January 2014 at 14:14

    I DON’T KNOW WHAT IT IS.

    Then why do you keep asserting that monetary policy has been too loose ?

    The end point is either socialism, or hyperinflation, or worse, both.

    Wanna be more specific ?

    Oh wait, you can’t.

  32. Gravatar of Tom Brown Tom Brown
    4. January 2014 at 14:14

    Mark A. Sadowski, O/T: Sorry to put this here but I don’t know how to contact you otherwise. Do you agree with the following statement:

    – quote —
    The Reserve Bank of New Zealand increased the monetary base from $3b in autumn 2004 to $12.8b in December 2006. Inflation in NZ never rose above 5% or so in the ensuing 5 year period.

    Balance sheet data: http://www.rbnz.govt.nz/statistics/tables/r2/
    Inflation data: http://www.rbnz.govt.nz/statistics/key_graphs/inflation/
    – end quote –

    The response to this from another person was:

    – quote –
    So you took Nov 2004 with currency 3030 and deposits in monetaray base of 2 to add to 3032. Then Dec 2006 these are 3958 and 8886, adding to 12,844. This would be a factor of 4.

    Think we could get Mark to be the judge on what counts as monetary base?
    – end quote –

    Do you agree this calculation of the monetary base was done correctly?

  33. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. January 2014 at 17:12

    Tom Brown,
    Due to technical problems I am unable to examine the balance sheet data until tomorrow at the earliest.

    The monetary base consists of currency in circulation plus anything that counts as reserve balances (i.e. deposits with the central bank). Obviously these are liabilities of the central bank.

  34. Gravatar of ssumner ssumner
    4. January 2014 at 18:02

    Mark, Thanks, I wish I’d read that before I did my post. BTW, how much did the budget deficit fall in gross terms (as a share of GDP) i.e. without cyclical adjustment?

  35. Gravatar of dtoh dtoh
    4. January 2014 at 19:01

    I don’t know why anyone takes PK seriously. He’s a total shill with an IIQ (Intellectual Integrity Quotient) of 0.

  36. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. January 2014 at 19:16

    Tom Brown,
    I managed to get my technical problems solved. (The solution involved unplugging and plugging my desktop back in. Turning it off and on, and more sophisticated approaches would not work.)

    I looked at the figures and the calculations look correct to me.

    As a side note, keep in mind that New Zealand has IOR and thus the amount of reserves can be set independently of the policy rate.

  37. Gravatar of Mark A. Sadowski Mark A. Sadowski
    4. January 2014 at 19:29

    Scott,
    “BTW, how much did the budget deficit fall in gross terms (as a share of GDP) i.e. without cyclical adjustment?”

    It’s not much different. The US general government balance increased by 2.5% of GDP in calendar year 2013 according to the IMF Fiscal Monitor. This is close to the CBO’s estimate that the US Federal deficit fell by 2.7% of GDP in FY 2013.

    Between calendar years 2010 and 2013 the US general government balance increased by 5.0% of GDP according to the IMF Fiscal Monitor. That’s more than all of the GIPS with the exception of Greece (6.7%).

  38. Gravatar of Geoff Geoff
    4. January 2014 at 20:00

    Daniel:

    “Then why do you keep asserting that monetary policy has been too loose?”

    I am guessing that money has been too loose, based on guessing what quantity of money would have been produced in a free market. I am guessing this because the whole reason central banking exists in the first place is to bring about more money than what a free market would have brought about. That’s why it was designed and implemented through Congress. Bankers and Congress could not acquire as much money as they wanted unless the government monopolizes money and prints the money they want.

    So I take these two considerations and conclude that the 500% percent increase in the monetary base the Fed brought about 2008-2009 is quite likely a lot more than what a free market
    would have generated.

    I am not claiming to know with certainty what the growth rate in money or spending would be in a free market, but that doesn’t mean I can’t make reasonable guesses as to what would have happened as compared to what we have to live with now.

    Please understand that I am “asserting” a counter-factual, and I am fully cognizant of the fact that it’s at best an educated guess.

    I’m open to being persuaded that a free market would have produced more money, using stronger arguments than my own.

    “The end point is either socialism, or hyperinflation, or worse, both.”

    “Wanna be more specific ?”

    “Oh wait, you can’t.”

    I actually can.

    (I define inflation as aggregate money supply.)

    In order for inflation to “work”, it has to accelerate in the long run. This is because inflation distorts economic calculation, and misleads investors by covering up market-based relative prices and relative spending, and replacing them with non-market relative prices and spending.

    It is exactly why we saw during 2008 that the growth rate in the money supply (required for price targeting) was no longer sufficient inflation to prop up the capital structure of the economy. It is also why Sumner believes his theory has been vindicated. It is only because his theory happened to historically be consistent with the requirement of higher (i.e. accelerating) money supply growth to prevent the corrections in the capital structure and thus continue the same aggregate “output” and “employment” trends.

    So why do I reject the theory that central banking can continue indefinitely, as long as it periodically refrains from continuing the acceleration of inflation to hyperinflation, and thus brings about corrections, unemployment, and so on? It’s because I think people will eventually learn, the way white blood cells eventually circle their attention to bacteria and cancer. Already the central bank now has more scrutiny on it than at any time in history. They hate scrutiny because their operation needs to be secretive for it to last. Much like a robber has to keep his activity secret for him to keep robbing. If he is exposed, it’s only a matter of time before he’s stopped.

    Knowledge of government is increasing faster than the government can keep up with and suppress/control. Ergo the NSA spying on everyone. It’s economic, not terrorism induced. The inflation empire is crumbling, and in the last throes totalitarian methods are expanded.

    So the central bank is caught in a bind. Try to remain secretive by continually accelerating the money supply until hyperinflation and loss of control in the short run, or refraining from accelerating inflation and allowing periodic corrections to occur, which increases scrutiny on itself and loss of control in the long run.

    The US government has chosen the long run, whereas other governments throughout history have chosen the short run. But they can’t escape the long run. We are at the same time IN the long run.

    NGDPLT is not capable of being a long run “solution.” It requires accelerating money supply growth, which is not sustainable.

  39. Gravatar of Daniel Daniel
    5. January 2014 at 04:17

    I am guessing that money has been too loose, based on guessing what quantity of money would have been produced in a free market.

    That’s a rather long-winded way of saying – “the fact that I don’t know doesn’t keep me from acting like I do”.

    I define inflation as aggregate money supply.

    I define Geoff as being synonymous with “mentally deficient”.

    Try to remain secretive by continually accelerating the money supply until hyperinflation and loss of control in the short run.

    I asked you to prove that hyperinflation is inevitable – and your answer it “it’s inevitable because it’s inevitable” ?

  40. Gravatar of Ralph Musgrave Ralph Musgrave
    5. January 2014 at 04:23

    Mike F.,

    You ask, “how is it possible for the Fed to not influence interest rates?” My answer is that it’s not possible. I.e. you’re agreeing with my criticism of Scott who claimed he didn’t believe in interest rate targeting. My answer to him was that his monetary policies inevitably influence interest rates, even if he doesn’t want to specifically target them.

    Next, you ask “If you could have the Fed do anything you want, what would that be?” My answer is that I favor the standard MMT solution for recessions: have the Fed and government cooperate, and print and spend money in a totally unbiased way. I.e. there’d be no bias towards interest rate adjustments or towards the rich, the poor, government, or the private sector.

    There are big political problems in effecting such a system. I.e. that “cooperation” system is a long term objective, rather than one that can be implemented next year.

  41. Gravatar of ssumner ssumner
    5. January 2014 at 06:44

    Mark, Thanks for the info.

    Ralph, You said;

    “You ask, “how is it possible for the Fed to not influence interest rates?” My answer is that it’s not possible. I.e. you’re agreeing with my criticism of Scott who claimed he didn’t believe in interest rate targeting. My answer to him was that his monetary policies inevitably influence interest rates, even if he doesn’t want to specifically target them.”

    This is a 100% non sequitor. It’s impossible for monetary policy to NOT affect the price of zinc. But no one claims there is no free market in zinc. No one claims the Fed is targeting the price of zinc.

  42. Gravatar of Mike Freimuth Mike Freimuth
    5. January 2014 at 10:47

    Ralph,

    I think that’s basically what they’re doing. It should be obvious that it’s impossible to spend billions/trillions of dollars without someone claiming that the way you do it is biased toward interest rates, or the poor or the rich or the government or something. Currently, they buy financial assets because (at least in part) that is the most “unbiased” way to get more money into the economy since you are simply trading the money for an asset of equal value. Does that change the value of the asset? Yes (at least potentially, though it’s not obvious before the fact which way it will change). But if you printed a trillion dollars and spent it on food stamps that would affect the value of financial assets too. In fact I can almost hear the criticism now.

    “The Fed is now dumping trillions of dollars into the economy ad spending it on food stamps. Since that money is spent on food and eventually raises the price of food and ends up in the pockets of big corporations, this policy is even more favorable to the rich than the old policy because now they end up with the money anyway without even having to give up their financial assets.”

    No matter how the Fed spends the money, financial assets (and interest rates) will be affected because they depend on the quantity of money and expectations about the quantity of money in the future. Sumner wants them to focus on NGDP and not worry about interest rates. This doesn’t mean that interest rates would not be affected by Fed policy. But that will be the case no matter what they do

  43. Gravatar of Mike Freimuth Mike Freimuth
    5. January 2014 at 11:03

    For the record, I do think a NGDP level target could be said to be less “biased” though I don’t think it’s a good word to use because it would be less arbitrary.

  44. Gravatar of Ralph Musgrave Ralph Musgrave
    5. January 2014 at 12:44

    Scott and Mike F. Thanks for your replies.

    Scott: Obviously Fed monetary operations have a finite effect on the price of zinc, but it’s minute compared to the effect on interest rates or government bond prices when the Fed buys bonds. Conversely, if the Fed bought stockpiles of metals, the main effect would be on the price of metals, rather than on interest rates.

    Mike F.: There’s an unavoidable connection between corporate share and bond prices on the one hand, and GDP. If GDP declines (as in a recession) so do share and bond prices. I see nothing wrong with the Fed / government machine boosting spending by households and government departments by enough to end the recession, which as you say will raise share and bond prices. But the rise will only be to pre-recession levels approximately. I don’t that would bring howls of protest.

    In contrast, if the Fed buys bonds, that boosts the net worth of households and doubtless raises their weekly spending. But there is a bias towards wealthy households. That makes no more sense than a bias towards poor households or Chinese households. Plus I doubt those households will spend much on investment, first because plant capacity utilisation is at record low levels. Second, because as Galbraith put it, “firms borrow when they can make money and not because interest rates are low”.

    And in practice during the recent recession government spending on infrastructure actually DECLINED, which was ridiculous. At the very least, infrastructure spending should have been held constant. See:

    http://www.businessinsider.com/us-infrastructure-spending-collapse-blog-2013-11

  45. Gravatar of Tom Brown Tom Brown
    5. January 2014 at 16:57

    Mark S: Thanks so much! I saw your direct response to JP and Vincent. Well you get $50 out of it anyway! Congrats!

  46. Gravatar of Peter N Peter N
    5. January 2014 at 17:04

    The test of the diagnosis of a balance sheet recession is whether there’s economic recovery when there’s balance sheet recovery. It doesn’t much matter how this recovery is achieved.

    This is what we see in the US consumer debt as a percentage of GDP has fallen from 96% to 77%. It’s not surprising when people with more money to spend decide to spend it.

  47. Gravatar of ssumner ssumner
    5. January 2014 at 18:45

    Ralph, It’s not even clear whether buying bonds makes their price go up or down. In the 1970s the bond purchases reduced their price, but raised the price of zinc by much more. It’s far from being a trivial effect. Other times bond purchases increase the price of bonds. Often there is almost no effect.

  48. Gravatar of Ralph Musgrave Ralph Musgrave
    6. January 2014 at 04:17

    Scott,

    Your claim that bond purchases by the Fed can cause bond prices to fall relies on a very abnormal and highly inflationary period: the 1970s. You also rely that period in your post No.18037, which goes into this question in detail (link below).

    You assume that the 1970s inflation was caused by Fed bond purchases. In fact there is a lot of argument as to what caused that inflationary episode. The oil price shock is often cited. Plus some claim it was a plain simple wage price spiral. As to the UK, I would cite excessive Trade Union militancy: certainly wages as a proportion of GDP rose to record levels in the UK in the mid 1970s. Plus working days lost thru strikes in the 1970s was about double that of the previous decade. I.e. it’s quite possible that the Fed was simply keeping up with inflation that would have occurred ANYWAY.

    Next, obviously I agree that a grossly excessive amount of bond purchasing by the Fed would cause inflation and hence a bond price collapse. But assuming the Fed behaves responsibly, it will purchase bonds in an amount just sufficient to bring full employment, but without excessive inflation. And in that case there’d be no bond price collapse. I.e. in that scenario, I suggest the standard laws of supply and demand would apply: i.e. Fed buys bonds, so bond prices rise.

    And if the latter supply / demand point does not apply, then that’s an absolutely HUGE FLAW in a standard bit of text book economics, namely that central banks can influence interest rates.

    http://www.themoneyillusion.com/?p=18037

  49. Gravatar of ssumner ssumner
    6. January 2014 at 05:28

    Ralph, That situation doesn’t just apply to the 1970s, there are plenty of other examples. Even some of the QE programs (not all) seemed to lower bond prices.

    You won’t find many reputable economists who think 11% NGDP growth during 1972 to 1981 was caused by unions of oil prices. Those factors don’t tend to boost NGDP at all. And it’s NGDP that matters, not inflation.

    Your last sentence confuses short and long term rates.

    In any case, you are not addressing the most important point, what is your counterfactual “non-distorted” bond yield? What is a neutral monetary policy? You don’t have a model.

  50. Gravatar of Ralph Musgrave Ralph Musgrave
    7. January 2014 at 03:41

    Scott,

    My “non-distortionary” policy is to have the government / central bank print money and increase all forms of spending in a recession. That has the merit of simplicity. Private spending is increased by cutting taxes, plus government spending rises. That will roughly speaking feed as much money into the pockets of creditors as debtors so there is little effect on interest rates.

    Doubtless that policy involves some distortions and has a finite effect on interest rates, but the distortions are less than pure monetary policy or pure fiscal policy.

    Simon Wren-Lewis advocated something of that sort yesterday:
    http://mainlymacro.blogspot.co.uk/2014/01/monetary-versus-fiscal-odd-debate.html

  51. Gravatar of ssumner ssumner
    7. January 2014 at 08:13

    Ralph, I don’t agree, that’s far more distortionary. It will require higher (distortionary) taxes in the future, or else lead to hyperinflation.

  52. Gravatar of Ralph Musgrave Ralph Musgrave
    16. January 2014 at 00:46

    Whence your assumption that taxes are distortionary? Obviously they CAN BE (e.g. a tax on all people over 6ft tall). On the other hand raising taxes on EVERYONE’S income would be pretty non-distortionary.

    Re the idea that fiscal stimulus funded by the issue of bonds or new base money will require increased future taxes, that flies in the face of the facts. E.g. the federal debt in the mid 1970s was about $1.5tr and in 2010 it was about $9tr. I.e. that $1.5tr was never repaid. What happened was that it was eaten away by inflation, plus economic growth reduces the debt/GDP ratio.

    But even if there were no inflation and no growth and the debt and/or new base money that funds fiscal stimulus is subsequently withdrawn via tax, what of it? The only SENSIBLE time to do the withdrawal is when the economy is overheating, i.e. when the withdrawal is required so as to prevent excess inflation. I.e. the tax does not make anyone WORSE OFF. Quite the reverse: it makes them better off in that it prevents excess inflation.

  53. Gravatar of Ralph Musgrave Ralph Musgrave
    16. January 2014 at 00:47

    Oops… The above comment was for Scott.

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