Watch what they predict, not what they say

Lots of commenters make a big deal about the fact that some Fed officials, and Ben Bernanke in particular, often make statements implying that they don’t engage in monetary offset.  One response is that they also make statements implying that they do engage in monetary offset.  Talk is cheap, and there’s no doubt the Fed would prefer that Congress do more of the heavy lifting, so they could do less (and hence be less controversial.)

But actions speak louder than words.  How does the Fed change its forecast of RGDP growth in 2013, as a result of the big tax increases plus sequester?  Take a look at the following, from The Economist:

Screen Shot 2014-03-06 at 9.32.43 AM

Lots of people have noticed that actual GDP growth accelerated in 2013, as compared to 2012, despite all the austerity we were warned about.  But of course lots of unexpected things can happen over a 12 month period.  I find it much more interesting to look at the expected effect of austerity. Notice that expected 2013 growth is identical to expected 2012 growth.

Now some will argue that that’s only because other things were changing to offset the effect of austerity.  For instance, the Fed did QE3 and forward guidance in late 2012.

Which is exactly the point.

PS.  In fairness, I’m not sure how fully they understood the extent of fiscal austerity in their December 2012 forecast.  They did cite looming fiscal austerity when justifying their monetary stimulus of late 2012, so it was clearly understood that austerity would occur.  But in March they lowered their RGDP growth forecast from 2.65% to 2.55%, perhaps because of more information about the severity of the austerity.

The Fed lowered its GDP forecast slightly downward in the March FOMC meeting

The Fed is forecasting from 2.3% to 2.8% in GDP growth for 2013, taking down the top end of the range from 2.3% to 3.0%. The Committee noted that the private economy was growing a little faster than anticipated, and that would nearly offset the fiscal drag imposed by the Jan 1st tax hikes and the sequester. They did adjust their 2014 and 2015 forecasts lower as well, although not dramatically.

On the other hand Q1 growth was very weak, so it seems equally likely that that triggered the downgrade in forecasts, not the sequester.  Fiscal austerity might or might not have lowered the Fed’s growth forecast by 10 basis points.  That’s far from the apocalyptic forecasts of the Keynesians. 


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200 Responses to “Watch what they predict, not what they say”

  1. Gravatar of SG SG
    6. March 2014 at 10:26

    Scott, I’m a huge fan, but this post actually seems to be a step back for you. Fed real GDP forecasts aren’t worth the paper they’re written on. This classic post by Evan Soltas illustrates the point very well:

    http://esoltas.blogspot.com/2012/08/the-fed-as-little-orphan-annie.html

    The Fed, for four solid years, was predicting that recovery was only a day away. The fact was that there was a disconnect between what the fed forecast in RGDP growth versus what it was willing to allow in terms of inflation and NGDP growth. The nominal variables are obviously the ones over which the fed has the most direct control, so with the Fed stupidly celebrating its failure to hit its 2% inflation ceiling, it’s no wonder that the catch-up RGDP growth failed to materialize.

    If we really wanted to look at the fed’s “actions” we would look at how they evaluate their performance relative to market forecasts of appropriate nominal variables (NGDP!). Unfortunately the Fed still fails to target the right variable, so everyone is more or less in the dark.

  2. Gravatar of benjamin cole benjamin cole
    6. March 2014 at 11:30

    The Fed staff has steadfastly predicted high on growth, high on inflation and way too high on unit labor costs for five years running…you know, only the basics. But they have something like 700 economists churning out reports…and mysterious contracts with even more…to what end?
    Why did Market Monetarism evolve outside the Fed? To this date, has the Fed ever held a conference or symposium on Market Monetarism?
    Is the Fed an example of cloistered ossification?

  3. Gravatar of Mark A. Sadowski Mark A. Sadowski
    6. March 2014 at 11:37

    Scott,
    Off Topic.

    JazzBumpa has a thoughtful and clearly written post that takes on Market Monetarist interpetations of 2008. If I have the time I may respond to his substantive points.

    http://angrybearblog.com/2014/03/did-the-fed-cause-the-great-recession.html

    But for the moment the following claim caught my attention:

    “In mid 2008, core inflation was running at 2.3 to 2.5%, not far off its decade-long average of 2.2%, and had been pretty stable year to date.”

    I knew right away this was incorrect in several respects and I had a hard time figuring out why until I realized that he was looking at core CPI and not core PCEPI.

    The Fed has never targeted core CPI. It targeted headline CPI from 1988 until 1999. In 2000 it switched to targeting PCEPI. In 2004 it switched to targeting core PCEPI.

    Why does this matter? Because the behavior of core CPI and core PCEPI was radically different over the period in question:

    http://research.stlouisfed.org/fred2/graph/?graph_id=164121&category_id=0

    Note that core PCEPI was significantly lower than core CPI until 2003. Year on year core PCEPI had been as low as 1.0% in June 1998. It averaged just under 1.9% in the decade through June 2008. It reached 2.3% in May through August 2008 and that was only a tenth of a percentage point below the highest level it had been in the previous 15 years.

    The reasons for the divergence of core PCEPI from core CPI relate to healthcare and housing but that’s not really important in my opinion. Nor am I trying to justify the inflation hawks’ behavior in 2008. But I do think it’s important that we look at the inflation measure that the Fed was actually paying attention to.

  4. Gravatar of ssumner ssumner
    6. March 2014 at 12:57

    SG, It make be a step backwards, but I think you missed the point. I agree that GDP forecasts are often inaccurate. But they do reveal the forecaster’s view of which factors affect GDP. So in that sense they are quite revealing, despite their inaccuracy.

    Ben, I presented a paper on NGDP targeting with futures markets at the Fed. I was told they don’t need your help, they know how to control AD.

    Mark, Very good point.

  5. Gravatar of Mark A. Sadowski Mark A. Sadowski
    6. March 2014 at 14:38

    Scott,
    Off Topic.

    More on JazzBumpa’s post.

    http://angrybearblog.com/2014/03/did-the-fed-cause-the-great-recession.html

    JazzBumpa on David Beckworth:
    “I have a hard time accepting this ignore what I do, pay attention to what I say [or don't say] argument.”

    In my opinion this mischaracterizes what David Beckworth is saying. He’s saying that the Fed needed to do more than mere actions. It needed to clearly communicate its intentions, and it needed to communicate the *right* intentions.

    JazzBumpa on David Beckworth:
    “It has to assume that people are deciding their actions by thinking months or years into the future based on what they think the Fed might do then, instead of reacting to what is happening today. Maybe I’m just disoriented by the time travel, but in a world where the major focus is on the current quarter’s returns, I don’t think very many actual people behave that way. Nor do I believe that the hoi polloi have even the vaguest awareness of Fed activities, let alone their words.”

    Private physical investment is sensitive to expectations of growth and is vulnerable to changes or even proposed changes in monetary policy. It *is* the volatile component of GDP whose decrease *is* the immediate cause of recessions:

    http://www.applet-magic.com/recessioncause2.htm

    Private physical investment decisions are largely made by corporations, not the hoi polloi.

    JazzBumpa on Marcus Nunes:
    “The Market Monetarist response, from Marcus is, “Interest rates are a terrible (even misleading) indicator of the stance of monetary policy.“ At his article linked in the first paragraph of this post, Marcus indicates that the true stance of monetary policy is the resulting growth in NGDP – which I believe, as post-hoc as it may be, is the axiom on which Market Monitarism rests.”

    This is precisely why we need market based measures of NGDP expectations, just as we already have for inflation expectations. Unfortunately the nearest substitute is the Survey of Professional Forecasters (SPF) which only comes out every three months, and probably is far less sensitive than a market base measure would be.

    The median forecast for one year NGDP growth by the SPF peaked at 5.8% in 2003Q4. It consistently fell below 5.5% by 2006Q1 and below 5.0% by 2007Q3. It fell from 4.50% in May to 4.08% in August 2008. This was the largest decline since the 0.43 point decline in 2004Q1 when the forecasted one year NGDP growth rate was much higher.

    By November 17 the one year NGDP forecast had fallen to 2.59%, a decline of 1.49 points. That is the largest decline ever in the one year NGDP forecast by the SPF on records going back to 1968. It was also a full 1.15 points below the previous record low in one year NGDP expectations of 3.74% in 1998Q4.

    How much of that decline occured between August 12 when the 2008Q3 forecast was made and the September 16 FOMC meeting is hard to say. But if inflation expectations as measured by TIPS spreads are any indication, the decline was evenly distributed throughout those three months. So NGDP expectations probably had been falling at the fastest rate on record for over a month from an already low level, but there was no direct way of knowing this at the time.

  6. Gravatar of Mike Sax Mike Sax
    6. March 2014 at 16:55

    “That’s far from the apocalyptic forecasts of the Keynesians.”

    Which Keynesians do you have in mind-a name or two? What was the forecast? I ask this because I don’t know which Keynesians you have in mind who allegedly said growth would fall off a cliff in 2013.

    If Congress had really failed to do a deal on the fiscal cliff it would have been plausible that GDP would have fallen off a lot. However, what most ‘Keynesians’ I’m aware of said was that that the austerity was needless and that it would lower growth to less than it would otherwise have been. Growth had been predicted to be more in 2013.

  7. Gravatar of Mike Sax Mike Sax
    6. March 2014 at 16:57

    ” there’s no doubt the Fed would prefer that Congress do more of the heavy lifting, so they could do less (and hence be less controversial.)”

    So when people like Krugman urge Congress to do more of the heavy lifting why do you object? Whenever there is criticism of fiscal austerity you criticize the piece because the Fed can allegedly fully offset it. If the Fed doesn’t want to do this-assuming they can-why are you insisting on it?

  8. Gravatar of lxdr1f7 lxdr1f7
    6. March 2014 at 17:46

    A bit off topic. If NGDP has been significantly subpar for 5 years now why is inflation still above 1%? Prices should be declining right? Sticky prices is only a short term phenomenon.

  9. Gravatar of flow5 flow5
    6. March 2014 at 17:56

    There she blows! Set the sails! va va voom! va va voom!

  10. Gravatar of Matt Waters Matt Waters
    6. March 2014 at 20:08

    “Which Keynesians do you have in mind-a name or two? What was the forecast? I ask this because I don’t know which Keynesians you have in mind who allegedly said growth would fall off a cliff in 2013.”

    Krugman, Delong among others would have predicted that the 1-2% of GDP austerity would have simply caused a 1-2% drop in RGDP. They support the idea of more QE, but believe monetary policy only has a small effect by reducing long-term rates and committing to keeping rates at zero.

    Austerity went up significantly in Q4-2012 while RGDP growth appears completely flat from 2012-2013. Ezra Klein tried to explain this with increased state/local expenditures, but state/local expenditures have to follow tax revenues due to balanced budgets. And tax revenues follow mostly from private economic activity.

    Therefore, the private sector would have had to go on to a 1-2% RGDP boom right when the federal government cut 1-2% of RGDP. In the past, Krugman has attributed private economic growth in liquidity traps only to the effect of long-term interest rate reduction or to the eventual failure of durable consumption and capital. With little movement in long-term interest rates, then suddenly a lot of failures happened in durable/capital stock must have coincided with austerity.

    …Or the multiplier is zero.

  11. Gravatar of Matt Waters Matt Waters
    6. March 2014 at 20:16

    “A bit off topic. If NGDP has been significantly subpar for 5 years now why is inflation still above 1%? Prices should be declining right? Sticky prices is only a short term phenomenon.”

    NGDP growth since 2009 is typical of NGDP growth we had 1991-2007. The issue is the level, for both NGDP and prices, is far below what their track would be without the deflation of 2008-09.

    As far as sticky prices, sticky price/wage theory holds that there will always be some of the economy that is not sticky. Oil had no issue dropping precipitously in 2008. These non-sticky markets will inflate and deflate along with NGDP, while most companies with declining revenues (their part of NGDP) will reduce headcount rather than wages. Even with reduced headcount, the company needs to make a profit on the marginal cost of the employees’ labor. Therefore, prices are sticky as well as wages.

    The more depressed industries need the most NGDP growth in order to “unsticky” their prices/wages. Each industry has a different point where their prices/wages become unsticky.

  12. Gravatar of Major_Freedom Major_Freedom
    6. March 2014 at 20:23

    Wages are made far more sticky because of inflation, as well as Marxist exploitation theory, minimum wage laws, and welfare.

    All of these problems are solvable without violence. Most of the inflationists on this blog are just intellectually lazy and refuse to think of better solutions that SWAT teams and legalized counterfeiters.

  13. Gravatar of Saturos Saturos
    7. March 2014 at 00:46

    Confessions: Sometimes when Scott says things like “I’m going to take a break from blogging for a while” I’m actually naive enough to believe him.

  14. Gravatar of Saturos Saturos
    7. March 2014 at 00:51

    :P

  15. Gravatar of Saturos Saturos
    7. March 2014 at 00:53

    In all seriousness though when even the openminded Adam Gurri is complaining (https://twitter.com/adamgurri/status/441215959747932160) it is probably a sign that saturation has been reached. The Guardian is spacing out the release of Snowden’s leaks for a reason, you know. And I say this as someone who rarely misses any of Scott’s posts and who thought that the recent Econlog post (http://econlog.econlib.org/archives/2014/03/ngdp_targeting.html) was one of Scott’s best ever in a catalogue of what, thousands now?

  16. Gravatar of Saturos Saturos
    7. March 2014 at 00:54

    Nick Rowe continues his streak of beautifully explaining things I thought only I believed (the nature of the demand for money): http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/03/coordination-and-the-demand-for-money.html

  17. Gravatar of Saturos Saturos
    7. March 2014 at 01:26

    Mario Draghi: “We have been everything but inactive.”

    http://www.nytimes.com/2014/03/07/business/international/european-central-bank-holds-rates-steady.html?smid=tw-share&_r=0

  18. Gravatar of Benjamin Cole Benjamin Cole
    7. March 2014 at 02:18

    Scott Sumner:

    I tried a Federal Reserve literature search through the St. Louis Fed website, and evidently the Fed or the Fed System has never published a paper on Market Monetarism.

    Now, Woodford did address a Fed conclave last year and more or less say NGDP targeting was best.

    And you gave your presentation.

    More than Fed 700 economists, and an unknown number of economists either on contract or retainer—but not one has ever written on Market Monetarism.

    It is like trying to find a monograph on surface ship vulnerability published by the US Navy.

  19. Gravatar of Benjamin Cole Benjamin Cole
    7. March 2014 at 02:32

    Mark Sadowski-

    Good point about the PCIPI—but!

    Okay, the 2 percent target is supposed to be an average target, not a ceiling. That means the Fed undershot the target all those years leading up to 2008. Where were the klaxons? The hysteria?

    And, that also means when the PCEPI reached the 2.2 percent or so, the Fed stomped on the brakes.

    This was about the time the FOMC used the word “inflation” more than 500 times in a single meeting.

    I still say the stats and transcripts (now that we citizens are “allowed” to look at the transcripts) reveal a Fed that is probably comfortable with inflation around one percent, and a ceiling of 1.5 percent. At two percent the FOMC loses its bowels (Richard Fisher attends the FOMC meetings in adult diapers).

    I don’t believe in inflation targeting, but if I did, I would day those targets are too low to allow robust real growth

  20. Gravatar of ssumner ssumner
    7. March 2014 at 03:18

    lxdr, A good reason to pay no attention to inflation. Sticky prices do not imply a sticky CPI.

    Saturos, Just for that I’ll write another post today.

  21. Gravatar of SG SG
    7. March 2014 at 05:25

    Scott,

    Fair enough, I guess my hang up is that Fed forecasts of steady growth are just as likely to reflect incompetence as they are to reflect the future path of monetary policy. You point to a forecast revealing that the fed believed that the impact of fiscal austerity would be limited, but the pre-crisis and early-crisis forecasts revealed that they believed the recession would be much shorter than it has been. Those forecasts were wildly, ludicrously optimistic, so it’s not as if they represented anything akin to useful forward guidance. Rather, the fed took other actions (letting Lehman fail, followed by failing to cut interest rates) that convinced the market that it was happy to let NGDP fall 9% below trend.

    If we’re talking about actions demonstrating the Fed believed it could offset fiscal austerity, exhibits A, B, and C are the postponement of the taper in the fall.

  22. Gravatar of TravisV TravisV
    7. March 2014 at 06:02

    Honest question:

    With stock futures up on this news, is the stock market no longer rooting for inflation?

    http://www.businessinsider.com/jobs-report-analysis-2014-3

    “there was a big gain in average hourly earnings (+0.4%), the strongest in a long time. This is a sign of a tightening labor force, which is something markets have been talking about lately, that the market is tighter than people realize.

    Bottom line: A solid, goldilocks report that the market will like. But the average hourly earnings is a big story.”

  23. Gravatar of TravisV TravisV
    7. March 2014 at 09:40

    Dear Commenters,

    Does anyone else find Greenspan’s rapid change in view on inflation in the 90′s as extraordinary? In 1996, he was interested in pursuing ZERO inflation. Then, suddenly, as unemployment approached 6%, he decided not to tighten and accepted higher inflation.

    How The Hell did Greenspan make such a rapid intellectual shift? Can anyone explain it?

    Below are some links with background:

    http://www.econjobrumors.com/topic/reminder-yellen-personally-responsible-for-2-inflation-target

    http://slate.me/1ea2tfG

  24. Gravatar of TravisV TravisV
    7. March 2014 at 09:51

    Major_Freedom,

    See this famous post by Prof. Sumner: “Long and Variable LEADS”

    http://www.themoneyillusion.com/?p=6693

    Is Prof. Sumner correct about “long and variable leads” or only partially correct? Where does his model go wrong?

    Whose views are closer to the truth: those who believe in “long and variable lags” or those who don’t believe in them?

    P.S.: Blast from the past: In the comments section of the “long and variable leads” post, notice Morgan Warstler’s praise of Lacy Hunt of Hoisington, who loves loves loves long-term U.S. treasuries. Hmmmmmmm……..

  25. Gravatar of TravisV TravisV
    7. March 2014 at 09:57

    Ha! Check out Prof. Sumner’s reply to Morgan Warstler in September 2010!

    http://www.themoneyillusion.com/?p=6693#comment-29472

    “You said;

    “Moreover, the demand problem is rapidly transforming into a structural problem as

    1. unemployed workers lose skills,”

    Which is why we need more demand.

    “2.bad debts accumulate,”

    which is why we need more demand

    “3. and the fiscal deficit explodes (70-80% due to NOMINAL tax revenue losses, stimulus, and automatic stabilizers).”

    which is why we need more demand

    Did I remember to tell you we need more demand?”

    Morgan deserves TONS of credit for being so open-minded about this subject since 2010…….

  26. Gravatar of Scott Sumner Scott Sumner
    7. March 2014 at 11:47

    SG, Good point about the taper.

    Travis, I think markets still want more NGDP, not sure about inflation.

    I think Mark Sadowski has a link showing that Yellen may have helped nudge him toward 2%.

  27. Gravatar of Major_Freedom Major_Freedom
    7. March 2014 at 11:55

    TravisV:

    I suspect the reason why Sumner adheres to the flawed approach of rejecting “long and variable lags” is due to a need to cover up the exploitative nature of inflation, for political strategy purposes. Inflation only “works” because it is exploitative. By that I mean inflation were instead a miraculous system that raised everyone’s incomes equally at the same exact time, then inflation would have little to none of the effect that you guys tend to call “stimulative.” It is precisely because inflation affects some incomes first, and then other incomes next, over time, which is what economists call “long and variable lags”, that we might see a correlation between higher inflation and higher employment or output. In short, inflation “works” only because not everyone knows, understands, or experiences it the same.

    Couple that with the vulgar version of EMH that purports all prices rapidly adjust to changes in the money relation, and it is not surprising that he would find himself knee jerking against what is so obviously true it should not even be debatable.

    The model goes wrong because it is a brainchild, or should I say stepchild, of general equilibrium theory. If you notice, there is a conflation between the events leading to the idea of a general equilibrium, with the equilibrium itself. This eay of thinking is encouraged because the general equilibrium framework cannot accommodate the market process. It deals only with final states of rest, and the corollaries of final states of constant change.

    If you instead view the market as an ongoing process, then it is easier to understand long and variable lags.

    An example: Did the Fed’s OMOs yesterday result in my company’s revenues instantly increasing by an equivalent percentage? No, of course not. It takes time for that new money to leave the banking system to a single borrower, who then takes time to exchange it with someone else, who then takes time to exchange it with someone else, and so on, before it reaches the last person. This is precisely why even the Fed acknowledges that it generally takes about 12 months or so after loosening or tightening before a change in “the economy” becomes noticeable and drowns out the other factors to a degree of confidence.

    Inflation is always and everywhere a micro phenomenon. Yes, it is true that if the income of group A goes up, then ceteris paribus so will the total of all incomes go up. But it is not true that if total incomes have gone up, that everyone’s incomes have gone up equally, or at all. The totality of incomes does not, cannot, describe relative or individual incomes.

    To answer your question of whose views are closer to the truth, those who accept or those who reject long and variable lags, the answer is trivial: Those who accept it.

  28. Gravatar of TravisV TravisV
    7. March 2014 at 12:42

    Major_Freedom,

    What do you think is the probability that the U.S. experiences 20%+ inflation within the next ten years?

  29. Gravatar of Tom Brown Tom Brown
    7. March 2014 at 12:49

    TravisV,
    One Austrian willing to make such a prediction is Vincent Cate: he says Japan will have > 2% inflation per month (> 26% a year) within 2 years from now.

    The only other predictions I’ve seen like that are from Peter Schiff, who when confronted about his predictions being wrong, simply said HIS definition of inflation is expansion of the base, and the base expanded, just like he warned would happen if the base expanded, and thus he was right all along. Lol.

  30. Gravatar of TravisV TravisV
    7. March 2014 at 13:56

    Re: Greenspan’s change of heart, here’s another great blog post illustrating how extraordinary it seems:

    http://www.cepr.net/index.php/blogs/beat-the-press/did-janet-yellen-argue-with-greenspan-for-higher-or-lower-interest-rates

    “‘Janet and I were both worried about inflation, even though it was very well contained at the time,’ Mr. Meyer wrote in a blog post last month. ‘We told the chairman that we loved him but could not remain at his side much longer if he continued, as he had been doing for some time, to push the next tightening action into the next meeting, and then not follow through.’

    “Mr. Meyer and Ms. Yellen ultimately stood by Mr. Greenspan, who had correctly predicted that technological change was fueling a boom in productivity and alleviating inflationary pressures. The Fed did not raise its benchmark interest rate until the following March.”

  31. Gravatar of Tom Brown Tom Brown
    7. March 2014 at 16:01

    Mark A. Sadowski, O/T: one remaining question I had regarding our previous discussion of the CB taking over banking in a cashless society: you drew a sharp distinction between nationalizing the banks under a single national bank run by the gov (but still there’s a separate CB). And the CB directly taking over. You cited some evidence from France regarding how nationalization itself makes very little difference. My question to you though is from a “black box” perspective (i.e. everything inside gov is in the black box), it doesn’t seem very different to me. Post nationalization, if the CB were to slowly start to take over the nationalized bank, one tiny step at a time: move the bank’s HQ to the CB’s HQ. Replace bank staff with CB staff. etc. So that at the end of this process, the national bank is fully incorporated into the CB w/o a trace of independence left. At what point do bank liabilities become “money?” Is it a gradual process, or does it happen all at once in one critical step? If one step, what would be that critical step or steps? Thanks.

  32. Gravatar of dannyb2b dannyb2b
    7. March 2014 at 18:48

    Tom Brown

    “At what point do bank liabilities become “money?””

    The bank liabilities where always money. Money isn’t considered money just because it is state issued. It is considered so because it is a medium of exchange, store of value and unit of account.

  33. Gravatar of Tom Brown Tom Brown
    7. March 2014 at 19:41

    dannyb2b, thanks. I’m looking for the MM answer though. I know Scott only considers MOA to be money. Normally MOA in the US is currency and reserves: both liabilities of the Fed. Currency, reserves, and bank deposits are all MOE, but only the first two are MOA.

    I presented the above hypothetical to Mark & Scott a week or so ago: i.e. starting from a cashless society, then the CB takes over the banking sector. So before the CB takes over, only reserves are money because that’s the only MOA. But after the CB takeover reserves are meaningless. This makes sense: imagine merging the CB’s balance sheet with that of the commercial banks’ balance sheets: reserves would go away. But now the bank deposits become direct CB-deposit liabilities. Mark and Scott agreed that these CB-deposits are the closest thing to money left, so they take on that role. I think that means we could call them the MOA at that point (of course they are still MOE).

    Nick Rowe calls MOE “money” so I guess I’m really after the Sumner/Sadowski view here. But I think Nick would agree about what we can call MOA in this hypothetical, both before and after the CB takes over.

    Mark was very clear, however, that if instead of the CB taking over the banks, the banks had been merely nationalized, then reserves would have continued to have their original role and that I couldn’t claim that the quantity of “money” had changed. I think this means that nationalized bank deposits would continue to be only MOE and not MOA and that reserves would continue to be both MOA and MOE. The MOE part is not really important: We only need concern ourselves with what constitutes MOA at any one point in time.

    Now I want to know exactly where the magic happens… exactly when we can call those bank deposits “money” (i.e. MOA) as we gradually CB-itize the nationalized bank.

  34. Gravatar of dannyb2b dannyb2b
    7. March 2014 at 20:07

    I see banks deposits, reserves and currency as money. They are all components of the USD with different limitations, features and purposes. They have different issuers so IMO you could say broader and narrow money monetary policy is controlled by commercial banks and the CB.

    Reserves are limited in that only banks with fed accounts can hold them. They are used to transact amongst depository institutions.

    Currency is limited in that it can only be physically transacted. It can only come into circulation as far as I know into the broader non banking system by means of banking intermediaries.

    Deposits are limited in that issuers require to hold a proportion of reserves in order to issue in countries like US (Australia doesn’t impose RR). Deposits are a more efficient means of transacting when compared to currency and more widely held than reserves.

  35. Gravatar of Tom Brown Tom Brown
    7. March 2014 at 20:54

    dannyb2b, … in case you’re interested in all that, here’s what else I learned, although I haven’t gotten buy-in on the language I use here, but I have some evidence that all three: Rowe, Sadowski and Sumner (and even David Glasner), might bless this basic story:

    Cashless society:
    time=t0, reserves=R, bank deposits=D, CB-deposits=0.

    I think we can claim that M(t0)=M0=R here. “CB-deposits” don’t really exist yet prior to the CB takeover, thus they’re 0. If P at time=t0 is P0, then should M change to M1 at time t1, then eventually P1 = P0*M1/M0 (the long term neutrality of money), all else being equal. So, for example, if the CB were to buy some bonds and increase R to R1, then P1 would eventually go to P1=P0*R1/R.

    However, if the CB now takes over the banks we get this:

    time=t1, reserves=0, bank deposits=0, CB-deposits=D

    Assume that R is not equal to D, and that R > 0 and D > 0.

    As Mark argued, the reserves go away. So do bank deposits because the banks are gone, and they are replaced with CB deposits. Thus M1=D.

    Here’s the rub though: P1 does NOT eventually go to P0*D/R. Why not? Nick Rowe explained: demand is transferred between bank deposits and CB deposits (i.e. between non-MOA and MOA) in this case thus invalidating the simple QTM formula. I *think* another way to say that is that velocity at time t1 has also changed due to the way in which M was changed. In fact V1=V0*R/D. QTM is only true if V1=V0 and Y1=Y0. Thus M1*V1 = M0*V0, and thus the price level doesn’t change, i.e. P1=P0 (assuming all else equal, or in this case that Y0=Y1). So the QTM formula fails in this case but of course the exchange equation: M*V=P*Y is still true, as it must always be since it’s a tautology. Another way to say that is that QTM is true when all else is equal, but in this case all else wasn’t equal. The way in which M was changed also changed V such that the change in M was perfectly offset.

    Again I’m trying to understand the MM view here, but in terms of these simple formulas and concepts, and that’s what I have so far. Of course it’s intuitive that P1=P0. Why would P change? I just wanted to work out the reason why it stays the same here even though M changed.

    Another thing I’d like to know is if there are other cases in which demand is transferred between MOA and non-MOA as a result of the method used to change the quantity of MOA (i.e. the method used to change M). For example, what if the CB were to take over something else and replace it with CB deposits (something other than bank deposits)? Are bank deposits unique here in the non-MOA world of goods?

    My previous thread with Mark, Scott, and Nick is here:
    http://www.themoneyillusion.com/?p=26213

  36. Gravatar of Tom Brown Tom Brown
    7. March 2014 at 21:01

    dannyb2b @ 7. March 2014 at 20:07

    That sounds like a fairly common set of ideas that you have there, but again, I don’t think it comports with the Sumner version of MM. To Sumner, bank deposits are credit and definitely NOT money! I’m not saying your ideas are incorrect (I’m in no position to judge!), but I’m interested in learning Sumner MM orthodoxy. :D

  37. Gravatar of dannyb2b dannyb2b
    7. March 2014 at 22:45

    Im pretty sure MM orthodoxy gets thrown off by a country like Australia that has no RR. For example since 1990 MB is up about 5-fold while CPI has less than doubled. P1 = P0*M1/M0 isn’t showing up in the empirical data. If V is stable in long run as I understand then I dont know how MM explains this. I could be missing something not sure where though.

    “I just wanted to work out the reason why it stays the same here even though M changed.”

    Using my reasoning, not MM reasoning I would say that’s because the money supply hasn’t actually changed. Credit (deposits) is money. Just becuase the deposits are held at a commercial bank or central bank doesnt change the fact they are money if they circulate through the economy in an identical manner. Why would the commercial bank deposits (credit according to MM) affect prices differently than physical money (currency) circulating through the system?

    How inconsistent is MM terminology with most people’s understanding of money? The deposits in you bank aren’t money its just credit and currency is only physical not what is in your deposit account. I would say currency is deposits at commercial banks and physical money and all dollars are money.

  38. Gravatar of Tom Brown Tom Brown
    8. March 2014 at 01:35

    dannyb2b, MM works fine with RR=0% and no cash. In theory anyway. MM isn’t about lending or “channels” or broad money or any kind of “money multiplier.” Read that link I provided… not for the comments, but for Sumner’s article. The “Channels to nowhere” post.

    Actually, this one on the HPE is even better:

    http://www.themoneyillusion.com/?p=23314

    “Channels to nowhere” makes a LOT more sense once you read the HPE one.

    Especially see case 7, the cashless society case. That’s ALWAYS my baseline case when thinking about MM, because I personally don’t like thinking about cash: it just makes the story messier IMO. I like to think about a cashless society with just a single commercial bank and where RR=0%: where MOA never moves anywhere in the private sector (other than the one bank) and never gets in the public’s hands. In fact now that Sadowski says it doesn’t make any difference if the commercial banks are nationalized, my new baseline case will be Case 7 with a CB and a single separate nationalized bank. Then I can truly say that MOA will NEVER touch the private sector’s hands, and yet according to theory MM still works. It brings the important aspects of the HPE to the fore w/o all the messiness of cash and banks and channels to worry about.

    To be sure, Sumner and Sadowski in no way think that currency (by which I mean physical cash: paper notes and coins) is unimportant. They think it’s very important, and frequently point out that prior to 2008 it comprised the bulk of the MOA in the US. And yet, when it comes right down to it, the theory works fine w/o it.

    I think Sumner just threw in case 7 to humor people like me who find it hard to believe that currency actually is important and who thus always bring up the “cashless case.” Well he’s very explicit there: cash is definitely NOT required for HPE or MM to work.

    So again, I understand there’s different ways to interpret what happens, but if you really want to digest the Sumner MM way, that HPE article above is a great place to start. Read that, and everything else here will make a lot more sense. :D

  39. Gravatar of dannyb2b dannyb2b
    8. March 2014 at 02:12

    It seems impossible to avoid transmission mechanisms. For example S doesn’t change if the new gold discovery cant enter the economy. Expectations only adjust if it is expected that the gold will enter the system or transmit into the system. Imagine the gold discovery is simply inaccessible then expectations wont budge because the gold supply cant be transmitted from underneath the earth to the economy.

    Supply can only move once gold or money is transmited into the system otherwise its the same as not having discovered any gold. Expectations are based on something actually happening in the economy in terms of S and D in the future.

    “my new baseline case will be Case 7 with a CB and a single separate nationalized bank. Then I can truly say that MOA will NEVER touch the private sector’s hands, and yet according to theory MM still works. It brings the important aspects of the HPE to the fore w/o all the messiness of cash and banks and channels to worry about.”

    Yes I agree. But There is a transmision mechanism. For example if the CB increases reserves it will affect rates of return on holding these and induce portfolio rebalancing into other assets. I’m not sure what I’m missing. Maybe Im wrong or maybe we have different ideas of what the transmision mechanism is. Expectations will move economy wide based on how people expect banks will react to changes in MB. Bank reactions are expected to transmit into the economy by affecting prices of assets and hence spending.

  40. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. March 2014 at 07:52

    Tom Brown,
    “My question to you though is from a “black box” perspective (i.e. everything inside gov is in the black box), it doesn’t seem very different to me. Post nationalization, if the CB were to slowly start to take over the nationalized bank, one tiny step at a time: move the bank’s HQ to the CB’s HQ. Replace bank staff with CB staff. etc. So that at the end of this process, the national bank is fully incorporated into the CB w/o a trace of independence left. At what point do bank liabilities become “money?” Is it a gradual process, or does it happen all at once in one critical step? If one step, what would be that critical step or steps? Thanks.”

    First of all, what do you mean by “money”? There are different ways of defining money and in the original hypothetical problem you posed, we were talking specifically about the monetary base. by definition he monetary base consists of currency and reserve balances. None of the physical steps you explicitly describe here affect either the amount of currency or the amount of reserve balances. Thus they have no effect at all on the monetary base.

    Secondly, whether or not something is a liability of the government is simply not a useful criteria when talking about the monetary base. There are many examples both historical and current of commercial banks that are state owned. By definition the deposits of these banks are a liability of the government. However, the deposits of these banks are not reserve balances with the central bank and hence are not part of the monetary base. There are also historical examples of central banks which were privately owned. In those examples the reserve balances were not a liability of the government.

    In short, this fixation on whether something is a liability of the government or not (inside the “black box”) seems to me to be an artifact of the MMT predilection for consolidating the treasury and central bank balance sheets, which MR, by essentially being a spinoff of MMT, has preserved for whatever reason. But it is not at all a useful distinction when thinking about monetary aggregates.

  41. Gravatar of Tom Brown Tom Brown
    8. March 2014 at 08:06

    dannyb2b, You write:

    “Imagine the gold discovery is simply inaccessible then expectations wont budge because the gold supply cant be transmitted from underneath the earth to the economy.”

    I don’t think Sumner would disagree. It’s only if it’s *expected* to increase supply at some point that it has an effect. That’s one of the only “channels” Sumner acknowledges. Here’s Scott in the “Channels to nowhere” post:

    “Because money is a durable asset, expectations of the future value of money play an important role in its current value. I suppose that is a channel of sorts, but it’s merely a channel connecting future expected NGDP to current NGDP.”

    So if one day the existence of the gold is announced, expectations rise perhaps, but if the next day it’s determined to NEVER be accessible, then they fall again.

    “For example if the CB increases reserves it will affect rates of return on holding these and induce portfolio rebalancing into other assets.”

    I *think* that’s the kind of explanation commentator “dtoh” might have made. dtoh spent a lot of time explaining things to me when I first started learning MM and he does not agree with Scott’s explanation. In particular he does not like the HPE. I thought I’d saved a link to my long thread with him, but I can’t find it. However, I did a site search on “dtoh” here:

    http://tinyurl.com/nxvnby3

    Maybe some of that is useful for you. I used to base my understanding off of dtoh’s ideas, but ever since Scott’s HPE article I’m OK thinking in terms of the HPE.

    Also, you’re “rates of return” argument is similar to JP Koning’s concepts of “convenience yield.” You might check him out too (the following is the result of clicking on the “convenience yield” tag in Koning’s right hand column):

    http://jpkoning.blogspot.com/search/label/convenience%20yield

    A lot of good articles in there. In fact just yesterday I asked JP his opinion of my hypothetical above and how I should count M. Here’s his response (it involves the return on gold… and he brings up the idea of another competing jewel being introduced, thus lowering the return):

    http://tinyurl.com/kycxa2f

    So you may not be missing anything! But Sumner has a particularly simple way of explaining it which is attractive. Well, let’s finish the quote above from Sumner:

    “To go from there to real variables such as output and employment, you simply need sticky wages and prices; channels like lending and interest rates add no explanatory power.”

    So that’s the easy part! If wages & prices weren’t sticky then changes in M or expectations of changes in M would have no real effects! P would move, but so what? It’s the stickiness that causes (usually) damaging transients to be set up. Eventually steady state will be reached again, but why let the intervening damage happen? If various shocks are creating the long term pressures on P, and the fact that P doesn’t move instantaneously is a problem, then adjusting M can undo those pressures now before the transients get going. It won’t cure the economy from booms and busts, just the unnecessary real effects caused by nominal shocks and stickiness combined. That’s the idea. Remember to MMs the reason for unnecessary recessions is that there’s an excess demand for money. Sumner, Rowe, and even DeLong, and even Keynes (according to Sadowski) have said that the goal of good monetary policy is to make it appear as if Say’s Law is true (even though we all know that stickiness means it’s not actually true). Lars Christensen has put it slightly differently, saying good monetary policy should make it seem like real business cycle (RBC) theory is true. David Glasner won’t get on board those trains… he has a more nuanced view, which I don’t fully understand yet:

    http://uneasymoney.com/2014/02/20/whos-afraid-of-says-law/

    I hope some of that helps. My goal here is to fully understand the internal MM logic. I think Sumner and Rowe give particularly simple explanations for that logic, so why fight it? Put your purple robe on and grab yourself a cup of Cool-Aide. Lol. If you need empirical support, just ask Sadowski: he’s a fountain of empirical support.

    Sometimes I do have trouble even with the internal logic, which is why I like my weird hypotheticals… to see if it all continues to stand up, at least internally. My goal is not necessary to believe it all when I’m done! :D

  42. Gravatar of Tom Brown Tom Brown
    8. March 2014 at 08:38

    Mark, in my original hypothetical I had the banks nationalized, which was a problem as you pointed out. When I changed it to the CB taking over, we did have a long side discussion about the monetary base, but in the end it seemed to me that regardless of the label “monetary base” that direct CB deposits liabilities (replacing commercial or nationalized bank deposit liabilities) for private sector entities would qualify as “money” if not monetary base. Actually, in a follow up comment, Sumner seemed to be OK calling these CB deposits “monetary base” … but no matter. Your objections are why I dropped the term “monetary base” in favor of the more general concept of MOA. I *think* direct CB deposits qualify as MOA here (especially given that there’s no cash and no reserves), and MOA is money according to Sumner. ONLY MOA is money according to Sumner. It makes sense to me because these deposits are under the direct control of the CB. They now essentially define what a $ is. Also, they’ve never stopped being an MOE. So you’re right: being a liability is not important, but being the most liquid $ denominated goods in this hypothetical, whose quantity is under the direct control of the CB I think does make them a good candidate for MOA here. What do you think? Saying they’re a liability of the CB is only important in that it implies the CB has complete control over them.

    So my though experiment is when does the MOA magic start for them? Is it when the balance sheet of the nationalized bank is formerly merged with the CB balance sheet for example? What is the essential quality here that defines MOA when the CB runs the banking system? And why doesn’t a nationalized bank have it? What is the crucial step in CB-itization of a nationalized bank at which the deposits flip to being MOA? Forget about “base money”… that proved to be a problematic term for this particular hypothetical. MOA is what’s important, and that’s what I want to focus on.

  43. Gravatar of Tom Brown Tom Brown
    8. March 2014 at 08:47

    dannyb2b, one last thing about weird hypotheticals: I don’t feel the least bit bad about introducing them into the discussion: Read any Nick Rowe post to see why! :D

  44. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. March 2014 at 08:48

    Tom Brown,
    “I’m looking for the MM answer though. I know Scott only considers MOA to be money. Normally MOA in the US is currency and reserves: both liabilities of the Fed. Currency, reserves, and bank deposits are all MOE, but only the first two are MOA.”

    You are of course referring back to the seemingless endless MOA/MOE debates which are usefully summarized by David Glasner here:

    http://uneasymoney.com/2012/11/25/its-the-endogeneity-redacted/

    The debate was not over what *is* money but “about whether the medium of account or the medium of exchange is the essential characteristic of money, and whether monetary disequilibrium is the result of a shock to the medium of account or to the medium exchange”.

    Incidentally, it might be useful to say something about the MOA.

    Open any elementary textbook discussing monetary economics and it will tell you that the three functions of money are 1) as a unit of account, 2) the MOE and 3) a store of value. The term “medium of account” however, is rarely used in textbooks.

    Where does it come from?

    “Medium of account” appears to have been coined by Jürg Niehans in “The Theory of Money” in 1978 (although, as Niehans notes, Wicksell seems to have inferred the concept as early as 1906):

    http://www.amazon.com/The-Theory-Money-J%C3%BCrg-Niehans/dp/0801823722

    Whereas unit of account refers to the word used to quote prices, make contracts, and keep accounts (e.g. dollar, euro, yen, pound etc.), Jurg Niehans defined “medium of account” as the good that defines the unit of account. For example, going from a silver to a gold standard changes the medium of account, with the unit of account remaining the same.

    In a purely fiat system, as the US has had since 1971, currency is the medium of account. Moreover, since the central bank can issue currency at will, there is no constraint on the creation of reserve balances. That is why monetary economists typically consider both currency and reserve balances to be the medium of account.

    Commercial bank deposits however, are not the medium of account. Banks are contractually required to redeem their deposits at par value, but deposits in insolvent or illiquid banks have been known to trade at a discount (e.g. Cyprus). This cannot happen to the medium of account, as its price is fixed, and the central bank is the lender of last resort, by definition.

  45. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. March 2014 at 09:50

    Tom Brown,
    “I’m looking for the MM answer though…I’m looking for the MM answer though.”

    I think it might also be useful to say a word or two about what it is exactly that characterizes the beliefs of Market Monetarism.

    Wikipedia is not the best authority, as it is subject to the whims of Wikipedia editors (I know firsthand, as I am the Wikipedia editor known as “Sadowski”). But it is reasonably up to date, and Market Monetarism is a rather new term. Here’s how MM is defined by Wikipedia:

    “Market monetarism is a school of macroeconomic thought that advocates that central banks target the level of nominal income instead of inflation, unemployment, or other measures of economic activity, including in times of shocks such as the bursting of the real estate bubble in 2006.[1] In contrast to traditional monetarists, market monetarists do not believe monetary aggregates or commodity prices such as gold are the optimal guide to intervention. Market monetarists also reject the New Keynesian focus on interest rates as the primary instrument of monetary policy.[1] Market monetarists prefer a nominal income target due to their twin beliefs that rational expectations are crucial to policy, and that markets react instantly to changes in their expectations about future policy, without the “long and variable lags” highlighted by Milton Friedman.[2][3]”

    So, the first sentence tells you that MM believes in NGDPLT. The second sentence seems primarily designed to point out that MM is not your grandfather’s monetarism. The third sentence tells you that MM rejects the focus on interest rates as the primary instrument of monetary policy. The fourth tells you that MM prefers NGDPLT because of rational expectations, and what I like to call (thanks to Noah Smith) the “random markets idea” (i.e. EMH).

    With the sole exception of NGDPLT all of these beliefs are standard textbook monetary economics of the type that you will find in Mishkin’s “The Economics of Money, Banking and Financial Markets”.

    For example, Mishkin says the following about the traditional real interest rate channel of the monetary transmission mechanism:

    “…many researchers, including Ben Bernanke of Princeton University and Mark Gertler of new York University, believe that the empirical evidence does not support strong interest rate effects operating through the use of capital.[1] Indeed these researchers see the empirical failure of traditional interest-rate monetary transmission mechanism as having provided the stimulus for search for other transmission mechanism of monetary policy…” (p. 618 of the 7th edition)

    And an entire chapter (28) of Mishkin is devoted to rational expectations and their implications for monetary policy.

    NGDP as an *intermediate target* of monetary policy is discussed with some skepticism on page 418, due to the fact that “the central bank has little direct control over nominal GDP”. But there is no discussion of NGDP as the *final target* of monetary policy, at least in the 7th edition (2004).

    In other words, when you get right down to it, Market Monetarism is simply standard textbook monetary economics with the addition of NGDPLT.

    This is in fact how I view what Scott Sumner has been trying to do the last few years. He is trying to get the (monetary) economics profession to climb out of the collective amnesia it seemed to fall into with the start of the Great Recession. Up until 2008, apart from NGDPLT, none of these ideas were considered strange or new.

    In many ways this is deja vu all over again, as in the Great Depression most economists forgot all that they seemed to know, as exemplified by the ideas of Hawtrey and Cassel, only a few years previously.

  46. Gravatar of Tom Brown Tom Brown
    8. March 2014 at 09:52

    Mark, yes, that’s a very good summary. I don’t think I disagree with any of that, having read it once through. I prefer JP Koning’s summaries to Glasners though, only because they are slightly more complete: he folds in Rowe, Sumner, Glasner, and Woolsey, and his own thoughts, which are evolving by the way.

    But here’s the reference to Scott’s article that you gave me a few days ago in the “Channels to nowhere” thread:

    http://www.themoneyillusion.com/?p=17357

    “I most certainly do think the medium of account is money, and I do think the equation of exchange applies to the medium of account–indeed it’s a tautology.” -Scott Sumner

    “Nick, Yes, I agree with your second comment. Although I’d prefer you call the base the “medium of account” not the “unit of account.”” -Scott Sumner

    So I think it’s very clear where Scott stands here and what language he likes to use. Since I’m in the house of Sumner, I’ll try to use Sumner’s language. And why not? It’s clear and easy to understand. :D

    Also, although Nick Rowe disagrees with Scott about what to call “money” (Nick includes goods which are MOE but not MOA, like bank deposits), it’s also pretty clear that Nick agrees with Scott in the “long term” … meaning to me that for long term effects, just look at the unit of acc…. er, sorry, the medium of account. :D

  47. Gravatar of Tom Brown Tom Brown
    8. March 2014 at 10:01

    … BTW, JP Koning *I believe* has gradually moved closer and closer to adopting Scott’s language here, although he used to be quite critical of it. That’s interesting to me because he seemed to be the one paying the most attention to the endless MOE vs MOA debates and, like I say, drawing up the most succinct, comprehensive and to the point summaries of the various party’s positions and how they related as the debates drug on.

  48. Gravatar of Tom Brown Tom Brown
    8. March 2014 at 10:13

    Mark, thanks for the review of what MM is. I certainly did not know all of that, but I am not surprised by any of it. I always considered MM to be mainstream in many respects, with the addition of NGDPLT, pretty much just like you say. When I write that I’m “looking for the MM answer” that in no way contradicts that… I realize there’s a huge overlap between the MM view and other views on much of this stuff, but that’s my shorthand way of writing all that: especially when addressing someone like dannyb2b, whose views *may* not overlap with MM much at all.

  49. Gravatar of Tom Brown Tom Brown
    8. March 2014 at 10:42

    Mark, so I almost forgot to thank you for answering my question, which I think you did: the important quality I was looking for:

    “Banks are contractually required to redeem their deposits at par value, but deposits in insolvent or illiquid banks have been known to trade at a discount (e.g. Cyprus)”

    So what if the deposits of a nationalized bank were 100% guaranteed to always trade at par by the CB itself. Would that one step essentially CB-itize the national bank?

    Rowe likes to talk about an asymmetry of redeemability between a CB and a commercial bank. So what if for a nationalized bank, this asymmetry were formerly abandoned and replaced, by law, with full symmetry? Maybe that’s what I was looking for.

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/10/what-makes-a-bank-a-central-bank/comments/page/2/

  50. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. March 2014 at 11:11

    Tom Brown,
    “Mark, so I almost forgot to thank you for answering my question, which I think you did: the important quality I was looking for:…”

    That’s good. I wasn’t sure because I wrote my comment on where the term “medium of account” comes from before I read your comment at “8. March 2014 at 08:38″, which is extraordinarily weird because I essentially answered the question before it was posed. (I guess I anticipated what was the core issue.)

    “So what if the deposits of a nationalized bank were 100% guaranteed to always trade at par by the CB itself. Would that one step essentially CB-itize the national bank?

    Rowe likes to talk about an asymmetry of redeemability between a CB and a commercial bank. So what if for a nationalized bank, this asymmetry were formerly abandoned and replaced, by law, with full symmetry?”

    I think this would be sufficient to convert the deposits of the commercial bank to MOA, although technically they still would not be part of the monetary base. But keep in mind you’re asking about some very strange hypotheticals here, although I agree such questions are often highly useful when thinking about the nature of money.

  51. Gravatar of ssumner ssumner
    8. March 2014 at 11:16

    Danny, You said:

    “Im pretty sure MM orthodoxy gets thrown off by a country like Australia that has no RR. For example since 1990 MB is up about 5-fold while CPI has less than doubled. P1 = P0*M1/M0 isn’t showing up in the empirical data. If V is stable in long run as I understand then I dont know how MM explains this. I could be missing something not sure where though.”

    Given the equation of exchange is a tautology, isn’t the residual real GDP growth in Australia?

  52. Gravatar of Brian Donohue Brian Donohue
    8. March 2014 at 11:17

    Mark Sadowski,

    Hat tip. Well put.

  53. Gravatar of dannyb2b dannyb2b
    8. March 2014 at 16:30

    Mark and Tom

    “In a purely fiat system, as the US has had since 1971, currency is the medium of account. Moreover, since the central bank can issue currency at will, there is no constraint on the creation of reserve balances. That is why monetary economists typically consider both currency and reserve balances to be the medium of account. ”

    Dollars are the medium of account right? If the commercial bank deposits and the MB have the same name “dollars” are they not both MOA? Both the fed and commercial banks have balance sheet restraints on issuance of their liabilities Im quite sure(respectively currency and deposits).

    ” Banks are contractually required to redeem their deposits at par value, but deposits in insolvent or illiquid banks have been known to trade at a discount (e.g. Cyprus). This cannot happen to the medium of account, as its price is fixed, and the central bank is the lender of last resort, by definition.

    If Fed liabilities exceed assets or it goes bankrupt then I think it may not be able to redeem all its reserves at par either.

  54. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. March 2014 at 17:25

    Scott,
    Off Topic.

    JazzBumpa responded to my many responses. Here is my reply.

    http://angrybearblog.com/2014/03/did-the-fed-cause-the-great-recession.html

    JazzBumpa,
    “This Atlantic article is relentlessly harsh in criticizing the Fed.”

    Just to be clear, I would say that Matt O’Brien was very critical of many members of the 2008 FOMC, and in my opinion those members deserved such criticism. We often say “the Fed” did this or that but tend to forget the Fed is run by people. Monetary policy is in the power of the 7 Board of Governors plus 5 Fed Bank Presidents in rotation, and can only be as good as the people in those positions.

    JazzBumpa,
    “It points out in the graph under numbered item 1, that in July, ’08, 6 month forward expectations were for the FF rate to be higher by about 32 basis points. Directionally incorrect, sure, but can 32 basis points that have yet to materialize 5 years later bring down the entire economy? And this hard on the heels of a rate cut an order of magnitude larger? If David’s response to my comment had addressed my questions about Fed actions in 2007-8, I would have written a substantially different post, or, quite possibly, none at all. As far as I can tell, nobody else who is considering this issue has paid any attention – other than waving it away – to the fact that the FF rate was cut from over 5% to 2% in less than a year. Why do the non-actions of August and September render this irrelevant?”

    As Marcus Nunes pointed out, by themselves nominal interest rates are an absolutely terrible indicator of monetary policy stance. The fact that the fed funds rate was reduced does not in and of itself make monetary policy expansionary. It needs to be compared to the neutral rate which unfortunately is not directly observable. Based on the fact that both NGDP growth and NGDP growth expectations were falling from early 2006 on through late 2008, it’s a safe bet that the neutral rate was below the fed funds rate throughout that entire time period and was itself falling.

    If for example the neutral rate was 3%, dropping the fed funds rate from 5% to 4% no more made monetary policy expansionary than if it had been dropped from 50% to 40%. It was still too high causing the rate of nominal income growth to slow and bring down the neutral rate still further.

    JazzBumpa,
    “All your comments are very meaty, and it’s going to take some time to digest them. But I want to respond to your graph adding context to the one I borrowed from Williamson. Except for the spikes, which are brief to the point of being ephemeral, the effective FF rate was running 50 or more basis points BELOW the Fed target. As I said in the post, the Fed had lost control of the rate. And the fact that it was running low reinforces the notion that the Fed’s stance and actions were ineffective.”

    The point of my version of that graph was to show that the Fed lost the ability to keep the fed funds rate at target after Lehman Brothers filed for bankruptcy precisely because the target was far too high, and after losing the ability to keep the fed funds rate at that too high target level it compounded matters by instituting interest on reserves in a bizarre counterproductive effort to hold short term interest rates up no matter what the consequences. We can be reasonably sure that these efforts were contractionary in part because every time the Fed took action to do so the stock market took another dive.

    JazzBumpa,
    “I don’y think aggregate demand can recover in a big way unless and until the middle and lower classes have money to spend. Fiscal policy can help, but it’s not at all forthcoming. Folks were living on borrowings for at least a decade, and that well is dry. The need for this resulted from incomes stagnating over 4 decades, while every increment of GDP growth and productivity gains went to the top. This is the sort of structural imbalance that is totally outside of the Fed’s sphere of influence.”

    This sounds like you subscribe to some version of the underconsumption hypothesis, which I would suggest is a highly implausible theory. First, there’s no evidence that those with wealth or high incomes save any more out of the income that they derive from the production of new goods and services than anybody else. Second, there’s no significant correlation between national savings rates and the rate of growth of nominal incomes.

    Wealth and income inequality, as undesirable as it may be for other reasons, is not an impediment to the ability of monetary policy to generate high levels of nominal income growth.In particular there are many examples of countries in the developing world where there is extraordinary wealth and income inequality and yet the growth rates of nominal income are sufficiently high to generate unhealthy levels of inflation.

  55. Gravatar of dannyb2b dannyb2b
    8. March 2014 at 17:38

    So even though deposits have the same name as currency (dollars), are used interchangeably in the economy with currency and more frequently than currency an assymetry of redeemability is what disqualifies them as MOA. Seems a bit off to me.

  56. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. March 2014 at 18:28

    dannyb2b,
    “Dollars are the medium of account right? If the commercial bank deposits and the MB have the same name “dollars” are they not both MOA?”

    “Dollars” are not the *medium* of account. “Dollars” are the *unit* of account. “Currency” and “reserve balances” are the *medium* of account.

    dannyb2b,
    “Both the fed and commercial banks have balance sheet restraints on issuance of their liabilities Im quite sure(respectively currency and deposits).”

    By definition the central bank is the *lender of last resort*. The only limit on a central bank’s ability to issue liabilities are its institutional limits on which assets it may purchase.

    In the case of the Federal reserve Section 14 of the Federal Reserve Act (FRA) sets out the rules governing Fed asset purchases.

    According to Section 14.1 the Fed may purchase gold, Treasury debt, Agency debt and Agency guaranteed debt. The open market stipulation prevents the Fed from purchasing Treasury or Agency debt directly (that would be “monetizing the debt”) so it must buy Federal government debt (interestingly, this does not apply to any other asset the Fed may puchase) in the secondary markets. This of course has not proved to be much of an impediment.

    The Fed is also permitted to purchase bankers acceptances and bills of exchange in the open market. These are privately issued assets but few American institutions use much of them anymore.

    The Fed is also allowed to purchase state and municipal debt
    and foreign government issued and guaranteed assets, as well as those of their agencies with a term not exceeding six months. The term constraint is important since about 99% of state and municipal bonds, and something like 88% of foreign bonds are of longer term.

    So what’s eligible for purchase? Roughly…

    Federal government Treasuries – $12.0 trillion
    Agency bonds – $2.0 trillion
    Agency guaranteed securities – $5.8 trillion
    Bankers acceptances – zilch
    Gold – $7.5 trillion
    State and municipal bonds – zilch
    Foreign bonds – $5 trillion

    This comes to about $32.3 trillion dollars. Now, the Federal Reserve currently holds about $3.9 trillion in such assets so that leaves about $28.4 trillion in assets that they still haven’t bought.

    (And I suppose they can buy up all the world’s foreign currency and overnight deposits which ought to be worth at least a few trillion dollars but let’s not get crazy!)

    And I still haven’t touched on section 13.3 of the FRA yet.

    Section 13.3 allows the Fed to lend to any individual, partnership, or corporation upon any collateral the Fed deems satisfactory. That’s the Section that allowed the Fed to create Maiden Lane I, II, and III, the Commercial Paper Funding Facility (CPFF), and the Term Auction Lending Facility (TALF) during the financial crisis. Approximately $2 billion is still currently lent out under Section 13.3 (through Maiden Lane and TALF).

    In theory under Section 13.3 private label MBS, CDOs, stocks or corporate bonds are all eligible collateral so the sky is the limit. In practice section 13.3 only allows loans under “unusual and exigent circumstances.” But guess who gets to decide what consitutes “unusual and exigent circumstances?”

    So yes, the Fed is legally prohibited from depositing money into the bank accounts of individuals with no strings attached, or, indeed, from buying up the global supply of cheese. But this accounting suggests there’s still ample room to issue more liabilities if the Fed so chooses.

    dannyb2b,
    “If Fed liabilities exceed assets or it goes bankrupt then I think it may not be able to redeem all its reserves at par either.”

    How can an institution whose liabilities are the very medium of account their value is measured in go bankrupt? The very idea boggles the imagination.

    Central banks cannot by definition default. The only support the Fed requires is the political support of the US that guarantees the legal medium of account nature of the dollars it issues. This political support does not require the financial support of the US Treasury, or of anyone else.

  57. Gravatar of Tom Brown Tom Brown
    8. March 2014 at 18:35

    dannyb2b,

    “Dollars are the medium of account right?”

    Remember, when Mark writes “currency” he means physical paper notes and coins. Regardless if those are at the bank (and thus vault cash, a component of a bank’s reserves) or in circulation, they are MOA. When he writes “reserves” this includes electronic Fed deposit liabilities owned by the banks. Those are MOA too. Bank deposit-liabilities owned by bank customers are not MOA because although they should be worth MOA dollars, they aren’t necessarily worth that much. The bank guarantees that your deposits can be swapped for MOA (currency is the only kind of MOA that non-bank private entities can own), but the CB does not guarantee they will exchange your MOA for bank deposits. And the bank may not be able to make good on it’s guarantee if it’s insolvent. That’s the asymmetric redeemability that Nick Rowe discusses in that link I provide above.

    Technically, I think you might want to say that “dollars” are the unit of account (UOA). But practically CB dollars (currency and reserves) are what Scott considers to be the MOA. Things are a little more clear in a gold standard. Say $1 = 1 oz. Then “$” are the UOA, and gold is the MOA. Credit denominated in $ (i.e. bank deposits) are MOE only. The quantity of MOA as measured by the UOA can be changed by decree of the CB: they could redefine $1 = 0.5 oz for example, thus doubling the MOA by that measure (w/o any actual new gold being discovered). But UOA doesn’t really come up much here on Scott’s site, so I try to avoid using it. In fact things are really simple here, because goods which are MOE only (i.e. not MOA, like bank deposits), don’t really matter too much in Scott’s interpretation. So here on Scott’s site you can pretty much forget UOA and MOE and only think in terms of MOA. He’d probably prefer that you did.

    “If the commercial bank deposits and the MB have the same name “dollars” are they not both MOA?”

    By “MB” you mean monetary base, right? The answer is no. MOE can be denominated in the UOA (“$”) but it’s still not MOA.

    “Both the fed and commercial banks have balance sheet restraints on issuance of their liabilities Im quite sure(respectively currency and deposits).”

    Commercial banks, sure, they have to stay solvent. The Fed practically doesn’t have that problem. The Fed may have some legal restraints… I’m not sure, but practically it doesn’t: it’s not like it’s risking bankruptcy by adding more base money. A couple of fun facts to keep in mind also: paper notes stored at the Fed are not MOA any longer: they lose their face value there, since they are recorded as Fed liabilities once they are sold to banks. In that regard they are very much like personal IOUs: when your IOU comes back to you it loses it’s value. When they are sold back to the Fed, they are removed as liabilities from the Fed’s BS, and they become scraps of paper again. If they are resold to banks, they again are recorded as liabilities on the Fed BS and take on their face value again. Also, electronic Fed deposits NOT held by banks (for example, the Tsy Dept.’s TGA deposit) are also not considered to be part of the monetary base, and thus are not MOA. Coins are an oddity, in that they are assets to those entities which posses them, but liabilities to no entity. They are MOA though. The Fed buys paper notes for production cost from Tsy (the BEP), but they buy coins from Tsy (the Mint) at face value. So when coins are at the Fed, they are not in circulation, but they still retain their face value. Coins are an “obligation” of Tsy, in that Tsy must accept them back again at face value, say when they are worn out.

    “If Fed liabilities exceed assets or it goes bankrupt then I think it may not be able to redeem all its reserves at par either.”

    Ultimately the Fed is the responsibility of Tsy, even though it has a large degree of independence. So say some brain-dead congressmen got together and insisted on a Fed audit and determined that it had negative equity (this is possible, but not likely), they could force the Tsy to “bail out” the Fed as a political show. At least I think that could happen. I think the collective IQ of congress would have to take another 10 or 20 point or so hit before that happened though, plus they’d have to catch the Fed at a bad time, like if the bonds it owned took a big drop in value, because interest rates when up dramatically, for example. The Fed makes a lot of money generally, and though almost all of that is remitted back to Tsy, they generally don’t have any problem keeping equity at or above 0.

    But it doesn’t really make sense to say that the Fed can’t redeem its reserves at par. Reserves are bank assets and Fed liabilities. In general a dollar of reserves “returned” to the Fed just means the Fed erases a dollar of liabilities from its BS. Coins excepted of course… those just become a dollar of Fed assets. Currency and reserves define what dollars are. That’s what being the MOA means. By definition a dollar of base money can’t have any other value other than a dollar. You can say MOA’s price is fixed at unity.

    Now someone like Mike Sproul, a backing theory advocate, would disagree. Sumner completely rejects Mike’s backing theory though. When I put on my Mike Sproul hat, I have to think differently. To Sumner, MOA is “paper gold.” So to say the Fed can’t redeem its base money at par is like saying you can’t get an oz of gold for an oz of gold.

    Some interesting alternative views to Sumner’s:

    Mike Sproul:
    http://www.csun.edu/~hceco008/realbills.htm

    Mike Freimuth:
    http://realfreeradical.com/2014/03/07/the-value-of-a-dollar/

    JP Koning:
    http://jpkoning.blogspot.com/2014/02/when-money-ceases-to-be-iou.html

    I personally enjoy learning all those different ideas. Sumner’s view is particularly simple and easy to understand in this regard. I’m like an atheist interested in religious studies… I don’t subscribe to any of them, but I like to learn the internal logic of all. And I’ve come to believe that econ is almost more of a religion than religion itself!

  58. Gravatar of dannyb2b dannyb2b
    8. March 2014 at 18:40

    “there’s no evidence that those with wealth or high incomes save any more out of the income that they derive from the production of new goods and services than anybody else”

    https://www.dartmouth.edu/~jskinner/documents/DynanKEDotheRich.pdf

    Current monetary policy is imbalanced in that it confers greater benefits to those that hold more assets therefore realizing a lower MPS. Instead of creating money and evenly allocating it to people and realizing a higher MPS.

    “there’s no significant correlation between national savings rates and the rate of growth of nominal incomes.”

    I think that is because the fed offsets any contractionary force of higher saving.

  59. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. March 2014 at 18:47

    dannyb2b,
    The Dynan, Skinner and Zeldes (DSZ) paper uses the CEX, SCF and PSID data which produce estimated aggregate savings rates in the range of 25%, 21% and 11-21% respectively over time periods (1980s) in which the savings rate measured by the BEA was approximately 8%-9% (see Table 2). The only data that even comes close to the correct aggregate measure is the PSID measure which uses an “active” measure of savings that effectively excludes capital gains income. This is not suprising because *capital gains are not, nor should they be, considered part of GDP*.

    Other studies, ones that actually produce aggregate savings rates consistent with the NIPA accounts, have shown that savings rates at times have actually been inversely related to income:

    http://www.federalreserve.gov/pubs/feds/2001/200121/200121pap.pdf

    This study in particular showed that the savings rate of the top quintile was negative in 2000.

  60. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. March 2014 at 18:52

    dannyb2b,
    “I think that is because the fed offsets any contractionary force of higher saving.”

    There’s no need to. The US has one of the lowest national savings rates in the advanced world as evidenced by our persistently large current account deficit.

    China on the other hand has a very high national savings rate as evidenced by its persistently large curent account surplus, and high rates of nominal income growth and inflation.

  61. Gravatar of dannyb2b dannyb2b
    8. March 2014 at 19:02

    Tom and Mark.

    Im not trying to impose my ideology or antagonize for any reason just to be clear.

    So what it comes down to is the definition on medium. Deposits although they are used more often as a medium for transactions than currency are not a medium.

    Maybe because of the assymetry of backing? This seems to be an entirely separate issue?

    Or does medium refer to something else? When I bought a car for $10000 the medium for the transaction was my deposit and the account was the number 10000 in my account. Thats how we accounted for the transaction based on the number of the deposit.

    “Bank deposit-liabilities owned by bank customers are not MOA because although they should be worth MOA dollars, they aren’t necessarily worth that much. The bank guarantees that your deposits can be swapped for MOA (currency is the only kind of MOA that non-bank private entities can own), but the CB does not guarantee they will exchange your MOA for bank deposits. And the bank may not be able to make good on it’s guarantee if it’s insolvent. That’s the asymmetric redeemability that Nick Rowe discusses in that link I provide above.”

    Bank deposits are worth the same. I buy a car with notes or transfer deposit, its the same. Deposits are higher risk than reserves but what about if my physical currency gets stolen?

    My point is becuase my bank deposits are higher risk doesnt mean they cease to be MOA. Its a more risky medium sure.

  62. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. March 2014 at 19:03

    dannyb2b,
    In the largest, and by most accounts, best study to date on the question of inequality and national savings, by Schmidt-Hebbel and Serven (2000), involving World Bank data on 82 countries over 1965-1994, they generally found no significant correlation between measures of income inequality and national savings.

    The lone exception was in a regression that used the income share ratio of top 20% to bottom 40%. The correlation was significant at the 5% level, but was negative. In other words, it suggested that greater inequality resulted in lower national savings.

    http://darp.lse.ac.uk/papersdb/Schmidt-Serven_(JDE2000).pdf

  63. Gravatar of dannyb2b dannyb2b
    8. March 2014 at 19:07

    Is there any circumstances where the MOE deposit is traded at a different price to the MOA currency for any goods or service? For example Is there any legitimate market where you have to pay more for an item if you pay in deposits as opposed to cash. If not Im pretty sure deposits are both MOE and MOA.

  64. Gravatar of Tom Brown Tom Brown
    8. March 2014 at 19:11

    … to be clear, Mike Sproul would not disagree that a dollar of base money is always defined to have a dollar’s worth of value. But he would argue that the value of the $ itself ultimately arises from the assets the CB holds. Even if it holds mostly Tsy bonds (i.e. promises to pay more $), as long as it holds some “anchor” assets this works out in his logic. He explains it here:

    http://jpkoning.blogspot.com/2014/02/the-cost-of-manufacturing-liquidity.html?showComment=1392652641149#c2747714437021819015

    Implicit in his view is that there’s some “reflux” channel through which holders of CB liabilities could ultimately redeem their notes. Like if the CB were to be liquidated for example.

    It’s a simple view… but still it’s hard to beat the simplicity of Sumner’s “paper gold” view!

  65. Gravatar of dannyb2b dannyb2b
    8. March 2014 at 20:38

    Tom

    “… to be clear, Mike Sproul would not disagree that a dollar of base money is always defined to have a dollar’s worth of value. But he would argue that the value of the $ itself ultimately arises from the assets the CB holds”

    Then why do deposits always hold the same value as currency? Why is there always a one for one exchange? They are interchanegable. If the CB liabs are more valuable why do they trade at the same price?

    More than 99% of the time deposits are safe and in exceptional circumstances in times of liquidation of a bank you only get back a proportion of deposits. Therefore the exception becomes the rule under this theory. Dont worry that more than 99% of time deposits are MOA only take into account the exception and make that the rule.

    What about currency that gets stolen is that not MOA also?

    “It’s a simple view… but still it’s hard to beat the simplicity of Sumner’s “paper gold” view!”

    I agree its a simple view but IMO misleading. Isnt it also simple to say all dollars are MOA?

  66. Gravatar of dannyb2b dannyb2b
    8. March 2014 at 20:57

    Mark

    What do you think of the idea that MP only directly affects existing asset holders with everyone else affected more indirectly in a sort of trickle down manner therefore limiting MP effectiveness?

    What if the fed evenly increased assets of all people (money) Therefore affecting the greater economy more efficiently?

  67. Gravatar of Mark A. Sadowski Mark A. Sadowski
    8. March 2014 at 21:29

    dannyb2b,
    “What do you think of the idea that MP only directly affects existing asset holders with everyone else affected more indirectly in a sort of trickle down manner therefore limiting MP effectiveness?”

    There are nine channels of the Monetary Transmission Mechanism (MTM) as enumerated by Mishkin. Only two of them are dependent on monetary policy’s effects on financial wealth. So I don’t think that this is true.

    “What if the fed evenly increased assets of all people (money) Therefore affecting the greater economy more efficiently?”

    Without knowing the specifics of what you are proposing, it sounds to me like this would be a violation of the Federal Reserve Act(FRA).

  68. Gravatar of Tom Brown Tom Brown
    8. March 2014 at 22:18

    dannyb2b, You should redirect any questions you have for me to Mark, since he’s a real expert on this stuff: I’d like to see how he answers myself.

  69. Gravatar of dannyb2b dannyb2b
    8. March 2014 at 22:35

    Mark

    “”What if the fed evenly increased assets of all people (money) Therefore affecting the greater economy more efficiently?”

    Without knowing the specifics of what you are proposing, it sounds to me like this would be a violation of the Federal Reserve Act(FRA).”

    The fed could issue reserve accounts to all members of public assuming the FRA is amended of course. In order to perform NGDPLT it would simply credit accounts of general public.

    If it is assumed that the MPS of wealthier people is the same as poorer people don’t you think it is inequitable to affect the economy through existing asset holders when conducting MP? Shouldnt new printed financial wealth (money) be expanded to all and evenly affect all peoples wealth and hence affect expectations and NGDP in this manner?

    The greater the assets an individual has the greater the benefit from increased asset prices. Therefore the wealthier people have greater influence than the less wealthy. It seems inordinate.

    The wisdom of crowds idea which Scott supports says that many people are smarter than the few. So letting all people have a more equal effect on the economy should be superior to only the more wealthy.

  70. Gravatar of dannyb2b dannyb2b
    8. March 2014 at 23:25

    Mark

    Assuming an equal MPS across the board wealthier people invest more (higher MPI) and poorer people consume more (higher MPC). Because about two thirds of the economy is consumption and only about 17% is investment it would be more efficient to affect all peoples wealth (higher avg MPC) and not just the richest through asset price increases. Agree?

  71. Gravatar of dannyb2b dannyb2b
    8. March 2014 at 23:41

    Mark

    If your interested in answering.

    ““Dollars” are not the *medium* of account. “Dollars” are the *unit* of account. “Currency” and “reserve balances” are the *medium* of account.”

    People account for things in terms of dollars. People dont account in terms of reserves or currency only. People dont ever further qualify they just quote and transact in dollars.

    Why are deposits not MOA? asymmetry of redeemability?
    Then why do deposits always hold the same value as currency? Why is there always a one for one exchange? They are interchanegable. If the CB liabs are more valuable (higher safety why do they trade at the same price? Things should be more expensive in terms of an MOE that carries higher risk.

    More than 99% of the time deposits are safe and in exceptional circumstances in times of liquidation of a bank you only get back a proportion of deposits. Therefore the exception becomes the rule under this theory. Dont worry that more than 99% of time deposits are MOA only take into account the exception and make that the rule.

    What about currency that gets stolen is that not MOA also? No redeemability there.

  72. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. March 2014 at 05:06

    dannyb2b,
    “The fed could issue reserve accounts to all members of public assuming the FRA is amended of course.”

    Given today’s Congress this would have less than zero chance of passing.

    “In order to perform NGDPLT it would simply credit accounts of general public.”

    So you’re proposing that the Fed simply give away money. Upthread you were concerned about the state of the Fed’s balance sheet. Now you’re proposing that the Fed increase its liabilities without balancing them with assets. Your concerns are exceedingly inconsistent.

    The problem with this proposal is how does the Fed reduce the monetary base when it wants to? By simply giving away money without acquiring assets it has nothing to sell. This proposal is guaranteed to lead to high inflation.

    “If it is assumed that the MPS of wealthier people is the same as poorer people don’t you think it is inequitable to affect the economy through existing asset holders when conducting MP?”

    First of all I never said that the marginal propensity to save (MPS) was the same for wealthier people. I said that the savings rate was not significantly different. The savings rate is an average. The MPS is a marginal. The evidence suggests that the mPS rises with wealth but the savings rate does not. This is not a contradiction. This is elementary mathematics.

    Second, and more importantly, you’re assuming the effect of monetary policy is asymmetric. That is, you are assuming that monetary policy is always expansionary and thus is always raising asset prices. It can work the other way as well. And if the central bank is trying the stabilize aggregate demand the effect on wealth inequality will be neutral.

    “So letting all people have a more equal effect on the economy should be superior to only the more wealthy.”

    If you think reducing inequality is an important public policy objective I suggest to you that you should do it through fiscal policy rather than through monetary policy. Monetary policy already has its hands full just trying to stabilize aggregate demand.

  73. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. March 2014 at 05:25

    danny2b,
    “Assuming an equal MPS across the board wealthier people invest more (higher MPI) and poorer people consume more (higher MPC). Because about two thirds of the economy is consumption and only about 17% is investment it would be more efficient to affect all peoples wealth (higher avg MPC) and not just the richest through asset price increases. Agree?”

    This is decidedly confused in several ways.

    In the national accounts private physical investment (I) is done exclusively by firms, not households. The term marginal propensity to invest (MPI) is not even a conventional one in any case.

    Second, the marginal propensity to consume (MPC) is the additive inverse of MPS. Thus MPC = 1 – MPS. So if MPS are equal (I’m not saying they are) so will MPC.

    Third, private physical investment is sensitive to expectations of growth and is affected by changes or even proposed changes in monetary policy. It *is* the volatile component of GDP whose decrease *is* the immediate cause of recessions. If we wanted to affect a specific component of GDP with monetary policy (and I am not saying we should want to) it would be investment, not consumption.

  74. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. March 2014 at 05:53

    dannyb2b,
    “Why are deposits not MOA? asymmetry of redeemability?”

    Yes.

    “If the CB liabs are more valuable (higher safety why do they trade at the same price?”

    Deposit accounts pay interest specifically because they are less liquid, and in some cases, have higher risk of irredeemability, than currency.

    “Therefore the exception becomes the rule under this theory. Dont worry that more than 99% of time deposits are MOA only take into account the exception and make that the rule.”

    MOA is term with an explicit definition. You cannot argue over a definition. If you have problems with the English language I suggest you take up another one or invent your own.

    “What about currency that gets stolen is that not MOA also? No redeemability there.”

    It is fully redeemable to whomever stole it.

  75. Gravatar of dannyb2b dannyb2b
    9. March 2014 at 06:00

    “Given today’s Congress this would have less than zero chance of passing.”

    Alot of positive proposals would never pass with todays congress.

    “So you’re proposing that the Fed simply give away money. Upthread you were concerned about the state of the Fed’s balance sheet. Now you’re proposing that the Fed increase its liabilities without balancing them with assets. Your concerns are exceedingly inconsistent.”

    I was never concerned with the feds balance sheet. I just stated that I could go bankrupt but Im not concerned.

    The fed could recognize money created as equity (bearer non voting) on its balance sheet instead of a liability.

    “The problem with this proposal is how does the Fed reduce the monetary base when it wants to? By simply giving away money without acquiring assets it has nothing to sell. This proposal is guaranteed to lead to high inflation. ”

    If under inflation targeting the fed would only expand money when inflation is below target. If inflation is above target then no expansion of money. You cant get inflation then unless some supply shock is ocurring. Since 1920 MB has never contracted in the US.

    http://research.stlouisfed.org/fred2/graph/?id=BASE#

    “First of all I never said that the marginal propensity to save (MPS) was the same for wealthier people. I said that the savings rate was not significantly different. The savings rate is an average. The MPS is a marginal. The evidence suggests that the mPS rises with wealth but the savings rate does not. This is not a contradiction. This is elementary mathematics.”

    By MPS I meant marginal propensity to spend. If the marginal propensity to save rises with wealth isn’t it preferable then to conduct MP with the broader public who will have a lower marginal propensity to save?

    “Second, and more importantly, you’re assuming the effect of monetary policy is asymmetric. That is, you are assuming that monetary policy is always expansionary and thus is always raising asset prices. It can work the other way as well. And if the central bank is trying the stabilize aggregate demand the effect on wealth inequality will be neutral. ”

    When is MP contractionary? MB hardly ever contracts for example.

    “If you think reducing inequality is an important public policy objective I suggest to you that you should do it through fiscal policy rather than through monetary policy. Monetary policy already has its hands full just trying to stabilize aggregate demand.”

    Inequality in terms of monetary policy means that the effect of MP is limited therefore being less effective. Its not some social proposal, just efficiency.

  76. Gravatar of dannyb2b dannyb2b
    9. March 2014 at 06:10

    “Deposit accounts pay interest specifically because they are less liquid, and in some cases, have higher risk of irredeemability, than currency.”

    Yes deposits are higher risk and can be less liquid. But dont cease to be MOA for any transaction I can see. MOA is different to risk. I always account for my transactions in terms of simply dollars. I dont know of any legitimate market where prices differ (accounting) for a good based on whether you pay in terms of currency or deposit.

    “MOA is term with an explicit definition. You cannot argue over a definition. If you have problems with the English language I suggest you take up another one or invent your own.”

    Ok any example of when the balance of your deposit is not an accurate account for a transaction. If I have 100 in my account do I ever have to pay 110 for a purchase that could cost 100 in currency for example? I cant think of any time when I cant account for a transaction in terms of my deposit balance.

    “It is fully redeemable to whomever stole it.”

    What if it was simply lost without a thief?

  77. Gravatar of Don Geddis Don Geddis
    9. March 2014 at 10:29

    @dannyb2b: “But dont cease to be MOA for any transaction I can see. … I dont know of any legitimate market where prices differ (accounting) for a good based on whether you pay in terms of currency or deposit.

    It seems to me that you’re confusing concepts. You talk about an “MOA” for “transactions” … but the thing that gets used in transactions, is the Medium of Exchange, not the Medium of Account.

    Before you start arguing about whether some thing is or is not part of the MOA, perhaps you should clarify what MOA even means? Do you have three different, distinct, concepts in your mind, for: (1) Medium of Exchange; (2) Unit of Account; (3) Medium of Account?

    The MOA isn’t what you go buy things with in a transaction. That’s the MOE. The MOA is more like the things you agree on in a long-term contract, e.g. a labor wage agreement or a mortgage. (E.g., what is it that you’ll repay to the bank in 30 years?)

  78. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. March 2014 at 10:31

    Scott,
    Off Topic,
    The conversation with JazzBumpa continues.

    http://angrybearblog.com/2014/03/did-the-fed-cause-the-great-recession.html

    JazzBumpa,
    “I believe that home price bubble equity was an ATM that grew consistently as a fraction of PCE after 1996, and accounted for over 2% in 2005 – and I got this from Greenspan and Kennedy, Table 2…Note that when this spigot got cut off, PCE in 2008 dropped by about 2.5%…So Equity extractions were equivalent to 6 to 8% of disposable personal income in 2005-6…I believe that someone at the subsistence level will spend the next dollar; that people at, say, twice the poverty level have unmet needs and would spend more if they could. That David Koch will spend his next dollar buying political influence, and that the multipliers are different.”

    The most up to date data from the Greenspan-Kennedy study can be downloaded from the Calculated Risk link that you posted. It shows that equity extraction as a percent of total PCE fell from 2.3% in 2005Q4 to 0.3% in 2008Q4. It had already fallen to 0.8% by 2007Q4 before the recession even started. Similarly net equity extractions as a percent of disposable income fell from 9.4% in 2006Q1 to (-2.2%) in 2008Q4. It had already fallen to 3.1% in 2007Q4.

    Although year on year nominal PCE fell 3.2% at trough, year on year nominal private nonresidential investment fell 27.7%:

    http://research.stlouisfed.org/fred2/graph/?graph_id=164620&category_id=0

    More importantly, year on year nominal PCE did not fall significantly until 2008Q4 whereas year on year nominal private nonresidential investment started plunging in 2008Q1. PCE growth was 4.8%, 3.9%, 4.1% and 3.3% in 2007Q4 through 2008Q3, whereas nonresidential investment growth was 7.2%, 4.1%, 0.0% and (-2.9%) in the same four quarters.

    And despite the fact that nonresidential private investment was only 13.5% of potential GDP in 2007Q4 it fell to 9.0% of potential GDP by 2009Q3 or by 4.5% of potential GDP. In contrast PCE fell from 67.2% of potential GDP in 2007Q4 to 63.1% of potential GDP in 2009Q2 or by 4.1% of potential GDP.

    So nonresidential private investment fell sooner, faster and further than PCE. Moreover this happens in all recessions. What does this have to do with equity extractions or wealth and income inequality? Not a darned thing.

  79. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. March 2014 at 12:35

    dannyb2b,
    “I was never concerned with the feds balance sheet. I just stated that I could go bankrupt but Im not concerned.”

    In other words you were just being argumentative for no reason at all.

    “If under inflation targeting the fed would only expand money when inflation is below target. If inflation is above target then no expansion of money. You cant get inflation then unless some supply shock is ocurring. Since 1920 MB has never contracted in the US.”

    This actually is not a bad point, but to be technical the monetary base decreased from $48.413 billion in December 1948 to $42.960 billion in April 1950, or by 11.3%:

    http://research.stlouisfed.org/fred2/graph/?graph_id=145118&category_id=0

    That would not have been possible under your system.

    “By MPS I meant marginal propensity to spend. If the marginal propensity to save rises with wealth isn’t it preferable then to conduct MP with the broader public who will have a lower marginal propensity to save?”

    This implies that monetary policy is limited in its ability to regulate aggregate demand currently which I don’t believe is true.

    “When is MP contractionary? MB hardly ever contracts for example.”

    The period from 1980 to 2009 is marked by a disinflationary trend during which core PCEPI fell from 9.0% to 1.1%. So we’ve just come through a contractionary period that lasted nearly three decades. Furthermore, you don’t need the monetary base to contract in order for monetary policy to be contractionary. The monetary base rose throughout that period.

    “Inequality in terms of monetary policy means that the effect of MP is limited therefore being less effective. Its not some social proposal, just efficiency.”

    How does one measure the efficiency of something which is essentially costless and virtually unlimited?

    “But dont cease to be MOA for any transaction I can see. MOA is different to risk. I always account for my transactions in terms of simply dollars. I dont know of any legitimate market where prices differ (accounting) for a good based on whether you pay in terms of currency or deposit.”

    This is entirely beside the point. From the perspective of the seller, how the transaction is paid for doesn’t matter as the transaction is completed. The difference relates entirely to the relationship between the depositor and the commercial bank. The bank pays the depositor for the illiquidity and risk.

    “Ok any example of when the balance of your deposit is not an accurate account for a transaction. If I have 100 in my account do I ever have to pay 110 for a purchase that could cost 100 in currency for example? I cant think of any time when I cant account for a transaction in terms of my deposit balance.”

    This is like talking to that 1970s computer program Eliza.

    http://en.wikipedia.org/wiki/ELIZA

    What on earth does this have to do with what I wrote? You evidently need better programming.

    The point is that medium of account has an explicit definition. You cannot debate definitions.

    “What if it was simply lost without a thief?”

    Again, this is totally irrelevant. The fact that nobody can find it does not detract from the fact that it is still fully redeemable.

  80. Gravatar of dannyb2b dannyb2b
    9. March 2014 at 15:11

    Potential iredeemability in exceptional circumstances doesnt change that deposits are also part of the MOA. It just means that deposits are a riskier aspect of the MOE. Account in MOA literaly means how you account for transactions. The accounting is always identical for transactions whether using deposits or currency.

    I wasnt concerned with the fed balance sheet. I was bringing it up to explore the idea of iredeemability with regards to MB under the current monetary arrangement.

    “This actually is not a bad point, but to be technical the monetary base decreased from $48.413 billion in December 1948 to $42.960 billion in April 1950, or by 11.3%:”

    We had a recesion during that period.

    “This implies that monetary policy is limited in its ability to regulate aggregate demand currently which I don’t believe is true.”

    MP has its limitations and these limitations vary according to how it is conducted. Everything has limitations.

    “The period from 1980 to 2009 is marked by a disinflationary trend during which core PCEPI fell from 9.0% to 1.1%. So we’ve just come through a contractionary period that lasted nearly three decades. Furthermore, you don’t need the monetary base to contract in order for monetary policy to be contractionary. The monetary base rose throughout that period.”

    Disinflation means prices are still going up. Therefore expansion. Deflation would be a different story.

    “How does one measure the efficiency of something which is essentially costless and virtually unlimited?”

    It can be subjective. Looking at potential output, unemployment of resources, labour, growth, stability etc.

    “The difference relates entirely to the relationship between the depositor and the commercial bank. The bank pays the depositor for the iliquidity and risk.”

    It comes down to: how do you account for this (key word is account)? Any payment made is accounted for in terms of either currency or deposit and the accounting is always identical.

    “The point is that medium of account has an explicit definition. You cannot debate definitions.”

    Ok what does account mean to you? How is account being redefined here? I could be wrong but I still haven’t had an explanation as to how.

  81. Gravatar of Tom Brown Tom Brown
    9. March 2014 at 16:09

    dannyb2b,

    Try reading a few of these articles on these subjects.

    Unit of account:
    http://jpkoning.blogspot.com/search/label/unit%20of%20account

    Medium of account:
    http://jpkoning.blogspot.com/search/label/medium%20of%20account

    Medium of exchange:
    http://jpkoning.blogspot.com/search/label/medium%20of%20exchangej

    Here’s one in particular I thought was good:
    http://jpkoning.blogspot.com/2013/09/ghost-money-chiles-unidad-de-fomento.html

    And another:
    http://jpkoning.blogspot.com/2012/11/discussions-of-medium-of-account-could.html
    (caution though: I believe JP’s views have changed a bit since he wrote that last one).

    He gives some real world examples, and some of them are pretty odd. But IMO, the odd ones are good because they help to illustrate the matter. You’ll also notice that Koning’s position changes: the latter articles are not the same as the early ones.

    I like to think of the medium of account and unit of account together as defining a “good” which by definition always has a price of unity. In a fiat system that good might be paper reserve notes. In a gold standard it might be a particular mass of gold. I’m pretty sure this “good” is almost always the most liquid good in the economy and is generally thought of as “money” (though depending on which MMist you talk to, maybe not the only good which is “money”). If you notice JP has identified a case there in Chile in which they have a MOA which is NOT an MOE (if I recall the article correctly). He’s a great resource for all kinds of interesting examples!

    The MOA is often an MOE as well. But not all MOE are MOA, even though there may never be a circumstance under which the MOE ever trades for anything different than 1:1 with the MOA. Maybe it’s just the remote possibility that it could trade for something other than 1:1 with the MOA that disqualifies it as an MOA, because it doesn’t define money in the way that a true MOA does.

    If you read some of those JP Koning articles, you’ll see some references to Bill Woolsey and his thoughts on the matter, and maybe some links to his writings. I’ve read a bit and they get into even more detail, bringing up more acronyms other than MOA, MOE, and UOA. I gather Bill was on some sort of committee that tried to clear all this stuff up (obviously they failed), but he has put some thought into it. I doubt anybody Koning mentions precisely agrees with Scott’s interpretation. I bet none of the people Koning mentions agree 100% with any of the other people for that matter.

    Like I mentioned before, Scott has one of the simpler ways of discussing it, especially w/ regard to fiat. Be glad for that! Also, I think he is done discussing the subject because of the many words wasted on the matter, seemingly with no resolution. Here’s his “final attempt” on MOA:

    http://www.themoneyillusion.com/?p=23629

    and the one immediately preceding that:

    http://www.themoneyillusion.com/?p=23269

    In particular pay attention to comments from Nick Rowe in both. Use Scott’s and Nick’s search boxes if you can’t get enough. There’s plenty more where that came from!

    Clearly there’s a lack of agreement, even amongst hardcore MMists!

    IMO, the best you can hope for is to learn what each particular MMist means when they use these terms, especially if they toss the word “money” into the mix, because that’s where it gets messy. Never trust that two MMists are talking about the same thing when they use the word “money.” Lol.

    Here’s another good couple of articles that touch on these subjects form Marcus Nunes (and bring up yet another interesting and odd example: that of Brazil in the 1990s):

    http://thefaintofheart.wordpress.com/2012/10/31/two-kinds-of-money/

    http://thefaintofheart.wordpress.com/2013/08/30/inflation-doesnt-have-a-life-of-its-own-i-e-its-not-inertial/

    Of course Nick Rowe has a ton, and David Glasner and Bill Woolsey both have blogs too which bring it up. You could probably spend a week or more reading all the material. Good luck!

  82. Gravatar of Tom Brown Tom Brown
    9. March 2014 at 16:42

    … I *think* it’s safe to say you can never trust that two MMists are talking about the same thing when they use the word “credit” either. (See Nick Rowe’s latest post, especially the comments for how he uses “credit”… I believe differently than Scott does. It’s a direct consequence of them not sharing a definition for “money” either). Econ is not science or engineering! It’s not like two scientists discussing “energy” where you can be 99.999% sure they mean exactly the same thing! In econ, even two monetary economists may not agree on what money is! Haha! IMO, econ will never escape the fact that people’s perception makes up a large part of the field. In econ, unlike science, perception can create its own truth. In that way it’s more akin to politics IMO. If people believe yellow rocks are more valuable than forests and streams full of trout, then they will be. If not, then they won’t be. Apparently the Native Americans living in California couldn’t figure out why the white man was destroying everything of real value for useless yellow rocks back in the 1850s. (That’s the story in the Sutter’s Mill museum anyway). :D

  83. Gravatar of dannyb2b dannyb2b
    9. March 2014 at 17:05

    I *think* it’s safe to say you can never trust that two MMists are talking about the same thing when they use the word “credit” either.

    Thats understandable as language has its limitations. But within context you’ll know what credit means for example.

    Its another thing entirely to change a definition to fit your argument(IM not accusing anyone) or to just be plain incorrect.

    “It’s not like two scientists discussing “energy” where you can be 99.999% sure they mean exactly the same thing!”

    With context and accurate definitions and being specific I think we make economics alot more like science.

    “econ will never escape the fact that people’s perception makes up a large part of the field. In econ, unlike science, perception can create its own truth.”

    Perception is key but incorrect perception doesnt become true just because you believe it (there may be some exceptions). If everyone perceived for some reason that water had no value and we polluted it all we couldnt escape reality at all we still need water.

  84. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. March 2014 at 17:20

    dannyb2b,
    “Potential iredeemability in exceptional circumstances doesnt change that deposits are also part of the MOA.”

    Jurg Niehans defined the term “medium of account” in 1978 and it is clear if you read his book commercial bank deposits are not MOA:

    http://www.amazon.com/The-Theory-Money-J%C3%BCrg-Niehans/dp/0801823722

    MOA has been used in the monetary economics profession for 36 years now by such people as Bennett McCallum, and MOA has always excluded commercial bank deposits.

    “MP has its limitations and these limitations vary according to how it is conducted. Everything has limitations.”

    Is there a shortage of ink and paper?

    http://upload.wikimedia.org/wikipedia/commons/0/0e/Inflaci%C3%B3_utan_1946.jpg

    “Disinflation means prices are still going up. Therefore expansion. Deflation would be a different story.”

    Assuming no dramatic changes in average RGDP growth, disinflation means falling rates of NGDP growth, which by definition is contractionary monetary policy.

    “It can be subjective. Looking at potential output, unemployment of resources, labour, growth, stability etc.”

    These are all *real* quantities and have absolutely nothing to do with measuring the “efficiency” of monetary policy the effects of which are best measured by *nominal* variables.

    “It comes down to: how do you account for this (key word is account)? Any payment made is accounted for in terms of either currency or deposit and the accounting is always identical.”

    Nevertheless the bank pays the depositor for the illiquidity and risk.

    “Ok what does account mean to you? How is account being redefined here? I could be wrong but I still haven’t had an explanation as to how.”

    Why is this my problem? Go read Jurg Niehans or any one of the dozens of research papers that use the term medium of account. It’s clear that commercial bank deposits are not MOA. Normal people don’t waste time trying to pick fights over the well established definitions of words.

  85. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. March 2014 at 17:36

    Tom Brown,
    “If you notice JP has identified a case there in Chile in which they have a MOA which is NOT an MOE (if I recall the article correctly).”

    You recall incorrectly. Chile’s Unidad de Fomento is purely a unit of account (UOA). It is an example of an UOA that is not an MOA.

  86. Gravatar of dannyb2b dannyb2b
    9. March 2014 at 18:00

    “Jurg Niehans defined the term “medium of account” in 1978 and it is clear if you read his book commercial bank deposits are not MOA.”

    Doesn’t mean he was right. He just made a definition and some people agree with it. Is he infallible or something? You cant tell me the definition is correct just because other people say so.

    You cant explain to me why deposits aren’t MOA without resorting to irredeemability. Yes deposits are less redeemable in certain rare circumstances but they are always used as MOA like currency.

    “Is there a shortage of ink and paper?”

    So you have MP efficiency down to one variable?

    “Assuming no dramatic changes in average RGDP growth, disinflation means falling rates of NGDP growth, which by definition is contractionary monetary policy.”

    Falling rates of NGDP GROWTH. A more accurate definition IMO is that growth is expansionary and negative growth is contractionary. Falling rates of growth are less expansionary but not contractionary.

    “These are all *real* quantities and have absolutely nothing to do with measuring the “efficiency” of monetary policy the effects of which are best measured by *nominal* variables. ”

    I think both real and nominal variables can indicate efficiency because IMO things like real inflation and ngdp are dependant on how money entered the system therefore working through the economy differently. To take an extreme example if the CB printed money and that money was all somehow wasted then inflation could increase more than if the money was used for investment.

    “Nevertheless the bank pays the depositor for the illiquidity and risk.”

    How does this relate to account? Remember account is the key word here.

    “Normal people don’t waste time trying to pick fights over the well established definitions of words.”

    I’m not picking any fight. I haven’t condescended like you have. The definition MOA is established amongst some but I believe the definition is inaccurate and misleading. I am open to being wrong on this but so far you haven’t explained why.

  87. Gravatar of dannyb2b dannyb2b
    9. March 2014 at 18:02

    edited following paragraph for typo:

    “These are all *real* quantities and have absolutely nothing to do with measuring the “efficiency” of monetary policy the effects of which are best measured by *nominal* variables. ”

    I think both real and nominal variables can indicate efficiency because IMO things like inflation and ngdp are dependant on how money entered the system therefore working through the economy differently. To take an extreme example if the CB printed money and that money was all somehow wasted then inflation could increase more than if the money was used for investment.

  88. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. March 2014 at 19:07

    dannyb2b,
    “You cant tell me the definition is correct just because other people say so.”

    It’s a definition. By definition it can’t be wrong.

    “Yes deposits are less redeemable in certain rare circumstances but they are always used as MOA like currency.”

    They are not MOA because they are less redeemable.

    “So you have MP efficiency down to one variable?”

    Yes.

    “A more accurate definition IMO is that growth is expansionary and negative growth is contractionary. Falling rates of growth are less expansionary but not contractionary.”

    No. Expansionary means the AD curve shifts to the right. Contractionary means the AD curve shifts to the left:

    http://1.bp.blogspot.com/_JqNx8yXnFE8/SxlWoq_PI8I/AAAAAAAABCg/7y9VXIleCrs/s1600-h/Tabarrok-Cowen+ADAS.JPG

    “I think both real and nominal variables can indicate efficiency because IMO things like inflation and ngdp are dependant on how money entered the system therefore working through the economy differently. To take an extreme example if the CB printed money and that money was all somehow wasted then inflation could increase more than if the money was used for investment.”

    Expansionary monetary policy moves the AD curve to the right. The only way that a rightward shift could result in different increases in the rate of inflation is if the short run aggregate supply curve has a different slope in each case. There is no plausible way that this could ever happen.

    “How does this relate to account? Remember account is the key word here.”

    How does it not relate to account? Do you earn interest on currency? Of course not.

  89. Gravatar of Tom Brown Tom Brown
    9. March 2014 at 19:31

    Mark, re: Chile, good catch. I see that I even commented on that at the time.

    How about the URV that Marcus discusses? He mentioned that it was a new MoA, and the exchange rate with the MoE changed on a regular basis. Did the URV start off being an MOE also?

  90. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. March 2014 at 20:11

    Tom Brown,
    “How about the URV that Marcus discusses? He mentioned that it was a new MoA, and the exchange rate with the MoE changed on a regular basis. Did the URV start off being an MOE also?”

    The URV was introduced as the UOA in March 1994. In July 1994 the real currency was introduced making it the MOA, and the MOE use of the cruzeiro real was retired.

    In my opinion when Marcus says the URV was the MOA from March on he was mistaken since no “good” existed during that time to define the unit of account. It was just the UOA.

  91. Gravatar of dannyb2b dannyb2b
    9. March 2014 at 21:33

    “No. Expansionary means the AD curve shifts to the right. Contractionary means the AD curve shifts to the left:”

    Well of course the AD curve doesnt shift to the right if the growth rate of realgdp is on horizontal axis. If you display the level of ngdp then the ad shifts to the right with any expansion. Why not display the level of ngdp on the axis?

    “Do you earn interest on currency? Of course not.”

    Does that mean you think reserves aren’t MOA because of IOR?

    “Expansionary monetary policy moves the AD curve to the right. The only way that a rightward shift could result in different increases in the rate of inflation is if the short run aggregate supply curve has a different slope in each case. There is no plausible way that this could ever happen.”

    Shapes of curves change according to how the economy is structured and how something works through the system. Spending on some things can be more inflationary. Some people may desire to save more or less etc…

    MP is as simple as just print more to you. Nothing else matters. What happens when debt to gdp is at 600% and rates are at -10% but lending is still blocked? Keep printing. There must be more to it.

  92. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. March 2014 at 08:11

    dannyb2b,
    “Well of course the AD curve doesnt shift to the right if the growth rate of realgdp is on horizontal axis. If you display the level of ngdp then the ad shifts to the right with any expansion. Why not display the level of ngdp on the axis?”

    A static AD-AS Model, that is, one in levels rather than in rates of change, is not well-suited to explaining modern business cycles. Since the end of WW II the rate of inflation typically has fallen during recessions, but has remained above zero. In the case of the US the only exception is the 1974-75 recession, where inflation increased due to negative aggregate supply shocks. If you tried to use a static AD-AS Model to show how a negative aggregate demand shock could cause a recession, it isn’t possible, as the graph implies any negative AD shock should lead to deflation.

    The static AD-AS Model was set up to explain recessions that occurred when the price of gold was stable, and the rate of inflation was close to zero. In the case of the US the best examples are the 1920-21, 1929-33, and 1937-38 recessions, all of which saw significant deflation. So what about post-WW II recessions, which typical see a slowdown in the rate of inflation, rather than outright deflation? One solution is to use a Phillips Curve diagram, but it it can only illustrate aggregate demand shocks, not aggregate supply shocks.

    Ideally we’d like to have an AD-AS Model that has inflation, not the price level, on the vertical axis. The dynamic AD-AS Model does just that.

    “Does that mean you think reserves aren’t MOA because of IOR?”

    Well no, of course not.

    For one thing the decision to pay IOR is purely a matter of monetary policy. The Fed could for example try to regulate short term interest rates by changing the reserve requirement. This is in fact what was done in 1936-37 which partially to blame for the 1937-38 recession. For another reason, unlike the amount of deposits at a commercial bank, the amount of reserve balances is entirely under the control of the central bank owing to the fact that the central bank can change the size of the monetary base at will.

    A commercial bank is a for profit enterprise that can and occasionaly does become illiquid or insolvant. The central bank is the institution charged with the conduct of monetary policy and is the lender of last resort.

    “Shapes of curves change according to how the economy is structured and how something works through the system. Spending on some things can be more inflationary. Some people may desire to save more or less etc…”

    We are talking about macroeconomics here, not microeconomics.

    The change in the rate of inflation resulting from a shift in the AD curve is determined by the slope of the short run AS curve. The slope of the AS curve is determined by the stickiness of wages and prices. There is no evidence at all that wage and price flexibility are affected by how changes in AD are brought about.

    “MP is as simple as just print more to you. Nothing else matters. What happens when debt to gdp is at 600% and rates are at -10% but lending is still blocked? Keep printing. There must be more to it.”

    The Bank Lending Channel is only one of the nine channels of the Monetary Transmission Mechanism (MTM) as enumerated by Mishkin. There’s considerable evidence that it has played little to no role in this particular economic recovery and that is hardly the first time that this would be true.

    Moreover, given that the velocity of broad money is inversely correlated to private debt leverage and velocity in turn is positively correlated to interest, inflation and the rate of change in NGDP, high debt levels and low interest rates are evidence that monetary policy that has been excessively tight, not excessively loose.

  93. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 09:08

    Mark,

    “In my opinion when Marcus says the URV was the MOA from March on he was mistaken since no “good” existed during that time to define the unit of account.”

    Ah, OK. I had the impression from his piece that it was later revealed that a URV was indeed targeted to a US dollar. But you’re saying that wasn’t the case when it was 1st introduced? Marcus isn’t clear on that point. If it had been defined as 1 URV = $1 from the start, couldn’t we say the “good” was the dollar, and the UOA was simply the name “URV?”

    That’s something the Bill Woolsey brings up actually: If I recall correctly, he introduces yet another concept for the definition which ties the name (the name being the UOA: something like “dollar” or the symbol “$”) to the MOA.

    Now for all I know, even if the Brazilians had defined a 1 URV = $1 from the start, dollars may have actually been circulating there, making them a de facto MOE also.

    But in theory, that wouldn’t have to be the case, right? Say they’d targeted some other stable currency which didn’t circulate in Brazil… perhaps a Swiss Franc. Or perhaps some other good that didn’t circulate in Brazil… like they could have said that 1 URV = the value of 1 mg of weapons grade enriched plutonium. Or 1 URV = the value of 1 Argentine national futbol team fan jersey. :D

    Just toying with some ideas here.

  94. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 09:39

    Reading more on this on Koning’s site… even looking at some of my old comments there. I’m not sure Bill had a separate term for the definition relating a symbol (UOA) to a commodity (MOA). They did have a separate concept called the “settlement media.” But the group he was involved with (and Scott too I think) was called New Monetary Economics (NME). Doing a search for that brought up some articles and comments there:

    http://jpkoning.blogspot.com/2013/09/separating-functions-of-moneythe-case.html#uds-search-results

    “I must confess that my thinking on these issues is still evolving. Part of the difficulty of following the debate about MOE, UOA, and MOA is that different people use different definitions for unit-of-account and medium-of-account. In regards to the latter, I’ve written two posts that try to hone in on the meaning of MOA.

    The group of thinkers who were most interested in splitting up the various functions of money created a field called “New Monetary Economics”, or NME. These people include Tyler Cowen, Bill Woolsey, Yeager, Randy Krozner, and Greenfield. Search google for BFH (Black Hall Fama).” — JP Koning

    JP in response to Scott:
    “Firstly, I borrow my definitions from Bill Woolsey who in turn contributed to the New Monetary Economics (NME) wave of the 1980s. These economists broke down all of money’s various functions into component parts and gave a name to each one. Since they’ve already done the work, and done it well, I defer to them.

    NME introduced one other definition I haven’t touched on: settlement media. For instance, in the BFH (Black-Fama-Hall) System, one of NME’s core models, the dollar was defined as a bundle of consumption goods. This definition was enforced by sales and purchases of gold in the market. The precise quantity of gold used to redeem dollars would have a market value equal to that of the bundle of goods defining the dollar ie. it was variable. In BFH, gold was referred to as the settlement media. The bundle of goods was the BFH’s MOA.”

    Scott’s paper:
    http://www.jstor.org/discover/10.2307/1992131?uid=3739560&uid=2&uid=4&uid=3739256&sid=21103515639801

    White’s paper:
    http://www.cato.org/sites/cato.org/files/serials/files/cato-journal/1989/11/cj9n2-7.pdf

    My question to JP:
    “Oh wait… so you’re combining the definition into the MOA?”

    His response:
    “Apologies if I may have shifted definitions over time. This research that went into this post really clarified my understanding of what is often a confusing set of distinctions between MOA, UOA, and MOE. Here’s where I am now:

    UOA: the various signs like £/s/d and $/¢ and the ratios between them (ie 100 cents in a dollar)
    MOE: the entire range of gold, silver, and copper coins in circulation, many of them foreign.
    MOA: the thing that is used to define the UOA. In medieval days, it was an index or link coin, typically the penny. Should we say that the penny itself was the MOA or was the quantity of silver residing inside the penny the MOA? Did the MOA change when the metal content of the link coin was debased? What if the link coin was recalled and reissued as a gold coin? Did the MOA change from silver to gold, or was the MOA still the penny? Much of this is semantic, but whatever the case, the MOA is a complex feature and we need to understand its various facets if we want to understand what determines the price level. (So long story short, I’m combining the definition into the MOA).”

    http://jpkoning.blogspot.com/2013/09/separating-functions-of-moneythe-case.html?showComment=1379518252608#c5220752594965594782

    I think that last quote is the latest. I pulled the Sumner and White links out of the text, but I haven’t read them yet.

    No wonder this is confusing!

  95. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 09:54

    … so if we are to believe, what I believe are JP’s current definitions, then UOA is literally just “the various signs like £/s/d and $/¢ and the ratios between them (ie 100 cents in a dollar)”

    That implies there’s no value associated with the UOA as it stands on it’s own. The UOA is just a set of self-contained names and symbols and ratios between the names and symbols, with no connection to the outside world.

    It sounds like he’s currently folding the definition associating the UOA with a value into the MOA.

    Thoughts?

  96. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 10:35

    Here’s Bill Woolsey, showing how the UOA (e.g. “$”) and the MOA (e.g. gold) can stay fixed, but the definition relating the two can change (thus changing the value of the UOA):

    http://www.themoneyillusion.com/?p=17412#comment-201444

    … that doesn’t seem to quite match JP’s latest.

  97. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 10:43

    Bill Woolsey brings up a good example here of something that can be an MOA but not an MOE:

    http://www.themoneyillusion.com/?p=17368#comment-200929

    “Just use an example of something that is cannot reasonably be used as a medium of exchange. Use electricity.
    The dollar is 5 kw of electricity. Then you make it 6.”

    So the Brazilians in theory could have done something similar: 1 URV = 1 kw-hr

    I think bill should have included a time multiplier to his measure of electricity, because just “kw” by itself does not fix the value.

  98. Gravatar of ssumner ssumner
    10. March 2014 at 11:05

    Everyone, If you don’t like the term MOA, then use “monetary base” for the current system, since gold plays no role. The base has a well agreed upon definition. And the Fed can control the size of the base.

  99. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. March 2014 at 11:40

    Tom Brown,
    “If it had been defined as 1 URV = $1 from the start, couldn’t we say the “good” was the dollar, and the UOA was simply the name “URV?””

    Yes.

    “But in theory, that wouldn’t have to be the case, right? Say they’d targeted some other stable currency which didn’t circulate in Brazil… perhaps a Swiss Franc. Or perhaps some other good that didn’t circulate in Brazil… like they could have said that 1 URV = the value of 1 mg of weapons grade enriched plutonium. Or 1 URV = the value of 1 Argentine national futbol team fan jersey.”

    This is a good question. Does the MOA have to actually circulate in the country where it is the MOA. I’d say, based on how MOA is defined, no.

    (Incidentally, how can you be so sure that there is no weapons grade plutonium in Brazil?)

    http://nuclearweaponarchive.org/Nwfaq/Nfaq7-4.html

    “Thoughts?”

    Just that since Jürg Niehans coined the term, I’ll stick with his definition. The UOA is the word (e.g. the dollar), and the MOA is the good which defines the UOA (e.g. currency):

    http://www.goairforcehomes.info/images/dollar/dollar1.JPG

    “Here’s Bill Woolsey, showing how the UOA (e.g. “$”) and the MOA (e.g. gold) can stay fixed, but the definition relating the two can change (thus changing the value of the UOA):
    …that doesn’t seem to quite match JP’s latest.”

    I agree 100% with Mayor Bill. I don’t know how it differs from JP’s conception.

  100. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 11:48

    Mark,

    “I don’t know how it differs from JP’s conception.”

    Well, the last time I asked JP, I asked him this:

    “…so you’re combining the definition into the MOA?”

    JP’s response: “So long story short, I’m combining the definition into the MOA”

    But from that comment on Sumner’s, it sounds like Bill refers to at least three separate concepts there:

    1. A UOA (e.g. a symbol like “$”)
    2. An MOA like gold or electricity
    3. A definition which relates the two, and which can change the value the UOA w/o changing either the UOA itself or the MOA (e.g. $1 = 1 oz gold).

  101. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. March 2014 at 12:05

    Tom Brown,
    The UOA is the unit of measure. It’s not only the word it’s how the word is defined. So there’s really only two concepts in Woolsey’s comment, and he’s explaining their meaning by referring them to each other.

    This is much less of a problem of course when you have a fiat currency like the dollar in which the UOA and MOA are inextricably linked.

  102. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 12:33

    Mark, It’s when he says this that makes me think otherwise:

    “The unit of account is the word used to quote prices, make contracts, and keep accounts.”

    “A dollar is 1/20th of an ounce of gold. The dollar is the unit of account and gold is the medium of account.

    It is possible to change the definition of the dollar. The dollar is 1/35th of an ounce of gold. Gold is still the medium of account. The dollar is still the unit of account, but the definition changed.”

    He literally says the UOA is “the word used”

    Also, this reads as three things to me, only one of which changes: “Gold is still the medium of account. The dollar is still the unit of account, but the definition changed.”

    Maybe I’m misinterpreting him. I get your point. I’d be OK incorporating the definition into the UOA, and maybe that’s what he actually means. JP’s comment certainly reads like the UOA only refers to the name or the symbol. Plus JP explicitly is attaching the definition part to the MOA now.

    So I may be wrong, but those are the sentences which made me think that way.

  103. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 12:45

    … and if you are correct about Bill intending to attach the definition to the UOA, then that is still explicitly different that JP’s position, who says he attaches the definition to the MOA. I was pretty clear when I asked him (see the link).

  104. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 12:47

    … although, I frankly don’t understand JP’s position as well as either the way you or I interpret Bill: so I’d prefer Bill in either case.

  105. Gravatar of dannyb2b dannyb2b
    10. March 2014 at 13:13

    Tom

    I would of thought the UOA is just numbers up to 2 decimals. 1.65 etc…and the MOA is dollars. MM might not agree though.

    It seems like MM is built around the idea that the CB creates the money only so they build definitions around this concept.

    Mark

    What does money mean to you? Is it not simply a MOA, UOE and store of value? Does base also have irredeemability because there can be currency collapses?

    What about bitcoin?

  106. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 13:21

    dannyb2b, well I’ve made an effort to contact both Bill and JP once again on this, so hopefully we can resolve this a little bit more.

    JP does explicitly say:

    “UOA: the various signs like £/s/d and $/¢ and the ratios between them (ie 100 cents in a dollar)”

    I’ve gone and asked him now if he means by that a self contained system of symbols and ratios cut off from any value in the outside world. He seemed to imply that last time, since I gave him very explicit examples telling him what I meant by “definition” relating UOA to MOA, and he said he NOW thinks that the definition part belongs to the MOA.

    To me it looked like Bill was in agreement w/ JP regarding the UOA anyway… but Mark disagrees. I actually used to think like Mark: that the “definition” was incorporated into the UOA, but both Bill and JP’s comments changed my mind on that. Hopefully Bill will respond to my request for a bit more clarity on the issue.

    Whew! :D

  107. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 13:30

    … but regardless of either Mark’s or my interpretation of Bill, I do love his electricity example:

    MOA = electricity. Try using that for an MOE!

    Let’s see, I could think of some more:

    MOA = McDonald’s fry cook labor.
    $1 = 1 hr of MOA by definition.

    Again, not a very handy MOE. Not very liquid either.

    Yet you could have a separate MOE, say paper bank notes, each with “$1″ stamped on them, and each worth 1 kw-hr, or 1-hr as the case may be.

  108. Gravatar of dannyb2b dannyb2b
    10. March 2014 at 13:34

    I would think of unit as coming from the word one in latin. Therefore units are whole numbers and cents are sub units.

    $ is the medium (of account and exchange) meaning the exchange is based on $.

    But what it really comes down to IMO is that the definition is based on the idea that money is only created by the CB and not the commercial banks.

  109. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 13:53

    dannyb2b, you lost me a bit on the latin, but yes, things are super simple the way Scott defines it for fiat money in the US: the MOA is simultaneously the most liquid good in the economy (“base money”), it’s also an MOE, and it defines money and thus it’s price is always fixed “at unity.” Meaning a dollar is always $1. You can divide it into 100 cents if you like, but the base unit is pretty clear. And yes, you could say that it is only created by the CB. But even that concept is a little messy in that you could say the CB imparts the MOA’s face value for paper reserve notes and electronic reserve deposit balances… however, coins are different. Their face value is bestowed on them by the Mint, which is under (and not independent from) Tsy. Plus there’s such a thing as a paper “US note” which is different than a reserve note: a US note looks like a paper reserve note, but it is a direct liability of the Treasury, NOT the Fed. There’s not many of them left anymore (they were last created in 1971 I think), but they are officially still currency and still in circulation. Hahaha!

  110. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 14:01

    … I think of the word “unit” in “unit of account” like I think of the word “meter” as being a unit of distance.

  111. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 14:04

    … or rather “$” is a unit of account, in the same way “meter” is a unit of distance.

  112. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 14:21

    dannyb2b, re: your comment at 10. March 2014 at 13:34

    Yes to the 1st paragraph (including the Latin) and practically yes to the 3rd (exceptions noted above). I think you have the idea on the 2nd, but I’m hesitant to exclude the concept of “UOA” from that… but no matter, I think Scott would be overjoyed to exclude the concept of UOA here and just talk about “base money.” He basically said so above.

  113. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. March 2014 at 15:51

    dannyb2b,
    “What does money mean to you? Is it not simply a MOA, UOE and store of value?”

    The three functions of money are 1) as a unit of account, 2) the MOE and 3) a store of value.

    I believe there is a scale of “moneyness” and generally the less liquid and/or redeemable something is, the less moneyness it has. Thus currency (part of the monetary base) has the most moneyness, followed by checkable deposits (part of M1), followed by savings deposits, small time deposits and money-market deposit accounts for individuals (part of M2), followed by large time deposits, money-market deposit accounts for institutions and short term repos (part of Divisia M3), followed by commercial paper and T-Bills (part of Divisia M4).

    “Does base also have irredeemability because there can be currency collapses?”

    Just because a currency experiences hyperinflation doesn’t mean it isn’t irredeemable. It just means you might need a wheelbarrow to help you complete a transaction.

    http://w3.newsmax.com/newsletters/uwr/images/transcript-img14.jpg

    “What about bitcoin?”

    Well obviously bitcoin is not part of any conventional measure of the money supply. It is still not commonly accepted for most transactions, so I would grade very low on the scale of moneyness.

  114. Gravatar of dannyb2b dannyb2b
    10. March 2014 at 17:27

    Mark

    “I believe there is a scale of “moneyness” and generally the less liquid and/or redeemable something is, the less moneyness it has.”

    I completely agree here. What I cant understand is why you would draw the line to not include deposits. Sure they are less redeemable but only in exceptional circumstances. Like I said before the exception seems to become the rule. Even MB can experience these exceptional circumstances also albeit less.

    If we look at the vast majority of exchanges they are done with deposits. So on this measure they have much more moneyness than MB. They are a much more efficient means of transacting than carrying physical notes also. Also safer than physical notes Im pretty sure.

  115. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. March 2014 at 17:37

    dannyb2b,
    “What I cant understand is why you would draw the line to not include deposits.”

    Because that’s the definition of medium of account. Jurg Niehans defined “medium of account” as the good that defines the unit of account. In the case of the dollar, that means currency. Deposits are not currency. This is currency:

    http://www.goairforcehomes.info/images/dollar/dollar1.JPG

  116. Gravatar of dannyb2b dannyb2b
    10. March 2014 at 17:40

    TOM

    Example of units of account: gram, ounce, dollar

    Example of medium of account: gold, silver, dollar

    For me anyway…

    If you were to ask for one of something in a transaction what would that be? One ounce or one gram or one pound? Thats the unit or units your working with.

  117. Gravatar of dannyb2b dannyb2b
    10. March 2014 at 17:45

    I understand Jurg came up with that definition 40 years ago but don’t you also think its floored? A better definition would include deposits. There also is other definitions out there that are less misleading or confusing IMO.

    Its a definition not the definition of MOA. Im sure he was/is a smart dude but no one is right about everything.

  118. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 17:50

    dannyb2b & Mark, JP Koning answered my latest question on UOA, and says his next post will be on the subject of MOA (and that he’ll try to clarify therein: goody!):

    http://jpkoning.blogspot.com/2014/03/is-value-premium-liquidity-premium.html?showComment=1394474536196#c4054499394272339372

    Haven’t heard back from Bill yet.

  119. Gravatar of dannyb2b dannyb2b
    10. March 2014 at 18:01

    “Jurg Niehans defined “medium of account” as the good that defines the unit of account”

    The good that defines the unit of account could be called maybe the medium of reference or just base or base medium (already is called base and thats why Scott said to just call it base if we cant agree on what MOA is).

    But to go and say that deposits aren’t MOA is confusing. Maybe the only difference we have is that I would like to employ terminology that is more accurate to reduce confusion and you just accept whatever terminolgy youre given. I think though that confusing terminolgy will undermone MM thats all.

    “In the case of the dollar, that means currency. Deposits are not currency. This is currency:”

    Currency just comes from old English and means in circulation. I would say deposits are in circulation and actually circulate more than paper money.

  120. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. March 2014 at 18:09

    Tom Brown,
    JPKoning says the following:

    http://jpkoning.blogspot.com/2014/03/is-value-premium-liquidity-premium.html?showComment=1394502909303#c8262633380551863464

    “I certainly hope Bill and I agree, since I learnt the terms from him!”

    And based on Woolsey’s comments it’s quite clear that he accepts Jurg Niehans’ definition of MOA.

  121. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. March 2014 at 18:18

    dannyb2b,
    “But to go and say that deposits aren’t MOA is confusing. Maybe the only difference we have is that I would like to employ terminology that is more accurate to reduce confusion and you just accept whatever terminolgy youre given. I think though that confusing terminolgy will undermone MM thats all.”

    This is not a MM specific term. It is a term that has been used in this fashion in monetary economics for 36 years by such well known economists as Bennett McCallum. It makes no sense at all to change the meaning of a term that has already used in this fashion in books and research papers just because one person finds it to be confusing.

    “Currency just comes from old English and means in circulation. I would say deposits are in circulation and actually circulate more than paper money.”

    Currency already has a specific meaning:

    https://research.stlouisfed.org/fred2/series/MBCURRCIR

    It does not need to be redefined just for you.

  122. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 18:19

    dannyb2b,

    “For me anyway…”

    Personally, I never try to have an original thought on the subject of econ, especially w/ regard to something as fundamental as definitions. The last thing needed in this world is for yet one more opinion to be tossed into the mix, however unimportant it is (like mine for example). As I mentioned before, the best you can generally hope for is to understand what each individual economist means when they use various words. If one economist decides to adopt one or more ideas or definitions from another economist w/o altering anything, well then Hallelujah!! That’s a group of two on the same page! …an almost unheard of large group in econ. Count your blessings! (one. two.)

    Oh, I kid the econ people… but it’s fun (and there’s maybe even a little truth to it). :D

  123. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 18:30

    Mark, I sincerly hope as many people are on the same page as possible… really!… but look at the question I asked JP and how he answered it: it’s pretty darn clear, don’t you think? I didn’t leave much wiggle room:

    My question:
    “Does that imply that the concept of UOA in isolation sets up a self contained system of names and symbols and relates the names and symbols to each other internal to this system with numerical ratios, but that this self contained system is not tied to any value or anything at all in the outside world? It sounds like the “definition” (which I take to be the thing which gives the UOA value in terms of an MOA) you now consider to be part of the MOA. Am I correct?”

    JP’s response:
    “Yep, that’s right.”

  124. Gravatar of dannyb2b dannyb2b
    10. March 2014 at 18:32

    Mark

    Just go along. Accept things as they are. Dont try to improve on anything I get it.

    Tom

    Why don’t you try to have an original thought? Thats what progress is all about. Imagine Einstein or Keynes or Summners or anybody didnt have original thoughts. Hahaha.

    “As I mentioned before, the best you can generally hope for is to understand what each individual economist means when they use various words.”

    Economics all speak a different language precisely as a consequence of having definitions that are contradictory or misleading.

    At least I feel we have got to the bottom of this MOA thing. What it comes down to from the point of view of some is just learn what others have defined and just apply it as it is. But dont try to improve on anything or remove the confusion. Thats not my idea of how economics or anything should be.

  125. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 18:53

    dannyb2b, if you want to have original thoughts, then be my guest: in my opinion you’re just asking for trouble with that attitude ;)

    And actually, maybe something good will come of all this… I pointed JP back to this thread, and he’s going to write a piece on MOA next… so maybe we can heard a few more cats into the same… uh… hmmm, where does one heard cats? I’m not sure how to finish that metaphor. But you get the idea.

  126. Gravatar of dannyb2b dannyb2b
    10. March 2014 at 19:14

    “if you want to have original thoughts, then be my guest: in my opinion you’re just asking for trouble with that attitude ”

    So you dont think for yourself? No offence just trying to understand what your saying.

  127. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. March 2014 at 19:18

    Tom Brown,
    Another example of an UOA that was not an MOA was the European Unit of Account (EUA). It was introduced in 1975 and its value was defined by a basket of European Community member currencies. In 1979 it was replaced by the European Currency Unit (ECU) at a one for one rate and in turn was replaced by the euro at a one for one rate in 1999. Finally in 2002 the euro currency was introduced making it an MOA.

  128. Gravatar of dannyb2b dannyb2b
    10. March 2014 at 19:56

    Mark

    If deposits aren’t money how does taxation work if I receive wages in the form of deposits into my account. You haven’t earnt money you just accumulated financial assets right?

    So M1 or M2 are not measures of the money supply? This would contradict the definition of money you espoused before right?

  129. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 20:06

    dannyb2b,

    “So you dont think for yourself? No offence just trying to understand what your saying.”

    I put a winking smiley up. I thought that’s all I needed to let you know that wasn’t meant to be taken seriously. Sometimes people don’t even do that for you around here.

  130. Gravatar of Tom Brown Tom Brown
    10. March 2014 at 20:07

    Mark, thanks for the example.

  131. Gravatar of Mark A. Sadowski Mark A. Sadowski
    10. March 2014 at 20:16

    dannyb2b,
    I didn’t say deposits are not money. I said they are not MOA.

  132. Gravatar of dannyb2b dannyb2b
    11. March 2014 at 01:32

    Mark

    In a previous comment you said that MPS is not the same as the savings rate. So your saying the wealthy do have a lower MPS?

  133. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. March 2014 at 05:47

    dannyb2b,
    The marginal propensity to save (MPS) is the proportion of each additional dollar of household income that is used for saving:

    http://en.wikipedia.org/wiki/Marginal_propensity_to_save

    On the other hand, the saving rate is the ratio of savings to income.

    The MPS is a marginal, and the savings rate is an average.

    Theoretically it is entirely possible for households with more wealth and/or income to have a higher MPS (which is equivalent to having a lower marginal propensity to consume, or MPC) than households with less wealth and/or income and yet still have a savings rate which is no different.

    And indeed, there are a lot of theoretical models that show MPS goes up (MPC goes down) with wealth and/or income, but is that how people actually behave? What we need are empirical studies.

    Here is one by Sahm, Shapiro and Slemrod (2009):

    http://www.nber.org/papers/w15421.pdf?new_window=1

    In particular look at Table 7. They find no significant difference in plans to spend the 2008 Tax Rebate by income level, although those in the highest income category were more likely than any other group to spend the rebate. They do find a significant difference (p-value = 0.078) by wealth class (stocks), but again, they found those that were in the highest wealth category were by far the most likely to spend the rebate.

  134. Gravatar of dannyb2b dannyb2b
    11. March 2014 at 06:40

    I dont think that study is relevant though becuase it doesnt really include the top 20% who have over 2 million household net worth, 1 milion in financial assets net worth, 95% of financial wealth, 89% of household wealth and 60% of all income.

    http://appam.confex.com/data/extendedabstract/appam/2012/Paper_2134_extendedabstract_151_0.pdf

  135. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. March 2014 at 07:28

    dannyb2b,
    The top wealth category in the Sahm, Shapiro and Slemrod study had a minimum of $250,000 in corporate stocks. According to Wolffe Table 5 stocks made up only 11.4% of of total household wealth. You do the math.

  136. Gravatar of dannyb2b dannyb2b
    11. March 2014 at 07:37

    But wouldn’t holdings of other assets be in similar percentages according to wealth strata therefore making stocks reasonable representation of wealth holdings?

  137. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. March 2014 at 08:21

    dannyb2b,
    That’s my whole point. If corporate stocks are 11.4% of total household wealth and the top wealth category holds a minimum of $250,000 in corporate stocks, that implies that the top wealth category holds a *minimum* of about $2,190,000 in wealth of all kinds.

  138. Gravatar of dannyb2b dannyb2b
    11. March 2014 at 18:01

    So doesnt this study support my case that transmiting money to people is more efficient because of a higher MPS average than just asset price increases under current monetary policy system? Increased asset prices wont transmit into spending as much as money transfers.

    If you give the wealthy money they spend but if their asset prices increase they might not spend much more. Liquidity may be part of it.

    Current MP is centered around adjusting the supply of assets (MBS, treasuries, MB) and affecting asset prices and interest rates more broadly.

    This study doesnt prove much really though.

    Small sample: only 49 people received a rebate that had stocks over 250000 in stocks

    The spend to save ratio is highest for lowest income earners

    Lower wealth people have to sacrifice spending to pay off debt more.

    The spending to saving ratio is pretty even across the board with the highest on both extremes of wealth.

    That survey is only showing what people are saying they will do with the rebate not what they are doing with it.

  139. Gravatar of dannyb2b dannyb2b
    11. March 2014 at 18:08

    “The only data that even comes close to the correct aggregate measure is the PSID measure which uses an “active” measure of savings that effectively excludes capital gains income. This is not suprising because *capital gains are not, nor should they be, considered part of GDP*.”

    Capital gains shouldn’t be a part of gdp but do represent savings. They should be included as savings.

  140. Gravatar of Mark A. Sadowski Mark A. Sadowski
    11. March 2014 at 19:47

    “So doesnt this study support my case that transmiting money to people is more efficient because of a higher MPS average than just asset price increases under current monetary policy system? Increased asset prices wont transmit into spending as much as money transfers.”

    That’s not my interpretation at all. An increase in asset values and a lump sum transfer are for all intents and purposes an increase in net wealth. The MPC should be identical in each case.

    “Small sample: only 49 people received a rebate that had stocks over 250000 in stocks…The spend to save ratio is highest for lowest income earners…Lower wealth people have to sacrifice spending to pay off debt more…The spending to saving ratio is pretty even across the board with the highest on both extremes of wealth.”

    You’re missing the point. The Reuters/University of Michigan Survey of Consumers is the largest and longest running consumer survey of its kind. The only statistically significant difference between the various groups was by wealth. Wealthier people had a higher MPC than less wealthy people.

    “That survey is only showing what people are saying they will do with the rebate not what they are doing with it.”

    Yes, of course, this is a defect of all surveys. But this is the best available *empirical* evidence that we have on the MPC by income and wealth class. I might add that Slemrod has excellent reputation.

    “Capital gains shouldn’t be a part of gdp but do represent savings. They should be included as savings.”

    Personal savings are part of GDP, but capital gains are not. Wouldn’t referring to capital gains as personal savings lead to needless confusion?

  141. Gravatar of dannyb2b dannyb2b
    11. March 2014 at 21:39

    “Personal savings are part of GDP,”

    Really? How is that worked out?

    ” An increase in asset values and a lump sum transfer are for all intents and purposes an increase in net wealth.”

    To convert assets to money should incur extra taxes and other costs.

    “The only statistically significant difference between the various groups was by wealth. Wealthier people had a higher MPC than less wealthy people. ”

    Id like to read up on that if you can provide a reference.

  142. Gravatar of Tom Brown Tom Brown
    11. March 2014 at 23:00

    dannyb2b, regarding your first point:

    ““Personal savings are part of GDP,”

    Really? How is that worked out?”

    I literally know nothing about this subject, but it did occur to me that I’d seen that in an accounting identity type formula before. I’m sure there are a ton of other sources on this, but here’s where I saw it:

    http://pragcap.com/yes-government-deficits-equal-private-surpluses

    GDP = C + S + T

    Where C = consumption, S = saving, T = taxes

  143. Gravatar of dannyb2b dannyb2b
    11. March 2014 at 23:18

    If we assume saving equals investment then the identity is correct. But it depends how savings is defined.

  144. Gravatar of Tom Brown Tom Brown
    11. March 2014 at 23:36

    Again, I’m definitely no expert, but if you look in the comments the author (Cullen) goes through some super simple examples involving building log cabins (IIRC). He gets some feedback on how to do the accounting properly from some accountant types. I don’t know your background… perhaps you have some actual econ education under your belt… I pretty much just go off what I read in these blogs! Ha… so I found the examples helpful.

  145. Gravatar of dannyb2b dannyb2b
    12. March 2014 at 00:58

    Im only an undergrad in econ/finance. I didnt even click on the link, too tired.

  146. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. March 2014 at 05:27

    dannyb2b,
    “Id like to read up on that if you can provide a reference.”

    As I said in my first comment, it’s in Slemrod et al, Table 7. They find a significant difference by wealth class. The p-value is 0.078 which means it is statistically significant at the 10% level.

    “Really? How is that worked out?”

    There are three approaches to computing GDP: 1) production, 2) expenditure and 3) income.

    The US uses the National Income and Product Accounts (NIPA) system and the rest of the planet uses the System of National Accounts (SNA). GDI is essentially GDP measured by the income approach. Japan produces a separate income approach GDP measure that is slightly different from the other two measures, but they still call it GDP. (They call it the “income approach GDP”.) In all other countries the three different approaches to computing GDP are all called “GDP”, and they are all precisely equal to each other.

    So, under NIPA:

    GDP = GDI + a statistical discrepancy. Disposable Personal Income (DPI) is a subset of GDI. Personal Savings (PSAVE) are a subset of DPI.

    And under SNA:

    DPI is a subset of GDP (measured by the income approach) and PSAVE is a subset of DPI.

    “Im only an undergrad in econ/finance.”

    This explains a lot. I’ll try and be more patient. But please try and curb the urge to post outlandish claims without supporting evidence. There’s a very strong possibility that you don’t know what you think you know.

  147. Gravatar of dannyb2b dannyb2b
    12. March 2014 at 18:37

    “You’re missing the point. The Reuters/University of Michigan Survey of Consumers is the largest and longest running consumer survey of its kind. The only statistically significant difference between the various groups was by wealth. Wealthier people had a higher MPC than less wealthy people. ”

    Ok in one study with a sample of 49 wealthier people. But what I meant was is this more empirically supported like with more studies? Alot of people repeat the idea that wealthier people have a lower MPC.

    This study also seems to support the idea that higher levels of debt adversely affect the efficiency of monetary policy because people with higher debt consume less. Therefore creating money on a non debt basis directly with the public should be more efficient.

    “the NIPA aggregate measures of current income—gross domestic income (GDI) for example—are viewed as arising from current production, and thus they are theoretically
    equal to their production counterparts (GDI equals GDP). NIPA saving is measured asthe portion of current income that is set aside rather than spent on consumption or related
    purposes. ”

    page 2-6

    http://www.bea.gov/national/pdf/NIPAhandbookch1-4.pdf

    It seems like they include the psave in order to establish the total income. They include the portion of peoples income that they saved and the portion they spent to figure out total income. That doesnt mean savings are a part of gdp it means income only is a part of gdp. Saving doesnt lead to income only spending.

    Therefore its incorrect to say psave are a part of gdp, they use psave only to establish income. I might be wrong though.

  148. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. March 2014 at 20:57

    dannyb2b,
    “Ok in one study with a sample of 49 wealthier people. But what I meant was is this more empirically supported like with more studies?”

    There are only a handful of empirical studies on the MPC by income and/or wealth level. Read the literature review in Slemrod.

    “Alot of people repeat the idea that wealthier people have a lower MPC.”

    Yes, I know. This is an assumption of a great many theoretical models. But there is no empirical evidence that this is in fact true.

    “This study also seems to support the idea that higher levels of debt adversely affect the efficiency of monetary policy because people with higher debt consume less. Therefore creating money on a non debt basis directly with the public should be more efficient.”

    Fortunately, the Bank Lending Channel is only one of the nine channels of the Monetary Transmission Mechanism so this should not be a problem.

    “It seems like they include the psave in order to establish the total income. They include the portion of peoples income that they saved and the portion they spent to figure out total income. That doesnt mean savings are a part of gdp it means income only is a part of gdp. Saving doesnt lead to income only spending.”

    Theoretically GDP should equal GDI exactly because aggregate expenditures should equal aggregate income. Thus all saving is balanced by someone elses spending. This is taught in Principles of Macroeconomics. Have you taken Econ 102 yet?

  149. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. March 2014 at 21:23

    For example, the NIPA handbook says on the following page (2-7) that “[personal savings] may generally be viewed as the portion of personal income that is used either to provide funds to capital markets or to invest in real assets such as residences.”

  150. Gravatar of dannyb2b dannyb2b
    12. March 2014 at 22:54

    I have graduated already. Maybe I should say Im postgrad.

    “Fortunately, the Bank Lending Channel is only one of the nine channels of the Monetary Transmission Mechanism so this should not be a problem.”

    All the channels (balance sheet, wealth , consumption etc…)revolve around 2 effects:

    1)Assets price changes

    2)Interest rates changes

    Therefore its easier just to say there is 2 transmision channels IMO.

    Interest rates affect lending and are therefore very important. 1 out of 9 doesnt really convey the importance of the interest rate channel. I would say more like 1 out of 2 or 1 out of 3 in the current economy.

    “This is an assumption of a great many theoretical models. But there is no empirical evidence that this is in fact true.”

    It just depends on how you account for savings though. The study I cited indeed says that higher income equals higher MPS.

    https://www.dartmouth.edu/~jskinner/documents/DynanKEDotheRich.pdf

    “The only data that even comes close to the correct aggregate measure is the PSID measure which uses an “active” measure of savings that effectively excludes capital gains income. This is not suprising because *capital gains are not, nor should they be, considered part of GDP*.”

    Im not saying capital gains are income but the proceeds of capital gains are largely used to save so cap gains should be counted towards the savings rate.

    Capital gains should not be part of gdp obviously. Fair enough you dont include capital gains as income. But what happens with the proceeds of cap gains either spent or saved should be included as gdp or savings respectively. If these arent included in the gdp or savings count then the MPS and gdp is incorrect.

    Monetary policy is largely centered on affecting asset prices through QE or fed rate adjustments which affect wealth and spending. Becuase monetary policy is so centered on wealth and its effect on spending IMO changes in wealth should be included as changes in savings. Savings dont have to come from income they can com from increased asset prices. The MPS could be derived from :

    1- ( Δconsume/Δ income+Δ in wealth) Its not like the only way to save is by accumulating money you earn form labour from wages or profits. You may also accumulate assets in order to save like pension or any investment really.

    If we measured the MPS in the previous manner then wealthier would have a much higher MPS I suspect.

    “all saving is balanced by someone elses spending.”

  151. Gravatar of dannyb2b dannyb2b
    12. March 2014 at 22:55

    “all saving is balanced by someone elses spending.”

    How?

  152. Gravatar of Mark A. Sadowski Mark A. Sadowski
    13. March 2014 at 04:05

    dannyb2b,
    “Interest rates affect lending and are therefore very important. 1 out of 9 doesnt really convey the importance of the interest rate channel. I would say more like 1 out of 2 or 1 out of 3 in the current economy.”

    Using Mishkin’s explanation of the mechanisms, interest rates can also be said to affect the Exchange Rate Channel and the Cash Flow Channel for example. I would not count either of these as “lending”. The Bank Lending Channel is only one channel, and has not played an important role in this recovery, nor did it play an important role in the Great Depression.

    “It just depends on how you account for savings though. The study I cited indeed says that higher income equals higher MPS.”

    The Dynan et al study is on the savings rate, not the MPS. Moreover it does not estimate the savings rate in a manner that is consistent with NIPA.

    “Im not saying capital gains are income but the proceeds of capital gains are largely used to save so cap gains should be counted towards the savings rate.”

    In the national accounts, personal savings are estimated as a residual (disposable income less consumption). If you don’t count capital gains as income than obviously you are not directly counting them towards the savings rate.

    “But what happens with the proceeds of cap gains either spent or saved should be included as gdp or savings respectively. If these arent included in the gdp or savings count then the MPS and gdp is incorrect.”

    But GDP is a measure of current production of goods and services. Were one to count the income from asset swaps it would no longer be GDP. Conceptually it would be comething else entirely.

    (As a side point, the MPS is not the same as the savings rate. One is a marginal and the other is an average. I’ve already defined these concepts for you clearly. You do understand the difference, don’t you?)

    “Becuase monetary policy is so centered on wealth and its effect on spending IMO changes in wealth should be included as changes in savings.”

    One does not automatically follow from the other. In any case, we already have measures of wealth, just as we already have measures of income. One is a stock and one as a flow. You seem determined (as many are) on conflating the two.

    “If we measured the MPS in the previous manner then wealthier would have a much higher MPS I suspect.”

    Again you’re confusing MPS with the savings rate. These are two different concepts and one has no direct bearing on the other.

    “How?”

    Well, one very common model of the problem is the ISLM model.

    http://en.wikipedia.org/wiki/IS%E2%80%93LM_model

    In that model, savings equals investment in equilibrium, and this equilibrium comes about through the interest rate mechanism. Physical investment is of course a part of aggregate expenditures and hence is part of the expenditure approach to GDP.

    “I have graduated already.”

    Then there is no reason for me to be patient. This is reason for me to be exasperated.

    How on earth does somebody graduate with a degree in economics and not know that aggregate expenditures = aggregate income, that aggregate savings is a component of aggregate income, and that aggregate savings equals aggregate investment in equilibrium?

    If I have to teach Econ 102 online to you, then you should ask for your money back to pay me tuition.

  153. Gravatar of dannyb2b dannyb2b
    13. March 2014 at 17:23

    “Using Mishkin’s explanation of the mechanisms, interest rates can also be said to affect the Exchange Rate Channel and the Cash Flow Channel for example. I would not count either of these as “lending”. The Bank Lending Channel is only one channel, and has not played an important role in this recovery, nor did it play an important role in the Great Depression.”

    You could say there is only one channel if not for QE becuase every effect depends on the change in the FFR (assuming required reserves, regulatory and capial requirements stay the same). Its obviously arbitrary. The reason some people say there is only two is becuase all effects whether balance sheet or anything are caused by the change in rates. Becuase of QE you could say there is two channels becuase it move other rates (MBS) and money levels which affects asset prices.

    The two biggests effect of changes in rates domestically are lending markets (lending levels and rates on mortgages for example) and asset prices.

    The xrate channel is affected because of different interest rates. So you could say its a subset of the interest rate channel. Demand for the currency changes because of differential funding costs and returns. Cash flows are also dpendant on changes in rates.

    You can say there is 9 channels or two, no one is wrong. But all nine channels revolve around rates (fed funds) and asset prices. You could even say there is one channel but becuase of .

  154. Gravatar of dannyb2b dannyb2b
    13. March 2014 at 18:32

    “The Dynan et al study is on the savings rate, not the MPS. Moreover it does not estimate the savings rate in a manner that is consistent with NIPA.”

    I know its not consistant with NIPA. Savings only includes savings from income from current gdp. Why not include savings from changes in asset prices in current period? Why not include all savings? Wealth is savings.

    “Personal saving (2–6) is personal income less the sum of personal outlays and personal tax and nontax payments. It is the current saving of individuals (including proprietors and partnerships), nonprofit institutions that primarily serve individuals, life insurance carriers, private noninsured welfare funds, and private trust funds. Personal saving may also be viewed as the sum of the net acquisition of financial assets (such as cash and deposits, securities, and the change in the net equity of individuals in life insurance and in private noninsured pension plans) and the change in physical assets less the sum of net borrowing and of consumption of fixed capital. ”

    Alongside net acquisition of financial assets why not also include net changes in wealth of all holdings.

  155. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. March 2014 at 04:48

    dannyb2b,
    “You could say there is only one channel if not for QE becuase every effect depends on the change in the FFR (assuming required reserves, regulatory and capial requirements stay the same). Its obviously arbitrary. The reason some people say there is only two is becuase all effects whether balance sheet or anything are caused by the change in rates. Becuase of QE you could say there is two channels becuase it move other rates (MBS) and money levels which affects asset prices.”

    You could even say there is only one channel of the Monetary Transmission Mechanism (MTM) if enumerating the channels was based purely on the source of the effect since all monetary policy effects ultimately derived from open market operations which change the size of the monetary base. But since the goal of enumerating the channels of MTM is identify the specific chains of causal effects from monetary policy to the economy that would defeat its whole purpose.

    “The two biggests effect of changes in rates domestically are lending markets (lending levels and rates on mortgages for example) and asset prices.”

    Actually the evidence for the effect of interest rates on asset prices is extraordinarily weak. In fact in his summary of how monetary policy effects stock prices he leaves it somewhat vague.

    “The xrate channel is affected because of different interest rates. So you could say its a subset of the interest rate channel. ”

    Yes, the conventional argument is that it is interest rates that determine exchaneg rates. However, Bennett McCallum has written couple of papers where he argues the Exchange Rate Channel renders the liquidity trap nonexistent precisely because it is not dependent on interest rate changes. And in fact countries like Bulgaria, Denmark, Japan and Switzerland have all been conducting active exchange rate policies of one form or another despite being up against the zero lower bound in interest rates.

    “Demand for the currency changes because of differential funding costs and returns. Cash flows are also dpendant on changes in rates.”

    This is all true of course but in my view interest rates are just an epiphenomenon, not the source of the effect. Moreover the empirical evidence shows that many of the conventional models for how interest rates effect the economy are quite simply wrong. The Traditional real Interest Rate Channel, as described by Mishkin, is in fact is something of a fantasy. Even Mishkin elaborates on this in his intermediate textbook.

    “You can say there is 9 channels or two, no one is wrong. But all nine channels revolve around rates (fed funds) and asset prices. You could even say there is one channel but becuase of .”

    As I said above, reducing the number of channels is counterproductive. In fact, it is possible that as time goes on the list will be expanded.

  156. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. March 2014 at 04:53

    dannyb2b,
    “I know its not consistant with NIPA. Savings only includes savings from income from current gdp. Why not include savings from changes in asset prices in current period? Why not include all savings? Wealth is savings…Alongside net acquisition of financial assets why not also include net changes in wealth of all holdings.’

    If the market value of an asset increases no savings derived from the production of new goods and services has taken place. Increases in wealth due to increases in asset prices are not savings out of the production of new goods and services.

  157. Gravatar of dannyb2b dannyb2b
    14. March 2014 at 05:34

    “If the market value of an asset increases no savings derived from the production of new goods and services has taken place. Increases in wealth due to increases in asset prices are not savings out of the production of new goods and services.”

    I know. But what Im trying to say is that all wealth is savings. I think it would be better to include all wealth in a savings rate measure. This would show how much the wealthier have saved compared to what they spend.

  158. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. March 2014 at 07:02

    dannyb2b,
    “But what Im trying to say is that all wealth is savings.”

    No, wealth is wealth, and income is income. Savings adds to the stock of wealth, but not all changes in wealth derive from income.

    Trying to conflate the two is a blatant exercise in obfuscation. Clarity is hard enough to achieve without propagandists constantly trying to render our language completely useless.

  159. Gravatar of dannyb2b dannyb2b
    14. March 2014 at 17:52

    “No, wealth is wealth, and income is income. Savings adds to the stock of wealth, but not all changes in wealth derive from income. ”

    Once again it comes down to definition. I understand the flow and stock concept obviously. But what is saved in the current period is wealth or becomes wealth. I would therefore add it to existing wealth in calculating a measure of savings or wealth compared to spending.

    “Actually the evidence for the effect of interest rates on asset prices is extraordinarily weak. In fact in his summary of how monetary policy effects stock prices he leaves it somewhat vague.”

    Ceteris paribus if you change the relative supply of assets their prices change. Of course this isnt being observed in many instances because the fed reacts to growth and inflation. So for example we see a contraction which brings down assets and then the fed starts to bring down rates and vice versa.

  160. Gravatar of dannyb2b dannyb2b
    14. March 2014 at 18:27

    What do you think of the idea that asset price increases are a form of capital income. Because the asset went up in value it means that it provided (produced?) something or value over that period (greater store of value than currency etc…). Isn’t that also akin to a service?

  161. Gravatar of dannyb2b dannyb2b
    14. March 2014 at 18:36

    The valuation of an asset is its expected future income. So if you sell and realize a cap gain now why wouldnt you include that as income?

  162. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. March 2014 at 19:17

    dannyb2b,
    “I would therefore add [what is saved] to existing wealth in calculating a measure of savings or wealth compared to spending.”

    To be frank this is gibberish. Wealth already includes savings. And we already have measures of savings. I really have no idea what you are trying to say here.

    “Of course this isnt being observed in many instances because the fed reacts to growth and inflation. So for example we see a contraction which brings down assets and then the fed starts to bring down rates and vice versa.”

    As a reason for why we don’t observe any meaningful effect of interest rates on asset prices this purely hypothetical. There is absolutely no empirical evidence that any of this is true.

    “What do you think of the idea that asset price increases are a form of capital income. Because the asset went up in value it means that it provided (produced?) something or value over that period (greater store of value than currency etc…). Isn’t that also akin to a service?…The valuation of an asset is its expected future income. So if you sell and realize a cap gain now why wouldnt you include that as income?”

    The income stream of new goods and services an asset produces is already being included in GDP as it is produced. Swapping the asset for another asset doesn’t produce any magical extra income derived from the production of new goods and services. That’s just an asset swap.

  163. Gravatar of dannyb2b dannyb2b
    14. March 2014 at 19:39

    The benefit an asset conferred in terms of being a better store of value than currency when realized (cap gain) is a service. Therefore it should be counted as GDP and income. Swapping assets isnt really extra gdp but the price change should represent gdp.

  164. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. March 2014 at 20:09

    dannyb2b,
    “The benefit an asset conferred in terms of being a better store of value than currency when realized (cap gain) is a service.”

    A *service* is by definition both perishable and variable. A *store of value* must be able to be saved and retrieved at a later time, and be predictably useful when retrieved. These two things are about as polar opposite as two economic concepts could be.

  165. Gravatar of dannyb2b dannyb2b
    14. March 2014 at 21:56

    “A *store of value* must be able to be saved and retrieved at a later time, and be predictably useful when retrieved.”

    It was saved and retrieved if the cap gain was realized. Should stock brokers and traders income not be part of GDP also by your definition?

  166. Gravatar of Mark A. Sadowski Mark A. Sadowski
    15. March 2014 at 07:09

    dannyb2b,
    “It was saved and retrieved if the cap gain was realized.”

    And if a capital gain was not realized? Doesn’t sound very predictable does it? So is it a store of value or isn’t it?

    “Should stock brokers and traders income not be part of GDP also by your definition?”

    Well, it’s not just my definition is it? The entire planet uses this definition when computing GDP.

    The compensation of employees in the securities, commodity contracts and other financial investments and related activities (i.e. “stockbrokers and traders”) subsector (NAICS 523) *is* included in GDP.

    Compensation totaled $190.1 billion (BEA) in 2012 for 859.1 thousand employees (FRED). This represented 2.2% of compensation of employees (FRED) and 0.64% of payroll employment (FRED). The total value added by the sector was $183.1 billion in 2012 representing just over 1.1% of GDP (BEA). Note that the total value added was less than employee compensation due to a negative gross operating surplus. Employee compensation is an unusually high proportion of total value added in NAICS 523 because labor dominates physical capital as a factor input.

  167. Gravatar of dannyb2b dannyb2b
    15. March 2014 at 16:13

    “And if a capital gain was not realized? Doesn’t sound very predictable does it? So is it a store of value or isn’t it?”

    When it goes up, yes. When it goes down, no. Are trolling me?

    “Well, it’s not just my definition is it? The entire planet uses this definition when computing GDP.”

    Seems like asset trading is counted in GDP in that sense. I agree because a service is conferred just like what an asset provides to its owner and maybe others.

    Do you think that because something like a definition is commonly agreed upon it is always correct or cant be improved upon?

  168. Gravatar of Mark A. Sadowski Mark A. Sadowski
    15. March 2014 at 18:00

    dannyb2b
    “When it goes up, yes. When it goes down, no. Are trolling me?”

    No, I’m just trying to get you to think clearly. If it goes down then it’s not really a very good store of value is it?

    “Seems like asset trading is counted in GDP in that sense. I agree because a service is conferred just like what an asset provides to its owner and maybe others.”

    The *people* doing the asset trading are providing the service. The *assets* aren’t doing squat.

    “Do you think that because something like a definition is commonly agreed upon it is always correct or cant be improved upon?”

    Both. You seem to think you are the first person that has ever given any thought to these matters. NIPA and SNA was hammered out after considerable thought in the 1930s, 1940s and 1950s and has been steadily refined ever since.

  169. Gravatar of dannyb2b dannyb2b
    15. March 2014 at 19:27

    “No, I’m just trying to get you to think clearly. If it goes down then it’s not really a very good store of value is it?”

    Your not thinking too clear. No it isnt and therefore it doesnt count as capital gains income. When it goes up though it is.

    “The *people* doing the asset trading are providing the service. The *assets* aren’t doing squat.”

    No financial asset can exist without people running the underlying legal, financial and governmental systems. Asset prices don’t change in a vacuum there is human involvement. Therefore the change in price of the asset is a consequence of people.

    “You seem to think you are the first person that has ever given any thought to these matters. NIPA and SNA was hammered out after considerable thought in the 1930s, 1940s and 1950s and has been steadily refined ever since.”

    There has been alot of thought put into how monetary policy is conducted but ngdp future targeting isnt happening. That must mean going by your logic that ngdp futures targeting is no good.

  170. Gravatar of Mark A. Sadowski Mark A. Sadowski
    15. March 2014 at 20:02

    dannyb2b,
    “When it goes up though it is.”

    If it doesn’t behave in a predictable fashion then it is not really a store of value, is it?

    “No financial asset can exist without people running the underlying legal, financial and governmental systems. Asset prices don’t change in a vacuum there is human involvement. Therefore the change in price of the asset is a consequence of people.”

    That’s not the point. The point is that the asset isn’t the the thing that is providing the *service*.

    “There has been alot of thought put into how monetary policy is conducted but ngdp future targeting isnt happening. That must mean going by your logic that ngdp futures targeting is no good.”

    NGDPLT only proposes to change the monetary policy target. It is evolutionary, not revolutionary. Moreover there is a well developed rationale for switching to NGDPLT.

    What you are proposing is a sweeping redefinition of several concepts that have been evolving at a very slow pace for over half a century. And it’s my considered impression that the amount of serious thought you have given to this borders on nihl. You barely have even a rudimentary grasp of the very things that you think are so essential to change. This tells me that this is more a project about statisfying some deep maniacal urge than in doing anything that is truly beneficial to anyone other than yourself.

  171. Gravatar of dannyb2b dannyb2b
    15. March 2014 at 21:16

    “If it doesn’t behave in a predictable fashion then it is not really a store of value, is it?”

    If the asset goes up then it does and thats when you realize capital gain income.It didnt if the asset went down thats why its not counted as a gain is it?

    “That’s not the point. The point is that the asset isn’t the the thing that is providing the *service*.”

    Neither is the paycheck doing the labor.

    “What you are proposing is a sweeping redefinition of several concepts that have been evolving at a very slow pace for over half a century. And it’s my considered impression that the amount of serious thought you have given to this borders on nihl. You barely have even a rudimentary grasp of the very things that you think are so essential to change. This tells me that this is more a project about statisfying some deep maniacal urge than in doing anything that is truly beneficial to anyone other than yourself.”

    Capital gains is included in some measures. So Im proposing what already exists. Im also proposing other things to add on but the capital gains aspect already exists.

    No bank does ngdp targeting. Your proposing a pretty big change there. (I think ngdp targeting would be better than what we have now btw).

    It seems like you keep trying to or cant resist diverting off to ad hominems. You undermine yourself by doing this, you are otherwise quite smart IMO.

  172. Gravatar of Mark A. Sadowski Mark A. Sadowski
    15. March 2014 at 21:34

    dannyb2b,
    “If the asset goes up then it does and thats when you realize capital gain income.It didnt if the asset went down thats why its not counted as a gain is it?”

    If the asset’s value isn’t predictable its not a good store of value.

    “Neither is the paycheck doing the labor.”

    The person receiving the paycheck is doing the labor.

    “Capital gains is included in some measures. So Im proposing what already exists. Im also proposing other things to add on but the capital gains aspect already exists.”

    Capital gains is only included in some measures of taxable income.

    “No bank does ngdp targeting. Your proposing a pretty big change there.”

    No central bank did Inflation Targeting (IT) before 1990. Now most central banks do it.

    NGDPLT merely proposes targeting the position of the AD curve rather than the point where it intersects the SRAS curve as with IT. That’s easier given the fact the SRAS curve moves. It’s also actually a small change that should be highly significant.

  173. Gravatar of dannyb2b dannyb2b
    16. March 2014 at 00:54

    “If the asset’s value isn’t predictable its not a good store of value. ”

    Im not saying its a good store of value if it declines heavily so therefore wouldn’t count it. But when it rises I would. Other assets get used as a store of value such as art, gold and real estate also.

    The benefit of capital gains is intangible also like art IMO. Like if Apple rises it benefits all sorts of things that are intangible.

    It seems inconsistent to include trading income (investment banking, stock trading etc) in GDP while not capital gains income.

  174. Gravatar of dannyb2b dannyb2b
    16. March 2014 at 02:10

    What about the asset itself as a good? Its like a value added good if the price went up.

  175. Gravatar of Mark A. Sadowski Mark A. Sadowski
    16. March 2014 at 05:43

    dannyb2b,
    “Im not saying its a good store of value if it declines heavily so therefore wouldn’t count it. But when it rises I would. Other assets get used as a store of value such as art, gold and real estate also.”

    Actually the fact that a store of value is not a service was the original issue. Even if the asset is a good store of value, a store of value is not a service, especially since by definition it is not perishable.

    “The benefit of capital gains is intangible also like art IMO. Like if Apple rises it benefits all sorts of things that are intangible.”

    How so?

    “It seems inconsistent to include trading income (investment banking, stock trading etc) in GDP while not capital gains income.”

    Asset trading involves a lot of labor input like most services, and very much unlike an asset.

    “What about the asset itself as a good? Its like a value added good if the price went up.”

    In the national accounts “value added” has a very specific meaning. It refers to the cost of the additional factor input (labor, capital etc.) put into the good. It does not refer to an increase in its price.

  176. Gravatar of dannyb2b dannyb2b
    16. March 2014 at 09:32

    If the price went up value has been added. For example look at a collectible vehicle that has been preserved or a piece of art. It has greater value than purchase price because some value has been added. The labour involved may simply be preserving or storing an asset. If we apply the principle that price derives value then some increase in value has been experienced.

    There is input involved in holding or maintaining any asset. Shareholders have to make sure the company is run, appoint executives etc…

    There is sacrifice in holding an asset as in risk taking, opportunity cost…

  177. Gravatar of Mark A. Sadowski Mark A. Sadowski
    16. March 2014 at 10:21

    dannyb2b,
    “If the price went up value has been added. For example look at a collectible vehicle that has been preserved or a piece of art. It has greater value than purchase price because some value has been added. The labour involved may simply be preserving or storing an asset. If we apply the principle that price derives value then some increase in value has been experienced.”

    The cost of restoring a collectible vehicle is already counted in GDP. There’s no need to count it again.

    “There is input involved in holding or maintaining any asset. Shareholders have to make sure the company is run, appoint executives etc…

    There is sacrifice in holding an asset as in risk taking, opportunity cost…”

    A share of stock is not a good.

  178. Gravatar of Tom Brown Tom Brown
    16. March 2014 at 15:12

    Mark and dannyb2b, JP Koning finally came out with his latest post on MOA:

    http://jpkoning.blogspot.com/2014/03/credit-cards-as-media-of-account.html

    I made the footnote (the “Tom Brown multiplier” Lol)! :D

  179. Gravatar of dannyb2b dannyb2b
    16. March 2014 at 17:30

    “The cost of restoring a collectible vehicle is already counted in GDP. There’s no need to count it again. ”

    Its a good and value has been added. There is no restoration happening though. The vehicle is increasing in value just by being placed in a garage. Like a piece of art that increases in value over time.

    Increases in price of an asset denotes an increase in value to the system and that’s why I think they should be included in income and possibly gdp. Non current goods/assets can also be value added and I think the way we should measure this is by capital gains.

  180. Gravatar of Mark A. Sadowski Mark A. Sadowski
    16. March 2014 at 17:42

    danny2b2,
    If no factor inputs have been expended on an asset, then no value has been added in a NIPA or SNA sense. A price increase is not the same as “value added”.

  181. Gravatar of dannyb2b dannyb2b
    16. March 2014 at 17:58

    “If no factor inputs have been expended on an asset, then no value has been added in a NIPA or SNA sense. A price increase is not the same as “value added”.”

    But there is always a factor input. For example storing an object, participating in shareholder activities and general maintenance on a house.

  182. Gravatar of Mark A. Sadowski Mark A. Sadowski
    16. March 2014 at 18:23

    dannyb2b,
    To the degree factor inputs have been added those are already counted in the flow of GDP, at least with respect to the costs of storing an object or the general maintenance of a house. A share on the other hand is not a good.

  183. Gravatar of dannyb2b dannyb2b
    16. March 2014 at 18:46

    For example if you buy a car and keep it in storage for 20 years when does the storage get included in gdp?

    But a company is an asset (a share is a piece of the asset) which like a good can have value added and is realized upon sale.

    Including value added to non current goods/assets should also be a part of gdp IMO.

  184. Gravatar of Mark A. Sadowski Mark A. Sadowski
    16. March 2014 at 19:27

    dannyb2b,
    “For example if you buy a car and keep it in storage for 20 years when does the storage get included in gdp?”

    The rent you pay to the storage facility is part of quarterly GDP.

    “But a company is an asset (a share is a piece of the asset) which like a good can have value added and is realized upon sale.”

    A company’s plant and equipment can have value added through the cost of additional factor input used on plant and equipment. This is reflected in investment in private nonresidential structures and equipment and so is already part of GDP.

  185. Gravatar of Tom Brown Tom Brown
    16. March 2014 at 19:30

    Mark (or anybody), do you have a copy of:

    Niehans, Jurg. The Theory of Money. Baltimore: Johns Hopkins University Press, 1978.

    If so, maybe you can copy the relevant pages for JP:

    http://jpkoning.blogspot.com/2014/03/credit-cards-as-media-of-account.html?showComment=1395013896754#c5478292911332625084

  186. Gravatar of dannyb2b dannyb2b
    16. March 2014 at 19:36

    “The rent you pay to the storage facility is part of quarterly GDP.”

    If I stored it at my house and it was my car I meant.

    “A company’s plant and equipment can have value added through the cost of additional factor input used on plant and equipment. This is reflected in investment in private nonresidential structures and equipment and so is already part of GDP.”

    If you spend 10k to make a car and sell it for 100k then 90k was value added and is income. If someone buys car for 100 and then sells it for 1 million at market rate value has also been added to the car also. Same goes for a company. Irrespective of level of investment the gain should be counted at market. Like the car when it was produced.

    You are describing the current system and I am describing how it is inconsistent.

  187. Gravatar of Mark A. Sadowski Mark A. Sadowski
    16. March 2014 at 20:18

    dannyb2b,
    “If I stored it at my house and it was my car I meant.”

    Then it obviously did not cost you very much to store it, unless you consider the opportunity cost.

    “If you spend 10k to make a car and sell it for 100k then 90k was value added and is income. If someone buys car for 100 and then sells it for 1 million at market rate value has also been added to the car also. Same goes for a company. Irrespective of level of investment the gain should be counted at market. Like the car when it was produced.

    You are describing the current system and I am describing how it is inconsistent.”

    GDP counts the flow of new goods and services produced, not the value of transactions when preexisting assets are swapped. A new car that sells for $100,000 adds $100,000 to GDP irrespective of how much of that was gross operating surplus (GOS).

    But if the very same car is then sold to somebody else for $1,000,000 nothing new has been produced. All that has happened is an asset swap has taken place. Person A is poorer one car but now has $1 million in cash. Person B is poorer $1 million in cash but now has a car. The combined balance sheets of persons A and B has not changed. Nothing new has been produced.

  188. Gravatar of dannyb2b dannyb2b
    16. March 2014 at 22:04

    “Then it obviously did not cost you very much to store it, unless you consider the opportunity cost.”

    Sure but value was added and its not in the gdp count. It didnt cost me much but it did cost me something and the way we measure what the added on value is monetarily. So the cap gain is value added just like if a manufacturer marked some clothes up by 100% by simply branding them Versace. Not much is done but value is added..

    “But if the very same car is then sold to somebody else for $1,000,000 nothing new has been produced. All that has happened is an asset swap has taken place. Person A is poorer one car but now has $1 million in cash. Person B is poorer $1 million in cash but now has a car. The combined balance sheets of persons A and B has not changed. Nothing new has been produced.”

    Whats new about this item is that it is now a historic car, when it was purchased it was non historic. Therefore value has been added.

    But what is current is the transaction in the current period which was a capital gain.

    An asset isnt the same today as it was 10 years ago, it has changed and that is value added if price has gone up. GDP should include improvements to existing goods/assets in this context.

  189. Gravatar of Mark A. Sadowski Mark A. Sadowski
    17. March 2014 at 05:06

    dannyb2b,
    If no factor inputs have been expended on an asset, then no value has been added in a NIPA or SNA sense.

    Perhaps the largest most comprehensive review of the measurement issues involved with GDP in recent years was the 300 page Stiglitz, Sen and Fitoussi report of 2009:

    http://www.stiglitz-sen-fitoussi.fr/documents/rapport_anglais.pdf

    Capital gains in the context of personal income is discussed briefly on the bottom of page 107, and the report makes no recommendations, although a footnote in that section points out that an earlier expert group (Canberra 2001) recommended that capital gains be excluded from measures of personal income.

    The rationale for excluding capital gains is explained in section 2.5.3 of Canberra 2001 (pages 28-29):

    http://www.lisdatacenter.org/wp-content/uploads/canberra_report.pdf

    “As described briefly in Section 2.4.2, Capital/holding gains, holdings gains and losses are not regarded as income, and the following paragraphs elaborate on that explanation.

    For a start, there is a language problem with the terms “holding gains” or “capital gains”, stemming from the number of complicated ways of reckoning capital gains. (These are described as holding gains in the SNA to make clear that they refer not only to gains on fixed capital but also, and more importantly, to gains on financial and other assets also.) It is easiest to explain with a simple example.

    Suppose an asset is bought for 100 and five years later it is worth 500. Over five years there has been a nominal holding gain of 400. If the asset is sold, the realised holding gain is 400. If it is not sold, the asset there is an unrealised gain of 400. This gain, however, relates to the five year period and for income calculations, one would only want the gain within the relevant accounting period, say a year. Suppose at the end of the previous year the asset was worth 450. During this year, the nominal holding gain is 50. Suppose the rate of inflation in the year is 10 per cent. Then 45 of this 50 is needed simply to maintain the real value of the asset. This 45 is called the neutral holding gain. The real holding gain is the remaining 5.

    What should be included in income? The SNA says none of them because income must be measured on the same basis as production where holding gains are rigorously excluded. It can be argued that for some analyses one might want to include the real holding gain of 5. This accords with the income definition of being as well off at the end of the period as at the beginning. For some purposes one might conceivably want to include the whole of the 50 (though never the 400), but this may also represent a form of double counting. For example, if the value of a share increases because of the increased performance of the company concerned, the increase in the share will be related to the increase in dividends expected in the coming years. To count both as income would be to count the same income flow in two periods.

    The treatment adopted in these guidelines is to exclude all holding gains and losses from income and the measure described here as ‘net accumulation of capital’. They should be recorded them as a separate memo item because they need to be taken into account in the compilation of balance sheets. The Canberra Group recommends (Chapter 4) that ideally data should be collected on holding gains and losses, but recognises the practical difficulties of doing so.”

  190. Gravatar of dannyb2b dannyb2b
    17. March 2014 at 14:30

    I understand NIPA and SNA I just dont agree with the methodology.

    The cap gain was only realized in this period so only needs to be counted in this period, no need to divide it up over the years. Only when a transaction is made is the income realized. The holder of asset wasn’t making 50 a year in income it was potential gains.

    When I paid capital gains I don’t remember having to adjust for inflation yearly and working out the yearly capital gains. I think of cap gains as value that was realized in that period. The value in the next period could be lower. Look at Japanese real estate for example.

    If the price of a product went up value has been added assuming the pricing mechanism operates effectively. Just like if wages went up more gdp is being produced.

    Just like a piece of art that took a few years to finish and was sold at the end of the period. You don’t count the final sale and divide it over the years you just count it at the end. Likewise with wages you don’t adjust for inflation when adding up GDP.

    It seems like asset prices are based on the future to a limited extent because we only have a limited understanding of the future and that is why asset prices fluctuate. Therefore counting cap gains is not double counting.

    If an asset price is derived from future income then over time its price would continually decline as the income stream gets used up if we assume limited life of asset. Therefore there would be no cap gains anyway.

  191. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. March 2014 at 06:16

    dannyb2b,
    “When I paid capital gains I don’t remember having to adjust for inflation yearly and working out the yearly capital gains. I think of cap gains as value that was realized in that period. The value in the next period could be lower. Look at Japanese real estate for example.”

    Capital gains (or “holding gains”) are generally not adjusted for inflation. If capital gains were adjusted for inflation then typically some or all of the gain would be attributable to inflation.

    “If the price of a product went up value has been added assuming the pricing mechanism operates effectively. Just like if wages went up more gdp is being produced.”

    Prices of assets can increase for reasons other than value being added or an increase in the present value of income. It might be attributable to a change in tastes or preferences for example, in which case it might simply be a relative price change. On the other hand, if the increase in price is due to value added, or an increase in the present value of the income stream, then those things are, or will be, already counted in GDP, so counting the capital gain would be double counting as the Canberra 2001 report noted.

    “Just like a piece of art that took a few years to finish and was sold at the end of the period. You don’t count the final sale and divide it over the years you just count it at the end. Likewise with wages you don’t adjust for inflation when adding up GDP.”

    But we’re not talking about a *new* piece of art or a *new* act of labor. We’re talking about a change in a price of a pre-existing asset over a period of time in which the general price level would have increased in almost any country excepting Japan. If the change in the price level exceeded the change in the asset price then the real price of the asset has fallen even if it is taxed on the change in nominal price.

    “It seems like asset prices are based on the future to a limited extent because we only have a limited understanding of the future and that is why asset prices fluctuate. Therefore counting cap gains is not double counting.”

    The uncertaintly can of course go both ways. Perhaps the actual present value of the income stream is far less, or is zero.

    “If an asset price is derived from future income then over time its price would continually decline as the income stream gets used up if we assume limited life of asset. Therefore there would be no cap gains anyway.”

    It depends on whether the asset has a clearly finite lifespan or if its ability to generate future income in one capacity is transferable to another purpose as need be.

  192. Gravatar of dannyb2b dannyb2b
    18. March 2014 at 15:35

    Capital gains (or “holding gains”) are generally not adjusted for inflation. If capital gains were adjusted for inflation then typically some or all of the gain would be attributable to inflation.”

    I thought so. Therefore its easier to calculate the capital gain.

    “Prices of assets can increase for reasons other than value being added or an increase in the present value of income.”

    Yes I understand but likewise a new good can increase in price without any value being added and that is always counted as GDP. So if we apply the principle that if price went up regardless of reason and calculate it as value added to assets then it would be more consistent it seems. Also because we only have a limited understanding of the future we cant say the asset is a future flow of income streams. It is in part but in part it isn’t.

    ” On the other hand, if the increase in price is due to value added, or an increase in the present value of the income stream, then those things are, or will be, already counted in GDP, so counting the capital gain would be double counting as the Canberra 2001 report noted.”

    It isnt double counting unless we assume a zero sum game from the point of view of the firm. It could be that there is a decline in the asset price when investment is made by firm (negative summ game). Or it could be that the benefit to the firm exceeds the cost and is reflected in the asset price. Therefore its not double counting.

    “But we’re not talking about a *new* piece of art or a *new* act of labor. We’re talking about a change in a price of a pre-existing asset over a period of time in which the general price level would have increased in almost any country excepting Japan. If the change in the price level exceeded the change in the asset price then the real price of the asset has fallen even if it is taxed on the change in nominal price. ”

    I did mean a new piece of art. Yes if price level growth exceeded increase in income real gdp went down and nominal gdp wentup.

    “The uncertaintly can of course go both ways. Perhaps the actual present value of the income stream is far less, or is zero. ”

    Exactly. There is alot we dont know about the future. So the only metric we can use to gauge the value of an asset is its price just like a new produced item.

    A more complete growth measure it seems would be to include new production and value added to non current assets.

  193. Gravatar of dannyb2b dannyb2b
    18. March 2014 at 16:32

    Tom Brown

    Im just curious about the statement JP Koning made and I was wondering if you know what he means by this: My answer to him is below the quoted paragraph.

    “I’d say that the card networks create a short-term non-negotiable dollar-denominated credit instrument that yields rewards when spent, and when accepted requires a large redemption fee.”

    Im sorry it just doesnt make sense to me. So the networks issue two types of credit, one non negotiable as described above and the other which is the balances in your card are negotiable?

  194. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. March 2014 at 17:31

    dannyb2b,
    “Yes I understand but likewise a new good can increase in price without any value being added and that is always counted as GDP. So if we apply the principle that if price went up regardless of reason and calculate it as value added to assets then it would be more consistent it seems.”

    But the principle is not the same because when calculating nominal GDP we’re only interested in the price at the time it is produced.

    “Also because we only have a limited understanding of the future we cant say the asset is a future flow of income streams. It is in part but in part it isn’t.”

    You’re the one who brought up the theory of present value of the future income stream, not me.

    “It isnt double counting unless we assume a zero sum game from the point of view of the firm. It could be that there is a decline in the asset price when investment is made by firm (negative summ game). Or it could be that the benefit to the firm exceeds the cost and is reflected in the asset price. Therefore its not double counting.”

    The past investments of a firm are a sunk cost and have no real bearing on evaluating an asset’s present value since they cannot be undone.

    “I did mean a new piece of art.”

    If it is a new piece of art then it becomes part of GDP when it is sold.

    “Exactly. There is alot we dont know about the future. So the only metric we can use to gauge the value of an asset is its price just like a new produced item.”

    Not if we are only interested in measuring the value of the production of new goods and services.

    “A more complete growth measure it seems would be to include new production and value added to non current assets.”

    GDP should only count the production of new goods and services.

  195. Gravatar of dannyb2b dannyb2b
    18. March 2014 at 18:16

    “But the principle is not the same because when calculating nominal GDP we’re only interested in the price at the time it is produced.”

    But don’t we only count in the current period a piece of art that was finalised in the current period but took several years to produce? I think we should extend this principle to all non current assets not just new ones. For example if over 3 years an asset experience a cap gain that was realised in the current period it should also be considered value added.

    “The past investments of a firm are a sunk cost and have no real bearing on evaluating an asset’s present value since they cannot be undone. ”

    But we should derive value added if there is any from the price of the asset. Value added to new assets and existing assets should be in a measure of growth as measured by changes in price.

    “GDP should only count the production of new goods and services.”

    A more comprehensive and accurate measure of growth would measure value added in terms of production of new goods and production added to existing goods. Or all added value.

  196. Gravatar of Mark A. Sadowski Mark A. Sadowski
    18. March 2014 at 19:13

    dannyb2b,
    “But don’t we only count in the current period a piece of art that was finalised in the current period but took several years to produce?”

    It’s counted as new production the moment it is sold.

    “I think we should extend this principle to all non current assets not just new ones. For example if over 3 years an asset experience a cap gain that was realised in the current period it should also be considered value added.”

    It can only add to the production of new goods and services once.

    “But we should derive value added if there is any from the price of the asset. Value added to new assets and existing assets should be in a measure of growth as measured by changes in price.”

    Physical investment *is* counted as part of new production so there’s no need to count it twice.

    “A more comprehensive and accurate measure of growth would measure value added in terms of production of new goods and production added to existing goods. Or all added value.”

    Production added to existing goods (i.e. physical investment) is already part of GDP.

  197. Gravatar of dannyb2b dannyb2b
    19. March 2014 at 04:15

    “It’s counted as new production the moment it is sold.”

    The same should happen with non current assets if value is added.

    “It can only add to the production of new goods and services once.”

    What has been added to the existing asset base is also new.

    “Production added to existing goods (i.e. physical investment) is already part of GDP.”

    From the point of the firm it is assumed to be a zero sum game though. This is usually inaccurate. We can determine whether value has been added by the capital gains.

  198. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. March 2014 at 05:28

    dannyb2b,
    “The same should happen with non current assets if value is added.”

    Where value added consists of aditional factors of labor and/or capital.

    “What has been added to the existing asset base is also new.”

    Provided the above is true.

    “From the point of the firm it is assumed to be a zero sum game though. This is usually inaccurate. We can determine whether value has been added by the capital gains.”

    There is no need to since physical investment is already part of GDP.

  199. Gravatar of dannyb2b dannyb2b
    19. March 2014 at 06:36

    You are describing the current system and I am trying to explain its shortcomings or inconsistencies.

    “Where value added consists of aditional factors of labor and/or capital.”

    What about enterprise? Capital gains income are returns from enterprise.

    What it comes down to is that you see how income should be recognized one way and I see it another. Whether Im right or you who knows but it looks like we have got to the bottom of it and we just don’t see it in the same way.

  200. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. March 2014 at 10:09

    dannyb2b,
    “Capital gains income are returns from enterprise.”

    Capital gains are a tax on the change in the nominal price of an asset between transfers. It is a wealth tax and consequently has almost nothing to do with the income derived from the production of new goods and services.

    “Whether Im right or you who knows but it looks like we have got to the bottom of it and we just don’t see it in the same way.”

    It doesn’t appear that you are right since this issue has been given careful study by some of the best minds in economics over a period spanning over half a century and they have come to starkly different conclusions from you.

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