David Glasner on me on IS-LM
Here is David Glasner:
Scott is totally right, of course, to point out that the fall in interest rates and the increase in the real quantity of money do not contradict the “money hypothesis.” However, he is also being selective and unfair in making that criticism, because, in two slides following almost immediately after the one to which Scott takes such offense, Foote actually explains that the simple IS-LM analysis presented in the previous slide requires modification to take into account expected deflation, because the demand for money depends on the nominal rate of interest while the amount of investment spending depends on the real rate of interest, and shows how to do the modification. Here are the slides:
. . .
Thus, expected deflation raises the real rate of interest thereby shifting the IS curve to the left while leaving the LM curve where it was. Expected deflation therefore explains a fall in both nominal and real income as well as in the nominal rate of interest; it also explains an increase in the real rate of interest. Scott seems to be emotionally committed to the notion that the IS-LM model must lead to a misunderstanding of the effects of monetary policy, holding Foote up as an example of this confusion on the basis of the first of the slides, but Foote actually shows that IS-LM can be tweaked to accommodate a correct understanding of the dominant role of monetary policy in the Great Depression.
Was I really so unfair? Did I actually accuse Foote of not understanding that tight money can reduce nominal rates. You be the judge:
Note the very last comment on the slide, about the significance of deflation. The rest of the PP slides develop this idea further, and correctly show that while tight money might raise real interest rates, it could lower nominal rates through the Fisher effect. Thus it could shift the IS curve. That helps, but it seems to suggest that the IS-LM model can be rescued by switching the argument from nominal to real interest rates. Alas, that won’t work. The Fisher effect is only one of the ways that monetary shocks impact interest rates. Tight money also reduces expected future real GDP, and this also shifts the IS curve. So it isn’t just nominal interest rates that fall, real rates also fell during the 1930s, as expected future real GDP plunged.
It sure looks like I’m suggesting that Foote “correctly” understood the distinction between the impact of monetary policy on real rates and nominal rates. I’m not sure where David got the idea I was being critical of Foote. Then David simply ignored my observation that switching from nominal to real interest rates in no way rescues the IS-LM model. Tight money can also reduce real interest rates. Ex ante real rates did fall during the 1930s. So IS-LM cannot be “tweaked to accommodate a correct understanding” of the role of money Depression. It’s rotten to the core.
David continues:
The Great Depression was triggered by a deflationary scramble for gold associated with the uncoordinated restoration of the gold standard by the major European countries in the late 1920s, especially France and its insane central bank. On top of this, the Federal Reserve, succumbing to political pressure to stop “excessive” stock-market speculation, raised its discount rate to a near record 6.5% in early 1929, greatly amplifying the pressure on gold reserves, thereby driving up the value of gold, and causing expectations of the future price level to start dropping. It was thus a rise (both actual and expected) in the value of gold, not a reduction in the money supply, which was the source of the monetary shock that produced the Great Depression. The shock was administered without a reduction in the money supply, so there was no shift in the LM curve. IS-LM is not necessarily the best model with which to describe this monetary shock, but the basic story can be expressed in terms of the IS-LM model.
I agree that the best way to visualize the Great Contraction is through a large increase in the demand for monetary gold. But I’m confused by David’s claim that this would not shift the LM curve. Gold was the medium of account. Unless I’m mistaken, an increase in the demand for gold would certainly be expected to shift the LM curve to the left, wouldn’t it? (But then IS-LM is not my forte, so please tell me if I am wrong.)
PS. In case you think I cherry-picked a quote, here’s the opening to my post, where I describe the quality of Foote’s PP slides:
Commenter Joseph sent me an excellent set of PP slides by a professor at Harvard named Chris Foote. He has a very clear derivation of the AD curve from the IS-LM model.
If I’m going to be accused of being unfair to someone, at least give me the satisfaction of trashing their work! My post had no criticism of Foote at all. Just some criticism of ideas he listed on one slide as things other people have claimed might have caused the Depression. I never assumed that was his view, and indeed he himself criticized some of those arguments in later slides.
PPS. And how does David know I am “emotionally committed” to the view that IS-LM is worthless? Perhaps I have rational reasons for holding that view. I’ve claimed that monetary policy can shift the IS curve, or else one has to assume the IS curve is upward sloping (Nick Rowe’s view.) I haven’t seen anyone rebut that view, emotionally or unemotionally.
Tags:
25. July 2014 at 17:27
“I agree that the best way to visualize the Great Contraction is through a large increase in the demand for monetary gold.”
Best way based on what though?
How can the best way awkwardly and purposefully and almost with a sense of eat me logic, ignore WHY the demand for gold increased the way it did? People did not eat gold. They did not seek to acquire gold as a final end. There is or are identifiable and logical reasons why people decided to hold onto gold for a longer average period of time than before.
The best way to visualize ANY significant event like Great Contractions is to do what all the best minded people in all walks of life do, from fictional characters like Sherlock Holmes to real life inquiring minds like Feynman or Newton. The best way to understand any event is to keep on asking why why why, and if we can’t answer why, then ask someone else for their thoughts on why. Don’t just arrogantly assert one level of whys are not even worth inquiring.
We don’t have to give an elaborate and sophisticated explanation on why the demand for gold holding drastically increased. At least not at first. We just don’t have to ignore what we can know. One of the things we can know is that sudden and drastic increases in money holding times strongly suggest there is something wrong with the real economy. If people prefer to hold more medium of exchange, then we can at least knlw that they are showing everyone that something is not quite right with real goods production.
If your theory contains the a priori assumption that individuals in a division of labor ought not determine total spending, but rather the government ought to determine it, then it is understandably difficult to view large changes in money demand and spending as something other than the question begging “failures” of government money management.
When people increase their money holding times, Austrians recognize this as not a flaw in free markets, but as a communication of “more resources should be reallocated to future goods, and fewer towards present goods.
25. July 2014 at 23:14
There is or are identifiable and logical reasons why people decided to hold onto gold for a longer average period of time than before.
You total moron, you autistic imbecile. It was the Bank of France, followed by the Fed, which decided to increase their gold reserves.
Do central banks count as “people” to Austro-morons ?
Also – don’t you ever get tired of hocking the same old tired methodological individualism ? Isn’t it obvious nobody’s buying it ?
Some people were dropped on their heads. You were thrown against a wall.
26. July 2014 at 06:21
Daniel
From one partially anonymous commenter to another, please refrain from using the term “autistic” as an insult and/or associating the condition with being “thrown against a wall”.
Note that autistic folks are often of average or above average in measured intelligence.
BTW I am not autistic.
26. July 2014 at 07:49
autistic folks are often of average or above average in measured intelligence.
Major_Moron obviously bucks the trend.
26. July 2014 at 11:32
“When people increase their money holding times, Austrians recognize this as not a flaw in free markets, but as a communication of “more resources should be reallocated to future goods, and fewer towards present goods.”
No, that’s wrong. Holding money signals a desire to be liquid, which is the exact opposite of what is required for the production of ‘future goods’, i.e. illiquid investments.
26. July 2014 at 12:24
Daniel:
You must have been abused worse than I had initially suspected. You are very traumatized. I feel sorry for you.
“It was the Bank of France, followed by the Fed, which decided to increase their gold reserves.”
This does not explain the deflationary forces Sumner attributes to the early 1930s as causing the Depression. Central banks having more gold, under the monetary system that existed at the time, is actually less deflationary, because it means they are able to redeem paper claims in specie. Central banks hoarding gold means people selling their gold to the central banks.
The gold hoarding that is being claimed as causing the Depression is not central banks hoarding gold, but individual market actors hoarding gold.
That is what has to be explained. That is what your lack of education and understanding can’t address.
“Also – don’t you ever get tired of hocking the same old tired methodological individualism ? Isn’t it obvious nobody’s buying it ?”
It’s far newer than the methodological collectivism you’ve been using and not knowing how or why it came about as a way of thought in the first place.
The reason I don’t get tired is the very reason you are baffled why I don’t.
Central banks hoarding gold during the 1920s and early 1930s before FDR made it illegal for individual citizens to own gold, is not deflationary, because the paper claims can circulate as money.
Your understanding of history is flawed.
—————————-
Philippe:
“Holding money signals a desire to be liquid, which is the exact opposite of what is required for the production of ‘future goods’, i.e. illiquid investments.”
Holding money longer signals a desire to be liquid in the present, but that isn’t the only signal that gets sent out.
26. July 2014 at 12:51
“Holding money longer signals a desire to be liquid in the present, but that isn’t the only signal that gets sent out.”
If you’re holding money, you’re not lending it or investing it. The production of ‘future goods’ requires lending and investing, i.e choosing to hold illiquid assets (loans, real investments) rather than holding the liquid asset which is money.
So holding money is the exact opposite of what is required for the production of ‘future goods’.
26. July 2014 at 14:19
Central banks having more gold, under the monetary system that existed at the time, is actually less deflationary
Damn. Even by your standards, it’s remarkably stupid. I stand in awe.
26. July 2014 at 14:40
Daniel,
I think this is the image you are looking for to describe M_F:
http://img1.wikia.nocookie.net/__cb20111123223539/pharyngula/images/f/f8/Fractal_Wrongness.png
27. July 2014 at 00:57
Heh, good find. I’ll save it for later use 😀
27. July 2014 at 11:55
Philippe:
“If you’re holding money, you’re not lending it or investing it. The production of ‘future goods’ requires lending and investing, i.e choosing to hold illiquid assets (loans, real investments) rather than holding the liquid asset which is money.”
You’re still ignoring the other signals sent by money holding.
And you don’t seem to be able to distinguish between nominal and real investment, nor the importance of relative investment between future and present goods.
Money holding doesn’t mean investment collapses to zero.
Money holding doesn’t mean consumption collapses to zero.
What money holding really refers to is the length of time that a sum of money is held after being earned. When we say the demand for money has gone up, we mean the length of time between expenditures has gone up.
Daniel:
“Central banks having more gold, under the monetary system that existed at the time, is actually less deflationary”
“Damn. Even by your standards, it’s remarkably stupid. I stand in awe.”
You stand without the requisite knowledge and without a substantive argument, as usual. You want people to believe what you say based on faith, just like you have accepted economic and political worldviews on faith.
Yes, it is true that under that monetary system, the more gold a country’s central bank has, the less deflation there tends to be in that country. A central bank that hoards gold means there are FIAT MONEY SPENDERS. That is how the central bank received the gold. They received the gold by way of paying transferable paper claims to the gold. Those paper claims that get out into the market are not inflationary if backed 100%, but under the monetary system that existed at the time it was not 100% backing. More paper claims circulated with gold par values than gold that existed. So the paper claims that can circulate by way of the “pyramid” on top of the gold, can be greater when the central bank has more gold.
You still have not actually answered why market actors hoarded money in the early 1930s. Your brain explodes because you cannot help but believe that the central bank and money are the primary drivers. It’s your philosophy that is depraved and causing you to be so uninformed and uneducated.
27. July 2014 at 11:58
Daniel:
This comment of yours in another thread is proof your mind is messed up:
“I’d say the choice is not between being “ruled by men” or “ruled by laws”, but between men you’d rather be ruled by and men you’d rather not be ruled by.”
“Deal with it.”
Your still stuck in stone age ideology.
27. July 2014 at 14:04
We already know your autistic, hence an Austrian cultist.
27. July 2014 at 15:02
you’re bullshitting again, M_F.
28. July 2014 at 08:23
Daniel:
My “austic” what? Lol.
Philippe:
You haven’t shown me “bs’ing” a first time, nor this time, so your comment is inaccurate.
My my, so much antagonism, so little substance.
28. July 2014 at 10:20
Damn you’re stupid.
28. July 2014 at 12:56
That’s your abuser talking.
28. July 2014 at 16:22
MF,
Do you realize that every time you come out with one of these bizarre amateur-psychologist statements of yours, you make yourself look like a very, very strange individual…?
Your obsessions come right into sharp focus, and it’s not a pretty sight…
29. July 2014 at 12:47
Philippe:
They’re not amateur.
Do you realize that I think your ideas are strange? And that if you believe my ideas are strange, it is actually reassurring to me?