Brilliant Krugman, dumb leftists

In all of the discussion about how wrong the right has been about monetary issues over the past 7 years, it’s also worth pointing out some flaws on the other side.  But first let’s start with the good news.  To put the following Paul Krugman quote into context, he’s responding to a Ambrose Evans-Pritchard story (exposé?) that the Fed sees falling long term rates as a sign of monetary ease, calling for a bit tighter policy stance.  Here’s Krugman making the observation that a contractionary demand shock can actually lead to lower long term interest rates over time:

A first-pass way to think about this is surely to suppose that the Fed sets U.S. interest rates, so that an increased willingness of foreigners to hold our bonds shows up initially as a rise in the dollar rather than a fall in rates. This may then induce a fall in rates because the stronger dollar weakens both growth and inflation, affecting Fed policy – but this means that the rate effect occurs because the capital inflow is contractionary, and is by no means a reason to tighten policy.

It’s only one step from there to Milton’s Friedman observation that low interest rates mean that money has been tight.

Some of my liberal commenters make a big deal of the fact that Krugman, and other liberals bloggers (DeLong, Thoma, Duy, Yglesias, Wren-Lewis, etc.) have favored monetary stimulus, and that lots of silly right wing Congressmen have opposed these policies.

On the other hand the left has not exactly covered itself in glory.  President Obama has done essentially nothing over the past 6 years to promote monetary stimulus.  Ditto for European social democrats.  Elizabeth Warren suggested that ultra-hawk Paul Volcker would be a dream candidate for  Fed chairman (no, I’m not joking.)  And now we have the Finance Minister of Greece, a country fanatically opposed to any sort of meaningful supply-side reform, denigrating Greece’s only hope for a demand-side economic recovery:

The European Central Bank’s bond purchases will create an unsustainable stock market rally and are unlikely to boost euro zone investments, Greek Finance Minister Yanis Varoufakis warned on Saturday.

The ECB began a program of buying sovereign bonds, or quantitative easing, on Monday with a view to supporting growth and lifting euro zone inflation from below zero up towards its target of just under 2 percent.

Bond yields in the currency bloc have collapsed, but record low interest rates so far have not spurred investments that would support growth in recession-hit countries like Italy or Spain.

“QE is all around us and optimism is in the air,” Varoufakis told a business audience in Italy. “At the risk to sound the party pooper … I find it hard to understand how the broadening of the monetary base in our fragmented and fragmenting monetary union will transform itself into a substantial increase in productive investments.

“The result of this is going to be an equity run boost that will prove unsustainable,” he said.

I don’t know whether to laugh or cry.  As Tyler Cowen keeps saying, these are not serious people.

PS.  In the right column of this blog I’ve had a pathetically inadequate and useless set of “categories.”  I’m in the process of vastly expanding that list, although I’m still struggling with how to categorize monetary policy posts—there are too many.  This post will go into the new category “praising Krugman,” among others.  This revision process will take a long time, I’ve only recategorized about the first 100 posts, out of over 2800. So for quite a while these new categories will only include a tiny fraction of the relevant posts.  It’s actually part of a project to turn my blog into a book.

HT:  Luis Pedro Coelho

 


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75 Responses to “Brilliant Krugman, dumb leftists”

  1. Gravatar of Britonomist Britonomist
    15. March 2015 at 08:05

    Yanis Varoufakis is many many things, but being ‘dumb’ is not one of them – he is in fact highly astute and experienced.

    Also last I checked Eurozone QE is deliberately not including Greek bonds in the purchases, so it’s really not unreasonable for anyone ‘serious’ or not to be skeptical that this will do much at all to help Greece.

  2. Gravatar of LK Beland LK Beland
    15. March 2015 at 08:09

    Typically, I don’t like speculating on the motives or thought process that lead others to a conclusion or another. It is usually used as an excuse to forgo making the intellectual effort to understand what these facts and arguments can bring to the table. I’ll make an exception and indulge myself.

    I think that many on the Left have a deep distrust of financial leaders, which explains much of their inability to conceptualize how monetary policy could help them achieve their objectives (e.g. set a stable nominal trajectory of government receipts to fund social programs).

  3. Gravatar of ssumner ssumner
    15. March 2015 at 08:14

    Britonomist, The fact that they are not buying Greek bonds has no bearing on whether the purchases boost AD. Obviously they do boost eurozone AD ,which is exactly what Greece needs (along with the supply-side reforms that the current Greek government also opposes.)

    LK, Yes. The left may not be interested in monetary policy, but monetary policy most certainly is interested in the left.

  4. Gravatar of Kevin Erdmann Kevin Erdmann
    15. March 2015 at 08:50

    From left to right, people proudly explain to me that the stock market has gone up because of loose money so that we need tight money to make it go back down to where it belongs. I think your characterization that we are in the stone age is optimistic.

  5. Gravatar of Vivian Darkbloom Vivian Darkbloom
    15. March 2015 at 08:51

    “Also last I checked Eurozone QE is deliberately not including Greek bonds in the purchases, so it’s really not unreasonable for anyone ‘serious’ or not to be skeptical that this will do much at all to help Greece.”

    As I understand the program, the bulk of the risk of ECB purchases will be borne by individual Euro Zone Central Banks (at the insistence of Germany). Thus, if the ECB buys Italian bonds, most of the risk of that will be transferred to the Italian Central Bank. I think serious people might agree that taking on that kind of risk would not make a lot of sense for a country that is already insolvent. (Alternatively, Greek Central Bank might have declined to participate in the program, but the details of such internal discussions are not public, to my knowledge).

    See, for example, here:

    http://voxeu.org/article/quantitative-easing-eurozone-its-possible-without-fiscal-transfers

    In essence, Greece wants the ECB to take on (even more) risk for Greece’s default. Certainly, having the rest of the Euro Zone take on even more risk than they already have for Greece’s problems would be “good for Greece”; but, given all that has been done for them so far, I’m not sure the criticism that the ECB and, indirectly other Euro Zone member states, are not undertaking even more risk on their behalf, is particularly reasonable. That doesn’t make Veroufakis “dumb”, but it does suggest he might be overreaching a bit.

  6. Gravatar of Britonomist Britonomist
    15. March 2015 at 09:01

    “Britonomist, The fact that they are not buying Greek bonds has no bearing on whether the purchases boost AD.”

    But AD is not boosted uniformly at all parts of the Eurozone as a result of specific QE policies, it would need an enormous boost in AD for it to substantially affect Greece in any way in a sort of ‘rising tide lifts all boats’ scenario. Do you honestly think this Eurozone QE is going to be that powerful?

  7. Gravatar of Britonomist Britonomist
    15. March 2015 at 09:13

    “As I understand the program, the bulk of the risk of ECB purchases will be borne by individual Euro Zone Central Banks (at the insistence of Germany). Thus, if the ECB buys Italian bonds, most of the risk of that will be transferred to the Italian Central Bank. I think serious people might agree that taking on that kind of risk would not make a lot of sense for a country that is already insolvent. (Alternatively, Greek Central Bank might have declined to participate in the program, but the details of such internal discussions are not public, to my knowledge). ”

    This is the entire point of a central bank, this is literally why they were created in the first place. They are the ultimate loss absorbers. But this analysis entirely depends on who is responsible for recapitalization of member central banks, one would think that it should be the ECB – which would make your point moot, in that scenario it’s ultimately the ECB that is taking on the risk still (but the ‘risk’ is of inflation, a central bank can’t run out of money it prints itself). However, if it is in fact the countries’ governments that are responsible for recapitalization, then that is just another case of a very deep design flaw of the Eurozone – it essentially means monetary policy isn’t really monetary policy at all. And on that basis it would be fair to criticize Eurozone QE, since it is preventing true monetary expansion by institutional design.

  8. Gravatar of Vivian Darkbloom Vivian Darkbloom
    15. March 2015 at 09:25

    @Britmouse

    That is certainly a fair point; however, those underlying facts certainly help to understand why the ECB is not “buying Greek bonds”. The story is a bit deeper. And, I do think, as you suggest, the underlying problem is lack of sufficient EU fiscal and political integration which makes the entire design “flawed”. It is, I think, a bit like marriage: if you pretend to be committed, but are, not, you’re asking for trouble.

  9. Gravatar of Major.Freedom Major.Freedom
    15. March 2015 at 09:31

    “In all of the discussion about how wrong the right has been about monetary issues over the past 7 years.”

    I didn’t know “the right” was a single monolithic individual entity with a specific unique series of thoughts.

    Anyway, I am neither left nor right, and my ideas being opposed to Sumner’s ideas actually consists of ideas that have been more consistent with the past 7 years of economic than his views.

    My views on history consist of both price theory and capital theory. In terms of prices, it has been true for the past 7 years that prices in general, or the price level, are higher with QE than they otherwise would have been without it. And, even more importantly, relative prices have been moved even further away from that which facilitates sustainable real economic coordination. With sovialist money, relative prices cannot (by virtue of the economy being a division of labor, where roles are specialized by individuals who are the centers of all economic phenomena) ever stabilize and reach a sustainable equilibrium. A stable aggregate price level or aggregate spending target cannot do it.

    The interpretation of the last 7 years of the EU have been misdiagnosed by AMMs. Money has not been too tight there. It has been too loose. Price changes would have otherwise gone deeply negative and interest rates would have been rising significantly, but the ECB reloosened, which influenced spending, prices and interest rates to be that which AMMs falsely interpreted as too tight money. For AMMs are going by the wrong baseline. The baseline is not their own ideal socialist target. The baseline is the result of every individual having economic freedom.

    Sumner is misdiagnosing the US as well. While he was claiming money was too tight, that judgment was the result of using the wrong baseline. The correct baseline would have made him conclude what economists have concluded (in many cases due to wrong reasons, just like Sumner concluded money was too tight for the wrong reasons), which is that money was far too loose, which distorted the economy and set it up for correction more painful than it otherwise would have been had it been experienced sooner with less loose money.

    It is not the job of the central bank to maintain full employment. The correct baseline is a socialist rule that maximizes employment for a temporary period of time until a correct ensues.

  10. Gravatar of Britonomist Britonomist
    15. March 2015 at 09:33

    Vivian, just for future reference me and Britmouse are not the same person.

    Anyway, I think the actual reason Greek bonds weren’t included is not that complicated, it is not because they are worried about risk to their own institutions. To the ECB Greek bonds are junk grade, and policymakes only want to include assets that are considered ‘safe’ as part of the purchases. The general idea is that buying assets like Greek bonds would have ‘distortive’ affects on the market by causing them to be mispriced, or might encourage fiscal profligacy.

  11. Gravatar of Britonomist Britonomist
    15. March 2015 at 09:46

    Found this bit of clarification:

    “The bottom line of Draghi’s answers was that the ECB would only buy government bonds rated lower than investment grade if the countries are in a bailout programme and the programme is not in a review period. Moreover, the ECB could not buy more than 33% of a single issuer. For Greece, all of this means that the ECB could at the earliest start purchasing Greek bonds only in June or July, if and when Greece has reimbursed the bond expiring in June which the ECB had (partly) purchased under the old SMP programme.”

    http://www.telegraph.co.uk/finance/economics/11451105/European-Central-Bank-readies-for-quantitative-easing.html

  12. Gravatar of Britonomist Britonomist
    15. March 2015 at 09:46

    For the record, I support Eurozone QE, I just don’t think it’s fair to paint all objectors as simply being ‘dumb’.

  13. Gravatar of Major.Freedom Major.Freedom
    15. March 2015 at 09:58

    “I don’t know whether to laugh or cry.”

    You could learn. There is a lot of what that finance minister said that is accurate. Unsustainable stock market boom is one cause of accelerated inflation.

    One of last things Greece needs is more inflation poison. Demand recovery, I.e. socialist money printing caused recovery? No such thing. A country cannot have a recovery with inflation. It is just another unsustainable boom. There is also no such thing as a real recovery, I.e. socialist capital planning caused recovery.

    AMMs are very inconsistent. They have no problems with recognizing the destruction that socialist capital planning brings, and they don’t use the phrase “recovery” if say the USSR communists “succeed” in building more camps and tanks with more labor.

    Yet when it comes to money, the blinders are out on, awkward ear burning thoughts dominate, and like a skeptical church goer who hesitently says what he is expected to say, AMMs suddenly start using phrases like recovery to describe the effects of socialist money planning.

    Central banks are in actuality a mafia criminal enterprise that is perceived as legitimate by enough people because it has been christened by the head church family, and enough people are religious followers of a secularized religion that many call Humanism.

    If someone not so christened does the exact same set of actions, they would be considered heretics and punished with spirit cleansing violence.

    “As Tyler Cowen keeps saying, these are not serious people.”

    Since when did “serious people” become defined as those who drank the same koolaid as Cowen and Sumner?

  14. Gravatar of Vivian Darkbloom Vivian Darkbloom
    15. March 2015 at 10:00

    @Britonomist,

    I will try to keep the name straight in the future.

    “Anyway, I think the actual reason Greek bonds weren’t included is not that complicated, it is not because they are worried about risk to their own institutions. To the ECB Greek bonds are junk grade, and policymakes only want to include assets that are considered ‘safe’ as part of the purchases. The general idea is that buying assets like Greek bonds would have ‘distortive’ affects on the market by causing them to be mispriced, or might encourage fiscal profligacy.”

    That may be the express view, but it doesn’t make (complete) sense to me. I think the “distortive effect” argument may well be a smokescreen, or at least a partial one. They don’t want to buy “unsafe” assets because they don’t want the risk on their balance sheets. This is the same reason the Germans insisted sharing risk on sovereign nation balance sheets. The Germans don’t want to be on the hook for those “unsafe assets” (and they don’t want inflation risk either). “Distortive effect on bond pricing sounds a lot better in the PR war than “we don’t want to pick up the fiscal tab”. So, I think it is complicated.

  15. Gravatar of Major.Freedom Major.Freedom
    15. March 2015 at 10:04

    Britonomist:

    “For the record, I support Eurozone QE, I just don’t think it’s fair to paint all objectors as simply being ‘dumb’.”

    They are simply called dumb because those who support EU QE (and call the opponents dumb) believe it will make it easier on themselves in not thinking about their own ideas and opposing ideas too much.

  16. Gravatar of Major.Freedom Major.Freedom
    15. March 2015 at 10:08

    “It’s only one step from there to Milton’s Friedman observation that low interest rates mean that money has been tight.”

    And therefore only two steps from there to Milton Friedman’s conclusion that the Fed should be abolished.

    http://www.youtube.com/watch?v=m6fkdagNrjI

  17. Gravatar of Peter K. Peter K.
    15. March 2015 at 10:24

    Seems like Reuters didn’t get the full story.

    Here is Varoufaki’s proposal for a QE printed in the Economist:

    http://www.economist.com/blogs/freeexchange/2014/11/economists-roundtable-euro-zone-3

    So what should Europe do?

    The European Investment Bank (and its smaller offshoot, the European Investment Fund) should embark upon a pan-euro-zone investment-led recovery programme worth 8% of euro-zone GDP. The EIB would concentrate on large-scale infrastructural projects and the EIF on start-ups, SMEs, technologically innovative firms, green-energy research etc.
    The EIB/EIF has been issuing bonds for decades to fund investments, covering 50% of the projects’ funding costs. They should now issue bonds to cover the funding of the pan-euro-zone investment-led recovery programme in its totality; that is, by waving the convention that 50% of the funds come from national sources.
    To ensure that the EIB/EIF bonds do not suffer rising yields, as a result of these large issues, the ECB can to step in the secondary market and purchase as many of these EIB/EIF bonds as are necessary to keep the EIB/EIF bond yields at their present, low levels. To stay consistent with its current assessment, the level of this type of QE could be set to €1 trillion over the next few years.
    In this scenario, the ECB enacts QE by purchasing solid eurobonds. The bonds issued by the EIB/EIF are issued on behalf of all EU states. In this manner, the operational concern about which nation’s bonds to buy is alleviated. Moreover, this form of QE backs productive investments directly, as opposed to inflating risky financial instruments, and has no implications in terms of European fiscal rules (as EIB funding need not count against member states’ deficits or debt).

    By purchasing large quantities of EIB bonds, the ECB can, in partnership with the EIB, help shift idle savings (that currently depress yields on all investments) into productive activities. This would be tantamount to a European New Deal.

    One might counter that the EIB may simply be unable or unwilling to conjure up ‘shovel-ready’ projects to the tune of €300 billion annually, both because it is worried about its creditworthiness and due to a lack of potentially profitable projects. My retort is twofold.

    The ECB’s QE support of EIB bonds will guarantee that the EIB yields will remain ultra-low for a long while, alleviating any pressure from credit-rating agencies.
    Europe desperately needs investment in energy (where its competitiveness is currently declining at a worrying pace), transport, and basic infrastructure (even Hamburg’s port is crumbling). In the short run, the EIB-ECB partnership can take over projects that fiscally stricken governments have mothballed. Gradually, new projects promising to deal with Europe’s burgeoning energy crisis will come on stream with great potential for profitable investment, ‘crowding in’ private investment in the process.

  18. Gravatar of Britonomist Britonomist
    15. March 2015 at 10:33

    Great find Peter.

    So we can conclude that Yanis is indeed dovish, not hawkish, supports boosting of AD by solicitation the ECB’s ability to expand its balance sheet and purchase bonds. He simply opposes traditional QE on operational grounds, and prefers a more ‘helicopter drop’ fiscal-monetary union type of policy.

    That means at the very least you can’t put him in the kind of camps that include people who think money is too tight and that interest rates need to be raised, he is far removed from those kinds of people.

  19. Gravatar of Vivian Darkbloom Vivian Darkbloom
    15. March 2015 at 10:39

    Peter K,

    That doesn’t sound like a “QE proposal” to me. It’s a big fiscal stimulus cake with a little QE icing on top. If Greece would get a non-pro rata share of those EIB loans, who will pick up the tab if they default? As I understand it, the EIB shareholding corresponds roughly to each EU country member’s GDP size. Again, another clever way for Greece to get others to pick up the tab. In every direction one looks, Greece is proposing ways to avoid making structural change.

  20. Gravatar of Britonomist Britonomist
    15. March 2015 at 10:48

    Structural change is soon becoming a meaningless buzzword, just because Greece needs structural change does not mean it isn’t also desperately suffering from depressed demand leading to deflation and recession – no amount of structural change will reverse this, and the Greek government alone is unable to finance a boost in AD while tied to the Euro. The fact of the matter is, Greece does need help from outside forces to spur growth again (or it needs to leave the Eurozone, which wont happen), acknowledging this is not a way to avoid structural change. And who said anything about a ‘non-pro rata’ share anyway.

  21. Gravatar of James in London James in London
    15. March 2015 at 11:02

    The Varoufakis proposal is definitely monetising the debt. That is the definition of central bank direct buying of freshly minted bonds. However, it is illegal and therefore won’t ever be implemented. He should know that, he does know that. And, given he is a smart guy, he must be disingenuous in proposing it.

    It does have the merit of increasing the supply of pan-EZ bonds, though, something that is necessary to creating an EZ monetary and fiscal union.

    If Europe really “desperately needs” investment in energy, transport and infrastructure then private investment should do the job just as well in financing these projects given ultra-low LT financing costs and abundant liquidity.

    The key is the “shovel-ready” element. Such projects need a lot of planning, careful and disciplined budgeting, non-corrupt tendering processes, and excellent project management – all things governments and especially Greek governments are well known to have in abundance. Ahem.

  22. Gravatar of Major.Freedom Major.Freedom
    15. March 2015 at 11:03

    Britonomist:

    “Structural change is soon becoming a meaningless buzzword, just because Greece needs structural change does not mean it isn’t also desperately suffering from depressed demand leading to deflation and recession”

    I do believe you have regarded structural change as “meaningless” for as long as you have been devoted to “demand is the problem” theory.

    Nominal demand falling and real output falling, below what they would have been in a free market, are both caused by many factors one of which is the very cure you are calling for. Inflation is one problem that millions of innocent Greeks suffered from, the effects of which is real output falling by more than it would in a free market.

    If you believe insufficient demand is responsible for why Greece particularly is in bad shape, then you have to conclude by the same principles that an individual household experiencing a falling demand must be the fault of others not spending enough money as you believe they should spend on the output of that household.

    It is not true that should spending on that household’s output fall, that coordination and individuals all achieving their own optimal outcomes somehow requires spending on another household’s output or a combination of other households that are so numerous that you have forgotten the implication by then, to go up by the same exact amount.

    This is an arbitrary assertion concerning the value of household output. No reason to take it seriously as anything other than a self-imposed delusion of knowledge.

  23. Gravatar of Vivian Darkbloom Vivian Darkbloom
    15. March 2015 at 11:04

    Britonomist,

    1. Do you really think that proposal is QE rather than a fiscal stimulus package?

    2. Do you really think that Veroufakis doesn’t want a larger share of those EIB loans? Whether or not he would get it, it’s obvious that he doesn’t want Greece to have to directly finance (through tax receipts or sovereign borrowing) 50 percent those projects. And, that regardless of whether he would get it, he want sother EU country shareholders to be on the hook for financing his “infrastructure projects”.

    3. The whole thing is a joke. Government financed “infrastructure spending” in the US is wasteful enough. Imagine the fun Greek contractors would have in fleecing those projects.

    3. “Structural change” is not a meaningless buzzword anymore than “Greece needs (even more) help” is a meaningless phrase. Greece is dragging its feet on the changes already agreed to, including privatization, pension reform, etc. much less that it is proposing more serious change that is necessary for its longer-term viability. All the “help” in the world is not going to save Greece in the long run if it refuses to change its ways. Greece will manage to postpone the day of reckoning for as long as others agree to its extortion. Business as usual is not a solution for Greece.

  24. Gravatar of Britonomist Britonomist
    15. March 2015 at 12:44

    @James

    “The Varoufakis proposal is definitely monetising the debt. That is the definition of central bank direct buying of freshly minted bonds. However, it is illegal and therefore won’t ever be implemented.”

    But this isn’t sovereign debt, this is buying debt from a European investment bank. Are you sure that’s illegal, and is there any good reason whatsoever it should be?

    @Vivian

    “1. Do you really think that proposal is QE rather than a fiscal stimulus package?”

    As I already said, it’s a combined monetary and fiscal operation.

    “2. Do you really think that Veroufakis doesn’t want a larger share of those EIB loans? Whether or not he would get it, it’s obvious that he doesn’t want Greece to have to directly finance (through tax receipts or sovereign borrowing) 50 percent those projects. And, that regardless of whether he would get it, he want sother EU country shareholders to be on the hook for financing his “infrastructure projects”.”

    Why are you acting like Veroufakis is some crony bureaucrat, are you aware he was quite well regarded economist and academic who only very recently joined Greek government? I think when he wrote that piece in the economist he was speaking as an academic and analyst and I don’t think he was even part of the Greek government yet, he was not making some official statement on behalf of the Greek government.

    ” The whole thing is a joke. Government financed “infrastructure spending” in the US is wasteful enough. Imagine the fun Greek contractors would have in fleecing those projects.”

    Keynesians have plenty of theoretical reasons to think you’re wrong, very very smart ones. In fact, Keynesians think it can be beneficial even if the spending is somewhat wasteful (think game-theoretical disequilibrium or lower hysteria induced equilibrium situations). He might be wrong, but he’s not an idiot even if he is wrong, you can be a “very serious person” and hold these views as they are with intellectual foundation in the literature.

  25. Gravatar of Britonomist Britonomist
    15. March 2015 at 12:53

    And he didn’t even mention Greek contractors or spending on Greece projects specifically, he mentioned Energy investment in Europe in general (extremely capital intensive stuff, often requires government involvement, nothing extremely out of the ordinary there), and a declining port in Hamburg…

    What he’s suggesting is completely standard Keynesian economics; combined monetary & fiscal stimulus in Europe to boost demand and spur growth. It’s no different from what Keynesians of many nationalities are suggesting.

    You almost appear to suggest it’s simply an insincere attempt to indirectly bailout Greece’s finances simply because he is Greek, this is bordering on bigotry.

  26. Gravatar of Vivian Darkbloom Vivian Darkbloom
    15. March 2015 at 13:11

    “You almost appear to suggest it’s simply an insincere attempt to indirectly bailout Greece’s finances simply because he is Greek, this is bordering on bigotry.”

    No, Britonomist, I’m suggesting he is sincerely attempting to indirectly bailout Greece’s finances simply because he is the Greek Finance Minister. He sincerely thinks he’s doing his job in the interests of Greece. I think he is doing it badly even though he may succeed in getting some very short term concessions. Why should such an attempt be “insincere”? I doubt that he is putting the EU’s interests above that of Greece, much less Germany. Perhaps that’s insincere vis a vis the Germans. Do you doubt that? I also think, above all else, Schaeuble is putting Germany’s best interests ahead of those of Greece and the EU. Ironically, despite that, I think that Greece would be better off if they followed Schaueble’s prescription than if they followed Varoufakis’s. Does that make me a bigot?

  27. Gravatar of Vivian Darkbloom Vivian Darkbloom
    15. March 2015 at 14:49

    “But this isn’t sovereign debt, this is buying debt from a European investment bank.”

    My first reaction to this was, well, actually they are buying debt in the secondary market from the* holders* of the EIB issued bonds. But, I guess the intended meaning of the above-referenced sentence was they are buying debt *issued by*, not *from* the EIB. But, of course, that distinction may merely be one of form.

    Back in the days before I retired, I was deep into the “conduit financing rules” issued by the IRS to prevent treaty shopping. The essence of those rules was to apply substance over form to determine who the actual financing (and financed) parties were. You know, back-to-back arrangements and so forth. If the United States were to establish a special purpose vehicle (SPV) to issue Treasury bonds and immediately remit those proceeds to Treasury, would this cease to be “sovereign debt”? I don’t think so. Similarly, like the formal distinction in the first paragraph above, while the EIB serves as a sort of mixing bowl, it issues debt and immediately uses those proceeds for loans to sovereign EU states. Does the injection of the EIB as intermediary mean that, in substance, the debt is not “issued by” those sovereigns? I would have serious doubts, but perhaps the inability to specifically tracing could convince the ECJ to ignore that even though money is fungible. The following sentence in the above-referenced description of the program may hurt more than it helps in that regard:

    “The bonds issued by the EIB/EIF are issued on behalf of all EU states.”

  28. Gravatar of Samuels Samuels
    15. March 2015 at 15:00

    Nice

  29. Gravatar of ssumner ssumner
    15. March 2015 at 15:04

    Britonomist, I don’t understand your argument. It’s not the job of central banks to tailor their policies to specific regions. Their only concern should be eurozone-wide AD, or eurozone-wide inflation. It makes very little difference which bonds they buy, as any boost to eurozone AD will tend to help the worst off countries the most, just as the previous fall in AD hurt the worst off countries the most. It’s symmetrical.

    Peter, Thanks, that’s even worse than the Reuters article. It’s sounds like a sort of fiscal union, with German taxpayers paying for Greece’s irresponsible spending.

    The fact is that it’s QE that is on the table, and Greece has now allied itself with the conservative German opponents of QE.

    God help the Greeks.

  30. Gravatar of Britonomist Britonomist
    15. March 2015 at 15:07

    “No, Britonomist, I’m suggesting he is sincerely attempting to indirectly bailout Greece’s finances simply because he is the Greek Finance Minister.”

    He wasn’t even the Greek finance minister when he wrote that piece in the Economist. You’re just plain wrong on this, supporting a Keynesian fiscal-monetary stimulus is entirely consistent with his views and the academic literature he subscribes to.

    “and immediately uses those proceeds for loans to sovereign EU states.”

    Not exactly. As far as I understand it, it issues loans and funding for specific investments and projects, some of these projects may not even have anything to do with sovereign governments directly, they may fund large ventures in the private sector for instance (why wouldn’t they, this is what investment banks do, and indeed the EIF does this for small to medium sized businesses). But this is besides the point, if QE isn’t considered illegally breaching rules on debt monetization, I see no reason why this should be when it is even less direct, even if you make some roundabout argument that ultimately but indirectly that’s what it is (I don’t care anyway, even if legal authorities might).

  31. Gravatar of Britonomist Britonomist
    15. March 2015 at 15:17

    “Peter, Thanks, that’s even worse than the Reuters article. It’s sounds like a sort of fiscal union, with German taxpayers paying for Greece’s irresponsible spending.”

    How on earth are you getting that interpretation:

    The EIB/EIF IS NOT GREECE. Supporting funding for those institutions does not in any way translate to supporting irresponsible Greek spending, that’s a fairly outrageous extrapolation.

  32. Gravatar of ssumner ssumner
    15. March 2015 at 15:55

    Britonomist, So the EIB/EIF would not support spending in Greece?

  33. Gravatar of Britonomist Britonomist
    15. March 2015 at 16:22

    Scott, it was a piece written in the Economist by Yanis in November in 2014 when he was still just a professor, which in turn was based on something he wrote on his website way back in May: , which was part of a broader “Modest Proposal” plan he and others (of other nationalities) outlined in July 2013 to solve the Euro crisis in general: http://yanisvaroufakis.eu/euro-crisis/modest-proposal/

    I don’t know why everyone determined to paint this as a Greek minister looking to secure a Greek bailout indirectly, that simply isn’t what that is. It was not a Greek centric proposal when he made it, it was a proposal for Europe as a whole.

  34. Gravatar of benjamin cole benjamin cole
    15. March 2015 at 16:41

    I keep reading that the Greeks are actually running a national budget primary surplus or close to it. In other words they have grown up— but are haunted by past indiscretions.

    Many private-sector businesses declare bankruptcy chapter 11, reorganize and keep going.

    While I think the bankruptcy of a nation is a more serious matter than that of the local grocery store, at this point it makes sense for the Greek people.

    The Greeks should declare bankruptcy–their budget is already in order—and they should bring back their own central bank and print drachmas to the moon.

    Or…they can try to live with 25 percent unemployment and the ECB forever.

  35. Gravatar of TravisV TravisV
    15. March 2015 at 18:01

    “How MIT Transformed Economics”

    http://www.economicprincipals.com/issues/2015.03.15/1699.html

  36. Gravatar of Major.Freedom Major.Freedom
    15. March 2015 at 18:04

    Benjamin Cole:

    You make yourself seem so philanthropic about Greece.

    But the logic behind what you’re saying suggests that should an individual firm make poor choices, then they should declare bankruptcy and then independence from their country’s central bank.

    Why shouldn’t every individual firm be free to issue their own currency to whoever is willing to accept it? Why should any individual become unemployed by central bank ineptitude?

    It is arbitrary to set the boundary exactly on the lines which resulted from bloody wars and conquests over the millennia.

  37. Gravatar of Major.Freedom Major.Freedom
    15. March 2015 at 18:12

    Sumner wrote:

    “It makes very little difference which bonds they buy, as any boost to eurozone AD will tend to help the worst off countries the most, just as the previous fall in AD hurt the worst off countries the most. It’s symmetrical.”

    It is not symmetrical. Inflation and deflation have asymmetric effects in terms of qui bono. Inflation tends to favor those who first receive new money relatively speaking, while deflation tends to favor those who last receive new money relatively speaking.

    Inflation also tends to relatively favor the already established whereas deflation tends to relatively favor the newcomers.

  38. Gravatar of Matt Waters Matt Waters
    15. March 2015 at 18:27

    I’m having a hard time following the arguments here about the Greek finance minister. It seems like there are two possibilities:

    1. He is a sincere VSP in the vein of Volker, using non-expectations outdated Keynesian arguments to say QE will do no good.

    2. He is being extraordinarily shrewd, somehow, in his criticism of QE. Is he trying to get some sympathy from the hard-money German populace? Is he worried that the ECB’s balance sheet getting larger will somehow reduce funds for the Greek bailout? Is he trying to position himself as a Greek VSP to get a job later on at the ECB, BIS or a private bank somehow?

    Ultimately the VSP arguments fail in all sorts of ways. QE is both “useless” and creates “asset bubbles.” Asset bubble, in fact, require two things. One, the money printed must be spent. Even if the new money is spent in a close infamy market, it’s still spent. So, QE was not useless. Two, investors are consciously burning money somehow to create the “bubble.” Sure, some investors do well by getting out at the right time, but overall investors have lost value. It can happen, sure, but it’s an extraordinary point which can’t just be said in passing. Unfortunately so many people just say “QE is creating asset bubbles” like it’s the most obvious thing in the world and give no evidence.

  39. Gravatar of Saturos Saturos
    15. March 2015 at 19:11

    Any news on when the Great Depression book is coming out, Scott?

  40. Gravatar of Matt Waters Matt Waters
    15. March 2015 at 19:18

    “I keep reading that the Greeks are actually running a national budget primary surplus or close to it.”

    Googling around about it, the truth seems to be that Greece is running a significant primary deficit still. Of all people, Yanis Varoufakis had the first link when I googled about it.

    http://yanisvaroufakis.eu/2014/04/24/greek-statistics-are-back-primary-deficit-presented-as-surplus-with-eurostats-seal-of-approval/

    For one thing, bank recapitalizations were not considered fiscal expenses. But also the Greek government seemed to find some money in the pension fund and in some local authorities. This money could actually be lending from the Troika, in which case it’s clearly not sustainable revenue.

    If Greece goes back to the Drachma, there are several issues. One is many Greeks are not in favor of leaving the Euro because the old Drachma was another source of corruption. Greece would also likely not have a big stash of hard foreign currency, making a run on the new Drachma a possibility. Would current Greek bank deposits still be in Euros, but without any source of Euros (i.e. the ECB)? The possibility of capital controls and the cost of Euro-Drachma conversion for exports (particularly tourism).

    When the Ruble looked like it was going to crash, I had a hard time understanding third-world currency crises and still do. Apparently simply raising interest rates is not enough and self-defeating. But it seems like there must be a better solution than capital controls.

  41. Gravatar of TravisV TravisV
    15. March 2015 at 19:54

    David Beckworth wrote a great post about a week ago on the European Monetary System. I can’t link to it here but if you Google it, it’s entitled “Fool Me Once, Shame on You; Fool Me Twice Shame on Me.”

  42. Gravatar of Ray Lopez Ray Lopez
    15. March 2015 at 20:09

    Reading these posts you see over and over: people believe in monetarism, that money is not neutral or superneutral, but without citing any evidence for this proposition (except circular references to saint Milton Friedman). Even the supposed Volcker ‘breaking the back of inflation’ scenario of the early 1980s was accompanied by Volcker LOWERING interest rates (in response to markets). Think about that. You are all blinded by ideology. The ant on the log is not steering the log. Take off your blinders!

    Sumner plans to turn this blog into a book? Then do his critics like MF and I make a cameo?

  43. Gravatar of Ray Lopez Ray Lopez
    15. March 2015 at 20:24

    @myself – one more thing: I have the citation in my hard drive, but from memory Friedman’s contribution to economics is advocacy of a theory that in his view explained the Great Depression, and that is monetarism. But monetarism is not his idea, it has roots elsewhere. By Friedman’s own admission, his greatest theoretical work was an improvement on the Cobb’s production function. Further, Friedman’s book “Monetary History..” is only a word-picture that describes why monetarism explains the Great Depression. It is not a comprehensive theory. Anybody who plays the stock market knows that there are ‘word pictures’ that ‘explain’ the stock market, but really have no predictive effect. An example? Google “January Effect in stocks”. Try and make money off it (as some academics tried in the 1970s). You will fail (as they did). A sort of Lucas Critique! Friedman further postulated velocity is stable in his quantity theory of money based on post-WWII data. But this data has been refuted recently–money velocity is not stable, and hence Friedman’s theory of the central bank printing money and raising NGDP is like trying to move a rock by pushing rather than pulling on a string. In short, monetarism, NGDPLT are false, at best only incomplete theories that help describe isolated incidents and periods in history, but with no predictive effect.

  44. Gravatar of Britonomist Britonomist
    15. March 2015 at 21:05

    Ray for the love of god stop posting, seriously your posts are really really terrible. In fact they’re probably worse than Major Freedom’s; just assertion after assertion with no justification or evidence to back them up and massive non sequiturs.

  45. Gravatar of Ray Lopez Ray Lopez
    15. March 2015 at 21:55

    @Britonomist – what was your last point? That you hate me? Who cares. I did source my posts, read them. Google a chart of Volcker’s era and US interest rates. Google January Effect and read the Wikipedia entry. Quit projecting your inadequacies.

    Off-topic: Sumner should do a post on this, IBM to build a cashless society (screen scrape from Seeking Alpha):

    Big Blue has reportedly “been in informal discussions about a blockchain-tied cash system with a number of central banks, including the U.S. Federal Reserve.” If central banks approve, IBM will “build the secure and scalable infrastructure for the project.”

  46. Gravatar of James in London James in London
    15. March 2015 at 23:09

    Britonimist: don’t worry re Ray (or MF) most readers have him on auto-filter. It’s not clear he’s a real person (same as MF). It’s hard to know what organisation pays them though, or for what reason.

  47. Gravatar of Major.Freedom Major.Freedom
    16. March 2015 at 02:15

    Britonomist:

    Ironically, “assertion after assertion with no justification” is precisely how I interpret your posts and posts of a number of others here.

    Who pays you people to post all your falsehoods?

  48. Gravatar of Brian Donohue Brian Donohue
    16. March 2015 at 02:54

    Ray, peak tightening under Volcker occurred in September of 1981. 1 year Treasury yields exceeded 17%.

    At the time, trailing 1-year CPI had crept back up over 10%.

    But this last round of tightening broke inflation’s back. Forward-looking CPI increases have never exceeded 6% since then.

    Realizing it had finally won the expectations game, the Fed was able to reduce 1=year rates to below 12% by the end of 1981.

  49. Gravatar of Ray Lopez Ray Lopez
    16. March 2015 at 05:23

    @Brian Donohue – thanks for taking up the challenge. I respect you more, for what it’s worth, as unlike our host and his minions you don’t chiefly resort to name calling as your retort. But you are wrong about Volcker. Please go here: tradingeconomics.com/united-states/interest-rate Now note US Fed Funds Rate for 1979-82. Note the ups and downs. This is Volcker. Now go to the St. Louis Fed website and chart CPI. What you will see is this: from July 1979 to Feb 1980, the Fed Funds rate spiked from 10% to 20%–a huge jump that should have dampened inflation. Let’s leave aside that the Fed was following the market rather than leading it (my contention vs yours), let’s just observe what happened to CPI. CPI during this time was NOT affected (St. Louis Fed site, I cannot leave a link as it’s too long), in fact, it actually accelerated! The Fed had a tiger by the tail, and the tiger wanted to run. Now notice that the Fed *lowered* interest rates from 20% to 10% from Feb 1980 to July 1980, and again no effect on inflation EXCEPT at the END of the period, in July, the CPI rate of increase actually *declined*! The *opposite* of the idea of ‘raise Fed rates to lower inflation’! As our host would say, “never reason from a price level / change”. The Fed then again raised interest rates from 10% to 20% from July 1980 until July 1981 (not September as you say, but no big deal) but inflation continued during this time at roughly the same reduced pace as from July 1980. In other words, inflation broke on its own without much influence from the Fed, which yo-yo’d around with interest rates, following the market. Inflation gradually receded on its own, indeed a flareup occurred in April to July 1982 despite the high Fed funds rate. In short, you can read this data and conclude the Fed not only no effect, but arguably had a negative correlation in 1980 (i.e., when the Fed tightened, inflation was not affected, and when it loosened, inflation actually fell). The only way you can find cause-and-effect is if you introduce “lags” from the time the Fed did something and inflation responded. I’m sure a clever statistician could do this, but it’s just data mining. I firmly believe, looking at this data and other data, that money is neutral or super-neutral, and the Fed has little or no influence beyond a few days. And greater minds, like Fisher Black thought likewise.

  50. Gravatar of LK Beland LK Beland
    16. March 2015 at 05:26

    Prof. Sumner,

    “It makes very little difference which bonds they buy, as any boost to eurozone AD will tend to help the worst off countries the most”

    I agree to some extent. There is a caveat, in my opinion. If you think of QE from Delong’s perspective (QE shifts the demand of risk-bearing capacity to the left), then it does make a difference which bonds they buy. Buying 1 T$ of riskier bonds (Greece, Spain, Portugal) will shift that demand-curve much more to the left than buying 1 T$ of low-risk bonds (Germany, France).

    In the former case, it leads to a much more sizable decrease of risk-bearing supplied/demanded and of its price. This, in turn, should lead to a larger growth of AD.

    (Here is the train of thought I am referring to: http://delong.typepad.com/sdj/2013/09/what-are-the-risks-of-quantitative-easing-really.html)

  51. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    16. March 2015 at 05:39

    Off Topic, Mr Sumner why doesn’t the expected NGDP growth number in your page match Hypermind’s NGDP contract price ? Shouldn’t they be the same ? Thank you.

  52. Gravatar of benjamin cole benjamin cole
    16. March 2015 at 05:56

    Matt Waters: hey it is all Greek to me. I just said they are close to a primary surplus.
    The Greeks are overburdened with debt. They need to declare bankruptcy, and burn the credit cards.
    And then print lots of money. They cannot print lots of money as they belong to the ECB which is making monetary policy for Germany.
    Is there a fate worse then having Teutonic central bankers with monetary noose around your neck? Forever?

  53. Gravatar of ssumner ssumner
    16. March 2015 at 06:04

    Britonomist, This post was addressing comments he made last week.

    Saturos, No, unfortunately.

    Thanks Travis.

    Britonomist, Ray warned us that he’s about to stop commenting, in the meantime enjoy the spectacle of Ray trying to understand Friedman’s views on velocity. Hilarious.

    James, Perhaps MMTers are paying them to make Austrianism look bad.

    LK, Yes, But I’d expect the difference to be very small.

    Jose, There are several Hypermind markets. Are you sure you have the right one?

  54. Gravatar of SG SG
    16. March 2015 at 06:13

    Scott,

    In case you’re now looking for a topic for a “bad Krugman” column, i’d nominate his post today

    http://krugman.blogs.nytimes.com/2015/03/16/st-augustine-and-secular-stagnation/

    “And how do we get to the higher target inflation rate, when monetary policy is having trouble getting traction? Fiscal policy! If you’re really worried about secular stagnation, you should advocate a combination of a raised inflation target and a burst of fiscal stimulus to help the central bank get there.”

    Isn’t his use of the word “burst” just wrong here? Even if we grant Krugman’s assuming away monetary offset, if fiscal stimulus is temporary, won’t it fail to increase inflation expectations? Wouldn’t a country attempting to boost its inflation rate via fiscal stimulus, *by definition* be committing itself to ever-increasing deficits? And wouldn’t that just turn said country into Venezuela?!?! Am I missing something here?

  55. Gravatar of Majromax Majromax
    16. March 2015 at 07:13

    @SG:

    > Wouldn’t a country attempting to boost its inflation rate via fiscal stimulus, *by definition* be committing itself to ever-increasing deficits?

    As always, what’s the central bank’s reaction function?

    Does your hypothetical central bank use the quantity of money as its policy instrument, or does it use interest rates?

    If the central bank targets the quantity of money, then MBase is precisely what the Fed wants it to be. If the central government issues more debt to finance stimulus, then to leading order that will not change the quantity of debt held by the Fed. In turn, this means that Ricardian equivalence will largely hold (in that debt issued now must be repaid with future tax revenues).

    Alternatively, if the central bank targets an interest rate, then it’s presumably *already* ensuring that the bond market clears at its target interest rate. That means that newly-issued debt will be purchased by the central bank, and to the extent that interest rates are positive that interest will be remitted to the government as seigniorage revenue.

    For an interest-rate-instrument central bank, deficit-financed stimulus acts as a “backdoor” way to force monetary stimulus. Krugman’s statements are consistent with the idea that this is his de facto interpretation of how a central bank works.

    For central banks that use essentially any other variable as their policy instrument, then deficit spending does not effect (or affect) aggregate demand: it is as if there is an instant monetary offset.

    @Major.Freedom, @ 15 March 18:04:

    > Why shouldn’t every individual firm be free to issue their own currency to whoever is willing to accept it?

    You’ve re-invented equities.

  56. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    16. March 2015 at 07:22

    Mr. Summner, yes, I was looking at Q1 NGDP contract, you show in your page the full year 2015. Thank you

  57. Gravatar of Brian Donohue Brian Donohue
    16. March 2015 at 07:31

    Ray, it’s one thing to say money is super-neutral (arguable, but wrong.)

    It’s quite another thing to say that inflation is not a monetary phenomenon.

  58. Gravatar of Postkey Postkey
    16. March 2015 at 09:53

    Ray Lopez

    “But this data has been refuted recently-money velocity is not stable, . . . ”

    This is why?

    “In those time periods we must expect the traditional quantity equation, MV=PY, to give the appearance of a fall in the velocity V, as money is increasingly used for transactions other than nominal GDP (PY). This explains why in many countries with asset price booms economists puzzled over an apparent ‘velocity decline’, ‘breakdown of the money demand function’ or a ‘mystery of missing money’.18”
    http://eprints.soton.ac.uk/339271/1/Werner_IRFA_QTC_2012.pdf

  59. Gravatar of Ray Lopez Ray Lopez
    16. March 2015 at 11:21

    @Brian D – you still are not answering why you feel the Fed has any sway over the economy. If money is superneutral, it will not affect the real economy, and inflation does not really matter, absent perhaps hyperinflation where prices change hourly. In fact, the 70s show just that: US real GDP were no less in the 1970s than in the 80s and even 90s. See more here: http://www.multpl.com/us-real-gdp-growth-rate (eyeballing the chart, and I think per capita it is more true, since lots of women when to work in the 80s to increase stagnant incomes)

    @Postkey- thanks! I will digest this later. Nice quote here: “As one monetary aggregate after another succumbed to an unstable relationship with nominal GDP, the [economics] profession became ever less specific about the very definition of money. Today, textbooks, as well as leading central bank publications, state that they do not know just what money is.” (but don’t tell Sumner, he thinks he knows!)

  60. Gravatar of Vaidas Urba Vaidas Urba
    16. March 2015 at 14:05

    Scott,
    Interesting piece by John Hussman this week (he read a bit of Rowe):
    http://hussmanfunds.com/wmc/wmc150316.htm

  61. Gravatar of ssumner ssumner
    16. March 2015 at 17:26

    SG, Check out my econlog post.

    Brain , You said:

    “Ray, it’s one thing to say money is super-neutral (arguable, but wrong.)
    It’s quite another thing to say that inflation is not a monetary phenomenon.”

    The poor guy doesn’t even understand that if inflation is not a monetary phenomenon then money is not neutral.

    Vaidas, Which part should I focus on? I didn’t care for his attempt at Granger neutrality, using interest rates as indicators of monetary policy.

  62. Gravatar of Ray Lopez Ray Lopez
    16. March 2015 at 21:04

    @sumner – please read and comment on the paper Postkey linked above. It’s quite good.

    Please explain your comment to Brian about me. I don’t understand, please decode it, Mr. Illuminati.

    Off-topic. On Tyler Cowen’s site I compared you to J. Sachs and L. Summers, putting you par with them. I want to apologize for such a rash comment. Since there’s no way to retract a statement on the internet, I do so here. Sorry, you are not like them at all, you are much better. I was talking about who is the biggest idiot of the three…

  63. Gravatar of Major.Freedom Major.Freedom
    17. March 2015 at 02:35

    Majromax:

    “You’ve re-invented equities.”

    Equities are liabilities. Claims on a firm’s business.

    A currency on the other hand would completely extinguish a liability.

    When you take ownership of a dollar, the giver owes you nothing more by virtue of you owning that dollar. The liability is completely extinguished. Same thing takes place for gold in a gold standard.

  64. Gravatar of ssumner ssumner
    17. March 2015 at 13:54

    Ray, If a 10% rise in the money supply does not cause a 10% rise in the price level, then money is not neutral.

  65. Gravatar of Ray Lopez Ray Lopez
    17. March 2015 at 21:11

    @ssumner – “Ray, If a 10% rise in the money supply does not cause a 10% rise in the price level, then money is not neutral.” – ah, thanks, I see now… So we need a new definition for this phenomena: (1) central bank does open-market operations, (2) prices have a non-linear relationship with said operations, e.g., a 10% rise in the money supply will only cause say a 5% rise in the price level (or it could cause a 15% rise in price level, or even a -10% (drop) in price level, etc), and, (3) in all of this, nominal variables in the economy such as prices, wages, and exchange rates, have no effect on real (inflation-adjusted) variables, like employment, real GDP, and real consumption.

    What shall we call this, Ray’s criteria? I was using ‘money superneutrality’ as a shorthand.

    What you should do is take on your critics head on in a post. I’ve read this blog going back over the years and you’ve not done that IMO. On occasion you get lone voices like mine that come and go, but you and your minions don’t really offer a comprehensive critique. And for every lone voice that bothers to post there are 1000s that don’t. So you should discuss:

    (1) what if Ray’s criteria above is true? You must admit the possibility that it’s true. You can dismiss it by saying something like, ‘well if monetarism does not work, then there’s no harm in adopting NGDPLT’, but I see a harm, see (2) below.

    (2) at some point, even if Ray’s critique is true over ‘normal’ ranges, central bank operations become inflationary. Even you will concede that. The central bank buying paper backed by junk paper such as kids lemonade stands for example. If the Fed expands, prices don’t change linearly, and it expands some more, more and more, then prices explode (remember it’s a non-linear relationship, so it could happen), then what? Fed contracts might be your answer, but the yo-yo effect might be like what happened with the Volcker Fed, which I discussed with Brian Donahue upstream at 16. March 2015 at 05:23

    (3), Last but least, the mechanics of NGDP futures. You are using them as a forecasting tool, but here’s the problem I see: (1) central bank sets a target of 4% NGDP growth for the next 6 months and begins open-market operations (OMO), (2) NGDP in the futures market does increase, but, the increase happens quickly as in one day (expectations), and, (3) central bank stops open-market operations ‘prematurely’, the next day (I would say this is a blessing but I think you would disagree), (4) futures prices fall the next day, or rise even more (non-linear). So what do you do? Does the central bank continue OMO for a fixed time, regardless of futures markets, or does it respond instantly to flip-flopping and volatile futures markets?

    I’d like to see some of this discussed in the future, in a blog post, that’s my special request. Thank you.

  66. Gravatar of Major.Freedom Major.Freedom
    18. March 2015 at 02:52

    Ray, the phrasing Sumner gave you for money neutrality is not quite right.

    The theory of money neutrality does not suggest that should the CB increase the money stock of its member banks that makes that increase an overall 10% increase, that if we don’t observe prices to have risen by 10% that this means money is not neutral. For there could be and most likely would be real causes for price changes, in which case we won’t see a 19% rise.

    Money neutrality is the theory that changes in the stock of money affect *only* nominal variables and not real variables such as output or quantity of employment.

    Thus of course includes all changes in price down to 0.000000000001%, down to zero even. In other words, if the money stock rises 10%, but that additional money is hoarded, and spending remains the same, then money neutrality actually allows for no price increases at all, and no change to real variables.

    Money neutrality does not claim that so-called “velocity” must remain the same. It only says that if there are effects, those effects are nominal only.

    By the way, the notion of money as neutral is a contradiction in terms, and not ionky that, but we are never living in the long run after a one time increase in the money stock in the distant past. Practically speaking, given that the money stock is always changing in the short run, even in a 100% reserve gold standard, the world is a world that is shaped in part by money being non-neutral day to day. The concept of “the long run” for short term changes is hypothetical. Today is the long run cumulative effect of a series of consecutive short run causes and effects. If we speak of the long run today, we mean the cumulative effects of shirt run causes and effects until then.

    Nobody can predict the long run of society. Some with power may have succeeded in bringing about what they wanted to bring about in the distant past, but nobody has the keys to Geist.

  67. Gravatar of Major.Freedom Major.Freedom
    18. March 2015 at 03:01

    One more point:

    Unless the Fed starts “giving away money”, that is, bringing about an increase in the money supply with no changes to real variables by virtue of even increasing the money supply, we will never even have a chance to observe whether money is neutral, for the way the Fed increases the money stock is by way of member banks sending the Fed assets.

    In other words, money is increased by way of a change in real variables that of course include government bonds, which is not only not a nominal variable, but was itself brought about by non-neutral money methods.

  68. Gravatar of Derivs Derivs
    18. March 2015 at 04:16

    Mjr. Freedum

    “Equities are liabilities. Claims on a firm’s business.”

    Claims on a firms business, technically yes, because they are the damn owners of the business. They are L only if you want to go to jail, common stock falls under E.

  69. Gravatar of Ray Lopez Ray Lopez
    18. March 2015 at 05:32

    @MF – thanks for that amplification. I don’t think it’s necessarily antagonistic with Sumner’s definition, but complimentary. I do think however that if NGDPLT is Superman, the Kryptonite is money neutrality and superneutrality. There are three pillars to NGDPLT: money non-neutrality and non-super-neutrality, sticky wages/prices (related to neutrality) and, money illusion. Like a three-legged stool, if you knock down one of these pillars the entire theory goes to the toilet.

  70. Gravatar of Daniel Daniel
    18. March 2015 at 05:47

    It’s so cute watching Ray try to argue against things he doesn’t understand.

    Like a small child designing a rocket.

  71. Gravatar of Major.Freedom Major.Freedom
    18. March 2015 at 14:52

    Derivs:

    “Claims on a firms business, technically yes, because they are the damn owners of the business. They are L only if you want to go to jail, common stock falls under E.”

    Perhaps you are not aware of the discussion between myself and Majromax. He claimed shares of stock are money. My response was that no, shares of stock are not money, they are claims on a business’s assets. The fact that you agree with that, despite what seems as you treat it as only a triviality, or tangential point, really just means that you agree with what I said regarding Majromax’s claim.

    By the way, why are you saying “damn”? You mad?

  72. Gravatar of Major.Freedom Major.Freedom
    18. March 2015 at 15:07

    Ray:

    My view is that money is not neutral, either in the short run or the long run. I’ve thought about it for a long time. I now think, and have for a while now, that if money is non-neutral in the short run, then it is impossible for it to be neutral in the run. Briefly, the reason is the same reason the world we are living in today is in part, and I would say a large part, the outcome of what transpired in ancient Greece. Greek philosophy changed the course of history.

    That is a big example, but I still think the same principle holds for smaller events. The world today is the outcome of all choices and all events that have taken place from the beginning of time.

    Henry Ford for example has permanently changed the course of history.

    And, each of us on this blog have permanently changed the course of history by virtue of our choices and actions.

    Every event that takes place has a permanent affect on how the history of the world unfolds.

    Money can never be neutral in the long run because the long run is the outcome of consecutive short runs. We are living in a world that is in part the outcome of the brief hyperinflation in the Weimar Republic. The real effects it had, permanently changed the course of history. We have all been affected by it.

    The course of history was also permanently altered by the Great Depression. Perhaps if money were different, if say the world had a free market in money since say 1900, then maybe some individual who became unemployed in our historical timeline, would have otherwise discovered some new technology, which may have after 100 years (alternative history, year of 2015) evolved into technology that allows humans to live on the moon. But nobody is living on the moon today because of what took place way back then in actual history.

  73. Gravatar of Major.Freedom Major.Freedom
    18. March 2015 at 15:12

    Does anyone know how to filter out specific commenters? I have at least two people in mind who I would much rather not have to even take the effort to skip over.

  74. Gravatar of Ray Lopez Ray Lopez
    18. March 2015 at 20:37

    @MF – thanks, your view is the economy is “path dependent”, and what happened months, years, decades ago affects it now. Probably true, as people learn from experience. “Money illusion” (fool me once…) and “sticky wages / prices” are a one-trick pony; what supposedly worked then won’t work again now. And I’m not even entirely sure the US Fed had any real influence in causing the Great Depression (contrary to Friedman’s assertion otherwise). As for WordPress, it sucks, but there’s a plug in somewhere to filter comments I once read. I would not use it, as these plug ins are often unstable.

  75. Gravatar of Jason Jason
    19. March 2015 at 02:28

    @Major.Freedom

    Yes, I think I know who you are thinking of. Here is a script that you can add to GreaseMonkey (for FireFox) or TamperMonkey (for Chrome) in order to remove repetitive or annoying comments:

    // ==UserScript==
    // @name Remove comments
    // @match http://*.themoneyillusion.com/*
    // @grant document
    // ==/UserScript==

    var elements = document.getElementsByClassName(“commentbody”);
    for (i = 0; i < elements.length; ++i) {
    var person = elements[i].innerText.split("\n")[0].trim();
    if ((person == "Major.Freedom") || (person == "Ray Lopez")) {
    elements[i].style.display = "none";
    }
    }

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