More links

My previous post has some links that I found interesting.  I’m told that those with RSS readers don’t necessarily notice, however, so I’ll start a new list today. 

I plan to return to blogging after July 4th, although with even Nobel Laureates now acknowledging that a tight Fed monetary policy in late 2008 caused the severe slump, I don’t see any pressing need to return.  

I do continue to follow the news and make notes, so I promise a very active July of blogging.  If you want to see my view of current events, just go back 12 months and read my old posts on the Greek crisis.  Nothing’s changed.

In case the WSJ piece falls behind a paywall, here’s the money graf:

Then, in summer 2008, the Fed committed what Mr. Mundell calls one of the worst mistakes in its history: In the middle of the subprime crunch—exacerbated by mark-to-market accounting rules that forced financial companies to cover short-term losses—the central bank paused in lowering the federal funds rate. In response, the dollar soared 30% against the euro in a matter of weeks. Dollar scarcity broke the economy’s back, causing a serious economic contraction and crippling financial crisis.

Yep.

2.  Yours truly in 1995; Greg Mankiw and Paul Krugman in 2011.

3.  Excellent Reihan Salam post.  (HT:  Tyler Cowen)

4.  Interesting Matt Rognlie post.  (I left a comment.)

5.  Greg Mankiw and I share the same Congressman.

6.  In a recent talk, Robert Lucas argued that a decline in “spending” (i.e. NGDP) produced the severe contractions of 1929-33 and 2008-09.  He argued that the slow recoveries were caused by adverse supply-side polices.  This is not “classical” or RBC economics, it’s AS/AD.   I think he’s right about the the Great Depression and the recent contraction, but only about 30% right about the current recovery (I attribute 70% of the slow recovery to lack of NGDP growth.)  Oddly, Paul Krugman and Matt Yglesias seem to think that Lucas denies that demand shocks cause recessions–which is clearly not Lucas’s view.

7.  One of the reasons why unemployment stays high:

LAST October, I won the Nobel Prize in economics for my work on unemployment and the labor market. But I am unqualified to serve on the board of the Federal Reserve — at least according to the Republican senators who have blocked my nomination. How can this be?

The easy answer is to point to shortcomings in our confirmation process and to partisan polarization in Washington. The more troubling answer, though, points to a fundamental misunderstanding: a failure to recognize that analysis of unemployment is crucial to conducting monetary policy.

Expertise in unemployment is of little help in monetary policy.  But the scary thing is that most people don’t even understand that tight money is contributing to high unemployment—at least Diamond knows that.  The lunatics have taken over the asylum.

8.  If you squint hard enough, and turn sideways, Matt Yglesias sort of, indirectly, hints that Obama should put me on the Fed (or Beckworth or Hendrickson).  At least I’d like to think that’s what he’s saying.

9.  The always insightful Tim Duy on monetary policy:

The turn toward contractionary policy – and monetary policy arguably turned contractionary when Fed policymakers questioned the wisdom of continuing QE2 – is surely one of the shocks that hit the economy.

.  .  .

For now, watch carefully for Fedspeak that speaks to the forecast – whether or not officials continue to see the current challenges as temporary.  And look for concern that additional asset purchases would have no impact, or a reiteration of Bernanke’s concerns that the tradeoffs are less favorable.  We are caught between rhetoric and reality – while the Fed may believe no more is coming, the history of this cycle is that more easing has always been needed.

10.   Paul Krugman notes (correctly) that I’m politically homeless.  The progressive left has recently been so good on monetary policy that I don’t feel any need to rush back into blogging.

11.  Why not put Greg Mankiw up for the Fed position?  He’d be confirmed easily.  A necessary condition for more monetary stimulus is that Ben Bernanke decides we need more monetary stimulus.  If Bernanke made that decision, I think Mankiw would support him.

12.  A report on the recent GOP debate:

Ron Paul, the Texas congressman who has run for president before, did little to shake his image as a fringe candidate by talking too fast and dropping obscure subjects like “Keynesian bubble” and  “monetary policy” into the conversation.

13.  Why NGDP growth is so slow:

The best cure for the economy now is time.

That’s the overwhelming opinion of leading economists in a new Associated Press survey. They say the Federal Reserve shouldn’t bother trying to stimulate the economy — and could actually do damage if it did.

The economists are lowering their forecasts for job creation and economic growth for the rest of this year, mainly because of high oil prices. A batch of bleak data over the past month has suggested that the 2-year-old economic recovery is slowing.

The economists now expect the nation to create 1.9 million jobs this year, about 200,000 fewer than when they were last surveyed eight weeks ago. They expect the unemployment rate, now 9.1 percent, to be 8.7 percent at year’s end. Before, they expected 8.4 percent.

Despite their gloomier outlook, 36 of the 38 economists surveyed oppose any further efforts by the Fed to invigorate growth.

14.  Redonkulus has a good critique of Cochrane.

15.  Our Congressmen are allowed to engage in insider trading, and also to accept some types of bribes.  But no naughty tweets allowed!

16.  The Tea Party has failed.

17.  There are two kinds of people, those who oppose the war on drugs, and evil people.  From Kevin Drum:

So there you have it: a genuine mystical experience with long-lasting positive effects, no reported negative effects, no known medical side effects in healthy people, and with virtually no chance of a bad experience. Does that sound like something you’d like to try? Well, you can’t: no matter how safe and beneficial it might be, psilocybin is a Schedule 1 controlled substance and you can’t have any. You may thank the War on Drugs whenever you like.

18.  Matt Yglesias tries to defend Metcalf, and ends up exposing the shallowness of Metcalf’s article (by making the points Metcalf should have made, but didn’t.)

19.  Bob Higgs on why hyperinflation hasn’t occurred (yet.)  Is the prime rate/Treasury spread wider than usual?

20.  Memo to the NYT editor:  This is less wrong, maybe one more try and you’ll get it right:

11:04 a.m. | Updated A previous version of this post incorrectly stated that Ozone is the highest bar in the world. It is, in fact, the highest bar in Asia, but has been surpassed by at.mosphere, at the Burj Khalifa in Dubai. The post has been corrected.


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412 Responses to “More links”

  1. Gravatar of marcus nunes marcus nunes
    23. May 2011 at 07:34

    Scott
    That´s the only good quote from the article. In the limit, he wants the dollar to “join the euro”!

  2. Gravatar of Benjamin Cole Benjamin Cole
    23. May 2011 at 08:14

    No pressing need? What do you think is happening to equities markets with QE2 ending?

    Pump out one blog on IOR or QE3. Something.

  3. Gravatar of Octahedron Octahedron
    23. May 2011 at 09:26

    July 4th is such a long ways away!

    I happened to be looking through some of your older entries yesterday and rediscovered why this is my favorite blog on the net.

  4. Gravatar of Liberal Roman Liberal Roman
    23. May 2011 at 11:26

    I was about to write the same thing Benjamin did above. This entire year seems to be a replay of 2010.

    We began both 2010 & 2011 with talks of recovery in the air. Then we progressed to talks of Fed exit strategy. Then we had a slowdown. Soon, my bet is that this summer talks of a “double dip” recession will begin again. And then, we need you and Krugman to start pounding the drum for QE3.

    The good news is that this has been my most successful year ever for stock trading. I am fully short right now and am just going to read everything coming out of the Fed waiting until I see signs of them reversing their tighter money stance. I expect the market to struggle until Bernanke at the very least puts the foot down on all this talk of raising rates and shrinking the Fed balance sheet.

  5. Gravatar of Bob Murphy Bob Murphy
    23. May 2011 at 18:23

    In the middle of the subprime crunch—exacerbated by mark-to-market accounting rules that forced financial companies to cover short-term losses—the central bank paused in lowering the federal funds rate.

    Yet another example of quasi-monetarists equating interest rates with monetary policy. Here’s Beckworth doing the same thing. Just when I think I understand their worldview…

  6. Gravatar of W. Peden W. Peden
    24. May 2011 at 05:17

    Bob Murphy,

    All changes in interest rates are monetary policy, but not all monetary policy is changes in interest rates. I don’t find that complex, but that’s maybe because I’m not an economist.

  7. Gravatar of Scott Sumner Scott Sumner
    24. May 2011 at 05:50

    Marcus, I agree.

    Benjamin, The break will make me more effective–I’m trying to develop new arguments.

    Thanks Octahedron.

    Liberal Roman, Maybe I should be short as well.

    Bob Murphy. Interest rates are often used as an instrument of monetary policy, but are not a good indicator.

    If interest rates were a good indicator of monetary policy, then one would argue that the Fed did not change policy at all between April and October 2008. But Mundell does claim policy tightened, and uses the foreign exchange value of the dollar as his indicator. Nevertheless, as long as the fed (foolishly) uses nominal interest rates as their policy instrument, I’m forced to pay attention, in order to evaluate what they are trying to do to the stance of monetary policy.

    W. Peden, I agree with the second part of your comment, but not the first. Suppose NGDP growth expectations stayed unchanged, and yet interest rates soared. I’d say monetary policy was unchanged.

  8. Gravatar of Richard A. Richard A.
    24. May 2011 at 07:25

    Let’s suppose the Fed had maintained a 5%/year growth path in nominal GDP. The FFR would not have declined to 0.25% but rather more likely be around 3%. They are paying a few billion dollars/year in interest on excess reserves to prevent the money they created to buy MBS from multiplying through the banking system. Had they not crashed the economy, the amount they would be paying in IOR would be more than 10 times greater than what they are paying now. At this level, the Fed would probably be running in the red. The Fed had an incentive to crash the economy.

  9. Gravatar of W. Peden W. Peden
    24. May 2011 at 08:32

    Prof. Sumner,

    I would say that, in that circumstance, there has been a (irrelevant) change in monetary policy but no change in monetary conditions. No change in policy, I think, requires doing nothing. Raising interest rates is never doing nothing, because it involves an active and consequential decision on the part of policymakers.

  10. Gravatar of Morgan Warstler Morgan Warstler
    24. May 2011 at 09:16

    http://www.google.com/search?sourceid=chrome&ie=UTF-8&q=Mundell%3A+Deflation+Risk+for+the+Dollar

    first link

    Mundell’s point carries… The US should fix its exchange rate to the Euro. And then use it’s strength to keep them from bailing out Greece.

    There’s GENIUS here:

    “From 2001-07, he argues, the dollar underwent a long, steady decline against the euro, tacitly encouraged by U.S. monetary authorities. In response to the dollar’s decline, investors diverted capital into inflation hedges, notably real estate, leading to the subprime bubble. By mid-2007, the real-estate bubble had burst. In response, the Fed reduced short-term interest rates rapidly, which lowered the dollar further. The subprime crisis was severe, but with looser money, the economy appeared to stabilize in the second quarter of 2008.”

    Or as I said 1.5 years ago:

    http://biggovernment.com/mwarstler/2010/02/17/we-ought-to-join-the-eu/

    ——

    See Scott? Here’s Mundell talking about WHAT SHOULD HAVE BEEN DONE DIFFERENTLY.

    From the get go, the problem was the US being lax with money.

    Why don’t you focus on the stuff the the guys who matter want to hear?

  11. Gravatar of Silas Barta Silas Barta
    24. May 2011 at 10:34

    Hey, maybe the Fed could make negative-interest-rate loans to anyone that shows up at a branch bank in a nice suit. That’ll fix up the shortage of money right quick. Also, let them collateralize the loan with gold so that the Fed can steal it, er, I mean “suspend convertibility” to help patch up any losses they take on their balance sheet.

    Pure brilliance, I tell you!

  12. Gravatar of Scott Sumner Scott Sumner
    24. May 2011 at 13:49

    Richard A, There are two problems with your claim that the Fed would lose money:

    1. If NGDP growth was about 5%, then reserves would be tiny, compared to current levels.

    2. If they had to pay more interest on reserves, they would also earn more on the asset side of their balance sheet.

    W. Peden, I don’t follow this:

    “Raising interest rates is never doing nothing, because it involves an active and consequential decision on the part of policymakers.”

    Suppose the monetary base is left unchanged, but rates in the free market rise due to more demand for credit. Is that a change in monetary policy?

    Morgan, I focus on the most sensible part of Mundell’s message.

  13. Gravatar of Liberal Roman Liberal Roman
    24. May 2011 at 17:41

    Speaking of Fedspeak, here is a dandy from James Bullard via Seeking Alpha

    “James Bullard thinks it’s “time to get rid of” core CPI as the Fed’s traditional inflation measure, adding that it could “systematically understate inflation for many years” if global energy demand outstrips supply over the coming decades”

    Wow, this doesn’t sound like a central bank ready to reverse its tightening stance. Talk about digging your heels in, Bullard goes all in with the hard money types. Which is weird, because unless I am wrong, Bullard was very much a dove before this doozy.

    Also Scott, if you are fielding questions, the best criticism I have heard of your views over the last few months has been that GDP is hard to measure and subject to many revisions. Therefore, it would be hard to target. Unlike CPI which is more stable and not revised as often. This actually does seem like a valid concern. I am not sure if you have addressed this before, but how would you respond?

  14. Gravatar of Jason Odegaard Jason Odegaard
    25. May 2011 at 03:29

    Scott,

    Your message still needs to get out there more: http://online.wsj.com/article/SB10001424052702304066504576341211971664684.html

    Morgan, the thrust of Mundell’s message is depreciating the dollar versus the euro. From Mundell’s point-of-view, QE is a stabilizing factor.

  15. Gravatar of W. Peden W. Peden
    25. May 2011 at 07:51

    Prof. Sumner,

    No, I wouldn’t say that was a change in monetary policy. On the other hand, I would call a change in the central bank’s lending rate to banks a change in monetary policy.

    There’s perhaps scope for some Transatlantic mistranslation here, because the monetary base is fully endogenous in the UK: the central bank always adjusts the monetary base to the day-to-day needs of commercial banks. Since Septemebr 1992, aside from QE, UK monetary policy has basically orientated around alterations in the bank rate i.e. the rate at which the BoE lends to commercial banks. Friedman and other American economists got hopelessly confused about the UK monetary system in the early 1980s, which is fair enough because British monetarists like Patrick Minford didn’t understand it either.

    In the US, as I understand it, the monetary base is actively manipulated (even during normal periods) by the Fed in order to alter the lending rates of commercial banks.

  16. Gravatar of Morgan Warstler Morgan Warstler
    25. May 2011 at 12:28

    Jason, the MONEYGRAF is the one I quoted.

    “From 2001-07, he argues, the dollar underwent a long, steady decline against the euro, tacitly encouraged by U.S. monetary authorities. In response to the dollar’s decline, investors diverted capital into inflation hedges, notably real estate, leading to the subprime bubble. By mid-2007, the real-estate bubble had burst. In response, the Fed reduced short-term interest rates rapidly, which lowered the dollar further. The subprime crisis was severe, but with looser money, the economy appeared to stabilize in the second quarter of 2008.”

    Mundell’s thrust is never “deprecation” – his thrust is that the spirit of “free trade zones” is pegged currency… if not a single global currency.

    Removing government control over money supply is his chief concern.

    Scott,

    Listen, I can’t make you be more famous, I can’t make you hold more sway…

    BUT dude, if you can’t point to 2001-2008 and tell a meaningful story about how Greenspan screwed up with loose money – conservatives will never listen to you.

  17. Gravatar of Scott Sumner Scott Sumner
    26. May 2011 at 05:15

    Liberal Roman, The GDP revisions aren’t a problem, as I favor targeting future expected NGDP, not current NGDP. Thus you could target the final revision, which are fairly accurate for business cycle purposes. In any case, the alternative policy (The Taylor Rule) faces exactly the same problem. And the CPI is highly inaccurate, so I can’t imagine why anyone would want to target the CPI. It showed housing prices rising faster than other prices between mid-2008 and mid-2009, the greatest housing price crash in history. And housing is 39% of the core CPI. Is that really what people want to target.

    W. Peden, I’m pretty sure the US is equally endogenous as the British monetary base. But endogeneity is a tricky concept. You can also argue that interest rates are endogenous, as they respond to changes in the economy via some sort of reaction function such as the Taylor Rule, or whatever macro aggregates the BOE is targeting (which might be NGDP.)

    I wasn’t suggesting that the BOE is targeting the MB, I know they don’t. My point is that interest rates can change without the central bank doing anything. The fact that most central banks use interest rates as a policy instrument doesn’t change that fact. Interest rates rose sharply in the 1970s, but I don’t think anyone would say monetary policy was contractionary during that decade. Rather interest rates rose because inflation rose.

    Jason, Thanks for that link. I agree with McKinnon that we might be facing stagnation, but I doubt we’ll get the inflation part of stagflation.

    Morgan, You said;

    “Removing government control over money supply is his chief concern.”

    Who would control the global money supply under a single global currency?

  18. Gravatar of W. Peden W. Peden
    26. May 2011 at 08:34

    Prof. Sumner,

    I agree, so long as we’re talking about commercial bank lending rates rather than central bank rates.

    It’s true that, under certain monetary systems, the central bank rate adjusts automatically to changes in the economy and so follows rather than leads, but I would regard that as part of a monetary policy decision e.g. the decision to follow a Taylor rule.

    As for the 1970s, if we’re talking about the central bank rate, I would say that raising the BoE/Fed lending rate to commercial banks DID involve a decision to tighten, but that this decision (relative to inflation) meant that monetary conditions loosened. This allows us to properly describe the counterfactual situation where nominal central bank lending rates never went up at all.

    I agree that monetary policies in Britain and the US were not tight (overall) in the 1970s, but the decision to raise the central bank’s lending rate (somewhat) in the 1970s was still a monetary policy decision. They could have decided to keep nominal rates low, which would have caused monetary conditions to be even looser.

    Perhaps I can avoid semantic issues this way: (1) all changes in the central bank’s lending rate are monetary policy decisions; (2) not all monetary policy decisions are to do with the central bank’s lending rate; (3) the central bank’s lending rate is not the only factor in the determination of monetary conditions and it is potentially only a minor factor.

  19. Gravatar of CA CA
    26. May 2011 at 11:59

    Krugman and DeLong have grown gloomy over the economy. What’s your general read Professor Sumner?

  20. Gravatar of Cameron Cameron
    26. May 2011 at 12:48

    http://monetarycrank.blogspot.com/2011/05/fed-funds-and-aggregate-demand-watch_26.html

    NGDP expectations have fallen significantly since Bernanke’s press conference :(

  21. Gravatar of Morgan Warstler Morgan Warstler
    26. May 2011 at 14:03

    Scott,

    No one. That’s the whole damn point. Monetary Union without political union. A “global currency” is really just competitive private currencies – with banks that could never play favorites, could never bailout anyone, could never decide to screw the savers for some just cause.

    This entire enterprise is about governments becoming inherently weaker – the money goes global, the workforce goes global, and governments stay in their own little pond – forced forever to compete aggressively for both.

    “the full faith and credit of the US” is a clear statement that the government will back up its debts by using force on its citizens.

    Ending that guarantee by hook or by crook is the long game.

  22. Gravatar of Silas Barta Silas Barta
    26. May 2011 at 14:49

    Scott_Sumner, write about Bitcoin.

  23. Gravatar of Jason Odegaard Jason Odegaard
    27. May 2011 at 05:46

    Morgan – Couldn’t any government use “force” (i.e. taxes) to cover government debt, even if the debts were incurred in various private currencies? Plus, it would seem private currencies unlikely to produce the stability of exchange that Mundell seems to advocate. Would there be any additional mechanism that promotes stability of exchange between private currencies?

    Scott – Right. “Stagflation” will need inflation to come true. However, I just saw this post (http://krugman.blogs.nytimes.com/2011/05/27/inflation-notes/) by Krugman this morning that leads to a Bloomberg article about how temp worker wages are rising. I’ll be watching if that number spreads widely into overall wages and starts indicating inflation…of which modest amounts wouldn’t hurt. But that will make the inflation hawks hyperactive again.

  24. Gravatar of W. Peden W. Peden
    27. May 2011 at 07:12

    So the OECD comes out saying both that (a) the UK government should consider reducing its deficit reduction plans if economic growth remains subdued and (b) that the Bank of England should raise interest rates in order to prevent inflation expectations becoming entrenched.

    There you go: fiscalism has now taken over the OECD. It looks like my philosophical case for the existence of progress in economics just became a lot harder.

  25. Gravatar of W. Peden W. Peden
    27. May 2011 at 07:14

    But they also “fear that rising inflation will cause a rise in interest rates that will bear down on growth”. The OECD has achieved total incoherence, which is an impressive accomplishment.

  26. Gravatar of Scott Sumner Scott Sumner
    27. May 2011 at 17:02

    W. Peden, You said;

    “As for the 1970s, if we’re talking about the central bank rate, I would say that raising the BoE/Fed lending rate to commercial banks DID involve a decision to tighten, but that this decision (relative to inflation) meant that monetary conditions loosened. This allows us to properly describe the counterfactual situation where nominal central bank lending rates never went up at all.”

    To me it’s more logical to say that the central banks loosened monetary policy in the 1970s, and if they had held the fed funds rate constant, they would have been loosening even more aggressively. I think interest rates are a very poor indicator of the stance of monetary policy, or even the direct of change.

    CA, Gloomy, especially compared to earlier this year.

    Cameron, Yes, that’s depressing. It also relates to W. Peden’s comment. The lower expected fed funds rates in the out years represent a tightening of monetary policy.

    Morgan, OK, but then what’s the medium of account? Are there going to be 100 different ones in America? Wouldn’t that be confusing? If there’s just one, can I print some too?

    Jason, If wage growth returns to normal, I’ll stop calling for monetary stimulus.

    W. Peden, That’s exactly what I’ve complained about! Do you have a link?

  27. Gravatar of Morgan Warstler Morgan Warstler
    27. May 2011 at 21:04

    This is your misunderstanding. Digital currency = near friction-less exchange.

    For all intents and purposes only the atomic notion of currency keeps alive 1%+ exchange fees.

    When the hit on conversion drops low enough, ANY currency that is infinitely sub-dividable just means you could be paying .01 of a unit for your groceries in the kick ass new currency – that refuses to print more.

    Jason, no – capital and talent goes global, and governments are forced to compete long term to keep them around.

    Exactly how much should people like Obama, Biden, Bush, and even Reagan actually matter? They are going to have a harder and harder time rousting up the resources to try and capture the same sized slice of the pie – as the pie gets bigger, they are going to keep getting less.

    I love Chris Christie, but any number of millions of regular competent businessmen are smart enough to outfox what passes for his level of productive talent in politics. Politics is not productive, people good at it don’t bring much to the productive table. I love hot chicks, but they aren’t super productive either.

    A world where we take “Mr. President” as seriously as we take Royalty is coming.

    BTW, “force” isn’t taxes – it is threatening to liquidate you, imprison you to make good on promises either the “voters” or the “leaders” made to creditors.

    This doesn’t mean they can’t pull it off, it just means it is in their far greater interest to grow their pie – no matter what (less of the new pie = more than they have now)

    —–

    The next century is about finding out how much the folks paying want to provide for the folks not paying in a far fairer discussion, and about cutting out all the middle men in the process.

  28. Gravatar of W. Peden W. Peden
    28. May 2011 at 05:53

    Prof. Sumner,

    “To me it’s more logical to say that the central banks loosened monetary policy in the 1970s, and if they had held the fed funds rate constant, they would have been loosening even more aggressively.”

    I suppose that’s what I was trying to say, except that since the counterfactual here involves the Fed doing nothing then a fortiriori they must have been doing SOMETHING with the Fed funds rates in the 1970s; it just wasn’t enough to address the rise in NGDP, so it was a loose monetary policy in spite of high nominal interest rates.

    “I think interest rates are a very poor indicator of the stance of monetary policy, or even the direct of change.”

    I agree. Even if we overlook the nominal vs. real distinction, monetary conditions are not monocausal e.g. the central bank rate may be overriden by accomodation of fiscal expansion, overfunding/underfunding, OMOs, reserve requirement changes, signalling and many ways besides.

    As for the OECD piece, I first read it in the London Times (paywalled) which was an interesting experience because the inconsistencies only became apparent over several articles. The OECD report itself seems to be available only for subscribers, but here are some online articles that refer to it-

    http://web.orange.co.uk/article/news/britain_should_raise_rates_warns_oecd

    http://www.guardian.co.uk/business/2011/may/25/interest-rates-must-rise-oecd

    http://www.guardian.co.uk/business/2011/may/26/george-osborne-spending-cuts-oecd

    - while the OECD leader suggests that their position isn’t quite as incoherent as I thought, though it still is nonsensical-

    http://www.bbc.co.uk/news/uk-politics-13558997

    Of course, if people thought in terms of NGDP or even just AD, we wouldn’t have this kind of incoherence. “We need higher interest rates, because NGDP is too high” and “We need looser fiscal policy, because NGDP is too low” are clearly inconsistent. It’s the idea that price inflation and output are two separate coins, rather than two faces of the same coin, which leads people astray.

    Ed Balls is managing to press all my buttons, because he’s also been saying that further fiscal stimulus would aid debt AS SUCH, rather than just the cyclical deficit. Even the most hair-brained Keynesian acknowledges that any sort of stimulus, even with a major multiplier, couldn’t reduce the structural deficit.

  29. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. May 2011 at 08:08

    Barney Frank’s role in the Fannie fiasco is news to Mankiw? He could have read about right here months ago.

  30. Gravatar of Morgan Warstler Morgan Warstler
    29. May 2011 at 06:49

    http://falkvinge.net/2011/05/29/why-im-putting-all-my-savings-into-bitcoin/

  31. Gravatar of Scott Sumner Scott Sumner
    30. May 2011 at 09:00

    Morgan, You said:

    “A world where we take “Mr. President” as seriously as we take Royalty is coming.”

    Great line. You are a natural blogger.

    W. Peden, Thanks, I’ll do a post on that when I return.

    “Ed Balls is managing to press all my buttons, because he’s also been saying that further fiscal stimulus would aid debt AS SUCH, rather than just the cyclical deficit.”

    When the right made this claim it was called “voodoo economics” by American progressives.

    Patrick, Yes, but I can’t get enough Barney-bashing. The local paper gave him a complete pass–it was pathetic.

    Morgan, I don’t know much about bitcoin, but just thinking out loud: How often has it been the case that buying into an asset that already appreciated 1000-fold has been a good idea?

  32. Gravatar of Doc Merlin Doc Merlin
    30. May 2011 at 15:25

    “Then, in summer 2008, the Fed committed what Mr. Mundell calls one of the worst mistakes in its history: In the middle of the subprime crunch—exacerbated by mark-to-market accounting rules that forced financial companies to cover short-term losses—the central bank paused in lowering the federal funds rate. In response, the dollar soared 30% against the euro in a matter of weeks. Dollar scarcity broke the economy’s back, causing a serious economic contraction and crippling financial crisis.”

    I’ve been talking about this for the past two years on this blog. It was seriously all an accounting rule change that turned what would have been a mild asset crunch into a real hardcore recession.

  33. Gravatar of Doc Merlin Doc Merlin
    30. May 2011 at 16:03

    “Morgan, I don’t know much about bitcoin, but just thinking out loud: How often has it been the case that buying into an asset that already appreciated 1000-fold has been a good idea?”

    1000-fold in half a year’s time… aren’t you the guy who doesn’t believe in asset bubbles? ;-)

    Well, in its defense, its a really, really neat way to control M, and also a really neat way to allow for anonymous transactions. I have no idea if it will continue to appreciate much, but I am reasonably certain it will become more and more important in allowing transfer of money.

  34. Gravatar of Morgan Warstler Morgan Warstler
    30. May 2011 at 17:37

    Bitcoin is very cool. The appreciation thing is just a natural side effect to a currency that has known quantity. But it’s value isn’t as an investment, its value is that the government doesn’t get to print more of it – it is non-political.

    Government’s really should be allowed anywhere near “monetary policy.” The economy is not their concern – providing lowest cost / friction-less services at the near edge of modern technology – is about the best we can hope for from them.

    I don’t really care for the anonymous part of bitcoin – I think the hat trick is a digital currency that is completely known – where the entire history of a unit and its parts can be tracked, where the amount held by every participant is known in real time, where all transactions are recorded and verifiable.

    Done properly the entire concept of theft almost evaporates – if money left your account, we know where it went, it can’t disappear, and the thief is nailed with such early frequency – it just stops.

    I like the idea of achieving the same thing with assets and cameras. I won’t mind living in a casino-like world where the eye in the sky is everywhere, because you can do whatever you want in those places – the invasion of “privacy” just leads to everything being legalized. Shame ends when you find out everyone else is a freak too.

  35. Gravatar of James in London James in London
    31. May 2011 at 04:42

    Welcome back (almost). Low wage inflation is not a sign of no inflation. Combined with high “headline” inflation it is a sign of the impoverishment of the masses. The US is becoming more like the Latam of the bad old days.
    http://www.imf.org/external/pubs/ft/staffp/2004/01/pdf/braumann.pdf

  36. Gravatar of Scott Sumner Scott Sumner
    31. May 2011 at 09:57

    Doc Merlin, I’m not sure what “M” is, or how bitcoin “controls” it.

    Morgan, I hope you are right–but this is America; home of the Puritans.

    James, The inflation rate in 2009 and 2010 was 1% using the GDP deflator. Latin America is not the comparison that comes to mind–I think Japan circa 1997 is a better bet. Of course headline CPI is about as meaningless a number as it is possible to find.

    The inflation from supply shocks does reduce living standards. The inflation produced by the Fed raises living standards.

  37. Gravatar of Doc Merlin Doc Merlin
    31. May 2011 at 12:03

    @Scott Sumner,
    I was referring to M in MV=PY
    Bitcoin controls its money supply through cryptology so the number of future bitcoins are very predictable. Bitcoin’s M also grows extremely slowly, so it tends to be price deflationary relative to dollars, this along with some anonymity is its main attraction for individuals wishing to hold them.

    “The inflation from supply shocks does reduce living standards. The inflation produced by the Fed raises living standards.”

    For a short period of time, sure. However, if this isn’t a 100% real effect then it must be offset by some amount of increased household austerity later.

  38. Gravatar of Doc Merlin Doc Merlin
    31. May 2011 at 12:06

    @Morgan
    ‘Done properly the entire concept of theft almost evaporates – if money left your account, we know where it went, it can’t disappear, and the thief is nailed with such early frequency – it just stops.’

    It can disappear if you lose your private key, i’ve lost probably about $10 (nowadays pricing) worth of bitcoins over my lifetime that way… this was when it was still a toy currency that cryptologists and crypto-anarchists played with.

  39. Gravatar of Wonks Anonymous Wonks Anonymous
    31. May 2011 at 14:42

    “How often has it been the case that buying into an asset that already appreciated 1000-fold has been a good idea?”
    Such rank chartism, I thought you were an EMH guy!

  40. Gravatar of Scott Sumner Scott Sumner
    31. May 2011 at 17:17

    Doc Merlin, I don’t think people see the problem with using Bitcoins as “M” in the MV=PY equation. If Bitcoins become the medium of account, then we would have 99.9% deflation in the last year, as the value of Bitcoins has soared against goods and services. Someone making 80,000 bitcoins/year, would see their income fall to 80 Bitcoins per year. Even worse, suppose wages were sticky. Then with that sort of deflation you’d have mass unemployment.

    Wonks Anonymous, Touche! Most of my commenters don’t believe in the EMH. I was trying to trick them into providing me with examples of bubbles that didn’t burst–so that later I could use those examples against them.

  41. Gravatar of Morgan Warstler Morgan Warstler
    1. June 2011 at 00:08

    Scott, no one makes $80K in bitcoins precisely because of your silly “medium of account” problem.

    Expect almost all transactions to be real time, set against dollar pricing… until it tips. And once it tips, game over.

    The massage is $100US for 90 minutes. The fact that you can keep paying that with less bitcoins is just an indictment of the Fed as the massage costs $110, $120, $130…

    If the Fed behaves, bitcoins appreciate more slowly. Likewise after a tipping point, long term contracts can exist – supermodels want paid in Euros, so contracts have to factor that risk swing in.

    And why do you do things like suppose wages are sticky? As the dollar gets destroyed and replaced by private currency, expectations will just have to eat it – when the hordes invade, you don’t assume Robert’s Rules.

    Cart. Horse.

  42. Gravatar of James in London James in London
    1. June 2011 at 02:06

    The masses don’t face the GDP deflator, whatever that is. They face the 29% increase in costs to fund the Memorial Day BBQ, are sceptical of headline CPI (even if does include energy and food).
    http://www.dailymail.co.uk/news/article-1390822/Memorial-Day-cookout-cost-29-year-thanks-inflation.html

    The professional classes, washington elites and banksters worry more about where to invest their 401Ks. That’s why it’s like Latam.

    Meaningful fiscal reform is what the US needs to restore domestic and global confidence in its economy – plus a little bit of liquidity now and again when the world loses confidence in the politicians doing the right thing. Although the two things are both necessary, the former is the real surgery, the latter remains mere field medicine.

  43. Gravatar of Scott Sumner Scott Sumner
    1. June 2011 at 04:58

    Morgan, You are missing the point. It doesn’t matter how the value of these currencies change against one another–it matters how they change against goods and services. And the dollar is more than 100 times more stable in purchasing power than bitcoins. (And I’m using the figures of bitcoin supporters!)

    James:

    1. The “masses” don’t face the CPI, it is a number pulled out of thin air by bureaucrats in DC.

    2. Even if the CPI perfectly measured “consumer prices,” it would be of no interest to monetary policymakers. It includes both supply and demand shocks, whereas monetary policy only influences AD. When there is a big adverse supply shock like a crop failure, American living standards will fall. If we try to prevent that by stabilizing the CPI, it will merely cause living standards to fall even more.

    3. If you really think the Fed should stabilize the value of the dollar (and I don’t) why not include all goods, not just consumer goods?

  44. Gravatar of Scott N Scott N
    1. June 2011 at 10:09

    Scott, I have been reading your blog since almost the beginning (Mankiw linked to early on and that’s how I found it) and I want to say thank you.

    First, you restored my faith in monetary policy and economics after the shock of 2008. I was really angry at the time since we had been led to believe up until then that we knew how to prevent such a thing. Then when it happened very few, if any, of the economists had answers. They immediately reverted to Keynesian stimulus ideas. Now I know that the Fed had the tools, could have prevented the shock, but was asleep at the switch (or distracted by the financial crisis).

    Second, like Liberal Roman, I have been very successful at stock market investing based almost exclusively on what I have learned from your blog. When I called my financial adviser last week and told him to get me completely out of equities and commodities, he thought I was nuts. Not so much anymore. I am truly grateful.

    I look forward to your return to blogging after July 4th. And keep posting links to sites where you are currently posting comments. Those have been very enlightening as well.

  45. Gravatar of Liberal Roman Liberal Roman
    1. June 2011 at 11:06

    I agree with Scott N entirely. After the crash of 2008, I lost my faith in free markets. I truly believed that Krugman and DeLong had all the answers. Once you start going down Keynesian path and accept that markets sometimes cause bad results, the case for all sorts of government intervention in the economy suddenly becomes justified.

    Anyway, speaking of the market, I was getting kind of worried my short was going to backfire on me, before today. It’s still kinda sad to root for a falling market though.

  46. Gravatar of Silas Barta Silas Barta
    2. June 2011 at 07:13

    @Scott_Sumner: Do you think Bitcoin would be a better currency if it would expand the number of Bitcoins in proportion Bitcoin-NGDP?

    If so, that reveals the emptiness of the NGDP measure, since people could game it by just shifting money back and forth between themselves to get NGDP to the desired level.

  47. Gravatar of Scott Sumner Scott Sumner
    2. June 2011 at 11:26

    Scott N, Thanks for the support. I just posted a comment over at Nick Rowe’s blog.

    I have mixed view on stocks. Right now they are being driven lower by the weak economy. But long term I see two positives:

    1. Low real interest rates for as far as the eye can see.
    2. Large profits from overseas–especially the LDCs.

    So it might be worth buying on sharp dips.

    Or maybe not. :)

    Silas, I like bitcoins. I just don’t want them to be the medium of account for wages. I’d rather not see 99.9% wage deflation.

  48. Gravatar of Silas Barta Silas Barta
    2. June 2011 at 11:38

    Interesting, but that wasn’t the question. Bitcoins could not be improved by predicating their quantity on “B-NGDP” because anyone could get it to the desired level without impacting economic reality. Similarly, you can achieve any NGDP target without affecting the economic reality: say, the NGDP shortfall is $X, so the governments pays someone $X for the service of “receiving $X”. How does that enhance the economy’s ability to produce bread?

  49. Gravatar of anon anon
    2. June 2011 at 11:39

    Is it possible to have different targets for the medium vs. long term? For instance, target a NGDP forecast over the short-run, but adjust the NGDP target so that over long time spans (10 years or more) the price level stays in a predictable path range.

    Re: Bitcoin, even assuming a best case scenario (i.e. supposing that the ‘bubble’ will not pop in the foreseeable future), it’s hard to see it as a ‘currency’ in the sense that monetary economists care about. For one thing, its speculative volatility makes it a poor store of value; furthermore, _nobody_ (AFAIK) is using ‘BTC’ as a unit of account except in the very short run. It’s only worth considering as a token of exchange.

    It seems that the nature of digital currency will eventually make the unit of account function quite redundant: given up-to-date and agreed-upon market data, it is easy to convert prices and money balances to one’s preferred unit.

  50. Gravatar of W. Peden W. Peden
    2. June 2011 at 15:12

    Silas Barta,

    Money is neutral in the long-run, so the answer to your question is obviously “not at all”. Monetary policy can reduce long-run output below its potential level, but it cannot raise it above its potential level. This is the REAL pushing-on-the-string.

    NGDP targeting (or any monetary regime) cannot produce bread. It can, however, stop people from NOT producing bread due to the misuse of the state’s monopoly power with regard to money. Of course, put that way, one wonders why the state has this monopoly power…

  51. Gravatar of marcus nunes marcus nunes
    3. June 2011 at 04:28

    Scott
    Interesting and relevant. From Gautti Eggertson
    http://libertystreeteconomics.newyorkfed.org/2011/06/commodity-prices-and-the-mistake-of-1937-would-modern-economists-make-the-same-mistake.html

  52. Gravatar of W. Peden W. Peden
    3. June 2011 at 05:21

    Anon,

    (1) Assuming that the level of output is roughly stable over 10 years, hitting a NGDP target consistently over 10 years would entail rough price stability.

    (2) It’s interesting how we’re now discussing NGDP as a short-term target, when historically inflation targeting and monetary aggregate targeting were supposed to be intermediate targets in order to meet long-term NGDP stability. The biggest story in monetary economics in the past 30 years is that monetary policymakers are capable of much more effective discretionary control that had previously been thought. In my opinion, this is because monetary policy has (the recent crisis aside) stopped being a proximate cause of crises, as monetary policymakers have stopped targeting the wrong things e.g. a fixed level of unemployment or an exchange rate + price level.

  53. Gravatar of Morgan Warstler Morgan Warstler
    3. June 2011 at 07:46

    Scott, precisely for the current “start-up” growth, they cannot be the medium of account for wages until we reach the tipping point.

    At that exact moment, as everyone would race to dump dollars – every argument you currently have against bitcoin, you’d then have against the dollar. It would be unstable, massively inflationary, and the US government wouldn’t have any way of stopping it.

    Which is a good thing… money not backed up by the force of guns and taxes.

  54. Gravatar of David Pearson David Pearson
    3. June 2011 at 09:19

    Scott,

    Its interesting that you think low real interest rates can persist. Japan has had consistently positive real rates, whereas ours are negative 2% or so. If “low” means “slightly positive”, then our real rates must climb 2% or more. This can either happen through deflation or rate hikes. With a weak recovery (which is evident), rate hikes are highly unlikely. That means deflation, which is bad for equities.

    Or perhaps you think persistently negative real rates are good for real equity returns? The evidence shows otherwise.

    A third possibility — decent real growth with low real rates due to demographics — seems improbable at the moment. Japan had an aging population and a lack of domestic investment opportunities. With all that, real rates remained around positive 1%. With higher growth, our real rates would arguably be higher.

  55. Gravatar of Mark A. Sadowski Mark A. Sadowski
    3. June 2011 at 20:37

    You’re missed.

    I’ve been trying to carry your message but some days it get’s hard, and confussing.

    Moreover I miss the ability to argue with you.

    How about Singapore for example:

    Singapore is not the model we should (or could) emulate.

    The following figures are from 2000/2009

    GDP per capita (2009 dollars PPP)
    US-43,571/45,918
    Germany-34,643/36,452
    Singapore-40,746/49,252

    GDP per hour worked (2009 dollars PPP)
    US-47.91/57.54
    Germany-49.38/53.32
    Singapore-31.64/34.47

    Average annual hours worked per employed person
    US-1857/1734
    Germany-1473/1390
    Singapore-2451/2399

    Employment as percentage of population
    US-49.0/46.0
    Germany-47.6/49.2
    Singapore-52.6/59.6

    Note that Singapore’s productivity level is 59.9% of the US level. The average number of hours worked per worker is 138.4% of the US level. And finally, note that the proportion of the population that is employed is 129.6% of the US level. So the main reason GDP per capita is higher in Singapore is that the number of hours worked per capita is nearly 80% higher.

    Note also that the rate of growth in productivity in Singapore is lower. Singapore’s productivity level was 66.0% of the US level in 2000. So although Singapore’s GDP per capita rose by 20.9% that was mostly due to the fact that the proportion of the population working rose by 13.3%.

    Why are so many Singaporans working, working such long hours, and why is that proportion increasing? Guest Workers.

    Guest workers as a percent of the populstion rose from 18.7% in 2000 to 25.3% in 2009. Excluding guest workers the proportion of the population that is employed is 45.9%. I can only speculate about hours worked but anecdotally I’ve heard that it is not uncommon for guest workers in Singapore to work six days a week and 15 hours a day. Thus I suspect that resident Singaporans work considerably less than 2400 hours a year.

    The only way we could emulate this model would be to bring in 100 million temporary guest workers each working 90 hour weeks. In my opinion that is not a sustainable model for growth.

    The source of most of this data is here:

    http://www.bls.gov/fls/intl_gdp_capita_gdp_hour.pdf

    I’ve been defending your point of view.

    Take alook here and my defense of George Selgin for example.

    http://marginalrevolution.com/marginalrevolution/2011/06/the-1937-1938-contraction.html

    I’m looking foreward to your return.

    I need a good cogent argument.

  56. Gravatar of Shane Shane
    3. June 2011 at 23:21

    Professor Sumner or anyone else:

    Perhaps a dumb question, but why can’t the U.S. Treasury continue to issue checks w/o borrowing. Certainly the Fed would have to honor them by crediting the receiving bank’s account with new reserves.

    So if Congress has authorized spending, but has stopped authorizing borrowing, why isn’t this a reasonable pretext for QE III? It would simply be another form of unorthodox monetary policy, conducted by creating reserves in exchange for Treasury checks rather than Treasury bonds.

    Seriously, aside from the fact that they won’t do this, what is stopping the administration from doing this? Any monetary lawyers out there know the relevant statutes? (Is there even such a thing as a monetary lawyer?)

  57. Gravatar of Scott Sumner Scott Sumner
    4. June 2011 at 05:45

    Silas, The effect of monetary policy on the economy depends entirely on whether the money being discussed is the medium of account. The dollar is a medium of account, and bitcoins aren’t. Hence there is no analogy.

    Anon, You asked;

    “Is it possible to have different targets for the medium vs. long term? For instance, target a NGDP forecast over the short-run, but adjust the NGDP target so that over long time spans (10 years or more) the price level stays in a predictable path range.”

    Yes, but I can’t imagine why you’d want to do that. People should care about NGDP, not the price level.

    Marcus, Thanks, I left a short comment over at Tyler Cowen’s blog. Here’s a longer response:

    In my view the big problem in late 1937 was gold hoarding. The big price run-up in 1936-37 was caused by gold dishoarding, and then the subsequent collapse was caused by gold hoarding (due to fear of devaluation.) Big wage increases in 1937 were also a problem. Fiscal policy had little effect.

    Morgan, Even if bitcoins drove the dollar out of circulation, its value would still be unstable. Using bitcoins as the medium of account would be a disaster.

    David, Good point, but in my view the only reason Japan’s interest rates are slightly positive is because they are up against the zero bound. I expect slightly higher trend inflation in the US.

    My main argument, however, was global. Japan’s excess saving results in a trade surplus. If the entire world begins to look more like Japan, we won’t run a trade surplus with Mars, instead world real interest rates will fall. I expect the world to look increasingly like Japan as population growth slows and high saving Asians become a MUCH bigger share of the global economy.

    If low interest rates are due to recession, they often will not be associated with higher equity prices. If low rates are a permanent equilibrium condition, they may lead to higher steady-state equity prices (say p/e ratio, or ratio to GDP.)

    Mark, I see those numbers very differently. Singapore is a fast growing developing country that has only recently become rich. So it’s no surprise that productivity remains below US levels–we are nearly highest in the world. For instance, in 2010 Singapore’s RGDP rose over 15%, and they had relatively little population growth. Hence GDP/capita is growing much faster than in the US, and the numbers you provided for 2009 are already far out of date. They are gaining on us fast.

    The higher level of hours worked reflects their lower tax rates (and vice versa for Germany). That’s a plus for Singapore, as work effort is closer to what people would prefer in an unregulated economy. Also recall that our 18% of GDP on health care is mostly waste. They spend 5% of GDP on health care and live as long as anyone in the entire world. They are also a high saving society, with 15.5% being millionaires, and the ratio is rising very fast. We have only 4.5% millionaires, and the ratio is rising slowly. Great wealth makes voters more responsible. It allows for Health Saving Accounts and fully funded pensions. It means fewer debt crises like the one we are going through. I see plenty to like about Singapore’s fiscal regime, and I haven’t even gotten into free trade and environmental taxes.

    100,000,000 million guest workers? That sounds great. Their guest worker program helps both the local residents (who enjoy higher living standards as a result), and the guest workers, who are better off than in their home country.

    Shane, I’m not sure, but keep in mind that bank reserves are also a form of government borrowing–they pay interest. I’d guess there is some law that prevents the Treasury from monetizing the debt, but am not certain. Or perhaps the Fed could refuse Treasury checks–send them back with the note “Insufficient funds.”

  58. Gravatar of Shane Shane
    4. June 2011 at 08:08

    I can just imagine the press conference with Boehner holding up that check stamped “NSF” in big red letters.

  59. Gravatar of David Pearson David Pearson
    4. June 2011 at 16:25

    Scott,

    I see your point. Consider, though, that China might re-balance towards the consumer at some point. Its already happening with wage growth recently outstripping GDP growth. China could run a trade deficit in 2-3 years on the back of a stronger RMB and a further acceleration in wage growth (and possibly consumer credit). The beneficiaries would be anyone that produces what the Chinese middle class needs: since China makes its own consumer goods, that leaves food and energy. The result would be real increases in some commodity prices for years to come, higher inflation pressure in the U.S., and higher U.S. real interest rates.

    The question is whether the world can continue to tap into a huge rural Chinese surplus labor force. The answer will be evident in the pace of Chinese wage gains.

  60. Gravatar of Morgan Warstler Morgan Warstler
    4. June 2011 at 17:32

    Scott, this is bullshit:

    “Morgan, Even if bitcoins drove the dollar out of circulation, its value would still be unstable. Using bitcoins as the medium of account would be a disaster”

    My argument is almost a tautology.

    The exact moment when they can drive the dollar out of existence is the exact moment when they become SUPER god damn stable.

    The moment that the medium of account is a fixed amount of currency that is infinitely digitally divisible AND everyone has made the switch… there is no more radical deflation. It ends. Prices go truly stable.

    Now there is no reason to hold them ( they don’t appreciate just holding on to them) because the dollar has been nuked, it is gone, and FINALLY – the government is neutered. They have no control, they can’t print shit, they can’t bailout shit, they can’t tax aggressively.

    Scott, all roads lead to private currency and governments that ONLY have power if they are an incredibly good deal.

    The first problem I think you show here is you don’t think much about the endgame – work backwards from the correct goal, and the line goes straight through bitcoin and what comes next.

    The second problem is you are not only a man without a smart phone, you are man without a cell phone.

    Very soon, everything in your wallet, including even your drivers license will simply be your cell phone – lose it, get and new one, put in your ID and password, and you are good to go.

    IN THIS WORLD, digital private currency is so easy to do, that governments have to ACT DIFFERENTLY simply because an alternative is so graspable.

    Today it is bitcoin, tomorrow is will be bitcoin 2,3,4,5 – and each will hold a gun to the head of the government, bankers, and Fed – forcing them to BEHAVE.

    You are a professor, why not ask yourself what the world would have to look like for wages to be “unsticky,” for prices to change daily, hourly, and for everyone to just accept it as normal.

  61. Gravatar of anon anon
    5. June 2011 at 02:11

    Morgan, you can’t “work backwards” from your endgoal and expect to reach useful conclusions. It’s a recipe for fallacious thinking.

    Specifically, bitcoin might help with some of your goals, but government will still hold a lot of real-world power and their ability to tax won’t diminish much. The biggest effect will probably be on the direct cost of transferring money–and that’s assuming that bitcoin holds its value and that the network can scale up somehow. For instance, the way bitcoin is setup at present, each computer in the network must store a copy of the “chain”, i.e. the ledger containing a history of all bitcoin transactions. This is obviously unsustainable.

  62. Gravatar of Scott Sumner Scott Sumner
    5. June 2011 at 06:25

    David, I agree that Chinese savings rates will fall, as China “rebalances” toward consumption. But I think Chinese investment will fall just as fast, maybe faster.

    I don’t see the rural work force as a big factor. Places like Singapore have huge surpluses, with no rural workforce to tap into.

    Morgan, You said:

    “My argument is almost a tautology.

    The exact moment when they can drive the dollar out of existence is the exact moment when they become SUPER god damn stable.”

    No, this isn’t a tautology, it’s blind religious faith. You have provided zero evidence that the value of bitcoins would be stable. In the real world nothing is stable in value–why would bitcoins be different?

  63. Gravatar of Bob OBrien Bob OBrien
    5. June 2011 at 17:12

    Scott,

    Did you view the slides of the Robert Lucas Lecture at the University of Washington on May 19? The link is here:

    http://www.econ.washington.edu/news/millimansl.pdf

    I live in Seattle and would have loved to go but I did not learn of it until after it was over.

    I would be interested in your reaction to his comments regarding the dual causes of the depression. The fed errors for 1929 to 1933 and the FDR policies for 1934 to 1939.

  64. Gravatar of Jim Glass Jim Glass
    5. June 2011 at 18:18

    “The exact moment when they can drive the dollar out of existence is the exact moment when they become SUPER god damn stable.”

    That contingency is theoretical in the extreme, but given it, you don’t believe the demand for money would vary ever again?

    More immediate and practical problems with bitcoin. And a follow up.

  65. Gravatar of Morgan Warstler Morgan Warstler
    6. June 2011 at 04:05

    Tautology:

    Assuming proliferation of a something like bitcoin, if it isn’t the standard, then things are still priced in dollars, and bitcoins (any limited currency) are just a great way to keep your money safe.

    The only time things could / will get priced in bitcoins (some kind of digital currency) is when the dollar is toppled.

    Why you think after the toppling instability if the new currency reigns is not clear.

    Why you fear a minor deflationary effect on a limited digital currency, I’m not able to grasp at all.

    When .000000009 becomes .000000008, it is not a big deal, you want to see 2% growth yoy – limited digital currency is more than able to achieve that.

    Jim, the joke on Quora was obvious the day it happened, there’s nothing in there that means anything – his follow up proved it.

    Ex: if you can move the market with $15K worth of bit coin, it is only because it is small and dollar denominated. If both of those conditions disappear his point is moot.

    You don’t look at a baby and complain it can’t run a 8 minute mile, let alone a 4 minute mile.

    note: I am open tot he idea that the pool currency should grow / shrink with population.

    anon, yes you do work backwards from what you want:

    a government that has no true lasting force or compulsion – instead one that can only do its best to make sure you want to keep your capital there or want to spend you money there. Nations competing for labor and capital is the goal.

    In order to not do that, we’d have to think government mattered more than it does. who wants more power power int he hands of the one marshmallowers?

    Don’t you read any science fiction? it is written to mold the future. Begin with the end in mind….

  66. Gravatar of Silas Barta Silas Barta
    6. June 2011 at 07:10

    @Scott_Sumner: Silas, The effect of monetary policy on the economy depends entirely on whether the money being discussed is the medium of account. The dollar is a medium of account, and bitcoins aren’t. Hence there is no analogy.

    I don’t think that follows. If bitcoin were the medium of account, it would still be obvious that varying the supply of bitcoins with “bitcoin-GDP” would be pointless, because (per my previous posts) people could maniuplate this number as they pleased by shifting money around — just like individuals or the government can with NGDP.

  67. Gravatar of Philo Philo
    6. June 2011 at 07:58

    The Fed is like a driver trying to get from A to B along a winding road. The driver could point the car in the direction of B and set the throttle for the average speed he expected to attain for the whole trip, but this would run him right off the road. There is nothing good about adopting and sticking with this average course. Instead he must continually adjust his direction, as appropriate to bends in the road. No doubt, during some brief stretches he will happen to be traveling exactly in the A-to-B direction, but that is quite incidental, and quite irrelevant to an evaluation of his overall performance. When, to get around a sharp turn, the driver turns hard left, this does not make it appropriate to wring one’s hands and bewail the fact that turning hard left is “unsustainable.”

    Charles Plosser’s call (in a speech yesterday in Finland) for the Fed “to withdraw the central bank’s record monetary stimulus and ‘normalize’ interest-rate policy” (from Bloomberg’s account) would be appropriate only if economic conditions were normal. Calling for “normalized” interest-rate policy under present circumstances is like calling for the driver around the sharp bend to straighten out his steering. What the Fed is doing may be a “record” large amount on some measure while being inadequate and insufficient on another. The driver may be turning the wheels farther left than ever before, yet still running the car off the *right* side of the road.

    Whatever the Fed is doing, it must always be ready to “exit”–that is, to change over to doing something else. We don’t need a specific “exit plan” (another Plosser hobby horse) for each momentary bit of Fed behavior. What we wish we had is confidence that the Fed has the perception and the judgment (along with the instruments) to keep the car on the road. Alas, the Fed has not inspired such confidence, and Mr. Plosser is one of the FOMC’s least inspiring members. (I think there are legitimate objections to Peter Diamond for the FOMC, but I would love to swap Plosser for Diamond!)

  68. Gravatar of Liberal Roman Liberal Roman
    6. June 2011 at 09:34

    I have been trying to find a perfect analogy for the state I find myself in. Best I could come up with is a doctor who truly believed malaria was caused by mosquitos, while the rest of the medical community was confounded by the problem and grasping for one crazy idea after another in trying to explain what is happening.

    I constantly watch one commentator after another either be too optimistic (“problems are transitory and due to Japan supply chain disruptions”) or be super gloomy (“Obama is killing the recovery”) with almost no one hitting on the right cause of the slow down. A tightening monetary policy.

    Oh well, all I can do is continue to short the hell out of this market. Big Bernanke speech tomorrow though. If I hear the words “exit strategy” come out of his mouth, I am doubling down on my short bets.

  69. Gravatar of Scott Sumner Scott Sumner
    6. June 2011 at 10:36

    Bob, Isn’t that the paper I discussed in my post?

    Morgan, If you have a model of how the price level will move over time under a bitcoin standard, I’d love to see it. All I see you doing is asserting that somehow prices will be stable, as if by magic.

    Silas, Are you saying the current Fed can’t target NGDP? After all, individuals can change their demand for currency. I don’t see what your argument has to do with bitcoins.

    Philo, I agree. I have no idea what Plosser means by “normalize” monetary policy, and I doubt he does either. What sort of fed funds target would be “normal” right now? What level of the base, or M2?

    Liberal Roman. I suspect that Bernanke has been hoping for a faster recovery, and has been disappointed again and again by the slow pace of recovery. Monetary policy should never be based on hope, it should be based on rational expectations. Let’s hope Bernanke sees the light.

  70. Gravatar of Silas Barta Silas Barta
    6. June 2011 at 14:08

    @Scott_Sumner: Are you saying the current Fed can’t target NGDP? After all, individuals can change their demand for currency. I don’t see what your argument has to do with bitcoins.

    You’re right: it’s not about bitcoins per se, but about the inherent problem in thinking that targeting NGDP can have positive real effects.

    Say there’s an output gap. So you and I trade a dollar bill back and forth, booking it as a purchase of “friendship” or whatnot, until NGDP is at the desired level (5% NGDP trend or whatnot). How did we close the output gap?

    Simple: we didn’t. We just stretched existing wealth generation across more units of NGDP. Something better would happen if the Fed achieved NGDP targets instead with a giant end-of-year purchase because _____ .

  71. Gravatar of Doc Merlin Doc Merlin
    6. June 2011 at 15:22

    “Doc Merlin, I don’t think people see the problem with using Bitcoins as “M” in the MV=PY equation. If Bitcoins become the medium of account, then we would have 99.9% deflation in the last year, as the value of Bitcoins has soared against goods and services. Someone making 80,000 bitcoins/year, would see their income fall to 80 Bitcoins per year. Even worse, suppose wages were sticky. Then with that sort of deflation you’d have mass unemployment.”

    Yah, bitcoin is still in the bootstrapping phase, not ready to replace the USD yet. In about a decade or so as it maxes out its market demand, the deflation should be relatively minor. Right now the largest bitcoin merchants are having to adjust their prices daily, which makes the menu costs a bit high.

  72. Gravatar of David Pearson David Pearson
    6. June 2011 at 15:30

    Scott,

    Repeatedly, Bernanke has told us that current stock market levels are evidence of the success of QE2. Thus, he has been using market expectations to guide policy. If there was “hope”, it was the collective hope of the markets that influenced him. Perhaps we are in the process of finding out this market hope was misplaced; however, that is not a violation of EMH. Markets can be the best predictors AND be wrong. This would be true in an NGDP targeting regime the same as in an implicit S&P500 targeting regime.

    As for going short on the basis of a perceived policy error: this would seem to negate the basis for using market expectations to set policy.

  73. Gravatar of Scott Sumner Scott Sumner
    6. June 2011 at 16:38

    Silas, There’s a mountain of evidence going back at least to David Hume that nominal shocks have real effects. The standard model (Keynesian/monetarist) implies that the Fed should try to stabilize some indicator of aggregate demand (not necessarily NGDP). You seem to reject that model. If you have some alternative explanation for that mountain of evidence that monetary policy has real effects, I’d love to hear it. Until you present that evidence there is nothing for me to comment on. You know my view of the transmission mechanism–sticky wages.

    Doc Merlin, See my response to Morgan. I can’t imagine how people can make any claim about the price level under a bitcoin standard. As far as I know, no one has modeled bitcoin. We might have stable prices, hyperinflation, hyperdeflation, or anything in between. If there’s an argument as to why prices will be stable, I’d love to hear it.

    David, You misunderstood what I meant by “hope.” Let’s say Bernanke expected 4.5% NGDP growth in 2012. Do you think he would have been pleased, indifferent, or disappointed if a little bird whispered in his ear that actual NGDP would come in at 4.7% in 2012? I say pleased. I think Bernanke was rooting for more than he expected. That should never happen with a target the forecast policy. This has nothing to do with the EMH. If if we do a Svenssonian “target the internal Fed forecast” policy we still should not be rooting for faster growth that we expect. And I claim Bernanke has been rooting for growth ever since October 2008. He should be just as disappointed by an unexpected upswing in nominal growth as he would be by an unexpected downswing in nominal growth. But he clearly isn’t. That’s my complaint.

  74. Gravatar of Silas Barta Silas Barta
    6. June 2011 at 18:10

    @Scott_Sumner: I did not dispute that nominal shocks could have real effects, though I understand if I came off as yet another troll ignorant of the evidence.

    What I disputed was that it would solve our economic problems if you and I passed a dollar back and forth between each other until:

    our transfers + NGDP = NGDP target

    Then, because (I claim) your position implies that it would, it is in error. You chose NGDP as the nominal target, not I. If you think NGDP targeting wouldn’t work for the above reason, then we can cross it off the list of nominal targets believed to be the secret to getting out of a depression.

    Who knows — maybe we’ll find that none of them work? (Like you found with price level targeting or nominal interest rate targeting.)

  75. Gravatar of Steve Steve
    6. June 2011 at 18:26

    No one has commented yet on the definitive withdrawal of Peter Diamond as nominee for the Fed. Now there are TWO open seats. From the press reports, it appears Shelby made it clear he will oppose candidates who support QE.

    Scott, it looks like we will need your blogging services again shortly. This is what you get for going on vacation. (I know the feeling all too well.)

    http://www.nytimes.com/2011/06/07/business/07nominate.html

    Mr. Diamond focused his criticism on Republicans in a sharply worded opinion article published Monday in The New York Times. “We should all worry about how distorted the confirmation process has become, and how little understanding of monetary policy there is among some of those responsible for its Congressional oversight,” he wrote.

    Mr. Shelby said in a statement Monday. “It would be my hope that the president will not seek to pack the Fed with those who will use the institution to finance his profligate spending and agenda.”

    Also, from Bloomberg:
    http://www.bloomberg.com/news/2011-06-06/nobel-laureate-peter-diamond-to-withdraw-his-nomination-as-a-fed-governor.html

    Shelby said that Diamond is “an old-fashioned, big government Keynesian” who “supported bailing out the big banks during the crisis” and “supports additional stimulus and quantitative easing.”

  76. Gravatar of Morgan Warstler Morgan Warstler
    7. June 2011 at 05:12

    “Doc Merlin, See my response to Morgan. I can’t imagine how people can make any claim about the price level under a bitcoin standard. As far as I know, no one has modeled bitcoin. We might have stable prices, hyperinflation, hyperdeflation, or anything in between. If there’s an argument as to why prices will be stable, I’d love to hear it.”

    Scott, much like science fiction, in order to have this discussion, you have to fiat certain things, stipulate to them, so that later you don’t turn the discussion into some other issue.

    So let’s start here: we are fiating that the dollar has been toppled, there was a crazy run on it, as everyone through them out, no longer takes them, that continued effect of 6%+ inflation and the ease of use of bitcoin toppled the Fed, and the US Gov for all intensive purposes has no control over its money supply.

    And there are only forever 24M bitcoins – endless digitally divisible. Carried around in smart phone wallets.

    It isn’t anonymous, so the US taxes consumption and property to fund government, but has a far less firm grip on taxpayers because they and their capital can quickly flee.

    Ok in that model, we’re all in on bitcoins and bitcoins exclusively – WHY do you assume there will be crazy volatility?

    And please remember the old rules about price stickiness and wage stickiness are far less “ruley” – people had to adapt to owning pure digital currency, they got used to seeing all prices change daily.

  77. Gravatar of Morgan Warstler Morgan Warstler
    7. June 2011 at 05:20

    Note: Matty ONLY likes you because you haven’t said out-loud over and over what happens when the target is hit and unemployment is still 8%.

    It’s a sin of omission. But a lie none the less.

  78. Gravatar of Scott Sumner Scott Sumner
    7. June 2011 at 05:44

    Silas, If much of the volatility of RGDP is caused by NGDP shocks, isn’t it likely that a stable growth in NGDP will also make RGDP more stable.

    Obviously I don’t see NGDP targeting as a panacea, there are also structural problems with the economy, as I have repeatedly stated.

    I don’t agree that price level targeting has failed. If the Fed had engaged in price level targeting we’d be much better off today–the current core price level is way below target. NGDP targeting is better than price level targeting, but even price level targeting is better than what we are actually doing.

    Steve, I commented briefly on Diamond, people should check out the post once and a while, I added three links just yesterday.

    Morgan, OK, your model is that the supply of bitcoins would be kept constant. I don’t know how you can make that claim, but let’s say you’re right. I still don’t see how that gets you stable prices. The real demand for base money has soared in Japan since 1995. If they had had a stable monetary base, they could easily have fallen into hyperdeflation.

    The problem with your model is that we have no reason to assume the demand for bitcoins is stable.

    You’re wrong about Yglesias and me. I’ve said many times that if NGDP is on target, you do not use monetary or fiscal policy to reduce unemployment. Rather you do supply-side reforms to make the labor market more efficient. I’d gladly raise interest rates with 8% unemployment, or 28% unemployment, if I thought it was needed to keep NGDP growing at 5% a year.

  79. Gravatar of Dustin Dustin
    7. June 2011 at 06:31

    “I’d gladly raise interest rates with 8% unemployment, or 28% unemployment, if I thought it was needed to keep NGDP growing at 5% a year.”

    ——————————————————————————————————

    Well there ya go, Morgan. Print those words out and tape ‘em to your wall.

  80. Gravatar of Morgan Warstler Morgan Warstler
    7. June 2011 at 07:04

    LOL Dustin, when Scott does post after post saying that… in fact EVERY TIME he says “let’s target NGDP” he throws in said qualifier – two things will happen:

    1. conservatives will pay more attention to him.
    2. liberals will stop paying attention to him.

    The only thing the DeKrugman crowd hears when Scott speaks is, “we’ll print some money, and make rich people worth less.”

    When Scott gets around to finally saying screw the unemployed, his liberal supporters will attack him with both barrels.

    Though to be honest, Scott does the same thing – he totally skips over the weight and force of what Mundell says to say, “Nobel Prize winner agrees!”

    Mundell says easy money led to the housing boom… he FOCUSES on what should have been done differently, and then after that sure the fed should have kept easing in 2008.

    —-

    Scott, thats the WHOLE point to bitcoin…. there will never be more than 24M EVER.

    Instead as the economy grows, the currency is digitally divisible.

    Huh? the problem with my model is… see you did it! right off the bat, you start looking at demand growth NOW vs. when everyone has been converted.

    The question to you is why if everyone is converted, you think the demand won’t be stable.

  81. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    7. June 2011 at 07:46

    Now Krugman is taking his cues from Robert Kuttner! Just when I think he couldn’t get any more simpleminded:

    ‘…everything we’re seeing makes sense if you think of the right as representing the interests of rentiers, of creditors who have claims from the past — bonds, loans, cash — as opposed to people actually trying to make a living through producing stuff. Deflation is hell for workers and business owners, but it’s heaven for creditors.’

    Even if you haven’t heard the old joke: ‘If you owe your bank $1,000 and can’t repay it, you have a problem, but if you owe one million and can’t repay it, the bank has the problem.’, if you’re teaching economics to sophomores at Princeton, you should have some clue that not being able to rely on ‘claims from the past’ would be a problem for an economy in the future.

  82. Gravatar of anon anon
    7. June 2011 at 10:37

    Morgan Warstler, we’ve known since the 1980s that you _can’t_ use monetary policy to target a fixed level of unemployment. It just doesn’t work that way. So I’m not sure why “every” liberal economist should stop paying attention to Sumner–this is something that all mainstream monetary economists agree about.

    If anything, NGDP level targeting gets you as close as feasible to pure AD management, which is something “liberals” should like. The Fed is dealing with the targeting problem right now–market expectations of inflation are right on target, so they’re probably not going to start QE3 even though a price-level or NGDP-level targeting policy would call for further easing.

  83. Gravatar of Silas Barta Silas Barta
    7. June 2011 at 11:22

    @Scott_Sumner: Silas, If much of the volatility of RGDP is caused by NGDP shocks, isn’t it likely that a stable growth in NGDP will also make RGDP more stable?

    Sure, if (and this is a huge if) that stable growth in NGDP is endogenous, reflecting actual welfare-enhancing transactiond. But that is 180 degrees off from exogenously *controlling* NGDP until it meets a target.

    To fail to distinguish the two falls into the same class of error as,

    “People who obtained a college degree earn more, so if we *cause* more people to earn a college degree, those people will earn more.”

    “People who go to church commit less violence, so making people go to church will make them less violent.”

    “Economies with lots of lending have good (measured) economic growth, so making banks lend money will lead to higher growth.” (Oh, wait, you buy that line too.)

    Likewise, any other numerous cases of “putting the cart before” the proverbial horse, or use of Evidential Decision Theory.

    Obviously I don’t see NGDP targeting as a panacea, there are also structural problems with the economy, as I have repeatedly stated.

    But what structural problem would be ameliorated by you and me swapping dollar bills a billion times? Or by me printing $X billion to buy buggy whips or some other outdated good?

  84. Gravatar of Bababooey Bababooey
    7. June 2011 at 12:54

    How often has it been the case that buying into an asset that already appreciated 1000-fold has been a good idea?

    We should ask Marc Anthony.

  85. Gravatar of Liberal Roman Liberal Roman
    7. June 2011 at 21:34

    Scott,

    You wrote “The progressive left has recently been so good on monetary policy that I don’t feel any need to rush back into blogging.”

    I think you are wrong here. Last couple weeks I feel a backlash from Krugman & Co. They are now basically saying that the slowdown is just proof that QE, although worth trying, is ultimately powerless and again we need more fiscal stimulus.

    Here is Delong summarizing what I have seen in the blogosphere lately:

    http://delong.typepad.com/sdj/2011/06/paul-krugman-has-always-argued-that-quantitative-easing-and-other-unconventional-monetary-policy-stimulative-measures-are-wea.html

    You need to come back and pound hard against this ignorance.

    I am actually now getting really worried about the economy’s prospects. I always felt that Bernanke would let the economy fall into another mid-summer lull and come to the rescue in the fall like he did last year. With all the commentary I am reading lately though, QE3 doesn’t even seem to be in the cards.

  86. Gravatar of W. Peden W. Peden
    7. June 2011 at 22:45

    Liberal Roman,

    It’s incredible how much one quarter of data can be intepreted, either as proof of a liquidity trap or as proof that Obama is totally hopeless on economic policy.

    It astonishes me, given the turn-around of the US economy (and, incidentally, broad monetary aggregates like M3 and M2) since QE2 began to get priced-in, that there are still people who doubt the effectiveness of monetary policy under these circumstances.

    If the US CPI inflation rate is 3.2% (CPI overestimates inflation, but we’ll regard CPI as CPI) and US real GDP growth is 1.8%, then that’s a CPI + real GDP growth rate of 5%. Compare that with 2.9% (1.1% + 1.8%) in Q2 2010, before QE2 began to get anticipated. Even if growth in the two quarters is identical, nominal GDP growth was clearly not. QE2 boosted aggregate demand. It’s undeniable.

    US growth is low right now, but I think this is due to supply-side factors, as in the UK. There were a huge number of supply-side pressures in Q1 2011. If they persist, this will obviously damped real GDP growth, but consider how much worse things would have been if US CPI + RGDP was still at 2.9% i.e. demand was still weak as well. If we see the supply-side pressures easing, we’ll see an acceleration of real GDP growth like we saw in Q3 and Q4 2010.

  87. Gravatar of Britmouse Britmouse
    8. June 2011 at 03:28

    Just wanted to say how much I’ve enjoyed reading through the archive of this blog – a wealth of knowledge passed on there, thanks, Prof Sumner!

    UK NGDP did bounce back strongly after the “snowed in” 10Q4 – quarter-on-quarter growth of 2.2% to 11Q1 is the second highest print since 1997, I really think Ed Balls should calm down a little.

    Annual NGDP growth still below trend, and the inflation hawks dominate the press :(

  88. Gravatar of Morgan Warstler Morgan Warstler
    8. June 2011 at 05:15

    http://krugman.blogs.nytimes.com/2011/06/07/richard-koo-is-unhappy-with-me/

    http://www.businessinsider.com/richard-koo-on-qe2-2011-5

    —-

    anon, I didn’t say liberal economist should stop, I said that if Scott made the title of his blog, “Screw Unemployment” and since he doesn’t care about them, advocated targeting NGDP, so that:

    We’d KNOW FOR SURE that when we ran on target, and unemployment stayed high that the problem was structural – that the problem was government regulation, minimum wage, screwed up tax policy.

    Liberals would HATE him and Conservatives would TRUST him, and that is a far more intelligent approach to getting Sumner’s ideas out and increasing his influence.

    Contrary to DeKrugman’s thinking – you do not have to tow the party line to be listened too as an economist by the right – see Friedman, see Mundell, see Mankiw.

    But you have to EXPLAIN your underlying assumptions clearly, and the problem Scott faces is not that people resist targeting NGDP because they don’t want to print money, it is because they don’t expect Sumner to be there for them AFTER the target is hit.

    Scott is ineffective at dragging economic liberals into the streets and killing their idols, and that’s how conservative Monetarists prove their chops.

  89. Gravatar of Morgan Warstler Morgan Warstler
    8. June 2011 at 07:14

    Scott, just saw this from Matty:

    http://thinkprogress.org/yglesias/2011/06/08/239174/one-lesson-from-germany-is-that-good-policy-doesnt-always-pay-off-politically/

    This is who he is…

    “Indeed, one might see Agenda 2010 as fitting alongside the 1993 deficit reduction plan in the United States as examples of how efforts at responsible centrist governance reap few rewards for progressive political parties.”

    His kind must be forced to SACRIFICE any rewards for progressive politics EVERYTIME they agree with you.

    That for a brief moment, they’ll cheer for the horse you cheer for, is not enough.

    This isn’t debate about whether to have QE3, this is a debate about how to run the economy. When they LOSE the debate, if then also there needs to be QE3 – then fine, we’ll have it.

    Do you want QE3 enough to earn it?

  90. Gravatar of Philo Philo
    8. June 2011 at 08:06

    I am struggling to understand the frequently-heard remark that current credit conditions are “tight.” Interest rates are lower than I ever remember them (and I have been around a long time); “tight credit” cannot mean high interest rates–at least, not for fully credit-worthy borrowers. So (I suppose) it must mean a high *risk premium*. Perhaps as the probability that the borrower will be unable to repay rises, the interest rate he must pay now rises *extraordinarily sharply*, compared with past practice. (But why would this be? And is this not inconsistent with the current low interest rates on junk bonds?) Or perhaps the point is that the average would-be borrower is now perceived by potential lenders to be much riskier than has normally been the case: would-be borrowers’ perceived credit-worthiness may be far below historical standards. (Is it really so low, or are potential lenders, as a group, unduly skittish?)

    But on either of these explanations, would-be borrowers would still be served, only they would have to pay high “interest rates” to compensate lenders for taking the (perceived) risk. Is that, in fact, the case: are a lot of loans being made to risky borrowers at high rates? Those who bewail “tight credit” give the impression not that perceived-to-be-risky borrowers are having to pay high rates, but that they are completely frozen out of the credit markets: that they cannot get a loan at any rate. But why would there not be “junk bank loans,” in parallel with junk bonds? Is this a matter of governmental regulation of the banks?

    I am neither a borrower nor a lender, and am out of touch with the market for bank loans, and commercial and consumer credit in general. Can someone enlighten me about the current “tight credit conditions”?

  91. Gravatar of W. Peden W. Peden
    8. June 2011 at 08:24

    Britmouse,

    Agreed. Incidentally, what’s your source for Q4 UK NGDP?

  92. Gravatar of Silas Barta Silas Barta
    8. June 2011 at 08:55

    Agreed, Philo. I don’t know how people get off saying that credit is tight or money is tight or whatnot. Right now, if you have a feasible chance of paying back the loan, if you look otherwise responsible, you can get a loan. And the rate will be low. The only people suffering are those who shouldn’t be borrowing in the first place. (In fact, there’s a HUGE class of undeserving, insolvent institutions getting loans WAY too cheaply — the large banks and “bank holding companies” or whatever.)

    If you can see all that and still insist that credit is “tight”, your understanding of this domain is pitiful. *looks in Scott_Sumner’s general direction*

    I had asked about this to Scott_Sumner before and his response was basically to cling to some nebuluous distinction between creditworthiness policy and credit policy. (I didn’t understand it either.)

    I had also asked Menzie_Chinn about this seeming incongruity — of responsible people getting loans easily while we’re told that wah, money’s too tight — and his response was basically, “anecdotes aren’t data, therefore I get to deny the obvious”.

  93. Gravatar of W. Peden W. Peden
    8. June 2011 at 09:11

    Silas Barta,

    If I told you that there was an economy with anemic domestic credit expansion (and declining private sector credit) and low interest rates, what would you look at in order to explain this fact?

    You might say “clearly, there are no creditworthy borrowers”. Perhaps, but this can only be because there is a shortage of money in the economy. Deposits and loans (contra Kaldor) are positively correlated, so if there is a lack of loans then there is probably a lack of deposits i.e. broad money. Of course, that would only be a credible explanation if we’d seen signs of a recent contraction in broad money, like in US M3…

    Just talking about “credit” is exactly the fuzzy Bernanke-esque thinking that got us into this mess.

  94. Gravatar of Silas Barta Silas Barta
    8. June 2011 at 09:43

    @W._Peden: If I told you that there was an economy with anemic domestic credit expansion (and declining private sector credit) and low interest rates, what would you look at in order to explain this fact?

    You might say “clearly, there are no creditworthy borrowers”.

    Nah, I’d probably say something like, “Wow, looks like there’s a lot of good, sustainable, real economic growth satisfying real consumer desires through sustainable production processes.” And then perhaps a bit later, “Kinda neat how people have avoided using debt financing too!” or “Great that they have hard money policies here!”

    Oh, what’s that? You implicitly assumed that the economy (in the sense we care about) must be in the toilet because people aren’t going into debt up to their eyeballs? Well, I guess it’s an assumption you forgot you made.

    Yes, high lending has often been correlated with good economic growth. That doesn’t mean that forcing random banks to lend money will _cause_ the growth.

    Just talking about “credit” is exactly the fuzzy Bernanke-esque thinking that got us into this mess.

    You’re preaching to the choir there. I only use the terms because the people I’m disagreeing with do, and even then I try to spell out exactly what it means when I reply (as I did in my last post). Unfortunately, all too many people use the term “credit” as one of their many euphemisms for “free money”. How many times have we heard, “Um, we at corrupt bank/carmaker X need some, uh, credit, you know, some short-term working capital”?

  95. Gravatar of W. Peden W. Peden
    8. June 2011 at 10:40

    “Nah, I’d probably say something like, “Wow, looks like there’s a lot of good, sustainable, real economic growth satisfying real consumer desires through sustainable production processes.” And then perhaps a bit later, “Kinda neat how people have avoided using debt financing too!” or “Great that they have hard money policies here!”

    Oh, what’s that? You implicitly assumed that the economy (in the sense we care about) must be in the toilet because people aren’t going into debt up to their eyeballs? Well, I guess it’s an assumption you forgot you made.”

    Who said anything about the economy being in the toilet? We’re talking about monetary conditions, not output. If you agree that the US has had an experience of tight monetary conditions, then we are in agreement.

    “Yes, high lending has often been correlated with good economic growth. That doesn’t mean that forcing random banks to lend money will _cause_ the growth.”

    Agreed. I believe in supply and demand: when the demand for something is high, the suppliers should supply; when the demand for something is low, suppliers should cut back.

    So when the demand to hold money is high, the money suppliers (unfortunately, a conglomerate based around a monopoly central bank in the case of the contemporary US) should increase the supply of money; when the demand for money is low (i.e. velocity is rising) the suppliers should cut back i.e. the money supply should be tightened.

    Anything else (“hard money” “sound money” “inflation targeting” “k% rule” etc.) is anti-market dogmatism. In a world without free banking, NGDP targeting is the least worst option. Of course, since money is neutral in the long run, even the best case scenario of NGDP targeting has a negative goal: the central bank should not CAUSE demand crises. Central banks will never, in the long run, achieve anything better, and the case that they can even manage that is unproven…

  96. Gravatar of Silas Barta Silas Barta
    8. June 2011 at 10:46

    @W._Peden: Here’s the source of our disagreement:

    So when the demand to hold money is high, the money suppliers (unfortunately, a conglomerate based around a monopoly central bank in the case of the contemporary US) should increase the supply of money; when the demand for money is low (i.e. velocity is rising) the suppliers should cut back i.e. the money supply should be tightened.

    When the demand to hold shares of IBM go up, should IBM print shares and give them to all who ask? Because that’s basically going on: someone holds on to IBM stock, thinking they own 1/10000000th of the company, and someone decides to dilute it to 1/100000000000th because hey, you know, other people need a share too. Ditto for money: what’s the point in saving if someone’s just going to print up whatever you don’t spend?

  97. Gravatar of Britmouse Britmouse
    8. June 2011 at 11:56

    @W. Peden – ONS series YBHA:

    http://timetric.com/index/EnNlYspdSiGrnIyr0n1x6g/

  98. Gravatar of Morgan Warstler Morgan Warstler
    8. June 2011 at 12:25

    In which Matty sees Sumner as a supporter of 4% inflation to solve for unemployment:

    http://thinkprogress.org/yglesias/2011/06/08/240232/newt-gingrich-thinks-high-inflation-reagan-era-monetary-policies-would-strengthen-the-dollar/

    You might want to do your first post back saying, “Who cares about Unemployment?

    because people seem to be missing your message.

  99. Gravatar of W. Peden W. Peden
    8. June 2011 at 12:28

    Silas Barta,

    “When the demand to hold shares of IBM go up, should IBM print shares and give them to all who ask? Because that’s basically going on: someone holds on to IBM stock, thinking they own 1/10000000th of the company, and someone decides to dilute it to 1/100000000000th because hey, you know, other people need a share too. Ditto for money: what’s the point in saving if someone’s just going to print up whatever you don’t spend?”

    I disagree with the analogy, but regardless: if IBM have new capital and the demand to hold a share of their capital is high, of course they will supply new shares. Equally, if we had a gold standard, when banks had sufficient gold stocks to issue fiduciary currency, they could do so.

    The rationale that “other people need a share too” isn’t the rationale that I’m giving. At all. Instead, it is that supply should match demand, which is not (as far as I know) that controversial a position…

    If we applied your logic to any other product, it would be clearly absurd. Should General Motors stop building cars (or at least keep the quantity of cars stable) because that “dilutes” the value of existing cars? If the demand for food increases, should farmers produce the same amount of food, since producing more would dilute the value of food?

    Saving and idle money aren’t the same, so the “poor savers” argument is irrelevant unless the central bank is inflating the economy with the aim that nominal interest rates on savings accounts are negative (and even then there are ways of preserving the value of your savings). It is perfectly possible for the return on savings to be positive and money to be in equilibrium i.e. the supply of money matches the demand for money.

  100. Gravatar of W. Peden W. Peden
    8. June 2011 at 13:01

    Britmouse,

    Thanks!

  101. Gravatar of Silas Barta Silas Barta
    8. June 2011 at 14:07

    @W._Peden: When GM produces a car, it produces a car. When a miner finds new gold, stores it, and spends a warehouse receipt for it, he’s produced new gold (with respect to that available for human use). What corresponding production happens when you produce money? What value does the Fed add when it creates a new dollar to spend into the economy?

    In all other kinds of production, you have to produce something of independent value in order to exchange it (indirectly) for something else of value. What valuable service (like mining gold or producing a car) does the Fed provide when it prints a dollar?

    Even IBM doesn’t just shift ownership of outstanding shares back to the board by printing more. Rather, they _auction_ them and can only do so with approval of shareholders. What is the corresponding constraint on the Fed’s toying with dollar quantities?

  102. Gravatar of Morgan Warstler Morgan Warstler
    8. June 2011 at 15:19

    In which Matty indicates GROWTH is not what he’s actually concerned about:

    http://thinkprogress.org/yglesias/2011/06/08/240168/if-supply-side-economics-was-true-would-liberals-embrace-it/

  103. Gravatar of johnleemk johnleemk
    9. June 2011 at 00:11

    Silas:

    In that case, why should there be any currency at all? Money matters because people want money — they demand it. And when there is demand, there needs to be supply.

    Free banking equilibrates supply and demand of money. In the absence of that, a gold standard almost guarantees that supply and demand will be misaligned; a central bank, subject to checks and balances (perhaps similar to those in Australia?) has a better chance of duplicating the supply and demand equilibration that would take place in a free banking system.

    Morgan,

    It sounds to me like Yglesias is

    1. Being tongue in cheek, prodding both supply-siders and progressives
    2. Playing coy about his own views

    That’s a post I imagine a right-wing counterpart of Yglesias could easily write — I don’t think it explicitly says much, if anything, about his own views.

  104. Gravatar of W. Peden W. Peden
    9. June 2011 at 05:10

    Silas Barta,

    “When GM produces a car, it produces a car. When a miner finds new gold, stores it, and spends a warehouse receipt for it, he’s produced new gold (with respect to that available for human use). What corresponding production happens when you produce money?”

    I don’t understand the question: “when money is created, what is created?” My knee-jerk reaction is “money”, but since I’m sure you’ve already worked that out in advance, I fear that I’ve misunderstood the satisfaction conditions of the question.

    “What value does the Fed add when it creates a new dollar to spend into the economy?”

    This can be easily worked out, like more axiological questions in economics, using Von Mises’s regression theorem. Money’s value can be traced back to its use in exchange. We attribute value to money because it was regarded as having money yesterday and we presume that will have money tomorrow.

    “In all other kinds of production, you have to produce something of independent value in order to exchange it (indirectly) for something else of value. What valuable service (like mining gold or producing a car) does the Fed provide when it prints a dollar?”

    It provides a dollar, whose value is identical in kind with other goods. This can be understood through the application of the tools of analysis laid out by Von Mises.

    “Even IBM doesn’t just shift ownership of outstanding shares back to the board by printing more. Rather, they _auction_ them and can only do so with approval of shareholders. What is the corresponding constraint on the Fed’s toying with dollar quantities?”

    The constraint is the mandate of the Fed. In the United States, this is an exceptionally stupid mandate (an undefined rate of price inflation + an undefined rate of unemployment). At others times and other places, there have been different constraints.

    In a free banking system, the constraint would be the confidence* in a bank. The supply of money would be governed by market forces: when the demand for a particular bank’s money increases, the supply would increase; when it falls, the supply would fall.

    In a world of central banks, we can only find ways of imitating this ideal. One is that the central bank should seek equilibrium by adjusting policy in line with changes in the demand for money. That is the essential idea behind NGDP targeting: central banks give up trying to manage the economy and simply adjust in response to what is happening in the economy. So, if the supply of money falls below the demand for money, the bank takes an expansionary stance. If the supply of money is above the demand for money, the bank takes a contractionary stance. NGDP is simply the indicator for this project, since NGDP is the money supply multiplied by the inverse of the demand for money.

    * Of depositors and other banks.

  105. Gravatar of W. Peden W. Peden
    9. June 2011 at 05:15

    johnleemk,

    You managed to say most of what I said, but more concisely.

    However, I don’t think we can be too harsh on the gold standard, even without free banking. George Selgin’s work suggests that, even if there were short-term instabilities in the highly imperfect 1871-1913 system, the kind of systemic instabilities that have come roughly every generation (or quicker) under central banking were not there. Also, I think it was Christine Romer who found that short-term price instability under the 1871-1813 system was greatly overstated by the way that historians had used commodity prices (which are always very instable) to calculate the price level in the 19th century.

  106. Gravatar of Morgan Warstler Morgan Warstler
    9. June 2011 at 06:04

    John, that’s wrong. Matty wouldn’t have commented on Drum otherwise, because his opinion differed.

    I gave not one, but two examples. I could go on daily (trust me).

    My lesson is clear and carries: “why” someone wants any single policy decision matters, precisely because it is better to NOT target NGDP, unless the left, the Matty’s of the world – have AGREED that when unemployment stays high, the solution is not more monetary policy.

    The only true reason to target NGDP is to discover once and for all that our unemployment is not a monetary phenomenon.

    If Scott sells it that way, if the terms of the bet are clear to conservatives and liberals alike, the policy can get adopted.

    Otherwise it is just academic noise.

  107. Gravatar of Jason Odegaard Jason Odegaard
    9. June 2011 at 06:41

    @Morgan

    Is it too late to talk a bit more on bitcoin? Hope not. All I wanted to note is that a fixed money supply cannot adjust to changes in demand for money (such as if I decide I want to keep .04 bitcoins as savings instead of .01 bitcoins).

    And I’m not clear on how bitcoin would prevent bank lending from growing the money supply. Same as with dollars or gold coins, if a bank lends me money to buy a building for conducting leather-tanning, that money for the purchase goes to another bank. M1 money has just gone up, and that would seem to happen whenever money exists – whether it’s gold, platinum, bitcoins, credits, or whatever. Would bitcoins prevent fractional reserve banking?

    But I do have fun thinking to myself, while walking along the street, the different ways bitcoins could be used at the retailers. Like you mentioned, the idea of a friction-less currency has a great appeal.

    But even if bitcoins became the coin of the realm, couldn’t governments require bitcoins in taxation? It doesn’t seem that currency issue is the root of power of a government – it is that the government is often perceived as the legitimate entity to exercise force. Isn’t it?

    @Silas – Are you more just concerned with how NGDP is measured? I agree, if NGDP measures moving dollars back and forth between people without any productive activity, then it’s a useless measure. But that’s a concern with how NGDP is measured – not whether or not the Fed should target the ideal of NGDP (sum of spending, investment, and exports).

  108. Gravatar of Silas Barta Silas Barta
    9. June 2011 at 07:23

    http://www.themoneyillusion.com/?p=9494

    @W._Peden & johnleemk: So your response seems to be that when the Fed prints and spends $X, it has created $X worth of value, just as surely as when a miner mines $X worth of gold or a masseuse provides $X worth of massage services? If so, then why limit ourselves to these piddling NGDP targets? Why not print up $20 trillion and add $20 trillion of value to the economy when you spend it?

    (Before you say the obvious, no, it’s not responsive to say, “But that would cause (too much) inflation!” The argument at hand is whether printing new money is creating value, and talk of these macroeconomic goal failures is not relevant to that particular issue in this context.)

    OTOH, if you *don’t* think that when the Fed prints and spends $X, it has created $X worth of value, then you agree that there’s a crucial difference between the Fed printing money and genuine production.

    I don’t see how, as johnleemk claims, my position implies that there should be no currency at all. Yes, the existence of money is a good thing. Rock on. But so is water. That doesn’t mean a marginal unit of water adds the same value as the first one.

    @Jason_Odegaard: Regarding NGDP, it’s not simply an issue of measurement. Rather, I’m making the same argument behind the Lucas Critique or Goodhart’s Law: you cannot take a historical correlation between X and Y to mean that if you *control* X to be at a certain level, you will get a desired level of Y.

    Sure, NGDP growth has historically been correlated with good times, but all those good times have occurred when there was no active attempt to control NGDP to a desired level. Once you start doing so, the dynamic that drove this correlation disappears. This problem cannot be solved with “improved” measurements of NGDP to weed out the “fake” transactions — or rather, if you could actually identify which transaction were not fake, you should be targeting that, not some loose historical correlate of it.

    Regarding bitcoin: I had read discussions of fractional reserve banking (FRB) with bitcoins on the bitcoin forums, and I agree with you that there can be such inflation of the bitcoin money supply. However — and this is the crucial point — bitcoin would allow you to insulate yourself from irresponsible FRB in ways that holding dollar-denominated instruments cannot. All you have to do is make sure you’re holding real bitcoins, not the bank’s bitcoin proxies.

    Then, if the bank ever screw up and makes stupid loans to fund, say, a housing bubble, you are protected. When “credit” contracts, in fact, your bitcoins become *more* valuable, and unlike with USD, there’s no one to debase your holdings to give these banks a bailout.

  109. Gravatar of Doc Merlin Doc Merlin
    9. June 2011 at 07:26

    “Oddly, Paul Krugman and Matt Yglesias seem to think that Lucas denies that demand shocks cause recessions–which is clearly not Lucas’s view.”

    Since when have Paul and Matt actually read/listened to what people on the right say?

  110. Gravatar of Morgan Warstler Morgan Warstler
    9. June 2011 at 08:37

    Jason, I view fractional banking done correctly as meaningless.

    For each and every loan there is a hard asset that can be sold for more than the amount borrowed against it.

    In that regard banks are simply pawn brokers, and pawn brokers do not increase the money supply.

    Even without bitcoin, I advocate a new kind of ultra transparent local virtual mutual bank – like something modeled on covester.com

    If we are gong to have FDIC….

    Then we should extend FDIC insurance coverage to guys sitting in their house as banks. Depositors get to use only debit cards, ATMs and checks… but can get far better returns. And every single loan written by the banker is exposed publicly and you can see how his book is performing. Performance grows deposits.

    He can only loan money locally. And he can’t sell the loans – unless he tanks, and then they are sold for him. And he splits profits of his loan making with depositors. So rich depositors are spreading $250K across lots of local bankers who have play the local long game to build careers for themselves.

    Performance grows loaning territory as well.

    If we’re going to have FDIC, we should make it about driving big banks into submission.

  111. Gravatar of ssumner ssumner
    9. June 2011 at 10:08

    Patrick, I consider myself a very high saver, and yet I don’t think I benefit from deflation. It hurts my investments. Krugman overlooks the fact that most savers have lots of assets that lose value during deflation. It’s not a zero sum game.

    Anon, I agree–even Yglesias favors NGDP targeting, not unemployment targeting.

    Silas, You seem to think that monetary policymakers can choose whether to influence NGDP or not. There is no choice, NGDP is determined by monetary policy, not “natural forces.” The only question is whether monetary policy will create a stable path for NGDP, or generate a highly unstable path.

    Would you want to ride on a bus where the driver decided to not control the steering whel, but rather let natural forces decide where the bus would go?

    Bababooey, I’m guessing that I don’t know enough pop culture to understand your joke. Are you referring to the lover of Cleopatra?

    Liberal Roman, Krugman is consistently inconsistent. But Krugam, DeLong, Yglesias, etc, have all aggressively advocated monetary stimulus, even recently.

    DeLong recently argued that QE2 was effective because it raised inflation expectations.

    W. Peden, I think it is still mostly demand-side. NGDP growth in the US is running below 4%, that’s not enough for a vigorous real recovery, structural problems or not. Having said that, I agree that we have structural problems, and certainly the UK has even more than we do. So it is part of the story explaining slow RGDP growth.

    More to come.

  112. Gravatar of ssumner ssumner
    9. June 2011 at 10:23

    Britmouse, That’s impressive if you mean 8.8% annual rate. Do you have a source?

    Morgan, What makes you think I want QE3 that badly? I want monetary stimulus, and there are certainly more effective tools than QE.

    Philo and Silas, No credit is not tight, it’s easy. Money is tight. (If by easy credit you mean low real interest rates. The term is rather ambiguous.)

    Morgan, I don’t support a 4% inflation target, or any inflation target. I probably once said that a 4% inflation target would be better than what we have now. But almost anything would be better than what we have now. We could get out of this recession with 2% core inflation, if the Fed got serious about stimulus.

    Doc Merlin, They seem to be attacking a cardboard cutout of Lucas, the the actual person.

  113. Gravatar of Silas Barta Silas Barta
    9. June 2011 at 12:02

    @ssumner: …Would you want to ride on a bus where the driver decided to not control the steering whel, but rather let natural forces decide where the bus would go?

    I don’t see how that’s responsive to anything I said. You seem to be just saying, “control good, recklessness bad”. Yeah, I agree. I’m not sure what that has to do with your thesis that it would “help the economy” if you and I swapped dollars until NGDP got to the right arbitrary number.

    Patrick, I consider myself a very high saver,

    So how do you like those zero interest rates on your savings and negative real 10-year stock market return?

    Philo and Silas, No credit is not tight, it’s easy. Money is tight. (If by easy credit you mean low real interest rates. The term is rather ambiguous.)

    Fine, “money” is tight, somehow right at the same time that it’s easy to get said money. In what practical sense is money tight? What qualified borrower has trouble getting loans? (Cause I don’t quite give a durn if people who don’t understand that adjustable rates adjust are being denied loans.)

  114. Gravatar of CA CA
    9. June 2011 at 14:25

    Pretty good reading here.

    http://pragcap.com/paul-krugman-richard-koo-are-both-wrong#ixzz1OixIusZF

  115. Gravatar of Britmouse Britmouse
    9. June 2011 at 14:40

    @ssumner – source is the GDP second estimate, page 24, series YBHA:

    http://www.statistics.gov.uk/pdfdir/oie0511.pdf

    I don’t wish to oversell this, there was a VAT hike in Q1 and the 10Q4 number was horribly weak, so a big jump was expected; there was a similar effect in 10Q1 attributed in part to the last VAT hike. (Maybe we should just keep raising VAT?)

    In fact the OBR (rough equiv to US CBO) were expecting a 2.6% quarterly jump, so we’re a little below the NGDP path they wanted to make the fiscal plans work.

  116. Gravatar of Morgan Warstler Morgan Warstler
    9. June 2011 at 15:05

    Scott, are you willing to bet?

    “Anon, I agree–even Yglesias favors NGDP targeting, not unemployment targeting.”

    That’s just bullshit. Let’s bet $20 to teach you a lesson.

    The question to Matty: “If we target NGDP at 5%, and find unemployment is 8.5% – will you be satisfied that we shouldn’t engage in more monetary stimulus?”

    I say no, because he will always have a target of unemployment and will assert the NGDP is whatever reduces it.

    ——

    Scott, your task is convince Matty that Fiscal does not work – will always be neutered, and then when he is only left with Monetary, we target 5% with level targeting – and winner, winner chicken dinner… the left is fucked once and for all.

    That you don’t understand the job in front of you, and assert crazy shit about the opposition freaks me out.

    These people are FAR MORE disturbing than you admit.

  117. Gravatar of Scott Sumner Scott Sumner
    9. June 2011 at 17:05

    Silas, The burden on proof is on you. I’ve said why I like NGDP targeting, you haven’t provided any arguments against.

    You said;

    “So how do you like those zero interest rates on your savings and negative real 10-year stock market return?”

    That’s my point. Milton Friedman said tight money produces near zero rates. I much preferred the easy money of 2007, when my stocks were much higher.

    On easy money, I think you are confusing money and credit–the concepts are completely unrelated.

    CA, That guy completely botched his analysis of QE in Japan. I’ve done lots of posts on that. He also doesn’t seem to understand Krugman’s expectations argument. You need to change expectations by making QE permanent.

    Britmouse, Still that’s very fast growth in NGDP. Obviously one can’t argue that fiscal austerity has slowed growth in AD.

    Morgan, Here’s a better idea–just ask “Matty.”

  118. Gravatar of Silas Barta Silas Barta
    9. June 2011 at 20:11

    @ssumner: Silas, The burden on proof is on you. I’ve said why I like NGDP targeting, you haven’t provided any arguments against.

    Not quite: Presumption goes in *favor* of (not against) the person claiming that it would NOT help the economy if you and I swapped a dollar back and forth until we met an arbitrary target. In this case, that means presumption favors me, and you must introduce enough evidence to overcome the strong prior that normal people have on the claim that “what Scott and Silas do in a basement with a dollar bill can’t solve economic problems”.

    As hard as it may be for you to accept, it is *not* particularly strong evidence to cite how “well, when people *aren’t* engaging in sham transactions, _and_ NGDP is high, the economy sure does swell!”

    On easy money, I think you are confusing money and credit–the concepts are completely unrelated.

    Well, then please cash out (pardon the pun) what you mean when you say money is tight. Who is having trouble getting money (in that sense), and why is their level of trouble indicative of a Pareto-inefficiency?

    Milton Friedman said tight money produces near zero rates. I much preferred the easy money of 2007, when my stocks were much higher.

    Well, I guess that’s where reasonable people can disagree. I don’t like when stocks are high as a result of unsustainable production models, like making ridiculous loans to people for houses they can’t afford.

    Yes, sucker that I am, even if I happen to own shares in a stock index. I place sustainable economic growth, targeted at real consumer desires, above my selfish need to have the government goose up my investments. I understand that’s not for everyone. Some folks just want a free subsidy.

  119. Gravatar of Morgan Warstler Morgan Warstler
    9. June 2011 at 20:12

    So, are you going to bet me or not?

    ——

    Side note: If you said things like, let’s end all the artificial supports for housing prices, so the banks are forced to eat it – and let the guys with dry powder buy up all the cheap housing inventory and do the dance of once-in-a-lifetime deals…

    then when you said, and oh-by-the-way let’s have a bit more inflation… your voice would carry louder.

    That’s why people now talk ab out what Uncle Milty said.

  120. Gravatar of johnleemk johnleemk
    9. June 2011 at 23:39

    Silas:

    “I don’t see how, as johnleemk claims, my position implies that there should be no currency at all. Yes, the existence of money is a good thing. Rock on. But so is water. That doesn’t mean a marginal unit of water adds the same value as the first one.”

    There is the misunderstanding. For virtually anything, money included, the marginal value of each additional unit will eventually diminish. That’s not in dispute.

    What does not follow then is that printing money is always a bad idea. That is about the same as saying that mining more minerals is always a good idea. Whether it is a good or bad idea depends entirely on supply and demand. In some cases, printing money adds value. In other cases, it does not. That’s it.

  121. Gravatar of W. Peden W. Peden
    10. June 2011 at 05:12

    “So your response seems to be that when the Fed prints and spends $X, it has created $X worth of value,”

    No. The value of $X is only its subjective value of use, which is contextual, just like water in Scotland and water in Saudi Arabia are not equal in value. The value of a new dollar in 1975 and in 1932 is not constant. This, as with most issues of value, is properly described by the work of Carl Menger and Ludwig Von Mises.

    If one is so devoted to mathematical economics that one insists on measuring the value of a given dollar, one can do it this way: a unit of currency is equal in value to the goods it can purchase. (This is only measuring its value as a medium of exchange.)

    This explains the asymmetry of money’s effect on output: it cannot raise output above potential output’s long-term trend (long-term neutrality) but it can reduce output below its long-term trend. So, when the Fed expands the money supply in such a way that it raises output to its potential level, this is a measurable contribution to the economy. When the money supply is increased and output is at its potential level, the effect is to increase inflation (and eventually this has a negative effect on output due to the disruptions caused by inflation).

    This also explains why (1) a $1 trillion expansion in a country suffering from a depression is a different animal from (2) a $1 trillion expansion in a country suffering from hyperinflation.

    Which brings us back to supply and demand. In case (2), there is an expansion of the money supply when the demand to hold money is falling. In (1), there is an expansion of the money supply when the demand to hold money is increasing.

    “OTOH, if you *don’t* think that when the Fed prints and spends $X, it has created $X worth of value, then you agree that there’s a crucial difference between the Fed printing money and genuine production.”

    There are differences, just not what you think. If a product is produced at a level in excess of the demand for that product, the value of that product falls and vice versa. This is as true of money as for cars, pins, food etc. and basically everything except Giffen goods.

    The only people I can imagine saying anything close to “producing X creates value Y” are people with supply-side theories of value like Marxists, and even then a Marxist would allow for changes in labour inputs in producing X. The great insight of Carl Menger was to locate the role of demand in the theory of value.

    There is no relationship between production and value that is independent of the demand for the product produced. This applies to money as to anything else, which is the lesson of Von Mises’ Regression Theorem. From work of Menger and Von Mises, we can deduce that money is asymmetrically neutral in regard to real output: its creation has no value when it is supplied above the level of demand, so an increase in the money supply above the demand for money (i.e. above the equilibrium level) increases prices rather than output in the long-run; on the other hand, continuous reductions in the supply of money below the demand for money have continuous negative effects on real output.

    Supply & demand. Equilibrium & disequilibrium. Monetary economics isn’t that far away from Economics 101…

  122. Gravatar of W. Peden W. Peden
    10. June 2011 at 05:13

    * At the start I should have said “its subjective value of use in relation to its abundance.”

  123. Gravatar of W. Peden W. Peden
    10. June 2011 at 05:13

    johnleemk,

    Once again, you express what I was trying to express more quickly and more precisely.

  124. Gravatar of W. Peden W. Peden
    10. June 2011 at 05:20

    Prof. Sumner,

    I agree that its mostly demand-side, but this is the point where supply-side weaknesses tend to get exposed. Also, while demand-shocks are neutral towards output in the long-run, the long-run can be a very long time. It was a very long-run before US output fully recovered from the demand-shock effects of the 1930s.

    Of course, the US could at least partly make up for the problems of poor supply-side policy with a vigorous Fed Chairman who had digested the lessons of the 1930s in America and the 1990s in Japan. Unfortunately, they got Ben Bernanke, who (contrary to some things he has said) is a creditist. I suspect that the focus on credit and the “lending determines spending” doctrine was a key part of the intellectual paucity of the reponse to the 2008-2011 crisis and the reversion to Dinosaur Keynesianism as an alternative.

  125. Gravatar of Silas Barta Silas Barta
    10. June 2011 at 07:59

    @johnleemk & W._Peden:

    Yes, I’m fully aware of subjective valuation, and I thought I phrased my last comment so that you wouldn’t find it relevant to reply as you did, but I guess it didn’t work. I’ll try again.

    First, when I’m referring to value, I’m referring to something like market value. (Ergo, not Marxist or “labor theory”.) I say “something like” because we all know that the market price can be artificially maniupulated and carry an artificial premium. Seeing no common term for this kind of value, I refer to it as simply “value”, mistakenly thinking people will understand what I mean, rather than err in the most unfavorable and most Marxist direction.

    When I bring a new gold bar onto the market, I may indeed produce “too much” in the sense that there are so many out there that its sale price won’t cover my production costs. But even then, the bar has positive value, just not, perhaps, net positive value to me.

    However, a dollar will almost always “sell” for more than its “cost of production”. If you say that dollars, like gold, “should” (in the appropriate sense which you won’t criticize due to excessive pedantry) be produced until their production cost exceeds their sale price, then you really are advocating much more dollar production than currently exists, and even that more should be produced when times are good and we’re not in some kind of liquidity trap.

    Hence the problem of trying to use that analogy to justify producing dollars.

    When someone produces gold, it makes sense to use the sales cost to determine whether it’s being “overproduced”. The same can’t be said for determining whether “too many” dollars are being produced. Hence the need for you to cite some other standard for “dollar value” that justifies when they should or should not be produced — because as it stands, you really are advocating production of a lot more dollars than even the bat-**** insane inflationists want.

    And if you don’t like this “leakage” through “hoarding” dollars, why bother stabilizing NGDP per year? Why not stabilize NGDP per second? Why not try to maintain the same number of dollar transfers at noon as at twilight? Isn’t there just as much a leakage problem with those evil hoarders stuffing dollars into their closets from 8 pm to 8 am, as there is when someone does the same from June to December? Economic terrorists, all of them!

  126. Gravatar of Liberal Roman Liberal Roman
    10. June 2011 at 09:21

    Atlanta’s Lockhart says no QE3 unless a “shock” event occurs. Its hilarious that his own language is that very “shock” event.

  127. Gravatar of MarkS MarkS
    10. June 2011 at 10:59

    You “need to make QE permanent”?

    Boy, you monetarists have been so wrong about QE that it’s amazing that anyone even listens to you all anymore. QE didn’t do anything positive for the economy. Real GDP peaked the instant it started because it’s nothing more than an asset swap. It didn’t add net new financial assets to the private sector. It didn’t do anything.

    And yes, it certainly changed inflation expectations. It changed them so much that we saw a speculative rally in commodities and a margin squeeze on the entire economy as a result.

    You and Beckworth have displayed time and time again that you have zero understanding of QE and the fact that you defend it after this recent economic decline is embarrassing.

    You need to read Koo’s book and understand that QE is a non-event.

  128. Gravatar of Morgan Warstler Morgan Warstler
    10. June 2011 at 11:53

    johnleemk,

    I am able to grok that money supply might need to increase in proportion to population, and I guess I can even accept that the government could get to print and spend this money first.

    But after that, I see no reason to ever produce print more money – if there is greater demand for it, then let people sacrifice more of their assets and labor to get it.

    The whole point to greater demand of a thing of limited supply is to reward the people who got to it first. To favor the winners.

    Why on god’s green earth would you build a system to favor the losers?

  129. Gravatar of W. Peden W. Peden
    10. June 2011 at 12:58

    Silas Barta,

    “When I bring a new gold bar onto the market, I may indeed produce “too much” in the sense that there are so many out there that its sale price won’t cover my production costs. But even then, the bar has positive value, just not, perhaps, net positive value to me.”

    I don’t see the positive value there. The gold bar is a net loss: no-one is willing to pay for the cost of its production. The time and effort involved in producing that gold bar could have been spent producing something that people were more willing to buy. You might as well have built a mini-pyramid in your garden: maybe someone would buy it, but it wouldn’t be worth the costs involved in making it and so it would have negative value.

    “If you say that dollars, like gold, “should” (in the appropriate sense which you won’t criticize due to excessive pedantry) be produced until their production cost exceeds their sale price, then you really are advocating much more dollar production than currently exists, and even that more should be produced when times are good and we’re not in some kind of liquidity trap.”

    I think that the principle on which money is produced will vary on the type of financial system. In a free banking system, Bank A would expand the money supply directly in proportion to demand, with the constraint being the confidence in Bank A.

    A central bank, if it has to exist for political reasons, should aim to “ape” this process as well as it can. So I admit that this stage the analogy to normal production breaks down. The principal, however, that our aim should be to avoid disequilibrium, remains.

    “The same can’t be said for determining whether “too many” dollars are being produced. Hence the need for you to cite some other standard for “dollar value” that justifies when they should or should not be produced — because as it stands, you really are advocating production of a lot more dollars than even the bat-**** insane inflationists want.”

    When the supply of money signicantly exceeds the demand to hold money, NGDP will rise above trend and problems of overheating/inflation etc. will begin to become apparent. An NGDP target would, I believe, primarily act as a CONSTRAINT on the central bank rather than a stimulus, much as an inflation target does. As a long-run project (assuming that we don’t get free banking) I agree with George Selgin’s ambition of having an NGDP target around the trend level of output (about 3% in the US) which would mean that price inflation in the long run would be negligible (if it existed at all) and only occur in response to supply-side shocks.

    I see a NGDP target as a way for central banks to minimise their effect on the economy. We have to remember that prices are signals: general inflation is a set of signals of deficient supply e.g. signals to producers that there are fat profits to be made by producing more; general deflation is a set of signals that there is abundance e.g. signals to consumers that they can afford to buy more. Central banks have a history of distorting these signals, either by creating demand-side inflation or demand-side deflation, neither of which are desirable. Given that the long-term trend of output is positive, my preference is for a long-term trend of deflation, but the transition to such a society would take some time e.g. the idea that nominal wages should increase every year would have to die-off.

    “And if you don’t like this “leakage” through “hoarding” dollars, why bother stabilizing NGDP per year? Why not stabilize NGDP per second? Why not try to maintain the same number of dollar transfers at noon as at twilight? Isn’t there just as much a leakage problem with those evil hoarders stuffing dollars into their closets from 8 pm to 8 am, as there is when someone does the same from June to December? Economic terrorists, all of them!”

    I don’t think that “hoarding” during the night is a problem. Even hoarding during a particular quarter might not be a problem. Nominal stability in the long run, however, IS important, as I think every single economist from Rothbard to Keynes would agree. Years are useful for target primary because, as a solar-bound species, we tend to operate on an annual basis: annual pay-rounds, financial years, annual budgets etc. Also, it is a convenient way to hold central bankers to account, and we all know that doesn’t happen often enough.

  130. Gravatar of ssumner ssumner
    10. June 2011 at 13:16

    Silas, You can’t beat something with nothing. Tell me your alternative monetary policy, or describe a flaw with NGDP targeting. You’ve done neither.

    Tight money is a policy expected to produce sub-optimal NGDP growth.

    I don’t just like the high stock prices of 2007, I also like that fact that unemployment was much lower in 2007. I’ll take 4.5% unemployment over 9.1% any day. And don’t say the jobs were unsustainable. Only a small share of job losses occurred in residential construction. Those were unsustaniable, but the other losses were very much avoidable.

    Morgan, I’ll bet you that Yglesias says he favors NGDP targeting, not unemployment targeting. What he “really believes” is no concern of mine, nor do I even believe in the concept of what someone “really believes.” What matters is what they say. I don’t bet on mind-reading.

    I frequently say the government should not be supporting housing prices.

    W. Peden. Those comments about Bernanke make a lot of sense.

    Liberal Roman, Yes, that’s very ironic.

    Mark, I predicted that rumors of QE2 would raise commodity prices, stock prices and foreign exchange prices. That it would raise inflation expectations, due to anticipated increases in AD. All those things happened exactly as I predicted. Skeptics like Krugman suggested that QE2 was unlikely to significantly raise inflation expectations. He was proved wrong. If the current slowdown is due to QE2, then why are stocks only now falling? I thought the stock market knew about QE2 8 months ago. I also pointed out that QE2 would be inadequate to produce a robust recovery, and that prediction also turned out correct. By the way, it isn’t just monetarists who think QE2 helped slightly, Bernanke says the same thing, as do Keynesian like DeLong.

    As far as Koo, isn’t he the one who claimed QE failed in Japan? I have numerous posts showing that the BOJ got exactly the results they wanted. They wanted a stable CPI, and the CPI is almost unchanged in the past 20 years. Check it out if you don’t believe me.

  131. Gravatar of MarkS MarkS
    10. June 2011 at 14:10

    Scott,

    Rising stock and commodity prices don’t mean that QE “worked”. You should know that nominal wealth and nominal price increases are nothing more than bets based on expectations by market participants. Surely you’re not naive enough to say that QE “worked” because stock prices worked?

    The bottom line is that QE was intended to increase aggregate demand and economic growth. It did the EXACT opposite by generating no growth and causing a margin squeeze through commodity prices. The expectation effect which you harp on endlessly was the cause of the commodity speculation and the margin squeeze. You can’t talk an economy into recovery.

    The proof is in the pudding. Real GDP has declined every qtr since QE started. QE failed and your support of it shows that your analysis and cheerleading of it was dead wrong.

    You were wrong. Hold yourself accountable.

  132. Gravatar of Liberal Roman Liberal Roman
    10. June 2011 at 15:05

    MarkS,

    How exactly is Scott wrong. Do you think it’s just a coincidence that the only thing that turned asset prices and the freefall of the economy in 2008 was not TARP. It was not ARRA. It was the announcement of QE1.

    In early 2010, what turned the economy downward? Talks of exit strategy from all Fed governors. What turned the economy around yet again in Fall of 2010?? QE2.

    What turned the economy around yet again very recently? Talks of exit strategy from all Fed governors. What will turn the economy around yet again sometime in late 2011? A new round of QE from the Fed.

    You say that QE did not raise demand. Not only did nominal GDP’s growth rate increased at each announcement of QE, but so did real GDP and so did all other “real” economy indicators (employment, PMI surveys, ISM indexes, etc., etc.) What other evidence do you need???

    We should be putting people like YOU up on the spot and asking you for evidence that your views are backed up by evidence! Tell me a time when FALLING asset prices led to a growing economy and growing employment.

  133. Gravatar of W. Peden W. Peden
    10. June 2011 at 15:36

    MarkS,

    “The proof is in the pudding. Real GDP has declined every qtr since QE started.”

    Well, if one’s going to be ignorant of the role of expectations and look at only Q1, then this is true. It’s also a trend made up of once instance, during which there was instability in oil producing countries and a major series of disasters in Japan. Sometimes one has to look beyond simple “A and B” logic.

  134. Gravatar of MarkS MarkS
    10. June 2011 at 19:05

    What a bunch of complete nonsense. QE1 ended in Q1 of 2010. RGDP was at 3% and continued to climb throughout the summer. It peaked as soon as QE2 was announced at 3.3%. It has declined every quarter since and will decline again this qtr likely at something in the low 2% range. So, the bottom line is clear – growth has declined throughout the entirety of QE2.

    I am not sure how anyone with an ounce of credibility can simply overlook these facts. The economy was stronger BEFORE QE2 started than it is now. That’s an irrefutable fact.

    I’d love to hear one of you guys explain to me how QE2 actually works to create economic growth? Can anyone here who is a monetarist actually explain the exact transmission mechanism through which the programs help to generate growth? And please, the Fed can’t talk growth into an economy so spare me the nonsense about being able to say “I would like 5% growth, presto changeo!”. How could anyone ever be so naive to believe that the Fed can do that?

  135. Gravatar of Morgan Warstler Morgan Warstler
    10. June 2011 at 19:46

    So are you going to bet me or not?

    Making sure Matty KNOWS exactly what you are saying isn’t hard, getting a response isn’t hard.

    Why read his archives, let’s ask him.

    I’m telling you the overall read on your stuff allows FAR TOO MUCH mental wiggle room for people who fundamentally want to ruin the world in your eyes – and taking it to them, is how you actually define far more accurately what you really believe to your readers.

    I’m saying that if we level target NGDP at 5% for the next 8 quarters – and unemployment is still 8% – Matty will argue that we have needed a higher target, and THAT MEANS he targets unemployment.

    His answer might be more complicated, but he will never agree that the basic problem is bad government / public employee / tax policy – he’s not able to actually mentally create a test by which a possible outcome is radical reduction of government size, complexity, or public employee power. Anything that leads that way is not valid.

    And IF that’s the case, you do yourself, nor your readers, a good service by not digging in and clearing it up.

    Routinely we see readers here shocked at the implications of your arguments when you extend them…. and thats where all the good shit happens.

    Matty meanwhile is only interesting as a liberal young’un coming to terms publicly with the failings of his actual beliefs. Things he thinks right now, will go away from him – like David Mamet. That’s the most interesting thing; when and why does he turn?

  136. Gravatar of Philo Philo
    10. June 2011 at 20:13

    I appreciate your answer to my question about “tight credit conditions.” But Bernanke himself, in his June 7 speech, mentioned “continued tightness in some credit markets,” claiming that “smaller businesses still face difficulties in obtaining credit,” though he added: “but surveys of both banks and borrowers indicate that conditions are slowly improving for those firms as well.” Are there really such difficulties? Are smaller businesses being discriminated against? If so, why? If not, why did Bernanke say so?

    You say the term ‘credit’ is ambiguous. What could Bernanke mean by it that would put the best face on his words?

  137. Gravatar of Mike Sandifer Mike Sandifer
    10. June 2011 at 20:14

    Scott,

    I’m not as skeptical about the potential positive effects of fiscal stimulus as you, but the case you make for just trying a QE program that targets the forecast level-wise, etc., is very compelling. To me the evidence that you produce and that I’ve found on my own make about as clear a case can be made that small QE programs can work. That is, small relative to the size of the problem.

    We may not need any fiscal stimulus if the Fed really puts the pedal to the mettle, and anyway, with Republicans in charge in the House and with any number in the Senate willing to filibuster, it’s hard to imagine any new stimulus spending or even necessarily net stimulative tax cuts coming, at least until Obama’s gone.(I wouldn’t be surprised to see a Republican president push a stimulus and get it through, since they actually care to at least be seen as doing something when they actually are seen as having control.)

    It’s truly something to behold the myriad ways people can look at what by all appearances is QE’s success and interpret failure.

    The seeming beginning of evidence of expectations for both QE1(March 18th expansion) and 2 were followed extremely closely temporally(as in same day, or even minute on relevant news vis-a-vis asset markets)by a falling dollar, improving trade balance, increased consumption, decreased unemployment/increased employment, improving nominal and real GDP, and yield curves predicting some level of recovery, asset market rises, etc. If this isn’t what QE success looks like, what the Hell is?

    There seems to be a much more compelling empirical case for the QEs having worked than the Obama stimulus, though I’d welcome a massive fiscal stimulus program. For one thing, there were two of them, and the effects in my mind were easier to predict in detail and the intended effects seem to have occurred, with some precision(~2% inflation target), without exception.

    The Obama stimulus was complex, perhaps poorly designed in some ways, and Summers and some other former members of the administration now say they overestimated the impact of highway infrastructure projects on employment.

    There were other problems as well, but perhaps worst of all was the temporary nature of the stimulus. Why should we have expected much effect with a ~2 year program and seemingly difficulty of trying more? I realize much the same could be said about the QEs, but at least we have the “extended period” language and a track record of a limit on how far the Fed will let inflation fall, and for how long. The Fed is still active(hopefully), even if insufficiently so and if intervention is always very late.

    The best way to test QE is to go all out, and even been seen as “reckless” as Krugman argues. Steal the show completely for months on end during a rapid recovery and even the idiots who aren’t convinced it worked will forget about it as memories of the downturn fade.

  138. Gravatar of Mike Sandifer Mike Sandifer
    10. June 2011 at 20:17

    I should have said the expansion of QE1 I think set in expectations-wise around March 18, 2009, if I recall.

  139. Gravatar of MarkS MarkS
    10. June 2011 at 20:28

    No one here actually explains the fundamental transmission mechanism under which QE works.

    Is it really just altering expectations to you guys?

  140. Gravatar of Dustin Dustin
    10. June 2011 at 20:55

    It’s declined every quarter since..? Isn’t that, like, one whole quarter? Started in 4Q 2010 and now we have data for 1Q 2011?

    And what is the proper number to use? Fred gives me different numbers depending on whether I use “percent change from year ago”, “compounded annual rate of change”, “continuously compounded annual rate of change”.

    1Q 2010 4.8/3.7 4.7/3.7 2.8/2.4
    2Q 2010 3.7/1.7 3.6/1.7 3.9/3.0
    3Q 2010 4.6/2.6 4.5/2.5 4.5/3.2
    4Q 2010 3.5/3.1 3.4/3.1 4.2/2.8
    1Q 2011 3.8/1.8 3.7/1.8 3.9/2.3

    Obviously the format is NGDP/RGDP

    The last column, which is “percent change from a year ago”, tells the story of increasing NGDP/RGDP peaking in 3Q 2010 and now falling.

  141. Gravatar of MarkS` MarkS`
    10. June 2011 at 21:14

    Surely you kid, right? You guys sure love to skew the facts, huh? My favorite is how you all like to claim that QE1 was such a smashing success and you cite a March start date. Well news flash – QE1 started in November 2008 and the economy and markets continued to tank for the next 5 months.

    QE2 started in August 2010. The Fed announced the reimplementation of QE in the THIRD qtr of 2010. We know the economy peaked. We have a full three qtrs of data for QE2 and it shows, unequivocally, that RGPD has declined since its inception.

    This idea that you all have built a theory of QE “working” based on altering expectations is worse than laughable. How can anyone take you seriously? Do you tell your children they’re beautiful and believe that they’ll wake up in the morning being beautiful? This is the crux of your economic theories?

    Surely you jest.

  142. Gravatar of Liberal Roman Liberal Roman
    10. June 2011 at 22:24

    @MarkS

    We can talk about “transmission mechanism” in another conversation (to make it short, yes it is all about expectations).

    But what you are saying is completely false. I guess what you are trying to say is that all QE did in the Spring of 2009 and in the Fall of 2010 was juice up asset prices for awhile. You are conceding that the stock market went up coincident with the announcements of QE, but (and correct if I am wrong) you arguing that had no impact on the “real” economy. It’s almost a comforting thought. It means basically, I shouldn’t be too worried about the stock market drop as of late and that it means nothing.

    But anyway, I think you are confused. You are using YoY comparisons and not annualized growth for your claims. Looking at the data presented by FRED via Dusin in the post above me, you could see the slow down in 2010Q2. Then a pickup after QE2 was signaled and announced in August/September in 2010Q3 and then in 2010Q4. And now we are down to 1.8% ANNUALIZED growth rate.

    YoY comparisons are not valid. Especially, coming off of a recession. The YoY comparisans are pretty easy in 2010Q1 compared to 2009Q1. Same goes for 2010Q2. Hence annualized rate of growth is what’s most important to look at.

  143. Gravatar of Jim Glass Jim Glass
    10. June 2011 at 23:19

    Raghuram Rajan, of U of Chi and ex-IMF chief economist, says money policy is too loose — virtuous savers aren’t getting enough interest, and are being punished by the govt as it “taxes the producers of savings”, to no beneficial economic effect.

    Krugman says Rajan’s “rentiers” are exploiting all us real productive working people by collecting too much interest income for no work, and using their control of government to make sure they keep doing so — at the cost of an economic recovery that could result if only we knocked the rentiers’ rents down further.

    Dang economists can’t agree on the simplest thing. :-(

  144. Gravatar of Morgan Warstler Morgan Warstler
    11. June 2011 at 05:09

    Sandifer, apparently you missed the memo….

    Scott is against fiscal, unless it is a tax cut.

    Scott will stop doing QE once the 5% level target is hit consistently – even if unemployment in 8,9,10%.

    You should view Scott’s NGDP as a way of removing the human element (read political) from Monetary, precisely so we can blame a bad economy on your side of the aisle.

    With variables removed, we’ll see clearly whether the problem is really all your fault!

  145. Gravatar of W. Peden W. Peden
    11. June 2011 at 05:23

    MarkS,

    “No one here actually explains the fundamental transmission mechanism under which QE works.”

    Exactly the same transmission mechanism(s) by which open-market operations work, plus expectations. That’s not very difficult to work out, because QE IS a programme of OMOs.

  146. Gravatar of W. Peden W. Peden
    11. June 2011 at 05:29

    Also, if we’re not being mechanistic dolts, we should start looking at the effect of QE2 from its announcement, not the beginning of its implementation. An announcement of an across-the-board income tax hike for the next budget today would start having effects today. People wouldn’t sit on their hands until the tax comes into effect and react then!

  147. Gravatar of Dustin Dustin
    11. June 2011 at 07:53

    “YoY comparisons are not valid. Especially, coming off of a recession. The YoY comparisans are pretty easy in 2010Q1 compared to 2009Q1. Same goes for 2010Q2. Hence annualized rate of growth is what’s most important to look at.”
    ===================

    Thanks for answering a question I always had, Liberal Roman. I always watched YoY numbers.

    Quarterly numbers blow anyway. I wish we had monthly numbers.

  148. Gravatar of Scott Sumner Scott Sumner
    11. June 2011 at 08:29

    Mark, You said:

    “Surely you kid, right? You guys sure love to skew the facts, huh? My favorite is how you all like to claim that QE1 was such a smashing success and you cite a March start date. Well news flash – QE1 started in November 2008 and the economy and markets continued to tank for the next 5 months.
    QE2 started in August 2010. The Fed announced the reimplementation of QE in the THIRD qtr of 2010. We know the economy peaked. We have a full three qtrs of data for QE2 and it shows, unequivocally, that RGPD has declined since its inception.
    This idea that you all have built a theory of QE “working” based on altering expectations is worse than laughable. How can anyone take you seriously? Do you tell your children they’re beautiful and believe that they’ll wake up in the morning being beautiful? This is the crux of your economic theories?
    Surely you jest.”

    I hope you are not referring to me. In March 2009 I did a post “Don’t get your hopes up”. Later I pointed out that QE1 was not increasing the monetary base. Not only did I not claim QE1 was a smashing success, I have been one of the most severe critics of the Fed–pointing out that money has been too tight throughout 2009 and 2010. And I was proved right, as NGDP growth came in way below the desired level.

    The QE1 that you refer to had no effect, because the Fed intentionally neutralized it with interest on reserves. My very first blog post pointed that out.

    If the “test” for QE2 is RGDP growth, then what is the test for the fiscal stimulus of late 2010? What is the test for the effect of the oil crisis? What is the test for the effect of the euro crisis? What is the test for the Japan disaster? Let me guess. You believe the test for the effects of all those shocks is exactly the same–RGDP growth in the US. If RGDP growth is slow it shows that monetary stimulus doesn’t work, and it shows that fiscal stimulus doesn’t work, and it shows that the oil crisis slowed growth, and it showed that the Japan crisis slowed growth, and it showed that the euro crisis slowed growth. Economics is so easy! No need to try to isolate the impact of any single factor.

    There’s a reason people look at market reactions to policy news, it allows you to isolate the impact of a single factor.

    You also don’t seem to understand even the basics of macro theory. You complain that QE2 failed to boost AD, and then use RGDP growth as evidence. I hate to tell you this but you’ve actually undercut your own model. That’s the data a RBC-type would use to show AD changes don’t have real effects. If you are testing the impact of QE2 on AD, you’d of course need to use NGDP, not RGDP. You might want to learn some basic macro theory before coming over here and claiming that we are all fools.

    Obviously you don’t follow this blog, or you wouldn’t suggest that I don’t discuss the transmission mechanisms. You also obviously failed to read my post “QE after 3 months” (or 4 months, I forget) I said the results were ambiguous if you chose to evaluate QE2 in terms of future performance of the economy. The unemployment rate fell sharply, but NGDP growth was modest. But I also pointed out that that approach is completely inconsistent with economic theory, which says the impact on markets comes with the policy news, and the future performance of the economy is affected by all sorts of factors. Unfortunately, we don’t have a futures market for NGDP. But if we did, I am confident that rumors of QE2 would have raised NGDP futures prices. All the other market responses are consistent with that assertion.

    Morgan, This is the last time I will answer you. I will bet you as to what Yglesias has said in his blog. He supports NGDP targeting not unemployment targeting. I will not bet you on what Yglesias truly believes, because there’d be no way to ascertain who was right. Feel free to ask him what he really believes, I encourage you. I don’t care about Yglesias’s subconscious beliefs, only his public statements.

    Philo, I don’t know how Bernanke knows this. I suppose banks tightened standards after the subprime fiasco, as they should have.

    Mike, The reason why many deny the effects of QE1 and QE2 is thet they were very inadequate relative to the needs of the economy. The economy did better, ceteris paribus, but still did rather poorly in an absolute sense. That’s why people like Mark are skeptical–they don’t understand the concept of ceteris paribus.

    more to come

  149. Gravatar of MarkS` MarkS`
    11. June 2011 at 09:05

    Scott,

    First of all, your “predictions” don’t predict anything. You make hedged comments like “I think QE1 will result in higher stock prices, but insufficient economic growth”. That makes for great blogging because you can always come back and say “look I was right!”, but anyone who sees what you’re doing will not be fooled. Your predictions are all vague and hedged just well enough so that you can never really be wrong. So, you’re not fooling me with that nonsense.

    Your theory of expectations is just rebranded EMH. I know you Chicago guys love to believe in EMH and you really think that market reactions justify policy response, but few things have been more discredited than EMH. That fact that you believe stock prices and their reactions justify a certain policy is a flat out joke.

    How exactly does IOR neutralize anything? Here you go again using another defunct theory to back your work. The money multiplier has been totally debunked. Banks never lend reserves. IOR has had no impact on lending. I work at a bank. We don’t care about IOR or reserves. We lend to customers when they walk in the door and are creditworthy. That’s just how it works in the real world. No theory here. IOR doesn’t matter to a bank’s lending operations.

    You clearly have no actual banking experience or any real understanding of the inner workings of the modern banking system. Your comments are nothing but vague hole-filled theories based on dead economics.

    I am shocked that you’ve fooled so many readers for so long. Your work has so many holes in it that I can hardly stop typing….

  150. Gravatar of Scott Sumner Scott Sumner
    11. June 2011 at 11:11

    Jim Glass, Rajan needs to read Milton Friedman. Ultra-low interest rates are a sign that money has been tight, not easy.

    Mark, You need to understand someone’s views before criticizing them, and you obviously don’t understand my views. For instance, I don’t favor targeting stock prices, indeed I consider the idea to be nuts. I favor targeting NGDP expectations. And consider the following:

    “How exactly does IOR neutralize anything? Here you go again using another defunct theory to back your work. The money multiplier has been totally debunked. Banks never lend reserves. IOR has had no impact on lending. I work at a bank. We don’t care about IOR or reserves. We lend to customers when they walk in the door and are creditworthy. That’s just how it works in the real world. No theory here. IOR doesn’t matter to a bank’s lending operations.”

    I never use the money multiplier in my analysis, except to argue that it is often not stable. I never argued that IOR affects lending. So you are beating a dead horse. The monetary base is the medium of account. If you pay interest on reserves you increase the demand for the medium of account. When you increase the demand for something you increase its value. Even a banker ought to be able to understand supply and demand.

    As far as me having no experience in banking, how does that relate to my monetary arguments? The banking system plays no role in my analysis. In addition, my experience is that bankers are often the least knowledgeable about monetary economics. They often confuse money and credit, for instance.

    I do agree with one thing you said:

    “No theory here.”

  151. Gravatar of MarkS MarkS
    11. June 2011 at 11:57

    Scott,

    I very much understand your theory. And yes, it is a theory (and a bad one at that).

    You believe that the Fed doesn’t even need to actually create any fundamental change in the economy. All they need to to is change expectations permanently. As you may or may not know, there is no correlation between the monetary base and future economic growth, inflation or really anything else. Reserve requirements don’t matter (just look at Canada where there are none), IOR has no fundamental impact on banking operations aside from providing rentiers with some additional income, and banking is never ever reserve constrained. This is all consistent with the idea that the monetary base has very little impact on the actual economy.

    Now, your little theory about expectations is interesting. But it’s just a theory. And it’s the logical equivalent of telling your child that they are beautiful (when in fact they might be really ugly). But again, that’s just not how the world actually works. I don’t change my lending behavior at my bank when the Fed says they’re altering base money permanently. I didn’t lend more money because they bought some reserves from me. And if they made QE permanent it would have ZERO impact on the way I run my bank. Likewise, it would have ZERO impact on my behavior as a consumer or producer. You can’t honestly believe that consumers change their behavior due to the Fed’s altering of base money?

    But yes, you actually do. And that’s what your theory comes down to. It comes down to saying “presto changeo” and hoping that if you keep telling your kid that they’re beautiful that one day they’ll wake up and find out that they’re beautiful.

    You need a heavy dose of reality and common sense. Nothing you say or theorize is as it is in the real world. NOTHING. And as someone with significant banking and consumption experience I can confirm as much.

    Your theory is just about the biggest bunch of nonsense that I have ever confronted in my life and it’s truly only something that an academic could embrace because anyone out there in the real banking world would be totally flummoxed by what you say and believe. It’s breathtakingly bad work.

  152. Gravatar of Mike Sandifer Mike Sandifer
    11. June 2011 at 12:31

    Scott,

    I think the best evidence the QEs worked is that inflation did seem to increase, and in fact, headed back up into the range the Fed wanted. In the case of QE2, Bernanke even explicitly stated the ~2% target once, if I recall correctly.

    And as I said, the inflation-related effects one would expect seemed to occur more or less immediately in relation to credible news about new QE.

  153. Gravatar of Mike Sandifer Mike Sandifer
    11. June 2011 at 12:34

    I guess I should add, does anyone disagree that inflation correlates increased immediately following Fed hints and official announcements about coming QE?

  154. Gravatar of Mike Sandifer Mike Sandifer
    11. June 2011 at 12:36

    And didn’t we have higher inflation for months after each QE program began?

  155. Gravatar of Mike Sandifer Mike Sandifer
    11. June 2011 at 12:43

    Morgan,

    I haven’t missed anything about Scott’s views on fiscal policy, as far as I can tell. I’ve been reading this blog for quite sometime now and frankly Scott makes very good cases for trying monetary stimulus before fiscal.

    I’d still want more fiscal, not only because I favor higher social spending in some areas anyway, but because the Fed isn’t signaling it’s willing to do much other than try to maintain a ~2% target, and very lazily at that. They are willing to let inflation fall for months before acting. I’ll take just about any stimulus, really.

    I’m not trying to speak for Scott here, but as far as I can tell we have the same values. Scott mainly just differs on technical points about how to get us where we want to go, in terms of more equitable wealth distribution, everyone having their basic needs met, etc.

  156. Gravatar of Mike Sandifer Mike Sandifer
    11. June 2011 at 12:46

    MarkS,

    You’re just silly. Expectations determine economic decisions. Yes, it’s just theory, as theory always is. So is gravity.

    You’re attacking what is really perhaps the most important and solid concept in economics and psychology.

  157. Gravatar of Mike Sandifer Mike Sandifer
    11. June 2011 at 13:08

    Liberal Roman,

    You wrote: “But what you are saying is completely false. I guess what you are trying to say is that all QE did in the Spring of 2009 and in the Fall of 2010 was juice up asset prices for awhile. You are conceding that the stock market went up coincident with the announcements of QE, but (and correct if I am wrong) you arguing that had no impact on the “real” economy. It’s almost a comforting thought. It means basically, I shouldn’t be too worried about the stock market drop as of late and that it means nothing.”

    I add that corporate earnings went way up along with stock prices, which some people think is causal. It’s not just asset prices inflation when consumption and earnings rise.

    This is easy to check and sends a strong signal that MarkS doesn’t even know how to begin an analysis of the effects of QE.

  158. Gravatar of MarkS MarkS
    11. June 2011 at 13:13

    No gravity is not a theory. It is a REAL natural phenomenon. It is not merely in our heads (like expectations and guesses about future realities. The fact that you would say something so utterly naive speaks magnitudes of the people here.

    This actually proves an important point. You guys are looking at the ways that people react to things such as gravity. I am looking at the way that things like gravity actually influence behavior. One is a reaction to fundamental underpinnings. The other is a real underlying force.

    As for QE causing inflation – that’s pure nonsense again. The jump in the headline CPI was almost ENTIRELY due to motor fuel. See here: http://research.stlouisfed.org/publications/es/11/ES1113.pdf

    This occurred largely because of the expectations that you all speak of and not due to some underlying fundamental economic reason. Economic participants incorrectly believed the Fed was printing money and causing inflation via QE. So they went out and bid up commodities. Lo and behold, we all now know that they didn’t print money and that the surge in commodity prices was largely unjustified. In the end, this surge in expectations actually HURT the economy because it resulted in ZERO wage inflation, zero real growth and only a margin squeeze through your expectations effect. You see, the expectations that you all speak so highly of about increasing AD actually REDUCED AD by crunching consumers.

    This is all pretty crystal clear by now. I am not sure how you all miss these simple facts.

  159. Gravatar of MarkS MarkS
    11. June 2011 at 13:18

    And before we get bogged down in theory vs law re: gravity, let’s just agree that gravity is a fact. Unlike your idea that managing expectations is all that’s needed to drive economic growth. That, is indeed, a theory.

  160. Gravatar of Cameron Cameron
    11. June 2011 at 14:02

    “Economic participants incorrectly believed the Fed was printing money and causing inflation via QE. So they went out and bid up commodities. Lo and behold, we all now know that they didn’t print money and that the surge in commodity prices was largely unjustified.”

    If this is what you believe then you actually agree with Scott much more than you realize. (although when you say QE didn’t cause inflation and go on to say the fed created inflation expectations which led to higher oil prices I think you’re being inconsistent)

    If the fed raised investor inflation expectations then the fed actually was causing inflation. If expected inflation rises then the opportunity cost of holding cash rises and demand for cash falls (as people shift to assets with higher real yields). Lower demand for cash means higher NGDP at any given supply of money.

    You’re partially right about the fed “not printing money” and disappointing markets. The inappropriate end to QE2 has once again signaled the feds hawkish stance and led to another decline in expectations. It’s really more about the fed promising to not back down as soon as we start to see mediocre (>300K/month) job growth.

  161. Gravatar of Mike Sandifer Mike Sandifer
    11. June 2011 at 14:09

    MarkS,

    First: http://www.bloomberg.com/apps/quote?ticker=USSWIT5:IND

    TIPS spreads: http://blogs.ft.com/money-supply/files/2010/11/10yr-tips-17th-nov-2010-590×354.png

    Is this just imagination?

    And with regard to expectations, psychologists can measure implicit expectations with great precision.

    Hernstein, R. J. (1961). Relative and absolute strength of response as a function of frequency of reinforcement. Journal of the Experimental Analysis of Behavior, July; 4(3): 267–272.

    http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1404074/

    Leon, M. I., & Gallistel, C. R. (1998). Self-stimulating rats combine subjective reward magnitude and subjective reward rate multiplicatively. Journal of Experimental Psychology: Animal Behavior Processes , July, Vol 24(3), 265-277.

    http://psycnet.apa.org/journals/xan/24/3/265/

    As you can see with the second paper, the matching law holds pretty much exactly when reward is delivered through direct brain stimulation, over several orders of magnitude.

    Also, check out some of these papers on empirical tests of temporal difference models.

  162. Gravatar of Mike Sandifer Mike Sandifer
    11. June 2011 at 14:10

    Link to temporal difference papers:

    http://scholar.google.com/scholar?hl=en&nord=1&q=temporal+difference+learning+shultz&biw=888&bih=459&ion=1&um=1&ie=UTF-8&sa=N&tab=ws

  163. Gravatar of Mike Sandifer Mike Sandifer
    11. June 2011 at 14:43

    Cameron,

    Well put.

  164. Gravatar of Bonnie Bonnie
    11. June 2011 at 15:51

    The average blend of gasoline (US) is somewhere in the area of 30-40% ethanol. Between 2007 and 2011 the price of corn went from ~$1.60 to ~$6.50 – the kind that is fed to livestock. It does not make sense to me that the measly ~1% rise in inflation expectaions between 3Q 2010 and 3Q 2011 could translate to such a dramatic increase in the price of corn, especially back in 2007-09. But we should take into account that nearly everything at the grocery store has some derivative of corn in it and that there are additional subsidies for the kind of corn that goes for ethanol than for food for either humans or animals.

    The price of gas has more than petroleum as a factor that affects the price. It would likely be far more expensive if not blended with something else, but on the other hand, I am not sure that the something else we currently use is really the right thing or that the government has not made a huge mistake in subsidizing crops for ethanol over and above food crops while doing very little to impact the price of oil.

    It matters not what the Fed does in that regard, that problem will not go away and fuel prices will still impact everyone’s bottom line until something is done to bring rationality to national energy policy. And of course the chicken littles with their sights on the Fed certainly are not helping in that regard by distracting attention from a large portion of the real problem.

  165. Gravatar of Morgan Warstler Morgan Warstler
    11. June 2011 at 17:42

    “I’ve been reading this blog for quite sometime now and frankly Scott makes very good cases for trying monetary stimulus before fiscal.”

    Wrong. I’ve nailed him down on this – we’ve actually had lengthy discussion of the difference between Fiscal as “tax cuts” vs. “actual government spending”

    Scott doesn’t favor more government spending, altho he has made the mistake in the past of calling tax cuts fiscal stimulus – they are not, cannot be – money originates in the hands of the private market, it is not owned by the government, what it claims is important to spend $ on it taxes / borrows for – what it doesn’t tax is an admittance, that it is best staying out of the way.

    —–

    So you really seem to miss it – Scott doesn’t think – try X, then try Y, then try Z – the point is he think only X is needed (and Z he’s outright against) and I’m OK with that as long as after X leaves the left with nothing they can survive on, Scott turns on them and lets them gasp for air – finished, done.

    —–

    Scott, it seems the bet just needs to be big enough to make you want to drive Matty to answer at length. How much will take?

  166. Gravatar of MarkS MarkS
    11. June 2011 at 17:53

    This is absurd. You can’t have all cost push inflation due to a change in expectations and claim that QE2 worked. You guys are in total denial that your theory makes zero sense in the real world.

  167. Gravatar of Mike Sandifer Mike Sandifer
    11. June 2011 at 18:24

    Morgan,

    I never said Scott favors fiscal stimulus, even without monetary stimulus. I can see how my statement was sloppy and can be interpreted that way though. And besides, it’s definitely not even a point on broader topic. This is a silly subtopic you created.

    I do recall Scott making statements such that after he’d removed disincentives for saving, and perhaps tried all that could be done free market-wise to allow for a more equitable distribution of wealth, he’d be open to restributive fiscal policies. In fact, he favors a progressive consumption tax now, but he’ll have to speak for himself.

    I’m now finished with this side topic.

  168. Gravatar of Mike Sandifer Mike Sandifer
    11. June 2011 at 18:26

    MarkS, you can keep throwing fits, but you just don’t seem to even understand the “theory” here in the first place, or even what a theory is generally, so don’t be surprised when you don’t sway anyone.

  169. Gravatar of Jim Glass Jim Glass
    11. June 2011 at 19:49

    The results of QE2 are briefly tallied in The Economist.

  170. Gravatar of Lucas Lucas
    11. June 2011 at 21:28

    Scott, what are your thoughts on “The Purple Tax Plan” [1]? Is it consistent with your ideal of a progressive consumption tax?
    Also, what do you think of “countercyclical” credit policy [2]? Would it stabilize the money multiplier and velocity?

    It seems to me (engineering mind) that combining countercyclical monetary policy along the lines of NGDP level targeting, countercyclical credit policy – regulations, capital requirements – and countercyclical fiscal policy – good automatic stabilizers, your ideas [3] – we’d be close to macroeconomic nirvana :)

    1- http://www.thepurpletaxplan.org/node/2
    2- http://www.economist.com/node/13446173?story_id=13446173
    3- http://www.themoneyillusion.com/?p=9254

  171. Gravatar of Morgan Warstler Morgan Warstler
    12. June 2011 at 04:44

    Mike, I actually find it instructive that you don’t want to get into the discussion where there is nothing for you in Scott’s theory.

    Don’t you want to make absolutely sure that Scott is actually more like you, and there isn’t a giant confusion on your part?

    I can’t quote chapter and verse, but I don’t think Scott cares at all about disparity.

    He supports my idea of a Guaranteed Income where all the unemployed get their safety net cash guarantee from the government, and then their labor gets auctioned off by the government to the private market even at $1 per hour.

    Which is a structural solution to unemployment – one that largely blames government policy and does little or nothing for wealth re-distribution.

    —–

    Scott, this is what I mean about everyone listening to Uncle Milty because they KNEW where all his stuff pointed. They knew he hated government, his bona fides were strong enough that the conservatives would listen to him.

    And guys like Mike didn’t find much they liked about Milt – monetary would be their only consolation prize.

  172. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    12. June 2011 at 10:49

    ‘You guys are looking at the ways that people react to things such as gravity. I am looking at the way that things like gravity actually influence behavior.’

    MarkS, do you ever bother to think about the things you write?

  173. Gravatar of james in london james in london
    12. June 2011 at 11:39

    “If you think of the right as representing the interests of rentiers, of creditors who have claims from the past — bonds, loans, cash — as opposed to people actually trying to make a living through producing stuff.” Is this Lenin c.1917?

    “Deflation is hell for workers and business owners, but it’s heaven for creditors.” It is not heaven for creditors since their collateral values fall.

    However, Scott, you say you are a big saver, but you are realy a big investor. Savers are people who expect a zero-risk retun on their cash. It can’t be done, but it is best to call a spade a spade, and not a moral-hazard inducing “FDIC-insured deposit”

    Also, is it not at least possible that the political gridlock in the US that prevents any meaningful action on the fiscal deficits is one of the causes of the faltering confidence in your country and in your economy. Expectations that things will get worse before they get better can’t help investment intentions or growth.

  174. Gravatar of Mike Sandifer Mike Sandifer
    12. June 2011 at 11:58

    Morgan,

    As I understand it, any plan to deal with unemployment would be in the event that Fed policy either couldn’t work or wouldn’t be tried. Either way he may favor government intervention, which is really the most important point.

    Milton Friedman pushed a negative income tax as I understand it, so he was light years ahead of many conservatives today in terms of caring about the less fortunate. He also said that some of the New Deal programs were needed at the time.

    http://www.youtube.com/watch?v=_9DH07MBG_w

  175. Gravatar of Mike Sandifer Mike Sandifer
    12. June 2011 at 12:21

    Personally, I think those who think a significant portion of this country will continue to tolerate flat or falling wages and an effective dilution of ownership of the country’s wealth are dreaming. Public opinion is already turning against immigration and I’m at least hearing anti-free trade rumblings here and there. Unless something changes in the medium-to-long term at least, it’s easy to see this consensus that’s helped support relatively higher growth in the US versus other developed economies erode and perhaps collapse, with potentially very serious consequences for political stability and even democracy itself.

    Hopefully, we won’t have to learn the hard way that at least some government intervention to level the economic playing field is a political and economic stability tax that must be paid.

    I see no reason why efficiency gains that result from automation replacing labor, or jobs moving overseas should go to the asset owners and corporate management so disproportionately. To me, the whole point of producing more with less is to provide a higher quality of living for all, which in some cases means working less. I see nothing wrong with people working less for more benefits as we become more productive as a country.

  176. Gravatar of Mike Sandifer Mike Sandifer
    12. June 2011 at 12:52

    Here’s a short clip of Friedman on the negative income tax idea:

    http://www.youtube.com/watch?v=ValHdlHd6MU

    Of course, I hear some conservatives bash him today, calling him a socialist and even Keynesian.

  177. Gravatar of Scott Sumner Scott Sumner
    12. June 2011 at 13:44

    Mark, You said;

    “I very much understand your theory. And yes, it is a theory (and a bad one at that).
    You believe that the Fed doesn’t even need to actually create any fundamental change in the economy. All they need to to is change expectations permanently.”

    You claim to understand my theory, and then proceed to demonstrate that you don’t. The Fed can’t change expectations out of thin air, they must implement a more expansionary monetary policy at some point in order to change expectations.

    “As you may or may not know, there is no correlation between the monetary base and future economic growth, inflation or really anything else.”

    Nor would you expect a correlation, even if there is a causal relationship between money and output. Nick Rowe just did a post on this–I suggest you read it to learn some macro theory.

    You said:

    “Now, your little theory about expectations is interesting.”

    You do realize that my “little theory” that expectations drive NGDP is pretty much the standard theory in both NK and classical economics.

    We know from the response of TIPS spreads to QE2 rumors that market participants most certainly did change their inflation expectations in response to QE2. So your assumption is wrong. You may not pay attention, but plenty of other people do.

    Mike, I agree that QE2 “worked” in the sense that NGDP is slightly higher than if we hadn’t done QE2. But some of the rise of inflation was due to adverse supply shocks and global growth. I doubt that QE2 had a major impact on the economy. The Fed needed to do much more.

    I agree we have the same values. I’m skeptical of fiscal policy, but think cutting the employer share of payroll taxes might help offset wage stickiness.

    Bonnie, I agree on ethanol.

    more to come . . .

  178. Gravatar of Scott Sumner Scott Sumner
    12. June 2011 at 14:10

    Morgan, You said;

    “Scott, it seems the bet just needs to be big enough to make you want to drive Matty to answer at length. How much will take?”

    Let me first check with Matty to make sure I’ll win. Then make it $1,000,000. :)

    Sorry, but I can’t take this seriously.

    And tax cuts are fiscal policy, BTW.

    Mark, You said;

    “This is absurd. You can’t have all cost push inflation due to a change in expectations and claim that QE2 worked.”

    Are you saying that currency depreciation has zero impact on AD?

    Mike, Yes I favor modest income redistribution. I’m open to:

    1. Education vouchers for the poor.
    2. Subsidy of HSAs and catastrophic insurance for the poor.
    3. Progressive consumption tax.
    4. Some sort of wage subsidy for (adult) low income workers.
    5. Perhaps some disability insurance, but I’m not quite sure what form is best. In general I think private charity does best in making the tough calls about who is deserving. I have an open mind on this question.

    Overall I’d prefer a relatively low tax regime, but those are examples of redistribution I’d support. We should study Australia, which has a pretty egalitarian system despite fairly low taxes.

    Lucas, I like it. It looks much better than our current system. But I’d like to know more about why they go for the cumbersome retail sales tax that applies to foreign travel, and not a simpler VAT.

    James, I am confused, as those quotations aren’t from me. I agree that political gridlock in the US has hurt confidence somewhat, and wouldn’t rule out a modest negative effect on the economy. But I still think lack of AD is the big problem.

    Saving is saving regardless of whether you buy safe or risky assets.

    Note that even safe assets have low yields right now–there are negative real rates on 5 year TIPS. I did a post earlier pointing out that Fed policy doesn’t even help savers, despite the low inflation. With more robust growth, real interest rates would be higher.

  179. Gravatar of Morgan Warstler Morgan Warstler
    12. June 2011 at 14:36

    Tax cuts might be fiscal policy, but they are not and will never be fiscal stimulus.

    We’ve been over this Scott.

    Tax cuts mean the government thinks its best policy is to not tax. That’s simply admitting they don’t know bupkis, that’s not “fiscal stimulus” – indeed true fiscal stimulus, whereby the government actually spends money on anything, a bridge, a public employee, etc. likely never has a real stimulative effect.

    Expectations prove my point: When tax cuts happen people EXPECT LESS GOVERNMENT. When fiscal stimulus happens people expect MORE government.

    Mark, Uncle Milty’s negative income tax IS MY PLAN – expect mine is better because it uses the Internet to do things not possible in his day. He’d love mine because it forces all recipients to be productive in the private economy.

    And you COMPLETELY MISS the point of his thinking. A negative income tax means LESS GOVERNMENT – it means we FIRE public employees because all other forms of government aid CEASE TO EXIST. It’s just the ultimate in direct payments.

    Indeed he later renounced the idea because he meant it to END all other government aid programs, not an addition to them.

    My god, why do you people intentionally miss the MAIN IDEA behind people’s work? Scott just did the same thing with Mundell’s article in the WSJ.

    It reeks of silly political chatter – where one side insists there is much common ground with the opposition in order to appear reasonable.

    —-

    Scott, you don’t take it seriously because you are not a serious guy.

    When you are playing for real, you’ll go all in, you’ll worry about convincing the right wing that you have their back – and that means taking lefty scalps – not counting coup.

  180. Gravatar of Mike Sandifer Mike Sandifer
    12. June 2011 at 15:28

    Morgan,

    Maybe one day you’ll succeed in besting Friedman on compassionate fiscal policy, even by his own opinion, which I’m sure you’ll find a way to discover.

    And, surely you’ll finally teach Scott what he really believes and make him realize how important the way you’re framing the issues is and that he take that bet you mention. You should be the one to decide his priorities and teach him about economics, given your obvious expertise.

    Either that, or maybe you need to go talk to a professional and/or maybe get a girlfriend or wife.

  181. Gravatar of MarkS` MarkS`
    12. June 2011 at 17:14

    So Scott, you’re telling me that you substantially changed your behavior as a consumer due to the Fed’s announcements? You have to be kidding me if you honestly believe that….

    The only thing that changed during QE2 was market speculation and a massive surge in oil and gas prices. That was the only real substantive change in the economy during QE2 and it’s clear that it caused the economy to slow.

    You’re making the classic “QE2 needed to be larger or permanent to be effective” argument. Great, so you’re pushing for a policy that would have generated even MORE cost push inflation.

    You don’t even seem to understand what QE is, how it works or what it has done.

  182. Gravatar of Mike Sandifer Mike Sandifer
    12. June 2011 at 21:02

    To quote you Scott:

    “Mike, Yes I favor modest income redistribution. I’m open to:

    1. Education vouchers for the poor.
    2. Subsidy of HSAs and catastrophic insurance for the poor.
    3. Progressive consumption tax.
    4. Some sort of wage subsidy for (adult) low income workers.
    5. Perhaps some disability insurance, but I’m not quite sure what form is best. In general I think private charity does best in making the tough calls about who is deserving. I have an open mind on this question.

    Overall I’d prefer a relatively low tax regime, but those are examples of redistribution I’d support. We should study Australia, which has a pretty egalitarian system despite fairly low taxes.”

    I have no problem with any of that, as long as it works. We should eliminate corporate income taxes and payroll taxes. I think you agree with that as well. I would eliminate income taxes entirely for most, and I think you’ve said you’d eliminate them for everyone.

    So, we’re really not far apart.

  183. Gravatar of Cameron Cameron
    12. June 2011 at 23:10

    MarkS,

    “So Scott, you’re telling me that you substantially changed your behavior as a consumer due to the Fed’s announcements? You have to be kidding me if you honestly believe that….”

    Whether you or I changed our behavior as a result of QE is irrelevant. The question is : Did QE2 push those on margin between holding money and holding any other asset into those other assets? If so, it had an effect.

    I also throw a slightly modified question back to you : Do you substantially change your behavior as a consumer due to changes in the federal funds rate? I doubt it. But I’m sure you’ll agree that changes in the fed funds rate have a significant impact on the economy. Maybe you would argue that changes in the fed funds rate affect short term interest rates, but higher inflation (which you agree the fed can cause) will have the same effect on real rates.

    The other obvious benefit of inflation is that it lowers real wages and debts. Do you deny that sticky wages are the cause of unemployment? If so, then why the disequilibrium in the labor market? If not, then how is returning the the pre-recession trajectory of the price level not helpful?

  184. Gravatar of dilletaunted dilletaunted
    13. June 2011 at 01:19

    “Whether you or I changed our behavior as a result of QE is irrelevant. The question is : Did QE2 push those on margin between holding money and holding any other asset into those other assets? If so, it had an effect.”

    perhaps partially the point Mark is trying to make is that the behavioral changes caused by QE2 have not been beneficial for the actual economy. QE2 has clearly had a psychological effect on speculators and Bill Gross, but so what?

    “Maybe you would argue that changes in the fed funds rate affect short term interest rates, but higher inflation (which you agree the fed can cause) will have the same effect on real rates.”

    how does the fed cause higher inflation? are we still talking about the psychological mechanism?

    “Do you deny that sticky wages are the cause of unemployment? If so, then why the disequilibrium in the labor market?”

    i do, and many do. lack of aggregate demand, fear, etc.

  185. Gravatar of W. Peden W. Peden
    13. June 2011 at 04:20

    MarkS,

    “Great, so you’re pushing for a policy that would have generated even MORE cost push inflation.”

    Monetary policy causing cost-push inflation without raising aggregate demand? Oh dear…

  186. Gravatar of W. Peden W. Peden
    13. June 2011 at 04:43

    MarkS

    “We lend to customers when they walk in the door and are creditworthy.”

    As if the bank’s reserves, the public’s deposits and the public’s creditworthiness were three unrelated variables!

  187. Gravatar of Morgan Warstler Morgan Warstler
    13. June 2011 at 05:33

    Sandifer,

    “So, we’re really not far apart.”

    Oh yes you are.

    Here let me help you see the gaping hole between the list (which is nearly a carbon of mine btw) and your own.

    Scott’s list is the list of someone who thinks in terms of objective basics, once you can check off “has food, has education, has “some” healthcare, etc.” society’s and thus rich people’s obligations to the poor ENDS.

    It is not subjective, it doesn’t go on and on and on, and grow based on whatever the wealthy can afford to give up.

    Meaning DISPARITY is meaningless. Meaning, after those folks are granted the basics, what people like Sandifer thinks “works” is meaningless.

    In fact, the ONLY WAY people on the right will Scott the time of day is precisely because his policies are not really what you want them to be.

    ——

    Look mike, it gives me no joy to have to do this work, but Scott is not what he seems to you, and he’s almost clinically incapable of painting in contrasts with anyone who for any reason wants to see QE done right now.

    That why the only interesting thing about Scott’s position is AFTER QE has happened, we’ve gotten a good run at 5% NGDP, and you are still left wanting.

  188. Gravatar of MarkS MarkS
    13. June 2011 at 07:49

    Cameron,

    D nails it:

    “perhaps partially the point Mark is trying to make is that the behavioral changes caused by QE2 have not been beneficial for the actual economy. QE2 has clearly had a psychological effect on speculators and Bill Gross, but so what?”

    QE had a negative psychological effect on the economy. I don’t see how anyone can deny that at this point? Making QE permanent as Scott advocates would have merely increased the level of commodity price speculation.

    Peden,

    Loans create deposits. Again, no one here actually has any banking experience. It’s ridiculous that you even opine.

  189. Gravatar of Philo Philo
    13. June 2011 at 08:13

    You wrote: “I suppose banks tightened standards after the subprime fiasco, as they should have.” By ‘tightened standards’, do you mean that they increased the interest rates they were charging riskier borrowers, or that they stopped granting loans to riskier borrowers at *any* interest rate? If the latter, why would they behave this way? I suspect anti-usury laws; is that the explanation? Are anti-usury laws a factor in exacerbating the financial crisis?

  190. Gravatar of MarkS MarkS
    13. June 2011 at 08:42

    Philo,

    Scott and the gang here have no idea how banking actually works in the real world. They’re working out of textbooks. Let a real banker (me) tell you hot it works.

    Banks are always capital constrained. We are never reserve constrained. The amount of base money has very little and almost no impact on our actual banking operations. We only require reserves to settle overnight payments and meet the Fed’s requires reserve ratios. That’s all.

    We lend to anyone who is a creditworthy customer who walks into our bank. Given our capital position (which has deteriorated across the entire industry in recent years for obvious reasons) many banks are tightening their standards so “creditworthy” has become more difficult to come by. It has ABSOLUTELY NOTHING to do with base money, QE or anything the Fed does to the amount of reserves. NOTHING.

    Quasi-monetarists claim that money is tighter than it should be because the Fed is paying IOR or not expanding base money permanently. Well, that’s just not how the real world works. I am a credit operations manager at a rather large regional bank outside of NYC. I know how all of this works and I can tell you that Scott Sumner and the gang of commentators here defending this monetarist position are just flat out wrong.

    They quite literally do not understand how the US banking system operates. They’re just reading out of some old defunct textbook.

  191. Gravatar of Scott Sumner Scott Sumner
    13. June 2011 at 08:55

    Morgan, You can define words in whatever way you wish, but it doesn’t change the fact that tax cuts boost GDP, and hence are stimulus.

    Maek, You said;

    “You’re making the classic “QE2 needed to be larger or permanent to be effective” argument. Great, so you’re pushing for a policy that would have generated even MORE cost push inflation.”

    Monetary stimulus affects AD, not AS. And only a portion of the higher oil prices was due to QE2. When oil prices rise due to less supply (Libya) it hurts the economy. When prices rise because monetary stimulus raises AD, it doesn’t hurt the economy. Indeed oil prices fell sharply in late 2008 and early 2009 as AD collapsed around the world. Then it began rising, as the world economy recovered. Your cost push theory would predict exactly the opposite correlation.

    I made over a $100,000 as a result of QE2. Why is it so hard for you to believe that it might have affected my consumption? Do you think corporations invest more when stock prices are high? Do you think a weaker dollar helps exports? Do you think higher commodity prices tends to increase US production of commodities? I guess not.

    Mike, I’m glad we agree.

    Philo, I’m not expert on banking, but I believe that in general banks simply turn down highly risky pospects, rather than charge a high interest rate. If a highly risky prospect walks into a bank, they might charge some absurdly high rate, rather than turn down the loan request. But the higher the rate, the more like the loan will default. So it may be more prudent to simply reject the loan prospect. Perhaps Mark can explain this–he’s in banking.

  192. Gravatar of MarkS MarkS
    13. June 2011 at 09:02

    Scott,

    One thing is true from all of these conversations. You’re not an expert on banking (your words) yet you continue to discuss monetary operations and banking as if you are. It’s clear that you really have no idea what you’re talking about.

    The comment that you “made over a $100,000″ is laughable. No Scott, you made a nominal gain in your personal wealth. Big difference.

    These are frightening comments from someone who is supposedly well respected in this industry.

  193. Gravatar of Morgan Warstler Morgan Warstler
    13. June 2011 at 09:30

    Scott, you are the one obscuring discussion.

    Tax cuts stimulate. They are stimulative. Maybe they are a “stimulus”

    BUT, when DeKrugman et al speak of “fiscal stimulus” they mean something entirely different.

    What possible reason do you have to group two non-groupable things? Why confuse poor Sandifer and the rest of your readers?

    The measuring stick is not NGDP, the measuring stick is size of government.

    Increasing the size of government to increase NGDP is not acceptable.

  194. Gravatar of CA CA
    13. June 2011 at 10:20

    MarkS, you didn’t respond to this part.

    “Why is it so hard for you to believe that it might have affected my consumption? Do you think corporations invest more when stock prices are high? Do you think a weaker dollar helps exports? Do you think higher commodity prices tends to increase US production of commodities? I guess not.”

  195. Gravatar of dilletaunted dilletaunted
    13. June 2011 at 10:53

    “Why is it so hard for you to believe that it might have affected my consumption?”

    yes, but who are you? how many people have the luxury of this experience? are you part of the already overleveraged middle and working classes of america? the stock market wealth effect is the only monetarist transmission mechanism re: QE2, it’s psychological, and i think mark is correct to criticize it

    “Do you think corporations invest more when stock prices are high?”

    corporations tend to invest more (and hire more!) when demand is adequate

  196. Gravatar of dilletaunted dilletaunted
    13. June 2011 at 11:06

    “Scott, you are the one obscuring discussion.”

    tax cuts and government spending are both fiscal stimulus

  197. Gravatar of Cameron Cameron
    13. June 2011 at 11:11

    dilletaunted,

    “how does the fed cause higher inflation? are we still talking about the psychological mechanism?”

    The Fed has complete control of NGDP in the long run. By promising higher NGDP in the future they create higher AD and inflation today. In the same way that a large oil discovery today that won’t be brought to market for years still reduces the price of oil today, the promise of a larger supply of dollars in the future lowers the price of dollars today.

    “i do(deny sticky wages are the cause of unemployment), and many do. lack of aggregate demand, fear, etc.”

    Lack of aggregate demand and fear only create unemployment through sticky wages and prices. Otherwise wages will fall to reach the equilibrium level employment for any level of AD.

    MarkS

    Alright, forget market prices. How do you explain the improvement in intial claims, the unemployment rate, raw jobs numbers, retail sales, industrial production, automobile sales, and ISM data at the exact moment QE2 began to be anticipated and their deterioration again at the exact moment it was realized QE2 wasn’t going to be extended?

    It’s not just markets that support our view, it’s economic data as well.

  198. Gravatar of CA CA
    13. June 2011 at 11:19

    This post from Scott deals with many of these questions.

    http://www.themoneyillusion.com/?p=9133

  199. Gravatar of dilletaunted dilletaunted
    13. June 2011 at 11:24

    “The Fed has complete control of NGDP in the long run. By promising higher NGDP in the future they create higher AD and inflation today…the promise of a larger supply of dollars in the future lowers the price of dollars today.”

    yes, this is the monetarist position…i’m not sure who you’re thinking this will convince who’s not already in your camp…but anyways. the fed doesn’t have a way of actual changing the amount of financial assets held by the non-government sector. they can change the form those assets take, like in qe2, but how relevant is this

    “Lack of aggregate demand and fear only create unemployment through sticky wages and prices. Otherwise wages will fall to reach the equilibrium level employment for any level of AD.”

    there are economics in which there are no equilibria, but that’s perhaps beyond the scope. it suffices to say that sticky wages are not necessary for involuntary unemployment, no matter how emphatic you are in this claim

    “It’s not just markets that support our view, it’s economic data as well.”

    what doesn’t support your view is actual, relevant transmission methods

  200. Gravatar of dilletaunted dilletaunted
    13. June 2011 at 11:30

    @CA still no convincing transmission mechanism there. just the fed increasing base money and saying ‘look! look!’ there maybe some market goosing afterwards, but once again it’s psychological, and its relevance meh. ‘it’s all about expectations’ is what is boils down to, and quasi-monetarists revel in it. people like me (and maybe marks) don’t think that’s good enough. let’s see some actual changes!

  201. Gravatar of Cameron Cameron
    13. June 2011 at 11:46

    “the fed doesn’t have a way of actual changing the amount of financial assets held by the non-government sector.”

    If the fed credibly promised that they would increase nominal GDP tenfold by 2020 you wouldn’t want to hold less cash? This is a perfectly reasonable transmission mechanism.

    The rise in various asset prices associated with QE2 strongly suggests that people shifted from cash into other assets in response. This increased NGDP immediately.

    “there are economics in which there are no equilibria, but that’s perhaps beyond the scope. it suffices to say that sticky wages are not necessary for involuntary unemployment, no matter how emphatic you are in this claim”

    The evidence of wage stickiness and a negative correlation between real wages and production in the great depression is enormous. See: http://www.jstor.org/pss/2946674

    “what doesn’t support your view is actual, relevant transmission methods”

    I prefer a model that works in practice over one that works in theory any day. The opposite view highlights so much of what is wrong with economics.

  202. Gravatar of dilletaunted dilletaunted
    13. June 2011 at 11:56

    “If the fed credibly promised that they would increase nominal GDP tenfold by 2020 you wouldn’t want to hold less cash? This is a perfectly reasonable transmission mechanism.”

    a ‘credibly promised’ claim by people at working at the fed now about what they and there successors would like to do is not perfectly reasonable transmission mechanism. plus, they don’t really have a way of doing such a thing, besides bluster

    “The evidence of wage stickiness and a negative correlation between real wages and production in the great depression is enormous.”

    this isn’t a response to what i said, but i’m dropping it

    “I prefer a model that works in practice over one that works in theory any day. The opposite view highlights so much of what is wrong with economics.”

    i’m asking for the way the fed operationally increases money supply (above demand) in such a way. no theory necessary

  203. Gravatar of Cameron Cameron
    13. June 2011 at 12:24

    “a ‘credibly promised’ claim by people at working at the fed now about what they and there successors would like to do is not perfectly reasonable transmission mechanism. plus, they don’t really have a way of doing such a thing, besides bluster”

    Committing to a policy such that NGDP will reach a certain level (returning to trend versus returning to a 5% growth rate for example) is both possible and will have immediate effects. Whether you want to see it through a permanent increase in the monetary base or a lower trajectory of fed funds rates, it is certainly achievable (unless, as Scott says, we are expected to remain in a liquidity trap forever). There may be political problems, but those shouldn’t be the concerns of economists making policy recommendations.

    “this isn’t a response to what i said, but i’m dropping it”

    My point is that sticky wages did matter during the great depression and we have every reason to believe wages are stickier today than they were in the past. Again: Do you deny sticky wages are the cause of unemployment? If so, then how can aggregate demand cause unemployment? And is there any reason to believe this is the true cause over the observed rise in real wages?

    “i’m asking for the way the fed operationally increases money supply (above demand) in such a way. no theory necessary”

    I gave my explanation above, but unless you have an alternative explanation for the changes in asset prices and economic data, your denial of QE2′s success is weak. In all of history, there isn’t a single, clear example of monetary policy failing to increase AD, let alone having no effect or decreasing it!

  204. Gravatar of MarkS MarkS
    13. June 2011 at 12:56

    Cameron,

    Your argument doesn’t hold water. You’re still not explaining a credible transmission mechanism. Anyone who understands banking knows that base money matters little to the broader money supply as banks are never reserve constrained. So, if the Fed came out and said they were going to increase the based by 10X you’d get a whole bunch of people on Zero Hedge screaming about hyperinflation, but the response in the actual banking world would be zero. Zilch. Nada.

    Does all of this alter expectations because people don’t understand modern banking? Yes. People like Zero Hedge readers really did go out and change their portfolio allocations because they don’t understand the banking system. Did it change anything in the real economy? Not really aside from making a few million old rich guys like Scott Sumner believe that they can afford a new boat now.

  205. Gravatar of MarkS MarkS
    13. June 2011 at 13:04

    The more important conclusion is this though – a program like QE alters underlying economic activity very little. But it appears to have created a substantial rally in many markets. So the problem here is one of discounted cash flows. If the market is pricing in high expectations of future cash flows due to a Fed program that doesn’t actually generate that then the risk is that the markets will readjust lower in the coming months and the Scott Sumner’s of the world will wonder why they bought that new boat with the 100K they no longer have in their brokerage account.

  206. Gravatar of Larry Larry
    13. June 2011 at 13:05

    I’d like to offer this as a temptation to comment on recent events:

    http://www.zerohedge.com/article/exclusive-feds-600-billion-stealth-bailout-foreign-banks-continues-expense-domestic-economy-

  207. Gravatar of dilletaunted dilletaunted
    13. June 2011 at 13:09

    “Whether you want to see it through a permanent increase in the monetary base or a lower trajectory of fed funds rates, it is certainly achievable (unless, as Scott says, we are expected to remain in a liquidity trap forever).”

    this is what i was getting at. the first is not a relevant transmission mechanism. the size of the base does not change the money supply, and thus cannot effect inflation fundamentally. of course, scott sumner-esque monetarists believe that the increase in the number of reserves is good enough because it’s so big all of a sudden and gets people all excited. the interest rate mechanism is sloppy and has deflationary effects as well. if these are your methods towards a ‘credible’ policy, then you have work to do.

    on the effectiveness of qe2:

    http://pragcap.com/qe2s-failure-and-the-housing-market

    http://pragcap.com/apparently-qe2-is-disappointing

  208. Gravatar of MarkS MarkS
    13. June 2011 at 13:58

    Zero Hedge is a total idiot. That guy has no idea how banking works. He confuses capital with reserves and uses the money multiplier at multiple points in that piece to prove his point.

    In other words, you should really ignore the whole thing since it’s just totally flat out wrong.

    Zero Hedge has been crying about hyperinflation since the inception of his site. Has anyone been more wrong than those jokers?

  209. Gravatar of Morgan Warstler Morgan Warstler
    13. June 2011 at 14:02

    “We’ve always wondered who will buy Treasurys” after the Federal Reserve purchases the last of its $600 billion to end the second leg of its quantitative easing program later this month, Gross said. “It’s certainly not Pimco and it’s probably not the bond funds of the world.”

    http://www.cnbc.com/id/43378973

    taunted,

    “tax cuts and government spending are both fiscal stimulus”

    Uninteresting. Non-responsive.

    My message carries – Scott does not support government spending programs to increase NGDP.

    Tax cuts are not government spending. There’s nothing meaningful in your assertions otherwise.

    It serves no purpose in discussion to try and put anti-government nd pro-government policies under the same definitional umbrella.

    It is no smarter than insisting governments should marry people.

    here to help you!

  210. Gravatar of Morgan Warstler Morgan Warstler
    13. June 2011 at 14:03

    MarkS,

    ZeroHedge rocks. You are judged by whether you get that.

  211. Gravatar of Morgan Warstler Morgan Warstler
    13. June 2011 at 14:16

    “After bubbles burst there is no pent-up desire to invest. Instead there is a glut of capital caused by overinvestment during the period of confidence — vacant houses, malls without tenants and factories without customers.”

    http://www.washingtonpost.com/opinions/how-to-avoid-a-lost-decade/2011/06/12/AGjnG8RH_print.html

    It is always simply a problem of price, the folks sitting on hard assets STILL HAVE HOPE that their losses will be inflated away.

    What we need a is message from the Fed that home prices are going to STAY DOWN, so that everyone still holding on, rushes to market and eats it.

    That’s actually kind of interesting, what if the Fed announced that the right now housing prices are too high, guaranteed that if home prices do rise, they will aggressively raise rates until home prices fall.

    With singular focus on driving down housing prices with expectations HOW QUICKLY could they liquidate the market?

    What’s the maximum possible liquidation scenario?

  212. Gravatar of MarkS MarkS
    13. June 2011 at 14:21

    Morgan,

    Personally, I don’t care how you judge me. I work every day in banking operations and I know exactly how these things work. If you want to read the fiction at Zero Hedge then be my guest. I don’t particularly care. I presume you’ll hire a dentist to perform your brain surgery should you need it. Reading Zero Hedge is the logical equivalent. That site thrives on scaring people by spreading misinformation.

    You eat it up hook line and sinker. Good for you for falling for it. Now go click some of their ads because they’re not their to help you. They’re their to make money off you by scaring you. You might as well help their cause out even though it’s making you dumber in the process.

  213. Gravatar of MarkS MarkS
    13. June 2011 at 14:22

    THERE vs THEIR. Oops.

  214. Gravatar of Cameron Cameron
    13. June 2011 at 14:28

    MarkS,

    “Your argument doesn’t hold water. You’re still not explaining a credible transmission mechanism.”

    The Fed announces that instead of aiming for 5% NGDP growth a year it will try to return NGDP to its long term trend. This increases NGDP expectations 10 years out and reduces demand for cash as nominal yields for other assets rise but cash stays at 0%. Since people want to hold less cash, they spend it faster and V increases. Higher M*V = Higher P*Y.

    Another way to put it : changes in future M affect current V.

    Unless you believe monetary policy can never be effective under any scenario, this holds.

    “The more important conclusion is this though – a program like QE alters underlying economic activity very little.”

    Once again, economic data is completely inconsistent with this view. Even QE2 led to a mini boom in economic activity. (unless you have an alternative explanation; I’m listening) Can you give me one example where monetary policy was tried and failed to create higher NGDP expectations? (And no, Japan is not an example when the BOJ has both drastically reduced it’s balance sheet and raised interest rates every time inflation hits 0%. They don’t get inflation because they don’t want it.)

    Also, if you think markets react so inappropriately to monetary policy announcements (even though economic data clearly follows the markets…) you should be thrilled. Apparently there are enormous profits just sitting there waiting to be taken. I take it you’ll be short equities and commodities the next time the Fed steps in?

  215. Gravatar of Silas Barta Silas Barta
    13. June 2011 at 14:35

    Sorry I haven’t kept up, but it was going in circles anyway.

    A challenge though: can someone find *one* warm body who actually bases their business plans explicitly on NGDP? Because Scott_Sumner seems to think there’s a lot of such people out there…

  216. Gravatar of dilletaunted dilletaunted
    13. June 2011 at 14:38

    “It serves no purpose in discussion to try and put anti-government nd pro-government policies under the same definitional umbrella.”

    that’s just how things are defined. there are monetary and fiscal channels towards stabilizing AD. tax cuts are a fiscal channel

    “The Fed announces that instead of aiming for 5% NGDP growth a year it will try to return NGDP to its long term trend. This increases NGDP expectations 10 years out and reduces demand for cash as nominal yields for other assets rise but cash stays at 0%. Since people want to hold less cash, they spend it faster and V increases. Higher M*V = Higher P*Y.

    Another way to put it : changes in future M affect current V.”

    this is just monetarist dogma, though. all bow down before ngdp expectations ten years from now. this is really how you want to run economic policy?

    monetarists believe that M can be targeted in a reliable way. others don’t. monetarists don’t have a transmission mechanism except for fed-centered bluster

    “Once again, economic data is completely inconsistent with this view. Even QE2 led to a mini boom in economic activity. (unless you have an alternative explanation; I’m listening)”

    marks (i think) and i believe that qe2 has not changed any underlying economic factors. it’s only caused speculation. i guess this is a kind of economic activity

    “Can you give me one example where monetary policy was tried and failed to create higher NGDP expectations? (And no, Japan is not an example when the BOJ has both drastically reduced it’s balance sheet and raised interest rates every time inflation hits 0%. They don’t get inflation because they don’t want it.)”

    still you’re solution boils down to japan just saying it’s going to get super serious about creating inflation. you don’t have a transmission mechanism

    “Also, if you think markets react so inappropriately to monetary policy announcements (even though economic data clearly follows the markets…) you should be thrilled. Apparently there are enormous profits just sitting there waiting to be taken. I take it you’ll be short equities and commodities the next time the Fed steps in?”

    of course not. smart investors ride bubbles. what does this have to do with getting us out of a recession?

  217. Gravatar of Dustin Dustin
    13. June 2011 at 14:39

    Lost in the shuffle, I think, is the fact that QE (or at least QE as carried out by Ben & Co.) was always thought of as a ‘better than nothing’ policy. From what I can tell, people like Scott Sumner and David Beckworth don’t *really* want more QE. What they really want is a monetary policy that targets a specific value of NGDP. They want clear communication from the Fed of the specific target for NGDP.

    I really wish the Fed would do that. At the very least, I think it would settle certain debates about the effectiveness of monetary stimulus.

  218. Gravatar of dilletaunted dilletaunted
    13. June 2011 at 14:44

    ‘ “We’ve always wondered who will buy Treasurys” after the Federal Reserve purchases the last of its $600 billion to end the second leg of its quantitative easing program later this month, Gross said. “It’s certainly not Pimco and it’s probably not the bond funds of the world.” ‘

    i guarantee you within five years bill gross will have bonds. and i’m sure he has positive exposure somewhere else. he’s just talking his book.

  219. Gravatar of MarkS MarkS
    13. June 2011 at 14:45

    Cameron,

    You’re still not explaining a transmission mechanism. I used the ugly kid example earlier – that is, I want my kids to be beautiful, but telling them they are beautiful doesn’t result in them being beautiful. They have to actually do something. Face lift, wear make-up, whatever. The same thing applies in economics. When the Fed says they want 5% NGDP market participants don’t just start behaving differently. That’s just not how the real world works. QE has no transmission mechanism. Period. Your lack of an explanation makes that abundantly clear.

  220. Gravatar of MarkS MarkS
    13. June 2011 at 14:46

    And if you think that speculative behavior in markets justifies some Fed operation then you’re doing nothing more than apologizing for the Fed’s ponzi finance. In which case, you might want to brush up on your Minsky. Ponzi finance is a problem, not a solution.

  221. Gravatar of dilletaunted dilletaunted
    13. June 2011 at 14:54

    “I really wish the Fed would do that. At the very least, I think it would settle certain debates about the effectiveness of monetary stimulus.”

    how many elements are there in the potentially-targetable-by-monetarists set?

  222. Gravatar of W. Peden W. Peden
    13. June 2011 at 15:15

    MarkS,

    “Loans create deposits. Again, no one here actually has any banking experience. It’s ridiculous that you even opine.”

    That doesn’t address what I’m saying at all. If anything, it reinforces my point: loans, deposits and creditworth are not unrelated variables. A business that is creditworthy in a period of loose money may not be creditworthy in a period of tight money. Contra Kaldor, during a corporate liquidity squeeze a businessman can’t just talk to his banker and get a loan because bankers are the slaves of businessmen. So talking as if the line of causality is purely from creditworthiness to lending is astonishingly naive.

  223. Gravatar of W. Peden W. Peden
    13. June 2011 at 15:33

    MarkS,

    “You’re still not explaining a transmission mechanism. I used the ugly kid example earlier – that is, I want my kids to be beautiful, but telling them they are beautiful doesn’t result in them being beautiful. They have to actually do something. Face lift, wear make-up, whatever. The same thing applies in economics. When the Fed says they want 5% NGDP market participants don’t just start behaving differently. That’s just not how the real world works.”

    If I tell my girlfriend that we’re going out on a date tomorrow, she will start reacting today, because she now knows that I’m going to behave in a certain way. If you promise to give your kids plastic surgery, you will get (possibly unexpected!) responses today, not when they’re old enough for the said surgery. If the Federal government announced tomorrow a 15% hike in corporation tax in the next budget, corporations would begin reacting today, not budget day 2012. And if the Federal Reserve announced a policy that commits them to certain policies in the future, the reactions will begin TODAY, not when the future comes.

    If there’s one good thing that economists have generally got into their heads in the last 40 years, it’s that people react to announced changes in policy immediately, not when the said policy is implemented. People are not red balls: if I say I’m going to kick a red ball, it doesn’t move; if, heaven forbid, I say I’m going to kick a person, they are likely to move before I kick them!

  224. Gravatar of Dustin Dustin
    13. June 2011 at 15:34

    “how many elements are there in the potentially-targetable-by-monetarists set?”

    ————————————————————————————————————

    If the Fed set an explicit target for NGDP (at whatever, Sumner’s 5% or Woolsey’s 3%), and no matter what they did they couldn’t hit their target (i.e. they could not affect nominal growth), then that would seem to be strong evidence that the Quasi-Monetarists are wrong about monetary economics, and the Mechanics People (Post Keynesians, MMT-ers, and others) are right.

  225. Gravatar of Jim Glass Jim Glass
    13. June 2011 at 15:50

    John Cochrane doesn’t like QE2:
    ~~~~
    Now, of all the stories we’ve heard to explain our sluggish recovery, how plausible is this one:

    “Our big problem is the maturity structure of Treasury debt. If only those goofballs at Treasury had issued $600 billion more three-month bills instead of all these five-year notes, unemployment wouldn’t be so high. It’s a good thing the Fed can undo this tragic mistake.”

    That makes no sense.

  226. Gravatar of MarkS MarkS
    13. June 2011 at 16:04

    Peden,

    I work in lending ops for a large regional bank. I know exactly how this stuff works. Loans create deposits. Your idea that loans are contingent upon deposits is factually wrong. I never check deposits or reserves before making a loan. I check the creditworthiness of the customer and based on our capital position I approve the loan. The fact that loans creates deposits proves your statement wrong. Loans ARE independent of deposits.

    Your examples of expectations prove my point. If you tell your gfriend you are going to take her out to dinner then she alters her expectations. But you better damn well take her out to dinner or else she will be crushed and her happy feelings will turn into sad feelings. The Fed is promising take everyone out to dinner, but they don’t have the transmission mechanism to actually take us out to dinner. So, they’ve set the bar high for expectations without any intention of actually doing anything. They’re the classic bad boyfriend and the markets are now realizing that they’re not going to get that fancy dinner they were promised last year.

  227. Gravatar of dilletaunted dilletaunted
    13. June 2011 at 16:13

    @ dustin

    i was trying to be clever. but yeah it would be a test of the current batch of monetarists

  228. Gravatar of Cameron Cameron
    13. June 2011 at 16:28

    MarkS and dilletaunted,

    “marks (i think) and i believe that qe2 has not changed any underlying economic factors. it’s only caused speculation. i guess this is a kind of economic activity”

    As I said before: How do you explain the improvement in intial claims, the unemployment rate, raw jobs numbers, retail sales, industrial production, automobile sales, and ISM data at the exact moment QE2 began to be anticipated and their deterioration as soon as it was realized QE2 wasn’t going to be extended?

    You say QE2 didn’t affect the economy but until you address the obvious improvement in the economy that occured along with QE2, I don’t know how I could possibly convince you.

    “still you’re solution boils down to japan just saying it’s going to get super serious about creating inflation. ”

    No. The BOJ actually took actions to signal that it didn’t want inflation. If the BOJ reduced rates to 0%, doubled its balance sheet and never tightened in any way you might be right. But that’s not what happened. They have tightened, multiple times. That’s a fact.

    Again, give me an example of when monetary policy was tried and failed. You can’t because it’s never happened… but you insist this time is different… Why?

    “You’re still not explaining a transmission mechanism.”

    I’ve explained multiple times how a commitment of higher NGDP in the future can lead to higher NGDP today. In the same was as a huge find of oil would certainly lead to a decline in oil prices (despite having no immediate transmission mechanism) a commiment to print enough money to increase NGDP will lead to an immediate reduction in the demand for money. The “opportunity cost of holding cash effect” certainly exists, even if you think it’s minor. I don’t see how anyone could deny this.

    What do you think I am missing? You agree the fed can alter expectations (market expectations yes, but those expectations clearly can and did bleed into the real economy). I assume you agree that lower money demand increases NGDP. How is that not a transmission mechanism?

    As Silas said, this is going in circles. Unless you can get more specific in your criticism or you address my questions (which you haven’t) we may as well stop taking up comment space and let others judge what we’ve said.

  229. Gravatar of Jim Glass Jim Glass
    13. June 2011 at 17:15

    You’re still not explaining a transmission mechanism. I used the ugly kid example earlier – that is, I want my kids to be beautiful, but telling them they are beautiful doesn’t result in them being beautiful. They have to actually do something.

    Do you give them a reason to do something? A very motivating reason? Or not? That makes a difference.

    The same thing applies in economics. When the Fed says they want 5% NGDP market participants don’t just start behaving differently. That’s just not how the real world works. QE has no transmission mechanism. Period. Your lack of an explanation makes that abundantly clear.

    Mere Fed announcements of intention have been immediately moving financial markets for years, without the Fed actually doing much about them. Because participants don’t want to get skewered by what they know is coming.

    If you *know* the price of something you need to buy is going to go up, do you wait around doing nothing until after it goes up, pass on the opportunity to buy cheap, instead be the last one to buy dear, and lose out to all your competitors? Maybe be put out of business, be fired by your boss, whatever? Or do you buy as fast as you can upon getting the knowledge, to get the best possible price? Choose.

    Ever since the Fed regained its credibility by causing so much pain to its doubters during the Volcker years, it has been able to move rates by just announcing its intention to do so, often with little or no further action at all. Because when market participants are tied to a rate, and a move in the rate will hammer them, then as soon as they learn the rate is going to move they change their own positions accordingly PDQ — or else they get hammered.

    And when the Fed announces rates are going to move they *believe*, so they act right then. The Fed doesn’t have to do anything more than that other than act consistently with its stated intent, not contervene it. Rate movement on announcment before action (if any) is very well documented.

    Since I assume you agree rates affect the real economy, I assume you also will agree the Fed can affect the real economy by merely talking to its children. “Hey kids, move to get out of the way of the bus.” They move!

    As for NGDP, let’s say an ecomomy with 2% real GDP growth, operating about 12% under capacity, with many unused resources, is expecting only 1.86% inflation and falling. That’s under 4% NGDP growth.

    Now let’s say the Fed announces “NGDP will grow 6% annually from now on for seven years. Come hell or high water!” — and you *believe* it. What does this mean?

    It means that people could get 6% inflation instead of only 1.86% — and on present course they are going to get 4% inflation, twice what they believed yesterday. Their money is going to lose value a lot faster than they expected. And *nobody doubts* that the Fed can create 6% NGDP, it can create Zimbabwean NGDP if it wants.

    What do they do? They get rid of part of your money accordingly, trading it for goods and services they believe won’t lose value. With so many productive goods and services being un-utilized, this brings some of them back into the economy, and GDP growth accelerates.

    The short-term aggregate supply line is flat with major unused resources available, so the ratio of GDP growth acceleration to inflation acceleration is high — it may even be more than 100%, inflation could fall to under 1.86% with GDP growth rising to take all the rest.

    E.g., during the recovery years of the Great Depression money supply grew 10% annually, GDP grew 8%, prices were flat to modestly falling.

    To sum, your analogy is bogus. Telling your children they are beautiful won’t make them beautiful, and the Fed telling the economy it is growing at 6% won’t make it grow 6%.

    But *motivating* your children by telling them they will get the nice carrot or the big nasty stick, depending on whether they clean up their mess, likely *will* get them to move, eh? And it is the same with the Fed and the economy. That’s the transmission mechanism. The very same the Fed has at all other times, no different.

  230. Gravatar of MarkS MarkS
    13. June 2011 at 18:42

    Cameron,

    All of the things you point as evidence of QE2 “working” were “working” beforehand. Everything you mention had been in expansion or improving for 2 years straight. There’s zero evidence showing that QE2 caused anything to improve. All of the trends you discuss were intact long before QE2 started.

    You keep saying that the Fed needs to target NGDP and comparing it to an oil find. That’s not even close to the same thing. An oil find is a real fundamental economic change. The Fed saying they want 5% NGDP is the equivalent of Exxon saying they want to find a gazillion barrels of oil. It doesn’t matter until they actually find the oil. Just like Fed policy doesn’t matter unless they do something that actually alters the economy. You keep claiming that QE does something real for the economy, but you can’t actually point it out or explain to anyone how it actually works.

  231. Gravatar of dilletaunted dilletaunted
    13. June 2011 at 20:32

    “I’ve explained multiple times how a commitment of higher NGDP in the future can lead to higher NGDP today.”

    ‘commitment’ is part of the fudge here. what is the fed going to do to make it stick? the fed is changing personnel and approaches all the time. the fed being super serious in its statements is not a relevant transmission mechanism, sorry. it’s a rain dance.

    “…a commiment to print enough money to increase NGDP will lead to an immediate reduction in the demand for money.”

    yes, but there is no ‘money printing’ (at least the way you mean it) going on here. the fed cannot change the net financial assets of the non-government sector. so no transmission mechanism, just scary rain dances

    “No. The BOJ actually took actions to signal that it didn’t want inflation. If the BOJ reduced rates to 0%, doubled its balance sheet and never tightened in any way you might be right. But that’s not what happened. They have tightened, multiple times. That’s a fact.”

    that’s a lot of reserves out there to be considered tightening. ‘loose’ isn’t the right word. but japan’s malaise is the result of fiscal mistakes, not monetary. richard koo is right

    “As I said before: How do you explain the improvement in intial claims, the unemployment rate, raw jobs numbers, retail sales, industrial production, automobile sales, and ISM data at the exact moment QE2 began to be anticipated and their deterioration as soon as it was realized QE2 wasn’t going to be extended?

    You say QE2 didn’t affect the economy but until you address the obvious improvement in the economy that occurred along with QE2, I don’t know how I could possibly convince you.”

    i don’t believe it because qe2 has no real way of improving economic conditions. so you’ve got correlation down stone-cold, i’ll give you that. but there’s plenty of other stuff going on in the world that can cause these fluctuations (note, i don’t have the time to actually verify your empirical claims here, but to me, it’s moot)

    “And *nobody doubts* that the Fed can create 6% NGDP, it can create Zimbabwean NGDP if it wants.”

    ha. i doubt this very, very much.

    “What do they do? They get rid of part of your money accordingly, trading it for goods and services they believe won’t lose value. With so many productive goods and services being un-utilized, this brings some of them back into the economy, and GDP growth accelerates.”

    money goes into commodities and input goods, causing our delightful margin squeeze. and then its also not going into real estate. or something. it’s so messy, and so ugly. let’s find something better than this

    a couple of general points:

    i don’t deny that interest rates have effects on the real economy. but the effects are blunt and often ambiguous in their inflationary vs. deflationary effects. there are relevant transmission mechanisms from changing interest rates and growth patterns. also, qe2 failed to budge rates at the long end of the curve

    i do deny that qe2 had any relevant transmission mechanism. you take a bunch of interest-bearing financial assets out of the economy and replace them with non-interest-bearing financial assets (ignoring IOR). and then hope that the portfolio shifts following this somehow counteract this lost income and spur growth? ick

  232. Gravatar of dilletaunted dilletaunted
    13. June 2011 at 20:44

    actually, one way the fed might be able to create Zimbabwean levels of inflation:

    http://www.theonion.com/articles/us-economy-grinds-to-halt-as-nation-realizes-money,2912/

  233. Gravatar of Jason Odegaard Jason Odegaard
    14. June 2011 at 03:52

    @MarkS
    A quick question. Earlier you said “banks never lend reserves”. I am curious, what do banks lend?

  234. Gravatar of Scott Sumner Scott Sumner
    14. June 2011 at 06:59

    MarkS, You said:

    “One thing is true from all of these conversations. You’re not an expert on banking (your words) yet you continue to discuss monetary operations and banking as if you are. It’s clear that you really have no idea what you’re talking about.
    The comment that you “made over a $100,000″ is laughable. No Scott, you made a nominal gain in your personal wealth. Big difference.
    These are frightening comments from someone who is supposedly well respected in this industry.”

    1. It’s true I know little about banking, but then you have clearly shown that you know little about monetary policy. And here’s the problem; this is a blog on monetary policy, not banking.

    2. The figure I cited for wealth gains was real, in nominal terms my gain was even larger.

    3. Well respected in what industry?

    Morgan, You should be attacking Krugman, not me. When discussing the events of 2009 Krugman says taxes are not fiscal policy, when discussing 1937 he says taxes are fiscal policy.

    dilletaunted; You responded to me:

    ““Do you think corporations invest more when stock prices are high?”
    corporations tend to invest more (and hire more!) when demand is adequate”

    Both are true. When the cost of building new corporate assets is lower than their value on Wall Street, then more corporate assets are built.

    You said:

    “yes, this is the monetarist position…i’m not sure who you’re thinking this will convince who’s not already in your camp…but anyways.”

    It’s also the New Keynesian position.

    You said;

    “The fed doesn’t have a way of actual changing the amount of financial assets held by the non-government sector. they can change the form those assets take, like in qe2, but how relevant is this”

    Yes, but they can change the supply of base money, and at positive interest rates base money is not a very close substitute for other financial assets.

    Larry, Is there a specific part that you want me to comment on?

    dilletaunted; You said;

    “the size of the base does not change the money supply, and thus cannot effect inflation fundamentally.”

    So the billion-fold increase in the German monetary base in the early 1920s had no impact on German inflation? Interesting.

    Increases in the base don’t directly increase the aggregates. Instead, they directly increase NGDP, and that (usually) leads to a greater demand for bank deposits. So it’s really a question of semantics.

    You said;

    “Scott sumner-esque monetarists believe that the increase in the number of reserves is good enough because it’s so big all of a sudden and gets people all excited.”

    That’s not really my view. I don’t think QE is a good policy, rather I think it’s better than nothing. It’s a policy that in theory might increase inflation expectations, and in the case of QE2 it did increase inflation expectations. I favor targeting NGDP futures prices, which is a totally different policy, and one that doesn’t require “credibility.”

    Morgan, Yes, I do not support government spending programs to increase GDP.

    Silas, You said:

    “A challenge though: can someone find *one* warm body who actually bases their business plans explicitly on NGDP?”

    How about the auto companies? They are very interested in forecasting “the economy” when deciding on production schedules for the upcoming year. When people talk about confidence in “the economy” they are actually referring to something pretty close to NGDP. And when they talk about “aggregate demand” they are basically talking about NGDP. Do you think the auto companies don’t care about aggregate demand in 2012 when making current investment decisions? If their forecasters told them aggregate demand in the US would fall 15% in 2012, or rise 15% in 2012, you think auto companies would be uninterested in that information?

    Dustin, Exactly.

    Jim Glass, Cochrane is flat out wrong on the response of financial markets. He ignores the impact on expectations.

    dilletaunted; You said;

    “‘commitment’ is part of the fudge here. what is the fed going to do to make it stick?”

    In all of human history there is no example of a fiat money central bank that tried to create inflation, and failed. That’s the least of our problems.

    You said:

    “ha. i doubt this very, very much.”

    So if the Fed bought up the entire stock of world assets with non-interest-bearing pictures of Ben Franklin ($100s) and Ben Bernanke personally owned all the wealth of the world, the value of those Federal Reserve Notes would not decrease. Then let’s do it!!!

    Jason, You said:

    “@MarkS
    A quick question. Earlier you said “banks never lend reserves”. I am curious, what do banks lend?”

    Mark’s never heard of the fed funds market. He’s never heard of someone borrowing money from a bank and then withdrawing the funds as cash. Of withdrawing the funds and re-depositing them in another bank. But we need to give him a break, as he’s only a banker.

  235. Gravatar of johnleemk johnleemk
    14. June 2011 at 08:15

    I really wonder what all the people claiming that the Fed can no more create money than Exxon can create oil believe running the printing presses does.

  236. Gravatar of dilletaunted dilletaunted
    14. June 2011 at 09:25

    “I really wonder what all the people claiming that the Fed can no more create money than Exxon can create oil believe running the printing presses does.”

    the Fed cannot create new financial assets, it can only exchange one form of financial asset for another, for example, it can purchase tsy’s and replace them with currency, etc. the maturity and return on the financial asset may change, but it’s still a financial asset. when people generally talk about ‘money printing’, they think of helicopter drops, etc., when new money is forced unilaterally upon the non-government sector. but this is a fiscal operation, not a monetary one, and thus the fed cannot do it

  237. Gravatar of dilletaunted dilletaunted
    14. June 2011 at 09:41

    “It’s also the New Keynesian position.”

    yeah, both camps are kind of lame.

    “So the billion-fold increase in the German monetary base in the early 1920s had no impact on German inflation? Interesting.”

    yawn. the billion-fold increase was a response to hyperinflationary pressures. the money-printing always comes afterward in hyperinflationary environments

    “Increases in the base don’t directly increase the aggregates. Instead, they directly increase NGDP, and that (usually) leads to a greater demand for bank deposits. So it’s really a question of semantics.”

    through expectations, of course. this isn’t ‘directly’ it’s roundabout indirectly with a couple of sleights of hand. it’s still just ‘look at all these reserves! better adjust expectations!” no way to run economic policy, in my view

    “In all of human history there is no example of a fiat money central bank that tried to create inflation, and failed. That’s the least of our problems.”

    once again, not a good way to actually control a sophisticated modern economy, in my view. we should have dropped threatening rain dances as a method of behavioral modifications a few centuries back

    “So if the Fed bought up the entire stock of world assets with non-interest-bearing pictures of Ben Franklin ($100s) and Ben Bernanke personally owned all the wealth of the world, the value of those Federal Reserve Notes would not decrease. Then let’s do it!!!”

    only if bernanke was wearing one of those krazy beer can hats, with a propeller

    ““@MarkS
    A quick question. Earlier you said “banks never lend reserves”. I am curious, what do banks lend?””

    bank lending creates deposits. that is, banks are never reserve-constrained in their lending, at least by the quantity of reserves they hold. they create money out of thin air, and do so by comparing the bank’s cost of capital and the credit-worthiness of the borrower. if the bank can earn a return, the loan is created, along with a deposit. reserves are an afterthought.

    “It’s a policy that in theory might increase inflation expectations, and in the case of QE2 it did increase inflation expectations.”

    and drove people into commodities, created margin squeezes, etc.

  238. Gravatar of dilletaunted dilletaunted
    14. June 2011 at 09:44

    “It’s true I know little about banking, but then you have clearly shown that you know little about monetary policy. And here’s the problem; this is a blog on monetary policy, not banking.”

    here’s scott admitting that the deposit multiplier story is bogus. thank you! hopefully we can expunge it from the undergraduate textbooks

    he’s of course only left himself with the expectations channel, so it’s rain dances from now on

  239. Gravatar of Scott Sumner Scott Sumner
    14. June 2011 at 09:55

    dilletaunted, Here’s your reasoning process:

    Me: GM can make cars.
    dilletaunted: That’s not true!! All GM does is convert one type of matter into another. It’s not true that they can create matter.
    Me: Um, I said they can create cars, not create matter.

    The point being that money and financial assets are not the same. If you don’t agree, try spending some stocks or bonds next time you go shopping at WalMart.

    Sorry, but I have trouble taking seriously a person who claims the Fed could print up some cash, buy all the wealth in the universe, and the value of that cash would not decline. Please don’t tell me that you’ve been drinking the Post-Keynesian koolaid.

    You said;

    “bank lending creates deposits. that is, banks are never reserve-constrained in their lending, at least by the quantity of reserves they hold. they create money out of thin air, and do so by comparing the bank’s cost of capital and the credit-worthiness of the borrower. if the bank can earn a return, the loan is created, along with a deposit. reserves are an afterthought.”

    Perfect example of the fallacy of composition. An individual bank can get reserves from other banks. The private economy as a whole cannot create reserves (actually base money). Macro is about aggregates, not the options of individual players. I can always get cash from an ATM if I want to. But if I create cash I get arrested for counterfeiting.

  240. Gravatar of MarkS MarkS
    14. June 2011 at 11:07

    Scott,

    Understanding monetary policy requires a deep understanding of modern banking. Since you claim to not understand one there is no reason why we should expect you to understand the other. Hence, your nonsensical comments here.

    You’ve proven that you don’t understand banking at all. Therefore, your readers should be highly skeptical of anything you write regarding banking.

    You’re pretending to be an expert on something when you lack the very most basic understanding of the thing upon which it is entirely based – THE BANKING SYSTEM!

    But don’t take it from me. You’re the one who admitted that you don’t understand banking….

  241. Gravatar of Morgan Warstler Morgan Warstler
    14. June 2011 at 11:51

    Cochrane has two standouts:

    “We are in danger of inflation for fiscal, not monetary reasons. If investors lose faith the U.S. will fix its long-run budget problems, they will try to sell government debt of all maturities. Rates will rise and stagflation will break out no matter what the Fed does.”

    And of course, my own concern with Scott:

    “Moreover, QE2 distracts us from the real microeconomic, tax, and regulatory barriers to growth. Unemployment isn’t high because the maturity structure of U.S. government debt is a bit too long, nor from any lack of “liquidity” in a banking system with $1.5 trillion extra reserves.”

    ATTENTION: would everyone please take note, Sumner does NOT support government spending (what liberals call fiscal stimulus) as stimulus, and he does support tax cuts.

    Jesus Christ it is hard to get anything done here – please Scott GET DISQUS, I will have it installed for you.

    ——

    This is WHY economists don’t get paid attention too by voters, the fact that anyone would argue with me using really bad terminology that pretends tax cuts are spending screams of liberals cloaking their bullshit in more bullshit.

    —–

    Another note: there is nothing in Scott’s agenda for liberals.

    1. They have to give up government spending as a form of stimulus – the Fed neutralizes all government spending by doing less monetary.

    2. They get locked down to a growth target, and the human element (the Fed) gets removed from the equation.

    —-

    As far as transmission mechanism goes – the Fed buys stuff, its off the market, that unspent capital has to go look around – apparently at commodities.

  242. Gravatar of Dustin Dustin
    14. June 2011 at 12:19

    http://rortybomb.wordpress.com/2011/06/14/interview-with-joe-gagnon-on-quantitative-easing-its-criticisms-and-the-argument-for-qe3/

    “Interview with Joe Gagnon on Quantitative Easing, its Criticisms and the Argument for QE3.”

  243. Gravatar of anon anon
    14. June 2011 at 13:04

    “[Cochrane:] We are in danger of inflation for fiscal, not monetary reasons. If investors lose faith … they will try to sell government debt of all maturities. … Rates will rise and stagflation will break out no matter what the Fed does.”

    This seems off to me, although we might see a cost-push squeeze, and _then_ the Fed + govt. would face hard tradeoffs between keeping measured inflation low and boosting AD.

    “Moreover, QE2 distracts us from the real microeconomic, tax, and regulatory barriers to growth.”

    This is way off. Precisely _because_ current growth is way below potential, it makes sense to stabilize actual growth via monetary/fiscal policy, _then_ we can seriously worry about long-run factors.

    “ATTENTION: would everyone please take note, Sumner does NOT support government spending (what liberals call fiscal stimulus) as stimulus, and he does support tax cuts.”

    Investment subsidies are better than broad-based tax cuts for demand-side stimulus. This was shown in a recent paper by Greg Mankiw, and I guess Scott would agree.

  244. Gravatar of Philo Philo
    14. June 2011 at 14:13

    @MarkS–

    You wrote: “We lend to anyone who is a creditworthy customer who walks into our bank. Given our capital position (which has deteriorated across the entire industry in recent years for obvious reasons) many banks are tightening their standards so ‘creditworthy’ has become more difficult to come by.” Why would a bank respond to capital constraints by simply cutting off the riskier lenders, rather than by raising the rates it charged across the whole range of risk levels? Even if a few banks decided to narrow their focus to blue-chip borrowers, wouldn’t others re-specialize in serving riskier ones (absent anti-usury laws)?

    Your answer suggests that the U.S. banking industry *as a whole* has lost capital in recent years. Is this really true? If existing banks have lost capital, would not new banks arise (unless there are serious barriers to entry), or would not non-bank financial institutions take up the slack from the lost lending by banks? In short, is it really harder for a somewhat risky small business to get a loan now than it was three or four years ago?

    I apologize for the ignorance these questions reveal; and, as Scott says, “this is a blog on monetary policy, not banking.” But I think the two are related *somehow*.

  245. Gravatar of dilletaunted dilletaunted
    14. June 2011 at 15:08

    “Perfect example of the fallacy of composition. An individual bank can get reserves from other banks. The private economy as a whole cannot create reserves (actually base money). Macro is about aggregates, not the options of individual players. I can always get cash from an ATM if I want to. But if I create cash I get arrested for counterfeiting.”

    whoa there scott, the banks can always get reserves at the fed’s discount window. so no, there is no fallacy of composition in what i said there, i’m not sure what you meant about creating stuff out of thin air, they certainly don’t create reserves out of thin air. this is basic stuff. but it is banking stuff, so who cares

    “The point being that money and financial assets are not the same. If you don’t agree, try spending some stocks. or bonds next time you go shopping at WalMart.”

    currency (i assume this what you are calling ‘money’ here; you should get more specific in what forms of it you’re talking about) differs from other financial assets in maturity, return etc. if you’re talking about treasury bonds, turning these into cash is easy, and the repo market basically eliminates any fallacy of composition issues here. go around and ask people if they think they are constrained from buying a corvette because they have a tsy instead of currency.

    the bottom line is, why are these people saving, scott? is it because they are stuck with illiquid financial assets? it certainly wasn’t the banks with their treasuries. qe1 i think was generally a success (as they were stuck with illiquid assets), at least in halting deflation, but qe2 was a joke and in fact operationally deflationary.

    “Sorry, but I have trouble taking seriously a person who claims the Fed could print up some cash, buy all the wealth in the universe, and the value of that cash would not decline. Please don’t tell me that you’ve been drinking the Post-Keynesian koolaid.”

    hmm…perhaps i was being coy here. i would stress that there is a difference between inflation and hyperinflation. maybe such ridiculous actions would cause inflation? you’re also taking a ton of interest income out of the economy, so that’s deflationary. but i could probably concede this point.

    a question for you: what can the fed legally purchase from the non-government sector? or just link me a list somewhere

  246. Gravatar of W. Peden W. Peden
    14. June 2011 at 15:58

    “I work in lending ops for a large regional bank. I know exactly how this stuff works. Loans create deposits. Your idea that loans are contingent upon deposits is factually wrong. I never check deposits or reserves before making a loan. I check the creditworthiness of the customer and based on our capital position I approve the loan. The fact that loans creates deposits proves your statement wrong. Loans ARE independent of deposits.”

    I agree that loans create deposits. Let’s see where we actually disagree-

    1: The creditworthiness of a potential borrower is related to his collateral, which is related to his wealth.

    2: A bank deposit is a form of wealth.

    3: All loans create deposits, but not all deposits are created by loans.

    So loans, deposits and creditworthiness are not independent of each other, because the quantity of deposits affects creditworthiness, creditworithess influences the creation of loans and loans influences the quantity of deposits.

    Are we together so far?

    “Your examples of expectations prove my point. If you tell your gfriend you are going to take her out to dinner then she alters her expectations. But you better damn well take her out to dinner or else she will be crushed and her happy feelings will turn into sad feelings. The Fed is promising take everyone out to dinner, but they don’t have the transmission mechanism to actually take us out to dinner. So, they’ve set the bar high for expectations without any intention of actually doing anything. They’re the classic bad boyfriend and the markets are now realizing that they’re not going to get that fancy dinner they were promised last year.”

    Look at broad money aggregates and AD. They already had the date.

  247. Gravatar of Jim Glass Jim Glass
    14. June 2011 at 16:02

    You keep saying that the Fed needs to target NGDP and comparing it to an oil find. That’s not even close to the same thing. An oil find is a real fundamental economic change. The Fed saying they want 5% NGDP is the equivalent of Exxon saying they want to find a gazillion barrels of oil.

    No, it’s not. The Fed increasing NGDP growth *is* a real fundamental economic change, and the Fed announcing it will do so is no different than an oil company announcing it has made a major oil find. Market participants affected by the real economic change react accordingly immediately.

    “And *nobody doubts* that the Fed can create 6% NGDP, it can create Zimbabwean NGDP if it wants.”

    ha. i doubt this very, very much.

    Ah! So this whole exercise of claiming “there is no transmission mechanism” reduces entirely to you claiming: The markets don’t believe there is any risk that the Fed can increase inflation by a few points, because *you* deny that the Fed can increase inflation.

    Ha! That’s an amusing take. If a bit ego-centric, considering all the dire warnings about in the market right now about how the Fed might increase inflation if it is not careful.

    :-)

    But I’m glad we’ve reached the bottom line here.

    Understanding monetary policy requires a deep understanding of modern banking.

    Maybe, but it also requires at least some understanding of monetary policy, for sure. Too bad, that.

  248. Gravatar of Morgan Warstler Morgan Warstler
    14. June 2011 at 16:53

    anon, cite please.

    unlike say AG subsidies, targeted investment subsidies are tax cuts. BTW, grover norquist is wrong on this one.

    when the government spends money on public works – that is fiscal stimulus. when they hire more public employees – that’s fiscal stimulus.

    when the government agrees to collect less revenue for whatever reason that is a tax cut.

    Subsidy (and I’m AGAINST subsidies) still PROVIDES CHOICE to the private market.

    With fiscal stimulus, the private market has no choice except to choose to work less or put up with it, the money will be taken from them and spent by the government.

    Maybe this will help: the government subsidizing the post office is fiscal stimulus, even though you’d be tempted to call it subsidized incentives. Because even if LL Bean stops mailing catalogs, the money will still be spent to keep the PO afloat.

    and…

    “This is way off. Precisely _because_ current growth is way below potential, it makes sense to stabilize actual growth via monetary/fiscal policy, _then_ we can seriously worry about long-run factors.”

    I actually WANT this to be the case, which is why I’m so adamant Scott either shit or get off the pot. he either has to take to crushing any hopes of the liberals gaining from his agenda, and preach the gospel of “fuck the unemployed” when we hit the target and stay there – OR ELSE the right will pay no attention to him.

    The upside is indeed controlling for a variable, so we can stop paying attention to monetary – remove the fed, use a computer to go after a price level and stick to it – and the right would go along.

    But since, we’re two years into Scott still having liberals confused he has something for them – we have to say that continued discussions about QE without KNOWING THE PUNCHLINE “fuck unemployment, that’s the government’s fault” is wasting time.

    better to liquidate the SOB, and teach Scott a lesson in learning to play politics.

    taunted,

    The Fed bought all kinds of shit from non-government agencies. They took junk as collateral.

    And why do you keep saying the Fed can’t create money out of thin air?

  249. Gravatar of dilletaunted dilletaunted
    14. June 2011 at 17:07

    “The Fed increasing NGDP growth *is* a real fundamental economic change, and the Fed announcing it will do so is no different than an oil company announcing it has made a major oil find.”

    unless it’s lying, the oil company has *actual physical oil* that it will soon be distributing to buyers. the fed has nothing similar to this, as it can’t distribute inflation

    “Ah! So this whole exercise of claiming “there is no transmission mechanism” reduces entirely to you claiming: The markets don’t believe there is any risk that the Fed can increase inflation by a few points, because *you* deny that the Fed can increase inflation.”

    i’m not sure i understand this. the point concerned Zimbabwean levels of inflation. this is a unique animal…

    perhaps ‘transmission mechanism’ is too fudgy of a word. how about this: there is no operational (mechanical?) way for the fed to create inflation. it can certainly say threatening things, do wacky rain dances, etc., and get a rise out of the markets, cause speculation and various price appreciations. once again, this seems like a poor way of controlling a complex, modern economy

    “Look at broad money aggregates and AD. They already had the date.”

    http://pragcap.com/the-exploding-u-s-money-supply-myth

  250. Gravatar of dilletaunted dilletaunted
    14. June 2011 at 17:11

    “And why do you keep saying the Fed can’t create money out of thin air?”

    the fed can only swap assets. maybe we’re talking about the same thing, but when people use the term ‘printing money’ they are usually thinking of unilateral helicopter drops, which is a fiscal operation

    “The Fed bought all kinds of shit from non-government agencies. They took junk as collateral.”

    yeah i was just wondering if there was a limit on what the fed can purchase out of the private sector. can it buy equity?

  251. Gravatar of W. Peden W. Peden
    14. June 2011 at 17:40

    dilletaunted,

    To quote from that article-

    “But what about M2? Isn’t it also exploding higher now? Not really.”

    http://www.shadowstats.com/charts/monetary-base-money-supply

    Glad we’re all in agreement then. Since mid-2010, the decline in broad money aggregates has reversed as the US has gone from basically being in deflation in mid-2010 (taking into account the Boskin factor in CPI) to not being in deflation.

    With a very simplistic (and quite possibly wrong) analysis, we can also infer that the announcement and implementation of QE2 boosted broad money aggregates, but nowhere near enough to create hyperinflation or even high inflation. I would even be surprised if US inflation rises above 4% on the flawed CPI measure.

    A date then, but nothing that her parents need worry about.

  252. Gravatar of Jason Odegaard Jason Odegaard
    14. June 2011 at 18:48

    @dilletaunted
    Yet, deposits don’t always end up in the bank that creates the loans. Thus reserves are an afterthought, but that doesn’t mean they are entirely unimportant.

    @MarkS
    I do not see how IOR has *no* effect on lending, though at the current rate the effect is probably small. If the Fed would pay 2% on excess reserves held at the Fed, would that not increase the interest rate bank customers would end up paying? Wouldn’t that affect lending?

    And doesn’t the Fed funds rate affect lending?

  253. Gravatar of dirk dirk
    14. June 2011 at 19:44

    Scott,

    Completely off topic, but I view you as the go-to guy for everything monetary these days (my apologies). I’ve been arguing with the anti-Fed conspiracy theory wing of the Mises acolytes lately — who believe the Rothchild’s still control all the central banks or something — and they keep bringing up how member banks get a 6% annual dividend payment on their shares, as if that’s proof the Fed is privately run by some small cabal of bankers from history immemorial. I perused the Fed’s website and was surprised to read that member banks do indeed receive a 6% return on their shareholder capital.

    Is there any good reason for that? It may be a trivial matter in the scheme of things, but the conspiracy theorists are arming themselves with it. Right now, in this low rate environment, it doesn’t seem to make any sense to give banks a 6% automatic return on capital, despite how small a percentage of their overall capital it might be on. It reminds me of the part in the Koran which reads: The price of a camel shall be X; The price of a servant shall be Y, without any concept that prices may legitimately need to change over time.

    Has any serious economist addressed this 6% interest Fed member banks get paid regardless of real world interest rates? Or is it one of those things that exists just to keep the crackpots and conspiracy theorists intrigued?

  254. Gravatar of Larry Larry
    14. June 2011 at 23:45

    I’ve been worried about leakage re US monetary policy. To the extent that the US is the global money supply, does the Fed have to target global NGDP futures?

    If QE2 went entirely to foreign banks, did we grow US MV?

    And while I instinctively accept EMH, which implies that ending QE2 is no big, I still don’t understand how we’ll find buyers for the 70% of US debt that the Fed was absorbing without substantial, contractionary rate increases.

    China is out. PIMCO is out. MM funds appear to prefer Greek sovereign debt. Who’s in?

  255. Gravatar of johnleemk johnleemk
    14. June 2011 at 23:58

    Let’s assume this “printing money just converts one type of asset to another” piddle is true. What happens when the Fed starts handing out crisp, new bank notes on the streets of all the major cities in the US? Still no inflation I suppose?

  256. Gravatar of Britmouse Britmouse
    15. June 2011 at 02:30

    http://www.statistics.gov.uk/pdfdir/lmsuk0611.pdf

    A timely boost to the UK employment figures in 11Q1 (+80K net new jobs; strongest quarterly growth for a decade), along with the strong NGDP number. Coincidences, eh? Private sector added 520K jobs over the last 4Qs, public sector lost a mere 14K.

    Wage inflation is still stuck <2% which will give a sufficient excuse for the BoE to avoid rate hikes for another few months.

    I hate to get all optimistic, but, a few more quarters like this… wow. Ed Balls will be toast. Labour will be toast. The Triumphant Return of the "Treasury View" to British politics.

  257. Gravatar of anon anon
    15. June 2011 at 03:51

    Morgan, check [1], which links Mankiw’s paper. Nick Rowe also has a related post on WCI.

    Why do you care so much about “what’s in it for liberals”, anyway? Sumner’s preferred policies may take deficit spending off the table as an AD-boosting policy, but they also remove the rationale for broad-based, short-term tax cuts.

    In my view, we should simply advocate for the best policy, and let policymakers play tug-o-war on the remaining issues, such as the long-run amount of regulation or government spending/redistribution. Consider Singapore vs. the Scandinavian countries as contrasting examples: both are careful to preserve incentives to long-run growth, yet they have very different levels of taxation/redistribution.

  258. Gravatar of Philo Philo
    15. June 2011 at 04:50

    (Of course, I meant: “. . . by simply cutting off the riskier *borrowers*.”)

  259. Gravatar of anon anon
    15. June 2011 at 05:38

    Fixed first link in my previous comment. Sorry for the inconvenience.

  260. Gravatar of W. Peden W. Peden
    15. June 2011 at 05:48

    johnleemk,

    Then American economists apparently define the act (a helicopter drop) as fiscal policy. Or something like that; the more I read about American monetary economics, the more I realise that Friedman probably was onto something when he said that British monetarists aren’t REAL monetarists. Congdon, Pepper, Sayers et al* were quantity theorists, anti-Keynesian and believed in targeting monetary aggregates, but they weren’t American monetarists. Friedman’s testimony to the Treasury in the early 1980s is an example of this difference, which can be roughly summarised like so-

    1. Whatever validity the money multiplier may have in the US, it has no application to the UK economy. The monetary base, in the British banking system, adjusts to NGDP, not vice versa. It is a backward-looking indicator, not a forward-looking indicator, as Nigel Lawson found out in the late 1980s when he targeted M0 and ended up ignoring a classic monetary boom. For this reason, British monetarists almost all focused on broad money and had very little interest in narrow money. Monetarists in the City never took M0 seriously.

    2. Perhaps because of institutional differences, British monetarists were interested in the central bank rate and the different ways financing of government debt, while American monetarists were interested in open-market operations and reserve requirements in a way that has little application to the UK economy.

    3. American monetarists tended to strictly demarcate fiscal and monetary policy. There was never, to my knowledge, an American book like Congdon’s “Debt Threat”. Until 1997, the British Treasury was essentially in control of both monetary and fiscal policy, so the co-ordination of both was natural though not universal e.g. monetary policy and fiscal policy played discordant tunes in 1974-1975.

    4. British monetarists were more willing to allow for alterations of monetary policy in response to extreme exchange rate movements, presumably because the UK economy is more vulnerable in this respect than the US economy.

    5. American monetarists were interested in reserve requirements. Insofar as British monetarists were interested in requirements, they were interested in cash requirements, because these are the important requirements in the UK banking system.

    This is probably why MarkS assumed I believed in the money multiplier. It probably also explains why Charles Goodhart, who has Post-Keynesian leanings, likes British monetarism but not American monetarism.

    * as opposed to narrow money folk like Alan Walters who erroneously transplanted American concepts like the money multiplier into the UK economy.

  261. Gravatar of W. Peden W. Peden
    15. June 2011 at 05:52

    anon,

    I agree. The revolution will be complete when (to paraphrase Nick Rowe) we think in these terms:

    Monetary policy: targets NGDP and therefore the control of inflation in the long run.

    Fiscal policy: targets the capital structure through taxes, public spending.

    Labour market policy: targets unemployment in the long run.

    This is as opposed to the bad old days of Neo-Keynesianism in the 1960s and 1970s-

    Monetary policy: targets the capital structure by adjusting interest rates.

    Fiscal policy: targets unemployment through expansion.

    Labour market policy: targets inflation through incomes policies.

  262. Gravatar of W. Peden W. Peden
    15. June 2011 at 05:54

    Britmouse,

    If the long-awaited end to supply-side problems finally comes (and especially if we get QE2UK) then I think that the Treasury View is indeed making a comeback. I would very much like that, because we could work out what is true and false in economics by looking at what Larry “If they succeed, everything I know about economics is wrong” Summers believes…

  263. Gravatar of Morgan Warstler Morgan Warstler
    15. June 2011 at 10:48

    anon, because I’m concerned about three steps later in game. The basics I’ve taken from almost two years here.

    1. Scott gives liberals nothing. If they adopt him, they are giving up “fiscal stimulus” (because it will be neutered by the Fed – ie the fed would have done more QE if Obama would stfu about stimulus and shovel ready jobs). If Scott could prove this, he’d win a Nobel – liberals giving up Fiscal would be a HUGE gain for humanity.

    2. If all Scott is going to get is Fiscal Stimulus, he just wants tax cuts.

    3. OK, so Scott’s plan is essentially Uncle Milty’s – let the fed be run by a computer. Have a level target of NGDP with the least possible deviation from 5% on a continued go forward basis. Now there is no human element, no political element, expectations are LOCKED. For all intents and purposes, monetary policy as a lever, as a variable is done.

    4. SO, what happens when we run the 5% machine for year and unemployment is 8.5%? Now we KNOW the government’s policies (taxes, pending, epa, labor, etc.) ARE TO BLAME.

    Assume the machine is running, and Obama starts spending more and more debt. He’s keeping prices and labor costs from falling as technology means it to happen, he’s creating inflation – and since the machine won’t allow the NGDP to grow over 5%, it starts driving up rates like nobodies business. Any government debt, now much get rolled over at super high levels

    Now assume instead, that the next President does everything he can to gut public employees, automates everything in government, intentionally tries to drive down costs at every possible opportunity – the machine drives rates into the ground, government debt costs go down.

    In Scott’s model, the government has very good reasons to become lean, mean, and pay below private market rates on everything they buy on everyone they employ – just like they used to.

  264. Gravatar of Jeff Jeff
    15. June 2011 at 12:21

    Scott,

    I wonder if you’ve seen Jeffrey Hummel’s paper
    Ben Bernanke versus Milton Friedman. It’s pretty good, and you’ll especially like the part about how the Fed, rather than injecting money in late 2007 and the first half of 2008, instead engaged only in redirecting the existing money to the financial markets that seemed to be in the worst shape.

    Of course, those markets were in bad shape mostly because the kind of lending they were doing (borrowing short and lending long on shaky collateral) is unsound. A general injection of money via open market operations (not paying interest on reserves, of course) would have let the invisible hand shut down the bad lending while not destroying the economy.

  265. Gravatar of W. Peden W. Peden
    15. June 2011 at 14:19

    This is worth reading. I particularly like the section on “socialist fiscalism”-

    http://ritwikpriya.blogspot.com/2010/01/macro-cube-1.html

  266. Gravatar of Morgan Warstler Morgan Warstler
    15. June 2011 at 15:07

    Jeff, niiiiiiiice.

  267. Gravatar of Jim Glass Jim Glass
    15. June 2011 at 16:05

    SF Fed describes 1961′s “Operation Twist” as precursor to QE.

  268. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    15. June 2011 at 16:33

    Thanks Jim, but I don’t think Mark S is gonna like:

    ‘We estimate the effects of Operation Twist using a high-frequency event-study methodology measuring the one- or two-day response of Treasury yields to major unanticipated announcements regarding Operation Twist. The rationale for this approach is that forward-looking financial markets should quickly incorporate all information from a public announcement shortly after the announcement is made. Moreover, it is intuitively reasonable that financial markets would not leave large profitable trading opportunities unexploited for more than a few hours, let alone one or two days. Jones et al. (1998) and Fleming and Remolona (1999) study the response of Treasury yields to major macroeconomic announcements and find that the yields quickly incorporate information from the announcements with no evidence of over- or under-reaction on the announcement date’

  269. Gravatar of Scott Sumner Scott Sumner
    15. June 2011 at 18:51

    MarkS, You said:

    “Understanding monetary policy requires a deep understanding of modern banking.”

    Not at all. The Fed controls the supply of base money. They merely need to adjust the supply until NGDP growth expectations are on target. This works fine even if a country doesn’t have a banking system.

    Morgan, He’s wrong about inflation.

    Dustin, Thanks. I henceforth refer all skeptics of QE2 to Gagnon, I’m sick of discussing it.

    anon, I’m not a fan of investment subsidies, unless they take the form of abolishing the corporate income tax.

    Philo, I my view the problem in the economy is not lack of lending, it’s lack of nominal spending. If the demand were there, companies would certainly supply the goods, and they’d be able to finance their production. If some banks are short of capital, they’d borrow from others.

    dilletaunted; You said;

    “whoa there scott, the banks can always get reserves at the fed’s discount window.”

    The Fed decides how much to lend out the discount window. During normal times it’s almost nothing, as they use various procedures to discourage discount loans. Normally discount loans are less than 1% of the base. Yes, discount loans increased sharply in the crisis, but that’s because the Fed wanted it to happen. They decide the amount of discount loans, by adjusting the rate and by moral suasion. They could close the discount window and do policy solely with OMOs, and nothing fundamental would change. But in that case there’d obviously be a fallacy of composition. So there’s 99% of a fallacy of composition, because the amount of DLs is normally trivial.

    For all intents and purposes the Fed decides on the size of the base.

    You said:

    “currency (i assume this what you are calling ‘money’ here; you should get more specific in what forms of it you’re talking about) differs from other financial assets in maturity, return etc. if you’re talking about treasury bonds, turning these into cash is easy, and the repo market basically eliminates any fallacy of composition issues here. go around and ask people if they think they are constrained from buying a corvette because they have a tsy instead of currency.
    the bottom line is, why are these people saving, scott?”

    You are confusing saving and the hoarding of money, two unrelated concepts. I am not claiming that recessions are caused by people saving and not spending, that’s a Keynesian fallacy. They are caused by money demand rising relative to money supply. Hence your corvette example is irrelevant. Read Nick Rowe, he has lots of good posts on this topic.

    You said;

    “hmm…perhaps i was being coy here. i would stress that there is a difference between inflation and hyperinflation. maybe such ridiculous actions would cause inflation? you’re also taking a ton of interest income out of the economy, so that’s deflationary. but i could probably concede this point.
    a question for you: what can the fed legally purchase from the non-government sector? or just link me a list somewhere”

    The Fed has made it very clear (in this crisis) they they can do whatever the hell they want. They’ve bought up all sorts of garbage. But there’s so much government and quasi- government debt around the world that the Fed would never have to buy up private debt. Currency demand is less than a trillion, and reserve demand is tiny with a negative IOR. So you could make the currency stock rise 50 fold just buying up government debt. If that isn’t hyperinflation, what is? But I’m not calling for hyperinflation, just 5% NGDP growth. Your concession reminds me of the old joke (GB Shaw?)

    Shaw: Would you sleep with me for a million pounds?
    Elegant lady: I suppose so.
    Shaw: Would you sleep with me for 10 pounds?
    Elegant lady: What kind of woman do you think I am!!
    Shaw: We’ve already established that, now we’re just haggling over the price.

    If you concede money creation causes inflation, it’s game over.

    Dirk, Obviously I think the conspiracy types are nuts, but I’d like to see the Fed cut all ties to the banking sector.

    BTW, I still think the tight money of 2008 hurt the banks badly.

    Larry, I agree we shouldn’t end QE2, but don’t agree that we need to focus on world NGDP. Each country has its own currency and needs to use it to control its own NGDP. (obviously excluding the euro region, which faces a collective decision.) Dollars overseas are mostly hoarded, not used in transactions, so they don’t have much effect on foreign GDPs.

    Britmouse, Interesting. As in the US, the jobs numbers seem better than the GDP numbers in Q1. Perhaps GDP was weak because of output declines in highly capital intensive industries. I plan a post when I return after July 4.

    W. Peden, I like that three part division for policy. Was that in a Nick Rowe post?

    Jeff, Yes, I read Hummel’s paper a while ago–I think he had some good points.

    W. Peden, I like that cube as well. I guess I’m in with Fisher and Woodford–strange bedfellows.

    Jim Glass. But Operation Twist wasn’t really aimed at stimulus, if I’m not mistaken. Or at least not as directly. They certainly weren’t trying to create higher inflation.

    Patrick, Yes, I use the Fleming and Remolona study in my classes–it’s very good.

  270. Gravatar of Jim Glass Jim Glass
    15. June 2011 at 19:01

    But Operation Twist wasn’t really aimed at stimulus…

    Stimulus wasn’t its goal — but it was intended to reduce long rates while leaving short rates unchanged, and the writer says it succeeded.

    He takes this as supoort for the effectiveness of QE as it works in much the same way with the same effect, even if the motivation is different.

  271. Gravatar of Scott Sumner Scott Sumner
    15. June 2011 at 19:16

    Jim, I know that the Keynesians think it works the same way, but I don’t agree. I think it works by raisng the future expected money supply.

  272. Gravatar of Jim Glass Jim Glass
    15. June 2011 at 20:16

    Yes, but a big point in the Twist story is that the markets reacted very swiftly to the Fed’s announcements of intent — with “highly statistically significant results” — just as with QE2. It explicitly edorses the result of QE. And isn’t any argument endorsing QE3 a welcome one?

  273. Gravatar of Jim Glass Jim Glass
    15. June 2011 at 21:57

    “The Fed increasing NGDP growth *is* a real fundamental economic change, and the Fed announcing it will do so is no different than an oil company announcing it has made a major oil find.”

    the oil company has *actual physical oil* that it will soon be distributing to buyers. the fed has nothing similar to this, as it can’t distribute inflation

    You’re saying a shift in inflation/deflation isn’t a real economic change, which changes the value of assets and investments, etc., and to which market participants respond?

    And central banks can’t “distribute” inflation? Well, when it *is* distributed, who do you think does distribute it?

    “Ah! So this whole exercise of claiming “there is no transmission mechanism” reduces entirely to you claiming: The markets don’t believe there is any risk that the Fed can increase inflation by a few points, because *you* deny that the Fed can increase inflation.”

    i’m not sure i understand this. the point concerned Zimbabwean levels of inflation. this is a unique animal

    The point was moving from a current 4% NGDP to 6% NGDP, which results in underutilized assets being brought into economic use via the mechanism described earler (multiple times). If the Fed can produce Zimbabwean-level inflation it certainly can produce less, such as 6% NGDP.

    perhaps ‘transmission mechanism’ is too fudgy of a word. how about this: there is no operational (mechanical?) way for the fed to create inflation.

    Ah, there we have it again. The Fed just can’t create inflation. That is your entire argument. You do realize this is a distinctly minority view, I’m sure.

    Curious, is it only now that it can’t create inflation or has it always been so? Can the Fed reduce inflation? Somehow the 10-year expectation now is down to 1.73%.

    the fed can only swap assets.

    Yet that is all it has ever been able to do. In the process, has it never been able create money or inflation?

  274. Gravatar of W. Peden W. Peden
    16. June 2011 at 05:25

    Prof. Sumner,

    It was in a Nick Rowe comment on a blog that I saw a while back and it stuck with me. It neatly summarises the change in policy since the 1960s/1970s, though we are now I believe going back to a world where fiscal policy is regarded as the determinant (perhaps even the sole determinant, apart from the Dreaded ATMs) of employment/unemployment.

  275. Gravatar of David Pearson David Pearson
    16. June 2011 at 07:06

    “I think it works by raisng the future expected money supply.”

    If you think future money supply will be higher, would you buy assets with inelastic supply and demand? Of course. Which is why it is a mystery why the Fed claims it had little impact on commodities prices. The “China demand” story fails to explain how the Shanghai index could stagnate for two years if real China demand was unexpectedly strong. This is especially true when one considers the correlation between China gdp and commodities demand (in other words, a positive commodity demand surprise correlates with a positive rgdp surprise). Moreover, the real equity discount rate in China has been stable — real interest rates are still quite low. So why haven’t Chinese equities reacted to these “surprises”?

    So yes, the Fed has created inflation expectations through expectations of commodity and import price pass-through. The mechanism for this, however, is largely denied by the Fed (they also deny much impacting the dollar!). Therefore, the Fed has no explanation, that I can think of, for why QE2 raised inflation expectations. Was it through shelter price expectations? Forecasts of pass-through of nominal wage increases? Both of these are highly doubtful. What is left?

  276. Gravatar of W. Peden W. Peden
    16. June 2011 at 10:19

    My favourite person in the world, Ed Balls, calls for an emergency VAT cut-

    http://www.bbc.co.uk/news/uk-politics-13787108

    - despite this policy failing the last time it was tried-

    http://news.bbc.co.uk/1/hi/business/7878669.stm

    http://www.guardian.co.uk/business/2009/aug/26/vat-cut-ineffective

    Balls could have called for QE2UK, but why would he do that when QE2UK would boost inflation rather than demand? ;)

  277. Gravatar of Britmouse Britmouse
    16. June 2011 at 12:27

    @W. Peden. “despite this policy failing”… to get Labour re-elected – you missed a bit.

  278. Gravatar of W. Peden W. Peden
    16. June 2011 at 13:11

    Britmouse,

    As far as I’m aware, the studies of the actualy effectiveness of the VAT cut in boosting demand in 2009 suggested that it had a minor impact.

    I suppose one could argue that the purpose of it was to get Labour re-elected and therefore label it as a failure on that basis, but that’s not the sense of ‘failure’ which I meant. For one thing, getting Labour into a position of electability in 2010 is a lot to ask from any single temporary tax cut.

  279. Gravatar of Britmouse Britmouse
    16. June 2011 at 13:25

    @W. Peden, apologies, I was being glib… I presume that ’05+ Labour fiscal policy is aimed at electoral success only, so should be judged against that benchmark; any economic effects would be considered unexpected side-effects. There were, what, 6 months of continued NGDP contraction after the Dec’08 VAT drop, right?

  280. Gravatar of Gabe Gabe
    16. June 2011 at 13:45

    “Scott- why does the fed pay the member banks 6% on shareholder capital?”

    “Dirk, Obviously I think the conspiracy types are nuts, but I’d like to see the Fed cut all ties to the banking sector.”

    You think “conspiracy-types are nuts”, but you have no explanation for why the banks get paid 6% of “shareholder capital” and you have no idea how much shareholder capital each bank has?

    Are the shareholder capital numbers a secret? if so then that is a conspiracy.

    Don’t hold your breath on the Fed cutting all ties with the banks ….lol! I may be nuts but at least I’m not naive.

  281. Gravatar of W. Peden W. Peden
    16. June 2011 at 13:49

    Britmouse,

    I thought it was close to 10 months, since RGDP didn’t stop contracting until Q4 2009. I remember consumer and retail reports consistently noting the lack of an observable effect from the VAT cut back in 2009.

    I agree on Labour’s fiscal policy, though I’d go back to around 2002 as the key date. In that year, public sector borrowing began to become very expansionary (“investing” in public services and all that spin) and we had the movement from an RPI target to a more forgiving CPI target, ensuring accomodative monetary policy for the expansion in public services. From 2002 onwards, we were running public sector deficits after over a decade of continuous expansion. (That also, incidentally, marks the time when public sector productivity began to go into a nosedive and private sector job growth became pitiful considering RGDP growth.)

    My narrative of that period is this: Brown thought that, after two terms, Blair would give up Number 10. He took the stance of being “like Blair but more left-wing, though not in a socialist way” and built up friendships in the public sector with big spending increases, while blocking the reforms that were supposed to accompany them according to Labour’s 2001 manifesto.

    When Blair decided to hang on (and on) and economic growth kept debt as a percentage of GDP respectable, Brown’s plan began to get extended. Reforms kept getting blocked (remember that “trust school” idea the Blairties had?) and public spending kept shooting up. In 2007, Brown nearly went to the country and tinkered with the idea from 2008-2010, such that we had about three years of pre-election panic and profligacy even apart from the economic crisis, stimulus and nationalisation programme.

    I think we both agree that there was a shift of Labour from trying to be the “party of prudence” with lots of neo-Gladstonian rules and posturing about fiscal neutrality, to being a party of unprecedented profligacy contained only by the independence of the BoE. However, I think that 2002 was the key date, not 2005, and for some reason I’ve just written a long mini-essay on this trivial point.

  282. Gravatar of Britmouse Britmouse
    16. June 2011 at 14:31

    @W. Peden, I will buy 2002. These discussions are part of why I love this blog so much, I hope Prof Sumner will indulge us.
    I just read Balls’ speech. How does he get away with this? It’s worse than doublespeak, it’s just lying. A drop in VAT will “put money directly in people’s pockets”. Yeah, find me a price index which went down in 2009, Ed. And the thing about how shrinking the deficit will not shrink the deficit again. If this man ever gets near the Treasury I will emigrate.

  283. Gravatar of CA CA
    16. June 2011 at 16:04

    Brad DeLong on more QE.

    http://delong.typepad.com/sdj/2011/06/should-we-do-another-round-of-quantitative-easing-debate-with-jim-grant.html

  284. Gravatar of Morgan Warstler Morgan Warstler
    16. June 2011 at 17:08

    Man o’ man, was that video great or what???

    http://online.wsj.com/video/the-market-debate-is-it-time-for-qe3/0D7BB646-82DF-4F18-A571-8937D35A14A8.html

    ——

    Ya know this really gets down to brass tacks – when DeKrugman has to sit in front of Grant, he flies the flag of “Milton Friedman! Milton Friedman!”

    But it is a god damn lie, and he is a god damn liar.

    To be honest he would have to ADOPT the complete Friedman package of smaller government, and oh yeah use monetary policy to keep things stable.

    He hates Milton Friedman and surely as he hates Scott Sumner – the difference is Uncle Milty would call DeKrugman out and piss all over his head.

    And Scott won’t get down in the dirt and crush him.

  285. Gravatar of Morgan Warstler Morgan Warstler
    16. June 2011 at 17:19

    It’s just soooooo perfect:

    “And I found what I could gauge of Jim Grant’s worldview depressing as well. He seemed to be selling rentier-populist ressentiment. Grant’s world is full of “takers”–and the Federal Reserve is helping them. And the biggest takers in Jim Grant’s mind are the hedge fund operators of Greenwich, Connecticut. Why are they the biggest takers? Because they can borrow cheap, at low interest rates, and put the money they borrow to work making fortunes. If only the Federal Reserve would shrink the money stock and raise interest rates! Then the hedge funds would have to pay healthy interest rates for their cash! Then the profits would flow to the truly worthy: the rentier coupon-clippers now suffering with their one basis point yields.”

    Dekrugman can eat it.

    The “rentier” class he speaks of – OWN THIS COUNTRY – they are the SMB guys who run every small town across America.

    They vote GOP, they create jobs, they are the best this country has to offer, they are what this country is about.

    And the only choice DeKrugam has now is to figure out how to serve up the Greenwich crowd on a silver platter to the SMB crowd, and wait patiently for the natural wealth distribution to occur.

    Because the simple fact is: NO ONE who DeKrugman claims to help owns their house. None of them have a drop of equity they will lose. Manhattan loses. And the houses can’t go away, the wealthy SMB guys in every town in America are ready willing in able to swoop in and buy it all up for pennies on the dollar.

    And what does DeKrugman get? cheaper rents for the people he claims to carer about.

    It’s enough of a consolation prize, he needs to make lemon-aid.

  286. Gravatar of Liberal Roman Liberal Roman
    16. June 2011 at 20:30

    Where are you Scott?? Greg Mankiw has turned against QE.

    http://gregmankiw.blogspot.com/2011/06/look-at-qe2.html

    I think you have counted your chickens before they hatched. We were far, far too optimistic in thinking that the success of QE2 would change anyone’s mind.

    The amazing thing is that I would have thought people would have noticed the temporary uptick in economic activity after QE2 and argued that it was just coincidence or maybe it was just one sample point. Nope. They are not even acknowledging the uptick and the subsequent downturn.

    COME BACK SCOTT!!…On the other hand, I am having too much fun making money shorting this market. Why don’t you stay away until Greece defaults because of overly tight monetary policy?

  287. Gravatar of Jim Glass Jim Glass
    16. June 2011 at 21:52

    The Fed is considering an explicit inflation target, says Bloomberg.

  288. Gravatar of Morgan Warstler Morgan Warstler
    16. June 2011 at 22:48

    1. How much more is gas costing the average family?

    2. Why don’t you think that alone is enough to slow the economy down – the way we see it right now.

  289. Gravatar of W. Peden W. Peden
    16. June 2011 at 23:13

    Britmouse,

    Ed Balls perhaps has the “Lawson factor”: he knows enough about economics to think that he knows a LOT about economics. There are occasional moments of perceptiveness e.g. that the government’s cuts programme would begin having effects on AD immediately because people have forward-looking expectations, but they are selective and rare.

    The best policymakers are not people like Lawson or Balls, but open-minded amateurs (usually lawyers) who are ready and willing to listen to advice.

    (By the way, RPI fell in 2009 as a year, but I don’t think it fell Dec 2008-on-Dec 2009 and anyway that fall was due to the housing market. CPI rose in 2009 and that’s the price index that would be impacted by a VAT cut, if any.)

  290. Gravatar of Britmouse Britmouse
    17. June 2011 at 01:15

    @W. Peden. Fair points. On price indices, OK, you found one, but yes, housing/mortgage effect – RPIX did not fall. The media seems to be very quiet about VAT today, so, I guess even they do not buy it.

  291. Gravatar of W. Peden W. Peden
    17. June 2011 at 01:54

    Britmouse,

    Good point on RPIX.

    I have no problem with a “plan B”; it’s just that I would rather see any sustained problems dealt with by QE2UK, not giving up the country’s fiscal credibility.

  292. Gravatar of Gabe Gabe
    17. June 2011 at 07:26

    This whole economy is non-sense on stilts. I agree the economy will be a disaster if the Fed doesn’t continue to monetize the debt. Nobody would want the toxic US govt debt unless they had faith the US government will monetize when push comes to shove.

    However, it seems that many here think that things will be all good if we just have the Fed engage in endless monetization! “Extend and pretend”…is that a chapter in the keynes-friedman bible that you guys worship?

  293. Gravatar of Dustin Dustin
    17. June 2011 at 08:24

    “However, it seems that many here think that things will be all good if we just have the Fed engage in endless monetization! ”

    ——————————————————————————————–

    If you think that anybody on the quasi-monetarist side is okay the Fed doing anything ‘endlessly’, then you haven’t been paying attention.

    From the FAQ: It is not about being smart, it’s about setting specific goals and promising to do whatever one can to meet those goals.

    Right? The goal is a specific target for NGDP. Establish the goal and do what’s necessary to meet it. The goal isn’t -1% NGDP. The goal isn’t +15% NGDP. Or +35,000%NGDP.

    The Sumner goal is 5%. Woolsey would like to see 3%.

    It’s all about establishing the goal and shooting for it. It’s never about doing anything ‘endlessly’.

  294. Gravatar of Scott Sumner Scott Sumner
    17. June 2011 at 08:52

    Jim Glass, Yes, any persuasive argument is useful. And thanks for the inflation expectation data.

    W. Peden, Nick should do a post on that.

    David, You said;

    “If you think future money supply will be higher, would you buy assets with inelastic supply and demand? Of course. Which is why it is a mystery why the Fed claims it had little impact on commodities prices.”

    I was talking about the long run, at which times relative prices are not affected. But let’s accept your assumption that we are looking at short run affects. In that case I’d argue it reflects both cyclicality of the product and the elasticity. I’m sure the Fed would acknowledge that QE had some affect on commodity prices, but the major correlation for commodity prices is with developing country industrial production, not US monetary policy.

    I don’t follow your comment on China. There is no doubt that commodities are closely correlated with developing country IP. The data is overwhelmingly persuasive. Lots of things affect equity prices, not just output. Remember our stock crash of 1987? There was no recession.

    The Fed probably downplays the role of QE in exchange rate movements for political reasons.

    W. Peden and Britmouse. I plan to address the UK when I return after July 4th. I agree that 2002 was the key date–the beginning of their second term.

    Gabe, If the the banks run the Fed, then why did the Fed adopt an ultra-tight money policy in the midst of a banking crisis? Why did they let Lehman fail? Do you really think the Fed would behave differently if the 6% return was eliminated? I find that very far-fetched.

    But I apologize for using the term “nuts.” You are right that there is a respectable argument for banker control of the Fed. I just don’t happen to agree. I blame the crisis on stupidity.

    CA and Morgan, Does Grant really think that reducing the money supply would cause higher rates? How’d that work out in the early 1930s?

    Liberal Roman, I plan to start bogging again after July 4. Mankiw doesn’t always agree with the posts that he links to. July 5 is a massive buy signal. Since late 2007 stocks always soar when I blog, and plummet when I don’t.

    Jim Glass, I saw that. Inflation targeting would be a big mistake. They should do price level targeting or NGDP targeting.

    Morgan, I think higher gas prices are slowing the economy. But only the part of the increase due to Libya, not the part due to QE2. QE2 raised NGDP expectations.

    Gabe, If I was in charge of the Fed we’d do much less monetization. I’d use NGDP targeting, not QE. Indeed I’d shrink the monetary base.

  295. Gravatar of David Pearson David Pearson
    17. June 2011 at 09:06

    Dustin,

    Would the Fed tighten if an NGDP overshoot happened in the presence of >8% unemployment?

    Of course the Fed would not intend to monetize endlessly. This is, instead, about the unintended consequences of their actions. Once you create a dependence on fiscal stimulus financed by the Fed, it is quite difficult to move away from that point in the absence of self-sustaining RGDP growth. In fact, doing so would risk a “repeat of 1937″. If the answer to stagnation is always, “the stimulus should have been bigger!”, then you could see how that dependence would grow over time instead of shrink.

  296. Gravatar of David Pearson David Pearson
    17. June 2011 at 09:19

    Scott,

    If China equities are not correlated with IP surprises, then what should drive them? As I said, the discount rate has been consistently low (low real interest rates) during the period. Further, corporate margins have not experienced unexpected changes (they are also consistently low). Moreover, given the structure of the Chinese economy, one would expect corporate revenue growth to strongly correlate with IP growth.

    The latest leg of the global commodities rally was coincident with the signalling of QE2. This signal was a surprise, unlike China IP growth rates. Commodities strongly outperformed China equities since the signal occurred. This outperformance fits with the explanation that commodities reacted to unexpected changes in the future path of Fed monetary policy, and not as much to unexpected changes in the path of China IP growth.

  297. Gravatar of Dustin Dustin
    17. June 2011 at 09:25

    “Would the Fed tighten if an NGDP overshoot happened in the presence of >8% unemployment?”

    ——————

    they would if they’re targeting NGDP.

    Unemployment is somebody else’s problem.

  298. Gravatar of Gabe Gabe
    17. June 2011 at 10:37

    “If the the banks run the Fed, then why did the Fed adopt an ultra-tight money policy in the midst of a banking crisis?”

    Increase the power of the Fed. Increase the national debt. crisis created in order to get the things doen they had wanted done for a long time.

    “Why did they let Lehman fail? ”

    Got rid of two big competitors Bear and Lehman….score +2 for the oligarchy

    “Do you really think the Fed would behave differently if the 6% return was eliminated? I find that very far-fetched.”

    We agree on this, they would find another way to steal the money. We could hope that it might them some time to figure out how and that the efforts to steal more would further incriminate them in the eyes of the public.

  299. Gravatar of Gabe Gabe
    17. June 2011 at 10:42

    “If I was in charge of the Fed we’d do much less monetization. I’d use NGDP targeting, not QE. Indeed I’d shrink the monetary base.”

    Ok so they can’t lower rates…how would target NGDP? QE2 was monetization, they bought debt securities with new money. I thought QE3 would be more of the same?

    See how the debt is rising? nobody else wants the debt unless they beleive the fed will intervene and support th treasury prices…when faith in this declines…as it has the last few weeks…all the markets tank. The only way to get markets back up is to prop it up with more QE…this is a recipe for endless QE.

    You think that targeting NGDP and hitting a target is going to make people forget that our whole economy is being held up by a 200 year old parasite infested hollowed out rotten trunk?

  300. Gravatar of Gabe Gabe
    17. June 2011 at 10:47

    “Of course the Fed would not intend to monetize endlessly. This is, instead, about the unintended consequences of their actions. Once you create a dependence on fiscal stimulus financed by the Fed, it is quite difficult to move away from that point in the absence of self-sustaining RGDP growth.”

    David Pearson is more eloquent than me, so I thank him for putting this in words. I haven’t heard any logical arguments to counter David’s beliefs. targeting NGDP at 5% will send all the assets into commodities first until they ramp up to prices that would allign with 5%….this proccess would cause lots of fear as people starve in 3rd world countries and lower classes in the developed world have their budgets pinched big time. I don’t see how this will cure our structural problems of having an ever-growing parasitical government acting as a cancer on the productive class.

    In fact, I’d guess the governemtn would use the anger over high commodity prices against foreign nations and start mroe wars….uhh kinda like they have been doing.

  301. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    17. June 2011 at 11:45

    ‘Greg Mankiw has turned against QE.’

    All he did was provide a link to Cochrane’s argument. He neither endorsed nor criticized it.

  302. Gravatar of dilletaunted dilletaunted
    17. June 2011 at 23:35

    “They could close the discount window and do policy solely with OMOs, and nothing fundamental would change. But in that case there’d obviously be a fallacy of composition. So there’s 99% of a fallacy of composition, because the amount of DLs is normally trivial.”

    so there isn’t a fallacy of compositions, correct? once you move down below 100%, bye bye fallacy. because the fed will always lend at the discount rate, or it loses control of the rates. the ‘moral suasion’ part is cute though.

    “I am not claiming that recessions are caused by people saving and not spending, that’s a Keynesian fallacy.”

    yawn. didn’t you accuse me of drinking koolaid or something earlier? monetarists these days should not be throwing stones…

    “The Fed has made it very clear (in this crisis) they they can do whatever the hell they want. They’ve bought up all sorts of garbage. But there’s so much government and quasi- government debt around the world that the Fed would never have to buy up private debt. Currency demand is less than a trillion, and reserve demand is tiny with a negative IOR. So you could make the currency stock rise 50 fold just buying up government debt. If that isn’t hyperinflation, what is? But I’m not calling for hyperinflation, just 5% NGDP growth. Your concession reminds me of the old joke (GB Shaw?)”

    can people please just call this the ‘haggling prostitute’ anecdote, and put it in these guys [insert haggling prostitute]? this gets the banal point across much quicker.

    “If you concede money creation causes inflation, it’s game over.”

    no, hyperinflation is the death of a currency. it’s a different beast than inflation caused by actual injections of financial assets (fiscal), or psychological speculation induced by dick-waggling fed chairmen.

  303. Gravatar of Johann Johann
    18. June 2011 at 10:45

    Professor Sumner,

    Why not recognize that the drug war does make sense if you’re a white parent in the suburbs who wants to increase the cost to your children of doing drugs?

    I feel like you and everyone else tries to analyze the drug war’s net benefits. What you should be doing is analyzing the drug war’s net benefits CONDITIONAL on group.

    For white/suburban parents, it seems like it makes perfect sense. You pay a bit more in taxes and your kids do a little bit less drugs. Sure, the inner city and Mexico might pay, but you never feel those effects.

    This is just a standard political economy problem (read: government gone wrong).

  304. Gravatar of Morgan Warstler Morgan Warstler
    18. June 2011 at 15:44

    Boys,

    When Pearson and Dustin are discussing, “Would the Fed tighten if an NGDP overshoot happened in the presence of >8% unemployment?”

    We get to the heart of what Scott does wrong. Conservatives stand against QE because they are the folks owed money.

    And conservatives hold all the power. Not the banksters, the real power the SMB, the local business owners who run the small ponds all across the country.

    They are the A power (think the US during cold war).

    The B power are the banksters (they are the soviets).

    The C power – who barely matter are the DeKrugman flank and the poor folks they whip into an uneducated frenzy (China).

    Scott makes the mistake of not couching his arguments so that the A power will let him have his way.

    And the only way to convince the rock ribbed GOP establishment – the Tea Party – is to START THE PITCH WITH:

    When we target NGDP:

    1. the Fed will be powerless.
    2. when we are run above the 5% target – we will ALWAYS tighten, no matter how much the C power liberals scream and the B power banksters scream about unemployment.

    It isn’t about finding a solution, it is about proving your bonafides to the people that matter. That’s the real task.

  305. Gravatar of Jim Glass Jim Glass
    18. June 2011 at 18:30

    “If you concede money creation causes inflation, it’s game over.”

    ‘no, hyperinflation is the death of a currency. it’s a different beast than inflation…’

    Now we seem to be straying into Modern Monetary Theory territory. The Professor was asking about them.

    And we are back again to the extraordinary claim, believed by so few, that ‘there is no operational (mechanical?) way for the fed to create inflation’, central banks *can’t* increase inflation!

    But extraordinary claims require extraordinary evidence — or at least a coherent explanation.

    So perhaps dilletaunted can point to a web site somewhere that logically explains, in somewhat more detail than he’s been able to in brief comments here, exactly *why* central banks can’t create inflation, so contra to the opinion of the rest of the world.

    If he can’t do that, so it seems he’s just figured this out for himself and declared the world wrong, well, he might as well give up argument and retreat to name calling.

    caused by … psychological speculation induced by dick-waggling fed chairmen.

    Yeah, like that.

  306. Gravatar of W. Peden W. Peden
    19. June 2011 at 05:56

    Jim Glass,

    The MMT theory interpretation of the rise in AD since mid-2010 is a classic example of the Duhem-Quine hypothesis: there are no crucial experiments in science.

    So a MMT theorist, in all candour, can look at the spike in AD after QE began to be anticipated and regard it as uninformative because they can more easily stomach a massive coincidental correlation between QE, broad money and AD than question their deepest hypotheses. This is made easier by the fact that, apparently, MMT is primarily accepted by Post-Keynesians with very little appreciation of the importance of expectations, such that an announcement of future behaviour by the Fed is thought to have no causal effects!

    This isn’t entirely unreasonable: we’d question our eyes before we thought we saw a ghost.

  307. Gravatar of Scott Sumner Scott Sumner
    19. June 2011 at 11:56

    David, You asked;

    “Would the Fed tighten if an NGDP overshoot happened in the presence of >8% unemployment?”

    We don’t have to speculate, we know the answer. In Europe the natural rates of unemployment were often over 8%, and various central banks often tightened when needed. Central banks do understand the issue of structural unemployment, and if that was the problem (which your example implicitly assumes) central banks would have no trouble tightening. Indeed there are many at the Fed who want to tighten right now, despite low NGDP growth.

    David, You asked;

    “If China equities are not correlated with IP surprises, then what should drive them?”

    I don’t understand this question. The correlation of Chinese industrial production and equity prices isn’t an opinion, it’s an easily verified fact. The question is what implication should we draw from the weak correlation? Chinese industrial production has soared in recent years, stocks haven’t. It does no good to say they should be correlated, they aren’t very correlated, which is why Chinese equities and oil prices aren’t very correlated.

    Beckworth has a post showing that commodity prices are extremely closely correlated with IP growth in developing countries. Unless someone can refute his post, I’ll assume that’s the best evidence we have.

    BTW, I do think QE2 contributed to higher commodity prices, partly through higher expected US growth, and partly through currency depreciation.

    Gabe, You said;

    “Increase the power of the Fed. Increase the national debt. crisis created in order to get the things doen they had wanted done for a long time.”

    Ben Bernanke seems a lot like me. I wouldn’t do that, why should I assume he would?

    (By a lot like me I mean we both research the Depression, have similar policy views, are professors, are relatively idealistic, think money was way too tight during the Depression, are not very forceful personalities, etc.)

    I find it hard to accept conspiracy theories because the people I meet in every day life simply don’t seem like that. The other problem with conspiracy theories is that if true, there really should be many more conspiracies than there seem to be. Why didn’t Bush have the military plant phony chemical weapons in Iraq, to make the invasion look justified? If that’s how people behaved, we can be 100% sure he would have done that. It would have been easy. Bush is probably more corrupt than Bernanke.

    You asked:

    “Ok so they can’t lower rates…how would target NGDP? QE2 was monetization, they bought debt securities with new money.”

    I’d cut rates on ERs to zero, and then set a much higher NGDP target, and do NGDP futures targeting. With NGDP futures targeting, the base becomes endogenous. If the expected NGDP growth was much higher, the demand for base money would be much lower.

    You said;

    “See how the debt is rising? nobody else wants the debt unless they beleive the fed will intervene and support th treasury prices…when faith in this declines…as it has the last few weeks…all the markets tank.”

    You facts are 180 degrees off. In recent weeks the price of Treasury bonds has been rising. People do want our debt.

    You said;

    “David’s beliefs. targeting NGDP at 5% will send all the assets into commodities first until they ramp up to prices that would allign with 5%….this proccess would cause lots of fear as people starve in 3rd world countries and lower classes in the developed world have their budgets pinched big time.”

    US NGDP grew at about 5% for several decades before 2008, and developing countries boomed. Then growth slowed, and developing countries went into recession. Then growth resumed in mid-2009, and developing countries recovered. Your facts are 180 degrees off.

    dilletaunted, You said;

    “so there isn’t a fallacy of compositions, correct? once you move down below 100%, bye bye fallacy. because the fed will always lend at the discount rate, or it loses control of the rates. the ‘moral suasion’ part is cute though.”

    No, the discount rate is a trivial part of monetary policy. If the window was eliminated nothing significant would change. The Fed determines the monetary base though OMOs. They never allow significant discount loans unless they want the base to be bigger or are bailing out banks. 99% wrong is wrong.

    I’m not sure what’s cute about moral suasion. Do you deny that it is a part of Fed policy?

    You anti-QT types need to develop a theory of the price level. Why is it not 1000 times higher, or lower? Why are prices 100 times higher in Japan than the US? Until you can do that, most macroeconomists won’t take your ideas seriously.

    If a lot of money creation causes hyperinflation, then somewhat less money causes somewhat less inflation. Hyperinflation is not a different beast. Countries have experienced persistent 10%, 20%, 40%, or 80% inflation. Any rate can and does happen.

    Johann, You said;

    “Why not recognize that the drug war does make sense if you’re a white parent in the suburbs who wants to increase the cost to your children of doing drugs?”

    Actually, it doesn’t even make sense for these parents, but that may explain why the drug laws are aimed at blacks, and why even Democrats support those laws. Here’s the problem, however, polls showed more whites than blacks favored pot legalization in the last California election.

    I find that after I talk to pro-drug prohibition types, they often change there mind. It’s not self-interest, it’s ignorance.

    W. Peden, I could sort of see how someone could buy the MMT during a liquidity trap, but these guys think doubling the monetary base doesn’t even matter when the fed funds rate is 5%, and almost all new base money goes into cash held by the public. Why does the public suddenly want to hold twice as much cash in real terms? They have no answer.

  308. Gravatar of Morgan Warstler Morgan Warstler
    19. June 2011 at 16:23

    MMT guys are just another flavor of DeKrugman.

    They want the government to “own” the money. Which is noise. Money is not a social good.

    Money in whatever conception starts always in the hands of private creators of value, they have something someone wants, and from there money happens.

    The government’s involvement is a sad state of affairs, and we are headed in exactly the opposite direction.

  309. Gravatar of CA CA
    19. June 2011 at 21:39

    I see that Greg Mankiw is advising Mitt Romney now. I was hoping that part of the reason for Professor Sumner’s “vacation” was because HE was advising Romney:) Shucks..

  310. Gravatar of W. Peden W. Peden
    20. June 2011 at 04:01

    Morgan Warstler,

    I’d say that Krugman and the MMT guys are significantly different. Krugman is a New Keynesian. MMT guys are mostly combining Post-Keynesianism with Chartalism.

  311. Gravatar of W. Peden W. Peden
    20. June 2011 at 04:03

    (And then they gave this combination a characteristically question-begging Post Keynesian name, just like “Post-Austistic Economics” or “Real World Economics”.)

  312. Gravatar of Morgan Warstler Morgan Warstler
    20. June 2011 at 05:37

    W.

    You are standing too close.

    DeKrugman is not an economist. Anything that starts by looking at a group of have-nots and then supporting any policy to help them have more via government action.. is not economics.

    You cannot run a blog called “Conscience of a Liberal” and call yourself an economist – I don’t care how many degrees, awards, and papers you accumulate. I don’t think of communism as economics either.

    Economics is about the trading / production between those who create…. everyone else is meaningless. In fact, macro ONLY exists as long as we still still have multiple government run currencies… it isn’t real economics either.

    So yes, I’m more of a strict constructionist, but generally when Fiscal policy (Keynesian gvt spending) is taken 100% off the table – we can be 100% sure, Dekrugman will evolve to advocate MMT – it is after all the radical application of monetary for the purposes of the have-nots.

  313. Gravatar of Morgan Warstler Morgan Warstler
    20. June 2011 at 06:07

    DeKrugman flapping his gums shows the clear error Scott makes in his presentation:

    “That’s about what I was thinking in, say, January 2009. With the severe financial crisis still relatively recent, and many people still expecting a V-shaped recovery, it didn’t seem possible to persuade the Fed to commit to a permanent rise in the monetary base or a rise in the medium-run inflation target, nor did it seem possible to convince markets that there had been a long-run change in policy.”

    http://krugman.blogs.nytimes.com/2011/06/20/woodford-on-monetary-and-fiscal-policy/

    Note the phrase “permanent rise” – what’s missing is DeKrugman having heard that crucial to Scott’s “just monetary” approach is the phrase, “fuck unemployment.”

    —–

    See what Scott should be saying is, “Since 5% NGDP has historically been able to keep the tides rising… if we adopt that explicit target AND NEVER run higher than 5%… then any UNEMPLOYMENT is government’s fault.”

  314. Gravatar of JimP JimP
    20. June 2011 at 07:01

    On the tea party – that they lost.

    The tea party is just another interest group – like any other. And the main economic event here for many years has been the transfer of money from young people to old people – because politicians can count and that’s all they can or want to do. From from opposing this both the tea party and Obama strongly support it and it will go on forever. End of story.

  315. Gravatar of Gabe Gabe
    20. June 2011 at 07:03

    “There are two kinds of people, those who oppose the war on drugs, and evil people.”

    I am a white parent in the suburbs and I agree with Sumner on this. It is myunderstanding that most all the people running the country are pro-drug war..therefore the country is run by evil people. We should not trust these evil people to run our monetary system.

    People are buying US bonds now because they do have faith that the fed will monetize as needed. I said people wouldn’t be buying bonds IF they believed monetization wouldn’t continue.

    All the inflation scenarios you listed are possible…no argument. Yes velocity matters as well as quantity.

    YES NGDQP can be +5% while thingss are going well, but givent he curent horrible strucutre of our economy, if this was the new explicit policy(money creation until NGDP -> +5%…then I doubt the economy would behave as you think it would. It would be a interestign experiemtn and I’d be in favor of it if economist would actually be willing to learn from it.

  316. Gravatar of Gabe Gabe
    20. June 2011 at 07:26

    “Ben Bernanke seems a lot like me. I wouldn’t do that, why should I assume he would?”

    He is the head of a organization that cannot fix the economy without just eliminating much of what his organization does. Allowing the big banks to go bankrupt was not viewed as an option for him. “Compromise”, “political feasability” these are his real guiding phrases. Too many of the supporters of his organization would not have viewed it as acceptable. Huge cognitive dissonance follows. He is doing what he has to do, to be accepted by the billionaires in nice suits who welcome him with open arms and promise to pay him 300k per speach in the years to come….if he doesn’t play ball in the right way he can kiss all that “respectability” to fly out the window.

    does he honestly believe that the US was too tight in the depression? yes

    did he really believe that a big housing price decline couldn’t really happen when he was repeating that so much in 2006? doubt it(probably lied), if so he isn’t that smart about the economy.

    Bush didn’t need to plant chemical weapons…the US government sold Sadam chemical weapons….they used them against Iran and the Kurds…only a moron would argue Sadam never had chemical weapons. The political establishment can tell lies endlessly in the proccess of creating wars and there are no repercussions. They are richer than ever so no additional false stories on the subject needed. Bush is happy. The military industrial complex is happy, they put the new guy in and started more wars….and now democrats cheer, because they find Obamas lies more palatable.

  317. Gravatar of Morgan Warstler Morgan Warstler
    20. June 2011 at 08:37

    Gabe, getting Sumner to view the Fed as an interest group serving primarily the interests of bankers… is impossible.

    If Scott admitted it, macro (Scott’s life) becomes a joke.

    The best we can do is push Scott to become the new Friedman, and to do that, he has to make clear what he delivers for conservatives, and what little value there is with his ideas for pro-government liberals.

    —-

    The way to sell more white parents in suburbs on ending the drug war, is to promise harsher sentences on violent crimes and less criminals in the ghettos – as more people have to get real jobs.

    It isn’t a sure fire winner, but just straight arguing that the tax cost is too high, isn’t the best foot forward.

  318. Gravatar of Gabe Gabe
    20. June 2011 at 10:18

    Of course if the world worked as Scott thinks the Fed would target NGDP at 5% or 6%….some #. Yet, unemployment is high, the economy sucks and things are getting worse and they will not ever target NGDP at a constant %.

    So are all the economist and bigwigs at the Fed idiots? or liars who serve the interest of some forces that are not obvious to Scott.

    Scott doesn’t want to come out and say they are idiots because that would force him to re-examine some of his other beliefs…yet he can never admit they are not serving some naive/altruistic/objectively good function…so instead he is left wondering “I wonder what information they have that we don’t know about, surely they have good reason for not doing what they should theoretically be doing.”

    how long can this delusion last?

    He knows the drug war is evil…there is a glimmer of the force in this man. If he believes the government is engaged in a evil war against it’s own people then he may soon become aware that the dark side of the force is involved in moneary policy administration as well.

    Hoping for a Friedman is not something I will engage in. He gave us the withholdig tax and is constantly used to support a interest rate setting policy right out of the communist manifesto. No thanks.

  319. Gravatar of JimP JimP
    20. June 2011 at 11:29

    An indirect call for nominal targeting – though it will never happen:

    http://online.wsj.com/article/SB10001424052702304451504576394002810246540.html

    This wont happen because Bernanke has promised to raise rates as soon as he sees the only kind of inflation we really need – wage inflation. That we wont get – and therefore what we will get – delivered to us by Ben – will be Japan.

  320. Gravatar of JimP JimP
    20. June 2011 at 11:30

    But then – maybe it will.

  321. Gravatar of JimP JimP
    20. June 2011 at 11:32

    Level targeting would of course do it – and with much less than 5 or 7 percent inflation. Can we get there?

  322. Gravatar of anon anon
    20. June 2011 at 11:46

    “Economics is about the trading / production between those who create…. everyone else is meaningless. In fact, macro ONLY exists as long as we still still have multiple government run currencies… it isn’t real economics either.”

    No, modern new keynesian/new monetarist macro _is_ sound economics nowadays. It basically falls out of monopolistic competition and short-run non-neutrality of money. The existence of “multiple government-run currencies” is irrelevant: J.S. Mill described demand-side (‘Keynesian’) effects under a gold standard in a 1844 essay.

    Gabe, “did he really believe that a big housing price decline couldn’t really happen when he was repeating that so much in 2006? doubt it(probably lied), if so he isn’t that smart about the economy.”

    The housing price bubble is partly a red herring. Its impact would have been contained, but for the de-facto monetary tightening post 2008. Bubbles are a fact of life–they can’t really be predicted in advance.

    “With the severe financial crisis still relatively recent, and many people still expecting a V-shaped recovery, it didn’t seem possible to persuade the Fed to commit to a permanent rise in the monetary base or a rise in the medium-run inflation target, nor did it seem possible to convince markets that there had been a long-run change in policy.”

    If we’d had a formal NGDP prediction market, very few people would have expected a V-shaped recovery in the first place, so Krugman’s point would have been a non-starter.

    Anyway, as I recall, inflation expectations were very low at the time. In hindsight, that should’ve been enough to justify a lot more easing on the Fed’s part.

    Gabe, “So are all the economist and bigwigs at the Fed idiots? or liars who serve the interest of some forces that are not obvious to Scott.”

    Many monetary economists think that NGDP and price level targeting are inferior to pure inflation targeting, because (1) NGDP is harder to measure, since it involves both quantities and prices, (2) price level targeting introduces undue discretion on how exactly the price level path is achieved, which increases uncertainty. They might be wrong about this, but they’re not obviously in bad faith.

  323. Gravatar of Morgan Warstler Morgan Warstler
    20. June 2011 at 12:56

    anon, you’ll need to be more specific for me.

    “It basically falls out of monopolistic competition and short-run non-neutrality of money.”

    That is gibberish.

    Looking at money as a medium of exchange is fine. Assume there is only one currency, or multiple private currencies, where no political will can affect the printing process… and monetary disappears.

    Looking at money as a storehouse of value, is only ok in as much as the government is not printing it to goose the economy along. In such a situation, you are saving simply because you don’t think current prices make it worth giving up your stored cash, there’s a glut of stuff and you expect to get a better deal down the line.

    Waving around a JSMILL 1844 reference does nothing to get around my main point…

    The only people who pretend macro is well established science, are non-productive idiots with a penchant for stealing from their betters.

    Real economics happens sans political calculations, meaning money isn’t a tool to help those without money. Money is not a tool for government.

    We don’t need Obama any more than we need DeKrugman – the business of America is business and all that.

  324. Gravatar of Jim Glass Jim Glass
    20. June 2011 at 13:44

    Economics is about the trading / production between those who create … everyone else is meaningless.

    That would be barter.

    If you think money is meaningless, try a barter economy.

  325. Gravatar of anon anon
    20. June 2011 at 13:46

    Morgan, “Looking at money as a medium of exchange is fine. Assume there is only one currency, or multiple private currencies, where no political will can affect the printing process… and monetary disappears.”

    Not really. What happens is that ‘monetary’ becomes a powerful argument for reforming the “printing process” so as to make it more conducive to long-term growth. Take the gold standard as an example again: as early as 1802, Henry Thornton was one classical economist who advocated temporarily suspending gold convertibility in order to avoid a sudden monetary contraction. Other classical economists similarly regarded monetary contraction as a great evil (see T.M. Humphrey 1991 for a survey). (To some extent, this emphasis was inherited from mercantilist thought, which regarded abundance of gold and silver coin as beneficial to national prosperity.)

    Or you could take contemporary arguments about EU monetary union as evidence, since the ECB is pretty much isolated from political influence (AIUI, it is not even accountable to the European Commission or the E. Parliament, except perhaps in very indirect ways).

  326. Gravatar of Morgan Warstler Morgan Warstler
    20. June 2011 at 15:54

    Jim,

    my comment meant that money exists for trading and production between creators, it does not exist to be printed in order to spur along a social good.

    anon, circular…

    couldn’t care less about your deep need to feel as if someone other than the guys with shored up value to their names should have total control over their capital.

    said another way, the printing right now is the “powerful argument” for doing it my way.

    long term growth is about taking all the folks who can’t create stuff as a class (see eggheads, politicians, and rent seekers) and paying no attention to their interests or desires… if they had real interests or desires, they’d learn to create stuff people want to buy.

    printing money isn’t conducive to growth, it is cheating… and thus, the only decent arguments for cheating – are if they are built on DESTROYING the forces/people that tend to support it.

    Scott’s ideas are then just a way to hack the system, to kick the leftists in the teeth… to give them what they ask for, but not what they want.

  327. Gravatar of JimP JimP
    20. June 2011 at 16:47

    The voice of gleeful deflation:

    http://mjperry.blogspot.com/2011/06/mits-bpp-monthly-inflation-rate-falls.html

  328. Gravatar of Bonnie Bonnie
    20. June 2011 at 17:08

    Has anyone read the book “Rollback” by Thomas E. Woods Jr.? I think the Austrian school has some great points, but it’s hard for me to tell whether what seems to me as going off the deep end is really going off the deep end. The author seems to think it’s too late to avoid a financial day of reckoning for the US simply because what would have to be done to get the govt back on sound financial footing isn’t politically feasible and so the politicains will just keep trying to kick the can down the road when there isn’t much road left. I read the first chapter and was thinking about buying it, but I’m not sure I want to if you all think it’s a bit over the edge.

    Any thoughts?

  329. Gravatar of JimP JimP
    20. June 2011 at 19:32

    Bonnie

    Books like that remind me of an insurance analyst who wrote for Forbes years ago. He always always said the same thing (like Jim Grant perhaps) – we are doomed doomed doomed. Always.

    Eventually I stopped reading the guy. And eventually they fired him.

    The doomsters are always the same. They are born to it. And many are Austrians.

  330. Gravatar of Scott Sumner Scott Sumner
    21. June 2011 at 04:58

    CA, Mitt Romney is the only GOP candidate that seems serious about policy issues. I like Gary Johnson, but he has no chance. Romney seems like the only one who’d even have a chance against Obama. I believe he’s the only one who refuses to condemn monetary stimulus. He also acknowledges that the world is getting warmer. He focuses on jobs.

    Gabe, Why would people buy bonds if they expected monetization? Wouldn’t they buy hard assets?

    Gabe, A recent poll of 36 private economists showed 34 oppose further monetary stimulus. Are they also corrupt? What’s their incentive to give that answer?

    Your comment on Iraq makes zero sense. Bush was badly hurt politically by the failure to finds WMD. It makes no difference what Saddam did in the past, Bush claimed their was an ongoing program (and by the way I’m not saying he lied on this point, he probably really thought they were hiding something.)

    You said;

    “So are all the economist and bigwigs at the Fed idiots? or liars who serve the interest of some forces that are not obvious to Scott.”

    Neither–monetary economics is very complicated–honest people can disagree. Even idealistic academics with no special interests (or the same special interest–being professors) often disagree.

    And Milton Friedman did NOT favor interest rate targeting.

    JimP, Yes, that’s precisely the problem, the Fed’s commitment to raise rates too soon–at the slightest sign of recovery.

    Bonnie, My general view is that the public debt in the US is a big problem, but not an imminent catastrophe. I don’t see a spectacular crisis, but rather fear debt leading to higher taxes, which gradually erodes the strength of the US economy.

    I agree with JimP, the doomsters generally overstate things.

  331. Gravatar of W. Peden W. Peden
    21. June 2011 at 05:34

    Prof. Sumner,

    I think that Jon Huntsman, when he runs, will be a vastly superior candidate to Mitt Romney.

  332. Gravatar of Scott Sumner Scott Sumner
    21. June 2011 at 05:43

    W. Peden, Maybe, I know little about him. BTW, I’m not impressed with Perry, even though I agree with him on smaller government. He seems too cocky–like another Bush II.

  333. Gravatar of David Pearson David Pearson
    21. June 2011 at 06:00

    Scott,

    As I understand it, increases in inflation expectations should lead to higher aggregate real income as real wages decline and employment rises. QE2 was successful in producing markedly higher inflation expectations.

    This, from the recent FRBSF economic letter:

    “…real disposable personal income declined at an average annualized rate of 0.4% in the three months ending in April 2011. This suggests that the purchasing power of U.S. households is not growing at the rate it was in the second half of 2010.”

    So, following a material increase in inflation expectations to above “normal” levels, rdpi declined.

    The question is, why didn’t the results match the model’s predictions? It seems the increase in real income from higher employment was more than offset by decreases in purchasing power. This is why the debate over the source of commodity inflation (Fed vs. China) is so important. If it is the Fed, then additional QE may just further reduce rdpi. I would say the debate is far less settled than you suggest. Commodity prices are correlated with China IP, and more recently, they are also highly correlated with QE signals. The latest steep commodity rally clearly began with the Jackson Hole speech. Further, theory predicts that commodity inflation should react to unexpected changes in commodity prices. I would conclude that the Fed is formulating policy with far less predictive models than is suggested by most economists.

  334. Gravatar of Gabe Gabe
    21. June 2011 at 06:32

    “Many monetary economists think that NGDP and price level targeting are inferior to pure inflation targeting.”

    The fed isn’t doing transparent inflation targeting or NGDP targeting. I wonder why that is?

    They do backroom decision making. (they talk to the heads of the big banks on the phone every day; Mishkin told me that personally in a direct question I asked at a talk he gave at Sloan.)

    Of course he swore that no useful info could be passed back to the big banks in the conversations, but if you believe that then your understanding of humans is limited IMO.

    So yes smart people can have a lot of differnet opinions on these things, but it doesn’t seem to me that the FEd straight forwardly attacks these problems with any sort of real rational methodology. I understand that it is is hard to debate with people of faith such as yourself. It makes you feel better to believe in your gods. I respect that. carry-on.

    “The housing price bubble is partly a red herring. Its impact would have been contained, but for the de-facto monetary tightening post 2008. Bubbles are a fact of life–they can’t really be predicted in advance.”

    - so you think that more loose policy would have blown the housing bubble bigger? I agree.

    “they can’t really be predicted in advance.”
    Michael Burry predicted it…he made a billion or so, It seems some Deushce Bank guys and some Goldman guys predicted it…read “The Big Short”. I can find plenty of youtube clips of Ron Paul and Peter Schiff talking about it very openly well before the peak in housing. Ben Bernanke did not predict it. It seems that people that value experiments and the scientific method would take that into account. People of faith will continue to spout the official doctrine as they have been trained in spite of all empirical evidence to the contrary. You can’t argue with stupid.

  335. Gravatar of anon anon
    21. June 2011 at 06:35

    David Pearson, I keep seeing this folk claim that QE2 raised relative demand for commodities, but is there any rigorous argument to that effect? QE2 has lead to a rise in medium-term interest rates, which is not favorable to commodity investors. And the Jackson Hole thing might have been a coincidence.

  336. Gravatar of Gabe Gabe
    21. June 2011 at 07:10

    “Gabe, Why would people buy bonds if they expected monetization? Wouldn’t they buy hard assets?”

    Primary dealers have been buying hundreds of billions in bobnds and then selling them right back to the Federal Reserve. Essentially making free money on every transaction.

    This is just fact. I’m not sure if you are realy ignorant of this or what.

    That is part of the agreement they have. If the Fed was not standing by as a potential buyer it is hard to prove what would have happened to bond prices…but I’d predict prices would have dropped by a lot and the rates the treasury has to pay would have been much higher. I would be interest to know what you think would have happened absent the Fed security blank(monetization promise) on US debt.

    “Gabe, A recent poll of 36 private economists showed 34 oppose further monetary stimulus. Are they also corrupt? What’s their incentive to give that answer?”

    In reality I’d bet most of those 36 economists didn’t like the poll was framed either. Beyond that I can’t tell you much about their personal motives except to say they were probably behaving in what they viewed was their own self-interest in the time frame they subjectively determined was most appropriate.

    If the only choice debated on MSM and amongst “serious economists” is “Stimulus”/”No stimulus” then both answers are going to cause pain. The popular sheeple answer is going to continue to vascillate between the two and unpleasantness will continue to follow as long as our structural problems remain.

    If those economist want to be in the “political realist” in-crowd then they will just accept whatever ridiculous framing of the issues they are told to accept.

  337. Gravatar of anon anon
    21. June 2011 at 07:11

    Gabe, “The fed isn’t doing transparent inflation targeting or NGDP targeting. I wonder why that is?”

    The Fed didn’t do transparent _anything_ pre-Bernanke, because they believed that obscurity would protect them from short-term political interference. Alan Greenspan has admitted as much in his 2007 book _The Age of Turbulence_. (Nevertheless, some people think that Greenspan’s Fed paid more attention to aggregate expenditure than Bernanke’s Fed does nowadays.) To the extent that the Fed does follow a rational methodology, it makes subjective sense for them to focus on inflation targeting, because that’s what most monetary economists would advocate.

    “[X] predicted it…”

    It’s easy to give names after the fact, but this proves very little. Most of the folks who “predicted” the financial crisis were professional permabears who are only right twice a decade, if that–and Austrians like Ron Paul, who are not that different from the former. I make an exception for the Big Short folks who actually put money behind their views and reaped the rewards of their foresight.

  338. Gravatar of David Pearson David Pearson
    21. June 2011 at 07:14

    anon,

    Commodity prices are correlated with short term real interest rates. These declined (were more negative) as a result of QE2. The reason for the correlation has to do with both zero-cost storage for speculators and with signals about the expected future path of monetary policy. Further, as commodities are a financial asset class, their prices benefit from the portfolio balances effect, wherein investors re-balance their portfolios towards risk assets as the Fed reduces the outstanding stock of Treasuries. Lastly, commodities benefit from both declines in real interest rates and real demand in dollar-peg countries as a result of portfolio re-balancing flows into those countries. On the latter point, there have been several articles in the FT detailing how Chinese companies stockpile copper, borrow against it, and use the proceeds to speculate further.

  339. Gravatar of Morgan Warstler Morgan Warstler
    21. June 2011 at 07:15

    Perry rocks. He is exactly what this economy needs.

    And, I’m not at all excited about his social conservatism stuff, but that’s liberals own damn fault….

    Once they start trying to tax people, write regulations, grow government – they put all the personal liberty stuff up on the table to be lost in their betting.

    If feminists want to keep abortion legal, if gays want to have marriage rights, etc. they need sacrifice big government, they have to throw public employee under the bus, and stand behind the non-social conservative Republican.

    It is amazing how many single-issue voters on the left don’t get this yet.

    A Perry win will help teach them.

  340. Gravatar of Gabe Gabe
    21. June 2011 at 07:16

    anon-
    Compute your own graph of real-short-term interest rates over the last 50 years. Use (Fed Funds rate- core CPI) if you wish, overlay a graph of the CRB index y-o-y change data series.

    Look at that chart and tell me if you think there is a linkage between a loose monetary policy and commodity price changes.

  341. Gravatar of Gabe Gabe
    21. June 2011 at 07:23

    Morgan,

    Perry is going to be as free-market as George Bush…when will you learn your lesson? Remember “No new taxes”, “a humble foreign policy”? “no child left behind”, new entitlements/Prescription drug programs, banker bailouts/ escalating payroll taxes that dwarf any income tax reductions, but are ignored?

    The big government brought about by republicans is always wrapped in a banner of “free-market”…so when things go wrong,
    The only thing these big government republicans teach democrats is that “free marketers” love corporate welfare and starting new wars….and for some reason the economy keeps getting worse.

  342. Gravatar of Wonks Anonymous Wonks Anonymous
    21. June 2011 at 07:36

    Scott, I think you’ll like this from Niklas Blanchard:
    http://www.theatlantic.com/business/archive/2011/06/keynes-only-useful-insight-is-liquidity/240763/

  343. Gravatar of Morgan Warstler Morgan Warstler
    21. June 2011 at 08:35

    Gabe, you just aren’t familiar with Texas these days.

    The $25B shortfall? Just cut 100K teachers!

    That is completely refreshing. That is EXACTLY how you handle a budget crisis, you cut public services, you become more productive.

    Texas spends 1/3 per prisoner per year than California.

    My god, Texas just passed “loser pays” tort reform.

    George Bush made one giant mistake, he should have started gutting the public employee unions January 2001, and never stopped.

    But 9-11 screwed up his compass.

    Perry wouldn’t make that mistake. I doubt any GOP President will. The word has gone out, the plan is in place, public employee unions are going down for the count. Choking off Dem’s main source of funding is something even Huntsman will do.

    ——

    Gabe,

    You might not like it, but spending all the money on big pharma and war is the only way to make sure Dems never get to pay off their voters. We will roll back Obamacare, they will learn another lesson – Clinton was the first guy who delivered them nothing, we’ll snatch back the gains from Obamacare – EVENTUALLY, Dem voters will learn there is no such thing as a free lunch.

    That’s been the game since 1980. And we’re down into the 7th inning… ending the promise of “free stuff” in Democracy is what the past 100 years has been about.

  344. Gravatar of Wonks Anonymous Wonks Anonymous
    21. June 2011 at 08:36

    Steve Hanke at Cato says Boost the Money Supply, Raise Interest Rates.

  345. Gravatar of CA CA
    21. June 2011 at 08:40

    Mitt Romney is far from a perfect candidate, but I think he’s the best chance Republicans have for beating Obama. I think Huntsman is very unlikely to win the nomination. Same for Perry.

  346. Gravatar of W. Peden W. Peden
    21. June 2011 at 08:53

    Gabe,

    “The fed isn’t doing transparent inflation targeting or NGDP targeting. I wonder why that is?”

    If I had a choice between getting my essays marked by an explicit external criteria or self-marking them on the basis of finding a “balance” between “controlling prolix” and “controlling imprecision”, I know which one I’d want.

  347. Gravatar of W. Peden W. Peden
    21. June 2011 at 08:56

    I agree that Romney is more likely to win the nomination than Huntsman, though I also think that Huntsman is more likely to win the presidency. However, my preferences are based on who I think would best perform as president, and that’s Hunstman for me: international experience, executive experience the ability to unite the country behind deficit control, youthful energy, social liberalism and as clean a slate as is feasible.

    Of course, if Huntsman turns out to have terrible policies, I’ll change my mind. I’m still disappointed that Mitch Daniels isn’t running.

  348. Gravatar of Gabe Gabe
    21. June 2011 at 10:59

    It seems the Ron Paul-Lew Rockwell-Murray Rothbard-libertarians have opposed every new war(social and military)and every new dollar spent by the government the last 40 years. They have been ignored rather easily. None of them have won control of any branch of government or been appointed to the Fed.

    The Bernanke has been very consistent over a couple of decades in advocating that we should err on the side of extra monetary creation if economist are worried about the economy crashing.

    If the Fed now pulls back on quanitative easing and the economy falters…then will the dastardly supremely powerful libertarian inflationistas be blamed? why are these people not ignored at this critical juncture? why not end the drug war or the afghan war instead or maybe end farm subsidies? this is a wierd time to start listening to these nutjobs.

    Let me be clear. Why is the fed pussy footing around?! print more money, buy more bonds, drop it out of a helicopter, buy empty houses! please!

  349. Gravatar of Gabe Gabe
    21. June 2011 at 11:15

    “ending the promise of “free stuff” in Democracy is what the past 100 years has been about.”

    It seems to me that the promise of free stuff has gotten bigger than ever. Your optimism on Perry is misguided IMO. I hope your right. But I remember the same arguments with people who bet me that W would cut the government! After 2 years it was the excuse of 9/11 and then a new election season, time wasn’t right. The truth is you go go read the reports put out by the guys these people associate with. With Bush you could go read the PNAC documents and you knew they would start new wars to justify more war spending. You could read the straussian socialist stuff and understand that ehy would be in favor of new entitlement programs.

    Reagan had lots of good things to say, but Kissinger was the bagman that told him he was picking daddy bush to be VP(via Greenspans book)…and then he brought in all his folks and you read their papers…and you could see that it had nothing to do with Reagan’s purported beliefs.

  350. Gravatar of Morgan Warstler Morgan Warstler
    21. June 2011 at 11:46

    Gabe, don’t let me confuse you:

    1. I’m not saying we should balance the budget, no the deficit has to be soooo high, so that Dems can’t buy stuff for their voters.

    But we now have plenty of debt, as rates go up, the % of tax returns servicing debt will ensure that Dems can’t get any payoffs done.

    The only time the right can finally stop this strategy is when the left declares Keynesian surrender and adopts a Balanced Budget Amendment approach and agrees to fight on straight up guns / butter terms for the approx 19% of GDP the gvt collects.

    2. I am saying that growing the debt BY WAY OF PUBLIC EMPLOYEES is horribly bad political strategy – George Bush made this gigantic mistake, and it set us back 10 years in American history.

    Allowing them to collect debt based dollars that they use to advocate for themselves basically zeroed out the gains we got from forcing Clinton to end welfare as we know it.

    And I am saying, that no GOP candidate will make the mistake of not ending the power of public employee unions.

    ——

    The choice of Perry is entirely based on his aggressive willingness to devolve power to the states and his PROVEN willingness (like Daniels) to go after public employees.

  351. Gravatar of Bonnie Bonnie
    21. June 2011 at 19:47

    Gabe:

    There is a method to the madeness of listening to the rothbardians right now. The reason is that QE only solves things that are related to monetary policy in the long-run. I agree with Professsor Sumner that what the Fed did (or should I say didn’t do) in the late summer/fall of 2008 was an awful mistake, and made the recession far worse than it should have been. But I also think that these Austrians have a point that there were structural issues in the background, and those are still there. Hence the end of QE2 and we’re back in the soup.

    I do not know the extent to which their point overlaps with Professor Sumner’s. We probably do need more QE, but we also need to clean up the big government mess to reduce costs and improve agility for business, and to get more of a self-adjusting free market economy back, in addition to removing the disincentives to save. The counterproductive IOER program needs to be scrapped. And that is the only thing I would trust the current crop of idiots in congress to do with the Fed – replace the ban on IOR.

    About the Balanced Budget Amendment: It isn’t the kind of salvation that many think it will be. It will solve none of the issues that caused the recession in the first place, or any of the issues clogging up the pipes for recovery. It’s just one of those things that gives people who are angry about govt spending hand over fist a warm fuzzy that something is being done about it. Don’t get me wrong, stopping the debt from growing is a good thing, and it might even accomplish it. But it is more likely that it will just shift the cost of all the statism to some other mechanism.

    The pumping of the housing ‘bubble’ is a great of example of how government gets its way without having to carry the responsibility for it on its books. And the emergency provisions would not have prevented all the debt racked up for fiscal stimiulus, or the bailouts, and maybe not even ObamaCare. If it takes an emergency to fund something coveted by politicians, we will just have more of them.

    It will be interesting to see how creative they get with unfunded mandates under a BBA regime. It will likely drive the final nail in the coffin of Federalism, with state government transforming into to nothing more than Federal puppets, using their own power to tax when the Feds reach their limit.

    Really, the BBA is just a bad way to not solve a problem.

  352. Gravatar of Gabe Gabe
    22. June 2011 at 05:47

    If we want a balanced budget amendement we should just default on the national debt. Then we will have a binding balanced budget clause. Default should not be taken off the table.

    The federal debt is an odious debt, that has been accumulated by a corrupt group of outlaws who aim to make us and our children pay for it eternally as tax serfs.

  353. Gravatar of Scott Sumner Scott Sumner
    22. June 2011 at 06:52

    David, QE2 should boost NGDP and P if it is credible. It was slightly credible. It will also boost RGDP unless there is an adverse supply shock. There were two adverse supply shocks in February and March, which explains why RGDP has done less well in the past three months, then late 2010. Ditto for the labor market.

    Commodity prices are highly correlated with growth in developing countries. Beckworth had a post showing that.

    Gabe, You said;

    “I understand that it is is hard to debate with people of faith such as yourself. It makes you feel better to believe in your gods.”

    It’s hard to debate with people that don’t respond to what I said, but instead rely on childish and immature arguments.

    You don’t know why 34 out of 36 economist polled oppose QE3? Maybe because they think it’s a bad idea. Is that so far-fetched?

    Wonks Anonymous, Yes, that’s a good piece by Blanchard. I left a comment over at the Krugman post on his Keynes paper at Vox.

    http://community.nytimes.com/comments/krugman.blogs.nytimes.com/2011/06/21/keynes-talk-non-pdf-version/

    I don’t understand the Hanke article.

  354. Gravatar of Morgan Warstler Morgan Warstler
    22. June 2011 at 07:01

    Bonnie, government owes us annual 2-5% productivity gains going back at least 20 years.

    I put that at $500B in annual savings in public spending to start growing towards $1T is annual savings – so instead of spending $2.2T on public employees in 5 years, I want to see it at $1.2T.

    Total automation of government. Think radical public policy stuff like, if you don’t have a smart phone in 5 years – you can’t receive social security deposits, and it is your drivers license, social security card, credit cards, and wallet. It is parking enforcement, fishing licenses, and most court trials.

    Where drug policy and prostitution policy are legal and regulated because you have to pay with your smart phone and be tracked, or it is illegal.

    Where everything is about writing laws and policy based on achieving maximum public productivity.

    Take Khan Academy and imagine it as the new Google. You only get a high school degree when you have learned and tested through EVERY part, EVERY concept in a limited set of adult imperatives.

    Refuse to allow government backed student loans for anything not science or math related.

    In such a world, the $200B in new annual tech revenue made from automating government, the massive influx of engineers from around the world, the wholesale renunciation of public employees as a worthy political force…

    Destroying GOV 1.0 is the new boom. They are 20% of economy, we’ll get 50%+ productivity gains out of them.

    That’s the path to salvation.

    If government had kept up with the private sector in productivity gains since WWII, by hook or by crook, that is the world we would already live in now.

    Scott worries about NGDP, I worry about productivity gains.

  355. Gravatar of David Pearson David Pearson
    22. June 2011 at 07:40

    I have seen the Beckworth chart and the correlation is clear. The strong correlation between QE and commodities is also clear from the following chart:

    http://www.minyanville.com/businessmarkets/articles/federal-reserve-treasury-department-treasuries-bond/4/8/2011/id/33844

    You have a point on the supply shocks. So the “experiment” was polluted by a violation of ceteris paribus. The question is, does the Fed then know if QE will lead to higher aggregate real income? I would put the confidence interval around this prediction at a very broad range: it could increase real income, or it could reduce it. The dynamic on the reduction side is logically consistent:

    -QE affects asset prices through a variety of influences (portfolio balances, path of future policy, etc).
    -QE should therefore raise commodity prices
    -Higher commodity prices reduce real incomes and dampen consumer confidence
    -Lower real incomes/confidence restrains real spending
    -The increase in employment resulting from lower real wages may or may not offset the above.

    The reality is that if QE does not increase house prices, it is likely that the above effect will dominate. The increase in stock and commodity prices (and decline in credit spreads) resulting from QE was of little benefit to the real economy. Consumers and new firms would benefit much more from higher house prices. Most employment growth comes from new firm creation (net), and this metric has been stagnant at low levels. Blame housing: erstwhile entrepreneurs need housing equity to serve as start-up capital and collateral for new start-ups. This is a true, economy-wide structural factor that could be relieved by boosting house prices. (Good luck with that!) For a look at how rising asset prices have left household balance sheets relatively unaffected, see the excellent charts in this piece from Nick Rowe’s colleague:

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/06/balance-sheet.html

    The charts are worst than they look since most of the asset gains have gone to the top 5% of households by wealth, households with a low propensity to consume.

  356. Gravatar of Morgan Warstler Morgan Warstler
    22. June 2011 at 09:12

    David, erstwhile entrepreneurs have access to BILLIONS, if not trillions in private capital IF they are allowed to buy the housing stock for 30-40% discounts off market rates.

    Maybe you don’t know this, but nobody can find returns.

    I’m not kidding and you are foolish to miss it. There is piles of predatory capital just waiting for the banks to have to put all the REO on the market and take it directly in the shorts.

    It will be an economic bonanza – 12M homes get sold for 20% of their highest sale price, and huge companies are formed to manage 10K+ single residental rentals.

    Hell, raise rates AND flood the market with housing stock.

    Every one of those homes gets rented cheap and earns investors 8-10% YOY not counting any long term appreciation happens.

    The houses are all being upkept, putting construction guys to work (at cheaper rates), and renter ratings starts to effect the price of rentals. If you take care of your home it is even cheaper.

    Anecdotally, I’ve got a buddy whose little fund now has more than 500 homes under management, he’s got no problem raising $. The government is finally approaching them with pools of fallow housing.

    The only thing holding back the housing bit of the economy, is trope that saving banks matters. When you stop worrying about the price of homes, policy is easy.

    Perhaps we ought to remove rents form the CPI, and base monetary on the price of oil and commodities.

  357. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. June 2011 at 11:37

    I thought Scott’s reply at Krugman’s was on the mark; even if monetarism can be said to have failed in 1979-82–inflation is a monetary phenomenon and the cure for it has the side effect of recession, does seem to have been vindicated by that episode–surely, Keynesianism was a more obvious failure in the US in the 70s (and also in Japan in the 90s).

    So, even though Krugman’s logic is much more rigorous in this talk than what he puts into his Times columns, he still really doesn’t have a convincing story supported by evidence.

  358. Gravatar of dirk dirk
    22. June 2011 at 12:18

    With the Fed’s dismal prediction today of 8% unemployment at the end of 2012, 3.5% GDP growth in 2012 and 1.7% core inflation through 2013, it seems that the Fed is more than content to predict its own failure. To the extent that they are thinking politically, it seems they have now taken an Obama loss for granted (they seem to be predicting it) and looking toward surviving a Republican take-over. Hence their policy of hoping for the best while predicting the worst. Up until today I’ve believed the Fed would become increasingly serious about fighting unemployment, but I have just given up on that with this latest in-house prediction.

  359. Gravatar of W. Peden W. Peden
    22. June 2011 at 13:01

    Patrick R. Sullivan,

    I think that Keynesianism has come to mean “non-Marxist left-wing economics”, so as long as there is a demand for that, it will still get defended. The empirical failures of Keynesian theories are irrelevant.

  360. Gravatar of JimP JimP
    22. June 2011 at 13:26

    On Krugman:

    He gives the only response really possible to that depressing Bernanke press conference.

    As Scott has been saying right along – target the forecast. And so Bernanke does. He forecasts 9% unemployment basically forever and then does his best to get it.

    http://krugman.blogs.nytimes.com/2011/06/22/profiles-in-fed-cowardice/?smid=tw-NytimesKrugman&seid=auto

  361. Gravatar of Jim Glass Jim Glass
    22. June 2011 at 21:24

    The scope of QE2:
    ~~~

    In terms of U.S. Treasury net new issuance to the public, total U.S. government borrowing since the inception of QE II through May 2011 was $654 billion. Annualized that’s over $1.1 trillion, equating to roughly 100% of U.S. net private savings (NPS). By any measure a huge amount of money.

    And how much of that debt new issuance has the Federal Reserve purchased? Answer, $681 billion or 104%.

    But this is only the beginning of the story. Have another look at the chart above … Not only has the Federal Reserve’s bid in the Treasury market been a large one but it’s been a relatively increasingly large one to boot.

    Indeed, over the past three months the Federal Reserve has absorbed 194% of the government’s debt new issuance…
    ~~~

    And now it ends…

  362. Gravatar of Morgan Warstler Morgan Warstler
    22. June 2011 at 21:37

    Market watch shows DeKrugman getting ass slapped…. in video. It’s gone viral!

    “Even the so-called boom on the stock market has been as much illusion as anything else, caused by the devaluation of the paper dollar. If you measure the stock market in a hard currency, there hasn’t been much boom at all. Indeed, the turmoil of the last few weeks means the S&P 500 is now less than 2% higher, when measured in Swiss francs, than as it was on Aug. 27, when Bernanke first unveiled his big idea.”

    Maybe Ben shouldn’t target the stock market, maybe he should target the Swiss franc.

    http://www.marketwatch.com/story/who-really-benefited-from-qe2-anyway-2011-06-22

  363. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. June 2011 at 08:49

    Yglesias gets this wrong:

    ‘Milton Friedman has strongly anti-statist views about economics but on an ethical level always conceded the righteousness of income redistribution via a negative income tax,’

    He did no such thing. His view was that redistribution was wrong, but if we were going to have it, it should be done in the least damaging way possible. I.e., the negative income tax which has built-in incentives to ween people off of it.

  364. Gravatar of W. Peden W. Peden
    23. June 2011 at 10:54

    Wonks Anonymous- that article has some merit, but I’m not sure what kinds of gains can be made by buying short-term government bonds at times of high inflation, while long-term government bonds are risky assets insofar as inflation rates will rise.

    It’s got me thinking, though. There are parallels to some of the problems of monetary control in Britain during WWI and the succeeding period.

  365. Gravatar of Morgan Warstler Morgan Warstler
    23. June 2011 at 15:56

    http://oll.libertyfund.org/?option=com_staticxt&staticfile=show.php%3Ftitle=97&chapter=3326&layout=html&Itemid=27

  366. Gravatar of Morgan Warstler Morgan Warstler
    23. June 2011 at 20:26

    (cross posted because Dekrugman will delete, not answer)

    Scott, the only thing worse than not having read Nozick, is pretending to yourself DeKrugman is able to understand him.

    Property rights exist based on force (credible threats and the like), before there was a government this fact was obvious, and thus we only buy enough government (the guys paying) to make sure we can keep those rights with force.

    If aliens ever showed up and promised to enforce property rights with violent punishment across the globe, and to do it for the grand price of a song because they knew truth and that is what truth told them to do…

    Government would end. Because the property holders would no longer pay off folks (government) to keep their property.

    All else is noise. And all other aspects of government past that are a mirage.

  367. Gravatar of MBP MBP
    24. June 2011 at 05:06

    Scott – I heard William Poole speak recently (former FOMC member). He was asked why the recovery has been so slow and his response was “regulatory shock”. He went on to say that monetary policy “doesn’t open up oil drilling in the gulf”.

    Perhaps your work isn’t done….

    BTW: he also got his PhD at U Chicago.

  368. Gravatar of JimP JimP
    24. June 2011 at 06:05

    Business Week on Bernanke’s self induced paralysis.

    What Now, Chairman Bernanke?

    http://www.businessweek.com/magazine/content/11_27/b4235013598241.htm

  369. Gravatar of Gabe Gabe
    24. June 2011 at 07:20

    I like your comment Morgan and I’d like to agree.

    I am a property holder now…I pay taxes to avoid being thrown in a cage. So yes I guess I do pay to maintain the property rights to my body/ be able to have my family sleep in the bank’s house etc.

    Unfortunately, most of the population doesn’t place much special importance to property rights as a fundamental principle of civilization.

    Instead the government is used as a tool by the powerful to help cut down on bothersome competition. The excuses/rationales they provide to the masses to justify their power are that they will redistribute income, provide safety nets, prevent market failures, protect the poor from the powerful etc. Most of the population is dumb so these are considered good reasons to pay money.

    Then there are academics that actually believe the Fed could improve the lives of the masses through detailed enough study and manipulation of the currency. Not only do they believe it is possible, but they also think the powers that be are earnestly trying to maximize our utility via a centraly planned monetary system.

    Any failure to predict what happens by the Fed is chalked up to a reason to increase power of the Fed, because it is taken on faith that the super humans at the fed are working for the betterment of all.

    I suppose Mao’s agricultural planners also thought he was earnestly putting a plan into action to do a better job of feeding everyone.

    We are now undergoing an experiment to see if we can shift 100% of the national budget over to paying interest directly to bankers. It will be interesting to see how this ends. I predict the portions of the budgets directed towards the military industrial complex and the bankers will win otu over the portion going to the herd. After that I am unsure.

  370. Gravatar of Scott Sumner Scott Sumner
    24. June 2011 at 08:06

    David, Commodity prices move on new information. The rise in commodity prices in the months after after QE2 was announced was not caused by QE2. So Minyanville’s chart isn’t testing the hypothesis he thinks it’s testing.

    You said;

    “The question is, does the Fed then know if QE will lead to higher aggregate real income? I would put the confidence interval around this prediction at a very broad range: it could increase real income, or it could reduce it. The dynamic on the reduction side is logically consistent:”

    When monetary policy increases AD during a period of slack it results in both higher real income and higher prices. There is enormous empirical evidence going back for centuries in support of that proposition. Real stock prices rose sharply on rumors of QE2, why would that happen if only inflation was expected? Higher inflation doesn’t boost real stock prices.

    I’m confused by your argument that QE2 failed to boost housing prices. Are you claiming that QE2 failed to boost NGDP, or that more NGDP has no effect on RGDP?

    Patrick, I agree.

    Dirk, Yes, the Fed has become passive, and they have also indicated why. They are complaining that all the pressure they receive is for tighter money. A survey showed 36 out of 38 economists oppose more monetary stimulus. That has to affect their behavior.

    JimP, Yes, that’s a good Krugman column.

    Jim Glass, Yes, but one problem is that they aren’t monetizing the debt, as they are paying interest on the reserves. So they are basically swapping one form of debt for another. I still think it delayed a double dip for 9 months, but unsterilized base injections would have been more effective.

    Morgan, You said;

    “If you measure the stock market in a hard currency, there hasn’t been much boom at all. Indeed, the turmoil of the last few weeks means the S&P 500 is now less than 2% higher, when measured in Swiss francs, than as it was on Aug. 27, when Bernanke first unveiled his big idea.””

    Fortunately when I buy gas and groceries, or shop at Walmart, or buy a new house, I pay in US dollars, not Swiss francs. Hence my high stock gains are very real in the only sense that matters, more purchasing power. The CPI is up a few percent, the DJIA far more.

    But I do envy Swiss tourists to America.

    Patrick, Good point about Yglesias.

    Morgan, I liked the the DeLong post a lot–it might be my favorite DeLong post.

    MBP, Obviously I strongly disagree with Poole, the main problem is weak NGDP growth.

    JimP, Yes, it’s paralysis–the same complaint Bernanke once made about the BOJ.

  371. Gravatar of David Pearson David Pearson
    24. June 2011 at 09:34

    Scott,

    If the full reaction of asset prices to a QE signal must be instantaneous, then one can only attribute a tiny fraction of the post-Jackson Hole stock market rally to QE2.

    “There is enormous empirical evidence going back for centuries in support of that proposition.”

    And yet, the proposition did not hold this time, ostensibly because of one North African civil war and one Japanese nuclear accident. I wonder how strong the predictive value of such a proposition can be when small supply shocks (relative to the size of the global economy) can cause it to fail.

  372. Gravatar of Morgan Warstler Morgan Warstler
    24. June 2011 at 09:48

    Gabe, that was the narrative from 1913-1980 (67 years). Since 1980 (31 years), we have been toppling the narrative. The narrative could not end until we were truly “out of money,” now that we’ve reached that point we’ll see a steady stream of basics like states rights, ending public employee unions, etc.

    The time is coming for the SMB crowd to flex its muscles as the ONLY A power, and to show everyone once and for all the corporatists are the minor B power. Way back in the back are the non-tax payers and public employees – the C power.

    Along the way, we’re always evolving towards more personal social freedoms, which makes far more stark the differences between economic choices.

    We have won. Now it is just an endgame.

    The fastest way to end it politically is to back burner social conservatives – by arguing states rights – giving them WHATEVER weird shit their hearts desires socially as long as it is only their state.

    And ending public employee unions.

    With their money out of the game by 2016, the state rights based GOP will own the system, and the corporatists will have no option but to support any and all policies that promote SMBs.

  373. Gravatar of james in london james in london
    24. June 2011 at 13:20

    Simon Johnson on the banking irresponsibility is spot on. Simon Johnson on fiscal irresponsibility is spot off. I can’t see why.
    http://baselinescenario.com/2011/06/23/could-the-us-have-an-expansionary-fiscal-contraction/

  374. Gravatar of JimP JimP
    24. June 2011 at 15:09

    Cochrane on targeting the tips spread. Its pretty interesting. According to his webpage he did not publish this. Too bad.

    http://faculty.chicagobooth.edu/john.cochrane/research/Papers/big_stick.html

  375. Gravatar of Mike Sandifer Mike Sandifer
    25. June 2011 at 06:40

    Krugman seems to do something of a hit job on Milton Friedman here:

    http://www.nybooks.com/articles/archives/2011/jul/14/busts-keep-getting-bigger-why/?pagination=false

    Here are a few quotes:

    1. “In Friedman’s worldview, free markets were the solution to practically every problem—health care, product safety, bank regulation, financial speculation, and so on.”

    2. “And Friedman squarely blamed government for the Great Depression, a view that is at odds with the data. (Although it is almost certainly true that mistakes by the Fed made the situation worse.) As Madrick quotes him, ‘The Great Depression, like most other periods of severe unemployment, was produced by government management rather than by inherent instability of the private economy.’”

    3. “Replace “Great Depression” with “the financial crisis and its aftermath,” and it could be John Boehner today, rather than Friedman in 1962, speaking these words.”

    4. “Like Reagan, Friedman proclaimed a creed of greedism (our term)—that unchecked self-interest furthers the common good.”

    I agree with #1 to a degree. I think Friedman was sometimes caught in an ideological box, but nothing like we see in conservatives today.

    #2 though strikes me as odd. My view is that Friedman blamed the government for letting the Great Depression happen, rather than having caused it. That’s a big difference in my mind, as Friedman did actually favor at least this form of government intervention in the economy, recognizing that markets don’t recover from recession well on their own. This puts Friedman light years ahead of many conservatives today.

    So, then to parallel Boehner and Friedman in #3 seems more than sloppy. Maybe it’s malicious. Somehow, I don’t think these two would be ideological cousins, nor agree very much on what needs to be done about the recession.

    He’s comparing a clown politician that I suspect almost no one outside of his district takes seriously with one of the most important economists of at least the last century. Even his significant contributions to fundamental macro theory aside, his popularization of free market economics has been vastly net beneficial, even if I think he was sometimes too ideological.

    And then statement #4 may as well compare Friedman to Gordan Gekko, which seems like a silly, naive interpretation of Friedman’s comments and implicit views on greed.

    This should be embarrassing for Krugman, as he comes across as a freshman political science student who just read Naomi Klein and took it as gospel. I don’t see any evidence Klein understands much about Friedman on any level, and Krugman comes across that way here.

    I basically see Friedman as being on the same side as liberals, but just having more skepticism on the prospects for successful government approaches to solving many problems. My sense is his values were the same, and frankly his anti-government skepticism is often shown to be justified.

    I want more government intervention than he did, but when I read him from time-to-time or see him in a video, I’m reminded to be humble, given the available evidence. It seems easier to often have the opposite of the desired effects of policy.

    I have no problem with the negative income tax, Fed-regulated, lighter approach to government, as long as everyone has their basic needs met and we’re not diluting the share of ownership in economic gains for the vast majority of Americans.

    Back to Krugman, he’s my second favorite blogger and I like his blog more all the time. I love his shift left and his dispensing with respect for people who deserve none, but it seems he needs to be more careful with his aim.

    I remember his comments about not reading conservatives anymore, and I think it’s potentially a symptom of a problem developing. There’s a huge difference between reading Mankiw and the Sarah Bachmann newsletter, but Krugman seems to be losing his ability to discriminate.

  376. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    25. June 2011 at 10:52

    Thanks for the link, Mike. I’ll go even further, Krugman is glossing over his own failures in this piece. As I’ve probably written here too often, he played a part in encouraging the tech bubble by swallowing the path dependence theory that his friends at Stanford, Paul David and Brian Arthur were peddling; the infamous chapter in ‘Peddling Prosperity’ titled, ‘The Economics of QWERTY’, which is pretty much wrong from the first capital letter to the final period. Without that theory we don’t have a bunch of youngsters giving away their products to gain ‘first mover advantage’ and become the next Microsoft. Even Enron believed in it.

    But, how childish is it to decry something that has existed since there has been oxygen on the planet; greed. The question isn’t, is ‘greed good’, but how to best control it. If Krugman would take a few minutes to read his own railings about regulatory failure, he might find a lesson there.

    Especially funny is that Milton Friedman (who like Adam Smith believed that the best way to control greed would be to make people have to give something up in order to get what they wanted, i.e. trade for it, rather than to lobby politicians to get what they wanted for them) famously proposed 100% reserve banking. Friedman was a CRITIC of the Federal Reserve system; thought the American economy had been more stable prior to its creation than after.

    Also, Krugman hardly distinguished himself while the housing bubble was developing. Where was he on the preposterous Alicia Munnell paper that ignited the subprime fiasco? Ted Day and Stan Liebowitz saw the problems in the offing back in the 90s, I don’t remember him complaining that the banks didn’t make loans to people without the means to repay them for good reasons. Nor did he complain when the Clinton HUD bullied the Mortgage Bankers Assn (whose head was Angelo Mozillo) into ‘voluntarily’ accepting the CRA under the rubric of their ‘Best Practices Initiative’. It wasn’t the banks and MBA’s idea to make these loans. That was the regulators’ gripe, wasn’t it.

  377. Gravatar of Mike Sandifer Mike Sandifer
    25. June 2011 at 11:13

    I couldn’t even finish reading that Krugman review. It would’ve never even occurred to me that it was written by an economist if they name weren’t there.

  378. Gravatar of W. Peden W. Peden
    25. June 2011 at 14:31

    Krugman is getting to the stage that Friedman was late in his career (minus the genius) as he lumps together those with whom he doesn’t agree into one tidy box. So Friedman became apt to lump everyone who approved of progressive taxation into the “socialist” box, just like Krugman now lumps everyone who doesn’t agree with Stiglitz-style comprehensive economic regulation into the “Tea Party” box.

    In the case of Friedman, it was laziness after decades of trying very hard to produce work of broad utility. In the case of Krugman, it’s laziness from someone who has been an “attack dog” for Keynesianism for some time. So perhaps the analogy for Krugman is someone like Thomas Sowell, who lost his patience sometime in the 1990s and has never been the same since. Sowell prostitutes his intellect to the Republican party in the same way that Krugman prostitutes his to the Democrats. A sad end.

  379. Gravatar of Mike Sandifer Mike Sandifer
    25. June 2011 at 17:24

    Peden,

    I don’t want to operationalize “genius” here, but it’s not as if Krugman hasn’t done some excellent theoretical work in macro. The problem is, it was maybe more than 30 years ago, and even the best scientists often end up over-the-hill by their 30s.

  380. Gravatar of Jim Glass Jim Glass
    25. June 2011 at 19:02

    Jim Glass, Yes, but one problem is that they aren’t monetizing the debt, as they are paying interest on the reserves…

    True, but I was instead wondering if when the Fed stops buying 104% of the Treasury’s bond issuance it might affect the Treasury’s cost of borrowing.

    As to Krugman and…

    how childish is it to decry something that has existed since there has been oxygen on the planet; greed. The question isn’t, is ‘greed good’, but how to best control it.

    Krugman is operating on the Phil Donohue level here, and Friedman already answered them both in the single most popular short Friedman clip on Youtube.

    [he] may as well compare Friedman to Gordan Gekko, which seems like a silly, naive interpretation of Friedman’s comments and implicit views on greed.

    This should be embarrassing for Krugman, as he comes across as a freshman political science student who just read Naomi Klein and took it as gospel. I don’t see any evidence Klein understands much about Friedman on any level, and Krugman comes across that way here.

    Krugman’s embarrassed himself in his misrepresentation of Friedman more than once before — or at least he should have, but the realization has never seemed to take.

    And really, in this light of this in particular, Krugman’s recent proclamation that he can fairly represent conservatives, but conservatives can’t fairly represent liberals … thus he can fairly represent conservatives as intellecually inferior … :-)

    I think we’ve all noticed how Krugman thinks (and feels) in terms of heros and villians, villians and villians … and of Keynes as his hero (if not savior of us all) — which pretty much automatically casts Friedman as his arch-villain (if not anti-Christ). So we can probably expect these “hit jobs” to keep coming.

  381. Gravatar of W. Peden W. Peden
    26. June 2011 at 03:10

    Mike Sandifier,

    Krugman was certainly a VERY good economist. However, I reserve “genius” in economics for those that produce jaw-dropping, paradigm-shifting work. Smith was a genius. Menger was a genius. Keynes was a genius. Friedman was a genius. Lucas is a genius. Krugman, even at his best, isn’t that good.

    In fact, you could argue that he’s failed to keep up with the best movements in macro during his time e.g. the move away from old income expenditure models to looking at portfolios and expectations. In that respect, he’s in company with Bernanke and the UK Treasury, which is good or bad company depending on one’s position.

  382. Gravatar of anon anon
    26. June 2011 at 08:52

    W. Peden, Krugman’s work on New Trade Theory was groundbreaking, if not “jaw-dropping, paradigm shifting work”. He is not as good on macro, but then he admits as much in his recent talk about Mr. Keynes.

    And really, Keynes a genius? Yes he was very influential, but that was due to his political savvy and being in the ‘right place at the right time’. As I stated previously, many classical economists paid attention to demand-side factors and monetary rigidities as causes of recessions and the business cycle. (These theories were not as influential among Keynes’s contemporaries, but many economists did carry that tradition forward, such as Cassel, Fisher, Hawtrey, Pigou etc.) Most people will agree that Keynes’s _General Theory_ is very confusing and not obviously rigorous, even when compared to other works in the classical tradition.

  383. Gravatar of W. Peden W. Peden
    26. June 2011 at 09:10

    anon,

    I certainly don’t mean to say that Krugman didn’t deserve a Nobel Prize or anything like that.

    Yes, Keynes was a genius, though most of his interesting work (e.g. on portfolios) was overlooked for decades. The General Theory is not his best theoretical book; that honour would have to go to either the Tract or the Treatise. As you say, much of what was supposedly Keynes’s seminal work had been anticipated and the rest of his famous work is mostly wrong e.g. the wage-theorem, the liquidity trap, the underconsumption stuff, the near-mercantilism and so on.

  384. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    26. June 2011 at 09:14

    Robert Higgs, in the piece to which Scott links:

    ‘First, I am not convinced that these gigantic sums will not, sooner or later, still become the fuel for hyperinflation, or at least for a greatly accelerating rate of general price inflation, which economists expected they would be before the recent recession and all of the government’s and the Fed’s extraordinary responses to it occurred. Second, I am not convinced that the banks will remain content forever with earning a negative real rate of return on their holdings of $1.5 trillion in excess reserves now languishing at the Fed. If they were to realize only the difference between the rate the Fed is paying them and the rate they would earn by lending these funds exclusively to prime customers — an increase of 3 percent on their return — they would gain an additional $45 billion in income. That’s a great deal of potential income to leave lying on the table, and it might be even greater if we factored in the additional income they might earn by lending to less-than-prime customers at greater rates. I understand, of course, that banks are seeking to repair their damaged balance sheets, in light of their recent debacle in real-estate-related investments of various sorts and in conformity with the new Basel requirements for increased bank capitalization. Still, I am not convinced that these consideration can account fully for the very curious conditions now existing in the banking industry.’

    Which is why I’m not convinced Scott is right (neither am I convinced he’s wrong).

  385. Gravatar of Scott Sumner Scott Sumner
    26. June 2011 at 10:26

    David, You said;

    “If the full reaction of asset prices to a QE signal must be instantaneous, then one can only attribute a tiny fraction of the post-Jackson Hole stock market rally to QE2.”

    No, there were many signals of QE in the period after August–speeches by Bernanke, Evans, Dudley, etc. Increasingly aggressive statements by the Fed. The markets responded to these signals.

    But yes, not all of the increase was QE2.

    You said;

    “And yet, the proposition did not hold this time, ostensibly because of one North African civil war and one Japanese nuclear accident. I wonder how strong the predictive value of such a proposition can be when small supply shocks (relative to the size of the global economy) can cause it to fail.”

    No, you’ve mixed up two unrelated ideas. I claimed that more NGDP leads to more RGDP in the short run, when there is slack in the economy. But we didn’t get much more NGDP. So it’s a moot point. The more difficult question is what’s holding back NGDP growth, and that’s something that is much harder to model. I claim it is tight money.

    James, I agree, it is monetary policy not fiscal policy that drives NGDP.

    JimP, I think Cochrane got the idea from me, at least he seems like he’d never heard of it when I discussed it with him by email.

    Mike, When Krugman gets political he loses all sense of proportion, and makes a lot of outrageous claims.

    Patrick, I agree.

    W. Peden, Yes, But Friedman was never as partisan as Krugman.

    anon, I view the General Theory as one of Keynes’s weakest works.

    Patrick, I’m much less worried than Higgs. So are the markets.

  386. Gravatar of Mike Sandifer Mike Sandifer
    26. June 2011 at 11:00

    I consider the demand-side people to be allies. If you think low AD is the problem, and favor more monetary or fiscal stimulus, I think you’re on my side, technical issues aside. But Krugman seems to think that even some who disagree on technical grounds are evil.

  387. Gravatar of Mike Sandifer Mike Sandifer
    26. June 2011 at 11:05

    Patrick,

    Who cares? I’ll take a problem of too-high-inflation over the present confusion over liquidity traps and general lethargy anytime.

    Volcker showed how easy, if temporarily painful, it is to crush high inflation. Having governments cope with disinflation and deflation has shown itself to be a much, much more difficult problem.

  388. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    26. June 2011 at 11:52

    ‘Patrick, I’m much less worried than Higgs. So are the markets.’

    I know, but, unfortunately, as Higgs says, history is on his side.

    ‘Who cares? I’ll take a problem of too-high-inflation over the present confusion over liquidity traps and general lethargy anytime.’

    Well, we had a decade an a half of inflation and recession (68-83) that was pretty unpleasant too. And, as Higgs points out, the potential inflation is much higher now.

  389. Gravatar of W. Peden W. Peden
    26. June 2011 at 12:23

    Patrick R. Sullivan,

    There will never be a period like 1968 to 1983 again, because central banks don’t target employment anymore. The policy errors of that period were (to simplify greatly) what happens when a central bank tries to control something it can’t control, which was brewing since the late 1940s but was largely constrained by the Bretton Woods system until 1971.

    Thanks to Friedman and Lucas and some less well-known heroes of that period, (a) we don’t think that it is the central banks’ role to control the unemployment rate (indeed, central banks are now notably sanguine about high unemployment) and (b) we don’t take a central bank seriously when it says it can’t bring down inflation.

  390. Gravatar of Mike Sandifer Mike Sandifer
    26. June 2011 at 12:24

    Patrick,

    The Fed was operating on a different paradigm before Volcker, if I’m correct. We’ve been using the current one now since. This Fed has too much credibility on keeping inflation low, if anything.

  391. Gravatar of W. Peden W. Peden
    26. June 2011 at 12:26

    One last note on Keynes- I’m no expert on the period, but as far as I know Keynes was the first economist to effectively argue that Say’s Law does not hold in a monetary economy. I think it was Nick Rowe (or someone with a similar stunning knowledge) who pointed out that Keynesians have tended to ignore Keynes’s actual work on this subject and believe that Say’s Law does not hold in ANY kind of economy, including a barter economy.

  392. Gravatar of Mike Sandifer Mike Sandifer
    26. June 2011 at 12:41

    As an obvious non-economist, I may be naive, but I think I could create plenty of stimulus if I were made dictator, either through monetary or fiscal channels.

    When it comes to monetary, I could always move beyond what seems like responsible policy in the extreme, and even just literally start creating new money by sending people checks/direct deposits. It would be seen as reckless and presumably a permanent increase in the money supply and hence be very effective. Perhaps it’d be too effective.

    Similarly, with fiscal policy, I could start a huge new reform agenda with new government benefit programs that would be very difficult to cut or eliminate politically in the future. Unlike the Obama stimulus, that expected permanence could give it a real chance to work. Of course, it’d also perhaps lower potential RGDP growth going forward, but that might be preferable to a lost decade.

    If I looked irresponsible enough on either front, I bet I could get the economy moving, despite some skepticism that either works well under the present circumstances. Presumably, the monetary stimulus would be the cheaper way to go and any excesses easier to deal with.

    I think there is a false debate going on in a sense in the argument between those who favor monetary stimulus and are skeptical that fiscal policy can work as stimulus, versus those who hold the opposite view. My impression is that monetarists are right in that a government can pretty much always create monetary inflation if it wants too badly enough, but Keynesians are also correct that if they actually spend enough money, fiscal policy will also work, however sub-optimally. How many people really think that the WWII government policies didn’t end the Great Depression?

  393. Gravatar of anon anon
    26. June 2011 at 13:20

    W. Peden, the term “Say’s Law” is ambiguous, and its meaning depends on context. Generally speaking, classical economists believed that demand for goods would fluctuate around a long-run equilibrium, as a result of short-run fluctuations in the demand for money balances. Thus, they admitted of violations of ‘Say’s Law’ in both directions, in the short-run. However, over the longer run, the demand for money would be stabilized (due to expectations, real balances effects etc.) so the effects of recession or ‘brisk demand’ would be temporary. (John S. Mill’s essay On the Influence of Consumption on Production and the chapter on Excess of Supply in his Principles seem to be representative of this view.) Whether this counts as a view that “Say’s Law does not hold” depends on whom you ask.

    Nevertheless, it’s true that a number of well-known classical economists paid little or no attention to ‘excess supply’–including Ricardo and Smith. One should keep in mind that Say’s statement of his Law of Markets was originally intended to refute the views of Malthus and others, who regarded excess supply as potentially a permanent condition which would replace economic growth with long-run stagnation and mass unemployment. It is quite possible that most of Keynes’ contemporaries–who were writing in a different time–failed to appreciate these subtle distinctions and adopted a dogmatic view of Say’s statement.

  394. Gravatar of W. Peden W. Peden
    26. June 2011 at 13:41

    anon,

    Fascinating reading. I’m not familiar with Mill’s work on this topic, so I’ll be sure to read that sometime. Thanks. :)

  395. Gravatar of David Pearson David Pearson
    26. June 2011 at 13:41

    Scott,

    “David, Commodity prices move on new information. The rise in commodity prices in the months after after QE2 was announced was not caused by QE2.”

    In reality, both the stock and commodities markets — all markets — discount the full effect of an uncertain event as probative signals arise, not all at once. Just as the China IP chart, the Minyanville chart above shows a strong correlation between two variables: in this case, QE2 purchases and commodities prices. That correlation, in turn, represents significant evidence of potential causality.

    On your other point, I thought that lower real wages caused higher aggregate income (via higher employment) in your model. We got lower real wages, and they arguably led to lower aggregate income. Whether or not one subscribes to the model, this evidence should at least result in a wider expected range of possible outcomes.

    The unintended consequence of Fed policy — especially in a world of dollar peg regimes — is to boost commodity prices and so lower real wages. It is entirely unsurprising that those lower real wages would reduce confidence and spending more than they would increase employment. More NGDP growth in the form of more inflation would only make the dynamic worse, not better. My argument is not that this thesis is right, but that it introduces a great deal of uncertainty around the effects of policy, much more uncertainty than the Fed is willing to acknowledge. This situation is analogous to that of the 2002-2007 period, when the Fed recognized that its policy would disproportionately impact housing finance markets, yet failed to anticipate or even follow the unintended consequences of that set of relative price distortions.

  396. Gravatar of W. Peden W. Peden
    26. June 2011 at 13:45

    Mike Sandifier,

    I’m always amused by the “Why did the Great Depression end?” debates, because the British experience during that period was unambigious: the £ left the GS in late 1931, the money supply began to recover and by 1934 we were at the beginning of a very big recovery from about 10 years of protracted stagnation and crisis. (That said, our experience is still misunderstood e.g. I remember an old school textbook saying that re-armament brought us out of the Depression, despite the fact that re-armament was negligible during the key 1932-1934 period.)

  397. Gravatar of Morgan Warstler Morgan Warstler
    26. June 2011 at 14:10

    Sandifer,

    “I couldn’t even finish reading that Krugman review. It would’ve never even occurred to me that it was written by an economist if they name weren’t there.”

    DeKrugman is NOT an economist. Please stop helping to pretend he is.

    You cannot begin any possible economic theory with “lets gets more free shit for the poor.”

    I realize many people have tried to confuse the issue, but econ is hard study of what people do, what the market does. It is dispassionate. Economics is an anthropological study of creators, inventors, market makers, consumers, etc.

    Economics is what eggheads who cannot do business themselves, do to study those who can.

    When DeKrugman is dead, he will be unremembered.

  398. Gravatar of JimP JimP
    26. June 2011 at 18:45

    Scott

    If Cochrane got the idea from you he should have said so. I have the impression Krugman has also stolen from you with not a word of acknowledgement. I am very disappointed that Cochrane would do so as well. He is a famous guy at a famous school. He could at least say where he gets his ideas.

  399. Gravatar of Scott Sumner Scott Sumner
    27. June 2011 at 05:12

    Mike, I wouldn’t say he thinks those he disagrees with are all evil, rather he regards them as evil or stupid. :)

    Patrick, You said;

    “I know, but, unfortunately, as Higgs says, history is on his side.”

    I don’t agree. The US economy today looks nothing like the US economy in 1964–before the Great Inflation. Interest rates are far lower, for instance. The only history I am aware of that is similar is Japan in the mid-1990s. And in 2011 they are still waiting for the inflation that people kept warning them about.

    W. Peden, I’m pretty sure Keynes wasn’t the only economist back then who thought Say’s Law did not apply to business cycles.

    Mike, There is no doubt the Fed can boost AD if they want to, but they say they are happy with the current level of AD, and they don’t think the economy needs anymore stimulus.

    David, I agree that both commodity and stock prices move on new information, and I agree that a substantial part of both stock and commodity price increases during September/October 2010 was caused by QE2. What I deny is that any increases after QE2 was announced were caused by QE2.

    You said:

    “On your other point, I thought that lower real wages caused higher aggregate income (via higher employment) in your model. We got lower real wages, and they arguably led to lower aggregate income. Whether or not one subscribes to the model, this evidence should at least result in a wider expected range of possible outcomes.”

    Yes, lower real wages caused by more NGDP do cause real growth. But the lower real wages of early 2011 were caused by supply shocks, not higher NGDP. So we didn’t get more growth.

    You said;

    “The unintended consequence of Fed policy — especially in a world of dollar peg regimes — is to boost commodity prices and so lower real wages. It is entirely unsurprising that those lower real wages would reduce confidence and spending more than they would increase employment. More NGDP growth in the form of more inflation would only make the dynamic worse, not better. My argument is not that this thesis is right, but that it introduces a great deal of uncertainty around the effects of policy, much more uncertainty than the Fed is willing to acknowledge. This situation is analogous to that of the 2002-2007 period, when the Fed recognized that its policy would disproportionately impact housing finance markets, yet failed to anticipate or even follow the unintended consequences of that set of relative price distortions.”

    This paragraph mixes up lots of unrelated issues, which need to be separated:

    1. Can monetary stimulus boost NGDP growth?
    2. Does faster NGDP growth caused by monetary stimulus also lead to more RGDP growth?
    3. Does faster RGDP growth caused by monetary stimulus cause sectoral distortions?

    I agree that after business investment collapsed in 2001, any macro policy aimed at preventing another Great Depression would likely boost other forms of investment. As a practical matter that means housing investment. The rise in housing investment was appropriate, and inevitable. It was not caused by low rates, but rather by a combination of collapsing business investment and the Fed’s decision not to allow Great Depression II.

    The distortions in the housing market CANNOT be addressed by the Fed, and MUST be addressed by better regulation/deregulation. Imagine the monetary stimulus had been accompanied by lots of bad student loans, or car loans, which were later defaulted on. Would that also be the Fed’s fault?

    As far as the question of whether more NGDP caused by monetary stimulus leads to more RGDP, the answer is yes, because any negative effects from higher imported commodity prices are more than offset by positive impacts of currency depreciation. At the global level, real commodity prices can only rise due to faster expected world real growth. And at the domestic level commodities are only a modest portion of trade, so the gains in exports will greatly exceed the costs from higher commodity import prices.

    I think your mistake is to assume that commodity price increases since November 3 2010 were caused by QE2. But they weren’t.

    And I won’t even bother with the question of whether the Fed can create more NGDP, as I think you and I probably agree they can.

    JimP. I’m not too concerned about that for two reasons.

    1. People often forget where they get ideas. Especially if the ideas have been transformed in their mind. His version is slightly different than mine.

    I’ve published more articles on targeting NGDP and CPI futures than any other economist (I believe, I’m not certain) so if the idea ever catches on I’ll get lots of credit. That’s why publications are so important in economics. Indeed I hope he makes a big splash with the idea–it will help my career.

  400. Gravatar of Morgan Warstler Morgan Warstler
    27. June 2011 at 05:44

    Scott, did you just say The Internet crash of 2001 would have become the Great Depression II, if Greenspan didn’t debase the currency 28% against the Euro and the government didn’t blow up the real estate market?

    Further down the rabbit hole….

    “The distortions in the housing market CANNOT be addressed by the Fed, and MUST be addressed by better regulation/deregulation.”

    BULLSHIT. Greenspan is a far smarter man than you and he has spent the past 3 years talking about saving housing prices – because if they fell, the banks would go insolvent.

    And of course QEII caused commodities to spike, it was predicted over and over by hard money guys that commodities would spike – and it happened.

    Look, you don’t want to won starving African babies, I get that. Your psyche is DEEPLY DRIVEN to categorically deny the African babies are starving because of your monetary policy.

    I’d say you should let it go Scott, instead take credit for the food riots in the ME, leading to the toppling of Dictators.

    —-

    Lastly, Matty biffed it on Nozick, and then had to admit it. I don’t think you have taken the time to understand.

    And it draws into question your more learned assertions of QEII. You are supposed to be the level headed one.

  401. Gravatar of Gabe Gabe
    27. June 2011 at 07:19

    Morgan,

    Sounds good, but I don’t trust a guy like Rick Perry to really support states rights. The TSA stand off will be a good test.

    If the TSA is still in charge of the Texas airports in a couple months we will know that Rick Perry is just another Bilderberg(increase the centralization of power) guy.

  402. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    27. June 2011 at 11:00

    ‘I don’t agree. The US economy today looks nothing like the US economy in 1964–before the Great Inflation.’

    To which Higgs would–actually he already has–say; ‘This time is different.’ Maybe it is, but then again….

  403. Gravatar of David Pearson David Pearson
    27. June 2011 at 11:51

    Scott,

    Markets were not just concerned with proving the existence of QE2, but also with predicting its effects. Markets made up their mind about these over time, not on the day the measure was launched. Thus, it is entirely possible that post-November changes in stock and commodities prices were partly due to QE2.

    To gauge the effect of higher food and energy prices, one has to look at the disproportionate effect these prices have on middle-income consumer confidence. This confidence effect is likely magnified in the presence of a decade of flat real wages and rising debt-to-income ratios.

  404. Gravatar of Gabe Gabe
    27. June 2011 at 14:53

    It is odd how Scott is so certain that ALL the market participants expectations for how QE2 would actually be executed and how various aspects of the market would react were 100% set at time “t”…even though many details of the plan and how all the market participants would react to the events would not be known until weeks and months later.

    Given the various changes in official plans and policies over the last 3 years it is very difficult to figure out what the government will do next even when they make an announcement. Bernanke promised he’d err on the side of inflation, but he doesn’t seem to be doing so now.

    Most market participants are also well aware that the Fed is very aware of “expectations theory” and is constantly trying to manage our expectations…which basically means the Fed thinks it is their job to lie to us if neccesary to get us to do what they think is “good”.

  405. Gravatar of Jim Glass Jim Glass
    27. June 2011 at 15:11

    Is the prime rate/Treasury spread wider than usual?

    I just went for a look-see at spreads, via Fred:

    [] Moody’s Baa corporate bonds have yielded 5.92 over three-month T-bills so far in 2011.

    For the 40 years 1971 through 2010 the average was 3.85 — so the spread has been 54% higher this year.

    From 2004 through 2007 the spread was 2.96 — this year it has been exactly double that.

    [] The 30-year conventional mortgage so far in 2011 has averged 4.71% over the three-month T-bill.

    From 1971 through 2010, the average was 3.38%.

    So for all the Fed has done with mortgage securities, the spread is still 39% higher than the 40-year average.

    Signs of tight money?

    (The prime rate has been fixed at 3.25% since January 2009. It’s not what it used to be.)

  406. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    27. June 2011 at 17:28

    BOne more of Brad DeLong’s admirers:

    http://www.slate.com/id/2297590/

    ”By the time Keynes wrote to Hayek (a letter Delong might study for its tone of confident generosity)’

  407. Gravatar of Jim Glass Jim Glass
    27. June 2011 at 17:47

    Edward Nelson of the Fed on Friedman’s Monetary Economics in Practice [.pdf] during the Great Recession.

    “I grasp the mantle of Milton Friedman. I think we are doing everything Milton Friedman would have us do.” — Ben Bernanke, 2010.

    Maybe relevant to the interest rate spreads I noted in my prior comment:

    ~~~
    As Friedman and Schwartz (1963a, p. 455) observe, the 1929-1933 contraction witnessed a “sharp widening in spread[s] among assets differing in the degree of confidence the holder could attach to their convertibility into a known cash sum at need and on short notice.”…

    This combination of a shrinking money stock and erupting private yields in the 1930s may be an extreme demonstration of the portfolio effect of monetary actions on risky yields.

    A version of this process is apparent in postwar episodes, as monetary expansion seems to reduce the spread between riskless and risky assets in the short run (Romer and Romer, 1990, p. 166).

    In a situation of financial crisis, of course, with other factors widening the spreads, the scope for monetary policy to counter this widening gains prominence.
    ~~~

    “The spreads are too wide, more money! don’t stop now!” would say Friedman? (In which case Ben isn’t doing quite ‘everything’.)

  408. Gravatar of B B
    27. June 2011 at 18:01

    “And in 2011 they are still waiting for the inflation that people kept warning them about.”

    The inflation, it’s right here! We found it! (/sarcasm)

    http://www.thefiscaltimes.com/Columns/2011/06/27/Core-Inflation-Rises-Interest-Rates-May-Follow.aspx

  409. Gravatar of Scott Sumner Scott Sumner
    28. June 2011 at 12:40

    Morgan, you said;

    “Look, you don’t want to won starving African babies, I get that. Your psyche is DEEPLY DRIVEN to categorically deny the African babies are starving because of your monetary policy.”

    Policies that reduce food supply (ethanol subsidies, etc) cause starvation. Policies that boost food demand (easy money) increase the total quantity of food consumed.

    Once more. . . “Never reason from a price change.”

    Patrick, Yes, but I don’t think it’s different, I think it’s Japan all over again. Japan is the closest parallel.

    David, I’m not concerned with consumer confidence, I’m concerned with NGDP growth, which is determined by the Fed. get higher NGDP growth, and consumer confidence will follow. What happened to consumer confidence when oil fell from $147 to $38 during 2008-09?

    I believe the effects of QE2 were fully priced in by early November, I can’t see why they wouldn’t have been.

    Gabe, Your argument cuts against David’s point, as it suggests markets had overestimated the effects of QE2 by early November.

    Jim, Thanks for that data–yes it is suggestive of tight money (although of course you’d also have to look at other variables.)

    Patrick, Good find. But Metcalf also seems a bit wacky. He criticizes DeLong for not being polite, even as he suggests libertarians are a bunch of nutcases.

    And he views DeLong as a rightwinger. Hmm. . .

    Jim, Thanks, I saw that Nelson paper, but don’t agree with him about Friedman. I think he would have said money was too tight due to IOR. So I agree with you.

    Thanks B, Let’s see what those guys say next year when inflation falls back below 2%.

  410. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    28. June 2011 at 13:28

    Yes, Scott, Metcalf is pretty ignorant of what capitalism is…and isn’t, but as I told the person who pointed me to that Slate piece, ‘The enemy of my enemy….’

  411. Gravatar of Edwin Alvarenga Edwin Alvarenga
    3. July 2011 at 19:53

    Prof Sumner, what do you think of Ron Paul’s idea to default on the the debt the Fed is holding?
    http://marginalrevolution.com/marginalrevolution/2011/07/greg-mankiws-exam-question.html#comments

  412. Gravatar of ssumner ssumner
    5. July 2011 at 13:53

    Edwin, I don’t see what he hopes to achieve. The place to start is with a Fed mandate, not getting rid of their assets. I presume he favors a gold standard, if so, that’s what he should advocate.

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