Aziz on monetary offset

Here’s John Aziz replying to a Ramesh Ponnuru piece discussing monetary offset:

But Fed policy wasn’t exactly tight during the stimulus. First, by the time the stimulus was enacted, the Fed had already dropped interest rates to zero, and it kept them there. Second, the Fed engaged in quantitative easing throughout the stimulus. By March 2009, it held $1.75 trillion of bank debt, mortgage-backed securities, and Treasury notes, reaching a $2.1 trillion in June 2010. That’s hardly tightening.

Ben Bernanke said (in 2003) that neither interest rates nor the money supply are good indicators of the stance of monetary policy.  Instead he suggests that NGDP growth and inflation are best.  By that criterion monetary policy after 2008 was the tightest since Herbert Hoover was President.  So Aziz is wrong in saying that policy was expansionary.  But I’d cut him some slack here, as obviously most people would agree with him, not Bernanke and I.  Indeed Bernanke would no longer agree with the Bernanke of 2003.

But this is not acceptable:

Now, Ponnuru’s argument isn’t that the stimulus caused the Fed to tighten, but that it would have been looser had there been no fiscal stimulus. But with the economy deeply, deeply in the dumps in early 2009, with unemployment soaring and consumer prices deflating, the Fed was already throwing the kitchen sink of experimental monetary policy at the economy and was doing so before the fiscal stimulus started. The hypothesis that the fiscal stimulus limited the Fed in any way is just not supported by the real world record of what the Fed did.

Even Bernanke would not agree with that.  He’s consistently indicated that the Fed could have done more, but simply chose not to.  The concern was “costs and risks” of unconventional stimulus. Actually there aren’t any costs and risks of acting, the costs and risks apply to not acting, something that the doves understood very clearly in the 2008 transcripts.  In any case, one option for 2009 would have been forward guidance, a tool that was not really utilized to any significant extent until late 2012.

Another option was level targeting, which would have been far more effective than the actions that the Fed actually did take.  Bernanke once recommended that the Japanese engage in level targeting.  Why does Aziz think Bernanke would not have done that sort of policy in an emergency situation where the Congress failed to act?  Bernanke almost certainly would have said; “if Congress won’t do its duty the Fed will have to save the economy from depression; we’ll do level targeting of the price level along a 2% track from 2008.”  And guess what, the expansionary impact of that announcement would have exceeded the effect of the ARRA.

But central bankers, like all humans “” especially operating in experimental domains like unconventional monetary policy “” get things wrong. Falling into a Japan-style trap of years of deflation “” something the United States has avoided “” would have been a much larger possibility without the relatively small amount of fiscal stimulus the United States had.

All I can say here is that if you want to argue for the efficacy of fiscal stimulus, you really don’t want to mention a country that did by most conventional measures one of the largest fiscal stimulus programs in world history, with one massive deficit after another, and an enormous amount of wasteful infrastructure spending on unneeded projects, and ended up with the worst performance of AD in all of modern world history, an NGDP that is actually lower than 20 years ago.  If you had told any economist in 1993 that 20 years later Japan’s NGDP would be lower than in 1993 they would have put you in a lunatic asylum.  And if you added that this would have occurred despite years of deficits running 10% of GDP, which drove the national debt up to 200% of GDP.  . . . well I think it’s fair to say that “old” Keynesian economics (which was already on the ropes in 1993) would have immediately collapsed.  And yet despite all that, and despite the spectacular failure of the 2013 austerity to do what the Keynesians predicted, the belief in the efficacy of fiscal stimulus refuses to die.

PS.  Ramesh Ponnuru has another excellent post, this one on policy in 2008.

PPS.  I can’t wait to see the transcripts from the meeting where they discuss NGDP targeting.  But will I live that long?  Commenter Lorenzo says the Reserve Bank of Australia releases the transcripts after just a few weeks.  It allows outsiders to give the central bank constructive feedback. Maybe our central bank doesn’t need any advice.


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70 Responses to “Aziz on monetary offset”

  1. Gravatar of lxdr1f7 lxdr1f7
    25. February 2014 at 19:17

    “Another option was level targeting, which would have been far more effective than the actions that the Fed actually did take.”

    How would the fed achieve level targeting though? More QE or negative rates? Just making the announcement that they are targeting levels wont affect expectations would it? Expectations move according to what physically expected in terms of QE or whatever the fed does right?

  2. Gravatar of ssumner ssumner
    25. February 2014 at 19:34

    lxdr, No, in the short run it is what the Fed says that matters, not what they do. In the long run it is what they do.

  3. Gravatar of Morgan Warstler Morgan Warstler
    25. February 2014 at 19:35

    All I can say here is that if you want to argue for the efficacy of fiscal stimulus, you really don’t want to mention a country that did by most conventional measures one of the largest fiscal stimulus programs in world history, with one massive deficit after another, and an enormous amount of wasteful infrastructure spending on unneeded projects, and ended up with the worst performance of AD in all of modern world history, an NGDP that is actually lower than 20 years ago. If you had told any economist in 1993 that 20 years later Japan’s NGDP would be lower than in 1993 they would have put you in a lunatic asylum. And if you added that this would have occurred despite years of deficits running 10% of GDP, which drove the national debt up to 200% of GDP. . . . well I think it’s fair to say that “old” Keynesian economics (which was already on the ropes in 1993) would have immediately collapsed.

  4. Gravatar of TravisV TravisV
    25. February 2014 at 20:39

    If Aziz doesn’t understand market monetarism, that’s disappointing.

    He’s written some very good posts in the past, particularly this one about Shadowstats:

    http://azizonomics.com/2013/06/01/the-trouble-with-shadowstats

    This one was also pretty good:

    http://azizonomics.com/2013/10/26/why-i-was-wrong-about-inflation

  5. Gravatar of TravisV TravisV
    25. February 2014 at 20:49

    Roger Farmer:

    “The Stock Market Crash of 2008 Caused the Great Recession”

    http://rogerfarmerblog.blogspot.com/2014/02/download-my-data-on-stock-market-and.html

    Hmmm, strange theory. Does anyone know Farmer’s explanation for 1987 (when a massive stock market crash didn’t lead to recession)?

  6. Gravatar of John Becker John Becker
    25. February 2014 at 21:29

    I love how Paul Krugman always makes fun of “zombie” economics when there is no worse zombie idea in the profession than Keynesianism.

  7. Gravatar of John Becker John Becker
    25. February 2014 at 21:33

    lxdr1f7,

    The Fed could do that by getting rid of interest on reserves and using the amount of monthly asset purchases instead of the interest rate. If they fell short of the level they wanted, they could increase monthly purchases until they hit the level they wanted. There is no zero lower bound on the amount of asset purchases they can do. Their biggest weapon is simply convincing the markets that they are serious about doing level targeting. If they made a credible commitment to keep inflation at a 2% level for instance, they might not have to do much quantitative easing at all due to rational expectations.

  8. Gravatar of lxdr1f7 lxdr1f7
    25. February 2014 at 21:41

    “lxdr, No, in the short run it is what the Fed says that matters, not what they do. In the long run it is what they do.”

    So in the long run they would of had to resort to negative rates and higher levels of QE anyway? Or would just the announcement of level targeting have made all markets react favorably and likely avoided the need to resort to neg. rates and higher QE later on?

    Its not the announcement of a level target that matters its the announcement of how far they are willing to go in terms of negative rates and higher levels of QE to achieve a target? They already have an inflation target now and its not being reached.

  9. Gravatar of Ben J Ben J
    25. February 2014 at 22:03

    As far as I am aware, Lorenzo is mistaken. I was surprised to see him say the RBA releases transcripts. I went looking (as I’ve never seen them), and all I found was the minutes, which are released two weeks after each policy meeting.

    The transcripts would be a much bigger step. At this point we don’t know the various opinions of the governor, deputy, the assistants or the public members of the board, who all sit in on the policy meetings. The minutes refer only to “some members” when concern or dissent is being registered. Further, unlike the Federal Reserve system, speeches by RBA officials toe the party line.

    Lorenzo, if I’m wrong, id love to see the transcripts!

  10. Gravatar of Lorenzo from Oz Lorenzo from Oz
    25. February 2014 at 23:01

    Actually, I said they release their minutes:
    http://www.themoneyillusion.com/?p=26229#comment-319690

    and I am just quoting their website:
    http://www.rba.gov.au/monetary-policy/rba-board-minutes/

  11. Gravatar of Ben J Ben J
    25. February 2014 at 23:30

    Ah ok, sorry Lorenzo.

    As far as I know, the RBA releases no transcripts. This means we don’t get much info about individual roles in monetary policy decisions, even years later.

  12. Gravatar of Ralph Musgrave Ralph Musgrave
    26. February 2014 at 02:12

    Scott,

    You trott out the tired old argument (para starting “All I can say…”) that we’ve just had a severe recession despite a large dollop of fiscal stimulus, which allegedly proves that fiscal stimulus doesn’t work. Well there’s an easy answer to that:

    We’ve just had a severe recession despite a large dollop of monetary stimulus, which proves that monetary stimulus doesn’t work.

    QED.

    However, I’m not impressed by either of the above arguments.

  13. Gravatar of foosion foosion
    26. February 2014 at 02:26

    >>Why does Aziz think Bernanke would not have done that sort of policy in an emergency situation where the Congress failed to act? Bernanke almost certainly would have said; “if Congress won’t do its duty the Fed will have to save the economy from depression; we’ll do level targeting of the price level along a 2% track from 2008.” >>

    Perhaps because Bernanke later talked about fiscal headwinds and that the Fed won’t or can’t do more. Perhaps because the Fed is tapering despite the data on inflation and employment and the fiscal headwinds. Perhaps because the Fed’s inability to recognize an emergency and its general attitude in 2008 as revealed in the transcripts.

  14. Gravatar of Benjamin Cole Benjamin Cole
    26. February 2014 at 03:43

    “Actually there aren’t any costs and risks of acting, the costs and risks apply to not acting, something that the doves understood very clearly in the 2008 transcripts”–Scott Sumner.

    Excellent!

    There is a misconception that doing nothing is safe–or in fact that doing nothing is doing nothing. If your neighbor’s house burns down, and you don’t even bother to call their department, are you doing nothing?

    For the Fed to take an academic interest in the Great Recession, or to merely pompously pettifog about the “evils” of inflation (Richard Fisher) is not “doing nothing.” It is being an active menace to American prosperity. It is not doing one thing: The Fed’s job.

    An analogy that maybe holds water (excuse the pun coming up): If you pump up your flat tire (assuming a slow leak), and you put more air than ever before, but the tire is still flat, should you

    1. stop pumping.
    2. keep pumping until the tire is inflated

    I say this analogy holds water, no?

    Speaking of water, I have decided it is time to fight fire with fire.

    From now on, we should refer to the “unforeseeable, unintended and potentially catastrophic consequences of a premature cessation of the Fed’s QE program.”

    There are “unpredictable consequences, potentially permanently corrosive in nature to our economy, of a decline in the level of QE at this time.”

  15. Gravatar of Mike Sax Mike Sax
    26. February 2014 at 03:45

    Speaking of Bernanke, Aziz has a good quote of him here. If the Fed is going to offset anything fiscal policy does even during this kind of slump Bernanke dodesn’t know about that-I guess he does it subconsciously.

    “To this list of reasons for the slow recovery “” the effects of the financial crisis, problems in the housing and mortgage markets, weaker-than-expected productivity growth, and events in Europe and elsewhere “” I would add one more significant factor–namely, fiscal policy. Federal fiscal policy was expansionary in 2009 and 2010. Since that time, however, federal fiscal policy has turned quite restrictive…”

    “Although long-term fiscal sustainability is a critical objective, excessively tight near-term fiscal policies have likely been counterproductive. Most importantly, with fiscal and monetary policy working in opposite directions, the recovery is weaker than it otherwise would be. But the current policy mix is particularly problematic when interest rates are very low, as is the case today. Monetary policy has less room to maneuver when interest rates are close to zero, while expansionary fiscal policy is likely both more effective and less costly in terms of increased debt burden when interest rates are pinned at low levels. A more balanced policy mix might also avoid some of the costs of very low interest rates, such as potential risks to financial stability, without sacrificing jobs and growth. [Business Insider]”

    I don’t know how much clearer he needs to be here. The level of fiscal contraction since 2011 has been counterproductive. It is counterproductive for fiscal and monetary policy to work in opposite directions.

    In other words he’s saying for the Fed to offset fiscal policy here would have been counterproducitve. In fact he’s complaining that fiscal policy has been undermining what monetary policy has done.

  16. Gravatar of Rajat Rajat
    26. February 2014 at 03:47

    In what way could the Japanese story of the last 20 years be not-inconsistent with not-old Keynesian economics?

  17. Gravatar of Daniel Daniel
    26. February 2014 at 04:38

    Ah yes, fiscal stimulus – is there anything in can’t do ?

    20 years of deficits in Japan – the result was deflation.
    Reagan’s deficits – and inflation decreased.

    It’s almost as if there is some powerful other force which controls aggregate demand. But what could it be ?

  18. Gravatar of ssumner ssumner
    26. February 2014 at 06:01

    lxdr, No, in the long run higher QE would not be required, as the amount of QE was already too much for an economy with positive interest rates.

    Ralph, Monetary policy has been contractionary. Yes, it’s been expansionary compared to the Eurozone, but our recession has been milder than the eurozone. Both had similar fiscal austerity.

    foosion, First of all we are talking about 2009, not 2008. Second, Bernanke has always indicated the Fed could do more.

    Mike, Fed officials said they were engaged in monetary offset in late 2012, I don’t know how much clearer they can be.

    I’ve addressed your comment in many earlier posts.

    Rajat, You’ll have to ask a NK.

    Daniel, Good question!

  19. Gravatar of TravisV TravisV
    26. February 2014 at 06:32

    Roger Farmer:

    “The Stock Market Crash of 2008 Caused the Great Recession”

    http://rogerfarmerblog.blogspot.com/2014/02/download-my-data-on-stock-market-and.html

    Hmmm strange theory. Does anyone know Farmer’s explanation for 1987 (when a massive stock market crash DIDN’T lead to recession)?

  20. Gravatar of TravisV TravisV
    26. February 2014 at 06:34

    Paul Krugman:

    “Uh-oh. Chinese equivalents of the TED spread and other gauges of financial stress in the US have widened sharply. The widening in the TED spread was one of the key reasons I was already very scared in late 2007. If past is prologue, we should be very worried about China now.”

    http://krugman.blogs.nytimes.com/2014/02/26/red-spreads/?_php=true&_type=blogs&_r=0

  21. Gravatar of M. M.
    26. February 2014 at 07:36

    Just a question about fiscal stimulus: if you assume some prices stickiness, why should there be a (perfect) monetary offset in case of a temporary fiscal shock?

    In NK models, fiscal shocks if unexpected and temporary can increase both AD AND AS in the short run through labor expansion (firms hire more labor because they can not freely adjust their prices). Thus the monetary offset is only partial and fiscal stimulus works.

  22. Gravatar of JLK JLK
    26. February 2014 at 09:16

    Clearly Bernanke has a model of the economy in his head in which fiscal policy could have an expansionary effect. (Find any transcript of testimony to Congress or press conferences from 2008 onward, and Ctrl-f on “fiscal” or “Congress.”) Further, he (and the rest of the Fed) believes there are “costs and risks” from expansionary monetary policy at previously lower and current levels of employment and inflation. Scott says he is wrong and there are none. Yet Scott often likes to point out when Bernanke agrees with him. So their respective models overlap in some respects, but differ in others (including policy prescription). A question: what are the differences in the two models about which Bernanke is correct? (i.e.what does he know that Scott doesn’t?) Or is Bernanke just wrong, about fiscal policy, monetary policy, or both?

  23. Gravatar of Matt McOsker Matt McOsker
    26. February 2014 at 10:01

    First, I am not arguing that the Fed did not do enough or fiscal is the only option. But, overall (fed, state and local) government spending, despite large deficits, has been pretty flat since the crisis. So when someone argues as Krugman has that the spending was not big enough – he might have a point given the size of the collapse in other areas. Domestic private investment collapsed, states severely cut back spending, and many increased their taxes too during the crisis – all drags on NGDP. On the plus side, our trade deficit declined significantly. PCE went down but seems to be fairly solid.

    FRED Chart:
    http://research.stlouisfed.org/fredgraph.png?g=svC

  24. Gravatar of John Thacker John Thacker
    26. February 2014 at 10:04

    In NK models, fiscal shocks if unexpected and temporary

    M:

    How do you propose “unexpected” fiscal shocks get through Congress? It seems a lot more likely to have “unexpected” Fed actions than unexpected fiscal stimulus. You’re expecting the Congress and the Presidency to act more quickly than the Fed.

    The most rapid stimulus in recent history would have to be the early 2008 stimulus checks, which passed in a matter of a couple of weeks. Would you say that they were not offset by the Fed, and that they were unexpected?

  25. Gravatar of M. M.
    26. February 2014 at 10:35

    I’m not saying no offset, I’m saying partial offset. Well, unexpected is not really the point. I just meant it was not known years before, thus agents (firms / households) could not adapt their behavior (pricing / coonsumption) to it.

    As I see it, if you assume that MP has real effects, you need some nominal stickiness. Expansionnary MP induces a shift in the AD curve and a move along the AS curve (which is not vertical, as prices are sticky).

    But the same logic applies for more AD due to gov. spendings (temporary): the increase in AD partially translates into inflation and partially into more AS. Thus the offset is partial and FP works.

    For the monetary ofsset to be perfect, you need the gov. spendings to have no effects at all on AS, i.e a vertical AS curve, i.e no nominal stickiness.

    Not saying one should use FP rather than MP (I think one should definitly prefer MP if possible), but just that if you believe MP works then you should also believe that FP works.

  26. Gravatar of Matt McOsker Matt McOsker
    26. February 2014 at 10:48

    M. – I’d say we needed MP and Fiscal in the 2008 debacle. And maybe better coordination, but politics is not part of most economic models, and probably could not be.

  27. Gravatar of John Thacker John Thacker
    26. February 2014 at 11:28

    M: The Japan experience is still difficult for me to dismiss. I have a difficult time looking at it and thinking that it would have been much worse without the fiscal stimulus. The influence of the monetary authority just looms larger.

  28. Gravatar of mpowell mpowell
    26. February 2014 at 11:41

    The title of Aziz piece is: “Did the fed undercut Obama’s Stimulus: no no no no”. And you’ve provided virtually no evidence that he’s wrong. Bernanke was explicitly calling for fiscal stimulus during this time. There’s the hypothetical of what the CB could have done with monetary offset over this time period and that is a debate about macroeconomics. Then there’s the hypothetical about what the Fed would have done absent Obama’s stimulus bill and that’s a matter of the people at the Fed. You would have been on better ground to just reiterate your argument that the fiscal multiplier is a measure of CB incompetence and just move on. Because Aziz has the best of his argument with Ponnuru.

  29. Gravatar of Major_Freedom Major_Freedom
    26. February 2014 at 12:22

    “Ben Bernanke said (in 2003) that neither interest rates nor the money supply are good indicators of the stance of monetary policy. Instead he suggests that NGDP growth and inflation are best. By that criterion monetary policy after 2008 was the tightest since Herbert Hoover was President. So Aziz is wrong in saying that policy was expansionary.”

    This is a non sequitur based on a fallacy of authority.

    First, Aziz being right or wrong in what he said isn’t grounded on what is occurring with NGDP. NGDP is an arbitrary statistic, because it would necessarily have to be politically imposed if it is goong to be a particular specific quantity.

    Two, what Bernanke thought in 2003 isn’t sufficient to conclude that Aziz is wrong. It is not a valid argument to say “Bernanke disagrees, hence you’re wrong.”

    Three, NGDP is not in fact a reliable indicator of the stance of monetary policy. This is because it ignores relative spending that only a free market in mpney can reveal. The same is true for price levels, i.e. “inflation”. Also, NGDP ignores not spending, i.e. money holding. Both of these are crucial to coordination, and yet forcing price levels this way or that by fiat, or forcing NGDP this way or that by fiat, affects relative spending and prices and moves them away from market determined relative prices and spending. So NGDP doesn’t work. It is just as flawed as price levels.

    A more reliable indicator than NGDP, which is itself flawed, is the ratio of money supply to volume of spending. At least here we can capture money holding. According to this metric, monetary policy during 2008 was incredibly expansionary.

    Productivity based monetary expansion is also more reliable than NGDP.

  30. Gravatar of Major_Freedom Major_Freedom
    26. February 2014 at 12:33

    “Bernanke almost certainly would have said; “if Congress won’t do its duty the Fed will have to save the economy from depression; we’ll do level targeting of the price level along a 2% track from 2008.” And guess what, the expansionary impact of that announcement would have exceeded the effect of the ARRA.”

    It is truly remarkable how deep the fallacious belief is that funny money dilution is something other than misleading and destructive

  31. Gravatar of Major_Freedom Major_Freedom
    26. February 2014 at 12:41

    TravisV:

    “Hmmm, strange theory. Does anyone know Farmer’s explanation for 1987 (when a massive stock market crash didn’t lead to recession)?”

    Because the Fed reinflated, and postponed the recession to 1991, which was quite acute.

    That more inflation can delay and increase the intensity of a bust that was itself caused by previous inflation, it doesn’t mean that the delayed bust is caused by insufficient inflation. It’s still caused by previous inflation.

  32. Gravatar of Jason Jason
    26. February 2014 at 13:00

    I have an argument that the Fed offset the “IS-LM” effect — i.e. shifting the IS curve — of the stimulus (it didn’t have to do very much to do so, so it probably did), but didn’t offset the “AD-AS” effect — i.e. increasing AD — of the stimulus (it would have had to do a lot to do so, so it probably didn’t):

    http://informationtransfereconomics.blogspot.com/2014/02/did-fed-offset-arra.html

    Everyone is right! :)

  33. Gravatar of marcus nunes marcus nunes
    26. February 2014 at 13:49

    No title
    Aziz had the gall to tell me that “correlation is not causation”

  34. Gravatar of benjamin cole benjamin cole
    26. February 2014 at 15:32

    Re China: Maybe the threat to China is bad loans, but I don’t see how if real estate values hold. Also their central bank can recapitalize banks.
    The threat yo China is probably central bankerfication of their central bank, the People’s Bank of China. The CCP has been good at monetary policy and China has boomed with moderate inflation.
    But lately the PBoC hs undershot targets…

  35. Gravatar of lxdr1f7 lxdr1f7
    26. February 2014 at 16:08

    “lxdr, No, in the long run higher QE would not be required, as the amount of QE was already too much for an economy with positive interest rates.”

    How do we estimate this with any certainty?

  36. Gravatar of Mike Sax Mike Sax
    26. February 2014 at 16:20

    You may not know how much clearer they could be but I do-Bernanke was clearer in what he said. He said the fiscal contraction was counterproductive. How do you spin this one into meaning the opposite? You addressed what he said in past posts?-it was a recent statement. Is it the time you said well they do monetary offset but they don’t know that they do it? Or maybe they do it but just never admit it? I remember at least one post that said something like that. How does that somehow wave away the fact that he said the fiscal contraction of the last 3 years has been counterproductive? It certainly sounds like he doesn’t think it best that fiscal and monetary policy work at cross purposes.

    If you addressed Bernanke saying that fiscal austerity has been counterproductive, fine, where is the link? Or is actually providing a link somehow beneath you?

    I don’t know who these phantom ‘Fed officials’ were back in 2012 that said that fiscal austerity hasn’t been counterproductive-maybe it was that post where they said X but you said they really meant Y- but apparently Bernanke disagrees with them, even after you had this imaginary bet that MM supposedly won in 2013. I guess Bernanke wasn’t too impressed by that either. Even after we had more growth due to austerity-as if we hadn’t had the austerity by your logic we would have less QE-he still says it’s counterproductive.

  37. Gravatar of Mike Sax Mike Sax
    26. February 2014 at 16:41

    Turns out Bernanke doesn’t believe in monetary offset either

    http://diaryofarepublicanhater.blogspot.com/2014/02/turns-out-bernanke-doesnt-believe-in.html

  38. Gravatar of Major_Freedom Major_Freedom
    26. February 2014 at 18:50

    “Even Bernanke would not agree with that. He’s consistently indicated that the Fed could have done more, but simply chose not to. The concern was “costs and risks” of unconventional stimulus. Actually there aren’t any costs and risks of acting, the costs and risks apply to not acting, something that the doves understood very clearly in the 2008 transcripts.”

    The italicized portion is incorrect. There are indeed costs and risks of acting. Every action has costs. Economists call it the law of opportunity costs. You do X, and you sacrifice all other possible alternatives ~X that would have required the same means as X.

    The costs of “acting”, that is, the costs of more inflation, is financial instability, capital distortions, and inevitable future painful corrections, along with relative economic stagnation compared to the optimal alternative of a free market in money.

    The Fed never stops inflating. What MMs call “not acting” is actually just a lower rate of inflation.

  39. Gravatar of Don Geddis Don Geddis
    26. February 2014 at 19:22

    MF: You need to brush up on your basic economics. First you talk about the “law of opportunity costs”, but then in your example (inflation), you only mention (hypothetical) direct costs, not opportunity costs!

    If you’re going to try to use real economic terminology, you might want to try to understand it first…

    (BTW: A big part of the benefit of monetary stimulus, is that its opportunity costs are close to zero.)

  40. Gravatar of TallDave TallDave
    26. February 2014 at 19:39

    Falling into a Japan-style trap of years of deflation “” something the United States has avoided “” would have been a much larger possibility without the relatively small amount of fiscal stimulus the United States had.

    Headdesk. How does someone write that sentence unironically? I mean, come on.

    That’s enough Internet for today, I can’t even

  41. Gravatar of Major_Freedom Major_Freedom
    26. February 2014 at 19:58

    Don Geddis:

    “MF: You need to brush up on your basic economics. First you talk about the “law of opportunity costs”, but then in your example (inflation), you only mention (hypothetical) direct costs, not opportunity costs!”

    You’re right! Good catch. I originally meant to say, but for some reason forgot along the way:

    The [opportunity] costs of “acting”, that is, the costs of more inflation, is financial stability, capital coordination, and avoidance of painful corrections, along with relative economic growth compared to the suboptimal alternative of fascist money production.

    “(BTW: A big part of the benefit of monetary stimulus, is that its opportunity costs are close to zero.)”

    That’s not true. The cost of fiat money is NOT just the material costs of the fiat paper itself, or the digital information itself.

    The full costs of fiat money includes the cost of running a state, because without a state, central banking is impossible.

    And, we must include the full costs of running the state, because if the only thing the state did was tax and threaten people with prison in order to impose the Federal Reserve system on them, then that institution would almost certainly be viewed as a criminal organization. So the state has to give away freebies so as to make it more palatable to the people. That costs money.

    The last time I checked, the costs of running the US state was, if you go by what it taxes, around $3 trillion a year. That is how much it costs to run a state that is necessary to enforce central banking and thus fiat money that itself costs very little.

    While I goofed on what I meant to write, I know that you just ignored both direct and opportunity costs by claiming the cost of fiat money is close to zero.

  42. Gravatar of Major_Freedom Major_Freedom
    26. February 2014 at 20:04

    I mean really Don, would it make any sense to sat that because sending an email costs next to nothing, that I can set up a system from scratch that can send and receive emails for close to zero costs?

    We have to take into account the full costs of investment required to enable, with the help of labor, the marginally low cost item to be produced.

    There are marginal costs, and there are full costs. You have to take into account full costs.

  43. Gravatar of Major_Freedom Major_Freedom
    26. February 2014 at 20:26

    Don:

    Then there is the moral argument.

    Do you, Don, support me being shot if I disagree with you about what money I want to trade in? With the existing laws, I am not able to choose what money I use, without being initiated with force, because I MUST seek out US dollars to pay taxes in US dollars. But I would rather never accept US dollars. Do you support me being shot because of that?

  44. Gravatar of Don Geddis Don Geddis
    26. February 2014 at 21:23

    MF: “Do you, Don, support me being shot

    I do, yes. Thanks for asking!

  45. Gravatar of Major_Freedom Major_Freedom
    26. February 2014 at 22:33

    I guess I am not surprised that Sumner’s fanbase would be composed of sociopaths. I mean, his intellectual foundation is grounded on violence. Like flies on…

    Makes me wonder how many more such fans he has.

    Well Don, all I can say to you is that I’m glad I asked, and, since you revealed yourself as a sociopath, since you want to shoot me, it is a good thing, for you, that we don’t cross paths. I’m guessing your family would rather you make it home for dinner.

    I hope other readers of this blog who aren’t sociopaths, understand who it is they are talkong with deep down.

    Or is that not “pragmatic”?

  46. Gravatar of Tom Brown Tom Brown
    27. February 2014 at 00:26

    Don Geddis, you’re one funny sociopath. 😀

  47. Gravatar of Mike Sax Mike Sax
    27. February 2014 at 03:54

    “Do you, Don, support me being shot if I disagree with you about what money I want to trade in? With the existing laws, I am not able to choose what money I use, without being initiated with force, because I MUST seek out US dollars to pay taxes in US dollars. But I would rather never accept US dollars. Do you support me being shot because of that”

    Amazing Major. Yet you claim I’m the drama queen. I’ve never heard a more mawkish outburst in my life.

  48. Gravatar of Ben J Ben J
    27. February 2014 at 05:24

    Today is the day Major Freedom went full internet tough guy

  49. Gravatar of Ben B Ben B
    27. February 2014 at 05:49

    Ben J,

    Are “real life” tough guys the ones who use the threat of violence behind a monopoly on violence to establish a monopoly on money production?

  50. Gravatar of ssumner ssumner
    27. February 2014 at 05:53

    M, I agree that fiscal stimulus can increase AS, but unless marginal tax rates are cut it’s not a big factor.

    JLK, I’ve discussed Bernanke’s views on offset in other posts.

    M, You said;

    “For the monetary ofsset to be perfect, you need the gov. spendings to have no effects at all on AS, i.e a vertical AS curve, i.e no nominal stickiness.”

    This is false, you are confusing shifts in AS and AD with movements along the curves. Monetary offset implies AD does not move, it does not require any assumptions about the slope of AS.

    mpowell, The burden of proof in on Aziz, but he did not make a single persuasive argument. And the empirical evidence is against fiscal stimulus.

    lxdr, You look at market indicators.

    Mike Sax, As usual you don’t even understand the issues being debated. I never claimed Fed officials claimed fiscal stimulus was ineffective. I said they claimed the Fed was engaged in monetary offset. And I have quoted them saying that in earlier posts. Pay attention.

    Talldave, You have the comment of the day, responding to this paragraph:

    “Falling into a Japan-style trap of years of deflation “” something the United States has avoided “” would have been a much larger possibility without the relatively small amount of fiscal stimulus the United States had.”

    With this comment:

    “Headdesk. How does someone write that sentence unironically? I mean, come on.”

    That’s how far inside the bubble Keynesians are. They think citing Japan somehow supports their case.

  51. Gravatar of Ben B Ben B
    27. February 2014 at 05:56

    Mike Sax,

    Claiming that a statement is mawkish doesn’t help understand whether or not you think it’s morally right to use violence against someone because they don’t want to have US dollars forced on them. I’m guessing that you would rather not directly address the question because you don’t have a non-sociopathic answer.

  52. Gravatar of Major_Freedom Major_Freedom
    27. February 2014 at 06:01

    Mike,

    Actually that question is one we should all be asking each other. It isn’t drama queen behavior, but a very effective means by which we can get to people’s actual core beliefs. That in my opinion is where we must go if we want real, and lasting change for the better. Talking about “do you support the welfare state” doesn’t get us anywhere. But, if I ask you the same question but in a slightly different way: “Mike, do you support me getting shot if I do not want to pay for welfare?” then we get to what you really think about the welfare state.

    Mawkish outburst? Really? Don tells me that he would like me shot, and I am the one with an outburst to be concerned about? I know we’ve had our differences, but come on, I don’t think now is the time for that. I think the time is for you and others to realize the kinds of people you’re dealing with here.

    I love to rock the intellectual boat. You should know that by now.

  53. Gravatar of Major_Freedom Major_Freedom
    27. February 2014 at 06:06

    Tom Brown:

    Glad you find that funny. Wow, did I ever expose some insight about the visitors here!

    Ben J:

    Who are the internet tough guys again? Not the ones who hide behind the skirt of the state because they’re too chickwn to impose their ideal monetary system on others themselves?

  54. Gravatar of Benjamin Cole Benjamin Cole
    27. February 2014 at 06:06

    I want everyone to know that I am the toughest man in the whole World Wide Web.

    Money? Paper printed by the U.S. Federal Reserve? I use Benjamin Franklins to wipe my butt.

    I light by Cuban cigars with US Grant–and I will blow the smoke in the face of any fiat-money sissies out there.

    I went into a bar in Wilmington, down by the harbor, and I put gold down on the bar to buy a drink, and I told the bartender not to give me any punk-paper money in change—I only take metal, as in silver.

    Somehow, these guys didn’t know I was the toughest man on the World Wide Web, and lucky for them I was already leaving when they booted me in the rear.

    I am posting this comment on my smartphone on the sidewalk, to show them I am not afraid of any fiat-money weenies. They are pretending not to be scared or to notice me.

  55. Gravatar of Major_Freedom Major_Freedom
    27. February 2014 at 06:34

    Benjamin:

    Oh ya, you’re real tough, hiding behind the government’s skirt just like Ben J. It takes a lot of guts to dp that.

  56. Gravatar of TravisV TravisV
    27. February 2014 at 07:15

    Matt O’Brien praises the 2009 fiscal stimulus. Why?????

    http://www.theatlantic.com/business/archive/2014/02/happy-birthday-stimulus-you-saved-the-world/283950

  57. Gravatar of mpowell mpowell
    27. February 2014 at 10:51

    Scott,

    I really don’t understand how Bernanke publicly calling for more fiscal stimulus isn’t a good argument that Bernanke wasn’t already undercutting the fiscal stimulus being provided. As I said, this isn’t a macro argument. This is about the politics of the fed. To refute Aziz’ claim you basically have to argue that Bernanke was either lying to the public and Congress about his preferences or that the fed was unintentionally undercutting fiscal stimulus. Talking about burden of proof doesn’t have any meaning in public debate. But I’ll put it this way: I’m going to start from the assumption that if the fed doesn’t intend to undercut fiscal stimulus they won’t. I won’t believe otherwise unless I see a good argument. So from my perspective, the burden of proof is not on Aziz.

  58. Gravatar of flow5 flow5
    27. February 2014 at 11:39

    The boom/bust’s cause (or catalyst – the mal-distribution and mis-allocation of risk credit assets that serve as loan collateral, i.e., credit allocation was bolstered or implicitly targeted via gov’t legislation, which was then incentivized by an excessively easy money policy), subsequently followed by the effect of a contractionary FOMC money policy (impaired assets).

    The “administered” housing prices would not be the “asked” prices, were they not “validated” by (MVt), i.e., “validated” by the world’s Central Banks. I.e., Central Bankers indirectly control housing price levels.

    And unless the roc in money flows expands at least at the rate prices are being pushed up, output can’t be sold and hence the work force will be cut back (because of limited upward & downward price flexibility in our economy since the Great-Depression). I.e., Bankrupt you Bernanke was the sole cause of the Great-Recession.

  59. Gravatar of flow5 flow5
    27. February 2014 at 11:41

    “Ben Bernanke said (in 2003) that neither interest rates nor the money supply are good indicators of the stance of monetary policy”

    Bankrupt you Bernanke doesn’t know the difference between money & liquid assets.

  60. Gravatar of Don Geddis Don Geddis
    27. February 2014 at 12:08

    @mpowell: “if the fed doesn’t intend to undercut fiscal stimulus they won’t

    Does the Fed desire more aggregate demand? Or not?

    If the answer is yes (and that’s why they welcome additional fiscal stimulus), then the natural question is: why haven’t they already provided this additional aggregate demand themselves? Do they not believe they have the power to raise AD? (That would seem to be a laughable claim.) Do they somehow think that using fiscal policy to raise AD is “better” in some way than using monetary policy? In what way, specifically?

    If, instead, AD is exactly where they wish to target it (say, for concerns about inflation) … then that implies that additional fiscal stimulus would raise it higher than they want, so of course they ought to offset any fiscal stimulus. Because their whole purpose is to control nominal aggregates, to hit their own targets.

    So, yes: Bernanke indeed said that he welcomed fiscal stimulus. But there is no reasonable macro model where his claim makes any sense. The best explanation is that he’s trying to defer blame from the failures of the Fed itself. He’s just looking for a plausible scapegoat, that’s all.

  61. Gravatar of Tom Brown Tom Brown
    27. February 2014 at 13:36

    MF, you don’t think there are funny sociopaths? You don’t have to be one to enjoy their humor… 😀
    (but it helps!)

  62. Gravatar of Major_Freedom Major_Freedom
    27. February 2014 at 15:22

    Tom Brown:

    Funny sociopaths are still sociopaths.

  63. Gravatar of flow5 flow5
    27. February 2014 at 15:43

    “Because the Fed reinflated, and postponed the recession to 1991, which was quite acute”

    Black Monday was simply the result of a very contractual money policy (the most negative since 1929). I.e., the Fed screwed up big time on bank squaring day.

  64. Gravatar of Mike Sax Mike Sax
    27. February 2014 at 16:20

    “As usual you don’t even understand the issues being debated.”

    As usual you’re using that same old crutch. The issue I brought up was that Bernanke clearly thinks monetary offset is counterproductive-where monetary and fiscal policy work at cross purposes at least during this kind of slump. Maybe during an overheated boom he might think that but not now.

    By ‘pay attention’ you mean that no one can read on of your posts without having read all 2000 or so previous ones and memorizing them word for word? You can’t assume everyone who reads a post read every other one you wrote-which is why a reasonable person may post a link more than once who’s trying to facilitate a real intellectual discussion rather than an indoctrination meeting-I see that as another crutch You can’t answer Bernanke here so you’re deflecting.

  65. Gravatar of Major_Freedom Major_Freedom
    27. February 2014 at 16:27

    flow5:

    “Black Monday was simply the result of a very contractual money policy (the most negative since 1929). I.e., the Fed screwed up big time on bank squaring day.”

    You’re ignoring the inflationary boom prior that made the Fed have to increase inflation even more to avoid a crash.

  66. Gravatar of Benjamin Cole Benjamin Cole
    27. February 2014 at 22:42

    Major Freedom:

    I challenge you to a duel!

  67. Gravatar of ssumner ssumner
    28. February 2014 at 05:06

    mpowell, I’ve discussed that argument many times in previous posts. Fed officials (including Bernanke) say many contradictory things. You can fixate on one comment that suggests they do offset, or another comment that implies they don’t. I look at the EVIDENCE.

    I do agree that Bernanke would prefer the Congress do more so that the Fed would be able to do less.

  68. Gravatar of flow5 flow5
    28. February 2014 at 08:42

    “You’re ignoring the inflationary boom prior that made the Fed have to increase inflation even more to avoid a crash”

    On Sept. 4 the Fed raised (1) the discount rate 1/2 percent to 6, & (2) the federal funds rate 1/2 percent to 7.25 (up from 5.875 percent in Jan). On Sept. 30 fed funds spiked at 8.38; fell to 7.30 by Oct. 7; then rose to a peak of 7.61 Oct 19 (Black Monday).

    At the same time, (Sept. & Oct 87), the decline in the proxy for real-gdp (its 10 month rate-of-change) plummeted (the sharpest decline in the statistical release since the Great-Depression). Then the quantity of legal reserves bottomed in the bi-weekly period ending 10/21/87. This was the trigger.

    At the time, the 30 year conventional mortgage yielded 11.26 percent, up from 8.49 percent in Jan. 87, & Moody’s 30 year AAA corporate bonds yielded 11.06 percent on 10/19/87, up from 9.37 in Jan. 87.

    The preceding tight monetary policy & the sharp reduction in legal reserves, had forced all interest rates up in the short run (when inflation & real-gdp were subsiding).

    And the banks scrambled for reserves at the end of their maintenance period – to (& bank squaring day), support their loans-deposits (contemporaneous reserve requirements were in effect exacerbating the shortfall & response time). Apparently a significant number of banks, or large banks with large reserve deficiencies, tried to settle their obligations at the last moment. And the NY “trading desk” failed to accommodate the liquidity needs in the money market.

    Black Monday’s trigger was obscured because the decline in monetary flows (MVt) which overlapped Qtr3’s & Qtr4’s GDP (quarterly reports are used by the Bureau of Economic Analysis to measure gross domestic product – not monthly).

    The Fed quickly reversed their policy when the markets panicked, i.e., they brought the volume legal reserves back into alignment.

  69. Gravatar of flow5 flow5
    28. February 2014 at 08:50

    The significant economic purpose for which a debt was contracted, or the manner in which it was financed, is of in-estimable value in evaluating its economic impact.

    QE encourages FINANCIAL investment as opposed to REAL investment (like 1929). E.g., depending on whether a debt is acquired to finance the acquisition of a:

    (1) (new-security), the proceeds of which are used to finance plant and equipment expansion, or the construction of a new house, rather than the purchase of an

    (2) (existing-security) or to finance the purchase of an existing house (read bailout), or to finance (1) (inventory-expansion), rather than refinance (2) (existing-inventories).

    The former types of investment are designated as (1) “real” as contrasted to the latter (2), which constitute “financial” investment (existing homes).

    Financial investment provides a relatively insignificant demand for labor and materials and in some instances the over-all effects may actually be retarding to the economy. Compared to real investment, financial investment is rather inconsequential as a contributor to employment and production. Only debt growing out of real investment or consumption makes an actual direct demand for labor and materials.

    The “key” to understanding the simple science is in identifying the use & non-use of savings. Macro economics concerns the rate-of-change in the flow-of-funds. And there is no such thing as “pushing on a string”. The Gov’t is the CB’s best credit worthy borrower. But the Gov’t is not the best user of savings.

  70. Gravatar of flow5 flow5
    28. February 2014 at 08:52

    Credit is the obverse of debt. Deficits, therefore, can be good, bad, or indifferent. Credit, properly used, is the “life blood” of a healthy economy. If the monies represented by the deficits are spent on projects which increase productivity and reduce waste, the deficits are beneficial no matter how financed. The initial inflationary effects of bank financing are quickly overcome by the larger output and lower unit costs. Debt incurred which reduces unit costs of production and promotes the health and welfare of the population obviously is “good” debt.

    Debt incurred to finance transfer payments (interest, pensions, etc.) is of dubious quality. Any enterprise, private or public, is in dire straits if it has borrowed in order to make such payments.

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