Cash and the zero lower bound

Let’s review the (alleged) zero bound problem.  The nominal interest rate falls to zero.  The Fed injects base money, and banks choose to hold it as excess reserves.  The Fed could try to force banks to lend it out with negative interest on reserves (IOR), but in that case deposit rates would go slightly negative and the public would pull the money out and hold it as cash.  The existence of cash creates an effective zero lower bound on nominal interest rates, or perhaps a lower bound of a few basis points negative, as there are costs of holding cash.

Many Keynesians think that this in some way makes monetary stimulus ineffective.  This is wrong, but let’s put that issue aside and consider another issue—does eliminating cash solve the zero bound problem, at least from the perspective of monetary policy ineffectiveness?  And the answer is clearly yes.  If you eliminate cash then the medium of account is 100 percent bank reserves.  If the Fed charges a negative 6 percent rate on bank reserves then the demand for bank reserves would plunge much lower, and AD would soar much higher. What happens to market interest rates in that scenario?  I’m not sure, but it doesn’t matter.  Eliminate cash and you definitely eliminate the zero bound problem on the policy rate.  The Fed can again use interest rates (IOR) as their policy lever.

Tyler Cowen links to a John Cochrane post that discusses the Keynesian argument for eliminating currency.  I agree with Cochrane that eliminating cash is a really bad idea, for standard libertarian reasons.  But Cochrane misses the point when he argues that people can still earn zero rates of return on other assets, such as stamps, gift cards and prepaid taxes, even if cash were eliminated.  Stamps,  gift cards and prepaid taxes are not the medium of account, only cash and bank reserves count.  If you eliminate cash and charge a strongly negative rare of bank reserves, the hot potato effect kicks in with a vengeance. Monetary policy is all about changes in the supply and demand for the medium of account.

Ironically, despite the fact that Cochrane teaches at the University of Chicago, he uses a strongly interest-rate oriented approach to monetary economics.  Milton Friedman used to insist that Keynesians kept making basic mistakes by assuming that monetary policy could be thought of in terms of market interest rates. Friedman was right, focusing on interest rates causes nothing but confusion.  (And recall the neo-Fisherian debate, which also got on the wrong track by assuming that changes in fed funds interest rates were “monetary policy.”)

PS.  I’m skipping over the dubious assumption that investors would be able to park trillions of dollars in zero interest gift cards in a negative IOR scenario.  My point is that even if they could, it would not prevent negative IOR from solving the zero bound “problem,” which of course all market monetarists already know is not actually a problem.


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148 Responses to “Cash and the zero lower bound”

  1. Gravatar of CMA CMA
    1. January 2015 at 22:01

    You dont need negative rates or to abolish currency if the fed conducts heli’s.

  2. Gravatar of Ray Lopez Ray Lopez
    1. January 2015 at 22:22

    Wow, where do I start? Sumner says: “The Fed could try to force banks to lend it out with negative interest on reserves (IOR), but in that case deposit rates would go slightly negative and the public would pull the money out and hold it as cash.”

    So what? So what if people store money in their mattress? Here in the Philippines, most poor people do not have bank accounts, and do just that. Most of the country is poor and I would not be surprised if 50% or more hold money outside of banks. Apparently the Keynesians (including their TNGDP close cousins) think that having money outside the bank system and not being able to manipulate the money supply via “multipliers” is bad. So they propose to abolish money! An amazing leap of logic. If this keeps up I see a bright future for Bitcoin, which, btw, like gold is a ‘hard currency’.

  3. Gravatar of Negation of Ideology Negation of Ideology
    1. January 2015 at 22:53

    Ray, you say:

    “Apparently the Keynesians (including their TNGDP close cousins) think that having money outside the bank system and not being able to manipulate the money supply via “multipliers” is bad. So they propose to abolish money!”

    Scott says the opposite:

    “I agree with Cochrane that eliminating cash is a really bad idea, for standard libertarian reasons.” and he also says of the zero bound – “which of course all market monetarists already know is not actually a problem.” So he’s opposed to abolishing cash, and disagrees that the “problem” they want to solve is really a problem.

    Ray, you really need to work on reading comprehension.

  4. Gravatar of Scott Sumner Scott Sumner
    1. January 2015 at 23:00

    CMA, Even a child knows that dumping money out of a helicopter is a silly idea.

  5. Gravatar of Scott Sumner Scott Sumner
    1. January 2015 at 23:04

    Ray, You are in way over your head. I oppose eliminating cash and don’t think the zero bound in any way inhibits monetary stimulus. You would have known that if you’d read the post.

    I also see a future for Bitcoin, or something similar. What does any of this have to do with the post? Nothing, as with your other comments. Who cares what the poor in the Philippines do with their cash.

    Keep trying, maybe someday you’ll leave a sensible comment.

  6. Gravatar of CMA CMA
    1. January 2015 at 23:30

    “CMA, Even a child knows that dumping money out of a helicopter is a silly idea.”

    Only a child would think that.

  7. Gravatar of Ralph Musgrave Ralph Musgrave
    2. January 2015 at 02:34

    Re the CMA versus Scott Sumner argument above, I’m with CMA. Scott: what are your actual REASONS for saying helicoptering is “silly”?

    There is however a weakness in helicoptering, which is that it may feed a relatively large amount cash into the private sector for a given effect on demand, and that may need to be reversed at a later date, which can be politically difficult. Thus a better option is to disburse about half the new money via extra government spending. The effect on employment of every dollar created and spent is more predictable in the case of government spending.

    An additional weakness in negative IOR is that it makes negative output profitable. Here is a simple, if somewhat silly example. I borrow money at minus 3%. I buy 100 houses and knock down one just for fun. A year later I re-sell them (say at the same price). Ignoring costs of sale, etc I make a profit!

  8. Gravatar of Ray Lopez Ray Lopez
    2. January 2015 at 03:06

    @Negation of Ideology, @ Sumner: You guys failed to read this sentence: “This is wrong, but let’s put that issue aside and consider another issue””does eliminating cash solve the zero bound problem, at least from the perspective of monetary policy ineffectiveness? And the answer is clearly yes . If you eliminate cash then the medium of account is 100 percent bank reserves. ”

    I’m not making this stuff up, the author of this blog is.

  9. Gravatar of Ben J Ben J
    2. January 2015 at 03:26

    Originally this comment was sarcastic, but Ray seems to struggle with anything unless it is strictly literal, so I rewrote it:

    Ray, do you understand the zero lower bound problem as stated by any New-Keynesian? They believe that negative policy rates will cause the public to hold all their base money in physical currency, which has a fixed nominal interest rate of zero, and thus that the policy rate cannot go below zero, and thus that in such a period monetary policy is effective.

    Scott is saying that this view is false, and thus that radical solutions like eliminating physical currency (which would obviously work) are not neccessary, and would be bad on libertarian grounds.

    You are literally criticising him for a view that is the opposite of what he holds. You have eclipsed every other commenter I have ever seen here in terms of terrible criticism. Remarkable.

  10. Gravatar of Ben J Ben J
    2. January 2015 at 03:28

    Ahh! Terrible typo:

    End of second sentence should of course be “and thus that in such a period monetary policy is INeffective.”

  11. Gravatar of Grant Gould Grant Gould
    2. January 2015 at 06:37

    If nothing else, it would be a great empirical test for the question of what sorts of things a medium of account is.

    If something can become a centrally controlled and surveilled accumulation of interest rate gimmicks, redefinable at the whim of the Fed’s software engineers, and yet still remain used as a medium of account, that would be a truly remarkable result indeed.

    Our host nails it: This solution, which isn’t a solution, is far worse than the problem, which isn’t a problem. Whatever one thinks of market monetarism, the notion of abolishing currency to make central bankers’ lives easier is so profoundly out of scale that it would be a _reductio ad absurdum_ in any other context.

  12. Gravatar of TravisV TravisV
    2. January 2015 at 06:58

    “Mario Draghi May Have Just Promised Quantitative Easing In Europe”

    http://www.businessinsider.com/mario-draghi-handelsblatt-interview-2015-1

  13. Gravatar of TravisV TravisV
    2. January 2015 at 07:11

    Dear Commenters,

    What are the most important issues Prof. Sumner disagrees with the WSJ editorial board about?

    Off the top of my head, I can only think of monetary policy, financial regulation and (maybe) pollution, defense policy, police, prisons and surveillance……

  14. Gravatar of TravisV TravisV
    2. January 2015 at 07:12

    Dear Commenters,

    Please see this post on the “economistic worldview.” http://www.themoneyillusion.com/?p=640

    Does Paul Krugman disagree with economists about any of points #1 – #7 listed by Sumner?

    If not, maybe Krugman isn’t truly that much of a leftist……

  15. Gravatar of LK Beland LK Beland
    2. January 2015 at 07:43

    The government/Fed could increase the cost of holding cash without eliminating it altogether. Simply stamping out 100$ bills (or even 20$ bills, for that matter) could go a long way in making cash less attractive, without going all 1984 on us.

  16. Gravatar of ThomasH ThomasH
    2. January 2015 at 07:45

    @ TravisV. Center-right Krugman is a “leftist?” What a silly idea.

    All the bad things that Cochrian says could happen would not prevent no-cash negative interest rate policy from increasing AD. It’s just unnecessary.

  17. Gravatar of Jim S Jim S
    2. January 2015 at 07:55

    I’m surprised that Miles Kimball; author of the blog “Confessions of a Supply-Side Liberal” has not been mentioned in this discussion. He has been pushing this idea hard since at least 2012. Examples of his posts are:
    â—¾How Subordinating Paper Money to Electronic Money Can End Recessions and End Inflation
    â—¾How the Electronic Deutsche Mark Can Save Europe
    â—¾Could the UK be the First Country to Adopt Electronic Money?
    â—¾Electronic Money: The Powerpoint File
    â—¾America’s Big Monetary Policy Mistake: How Negative Interest Rates Could Have Stopped the Great Recession in Its Tracks

  18. Gravatar of Brian Donohue Brian Donohue
    2. January 2015 at 08:21

    I’m with LK Beland and the heli-droppers. What do negative nominal rates get you that 0% rates and 2% inflation don’t?

  19. Gravatar of JP Koning JP Koning
    2. January 2015 at 08:30

    I’m just trying to anticipate what Cochrane might say here, but if cash is eliminated then why must reserves necessarily become the medium of account? What if the population chooses to use gift cards etc as the medium of account?

  20. Gravatar of Scott Sumner Scott Sumner
    2. January 2015 at 08:49

    Ralph, Given that I’ve responded to this question dozens of times, I can only assume you have a weak memory. Maybe I shouldn’t have been so snarky with CMA, but I am trying to run a serious blog and after six years it gets tiresome to respond to people who talk about dumping money out of helicopters. There is no possible justification for such a loony idea.

  21. Gravatar of Scott Sumner Scott Sumner
    2. January 2015 at 08:54

    Brian, I’m not saying negative rates are a good idea, just that they eliminate the zero bound “problem.”

    Everyone, It’s really hard to eliminate cash or bank reserves as a MOA. Even in high inflation countries the public tends to cling to base money as the MOA.

  22. Gravatar of Ray Lopez Ray Lopez
    2. January 2015 at 09:00

    BenJ: “Scott is saying that this view is false, and thus that radical solutions like eliminating physical currency (which would obviously work) are not neccessary, and would be bad on libertarian grounds.”

    But why would it “obviously” work if the theory is wrong? Hence Sumner is adopting the Neo-Keynesian model for liquidity preference? Clear as mud.

    Here is what a Neo-Keynesian says btw on this issue: “Moreover, longer-term rates will then be higher than short-term rates , because of what Keynes called ‘liquidity preference’: thus, if short-term and long-term rates were both zero, the owner of bonds would be forgoing the benefits of holding a liquid and riskless asset – money – for no compensating return. As a result, in a deflationary environment, it is even harder to make long-term real rates negative than short-term ones. In these conditions , therefore , deflation or even low inflation may prove highly contractionary for the economy.” – Wolf, Martin (2014-09-11). The Shifts and the Shocks: What We’ve Learned-and Have Still to Learn-from the Financial Crisis (p. 39). Penguin Group US. Kindle Edition.

    Thanks for this exchange. To be blunt I don’t want to discuss it further. It’s clear to me that Sumner enjoys being opaque, possibly to ‘hedge his bets’ with weasel words. Krugman does the same thing and so do most economists (I do like M. Wolf however, he writes clearly, though I disagree with his Neo-Keynesian interpretation at times).

  23. Gravatar of benjamin cole benjamin cole
    2. January 2015 at 09:08

    These loopy discussions about 0% inflation and negative interest rates and deflationary federal police-state cashless nations happen because…economists have lost their minds. there is a cadre of economist who insist (without any real world examples) the economic cure-all is zero percent inflation or mild deflation.
    Or, we can keep inflation in the 2 percent to 3 percent range, and keep our cash and have prosperity: it was called 1982 to 2007. Of course, I am only citing the real world and recent history. John Cochrane has an economic model he can refer to, evidently much more persuasive. And you know what they say, “Sure, mild inflation might work in practice, but more importantly, does it work in theory or in my model?”

    Casel Stengel once asked, “Can’t anybody here play this game?” Scott Sumner knows when Stengel asked that.

  24. Gravatar of David de los Ángeles Buendía David de los Ángeles Buendía
    2. January 2015 at 09:08

    Dr. Sumner,

    1) You wrote:”The Fed injects base money, and banks choose to hold it as excess reserves. The Fed could try to force banks to lend it out with negative interest on reserves (IOR), but in that case deposit rates would go slightly negative and the public would pull the money out and hold it as cash.”

    I believe that this summary is inaccurate. How much money banks collectively hold in excess reserve is not a function of individual bank decisions making but rather Federal Reserve Bank (FRB) policy. As the FRB of New York notes:

    “While changes in bank lending behavior may lead to small changes in the level of required reserves, the vast majority of the newly-created reserves will end up being held as excess reserves almost no matter how banks react. In other words, the quantity of excess reserves depicted in Figure 1 reflects the size of the Federal Reserve’s policy initiatives, but says little or nothing about their effects on bank lending or on the economy more broadly.”[1]

    Bank lending is not a function of the size of excess reserves.

    2) You wrote:”Many Keynesians think that this in some way makes monetary stimulus ineffective.”

    I believe that this is misstating or obscuring the problem. During periods of economic contraction (e.g. the Great Recession) central banks, (e.g. The Federal Reserve Bank) attempt to lower interest rates through Open Market Operations (OMO, i.e. buying United States Treasury (UST) Bonds, Bills, and Notes) with newly created currency (e.g. Federal Reserve Notes). Under these conditions government securities would pay almost no interest which makes them indistinguishable from currency. It is thus impossible for the central bank to lower interest rates further and thus provide additional stimulus through lower interest rates. A central banks is thus “out of ammunition”.

    This is why unconventional monetary policy (e.g. the Quantitative Easing Policy) is needed, to provide additional stimulus beyond the traditional OMO’s ability to lower interest rates. The size of bank reserves are only of significance as part of a process to lower interest rates, not because of they are not be lent out.

    The proposal to eliminate cash is merely a tool to allow central banks to be able to lower interest rates further than if cash were available. The Zero Bound Problem vanishes because the equivalency of cash to securities vanishes when cash vanishes.

    [1] http://nyfed.org/TXG5La

  25. Gravatar of Kenneth Duda Kenneth Duda
    2. January 2015 at 09:50

    Scott, thanks for this post. I knew something didn’t smell right with Cochrane’s post, and thanks to you, it now seems obvious to me: Cochrane is assuming that the market will create an infinite supply of 0%-nominal-return assets when demand-deposit accounts are yielding negative 6%. Why would the market do this? Anyone providing such an asset would find itself holding a lot of hot potatoes. No one is going to fall into that trap for long, so the opportunities Cochrane identifies to acquire zero-nominal-return assets would dry up in a hurry if we actually wound up in a world with no currency and negative IOR.

    -Ken

  26. Gravatar of Major.Freedom Major.Freedom
    2. January 2015 at 10:09

    Ray,

    Yeah Sumner is trying to have it both ways. He says eliminating cash will “work” in terms of economic theory of the zero bound, which is a green light to those who have the power and are willing to aggress against people, but then he says it is a bad idea out of libertarian considerations. He gets to advise the state on how to better control the economy, and he gets to tell libertarians that they are straw manning him. One face one way another face another way.

    Which part do you think the psychos will focus on? The part that teaches them how to have more control over spending, or his obvious lip service comment about “it’s against liberty”, which he knows the Keynesians won’t even care about? That comment about liberty wasn’t for policy makers or Keynesiana, and he knows it. It was specifically to defend himself against libertarians as he turns face and teaches the central bankers how they can overcome the zero bound problem, which is really a problem of they can wrest control away from the Treasury and put it in the hands of their oligopolistic central banker hands.

    This is friggin Machiavellianism, that’s all it is. It is an appeal to the Prince on how to better control the people.

    Sumner says standard libertarian theory is the reason for why eliminating cash is a “bad idea”. Notice he did not say pragmatic considerations are why it is a bad idea! So if aggressing against people to force them out of cash is a bad idea because of libertarian considerations, then surely forcing them into an oligopoly of money is also a bad idea. Oh wait, now pragmatism matters because it was questioned. My bad!

    Sumner cannot be more explicit in which contradictions he believes are permissible under the banner of pragmatism, and which ones are not. He said he misleads on purpose for the greater good. If the goal is NGDPLT, and overcoming biases in the economics establishment that would otherwise stand in its way, then just tell people what they want to hear so as to get them on board. Liberty is incompatible with that! Liberty is an individualist concept. Pragmatic libertarianism is just another way of wanting to violate liberty when one feels like it, and politely say screw the victims.

    Sumner is giving intellectual encouragement to psychos who want to abolish cash and overcome the zero bound “problem”. As you point out, he says abolishing cash will work. That it will succeed at eliminating the zero bound problem. That it will give the central bank more control over spending and less control, allegedly, to the Treasury (that’s false, but that’s for another day), and if it means the state abolishing cash along the way, then he’ll shed crocodile tears and claim “straw man!” against libertarians. Get it?

    If a policy maker or Keynesian were to read his post, and those are the target readers, and they focus on his technical point of eliminating cash as capable of helping a NON-LIBERTARIAN central bank, and said “Sumner says this will work”, and they ignore his quick comment in passing of “it is a bad idea because of liberty”, then what will he say to that psycho? That they didn’t listen to him, or that they did listen to him? He said eliminating cash would “work”, but it’s a bad idea libertarians!

    Would he honestly act all surprised if they ignored his comment on liberty and focused on the technical non-libertarian solution instead? Haha.

    Sumner has insinuated on so many occasions that cash is the province of criminals, of drug dealers and mafia families. Now of course he’ll say no that isn’t what he thinks. He just keeps mentioining criminals in the same paragraph. For the greater good right? I think from his intellectual investment perspective he doesn’t even know of any rational reason for people to use cash. Especially when it stands in the way of the central bank having more control over spending! So that is why there is lip service to libertarianism as the only reason to defend against abolishing it through law. Morality is the gap filler. There is allegedly no intellectual reason, so let us just dump it in the moral bin, and then should any free market economist question it, he can always say “But I said it was a bad idea!”. Then he grins as he walks away, knowing he did something for the greater good.

    Repeatedly mentioning cash as connected to criminals and drug dealers will convince the evangelical republicans, who tend not to be Keynesians, to abolish cash, and now mentioning cash as connected to the zero bound problem will convince the Keynesians to abolish cash.

    And oh just mention it is bad from a libertarian perspective to shut the libertarians up.

    With enough political support based on contradictions and dishonesty, and worst of all implicit and explicit advocacies of aggression against innocent people, and absence of rational justifications to maintain cash, NGDPLT might just become reality yet!

    Say anything to anyone to get them on board with NGDPLT, either directly by becoming allies, or disarming them should they be opponents. For the greater good.

  27. Gravatar of JP Koning JP Koning
    2. January 2015 at 10:39

    MF, people who want to combat the zero lower bound problem by tinkering with cash aren’t psychos. Even in a libertarian free banking paradise, competing banks would ensure that they had mechanisms to abolish cash (or neuter it in some way) and thereby overcome the zero bound problem. (link).

  28. Gravatar of Britonomist Britonomist
    2. January 2015 at 10:41

    Hey Scott, Brito here, not sure if you remember me. Been a very long time (2 years?) since I last commented, I’m amazed Major Freedom is still making insanely long winded comments on all of your posts. Some things simply never change :).

    @David de los Ángeles Buendía

    “Bank lending is not a function of the size of excess reserves.”

    In your quote of Scott, he never seemed to say such a thing about lending being a function of excess reserves. He implied lending might be a function of charging a negative interest on reserves, but that’s clearly not the same thing.

  29. Gravatar of TravisV TravisV
    2. January 2015 at 11:29

    Has anyone reviewed Barry Eichengreen’s new book yet?

  30. Gravatar of David de los Ángeles Buendía David de los Ángeles Buendía
    2. January 2015 at 11:44

    Hello Britonomist,

    I will grant you that he did not in fact use that exact language but Dr. Sumner introduced his blog with a discussion about the Federal Reserve Bank injecting “…base money, and banks choose to hold it as excess reserves” and then trying “…to force banks to lend it out with negative interest on reserves (IOR)…”. So the entire discussion is framed with a discussion of increased bank reserves and bank lending. It is hard not to read this as some sort of suggestion that the excess reserves ought to be lent but are not in someway associated with the size of the reserves.

    The first paragraph is simply very difficult to decipher as bank reserves have little to do with the question at hand, abolishing currency to eliminate the liquidity trap.

    Quite frankly, the entire first paragraph can be eliminated and it would not change the nature of the discussion.

  31. Gravatar of Gordon Gordon
    2. January 2015 at 14:14

    Scott, I hope you’re not deterred from reaching out to a lay audience in some fashion because of the obstinate idiocy of a couple of people here. Do I understand why the zero lower bound is not a problem and why doing away with cash and having a negative IOR is not necessary? Yes and yes. Do I think it’s important for more of the general public to understand these issues and how they relate to fiscal and monetary policy? Yes. Politicians pander to and take advantage of the economic ignorance of their constituents. If much of the populace continues to remain ignorant, conservative politicians will keep attempting to stop the monetary policy necessary to maintain nominal stability and liberal politicians will keep pushing for fiscal solutions to end recessions.

  32. Gravatar of James in London James in London
    2. January 2015 at 14:32

    Of course you are right that in a totalitarian state where alternative monies are suppressed then heavily negative IoR would work to boost AD, but AD would have already plunged and stayed low for other reasons – see North Korea.

    It would make a good SF novel though, with the evil FRB and its legions of alternative money hunters, outlaw printing presses, informants and libertarian heroes fighting for NGDPLT.

  33. Gravatar of Ben J Ben J
    2. January 2015 at 17:23

    Ray,

    Try reading each syllable out loud. This often helps people with very poor reading comprehension, and those who lack the focus to pay attention to detail.

    In this case, you have confused Neo-Keynesian with New-Keynesian, which are not the same thing.

  34. Gravatar of TravisV TravisV
    2. January 2015 at 18:48

    Good two-minute video where David Rosenberg argues the Fed won’t raise rates next year due to the strong dollar and other factors:

    http://www.cnbc.com/id/102305887

  35. Gravatar of Ray Lopez Ray Lopez
    2. January 2015 at 19:12

    @MF – thanks, that was informative. We need you on this board to decode what Sumner is saying. He is a dangerous man if he wants to get rid of cash.

    @BenJ–you are saying Martin Wolf is a New-Keynesian, not a Neo-Keynesian? Why don’t you just say so directly, instead of elliptically? Are you an economist, who likes to answer with a question mark?

    @Gordon – not everybody that disagrees with you is an ‘idiot’.

    @David de los Ángeles Buendía – You are new here I see. On this blog, like in Orwell’s 1984, “clarity” is “obscurity” and “obscurity” is “clarity”. That way if you are wrong in your prediction your words cannot be used against you.

    @JPKoning – thanks, that was informative. Indeed, the section of your link that discusses “penalize cash” addresses the so-called ‘problem’ of holding cash. Suppose real interest rates are negative. Then, if you hold cash, you would have to pay your bank a fee every month (‘penalize cash’) for the privilege of having the bank hold your cash, unless you wish to hold your cash in a mattress, which most people don’t. This is done already with EU central banks today with their deposits, and with the Swiss franc (negative interest rates paid). BTW with a gold standard you would not have this problem.

  36. Gravatar of Major.Freedom Major.Freedom
    2. January 2015 at 19:27

    JP Konig:

    “MF, people who want to combat the zero lower bound problem by tinkering with cash aren’t psychos.”

    Well when you call what the psychos do the Orwellian term “tinkering”, then of course it doesn’t sound so bad. It sounds like some chilled out dude in his garage or workshop, who isn’t threatening anyone with violence if they don’t obey what he tells them to do with their own property and bodies, trying to fix a broken gadget.

    It also doesn’t sound so bad when there is already a state monopoly anyway, and it is just a matter of ceasing the minting operation at the Treasury.

    We’re lab rats either way.

    “Even in a libertarian free banking paradise…”

    It would not be a paradise. It would be messy and dirty, it would contain instances of fraud, of bankruptcies and economic hardships, pretty much everything that takes place under central banking, just less worse, and the best we have. Paradise is a thought that is not possible on Earth, unless you define paradise as life on Earth that is. I am not in any way advancing or promising or believing that a free market in money will solve all problems of money. It is just the best method at solving any problems, which are inevitable.

    “…competing banks would ensure that they had mechanisms to abolish cash (or neuter it in some way) and thereby overcome the zero bound problem.”

    That may very well be, but should I be OK if any banker tries to stop those who want to use some paper claim as a medium of exchange, by threatening them with violence to ensure cash as such is abolished? No, and it doesn’t make a difference if that banker also happens to be wearing a badge.

  37. Gravatar of Ray Lopez Ray Lopez
    2. January 2015 at 19:28

    Off-topic: Our fearless leader quoted elsewhere: ‘As Scott Sumner says, “I don’t care if currency is only 1% of all financial assets. Give me control of the stock of currency, and I can drive the nominal economy and also impact the business cycle.”* (http://jpkoning.blogspot.ca/2013/08/give-bernanke-lever-long-enough-and.html)

    The fallacy of this ‘logic’ is that people will not use money if it becomes too debased. Coins, as units of account, were only used from the 6th century BCE. Before then they used grams of gold or silver, at the market price. So if Sumner wants to destroy currency by overissuing it, which would ruin the ‘unit of account’ function of said currency, businesses will stop using it, and resort to barter, or Bitcoin, or gold, or some other currency that has value and is not rapidly depreciating. The logic of debasing the currency to inflate nominal GDP is about as sound as heating your house by warming your thermometer. Ludicrous.

  38. Gravatar of Major.Freedom Major.Freedom
    2. January 2015 at 19:36

    And no banker cares about the “zero bound problem.”. This is a problem for ivory tower denisons who are fighting to be the court intellectuals.

    As long as as there is some positive interest to be made by lending, and interest in the markey never goes to precisely zero, then there is all the incentive needed to lend instead of hoarding every dollar.

  39. Gravatar of JP Koning JP Koning
    2. January 2015 at 20:25

    “but should I be OK if any banker tries to stop those who want to use some paper claim as a medium of exchange”

    You’d be ok with it. If a bank attaches a call option to the cash liabilities they issue, then it is the duty of anyone who freely accepts those liabilities to return them to the issuing bank when that option is excercised.

  40. Gravatar of ssumner ssumner
    2. January 2015 at 22:47

    Ray, I think you are right that my words would appear opaque to someone who has not studied economics. This blog is not intended for the general public.

    Ben, I agree, it’s silly to waste time on these esoteric policy proposals when straightforward monetary stimulus works fine.

    Thanks Ken.

    David, I think you misunderstood the post. I never claimed bank lending was a function of the size of ERs. Obviously it is not.

    Britonomist, Thanks for returning.

    Gordon, Don’t worry, I’ll keep reaching out to those who want to learn, and are willing to do the necessary homework.

    Everyone, Here’s me:

    “I agree with Cochrane that eliminating cash is a really bad idea, for standard libertarian reasons.”

    And here is how Ray Lopez “decoded” my mysterious writing:

    “We need you on this board to decode what Sumner is saying. He is a dangerous man if he wants to get rid of cash.”

    Ray is always good for a few laughs.

  41. Gravatar of Saturos Saturos
    2. January 2015 at 23:01

    Tony Yates on why raising the inflation target is preferable to level targeting: http://longandvariable.wordpress.com/2015/01/02/escaping-the-zero-bound-ngdp-plt-vs-raising-the-inflation-target/

  42. Gravatar of Ray Lopez Ray Lopez
    3. January 2015 at 02:29

    @Sumner – your post was unclear, but JPKoning cleared it up for me. Thanks to JPKoning. Anyway, if you are not writing for people like me (and I have taken Econ 101, 102) then you should not care if I make some misstatements. Glad I made you laugh though.

    However, a more careful reading of your posts shows: (1) J. Cochrane was not wrong at all (you did not rebut him except with the single sentence I cite below), and (2) this sentence is wrong on two grounds: “If you eliminate cash and charge a strongly negative rare [sic] of bank reserves, the hot potato effect kicks in with a vengeance” “rare” should read ‘rate’, but more importantly, despite your apparent disavow (from another post, see: http://www.themoneyillusion.com/?p=15208) of monetary velocity, you use velocity as a component in your analysis when you cite “hot potato effect” – this is nothing more than “V” in the quantity theory of money (http://en.wikipedia.org/wiki/Quantity_theory_of_money)

  43. Gravatar of Matt Waters Matt Waters
    3. January 2015 at 03:07

    A couple of things:

    1. The MOA vs. MOE arguments always makes my mind spin and doesn’t seem to address the underlying issues. I think both MOA and MOE go hand-in-hand. Account is truly arbitrary. You can value anything, literally anything, in Big Macs or Nick Cage DVD’s. You can even value excess reserves in Big Macs. It only makes sense to account for assets in dollars because transactions are legally bound to be done in dollars. Contracts with workers are in dollars, loans are in dollars, etc.

    2. The deleterious effects of deflation or varying/high inflation are tied to the fact exchanges happen in dollars. Sticky wages is a REAL effect which arises from a NOMINAL issue. Also, the effects of varying inflation rates transfer wealth readily between creditors and debtors when interest rates are fixed. This, too, is a real effect of a nominal change. Nominal effects of nominal changes don’t matter.

    3. For stamps, gift cards, etc., the fact that people use them as stores of value does not matter. If one buys a gift card, the company receiving the cash for the gift card then has to do something with the cash. If the Fed successfully enforces a 5% yearly charge on holding cash, then the company won’t agree to sell gift cards without the same 5% effect. If somebody gets a $100 gift card and uses it a year later, the company has to provide $100 worth of goods when they only have $95 in the bank. For stamps, the effect would be to increase the price of stamps at the start of the year and then have the price of stamps decrease at the same 5% rate. Krugman showed a similar effect with gold prices at very low interest rates.

    4. With the 5% penalty for holding cash in effect, SOMEBODY has to bid up prices of other assets, which includes bidding up prices of bonds to the point where interest rates are negative. As the saying goes, everybody has a price. In this case, everybody with extra assets who wants to hold cash will have a point where they accept making -2% loans instead of -5% cash.

    4. The question is if the Fed can successfully enforce a 5% penalty on holding cash for a year. Clearly it has the power on excess reserves. Literal cash, due to the security and space taken up in vaults, has a negative interest rate built in without IOR penalties. So the Swedish and Swiss banks could successfully charge 0.25% on cheaper electronic reserves. But I don’t see how the Fed could enforce 5% penalty on holding cash if they still convert reserves to cash on demand. Could the Fed then penalize banks for vault cash as well? Sure, but the bank also has to give cash on demand to bank customers. Non-bank companies, or possibly banks who are not in the Fed system, could quickly provide such a service. One option the Fed has is to restrict how many reserves can be converted to cash, but that would be about as difficult as eliminating cash entirely.

    In the end, Cochrane is wrong but as somebody on the committee of the concrete steppes, I do have trouble seeing how the 5% penalty could be done in practice to truly create a 5% penalty on holding cash. There are some MM responses. For example, if the Fed can create the expectation that it won’t allow significant deflation, then why would it ever need a 5% penalty? Risk-free real interest rates will never get that negative. But then what if the market has some irrational participants and/or the market has enough uncertainty about the power of the Fed’s actions to create deflation without -5% IOR?

  44. Gravatar of Ray Lopez Ray Lopez
    3. January 2015 at 03:25

    @Matt Waters – good analysis, but you’re quite wrong. First, there’s no such thing as ‘sticky wages’. Even B. Bernanke in his paper on int’l responses to the Great Depression (cited by me a few weeks ago) found the evidence for sticky wages unclear: and he is a mainstream economist. Second, “Could the Fed then penalize banks for vault cash as well? ” they sure could, why not? And “I do have trouble seeing how the 5% penalty could be done in practice to truly create a 5% penalty on holding cash”- again, why not? If people wish to ‘make 5%’ by holding all their cash at home, in their mattress, they are truly foolish as the risks from robbery and the like will surely outweigh the -5% penalty, but hey, it’s a foolish world out there.

    The more I read the post the more I am convinced the people herein are brainwashed (MF and a few others aside). Then again, they would not post here if they did not believe in Sumner’s thesis–self-selection at work.

  45. Gravatar of Britonomist Britonomist
    3. January 2015 at 05:11

    Here’s a more interesting question. Let’s suppose the Fed really wanted to do ‘helicopter drops’, what would be the most effective means of doing this, without risking it causing too much inflation? Last I was at university, a standard NK model was still using a representative consumer, so how can we replicate an increase in M for the representative consumer in a real economy?

    Do we just credit everyone’s bank account? Or do we fund additional deficit spending? The latter increases actual purchases from the government, so it would have a fiscal multiplier effect?

  46. Gravatar of Ray Lopez Ray Lopez
    3. January 2015 at 06:22

    @Britonomist – Last I was at university, the standard K model did not care about a representative consumer. The logic was “pay somebody to dig a hole, and pay another to fill it up again” and that this would magically, via a multiplier, cause AD to increase.

  47. Gravatar of Britonomist Britonomist
    3. January 2015 at 06:26

    Ray, I’m talking about a standard NK as in “New Keynesian” model, not the K (I’m assuming you mean Keynesian) model taught in undergraduate macro (Keynesian cross, IS-LM or anything like that).

  48. Gravatar of Michael Byrnes Michael Byrnes
    3. January 2015 at 06:26

    It’s one thing to say, “There’s no such thing as sticky wages”.

    It’s another thing entirely to walk into your annual performance review and be told that, having met or exceeded all of your performance goals, your pay will only be docked by 2%.

  49. Gravatar of Britonomist Britonomist
    3. January 2015 at 06:28

    As in I’m NOT talking about IS-LM or Keynesian Cross, I’m talking about the basic DSGE models I were taught in my 4th year.

  50. Gravatar of Britonomist Britonomist
    3. January 2015 at 07:47

    “There’s no such thing as sticky wages”.

    And I say: tell that to your employees, to their union, to the regulators, to your accountants, to your auditing firms, to your public relations staff, to the public, to the press, to yourself. Then say that again. :)

  51. Gravatar of TravisV TravisV
    3. January 2015 at 08:24

    Chicago economist James Heckman interviewed by John Cassidy:

    http://delong.typepad.com/sdj/2015/01/2015-01-03-weekend-reading-john-cassidys-interview-with-james-heckman.html

  52. Gravatar of Major.Freedom Major.Freedom
    3. January 2015 at 08:53

    If you define sticky wages as wage rates that change more slowly than prices of final output, then you are in the same group as Sumner who doesn’t understand what sticky wages are, which is amazing in its own right because his NGDPLT theory is advanced as a solution to the problem of unemployment rising when NGDP falls. Apparently if productivity rises such that prices fall, leaving NGDP unchanged, if wage rates do not fall to the same degree as prices, then this is supposed to represent a problem for employmen, even though unemployment does not rise.

    If you define sticky wages as wage rates that change more slowly than the nominal demand for labor, then your definition does not apply to every instance of a wage payments along with every instance of a monthly or annual expenditure on wages. If the nominal demand for labor changes by way of changes in the money relation (i.e inflation or deflation of money supply), then it is possible, indeed likely, that some wage payments will rise almost immediately, as the initial inflation takes the form of credit expansion which is then dedicated, i.e. spent by the borrower, towards net investment. Wages are paid out of investment.

    And once those initial receivers of new wages go out and spend that money, the incomes of others then rises, which might then lead to increased wage payments elsewhere, and so on. A wage multiplier if you will. And then after a significantly longer period of time, the initial inflation might then finally raise the wage payments of the last group of laborers who happened to be at the end of the line in terms of exchanges.

    Now all throughout this inflation process, which requires time (which is why we don’t see every individual’s income, profit or wages, immediately rise after each and every OMO by the Fed) because Human Action itself, of learning, and most of all in making exchanges, is structured in time, all throughout this inflation process, total wage payments added together is increasing, and total spending on final products is increasing, however not every individual’s income is rising along with the total increase in wage payments or spending.

    So in the aggregate, which is the source for these historical studies of nominal demand for labor and wage rates, it does indeed appear that “wages are sticky.” For in the aggregate, which adds up individual components that are at different stages of the inflation process, there is always included in that group the individual laborers who are still waiting for the rising tide of spending to get to their pockets. The people closest to the shore MUST wait for the group further into the sea to choose, to choose in making increased expenditires on whatever the people closer inland are offering for sale.

    Yes, wages are sticky from a mechanistic, aggregated view of human life. Positivist economists cannot help but view themselves, and worser still, viewing others, as cogs in some grand societal machine, where the object of study is that aggregate conception and not the components. For if you change the outer shape of the machine, then surely the components will fit together.

    Oops, no individual can ever know what the outer shape should look like, yet I have to live among some psychos pretending to know they do (modern age techno-priests and techno-priestesses willing to urge criminals and thugs to force these grand visions on real world human beings.

    Even though some wage rates (those further out to sea) rise and fall along with the initial changes in the money relation, the techno-priests want us to focus on the whole machine, and become scared at the thought of the techno-priests losing control and allowing individuals to fully control their own monetary futures, so that we willingly go along mislead. And this fear mongering is given the appearance of techno-mantras. Wages are sticky we are told, because look at the machine!, and pay no attention to the events surrounding some benefitting by the coercion at your expense. The machine is not behaving ideally we are told. Ideally the machine should look like one where all wage rates immediately rise after each and every OMO by the Fed. Heli drops are the only way, but we must consider that silly. The real goal is techno-priest control. But they can’t do it alone. They need bureaucrats. They need soldiers. They need money managers. So you must wait for their revelatory inspiration, meaning they must be further out to sea, and you must be closest to the shore, and then wait for the EMH exchanges. You can go further out to sea if you want, but you must do as the techno-priests please, which is to become a further out to sea money manager, or bureaucrat, or soldier. Abandon all your shoreline desires. God is out there in the deep ocean.

    If you disagree with all this, then you must be anti-water.

  53. Gravatar of Matt Waters Matt Waters
    3. January 2015 at 08:55

    “No such thing as sticky wages.”

    The evidence is overwhelming. I have no idea what you’re referring to with Bernanke, but it’s likely you’re interpreting it wrong. He may have said some employers cut hours instead of positions, which is still an above-equilibrium wage with below-equilibrium quantity of work.

    The evidence for sticky wages is overwhelming:

    http://graphics8.nytimes.com/images/2012/04/03/opinion/040312krugman1/040312krugman1-blog480.jpg

    I also have no idea what your anecdotal experience is like, but I have simply never seen or heard about people taking wage cuts in their current positions. If sticky wages were not true, then all the industries with revenue shortfalls in 2008 would have responded by lowering wages. Look at the price of oil in 2008. That is how wages should have responded. But where are all these people with wage cuts? A ton of firms did massive layoffs or furloughs, but hardly any did wage cuts.

    As far as people making 5% from holding cash, like I said there are banks not part of the Fed system and reputable companies such as insurers who would be willing to safeguard cash holdings. Even at a small saver level, if the risk-free rate were -5% and their savings could be quickly converted to cash, I would have a hard time not telling them to put cash in a vault or use companies that guarantee cash holdings.

  54. Gravatar of Major.Freedom Major.Freedom
    3. January 2015 at 09:01

    INB4 “B-but you can be an initial reciever of money if you go to an ATM!”

    I can’t stop laughing at that ignorance.

    Hey everyone, did you know that you can increase the total money supply by decreasing your deposit balance and increasing your cash, dollar for dollar? You can solve the NGDP problem yourself! Lol

  55. Gravatar of Dan W. Dan W.
    3. January 2015 at 09:02

    I find it a little funny that the argument for sticky wages rests on micro economic arguments. From a macro perspective sticky wages do not exist. Just look at how rapidly incomes are changing in the oil services industry! The evidence shows that companies do adjust their wage levels up and down. Now if you want to argue that on an individual level bosses are reluctant to cut salaries so be it. But since when did macro-econ care about individual economic outcomes?

  56. Gravatar of Britonomist Britonomist
    3. January 2015 at 09:05

    Nominal sticky wages are clearly present at a macro level, I even made a short post about it years ago when I actually blogged: http://neweconomicsynthesis.wordpress.com/2012/08/30/sticky-nominal-wages-in-a-nutshell/

    Look at this, it doesn’t get any more clear. Huge drop in output per worker, no drop in nominal wages.

  57. Gravatar of Major.Freedom Major.Freedom
    3. January 2015 at 09:38

    Matt Waters:

    There is no such thing as evidence that is not made evidence by way of a theory that is used to understand past data.

    Past data does not speak for itself. It is not the case that past data makes an economic theory true or false. It only makes a historical claim true or false.

    It is possible for a theory to be false, but appear as true because of a misreading of past history.

    The chart you linked to does not prove the theory that “wages are sticky”. If we start at what the chart contains, there are wages that change along with earnings, and wages that do not change when the change in earnings is somewhat negative.

    At best, all the chart shows is that, by way of survey, when (log of) company earnings changes are somewhat negative, some wages do not change somewhat negatively. About 16 percent of wages remain unchanged when company earnings are somewhat negative. The rest change. So 84 percent of wages change along with company earnings…and that means “wages are sticky”? OK, “wages are sticky” then.

    But that doesn’t logically compel anyone to conclude wages are sticky as an economic theory.

    But apart from the chart, which makes a weak historical case, let alone no economic case, sticky wages are not sticky because of their lack of perfect adjustment to a company’s earnings. Sticky wages is a theory that wages do not change along with changes in the nominal demand for labor. Small changes in company earnings are only tengentially related to this. Company earnings are an accounting abstraction. They are subject to “earnings management”. Companies avoid declaring small earnings losses, and often manage their accounting practises so that they declare zero earnings instead. Much like a teacher might give a student a passing mark of 50 even though they really got 49.

    But again that is all historical anyway. History seems to suggest that 84 percent of wages have changed with changes to company earnings.

    Economically, this does not prove that this will always be the case. Nobody is compelled to believe that wages ARE sticky as if it were some sort of natural law of the universe. People can and do learn, change, and adapt. Your chart is consistent with that theory. 84 percent of wages adjusted when company earnings changed! You’re telling us to believe that because 16 percent of wages for specific roles HAVE NOT changed when company earnings losses are modest, that this means wages as such ARE, which means forever, sticky.

    If all you are saying when you say wages are sticky, is that 16 percent of wages have not changed when company earnings losses were modest, then are you really putting a dent in the theory that wages tend to change along with changes to demand for labor, to earnings, and to every other nominal variable? I think not. It is absurd to believe that non-sticky wages requires a perfect normal curve in your chart. That is cult of Pythagoras level madness.

    I never envisioned a perfect normal curve when I advanced the theory, which is consistent with your chart by the way, that wages tend to fall when the nominal demand for labor falls. Whoever said the changes have historically been perfectly correlated? Those two people are who your chart refutes.

  58. Gravatar of Major.Freedom Major.Freedom
    3. January 2015 at 09:41

    Britonomist:

    So you’re saying that sticky wages occur when companies decrease their nominal investment in capital goods which then leads to lower labor productivity?

  59. Gravatar of Britonomist Britonomist
    3. January 2015 at 09:46

    All I’m saying is a recession these days doesn’t imply a sudden complimentary drop in (nominal) wages for existing jobs on average, the data simply doesn’t reflect this.

  60. Gravatar of Major.Freedom Major.Freedom
    3. January 2015 at 09:54

    Britonomist, wages are paid in dollars, not final output. If output falls to say half of what it used to be, it is not true that despite inflation, and despite the quantity theory of money that allows for even a 25% variability in velocity, that nominal wages must fall by half as well. Wage rates are a function of the supply and nominal demand for labor. Productivity has nothing to do with this in the aggregate. In the aggregate, total money supply and total spending can remain forever fixed, while productivity forever improves and prices forever fall.

    Rising total productivity does not necessitate rising nominal wage payments, which is to say falling total productivity does not necessitate falling nominal wage payments.

    Serious question: Does ANYONE who claims wages are sticky, understand what it even means? I see a dozen different theories, all of them wrong.

  61. Gravatar of Major.Freedom Major.Freedom
    3. January 2015 at 09:57

    Britonomist:

    “All I’m saying is a recession these days doesn’t imply a sudden complimentary drop in (nominal) wages for existing jobs on average, the data simply doesn’t reflect this.”

    You’re defining a recession in terms of output. OK. But then nominal wages changing along with output is not what NON sticky wages requires anyway.

    Nominal wages do not need to keep rising forever along with increases in output, and they certainly do not need to fall along with decreases in output, before it is true that wages are not sticky.

  62. Gravatar of Scott Sumner Scott Sumner
    3. January 2015 at 11:06

    Ray, Yes, my comment that “eliminating cash is a really bad idea” is certainly very vague. I can see how you would assume I meant it was a really good idea.

    Velocity is the ratio of NGDP to M. If I had truly “disavowed” V I would have had to either:

    1. Disavow NGDP
    2. Disavow M
    3. Disavow division

    Both Bernanke and I believe wages are somewhat sticky, and both of us think that sticky wages cannot fully explain the Great Depression.

    But thanks for the velocity comment, you made my day.

  63. Gravatar of Scott Sumner Scott Sumner
    3. January 2015 at 11:13

    Matt, Under the proposal there would be no vault cash.

    Dan, The fact that wages go up and down (which is true) has no bearing on the claim that wages are sticky.

  64. Gravatar of Dan W. Dan W.
    3. January 2015 at 12:11

    Scott,

    From a macro perspective the claim of “sticky wages” makes little sense. If a firm experiences a decrease in revenue it may choose, for some time, to maintain staff at its current size & wages. Consequently the firm has less profits. So while employee wages are “sticky” the firm’s income is not. Likewise, if the firm enjoys greater revenues it may choose, for some time, to maintain staff at its current size & wages. In which case employee wages are “sticky” but the firm’s income is not. From a macro perspective should it matter who receives what portion of a firm’s revenues?

  65. Gravatar of Negation of Ideology Negation of Ideology
    3. January 2015 at 12:20

    Scott,

    I have two technical questions about stickiness:

    1. For monetary policy, does it matter if wages are sticky, or that anything is sticky? Asked another way – as long as some prices change more slowly than others, wouldn’t monetary shocks cause problems?

    2. If all contracts, including wages, rents and debt contracts were written in NGDPLT adjusted terms, either by custom or law, would monetary shock no longer matter? And would that be equivalent to your proposal?

  66. Gravatar of Daniel Daniel
    3. January 2015 at 13:20

    Dan W

    Have you ever considered being (slightly) less of an idiot ?

    https://en.wikipedia.org/wiki/Nominal_rigidity#Mathematical_example:_a_little_price_stickiness_can_go_a_long_way

  67. Gravatar of Exasperation Exasperation
    3. January 2015 at 15:00

    Dear lord, why does this blog attract such persistent trolls. It used to be just Major.F, now theres also Ray. So much comment polution. I have pity for you Scott.

  68. Gravatar of TallDave TallDave
    3. January 2015 at 15:12

    Sort of interesting in an academic sense I guess, but I don’t believe cashlessness has much real world relevance.

    But I suppose around here it goes without saying it would be much easier to simply use a target that doesn’t create a ZLB problem in the first place.

  69. Gravatar of Ray Lopez Ray Lopez
    3. January 2015 at 16:02

    http://en.wikipedia.org/wiki/Dynamic_stochastic_general_equilibrium#Controversy (“Noah Smith observed that “DSGE fails the market test.” … N. Gregory Mankiw, regarded as one of the founders of New Keynesian DSGE modeling, has also argued that ‘New classical and new Keynesian research has had little impact on practical macroeconomists who are charged with […] policy. […] From the standpoint of macroeconomic engineering, the work of the past several decades looks like an unfortunate wrong turn.’)

    As for sticky wages, everything MF says is largely correct. As for Matt and Britonomist’s graphs, they simply show that corporations are loathe to cut wages–this does NOT mean that output is affected. Why? It’s well known that corporations (having more than 500 employees, which constitute 51% of all workers employed) will ‘overstaff’ on purpose, supposedly so they can ‘hire from within’ when a vacancy arises during boom times. When tough times come, these corporations will fire the marginally productive workers but not cut wages. However, the remaining workers have greater productivity, hence Britanico’s chart (http://neweconomicsynthesis.wordpress.com/2012/08/30/sticky-nominal-wages-in-a-nutshell/) simply shows corporations doing the same output with less workers (i.e., more productivity per worker).

    @Daniel–you are a potty mouth. Your cut-and-paste stuff does not cut it, stink-o: your link goes to sticky prices, not sticky wages. Two different things (see above).

    @Sumner–thanks for clarifying you are not against velocity. From your posts I could not tell. Again, obscurity.

    @Dan W – you nailed it buddy! Let’s see if Sumner dodges your question. You have not yet drunk the Kool-Aid, good on you.

  70. Gravatar of Ray Lopez Ray Lopez
    3. January 2015 at 16:34

    @myself – Britanico’s chart, upon reflection, simply shows that the remaining workers in a corporation, the ones that were not fired, did not take a pay cut. But it does not address the fact that the corporation was likely overstaffed prior to the recession. So Dan W’s point stands: why should it matter if zero marginal productivity workers are fired by a corporations during tough times? If society is that concerned about these workers, give them welfare. There are no sticky wages. Further, the fact that in Matt’s graph there is a slight upward bias in wages about the mean (and a bunch stuck at the mean) is simply evidence that over time, with fiat money inflation, there is a slight upward bias in wages, nothing more. After all, during the gold standard a good day’s wage was $2. We can’t expect people to work for that anymore.

  71. Gravatar of Saturos Saturos
    3. January 2015 at 18:33

    Congrats on your new gig, Scott! I predicted this would happen, you’re a natural fit! (Now if only you could format your titles like the regular bloggers too.) Maybe I’ll even make another account and try and sneak past Lauren’s moderation to comment there someday. God, I’ll have to think up substantive criticisms all the time, or something.

  72. Gravatar of Saturos Saturos
    3. January 2015 at 18:35

    Norman Carton also suggests a good criterion for which posts should go on that blog instead of this one: the shortest ones.

  73. Gravatar of CA CA
    3. January 2015 at 18:37

    Simon Wren-Lewis and Tony Yates are having a good debate on NGDP Level targeting on their respective blogs. (I won’t post the links because whenever I do my comment gets held up. Just google their names)

    Sadly, they’re both extremely dismissive of market monetarism, calling it “faith based” and generally deriding it as unscientific.

    Wouldn’t it be awful if when NGDP targeting wins the day, the Keynesians get the credit instead of the market monetarists?! Please say it wont be so:(

  74. Gravatar of Ray Lopez Ray Lopez
    3. January 2015 at 19:19

    @CA, others – Who said the below? A Nobelist. So who to believe? A blogger from a small but fine community college in MA of about 5k souls, or, somebody who has WON THE NOBEL PRIZE IN ECONOMICS baby!

    I’m with Krugman on this one. Japan is my example. Oh, let me anticipate your objections dear targeting NGDP cultist: Targeting NGDP failed in Japan because the Rational Expectations fairy was not convinced? That’s it? Japan’s expansion was not ‘credible enough’? We did not have a NGDP futures market so the people were not convinced the JP central bank would continue to expand the money supply? Is that it? Pfft.

    http://krugman.blogs.nytimes.com/2010/10/29/more-on-friedmanjapan/

    So, after 2000 the Bank of Japan engineered a huge increase in the monetary base; this was the original quantitative easing. And it didn’t even translate into a surge in the money supply! This is why I’m so skeptical of people who say that all the Fed has to do is target higher nominal GDP growth “” in liquidity trap conditions, the Fed doesn’t even control money, so how can you blithely assume that it controls GDP?

  75. Gravatar of Ray Lopez Ray Lopez
    3. January 2015 at 19:38

    @myself – Further links to support my point of view:

    http://www.economics21.org/commentary/feds-dangerous-game (2010 commentary, but updated with two links below)

    http://research.stlouisfed.org/fred2/series/GPDI (Gross Private Domestic Investment back up to trend, and surpasses 2008 highs)

    http://research.stlouisfed.org/fred2/series/PCECA (Consumer Expenditures are back up to trend, and surpass 2008 highs)

    So, why target NGDP now? What is the problem? Does anybody seriously think you can solve structural problems by printing money? Pfft.

  76. Gravatar of Ray Lopez Ray Lopez
    4. January 2015 at 02:57

    Do you targeting NGDP cultists see the analogy is this good sentence? “Is Japan’s central bank creating the biggest pyramid scheme in world history? It’s a valid question as Governor Haruhiko Kuroda endeavors to do what monetary scientists from Milton Friedman to Anna Schwartz to Robert Mundell would surely say is impossible: creating inflation and sending stocks soaring, while also keeping bond yields below 1 percent, or at the very worst, 2 percent. Negligible borrowing costs is the only way a nation with an aging and shrinking population can service such a massive debt without becoming the next Greece or Argentina.” – W. Pesek “Japanization” (2014)

  77. Gravatar of Britonomist Britonomist
    4. January 2015 at 06:19

    They don’t call certain Japanese bond trades the ‘widowmaker’ for nothing, look it up, Japan has a totally different savings culture.

  78. Gravatar of Cash and the Zero Lower Bound « Economics Info Cash and the Zero Lower Bound « Economics Info
    4. January 2015 at 07:00

    […] Source […]

  79. Gravatar of ssumner ssumner
    4. January 2015 at 07:15

    Dan, Yes, sticky wages matter precisely because it makes profits more volatile.

    Let me ask you a question. Since you have obviously never studied economics, and don’t know why economists think sticky wages are important, why are you so dismissive of the theory? I would think that a person should at least understand a theory before dismissing it out of hand.

    Ray, You said:

    “Again, obscurity.”

    Yeah, I can see how you’d find all of this quite obscure. But thanks for those insightful comments on DSGE models.

    You said:

    “Targeting NGDP failed in Japan because the Rational Expectations fairy was not convinced? That’s it?”

    Wow, no one ever told me that Japan tried NGDP targeting! When was that?

    You said:

    “So, why target NGDP now? What is the problem?”

    The purpose of NGDP targeting is not to solve problems, it’s to prevent future problems. You might want to find out what we think before dismissing our ideas out of hand. We have written lots of papers explaining the logic of NGDP targeting.

    As far as the Krugman quote, I published a paper explaining why temporary QE doesn’t work even before Krugman did.

    Negation,

    1. Yes it matters if wages are sticky.

    2. If everything was completely NGDP-adjusted then monetary policy would not matter very much. Check out a currency reform as an example.

    Thanks Saturos.

    CA, I’ll take a look.

  80. Gravatar of Ray Lopez Ray Lopez
    4. January 2015 at 07:21

    @Britonomist- the only big difference I see with Japan’s bond market vs the rest is that they have relatively few foreign investors, but if Japan’s bond market blows up, like hedge fund manager J. Kyle Bass says it will, I’m sure it will affect the world.

  81. Gravatar of Ray Lopez Ray Lopez
    4. January 2015 at 07:24

    @Sumner –I see professor. Appeals to authority, and using the Royal We is your argument: ” We have written lots of papers explaining the logic of NGDP targeting.”. Links please, so we unEjucated peons can come up to speed would be appreciated. Or we can simply shout back and forth here. Oh that’s right, now I recall: you don’t write this blog to educate people like me. OK then, back to our regularly scheduled programming…

  82. Gravatar of Britonomist Britonomist
    4. January 2015 at 09:59

    I don’t see how the Japanese bond trade can “blow up”, foreign investors can’t exert any influence, as we’ve seen the BOJ is happy to buy up 70% of Japanese bonds that are issued or more, there’s nothing that can really happen to cause yields to go out of control.

  83. Gravatar of Negation of Ideology Negation of Ideology
    4. January 2015 at 10:24

    Ray –

    “Links please, so we unEjucated peons can come up to speed would be appreciated.”

    If you’re serious, and not just trolling (I know everyone, unlikely) – I’d suggest you start with the links under “Quick intro to my views” on the right side of this page. Read them all, but here are some of my favorites:

    “Defense of NGDP Targeting” is an excellent introduction, with this quote answering one question you had: “Monetary policy is not an answer to structural policy problems”

    “NGDP Futures Targeting” links to a paper that’s a little more in depth.

  84. Gravatar of Doug M Doug M
    4. January 2015 at 10:31

    Negative IOR doesn’t mean that banks will charge negative rates to their customers. They would still be lending most of their money out at a positive rate. So, banks would still want to attract depositors.

    And there is little indication that customers would pull all their money from their bank if banks charged negative rates. Small depositors effectively receive a negative rate when you look at the fees that they pay, and they still open accounts.

  85. Gravatar of Negation of Ideology Negation of Ideology
    4. January 2015 at 10:35

    Scott –

    Thanks for the answer – that clarifies things.

  86. Gravatar of Ray Lopez Ray Lopez
    4. January 2015 at 10:46

    @Britannico–using your logic there’s never any problem with bonds anytime. If domestic savers get repressed, it’s OK since ‘we owe it to ourselves’? The assumption in your logic is if foreigners get repressed, in your book that might be more bad? But why? The USA can always renounce its debts to the 50% of the bondholders that are foreign, and likely, like Argentina showed, even Greece, go back to the bond market after default with relatively few problems…there’s a sucker born every minute. So it’s ‘win-win’ and in a way you and your kind illustrate, as MF would say, why we should not entrust money into the hands of ‘do-gooders’ and/or Keynesians or monetarists like Sumner

    @Negation of Ideology – I thank you for these links. Will read them now

    @Doug M – agreed. Negative interest rates are not a problem, for the reasons you discuss. Ergo it follows the Liquidity Trap from zero rates is largely also a myth.

  87. Gravatar of Britonomist Britonomist
    4. January 2015 at 10:49

    What is this about foreigners or domestic savers getting repressed, I never said anything of the sort.

  88. Gravatar of Ray Lopez Ray Lopez
    4. January 2015 at 11:28

    I speed read all the Sumner ‘Quick Intro to my views’ links. Most of it was superficial red herring and strawman baiting, but I did find some points of disagreement below.

    http://mercatus.org/publication/market-driven-nominal-gdp-targeting-regime

    1. Dishonest: says either NGDP or Price Level targeting can be used as a framework, contrary to Sumner’s answers to me on this blog that ignored Price Level targeting.

    2. Correctly states gold can be used to back money, but then presents a strawman parade of horribles re Au.

    3. Most importantly, erroneously depends on a future market for NGDP targeting, yet, strangely, fails to even mention that such future markets are notoriously suspect to swings in sentiment, much more than new discoveries of gold or silver (check out any futures market and see for yourself). If Sumner is vocal and concerned about wild swings in precious metals affecting monetary policy, he is strangely silent and unconcerned about NGDP future prices being volatile.

    http://mercatus.org/publication/case-nominal-gdp-targeting

    1. Mischaracterizes Bernanke’s position on the Great Depression and gold, see the paper I cited in this blog for the original source material. “Critics of the gold standard, like Ben Bernanke, point to periods of deflation such as 1893-96 [SIC], 1920-21, and 1929-33, which were associated with falling output and rising unemployment [Not true, the late 1800s was a time of deflation yet prosperity, not just the three years cited, see: http://en.wikipedia.org/wiki/Long_Depression and “As economists Friedman and Schwartz have noted, the decade from 1869 to 1879 saw a 3-percent-per annum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita. Even the alleged “monetary contraction” never took place, the money supply increasing by 2.7 percent per year in this period.”]. This is partly because wages are sticky in the short run.” Misleading or wrong! Besides getting wrong growth rates in the Long Depression, which Angus Maddison also confirms as positive and robust, Sumner gets wrong Bernanke, as Bernanke said the evidence for sticky wages internationally was unclear. At best, sticky wages statement is true for the USA, the UK maybe, but internationally the evidence is mixed says Bernanke.

    2. “I think the Taylor Rule is flawed” says Sumner, yet the Taylor Rule has been shown to work, when backfitted with actual data, while Sumners’ “futures based target NGDP” is completely speculative, without even historical data to back test it against (prove me wrong Sumner)

    http://vimeo.com/11700175 (“In his talk, Sumner argues that the Great Depression in America had two main causes. The initial contraction was triggered by a big drop in aggregate demand caused by worldwide gold hoarding (especially in America and France). Then the recovery was slowed by a large drop in aggregate supply resulting from President Roosevelt’s high wage policy. He also discusses the Depression in other countries, and some modern parallels.”) – Egad, fairy tale story telling, video style, which is an inefficient way of communicating, best reserved for schoolchildren, trendy girls, and senile old people; revisionist history at its worst. I also posit that the man that was stabbed died of “backing into the knife” and the gunshot victim died of “lead poisoning” while “guns don’t kill people, people do”. Only a dyslexic could understand this logic. In fact, the causes of the Great Depression could well have been structural (transition from steam to electrical power), the result of going off the true classic gold standard (unmanaged by a US central bank, created in 1913), a routine 1929 recession that, due to panic, turned into a depression, Fordism (Google this), which resulted in perhaps sticky wages in the USA, war debts distorting the real economy, or, other unknown factors. Sumner’s stated reasons are perhaps 5% probable of being true given so many other scenarios.

  89. Gravatar of Ray Lopez Ray Lopez
    4. January 2015 at 11:35

    @Britonomist–that was my inference from your post. We can disagree on that inference. BTW, my long review of Sumner’s Quick Links, only 649 words (four paragraphs), is not showing up because “Your comment is awaiting moderation.”. I will check again tomorrow, but it could be Sumner is surrendering to censorship. If so, then I am like Heisenberg: I win.

  90. Gravatar of TravisV TravisV
    4. January 2015 at 14:02

    Benjamin Cole: “Economists Sink Into Dementia”

    http://thefaintofheart.wordpress.com/2015/01/04/economists-sink-into-dementia

  91. Gravatar of ssumner ssumner
    4. January 2015 at 21:24

    Ray, You said:

    “I will check again tomorrow, but it could be Sumner is surrendering to censorship. If so, then I am like Heisenberg: I win.”

    Why would I ever censor your views–you are like a dream come true for me. It’s great to have a guy who attacks me every day and gets everything wrong in such a laugh out loud fashion that it makes me look good by comparison.

    Most people would get discouraged when day after day it is pointed out that they are making silly mistakes, and give up. Thank God that you keep charging ahead.

    This is not the first time you’ve charged me with censorship, nor is it the first time you’ve been informed that long comments are often held in moderation for approval. Nor is it the first time you’ve ignored what you’ve been told.

    And “the royal we?” Is there only one market monetarist?

    Ray, You said:

    “@Negation of Ideology – I thank you for these links. Will read them now”

    So let’s see. When I provide you with links to my view, you ignore them. Then you claim that I fail to provide these links. But when Negation provides the same links you thank him. That doesn’t seem very polite.

    Bonus points for anyone who can figure out what the hell Ray is talking about in the following paragraph:

    “Mischaracterizes Bernanke’s position on the Great Depression and gold, see the paper I cited in this blog for the original source material. “Critics of the gold standard, like Ben Bernanke, point to periods of deflation such as 1893-96 [SIC], 1920-21, and 1929-33, which were associated with falling output and rising unemployment [Not true, the late 1800s was a time of deflation yet prosperity, not just the three years cited, see: http://en.wikipedia.org/wiki/Long_Depression and “As economists Friedman and Schwartz have noted, the decade from 1869 to 1879 saw a 3-percent-per annum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita.””

    ?????????

    Or how about this beauty:

    “Dishonest: says either NGDP or Price Level targeting can be used as a framework, contrary to Sumner’s answers to me on this blog that ignored Price Level targeting.”

    ??????????

    I’d like to disagree, but how can I disagree if I don’t know what you are claiming?

    Doug, It depends on whether cash exists–that makes a huge difference.

  92. Gravatar of Max Max
    4. January 2015 at 22:58

    Matt, “For example, if the Fed can create the expectation that it won’t allow significant deflation, then why would it ever need a 5% penalty? Risk-free real interest rates will never get that negative.”

    Long term rates would not, but conceivably short term rates could. In a financial crisis, for example.

  93. Gravatar of Ray Lopez Ray Lopez
    4. January 2015 at 23:28

    @Sumner – thanks for the backhand compliments, I’ll take them I guess. What you question with ???? is straight-forward, for example I question your attacking of the period 1893-96 as representative of the Long Depression, which, as I and M. Friedman say, was prosperous. Get it now? Don’t matter, let’s move on to bigger issues.

    I see you avoided answering the one big question I had, that I was hoping you would bite on (yes I troll, but I am a good troll), and that’s #2, so I pose it again. Please answer, or, if your blog faithfuls and minions can answer, that’s fine too.

    Ray sez:
    2. “I think the Taylor Rule is flawed” says Sumner, yet the Taylor Rule has been shown to work, when backfitted with actual data, while Sumners’ “futures based target NGDP” is completely speculative, without even historical data to back test it against (prove me wrong Sumner)

    In short, has anybody tested ‘targeting NGDP’? When you wish a 16 trillion dollar economy to adopt your (wacky, IMO) framework, you should at least, as some of your critics say, have a formal math model or computer simulation to back it up, rather than a comforting word-picture narrative. And no, citing your fellow academics book on the subject is NOT an accepted answer. Point to me a paper that tests targeting NGDP please.

    As a bonus, please answer whether the notorious volatility of futures markets will affect your targeting NGDP proposal. IMO it will make money creation much more haphazard than the discovery of new gold in the gold standard era did. Perhaps this is what the targeting NGDP critic L. Ball meant when he showed your scheme is “disastrous” (see my previous post).

    Ball’s back in your court, ace. Though since I ask two questions rather than one, I’m afraid you and your minions will answer neither.

  94. Gravatar of Saturos Saturos
    5. January 2015 at 04:14

    Scott, any thoughts on this paper? http://scholar.harvard.edu/files/bblockwood/files/lockwoodnathansonlweyl_allocoftalent.pdf

    and the new quadratic voting paper is also interesting: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2343956

  95. Gravatar of Ray Lopez Ray Lopez
    5. January 2015 at 05:19

    @Saturos — first paper says: ‘tax the rich more since they are lawyers and that has less social utility than more modest bricklayers’, the second is simply a vote buying scheme where one person cannot buy all the votes since they become progressively more expensive. Boring papers both. Let’s move on to some good stuff…

    @everybody who makes money and wants to keep it:
    Depression economists like Bernanke and Sumner like to build their models around the US and sometimes UK, France, and then extrapolate to the rest of the world (as a weighted average analysis, that’s fine, but as a one-country, one-vote discrete set of points, it’s not, as Rogoff et al point out the differences in ‘This Time Is Different’). But inconvenient facts get in the way… see the below. Canada had no central bank (no Fed) and did fine. Canada ran into trouble when they want OFF the gold standard. And note Canada’s banks pegging their currency to the US dollar actually hurt Canada (it did not recover from the Great Depression as quickly as did the USA in the 1930s).

    http://econbrowser.com/archives/2014/09/facts-are-stupid-things

    There are some other stubborn facts to consider. Canada did not have a central bank until 1935. However, Canada did not experience the US banking panics of 1873, 1884, 1890, 1893, 1896, or 1907. No Canadian banks failed during the Great Depression.

    Your graph indicates that Canada’s gap decline started in 1928 and did not turn until 1933. If Canada was on the gold standard until 1931 the FACTS say that gold had nothing to do with either the decline [around 3 years before leaving the gold standard] or the recovery [two years after leaving the gold standard]. I do appreciate you showing this. So did the decline in 1928 have anything to do with the gold standard? Actually yes. in 1929 Canada stopped redeeming Dominion notes in gold. Canada leaving the gold standard initiated the economic decline. After 1931 the Canadian dollar was essentially pegged to the dollar. The FDR took the US off of the gold standard in 1933 but then returned the US to the gold standard at $35/oz in 1934. The US was not off of the gold standard one full year. So, Canada essentially returned to the gold standard with the US in 1934 [and their recovery was retarded].

  96. Gravatar of TravisV TravisV
    5. January 2015 at 09:49

    Fascinating review of Adam Tooze’s book by David Frum:

    http://www.theatlantic.com/international/archive/2014/12/the-real-story-of-how-america-became-an-economic-superpower/384034/?single_page=true

    Frum is pretty critical of Jim Grant’s “The Forgotten Depression, 1921: The Crash That Cured Itself”

  97. Gravatar of David de los Ángeles Buendía David de los Ángeles Buendía
    5. January 2015 at 10:18

    Hello Gordon,

    If the Zero Bound Problem is in fact not a problem it is for entirely different reasons, at least in the United States. In the United States currency (cash) is not actually equivalent to United States Treasury securities (UST Bills, Bonds, Notes, &c). They enjoy a significant legal preference to currency. UST securities are exempt from a number of core provisions of bankruptcy law[1]. These “safe harbour” provisions create a significant preference for UST securities over currency.

    [1] http://blogs.law.harvard.edu/bankruptcyroundtable/2014/09/23/rolling-back-the-repo-safe-harbors/

  98. Gravatar of Brian Donohue Brian Donohue
    5. January 2015 at 10:21

    Great link TravisV.

  99. Gravatar of TallDave TallDave
    5. January 2015 at 10:25

    Negation of Ideology,

    Those FAQs are some of Sumner’s best work imho. I still refer back to them fairly often, when I’m asked something about NGDPLT.

    The funniest thing about people who criticize NGDPLT is they don’t seem to realize how close it is to the IT policy that the Fed has been following since Volcker, it just obviously works better at conditions like 2008-9. It’s much more of a refinement than a revolution.

    Fortunately the notion of an NDGP target seems to be catching on at the Fed and BOJ, as notion of liquidity traps prove untenable. OTOH, I weep for the Eurozone.

  100. Gravatar of Nick Nick
    5. January 2015 at 12:07

    Prof Sumner
    that first unclear paragraph from Ray you asked about has two seperate contentions in it about two different depressions. They are interwoven in the manic style of a fever dream or a poem, with one sentence often containing fragments from both complaints.
    First, the ‘long depression’ featured strong growth. He cites Milton Friedman and Angus Maddison in support of this, albeit seperatel by a few sentences. This is confusingly placed right in the middle of the second point, an accusation that you mischaracterize bernankes position on sticky wages role in the ‘great depression’. He says Bernake believes the evidence for sticky wages internationally is weak. No link there, though.
    Do I win the Bonus???

  101. Gravatar of TravisV TravisV
    5. January 2015 at 12:37

    Brian Donohue,

    Glad you liked it. Maybe Sumner or Glasner (my favorite historians of that period) will have something to say about it.

  102. Gravatar of TravisV TravisV
    5. January 2015 at 13:01

    Lars Christensen and Lorenzo from Oz on Adam Tooze:

    http://marketmonetarist.com/category/adam-tooze

  103. Gravatar of Charlie Jamieson Charlie Jamieson
    5. January 2015 at 13:09

    You start with a flawed premise.
    Banks don’t lend reserves. pragcap makes a very good case for this.

    I think the weakness in any monetary argument is that if you put more money into the system then the economy will improve. This is perhaps true in that sense that if it rains on good soil, you will get a good crop, but if you water bad soil you just create problems. If people borrow money for productive uses, that is good. If people borrow money to buy financial assets, you have today’s economy.
    We don’t really have a mechanism for getting money onto productive soil, and we need structural changes to make the soil receptive. Just today in the WSJ there was an article that the number of young business owners continues to fall. It’s very tough to start a business become of the tax and regulatory issues.
    The Fed is very good at creating financial assets and reserves for the financial system, but this also creates obligations for the rest of us and handicaps the real economy.

  104. Gravatar of TravisV TravisV
    5. January 2015 at 13:37

    Krugman: Thinking About International Bond Yields: Currencies matter.

    http://krugman.blogs.nytimes.com/2015/01/05/thinking-about-international-bond-yields

  105. Gravatar of Major.Freedom Major.Freedom
    5. January 2015 at 14:22

    Exasperation:

    “Dear lord, why does this blog attract such persistent trolls. It used to be just Major.F, now theres also Ray. So much comment polution. I have pity for you Scott.”

    You are the answer to your own question. Or, in other words, takes one to know one?

    Sumner:

    “Bonus points for anyone who can figure out what the hell Ray is talking about in the following paragraph:

    “1. Mischaracterizes Bernanke’s position on the Great Depression and gold, see the paper I cited in this blog for the original source material. “Critics of the gold standard, like Ben Bernanke, point to periods of deflation such as 1893-96 [SIC], 1920-21, and 1929-33, which were associated with falling output and rising unemployment [Not true, the late 1800s was a time of deflation yet prosperity, not just the three years cited, see: http://en.wikipedia.org/wiki/Long_Depression and “As economists Friedman and Schwartz have noted, the decade from 1869 to 1879 saw a 3-percent-per annum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita.””

    Ray is claiming two things. One, you are mischaracterizing Bernanke’s views on the Great Depression and gold, in which he refers to original source material that would seem to support that claim.

    Two, which is muddled, the reference to 1893-1896 as a time of falling prices, output and employment should be placed in a context of a longer period of time during the late 19th century. He says “not true” about 1893-1896 but that is likely a misused token response to the common belief that the 1870s were a period of depression. He wants to emphasize that Friedman and Schwartz report quite significant real growth during the 19th century, particularly during the period of 1869-1879 when many economists today label that time as a depression because of the falling prices. That they are “reasoning from a price change”.

    It is muddled, but if you know the source material he is referencing, which I do, then it is understandable.

  106. Gravatar of Ashton Ashton
    5. January 2015 at 15:28

    Scott, I saw an article on NBC from way back in February 2007 where Alan Greenspan (accurately) predicts a Recession in the U.S. at the end of ’07-early ’08. Greenspan put it down to ‘coming to the end of an business cycle’ and cited the stabilisation of profit margins.

    Now, if the Fed tightened money during 2007–which I think it did–is it possible that Greenspan is wrong and that stabilisation of the profit margin is due to a slightly constricted nGDP growth as a result of tight money, and not simply the ‘end of a business cycle’.

  107. Gravatar of TallDave TallDave
    5. January 2015 at 16:38

    This is perhaps true in that sense that if it rains on good soil, you will get a good crop, but if you water bad soil you just create problems.

    Sometimes there isn’t enough rain. The proper role of a central bank is to smooth rainfall to maximize crop yields. Certainly banks can overwater (see TGI) but just as certainly they can exacerbate a drought (see TGD).

  108. Gravatar of Ray Lopez Ray Lopez
    5. January 2015 at 18:47

    @Nick – you win the bonus! Here is the cite to the Bernanke paper, it’s quick to download: http://www.nber.org/chapters/c11482 (The Gold Standard, Deflation, and Financial Crisis
    in the Great Depression: An International Comparison – Bernanke et al.), see the language on p. 46 (“The reliance on…”) for the ‘no sticky wages internationally’ point.

    I also urge you, if you have time, to read p. 39 regarding France and why it did NOT play by the “rules of the game” with gold, and (as central banks have done throughout history) and ‘sterilized’ gold inflows so they could hoard gold rather than expand the money supply as was needed (and if gold was free rather than controlled by central banks would have happened, through individual action by people). It’s easy to understand, even if you’re not an economist like me. In short: it’s hard to control the actions of millions of people–they cannot ‘sterilize gold inflows’ like a single central bank player can. Ron Paul had it right: audit the Fed, then abolish the Fed. Crowd-source the central banks. You can be sure there’s no ‘bad policy moves by the Fed’ if you do that. Analogy: if it was up to individual people to wage wars, would we have mass wars? No. Yes we would have terrorism, like today, but the idea of the US, UK helping the French fight Germany in WWI, en masse, is ludicrous. Arguably Germany would have occupied France for a while, demanded reparations, and left, as they did in 1870, and we’d avoided both WWI, WWII and the growth of Big Government (I’m not defending the Germans BTW, who I think were largely responsible for WWI and WWII)

    Even though we disagree perhaps, I can tell Nick you are more flexible in mind that Sumner, and I applaud you.

    @Major Freedom–correct. It’s not rocket science if you have an open mind. If you don’t, “cognitive dissonance” prevents you from entertaining thoughts that conflict with your warped mind.

    BTW we’ll see if Sumner ever answer the two big questions I raised upstream, namely, why would futures markets be less volatile than new gold discoveries, and, if he or anybody has back-tested targeting NGDP with real world data or a model. Run away Sumner!

  109. Gravatar of Charlie Jamieson Charlie Jamieson
    5. January 2015 at 19:21

    Sometimes there isn’t enough rain. The proper role of a central bank is to smooth rainfall to maximize crop yields. Certainly banks can overwater (see TGI) but just as certainly they can exacerbate a drought (see TGD).

    Lots of ‘rain’ — liquidity — out there. There is money on Wall Street, money for government and money for economists to shop for $1m ranch houses in Southern Cal, but for most Americans, all the Fed’s machinations are useless.

  110. Gravatar of Nick Nick
    6. January 2015 at 05:41

    thanks Ray, I guess
    FWIW, 130 years from now when economists use different output metrics and price indices maybe people will be able to offer arguments that 2007-2012 was actually a period of prosperity. The past is a different country. But when lots of people in your nation are out of work and complaining loudly enough about it to dominate political debate it is a problem.
    I’ve never read an analysis of the ‘long depression’ that managed to get rid of all the primary sources from back then complaining about the lack of work, or the sources from the other side complaining about ‘populists’ taking advantage of the unemployed for political gain. Something bad was going on…

  111. Gravatar of Daniel Daniel
    6. January 2015 at 07:07

    Paging Inbred_Ray, Major_Moron and Dan W

    http://www.nber.org/papers/w20770

  112. Gravatar of Ray Lopez Ray Lopez
    6. January 2015 at 07:23

    @Nick–something bad always going on if you listen to poor folk. From statistics (Angus Maddison) growth during the Long Depression was almost the same as in the post-WWII western economies period, a little less, and good enough to attract Italians, Greeks, Russians and other Europeans to the USA. Plus industrialization matured (chemical industries, electrical power, light bulb, radio started, car industry started, sanitation perfected, telephone started, balloon industry started–led to the zeppelin and then aeroplane in next century– steel and oil industries scale up, skyscrapers invented, better bridges, bigger ships, faster printing via lithography) enabling population growth to continue at the doubling every 35-40 year pace of before, eventually slowing to 2x in 50 years of today. More people move to cities. It’s all good. But labor got antsy and struck more (hence Pinkerton strikebreakers), there was income tax agitation by Progressives, and Big Trusts scared people not used to economies of scale (these trusts also abused their market power at times it was claimed, possibly by disgruntled former businessmen and ‘liberal’ journalists like Ida Minerva Tarbell, though there was some truth in what they say). And, best of all, we had honest gold money (true, often sterilized by evil central bankers at times so the people did not benefit from gold inflows) though we still had evils like Jim Crow and women could not vote.

    In short, a return to Long Depression productivity would be welcomed by almost every economist today.

  113. Gravatar of Ray Lopez Ray Lopez
    6. January 2015 at 07:27

    @Daniel the potty-mouth – We do not find nominal rigidities everywhere. Salespeople working on commission often have flexible wages, as do (some) people working in high-trust, high morale organizations – See more at: http://marginalrevolution.com/#sthash.4KSC8nFm.dpuf And we are not in a caste bound Indian society that this paper refers to. Have you been to India? I have, and am posting from Manila. What you find is a very stratified society in this part of Asia. They don’t make much, but they have lots of rules and you can’t just pay people what you want. Productivity is low too. Different culture.

  114. Gravatar of Daniel Daniel
    6. January 2015 at 07:30

    I love how Ray’s brain is completely immune to reality.

  115. Gravatar of ssumner ssumner
    6. January 2015 at 08:13

    Ray, You asked:

    “BTW we’ll see if Sumner ever answer the two big questions I raised upstream, namely, why would futures markets be less volatile than new gold discoveries, and, if he or anybody has back-tested targeting NGDP with real world data or a model. Run away Sumner!”

    I propose pegging the price of NGDP, just as gold prices were pegged during 1879-1933. Not sure what your comment on gold discoveries implies for any of this, but I’m sure you see some sort of weird connection. For me it will remain eternally “obscure.”

    And the fast growth during the last third of the 19th century was mostly due to population increases, not productivity. The business cycle was strongly correlated with the price level.

    The Taylor Rule worked OK when rates were positive, but failed disastrously at the zero bound.

    Canada had no central bank and did fine? Not true, but even if true it would support my claim that our central bank helped cause the Depression. Canada had no banking panic because they lacked our idiotic unit banking laws.

    Ashton, I’d say some of each; the business cycle is partly monetary and partly other factors.

    Charlie, You said:

    “Banks don’t lend reserves. pragcap makes a very good case for this.”

    This has to be the most tiresome and idiotic debate in the blogosphere. Please read Nick Rowe’s posts on this and then come back here.

    Or if you insist on an answer, “lending out reserves” is a metaphor for banks changing their behavior in such a way that the public chooses to hold a larger share of base money in the form of cash.

  116. Gravatar of Zack Zack
    6. January 2015 at 12:33

    “The Taylor Rule worked OK when rates were positive, but failed disastrously at the zero bound.”

    I’m a little confused by this statement. I thought it was pretty widely acknowledged that the fed funds rate deviated from the Taylor Rule since about 2001. How can you say it “failed disastrously” when it wasn’t even being followed?
    (note: I’m not trying to argue that the Taylor Rule is the ideal policy. I’m just not sure what you mean here).

  117. Gravatar of Charlie Jamieson Charlie Jamieson
    6. January 2015 at 12:38

    Or if you insist on an answer, “lending out reserves” is a metaphor for banks changing their behavior in such a way that the public chooses to hold a larger share of base money in the form of cash.

    How do banks do that? Why would it matter if I hold my money in deposits or cash when I can spend either?
    More to the point, by ‘public’ you do realize that the holders of these reserves are financial institutions and the wealthy. The main street economy — the median American — has less income and wealth than he did 20 years ago, and all these monetary actions are only tilting the scale further against them.
    And we could reduce reserves if the Fed sold their bonds back to the public — but again, there is no difference in banks holding bonds or holding reserves.

  118. Gravatar of ssumner ssumner
    6. January 2015 at 15:13

    Zack, Yes, it deviated, but still the policy worked OK until 2008. When rates hit zero the Taylor Rule was useless, as the Fed could not adjust rates to their appropriate level. Even if they have followed the exact Taylor Rule in the early 2000s, we would have had the same problem after 2008.

    Charlie, Banks can reduce deposits and reserves by lowering the interest rate on deposits (even make it negative.)

  119. Gravatar of Michael Byrnes Michael Byrnes
    6. January 2015 at 18:56

    Does the Taylor rule fail because it is entirely backward looking?

  120. Gravatar of Ray Lopez Ray Lopez
    6. January 2015 at 20:16

    @Sumner- thank you! I appreciate your answer, I fully expected you to run away! Sorry I underestimated you. :-)

    Sumner: “I propose pegging the price of NGDP, just as gold prices were pegged during 1879-1933.”

    I will read more in the future, but I’m curious if you have time to explain how pegging, which implies Fed discretion (unless there’s some sort of iron-clad rule) is any different then from today’s flexible Fed dual mandate policy?

    Sumner: “ And the fast growth during the last third of the 19th century was mostly due to population increases, not productivity. The business cycle was strongly correlated with the price level.

    Gains were observed in all western countries in the late 19th century, indeed due to emigration, but so what? I don’t think you would claim for example targeting NGDP will increase productivity. Anyway, you can also argue population increases were due to greater technological innovation and the like (sanitation improved with better municipal works for example).

    Thanks for reading! My New Years resolution is to attack Sumner more selectively….haha

  121. Gravatar of Ray Lopez Ray Lopez
    7. January 2015 at 07:03

    Looks like a proposed bill to make the Fed follow a “mechanical” rule like targeting NGDP (or the Taylor Rule; it’s not specified what rule is required, just that a rule be adopted by the Fed) was introduced last year, but died in committee. Shame. If you feel strongly enough, write your representative to push this bill forward. – RL

    http://www.opencongress.org/bill/hr5018-113/show
    H.R.5018 – Federal Reserve Accountability and Transparency Act of 2014

    Federal Reserve Accountability and Transparency Act of 2014 – Amends the Federal Reserve Act (FRA) to direct the Chairman of the Federal Open Market Committee (FOMC) to submit to the Comptroller General (GAO) and to certain congressional committees a Directive Policy Rule (DPR), including an identification of FOMC members who voted in its favor. Defines DPR as a policy rule developed by the FOMC that meets specified requirements

    Sponsor: http://en.wikipedia.org/wiki/Bill_Huizenga

  122. Gravatar of Charlie Jamieson Charlie Jamieson
    7. January 2015 at 07:14

    Charlie, Banks can reduce deposits and reserves by lowering the interest rate on deposits (even make it negative.)

    Not realistic, though. Even if rates were negative, is the institution with millions in cash going to withdraw its deposits for hard currency? It might send its deposits to a foreign bank.
    And presumably you want to reduce reserves to get money flowing, but would the institution then turn around and use that hard currency to buy things?

    Now what if the bank *lent* money at negative rates? Wouldn’t that get money to the public?
    As an aside, I think that’s what student loans are really about. Borrow money for college, and carry the loan until it gets forgiven.

  123. Gravatar of Philippe Philippe
    7. January 2015 at 10:45

    Charlie,

    Bank deposits represent bank reserves owed by the bank to depositors. Banks do lend reserves to the public.

  124. Gravatar of Charlie Jamieson Charlie Jamieson
    7. January 2015 at 11:19

    Phillippe, that’s flat wrong, but others can make the case better than I can. The Bank of London came out with a paper on this last year. … A blogger named Tom Brown might be able to comment on this.

  125. Gravatar of Philippe Philippe
    7. January 2015 at 11:29

    Charlie, it’s not wrong. A bank deposit is a debt owed by the bank to the deposit holder. The thing owed by the bank to the deposit holder is base money, i.e. cash or central bank deposits (i.e. bank reserves).

  126. Gravatar of Charlie Jamieson Charlie Jamieson
    7. January 2015 at 11:39

    Sorry, the orthodoxy is wrong.
    Banks don’t lend reserves. Lending creates deposits.
    The public weighs many factors in deciding whether to take out loans, but the amount of reserves in the system has nothing to do with this decision.

  127. Gravatar of Philippe Philippe
    7. January 2015 at 11:58

    Charlie,

    “lending creates deposits”

    That is true, but that doesn’t mean that banks don’t or can’t lend reserves.

    “the amount of reserves in the system has nothing to do with this decision”

    That may be true in certain circumstances, but that doesn’t mean that banks don’t or can’t lend reserves.

    Commercial bank ‘reserves’ are base money held by a commercial bank, either in the form of vault cash or deposits at the central bank.

    Commercial bank deposits are debts owed by the bank to its ‘depositors’. The thing owed by the bank to its depositors is base money.

    When a commercial bank makes a loan, it lends base money. When it creates a deposit, it borrows base money from the depositor.

    So when a bank makes a loan and creates a deposit, it is both lending base money to the borrower and borrowing base money from the depositor (they are initially the same person).

  128. Gravatar of Philippe Philippe
    7. January 2015 at 12:04

    There’s some semantic confusion here because once cash is withdrawn by the public from a bank, that cash is no longer a part of the bank’s reserves.

    This means that if a bank lends base money to someone, and that person withdraws the base money as cash, that base money is no longer part of the bank’s reserves. It is instead just cash in circulation.

    So in a sense banks can’t lend “out” their reserves, because as soon as the reserves are taken “out” of the banking system (i.e. withdrawn as cash) they are no longer bank reserves.

  129. Gravatar of Philippe Philippe
    7. January 2015 at 12:08

    but that’s just semantics.

    Banks lend base money and they borrow base money. They can borrow base money from the public without the public physically handing over cash (i.e. ‘depositing cash’). Banks do this by just issuing IOUs (i.e. debts), i.e. bank deposits.

  130. Gravatar of Charlie Jamieson Charlie Jamieson
    7. January 2015 at 12:13

    When deposits are withdrawn from Bank A, they are generally deposited in Bank B, so there is no change in reserves.
    Talking about cash is a distraction.
    ..
    A bank doesn’t need deposits to make loans. It doesn’t even need reserves – it makes the loans and finds the reserves.

    I think the key takeaway is that banks are not ‘sitting on reserves’ and so not lending them to the public.
    I think we’ve made policy errors by focusing on trying to increase lending without trying to improve the economy so that borrowers can make their payments. We induced borrowers to take out loans to buy and sell houses but because their incomes did not rise, this was a temporary boost to the economy.

  131. Gravatar of Philippe Philippe
    7. January 2015 at 12:23

    “A bank doesn’t need deposits to make loans”

    Bank deposits are bank debts – i.e. money owed by the bank to the depositor. Obviously a bank doesn’t necessarily need deposits in order to make loans, if it already has some capital with which to make loans.

    “It doesn’t even need reserves”

    Banks can issue IOUs/debts/deposits without necessarily having reserves on hand equal to those IOUs. But anyone can do this. I can issue an IOU for $10 to you without having $10 in my possession. In this case I am borrowing $10 from you and you are lending $10 to me. Physical cash does not need to change hands for this to be the case.

  132. Gravatar of Philippe Philippe
    7. January 2015 at 12:27

    “banks are not ‘sitting on reserves’ and so not lending them to the public”

    If banks made more loans and increased the amount of deposits, then the amount of excess reserves would shrink. Excess reserves would be converted into desired or required reserves, and the public might also choose to hold more cash.

  133. Gravatar of ssumner ssumner
    7. January 2015 at 12:30

    Michael, That’s part of it, but the zero bound also was a problem.

    Ray, You said:

    “I will read more in the future, but I’m curious if you have time to explain how pegging, which implies Fed discretion”

    Is that a joke? Pegging is discretion?

    You said:

    “Thanks for reading! My New Years resolution is to attack Sumner more selectively….haha”

    A glimmer of sanity?

    Charlie, You said:

    “Not realistic, though. Even if rates were negative, is the institution with millions in cash going to withdraw its deposits for hard currency? It might send its deposits to a foreign bank.”

    Isn’t that what you want at the zero bound?

    That Bank of England paper (not “London”) was ripped to shreds in the blogosphere.

    You said:

    “When deposits are withdrawn from Bank A, they are generally deposited in Bank B, so there is no change in reserves.”

    Not even close to being true. Up to 2008 the percentage of cash withdrawn that stayed out of the banking system was about 95%. Today it’s a bit lower, but still quite large. Don’t tell me you’ve been dabbling in MMT or “monetary realism?”

  134. Gravatar of Philippe Philippe
    7. January 2015 at 12:50

    Scott,

    “Up to 2008 the percentage of cash withdrawn that stayed out of the banking system was about 95%”

    Don’t a lot of businesses that take cash, such as shops etc, deposit a lot of that cash?

  135. Gravatar of Charlie Jamieson Charlie Jamieson
    7. January 2015 at 12:55

    Bank of England, sorry. … I thought it made a very good case. But I come to this debate without having been taught anything different.

    ‘Up to 2008 the percentage of cash withdrawn that stayed out of the banking system was about 95%.’ — that wasn’t my point. When deposits are withdrawn they almost always just go to another bank.

    Phillipe, most of the public is choosing not to take loans because economic prospects are so-so. Demand is the issue, not supply. You cannot induce lending merely by low rates.

  136. Gravatar of Philippe Philippe
    7. January 2015 at 13:01

    Charlie,

    “You cannot induce lending merely by low rates”

    That’s a different argument to the one you were making about reserves. You’re now talking about the ‘ZLB’ debate – i.e. that interest rates can’t go low enough to increase borrowing and spending sufficiently.

  137. Gravatar of ssumner ssumner
    7. January 2015 at 13:43

    Charlie, You said:

    “Up to 2008 the percentage of cash withdrawn that stayed out of the banking system was about 95%.’ “” that wasn’t my point. When deposits are withdrawn they almost always just go to another bank.”

    You are still completely missing the point. What matters is the net outflow of cash. Sure, individual currency notes go in and out of the banking system all the time. They also go in and out of Walmart. But what matters is the net position of currency, i.e. the stock of currency and the stock of bank reserves. During most years, after the Fed injects currency into the banking system 95% goes out in currency, and in net terms stays out there as currency in circulation.

    This isn’t just a market monetarist view, Krugman says the same thing, as do all reputable economists.

    And I don’t know who’s talking about “inducing lending,” certainly not me.

  138. Gravatar of ssumner ssumner
    7. January 2015 at 13:44

    Oops, I did say lend it out in the post, but I actually meant get rid of it in any way they choose—including buying bonds or other assets.

  139. Gravatar of Charlie Jamieson Charlie Jamieson
    7. January 2015 at 13:47

    ‘You’re now talking about the ‘ZLB’ debate – i.e. that interest rates can’t go low enough to increase borrowing and spending sufficiently.’

    I think I’m saying the opposite. The public will borrow based on economic conditions — can they make the money work for them, and can they pay the interest. For example young people are not buying new homes if they don’t see their income rising, no matter what the interest rates are.
    I disagree with the idea that the central bank could spur lending if only it could keep reducing rates.

  140. Gravatar of Charlie Jamieson Charlie Jamieson
    7. January 2015 at 13:51

    ‘Oops, I did say lend it out in the post, but I actually meant get rid of it in any way they choose””including buying bonds or other assets.’

    Well, if you ‘get rid’ of deposits by buying assets, then somebody else holds the deposits.

    Isn’t expanded lending what you are after here? I keep reading that people want reserves to be lent out.

  141. Gravatar of Philippe Philippe
    7. January 2015 at 13:54

    Scott,

    “During most years, after the Fed injects currency into the banking system 95% goes out in currency, and in net terms stays out there as currency in circulation”

    I suppose if all existing cash was withdrawn and promptly redeposited, then there wouldn’t be much need for additional cash over time.

    Any new cash introduced to the system by the federal reserve must reflect demand by the public to hold more cash in circulation. That’s a bit different to the claim that 95% of all cash withdrawn stays outside of the banking system.

  142. Gravatar of Philippe Philippe
    7. January 2015 at 13:59

    Charlie,

    negative interest rates affect savers as well as borrowers. The exact effect of negative rates is debated and debateable, but that’s a different argument to the one you were making, that banks ‘don’t lend reserves’.

  143. Gravatar of Charlie Jamieson Charlie Jamieson
    7. January 2015 at 14:03

    Well, they don’t.

    Sorry!
    I will let others make this argument better than I can.

  144. Gravatar of Philippe Philippe
    7. January 2015 at 14:12

    whatever, I think it’s just a semantic issue. Banks lend and borrow money. Reserves are money that banks hold in their vaults or at the central bank.

  145. Gravatar of Philippe Philippe
    7. January 2015 at 14:14

    banks don’t lend deposits because deposits are bank debts, on the liability side of their balance sheet.

  146. Gravatar of ssumner ssumner
    8. January 2015 at 07:58

    Charlie, I don’t think the central bank should ever try to “spur lending.” Like with any variable, they have much more control over nominal lending than real lending.

  147. Gravatar of ssumner ssumner
    8. January 2015 at 08:00

    Charlie, The “banks don’t lend reserves” theme is an idea concocted by a internet cult, it’s not mainstream economics. The claim isn’t so much wrong as it is meaningless. As Krugman says, “it’s a simultaneous system.” There’s really nothing to debate.

  148. Gravatar of Bitcoin Faucet Rotator Blog Cracks in the zero-lower bound Bitcoin Faucet Rotator Blog Cracks in the zero-lower bound
    10. April 2015 at 05:39

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