“Should’ve hit Yellen harder, say Summers’ friends”
That’s a headline that might raise some eyebrows. Even more interesting is that the video suggests they should have attacked Yellen for favoring policy transparency.
Vote for Larry, he’ll keep the secrets well hidden within the temple. When you need to know something, Mr Summers will tell you.
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29. September 2013 at 10:00
This is always happening in politics.
The difference is whether the information concerning these events are “leaked” to the large news companies.
It’s becoming more politicized because the economy is becoming more and more dependent on the Fed, and less and less dependent on real savings. This is unfortunate news.
We can also thank in part the bloggers who write polemics and other political propaganda concerning the Fed on a more or less consistent basis.
What is continually spreading in economics is the same thing that happened in philosophy: Politicization.
29. September 2013 at 10:20
Goodness, that’s worse than your worst blogpost title.
29. September 2013 at 10:30
Anyone have any useful thoughts on this, other than, “We really need an NGDP futures market”? http://www.federalreserve.gov/econresdata/notes/feds/2013/why-have-americans-income-expectations-declined-so-sharply/
29. September 2013 at 10:52
“Even more interesting is that the video suggests they should have attacked Yellen for favoring policy transparency.”
This explains why Larry Summers’ supporters thought the fact that there’s zero record of him writing or saying anything substantive about monetary policy in nearly 20 years made him the ideal candidate.
29. September 2013 at 12:09
Saturos:
“other than, “We really need an NGDP futures market”?”
Yes. Individuals tend to want purchasing power, not nominal income abstracted from real goods.
When people “expect an income” that really means they expect to be able to purchase a particular quantity (and quality) of goods.
When there complaints of the form “I make an insufficient income”, or “I want to earn more money”, or “My income expectations are such and such”.
They are NOT telling you or any technocrat in the central bank that they want $X dollars in existence, or $Y spent in the aggregate, or a Z% increase in nominal spending.
If nominal spending want up say 5% per year, but for whatever reason real output stayed constant, or declined slightly each year, then those same complaints of “I want to earn more income” are still deriving from a desire for an ability to purchase more real goods. Here, just like a constant aggregate spending, or declining aggregate spending, individuals would always be referring to real goods, i.e. purchasing power.
Finally, an NGDP futures market would not do what you believe it does. There is no value to the investor to investing in these securities other than the only return I have been able to parse out of Sumner’s statements: interest paid on margin accounts.
There is no “connection” to NGDP, because no investor can take ownership of it. Futures markets can only exist in markets where the underlying has direct or indirect value to the individual investor. Since the payoff of an NGDP futures contract wouyld be the discretionary interest rate paid by the Fed, the value of the contracts would be akin to a fixed income instrument.
The fact that no NGDP futures market exists now SHOULD have been evidence to everyone who believes it can work that anyone who tried to sell one, would find zero demand for them.
29. September 2013 at 12:33
Saturos, Don’t you wish you had friends like Larry’s friends?
Saturos, I tend to prefer market forecasts to these polls. Who knows how the public interprets these sorts of questions. How many people even know the difference between nominal and real variables? 20%?
But yes, nominal income expectations are low right now.
Mark, Good point.
29. September 2013 at 12:51
There is no rhyme or reason, economically speaking, why aggregate spending MUST rise every single month by whatever percent.
If an economy is unhealthy, in the sense of being distorted by too much prior inflation, according to which unhampered market forces would bring about an acute monetary deflation, then a central bank inflationary reaction that generates even a mild deflation, or zero deflation, would represent a destructive inflation, not a destructive deflation.
If the Fed has to keep printing $85 a month to stop the economy from going into a deflationary correction, then narrowly focusing on “NGDP” would miss the mark. For the trade-off of attaining non-deflationary NGDP would be an even more distorted economy, a distorted economy that brought about the perception that inflation was necessary in the first place.
This path that we are on is consistent with the path that Austrians claimed would occur if the central bank is persistent in using inflation to stop needed corrections. As each subsequent inflation increasingly distorts the economy, even greater inflation is required to stop a correction that would occur with constant inflation.
In their fears of preventing deflation, inflationists are (mostly unintentionally) beinging us all to a point at which their fears over political fall-out are more likely realized. They are fulfilling their own procphecies unintentionally because they don’t fully understand the ramifications of inflation in the positive sense. 99.9% of the time the focus is on the ramifications of insufficient inflation.
Did we not learn from Weimar transitioning into Nazi Germany? In Weimar, the inflation accelerated, as it is accelerating here as well. After accelerating and distorting the economy to such a degree that even the inflationists conceded that inflation is a problem, the only possible alternative was a (crushing) deflation.
Market monetarists mistakenly believe that they can avoid undue deflation and undue inflation by “stabilizing” not price levels, but aggregate spending. They don’t realize that by fixing aggregate spending, a central bank would be distorting the economy to the extent that corrections require cash holding times to increase (and thus spending to decrease) in order for individuals to learn and recalculate gain and loss expectations in a way that unintentionally rebalances capital invested in a division of labor.
By reversing the much needed consequence of cash holding times increasing, NGDP targeting will end up requiring accelerating money supply inflation, which of course is unsustainable.
Australia experienced this throughout the 1990s and 2000s. Aggregate spending remained fairly stable, but at the cost of accelerating money supply inflation, which peaked at almost 23% increase per year by 2008!
Thus the RBA, as most central banks who are controlled by those who know that they might lose control if they hyperinflate, chose the route of reversing monetary inflation, which of course allowed a correction in Australia to take place, and the rate of unemployment rose.
A policy of a FIXED rate of NGDP growth in the US would have the effect of monetary inflation increasing to 10%, to 15%, to 20%, and beyond Australia’s rate, until the money supply increases so much that there is no way the central bank can continue to control aggregate spending, since its balance sheet would be insufficient to “soak up” the high quantity of money.
I implore everyone here to learn that perpetual violence in a market system will inevitably result in either an abolition of the market, or institutional self-destruction from the initiators of violence and revolutionary market reform. Neither option is desirable IMO.
29. September 2013 at 13:41
There you go again with your nonsense Geoff,
It is extremely easy, in the technical sense for a central bank to stop inflation. There are a variety of options . One is to raise the interest rate on reserves. If the ngdp growth rate is 10%, then the IOR should be something close to 25% to stop the inflation. Second, a CB can raise its primary interest rate, in the Feds case being the Fed funds rate. Third and most esoteric, a CB can “passively contract” by simply not buying as many securities, a CB achieves the same contractionary effect as if it did sell them.
All of this regards the TECHNICAL ease of stopping inflation. I acknowledge the political difficulty. However, part if the reason Paul V had so much trouble in the 80s is because he didn’t adequately inform the public when he would relent on the punishingly high interest rate. (He made vague promises according to Scott) once he did bring the ffr down however , the economy recovered. This teaches us something. One, that credibility once lost, can ALWAYS be regained. Two, the short run Philips curve can be reestablished, and three, it’s a categorically different type of recession in which you know you’ll be rehired after a short furlough when the CPI comes down, then the endless pain we have now. (Which the Austrians seem to enjoy)
29. September 2013 at 14:34
Edward:
“It is extremely easy, in the technical sense for a central bank to stop inflation. There are a variety of options. One is to raise the interest rate on reserves.”
Banks aren’t the only owners of money. If the central bank pays interest on reserves, it would only be on what banks consider to be “their” money. But for the hundreds of millions of people who view their cash accounts as “their” money, their spending would still exist.
“If the ngdp growth rate is 10%, then the IOR should be something close to 25% to stop the inflation.”
You’re not grasping the nature of exponential functions here, specifically in the quantity of money.
“Second, a CB can raise its primary interest rate, in the Feds case being the Fed funds rate.”
No, this is just the rate of lending between banks. It won’t reduce the quantity of money or the quantity of money in circulation.
You are “reasoning from interest rates” on that one.
“Third and most esoteric, a CB can “passively contract” by simply not buying as many securities, a CB achieves the same contractionary effect as if it did sell them.”
Not buying as many securities would then have the effect of bringing about a correction, which would reduce NGDP. But the claim I am making holds NGDP growth constant, so your point here is moot.
“All of this regards the TECHNICAL ease of stopping inflation.”
None of the things you mentioned are solutions to the problem I have raised.
“I acknowledge the political difficulty. However, part if the reason Paul V had so much trouble in the 80s is because he didn’t adequately inform the public when he would relent on the punishingly high interest rate. (He made vague promises according to Scott) once he did bring the ffr down however , the economy recovered. This teaches us something. One, that credibility once lost, can ALWAYS be regained. Two, the short run Philips curve can be reestablished, and three, it’s a categorically different type of recession in which you know you’ll be rehired after a short furlough when the CPI comes down, then the endless pain we have now. (Which the Austrians seem to enjoy)”
This is not related.
29. September 2013 at 14:36
And an ngdp futures market is NOT inherently like a futures market for gold or pork bellies. It’s more of a prediction market, cash settled at expiration tine, that is if I understand Scott correctly .
29. September 2013 at 14:51
Who cares how much money you print, AS LONG AS IT IS HOARDED beyond the fixed point of NGDP growth. Let’s say there was a CB in existence WITH a hawkish reputation committed to NGDP growth of 5% year, and had the power to write checks to ordinary citizens. It doesn’t matter if the CB were to send checks if 100,000 units of whatever currency to all employed citizens, if the money sits in their checking accounts. They would experience a Real gain in wealth. (Obviously an extreme example but the point still remains it doesn’t matter how much M increases, so long as V says constant)
An IOR is still a risk free rate. Raise it and corporations would have to offer competitive yields in order to draw bank lending away. And the fed funds rate is not just the interbank lending rate in America, it’s also the rate on 1 month tbills. Sell those risk free securities at higher yields and you’ll contact the nominal economy
29. September 2013 at 16:51
Edward:
“And an ngdp futures market is NOT inherently like a futures market for gold or pork bellies.”
That’s why it won’t work.
“It’s more of a prediction market, cash settled at expiration tine, that is if I understand Scott correctly.”
Cash settled is the interest paid. The contract price is by design fixed.
“Who cares how much money you print, AS LONG AS IT IS HOARDED beyond the fixed point of NGDP growth.”
You think in your mind that you do not care, because you realize it is the part that collapses NGDPLT. You have to minimize it.
“Let’s say there was a CB in existence WITH a hawkish reputation committed to NGDP growth of 5% year, and had the power to write checks to ordinary citizens. It doesn’t matter if the CB were to send checks if 100,000 units of whatever currency to all employed citizens, if the money sits in their checking accounts.”
But that’s just it. Cash sitting in bank accounts is eventually spent. Spending is how it got there in the first place.
“They would experience a Real gain in wealth. (Obviously an extreme example but the point still remains it doesn’t matter how much M increases, so long as V says constant)”
No they wouldn’t. They would only experience a real gain in wealth if there is an increase in production.
“An IOR is still a risk free rate. Raise it and corporations would have to offer competitive yields in order to draw bank lending away.”
No they wouldn’t. Bond investors don’t have access to “IOR”. What you mean to say is that BANKS who intend to invest in bonds will be investing in an environment of choosing between IOR or corporate/government debt. But like I said, banks aren’t the only investors or spenders.
“And the fed funds rate is not just the interbank lending rate in America, it’s also the rate on 1 month tbills.”
No it isn’t. The fed funds rate is a specific rate paid on funds lent between banks in the overnight market. It is NOT the rate on one month t-bills. If the rates of the two are equal, or close to equal, it is a statistical/historical fact only.
“Sell those risk free securities at higher yields and you’ll contact the nominal economy”
No you wouldn’t, because money earned on interest is money capable of being spent.
29. September 2013 at 18:43
Fallacy after fallacy,
Interest rates on tbills are a tax on other investments while they last depending on how high the interest rate, investors would choose to reinvest it rather than spend it in Consumption.
Also, banks are a substantial source of investment. Even if the I O R is not open to regular people, the absence if investment houses buying private bonds would keenly be felt.
Also, you appear to never have heard if something called the “pigou effect” or real balance effect.” It happens when cash holders gain in real terms because of a fall in prices. What Austrian and Austrian loonies miss is there can also be an inflationary real balance effect. If all citizens gain a temporary windfall, and prices move up only slightly or not at all, it is either the same it a very similar effect to prices falling on all cash holders. Less pain, more gain long term and short term. Nobody has to be exploited and nobody’s wages have to be cut in real terms, and everybody receives the money at the same time.
29. September 2013 at 19:22
Edward:
“Fallacy after fallacy”
I’ve noticed you like to say things like this a lot, but I have yet to see you actually back it up.
“Interest rates on tbills are a tax on other investments while they last depending on how high the interest rate, investors would choose to reinvest it rather than spend it in Consumption.”
Interest is not a tax, it is a return. The models you are likely talking is a calculation of a premium, e.g. the rate of return on “other investments” minus the risk free rate.
“Also, banks are a substantial source of investment.”
They are not the only source. And my point was about spending of all types, not just lending, and not just from the banks. You have yet to even address that point, let alone show an understanding of the argument being presented.
“Even if the I O R is not open to regular people, the absence if investment houses buying private bonds would keenly be felt.”
It cannot be a solution to the problem I have raised. It can only reduce it slightly.
“Also, you appear to never have heard if something called the “pigou effect” or real balance effect.”
Actually I have. They are widely misunderstood. I am pretty sure you misunderstand them as well. Let’s see what you say:
“It happens when cash holders gain in real terms because of a fall in prices. What Austrian and Austrian loonies miss is there can also be an inflationary real balance effect.”
Yup, you don’t understand it.
Even if there is a rise in cash balance on the basis of the existence of price deflation, this rise would be delimited, and basically one time. A price deflation of -2% say would NOT generate a continuously increasing cash holding waiting times. It would NOT generate continuously increasing cash balances relative to spending ad infinitum.
It would, at most, bring about a rise in cash balance as a percentage of total assets valued in dollars, for example 10% (or 12% or 14% or whatever), and then after that, there would be no further increase.
But this also does not address my argument about rising cash balances in an environment of fixed NGDP growth.
“If all citizens gain a temporary windfall, and prices move up only slightly or not at all, it is either the same it a very similar effect to prices falling on all cash holders.”
Irrelevant!
“Less pain, more gain long term and short term.”
Irrelevant.
“Nobody has to be exploited and nobody’s wages have to be cut in real terms, and everybody receives the money at the same time.”
There is no exploitation in falling prices. Those who earn a “real return” on the basis of holding cash must first earn that cash. So they have to produce in order to consume. Secondly, those who invest money will earn a greater return than those who hold cash.
But once again, you’re not addressing the point I am making.
29. September 2013 at 19:41
This just further supports my working model of Larry Summers. In particular, his complete inability to work out that people were agin him because of him, not because of some comparison with another.