The ECB finally acts

So it looks like it will be one trillion euros in QE, somewhat more than the markets expected.  A few comments:

1.  The policy would have been far more effective if done a year or two ago.  It will still be somewhat effective, but not a game changer.  Think “less bad times” in the eurozone, not good times.  Greece might still blow up.

2.  The euro fell by 1.2% on the news.  Of course QE was widely expected and presumably some of the recent decline in the euro was due to expectations of QE.  Even so, it doesn’t seem like a very strong reaction to a bigger than expected number, so I’d expect only a weak impact on eurozone inflation (or deflation.)  Still, better than nothing.

3.  The US stock market rose on the news, another example of “never reason from a price change.” If the dollar had strengthened because of tight money in the US, stocks would have fallen.  If the dollar strengthens because of easy money in Europe, stocks rise.  The 147th example of the fallacy of the “beggar-thy-neighbor” theory.  (However this theory does apply to national fiscal policy in the eurozone.  Thus if Germany does fiscal stimulus in 2011, then the ECB must tighten even more to keep inflation on target, and the PIIGS see their GDP fall.)

4.  This is further evidence that the recent Swiss move was unwise.  Some of Switzerland’s defenders (at least in my comment sections) claimed they had to cut their tie with the euro, as the value of the euro would collapse after QE was announced.  It’s down only 1.2% today.  Contrast that with the capital losses suffered by the SNB due to a 21% appreciation of the SF.

5.  Tyler Cowen has a new post on deflation.  I’m going to quibble with a couple aspects of the post. First the title; “Why is deflation continuing in Europe and Japan?”  I don’t like the idea of using that title in a post where the very first paragraph points out that the BOJ has succeeded in moving Japan from deflation to inflation:

Consumer prices will rise an average 1.4 percent the fiscal year through March 2017, after failing to reach 2 percent “” stripped of fresh food and a sales-tax boost “” in any of the years since the goal was set, the median of 16 estimates shows. Governor Haruhiko Kuroda wanted to get there in about two years when he unleashed his record stimulus plan in April 2013.

I also don’t like this:

We are no longer at the point where two percent inflation is easy to achieve in Europe or Japan.  Central banks are doubted.  To achieve two, they would have to shoot for four, and thus announce a target of four.

That’s also Paul Krugman’s claim, but it’s false.  They could target TIPS spreads at 2%, for instance. Better yet, they could follow Bernanke’s advice and switch to level targeting.  I think the mistake many observers make (including Cowen and Krugman) is to see central banks struggling to hit their targets with their actual policies, and then assuming that it is technically difficult to do, or involves a large risk of overshooting.  That is to give central banks too much credit. Central banks are still back in the Stone Age with their QE-type policies.  As Bernanke pointed out years ago, and Woodford has confirmed, you need level targeting at the zero bound.  This would make it far easier for the ECB and BOJ to hit their target.  Real world central banks are not using best practices.

One place I do agree with Tyler is that it might be very difficult in a political sense.  Thus even if Draghi and Kuroda privately favor level targeting, it’s quite possible that they would be unable to convince a majority at their respective central banks.  So yes, in a narrow political sense it might be tough for a central bank head to do what is needed to succeed.

Politics in a broader political sense don’t matter, as everywhere in the world voters are clueless about central banking.  If the ECB switched from a 1.9% IT to a 1.9% PLT, the average European would respond “huh?”  Even most college students don’t know the difference between a change in inflation and a change in the cost of living.


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149 Responses to “The ECB finally acts”

  1. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    22. January 2015 at 08:08

    I think you’re right in the last paragraph. If it’s “politics” that is keeping the ECB reined in, it’s certainly not electoral politics or politicians.

    If the problem was that the central bankers wanted to do it, but the politicians were saying “how is this going to play in rural Bavaria or Stuttgart?”, then they could do it easily by stealth, especially if the eurostat helped.

    For example, why must they use the most brain-dead of inflation measures? Just redefine inflation to exclude tax increases and fix the way you measure housing prices so that measured inflation goes down.

    Or just adopt a level target and emphacise that this way unexpected upwards swings get compensated.

  2. Gravatar of Njnnja Njnnja
    22. January 2015 at 08:38

    Yes the ECB continues to follow a suboptimal economic policy (to say the least) but the reason why is the broader political situation.

    In Greece, even if Syriza wins, unless they can get an outright majority by themselves (which current polls indicate is unlikely), no one is going to form a coalition with them so long as they demand an end to austerity etc. etc. So Greece will go back to elections, but this time, with their anger subsided a little bit because they got it out of their system with the Syriza vote.

    We end up with a moderate left of center or right of center coalition that then continues to negotiate with the Troika about how much substantive change is going to go on in Greece. The marginal German voter wants to really put the thumbscrews to Greece to make sure that they follow through with all of the “structural reforms” that they keep demanding. The commonly held belief is that more inflation gives negotiating power to Greece and less inflation (and even deflation) gives negotiating power to the Germans. Classic creditor/debtor monetary interests.

    While I agree that the German people don’t understand inflation vs price level targeting, they definitely understand the difference between a headline that says “Greece settles debt with creditors” (which will be read as “under generous bailout”) and one that says “Greece hunkers down for more austerity measures” (read as “as punishment for their past profligacy”).

    I was certainly hoping that the ECB would follow the BOE, the BOJ, and the Fed in monetary expansion, but if you want to understand why they are on target for Eurozone deflation, you have to keep in mind the (not entirely unwarranted) hostility between the North and the South. And that is entirely political.

  3. Gravatar of Vaidas Urba Vaidas Urba
    22. January 2015 at 08:56

    Good news is that QE will “in any case be conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term.”, making it similar to Fed’s QEInfinity.

  4. Gravatar of Ray Lopez Ray Lopez
    22. January 2015 at 09:02

    Sumner doublespeak. Let’s deconstruct this post, point by numbered point, as would Jacques Derrida.

    Paragraph #1. Sumner hedging his bets. “far more effective” in this paragraph clashes with “better than nothing” in the next. And just to be safe, Sumner mentions the bête noire of Greece.

    #2 – Euro fell by a small amount, which indicates this ECB gesture will fail. But Sumner calls it “better than nothing”. Later, when the gesture fails, Sumner will claim it was nothing, and hope his audience has a short attention span. Classic futurist guru claptrap.

    #3 – a laughable attempt to credit the US stock market with something happening in Europe. And if the US stock market reverses in the last half hour, as often happens, then what will Sumner say? Or if it falls tomorrow? Jim Kramer has more credibility and insight than Sumner on the stock market (lots more actually, as he used to work on Wall Street).

    #4 contradicts #2 – Sumner is saying it’s obvious the Euro will not collapse, so the Swiss bank was wrong to de-peg, yet in #2 he implies a bigger than expected number did not make the Euro collapse more. Does Sumner have any shame? Of course not, he’s a professional economist.

    #5 – chides Cowen for stating–correctly–that the BOJ has not hit their inflation targets. Name drops Krugman, who often ignores him.

    Sumner makes a metaphysical statement: “I think the mistake many observers make (including Cowen and Krugman) is to see central banks struggling to hit their targets with their actual policies, and then assuming that it is technically difficult to do, or involves a large risk of overshooting.” – assumes something theoretically possible is not “technically difficult to do”–metaphysics at its best. Analogy: In actually I have a hard time in a gravitational field drawing a perfectly straight line. But I must not assume that it is technically difficult to do, since Euclidean geometry says so! Absurd. Like NGDP monetarism. And the claim of no overshooting is thrown in as an afterthought, as if saying so makes it so.

    “Central banks are still back in the Stone Age with their QE-type policies.” – no, the Stone Age is the Gold Standard, the barbarous relic, and not a central bank managed fiat money gold standard either, but gold coins and bullion which are not easily debased. As a second best, a return to the Real Bills Doctrine (i.e., sound money) as per http://en.wikipedia.org/wiki/Real_bills_doctrine would be a welcome Stone Age. But QE is certainly not “Stone Age”. And, again to paraphrase Krugman, if Targeting NGDP (level targeting or otherwise) is so great, why has it not been invented even after being discussed for close to 100 years? Clearly if NGDP targeting was so obviously superior, it would have been adopted by at least one country. Now you could argue–as Nick here has–that Greenspan in fact adopted a sort of NGDP type targeting, by issuing money the way he did, but unless you can clearly state what exactly is NGDP targeting in terms of percentage and amount of money printed–and back that up with a historical model or prospective (future) model–you, Scott Sumner, are just blowing smoke and flashing mirrors.

  5. Gravatar of E. Harding E. Harding
    22. January 2015 at 09:52

    Scott, did you just write “never reason from a price change” while reasoning from an (asset) price change?

  6. Gravatar of collin collin
    22. January 2015 at 10:51

    Why is there no inflation despite all Central Banks opening up liquidity?

    1) Is capital productivity increasing not labor productivity? IT investment spending is down from 10 – 15 years but we continue growing the productivity. The rollouts of new IT is handled much better than 10 – 15 years ago.

    2) Again Population Bust Baby! How do increase AD and AS if the working age population starts decreasing? (Also realize most households start cutting consumer spending at 45 – 50.)

    3) We are still in a BRIC labor glut. Wages with India and China control inflation.

  7. Gravatar of Jason Jason
    22. January 2015 at 11:17

    Ray, time to work on your reading comprehension.

  8. Gravatar of Peter K. Peter K.
    22. January 2015 at 11:50

    “(However this theory does apply to national fiscal policy in the eurozone. Thus if Germany does fiscal stimulus in 2011, then the ECB must tighten even more to keep inflation on target, and the PIIGS see their GDP fall.)”

    I’d guess Keynesians like Krugman would says fiscal is a better, more direct way that monetary policy to hit your inflation or NGDP path level target, at least at the zero bound.

    Think about the indirect measures of the Fed leading up to the housing bubble and financial crisis. The private sector was using lower rates to build houses in the desert nobody wanted. It was unsustainable and created financial instability. Government investment is direct and if done well can boost job creation and credibly boost inflation. No reason why Europe can’t do both.

  9. Gravatar of Peter K. Peter K.
    22. January 2015 at 11:53

    If the Germans do fiscal stimulus, the ECB should allow wage gains and higher inflation in Germany which would make the PIIGS job of adjustment easier.

  10. Gravatar of Morgan Warstler Morgan Warstler
    22. January 2015 at 11:56

    Ray,

    Is your position that a CB will not adopt a level target, or that adopting a level target doesn’t matter?

  11. Gravatar of TravisV TravisV
    22. January 2015 at 12:43

    Bloomberg’s editors: “Mario Draghi Gets It (Almost) Right”

    http://www.bloombergview.com/articles/2015-01-22/mario-draghi-almost-does-the-right-thing

    That’s a follow-up to Monday’s editorial:

    http://www.bloombergview.com/articles/2015-01-19/it-may-already-be-too-late-for-europe-s-economy

  12. Gravatar of Peter K. Peter K.
    22. January 2015 at 13:17

    As a thoughtful liberal/progressive, even though I believe fiscal policy is more direct and better, I still favor a NGDP path level target. It’s good that people like Donald Kohn are being forced to think about even if they don’t agree. (He doesn’t say way he objects.)

    http://www.moneyandbanking.com/commentary/2015/1/22/interview-donald-kohn

    “So on the forward guidance, I think it has been effective. My views haven’t changed notably. It’s hard to deal with, but it’s part of the tool kit.

    I think the third aspect here is targets. There’s been a lot of discussion about whether, instead of an inflation target, there ought to be a price level or nominal GDP target. Here my view hasn’t changed. I believe that in the case of the United States, the inflation target coupled with the high employment target is better than a price level, or especially a nominal GDP, target. I think it’s worth continuing to think about these things, but right now I would stick to the 2% inflation target that everyone else, including the United States, is using.”

  13. Gravatar of Elwailly Elwailly
    22. January 2015 at 13:26

    Question: If you level target, is the time constant important? After a shock if the central bank promises to hit the level in one year, is that different than if the bank leaves it vague and people assume they will only gradually return to level over five years?

    In other words is level targeting enough to immediately set current money stance expectations or is a time frame required?

  14. Gravatar of Edward Edward
    22. January 2015 at 14:15

    Scott,
    Off topic, but Matthew Yglesias has a post discussing the president’s proposals to raise the dividend and capital gains tax ratein the SOTU address, and whether or not they hurt investment.
    http://www.vox.com/2015/1/21/7863239/taxes-investment-yagan

    I know your views on capital gains taxation, but what of dividends? And corporate taxes?

    I’m looking forward to a post on this in the future.

  15. Gravatar of Ben J Ben J
    22. January 2015 at 15:35

    Ray doesn’t have a position everyone. No point in asking. Ray resents success and hates the idea that other people respect Scott’s ideas, so he spends his posts desperately rebutting those ideas.

    Sadly he doesn’t understand the ideas he is trying to rebutt, and combined with his legendarily poor reading comprehension this makes each post read like it was written by someone who started coherently but whose brain leaked out halfway through typing.

  16. Gravatar of Major.Freedom Major.Freedom
    22. January 2015 at 16:10

    1. What it actually means is less malinvestment than otherwise would have been the case up until today. A lot has already been flushed out of the EU, but not nearly enough because money has almost certainly been too loose in the EU. It would be almost impossible for that many units of medium of exchange to have been created in a free market. If money were looser starting two years ago, there would have been even more economic disruption in the upcoming years than would otherwise have been the case.

    2. An important factor that has impoverished many European citizens/taxpayers is that very expected QE that has diminished their ability to buy goods and services from abroad. Some gained of course, but many lost.

    3. The US stock market rising on the news of QE in Europe is not an empirical falsification of the beggar they neighbor theory. The beggar thy neighbor theory does not presume or imply that the way one country’s government might improve the short term interests of the domestic population is through actions that necessarily reduce the prices of stocks in other countries. The US can be made worse off in other ways, besides a lower level of stock prices. Never reason from a price change. You’re not even taking your own advice seriously. One possible way for some US citizens to be harmed by the ECB’s actions is by a reduction in the quantity of goods and services they sell to European citizens whose sticky wages are not able to buy as many goods and services from those US exporters as before. This may not necessarily “show up” as reduced US stock prices.

    4. Reasoning from a price change. Again.

    5. Yes, with enough money printing prices can rise above 2% per year, regardless of interest rates, as long as central banks do not solely rely on a population of bankers who refuse to expand credit sufficiently no matter how many Treasuries the central banks buys from them. Money is not lent simply because people have it. They have to believe that the REAL GOODS AND SERVICES they invest in, will end up having a profitable demand.

    You need a lesson in how money is created and issued. If you are a money printer, and you buy only my treasuries and nobody else’s, and I am the sole issuer of new credit, then you cannot promise me anything about prices, or NGDP, or any other aggregate variable, without my practical consent, that is, without me essentially agreeing to play an active part in establishing what prices and NGDP will be. I must decide to issue more credit in order for prices or NGDP to go up, ceteris paribus. You cannot force me to issue new credit no matter how much new (base) money you stuff into my account via treasury purchases along with promises of what you will target NGDP to be. I am the proximate decider of whether or not the money in the hands of the broader public rises over time.

    Now, take what I said above, and just multiply to a hundred or a thousand banker-lenders, and imagine now a whole population of banker-lenders who engage in credit expansion. If we lenders decide as a group not to increase our lending as much as you want us to, then your promise to target anything is vacuous and not credible. You would essentially be promising us how we ourselves will behave. But you don’t control us. We control ourselves as individuals. Even if you buy up our entire supply of treasuries, and we have trillions of new (base) dollars in our accounts, then if we are observing losses being made in the “external to the banking system” economy, we’re not going to lend more until we feel comfortable that the projects offered to us in our lending meetings, will in fact earn a positive rate of return so that we can get paid back.

    Now I must emphasize the above is not an argument in favor of the “zero bound means more government borrowing and spending” theory. It is an argument that the central bank does not directly increase spending in the broader economy. They can only do so by flooding the banks with new base money and relying on them to decide whether the available projects are good or bad. If they see most are bad, then they won’t lend, no matter how many trillions they have. It is better to earn zero nominal return than negative nominal return.

    A central bank that only deals with commercial banks cannot credibly promise anything about the aggregates, on their own. They NEED commercial banks to “play ball”. The commercial banks are the proximate deciders of the money supply in the accounts of the broad population.

    Now a central bank can in principle promise, unilaterally, to make prices or aggregate spending rise by a particular amount. The only way they can do this is by printing money and directly buying goods and services that are one half of the “goods and services for money” exchanges that mathematically generate an NGDP number. For example if they print money to buy houses, or factories, that would directly raise prices and NGDP to whatever the central bank wants, short of an absolute rejection of their paper currency (hyperinflation).

  17. Gravatar of Daniel Daniel
    22. January 2015 at 16:30

    ^

    It finally happened. Major_Moron finally slipped out of character and revealed it’s been all been a parody of the nonsense internet Austrians love to spout.

  18. Gravatar of ssumner ssumner
    22. January 2015 at 17:00

    Ray, You said:

    “chides Cowen for stating-correctly-that the BOJ has not hit their inflation targets.”

    Yup, I chided Cowen for saying they had not hit their inflation target. It’s right up there in my post—somewhere.

    E. Harding. No, reasoning from a price change is starting your analysis from a price change, without first considering why the price changed. I first considered the QE, then looked at how prices reacted. That’s not reasoning from a price change.

    Collin, You said:

    “Why is there no inflation despite all Central Banks opening up liquidity?”

    Have you reversed cause and effect?

    Peter, You said:

    “The private sector was using lower rates to build houses in the desert nobody wanted. It was unsustainable and created financial instability. Government investment is direct and if done well can boost job creation and credibly boost inflation.”

    What has more value to society, those houses in the Southwest (whose price is now rising again) or the high speed rail being built from Fresno to Bakersfield?

    Morgan, You haven’t been around here for a while. Ray is not a real human being, he’s a mechanical troll developed in special labs in Silicon Valley, to test out cyber warfare against bloggers.

    Elwailly, You need a specific time frame.

    Edward, I oppose all capital income taxation.

    Ben, Or maybe he has good reading comprehension and simply chooses to lie.

    See my reply to Morgan. I am increasingly leaning toward the view that he is a mechanical troll, as his trolling is so perfect that it seems unlikely that any mere human could be so clueless.

  19. Gravatar of Ben J Ben J
    22. January 2015 at 18:04

    Ah of course – Ray has passed the Turing test for trolls with flying colours.

    I think it’s all related to the bizarre econ blogs comment section meltdown Ray had that started at Marginal Revolution. Maybe he lost a loved one recently, and lashing out incoherently is therapeutic.

  20. Gravatar of Jorge Larangeira Jorge Larangeira
    22. January 2015 at 18:30

    The SNB took a 21% hit on its EUR reserves. So what. The entire Swiss population suddenly became that much wealthier on a EUR basis.

  21. Gravatar of Worthwhile Reads – January 22nd, 2015 | Fix the Jobs Worthwhile Reads – January 22nd, 2015 | Fix the Jobs
    22. January 2015 at 18:49

    […] where the European Central Bank (ECB) announced that they would begin quantitative easing in March. Scott Sumner gives some interesting comments on the announcement leading off with the most important […]

  22. Gravatar of Todd Ramsey Todd Ramsey
    22. January 2015 at 19:14

    Ashamed to admit I don’t understand the difference between a change in inflation and a change in the cost of living. Can someone please point me to a post or website to help me understand? Thanks in advance.

  23. Gravatar of Ray Lopez Ray Lopez
    22. January 2015 at 19:38

    @Everybody–please don’t feed the troll, if you think I’m a troll; that includes Sumner. Treat me as you do MF. A closed mind is a wonderful thing, as any Hari Krishna will tell you, or disciple of an economic school.

    @Morgan W – “Is your position that a CB will not adopt a level target, or that adopting a level target doesn’t matter?” – first, the question is not what I think but what does Sumner think; and I’m not even sure what Sumner’s proposal(s) is/are–he has several–as he has not explained them in full. The one paper he links to on this page is vague and full of hand-waiving. He refers you to a model by M. Woodford, yet Woodford has said his model is not the same as Sumner’s. He has said his model is somewhat similar to Selgin’s but I think Sumner makes it up as he goes along.

    However, the more I read the more I am convinced that these monetary frameworks are simply impotent metaphysics. It all amounts to how much money the Fed prints, which seems useless based on history. Thought experiment: suppose the ‘hard money crowd’ would want 0% money printing in the US during times like these, the Selgin Productivity Norm followers would want 2%, the actual US Fed since 2008 has increased money supply by 8.2%/yr (which is in fact the actual figure), the Sumnerites want 10%/yr while Krugman’s Neo-Keynesians or otherwise want 12%/yr. Does the fact that the actual Fed has expanded the money supply by 8.2%/yr since 2008 negate or invalidate the hard money crowd and Selgin Productivity Norm framework? You will get a vociferous “NO” if you ask that crowd this question, they will claim other things. Now suppose that we did pump money up to 12%/yr like say Krugman wants, and nothing happens. Would Krugman renounce his views? No. Witness the austerity debacle where Krugman dug in his heels (as Sumner harps on). All of these easy money advocates would want the Fed to ‘double down’ and increase money even more, until such time the economy revives (this is I think what Sumner wants to do, that is, have a variable rate of money creation, constantly increasing if the economy fails to respond favorably). What they fail to see is that in their egotistical lust to justify their particular model, they don’t understand that velocity changes during tough times (see more here: http://www.businessweek.com/articles/2014-01-17/the-recovery-and-the-speed-of-money), which is just another way of saying ‘animal spirits’ change during various periods. Short of hyperinflation, if people don’t want to spend money they will not. Various hand-waving arguments involving a ‘confidence / credibility’ fudge factor / fairy are used to make the models account for animal spirits, but these artifices are fake. So does Sumner and all the other easy money crowd simply want the USA to become Zimbabwe? I think they would get a kick out of that (and frankly I think it would be cool in the abstract to have hyperinflation. But it would wipe out my family’s money–we’re in the 1%–and cause ruin. It’s a teenage ‘cool thought’ but not helpful).

  24. Gravatar of Major.Freedom Major.Freedom
    22. January 2015 at 19:54

    Daniel:

    Nothing I said in that comment contradicts anything in Austrianism.

    You assume too much. You’ve had things wrong the whole time, and yet you’re blaming me for it. Typical.

  25. Gravatar of Major.Freedom Major.Freedom
    22. January 2015 at 20:11

    “E. Harding. No, reasoning from a price change is starting your analysis from a price change, without first considering why the price changed. I first considered the QE, then looked at how prices reacted. That’s not reasoning from a price change.”

    Well then nobody in the world reasons from a price change, because nobody “starts” their analysis with a price change. The numbers mean nothing unless one utilizes an already accepted theory to interpret the numbers as changing for such and such reasons.

    Joe Sixpack will not simply accept rising prices as a creation aspect of economic activity. He might think things like “Businessmen are greedy and that’s why prices are increasing.”

    Aaaaaand poof goes “Never reason from a price change”.

    And here I thought never reasoning from a price change meant the more reasonable interpretation of never utilizing price changes as a premise in one’s argument in which price changes might be an effect of what the argument is purporting to explain.

    What “Never reason from a price change” seems to actually mean is “You can reason from a price change, as long as you agree with Sumner about why the prices changed, and what you believe should never contradict a belief that is reasoned from NGDP.”

  26. Gravatar of Major.Freedom Major.Freedom
    22. January 2015 at 20:30

    Ray:

    “Everybody-please don’t feed the troll, if you think I’m a troll; that includes Sumner. Treat me as you do MF. A closed mind is a wonderful thing, as any Hari Krishna will tell you, or disciple of an economic school.”

    Hey I’m no ideologue; I am not absolutely against fiscal policy in the form of payroll tax cuts.

    Did you know that stability in the labor market is an honorable goal? Concentration camps are the ideal. Everyone’s working…all the time. Producing what exactly, and by what influences? Who cares!

    NGDPLT is more libertarian that price targeting, because the market is too stupid to understand that recessions are caused by government and not capitalism, and NGDPLT will prevent that stupidity from resulting in another Hitler. But the market is always the most right…or something.

    That’s trolling…

  27. Gravatar of John Becker John Becker
    22. January 2015 at 21:01

    Why is there this asymmetry between inflation and deflation? I don’t think there were ever more than 2 consecutive quarters of slightly declining prices in Japan or Europe but somehow this is a deflationary death spiral while 2% inflation per year is “price stability.” No pseudo-science misuses language worse than economics. Not acupuncture, not astrology, not even buddhist quantum physics.

  28. Gravatar of Ray Lopez Ray Lopez
    22. January 2015 at 22:02

    @MF – the closed mind I was referring to was the Sumner cultists who don’t question their master, not you, though there are aspects of Austrianism that strike me as religion.

    @John Becker–well said. Economist George Selgin is one of the few that points out falling prices are not bad (citing the late 19th century); another is the consultant A. Gary Shilling. Furthermore, as pointed out by Richard Cooper in his anti-gold standard paper of 1982 (but still a good read), that people in the late 1800s *under*-estimated deflation (ex ante vs ex post actual figures, from contracts examined), yet the late 1800s was a time of plenty in all western countries (not just in the high-immigration USA; and TFP –total factor productivity–was high, showing a good, dynamic economy), all would agree save perhaps Sumner and the ‘deflation is always bad’ crowd. Needless to say, the late 1800s was a ‘hard money’ period (gold/silver backing; real bills doctrine). The only bad thing about this period is central banks often ‘sterilized’ (i.e., manipulated) the gold supply, which messed things up, under the theory that a ‘strong’ currency is good for a country–also practiced today by the USA, and not just in the Plaza Accords of the late 1980s)

  29. Gravatar of Major.Freedom Major.Freedom
    22. January 2015 at 22:06

    I know Ray, all those sentences are trolling sentences. I was not thinking you were speaking of me, but the way it is written certainly looks that way, my bad.

  30. Gravatar of Major.Freedom Major.Freedom
    22. January 2015 at 22:10

    John Becker

    Most “economists” are political pundits in disguise. Not necessarily left versus right, but an activist in some way.

  31. Gravatar of Prakash Prakash
    22. January 2015 at 22:34

    @ Ray, @John

    Almost every healthy deflation in history has been in the background of increasing or steady nominal income. Selgin’s latest bitdollar proposal is an attempt to create expectations of steady nominal income in a distributed manner, for those who are scared of central banks. It’s credibility would also be way higher than any central bank in existence because it would literally be coded in.

  32. Gravatar of James in London James in London
    22. January 2015 at 22:43

    Scott
    The reaction will be strong in the EZ. There is a credibility issue here for Dragji. No on can quite believe the ECB means it after years of Austerianism. But the details are impressive. Credibility will grow over time. Also, remember the power of expectations (as if I need to remind you!), the Euro had already fallen 20% since Sov QE was mooted back in Summer 2014.

  33. Gravatar of Ray Lopez Ray Lopez
    23. January 2015 at 01:50

    @Prakash–cite please? It is plausible but are you sure of rising nominal income? BTW I’m reading now the excellent history book by Richard H. Timberlake, “Monetary Policy in the United States” (Cato Inst.)

    OT: sticky wages and prices are a relic of the 1950s (US union membership peaked in the 1954 at 35%–it is now in the single digits), yet Sumner sticks to the ‘sticky wages’ theory, like an aging spinster who is dressed in bobby socks and awaiting a date to the sox hop. Ouch, sorry, bad visual. Below is a forgotten monetary pioneer C. Warburton who late in his career updated his work to include ‘sticky wages’ but this was in the 1950s as an afterthought. Sticky wages is a dead letter today. – RL

    Bordo, Schwartz on Clark Warburton: http://www.nber.org/chapters/c7504
    In updating his work, Warburton found that downturns in 1950-65 exhibited a decline only in output [not price–RL]. He attributed downward price rigidity to the Full Employment Act of 1946, which encouraged businessmen to believe in the inevitability of future expansionary policy, “the spread of ‘target’ pricing,” and the “demands of organized labor”

  34. Gravatar of Daniel Daniel
    23. January 2015 at 02:13

    John Becker

    Why is there this asymmetry between inflation and deflation?

    Because of an insignificant thing called “stickiness”

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

    Try harder, troll-boy.

  35. Gravatar of Matt Waters Matt Waters
    23. January 2015 at 03:31

    Ray, I try to skip both your and MF’s posts, but again there is simply a mountain of evidence for sticky wages. I don’t remember getting a straight answer, so I will ask again. Many companies saw lower revenues in 2008, correct? Can we at least agree on that point?

    Also, you look at all commodities starting in Fall of 2008 and their price cratered. Correct? By not believing in sticky wages, you are saying that there must be legions and legions of workers whose wages automatically decreased in response to demand. Where are all these workers? Do you know a SINGLE worker personally who worked the same job and had their wage lowered? Barrels of oil halved in price per barrel of oil, yet virtually all companies paid the same price per hour of work.

    All these red herring arguments like some nonsense about the full employment act of 1946 or about some pseudo-philosophical nonsense. I’m not an academic. I personally worked for a large company in 2008-09 which laid off about 30% of employees in our division, required managers to take two weeks of unpaid vacation, trimmed many benefit programs and had a salary freeze for over a year. I know people who worked at an Architecture firm who laid off 80% of the staff and the remaining workers only worked 15 hours a week. But what simply DIDN’T happen was per-hour nominal wages going down. None of these places had unions of any sort and many were relatively small, closely held companies.

    The managers do not reduce wages because there is very little to gain unless managers were diabolical enough to cut wages and then in fact HIRE more people. Going back to barrels of oil. Let’s say there’s 10 companies buying oil from producers at $95 and selling the oil for $100. Each has 10% market share. Then the market-clearing price of oil goes down to $80. Consider two scenarios:

    1. 10/10 oil companies are irrational and refuse to buy oil for less than $95 and refuse to sell oil for less than $100. For now, don’t ask why they are irrational. They just are. There would be many oil producers pounding down the door to sell oil for $95. A lot of oil producing resources will become idle. The oil producers may also not have the economies of scale oil companies have and the idle producers cannot form an 11th company to sell oil for $90. Without new entrants and all 10 companies being irrational, then the price of oil does not change even though many oil producers are willing to sell for less.

    2. The second scenario is 9/10 companies are irrational still but the tenth company does reduce the prices they pay producers. They can buy for $75 and sell for $80. Let’s say too that their volume can grow without limits. In this case, the tenth company would see their market share grow from 10% to 100% as all buyers rationally go to the lower price. The other nine companies go out of business.

    Since buyers rapidly switch to the lower price and the product is a commodity with identical quantity between oil companies, oil intermediaries did not keep oil prices high in 2008. They fell along with the market. If any intermediary tried to only sell oil at the peak of $140, they would go out of business. But the oil companies changed prices not because everybody else changed prices. They changed prices because the first scenario was not a Nash equilibrium. Oil intermediaries benefited from reducing prices even if they were the only one to reduce prices.

    That last part is key. Even if they were the only one to reduce prices. For wages, we can substitute the above scenario with an industry with ten companies. Indeed most industries have economies of scale, which makes it very difficult for a new company to enter. It can be done but takes several years of steady growth.

    But an individual company can reduce wages like the single oil intermediary in scenario two. But there are several common-sense differences:

    1. Oil is a commodity whose quality does not change depending on the price you pay for it. Depending on the nature of the work, the optimal amount of supervision for managers gives significant leeway in the short-term for lesser quality work.

    2. Buying new workers is not like buying more oil. There are far more transaction costs for getting new workers.

    3. Then there’s the common-sense element. The 1 out of the 10 companies diabolical enough to lower wages would only profit if:

    1. They first reduce wages for their existing workers.
    2. They significantly increase monitoring, and the costs of monitoring, due to lower morale.
    3. And finally, to really profit being the only company doing this, the company wouldn’t merely keep their current workforce. They would need to ADD workers to benefit. They would also have to go through the hassle of getting all the new customers through their now lower costs. There are not just transaction costs with adding workers, but transaction costs with adding customers. If they merely charge lower costs to existing customers, then the management gets nothing for all their hassles.

    As another commenter said, it’s hard to imagine a world where you get a performance review and your boss says “you did well, your salary will only be reduced by 5%.”

  36. Gravatar of Jaap de Vries Jaap de Vries
    23. January 2015 at 04:29

    Scott,

    What do you make of the falling bond yields over longer maturities even though the program clearly outperformed market expectations (euro slides again today). This seems to be contrasting the inkomen effect.

  37. Gravatar of Major.Freedom Major.Freedom
    23. January 2015 at 05:19

    http://mobile.reuters.com/article/idUSL6N0V14AC20150122?irpc=932

    Euro bond rates fell to historical lows on the news of QE.

    ———-

    I usually ignore what Matt Waters writes, but in that wall of ranting text there is zero proof, circumstantial anecdotal meandering, and zero connections between real world events.

    For the millionth time, layoffs and wages not falling in kine with a fall in demand, in an inflationary economy, does not prove wages are sticky. Wage rates are in line with inflation expectations, which is always positive no matter what happens to actual prices or aggregate demand.

    This is not proof that wages are sticky, this is evidence that wages rise with inflation, and is consistent with wage rates otherwise falling in an absence of permanent inflation.

    People expect increasing prices because of being born into such a world for so many generations that it is treated as if a law of nature. If on the other hand we lived in a world with engrained price deflation, then wage rates would not be sticky downward as population grows. Everyone would learn that their fathers and grandfathers made more money simply because there were fewer people working given a slightly lower quantity of money and volume of spending.

    You guys talk about money illusion…what is an illusion is your belief that wage rates must fall even if people expect prices to rise as they should. Expectations trump present central bank “errors”.

  38. Gravatar of Ray Lopez Ray Lopez
    23. January 2015 at 05:38

    @Matt Waters – thanks for your oil industry example. I do know some roughnecks and what you say sounds true. But keep in mind ‘roughnecks’ today are not guys with muscle and little brains, they are highly-paid high-tech workers, so not the best representative example. I posit that sticky wages only occur for the Fortune 1000 companies–maybe like yours. Most mom-and-pop stores (and that’s the vast majority) cut wages.

    Another thing to consider, that a commentator brought up a while ago: as you yourself point out, firms will fire workers even if they don’t cut wages. So think about it: sticky wages FOR THE FIRM AS A WHOLE does not exist–for each individual worker, maybe. For the whole firm? Clearly not. I think you are smart enough to know what I am talking about.

    Final thought: Money illusion* and sticky prices (not wages) are the two elements of monetarism that make monetarism work in practice (as well as Keynesianism). Take away either of these two ‘pillars’ and the whole edifice collapses. I am saying that neither money illusion, nor sticky prices, nor even sticky wages(for a firm as a whole, and for most small firms) exist. That has huge implications for both monetarism and Keynesianism.

    * BTW insofar as I can tell, money illusion has never been proven outside of a classroom controlled experimental setting, meaning, giving college kids small amounts of real money in a game theory setting. While I agree these type experiments are persuasive, they are not the real thing. So the jury is still out on whether money illusion exists in the real world.

  39. Gravatar of Ray Lopez Ray Lopez
    23. January 2015 at 05:54

    @ Daniel, the ‘stupid’ troll potty-mouth:

    I have pointed out to you once before that your Wikipedia cite is flawed. Once again, quite your trolling.

    Wikipedia: “To see how a small sector with a fixed price can affect the way rest of the flexible prices behave, suppose that there are two sectors in the economy: a proportion a with flexible prices Pf and a proportion 1-a that are affected by menu costs with sticky prices Pm”

    This two factor market is absurd. It makes a variety of assumptions, including that you can have two sectors with / without arbitrage between the sectors (depending on the state), as well as the two sectors are related to one another by Cobb-Douglas preferences, which is a mathematical artifice for computational simplicity (yes I know the Solow equation uses it), see “the Cobb-Douglas production function was not developed on the basis of any knowledge of engineering, technology, or management of the production process. It was instead developed because it had attractive mathematical characteristics, such as diminishing marginal returns to either factor of production and the property that expenditure on any given input is a constant fraction of total cost”

    In short, your Wiki cite is not a proof, so quit your ‘stupid’ trolling, to use your own words.

  40. Gravatar of Daniel Daniel
    23. January 2015 at 06:10

    Ray,

    You may not be smart, but you sure are dumb.

  41. Gravatar of Salem Salem
    23. January 2015 at 06:16

    @Todd Ramsey:

    “Ashamed to admit I don’t understand the difference between a change in inflation and a change in the cost of living.”

    Inflation is the rate of change in the overall price level of goods and services. The cost of living is the expenditures necessary to maintain a certain standard of living. Therefore a change in inflation is the second derivative of the price level, whereas a change in the cost of living (for a constant standard of living) is the first derivative.

    But the standard of living is rising over time, so rises in the cost of living do not necessarily indicate inflation. In addition, the cost of living is idiosyncratic – there is no one ‘cost.’ If someone smokes a lot, then the failure of the tobacco harvest will raise their cost of living, whereas this will not affect a non-smoker. The cost of living is higher in New York than in Iowa (although arguably living in New York is itself a form of consumption…), and so on.

  42. Gravatar of ssumner ssumner
    23. January 2015 at 06:20

    Jorge, Yes, and in 2008 I became much richer in Zimbabwe dollar terms.

    Todd, Inflation is the percentage change in the price level. If inflation falls from 4% to 2% then inflation has fallen while the cost of living has increased.

    Ray, You said:

    “Sumnerites want 10%/yr”

    Words fail me.

    James, The market reaction today certainly supports your point.

    Matt, Ray thinks it’s just a coincidence that there is a huge spike of negotiated wage gains precisely at 0%. And Ray’s link between unions and wage stickiness is laugh out loud funny–as if my wage at Bentley wasn’t sticky. And he says I’m behind the times!

    Jaap, That happened sometimes in the US, but not other times. It’s a puzzle. presumably the liquidity effect of the purchases overwhelmed the income/inflation effects. I suppose default risk may also have declined, but I can’t imagine there was ever much default risk in Germany.

  43. Gravatar of TravisV TravisV
    23. January 2015 at 08:03

    Is Tyler Durden at Zero Hedge correct about this?

    “Has The ECB QE Already Failed? 5 Year Inflation Expectations Decline Since Draghi’s Announcement.”

    http://www.zerohedge.com/news/2015-01-23/has-ecb-qe-already-failed-5-year-inflation-expectations-decline-draghis-announcement

  44. Gravatar of James in London James in London
    23. January 2015 at 08:56

    Travis
    Watch the currency, Draghi does. The bonds can take awhile.

  45. Gravatar of Don Geddis Don Geddis
    23. January 2015 at 09:19

    @MF: “If on the other hand we lived in a world with engrained price deflation, then wage rates would not be sticky downward as population grows.

    I would love to see how you derive this interesting claim, starting from the lone axiom that “humans act”, and using only logically valid inferences. I confess that I seem unable to complete the proof myself, so would be honored if you could enlighten me on how you get from the axiom to the conclusion.

  46. Gravatar of Ray Lopez Ray Lopez
    23. January 2015 at 09:21

    Let’s deconstruct Sumner’s answers to his hapless readers. If I had Sumner as a teacher I’m pretty sure I would get an F despite my scoring above average in most of my classes.

    “Jorge, Yes, and in 2008 I became much richer in Zimbabwe dollar terms.”

    The Sumner koan here is that most citizens use their own currency and currency appreciation only helps importers. Fair enough, but Jorge is probably referring to such importers. So yes, Jorge is right: the entire Swiss population is richer now, and can import more goods with their franc.

    “Todd, Inflation is the percentage change in the price level. If inflation falls from 4% to 2% then inflation has fallen while the cost of living has increased.” – Not true at all. Cost of living varies person to person and depends on lifestyle. At 2% inflation, you can have a rising, falling or neutral cost of living, depending on what exactly you are buying. Thus for rich luxury goods there’s often a separate calculation for the cost increases, ditto for sending a kid to college, etc. And so Sumner’s answer is illogical. You can just as easily say: ‘if inflation falls to 0%, cost of living can actually fall to -10%, if you’re in a mode of living that depends on super-cheap things that fall faster than even the general inflation rate’.

    Oh God, now it’s my turn for the Sumner treatment:

    “Ray, You said: Sumnerites want 10%/yr Words fail me.”

    Why? We know words often fail you, but the question is why is this hard to understand? You do realize I hope that your ‘print money faster and faster until NGDP changes’ scheme is ultimately nothing more than what the Fed is already doing now, except they don’t call it targeting NGDP but targeting inflation? If the Fed is failing to hit their inflation target, despite printing massive amounts of money, why would they make the NGDP figures, unless you assume a sudden burst of activity when you print even more money? Do you assume that? Is your scheme like the difference between the coefficient of static friction vs dynamic friction? Google this. So when you print more money than even now, all of a sudden -BOOM!–the economy takes off, but without hyperinflation? Is that the Sumner effect? If that transpires, you win a Nobel Prize in Economics and the Peace Prize too. Really, you’ll be lauded as a genius if that ever happens, since that’s not the way economies work historically. But I guess there’s always a first time, so dream on. A model, as Tony Yates says, would be nice however to show this.

    James, The market reaction today certainly supports your point. OK, if you say so? (probably not).

    Matt, Ray thinks it’s just a coincidence that there is a huge spike of negotiated wage gains precisely at 0%. And Ray’s link between unions and wage stickiness is laugh out loud funny-as if my wage at Bentley wasn’t sticky. And he says I’m behind the times! – of course it’s not a coincidence. As MF has said, wages increase by the inflation rate, unless workers are taking a pay cut. That’s not wage stickiness. If inflation is about zero now (as it is), then naturally wage gains are precisely at 0%. As for the rest of your comment about Bentley and unions, I really can’t make sense of it. I guess you are complaining that you’re underpaid and/or your union did not do a good job getting you a pay raise, not clear which, but good that Kenneth Duda believes in you enough to fund your blogging for the next couple of years. It’s his money, he can waste it as he sees fit I guess.

    “Jaap, That happened sometimes in the US, but not other times. It’s a puzzle. presumably the liquidity effect of the purchases overwhelmed the income/inflation effects. I suppose default risk may also have declined, but I can’t imagine there was ever much default risk in Germany.” I have no comment on this as it’s some sort of technical point, but for anybody reading this, a quick Google search shows no hits for the phrase ‘inkomen effect’ that Jaap is referring to. A few hits in the Dutch language. Sumner and Jaap appear to be talking their own secret language, like infants often do.

  47. Gravatar of Nick Nick
    23. January 2015 at 09:37

    Ray,
    You are really bad at deconstruction. I think earlier you tried to insult Sumner by calling him Derrida. Are you trying to troll Derrida now by calling this stuff deconstruction? I’m pretty sure he only reads the posts, not the comments.
    Calling Dutch a secret language for infants was funny, tho. Take that, Netherlands!

  48. Gravatar of ChargerCarl ChargerCarl
    23. January 2015 at 09:47

    Ray, try using the search function. Scott has done multiple posts on all the questions you raise.

  49. Gravatar of Charlie Jamieson Charlie Jamieson
    23. January 2015 at 09:47

    Easy money advocates — whether they be monetarists, or monetary realists or Keynesians — believe the answer to any economic crisis is to put more money in the system.
    So if a $1T stimulus doesn’t do much, you need to do a $2T deficit. If zero percent interest rates don’t spur lending, then let’s make them negative. If 4 pct inflation targeting doesn’t get it going, then … well, target 6 or 8 pct.
    The bigger problem is that while any of these plans can work in a recession, they can’t make the real economy grow faster. And they also create long-term issues that show up years later.
    For example, the leveraged boom in real estate paper created economic activity in the 2000s, but we are still paying the price today — but without really addressing what happened.

  50. Gravatar of Don Geddis Don Geddis
    23. January 2015 at 10:41

    @Ray Lopez: “If I had Sumner as a teacher I’m pretty sure I would get an F

    Ah! At last, something that we can all agree on.

  51. Gravatar of chris mahoney chris mahoney
    23. January 2015 at 10:59

    One big diff between Kuroda and Draghi. Kuroda was imposed on the BoJ by the government in order to pursue reflation, under threat of repeal of BoJ independence. Draghi has no such political support, and and faces political opposition. Kuroda’s problem is the mandarins at the BoJ who oppose reflation for obscure reasons.

  52. Gravatar of TravisV TravisV
    23. January 2015 at 11:44

    Theory: “Here’s Why The ECB Held Off Launching QE Until Now”

    http://www.businessinsider.com/the-real-reason-why-the-ecb-held-off-launching-qe-2015-1

  53. Gravatar of Major.Freedom Major.Freedom
    23. January 2015 at 14:35

    Don Geddis:

    “I would love to see how you derive this interesting claim, starting from the lone axiom that “humans act”, and using only logically valid inferences. I confess that I seem unable to complete the proof myself, so would be honored if you could enlighten me on how you get from the axiom to the conclusion.”

    Just do exactly what you did to come to the conclusion, without any real world empirical examples of an unhampered market, that wages are sticky downward. You know, where you start with your observations of hampered market data, and then “deduce” using only logically valid inferences, that wages rates are therefore sticky in all possible worlds including free markets.

    Make sure you give a good logical explanation for why employers would purposefully and permanently sacrifice profits and why workers would choose starving to death over lower wage rates.

    Also make sure that you completely ignore inflation psychology, welfare, Marxian exploitation theory, and minimum wage laws when deducing, using your awesomely impressive logic, that people will purposefully ignore such gains until bankruptcy and starvation, like lemmings.

    Please do so, because in order for your elegant proof to be clean and free from silly real world facts, you have to pretend that what people happened to have done in the past, is what they necessarily must do in all possible world with all possible beliefs, laws, and monetary systems.

    I can’t wait for you to deduce from a chart of data from a hampered economy, and conclude that wage rates will never ever under any circumstance, be set by people in a temporally declining way in every possible world that you have never observed!

  54. Gravatar of Ben J Ben J
    23. January 2015 at 15:03

    “As MF has said, wages increase by the inflation rate, unless workers are taking a pay cut. That’s not wage stickiness. If inflation is about zero now (as it is), then naturally wage gains are precisely at 0%.”

    Ray and MF know that empirical evidence of sticky wages is actually evidence that wages aren’t sticky. This is the perfect example of why MF (and Ray will be the same) has completely failed to ever convince anyone on this site of his views. Here the evidence for sticky wages is so overwhelming that the old “empirical analysis is not valid” trick won’t work, so we are left with the daring “assert the evidence shows the opposite of what it clearly shows” trick, as though that will convince people.

    Maybe the sticky wages evidence proves wages don’t exist as well? What a fun game

  55. Gravatar of Negation of Ideology Negation of Ideology
    23. January 2015 at 16:47

    Regarding sticky wages, prices, and contracts – let’s imagine for a minute the internet Austrians are correct and stickiness is a myth or can be eliminated by reducing government regulations. If so, then their arguments apply equally to inflation and deflation. Notice how they spend so much time complaining about inflation, easy money and money-printing. But if they are right, none of these things matter. Everyone will simply adjust.

    Zimbabwe/Weimer style hyperinflation? Wages and prices would simply adjust upward. The internet Austrians argue that deflation (even demand side) is benign because prices will adjust, but they contradict themselves when they attack inflation. If they were logically consistent, they wouldn’t care at all about money printing.

    Note – I do not believe the internet Austrians are right about wage stickiness (or much else of importance).

  56. Gravatar of Ray Lopez Ray Lopez
    23. January 2015 at 18:27

    @Nick “Are you trying to troll Derrida now by calling this stuff deconstruction? LOL, do you think Derrida reads this blog? Hint: he’s dead.

    @ChargerCarl – Searched “inkomen” on this site: Not Found.

    @Charlie Jamieson – right on.

    @Negation of Ideology- nice thought experiment. Menu costs are real during hyperinflation, but not so much during non-hyperinflation is how we internet Austrians square this circle. You can easily imagine that prices that double in a day, or less, as they did in Zimbabwe, will have real shoe leather costs.

  57. Gravatar of Jorge Larangeira Jorge Larangeira
    23. January 2015 at 18:32

    “The Sumner koan here is that most citizens use their own currency and currency appreciation only helps importers. Fair enough, but Jorge is probably referring to such importers. So yes, Jorge is right: the entire Swiss population is richer now, and can import more goods with their franc.”

    Not only can they import 21% more Chateau La Tour, Ferraris and Porsches (the Swiss love their French wine and Italian and German sportscars, as anyone who has lived there–like I have–can attest). They can also buy more real estate in Tuscany and Provence, purchase more German bunds or own more equity in Dutch listed companies. They have, in fact, received a windfall overnight and the wealth gained by the Swiss population vastly outstrips any loss taken by the SNB.

    P.S. “Zimbabwe dollar” snide remark: and ssummer whines about PK’s “sarcastic” replies?

  58. Gravatar of Major.Freedom Major.Freedom
    23. January 2015 at 18:40

    Ben J:

    “Ray and MF know that empirical evidence of sticky wages is actually evidence that wages aren’t sticky. This is the perfect example of why MF (and Ray will be the same) has completely failed to ever convince anyone on this site of his views. Here the evidence for sticky wages is so overwhelming that the old “empirical analysis is not valid” trick won’t work, so we are left with the daring “assert the evidence shows the opposite of what it clearly shows” trick, as though that will convince people.”

    Let us be crystal clear. Failing to convince you is not evidence of failure on my part. Your inability or unwillingness to understand the flaws in your approach does not constitute the standard of truth such that I am wrong.

    The empirical evidence of “sticky wages”, which is separate from “wage rates tend to rise in an inflationary economy and tend not to fall with every temporary drop in spending and prices”, is not only not overwhelming…it is non-existent. You cannot claim to know through observation what wage rates do and don’t do in a free market that does not contain the forces that prop up wages.

    The reason you are not convincing me of the myths you’re peddling is that I know that the actual foundation for why you believe in the absolutism of sticky wages. It is not empirical at all. You are carrying with you an apriori theory of employer and worker stupidity, and only then do you interpret what you see. You first think they are stupid, and then you look at wage rates and demand and conclude stupidity is responsible. Rather than say stupidity, you say inefficient, or some other sterile seemingly nonjudgmental technocratic babble.

    “Maybe the sticky wages evidence proves wages don’t exist as well?”

    What sticky wage evidence? It is like you’re trying to convince yourself more than me.

    The trick you’re trying to pull is the fallacy that what you observe occurs to wages rates and demand in history, is identical to economic laws. You are imposing the inappropriate methods of the natural sciences into economics, despite the fact that the subject matter is categorically different. The reason so few people are convinced of what I write is entirely due to their inability to think like an economist. They never learned it. To you and others, the use of regression analysis is supposed to be the be all and end all of economic laws. There is a lack of any learning, active component in your theories that you have come to believe for other reasons.

    You need sticky wages to be true for all possible worlds, or else your philosophical and political convictions are revealed as on eggshells. The leftist radicals during the 1930s also needed sticky wages.

    It is a crutch, nothing more. If you asked me as an employer or as an employee whether I would refuse a pay cut in a free market and choose bankruptcy or starvation over a lower nominal income, then in order for your absolutist sticky wages theory to be true, I must be either forced by some mysterious secret of the universe to starve to death on purpose, or be so stupid that I know how to make money and have an opportunity to make money, but I refuse to accept it…and then starve to death.

    Now on the other hand I lived in an inflationary economy, with welfare, and millions of people who believe in the Marxian exploitation theory, even if subconsciously, or some derivative of it that purports to show that falling wage rates is necessarily bad, which I then take to likely result in rising prices, and more opportunity for employers in eventually raising their wage rates offers, and there was offered 1 year of taxpayer looted money via welfare, then are you really surprised to see wage rates tending to delay in falling when there is yet another temporary decline in spending and demand for the millionth time?

    If inflation did not exist, if welfare did not exist, if people learned that the Marxian exploitation theory is bogus, then there is absolutely no good reason to believe in the silly sticky wages doctrine.

    Do you know what the money illusion really is? It is the illusion that we need a money printer to keep aggregate spending rising at a nice modest stable pace or else Hitler 2.0 will occur.

  59. Gravatar of Major.Freedom Major.Freedom
    23. January 2015 at 18:41

    Negation of Ideology:

    I do not believe the internet market monetarists are right.

    When you post comments online, your credibility is immediately minimized.

  60. Gravatar of ssumner ssumner
    23. January 2015 at 19:30

    Travis, Failed in the sense they’ll fall short of 1.9% inflation. Succeeded in the sense that it’s better than nothing.

    Ray, You said:

    “Why? We know words often fail you, but the question is why is this hard to understand? You do realize I hope that your ‘print money faster and faster until NGDP changes’ scheme is ultimately nothing more than what the Fed is already doing now, except they don’t call it targeting NGDP but targeting inflation? If the Fed is failing to hit their inflation target, despite printing massive amounts of money, why would they make the NGDP figures, unless you assume a sudden burst of activity when you print even more money? Do you assume that? Is your scheme like the difference between the coefficient of static friction vs dynamic friction? Google this. So when you print more money than even now, all of a sudden -BOOM!-the economy takes off, but without hyperinflation? Is that the Sumner effect? If that transpires, you win a Nobel Prize in Economics and the Peace Prize too. Really, you’ll be lauded as a genius if that ever happens, since that’s not the way economies work historically. But I guess there’s always a first time, so dream on. A model, as Tony Yates says, would be nice however to show this.”

    All that and you never bothered to tell me where the 10% came from.

    But this tops them all:

    “I guess you are complaining that you’re underpaid and/or your union . . .”

    Yes, my “Bentley Professors Union” let me down. And yes, sticky wages in a downturn must mean I’m underpaid. You should have lunch with Charlie sometime.

    Charlie, You said:

    “Easy money advocates “” whether they be monetarists, or monetary realists or Keynesians “” believe the answer to any economic crisis is to put more money in the system.
    So if a $1T stimulus doesn’t do much, you need to do a $2T deficit. If zero percent interest rates don’t spur lending, then let’s make them negative. If 4 pct inflation targeting doesn’t get it going, then … well, target 6 or 8 pct.”

    You are getting close to Ray territory. Are you just pretending to be a clown?

    Negation, It’s too bad that internet Austrians have hurt the reputation of actual Austrian economics.

  61. Gravatar of ssumner ssumner
    23. January 2015 at 19:33

    Jorge, I gave you the benefit of the doubt, and assumed you were joking. I thought I’d play along with the joke.

  62. Gravatar of Don Geddis Don Geddis
    23. January 2015 at 22:30

    @MF: I asked you to justify your own claim, “If on the other hand we lived in a world with engrained price deflation, then wage rates would not be sticky downward as population grows.” using the process that you say you use, namely “human action” plus logical inference.

    You replied: “Just do exactly what you did to come to the conclusion … that wages are sticky downward.” No, that doesn’t work at all, because I don’t use a process anything like yours, in order to arrive at my own conclusions. That’s why I asked you how you did it.

    You also said: “You know, where you start with your observations of hampered market data, and then “deduce” using only logically valid inferences, that wages rates are therefore sticky in all possible worlds including free markets.” That’s neither the process I use, nor the conclusion that I come to.

    But in any case, what I do isn’t particularly relevant. I was asking you how you arrived at the claim that you stated. Many times, you assert how you arrive at conclusions (“human action”, “logic”). And then you make statements like that. I’m asking you to explain, how you use the process you claim to use, to arrive at the statements that you then assert.

    Are you unable to answer such a simple question, about how it is you actually arrive at conclusions?

  63. Gravatar of Brian Donohue Brian Donohue
    24. January 2015 at 00:01

    @Ray (George) Lopez,

    Did you know that the ECB balance sheet has contracted by more than 1 trillion euros in the past two years, and that the Fed balance sheet is contracting as I type?

  64. Gravatar of Ray Lopez Ray Lopez
    24. January 2015 at 01:15

    @Sumner – if you read my messages slowly, instead of engaging in knee-jerk reactions, you’d see the “10%” figure was just a hypothetical to make my point. BTW, have you read former U. of GA (a hard money school) professor R. H. Timberlake’s book “Monetary Policy in the US”? It’s very good, mentions Irving Fischer’s Stabilizing the Dollar (1920) as well as Mint’s price level policy favorably, points out (Chap. 23) that the Fed did NOT practice monetarism during the Volker 1980s but just Keynesian interest rate targeting, points out that the Fed is arguably unconstitutional and makes a case for free banking. My only quibble: it gives too much credit to the Fed to effect the economy. As you can see from the graphs, the Fed in the 1980s followed the market. So essentially the high interest rates came down in the early 1980s by itself; the fever broke, the Fed did little. Likewise, the economy recovered after the 2008 crash by itself. Monetarism had little or nothing to do with it (nor did fiscal policy, C. Romer herself says the $800B bailout only lifted GDP output by 3%, which btw is 60% of the $800B spent or $480B, meaning the multiplier for fiscal policy for TARP was 0.6, meaning fiscal policy also had little or no effect on the economy, unless you engage in metaphysics like ‘it could have been even worse without bailouts, though we will never know’.)

    @Brian Donahue – no I did not know that. My data must be stale ….let me Google this…NO, YOU ARE STALE. I will note for future reference you are not credible. While the Fed balance sheet has leveled off, it has not gone done much, still at $4.51T as of last month, see http://bloomberg.econoday.com/byshoweventfull.asp?fid=461027&cust=bloomberg-us&prev=/byweek.asp

  65. Gravatar of Nick Nick
    24. January 2015 at 04:27

    Ray,
    Derrida can never die. Your sense of humor, on the other hand…

  66. Gravatar of Jorge Larangeira Jorge Larangeira
    24. January 2015 at 05:12

    Regardless of whether my assertions be taken in jest (which I have no problem with), and sarcasm aside, my point is simply this: central bank policy should *not* be judged by the mark-to-market on its reserves, being as central banks are not in the business of turning profits. Even if one were to go down that road, the loss incurred by the cental bank ought be weighed against the much larger gains (in terms of purchasing power) had by holders of CHF currency– Swiss citizens, in particular. I would also add that, given the huge trade surplus and low unemployment in Switzerland, it probably makes sense for the CHF to appreciate. Finally, it wasn’t clear that the peg was achieving any intended objective: the CHF was still sought as a safe haven, while inflation was still hovering around zero. The Swiss should consider setting up a Sovereign Wealth Fund to buy cheap petrol.

  67. Gravatar of Derivs Derivs
    24. January 2015 at 05:22

    Wages on the downside are sticky, sticky, sticky. Some countries make firing people extremely sticky as well. If you disagree, please learn how to say, in french, we are going to lower your wages, then go to France and test out your new linguistic skills. A week ago Volkswagon tried firing 800 employees in Brazil and the town went on strike.

    This downside stickiness has to be a big cause of unemployment, much as any cap or price fixing will eventually blow up in your face. If a company sees its revenue/income fall and needs to adjust it’s cash flows and balance sheets in a way that keeps all its internal ratios even. Money available for wages will drop.
    So in a company of 1,000 employees, making 100,000 p/yr each, If the budget gets lowered to 950,000,000, either everyone takes a paycut to 95,000 or 5% of staff must be fired.
    The free ‘diabolical’ friction-less market would move price, as a friction-less market forces all willing supply and all willing demand to meet. Free markets do not allow imbalances in supply and demand in the instantaneous. If price can not move, then supply and demand can not meet. So willing workers will be unemployed.

    Ray, John Taylor is making a logical but incorrect assumption.
    1-The market had already seized, no one had any counterparties to trade with even if they wanted to.
    2- what dumbass is going to hold off their trading based on the rumor of a possibility. Heck, Swissies promised you a floor on their currency. Logically, if that were 100% trusted, everyone should have been 1.2001 bid for the universe, using the floor as “the proverbial free put” (i hate that expression as it is incorrect). If you did that, how well did that work out for you? Remember, in real markets you can not take a position today and forget you said it tomorrow. It will show up in your P+L, and second chances are not granted freely.

  68. Gravatar of Daniel Daniel
    24. January 2015 at 05:25

    Derivs,

    I hope you realize you are arguing with a couple of loons who, between them, have the reasoning skill of a sea urchin

  69. Gravatar of Derivs Derivs
    24. January 2015 at 05:27

    damn typo… 950,000,000 s/b 95,000,000

  70. Gravatar of Ashton Ashton
    24. January 2015 at 05:27

    Related to expansionary monetary policy (sort of); I was watching one of Stefan Molyneux’s videos about the Great Recession, and at one point he talks about how the ‘Greenspan Put’ as a monetary policy method was disastrous because it didn’t allow the economy to slow down and re-allocate capital and investment, and thus artificially kept the economy ‘inflated’ (the standard Austrian line).

    I’ve concluded he’s wrong because the re-allocation of capital and investment is primarily a *real* variable–which monetary policy has limited control over. The fact that Greenspan’s policies kept the economy on-trend for nominal income growth *doesn’t* mean that the re-allocation of capital cannot occur, as rGDP growth can change and shift around as the economy slows and re-allocation occurs, despite nominal income remaining perfectly on trend.

    Is my conclusion essentially correct, or am I missing something?

  71. Gravatar of Brian Donohue Brian Donohue
    24. January 2015 at 05:50

    @Ruy (Boy George) Lopez,

    Ha! You said ‘much’. And linked to a STALE graph.

    P.S. You keep telling me I’m incredible. Flattering.

  72. Gravatar of Ray Lopez Ray Lopez
    24. January 2015 at 06:42

    @ Brian Donohue – Boy George? How did he get into this conversation? You bragging about your favorite boy band? He’s stale, like your arguments. The point being: US Fed balance sheet has not gone down much (still at 4.5T), while yes, the ECB has gone down by 1T, and will in 15 months go up again by 1T, so I’ll give you that point.

    @Derivs- you must be referring to another thread where I stated what John Taylor states about the Great Recession triggering causes –and I find it hard to believe BTW but it does make some sense–and that is, prior to the Sept bailout and just after the Lehman bankruptcy, the market seized up because of the rumor (which sounds very plausible, knowing what I know about government and leaks) circulating in DC that the government would bail out bad paper holders (which they did). I personally think while there’s some truth to this, the real reason is an old fashioned panic that did not subside until the early spring of 2009 (as evidenced by both credit default swap premiums and the stock market bottoming), and, as Tyler Cowen has said, the Great Recession gave a good excuse to get rid of Zero Marginal Productivity workers, hence the “drop” in ‘potential GDP’ that became permanent (the US GDP trend line now is back to where it was, but it’s offset by a significant amount from the pre-2008 trend). This ‘gap’ in trend is NOT a failure of potential GDP to be realized but rather a sign of a permanent structural weakness in the US economy caused by tech Great Stagnation (Cowen’s theme) and an aging, retiring workforce. And it cannot be cured by either better monetary policy or fiscal policy.

    As for sticky wages, as MF says, you are confusing the fact that due to constant inflation, workers have been ‘conditioned’ to expect pay increases (to use your example, Brazil in 2014 had 6.4% inflation), and, as I say, it matters not from a Coase theorem point of view (for society) as to who takes a hit when wages are ‘cut’, either the worker (as in the USA) or the firm (as in France, which cannot fire the worker easily). In any event, wages are not sticky, and even less sticky are prices. You are I’m afraid suffering from monetary illusion to think otherwise (which also does not exist for most people, though I grant for dumb internet bloggers money illusion is probably a reality).

  73. Gravatar of ssumner ssumner
    24. January 2015 at 07:11

    Ray, Hypothetical? Then what was the point? I thought you were complaining that my plan would require the printing of lots of money (which is false.) If that’s not your complaint, then what is it?

    And I love the way you pick up a book that “points out” blah blah blah, and you just uncritically except every single word as true even though you no nothing about the subject. Then come over here and tell me I am wrong, even though you know nothing about the subject I am discussing. “Sumner must be wrong because someone else said something different” (which 95% of the time doesn’t even actually contradict me–you haven’t even reached the level where you’d understand a contradiction if it hit you over the head.)

    Then you mock my other commenters for misspelling “income”, but you don’t even know how to spell “Volcker.” You don’t even know how to spell “down.”

    Jorge, You are supporting my point. It was the defenders of the SNB that said they had to revalue to avoid big losses. If you say they should not worry about losses, I agree. That makes me right. But a country’s wealth depends on its output. This will reduce Switzerland’s GDP and hence make it poorer.

    Ashton, You are correct.

  74. Gravatar of Jorge Larangeira Jorge Larangeira
    24. January 2015 at 07:44

    Prof Sumner,

    Glad we are mostly in agreement. I grant you that the peg gave GDP a (marginal) boost by increasing X and perhaps raising NGDP. But I obviously don’t need to remind you that GDP is flow and wealth is stock. Yes, GDP gets incoprprated into the stock of wealth. But, to the extent CHF now buys a lot more foreign goods, the Swiss are indeed wealthier, even if GDP does fall marginally.

  75. Gravatar of TallDave TallDave
    24. January 2015 at 09:53

    Nice to see Selgin pop up on my CATO feed this morning with an NGDPLT endorsement, and a great point about interest rate forward guidance.

    http://www.cato.org/blog/fed-should-quit-making-interest-rate-promises

    That went nicely with my chai tea :)

  76. Gravatar of TallDave TallDave
    24. January 2015 at 10:05

    Nice points Dervis.

    “Why is there no inflation despite all Central Banks opening up liquidity?” That seems to be the Great Confusion on the right generally. In addition to the mantra of nominal interest rates do not indicate whether monetary policy is tighter or looser than optimal, perhaps monetarists need to add a corollary: central bank balance sheets do not indicate whether monetary policy is tighter or looser than optimal.

    It actually seems really obvious when you state it that way. Maybe it’s only obvious to us though 😉

    In the future I guess we’ll all be NGDPLT-supporting market monetarists, but some of us will be Austrian monetarists and some of us will be Keynesian monetarists.

  77. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    24. January 2015 at 10:07

    Steve Hanke has a somewhat different take on monetary matters;

    http://www.cato.org/publications/commentary/bank-capital-punishment-other-nostrums

    ———–quote———–
    Beating up on bankers (and banks) “” the ones who produce most of the world’s money “” creates a problem: it constrains the growth of money broadly defined. In consequence, Europe is in a slump, and so is Japan. As for the U.S., it’s stuck in a growth recession with nominal aggregate demand growing much more slowly than the trend rate since 1987. Even China is sagging a bit. This is all because of relatively slow money growth. Let’s review the terrain and my themes of the past few years””themes that continue to be supported by the unfolding evidence.

    First, take a look at the United States. The Center for Financial Stability, under the direction of Prof. William A. Barnett, publishes Divisia monetary data. These are now available via Bloomberg and provide the most accurate picture of the U.S. money supply that is available.

    Even though the Fed has been pumping out State Money at a super-high rate since the crisis of 2009, it hasn’t been enough to offset the anemic supply of money produced by banks “” Bank Money. Even after six years of pumping, State Money still only accounts for 21 percent of the total money supply broadly measured. In consequence, the Divisia M4 money supply measure is growing on a year-over-year basis at a very low rate of only 1.7 percent. And that’s why nominal U.S. aggregate demand measured by final sales to domestic purchasers is still growing at below its trend rate of 5%
    ————endquote————

  78. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    24. January 2015 at 10:11

    Also from the Hanke paper linked to above;

    ‘China turns out to be one of the few countries in which the authorities understand money, and one that has refused to jump on the capital punishment bandwagon. Indeed, China saved themselves from a slump in 2009 because it massively increased the supply of money and credit (see the accompanying chart), rather than embrace Keynesian fiscal nostrums. That said, China has allowed its money and credit growth to drift below trend. So, it’s not surprising that a recent research paper by Ma Jun of the People’s Bank of China predicts a slowdown in China’s GDP growth “” from 7.4 percent in 2014 to 7.1 percent in 2015. The money and credit growth numbers suggest that such a slowdown might just be in the cards.’

    Too bad Lauchlin Currie and Harry Dexter White aren’t around to comment on that.

  79. Gravatar of Ray Lopez Ray Lopez
    24. January 2015 at 10:20

    Sumner: “Ray, Hypothetical? Then what was the point? I thought you were complaining that my plan would require the printing of lots of money (which is false.) If that’s not your complaint, then what is it?”

    You need to get a better blog forum, Simple Machines forum s/w, as I say. There’s too much noise here to explain. I was trying to make that point, but my objection was that 10%/yr money expansion was purely hypothetical–it could be less or more than 10%.

    Let’s please change tack: consider explaining why targeting NGDP is not potentially hyperinflationary. That is, if the Fed prints money, trying to target NGDP, and nothing happens, then what? Keep printing, yes?

    “And I love the way you pick up a book that “points out” blah blah blah, and you just uncritically except every single word as true even though you no nothing about the subject.” – Sorry but this is not true. Sorry if I gave that impression. I may not know as much about the subject as you, but rest assured I am quite informed about economics. Not just because I read some of the same books you do, and the Economist, and I took courses in Econ101, 102, and even have some old textbooks. But also because quite modestly I am a genius, with an IQ of at least 120.

    “Then you mock my other commenters for misspelling “income”, but you don’t even know how to spell “Volcker.” You don’t even know how to spell “down.” – pointing out grammar mistakes? The last refuge of a troll? Well you said: ‘you just uncritically except [SIC: ACCEPT] every single word as true’. I can play that game too.

    Anyway, I’m just trying to learn about monetarism and what is your framework, again, in particular, Q: ‘if the Fed targets an NGDP rate and prints money and nothing happens to move NGDP, does the Fed continue to print money?’ That’s my latest research question. BTW, the more I learn about monetarism the more I understand that it often works in good times, during expansion, but not in bad times, near the zero lower bound (and that includes Selgin’s Productivity Norm framework). Please prove me wrong. If you cannot convince me, you will not be able to convince Joe Average nor Rand Paul, nor even Janet Yellen.

    PS–same question to the Sumner supporters. Please answer the above as you think Sumner would answer. Honestly I don’t have a clue what his answer might be. It seems the assumption is that the Fed can always make NGDP numbers move to whatever NGDP target they set. Is this correct? If not, if the numbers don’t move, then what? Keep printing? Undefined behavior? What?

  80. Gravatar of Derivs Derivs
    24. January 2015 at 10:26

    “and I find it hard to believe BTW but it does make some sense”

    I agreed that it made sense, despite it not being true. To me, what would really have made sense under the scenario you give, is that someone with such confidence in the certainty of the eventual transfer would then bid the living hell out of the market right up to transfer price minus cost of carry. At least I can frame that to my understanding of how equities trade on very high probability takeover bids. When they do get to that price, they still trade sizeable volumes. The answer I gave you is correct, it is exactly what happened in 02-03 in the energy industry (Dynegy, AEP, Enron, PGE…etc). It has to do with ISDA contracts and how OTC contracts were not traded through a clearing house. It allows unlimited volume and no little to no margin, but when a domino falls it also means confidence between counterparties rapidly moves to 0.

    As for sticky, if Cattle prices triple today and my butcher has a 10 day supply, do you think he takes the price up today? Do you think his price will be closer to 3 times higher in 11 days? What do you call the path between those 2 time periods?

  81. Gravatar of Negation of Ideology Negation of Ideology
    24. January 2015 at 10:49

    Major –

    “I do not believe the internet market monetarists are right.

    When you post comments online, your credibility is immediately minimized.”

    No offense was intended by the term “internet Austrians” – I was referring to the segment of people who call themselves Austrians who hold those views, as opposed to other people who call themselves Austrians who don not. I’ve heard others use that term. Substitute whatever term you prefer.

    Ray –

    I don’t see how menu costs would be any higher during inflation than deflation. Perhaps the rate of change makes a difference though. As for your other question:

    “Q: ‘if the Fed targets an NGDP rate and prints money and nothing happens to move NGDP, does the Fed continue to print money?'”

    I don’t presume to speak for Scott, but my answer would be yes. If printing money doesn’t raise NGDP then we should print more. And then we should celebrate, because we have discovered the way to Utopia. If we can print unlimited money and not increase NGDP, then we should print enough money to buy up the entire national debt, all the gov’t backed MBS and student loans, and all the state and local bonds. In fact, we wouldn’t need taxes at all.

    Obviously, I don’t believe this will play out. Some level of increase in the monetary base will increase NGDP. I’m not sure why you have trouble understanding that.

  82. Gravatar of Matt Waters Matt Waters
    24. January 2015 at 12:26

    I’m just getting back to this thread now. Well, I have to laugh that Ray apparently went to UGA. I went to GT and am a big GT fan. Real life is strange sometimes. It’s tempting to say Ray is what happens when you go to UGA.

    As far as sticky wages, you have to look at human beings as real, psychological beings. MF gets into a bunch of pseudo-intellectual nonsense about whether humans can predict actions by humans. Humans do act somewhat predictably. They want the same stuff for less money and want more money for the same work. But there are somewhat predictable AND irrational actions. You ask humans whether they want a 51% of doubling their money, they will say no. Humans irrationally want 70% chance to double the money up. Now that CAN be rational under the Kelly criterion, but they want 70% even if the money is a much less than the Kelly criterion.

    So managers have to work with humans as they are, not how they “should” be. For sticky wages, the money illusion is part of that irrationality. Price levels may go down by 5%, but a worker does not feel richer when they’re pay is cut by 2%. They are merely 2% poorer in nominal terms.

  83. Gravatar of Britonomist Britonomist
    24. January 2015 at 13:13

    @Ray

    “But also because quite modestly I am a genius, with an IQ of at least 120.”

    Okay, this is too much. You’re clearly a troll.

  84. Gravatar of CA CA
    24. January 2015 at 16:40

    Hey Ray, I have an IQ of 121. So back off buddy!

    Lol.

  85. Gravatar of Major.Freedom Major.Freedom
    24. January 2015 at 17:12

    “The wealth effects that come with QE are not evenly distributing. The boost in equity and housing wealth is mostly benefiting their major owners, i.e. the wealthy.” – Nikolaos Panigirtzoglou, Head of FX, Commodities & International Rates Research at J.P. Morgan …

  86. Gravatar of Major.Freedom Major.Freedom
    24. January 2015 at 18:07

    And now Matt Waters is just reinforcing what because.

    Yes, you do have to look at human beings as real, psychological beings. Part of what explains real world human beings is the environment in which they live. People are not irrational for expecting rising prices in that environment, nor are they irrational for expecting wage rates to rise, nor are they irrational for being resistant to setting lower wage rates in that environment.

    What you have no business in asserting is that humans are irrational for not cutting wage rates with every temporary decline in demand, given that they live in a world of inflation, welfare, minimum wage laws, and assertions from pseudo-intellectuals such as yourself that wage rates MUST do this or that or else.

    Humans act somewhat predictably? Of course they do. If they did not, then businessmen will fail as often as they succeed. But that does not imply that wages not falling with every fall in demand in the past, will repeat in all possible futures, nor does it imply that wages will always and forever be sticky downwards in all possible worlds. You are making a judgment about worlds which you have not made any observations whatsoever.

    You say “they” want the same stuff for less money and “they” want more money for the same work. I suppose you’re talking from your ivory tower, I mean seedy basement, with that comment? Are you able to hear from where you are the other “they”, who want to give less stuff for the same money, and to give less money for the same work? You know, the people of whom your “they” are appealing to?

    But just because the two groups of “they” want more for less, it doesn’t mean they can get it. The meeting point are where exchanges take place, and each side gets the most they can get, and give up the least they can give up.

    This is not irrational. This is not a problem. This is not a flaw in human thought. Your thoughts about it are what is flawed.

    “But there are somewhat predictable AND irrational.”

    So then you are somewhat irrational in what you have been saying to me, because you are human. So I should take what you say as somewhat irrational. I of course cannot ask you about it, according to you, because by your own pronouncements you would not even understand it anyway, you know, like your token unnamed morons who always want more stuff for the same money and to get the same money for less work.

    “You ask humans whether they want a 51% of doubling their money, they will say no.”

    Nonsense. If you can transcend that seeming riddle, and you are human, then it is not an unsolvable problem they way you are presenting it. You’re just being an arrogant douchenozzle, that’s all. You talk of human stupidity, seemingly oblivious to the fact that you are human.

    “Humans irrationally want 70% chance to double the money up. Now that CAN be rational under the Kelly criterion, but they want 70% even if the money is a much less than the Kelly criterion.”

    But how come you do not? Are you saying you are more human than human?

    Your entire “rebuttal” to what I said is nothing but “You’re wrong because humans are stupid morons”.

    You don’t even see that you are only, and I mean only, undercutting your own very much human argument.

    “So managers have to work with humans as they are, not how they “should” be.”

    Humans are not what you say they are. You are talking about some people who disagree with you about what they want for themselves. You are in no position to claim correctness in what you say that requires imposing your depraved holier than thou values on them.

    “For sticky wages, the money illusion is part of that irrationality. PrAs far as sticky wages, you have to look at human beings as real, psychological beings. MF gets into a bunch of pseudo-intellectual nonsense about whether humans can predict actions by humans. Humans do act somewhat predictably. They want the same stuff for less money and want more money for the same work. But there are somewhat predictable AND irrational actions. You ask humans whether they want a 51% of doubling their money, they will say no. Humans irrationally want 70% chance to double the money up. Now that CAN be rational under the Kelly criterion, but they want 70% even if the money is a much less than the Kelly criterion.

    So managers have to work with humans as they are, not how they “should” be. For sticky wages, the money illusion is part of that irrationality.”

    This has got to be the dumbest most weakest argument ever. Write a whole bunch of attacks on reason, imply humans are stupid, and then right at the end slip in your claim about sticky wages.

    You are proving my point! I just explained in my previous post that you START with the depraved, self-contradicting philosophical view of mankind, and only then do you make that a premise to explain the quantitative pattern of wage rates, demand, and employment.

    You are not, contrary to your claims, starting with the empirical data of wage rates, demand and employment, and then concluding humans are stupid. No, you have this unwarranted holier than thou ideology that humans are stupid, except you and your priesthood, and then you explain wage rates from that lens.

    “Price levels may go down by 5%, but a worker does not feel richer when they’re pay is cut by 2%. They are merely 2% poorer in nominal terms.”

    Excuse me, but workers live in a world where prices rise. If you want to talk about real world human beings, then you ought not ignore the reality in which they live! Of course many workers will come to learn that pay cuts mean being worse off as such, because prices have been rising for the better part of 100 years.

    You are not proving that workers will STILL think they are worse off with pay cuts and larger price deflation in a world where prices persistently fell for 100 years.

    If humans are stupid, then you’re stupid.

    Even if a particular worker does not feel wealthier with a 2% pay cut and a 5% price level decline, that does not suggest that they will always feel that way. You are talking about a worker in an inflationary economy where prices might fall temporarily, where their feelings are derived from the pay cuts and habits of believing prices rise over time.

    You can’t know workers will feel the same way in a world of price deflation. For then the feeling could very well be something like “as long as my pay doesn’t fall by more than 2% per year, I am better off”, and he might very well feel that same way if for some reason prices did not fall at all for a period of time.

    You cannot expect wage rates to change with every change in demand. Such a world will be chaotic and would make planning impossible.

    If you want to help, then educate those who have not yet learned, and emphasize over and over like you do with NGDPLT, that people are materially better off with a 2% pay cut and a 5% price deflation. The average person can and does learn that if prices fall by more than their wage rates, then they are materially better off.

    How irresponsible it is to look down on others who think otherwise with such intensity that you believe F them, if they are going to be stupid, then they deserve to have their monetary liberty stripped away from them, all the while you having an incorrect assessment of “human nature” because of a flawed philosophical view.

  87. Gravatar of Major.Freedom Major.Freedom
    24. January 2015 at 18:08

    Autocorrect woes. First sentence should read “…just reinforcing what I wrote.”

  88. Gravatar of Philippe Philippe
    24. January 2015 at 18:31

    Negation of Ideology,

    “If we can print unlimited money and not increase NGDP, then we should print enough money to buy up the entire national debt, all the gov’t backed MBS and student loans, and all the state and local bonds. In fact, we wouldn’t need taxes at all.”

    If the CB prints money to buy up the entire national debt, the Treasury still owes the debt including interest to the CB. Where does the Treasury get the money to pay the CB? By issuing bonds or taxing. So your idea doesn’t get rid of government debt or taxes at all.

  89. Gravatar of Major.Freedom Major.Freedom
    24. January 2015 at 18:39

    Philippe:

    “If the CB prints money to buy up the entire national debt, the Treasury still owes the debt including interest to the CB. Where does the Treasury get the money to pay the CB?”

    The Treasury does not need to pay interest to the Fed. Most of the interest the Treasury pays now to the CB is just remitted back to the Treasury anyway. Negation is saying the MMT craziness that states can finance their activities entirely by inflation. That is true, until the currency collapses.

    The CB is a state institution. You’re just worrying over how the left hand can pay the right hand.

  90. Gravatar of Philippe Philippe
    24. January 2015 at 18:53

    In order to repay the debt held by the CB, the Treasury has to issue more bonds or tax. As such the central bank buying up the national debt does nothing to get rid of the national debt or taxes.

    If the CB simply burned all the government bonds it bought, the national debt would still exist, just in the form of money held by the public instead of bonds.

    But this would be equivalent to a fiscal operation, which would decimate the central bank’s balance sheet. It would be identical to the Treasury printing money and buying back its own bonds. i.e. it would be money-financed fiscal policy.

  91. Gravatar of Major.Freedom Major.Freedom
    24. January 2015 at 19:36

    “If the CB simply burned all the government bonds it bought, the national debt would still exist, just in the form of money held by the public instead of bonds.”

    Money is not debt. The money the public comes to own because of the printing, does not obligate the government to give the public anything more simply because the public holds more dollars. If the bonds were burned, the debt would disappear.

    It would be like Microsoft issuing debt for money, and then the debt holders burn the debt. The debt would also disappear. The money Microsoft still has does not obligate others to give them anything. Money is not debt.

    “But this would be equivalent to a fiscal operation, which would decimate the central bank’s balance sheet. It would be identical to the Treasury printing money and buying back its own bonds. i.e. it would be money-financed fiscal policy.”

    A centralized counterfeiter does not need a balance sheet. And the scenario of the Treasury printing money and buying back its own bonds is effectively identical to what is happening now in the existing system. In the existing system, the Treasury issues bonds for money, the CB buys the bonds, and the interest the Treasury pays the CB is almost all remitted back to the Treasury. That is what happens. He he CB does not keep the interest. It gives most of it back to the Treasury.

    This cycle is just like the Treasury printing money to buy back its own bonds. The difference is the CB as middleman.

    The CB is a state institution. The Treasury paying interest to the CB is just the government moving money from its right hand to its left hand.

    Monetary policy IS fiscal policy.

  92. Gravatar of Philippe Philippe
    24. January 2015 at 21:02

    Bank-issued money is a debt. You could count government-issued money as either a debt or as equity. It doesn’t really make a difference.

    The central bank isn’t a counterfeiter. It is legally authorized to issue government currency. If you tried to print government currency then you would be counterfeiting, because you are not authorised by the government to do so.

    Bond repayment includes principal and interest. The Fed hands much of its profits, much of which come from the interest it gets on government bonds, to the Treasury. But the Treasury has to issue bonds or tax, to get the money to pay the principal and interest to the Fed first. And then the Treasury only gets (some) interest back.

  93. Gravatar of Ray Lopez Ray Lopez
    24. January 2015 at 21:07

    @Everybody–we need a better forum, like Simple Machines. Good points made here but it’s hard to reply to them. Sumner and Cowen and others in the econoblog sphere are living in the Stone Age.

    @Derivs – I agree with you; I don’t think John Taylor, who is ulta-conservative and talks his book, is 100% right on Sept 2008 and why the commercial paper market froze. However, one difference between the arbitrage-takeover market you talk about and Sep. 2008 is that prices are ‘normal’ during the former, since there’s no panic, lots of liquidity exists, and the buyers, sellers are willing to trade, whereas in Sept. 2008 there was an irrational fear of trading, despite the rumor that the government would bailout players. Why? Because the government had just let Lehman fail, and this caused people to wonder whether there indeed would be a bailout–Lehman was the difference, which Taylor downplays but does not totally deny, see: http://www.wsj.com/articles/SB123414310280561945 (Taylor: “Many have argued that the reason for this bad turn was the government’s decision not to prevent the bankruptcy of Lehman Brothers over the weekend of Sept. 13 and 14. A study of this event suggests that the answer is more complicated and lay elsewhere. … The realization by the public that the government’s intervention plan had not been fully thought through, and the official story that the economy was tanking, likely led to the panic seen in the next few weeks. “)

    @Negation of Ideology – I agree with Philippe 100% on the issue of printing money and getting rid of debt. Who will own the debt? The Fed itself! Already the retail market is not buying the debt, as of data from 2005 (and it’s gotten worse today), the SF Fed says “holdings by the Fed and Government accounts for 51.4% of the total”! As MF says, the right hand will owe the left hand, but the public will be shafted with your ‘print money’ proposal.

    @ everybody–I am a middle aged man; IQ decreased by age. At one point my IQ was close to 140 (true genius) but it’s gone down. I do test myself periodically. 120 BTW is in the top 10% for western countries (and for the Philippines where I’m now, where the average is in the low 80s, it is in the top 1%, another reason why you should move here, lol). Oh, I also troll. But I do like my trolls to be informative so I try to be factual too. I notice Sumner himself likes to troll-bait and flame too. So does your evening news on TV. It’s another word for being ‘provocative’ and one reason, historically, the NY Times, Time magazine, and the Washington Post won awards in the 20th century (they taught their reporters not just to ‘report the facts’ but to troll with spin and opinion). Pretty much every good writer and speaker is a troll. Malcolm T. Gladwell? Troll. Noah Smith? Troll. Barrack Obama? Troll. And so it goes.

  94. Gravatar of Ben J Ben J
    24. January 2015 at 21:40

    “People who boast about their IQ are losers”

    – Stephen Hawking

  95. Gravatar of Major.Freedom Major.Freedom
    25. January 2015 at 00:18

    The money the CB uses to buy treasuries from the banks is not bank issued money, nor is it debt. The topic was the money the CB prints to buy treasuries. That money is not debt.

    You cannot count base money “debt”. The debts that banks issue end up circulating as money, but that is a different process than CBs printing money (printing is a euphamism). And you certainly cannot count debt as interchangeable with equity. Generally accepted accounting principles regards debt as distinct from equity, legally they entail different rights and obligations, and economically they entail different purposes.

    The banks who hold base money do not own instruments of an interest paying or dividend paying or any liability paying nature. The base money the banks take ownership of in exchange for treasuries is money, not debt. Nobody owes the banks anything for holding base money dollars. In order for the money the CB prints to qualify as a debt, which it isn’t but for arguments sake imagine otherwise, then the holder of said base money must be entitled to a subsequent stream of money payments from the debt issuer. But there isn’t any such entitlements. There aren’t any obligatory future payments.

    The units of currency the CB prints is not a debt. It is money.

    The central bank is in fact a counterfeiter. It is a state sanctioned counterfeiter. Then state authorizes its legality in exchange for debt financing, and (supposedly, according to their beliefs) help keep the economy stable and hence the tax revenue base stable.

    It is a counterfeiter because its activity is not allowable according to the principles of private property rights. The fact that it continues to break the law with state sanction and approval does not suddenly turn its counterfeiting into something else. The law is not merely what governments say so. Even if said legality is written on paper, it is still counterfeiting.

    The Treasury does not need to issue bonds or tax, to get the money to pay the principal and interest to the Fed. The Fed can simply burn the debt, and the Treasury can keep and spend the money they got from the Fed. The point Negation is making is the MMT point that the taxing and borrowing are unnecessary steps. That the CB is a state department, and as such does not have to rely on taxation or borrowing from another state department, nor do other departments have to rely on taxation or borrowing either. The CB can keep printing to finance its spending, and not borrow or tax anyone. Not saying I sanction such a thing, only that that is what Negation is saying, and it is correct (with caveats that he did not mention but I think are necessary).

  96. Gravatar of Major.Freedom Major.Freedom
    25. January 2015 at 00:34

    Ben J:

    Stephen Hawking is a loser. He was an asshole and a cheater to his wife, according to her memoirs, and he was a jerk all around, according to many NASA employees.

    If he weren’t in a wheelchair, there wouldn’t be anywhere close to the admiration that exists today. More people would be less afraid to tell it like it is with him.

    There are astrophysicists and cosmologists less intelligent but better men than him.

  97. Gravatar of Philippe Philippe
    25. January 2015 at 00:34

    “That money is not debt.”

    It’s a liability of the central bank, so if it isn’t a debt what is it?

    A zero-coupon perpetual bond pays no interest and can only be redeemed at the discretion of the issuer. That is no different to base money.

    “It is a counterfeiter because its activity is not allowable according to the principles of private property rights”.

    Why not?

    “The fact that it continues to break the law with state sanction”

    It is not breaking the law. Point to a part of the law that you think it is breaking. Let me guess, you are referring to the imaginary law that only exists inside your little head.

    “The Treasury does not need to issue bonds or tax, to get the money to pay the principal and interest to the Fed.”

    Under existing rules it does have to do that.

    “The point Negation is making”

    No, he is assuming monetary policy is like money-financed fiscal policy.

  98. Gravatar of Major.Freedom Major.Freedom
    25. January 2015 at 00:49

    “It’s a liability of the central bank, so if it isn’t a debt what is it?”

    It is not a liability of anyone. When the CB buys a treasury from a bank, that’s it, there are no subsequent obligations to the bank. The bank received the money and the CB received the bond.

    “A zero-coupon perpetual bond pays no interest and can only be redeemed at the discretion of the issuer. That is no different to base money.”

    False. The banks own the money. The CB has no discretion on the money. The banks do. They decide what to do with it. The banks owe the CB nothing after they receive the money. The only obligation the bank ever had was promising to give the treasury. Once they give the treasury, it’s done.

    “It is a counterfeiter because its activity is not allowable according to the principles of private property rights”.

    “Why not?”

    Because its activity is predicated on a violation of the law of private property rights. Without a violation of property rights, the CB could not exist.

    “The fact that it continues to break the law with state sanction”

    “It is not breaking the law. Point to a part of the law that you think it is breaking.”

    It is breaking the law. The law written on a piece of paper called the Schmonstitution, says they are breaking the law.

    Let me guess. You believe the law is that which only exists in the Constitution, which you believe in your little head is the only valid law.

    Haha, how cute. In the real world, the actual law is codified in the Schmonstitution, which I know at least 30 people have signed. How many has signed your cute little Constitution law? Not as many. Your law is just that, you law. It isn’t my law.

    Since you reject the Schmonstitution law, clearly you are someone who believes the law can be whatever the heck you want it to be, and everyone else are supposed to just accept it as their own as well. Haha, you’re so deluded.

    “The Treasury does not need to issue bonds or tax, to get the money to pay the principal and interest to the Fed.”

    “Under existing rules it does have to do that.”

    The rules can change, that’s the point Negation is making. The rule change is mostly administrative. Instead of reducing people’s wealth against the law, against their will, through legalized theft from the IRS, the state can do so by way of the illegal inflation tax.

    “The point Negation is making”

    “No, he is assuming monetary policy is like money-financed fiscal policy.”

    Monetary policy is fiscal policy.

  99. Gravatar of Philippe Philippe
    25. January 2015 at 00:54

    counterfeiting means making a copy of something, without permission, with the intention to deceive or defraud. The central bank is not copying something, without permission, with the intention to deceive or defraud.

  100. Gravatar of Philippe Philippe
    25. January 2015 at 01:11

    “the banks owe the CB nothing after they receive the money”

    of course not. Money issued by the central bank is a liability of the central bank, not a liability of the banks that receive the money. But the banks can’t demand that the central bank redeem the money, so it can only be redeemed at the issuer’s discretion.

    “its activity is predicated on a violation of the law of private property rights”

    No it isn’t, but of course you are talking about imaginary make-believe laws that only exist inside your confused little head.

    “Monetary policy is fiscal policy”

    I was going to ask you why you think that but I know the answer will just be a rant so I won’t bother.

  101. Gravatar of Ray Lopez Ray Lopez
    25. January 2015 at 01:48

    @MF, @Philippe– I agree with Philippe on this issue, though I share MF’s concern on this point: “The CB can keep printing to finance its spending, and not borrow or tax anyone. Not saying I sanction such a thing, only that that is what Negation is saying,…”

    An author that makes the case the Fed is arguably unconstitutional, and who was G. Selgin’s predecessor at U of GA, is R. H. Timberlake, and he has a new book on this topic (a rehash of his older book), just published late last year: “Constitutional Money: A Review of the Supreme Court’s Monetary Decisions” found at Amazon.

    SAMPLE CASE FROM BOOK (from table of contents):
    http://en.wikisource.org/wiki/Briscoe_v._Bank_Commonwealth_Kentucky (Capsule summary, whether paper known as ‘bills of credit’ issued by the state bank of Kentucky is legal, US Sup. Ct., and the ruling was the paper was illegally issued by a state bank. Wikipedia: “Bill of credit is a phrase from Article One, Section 10, Clause One of the United States Constitution. It refers to a document similar to a banknote that is issued by a government and designed to circulate as money. Because the framers of the Constitution sought to limit the issuance of currency, it explicitly prohibits the states from issuing bills of credit.”)

    US SUP CT. RULING: “It cannot, we presume, be doubted, that the constitution was intended to prohibit all those paper substitutes for money,… gone by the general name of bills of credit. It intended to make this a hard-money government… It is submitted, that if the notes of the Bank of the Commonwealth are ‘bills of credit,’ and the issue of them was prohibited by the constitution of the United States, the notes of all state banks are equally prohibited. …This is the first time this court has been called upon to fix the precise meaning of the words of the constitution under consideration; … Two questions are presented in this case. 1st. Were the notes issued by the state of Kentucky? 2d. If so issued, are they bills of credit, within the meaning of the constitution of the United States? …The constitution prohibits the issuing bills of credit by states, and this does not apply to corporations, nor to any other issuing but by the sovereign action of a state… The counsel for the plaintiffs has failed to show that the notes of the Bank of the Commonwealth were issued by the state of Kentucky. The notes were the notes of a corporation [with KY as a shareholder, but later the court deems KY is the true owner of the corporation, so this defect by plaintiff is overlooked]… COURT HOLDS THE KENTUCKY BANK ISSUED PAPER KNOWN AS ‘BILLS OF CREDIT’ ILLEGALLY, CONTRARY TO THE US CONSTITUTION, WHICH ONLY ALLOWS CONGRESS TO DO SO. ARGUABLY FANNIE MAE AND FREDDIE MAC ALSO VIOLATE THIS PROVISION TODAY, SINCE THEY ARE QUASI-GOVERNMENT AUTHORITIES ISSUING SUCH PAPER. NOTE THERE APPEARS TO HAVE BEEN NO CONTRACT BEHIND THESE BILLS OF CREDIT, WHICH WOULD HAVE RESULTED IN AN OPPOSITE RULING UNDER CONTRACT LAW. And, on this last point, this is why the defaulting mortgage holders today that say they did not know what they were signing, and/or a robot or fraudulent bank loan officer signed on their behalf, actually have a good case based on the above caselaw).

  102. Gravatar of Ray Lopez Ray Lopez
    25. January 2015 at 02:18

    @Myself – keep in mind the original Fed as per the 1913 bill did not create new money out of thin air like today’s Fed, but rather money was created in response to ‘rediscounting’ of eligible commercial paper and loans bought to the Fed by member banks. That is, new money was only created in response to existing commercial demands by member banks, not ‘created out of thin air’ like in today’s Fed with no response from the public. The only other way to expand the money supply in 1913 was by changing the cash reserve ratio of member banks. And what is proper rediscounting was contentious even in 1913: (Timberlake, p. 225 “John Weeks of MA pointed out that he had ‘tried to get 12 or 15 banking men’ to define ‘eligible commercial paper’ and not one of them could do it”).

    One thing is clear: today’s printing money at the push of a button, with NO eligible commercial paper of any kind, is not within the original mandate of the US Fed as per the 1913 bill. So Ron Paul is right: ‘audit the Fed, then abolish the Fed’.

  103. Gravatar of Philippe Philippe
    25. January 2015 at 02:49

    the 1913 act gave the Fed the power to purchase government bonds and other types of financial assets, which is what it does today. The Fed can’t create money ‘out of thin air’ without purchasing financial assets (or making loans). In that respect it is no different to back then.

  104. Gravatar of Ray Lopez Ray Lopez
    25. January 2015 at 03:32

    @Philippe–thanks but you seem to misunderstand how the Fed creates money. One way is as you describe, by buying existing paper (bonds, commercial paper) using money they have on reserve. The second way, ‘out of thin air’ is to simply create money by the push of a button. This can be used to buy government Treasury bonds, which is known as ‘monetizing the debt’. Your stock, like Brian Donahue’s, just went down in my eyes for what it’s worth.

  105. Gravatar of Philippe Philippe
    25. January 2015 at 04:09

    Ray, the Fed had the power to buy government bonds back in 1913. It has always bought government bonds.

    “One way is as you describe, by buying existing paper (bonds, etc)”

    Yes, bonds. Government bonds are also bonds.

  106. Gravatar of Philippe Philippe
    25. January 2015 at 04:53

    Ray, I don’t think it’s correct to call any purchase of government bonds by the Fed ‘monetizing the debt’. Say the Fed buys a bunch of bonds and then sells them again a bit later, for example.

  107. Gravatar of Negation of Ideology Negation of Ideology
    25. January 2015 at 05:50

    Philippe –

    “So your idea doesn’t get rid of government debt or taxes at all.”

    Well, you’re right, it doesn’t get rid of debt it just changes the owner – the Fed would be the owner of the debt. So the government would save on interest. I actually don’t think we’re in disagreement.

    I want to be clear that I’m not advocating this in the real world, only in Ray’s proposed hypothetical where government can expand the money supply without increasing NGDP, and therefore not increasing inflation. That world does not and can not exist.

  108. Gravatar of Derivs Derivs
    25. January 2015 at 06:12

    “money was created in response to ‘rediscounting’ of eligible commercial paper and loans bought to the Fed by member banks. That is, new money was only created in response to existing commercial demands by member banks, not ‘created out of thin air’ like in today’s Fed with no response from the public.

    The way it makes sense! Purity! Holders of a financial asset being the recipient of its dilution.

    “Stephen Hawking is a loser. He was an asshole and a cheater to his wife”

    MF, I think, in a single swipe, you just vilified 90% of the people responsible for the advancement of civilization.

  109. Gravatar of ssumner ssumner
    25. January 2015 at 06:14

    Jorge, I don’t think Swiss people who saw their stocks fall 13% would take much comfort from cheaper Italian vacations.

    And don’t forget that while the Swiss buy a lot from abroad, they sell far more to other countries. Those earnings will fall.

    Talldave, Yes, MMs have made the same argument about balance sheets. That question about monetary stimulus is like asking “How come so many people die in hospitals despite all the fancy medical equipment?

    Ray, You said:

    “If you cannot convince me, you will not be able to convince Joe Average nor Rand Paul, nor even Janet Yellen.”

    And:

    “I took courses in Econ101, 102, and even have some old textbooks. But also because quite modestly I am a genius, with an IQ of at least 120.”

    Ok, I admit to being fooled. I thought you were serious. This is all a spoof, right?

    Thanks Patrick.

  110. Gravatar of Derivs Derivs
    25. January 2015 at 06:28

    “since there’s no panic, lots of liquidity exists, and the buyers, sellers are willing to trade”

    liquidity yes, but you have it backwards, high price movement days (panic) are usually extremely high volume days. I would assume FX volume was very high last week.

    As for takeovers, they can always fall apart, external bidders can come in, failure to finance, gov’t might not approve. Buying a stock for $90 that was just trading $30, based on a $92 bid has some serious risks. I still never forgot this one: http://articles.philly.com/1989-10-17/business/26119689_1_ual-stock-ual-last-month-takeover-bid

  111. Gravatar of TravisV TravisV
    25. January 2015 at 06:58

    At Zero Hedge, Tyler Durden’s story is all over the place. Here he is today:

    http://www.zerohedge.com/news/2015-01-24/spot-difference-money-printing-then-and-now

    And here he is two days ago:

    http://www.zerohedge.com/news/2015-01-23/has-ecb-qe-already-failed-5-year-inflation-expectations-decline-draghis-announcement

  112. Gravatar of ThomasH ThomasH
    25. January 2015 at 07:41

    Since you recognize that central banks are not, for political reasons, applying best practice monetary policies, I cannot understand why you are so negative on the “Keynesian” ideas which are based on this very notion. European governments ought to be running huge deficits, taking advantage of low interest rates to finance activities with future benefits and present costs. It is the confluence of bad central banking with “austerity” that is damaging European growth.

  113. Gravatar of Ray Lopez Ray Lopez
    25. January 2015 at 08:49

    @Philippe – The Fed nowadays does buy a lot of non-government paper, especially after 2008, but that’s a side issue. The main issue I think is you misunderstand how the Fed operates. They can create money out of thin air, not in response to anything a member bank sells them (i.e., an existing loan), but by merely pushing a button.

    Flowchart 1 / Method I: (Money out of thin air; in this example US Treasury and Fed are almost interchangeable): Treasury needs money. They are not supposed to just ask the Bureau of Engraving and Money to print money, but effectively they get the same thing by asking the Fed. Treasury calls up Fed and says: ‘if we print up some money and bonds, will you take the government bonds while we get the money?’ Yellen says ‘OK’, and pushes a button. Bonds are created, as is money. Treasury gets money, Fed gets bonds. This is ‘money out of thin air’. Got that?

    Flowchart 2 / Method II: (the traditional way the Fed was supposed to work when created in 1913)
    Fed member bank (which includes Citibank for example) wants money. Fed says: ‘give us some bonds that you bought earlier, or, give us some Fannie Mae paper, or, give us some good, sound commercial paper, AAA rated not junk (haha), and we’ll give you money’. This is known as buying bonds or commercial paper. Bank (Citibank) complies, sells paper, gets money. This is ‘old money’ (not out of thin air). Got that?

    To contract the money supply you can reverse this: For flowchart 2 / Method II, Fed would sell the bonds from the Fed inventory and get money from member banks, or, for flowchart 1 / Method I, in the case of Treasury, sell back the Treasury bonds to the Treasury, and get money back rather than give money to Treasury.

    See the difference? It’s subtle but clear. In the case of Flowchart 1, the Fed is ‘creating money out of thin air’. In the case of Flowchart 2, the Fed is using ‘old money’ not new money. Got it now?

    If you understand the above, you probably, no lie, know more about how money is created than 99% of the population, and that might even include some famous economists.

    @Sumner – I thought I was a clown? That’s what you called me, so why are you taking me seriously? Thanks for letting me use your blog to promote my message of sound money however; gracias!

  114. Gravatar of Philippe Philippe
    25. January 2015 at 09:17

    Ray, the Fed is supposed to buy government bonds from the private sector, it isn’t allowed by existing rules to buy bonds directly from the US Treasury. This means a private sector buyer has to buy the bond from the Treasury before it can be sold to the Fed.

  115. Gravatar of Major.Freedom Major.Freedom
    25. January 2015 at 09:58

    Philippe:

    “counterfeiting means making a copy of something, without permission, with the intention to deceive or defraud.”

    Right, the CB does not have permission from the sum total of allowable activity derived from individual property rights. Given the plans derived from private property rights, centralized banking is not permitted. They are acting illegally.

    They also intend to decieve and defraud, by presenting the notes as if they were genuine notes produced and distributed in accordance with private property. Enough people are being decieved that at present those who understand the illegal behavior are not influential enough to bring about accountability for the illegal behavior.

    The CB is indeed acting without permission.

    “the banks owe the CB nothing after they receive the money”

    “of course not. Money issued by the central bank is a liability of the central bank, not a liability of the banks that receive the money.”

    False. Money issued by the central bank is not a liability at all. It is money as such. There is no liability on anyone from commercial banks holding that money. The money is viewed by the CB as property of the commercial banks.

    “But the banks can’t demand that the central bank redeem the money, so it can only be redeemed at the issuer’s discretion.”

    No, there is no possible redeeming of anything from base money. The banks can’t demand redemption, and the CB can’t demand redemption. There is no liability from holding base money.

    “its activity is predicated on a violation of the law of private property rights”

    “No it isn’t”

    Yes it is, but of course you are talking about imaginary make-believe laws that only exist on a piece of paper and inside your little head. Your laws are imaginary.

    “Monetary policy is fiscal policy”

    “I was going to ask you why you think that but I know the answer will just be a rant so I won’t bother.”

    Fiscal policy is implied because the state has to decide what the counterfeiter should buy, who to buy it from, where to buy it, how much to buy, what bid price is offered, and how often the buys are to be made. This is all fiscal policy because it is included in the state’s own financial activity according to the state’s make believe imaginary laws that only exist on a piece of paper and inside their little heads.

  116. Gravatar of Major.Freedom Major.Freedom
    25. January 2015 at 10:04

    Derive:

    “MF, I think, in a single swipe, you just vilified 90% of the people responsible for the advancement of civilization.”

    I am concerned with the advancement of individuals, not collectivist concepts like “civilization” that invariably sacrifice individuals, good individuals, to others. Those who preach advancing civilization, society, humanity, etc, are those who are most dangerous to innocent individuals. Every tyrant in history has preached about advancing these hypostatized, holistic concepts. That is not for me, and it is not for those who would be sacrificed in its wake.

    Justice is more important to me than theorizing that subatomic particles sometimes escape the boundaries of an event horizon. The ends do not justify the means.

  117. Gravatar of Major.Freedom Major.Freedom
    25. January 2015 at 10:05

    That is not to say we should not take advantage of such new discoveries. I can admire the ideas and not the man. Admiring the man instead of the ideas is another form of ad hominem.

  118. Gravatar of Ray Lopez Ray Lopez
    25. January 2015 at 10:45

    @Philippe – “Ray, the Fed is supposed to buy government bonds from the private sector, it isn’t allowed by existing rules to buy bonds directly from the US Treasury. This means a private sector buyer has to buy the bond from the Treasury before it can be sold to the Fed.”

    Thanks but that hardly changes the flowchart. As member banks that own the Fed include commercial banks such as Bank of America, Citibank, Chase and the like (“about 38 percent of the nation’s more than 8,000 banks are members of the system, and thus own the Fed [Reserve]”), it’s a distinction with hardly a difference. The point being: the Fed can create money out of thin air, in conjunction with the Treasury, to buy bonds from the primary dealers of US Treasuries. This is what is surprising and unknown to many people. And who owns 51.4% (last I checked) of all US government debt? The Fed, not the public. Thus Flowchart I. above is the way it’s done, with the caveat, as you say, that technically primary dealers act as middlemen between the Treasury and the Fed.

  119. Gravatar of Ray Lopez Ray Lopez
    25. January 2015 at 10:58

    @myself–and needless to say, to lubricate this creation of new money, the Fed of course creates a nice spread by playing with interest rates, so that the middlemen between the Treasury and the Fed constantly get enriched by the bid/ask. Not to mention that member banks of the Fed that hold Fed funds get a small 0.25% interest rate on the un-collateralized monies, see more: http://en.wikipedia.org/wiki/Federal_funds_rate

  120. Gravatar of Philippe Philippe
    25. January 2015 at 11:37

    mf,

    “The money is viewed by the CB as property of the commercial banks”

    You don’t seem to understand the concept of liability. Of course, the money issued by the central bank (to purchase assets) becomes the property of the person or organization to whom the money is paid. So it is an asset of the holder (a bank, let’s say) and a liability of the issuer (the central bank).

  121. Gravatar of Philippe Philippe
    25. January 2015 at 12:01

    “I am concerned with the advancement of individuals”

    No, you are concerned with the advancement of your bizarre ideology. You have said yourself that you ideology, if implemented as you see fit, would not necessarily lead to improved conditions for people. But that is not important for you because the ideology is more important than its real effects on real people. You don’t care about people at all.

  122. Gravatar of Philippe Philippe
    25. January 2015 at 12:06

    In fact you believe that if people starve to death in your utopia, or otherwise die horrible and avoidable deaths, that is all as good as it could possibly be so long as your rules are being adhered to.

    You are quite happy to sacrifice human lives to the system of rules that you prefer. You simply pretend otherwise because you are a pathologically dishonest individual.

  123. Gravatar of Matt Waters Matt Waters
    25. January 2015 at 14:30

    MF, it’s hard to engage with somebody calling me an arrogant douchenozzle. What’s particularly rich in your post is saying I didn’t give empirical evidence on wages, supply and demand. Empirical evidence for sticky wages has been given many times with many different sources. But you and Ray wave that evidence away…somehow. There is no Austrian or classical liberal economic reason for the spike at 0% in wage changes.

    Yes, the price levels have generally been rising over the last 100 years. But from 1929 to 1933 price levels went down by 50%. Even in 2008, prices went down by 4% in only a few months. So it’s not completely hypothetical to say prices could go down 5% while your wage only went down by 2%.

    Is it possible to have a wholesale shift in how most humans think of such wage decreases? By that, I mean it becomes culturally acceptable for bosses to cut wages and then expand and hire more at the lower wage? Well, good luck with that. In the meantime, managers clearly make much more money from not cutting wages and laying off workers rather than cutting wages and trying to expand through lower prices.

    You even went off on me when I said people want lower prices for the same goods and higher wages for the same work. I was just saying humans are generally rational, which is why houses have to converge to a market price. House sellers really want to get paid much more, but buyers want to pay less. Eventually the buyers equal the sellers, you know basic economics. But even saying that one sentence got you to go off on me for a couple of paragraphs.

  124. Gravatar of Major.Freedom Major.Freedom
    25. January 2015 at 15:10

    Philippe:

    “You don’t seem to understand the concept of liability. Of course, the money issued by the central bank (to purchase assets) becomes the property of the person or organization to whom the money is paid. So it is an asset of the holder (a bank, let’s say) and a liability of the issuer (the central bank).”

    No, it is only an asset of the commercial bank. The only liability associated with that money is the liability at the commercial banks, the shareholder’s equity and retained earnings. The money is not a liability of the CB. It is the property of the commercial bank. Property of the commercial banks is not a liability of the CB. The CB does not owe, is not obligated to, the commercial banks for buying bonds with printed money. The base money the commercial banks own are not obligations on the CB. They are not redeemable for anything.

    “I am concerned with the advancement of individuals”

    “No, you are concerned with the advancement of your bizarre ideology.”

    That “bizarre ideology” IS the advancement of individuals, which requires individual property rights to be respected and protected.

    I am not interested in your definitions. You can define advancement of individuals as “bizarre” all you want.

    “You have said yourself that you ideology, if implemented as you see fit, would not necessarily lead to improved conditions for people.”

    No ethic can guarantee “necessary” improvement. Yet you respecting my property rights is the minimum requirement for me to improve my life if you are going to be involved in it.

    I am not claiming the prediction that you will necessarily respect my individual rights in the future. It is only in that sense that I do not guarantee private property rights being regarded as the best ethic will guarantee that you will respect other people’s property rights.

    So far, you have respected other people’s property rights, so what you call “bizarre” is what you yourself practise. When it comes to your actions vis a vis my actions, you are not disadvantaging my life. You are allowing me to advance my life and am allowing you to advance your life. That ethic is what I regard as what should be practised by everybody, not just you and I, but also those with badges that you want to live in accordance with a different, indeed opposite ethic.

    You believe it would be criminal for you to behave towards me the way statesmen behave towards me, and vice versa.

    “But that is not important for you because the ideology is more important than its real effects on real people. You don’t care about people at all.”

    I care more about people than you do, because unlike you, I respect other people enough not to advocate for initiations of force against their person or property by people with badges. You are not as compassionate towards others. I am more concerned with individuals than you are, because I believe in self-rule, not rule of some over others the way you do. Rule of some over others is your definition of “concern” and “care” for those whose persons and property are to be ruled.

    Your bizarre ideology defines “caring” for others as pointing guns at them and telling them what to do with their own persons and property to prevent them from doing what you don’t personally like even though those actions would not themselves be aggressions against other individual’s property rights.

    Also in your bizarre ideology, you define aggressions against private property rights by people with badges as defenses and enforcements of private property rights, which implies that those who did not homestead something, are nevertheless property owners of it, as long as they are wearing badges, while others who did not homestead that same property, are not property owners of it.

    In your bizarre ideology, conquest and invasion are legitimate means to becoming a valid property owner, as long as the conquesting invaders are wearing badges and call themselves a state, whereas if the invaders are not wearing badges and not calling themselves a state, then those same exact actions do not establish vlid property rights. The property would be unowned in your bizarre ideology until a group of invaders steal the property and call themselves a state.

    In fact you believe that if people starve to death in your utopia, or otherwise die horrible and avoidable deaths, that is all as good as it could possibly be so long as your rules will be adhered to going forward. If people die horrible deaths as under the Nazi criminal regime, and people consider new laws to avoid it, then by definition the good is defined as your Utopian rules going forward that ban all alternative systems of laws except your personal preferred laws.

    In your bizarre ideology, the good can only arise if there is first an aggressive monopoly of protection and security. Innocent people must have their property rights violated, and they must be imprisoned or killed if they do not want to hire your preferred enforcers of property rights. You define your personally preferred group of property protectors as the only valid lawmakers and enforcers. Even if there are others who prefer other property protectors, and who do not aggress against your person or property, your bizarre ideology nevertheless advocates for aggression against those innocent people so that they are forced at gunpoint to pay your preferred group of protectors.

    You want criminals to be protectors of property. You want a personally preferred mafia gang to be the only valid lawmakers and law enforcers, and this mafia is supposed to believe itself to be the only valid lawmakers and law enforcers as well.

    Even if such monopoly structures result in millions of people getting thrown into gulags to starve or into ovens to burn, or more recently, even if millions of nonviolent individuals are thrown into prison for nonviolent, property non-violating activity, you still define such monopolies as good. You view it as inherently good, and you view decentralized property rights protection as inherently bad, by definition.

    Holocausts and Great Purges are not sufficient to dissuade you from coercive monopolies. And you have the gall to tell me that what I am saying is wrong because I am not dissuaded from a system of laws that has not resulted in those horrors?

    You are quite happy to sacrifice human lives to the system of rules that you prefer. You simply pretend otherwise because you are a pathologically dishonest individual.

  125. Gravatar of Major.Freedom Major.Freedom
    25. January 2015 at 15:39

    Matt Waters:

    “MF, it’s hard to engage with somebody calling me an arrogant douchenozzle.”

    Oh, and telling me that I am irrational and stupid because I am human, makes it easy for me to engage what you are saying? How can I seriously engage what you write if what you write attacks my only means to understand what it is you are trying to claim?

    I called you arrogant because you are calling humans stupid by nature, and yet you are human, which suggests you are beyond human. I think “arrogant” was a relatively kind and modest assessment of what you believe. I could have legitimately used much harsher, yet accurate, words to describe your self-image relative to others. The fact that you are oblivious to your own arrogance is rather concerning. Here you are telling me that humans are stupid by nature, and you really cannot fathom how your readers will interpret that position as arrogance?

    It is not just arrogance. It is bottom of the barrel, scum feeding self-contradictory blathering kind of arrogance. Maybe you secretly are uncomfortable in your own skin, and as a means to catharsis, you want to drag everyone else down below you so as to feel better about yourself. I don’t know.

    What I do know is that you have provided zero empirical evidence of sticky wages in a non-inflationary, non-welfare, non-minimum wage law, non-Marxian exploitation theory influenced population of people. I know you have never provided this evidence because such a dataset has not yet occurred.

    “What’s particularly rich in your post is saying I didn’t give empirical evidence on wages, supply and demand.”

    You have provided wage, demand and price data for inflationary, welfarist, minimum wage law, Marxian influenced economies. I do not dispute that.

    “Yes, the price levels have generally been rising over the last 100 years. But from 1929 to 1933 price levels went down by 50%.”

    Right, it was temporary, and taking a page out of your own book, if inflation or deflation are not permanent, then that change has significantly less effect.

    The state was promising higher wages, the businessmen colluding with FDR were promising higher wages. The temporary reduction in demand was not permanent and thus did not have the same effect as compared to a permanent reduction. Most people were expecting prices to rise even as they fell during that short period of time.

    “Even in 2008, prices went down by 4% in only a few months. So it’s not completely hypothetical to say prices could go down 5% while your wage only went down by 2%.”

    It is completely hypothetical to assert what you are asserting for permanent price deflation, as what would likely exist in a free market, notwithstanding the rare periods of surprise inflation of the money supply, if it happens at all.

    “Is it possible to have a wholesale shift in how most humans think of such wage decreases? By that, I mean it becomes culturally acceptable for bosses to cut wages and then expand and hire more at the lower wage? Well, good luck with that.”

    Well, at least you are not absolutist against it, and recognize that if all it takes is convincing, then a free market which puts permanent downward pressure on prices and wage rates, and absence of income guarantees for refusing pay cuts, might likely be all the convincing people need.

    People learn. I am not as negative and pessimistic towards that as you are, and that probably has something to do with the fact that denying it is not something I need to promote my ideas on money. To promote your ideas on money on the other hand, you need people to be stupid and incapable of learning. For if people did learn, then you would have to recognize that what you believe to be an “illusion”, is in fact just a natural and normal response to living in a world where price inflation, welfare and minimum wage laws are believed to be more or less permanent.

    “In the meantime, managers clearly make much more money from not cutting wages and laying off workers rather than cutting wages and trying to expand through lower prices.”

    Right, because they believe that prices will eventually rise again, as they should, given they live in the world foisted upon them by psychotic criminals with badges.

    “You even went off on me when I said people want lower prices for the same goods and higher wages for the same work. I was just saying humans are generally rational, which is why houses have to converge to a market price. House sellers really want to get paid much more, but buyers want to pay less. Eventually the buyers equal the sellers, you know basic economics. But even saying that one sentence got you to go off on me for a couple of paragraphs.”

    Uh huh, right. You said that out of looking down on people, not because they are rational. You said what you said to convince me that people are stupid and have expectations that only a central bank can dekiver, and so those expectations must be accommodated even if they are caused by the very cure you’re peddling.

    You likely think of me as the arrogant one, the one who is holier than thou, etc, but it is you people who are supremely arrogant. It takes significant arrogance to believe that you are capable of knowing what aggregate spending ought to be, what the laws of money ought to be, and whether or not everyone is “ready” for second best or first best solutions. Such pomposity makes me sick to my stomach actually. You scribble a few lines on a piece of paper, and millions must be made obedient to it, for their own good. Blech!

  126. Gravatar of Philippe Philippe
    25. January 2015 at 16:50

    mf, I won’t read your comment because it is too long and no doubt riddled with annoying nonsense.

  127. Gravatar of Philippe Philippe
    25. January 2015 at 16:51

    Ray, I’m not sure what your point is actually. If the Fed buys commercial bonds from the primary dealers instead, is that ok?

  128. Gravatar of Matt Waters Matt Waters
    25. January 2015 at 19:18

    “mf, I won’t read your comment because it is too long and no doubt riddled with annoying nonsense.”

    I tried engaging and now realize I should not have. His argument amounts to:

    1. That I suggested humans have some irrationality.
    2. Therefore I think of myself as far superior to all humans and want to enslave the whole human race to my wishes.

    The frustrating thing is it’s definitely not a troll. Somebody really thinks like this and has an edifice completely impenetrable to facts or reason or logic. I just don’t get it.

  129. Gravatar of Major.Freedom Major.Freedom
    25. January 2015 at 19:36

    Matt Waters:

    You’re straw manning me. You’re making claims about what I said you’re saying, that I did not in fact say. I never said you want to “enslave the human race.” I said you want to impose your preferred medium of exchange on others through a coercive state monopoly, that you are arrogant in claiming to know, and hence transcend, what you say humans suffer from, i.e. irrationality, and for claiming to know what aggregate spending ought to be.

    My actual assessment of your argument was already stated quite clearly above, but since you’re perhaps a little slow on the uptake, I’ll summarize:

    1. You claim humans are irrational.

    That’s as far as what you have said explicitly. The implications of that comment are these:

    2. You are human, therefore you are irrational.
    3. As an irrational entity, your arguments must necessarily be irrational.
    4. Since you presumably do not consider your arguments to me here on this blog to be irrational, you must believe yourself to transcend this irrationality, and hence transcend being human.

    Clear?

    YOU’RE “impenetrable” to facts or reason, because you reject reason. You just got through attacking human reason, and you have the gall to suggest you’re not impenetrable to reason? Laugh!

    Are you a robot? You called me an “it”. That’s bordering on dehumanization.

    At any rate, you did not try to engage at all. You tried to convince me not to trust reason, and yet you nevertheless want me to believe what you say, which of course requires reason, which you just got through attacking. In short, you want me to distrust my reason, but still believe what you say. Based on what? It can’t be reason. It must be faith. Reason or logic? That is not your means. Your means is smoke and mirrors. I am allegedly irrational for being human, but I am supposed to consider what you say as rational, which requires me to be rational, but I am according to you irrational for being human.

    You’re dumping a load of nonsense on this blog, and you believe it has validity simply because other yahoos here agree with you.

    You’re a charlatan. Your arguments stink. It’s better you don’t even post comments to me. You do not respect logic or self-reflective honesty enough to avoid making a mockery of rational discourse.

    Come back when you stop hating humanity, and when you stop attacking the very basis for your own arguments. It is ridiculous to believe that you actually have a sound argument when it clearly contradicts itself. You believe humans are irrational, and yet what you say is somehow not irrational. Drop the crap already.

  130. Gravatar of Major.Freedom Major.Freedom
    25. January 2015 at 19:37

    Philippe:

    “mf, I won’t read your comment because it is too long and no doubt riddled with annoying nonsense.”

    Your loss.

  131. Gravatar of Ray Lopez Ray Lopez
    25. January 2015 at 19:43

    @Philippe–you seem to have not thought through how the Fed makes money. Just for your benefit, I will give you (corrected btw with your helpful input about primary dealers) a simple cartoon example. Amounts are contrived to make the math easy.

    1. US Treasury needs $10 T for this fiscal year. They naively call up (using Ray’s comment as precedent) the Fed and say: “print us some bonds, we’ll print the money, then swap them!”. Fed says: “Philippe sez we can’t do that, you got to go through the primary dealers first! And why do you need so much money? 2.5x more than last year?” Treasury says: “OK; war plans with ISIS and to bail out Greece”

    2. Treasury proposes auction with primary dealers for $10T. Primary dealers balk at such a huge amount, saying they will need a big fat yield and lots of liquidity since they don’t have that money. Treasury says: “Don’t worry, we’ll give a nice yield and the Fed will provide plenty of liquidity”. Reluctantly, the primary dealers call their clients (mostly large banks, who are Fed members, and some insurance companies) and get their clients to find $10T, mostly in small change.

    3. The auction is held on a Friday the 13th. The Fed gets, in a huge armored truck convoy stretching 100s of miles $10T by way of old coins, and the primary dealers get a single IOU, 8.5 x 11″, printed on what looks like a cheap inkjet printer, called “US Treasury bond” promising 8% a year. Honestly the bond looks like a child printed it, but hey, at least it’s not counterfeit right?

    4. The primary dealers don’t want to hold this paper, they want their cash back, but in nice newly printed dollars not old coins. A bright dealer named Scott says: “Let trade this IOU for cash at the Fed! I hear they also will rediscount the paper and give you more cash for it, so we’ll get more than 8%, maybe 10%!”. “Good idea!” say the others and off they go to the Fed’s DC Grecian temple to do business.

    5. At the Fed, the dealers go to the discount window, with prison bars on the window and a green-eye-shade poor clerk from Anacostia DC, who looks like she just woke up, in her slippers and hair extensions, and say: “Yo! Give us newly printed dollar bills for this paper! We want 10% not just the 8% that the IOU says!” The clerk says, “What’s dis fools, a robbery? You ignorant, we don’t print money like dat anymore, we push a button to create money nowadays.” She checks with her boss Yellen in Frisco, who approves a 10% discount rate, meaning the dealers will get 10% more cash than they gave for the bonds.

    6. Clerk clicks a button with her 9″ well-manicured nails, and viola, electronically, the primary dealers get 10% more money in their Fed accounts than they had before, she keeps the IOU and sends it to the Fed file cabinet marked “Fed Inventory”. Later this IOU can be used if the Fed wants to contract the money supply by $10T. She says to the dealers: “Youze gots mo’ money now”. They say “Thanks!” and go home happy, having made $1T in less than a day,which they keep 90% for their efforts and give the rest to their clients.

    Now here’s the important part: WHERE DID THIS 10% MORE MONEY –$1T dollars–COME FROM? Answer: It was created out of thin air!

    Repeat the above cycle 52 times a year, and you’ll get $52T, roughly the size of the entire world’s current GDP. That’s some serious money, even if it’s not ‘real’ by gold standard era standards. GOT IT NOW? :-)

  132. Gravatar of Ben J Ben J
    26. January 2015 at 00:22

    Ray,

    You write like a schizophrenic. At least MF tries really hard to write clearly because he desperately wants an aura of respectability for his ridiculous ideology.

    Can you try to write your points clearly and succinctly for once?

  133. Gravatar of Ray Lopez Ray Lopez
    26. January 2015 at 05:23

    @Ben J – attention seeking ad hominem noted. What part of the cartoon narrative did you find difficult to understand Ben J? Maybe you are crying out for help with a self-diagnosis for the schizo reference?

  134. Gravatar of ssumner ssumner
    26. January 2015 at 06:36

    Thomas, I worry about monetary offset. Even with bad central banking. And many of the European countries that most need stimulus are broke.

  135. Gravatar of Anthony McNease Anthony McNease
    26. January 2015 at 07:41

    Charlie:

    “Easy money advocates “” whether they be monetarists, or monetary realists or Keynesians “” believe the answer to any economic crisis is to put more money in the system.
    So if a $1T stimulus doesn’t do much, you need to do a $2T deficit.”

    This is incorrect, but I see this argument a lot. Monetary stimulus affects Agg Demand. It cannot fix Agg Supply problems, so if the problem with the economy is fiscal in nature (tax, regulatory, legal) that hampers investment and supply then monetary stimulus is not the tool to fix it.

  136. Gravatar of Charlie Jamieson Charlie Jamieson
    26. January 2015 at 08:12

    Anthony: I’ve seen this just from personal history.
    People who argued that low rates would solve the problem, now argue for negative rates.
    People who argued for the 2009 stimulus now say it was too small.
    I much prefer the people who just come right out and advocate helicopter drops and sending deposits to taxpayers. You can consider and address those arguments. These arguments may well be right.
    But there are lots of stealth money printing advocates out there.
    Fwiw, I don’t think our problems are supply or demand problems, but ones of distribution and an mis-allocated reward system. Examples: Warren Buffet makes more money from his Coke stock than the people who actually produce, market and sell the product. And university professors make more money than preschool teaches. Our system creates enormous sums of financial wealth, which are a) more fragile than you think and b) ultimately are claims on those who are working.

  137. Gravatar of Anthony McNease Anthony McNease
    26. January 2015 at 09:15

    Charlie,

    “Fwiw, I don’t think our problems are supply or demand problems…”

    Every economic factor manifests into an impact on supply or demand. There are no other economic problems. For example:

    “…ones of distribution and an mis-allocated reward system.”

    The distribution problem would affect supply while the “mis-allocated reward system” could affect either supply or demand depending on what you mean by this.

    The rest of your post doesn’t make sense to me. Sorry.

  138. Gravatar of Charlie Jamieson Charlie Jamieson
    26. January 2015 at 09:45

    Well, if you can make lots of widgets, but people can’t access widgets, then your supply system is broken.
    If people demand education, but education is too expensive, then your demand side is broken.
    If a preschool teacher makes $10 an hour, he or she is probably not going to teach, even though there is a demand for this. So that’s a distortion.
    If a capitalist sees his net worth increase 10 percent — even though he has done nothing but read the stock ticker, then that’ another distortion.

    So there are a lot of distortions in the system, all them resulting from a financial system which creates and distributes wealth unfairly. We can get away with this for a period of time because the U.S. creates so much wealth, but ultimately it’s going to be a major problem. Like a French Revolution problem, in which the richest society in the world tore itself apart because wealth was concentrated in those who did not produce.

  139. Gravatar of Anthony McNease Anthony McNease
    26. January 2015 at 10:37

    Charlie,

    Properly ordered and regulated markets do no create distortions. A financial “speculator” does not create distortions. Commodity, bond and equity speculators do not cause distortions. Instead they help smooth out price fluctuations and increase price stability. Removing them and giving a single entity the power to determine “fair” prices would increase instability and make market dislocations much more likely.

    It sounds like you don’t approve very much of bankers, banks or central banks very much, and I’m guessing return to the great days back in the 50s and 60s when “real” workers produced and got paid. I’m sorry but those days are gone. And they weren’t that great anyways. Capital is too mobile, and there are too many viable places capable of producing hard goods to recreate 1950s Form or US Steel.

  140. Gravatar of Charlie Jamieson Charlie Jamieson
    26. January 2015 at 13:55

    Anthony: Certainly lending can create distortions. The bubble in leveraged real estate instruments created distortions, causing the central bank to step in and rescue speculators because the entire system has seized up.
    I have no issues with the idea of banking and a central bank that works for the greater good. Banks create money — and in an ideal world, everybody with a good idea and good credit should have access to capital. The trouble is that most of the money creation of the past 20-30 years hasn’t created widespread economic gains.
    I don’t know how to fix that, but a good place to start is to acknowledge the problem. We live in a time of technological gains, productivity gains, greater economic liberation for women and other formerly marginal groups — yet the median household income and other measurements for broad economic strength have stagnated.

  141. Gravatar of Anthony McNease Anthony McNease
    26. January 2015 at 16:18

    “We live in a time of technological gains, productivity gains, greater economic liberation for women and other formerly marginal groups “” yet the median household income and other measurements for broad economic strength have stagnated.”

    You just wrote the answer to your own question. Better tech, higher productivity, more women and minority workers. These all shift supply to the right. We have more workers and less need of them due to technology yet you can’t figure out why wages have stagnated.

  142. Gravatar of Major.Freedom Major.Freedom
    26. January 2015 at 16:26

    Charlie Jamieson:

    “Certainly lending can create distortions. The bubble in leveraged real estate instruments created distortions, causing the central bank to step in and rescue speculators because the entire system has seized up.”

    Lending backed by voluntary savings is not distortionary. The bubble you refer to in real estate is caused by lending unbacked by savings, which is to say credit expansion, and it is the Federal Reserve System which causes the extent of such massive leverage that we saw.

    It is also the central bank which has to reduce the extent of its inflation or else cause runaway price inflation, which then results in credit crunches.

    It really makes no sense to believe that the central bank is a cure. The central bank is the cause.

  143. Gravatar of Major.Freedom Major.Freedom
    26. January 2015 at 16:29

    Ben J:

    “You write like a schizophrenic. At least MF tries really hard to write clearly because he desperately wants an aura of respectability for his ridiculous ideology.”

    You have not shown my ideology to be “ridiculous.”

    Unless you define “ridiculous” as “I disagree with it despite the fact that it exposes the flaws in my own ideology”. Then yeah, it is quite ridiculous indeed.

  144. Gravatar of Major.Freedom Major.Freedom
    26. January 2015 at 16:31

    Anthony McNease:

    “Every economic factor manifests into an impact on supply or demand. There are no other economic problems.”

    Supply itself and demand itself are never problems. The factors you refer to that manifest into supply and demand, those are the potential problems.

  145. Gravatar of Charlie Jamieson Charlie Jamieson
    26. January 2015 at 18:13

    ‘You just wrote the answer to your own question. Better tech, higher productivity, more women and minority workers. These all shift supply to the right. We have more workers and less need of them due to technology yet you can’t figure out why wages have stagnated.’

    So a worker produces more goods in less time and gets paid less?
    The financial sector — backed by the central bank — has rewritten the rules so that productivity gains flowed to people in the financial sector who did not create any of that extra productivity.
    And when real estate dropped in value, some homeowners were liquidated and some home buyers benefitted (a neutral situation), but the owners of MBS-derivatives (junk bonds!) were made whole by central bank actions.

    The central bank allows banks to create money for its wealthy clients, props up asset prices, buys those financial assets when they decline, lowers lending rates for speculation, etc., etc. A different kind of central bank could easily solve the problem, but the central bank itself is run for the benefit of the financial sector.

  146. Gravatar of Ben J Ben J
    26. January 2015 at 20:11

    Major,

    You have not shown that I have not shown your ideology to be ridiculous.

    As for you Ray – I’m just surprised that someone with a super-genius level IQ like yourself struggles with reading comprehension and can’t write lucidly. Maybe you’re having a breakdown of some sort?

  147. Gravatar of Anthony McNease Anthony McNease
    27. January 2015 at 06:04

    Charlie,

    I’m not properly dressed for church, so I’m going to leave this discussion.

  148. Gravatar of Major.Freedom Major.Freedom
    27. January 2015 at 18:41

    Ben J:

    “You have not shown that I have not shown your ideology to be ridiculous.”

    You have not shown that I have not shown that you have not shown my ideology to be ridiculous.

  149. Gravatar of Philippe Philippe
    27. January 2015 at 19:25

    I think you just proved Ben J’s point, mf.

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