The issue SNB defenders don’t address
A few weeks ago the Swiss National Bank stunned the markets and many economists by letting the SF appreciate by 20% against the euro. On the face of it, this seemed inconsistent with Swiss policy goals (ending deflation.) Switzerland is already in a mild deflation, and this is likely to make it more severe.
Nonetheless, some claimed the move was inevitable and even beneficial (in a “lesser of evils” sense.) It’s pretty hard to claim a move was inevitable if the markets and most pundits expected exactly the opposite—unless the SNB had inside information. But I’ve never seen anyone present a plausible argument for that proposition. As far as being beneficial, John Cochrane presents the most frequently heard argument:
To defend the peg, the Swiss central bank had bought close to a year’s Swiss GDP of euros (short-term euro debt really) to issue similar amounts of Swiss Franc denominated debt.
This is a QE — a big QE. Buy assets, print money (again, really interest-paying reserves). So to some extent the news items are related. And, it’s pretty clear why the SNB abandoned the peg. If the ECB started essentially the opposite transaction — buying debt and selling euros — the SNB would soon be awash.
A peg depends on credibility. The dollar is pegged to 4 quarters. The Fed is not racking up huge dollar for quarters QE, because everyone knows it will always be thus. The fact that the SNB had to buy euros at all is a great signal that everyone knew the peg was temporary. As, in fact, the SNB had made pretty clear. Sometime or other, probably when it’s most important, investors thought, Swiss Francs will shoot up again. Might as well buy more of them.
An exchange rate peg is fiscal policy. Really, the “credibility” a country needs is fiscal credibility.
The peg fell apart because the SNB was trying to do it alone. On the day of abandonment, the SNB lost about 20% of its balance sheet, since it owns Euros and owes Swiss Francs. Had things gone on any more before the plunge, they would have had to go begging to the Treasury for a recapitalization. “We just lost 20% of GDP, could you please send us some fresh government bonds to back our CHF debt issues?” That works seamlessly in economic models, but would be a political nightmare for a central bank.
One can certainly make a respectable argument that countries should not peg their currencies to another currency. (I prefer NGDP targeting to exchange rate targeting.) But otherwise I think Cochrane misses the point.
Unless I’m mistaken, the first paragraph is incorrect; the SNB did not buy close to one year’s GDP worth of euros defending the peg. In fact, the SNB was buying massive quantities of euros before the peg, and their rate of purchases dropped off after they pegged the franc at 1.20 in late 2011.
The deeper problem here is the hidden assumption that without the peg the SNB would not have to buy as many assets as with the peg. That’s certainly true if they left the peg for a more expansionary monetary policy, such as we see in Australia (which lets its currency float.) But the Swiss did the opposite. Even the SNB admits that the recent move represented a tightening of monetary policy. And here’s the problem that Cochrane and other miss. In the long run, there is a very strong negative correlation between the rate of NGDP growth and the size of balance sheets as a share of GDP. The faster the rate of NGDP growth, the higher the level of nominal interest rates, and the lower the demand for zero interest base money. Tighter money means bigger balance sheets. Thus in the long run the recent Swiss move will make their balance sheet even larger than the previous policy, which will lead the SNB to assume even more risk. (To their credit, they did reduce IOR to negative 0.75%, which will lower base demand. But why not stop there?)
Note that I said “in the long run.” Obviously over short periods of time the opposite may be true; monetary easing may increase the balance sheet as a share of GDP. But surely the issue of central bank balance sheets and risk is a long run issue, and it makes no sense to minimize the problem today at the cost of bigger problems down the road.
Don’t believe me? It looks like my prediction came true just days after the recent depreciation:
The Swiss National Bank reaffirmed its willingness to intervene in markets, sending the franc to its weakest level against the euro since the institution abandoned its currency cap.
“We’re fundamentally prepared,” Vice President Jean-Pierre Danthine said in an interview with the Tages-Anzeiger newspaper published on Tuesday. The Tribune de Geneve and 24 Heures newspapers published similar comments.
Since abandoning its cap on the franc of 1.20 per euro on Jan. 15 and charging more for sight deposits, SNB policy makers have given a series of interviews to local newspapers saying the franc is overvalued and that they are prepared to wage further interventions.
SNB Spokesman Nicolas Haymoz declined to comment on speculation the SNB was intervening in markets.
The tighter the monetary policy, the more that foreigners will want to hold Swiss francs. What if the SNB simply refused to provide them? You mean like when the Fed refused to meet the market demand for dollars between 1929 and 1933?
HT: James in London
Update: Some commenters have questioned my claim that SNB purchases slowed after the peg was enacted in late 2011. Evan Soltas has a post explaining why this occurred.
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31. January 2015 at 07:50
http://www.snb.ch/en/iabout/stat/statpub/balsnb/stats/balsnb/snbbil_A3_1
Your point about currency purchases is mistaken I believe. Initially purchases by the SNB did slow down after the peg was announced but it eventually picked back up. I’m not sure what your and Cochrane’s counter factuals are though and its certainly possible to argue that most of those purchases would have been made any way.
31. January 2015 at 08:21
The SNB erred. It should have introduced the negative IOR long ago to limit the required purchases. That’s gotta be a great source of seignorage for a central bank. One argument I can see for ending the peg is “what if the governments in the Eurozone defaulted?”. I think that argues for holding short term debt and Euro cash (and using negative IOR to limit the need to do either). Another argument is the extreme case where the Euro countries simply abandon the Euro and call it worthless scrip. That’s just so unlikely. And even the Ostmark “appreciated” on the day it was abandoned.
31. January 2015 at 08:52
Why accept that QE must involve central bank buying of assets? Why not monetization of taxes due? Why have a fiat currency and then hamstring yourself?
The SNB has accumulated assets equal to a year’s GDP. The Swiss are (incorrectly since they got the assets for free, by printing money) worried about a fall in asset values.
Okay, then do not have the SNB accumulate assets.
Jeez, the SNB could have also financed a two-year Swiss national tax holiday. Print up the money and give it the Swiss treasury. Inflationary?
That is the point!
31. January 2015 at 09:01
“Unless I’m mistaken, the first paragraph is incorrect; the SNB did not buy close to one year’s GDP worth of euros defending the peg. In fact, the SNB was buying massive quantities of euros before the peg, and their rate of purchases dropped off after they pegged the franc at 1.20 in late 2011.”
I believe you have the data wrong on this one.
http://www.rcis.co.za/wp-content/uploads/2015/01/clip_image067.gif
31. January 2015 at 09:12
Joseph, You said:
“Initially purchases by the SNB did slow down after the peg was announced but it eventually picked back up.”
I agree, but my point was that the peg was not the cause, as purchases slowed after the peg was instituted. Purchases picked up later during the eurocrisis of 2012, AFAIK.
If the peg was the problem, purchases would have picked up after the peg, instead they slowed, until another crisis occurred.
Thanks for the link that was helpful. Which time series do you think is best?
Bill, An even simpler solution would be to hold non-eurozone government debt, there’s plenty of default risk free debt out there.
Ben, That’s essentially a helicopter drop, and there are far cheaper ways of getting the inflation they want (which is not very much.)
31. January 2015 at 09:14
I must be missing some basic knowledge about the way central banking works. Cochrane said “”We just lost 20% of GDP, could you please send us some fresh government bonds to back our CHF debt issues?” That works seamlessly in economic models, but would be a political nightmare for a central bank.”
When the balance statement of a central bank shows that liabilities exceed assets by 20%, why is that an immediate problem? It would seem only to be a problem if the bank wanted to sell its assets in an effort to reduce the monetary base and were to run out of assets before its goal was reached. In Switzerland, though, it seems that further purchases of assets, in exchange for new francs, are in store, and that that might reduce the 20% figure to a smaller one.
31. January 2015 at 09:22
LK, That graph seems to have put the onset of the peg in the wrong place, it occurred after the big spike in assets that the graph makes it look like occurred after the peg. Check out the Evan Soltas post I put in the update, or the table of data provided by commenter Joseph.
Daniel, It would only be a problem if the central bank had to sell off a large share of their assets. But in fairness that is a distinct possibility (although I think rather unlikely in the near future.)
31. January 2015 at 09:25
Sumner talks about ‘errors’ but if anybody ‘erred’ here in is not the SNB but Sumner himself. Errors include:
1) Sumner errs in thinking that a central bank, by not targeting an exchange rate, and instead targeting NGDP, is immune from making mistakes (Sumner may have in mind Soros breaking the Bank of England on Black Wednesday). But this is clearly wrong, as per this thought experiment: suppose the US Fed adopts Sumner’s NGDPLT framework. Let’s assume they will print money and/or engage in open operations until such time NGDP expands by 5%. So the Fed prints money, and nothing happens. Then what? Print more. Again nothing. Then what? Print. Nothing. Print more. Nothing. Print again. Nothing. Now it’s panic time at the Fed, and what is Sumner’s proposal? Print more? You see, Sumner’s Achilles Heel is that the assumption is that the Fed can always “steer” the economy with the money supply, short term. But if this is not true, what is Plan B? At the zero lower bound, if people don’t want to spend, they won’t. As Krugman says, a permanent spending spree or printing money spree will be offset by even more savings (Ricardian Equivalence), unless the public thinks the spree is temporary and to the extent there’s any short-term money illusion (which is measured in days and weeks, not months and years IMO). So the only way to break this expectation by the public is via hyperinflation or a temporary spending spree in Federal fiscal policy, like an NRA (national works program), to soak up the printed money, which we all know is wasteful. In short, Sumner’s NGDPLT is like pushing on a string unless it is accompanied by wasteful fiscal spending. And if you disagree, is this then a key fundamental assumption of monetarism? That printing money will always, in a one-to-one fashion, cause the nominal GDP to expand? That’s not the way economics works, if you’ve ever seen a scatter plot of X vs Y you’ll understand. Economics is not physics. So again, if you print money and nothing happens, then what? If you build it and they don’t come, then what? Blame it on the Credibility Fairy? The burden is on Sumner to answer.
2) Sumner errs by assuming his critics are always wrong or mistaken. He’s not the only one, but it seems Sumner’s posts always have some world-class economist who does not understand: “… I think Cochrane misses the point.” At some point you have to consider that it’s Sumner, not the other fellow, who misses the point.
3) Imagine if I ended every sentence with a question? Would this be annoying? Some people talk like this too? Does it give the impression I don’t know what I’m saying? Sumner is like this? Sumner is the Reflex by Duran Duran: “It’s a lonely child, waiting in the dark, the reflex is answered with a question mark…”
31. January 2015 at 09:39
Scott,
Is the following a correct statement of your position?
“It’s not the policy of an official peg per se that caused the SNB balance sheet to swell, it was the desire of SNB officials to not let the Swiss franc appreciate against the euro.”
31. January 2015 at 09:43
@Ray Lopez: “At the zero lower bound, if people don’t want to spend, they won’t.” Nope! You got it wrong.
“the only way to break this expectation by the public is via hyperinflation” Why is that “the only way”? Why not just some regular, ordinary, low inflation (e.g. 3-4%)? What bizarre theory do you have, where hyperinflation succeeds, but normal inflation is impossible?
“pushing on a string” And yet we have plenty of real-world evidence, that lots of central banks in the last few years were able to successfully devalue their currencies, despite being at the ZLB. So maybe you’re in error about the string thing?
“one-to-one” Not 1-to-1, no. And you’ve left out the most important part, which is expectations.
31. January 2015 at 09:50
Ray, You said:
“Imagine if I ended every sentence with a question? ”
Cute.
Here’s what you should have written. Imagine if a loony commenter who admits to almost no education in economics and who is a spoiled rich guy who inherited his money did post after post ridiculing a famous monetary economics blogger. Who would you trust?
Bob, No, my claim is the opposite, that appreciating the SF will require more asset purchases in the long run, a bigger balance sheet.
31. January 2015 at 10:12
Basic question for anyone…
Is there something to the idea that in a world of patchwork monetary regimes, long-term changes in relative income/wealth over time will naturally be expressed in large part via the respective value of their currencies?
So that we could have guessed, say, that the US dollar would have strengthened against the British pound during the 20th century?
Or that the Chinese currency will appreciate against developed countries’ currencies over the next 40 years?
Any truth to these ideas?
Basically, did the Swiss face a choice between mirroring ECB QE or cashing in some of their relative increase in wealth compared to their surrounding currency zone now?
I understand this might cause some negative short-term macroeconomic fallout, but if unemployment is low, maybe not so much.
Fascinating example, but largely seems like ‘a nice problem to have’ as Soltas says. As a small, rich open economy virtually surrounded by Euroland, it’s hard to generalize from this example.
31. January 2015 at 10:28
@Don G – see the below. I think you will agree I’m not the only one complaining about pushing on a string. As for ‘expectations’ that’s simply the obverse of what I am saying. I am assuming a string is being pushed on, while you are assuming it’s a rigid rod. Why is your speculation any better than mine? We’re both just shooting in the dark, agreed?
@Sumner – I concede you have more credibility than me. I just want to know why. It’s a real mystery, then again, Jim Jones of Jonestown got his followers to drink cyanide so credibility does not equal viability. What you need is a whitepaper clearly explaining your assumptions, and, the ‘concrete steps’ for implementing NGDPLT.
from ‘thefaintofheart’ blog –The Arthurian October 13, 2012 at 5:37 Good post. Interesting pdf. But the quote from Sumner, “The central bank determines the total level of spending” is pushing on a string. Pushing new money into excess reserves is not the same as spending. Sumner confuses “spending” and “printing”, as many people do. Marcus Nunes October 13, 2012 at 9:09 Art, You´re being unfair to Scott. He even favors negative interest on excess reserves just so that “printing becomes spending”.–
What to make of this? Sumner apparently will let the Fed push on a string by printing money, then penalize banks if they don’t lend it with a negative interest rate, which means the banks will simply refuse to take the Fed money (to avoid the penalty). Then what? Pushing on a string indeed. Sumner’s plan would make more sense if he coupled it with a Krugman / Keynesian style fiscal policy to spend this newly printed money. Why doesn’t he do that? Is his Chicago roots holding him back? Sumner’s plan is half-baked, neither fish nor fowl, and it doesn’t logically work (except if you assume, a priori, that it works due to the ‘expectations fairy’ or other such fudge factor). Not that I believe Krugman’s spending would work either, but at least Krugman’s plan is more logical.
31. January 2015 at 10:28
Ray, you do realise that you’re challenging the ability of a theoretically unchained central bank from depreciating its own currency? Your logic is not like Cullen Roche who points out legal difficulties or practices or habits. You’re challenging this on the field of theory.
I think that if a CB runs out of assets to buy in the real world while expected inflation has not caught up, I’m pretty sure that nearly every kid in the world would be IPOing his lemonade stand or the equivalent. And the fed, so so desparate to get the people to spend, would be buying those shares at the market price. There you got your helicopter drop. You’ve also basically solved scarcity.
31. January 2015 at 11:44
I wish Yglesias had mentioned utilitarianism here:
http://www.vox.com/2015/1/29/7945119/all-politics-is-identity-politics
“All politics is, on some level, identity politics. The idea that it’s some special attribute of black politics or feminist politics is just blindness. And while identity politics can be practiced in bad ways or in pursuit of bad goals, that’s simply to say that politics can be practiced both for good and for ill. The idea that gendered or ethnic claims are despoiling a liberalism of pure selves and neutral rationality is little more than an unselfconscious form of identity politics. Politics is about collective decisions. This necessarily implicates individuals’ identities by defining who is inside and who is outside the community of concern and under what terms…..”
31. January 2015 at 12:15
I think I read somewhere that the SNB is at least partially privately held by shareholders. It could be that the terrible decision was a result of shareholder panic instead of a policy decision. Now if that’s the case it was still a terrible decision, because it wiped out a big chunk of their balance sheet. Maybe this is why the SNB seems to be changing its mind. It’s just cutting losses.
31. January 2015 at 12:21
TravisV:
Yglesias wrote: “Politics is about collective decisions. This necessarily implicates individuals’ identities by defining who is inside and who is outside the community of concern and under what terms…..”
Maybe. It could be that Matt meant “Even a decision by the state via politics to leave certain spheres of society alone is a ‘collective decision,'” but your quote sure has a bit of a totalitarian feel to it. Everything within the state. Nothing outside the state.
31. January 2015 at 19:02
@Prakash – I am against monetarism and theory supports me. The US Fed expanded their balance sheet so that 38% of their total comprises toxic mortgages, from less than $1T before 2008 to $4.5T today–and nothing good happened in the economy. Ditto Japan for close to a generation. Explain that? If you do a good job explaining that, I’ll go away.
So here’s my model: if the US Fed expands six fold in 7 years, and nothing happens, what next? Sumner wants even more expansion. As you say, at some point the Fed will be buying kids lemonade stands. You don’t see how that will explode into hyperinflation? If so, you lack imagination.
31. January 2015 at 19:22
Don Geddis:
@Ray Lopez: “At the zero lower bound, if people don’t want to spend, they won’t.”
You replied: “Nope! You got it wrong.”
Please explain how I can spend more money given the fact that I do not want to spend more money.
31. January 2015 at 19:27
Ray:
“So here’s my model: if the US Fed expands six fold in 7 years, and nothing happens, what next? Sumner wants even more expansion. As you say, at some point the Fed will be buying kids lemonade stands.”
Sumner has stated in the past that if buying bonds won’t work in raising NGDP “sufficiently” (meaning arbitrarily according to his socialist plan), then the Fed should buy stocks, and if buying stocks isn’t enough, then to buy other things.
Yes, the Fed buying kid’s lemonade stands (assuming the kids have the proper government permission to sell lemonade on land nobody in government ownss or has a right to enforce laws on) is not outside the boundaries of AMM. AMM advocates for the Fed to buy 99% of what is produced if it means achieving the socialist “target”.
31. January 2015 at 19:35
I’m not an expert on Central bank accounting, but I think the first series, “Official reserve assets and other foreign currency assets (approximate market value)” is the most comprehensive number. “Foreign currency reserves (in convertible foreign currencies): Securities” seems like it would be where most of the assets that the SNB bought would be filled under, but I also don’t know if the buying of QE assets affects the purchases of other assets. Foreign Currency Reserve: Securities also makes up the bulk of the balance sheet Foreign currency reserves (in convertible foreign currencies): Securities.
The PDF I linked to below breaks down the balance sheet with reference to each of those series for the month of December.
http://www.snb.ch/ext/stats/balsnb/pdf/deen/A3_1_Waehrungsreserven_der_CH.pdf
31. January 2015 at 19:35
I’m not an expert on Central bank accounting, but I think the first series, “Official reserve assets and other foreign currency assets (approximate market value)” is the most comprehensive number. “Foreign currency reserves (in convertible foreign currencies): Securities” seems like it would be where most of the assets that the SNB bought would be filled under, but I also don’t know if the buying of QE assets affects the purchases of other assets. Foreign Currency Reserve: Securities also makes up the bulk of the balance sheet Foreign currency reserves (in convertible foreign currencies): Securities.
The PDF I linked to below breaks down the balance sheet with reference to each of those series for the month of December.
http://www.snb.ch/ext/stats/balsnb/pdf/deen/A3_1_Waehrungsreserven_der_CH.pdf
31. January 2015 at 19:38
Don Geddis:
@Ray Lopez: “At the zero lower bound, if people don’t want to spend, they won’t.”
You replied: “Nope! You got it wrong.”
Please explain how I can spend more money given the fact that I do not want to spend more money.
You suffer from a stunted imagination. Major. You spend money that is going to lose some portion of its purchasing power, getting rid of it like a hot potato, in order to hold on to real goods and services
31. January 2015 at 19:46
Ray:
“So here’s my model: if the US Fed expands six fold in 7 years, and nothing happens, what next? Sumner wants even more expansion. As you say, at some point the Fed will be buying kids lemonade stands.”
Sumner has stated in the past that if buying bonds won’t work in raising NGDP “sufficiently” (meaning arbitrarily according to his socialist plan), then the Fed should buy stocks, and if buying stocks isn’t enough, then to buy other things.
Yes, the Fed buying kid’s lemonade stands (assuming the kids have the proper government permission to sell lemonade on land nobody in government ownss or has a right to enforce laws on) is not outside the boundaries of AMM. AMM advocates for the Fed to buy 99% of what is produced if it means achieving the socialist “target”.
Imagine what this mentality is trying to prove. It is essentially saying that we can produce an essentially INFINITE gain in wealth because people and banks are going to hoard every extra dollar printed. If prices don’t move, people and banks will still have infinite real gains in wealth.
SInce this scenario is obviously absurd (WE KNOW this won’t happen) It goes to show how idiotic the “zero lower bound” liquidity trap” the Fed is powerless people are being. Are you listening Ray Lopez?
My question to you Major, is why are you carrying water for somebody who accepts these quasi Keynesian views?You’re an austrian.
31. January 2015 at 19:47
“@Prakash – I am against monetarism and theory supports me. The US Fed expanded their balance sheet so that 38% of their total comprises toxic mortgages, from less than $1T before 2008 to $4.5T today-and nothing good happened in the economy.”
31. January 2015 at 19:50
“Nothing good happened in the economy”
Are you COMPLETELY clueless? We are in a recovery, albeit a weak one by historical standards. gas prices are at an all time low. Unemployment is in the 5% range.
So much for YOUR models Ray Lopez
31. January 2015 at 19:54
Edward:
Please explain how 10 banking powerhouses, who collectively must lend more in order for the aggregate money supply and volume of spending to rise the way you claim the central bank has control over, or can have control over, but who refuse to lend that much more, thus making the aggregate money supply and volume of spending not increase the way you believe the central bank can control it, are somehow going to nevertheless experience a decreased purchasing power of their reserves and deposits.
You keep talking about money that “is” going to lose purchasing power, seemingly completely oblivious to the real world monetary mechanism fact that the way money loses purchasing power is predominantly by way of banks lending more money into existence with reserves as a backup.
I ask again, given I do not want to spend more money, please explain how I will spend more money. I should advise you that right now, and for many years, I have held a significant positive cash balance DESPITE the fact that I have always believed that prices will be higher in the future than they are in the present. In order to “convince” me to spend more, is if my income grows. I am not going to spend more simply because prices will rise. If prices rise but my income does not, then I will purposefully not spend more and reduce the goods and services I buy.
Since when was it a mathematical necessity that I will spend more simply if prices rise? Have you even looked at the chart Sumner posted in his latest post on real wages? Notice a marked kink around the early 1970s? Rising prices does not necessarily cause people to keep spending more yo keep up, especially when they CANNOT keep spending more because their incomes are not rising as fast as price inflation.
31. January 2015 at 19:58
Edward:
“Are you COMPLETELY clueless? We are in a recovery, albeit a weak one by historical standards. gas prices are at an all time low. Unemployment is in the 5% range.”
That is BS. You are of course sneaking in YOUR personally preferred definition of “recovery” and arrogating it to be some objective standard that truly represents every single human being’s thoughts, desires, plans, and lives.
You’re as arrogant and oblivious as Matt B.
Is that what MM requires of its supporters? To define what is good and what is bad for billions of other people? Good lord.
31. January 2015 at 20:11
“Please explain how 10 banking powerhouses, who collectively must lend more in order for the aggregate money supply and volume of spending to rise the way you claim the central bank has control over, or can have control over, but who refuse to lend that much more, thus making the aggregate money supply and volume of spending not increase the way you believe the central bank can control it, are somehow going to nevertheless experience a decreased purchasing power of their reserves and deposits.”
You’re loading the deck with how you designed that question. Of course, with the way you designed that question, if banks are dead set against lending more, than they won’t lend but why would this be the case? Imagine if banks were reimbursed for every new loan they made and securitized and sold to the Fed. They won’t pass up the chance to make more money.
As for the rest, lets say you wanted to buy a new TV at Wal Mart or Best Buy or Target real bad, and its on sale only for the first week of February for 400 bucks. After the week ends it will jump back up to its original price. Et ceteris paribus, you’ll buy now IF YOU WANT THE PRODUCT and avoid the higher price.
(That is if you’re not crazy)
31. January 2015 at 20:16
“Are you COMPLETELY clueless? We are in a recovery, albeit a weak one by historical standards. gas prices are at an all time low. Unemployment is in the 5% range.”
That is BS. You are of course sneaking in YOUR personally preferred definition of “recovery” and arrogating it to be some objective standard that truly represents every single human being’s thoughts, desires, plans, and lives.
I go with consumer confidence. I go with the majority. (At least in this case) I think its reasonable to assume that people enjoy being employed to not being employed, and not because of their wage demands. The arrogant, sadistic approach is the austerian approach that caused misery and untold suffering, and right wing political parties, in Europe. Its also the all or nothing austrian approach, which if it were tried, would do the same.
31. January 2015 at 20:33
Edward:
“Imagine what this mentality is trying to prove.”
No “imagination” is necessary. I am saying nothing other than relaying what Sumner has stated on the matter. If you don’t believe me, look it up like I did and prove it to yourself like I did.
You are unbelievably obtuse. You visit this blog enough to not have to pretend that what I said is so controversial.
“It is essentially saying…”
Essentially? Warning! Straw man alert! Incoming!
“that we can produce an essentially INFINITE gain in wealth because people and banks are going to hoard every extra dollar printed. If prices don’t move, people and banks will still have infinite real gains in wealth.”
There it is!
Notice the equivocation. Your first mention is of wealth, by itself. Wealth is valued property. Money is property, hence money is wealth. But then by the last sentence you wrote real wealth. You wrote that as if I believe money is real wealth like bread or water.
Do you train to be a shyster or does it come naturally?
If people WANT to hold more money and they WANT to hold less real goods, then who the hell are you to define that as bad, or impoverishing, or anything else other than what it actually is, which is those people seeking their goals of more money and less real wealth?
It is like you believe humans are consumerist sheeple idiots who like robots go out and automatically seek more goods at each and every decision. Holy narrow minded view of people Batman!
What I said and what you said I essentially said, are as different as your beliefs and economic truths.
“SInce this scenario is obviously absurd (WE KNOW this won’t happen) It goes to show how idiotic the “zero lower bound” liquidity trap” the Fed is powerless people are being. Are you listening Ray Lopez?”
Please explain how I will lend more money simply by you buying my garbage, printed money or not, given that I prefer to hold more cash and LOSE in real terms, than lending more and risk losing both in real terms and in terms of money.
You keep taking as if you have no idea how money actually leaves the Federal Reserve System.
“My question to you Major, is why are you carrying water for somebody who accepts these quasi Keynesian views?You’re an austrian.”
I am not carrying the water for Ray. Please stop playing this tribalist us against them immaturity. It is sickening.
I do not accept your assumption that in a world where central banks rely on commercial banks to let loose every nickel of reserves the central bank prints, into the deposit accounts of the greater public, that the central bank has some sort of omnipotent control over an outcome of that dependency, which is NGDP.
If banks do not want to lend more, then in our system it does not matter how many additional dollars end up in their money for lending accounts. When they believe every additional investment is not worth the risk, if they are lending as much as they think is justified given existing conditions in the greater economy, where having more reserves will have little to any additional effect on their lending, then doubling or tripling or quintuplig their reserves is going to do jack shit. This is not a zero bound problem. It is a the economy is too messed up to lend that much more problem.
Everyone and their mother’s uncle are effectively screaming that insufficient money is not the problem. With this much cash hoarding given the monstrous size of the increase in base money by the Fed, obviously the problem is not insufficient money. This is the case despite the fact that all else equal, everyone and their mother’s brother will accept more money if offered. Money is not simply spent because it is owned. AMMs have a fallacious understanding of money. Every time the premises and deep convictions are prodded and poked, I am astonished at how utterly backwards the views are on money coming out of the AMM camp.
The more time passes, the more I am convinced that ignorance is a requisite to becoming an honest supporter of AMM, and every other form of monetarism.
When you have the thought that the Fed can raise NGDP as much as it wants, you are whether you realize it or not, assuming that the commercial banks are on board with it. If they are not, then NGDO will NOT rise no matter how many treasuries the Fed buys. At some point the banks will say that’s it, this is the max rate.
Now when Austrians argue that the Fed can make NGDP go up as high ad they want, they have in mind the critical assumption that the Fed circumvents the commercial banks and does the crazy shenanigans that Sumner advocates with a straight face, namely, putting money and more spending in the economy buy way of something other than credit expansion. No, I do not lack imagination on this score. I keep my mouth shut lest one of my sarcastic comments is viewed seriously in this insane asylum called moneyillusion.
The only reason why Japan seemed by able to overcome the zero bound problem is because the Japanese banks played ball. That is it. It is not because the BOJ inflated sufficiently while the Fed did not. The bankers call the shots with their reserves, not the Fed. I don’t care if that scares you, or makes you feel less in control of other people’s lives.
Monetary policy is the Fed stuffing money into commercial bank coffers. Period. Every argument on monetary policy must keep that in mind if it is to be realistic. Unless you want more insanity and have the Fed stuff money in the accounts of those other than lenders, then if banks don’t play ball, then the Fed really is pushing on a string. No, this is not some sneaky way of proving that treasury borrowing and spending is the only way to increase aggregate spending given this constraint. The Fed can start relying on people other than bankers and treasury members, as a possible alternative. All the zero bound problem really proves is that I will not lend more into losing investments no matter how much additional money I have. I would rather hold money and lose zero nominal value and some real value, than lose both.
The economy is just too messed up to rely on bankers and treasury. They cannot fix the problems they themselves caused. The only fix is to allow unhampered economic calculation.
31. January 2015 at 20:46
Edward:
“I go with consumer confidence. I go with the majority.”
If everyone went with the majority opinion, there would be no opinion, because every individual would be staring at every other individual waiting for an opinion to form.
You’re not actually going by the majority. You’re going by your own personal worldview and definitions, claiming they are majority opinions, and then pretending that whatever the majority believes, is therefore true for the minority as well.
Tell me, if the majority believed that their livelihood and prosperity growth depended on eradicating a particular ethnicity, then would you still then go by the majority?
You are only referring to the majority when it suits your own selfish pursuits, but when the majority disagrees, then you become a freedom fighter, corrector, educator and activist whose duty it is to shape and form the majority to realize that what they really wanted all along, is what you personally want for them.
The shysterism on this blog is palpable.
“I think its reasonable to assume that people enjoy being employed to not being employed, and not because of their wage demands.”
Your ideas are arrogant, and sadistic. What you think is not what everyone thinks for themselves. We only need to look at people who CHOOSE unemployment, I.e. to quit their jobs but remain in pursuit of a future job, perhaps, or those who make others unemployed because what those others produced, is not what the consumers want.
We also only need to look at the occasional periods when people prefer to hold more money and less real wealth, who prefer to bankrupt firms around the country because they don’t want to buy the products produced. No, this is not a problem of insufficient money. It is a problem of the wrong goods being produced.
Material produced objects are not desirable or valuable simply because they are produced and available for sale.
Money held is not desired to be spent simply because more of it comes into existence.
31. January 2015 at 20:53
“The only fix is to allow unhampered economic calculation.”
Which is defined only to be the theoretical economic calculation that occurs in your imaginary anarcho-capitalist world, which is therefore a political point, and not an economic point.
1. February 2015 at 07:17
@Edward, @MF – I think MF wins the debate, but Edward I do see your point. Your point –and it’s logically persuasive–is that today’s weak recovery in the USA is due thanks to Fed asset purchases, which went from a balance sheet of less than $1T in 2008 to $4.5T today–that’s a gain of 3.5T in six years, or $0.583T/yr. So, for a $16T economy, a increase in the money base (as a result of the Fed buying toxic paper from banks) to the tune of 0.583/16 = 3.6% = ~4% of GDP makes the difference between a recession (or worse) and today’s weak recovery? That’s your claim? Fine. I agree it’s logical. So tell me Sir Edward, if that’s true, what happens when the Fed decides to unwind its inventory? Do we go back to recession? And if the Fed decides never to unwind, do you see, as a Sumner disciple, any end to QE? Can the Fed constantly expand its balance sheet to absorb more and more toxic junk paper in exchange for printing money? I ask you (or anybody else) since I doubt Sumner would ever answer such a concrete question.
1. February 2015 at 07:41
Tyler Cowen: “How Andrew Sullivan changed America”
1. February 2015 at 07:41
http://marginalrevolution.com/marginalrevolution/2015/02/how-andrew-sullivan-changed-america.html
1. February 2015 at 08:03
“what happens when the Fed decides to unwind its inventory? Do we go back to recession? And if the Fed decides never to unwind, do you see, as a Sumner disciple, any end to QE?”
I don’t think the Fed did TARP expecting to ever unwind their assets. I thought that was the point of TARP. To take assets off of M-T-M and move them to accrual accounting. A move from weak to strong hands. Those assets are not infinite expiration assets, they will expire naturally over time. It never should have gotten to the point that they had to take those assets, but once the problem was obvious, there unfortunately were few choices.
As for QE2 and 3 and 4 and 5 and 6 and…. thank you, it forced me out of money and into higher performing assets. Why argue so much? If what is being done is ‘blinking neon sign’ wrong, then obviously it should be equally obvious as to why and what the consequence must be, so position yourself for the reaction and profit from it.
1. February 2015 at 08:25
Ray,
The fed NEVER has to “unwind” it’s balance sheet. Never. It’s a common fallacy, so I won’t hold it against you. All the fed has to do is to slow the rate of purchases eventually to zero. That will “passively contract” the Feds balance sheet when inflation is on the upswing. Balance sheet concerns are WAY overblown.
You also have a fundamental misunderstanding of how monetary policy is conducted in general. Even with regular OMOs, when the fed announces a federal funds rate target, it is commiting itself to OMOs at a particular price, theoretically forever, but in practice, until when the fed changes interest rates.
1. February 2015 at 08:45
Brian, Part of the difference is explained by inflation differentials, and part is explained by real growth differentials.
Ray, Almost everything you say about my views is wrong. I warned you early on that you were in over your head. Perhaps 120 just isn’t high enough?
Anthony, If I was a shareholder I would have been horrified by the decision. On the other hand the minus 0.75% interest might be explained that way.
Thanks Joseph.
1. February 2015 at 09:06
Miles Kimball: “John Stuart Mill on the Rich and the Elite”
1. February 2015 at 09:07
http://blog.supplysideliberal.com/post/109744022122/john-stuart-mill-on-the-rich-and-the-elite
1. February 2015 at 12:46
MF,
“Since when was it a mathematical necessity that I will spend more simply if prices rise?”
You don’t need to actually increase final consumption to be considered “spending more” macro-economically. You can also move your cash into investment and since the businesses you are investing into are subject to the same devaluation if they keep cash they are likely to buy more business equipment and infrastructure, basically use the opportunity to grow their business.
If money returns -4% real and there are some business out there with a potential safe return of -3% why would you not make that investment instead of keeping cash? That business spending would not have happened at 2% inflation.
“If people WANT to hold more money and they WANT to hold less real goods, then who the hell are you to define that as bad, or impoverishing, or anything else other than what it actually is, which is those people seeking their goals of more money and less real wealth?”
If they want that money because they just want the actual money, to frame the little pieces of paper and decorate their walls then fine. If they want it as a store of value to spend later then it is also ok but it should not return more than private stores of value on a risk adjusted basis. Money is only worth so much above its intrinsic value because it is backed by a formidable government legal framework. It is a huge distortion to the markets and a subsidy to cash hoarders if governments allow their paper to keep value at a risk adjusted rate above private stores of value such as stocks, bonds, commodities or even just purchases of things people are going to need later.
On the private markets, the safest stores of value can have returns that are very negative. That is simply natural in a universe where things tend to decay unless you input work and energy into them. The government should not let fiat price useful private stores of value out of the markets.
1. February 2015 at 14:05
Benoit,
Exactly!
1. February 2015 at 19:55
@Edward – Thanks for the elaboration. That’s basically what I was getting to when I mentioned “you’ve basically solved scarcity”, but looks like a more detailed explanation was needed.
@Ray – You jump from deflation to hyperinflation without a stop at normal inflation. Did you run through the scenario in your head before you made that statement?
The CB announces a path, it announces level targeting and if its statements are not enough to set expectations, then it starts open market operations.
Monetary operations do not bring new goods into the world. They don’t resolve scarcity. So, somewhere along the path of increasing money base, the money value WILL touch the nominal target. At that point the open market operations stop. The credibility is established. There may be a chance of overshoot, hence level targeting, so that mistakes of the past can be rectified in the future.
About the real world examples, a lot of the MM bloggers have pointed out examples where real world CBs who don’t set public expectations and follow them throughout. Undershooting the goals once is an honest mistake. Undershooting them again and again, is an indication that your real targets are different from your announced ones. That uncertainty in the monetary standard is not good for business.
@Benoit- An excellent comment.
1. February 2015 at 20:02
@Sumner–“Ray, Almost everything you say about my views is wrong. I warned you early on that you were in over your head. Perhaps 120 just isn’t high enough?”
Appeals to authority won’t cut it in the blogosphere professor, even if you did save the world says The Atlantic writer. I am as famous as you here, maybe even more so (I’ve been using this handle since 1996, when the internet was Unix typed commands on a T3 line). Krugman’s hint for you, from his 2.1.15 blog: “Oh “” and never, never, get too self-important” (cites favorably DeLong and Simon Wren-Lewis*, no mention of you, sadly).
* I wonder if Simon is a distant relative of–I bet he is–this guy: http://en.wikipedia.org/wiki/John_Wren-Lewis
1. February 2015 at 20:09
Ray,
No one I have ever seen commenting on an economics blog is as self-important as you are. You constantly misrepresent and lie about other people’s views while criticising them and telling people how smart you are. Maybe you should take Krugman’s advice before anyone else does!
1. February 2015 at 22:05
Benoit:
MF: “Since when was it a mathematical necessity that I will spend more simply if prices rise?”
Benoit: “You don’t need to actually increase final consumption to be considered “spending more” macro-economically. You can also move your cash into investment and since the businesses you are investing into are subject to the same devaluation if they keep cash they are likely to buy more business equipment and infrastructure, basically use the opportunity to grow their business.”
My statement of “spending” includes spending money on nonconsumption items. I was not referring to only consumption spending.
So I ask again, since when was it a mathematical necessity that I will spend more simply because prices rise? Imagine me to be a banker myself if you can only envision me as hoarding cash that a bank will then be assumed as ipso facto investing due to rising prices. I am asking where the notion of spending necessarily increasing derives.
If people do not divest themselves entirely of cash, even though prices rise, don’t you think it is crazy to believe in any such necessary connection between prices and total spending?
“If money returns -4% real and there are some business out there with a potential safe return of -3% why would you not make that investment instead of keeping cash? That business spending would not have happened at 2% inflation.”
Woah woah, let’s back up here. It is not my obligation to explain to you why I will not increase my spending (reminder: spending here includes consuming and investing). I am asking why I must increase my spending given prices have risen or are expected to rise. Answering my question of why with why not, is not an answer, but a desire to shift the burden of answering my own question to me even though what I am questioning is not what I myself proposed.
If holding cash returns -4% real, and your hypothetical business opportunity returns -3%, then it is not “safe”. It is less safe than cash, that is all you can say. And that is precisely why it returns a higher rate.
But you’re assuming risk neutrality! That if an investment is exoe ted to return -3%, then as if like a robot, I must choose that instead of -4%. But you still have not answered why I MUST choose -3% with more risk rather than -4% with less risk.
I could and very well might choose -4% because I do not want to expose myself to the risk that is associated with -3%.
“If people WANT to hold more money and they WANT to hold less real goods, then who the hell are you to define that as bad, or impoverishing, or anything else other than what it actually is, which is those people seeking their goals of more money and less real wealth?”
“If they want that money because they just want the actual money to frame the little pieces of paper and decorate their walls then fine.”
What the hell does “then fine” mean exactly? That you sitting on your throne hath declared that the plebes shalt be permitted to use money for the walls, but not holding temporarily?
“If they want it as a store of value to spend later then it is also ok but it should not return more than private stores of value on a risk adjusted basis.”
Do you even know how to market? Or is the market that which must result in what you decree it “should” result in? Such arrogance!
The return I get is what I and my lender or borrower agree to, or the return that I get given what others have decided is the new value of my investment through their activity unhampered by me.
You are just prejudicially hostile towards private money holders earning a real return on money they peacefully earned in the market, and prejudicially friendly towards government bond holders earning a real return on money that is paid back through coercive taxation and inflation. And why? Because only through the latter is your monetary utopia “rule” feasible.
You are sneaking in a value judgment that suggests it is unjust and immoral for people to work hard to earn money, “invest” it, and earn a modest real return. To you this is an evil. To you cash hoarding should not return more than some holy minimum decided by non-market actions. Because aw shucks, fiat money is already hugely distorting.
You don’t fool me!
“Money is only worth so much above its intrinsic value…”
Repeat after me: There is no such thing as “intrinsic value”.
“…because it is backed by a formidable government legal framework. It is a huge distortion to the markets and a subsidy to cash hoarders if governments allow their paper to keep value at a risk adjusted rate above private stores of value such as stocks, bonds, commodities or even just purchases of things people are going to need later.”
Which means rising prices is a “subsidy” to cash dishoarders!
Why is it a good thing to screw over cash holders, and subsidize cash dishoarders, but a bad thing to screw over cash dishoarders, and subsidize cash dishoarders?
Oh oh! I know. NGDPLT needs to attack cash hoarding and encourage cash spending, so we must become morally opposed to cash hoarding and morally supportive of cash spending, and then couch it all in seemingly economic value free disinterested jargon.
Also, why in the world would holding cash earn a higher return than investing it even in a world of price deflation? You said cash holding “should not” earn a higher risk adjusted return than stocks. Well, why would it? Seems like a nonsense concern.
Why is it a “distortion” for fiat money to be printed at a rate that results in a real return from holding it, but not a “distortion” for it to be printed at a rate that results in a real loss from holding it? Distortion from what standard pray tell? If a free market tends to have falling prices, is it not true then that rising prices is reflective of distortion and not vice versa?
Holding cash is less risky than investing cash, and if you adhere to basic risk return models, there is no reason for you to presume that price deflation will result in cash holding earning a higher risk adjusted return than stocks. It is a red herring anyway.
“On the private markets, the safest stores of value can have returns that are very negative. That is simply natural in a universe where things tend to decay unless you input work and energy into them. The government should not let fiat price useful private stores of value out of the markets.”
WHY?
It does so by merely existing, and is not made more pronounced if cash is printed at a rate that results in productivity based price deflation. If prices fell by 2% per year, that will not result in any more “crowding out”. People holding cash for longer than before because of it earning a small real return does not mean that they will have fewer resources to invest and produce goods. The same resources can be produced and invested. Less money will just be used in those exchanges than otherwise would have been the case. Less money being exchanged counter-factually does not mean less productivity per capita. It means a higher value of money compared to the unobserved counterfactual.
You are just trying to screw over cash holders, which is really everybody not a central banker, or, less so but still significant, the initial cash receivers. Everyone who cannot print their own money or be close to them MUST incur a real loss for holding cash, which means everyone not a central banker or special interest group must incur a real loss. Why? Because Benoit says so.
Why don’t you just say that you want to have coercion against people into spending slightly more money and holding slightly less money, instead of coercion against then into spending slightly less money and holding slightly more money, even though you can’t control how much people spend given prices?
I ask again: Since when was it a necessity for me to spend more simply because prices rise? What if I will only spend more if my income first increases? Then what? If prices rise because of reasons apart from my income changes, then a policy of rising prices to “encourage” me to spend more will fall flat. And that is what I am referring to. I ask why prices make me spend more.
2. February 2015 at 06:59
I really do not understand the certainty everyone has that interest rates are going to rise significantly…….
“Berkowitz waits for higher rates for BofA”
http://seekingalpha.com/news/2262996-berkowitz-waits-for-higher-rates-for-bofa
2. February 2015 at 07:17
@Prakash- read MF’s response above, which I adopt. There’s nothing that forces people to invest or spend if prices rise. Hence, indeed, you can go from deflation to hyperinflation (‘too much money chasing too few goods’) if the central bank continues to expand the money base without restraint. That point comes at about the time (if not before) the Fed starts buying kid’s lemonade stands the way they now buy junk mortgages. And since prices are not continuous, but jump, you might not even get a stop at ‘normal inflation’ in-between deflation and hyper-inflation, as you claim.
2. February 2015 at 09:50
Central banks making errors like the SNB did make me think that free banking would be better. The private banks made bad errors in 2004-2007 but the central banks have shown that they can make big errors too.
2. February 2015 at 11:17
Ray, You said:
“I am as famous as you here, maybe even more so”
And then you said:
“Krugman’s hint for you, from his 2.1.15 blog: “Oh “” and never, never, get too self-important””
What can I possibly add?
Travis, If they expect much higher rates, they may be in for a long wait.
2. February 2015 at 11:34
Noah Smith discusses Prof. Sumner at length in this new column:
http://www.bloombergview.com/articles/2015-02-02/keynesians-market-monetarists-blog-for-economic-truth
2. February 2015 at 12:54
Would it be good to break out central bank into 4 or 5 regional banks to minimize the effect of a bad mistake?
2. February 2015 at 14:16
@Floccina: The critical question is, what happens to the size of the monetary base? There is only one unit of account (dollar). “Decentralizing” the central bank, doesn’t somehow give you multiple zones with different currency. It’s all still the same dollar.
2. February 2015 at 14:55
MF, I am not assuming risk neutrality. All my arguments apply to risk adjusted rates.
“Which means rising prices is a “subsidy” to cash dishoarders! […]
Why is it a “distortion” for fiat money to be printed at a rate that results in a real return from holding it, but not a “distortion” for it to be printed at a rate that results in a real loss from holding it? Distortion from what standard pray tell? If a free market tends to have falling prices, is it not true then that rising prices is reflective of distortion and not vice versa?”
Inflation is not a subsidy to cash dishoarders from hoarders, at least not a forced subsidy since hoarders can always move out of cash and into the private markets to get private market rates. With higher inflation, people gain from getting out of the government distorted store of value and going into the private markets. In this scenario you are discouraging the distortion by pushing people into private savings.
The situation is not symmetric. The subsidization of cash hoarders through low inflation results in people moving into private markets losing real value compared to staying in government subsidized fiat. Since this loss is imposed, people, business and banks tend to stay in the government controlled store of value. Here you are promoting the distorted fiat form of saving.
“The return I get is what I and my lender or borrower agree to, or the return that I get given what others have decided is the new value of my investment through their activity unhampered by me.”
That is only true of things not fiat. Fiat real returns are determined by central banks and should not be set as high as to cut off the private markets.
“You are just prejudicially hostile towards private money holders earning a real return on money they peacefully earned in the market, and prejudicially friendly towards government bond holders earning a real return on money that is paid back through coercive taxation and inflation. And why? Because only through the latter is your monetary utopia “rule” feasible.”
Yes I am hostile when they are getting above market rates through propped up government fiat while in the process not contributing to investment in real wealth creation and real value while expecting to get real wealth and real value in the future in exchange for their fiat.
When you negotiate for a price “peacefully”, you don’t negotiate for this price plus a perpetual safe real return on the money above what the private markets can provide. You are just negotiating the immediate price.
“You are sneaking in a value judgment that suggests it is unjust and immoral for people to work hard to earn money, “invest” it, and earn a modest real return.”
This has nothing to do with morals. Letting the markets determine the value of safe stores of value makes them efficient. A government sponsored artificially propped up store of value that disincentivizes private investment is disastrous for economic efficiency.
“It does so by merely existing, and is not made more pronounced if cash is printed at a rate that results in productivity based price deflation.”
Monetary policy as little to do with productivity based deflation. That comes from improved efficiency, technology and ressources availability. It can reduce prices without leading to unemployment or lower real gdp. This is not the scenario we are talking about. Plus, it is not very relevant in the current world where we are not seeing fast increases in real gdp due to rising real produtivity.
” If prices fell by 2% per year, that will not result in any more “crowding out”. People holding cash for longer than before because of it earning a small real return does not mean that they will have fewer resources to invest and produce goods. The same resources can be produced and invested.”
They can be invested but they won’t. Who will invest in the -4% private safe assets when fiat returns -2% to individuals?
“Less money will just be used in those exchanges than otherwise would have been the case. Less money being exchanged counter-factually does not mean less productivity per capita. It means a higher value of money compared to the unobserved counterfactual.”
That is incorrect, at least in the short run, fewer things will be invested into because money will act as a barrier to investment.
“there is no reason for you to presume that price deflation will result in cash holding earning a higher risk adjusted return than stocks. It is a red herring anyway.”
Of course it does, otherwise you wouldn’t see all the excess reserves piling up. When you have rising excess reserves, that is fiat literally replacing potential private investments that would have had lower risk adjusted returns.
“You are just trying to screw over cash holders”
Am I though? All their other investments and job prospects are going to perform better in the long run if fiat is not acting as a barrier to the economy.
You hard money types would like the government to subsidize a widely available and safe paper store of value that has better risk adjusted returns than what the private market can provide. It is not the role of government to provide this.
It is the worst form of subsidy because even if it may get a few more percentage returns to individual subsidized cash savers, on the aggregate idle excess cash gets near -100% returns over the period it is made idle.
When you have lots of excess idle cash used as savings on the aggregate, there ends up being insufficient real private investment to fulfill the future spending expected from this cash. Accumulated idle excess cash becomes like a ponzi scheme. The central bank will have to devalue other assets and put upwards pressure on taxes if it want this cash to maintain value when fiat hoarders start to spend it and excess money starts chasing the few goods that were actually created by private investment.
Excess cash buildup caused by overly tight money causes more inflation risks later or results in even tighter money. If central banks don’t let the prices correct upwards when the hoarders want to spend it, it will basically amount to shifting the wealth of real investors and taxpayers to value destroying fiat savers. Cash is an illusory store of value on the aggregate as there is no stuff or production capacity tied to it. We should not reward people for stockpiling it in excess of what is needed for smooth transactions and contract negotiations.
4. February 2015 at 00:01
@ Ray – Please mention a single example from history where deflation became hyperinflation in one month, assuming that is the typical time of reaction for current central banks. NGDP futures markets, would of course be much faster. We’re not even considering that.
About the “you can’t force me to spend”, I mostly agree. But those who do spend on other items when the currency is inflated do better than those that don’t and get to become slightly richer, the way this whole market economy thing works.
If Cantillon effects are your concern, then announcing targets, buying the safest assets and moving on to riskier ones is precisely the method that minimises the same. The toxic mortgages and lemonade stands come much much later. I hope you do understand that. Do not confuse what market monetarists advocate with what the fed did. The Fed should keep a public list of exactly what assets in exactly what order it will buy. Any deviation from such a list would be a violation of the spirit behind a rules based monetary policy.