The WSJ channels Rothbard

Mark Spitznagel published the following in the Wall Street Journal:

In the 20th century, the economists of the Austrian school built upon this fact as their central monetary tenet. Ludwig von Mises and his students demonstrated how an increase in money supply is beneficial to those who get it first and is detrimental to those who get it last.

This is not correct. If I sold some bonds to the Fed at market prices, I would not benefit.  An unanticipated monetary injection helps debtors and hurts creditors, by raising the price level and NGDP.  However, during the past 3 and 1/2 years inflation has been lower than any time since the mid-1950s, and NGDP has grown at the slowest rate since the 1930s, so obviously that’s not an issue right now.

As Mises protégé Murray Rothbard explained, monetary inflation is akin to counterfeiting, which necessitates that some benefit and others don’t. After all, if everyone counterfeited in proportion to their wealth, there would be no real economic benefit to anyone. Similarly, the expansion of credit is uneven in the economy, which results in wealth redistribution. To borrow a visual from another Mises student, Friedrich von Hayek, the Fed’s money creation does not flow evenly like water into a tank, but rather oozes like honey into a saucer, dolloping one area first and only then very slowly dribbling to the rest.

It is akin to counterfeiting, but the counterfeiter is the federal government, who earns inflation tax revenue, and the victims are the holders of non-interest bearing currency, who see its purchasing power fall.  But the recent injection of “money” is mostly interest-bearing reserves, so the government is not gaining from “counterfeiting,” rather it is exchanging one interest-earning asset for another.  In any case, Rothbard’s point actually disproves the previous assertion.  It’s not who gets it first that gains; it’s who sells it first, after producing the currency at near-zero cost.

The Fed doesn’t expand the money supply by uniformly dropping cash from helicopters over the hapless masses. Rather, it directs capital transfers to the largest banks (whether by overpaying them for their financial assets or by lending to them on the cheap), minimizes their borrowing costs, and lowers their reserve requirements. All of these actions result in immediate handouts to the financial elite first, with the hope that they will subsequently unleash this fresh capital onto the unsuspecting markets, raising demand and prices wherever they do.

Here the author is confusing increases in the monetary base that accommodate increases in the demand for liquidity, with exogenous increases in the money supply that drive up prices via the hot potato effect.

The Fed, having gone on an unprecedented credit expansion spree, has benefited the recipients who were first in line at the trough: banks (imagine borrowing for free and then buying up assets that you know the Fed is aggressively buying with you) and those favored entities and individuals deemed most creditworthy. Flush with capital, these recipients have proceeded to bid up the prices of assets and resources, while everyone else has watched their purchasing power decline.

Milton Friedman said ultra-low rates were a sign that money has been tight.  Spitznagel suggests monetary policy has been very expansionary.  Given the very low inflation over the past three and a half years, it’s pretty obvious who’s right.  It’s too bad the Wall Street Journal has abandoned the ideas of Milton Friedman.  In a few years their predictions will look rather silly.

HT:  Dilip.   Paul Krugman also has some comments.


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83 Responses to “The WSJ channels Rothbard”

  1. Gravatar of david david
    21. April 2012 at 05:33

    Wasn’t the confusion of the signals for ‘calculation’ the neo-Austrian argument, whereas the disparate class effects of traditional monetary instruments were post-Keynesian arguments? When did the latter jump the fence?

    I mean, Austrians regularly concede that non-state forces can destabilize money demand on its own (they just say that the state makes the problem worse), but they’re hardly going to make the class argument there as well, are they now.

  2. Gravatar of marcus nunes marcus nunes
    21. April 2012 at 05:48

    Scott
    The whole monetary policy thing is screwed up. The Krugman piece you link has links to other pieces that you should take a look.
    It seems everyone is thinking of MP as interest rates. Since they are at the “ZLB”, the only way MP can remain “expansionary” is to promise to keep rates at the “ZLB” for a long time.
    But that would only be indicating that MP will remain tight for a long time too.
    MP has become like the proverbial dog trying to bite its own tail. Just keeps circling until it drops from exhaustion.

  3. Gravatar of marcus nunes marcus nunes
    21. April 2012 at 06:10

    Angry Bear, as usual helps mess it up!
    http://www.angrybearblog.com/2012/04/paul-krugman-is-very-very-wrong.html

  4. Gravatar of dwb dwb
    21. April 2012 at 06:10

    good post (as always).

    talk about throwing a brick at a screen…It’s theology, the way most adherents stick to it dogmatically.

    Just get a bunch of MMTers in a room with Spitznagels cult and see if they’ll annhilitate each other and leave a pile of $$.

    Thankfully, none of Spitznagels stuff makes it to the top ten most read/viewed, or most emailed on the WSJ. It gets no traction: I think people see it for the nonsense that it is.

    By the way, if banks are benefiting, someone should alert them.
    http://finance.yahoo.com/echarts?s=XLF+Interactive#symbol=xlf;range=20070219,20120420;compare=%5Egspc;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

  5. Gravatar of Justin Irving Justin Irving
    21. April 2012 at 06:34

    It is interesting how those who ‘got the money first’ bid up assets (just before and after QEII) only to bid them down a few months later, when the Fed became hawkish again. Even though the monetary base was still huge. One would almost think that markets are efficient and that the median NGDP forecast steers asset prices, rather than mechanistic base money seepage.

    The Austrian view gives less credit to the public and market participants than even Vulgar Keynesianism (1950s-70s macro). Bankers have no special foreknowledge of future inflation, and if they did they couldn’t keep it from the public because of the EMH. Nothing stops society as a whole from raising their price and wage demands at the same time if demand-inflation is truly on the horizon. I say this as a recovered Austrian.

  6. Gravatar of StatsGuy StatsGuy
    21. April 2012 at 06:56

    “And given that rates are likely to frequently hit the zero bound in future recessions (as trend productivity growth and population growth both slow) NK policy will fail us again and again in future recessions, i.e. when we most need it to be effective.”

    I wish you would do a post just on this issue – that “unconventional” is a terrible term for implying that our current _real_ situation is only temporary. It’s likely – due to slowing population growth and hitting resource limits and high _global_ savings rates (particularly counting reinvestment of dividents/gains) – that real savings interest rates will be negative for a long time… In other words, preserving future consumption will not be safe or easy. Those who want to blame this on government are having a field day, but if the Fed doesn’t institute a rule that works in the new world (when we hit the zero bound) we’re going to be taking the economy through paroxysms every time something happens (e.g. wait for definitive proof of a crash before getting enough QE to muddle through).

  7. Gravatar of James James
    21. April 2012 at 07:20

    Scott,

    You and the WSJ are both right. Uncontroversially, If I print some mone, buy a bond you had issued, and then give it to you, you benefit by my action which eliminates your debt. The seller of the bond benefits from selling the bond to me as well, otherwise they would be unwilling to sell it. If the seller of the bond uses the newly printed cash to issue a loan to the marginal borrower, the marginal borrower benefits by getting access to that money before anyone else has used that money to bid up the prices of any goods.

    Similarly to the case where I buy a Sumner bond, primary dealers benefit from increases to the money supply because the Fed has to pay more than the market price for whatever bonds it buys in order to be the best bidder. That’s why they are willing to do business with the Fed. If you don’t think the initial recipient benefits from selling bonds to the open market desk, how do you account for their willingness to participate in the transaction?

  8. Gravatar of Jon Jon
    21. April 2012 at 07:51

    “It’s too bad the Wall Street Journal has abandoned the ideas of Milton Friedman. ”

    But it isn’t the WSJ who authored that essay. It is quite common for the WSJ to give ink to other views; just as they give ink to Alan Blinder, who they most certainly disagree with.

  9. Gravatar of JL JL
    21. April 2012 at 07:56

    Scott,

    How can we recognize in real time whether money is too loose or tight?
    Or, alternatively, how can we provide the public with an easy to understand monetary policy indicator?

    I’m thinking of a highly visible indicator that the average person can monitor and understand.
    NGDP futures would be nice, but I would prefer something we already have.

    If money is too loose then John Doe can immediately see gas and stock prices rise. So that’s a easy and visible dashboard light, but it doesn’t tell the whole story (never reason from a price change…).

    If money is too tight, John Doe can only discover this months later when he sees the depression in his rear view mirror.

    Since John Doe only has a dashboard light for one of the two monetary policy failures, he cannot accurately judge Fed policy.
    He will overestimate the times that the Fed is too loose and underestimate the times they are too tight.

  10. Gravatar of dwb dwb
    21. April 2012 at 08:12

    @James,
    the words sound seducing but they are wrong. It does not work like that (see the NY fed site). Practially every line is flawed. Primary dealers are only intermediaries between money market funds, pension funds, etc., and the Fed.

    banks make money largely by originating loans (not so much on the spread, either, because they shift the interest rate risk on assets hey hold to others). If they hold assets, they make money on the credit risk as a rule, not interest rate risk.

    thats why banks have underperformed the market: when growth slows, delinquencies rise and loan growth slows.

  11. Gravatar of Mike Sproul Mike Sproul
    21. April 2012 at 08:20

    Central banks are not counterfeiters. Counterfeiters don’t put their name on their money, don’t recognize it as their liability, and don’t stand ready to use their assets to buy back that money. When a counterfeiter prints money, that money becomes the liability of the central bank, but the central bank’s assets are unaffected. Thus each dollar has less backing and the dollar loses value. When the central bank itself issues money, the central bank gets equal-valued assets in return. The central bank’s assets thus rise in step with its money-issuance, and the value of the dollar is unaffected.

  12. Gravatar of ssumner ssumner
    21. April 2012 at 08:51

    David, I can’t answer that, maybe someone else can.

    Marcus, Yes, thinking of Fed policy in terms of interest rates just adds to the confusion.

    dwb, Yes, I actually think easier money would help the banks, but we don’t actually have easy money, we have low rates.

    Justin, Good points. Glad to hear you “recovered.”

    Statsguy, I agree, and have done a few such posts.

    James, An easy money policy can make bond prices rise, but more often it makes them fall (due to fear of inflation.)

    Jon, True, but their own editorials are just as bad.

    JL, Without NGDP futures I’d combine TIPS spreads with NGDP consensus forecasts.

    Mike, In the 1960s and 1970s the Fed issued lots of money that they never bought back, despite the fact that its value (purchasing power) was plummeting.

  13. Gravatar of Morgan Warstler Morgan Warstler
    21. April 2012 at 09:20

    We ought to take CEO compensation and not tie it to stock price, but stock price divided by interest rates urged Fed.

    And then find out how many on Wall Street want more QE.

    Immediately the real talent will be apparent.

    —–

    Scott,

    The Fed buying up MBS benefited someone directly.

    GS knowing when QE is coming allows them to time their actions accordingly.

    The Fed propping up stock prices to save CEO asses in companies that should be DYING including the banks that should be LIQUIDATED…

    Without the Fed doing QE far more Wall Street executives would be penniless, and some new entrepreneur would be feasting on their corpse.

    Stop with the jargon and admit it.

  14. Gravatar of Morgan Warstler Morgan Warstler
    21. April 2012 at 09:34

    multiply

  15. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    21. April 2012 at 09:55

    ‘Angry Bear, as usual helps mess it up!’

    No kidding. That place is all-left-wing-politics-all-the-time. By coincidence, the author of that post, Ken Houghton, has chimed in as a ‘usual suspect’ here;

    http://delong.typepad.com/sdj/2012/04/parsons-blames-glass-steagall-repeal-for-crisis.html

    which touches something I was discussing in the previous thread here; Eugene White’s theory of incentives for banking. For those with long memories (and no life?) who might be thinking, ‘Hey, I thought you were persona non grata at DeLong’s.’ Well, a spoonful of sugar apparently does make the medicine go down in a most delightful way; ‘Unaccustomed as I am to defending Prof. DeLong, he’s clearly in the stronger position here.’

  16. Gravatar of Benjamin Cole Benjamin Cole
    21. April 2012 at 10:01

    “In a few years their (WSJ) predictions will look rather silly.”—Scott Sumner.

    They look silly right now. Worse, they lack civic responsibility, intellectual curiosity, statesmanship, character, and integrity.

    To write op-eds for the WSJ, I guess you have to wear a dunce cap with blindfold.

    The WSJ, once a pillar of business journalism and often astute purveyor of conservative sentiments, has marginalized itself into the Fox news crowd.

  17. Gravatar of Mike Sproul Mike Sproul
    21. April 2012 at 10:03

    Scott:

    When the central bank won’t buy back its money, or will only buy it back at a reduced rate, then that’s a partial default, and the effect looks similar to counterfeiting. For example, if the central bank’s net worth=0, then the dollar would lose 2% of its value if:
    1) the central bank devalued 2%
    2) the central bank lost 2% of its assets
    3) the central bank issued 2% more dollars and got no new assets in exchange
    4) Counterfeiters increased the money supply by 2%

    But if the central bank’s assets exceed its liabilities by at least 2%, so that its net worth is positive, then only #1 above would cause the dollar to lose value. The others would not affect the dollar’s value.

  18. Gravatar of Major_Freedom Major_Freedom
    21. April 2012 at 10:17

    ssumner:

    “In the 20th century, the economists of the Austrian school built upon this fact as their central monetary tenet. Ludwig von Mises and his students demonstrated how an increase in money supply is beneficial to those who get it first and is detrimental to those who get it last.”

    This is not correct. If I sold some bonds to the Fed at market prices, I would not benefit.

    But that’s just it, the bonds are not sold to the Fed at “market prices.” They are necessarily sold at above market prices, for the simple fact that with the Fed creating new money to buy the bonds, they are bringing about an increased nominal demand as such, and because of that, the initial receivers get MORE money than they otherwise could have gotten had they been compelled to sell their bonds in the open market that did not have a Fed creating new money, and thus selling those bonds into LESS nominal demand.

    An unanticipated monetary injection helps debtors and hurts creditors, by raising the price level and NGDP. However, during the past 3 and 1/2 years inflation has been lower than any time since the mid-1950s, and NGDP has grown at the slowest rate since the 1930s, so obviously that’s not an issue right now.

    Sorry, but the Cantillon effect is ubiquitous. It does not disappear if “aggregate spending” doesn’t rise by as much as you would want it to, nor does it disappear if price inflation doesn’t rise by as much as it did in the recent past.

    Even if every last cent of monetary “injection” is anticipated by everyone, which by the way never happens and is therefore sufficient to refuting your whole line of thinking, even if it were anticipated by everyone, there would STILL be beneficial to those who receive the new money first and detrimental to everyone else. The problem of wealth transfer does not arise due to information asymmetries. It arises due to the physicality of the monetary system, of who gets the new money first, who gets to spend it first, before others can physically increase their demand because they physically haven’t gotten the new money yet as it has not yet been spent and respent enough times to get to them.

    Even if I know 100% that you are going to get a check from the Fed for your treasury bond, which by the way will have a higher price than otherwise if there is a money creator standing ready to buy them, I am powerless to do anything to prevent you from gaining at the expense of myself and everyone else. I cannot sell my goods and services for higher prices, because I have to sell into a demand that currently exists, not the demand that is going to be boosted by your subsequent spending in the future. My income is limited to the demand that currently exists, and because your demand is going to be boosted by the money creator, above what it otherwise would have been if you were instead compelled to selling your bond into the current demand without the Fed, it follows that you are going to get an increase in income due solely to the money printing, that nobody else can benefit from, since they are constrained to the smaller demand.

    In short, those who sell their goods/securities to money printers are not as constrained in what they can fetch, as compared to what their constraints would have been had they sold their goods/securities into a market without money printers. This is the case even if everyone knows exactly what is going on. People cannot overcome the physical limitation of not having primary ownership of new money, merely be becoming aware of it. Knowledge alone isn’t enough. It’s the physicality of money transfers that matters.

    Rothbard was a praxeologist, a scientist of human action, as were a number of classicals before him, although they were not self-aware or explicit in this respect. Rothbard (through Mises) noticed praxeological phenomena that even Hayekians could not grasp in their “knowledge problem” framework.

    It is akin to counterfeiting, but the counterfeiter is the federal government, who earns inflation tax revenue, and the victims are the holders of non-interest bearing currency, who see its purchasing power fall.

    This admission you just made completely contradicts your first paragraph where you denied it happens. Before you said that inflation does not benefit the initial receivers at the expense of later receivers. Now you are saying that inflation generates gains for the state, who acquire inflation tax revenues, and generates losses for victims, who own non-interest bearing currency. That is exactly what Rothbard and Mises were referring to when they said that inflation is beneficial to the initial receivers (the state, banks) and detrimental to everyone else (those who receive the new money last, meaning those who make do with their non-interest bearing currency balances.)

    But the recent injection of “money” is mostly interest-bearing reserves, so the government is not gaining from “counterfeiting,” rather it is exchanging one interest-earning asset for another.

    The banks are still gaining at the expense of others, because if the Fed did not inflate the money supply with interest bearing reserves, the banks would have been compelled to selling their assets into a market with far less cash presented as demand. That would have bankrupted most of the major banks. Since there is no such thing as a free lunch, the costs of this interest bearing reserve bailout fell on those NOT the banks, i.e. those who did not receive these interest bearing reserve bailouts.

    In any case, Rothbard’s point actually disproves the previous assertion. It’s not who gets it first that gains; it’s who sells it first, after producing the currency at near-zero cost.

    It’s actually a graduated scale of gains and losses. The very first person or people to “sell” the new money gain THE MOST, because they can buy goods that are priced given the current supply of money. Even if they announce to the world that they are going to print and spend $100 billion, there is nothing that everyone else can do to avoid incurring losses. It is physically impossible for people to all raise their sales for the goods and services they are selling if the additional money doesn’t actually exist yet and thus cannot be used in exchanges to support the additional sales requests. 100 million people cannot all ask for higher revenues just because a money printer announces that he is going to increase future revenues by inflation. No, those 100 million people are constrained to asking for revenues that are in line with the current money supply, which is at this time lower, and they are constrained to asking for sales revenues that are in line with current cash balances, which are at this time lower.

    Once the creator of money actually creates and “sells” the new money, then what happens is that the next person or group of people, who themselves were exploited somewhat by the money printer, nevertheless gain at the expense of everyone else other than themselves and the money printer. For now, cash balances are higher, and thus prices for goods/securities as such are somewhat higher than they otherwise would have been, and yet a substantial portion of the population are still constrained to their current cash balances that have not yet increased because they have not yet dealt with anyone who dealt with the money printer. So they still lose while the second in line gains. After the second in line parties “sell” the new money, the same thing occurs as before, only the gain is somewhat less, and the loss is somewhat less. The gains shrink as more and more prices rise from party to party exchanges, and the losses shrink as more and more people come into ownership of the new money as it spreads throughout the economy.

    This is the case even if everyone knows exactly what is going on.

    So if we then consider the real world, where most people don’t even understand the monetary system, and where even those who go to school are still clueless because they are taught by misguided agenda driven economics professors, the gains and losses are even more pronounced, because there will be many people who COULD have asked and gotten a higher price for the goods and services they sell, but don’t, because they don’t know to ask for more. It’s like a sucker dealing with Goldman Sachs and being told by Goldman “We cannot buy at a higher price because we are at risk of bankruptcy, and there is a liquidity crisis, etc”, but meanwhile, Goldman is the recipient of multibillion backdoor bailouts from the Fed, and could have sold at higher price, or, for corporate raiders, or debtholder covenant owners, would have been compelled to sell ownership.

    Here the author is confusing increases in the monetary base that accommodate increases in the demand for liquidity, with exogenous increases in the money supply that drive up prices via the hot potato effect.

    No. The author is not talking about that here. You’re comparing apples and oranges. You are confusing inflation of the money supply leading to prices not rising over time with inflation of the money supply leading to prices being higher than they otherwise would have been had there been no inflation of the money supply, which we may observe as prices not rising over time.

    You fallaciously believe that when people desire more cash, that they are somehow just wanting more cash and not more purchasing power. In reality, when people want more cash, they want more purchasing power. You are going backwards. You believe that because the end point of a general desire for more cash and more purchasing power is a higher ratio between prices and cash balances, that you can just skip the middle steps, and go right to increasing people’s cash balances and leave prices unchanged.

    So you believe that instead of people starting with a 100 cash to 400 price level, and contemplating people wanting to increase the purchasing power of their money such that cash to price level is 50%, you believe that inflation of the money supply should be the answer. Instead of no inflation, and seeing things change to 100 cash and price level 200, you want the Fed to inflate the money supply such that we get 200 cash to 400 price level. That way, prices don’t have to change, people have the higher purchasing power they want, and no unemployment or fall in output is necessary, and it can all be nice and smooth and stable and nice and stable and nice.

    There’s just one problem with that: The only way that everyone’s cash balances can increase by 100 in total, is THROUGH exchanges of person to person trades. If there is a GENERAL desire to increase purchasing power, then putting more money into exchanges works directly against increasing purchasing power. “Demand” is not some ephemeral floating abstraction that exists apart from individual to individual exchanges.

    If there are 100 people in the market, and they all want to increase their purchasing power, then should inflation enter this market in one person’s pocket first, then it is absurd to believe that everyone’s cash balances can rise without making prices rise. This is because the only way that every individual’s cash balance can rise is by each of them increasing their own nominal sales. They can’t all raise their cash balances by maintaining existing prices and just holding onto more of the money they earn. If everyone is making more sales revenues, and their supply is of course constrained to their physical productivity, then the ONLY conduit by which cash balances can increase is by higher prices.

    Those 100 people have a given supply of labor, of goods and services, and so the only way they can all increase their cash balances is through exchanges, i.e. by the prices of those things rising. And when that happens, their desire for more purchasing power is nullified, because while they have higher cash, it came at the cost of higher prices.

    The common error market monetarists make is to assume that a general desire for increased purchasing power is really nothing but some people’s desire for more cash, which can be satisfied by others reducing their cash.

    Milton Friedman said ultra-low rates were a sign that money has been tight.

    Never reason from interest rates!

    Ultra low rates MIGHT be a sign money is tight, but in our economy, it’s a sign that money is loose, because the Fed has to create new reserves to hold down the fed funds rate.

    Spitznagel suggests monetary policy has been very expansionary. Given the very low inflation over the past three and a half years, it’s pretty obvious who’s right. It’s too bad the Wall Street Journal has abandoned the ideas of Milton Friedman. In a few years their predictions will look rather silly.

    Very low inflation? Monetary inflation of M2 is 10% yoy. Price inflation is 3.5% for retail goods.

    The last 3.5 years saw massive fed inflation, but low credit expansion. The Fed can’t force the banks to lend.

  19. Gravatar of James James
    21. April 2012 at 10:45

    Scott,

    I have no disagreement over what happens to long term bond prices due to inflation expectations. My original comment was about the specific transactions between the open market desk and primary dealers.

    In that transaction, the Fed must pay more than the next highest bidder or the primary dealer would sell to that next highest bidder. The difference between what the open market desk pays and what the next highest bidder is willing to pay is a transfer from the open market desk to the primary dealer.

    When the Fed then remits the interest payments on those bond to the Treasury, that is another transfer from people with less influence over federal spending to people with more influence over federal spending.

    I’ll say this another way. An activity can only do some combination of four things: create wealth, destroy wealth, redistribute wealth, or not affect wealth. Which of these do you think is the outcome of open market operations?

  20. Gravatar of dwb dwb
    21. April 2012 at 10:51

    mf,
    thats theology. any fool can cut and paste what somebody else wrote. to last in the meritocracy of ideas requires evidence not made up fiction. you keep repeating the same nonsense like we have not read it. no mattet how mamy times you repeat gibberish, its still unsubstantiated gibberish.

  21. Gravatar of dwb dwb
    21. April 2012 at 11:08

    @james,
    no: securities are auctioned. more securities are typically tendered than the fed purchases or sells. the actual amount auctioned (several billions) is minuscule compared with the total trading volume of treasuries and agencies.

    The auctions are announced in advance, and dealers have to buy securities to tender into the auction, no fool would sell them to a dealer knowing the dealer is selling them to the fed at a higher price.

    http://www.newyorkfed.org/markets/omo/dmm/temp.cfm?SHOWMORE=TRUE

  22. Gravatar of dwb dwb
    21. April 2012 at 11:10

    @james,
    and the total market for securities is trillions.

    http://www.dtcc.com/products/fi/gcfindex/

    as Scott said, other forces (like inflation expectations are bigger drivers of long term bond prices).

  23. Gravatar of Negation of Ideology Negation of Ideology
    21. April 2012 at 12:06

    Mike Sproul has the best comment on this thread.

    “Central banks are not counterfeiters. Counterfeiters don’t put their name on their money …”

    I am all for debating whether a particular central bank is issuing too much or to little currency. But calling it counterfeiting is incorrect – that is a fact not up for debate.

    According to Websters:

    http://www.merriam-webster.com/dictionary/counterfeit

    counterfeit – “made in imitation of something else with intent to deceive”

    When the Board of Directors of a corporation has an IPO is it “counterfeiting” its own stock? The Central Bank lawfully issuing currency is not counterfeiting its own notes either.

  24. Gravatar of marcus nunes marcus nunes
    21. April 2012 at 12:06

    For the “Record”
    This must be a record of sorts. Major_Freedom´s comment has 2215 words. Scott´s post has a paltry 519 words!

  25. Gravatar of Negation of Ideology Negation of Ideology
    21. April 2012 at 13:27

    Marcus,

    I didn’t actually read Major’s dissertation(I doubt anyone did). I hit page down a few times, saw the words “In short”, chuckled to myself, then paged down a few more times.

    Is it a record to use the words “In short” in the middle of a 2215 word comment?

  26. Gravatar of Ron Ronson Ron Ronson
    21. April 2012 at 13:59

    “Milton Friedman said ultra-low rates were a sign that money has been tight. Spitznagel suggests monetary policy has been very expansionary. Given the very low inflation over the past three and a half years, it’s pretty obvious who’s right.”

    Is it no possible that:

    1) The money supply is expanding and giving the benefits to those who receive the money first just like the referenced post says. Just because there is low inflation doesn’t mean people aren’t benefiting.

    and

    2) Monetary policy is nevertheless still tight as the increase in money supply still is not sufficient to address the NGDP-gap?

    I was thinking about this article in the context of the recent Steve Keen discussion. MMist typically call for NGDP to rise 5% a year (2% inflation plus 3% to accommodate RGDP growth). If velocity is constant then this will a 5% increase in the money base. They tend to assume that this will enter the economy with no distortionary effects. Is that a realistic assumption ?

    – If it enters the economy via the CB setting IRs low enough then banks will create the new money via loans. The debt ratios will go up just as Keen suggests and eventually cause the problems he suggests

    – If it enters via OMO (the fed buying treasuries) then this would give the govt sector a free lunch. (The treasury sells bills to the fed who pay for it with some of the 5% of new money created. The govt sector is essentially printing money to buy stuff with).

    I apologize if this is tangential to the post but these things are my mind. Am I missing something about the way the money supply is increased or why it would not be harmful ?

  27. Gravatar of Mike Sax Mike Sax
    21. April 2012 at 14:29

    Got to agree with Marcus and Negation, Major. Whatever your virtues may be they are not brevity and concision. Of course this post was bound to get you going as you are such an inflation phobe

  28. Gravatar of Mike Sproul Mike Sproul
    21. April 2012 at 14:49

    Ron:

    “If it enters via OMO (the fed buying treasuries) then this would give the govt sector a free lunch.”

    That’s why the quantity theory of money should bother you—because it implies a free lunch. That’s the hallmark of a bad economic theory. The backing theory of money implies no such free lunch.

  29. Gravatar of Major_Freedom Major_Freedom
    21. April 2012 at 15:03

    dwb:

    thats theology.

    No, it’s quite secular.

    any fool can cut and paste what somebody else wrote.

    I didn’t copy and paste a single word from anyone. I just quoted passages to provide context for my responses.

    to last in the meritocracy of ideas requires evidence not made up fiction.

    Then stop making things up and stop writing fiction.

    you keep repeating the same nonsense like we have not read it.

    You keep responding with the same nonsense like I have not read it.

    no mattet how mamy times you repeat gibberish, its still unsubstantiated gibberish.

    You keep repeating that it is gibberish, and yet you have not yet backed that claim up with substantive arguments that show how or why it is gibberish.

    You’re just being antagonistic because you can’t respond with informed knowledge.

  30. Gravatar of Major_Freedom Major_Freedom
    21. April 2012 at 15:07

    marcus nunes:

    For the “Record”

    This must be a record of sorts. Major_Freedom´s comment has 2215 words. Scott´s post has a paltry 519 words!

    Trust me, this is not anywhere close to my record. One time I wrote a response that got close to 10000 words.

    Negation of Ideology

    I didn’t actually read Major’s dissertation(I doubt anyone did). I hit page down a few times, saw the words “In short”, chuckled to myself, then paged down a few more times.

    Is it a record to use the words “In short” in the middle of a 2215 word comment?

    It’s quite common. It just summarizes the preceding paragraphs.

    Why are you two so unable to address comments and arguments, and you feel compelled to focusing on form instead? Are you just not that fast at reading? When Sumner writes a long blog post, I personally like it, because it goes further in depth than the brainless talking points you guys keep pelting.

  31. Gravatar of Major_Freedom Major_Freedom
    21. April 2012 at 15:09

    Mike Sax:

    Got to agree with Marcus and Negation, Major. Whatever your virtues may be they are not brevity and concision. Of course this post was bound to get you going as you are such an inflation phobe

    I am not an inflation phobe. I just recognize the destruction it unleashes that you inflation fetishists don’t bother dealing with.

  32. Gravatar of Major_Freedom Major_Freedom
    21. April 2012 at 15:11

    Ron Ronson:

    “Milton Friedman said ultra-low rates were a sign that money has been tight. Spitznagel suggests monetary policy has been very expansionary. Given the very low inflation over the past three and a half years, it’s pretty obvious who’s right.”

    Is it no possible that:

    1) The money supply is expanding and giving the benefits to those who receive the money first just like the referenced post says. Just because there is low inflation doesn’t mean people aren’t benefiting.

    and

    2) Monetary policy is nevertheless still tight as the increase in money supply still is not sufficient to address the NGDP-gap?

    Yes! At last someone on this board is thinking correctly. This point is an excellent one. NGDP can be collapsing, and yet the Cantillon effect persist, as the physical mechanics of it are not eliminated by virtue of the dynamics of some aggregated statistic that pretends to be an object of action.

  33. Gravatar of Cassander Cassander
    21. April 2012 at 15:14

    “Printing money benefits those who do the printing,” and “We need to do more printing” are not contradictory concepts. And it seems to me that having the fed mail everyone checks would be much more stimulative and much fairer than buying bonds.

  34. Gravatar of flow5 flow5
    21. April 2012 at 15:23

    “Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession. And there’s nothing that policy makers can do to head it off”

    Why aren’t you trumpeting “target nominal gDp” right now???? This is your chance to be proactive.

    ==================

    “Milton Friedman said ultra-low rates were a sign that money has been tight”

    Discussions of interest, especially short-term rates, are usually couched in terms of the “money market”. As long as this is just a “street-wise” expression confined to the business community, no harm is done. Unfortunately, under the influence of the Keynesian dogma, academicians have been trying for too long to analyze interest rates in terms of the supply of and demand for money. A “liquidity preference” curve is presumed to exist which represents the supply of money. In this system interest is the cost which must be paid, if lenders are to forgo the advantages of liquidity. All of this has little or nothing to do with the real world, a world in which interest is paid on checking accounts.

    Interest, as our common sense tells us, is the price of obtaining loan funds, not the price of money. The price of money is the inverse of the price level. If the price of goods and services rises, the “price” of money falls. Interest rates in any given market at any given time are the result of the interaction of all the forces operating through the supply of and the demand for, loan funds.

    Loan funds, of course, are in the form of money, but there the similarity ends. Loan funds at any given time are only a fraction of the money supply — that small part of the money supply which has been saved, and is offered in the loan credit markets. Unfortunately, Keynesian economists have dominated the research staffs of the Fed as well as the halls of academia.

    While monetary policy is formulated by the Federal Open Market Committee (FOMC), monetary procedures are determined by the “academic” research staffs. In their world, high interest rates are evidence of “tight money”, low rates of “easy money”; and, a proper rate of growth of the money supply is obtainable by manipulating the federal funds rate. Consequently, to bring interest rates down the money supply should be expanded and vice versa.

    The only instance in which an expansion of the money supply is synonymous with an increase in the volume of loanable funds involves an expansion of commercial bank credit. When the depository institutions make loans to, or buy securities from, the non-bank public an equal volume of new money (demand deposits) is created. This expansion is made legally possible by a growth of legal reserves (& excess reserves or the bank’s clearing balances) in the banking system, which in tern is the consequence of net open-market purchases by the Reserve banks.

    To increase the volume of legal reserves in the member banks, the Fed buys governments, (usually T-Bills) in the open market in sufficient quantity to more than offset all legal reserve consuming factors (e.g., the withdrawals of currency from the banks by the non-bank public). These purchases tend to increase the price of bills, thus reducing their discounts (interest rates). The incremental reserves also add to excess reserves thus enlarging the supply of “federal funds”. Federal funds rates are thus held down, or are prevented from rising.

    The long-term effects of these operations on short-term rates are just the opposite. The banks are able to (and do) expand credit on a multiple basis relative to the additional excess reserves. This “multiplier effect” on the money supply, and money flows, puts additional upward pressure on prices. The long term effect, therefore, is higher inflation rates, and a higher “inflation premium” in both short and long-term interest rates.

    Higher interest rates consequently are not evidence of “tight money”; rather they are the consequence, over time, of an excessively easy (irresponsible) money policy – money expansion so great that monetary flows (MVt) substantially exceed the rate of expansion in real output.

    While interest rates are not determined by the supply of and the demand for money, changes in thee volume of money and monetary flows (MVt), as noted above, can alter rates of inflation and, therefore, the supply of and the demand for loan-funds.

    The significant effects of these monetary developments are long-term and involve an alteration in inflation expectations. Inflation expectations operate principally through the supply side for loan-funds. Specifically, an expectation of higher rates of inflation will cause the supply schedules of loan funds to decrease. That is to say, lenders will be willing to lend the same amount only at higher rates.

    Under the assumption of increasing rates of inflation, the supply of loan funds would decrease in both a quantitative and schedule sense. That is to say, lenders reduce the volume of loan funds offered in the markets and refuse to loan any particular volume of funds except at higher rates.
    At the same time supply is decreasing, the demand for loan funds can be expected to rise as a consequence of the expected massive increases in federal deficits. With supply decreasing and demand increasing (in the schedule sense), there is only one way for interest rates to go – up.

  35. Gravatar of Negation of Ideology Negation of Ideology
    21. April 2012 at 16:17

    Ron –

    “If it enters via OMO (the fed buying treasuries) then this would give the govt sector a free lunch. (The treasury sells bills to the fed who pay for it with some of the 5% of new money created. The govt sector is essentially printing money to buy stuff with).”

    This is no different than Microsoft issuing shares to buy out another company. It is essentially printing stock to buy stuff with. What is puzzling is why anyone would object to this. Shouldn’t everyone favor governments delivering services at the lowest cost? I’m not sure how that qualifies as a free lunch. The alternative is for the Fed to give new currency to some favored group(such as bankers or gold miners) and then borrow its own currency abck from that group at interest. It’s hard to imagine a more foolish policy.

    Cassander –

    “And it seems to me that having the fed mail everyone checks would be much more stimulative and much fairer than buying bonds.”

    The Fed would probably have to lend everyone money so it has the ability to reduce the monetary base later. Then you’d have to deal with the issue of defaults. Or the Fed could lend money to the Treasury and Congress could give tax rebates.

  36. Gravatar of James James
    21. April 2012 at 16:59

    dwb,

    So far as I understand, the primary dealers that the Fed deals with are all profit seeking organizations. They operate with the intention to enter only into transactions which are profitable.

    Why, according to you, are they willing to tender large amounts of securities to the open market desk?

  37. Gravatar of Ron Ronson Ron Ronson
    21. April 2012 at 17:57

    Negation of Ideology,

    I suppose if you support the idea of government spending and think they will use this power wisely then financing by printing rather than taxation is not a big deal (especially if they are targeting something sensible like NGDP).

    If you do not like the idea of government spending because you think that it distorts the economy and do not trust the government to be restrained then allowing the government to print and spend may not seem so great of an idea.

  38. Gravatar of Major_Freedom Major_Freedom
    21. April 2012 at 18:43

    Propagation of Ideology

    “If it enters via OMO (the fed buying treasuries) then this would give the govt sector a free lunch. (The treasury sells bills to the fed who pay for it with some of the 5% of new money created. The govt sector is essentially printing money to buy stuff with).”

    This is no different than Microsoft issuing shares to buy out another company. It is essentially printing stock to buy stuff with. What is puzzling is why anyone would object to this. Shouldn’t everyone favor governments delivering services at the lowest cost?

    How in the world can you classify my cash balance and nominal income declining in purchasing power a “service” to me? It’s not my service. I am in service of those who print money because I am producing real wealth while they’re just buying it without producing real wealth of their own.

    I’m not sure how that qualifies as a free lunch.

    You can easily see it’s a free lunch by virtue of the fact that the state arrests and imprisons counterfeiters of money. If it’s a “service” that money is printed, then you and the state and everyone else should welcome anyone to print money.

    The alternative is for the Fed to give new currency to some favored group(such as bankers or gold miners) and then borrow its own currency abck from that group at interest. It’s hard to imagine a more foolish policy.

    Another alternative is for the Fed to send checks to every individual in the country, and not just a favored group.

    Note that issuing new stock and printing money are not the same. The difference is that stock is not money. Microsoft shares are not universally medium of exchange backed by legal tender laws.

    Your analogy would only work if Microsoft shares were forced by law as legal tender, so that everyone must pay the state taxes in the form of Microsoft stock, and then Microsoft issues new shares, but only to a select few people, and not everyone, which of course dilutes the value of the shares that everyone else owns.

    Cassander

    “And it seems to me that having the fed mail everyone checks would be much more stimulative and much fairer than buying bonds.”

    Bingo. Of course if the Fed did do this, it would completely nullify WHY the Fed was created in the first place, which is to enable the banks and the Treasury to gain at the expense of everyone else. If everyone got checks, then the banks and the Treasury would no longer be able to gain at the expense of everyone else, and inflation would eventually be seen as completely useless.

    Propagation of Ideology:

    The Fed would probably have to lend everyone money so it has the ability to reduce the monetary base later.

    That’s not necessary. The Fed can just sell shares in the Fed. Everyone can sell their cash to the Fed in exchange for stock that pays 6% dividends on Fed profits. Or they can sell Treasury debt. Or mortgage backed derivatives. Or the IRS can just raise taxes to take liquidity out of non-IRS cash balances.

    Then you’d have to deal with the issue of defaults.

    No different than today.

  39. Gravatar of pyroseed13 pyroseed13
    21. April 2012 at 19:20

    As someone who is also a recovered Austrian, I really don’t understand how these crackpot ideas about monetary policy continue to fester. The efficient market hypothesis and rational expectations assumption fundamentally dismantle the Austrian Business Cycle theory. Given that the theory itself makes the robust claim that Fed booms always lead to busts, I would like such a claim to be falsifiable, not reliant on a-priori reasoning and praxeology.

    Also, have Austrians made any attempt to study the presence of ABCT in other countries? They seem to only cite U.S. recessions, weakly I might add, as evidence for their boom-bust cycle. I’ve heard Austrians claim that the ABCT does not explain the Great Depression, so it seems that even some of them are uncertain about where their theory is applicable.

  40. Gravatar of Bonnie Bonnie
    21. April 2012 at 20:41

    MF:

    If we were on a gold standard and started discovering new deposits all over the place, having another gold rush, it would be the same concept. The gold mine owners would get the “new money” first while having more of it around in circulation would eventually lower the market value. Same problem, few hands getting it first until it circulates out. It is nothing inherent to the Fed with fiat money.

    And I did it all in 71 words, not counting this last sentence.

  41. Gravatar of Mike Sax Mike Sax
    21. April 2012 at 20:58

    Major if you’re not an iflation who is? We have very little inflation right yet you like the WSJ editorial page see inflation around every corner.

  42. Gravatar of Philo Philo
    21. April 2012 at 21:02

    Miscellaneous comments:

    “If I sold some bonds to the Fed at market prices, I would not benefit.” Well, you *might* benefit; indeed, a very plausible explanation of your voluntarily selling the bonds is that you thought you *would* benefit.

    (Spitznagel:) “if everyone counterfeited in proportion to their wealth, there would be no real economic benefit to anyone.” Shouldn’t he have said: “. . . in proportion to their holdings of currency . . .”?

    “It’s not who gets it first that gains; it’s who sells it first . . . .” Providing the “seller” is dealing with people whose expectations of inflation have not yet adjusted to the increased money supply (so that their prices are sticky).

    “It’s too bad the Wall Street Journal has abandoned the ideas of Milton Friedman. ” I take it this op-ed is typical of what they publish (I don’t read the WSJ, and this example does not encourage me to start).

  43. Gravatar of Major_Freedom Major_Freedom
    21. April 2012 at 21:09

    Bonnie

    If we were on a gold standard and started discovering new deposits all over the place, having another gold rush, it would be the same concept.

    No, it would be different in many key respects. One, ANYONE would be in principle capable of procuring gold out of the ground himself, so there would be no systematic bias in favor of bankers. Two, the rate of gold discovery is far more stable and gradual than fiat money, so the hypothetical of a massive gold discovery is far rarer than the Fed clicking a few keyboard keys to give money to their friends. Three, a gold standard would put a far greater restraint on states spending money as compared to a fiat standard. With gold, they can’t just print it at virtual zero cost. Four, and most importantly, there is no moral hazard built into the gold standard as there is with fiat. The mere existence of a money printer alters economic behavior (for the worse).

    The gold mine owners would get the “new money” first while having more of it around in circulation would eventually lower the market value.

    You’re right. But I’m glad you at least admit this occurs with fiat money. Even Sumner fails to comprehend this.

    Same problem, few hands getting it first until it circulates out. It is nothing inherent to the Fed with fiat money.

    Oh but it is, because there are no systematic favorites with a gold standard.

    And I did it all in 71 words, not counting this last sentence.

    And funny enough, they are all just parroted talking points that are easily refuted. Imagine that!

    Mike Sax

    Major if you’re not an iflation who is?

    I don’t know what that means.

    We have very little inflation right yet you like the WSJ editorial page see inflation around every corner.

    We do not have very little inflation. M2 is increasing at 10% YoY. Retail prices are increasing 2.5%. Producer prices are even higher.

  44. Gravatar of Bonnie Bonnie
    21. April 2012 at 21:45

    MF:

    I meant, it is nothing inherent only to the Fed with fiat money.

    Come to think of it, this is what bothers me about many of the so-called Austrians. Applying this concept to the Fed in such a focused manner stretches the truth around like taffy and seems more like anti-Fed propaganda than anything resembling intellectual honesty.

    If you really wanted to get rid of the Fed, you would use the information Sumner has here, the closest thing to the truth I have found, and shout it from the roof tops, letting everyone know its dereliction in management of the money monopoly is responsible for the severity of the crash, it knows its responsible for it and refuses to do anything about it while more and more people are financially destroyed every day. You don’t have to agree with the system or Sumner’s proposal to talk about what has happened over the last few years to convince folks that they have been directly hurt by what has taken place, and get them torqued off at the truth rather than vague fictions that only confuse them. If you have a goal to reach, reach it. But of course, you have to have that as a goal in the first place, and in your case, it appears highly highly questionable.

  45. Gravatar of Bonnie Bonnie
    21. April 2012 at 22:24

    MF:

    I don’t think you did refute my statement.

    Having the Fed give the money to bankers isn’t materially different because of two reasons; 1) The Federal government owns quite a sizable portion of the land including the mineral rights; 2) most land owners do not own the mineral rights.

    You make assumptions about gold that may or may not be true. We don’t know how much of it there is, only what has been found.

    If your point is that it is unlikely to happen as fast with gold as with the fiat money, that is probably correct in general, but the argument that was made was that this phenomenon is in specific case to the Fed and fiat money. Faster or slower doesn’t make it specific to either. The speed is an entirely different argument than one you made, and it neglects the dynamics of the demand for money as to whether and how much the price level is affected.

  46. Gravatar of Dtoh Dtoh
    22. April 2012 at 01:52

    There is a fundamental misconception of the way the primary broker dealers operate. There is no guaranteed profit by tendering to the fed. You may have bought notes in anticipation of the tender but then because of market conditions, you may have to tender at a price below what you paid. You may go short in a tender hoping to cover at a lower price later on but not be able to so. Your offer in the tender may be too high leaving you with a long position which you have to sell. The market is very open and transparent, virtually anyone can make these same bets with almost no transaction costs. The advantage of being a primary broker dealer is minuscule.

    Also I don’t get this argument about the magical value of getting the money first. The money could easily change hands a dozen times on the same day the tender takes place. Whoever ends up with the money is typically whoever was a net seller of notes…not likely the broker dealers…more likely my mother, or Ford Motor Credit or the Saudi Arabian Monetary Authority, or some state employees’ pension plan.

    Instead of making these claims about mystical benefits to the bankers, people should take a look at the actual mechanics of who is buying and selling what and who makes money.

  47. Gravatar of todd todd
    22. April 2012 at 04:51

    Bonnie,

    The unexpected discovery of gold at a random point in the business cycle and long-run growth path is quite a bit different than the deliberate introduction of new fiat currency in a recessionary environment. The difference in the perceived ability to control increases in the monetary base would seem to point to different behavioral responses. If we assume that we don’t know how much gold exists or when it will be discovered and extracted, I doubt that people will not attempt to coordinate their economic activities with the quarterly reports of mining executives the way they do with the minutes of the Fed meetings.

  48. Gravatar of Brito Brito
    22. April 2012 at 06:10

    “so there would be no systematic bias in favor of bankers.”

    No, instead there would be a systematic bias in favour of precious metal mining conglomerates, who are half the time are not even based in the home country.

  49. Gravatar of Rien Huizer Rien Huizer
    22. April 2012 at 06:30

    Scott,

    Heartwarming that the WSJ (now a Murdoch paper -should I say more) is now in economic hibernation mode.

    For all the embedded common sense in Austrian Economics, they assert, correctly, that economics cannot be more than an assumption based exercise. As such it is interesting, but useless in a world where politics needs an economics discipline that supports public policymaking in democracies. Elitists like the original Austrians were intellectually respectable and Viennese. But no politician in the 20 and 30s would entertain their ideas. Which they must have found entertaining.

    The current generation of US Austrians have taken this stuff out of context: whereas the original Austrians cannot have believed that anyone would ever base economic policymaking on their ideas (and they did not care too much for mass democracy anyway) these people campaign for completely impractical types of gvt action (or inaction). That the WSJ has time for Austrians signals only one thing, they have no idea in which direction they should bias their op-eds right now. Maybe their boss really believed Santorum had a chance..

  50. Gravatar of dwb dwb
    22. April 2012 at 07:34

    @james,
    So far as I understand, the primary dealers that the Fed deals with are all profit seeking organizations. They operate with the intention to enter only into transactions which are profitable.

    Why, according to you, are they willing to tender large amounts of securities to the open market desk?

    The short answer is that a bank or investment bank wants to be a primary dealer mainly because it gives them market access and allows them to give “full service” clients (which is where the the real money is). Open market operations are not profit centers, in fact there are a lot of obligations being a primary dealer.

    Among them, NY Fed *expects* primary dealers to participate in treasury auctions and open market operations. One of the things the NY Fed reviews is the ability to consistently do this. There are other obligations as well, like providing market color and reporting to the NY Fed.

    Treasury and open market auctions are competitive, and the result is not known beforehand (if someone does leak it, they can go to jail). Dealers submit bids but do not know if they will be awarded anything. Also: my recollection is that dealers are allowed to go short into the auction, to keep it honest, as long as they cover in the market in time to deliver the securities. Dealers have been caught short and lost money.

    Generally, the price that clears the auction is close to market.

    Here are some relevant excerpts from the NY Fed Operating Policy: http://www.ny.frb.org/markets/pridealers_policies.html

    The New York Fed expects a primary dealer to:

    participate consistently as counterparty to the New York Fed in its execution of open market operations to carry out U.S. monetary policy pursuant to the direction of the FOMC;
    provide the New York Fed’s trading desk with market commentary and market information and analysis helpful in the formulation and implementation of monetary policy;
    participate in all auctions of U.S. government debt; and
    make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account holders.

    In its ongoing evaluation of a primary dealer’s performance against these expectations, the New York Fed will look to the amount of business of various types actually transacted and the quality of the firm’s participation along with the quality of the market commentary it provides to the New York Fed. Specifically, in evaluating participation in the New York Fed repo operations, the New York Fed will expect a primary dealer to bid in every operation commensurate with its size, and its bid rates should be reasonable when compared to the range of rates in the market, taking into account market volatility and other risk factors. In other open market operations, the New York Fed will expect a primary dealer to bid, or otherwise participate, in operations at levels commensurate with its size and presence in the market.

    Primary dealers that do little business with the New York Fed over a period of time, that repeatedly provide bids and offers in the New York Fed operations or Treasury auctions that are not reasonably competitive, or that fail to provide useful market information and commentary, are not meeting the New York Fed’s expectations of a primary dealer. In those situations, the New York Fed may limit a primary dealer’s access to any or all of the primary dealer facilities or operations, and may suspend or terminate a primary dealer if it continues to fail to meet these business standards.

  51. Gravatar of Jeff Jeff
    22. April 2012 at 07:36

    Spitznagel’s first point, alleging that the Fed overpays for the securities it buys, is just silly. In every voluntary transaction, the buyer values the thing bought more than the seller does, else the transaction wouldn’t take place. This is not “overpayment”, it’s just normal, everyday transacting.

    His story about how Fed-initiated changes in interest rates happen is also wrong. If the Fed wants to lower the funds rate from 3 percent to 2 percent, it issues an announcement to that effect and directs the NY Fed to make it so. And, like magic, before the NY Fed does anything at all, the rate drops to the new 2 percent level immediately. It’s what Nick Rowe calls the Chuck Norris effect: Everyone in the market knows that the NY Fed can make the new rate stick by loaning unlimited amounts of money it creates on the fly, so they immediately take this into account when calculating what rates they themselves are going to offer and/or accept. There is no interval in which some favored insiders get to borrow from the Fed at 2 percent while everyone else is paying 3 percent.

  52. Gravatar of ssumner ssumner
    22. April 2012 at 07:41

    Morgan, Didn’t they buy GSE debt that was already guaranteed by the Treasury? That’s effectively Treasury debt.

    Ben, Yes, we already know the predictions will fail.

    Mike, You can call it “partial default” I call it normal fiat money monetary policy. The point is that OMPs were very inflationary during the 1960s and 1970s, and not because of budget deficits (which were small.)

    MF, No, they are bought at market prices.

    James, You said;

    “I’ll say this another way. An activity can only do some combination of four things: create wealth, destroy wealth, redistribute wealth, or not affect wealth. Which of these do you think is the outcome of open market operations?”

    The answer is simple. OMOs that move NGDP closer to a stable growth path create wealth. Those that don’t destroy wealth. It makes no difference whether the OMO raises or lowers the monetary base.

    Negation, I just meant the impact on the price level was the same.

    Marcus, You said;

    “This must be a record of sorts. Major_Freedom´s comment has 2215 words. Scott´s post has a paltry 519 words!”

    I’m flattered that he found so many interesting topics to discuss.

    Ron, Sure it’s possible that the Fed is selling money at below market prices, but I doubt it.

    pyroseed13, In fairness, there are some very good Austrian economists. The internet tends to bring out the crazies.

    Dtoh, Thanks for that info.

    Brito, Good point about gold.

    Rien, Interesting perspective.

  53. Gravatar of dwb dwb
    22. April 2012 at 07:47

    @Brito,

    No, instead there would be a systematic bias in favour of precious metal mining conglomerates, who are half the time are not even based in the home country.

    i think you hit the nail on the head right there. the whole Spitznagel/MF bs is based on money “not being dropped from helicopters” yet they favor gold, which is not continuous in the earths crust, and takes gobs of capital to dig it up (which favors the big conglomerates and their banks!).

    If the Spitznagel/MF crowd were true to their religion, they would be pushing bitcoin or some other quasi-commodity money without all the disadvantages of gold (I am thinking of Selgins paper on quasi-commodity money here). Methinks either they have not thought it through and are merely regurgitating Rothbard, or they have some other agenda. When a hedge fund manager pushes something, I always assume its his book. Never met a charitable self-sacrificing hedge fund manager in my life.

  54. Gravatar of Ron Ronson Ron Ronson
    22. April 2012 at 08:23

    Scott,

    Thanks for your reply to my comment (“Ron, Sure it’s possible that the Fed is selling money at below market prices, but I doubt it.”). My point was only partially about what MF calls “cantilon effects” but mainly about the how MMist recommendation on mooney supply growth would affect levels of debt which I will now ask in a different way.

    Before the great recession MMist appear to be have been supportive of the feds policy during the great moderation of increasing the money supply (and NGDP) by roughly 5 per year. Steve Keen however clearly sees the great moderation as being a period of ever increasing indebtedness which eventually led to the problems of 2007/8.

    My question is : Assuming that some of the 5% money supply growth entered the economy via loans from the banking system then to what extent is it true that increasing the money supply in this way caused debt ratios to rise? Irrespective of whether fed policies during the great moderation “caused” debt ratios to rise what effect do MMist see the reversal in this level of indebtedness playing in the NGDP dip in 2008?

  55. Gravatar of Cassander Cassander
    22. April 2012 at 11:42

    “The Fed would probably have to lend everyone money so it has the ability to reduce the monetary base later. Then you’d have to deal with the issue of defaults. Or the Fed could lend money to the Treasury and Congress could give tax rebates.”

    The fed can reduce the money supply by attrition and by controlling reserve ratios, it doesn’t need the money from individuals back. My biggest concern is the political knock on effects that would come mailing everyone hundreds of dollars.

  56. Gravatar of Major_Freedom Major_Freedom
    22. April 2012 at 12:15

    ssumner:

    MF, No, they are bought at market prices.

    No, they are bought at above market prices. Prices that are formed on the basis of inflation increasing demand in the demand and supply relation to prices, are not market prices.

    dwb:

    i think you hit the nail on the head right there. the whole Spitznagel/MF bs is based on money “not being dropped from helicopters” yet they favor gold, which is not continuous in the earths crust, and takes gobs of capital to dig it up (which favors the big conglomerates and their banks!).

    No, it does not favor banks. ANYONE can dig up gold if they want to.

    If the Spitznagel/MF crowd were true to their religion, they would be pushing bitcoin or some other quasi-commodity money without all the disadvantages of gold (I am thinking of Selgins paper on quasi-commodity money here). Methinks either they have not thought it through and are merely regurgitating Rothbard, or they have some other agenda. When a hedge fund manager pushes something, I always assume its his book. Never met a charitable self-sacrificing hedge fund manager in my life.

    Meknows that you have not thought things through, and are merely regurgitating market monetarists, or you have another agenda.

    If I were consistent with my own views, then I wouldn’t “push” any particular commodity over another. I would fight to be able to use any money that I want, and expect that other individuals will do the same. Whatever commodity or commodities end up being used, won’t be due to any ex cathedra pronouncement from me, the way you seem to imagine yourself being in control of fiat money inflation, hahaha.

    It’s not a religion, dwb. Just because you worship and pray in the centralized, statist, monopoly inflation religion, it doesn’t mean that those who don’t pray to that religion must be praying to another religion.

  57. Gravatar of Major_Freedom Major_Freedom
    22. April 2012 at 12:21

    Bonnie:

    MF:

    I don’t think you did refute my statement.

    Of course not. If you did, then you’d be right. Can’t have that.

    Having the Fed give the money to bankers isn’t materially different because of two reasons; 1) The Federal government owns quite a sizable portion of the land including the mineral rights; 2) most land owners do not own the mineral rights.

    Fighting for monetary sovereignty at the individual level of course INCLUDES fighting for ownership rights at the individual level, so telling me that the feds own this or that quantity of land is irrelevant. I would fight for that land to be owned by individuals, not the state.

    You make assumptions about gold that may or may not be true. We don’t know how much of it there is, only what has been found.

    The money supply does not have to keep increasing to facilitate a growing real economy. Prices can gradually fall as more and more goods are produced.

    If your point is that it is unlikely to happen as fast with gold as with the fiat money, that is probably correct in general, but the argument that was made was that this phenomenon is in specific case to the Fed and fiat money.

    No, it was not an argument that it ONLY exists with the Fed and fiat money. The argument was that is exists with the Fed and fiat money.

    Faster or slower doesn’t make it specific to either. The speed is an entirely different argument than one you made, and it neglects the dynamics of the demand for money as to whether and how much the price level is affected.

    The price level is not an object of individual action. It doesn’t matter to individual investors or sellers what the price level is. They are only concerned about price spreads, the prices of inputs and the expected output prices. If output prices fall because money is “tighter”, then investors and sellers will eventually come to expect falling prices, and price current factors accordingly. There is no systematic downward force on wealth generation with “tight” money.

  58. Gravatar of Major_Freedom Major_Freedom
    22. April 2012 at 12:26

    Bonnie:

    I meant, it is nothing inherent only to the Fed with fiat money.

    So if murder is not specific only to the state, then we shouldn’t say the state should not murder?

    Come to think of it, this is what bothers me about many of the so-called Austrians. Applying this concept to the Fed in such a focused manner stretches the truth around like taffy and seems more like anti-Fed propaganda than anything resembling intellectual honesty.

    Blah blah blah. This is exactly what I would expect from many so-called inflationists, who preach pro-Fed propaganda and are intellectually dishonest.

    If you really wanted to get rid of the Fed, you would use the information Sumner has here, the closest thing to the truth I have found, and shout it from the roof tops, letting everyone know its dereliction in management of the money monopoly is responsible for the severity of the crash, it knows its responsible for it and refuses to do anything about it while more and more people are financially destroyed every day.

    Sumner is not intellectually against the Fed, and he is not spreading truth. He’s spreading falsehoods, and he is saying the Fed can and should control money so that someone can control “NGDP”, rather than leaving it to individuals.

    You don’t have to agree with the system or Sumner’s proposal to talk about what has happened over the last few years to convince folks that they have been directly hurt by what has taken place, and get them torqued off at the truth rather than vague fictions that only confuse them. If you have a goal to reach, reach it. But of course, you have to have that as a goal in the first place, and in your case, it appears highly highly questionable.

    Right back at you.

  59. Gravatar of Will Will
    22. April 2012 at 16:22

    UGH! The decline of the Wall Street Journal continues apace! Any time someone mentions Rothbard with a straight face, it is time to squint carefully at everything they say. Unfortunately, as Major Freedom shows, they often have no scarcity of things to say.

  60. Gravatar of Josiah Neeley Josiah Neeley
    22. April 2012 at 18:18

    This must be a record of sorts. Major_Freedom´s comment has 2215 words. Scott´s post has a paltry 519 words!

    Sadly this is not a record for Major Freedom.

  61. Gravatar of Major_Freedom Major_Freedom
    22. April 2012 at 19:07

    Josiah Neeley:

    Black Adder, we’ve missed you on Consulting by RPM.

  62. Gravatar of ssumner ssumner
    23. April 2012 at 17:04

    Ron, The money supply increase is completely unrelated to lending. It’s based on how much cash people want to hold at different income levels. If there was too much lending (and I agree there was) you can only address that through better regulation (either less or more) not through monetary policy.

  63. Gravatar of Major_Freedom Major_Freedom
    23. April 2012 at 17:52

    ssumner:

    Ron, The money supply increase is completely unrelated to lending. It’s based on how much cash people want to hold at different income levels.

    People always want to earn more money. They don’t want to hold cash per se, they want to hold purchasing power. If a desire to hold more cash is brought about by inflation, and not falling prices, then it nullifies the desire for more purchasing power, since people desiring to increase cash is brought about by increased sales revenues, i.e. higher goods prices and higher wage prices.

    Lending is related to the money supply because the banks unilaterally increase the money supply by expanding loans ex nihilo, i.e. unbacked by prior savings.

    If there was too much lending (and I agree there was) you can only address that through better regulation (either less or more) not through monetary policy.

    Hahaha, as if the state wants to curb credit expansion. That’s hilarious.

  64. Gravatar of Brandon Brandon
    24. April 2012 at 12:41

    I just read through the whole exchange, and I gotta say (bear with me) that with the exception of gold mining favoring big conglomerates (“anybody can dig for gold!”), nobody here actually refuted any of Major Freedom’s arguments convincingly.

    If you can’t refute the arguments of a dude named Major Freedom then perhaps it would be better to re-read the Austrian arguments and incorporate them into your own rather than dismiss or distort them out of hand. #justsayin

  65. Gravatar of Negation of Ideology Negation of Ideology
    24. April 2012 at 14:33

    Brandon,

    “with the exception of gold mining favoring big conglomerates (“anybody can dig for gold!”)”

    But isn’t that a huge exception? That’s like saying “Other than that whole NGDP targeting thing, Scott Sumner has some good points!” (I’m only using that as an example, I agree with NGDP targeting.)

    The key point is, the gold standard is purely a welfare program for gold mining companies and the corporations and foreign governments who own gold mines.

  66. Gravatar of Ron Ronson Ron Ronson
    24. April 2012 at 15:39

    Scott,

    Again thanks for the reply – but I’m confused now how new money (specifically the 5% that was the average NGDP increase during the great moderation) gets into the money supply if not via bank loans. It is my understanding that OMOs (where the Fed buys treasuries) work by giving banks additional reserves from the money deposited by the sellers of the Treasuries. If they don’t lend those reserves out then how does the money supply increase ?

    I know that demand to hold the new money is also relevant but I assume that demand for money must be growing as the economy grows or there would be no point having a 5% NGDP target in the first place.

  67. Gravatar of dwb dwb
    24. April 2012 at 16:00

    I just read through the whole exchange, and I gotta say (bear with me) that with the exception of gold mining favoring big conglomerates (“anybody can dig for gold!”), nobody here actually refuted any of Major Freedom’s arguments convincingly.

    well, read back about through the comments of about the last 1500 of Scotts posts. we have all rebutted his points endlessly, but when we finally get him cornered, we are labeled as having Stockholm syndrome or as being brainwashed. sigh. pretty sure its just inflexible dogma. thats my opinion.

    Here is the list of things I agree with that MF says:
    *Inflation distorts relative prices.
    *ideal fed policy means money is dropped from helicopters.
    *supply-side productivity is good, results in lower prices, and higher standards of living.

    Here is the list of things that make no sense:

    *The world trade center was a controlled demolition by the fed

    *demand-side deflation is good. {demand-side deflation distorts relative prices worse than inflation; the argument is at least symmetric, but deflation is worse due to debt}

    *NGDP targeting of about 3-5% is coercive monetary policy and will lead to higher ruinously higher inflation. {empiricaly false.}

    * the gold standard is better because the money is dropped from helicopters {no, it favors mining companies, plus a whole lot of other issues}.

    *fiat money results in the end of civilization.

    *the state is murderously oppressive

    As for ideal fed policy, i live in the real world. the perfect cannot be the enemy of the good. I would be in favor of a quasi-commodity money like bitcoin that increases at a constant 4.5% per year, thats great, but i dont see that happening for a long time, and ngdp targeting is the first step to get there anyway IMO. in the mean time, ngdp targeting with a constant fiat money increase (or however we effect it through ngdp futures or whatnot) is just as good. civilization wont end.

  68. Gravatar of Lorenzo from Oz Lorenzo from Oz
    24. April 2012 at 17:11

    I finally decided to have a go at what I disagree with in Austrian analysis and why Austrian commentators are so often the way they are here. (I gather from Lars Christensen that George Selgin may be now an ex-Austrian, but as I don’t criticise his work, that’s OK.)

  69. Gravatar of Brandon Brandon
    24. April 2012 at 21:36

    @Negation of Ideology,

    But isn’t that a huge exception?

    Fair enough.

    @dwb,

    Thanks. For both the clarification and the good laugh.

  70. Gravatar of Major_Freedom Major_Freedom
    24. April 2012 at 21:44

    Brandon

    I just read through the whole exchange, and I gotta say (bear with me) that with the exception of gold mining favoring big conglomerates (“anybody can dig for gold!”), nobody here actually refuted any of Major Freedom’s arguments convincingly.

    Gold mining does not favor anyone in particular, because unlike fiat money creation, ANYONE can produce gold!

    To say that a gold standard favors particular people is like saying copper mining benefits only particular people. No, anyone can mine copper if they want, just like they can mine gold if they want.

    Fiat money is what benefits the banking conglomerates, because they are granted a government privilege of not only being able to create legal tender via credit expansion, but they also stand to benefit from typically being first in line to the money printing press, before the money creation has a chance to spread throughout the economy raising prices. In other words, the big banks can receive inflation money and buy goods and assets at lower prices.

    If you can’t refute the arguments of a dude named Major Freedom then perhaps it would be better to re-read the Austrian arguments and incorporate them into your own rather than dismiss or distort them out of hand. #justsayin

    Re-read? Try read at all. None of these people have ever read Austrian books in depth. It’s painfully clear from their statements.

    <bNegation of Ideology

    Brandon,

    “with the exception of gold mining favoring big conglomerates (“anybody can dig for gold!”)”

    But isn’t that a huge exception? That’s like saying “Other than that whole NGDP targeting thing, Scott Sumner has some good points!” (I’m only using that as an example, I agree with NGDP targeting.)

    Brandon is wrong on that point.

    The key point is, the gold standard is purely a welfare program for gold mining companies and the corporations and foreign governments who own gold mines.

    As opposed to what, a welfare program from banking companies and the corporations and states who own the printing presses?

    It’s simply astonishing how you can chastise gold for being a welfare program for certain people, and yet your desired fiat money system is exactly that

    Is your statist religion so ingrained that you actually believe that if the state benefits, you benefit? Or if the state benefits, then this is better as compared to a situation where any individual can in principle produce their own gold, where anyone who wants to produce gold has to make an investment in it, which means even the largest gold miners will almost certainly only earn the going rate of profit, since any abnormally high profits will disappear through increased investment?

    Moreover, it is NOT true, in a division of labor, that the only people who benefit from gold mining are gold miners. They provide a voluntary service to others who choose to use gold as money. Unlike fiat money, where people are coerced into accepting it through legal tender and taxation laws, gold money is not forced. Gold money is only money, in my treatment, if individuals choose it at the individual level. They don’t have to use gold if they don’t want to, and gold miners are not going to demand taxes in gold, or enforce contracts only in gold.

    dwb

    “I just read through the whole exchange, and I gotta say (bear with me) that with the exception of gold mining favoring big conglomerates (“anybody can dig for gold!”), nobody here actually refuted any of Major Freedom’s arguments convincingly.”

    well, read back about through the comments of about the last 1500 of Scotts posts. we have all rebutted his points endlessly, but when we finally get him cornered, we are labeled as having Stockholm syndrome or as being brainwashed.

    Where in the world did you “rebute my points endlessly”?

    As far as I can tell, that’s what I have been doing to your points.

    sigh. pretty sure its just inflexible dogma. thats my opinion.

    Speak for yourself. You hold the dogma that fiat inflation does what you say it does. You are utterly inflexible on this point.

    You only perceive inflexibility on my part because I refuse to bend to your inflexibility. You’re inflexible and yet you chastise me for being inflexible.

    Here is the list of things I agree with that MF says:

    *Inflation distorts relative prices.

    *ideal fed policy means money is dropped from helicopters.
    *supply-side productivity is good, results in lower prices, and higher standards of living.

    Here is the list of things that make no sense:

    *The world trade center was a controlled demolition by the fed

    I didn’t say the feds did it. All I ever said was that the science shows it was a controlled demolition. Who was responsible for it I do not know, but I have guesses, and they aren’t Saudis.

    *demand-side deflation is good. {demand-side deflation distorts relative prices worse than inflation; the argument is at least symmetric, but deflation is worse due to debt}

    Demand side deflation does not generate malinvestment. It not worse than inflation. It is better. I didn’t say it was “good.” Good conveys a moral judgment. I am talking strictly economics.

    *NGDP targeting of about 3-5% is coercive monetary policy and will lead to higher ruinously higher inflation. {empiricaly false.}

    You can’t say empirically true, any more than you can’t say mercury ingestion, because it doesn’t kill instantly, is not fatal, because in the meantime, “it is empirically proven that the person who ingested mercury is still alive.”

    NGDP targeting IS coercive, and that has been empirically and theoretically proven. Central banking is enforced by law. Laws are enforced by coercion, not consent. It is based on violence.

    * the gold standard is better because the money is dropped from helicopters {no, it favors mining companies, plus a whole lot of other issues}.

    I never claimed that. I never claimed gold is dropped by helicopters. You know, it would help what little credibility you have by at least getting my arguments right. I mean it’s obvious you’re not even trying, because you’re too focused on spreading your agenda.

    *fiat money results in the end of civilization.

    I didn’t claim that either. I said fiat money has an inevitably end result of either hyperinflationary depression, or deflationary depression. I never said anything about end of civilization.

    *the state is murderously oppressive

    I didn’t say murderously oppressive. What’s with you and straw men? Are you so unable to refute my actual points that you try to deceive others into believing that I hold things that I do not in fact hold? You’re an intellectual parasite is what you are. You’re dishonest.

    As for ideal fed policy, i live in the real world.

    And yet you don’t understand it.

    the perfect cannot be the enemy of the good.

    Worthless talking point. I do not speak in terms of perfection.

    I would be in favor of a quasi-commodity money like bitcoin that increases at a constant 4.5% per year, thats great, but i dont see that happening for a long time, and ngdp targeting is the first step to get there anyway IMO.

    Spending stability is no less a chimera than price stability, or interest rate stability.

    in the mean time, ngdp targeting with a constant fiat money increase (or however we effect it through ngdp futures or whatnot) is just as good. civilization wont end.

    Good according to what? According to who? Not my standard and not me.

    Lorenzo from Oz

    I finally decided to have a go at what I disagree with in Austrian analysis and why Austrian commentators are so often the way they are here. (I gather from Lars Christensen that George Selgin may be now an ex-Austrian, but as I don’t criticise his work, that’s OK.)

    You must read Rothbard, Mises, Hoppe, Reisman, and De Soto, if you want to consider yourself knowledgeable of Austrian economics. Horwitz and Selgin are not really “Austrians”.

    PS Your article is weak.

    (1) You write: “Capital is not homogeneous (neither is labour; something which seems to figure rather less in Austrian analysis) but there is enough flow of resources in an economy that heterogeneity is not all there is to grapple with.”

    “Enough flow of resources that heterogeneity is not all there to grapple with”? This is just hand waving. It is not rigorous enough. There is no logic or arguments.

    (2) The “delays” that we observe in the real world is precisely why Austrians are so adamant about the Fed refraining from creating unsustainable booms. The corrections are painful. The heterogeneity of resources and labor, and the readjustment process, does not stand as an argument against Austrian emphasis on free labor markets to maximize wage flexibility. Austrians don’t argue that wage rates instantly adjust. They don’t argue that there is no correction periods. They don’t argue that wages fall instantaneously. They only say that a free labor market is maximally flexible when it comes to wages and prices. The “pure and perfect competition” doctrine that undergirds your conception of what the free market advocates are saying, is actually a straw man. It is I suspect purposefully designed as a straw man to justify state intervention because it is guaranteed the free market cannot live up to such an absurd, non real world standard.

    (3) There is no “perfection” conception of the market in Austrian theory. At best, there is only an assumption of a tendency towards it.

    (4) This is just plain wrong. Entrepreneurs are concerned with expected income yes, but this expected income is derived from expected prices, given the supply that they plan to offer. Entrepreneurs plan according to prices, not incomes abstracted from prices. The proof of this is easy to see. Just consider restaurants, car dealers, clothing stores, and all other sellers who ask given prices for their goods, and they are willing to sell few goods or very many goods at those prices, and they won’t adjust their prices, or won’t adjust them very much, on “slow days.” These sellers encompass a substantial population of sellers, and these entrepreneurs utilize prices in their plans, not incomes. They want to sell their goods at prices that earn them profits on cost of goods sold.

    (5) Inflation is worse than deflation, because deflation does not generate malinvestment. You classify malinvestment as legitimate output, because goods are “moving” and workers are “moving.” But it cannot last. Deflation based productivity can last.

    (6) Risk aversion is subsumed under time preference in the time preference theory of interest. The more risk averse a person is, the more their actions display a higher time preference. This is because risk aversion is priced by a reduction in present prices relative to expected future prices for investments. A reduction of present prices relative to future prices for investments implies less investment all else equal, and less investment all else equal implies a higher time preference.

    (8) Austrians don’t claim that booms have to be characterized by rising prices over time. As Rothbard pointed out, the 1920s were inflationary despite the stable prices, because the monetary inflation was met with high real productivity.

    It’s not the rising prices that are the problem of the boom, it’s the monetary inflation.

    (9) Austrians don’t claim that all busts are caused by government intervention generating prior booms. Meteors, natural disasters, plagues, these can bring about depression as well. Austrians are only saying that the frequent busts we see in modern economies, that most people blame the market for, are government created. They aren’t saying that if a meteor hits, that it’s the government’s fault.

    (10) JB Say refuted the general glut myth hundreds of years ago. DeLong is just behind the times. Note, before you herp derp about Keynes allegedly refuting Say’s Law, please read Hazlitt’s book economics in one lesson, to see why Keynes didn’t even get Say’s Law correct.

    (11) This is just plain messed up. Internet anti-Austrians are typically abusive, indifferent to evidence, and discount experience. Every time logic is introduced, the anti-Austrian almost always ignores it and demands evidence of counter-factuals. Austrian economics is not based on natural law ethics, it’s based on natural law. So the reference to Flew and Feser are misguided. Feser’s response was to Rothbard’s ethics, not his economics. And Feser made so many errors that I myself refuted them line by line here

    As for Coase, Walter Block thoroughly demolishes his theory here.

    (12) Risk is attenuated in Austrian analysis. Risk is in fact an integral part of Austrian theory of entrepreneurship. Your two responses to why you don’t like malinvestment are weak.

    Your only reference to malinvestment in your first cited post was this:

    “What’s a fine idea in downturn Houston may very much be “malinvestment” in Port-au-Prince. If firms go bust when economic activity drops significantly, what does that prove except the level of economic activity has dropped significantly?”

    Austrians distinguish between entrepreneurial errors and malinvestment, on the basis that malinvestment is caused by central banks bringing about interest rates that are not a reflection of individual’s true time preferences, and credit expansion that is not a result of voluntary saving.

    In your second cited post, you write:

    “But suppose one slides into (in compete contradiction of Austrian value subjectivism) the notion that being a “malinvestment” is an intrinsic quality of an investment. Then the level of economic activity become irrelevant to the level of “malinvestment”. So, you can happily advocate any amount of restrictive “adjustment” because the level of “bad investments” wasting resources is set.”

    That is a terrible supposition. Denying value subjectivism is a complete denial of economic science. There is no such thing as inherent value, or inherent “mal-ness” to an investment. It’s all human judgments.

    (Conclusion)

    Animal spirits is not useful at all in explaining the economy. It is a deux ex machina.

    Austrians hold that while changes in monetary policy brings about, and exposes, malinvestment and recession, the problems are crystalized in the real part of the economy, which is distorted.

    Your claim that the Great Depression was caused by “tight money” is a myth. It was the previous boom that caused it. The choices on the part of people to drastically reduce their spending and lending, which then collapsed aggregate demand, was an effect of the problems, not a cause of the problems.

    The Fed inflated by record amounts after the 1929 collapse, but banks and individuals hoarded a substantial portion of the new money, which is why spending and lending fell and why the broader money supply fell. Your view of busts being purely a product of deflation is utterly fallacious.

    All in all a very, very weak attempt. You simply cannot consider yourself equipped enough to address Austrian theory if you don’t read Rothbard or Mises, and you only read them through third party (fallacy ridden) critiques.

  71. Gravatar of dwb dwb
    25. April 2012 at 07:06

    @Lorenzo from Oz

    I finally decided to have a go at what I disagree with in Austrian analysis and why Austrian commentators are so often the way they are here. (I gather from Lars Christensen that George Selgin may be now an ex-Austrian, but as I don’t criticise his work, that’s OK.)

    good post.

  72. Gravatar of Brandon Brandon
    25. April 2012 at 14:38

    @Major Freedom,

    Gold mining does not favor anyone in particular, because unlike fiat money creation, ANYONE can produce gold!

    To say that a gold standard favors particular people is like saying copper mining benefits only particular people. No, anyone can mine copper if they want, just like they can mine gold if they want.

    Fair enough. I am curious though, when you write about a “gold standard”. Could you elaborate on what you mean by such a standard (in 200 words or less, if possible)?

  73. Gravatar of Lorenzo from Oz Lorenzo from Oz
    25. April 2012 at 21:00

    Major_Freedom: (4) This is just plain wrong. Entrepreneurs are concerned with expected income yes, but this expected income is derived from expected prices, given the supply that they plan to offer. Speaking as someone who is actually in business, that’s crap. When we are setting prices, we worry about what effect it will have on use of our services–i.e. the number of transactions. What we want is sufficient income to (more than cover) our costs. I wasn’t making this up, I was speaking from experience.

    (5) (5) Inflation is worse than deflation, … Flatly not true, as the historical evidence amply shows. Even hyperinflation is better than a serious deflationary episode. (Productivity-based deflation, such as we have experienced in IT, is a somewhat different case.)

    Your habit of defining away evidence rather confirms the thrust of my post. Also, I am not adopting Keynesianism (and I specifically critiqued “animal spirits”).

    The Block article does not actually attack the concept of transaction costs.

    dwb: thanks. Lars Christensen liked it too.

  74. Gravatar of Paul Andrews Paul Andrews
    26. April 2012 at 03:48

    Scott,

    The Fed achieves its interest rate target by purchasing bonds. The purchase pushes the interest rate down, and the price up.

    To lower the interest rate, the Fed buys enough bonds to achieve that rate.

    The first dollar’s worth is at the market price.

    Each incremental dollar’s worth is purchased at a marginally higher price, and so on until the target interest rate is achieved.

    Therefore the Fed pays above the prior market price for any sizeable purchase. If this were not true, the interest rate would remain unchanged, and the target would not be achieved.

    This benefits the sellers of the bonds who receive above the previous market price. It also benefits those who hold government bonds, as their holding is revalued upwards.

    The same concept applies when the Fed is purchasing longer-dated bonds. Each purchase made for the purpose of implementing monetary policy, as opposed to the purpose of storing wealth or investing in government activities, inflates the price of the bond, and enriches all those private parties who hold government bonds.

  75. Gravatar of Jeff Jeff
    26. April 2012 at 06:42

    @Paul Andrews,

    Read the second paragraph of my comment earlier in the thread.

  76. Gravatar of Paul Andrews Paul Andrews
    26. April 2012 at 13:31

    @Jeff

    If you were right the Fed would never need to actually buy bonds, and yet the Fed owns plenty of bonds.

    A fear of Chuck Norris today is rooted in the actions of Chuck Norris yesterday. If Chuck Norris doesn’t follow through today, he will command no fear tomorrow.

  77. Gravatar of ssumner ssumner
    27. April 2012 at 12:10

    Brandon, You must be new here. There is no point in trying to “refute” MF; it’s like talking to a wall. He never responds to reasoned arguments. Not once in a million comments.

    Ron, You are wrong, most of the new money during the Great Moderation was currency—bank reserves were only a tiny faction. In any case bank reserves are not equal to bank loans.

    Paul, You said;

    “The Fed achieves its interest rate target by purchasing bonds. The purchase pushes the interest rate down, and the price up.”

    Often just the opposite is the case, otherwise you’d have low interest rates during hyperinflation.

  78. Gravatar of Paul Andrews Paul Andrews
    27. April 2012 at 17:21

    Scott,

    “Often just the opposite is the case, otherwise you’d have low interest rates during hyperinflation.”

    In period one of a hyperinflation, before the CB has a chance to respond, interest rates are low.

    In subsequent periods the CB (assuming it wants price stability) attempts to lower the inflation rate by raising interest rates. Therefore there is no contradiction with my statement above.

  79. Gravatar of Major_Freedom Major_Freedom
    27. April 2012 at 20:05

    Brandon

    Fair enough. I am curious though, when you write about a “gold standard”. Could you elaborate on what you mean by such a standard (in 200 words or less, if possible)?

    When I say gold standard, it is always in a context of my overall philosophy, which is individualism. In a free market, gold typically becomes the money of choice, so I use free market money and gold standard money interchangeably, but technically, they are distinct.

    Thus, IF the free market process results in gold money, then it would entail any individual being legally permitted to use his own property to mine his own gold. No individual would have a government enforced monopoly privilege to be the sole money producer, the way the Fed has a government enforced privilege monopoly today.

    Thus in a gold standard, any individual can use their property to “create money”.

    ssumner

    Brandon, You must be new here. There is no point in trying to “refute” MF; it’s like talking to a wall. He never responds to reasoned arguments. Not once in a million comments.

    This is utterly dishonest, and smacks of self-doubting drama queen gossip and rumor mill fluff to deceive people into siding against me based on taking you on faith, just like they are expected to take NGDP targeting on faith.

    I ALWAYS respond to reasoned arguments, you just rarely present them.

  80. Gravatar of Major_Freedom Major_Freedom
    27. April 2012 at 20:47

    ssumner:

    Paul, You said;

    “The Fed achieves its interest rate target by purchasing bonds. The purchase pushes the interest rate down, and the price up.”

    Often just the opposite is the case, otherwise you’d have low interest rates during hyperinflation.

    Again you contradict yourself. Depending on the day of the week, the fed can decrease interest rates by increasing bank reserves (inflation), or it can increase interest rates by increasing bank reserves (inflation).

    After reading your comments for the last few months, it is clear to me that you simply have no idea how the Fed actually goes about targeting a lower interest rate which would have been higher absent Fed actions: In EVERY CASE, the way the Fed brings the fed funds rate down to be lower than what it otherwise would have been, is by buying bonds or other securities from the banks, thus increasing bank reserves, and bringing about what you call “the liquidity effect.”

    If in general banks that are cash strapped, face bankruptcy, and need liquidity to pay the bills as well as withdrawals and transfer requests, when they go in the overnight fed funds market, they find that the amount of liquidity dries up when the Fed is “tight.” Banks try to reduce their lending because they need cash, and banks try to increase their borrowing in the overnight market. When this happens, the overnight rate would increase all else equal. It’s more and more banks chasing after fewer and fewer funds. Lending banks will only lend at higher rates, and borrowing banks will pay higher rates because the alternative is bankruptcy or bank runs.

    This is where the Fed comes in. If the Fed doesn’t increase bank reserves, then the fed funds rate will be higher than what they believe would “facilitate financial system stability.” So to reduce that overnight rate, the Fed does what Paul is CORRECT in saying the Fed does: The Fed increases bank reserves by buying securities from the banks, typically government bonds, at of course higher than market rates, because if the banks tried to sell those bonds in the market, they’d fetch a lower price on the basis that there would be less money and spending on account of the Fed NOT inflating the money supply when buying bonds.

    So when the Fed buys bonds, they not only bring about a higher amount of spending in the market, which increases the prices of the securities the banks are selling to the Fed, but it also lowers the fed funds rate, because it reflushes the banks with cash so that there is less scarcity of money to lend and to borrow.

    Just imagine the banks trying to sell government bonds issued by a deficit spending Treasury, in an economy without the Fed inflating the money supply to buy those bonds. Only a FOOL would believe that the rates on those bonds would not increase. Deficit spending Treasuries eventually go bankrupt without a central bank counterfeiter, I mean printer, of money, buying those bonds. This is how the central bank keeps the rates on government bonds lower than what they otherwise would have been.

    It is a mistake to believe that government bonds must pay at least the rate of consumer price inflation. You are incorrectly claiming that rates should go up when the Fed inflates, and yet all theory and empirical facts contradict that. There has been a 30 year bull run in debt in case you hadn’t noticed, and during that time the Fed has accelerated, not reduced, monetary inflation. Forget about prices. Don’t reason from price changes. Forget about NGDP. Never reason from spending changes.

    Look at the monetary inflation. The Fed has, since 2008, increased bank reserves by record amounts, and that is how they have kept the fed funds rate at a record low. Yes, all this liquidity is trickling out into the economy, boosting prices, and interest rates are under pressure to rise, which is why the Fed has had to accelerate monetary inflation to keep the fed funds rate at a record low, but it is possible that interest rates can be low while monetary inflation is high, for many years, while an asset bubble is inflated and consumer prices have not yet started to rise.

    It is simply baffling to me how anyone can believe that the way the Fed targets a zero fed funds rate is by abstaining from buying bonds/securities from banks, rather than inflating into the banking system by buying bonds/securities from the banks, or how anyone can believe that interest rates on government bonds would have been LOWER throughout 2011 if the Fed didn’t buy 61% of all debt issued by the Treasury. It is perhaps one of the most easiest things to understand, that if the Fed didn’t inflate and didn’t buy 61% of the Treasury debt, that the demand for Treasury debt would have been substantially lower, and thus interest rates would have been HIGHER, not lower, on that debt.

    Market monetarism is simply intellectually bankrupt.

    Want to know a strong piece of evidence that market monetarism is intellectually bankrupt? It is attracting the likes of Krugman and Bernanke, whose education have left them helpless, and so devoid of a sound understanding of economics, that they perceive targeting “aggregate spending” as the next God to worship.

    This God will fail as well. Why? Because inflation distorts the real economy, and that leads to people seeking to hold more cash, which of course requires more inflation to maintain the same constant increase in “spending”, which of course distorts the economy even more, which then leads to another increase in demand for cash, which requires even more inflation to maintain the same constant increase in “spending”, and so on, accelerating towards runaway inflation, if not sooner, then later.

    NGDP targeting through inflation can only avoid eventual destruction of the currency if money were neutral and did not affect the capital structure of the economy in ways beyond that of voluntary consumer preferences. Unfortunately for market monetarists, the non-neutrality of money is logically built in the nature of money itself.

    Individual actors who have to act with a Fed printing money, become increasingly dependent on the Fed, if not consciously and directly, then unconsciously and indirectly. Increases in nominal demand are constantly mistaken to be sustainable increases in real demand.

    Market monetarists have to learn the lesson that the only mechanism and “channel” for money production that can promote general prosperity is money that is controlled by individual property owners in economic competition. Nobody is intelligent enough to know what they themselves will learn and do in the future, let alone what 300 million other individuals will learn and do in the future. It’s akin to wanting a priest to rule the world on the basis that the priest is closest to God.

  81. Gravatar of Major_Freedom Major_Freedom
    27. April 2012 at 22:18

    Lorenzo from Oz:

    Major_Freedom: (4) This is just plain wrong. Entrepreneurs are concerned with expected income yes, but this expected income is derived from expected prices, given the supply that they plan to offer.

    “Speaking as someone who is actually in business, that’s crap.”

    Speaking as someone who is in business, it’s not crap. You’re crap is crap.

    Almost all businesses sell according to cost plus markup. They sell according to price differentials, not “income”.

    When we are setting prices, we worry about what effect it will have on use of our services-i.e. the number of transactions.

    That’s exactly proving my point.

    What we want is sufficient income to (more than cover) our costs.

    No, you want sufficient profits on investments, which is determined by the difference between revenues and costs. You set prices for the services that will cover the costs.

    The incomes you desire are based on the prices you paid for the factors, and the expected prices you could fetch for your services. You can’t just increase prices arbitrarily so as to maximize your income. You have a supply of services that you can offer, and you price those services out.

    I wasn’t making this up, I was speaking from experience.

    As was I. In my business, we set prices according to cost plus profit. We sell however many units are demanded at those prices. We don’t lower prices when monetary demand falls. We simply sell fewer units and maintain prices because we want to earn profits to cover our costs.

    It is only when monetary demand is persistently high or persistently low, do we change our investment.

    (5) (5) Inflation is worse than deflation,

    “Flatly not true, as the historical evidence amply shows.

    Flatly it is true, as historical evidence of fiat paper money conclusively shows.

    Even hyperinflation is better than a serious deflationary episode.

    Nope. It’s worse because it adds to malinvestment, you know, the thing you don’t understand and pretend doesn’t exist. It was the social and economic upheaval from the hyperinflation in Wiemar that helped set the stage for the rise of fascism in Germany.

    (Productivity-based deflation, such as we have experienced in IT, is a somewhat different case.)

    Agreed.

    Your habit of defining away evidence rather confirms the thrust of my post.

    But you haven’t once showed that I do define away any evidence. You’re just making that up. You have to show these claims through evidence, not just claim them.

    Also, I am not adopting Keynesianism (and I specifically critiqued “animal spirits”).

    Conceptually, all monetarists and market monetarists are Keynesians. “Aggregate demand” fetishism.

    The Block article does not actually attack the concept of transaction costs.

    I know. It’s not transactions costs per se that are the problem. It’s what Coase does with them that is the problem. This is what Block addresses.

  82. Gravatar of Major_Freedom Major_Freedom
    27. April 2012 at 22:19

    Your*

  83. Gravatar of Ron Ronson Ron Ronson
    28. April 2012 at 09:29

    Scott,

    I’m not disputing what you are saying , I’m just trying to understand how the fed increased the money supply to stabilize NGDP during the great moderation. and how (if at all) that affected debt levels.

    Following chart shows that m2 increased much faster than increase in currency

    http://research.stlouisfed.org/fredgraph.png?g=6O6

    And following chart shows that household debt and mortgage debt increased in line with M2.

    http://research.stlouisfed.org/fredgraph.png?g=6O7

    I’m trying to find a good narrative to explain these charts.

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