Here’s Frances Coppola:

Technology changes and post-crisis monetary policy are making financial assets and money indistinguishable. Central banks now need to work in partnership with fiscal authorities.

Several economists at the Lindau meeting were severely critical of central banks’ conduct of monetary policy in the light of continuing depression in the US, Japan and much of Europe, and called for greater use of fiscal policy to bring about recovery. Among the most critical was Christopher Sims, who gave a trenchant presentation on “Inflation, Fear of Inflation and Public Debt”.

He started by announcing the death of the quantity theory of money, MV=PY. Due to interest on reserves and near-zero interest rates, “money” can no longer be clearly distinguished from other financial assets. This is a fundamental point which requires some explanation.

These days, nearly all forms of money bear interest, which makes them indistinguishable from interest-bearing assets. For Sims, the paying of interest on bank reserves, coupled with the decline of physical currency, all but eliminates the distinction between interest-bearing safe assets such as Treasury bills and what we traditionally call “money”. All assets can be regarded as “money” to a greater or lesser extent: the extent to which assets have “moneyness” is really a matter of liquidity.

Sometimes words can get in the way of meaning.  There is no point in arguing about what the term “money” really means, it obviously means different things to different people.  But the term “base money” still has a pretty clear meaning; currency in circulation and bank deposits at the Fed.  The Fed happens to have a complete monopoly on the (US$) monetary base.  Prior to 2008 it could determine the supply of base money through OMOs and discount loans, and it could influence the demand for base money through changes in reserve requirements.  After 2008, a 4th tool was added—interest on reserves, which also impacts the demand for base money.  With these four tools the Fed can push the value of the dollar (in terms of euros) to anywhere between zero and infinity.  That’s a lot of power.  Nothing fundamental has changed, at least nothing relating to the validity of the quantity theory of money.

A few other points:

1.  The quantity theory of money has NOTHING to do with the equation of exchange.  That equation is best viewed as a definition of velocity, nothing more.  Definitions are not theories.

2.  Currency is not “declining.” The currency stock is growing faster than GDP.  It is also becoming a steadily larger share of the monetary aggregates.

HT:  Marcus Nunes

Adam Ozimek has an interesting post on merit:

The answer is of course that the murkiness Freddie sees exists in all these areas. And yet, should we not praise good behavior? Should we stop praising honesty because, like work ethic of someone who finished med school, we can’t in a rigorous way distinguish when honesty is just a product of how they were brought up?

I would say no, in both cases we should praise the achievements and think of them as such. To me it is simply common sense we should praise honest people. I would say the same applies to those with economic and intellectual achievements, but to folks like Freddie that is not the case. Much like I don’t know how to explain to someone why telling the truth is praiseworthy if they don’t see it, I can’t really explain to Freddie why having a good work ethic or the other characteristics that help make someone economic or academically successful is praiseworthy if he doesn’t see it. I can only draw parallels and ask what the differences are.

But what I do think should be visible to all is that holding aside all of these philosophical difficulties, praising moral behavior and having an economic system that rewards the creation of economic value is instrumentally valuable. A world that praises charitable behavior despite humanity’s widely differing propensities for it means we have more charitable behavior and are all better off, including those without such propensities. And a world that rewards the creation of economic value despite humanity’s widely different propensities for it means we have more economic value and are all better off, including those without such propensities.

In other words, Freddie’s socialist dream is a bad idea even I can’t convince you it’s also immoral.

I think I do know how to explain to someone why telling the truth is praiseworthy, and it isn’t “common sense.”

It’s a mistake to differentiate between how someone was “brought up” and how they are treated as an adult.  Being well brought up means being praised when you do good and criticized when you are bad.  That process never ends.  I’ve been criticized a lot over the past decade, and I’m in my late 50s.  The criticism has probably made me a better person, and has certainly changed my behavior in certain respects.  When commenters/friends/family criticize me, they help “bring me up.”  Ditto for when they praise me.  In other words, criticism and praise have instrumental value.

Ozimek is criticizing a post by Freddie deBoer, which ends as follows:

The long-term project of those who decry the role of unearned advantage in human society should not be to try and parse who is most and least privileged. The project should be to deny the salience of “merit” as a moral arbiter of material security and comfort. The very notion of just deserts- the notion that some people have legitimate accomplishments that we must celebrate because they represent “merit,” whatever that is, distinct from their privileges- is what has to die. There is no space where privilege ends and legitimate accomplishment begins. There is, instead, a world of such multivariate complexity that we can never know whose accomplishments are earned and whose aren’t. Instead, we should recognize the folly of tying material security and comfort to our flawed perceptions of other people’s value, and instead institute an economic system based on the absolute right of all people to food, shelter, clothing, health care, and education.

Unlike 99% of libertarians, I agree with much of this paragraph, except for the last half of the last sentence.  I wish he had ended his post as follows:

Instead, we should recognize the folly of tying material security and comfort to our flawed perceptions of other people’s value, and instead institute an economic system based on maximizing aggregate utility. That system is called capitalism.

I also slightly disagree with deBoer’s comments on merit.  I certainly don’t think we “must celebrate” the success of billionaires, but I do think praise is appropriate for the sort of good behavior that has positive external benefits.  It’s worth mentioning in the media that Bill Gates spends his wealth on charity, not 500 foot yachts.  Not because Gates needs our praise, or even “merits” it in the common sense meaning of the term.  Rather we should praise him because poor kids in Africa need his mosquito nets.

Nicolas Goetzmann sent me the following article in the FT, by Wolfgang Munchau:

The third theory is monetarist. Some will be surprised to find that monetarists still exist, but they do under new guises, such as “market monetarists”. Milton Friedman, the godfather of monetarism, said inflation is always and everywhere a monetary phenomenon. And so, of course, would be a lack of inflation. The market monetarists argue that the central bank should target a certain measure of broad money in circulation to achieve price stability.

Yikes.  I’m still counting the number of mistakes in that paragraph.  How many can you find?

At least he didn’t call us Austrians, which is how Allan Meltzer referred to me (twice!) at the recent Mont Pelerin Society meetings.  🙂

PS.  I wonder if famous pundits think this way:  “I vaguely recall hearing something about market monetarists.  I suppose they must believe X.  I could look it up, but eh, I’m an important pundit and MMs are a bunch of nobodies, so they’ll just have to make do with my characterization. After all, I’m pretty busy right now.”

We really ought to consider adopting a whole new monetary regime, NGDPLT.  But what if the Fed refuses. What then?  Then we are in the world of second best—QE and negative IOR.  These are not good policies, but they are less bad than deep depressions or wasteful government spending. Here’s Simon Wren-Lewis:

Perhaps these distortions are quite small. However this discussion illustrates a more serious problem with QE, which is that we still have no clear idea of its effectiveness, or indeed whether effects are linear, and what the best markets to operate in are. Announcements about QE clearly influence the market, but that could be because it is acting as a signalling device, as Michael Woodford has argued. Jim Hamilton is also sceptical. This strongly suggests that the uncertainty associated with the impact of QE is far greater than any uncertainty associated with either conventional monetary policy or fiscal policy.

Thinking about it this way, I cannot see why some people insist that unconventional monetary policy is always preferable to fiscal policy. In a comment on a recent Nick Rowe post, Scott Sumner writes “My views is that once the central bank owns the entire stock of global assets, come back to me and we can talk about fiscal stimulus.” What this effectively means is that it is better for one arm of the state (the central bank) to create huge amounts of money to buy up large quantities of assets than to let another arm of the state (the Treasury) advance consumers rather less money to spend or save as they like. This preference just seems rather strange, but maybe Lenin would have approved!

Of course I was joking, but I do seriously believe that Britain would be better off if it were able to acquire the entire stock of global wealth, at zero cost. That would be even more impressive than the “pink bits” on the map acquired under Queen Victoria.  However if I had my way the Fed would have adopted a policy closer to that of the Reserve Bank of Australia (a monetary base of 4% of GDP), rather than the BOJ (a monetary base of more than 20% of GDP.) QE is both a sign of a failed policy, and at the same time (paradoxically) is better than not QE, combined with the same failed policy.

Debates over monetary policy should not be debates over QE.  The discussion should focus on what policy regime is optimal.  An optimal policy regime would probably not involve any QE at all. And even if it did, it would still be less inefficient than fiscal stimulus. That was my point.  (Remember that the “advance to consumers” must eventually be clawed back via distortionary taxes.)

One way of stimulating demand when interest rates are stuck at zero is to promise a combination of higher than ideal inflation and higher than ideal output in the future. (This can be done either explicitly or implicitly by using some form of target in the nominal level of something like nominal GDP. For those not familiar with how this works, see here.) The cost of this policy is clear: higher than ideal future inflation and output. Once again, these costs can be worth it because of the severity of the current recession, which is why nominal rates are stuck at zero. Whether these costs are greater or less than the cost of changing government spending is debatable: a paper by Werning that I discussed here suggests optimal policy may involve both.

Given that inflation doesn’t matter at all, it is hardly possible for it to be above or below “ideal” levels.  People who talk about the welfare costs of inflation are confusing inflation with NGDP growth.  There are welfare costs of excessive long run NGDP growth, primarily excess taxation of nominal returns on capital. But inflation by itself does not have important welfare costs.  The only possible inflation cost is the “menu costs” of price changes, but even that is unclear, given that nominal wage changes also involve menu costs.  Thus a NGDPLT policy minimizes both the “welfare cost of inflation” and the problem of suboptimal output fluctuations.  There is no trade-off. NGDPLT also reduces financial sector instability, relative to inflation targeting.  It’s a win-win-win policy.

HT: Marcus Nunes, who also has a post.

Tyler Cowen linked to an excellent observation by Ross Douthat:

The point is that as a society changes, as what’s held sacred and who’s empowered shifts, so do the paths through which evil enters in, the prejudices and blind spots it exploits.

So don’t expect tomorrow’s predators to look like yesterday’s. Don’t expect them to look like the figures your ideology or philosophy or faith would lead you to associate with exploitation.

Expect them, instead, to look like the people whom you yourself would be most likely to respect, most afraid to challenge publicly, or least eager to vilify and hate.

Because your assumptions and pieties are evil’s best opportunity, and your conventional wisdom is what’s most likely to condemn victims to their fate.

Saturos sent me a post that discusses (among other things) how the group that formed to promote free speech on campus eventually become the most powerful opponent of free speech on campus.

I’m also reminded that the group that fought hardest for monetary equilibrium in the 1970s (the hawks) became the group most forcefully promoting monetary disequilibrium in the 200os.

And that the group that fought hard to engage the US in the fight against fascism in the 1940s (those opposed to isolationism) became promoters of fascist regimes during the Cold War.

And the group that fought for liberal reforms in the 1800s eventually began promoting eugenics.

And the group that formed to promote the liberation of women ended up promoting laws against prostitution and pornography.

I just got back from a Mont Pelerin meeting in Hong Kong.  I was on the panel discussing the “The Coming Inflation Threat.”  Of course I said that there is no inflation threat.  After the meeting a young person from Australia told me that among his generation of classical liberals the general view is that “If they can’t have an Austrian world, their second choice is a Scott Sumner world.” Naturally I was flattered, but of course if it ever happened then at some point I’d become a force for evil in the world.

PS.  The conference was excellent—much better than I expected.

PPS.  We may not have a Scott Sumner world, but Saturos sent me a post showing that at least I am on the map.  Indeed 4 economics blogs made the map.  Three certainly belong there—about the fourth I have  .  .  .  no opinion.

PPPS.  This seems relevant to the post:

There is a single characteristic, I argue, that defines and unites the cognitive community that you and I share if you are reading this (the community of nerds). These days we often identify as rationalists, skeptics, or atheists, interested in cognition and cognitive biases; we are likely to eat LSD at Burning Man. We read analytic philosophy, science fiction, and LessWrong. We are intelligent, socially awkward, and heavily male. Is there a good name for that?

Lucid Dream

Intelligence and social awkwardness partially explain many of the patterns of our community, but neither is the characteristic I have in mind. This characteristic may be explained by analogy to lucid dreaming (incidentally, a common interest of our members). Dreams ordinarily fool us; despite their incoherence, we accept them as fully real while we are in them.

With effort, over time, you can get in the habit of performing “reality checks” during waking life: trying to push your fingers through solid surfaces, perhaps, or to breathe with airways closed. When asking, “am I dreaming?” and testing coherence becomes enough of an aspect of everyday reality, you may start performing reality checks in dreams, too. If you are successful, your reward will be an insight denied to most people: knowledge of the fact that you are dreaming.

Dreams demonstrate that our brains (and even rat brains) are capable of creating complex, immersive, fully convincing simulations. Waking life is also a kind of dream. Our consciousness exists, and is shown particular aspects of reality. We see what we see for adaptive reasons, not because it is the truth. Nerds are the ones who notice that something is off – and want to see what’s really going on.

Our People

Communal belief – social reality – and the sacrednesses that it produces are precisely the powerful layers of distortion that we are likely to notice (and hence have a chance at seeing through). We are less able than normal humans to perceive social/sacredness reality in the first place, and to make matters worse, we are addicted to the insight rewards that come from trying to see through it even further. Autism is overrepresented in our community; depression, too. Autism is associated with a reduced ability to model other brains in the normal, social way; this failure carries even into modeling the mind of God, as autism is inversely linked to belief in God. The autistic person is more likely than the neurotypical to notice that social reality exists; we might say the autistic person gets a lucid dreaming reality check for the great social dream with every inscrutable (to him) human action he witnesses.

Mild depression removes pleasurable feelings from everyday life; it interferes with a mechanism for sacredness-maintenance distinct from the theory of mind path autism blocks. Meaning is deconstructed in depression; social connection is weakened. Ideas and things that for normal individuals glow with significance appear to the depressed person as empty husks. The deceptive power of social and sacredness illusions is weakened for the depressed person (as are certain other healthy illusions, such as the illusion of control). This is not necessarily a victory for him, as self-deception is strongly related to happiness; the consolation of insight may not make up for the loss of sacredness in terms of individual happiness. The characteristic that distinguishes us is not necessarily a good thing. Our overdeveloped, grotesque insight reward seeking is likely maladaptive, and is probably not even doing our individual selves any good. Extremists – those most capable of perceiving social/sacred reality – are happiest.