A recent twitter discussion of electronic money
I haven’t gotten into twitter (lack of time) but occasionally see twitter threads linked to in blogs. Miles Kimball recently linked to an interesting twitter discussion of electronic money. I’d like to offer a few comments, but first a brief explanation.
Some economists (not me) think the zero lower bound prevents central banks from enacting monetary stimulus. Others think it makes monetary stimulus more difficult, uncertain, or controversial. I think it’s only a problem because central banks foolishly use interest rate targets as both their policy instrument and their signaling device.
One alternative is to eliminate the zero lower bound by paying negative interest on base money. In the 1930s Silvio Gesell proposed doing that through “stamped money.” In 2009 I proposed a more limited plan aimed only at bank reserves (including vault cash.) There are technological problems that make negative interest on currency held by the public much more difficult to implement. On the other hand in a few decades we’ll probably switch our monetary system from currency to electronic money, where negative interest will be easy to implement. No more zero bound. Miles Kimbell has suggested that we speed up that process, and do today what we are likely to at some point anyway. (Although for some reason he contemplates paper currency continuing to exist, albeit de-monetized.)
Here’s the first tweet of interest from Miles Kimball:
It is not only better, but less radical to eliminate the ZLB by e-$. Lift Inflation Expectations to Boost Growth?
Here Kimball suggests that negative interest rates on base money are less controversial than higher inflation expectations. I can think of 4 possible ways of addressing the zero bound problem:
1. Raise the inflation target so that nominal rates never fall to zero.
2. Boost the monetary base as needed to hit the existing inflation target, perhaps buying lots of unconventional assets if the Fed runs out of T-securities to buy.
3. Reduce the demand for base money by a Robert Hall-style regime where the interest rate on base money is reduced to a level expected to produce on-target inflation.
4. Keep the existing 2% inflation target, but shift to level targeting. That might (or might not) allow us to avoid the zero bound. In other words, it’s not clear the extent to which we are at the zero bound because our inflation target is too low, and the extent we are there because the Fed allowed deflation in 2009, and didn’t attempt to make up the lost ground. Even better, shift to NGDPLT.
The supply approach might require the Fed to accumulate a large stock of financial assets, raising concerns about risk/socialism, etc. Or it might not. It’s quite possible that the Fed could hit its existing inflation/employment target without printing more money, if the central bank added credibility through a futures targeting regime. We simply don’t know.
Kimball’s approach reduces base demand with a controversial policy of e-money, which raises issues of “big brother” watching everything you do. However I notice the younger generation doesn’t seem greatly concerned about the loss of privacy coming along with the electronic surveillance state, so maybe this isn’t a big issue.
A possible compromise would pay negative interest on bank reserves (including vault cash) but not currency held by the public. In theory, that doesn’t really “solve the problem” of the zero lower bound, as I envision currency continuing to be a media of account (unlike Miles.) But as a practical matter it would, as vast private currency holdings are fairly costly. If the public had to suddenly absorb an extra $2 trillion in currency (nearly $20,000 per family of three) it would be highly inflationary. Unfortunately even this move is much too controversial for the Fed. They refuse to even go to a zero interest rate on bank reserves, which was standard policy for the first 95 years of the Fed’s existence. QE is less controversial.
Of course I favor option 4, shifting to level targeting (and also shifting from prices to NGDP.) This might not be enough, in which case I’m pretty indifferent between a slightly higher NGDP target (say 5% vs. the current de facto 4%), or a large Fed balance sheet. If the balance sheet got so large that the Fed had to buy assets other than Treasury securities or their equivalent (Treasury-backed MBSs) then I’d favor a negative IOR or a higher NGDP target. But again, I think it is extremely unlikely that this scenario would occur in the US. It’s probably not even worth thinking about.
I believe much of the blogosphere debate is off target. We shouldn’t be looking for new ideas that might “solve problems.” The real problem is that the Fed hopes we end up in a position that is different from where they expect us to end up. If they’d been targeting the forecast since 2008 then none of this would have happened. The zero bound is a symptom of a failed policy, not a constraint that prevents the Fed from enacting a policy that they expect will produce the results that they hope to achieve. For instance, consider these Kimball tweets:
Australia is not a good example. I don’t think Australia was ever near the Zero Lower Bound. . . .
e-money is only directly important when you hit the Zero Lower Bound.
Australia did not hit the zero bound precisely because they followed a policy that (de facto) mimicked the path of NGDPLT. So it’s a great example. If you have sound monetary policy you probably won’t hit the zero bound in the first place, unless you are a slow-growing economy with an ultra-low inflation target (i.e. Japan.) Then the zero bound might even become the norm. But why would a country want to do that?
BTW, I do agree with Kimball that it would be bad idea to raise and lower the inflation target depending on the state of the economy. The beauty of NGDP targeting is that it is actually a target that a central bank would be comfortable sticking with in good times or bad. As we are seeing in Britain, an inflation target gets ignored when it signals the need for the sort of (contractionary) demand-side policies that seem obviously crazy to the policy elite.
PS. Kimball also tweeted the following:
Not much inflation in 30’s. In any case Fed controlled monetary policy, not Roosevelt.
Actually Roosevelt did control monetary policy, using the lever of changes in the price of gold. This forced the Fed to be much more expansionary than they wished to be. Between March 1933 and March 1934 the WPI rose by over 20%, and broader price indices rose by 5% to 10%. That’s pretty impressive inflation in an economy with 25% unemployment and risk-free interest rates stuck at the zero bound.
Today we have a 100% fiat money regime and (supposedly) can’t even manage a measly 2.5% inflation. Talk about technological regress! The interwar generation would have laughed at our incompetence: “You have unbacked paper money and can’t figure out how to debase it? Are you kidding me?”
The following video shows how I view fiat money central banks that don’t know how to debase their own currencies:
Love the rabbit hunting sequence.
Tags:
3. April 2013 at 16:16
Scott,
It would be far, far better if the Fed were to buy 10 trillion or so Treasury’s, especially held by foreign governments. Lowering the interest rate on reserves will try and send money through a unstable pipe, demand for loans is still not what it used to be, with household debt up to 100% of income. Even if households are borrowing again, do we really want them to worsen their balance sheets?
Household and corporate balance sheets are far more important than the Fed’s balance sheet. My method will weaken the dollar and lower the prices of our goods and assets without increasing the amount of loans in circulation and starting the whole bad debt cycle all over again
3. April 2013 at 16:37
“Australia did not hit the zero bound precisely because they followed a policy that (de facto) mimicked the path of NGDPLT.”
Please stop saying this. It is utterly, ridiculously, wrong. I can’t figure out how to insert a chart in comments but I will try to email you one.
3. April 2013 at 16:50
Negative IOR with unlimited currency doesn’t accomplish anything, it just converts 0% reserves into 0% currency. There is nothing inflationary about it.
Negative IOR without currency printing would work, since it would de-dollarize paper money. Paper money would still be a medium of exchange, but it would trade above face value. And Fed Funds could take any value since 0% dollars wouldn’t exist.
Miles’s idea is for a new paper-only currency with a crawling peg (not his words – this is my interpretation). But you can’t just re-purpose the existing paper money for the new currency, since that would be a default.
3. April 2013 at 17:29
I was in a discussion with Miles about monetary policy and technology shocks last night. Miles contends (as criticism of NGDPLT) that technology shocks necessitate adjusting a NGDP target. You can view most of the conversation at the link below:
http://storify.com/mileskimball/why-the-nominal-gdp-target-should-go-up-about-1-af
3. April 2013 at 18:16
Edward, I actually think the amount of loans would be about equal either way. But I’m all for doing OMOs first, and then lower IOR if needed.
BTW, I doubt we’d need to do anywhere near $10 trillion in OMP, if the IOR was set at zero.
Declan. I had a long debate with someone about a year or two ago on this point. I looked at the data quite closely. And the bottom line is that they have been pretty close to NGDPLT. The NGDP rose above trend, then fell below, then bounced back.
Max, I don’t agree, it’s much more costly to hold $2 trillion in cash than $2 trillion in reserves. With negative IOR, market rates on bank deposits would go negative.
In any case, the purpose of negative IOR is not to create inflation, it’s to reduce the size of the central bank balance sheet. Creating inflation is easy, even upper class twits could do it.
Niklas, Sure, if price stickiness is the macro problem then you want to stabilize the price level. But in fact wage stickiness and unemployment are the key macro problems, hence you want to stabilize the wage level. NGDP targeting can do that better than price level targeting.
3. April 2013 at 18:37
Scott,
1) You need to be more derisive of any talk of a ZLB. There is only a nominal ZLB, and economic players don’t make decisions based on nominal rates. A financial asset can easily have a negative expected real return regardless of the nominal price/return.
2) No reason you can’t make electronic money anonymous.
3. April 2013 at 18:40
Dr. Sumner:
“One alternative is to eliminate the zero lower bound by paying negative interest on base money.”
You mean you want the Fed to start taxing bank reserves.
Paying negative interest like saying donating a liability.
Given that you want the Fed to start taxing bank reserves, I suppose the imagined outcome would be that the banks are more likely to…what, lend it out? But if there were more profitable loans to be made, wouldn’t the banks just issue new credit on their own? Why second guess the market?
3. April 2013 at 20:08
Scott
The problem is that if the “solution” is ‘simple’, as advertised by NGDP-LT, few will accept it. There would be so many ‘lost faces’ and so much fewer DSGE ‘complicated’ papers to be written…
3. April 2013 at 20:42
To repeat… there’s is no ZLB “problem”. It’s total superstition. Just like the sound “barrier” or sailing off the “edge” of the earth.
Scott, you should be ridiculing these people who keep talking about it.
3. April 2013 at 20:59
Try this: http://www.the-human-predicament.com/2012/05/how-to-stimulate-economy-without.html
3. April 2013 at 21:06
use e-$ to target NGDP
3. April 2013 at 21:19
Japanese stocks get a 1% pop and the Yen falls 1% seconds after BOJ announcement.
http://www.bloomberg.com/news/2013-04-04/bank-of-japan-boosts-bond-purchases-at-kuroda-s-first-meeting.html
3. April 2013 at 21:35
Re-posted until Geoff has the guts to admit he’s wrong
Geoff,
The 1970″²S were a refutation of “Old Keynesian” dogma. New Keynesians allow for an altered theory that has negative supply shocks, and Monetary Neutrality. Speaking of monetary neutrality, it was Milton Friedman who made the public statement that the Phillips Curve was not ultimately stable, and greater and greater injections of money would not lower unemployment. He was proven right. He made this statement, in ADVANCE of the coming inflation, in a speech in 1968 to the AEA. So you can’t accuse the friedmanites, and new Keynesians of simply adding epicycles. The true test of a theory is its ability to explain and predict BEFORE an event takes place. Friedman did so. HIS version of AD theories were confirmed
Friedman NEVER said that the SHORT term philips curve did not exist or was not worth pursuing. He said that the Fed didn’t inflate ENOUGH during the depression, if you might recall.
The Friedmanite/New Keynesian theory allows for different responses to different situations, not the one size fits all, idiotic, Austrian solution of tighter money, always, everywhere all the time.No NK worth his salt would EVER recommend anything like easier money for, say Latin American countries that experienced hyperinflation. Read what Jeffrey Sachs helped do with regards to Bolivia.(Hint: it wasn’t to say, the stimulus was too small!)There is absolutely NO contradiction between’s Friedman’s critique of the Fed in the 30″²s and his critique of the Fed during the 70″²s.
That you could say that the 70″²s somehow “disproved” AD theories only reveals your sad ignorance.
You say that NGDP and spending on wages are different things, fine, EVERYONE acknowledges this. If I recall correctly, Scott once said that wage level targeting was the best, but because of political reasons, it couldn’t b implemented.
And I believe he also said that NGDI is a more accurate reading, that finalized spending. (Right Scott?) Oh, and by the way, there is nothing wrong with a self- reinforcing causality loop. The Fed targeting NGDp will raise it by a certain amount, which will then increase employment, which will then increase NGDP by more and so on.
Finally, lets get to the falsifiability aspect of NGDPLT. I will demonstrate to you how its truly scientific and falsifiable. NGDP falls in country x by 10%. Country X has been targeting for a while now at 4.5%. Scott’s theory would be for the Fed to target the futures market of expected NGDP by 14.5 percent, to make up for lost ground, and to get back to trend. (Not one iota more, so you can’t accuse him of being some wild eyed dove) If NGDP rises in the form of 13% inflation and 1.5% real growth, then we KNOW for a fact that X’s problems ARE NOT demand related, but supply related, so they have to do reforms. If, on the other hand, 13% of the growth of NGDP comes in the form of REAL growth, and only 1.5% inflation, then we know for a fact that X’s problems ARE demand related, and the stimulus was successful.
Either way Scott’s theory is confirmed in its universal sense BECAUSE IT IS SO EXPANSIVE AND WE KNOW THE GOALPOSTS. He doesn’t keep moving them around in his theoretical models like the Austrians do. In specific terms, however, if Scott made predictions one way or the other about where the split will lie, then will have subjected himself to a falsifiability test, and he’ll be honest enough to say he was wrong is he actually, rather than saying “ economic theories cannot be proven on the basis of historical data!”
3. April 2013 at 21:37
MCK and Caroline Baum in Bloomberg on the Gold Standard: http://www.bloomberg.com/news/2013-04-03/the-gold-standard-wasn-t-so-bad.html
http://www.bloomberg.com/news/2013-04-03/gold-bugs-had-the-best-monetary-rule.html
3. April 2013 at 21:38
And the New Yorker tips Yellen as next Fed Chair: http://www.newyorker.com/online/blogs/johncassidy/2013/04/janet-yellen-ben-bernanke-federal-reserve-next-chair.html
3. April 2013 at 23:28
http://finance.yahoo.com/news/bank-japan-scraps-overnight-call-051241190.htm
TOKYO (Reuters) – The Bank of Japan shocked markets on Thursday with a radical overhaul of its policymaking, adopting a new balance sheet target and pledging to double its government bond holdings in two years as it seeks to end nearly two decades of deflation.
…
The Nikkei stock index unwound losses of more than 2 percent to end up 2.2 percent, just shy of a 4-1/2 year closing high hit last month.
…
In doing so, it will revert to open-ended asset purchases and buy over 7 trillion yen ($75 billion) of long-term government bonds per month, so that the balance of its bond holdings increase at an annual pace of 50 trillion yen.
3. April 2013 at 23:53
In NGDPLT, which one is the more important part NGDP or LT? If you could have only one of these, i.e. either price level targeting or NGDP growth rate targeting, which one would you choose?
4. April 2013 at 00:57
Scott,
Will be very interested to hear your comments on the BOJ news.
IMHO 2% inflation is a very aggressive target. I think a CB can target NGDP, but they have much less control over how that breaks down between real growth and inflation. Also, in a country like Japan with many years of low inflation or deflation, there is a hysteresis effect which slows upward pricing pressure. Accordingly, it would not be surprising to need real growth rates of 4 or 5% to achieve 2% inflation, and I would think the BOJ would significantly scale back its OMP once the economy started to achieve 2 or 3% real gains.
That said, with the right tax and regulatory reforms, Japan is certainly capable of sustaining 4 or 5% real growth for an extended period of time.
4. April 2013 at 02:49
[…] See full story on themoneyillusion.com […]
4. April 2013 at 04:10
“Max, I don’t agree, it’s much more costly to hold $2 trillion in cash than $2 trillion in reserves. With negative IOR, market rates on bank deposits would go negative.”
That’s a good reason not to do it – it imposes costs on the economy, for no benefit. (Eliminating the zero bound also imposes costs, but with a benefit).
Negative IOR doesn’t penalize holding base money, it only penalizes holding one form of base money. It’s not a solution to anything.
“In any case, the purpose of negative IOR is not to create inflation, it’s to reduce the size of the central bank balance sheet.”
It has no such effect. Reserves are replaced with currency, no change in balance sheet size.
4. April 2013 at 04:42
Everyone, Thanks for the Japan info.
dtoh, I’ll get plenty derisive today.
Geoff. I’m not trying to distort the market, nor am I trying to encourage banks to make more loans. No price controls are being recommended.
Edward, Geoff just made a complete fool of himself in the comment section of the previous post. Any tiny credibility he might have had is gone.
Saturos, It seems almost everyone assumes Yellen is the next chair.
Ossi, Good question. I suppose I’ve expressed an opinion on that in the past, but I’m actually a bit undecided. For now I’ll just say:
1. NGDP growth targeting, if it was a “target the forecast” policy.
2. Price level targeting, if it was not a target the forecast policy.
dtoh, I hope you are right, but I’m more skeptical about their real growth potential. I believe any “pop” to growth would be short lived–a year or two. Still, that’s worth doing!
Max, Your comment is internally inconsistent. If it discriminates as you say, and is costly as you say, then obviously it cannot simply replace reserves with cash.
If I was put in charge of monetary policy I would not do negative IOR, because it’s not needed. I just put it out there for worry-worts who think other policies would not be enough.
4. April 2013 at 05:16
“Max, Your comment is internally inconsistent. If it discriminates as you say, and is costly as you say, then obviously it cannot simply replace reserves with cash.”
Well, let’s suppose the Fed Funds rate goes a little lower than with IOR=0%. So what? Surely you don’t believe that the difference between now and a highly inflationary state is a tiny reduction in the Fed Funds rate, with no further reduction possible.
4. April 2013 at 05:39
Thanks for writing about this. There is a lot here. Some of the answers are in this Twitter conversation (before I saw this post):
http://storify.com/mileskimball/electronic-money-nominal-gdp-targeting-and-the-tra
Some I need to write about at greater length.
I do want to address one thing here. You wrote:
“Kimball’s approach reduces base demand with a controversial policy of e-money, which raises issues of “big brother” watching everything you do. However I notice the younger generation doesn’t seem greatly concerned about the loss of privacy coming along with the electronic surveillance state, so maybe this isn’t a big issue.”
The reason I keep the demonetized paper currency around is to address people’s concerns about privacy, as well as whatever psychological attachment they have to paper currency. So the answer to this puzzlement:
“(Although for some reason he contemplates paper currency continuing to exist, albeit de-monetized.)”
Is partly the privacy concerns you mention.
4. April 2013 at 06:13
When “they” create negative interest rates, I hope they also create a magical function that can take away 5% of your house or the gold stashed in the floorboards, otherwise it will fail. And if we get Orwellian times, there will be an exodus by the internationally mobile. It is already brewing amongst the young.
4. April 2013 at 06:18
And talking of nDGP: great. Look forward to structuring more financial products that inflate GDP. Looks like the ECB will buy SME CLOs. A central bank can’t pre-determine sustainable and true growth. nGDP will get arbitraged. You can’t smooth or force the creation of intelligence & innovation. That is worse than Orwellian.
4. April 2013 at 08:17
Before getting into the “radical” negative interest on reserves, and the even more radical demaning payment to hold currency, we start with the very mild….not paying interest on reserves
4. April 2013 at 11:28
“You have unbacked paper money and can’t figure out how to debase it?”
Haha. They’d send you over to Weimar Germany for lessons.
4. April 2013 at 13:04
Professor Sumner.
I liked this post very much. A Great Sumnery, 🙂 , of where we are at.
You say…”There are technological problems that make negative interest on currency held by the public much more difficult to implement. “
I would add that there are HUGE phycological problems with it too. It just seems so wrong on a gut level… Also, why keep your money in a bank at all if the interest rate is neg ? (Maybe I am misinterpreting what “Public” means in this case ? )
Declan, I want to see why Scott is wrong about Australia too… Got a link ?
dtoh says… “To repeat… there’s is no ZLB “problem”. It’s total superstition. Just like the sound “barrier” or sailing off the “edge” of the earth.
Scott, you should be ridiculing these people who keep talking about it.”
I get what you are saying, but by rejecting the very concept of the ZLB you put yourself too far out side the debate . One can explain why the ZLB SHOULD not be a problem… but AS THINGS ARE it is a very real problem.
Even if it is caused by pure ignorant devotion to traditions… the traditions still rule. And within those traditions there are different approaches to dealing with with the ZLB. Choosing among the more Establishment ways of dealing with the ZLB is still a very important exercise… They can have a huge impact. To be silent on them would be irresponsible.
I guess all I am trying to say is that you can do both… Attack the very concept of the ZLB, and address the problems of ZLB within the realm of what is possible now.
4. April 2013 at 13:14
Dr. Sumner:
“Geoff. I’m not trying to distort the market, nor am I trying to encourage banks to make more loans. No price controls are being recommended.”
Whether or not you’re intending to do it is different from whether or not your calls will do it.
If you’re not trying to encourage banks to make more loans, then what are you intending for the banks to do with the reserves, given that they are going to be taxed if held?
If the banks aren’t doing that now, why do you want to change that through taxing reserves?
“Edward, Geoff just made a complete fool of himself in the comment section of the previous post. Any tiny credibility he might have had is gone.”
Thanks, but this is likely something you WISHED happened, rather than something that you know IS happening.
—————-
Edward:
First, I humbly ask that next time, you format your posts a little better. The format you have is rather difficult to parse. I don’t know if you’re quoting me or not in there.
Anyway, my responses:
“The 1970″²S were a refutation of “Old Keynesian” dogma. New Keynesians allow for an altered theory that has negative supply shocks, and Monetary Neutrality. Speaking of monetary neutrality, it was Milton Friedman who made the public statement that the Phillips Curve was not ultimately stable, and greater and greater injections of money would not lower unemployment. He was proven right. He made this statement, in ADVANCE of the coming inflation, in a speech in 1968 to the AEA. So you can’t accuse the friedmanites, and new Keynesians of simply adding epicycles. The true test of a theory is its ability to explain and predict BEFORE an event takes place. Friedman did so. HIS version of AD theories were confirmed”
The “Old Keynesian” dogma that there is a causal relatioship between AD and wage payments, isn’t abandoned in MM theory. It’s still clung to, as the posts on this blog have made clear. The reason MM wants NGDP targeting is to prevent unemployment from rising which is itself the same theory of the causal link between AD and wage payments.
“Friedman NEVER said that the SHORT term philips curve did not exist or was not worth pursuing. He said that the Fed didn’t inflate ENOUGH during the depression, if you might recall.”
True, but I don’t see how this is related. At any rate, the Fed did try to inflate after the stock market collapse of ’29, but wage earners and bankers who did continue to make money, overruled the Fed by hoarding what it printed. Of course this is what is often jumped on by inflationists who say that an unconstrained Fed could have stopped the depression, but they would only be ignoring the subsequent bubble that would have otherwise been unleashed on the basis of non-market inflation.
“The Friedmanite/New Keynesian theory allows for different responses to different situations, not the one size fits all, idiotic, Austrian solution of tighter money, always, everywhere all the time.”
As far as I am aware, Austrian theory doesn’t “call for tighter money, always, everywhere all the time”, but rather doesn’t “call” for anything whatsoever. I don’t think it’s a normative theory.
What you probably meant to say is that individuals who either call themselves Austrian, or are regarded as Austrian, tend to reject calls for more inflation, which makes it appear that they “call for tighter money, always, everywhere all the time.” Seems like the Fed is never justified in inflating with those stingy doctrinaire Austrians.
The reason that perception has arisen is because we just so happen to live in a society where a 100 year old central bank keeps on blowing up physically unsustainable economic booms, where the times that the central bank has to stop printing money or else it will generate too high of inflation, brings about new valuations, new exchanges, and new capital and labor activity that is “too painful” for short term minded inflationists to accept, and so call for more inflation, of which most who consider themselves Austrians consider to be antithetical to a real cure, because they hold it was past inflation that caused the problems in the first place.
“No NK worth his salt would EVER recommend anything like easier money for, say Latin American countries that experienced hyperinflation.”
There is no real grounds for NKs to know what the right quantity of money and rate of money growth should be such that they are even in the position to making credible judgments as to whether or not money is too tight or too loose in Latin America.
NKs do not understand that the only valid source of information from which they can learn whether or not money should be looser or tighter, is if and only if money production and money spending are market driven.
Money is a commodity valued by individuals for various purposes, but most fundamentally as a medium of exchange. No individual can know, a priori, what money balances others will want, nor how much spending they want to engage in. But that is what all inflationists believe they are able to do, most often by observing past money balance and spending trends and falsefly inferring a constancy into the future as if humans are robots.
“Read what Jeffrey Sachs helped do with regards to Bolivia.(Hint: it wasn’t to say, the stimulus was too small!)There is absolutely NO contradiction between’s Friedman’s critique of the Fed in the 30″²s and his critique of the Fed during the 70″²s.”
The same flawed assumptions were present for both, namely, the flawed assumption by Friedman that he knows what the right quantity of money should have been for both times. He didn’t know, and he was full of it. Just like you would be full of it if you actually believed that you know money should be this or that. You can’t know this. It’s futile. You’re pretending to be all intelligent and smart as to what money should be, just because it’s monopolized. But just because something is monopolized, it doesn’t mean that you suddently acquire the intellectual wherewithal to know what can only be known dispersedly by millions of separately thinking and planning individuals.
“That you could say that the 70″²s somehow “disproved” AD theories only reveals your sad ignorance.”
No, it only reveals your recalcitrance in being unable to admit it when a theory has been debunked.
And I love it how you changed the context into “AD theories” with an “s”, as if claiming that high inflation and high unemployment refutes the theory that high inflation leads to lower employment, somehow means I am denying every other AD theory under the Sun.
“You say that NGDP and spending on wages are different things, fine, EVERYONE acknowledges this.”
Yet I am seemingly the only one who is actually integrating that into my arguments. You and so many others are not. On the surface you admit they’re different things, but then when you talk to the laymen, when you advance your theories, when you go about actually proposing what ought and ought not be done, you go on and on as if they can be treated interchangeably. You see wage payments declining, you see NGDP declining, and you immediately think in your mind “more NGDP means more wage payments!”
“If I recall correctly, Scott once said that wage level targeting was the best, but because of political reasons, it couldn’t b implemented.”
Precisely. Going from NGDP targeting to aggregate wage payment targeting is an intellectual outgrowth of Phillips curve thinking. It is the very thing expected from those whose ideas treat NGDP and wage payments as interchangeable. If not NGDP, then so what! Let’s do wage targeting. Pretty much the same thing, right?
“And I believe he also said that NGDI is a more accurate reading, that finalized spending. (Right Scott?)”
You get a star sticker of the week!
“Oh, and by the way, there is nothing wrong with a self- reinforcing causality loop. The Fed targeting NGDp will raise it by a certain amount, which will then increase employment, which will then increase NGDP by more and so on.”
See that? You said raising inflation will increase employment. Again the same causal theory. This is, mind you, right after you said the theory was falsified by Friedman. Interesting.
At any rate, of course there is something wrong with that, but you’d have to understand micro-economics to see it.
“Finally, lets get to the falsifiability aspect of NGDPLT. I will demonstrate to you how its truly scientific and falsifiable. NGDP falls in country x by 10%. Country X has been targeting for a while now at 4.5%. Scott’s theory would be for the Fed to target the futures market of expected NGDP by 14.5 percent, to make up for lost ground, and to get back to trend. (Not one iota more, so you can’t accuse him of being some wild eyed dove) If NGDP rises in the form of 13% inflation and 1.5% real growth, then we KNOW for a fact that X’s problems ARE NOT demand related, but supply related, so they have to do reforms. If, on the other hand, 13% of the growth of NGDP comes in the form of REAL growth, and only 1.5% inflation, then we know for a fact that X’s problems ARE demand related, and the stimulus was successful.”
You’re making the same mistake every empiricist minded person makes. You’re not separating the theory that the resulting real growth occurred BECAUSE of the inflation, from the theory that the resulting real growth occurred DESPITE the inflation.
You can’t just conclude that if you observe 13% inflation and 1.5% real growth, that the problems are supply related and not demand related. It could be the other, or both. The paltry 1.5% real growth could very well be CAUSED by the inflation, where real growth would otherwise have been 3% or more without the inflation.
Yes, presented in the way you presented it, NGDPLT is falsifiable, but the underlying premises of NGDPLT are NOT falsifiable, and it is precisely those premises that are flawed and can only be rectified through better non-falsifiable economic logic.
“Either way Scott’s theory is confirmed in its universal sense BECAUSE IT IS SO EXPANSIVE AND WE KNOW THE GOALPOSTS. He doesn’t keep moving them around in his theoretical models like the Austrians do.”
As far as I know, Austrian theory doesn’t use models, and doesn’t keep changing. The axiom of human action is the same.
More importantly, and what you have to understand, is that whether or not Scott’s theory is “confirmed”, has no bearing on the truth of the theory, if you understand the further truth that economic theories aren’t empirical, but a priori, due to the fact that humans learn and change over time, thus rendering past history a unique experience.
You can’t induce from a unique history.
“In specific terms, however, if Scott made predictions one way or the other about where the split will lie, then will have subjected himself to a falsifiability test, and he’ll be honest enough to say he was wrong is he actually, rather than saying “ economic theories cannot be proven on the basis of historical data!”
And so it goes. Price inflation targeting monetarism was falsified. But that hasn’t stopped central banking. Once Sumner’s theory is falsified, as it will as all Lucas Critique applicable theories do, once people have come to adapt to NGDP targeting, then the given target of 4.5% or whatever it is, will be insufficient, and we’ll have to suffer under yet another generation of technocrats with the new new new 5 year plans, and so on ad infinitum like a bunch of mindless monkeys who refuse or are unable to understand that the problem is the planning itself, not the numbers of the plan.
4. April 2013 at 13:20
[…] a recent post on Mike Kimball´s ‘electronic money tweets’, Scott […]
4. April 2013 at 14:02
A word limit on posts would be nice.
4. April 2013 at 17:15
Max, No, a small reduction in rates wouldn’t matter much. But then rates never matter much. I don’t believe monetary policy works through interest rates, it works through the hot potato effect.
Miles, Perhaps, but I can’t imagine why the public would want to hold currency in any significant quantity if it was no longer a medium of account. The demand for bitcoins is tiny compared to the demand for currency.
Geoff, You said;
“If you’re not trying to encourage banks to make more loans, then what are you intending for the banks to do with the reserves, given that they are going to be taxed if held?”
Gee, what would banks do with all that cash if they didn’t want to make loans. Let me think a minute . . .
Bill, I tried to implement one, but my tech support could not figure out how.
4. April 2013 at 18:05
Scott,
You said; “I hope you are right, but I’m more skeptical about their real growth potential. I believe any “pop” to growth would be short lived-a year or two. Still, that’s worth doing!”
My read.
Short term – I think Japan will get a pop of very high RGDP well before reaching 2% inflation, which will probably cause the BOJ to adopt a less aggressive monetary policy thus pulling the rug out from under the growth.
Long term – If there were real reform of tax and regulation, Japan could easily achieve real growth above 5% for an extended period of time. I personally think the chance of real reform is low. To my mind however, the unknown variable in the calculus is Chinese military strength and aggressiveness. There is still a very nationalistic streak in much of the Japanese bureaucracy and political leadership and increasing fear of China could cause a shift toward more pro-growth economic policies (e.g. real reform).
4. April 2013 at 18:16
Bill,
ZLB is only a psychological problem. I’m not saying Scott, should ignore it, I’m saying he should refute it and ridicule it.
There are only problems with the ZLB if you assume economic players are irrational and make decisions based on nominal rather than real rates of returns.
4. April 2013 at 19:10
Dr. Sumner:
“Gee, what would banks do with all that cash if they didn’t want to make loans. Let me think a minute . . .”
I know! How about another real estate bubble? Or another stock market bubble?
BUY STOCKS AND REAL ESTATE OR WE WILL TAX YOUR ASS!
What could possibly go wrong? Nothing, because bubbles don’t exist. What could go right? NGDP would rise. Checkmate bitchez.
4. April 2013 at 19:24
Geoff,
I think you’re conflating two issues. IMHO, most recent bubbles have been caused by the government providing subsidized credit to financial institutions in the form of an implicit TBTF guarantee.
4. April 2013 at 22:04
“Max, No, a small reduction in rates wouldn’t matter much. But then rates never matter much. I don’t believe monetary policy works through interest rates, it works through the hot potato effect.”
The reason why there is a “hot potato effect” away from the zero bound is that an increase in base money can’t be accommodated by a *tiny* interest rate change, because the marginal dollar isn’t valued for its transaction services, only for its interest, which isn’t competitive.
At the zero bound, a huge increase in the quantity of money can be accommodated by a tiny interest rate change, since money is already fully interest rate competitive with bonds.
4. April 2013 at 22:05
dtoh, I wouldn’t want to fly in an airplane designed by someone who thought that gravity was only a psychological problem.
4. April 2013 at 22:43
dtoh:
“I think you’re conflating two issues. IMHO, most recent bubbles have been caused by the government providing subsidized credit to financial institutions in the form of an implicit TBTF guarantee.”
Most? You mean not all? Then my point stands.
IMHO, regulatory and fiscal activities determine WHERE the bubbles will be concentrated, while the monetary activities determine WHEN bubbles will occur.
I think even in the most laissez-faire world, if there is a CB not constrained to any market signals of profit and loss, it’s only a matter of when, not if.
5. April 2013 at 00:05
Geoff,
“Most? You mean not all? Then my point stands.”
Most! But if you include regulatory incompetence in other areas then I would say all.
“Monetary activities determine WHEN bubbles will occur.”
Well yes to the extent that bubbles mostly occur when the economy is healthy, but that’s like saying patients in a coma aren’t usually arrested for drunk driving.
5. April 2013 at 00:13
Max,
“The reason why there is a “hot potato effect” away from the zero bound is that an increase in base money can’t be accommodated by a *tiny* interest rate change, because the marginal dollar isn’t valued for its transaction services, only for its interest, which isn’t competitive.
At the zero bound, a huge increase in the quantity of money can be accommodated by a tiny interest rate change, since money is already fully interest rate competitive with bonds.”
So this is where I disagree with Scott. I think the HPE is a pretty good model for describing the correlation between NGDP growth and increase in the Base, but IMHO the triggering/ transmissive mechanism is the real price of financial assets an increase in which will cause a marginal increase in the exchange of financial assets for real goods and services.
If you measure real prices of financial asset as expected real IRR, then it’s obvious that ZLB has no impact as higher inflation expectations will reduce expected real IRR (on cash or interest bearing securities) and trigger a marginal increase in the exchange of financial asset for real goods and services just as effectively as a decrease in the nominal interest rate.
I agree with you on gravity, but I don’t believe the earth is flat of that there is an actual ZLB.
5. April 2013 at 00:31
dtoh:
“Most! But if you include regulatory incompetence in other areas then I would say all.”
Regulators can’t stop bubbles. They’re not Gods. They’re not omniscient. They have literally no clue as to how much each industry should expand relative to the others. How do I know this? Because nobody knows it.
“Monetary activities determine WHEN bubbles will occur.”
“Well yes to the extent that bubbles mostly occur when the economy is healthy, but that’s like saying patients in a coma aren’t usually arrested for drunk driving.”
Mostly? You mean not always? My point stands again!
The more hedged you try to make your language…
5. April 2013 at 01:06
Geoff,
You know what I’m saying.
We’re always going to have bubbles….it’s in the nature of politics and human fallibility.
I don’t think we can eliminate them, but we can reduce them. I’ve commented on this before but I think the way to do it is through the use of stricter asset/equity ratio regulations by asset class.
That said, you could also reduce the number of bubbles by starving the economy through tight monetary policy but that’s like throwing the baby out with the bathwater.
6. April 2013 at 09:43
dtoh:
Any solution you have in mind that doesn’t require SWAT teams and threats of prison?
Just curious.