About that “impotent” monetary policy

Here’s Paul Krugman:

The same impotence of conventional monetary policy that makes open-market purchases of Treasuries useless at boosting GDP also mean that broad monetary aggregates that include deposits are largely immune to Fed influence. The Fed can stuff the banks full of reserves, but at zero rates those reserves have no incentive to go anywhere, and even if they do they can sit in safes and mattresses.

Yes, if open market purchases of bonds don’t boost NGDP, then they would also fail to boost M2.  That’s what the liquidity trap theory says.  But it says far more than that. Here are some other implications of Krugman’s claim:

1.  QE fails to boost stock prices.

2.  QE fails to affect bond prices.

3.  QE fails to affect exchange rates.

You thought Japanese QE depreciated the yen?  That’s just your imagination.  You think QE recently caused the euro to depreciate?  You are hallucinating.  The dollar fell 6 cents on the day QE1 was announced, in March 2009?  That’s a coincidence.

GDP growth accelerated in 2013, despite a $500 billion decline in the budget deficit, and hundreds of Keynesians predicting a slowdown or even recession?  Nothing to do with QE.

HT:  Benn Steil

PS.  I have a new post over at Econlog


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64 Responses to “About that “impotent” monetary policy”

  1. Gravatar of E. Harding E. Harding
    10. May 2015 at 08:21

    And the New, data-immune Krugman also failed to look at actual monetary aggregates (such as bank deposits, M1, and M2), only showing us the ultra-misleading so-called “money multiplier”. If that’s not dishonesty, I don’t know what is. I’m pretty sure that, with no QE, inflation over the past six years would have averaged under 1%.

  2. Gravatar of E. Harding E. Harding
    10. May 2015 at 08:23

    I mean, can anyone come up with a reason for why M1 and required reserves have been skyrocketing since the recession other than QE?

  3. Gravatar of Ray Lopez Ray Lopez
    10. May 2015 at 09:22

    Krugman of course is quite right: monetarism is an illusion. Who to believe? Nobelian or blogger who calls his commentators ‘moron’ and ‘idiot’? That’s a no-brainer.

  4. Gravatar of E. Harding E. Harding
    10. May 2015 at 09:52

    @Ray Lopez
    Weimar!

  5. Gravatar of Max Max
    10. May 2015 at 09:57

    E., money demand is a function of seigniorage among other things (interest on short term loans minus interest on deposits). Before 2008 deposit seigniorage averaged about 2%; after 2008 0%. Banks are reluctant to set negative rates.

    Same with base money – seigniorage is way down. Negative in the case of reserves!

  6. Gravatar of Ray Lopez Ray Lopez
    10. May 2015 at 10:01

    @E. Harding – no, you’re mistaken; that money is not superneutral at the hyperinflation level is no contradiction of the fact monetarism is impotent. Recall Brazilians largely adjusted to inflation in the high teens (which is not hyperinflation), and lost a mere 3-5%/yr over a forty year period. Source: Calomiris “Fragile By Design” book. Face it: money supply does not matter, not just at the lower bound as Krugman points out but everywhere else. The Rational Expecationists like F. Black had it right decades ago.

  7. Gravatar of Britonomist Britonomist
    10. May 2015 at 10:08

    Still lacking a model…

  8. Gravatar of Britonomist Britonomist
    10. May 2015 at 10:24

    “I mean, can anyone come up with a reason for why M1 and required reserves have been skyrocketing since the recession other than QE?”

    I don’t get it? Why wouldn’t M1 surge with QE? Banks need to issue deposits in order to acquire QE reserves. I don’t get your point.

  9. Gravatar of Richard A. Richard A.
    10. May 2015 at 10:27

    I wrote this in the comment section on Krugman’s blog:

    The drop you see in 2008 in the M2/MB ratio was a result of the Fed’s stupid decision to pay interest on reserves (as high as 1% in 2008). This caused banks to hold on to their reserves which helped bring down the M1 money multiplier from about 1.6 to less than 1, making the recession much worse.

  10. Gravatar of Britonomist Britonomist
    10. May 2015 at 10:32

    It wouldn’t have made a difference Richard if they paid interest on excess reserves or not.

  11. Gravatar of ssumner ssumner
    10. May 2015 at 10:38

    E. Harding, Good point.

    Ray, I’m sure Paul is pleased to have you on his side. Check out his views on money neutrality, since you are such a big fan of “Nobelians”

    Richard, Yes, that’s part of the story.

  12. Gravatar of E. Harding E. Harding
    10. May 2015 at 10:47

    “Why wouldn’t M1 surge with QE?”
    -Exactly, Britonomist. It’s the fact Krugman’s denying this that makes me so angry.
    “lost a mere 3-5%/yr”
    -Of what?

  13. Gravatar of Britonomist Britonomist
    10. May 2015 at 10:54

    “It’s the fact Krugman’s denying this that makes me so angry.”

    I don’t see how he’s denying this, unless you think Krugman considers M1 to be a ‘broader aggregate’.

  14. Gravatar of E. Harding E. Harding
    10. May 2015 at 11:04

    I’ve long believed IOR is too small to affect much of anything. How large an effect can .25% have? Most loans yield well over that.

  15. Gravatar of Don Geddis Don Geddis
    10. May 2015 at 11:20

    @Ray Lopez: “Who to believe? Nobelian or blogger

    I love how you’re so unashamed to use argument from authority. You don’t even try to hide it! You just completely ignore the actual content, and your only contribution is a logical fallacy.

  16. Gravatar of Major.Freedom Major.Freedom
    10. May 2015 at 11:37

    Geddis:

    You don’t actually believe appealing to authority is something everyone should avoid, because Sumner does it all the time and you remain silent to it.

  17. Gravatar of E. Harding E. Harding
    10. May 2015 at 11:44

    @Major.Freedom
    -When?

  18. Gravatar of Matt Waters Matt Waters
    10. May 2015 at 11:47

    Has Krugman addressed directly that AD kept increasing despite a significant increase in deficits? The closest I saw was Ezra Klein addressing and he argued that the AD increase was due to state government spending.

    In a mathematical sense, that’s correct. Much of NGDP’s increase has been increasing state spending. But states have balanced budget amendments which make them like private companies in a Keynesian framework.

    In a Keynesian framework, high-earners could keep much of their earnings in cash and therefore tax increases at the state level could increase AD. There haven’t been tax increases though and therefore AD expectations must be responsible.

    I do understand Krugman’s issue with expectations, despite the evidence supporting them. Deficit spending is much more mathematically and logically appealing in many ways. In theory, if the Fed was bound to only buying risk-free bonds, all the investors COULD still sit on their money despite the Fed buying $14 trillion or so of debt. Negative IOR could be added as well, but if investors could hold physical cash, negative IOR could be limited as well.

    I’m not sure how to resolve this issue with expectations exactly, unless you have a full-blown NGDP or inflation futures framework. The Fed would need to participate in the market directly rather than the market informing actions. The de facto digitalization of money, as Kimball has proposed, could also work to allow possibly significant negative IOR.

  19. Gravatar of Major.Freedom Major.Freedom
    10. May 2015 at 12:45

    E. Harding:

    Usually takes the form:

    Poster: “That sounds kooky”

    Sumner: “So I guess [prominent name goes here] is kooky as well, huh?”

  20. Gravatar of E. Harding E. Harding
    10. May 2015 at 12:52

    @Britonomist
    -M2 is definitely a broader aggregate than the monetary base, and it definitely has been significantly positively affected by QE.

  21. Gravatar of Britonomist Britonomist
    10. May 2015 at 13:12

    Krugman’s graph would suggest otherwise E. Harding.

  22. Gravatar of Major.Freedom Major.Freedom
    10. May 2015 at 14:05

    Britonomist:

    “Krugman’s graph would suggest otherwise E. Harding.”

    No chart can possibly show the counterfactual world of M2 that would otherwise have existed without QE.

    What you are doing when claiming that “the chart shows differently” is really just insisting that your a priori theory is correct and you’re using the chart as a means to convince E Harding of that theory.

    For how could the chart show on its own the counterfactual world of a collapsed M2 without QE, such that with QE we thus see a more modest temporal increase in M2? That minor increase, when juxtaposed with a collapsed M2, is very much consistent with the argument that QE had a massive, super sized effect on M2.

  23. Gravatar of Ben J Ben J
    10. May 2015 at 14:45

    Major Freedom:

    Usually goes:

    “Rothbard said X. Checkmate statists.” (Repeat on blog sites for a decade, and await the beginning of the great Rothbardian society)

    Ray Lopez:

    Usually goes:

    “First word I think of. Referenced in first Google result of word I think of. Sumner is bad because of first word I think of.” (Repeat until the buzzer goes off, when I’ve gotta go do the same at marginal revolution)

  24. Gravatar of benjamin cole benjamin cole
    10. May 2015 at 15:33

    Scott: you mentioned bonds and equity prices in your numbered 1 2 3 list but I think you should also mention property prices, which appear to reflate during QE.

    It is also unknown what bond sellers (to the Fed) did with their money. They may have purchased bonds, stocks, or property but they may have also spent their money.

    Lastly, there was an explosion of cash in circulation during QE. About $500 billion in cash is entered circulation since QE. No one knows how often this cash circulates, or if the expansion in cash in circulation was related to QE.

    All in all,I would say the circumstantial evidence is that QE was successful and should have been larger and more aggressive, and properly considered part of conventional monetary policy going forward.

  25. Gravatar of E. Harding E. Harding
    10. May 2015 at 16:59

    “Krugman’s graph would suggest otherwise E. Harding.”
    -How? QE has an additive effect on M2, not a multiplier effect.

  26. Gravatar of Major.Freedom Major.Freedom
    10. May 2015 at 17:21

    Ben J:

    yawn

    Benjamin Cole:

    Too bad you are unable to understand the destructive effects of QE.

  27. Gravatar of Beefcake the Mighty Beefcake the Mighty
    10. May 2015 at 18:59

    So, E Harding is “pretty sure that, with no QE, inflation over the last six years would have averaged under 1%”. Since he regards Krugman as “data-immune”, I’m sure he has some econometrics to back this claim up. Right?

  28. Gravatar of Thomas Thomas
    10. May 2015 at 20:22

    How could you have misunderstood what Krugman said? Very explicitly he said :
    “conventional” and the was more specific by saying vying “treasuries” fault him for not discussing WE if you want, but ha only said that conventional monetary policy was ineffective. Do you disagree with that?

  29. Gravatar of Ray Lopez Ray Lopez
    10. May 2015 at 20:27

    “Ben Bernanke evidently believed that Alan Greenspan, as the Grand Illusionist, waved a wand (a modest cumulative rate cut already reflected in market prices) in October 1987 and via intangible confidence effects – or the stirring effect of his magical performance – turned the US economy back from the abyss and into a new round of strong economic recovery. In acting similarly in mid-September 2007 in the aftermath of the credit-bubble bursting which had occurred during August (2007), it seems that Bernanke was aiming to repeat the Grand Illusionist’s success.” – from Bubbles in Credit and Currency How Hot Markets Cool Down by (mainstream economist) Brendan Brown (2008).

    Face it: monetarism is indeed money illusion””by the people like you brainwashed readers who believe in it. It does not exist, neither at the zero lower bound like Krugman agrees, nor, as Fisher Black stated, anywhere else.

  30. Gravatar of E. Harding E. Harding
    11. May 2015 at 01:45

    Does anyone doubt this:
    http://research.stlouisfed.org/fred2/series/DPSACBM027SBOG
    would have looked more like this:
    https://research.stlouisfed.org/fred2/series/LOANS
    without a sound infusion of this:
    http://research.stlouisfed.org/fred2/series/CASACBM027SBOG
    ?

  31. Gravatar of E. Harding E. Harding
    11. May 2015 at 01:55

    How could you have misunderstood what Krugman said? Very explicitly he said :
    “conventional” and the was more specific by saying vying “treasuries”

    -No, Thomas, this is what Krugman said:

    The same impotence of conventional monetary policy that makes open-market purchases of Treasuries useless at boosting GDP also mean that broad monetary aggregates that include deposits are largely immune to Fed influence.

    Note the second half of this sentence! Also, as Sumner has repeatedly pointed out, open-market purchases of Treasuries are by no means useless at boosting GDP, so Krugman’s wrong here as well.

  32. Gravatar of Willy2 Willy2
    11. May 2015 at 03:46

    More proof that Krugman doesn’t know what he’s talking about. He keeps blabbing about the “Zero bound”.

  33. Gravatar of Engineer Engineer
    11. May 2015 at 04:25

    “Still lacking a model…”

    LOL…I think that applies to Macro Economics in general…

    All those Nobel prizes and intellectual grandstanding… and so little progress…

    “Who to believe? Nobelian or blogger” …this is sarcasm right?

  34. Gravatar of bill bill
    11. May 2015 at 05:20

    Bernanke clearly disagrees with Krugman. He said on his blog that the Fed started paying the 25 bps in IOR to be sure the banks held the funds on their balance sheets. Personally, I think that was a mistake. With zero or negative IOR, the Fed could have achieved its targeted NGDP path with less QE.

  35. Gravatar of Beefcake the Mighty Beefcake the Mighty
    11. May 2015 at 05:21

    @E Harding

    OK, so the answer is “no”. Market monetarism as religion.

  36. Gravatar of ssumner ssumner
    11. May 2015 at 05:43

    E. Harding. 0.25% can be the difference between hyperinflation and hyperdeflation. It’s a knife edge equilibrium. I did a post on this point a few months ago.

    Matt, That’s right, I’m always amazed at how many Keynesians fail to understand that S&L spending is endogenous in their models. They are mesmerized by the letter “G.”

    Benjamin, Agreed, I mentioned the asset markets where the effect is easiest to see in real time.

    Thomas, I’m not sure what you are saying, but QE is conventional monetary policy. It’s also what Taylor was discussing, and I’d like to think Krugman was not being dishonest in his response to Taylor.

    Engineer, We have too many models.

  37. Gravatar of Britonomist Britonomist
    11. May 2015 at 06:04

    “LOL…I think that applies to Macro Economics in general…”

    No?

    Macroeconomics is full of models, but there are very few models I’ve seen from market monetarists, the only one I’ve seen was from Rowe, which answered completely different questions to the contentious issues I’m interested in.

  38. Gravatar of Ray Lopez Ray Lopez
    11. May 2015 at 07:25

    Sumner: “E. Harding. 0.25% can be the difference between hyperinflation and hyperdeflation. It’s a knife edge equilibrium. I did a post on this point a few months ago.” – you must be joking!? 0.25% is critical?? Nothing outside of quantum physics is so unstable, and certainly not US society. 0.25% is noise outside some chaotic math model where the flapping of a butterfly can cause a hurricane. The post you cite is this one: https://www.themoneyillusion.com/?p=27538 and it shows nothing but erudite sophistry.

  39. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    11. May 2015 at 08:36

    In praise of cheap labor?

    http://www.voxeu.org/article/labour-power-sets-neutral-real-rate

    ———quote——-
    As central bankers have frequently reminded us, the neutral real interest rate is set by the economy, not by the central bank.5 Globalisation and associated labour market convergence have been associated with a collapse in labour power in the west. When labour had power, the marginal costs of labour were high. As such, there was a big incentive to invest in capital to substitute labour for capital [sic], and this brought the cost of capital higher. As labour lost power, wage pressures in the west collapsed.6 This led to a falling labour share of GDP, especially away from the top 20% of Western households …. With lower labour costs, a reserve army of global workers whose size grew as trade barriers dropped and emerging countries developed, companies have increasingly been incentivised to substitute capital for labour, reducing the requirement for capital, and bringing the cost of capital lower in the west ….

    The fall in the neutral real rate of interest (NRRI) in the west has been like in a textbook. It does not signify secular stagnation in economic growth rates, but instead the loss of labour power. And as the neutral rate has fallen, the present value of future promised cash flows has gone up in value. Figure 10 shows the total returns from investing in 15-year and 30-year zero-coupon US Treasury bonds (red and blue, respectively), and the S&P500 index of US stocks (green line). Over the past 35 years, assets have rallied largely in accordance with their sensitivity to changes in the neutral rate of interest:

    The negative asset market implications of slow economic growth in the west have been less important than the positive asset market implications of weak labour pricing power.
    ———-endquote——–

  40. Gravatar of E. Harding E. Harding
    11. May 2015 at 12:00

    @ssumner
    “I did a post on this point a few months ago.”
    -I had the impression that your posts on this point were a criticism of that idea. I guess my impression was wrong. In any case, have we actually seen this play out in real life? I find the idea of such miniscule differences having such a large effect to be implausible, but what do I know? I’m not an economist.

  41. Gravatar of E. Harding E. Harding
    11. May 2015 at 12:09

    “Personally, I think that was a mistake. With zero or negative IOR, the Fed could have achieved its targeted NGDP path with less QE.”
    -Yes, but at the cost of some seriously pissed-off banks and depositors. More QE would probably have been a better option than messing around with negative rates like some European central banks have.

  42. Gravatar of Engineer Engineer
    11. May 2015 at 13:13

    Yes, my mistake…macroeconomics is full of models….I was referring to models that are useful for predicting the future of the economy. The FED with all of their models didn’t exactly predict 2008…

    I don’t see models in macro like those for micro…like supply vs demand…models makers start with a particular political philosophy and create a model to defend it. It is not an easy topic, because ultimately you are dealing with human behavior. When I took a couple years of economics in college which focused on Keynesian models..I thought they were lacking and full of huge holes..and this was basically the theory that underlie most of bad policies in the world…..so it is better to have no model than make predictions and policies based on poor models.

  43. Gravatar of dtoh dtoh
    11. May 2015 at 14:46

    @Scott,
    I think there are two parts to PK’s argument.

    1. New money that ends up as ER has no impact on the economy. (CORRECT)

    2. The Fed can’t control ER. (FALSE)

  44. Gravatar of Major.Freedom Major.Freedom
    11. May 2015 at 16:10

    Dtoh:

    “New money that ends up as ER has no impact on the economy. (CORRECT)”

    That’s actually false. There is an impact on the economy by virtue of the valuations, choices and activities in the very issuance of new money by the Fed, regardless of whether the banks then hold onto the new money for a period of time.

    The purchasing of assets, the choices being made by the banks by virtue of them having ER, the opportunity costs associated with this activity, all of these things have an impact on the economy.

    Every purposeful behavior has an impact on the economy.

    Now, if you want to narrow “impact” down to say the multiplier effect, or bank lending, then even in these instances there is still an impact. Bankers have different incentives when they have excess reserves, and as every economist knows, incentives affect behavior.

  45. Gravatar of Don Geddis Don Geddis
    11. May 2015 at 17:41

    @Engineer: “The FED with all of their models didn’t exactly predict 2008…

    I hate this (common) argument. A good macro model shouldn’t have “predicted” 2008, because it was entirely a voluntary choice on the part of incompetent central bankers, not a necessary consequence of the previous economic conditions.

    You have a house with a thermostat set to 68 degrees, and an infinitely powerful HVAC system. You notice that a thunderstorm is predicted for tomorrow’s weather, and you wonder what the temperature will be inside the house tomorrow. The best prediction is: 68 degrees (just like always).

    If the thunderstorm comes, and then the thermostat at the same time decides to break and turn on the AC instead of the furnace, sure, the house will become really cold. But you wanted the theory ahead of time, to predict that the thermostat would break?

    I could imagine such a theory, but that would be a theory of politics, not a theory of economics. A good economic macro theory should not have predicted the financial meltdown in 2008. (The meltdown required a central bank that chose voluntarily to fail to meet its own targets.)

  46. Gravatar of Don Geddis Don Geddis
    11. May 2015 at 17:46

    (…continuing…)

    Another way to put it: there’s more that affects the economy, than just economics. The 2011 tsunami reduced Japan’s real GDP. Should a macro model include geology? An asteroid wiping out Europe would affect Eurozone GDP. Should astronomy be part of an economic model?

    The 2008 recession was a failure of central bank politics, not a failure of economic models.

  47. Gravatar of Engineer Engineer
    11. May 2015 at 19:06

    “A good macro model shouldn’t have “predicted” 2008, because it was entirely a voluntary choice on the part of incompetent central bankers, not a necessary consequence of the previous economic conditions.”

    So..you are you saying that 2008 was the result of incompetent central bankers policies or that their response was initial crisis was incompetent and made the crisis much worse. In either case, did they not have a model to predict what the results of different policy options for dealing with the crisis would be? The model you are describing just filters past data and extrapolates it into the future. Astronomy is not part of the model, but if one does hit and it causes a run on the banks, ideally an economic policy based on a model would be pretty beneficial. From my vantage point…all i saw was a hodgepodge of different policies. The models they used must have predicted programs like cash for clunkers to be the solution.

    I would model the Fed just like control theory or designing an amplifier circuit. You don’t really need to know all the working of the black box ..you have a negative feedback circuit that controls it…all you really need to know the amplification you are aiming for..in this case the NGDP and the circuit will stabilize to this value in the presence of of both expected and unexpected signals….. as in the case of designing an audio amplifier….simple in theory but in practice it is an art.

  48. Gravatar of TravisV TravisV
    11. May 2015 at 19:25

    Someone at the Riksbank:

    “A Note on Nominal GDP Targeting and the Zero Lower Bound”

    http://economistsview.typepad.com/economistsview/2015/05/a-note-on-nominal-gdp-targeting-and-the-zero-lower-bound.html

  49. Gravatar of Don Geddis Don Geddis
    11. May 2015 at 20:01

    @Engineer: “you have a negative feedback circuit that controls it … in this case the NGDP and the circuit will stabilize to this value in the presence of of both expected and unexpected signals

    Yes, exactly. It’s simple.

    But the actual Fed, in 2008 and for a few years afterward, observed that unemployment was (well) above target, inflation was below target … and yet, the Fed decision makers concluded that no additional monetary easing was required. In other words, they voluntarily stopped acting as a negative feedback circuit.

    You can still see this dysfunction today. The entire last year has been filled with public speculation about “when is the Fed going to raise rates?” Would it happen sooner? Or would they delay until slightly later? But everybody is acting as though the question is “when”, not “if”.

    But what is the current economic condition, such that raising rates is the appropriate feedback response? Is unemployment too low? No. Is inflation too high? No. Why would an NGDP negative feedback circuit even consider raising interest rates at this time, when that is an action that has known effects which provide harm instead of benefit at this time?

    simple in theory but in practice it is an art

    Not as hard as you think. If you put me in charge of the Fed, I could shut down the entire organization, and write a simple computer program running on a laptop, that would order Open Market Operations (based on NGDPLT). And the US economy would perform far, far better than it has for the last century.

  50. Gravatar of Major.Freedom Major.Freedom
    11. May 2015 at 20:26

    Geddis:

    “I hate this (common) argument. A good macro model shouldn’t have “predicted” 2008, because it was entirely a voluntary choice on the part of incompetent central bankers, not a necessary consequence of the previous economic conditions.”

    You’re partly right, and partly wrong.

    What you got right is that precisely because the subject matter of economics is people who make choices, there are no macroeconomic models based on mathematical constants in relations the use of which allows one to make predictions.

    Consider the actors utilizing such models. By learning that which the models presumably teach them, the researchers must be regarded as beings who transcend the constraints of the models. They must be regarded as beings who can learn in as yet unpredictable ways. They cannot know what the models presumably allow only after learning, before said learning.

    All of what so-called “econometricians” do as econometricians is utter nonsense.

    Where you are wrong however is in claiming that the presence of choice is somehow a sufficient means to not only transcend models in the cognitive sense, but to become completely unglued from objective considerations throughout time.

    If a man starts a project that he falsely believes can be completed because his judgments concerning current and future resources are factually wrong, then while he does have the ability to choose what to do going forward after the mistakes are made, he nevertheless does not have the ability to avoid the consequences of his and other people’s actions.

    You believe that central bank “incompetency” only occurs when NGDP declines by some unstated amount. This is of course intentionally argued as a backdoor means to promote your own ideal socialost money printing rule as competent.

    Yet you do not have the requisite information that would enable you to know what you presume to know.

    A much better theory is that the incompetence in central banking is permanent. That this permanence is not due to some inherent flaws in the abilities or potentials of central bankers, but rather that no mortal being can know what only a free market can provide, without actually using or living in a world with the free market process in money production and distribution.

    You have absolutely no idea how many cars are optimal for other people, without there being a market in cars that would provide you with the requisite information. Asserting “Permanent 5% growth” because of some vague belief that a significant and sudden drop in the production and supply of cars would make people’s lives worse off, is tantamount to an admission that one has no rational justification for that assertion.

    What you call a period of central bank incompetence is actually just another period of incompetence. The central bankers were also incompetent during the previous “stable” period, but you do not understand this because you conflate absence of knowing how to identify problems with there being no problems.

    The Fed was incompetent during the period of time 2000-2007 (and before and after) when it inflated according to some arbitrary non-market rule that thwarted millions of investors all around the world from coordinating their activities. Form the investors, like the central bankers, could not observe and could not experience a free market pricing system. This has led to projects being initiated that could not physically be completed. These are the objective factors that are impossible to escape once the damage is done.

    You say you “hate” the theory that recessions are consequences of past actions, but are rather just reflections of current central bank incompetence. This is just religion. Faith in central banking to fix errors that arise precisely because of the central banks existing at all and making good market pricing an impossibility.

    Central banks always have two broad categories of choice. One is to accelerate inflation so as to prevent corrections, and prolong and exacerbate malinvestment until no amount of additional money printing can delay the corrections any longer, beyond which further inflation leads to outright currency rejection.

    This is a choice most central banks have made throughout history, although it has become less frequent in this age.

    The second option is for central banks to refrain from continuous acceleration of inflation, which of course is the only option available to avoid currency rejection. This is the choice the Fed has been making since 1913. Fed bankers have historically refrained from continuous acceleration in inflation so as to avoid hyperinflation. The result of this is that instead of physical reality limitations being reached through continuous acceleration in inflation, with the corrections taking place alongside hyperinflation, there are rather periods of refraining from continuous acceleration, with the errors therefore being exposed earlier on.

    This is why we observe throughout the history of the Fed, a very close correlation between recessions and your definition of money tightening. It is because the Fed bankers have historically just so happened to have chosen to avoid hyperinflation and thus earlier recession rather than later even bigger recession along with hyperinflation.

    It is also why you naive, economically illiterate technocrats who have physics envy, whose main talent after graduating with an economics degree or two, consists primarily in “Making a hypothesis, collecting data, run a regression, test theory, and confirm/falsify.” As a result, you mental leptons have come to believe in the myth that recessions are at root, ultimately caused by, “tight money”, because of the superficial correlations you see coupled with a faith in (monetary) socialism.

    There is zero understanding of economic calculation, or capital structure intertemporality, or market based information, in MM circles. You falsely believe that as long as there is enough inflation and “spending”, that real coordination will magically take place without market prices or interest rates because abracadabra EMH.

  51. Gravatar of Admiral.Freedom Admiral.Freedom
    12. May 2015 at 04:34

    Major,

    So I assume that you want to eliminate the FED altogether. Should I assume that you favor a return to the gold standard or do you think an economy that uses bitcoins as its main currency would work.

  52. Gravatar of ssumner ssumner
    12. May 2015 at 05:54

    Patrick, I don’t see the connection between cheap labor and low rates.

    E. Harding. Of course central banks are not so foolish as to end up in hyperinflation of hyperdeflation. They do mid-course corrections. But 0.25% interest rate increases in 1937 (US) 2000 and 2006 (Japan) and a 0.5% rate rise in the eurozone (2011) all led to double dip recessions.

    Engineer, But we have very good models explaining why it’s impossible to predict events like 2008.

    In any case, physicists can’t predict earthquakes, or even the weather more than a week or two ahead. Any complex system is hard to predict, whether in economics or applied physics.

    Thanks Travis.

  53. Gravatar of Willy2 Willy2
    12. May 2015 at 06:58

    @ssumner: You’re cherry picking.

    Whether or not Monetary Policy is “impotent” depends on 2 characters called Mr. Market & Mr. Margin. Those 2 people didn’t want to facilitate e.g. US monetary policy in 2007 & 2008. That made Monetary policy in those 2 years “Impotent”.

    “Engineer, But we have very good models explaining why it’s impossible to predict events like 2008.”

    Disagree. There’s actually a VERY good gauge that predicted the 2008 events. And that’s credit growth. Credit growth peaked in 2006 at $ 4.5 trillion and that as also the peak for the economy. Source: Steve Keen.

  54. Gravatar of Don Geddis Don Geddis
    12. May 2015 at 16:04

    @MF: “because the subject matter of economics is people who make choices, there are no macroeconomic models … the use of which allows one to make predictions.” Psychology also studies people who make choices. Strangely (to you), they have lots and lots of models offering reliable counter-intuitive predictions of people’s behavior.

    They cannot know what the models presumably allow only after learning, before said learning.” Nope. Models allow for explicit knowledge, and meta-level reasoning. But behavior doesn’t require explicit knowledge. You don’t have to know why people behave predictably (or even that they do!), for their behavior to be accurately predicted by some model. And knowing the model doesn’t (necessarily) change people’s actions.

    You believe that central bank “incompetency” only occurs when NGDP declines by some unstated amount.” Nope. All these years, wasting your time here … and you really can’t be bothered to learn the first thing about what people are talking about here. Such a shame. Amusing that your failure to understand Market Monetarism, has no effect on your confidence that it surely must be wrong.

    some vague belief that a significant and sudden drop in the production and supply of cars would make people’s lives worse off” Nope. I have no opinion on whether there should be more or fewer cars.

    The second option is for central banks to refrain from continuous acceleration of inflation” Yet another excluded middle fallacy from you. You’ve completely ignored the case of stable inflation (or stable NGDP growth). Then you wouldn’t have business cycle recessions — nor would you have “continuous acceleration” (which nobody is advocating).

    you mental leptons” Is that … an insult? Is it even a semantically meaningful phrase? Whatever. I love it! Made my day.

  55. Gravatar of ssumner ssumner
    13. May 2015 at 07:28

    Willy2. How can you say monetary policy was impotent in 2007-08? The Fed adopted tight money, and got a recession. That’s potent.

    No, the economy did not peak in 2006.

  56. Gravatar of Willy2 Willy2
    14. May 2015 at 13:00

    Because it’s not het FED that adopted a “tight” policy. Look at the balance sheet of the FED. Since – at least – the 1960s that balance sheet kept growing. What do you mean “tight” policy ?

    GDP = Income + Change in debt (Steve Keen). Credit growth peaked in 2006 at plus $ 4.5 trillion and plunged to minus $ 2.5 trillion in 2009. That’s a swing of 7 trillion in a 15 trillion economy in 3 years. Compare that with the measily ~ 1 trillion by witch the FED’s balance sheet grew in 2008 & 2009.

    It was the private sector that contracted and overwhelmed the FED.

  57. Gravatar of Willy2 Willy2
    14. May 2015 at 13:03

    The same happened in 1929-1933. The FED bought tonnes of bonds yet markets kept going lower in that same timeframe.

  58. Gravatar of ssumner ssumner
    14. May 2015 at 14:41

    Willy2, You are about the only person who judges the stance of monetary policy by the balance sheet. But since you insist:

    Up until July 2007, the balance sheet (monetary base) had been growing at 5% per year for many years. That suddenly came to a screeching halt for nine months, until May 2008. NGDP growth slowed at the same time, and the economy tipped into recession.

    So first of all you have the wrong criterion for measuring the stance of money. But even if we use your criterion money was tight in late 2007 and early 2008.

  59. Gravatar of Major.Freedom Major.Freedom
    14. May 2015 at 17:06

    “So first of all you have the wrong criterion for measuring the stance of money.”

    NGDP is also the wrong criterion for a rational conceptualization of the extent of money production.

    Subjective value theory (remember that?) requires individual economic freedom to be the method by which the extent of money production can be valued.

    No one person’s judgment is everyone else’s judgment, but it is precisely everyone’s judgment that is necessary for us to learn whether more money or less money ought to be produced.

    Sumner’s opinions don’t matter for truth.

  60. Gravatar of Major.Freedom Major.Freedom
    14. May 2015 at 17:34

    Geddis:

    “Psychology also studies people who make choices. Strangely (to you), they have lots and lots of models offering reliable counter-intuitive predictions of people’s behavior.”

    No psychologist has discovered any constantcies in causal relations either. What you call “reliable” is code for “I only have fleeting probability judgments of distinct events”

    “They cannot know what the models presumably allow only after learning, before said learning.”

    “Nope. Models allow for explicit knowledge, and meta-level reasoning.”

    False. Models do not “allow” for anything. What you are actually referring to is that you (wrongly) believe that models can help you learn something before you actually go out and learn it. That is of course impossible.

    “But behavior doesn’t require explicit knowledge.”

    Purposeful behavior is distinct from behavior. If you claim to know some constancy in relations, you are still left with the causal chain from the beginning of the universe that led to that particular event, which is impossible for us to know.

    This is why you cannot but help treat my responses to you as subjective value judgments, I.e. I am making the wrong choices in what I think is true. You are whether you like it or not, you are using subjective value judgments as the datum.

    “You don’t have to know why people behave predictably (or even that they do!), for their behavior to be accurately predicted by some model. And knowing the model doesn’t (necessarily) change people’s actions.”

    False. That is just the flawed assumption of positivism. That a theory, no matter how internally inconsistent, is treated as truth if it can predict for a time. Pirate attacks and global warming.

    “You believe that central bank “incompetency” only occurs when NGDP declines by some unstated amount.” “Nope. All these years, wasting your time here … and you really can’t be bothered to learn the first thing about what people are talking about here. Such a shame. Amusing that your failure to understand Market Monetarism, has no effect on your confidence that it surely must be wrong.”

    Oh sorry, I forgot to include Weimar and Zimbabwe.

    “some vague belief that a significant and sudden drop in the production and supply of cars would make people’s lives worse off” “Nope. I have no opinion on whether there should be more or fewer cars.”

    Because a sudden 20% drop in production of cars will make some people’s lives worse off, you believe there should be 5% growth in cars controlled by the government. That is MM logic.

    “The second option is for central banks to refrain from continuous acceleration of inflation”

    “Yet another excluded middle fallacy from you.”

    You haven’t shown me committing this a first time, so I don’t see how “another” is warranted.

    “You’ve completely ignored the case of stable inflation (or stable NGDP growth).”

    No, I did not “ignore” it. I reject it as untenable.

    Inflation doem not affect all prices equally. Pricing is temporal.

    “Then you wouldn’t have business cycle recessions “” nor would you have “continuous acceleration” (which nobody is advocating).”

    Yes, there would be. Recessions caused by central banking cannot be cured by central banking. It is not the price or spending trends that cause recessions. They are but symptoms of that which causes recessions.

  61. Gravatar of Major.Freedom Major.Freedom
    14. May 2015 at 17:35

    Admiral.Freedom:

    Let the market decide.

  62. Gravatar of Don Geddis Don Geddis
    14. May 2015 at 19:26

    @MF: Always a delight to interact with your level of crazy.

    any constantcies in causal relations” Nobody is seeking “constancies”. You’ve imagined a strawman goal that nobody advocates.

    I only have fleeting probability judgments of distinct events” I would certainly be satisfied with a macroeconomic theory that is as useful and predictive as thermodynamics, meteorology, and quantum mechanics. Statistical predictions are sufficient for science, and for informing policy choices.

    Because a sudden 20% drop in production of cars will make some people’s lives worse off, you believe there should be 5% growth in cars controlled by the government. That is MM logic.” Nope. Wrong again. You really do a terrible job at trying to imagine what Market Monetarists actually believe and advocate. I wonder what kind of progress you might make, if you devoted your energies to trying to understand, first, and then only later to criticize. But alas, you’ve shown a remarkable consistency in skipping that first step.

    Recessions caused by central banking cannot be cured by central banking.” Is this another one of your ironclad conclusions, reached by using only pure logic, starting only from the lone axiom “humans act”? As usual, would love for you to show us the full derivation of that proof.

  63. Gravatar of Major.Freedom Major.Freedom
    14. May 2015 at 20:02

    Geddis:

    “Nobody is seeking “constancies”. You’ve imagined a strawman goal that nobody advocates.”

    Constancies are presupposed in model driven predictions. You are just not yet well read enough to grasp it.

    The constancies need not be recognized by you when you use your preferred approach.

    The constancy assumption is engrained in the method of falsificationist modelling itself.

    Anyone who acts in time, who proposes a theory, and then some time later collects data, and then some time later tests it, and then some time later concludes that the theory has been confirmed or falsified, that person is presuming a constancy in relations over time. That is what thinking a theory has been falsified or confirmed implies.

    For if there were no presumption of constancy, then all anyone could actually know is that some sequence of observations were made in the past, and then either the same sequence was observed or not observed in the present, and that’s it, nothing else would follow. But if you say a theory or model has been confirmed, then what you are invariably presuming is that there is a constancy in relations. That you can claim a theory has been falsified or confirmed because you believe reality itself is so structured to contain unchanging causal relations. That is what causality is about. But where does it come from? It comes from how we ourselves are structured. Action presupposes a constancy in relations of one’s (non-acting) surroundings. But that’s just it. You want to not only assume constancy in your non-acting surroundings, but you want to do the same thing when trying to understand other actors. You of course don’t presume constancy in yourself, because your belief in being able to learn about me through modelling and predictions, requires you yourself to not be constant.

    This is exactly why police states, socialist states, totalitarian states, and control-based societies, are always intellectually guided and motivated by the idea that the actors in the state are the only real actors, whereas everyone else are automatons, lab rats, non-acting material objects to be tested, manipulated, and controlled, all through the use of inherently contradictory technocratic models. Social engineering. The people in the NSA collecting vast swaths of data on all other people, in order to predict and control the population. This is no coincidence.

    This in a nutshell is what you are many years away from sufficiently understanding.

    “I only have fleeting probability judgments of distinct events”

    “I would certainly be satisfied with a macroeconomic theory that is as useful and predictive as thermodynamics, meteorology, and quantum mechanics. Statistical predictions are sufficient for science, and for informing policy choices.”

    Humans are not atoms or molecules. You say you would be satisfied, but what you really believe is that you cannot but think of other humans as mere automatons, to be poked and prodded, predicted and controlled. What you would really be satisfied with is if you could unlock those magic formulae that have heretofore remained hidden.

    “Because a sudden 20% drop in production of cars will make some people’s lives worse off, you believe there should be 5% growth in cars controlled by the government. That is MM logic.”

    “Nope.”

    Yup. That is indeed MM logic.

    “Recessions caused by central banking cannot be cured by central banking.”

    “Is this another one of your ironclad conclusions”

    …reached by logic and evidence, yes.

    Surely your belief otherwise has been proved by theory, right? That the lone axiom underlying your positivist methodology, of constant causal relations, is what you used to prove that everything in the universe, including human thought and action, are necessarily and without question ontologically constrained to this constancy?

    Please show the proof of that fundamental lone presumption. Please prove to me that my thoughts and actions are determined in accordance with constant causal relations. That is, prove to me that using positivist models “works” on me.

    Be warned that I have choice. I can think totally opposite to what you claim via prediction I should think. Every time. Not once has anyone proved otherwise.

  64. Gravatar of CA CA
    14. May 2015 at 20:57

    Geddis is kicking some MF ass.

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