Be careful who you link to

Samuel Brittan recently argued that the Cameron government should rely on fiscal stimulus, rather than monetary stimulus:

Central banks can inject money, but there is a limit to what they can do when nominal interest rates are near zero. The Bank of England’s “no change” decision on Thursday illustrates these limits as well as the native caution of most central banks.

This is certainly a bizarre assertion.  I’ve watched the BOE pretty closely over the past few years, and I’ve never been under the impression that they refrained from stimulus because of some sort of mythical “limits” on the efficacy of monetary policy at the zero bound.  They’ve depreciated the pound against the euro, and they’ve done QE.  They haven’t raised their inflation target because that’s a decision made by the Cameron government.  So I was quite interested to see what support Brittan could draw from the linked article.  It turns out that virtually every paragraph in the article undercuts his assertion:

Britain’s interest rate-setting body voted on Thursday to hold rates at their current record low of half a percentage point and to refrain from any further efforts to boost demand by stepping up its gilt purchases, a measure known as quantitative easing.

The Bank of England’s Monetary Policy Committee’s decision was largely predicted by economists after a survey of the services sector – which accounts for three-quarters of the UK economy – showed that activity proved more robust in May than many had expected.

Indeed, some of the data published this week suggest that the recent gloomy results from a survey of employers in the manufacturing sector may have been more statistical outlier than economic bellwether.

Since the start of the week, figures on employment in the manufacturing sector, housing, construction and retail sales have all pointed to an economy that is growing – albeit slowly – but certainly not contracting. The last report on employment suggested that job losses in the private sector were falling.

So you have paragraph after paragraph that do not “illustrate the limits” of monetary policy, but rather clearly indicate that the BOE could have done more, but felt that the economy didn’t need any more stimulus at this time.  They may be wrong (I agree with Brittan that more stimulus would be helpful) but far from “illustrating” his hypothesis it refutes it.  Let’s continue:

However, economists expressed scepticism that the MPC’s asset purchasing programme has run its course, particularly if the banking and sovereign debt crisis in the eurozone – which is already in recession – remains unresolved.

“Growth is so weak that more stimulus is needed,” said Brian Hilliard, economist at Société Générale. The bank has cut its forecast for UK growth this year to 0.1 per cent from its previous estimate of 1.6 per cent. “The question is when, not if,” more stimulus will come, Mr Hilliard added.

So the people that watch the BOE closely think they are making a mistake, and that more stimulus will be provided.  But how is this possible if the BOE has reached its limit?

But Michael Saunders, economist at Citi, said the MPC may have wanted to hold back from action this month in part because its inflation forecasts have often been wrong in the past few years and the committee now looks for more cues from economic data to decide if increased stimulus is needed. “They are worried about the stickiness of inflation because they got it so badly wrong for the past few years,” he said.

But wait, isn’t more inflation a good thing?  After all, Krugman argues that the inflation target should be raised to 4%.  Last time I looked AD increases tend to boost inflation.  Now that might not happen in a deflationary trap, but Britain’s had above target inflation for several years.  Does Brittan agree with Krugman that more stimulus requires more inflation?  Let’s go back to the Brittan article:

No book is perfect and I have two reservations about Mr Krugman’s. The first is the emphasis on boosting government spending. Now, when real interest rates are low or negative, is indeed an ideal time to undertake infrastructure projects. Nevertheless, demand could just as well be expanded by the tax-cutting route. Would tax cuts be spent? Yes, if they are aimed at lower-income families or if they are VAT cuts announced as temporary. Too much emphasis on public spending reinforces the erroneous impression that expansionist policies are a “big government” idea.

I have a stronger objection to Mr Krugman’s proposal to raise national inflation targets from 2 per cent to 4 per cent. At a stroke the real burden of debts would be slashed. A similar suggestion is made by a notable British economic historian, Nicholas Crafts, in a paper for the liberal think-tank CentreForum that cites the avowed aim of raising prices by an earlier Conservative-dominated coalition from 1932 onwards.

But that government was starting from a background of stable or even falling prices, whereas governments in the past few decades have been struggling to prevent creeping inflation from degenerating into the runaway variety. Apart from anything else, who would now believe any official reassurance that the target would not be raised again?

Obviously I love the first of those three paragraphs.  But what’s this opposition to higher inflation?  Britain’s had 3% inflation during a deep recession; does he really think that fiscal stimulus can magically create a robust recovery without raising inflation above 2%?  If the BOE is instructed to keep inflation at 2%, won’t they have to reduce AD every time the fiscal authorities try to raise it?  I’m quite sure Brittan doesn’t want or expect them to nullify fiscal stimulus with a slavish adherence to a 2% inflation target.  Then why have the target in the first place?  Why not instruct the BOE to shoot for the AD outcome that you’d actually like to see?

Now let’s return to the article that Brittan linked to:

But the scale of government austerity planned for next year – equal to 1.5 per cent of GDP – is so large that it is impossible to imagine that more monetary stimulus will not be needed, as well as some slowdown in the pace of the spending cuts, Mr Saunders said.

This is exactly the point.  Britain needs fiscal austerity and it needs the BOE to offset any negative effects on AD.  I have no idea whether the BOE will do as they predict, but I do know that this is precisely what the Cameron government should be telling it to do.  They should tell the BOE the following, in no uncertain terms:

We plan to gradually reduce the budget deficit so that Britain doesn’t end up like Japan.  Our policy is based on the assumption that NGDP will grow by 4.5% per year over the next decade (or whatever they have planned for.)  We expect the BOE to deliver adequate NGDP growth so that we can restore the soundness of British finances, promote a reasonable recovery, and maintain low inflation on average in the long run.

The Cameron people need to read up on how popular FDR became when he ignored the advice of all the “experts” and promoted a radical agenda of reflation.  But don’t aim for a higher cost of living for the British, aim for a higher level of incomes.

Brittan makes the mistake I’ve referred to over and over in this blog, dozens of times.  Pundits keep talking as if fiscal stimulus boosts RGDP growth and monetary stimulus boosts inflation, but that just isn’t so.  Both boost AD.  Until the two start coordinating with each other, they’ll work at cross purposes.  I thought all this was solved during the golden age of New Keynesianism.  Now it’s like everything’s been forgotten and we’ve reverted to the Stone Age.


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35 Responses to “Be careful who you link to”

  1. Gravatar of marcus nunes marcus nunes
    9. June 2012 at 05:55

    And I thought Samuel Brittan was seen as an early proponent of NGDP targeting. Seems everyone´s memory has been shot circuited by the so called “financial nature” of this crisis.

  2. Gravatar of Mike Sax Mike Sax
    9. June 2012 at 07:18

    Whether the BOE could do more seems academic-they wont do more is clear. Of course there’s no reason why fiscal stimulus in Britain would need be undercut by monetary stimulus either-as you note Cameron effectvely controls monetary policy through his Exchequer Osbourne.

    Off the beaten path some monetary history:

    Alexander Hamilton’s money mischief http://diaryofarepublicanhater.blogspot.com/2012/06/alexander-hamiltons-money-mischief.html

  3. Gravatar of marcus nunes marcus nunes
    9. June 2012 at 07:29

    Expanding on Samuel Brittan´s “loss of memory”:
    Just a month ago, May 10, he wrote in “A real alternative to austerity economics”:

    High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/73699910-99ca-11e1-aa6d-00144feabdc0.html#ixzz1xJIJGgj8

    “Yet there is a way of sustaining an expansionary policy while minimising this threat. This is not through any financial market gimmick but by a different way of thinking. Long-time readers will not be surprised to learn that I have in mind something usually called a nominal GDP objective. One of the greatest obstacles is that its name is so off-putting. I seem to remember a former chancellor, Nigel Lawson, saying that it lacked sex appeal.
    Yet the basic idea could hardly be simpler. The growth figures that dominate the headlines are of “real” gross domestic product, which means they are corrected for inflation. With nominal GDP they are uncorrected. The idea of targeting nominal GDP is to leave room for real growth, but damp any inflationary take-off.”
    http://www.ft.com/intl/cms/s/0/73699910-99ca-11e1-aa6d-00144feabdc0.html#axzz1xJHtIZGJ

  4. Gravatar of Mark A. Sadowski Mark A. Sadowski
    9. June 2012 at 08:24

    Scott,
    About a month ago I referred to the UK experience during the Great Depression. In particular UK was in a “liquidity trap” and yet applied monetary stimulus coupled with a fiscal consolidation. The recovery was moderate but successful and public debt fell as a percent of GDP. The situation is especially applicable to large relatively closed countries because the 1931-37 recovery was driven almost entirely by private domestic demand:

    https://www.themoneyillusion.com/?p=14300#comment-156806

    I’ve used this example several times so far to prove monetary stimulus is never impotent in a “liquidity trap” and it usually leaves PKs and MMTers either speechless or frothing with four letter words.

    The Nicholas Crafts’ paper is beautiful by the way. He says everything I was trying to say, only much more better. Now if only Brittan would sit down with it and think this through more clearly.

  5. Gravatar of ssumner ssumner
    9. June 2012 at 08:38

    Marcus, Good find.

    Mike Sax, You said;

    “Whether the BOE could do more seems academic-they wont do more is clear. Of course there’s no reason why fiscal stimulus in Britain would need be undercut by monetary stimulus either-as you note Cameron effectively controls monetary policy through his Exchequer Osbourne.”

    Your second sentence completely contradicts your first sentence.

    Mark, Good point, and I’d add that Britain seemed to also have supply-side problems in the interwar years, a very high natural rate of unemployment.

  6. Gravatar of TallDave TallDave
    9. June 2012 at 08:44

    I was surprised to learn the UK has actually set a 70% cap on the amount of any gov’t debt issuance that BOE can buy. Apparently they are at least near enough to that limit to start thinking about such things — of course, there are many other options beyond that.

  7. Gravatar of Brito Brito
    9. June 2012 at 09:08

    MPC could not admit that they were powerless, even if they were, because that would be disastrous and its pessimism might risk some sort of market expectations readjustment. I would never expect a central bank to admit to being powerless.

  8. Gravatar of Lorenzo from Oz Lorenzo from Oz
    9. June 2012 at 09:13

    Perhaps the paradox that cutting interest rates is a signal for monetary easing but low interest rates are a sign of monetary tightness is too paradoxical for people and they cannot keep both ideas in their head. Or perhaps interest rates are so automatically the “mechanism” that that particular signal becomes all there can be.

    Think about money and monetary policy in supply, demand and expectations terms, and the so-called “zero bound” looks like nothing more than a policy phantasm from over-relying on a specific signalling device.

    (I have added a new gravatar which shows I am trying to get around WordPress deciding to declare me persona spamnata because I used an Italian ISP for a week or so.)

  9. Gravatar of Lorenzo from Oz Lorenzo from Oz
    9. June 2012 at 09:19

    I call interest rates a signal because, when an inflation-targeting central bank with unbalanced credibility (i.e credible on price expectations, not income expectations) changes interest rates, it work for inflation but not income. But when a central bank with balanced credibility (i.e. credible on price and income expectations) changes interest rates, it works for both. Because, as the MM community knows, expectations rule and the policy signal operates within the web of expectations the central bank has chosen to create.

  10. Gravatar of Lorenzo from Oz Lorenzo from Oz
    9. June 2012 at 09:22

    Now, the real test; will it let me post a link to my attempt to produce a lay-friendly guide to monetary policy.
    http://skepticlawyer.com.au/2012/06/06/easy-guide-to-monetary-policy/

  11. Gravatar of marcus nunes marcus nunes
    9. June 2012 at 10:01

    Lorenzo
    I thought your EGMP was very good. I suggested for some of my students.

  12. Gravatar of Saturos Saturos
    9. June 2012 at 10:16

    Tyler just linked approvingly to this Dani Rodrik post: http://rodrik.typepad.com/dani_rodriks_weblog/2012/06/what-i-learned-in-latvia.html

    What do you think?

  13. Gravatar of Negation of Ideology Negation of Ideology
    9. June 2012 at 10:24

    Lorenzo,

    I read your guide and I think it’s very good. My only question is doesn’t there have to be a “first cause” or “first mover” (No, I’m not talking about the origin of the universe, only money). I understand that “People take your money because they expect to use it in future transactions.” But why did people initially expect it to have value? Is it because of the taxing authority of the state? Or because at one time it was backed by something else?

    I think it’s the former, but I’d be curious as to your thoughts. Again, excellent work.

  14. Gravatar of Cedric Cedric
    9. June 2012 at 10:28

    “Pundits keep talking as if fiscal stimulus boosts RGDP growth and monetary stimulus boosts inflation, but that just isn’t so. Both boost AD.”

    YES, this. This will go on your wikiquotes page.

  15. Gravatar of Saturos Saturos
    9. June 2012 at 10:43

    Robin Wigglesworth thinks markets are addicts: http://www.ft.com/intl/cms/s/0/17b50528-b185-11e1-bbf9-00144feabdc0.html

  16. Gravatar of marcus nunes marcus nunes
    9. June 2012 at 15:29

    Market Monetarism: A “Third Way” in economic policy:
    http://thefaintofheart.wordpress.com/2012/06/09/time-for-a-third-way-in-economic-policy/

  17. Gravatar of Morgan Warstler Morgan Warstler
    9. June 2012 at 18:52

    http://nymag.com/daily/intel/2012/06/obama-steps-on-message-gop-steps-on-economy.html

    Jon Chait gives me the perfect graph!

    We will not have thing right until that Blue line is ACTUALLY LOWER, not below the Red line, it has to keep heading down.

    The only way we can fund a single wage increase for ANYONE in the public sector is if someone gets fired to pay for it.

  18. Gravatar of Morgan Warstler Morgan Warstler
    9. June 2012 at 20:36

    As a reminder of what Sax’s “C power” does during the day:

    http://tv.yahoo.com/news/-judge-judy–tops-daytime-ratings-in-first-year-post-oprah.html

  19. Gravatar of Tim Tim
    10. June 2012 at 03:48

    Hi Scott
    Off topic i know, but could expansionary monetary policy cause the exchange rate to appreciate? Because when the RBA recently cut rates, the AUD appreciated slightly. Just curious as to why you think this is so.
    Thanks
    Tim

  20. Gravatar of Paul Andrews Paul Andrews
    10. June 2012 at 04:43

    Tim,

    The markets were expecting a cut of 25-50bps. The RBA cut by 25bps – i.e. less than the average expectation, so a slight appreciation is to be expected.

  21. Gravatar of Tim Tim
    10. June 2012 at 04:49

    Yes but the stock market rose, which is a conflicting signal.

  22. Gravatar of ssumner ssumner
    10. June 2012 at 10:25

    Tall Dave, They can’t be near the limit unless they have a high interest rate on reserves. But in that case they should just cut the IOR. The UK debt is plenty big.

    Brito, Fortunately they never are powerless, unless the government puts some sort of weird regulation into effect.

    Lorenzo, I agree with those comments, and that is an excellent guide–I’ll link to it in the future.

    Thanks Cedric.

    Tim, I’ve often wondered about that. Theory suggests the answer is no. But I wonder if it could so increase expected growth that the exchange rate rose. It’s an open question.

    Everyone, I’ll look at all those links later today.

  23. Gravatar of ssumner ssumner
    10. June 2012 at 10:44

    Saturos, That was a fair and balanced report on Latvia.

  24. Gravatar of Lorenzo from Oz Lorenzo from Oz
    11. June 2012 at 03:29

    Scott, thanks 🙂

    Marcus, I am flattered 🙂

    Negation of Ideology, thanks. As for the dreaded “origin of money” question, that is so a “define your terms” question. Coins, the first clear medium of account, are a creation of rulership. They are a much easier way for rulers to collect taxs. Taxes provided an acnhoring set of transactions. They set a formal unit of account, but not the swap values of money. Something that was first dscovered by the Chinese was that notes woould do. Rulership could establish the expectation of future use sufficiently that the sheer convnience of money took over.

    Took milllennia to create full money. Even after coins were invented, it was not necessariy in rulership/s interest to create it. The Khmer Empire never bothered, though it was well aware of coins.

    It ran a system based on labour service. There were plenty of trade goods, some of which clearly also worked as media of exchange. There were service obligations, but no coins and no full money.

  25. Gravatar of Major_Freedom Major_Freedom
    11. June 2012 at 06:30

    Propagation of Ideology:

    …doesn’t there have to be a “first cause” or “first mover” (No, I’m not talking about the origin of the universe, only money). I understand that “People take your money because they expect to use it in future transactions.” But why did people initially expect it to have value? Is it because of the taxing authority of the state? Or because at one time it was backed by something else?

    I think it’s the former

    It’s actually the latter. Money that is expected to have value in the future is derived by money already being valued in the past. A state cannot tax from the people what the people have not already voluntarily valued in the past through exchanges. Gold and silver as money preceded the first US government in the territory now known as the US. The first US printed dollar was redeemable in gold. This is where the value of the first US dollar is derived. It wasn’t state decree. Fast forward to 1933, when the government reneged on its promises to redeem dollars for gold for the public, and then again to 1971 when they reneged on the world’s central banks, people have continued to accept US dollars in trade by way of the state demanding to be paid taxes in unbacked US dollars. This situation is not primary. It is not the origination of value for the US dollar. It is an after-effect of the valuation of money originating out of market exchanges. If we trace the value of the US dollar to the past, we will go back to the US dollar being backed by gold. That is, we will find that the US dollar is valued today because of a series of valuations stretching back to gold. We won’t go back to an initial state decree that said something like “Henceforth, cotton and linen shall be legal tender.” That came later.

    Lorenzo from Oz:

    As for the dreaded “origin of money” question, that is so a “define your terms” question. Coins, the first clear medium of account, are a creation of rulership.

    Coins can be creations of rulers. It is not the case that they are creations of rulers. There are many examples of private coinage flourishing throughout history. States monopolized coin minting after coins already circulated. In the US for example, when the US government first began to monopolize the coinage, each coin bore the guarantees of private bankers. Privately minted coins circulated in the US as late as 1848! See B.W. Barnard (1916) “The use of Private Tokens for Money in the United States”.

    They are a much easier way for rulers to collect taxs.

    If the state minting coins made taxation “easier”, then that implicitly means the state collected taxes before they minted coins, when it was “more difficult.”

    It’s interesting watching statists blather on about history. It’s like watching creationists talk about particle physics.

  26. Gravatar of Major_Freedom Major_Freedom
    11. June 2012 at 06:35

    Lorenzo from Oz:

    I call interest rates a signal because, when an inflation-targeting central bank with unbalanced credibility (i.e credible on price expectations, not income expectations) changes interest rates, it work for inflation but not income. But when a central bank with balanced credibility (i.e. credible on price and income expectations) changes interest rates, it works for both. Because, as the MM community knows, expectations rule and the policy signal operates within the web of expectations the central bank has chosen to create.

    You make it sound like interest rates are only a signal when there is a central bank and inflation. In an absence of a central bank and inflation, interest rates on loans would be a signal. And that signal would be a less hampered and distorted one.

  27. Gravatar of Saturos Saturos
    11. June 2012 at 08:41

    This is the second time Scott has used this title for a post. I wonder if that’s happened before…

  28. Gravatar of Lorenzo from Oz Lorenzo from Oz
    11. June 2012 at 10:22

    MF Try and make your ignorance of history a little less obvious. Before coins, taxes were collected in kind and by labour service.

    And coins can created by private operators, but they were originally created by rulerships.

    If there is no central bank, the interest rates are just a price. Watching the appalling performance of the key central banks makes me more sceptical about their value. But I always thought there was a decent argument for not having them. I just don’t think it is currently politically feasible and I certainly don”t think the worse thing they do is create inflation.

  29. Gravatar of Lorenzo from Oz Lorenzo from Oz
    11. June 2012 at 10:23

    That should be “can be created” and “then interest rates …”

  30. Gravatar of Major_Freedom Major_Freedom
    11. June 2012 at 17:24

    Lorenzo from Oz:

    MF Try and make your ignorance of history a little less obvious.

    That’s funny, coming from someone who is ignorant of history.

    Before coins, taxes were collected in kind and by labour service.

    Before state minted coins, taxes were collected in kind and by labour service…and in private coins.

    And coins can created by private operators, but they were originally created by rulerships.

    There is no empirical evidence for that. There is archeological evidence that suggests coins were created by both states and private minters. You can’t say states did it first, because the world isn’t a single country. It is dispersed. In some locations, states minted coins. In other locations, private minters minted coins. Saying “states did it first” is a vacuous claim in a global context full of independent communities, cultures, and economies. Not only is it not the case, since private coins came first in the temporal sense, but also because it doesn’t even matter what came first in the temporal sense, because one people in one community originating private coins, and another people in another community whereby a state minted the first coins, is sufficient to prove that coins and money do not only arise out of state decree.

    It would be like saying because Leibniz independently discovered calculus temporally after Newton, we should say without Newton, calculus would never be invented.

    If there is no central bank, the interest rates are just a price. Watching the appalling performance of the key central banks makes me more sceptical about their value. But I always thought there was a decent argument for not having them. I just don’t think it is currently politically feasible and I certainly don”t think the worse thing they do is create inflation.

    That is also wrong. Without a central bank, interest rates are a signal of time preferences. Interest rates being a “price of money” is a myth. It is easily seen as a myth by simply considering periods of rapid (but not hyper-) inflation. In rapid inflation, liquidity preference falls, and yet interest rates skyrocket, counter to what the “price of money” theory would predict. When inflation comes back down, liquidity preference rises, and yet interest rates fall back down, also counter to what the “price of money” theory would predict.

    You say watching the appalling performance of central banks makes you question their value. But even there, that is contingent upon you being able to even grasp the full implications of their failure. If there were more of those who can trace out more of the effects of inflation, there would almost certainly be a fundamental change in the monetary order. But it unfortunately seems like things have to get worse before they get better.

  31. Gravatar of Lorenzo from Downunder Lorenzo from Downunder
    11. June 2012 at 17:50

    MF: There is no evidence of private coins in the archaeological record before the apparent invention of coins by Lydian kings. Menger’s Just So story has no basis in the archaeological evidence.

    There were units of account, and media of exchange, but they do not seem to have come together in a medium of account before coins.

    And yes, in a sense all prices are signals. But, if you have a central bank, its setting of interest rates is a signal beyond the way any price is. Hence the signal works differently depending on what expectations the central bank has established.

    And if central banks can oversupply money, they can undersupply it as well. Indeed, undersupplying to maximise return is classic monopoly provider behaviour.

  32. Gravatar of Major_Freedom Major_Freedom
    11. June 2012 at 20:19

    Lorenzo from Oz:

    There is no evidence of private coins in the archaeological record before the apparent invention of coins by Lydian kings.

    No, the archaeological evidence does not suggest that the earliest known cases of coins were Lydian. That claim is from Herodotus. Archaeologists have found no evidence of this, as the capital of Lydia contained no findings of state minted coins. Even the proponents of the Lydian coin story admit that the coins mentioned were not used as a medium of exchange.

    The earliest known case of coins used as a medium of exchange as found by archaeologists is in Aegina, and they are not certain whether the coins were minted by the people or by the King.

    Menger’s Just So story has no basis in the archaeological evidence.

    Menger’s barter theory of money is not falsified by instances of Kings monopolizing an already existing commodity that was used as barter.

    Every instance of Kings minting coins, arises out of the precious metal ALREADY being valued for uses other than money, and exchanged for other commodities. The Aegian coins, and the Lydian coins, were composed of metals that were already produced and valued in barter exchanges.

    There were units of account, and media of exchange, but they do not seem to have come together in a medium of account before coins.

    All these uses are subsidiary to the medium of exchange property.

    And yes, in a sense all prices are signals.

    Interest rates are not a price of money.

    But, if you have a central bank, its setting of interest rates is a signal beyond the way any price is.

    It won’t be a signal of actual time preference changes.

    Hence the signal works differently depending on what expectations the central bank has established.

    It doesn’t matter what the expectations are of central bank actions when it comes to whether or not prevailing interest rates are derived from real savings only, or funny money dilution.

    And if central banks can oversupply money, they can undersupply it as well. Indeed, undersupplying to maximise return is classic monopoly provider behaviour.

    You cannot know what the proper money supply should be in the absence of the system of profit and loss, in the production of money itself.

    Knowing that the Soviet central planners could “underproduce” food doesn’t mean that you can know how much food should be produced and which food should be produced and where it should be produced, by using the power of the communist planners. You can only know such things by recourse to the unhampered price system as it pertains to food production. The same thing holds true for money.

  33. Gravatar of Lorenzo from Downunder Lorenzo from Downunder
    12. June 2012 at 00:30

    (1) Using something already valuable is obviously an easy way to get coins accepted.

    (2) Units of account are actually a more important feature, since you can set debts in them even if there is no single medium of exchange.

    (3) The barter story seems to have been vastly exaggerated. It existed, but more as a fringe activity. The historical evolution seems to have been one where personal relations originally dominated (incorporating debits and credits and implicit exchanges), then personal exchange grew (with expansion of mediums of exchange, especially after coinage kicked off) and then, in recent centuries, impersonal exchange (with the expansion of institutional arrangements). It is dangerous to project back from societies dominated by impersonal exchanges to ones dominated by personal relations.

    (4) Did not say interest rates are the price of money: in fact I have repeatedly said that they are not in various comments and posts.

    (5) It is quite clear that expectations are crucial in understanding the hold/spend on consumption or assets/send out of country options for money. Indeed, money itself, since it is fundamentally based on expectations (i.e. the expectation that it will be useful in future exchanges). As the monopoly provider, central banks have great power in the expectations they do, and do not, generate.

    (6) One can tell undersupply or oversupply without knowing the “correct” level.

  34. Gravatar of ssumner ssumner
    12. June 2012 at 09:10

    Saturos, I’m getting old, and old guys always repeat themselves.

  35. Gravatar of Major_Freedom Major_Freedom
    12. June 2012 at 10:38

    Lorenzo from Oz:

    1. Ergo Menger’s barter theory of money is consistent with the data. You do understand Menger’s theory, don’t you? It’s just a theory that whatever the money commodity happens to be, it derived its value by initially being produced and exchanged in its “raw” state. That’s all it means. If a King starts to mint coins, then the “backing” of those coins was already valued for its own sake in barter trades. The same holds true for US dollars. They were initially backed by gold, and gold was initially used in barter. Then the gold was dropped, and they are now backed by the supreme value of violence.

    2. The units of accounts themselves derive from barter, and yes, debts can be settled in this way beyond medium of exchange. But there is no way of knowing what the values for the units of accounts should be, unless the units of account defers to a universal relative valuation, i.e. medium of exchange.

    3. The barter theory is not exaggerated at all. It is simply a logically necessary phenomena if a commodity is to become universally accepted. The chronology of the archaeological record, as you note, is consistent with it. You even started with barter in your version of events.

    4. You said interest rates are a price. Since interest is earned on money being lent, the only possible “price” involved here is the price of the money sums being exchanged. If you say interest is not a price of money, then what exchange were you referring to, if not the sums of money being lent, that would reveal a “price”?

    5. Expectations must always defer to actualizations. Central bank can convince others to expect certain money and spending and interest rates, but those expectations are not expectations of the MARKET. They are expectations of a central planner. Investors however need to know MARKET conditions, and they can’t do that when the conditions are interfered with by central banks. Just because investors can accurately predict what the Fed does and wants, it doesn’t mean that they are accurately predicting what the consumers actually want in the division of labor. It’s apples and oranges. Central banks cannot know proper money supply should be in the absence of the system of profit and loss, in the production of money itself. Expectations of Fed actions are in fact subsidiary in this respect.

    6. One cannot know oversupply and undersupply without recourse to the unhampered price system. You can make better and worse guesses, but correctly guessing that there is a relative undersupply or relative oversupply, is not the same thing as knowing the actual extent of the oversupply or undersupply that would enable you to know how many paper bills should be printed.

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