Explanation of the Petition

Thanks for the tips.  If there are any further changes they will probably be tiny, as I want to get this out ASAP.   Those who want to sign, comment below (the actual petition post) from a job email; unfortunately for now I will limit actual names on the document to professional economists and (finance profs) with some job affiliation.  I think it will have more impact, that way.  But anyone who wants to “sign” in the comment section is welcome to do so.  Please pass the actual petition link on to any economists who you think might be willing to sign.   Thank you.

Bill,  I took out all the stuff on various reasons for the bank interest penalty, and just went with the last half of the petition.  That is the link I’ll send out.  I think I’ll keep the inflation option, as there’s lots of famous economists on record for inflation targeting now (Hamilton, Mankiw, Mishkin, Rogoff, etc.) that I want to sign.  I have to go with my gut instincts on that one.

Aaron,  I changed it to 5 years.

Rob,  I took out the specific mention of fiscal policy in the intro, and just emphasized the positives about monetary policy.

Thanks for those comments.



13 Responses to “Explanation of the Petition”

  1. Gravatar of smokedgoldeye smokedgoldeye
    3. March 2009 at 12:27


    “I want to get this out ASAP” What’s the rush? Reminds me of the rush to pass the $800MMM stimulus bill before our wise elected representatives had even read it! I gather you are very afraid of deflation. You responded to DanC earlier saying “Deflation historically leads to leftist policies”…is that why the National Socialist Party took hold after the hyperinflation of the 1930’s in Germany? Why so afraid of deflation? Look at the rampant deflation in computer prices over the past decades. I love it. Falling prices was the one consolation during the Great Depression. Try to imagine being unemployed for months and watching prices steadily go up. Yikes. And as for debt being harder to pay back, too bad for debtors and kudos to savers. People will save yes as they watch prices fall. Save for what reason? FOR SPENDING LATER. Spending on all the great new gizmos that businesses like mine will have been developing using those consumers borrowed savings and that are finally ready for sale! I’m guessing you’re rushing like mad to jet off to Rome for the Atlantic Society meeting. Please don’t leave more of a mess in your wake as you encourage more confiscatory inflation with your petition (there’s no getting around it: the Fed printing money behind your back is a hidden tax). I wonder what the average high school student would think of deflation of college tuition?

  2. Gravatar of Jeff Hummel Jeff Hummel
    4. March 2009 at 06:25

    Scott: I found out about your blog through EconLog and Marginal Revolution and have since read all your posts avidly. I agree with much of what you write, especially about the power of monetary policy, although like Tyler, I’m skeptical of your causal explanation for the current crisis. But even when I disagree I find your analysis well reasoned and stimulating.

    My specific comment relates to the Fed’s paying interest on reserves. While I agree with you that it is a blunder that ranks with the Fed’s doubling of reserve requirements in the mid-1930s, I think you’ve missed an important aspect of the Fed’s motivation, which relates to how it manages bank clearings. I myself have been posting about the current crisis over at Liberty & Power, and two of my posts relate directly to this issue: Paradoxes of Paying Interest on Reserves and Footnote on Bank Clearing Systems.

    I don’t know whether your proposal to charge interest on reserves merits reconsideration on the basis of the clearing-system dimension, but that dimension does suggest why the Fed will probably resist such a change vehemently.

    By the way, bear in mind that only reserves held in form of deposits at the Fed currently pay interest, whereas reserves held in the form of vault cash do not. This of course now gives the banks a strong incentive to encourage people to switch from using ATMs (a major sources of bank demand for vault cash) to using debit cards. But if the Fed starts charging interest on deposits at the Fed, it will cause banks to convert their deposits at the Fed into vault cash in order to evade the interest payments, unless you figure out some way to charge interest on their vault cash as well.

    Jeffrey Rogers Hummel
    San Jose State University

  3. Gravatar of ssumner ssumner
    4. March 2009 at 09:10

    Dear Smokedgoldeye, I should have said deflation led to statist policies, not leftist policies. But I hate statism from the left or the right. Contrary to your claim, Germany suffered enormous deflation in the early 1930s, which as you say led to the (highly statist) Nazi’s taking power. Falling computer prices are due to rising productivity, and that’s why they don’t cause unemployment in the computer industry. But for the economy as a whole, if nominal GDP falls sharply, as it is right now, it will lead to mass unemployment.

    Jeffrey, Very useful reply. I will try to link to your papers when I amend my “proposal for a petition” post to reflect your comments. BTW, the vault cash issue isn’t a big problem, but I need to address it. With reserve levels so high, I am not worried about the clearinghouse issue if the “supplemental reserve” version of my proposal was adopted. Unlike you, I am not worried about inflation, as I think the Fed will quickly pull out reserves at the slightest sign of high inflation—indeed I think they will overreact. Still, very good ideas. Check out my revised post in an hour.

  4. Gravatar of smokedgoldeye smokedgoldeye
    5. March 2009 at 02:50

    “I hate statism”. But how can you hate statism and love fiat money? Merriam-Webster defines statism as a “concentration of economic controls and planning in the hands of a highly centralized government”. Would you argue that fiat money is not a statist tool? Please explain this apparent inconsistency in your argument.

  5. Gravatar of David Pearson David Pearson
    5. March 2009 at 06:41


    A question for you. An unintended consequence of ZIRP is to lower long term return expectations on wealth. Wealth holders make projections of these returns and it partially drives their spending decisions. So lower the returns, and you lower spending and therefore velocity. Further, wealth holders may decide that to meet their long term spending needs in the absence of income, they need to both save more and liquidate non-income earning assets.

    So ZIRP unquestionably has some deflationary effects. To have ZIRP/QE without engendering inflationary expectations is to indirectly cause a net increase in deflationary expectations. You get all of the pain of no-income and zero gain. Do you agree? You might argue that QE boosts income expectations because of the intended effect on the real economy. The stock market and various other indicators are telling us that economic actors are not buying this.

    So the deflationary ZIRP dynamic makes an inflation target all the more useful. However, 2% — obstensibly the current target — is not enough of a threat to wealth introduce “tail risk” to cash hoarders. On one side (real assets) you have the probability of a large loss; on the other, a quantified, certain small loss (2% p.a.). The asymmetry of tail risk virtually ensures that cash hoarders do not change their behavior.

    Krugman has argued that the Fed needs to be “irresponsible” in its attitude towards taming future inflation. He’s saying, in other words, you need tail risk on both sides. Do you agree?

  6. Gravatar of ssumner ssumner
    5. March 2009 at 09:15

    Smokedgoldeye, I am a pragmatic libertarian, not a dogmatic libertarian. I am trying to make the current monetary system work better, to reduce the risk of statism in other areas. There is zero chance of removing the government from money in the near future. Let’s at least get low and stable inflation or NGDP growth, so the rest of the economy can do well, and hopefully fight off statist policies in other areas.

    David, Very thoughtful comment. I have also been working on this issue, and have reached some tentative conclusions. I like to look at the asymmetry in policy-making, which is the opposite of what you correctly describe regarding QE. Aggressive easing by the Fed that produces a 3% median inflation forecast, might result in a much higher average forecast due to the long tail. My hunch is that if we use forward-looking markets this is less of a problem than one might imagine. For instance, if 5% nominal GDP targeting of futures contracts had been adopted last June, the price of those contracts, and the the expected future growth, would have stayed near 5%. So we never would have had the liquidity trap conditions you worry about. Would it be too late today? I doubt it. I think such a policy would boost nominal growth expectations enough to lift us off the ZIRP floor. This is where I disagree with a lot of new Keynesians, I think the goal should be to raise interest rates through an expansionary monetary policy. If you don’t think that is possible, read my rational expectations post from a few weeks back. And even without a futures targeting system, I think roughly the same results could ve achieved by looking at financial market indicators. Remember, extreme macro instability (i.e., employment fluctuations) isn’t so much caused by changes in actual inflation (as we saw in 2007-08) but rather by changes in expected inflation compared to what was expected a few months earlier (as we are seeing in spades during 2008-09.)

    I read recent stock market history differently. I see ZIRP as a failure of monetary policy. Under a credible forward looking policy, interest rates would never have fallen to zero. So I think it is a mistake to focus on interest rates when thinking about policy. The QE that has occurred is of exactly the wrong kind:

    1. Accompanied by interest payments on reserves
    2. Done grudeingly in response to severe deflation, not aggresively to stay ahead of the curve.
    3. Unaccompanied by an explicit nominal target, with a promise to maintain level targeting.

    I think if you look at the extremely enthusiastic stock market response to the slightly more aggressive than expected fed rate cut of December (and its accompanying language), you will see that the stock market desperately wants an aggressive easing of policy–even at near zero rates.

    Your point fits the 1932 OMOs when policy wasn’t credible because of the constraints of the gold standard. As soon as FDR devalued the dollar the policy became credible and stock market soared. We’re not tied to gold today, and can do the same through a basket of unconventional procedures.

    Don’t let my comments here discourage you. You point is extremely important and I am not certain that the answer I provided actually addresses it satisfactorily. I will keep thinking about it. One more thing. I am not 100% sure how to answer your last question. My hunch is that without a financial market-oriented forward-looking policy Krugman is right. With it he is wrong, as futures targeting would get nominal expectations up to the level where asymmetry wouldn’t be much of a problem. But I need to think about it.
    Is Krugman’s views on asymmetry from the 1998 “It’s baaack” paper?

  7. Gravatar of ssumner ssumner
    5. March 2009 at 09:55

    David, Here is another way of answering your question, particularly the part about “the stock market doesn’t buy it”. You probably know about Svensson’s “foolproof” escape from a liquidity trap–directed at the Japanese. He argued that currency depreciation could boost prices and inflation expectations in Japan. Now suppose the BOJ set out on a much more aggressive policy of QE, and the foreign exchange market didn’t “buy it.” I.e. suppose the yen continued appreciating. Then the BOJ could simply make the market in yen, buy selling unlimited quantities of yen at the depreciated rate. No one disputes that this would be technically possible, just about whether it was politically feasible.

    Now I agree that the currency depreciation idea is not optimal for this worldwide recession, and I agree my futures targeting idea may be risky and politically infeasible, but I also think we can get the job done through ordinary policies (OMOs) that look at market indicators.

    It is important to understand that my argument cannot be boiled down to a single element. I combine theory, history, and intuition in a way that is different from other more famous economists because they simply haven’t had time to examine some mundane facts as closely as I have. One of those facts is that even without Svensson’s exchange rate idea, Japan could have easily escaped it’s liquidity trap by simply TRYING to get to 3% inflation. They never did, instead tightening policy in 2000 and 2006 even as the GDP deflator continued to fall. So there is really no example in world history of a central bank under a (floating) fiat system sincerely wanting to inflate, but being unable to because the market didn’t believe them. Other more famous economists just glance at the Japanese case and say “yeah, that looks like a expectations trap.” But ‘trap’ isn’t really the appropriate term. Krugman has an expectations trap theory without a plausible example. If you are wondering about the current recession–read my “Let Bernanke be Bernanke” post today. If the Fed sincerely wants to set an explicit nominal target growth path, promise to hit it, or catch up later (level targeting), and say they’ll do as much OMOs as required, I am confident the markets will believe them. If they only do some of those things, I have doubts about whether it will work. So far they have done none, and thus I am not surprised the stock market continues to fall. So you and I are probably not that far apart.

  8. Gravatar of smokedgoldeye smokedgoldeye
    5. March 2009 at 10:27

    “I am a pragmatic libertarian, not a dogmatic libertarian. I am trying to make the current monetary system work better, to reduce the risk of statism in other areas. There is zero chance of removing the government from money in the near future.” It sounds to me that you agree that fiat money is statist and that, while you don’t like it (because you “hate statism”), later is a better time to recommend natural money. You’ve essentially agreed that fiat money should be abolished in the medium to long term. Why not recommend that course of action now? If not us, who? If not now, when? Please correct any part of my logical progression above as needed. Personally, I can think of no better time for learned economists to shine a harsh light on fiat money. The system is clearly failing. Please help me to clearly understand your position of reducing hateful statism in some areas but not others. There’s a saying “To a man with a hammer, everything is a nail.” I hope that you are not simply a libertarian with a zealous grip on your monetary interventionist hammer.

  9. Gravatar of David Pearson David Pearson
    5. March 2009 at 10:35


    Thanks for taking the time to answer. I think we are not too far apart. The key difference, perhaps, is I think you have to make the tail risk of a policy mistake (in favor of hyperinflation) loom large in order for inflation targeting to be effective. You think that raising the mean of the distribution (the target rate) would be enough. But if the Fed is determined — by virtue of wanting to retain inflation-fighting credibility — to prevent high inflation, then what does the probability distribution look like? Its not a normal one, it is skewed heavily towards deflation.

    So for cash hoarders to face a normal distribution of outcomes, the Fed needs to sacrifice some of its inflation-fighting capability. That raises the long-term cost of monetary stimulus. It may still be an acceptable cost, but it must be recognized nonetheless. Unless you’re right, and creating higher mean expectations is sufficient to change behavior.

  10. Gravatar of David Pearson David Pearson
    5. March 2009 at 11:30


    Here’s the Krugman blog post suggesting the Fed be “irresponsible” in order to impact expectations. There is a link to a relevant paper/speech on Japan:


  11. Gravatar of ssumner ssumner
    6. March 2009 at 17:19

    Smokedgoldeye, One problem I have is that I don’t know what no government looks like. Abolish FRNs? Then what about government debt which is a promise to pay FRNs to bondholders? They can’t afford to pay off the debt right away. Go back to gold and make governmetn pay the debt in gold? You tell me exactly your no-government plan, and I’ll critique it. But right now I don’t know exactly what you envision.

    David, I might also reply to you by email at some point, as I am curious if you are an academic working on the same problem as I am. Let me try to explain my view in a different way. There are two options:

    1. The “let’s wait and see” option
    2. The target market indicators option

    Under option 1, the Fed throws money out there and waits for the long lags to play out. This often lacks credibility, and as a result there is a very long tail (which I interpret as a fairly high prob. of failure (mild deflation) and a small prob. of success, in which case the massive QE raises velocity and overshoots toward hyperinflation. I get all that. (Or at least I think I do.) But when targeting market prices observable in real time it is different. In the limiting case of my NGDP futures scheme–the market will expect 5% NGDP growth, and thus from the instant the policy is instituted you won’t be in a liquidity trap. But this means that the distribution with the long tail becomes pretty normal–since expected inflation is positive, velocity is reasonably well behaved, and you don’t need very much QE to hit your target. The problem with the “Let’s wait and see approach” i.e. throw money out there and wait to see how the long and variable lags play out, isn’t so much that the policy lacks credibility, but that the Fed doesn’t know how much credibility the market would assign to any QE. Under my plan that’s not a problem, and I think even under a more flawed plan relying on real world markets it’s manageable, especially (and this is important) if accompanied by explicit targets with level targeting should there be a temporary overshoot.

    Thanks for the Krugman piece, I’ll take a look.

  12. Gravatar of Bill Woolsey Bill Woolsey
    7. March 2009 at 13:15


    The notion that lower interest rates will be deflationary ignores the fact that there are debtors for every creditor. Lower interest rates leaves debtors with more income after paying interest so that they can purchase other things.

    And yes, it lowers the income received by creditors.

    But it nets out.

    Some interest rates are very low–near zero.

    The argument that low interest rates is “deflationary” should be able to be turned around. Let’s raise interest rates and then spending will rise!

    This is like arguming that putting a price floor on goods and services and mandating higher prices will raise income and spending.

    Yes, it may raise some peoples income. And raise their spending.

    But the people paying the higher prices have less to spend on other things.

    Similarly, those paying the higher interest will have less to spend on other things.

    Anyway, not all interest rates are anywhere close to zero. People who want to earn a yield (especially people saving for some kind of goal) can purchase longer term or higher risk securities.

    My own view is that the first best solution for people all trying to accumulate low risk, short term assets is that their nominal yields should be negative.

    Zero? No. Negative.

    People should have no expectation that they can move consumption from the present to the future without accepting some risk. If there are other people willing to bear that risk and give them a return, that is fine. But if the demand for such assets is greater than the supply, then the yields should be negative.

  13. Gravatar of ssumner ssumner
    9. March 2009 at 17:07

    Bill, If you mean a low interest rate policy of the Fed is not deflationary, then I agree. Any argument based on creditors getting less income is probably wrong (especially in the U.S where debtors outnumber creditors.)

    There is another issue that I would like to post on sometime–which is that lower rates caused by a reduction in the Wicksellian natural rate may be deflationary, by lowering velocity. That’s a entirely different issue, but may explain why people link the two.

Leave a Reply