Finally!
My new book (entitled The Money Illusion) can now be ordered online. My intended audience for the book is mostly younger people that are studying macroeconomics. While I welcome older readers, for a couple of reasons many of them won’t be persuaded by my arguments:
First, I don’t fit neatly into any of the tribes out there. Right-wingers won’t like the fact that I blame the Great Recession on tight money policies of the sort advocated by conservatives. Progressives won’t like the fact that I blame the Great Recession on government policy (the Fed), not the “inherent instability of capitalism”. They won’t like my dismissal of fiscal policy, or my claim that unemployment compensation boosts unemployment. I didn’t write this book to win friends.
A second problem is that my views are pretty contrarian. I reject the conventional way of looking at monetary policy, which focuses on central bank control of interest rates. Instead, I argue that what really matters is central bank policies that influence the supply and demand for base money. I deny the existence of asset price bubbles.
So I’m looking to convince people who haven’t yet adopted a tribe, who still have an open mind about how the world works. Those are often younger people.
George Selgin wrote a nice review of the book for Barron’s. At one point he noted that I hadn’t given much attention to the case for NGDP targeting:
The Money Illusion is more than a restatement of the tenets of Market Monetarism because it also looks at sundry other monetary economics topics, albeit always from Sumner’s distinct point of view, and because it includes Sumner’s account of his own intellectual journey. But by pursuing these other agendas, it sacrifices the advantage of a narrower scope, and correspondingly sharper focus. The case for NGDP targeting is among the casualties of this approach: Arguments for it may be the warp of the book. But too often they disappear behind its weft.
While I do make a forceful case for NGDP targeting, that’s certainly not the main focus of the book, and not the focus of what I’ve been doing for the past 13 years. So what has been my focus? On policy questions I’ve emphasized three points:
1. Level targeting of a nominal aggregate. Commit to return to the previous trend line after a nominal shock.
2. Target the market forecast. Set policy at a position where the market expects success.
3. A “whatever it takes” monetary policy. The central bank should do as much as necessary to hit its target, and should not rely on fiscal stimulus. Failure is not an acceptable outcome.
To me, these are the core ideas of market monetarism.
Another theme of my blogging has been “never reason from a price change”. Interest rates do not tell us anything about the stance of monetary policy. This is also a monetarist idea.
Obviously there’s much more in the book. I tried to write the sort of book that I would have enjoyed reading at age 20. I hope you enjoy it and I welcome your feedback.
PS. Over at Econlog I have some additional thoughts on the book.
PPS. I originally intended to write the book using the breezy informal style of my blog posts, but was strongly dissuaded by reviewers. (I kept one page of that style as an example for readers that never saw my blogging.) Chapter 1 was originally entitled “The Autistic Economist”—you can image how that went over in this woke era! On a serious note, I do thank a number of reviewers for making the book better, for preventing me from repeatedly embarrassing myself.
PPPS. I have a Mercatus working paper coming out this fall that presents economists like Paul Krugman and Ben Bernanke in a more favorable light than this book. There’s no direct contradiction, just a focus on the positive contributions in my new working paper.
Tags:
2. September 2021 at 11:10
Congratulations! Looking forward to reading it.
2. September 2021 at 11:33
Congrats! I see Kling already has a blog post on it.
2. September 2021 at 11:58
Look forward to reading it.
2. September 2021 at 12:00
Congratulations! I am going to buy and read your book, even though I am not young anymore.
2. September 2021 at 12:32
Congratulations! I will read it asap.
2. September 2021 at 13:42
Scott, I found your arguments very persuasive at age 41. I’ve read a lot about macro from a lot of different sources, but the stuff I actually believe comes mainly from you and your blog. Thank you.
2. September 2021 at 13:59
I echo Ken Duda. The 2008 recession greatly confused me, I started reading your blog, and all the pieces just fell into place. (Also started at age 41, although I have to admit I wasn’t yet in any macroeconomic “school” cult, so perhaps that is the key part.)
2. September 2021 at 14:00
Oh! And of course, many congratulations on the publication of your book.
2. September 2021 at 14:22
Thanks everyone, I’m already starting to regret the “young” comment. Oh well. I was thinking of older people who have been professional macroeconomists their entire adult life. It’s going to be difficult to convince them—AS IT SHOULD BE.
2. September 2021 at 14:43
Just ordered it so I feel less guilty about my trolly, rambling comments on your blogs. Promise you won’t spend any of the proceeds at Subway.
p.s. Although you’ve convinced me of the critical value of good Fed policy, asset price bubbles are a real thing–even if they’re frequently hard to identify and impossible to time.
2. September 2021 at 15:29
Will there be a Kindle version at some point ?
2. September 2021 at 17:25
Congratulations. I hope it has tremendous influence.
2. September 2021 at 17:40
Congrats Scott – get your ideas out through as many channels as possible. I’m another one who learned a lot from you way after 40!
2. September 2021 at 18:29
Congratulations on the book coming out ! Will there be a kindle version?
I think I was born in the same decade as Scott but a bit later – so I’m counting myself in the target ‘young’ category.
2. September 2021 at 19:21
Congratulations and good luck with the book!
(As a professional troll, I hearby discount this comment by 15 percent)
2. September 2021 at 21:22
Congratulations, Scott, a great achievement and one you should be very proud of. I echo what others have said about learning so much from your posts over the years, and not just about macroeconomics either! But on that, despite having studied undergraduate macroeconomics, I didn’t know how to make practical sense of the Great Recession until I started reading you – was it bubbles, was it a market failure in lending, was it a failure of the market system…
I’ll ask the question I asked over at EconLog – does the book cover the MM ‘test’ of 2013 and the fallout?
As for the one page example of your blogging style, although I think the first post of yours I read was your comment on Tyler Cowen’s ‘The Great Stagnation’ (which blew me away – your comment that is: https://www.themoneyillusion.com/review-of-the-great-stagnation/), I think this is one of the posts that really started my awakening: https://www.themoneyillusion.com/what-were-talking-about-when-we-talk-about-inflation/ Bandying around the idea of banning a word like ‘inflation’ was like a wow-moment for me. Bonus points for the Murakami reference in the title.
2. September 2021 at 22:03
Everyone, I’ll look into the kindle question and get back to you.
Rajat, Thanks, but I hate to be reminded that my posts were better in the old days.
Yes, the 2013 test is covered in the book.
3. September 2021 at 01:11
I was wondering when you would make a post about this. Very much looking forward to reading this and then forcing everyone I know to follow suit. Slightly confused as to when I’ll get it, however; Amazon.co.uk says it came out today, 3 September, but my pre-ordered copy will arrive on 21 October? Ah well, all things come to those who wait.
3. September 2021 at 03:39
Looking forward to reading it… I have always loved your non-tribalist views. Placing evidence above ones affinity for their team is a much needed virtue in this day and age.
3. September 2021 at 05:28
Congrats – look forward to reading it
3. September 2021 at 08:27
Hey Prof Sumner, I’ve been a reader of your 2 blogs for a couple years now and am very excited to read the book! I recently got a masters in econ but my program lacked a more in-depth study of monetary economics that I assume you get more from a PhD program. This is what really interests me and I’m excited to learn more!
3. September 2021 at 08:28
It’s great that Sumner finally admits he’s trying to brainwash children.
Someday, hopefully before you die, you will learn that a good argument is persuasive at any age.
However, you are right in suggesting that indoctrination is easier amongst the young.
Putting aside another failed book, that won’t sell, we are glad to see that Europe is finally banning vaccines for those under 15. Sumner’s been advocating the vaccination of children, masking them up, and separating them by skin color under the banner of CRT for far too long.
Time for common sense, and “real science” to strike back against the quacks.
End the Fed!
3. September 2021 at 08:43
This is going to sound like hyperbole but it’s not – Scott’s blogging significantly accelerated the modernization of macroeconomic policy around the world and especially in the US.
Thanks to Scott, many (but not enough) among the press, academia, politicians, and laypeople are aware that forward-looking, market-based expectations of inflation are a critical barometer of how the fed is doing responding to nominal shocks.
Contrast the speed and decisiveness of the Fed’s actions in March 2020 with what happened in late 2008. I think the most underappreciated fact about the pandemic is just how easily the initial shock could have spiraled into disaster. Scott might not get a Nobel prize but he’s got something much more impressive – his ideas made a real difference in improving the lives of countless people.
3. September 2021 at 09:33
Everyone, There will be an electronic version of the book.
https://press.uchicago.edu/ucp/books/book/chicago/M/bo85902197.html
3. September 2021 at 09:35
Thanks everyone.
Tacticus, Yes, I was very disappointed by the slow pace of the publisher.
3. September 2021 at 09:40
Congratulations! I’ve always enjoyed your consistency, when compared with the vast number of public intellectuals who zig-zag based on the position of their ideological “side” at a given moment. Not that those people are wrong (many of them are brilliant and highly insightful), but it’s refreshing to read someone who doesn’t change all of his opinions based on the latest fad.
3. September 2021 at 11:42
Congrats, Scott. Looks like I’ve got some reading to do.
3. September 2021 at 13:52
Congratulations!
4. September 2021 at 00:40
Congratulations!
at least when viewed in Lithuania, Amazon.com shows that the book is temporarily out of stock
4. September 2021 at 05:49
Professor Sumner,
You say “I deny the existence of asset price bubbles.” Given the existence of companies with 2 trillion dollar valuations I think this claim is really bold. I think We live in an era with highest level of asset bubbles.
Besides, in my judgement ‘whatever it takes’ monetary policy has its limits. The reason is that it relies on debt. And debt has limits. Someone cannot borrow disproportionately his own income. In supply side since there is oligopolistic competition, some companies make huge sum of profits thus they don’t need to borrow. Share buy-backs are clear indication for this pattern. And other companies have limits to borrow to their income/equity ratio. Therefore, in the long run, it is only the government can borrow without limitation.
In addition, I think your proposal about monetary policy is the Market Monetarism version of Modern Monetary Theory. In other words, while Keynesian left is shifting to MMT, Monetarist right is shifting to MM. While MMT proposes ‘whatever it takes’ fiscal policy to reach the highest level of prosperity, MM proposes ‘whatever it takes’ monetary policy to reach the same goal.
While the left gives the control to the government, the right gives the control to the central bank which is another state institution.
These approaches both from right and left show that economics profession lives its dejavu moment with soften attitudes similar to post-1929 period.
4. September 2021 at 06:16
I agree with everything in the second paragraph——and while I am not exactly an expert in Economics and have learned much from this blog and other sites (Econlib, eg) I have always leaned this way. And it is exasperating reading the WSJ. This blog has stressed what monetary policy can and cannot do.
However, I must complain. Do U of Chicago and Amazon have some kind of mutual problem? Cannot buy it (it just was released!)—-I can “rent” it for $65–(Rent?!!) which I find absurd. I am guessing you have zero control over this. But the way Textbooks (I am assuming The Money Illusion is in the textbook category) are priced in general are a ripoff and monopoly driven.
Hence your comment at this being aimed defacto at students (“younger people”). Again, I am sure you have no pricing control, but Chicago does. I don’t get it——your $35 dollar version is borderline priced——-but it cannot be bought on Amazon. I also like Kindle. Less trees wasted—and easier to read on my IPad.
Needless to say—-there would be a multiple number of books sold if the price were lower——unless Economics texts have a coefficient of infinity in it’s PED—-as in no one wants to buy any. (Or a zillion). It’s exasperating.
4. September 2021 at 06:22
Oh, yes—-Congratulations!
4. September 2021 at 06:28
Congratulations.
4. September 2021 at 06:38
Zero not infinity—said I was not an “expert”
4. September 2021 at 07:36
Sumner: “My intended audience for the book is mostly younger people that are studying macroeconomics.” “Give me a child till he is seven years old,’ said St Ignatius Loyola, ‘ and I will show you the man. ‘”
I feel sorry for Sumner however, as his “one-variable solution” sounds laughably simplistic. But he is sincere about it, since he’s already retired and doesn’t need to justify his job by having to periodically write a book or paper. However, literally writing a children’s book would have been more profitable (preschool kids books and romances are the most profitable books).
Sumner: “I do thank a number of reviewers for making the book better, for preventing me from repeatedly embarrassing myself. ” – now that’s a book I’d have paid to read.
Note that with the exception of Michael Rulle and Sagat, most posters here simply offer congratulations instead of thinking critically. How lame. With the exception of David R. Henderson of course, as they are contemporaries in the same field.
@SG – do you realize–and I hope Sumner reads this and corrects me–that SS has never acknowledged the Fed’s March 2020 “QE-infinity” announcement as being a factor for the V-shaped recovery in the USA? I have repeatedly called on Sumner to do so, even by private email (which he never replied to), and he has not. If Sumner refuses to say monetary policy had anything to do with the V-shaped recovery in 2020, why are you comparing 2020 to 2008?
4. September 2021 at 07:59
The book is a good documentary of the bad FOMC policies, lessons for history. But we are head for even greater trauma.
http://socialsecuritydefaultclock.org/
4. September 2021 at 09:16
Sven, You said:
“Besides, in my judgement ‘whatever it takes’ monetary policy has its limits. The reason is that it relies on debt.”
No, it doesn’t rely on debt.
You said:
“In addition, I think your proposal about monetary policy is the Market Monetarism version of Modern Monetary Theory. In other words, while Keynesian left is shifting to MMT, Monetarist right is shifting to MM. While MMT proposes ‘whatever it takes’ fiscal policy to reach the highest level of prosperity, MM proposes ‘whatever it takes’ monetary policy to reach the same goal.
While the left gives the control to the government, the right gives the control to the central bank which is another state institution.”
This is a bad analogy. It’s not just two different ways of impacting AD, it’s radically different views on the impact of AD on the economy and the most desirable path of AD.
And God help us if Keynesians are switching to MMT. Do you know of a single distinguished Keynesian who has shifted to MMT?
Michael, I have no say over pricing, but I will say that the time cost of reading the book is far higher than the dollar price. I.e., the $35 price is only a small faction of the total opportunity cost.
4. September 2021 at 09:38
Scott
You are funny. And in my case, without doubt correct!
4. September 2021 at 09:44
Actually—-as you can see, I always get economic ideas backwards. I should have said, for me I doubt it!
4. September 2021 at 09:53
Sven,
I don’t understand your point about a $2 trillion market cap indicating there must be a bubble. If you look at Apple, for example, with an over $2.5 trillion cap, they currently have the earnings to justify that valuation. They can grow earnings at roughly the GDP growth rate and it’s justified. What’s your valuation calculation?
4. September 2021 at 10:54
Money Growth Does Not Cause Inflation: https://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/
and
What Actually Causes Inflation (and who gains from it) https://www.forbes.com/sites/johntharvey/2011/05/30/what-actually-causes-inflation/
4. September 2021 at 11:46
What’s your list of monetary books everyone should read?
I’ve read a lot.
Personally I still consider a Monetary History of the United States by Friedman as the single best.
4. September 2021 at 11:54
Scott, “my claim that unemployment compensation boosts unemployment”.
What do you think about “States That Cut Unemployment Benefits Saw Limited Impact on Job Growth. Half of U.S. states ended enhanced unemployment insurance payments early ahead of nationwide termination of benefits for millions of people” https://www.wsj.com/articles/states-that-cut-unemployment-benefits-saw-limited-impact-on-job-growth-11630488601
4. September 2021 at 11:56
Kester, I find it amusing that you’d link to that Forbes article like it’s supposed to persuade me that I’m wrong. Do you really think I’m unaware of his arguments? I’ve spent my entire life studying monetary economics.
Sean, The FAQs in the right column has a list (item #21)
4. September 2021 at 11:57
Foosion, I have a couple recent posts over at Econlog on that issue.
4. September 2021 at 21:41
@Kester – thanks for the links and for exposing Sumner as a fraud. Indeed, the second article points out implicitly there’s no such thing as “money illusion”. Instead, inflation is a rational process in response to either a supply or demand imbalance. Magically dropping double the money supply by helicopter to every American will not cause long term inflation. In the short term it will simply harm some savers and help some debtors, but it’s a wash. Long term inflation is caused by a war, a bottleneck (labor in the post-WWII era), a deficit in a vital sector hard to substitute (e.g., limited oil due to OPEC) and the like, in physical goods and services, not by printing money. Money is neutral. Sumner spent a lifetime studying this but he still got it wrong, a classic case of not seeing the forest for the trees. Here’s a man who doesn’t believe in bubbles (so an investment in the horse-and-buggy maker sector in the late 19th century would be, by Sumner’s standard, a wise investment, as bubbles are impossible, same for Three Mile Island or Chernobyl real estate).
5. September 2021 at 01:43
Congratulations Scott! Looking forward to reading it this fall
5. September 2021 at 08:26
Ray, LOL, you still don’t know what money neutrality means. If money is neutral then increases in the money supply will cause increases in the price level. You have it backward.
Kester is arguing that money is non-neutral.
5. September 2021 at 10:44
Michael Sandifier,
2 trillion dollar valuations, stock market in general, crypto currencies, commodities (such as gold), and bonds all swim in a huge bubble economy caused by massive amount of money supply increase. Stock of money has never been this much in the history of the world. Claiming asset bubbles nonexistent only possible with a religious belief to markets. This is called ‘market fundamentalism’.
5. September 2021 at 10:54
Michael Rulle,
I published my book by myself via Amazon. (It is also an economics book) It is 5 dollars. E-book is 3 dollars. And it is the lowest possible price. However, Amazon does not promote it. So, I have to do it by myself and it is not working. Publisher needs to make money and there are promotion costs. Besides, Prof. Sumner should make money. Thus, I don’t think it is pricey.
When it comes to opportunity cost it is not directly related to price.
5. September 2021 at 11:26
Prof. Sumner,
“Besides, in my judgement ‘whatever it takes’ monetary policy has its limits. The reason is that it relies on debt.”
No, it doesn’t rely on debt.
How FED issues money to market? By buying debt assets through banking mechanism. And banks lend to other people including government as far as I know. If wages do not grow at the same rate as output growth there needs to be more borrowing to keep AD at equilibrium. So, capitalist system is working with credit mechanism. Why do you say it is not debt is the something I can’t perceive.
“In addition, I think your proposal about monetary policy is the Market Monetarism version of Modern Monetary Theory. In other words, while Keynesian left is shifting to MMT, Monetarist right is shifting to MM. While MMT proposes ‘whatever it takes’ fiscal policy to reach the highest level of prosperity, MM proposes ‘whatever it takes’ monetary policy to reach the same goal.
While the left gives the control to the government, the right gives the control to the central bank which is another state institution.”
This is a bad analogy. It’s not just two different ways of impacting AD, it’s radically different views on the impact of AD on the economy and the most desirable path of AD.
Well, I said this with an intention to pointing out the intervention to market. One is fiscal another is monetary. And even though it looks radically different ways of affecting AD, if government borrows due to monetary policy and handing out to the people like happened during the pandemic I think that wouldn’t be that much different. And I insist that in the long run due to debt limits it will depend on government’s capability to keep AD in equilibrium.
And God help us if Keynesians are switching to MMT. Do you know of a single distinguished Keynesian who has shifted to MMT?
I acknowledge that Keynesians shifting to MMT may be a wrong claim. MMT is the farthest point of the spectrum of the left. However, MMT is gaining ground unfortunately. Besides, Keynesians even though they don’t side with MMT, you should not deny this that they become much more favourable to excessive fiscal stimulus. And I think this is not contradictory to my point.
5. September 2021 at 11:30
Kester,
Haha, I saw that article years ago. I think many people saw that article. And that article is preposterous. Really funny.
5. September 2021 at 11:39
Ray Lopez,
Prof. Sumner is right. You don’t know what money neutrality is. İnflation occurs due to an increase in money supply provided that aggregate demand does not fall short of aggregate supply.
In other words, if the velocity of money falls at the same rate with money supply increase like in the post-2008 period inflation will not occur.
https://fred.stlouisfed.org/series/MZMV
https://fred.stlouisfed.org/series/M2V
5. September 2021 at 11:40
“The spot and forward price for a non perishable commodity imply all storage costs, including interest expense. Therefore, with a permanent zero-rate policy, and assuming no other storage costs, the spot price of a commodity and its price for delivery any time in the future is the same. However, if rates were, say, 10%, the price of those commodities for delivery in the future would be 10% (annualized) higher. That is, a 10% rate implies a 10% continuous increase in prices, which is the textbook definition of inflation! It is the term structure of risk free rates itself that mirrors a term structure of prices which feeds into both the costs of production as well as the ability to pre-sell at higher prices, thereby establishing, by definition, inflation.”
http://moslereconomics.com/2014/10/13/there-is-no-right-time-for-the-fed-to-raise-rates/
5. September 2021 at 12:00
Sean,
Wealth of Nations by Adam Smith
On the Principles of Political Economy and Taxation by Ricardo
A Tract on Monetary Reform by Keynes
General Theory of Employment, Interest and Money by Keynes
A monetary history of the United States by Friedman
The Theory of Capitalism by Orkun Baysal
and read some monetary and macro text book
5. September 2021 at 14:29
Sven, Injecting money into the economy can be done without creating any debt. You simply buy assets with the newly created money. Of course over time the nominal amount of debt will rise if there is an expansionary monetary policy, but the nominal amount of everything else will rise in that case. Monetary expansion does not boost the debt/GDP ratio.
5. September 2021 at 14:37
Adding the book to my reading list. Looking forward to it and congrats on getting the book published.
5. September 2021 at 16:35
Sven,
When you have a company, like Apple, that is generating ~$100 billion in earnings annually, assume a forward discount rate of 4%, which is close to that of the S&P 500, the NPV of that same level of future earnings is $2.5 trillion. This isn’t speculating that Apple earnings will grow to that level. They’re already there. Apple’s current discount rate is 3.3%, which further supports my point.
Do you have specific examples of stocks, bonds, or crypto assets which your calculations indicate are overvalued in your view?
5. September 2021 at 23:32
@Sven- Sumner schooled you, lol. And you misread me, as did Sumner. I said “Magically dropping double the money supply by helicopter to every American will not cause ***long term*** inflation” (emphasis added). A helicopter drop will of course cause prices to rise, but it’s a one-off affair.
@Sumner – you misread me, and then you made this howler: (Sumner): “Sven, Injecting money into the economy can be done without creating any debt. You simply buy assets with the newly created money. Of course over time the nominal amount of debt will rise if there is an expansionary monetary policy, but the nominal amount of everything else will rise in that case. Monetary expansion does not boost the debt/GDP ratio.” – absurd. You know perfectly well the moral hazard of the Fed buying junk commercial paper with newly created money, it creates an incentive to take on more debt, long-term, that will ruin a country. While it’s true in the short term the Fed issuing money simply transfers junk bonds from private hands into public hands, in the long run, it increases net debt. Look at the Bank of Japan: BOJ owns 70% of government debt (compared to Bank of England’s 2021 30%) 15% of corporate debt and even 7% of all JP equities (and in some stock indices around 50%), consequently, JP debt-to-equity is well over 200%.
BTW JP with Abenomics (2012-2020) tried for 8 years to do essentially NGDP level targeting (marred by a few tax hikes) and failed. Demographics–i.e., real factors–doomed Japan, not mechanical things like the Quantity Theory of Money. You’re so smart and can’t see that? Wilful blindness.
6. September 2021 at 06:52
@Kester Pembroke.
John T. Harvey’s Money Growth Does Not Cause Inflation!
House prices won’t fall back unless there’s an absolute drop, a negative decrease, in the rate-of-change in money flows, volume times transactions’ velocity, proxy for inflation. That affects/controls particular asset prices. That probability is very low.
The only time prices fall back to previous levels is when monetary flows, proxy for inflation, falls back.
#1 The Great Depression, from March 1930->April 1934, #2 the July 1990–Mar 1991 recession (destruction of the Savings and Loan Associations — supplanted by FNMA and GNMA, from March 1991 to November 1992, and #3 the Great Recession (from March 2006 to July 2008), are the only three examples.
As Alasdair Macleod via GoldMoney.com authored:
“Remarkably, in a speech on monetary policy given at the Jackson Hole conference last Friday, Jay Powell never mentioned money, money supply, M1 or M2. With money supply expanding at a record pace to fund both QE and intractable budget deficits the omission is extraordinary.”
Atlanta’s GDPnow’s latest estimate: 3.7 percent — September 2, 2021. That corresponds to the drop in the rate-of-change in short-term money flows, proxy for real output.
1/1/2021 ,,,,, 0.65
2/1/2021 ,,,,, 0.66
3/1/2021 ,,,,, 0.70 6.3% R-gDp
4/1/2021 ,,,,, 0.70
5/1/2021 ,,,,, 0.77
6/1/2021 ,,,,, 0.80 6.6% R-gDp
7/1/2021 ,,,,, 0.82
8/1/2021 ,,,,, 0.68
9/1/2021 ,,,,, 0.38 3.7% R-gDp
You see, Chairman Jerome Powell is a patented liar. As Steve Hanke says: “money is what matters”.
“Federal Reserve Chairman Jerome Powell last month told the House Banking Committee “it would be a mistake” to tighten monetary policy “at a time when virtually all forecasters” believe that inflation “will come down” on its own.”
As I’ve repeated said: “The FED covers up its elephant tracks”.
6. September 2021 at 07:09
re: “No economist disagrees with the basic equation MV=Py”
I do. It’s stock vs. flow. Income velocity, Vi, is a “fudge factor,” but the transactions velocity of circulation, Vt, is a tangible figure.
Vi is a “residual calculation – not a real physical observable and measurable statistic.”
I.e., income velocity, Vi, is endogenously derived and therefore contrived (N-gDp divided by M) whereas Vt, the transactions’ velocity of circulation, is an “independent” exogenous force acting on prices.
As Dr. Philip George posits: “Changes in velocity have nothing to do with the speed at which money moves from hand to hand but are entirely the result of movements between demand deposits and other kinds of deposits.”
Bank-held savings have a zero payment’s velocity. And all monetary savings originate in the banks. Banks do not loan out savings. From the standpoint of the entire payment’s system, the monetary savings practices of the public are reflected in the velocity of their deposits, and not in their volume.
https://fraser.stlouisfed.org/files/docs/releases/g6comm/g6_19961023.pdf
https://monetaryflows.blogspot.com/2010/07/monetary-flows-mvt-1921-1950.html
6. September 2021 at 07:15
re: “But, Friedman further specifies that V is relatively constant and so, therefore, is the demand for cash.”
Nobel Laureate Dr. Milton Friedman was “one dimensionally confused”.
Velocity accelerated during the “monetization” of time deposits, the transition from clerical processing to electronic processing, and the end of gated deposits. This ended in 1981. Since then:
Percentage of time (savings-investment type deposits) to transaction type deposits:
1939 ,,,,, 0.42
1949 ,,,,, 0.43
1959 ,,,,, 1.30
1969 ,,,,, 2.31
1979 ,,,,, 3.83
1989 ,,,,, 3.84
1999 ,,,,, 5.21
2009 ,,,,, 8.92
2018 ,,,,, 4.87 (declining mid-2016 with the increase in Vt)
Historical FDIC’s insurance coverage deposit account limits (commercial banks):
• 1934 – $2,500
• 1935 – $5,000
• 1950 – $10,000
• 1966 – $15,000
• 1969 – $20,000
• 1974 – $40,000
• 1980 – $100,000
• 2008 – $unlimited
• 2013 – $250,000 (caused taper tantrum)
Frozen savings ,,,,, Reg Q ceiling %
11/01/1933 ,,,,, 0.0300
02/01/1935 ,,,,, 0.0250
01/01/1957 ,,,,, 0.0300
01/01/1962 ,,,,, 0.0350
07/17/1963 ,,,,, 0.0400
11/24/1964 ,,,,, 0.0450
12/06/1965 ,,,,, 0.0550
07/20/1966 ,,,,, 0.0500
04/19/1968 ,,,,, 0.0625
07/21/1970 ,,,,, 0.0750
It’s stock vs. flow.
6. September 2021 at 07:22
That’s the callosal error. The banks all compete against one another for the same volume of money (as determined by the FED, not by the savings practices of the public).
All monetary savings originate within the system. The source of interest bearing deposits is demand deposits. As time deposits grow, demand deposits are depleted dollar for dollar.
That’s why Dr. Phillip George’s equations work in his “The Riddle of Money Finally Solved”. There becomes a shifting of liabilities.
“When interest rates go up, flows into savings and time deposits increase” ( the ratio of M1 to the sum of 12 months savings ).
It is hard for the average person to believe that banks do not loan out savings or existing deposits – demand or time. But the DFIs always create money by making loans to, or buying securities from, the non-bank public.
This results in a double-bind for the Fed (FOMC schizophrenia: Do I stop because inflation is increasing? Or do I go because R-gDp is falling?). If it pursues a rather restrictive monetary policy, e.g., QT, interest rates tend to rise.
This places a damper on the creation of new money but, paradoxically drives existing money (savings) out of circulation into frozen deposits (un-used and un-spent, lost to both consumption and investment). In a twinkling, the economy begins to suffer. 2018 is prima facie evidence.
6. September 2021 at 08:07
re: “What is “money” in a modern, credit-based financial system? Is it that stuff you carry in your pocket, the 1’s and 0’s of the electronic entries in your bank account, the available balance on your credit card, your checking account, your savings account? In practice, this question is so difficult to answer that economists actually offer several possible definitions, just in case!”
Money is the measure of liquidity. It is the “yardstick” by which the liquidity of all other assets is measured.
See: TOWARD A MORE MEANINGFUL STATISTICAL CONCEPT OF THE MONEY SUPPLY Leland J. Pritchard
First published: March 1954
6. September 2021 at 08:11
re: “You cannot force anyone to sell a Treasury Bill in exchange for new cash”
The FED used to target *RPDs* as Paul Meek’s (FRB-NY assistant V.P. of OMOs and Treasury issues), described in his 3rd edition of “Open Market Operations” published in 1974.
6. September 2021 at 08:14
re: “where all those assumptions regarding the variables DO hold, but not here, not today, not in the United States of America in 2011. That’s not how it works. It’s a damn shame, I know, because it’s so simple and intuitively appealing and it would make controlling inflation really simple”
It’s grade school stuff. This is what inflation looks like:
According to my calculations:
01/1/2020 ,,,,, 0.11
02/1/2020 ,,,,, 0.03
03/1/2020 ,,,,, 0.21
04/1/2020 ,,,,, 0.40
05/1/2020 ,,,,, 0.46
06/1/2020 ,,,,, 0.50
07/1/2020 ,,,,, 0.53
08/1/2020 ,,,,, 0.56
09/1/2020 ,,,,, 0.61
10/1/2020 ,,,,, 0.68
11/1/2020 ,,,,, 0.79
12/1/2020 ,,,,, 1.26
01/1/2021 ,,,,, 1.31
02/1/2021 ,,,,, 1.41
03/1/2021 ,,,,, 1.51
04/1/2021 ,,,,, 1.60
05/1/2021 ,,,,, 1.65
06/1/2021 ,,,,, 1.78
07/1/2021 ,,,,, 1.91
08/1/2021 ,,,,, 2.01
09/1/2021 ,,,,, 1.95
10/1/2021 ,,,,, 1.95
11/1/2021 ,,,,, 1.81
12/1/2021 ,,,,, 1.92
01/1/2022 ,,,,, 1.97 inflation spikes
02/1/2022 ,,,,, 1.53
03/1/2022 ,,,,, 1.26
04/1/2022 ,,,,, 1.18
6. September 2021 at 08:29
John T. Harvey is obviously mentally retarded. Again: “Therefore, the rising prices led to an increase in the supply of money and not the other way around.”
First, the OPEC administered price increase in oil would have been deflationary if the FED hadn’t validated its price.
Second, The Federal Reserve (BOG), under Chairman William McChesney Martin Jr., re-established WWII stair-step case functioning (and cascading), interest rate pegs thereby using a price mechanism (like President Gerald Ford’s: “Whip Inflation Now”), and abandoning the FOMC’s net free, or net borrowed, reserve targeting position approach (quasi-monetarism), in favor of the Federal Funds “bracket racket” in 1965 (presumably acting in accordance with the last directive of the FOMC, which set a range of rates as guides for open market policy actions).
The effect of tying open market policy to a repurchase agreement bracket (or some policy peg, e.g., today’s remuneration rate on IBDDs) was to supply additional (and excessive) complicit reserves to the banking system whenever loan/investment demand (i.e., bank deposits), are increased.
Third, remember that in 1978 (when Vi rose, but Vt fell) all economist’s forecasts for inflation were drastically wrong.
Put into perspective: There were 27 price forecasts by individuals and 9 by econometric models for the year 1978 (Business Week). The lowest (Gary Schilling, White Weld), the highest, (Freund, NY, Stock Exch) and (Sprinkel, Harris Trust and Sav.).
The range CPI, 4.9 – 6.5 percent. For the Econometric models, low (Wharton, U. of Penn) 5.7%; high, 6.6% U. of Ga.). For 1978 inflation based upon the CPI figure was 9.018% [and Leland Prichard, in his Money and Banking class, predicted 9%].
See: G.6 Debits and Deposit Turnover at Commercial Banks
http://bit.ly/2pjr81u
6. September 2021 at 09:12
Michael Sandifier,
You just obsessed with Apple apparently. Yes, apple makes huge sums of money. That’s correct. That’s one company. However, there are other companies such as Tesla and Amazon do not make that much money. This is one point.
Crypto currencies are imaginary assets that do not back any real thing behind them. So, actually all crypto market is bubble.
Money supply is increasing without a constraint since 2008. That money needs to go somewhere. And the money is creating bubbles apparently.
6. September 2021 at 10:16
Hi Ray
I know this is ticky tacky—as in shoddy—-and like the Marjorie Reynolds song Little Boxes—perhaps a bit obnoxious —-however—the original meaning of Money Illusion —at least Fisher’s—was the lack of awareness that money can decrease or increase in value (inflation and deflation). It is the lack of awareness that is the illusion. To be honest, I never understood why that was an illusion like a magic trick. Doesn’t every one know that?
Money Neutrality which I view as a logical application of money illusion—-is the recognition that changes in money supply (really the supply and demand for money which in some way must take velocity into account I assume) does not impact real output—“at least in the long run” per the helicopter drop example.
But isn’t that obvious too? What am I missing —-what is the issue—-is this controversial?
Remember I am a know nothing (really, know a little) in economics.
6. September 2021 at 10:28
Sven,
You made a statement about $2 trillion valuations without specifying. So I provided a single example of such a valuation justified with current earnings, which would assume little to no more earnings growth than the market as a whole.
Now, you take Amazon and Tesla. For Amazon, look at the historical data on their P/E ratio:
https://www.macrotrends.net/stocks/charts/AMZN/amazon/pe-ratio
Is that history mostly consistent with your bubble assumptions? Amazon earnings have consistently grown faster than those of the S&P 500.
Currently, the Amazon P/E is 60.62, versus 35.38 for the S&P 500. Is it so crazy to think Amazon earnings will grow 75% faster than those of the S&P 500, particularly given the history? Where’s the bubble?
With Tesla, it’s more speculative, of course, but given their gross margins on cars, which is roughly 25%, with increasing economies of scale as they continue to reach production capacity in their new China factory and start to bring the new Austin and Berlin factories online, in addition to scaling their utlility scale and home scale energy businesses, it’s extremely easy to justify their nearly $700 billion market valuation.
Just take cars alone, and if they can reach about 2.5 million car sales per year, at an average cost of $50,000, with a 25% net margin(very different from gross, I realize), the valuation is justified. Or if the net margin is 10%, they’d need to sell 6.25 million cars-per-year.
So, Tesla doesn’t even need to be successful in all of their lines of business to easily justify their valuation. Or, they can have lower than projected success in all of their lines of business, and the valuation is justified. The market is factoring in the risk inherent in what is still a growth stock, despite it’s market cap.
Regarding cryptos, I’ve never been a fan of Bitcoin, because it seems very limited in it’s design, but it’s easy to imagine bright futures for alternatives, such as ETH, which is designed to fit far more use cases. There’s still a long way for the technology to develop before the valuations begin to be so obviously justified, but when is that not the case with new technologies? There’s tremendous uncertainty right now, but also tremendous potential for future earnings. The market volatility for these assets reflects that reality well.
6. September 2021 at 10:30
Michael, It’s a waste of time to try to educate Ray. Just make fun of him. That works best.
6. September 2021 at 10:37
And I should have mentioned that Amazon’s price has appreciated at 3 times the rate of the S&P 500 over just the past 5 years.
6. September 2021 at 10:41
Professor Sumner,
Unfortunately, you are dead wrong on this.
So let it be clear how the system is working. Real money supply increases in a parallel course with economic growth and falling interest rate.(Velocity falls correspondingly) And capitalism creates income inequality in its usual course. Capitalism is inherently deflationary. (Assuming redistribution is neutral) Therefore, income does not grow at the same rate with economic growth. Thus, debt needs to grow constantly to keep AD equals to AS. There are two factors that propagate debt/GDP ratio. Economic growth and interest rate. As output grows and interest rate falls, debt grows in a parallel course.
https://tradingeconomics.com/united-states/households-debt-to-gdp
https://tradingeconomics.com/united-states/government-debt-to-gdp
(extend the line to the longest time period to see the pattern)
https://www.forbes.com/sites/mayrarodriguezvalladares/2021/04/10/us-corporates-continue-to-gorge-at-the-debt-trough/?sh=60c87cfc1d01
6. September 2021 at 10:48
Sven
I do not agree that Scott should make money. I believe that Scott should have the opportunity to make money. As it relates to pricing—-I cannot speak to your situation—-descriptively I assume you have a very low price elasticity of demand—-since you lowered your price and nothing happened. Don’t know your background etc.
But Scott—-even as he is not known like some of the economists who became pols—-or opinion writers—-I assume is pretty smart—-And his comparative advantage is he is one of the few who have pointed out that nominal GDP is defacto evidence of tightness—-I criticized,him at first, as many have, that it was circular reasoning—-but his evidence and quasi predictions have persuaded me —-even as I struggle to understand details—I.e.the machinery of how it all works. Selgin, I believe, saw it somewhere—-referred to Scott as a velocity compensated Friedman——(or one who focuses on policy needing be a function of supply and demand as it seeks its objectves
My point is he is almost Sui-Generis——therefore——the combination of being less known, unique, and a updated version of Friedman—-requires him to sell his book cheaper——not too cheap——but U of Chicago Press could care less (I used to have a part time job at Columbia University Press) —-they are production drones following the standard dumbass path of thestudent driven, tax benefited, and student loan subsidized monopoly pricing model of textbooks.
This does not only not help Scott—-it limits getting the message out——and if he could—I assume he would have gone elsewhere—-but as I said —-he is not that known. Chicago sucks—-but at least they published it.
6. September 2021 at 10:55
@ Michael Rulle – yes, I agree, thanks for the Fisher info I did not know that. You’re pretty knowledgeable for somebody who claims to have no economic expertise despite being a candidate for a Federal Reserve job (smile). Money is not constant, it fluctuates (inflation and deflation) but outside the Hicks-Hansen framework of IS-LM, nobody has ever shown money NON-neutrality works more than a few quarters at best. In the long run, fundamentals and ‘animal spirits’ matter more than IS-LM. Something Sumner has yet to lern.
@SSumner – you’re a retired professor and you believe in insulting your readers? I hate to have had to take your econ class, though I’m sure I could have survived it by simply regurgitating whatever slop you fed your students. No wonder 99.9% of them never bothered to ever say ‘thank you’ for anything you every did (except when they needed a letter of recommendation). PS–I think education including higher education is signaling (and I have three advanced degrees) and largely pragmatically worthless.
6. September 2021 at 10:55
Corrections above
‘Nominal GDP”—-should be “Declining nominal GDP”
“Policy”—-“Monetary Policy”
Supply and demand——“supply and demand of money”
Probably everything else I said 🙂
6. September 2021 at 10:57
Ray Lopez,
Well. Long-term inflation is under the control of central bank and government. There is no out of control inflation. Money supply does not grow by itself.
Besides, Can you clarify how prof. Sumner schooled me?
6. September 2021 at 11:05
Years ago, I looked up Scott on sites where students rate their professors. Scott always had very high ratings. For example:
https://www.ratemyprofessors.com/ShowRatings.jsp?tid=286729
4.9 out of 5 isn’t bad, eh?
He isn’t paid to write this blog or respond to comments, so I try to take what he offers in the spirit in which it’s given. It’s all a positive externality to me.
And Ray doesn’t understand that Scott has always said monetary policy is neutral in the long-run. If he were a serious commenter, he would try to understand the SRAS/SRAD model and figure out time frames and perhaps argue some nuances, but that’s not what he does. He throws out wild strawman arguments that he then addresses with nonsense.
6. September 2021 at 11:17
Michael Sandifier,
I think you are more like a finance person. And clearly you don’t have enough knowledge about money and macro. It is not about value of some corporation. It is about money supply. interest rates
6. September 2021 at 11:28
Michael Rulle,
“I do not agree that Scott should make money. I believe that Scott should have the opportunity to make money. As it relates to pricing—-I cannot speak to your situation—-descriptively I assume you have a very low price elasticity of demand—-since you lowered your price and nothing happened. Don’t know your background etc.”
It is prof. Sumner’s choice to make money or not. In my case, yes, it was higher price then I lowered it. However, the real problem is recognition. Since I don’t have a name it is very hard to publicise. I didn’t think about promotion while I’m writing the book. Writing was really exhausting already.
6. September 2021 at 11:56
Sven
I wish I could offer advice, even common sense advice—but I am quite sure I would have similar difficulties.
Every once in a while, someone comes up with a particular angle on a topic——which creates a new awareness. I don’t know if Ricardo actually “discovered” comparative advantage——I somehow doubt it——but he is the first one to present the idea in the framework of trade and opportunity cost analysis. But, since Smith was a proponent of free trade——and if we assume Hayek’s spontaneous order was generally correct (it does not matter if Hayek ever existed ——just if his idea was correct)—I would think that if countries followed free trade what Ricardo “discovered” would have already happened.
That’s what I mean. It’s hard to discover something new. But it does happen—-but tend to be adjustments.
Not sure how correct this is—-but I believe it is partially, maybe largely correct,
6. September 2021 at 12:18
Sven,
Stock prices are based almost entirely on future expected earnings, which are influenced by economic growth, obviously. Do you have an actual alernative model you want to present for stock valuation? The model I use is the standard finance model, which is well-supported empirically.
When it comes to macro, I’m not an economist, or even close, but I try to base my analysis on empirical fact. Since you’ve seen fit to comment on my macroeconomic knowledge, without necessarily knowing anything about it, why don’t you tell me what my model is?
In short, do you have any replies that are not simply ignoring the point with ad hominem?
6. September 2021 at 14:53
Congratulations Scott. Guess I’m not THAT young anymore-just turned big 50-but looking forward to reading it.
I will say that regarding the younger generation they’ll be a little nonplussed as it’s not only not in audio book form it’s not on Kindle.
Just my opinion but I-respectfully-urge you to consider Kindle-if not also AudioBooks
Again-congrats
6. September 2021 at 19:46
By the way, I made some graphs today comparing trend NGDP growth with the trend growth in the S&P 500. Here’s a tweet with showing the close correspondence in terms of returning to the pre-pandemic trend:
https://twitter.com/mike_sandifer/status/1435085399521640450
I’ll have to put together more data for a better argument for using the S&P 500 to facilitate an NGDP level targeting regime.
6. September 2021 at 22:57
@Michael Sandman – “And Ray doesn’t understand that Scott has always said monetary policy is neutral in the long-run.” – what? LOL. Scott said that? It’s in every Econ 101 textbook! Please define “the long run” and I’ll go away. Is it two quarters like a paper from Oliver Blanchard once said, based on data during the time the USA was dominant after WWII? Or is it, now that money velocity is not constant, something else? Bernanke et al. found Fed policy shocks account for a mere 3.2% to 13.2% of the change in any economic variable (GDP, employment, etc), i.e., monetarism is almost trivial. Bernanke as in Ben.
BTW, I bet a lot of professors get high marks from students with grade inflation these days.
7. September 2021 at 05:05
re Scott Sumner: “I argue that what really matters is central bank policies that influence the supply and demand for base money.”
That, in a nutshell, is the truth. But “base money” excludes the currency component, as an increase in currency is contractionary (unless offset by a new increase in Reserve Bank credit). And “base money” changed once reserves were remunerated.
Link: Charles Hugh Smith
https://seekingalpha.com/article/3152196-bank-reserves-and-loans-the-fed-is-pushing-on-a-string
“one in 1960, where the ratio was 10:1, and the other in 2008, where the ratio was 219:1”
I.e., in spite of the increased leverage prior to the GFC, the growth in the money stock faltered.
And we know that Bernanke dismissed monetarism’s connection. As Dr. Richard G. Anderson (the world’s leading guru on bank reserves) wrote me:
“Spencer, this is an interesting idea. Since no one in the Fed tracks reserves…”
And Anderson reconstructed the St. Louis figures’ required reserves to conform to the DIDMCA (obfuscating what really happened under Paul Volcker).
7. September 2021 at 05:15
Lopez: “Please define “the long run” and I’ll go away. Is it two quarters like a paper from Oliver Blanchard once said, based on data during the time the USA was dominant after WWII?”
That’s the wrong metric. The FOMC’s monetary policy objectives should be formulated in terms of desired rates-of-change, roc’s, in monetary flows, volume times transaction’s velocity, relative to roc’s in the real-output of final goods and services -> R-gDp.
Roc’s in N-gDp, or nominal P*Y, can serve as a proxy figure for roc’s in all physical transactions P*T in American Yale Professor Irving Fisher’s truistic: “equation of exchange”. Roc’s in R-gDp have to be used, of course, as a policy standard.
7. September 2021 at 06:12
“I originally intended to write the book using the breezy informal style of my blog posts, but was strongly dissuaded by reviewers.”
I believe you should have listened to yourself, and not the “reviewers”.
Academics are notoriously awful writers. They are awful, because they use unnecessary words and phrases to create the appearance of “intellectualism”, when in reality it’s garbled “pseudo intellectualism”. In other words, they don’t really understand what they are talking about, and they have no idea how to explain their thoughts cogently, so they throw around words and phrases and structure sentences that have relatively little meaning. The best example of this is “Hannah Arendt”. She was a moron, who wrote about absolutely nothing. Circular logic, and word play, is not “intelligence”.
There is a reason Thomas Sowell has written 50 best sellers. His writing is clear, concise, logical, and persuasive.
7. September 2021 at 13:33
@Spencer Bradley Hall – you’re joking? If the Fed takes ten years to achieve the Fed’s objective, or even 50 or 75 years, you’d call that success? No. In the real world, if the Fed cannot achieve a policy metric in two quarters, then the Fed and monetarism have failed. And despite best efforts, both in the USA and Japan (Abenomics), central banks have not done anything despite QE worldwide. We must therefore conclude, not only is the QTOM flawed, but money is neutral. By ‘we’ I mean rational people, not you and SS.
8. September 2021 at 05:35
I love discussing “bubbles”.
First, we need a definition, as it is easy to fall into ex-post rationalizations. I also do not believe in bubbles——but my definition might be slightly narrower than Scott’s. —-won’t give my definition here —too long.
But here are some examples. I worked with a French PHD person in my group who discovered a security that was long before issued by France. It was linked in some way to gold—I forget the details. He described a risk-less arbitrage——sell/buy the bond (forget which); buy/sell gold in some way. % profit was very high—-France was not about to default and bond pricing could not be a function of credit. The arb went away fast—2 months or so—-(if you can arb something ——a bubble is somewhere—-if it goes away—-the market agrees).
Back in around the late 90s, I forget which company engaged in this—it was public—-there was a fund of funds for private equity funds. It traded at a substantial multiple (like 100s of percent) higher than the market value of its underlying funds. This was not an arbitrage—-so the rationale for owning it was they could pick which ~P/E firms—would outperform others. Was this a bubble stock? Since as an EMF guy, I doubted the ability of even the underlying funds to outperform the market, leverage adjusted, on stock picking in P/E terms—-why would anyone believe these guys could “pick the pickers”. We always got a kick out of it——we assumed it would literally go to zero—it did. I kind of viewed this as a scam—-in real-time. But is a scam a “bubble”? Sometimes if there is manipulation.
Then there was the big boys— Enron and AIG. I was very familiar with both. Ultimately they were stocks that crashed and burned. Were they bubbles? I have written much about AIG——which colored my view of the “Great Recession”. This is why I found Scott’s blog so interesting. It provided an ex-post rationale for my (not speaking of anyone else) belief then that markets were grossly mispricing credit —-TOO LOW——with implied home mortgage default rates spiking as high as 30-40%.
The guys who made money—-the famous John Paulson——did so for the wrong reason if Scott is correct. Paulson had no clue as to Bernanke as tight. He believe housing had been a bubble crashing. The other Paulson—Bush’s guy—-took down AIG—-again no time for details——but it was a major error that should have been obvious. Not saying that credit prices should not have declined—-am saying they declined too much.
Mark to Market of illiquid instruments creates problems. AIG got squeezed. Enron’s revenue was overstated by literally by a factor 50-100 based on normal accounting. It also created incentives to create your own pyramid schemes—-except against yourself. This was Enron—-then they used the stock which benefited from the self ponzi as collateral. I was a fairly senior guy at a large NA bank. I was smart enough to listen to smart guys.
My appointee to the credit committee said the bank was going to lend to Enron—-during its hey day. He explained to me that he was going to be the only guy to vote no and told me why. That is when I realized Enron was doomed.(Funny, later that bank got heavily penalized and “my guy” —the only American on the credit committee—was interviewed by the SEC—-as in “how is that the only American was the only guy who knew” —as if he was the guy with inside info.
Was Enron a bubble? It was a scam. Is that the same thing?
Was AIG a bubble? Putting aside alternative history of Bernanke not being too tight—-AIG was a victim of dumb ass pols being pushed by Goldman—-who was desperate—-All which was known—-and misunderstood with government favoring one over the other.
What about Lehman? I was not the only one who believed they would go under. It did not take a genius. Was that a bubble? They had defacto gone bankrupt in 1973, 1981, 1989, and 1993—and the same people were running it in the area which caused it. They almost did again in 1998—and escaped by the skin of their teeth. Then it finally bought the bullet in 2008.
So,many things one could say about it —-it was obvious—if you knew what it did. A Bubble?
Bubble is a word. But if a price of something by those in the know is obviously ridiculous—does that make it a bubble?
The answer would be NO if there were 100 contra examples. But in my tiny world with my tiny brain—-there have been very few times that I could say with certainty something was clearly wrong——
I won;t tell the tale of Metallgesellschaft——a Lehman tale—was directly in the middle—I said stay away——strongly —almost begging—-Gone in a week—but my bosses were clever too-they knew Germany would bail out creditors—via DB.
Was that a bubble?
8. September 2021 at 06:40
Michael Sandifier,
First of all, I did not want to offend you with ad hominem. If you perceived it that way. Sorry! Since you insisted on financial perspective as opposed to my macro economic explanation I wanted to express my impression this way.
As for your arguments,
“Stock prices are based almost entirely on future expected earnings, which are influenced by economic growth, obviously. Do you have an actual alernative model you want to present for stock valuation? The model I use is the standard finance model, which is well-supported empirically.”
Individual stock prices are based on future expected earnings. However, there are some macro factors that change the whole picture. One is that capitalism is inherently deflationary. Therefore, it evolves over time to oligopolistic competition. In other words, companies in S&P 500 will be bigger and their earnings will increase correspondingly. That means there is an asymmetrical market structure. Secondly, as interest rates fall, money (or savings) due to the motivation to earn higher return will shift to stocks. Therefore, stock prices rise with an inverse relationship to interest rates. So not only economic growth is the factor for stock prices.
There is particularly one monetary variable that shows this relationship. It is the velocity of MZM.
https://fred.stlouisfed.org/series/MZMV -just check long term trend.
https://www.cnbc.com/quotes/.SPX —please also check long-term trend of S&P you will see strong correlation with interest rates.
If you are interested in monetary and macro analysis, I can recommend you my book. I explained how money changes the entire system.
https://www.amazon.com/dp/B093RWX8FX
8. September 2021 at 07:22
It’s the forward pricing channel.
The spot and forward price for a non perishable commodity imply all storage costs, including interest expense. Therefore, with a permanent zero-rate policy, and assuming no other storage costs, the spot price of a commodity and its price for delivery any time in the future is the same. However, if rates were, say, 10%, the price of those commodities for delivery in the future would be 10% (annualized) higher. That is, a 10% rate implies a 10% continuous increase in prices, which is the textbook definition of inflation! It is the term structure of risk free rates itself that mirrors a term structure of prices which feeds into both the costs of production as well as the ability to pre-sell at higher prices, thereby establishing, by definition, inflation.
http://moslereconomics.com/2014/10/13/there-is-no-right-time-for-the-fed-to-raise-rates
8. September 2021 at 07:39
Michael Rulle,
Thank you for your well-intentioned attitude.
When it comes to your arguments, I will say a couple things on them.
“Every once in a while, someone comes up with a particular angle on a topic——which creates a new awareness. I don’t know if Ricardo actually “discovered” comparative advantage——I somehow doubt it——but he is the first one to present the idea in the framework of trade and opportunity cost analysis. But, since Smith was a proponent of free trade——and if we assume Hayek’s spontaneous order was generally correct (it does not matter if Hayek ever existed ——just if his idea was correct)—I would think that if countries followed free trade what Ricardo “discovered” would have already happened.”
Yes, especially in economy most of the order is spontaneous. The primary reason for this is that economy is a very complex and complicated subject which is very hard to understand entirely. One variable affects many other things. It is like medicine. What happens in one of your organ may change many other things in your body. Therefore, economists mostly make partial analysis. And they can understand analyses of other economists also partially. Ricardo cannot understand Malthus in the same way Malthus not, Keynes cannot understand Ricardo, Hayek and Marx, and vice versa. Different economic schools are the consequence of this natural structure. And since economists cannot present a well-structured scheme, policy-makers implement their own interests.
Like you pointed out Ricardo’s comparative advantage hypothesis, Ricardo actually formulated it with international monetary system analysis by integrating with an ingeniously designed model. However, since other economists could not link these two factors they just thought about it with products trade. And policy makers tried to maximise their income with this partial inference. Therefore, to this day, it was not the free trade Ricardo proposed what we have experienced.
As I say linking different parts of economics is very hard. I gave too much of my time and effort to achieve this. To understand how money affects capital, real economy, international trade I studied and thought so much. And I believe finally I have achieved other economists could not do yet. My analysis is unique in economic literature. It is a holistic analysis that has a causal relationship order. It will sooner or later be visible and recognised. I try it to be as soon as possible.
8. September 2021 at 10:11
Everyone, Stop talking about “making money”. You have no idea how silly you sound. The book is relatively cheap and I’ll make like $1 an hour for writing it. (Admittedly much more than I got for writing my Great Depression book.) It’s a trivial factor in my financial situation.
8. September 2021 at 10:42
Looks like the link to the George Selgin review is not pointing to the right article.
This is the correct link I believe:
https://www.barrons.com/articles/scott-sumners-testament-to-original-thinking-51630503310
Cheers and congrats on the new book
8. September 2021 at 10:45
Thanks Glen, I fixed it.
8. September 2021 at 18:30
Sumner: “the book is relatively cheap and I’ll make like $1 an hour for writing it. (Admittedly much more than I got for writing my Great Depression book.)” – I liked your Great Depression book, even though I say Roosevelt’s fireside chats and radio turned around the US 1933 bank panic known as the Great Depression, not going off gold, but since the two events are contemporaneous we’ll never really know. Perhaps people irrationally were stimulated to spend based on misguided notions of money illusion? Possible, though Argentina going off gold in 1929 did not end their Great Depression. More to the point, if the market values your labors at $1 a hour and Rihanna’s labors at an astronomical multiple of that (internet: “Rihanna is now officially a billionaire, with a net worth of $1.7 billion, according to Forbes”), what does the Free-ish Market imply about the utility of your work compared to the babble of Rihanna’s rap/pop music? Sorry Scott, but if you’re a Free Marketeer as you claim, you have to conclude your efforts at economics pails in comparison to the utility of Rihanna’s “Good Girl Gone Bad” album ($2.8M)
9. September 2021 at 08:21
Sven,
The US hasn’t experienced deflation since the 1930s. Did you mean to say that capitalism is inherently disinflationary? And, how does that make sense? The inflation rate isn’t endogenous. It’s determined by Fed policy.
Also, are you aware that the mean NGDP growth and the mean S&P 500 earnings yield(inverse P/E) are close to equal in the long run? In my model, variances are caused by nominal and real shocks. The empirical data very much support this view.
When interest rates are low, the S&P 500 earnings yield falls. The earnings yield is the same thing as the discount rate for the index, so it automatically takes factors that cause lower interest rates into account.
And S&P 500 stocks are concerned, they collectively represent about 80% of the US stock market cap. They are obviously large companies that, on average, have saturated their markets. They depend largely on economic growth for earnings growth.