Inflationistas and liquidity trappers

For six years Paul Krugman has been engaged in an intellectual war against the forces of evil on the right.  Those who claim that monetary stimulus would lead to high inflation.  Over that same period I’ve been engaged in a three-way struggle; market monetarism against the forces of misguidedness on both the left and the right.  (Unlike Krugman I believe my opponents are well intentioned.) Monetary stimulus won’t lead to high inflation, and it’s not ineffective.  For once I’m the sensible moderate.  Now the battle continues—and this time it’s Krugman’s post that needs correcting:

Switzerland has never paid interest on reserves “” and lately it has taken to doing the opposite, charging banks 0.25 percent for the privilege of parking their money at the central bank. So has the Swiss National Bank’s huge increase in the monetary base, which dwarfs what the Fed has done, produced inflation?

Well, look at the included chart. Monetary base up by a factor of eight. Money supply up by much less, because banks didn’t lend the funds out. And consumer prices flat, indeed flirting with deflation.

This is all exactly what a basic liquidity trap model “” the one I laid out in 1998 “” predicted. So the inflationistas are finally going to concede their mistake, right?

As I’ve noted before, the 1998 model doesn’t say monetary policy is ineffective, indeed soon after it was published he was using the model to argue against fiscal stimulus and in favor of monetary stimulus in Japan.

In 2010 the Swiss franc had become too strong for comfort, and the Swiss National Bank was buying up lots of foreign assets to hold down its value.  By then Krugman had become very skeptical of the effectiveness of monetary stimulus at zero rates:

Oh, and about the exchange rate: there’s this persistent delusion that central banks can easily prevent their currencies from appreciating. As a corrective, look at Switzerland, where the central bank has intervened on a truly massive scale in an attempt to keep the franc from rising against the euro “” and failed:

Later I pointed out that even that claim was wrong, but at least it was plausible. Beginning in September 2011, however, the claim was no longer even plausible, as the SNB depreciated the franc sharply and then pegged its value to the euro.  As I’ve argued many times, there is much in Krugman’s monetary analysis that is correct, and even ahead of his critics.  But there is one fatal flaw, shared by many of my commenters.  Krugman assumes that if a central bank has done X purchases of assets, and failed to hit its nominal target, then it would have to do more than X to hit its target.  But in the Alice in Wonderland world of monetary economics, it’s exactly the opposite; the more ambitious your target, the less you have to do.  And that’s equally true of exchange rate targets and NGDP targets.  Among the developed countries, Australia had the most ambitious NGDP target in this century, and its central bank has had to do the least to hit it.

In 2012 Evan Soltas provided evidence that as soon as the SNB started pegging the exchange rate, they didn’t need to buy anywhere near as many foreign assets to hold down the value of the SF.

Its credibility is so powerful, in fact, that the SNB has stopped having to buy up foreign currencies with new swiss franc, which it did in earnest to prove its commitment in 2011, increasing its foreign exchange reserves by 177 billion from July to September. It hasn’t had to defend at all the value of its currency against appreciation since September, despite what should be enormous pressures. (See here and here for the data.) That is truly remarkable, when you zoom out for the macroeconomic big picture.

That is the power of credible monetary promises. And we can do the same thing with the price level path, of course, managing correctly the striking strength of market expectations. All it takes is the appropriate use of the expectational channel; re-establish 5 percent annual NGDP growth as did the SNB for its currency, and then the market will do the rest for you.

I found some monetary base data that is quite interesting.  From January to September 2011 the Swiss monetary base soared from 79b SF to 253b SF.  That’s Zimbabwean money printing, and it shows why Krugman is so contemptuous of the inflationistas.  Switzerland got essentially zero inflation.  But then something interesting happened; after the currency was depreciated and pegged at 1.2 SF/euro, the base actually fell to 215b by May 2012.  Once investors stopped thinking the SF was going to move ever higher, they no longer had a strong incentive to speculate in that asset. It became easier to defend the currency.

Alas, there was one more attack in mid-2012, as eurozone investors worried about a collapse in the euro.  Naturally, in that environment the SF would be attractive at even a zero expected rate of return.  The base rose again to 349b SF in September 2012, at which point growth slowed sharply (it’s 376b today.)  More importantly, the 1.2 SF/euro peg held.  Krugman was wrong, currency depreciation is not difficult if it is followed up with a level targeting regime.

With the recent collapse of the Russian economy, the SNB imposed a negative 0.25% interest rate on reserves.  So I suppose you could call that a “problem,” that is, if having the rest of the world be willing to pay you to accept their loans is considered problem.  Personally, I can think of lots of other European countries that would be happy to trade places with Switzerland.  Starting with Greece, and ending with . . . let’s face it, except for Norway wouldn’t any of them rather be in Switzerland’s shoes right now?

The recent success of the SNB and the BOJ in their attempts to depreciate their currencies is pretty conclusive evidence that the liquidity trappers are wrong.  Yet Paul Krugman continues to trumpet his successes against the inflationistas, which quite frankly is like shooting ducks in a barrel, and ignore the monetary theory that is superior to both the crude quantity theory and crude liquidity trap Keynesianism. The only macro theory capable of explaining all of the major stylized facts of the past 6 years.

The theory that didn’t even have a label until Lars Christensen named it in 2010.


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81 Responses to “Inflationistas and liquidity trappers”

  1. Gravatar of EconStudent EconStudent
    21. December 2014 at 08:43

    Krugman says “Money supply up by much less, because banks didn’t lend the funds out”. I didn’t think banks could lend reserves.
    http://www.forbes.com/sites/francescoppola/2014/01/21/banks-dont-lend-out-reserves/ What am I missing?

  2. Gravatar of Philippe Philippe
    21. December 2014 at 08:45

    banks can and do lend reserves. Coppola’s just saying they don’t lend reserves “out” in the sense that they tend to stay lodged at the central bank instead of being withdrawn by borrowers as cash.

  3. Gravatar of Philippe Philippe
    21. December 2014 at 09:05

    Coppola is correct that banks create deposits ‘out of thin air’, but that’s because deposits are simply bank debts. So yes they can choose to go into debt ‘out of thin air’ if they want to.

  4. Gravatar of Ray Lopez Ray Lopez
    21. December 2014 at 09:38

    This analysis by Sumner is woefully inadequate. The Swiss franc is not governed by big country “macro” variables as Sumner assumes, instead, it is governed by ‘hot money’ that flows into Switzerland from the rich in other countries trying to avoid bad things happening to their money, a variable that is exogenous and nearly uncorrelated to big ‘macro’ variables like global inflation and the like. The period cited by Sumner –January to September 2011–was the peak time of the Greek euro crisis. During that time I was in Greece and many people moved their money to CH. The amount cited by Sumner, 174 CHF Bn (253-79) is not that much money and can be accounted for almost entirely by Greeks sending their euro to Switzerland. Assume 3 M Greeks, 30% of the population, send 58k CHF (=47k Euro) each to Switzerland, not that much (I personally know individuals who moved 20 times that much) then that would account for the 174Bn CHF increase. And there were other people besides Greeks sending money to CH. In short, much ado about nothing, no surprise.

  5. Gravatar of Ray Lopez Ray Lopez
    21. December 2014 at 09:51

    @myself- here is a link that proves my point about 2011 being bad in Greece: http://www.ft.com/cms/s/0/003cbb92-4e2d-11df-b48d-00144feab49a.html

    Notice Sumner concedes this point when he states, regarding 2012 (when the Greek Euro crisis resumed): “alas, there was one more attack in mid-2012, as eurozone investors worried about a collapse in the euro. Naturally, in that environment the SF would be attractive at even a zero expected rate of return. The base rose again to 349b SF in September 2012, at which point growth slowed sharply (it’s 376b today.) ”

    Again, the main point is that you cannot derive anything from the Swiss experience that is not idiosyncratic to capital flight, which has almost nothing to do with macro conditions.

  6. Gravatar of Negation of Ideology Negation of Ideology
    21. December 2014 at 10:03

    “Yet Paul Krugman continues to trumpet his successes against the inflationistas, which quite frankly is like shooting ducks in a barrel, and ignore the monetary theory that is superior to both the crude quantity theory and crude liquidity trap Keynesianism.”

    I agree with this, but I only partially blame Krugman. The right keeps putting the ducks in the barrel and daring Krugman to shoot them. The right needs to get serious about monetary policy, and stop letting the inmates run the asylum.

  7. Gravatar of Nick Nick
    21. December 2014 at 10:11

    Ray, you said:
    “it is governed by ‘hot money’ that flows into Switzerland from the rich in other countries trying to avoid bad things happening to their money, a variable that is exogenous and nearly uncorrelated to big ‘macro’ variables like global inflation and the like.”
    You are mixing ‘real money’ and ‘hot money’ into the same term. Nice. And since when are global macro conditions and inflation unrelated to ‘avoid(ing) bad things happening to money’?
    You could say that the Swiss will face additional monetary shocks, above and beyond the ones caused by global macro, but doesn’t that make defending their nominal targets even more impressive?
    Arguing that the Greek debt crisis is divorced from ‘big “macro”‘ variables’ is also weird.

  8. Gravatar of Major.Freedom Major.Freedom
    21. December 2014 at 10:13

    “For once I’m the sensible moderate.”

    Standing between that tiny gap between left and right socialist extremists in money, does indeed make one hold a “moderate” view in that extremist world, but it does not make one “sensible” from the perspective of reason. The three views are all insane. There are many “rules” socialists can follow, in the “do not respect other’s property rights” range of activity.

    Noam Chomsky, despite his ideological faults, made a good point that “debates” in the political arena are manufactured so as to appear all inclusive, but are really extremely narrow in scope that benefit the two parties in power.

  9. Gravatar of benjamin cole benjamin cole
    21. December 2014 at 10:18

    Excellent blogging.
    I am a devout Market Monetarist and a pro-businees type of guy.
    That said, Krugman has a point: what is behind the right-wing’s chronic and peevish insistence that hyperinflation is pending and money should be tighter?
    This is not economics. Richard Fisher, Dallas Fed President, rang worried klaxons recently that wages were rising faster than prices. Horrors!
    Then there are the atavistic perceptions that loose money might help growth but helps creditors even more, ergo is bad.
    Something is foul in the right-wing peevish obsession with inflation.

  10. Gravatar of Daniel Daniel
    21. December 2014 at 10:23

    Benjamin,

    Robin Hanson might have something to say about this, in his farmer vs forager model

  11. Gravatar of Major.Freedom Major.Freedom
    21. December 2014 at 10:37

    Negation:

    “The right needs to gets serious about monetary policy, and stop letting the inmates run the asylum.”

    You mean you want the status quo right to start looking like your ideal version of the right, which is itself insane.

    They can’t stop letting inmates run the asylum. The asylum IS socialist control. Market monetarism will just unleash another gang of socialist inmates to take control of the asylum.

    If you really wanted inmates to stop running the asylum, you’d find a way to reject the ideas that made the “we are duty-bound to what the inmates in the asylum say” arise in the first place, and start thinking about and educating others about ideas that clarify and allow people to understand them to be institutions that house psychopathic criminals rather than leaders.

  12. Gravatar of Philippe Philippe
    21. December 2014 at 10:41

    mf has redefined ‘socialism’ to mean anything other than the nonsensical belief system called ‘anarcho-capitalism’.

  13. Gravatar of ssumner ssumner
    21. December 2014 at 10:55

    Econstudent, You said:

    “What am I missing?”

    You are missing the fact that banks can lend out reserves. However most bank loans involve new deposits being created, as Coppola says.

    Ray, You said:

    “This analysis by Sumner is woefully inadequate. The Swiss franc is not governed by big country “macro” variables as Sumner assumes, instead, it is governed by ‘hot money’ that flows into Switzerland from the rich in other countries trying to avoid bad things happening to their money, a variable that is exogenous and nearly uncorrelated to big ‘macro’ variables like global inflation and the like.”

    Another swing and a miss. I never assumed the inflows were anything but hot money.

  14. Gravatar of Edward Edward
    21. December 2014 at 10:58

    Philippe,
    mf has redefined ‘socialism’ to mean anything other than the nonsensical belief system called ‘anarcho-capitalism’.

    Of course

  15. Gravatar of Major.Freedom Major.Freedom
    21. December 2014 at 11:36

    Benjamin Cole:

    “I am a devout Market Monetarist and a pro-businees type of guy.”

    That is a self-description impossible to act upon. They are just words designed to curry sentimental consonance. It is a romantic notion.

    If you were pro-business, in the way the term actually refers, then you would be pro-business in the production and distribution of money, and there would be no room for supporting socialist money control, i.e. market monetarism.

    Market monetarism is anti-business in the production and distribution of money (as well as protection and security, which makes states and hence central banks possible).

    The reason why the word “market” is added to “monetarism” was to deceive, either oneself and others, or just others, into believing that “the market” will determine the money supply and interest rates, if the CB only prints whatever is necessary to make NGDP rise at a constant rate. It is falsely believed that an absence of the CB looking at money supply or interest rates means that the CB is not affecting those variables.

    I learned this from Sumner. He has argued that the aggregate money supply during the 1920s did not undergo a high growth rate, because, no joke, the Fed was not tracking M2 or M3 at the time.

    I wonder if he would go as far as saying there was no aggregate money supply at all due to it not being looked at by the Fed.

    Market monetarism is not in fact market driven money supplies or interest rates. The Fed still determines them. Does “determine” mean the FOMC sits in a room and discuss what they should be? No, but they do discuss what NGDP should be. And just like in the 1920s when the Fed “determined” what bank solvencies should be, they invariably determined the aggregate money supply even though they were not even looking at it.

    What all “market socialism” advocates share is the underlying assumption that the world can be split, divorced into two spheres of independent activities, with socialist determinations on the one side, and market determinations on the other side, with zero determinations moving over to the other side.

    Ergo we see claims like “The Fed should determine NGDP, and the market should determine the rest”, as if market actors are even legally allowed or in a position to determine the rest. No, it is not possible for market actors to determine the money supply or interest rates, because both of those are affected by socialist control over NGDP.

    The only way the market can determine the money supply and interest rates is if the market also determined NGDP, and vice versa.

    The market is always trying to expunge state currency from society. The market is legally prevented from doing this by continued state threats of violence, and actual uses of violence for those intrepids who disobey regardless of the threats. As most obey the threats, we see the effects of the market process expunging state currency in other areas, like NGDP, employment, and real production. Yet the socialists double down and view the problems that occur as not a failure of maintaining the existence of monetary socialism, but rather a failure of the right rules of socialist money issuance.

    The reason why we see such antagonism and disagreements in money, and hardly any at all regarding cars or frozen pizzas, is because money is controlled socialistically, and socialists as a group never agree with each other. Stalin had to liquidate his socialist enemies. So did Hitler, and Mao. The only way one socialist can get his plan implemented over another socialist’s plan, is through more violent aggression over the other, and everyone else.

    So there are appeals to the statesmen to think and act in accordance with one socialist plan, and rely on the state’s guns to suppress all other socialist plans.

    Market monetarism is nothing but another socialist plan presented as a solution to past socialist failures. And it too requires aggression to “succeed”. Statesmen are needed. They must threaten aggression against anyone who prefers to opt out and act upon that opting out by living without using or accepting state currency.

    I have been told by market monetarists that they are not trying to bring about a new aggression. That I am free to not use state currency. They tell me the threats from the state are hollow, that if I want to only use my own currency, then there is no law standing in the way of me doing that. These people have not read the laws, and they have not correctly interpreted past events of people doing just that and getting harassed by the state.

    Sumner quibbling with Krugman is like a Trotskyist quibbling with a Stalinist. Not in terms of content, but in terms of the false presumption that there can be agreement without aggression of one over the other, if not directly than through guns for hire (the state).

    I see the question “What is it about the concerns over (price) inflation?” Well, for one thing, the fact that it is happening and has been happening (see asset prices, and stock and bond prices). Stocks that the main indexes track have risen substantially since QE. Bind prices have continued to rise (yields fell). The last few months notwithstanding, price inflation is alive and well. If anyone says they have a concern about price inflation, they cannot be assumed as arguing over an idea only. Price inflation is taking place right now.

    We are supposed to awkwardly accept all this and not be concerned because NGDP is just modestly rising mostly in accordance with the MM socialist rule. MMs are intellectually ill-equipped to be able to understand the inflation transmission mechanism. Side show theories to “market socialism”, such as EMH, are the opium preventing clear thinking on how markets actually work.

    Free market economists have been proved right constantly. They are offering the best explanation of what is taking place and what has taken place. I don’t put my trust in astrologers or tarot card readers whose predictions ended up being accurate some of the time. That is how one gets burned.

  16. Gravatar of Major.Freedom Major.Freedom
    21. December 2014 at 11:48

    Edward:

    Ah, retreating to the argumentative fallacy of linguistic prescriptivism.

    How unsurprising.

    Socialism is defined, by the commonly understood definition, as centralized control over the means of production.

    The last time I checked, the state has monopoly control over the issuance of money, and thus by the commonly understood definition, has control over the means of producing money.

    That is monetary socialism according to the commonly understood definition of socialism.

    Now, I will not say that you ought not redefine socialism to mean whatever you believe it ought to mean, because I know better. I don’t have to engage in linguistic prescriptivism, because I have learned that the meaning of my arguments are superior to yours.

    So let us find a word for you then that defines state monopoly over a good X. Since you don’t want to use the common definition of socialism (probably because you don’t want to be labelled as a socialist, which has acquired a prescriptive, pejorative, accusatory definition, rather than a purely descriptive one which I myself use, and you are afraid of being labelled a term that connotes this recent pejorative definition), then how about socialismish? Or socialisticishness?

    I will leave it up to you to decide. I will continue to use the descriptive definition and let you sweat and squirm over trying to find self-aggrandizing ways to promote Plank #5 in Marx’s Communist Manifesto, which reads:

    “Centralization of credit in the hands of the state, by means of a national bank with State capital and an exclusive monopoly.”

  17. Gravatar of Major.Freedom Major.Freedom
    21. December 2014 at 11:53

    I am waiting for someone, anyone, to say that they do not advocate for plank #5 because they don’t want the state’s central bank to control credit.

    Then I will laugh, because the state controlling bank reserves is controlling credit. The same way a central bank would control NGDP. Control the base to whatever degree is necessary to bring about the desired NGDP.

    But yeah, you guys are not monetary socialists at all. Lol

  18. Gravatar of Daniel Daniel
    21. December 2014 at 12:24

    I’d love to know the person who, upon being called a “monetary socialist” by an austro-moron, decided to drink the Kool-Aid and join the cult.

  19. Gravatar of Philippe Philippe
    21. December 2014 at 12:38

    MF,

    Marx viewed the state as a capitalist institution which existed to defend the interests of the ruling capitalist class:

    “The executive of the modern state is nothing but a committee for managing the common affairs of the whole bourgeoisie”

    “By the mere fact that it is a class and no longer an estate, the bourgeoisie is forced to organize itself no longer locally, but nationally, and to give a general form to its average interests. Through the emancipation of private property from the community, the state has become a separate entity, alongside and outside civil society; but it is nothing more than the form of organisation which the bourgeois are compelled to adopt, both for internal and external purposes, for the mutual guarantee of their property and interests.”

    Marx advocated the proletarian takeover of the state, so as to overthrow the ruling capitalist class, but his ideal communist society was actually a ‘stateless’ society:

    “The society which organizes production anew on the basis of free and equal association of the producers will put the whole state machinery where it will then belong-into the museum of antiquities, next to the spinning wheel and the bronze ax.”

    “The interference of the state power in social relations becomes superfluous in one sphere after another, and then ceases of itself. The government of persons is replaced by the administration of things and the direction of the processes of production. The state is not “abolished,” it withers away.”

  20. Gravatar of Philippe Philippe
    21. December 2014 at 12:51

    Socialism is usually defined as the social, or communal, ownership of the means of production. This is not necessarily the same thing as state ownership. For example, a monarchy in which the monarch or aristocracy owns the means of production would not be an example of socialism. Nor would state ownership in a state controlled by the capitalist class be an example of socialism, according to socialists.

  21. Gravatar of Philippe Philippe
    21. December 2014 at 12:58

    also, what they mean by “centralization of credit in the hands of the state, by means of a national bank with State capital and an exclusive monopoly” is the total abolition of private banks and their replacement with an exclusive state monopoly.

  22. Gravatar of Buck Smith Buck Smith
    21. December 2014 at 13:01

    Any inflation measurement that does not include college education and health insurance is biased low.

  23. Gravatar of Major.Freedom Major.Freedom
    21. December 2014 at 13:11

    Daniel:

    “I’d love to know the person who, upon being called a “monetary socialist” by an austro-moron, decided to drink the Kool-Aid and join the cult.”

    I don’t want you to believe anything in part because it was presented to you on a silver platter that apologizes and sanctions your previous misdeeds as understandable.

    If you reject an idea because it makes you feel bad, then you are unable or unwilling to respect other people’s liberty if they make you feel uncomfortable. That is precisely who I do NOT want to spread the message of liberty. If you tell me you would not support the respect of other people’s property rights if they say or do anything that makes you feel bad, then why on Earth would I welcome you? You would abandon the cause at the first sign of where you must stand up the most, to public scrutiny. I would rather you not join the cause if you cannot even show an ability to stand up to friggin verbal criticism of all things. You’re too weak at this point to even be of value to me in that respect.

    You need to become intellectually stronger first. You need to show you can handle tough criticisms, without having these persistent emotional meltdowns where you resort to name calling.

    You want me to sanction you regardless of your intellectual faults. Do you think calling me names is going to encourage me in valuing you being a messenger of liberty?

    We need fighters, not wusses.

    —————+-+-

    Philippe:

    “Marx viewed the state as a capitalist institution which existed to defend the interests of the ruling capitalist class”

    Marx believed, and thus indirectly advocated for, a state monopoly first, as a means to stateless Utopia. He wrote the Communist Manifesto as a political guide to action for the existing population which did not enforce those ten planks.

    His belief that state power would wither away was not due to a belief that state power itself would wither away, but because he believed civil life would be absorbed entirely into the political sphere. He believed that by abolishing private property in civil life, and putting full control over all property in the hands of a state, that everyone would become a “new socialist man”, whose voluntary choices and actions exactly match what a totalitarian state requires when there is disagreements in people who refuse to let go of their bourgoisie notions of civil property.

    The crucial point to keep in mind about Marxism is that the transition from the “raw communism” stage (please Google that) which is what the Communist Manifesto advocated, which you and I define as totalitarian dictatorship, is that the “dialectic” of history would assert itself over and above all empirical human desires and wants, and cause a transition to statelessness in its own right. The “Aufhebung” of history where civil and political spheres of activity would absorb with each other into communism. New socialist man will feel no coercion because he willingly acts in accordance with the requirements of history in which communism is supposed to inevitably occur as the next and final stage of human development.

    Marxism is not only statelessness. Marxism is a description of history. It also includes the stages prior to communism. It includes the totalitarian dictatorship stage.

    For those of us who think raw communism does not automatically transition to statelessness, because we reject the existence of the historical dialectic as Marx believed in (from Hegel), then totalitarian dictatorships that last centuries and will never transition to stateslessness if the criteria is for everyone to first act as a totalitarian would have them act but without having to force them, is a pipedream. For us, Marxism can only ever get us to totalitarianism. And that is what has happened in real life with every country that tried it.

    But all this is neither here nor there in what I said about what market monetarism is about. State monopoly over money is indeed a plank of communism in Marxism. It is a necessary stage in Marx’s worldview.

    While you believe it is a choice that history does not make inevitable, whereas Marxism does, still means that what you are advocating, is socialism in money as per Marxism.

  24. Gravatar of Major.Freedom Major.Freedom
    21. December 2014 at 13:29

    Philippe:

    “Socialism is usually defined as the social, or communal, ownership of the means of production. This is not necessarily the same thing as state ownership. For example, a monarchy in which the monarch or aristocracy owns the means of production would not be an example of socialism. Nor would state ownership in a state controlled by the capitalist class be an example of socialism, according to socialists.”

    Monarchical control over the means of production would in fact be an example of “social, communal ownership”, if the monarchy acts on behalf of everyone in society.

    Think that is impossible? I do as well. But do you know what is also impossible? For a majority to do so as well. A majority controlling the means of production and acting on behalf of everyone in society is what most self-described socialists you are referring to would believe gets us over that “centralized control is not socialist control” requisite. And yet that still isn’t a case where there are people who are NOT “represented” by the actual controllers of capital. For here, there is a minority, 49% of all people, who have “representatives” in the centralized power who control all capital “on their behalf”.

    So there is no qualitative difference between democratic socialism and monarchical socialism. They are both qualitatively the same. They differ in degrees. Whereas in monarchy only those who share the same general bloodline have control, in democracy only those who make up the majority 51% have control.

    That is still socialism. That is still common ownership of the means of production. Instead of bloodlines controlling capital on behalf of everyone, it is 51% who control capital on behalf of everyone.

    A duck is a duck because it quacks, not because it a different color.

    “… also, what they mean by “centralization of credit in the hands of the state, by means of a national bank with State capital and an exclusive monopoly” is the total abolition of private banks and their replacement with an exclusive state monopoly.”

    The Fed member banks are a part of the state. When civil banks become absorbed into the political sphere, and who must follow rules established and enforced by the politicians, but who are delegated some decision making authority, does not mean that plank #5 does not exist. Marx himself believed that communism is a society whereby the whole society is one giant state; one factory, as it were.

    By means of a central bank. That is the means by which Marx envisioned history to go towards (temporarily).

    The state establishes the rules the “private” banks must follow when it comes to credit. The Fed and FDIC establishes these rules. The “private” banks MUST follow them.

    Finally, it must be mentioned that even if everyone were Marxist, and tried to enact Marxism, it would not exactly match what he wrote. So your argument that plank 5 does not apply because you view the state regulated banks as “private”, is not a challenge to the point I made. I expect there to be differences. Absence of perfect expression is not a justified argument that Marxism is not practically in effect.

  25. Gravatar of Philippe Philippe
    21. December 2014 at 13:52

    “His belief that state power would wither away was not due to a belief that state power itself would wither away, but because he believed civil life would be absorbed entirely into the political sphere.”

    No, that’s not correct. For example:

    “The working class, in the course of its development, will substitute for the old civil society an association which will exclude classes and their antagonism, and there will be no more political power properly so-called, since political power is precisely the official expression of antagonism in civil society. . . . Do not say that social movement excludes political movement. There is never a political movement which is not at the same time social. It is only in an order of things in which there are no more classes and class antagonisms [communism] that social evolutions will cease to be political revolutions.”

    (Marx, The Poverty of Philosophy, 126)

  26. Gravatar of James in London James in London
    21. December 2014 at 14:01

  27. Gravatar of Philippe Philippe
    21. December 2014 at 14:12

    ‘the dictatorship of the proletariat’ was Marx’s term for the takeover of the state by the working class. He referred to the existing situation as the ‘dictatorship of the bourgeoisie’.

    By ‘the dictatorship of the proletariat’ he didn’t mean a totalitarian dictatorship by a small elite, but rule by the working class, in a form of democracy. Marx advocated universal suffrage. This was meant to be a transitional phase in which the proletariat used the means of power to overthrow the ruling capitalist class, before the emergence of his ideal ‘stateless’ communist society (based on communal ownership), which he described as “associations of free and equal producers”.

  28. Gravatar of ssumner ssumner
    21. December 2014 at 14:18

    James, My thoughts exactly.

  29. Gravatar of Brian Donohue Brian Donohue
    21. December 2014 at 14:22

    Very good post, Scott. And points for effort in your ministration to the benighted.

  30. Gravatar of Philippe Philippe
    21. December 2014 at 14:25

    sorry, Scott. Just correcting MF’s errors.

  31. Gravatar of Major.Freedom Major.Freedom
    21. December 2014 at 15:05

    Philippe:

    That quote supports what I wrote. In that paragraph Marx is reiterating his belief that in communism, the historical antagonism between civil and political activity would disappear because socialist man would become both civil and political. By political Marx meant acting for the common good. He believed division of labor and private property turned civil activity, i.e. egoist activity, against political activity, i.e. common good activity. He believed there had existed a schism in man’s nature which only an absorption of social into political (and vice versa) could overcome.

    You won’t be able to understand this by tearing single passages away from their context and interpreting them the way you want.

    “the dictatorship of the proletariat’ was Marx’s term for the takeover of the state by the working class. He referred to the existing situation as the ‘dictatorship of the bourgeoisie’.”

    A common a misconception. No, by “dictatorship of the proletariat” Marx was actually referring to the demographic makeup of society.

    By ‘the dictatorship of the proletariat’ he didn’t mean a totalitarian dictatorship by a small elite, but rule by the working class, in a form of democracy.”

    Which would itself not be “rulership” according to Marx, but a liberation.

    What you are talking about are the writings of Marxist followers. If you read Marx closely, he did not define dictatorshi of the proletariat in the way you describe.

  32. Gravatar of Major.Freedom Major.Freedom
    21. December 2014 at 15:08

    Philippe:

    “sorry, Scott. Just correcting MF’s errors.”

    But you only showed your own errors which I just corrected.

  33. Gravatar of tesc tesc
    21. December 2014 at 15:13

    Phillipe

    Can you please stop arguing with MF in this blog? Exchange emails or something.

    I actually want to read what you have to say about monetary policy. But arguments with MF? Please do not take that space.

    It does become a pain having to skip over so much anarcho-fantasy to get to policy discussions. Then you feed the guy attention instead of sending him to counseling, making it worse.

    Please don’t

    please help the guy with your

  34. Gravatar of Major.Freedom Major.Freedom
    21. December 2014 at 15:18

    tesc:

    Can you please move your discussions about the optimal socialist money printing rules to email? I don’t want to read so much socialist-fantasy in order to get to posts suggesting how to solve economic problems rationally, and peacefully.

    By feeding attention to yourself and other monetary socialists here, you’re not thinking about sending yourselves to counseling, making the world worse.

    Please don’t.

  35. Gravatar of tesc tesc
    21. December 2014 at 15:19

    By the way Sumner, great post.

  36. Gravatar of Major.Freedom Major.Freedom
    21. December 2014 at 15:30

    tesc:

    Perhaps you’ve not been paying attention. Philippe wants monetary policy to target an aggregate income/spending measure.

    How many times do want the same thing repeated to you?

    Come on people, are we slow learners or something? Let us get to how we can resolve our differences, specifically you ceasing to advocate for aggression against myself and others who have done nothing violent towards you.

    You ought to cease and desist, not me.

    It is almost as if…you want the posts here to resemble the kind of repetitive statement counselling sessions that psychiatrists plan for their patients. Lots of hostility, antagonism, against others who say things that do not imply any aggression towards your person or property, and a desire, a calling, to destroy those voices.

  37. Gravatar of Philippe Philippe
    21. December 2014 at 15:49

    http://4.bp.blogspot.com/-w-qBK6mtM8o/ULZuEE_r0gI/AAAAAAAAAbc/WS-gnqHUeIs/s1600/Camel+foaming+r.jpg

  38. Gravatar of Major.Freedom Major.Freedom
    21. December 2014 at 15:57

    Philippe:

    If I wanted to see photos of your mother, I’d visit saggyhags.com

  39. Gravatar of Nick Rowe Nick Rowe
    21. December 2014 at 16:11

    Good post Scott!

    EconStudent: read my post here: http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/06/repeat-after-me-people-cannot-and-do-not-spend-money.html

    (But be warned; the first half of my post is ironic.)

  40. Gravatar of dtoh dtoh
    21. December 2014 at 16:12

    Scott,
    I will just say this about inflation. I have never met a seller of anything who raised prices on the basis of anything other than expected supply and demand.

  41. Gravatar of benjamin cole benjamin cole
    21. December 2014 at 16:13

    Major Freedom: The private-sector, free-market idea of financial insurance is called AIG.

    I love free markets, I love free enterprise. But such industries as finance are characterized by many actors exusively governed by self-interest. Such industries can collapse with widespread consequences.

    Ergo, not as an ideological result, but as a pragmatic result, I like central banking.

  42. Gravatar of Major.Freedom Major.Freedom
    21. December 2014 at 17:32

    Benjamin Cole:

    Pragmatism is an ideology no less than all non-pragmatic philosophies of the human mind, of social relationships, and of activity vis a via the material world.

    Financial insurance? All insurance must have means out of the existing world conditions, not potential world conditions. It is impossible for anyone to be insured against socialist money when they are forced to live in such a world and where all insurance would consist of means available in the existing world.

    A free market in money means what it says it means. If computers or automobiles were monopolized by the state, any possible insurance against whatever unintended or negative effects from that monopoly, would not be a world of a free market in computers or automobiles.

    You write:

    “I love free markets, I love free enterprise. But such industries as finance are characterized by many actors exusively governed by self-interest. Such industries can collapse with widespread consequences.”

    Excuse me, but all market enterprises are governed exclusively by self-interest.

    You see, it is not pragmatism that motivates you. It is ideology against self-interest. This is a common ideology that EVERY socialist shares with each other. They are all against the self-interest of other individuals, and all seek to abolish it, and turn everyone into selfless instruments of the “common good.”

    You seem to interject your anti-self-interest ideology into finance. You take for granted the existence of state monopoly in money (which is also determined by self-interest, but a violent sort that destroys the self-interest of others instead of finding opportunities for self-interested mutually beneficial exchanges), and then cover your refusal to recognize self-interest in all industries, and thus excuse your lack of advocating for socializing all industry under state monopoly, under the umbrella of pragmatism. Pragmatism is really just wanting contradictory ideologies in your worldview to be excused and permitted as valid.

    Think about it. All industry in a free market is guided by self-interest. Why not advocate for ultimate self-interest manifested in state monopoly of all industry? Why stop at finance? It is because it just so happens to be a very pervasive status quo phenomena, which I am not to upset.

    It would be more honest of you to just say you are against market based self-interest and find it grotesque, but you are for political self-interest and find it honorable, in money issuance.

    Politicians, central bankers, and others who WANT state power are the ones who carry self-interest to socially destructive extremes. They refuse to abstain from seeking self-interested goals that aggress against other people. They go beyond those limits.

    If there is ever a good solution to constraining socially destructive self-interested actions, it would be to completely privatize it. The absolute worst solution is to monopolize it in the hands of a few by law.

    Self-interest is, as Adam Smith wrote, the motivator for why the breadmaker provides you with bread.

    If you want to minimize the socially destructive self-interest, then you decentralize it, and make it so that should any individual go out and manipulate, defraud, aggress against, or otherwise harm the property rights of anyone else, then their destruction would cause minimal damage.

    Food is much more important than money, wouldn’t you agree? Given how important food is, and given your pretend pragmatic, pretend nonideological stance regarding self-interest in the production of a good and the consequent need to monopolize that good, shouldn’t you be saying that the state monopolizing all food would at least in principle be a superior alternative than food production in a free market? After all, with all the possible self-interested food producers, wouldn’t they cause even more havoc in people’s lives? Food is more important than money.

    I don’t believe you when you say your motivator is not ideology but pragmatism. I think you have just come to believe that you can get other people to agree with you more by presenting your ideology as something else, a sort of “get things done” entrepreneurial or businessman like attitude, than a sophisticated, verbose philosophical diatribe.

    Neverthelesa, ideology is how you came to the conclusions you wrote above. You have made a series of philosophical arguments about self-interest. And they are not even pragmatic!

    Monopolizing anything as a means to minimize the destructive effects of unconstrained self-interest is the most counter-productive conclusions one can make.

    If you want a pragmatic solution to destructive self-interest in the production of X, then you friggin decentralize the production of X.

    Tell me this Negation, are you more worried about bad decisions being made in central banking, and legislation in general, or are you worried more about, and oh let’s make this easy, the sum total of all bad decisions that are being made in food production, medicine production, housing production, clothing production, vehicle production, electronics production?

    Please remember that you spend most of your time on a blog talking about your worries over central banking.

    Do you honestly believe it is a coincidence that you are worrying more about central banking and legislation, much more so than you worry about everything produced in the market? It is not a coincidence at all! You just have to learn and understand that you are worrying so much about money and legislation precisely because they are monopolized, and preciaely because self-interested actions unconstrained to property have the most devastatingly destructive social effects!

    I am not a pragmatist, and yet what I advocate is an actual optimal solution to the problems you worry about every day, and I know that your solution actually unleashes destructive self-interested activity, the exact opposite of what you believe it actually does.

  43. Gravatar of Major.Freedom Major.Freedom
    21. December 2014 at 17:37

    Sorry Benjamin, I wrote in “Negation” instead of Benjamin there.

  44. Gravatar of Ray Lopez Ray Lopez
    21. December 2014 at 17:51

    @MF – wow, reading your stuff is like cracking open a good textbook and learning…so much good stuff I can’t even express it all…keep it up! It’s so good you should perhaps open your own blog and quit wasting your time with this brainwashed crowd. I’m half thinking I should stop posting here myself…

    @Sumner: read these two sentences you wrote–back to back–and see if you can reconcile them. I can’t: “Once investors stopped thinking the SF was going to move ever higher, they no longer had a strong incentive to speculate in that asset. It became easier to defend the currency.

    Alas, there was one more attack in mid-2012, as eurozone investors worried about a collapse in the euro. Naturally, in that environment the SF would be attractive at even a zero expected rate of return. ”

    So there you go. Hot money from capital flight /fright is why the SF was attractive in the period you mentioned, and it has nothing with CH central bank credibility, as you and Evan Soltas seem to think.

    @Nick – Sumner answered your question. So you were wrong and I was right. It’s OK, win some, lose some.

  45. Gravatar of Ray Lopez Ray Lopez
    21. December 2014 at 18:30

    @ all– each and every word and phrase of MF is nuanced, informed, excellent. I don’t want to know or out MF, but I think he’s a college professor or very knowledgeable finance quant, possibly retired. You should be listening to him instead of antagonizing him. Especially you Daniel, potty mouth.

    MF says: “Market monetarism is not in fact market driven money supplies or interest rates. The Fed still determines them. Does “determine” mean the FOMC sits in a room and discuss what they should be? No, but they do discuss what NGDP should be. And just like in the 1920s when the Fed “determined” what bank solvencies should be, they invariably determined the aggregate money supply even though they were not even looking at it.”

    This got me thinking: the Fed, as MF points out, does do a sort of targeting NGDP with their discretionary rules, but it’s not a fixed, mechanical targeting but changes (hence arguably not ‘credible’). Sumner’s target NGDP scheme is a mechanical rule for monetary policy, that makes it more credible, albeit it still sounds a bit open ended (I wish he would give a concrete example on his FAQ on how it works). The gold standard (exchange version and pre-WWI version) was also a mechanical rule that supposedly left no room for interpretation. But all mechanical rules are subject to interpretation, which means the Fed can ‘get it wrong’ as it may have done in the early 1930s. In the case of gold, central banks, unlike the masses, ‘sterilized’ gold by raising rates to hoard gold, when it should have let the market expand the money supply with gold inflows. In the case of NGDP, who is to say if the Fed also fails to apply NGDP as Scott wants it? Supposedly, there will be NGDP futures to guide on this, but, as we know, futures are prone to both market manipulation from players, as well as ‘irrational exuberance’ that will result in booms and busts in the futures prices.

    In short, Scott Sumner’s ‘target NGDP’ mechanical rule is as open to abuse as today’s central bank ‘discretionary’ rules, and as the Gold Standard’s supposedly ‘mechanical rules of the game’. It’s fantasy. It’s better therefore to abolish central banks, go to either a bitcoin system or constitutionally bound system where money supply is not allowed to expand more than Friedman’s 3%/year (or some variant of the Taylor rule), and, dare I say it, require, as in many US state constitutions, balancing the federal budget every year. Keynesian does not work. Sticky wages, sticky prices are a myth (I have sources material from B. Bernanke that says this, if you want to argue over it). The IS-LM diagram is at best a fiction that holds during brief times, a textbook rule of thumb akin to the Laffer curve: a truism but of no normative value as to what you should do (where on the Laffer curve are you now? Wikipedia on IS-LM (Keynes baby): Although generally accepted as being imperfect, the model is seen as a useful pedagogical tool for imparting an understanding of the questions that macroeconomists today attempt to answer through more nuanced approaches. As such, it is included in most undergraduate macroeconomics textbooks, but omitted from most graduate texts due to the current dominance of real business cycle and new Keynesian theories.

    And this howler on IS-LM from Wiki: One hypothesis is that a government’s deficit spending (“fiscal policy”) has an effect similar to that of a lower saving rate or increased private fixed investment, increasing the amount of demand for goods at each individual interest rate. An increased deficit by the national government shifts the IS curve to the right. This raises the equilibrium interest rate (from i1 to i2) and national income (from Y1 to Y2), as shown in the graph above. The equilibrium level of national income in the IS-LM diagram is referred to as aggregate demand.

    LOL! The government’s deficit spending is the same as increased private fixed investment? Never! Government spending is always waste, always. Nothing the government does, from conducting World War II properly to robbing Peter to pay Paul, to regulating (or trying to) Bitcoin, to legislating the Clear Air act, is done wisely. Nothing and never.

  46. Gravatar of Ben J Ben J
    21. December 2014 at 18:36

    I think Ray Lopez might be another “Geoff”, if you get my drift…

    In any case, I think we should start doing Ray Lopez skits.

    Mayor: “Mr. Lopez, announcing that the police would soon begin enforcing a speed limit on the local road has been effective in slowing down drivers”

    Ray Lopez: “Au contraire, Mr Mayor! It is clear to any thinking man that this change of speed was due to the driver’s individual willingness to press his or her foot against the accelerator and brake at different rates. ‘Hot flows’ of feet onto brakes, we like to call them. Don’t be upset though old chum, easy mistake to make”

    Mayor: “…”

  47. Gravatar of Major.Freedom Major.Freedom
    21. December 2014 at 19:21

    Ben J:

    I am not Ray Lopez. He cites historical data I don’t bother reading. Plus he is pro-gold, when I am pro-free market in money. I knew Sumner had an FAQ also. Plus Lopez is saying he is wrong more often, lol. That should have been a giveaway. I only say things I am confident are right, so I end up not making as many mistakes.

  48. Gravatar of Major.Freedom Major.Freedom
    21. December 2014 at 19:36

    Ray Lopez:

    “In short, Scott Sumner’s ‘target NGDP’ mechanical rule is as open to abuse as today’s central bank ‘discretionary’ rules, and as the Gold Standard’s supposedly ‘mechanical rules of the game’. It’s fantasy. It’s better therefore to abolish central banks, go to either a bitcoin system or constitutionally bound system where money supply is not allowed to expand more than Friedman’s 3%/year”

    If as you say a mechanical rule such as NGDP targeting is open to abuse, then so would the mechanical rule of 3% increase in money supply. It makes no sense to say that a state can obey its own rules and refrain from violating all mechanical rules…except Friedman’s mechanical rule.

    And if the state “adopted” Bitcoins as legal tender, and demanded taxes in it, then it would coerce me into having to acquire Bitcoins in order to pay taxes. I don’t want to be coerced into using Bitcoins, or fiat money, or gold, or any other currency, thank you very much.

    (Just so you know, flattering me is going to lead to many other posters here losing their s#!t. They cannot handle more than one free market type here. It is easier for there to be one who disagrees with them, so that they can put a personal face to it, so that it is easier to attack the opposing ideas. Attacking many different people personally will expose their ground as ad hominem.

    This is why so many people believe you’re me. They are used to seeing free market ideas underneath my name. They also WANT to believe I am the only free market advocate here. Imagine their horror if the ideas multiplied across more than one person here! It would be unbearable to their sensitivities. They need echo chamber banter. They need to validate each other. They need to say positive things towards each other regardless of the truth value, so as to destract them from their miserable, pathetic lives they brought on themselves with their poor philosophical choices.)

  49. Gravatar of Bob Murphy Bob Murphy
    21. December 2014 at 20:04

    Scott,

    Wow, I don’t know that I ever saw that Krugman quote about it being a “delusion” that central banks can keep their currencies from appreciating. (Or if I did read it at the time, I forgot about it.)

    Now I am more sympathetic to your constant claim that Krugman should be surprised by the BOJ’s moves, even though prima facie the BOJ has been doing exactly what 1990s Krugman wanted.

  50. Gravatar of Benjamin Cole Benjamin Cole
    21. December 2014 at 20:07

    Major Freedom-

    Perhaps I expressed my self poorly.

    I like free markets, free enterprise.

    There are times when private actions have public, or macroeconomic consequences, such as me storing nerve gas in rusty cylinders in my basement.

    Do my neighbors have the right to prevent me from storing nerve gas in rusty tin cans in my basement? The answer is ideologically wrong, yet pragmatically correct: Yes they do.

    So it is with our banking and financial systems.

    We know that many people of many shades of character are attracted to finance, and that consequences of their actions can have macroeconomic impacts.

    You may differ from me. That is fine. But I believe that private-sector actors do not have the authority, gravitas, honor or pockets to create a permanently stable banking system, and once-a-generation collapses are possible. These collapses have macroeconomic consequences.

    So, as a pragmatic matter, just as my neighbors can prevent me from having nerve gas stored in tin cans in my basement, I think we should have a central banking system.

  51. Gravatar of Major.Freedom Major.Freedom
    21. December 2014 at 20:33

    Benjamin Cole:

    Communicating your ideology as you feeling entitled to violate other people’s property rights out of fear, is not better, but worse than pragmatism. For now you are falling back on emotion, not reason.

    I see no reason why I should take your fears over your neighbors having tear gas in their basements, as rational justification for why you are entitled to violate my property rights to prevent me and everyone else from using our own medium of exchange.

    What you are doing is trying to invoke fear in me, so as to go along with your desire for myself and others to be coerced into a monetary monopoly. That is a argumentative fallacy.

    You are obligated to present a rational argument for why monopolizing money into the hands of a state, is justified, without appealing to fear.

    I am not afraid of you using your own money and not being coerced from a state monopoly.

    Yet you are afraid of me and others doing so.

    Since you argued that your feeling of being afraid justifies the existence of a state monopoly in money, then presumably my not feeling afraid of privately run money would justify the existence of privately run money.

    But since our conclusions contradict, despite us both using the same premises to get to the conclusion, that means the premise of being afraid or not being afraid are not valid premises in your justificstion for the existence of a state monopoly in money.

    I think you are not just saying what you think in a way that you hope would be clearer, I think what you are saying is flawed and you would rather not accept it because you are claiming your fears are more important than your reason.

  52. Gravatar of Major.Freedom Major.Freedom
    21. December 2014 at 20:50

    Benjamin Cole:

    I would like for you to really flesh out in detail, and you can do this in your time away from this blog, why you believe individuals constrained to respecting each other’s property rights “do not have the authority, gravitas, honor or pockets to create a permanently stable banking system.”

    Try to avoid the one liners sufficing. Dig deeper and keep asking why why why until you’re absolutely exhausted mentally.

    Have you even asked why stability is a desirable goal? What exactly is it about “instability” that you find aggression to be the only solution? Isn’t aggression itself destabilizing? Isn’t central banking destabilizing? What empirical data, and what theory, are you referring to when you make these statements? I hope your data completely excludes times when states intervened in money! For that would be most wrong. Data that includes state intervention cannot possibly be data that proves absence of state intervention is responsible for the data being what it is.

    So I imagine you believe what you believe because of theory. Why are you afraid of free markets in money? Has the state not been responsible at all for that fear? Where did that fear originate if it isn’t empirical data that is a result of state monopoly in money?

    Could it be you fear a free market in money because of the mess state monopolies in money have caused, and the belief that if a state monopoly cannot do a good job, then certainly a free market could not do any better? Be honest! Lying to me is only going to hurt yourself.

    Money is not tear gas. Money is a medium of exchange. Money is not a weapon. Remember that.

  53. Gravatar of Major.Freedom Major.Freedom
    21. December 2014 at 21:05

    Benjamin Cole:

    What would you say if I proposed that you and everyone who agrees with you should be free to use the currency of a fiat monopoly issuer if you so choose, but I and everyone who agrees with me should be free to use the currency of any individuals we want?

    If that is in fact what took place say next year, would you fear that, imagine something akin to tear gas canisters in our basements, and be OK with armed men coming to our homes and places of business, and threatening to kidnap or shoot us if we don’t start using the currency of your desired monopolist?

    Would you really believe that what you are supporting is “pragmatic” and morally justified?

    What if the reason I gave you for why I want out of your preferred currency, is the very reason you gave to me why I should not be free to choose, which is too much volatility and macro disruption under central banking? What if I believed you were wrong about central banks promoting permanent stability? Would you then advocate for the guns to be put down, and for us to continue using the currency of our choice, while leaving it to you to decide what currency you use?

    If your central bank messes up, then the destruction would be mostly constrained to those who accepted it in use as money, with some indirect mess placed on others who in some way trade or otherwise rely on you and others who use that currency.

    But if I and everyone else were forced into using your desired currency, then when your central bankers mess up, they directly negatively affect everyone.

    If you really were motivated by eliminating volatility induced problems in people’s lives, then you would trust then to be able to figure out which money is best, exactly like you have claimed yourself capable of doing. What the heck makes you more intelligent than me or millions of others when it comes to money?

    I am going to go out on a limb and suggest that whatever problems you envision in money, are better handled by millions of individuals in a decentralized, market based system, than anything of what you have to say about the matter which you want made mandatory for everyone.

  54. Gravatar of Major.Freedom Major.Freedom
    21. December 2014 at 21:17

    One final point…

    The best way to understand the market is not by trying to figure out what the world would look like with it. That is a farcical attempt at deifying yourself.

    The best way to understand the market is a process of problem solving, which you personally won’t always have a direct answer for. If you imagine a problem in social life, for example massive monetary volatility, then ask yourself how the free market prices might solve that problem. If you can’t figure it out, then seek out individuals who do know, and if you still can’t find an answer, then please for the love of humanity the answer is not to point guns at innocent people. Be patient. With literally billions of minds at work, answers are inevitable.

    If what you want is not what others want for themselves, then leave them alone, and go try to convince others that total spending among you should keep increasing at a particular rate.

    Don’t worry, we won’t start throwing tear gas at you if you disagree with that, even though the police who enforce state monopolies in money do in fact throw tear gas at the disobedient.

  55. Gravatar of Daniel Daniel
    21. December 2014 at 23:41

    Benjamin – see what happens when you engage the morons ?

    Between Inbred_Ray and Major_Moron (assuming they’re not the same person), it’s a perfect storm of stupidity.

  56. Gravatar of Daniel Daniel
    21. December 2014 at 23:47

    Also,

    Your conclusion does not follow from your premises.

    How exactly does the existence of a financial sector warrant the existence of a central bank ?

    You say “their actions have macroeconomic consequences”. Well, since everything is connected to everything, every action has macro consequences.

    Where do you draw the line ?

    And no, a collapse of a financial sector does not necessarily take down the whole economy.

    So you might want to rethink your priors on this.

  57. Gravatar of Daniel Daniel
    21. December 2014 at 23:58

    Here’s Nick Rowe on this

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/01/is-the-macroeconomic-importance-of-finance-an-artefact-of-monetary-policy.html

  58. Gravatar of Ray Lopez Ray Lopez
    22. December 2014 at 01:03

    @MF – you the man; don’t worry about me stealing your thunder here (and why anybody would confuse us as the same person, when we have completely different writing styles, is beyond me but shows how paranoid this board is). You sound very Austrian, deducing your answers just by deep thought, without resorting to data. Like Cool Hand Luke eating the fifty eggs in the movie, I admire your persistence, though I would not copy you.

    @Daniel–wow, wishing cancer upon yourself just to win an argument in the comments section of a blog that has little or no influence in the real world. That’s even more impressive, or pathetic, than eating fifty eggs in one go.

    @Benjamin Cole – the use of a central bank reduces, statistically, large bank failures in theory but also introduces moral hazard. Like fire insurance does. Badly administered fire insurance, without checks and balances, means business owners will burn down their businesses to collect the fire insurance, which endangers fire fighters lives. You seem bright enough to see this, unlike some of the others that post here. Canada escaped bank failures both in the Great Depression and in the Great Recession because they had “big banks”, but, as AIG showed, as Citigroup showed, the bigger they are, the harder they fall, don’t forget.

  59. Gravatar of Daniel Daniel
    22. December 2014 at 01:06

    Inbred_Ray,

    Reading your retarded drivel had already given me cancer.

  60. Gravatar of Ray Lopez Ray Lopez
    22. December 2014 at 01:41

    Here is what I stumbled upon in Worthwhile Canadian Initiative blog, an interview with M. Friedman sometime in 2000. Note his simplistic solution. He died a timely death so he would not live to see his theories fail. Truth is, with a gold standard the market would self correct since people would not wait to see what central bankers are going to do next, which creates uncertainty (‘confidence fairy’). In short, we don’t need more Fed discretion, we need less. – RL

    David Laidler: Many commentators are claiming that, in Japan, with short interest rates essentially at zero, monetary policy is as expansionary as it can get, but has had no stimulative effect on the economy. Do you have a view on this issue?

    Milton Friedman: Yes, indeed. As far as Japan is concerned, the situation is very clear. And it’s a good example. I’m glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy.The Japanese bank has supposedly had, until very recently, a zero interestrate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.

    During the 1970s, you had the bubble period. Monetary growth was very high. There was a so-called speculative bubble in the stock market.In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasi-recession ever since. Monetary growth has been too low. Now, the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?”

    It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.

  61. Gravatar of Philippe Philippe
    22. December 2014 at 01:59

    Benjamin, why do you think it is ‘ideologically wrong’ for your neighbours to prevent you from storing nerve gas in rusty tin cans in your basement? Seems odd to me.

  62. Gravatar of Neil Neil
    22. December 2014 at 04:29

    Here is what has me scratching my head. Paul Krugman is spending his time writing about how ineffective monetary policy is but then also suggesting that Janet Yellen is going to make a huge policy mistake by raising rates next year. Heads I win, tails you lose. It is very typical of him.

  63. Gravatar of Nick Nick
    22. December 2014 at 06:17

    Nice Tim Duy post on Yellen’s press conference:
    http://economistsview.typepad.com/timduy/2014/12/asked-and-answered-mostly.html
    I envy Prof Duys dry wit … Or maybe I am reading my own frustrations into his writing…

  64. Gravatar of Cory Hoffman Cory Hoffman
    22. December 2014 at 06:33

    Terrific Blogging! It is so strange to me the way Professor Krugman sidesteps really taking Market Monetarism head on the way he takes on, say, John Cochrane. I have posted comments on his blog asking him to comment on NGDLT and why he might not think that would sufficient to overcome the problems he sees with monetary policy but he has yet to do so.

  65. Gravatar of benjamin cole benjamin cole
    22. December 2014 at 06:35

    After reading these comments, I have decided to admit it: I am a Hitlerian Marxist, and I wish Stalin was alive to run the Fed. I wish I could wipe out all the snooty restaurants and build vast dining halls instead.
    And store nerve gas, not tear gas, in my basement. And wear johdpurs with riding crop as I whipped Austrian monetarists into total submission.

  66. Gravatar of Steven Kopits Steven Kopits
    22. December 2014 at 06:37

    I think the Norwegians would prefer to be in Switzerland next year. I think we’ll see a recession in that Nordic country.

  67. Gravatar of ssumner ssumner
    22. December 2014 at 06:43

    Bob, I’d guess many of Krugman’s fans are also unaware of his views.

  68. Gravatar of ssumner ssumner
    22. December 2014 at 07:00

    Steven, Norwegian unemployment is currently 3.7%. I predict it will be about 4% a year from now. But yes, the nominal value of North Sea oil output will fall sharply, and energy investment may also decline.

  69. Gravatar of Saturos Saturos
    22. December 2014 at 07:25

    The ECB’s chief economist explains current policy: http://www.project-syndicate.org/commentary/ecb-monetary-policy-targets-by-peter-praet-2014-12

  70. Gravatar of Steven Kopits Steven Kopits
    22. December 2014 at 08:23

    I’ll take the over on Norwegian unemployment. Norway’s going to divorce itself for its oil industry over the next decade, and I expect some notable mean regression wrt respect to per capita GDP to northern European norms. Per capita GDP in Norway is almost twice that of Germany. In a decade, I expect it will be something like 50% more. You can do the math.

    As for ISIS and Hollywood, I think it’s something of a diffuse target. Times Square, the New York Stock Exchange–those are very tangible and specific.

    Regarding security and the media, I was on Al Jazeera last night, and let me assure you they take security very seriously. You know that opening scene in Three Days of the Condor? That sort of thing.

    By the way, Al Jazeera has beautiful studios. Much better than CNBC or CBS News.

  71. Gravatar of Student Student
    22. December 2014 at 08:30

    When will people learn that you should never feed a troll under any circumstances. RL=MF=troll. Don’t read or respond. There is no value in doing so. You know what they are going to say before they say it, so whats the point?

  72. Gravatar of Thiago Thiago
    22. December 2014 at 11:24

    “Money supply up by much less, because banks didn’t lend the funds out”.
    Fair enough, but can’t they eventually do exactly it? Are the inflationists’fears totally groundless? Yes, I am aware, their favorite haunting spectres have sistematically failed to materialize. As a non-econ man, I am asking if it was obvious from the begining that they were to fail to materialize.
    Thank you.

  73. Gravatar of James in London James in London
    22. December 2014 at 11:44

    Student +1 (you forgot flow5, though)

    I think they they may come from North Korea. Those guys are scared of MM and its threat to lead of permanently better monetary policy, and so need to disrupt this comment thread. Quite a complement when you think about it.

  74. Gravatar of ssumner ssumner
    22. December 2014 at 12:14

    Saturos, He seems to be living in a different universe from me.

    Steven, Yes, Norwegian GDP might fall if the oil runs out, but what does that have to do with unemployment?

    Student, Great advice.

  75. Gravatar of ssumner ssumner
    22. December 2014 at 12:16

    James, Yes, I do recall some posts where I mocked North Korea. The Austrian drivel is obviously just a pose to avoid suspicion of being communist spies.

  76. Gravatar of Ray Lopez Ray Lopez
    22. December 2014 at 19:12

    Our fearless leader, instructing his charges not to engage in debate with anybody who disagrees with them: “James, Yes, I do recall some posts where I mocked North Korea. The Austrian drivel is obviously just a pose to avoid suspicion of being communist spies.”

    LOL, I don’t know whether to laugh or cry, as he would say… This place is quite different from Marginal Revolution’s comments section. For one thing, it’s a lot dumber, maybe taking a lead from their host?

  77. Gravatar of ssumner ssumner
    23. December 2014 at 13:25

    Ray, It’s certainly got a lot dumber in the past two weeks.

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