Lunch at the China Star

Tyler Cowen just posted the following (after our lunch at China Star):

Here in a short paragraph is my current take on where Ben Bernanke would differ from Scott.  As the shadow banking system was imploding in 2008, due to a downward revaluation of collateral, nominal gdp stabilization would have required that the Fed resort to the medium of currency printing on a very large scale.  Scott favors such a move.  Bernanke would worry that the collapse of (some) intermediation would mean you get most of the output losses anyway, while the printing of currency would create subsequent problems with management of expectations, relative sectoral shocks (currency is only a partial substitute for credit), and medium-term adjustment once the smoke has cleared, not to mention political relations with Congress and interest groups within the Fed system itself.  Therefore Bernanke didn’t want to do it, even though in principle he likes to see nominal gdp stabilized, and has written and said as such.

I did say something about printing currency, but I meant instead of excess reserves.  I actually think the most important thing would have been to institute an explicit NGDP target, LEVEL TARGETING.  Do that, and very little currency would need to have been printed.  Large monetary bases are a sign of failed tight money policies, not easy money.  When money is easy, the ratio of the base to GDP is low, as in Australia.

BTW,  Tyler is right about currency being an imperfect substitute for credit, if it weren’t then open market operations would be ineffective at the zero bound.  Because it’s an imperfect substitute, permanent OMOs with cash are a powerful tool for controlling NGDP.

We also talked a bit about China.  Tyler seems to think that China may face a major economic crisis, and end up getting stuck in a middle income trap.  I don’t agree.  However I predict that at some point in the future there will be a consensus in the blogosphere that Tyler was right.  But I think that consensus will itself be wrong, it will be just a bump in the road, like Korea 1998.  If and when it happens, however, it will seem like THE END OF THE WORLD.

Today Tyler linked to an Izabella Kaminska post in the FT, which contains two graphs.  The second one shows Chinese housing prices.  Here are my comments about that 2nd graph:

1.  I am pretty sure that Kaminska thinks this graph shows that the Chinese housing market has been highly unstable during recent years.

2.  I think 99% of readers would interpret the graph the way I assume Kaminska did. (I don’t know about Tyler.)

3.  The graph actually shows an amazingly stable Chinese housing market.  Chinese incomes are growing at double digit rates.  I’d expect years of 30% price appreciation and then 10% price depreciation.  Instead prices have been almost constantly increasing, but never by more than about 12%.  The biggest drops are about 2%.  If the graph was levels instead of rates of change, everyone would agree with me.  But it’s not, and graphs can be highly misleading.  Tyler calls his link “Facts about Chinese real estate.”  But what is a fact?  I tried to get into a debate with Byran Caplan on epistemology at lunch, but Tyler very wisely pushed us back toward social science, an area where debates are not necessarily 100% sterile.

PS.  I agree that the food at China Star is great.


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41 Responses to “Lunch at the China Star”

  1. Gravatar of Major_Freedom Major_Freedom
    19. March 2012 at 12:50

    Tyler seems to think that China may face a major economic crisis, and end up getting stuck in a middle income trap. I don’t agree. However I predict that at some point in the future there will be a consensus in the blogosphere that Tyler was right. But I think that consensus will itself be wrong, it will be just a bump in the road, like Korea 1998. If and when it happens, however, it will seem like THE END OF THE WORLD.

    I think Tyler is right, and that you and all the other market monetarists are going to be caught off guard again just like you were with the housing collapse of 2007-2008 in the US.

    I will go further than Cowen. I will say the coming collapse in China is going to be the worst collapse in recorded history. This is because not only did China blow up a huge central economic planning monetary boom, but they combined it with a large degree of central economic planning in construction, utilities, and other “real” projects apart from money that have zero true economic value.

  2. Gravatar of Manny C Manny C
    19. March 2012 at 13:09

    Governor of Reserve Bank of Australia talks what monetary policy can do / should do. He’s laying the groundwork for a tightening of policy and pushing for increased productivity reform:
    http://ricardianambivalence.com/2012/03/19/stevens-to-swan-call-banksy/

  3. Gravatar of Cthorm Cthorm
    19. March 2012 at 13:38

    Nice to hear you’re in good company Scott.

    I totally agree on China. I would be shocked if they did not have a short decline sometime in the next 10 years, after more than 30 years of rapid growth. I would not be surprised if trend growth slowed down below double digits into the 7-9% range.

    The fundamental growth factors behind China will give the economy plenty of padding to absorb new infrastructure, housing, and other physical capital. The demographics could become an issue in another 20 years as the OCP begins to weigh on the safety net/social structure. I think China will break all the rules about social change and manage a slow and relatively smooth transition to a republican form of Government.

  4. Gravatar of Matt Matt
    19. March 2012 at 13:43

    What city are you all in. I’m interested in the restaurant…

  5. Gravatar of Kenan Kenan
    19. March 2012 at 13:54

    “I think Tyler is right, and that you and all the other market monetarists are going to be caught off guard again just like you were with the housing collapse of 2007-2008 in the US.”

    I think you miss the point about market monetarism. correct me if I’m wrong, but the point is if the central bank is targeting ngdp, for instance, it doesn’t really matter, with respect to unemployment, if stuff like a housing collapse happens.

  6. Gravatar of Tommy Dorsett Tommy Dorsett
    19. March 2012 at 14:16

    Slightly off topic: I assume Romer no longer speaks for you:

    http://www.nytimes.com/2012/03/18/business/marginal-tax-rates-and-wishful-thinking-economic-view.html?_r=1&scp=1&sq=Romer&st=cse

    So, here we have a seasoned economist failing to distinguish between tax rates on income and tax rates on capital, failing to distinguish between war time and peace time (when the slope of the Laffer Curve will surely differ) and failing to distinguish between modest increases in tax rates that leave them at resonable levels (the US in the 1990s) and more draconian rises (the UK in 2009, most of the world before 1980).

    To cap it all off, she tosses the spirit of Simpson-Bowles (base broadening + rate streamlining) overboard by advocating both base broadening and rate increases – a stick and a stick approach. Sorry, but I liked her better when she was a market monetarist for a day.

  7. Gravatar of Major_Freedom Major_Freedom
    19. March 2012 at 17:29

    Kenan:

    I think you miss the point about market monetarism. correct me if I’m wrong, but the point is if the central bank is targeting ngdp, for instance, it doesn’t really matter, with respect to unemployment, if stuff like a housing collapse happens.

    Yes, market monetarist theory/practise, and the ability of market monetarists to predict future events given current trends, are two different things.

    But central bank inflation, even NGDP targeting, CAUSES stuff like housing collapses. So it’s not independent of those things.

    I mean, what good are market monetarists if A. They cannot know why booms and busts occur, and B. Their own policies generate them?

  8. Gravatar of Alan K. Alan K.
    19. March 2012 at 17:48

    Of course the graph is misleading, with scary red ink and selection-biased timeline, but what did you have to eat?

    Matt: China Star is in Fairfax, VA. For more info and a great story:

    http://www.oxfordamerican.org/articles/2010/feb/24/todd-kliman-chases-perfect-chef/

  9. Gravatar of DonG DonG
    19. March 2012 at 19:41

    Can a national policy of high education and industrial espionage let a country avoid the middle income trap? If a populous country like China does get stuck in the trap, will their GDP be twice that of the USA? That still seems pretty successful to me.

    –DonG

  10. Gravatar of 123 123
    19. March 2012 at 21:28

    “Bernanke would worry that the collapse of (some) intermediation would mean you get most of the output losses anyway”

    1. To the extent these output losses are really “real”, NGDP level targeting is the best from the dual-mandate point of view, indeed, Bernanke has moved to this direction recently, albeit not as far as needed.
    2. Financial disintermediation was mostly caused by the volatility of expected NGDP. See my comment here:
    https://www.themoneyillusion.com/?p=13353#comment-140482
    (and also a subsequent comment from Lars, and a comment from David Eagle at the end of the thread)
    3. Some mild volatility of expected NGDP is unavoidable (otherwise the Fed would be making losses), but there was plenty of collateral not related to structured finance that was available for the temporary expansion of money supply that was needed at the time. Indeed, the “downward revaluation of collateral” problem was much larger in the Eurozone four months ago, but the ECB was able to implement Svensonnian policy by running collateralized full-recourse auctions with high haircuts.

  11. Gravatar of Rien Huizer Rien Huizer
    20. March 2012 at 04:55

    Scott,

    Tyler’s comments are not that bad: his take on why Bernanke did what he did, despite maybe being a MM adherent is eminently plausible. He may have done whatever he could do under the circumstances and the constraints a Fed Cheir has to live with.

    As to China: no one knows well enough (right: “well enough”) what goes on there. The true condition of the economy is probably an official secret. And since the chinese economy is more or less a gigantic conglomerate without proper financial markets constraints, but with control of the apparatus of a souvereign state (an officially repressive one at that), conventional macroeconomic analysis may well be largely irrelevant. Of course the thing grows, but how, why and how long is subject to a variety of guesses. My guess is forced savings, clever copying and a confidence trick with the ordinary people that makes it possible to use very little overt repression. Will it last? Who knows.

    Unless you think that an economy where over 70% of the businesses with over 100 employees are state-controlled is susceptible to conventional economic analysis. Let me suggest that the priorities of the incoming gvt are: how to reassert control (slipping); how to reward cq punish allies and ennemies; how to make sure sponsoring elders do not get the means to have second thoughts. More or less what would happen at a large, mature US corporation without cumbersome shareholders.

  12. Gravatar of bill woolsey bill woolsey
    20. March 2012 at 06:04

    “I think you miss the point about market monetarism. correct me if I’m wrong, but the point is if the central bank is targeting ngdp, for instance, it doesn’t really matter, with respect to unemployment, if stuff like a housing collapse happens.”

    This is too strong. It is rather that stuff like a housing collapse require shifts in employment and this shift will be associated with higher unemployment for a time. Construction employment falls, and employment in other area takes time to expand.

    Or view, is that if nominal GDP shrinks, or even grows more slowly, this will generate additional unemployment on top of the necessary and desirable amount.

    So, the unemployment rate might need to rise from 4.5% to 6% for a couple of years, but if nominal GDP shifts to a lower growth path, then it will rise to 10.1% and only gradually fall to 6% and then on to 4.5%.

    Market monetarists have no faith in the ability of anyone to discover this path–is 6% the necessary transitional unemployment rate? How fast should it fall back to 4.5%. Or is 4.5% going to be the right level?

    Our view is keep nominal GDP growing on a stable growth path. If it deviates, get it back over the next year. And don’t do anything thing according to changes in the unemployment rate.

    Shifts in the composition of demand–from housing to other things, for example–will impact unemployment. And the monetary authority should do nothing about it.

  13. Gravatar of Rien Huizer Rien Huizer
    20. March 2012 at 06:17

    Bill Woolsey

    Right! Not rocket science; no snake oil. Just unspectacular but good policymaking within well understood patterns of cause and effect.

    You said:

    “Shifts in the composition of demand-from housing to other things, for example-will impact unemployment. And the monetary authority should do nothing about it.”

    Better: there is little any gvt function (monetary, fiscal or archeaological or whatever) can do about these things without making a mess elsewhere. Not nothing, but just little. Much less than politicians need to thrive.

  14. Gravatar of Cthorm Cthorm
    20. March 2012 at 06:47

    Bill and Rein,

    Well said. I hope other people see the beauty in the idea’s simplicity too. There is no presumption of superior knowledge, nor even the hubris to say that X% is the “right” path. It is simply choosing a given baseline, around which markets and the supply side of the economy can adjust without further direction or meddling. It is one small step toward the classical model.

  15. Gravatar of Greg Ransom Greg Ransom
    20. March 2012 at 08:46

    “Social Science” is 99% fake science developed under the influence of false answers to bogus epistemological demands.

    I.e. most “social scientists” are essentially not much more than very bad epistemologists, with a gas cloud of misused stats and math to hide the fact.

  16. Gravatar of Majorajam Majorajam
    20. March 2012 at 08:46

    Scott, since no one I’m aware of is actually advocating a helicopter drop, by what mechanism would it actually be possible to ‘print’ money, as you suggest? As you point out, creating reserves in a financial crisis is pushing on a string.

    So what then? This is important, because if you can’t actually identify a mechanism, then it isn’t actually an argument.

    Note, in particular as it bears on choice of mechanisms, Cowen’s reference to expectations. I would put to you that one of the reasons your policy perscriptions have no hope of ever being tried is that no one wants to gamble on the effect that would have on real interest rates.

    After all, when money ceases to be a store of value, it ceases to be money. Hence the rub wherein inflation doesn’t work too well in the midst of capital flight.

  17. Gravatar of Cthorm Cthorm
    20. March 2012 at 09:44

    @Majorajam

    You are missing the point. The Fed has the power to increase M→∞ but that does not mean doing so is required. If the Fed announces a clear, explicit target then only a minimal increase in M would be required. The expectation of inflation, bounded by the explicit policy target, would increase V substantially.

    Pondering the implications for the real interest rate is more or less a waste of time, but it is not nearly as uncertain as you imply. Ceterus paribus an increase in the inflation premium will increase the nominal interest rate. The Quantity Theory of Money, which you appear to be familiar with, posited that real interest rates were determined solely by non-monetary factors like time preference and and productivity. The QTM does this by assuming V is stable, which is clearly false. AFAIK the relationship between V and the real rate is not linear, but I would expect the real rate to be positively correlated with M*V (i.e. nominal output). I’d actually be interested if Lars, Bill, or Scott could answer that part.

  18. Gravatar of Major_Freedom Major_Freedom
    20. March 2012 at 10:07

    Majorajam:

    Scott, since no one I’m aware of is actually advocating a helicopter drop, by what mechanism would it actually be possible to ‘print’ money, as you suggest? As you point out, creating reserves in a financial crisis is pushing on a string.

    This question is a good question, but not because it has any single answer that is direct and contextual, but rather because by thinking about it more, we can discover that ANY delivery method will be discretionary, arbitrary, and hence inevitably it will become political.

    You see, in theory, Sumner et al when they conceive of NGDP, they think in terms of a single aggregate that masks all the details. It’s only reluctantly that they delve into the precise pathways for new money flow, and very often they get defensive and make errors in just how redistributive inflation really is.

    So they hastily and anxiously say “The Fed can just buy enough government debt, and that should be enough.” They believe they have defended themselves against the progressive liberals, and so that is sufficient in their statist minds, because the only people who allegedly matter are the right and left wing state intellectuals and the state itself.

    Just like Sumner said, they don’t care about their neighbors or what their neighbors think. They believe themselves to be ivory tower intellectuals who are too pure to dirty themselves with the rabble rousers.

    Back to the transmission of inflation, there is really only one fair method, and that is for the central bank to print money and give it to each and every individual, either for nothing, or for whatever the individual wants to sell to the Fed, subject of course to a maximum sum of money.

    Anything less is necessarily redistributionist, and will necessarily enrich some people at the expense of others.

    Of course, if the Fed really did adopt the policy of printing money and giving money to every individual in the country, then the policy will almost immediately become fruitless to anyone, since if everyone has a higher cash balance, then everyone will put forward a higher demand, and that will make all prices rise more or less the same, thus completely nullifying the whole pragmatic nature of central banking, which is to enrich banks and the state at the expense of everyone else, whether the counterfeiters realize it or not. They can’t bring about the kind of noticeable effects they want to see if they just gave everyone cash over time.

    Inflation then HAS to be arbitrary and discretionary, and politicized. All the major political centers will fight their way to the front of the line to the printing press, leaving all the others in the dust.

    In free market competition on the other hand, money production is not arbitrary. It is founded upon respect for private property rights and voluntary exchange. Money will enter the economy at points consistent with free trade and productivity, rather than political clout. ANYONE can in principle produce money, by going into the business of money production themselves, and they won’t have to gain the permission of the state, they won’t have to gain any license, they can just invest in precious metals extraction, and produce money for themselves. Since every individual has difference needs and preferences and circumstances, not everyone will go into money production. Private property rights and voluntary exchange will form the framework by which money enters and then flows through throughout the economy.

    Contrast that now with money flowing primarily to the banks and state first, before the average Joe who is legally prohibited from being his own “primary dealer” and thus legally prohibited from being first in line to the Fed’s money printing machine.

  19. Gravatar of Majorajam Majorajam
    20. March 2012 at 10:42

    Cthorm, a target without a credible mechanism for enforcement is no target at all (see, for example, former Thai PM Yongchaiyudh for details). You have not identified such a mechanism. I can assure you, the devil in these matters is in those details.

    Also fyi, the real interest rates to which I refer have exceedingly little to do with marginal rates of substitution. Rather, they regard what happens to liquidity when people begin to question whether “money” is actually money.

  20. Gravatar of Greg Ransom Greg Ransom
    20. March 2012 at 12:27

    Where do Weimer Germany and 1920s Austria fit in this scheme?

    “Large monetary bases are a sign of failed tight money policies, not easy money. When money is easy, the ratio of the base to GDP is low.”

    The prediction is that Weimer Germany and 1920s Austria have a super low ratio of base money to GDP.

  21. Gravatar of Negation of Ideology Negation of Ideology
    20. March 2012 at 13:42

    Major:

    “ANYONE can in principle produce money, by going into the business of money production themselves, and they won’t have to gain the permission of the state, they won’t have to gain any license, they can just invest in precious metals extraction, and produce money for themselves.”

    And there’s the rub. Very few people own gold mines, so very few people will benefit from your proposed policy of subsidizing gold mining. Anyone can in principle and practice produce a portion of GDP, because it includes all goods and services.

    “Money will enter the economy at points consistent with free trade and productivity, rather than political clout.”

    False. Money will enter the economy by the government giving subsidies to the handful of corporations that own gold mines.

    You are very conflicted. On the one hand, you talk about the free market quite a lot. On the other hand, you advocate socialized gold. If you applied your free market arguments to gold, you would realize that the government should get out of the gold business, auction off its entire stock of gold, and then treat gold no different than pork bellies.

    Tying a nation’s currency to the entire economy (GDP) is by definition neutral. No one in the country is favored over anyone else. No industry is encouraged or discouraged. All production is based on consumer sovereignty. The gold standard explicitly favors the tiny percentage who own gold mines over the vast majority who do not.

  22. Gravatar of ErroneousFool ErroneousFool
    20. March 2012 at 13:57

    http://www.federalreserve.gov/newsevents/files/bernanke-lecture-one-20120320.pdf

    I had difficulty locating the slides from Chairman Bernanke’s lecture today, so I thought I’d post them here… Very good (and clear) outline of the Great Depression and how the Fed responded, although I suspect it will be review material for most readers here…

    Of particular interest is slide 8: “In normal times, central banks adjust the level of short-term interest rates to influence spending, production,
    employment, and inflation.”

    Observations:
    1. Implicitly, I read an acknowledgement that we are not in normal times at the moment, which is why we have gone to unconventional policy tools.

    2. As in the energy/hydrocarbon industry; we desperately need a new set of language. When “unconventional” constitutes the bulk of activity, that demarcation is thoroughly unhelpful. I am not clear why targeting the forecast / NGDP targeting / etc has not caught on as broader descriptions of policy tools… We just need something catchier than this!

  23. Gravatar of Major_Freedom Major_Freedom
    20. March 2012 at 14:22

    Propagation of Ideology:

    “ANYONE can in principle produce money, by going into the business of money production themselves, and they won’t have to gain the permission of the state, they won’t have to gain any license, they can just invest in precious metals extraction, and produce money for themselves.”

    And there’s the rub. Very few people own gold mines, so very few people will benefit from your proposed policy of subsidizing gold mining. Anyone can in principle and practice produce a portion of GDP, because it includes all goods and services.

    The point is that ANYONE is legally allowed to work, produce, and/or trade to acquire money in a free market money society.

    In the current regime, only a few are legally allowed to create money. Those at the Fed and at the member banks. Additionally, those who do produce money, are not producing money that is legally mandated onto others via a monopoly. It would be like shoe production. Anyone can produce shoes, and those who produce shoes are not producing something that others are mandated to use by law.

    It’s not that there is only a very few people in charge of the monopoly printing press. It’s that there is coercion in establishing that fact.

    If in freedom the overwhelming majority of people prefer to spend their time producing something other than money, because they can make more money that way, then this is different from the overwhelming majority of people being legally coerced into NOT doing what the Fed is doing.

    “Money will enter the economy at points consistent with free trade and productivity, rather than political clout.”

    False. Money will enter the economy by the government giving subsidies to the handful of corporations that own gold mines.

    First, I said a free market in money. I didn’t say a subsidized corporatist society. If you want to talk about government subsidizing money creators, then look no further than the state’s treasury and central bank giving TRILLIONS of dollars to the banks.

    Second, even if the state does end up giving subsidies to corporations that own gold mines, the state would have to first acquire gold to do it. That means they must tax or borrow. Taxing and borrowing are far more difficult than printing money and subsidizing corporations that way, so at the very least, a free market gold standard would drastically REDUCE the extent of the state’s ability to subsidize politically favored corporations.

    You are very conflicted. On the one hand, you talk about the free market quite a lot. On the other hand, you advocate socialized gold.

    You’re confused. I don’t advocate for “socialized gold.” I advocate for a free market in money, and, in addition to that, I recognize that such a system will almost certainly become precious metals based, as it always has been in economies with an extensive enough division of labor, like ours.

    If you applied your free market arguments to gold, you would realize that the government should get out of the gold business, auction off its entire stock of gold, and then treat gold no different than pork bellies.

    If I did agree with that, will you retract your accusation of me being conflicted? Because I do agree with that.

    Tying a nation’s currency to the entire economy (GDP) is by definition neutral.

    Only if you define neutrality that way, which I don’t.

    At any rate, one cannot “tie” a nation’s currency to “the entire economy” without a totally arbitrary reasoning. It would be like claiming we can tie shoe production to the entire economy and make shoes “by definition neutral.”

    No one in the country is favored over anyone else. No industry is encouraged or discouraged. All production is based on consumer sovereignty. The gold standard explicitly favors the tiny percentage who own gold mines over the vast majority who do not.

    A gold standard that is the result of free market forces is not “favored” to anyone specifically.

    If consumer sovereignty results in only a handful of gold mine owners, then there is no difference between that and consumer sovereignty resulting in only a handful of PDA manufacturers.

  24. Gravatar of Negation of Ideology Negation of Ideology
    20. March 2012 at 15:42

    Major:

    “Second, even if the state does end up giving subsidies to corporations that own gold mines, the state would have to first acquire gold to do it.”

    Under the gold standard, the government acquires gold by printing currency and buying gold from the corporations who own the gold mines, at a price controlled by the government. That is the subsidy, and that’s why the proper term is Socialized Gold, not the euphemism “Gold Standard”.

    Me – “If you applied your free market arguments to gold, you would realize that the government should get out of the gold business, auction off its entire stock of gold, and then treat gold no different than pork bellies.”

    “If I did agree with that, will you retract your accusation of me being conflicted? Because I do agree with that.”

    Yes I would, if you really agree with that. Just to make sure I understand your position correctly:

    Do you advocate the government printing currency and trading it for gold? Do you favor allowing people to pay their taxes in gold?

    If you answer yes to either question, then you don’t agree with my statement. That is, unless you also favor the same policy with regard to pork bellies. But then how would the government determine the gold/pork belly exchange rate for tax purposes? How would you manage everyone paying taxes in whatever they feel like?

  25. Gravatar of Negation of Ideology Negation of Ideology
    20. March 2012 at 15:49

    Major – One more point:

    “If consumer sovereignty results in only a handful of gold mine owners, then there is no difference between that and consumer sovereignty resulting in only a handful of PDA manufacturers.”

    That’s true, as long as the government doesn’t print currency and trade it for gold or PDA’s or accept gold or PDA’s for taxes.

  26. Gravatar of Rob Rob
    20. March 2012 at 18:20

    Fwiw, my own definition is that a “fact” is whatever is sitting there as soon as you stop thinking.

  27. Gravatar of Major_Freedom Major_Freedom
    20. March 2012 at 20:03

    Propagation of Ideology:

    “Second, even if the state does end up giving subsidies to corporations that own gold mines, the state would have to first acquire gold to do it.”

    Under the gold standard, the government acquires gold by printing currency and buying gold from the corporations who own the gold mines, at a price controlled by the government. That is the subsidy, and that’s why the proper term is Socialized Gold, not the euphemism “Gold Standard”.

    This is not a free market gold standard. This is a fiat paper standard, seemingly backed by gold whereby the government prints gold claims beyond what exists in gold.

    Do you advocate the government printing currency and trading it for gold?

    No.

    Do you favor allowing people to pay their taxes in gold?

    If taxation exists, yes.

    If you answer yes to either question, then you don’t agree with my statement.

    How is getting the government out of the gold market completely consistent with your first question of the government printing paper notes and acquiring gold?

    That is, unless you also favor the same policy with regard to pork bellies. But then how would the government determine the gold/pork belly exchange rate for tax purposes?

    I don’t think you know what a free market gold standard truly entails. In this situation, GOLD is money, not government issued paper notes.

    How would you manage everyone paying taxes in whatever they feel like?

    If people choose precious metals as their money, then the state will tax in precious metals.

    “If consumer sovereignty results in only a handful of gold mine owners, then there is no difference between that and consumer sovereignty resulting in only a handful of PDA manufacturers.”

    That’s true, as long as the government doesn’t print currency and trade it for gold or PDA’s or accept gold or PDA’s for taxes.

    I don’t see how “as long as the government doesn’t accept gold” follows.

    Not everyone has to be a gold miner to own gold, earn gold, and pay taxes in gold.

  28. Gravatar of Benjamin Cole Benjamin Cole
    20. March 2012 at 21:38

    If we have a world of growing population and incomes, then a fixed supply of money—a gold standard—will require constant deflation to achieve prosperity, or a constant increase in velocity.

    Instead, almost surely, a gold standard will lead to perma-recessions-deflations. Deflations discourage lending and investment. Try banking in a deflationary environment.

    Indeed, the incentive is always to what–prices will go down, if you can hold onto tour gold hoard a little longer….Hume comes to mind.

    The key is to remember money is a medium of exchange, not a store of value.

    If money becomes a store of value it then makes sense to draw money out of circulation—slowing the economy down, and leading to deflationary recessions.

    A wise man knows that all gold is fool’s gold.

    Baubles and shiny metals are for impressing primitives, or jewelry for women.

  29. Gravatar of Major_Freedom Major_Freedom
    20. March 2012 at 23:29

    Benjamin Cole:

    If we have a world of growing population and incomes, then a fixed supply of money””a gold standard””will require constant deflation to achieve prosperity, or a constant increase in velocity.

    Instead, almost surely, a gold standard will lead to perma-recessions-deflations. Deflations discourage lending and investment. Try banking in a deflationary environment.

    That is false. Investors don’t invest into the price level. They invest into price SPREADS, namely input factor prices and expectations of output prices.

    If there is a gold standard, then the falling prices that take place alongside increasing supply can easily be accommodated by investors, by them anticipating lower future prices. Instead of anticipating $102 next year, they will anticipate $98. And, instead of bidding for factors of production for a price of $92 for expected future price of $102, say, they will bid a price of $88 for an expected future price of $98.

    If investors can bid up factor prices in anticipation of higher future prices in an inflationary economy, then there is no reason why they can’t bid DOWN factors of production in a deflationary economy.

    There is absolutely no foundation for “perpetual depression” under a gold standard.

    Empirically, it is not the case that the country was in perma depression under gold. In fact, the country grew spectacularly and surpassed the UK when it was on gold.

    Indeed, the incentive is always to what-prices will go down, if you can hold onto tour gold hoard a little longer….Hume comes to mind.

    Inflation doesn’t lead to people holding zero cash balances, and deflation won’t lead to people holding infinite cash balances.

    Yes, a real return can be made by simply holding onto gold. That is a GOOD thing, especially for the poor who tend not to invest very much. But having said that, MORE return can be made through investing, and just like we don’t see every investor park their money in treasuries for a “risk free” return, so too is it with gold that you won’t see investors parking all their investment in gold hoarding.

    The key is to remember money is a medium of exchange, not a store of value.

    A store of value is a PARAMOUNT attribute of money. Money cannot even function as a medium of exchange if it had a store of value of zero.

    If money becomes a store of value it then makes sense to draw money out of circulation””slowing the economy down, and leading to deflationary recessions.

    False. Drawing money out of the economy on the basis of a certain average percentage price drop isn’t going to lead to perpetually increasing cash balances. It will only result in a one time delimited rise in cash balances, just like a given average percentage of inflation leads to a one time delimited fall in cash balances.

    Increasing cash balances does not at all “slow the economy down.” You’re totally ignoring prices. Prices will be lower, and so all supply can still be purchased.

    A wise man knows that all gold is fool’s gold.

    That man is certainly not wise. He is a fool.

    Baubles and shiny metals are for impressing primitives, or jewelry for women.

    They are also for money.

  30. Gravatar of Assorted links — Marginal Revolution Assorted links — Marginal Revolution
    21. March 2012 at 13:33

    […] 1. Scott on lunch at China Star. […]

  31. Gravatar of ssumner ssumner
    21. March 2012 at 18:22

    MF, I predict that at some point you will claim to have been right.

    Manny, Thanks for the link.

    Cthorm, I agree.

    Matt, Fairfax VA.

    Kenan, Yes, and also that with NGDP targeting the housing collapse would have been milder (but still fairly large.)

    Tommy, Sorry to hear she anti-supply-side.

    Alan, I didn’t order the dishes, and other than green beans I don’t recall much of what I ate. I think there was a beef dish and a scallops dish.

    DonG, Their GDP may already be larger than the US, it’s basically just a matter of opinion (as is the question of which country is larger in square miles). I’d guess they will level off at 75% of US per capita GDP, just like almost everyone else seems to.

    123, I mostly agree, but not sure why the Fed would otherwise make losses.

    Rien, I didn’t say his comments were that bad, just that I didn’t think they’d have to print much currency.

    As for China, there’s no mystery as to why it grows fast, it would be bizarre and shocking if it didn’t. It grows really fast for three reasons:

    1. It’s really poor.
    2. It’s full of Chinese.
    3. It’s no long ruled by a madman.

    Majorajam, You said;

    “As you point out, creating reserves in a financial crisis is pushing on a string.”

    I’m not fan of the “pushing on a string” analogy.

    As far as expectations, that’s always the main mechanism by which monetary policy works (liquidity trap or not). But ultimately expectations must be about something. I believe it is expectations of the hot potato effect.

    Greg Ransom, You said;

    “The prediction is that Weimer Germany and 1920s Austria have a super low ratio of base money to GDP.”

    And they did, hence the prediction was validated. Will you now finally admit that I am right?

    ErroneousFool, Thanks for the link.

    Rob, Is that (opinion) a fact?

  32. Gravatar of Major_Freedom Major_Freedom
    22. March 2012 at 04:12

    ssumner:

    MF, I predict that at some point you will claim to have been right.

    Anyone can make that “prediction”, about me, about you, about anyone.

    You predict “a bump in the road” for China.

    I predict that at some point, someone somewhere will claim that you were right. But they will be wrong.

  33. Gravatar of 123 123
    22. March 2012 at 09:55

    “I mostly agree, but not sure why the Fed would otherwise make losses.”

    All the reasons were given by Cowen in his 1997 paper
    “Should the Central Bank Target CPI Futures?”. Tyler’s model can explain why expected 0.5% deviations from NGDP path may be socially optimal, but it cannot explain the necessity of the Great Recession.

    During gold standard the gold peg was defended by transportation costs that created the gold points. Absent these, gold pegs would have collapsed much more frequently. For same reasons, NGDP corridor is necessary.

  34. Gravatar of Majorajam Majorajam
    22. March 2012 at 10:26

    Scott, just for clarification, was your response there a smokescreen or product of genuine misunderstanding, or just a piss take? Or maybe that’s distinction without a difference.

    The question regarded mechanisms, and expectations cannot be established by fiat. Even if they could, a margin call is still a margin call.

    Let us know if you have anything other than legitimations to share.

  35. Gravatar of Rob Rob
    22. March 2012 at 11:04

    “Rob, Is that (opinion) a fact?”

    Ha! 🙂

    This opinion really is an expedient, like all the rest. However, I’d say that not only does it agree with my others quite well, but that it is generally good in the way of belief.

  36. Gravatar of ssumner ssumner
    24. March 2012 at 07:57

    123, I don’t see the Fed taking a net long or short position, so I doubt there’ll be gains or losses. The Fed sets the base in such a way that the speculators are equally balanced.

    I see no reason for a corridor system.

    Majorajam, I don’t understand your comment. Most elite macroeconomists believe that the Fed conducts monetary policy primarily by shaping expectations. But as I said, expectations must be about something. They are implicitly about the expected future path of monetary policy, however defined (I prefer to use the non-interest-bearing supply of base money, but there are other approaches.

  37. Gravatar of dwb dwb
    24. March 2012 at 08:05

    Most elite macroeconomists believe that the Fed conducts monetary policy primarily by shaping expectations. But as I said, expectations must be about something. They are implicitly about the expected future path of monetary policy, however defined (I prefer to use the non-interest-bearing supply of base money, but there are other approaches.

    Some elite macroeconomists are puzzled that we see nearly 2% inflation (even though the “output gap” has not been closed) even though the Fed itself has created the expectation and committment to 2% inflation.

    Well, duh. (and BTW, thats also what the models say should happen when you incorporate expections). The only real puzzle is why people are puzzled.

    now imagine what would happen if:
    1. we created the expectation and committment to a nominal income target; and
    2. we created the expectation and committment to close the gap; and
    3. we backed it up with the “bazooka” if necessary (which is more about signalling of true committment than supply/demand for treasuries, lets face it).

    gee, i wonder what would happen.

  38. Gravatar of 123 123
    24. March 2012 at 11:24

    “I don’t see the Fed taking a net long or short position, so I doubt there’ll be gains or losses. The Fed sets the base in such a way that the speculators are equally balanced.

    I see no reason for a corridor system.”

    So the Fed would be like a bookmaker who earns no spread on the difference between long and short odds and pays above market rates on margin deposits to attract business. It is quite obvious this is not profitable. And the potential losses on the interest rate subsidy are unlimited.

  39. Gravatar of ssumner ssumner
    25. March 2012 at 10:28

    dwb, Very good observation.

    123, No, that’s not the subsidy I proposed. The subsidy is a fixed sum, divided equally among all traders. As the number of trades doubles, the subsidy per trade falls in half.

    Yes, the Fed would lose a tiny bit of money, trivial compared to the welfare gains of effective monetary policy.

  40. Gravatar of dwb dwb
    25. March 2012 at 12:06

    I am increasingly finding other explanations for 2% inflation in the face of high unemployment unsatisfying. Sticky wages are no doubt part, but having seen all manner of pay freezes, pay cuts, bonus cuts, and so on, i am deeply skeptical. Corporate HR is not shy, they will tell you flat out employee costs cannot grow faster than revenues, so they will impose pay freezes or cuts if they need to; they can cut benefits or make you pay more towards health care; they can chop the bonus pool – they have a lot of tools to align compensation.

    Sticky wages explain why its positive, not why its magically ~2%.

    On the other hand, we know from the Fed’s research that QE mostly works through signalling.

    So i cannot help coming to the conclusion that all we are witnessing is the power of a credible central bank to achieve its target. Why is corporate HR doling out 1.5% – 2% pay raises on average (+/-x where x depends on your rating)? Because Corporate HR thinks thats what the average cost of living adjustment “should be”. (yes the chief economist and head of HR meet from time to time, information is shared at executive meetings).

    Why does everyone think that 2% is the “right” no-real-raise cost of living adjustment?

    Because the Fed told them so.

    If the fed sets out to get 2% inflation, thats what they will get.

  41. Gravatar of 123 123
    25. March 2012 at 13:27

    ” No, that’s not the subsidy I proposed. The subsidy is a fixed sum, divided equally among all traders. As the number of trades doubles, the subsidy per trade falls in half. ”

    As I am sure there is a lot of NGDP hedging demand, I am going to assume there is no subsidy at the margin. In fact, there is an embedded tax, as your scheme uses a very restrictive margin deposit scheme. That’s why it may work without losses 🙂

    Compare LTRO to your scheme. If you are a bank that wants deflation insurance, LTRO allows you to use a wide range of collateral – that’s very useful, on the other hand you pay more for insurance. In your scheme it is the be opposite. In principle, both can be profitable.

    I like LTROs more, as you get the same amount of stimulus with a smaller central bank balance sheet. And there is a secondary stimulus channel that works via markets where collateral is traded even when the required return on arbitrage is high.

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