“Plunging euro reduces the euro price of oil.”

You won’t see the quotation in the title of this post in any business articles.  Instead you’ll see “stronger dollar cuts commodity prices.”

Never reason from a price change.  If the strong dollar was driving down oil prices, then the weaker euro should be driving them up.  After all, every exchange rate is two-sided, if one currency rises then the other currency falls.  But oil is falling sharply in both dollar and euro terms, which means there’s a third factor involved.  The same third factor that is depressing stock prices everywhere in the world, whether denominated in the rising dollar, the yen, or the euro.  The same factor that would be driving NGDP futures much lower, if our criminally negligent central banks would actually spend a few bucks setting up a NGDP futures market.

It’s the same old gang of four (Fed, ECB, BOJ, BOE) that’s been decimating the world economy and financial system for 4 years.

PS.  Yes, I suppose I’m naive in assuming that powerful institutions would want to set up markets that would expose their ineptitude.  But the Hansonian view of the world is just too depressing to contemplate.


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53 Responses to ““Plunging euro reduces the euro price of oil.””

  1. Gravatar of Dennis Dennis
    19. May 2012 at 05:57

    I’m sure you’ve discussed this earlier, but how much do you think it would actually cost to set up a NGDP futures market? Maybe you could convince a smart billionaire or venture capitalist to make one. Once it proves how great it is, you could sell it to the Fed. Or pitch it to End-the-Fed types as way to as you say “expose their ineptitude”

  2. Gravatar of Major_Freedom Major_Freedom
    19. May 2012 at 06:02

    Never reason from an aggregate spending change.

  3. Gravatar of Major_Freedom Major_Freedom
    19. May 2012 at 06:04

    The Fed, ECB, BOJ, BOE decimated the world economy and financial system in the boom prior to the 2008 collapse. That’s where the errors took place that later resulted in an “unexplainable” drop in aggregate spending.

  4. Gravatar of Mike Sax Mike Sax
    19. May 2012 at 06:11

    “If the strong dollar was driving down oil prices, then the weaker euro should be driving them up.”

    I guess the one thing that those who think the strong dollar is driving them down might say is that what’s different is that the US dollar is the world reserve currency. I’m not necessarily expousing this idea but I think that’s what they might argue.

  5. Gravatar of Major_Freedom Major_Freedom
    19. May 2012 at 06:25

    “If the strong dollar was driving down oil prices, then the weaker euro should be driving them up.”

    Relative changes in foreign exchange doesn’t mean commodities have to rise in price in either currency. If the increase in strength of the dollar is due to factors other than inflation of the Euro, then there is no upward pressure on oil prices in Euros.

    For example, both Euros and US dollars could be in deflation, meaning the M3’s for both are falling, and the US dollar could be deflating by more than the Euro, which could make the US dollar more valuable vis a vis the Euro, and yet oil prices in Euros could fall as well since the Euro is also experiencing a deflation.

  6. Gravatar of ssumner ssumner
    19. May 2012 at 07:23

    Dennis. These markets are very cheap to set up. And trillions in wealth is at stake.

    Mike Sax, It would make no difference if the euro was the world reserve currency.

  7. Gravatar of Michael Michael
    19. May 2012 at 07:28

    Could an NGDP futures market be set up by a private entity? That obviously would not force the Fed to target it, but it would put the right information (market judgment of future NGDP growth) out there.

  8. Gravatar of Michael Michael
    19. May 2012 at 07:28

    Could an NGDP futures market be set up by a private entity? That obviously would not force the Fed to target it, but it would put the right information (market judgment of future NGDP growth) out there.

  9. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    19. May 2012 at 08:01

    http://krugman.blogs.nytimes.com/2012/05/11/macroeconomic-morality/?pagewanted=all

    ‘I don’t regard anyone who disagrees with me as necessarily a mendacious idiot.’

    and,

    ‘I like to think that I have enough integrity to change my views when it becomes clear that they were wrong.’

    Maybe we should ask former Sec’y of the Army Thomas White for a second opinion.

  10. Gravatar of Bonnie Bonnie
    19. May 2012 at 08:21

    Lars Christensen posted an alternative that might be a good start toward stabilizing what’s going on now with policy that appears to lack a floor. For the Fed, it could be done by targeting TIPS, a market that is already in place. NGDPLT is much better, of course, but if we could at least get them to do something like this, just a little tweak of IT, it would be a big improvement while taking some of the political pressure surrounding easing out of the equation.

    http://marketmonetarist.com/2012/05/18/the-cheapest-and-most-effective-firewall-in-the-world/

  11. Gravatar of Morgan Warstler Morgan Warstler
    19. May 2012 at 08:53

    The reality is that the code for this kind of thing is already written.

    Is there anything that legally would keep the Fed from running a retail NGDP futures market online before arguing it should adopt it to Congress?

    Just like Forex, you put your money in an account before you bid, but unlike FOREX there would be no spread.

    Couldn’t the Fed call it economic research?

    Here is an example of a little start up that would OBVIOUSLY love to help the cause:

    http://inklingmarkets.com/homes/features

    they use play currency, and actually mention betting on China GDP.

  12. Gravatar of Lars Christensen Lars Christensen
    19. May 2012 at 09:02

    Bonnie, thanks for mentioning my idea. I think that the major central banks of the world could do this tomorrow – if the Fed, The ECB, BoE, BoJ and SNB all announced that they would put a floor under inflation expectations of 1.95% then no more QE would be needed and I am pretty sure the crisis would come to an end very fast.

  13. Gravatar of RebelEconomist RebelEconomist
    19. May 2012 at 09:08

    “…if our criminally negligent central banks would actually spend a few bucks setting up a NGDP futures market”

    You are starting to sound like a ranting troll on your own blog!

    I guess if people were concerned about NGDP, there would be an NGDP futures market already – financial markets are not usually shy of innovation if demand exists or even can be generated. For example, if borrowers were relying on a certain level of NGDP for their projects to pay off, they could short some NGDP futures to hedge.

  14. Gravatar of james james
    19. May 2012 at 10:11

    Sumner,

    don’t we already have a NGDP equivalent? aka the TIPS market?

  15. Gravatar of ChargerCarl ChargerCarl
    19. May 2012 at 10:30

    Scott, do you have a post that explains what an NGDP futures market is?

  16. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. May 2012 at 11:01

    Meanwhile, 2-year inflation expectations are falling faster than a North Korean missle on takeoff:

    http://www.bloomberg.com/quote/USSWIT2:IND/chart

    I’m glad to see that the appointments of Jeremy Stein and Jerome Powell have made such a difference.

  17. Gravatar of dwb dwb
    19. May 2012 at 11:19

    in a very strange crisis-begets-action way i kinda feel we are getting closer: all signs point to more easing action next month. I sense that the hawks are going to want something to prevent inflation from “spiraling” to, know, 2.5%. god forbid.

  18. Gravatar of Bob A Bob A
    19. May 2012 at 11:48

    Yes, please expand on the futures market. It could be set up in a few days by the CME but that doesn’t mean it will function the way our dear host wants. What does the microstructure looks like? And why doesn’t it rely on rational expectations to affect NGDP according to the model? BTW, the real world is where brilliant economist dreams go to die.

  19. Gravatar of Edward Edward
    19. May 2012 at 11:49

    Major_Freedom
    18. May 2012 at 16:09 :

    “I’ll give you the main example. The most compelling argument in my mind against the inflation “distortion” miscoordination argument is the general nature of the boom and bust. Yes some sectors rose and fell more than others. But all rose to some degree during the boom and all fell to some degree during the bust

    This isn’t a falsification. Production takes time.” (So what! True but irrelevant) “If the higher order capital stages go bust, then it’s not like the consumer stages can instantly produce and sell more consumer goods. The resources don’t even exist yet! Computer retailers for example cannot possibly sell more PCs unless there is more capital goods produced that makes more PC production possible. But if those stages go bust, then computer sellers have to wait for those resources to increase in production once again. Of COURSE we would expect to see a general decline in productivity despite the fact that the boom was concentrated in the capital goods stages.

    Capital goods are heterogenous, as well as consumer goods, as austrians love to teach us. The capital goods used in building cars are different from the ones building computers which are different than the ones building houses. If we see a housing boom and bust, we would expect to see a boom in the industries that directly supply hosting, but NOT necessarily in the capital goods industries that supply computers, that supply cars, that build airplanes and so on! Only a universal commodity like oil, or a commodity that is used on the other side of every transaction like money can infect the whole economy and cause a general decline of goods and services (with the exception of money of course)
    Your argument flops

    “(with the exception of cash and risk free assets- thats the only supply shortage, thats compelling) How can the main PROBLEM be miscoordination if all escorts rise and fall during the boom and bust even if they don’t fall by the same amount.

    They DON’T rise and fall by the same amount. Some sectors crash far more than other sectors”

    BUT THEY ALL FALL TO SOME DEGREE! Your chart shows this!

    http://i.imgur.com/AOHwQ.png

    Don’t you get it? We have a general glut relative to money. Thats what the evidence suggests.

    Also why is “the natural rate of interest COMPLETELY unobservable?

    The same reason why a jammed radio makes the real signal inaudible.

    There is only one set of interest rates that are observable, and those are the ones that exist, and the ones that exist are the ones affected by the Fed. They are the only rates investors have to go by. They can’t see interest rates that don’t exist!”

    One of my pet peeves in economics, one thing I really REALLy hate, is the way economists, both on the left and on the right, use the word “interest” for everything under the sun- the natural rate, the market rate, the wicksellian rate. Can we please please use the word DISCOUNT when talking about time preference? And your analogy is wrong, Its not that the whole radio or all stations are jammed, its ONE station, that might have white noise, the other “stations might be working fine.

    “Consumption savings data is available in real time always in the economy if record show that Americans are saving 4 percent of their income and consuming 96 percent shouldn’t the present discount rate be twenty four percent and easily available for NPV (You really think entrepreneurs are imbeciles don’t you.

    No, entrepreneurs are not imbeciles. Even looking at the real saving rate of consumers, may get some of the more sophisticated investors to consider prevailing interest rates as lower than what they otherwise would be, but the problem is that the profit motive eliminates prudent investors from competition. Those investors who don’t care, and take advantage of the lower nominal interest rates, can for a time attract capital away from other investors by making more short term profits than they do, which will turn the “wise” investors into suckers. Investors are by the nature of the case compelled to do the wrong things in order to make money and stay competitive.

    “I am not saying investors are stupid. I am saying they cannot help but get caught up in the boom, because if they don’t, they cease being entrpreneurs! Inflation acts like a filtration process for short term oriented investors who either don’t care about Austrian business cycle theory, or don’t know about it. I’ve done surveys, and I can tell you that a minority of businessmen have even heard of Austrian business cycle theory. That’s a major reason why the business cycle continues to exist. It’s not that they are stupid, it’s that they either don’t know it, or they do, but the profit motive is too strong to resist.”

    “If an entrepreneur had to choose between losing business to other entrepreneurs because he refuses to pay the higher factor input prices, on the basis that he knows the real savings rate doesn’t justify it, and choosing to enter the market and staying competitive, knowing that the game of musical chairs can stop at any time, then what happens in reality, not in your head, but in the real world market, entrepreneurs and investors go into the market anyway, and try to get out before the music stops.”

    This is, incidentally, why so many businessmen are so focused on short term results. The only way to compete in an inflationary, distorted market is to try to make the fastest profits possible, and then get out before the next bust comes.

    I understand what you’re saying, and to a SMALL extent you’re right, but you’re still wrong in the bigger picture. First if capital is available from the outside, or a real savings boom, similar effects occur to the “inflationary boom” “Inflation” is it unique or necessary to the process. Second you’re still assuming that entrepreneurs if they’re not stupid, are incredibly weak. WHile this might describe a certain amount of people during the boom not all are like that. Let me give you an analogy in the stock market. During the 90’s Warren Buffet was mocked as a has been for refusing to invest in the internet boom. He steadfastly refused the temptation because he believed it was a bubble and he knew he wasn’t good with tech. He ended up having the last laugh and last time i checked He was doing fine and still had plenty, even after the real estate crash.

    Entrepreneurs still have free will. Its their own damn fault if they choose investments that have razor thin net profit margins and are extremely sensitive to changes in interest rates. Incidentally their is way to forecast whether or not a business will survive a bust and or if it’ll crash. Its called looking at net profit margins and the return on its assets. All things being equal, it is better to have a business with strong margins rather than a high profit business with low margins. A business should expand up until constant returns to scale become diminishing because then unit costs start rising and further profits aren’t worth it. The goal should not necessarily be to be the biggest with the most profits, but survival

    “Thats why I don’t like Keynesians or Austrians both of them seem to think market participants are stupid albeit for different reasons)

    YOU think market participants are stupid! That’s why you think they cannot help but engage in self-destructive behavior in a free market money standard. You should look in the mirror.”

    YOU should look in the mirror. Hey this is fun. You have an extremely odd habit of parroting what people say back to them when you can’t think of anything better to say. You’re hilarious. You should start a comedy routine. Keep it up.

    “Finally if price deflation is the only route to real economic growth what happens when the one cent lower boundary is reached after years and years of deflation?

    I didn’t say price deflation is the only route to real economic growth. Only that in a healthy capitalist market, where money production is integrated into the division of labor just like every other good, prices end up tending to fall over time. This would have otherwise sent signals to investors on how to price their investments, but inflation distorts that by messing up relative prices and interest rates.”

    When productivity of real goods and services outstrips money prices tend to fall I get that. The rest is gibberish. It has been refuted dozens and dozens of times Yet stubborn Rothbardians, like flat earthers or anti-evolutionists refuse to listen Money is neutral in the long run and entrepreneurs who are successful are strong and not easily fooled.

    “To answer your question, that’s easy. Once the one cent boundary is reached, then NEW denominations can be created. Half cents can be called something. Tenths of one cent can be called something. Exactly like the central bank introduced new denominations, e.g. $1000 dollar bill, $10,000 dollar bill, etc, but in the other direction. Instead of adding zeroes and using new words to describe those values, zeroes can be taken away and new words can be used to describe those values.

    It would be just as silly for me to ask what would happen a zillion years from now once we go through all the “illions”. Billion, trillion, quadrillion, centillion, sextillion, septillion, etc, etc. What’s the boundary? There isn’t any, is there? Same thing with going towards zero. We can progressively smaller denominations as we approach zero.”

    Other currencies like yen, or thai baht or rubles, or reals, are worth much less than the dollar. If it takes one thousand thai baht to buy one dollar. isn’t it the same as saying one-thousandth of $1 buys 1 baht. Don’t we already have denominations smaller than one penny- IN OTHER CURRENCIES? There isn’t any fundamental difference between increasing the amount of thai baht in circulation, and adding zeroes to the left side of the decimal place of dollars and cents. The only difference between deflation and inflation is for those who hold cash. Inflation taxes cash holders who can get around it by investing in platinum, gold,silver the stock market or real estate. Deflation aids cash holders who get a risk free return the same as government bonds. (which I’m not a fan of also, by the way.) As long as investments in the real economy are expected to grow faster than returns on cash, than its no problem, 1-3% deflation is discounted as risk free in NPV calculations just like government bonds. Its when the expected return on cash outweighs nearly all investment in the real economy, then deflation becomes a problem, a problem which Austrians wrongly attribute to previous inflation.

    “(Don’t laugh its a valid question) You said any amount of money in the economy can clear balances, provided prices are flexible. Well the one cent boundary is a limit to flexibility. Or in the gold standard, lets make the ridiculous assumption that their is one ounce of gold in the entire economy. (lol) Isn’t it a bit ridiculous to go around then talking about nano-nano-nano ounces! Doesn’t it just make more sense to increase the money supply in general?!!

    The worst defense of inflation…ever.”

    That isn’t my defense of money inflation. Clearly you don’t understand the concept of TONGUE IN CHEEK and mind games brain teasers and thought experiments. We can safely add a lack of a sense of humor to you list of flaws.

  20. Gravatar of dwb dwb
    19. May 2012 at 11:51

    I went back and reread Orphanides paper by the way and left more comments (less rant-ish) for Altig, since i know he reads them.

    big takeway IMO was that NGDP targeting performs better under uncertainty (i know you are not surprised there – although orphanides goes growth, not path targeting nevertheless, i think path targeting would have improved this).

    anyway, then i read Posens Q&A on lessons learned:
    http://blogs.wsj.com/economics/2012/05/18/qa-lessons-on-central-banking-from-bank-of-englands-posen/

    The second thing that I’ve learned is just a really strong affirmation of something that I suspected, which wasn’t a surprise but was very forcefully brought home: Macro forecasting is so much more art than science.

    I think you should do a post: ngdp targeting performs better when we don’t know what the hell is going on with the economy.

  21. Gravatar of Edward Edward
    19. May 2012 at 11:57

    Scott

    “Edward, He made vague promises. But look, the signal extraction model is not able to explain business cycles-I agree with Krugman. But it’s silly to focus on 1982, you could just as well point to any other recession.”

    I wasn’t rooting for the signal extraction model. I was wondering whether he would have done better, and the recession, not have been so severe, if he had told the American people where he wanted the price level to go. Maybe half the problem in 1982 was price expectations instability”

    And you didn’t answer, what if the CB stops conducting open market operations completely and slows the MB growth rate to zero. Is that or is that not a more effective way to cool the economy?

  22. Gravatar of Edward Edward
    19. May 2012 at 12:00

    Major freedom:

    Inflation is NOT unique or necessary to the process, that what it should have said.

  23. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. May 2012 at 12:35

    dwb,
    Between Frankel’s post, Altig’s response, thinking about Hendrickson’s paper on the Great Moderation and Posen’s Q&A I’m beginning to think the common thread running through our global mnightmare is inflation targeting (IT):

    http://press.princeton.edu/titles/6380.html

    Funny, when I developed/taught an undergraduate course on Monetary Policy in the fall of 2010 I spent a week tentatively suggesting that IT was the main cause of the recession. Were I to do it again I think I would take more of a stand on IT:

    http://www.youtube.com/watch?v=ErFsW4-FDWw

  24. Gravatar of dwb dwb
    19. May 2012 at 14:25

    i think that is definitely part of it. another is a indescribable mix of overconfidence and getting trapped into focusing on credibility. credibility is a function of the political will to cause the next recession, that’s all.

    The Fed has consistently placed excessive confidence in their models (its not really surprising to me, as i’ve said before, that models predict that 5%-5.5% growth would be inflationary – models are calibrated with data most of which is when the economy is near full employment, so the models underestimate slack).

    I think “flexible” inflation targeting might be ok as a simple rule is there was not model overconfidence and if the Fed could distinguish between AD and AS shocks (do we want them to respond to the disinflation of a productivity shock with more inflation? no!). For example, a gdp deflator path level rule might be very close to ngdp PLT. except I think that there are still lots of good arguments for ngdp over gdpplt.

  25. Gravatar of Bonnie Bonnie
    19. May 2012 at 15:46

    Mark:

    Inflation Targeting: Lessons from the International Experience
    Ben S. Bernanke, et al

    Complete illustrations here:
    http://www.youtube.com/watch?v=mrr25jIOweE&feature=related

  26. Gravatar of Steve Steve
    19. May 2012 at 16:32

    @ Mark, Scott

    The only reason inflation expectations rose above 2% in February and March was the belief that a military strike on Iran was imminent.

    Frame the question in a different way: Should a central bank tighten monetary policy in reaction to an attempt to disable Iran’s nuclear ambitions?

    That’s what we are facing here, with the end of the “Twist” and the end of the LTRO.

  27. Gravatar of Bill Ellis Bill Ellis
    19. May 2012 at 16:46

    Did y’all see this ? Pretty cool.
    http://www.slate.com/blogs/moneybox/2012/05/18/don_t_believe_the_quot_taxmageddon_quot_hype.html

  28. Gravatar of Morgan Warstler Morgan Warstler
    19. May 2012 at 17:33

    SEE THERE?

    Matty reads this blog and doesn’t like what he sees.

    The Fed WILL NOT do monetary stimulus for tax hikes.

    That’s WHY Ben is out making it so damn clear.

    The Fed WILL do m.stimulus for tax cuts and spending cuts.

    And Matty doesn’t LIKE THAT one bit.

  29. Gravatar of ssumner ssumner
    19. May 2012 at 19:04

    Michael, Yes, but it really needs a public subsidy, as there is very little interest in trading NGDP futures. That’s why no market currently exists.

    Patrick, Good to know I’m not “necessarily” a mendacious idiot.

    Lars, That would be a good start, but they’d need to do more.

    Rebeleconomist, I agree, that’s why we need the Fed to set it up and subsidize trading.

    James, No they are very different.

    Chargercarl, Yes, google “spot the flaw in NGDP futures targeting.”

    Mark, It’s time for the annual spring swoon.

    dwb, No surprise.

    Bob A, Always fun to see someone ridiculing something they know nothing about. See response to Chargercarl.

    dwb, Posen’s mistake was staking his reputation on an inflation forecast.

    Edward, He did tell the public where he wanted inflation to go, but it didn’t go where he wanted it to go.

    I’m opposed to policies of targeting the base–base demand is too unstable.

    Steve, Good point.

    Bill Ellis, I’m actually kinds of surprised how much Yglesias and Avent seem to have bought into my monetary offset argument. I must be more persuasive than I thought.

    My adviser was Lucas of the “Lucas Critique”—wouldn’t it be funny if another critique got named after me.

  30. Gravatar of Bob A Bob A
    19. May 2012 at 19:51

    Thanks, i will.

  31. Gravatar of Bob A Bob A
    19. May 2012 at 20:05

    Wait, are you saying I don’t know about about finance and macro? Really? I know you have no idea who I am but others sympathetic to ngdplt targeting seem to have problems with your scheme so I’m not alone

  32. Gravatar of Major_Freedom Major_Freedom
    19. May 2012 at 20:55

    Edward:

    I’ll give you the main example. The most compelling argument in my mind against the inflation “distortion” miscoordination argument is the general nature of the boom and bust. Yes some sectors rose and fell more than others. But all rose to some degree during the boom and all fell to some degree during the bust.

    This isn’t a falsification. Production takes time.

    (So what! True but irrelevant)

    So what? So that’s the reason all sectors fall to some degree during the bust. The fact that production takes time is why you don’t see the consumer goods stages instantly recover after a collapse in the higher order stages like construction. It’s absolutely crucial to understanding why there is no instant recovery after an unsustainable expansion in the higher order stages of production.

    “If the higher order capital stages go bust, then it’s not like the consumer stages can instantly produce and sell more consumer goods. The resources don’t even exist yet! Computer retailers for example cannot possibly sell more PCs unless there is more capital goods produced that makes more PC production possible. But if those stages go bust, then computer sellers have to wait for those resources to increase in production once again. Of COURSE we would expect to see a general decline in productivity despite the fact that the boom was concentrated in the capital goods stages.”

    Capital goods are heterogenous, as well as consumer goods, as austrians love to teach us. The capital goods used in building cars are different from the ones building computers which are different than the ones building houses. If we see a housing boom and bust, we would expect to see a boom in the industries that directly supply hosting, but NOT necessarily in the capital goods industries that supply computers, that supply cars, that build airplanes and so on!

    Yes, but you’re ignoring the fact that in a recession there is a slump in the higher order stages in general. There is not only a general slump in the stages that housing depends on. There is a slump in the stages that are acutely sensitive to interest rates, so there will in fact be a slump in not only what housing depends on, but what every other consumer good depends on, namely CAPITAL.

    Only a universal commodity like oil, or a commodity that is used on the other side of every transaction like money can infect the whole economy and cause a general decline of goods and services (with the exception of money of course)

    Your argument flops

    On the contrary, it’s it’s not commodities per se that are affected, it’s the resources that lie in the capital intensive, sensitive to interest rates stages. That is oil plus many other commodities. It’s not specific to oil. It’s specific to the projects that become relatively attractive when interest rates fall.

    “(with the exception of cash and risk free assets- thats the only supply shortage, thats compelling) How can the main PROBLEM be miscoordination if all escorts rise and fall during the boom and bust even if they don’t fall by the same amount.

    It’s precisely because interest rates don’t affect all stages equally that we see different stages fall by different amounts. That is consistent with a discoordination problem, not an aggregate demand problem.

    “They DON’T rise and fall by the same amount. Some sectors crash far more than other sectors”

    BUT THEY ALL FALL TO SOME DEGREE! Your chart shows this!

    THAT’S BECAUSE PRODUCTION TAKES TIME! When the higher order stages collapse, like construction collapsed to a relatively high degree, it’s not like all the consumer goods that depend on construction can instantly recover! They have to wait for the more capital intensive stages to heal first, before they can expand once again!

    Don’t you get it? We have a general glut relative to money. Thats what the evidence suggests.

    No, you cannot say that. The evidence is also perfectly consistent with a discoordination problem between stages. You cannot use the evidence to rule out all theories that are consistent with the data!

    Also why is “the natural rate of interest COMPLETELY unobservable?

    I already answered this. It’s because the interest rates that exists are the interest rates that are a result of the Fed’s intervention. There is only one set of interest rates, and those interest rates are interest rates given the Fed is influencing them. As a result, the real market interest rates do not exist. They are overruled by Fed policy.

    One of my pet peeves in economics, one thing I really REALLy hate, is the way economists, both on the left and on the right, use the word “interest” for everything under the sun- the natural rate, the market rate, the wicksellian rate. Can we please please use the word DISCOUNT when talking about time preference? And your analogy is wrong, Its not that the whole radio or all stations are jammed, its ONE station, that might have white noise, the other “stations might be working fine.

    No. There are no other stations. There is only one station, and that one station is the real world set of interest rates. That one station of real world interest rates are in part a result of the Fed, which means if interest rates are 1%, 3%, 5%, etc, then the real market rates of interest, the rates that would have otherwise existed without the Fed, do not exist.

    Regarding your pet peeve with respect to calling interest a “discount” instead: you’re just arguing over semantics. Call it whatever you want. The word doesn’t matter. The meaning is the same. The non-Fed influenced interest rates do not exist because the Fed exists and is influencing interest rates.

    “No, entrepreneurs are not imbeciles. Even looking at the real saving rate of consumers, may get some of the more sophisticated investors to consider prevailing interest rates as lower than what they otherwise would be, but the problem is that the profit motive eliminates prudent investors from competition. Those investors who don’t care, and take advantage of the lower nominal interest rates, can for a time attract capital away from other investors by making more short term profits than they do, which will turn the “wise” investors into suckers. Investors are by the nature of the case compelled to do the wrong things in order to make money and stay competitive.”

    “I am not saying investors are stupid. I am saying they cannot help but get caught up in the boom, because if they don’t, they cease being entrpreneurs! Inflation acts like a filtration process for short term oriented investors who either don’t care about Austrian business cycle theory, or don’t know about it. I’ve done surveys, and I can tell you that a minority of businessmen have even heard of Austrian business cycle theory. That’s a major reason why the business cycle continues to exist. It’s not that they are stupid, it’s that they either don’t know it, or they do, but the profit motive is too strong to resist.”

    “If an entrepreneur had to choose between losing business to other entrepreneurs because he refuses to pay the higher factor input prices, on the basis that he knows the real savings rate doesn’t justify it, and choosing to enter the market and staying competitive, knowing that the game of musical chairs can stop at any time, then what happens in reality, not in your head, but in the real world market, entrepreneurs and investors go into the market anyway, and try to get out before the music stops.”

    “This is, incidentally, why so many businessmen are so focused on short term results. The only way to compete in an inflationary, distorted market is to try to make the fastest profits possible, and then get out before the next bust comes.”

    I understand what you’re saying, and to a SMALL extent you’re right, but you’re still wrong in the bigger picture. First if capital is available from the outside, or a real savings boom, similar effects occur to the “inflationary boom” “Inflation” is it unique or necessary to the process.

    Sorry, this makes no sense to me.

    Second you’re still assuming that entrepreneurs if they’re not stupid, are incredibly weak.

    No, they are not weak either. You cannot possibly expect entrepreneurs to know the real interest rates, or what you call discount rates, when they are not observable! You’re asking that entrepreneurs can know information about time preferences and real savings, without access to observable information that would have existed had the Fed not manipulated the interest rates. That is asking far too much. Saying that entrpreneurs cannot observe the real rates is not an attack on entrepreneurs. It’s a basic argument about people not able to know something empirical unless they can observe it!

    WHile this might describe a certain amount of people during the boom not all are like that. Let me give you an analogy in the stock market. During the 90’s Warren Buffet was mocked as a has been for refusing to invest in the internet boom. He steadfastly refused the temptation because he believed it was a bubble and he knew he wasn’t good with tech. He ended up having the last laugh and last time i checked He was doing fine and still had plenty, even after the real estate crash.

    Not all investors are able to do this. You’re taking an example of an exemplary investor and asking me to believe that all or most investors are like this. You’re being unrealistic. In the real world, most investors do get caught up in the booms. The profit motive is too strong for most entrepreneurs to resist. In a non-Fed manipulated economy, the profit motive would have balanced the productive stages. But with the Fed, the profit motive results in investors making the wrong decisions. Warren Buffet is a billionaire. He can afford to keep his powder dry a lot longer than other investors. Most investors are in a sink or swim position.

    Entrepreneurs still have free will. Its their own damn fault if they choose investments that have razor thin net profit margins and are extremely sensitive to changes in interest rates.

    So who’s attacking investors now? You.

    You can’t blame investors for chasing profits. You can’t blame them for not being able to know what the true interest rates are even though they are unobservable.

    Incidentally their is way to forecast whether or not a business will survive a bust and or if it’ll crash. Its called looking at net profit margins and the return on its assets.

    Net profit margins and returns on assets are altered by the Fed’s actions. It is precisely because investors are looking at information that the Fed affects that doing what you say they should do, leads to malinvestment!

    All things being equal, it is better to have a business with strong margins rather than a high profit business with low margins. A business should expand up until constant returns to scale become diminishing because then unit costs start rising and further profits aren’t worth it. The goal should not necessarily be to be the biggest with the most profits, but survival

    You are ignoring the fact that the Fed’s actions alter relative profit margins, relative returns on assets, etc.

    “YOU think market participants are stupid! That’s why you think they cannot help but engage in self-destructive behavior in a free market money standard. You should look in the mirror.”

    YOU should look in the mirror. Hey this is fun. You have an extremely odd habit of parroting what people say back to them when you can’t think of anything better to say. You’re hilarious. You should start a comedy routine. Keep it up.

    What is this, I know you are but what am I? That was a weak response.

    You do in fact think investors are stupid. You think they are stupid for not knowing information that is unobservable!

    “I didn’t say price deflation is the only route to real economic growth. Only that in a healthy capitalist market, where money production is integrated into the division of labor just like every other good, prices end up tending to fall over time. This would have otherwise sent signals to investors on how to price their investments, but inflation distorts that by messing up relative prices and interest rates.”

    When productivity of real goods and services outstrips money prices tend to fall I get that. The rest is gibberish. It has been refuted dozens and dozens of times Yet stubborn Rothbardians, like flat earthers or anti-evolutionists refuse to listen Money is neutral in the long run and entrepreneurs who are successful are strong and not easily fooled.

    This is a non-response. Saying it’s “gibberish”, without showing why, without showing any substantive information in your response, tells me you have nothing.

    “To answer your question, that’s easy. Once the one cent boundary is reached, then NEW denominations can be created. Half cents can be called something. Tenths of one cent can be called something. Exactly like the central bank introduced new denominations, e.g. $1000 dollar bill, $10,000 dollar bill, etc, but in the other direction. Instead of adding zeroes and using new words to describe those values, zeroes can be taken away and new words can be used to describe those values.”

    “It would be just as silly for me to ask what would happen a zillion years from now once we go through all the “illions”. Billion, trillion, quadrillion, centillion, sextillion, septillion, etc, etc. What’s the boundary? There isn’t any, is there? Same thing with going towards zero. We can progressively smaller denominations as we approach zero.”

    Other currencies like yen, or thai baht or rubles, or reals, are worth much less than the dollar. If it takes one thousand thai baht to buy one dollar. isn’t it the same as saying one-thousandth of $1 buys 1 baht. Don’t we already have denominations smaller than one penny- IN OTHER CURRENCIES? There isn’t any fundamental difference between increasing the amount of thai baht in circulation, and adding zeroes to the left side of the decimal place of dollars and cents. The only difference between deflation and inflation is for those who hold cash. Inflation taxes cash holders who can get around it by investing in platinum, gold,silver the stock market or real estate. Deflation aids cash holders who get a risk free return the same as government bonds. (which I’m not a fan of also, by the way.) As long as investments in the real economy are expected to grow faster than returns on cash, than its no problem, 1-3% deflation is discounted as risk free in NPV calculations just like government bonds. Its when the expected return on cash outweighs nearly all investment in the real economy, then deflation becomes a problem, a problem which Austrians wrongly attribute to previous inflation.

    Irrelevant to the issue at hand of being able to re-denominate currency units as the value of money increases over time.

    “The worst defense of inflation…ever.”

    That isn’t my defense of money inflation. Clearly you don’t understand the concept of TONGUE IN CHEEK and mind games brain teasers and thought experiments. We can safely add a lack of a sense of humor to you list of flaws.

    Worst sense of humor…ever.

  33. Gravatar of RebelEconomist RebelEconomist
    20. May 2012 at 02:00

    dwb / Scott

    While I was critical of Posen’s dovishness, I do think his conduct was honourable in being clear about the view underlying his MPC vote, and keeping his word when that view was shown to be wrong: “If I have made the wrong call, not only will I switch my vote, I would not pursue a second term. They should have somebody who gets it right and not me. I am accountable for my performance.” ( http://www.guardian.co.uk/business/2011/mar/27/inflation-cuts-consumer-spending-mpc )

    Would Scott care to give us a hostage to fortune in case NGDP targeting is adopted?

  34. Gravatar of Lorenzo from Oz Lorenzo from Oz
    20. May 2012 at 02:07

    The Fed, ECB, BOJ, BOE decimated the world economy and financial system in the boom prior to the 2008 collapse. That’s where the errors took place that later resulted in an “unexplainable” drop in aggregate spending.

    One of the many advantages in being an Australian in these times is that you can spot what nonsense Major Freedom is spouting. The RBA ran a mildly more inflationary policy than the Fed, BoE, ECB and (especially) BoJ during the Great Moderation (hence mildly more expensive credit) but avoided the GFC and Great Recession even though Australia has much the same level of aggregate debt as other developed countries (just much less of it is public debt). It was not what the RBA did in the boom that counted, it was what it did/did not do (and the others did not do/did) when conditions changed that mattered.

  35. Gravatar of Michael Michael
    20. May 2012 at 04:10

    Scott, on whether private NGDP futures markwet would be possible:

    “Michael, Yes, but it really needs a public subsidy, as there is very little interest in trading NGDP futures. That’s why no market currently exists.”

    It makes sense that the would be no market if there was no interest. But why no interest? In this world where central banks do not target NGDP, would this type of market not represent the ultimate way to hedge? Or would this typw of hedging cause the market to fail?

  36. Gravatar of Saturos Saturos
    20. May 2012 at 05:17

    Lorenzo, Yes, and in fact it was our higher rate of inflation which allowed us to avoid the ZLB in ’08 (that and a swift response).

  37. Gravatar of RJ RJ
    20. May 2012 at 09:51

    MF –

    “THAT’S BECAUSE PRODUCTION TAKES TIME! When the higher order stages collapse, like construction collapsed to a relatively high degree, it’s not like all the consumer goods that depend on construction can instantly recover! They have to wait for the more capital intensive stages to heal first, before they can expand once again!”

    If this were true, the drops in your graph would be staggered along the x-axis. Instead the declines start at around the same time, and all have a local minima somewhere in 2010. This is a poor piece of evidence for your argument.

  38. Gravatar of Major_Freedom Major_Freedom
    20. May 2012 at 13:39

    Lorenzo from Oz:

    The RBA ran a mildly more inflationary policy than the Fed, BoE, ECB and (especially) BoJ during the Great Moderation (hence mildly more expensive credit) but avoided the GFC and Great Recession even though Australia has much the same level of aggregate debt as other developed countries (just much less of it is public debt). It was not what the RBA did in the boom that counted, it was what it did/did not do (and the others did not do/did) when conditions changed that mattered.

    One of the advantages of being an economist is that you can see the nonsense folks like Lorenzo are spewing.

    The economist knows that he RBA is setting the Australian economy up for a greater decimination than it otherwise would have experienced, because of what they are doing during the unsustainable boom they are creating.

    When conditions changed? As if the RBA isn’t itself bringing about changes de jure, and only ever acts as some sort of seagull manager and acts when necessary and doesn’t act otherwise? The RBA is also continually inflating, which is creating its own set of “conditions”, such as…you guessed it, inevitable recession. Australia has recently slowed its money printing, and there are now stresses in the housing market.

    RJ:

    “THAT’S BECAUSE PRODUCTION TAKES TIME! When the higher order stages collapse, like construction collapsed to a relatively high degree, it’s not like all the consumer goods that depend on construction can instantly recover! They have to wait for the more capital intensive stages to heal first, before they can expand once again!”

    If this were true, the drops in your graph would be staggered along the x-axis. Instead the declines start at around the same time, and all have a local minima somewhere in 2010. This is a poor piece of evidence for your argument.

    You’re misreading the chart, and I guess that’s my fault because I “set” the index of 100 for each sector at the beginning of 2008, for the purposes of showing the relative differences in declines.

    To address your point, if you look at this chart, I used the same data, but I set the index to 100 for each sector at the beginning of 2006 rather than 2008, so that we can see what happened to each sector over time before late 2008 and the already general decline in all sectors was well on its way.

    If you notice, starting around the beginning of 2007, we can see construction, durable goods and non-durable goods sectors starting to decline, and it isn’t until around the beginning of 2008 that the retail sector and service sector started to decline. There is a distinct staggering along the x-axis as you expected, which couldn’t be seen in the other chart because I was making a different point.

  39. Gravatar of ssumner ssumner
    20. May 2012 at 18:23

    Bob A. You said;

    “Wait, are you saying I don’t know about about finance and macro?”

    No, what gave you that impression? But you don’t seem to know much about NGDP futures targeting.

    Rebeleconomist, I’m sure you know that NGDP level targeting won’t be adopted, but sure, I’ll apologize if it is and doesn’t work.

    Michael, I’m not sure why there’s no interest, but I’m glad their isn’t. If there were lots of hedging than NGDP futures prices might be biased. I prefer a pure gambling market.

  40. Gravatar of Lorenzo from Oz Lorenzo from Oz
    21. May 2012 at 00:09

    Major_Freedom: Faith-based economics, free of any actual evidence and all based on assertions about some docrtinally required future, is not actually economics. You might care to look up the Australian poem “We’ll all be ruined said Hanrahan”.

  41. Gravatar of Saturos Saturos
    21. May 2012 at 01:07

    That’s a fantastic poem! It seems that economic commentators never change.

  42. Gravatar of Benny Lava Benny Lava
    21. May 2012 at 04:49

    This reminds me of a question I regularly pose to hard money inflation hawks: how do you separate price changes in oil caused by the Fed from price changes caused by supply and demand? I usually get no answer on this.

  43. Gravatar of dwb dwb
    21. May 2012 at 04:53

    @Benny Lava:
    not sure what you mean by “supply and demand” but the gdp deflator is basically a price index for domestically produced goods, while the CPI, PCE, etc includes imports and so on.

    for example, if you look at Lars Christensen’s graph a week or so ago (“failed ECB policy – the one graph version”) you can see the difference as it applies to the ECB. you can do the same exercise for the US (comparing GDP Def to PCE price index)

  44. Gravatar of Negation of Ideology Negation of Ideology
    21. May 2012 at 05:55

    Benny Lava –

    Simple, according to “hard money inflation hawks” any price increase of anything is caused by the Fed, and any price decrease of anything is caused by supply and demand.

  45. Gravatar of MMJ MMJ
    21. May 2012 at 11:19

    Scott,

    Given there is no demand for an NGDP futures market, why will people trade it if it’s created by regulatory fiat?

    I’m sure you’ve answered this before, so if you, or a member of your rapidly-expanding fan club could direct me to a link…

  46. Gravatar of ssumner ssumner
    21. May 2012 at 11:21

    MMJ, Trading would be subsidized by the government.

    Google the article “Spot the flaw in NGDP futures targeting.”

  47. Gravatar of Major_Freedom Major_Freedom
    21. May 2012 at 17:52

    Lorenzo from Oz:

    Major_Freedom: Faith-based economics, free of any actual evidence and all based on assertions about some docrtinally required future, is not actually economics. You might care to look up the Australian poem “We’ll all be ruined said Hanrahan”.

    As usual, Lorenzo displays no comprehension of Austrian economics.

    Austrian economics, or rather economics, is based on rationalism, not faith.

    Historical data is not evidence of any theory. It is unique to the past. Historical data makes no sense without an a priori theory. Your a priori theory is fallacious. You just ignore all your presuppositions, which is why you are so convinced your interpretation of the historical data is correct. You are blind to your own presumptions.

    You’re not an economist. You don’t even discuss economics. You’re a bookkeeper. A data collector. You’re like a chemist’s assistant whose job is to collect and label all the chemicals collected, without having the slightest clue as to the nature of chemistry.

  48. Gravatar of Lorenzo from Oz Lorenzo from Oz
    22. May 2012 at 00:06

    Major Freedom: your commitment to rationalism is no doubt why you think sneering personal abuse is a mode of argument. If everything is “self-evident” that only leaves stupidity or malice to explain disagreement; a sad world to live in.

  49. Gravatar of Saturos Saturos
    22. May 2012 at 06:16

    Major Freedom does us all the great service of making these pages harder to scroll down.

  50. Gravatar of Major_Freedom Major_Freedom
    22. May 2012 at 06:50

    Saturos:

    Major Freedom does us all the great service of making these pages harder to scroll down.

    You do likewise by posting.

  51. Gravatar of Major_Freedom Major_Freedom
    22. May 2012 at 07:22

    Lorezno from Oz:

    Major Freedom: your commitment to rationalism is no doubt why you think sneering personal abuse is a mode of argument.

    I just treat you poorly because you treat me poorly. You constantly engage in antagonism, ad hominem and other filth whenever you address me. Every time I see your sneering face in the icon that accompanies your posts, prefaced by “Major_Freedom:”, I know low brow mocking and repulsive slander are coming.

    You should look in the mirror. If you want to be treated with respect, you should treat others with respect. Me, I don’t care if you treat me with respect or not, for I am a grown man who doesn’t become a whiny princess whenever I am mocked. But I do enjoy mocking when I am mocked.

    If everything is “self-evident” that only leaves stupidity or malice to explain disagreement; a sad world to live in.

    Wrong on multiple levels. For one thing, the deduced propositions are not “self-evident”. They are not immediately known the way the color of leaves are immediately known. They require quite a bit of thinking, which by the way is a form of action.

    Second, you presented a false choice. You’re ignoring a third possibility. A person can be a sophisticated thinker, intelligent about many things about the world, but just hasn’t been exposed enough to this particular field of inquiry. They don’t have to be either stupid or malicious. They can just be uninformed. In your case, you have claimed to have read Austrian texts, but the fact that you are always making errors about it means you either haven’t really read it, or it is just going over your head.

    This stuff takes YEARS to fully grasp. You can’t just hastily read one Mises book and claim to be an expert. You have to completely expand your consciousness in the ways you think and look at the world. You have to be able to know the difference between thinking as a positivist or materialist, and thinking as a rationalist, which means you have to read philosophy, particularly Locke and Hume, Marx and Hobbes, Leibniz and Kant, and today, HH Hoppe and R. Long. Thus far, you are unable or unwilling to think as a rationalist. You are only able or willing to think as a positivist. That is why you don’t understand Austrian economics. It is in fact why most people who don’t understand it, don’t understand it. You simply have to be comfortable with engaging in deep self-reflection, which some people are for whatever reason not willing to do, due to fears, or bad memories, or lack of self-esteem, or feelings of foreignness, or whatever.

  52. Gravatar of MMJ MMJ
    22. May 2012 at 09:34

    Scott,

    Thanks. It’s here: https://www.themoneyillusion.com/?p=1184
    And it’s “Spot the flaw in nominal index futures targeting”.

  53. Gravatar of ssumner ssumner
    23. May 2012 at 06:05

    Thanks MMJ.

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