Steve Waldman has a great idea

I was recently reminded of Steve Waldman’s extremely fertile mind when I reread an old post on technology that Tyler Cowen also likes.  As you will see, I am much less impressed by Steve’s post-Keynesianism, but even in a post I don’t much like there is one brilliant idea.  Here’s Steve:

I am not neutral between the economic schools I’ve identified for a love-fest. Although I dislike binding myself with labels, I lean post-Keynesian. I agree with many critics that monetary policy alone is unlikely to be effective, and my gut inclination is not at all favorable to monetary policy as an instrument. I think overreliance on monetary policy, especially during the so-called Great Moderation, played a key role in the development of socially destructive inequality and economically catastrophic patterns of aggregate investment.

I’m not quite sure what it means to be “not at all favorable to monetary policy as an instrument,” but I suspect I wouldn’t like any of the possible interpretations.  To me, the most natural interpretation of that phrase is that Steve Waldman favors a barter economy.  But I very much doubt that’s what he had in mind.  Other possible interpretations are that Steve favors a monetary system, probably even a central bank, but doesn’t want the central bank to “do monetary policy.”  But what does that mean?  Hold the short term rate constant?  That could easily lead to hyperinflation or hyperdeflation in the long run, policies Waldman presumably opposes.  Keep the monetary base fixed?  Waldman is a post-Keynesian, not an right-wing monetarist.  A few paragraphs later his policy preferences come into focus:

The incremental cost of trying a bit more monetary policy seems small to me by comparison. I don’t think it’s likely to work, but I am heartened at least that the variant proposed by the market monetarists is much less toxic than the mainstream dogma that, de jure or de facto, prizes price stability above all things. I’m still skeptical, but NGDP path targeting represents a huge improvement over inflation targeting as a monetary policy rule. I’d be willing to give it a try. In exchange, I’d like to try to persuade monetarists of good will to agree to limits on what constitutes legitimate monetary policy, and to assent to a coherent and non-corrupt fiscal lever as a backstop.

This sets up a wager that both sides should smugly accept. The market monetarists should be glad to accept the fiscal backstop, despite theoretical objections, because they should be sure that it will not need to be used. I can put up with one last big monetary push. I expect it won’t work, but it will automatically open the door to policy that I’m pretty sure will work. In either case, whichever side is wrong will be glad to have taken the bet.

This sounds pretty market monetarist to me, and I’d be happy to do that bet, especially if the back-up was a coherent and non-corrupt fiscal policy.  I presume Steve means simple old-fashioned monetary policy, with none of the bells and whistles added since 2008.  No Fed purchases of dodgy assets, no interest on reserves.  Just straightforward swaps of cash for bonds.  I’m all for that.

So what would happen if we did Steve’s proposal?  The answer is simple.  We’d never, ever, use fiscal stimulus, as the demand for base money is relatively low in an economy with a 5% NGDP target, level targeting.  Especially if the base money pays no interest.  I’d guess that this deal would force the Fed to cut the monetary base by roughly 60% over the next year in order to hit its NGDP target.

Sure anything is theoretically possible.  It’s possible people might want to hold 100% of GDP in the form of cash in an economy where NGDP is trending upwards at 5% a year.  And it’s theoretically possible I’ll win the Nobel Prize in economics.

If we could truly finance all of government by borrowing at zero per cent interest, I’m all on board for aggressive tax cuts and a bigger national debt.

There are actually two reasons why I love Steve’s idea.  First, I like the money first approach.  I’ve always argued we should rely on monetary policy unless the Fed runs out of ammunition.  But more importantly, I’d love to see Keynesians sign on to this idea, as it would force people to think about just what it means to run out of ammunition.  And that would make them realize just how far we are from running out of ammunition.  And that would make them realize what an outrage it is that the Fed refuses to act despite not having even come close to running out of ammunition.

PS.  My first remarks might seem to some to represent exactly the sort of sarcastic, cheap shot, egotistical point scoring that Steve was earnestly (and correctly) arguing against.  Not so.  I swear to God I have no idea what people mean by being “opposed to using monetary policy” (unless they want to abolish the Fed.)  And I have a hunch that my policy differences with the mainstream have a lot to do with the fact that most people seem to think the phrase “not relying on monetary policy” has some sort of coherent meaning.  Perhaps that’s because I see monetary policy as being solely responsible for driving the nominal economy, the only question is which direction you steer.  Whereas post-Keynesians (and many others) don’t seem to have any model of the nominal economy at all.  For them, the current price level can only be explained in terms of the previous price level—it’s a historical datum.

PPS.  My previous post discussed Tyler Cowen’s suggestion that our universities seem like a complete mess.  In a perfect world Steve Waldman (a grad student at Kentucky) would be getting dozens of unsolicited job offers solely on the basis of the post I linked to first.  Great programs would be constructed by hiring great minds.  Alas, that’s not how things work.


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47 Responses to “Steve Waldman has a great idea”

  1. Gravatar of Don Geddis Don Geddis
    14. April 2012 at 09:24

    I have no idea what people mean by being “opposed to using monetary policy”

    Surely we can reconstruct the thought process. It may not, in the end, be coherent … but I don’t think it’s so difficult either.

    Imagine: The “usual” mode of the Fed is to adjust short-term interest rates, as during the Great Moderation. Then, in 2008, that usual mechanism reached the zero lower bound. Also, a Great Recession began. What is to be done next? Some people say, “the Fed should try some new and odd actions, which have never been necessary or used in the last 30 years (at least)”. Other people say, “no, no — the Fed should be restricted to ‘conventional’ monetary policy (= adjusting rates); now is the time for, e.g., fiscal stimulus”. (Or maybe just lots of time to reduce “structural unemployment”.)

    Everyone agrees that unemployment is far too high. “Something” should be done. People who write that they are “opposed to using monetary policy” in the current economic circumstances, are surely signalling that they approve of the Fed’s current performance, and believe that improvements in the economy ought to come from somewhere other than changes at the Fed.

    This may not all tie together coherently, but it’s at least possible to imagine what kind of model they must have in their heads.

    Let me put it another way: You agree that the Fed can’t control the distribution between P and Y, right? That’s an important part of the economy, but I suspect that you would be “not at all favorable to monetary policy” as a proposed solution to somehow trading off more Y for less P. While that’s an important economic concept for the citizens to be concerned about, it’s not appropriate for the Fed to try to change actions based on the Y/P mix.

    Surely these other people have the same attitude, about something like unemployment. Perhaps the Fed “should” only worry about price stability (like in Europe), and so far it’s doing a great job! Inflation is low, yay! And yes, we’re all concerned about unemployment too, but that shouldn’t be something the Fed worries about. Hence they are “opposed to using monetary policy”, in the same way you would be opposed to using it if the goal was to accelerate RGDP instead of just NGDP.

  2. Gravatar of bill woolsey bill woolsey
    14. April 2012 at 09:38

    Scott:

    Monetary policy–changing interest rates to try to change how much people borrow and spend.

    So, if spending is too low, lower interest rates so people will borrow more money to spend more on output.

    If spending is too high, then raise interest rates so people will borrow less money to spend on output.

    Now, if we have a persisent problem of too little spending (secular stagnation,) then you can try to lower interest rates more and more to get people to borrow more and more and keep up spending. Of course, all of that borrowing means more and more debt. This will never work in the long run.

    The real answer strong unions to raise wages. A higher minimum wage would help. The workers will spend all the income they earn, pretty much. And the corporation will save less, but continue to invest to obtain capital goods to help produce the extra goods the workers are buying.

    Monetary policy means getting those workers to go deeper and deeper into debt and pay more and more interest to the rich so that they can maintain consumption. What they need is higher wages so that they can buy the consumer goods without going into debt.

    Or, you can tax the rich and use the money to provide essential government services–new hospitals, high speed trains, windmills for clean energy, etc.

    The rich have to pay more taxes so they save less. And there is more spending. The newly hired government workers spend. or private firms building the railroads or windmills spend.

    In other words, the real answer is socialism.

    What do you think “post-Keynesianism” is about?

    It is a bit like internet Austrian economics. Malinvestment, blah, blah… therefore.. abolish the Fed, 100% gold standard.. anarcho-capitalism.

  3. Gravatar of Morgan Warstler Morgan Warstler
    14. April 2012 at 10:10

    Steve has a few problems:

    1. When NGDP is running at 5%, and unemployment is still 7.5%, Steve will want Fiscal spending, and won’t be able to have it because it will push NGDP up over 5%

    Eventually it dawns on the left that under NGDPLT (we’ve taken monetary policy off he table) all unacceptable unemployment is structural.

    Ultimately, what they mean is they want to create any kind of job killing regulation, any kind of wage rules, and then after that, run the economy.

    2. It is a genius trade, but when inequality in cash goes up, and inequality in lifestyle goes down, Steve will still be upset.

    So when new drugs are invented sooner and thus are cheaper sooner for the poor, he won’t count that correctly.

    3. AL OF THIS comes down to Scott doing a horrible job of telling people what happens to size of government AUTOMATICALLY when we do NGDPLT.

  4. Gravatar of MikeDC MikeDC
    14. April 2012 at 10:18

    Speaking of “great ideas”, have you read Sheila Bair’s op-ed from yesterday’s Washington Post.

    http://www.washingtonpost.com/opinions/fix-income-inequality-with-10-million-loans-for-everyone/2012/04/13/gIQATUQAFT_story.html

  5. Gravatar of Morgan Warstler Morgan Warstler
    14. April 2012 at 10:18

    Scott, if you start a post with “NGDPLT is great for capitalism and will shrink government… even other government, not just the US”

    You will not have any more confusion from folks like Steve.

  6. Gravatar of Mike Sax Mike Sax
    14. April 2012 at 10:42

    Morgan you’re missing where Steve had this condtion “and to assent to a coherent and non-corrupt fiscal lever as a backstop”

    If unemployment couldn’t get beneath 7.5% the fiscal lever backstop kicks in.

  7. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    14. April 2012 at 11:01

    It would be interesting to hear what Sheila Bair thinks when she writes;

    ‘For several years now, the Fed has been making money available to the financial sector at near-zero interest rates. Big banks and hedge funds, among others, have taken this cheap money and invested it in securities with high yields.’

    High yields on interest on reserves?

  8. Gravatar of Becky Hargrove Becky Hargrove
    14. April 2012 at 11:07

    That early Waldman post was a treasure trove this morning, from which I nonetheless need to focus: Compared to others, how might Steve feel about monetary policy? First I will wager that he is quite a nuanced post Keynesian, just as some of us are nuanced in our libertarian beliefs which, at least on this blog, are largely a springboard for action. Some oppose monetary policy because “Main Street is tapped out”. However, some post Keynesians do not want to think about nominal economies for good reason, one that has little to do with Main Street – the service economies are where the action is, and how many loans does one see being made for services? Here’s the quote that tells me Steve is not the garden variety post Keynesian, from the first link: “I think of government, education, health care, and finance collectively as the information asymmetry industry and I find it terrifying that many people presume that they are the future growth industries of the United States.” In other words some post-Keynesians would not lose sleep at night over such things. Steve does.

    I suspect that he may question the efficacy of monetary policy in part because he doesn’t know whether people would find better equilibrium in the new realities. Some would fight and continue to distort by many means, hence he could be a tad bit skeptical of human nature. Plus, knowledge wealth needs to be better understood in AS/AD frameworks, but enough already!

  9. Gravatar of 123 123
    14. April 2012 at 11:18

    Opportunistic fiscal policy might be a good idea sometimes. Uber-anti-Keynesian Stephen Williamson once said:
    “However, we have some clear cases in which government debt matters. One thing that works, for example in New Monetarist Economics, is that you can have a scarcity of liquid assets used in financial trade. If the government runs a deficit and floats more government debt, this can relax financial market constraints, and you can make everyone better off. This is consistent with some of Ricardo Caballero’s ideas.”

    Sometimes tax system has got supply-side advantages in financial intermediation vs. the banking system. Of course, this applies to deficits generated by tax cuts. Spending increases are a sure road to socialism.

  10. Gravatar of 123 123
    14. April 2012 at 11:29

    Sometimes fiscal policy has got some demand management role too. Central banks do not peg the expected AD exactly. There is a bid-ask spread on expected AD – a Bernanke put and a Bernanke call.
    When unemployment is too large (e.g. now), or when bid-ask spread is extremely large (e.g. in January 2009), fiscal policy makes a lot of sense, and the multiplier is large when expected AD is low inside the bid-ask spread.
    Of course, tax cuts are preferred to spending increases.
    Taxes should be cut until Yellen starts making speeches calling for monetary tightening.

  11. Gravatar of 123 123
    14. April 2012 at 11:50

    Central bankers with tight bid-ask spreads like the ECB are strongly against fiscal stimulus. Bernanke runs a larger bid-ask spread and unsurprisingly he is supportive of fiscal stimulus.

  12. Gravatar of Benjamin Cole Benjamin Cole
    14. April 2012 at 12:10

    You want to try Market Monetarism?

    Bring it on, baby, bring it on.

    My only caveat: When we do QE, no sissy measures. Just as generals do not want to try to win a war with a too-small force, we MM’ers have to make sure the Fed goes in all guns blazing, the paint is blistering in money-printing room and the plates are melting from churning out so much money.

    The public has to have no question the Fed is going all in for growth, not hide-and-seek and peek-a-boo dithering and course reversals.

    David Beckworth contends this might fire up global growth, and I think he is right.

  13. Gravatar of ssumner ssumner
    14. April 2012 at 12:14

    Don, No, Steve clearly indicates he wants to try market monetarist policies–and he knows rates are stuck at zero right now. So he certainly doesn’t consider QE to be “non-monetary policy”.

    And the Fed drove us into this recession with a tight money policy. I hope and think that Steve doesn’t approve of that sort of policy.

    Bill, You said;

    “What do you think “post-Keynesianism” is about?”

    Then why does Steve say he favors trying MM policy prescriptions first?

    Morgan, I have you to tell them, I don’t need to.

    MikeDC, I thought it was exactly the opposite. Banks have been selling securities to the Fed, in order to hold reserves.

    Patrick, Exactly my thought!

    Becky, Yes, he is a very nuanced thinker.

    123, I see no evidence that there is a shortage of liquid assets, nor that there is any role for fiscal policy in reducing the “bid-asked spread” (Which would always be zero under NGDP futures targeting.) If we did need more risk free assets, they should ALWAYS be supplied via tax cuts, never spending increases.

  14. Gravatar of Morgan Warstler Morgan Warstler
    14. April 2012 at 13:10

    “and to assent to a coherent and non-corrupt fiscal lever as a backstop”

    Sax,

    We adopt NGDPLT at 4.5%.

    We’re at 0% RGDP and 4.5% inflation

    Public employees want a raise, cost of living and all that.

    IF Congress bends to SEIU. the Fed raises rates and Main Street goes ape shit – SEIU eats it.

    IF unemployment is 7.5% and Congress tried to do a job policy, the Fed (say it with me) raises rates, and Main Street comes and – jobs plan eats it.

    Sax, imagine a world where the Fed is BRUTAL, anytime Congress pushes past 4.5%, Ving Rhames in a banker’s visor runs out and goes Medieval on the Tea Party interests until they CRUSH your dreams.

    The whole point is SEIU + OWS loses 99% of the time against the Tea Party.

    NGDPLT just increases the frequency of the match ups.

  15. Gravatar of Saturos Saturos
    14. April 2012 at 14:11

    “It’s [theoretically] possible people might want to hold 100% of GDP in the form of cash in an economy where NGDP is trending upwards at 5% a year.”

    If k = 1 permanently, I really don’t think we should be calling it an “economy” anymore. Nobody is using exchange to satisfy their wants.

  16. Gravatar of interfluidity » On Tyler Cowen’s “Great Stagnation” interfluidity » On Tyler Cowen’s “Great Stagnation”
    14. April 2012 at 18:01

    […] 10:00 p.m. EDT: More than a year later, Tyler Cowen and Scott Sumner have said nice things and relinked this piece. I gave it a reread, and though I remain happy with […]

  17. Gravatar of John John
    14. April 2012 at 21:35

    I think he was joking about the non-corrupt fiscal policy part. Anyone smart knows that’s impossible.

  18. Gravatar of John John
    14. April 2012 at 21:43

    I think some of the people on this site need to realize that there are real limits to what creating money can accomplish and people who try to stop the Fed from doing things like what they’ve done in the last four years isn’t to be a goon and rain on everyone’s parade. I wish I lived in a world where running the printing press gave you a free lunch. Global poverty and any other economic problem would have been solved long ago. The next time someone recommends printing money willy-nilly, just remember that all you are creating is pieces of paper and ink. You can’t print capital goods, you can’t print savings, you can’t print resources, you can;t print work ethic, you can print ingenuity.

  19. Gravatar of John John
    14. April 2012 at 21:48

    I should add to that the only thing inflation really does is to temporarily spur business activity by making businesses look artificially profitable due to pre-inflation replacement and depreciation costs (accounting techniques are designed for money with a stable value). At a higher inflation rate you can expect to see increases in employment until inflation slows down and you get a recession with the symptoms of a deflation. Classical cycle of business picking up with inflation and crashing later has been observed time and time again.

  20. Gravatar of Major_Freedom Major_Freedom
    14. April 2012 at 22:05

    John gets it.

  21. Gravatar of 123 123
    14. April 2012 at 23:30

    “I see no evidence that there is a shortage of liquid assets”
    It was in January 2009, when off-the-run treasuries and TIPS were illiquid.

    “nor that there is any role for fiscal policy in reducing the “bid-asked spread””
    The role is not to reduce the spread, but to move the expected AD inside the spread. Outside the spread, the multiplier is zero. The spread was enormous in early 2009, however Bernanke has taken steps to reduce it by getting the FOMC to agree on a common target for AD.

    “(Which would always be zero under NGDP futures targeting.)”
    See my reply here:
    https://www.themoneyillusion.com/?p=13623#comment-145428
    In effect, for distressed companies and individuals, costs for trading in NGDP markets are large. Even though there is no bid-ask spread for those who are able to post margin deposits in your system, credit risk creates a bid-ask spread for leveraged economic agents.

    “If we did need more risk free assets, they should ALWAYS be supplied via tax cuts, never spending increases.”

    100% agree about the tax cuts vs spending increases.
    However, the problem is never a shortage of risk-free assets, if it was, bailouts would be a good policy. The problem is a shortage of liquid assets.

  22. Gravatar of bill woolsey bill woolsey
    15. April 2012 at 05:44

    Scott:

    I have yet to figure out why checkable deposits backed 100% (and more) by central bank deposits are not “riskless” assets that can be used for trading.

    Of course, if by “shortage of safe assets” we just mean, so the Fed shouldn’t contract base money despite it being high by historic standards, OK.

    Normally, checkable deposits pay low interest. Partly that is because of regulation, with interest being banned for business accounts, but more generally, banks need capital and there are some transactions costs.

    Anyway, it is apparent that some people can use short and safe interest bearing assets in place of checkable deposits. I find it hard to believe that they are more liquid, but usually they have better yields.

    Rather than having firms borrowing short from banks and holding deposits in the banks, they cut out the “middleman” and businesses sell short term commercial paper which is purchased by other businesses as a short term investment that substitutes for holding money.

    A firm needing to make an expenditure can either sell short term commercial paper to the myriad of other firms willing to buy it, or else, sell some of the short term commercial paper it owns to make payments. Or, they can use the short term commerical paper they own as collateral to borrow enough to make the payment.

    As you can imagine, all of this buying and selling of commercial paper creates alot of activity for financial traders. People work for large corporations buying and selling their own and others commerical paper. There commerical paper dealers. Banks are in the thick of it too, both employing traders and managing sweep accounts.

    To me, a shortage of safe assets, means, not much activity for the commercial paper dealers, which is a personal problem for them.

    The businesses that would hold this commercial paper rather than money need to hold more money (in the form of checkable depostis.) The quantity of checkable deposits needs to be expanded enough to meet that demand.

    Those who were borrowing by selling commerical paper need to borrow from banks. This should create an increase in the demand for credit matching the increase in the demand to hold money.

    But to the degreee that the same reason there is a “shortage of safe assets,” banks don’t want to make loans, then what should happen is that banks pay less on checkable deposits compensating them for creating deposits while holding some kind of assets.

    Of course, the direct effect of banks not wanting to make short term loans is for the banks instead to buy what assets remain safe and short. For example, T-bills.

    When the yields on those are driven down enough, then it is reserve balances at the central bank.

    And so, the central bank needs to expand the quantity of those. To the degree it is buying T-bills, it is not solving the problem. (Banks are holding reserves because there is such a high demand for T-bills their rates are being driven to zero.)

    And so, the central bank is going to have to buy other sorts of assets, longer and riskier ones.

    But, banks can do that too, but they will do so only if the interst rates on deposits gets low enough. Maybe negative.

    So, we hear from these finance practitioners that there is a shortage of safe assets. Well, their business activity does depend on buying and selling them as a subsitute for people just using balances in checkable depostis.

    However, this cry will be reinforced by nearly every corporate treasurer. Cash management is more expense. The assets earn less and it is more expensive to borrow. They have to pay banks higher interest than for what they “should” be able to sell commercial paper. Their funds are remaining “idle” in low to zero interest checkable deposits.

    Well, I guess there are some firms that are selling commercial paper at very low yields now.

    The notion that there is not physically (or nominally) enough short and safe assets to make transactions is implausible.

    If the interest rate on T-bills, reserve balances, and checkable deposits was -10%, I think that “velocity” would rise right smartly and there appear to be plenty of money to make all the transactions anyone would want.

    But that would create a massive currency drain and investments in safe’s and fortresses.

    As long as you all want to have your zero-nominal interest rate currency, then the issuer, the central bank, will have to purchase long and risky assets while creating short and safe assets. Of course, if we have a credible target for nominal GDP, this will help solve the problem. Some of those holding short and safe assets will sell them to fund purchases of goods and services. This reduction in demand will reduce the shortage. Some of the firms that would like to supply short assets are not considered safe, but if spending on output were expected to be higher, they would be safe. Those firms currently considered safe and who are issuing short and safe assets might be willing to sell more to purchase capital goods if they expected stronger sales in the future.

    But if nominal GDP were expected to be on target, and currency is short and safe and to be issued in the amount demanded, then there is a near zero nominal bound and the issuer of that money must be ready to create short and safe assets–that is, base money.

    Of course, using checkable deposits matched by base money to make purchases might create less employment for finanical traders. So?

  23. Gravatar of bill woolsey bill woolsey
    15. April 2012 at 05:55

    Scott:

    Perhaps I was too harsh on Waldman.

    Still, think of it this way.

    What we really need is free banking with index futures convertibility based upon a 3% growth path for nominal GDP.

    But that isn’t going to happen. So having the Fed commit to a couple of years of 7% nominal GDP growth and then 5%, backing it up by saying it will do as much quantitative easing as it takes, is the most realistic option. (If it actually happens, then people will be better off. Long run programs for monetary reform can be pursued from there. Of course, we have no guaratnee that the Fed won’t screw up again.)

    Really what we need is socialism to save the working class. But that isn’t going to happen. Maybe having the Fed commit to 7% nominal growth for a couple of years and then 5% after, and promising as much quantitative easing as it takes, will at least solve the unemployment problem today.

    We might as well give it a try. But, I am doubtful it will work, because the real problems are deeper. But if we try and it doesn’t work, then that is one more bit of evidence that we need more fundamental change.

    I think the analogy is obvious. Of course, I don’t have quite the same notion that modest reform won’t work.

  24. Gravatar of bill woolsey bill woolsey
    15. April 2012 at 06:11

    Scott:

    I know. Think about your view of quantitative easing without any committment to a target for nominal GDP.

    Well, we might as well try it. I might help.

    And if it does’t work, then maybe we can convince people to try what we really need, which is a target for a growth path for nominal GDP.

  25. Gravatar of Morgan Warstler Morgan Warstler
    15. April 2012 at 06:16

    “Really what we need is socialism to save the working class.”

    Bill, I have told you about my plan for Guaranteed Income / Auction the Unemployed?

    Think of it as socialized labor at the low end without any state run enterprises.

  26. Gravatar of ssumner ssumner
    15. April 2012 at 09:05

    Saturos, Actually, that’s not quite right, as money holdings are a stock and NGDP is a flow. For instance, right now K exceeds 1 if measured at monthly frequencies.

    John, You said;

    “I think some of the people on this site need to realize that there are real limits to what creating money can accomplish”

    I’ve never met anyone who didn’t understand this.

    You also said:

    “I should add to that the only thing inflation really does is to temporarily spur business activity”

    The problem is that you and MF don’t seem to understand what tight money can do, or even that money has been very tight in recent years.

    123, You seem to be defining bid-asked spreads in a very unusual way. I think my definition is standard. I would have had no difficulty buying or selling NGDP futures in late 2008–and indeed would have welcomed the oppoortunity to get rich, if only the Fed had allowed me to bet agaisnt their policy. There were lots of other people like me.

    I do agree that there was a brief liquidity problem in January 2009, which could have been fixed with a more stable monetary policy targeting NGDP expectations.

    Bill, I agree that checking accounts are safe assets.

    I also agree that there are lots of other problems out there, but i think many are being misdiagnosed because of the recession.

    And yes, QE is worth doing, even if it doesn’t help much without an explicit target.

  27. Gravatar of 123 123
    15. April 2012 at 10:52

    “You seem to be defining bid-asked spreads in a very unusual way.”
    Maybe I have stretched the metaphor a little bit too much…

    “I do agree that there was a brief liquidity problem in January 2009, which could have been fixed with a more stable monetary policy targeting NGDP expectations.”

    Severe liquidity problems started in September 2008 and have lasted at least six months.

    The problem with the lack of liquidity is that you don’t know what to target. Inflation swaps and TIPS gave completely different readings in January 2009. NGDP expectations would have differed too in the NGDP swaps vs. NGDP futures markets.

  28. Gravatar of dwb dwb
    15. April 2012 at 11:23

    And yes, QE is worth doing, even if it doesn’t help much without an explicit target.

    I think that many will see the failure to renew operation twist, or some other measure (sterilized QE), as passive tightening, because its a sign that the hawks have more sway and the Fed is not committed to unemployment side of the mandate.

    now, yes, it would be much better with an explicit target, but I think many market participants are still at asking: are they really committed to the “balanced” aspect of balanced, or are they merely inflation targeting. One day Bernanke or Yellen says we need to make up the gap, one day Kochlerakota or Fisher says we need to withdraw stimulus early. whose in charge?

    If policy works through expectations, what should i expect right now? no clue. It’s ironic in SF Fed Williams letter he talked about “uncertainty”- he forgot FOMC policy uncertainty!

    So yes, it would help enormously! It would signal the Feds committment to closing the output gap.

  29. Gravatar of Lorenzo from Oz Lorenzo from Oz
    15. April 2012 at 12:35

    Scott: The problem is that you and MF don’t seem to understand what tight money can do, or even that money has been very tight in recent years. Another way to think about it is they only care about the price of money (or, more accurately, having no shift in its aggregate “swap values”), not the supply and demand for it. The level of transactions is not to be changed via the price level, for stability of the price level counts far more than the level of transactions. Money is only for “economic calculation” conceived in these very narrow terms, any facilitation of transactions/economic activity is absolutely subordinate to “calculation stability”.

    That the least inflationary boom in decades was followed by the biggest slump in decades is somehow an irrelevant datum. But this is yet another reprise of arguments of the 1930s. Or even earlier arguments.

  30. Gravatar of ssumner ssumner
    16. April 2012 at 06:39

    123, The TIPS comparison is not a good one. If the demand for TIPS falls the price of TIPS falls. If the demand for NGDP futures declines there is no first order effect on price, as demand for both short and long positions will fall.

    dwb. You said;

    “If policy works through expectations, what should i expect right now? no clue. It’s ironic in SF Fed Williams letter he talked about “uncertainty”- he forgot FOMC policy uncertainty!”

    Exactly.

    Lorenzo, Yes, just like the 1930s.

  31. Gravatar of Major_Freedom Major_Freedom
    16. April 2012 at 07:06

    dwb. You said;

    “If policy works through expectations, what should i expect right now? no clue. It’s ironic in SF Fed Williams letter he talked about “uncertainty”- he forgot FOMC policy uncertainty!”

    Exactly.

    Bingo.

    As a small business owner, I have no idea how the Fed’s policy will affect the prices of either the factor inputs I use, or the output prices of the goods I will sell.

    If only the Fed listened to market monetarists, and began a definite expectations monetary policy program, like NGDP targeting!

    Then things would be better, because then I would still have no idea how the Fed’s policy will affect the prices of either the factor inputs I use, or the output prices of the goods I will sell.

  32. Gravatar of Major_Freedom Major_Freedom
    16. April 2012 at 07:55

    ssumner:

    John:

    You also said:

    “I should add to that the only thing inflation really does is to temporarily spur business activity”

    The problem is that you and MF don’t seem to understand what tight money can do, or even that money has been very tight in recent years.

    Notice how you did not even address John’s point about the temporariness of the effects of inflation, and instead relegated yourself to throwing your hands up in the air and saying “No inflation is worse. WORSE I tell you!”

    Tight money? You don’t understand what tight money can do. Tight money compels investors and business owners to FIX the problems created by past inflation, by finally obeying the orders given by consumers and savers IN FULL. Consumers and savers take back control of the wheel of the economy, who then determine demands everywhere, and that reveals which investments are good and which are bad. If past inflation was high, as it was 2001-2008, then the more painful the corrections will be, but they are necessary and will be made sooner or later.

    The recent boost in aggregate demand 2011-present hasn’t “fixed” the economy. It just stopped the correction process, moved the problems over the Fed’s balance sheet, indebting the Treasury in the process, and is again misleading and coaxing people into “spending”.

    Since you market monetarists have no clue about anything more specific than “aggregate spending”, since they believe inflation affects everything equally, since they’re blind to the problems that are created by inflation even with “stable” aggregate demand, they are therefore blind to housing bubbles, Nasdaq bubbles, student loan bubbles, sovereign debt bubbles, and all other bubbles created by inflation (and “legal” government intervention).

    When the student loan bubble pops, then market monetarists are again going to call for the Fed to print money and give it to the banks, to “buy” their assets, at higher than market prices of course, just like they have been doing with treasuries, MBSs, and the other garbage that would have fetched far less in the open market without a money printer promising to buy said garbage.

    The Fed already owns the Treasury (Fed is now the number one Treasury debt owner), they now own a huge chunk of the mortgages across the country, and when the student loan bubble bursts, they’ll end up owning the future cash flows of college graduates’ incomes too. First step was for Congress to pass a law that students cannot default on their debt. Second step is to buy the student loan debt that isn’t being serviced, from the banks, at higher than market values of course.

    At this rate, the Fed is going to end up owning the entire US economy, intentionally or unintentionally.

    Central bank balance sheets around the world are going parabolic, and blind useful stooges in Fed financed economic departments around the country are like obedient poodles diverting the public’s attention to antiquated “aggregate demand” gobbledygook, as if the seller of fake dog poop should keep making dog poop even if he doesn’t have enough sales revenues to cover his costs, because the Fed will just print money so that his sales are artificially boosted.

    There is zero understanding of the concept of individual economic calculation in market monetarism, which is why we see such hilarious contradiction all the time, such as seeing them wanting the Fed to print money to bail out American businesses against foreign competition, but not Texas or California businesses specifically, because that would be playing favorites. Never mind market monetarism’s explicit call for the Fed to play favorites with the banks, since they get the newly created money first and they get to sell their garbage at above market prices.

    Market monetarists should read Sheila Bair’s rather amusing and yet penetrating article on inflation here:

    http://www.washingtonpost.com/opinions/fix-income-inequality-with-10-million-loans-for-everyone/2012/04/13/gIQATUQAFT_story.html

    And Carolyn Baum’s article here:

    http://www.bloomberg.com/news/2012-04-11/inflation-lurks-as-stealth-tax-on-top-of-form-1040.html

  33. Gravatar of Major_Freedom Major_Freedom
    16. April 2012 at 08:36

    ssumner:

    I realize you define “tight money” the way the Keynesians define it: the Fed is not printing enough money to maintain “demand”, or “NGDP”. But here’s a question I don’t see anyone asking: If NGDP doesn’t merely stabilize, but positively falls should the Fed merely reduces the extent of its inflation, as what occurred 2006-2007, then shouldn’t that tell you that the market, if it had control over money, WANTS to reduce spending compared to what it was prior? If the market wants to reduce spending, then shouldn’t Fed policy accommodate for it by letting NGDP fall, and letting the market take over just how much spending out of cash balances takes place, and thus just how high (or low) aggregate demand gets?

    Suppose I print globs of money and give it to you, the way the Fed does with the banks. My actions would clearly have a positive effect on the real structure of the economy. The real economy will change to accommodate a money printer. Businesses will believe there is a real demand for their goods and services, when in reality there is just money printing financed demand. If I stop printing money and thus stop giving you money, what will happen? If “spending” doesn’t stabilize, but actually falls, then that should tell you something. It should not tell you that I am not printing enough money, but rather it should tell you that there was too much money creation prior, and now people are spending what they want to spend out of their existing cash balances. THAT should be the basis of how investors and consumers behave going forward. Let them decide how much of their current cash to hold for longer, and how much to spend in the present. That will fix all the errors made because of my money printing. I can’t keep printing money to sustain all the errors, because the more I print, the more errors will appear, and the closer we will get to real resource scarcity preventing any further inflation from working. At that point, I choose either hyperinflation or letting the market decide what to do, which is of course deflationary correction, unemployment, and all the problems you ignorantly thought inflation could fix on its own.

    You and Woolsey are clueless as to the direction of action, because your worldviews cannot help but take you there. You believe that if spending out of cash balances falls, or, how you interpret it, if “the demand for money holding rises”, that the Fed should print money, giving it to the banks, such that “spending” remains the same, even if spending out of income is replaced by spending out of debt creation, and cash balances rise.

    This is backwards. People don’t decide to “spend” a hypothetical sum of money and then calculate what their cash balances have to be given their income, after which they sit around like idiots waiting for the Fed to print money if there are any gaps in desired cash holding versus actual cash holding. No, people decide to earn (or borrow) money, which is a choice of holding cash, and then they decide how much to spend out of their cash balances and how much to hold onto for longer.

    If the Fed stops printing money, and people don’t merely stabilize their spending and cash holding, but positively reduce spending, as what occurred post 2008, then that should tell you that the Fed was far too “loose” prior, and should be less loose going forward, not more loose like you’re calling for.

    If the Fed stops printing money, and the banking system’s creation of new credit collapses, such that M3 collapses, as what occurred post 2008, then that should tell you that the Fed was far too “loose” prior, and that the banks should be creating less credit, not more credit, and thus there should be less nominal spending, not the same spending.

    If the Fed stops inflating, then the real economy in control of consumers, investors and savers will finally start to accommodate a non-money printing economy, i.e. an economy of money earners. All the businesses that originally depended on my money printing to even survive, will be exposed as unprofitable and wrongheaded once I stop inflating, because I would be finally giving the control of the economy back into the hands of money earners.

    Only money earners can sustain an economy long term. Money printers cannot. Why not? It’s because:

    Money printers destroy the ability of individual economic actors in a division of labor to economically calculate and rationally allocate SCARCE resources, and turns the economy into an unsustainable gambling casino built on a house of cards, which inevitably results in either inflationary depression or deflationary depression.

    “Stable” aggregate spending growth from a monopoly money printer is NOT a path towards long term economic prosperity and financial security. It is doomed to fail, as it is not a course of action that is integrated into the sphere of individual economic calculation, of private property and voluntary exchange.

  34. Gravatar of 123 123
    16. April 2012 at 08:46

    Scott: “The TIPS comparison is not a good one.”

    In both cases the liquidity problems increase the required return on arbitrage activities, including the arbitrage between your expectations and TIPS/NGDP futures. Ergo, the volatility of AD increases.

  35. Gravatar of D R D R
    16. April 2012 at 08:56

    “If the market wants to reduce spending…”

    This is gibberish. The market doesn’t “want” anything.

  36. Gravatar of Major_Freedom Major_Freedom
    16. April 2012 at 09:04

    dwb:

    “If the market wants to reduce spending…”

    This is gibberish. The market doesn’t “want” anything.

    By “the market” I mean the outcome of individual private property owners producing and exchanging in a division of labor.

    Of course “the market” doesn’t act. It’s a short form to refer to the above, so that I don’t have to keep typing out the long form every time.

  37. Gravatar of D R D R
    16. April 2012 at 09:17

    “By ‘the market’ I mean the outcome of individual private property owners producing and exchanging in a division of labor.”

    So your use of “want” invites the reader to believe that the outcome is desired, when in fact the result could go against the interests of every participant in the market.

  38. Gravatar of dwb dwb
    16. April 2012 at 09:25

    @Major_drama_queen:

    I didn’t direct any comments at you. However, since you asked:
    The Fed already owns the Treasury (Fed is now the number one Treasury debt owner…
    At this rate, the Fed is going to end up owning the entire US economy, intentionally or unintentionally.

    um, no, no, no, no please check your facts.

    There is zero understanding of the concept of individual economic calculation in market monetarism

    you should actually spend some time READING what Scott and other write. you are attacking a straw man.

    If only the Fed listened to market monetarists, and began a definite expectations monetary policy program, like NGDP targeting!

    Then things would be better, because then I would still have no idea how the Fed’s policy will affect the prices of either the factor inputs I use, or the output prices of the goods I will sell.

    exactly – FOMC policy is not supposed to affect relative prices. Thats up to consumers and savers.

    Fed policy is not fooling anybody buying anything they dont want.

    Money printers inflation or deflation destroys the ability of individual economic actors in a division of labor to economically calculate and rationally allocate SCARCE resources

    its important… both deflation AND inflation screw up relative price signals. thats why we stabilize ngdp.

  39. Gravatar of Major_Freedom Major_Freedom
    16. April 2012 at 09:50

    dumb witless bum (dwb):

    I didn’t direct any comments at you.

    I was the one who said “If the market wants to reduce spending”, which you quoted. You said it is gibberish. Since I said it, it’s directed at me.

    Perhaps you can stop drinking for just an hour.

    However, since you asked:

    I didn’t actually, but thanks for presuming anyway.

    “The Fed already owns the Treasury (Fed is now the number one Treasury debt owner…”

    “At this rate, the Fed is going to end up owning the entire US economy, intentionally or unintentionally.”

    um, no, no, no, no please check your facts.

    It is the facts that grounds the above observation. You need to check your facts.

    “There is zero understanding of the concept of individual economic calculation in market monetarism.”

    you should actually spend some time READING what Scott and other write. you are attacking a straw man.

    You should actually READ the lack of any understanding of individual economic calculation in market monetarism. You accuse me of not reading, but that’s false.

    “If only the Fed listened to market monetarists, and began a definite expectations monetary policy program, like NGDP targeting!”

    “Then things would be better, because then I would still have no idea how the Fed’s policy will affect the prices of either the factor inputs I use, or the output prices of the goods I will sell.”

    exactly – FOMC policy is not supposed to affect relative prices. Thats up to consumers and savers.

    First, that “exactly” is just an admission of the utter vacuousness of NGDP targeting. If you admit no individual plans around NGDP, then you must admit NGDP is not an improved monetary policy.

    Second, inflation does affect relative prices, because inflation doesn’t enter everyone’s cash balances at the same time via helicopter drops, it enters the economy at distinct nodes, to specific people, who perform specific economic functions in the division of labor. That means inflation does affect relative prices.

    Third, if your claim that “it’s up to consumers and savers” were honest, instead of being fake, then you would not be calling for the Fed to use inflation to overrule consumer and saver SPENDING and CASH HOLDING preferences either.

    Fed policy is not fooling anybody buying anything they dont want.

    I didn’t say that it fools people into “buying what they don’t want.”

    Fed inflation fools people into investing into what cannot be sustainable in accordance with consumer and saver preferences.

    “Money printers inflation or deflation destroys the ability of individual economic actors in a division of labor to economically calculate and rationally allocate SCARCE resources”

    its important… both deflation AND inflation screw up relative price signals. thats why we stabilize ngdp.

    “Stabilizing” NGDP is actually inflation. It’s not zero inflation/deflation.

    And you’re wrong about deflation. Deflation, provided it is done via the market process, does not screw up relative pricing signals. It is a corrective process that fixes past errors caused by inflation, or what you like to call “stability.”

  40. Gravatar of Major_Freedom Major_Freedom
    16. April 2012 at 09:54

    D R:

    “By ‘the market’ I mean the outcome of individual private property owners producing and exchanging in a division of labor.”

    So your use of “want” invites the reader to believe that the outcome is desired, when in fact the result could go against the interests of every participant in the market.

    That’s impossible. If every individual wanted to increase their purchasing power, through attempting to hold more cash for longer, which then leads to reduced spending and lower prices, then this will be in line with preferences, for purchasing power will be raised, and no violation of individual property rights is necessary.

    Central bank inflation, because it is based on violations of property rights, cannot ever act in accordance with individual preferences.

    Saying that inflation is “desired” when people want higher cash balances in an attempt to increase their purchasing, opens the reader into believing that the outcome of inflation is desired, when in reality the effects of inflation are not desired by individual preferences, but rather the preferences of only a few individuals, against all others.

  41. Gravatar of D R D R
    16. April 2012 at 10:13

    “That’s impossible….”

    Why do you believe in this one outcome alone out of the infinity of possible outcomes?

  42. Gravatar of Major_Freedom Major_Freedom
    16. April 2012 at 10:17

    Why do you believe in this one outcome alone out of the infinity of possible outcomes?

    There isn’t infinity of possible outcomes. I am constraining all the possible outcomes to the market process of individual private property derived from production and voluntary exchange only.

    In this context, it is impossible for everyone to not get what they want, given that every individual gets what they want provided it is constrained to individual private property rights derived from production and exchange.

  43. Gravatar of D R D R
    16. April 2012 at 10:23

    “There isn’t infinity of possible outcomes. I am constraining all the possible outcomes to the market process of individual private property derived from production and voluntary exchange only.”

    You made all kinds of assumptions, but refuse to state them explicitly.

  44. Gravatar of Negation of Ideology Negation of Ideology
    16. April 2012 at 10:24

    Major –

    “If every individual wanted to increase their purchasing power, through attempting to hold more cash for longer, which then leads to reduced spending and lower prices, then this will be in line with preferences, for purchasing power will be raised …”

    I’m surprised at this statement even from you. You seriously believe it’s possible for everyone to raise their purchasing power at the same time? The total purchasing power can never exceed the total amount offered for sale. The only way to increase everyone’s purchasing power is to increase productivity.

  45. Gravatar of dwb dwb
    16. April 2012 at 10:29

    @major_drama_queen

    dumb witless bum (dwb):

    please try much harder. thats not even a 4th grade insult.

    I was the one who said “If the market wants to reduce spending”, which you quoted.

    no, i did not quote you, please check who did (which proves you are not a very careful reader).

    if your claim that “it’s up to consumers and savers” were honest, instead of being fake, then you would not be calling for the Fed to use inflation

    1. The Fed only owns a small portion of outstanding treasury and MBS debt.
    2. you are attacking a false premise here. no one is calling for “inflation.” ideally the Fed would stabilize ngdp growth at zero inflation, and have a small to non-existent balance sheet.

    you said “At this rate, the Fed is going to end up owning the entire US economy, intentionally or unintentionally.”

    More drama than my daughter! Those pink tights are cutting off the circulation to your brain. but you DO look good in them.

  46. Gravatar of 10 Monday PM Reads | The Big Picture 10 Monday PM Reads | The Big Picture
    16. April 2012 at 12:00

    […] Save Wall Street’s Honor (Bloomberg) – A slightly off-center perspective on monetary problems. (The Money Illusion) – Liberals and conservatives don’t just vote differently. They think differently. (Washington […]

  47. Gravatar of Major_Freedom Major_Freedom
    18. April 2012 at 05:32

    dwb:

    @major_drama_queen

    Please try much harder. thats not even a 4th grade insult.

    “I was the one who said “If the market wants to reduce spending”, which you quoted.”

    no, i did not quote you, please check who did (which proves you are not a very careful reader).

    You’re right, it was D R. My bad.

    if your claim that “it’s up to consumers and savers” were honest, instead of being fake, then you would not be calling for the Fed to use inflation

    1. The Fed only owns a small portion of outstanding treasury and MBS debt.

    The Fed is the world’s single largest owner of Treasury debt.

    2. you are attacking a false premise here. no one is calling for “inflation.”

    Every single market monetarist is calling for inflation. Every single Fed supporter is calling for inflation. No one is calling for inflation? You’re out of your mind.

    ideally the Fed would stabilize ngdp growth at zero inflation, and have a small to non-existent balance sheet.

    Ideally according to what? According to who? You? Your role models controlling the printing presses? Don’t make me laugh.

    you said “At this rate, the Fed is going to end up owning the entire US economy, intentionally or unintentionally.”

    More drama than my daughter! Those pink tights are cutting off the circulation to your brain. but you DO look good in them.

    Yes, ignore the trends, go back to sleep, the Fed will take care of you, everything will be fine. Don’t want any downstairs drama, because that is what kept you up at night whilst growing up, giving you nightmares.

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