Structuralist vs. monetary explanations of the Great Recession: What if we had a housing recovery without more NGDP?

Some people argue that the housing crash caused the Great Recession.  Others think it was tight money, which led to a big fall in NGDP.  So what would happen if housing started growing again, contributing positively to RGDP growth?  Market monetarists like me say it wouldn’t help, unless NGDP began rising more rapidly.

I am seeing increasing reports of a housing recovery (here and here) with housing starts up sharply in recent months.  I look forward to seeing the second quarter NGDP and RGDP numbers.  I fear that if the NGDP number is disappointing, then RGDP will also disappoint.  The culprit will be some other sector this time, not housing, and probably not autos.

We’ll find out next week.

Off topic:  Matt Yglesias asked if I agreed that the GDP deflator was a better inflation target than the PCE (or CPI.)  I do.


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61 Responses to “Structuralist vs. monetary explanations of the Great Recession: What if we had a housing recovery without more NGDP?”

  1. Gravatar of Major_Freedom Major_Freedom
    19. July 2012 at 10:43

    So what would happen if housing started growing again, contributing positively to RGDP growth? Market monetarists like me say it wouldn’t help, unless NGDP began rising more rapidly

    Seriously, why won’t it help? Do we spend to spend, or do we spend to produce and consume?

    What if RGDP grew, what if unemployment fell, what if all the major “real” indicators improved, but NGDP remained unchanged? Or fell slightly?

    If Sumner won’t answer, then maybe someone else can?

  2. Gravatar of jdupton jdupton
    19. July 2012 at 10:59

    I think if RGDP grew and NGDP remained unchanged, that would mean deflation, and the Wage/NGDP ratio (which Prof Sumner thinks is key to the business cycle) wouldn’t change. I guess if RGDP grew significantly enough, and inflation stayed steady, that in itself would be enough of an NGDP boost.

  3. Gravatar of Michael Michael
    19. July 2012 at 11:13

    If the added spending on one form of output (housing) is offset by reduced spending on other forms of output, RGDP won’t grow.

    All the major “real” indicators will not improve in the absence of more spending on output.

  4. Gravatar of Jonathan M.F. Catalán Jonathan M.F. Catalán
    19. July 2012 at 11:15

    Are there NGDP statistics for ~1873-1894. If not, that would be an interesting project.

  5. Gravatar of Martin Martin
    19. July 2012 at 11:29

    Scott,

    “I look forward to seeing the second quarter NGDP and RGDP numbers. I fear that if the NGDP number is disappointing, then RGDP will also disappoint. The culprit will be some other sector this time, not housing, and probably not autos.”

    I take it that the assumption driving this conclusion is that nominal wages/prices are/continue to be sticky downward?

  6. Gravatar of dwb dwb
    19. July 2012 at 12:19

    read peter capelli’s book- why good people cant get jobs. its an easy read, i finished it in about an hour at the gym. its filled with details about the state of the labor market it corporate america. i wish there was a single sentence i could disagree with, but some of my personal anecdotes are even more ridiculous that his.

    he totally demolishes the mass structural employment idea better than ive ever seen.

  7. Gravatar of Mathieu Dufresne Mathieu Dufresne
    19. July 2012 at 12:24

    I’m probably wasting my time but nGDP isn’t independant of the change in debt. Again you say that a big drop in nGDP as been caused by tight money, but you define tight money as falling nGDP…

    In fact, the drop in nGDP as been caused by deleveraging, which itself as been caused by the burst of the housing bubble. The important thing to realize is that the change in house prices is driven by the acceleration of mortage debt and nothing can accelerate forever, a bubble has to burst.

    In any case, if you want to compare two theories, you need to understand both and test them against the datas. Your understanding of dynamics and debt seems deficient to me, so I doubt you can understand those concepts straight away, it will take time and an open mind. Maybe you can prove me wrong but I don’t think you will ever get the point. Anyway, as a start, here’s two references you should read carefully.

    http://www.debtdeflation.com/blogs/2012/06/15/submission-to-the-senate-economics-committee-post-gfc-banking-inquiry/

    http://www.debtdeflation.com/blogs/2012/07/03/european-disunion-and-endogenous-money/

  8. Gravatar of jdupton jdupton
    19. July 2012 at 12:48

    Mathieu – I’ve also been trying to reconcile the deleveraging view with the market monetarist view. I think Scott accepts that there is deleveraging. But deleveraging doesn’t have to lead to lower NGDP. Monetary policy can help maintain NGDP growth, even in the face of deleveraging.

    If, on the supply side, we had absolutely zero excess capacity, all the NGDP growth would come as inflation. But we do have excess capacity. So some of the NGDP growth would come as inflation, and some would come as RGDP growth. The Wage/NGDP ratio would come down to a level consistent with full employment. (From a deleveraging perspective, higher incomes could lead to more manageable debt levels. And deleveraging would make people even more willing to work, increasing capacity.)

    At least, that’s my understanding.

  9. Gravatar of Morgan Warstler Morgan Warstler
    19. July 2012 at 12:54

    dwb,

    tech lets people do more and more…

    This means we have more ZMP workers.

    SOOOOOOO…… the problem is STRUCTURAL.

    We need a structural solution, we need to AUCTION the unemployed.

    This gets you workers with ever expanding specific skills at the prices that employers need to pay to make a profit off their labor.

    We shouldn’t hide from using TECH to solve for the problem caused by tech.

  10. Gravatar of Mike Sax Mike Sax
    19. July 2012 at 12:57

    “Seriously, why won’t it help? Do we spend to spend, or do we spend to produce and consume?”

    “What if RGDP grew, what if unemployment fell, what if all the major “real” indicators improved, but NGDP remained unchanged? Or fell slightly?”

    Major, evidently this is the mainstream view-that the goal of stimulus is not to raise output but inflation as typified here by James Bullard. Note I’m quoting him not talking about my own take on it.

    “To say that monetary stabilization policy cannot be e¤ective once the zero lower bound has been encountered is to say that the central bank cannot create in‡ation once this condition is met. In the New Keynesian DSGE models I describe here, this is indeed the case and, in those models, the
    alternative way to create in‡ation is to get output to increase, which in certain circumstances then puts upward pressure on in‡ation. So, the goal is to create more output as a way to get more in‡ation. Higher in‡ation and
    expected in‡ation is useful at the zero lower bound because, with nominal rates at zero, higher in‡ation means lower real rates of return, which by conventional de…nitions is stimulative monetary policy. It is a roundabout way to in‡uence in‡ation expectations, but there you have it”

    http://www.stlouisfed.org/newsroom/speeches/pdf/2012-01-12-death-of-a-theory.pdf

  11. Gravatar of Bill Ellis Bill Ellis
    19. July 2012 at 13:17

    Morgan, I just read your completely uncalled for rude reply to me on another thread.

    I am done with you.
    Good luck in life. A person with your social IQ is gonna need it.

  12. Gravatar of dwb dwb
    19. July 2012 at 13:19

    @morgan,

    partly. an auction would be a big improvement over the current process. not big: massive. if you mean that the structural problem is in part that the search process is broken, i agree. there are things i look for tho that are to quantify (initiative, adaptability, intellectual curiosity). most projects people work on are novel, so the most important “skill” is the ability to figure $hi! out. cant assess that except through a probationary period.

    aggregate demand tho is a big driver. if i have 10 applicants, i can be picky. when i need to move because otherwise i lose sales, then i am willing to be flexible or train. even if you graduate from a good school, with an MBA, you need to be a spreadsheet jockey for a long time. there is an interesting stat in the book about IT: in the 90s most people getting hired had no experience. most “skills” are learned on the job. when demand is low, its hard to build new skills.

  13. Gravatar of marcus nunes marcus nunes
    19. July 2012 at 13:23

    If the fall in house prices and residential investment that began in early 2006 had no measurable impact in NGDP (and RGDP, unemployment, etc.), symetry would indicate that an increase in house starts should not have an impact either.

  14. Gravatar of Don Geddis Don Geddis
    19. July 2012 at 14:24

    MF: Hey look! You’re finally asking questions now (instead of just lecturing from ignorance). Impressive!

    I really should reward you with an answer, but you’ve burned so much credibility in the past, it’s hard to take you seriously…

  15. Gravatar of Daniel Daniel
    19. July 2012 at 14:28

    http://www.bloomberg.com/news/2012-07-19/sales-of-existing-u-s-homes-unexpectedly-decreased-in-june.html
    Probably retail and manufacturing.

  16. Gravatar of Mathieu Dufresne Mathieu Dufresne
    19. July 2012 at 14:30

    jdupton,

    If you manage to increase nGDP with monetary policy, it necessarily need to come from the change in debt. The first option is to drop interest rates, which increase lending but this option is out at the zero lower bound anyway. The second thing the Fed can do is basically to increase banks reserves, but it can’t inject money directly into circulation. The money in circulation is the liabilities of the banks to non-bank public (deposits). In order to increase deposits, banks need to lend more money. Increasing reserves can potentially increase lending by reducing the cost of reserves, therefore allowing banks to offer lower long term interest rates. An announcement of intervention by the Fed could also have an impact on expectations and influence the williness of the public to take on more debt.

    The problem is, the only thing which can make public willing to reach such level of levrage is gambling on rising assets prices. In other words, if monetary policy is to succeed, it can only do so if another bubble takes off.

    Understanding dynamics is important to avoid misinterpreting the datas. You can have a recovery when you’re still deleveraging. The tricky thing is that the change in unemployment is correlated with the acceleration of debt. If you’re deleveraging and the rate of deleveraging slows down, it means the acceleration of debt turns positive (while the change in debt is still negative), which implies that the change in unemployment will turn negative. Howerver, if the recovery is to be maintained, the acceleration of debt needs to stay positive, which means you will start leveraging again after some time.

    That’s a little summary and lot of things would need to be said. However, I’m not the best person to explain the whole thing, I’m only channeling, so you better go to the references I gave if you want to have more details.

  17. Gravatar of Neal Neal
    19. July 2012 at 15:00

    The housing bubble’s financial impact drove down NGDP expectations, which pushed the demand curve in the LF market far left, which led the Fed’s money supply to be far too tight, which depressed actual NGDP, which crushed the economy.

  18. Gravatar of Don Geddis Don Geddis
    19. July 2012 at 18:31

    Mathieu: Why does the Fed need to go through the debt channel? Why can’t it simply buy Treasuries on the open market? Wouldn’t that directly add cash to the economy, using a channel different than bank reserves and lending?

  19. Gravatar of Morgan Warstler Morgan Warstler
    19. July 2012 at 18:39

    dwb,

    A GI with local auction has the added benefit of forcing the WalMarts of the world to pay a premium for a stable workforce.

    So it solves the picky choosy thing off the bat.

    Bill, don’t get into verbal fistfights with guys who are smarter than you.

    I have A PLAN. I take all comers. Mainly because I want to make the plan actually better. You gave it a glimpse and spouted off, I gave you chapter and verse, you acted put out and hurt.

    Mainly because you don’t LIKE what my plan does, but it is sooooo politically favorable, you got nothing. It is the future.

  20. Gravatar of Edward Edward
    19. July 2012 at 20:19

    Morgan,

    When you say auction the unemployed, you mean have a smart entrepeneur come up with a site like facebook or linked-in where prosective employers and employees bid and ask each other like the stock market? If thats the case Morgan, why haven’t you invented it yet and become a millionaire? (I might just steal your idea LOL 😉 Also would your guaranteed income plan be enough to cover the cost of debt, which is the ultimate sticky price, and the high cost of living in some cities?

  21. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. July 2012 at 20:21

    Jonathan M.F. Catalán,
    “Are there NGDP statistics for ~1873-1894. If not, that would be an interesting project.”

    There’s lots of sources, but for historical US specific macro stats I like this source (one stop shopping):

    http://www.measuringworth.com/usgdp/

    Their stats are based on all the most widely accepted current estimates, so they are easily cited.

    I think I see where you may be going with this. Theoretically if productivity growth is fast enough, and labor markets flexible enough, deflation is not a problem. In my personal opinion however, the Panic of 1873 was worse than most people realize, especially in terms of the unbelievably high levels of urban unemployment. And the Panic of 1893 was easily second only to the Great Depression in overall severity.

    But I think I may be in the minority around MMs on this score as I know Beckworth (and Selgin) and Scott disagree with me.

  22. Gravatar of Edward Edward
    19. July 2012 at 20:27

    And Scott, I think its a good idea to cut payroll taxes permanently to lower the NAIRU. 5.5-6% Come on. It’s a friggin disgrace.(By historcial American standards) I hate, hate hate HATE how we keep moving the goalposts how we excuse mediocrity.

    In the 40, 50s and 60s, 6 % unemployment would have been considered catasrophic, 3% was the natural rate back then.
    Speaking of the 50s and 60s, do you think you can do a post rebutting Krugman’s assertions about the post world war 2 period?

  23. Gravatar of Edward Edward
    19. July 2012 at 20:31

    “historical american standards.”

  24. Gravatar of Bill Ellis Bill Ellis
    19. July 2012 at 20:43

    Morgan, I was not trying to get into a verbal fight with you. I was trying to have a discussion.

    Using Phrases like…”you are an idiot” and “You really just talk out your ass” does not demonstrate that you are are smarter than anyone…all it does is reveal you to be a maladjusted little boy.

    You put your auction plan forth as a substitute for our present social welfare system. That is an insane assertion.

    The bulk of our Social welfare system is… SS Medicare and Medicaid…only a complete loon would see auctioning off the labor of the unemployed a substitute.

    I don’t mind exchanging ideas with loonies. But when they are dickheads about it is no fun…I am here for the Pleasure of it.

    So I am putting a fork in ya…

  25. Gravatar of Jonathan M.F. Catalán Jonathan M.F. Catalán
    19. July 2012 at 22:19

    Mark,

    In my personal opinion however, the Panic of 1873 was worse than most people realize, especially in terms of the unbelievably high levels of urban unemployment.

    1873 followed the Greenback period; it was a period of monetery readjustment. But, the historical evidence in favor of the “productivity norm,” or a falling price level with an increase in output, is really between 1873 (maybe 1879, better — although, by the mid 1870s industrial productivity began to rise) and 1894.

  26. Gravatar of Saturos Saturos
    19. July 2012 at 23:56

    Scott, what do you think of charts like these (from Jesse Livermore on Twitter): http://twitter.com/Jesse_Livermore/status/226222001063329793/photo/1

  27. Gravatar of RebelEconomist RebelEconomist
    20. July 2012 at 02:21

    Regarding the best inflation measure, as I was trying to explain in a comment a few posts ago, on a quantity theory / equation of exchange view of the world, the ideal inflation measure should include everything that is traded against money – wages, assets, taxes, the lot. It seems to me that all prices are roughly cointegrated, so if you do target a narrow measure of inflation, and some of the items outside the target get out of line, the resulting stress can be difficult to deal with. This is key to the present crisis. In the US and UK, populist central bankers allowed asset prices to get out of line because they were not formally targeted, resulting in the problem of whether this imbalance will be resolved by allowing asset prices to fall or targeted inflation to rise.

    This is why I think it would be a mistake to target an even narrower measure of inflation like the GDP deflator. It would lead to situations like the central bank trying to turn back a tide of, say, commodity price inflation at the stage where it had driven up wage costs which were beginning to be reflected in retail prices.

    Scott’s answer to such problems is to simply disregard inflation and say that only NGDP growth matters. I do not think that that would prove acceptable in the long run, but in the short run, politicians and the financial industry will cheer him on, in the hope that the stress between asset and consumer prices will be resolved without falling asset prices.

  28. Gravatar of dwb dwb
    20. July 2012 at 04:02

    you mean have a smart entrepeneur come up with a site like facebook or linked-in where prosective employers and employees bid and ask each other like the stock market?

    i think the website itself is probably the easy part: you need something like a combination of ebay, monster, and match.com (the latter to capture the personality/skills aspect many employers want).

    the hard part is selling HR at large firms this will add value (which is tricky since it involves eliminating a good deal of what HR is supposed to be doing!). you almost need to pass a law that forces this on employers. kinda ironic that the government needs to stop in to plan the labor market so that its more like an actual market.

  29. Gravatar of Browsing Catharsis – 07.20.12 « Increasing Marginal Utility Browsing Catharsis – 07.20.12 « Increasing Marginal Utility
    20. July 2012 at 04:06

    […] If housing is recovering and RGDP isn’t, doesn’t that mean the structuralist/ABCT explan…? […]

  30. Gravatar of Bill Ellis Bill Ellis
    20. July 2012 at 06:10

    Scott,
    The element of the Housing crash that caused this depression is financial. The fall in construction is a symptom. An upswing in construction though helpful, wont reverse the depression and should not be expected to reverse it.

    I don’t have to tell you, the housing crash wiped out much of the borrowing and spending power of the consumer. It caused consumers that still have money and credit to pull back on spending and and borrowing… decreasing demand.

    It caused the banks to severely tighten their lending to consumers…decreasing demand.

    Those of us who… “argue that the housing crash caused the Great Recession”… won’t be looking at a reversal in housing starts as an indicator of an end of this depression, we will be looking for improvement in household-debt burdens.

  31. Gravatar of Major_Freedom Major_Freedom
    20. July 2012 at 06:47

    jdupton:

    I think if RGDP grew and NGDP remained unchanged, that would mean deflation, and the Wage/NGDP ratio (which Prof Sumner thinks is key to the business cycle) wouldn’t change. I guess if RGDP grew significantly enough, and inflation stayed steady, that in itself would be enough of an NGDP boost.

    If Wage/NGDP ratio is key to the business cycle, then wouldn’t it be wrong to say that we had a recession because NGDP fell? Wouldn’t one be just as “correct” using this logic, by saying that we had a recession because wage rates didn’t fall? That we have recessions because of all the myriad of “real side” factors that make wage rates more inflexible relative to a standard that we should talk about and make explicit?

    Suppose that a worker’s alternatives were A. Job that pays half of his prior wages, and B. Zero taxpayer financed income, welfare, or insurance?

    Michael:

    If the added spending on one form of output (housing) is offset by reduced spending on other forms of output, RGDP won’t grow.

    Well it depends on what you mean by “REAL” GDP. If you do mean real as in real goods and services, rather than “last year’s” NGDP, which is not a real concept at all but a nominal concept, then real GDP can grow with a shift in spending, for example, people can reduce their consumption spending, and increase their investment spending, which will have the long term result of increasing productivity of consumer goods from what it otherwise would have been.

    The following graph is what I have in mind:

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

    The black line is final consumer goods and services. Vertical axis is supply, horizontal axis is time. The point at which consumer goods initially dips is a decrease in consumer spending and increase in investment. Then, after some time, when the investment becomes ready for consumer goods, the production of consumer goods increases at a rate higher than before the saving.

    All the major “real” indicators will not improve in the absence of more spending on output.

    Well, when you only consider the “real” indicators, and not the REAL indicators, then sure, without inflation, “real” indicators won’t rise.

    Yet only if you view increased spending as a goal, would it make any sense to use the word “improve” to describe it. For me, I want to make my consumption grow, and I can do that by being productive. Thus, the goal of economic activity in my mind is how to “improve” the supply of goods and services.

    Don Geddis:

    MF: Hey look! You’re finally asking questions now (instead of just lecturing from ignorance). Impressive! I really should reward you with an answer, but you’ve burned so much credibility in the past, it’s hard to take you seriously…

    What is this drama queen craziness? You sound like one of my ex-girlfriends. “You were a meanie! Just because you’re nice now, it doesn’t mean I have to pretend that I like you like you. I’m going to not like you like you.”

    Oh, and you haven’t shown where I have “lectured from ignorance”, so I can’t take you seriously.

  32. Gravatar of marcus nunes marcus nunes
    20. July 2012 at 06:48

    @ Saturos
    I commented on the Jesse Livermore Chart:
    http://thefaintofheart.wordpress.com/2012/07/20/an-alternative-to-the-wage-stagnation-debt-explosion-story/

  33. Gravatar of Major_Freedom Major_Freedom
    20. July 2012 at 07:13

    Mark Sadowski:

    Thanks for the link to the GDP data that goes back all the way to 1790! That’s pretty valuable.

    You said:

    “Theoretically if productivity growth is fast enough, and labor markets flexible enough, deflation is not a problem. In my personal opinion however, the Panic of 1873 was worse than most people realize, especially in terms of the unbelievably high levels of urban unemployment. And the Panic of 1893 was easily second only to the Great Depression in overall severity.”

    Here’s John J. Klein:

    “The financial panics of 1873, 1884, 1893, and 1907 were in large part an outgrowth of…reserve pyramiding and excessive deposit creation by reserve city and central reserve city banks. These panics were triggered by the currency drains that took place in periods of relative prosperity when banks were loaned up.” – Money and the Economy, pg 145.

    Banks, particularly the larger ones, were definitely encouraged to expand credit because they would be freed from their contractual obligations by legal suspensions of cash withdrawals if trouble arises. Also, under the new National Banking system, the NY cartel had created a Clearing House which was empowered to issue “clearing house certificates.” These certificates were extra bank reserves created out of thin air to bail out banks during panics. The political mentality of shielding banks from the consequences of their own actions was rife during the 19th century, and it carried into the 20th century with the formation of the Fed, whose notes were modeled after these certificates.

    Every single bank panic of the 19th century was preceded by a prior undue expansion of the money supply, derived ultimately from state power. But for some reason, both “socialist” Keynesians and “free market” Monetarists have come to believe that the 19th century was one of laissez-faire banking.

  34. Gravatar of marcus nunes marcus nunes
    20. July 2012 at 07:34

    @ Mark Sadowski
    On many “panics” using “measuring worths´s data”:
    http://thefaintofheart.wordpress.com/2012/06/15/panics-galore/

  35. Gravatar of Steve Steve
    20. July 2012 at 07:51

    But Scott, don’t you know that we also had a bubble in long-term care insurance? And a structural oversupply of old people?

    “Prudential Financial Inc. (PRU), the second-largest U.S. life insurer, will halt sales of group long- term care coverage as low interest rates pressure returns.”

    http://www.bloomberg.com/news/2012-07-18/prudential-financial-halts-sale-of-group-long-term-care.html?cmpid=yhoo

  36. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. July 2012 at 09:05

    @Jonathan M.F. Catalán,
    I personally think much more work needs to be done on the Panic of 1873. I once estimated potential output for much of the 19th century based on a production function approach. The estimates were not backed up and so are long gone. But my memory is that the amount of slack in the economy didn’t peak until 1878, and it took 3 years of double digit growth to get us back to potential. It’s under recognized as a serious depression because it primarily affected what was then relatively small sector of the economy (urban manufacturing), impacted people without much voice (immigrant labor) and productivity and population growth was so swift that deepening depression occurred even when growth was positive.

    @Major_Freedom,
    “Every single bank panic of the 19th century was preceded by a prior undue expansion of the money supply, derived ultimately from state power.”

    In the 23 years between 1873 and 1896 nominal GDP fell 8 times on an annual basis. That’s the source of the problem.

    “But for some reason, both “socialist” Keynesians and “free market” Monetarists have come to believe that the 19th century was one of laissez-faire banking.”

    Well, I guess the solution to the failures of central planning always involve more central planning. 🙂

    @Marcus,
    Nice post.

  37. Gravatar of Major_Freedom Major_Freedom
    20. July 2012 at 11:22

    Mark A. Sadowski:

    “Every single bank panic of the 19th century was preceded by a prior undue expansion of the money supply, derived ultimately from state power.”

    In the 23 years between 1873 and 1896 nominal GDP fell 8 times on an annual basis. That’s the source of the problem.

    Wrong. NGDP doesn’t fall for no reason. You have to source the decline in spending to prior causes.

    Why are you not considering NGDP falling month over month, or week over week, as a source of the problem? Why does NGDP have to fall over a one year span before it becomes a problem? Suppose NGDP fell for one hour, then continued to rise thereafter. Is that a “problem” that required more Fed inflation for that hour? Suppose you notice a pattern of spending that is a rising and falling every two weeks. Would you say that this “problem” is caused by the Fed not inflating during the periods of falling spending and not deflating during the periods of rising spending? Or would you realize that spending rises and falls every two weeks because of worker paycheck frequency?

    Falling spending is not the problem. The problems, if they are actually problems, are what caused the falling spending. That’s what you’re not looking at.

  38. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. July 2012 at 11:50

    Major_Freedom,
    “NGDP doesn’t fall for no reason. You have to source the decline in spending to prior causes.”

    It really doesn’t matter what caused it. If I kept it from falling there would be no financial panics/depressions.

    “Why are you not considering NGDP falling month over month, or week over week, as a source of the problem? Why does NGDP have to fall over a one year span before it becomes a problem?”

    I’m citing annual data because that’s all that’s available. We don’t have monthly NGDP for 1873 and we don’t have weekly NGDP now.

    “Suppose NGDP fell for one hour, then continued to rise thereafter. Is that a “problem” that required more Fed inflation for that hour? Suppose you notice a pattern of spending that is a rising and falling every two weeks.”

    NGDP variation due to seasonal, weekly, daily or other regular easily anticipated factors are never a problem, nor should they be.

  39. Gravatar of Major_Freedom Major_Freedom
    20. July 2012 at 12:13

    Mark A. Sadowki:

    It really doesn’t matter what caused it.

    Well that belief is why you’re wrong, because such a belief makes it impossible to discern whether or not the solution you are proposing is itself the prior cause.

    If I kept it from falling there would be no financial panics/depressions.

    That’s the error in your thinking, because it is precisely past refusals to let it fall that have caused the problems that later manifested in a fall of NGDP behind your back.

    I’m citing annual data because that’s all that’s available. We don’t have monthly NGDP for 1873 and we don’t have weekly NGDP now.

    I was talking about the theory. In theory, if we did have monthly or weekly or daily or even hourly data, that this would be grounds for the Fed to print money for its friends so that spending never falls in the space of an hour?

    NGDP variation due to seasonal, weekly, daily or other regular easily anticipated factors are never a problem, nor should they be.

    What about voluntary individual decision making in the market? Shouldn’t that never be a problem?

  40. Gravatar of Curious Bystander Curious Bystander
    20. July 2012 at 12:17

    «It really doesn’t matter what caused it. If I kept it from falling there would be no financial panics/depressions.»

    As some commenter already put it here, that’s the same as saying «It is not the fall that kills you but the sudden stop at the end»

    If only somehow we managed to continue falling we’d be doing just fine. /sarcasm

  41. Gravatar of Major_Freedom Major_Freedom
    20. July 2012 at 12:19

    Mark Sadowski:

    NGDP variation due to seasonal, weekly, daily or other regular easily anticipated factors are never a problem, nor should they be.

    Why are daily and weekly changes never a problem, but yearly changes are a problem?

    If NGDP fell for 6 months, is that not a problem? Why? What about 9 months? Yes? No? Why?

    During what period are NGDP changes “not a problem”, and during what period are NGDP changes “a problem”, and what is the economics arguments for why that period and not another period is the cause for “problems”?

    I don’t see any rigorous thinking going on here. I see too much ad hoc post rationalizations to apologize for central banking.

  42. Gravatar of Major_Freedom Major_Freedom
    20. July 2012 at 12:42

    Curious Bystander:

    As some commenter already put it here, that’s the same as saying «It is not the fall that kills you but the sudden stop at the end»

    Good analogy. It does sound incredibly myopic doesn’t it? “It really doesn’t matter what caused it. If I kept it from falling there would be no financial panics/depressions.”

    It’s like he is a weird sort of superhero who doesn’t care if he throws people off cliffs, as long as he is there to rescue them just before they hit the ground.

    If only somehow we managed to continue falling we’d be doing just fine.

    The bottom of this fall is what the “hysterical dogmatists” who cry “hyperinflation!” are, aware or not, talking about, but they are continually mocked by those who think as long as they’re falling for another year, then the mocking is justified.

    I picture inflation as a situation where everyone is falling down a darkened seemingly endless pit.

    So as each day, month, year passes, without hitting the bottom, those who say there is no bottom become emboldened and more self assured, and they advertise this false assurance to themselves by mocking those who question it.

    Of course, when the bottom is finally hit, those who said there is a bottom will be told by the very serious people that they only got “lucky”, that they only hallucinated the bottom, that there was no information along the edges of the pit that could have enabled them to know where the bottom is and thus when the bottom will be reached.

    Keynesians/Monetarists believe there is no bottom because they believe everyone is in a free fall orbit. (Circular Flow of Income)

    Austrians believe there is a bottom because they believe everyone is in a free fall down to Earth. (Hayekian Triangle)

    Keynesians/Monetarists deal with abstract floating concepts like pure mathematicians do. They do not constrain the mental concepts to real world Earthly action. They stay in the mental world (circulating…orbiting…free fall without a bottom).

    Austrians deal with practical concepts like applied mathematicians do. They constrain the mental concepts to real world Earthly action. They bridge the mental and physical world (direct line…velocity…free fall with a bottom).

  43. Gravatar of Curious Bystander Curious Bystander
    20. July 2012 at 13:41

    Major Freedom, just for reference here are the links to the original comments

    https://www.themoneyillusion.com/?p=15389#comment-170174
    https://www.themoneyillusion.com/?p=15389#comment-170188

    And professor Sumner reply? «The Fed determines NGDP»

    A similar dialog would have been: “It weather and the road conditions which limit the car speed», «No it is how much the driver presses the gas pedal»

  44. Gravatar of ssumner ssumner
    22. July 2012 at 07:29

    Jonathan, I don’t know, but NGDP certainly trended upward during the late 1800s.

    Martin, Yes,

    dwb, Good point.

    Mathieu, Thanks for the links.

    jdupton, Yes, that’s what I’m claiming.

    Neal, Yes, the financial crisis might have helped push monetary policy off course, but it was certainly not the only factor

    Marcus Nunes, Exactly.

    Edward, I agree we should do reforms to lower the natural rate of unemployment.

    Saturos. I regard those sorts of graphs with utter contempt. Why not link debt to the rise in oil prices, which occurred about the same time? It makes about as much sense.

    Bill Ellis. I agree that lack of spending is the key problem, which is why I focus on monetary policy.

    Steve, That’s a good one.

    Curious, People can’t fall forever, they’ll eventually hit the ground. NGDP can rise at 5% forever.

  45. Gravatar of flow5 flow5
    22. July 2012 at 07:30

    Roc’s in MVt = roc’s in nominal gDp. As the roc in the proxy for real-gDp collapsed in the 2nd qtr (the roc in MVt), so did real-gDp. The roc in the proxy for inflation didn’t fall much so nominal gDp will fall to the extent that real-gDp did. You don’t need a a ngDp futures market.

    You need economists that know the difference between the supply of money and the supply of loan funds

    know the difference between means-of-payment money and liquid assets

    know the difference between financial intermediaries and money creating institutions

    recognize aggregate monetary demand is measured by monetary flows (MVt) not nominal GDP

    recognize that interest rates are the price of loan-funds, not the price of money

    recognize that the price of money is represented by the various price (indices) level

    realize that inflation is the most important factor determining interest rates, operating as it does through both the demand for and the supply of loan-funds

  46. Gravatar of Curious Bystander Curious Bystander
    22. July 2012 at 14:49

    ssumner: «Curious, People can’t fall forever, they’ll eventually hit the ground. NGDP can rise at 5% forever.»

    Scot, will you treat a broken leg with painkillers? And two broken legs with more painkillers? And two broken legs and two broken arms with even more painkillers? But you will treat every drop in RGDP with more inflation right?

    My point is that the reason why there is a drop in NGDP matters. And your «fix» may stay in the way of real recovery. And then the whole thing will blow in your face. You hardly can have both an 5% NGDP growth and 10% CPI inflation even for few years. «Forever» being totally out of question.

  47. Gravatar of Major_Freedom Major_Freedom
    23. July 2012 at 08:49

    Curious Bystander:

    My point is that the reason why there is a drop in NGDP matters.

    Bingo. This is what is not being addressed at all. Well, actually it is, kind of, by the excuse “the Fed caused the fall.” This is however an argument that really says “The Fed did not positively print enough money to add to the market side determined (decline of) NGDP.” Well, OK, fine, but what caused the market side decline in NGDP? That is what no MM is touching with a ten foot pole, because, I strongly suspect, it leads right back to their own recommended policies as the cause.

  48. Gravatar of Major_Freedom Major_Freedom
    23. July 2012 at 08:52

    ssumner:

    Curious, People can’t fall forever, they’ll eventually hit the ground. NGDP can rise at 5% forever.

    Not if accelerating monetary inflation is needed to maintain 5% NGDP growth. Ask the RBA.

  49. Gravatar of Saturos Saturos
    23. July 2012 at 09:09

    The rate of base money growth is not accelerating in Australia. MF, your hypothesis requires that people continue to desire larger and larger stocks of money relative to income over the long run. What makes you think that would happen?

  50. Gravatar of Major_Freedom Major_Freedom
    23. July 2012 at 09:27

    Saturos:

    The rate of base money growth is not accelerating in Australia.

    I didn’t say base money. I said monetary inflation, which is the aggregate money supply.

    MF, your hypothesis requires that people continue to desire larger and larger stocks of money relative to income over the long run. What makes you think that would happen?

    The same reason people desire to hold more money in the short run: Accumulating real side problems.

  51. Gravatar of Saturos Saturos
    23. July 2012 at 10:10

    Aha! So you admit that we wouldn’t have accelerating NGDP growth, i.e. accelerating price inflation, as that leads to people holding less and less money (the Cagan effect). Gotcha. And real income losses lead people to hold less money as a function of lower income, also pushing up velocity. And that also means you can’t argue that we’ll have fixed NGDP growth, falling real output and rising prices.

    I said base money, because that’s what the Fed actually controls. Unless you’re accusing them of fiddling with reserve requirements, or some kind of regulatory failure.

  52. Gravatar of Saturos Saturos
    23. July 2012 at 10:14

    “I said base money, because that’s what the Fed actually controls.”

    And what the RBA controls. And M2 growth hasn’t been accelerating either, AFAIK.

  53. Gravatar of Major_Freedom Major_Freedom
    23. July 2012 at 10:49

    Saturos:

    Aha! So you admit that we wouldn’t have accelerating NGDP growth, i.e. accelerating price inflation, as that leads to people holding less and less money (the Cagan effect).

    Admit? It isn’t something pertinent to my argument. My argument is that NGDP growth cannot be held 5% indefinitely, because the accelerating money growth will eventually overwhelm the desire to control it. It would be like me having $1 trillion in cash and you owning securities that have a value of $500 billion to me, and then you try to stop me from spending the other $500 billion and thus losing “control” over my spending.

    And real income losses lead people to hold less money as a function of lower income, also pushing up velocity.

    Real income measured by what? Past times? They could still increase over time despite problems accumulating.

    And that also means you can’t argue that we’ll have fixed NGDP growth, falling real output and rising prices.

    I don’t argue that you can have fixed NGDP growth in the long run.

    I said base money, because that’s what the Fed actually controls. Unless you’re accusing them of fiddling with reserve requirements, or some kind of regulatory failure.

    I said aggregate money, which the Fed indirectly controls, and that without such indirect control, continuous credit expansion would be impossible.

    And what the RBA controls. And M2 growth hasn’t been accelerating either, AFAIK.

    M3. The 1990-2008 “Great Australian Moderation” saw accelerating M3, and after a 2 year slowdown, which lead to a 2 year slowdown in NGDP growth, it has again been accelerating from a low of 5% in early 2010, to 10% today.

  54. Gravatar of ssumner ssumner
    24. July 2012 at 03:33

    Curious, You said;

    “You hardly can have both an 5% NGDP growth and 10% CPI inflation even for few years. «Forever» being totally out of question.”

    Why not? Certainly monetary policy can’t prevent RGDP from falling at 5% a year forever. But then that’s not likely to happen anyway.

  55. Gravatar of Curious Bystander Curious Bystander
    24. July 2012 at 12:00

    ssumner: «Why not? Certainly monetary policy can’t prevent RGDP from falling at 5% a year forever. But then that’s not likely to happen anyway.»

    Obviously, because people are going to run away from such a «theoretically sound» currency which keeps losing value at 10% per-year.

  56. Gravatar of ssumner ssumner
    25. July 2012 at 18:19

    Countries have run 30%, 50%, even 70% inflation rates for decades without people running away from the currency.

  57. Gravatar of Curious Bystander Curious Bystander
    26. July 2012 at 13:32

    The is even a word for that phenomenon that does not exist. Dollarization.

  58. Gravatar of ssumner ssumner
    27. July 2012 at 04:25

    Curious, You don’t seem to be able to read–I never said dollarization doesn’t exist. But no country ever dollarized because of 10% inflation. I visited Turkey after they had had decades of 50% inflation, and they weren’t dollarizing. Turkish money was still the currency in use.

  59. Gravatar of Curious Bystander Curious Bystander
    27. July 2012 at 14:04

    Scott, I’m not exactly sure what your argument is. It can be eigher that

    a) There’s not such thing as dollarization in Turkey. (Wrong)
    b) Dollarization is not proof that people are trying to run away from their official devaluing currencies. (Hilarious)

    So which one?

    P.S There was recently a monetary reform in Turkey, which has replaced the old lira with a new lira. One wonder why?

  60. Gravatar of ssumner ssumner
    28. July 2012 at 13:14

    I just found out you don’t know that MV=NGDP. Any explanation I give you will go right over your head. There’s no point.

  61. Gravatar of Curious Bystander Curious Bystander
    28. July 2012 at 14:29

    Fisher laid out a more modern quantity theory of money (i.e., monetarism) than had been done before. He formulated his theory in terms of the equation of exchange, which says that MV = PT, where M equals the stock of money; V equals velocity, or how quickly money circulates in an economy; P equals the price level; and T equals the total volume of transactions. Again, modern economists still draw on this equation, although they usually use the version MV = Py, where y stands for real income.

    Now. Context, context, context.

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