Things Thomas Sargent supposedly said
I am aware that things often get lost in translation. But for what it’s worth, Saturos sent me a Tyler Durden post that cites some Thomas Sargent comments translated from a German interview:
“The countries with declining prices is troubled countries like Greece. They must make their price competitiveness, they have lost in recent years, again. This requires falling wages and rising productivity. As a result, unit labor costs go back, and the company may cut prices. This is not a dangerous deflation, but part of the necessary correction so that these countries are internationally competitive again, “Sargent said in an interview:.
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In addition, there are, according Sargent “historically no reason to fear deflation.”
Ummm, 1929-33.
On the contrary: “We all benefit when technological progress lowers the prices, such as computers,” said Sargent.
Is Greece’s high tech sector booming today?
That central banks pursue an inflation rate of around two percent, according to Sargent is because they consider it their job to “make bad debt good debt”. Of an inflation governments benefited with high debt.
Fisher effect?
Sargent: “Inflation is a major redistribution machine, which reduces the real debt burden for the benefit of creditors and devalued the assets of the creditors.” To prevent this, according to Sargent, the reintroduction of the gold standard would be possible, “I would not necessarily say that it would be the best solution, but it would not be foolish.”
Eurozone inflation is 0.7%. Long term eurozone debt contracts reflect an expectation of 2% inflation.
Owners of Greek debt are getting screwed, but by disinflation contributing to default, not higher than expected inflation.
Please let me know if (as I suspect) Sargent was mistranslated.
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17. November 2013 at 14:14
To me, the translation seems mostly correct.
17. November 2013 at 14:20
There are some mistakes, but none affecting the substance of the text.
17. November 2013 at 14:26
This would be my quick translation of that article:
Countries with falling prices include crisis countries such as Greece. These countries must restore their price competitiveness which they have lost over the past years. To do this requires either reduced wages or increased productivity. Wage unit costs would be thereby reduced and businesses could reduce their prices. This is not dangerous deflation but part of a necessary correction whereby these countries would again become competitive.
Furthermore, according to Sargent, “there is from the historical perspective no reason to fear deflation” To the contrary, “We all profit if technological progress causes prices to be reduced, such as with computers. The fact that Central Banks target an inflation rate of about 2 percent is, according to Sargent, because they see it as their job “to make good debts from bad debts”. Sargent: Inflation is a big redistribution machine that reduces the real value of debt owed by debtors and reduces the wealth of creditors”,
In order to avoid this, one could think about returning to the gold standard. “I would not necessarily say that it would be the best solution, but it also should not be feared. Up until WWI we had the gold standard to prevent central banks and governments from printing unlimited amounts of money. During this time prices fluctuated heavily, but this worked itself out over the years.
I suspect the original was in English so something may have been lost in the translation from English to German. I found the first sentence a bit odd in relation to the second, but that’s what it says. Perhaps the intended meaning was that prices (meaning primarily wages leading to lower production costs) have fallen, and need to fall even more.
17. November 2013 at 14:32
Thanks Vivian, It is certainly true that given Greece’s predicament, and given their decision to stay in the eurozone, they need to deflate.
17. November 2013 at 14:34
Thanks Simon and Jens.
17. November 2013 at 14:34
I recently resumed a long running conversation with a Dutch commenter who is a firm believer in the benefits of deflation. In our most recent exchange (we were talking about the Euro Area) I expanded on something I read dajeeps say that seemingly stopped him cold. I said:
“Assuming that firms have a constant markup above the cost of production, and that wages are subject to downward nominal rigidity, then the only way there can be price deflation without unemployment is if productivity growth exceeds the rate of change in wages.
So “good” deflation results from rapid increases in productivity. “Bad” deflation results from tight monetary policy.
Since good deflation doesn’t come from monetary policy, the central bank doesn’t really have any reason to target it, does it?”
dajeeps’ original comment, which inspired my argument, may be found here:
http://thefaintofheart.wordpress.com/2013/11/14/the-cato-conference-takes-off-and-crashes/#comments
17. November 2013 at 15:13
Ummm, never reason from a price change. Prices falling during the 1929-1933 period is not why it was a rough period.
It is true that we have nothing to fear from price deflation. But that doesn’t mean we should ignore everything and anything that might cause price deflation.
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“It is certainly true that given Greece’s predicament, and given their decision to stay in the eurozone, they need to deflate.”
So that’s why we’re seeing on this blog all those posts about heavily indebted states that remain in the US dollar standard, like California and Hawaii, needing to deflate. Oh wait…
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Sigh…Never reason from a price change.
The argument that inflation leads to redistribution is not mitigated, let alone refuted, by consumer price inflation rates being “only” 0.7% or 2%.
There is no disinflation. You just said Eurozone price inflation is a positive 0.7% now, and that via debt prices expected price inflation is 2%.
This is likely cognitive dissonance. Take the argument that inflation redistributes wealth, which is true, by claiming that 2% price inflation is actually disinflation.
Impressive…
17. November 2013 at 18:09
OK, so the southern tier countries have to deflate to regain competitiveness if they want to stay in the Euro. Isn’t the amount they need to deflate a quantifiable number?
For example, Richardo Hausmann took a crack at a kind of calculation in 2012. http://www.ft.com/intl/cms/s/0/ec138fb2-524c-11e1-9f55-00144feabdc0.html
Doesn’t taking on additional sovereign debt just retard the adjustment process in Greece? Doesn’t it just facilitate not adjusting?
We debated in the previous post the comparative merits of a shock-therapy type of adjustment per the Baltics or some sort of more gradual type for the southern tier. Nevertheless, the gist of Scott’s post would seem to suggest that the end game–the point of successful adjustment for Greece–can be calculated ex-ante. Anything that slows that process is just a waste of money, because you still have to get to that devalued level in the end.
Is that right?
17. November 2013 at 18:13
One of the things I haven’t seen is a quantitative assessment of the process of adjustment of sticky prices and wages in the southern tier.
If we assume that the Euro effectively means that adjustment must all come in wages and prices, then we can actually measure the pace of these adjustments in southern tier countries.
Has anyone done that?
17. November 2013 at 18:15
Mark S.: “Since good deflation doesn’t come from monetary policy, the central bank doesn’t really have any reason to target it, does it?”
A non-sequitur, Mark. Of course the CB cannot target productivity itself; but it can have an NGDP target such as would allow for good deflation. It’s just a question of setting the NGDP growth-rate target at the trend rate of growth of weighted factor input. I made this recommendation and offer reasons in its favor in my 1997 pamphlet. The point of a “productivity norm,” and indeed of any NGDP targeting scheme to some extent, is precisely that CB’s should _refrain_ from attempting to maintain a stable inflation rate in the face of productivity growth-rate innovations.
17. November 2013 at 18:23
Misinterpretation, meet mistranslation.
http://krugman.blogs.nytimes.com/2013/11/16/secular-stagnation-coalmines-bubbles-and-larry-summers/?_r=1&
For the smartest self-anointed smartest guys in the room, they are pushing some pretty stupid, if not disastrous, notions.
17. November 2013 at 18:43
George Selgin:
If we can all agree that a free market in money is ideal, and if we can all agree that given a central bank exists it can “target” any nominal variable it wants, and given that we can all agree that a free market in money would almost certainly be gold-based, then why do you believe that a “productivity norm” or “NGDP” based rule is optimal?
Wouldn’t a rule that “targets” a money supply growth rate that matches the rate of gold production be the most optimal rule there can be, given that a central bank exists?
If not, why not?
17. November 2013 at 18:54
It’s astonishing how Krugman is, in the age of the internet, utterly unaware of the (very old) refutations of his statements.
“Saving hurts the economy – it even hurts investment, thanks to the paradox of thrift.”
No, saving helps the economy, and investment requires saving. The paradox of thrift does not exist. Consumption spending shrinks the economy because it takes wealth out of the total supply of goods, without putting any wealth back in. One is not producing a pizza by eating it.
“But suppose that U.S. corporations, which are currently sitting on a huge hoard of cash…”
Of course corporations are sitting on huge piles of cash. The government, with Krugman’s blessing, printed all of it. Even if a corporation spent its entire cash balance, it would still be the case that “corporations are sitting on huge piles of cash”, for it would immediately become owned by another corporation. Wage payment? It would be immediately deposited into a bank, which would likely be a corporation.
Krugman is moralizing. He HATES it when individuals act in ways beneficial to themselves, without being aggressive towards others, in ways that he does not agree with. He doesn’t care about the long run suffering of people. He wants the government to be a savior in the short term.
18. November 2013 at 01:43
Krugman:
Was that you Geoff?
18. November 2013 at 05:19
Geoff: “If we can all agree that a free market in money is ideal…”
So far as I’m concerned, a free market in money is a means, not an end in itself, and therefore not a policy “ideal.” Conversely, when I speak of a “productivity norm” as an ideal, or state how (in principle) a central bank might approximate it by adhering to a particular NGDP growth rate target, I do not mean to deny that the ideal may better be approximated by a decentralized arrangement.
I say all of these things in _Less Than Zero_, and have said them many times since. So there’s little reason for anyone to suppose that I prefer central bank based alternatives to free-market ones.
18. November 2013 at 07:33
Mark, I agree about the two types of deflation. But I also agree with George. Not sure if you guys disagree, or are talking about different things.
Steven, To some extent the end game also depends on the overall eurozone NGDP growth rate, set by the ECB.
18. November 2013 at 07:39
Well now I am properly scared. If even Sargent can say this stuff…
18. November 2013 at 10:38
Scott,
I agree with George so I disagree with him that we disagree. The nonsequitor was the whole point and the reason why the commenter stopped arguing with me.
18. November 2013 at 20:19
Geoff,
You said: “There is no disinflation. You just said Eurozone price inflation is a positive 0.7% now, and that via debt prices expected price inflation is 2%.
This is likely cognitive dissonance. Take the argument that inflation redistributes wealth, which is true, by claiming that 2% price inflation is actually disinflation.”
You misread Sumner’s argument. He was not citing 0.7% and 2% as two examples of low inflation. He was saying that long-term debt contracts reflect 2% inflation and cannot be changed, but current inflation is 0.7%. As a result, debtors are seeing the real value of the debt go up. He was arguing that, since debt contracts incorporate inflation expectations, below expected inflation hurts debtors as much as above expected inflation hurts creditors. Feel free to argue with that as much as you want, but Sumner was not claiming that 2% inflation is low.
19. November 2013 at 09:58
Mark, That sounds right.
19. November 2013 at 17:17
George Selgin:
I think there is a misunderstanding. I was not insinuating you prefer a central banking system to a free market one. What I am saying is that IF we agree that a free market in money is the ideal (or, in your interpretation, the ideal “means to an end, not an end in itself”, which is of course a valid distinction, but not essential to this particular argument), then isn’t there a central bank “targeting rule” that is even closer to the “ideal” than “productivity norm”? I agree that a productivity norm is very close, but I am asking if you think we can get even closer.
Wouldn’t a rule that targets a rate of growth in the money supply that matches the rate of gold production be even closer, assuming that a free market money would likely be gold based? If not, why not?
Again, let’s leave our political “advocacies” aside. This is an analytical argument I am making.
19. November 2013 at 17:23
J:
If current inflation is 0.7%, but we can infer future inflation, via bond prices, of 2%, then my actual argument, which I don’t think you addressed, is WHERE is this alleged “disinflation”?
Your interpretation of what Sumner said:
“He was saying that long-term debt contracts reflect 2% inflation and cannot be changed, but current inflation is 0.7%. As a result, debtors are seeing the real value of the debt go up. He was arguing that, since debt contracts incorporate inflation expectations, below expected inflation hurts debtors as much as above expected inflation hurts creditors.”
is not what I am disagreeing with. I am disagreeing with the claim that there is “disinflation”. Disinflation means below zero inflation.
Or are we going to call any country with below Sumner desired level inflation “disinflation”? I am not joking here, I am being serious.