“This is a policy and not an expedient.”

Here’s Noah Millman discussing NGDP targeting:

A variety of much more knowledgeable commentators than I have been making the case for some time that the primary cause of our lingering economic difficulties is that the Fed has been too tight with money. Scott Sumner is probably the best exponent of this view, and of the view that a change in the Fed’s policy framework is necessary to address this problem effectively for both the short and long term (if the Fed targeted NGDP rather than following some version of the Taylor rule, he argues, the policy responses during both the Great Recession and the Great Inflation of the 1970s would have been more correct), and he’s won support from both the left and the right for his views – which makes sense because, from the left’s perspective, he’s making an argument for higher inflation and for placing a higher priority on reducing unemployment versus protecting the interests of asset-holders, while from the right’s perspective he’s articulating a policy alternative that could actually address our economic problems without increasing spending or the scope of involvement of the Federal Government in the economy (as a Keynesian fiscal policy would be likely to do).

But the implicit assumption behind a call to shift to NGDP targeting is that we know what the long-term growth potential of the economy is. But what if we don’t?

He has this exactly backwards.  Yes, we do not know the potential output level.  But that’s exactly why we should replace the Taylor Rule (which requires such knowledge) with NGDP targeting, which does not.

Millman’s essay is entitled “Is our economy too broken for the Fed to fix it?”  In a recent post I argued that the Fed should not try to “fix problems.”  It should aim for steady 5% NGDP growth, level targeting, regardless of whether inflation is negative 20% or positive 20%.  The Fed shouldn’t even be estimating potential output, it’s job is to control nominal aggregates like NGDP.

Because I’ve often criticized Fed policy in recent years, I think many readers assume I view the Fed as a sort of toolkit that can fix problems.  That was Fed policy during the Great Inflation, and it of course ended up doing more harm than good.  Here’s Franklin Roosevelt in October 1933:

Some people are putting the cart before the horse. They want a permanent revaluation of the dollar first. It is the Government’s policy to restore the price level first. I would not know, and no one else could tell, just what the permanent valuation of the dollar will be. To guess at a permanent gold valuation now would certainly require later changes caused by later facts.

When we have restored the price level, we shall seek to establish and maintain a dollar which will not change its purchasing and debt-paying power during the succeeding generation. I said that in my message to the American delegation in London last July. And I say it now once more.

Because of conditions in this country and because of events beyond our control in other parts of the world, it becomes increasingly important to develop and apply the further measures which may be necessary from time to time to control the gold value of our own dollar at home.

Our dollar is now altogether too greatly influenced by the accidents of international trade, by the internal policies of other Nations and by political disturbance in other continents. Therefore the United States must. take firmly in its own hands the control of the gold value of our dollar. This is necessary in order to prevent dollar disturbances from swinging us away from our ultimate goal, namely, the continued recovery of our commodity prices.

As a further effective means to this end, I am going to establish a Government market for gold in the United States. Therefore, under the clearly defined authority of existing law, I am authorizing the Reconstruction Finance Corporation to buy gold newly mined in the United States at prices to be determined from time to time after consultation with the Secretary of the Treasury and the President. Whenever necessary to the end in view, we shall also buy or sell gold in the world market.

My aim in taking this step is to establish and maintain continuous control. This is a policy and not an expedient.

In the end FDR did not achieve his goal, partly because of bad advice from his staff.  But at least he understood the proper role of monetary policy—level target a nominal aggregate that you believe will promote macroeconomic stability.  (Of course I prefer NGDP to prices.)

Stable money does not magically eliminate real shocks to the economy, there will still be periods of “stagflation.”  Rather it prevents the monetary authority from making those problems even worse.

Arnold Kling suggests that many Keynesians and monetarists don’t understand that monetary policy is not a panacea:

Another monetarist, Scott Sumner, argues that the worst monetary policy deviations came not before the crisis but afterward. In his view, the issue is less the Fed’s earlier looseness and more the Fed’s excessive tightness in 2008 and ever since. .  .  .

Neither stubborn Keynesians nor stubborn monetarists see a need to take into account financial markets or structural unemployment. Instead, they take the view that any desired macroeconomic outcome can be achieved with the right fiscal and monetary policy approach.

He’s right that I don’t want to take structural factors and financial markets into account when setting monetary policy (except to the extent financial markets signal expected NGDP growth.)  I also oppose basing monetary policy on recent asteroid collisions on Jupiter.  There’s no need be defensive about about this seemingly blinkered approach to monetary policy.  The burden of proof is on those who claim that monetary policy should look at variables other than NGDP growth expectations.  The burden of proof is on those who think the Fed was correct in worrying about stock prices in 1929 despite low and stable NGDP growth.  Or who believe the Fed was correct in trying to estimate potential output in the 1970s even as NGDP showed policy wildly off course.

But Arnold is wrong in claiming that we think “any desired macroeconomic outcome can be achieved” via monetary policy (or fiscal policy.)  Real shocks will continue to cause real problems.  If an asteriod destroys 1/2 of the US, the Fed should keep NGDP (per capita) growth right on target for the other half.
I don’t have time to comment on everything I read during my recent trip, so I’ll let Tim Duy respond to Felix Salmon’s claim that debt can impact potential output:

My additional criticisms of Salmon approach is that is seems primarily a demand side story to a supply-side question. Presumably, all of the productive resources (or nearly all of them, allowing for some hysteresis effects) still exist.  The debt is just plumbing in the background that helps support the demand for those resources.  So Salmon’s story just collapses down to an aggregate demand shortfall that really has nothing to do with potential output.

BTW, I don’t deny that one can construct stories where debt indirectly affects the supply-side of the economy (although I’m not persuaded by those stories), but Salmon doesn’t even try to do that.  The reader of his column is apparently supposed to follow his logic without any explanation.  I’d guess that (with the exception of Tyler Cowen) almost all the readers who nod their heads in approval when reading Salmon don’t even know that his argument makes no sense without a supply-side transmission mechanism.

HT: Marcus Nunes


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130 Responses to ““This is a policy and not an expedient.””

  1. Gravatar of Tommy Dorsett Tommy Dorsett
    22. March 2012 at 07:50

    Scott — Did Milton Friedman want to *level target* the money stock, or simply growth-rate target?

  2. Gravatar of Joe Joe
    22. March 2012 at 07:51

    Scott,
    It seems clear that an NGDP level targeting regime would respond well to demand shocks. It doesn’t seem as intuitive when it comes to supply shocks. Have you written anything on that that you can point me to?

    Thanks!

  3. Gravatar of Alex Godofsky Alex Godofsky
    22. March 2012 at 08:13

    Joe, under NGDP level targeting supply shocks ahow up as inflation.

  4. Gravatar of Morgan Warstler Morgan Warstler
    22. March 2012 at 08:15

    Scott this dances around the fact that you didn’t pull 5% from your ass.

    You took 3% RGDP and added 2% CPI and got 5%.

    You made an explicit assumption about the growth potential of economy.

    Meanwhile, woolsey (and me) took and assumption of less than 3% RGDP and said “well, just in case it is less than historical, let’s assume NO INFLATION”

    The INTERESTING thing is that under woolsey’s plan it is more obvious to all involved, what happens when RGDP is over 3% or inflation is over 0%

    Same thing happens under your plan, but under woolsey’s the question is more obvious, since it seems more likely.

    The answer is lots of pissing on booms.

    This is why I’m write that 3% NGDPLT is just more like the gold standard than 5% NGDPLT.

    Indeed, Kudlow would prefer 3% over 5% for a specific, if not ideological reason.

    Why is so hard to get you to admit that there’s lots of embedded assumptions and agendas in the # chosen?

  5. Gravatar of dwb dwb
    22. March 2012 at 08:25

    I’d guess that (with the exception of Tyler Cowen) almost all the readers who nod their heads in approval when reading Salmon don’t even know that his argument makes no sense without a supply-side transmission mechanism.

    no i think its even worse that that: this gets back to the whole savings vs. investment issue. we call equity an asset but debt is bad … ugh.

    the pile of debt (plus equity) simply reflects the pile of capital we have built up over time.

    The fact that the inverse of debt/gdp (=gdp/debt) is going down over time merely reflects: 1)declining marginal product of capital; and 2) we need an ever- bigger pile of capital for the baby boomers. {you can debate technology effects but this graph does not even come close to ascertaining the growth residual}

    There is clearly some sort of tax (supply-side) effect from favoring equity vs debt finance but in the end its all… capital.

    Its sad, because I think a version of Tobin’s general equilibrium derivation and growth theory is still taught in macro.

    the recent “wiggles” merely reflect the fact that the returns to the existing pile of capital were low (fall in AD) so until returns rose (either through depreciation, falling prices, or higher AD,there was no incetive to build).

    the fact that is seems like an entire generation of economists cannot get the link between “debt” “equity” “capital” “savings” and “investment” is really … argh!

  6. Gravatar of dwb dwb
    22. March 2012 at 08:28

    … PS, calculate the “service” on the total debt as a fraction of gdp, its a big yawner. say you need a 4% real return on that pile of debt, er, capital. its <15% of gdp. gee, i wonder if there is a relationship between "profits" and returns accruing to debt+equity, er, capital?

  7. Gravatar of Greg Ransom Greg Ransom
    22. March 2012 at 08:32

    Why not 10% NGDP growth?

    “It should aim for steady 5% NGDP growth.”

  8. Gravatar of Greg Ransom Greg Ransom
    22. March 2012 at 08:35

    Price level targeting does NOT guarantee macroeconomic stability.

    See _Monetary Theory and the Trade Cycle_ and _Prices and Production_, by F. A. Hayek, etc.

  9. Gravatar of Major_Freedom Major_Freedom
    22. March 2012 at 08:37

    ssumner:

    Yes, we do not know the potential output level. But that’s exactly why we should replace the Taylor Rule (which requires such knowledge) with NGDP targeting, which does not.

    The whole justification for 5% NGDP, instead of 2% or 25%, is based on an estimate that acts as an expectation of future output. It is based on an estimated 3% real growth combined with 2% price inflation!

    You may believe that an NGDP targeting policy going forward is not making any estimates of future output or prices, but you would be ignoring the fact that basing a future policy on past historical data of output and prices, is STILL a policy that estimates future output and price trends!

    The inference you are making, probably unintentionally, is that future output and price trends will match past output and price trends. That is why you are calling for a 5% NGDP target GOING FORWARD, as opposed to 15%, or 10%. You are implicitly estimating future real output as 3% and future price inflation as 2%. It is a naive extrapolation of past data into the future, where it definitely becomes an estimate for future output and prices.

    Therefore, the notion that NGDP targeting does require estimates of future potential output, or prices, is false.

    The Fed shouldn’t even be estimating potential output, it’s job is to control nominal aggregates like NGDP.

    Then why are you doing just that in order to come up with a 5% number instead of another number? You are calling for a 5% precisely because you are ESTIMATING future real gdp and price inflation to be consistent with past real gdp and price inflation. You’re estimating real GDP to be 3% and price inflation to be 2%. That is why you are calling for a future 5% target.

    Maybe you have no idea what the implications of your worldview are, and you only lie to yourself by pretending that the 5% NGDP number is somehow completely independent from all estimations. But that would of course make the 5% NGDP number COMPLETELY ARBITRARY.

    What if some other market monetarist called for a 20% NGDP target? What would your response be? If it is ANYTHING to do with “20% would be too much given historical output and price inflation”, then right away you are making an estimate of future output and price inflation! You would be saying that you don’t ESTIMATE future output to be such that a 20% NGDP is warranted.

    Because I’ve often criticized Fed policy in recent years, I think many readers assume I view the Fed as a sort of toolkit that can fix problems.

    I can’t speak for others, but for me, who doesn’t believe the myth that cash holding is a “problem” that needs “fixing” by the Fed, know that your advocacy is in fact for the Fed to be toolkit fixer, who is supposed to “solve” the “problem” of cash holding changes whenever they arise, to print more when the “problem” increases, and print less when the “problem” subsides.

    It’s no different in terms of “fixing problems” than the Fed printing money to “solve the problem” of price deflation.

    You want the Fed to focus on the “problem” of changes in cash holding, and thus changes in nominal spending, and to fix this “problem” whenever it arises. The red herring of you not caring if prices rise by 20% or fall by 20%, is just to distract away from the fact that you want the Fed to be a permanent handy man toolkit fixer, to swoop in and solve the “problem” of cash holding changes.

  10. Gravatar of Greg Ransom Greg Ransom
    22. March 2012 at 08:39

    Which was supplied in the early and mid 2000s by former BIS chief economist William White and a number of current BIS economists:

    “Salmon don’t even know that his argument makes no sense without a supply-side transmission mechanism.”

    http://www.bis.org/list/bispapers/index.htm

  11. Gravatar of Greg Ransom Greg Ransom
    22. March 2012 at 08:44

    Disequilibrium in the finance and in the time structure of investment can produce “real shocks” — “elephant in the room ” phenomena which your theory demands you to pretend does not exist.

    “Real shocks will continue to cause real problems.”

  12. Gravatar of Greg Ransom Greg Ransom
    22. March 2012 at 08:49

    William White and his BIS staff constructed one of these “stories” in the early and mid 2000s which fairly accurately foretold exactly what happened.

    “I don’t deny that one can construct stories where debt indirectly affects the supply-side of the economy.”

    Alan Greenspan wouldn’t even look White in the eye when White presented his “story” before Fed bankers at Jackson Hole.

  13. Gravatar of Bill Woolsey Bill Woolsey
    22. March 2012 at 09:05

    It is better to use 3% than 5%. At some point, the argument that we were at 5% during the Great Moderation is going to be pointless.

    Yes, a disinflation when we are in the middle of a banking crisis is a bad idea.

    A disinflation when we are way below trend is a bad idea.

    But if the economy really does recover over the next few years, then promoting this new regime with a 3% growth rate is probably a good idea.

    As you know, what I support is an increase in nominal GDP along the lines of the Reagan/Volcker recovery, and then shifting to the 3% growth rate. But before long (I still hope,) the economy will recover, and we will be arguing about a better regime so we do better next time.

  14. Gravatar of dwb dwb
    22. March 2012 at 09:13

    @Greg
    which W. White paper are you referring to? The link takes me to all of them.

    Sure you can “tell a story” where there is disequilibrium, real rates of return are screwed up, and capital gets misallocated (most non-govt debt is investment-related, not current consumption). that is not a “debt” story that is a disequilibrium story. To make it a “debt” story you have to create a story how debt and equity finance specifically are mispriced. Since the period in question is 1950-present, its a tough story to tell.

  15. Gravatar of dwb dwb
    22. March 2012 at 09:19

    @Bill Woolsey
    It is better to use 3% than 5%.

    why 3%

  16. Gravatar of Bill Woolsey Bill Woolsey
    22. March 2012 at 09:21

    Most market monetarists favor a stable growth path for nominal GDP. I support 3% because I expect it to generate stable prices on average. Still, we emphasize that it won’t provide stable prices or constant inflation all the time. Adverse supply shocks would generate temporary inflation (higehr inflation) and a higher price level (growoth path of prices..) Favorable supply shocks would generate deflation (or disinflation) and a lower price level (or growth path of prices.)

    If the supply shocks are temporary, then the effects on the price level and inflation are reversed. The price level rises and then later falls. Or, the price level falls and then rises.

    Now, if the growth rate of potential output slows or speeds up for a long period of time, including permanently, then there will be mild inflation or deflation. (With 5%, it is slightly higher or lower inflation than 2%.) We understand this and consider it the least bad option.

    We are dead set againt having monetary policy stablize the price level, growth path of prices, or the inflation rate in the face of adverse supply shocks. We don’t think it is important to make sure that inflation stays zero or 2% if productivity speeds up or slows down for extended periods of time.

    Keeping spending on output on a stable growth path is the least bad macroecinomic environment. What happens to the price level or inflation in the short term, or the rate of inflation generated in the long term is not all that important.

    For example, I don’t think a 2% growth path (and the 1% trend deflation) would be bad. I don’t think a 4% growth path, with a trend 1% inflation is all that bad.

    The reason for 5% is that it is close to the actual trend.

    Sumner (unfortunately,) is adding the 2% inflation favored by the central bankers to the 3% trend of real GDP growth to get 5%. If it weren’t for the fact that the trend during the Great Moderation was 5.4%, I would have no use for this approach, but as it is, there was a strong argument for having the Fed stay on that growth path in 2008 and return to it in 2009.

    But at some point, I think we have to recognize that central bankers are never going to like nominal GDP targeting and “helping” them with their 2% target for inflation on average won’t do any good.

    If you want to be on the Fed team, you have to come up with arguments why it makes sense for them to periodically adjust short term interest rates subject to flexible restrictions on inflation. Not letting inflation get out of control. Of course, they also need to make sure that unemployment doesn’t get out of control either.

    Telling them to keep nominal GDP on a target growth path is not going to be popular with central banks. How interested where they in keeping the quantity of money growing at a slow, stable rate?

  17. Gravatar of Greg Ransom Greg Ransom
    22. March 2012 at 09:30

    dwb, read this:

    http://hayekcenter.org/?p=2954

    and follow the links found here re William White:

    http://hayekcenter.org/?p=1688

    “Sure you can “tell a story” where there is disequilibrium, real rates of return are screwed up, and capital gets misallocated (most non-govt debt is investment-related, not current consumption). that is not a “debt” story that is a disequilibrium story.”

    The “debt” story is at the heart of this disequlibrium story — and always was in Hayek’s work, see _Monetary Theory and the Trade Cycle_ and _Prices and Production_.

  18. Gravatar of Greg Ransom Greg Ransom
    22. March 2012 at 09:36

    dwb, go here and scroll down to the early and mid 2000s.

    http://www.bis.org/search/?q=hayek&mp=any&_st=false&c=50&sb=1

    Search engines are your friend.

  19. Gravatar of Greg Ransom Greg Ransom
    22. March 2012 at 09:38

    Here are some of William White’s papers:

    http://www.bis.org/search/?q=hayek+william+white&mp=all&_st=false&c=25&sb=1

  20. Gravatar of Greg Ransom Greg Ransom
    22. March 2012 at 09:42

    Here are some by William White specifically on financial, monetary and macroeconomic stability:

    http://www.bis.org/search/?q=hayek+william+white+monetary+financial+stability&mp=all&_st=false&c=25&sb=1

  21. Gravatar of Max Max
    22. March 2012 at 09:51

    Bill, if the implicit inflation target is too low then you can run into the zero bound.

    If the zero bound is eliminated, then aiming for 0% inflation (long term) is probably best.

    And actually, it’s not that difficult to overcome the zero bound. You just have to stop allowing people to convert base money into currency. Currency then becomes bond-like, redeemable for base money, but not itself base money.

  22. Gravatar of Benjamin Cole Benjamin Cole
    22. March 2012 at 10:11

    Woolsey—I enjoy your commentary very munch, but a question:

    How do we even measure prices? As I am sure you know, some contend the CPI overstates inflation. Businesses and consumers constantly migrate to better deals in a rapidly evolving array of goods and services. (I can take 1000 digital pix and send by e-mail to Thailand immediately. To do that with old-fashioned film and air-freight would have cost thousands of dollars just a few years back).

    Measuring prices is necessarily subjective and inaccurate. Certainly it is inaccurate within ranges we have now. In other words, at official 1.4 percent inflation, we may actually be in deflation.

    I would rather err on the side of growth and endure moderate inflation (if we are even sure we have inflation) than to pursue price stability and lose real growth.

    Again, I am not sure what is the benefit of stable prices (if we could even measure such). We are speaking about an artificial nominal index of prices.

    The literature suggests benefits of stable prices vs. moderate inflation are meagre, and you run the risk of losing economic growth.

  23. Gravatar of Joe Joe
    22. March 2012 at 10:16

    Alex Godofsky,
    Thanks. I understand that it will show up as inflation. When I say that it is less intuitive, what I mean is that in response to a reduction in demand, the NGDP target naturally absorbs the reduction in real GDP growth, and turns it into inflation, reducing real wages and providing stimulus to return the economy to trend.

    In response to a reduction in supply, say a severe oil price shock, level targeting would seem to accelerate the contraction, perhaps even imposing negative RGDP growth for a time. In this case, aren’t we stifling the very inflation that would help real wages adjust smoothly to the new supply curve?

    Forgive me if I’m not expressing this well. I’ve only just started thinking about it, so my thoughts on it aren’t all that clear yet.

  24. Gravatar of dwb dwb
    22. March 2012 at 10:30

    @Bill Woolsey
    But at some point, I think we have to recognize that central bankers are never going to like nominal GDP targeting and “helping” them with their 2% target for inflation on average won’t do any good.

    I strongly disagree with that. I think it has been well-received. The real issue is that there are some practical hurdles (key: no forward looking indicators like CME NGDP futures or reliable monthly GDP numbers). Those need to be in place and have a decent tracking history before a bank will switch.

    Also, I dont think there has really been 2% “inflation” in the trend nominal gdp (2% in a statistic is not 2% actual inflation). Inflation statistics overstate actual “inflation” is only a question of how much.

  25. Gravatar of Major_Freedom Major_Freedom
    22. March 2012 at 10:33

    ssumner:

    The burden of proof is on those who claim that monetary policy should look at variables other than NGDP growth expectations.

    Why not precious metal (gold/silver) supply growth expectations?

    If you say you don’t care about deflation, output, or unemployment in an NGDP targeting world, then you don’t have to care about prices, output, or employment in a gold backed Fed note world either! We’ll have the added bonus of being safe from the ravages if inflation financed wars, bailouts, declines in purchasing power, and all other inflation shenanigans.

  26. Gravatar of Benjamin Cole Benjamin Cole
    22. March 2012 at 10:35

    BTW, John Cochrane (Stanford) has just blogged that he is in Japan, and he sees proof that fiscal deficits do not work. He does not even mention monetary policy.

    Every time I think we Market Monetarists are making headway…..

  27. Gravatar of Bill Woolsey Bill Woolsey
    22. March 2012 at 10:44

    Max:

    With low nominal GDP growth, deflation occurs when real GDP growth is high. I don’t want to say that it is inconceivable that real GDP growth would be high (and expected to be high) and equilibrium real interest rates would be low, but I doubt it would be a problem.

    When anticipated real growth is low (and so real interest are likely low,) the expected deflation rate would be lower (or the inflation rate higher.)

    Targeting interest rates is a bad idea anyway, so what happens is that govermnent-issued zero interest currency is going to require that the central bank by lots of assets, perhaps longer term and riskier ones. If this becomes a problem–keeping nominal GDP on target requires that the central bank have an excessively large balance sheet that imposes too much risk on the taxpayer, then the answer is privatizing hand-to-hand currency. Then the government guaranteed assets can have negative yields if necessary.

    Having the government monopolize hand to hand currency had have inflation all the time (and so letting government borrow at a negative rate,) is no answer to the problem of the equilibirum rate on government guarnteed debt sometimes turns negative.

  28. Gravatar of Major_Freedom Major_Freedom
    22. March 2012 at 10:51

    Bill Woolsey:

    When anticipated real growth is low (and so real interest are likely low,) the expected deflation rate would be lower (or the inflation rate higher.)

    Real growth is not a component of interest rates. Interest rates are a function of the difference between two money demands, demand for factors of production and demand for output (profits).

    Real growth can be very high or very low, without any difference in interest rates, as long as the difference in demands remain the same.

    The productivity theory of interest is fallacious.

  29. Gravatar of dwb dwb
    22. March 2012 at 10:53

    @Benjamin Cole

    Measuring prices is necessarily subjective and inaccurate. Certainly it is inaccurate within ranges we have now. In other words, at official 1.4 percent inflation, we may actually be in deflation.

    good job btw on Pethokoukis.

    From 1988 to 2012 2% inflation would imply a 60% increase in the price level.

    Its very hard to with an actual concrete example of 60% increase. Milk, eggs, gasoline – sure. Home prices? well median home prices went up ~36% but size (sq ft) went up 20% using census data, for only a 12% increase.

    How about a 1988 Ford Taurus (MSRP 11,280, bought for $10k). it had a 106″ wheelbase, 26/21 mpg, 90 HP 2.5L engine.

    The comparable model today is the Focus (106″ wheelbase, 36/26 2.0 L 160 HP engine – today’s Taurus actually is bigger than the 1988 one), which is 16K (MSRP 19k). Thats a 60% increase *except* that gas is $4, so the 1988 one will cost 2500/year more in gas. So over 5 years the true cost is only 12% different, and i have not even started accouting for airbags, comfort, etc. …

    All i am saying is that when you start doing examples, 2% in an inflation statistic is not even close to 2% inflation!!

    btw,i got this idea from Ed Dolan and the wishbook web post a few weeks ago. great idea!

  30. Gravatar of Bill Woolsey Bill Woolsey
    22. March 2012 at 10:55

    Ben:

    I don’t think that the problem is shifting the growth path of nominal GDP. I will grant that shifting the growth rate requires adjustment, but I don’t think having a faster growth rate generates more growth.

    I don’t think deflation of prices of final goods and services interferes with growth.

    I think shifting to a lower growth path of nominal GDP does interfere with real growth.

    I don’t favor targeting any kind of inflation, but if I was thinking about prices, it would be the GDP deflator and not the CPI.

    I think focusing on inflation as a goal of monetary policy is a mistake.

    Now, if you think that the 3% trend growth in real output has been understated for years because the GDP deflator is calculated wrong, and that real GDP was growing 4%, then argue that. Yes, I would say that if that were true, a trend growth path of nominal GDP would be better. But I don’t think there would be much harm if it was 3% and the true inflation rate was -1%.

  31. Gravatar of Major_Freedom Major_Freedom
    22. March 2012 at 10:57

    Benjamin Cole:

    John Cochrane (Stanford) has just blogged that he is in Japan, and he sees proof that fiscal deficits do not work. He does not even mention monetary policy.

    Off topic, but the Japanese “lost decades” is a myth.

    Using GDP per capita (PPP), Japan has grown consistently since at least 1980.

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

    Those who look at “traditional” metrics like prices, GDP, etc, are missing the forest for the trees.

  32. Gravatar of Major_Freedom Major_Freedom
    22. March 2012 at 11:03

    Bill Woolsey:

    I think shifting to a lower growth path of nominal GDP does interfere with real growth.

    What if consumers WANT to consume less in the present and more in the future, by positively reducing their consumption and increasing their cash balances?

    Shouldn’t the lower growth path of nominal GDP, and any reduction in real current output that exists alongside of it, be a reflection of an efficient economy?

  33. Gravatar of Majorajam Majorajam
    22. March 2012 at 11:08

    Dear, dear. The transmission mechanism is the easy part. Commercial relationships sustained by escalating amounts of specious claims, and that are inherently unsustainable, always result in massive waste. They lead inexorably to greater quantities of debt, which require greater quantities of guarantees to intermediate. So we traverse from one ‘high quality creditor’ to the next; banks to government agencies, to insurance companies, and now to the last ones standing- the sovereign.

    And here we sit, with on the one hand a bunch of countries out there, making things, and on the other, another country buying all these chotchkies, while cultivating an expertise on fashioning IOUs and marketing the imported bits of plastic kitsch, and we’ve gotta wonder how unsustainable debt dynamics might affect our ability to make ‘stuff’ (presumably, ‘stuff’ that people of means are actually interested in buying).

    It’s 2012. I never thought this level of ignorance would survive 2008. And yet, here we are.

  34. Gravatar of Alex Godofsky Alex Godofsky
    22. March 2012 at 11:46

    Major_Freedom:

    “What if consumers WANT to consume less in the present and more in the future, by positively reducing their consumption and increasing their cash balances?”

    Because doing so in the aggregate is impossible. Trading aggregate present consumption for aggregate future consumption purely through stockpiling currency can’t be done. You can only exchange aggregate present consumption for aggregate future consumption through investment, i.e. spending money on actual capital.

  35. Gravatar of Major_Freedom Major_Freedom
    22. March 2012 at 11:57

    Alex Godofsky:

    Because doing so in the aggregate is impossible. Trading aggregate present consumption for aggregate future consumption purely through stockpiling currency can’t be done. You can only exchange aggregate present consumption for aggregate future consumption through investment, i.e. spending money on actual capital.

    Everyone can reduce their consumption spending and hold their investment spending unchanged. Total cash balances of course won’t change, but the amount of cash people keep on hand before they spend it on consumption, that can change. Instead of people holding onto cash for a week before they consume with it, say, they instead hold onto cash for a year before they consume with it, say. They can do this while holding investment spending unchanged over time.

    If they do this, then the relative profit in consumer goods production will fall compared to profit in capital goods. That will shift capital away from consumer goods into capital goods, and turn the economy into a more capital intensive one, with less current real output, and eventual higher future real output.

  36. Gravatar of Morgan Warstler Morgan Warstler
    22. March 2012 at 12:41

    Man it would be great to have Scott and Bill really suss out the differences between 3 and 5%.

  37. Gravatar of Major_Freedom Major_Freedom
    22. March 2012 at 12:57

    Morgan:

    Man it would be great to have Scott and Bill really suss out the differences between 3 and 5%.

    As with all those who are at root philosophically socialist thinkers, differences over issues such as this are ultimately decided on the basis of guns. If the state’s central bank wants X%, and the state uses force to maintain the fiat money system, then X% wins.

    Another socialist minded person who wanted X+x%, but couldn’t take control over the state, or influence the state in his way, well, his argument “loses”.

    They probably don’t even realize that 5% is just as subjective a number as 3%. But they nevertheless insist on believing economic reality “speaks” to them a specific “objective” number, kind of like the Pythagoreans thought the number 2 had unlucky powers, the number 3 the first true number, the number 4 to be the most “perfect” number, and the number 10 to be the most sacred of all numbers.

    100,000 years from now, historians are going to look at folks like Sumner and other monetarists and rank them in along with the other quantophrenia “ancients”.

  38. Gravatar of Benjamin Cole Benjamin Cole
    22. March 2012 at 13:28

    Major F-

    You are right–Japan hasn’t had a lost decade, it has has lost two decades.

    Since 1992, industrial production in Japan has fallen 20 percent. It has doubled in the USA.

    Real wages are down in Japan in the same period, while up slightly in the USA.

    Equites are off 75 percent in japan since 1992, and property down 80 percent.

    How would you like to take losses like that? And when would you start investing again, especially if prices and property kept going down? In your lifetime?

    Tight money (especially after a real estate bust) is just plain stupid. It does not work. BTW, Milton Friedman, Alan Meltzer, Ben Bernanke, and John Taylor all advised Japan to go to QE hot and heavy and print a lot of money. I mean, the Bank of Japan has suffocated their economy, so obviously even right-winger have advised they get monetarily aggressive.

    Even a mature economy like the USA, rent with political divisions and federal social programs and a huge parasitic military complex, radically outperformed Japan from 1992 to present.

  39. Gravatar of Shane Shane
    22. March 2012 at 13:39

    Duy’s argument about asset bubbles being a mechanism for bringing AD back into balance is quite compelling. Is there any literature on the relationship between asset bubbles, so-called, and a negative savings rate? Could bubbles be “rational” if they reflect a glut of savings flowing back into consumption, and the remaining capital stock thus increasing in value?

  40. Gravatar of Eric G Eric G
    22. March 2012 at 15:48

    I have 2 questions:

    Would it still be good policy to target NGDP even if inflation were to 20% or a drop of -20%?

    What would the Fed actually have to do to target NGDP? What are their means, i.e. buying bonds,

  41. Gravatar of Morgan Warstler Morgan Warstler
    22. March 2012 at 16:17

    MF,

    I think I’ve been clear about this before…

    Sumner’s NGDP is a step towards the Digital Austrian future you speak of.

    Eventually, there will be a private digital currency infinitely divisible that main feature is that they don’t make more of it.

    And everyone will adopt it.

    BEFORE THEN, the immediate attainable goal is to weaken the Fed and the Federal Gvt. – Scott’s plan does so in very tricky ways.

    That’s not really arguable.

    Indeed, it fools both liberals and yourself – it is very, very tricky.

    I myself am an anarcho-capitalist, who stopped being an idealist @1994, so I don’t really care what tactics are deployed to ruin Democrats and roll back the handouts to voters.

    It won’t take forever for corporations to be truly global (and free), and it won’t take forever to get a kick ass digital currency.

    Steps in that direction are healthy.

  42. Gravatar of Morgan Warstler Morgan Warstler
    22. March 2012 at 21:16

    Sumner, I dare you to not want a cell phone:

    http://tacocopter.com/

  43. Gravatar of dtoh dtoh
    23. March 2012 at 00:54

    Quick questions for Bill and Scott.

    1. If you target 5 instead of 3. What percent of the difference will be price (inflation) and what will be volume (RGDP)?

    2. If you go from 5 to 7, is it the same percent?

    3. Is there some NGDP target number beyond which you get zero or negative growth in RGDP?

  44. Gravatar of Bill Woolsey Bill Woolsey
    23. March 2012 at 03:38

    I “care” out human well being. I think that employment, real output, and unemployment are all related to that. And so, I care about them.

    But I don’t think that a monetary authority should be trying to stablize any of those things. I don’t think the monetary authority should be trying to determine the correct level of those things and manipulate the quantity of money to move them to the proper level. In other words, I think having the output gap in the central bank’s reaction function is a bad idea.

    Inflation, on the other hand, is less of a concern on the one hand, but more closely related to the task of a monetary authority, or more generally, to the role of a monetary regime. A monetary regime must target, or more generally, determine, some nominal value, and the price level is a plausible target.

    But I think the price level (or inflation) is a less desirable taret than the growth path of nominal spending on output. It is a less desirable nominal value for a monetary regime to determine than the growth path of spending on output.

    Given a monetary regime that determines the growth path of nominal expenditure on output, such as a monetary authority that targets a growth path of nominal GDP, then the price level is no longer targeted. I don’t think the monetary authority should be manipulating the quantity of money depending on what happens to inflation. I don’t think inflation should be included in the central bank’s reaction function.

    I judge a monetary regime based on how well it allows the real quantity of money to adjust to the real demand to hold money. I think that the based way to do this is for the nominal quantity of money to adjust to changes in the nominal quantity of money. But the nominal demand for money depends on what nominal value is being determined by the monetary regime. it has to be something, and a stable growth path of spending on output is the least bad option.

    How steep is that growth path? I think that is of less importance, but I prefer on that keeps nominal incomes growing with the trend productive capacity of the economy. Usually, nominal income should grow with real income. This would keep the price level for final output constant on average. It does not keep consumer prices steady.

    But I think keeping nominal spending on output growing on a constant growth path is much more important that keeping nominal income growing with real income. Having final output prices (and consumer prices) change is a better signal of changes in real income due to changes in some particular market. And it is no worse for persistent changes in the growth rate of productivity. If a permanent slowdown of the growth rate of potential output resulted in slightly higher inflation, then it would be OK. And the same with more rapid growth in protential output leading to permanently lower inflation (or mild deflation.)

    On the other hand, sharp changes in productive capacity, and especially changes in the supply of particular goods, are better signalled by changes in particular prices, without worrying at all about how they impact some average of prices, or even, if there is little change in relative prices, a sharp change in the price level (or growth path of prices,) is better than trying to force nominal incomes to change and keep the price level steady.

    I think interest rates should also change to coordinate saving and investment. If sudden sharp changes in interest rates occur, then that should be fine. It is not the role of a monetary regime (or a monetary authority) to stabilize interest rates. Does that mean I don’t care about interest rates? Not really. Like any market price, they have a job to do, they need to coordinate.

    If you understand this approach, I think you can understand in what sense a market monetary “does not care” about inflation or real output. We know and understand that if nominal spending on output stays on a stable growth path, then there will be changes in real output, employment, unemployment, the price level, the inflation rate (and interest rates.) It is just that we don’t think that a monetary authority should do anything about them.

  45. Gravatar of Bill Woolsey Bill Woolsey
    23. March 2012 at 04:25

    Dtoh:

    I think it is none.

    The difference between 5% and 3% is 2% trend inflation.

    And the same for 5% and 7%. 4% rather than 2% trend inflation.

    And if we went to 2% rather than 5% nominal GDP growth, it would be 1% deflation rather than 2% inflation.

    I think that trying to base the financial system on government issued hand to hand currency starts running into problems with any trend growth rate for nominal GDP less than zero. For example -2 percent would be really problematic. But with a cashless payments system all that would happen is that some interest rates would negative.

    Now, I don’t really believe in super-neutrality.

    But the growth rates probably wouldn’t be much different at all, instead there would be some slight difference in the level–growth path. I think the impact is ambiguous–forces pushing both ways, and the net effect small.

    If you start talking about 100% inflation, it would be hard to conceive of much in the way of positive effects, and mabye the negative effects would start to add up.

    Real world examples of high inflation aren’t based on rapid and steady growth targets for nominal GDP. And they are often full of price ceilings, including on nominal interest rates. And so, all those things have bad consequences.

    And perhaps they are no accident.

    In my view, the only thing 5% has going for it is that the trend from 1984 to 2008 was 5.4%.

    The benefit of 3% is long run price level stability and nominal incomes rising at trend real incomes.

    I think it is a much better starting point for a new monetary regime. That is especially true when we have to fight claims that we are inflationists.

    I support 10% nominal GDP growth for a year, then 3% forever. But I expect the economy will recover, and once that happens, then I will just advoate the new regime with a 3% growth rate.

    I think the huge increase in the price level since the Fed was founded is good club to use against it.

    I think that the mainstream conservatives plan 2% inflation rate, is a good club to use against them.

    That this rule allowed spending on output to fall then take 5 years to recover and so we had a horrible recession is another useful club.

    I don’t believe inflation is ever good. But I also don’t think that it is sensible to beat one’s head againt popular anti-inflation prejudice.

    Any notion the monetary regime should generate inflation, but that it should keep it from getting too high or too low, is the wrong way to do it.

    We need a monetary regime that doesn’t generate inflation. Supply shocks generate inflation (and deflation.) Those aren’t the monetary authorities job. The monetary authority can’t produce more oil. Persistent productivity slowdowns cause persistent mild inflation. Trying to speed productivity up is not the monetary authority’s job. Improve the supply side policies.

    The notion the monetary regime should engineer persient inflation so that those who borrow with government guarantees (the government itself and FDIC insured banks) can do so at negative real interest rates, or employers can cut real wages on the sly, with the workers not being any wiser, are not attractive arguments to me.

    That the monetary authority should adjust the quantity of money to the amount people want to hold, and that spending on output should grow at the long run trend of productive capacity sound sensible.

    In my view, central bank practice depends on a fraud. People think that inflation is a force of nature and the central bank is fighting hard against it, keeping it down to only 2%. And the economy is generating all of this unemployment, and the central bank is fighting hard to get it lower.

    In reality, the trend inflation rate is entirely the monetary authorities fault. When the monetary authority fails to keep the quantity of money growing with the demand to hold it, the resulting decreases in output and increases in the unemployment rate are the monetary authorities fault.

    Of course, some changes in unemployment and real output are not the monetary authorities fault. And while it is possible to stabilize prices despite changes in the prices of particular goods, or to offset the effects of shifts of output, that usually does more harm that good.

  46. Gravatar of Major_Freedom Major_Freedom
    23. March 2012 at 05:09

    Benjamin Cole:

    You are right-Japan hasn’t had a lost decade, it has has lost two decades.

    Read what I said again. I said decades with an “s.”

    The data I posted falsifies the conjecture that they experienced two lost decades.

    Since 1992, industrial production in Japan has fallen 20 percent. It has doubled in the USA.

    Industrial production is not the only productive activity there is. You are ignoring services.

    Japan’s industrial production index, from Jan 1992 to just before the financial crisis, went from 89 to 111. The 2008 crisis saw it collapse to below 70. It has since risen to 87.

    Real wages are down in Japan in the same period, while up slightly in the USA.

    No that’s false. Real wages went up in Japan throughout the 1990s and 2000s, albeit slowly.

    Equites are off 75 percent in japan since 1992, and property down 80 percent.

    Nominally, yes. But nominal changes are obviously not as important as real changes.

    Property is down 80%? Clearly that can’t mean 80% of Japanese territory floated out into sea. It just means the nominal prices are way down.

    How would you like to take losses like that?

    What losses? You haven’t shown any REAL losses.

    And when would you start investing again, especially if prices and property kept going down? In your lifetime?

    Nominal investment does not have to keep rising every year. Economic growth can occur on a foundation of the same nominal investment each year, and falling prices due to productivity gains, which Japan has clearly experienced.

    Tight money (especially after a real estate bust) is just plain stupid. It does not work.

    The data falsifies that conjecture.

    BTW, Milton Friedman, Alan Meltzer, Ben Bernanke, and John Taylor all advised Japan to go to QE hot and heavy and print a lot of money.

    They were all wrong.

    I mean, the Bank of Japan has suffocated their economy, so obviously even right-winger have advised they get monetarily aggressive.

    They have not “suffocated” their economy. You’re just presupposing your own theory to be true. It’s not true.

    Even a mature economy like the USA, rent with political divisions and federal social programs and a huge parasitic military complex, radically outperformed Japan from 1992 to present.

    Who cares. The US outperformed many other countries as well, even those that had “loose” money.

    Japan’s GDP per capita (PPP) is right in line with other OECD countries:

    http://i.imgur.com/diUI3.png

    Japan outperformed a number of countries with “loose” money.

    Your position is just not tenable. You are letting your false “tight money” theory distort your interpretation of the data.

  47. Gravatar of Morgan Warstler Morgan Warstler
    23. March 2012 at 05:40

    “In my view, central bank practice depends on a fraud. People think that inflation is a force of nature and the central bank is fighting hard against it, keeping it down to only 2%. And the economy is generating all of this unemployment, and the central bank is fighting hard to get it lower.”

    If we hooked Sumner up to an fMRI machine, this is what he believes too.

  48. Gravatar of Bonnie Bonnie
    23. March 2012 at 05:44

    Bullard of the St. Louis Fed says the US and Germany have “Ultra-easy [monetary] policies.”

    Fed’s Bullard Sees Price Threat From G-7 Delaying Tighter Policy

    http://www.bloomberg.com/news/2012-03-23/fed-s-bullard-sees-price-threat-from-g-7-delaying-tighter-policy.html

    “”Once inflation gets out of control, it takes a long, long time to fix it,” Bullard said in a Bloomberg Television interview in Hong Kong today. “Ultra-easy” policies across the Group of Seven nations, which include the U.S. and Germany, may be retained for too long, he said.”

  49. Gravatar of Major_Freedom Major_Freedom
    23. March 2012 at 06:11

    Morgan:

    Sumner’s NGDP is a step towards the Digital Austrian future you speak of. Eventually, there will be a private digital currency infinitely divisible that main feature is that they don’t make more of it. And everyone will adopt it. BEFORE THEN, the immediate attainable goal is to weaken the Fed and the Federal Gvt. – Scott’s plan does so in very tricky ways. That’s not really arguable. Indeed, it fools both liberals and yourself – it is very, very tricky. I myself am an anarcho-capitalist, who stopped being an idealist @1994, so I don’t really care what tactics are deployed to ruin Democrats and roll back the handouts to voters. It won’t take forever for corporations to be truly global (and free), and it won’t take forever to get a kick ass digital currency. Steps in that direction are healthy.

    I wasn’t speaking of a digital Austrian future. Austrians, by the way, hold that money has to be an economic good that satisfies certain criteria, homogeneity, durability, divisibility, and relatively highly valued per unit of physical measure. Comparing all commodities, precious metals beats digital bits and bytes for the 4th criteria, and is consistent with the first 3, so precious metals will win out over digital bits, in a free market that is. The mindset of most of the world’s “economists” and intellectuals however, especially when it comes to banking (the overwhelming majority of “economists” in the world are communists when it comes to banking), we may have a digital currency, controlled by the state, or world state. That’s the ultimate goal of some of the international bankers, at least as reported by Aaron Russo before he died.

    As for this conspiracy theory you’re putting on my desk, that those who advocate for NGDP targeting are really a secret reverse-Fabian cabal who want to gradually abolish central banking, is I must say very entertaining. But it is more rightly considered a positively Fabian policy, in that it it can only ever get us to – what market monetarists believe to be – “perfectly efficient”…CENTRAL BANKING. NGDP targeting, because it presupposes the existence of central banks, cannot ever be a framework to abolish central banks. It can only stand by and sit while central banks either abolish themselves by way of destroying their respective currencies, or yammer on about central banks not printing enough. There is no direct connection between NGDP monetary theory and abolishing central banks. In other words, if central banks are going to be abolished, it won’t be because of NGDP theory “secretly” fulfilling an Utopian goal.

    Bill Woolsey:

    I “care” out human well being. I think that employment, real output, and unemployment are all related to that. And so, I care about them.

    So if unemployment rises to double digits, if output falls, if price inflation goes from 20% to -20%, then as long as NGDP is rising at 3% per year (3 is indeed your magical lucky number, as opposed to Sumner’s magical number 5, isn’t it?), then you will not say the central bank should change its policy in any way? It should maintain 3% through thick and thin?

    But I don’t think that a monetary authority should be trying to stablize any of those things. I don’t think the monetary authority should be trying to determine the correct level of those things and manipulate the quantity of money to move them to the proper level. In other words, I think having the output gap in the central bank’s reaction function is a bad idea.

    Of course, you instead think that a monetary authority should be trying to stabilize cash balances vis a vis spending. You think the monetary authority should be trying to determine the correct level of cash holding vis a vis spending and manipulate the quantity of money to move them to the proper level. In other words, you think having the “spending gap” in the central bank’s reaction function is a good idea.

    You’re just replacing one religion for another. “Don’t listen to THOSE priests! Listen to THIS priest instead!”

  50. Gravatar of W. Peden W. Peden
    23. March 2012 at 06:13

    Bill Woolsey,

    Well put. Are your objections to George Selgin’s productivity norm based on the costs of trend deflation?

  51. Gravatar of ssumner ssumner
    23. March 2012 at 07:28

    Tommy, I think he favored level targeting.

    Joe, Google my paper at National Affairs. NGDP is especially good when there are supply shocks. For demand shocks it’s the same as inflation targeting.

    Morgan, No, I simply noticed that 5% was the actual trend over recent decades.

    dwb, Good point.

    Greg, High NGDP growth leads to higher real taxes on capital.

    Why does White think debt will make people want to work less.

    MF, No, real growth plays no role in coming up with the 5% figure.

    Bill, Maybe, but it’s a moot point unless the Fed adopts NGDPLT. If they do, then 3% is fine. If they don’t we should aim for 7% like Australia.

    Ben, My hunch is that Cochrane doesn’t even think money is tight.

    Majorajam, Why does this make people want to work less?

    Shane, I don’t follow your question. How can savings flow into consumption? Saving and consumption are opposites–money saved is not consumed.

    Eric G.

    1. Yes

    2. They’d do two things. Commit to level targeting (by far the most important). And second, supply as much base money as the public wants to hold when NGDP growth expectations are right on target.

    dtoh, Obviously no one knows, and it depends on all sorts of factors like wage stickiness at zero percent and MTRs on capital income. You’d want the NGDP growth rate that maximizes RGDP. If we do level targeting that’s probably around 3%, if not it’s probably around 7%.

    Bonnie, That’s too bad.

  52. Gravatar of bill woolsey bill woolsey
    23. March 2012 at 07:55

    Major Freedom:

    Yes. 3% through thick and thin.

    If real output falls 20% and the price level rises 20%, I would not favor either raising nominal GDP (to raise demand for output in the futile hope this would raise real output,) or reducing nominal GDP (to reduce demand for output, and reverse the inflation. This is possible, but undesirable.)

    I favor a monetary regime that adjusts the quantity of money to the amount demanded. That does not involve “stabilizing” cash balances. It changes them with the demand to hold them.

    I want a monetary regime that avoids changes in spending on output due to shortages or surpluses of money. I want a monetary regime that doesn’t require changes in the price level to correct shortages or surpluses of money.

    I want a monetary regime that maintains monetary equilibirum and avoids monetary disequilibrium.

    If there are no supply shocks, then this stabilizes the price level too. While it depends on the exact nature of the supply shock, stablizing the price level when one occurs involves generating monetary disequilibrium.

  53. Gravatar of bill woolsey bill woolsey
    23. March 2012 at 08:02

    I think the productivity norm would be fine, as long as we are talking about nominal GDP growing at the trend growth rate of resource growth. I don’t think targeting deflation at the growth rate of total factor productivity is realistic. So, you basically take the trend growth rate of real GDP, subtract off the trend growth rate of total factor productivity, and that is the growth rate for the target growth path of nominal GDP. The trend deflation rate would be equal to the growth rate of total factor productivity.

    I think this would be fine. I don’t think it is any better than a growth rate of nominal GDP at the trend growth rate of potential output.

    George has sometimes argued that it does make a difference, and that the extra growth is distortionary. I don’t know where he is on that now.

  54. Gravatar of Negation of Ideology Negation of Ideology
    23. March 2012 at 08:42

    Shouldn’t population growth enter into this? It seems to me the target should be NGDP per adult, level targeting at 2%. (That would correspond to 3% growth assuming pop growth is about 1%) I know we only take a census every 10 years, but I can’t imagine that estimating the number of people over 18 is any more difficult than estimating GDP.

    Then if there’s an increase in immigration you’d get an immediate increase in trend NDGP, as you should. And if there’s a baby boom, you’d get an increase in NDGP in 18 years. If those people are less productive than average, you’d have a slight inflation (measured by PCE), and if they are more productive, you’d get a slight benign deflation.

  55. Gravatar of bill woolsey bill woolsey
    23. March 2012 at 09:10

    Negation of Liberty:

    I wouldn’t want to use 18, necessarily.

    http://research.stlouisfed.org/fred2/series/CNP16OV?cid=104

  56. Gravatar of Greg Ransom Greg Ransom
    23. March 2012 at 09:14

    ?????

    Scott writes,

    “Why does White think debt will make people want to work less.”

  57. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. March 2012 at 09:19

    Well, Selgin isn’t exactly impressed with Bernancke’s lecture (or he got up on the wrong side of the bed);

    http://www.freebanking.org/2012/03/21/anti-bernanke/

    ‘The theory is the one according to which a rumor spreads to the effect that some bank or banks may be in trouble, which is supposedly enough to trigger a “contagion” of fear that has everyone scrambling for their dough. Bernanke refers listeners to Frank Capra’s movie “It’s a Wonderful Life,” as though it offered some sort of ground for taking the theory seriously, though admittedly he might have done worse by referring them to Diamond and Dybvig’s (1983) even more factitious journal article. Either way, the impression left is one that ought to make any thinking person wonder how any bank ever managed to last for more than a few hours in those awful pre-deposit insurance days. That quite a few banks, and especially ones that could diversify through branching, did considerably better than that is of course a problem for the theory, though one Bernanke never mentions. (Neither, for that matter, do many monetary economists, most of whom seem to judge theories, not according to how well they stand up to the facts, but according to how many papers you can spin off from them.) In particular, he never mentions the fact that Canada had no bank failures at all during the 1930s, despite having had no central bank until 1935, and no deposit insurance until many decades later.’

  58. Gravatar of Negation of Ideology Negation of Ideology
    23. March 2012 at 09:50

    Bill –

    “Negation of Liberty:

    I wouldn’t want to use 18, necessarily. ”

    I might have to think of a new name! But seriously, it seems to me we use 18 in our country as the age when people are legally considered adults, voting citizens. I’m not sure why you’d want to use the Civilian Noninstitutional Population. People in prison still factor into the economy. If we legalized drugs and let a ton of people out of prison wouldn’t that just mean a shift of GDP from state prisons to private spending, meaning NGDP shouldn’t change? And I can understand excluding military stationed overseas, but if they are stationed here, their spending is part of GDP.

    Anyway, I recognize that these details are relatively minor, in the weeds stuff (but still interesting, to me anyway) – I’d be very happy with your general approach – or Scott Sumner’s obviously.

  59. Gravatar of W. Peden W. Peden
    23. March 2012 at 09:59

    In a large country with dramatic demographic changes (like China or India) presumably per capita targeting WOULD make a big difference.

  60. Gravatar of bill woolsey bill woolsey
    23. March 2012 at 11:01

    You are mistaken about prisons. If people get out, this raises the civilian noninstitutional population, and if GDP per civilian noninstitutional population member is targeting, then the target for nominal GDP rises.

    Of course, if we have prison industries, that doesn’t work too well.

    The military aspects of that statistic are problematical too. The soldier’s salary count as part of nominal GDP.

    You moblize lots of soldiers, so nominal GDP per civilian population rises. Returning it to target causes a contraction.

    But I really don’t think it makes all that much difference.

  61. Gravatar of Benjamin Cole Benjamin Cole
    23. March 2012 at 11:14

    Major F-

    http://thinkprogress.org/yglesias/2011/08/25/304564/falling-real-wages-in-japan/?mobile=nc

    This link says there are falling real wages in Japan, and for a long, long time.

  62. Gravatar of Major_Freedom Major_Freedom
    23. March 2012 at 11:15

    ssumner:

    MF, No, real growth plays no role in coming up with the 5% figure.

    NGDP = RGDP + inflation

    You’re mistaken. Real GDP is a measure of real growth.

  63. Gravatar of Major_Freedom Major_Freedom
    23. March 2012 at 11:19

    Benjamin Cole:

    This link says there are falling real wages in Japan, and for a long, long time.

    That link only goes back to Oct 2006, which of course would paint Japan in an unfavorable light, considering that was soon before the bank/financial crisis.

    This study…

    http://www.imf.org/external/pubs/ft/wp/2009/wp0997.pdf

    …goes back to 1996, and shows real wages have grown from an index of 100 (normalized) in 1996, to an index of 107 just before the financial crisis.

    Think progress

  64. Gravatar of Major_Freedom Major_Freedom
    23. March 2012 at 11:26

    Bill Woolsey:

    Yes. 3% through thick and thin.

    Then why not gold through thick and thin? Why not the CURRENT monetary regime through thick and thin? If you’re OK with ANY outcome, then why not the current outcome that leads you to wanting monetary policy to change?

    You’re position is not consistent. If you’re find with any level of employment, output, and inflation, then why aren’t you fine with the current regime’s outcomes for employment, output, and inflation?

    I favor a monetary regime that adjusts the quantity of money to the amount demanded. That does not involve “stabilizing” cash balances. It changes them with the demand to hold them.

    It is the same thing. Controlling spending by changing cash balances is the same thing as controlling cash balances by changing spending. They are two sides of the same coin.

    I want a monetary regime that avoids changes in spending on output due to shortages or surpluses of money.

    So you want the Fed to micromanage people’s cash holding periods whenever they “last too long”.

    I want a monetary regime that doesn’t require changes in the price level to correct shortages or surpluses of money.

    You want a monetary policy that does require changes in cash balances to “correct” the “incorrect” periods of time that people hold onto their money before they spend it.

    I want a monetary regime that maintains monetary equilibirum and avoids monetary disequilibrium.

    You want a monetary regime that maintains temporal spending and disrupts temporal monetary preferences.

    If there are no supply shocks, then this stabilizes the price level too. While it depends on the exact nature of the supply shock, stablizing the price level when one occurs involves generating monetary disequilibrium.

    I thought you said stable prices are irrelevant.

  65. Gravatar of RebelEconomist RebelEconomist
    23. March 2012 at 11:29

    Why 3 or 4% not 5%? As I wrote a few days ago in response to Scott’s post on the UK, because you want (I hope) to avoid getting NGDP targeting adopted for the opportunistic reason that it gives a short run easing of monetary policy to relax some of the economic strains that have been allowed to develop, such as excessive asset prices, debt, and real wages.

    A lot of commentators on economic blogs have silly ideas about central bankers being anti-inflation zealots. Remember that most of the influential ones are often career academics or central bankers in their 40 and 50s and as such sometimes have mortgages and, in the US, 401K stock portfolios. If anything, they probably personally lose from uncompromising suppression of inflation. They also know that voting monetary policy officials are generally subject to approval by politicians, so they have career reasons not be, as Mervyn King put it, “inflation nutters” (eg note that the dovish David Miles was reappointed as an “external” MPC member whereas the hawkish Andrew Sentance was martyred). One thing that we should have learned from the failure of inflation targeting in Britain is that central bankers cannot be relied upon to naturally act as counsel for the prosecution when it comes to monetary policy – they need to be cornered like rats!

  66. Gravatar of Majorajam Majorajam
    23. March 2012 at 12:12

    I wonder Scott, are estimates of potential GDP affected when estimates of the stock of human and physical capital are decimated? And while we’re on this drift, is beggar thy neighbor a good strategy for dealing with a global output gap? And speaking of which, is unemployment a voluntary condition in your world? Because you might consider getting out more if so.

    Sticky asset prices are standing over the body with a blood splattered smoking gun in their hand and you’re pinning your star on sticky wages. How fitting for an exponent of a wantonly ignorant profession.

    Safe to file all this under ‘the sun also rises’ then. Keep up the good work here.

  67. Gravatar of Jim Glass Jim Glass
    23. March 2012 at 12:41

    Fed’s Bullard Sees Price Threat From G-7 Delaying Tighter Policy”

    Federal Reserve Bank of St. Louis President James Bullard said the U.S. and world economies risk elevated inflation that persists for years should developed nations mistime their exits from easy monetary policies.

    “Once inflation gets out of control, it takes a long, long time to fix it,” Bullard said in a Bloomberg Television interview in Hong Kong today. “Ultra-easy” policies across the Group of Seven nations, which include the U.S. and Germany, may be retained for too long, he said.

    U.S. monetary policy may be at a “turning point” and the Fed’s first interest-rate increase since the global financial crisis could come as soon as late 2013, Bullard said in a speech earlier today.

    That view contrasts with a debate among Fed policy makers on whether more stimulus is needed…
    ~~~

    Apparently the St Louis Fed and Cleveland Fed don’t talk to each other.

    “The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.38 percent.”

  68. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. March 2012 at 13:20

    My eyes are shooting darts right now.

    I’m sooooo angry! I’ve been touring libertarian and conservative sights for the past few days and I’ve been BLOCKED repeatedly.

    Everytime I bring up data or facts someone complains and I’m BLOCKED!

    It’s so tiresome.

    I don’t get treated like that by Mark Thoma. I only occasionally get treated like that by Brad deLong or Paul Krugman (despite their denials).

    More importantly, I’ve never been treated that way by you Scott. You always hear me out and when you eliminate a comment you always take the time to give me a rational explanation.

    IMO you are the only true Libertarian left.

  69. Gravatar of Jim Glass Jim Glass
    23. March 2012 at 13:33

    Japan’s GDP per capita (PPP) is right in line with other OECD countries: http://i.imgur.com/diUI3.png

    You keep saying this, yet…

    (will this formatting carry over?)
    ~~~~

    International Monetary Fund, World Economic Outlook Database, October 2010

    G-7, gross domestic product based on purchasing-power-parity (PPP) per capita GDP, 1992 and 2010.

    2010 dollars

    Nation …. 1992 ….. 2010 … Growth
    UK ……….27,149 … 35,053 … 1.29
    Canada ….31,162 … 39,034 … 1.25
    USA …… .38,388 … 47,132 … 1.23
    Germany ..31,523 … 35,930 … 1.14
    France …. 30,242 … 34,092 … 1.13
    Japan …… 32,111 … 33,828 …1.05
    Italy …….. 28,864 … 29,418 …1.02
    ~~~~~~~~~

    I dunno, 5% growth over 18 years doesn’t look so even with the other countries to me.

    Did beat Italy, though.

  70. Gravatar of Majorajam Majorajam
    23. March 2012 at 13:36

    PS dwb’s point was indeed a good one in a world that regards empirical evidence as a nettlesome distraction. So he’s clearly come to the right place.

    Back in the real world, the trebling of US debt to GDP has had a big impact on cyclically-adjusted investment spending all right. It has rather appreciably declined as a fraction of output over the last 30 years. Oops.

    But forget the data for a second. Who would argue with a straight face that we’re been prudently saving/investing for the coming bulge in retirees? Our infrastructure, from roads, bridges, rail and ports, to public transportation, electricity grids and transmission lines, to just about anything I can think of, were by large built when the Beatles were still pop, are old and crumbling and altogether inadequate to our economy. And don’t get me started on our airports. If pressed I may be able to come up with one impressive civic accomplishment since the 1970s. And that’s if you want to count the big dig!

    Meanwhile, we are at the bottom of the league tables in things that affect our youth, like education performance and spending and broadband access. The last time our margin obsessed corporations actually appeared to believe in their ability to grow revenues was the TMT bubble, since which their domestic investment has been moribund. So this assertion about how prudent we’ve been borrowing money to buy 5 bed room track houses in the exurbs simply beggars belief.

    Now that that’s unmasked as the grotesque legitimation cum rank ignorance wearing a bowtie it is, here’s a thought experiment for the brain trust here. What do the two sectors of the economy where the wage deflation/outsourcing shocks emanating from emerging mercantilist Asia have had the least impact? Health Care and Education. And what do the behavior of these two sectors over the past three decades share in common? Give you a hint, the lead-in is something of a giveaway.

  71. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. March 2012 at 13:40

    Jim Glass,
    UK hasn’t done so well recently though, has it? Despite having an unpegged currency.

  72. Gravatar of Benjamin Cole Benjamin Cole
    23. March 2012 at 13:49

    Major F–

    http://en.wikipedia.org/wiki/Economy_of_Japan

    According to the above, Japan’s PPP Per Capita was 81 percent of the USA’s 20 years ago, and now is 71 percent.

    So, the nation that moderately expended its money supply easily outperformed the nation that tightened it money supply.

    What is this argument about?

    You are starting with a premise, and then desperately trying to find evidence.

  73. Gravatar of Mike Sax Mike Sax
    23. March 2012 at 14:07

    Morgan you predict NGDP will lead to:

    “The answer is lots of pissing on booms.”

    It’s great because you got Major Freedom saying that what we need to do is piss on booms and you want the same thing but you can’t convince him that NGDP will get you there.

    If Scott is this master manipulator aren’t you blowing his cover? You would rather convince the tea party crowd and forget tricking us liberals, yet clearly MF is rigidly unconvinced.

    If a 3% rate is more obvious then you would be smarter to use 5% right?

    I mean it’s true a 3% rate implies either a major drop in output going forward-Tyler Cowen’s Great Staganation-or a drop to a 0% inflaton target. 5% makes it seem less austere as it seems to jibe more with historical precedence.

    Of course even 5% is lower than historical precdent. Desptie the talk of an assumed 2% inflation target, historically even during the Great Moderation we didn’t have such a low inflation rate at least at trend. So realistically based on history you should even has the target a little higher-more like 6 or 6.5%

  74. Gravatar of Mike Sax Mike Sax
    23. March 2012 at 14:12

    Major Freedom, you certainly give us an inspiring vision-stagnant Japan as the model we should shoot for.

    “Japan’s industrial production index, from Jan 1992 to just before the financial crisis, went from 89 to 111. The 2008 crisis saw it collapse to below 70. It has since risen to 87.”

    Ok then by your own premise it’s still down to 87 from 89 after 20 years-that is to say, Japan has been stagnant.

  75. Gravatar of Mike Sax Mike Sax
    23. March 2012 at 14:13

    And Major Freedom? I want to see the day some Market Monetarist shoots for a 20% NGDP target. Maybe I’ll become one myself at that point. LOL

  76. Gravatar of dwb dwb
    23. March 2012 at 14:44

    @Major F-
    you are “young retired and weathly” (your words) why dont you just stop yammering and move to Japan if its so great.

  77. Gravatar of Morgan Warstler Morgan Warstler
    23. March 2012 at 15:06

    “As for this conspiracy theory you’re putting on my desk, that those who advocate for NGDP targeting are really a secret reverse-Fabian cabal who want to gradually abolish central banking, is I must say very entertaining. But it is more rightly considered a positively Fabian policy, in that it it can only ever get us to – what market monetarists believe to be – “perfectly efficient”…CENTRAL BANKING. NGDP targeting, because it presupposes the existence of central banks, cannot ever be a framework to abolish central banks. It can only stand by and sit while central banks either abolish themselves by way of destroying their respective currencies, or yammer on about central banks not printing enough. There is no direct connection between NGDP monetary theory and abolishing central banks. In other words, if central banks are going to be abolished, it won’t be because of NGDP theory “secretly” fulfilling an Utopian goal.”

    MF, look dude, Uncle Milty wanted a computer to run the Fed.

    A futures market run on 3% NGDP is a big improvement over that.

    My mechanism would be to run it like Forex, so that people have to fun their betting account, they place their bets – and if NGDP comes in too high, the bank keeps some or all of your cash, reducing the supply.

    Comes in too low, they print money and hand it to you.

    That’s not a Fed buying / selling T-Bills from GS on some knowable schedule, that’s printed money into Aunt Betty’s pocket.

    —-

    As to your RGDP being real thing -yes, yes sure, one of my maxims is that on Real Savings from Real Productivity gains can be invested in other new areas. I only want R, not N.

    But frankly, measuring RGDP is harder than measuring NGDP, and we want less funny gvt. #’s to manipulate, not more.

    And yes it is true that sometimes we run under 3% RGDP, but I suspect under this kind of operation, we grow RGDP at 3% easily.

    That’s ACTUALLY the point you don’t respond to:

    At 3% NGDPLT, there would be immense public outcry if public employees get raises, cutting them back for productivity gains will become a national pastime.

    We’ll end up with 300% more cries that we run GVT like Wal-Mart… always at every corner trying to cut prices.

  78. Gravatar of Mike Sax Mike Sax
    23. March 2012 at 15:21

    “At 3% NGDPLT, there would be immense public outcry if public emploOyees get raises, cutting them back for productivity gains will become a national pastime”

    So Morgan, the key is to have a low enough NGDP target is that it? If you had say a 7% target for arguements sake there would be no disciplining of the publicn employees?

    Your real goal is just no inflation which you get with a 3% RGDP historical rate. Or a la Cowen, a 1.5% GDP rate and a 1.5% inflation rate.

  79. Gravatar of Morgan Warstler Morgan Warstler
    23. March 2012 at 15:54

    Mike, the key is to have the target FEEL LIKE a cap.

    Have either too much inflation or too much boom VERY quickly piss off Main Street. Drill Baby! Fire Fire!

    So there’s no room to grow the public sector, and everyone suddenly gets that firing public employees (think 50%+ productivity gains over 20 years) means that there’s new room under the cap for low cost private sector borrowing.

    CLARITY happens.

    And with clarity my side wins.

  80. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. March 2012 at 16:33

    Hi Morgan.

    I still think you’re a dick but that’s OK. So am I.

  81. Gravatar of Lorenzo from Oz Lorenzo from Oz
    23. March 2012 at 16:56

    Major_Freedom: Austrians, by the way, hold that money has to be an economic good that satisfies certain criteria, homogeneity, durability, divisibility, and relatively highly valued per unit of physical measure. One can tell that Austrian economics started off in a deeply Catholic polity. It uses the typical A-T (Aristotelian-Aquinas) natural law approach of defining an ideal version and then declaring anything that does not conform to said definition is perverse and does not count. If your conclusion gets to set the ambit of your premises, then you can “prove” almost anything (which is why A-T natural law theory is terrific for supporting religious doctrine).

    Money is a transaction good, something you hold for the purpose of engaging in transactions: pure money is something that is only used as a transaction good. Fiat paper money is pure money as it has no other use than as a transaction good. Lot of things have been used as media of exchange, but money has the extra quality of embodying the unit of account; and fiat paper money has no other role than being such a medium of account.

    Now, whether paper fiat money is the best form of money is another question, but it is most certainly money. In fact, it is nothing else other than money — that is what makes pure money.

    The notion that definitions can do your analytical work for you is conducive to a great sense of certainty. Alas, the world is a more complicated place. (I try to grapple with the nature of money and monetary policy here; you can see I am agnostic on the issue of whether local money should have a monopoly supplier as it has much the same complexities as other forms of infrastructure.)

  82. Gravatar of Shane Shane
    23. March 2012 at 18:17

    Yeah, I don’t know if that question made any sense. What I think I was thinking was if big run ups in debt were financing a large share of consumption, as long as that consumption was macroeconomically sustainable (i.e. as long as it did not result in inflation) then there should be no problem–things were ultimately fundamentally sound. One way this might have been reflected was via asset “bubbles” which would bring the net worth of consumers who “should” have been able to afford those things the economy could have produced–but weren’t because of income equality–back in line with the fundamentals.

    In other words, could “asset bubbles” be a back door mechanism for redistributing consumption?

  83. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. March 2012 at 18:59

    Scott,
    I’ve got data in storage.

    But I will not release it until you acknowledged I even exist.

    Ahhh,hahh.

    P.S. To be honest I might not even then.

  84. Gravatar of Major_Freedom Major_Freedom
    23. March 2012 at 19:45

    Jim Glass:

    I get different data:

    The data actually shows:

    Country …… 1992 …… 2010 …… Rate
    Japan …… 20,660 … 33,828 …1.637

    And if we take 1989, the starting year of the supposed lost decades, it’s 17,250. This makes the growth even larger.

    Why are you omitting so many countries that Japan beat? Why are you only including Italy? Japan has outperformed many “loose money” economies, and yet you only include Italy.

    Benjamin Cole:

    According to the above, Japan’s PPP Per Capita was 81 percent of the USA’s 20 years ago, and now is 71 percent.

    So what. That doesn’t mean Japan stagnated or declined absolutely.

    So, the nation that moderately expended its money supply easily outperformed the nation that tightened it money supply.

    And what of the other nations that expanded their money supplies that Japan outperformed? You’re just cherry picking two countries to advance a premise. Look at the whole picture.

    What is this argument about?

    This argument is about me refuting the claim that Japan experienced any “lost decades.” Japan has grown in line with the other OECD countries. It has experienced a steady growth in real GDP per capita (PPP) from around $16k in 1989, to over $32k just before the financial crisis.

    You are starting with a premise, and then desperately trying to find evidence.

    Look the mirror you premise starting, desperate data finder. I am only reporting the data. You’re cherry picking a “loose money” country that outperformed Japan, while totally ignoring all the “loose money” economies that underperformed Japan. You’re being a hypocrite.

    Mike Sax:

    Major Freedom, you certainly give us an inspiring vision-stagnant Japan as the model we should shoot for.

    I didn’t say Japan was an ideal model. I am only showing Japan did NOT experience any “lost decades”. You monetarist noobs are just trying to belittle Japan because it proves that tight money does not lead to stagnation, thus refuting your entire silly worldview. You can’t handle this, so you just repeat the same incorrect data that doesn’t show the actual story.

    “Japan’s industrial production index, from Jan 1992 to just before the financial crisis, went from 89 to 111. The 2008 crisis saw it collapse to below 70. It has since risen to 87.”

    Ok then by your own premise it’s still down to 87 from 89 after 20 years-that is to say, Japan has been stagnant.

    Jeepers, when you pick a time right after the financial crisis, then sure, the growth doesn’t look good, but the “lost decades” story is NOT a story that takes the financial crisis into account. The “lost decades” story was being espoused BEFORE the crisis hit, when the index went from 89 to 111. During THAT time, the claim was that Japan was experiencing a “lost decades.”

    You’re clearly just trying to look for any excuse to continue to advance the FALSE “lost decades” story of Japan.

    Mike Sax

    And Major Freedom? I want to see the day some Market Monetarist shoots for a 20% NGDP target. Maybe I’ll become one myself at that point. LOL

    It will be just as arbitrary as 5%

    dwb

    you are “young retired and weathly” (your words) why dont you just stop yammering and move to Japan if its so great.

    Why don’t you stop yammering and move to NGDP Utopia Australia if it’s so great.

    Oh that’s right, we’re just talking about FACTS, not where we like to live. Get a grip dude.

    Morgan Warstler

    MF, look dude, Uncle Milty wanted a computer to run the Fed.

    Good for Uncle Milty.

    A futures market run on 3% NGDP is a big improvement over that.

    A free market gold standard is a practically infinite improvement over 3% NGDP.

    My mechanism would be to run it like Forex, so that people have to fun their betting account, they place their bets – and if NGDP comes in too high, the bank keeps some or all of your cash, reducing the supply.

    That’s ridiculous. Banks aren’t obligated to hold cash just because some silly index futures goes up or down. What are you people smoking?

    Comes in too low, they print money and hand it to you.

    They have no incentive to do that.

    That’s not a Fed buying / selling T-Bills from GS on some knowable schedule, that’s printed money into Aunt Betty’s pocket.

    That’s silly. NGDP targeting doesn’t mean regular folks get free money from the Fed.

    As to your RGDP being real thing -yes, yes sure, one of my maxims is that on Real Savings from Real Productivity gains can be invested in other new areas. I only want R, not N.

    I was actually directing that comment to Sumner. He mistakenly believes NGDP targeting of 5% is somehow independent of real output considerations, despite the fact that he thinks of NGDP as equal to RGDP + inflation.

    But frankly, measuring RGDP is harder than measuring NGDP, and we want less funny gvt. #’s to manipulate, not more.

    This is a major reason why nominal money targeting that is based on real output is so crude and sloppy.

    And yes it is true that sometimes we run under 3% RGDP, but I suspect under this kind of operation, we grow RGDP at 3% easily.

    So you agree that a target NGDP of 5% is formed by making expectations of future potential output, of 3%?

    That’s ACTUALLY the point you don’t respond to:

    At 3% NGDPLT, there would be immense public outcry if public employees get raises, cutting them back for productivity gains will become a national pastime.

    Oh yeah, like there is a huge public outcry today with public employees making more than their private sector counterparts? Give me a break.

    We’ll end up with 300% more cries that we run GVT like Wal-Mart… always at every corner trying to cut prices.

    Yeah, that makes sense. Voters who are bribed with government money are going to hate it when the government has more money to give to them.

    Lorenzo from Oz

    One can tell that Austrian economics started off in a deeply Catholic polity. It uses the typical A-T (Aristotelian-Aquinas) natural law approach of defining an ideal version and then declaring anything that does not conform to said definition is perverse and does not count.

    Aristotle wasn’t Catholic. You just introduced that term to smear natural law. If you ever bothered to read Aquinas, you would have known that while he was a devout worshipper, he was very clear that his natural law philosophy does not REQUIRE a supernatural being.

    And what is so wrong with holding murder and rape as wrong no matter what any positive law allows?

    Natural law is ultimately based on rationalist philosophy. If you want to criticize or question it, then by all means, have at it.

    If your conclusion gets to set the ambit of your premises, then you can “prove” almost anything (which is why A-T natural law theory is terrific for supporting religious doctrine).

    No, one cannot prove almost anything in natural law. Natural law is very restrictive. Sure, many have tried to couch their prejudices and hatred in supposed natural law argumentation, but then again, so have many of those who adhere to a philosophy other than natural law. A natural law theorist can refute another natural law theorist, by playing according to the same rules of thinking.

    Money is a transaction good, something you hold for the purpose of engaging in transactions: pure money is something that is only used as a transaction good. Fiat paper money is pure money as it has no other use than as a transaction good. Lot of things have been used as media of exchange, but money has the extra quality of embodying the unit of account; and fiat paper money has no other role than being such a medium of account.

    Money is ALSO a storage of value, a commodity that has value in its own right. Yes, I realize that this understanding can easily make you slip into the realm of cash hoarding and all the prejudices concerning that, but you cannot deny it just because you don’t like the implications of accepting it.

    Money cannot even be money unless people can derive value in holding it and NOT using it in exchanges. Yes, money is also valued for its exchange use, but money is not one dimensional in being ONLY valued for its exchange property.

    Now, whether paper fiat money is the best form of money is another question, but it is most certainly money. In fact, it is nothing else other than money “” that is what makes pure money.

    Cotton and linen and ink, the commodities that Federal Reserve notes are made of, and the silicon chips and copper wires, which is what serve as the commodity for digital money, are also valued as non-money uses.

    You have to accept that money MUST have a value outside of its money use. There is no such thing as “pure” money that has zero value outside of its exchange use.

    The notion that definitions can do your analytical work for you is conducive to a great sense of certainty. Alas, the world is a more complicated place. (I try to grapple with the nature of money and monetary policy here; you can see I am agnostic on the issue of whether local money should have a monopoly supplier as it has much the same complexities as other forms of infrastructure.)

    Yes the world is complex, but that doesn’t mean we can’t be certain of some things.

  85. Gravatar of Morgan Warstler Morgan Warstler
    23. March 2012 at 22:02

    “Yeah, that makes sense. Voters who are bribed with government money are going to hate it when the government has more money to give to them.”

    When we argue, we should give other the benefit of doubt on smarts, not take the short route and respond to obvious side issues.

    My entire construct is that we shrink the public employee unions by making it clear to the needy elderly they only get more IF public employees get less.

    We don’t have to pay off ALL the voters to win, we just have to get the elderly who currently vote left, to throw public employees under the bus.

    Divide and conquer.

  86. Gravatar of Jim Glass Jim Glass
    23. March 2012 at 23:01

    Major_Freedom wrote:

    Jim Glass: I get different data:

    The data actually shows:

    Country …… 1992 …… 2010 …… Rate
    Japan …… 20,660 … 33,828 …1.637
    ~~~~~~~~~~~~~~~~~~~

    Um, no. You are quoting GDP per capita by PPP in “current” dollars there — 1992 dollars v 2010 dollars. That is, near all the gain you claim for Japan is inflation of the US dollar.

    Ironic, that.

    The corresponding numbers for the USA (which you must have looked at but didn’t quote) are 24,700, and 47,132. Do you really believe that real GDP in the USA grew 91% per capita in those years? That *should* have been a tip off.

    Why are you omitting so many countries that Japan beat?

    Like which ones? Here’s what you do, instead of trolling around for links to graphs that you don’t realize include inflation as your great equalizer, try this: Get numbers from a primary source citing per capita PPP GDP in constant value dollars — 2010, 1992, 1950, whatever year, you pick.

    Tell us how many countries have done less than than Japan’s 5.3% since 1992, when their bubble burst and economic problems started.

    I gave you the numbers for the G-7, Italy did less, that’s one of seven. See how many others you can find that Japan beat with its 5.3%

    Quote the actual dollar numbers. And tell us the year of that dollar.

  87. Gravatar of ssumner ssumner
    24. March 2012 at 07:31

    Negation, Yes, NGDP per capita is better. Better still, use NGDP per member of the labor force.

    MF, I meant it played no role in determining what NGDP growth rate is best.

    Majorajan, You asked:

    “I wonder Scott, are estimates of potential GDP affected when estimates of the stock of human and physical capital are decimated? And while we’re on this drift, is beggar thy neighbor a good strategy for dealing with a global output gap? And speaking of which, is unemployment a voluntary condition in your world?”

    1. Yes.

    2. Yes.

    3. I don’t view voluntary unemployment as a useful concept. It has no clear meaning.

    Jim Glass, I no longer buy the Cleveland Fed estimates. Marcus Nunes tried to explain it to me, but it makes no sense (as far as I can tell.) I’d like to see the key data points that produce that result.

    Thanks Mark, Sorry to hear others are blocking you.

    Majorajam, You said;

    “Back in the real world, the trebling of US debt to GDP has had a big impact on cyclically-adjusted investment spending all right. It has rather appreciably declined as a fraction of output over the last 30 years. Oops.”

    I never denied that, and it has nothing to do with the issues I discuss on my blog.

    Shane, Yes, bubbles could redistribute consumption.

  88. Gravatar of Major_Freedom Major_Freedom
    24. March 2012 at 07:50

    ssumner:

    MF, I meant it played no role in determining what NGDP growth rate is best.

    No, you’re still mistaken. It is the estimate for real GDP of 3% going forward (which is based on a naive extrapolation of past real GDP growth of 3%) that explains why you are choosing 5% NGDP as “the best rate”, as opposed to, say, 10% NGDP or 20% NGDP.

    As long as you think “NGDP = RGDP + inflation”, you are in fact taking into account an estimated/potential real productivity as playing a role in “the best” NGDP growth rate.

  89. Gravatar of bill woolsey bill woolsey
    24. March 2012 at 07:52

    Major Freedom:

    You are very confused.

    If the quantity of money adjusts to the demand to hold money, each and every individual who chooses to hold more money can do so. Each and every individual who chooses to spend less out of current income can do so.

    No one “micromanages” each person’s cash balance holding. No one forces anyone to spend more.

    Each person spends exactly what they want, and change their money holdings as they choose. If they want to sell other asets and hold money, they do it. If they want to reduce spending out of current income and accumulate money, they do it.

    What they don’t do is cause changes in the total volume of spending in the economy.

    Any individual who wants to cause total spending in the economy to fall, and tries to accomplish this by spending less money, is delusional. The tiny impact on total spending in the U.S. by any one individual spending none of their current income is insignificant. As for some plausible decease in spending (say, suing 5% of income to had to moeny holdings) has even less effect. Why would anyone care?

    The notion that everyone at once is choosing to accumulate more money because they want total spending to fall is absurd. Each person chooses to accumulate more money because they want to hold more money, and reduce spending because it is necesary to obtain more money.

    Does keeping spending from falling require anyone to hold more money than they would like? No, it doesn’t. Each person always can hold whatever amount of money they like.

    Anyay, I think nominal expenditure on output should grow at a 3% rate and this should not change regardless of what happens to prices or output.

    The status quo or a regime where base money changes with the deposit or withdrawal of gold at the central bank (I guess the Peel scheme,) are worse.

    The status quo generates fluctuations in output that are unnecessary and undesirabl. It also generates a trend inflation rate that is unnecessary and undesirable. The Peel scheme generates fluctuations in prices and output that are unnecessary and undesirable.

    Unforunately, no monetary order avoids all changes in output. While a monetary regime can avoid all changes in the price level, often, that cause more harm that good.

    Keeping nominal GDP growing at 3% avoids the undesirable and unnecessary changes in output and only allows the changes in the price level where avoiding them would cause more harm than good.

  90. Gravatar of Major_Freedom Major_Freedom
    24. March 2012 at 07:57

    Morgan Warstler:

    My entire construct is that we shrink the public employee unions by making it clear to the needy elderly they only get more IF public employees get less.

    OK, but what about government spending such as welfare, subsidies, and other transfer payments to the private sector voters? If government “grows” in this respect, the voters will vote for those who promise them the most $$$.

    You make it seem like NGDP targeting will suddenly turn a welfare/warfare democratic society into a small government, more laissez-faire society, by introducing a mechanism of fighting over a “fixed pie.” But this ignores the fact that the state can just take up more of the total spending, crowd out private spending, and gather more voters who receive welfare and warfare transfer payments.

    We don’t have to pay off ALL the voters to win, we just have to get the elderly who currently vote left, to throw public employees under the bus.

    The elderly don’t vote left. The elderly vote left and right. Remember, the left and right in this country are both very protective of social security. Neither party will dare touch it, because they know the elderly won’t vote for anyone who does touch it.

  91. Gravatar of Major_Freedom Major_Freedom
    24. March 2012 at 08:21

    Jim Glass:

    Um, no. You are quoting GDP per capita by PPP in “current” dollars there “” 1992 dollars v 2010 dollars. That is, near all the gain you claim for Japan is inflation of the US dollar.

    Ironic, that.

    As far as I can see, this is the only data which is available in the source you cited. There is only “current” prices.

    “Why are you omitting so many countries that Japan beat?”

    Like which ones?

    Here’s an idea. Instead of trolling around for links to data which you omit substantial portions of in order to advance a prejudicial agenda, instead include more of the data, to get a better overall picture.

    You just included G7 countries. But G7 countries (less Japan) aren’t the only countries with “loose money”.

    The fact that Japan beat Italy SHOULD have proof enough. But we have far more countries to compare:

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

    This chart shows Japan is right in the thick of things when it comes to output. It shows a far better picture than your silly short list that puts Japan second last.

    Notice all those countries below Japan? They ALL have “loose money.” Notice the Euro area. Notice the OECD total. Japan beat them. Notice Japan beat France, Spain, Italy, Greece, New Zealand, Korea, Czech Republic, Portugal, Hungary, Poland, Mexico, and Turkey.

    Lost decades? FALSE.

  92. Gravatar of Major_Freedom Major_Freedom
    24. March 2012 at 08:32

    Bill Woolsey:

    You are very confused.

    Oh this ought to be fun.

    If the quantity of money adjusts to the demand to hold money, each and every individual who chooses to hold more money can do so. Each and every individual who chooses to spend less out of current income can do so.

    EVERYONE wants to earn more money, ALL the time. It is NOT a valid excuse to print money just because people want to have more money.

    The fact that is totally going over your head is that when people want to hold more cash, they don’t just want to hold more dollars. They want to hold more PURCHASING POWER. Do you know what that means? It means that by you believing the central bank has to inflate whenever a lot of people attempt to hold more cash, you are advocating for precisely the OPPOSITE of what people want! You FALSELY believe that you are “giving people what they want” when you apologize for inflation.

    In the absence of inflation, do you know what will happen if people want to hold more cash? PRICES WILL FALL RELATIVE TO CASH BALANCES. That is what the people actually want when they try to hold more cash. They would in fact get it if it weren’t for you apologists of inflation.

    I’m highly confused? You’re totally out to lunch.

    No one “micromanages” each person’s cash balance holding. No one forces anyone to spend more.

    The Fed micromanages spending, by changing cash balances. That is the flip side of the coin of micro-managing cash balances, by changing spending.

    Each person spends exactly what they want, and change their money holdings as they choose. If they want to sell other asets and hold money, they do it. If they want to reduce spending out of current income and accumulate money, they do it.

    People don’t just want to spend nominal dollars. They want to spend nominal dollars that have a particular purchasing power. By inflating the dollar in response to people wanting more purchasing power via trying to hold more money, you are totally short circuiting that process. Why? Because you’re fixated on “spending” like the yahoo Keynesians whom you alegedly decry.

    You are like two peas in the same pod.

    What they don’t do is cause changes in the total volume of spending in the economy.

    That’s exactly the problem. People WANT total spending to fall when they try to hold more money. That’s how they get the higher purchasing power they want.

    Any individual who wants to cause total spending in the economy to fall, and tries to accomplish this by spending less money, is delusional. The tiny impact on total spending in the U.S. by any one individual spending none of their current income is insignificant. As for some plausible decease in spending (say, suing 5% of income to had to moeny holdings) has even less effect. Why would anyone care?

    OK, and what if LOTS of people want to hold more cash, like say in a depression when lots of people are looking for more liquidity, i.e. more purchasing power? At the very time they need it most, you are most vocal in short circuiting their desires.

    You say it’s delusional to think people can’t shrink aggregate spending? Give me a break. Just look at post 2008 when NGDP nosedived. Goodness.

    The notion that everyone at once is choosing to accumulate more money because they want total spending to fall is absurd.

    No, it’s not absurd. You’re absurd. You’re being absurd in believing that total spending falling, and the resulting increase in general purchasing power, is somehow not the consequence of the collective actions of millions of individuals.

    Each person chooses to accumulate more money because they want to hold more money, and reduce spending because it is necesary to obtain more money.

    FALSE. Individuals want to hold more money to acquire more purchasing power, not just to hold more pieces of paper with numbers on them. They want to be able to buy more goods than they otherwise could have. They want more purchasing power, not more dollars per se.

    Does keeping spending from falling require anyone to hold more money than they would like? No, it doesn’t. Each person always can hold whatever amount of money they like.

    Keeping spending from falling prevents people from increasing their purchasing power by way of trying to increase their cash balances, which would have otherwise made prices fall in relation to total cash balances.

    You say it’s absurd? It’s only absurd to you because you’re confused.

    Anyay, I think nominal expenditure on output should grow at a 3% rate and this should not change regardless of what happens to prices or output.

    And I pulled 6.5% out of my keester. I’m right?

  93. Gravatar of dwb dwb
    24. March 2012 at 08:40

    @MF-
    Sure as long as we are talking about FACTS, you are right, Australia is a great example. imitation is the sincerest flattery. {and incidentally, I do have cousins who moved to New Zealand and colleagues who moved to Australia, when the kids are in college, its a possibility}.

  94. Gravatar of Becky Hargrove Becky Hargrove
    24. March 2012 at 08:45

    It’s one thing when MF goes after me and says “Oh this ought to be fun!” Another altogether when the target is Bill Woolsey. (hehe)

  95. Gravatar of D R D R
    24. March 2012 at 09:54

    “No, it’s not absurd. You’re absurd. You’re being absurd in believing that total spending falling, and the resulting increase in general purchasing power, is somehow not the consequence of the collective actions of millions of individuals.”

    Just because millions of individuals do a thing does not mean the aggregate effect is intended– let alone desired– by any one of those millions. Do you really think everyone was wondering how to reduce aggregate income?

    No, when millions of individuals cut back on their spending, they did not think this would result in their becoming unemployed.

  96. Gravatar of Bill Woolsey Bill Woolsey
    24. March 2012 at 10:26

    Major Freedom:

    I actually understand basic monetary economics. I have told you before, not only have I read Rothbard and Mises, I was once a dogmatic Rothbardian. (By the way, neither Hoppe nor Block have added anything useful.)

    I take the orthodox view that the demand for money is a demand for real purchasing power. It is like second nature to me. More importantly, is is a basic assumption of the conversation.

    So, if there is an increase in the demand to hold money at any given level of prices, then an increase in the nominal quantity of money, at that same level of prices, is an increases the real quantity of money that matches the increase in the real demand for money.

    I am perfectly aware that a decrease in the level of prices and wages would incease the amount of purchasing power people hold, which we monetary economists call an increase in the real quantity of money. Generally, we would say that if the real demand for money increases, and the nominal quantity of money is fixed, then equilibrium requires an inversely proportional decrease in the price level, including resource prices level wages, so that the real quantity of money rises to match the increase in th real demand for money.

    My view is that it is better for the nominal quantity of money to rise at a given level of prices, which also raises the real quantity of money, an amoiunt that matches the increase in the real demand for money.

    In both cases, the real quantity of money rises to match the real demand to hold money. In one case, the level of prices and wages is not impacted. In the otehr case, prices and wages fall in proportion to the increase in the real demand for money.

    So, I would say that you have a somewhat confused understanding of this process. Mises, Hayek and Rothbard undrstood it very well. And Friedman and all of the other orthodox monetarists understood it quite well. And the Keynesians of the sixties and the new Keynesians of today, like Bernanke, understand it quite well. And the market moentarists understand it quite well. It is you that seem to think this is some key insight of the “Miseans.”

    Now, reading your argument here, I can see that you have some odd notion that the reason that people accumulate money is that they want to make the purchasing power of money rise. Well, that is also delusional. It is a bit like saying that I want to buy some Apple stock in order to make the price of Apple stock rise. Now, it is true that many people buy Apple stock because they expect the price of Apple stock to rise. But to say that the reason a person wants to purchase it is because they want to make it more expense because of their own purchase is foolish. Anyway, the decrease in the equilibirum price level because of the increase in the demand for money by any one person is so small as to be irrelevant.

    I think what is really motivating you is the notion that if the demand for money should rise, and the nominal quantity of money should stay the same, then a real capital gain on the existing quantity of money is the just desert of those already holding the money. If instead, the monetary regime is one where the nominal quanity of money rises when the real demand for money rises, then there is no real capital gain on money. The increase in the nominal quantity of money has “stolen” the justly deserved real capital gain that would go to those who were already holding the money.

    I don’t think people holding money have any such moral right to a capital gain when the demand for money rises. As in, I think your entire perspective is based upon a nonsensical chimera.

    But, I will still make several points about the economics. If the nominal quantity of money is fixed, then when the real demand for money falls, the price level rises, and there is a real capital loss to all of those holding money. A system that adjusts the nominal quantity of money to the demand to hold money means that those holidng money avoid those capital losses.

    Second, I suspect you are confusing the trend with the effect of changes. In other words, a fixed quantity of money means that changes in the demand for money around trend result in both deflations and inflations. An institution that adjusts the quantity of money according to changes in the demand for money around trend avoids both the inflations and deflations. It is better.

    Second,nominal interest rates depend on the trend. Most money takes the form of deposits that pay interest. If the demand for moeny is growing, then a constant quantity of money means that the nominal interest rate paid on money is lower than it would be if the quantity of money rose with the demnd to hold it.

    For most people, most of the time, a scheme that keeps the nominal quantity of money growing with the real demand for money means that people will be earning interest on their nominal money holdings. This directly increases their personal money balances with the interest they earn. If their personal demand for money grows more quickly than that, then they must restrainst spending out of income so that their money holdings will grow faster than the interest they are earning on their money holdings. If, on the other hand, their money demand is growing more slowly than the interest on their money holdings, then they spend the excess.

    It is only hand to hand currency, that pays no nominal interest, and only gets a real return from a deflationary environment. And, if you have the growth rate of nominal GDP at a trend that generates a deflation rate equal to the appropriate real interest rate on hand to hand currency, then that “problem” is solved. But I don’t think making sure hand to hand currency has an optimal real rate of return is particulary important. In my view, privatizing currency allows banks to easily pay nomnial interest to those withdrawing currency from their deposit account.

    But again, regardless of whether the proper target for nominal spending on output generates a trend deflation and so a return from holding currency, it is much better for fluctuations in the demand for money to be met by adjustments in the nominal supply rather than making all prices and wages fall or rise to bring the real quantity i nline with the demand to hold money.

  97. Gravatar of Greg Ransom Greg Ransom
    24. March 2012 at 11:27

    Is this suppose to be the response of “someone who is always sincere”?

    Scott writes,

    “Why does White think debt will make people want to work less.”

    Somene constantly required to _punt_ is not someone who instills confidence in others.

  98. Gravatar of Bill Woolsey Bill Woolsey
    24. March 2012 at 11:43

    Major Freedom:

    I almost forgot.

    The demand for money is how much money people want to hold.

    It isn’t how much money they would accept as a gift, the amount of income they wish they could earn in exchange for their resources, or the amount of money they would like to borrow.

    People always want to earn more money? I suppose. But that has nothing to do with the issue at hand.

    The way people demand more money is by selling other assets for money or else accumulating money by spending less than is earned from income.

    Selling other assets for money is a change in the form in which assets are held. Accumulating money out of current income it a method of saving.

    Learn some basic economics.

  99. Gravatar of Jim Glass Jim Glass
    24. March 2012 at 13:49

    Jim Glass wrote: Um, no. You are quoting GDP per capita by PPP in “current” dollars there “” 1992 dollars v 2010 dollars. That is, near all the gain you claim for Japan is inflation of the US dollar.

    Ironic that.

    Major Freedom replied:

    As far as I can see, this is the only data which is available in the source you cited. There is only “current” prices.

    So you are telling us all that, for all your lecturing about Japan’s real PPP GDP growth during the last 20 years, you have no actual data for it, because…

    1) You are incapable of finding numbers for GDP growth in constant dollar terms anywhere on the whole wide world of the web, *and*

    2) When you do have the numbers in 1992 and 2010 dollars right in front of you, you are incapable of making an inflation adjustment between them.

    Wow. Perhaps you should be more modest about your claims of knowledge and your degree of expertise backing them, eh?

    But no, instead you just repeat the same old link to a chart you googled up which …

    1) Counts Japan’s growth back to 1987, including 5 years of its real estate bubble growth, *and*

    2) Includes in Japan’s “growth” all the inflation in the US dollar since 1987!

    Wow, coming from *you* this method is really doubly ironic!

    Let’s apply these very same numbers and logic for the USA:

    “Real GDP growth has been 91% per capita since 1992, superior! This superior performance is half again better even than Japan’s(!), which itself has been doing fine! (That real estate bubble I insist on counting from 1987 to 1992 for Japan really helped its growth as I count, so who could complain about a bubble here?) The Fed’s been doing a *great* job. That’s +91% *per capita*! Who could complain? I endorse this view — Major_Freedom.”

    I mean, realllllly… From you, Mr. Anti-Inflation, Anti-Bubble himself. 🙂

    OK … the reasonable reply from you would have been to say, “Ooops. I missed the inflation adjustment. Sorry. Yes, Japan’s real PPP GDP growth per capita since its bubble burst in 1992, over the last full 20 years, has been only about 5%. Very weak.”

    And people could have continued with regular conversation.

    As the saying goes, “When you find you’ve dug yourself into a hole, stop digging”.

    But hey, since you want to continue shoveling it, I again challenge you to produce real constant dollar numbers from 1992 on for the all those countries you claim are doing so much worse than Japan.

    Here, I’ll do another couple for you, outside of the G-7, from your chart’s list of countries that you *say* Japan has topped…

    GDP per capita by PPP, 2010 dollars
    Nation … 1992 …….. 2010 … Change
    Greece … 21,947 …. 28,834 … 1.31
    Spain ….. 24,034 …. 29,652 … 1.23
    Japan ….. 32,111 … 33,828 …. 1.05

    See, it can be done! And ooops, both Greece and Spain, which you claim did worse than Japan, actually did over *4x better* than Japan!

    But … how to reconcile this with the chart you keep linking to? It’s simple (even apart from these real numbers omitting 18 years of US inflation and 5 Japan bubble years).

    The thing is that chart of yours isn’t about growth rate at all. That’s why the word “growth” doesn’t appear on it anywhere. That chart is simply a ranking of nations by GDP per capita in 2007. Period.

    That’s why Japan is in the middle of it. Because its 2007 GDP per capita was in the middle of the *ranking* in 2007. Whether its initial GDP was high or low, and thus its growth was high or low, is irrelevant.

    Japan is ranked ahead of Spain and Greece on your chart NOT because its GDP per capita grew faster than theirs, which it didn’t, but because it *ended larger*. Japan would be ranked at the same spot on that list if its GDP had *shrunk* since 1987. Get it?

    That is strictly a ranking by GDP in 2007. End.

    Dude: you don’t know how to read your own charts.

    Now I suggest that it really is finally time for you to stop digging.

    To everyone else, this guy is just flat incompetent. In usenet days we used to have a saying, “Don’t feed the trolls. (Unless you want to keep them around for amusement value.)”

  100. Gravatar of Major_Freedom Major_Freedom
    24. March 2012 at 14:36

    D R

    Just because millions of individuals do a thing does not mean the aggregate effect is intended- let alone desired- by any one of those millions. Do you really think everyone was wondering how to reduce aggregate income?

    D R, you have to STOP thinking like a central planner. I am not trying to convince you that the “aggregate” is something that ANY individual or group of individuals intend to change when they act as individuals, as if my talking about the aggregate effect is something that is planned by a single consciousness. The aggregate effect of millions of individuals doesn’t have to be consciously planned.

    The same way that the aggregate effect of millions of individuals saving and investing in the division of labor is a more productive overall economy, which is not consciously planned by any individuals, so too will the aggregate effect of millions of individuals trying to hold more cash is a lower aggregate nominal spending, and higher purchasing power of money. One individual choosing to hold more money will, however small, raise the purchasing power of money.

    When lots of people try to hold more cash, then the effect is also a higher purchasing power for those people. They don’t even have to consciously intend for aggregate spending to fall, for their actions to bring them benefits.

    No economic statistics, least of all aggregate statistics like aggregate demand, have to be controlled by a single consciousness. A lack of conscious control for those aggregate statistics does NOT mean that there has to be an external to the market entity that ensures it remains at whatever crazy arbitrary level you believe is “scientific” or “stabilizing” or “promoting of prosperity.”

    No, when millions of individuals cut back on their spending, they did not think this would result in their becoming unemployed.

    Oh my God, you mean when people decide to spend more money on cars, and less money on horse carriages, that they didn’t intend for those workers in the horse carriage business to become temporarily unemployed? Darn it! The consumers are evil for improving their situations by voluntary behavior! Yes, the all mighty powerful state should step in and print and money to prop up the horse carriage industry, and prevent those poor poor workers from being compelled to seek work in those businesses that the consumers ARE spending their money.

    Have you read Bastiat’s satirical essay called The Petition of the Candlestick Makers?.

    If consumers change their spending habits, and that creates temporary unemployment, then it is counter-productive for the state to print and spending money to keep those workers in businesses that consumers don’t even value.

    You have to stop trying to attack and overrule consumer sovereignty. The whole reason we work hard to produce all day is ultimately to give what consumers (meaning all of us) want. If consumers spend less money in one industry, and more in another industry, and that causes temporary unemployment, then let them. If consumers spend less money on consumption in general, and that causes temporary unemployment in consumer goods industries in general, then let them.

    You have to cease viewing peaceful, voluntary, market oriented consumer preference changes as “self-destructive” behavior simply because those who are working for the consumer’s benefit have to change their plans and find new jobs.

    Bill Woolsey

    I actually understand basic monetary economics. I have told you before, not only have I read Rothbard and Mises, I was once a dogmatic Rothbardian. (By the way, neither Hoppe nor Block have added anything useful.)

    Bill, I’d rather just focus on ideas to be honest. But you keep prefacing your posts with “MF, you don’t understand economics”, or “MF, your’e confused.”

    Let me tell you that *I* actually understand both basic and advanced economics. So you can dispense with the personal attacks, and so will I. Deal?

    I take the orthodox view that the demand for money is a demand for real purchasing power. It is like second nature to me. More importantly, is is a basic assumption of the conversation.

    Then why are you saying that an increased demand for cash holding has to be responded to with the central bank bringing about a REDUCED purchasing power of money? By creating more money, and by bringing about more spending, that prevents individuals from achieving the higher purchasing power desired.

    So, if there is an increase in the demand to hold money at any given level of prices, then an increase in the nominal quantity of money, at that same level of prices, is an increases the real quantity of money that matches the increase in the real demand for money.

    NO! That’s false. The only way that the larger portion of the population can increased their cash balances in the way you describe, is by way of more money spending “in circulation.” The Fed doesn’t send checks to every individual. Individuals in the aggregate increase their cash balances through TRADE. If more money and spending are put into exchanges, into trades, then that can only INCREASE prices.

    For example, if I am a home seller, and I want to increase my cash balance, then the only way I can do so is by buyers of homes spending MORE money on the homes I sell. That means the home prices will be HIGHER Bill, not lower. So by the time I have my higher cash balance, guess what happened? PRICES have risen, thus totally nullifying my desire to have HIGHER purchasing power.

    Make sense now?

    Your error is that you believe cash balances in the aggregate can rise throughout the economy totally divorced from exchanges, demand and prices, as if inflation of the money supply really is sent by helicopters and everyone’s cash balances increase like shmoo from the sky totally apart from spending from person to person.

    I am perfectly aware that a decrease in the level of prices and wages would incease the amount of purchasing power people hold, which we monetary economists call an increase in the real quantity of money. Generally, we would say that if the real demand for money increases, and the nominal quantity of money is fixed, then equilibrium requires an inversely proportional decrease in the price level, including resource prices level wages, so that the real quantity of money rises to match the increase in the real demand for money.

    All well and good. But you also ought to be perfectly aware that higher purchasing power cannot be had if inflation of the money supply takes place alongside people trying to hold higher cash balances in an attempt to increase their purchasing power.

    The root principle here that has to be made clear is that total cash balances cannot increase when individuals seek to increase their purchasing power. Individually, people can do it, on the basis of other individuals reducing their cash balances through trade. But in the aggregate, it cannot be done (in the absence of inflation). So if everyone wants to increase their cash, as happens in a depression, then the ONLY way that they can accomplish their desires is by way them reducing prices. This doesn’t have to be controlled by a single consciousness, but that is the aggregate result nonetheless. You seem to get this.

    But for some reason, you believe that people can increase their purchasing power WHILE the Fed is printing and spending money to increase money and spending in the economy. This is impossible. My guess for why you believe it can be done is because of an unfortunate side effect of taking concepts like aggregate demand, and believing that the Fed can raise and lower it, all on their own, without the intended or unintended “aid” of millions of individuals throughout the economy. Remember, aggregate spending is just the total spending of all the individuals in the economy. If you want that statistic is to increase from where it otherwise would have been, then what you must accept is that you are wanting millions of individuals throughout the economy to INCREASE their nominal spending.

    And here’s the kicker: If individuals are going to spend more money, then I hope you realize that more money in the economy does NOT bring about more supply. Printing money is not the creation of a factory. So that means if millions of individuals are going to increase their nominal spending, and real supply is whatever it is, then, and this is what you and all market monetarists have to understand: PRICES WILL RISE.

    You are fallaciously holding prices constant when you conceive of the Fed bringing about more nominal spending throughout the economy. You don’t seem to understand that millions of individuals can only increase their cash balances via exchanges, of trading a definite supply of goods and services for the more money and spending that is being brought about by inflation.

    In other words, aggregate cash balances can only rise by virtue of people bidding and asking for HIGHER PRICES than they otherwise would have paid, for all the goods and services they trade with each other.

    This is difficult to grasp so I will explain further. While an individual home seller can increase his purchasing power by way of simply selling at whatever prices he can get, and then accumulating cash, which requires others to decrease their cash, in the situation where EVERYONE wants to hold more cash, then you MUST allow this process to occur by letting prices fall. It’s the only way people in general can increase their purchasing power.

    And what does all this that mean? It means that should people in general succeed in raising their cash balances, they are totally deprived of the necessary flip side of the coin to increase their purchasing power: falling prices.

    Do you see it now?

    My view is that it is better for the nominal quantity of money to rise at a given level of prices, which also raises the real quantity of money, an amoiunt that matches the increase in the real demand for money.

    Nominal spending cannot increase without prices being higher than they otherwise would have been. Aggregate demand is not divorced from exchanges and prices. Aggregate demand is just the collective result of millions of individuals exchanging goods and services for specific prices. If you want aggregate demand to rise, then because this doesn’t increase real supply, it means that you’re asking for higher prices to be paid for goods. That’s the only way cash balances can increase in general.

    In both cases, the real quantity of money rises to match the real demand to hold money. In one case, the level of prices and wages is not impacted. In the otehr case, prices and wages fall in proportion to the increase in the real demand for money.

    Since prices ARE impacted, that statement is false.

    So, I would say that you have a somewhat confused understanding of this process. Mises, Hayek and Rothbard undrstood it very well. And Friedman and all of the other orthodox monetarists understood it quite well. And the Keynesians of the sixties and the new Keynesians of today, like Bernanke, understand it quite well. And the market moentarists understand it quite well. It is you that seem to think this is some key insight of the “Miseans.”

    I hope I made it more clear for you so that you are no longer confused.

    Now, reading your argument here, I can see that you have some odd notion that the reason that people accumulate money is that they want to make the purchasing power of money rise. Well, that is also delusional. It is a bit like saying that I want to buy some Apple stock in order to make the price of Apple stock rise. Now, it is true that many people buy Apple stock because they expect the price of Apple stock to rise. But to say that the reason a person wants to purchase it is because they want to make it more expense because of their own purchase is foolish. Anyway, the decrease in the equilibirum price level because of the increase in the demand for money by any one person is so small as to be irrelevant.

    You too are suffering from the same fallacious central planning mentality as D R.

    I am not saying that individuals consciously and purposefully want to increase the purchasing power of “money” like some secret central planner when they seek higher cash balances. I am saying a higher purchasing power of money is the inevitable result of everyone trying to increase their own individual purchasing power. If everyone wants to increase their purchasing power, then this can be done by letting it be, by letting the results occur, by sitting back and observing that individuals in the aggregate are very much succeeding in satisfying their respective desire to increase their own purchasing powers!

    I think what is really motivating you is the notion that if the demand for money should rise, and the nominal quantity of money should stay the same, then a real capital gain on the existing quantity of money is the just desert of those already holding the money.

    No, but nice try. This is not just some secret plan to bring rewards to existing cash hoarders, Bill. I am speaking in terms of economics and economic principles, and understanding how people can get what they want, and how they can get what they want if only you stopped trying to manipulate them because you have some ridiculously arrogant mentality that you have to save people from some alleged self-destructive behavior where people will harm themselves if “too many” of them engage in self-interested behavior.

    Just like individuals do NOT “harm themselves” by spending less money on horse carriages and spending more money on cars, thus bringing about temporary unemployment in the horse carriage industry, so too do they not “harm themselves” by spending less money on consumer goods in general and accumulating cash, thus bringing about temporary unemployment in consumer goods industries.

    Consumers aren’t working for workers and producers. Workers and producers are working for the consumers. Consumers are not morally or economically obligated to make sure that they don’t bring about unemployment in various sectors of the economy, by sacrificing their own desires of wanting higher purchasing power, for the sake of keeping workers and producers from having to change their behavior. We produce to consume. We don’t consume to produce.

    If instead, the monetary regime is one where the nominal quanity of money rises when the real demand for money rises, then there is no real capital gain on money. The increase in the nominal quantity of money has “stolen” the justly deserved real capital gain that would go to those who were already holding the money.

    Ah, I get it now. You believe that people who merely hold onto their earnings for longer than you feel is “justified”, are earning “unjust” gains if they experience an increase their purchasing power by way of falling prices. They just “sit back”, and they earn a gain. You hate THAT? Give me a break. For someone who advocates for NGDP targeting to be brought about by the central bank buying GOVERNMENT DEBT. If individuals hold cash and earn a gain, you consider than to be “theft.” If instead individuals buy government debt with their cash, and earn a gain, then all of a sudden, there is no longer theft.

    I am not sure if you are joking, but for you to say that an individual holding onto cash is “theft”, whereas they can avoid being thieves by buying government debt, which is financed by TAXES (hello!), is truly a sign of intellectual confusion.

    If I earn money, and prices around me fall, then I am not stealing anything from anyone. People who are working hard and producing, would be earning their money too. They would be making gains by producing for their fellow men, just like the cash hoarder earned their money by producing for their fellow men.

    Your worldview is so absurd that it is literally leading you to HATING people for merely holding onto their earnings for a period of time that you in your central planning mentality consider to be “unjustified.”

    And your confusion goes even deeper. By advocating for NGDP targeting via inflation, what you are doing is advocating for people to receive money from the printing machine. You want them to receive a gain at the expense of everyone else who receive the new money later on. And yet you are claiming to be all against people earning a gain for doing nothing? What are the primary dealers doing to be first in line to the fed’s money printing? Nothing. They are buying and selling securities, and their earnings their are justified, but when they get money from a money printer, they are getting MORE money than they otherwise could have gotten if they had to sell their securities in the open market, where the demand is obviously lower without an inflation machine.

    I don’t think people holding money have any such moral right to a capital gain when the demand for money rises. As in, I think your entire perspective is based upon a nonsensical chimera.

    EVERYONE holds cash Bill. If prices fall, then EVERYONE who holds cash experiences an increase in purchasing power. By saying you don’t believe people who hold cash have a moral right to make a gain (that is CRAZY!), you are saying millions of people don’t deserve any gains together by way of falling prices. Step back and just look at what you’re saying. You’re an attacker of individuals making gains in the free market. You’re immoral.

    And those individuals who have cash balances, they earned that money Bill. They are entitled to whatever that money brings them, even the gains it brings them in a free market where prices fall and their purchasing power rises. You say it will be “unfair” to those who hold lower cash versus those who hold higher cash? Well, the same thing is true for those who consume away their earnings instead of making investments. People would be free to accumulate cash to their ability, and each individual will have their own desire for cash vis a vis other things, and they will make gains according to how much they produce to earn that cash.

    You seem to be forgetting that people holding higher cash balances can only do so by earning that money by being productive. How can you possibly call the gains they make “theft”? They PRODUCED to earn that money! Just because the gain would be HIGHER if prices fall, that doesn’t mean their gain is “immoral.”

    You don’t think they have a moral right to making a gain? Well let me tell you something. I don’t think people holding short term government debt have any such moral right to a capital gain when the demand for such securities rises because of the Fed buying them with inflated money. You want to talk about illicit gains? Start in your own worldview, and stop attacking free market behavior.

    But, I will still make several points about the economics. If the nominal quantity of money is fixed, then when the real demand for money falls, the price level rises, and there is a real capital loss to all of those holding money. A system that adjusts the nominal quantity of money to the demand to hold money means that those holidng money avoid those capital losses.

    LOL not even close. They aren’t avoiding those losses. More money and spending in the economy is just making their higher nominal cash balances worth less. This is basic friggin economics!

    You can’t erase a loss by making their gross incomes higher in nominal terms, but worth less in real terms.

    Woah.

    Second, I suspect you are confusing the trend with the effect of changes. In other words, a fixed quantity of money means that changes in the demand for money around trend result in both deflations and inflations. An institution that adjusts the quantity of money according to changes in the demand for money around trend avoids both the inflations and deflations. It is better.

    No Bill, it is not better. You’re highly confused.

    An institution that reverses the very thing that people want, which the people could have otherwise gotten without that institution, is not “better.” It’s worse.

    You are implicitly admitting that people can get what they want in the absence of the central bank. Your rationalization of it is to HATE it that people can get what they want. You call it “immoral”. And what is your solution? To bring about the exact same thing you decry, which is people making gains for doing NOTHING, except being first in line to the Fed’s printing press. They get more nominal income by being first in line, and that gives them a gain that they could not have gotten if they instead had to sell their securities to the open market, and you’re saying this is an improvement?

    You’re out of your mind.

    You’re not solving the problem of “free” gains. You’re only taking the free gains away from the millions of average people in the economy, and giving them to the political and banking elite instead.

    You replace gains in the market, to gains via politics.

    You are not erasing those gains. You’re just saying “it’s immoral so let the state and the banking elite make those gains instead.”

    The major difference is that whereas the “free” gains in the market are voluntary, and moral, the “free” gains by the government and banking elite is INVOLUNTARY, and immoral.

    Second,nominal interest rates depend on the trend. Most money takes the form of deposits that pay interest. If the demand for moeny is growing, then a constant quantity of money means that the nominal interest rate paid on money is lower than it would be if the quantity of money rose with the demnd to hold it.

    False. That is just the silly liquidity theory of interest. Interest is a function of time preference, of the spread between demand for input and demand for output, meaning the ratio between investment and consumption. NOT cash holding amounts.

    The demand for money is how much money people want to hold.

    No, the demand for money is how much purchasing power people want. if the Fed prints more money, then people have lower purchasing power.

    People always want to earn more money? I suppose. But that has nothing to do with the issue at hand.

    It has everything to do with it. Saying that people’s desire to have more cash should be responded to with inflation, would result in infinite inflation. Of course the fed isn’t dumb enough to do that, so people are achieving higher purchasing power by unintentionally making prices fall over time by way of productivity.

    The way people demand more money is by selling other assets for money or else accumulating money by spending less than is earned from income.

    Oh wow, so you do understand that the only way there can be more aggregate spending, is by way of people buying and selling the same goods for higher prices, which of course reduces their purchasing power.

    Selling other assets for money is a change in the form in which assets are held. Accumulating money out of current income it a method of saving.

    Cash hoarding is not saving.

    Learn some basic economics.

    LOL, I already know basic economics. You don’t. You’re so wrong about so many things. I mean just look at what you’re saying. You were compelled to leave the realm of economics, and enter the realm of morality, and you ATTACK people’s voluntary behavior. You HATE people making gains for merely holding onto their earnings. Oh the humanity! We should keep the people down.

  101. Gravatar of Major_Freedom Major_Freedom
    24. March 2012 at 15:32

    Jim Glass

    I see you’re getting rather desperate. This time you’re relegating yourself to playing primitive tribal warfare games of “us vs. HIM”

    As far as I can see, this is the only data which is available in the source you cited. There is only “current” prices.

    So you are telling us all that, for all your lecturing about Japan’s real PPP GDP growth during the last 20 years, you have no actual data for it, because…

    1) You are incapable of finding numbers for GDP growth in constant dollar terms anywhere on the whole wide world of the web, *and*

    2) When you do have the numbers in 1992 and 2010 dollars right in front of you, you are incapable of making an inflation adjustment between them.

    Nah, just telling you that the source you cited, doesn’t contain the numbers that you reported here.

    Wow. Perhaps you should be more modest about your claims of knowledge and your degree of expertise backing them, eh?

    Oh is that what is making you mad? I am not bowing down to you? Now it makes sense.

    But no, instead you just repeat the same old link to a chart you googled up which …

    1) Counts Japan’s growth back to 1987, including 5 years of its real estate bubble growth, *and*

    2) Includes in Japan’s “growth” all the inflation in the US dollar since 1987!

    So let me get this straight. You had no problems including the time periods that included the financial crisis, which of course massively skews the results down thus misleadingly making the “lost decades” story more plausible, but you have a problem including the time period that includes THREE years of the housing boom (it crashed in 1990, not five years after 1987), because….it massively skews the results?

    Stop being a hack.

    If you don’t want to include 1987-1990, then Japan STILL grew gradually in real terms over the time period that you fallaciously claim to be “lost decades.”

    Let’s apply these very same numbers and logic for the USA:

    “Real GDP growth has been 91% per capita since 1992, superior! This superior performance is half again better even than Japan’s(!), which itself has been doing fine! (That real estate bubble I insist on counting from 1987 to 1992 for Japan really helped its growth as I count, so who could complain about a bubble here?) The Fed’s been doing a *great* job. That’s +91% *per capita*! Who could complain? I endorse this view “” Major_Freedom.”

    This would only work if I claimed the US went through a lost decades, Jim. It doesn’t work in the present situation.

    OK … the reasonable reply from you would have been to say, “Ooops. I missed the inflation adjustment. Sorry. Yes, Japan’s real PPP GDP growth per capita since its bubble burst in 1992, over the last full 20 years, has been only about 5%. Very weak.”

    Oh please. You mean you just want me to believe in the same myth as you do?

    Japan still did better than many OECD “loose money” countries. The only point I am making is that Japan did not go through any lost decades of output decline. They grew in real terms pretty much the whole time, including or excluding the housing boom 1987-1990 period.

    But hey, since you want to continue shoveling it, I again challenge you to produce real constant dollar numbers from 1992 on for the all those countries you claim are doing so much worse than Japan.

    Why 1992? The bubble burst in 1990. And I already showed you multiple sources that are SUFFICIENT to refuting the lost decades myth.

    You can slice and dice the data all you want, but the data doesn’t lie.

    Here, I’ll do another couple for you, outside of the G-7, from your chart’s list of countries that you *say* Japan has topped…

    GDP per capita by PPP, 2010 dollars

    Nation … 1992 …….. 2010 … Change

    Greece … 21,947 …. 28,834 … 1.31

    Spain ….. 24,034 …. 29,652 … 1.23

    Japan ….. 32,111 … 33,828 …. 1.05

    See, it can be done! And ooops, both Greece and Spain, which you claim did worse than Japan, actually did over *4x better* than Japan!

    Holy crap. Do you not know how to read a basic chart? Since the chart I linked to here:

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

    includes both 1987 and 2007, it means that the 2007 real GDP (PPP) number is the combined result of INCLUDING the massive housing bust in Japan. Because by 2007, PRIOR to the financial crisis, the time period that people were saying the lost decades occurred!, Japan beat all those countries below it.

    You can’t cherry pick 1992 and 2010, because the post 2008 collapse period is AFTER the time period that people claimed Japan experienced a lost decades!

    But … how to reconcile this with the chart you keep linking to? It’s simple

    This ought to be fun.

    The thing is that chart of yours isn’t about growth rate at all. That’s why the word “growth” doesn’t appear on it anywhere. That chart is simply a ranking of nations by GDP per capita in 2007. Period.

    You’re blind. Yes the chart is a ranking of GDP per capita (PPP). But what you are missing is that it includes TWO cross sectional time periods, 1987 and 2007. We can therefore see growth by seeing how much GDP changed. In other words, take your glossy eyes and look at the length of the dark blue bars relative to the light blue bars up and down the chart. Those dark blue bars relative to the light blue bars tell you how much each country grew from 1987 to 2007.

    Not only that, but precisely because 1987 is the base year, which includes a portion of Japan’s housing boom, it makes the resulting growth up to 2007 EVEN MORE PRONOUNCED. So the dark blue bar relative to the light blue bar for Japan would be even higher if 1992 was the base year.

    Yes, I know you so much want to make Japan look worse by including the financial crisis, which hit Japan harder than many other countries, but if you take the time periods that people were saying Japan went through a lost decades, then you will see that Japan did in fact grow.

    Just compare Japan to Germany. Japan almost matched Germany to the dollar in terms of the size of real GDP per capita in 1987 and 2007. Is anyone saying Germany went through a lost decades?

    It is simply amazing how you cannot even glean any growth out of the chart above. And you’re considering yourself capable of lecturing me on this?

    That’s why Japan is in the middle of it. Because its 2007 GDP per capita was in the middle of the *ranking* in 2007. Whether its initial GDP was high or low, and thus its growth was high or low, is irrelevant.

    It is very much relevant. Since Japan’s 1992 real GDP was even lower than its 1987 real GDP, it makes its 2007 ranking all the more impressive.

    Japan is ranked ahead of Spain and Greece on your chart NOT because its GDP per capita grew faster than theirs, which it didn’t, but because it *ended larger*. Japan would be ranked at the same spot on that list if its GDP had *shrunk* since 1987. Get it?

    But it didn’t shrink. THAT’S THE POINT. Japan GREW in real terms. Japan’s real GDP per capita grew from $16k in 1989, to over $32k just before the financial crisis.

    Dude: you don’t know how to read your own charts.

    LOL, I’m reading them just fine. YOU don’t know how to glean growth from the chart.

    Now I suggest that it really is finally time for you to stop digging.

    The only one digging is you. You say it’s misleading to include the housing boom, and yet it’s not misleading to include the financial crisis, which didn’t affect all countries equally. You want to include data that shrinks Japan’s real GDP growth, when the time period that is relevant is the time period people were saying Japan had a lost decades. That time was PRIOR to the financial crisis, so you can’t include it and then say “the lost decades story is right.”

    To everyone else, this guy is just flat incompetent. In usenet days we used to have a saying, “Don’t feed the trolls. (Unless you want to keep them around for amusement value.)”

    Hahahahaha, now that’s funny.

  102. Gravatar of Major_Freedom Major_Freedom
    24. March 2012 at 15:55

    Correction:

    “It is very much relevant. Since Japan’s 1992 real GDP was even lower than its 1987 real GDP, it makes its 2007 ranking all the more impressive.”

    Should read

    “It is very much relevant. Since Japan’s 1992 housing market was even lower than its 1987 housing market, it makes its 2007 ranking all the more impressive.”

  103. Gravatar of D R D R
    24. March 2012 at 16:00

    Me: “Just because millions of individuals do a thing does not mean the aggregate effect is intended- let alone desired- by any one of those millions.”

    Major: “The aggregate effect of millions of individuals doesn’t have to be consciously planned.”

    Is that supposed to be an argument *against* what I wrote?

  104. Gravatar of Major_Freedom Major_Freedom
    24. March 2012 at 16:15

    D R:

    Is that supposed to be an argument *against* what I wrote?

    Yes, because you said it was absurd for me to (allegedly) suggest that individuals acting to increase their purchasing power (via higher cash balances relative to prices), is somehow a conscious set of choices for individuals to reduce the general price level, or aggregate nominal spending.

    That response I gave is to show you that this is not what I am suggesting.

    The aggregate price level results, the aggregate nominal spending results, are just an outcome of the collective actions of individuals, exactly like workers in the horse carriage industry becoming temporarily unemployed due to being outcompeted by the car companies, is just an outcome of the collective actions of individuals.

    For some reason, when the context is “everyone”, and the actions of “everyone”, you refuse to mentally accept temporary unemployment that results, and you say the Fed should print and spend money to “reverse” things.

    But then why aren’t you advocating for the Fed to print and spend money to bail out individual companies that consumers bankrupt and bring about temporary unemployment and losses? Here’s where you go from a correct “No inflation to bail out individual companies”, to a fuzzy, middle magical realm where logic turns upside down, black becomes white, down becomes up, and all of a sudden, in the aggregate, unemployment and bankruptcies and losses are intolerable, and the fed does have to print and spend money to reverse voluntary desires that created temporary unemployment, and now they should print and spend money to bail out companies.

    Your silly excuse that because consumers didn’t intend to generate unemployment by way of trying to hold more cash and reducing their consumption spending, is no less true for consumers not intending to generate unemployment by choosing new, better products over older, inferior products. You’re OK with consumers generating unintentional temporary unemployment by way of changing their spending from here to there, but you’re not OK with consumers generating unintentional temporary unemployment by way of reducing their consumer spending.

    My guess as to why you hold this contradictory view is that you believe an aggregate reduction in consumer spending means those who become unemployed can never be rehired, as if employment depends on a minimum level of consumer spending, which is….what? A totally arbitrary status quo level of consumer spending. Even for an economy that has too much consumer spending relative to investment spending. It doesn’t matter.

  105. Gravatar of Major_Freedom Major_Freedom
    24. March 2012 at 16:44

    Bill Woolsey:

    This paragraph I wrote:

    “For example, if I am a home seller, and I want to increase my cash balance, then the only way I can do so is by buyers of homes spending MORE money on the homes I sell. That means the home prices will be HIGHER Bill, not lower. So by the time I have my higher cash balance, guess what happened? PRICES have risen, thus totally nullifying my desire to have HIGHER purchasing power.”

    I can anticipate being misunderstood.

    In this example, general prices don’t have to rise, because me as an individual home seller, who receives more demand for houses, will be in an economy with less demand for other goods, and thus lower prices for other goods. So general prices don’t rise. But my cash balance can only rise if people SPEND more money on existing homes, and in a given supply of homes, an increase in demand for homes will make home prices rise. I take supply of houses as a given, to make it serve as an analogy for the whole economy, where supply in the aggregate has to be taken as a given, in order to analyze what happens when inflation of the money supply, and the concomitant increase in nominal spending, takes place.

    The point is that my cash balance can only rise by virtue of engaging in trades with others who have money to spend.

    Since nominal spending only takes place in exchanges, it means that increases in nominal spending will only take place in exchanges as well. With more money and spending IN EXCHANGES than otherwise would have been the case, it means, and this is the point I tried to make with the example above, it means that PRICES must be higher.

    The lesson here is that you can’t divorce aggregate demand from exchanges. You can’t abstract it away from exchanges. if aggregate demand rises, it means there is more money and spending in exchanges. Since printing more money and spending is not the same thing as building more factories and capital goods and consumer goods, it means that the prices of factories, capital goods and consumer goods must rise.

    So you holding prices constant when considering a scenario of higher aggregate nominal spending, is an incorrect assumption.

    Finally, I used to be a dogmatic statist monetarist Keynesian like you. Really, I mean I did what you do now, which is pray to Milton Friedman, worship inflation, and sing all glory to counterfeiting because I too had the irrational philosophical worldview that individual self-interest, even in a context of respect for private property rights, resulted in widespread self-destructive behavior.

    But then I read the non-dogmatic Austrians, who base their economics on acting man, which is a very Earthly framework, and my dogmatism evaporated. I ceased being a mystical hater of free markets, and became an economist instead.

  106. Gravatar of Lorenzo from Oz Lorenzo from Oz
    24. March 2012 at 20:48

    Major_Freedom: Aristotle wasn’t Catholic. You just introduced that term to smear natural law. If you ever bothered to read Aquinas, you would have known that while he was a devout worshipper, he was very clear that his natural law philosophy does not REQUIRE a supernatural being. Wow, that so misses the point. Belief in God has nothing to do with my comment. St Thomas Aquinas achieved a Christian synthesis with Aristotelianism that has been the basis of Catholic philosophy almost ever since (certainly since the Council of Trent). To Aquinas, Aristotle was “the Philosopher” and Ibn Rushd/Averroes was “the Commentator”–Aristotle was not even a monotheist, but Ibn Rushd/Averroes in particular put a monotheist construction on Aristotelianism that Aquinas then synthesised with Christian thought.

    The notion that natural law is somehow needed for moral reasoning is also wildly wrong and so not implied by anything I wrote.

    No, one cannot prove almost anything in natural law. Natural law is very restrictive. Actually, that is a good point. What I should have said is that one can be as restrictive as you like. I haven’t been happy with my own formulation on this point, so that is helpful.

    Money is ALSO a storage of value, a commodity that has value in its own right. Only in a very limited sense. It is very much the least interesting aspect of money.

    There is no such thing as “pure” money that has zero value outside of its exchange use. How about digital entries? The value you point to is radically unconnected to its exchange value, that is the point.

    Yes the world is complex, but that doesn’t mean we can’t be certain of some things. Perhaps, but particular modes of thought and reasoning encourage excessive epistemic confidence.

  107. Gravatar of Major_Freedom Major_Freedom
    24. March 2012 at 21:52

    Lorenzo from Oz:

    Wow, that so misses the point. Belief in God has nothing to do with my comment. St Thomas Aquinas achieved a Christian synthesis with Aristotelianism that has been the basis of Catholic philosophy almost ever since (certainly since the Council of Trent). To Aquinas, Aristotle was “the Philosopher” and Ibn Rushd/Averroes was “the Commentator”-Aristotle was not even a monotheist, but Ibn Rushd/Averroes in particular put a monotheist construction on Aristotelianism that Aquinas then synthesised with Christian thought.

    Is there a reason why you brought up Catholicism?

    The notion that natural law is somehow needed for moral reasoning is also wildly wrong and so not implied by anything I wrote.

    Those who hold that it is only in the nature of things that a rational human morality can be grounded, insist that natural law is needed in any discussion of morality. I wasn’t saying it is implied in what you wrote. I simply wanted to convey that it is justified for a natural law theorist to critique positive law. I mean, who else but a natural law ethicist could say that murder and rape are still wrong even if the entire world, minus him of course, believe they are morally justified?

    “No, one cannot prove almost anything in natural law. Natural law is very restrictive.”

    Actually, that is a good point. What I should have said is that one can be as restrictive as you like. I haven’t been happy with my own formulation on this point, so that is helpful.

    Actually not even the natural law theorist can be arbitrarily as restrictive as one would like. There really is no “choice” in the matter. It’s very much like mathematics in this respect. It’s constrained by the logical structure of the human mind, and reality.

    “Money is ALSO a storage of value, a commodity that has value in its own right.”

    Only in a very limited sense. It is very much the least interesting aspect of money.

    You can say “limited” all you want. You can belittle it, minimize it, say it’s not interesting, you can even ignore it. But the property that money has to be valued for non-monetary purposes, is nevertheless a necessary requirement for a commodity to even be a money.

    A commodity that is not valued for non-monetary purposes, cannot function as money. It would be like trying to turn fairies on pinheads into money. Every money that has ever existed, had the attribute of being also valued apart from its monetary use. That will never change. Take our current monetary system of pure fiat. Cotton and linen for Federal Reserve note money, silicon and copper chips for digital money, tin and nickel for coin money, the list goes on and on. Money is just the most marketable economic good. All economic goods, even money, are valued apart from any potential money use.

    That may make you mad, but it’s the case, and so it’s very irresponsible to sweep that fact aside.

    “There is no such thing as “pure” money that has zero value outside of its exchange use.”

    How about digital entries?

    Notice that every single physical object that “houses” such digital currency, is valued apart from any monetary use.

    The value you point to is radically unconnected to its exchange value, that is the point.

    Except it isn’t. Even electrons and circuits in specific orientations, i.e. information, have an exchange value.

    Digital money is much like encrypted data in this sense. People pay for it.

    “Yes the world is complex, but that doesn’t mean we can’t be certain of some things.”

    Perhaps, but particular modes of thought and reasoning encourage excessive epistemic confidence.

    Seemingly paradoxically, I think it is the most hardcore skepticism that leads to excessive epistemological confidence. Skeptics are way too overconfident in how sure they are about the nature of the human mind, such that they become excessive in their zeal that humans cannot know anything with certainty. Such certainty in such a contradictory outlook requires excessive confidence, no?

    At any rate, I think it’s better to be overconfident and thus trust oneself to be able to learn if one is wrong, than be underconfident and not trust oneself to even realize one made an error and that one has the capability of correcting it and improving one’s knowledge.

    You might have your own approach.

  108. Gravatar of Bill Woolsey Bill Woolsey
    25. March 2012 at 05:08

    “For example, if I am a home seller, and I want to increase my cash balance, then the only way I can do so is by buyers of homes spending MORE money on the homes I sell. That means the home prices will be HIGHER Bill, not lower. So by the time I have my higher cash balance, guess what happened? PRICES have risen, thus totally nullifying my desire to have HIGHER purchasing power.”

    This is false.

    An individual can increase money holdings without those they sell to spending more. All the individual has to do is spend less. The money received is the same, and if less money is spent than recieved, then money holdings expand for the individual.

    When the quantity of money expands to match the increase in the demand to hold money, then those borrowing the newly created money spend it, and those selling to them have more.

    Those who would have sold to those who are increasing their money demand have less money.

    There is a change in the composition of demand away from those who would have sold to those who want to hold more money towards those who sell to those who borrow the nearly created money.

    The total amount of purchasing power held by everyone all together has increased. The person who demanded more money as money (which they obtained by spending less,) and the people who were selling to them have less and the people selling to those who borrowed the newly created money have more. The total has increased by exactly the increase in the intial demand for money and it is in the hands or the person who demanded for money.

    While the demand for the products of those selling to those receiving the newly created money rises, and presumable the prices and production rises, but the demand for those who were selling to the person who is accumulating more money have lower demand for their products and presumably lower prices and production. Total spending is not effected. Aggregate production is not effected. And the price level is not effected. There is a shift in the composition of demand.

    It is false that the quantity of money each individual holds cannot increase without prices rising.

    If the quantity of money rises no more than the demand to hold money, then there is no tendency for prices to rise at all. But the real quantity of money has risen.

    By the way, I have never once in my entire life claimed that the only way for the real quantity of money is for a central bank to create more money. I have never said that the only way for real expenditure on output to match productive capacity is for a central bank to expand the quantity of money.

    If have explained in great detail the market process by which full employment returns with a fixed nominal quantity of money. It is just that it is horribly desruptive and painful, and adjusting the nominal quantity of money to the demand to hold it is much less distruptive and painful.

    The quantity of goods isn’t fixed. They can and do change.

    The notion that any increase in the spending must cause higher prices because the quantity of goods is fixed is absurd.

    If people want to hold more money because of a depression, an increase in the nominal quantity of money allows them to hold more. If the increase is modest, it would just make the deflation less. If it is just right, there is no deflation. If the quantity of money rises more than the demand for money, then the price level rises.

    If the monetary regime has already failed to accomodate an increase in the demand to hold money, and as result, spending has fallen, and both prices and production have fallen too. The nominal demand for money falls to match the existing quantity when this happens. The real quantity rises with the lower prices, and the real demand falls with the lower real output and real income. Anyway, if this disturbance is reversed, and the nominal quantity of money is increased to the amount people would hold if prices and output had not fallen, then the likely result is that prices and output would both rise–recovering to their previous level.

    But even after prices have recovered, the real quantity of money is higher matching the demand. Now, if people are only demanding more money because of poor economic conditions, and the economy does recover, and the demand to hold money falls again, then the quantity of money should decrease.

  109. Gravatar of Major_Freedom Major_Freedom
    25. March 2012 at 05:52

    Bill Woolsey:

    “For example, if I am a home seller, and I want to increase my cash balance, then the only way I can do so is by buyers of homes spending MORE money on the homes I sell. That means the home prices will be HIGHER Bill, not lower. So by the time I have my higher cash balance, guess what happened? PRICES have risen, thus totally nullifying my desire to have HIGHER purchasing power.”

    This is false.

    I called it.

    https://www.themoneyillusion.com/?p=13634#comment-145136

  110. Gravatar of D R D R
    25. March 2012 at 07:30

    “That response I gave is to show you that this is not what I am suggesting.”

    You *seemed* to suggest that individuals increase cash holdings in the *hopes* that this would lower prices. If this is not what you meant, perhaps you should clarify.

    As for this business about what I do and do not think, you are clearly no reader of minds.

  111. Gravatar of Major_Freedom Major_Freedom
    25. March 2012 at 07:36

    Bill Woolsey:

    An individual can increase money holdings without those they sell to spending more. All the individual has to do is spend less. The money received is the same, and if less money is spent than recieved, then money holdings expand for the individual.

    OK good, now think in the aggregate, and what happens when there is an increase in aggregate nominal spending, which is just the totality of all money spent in exchanges. Since more dollars in exchanges is not the same thing as more real goods being exchanged, then it is necessary that prices rise.

    When the quantity of money expands to match the increase in the demand to hold money, then those borrowing the newly created money spend it, and those selling to them have more.

    This is false. People cannot increase their cash holdings except by way of exchanges, which means people cannot make more money to hold unless the prices for what they sell are higher. You say all they need to do is spend less out of income, but my point is that prices rise on the income side. You are saying prices are only relevant on the spending side. This is all wrong because income IS the flip side of people spending.

    Aggregate nominal spending rising means aggregate nominal incomes are rising. Aggregate nominal incomes rising means money in exchanges increase. That means prices rise. They don’t stay the same.

    It is impossible to create enough money to “match” the desire to acquire it. This is, funny enough, why you believe it’s possible. Every new dollar the Fed creates, as long as the dollar is still money, will be desired by someone somewhere.

    The desire for money ALWAYS outstrips the supply of money. This is what makes money scarce.

    You are still incorrectly divorcing money spending with exchanges and prices. You can’t do that. Cash balances for people cannot rise unless those people receive money, which means other people have to spend money.

    The total amount of purchasing power held by everyone all together has increased. The person who demanded more money as money (which they obtained by spending less,) and the people who were selling to them have less and the people selling to those who borrowed the newly created money have more.

    You’re ignoring the processes and focusing only on final states of rest. You correctly identified that those who want more money need to find those who want less money. Here, prices do not change because it’s a shift in demand, not an increase in demand. But you are completely ignoring the affect that creating, borrowing and spending new money into existence has on prices. When new money is borrowed and spent into existence, THAT raises prices. So the net effect in your scenario here is no change in prices on account of spending existing money PLUS the increase in prices on account of borrowing new money into existence.

    So it is impossible to avoid a rise in prices from what they otherwise would have been, if new money is borrowed and SPENT into existence.

    The total has increased by exactly the increase in the intial demand for money and it is in the hands or the person who demanded for money.

    And along the way, prices have risen precisely because of the additional nominal spending in exchanges. If you again imagine another “desire for more money” (a desire of which is all the time), and against another round of inflation via borrowing and spending money into existence, then prices will again go up.

    While the demand for the products of those selling to those receiving the newly created money rises, and presumable the prices and production rises, but the demand for those who were selling to the person who is accumulating more money have lower demand for their products and presumably lower prices and production. Total spending is not effected.

    No, now you’re ignoring the rise in prices that took place in the particular goods that are sold to those who receive more money because of others wanting less money. Now you’re focusing only on the fall in prices due to the lower spending of those lower cash balance people, and then connecting these people up with those who are bringing about higher prices on account of more borrowing, and then saying the net effect is zero.

    You have to include three variables, not just two.

    The three variables are

    1. Those who bring about higher prices by increasing their spending out of existing cash balances.

    2. Those who bring about lower prices by decreasing their spending out of existing cash balances.

    3. Those who bring about higher prices by increasing their borrowing and spending and creating new cash balances.

    The first two cancel, but the addition of the third is what brings about a net rise in general prices, and it is here that the source of new money and spending in exchanges exists.

    Aggregate production is not effected. And the price level is not effected. There is a shift in the composition of demand.

    Nope. Aggregate production is affected by way of temporarily lower interest rates that took place on account of borrowing new money into existence. The price level is increased. There is an addition to aggregate demand. When it comes to spending money out of existing cash balances, those who try to spend more require others to spend less, and thus no effect on general prices. When it comes to borrowing and spending new money into existence, those who try to borrow and spend more will bring about an addition to aggregate demand, and thus will bring about higher prices.

    It is false that the quantity of money each individual holds cannot increase without prices rising.

    No, it is false that the quantity of money ALL individuals taken together collectively, cannot increase without prices rising.

    If the quantity of money rises no more than the demand to hold money, then there is no tendency for prices to rise at all. But the real quantity of money has risen.

    The demand for more money is practically infinite. Practically everyone wants more money. It is absurd to believe that a scenario can exist where there is only a delimited desire for more money, and that more inflation of the money supply can somehow satisfy that delimited desire, until the next time the desire increases.

    This is not what happens in reality. Any central bank that truly followed a policy of creating more money whenever they believed people wanted more of it, would very quickly collapse the currency. If I asked you if you wanted more money, and if I asked everyone else, then the answer would almost universally be “yes.”

    By the way, I have never once in my entire life claimed that the only way for the real quantity of money is for a central bank to create more money.

    I didn’t accuse you of that.

    I have never said that the only way for real expenditure on output to match productive capacity is for a central bank to expand the quantity of money.

    Didn’t accuse you of that either.

    If have explained in great detail the market process by which full employment returns with a fixed nominal quantity of money. It is just that it is horribly desruptive and painful, and adjusting the nominal quantity of money to the demand to hold it is much less distruptive and painful.

    If merely avoiding pain and disruption is so important to you, then why don’t you advocate for the Fed to print money to bail out individual companies that consumers want to bankrupt? If you say consumers can bankrupt companies, then why not via them reducing their consumption spending and holding onto their earnings for a longer period of time than before?

    I don’t believe you when you say that the reason for why you are calling for inflation is for the benefit of the regular people. I don’t believe you because you attack regular people who make “unjust” gains by way of paying lower prices and seeing their money earnings rise in purchasing power. You’re just your run of the mill cash hoarder hater.

    The quantity of goods isn’t fixed. They can and do change.

    Printing money is not the creation of a real good.

    The notion that any increase in the spending must cause higher prices because the quantity of goods is fixed is absurd.

    It’s not absurd. It’s absurd to believe that an increase in nominal spending from what otherwise would have existed, DOESN’T bring about higher prices than what would otherwise have existed.

    It doesn’t matter if inflation is followed temporally by higher, unchanged, or lower prices. This is counter-factual argumentation. More money and spending in exchanges than what would otherwise existed raises prices in exchanges from what they otherwise would have been. This is mathematically necessary. It is not hypothetical or empirical.

    If people want to hold more money because of a depression, an increase in the nominal quantity of money allows them to hold more.

    Which raises prices along the way, which destroys their desire to increase purchasing power.

    If the increase is modest, it would just make the deflation less. If it is just right, there is no deflation.

    If the increase is positive, then prices will be higher than they otherwise would have been. If the increase is negative, then prices will be lower than they otherwise would have been.

    Temporally, it depends on productivity.

    If the quantity of money rises more than the demand for money, then the price level rises.

    The demand for more money is not delimited. The desire for more money that what exists is always present. If this didn’t exist, money couldn’t function as money. Money must be scarce, which means the desire for it has to outstrip the supply of it.

    You’re just imagining a problem that doesn’t exist, and calling for a policy that not only cannot solve it, but doesn’t even do what you claim it does.

    If the monetary regime has already failed to accomodate an increase in the demand to hold money, and as result, spending has fallen, and both prices and production have fallen too.

    Consumers who reduce their consumption spending by trying to increase their cash balances, this is SUPPOSED to be accompanied by a reduction in production of present goods. It’s what the consumers want by virtue of their actions. They aren’t wanting to consume the same as before. By their actions, they want to consume less in the present, and more in the future (because they hold their cash rather than burning it).

    By saying that this has to be responded to with inflation of the money supply, and higher nominal incomes and hence higher nominal prices, you are short circuiting this process and attacking the very thing consumers want.

    The nominal demand for money falls to match the existing quantity when this happens. The real quantity rises with the lower prices, and the real demand falls with the lower real output and real income. Anyway, if this disturbance is reversed, and the nominal quantity of money is increased to the amount people would hold if prices and output had not fallen, then the likely result is that prices and output would both rise-recovering to their previous level.

    No, that’s false, because it distorts economic calculation. Consumers who spend less money and who try to increase their cash balances, would have otherwise sent signals to investors to invest into and produce fewer consumer goods, and redirect their capitals into capital goods (future consumption). Inflation distorts this by preventing the fall in prices from taking place, which therefore prevents it from coordinating consumer and investor/seller behavior.

    The nominal demand for money cannot rise in the aggregate. You are still ignoring the lesson that total cash balances cannot rise when everyone wants to hold more money. If everyone wants to hold more money, then everyone is thinking that prices are too high relative to their cash balances. The only way to solve this is by them increasing their purchasing power.

    You mistakenly believe the Fed can do this without prices and spending falling, by way of inflation. Your main error is that higher aggregate cash balances cannot rise but through higher aggregate nominal spending. But higher aggregate nominal spending INCREASES prices. It does not avoid affecting prices. This is the case even if everyone is wanting to hold higher cash balances only.

    It’s like you believe it’s possible for everyone to be able to think and do this: “I want to increase my cash by X, and I will do this through maintaining existing income over time, but reducing my spending over time.”

    What people really want when they think this is higher purchasing power, not just more dollars. The reason why inflation of the money supply cannot solve this desire, is because it is impossible for inflation of the money supply to increase everyone’s cash balances and yet have everyone maintain the same aggregate income. You are mistakenly separating incomes and spending from each other, when they are two sides of the same coin.

    The ONLY way that everyone can experience a rise in purchasing power is by the “disruptive” process of falling spending and falling prices. They cannot increase their purchasing power in the way you describe. Inflation affects the income side of the coin. You mistakenly believe that as long as people don’t spend more, then inflation cannot raise prices. But that’s silly. Higher incomes means people are in fact spending more, and with higher incomes and spending, prices will be higher. You incorrectly said prices don’t have to rise when this happens. But that violates basic mathematics. Higher incomes in the aggregate cannot take place without higher prices than would have otherwise existed. It doesn’t mean you have to see increasing prices over time in the temporal sense, it just means that whatever prices exists, will be higher than they otherwise would have been had incomes been lower without the inflation.

    Suppose 1000 total cash balances exist, and there is 1000 total spending each period. You mistakenly believe that it is possible to increase everyone’s cash balance via inflation, without affecting prices, as long as everyone is trying to hold higher cash balances (i.e. purchasing power). Here’s how you can see that’s wrong: If we for example assume that people want 10% higher purchasing power, then prices have to be 10% lower RELATIVE to cash balances. This of course means that, as a preliminary for now, either prices have to fall by 10% and cash balances remain the same, or cash balances have to rise by 10% and prices remain the same. Agreed?

    Well here’s how we can eliminate your proposal of inflation:

    Ask how everyone’s cash balances can rise by 10% while prices remain the same.

    The only way it can be done is if people see a 10% rise in their incomes. Do you understand why it has to be through incomes only? Has to be through incomes only, because if instead people tried to increase their purchasing power through reducing their spending in an attempt to raise the purchasing power of their cash balance by 10% relative to prices, then that will prevent others from increasing their purchasing power by 10% through increased cash balances relative to prices. Do you see?

    So if you believe that inflation is a possible solution, you still cannot abstract away from exchanges and incomes. Incomes have to rise by 10%. But what does 10% higher nominal incomes lead to? It leads to aggregate spending of 1100 instead of 1000. What does that lead to? It leads to higher prices of course.

    So what ends up happening with the inflation solution, is that while yes, cash balances are 10% higher, people are nevertheless still being deprived of their actual desire to increase their purchasing power, because while their cash is 10% higher, prices are also 10% higher too (since aggregate cash balances can only increase via higher aggregate incomes and spending). The purchasing power of their cash balances is therefore no higher than before. Total cash balances is 1100, but total spending was 1100 and hence prices were 10% higher.

    Let’s try it again. Since people didn’t get what they wanted, they again try to increase their purchasing power by 10%. If inflation is the solution yet again, then just like before, while cash balances do increase by 10%, to 1210, it had to be done through higher aggregate incomes and spending of 1210. Remember, people who reduce their spending in an attempt to increase their purchasing power, must be making the same income to in order to accumulate cash. But maintaining the same incomes all around means prices won’t fall. If cash balances rise by 10% to 1210 then, it MUST be the case that the income side MUST grow to 1210. But if incomes rise to 1210, then again, the PURCHASING power of money will have again fallen, and people will be frustrated in not getting a 10% increase in purchasing power.

    And on and on it goes.

    It should be clear that the only way everyone can increase their purchasing power by 10% is by a fall in prices of 10% and the same cash balances as before. Higher aggregate cash balances just means there is higher aggregate incomes and thus higher aggregate prices.

    But even after prices have recovered, the real quantity of money is higher matching the demand. Now, if people are only demanding more money because of poor economic conditions, and the economy does recover, and the demand to hold money falls again, then the quantity of money should decrease.

    And the penny drops. As with all absolutists, you leave an escape hatch that gives the central planners to be the final judge on exactly when people wanting more money is “because of poor economic conditions” and when it is otherwise, thus totally maintaining for themselves the control and decision making for when inflation is “good inflation”.

    How in the world can one possibly distinguish between a person wanting to hold more cash and more purchasing power because of “poor economic conditions” versus “otherwise”? What will your central planning mind desire if people disagree on how bad “the economy” really is? Suppose a person considers himself to be doing well in an economy that another who doesn’t consider himself to be doing well would consider to be “poor economic conditions”. Should the Fed inflate or not inflate? Oh that’s right, better not go down that route, and instead fall back on “it depends on what happens to NGDP.” But since when do individuals care about NGDP? Individuals only care about their own markets, their own incomes. It’s absurd to treat individual market actors as nothing but means to some “nobler” end that is NGDP, as if individuals even plan for NGDP when they plan and act economically, such that if NGDP falls from where it was just before, that it means “something is wrong.” Humans aren’t robots. It’s not the case that they have to be either spending no less than they did before, or else something is wrong with them, and they “need help” from some external to the market agency.

  112. Gravatar of D R D R
    25. March 2012 at 07:57

    “OK good, now think in the aggregate, and what happens when there is an increase in aggregate nominal spending, which is just the totality of all money spent in exchanges. Since more dollars in exchanges is not the same thing as more real goods being exchanged, then it is necessary that prices rise.”

    That’s not obviously true. Prices could fall and the quantity of stuff exchanged could rise by more than enough to compensate for the fall in prices.

  113. Gravatar of D R D R
    25. March 2012 at 07:59

    “The desire for money ALWAYS outstrips the supply of money. This is what makes money scarce.”

    Way to conflate “desire” and “demand”

  114. Gravatar of Major_Freedom Major_Freedom
    25. March 2012 at 08:01

    D R:

    “That response I gave is to show you that this is not what I am suggesting.”

    You *seemed* to suggest that individuals increase cash holdings in the *hopes* that this would lower prices. If this is not what you meant, perhaps you should clarify.

    Even if I meant that, it still doesn’t make what you said any more plausible.

    Do you have any understanding of the price system, and how it is not planned by any single consciousness?

    The price system is not some laboratory that is controlled. The price system is very much an unplanned, yet vitally important component in economic action. No individual plans the price level. The fed tries to centrally plan it, but they shouldn’t, because it’s usefulness arises out of it’s lack of being centrally controlled.

    When individuals try to increase their cash balances, what they are actually wanting is higher purchasing power. If the price system is undisturbed by central planners, then individuals can coordinate their selfish actions with each other. The benevolent unplanned outcome of everyone trying to increase their purchasing power by seeking higher cash balances, is falling prices. The price system acts as an unplanned coordinating mechanism that can allow individuals to get what they want in a context of other individuals getting what they want too. If everyone wants more purchasing power, and they do this by trying to increase their cash balances, then the unplanned outcome of falling prices is what will enable all the individuals to get what they want.

    Folks like Bill Woolsey, at some level, understand this, and accept that people can get what they want without any need for a central planner manipulating the price system. But because folks like him are so intellectually, emotionally, and psychologically invested in advancing central banking, they need to find a reason to overrule the market. So they believe in nonsense such as cash holders earning a real gain by way of merely holding cash is “immoral”, “unjust”, and “theft.” They say this because it is necessary for the state to be introduced in what is otherwise peaceful behavior. They have to call it immoral, to justify the state as being moral. But they are totally clueless that their own advocacy of NGDP targeting, which requires central banks buying government debt, THAT is just sitting back and getting truly unjust, immoral and stolen gains, because government debt is ultimately financed by coercive taxation or the coercive inflation tax.

    It’s almost like they refuse to consider others as moral since they are themselves immoral. “Oh you think you’re all moral? Really? You think that Joe Smith sitting on his cash earnings, and benefiting from falling prices, is moral? Pshaw!”

    The price system is optimized when it is UNDISTURBED. Sure, private sector agents can disturb it by “illegal” countefeiting, but even “legal” central banks who disturb it are destroying the very benevolent coordinating mechanism that the price system presents.

    If you just stopped attacking free market prices, and understood what it really is, (it is not just another tool in a central planner’s toolbox), then you would understood what it is I am actually saying. You keep making me out to being someone who believes that protection of the free market price system somehow means I also have to believe that it is being consciously directed by those who simply want to increase their cash balances due to wanting higher purchasing power.

    When I protect the price system in discussions about what happens when people try to hold more cash, I am not trying to argue that people even know that prices will fall, or that they even have to understand it. They don’t have to understand aggregate price levels, aggregate spending, in order for the price system to function perfectly well. The price system acts as its own regulator.

    Individuals don’t have to know that aggregate spending will fall, they don’t have to know that aggregate prices will fall, before falling aggregate price levels and falling aggregate spending can be “safe” and “controlled” and “looked after.”

    Individuals do not plan according to aggregate prices, or aggregate spending. Individuals plan according to their own situations, the demands in their own markets. Investors who live in a price deflation society will just make different expectations of future prices, and thus price current factors accordingly lower. Massive and rapid declines in aggregate spending, like in 2008, are almost ALWAYS the result of prior distortion of the market due to past central bank loose money. The solution to central bank idiocy cannot possibly be more central bank. The solution to central bank failure is the free market.

    As for this business about what I do and do not think, you are clearly no reader of minds.

  115. Gravatar of D R D R
    25. March 2012 at 08:06

    “Which raises prices along the way, which destroys their desire to increase purchasing power.”

    If they *hold* the additional cash, then prices rise because…?

    And why do you think higher prices would destroy *desire* to increase purchasing power? Because people then feel defeated and give up?

  116. Gravatar of D R D R
    25. March 2012 at 08:22

    “The benevolent unplanned outcome of everyone trying to increase their purchasing power by seeking higher cash balances, is falling prices.”

    What makes you think that deflation is a benevolent outcome? Sure, it’s good for people already holding cash, but that’s far from the end of the story.

  117. Gravatar of ssumner ssumner
    25. March 2012 at 08:54

    MF, You said;

    “No, you’re still mistaken. It is the estimate for real GDP of 3% going forward (which is based on a naive extrapolation of past real GDP growth of 3%) that explains why you are choosing 5% NGDP as “the best rate”, as opposed to, say, 10% NGDP or 20% NGDP.”

    I have dozens of posts showing you are wrong. I don’t think the government should even be measuring inflation and RGDP.

    Greg, How can I respond when you haven’t even told me what White believes? You provided links but I don’t have much time to read links, hence I need a summary of his views. Why does he think debt affects the rate of employment?

    The comment section is for reader comments, not a place to provide links for me to read. I’ll read them if you convince me they are interesting, not otherwise.

  118. Gravatar of D R D R
    25. March 2012 at 09:19

    “I don’t think the government should even be measuring inflation and RGDP.”

    Now that is truly fascinating.

  119. Gravatar of Major_Freedom Major_Freedom
    25. March 2012 at 13:46

    D R:

    “Which raises prices along the way, which destroys their desire to increase purchasing power.”

    If they *hold* the additional cash, then prices rise because…?

    Because prices rising is the only way that everyone can increase their cash balances, given the supply of real goods and services that are being exchanged.

    And why do you think higher prices would destroy *desire* to increase purchasing power? Because people then feel defeated and give up?

    Yeah, what I said is badly worded. I meant it will destroy the goal of people wanting higher purchasing power.

    “The benevolent unplanned outcome of everyone trying to increase their purchasing power by seeking higher cash balances, is falling prices.”

    What makes you think that deflation is a benevolent outcome?

    The fact that it results from voluntary exchange based on private property rights.

    Sure, it’s good for people already holding cash, but that’s far from the end of the story.

    Everyone who takes part in the division of labor holds at least some cash. Everyone will make the same real rate of “deflation” return on their cash. And you’re ignoring what happens AFTER. It’s not like a return on cash is a one time thing. In a world of falling prices based on productivity, people can going forward hold a portion of their assets in cash, to gain a return the same way people invest their “excess” cash in t-bills or other government bonds. The difference of course is that whereas the returns people make on their cash does not require coercion, the return on investing in government debt does require coercion.

    So you can’t say the return on cash is “theft” out of one side of your mouth, while you advocate for NGDP targeting via central banks investing in government debt out of the other side of your mouth.

    ssumner

    MF, You said;

    I have dozens of posts showing you are wrong. I don’t think the government should even be measuring inflation and RGDP.

    Wow.

    You saying that NGDP target should be 5%, as opposed to 50%, is you saying the Fed should take into account a MEASUREMENT of “RGDP” of 3%! You’re measuring it and then naively extrapolating it into the future, where the Fed is supposed to be targeting 5% on the basis of an estimated 3% RGDP going forward.

    Where else did you get the 3% RGDP if not through measuring it?

  120. Gravatar of D R D R
    25. March 2012 at 17:36

    “The fact that it results from voluntary exchange based on private property rights.”

    *Anything* which results from voluntary exchange based on private property rights is benevolent? That’s a discussion closer if I ever read one.

    Enjoy your fantasy world.

  121. Gravatar of Major_Freedom Major_Freedom
    25. March 2012 at 17:44

    D R:

    “The fact that it results from voluntary exchange based on private property rights.”

    *Anything* which results from voluntary exchange based on private property rights is benevolent?

    Of course.

    What other standard is there for what constitutes a benevolent outcome for individuals you have never met and have no idea what they want?

    That’s a discussion closer if I ever read one.

    That’s an obvious excuse if I ever read one.

    Enjoy your fantasy world.

    It’s the real world.

  122. Gravatar of Bill Woolsey Bill Woolsey
    26. March 2012 at 07:39

    Major Freedom wrote:

    “Because prices rising is the only way that everyone can increase their cash balances, given the supply of real goods and services that are being exchanged.”

    This is false.

    This is not “Austrian Economics.” It is just wrong.

    Ask Murphy or someone.

    Perhaps you are confusing the demand for money with how much money people would like to earn?

    The demand for money is how much money people want to hold.

    People can obtain more money by either selling nonmonetary assets or else refraining from spending money earned on goods, services or assets.

    Even if the supply of goods is unchanged, the quantity of money can be increased to match this demand without there being any increase in the price level.

    If people sell other assets for money, then banks (including a central bank) can purchase the assets with newly created money. By assumption, the people want to hold this money and not spend it. Those who were holding the other assets now hold money. The bank (including maybe the central bank) has issued the money and is now holding these other assets.

    If, on the other hand, the money is accumulated by spending less out of current income, if that money would have been spent on finanical assets, then when the banks (including maybe the central bank) creates new money, it purchases the financial assets instead. Those who wanted more money have it. Instead of them buying finncial assets, the banks buy the financial assets. The prices of the financial assets are unchanged.

    Finally, if the period accumulating money would have purchased capital goods, then they don’t and accumulate money. The bank (and maybe the central bank,) purchases finanical assets, which raises their prices and lowers their yields. This causes firms to sell fincial assets and buy capital goods (and maybe consumer goods.) Anyway, the changes in the demand for capital goods offset, leaving them the same.

    Finally, if those accumulating money were going to purchase consumer goods, the demand for consumer goods falls. The bank (and perhaps the central bank) purchases finanical assets, raising their prices and lowering their yields. The demand for capital goods rises (or maybe the demand for consumer goods rises some too.) Anyway, the decrease in the demand for consumer goods is offset by the increase in the demamd for capital goods.

    Even if the total quantity of goods (or even each type of good) is unchanged, the prices of some goods rise and others fall.

    The demand for money rose. It is held by those who wanted it. And the price level does not increase.

    The an increase in the demand for money offset by an increase in the quantity of money does not impact the price level, even if the amount of goods are unchanged.

    In reality, the quantities of goods are not given, but increase all the time because of more productive resources and better technology.

    Also, if the goal is to raise money expenditures on output, then this does involve more money being spent on output. And if the amount of the products is fixed, then it does raise prices. However, increasing everyone’s cash balances doesn’t require an incease in spending on output.

    It is quite possible to have people hold more cash balances and the price level fall. All it takes is that the quantity of money rise less than the demand to hold moeny.

  123. Gravatar of Major_Freedom Major_Freedom
    26. March 2012 at 09:33

    Bill Woolsey:

    I got you Bill. It’s game over. Everyone together cannot acquire more money unless there is more money earned in exchanges.

    You do understand that exchange constraint don’t you?

    You are ignoring the market process of exchange, of the process by which people get to the end point of having more PURCHASING POWER. You’re incorrectly considering an impossible scenario of there being higher cash balances but the same spending and prices, and substituting that in place of the only possible real world process of how people actually go about acquiring more purchasing power.

    You’re ignoring what had to happen to prices in order for people to gain a higher purchasing power through having higher cash balances. As inflation of the money supply enters the economy and is spent and respect, in order to allegedly “satisfy” people’s desire to hold more cash to get higher purchasing power, what is happening is that nominal incomes are growing in exchanges.

    It’s the process of exchange that enables everyone to increase their purchasing power via acquiring higher cash balances relative to prices.

    You keep conflating “higher cash balances” with “higher purchasing power.” Higher purchasing power is not higher cash balances. Higher purchasing power is higher cash balances relative to prices.

    But because should everyone desire higher purchasing power, as in a depression, then the only way this can be done is if the value of cash balances rises relative to prices, which means you can’t introduce more money into the constraint of exchanges and expect prices to fall relative to cash balances.

    This is your problem. While you understand that a higher purchasing power can only be had by higher cash balances relative to prices. you nevertheless mistakenly believe that inflation of the money supply into exchanges can bring this about, as if inflation really is just old Ben dropping money bags from a helicopter external to the constraint of exchanges. Sure, that method can avoid the exchanges constraint, and sure, that can increase everyone’s cash balances without affecting prices, but that’s NOT how the real world of inflation works. Inflation is constrained into exchanges, and as such, you cannot have a situation where cash balances for everyone increase and yet spending and prices remain the same. That is silly.

    In a population of 100 million people, and everyone wants to have higher purchasing power, then because everyone can only get higher purchasing power through exchanges of money, it means that while everyone tries to increase their purchasing power through getting a higher cash balance relative to prices, your advocacy of the Fed printing money FRUSTRATES people’s desires. For the new money circulates throughout the economy through exchanges, not dropped from helicopters.

    So if you view all individuals as sellers of something, which you must if we are going to find out how all individuals can achieve a higher purchasing power, then you have to understand that all 100 million sellers cannot individually increase their cash together unless they all earn a higher nominal income. You understand that, don’t you? Well, if nominal incomes are going to rise, then the prices of what people sell will otherwise rise as well.

    The demand for money is how much money people want to hold.

    We’re talking about purchasing power, which is had in a monetary economy by people desiring to hold more money. We’re not talking about people ONLY wanting to hold more money. The goal is not holding more money, the goal is holding more money relative to prevailing prices. The goal is higher purchasing power. I am telling you that your “solution” of people wanting a higher purchasing power through higher cash balances relative to prices, can somehow be had with inflation of the money supply. But that’s false.

    People can obtain more money by either selling nonmonetary assets or else refraining from spending money earned on goods, services or assets.

    That will make prices fall, and that is what can enable people to gain more purchasing power.

    By printing and spending money as the solution, by trying to get people’s cash balances to increase nominally, that “solution” raises prices, because the only way that everyone can have higher cash balances together is by them earning more nominal income in their exchanges. With more money in exchanges, prices go up, they don’t stay the same. Since prices go up, the goal of people wanting to increase their purchasing power is frustrated. People don’t just want more cash. They want more purchasing power. You are abstracting away from prices and exchanges, praying prices don’t rise, when in reality inflation and increasing aggregate nominal cash balances cannot be done in any other way than through raising nominal incomes and thus prices of whatever people sell to earn those nominal incomes.

    Even if the supply of goods is unchanged, the quantity of money can be increased to match this demand without there being any increase in the price level.

    This is false. Inflation is not dropped from helicopters. Inflation is constrained to the realm of exchanges and incomes. If total cash balances rise in a world constrained to exchanges, then total incomes and hence general prices must rise. They cannot possibly stay the same.

    As this happens, people’s desire to acquire more purchasing power is frustrated. While they acquire more nominal cash, the value of the cash is being diminished relative to goods and services that are being sold. Therefore, their purchasing power is not getting any higher.

    If people sell other assets for money, then banks (including a central bank) can purchase the assets with newly created money. By assumption, the people want to hold this money and not spend it. Those who were holding the other assets now hold money. The bank (including maybe the central bank) has issued the money and is now holding these other assets.

    By purchasing those assets with inflation money, the central bank raises the prices of those assets from where they otherwise would have been had they been sold in a market without the inflation. The purchasing power desires of the primary dealers is therefore slightly diminished, but not by much, since only the prices of those particular assets they sold rose in price.

    But since we’re in a context of EVERYONE wanting more purchasing power, it means that the existing difference between cash balances and prices, is not large enough for people yet. So how do the rest of the people increase their purchasing power? They all try to earn more money by selling at higher prices and buying at lower prices. As the initial receivers spend the additional money they are getting from the Fed, on the basis that their purchasing power is satisfied (because prices in general still have not increased because of the inflation of the money supply to them), the next people in line can succeed in selling at higher prices than they otherwise could have gotten, and they also try to buy at lower prices. Since they are second in line, MORE prices have increased now, and so their purchasing power desires are even more frustrated by the inflation, but still it’s not too bad, because we’re still in the initial stages of inflation flowing through exchanges in the market. Prices are rising, but only a minority of prices are rising at this point, because the new money has only been exchanged for a few goods relative to total goods.

    As the new money circulates throughout the economy through exchanges, people who want higher purchasing power will be earning higher nominal incomes, but prices keep rising on the very foundation of there being more money in exchanges.

    You falsely believe that exchanges can be bypassed. They can’t.

    If, on the other hand, the money is accumulated by spending less out of current income, if that money would have been spent on finanical assets, then when the banks (including maybe the central bank) creates new money, it purchases the financial assets instead. Those who wanted more money have it. Instead of them buying finncial assets, the banks buy the financial assets. The prices of the financial assets are unchanged.

    Everyone cannot accumulate more money by spending less out of income. That’s the point. You’re completely denying the context. We’re not talking about only some people wanting higher purchasing power while others are willing to lower their purchasing power. In that case, sure, one party giving money to another party is the solution. But you’re not talking about merely one party giving another party money. You’re talking about one party CREATING new money and putting into the spending stream. That’s a whole different kettle of fish.

    We’re talking about a general desire of people to increase their purchasing power, as takes place in a depression. You cannot abstract banks away from those who want higher purchasing power in a depression! In a depression, banks are especially prone to wanting to spend LESS on buying assets and acquire more cash through selling assets, in order to boost their purchasing power. By you saying banks would be willing to buy assets at prevailing prices, as if it is their job to provide people with purchasing power, totally denies the context under discussion.

    If banks buy assets at prevailing prices, then their cash balances are NOT increasing relative to prices, and hence they are NOT increasing their purchasing power! The way that banks, as well as everyone else together, can increase their purchasing power, is if the value of THEIR OWN cash balances rises relative to prices. If banks just create a new loan out of thin air, which “replaces” the “lost demand” from those who otherwise would have spent their money but instead hold onto it, then the cash balance value of those non-bank entities taken together will not be any higher either. If non-bank entities want to increase their purchasing power TOGETHER, which is the context, then you cannot sneak in a party that is willing to lower their cash balance relative to prices and thus lower their purchasing power, to “finance” the purchasing power desires of everyone else. That party too will want more purchasing power.

    If the bank wants to increase its purchasing power, if the bank’s customers want to increase their purchasing power, then clearly creating new loans ex nihilo, and the bank buying up assets and preventing those prices from falling, cannot possibly succeed in raising the bank’s purchasing power. The bank will have the same cash it owns, and it will see no change in prices. Hence its purchasing power did not increase. So what will it do now? It will do what I am saying it would have done all along, which is the opposite of what you said they will do, which is that they will SELL more assets and buy assets but only at lower prices. They won’t be buying assets at the same prices!

    Your view of banks is silly. You are actually viewing banks as some sort of benevolent altruists who will “take care of people who want more cash balances.” That’s not what banks do. Banks earn profits. In a depression, banks also tend to want to become more liquid. If there is a depression, and there is a general desire amongst the people to increase their purchasing power, then BANKS INCLUDED will be in the business of selling their assets to anyone who wants to buy them, and because others also want to hold more cash relative to prices, they too will be selling their goods and services to whoever wants to buy them. In this scenario, of people want to sell in order to increase their purchasing power, the ONLY solution in a context of exchanges is for prices to fall.

    By introducing more money and spending in the economy of people who want to increase their purchasing power, prices will rise. No, you cannot imagine an escape hatch of a party that provides infinite incomes to others, especially when that party itself is in the context of exchanges and wants to increase their purchasing power by finding more cash from other parties.

    Your position has led you into having to completely deny the context at hand. A general desire to increase purchasing power, in a depression, doesn’t originate with consumers. It originates with businesses, especially banks.

    Finally, if the period accumulating money would have purchased capital goods, then they don’t and accumulate money.

    What if everyone wants higher purchasing power? Lending banks will be reducing their lending in a condition of a general desire to increase purchasing power. There will be a “credit crunch.”

    The bank (and maybe the central bank,) purchases finanical assets, which raises their prices and lowers their yields.

    You say this about prices, and yet you are unable to see that it frustrates people’s desire for more purchasing power. Your solution increases cash and prices together, thus preventing higher purchasing power. My solution (letting them be) allows people to increase their cash balances relative to prices and thus actually succeed in increasing their purchasing power.

    Again, you need to stop abstracting away from exchanges and incomes.

    Finally, if those accumulating money were going to purchase consumer goods, the demand for consumer goods falls. The bank (and perhaps the central bank) purchases finanical assets, raising their prices and lowering their yields. The demand for capital goods rises (or maybe the demand for consumer goods rises some too.) Anyway, the decrease in the demand for consumer goods is offset by the increase in the demamd for capital goods.

    This is the second “finally”, BTW.

    You cannot know what people WOULD have done with their money, if they simply hold it. You can only observe what people DO spend their money on, and how that changes over time. If people increase their cash by reducing their consumption, and in response the central bank buys assets, then this only brings about a false boom, because the prices of assets rises by MORE than they otherwise would have without the inflation.

    It’s not just about “making asset prices rise” and “making consumer prices fall” or “making the demand for assets rise if demand for consumption falls.” It about three things, cash, investment, and consumption. Holding more cash does not by itself tell us people’s time preference for consumption. You cannot imagine yourself to knowing that people “would have” spent that money on consumption.

    Even if the total quantity of goods (or even each type of good) is unchanged, the prices of some goods rise and others fall.

    Prices for assets would have been LOWER without the inflation. The desire for more purchasing power is therefore frustrated.

    The demand for money rose. It is held by those who wanted it. And the price level does not increase.

    Nobody cares about price levels. They only care about the prices of things they buy and sell. In your example of inflation leading to rising asset prices, banks are frustrated in achieving higher purchasing power of their cash balances, because what they buy are not falling in price relative to their own cash balances.

    Combine this with everyone else, where each individual who wants more purchasing power sees prices around him rise on account of inflation leading to higher nominal incomes, and everyone becomes frustrated.

    The an increase in the demand for money offset by an increase in the quantity of money does not impact the price level, even if the amount of goods are unchanged.

    You keep repeating this fallacy.

    In reality, the quantities of goods are not given, but increase all the time because of more productive resources and better technology.

    Of course, but this will just lower prices from whatever we initially supposed in our analysis, given whatever quantity of money is being supposed. Since we’re talking about what happens with inflation, we have to think about inflation given a particular productivity. Adding an increasing productivity doesn’t change the conclusion.

    Also, if the goal is to raise money expenditures on output, then this does involve more money being spent on output.

    That isn’t the goal. The goal is people trying to have higher cash balances relative to the prices that they pay. That means it’s not just about having more nominal cash. It’s about having more valuable cash. Your solution reduces the value of cash.

    It is quite possible to have people hold more cash balances and the price level fall. All it takes is that the quantity of money rise less than the demand to hold moeny.

    No, that is impossible in the real world where inflation percolates throughout the economy via exchanges, not from central bank helicopters or from benevolent banks who want to decrease, or maintain, their own purchasing power and just sending out new loans to whoever wants more cash.

  124. Gravatar of Bill Woolsey Bill Woolsey
    26. March 2012 at 10:02

    Major Freedom:

    Sorry, I couldn’t read all of that.

    You “got me?”

    Gottcha! What a joke.

    You are unteachable.

  125. Gravatar of Major_Freedom Major_Freedom
    26. March 2012 at 10:20

    Bill Woolsey:

    Sorry, I couldn’t read all of that.

    Summary:

    You are fallaciously abstracting away from exchanges and incomes when you propose the solution for raising purchasing power to be rising cash balances and the same spending and prices.

    In the real world, where money changing hands is constrained to exchanges and incomes, the only possible solution for people to increase their purchasing power is for prices to fall.

    You are unteachable.

    I refuse to be taught something I know through my teachings to be a fallacy. I am very much teachable, but you are in no position at all to be teaching me about this particular topic. You need to be taught by me.

  126. Gravatar of dwb dwb
    26. March 2012 at 14:18

    @MF
    In the real world, where money changing hands is constrained to exchanges and incomes, the only possible solution for people to increase their purchasing power is for prices to fall

    you are right: if the central bank keeps nominal income (growth) steady then productivity will result in higher purchasing power. Thats exactly the idea, the central bank stabilizes nominal income growth to population and productivity growth, essentially (we can debate whether thats 3,4,5%). So it seems to me we are all in agreement with that point.

    you are too hung up on money electronsAnd there are many near-money electrons substitutues (heck, even bitcoin).

    Most of the power of the central bank to “make it so,” is just setting expectations and setting the target. QE1 and 2 did not in the end suck that many bonds out of the market compared to the stock of bonds.

    Get past your peevish fixation with money electrons. Fundamentally, it does not matter what electrode the fed pulls to move electrons around. What gets the job done is the mere threat to act.

  127. Gravatar of Major_Freedom Major_Freedom
    26. March 2012 at 17:58

    dwb:

    you are right: if the central bank keeps nominal income (growth) steady then productivity will result in higher purchasing power. Thats exactly the idea, the central bank stabilizes nominal income growth to population and productivity growth, essentially (we can debate whether thats 3,4,5%). So it seems to me we are all in agreement with that point.

    We were talking about higher purchasing power than what productivity induced lower prices can allow for. The kind of desire for more purchasing power than leads people to wanting to sell assets they otherwise would not have sold, and to buy assets at prices lower than they otherwise would have paid.

  128. Gravatar of dwb dwb
    27. March 2012 at 05:26

    @MF
    you are hung up on the trees. money and financial wealth are not economic assets, just claims.

    Of course one needs to sell “wealth” (move some book-entry electrons around) to consume more than current income. But doing that does not make it so. For the economy as a whole, people cannot consume more oranges (meat, computers…) than there is capacity to make them. The “wealth” that people are selling is previous years savings (unless you are Paris Hilton, in which case its your daddy’s savings), which in turn are just claims on the capacity to use/make stuff.

    For the economy as a whole, the only way to improve purchasing power is to make better stuff faster, with fewer resources (increase capacity). We also need more capacity just to keep up with population growth.

    I think you hit the central idea: the central bank steers nominal income and productivity gains will result in higher purchasing power.

  129. Gravatar of Major_Freedom Major_Freedom
    28. March 2012 at 22:00

    dwb:

    you are hung up on the trees.

    Ooh ooh aah AAH!

    Seriously, I don’t know what that means.

    money and financial wealth are not economic assets, just claims.

    Assets can be claims. Being a claim does not preclude being an asset.

    They are treated as assets according to GAAP. What system of accounting are you using?

    Of course one needs to sell “wealth” (move some book-entry electrons around) to consume more than current income. But doing that does not make it so. For the economy as a whole, people cannot consume more oranges (meat, computers…) than there is capacity to make them.

    For the economy as a whole, the purchasing power of money can change. The purchasing power of money can change when prices fall relative cash balances.

    The “wealth” that people are selling is previous years savings (unless you are Paris Hilton, in which case its your daddy’s savings), which in turn are just claims on the capacity to use/make stuff.

    Notwithstanding the out of left field Hilton comment, the wealth that people are selling (why are you putting wealth in scare quotes?) are not claims on stuff. They are the stuff. The factories, machines, inventory, the invested wealth being reproductively employed.

    For the economy as a whole, the only way to improve purchasing power is to make better stuff faster, with fewer resources (increase capacity).

    This is false. The purchasing power of money can also rise by virtue of falling prices relative to cash balances on the basis of less spending out of cash balances.

    I think you hit the central idea: the central bank steers nominal income and productivity gains will result in higher purchasing power.

    It’s the exact opposite. Fed inflation decreases the purchasing power of money, it doesn’t increase it.

  130. Gravatar of TheMoneyIllusion » Noah Millman on NGDPLT TheMoneyIllusion » Noah Millman on NGDPLT
    13. September 2012 at 06:06

    […] of the economy is. Scott Sumner, one of the most capable exponents of NGDP targeting, says I have this backwards, but I think he’s confusing the short with the long term. A 2% inflation target is a prudential […]

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