What Ben Bernanke can learn from Humpty Dumpty

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean””neither more nor less.”
“The question is,” said Alice, “whether you can make words mean so many different things.”
“The question is,” said Humpty Dumpty, “which is to be master — that’s all.”

Paul Krugman recently made the following claim:

The shared starting point here is that we are in a situation in which the Fed would clearly cut rates if it could; based on historical relationships between unemployment, inflation, and policy rates, the Fed funds rate “should” be something like -4 percent. But the Fed can’t do that.

I think that’s probably right, although I doubt the Fed would cut rates by 400 basis points, even if they were able to.  But why not cut the fed funds target?  The conventional answer is that it “wouldn’t do any good, as nominal rates can’t fall below zero” (or even below the IOR rate, if you want to be picky.)  That’s true, but while there’s a lower bound on the actual fed funds rate, there’s no lower bound on the fed funds target.

Before you assume I’ve completely lost my mind, I strongly suggest readers take a look at this provocative Nick Rowe post:

The natural rate of interest is not a number; it’s a time-path. And the central bank doesn’t observe that time-path, so when it sets the actual rate it will almost always miss the natural rate time-path. And when the economy is off that time-path, that will cause the time-path to shift. Because expectations will change. And because reality will change too, as investment changes and capital stocks (understood in the broadest sense to include human capital and the stock of employment relations) change too. So, while useful as a theoretical concept, the natural rate of interest is perhaps not so useful as a practical guide to monetary policy as the Neo-Wicksellian approach requires.

Which is perhaps why all of us, central banks especially, should stop framing monetary policy in terms of interest rates. Setting interest rates is not what central banks really really do. It’s a social construction of what they do. When central banks talk about setting interest rates that is only a communications strategy, and not a very good communications strategy, especially at times like this.

[Update: Tom Hickey asks: “So monetary policy boils down to central bank communications leading to expectations?

My response: That’s 99.9% of it, yes!

So cutting the fed funds target to negative 4% isn’t quite as good as cutting the actual fed funds rate to minus 4%, it’s only 99.9% as good.  In other words, it’s like cutting the actual fed funds rate by 3.996%.  I’ll take that!

By now many of you are looking for the flaw in my argument.  You won’t find it.  At least you won’t find a flaw in the logic.  Instead you’ll plunge down a rabbit hole into the endlessly paradoxical world of monetary policy.  A world where it’s not at all clear what the Fed “really does.”  Does it control the money supply, control interest rates, or control NGDP expectations?  Where it’s now believed that what really matters is the expected future path of policy, and current policy decisions work primarily by changing expectations of future policy.

Almost everyone now agrees that during normal times a temporary $10 billion dollar open market purchase will temporarily reduce short term interest rates.  And almost everyone believes that if the OMP is expected to be reversed in one month, it will have almost no impact on the macroeconomy.  And almost everyone agrees that if the OMP is permanent it will result in roughly 1% higher prices and NGDP in the long run.  The implication of all this is that current monetary policy actions matter, if at all, by changing expectations of future monetary policy.

Assume that during normal times the Fed sees indications that NGDP will grow at slightly less than the desired rate of 4.5% over the next 12 months.  They might respond with a cut in the fed funds target, which the markets take as a signal that the Fed intends to do what it takes to boost expected NGDP growth back up to 4.5%.  Some conceive of that action as lowering the expected future path of rates relative to the natural rate, other see it as raising the expected future money supply.  But the key is expectations—if you don’t change expected future policy, you aren’t going to significantly impact the macroeconomy.

The program called “QE2” consisted of the Fed exchanging an interest-bearing risk-free government liability called excess reserves for another interest-bearing risk-free government liability called Treasury securities.  One can make a pretty good argument that this program “didn’t do anything” in a narrow technical sense.  But nonetheless markets responded in the following fashion:

1.  Equity prices rose on the news.

2.  Inflation expectations rose on the news.

3.  The dollar depreciated on the news.

That’s quite a bit of activity for a program that “didn’t do anything.”  Of course it did do one thing—it communicated something about the Fed’s determination to do whatever it takes (over a long period of time) to prevent the economy from slipping into deflation.

Nick Rowe has argued that once rates hit zero the Fed loses its ability to communicate, at least in its preferred language.  I’ve accepted that argument, and to some extent I still do.  But not completely.  I now think that the Fed should have developed a back-up plan for how to operate at the zero bound, how to communicate policy intentions.  At one time I thought they had (partly based on my reading of Bernanke’s academic work.)  Now I can see that they don’t have any coherent strategy, and are just making it up as they go along.

I strongly believe that interest rates are the wrong policy instrument.  But most people disagree with me.  Even when the Fed does QE, they justify it as an action that will reduce long term rates.  They seem completely unable to communicate to the public in any non-Keynesian language.  OK, then why not keep talking Keynesian?

Here’s my suggestion:  If the Fed is committed to communicating in terms of the fed funds rate, why not continue to have the Fed set a “shadow fed funds target.”  The proposal would work as follows.  The FOMC would continue to meet every six weeks and vote on the fed funds target that would be most effective in communicating their macro policy goals.  For instance, this might be the number that results from the Taylor Rule formula.  No consideration would be given to whether this was a positive or negative number.  Then the Fed would announce the target, and instruct the New York trading desk to get as close as possible (which would be zero, or perhaps the IOR rate.)

In my view this policy would be a disguised form of semi-level targeting.  This will require some explanation, as most people are used to thinking in terms of growth rate targeting.  But first a digression on policy since 2008.

In the opening quotation Paul Krugman overlooks one weakness in his argument.  The fed funds target was above zero during the entire collapse of NGDP from June to December 2008.  This collapse is best seen using monthly NGDP estimates from Macroeconomics Advisers:

This might be viewed as a policy error, perhaps partly due to lags, partly due to backward-looking policy, and partly due to the mistaken belief that the banking crisis was the “real problem” and that saving banking was the key to preserving NGDP growth.  But whatever the cause, the Fed had three choices.  Try to go all the way back up to the pre-2008 trend line (level targeting.)  Try to go part way back (semi-level targeting.)  Or start a new trend line from the 2009 trough (growth rate targeting.)  They actually chose the latter option, although it’s not clear if this was intentional, as the Fed is highly secretive about its NGDP policy goals.)

Once rates hit zero, the most effective Fed actions were steps that would communicate the policy goal.  In practice, they’ve behaved as if they were doing growth rate targeting.  (Let bygones-be-bygones and go for 4.5% NGDP growth from the 2009 low.)   But it’s certainly possible that they would have preferred semi-level targeting, i.e. going at least part way back to the original trend line.  I strongly suspect Bernanke would have preferred faster NGDP growth, but it’s hard to read the overall FOMC because it includes members that seem to use a non-mainstream macroeconomic framework, and hence talking about the “FOMC view” requires rather heroic assumptions.

Under my plan the 2010 meeting that led to QE2 might have gone as follows:  The FOMC meets and sees that NGDP growth is slower than they’d like.  They vote to cut the shadow fed funds target by 1/2%, from negative 2.75% to negative 3.25%.  This sends a signal to the markets that the Fed will engage in future policy actions to raise NGDP slightly faster than the markets previously expected.  Interestingly, that’s exactly how monetary policy works in normal times, or at least that’s 99.9% of how it works.  The other 0.1% is that a small change in the fed funds rate over just the next 6 weeks actually affects a few investment decisions.

For those readers from the “concrete steppes” who have trouble visualizing how a purely symbolic fed funds target can impact the macroeconomy, you might try the standard Keynesian explanation.  The Fed is known to move slowly and methodically, it’s highly inertial.  If the fed funds target falls from minus 2.75% to minus 3.25%, then it pushes the date where rates are expected to rise above zero out further into the future.

(BTW, I don’t see that as being the mechanism, rather I see it “working” by increasing the future expected level of cash in circulation, but I’m in the minority.)

OK commenters, now’s your chance to tell me what an idiot I am.

PS.  I’d pay a lot of money to see Ben Bernanke start quoting Humpty Dumpty next time he testifies in front of Congress.

Update: I see from the comments that people are missing the point–probably because I tried to get too cute.  Here it is:

1.  During normal times the Fed communicates its NGDP intentions (or weighted average of inflation plus output gap, if you prefer) with fed funds target signals.  During January 2001, September 2007, and December 2007, the equity markets immediately swung plus or minus 4% to 8% over Fed decisions about whether to cut rates by 1/4% or by 1/2%.  To put it bluntly, the markets don’t give a s*** what the fed funds rate is over the next 6 weeks, they care about these anouncements because the Fed is signalling its future intentions for NGDP.  Yes, it would be easier if they would explicitly tell us where they want to go, but they won’t.

2.  The Fed wrongly thinks it’s communicating by changing the fed funds rate, but the markets are responding to the fed funds target, and what that tells us about the future path of monetary policy.

3.  Because the Fed wrongly thinks the actual fed funds rate over the next six weeks is what is important, they wrongly believe they have gone “mute” once rates hit zero, they don’t think they are able to communicate with the markets.

4.  But they haven’t gone mute, the actual fed funds rate over the next 6 weeks is an epiphenomenon of monetary policy, it’s the fed funds target that signals the actual (long run) policy.  They can use that target to signal future policy intentions regardless of where the actual fed funds rate is, as long as future interest rates are expected to rise above zero.  (If they aren’t expected to then the government should just monetize the national debt.)

5.  If they thought about things correctly, in a Nick Rovian way, they’d realize they had never really lost their voice, they just thought they had.

6.  If they insist on talking interest rate talk, then don’t stop talking once rates hit zero!


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114 Responses to “What Ben Bernanke can learn from Humpty Dumpty”

  1. Gravatar of Lars Christensen Lars Christensen
    22. April 2012 at 08:08

    Scott, I have a couple of comments.

    1) How different is this proposal from the policy of announcing a rate path?
    2) Since we are talking about a “shadow interest rate” which can not be observed in the real world why not instead a shadow REAL interest rate? So if actual observable real fed fund rates is lets say -2% and the Fed announce that it would like to see -3% then that would automatically signal that it would conduct open market operations to increase inflation by 1%-point.
    3) I think it is increasingly becoming problematic to talk about returning to the pre-crisis trend in US NGDP. A lot of real adjustment has already taken place. Therefore, I would agree – as you seem to indicate – that lower level target than the pre-crisis trend could make sense. To me at least it is more important to clearly state the target rather than go for a certain quasi-historic level.
    4) I still hate the idea of using interesting rates (in any form!) as a policy instrument. It still don’t really make any sense…

    Would your idea be better than the present policy? Not a lot in my view and I think it is very important to continue to argue that the Fed should not focus on communication about policy instrument but rather on the nominal target.

    Scott, you are certainly no idiot, but you are a pragmatic revolutionary (as Friedman). This time I unfortunately fear you are too pragmatic. I prefer a bit more revolution and a little less pragmatism.

  2. Gravatar of dwb dwb
    22. April 2012 at 08:10

    I think that’s probably right, although I doubt the Fed would cut rates by 400 basis points, even if they were able to.

    If the Fed is committed to communicating in terms of the fed funds rate, why not continue to have the Fed set a “shadow fed funds target.” The proposal would work as follows. The FOMC would continue to meet every six weeks and vote on the fed funds target that would be most effective in communicating their macro policy goals. For instance, this might be the number that results from the Taylor Rule formula.

    so as I mentioned on Krugmans comments, the FRB has a “virtual fed funds rate” which tracks the effect of QE which indeed shows that the Fed has done 1/2 its job (see below). I skimmed the methodology – I am skeptical but dont really have a basis to question it. It shows the virtual Fed Funds rate was not low enough to close the output gap (alternatively, not enough QE), which is correct IMO.

    You are taking this one step further and saying to basically use the virtual fed funds rate to determine how much QE to do (as a communications strategy).

    Overall, i like it. Usually I hate to add model uncertainty on top of model uncertainty, but since its mostly about signaling anyway I dont see a big drawback (as long as we are using the “target” that stems from an NDGP-targeting extended taylor rule). It certainly gets us a lot closer (and implicitly, a lot of economists are doing this math in their heads anyway).

    good stuff.

    http://macroblog.typepad.com/macroblog/2012/03/unconventional-policy-or-unconventional-circumstances.html

  3. Gravatar of Philo Philo
    22. April 2012 at 09:03

    Why is “the Fed . . . highly secretive about its NGDP policy goals”? Isn’t it *obvious* that “the most effective Fed actions were [and always are] steps that would communicate the policy goal”? Bernanke’s self-vaunted steps toward better communication have been very modest. He is only a slight improvement on Greenspan, who boasted about the opacity and emptiness of his public statements.

    I don’t understand their thinking.

    I also don’t understand your proposal: What is the meaning of a “target” that everyone knows can’t be attained?

  4. Gravatar of Greg Ransom Greg Ransom
    22. April 2012 at 09:05

    Have you even pretended to justify where a post misallocation bust NGDP trend line should start?

  5. Gravatar of Greg Ransom Greg Ransom
    22. April 2012 at 09:09

    Humpty-dumpty quotes for Bernanke to say:

    “Must a name mean something?” Alice asked doubtfully.

    Of course it must,” Humpty Dumpty said with a short laugh; “my name means the shape I am – and a good handsome shape it is, too. With a name like yours, you might be any shape, almost.”

  6. Gravatar of Benjamin Cole Benjamin Cole
    22. April 2012 at 09:35

    Excellent blogging.

    As a Sumner groupie and not a full-on Phd. economist, I might disagree with one element of this post.

    I sense Fed buying of hundreds of billions of bonds through QE, sustained until transparent nominal growth targets are hit for six quarters in a row, is both a matter of PR and real.

    I mean, investors will have less and less places to invest, thus raising asset values and perhaps consumption. Money will get pumped into the economy in real life, and I think Milton Friedman said so. Print the effing money until you get sustained results, in other words, just like Milton said.

    Anyway, we want Bernanke to learn from Chuck Norris, not Humpty-Dumpty.

  7. Gravatar of dwb dwb
    22. April 2012 at 09:50

    @Lars:


    2) Since we are talking about a “shadow interest rate” which can not be observed in the real world why not instead a shadow REAL interest rate? So if actual observable real fed fund rates is lets say -2% and the Fed announce that it would like to see -3% then that would automatically signal that it would conduct open market operations to increase inflation by 1%-point.

    I agree with your points, naturally, but I think the way you phrased the question answers itself: when discussing decreasing the short-term real rate of interest by increasing inflation, its impossible to “sell” more inflation no matter how minute, (and more importantly, impossible to know how much AD will show up as inflation vs real growth).

    we could also impose negative IOR or tax large desposits, but that would also violate some sort of perceived social contract.

    which illustrates why interest rates are an epic fail at the ZLB.

  8. Gravatar of ssumner ssumner
    22. April 2012 at 09:55

    Everyone, No time to respond now, I left an update to clarify some points.

  9. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. April 2012 at 10:17

    I liked this post so much I decided to do a blog post myself;

    http://hisstoryisbunk.blogspot.com/2012/04/cool-hand-scott-sumner.html

    Scott even looks a little like Paul Newman, and certainly is as persistent in attempting to break out.

  10. Gravatar of Dan S Dan S
    22. April 2012 at 10:49

    Scott,

    Since nominal interest rates ultimately follow NGDP growth, is it your opinion that under a NGDPLT scheme, we would see the risk-free short term interest rate hover around 5% most of the time?

  11. Gravatar of flow5 flow5
    22. April 2012 at 11:30

    Enough with the hypotheticals. What do you do right now? The roc in MVt is falling. Barring countervailing stimulus, MVt will crash in June (i.e., nominal gDp). QE3 for thee?

  12. Gravatar of Tommy Dorsett Tommy Dorsett
    22. April 2012 at 12:42

    Scott — Isn’t the late 2014 commitment on Fed funds Bernanke’s way to do what you’re talking about but in somewhat veiled terms (which, admittedly, may make it less effective)?

    BTW, check out your boy John Taylor in Barron’s, suggesting both QE1 and QE2 were a mistake and that the Fed funds rate should actually be 100 bps higher (without regard to NGDP rising by that magnitude before hand).

    http://online.barrons.com/article/SB50001424053111903835404577347834076048076.html?mod=BOL_hps_mag#articleTabs_article%3D1

    Sigh.

  13. Gravatar of marcus nunes marcus nunes
    22. April 2012 at 13:25

    Scott – You wrote:
    “I strongly believe that interest rates are the wrong policy instrument. But most people disagree with me. Even when the Fed does QE, they justify it as an action that will reduce long term rates. They seem completely unable to communicate to the public in any non-Keynesian language.”
    I don´t, but Krugman definetely does:
    http://thefaintofheart.wordpress.com/2012/04/21/much-ado-about-nothing/

  14. Gravatar of Justin Irving Justin Irving
    22. April 2012 at 14:17

    @Tommy Dorsett

    This is just what I was thinking, but lowing the policy *target* would give people more assurances that they wouldnt raise the actual rate above zero if oil prices started climbing (or whathaveyou). If the policy target were at -4% today, it would take maybe a year and a half to get back to a target of zero, unless they were willing make really big adjustments.

  15. Gravatar of flow5 flow5
    22. April 2012 at 14:46

    MVt ready to break:

    11-Oct ,,,,,,, 0.26 ,,,,,,, 0.13
    11-Nov ,,,,,,, 0.24 ,,,,,,, 0.14
    12-Dec ,,,,,,, 0.25 ,,,,,,, 0.16
    12-Jan ,,,,,,, 0.25 ,,,,,,, 0.16
    12-Feb ,,,,,,, 0.29 ,,,,,,, 0.15
    12-Mar ,,,,,,, 0.26 ,,,,,,, 0.13
    12-Apr ,,,,,,, 0.24 ,,,,,,, 0.14
    12-May ,,,,,,, 0.24 ,,,,,,, 0.10
    12-Jun ,,,,,,, 0.27 ,,,,,,, 0.04
    12-Jul ,,,,,,, 0.25 ,,,,,,, 0.04

    Real-output falls: 14 -> 4 (April month-end to June month-end)…
    with no change in inflation. That’s called stagflation (business stagnation accompanied by inflation).

    Fed intervention is inescapable.

  16. Gravatar of Morgan Warstler Morgan Warstler
    22. April 2012 at 15:23

    flow5,

    Let’s try my “Ben gets one play to help Obama win” game and see if it matches your numbers.

    Using you numbers when does Fed act?

    Is that the same date as optimal election gaming?

  17. Gravatar of Dustin Dustin
    22. April 2012 at 16:45

    flow5,

    clue me in here, where are you getting those numbers and what are they?

  18. Gravatar of Krugman poses the wrong question | Historinhas Krugman poses the wrong question | Historinhas
    22. April 2012 at 17:00

    […] much more detail check out this Scott Sumner post: I strongly believe that interest rates are the wrong policy instrument.  But most people disagree […]

  19. Gravatar of Miguelito Miguelito
    22. April 2012 at 17:05

    Reading this just after reading the 2008-2009 section of Hetzel’s book, I can’t help but feel you’re being charitable. The Fed did not communicate a target of 4.5% growth from the post-crash level. It was more like, “Inflation won’t exceed 2% even if it means the end of the world; we are hopeful that will be consistent with 2.5% real growth.”

  20. Gravatar of Steve Steve
    22. April 2012 at 18:21

    “To put it bluntly, the markets don’t give a s*** what the fed funds rate is over the next 6 weeks, they care about these anouncements because the Fed is signalling its future intentions for NGDP. Yes, it would be easier if they would explicitly tell us where they want to go, but they won’t.”

    I’ve wondered if the Yellen/Bernanke crowd should extend an olive branch to the regional fed hawks: They could switch their pledge for 0% rates until late 2014 to a below 1% rates pledge until late 2016.

    I know, no one will be happy with that. The hawks will cry inflation, policy shouldn’t be dependent on the calendar. Sumner will cry wrong target. But it’s something I’ve been thinking about.

  21. Gravatar of Major_Freedom Major_Freedom
    22. April 2012 at 19:45

    Bernanke is going to go down in history as the Fed chief that brought about a depression greater than the Great Depression.

    His actions since 2008 have sealed it, and not because he “didn’t print enough”, but because he did print, and he printed so much and has held interest rates so low for so long, that the economy is almost totally warped.

    Just like everyone thought everything was fine 2001-2007, when NGDP was rising all nice and cleanly, when AD was rising all nice and cleanly, when unemployment was subdued, when output was expanding, little did the – what I like to call – “high priests of aggregate statistics” comprehend that money and interest rates cannot be centrally managed better than an individualist controlled market. Centrally forcing money and interest rates to be something else is doomed to failure.

    NGDP fell in 2008, and no market monetarist has the slightest clue on why that happened. They are relegated to treating it like some unexplainable “shock”, as something inexplicably inherent in a capitalist system, as something that the central bank was supposedly created to stop (I laugh every time I hear people advance that whopper).

    While market monetarists are busy believing that the economy is at least being kept alive by the “inadequate” inflation from the Fed, in reality the economy is getting worse BECAUSE the inflation is positively damaging the capital structure.

    When the next correction arrives, NGDP is going to plunge once more, market monetarists are going to again be completely oblivious to what is transpiring, and they are again going to say the problems only started once NGDP fell, and not before.

    And again the solution is going to be “more inflation.”

    Textbook insanity.

  22. Gravatar of Ben J Ben J
    22. April 2012 at 20:44

    MF,

    You are making a strong statement that Bernanke’s actions will cause a Depression. I am interested in this, specifically. I’ve read what you’ve written on this blog a bit, and this is the first macro prediction I’ve seen you make, even if it is vague. What do you think will happen? What is the future as you see it?

    And if the alternative takes place, say, a long and painfully slow grind back towards full (structural) employment within the context of the current policy, with no dramatic depression, will you reconsider your position?

    I guess what I’m trying to say is that you seem very confident in your views. Are you willing to back yourself with a prediction approaching falsifiability?

    Scott, I’ll be looking at Grad schools in Econ soon, and thoroughly enjoying reading your work. I’ll be posting questions for you here soon, no doubt! Cheers mate.

  23. Gravatar of Morgan Warstler Morgan Warstler
    23. April 2012 at 03:55

    mf,

    Scott is 100% capable of explaining NGDPLT starting in 2000 keeps the housing crisis from happening…. where shocks are minimized because govt. is shrinking.

    The story says outright that Barney Frank isn’t allowed to exist.

    Scott doesn’t want to own that story.

  24. Gravatar of Morgan Warstler Morgan Warstler
    23. April 2012 at 04:01

    BUT, immediately after Scott loses his about with me, and Obama isn’t president…

    Scott will own his mistake, take of the mask and let everyone see once and for all how his plan puts govt. in the corner.

    Finally, the sales job will be all about cutting fiscal govt. spending and using inflation to not feel the effects, until we reach “trend” (whatever hell number gets picked).

    The real hope for America is my Guaranteed Income plan, because once everyone has a damn job, we won’t be hearing about unemployment ever again… so printing money falls off the table.

  25. Gravatar of Morgan Warstler Morgan Warstler
    23. April 2012 at 04:02

    loses his bet

  26. Gravatar of Dtoh Dtoh
    23. April 2012 at 04:09

    Scott,

    1. As you frequently say “Expectations have to be about something.” Even if you can signal, you still need an ability to act.

    2. I’m of the view that it is the price (expected real return) of financial assets relative to the price of real goods and services that impacts spending (NGDP) and not the hot potato effect.

    3. Expectations of inflation impact the expected price ratio of financial assets to the price of real good and services and thus OMP are sufficient to make NGDP adjustments.

    4. If OMP and inflation expectations are insufficient to give credibility to Fed action, negative IOER and a transaction fee for converting into cash would work.

    5. Baring that, regulations setting MINIMUM asset to equity ratio for banks would increase leverage pushing up financial asset prices and accomplishing then same thing.

  27. Gravatar of Rien Huizer Rien Huizer
    23. April 2012 at 05:17

    Scott,

    1. Your idea about publishing a target (even if it has a minus sign) is not as crazy as it sounds. The media will process it anyway for the general public (Fed needs to know how the media will do that) and more advanced observers will understand the message.

    2. whether that should be the Taylor rule I am not so sure. Unlikely that would get you back to the long term path. But maybe a sort of transparently presented forward looking taylor rule. Problem Taylor rule is also that potential output under current circumstances has probably large margin of error. And once you pick a doctrine you will have to stick to it. But in principle, having a ff target below zero should have an effect. And if combined with a respectable (and stable) underlying logic that analysts can use to create stories, there would be expectations formation.

    3. The tension between credibility and discretion. You would not want the Fed to become irrelevant and i fear that is what the zero bound would do if it would stay there for years (a negative target (if properly understood) would add a dimension and keep the Fed relevant). The point may be that the Fed wants to remain discretionary (though not capricious or arbitrary). If the Fed’s credibility were joined with a stated (but also rules-based) targetthat could be negative as the main signal, rather than an just observable rate that cannot, it is reasonable to assume that that could /should then be put into the NK beliefs and models and maybe that would drive a society-wide consensus about rational expectations. But how does the Fed reposition its credibility without losing its discretion?

    Maybe there is someone here who can put minus 4% in a good DSGE model for the US?

  28. Gravatar of DonG DonG
    23. April 2012 at 05:25

    Reading the comments on the Krugman post, it seems that most (almost all people) blame the FED for taking away their interest income *and* causing inflation. There seems to be mass confusion about nominal v. real interest rates and risk-reward in the investment market. To twist your phrase, it is hard to reason into ignorance.

  29. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. April 2012 at 07:12

    ‘What do you think will happen? What is the future as you see it?’

    Regulars here know that Scott fears we’re going to emulate Japan; many years of subnormal economic growth thanks to timorous central banking.

  30. Gravatar of dwb dwb
    23. April 2012 at 08:37

    Actually I fear worse than Japan: in Europe the conservatives are going to get thrown out because the ECB has not properly offset austerity. Which means small government reforms, lower taxes, labor reforms, will get further postponed or ditched.

    Same in the US. The longer the Fed goes without closing the output gap, the more people will turn to fiscal policy. voters have a tendency to vote for more govt, not less, when unemployment is high.

  31. Gravatar of Major_Freedom Major_Freedom
    23. April 2012 at 08:39

    Ben J:

    MF,

    You are making a strong statement that Bernanke’s actions will cause a Depression.

    I consider the claim that printing money can solve structural problems an even stronger statement.

    I am interested in this, specifically. I’ve read what you’ve written on this blog a bit, and this is the first macro prediction I’ve seen you make, even if it is vague. What do you think will happen? What is the future as you see it?

    It’s not so much a macro prediction as it is a statement about the necessary outcome of a policy of printing money to stop declining output and declining employment.

    I’ve said on many occasions that the end result of a fiat money system, the controllers of which print money to stop aggregate demand from falling, or to stop output and unemployment from falling, is either hyperinflationary depression, or deflationary depression. This is the end result, and it can take years, even decades if the economy concerned is complex and large enough.

    The reason why I say Bernanke is going to down in history as causing the greatest depression of all, is because I suspect that the bubble is now concentrated in the institution of money printing itself, the state. I suspect there is a sovereign debt bubble. I can’t say for sure, because I cannot disentangle a single set of data into “the investments would not have occurred if there was no inflation” and “these investments would have occurred if there was no inflation.” I can only do so once the bubble pops, once the tide goes back out, and we see who’s not wearing any swim trunks.

    I suspect there is a sovereign debt bubble because it looks almost identical to investors using the housing market to “cover up” the mess that was left after the Nasdaq bubble popped. Remember when Krugman said in 2002 that Greenspan had to create a housing bubble to offset “moribund investment”? Remember how that turned out? Now we are all supposed to believe that a sovereign debt bubble can offset the real estate collapse.

    The inflation from the Fed is, I suspect, being concentrated in sovereign debt, just like inflation was concentrated in housing a few years ago. Most economists believe the economy is no longer being destroyed, because “aggregate spending” is back up, and “employment” is rising again. Little do they know that sovereign debt is far more risky, and far more shaky a foundation than even real estate. What’s rather amusing is how they teach you that government debt is the least risky investment, whereas real estate is most risky. I hold government debt to be the most risky investment of them all, because government debt unleashes a power that has the capability of destroying not only individual lives, but itself as well. It’s a black swan tail end type risk that isn’t usually taught in typical asset pricing models that only look at recent past volatility of cash flows, etc. How many investors priced in the housing collapse? The largest institutional investors didn’t, since they lost huge. How many investors priced in the middle east “spring”? These events are almost always ignored, because they aren’t “normal.”

    But those of us who have studied history, economics, and philosophy, know that the powers being unleashed right now, in the name of humanity, are far more dangerous than some house falling in price in Nevada and employees having to find something else to do at a lower wage.

    Market monetarists, and all other central economic planning apologists and advocates, remind me of high middle age priests who didn’t expect to see the 18th century Revolution overturning “divine right.” Well, in today’s age, our contemporary statist priests and witches cannot comprehend “human rights” being overturned either. They put their trust in the state to have all the attributes of individuality. Of course they yammer on that “the state is too big”, that they “would otherwise prefer it if the Fed didn’t exist”, etc, etc, but their actions betray their professed values. They are utilizing the state to further their own ends, then chastising it as evil to appear virtuous in their own minds.

    When was the last time the entire world was on a fiat money standard? It’s never happened before. Every localized fiat currency collapsed at some point, and people believe this time is different, because now humanity has the opportunity to be ruled by technocrats with diplomas financed by the very money printers being “critiqued”? This is like King Louis XIV financing “monarchical studies” and then some idealistic yahoo expects the students to write and publish papers on how to overturn monarchy.

    You’ll never find true knowledge of money printing by those educated in a system financed by the very money printers in question.

    And if the alternative takes place, say, a long and painfully slow grind back towards full (structural) employment within the context of the current policy, with no dramatic depression, will you reconsider your position?

    Sure, but your proposal almost certainly won’t even have a chance to happen, since we are not living in an age where the state abstains from intervening in the economy in the form of money printing and spending. We almost certainly won’t see an “experiment” whereby the state and Fed do nothing, then they clearly communicate their intentions to do nothing, then accept whatever consequences that occur, then we see how long it takes for employment and output to recover. Which politician is willing to risk their own careers for the sake of this “experiment”? They’ll just as soon drive everyone over a cliff before they’ll consider that.

    I guess what I’m trying to say is that you seem very confident in your views.

    Can I ask you a serious question: WHY is that a problem to you? Think about it. Is it better to be unsure of what I want, so that others who are sure can take over that responsibility for me, to make me better off than I could myself? Would I really be better off with free food, clothing, shelter, and sexual services, living in a cage ruled by benevolent caregivers, rather than being out of the cage, where food, clothing, shelter and sex are less certain and up to me to get? I’ll choose death in freedom over life in a cage.

    Are you willing to back yourself with a prediction approaching falsifiability?

    Since I hold that I cannot predict my own future path of learning, and thus my own future knowledge, and thus my own future actions, I certainly won’t be so pretentious and ignorant as to consider myself knowledgeable enough to predict your future path of learning, and thus your future knowledge, and thus your future actions.

    You ask me to back my statements up with something that I consider to be impossible to do. My position is cannot be strengthened by a false certainty of a prediction of that which I hold cannot be predicted scientifically.

    Those who make scientific predictions in economics, and turn out correct, are not correct because their models are true. If they were, then economists, not entrepreneurs, would be among the world’s wealthiest. In reality, most economists are toiling away in dank, sterile, windowless offices, putting up with idiot students knocking on their doors all day, earning far less than what their entrepreneurial students end up making, and scribbling on paper trying to find the magic formula to end all formulae.

    The predictive power of most economists was exposed as as utter failure with the housing collapse. Most economists were clueless. Even the top tier school PhDs at the Fed were clueless, even as late as September 2008!

    In other words, the economics of the sort that Sumner teaches, is nothing but a welfare driven employment program of astrology.

    Scott, I’ll be looking at Grad schools in Econ soon, and thoroughly enjoying reading your work. I’ll be posting questions for you here soon, no doubt! Cheers mate.

    If your goal is to find gainful employment, then grad school may be a good idea. If you’re looking to find knowledge and truth, then grad school is going to poison your mind.

  32. Gravatar of Major_Freedom Major_Freedom
    23. April 2012 at 08:48

    Patrick R. Sullivan:

    Regulars here know that Scott fears we’re going to emulate Japan; many years of subnormal economic growth thanks to timorous central banking.

    Subnormal growth? Japan has experienced “normal” growth, when you look at the right data and use the right theory to interpret it.

    Japan has performed comparably to other developed nations. They have grown almost identical to Germany and France. They outperformed the Euro area, and the OECD average. They outperformed Italy, New Zealand, Czech Republic, Portugal, Hungary, Poland, Mexico, and Slovak Republic. All these other countries have relatively “looser” money, and yet they were outperformed by relatively “tighter” Japan.

    How do you reconcile that? If you value “evidence”, then will you change your mind in accordance with it?

    Lesson: economies don’t need inflation to grow. They can grow on the side of increased supply and falling prices.

    The reason why so many economists believe Japan experienced a “lost decades” is because their theory is all messed up. They fallaciously equate falling prices with recession/depression and stable prices with stagnation.

    All it really means is that fewer pieces of toilet paper are being printed relative to real goods being produced.

  33. Gravatar of Major_Freedom Major_Freedom
    23. April 2012 at 08:49

    dwb:

    Actually I fear worse than Japan

    You mean you fear us performing as good as Italy, New Zealand, Czech Republic, Portugal, Hungary, Poland, Mexico, the Slovak Republic, the euro area, and the OECD average? Because that’s who Japan outperformed.

  34. Gravatar of Benjamin Cole Benjamin Cole
    23. April 2012 at 08:55

    Major F-

    As long as we genuflect to the hobgoblin of price stability, we will never get off of our financial knees.

    And as Benjamin Franklin said, “He who trades the pursuit of economic prosperity for the perceived security of price stability will soon have neither.”

    But, take comfort. Jesus Christ said, “It is easier to get a rich man through the eye of a needle than into the Kingdom of Heaven.”

    The Fed’s tight-money policy is helping a lot of us get into heaven.

    If we go to a gold standard, heaven is going to get very crowded.

    So, do you worship gold as a deity? Or as a practical matter?

  35. Gravatar of Major_Freedom Major_Freedom
    23. April 2012 at 09:49

    Benjamin Cole:

    As long as we genuflect to the hobgoblin of price stability, we will never get off of our financial knees.

    And I will add that genuflecting to the demon of spending stability is just as apostatizing to our financial ownership.

    And as Benjamin Franklin said, “He who trades the pursuit of economic prosperity for the perceived security of price stability will soon have neither.”

    As I once said, and now say again, “He who trades the pursuit of individual ownership for the perceived security of spending stability will have neither, and lose both.”

    But, take comfort. Jesus Christ said, “It is easier to get a rich man through the eye of a needle than into the Kingdom of Heaven.”

    I don’t take comfort in religious dogma.

    The Fed’s tight-money policy is helping a lot of us get into heaven.

    I consider the Fed’s policy to be loose, because I don’t define tightness and looseness according to the hobgoblin of “spending stability”.

    If we go to a gold standard, heaven is going to get very crowded.

    No, it will just reveal how crowded things already are, and always were.

    So, do you worship gold as a deity? Or as a practical matter?

    Just because you worship fiat money, it doesn’t mean that my rejection of that worship somehow implied that I worship some other chimera.

    Or are rhetorical questions just a way for you to evade and ignore the arguments I am making?

  36. Gravatar of Major_Freedom Major_Freedom
    23. April 2012 at 09:52

    I also suspect there is a student loan bubble, which is a bubble formed on the (suspected) sovereign debt bubble. A large portion of student loans are “backed” by the Treasury.

  37. Gravatar of Saturos Saturos
    23. April 2012 at 09:59

    “This sends a signal to the markets that the Fed will engage in future policy actions to raise NGDP slightly faster than the markets previously expected.”

    But that would be just like an explicit commitment to target higher NGDP levels, only in a roundabout way. Indeed the market interpretation of this signal, if effective, would have nothing to do with the funds rate per se at all, and everything to do with expected future aggregate demand. So the negative funds target is just “poetic phrasing” – it doesn’t have any literal meaning, so the markets can only parse this as a commitment to a more “expansionary intent” for monetary policy than otherwise. Which is exactly what the Fed is refusing to come out and say literally! So I don’t see how translating this into Keynesian language helps any.

    To use an analogy: the Fed refuses to communicate with its clients in English, but insists speaking Chinese. But the Chinese language doesn’t have any words for what the Fed wants to say, so the Fed makes up its own words. No one knows what the hell they’re saying now, Chinese or no, so it issues its own update to the Chinese-English dictionary where it provides an English translation for each word in its new sentence, so that readers have to go on an “Easter egg hunt” through the dictionary to replace each of the Fed’s Chinese characters with an English phrase, eventually spelling out the Fed’s intended sentence in English. It’s like sending the same message as a cipher. What you’re asking the Fed to do is adopt a (semi-)NGDP level target, but then wrap that in Keynesian gibberish (negative funds rate targets) which can only be made sense of by ciphering out from Keynesian into NGDPese – so they haven’t solved anything at all, they’re just speaking monetarist sentences after all, only in Keynesian cipher (as supposed to something that actually means something in Keynesian terms).

    What I’m saying is, if the Fed can’t say to the public “We want higher levels of nominal spending over the next several years, and aim to generate them”, then neither can it say a sentence like “@#$@#%#$^@#&%$&$%@&$*@$@$*!#@(“, which only has meaning once translated as, “We want higher levels of nominal spending over the next several years, and aim to generate them”.

    In Keynesian, setting an interest target is supposed to mean an attempt to realize that interest rate – if it is interpreted more broadly as meaning “loosening in general”, then readers are already translating out of Keynesian. The only consistently Keynesian interpretation would be to say that the Fed wants to keep rates at zero for longer periods of time – but isn’t that exactly what they’ve already said? And isn’t that bad, precisely because interest rates are such a bad signal of the stance of monetary policy? And yet Keynesians can only construct propositions about interest rates, not the quantity of money. Sure, they can also talk about directly targeting the goal variable, like NGDP – but wasn’t the whole assumption of this post that they were unwilling to do that? So if Keynesians are restricted to making statements about interest rates, then at the ZLB there is no meaningful interest-rate-statement which signals looser policy.

    Again, if Ben Bernanke won’t just come out and say he wants more NGDP, then saying he wants lower Fed funds rates won’t help him, as that means nothing – you can’t have lower funds rates, so the only thing he could possibly mean is he wants more NGDP. He’s not translating, he’s ciphering. In normal times, lowering rates signals expansion by indicating that the Fed will (or would) do more OMOs. But a negative rate signals nothing, as it’s not clear what change in its actual behaviour the Fed is promising (threatening).

  38. Gravatar of Major_Freedom Major_Freedom
    23. April 2012 at 10:31

    Morgan Warstler:

    Scott is 100% capable of explaining NGDPLT starting in 2000 keeps the housing crisis from happening…. where shocks are minimized because govt. is shrinking.

    How about explaining why NGDP fell in 2008, despite the fact that the Fed never stopped printing money, and never ceased communicating its interest rate intentions, and always held consumer price inflation within target?

    The story says outright that Barney Frank isn’t allowed to exist.

    Scott doesn’t want to own that story.

    BUT, immediately after Scott loses his [bet] with me, and Obama isn’t president…

    You can’t know he’ll lose that bet, until after the event occurs.

    Or you’re going to show us all how you became a billionaire making a series of bets that pay off if Obama remains President?

    The real hope for America is my Guaranteed Income plan, because once everyone has a damn job, we won’t be hearing about unemployment ever again… so printing money falls off the table.

    How is receiving a guaranteed income the same as having a job? Sounds like welfare to me. Or did you mean everyone should be able to work for the state, at their own expense?

  39. Gravatar of Morgan Warstler Morgan Warstler
    23. April 2012 at 10:49

    MF,

    This is it:

    http://www.interfluidity.com/v2/3212.html#comment-24415

    Take unemployment off the table, run a quasi-govt. agency the size of Facebook, and let it suck up and take over all forms of Aid (food stamps, housing, energy, etc)

    It’ll destroy public employee unions at state and local levels in just a couple years…. every state gvt. will look like Indiana.

  40. Gravatar of John John
    23. April 2012 at 11:27

    Do you really think a room full of economists are ever going to be able to agree on what an effective policy strategy would be in an “endlessly perplexing field”? Managed currencies in general have been and always will be disasters. The value of a piece of paper will always fall back down to the value of paper and ink. Looking back on the past 40 year experiment in unchained money, I can’t see anyway not to conclude that it has been a failure; a time of less progress than the proceeding generations.

  41. Gravatar of Major_Freedom Major_Freedom
    23. April 2012 at 11:41

    Morgan Warstler:

    This is it:

    http://www.interfluidity.com/v2/3212.html#comment-24415

    Take unemployment off the table, run a quasi-govt. agency the size of Facebook, and let it suck up and take over all forms of Aid (food stamps, housing, energy, etc)

    It’ll destroy public employee unions at state and local levels in just a couple years…. every state gvt. will look like Indiana.

    This plan is just removing the minimum wage laws, and allowing employers and employees to agree to $40 a week wage contracts.

    It isn’t guaranteed, because the contingency rests on the choice of the “bidders.”

  42. Gravatar of Major_Freedom Major_Freedom
    23. April 2012 at 11:51

    John gets it, except for the rather awkward “in general have been and always will be”.

  43. Gravatar of Jake N Jake N
    23. April 2012 at 12:45

    Scott,

    Thanks for this post. I haven’t been following the Econ blogosphere for long, and as an undergrad I sometimes have a hard time keeping up with the discussion. But this made a lot a sense, and I feel like I learned something from it.

  44. Gravatar of Benjamin Cole Benjamin Cole
    23. April 2012 at 13:02

    Major F-

    I admit. I love prosperity, I love printing money, I love driving to Vegas with a big-boobed blonde in the car and a weekend of gambling and debauchery ahead of me.

    Prosperity is associated with rising prices.

    Boom, boom, boom, boom, boom.

    That’s what I want.

    I love money.

  45. Gravatar of Major_Freedom Major_Freedom
    23. April 2012 at 13:57

    Benjamin Cole:

    Prosperity is associated with rising prices.

    No, prosperity is associated with falling prices, since prosperity is associated with higher supply.

    Rising prices is associated with money printing, or lower supply and hence impoverishment.

    Congratulations on committing an error that even the classicals of the 19th century were already warning against.

    One more crap monetarist economic lesson and you might just pass the 20th century mark for economic science. You can do it!

  46. Gravatar of Brito Brito
    23. April 2012 at 14:52

    Major_Freedom, prosperity is associated with EITHER higher supply = lower prices, OR higher demand = rising prices.

    Rising prices is also associated with rising wages, rising incomes and booming stock markets, which in turn is associated with prosperity.

  47. Gravatar of John John
    23. April 2012 at 16:31

    M.F. and Ben Cole,

    Economic progress isn’t necessarily tied to either rising or falling prices. Economic progress consists in rising productivity which increases real wages per worker. Other things equal, this tends to make prices lower then they would be otherwise as people gain greater purchasing power. However, things are never equal and improving economic conditions have been associated with falling, stable, and rising prices. There is no necessary correlation between improving economic conditions and prices other than the fact that goods become more affordable in real terms.

  48. Gravatar of ssumner ssumner
    23. April 2012 at 16:52

    Lars, I see all sorts of problems with the promises to keep rates low until a specified date. That sort of policy might not be appropriate a year from now. My plan would not force the Fed to change its way of communicating. Markets know how to interpret changes in fed funds targets, so the Fed could keep talking the same way as they always have. The promise of low rates until 2014 seems quite ambiguous, it’s not clear whether it’s conditional on the economy, and if so in what way. In addition, my proposal can be adjusted after each meeting, the Fed 2014 promise is more awkward to adjust, as it looks to many like they would be reneging on a previous commitment.

    dwb, Thanks, I certainly understand where he is coming from, but I am skeptical of those estimates. That entire exercise treats low rates as easy money, just not easy enough. But if the low rates are themselves caused by tight money, then the interpretation is quite different.

    To see how far we are from the “right policy,” just look at NGDP, or NGDP expectations assuming level targeting, or quasi-level targeting.

    Philo, I suppose it’s to allow them to avoid criticism (which would be more widespread if they had committed to a certain level of AD.)

    Greg, If the Fed was doing its job they should never change the trend line. Given they haven’t done their job, it’s a bit more difficult. I’ve tended to accept Irving Fisher’s compromise of going 1/2 the way back–split the pain between lenders and borrowers. Recently I’ve argued for going only 1/3 of the way back. In 20 more years I’ll suggest forgetting about the old trend line.

    Thanks Ben, More QE is also fine. Best would be an explicit NGDP target.

    Patrick, If only it were true that I looked even a little like Paul Newman, my life might have turned out differently.

    Dan, Yes, right around 5%.

    Flow5, I have no idea what is special about June, but more QE is fine.

    Tommy, See my answer to Lars above. I’m not sure why Taylor thinks we need tighter money, inflation is likely to average below 2% over the next few years with current policy. And there is obviously an output gap.

    Marcus, Yes, he’s an interest rate-centric economist.

    Miguelito, Yes, I was being charitable–it would help if they would tell us what they are trying to do, but of course they themselves don’t agree.

    Steve, The hawks would probably be even more upset by that. And I’d be a bit disturbed as well. They need to make it conditional on outcomes.

    Thanks Ben J. BTW, if you are planning on attending grad school I’d strongly suggest you don’t read Major Freeman’s comments.

    Dtoh, Nothing will have much effect unless it’s expected to persist.

    Rien, I agree that we can do much better than the Taylor Rule, I was just using that as an example.

    DonG, Yes, there really is mass confusion on these issues.

    Patrick, That is my fear, although I still think it’s likely that we’ll exit the zero rate situation sooner than Japan–the fundamentals here are somewhat stronger.

    Saturos, You said;

    “But that would be just like an explicit commitment to target higher NGDP levels, only in a roundabout way. Indeed the market interpretation of this signal, if effective, would have nothing to do with the funds rate per se at all, and everything to do with expected future aggregate demand.”

    Bingo! But what you don’t see is that this is business as usual. No one can seriously believe that the stock markets went wild in 2001 and 2007 on Fed announcements because they cared about a 1/4% change in the Fed funds target, it’s ALWAYS about signaling future policy intentions.

    The markets do know how to interpret Fed-talk. The understand that “quarter point cut” means “enough base money in long run to support higher NGDP,” thus raising expected NGDP growth right now.

    John, The dollar was “chained to gold” during 1929-33—how’d that work out?

    Thanks Jake.

  49. Gravatar of Brito Brito
    23. April 2012 at 17:00

    “Economic progress consists in rising productivity”

    That’s supply side prosperity. You can be in a slump or a boom with productivity remaining constant.

  50. Gravatar of Benjamin Cole Benjamin Cole
    23. April 2012 at 17:16

    John, et al:

    I should have written, “In modern economies, prosperity is associated with rising prices.”

    The modern economy defined by falling prices is Japan, and they have been an epic failure for the last 20 years. Their growth is below that of statist France or Italy.

    In general, in real boom times, you see upwards price action in modern economies. Housing, real estate, wages, profits, stock prices—boom, boom, boom, boom.

    This is obvious, hardly needs stating.

    If you start with the premise that price stability is the goal—and you have only a subjective index of nominal prices as your guide—you will asphyxiate your economy.

    I would rather live with five percent real growth and five percent inflation than mild deflation and one percent real growth. The gold nuts like the other way around. That is why we call them “nuts.”

    And yes, Scott Sumner is right, QE has to be done in coordination with nominal GDP targeting, as in “we conduct QE until nominal growth targets are hit for a sustained period, as in six straight quarters.”

    Noting wrong with the USA that a sustained bull market and honking boom times for 10 years would not fix. We did it before—we called it the 1990s.

  51. Gravatar of Major_Freedom Major_Freedom
    23. April 2012 at 17:48

    Brito:

    “Economic progress consists in rising productivity”

    That’s supply side prosperity. You can be in a slump or a boom with productivity remaining constant.

    Saying “supply side prosperity” is redundant. It’s the only source of economic prosperity.

    If productivity remains constant, then if you want say the economy is slumping regardless, then that’s your definition, but it’s not mine.

  52. Gravatar of Major_Freedom Major_Freedom
    23. April 2012 at 18:01

    I should have written, “In modern economies, prosperity is associated with rising prices.”

    That’s still false, because prosperity is increased supply, and increased supply makes prices fall all else equal. It is not associated with rising prices.

    If people have twice the goods at half the prices, they’re twice as wealthy, regardless of the fact that prices are half.

    People’s prosperity depends on real goods and services, not how much money is sloshing around the economy.

    The modern economy defined by falling prices is Japan, and they have been an epic failure for the last 20 years. Their growth is below that of statist France or Italy.

    Oh that’s right, when growth is comparable to France and Italy, two loose money countries, pretend that they are epic failures anyway, so that you can then continue to spread the fallacy that Japan is an epic failure for 20 years.

    Nonsense.

    Nobody is saying France or Italy has experienced a lost decades, and yet you’re claiming that Japan has?

    Japan has not been an epic failure. They outperformed the Euro area, they outperformed the OECD average.

    If Japan is an epic failure, then all the loose money countries that Japan outperformed are WORSE than epic failures.

    Face it, you’re just itching to label Japan as a failure because it completely refutes your silly stupid worldview that prosperity requires printing oodles of toilet paper money.

    In general, in real boom times, you see upwards price action in modern economies. Housing, real estate, wages, profits, stock prices””boom, boom, boom, boom.

    You only see upward prices because of money printing. It does not signify more goods and services.

    This is obvious, hardly needs stating.

    It’s wrong.

    If you start with the premise that price stability is the goal””and you have only a subjective index of nominal prices as your guide””you will asphyxiate your economy.

    If you start with the premise that spending stability is the goal, then you’re still in the realm of economic absurdity.

    I would rather live with five percent real growth and five percent inflation than mild deflation and one percent real growth.

    I prefer to live with more real goods and services regardless of prices. I’d rather have monetary sovereignty.

    The gold nuts like the other way around. That is why we call them “nuts.”

    The fiat nits like the other way around. They want more toilet paper money to wipe their arses with. That is why I call them fiat nuts.

    And yes, Scott Sumner is right, QE has to be done in coordination with nominal GDP targeting, as in “we conduct QE until nominal growth targets are hit for a sustained period, as in six straight quarters.”

    No, Scott Sumner, PhD, blogger and man of leisure, is wrong. There should not be QE, there should not be spending targeting, and there should not be a Fed.

    Noting wrong with the USA that a sustained bull market and honking boom times for 10 years would not fix. We did it before””we called it the 1990s.

    And the cost was the Nasdaq collapse.

  53. Gravatar of Major_Freedom Major_Freedom
    23. April 2012 at 18:22

    Brito:

    Major_Freedom, prosperity is associated with EITHER higher supply = lower prices, OR higher demand = rising prices.

    A higher quantity demanded does not imply rising prices. Only more MONEY SPENDING results in higher prices. In the aggregate, higher money spending is caused by a higher quantity of money, i.e. inflation.

    Higher quantity demanded, in the context of higher productivity and no inflation, leads to falling prices, not higher prices.

    Be careful not to conflate an increase in the quantity of goods demanded in response to lower prices, with an increased demand for goods in the form of more money and spending for those goods.

    Rising prices is also associated with rising wages, rising incomes and booming stock markets, which in turn is associated with prosperity.

    No, it isn’t. Prosperity is associated with lower prices, not rising prices. Inflation is associated with rising prices.

    Nominally increasing wages, nominally increasing stock prices, nominally increasing anything isn’t worth a damn if productivity is not increasing.

  54. Gravatar of Major_Freedom Major_Freedom
    23. April 2012 at 18:24

    ssumner:

    Thanks Ben J. BTW, if you are planning on attending grad school I’d strongly suggest you don’t read Major Freeman’s comments.

    Why? Should he take you on faith, or is there a particular reason you have in mind?

    At least I gave some context in referring to evidence: the performance of graduate level economists. What is your argument for why grad school is attractive, other than gainful employment and being brainwashed?

  55. Gravatar of Major_Freedom Major_Freedom
    23. April 2012 at 18:27

    John:

    M.F. and Ben Cole,

    Economic progress isn’t necessarily tied to either rising or falling prices. Economic progress consists in rising productivity which increases real wages per worker. Other things equal, this tends to make prices lower then they would be otherwise as people gain greater purchasing power. However, things are never equal and improving economic conditions have been associated with falling, stable, and rising prices. There is no necessary correlation between improving economic conditions and prices other than the fact that goods become more affordable in real terms.

    When you say “associated with”, do you mean BECAUSE of higher prices, or DESPITE higher prices? The difference is crucial.

    It would be like saying rising productivity “is associated with” higher white collar crime, and then incorrectly inferring that rising productivity can be boosted by increasing white collar crime.

    Every improvement you have seen is due to rising productivity, and all else equal, that lowers prices. That is enough to conclude that rising productivity is associated with lower, not higher, prices.

  56. Gravatar of Morgan Warstler Morgan Warstler
    23. April 2012 at 19:36

    MF, if you can’t admit that ANYONE is worth $40, if even to toss rings at them, you just aren’t being honest. Somoene will find ROI on any American at $40 a week.

    So skip with the “justs” – I’m fixing illegal immigration, retirement age, ghettos, and decimating public employee unions. So you cheer. My trick to to make Monetary meaningless with a nice micro-economic hack. It’s the micro version of Mundell convincing Europe to become conservative.

    Ya know MF, the very BEST libertarians are far too tricky to be dogmatic. You don’t seem to grasp the phrase, “by any means necessary.”

    —-

    And a perfect sentence from the NYPOST, which I consider to be a solid barometer for the American psyche:

    “The Fed can make a “profit” simply because this stuff has value as long as interest rates are super-cheap. Low rates mean that more people can pretend they can afford to pay all they’ve borrowed. So the Fed’s assets, which are made up of other people’s debt, look nice.”

    http://www.nypost.com/p/news/opinion/opedcolumnists/zero_to_crash_speed_ny_next_peril_urCe00NRgilgnUYdw2jIeP

  57. Gravatar of flow5 flow5
    23. April 2012 at 19:51

    Economics is a science. There is no ambiguity in forecasts: In contradistinction to Bernanke (and using his terminology), forecasts are mathematically “precise”. The “science” of mathematical economics currently shows that the rate-of-change (roc), in monetary flows (our means-of-payment money Xs its transactions rate-of-turnover), falls from April’s month-end until June’s month-end. So, Morgan Warstler, the FED acts in JUNE.

    I.e., contrary to economic theory, & Nobel laureate Dr. Milton Friedman, monetary lags are not “long & variable”. The lags for monetary flows (MVt), i.e., the proxies for (1) real-growth, and for (2) inflation indices, are historically, always, fixed in length (i.e., mathematical constants).

    Aggregate monetary demand is measured by the monetary flows (MVt) not nominal gDp, To those who may question the validity of using transaaction data with gDp data, there is evidence to prove rates roc’s in nominal gDp can serve as a proxy figure for roc’s in all transctions. Roc’s in real gDp have to be used, of course, as a policy standard.

  58. Gravatar of Steve Steve
    23. April 2012 at 20:06

    Fun Major_Freedom statistic of the day:

    15 posts
    3521 words
    17547 characters

  59. Gravatar of Steve Steve
    23. April 2012 at 20:12

    “Steve, The hawks would probably be even more upset by that. And I’d be a bit disturbed as well. They need to make it conditional on outcomes.”

    You’re probably right, a 1% or lower pledge through 2016 isn’t the best idea. But it stems from my concern that the Fed hasn’t acknowledged that the Wicksellian rate is very low, and therefore potential policy errors are asymmetrically skewed to the downside. Obviously we agree that problem is an artifact of the policy instrument of choice.

  60. Gravatar of Morgan Warstler Morgan Warstler
    23. April 2012 at 20:43

    “Economics is a science.”

    And according to this science if there is only one currency there is no macro.

    And sticky wages are a misnomer and unemployment is only structural.

    It is better for those whose personal strategy is positing social injustice, to not to call econ a science.

    War is a science. The winner is essentially pre-determined.

    Econ as a science ends like wars and Darwinsim: the weak eat it.

  61. Gravatar of Saturos Saturos
    23. April 2012 at 21:55

    “No one can seriously believe that the stock markets went wild in 2001 and 2007 on Fed announcements because they cared about a 1/4% change in the Fed funds target, it’s ALWAYS about signaling future policy intentions.”

    Right. And you’re saying that the Fed is so wedded to this roundabout mode of communication with markets that when rates hit zero, instead of saying “We want to expand more, and remain in expansion until things really are better”, they need to go through a charade of, “Let’s pretend we have positive rates. Now, I’m going to “cut” the rate by several percentage points. Please react the exact same way you would have if that had been a normal rate cut.”

    In other words, interest rate signaling was always absurd, and now that the absurdity is apparent, we’re going to make it even more absurd.

  62. Gravatar of Greg Ransom Greg Ransom
    23. April 2012 at 22:18

    Thanks Scott, that is actually in the ball park of the reasonable.

    Scott wrote,

    “Greg, If the Fed was doing its job they should never change the trend line. Given they haven’t done their job, it’s a bit more difficult. I’ve tended to accept Irving Fisher’s compromise of going 1/2 the way back-split the pain between lenders and borrowers. Recently I’ve argued for going only 1/3 of the way back. In 20 more years I’ll suggest forgetting about the old trend line.”

  63. Gravatar of Ben J Ben J
    24. April 2012 at 02:16

    Thanks Scott… haha, I will keep your advice in mind. I think you’re right, but posting on your blog seems to go hand in hand with MF.

    I will just quickly say that the debate around how prices are associated with prosperity should be held in light of the name of this blog – after all, if people didn’t fall for the money illusion, then the price level would be irrelevant (and MF would be right). But they do; nominal wages are very sticky downwards, and so productivity isn’t the only story. Nominal price has an effect on behaviour, even though it “shouldn’t”.

  64. Gravatar of Saturos Saturos
    24. April 2012 at 04:08

    Ben J,
    Yeah, but keep in mind that even without money illusion, deflation is still problematic because nominal interest rates have a ZLB, so deflation pushes up real rates above the equilibrium. Also sticky nominal debts – falling nominal income inevitably causes a debt crisis.

    MF, do you really think Market Monetarism is the biggest enemy of Freedom? Are you allocating your Freedom-fighting efforts optimally? I mean, do you actually ever try arguing with actual socialists who actually despise economic freedom?

    Morgan Warstler,
    The popular media is always several steps behind on economic analysis, but in this case the NYPOST seems to have done what every confused economist who hasn’t recognized the true nature of the recession (but has a few sharp words against govt intervention) seems to have done – clutched at pseudo-Austrian theories which are forced to assume that people don’t have rational expectations. Just walk into any undergrad survey course on the “GFC” these days. It’s shocking.

  65. Gravatar of dwb dwb
    24. April 2012 at 04:51

    MF, do you really think Market Monetarism is the biggest enemy of Freedom? Are you allocating your Freedom-fighting efforts optimally? I mean, do you actually ever try arguing with actual socialists who actually despise economic freedom?

    for some reason he’s appointed market monetarism his arch-enemy (and a really poor imitator of Rothbard and Mises, at that). he should go take on the MMTers, and Keynsians who want $2 Tn of goverment stimulus, that would be worth watching

    1. money spending and ngdp targeting
    2. @%$£^!!!
    3. coercive brainwashed stockholm-syndrome surrogates of the soviets!!!

  66. Gravatar of Negation of Ideology Negation of Ideology
    24. April 2012 at 06:28

    Ben J –

    Don’t forget about debt contracts. Sticky wages are important, but even if wages were somehow 100% flexible (of course that’s absurd because there are good reasons for long term wage contracts), debt contracts are nominal. So unexpected deflation results in arbitrary redistribution from debtors to creditors, just like unexpected inflation results in arbitrary redistribution from creditors to debtors.

    Good luck in your graduate economics school search!

  67. Gravatar of dwb dwb
    24. April 2012 at 06:44

    So unexpected deflation results in arbitrary redistribution from debtors to creditors,

    my favorite topic, so just let me add some thoughts:

    *long term nominal debt contracts are (financially) identical to leases. they are fundamentally the same as very long term *price* contracts (for the portion of the remaining unpaid balance). that makes house prices, for example, very sticky.

    *To be precise, when you talk about deflation/inflation and debt devaluation you have to include the OTHER way debts can be devalued: foreclosure. There is no economic difference (for an individual) between me abrogating my debt via foreclosure and inflation devaluing the debt , except for foreclosure costs and the long term stain on my credit rating. Of course, inflation affects ALL debts simultanously whereas foreclosures only hit the particular industry affected. Now the home ownership rate is ~65% so it seems like some inflation would be more efficient.

    * when prices for a good decline price contracts need to be reset before the market gets back to equilibrium. In housing we can chose path a)inflation, path b) deflation/foreclosure, but there is no path c. creditors will see some portion of their debt devalued one way or the other because the price contracts need to be reset.

  68. Gravatar of Negation of Ideology Negation of Ideology
    24. April 2012 at 06:46

    Scott,

    It’s not strictly true that the Fed can’t create negative interest rates on Treasuries. All it has to do is buy them at higher than face value. If the Fed bought 3 month Treasuries with a face value of $100 for $101 that would be roughly equivalent to a -4% annual interest rate. During the recent economic crisis, there was an auction that produced a slight negative rate on short term Treasuries. I believe the Bureau of Public Debt framed it and put it on its wall.

    The Fed would take a loss on the transaction, but the Treasury would take an equal gain. I’m not saying that this is a good idea, just that it’s possible.

    At the end of the day, it would probably be equivalent to QE. The Treasury would probably sell more short term to the Fed and issue less long term, or buy back previously issued long term debt. In effect, the Fed would be loaning the Treasury the money to do QE.

    “I strongly believe that interest rates are the wrong policy instrument. But most people disagree with me. ”

    You can count me as one of the people who agrees with you. Targeting interest rates, or the the price of T-Bills, is only slightly more sane than targeting the price of shiny metals or pork bellies.

  69. Gravatar of Brito Brito
    24. April 2012 at 07:47

    “A higher quantity demanded does not imply rising prices. Only more MONEY SPENDING results in higher prices. In the aggregate, higher money spending is caused by a higher quantity of money, i.e. inflation.”

    And more spending is associated with rising prosperity. I’m sure you don’t mind admitting that when lots of gold is mined under a gold standard in a region increasing everyone’s wealth in gold, causing more money spending, that there is prosperity.

    “Higher quantity demanded, in the context of higher productivity and no inflation, leads to falling prices, not higher prices.”

    Higher quantity demanded does not have to be anything to do with the context of higher productivity; it can be entirely from a shift in preferences or behaviour regardless of productivity. If you don’t think that then you utterly, utterly disagree with classical economics and you must not ever ever ever reference classical economics again, ever.

    “No, it isn’t. Prosperity is associated with lower prices, not rising prices. Inflation is associated with rising prices.

    Nominally increasing wages, nominally increasing stock prices, nominally increasing anything isn’t worth a damn if productivity is not increasing.”

    You have never encountered the real world have you? Productivity is not a guarantee of prosperity, the thirties was actually one of the most productive decades of the 20th century, but it was a horrible time in terms of prosperity and producing; DESPITE falling prices. The deflationary period was one of the most destructive economic periods the US had ever encountered, which is what prompted Hayek to remark that allow deflation is an utterly ridiculous policy.

    The statistics say exactly the opposite of what you’re saying, prosperous countries do not experience deflation, they do experience rising nominal wages.

  70. Gravatar of flow5 flow5
    24. April 2012 at 08:05

    “Morgan Warstler”

    “Econ as a science ends like wars and Darwinsim: the weak eat it”

    Too weird (& un-scientific), for me.

    Take the broad brush: “Science (from Latin scientia, meaning “knowledge”) is a systematic enterprise that builds and organizes knowledge in the form of testable explanations and predictions about the universe”

    Your camp:
    “The eminent British economist of the 1930s, John Maynard Keynes, once essayed to defend his profession by declaring that economic theory is not a body of doctrine to be ingested and duly regurgitated by students, but rather a method of thought which ought to reduce to rationality whatever might be the vexing issues of the day. Yet the formal rationality of theoretical economics too easily leaps through stratospheres of abstraction, never to feel the gravitational tug of reality; it orbits endlessly in the rarefied galaxy of theorems, lemmas, proofs, and assumptions, mischievous assumptions” – Edward Meadows

    My camp:
    Economic prognostications are infallible (for less than one year). That involves scientific investigation: “Scientific method refers to a body of techniques for investigating phenomena, acquiring new knowledge, or correcting and integrating previous knowledge.[1] To be termed scientific, a method of inquiry must be based on gathering empirical and measurable evidence subject to specific principles of reasoning”

    Example: There were 27 price forecasts by individuals & 9 by econometric models for the year 1978. The lowest (Gary Schilling, White Weld), the highest, (Freund, NY, Stock Exch) & (Sprinkel, Harris Trust & Sav.). The range CPI, 4.9 – 6.5 percent. For the Econometric models, low (Wharton, U. of Penn) 5.7%; high, 6.6% U. of Ga.). Dr. Leland J. Pritchard’s forecast (using MVt), for 1978, between 8 & 9 percent. For 1978 inflation based upon the CPI figure was 9.018%

    That’s science as applied to economics.

  71. Gravatar of Brito Brito
    24. April 2012 at 08:09

    MF, let’s look at some prosperous nations shall we? Lets start with Luxembourg, possibly the most prosperous nation on the planet, surely we’ll see an extended period of deflation right?

    http://www.tradingeconomics.com/luxembourg/inflation-average-imf-data.html

    Doh! Okay, how about…. Norway, another very prosperous nation:

    http://www.aboutinflation.com/_/rsrc/1320231162361/inflation-rate-historical/norway-inflation-rate-historical-chart/Norway_Inflation_Rate_Historical_1984_2011.png

    Damn! No deflation either. I can do this all day but every single prosperous country shows the same thing.

    How about something even more illustrative:

    http://inflationdata.com/articles/wp-content/uploads/2010/07/Inflation_and_recession.jpg

    Notice how recessions are almost always deflationary?

    Yeah…

  72. Gravatar of dwb dwb
    24. April 2012 at 08:11

    why do we keep saying MONEY spending. there is no other kind, except maybe bartering.

  73. Gravatar of Brito Brito
    24. April 2012 at 08:15

    MF, MV=PY

    Given that all evidence and all mathematical models ever pretty much shows supply curves to not be vertical in the short run or during recessions, we can say that a rise in MV will cause both P and Y to rise, in that case, a rise in V, holding M constant, will also cause P and Y to rise, thus demand can increase causing P and Y to increase without a change in the money stock but instead a change in velocity, QED.

  74. Gravatar of Major_Freedom Major_Freedom
    24. April 2012 at 09:03

    Brito:

    Given that all evidence and all mathematical models ever pretty much shows supply curves to not be vertical in the short run or during recessions, we can say that a rise in MV will cause both P and Y to rise, in that case, a rise in V, holding M constant, will also cause P and Y to rise, thus demand can increase causing P and Y to increase without a change in the money stock but instead a change in velocity, QED

    The slope of supply curves are ALWAYS assumed, hypothesized, taken for granted, derived from first principles, etc. They cannot be observed. They cannot be empirically derived.

    The only part of the supply curve that is observable is the intersection with demand, i.e. price.

    Mathematical models that presume a sloping supply curve are based not on irrefutable observable evidence, but assumptions and theories concerning the relationship between inflation and supply.

    When economists observe prices, they draw supply and demand curves through that point, and in principle there are practically infinite shapes that can be assumed.

    Moreover, when the price of a good is observed to change, and the supply is observed to change, this is NOT in any sense an observation of movement along a supply curve. It is also perfectly consistent with an observation of changing demand in addition to the change in supply. In other words, one could be observing a series of completely different supply curves at each observed price.

    MV does not affect supply if you don’t start with the assumption of a sloped supply curve. Only if you presume a sloping supply curve from some non-empirical foundation can you conclude that changes in MV affects Y.

    Since there is no empirical reason why one has to presume a sloping supply curve, and since there no mathematical reason why one has to presume a sloping supply curve, it means that your entire argument falls like a house of cards.

  75. Gravatar of Major_Freedom Major_Freedom
    24. April 2012 at 09:05

    dwb:

    why do we keep saying MONEY spending. there is no other kind, except maybe bartering.

    To make it clear when real supply is not increasing or decreasing, and there is only inflation of the money supply.

    In principle, even in a monetary economy, people are exchanging goods and services for other goods and services. Money as a medium of exchange only facilitates barter. Say’s Law, properly understood, is associated with this.

  76. Gravatar of Benjamin Cole Benjamin Cole
    24. April 2012 at 09:12

    Krugman has big article out today and he comes close to advocating Market Monetarism. He is one step away from MM—as is John Taylor.

    Could John Taylor and Krugman become married, at an altar hosted by Scott Sumner?

    Sat tuned!!!

  77. Gravatar of Major_Freedom Major_Freedom
    24. April 2012 at 09:16

    Brito:

    MF, let’s look at some prosperous nations shall we? Lets start with Luxembourg, possibly the most prosperous nation on the planet, surely we’ll see an extended period of deflation right?

    I didn’t say that prosperity necessarily requires observing falling prices over time. I said prosperity is associated with falling prices compared to what otherwise would have existed.

    Economics requires a counter-factual based understanding. More goods and services makes the prices lower than they otherwise would have been had the supply of goods and services been lower. Whether or not one observes falling, rising, or stable prices over time is completely irrelevant, because over time there is a central bank inflating the money supply faster or slower.

    No matter what happens to prices, our standard of living depends on supply, and when there is higher supply than there otherwise would have been, then prices are lower than they otherwise would have been.

    Economics requires a little imagination. If all you focus on is what is observed, then you will not be utilizing a necessary component of economic science, which is your ability to reason and think abstractly. Any moron can observe prices rising or falling over time. It takes an economist to know what otherwise would have existed had certain variables been different at that time.

    All your references to price changes over time in the various countries just proves you don’t think like an economic scientist, but rather a data collecting historian, a bookkeeper.

    Notice how recessions are almost always deflationary?

    You mean notice how correction periods are accompanied by people trying to increase their purchasing power on account of the current price structure being overpriced? Yeah, I notice that too.

    Notice how the correlation between falling prices and depressions, indeed any correlation between any two variables, does not imply causality, and that if you had a correct theory to interpret the data, rather than the false theory you currently adhere to, you would have known that falling prices and depressions are themselves both effects of a previous cause, which brought about the falling prices and depression? That the falling prices didn’t cause the depression and that the depression didn’t cause the falling prices, but that both the falling prices and depression were brought about by a prior cause of INFLATION, which distorted the economy and made correction inevitable? Yeah, I noticed that too.

  78. Gravatar of Brito Brito
    24. April 2012 at 09:20

    “The slope of supply curves are ALWAYS assumed, hypothesized, taken for granted, derived from first principles, etc. They cannot be observed. They cannot be empirically derived.”

    But the first principles can be and HAS been empirically observed. Sticky prices, non immediate adjustment of prices, price rigidity, has been empirically observed without question. If you deny this you are sticking your head in the sand.

    Excess capacity has ALSO been empirically observed, again denying this is sticking your head in the sand.

    “Mathematical models that presume a sloping supply curve are based not on irrefutable observable evidence, but assumptions and theories concerning the relationship between inflation and supply.”

    Actually no, modern models are microfounded, the relationship between inflation and supply is a result of the mathematical model, NOT an assumption, you are 100% wrong, as usual.

    “Since there is no empirical reason why one has to presume a sloping supply curve, and since there no mathematical reason why one has to presume a sloping supply curve, it means that your entire argument falls like a house of cards.”

    This is the most insane thing I have ever heard. It seems your whole economic model is based on the assumption of vertical supply curves at all time, that is an extremely naive and ridiculous assumption, even if you ignore all the empirical evidence against it, it is utterly against all intuition.

  79. Gravatar of Brito Brito
    24. April 2012 at 09:29

    “I didn’t say that prosperity necessarily requires observing falling prices over time. I said prosperity is associated with falling prices compared to what otherwise would have existed.”

    Actually no, you didn’t say that.

    “our standard of living depends on supply”

    Completely stupid, again only someone who utterly ignores reality would think demand has no role to play. And you have nothing to support you, all the most robust economic models utterly disagree with you, including modern DSGE models which are entirely consistent with classical economics, your arguments are entirely non-compelling, entirely unconvincing.

  80. Gravatar of Major_Freedom Major_Freedom
    24. April 2012 at 09:35

    Brito:

    “A higher quantity demanded does not imply rising prices. Only more MONEY SPENDING results in higher prices. In the aggregate, higher money spending is caused by a higher quantity of money, i.e. inflation.”

    And more spending is associated with rising prosperity.

    No, it isn’t. Rising spending is associated with inflation of the money supply.

    Rising prosperity is associated with rising supply, and in this context, spending need not be rising.

    I’m sure you don’t mind admitting that when lots of gold is mined under a gold standard in a region increasing everyone’s wealth in gold, causing more money spending, that there is prosperity.

    I won’t admit that prosperity is higher when people have more fiat toilet paper money.

    In a gold standard, where the money itself is also a consumer good that derives direct utility, then an increase in the supply of gold is associated with an increase in prosperity.

    You can’t mimic this by violence. You can’t mimic this by forcing everyone through legal tender and taxation laws that whatever the state deems is money, that an increase in the supply of it is also an increase in prosperity. Only if individuals are free to use their own money, can you claim that an increase in the supply of it represents an increase in prosperity.

    Fiat money does not increase anyone’s prosperity, except for the money printers and those who are near the first in line, who benefit at the expense of others via the wealth transfer mechanism inherent in fiat money, that does not exist in a gold standard. in a gold standard, anyone is in principle capable of producing their own gold. In fiat money systems, only the state can produce money, and everyone else are accused of counterfeiting.

    Nobody who produces money in a gold standard is a counterfeiter. Nobody has any legal privilege. Nobody is systematically exploited by wealth transfer and nobody systematically exploits by wealth transfer.

    “Higher quantity demanded, in the context of higher productivity and no inflation, leads to falling prices, not higher prices.”

    Higher quantity demanded does not have to be anything to do with the context of higher productivity; it can be entirely from a shift in preferences or behaviour regardless of productivity.

    Not in the aggregate, which is the context when money and supply are considered. In the aggregate, a higher quantity demanded can only exist via increased production.

    If you don’t think that then you utterly, utterly disagree with classical economics and you must not ever ever ever reference classical economics again, ever.

    Never ever ever never ever never?

    “No, it isn’t. Prosperity is associated with lower prices, not rising prices. Inflation is associated with rising prices.”

    “Nominally increasing wages, nominally increasing stock prices, nominally increasing anything isn’t worth a damn if productivity is not increasing.”

    You have never encountered the real world have you?

    You don’t know how to respond to arguments you can’t refute with anything but rhetorical questions, can you?

    Productivity is not a guarantee of prosperity, the thirties was actually one of the most productive decades of the 20th century, but it was a horrible time in terms of prosperity and producing; DESPITE falling prices.

    It was more prosperous than it otherwise would have been had productivity been lower.

    Do you not understand the concept of “than it otherwise would have been”? That’s how you reason in economics. You don’t only look at what exists, declare there was high productivity and low standards of living. You instead say that prosperity would have been higher had productivity been higher, and prosperity would have been lower had productivity been lower.

    Productivity is the source of prosperity. The thirties was characterized by massive government intervention, which reduced the standard of living of millions of people from what it otherwise would have been. That is how we reconcile productivity with existing standards of living.

    The deflationary period was one of the most destructive economic periods the US had ever encountered, which is what prompted Hayek to remark that allow deflation is an utterly ridiculous policy.

    Hayek was wrong.

    Deflation didn’t cause the Great Depression. The deflation and the Depression were both caused by a prior factor, namely inflation during the 1920s, which distorted the economy.

    The statistics say exactly the opposite of what you’re saying, prosperous countries do not experience deflation, they do experience rising nominal wages.

    No, the statistics cannot tell their own story. All data must be interpreted by theory. Data does not speak for itself.

    You’re not interpreting the data correctly because your theory is wrong. Prosperous countries don’t need to experience falling prices over time. Prosperous countries experience lower prices than otherwise would have existed, all else equal, had prosperity been lower.

    Prosperous countries would be even more prosperous if there was no inflation, no central banks. Then the rising productivity would be founded on real savings, and the growing prosperity will be accompanied by not only lower prices than otherwise would have existed, but also typically falling prices over time as well, as the rate of real productivity exceeds the rate of money creation.

    In summary, your theory is just all messed up. You fallaciously believe that your crap theory follows from the data, when in reality the your theory is just being used to incorrectly interpret the data.

    Your crap theory is that inflation is necessary for economic growth, that falling prices causes depressions, and that prosperity is associated with rising prices. This crap theory is what you are using to fallaciously interpret past data.

    If your theory was correct, if you utilized the theory that inflation is not necessary for economic growth, that falling prices do not cause depressions, and that prosperity is associated with falling prices, then you would not only still have a fully consistent theory with past data, not only would you be perfectly capable of explaining the data using that theory, but you’d also have the correct theory.

  81. Gravatar of Major_Freedom Major_Freedom
    24. April 2012 at 09:42

    Brito:

    “I didn’t say that prosperity necessarily requires observing falling prices over time. I said prosperity is associated with falling prices compared to what otherwise would have existed.”

    Actually no, you didn’t say that.

    I did say that. I did not say what you attributed to me as saying. I didn’t say anything about prices changing over time.

    “our standard of living depends on supply”

    Completely stupid, again only someone who utterly ignores reality would think demand has no role to play.

    Completely and utterly imbecilic. Only someone who HAS AN INCORRECT THEORY would possibly believe that there is somehow a problem of lack of demand, only someone who adheres to a depraved philosophy of man would possibly believe anything other than the truth that the demand for more wealth is practically infinite. Humans are a rational species, and no amount of wealth is the end game, of what is finally good enough and no more. There is always a desire for more, and because of that, the only thing holding people back from having higher prosperity is supply.

    When supply is produced in the correct proportions, quantity demanded takes care of itself. It is guaranteed by virtue of people demanding infinite wealth. The problem then is how to maximize the production of wealth in the correct proportions. The problem of economics is not how to produce a need, or produce a desire, or ensure that consumption matches the ability of people to produce.

    Your philosophy is depraved. I call your philosophy consumptionism, because it fallaciously considers economic life to be one where the problem is how to ensure there are enough profligate consumers who eat and consume wealth, as if producers of wealth benefit from others consuming their wealth, as if they don’t actually benefit from other producers of wealth.

    Your worldview is twisted.

    That’s why you can’t help but misinterpret economic data.

    And you have nothing to support you, all the most robust economic models utterly disagree with you, including modern DSGE models which are entirely consistent with classical economics, your arguments are entirely non-compelling, entirely unconvincing.

    Right back at you, you non-robust, non-economic, non-modern, non-consistent, non-compelling, non-convincing economic illiterate.

  82. Gravatar of Brito Brito
    24. April 2012 at 09:44

    “You can’t mimic this by violence. You can’t mimic this by forcing everyone through legal tender and taxation laws that whatever the state deems is money, that an increase in the supply of it is also an increase in prosperity. Only if individuals are free to use their own money, can you claim that an increase in the supply of it represents an increase in prosperity.”

    Nonsense, fiat money has been observed to exist without any state or violence. Its value is dependent on social convention, not violence, again what you say is completely countered by modern research into money.

    And individuals do derive utility from cash, to say otherwise is moronic.

    “In the aggregate, a higher quantity demanded can only exist via increased production.”

    Yes in the aggregate, this is what 20th century economics has shown again and again and again and again.

    “It was more prosperous than it otherwise would have been had productivity been lower.”

    Obviously, I didn’t say productivity made things worse, I said productivity doesn’t guarantee the economy is operating at its optimum. That’s the point, if you think the great depression was the optimal economic situation at the time then you’re a moron.

    “Deflation didn’t cause the Great Depression. The deflation and the Depression were both caused by a prior factor, namely inflation during the 1920s, which distorted the economy.”

    Not according to 99% of the research, and I have no reason to believe you, random internet person, instead of them. Dismissed.

    “Your crap theory is that inflation is necessary for economic growth, that falling prices causes depressions, and that prosperity is associated with rising prices. This crap theory is what you are using to fallaciously interpret past data.”

    My theory says nothing of the sort, you have no idea what you’re talking about.

  83. Gravatar of Brito Brito
    24. April 2012 at 09:50

    “There is always a desire for more, and because of that, the only thing holding people back from having higher prosperity is supply. ”

    No, people can be stuck in a lower equilibrium where their low income and employment constrains demand, and the low demand constrains employment and production, creating a vicious circle, which for game theoretical reasons (or numerous other reasons to choose from). This has been mathematically proven using ONLY the assumptions of classical economics, if you agree with classical economics, you must agree with this, otherwise you disagree with mathematics or you disagree with classical economics.

  84. Gravatar of dwb dwb
    24. April 2012 at 09:58

    @ Brito,
    i admire your courage, but the lizard men cannot be reasoned with. speaking from experience here.

  85. Gravatar of Major_Freedom Major_Freedom
    24. April 2012 at 09:59

    Brito:

    “The slope of supply curves are ALWAYS assumed, hypothesized, taken for granted, derived from first principles, etc. They cannot be observed. They cannot be empirically derived.”

    But the first principles can be and HAS been empirically observed.

    No, they don’t. You cannot observe counter-factuals. You cannot observe what people would have otherwise done had supply been slightly different, or had demand been slightly different.

    You are incorrectly claiming that everything relevant to economic science must be observable. Except you’re forgetting the most part of economic science, namely, the friggin subject matter: HUMAN ACTION. Because economics is the science of human action, not collecting historical data, you MUST include into all economic analysis, a non-empirical, non-observable, human component, which the classicals only indirectly knew, which in German is called “Verstehen.” It is the self-reflexive component of economic science that most mainstream economists have utterly forgotten, but still very often use it, in so sloppily a manner because they’re not educated in it.

    First principles are NOT observable. The proof of this is easy to see. Just consider the concept, the action, of observation itself. The meaning and significance of observation, its grounding, its justification, cannot possibly be derived observationally, lest one engage in circular logic.

    The justification, the grounding of observation is the very non-empirical foundation that I am referring to above, which you are ignorant of.

    Sticky prices, non immediate adjustment of prices, price rigidity, has been empirically observed without question. If you deny this you are sticking your head in the sand.

    Sticky compared to what exactly? What standard? Is it a real world standard? Of course it isn’t, because your fundamental standard of judgment is mystical, and not reality based. You have an image in your head of what “ought” to occur, and any deviation from it in the real is deemed an “imperfection”.

    Sticky prices, if you bothered to truly understand it, is exacerbated by the very “solution” you believe is justified, namely inflation. Inflation makes prices rise over time, and that then leads to people becoming psychologically and habitually used to it, which then makes them less willing to lower prices even when the existing monetary conditions require it for full employment and full resource utilization.

    But you inflationists in your ignorant zeal believe that because people are victimized by inflation, economically and psychologically, such that they come to get used to it and resist reducing prices, you then ignorantly believe that this justifies inflation.

    You’re very much like twisted prison guards who poke sticks at the prisoners between the cell bars, and then when the prisoners spew hatred at you, when they lunge at you trying to tear your head off, you then ignorantly say “You see everyone? This is why we keep them in cages. Just look at how they are acting!”

    Excess capacity has ALSO been empirically observed, again denying this is sticking your head in the sand.

    Excess capacity from what standard?

    The existence of sticky prices and the existence of idle resources, do not justify inflation. Both are exacerbated by inflation. Inflation makes prices more sticky, and inflation distorts the economy, leading to periods of idle resources that are recalculated to not be as valuable as before, the owners of which resist reducing prices because they too are used to inflation.

    “Mathematical models that presume a sloping supply curve are based not on irrefutable observable evidence, but assumptions and theories concerning the relationship between inflation and supply.”

    Actually no, modern models are microfounded, the relationship between inflation and supply is a result of the mathematical model, NOT an assumption, you are 100% wrong, as usual.

    Mathematical models are based on assumptions, my belligerent interlocutor. YOU are 100% wrong.

    Modern models are micro-founded, but that doesn’t mean they are grounded in something other than assumptions.

    Mathematical models being mathematical does not mean there are no assumptions being made. Mathematics is a tool of humans. It is not whispers from Gods.

    “Since there is no empirical reason why one has to presume a sloping supply curve, and since there no mathematical reason why one has to presume a sloping supply curve, it means that your entire argument falls like a house of cards.”

    This is the most insane thing I have ever heard.

    You are the most ignorant person I’ve ever heard. Hey this is fun.

    It seems your whole economic model is based on the assumption of vertical supply curves at all time, that is an extremely naive and ridiculous assumption, even if you ignore all the empirical evidence against it, it is utterly against all intuition.

    There is no empirical evidence against it. There is ZERO empirical evidence proving any supply curve slope. All supply curves are mentally derived, they do not follow from observed data. Again, when prices are observed to change over time, and the corresponding supplies and demands are observed to change over time, it is false to infer from this that one is moving along a single supply curve, or single demand curve. One could be jumping to entirely new supply curves, and/or entirely new demand curves.

    Supply curves are NOT empirically derived! They are derived from first principles. They are based on theory, not data.

    You are unequivocally totally and completely wrong about everything you are saying. You’re confused.

  86. Gravatar of Brito Brito
    24. April 2012 at 10:10

    “No, they don’t. You cannot observe counter-factuals. You cannot observe what people would have otherwise done had supply been slightly different, or had demand been slightly different.”

    You’re a moron, I JUST SAID THAT SUPPLY CURVES ARE NOT OBSERVED, THAT THE FIRST PRINCIPLES INSTEAD ARE OBSERVED AND THEN SUPPLY CURVES ARE MATHEMATICALLY DERIVED FROM THE FIRST PRINCIPLES, LEARN TO READ.

    “First principles are NOT observable. The proof of this is easy to see. Just consider the concept, the action, of observation itself. The meaning and significance of observation, its grounding, its justification, cannot possibly be derived observationally, lest one engage in circular logic.”

    Sticky prices is observable; surveys of multiple businesses will all reveal that prices are sticky. Austrians are ridiculed by all philosophers of science of being utter utter amateurs, I don’t give a crap about what Austrians say about the philosophy of science, there is a near consensus from people who actually know what they’re talking about that Austrians have no clue what they are talking about.

    “Sticky compared to what exactly? What standard? Is it a real world standard? Of course it isn’t, because your fundamental standard of judgment is mystical, and not reality based. You have an image in your head of what “ought” to occur, and any deviation from it in the real is deemed an “imperfection””

    Compared to split second immediate adjustment of prices in response to any change in demand, that is an assumption that is required for supply curves to be vertical at all times, that assumption is insane. Choosing between the assumption of non sticky prices and sticky prices, I will choose sticky prices (as would any other rational individual).

    And even if you completely reject looking at reality as a way to do economics, sticky prices itself can be entirely derived from the principles of classical economics, via contract theory. Your position holds no wait, none.

    “Sticky prices, if you bothered to truly understand it, is exacerbated by the very “solution” you believe is justified, namely inflation. Inflation makes prices rise over time, and that then leads to people becoming psychologically and habitually used to it, which then makes them less willing to lower prices even when the existing monetary conditions require it for full employment and full resource utilization.”

    Ahahaha you don’t know anything about sticky prices. Sticky prices doesn’t require inflation in the slightest, inflation is never offered as a solution to sticky prices, in fact the OPPOSITE is true, these models call for 0% inflation to remove distortions from sticky prices. That’s right, the models you attack call for 0% inflation.

  87. Gravatar of Major_Freedom Major_Freedom
    24. April 2012 at 10:15

    Brito:

    “You can’t mimic this by violence. You can’t mimic this by forcing everyone through legal tender and taxation laws that whatever the state deems is money, that an increase in the supply of it is also an increase in prosperity. Only if individuals are free to use their own money, can you claim that an increase in the supply of it represents an increase in prosperity.”

    fiat money has been observed to exist without any state or violence.

    Nonsense. Violence doesn’t actually have to physically exist before one can conclude it’s based on violence. Threats of violence are enough.

    A prisoner who never attempts to escape won’t get shot at, but that doesn’t mean that his imprisonment isn’t based on violence.

    Fiat money is based on violence. I’m not sorry to have to expose this to you.

    Its value is dependent on social convention, not violence, again what you say is completely countered by modern research into money.

    Social convention exercised through force of the state.

    And individuals do derive utility from cash, to say otherwise is moronic.

    The general standard of living of people is not improved by virtue of more fiat toilet paper money sloshing around. To say otherwise is imbecilic.

    “In the aggregate, a higher quantity demanded can only exist via increased production.”

    Yes in the aggregate, this is what 20th century economics has shown again and again and again and again.

    Glad that you are now keeping up, slightly.

    And it’s not 20th century economics that showed this. The classicals already knew it. It’s why Say had to introduce Say’s Law to refute a common misconception at the time, which in your case persists even in the 21st century.

    “It was more prosperous than it otherwise would have been had productivity been lower.”

    Obviously, I didn’t say productivity made things worse, I said productivity doesn’t guarantee the economy is operating at its optimum.

    You didn’t say anything about any “optimum”. That’s just you introducing an escape hatch for your own absolutist, false views that are easily exposed as fallacious.

    I didn’t accuse you of saying productivity makes things worse. I just corrected you in your incorrect claim that productivity is not the source of prosperity.

    As for this “optimum” no true scotsman, what YOU consider to be optimum is not what I consider to be optimum, so your worldview is irrelevant to me.

    That’s the point, if you think the great depression was the optimal economic situation at the time then you’re a moron.

    If you think Elvis Presley is still alive, then you’re an idiotic, retarded, imbecilic ignoramus.

    See how I didn’t actually call you those names?

    “Deflation didn’t cause the Great Depression. The deflation and the Depression were both caused by a prior factor, namely inflation during the 1920s, which distorted the economy.”

    Not according to 99% of the research, and I have no reason to believe you, random internet person, instead of them. Dismissed.

    Fallacy of authority. Dismissed.

    “Your crap theory is that inflation is necessary for economic growth, that falling prices causes depressions, and that prosperity is associated with rising prices. This crap theory is what you are using to fallaciously interpret past data.”

    My theory says nothing of the sort, you have no idea what you’re talking about.

    Your theory says everything of that sort. You wrote it in black and white.

    “There is always a desire for more, and because of that, the only thing holding people back from having higher prosperity is supply.”

    No, people can be stuck in a lower equilibrium where their low income and employment constrains demand, and the low demand constrains employment and production, creating a vicious circle, which for game theoretical reasons (or numerous other reasons to choose from).

    You completely ignored the crucial part of my argument, concerning “in the proper proportions.”

    The economy is never in equilibrium. It cannot be “stuck” in any equilibrium. There is always a tendency taking place.

    Falling income follows from the economy NOT being “in the correct proportion”.

    Consumption spending does not just arbitrarily fall for no reason. Consumers don’t suddenly capriciously reduce their consumption spending. This too is an EFFECT of a prior cause, namely the reduction in wage payments which itself is part of a fall in investment spending, on account of the current capital structure being distorted.

    Your view of economics is backwards. It is not the case that consumers suddenly stop spending, which then lowers incomes, which then generated unemployment, etc, etc, etc. These are all effects of a prior cause that escapes you.

    Workers spend less when THEIR incomes fall. Why would wages fall? Because employers find that their projects are no longer sustainable. Why are they not sustainable? It can’t be because of workers spending less out of their wages, because that is circular logic.

    This has been mathematically proven using ONLY the assumptions of classical economics, if you agree with classical economics, you must agree with this, otherwise you disagree with mathematics or you disagree with classical economics.

    Mathematical proofs follow from initial assumptions that are either true or false. The crap models you’re referring to are false. Sure, the conclusions of those mathematical models might follow exactly from the premises. But if the premises are false, than one cannot claim that the conclusions are true.

    dwb:

    @ Brito,

    i admire your courage, but the lizard men cannot be reasoned with. speaking from experience here.

    Nice straw man, but I am the only person being reasonable in this debate. Brito is utilizing irrational foundations. That is not being reasonable.

    You’re just siding with him the same way a Catholic sides with a Christian against an atheist. The enemy of your enemy is your friend.

  88. Gravatar of Brito Brito
    24. April 2012 at 10:15

    “The existence of sticky prices and the existence of idle resources, do not justify inflation. Both are exacerbated by inflation. Inflation makes prices more sticky, and inflation distorts the economy, leading to periods of idle resources that are recalculated to not be as valuable as before, the owners of which resist reducing prices because they too are used to inflation.”

    Strawman, I never said anything of the sort. Idle resources cause supply curves to be non vertical, it has absolutely nothing to do with justifying inflation. What I’m saying is that if you believe in vertical supply curves, then you must 100% deny the existence of idle resources EVER, otherwise you acknowledge non vertical supply curves, which means your entire theory is WRONG.

    “Mathematical models are based on assumptions, my belligerent interlocutor. YOU are 100% wrong.”

    I KNOW THEY ARE BASED ON ASSUMPTIONS, you jut don’t know what assumptions they are based on. You think the model simply presumes supply curves are non vertical, THIS IS WRONG WRONG WRONG WRONG. The supply curve being non vertical IS A RESULT OF THE MATHEMATICS IN THE MODEL DERIVED FROM FIRST PRINCIPLES, it is NOT an assumption.

    “Mathematical models being mathematical does not mean there are no assumptions being made. Mathematics is a tool of humans. It is not whispers from Gods.”

    Strawman, I never said that.

  89. Gravatar of Brito Brito
    24. April 2012 at 10:23

    “Social convention exercised through force of the state.”

    Modern research disagrees, you have offered no evidence, dismissed.

    “The economy is never in equilibrium. It cannot be “stuck” in any equilibrium. There is always a tendency taking place.”

    Oh, so you’re bringing disequilibrium economics into this then? In that case you must 100% disagree with classical economics, and almost all disequilibrium models I have EVER seen disagree with you.

    “Consumption spending does not just arbitrarily fall for no reason. Consumers don’t suddenly capriciously reduce their consumption spending. This too is an EFFECT of a prior cause, namely the reduction in wage payments which itself is part of a fall in investment spending, on account of the current capital structure being distorted.”

    I never said anything of the sort, an initial fall in consumption is triggered by a large shock, usually a massive financial crisis. However, once this initial fall in consumption occurs, the consumption can stay stuck too low for an extended period time regardless of supply because of feedback loops, again mathematically proven.

    “The crap models you’re referring to are false”

    Then you must always disagree with classical economics, if you ever reference classical economics again (which relies on the same premises) you are a massive hypocrite.

  90. Gravatar of Brito Brito
    24. April 2012 at 10:35

    Here is the conundrum MF, if you accept the premises of classical economics, PLUS two additional premises of incomplete information and uncertainty, THEN a microfoundation for sticky prices can be derived from these principles entirely, through contract theory, thus you MUST agree with sticky prices and wages.

    Otherwise you: a) believe everyone has perfect information, which is stupid for obvious reasons, b) believe that everything is certain, which is also stupid, or c) disagree with classical economics.

  91. Gravatar of Major_Freedom Major_Freedom
    24. April 2012 at 10:42

    Brito:

    “No, they don’t. You cannot observe counter-factuals. You cannot observe what people would have otherwise done had supply been slightly different, or had demand been slightly different.”

    You’re a moron

    And now you’ve proven yourself to be a child who has no business discussing economics on this blog.

    I JUST SAID THAT SUPPLY CURVES ARE NOT OBSERVED, THAT THE FIRST PRINCIPLES INSTEAD ARE OBSERVED AND THEN SUPPLY CURVES ARE MATHEMATICALLY DERIVED FROM THE FIRST PRINCIPLES, LEARN TO READ.

    FIRST PRINCIPLES ARE NOT OBSERVED, THAT WAS MY ARGUMENT.

    When you say first principles are observed, then the supply curves are then derived from them, you are still saying that supply curves are observationally derived.

    I don’t care if you move it one step back. You’re still wrong.

    “First principles are NOT observable. The proof of this is easy to see. Just consider the concept, the action, of observation itself. The meaning and significance of observation, its grounding, its justification, cannot possibly be derived observationally, lest one engage in circular logic.”

    Sticky prices is observable;

    Sticky from what standard? This is the second time I have asked this, and yet you continue to evade it. I know why.

    surveys of multiple businesses will all reveal that prices are sticky.

    Surveys mean diddly squat. What matters is actions.

    Austrians are ridiculed by all philosophers of science of being utter utter amateurs, I don’t give a crap about what Austrians say about the philosophy of science

    Fallacy of authority.

    You can’t think independently, you can’t think for yourself, you’re only purpose so far has been to advance what you consider to be the most popular ideology. Since when was the mainstream correct? Oh that’s right, never. If we used your sheep like follow the popular belief absurdity, humans would never have escaped living in caves, because everyone would have remained just copying everyone else, and no progress would ever be made.

    The popular consensus in the 18th century was wrong. The popular consensus in the 19th century was wrong.

    And you expect me to be as ignorant as you and just play follow the leader again, after it has been empirically falsified as a grounding for truth?

    You’re lost. You have no grounding for anything you say other than what you believe the most popular beliefs are. You’re not a thinker. You’re an intellectual peon.

    there is a near consensus from people who actually know what they’re talking about that Austrians have no clue what they are talking about.

    They don’t know what they are talking about. You have no clue what you are talking about.

    “Sticky compared to what exactly? What standard? Is it a real world standard? Of course it isn’t, because your fundamental standard of judgment is mystical, and not reality based. You have an image in your head of what “ought” to occur, and any deviation from it in the real is deemed an “imperfection””

    Compared to split second immediate adjustment of prices in response to any change in demand, that is an assumption that is required for supply curves to be vertical at all times, that assumption is insane.

    You didn’t answer my question.

    And no, vertical supply curves do NOT require instantaneous price changes. All they require is an assumption of price taking. Sellers can be assumed to not derive direct consumption utility from their supplies, and so they will accept the highest price that they can get.

    There is no assumption needed of instantaneous price changes.

    And it’s ironic that you would believe MY argument requires it, because it is very clear that the answer to my question, which you evaded, REQUIRES instantaneous price changes. That’s the only way that prices can be “non-sticky”.

    In other words, the standard that you are using to decry price stickiness, is the very standard you fallaciously attributed to me as if I hold it, after which you then attacked it.

    My guess is that you know the standard by which you claim “price stickiness!”, which is instantaneous price changes according to every minute change in supply and demand, and you know it’s bogus, so you then thought “Oh yeah? Well YOU require it too! So don’t chastise me!”

    The problem with that is that I DON’T require instantaneous price changes. Why? Because my standard is, unlike your crap standard, the real world. My standard is reality. Your standard is some ridiculous other dimension where humans are not humans, where prices change instantaneously according to every change in supply and demand.

    That’s why you say that real world prices are “sticky”. It’s because they don’t behave according to your non-real world crap standard.

    What was hilarious was watching you try to dump your crap standard onto me as if I require it, or want it. I don’t require it and I don’t want it. Keep it to yourself, thanks.

    Choosing between the assumption of non sticky prices and sticky prices, I will choose sticky prices (as would any other rational individual).

    False dichotomy. If you instead used a real world standard, you would not feel compelled to only think in such extremes of instant price changes and “sticky” price changes. You’d know that prices changes when individual human actors decide to change them, and that there is no other standard. There is no other “super-human” standard that is to be imposed by state power, to “solve” the real world problem of “stickiness”, where it is believed that the state can bring us all closer to your awful non-real world standard of idealism and economic absurdity.

    This is why you are so ignorant. You have this fantastical notion that because the real world market doesn’t resemble your absurd standard, that this justifies every state intervention that is ostensibly designed to “minimize the damage” that free people allegedly foist upon themselves like idiots, where the state is to be viewed as a social savior, who can print and spend money to aggrandize themselves and their friends, so that the stupid morons in the market who won’t decrease their prices can get their just deserts.

    You’re clueless. Just like all victimizers, you blame the victim for why they resist falling prices. You call for printing and spending money, which makes prices rise, which leads people to expect rising prices, thus making them psychologically more resistant to falling prices, then in your “observation only” world, you then destructively call for more of what exacerbates the problem you perceive in the first place.

    And even if you completely reject looking at reality as a way to do economics, sticky prices itself can be entirely derived from the principles of classical economics, via contract theory. Your position holds no wait, none.

    Hahaha at your “even if you completely reject looking at reality.”

    That’s exactly what you are doing. You are completely rejecting looking at the reality of human action.

    “Sticky prices, if you bothered to truly understand it, is exacerbated by the very “solution” you believe is justified, namely inflation. Inflation makes prices rise over time, and that then leads to people becoming psychologically and habitually used to it, which then makes them less willing to lower prices even when the existing monetary conditions require it for full employment and full resource utilization.”

    Ahahaha you don’t know anything about sticky prices.

    Ahahaha I just demolished your call for inflation and now you have nothing else except mindless antagonism.

    Sticky prices doesn’t require inflation in the slightest, inflation is never offered as a solution to sticky prices, in fact the OPPOSITE is true, these models call for 0% inflation to remove distortions from sticky prices.

    Utterly false on multiple levels. One, I did not say that sticky prices “requires” inflation. I said sticky prices is EXACERBATED by it. You do know the difference, right? Egads. Two, inflation IS offered as a solution to sticky prices. That’s the entire justification for “increasing aggregate demand” by way of state printing and state spending. Both Monetarists and Keynesians, those you ignorantly follow, both hold inflation and/or spending as “solutions” to sticky prices. Three, 0% price inflation in an economy where prices would have otherwise fallen on the basis of higher productivity, WOULD STILL make people resistant to falling prices. If prices didn’t fall, because inflation of the money supply was such that prices remained unchanged (however crude you would measure such a thing), then that would make people just as psychologically resistant to FALLING prices as would a policy of 2% price inflation.

    Only in a world where prices ACTUALLY fell, could people become psychologically used to falling prices such that they would decrease their resistance to falling prices when the new monetary conditions required it for full employment and resource utilization.

    You laughably gloat at 0% price inflation as if it is the final final final solution, but it’s just as bad as 2% when it comes to exacerbating price stickiness.

    That’s right, the models you attack call for 0% inflation

    I didn’t attack any model specifically, other than the ones that call for money printing to prevent falling prices. I don’t care if some call for 2%, whereas others call for 0%. you’re not scoring any points with me by simply telling me that one inflation model has a different rate of money printing. It’s the money printing itself that is the problem.

  92. Gravatar of Major_Freedom Major_Freedom
    24. April 2012 at 10:56

    Brito:

    “The existence of sticky prices and the existence of idle resources, do not justify inflation. Both are exacerbated by inflation. Inflation makes prices more sticky, and inflation distorts the economy, leading to periods of idle resources that are recalculated to not be as valuable as before, the owners of which resist reducing prices because they too are used to inflation.”

    Strawman, I never said anything of the sort.

    That wasn’t an accusation numnuts. That is what I said. You are beyond hopeless.

    Idle resources cause supply curves to be non vertical, it has absolutely nothing to do with justifying inflation.

    No, they don’t cause supply curves to be non-vertical. It only follows from your assumption that idle resources can be put into effect via inflation, thus increasing output compared to past periods, that you believe this.

    What I’m saying is that if you believe in vertical supply curves, then you must 100% deny the existence of idle resources EVER, otherwise you acknowledge non vertical supply curves, which means your entire theory is WRONG.

    That does not follow. Vertical supply curves are perfectly consistent with 99.9% idle resources.

    “Mathematical models are based on assumptions, my belligerent interlocutor. YOU are 100% wrong.”

    I KNOW THEY ARE BASED ON ASSUMPTIONS, you jut don’t know what assumptions they are based on.

    If you now admit that they are based on assumptions, then that is sufficient to refuting your initial claim that they are observationally derived.

    You think the model simply presumes supply curves are non vertical, THIS IS WRONG WRONG WRONG WRONG.

    I did not say that.

    The supply curve being non vertical IS A RESULT OF THE MATHEMATICS IN THE MODEL DERIVED FROM FIRST PRINCIPLES, it is NOT an assumption.

    The initial assumptions upon which the math is applied, are assumptions, hence the conclusion of non-vertical supply curves is also an assumption. Just because there is math being used in the interim, it doesn’t make the conclusion irrefutable.

    “Mathematical models being mathematical does not mean there are no assumptions being made. Mathematics is a tool of humans. It is not whispers from Gods.”

    Strawman, I never said that.

    Yes you did. You said the conclusions are based on math, and are hence not assumption based.

    Now you seem to admit that the steps prior to the mathematical operations are assumptions.

    “Social convention exercised through force of the state.”

    Modern research disagrees, you have offered no evidence, dismissed.

    Fallacy of authority yet again. Dismissed yet again.

    Modern research disagrees with you, and agrees with me.

    “The economy is never in equilibrium. It cannot be “stuck” in any equilibrium. There is always a tendency taking place.”

    Oh, so you’re bringing disequilibrium economics into this then?

    Oh, so you admit that the economy is never in equilibrium then?

    In that case you must 100% disagree with classical economics, and almost all disequilibrium models I have EVER seen disagree with you.

    Classical economics was not based entirely on equilibriums, and it is irrelevant to my argument anyway. I’m not here defending classical economics as such.

    “Consumption spending does not just arbitrarily fall for no reason. Consumers don’t suddenly capriciously reduce their consumption spending. This too is an EFFECT of a prior cause, namely the reduction in wage payments which itself is part of a fall in investment spending, on account of the current capital structure being distorted.”

    I never said anything of the sort, an initial fall in consumption is triggered by a large shock, usually a massive financial crisis.

    And what caused the financial crisis? Let me guess: Lack of state power being exercised. Hahaha.

    However, once this initial fall in consumption occurs, the consumption can stay stuck too low for an extended period time regardless of supply because of feedback loops, again mathematically proven.

    There should be a fall in consumption if people decide to spend less on consumption and desire higher cash balances. The economy is a place where individuals get what they want, is it not?

    “The crap models you’re referring to are false”

    Then you must always disagree with classical economics, if you ever reference classical economics again (which relies on the same premises) you are a massive hypocrite.

    Non sequitur. I don’t have to say anything about classical economics to know your theory is false.

    Here is the conundrum MF, if you accept the premises of classical economics, PLUS two additional premises of incomplete information and uncertainty, THEN a microfoundation for sticky prices can be derived from these principles entirely, through contract theory, thus you MUST agree with sticky prices and wages.

    I know the pedagogical crap that they spew in micro econ 101. I don’t need to be lectured by someone who can only play follow the leader and can’t think for himself.

    Incomplete information? From what standard? It’s just as non real world as your ridiculous sticky prices standard.

    Otherwise you: a) believe everyone has perfect information, which is stupid for obvious reasons, b) believe that everything is certain, which is also stupid, or c) disagree with classical economics.

    You’re not addressing anything I am saying, you’re only regurgitating talking points from your worthless economics classes. I’m not interested. I know it all already. You are talking as if I don’t know it.

  93. Gravatar of Brito Brito
    24. April 2012 at 11:08

    “When you say first principles are observed, then the supply curves are then derived from them, you are still saying that supply curves are observationally derived.”

    Pathetically moving the goal posts, you explicitly said that supply curves are simply assumed to be sloping, when I showed that this is an outrageous lie on your behalf, now you’ve completely changed your story about how its the first principles that are assumed as if that’s just as bad. I know the first principles are assumed, that is entirely my point, and now you’re agreeing with my point.

    “Sticky from what standard?”

    Already answered.

    “Surveys mean diddly squat.”

    Pathetic. Surveys are superior to guessing out of thin air. And we can observe price setters in firms, we can observe unions, we can observe wages being above marginal product, we can observe wages being contracted over a few months or even a year rather than variable, we can observe menu costs. You are wrong.

    “Fallacy of authority.”

    It’s not a fallacy when you’ve offered no argument whatsoever, only rhetoric. Then it’s simply a matter of trust, I have absolutely no reason to trust your assertions or to trust you, thus I dismiss you, it’s really quite simple.

    “You didn’t answer my question.”

    Yes I did, non sticky prices = instantaneous adjustment, this is DEFINITIONALLY TRUE.

    “And no, vertical supply curves do NOT require instantaneous price changes.”

    Yes they do.

    “All they require is an assumption of price taking.”

    Perfect competition is an unrealistic assumption regardless, you still have no case.

    “is the very standard you fallaciously attributed to me as if I hold it”

    If you don’t hold it then you agree that supply curves are non vertical, it’s that simple.

    “False dichotomy. ”

    Not false, it’s implied by the definition. The fact is you do agree with sticky prices, you’re just trying to squirm out of it by saying a load of meaningless crap about real world standards. The real world is sticky prices, a completely impartial observer of firms will conclude sticky prices.

    “You are completely rejecting looking at the reality of human action.”

    No, looking at human actions will show exactly this behaviour.

    “Two, inflation IS offered as a solution to sticky prices.”

    No it doesn’t, that is a lie and shows you have absolutely no clue as to what you’re talking about, absolutely none.

    “That’s the entire justification”

    No, sticky prices shows that money is non neutral in the short term, that is it. It doesn’t say increasing AD will make prices non sticky, it doesn’t say inflation cetiris peribus will be good (in fact it says the opposite). Secondly, you don’t understand these models, they actually look at EXCESS inflation and deflation, i.e. the optimal amount of price changes, which COULD be declining, is normalized to zero. Seriously you have no clue what you’re talking about, it’s embarrassing.

  94. Gravatar of Brito Brito
    24. April 2012 at 11:28

    “It only follows from your assumption that idle resources can be put into effect via inflation”

    Again, this is utterly moronic, I’m not even talking about inflation right now because we disagree on things far more fundamental that needs to be sorted out. Idle resources says the EXACT OPPOSITE of that, it says that they can be put into use by increasing demand WHILST NOT INCREASING INFLATION, what you just said couldn’t be more wrong, seriously.

    “That does not follow. Vertical supply curves are perfectly consistent with 99.9% idle resources.”

    Not at all, which about 10 million + pages of economics research has shown.

    “If you now admit that they are based on assumptions, then that is sufficient to refuting your initial claim that they are observationally derived.”

    Axioms can have empirical support. It’s a matter of choosing plausible assumptions, assuming sticky prices is plausible because real world data reflects it, it can be entirely microfounded with incomplete information and uncertainty, and the alternative is utterly utterly absurd which you even admit but then try to squirm out of.

    “The initial assumptions upon which the math is applied, are assumptions, hence the conclusion of non-vertical supply curves is also an assumption.”

    That is the stupidest thing I have ever seen. This just solidifies my opinion that Austrians are /terrible/ at epistemology. A result derived from axioms is not an assumption, the axioms are the assumptions, not the result.

    “Yes you did. You said the conclusions are based on math, and are hence not assumption based.”

    No, I did not say that.

    “Oh, so you admit that the economy is never in equilibrium then?”

    Depends on your definition of equilibrium, but even then it has no affect on my argument because disequilibrium models agree with me even more.

    “Classical economics was not based entirely on equilibriums, and it is irrelevant to my argument anyway. I’m not here defending classical economics as such.”

    General equilibrium is the comprehensive classical model, and you kept bringing up classical economics as a bastion of truthfulness, I will remember in future whenever you bring up any conclusion from classical economics that you are not allowed to do so without being a hypocrite.

    “And what caused the financial crisis? Let me guess: Lack of state power being exercised. Hahaha.”

    I never said that.

    “There should be a fall in consumption if people decide to spend less on consumption and desire higher cash balances. The economy is a place where individuals get what they want, is it not?”

    Have you heard of pareto optimality, another great thing from classical economics? Are you aware that people can be stuck in a situation below its pareto optimal, but for game theoretical reasons wont move to the pareto optimal? Think of prisoners dilemma, in that situation individuals preferred situation is that they both remain silent, but rationality demands that they fink, thus rationality does not always result in getting exactly what you want.

    “I know the pedagogical crap that they spew in micro econ 101.”

    Apparently not, because this stuff isn’t taught in micro 101, graduate courses in contract econ maybe, not micro 101.

    “Incomplete information? From what standard? It’s just as non real world as your ridiculous sticky prices standard.”

    What a ridiculous question, utterly utterly meaningless.

    “You’re not addressing anything I am saying, you’re only regurgitating talking points from your worthless economics classes. I’m not interested. I know it all already. You are talking as if I don’t know it.”

    I like how you completely and utterly evaded the issue.

  95. Gravatar of Brito Brito
    24. April 2012 at 11:31

    And with that, I’m done. When I boiled it all down to the core issue (the conundrum), MF completely refused to address it, thus I now agree with DWB, he 100% cannot be reasoned with.

  96. Gravatar of Saturos Saturos
    24. April 2012 at 11:41

    Brito

    “he 100% cannot be reasoned with”

    I already demonstrated that result last week:

    https://www.themoneyillusion.com/?p=14001

  97. Gravatar of dwb dwb
    24. April 2012 at 13:45

    If you now admit that they are based on assumptions, then that is sufficient to refuting your initial claim that they are observationally derived.

    not so: one can make models with all sorts of assumptions. The model should make falsifiable predictions (tricky thing in economics of course, have to find natural experiments). So if the predictions are false, some of the assumptions are false (conversely, if the model agrees, then the model is among those that agree with observation). Some economists even do experiments these days.

    Austrianism makes no falsifiable predictions that i know of, its all assumptions. That makes it dogma, not a theory. Certainly not a theory grounded in observation. Some of those assumptions i agree with (that inflation and deflation distorts relative prices) others i do not , mainly because they are empirically false (the bulk of the evidence for example shows wages are sticky).

  98. Gravatar of Saturos Saturos
    24. April 2012 at 20:25

    dwb,

    ABC is a falsified theory, as far as I’m concerned

  99. Gravatar of Saturos Saturos
    24. April 2012 at 20:33

    Same with Marxism, so long as you don’t keep shifting the goalposts. Social science isn’t philosophy – we do get clear results, sometimes.

  100. Gravatar of Major_Freedom Major_Freedom
    24. April 2012 at 23:10

    Brito:

    “When you say first principles are observed, then the supply curves are then derived from them, you are still saying that supply curves are observationally derived.”

    Pathetically moving the goal posts, you explicitly said that supply curves are simply assumed to be sloping, when I showed that this is an outrageous lie on your behalf, now you’ve completely changed your story about how its the first principles that are assumed as if that’s just as bad.

    Utterly false. I explicitly said supply curves are assumed because they are in fact assumed. It doesn’t matter if the assumptions are then followed by mathematical operations. I am not shifting any goal posts. You just fallaciously believe that “they use math!” is a get out of jail card that somehow justified your false claim that supply curves are not assumed, and are empirically, observationally derived. That was your original claim, and now you’ve completely backtracked on it, and in the process, you hilariously accuse me of changing my argument, when I have held the same argument. Supply curves are assumed, they are not, contra your claim, observed. Even if the assumptions contain mathematics as well, that doesn’t mean they are not assumed!

    Assumed doesn’t mean they are just randomly puked up. It means it is not derived by observation.

    I know the first principles are assumed, that is entirely my point, and now you’re agreeing with my point.

    BS. You didn’t know that, because you initially said supply curves are non-vertical according to some unstated “evidence”. That clearly means observations, NOT assumptions.

    Stop lying. You’re only digging a bigger hole for yourself.

    “Sticky from what standard?”

    Already answered.

    Hahaha, no you didn’t. All you did was evade answering, and you tried to turn it around and accuse me of adhering to a world where prices adjust instantaneously. You didn’t answer it at all.

    “Surveys mean diddly squat.”

    Pathetic.

    Weak.

    Surveys are superior to guessing out of thin air.

    Surveys are inferior to logic and to actual behavior.

    And we can observe price setters in firms, we can observe unions, we can observe wages being above marginal product, we can observe wages being contracted over a few months or even a year rather than variable, we can observe menu costs.

    So what? I am not denying you can observe these things. I am saying you’re not interpreting this data correctly.

    You are wrong.

    About what? You just listed a bunch of things one can observe, as if that alone is sufficient to proving your lame argument.

    “Fallacy of authority.”

    It’s not a fallacy when you’ve offered no argument whatsoever, only rhetoric.

    Yes it is a fallacy of authority no matter what I say after you commit it. The fallacy of authority is not absolved by anything anyone says after you commit it.

    And I have been offering MANY arguments. Merely labeling them as “rhetoric” is not an argument against them.

    Then it’s simply a matter of trust, I have absolutely no reason to trust your assertions or to trust you, thus I dismiss you, it’s really quite simple.

    No, it’s not a matter of trust. Yes, I know you lack the requisite knowledge, and you don’t understand economics, and you don’t understand what I am saying, and so your only foundation at this point is either accept me blindly or reject me blindly, but I am not asking you to trust me. The logic I present to you, and it’s up to you and only you to understand it.

    “You didn’t answer my question.”

    Yes I did

    No, you didn’t. I asked you:

    “Sticky compared to what exactly? What standard? Is it a real world standard? Of course it isn’t, because your fundamental standard of judgment is mystical, and not reality based. You have an image in your head of what “ought” to occur, and any deviation from it in the real is deemed an “imperfection””

    And you replied:

    “Compared to split second immediate adjustment of prices in response to any change in demand, that is an assumption that is required for supply curves to be vertical at all times, that assumption is insane.”

    You replied to my question about what standard you are using to label prices as “sticky”, by accusing my standard of being split second price adjustments and “insane.”

    That is NOT answering my question of what standard you are using. That is just you attacking my standard that isn’t even my standard.

    non sticky prices = instantaneous adjustment, this is DEFINITIONALLY TRUE.

    Finally. You answered. OK, so the standard of price adjustments is instantaneous adjustment. Now tell me, on what friggin planet, let alone Earth, can this possibly be a real world standard by which to judge real world phenomena?

    Instantaneous price adjustments are not possible for ACTORS who live and act through time. You’re introducing an INSANE standard to judge price adjustments, and then, to top it off, you believe that because prices don’t behave like they do in your made up fantasy land, that this justifies inflation, which not only operates throughout time and is “sticky” as well compared to instantaneous price increases, but exacerbates downward stickiness?

    Your worldview is absurd.

    “And no, vertical supply curves do NOT require instantaneous price changes.”

    Yes they do.

    No, they don’t. Prices can move slower than your speed of learning (I know, huh!), and that won’t imply a non-vertical supply curve.

    Sellers can be price takers, and accept the highest prices that they think they can get, and prices can adjust fast or slow or at any rate in this process.

    “All they require is an assumption of price taking.”

    Perfect competition is an unrealistic assumption regardless, you still have no case.

    I didn’t say perfect competition my straw man spewing interlocutor.

    See, this is the problem with you statist boobs. You constantly attack a conception that no free market economists actually adheres to, and then you believe you have addressed their actual arguments that have nothing to do with that conception.

    The assumption of price taking does NOT require or imply any “perfection” in the market.

    “is the very standard you fallaciously attributed to me as if I hold it”

    If you don’t hold it then you agree that supply curves are non vertical, it’s that simple.

    Non sequitur. I can not hold it AND refuse to reject vertical supply curves.

    “False dichotomy. “

    Not false, it’s implied by the definition.

    No, it isn’t. I offered a third alternative that is consistent with the definition.

    The fact is you do agree with sticky prices, you’re just trying to squirm out of it by saying a load of meaningless crap about real world standards.

    The shoe is on the other foot. Now that I got you to admit that your standard for judging price flexibility is an absurd non real world standard, that’s all I need to completely reject your nonsense, since all my arguments are grounded in reality. Your mind is in some fantasy Platonic land of ideals that do not exist anywhere on Earth, and so YOU’RE the one saying a load of meaningless crap.

    At least I am in the real world. You’re not.

    The real world is sticky prices, a completely impartial observer of firms will conclude sticky prices.

    The real world is not one of sticky prices, if you use a real world standard.

    It is an ontological and epistemological abomination to judge reality according to unreality. It’s pathetic.

    “You are completely rejecting looking at the reality of human action.”

    No, looking at human actions will show exactly this behaviour.

    You just admitted that it doesn’t. You just admitted that what shows sticky prices is your silly non real world instantaneous price adjustments. Whatever the foundation for that belief, it isn’t consistent with real world human action.

    “Two, inflation IS offered as a solution to sticky prices.”

    No it doesn’t, that is a lie and shows you have absolutely no clue as to what you’re talking about, absolutely none.

    Absolutely false. It is offered as a solution, and that you deny it shows you are completely and utterly clueless, and you have no business talking economics at all.

    “That’s the entire justification”

    No, sticky prices shows that money is non neutral in the short term, that is it.

    What ignorance. Not only do sticky prices do not show money is non neutral, as the non neutrality of money is grounded in the praxeological character of money, but money non neutrality is itself just another form of justification for inflation. You’re just moving the inflation justification one step back without even knowing it. Too funny.

    It doesn’t say increasing AD will make prices non sticky

    I didn’t claim it did Mr. Straw Man.

    it doesn’t say inflation cetiris peribus will be good (in fact it says the opposite).

    False. It does say inflation is good. It says inflation is a good solution to overcome the decline in output, employment and incomes brought about by “price stickiness.”

    Virtually every free market argument against inflation, that is based on prices falling so as to clear the market for labor and resources, is met by the inflationist statist with “inflation is justified because prices are sticky. Prices won’t fall, so we can avoid declining employment and declining output by way of printing money, which boosts aggregate demand, which makes profitable the investments that have high input factor prices.”

    I’ve been in many arguments with statists far more educated than you, and they all say inflation is a cure for the problem sticky prices, as well as a cure for everything else that allegedly ails modern economies.

    Secondly, you don’t understand these models, they actually look at EXCESS inflation and deflation, i.e. the optimal amount of price changes, which COULD be declining, is normalized to zero.

    Hahaha, yet another straw man. Seriously, arguing with you is like arguing with a pigeon.

    I didn’t say the models welcome “excess” inflation.

    Seriously you have no clue what you’re talking about.

    “It only follows from your assumption that idle resources can be put into effect via inflation”

    Again, this is utterly moronic, I’m not even talking about inflation right now because we disagree on things far more fundamental that needs to be sorted out.

    Again this is utterly moronic? You haven’t even shown how anything I said is moronic a first time.

    You’re not talking about inflation? You mean you want to change the context of that which you pray for, because you have been shown it’s all bupkus? OK, let’s switch the goal posts.

    Idle resources says the EXACT OPPOSITE of that, it says that they can be put into use by increasing demand WHILST NOT INCREASING INFLATION, what you just said couldn’t be more wrong, seriously.

    I meant monetary inflation, not price inflation.

    I have been using inflation as an increase in the money supply the whole time. I say price inflation when I refer to rising prices, or what you just call inflation. Go ahead, read every single post you made and that I made, to see I made this clear.

    You couldn’t be more eager to prove me wrong because you know you’re so far refuted that you can only just mindlessly antagonize at this point. It’s painfully obvious. At this point, I am just correcting you, and you immediately knee jerk with “NO!” than you spew straw man, logical fallacies, and you move the goal posts. You’ve lost.

    “That does not follow. Vertical supply curves are perfectly consistent with 99.9% idle resources.”

    Not at all, which about 10 million + pages of economics research has shown.

    Fallacy of authority. And you’re wrong. Idle resources do not refute the existence of vertical supply curves. It has NOTHING to do with it.

    “If you now admit that they are based on assumptions, then that is sufficient to refuting your initial claim that they are observationally derived.”

    Axioms can have empirical support.

    Not all axioms do, and those are the ones that ground economic science.

    Empirical axioms ground claims from historians and data collectors, not economists.

    The axioms that are not observable are those that ground the concept of observation, and those that cannot be observed, but only understood. For example, I cannot observe human ACTION that is purposefully directed. Observationally, there is only movement of people, and there is only movement of objects. ACTION must be understood.

    Even the law of marginal utility cannot be derived observationally. It also must be understood.

    It’s a matter of choosing plausible assumptions

    “Plausible” according to what standard? Your assumptions are not plausible because they are not based on the real world.

    assuming sticky prices is plausible because real world data reflects it

    How can a non real world standard possibly prove anything about the real world? You’re not making any sense. Only real world standards can prove things about the real world.

    it can be entirely microfounded with incomplete information and uncertainty, and the alternative is utterly utterly absurd which you even admit but then try to squirm out of.

    I didn’t try squirming out of anything. That’s what you are doing, not me.

    If the alternative to incomplete information and uncertainty are “absurd”, then you just admitted your standard for judging the real world is absurd, because those are precisely the standards you are utilizing when trying to understand the real world.

    “The initial assumptions upon which the math is applied, are assumptions, hence the conclusion of non-vertical supply curves is also an assumption.”

    That is the stupidest thing I have ever seen.

    You’re having a meltdown. Your claims are collapsing in quality. You have nothing left in your tank. If this is the only response you can muster, then I suggest you spend your time more wisely.

    This just solidifies my opinion that Austrians are /terrible/ at epistemology. A result derived from axioms is not an assumption, the axioms are the assumptions, not the result.

    Hahaha, you don’t know the first thing about epistemology. Any crude Austrian would clean your clock in it.

    A result derived from an ASSUMPTION is also an assumption. You deftly switched from assumptions to axioms, and then pretended that your fallacious assumptions are somehow at the logical status of axioms? Please. Your standard is instantaneous price adjustments. That’s not an axiom. That’s an assumption.

    Oh, and to let you know, I’m not an Austrian. So every time you talk smack of them, you’re not addressing me.

    “Yes you did. You said the conclusions are based on math, and are hence not assumption based.”

    No, I did not say that.

    Yes, you did say that.

    You said:

    “Given that all evidence and all mathematical models ever pretty much shows supply curves to not be vertical in the short run or during recessions, we can say that a rise in MV will cause both P and Y to rise, in that case, a rise in V, holding M constant, will also cause P and Y to rise, thus demand can increase causing P and Y to increase without a change in the money stock but instead a change in velocity, QED.”

    “Oh, so you admit that the economy is never in equilibrium then?”

    Depends on your definition of equilibrium, but even then it has no affect on my argument because disequilibrium models agree with me even more.

    Hahahaha, “it depends on your definition of equilibrium” = “Yes, I take it back, but I don’t want you to know this because I’m still butt hurt.”

    “Classical economics was not based entirely on equilibriums, and it is irrelevant to my argument anyway. I’m not here defending classical economics as such.”

    General equilibrium is the comprehensive classical model, and you kept bringing up classical economics as a bastion of truthfulness, I will remember in future whenever you bring up any conclusion from classical economics that you are not allowed to do so without being a hypocrite.

    General equilibrium does not have a monopoly in classical economics, and I am only bringing up certain classical ideas, no the entirety of it.

    I can bring up any idea derived from the classicals that I want, and not adhere to any equilibrium, and not be a hypocrite while doing so.

    I am not here defending classical economics. I am here defending economics from the Platonic crap you are attacking it with.

    “And what caused the financial crisis? Let me guess: Lack of state power being exercised. Hahaha.”

    I never said that.

    I didn’t say you did. You didn’t answer my question. So what caused it? Lack of state power being exercised? Yes? No? Don’t want to tell? Hahaha

    “There should be a fall in consumption if people decide to spend less on consumption and desire higher cash balances. The economy is a place where individuals get what they want, is it not?”

    Have you heard of pareto optimality, another great thing from classical economics?

    Good lord you’re ignorant. Pareto was an economist from the 1930s. He wasn’t a classical. He was a Keynesian you economically illiterate oaf.

    Are you aware that people can be stuck in a situation below its pareto optimal, but for game theoretical reasons wont move to the pareto optimal?

    Are you dense? We went over this already. I do not hold that the economy can be in any equilibrium. Is your memory as terrible as your economics now?

    I notice that you have a penchant for bringing up irrelevant points when you don’t know how to address the arguments I am making.

    I say that if consumers want to spend less on consumption, and hold more cash for longer, that a declining current production of consumer goods is in line with consumer preferences, and you introduce a red herring about Pareto optimality? Get real.

    If consumers want to spend less on current consumption, and they want to hold more cash for longer, so that they can consume more in the future than they otherwise could have (since they’re not burning their money), then what argument can you possibly have against production of current consumer goods declining?

    Oh that’s right, you don’t have an argument, other than “the state must force the issue by replacing the market’s consumers, by becoming a consumer itself.” I forgot. The state is to control the economy, not consumers. You’re a statist, not an economist.

    Think of prisoners dilemma, in that situation individuals preferred situation is that they both remain silent, but rationality demands that they fink, thus rationality does not always result in getting exactly what you want.

    More irrelevant first year econ crap.

    Is this all you got? Next year you’ll probably start spewing nonsense about Cobb-Douglas production functions.

    The prisoner’s dilemma does not characterize the real world market. In the real world market, there are no prisoner type rules. There are no prisoner assumptions. Oh, and the prisoner’s dilemma presumes ex post perfect information, which of course does not exist in the real world, and what’s hilarious is that it goes against your plea to get me to accept imperfect information. Now that’s funny.

    “I know the pedagogical crap that they spew in micro econ 101.”

    Apparently not

    Apparently knee jerk contrariness for the sake of being contrary

    because this stuff isn’t taught in micro 101, graduate courses in contract econ maybe, not micro 101.

    Well maybe in your third tier community college, but not mine. Once I did go to grad school though, this stuff was again regurgitated in the first few weeks.

    “Incomplete information? From what standard? It’s just as non real world as your ridiculous sticky prices standard.”

    What a ridiculous question, utterly utterly meaningless.

    Interesting how this question is now ridiculous, after you have already answered the question above without saying anything about it’s alleged ridiculousness.

    Contrary for the sake of being contrary.

    “You’re not addressing anything I am saying, you’re only regurgitating talking points from your worthless economics classes. I’m not interested. I know it all already. You are talking as if I don’t know it.”

    I like how you completely and utterly evaded the issue.

    I did not evade any issue. You are. You are evading the issue, introducing irrelevant garbage, then holding me hostage to it as if I am even supposed to care about it. It is not addressing our disputes. You’re just throwing everything in but the kitchen sink, hoping something will stick.

    And with that, I’m done. When I boiled it all down to the core issue (the conundrum), MF completely refused to address it, thus I now agree with DWB, he 100% cannot be reasoned with.

    I am not refusing to address anything, you’re just making that up to give yourself a psychological fix, and I now know that you, like dwb, cannot be reasoned with.

  101. Gravatar of Major_Freedom Major_Freedom
    24. April 2012 at 23:48

    Saturos:

    Brito

    “he 100% cannot be reasoned with”

    I already demonstrated that result last week:

    https://www.themoneyillusion.com/?p=14001

    What, you want validation too after being refuted? What’s with you drama queens anyway?

    Where in the world did you “demonstrate” any “unreasonableness” on my part?

    I think you’re just confusing my conviction that you are wrong, with something being wrong with me in terms of reasonableness.

    dwb:

    “If you now admit that they are based on assumptions, then that is sufficient to refuting your initial claim that they are observationally derived.”

    not so: one can make models with all sorts of assumptions.

    That doesn’t refute what I just said above. I said assumptions are not observationally derived. You then say that’s not true because many assumptions can be made? That makes no sense.

    The model should make falsifiable predictions (tricky thing in economics of course, have to find natural experiments). So if the predictions are false, some of the assumptions are false (conversely, if the model agrees, then the model is among those that agree with observation). Some economists even do experiments these days.

    It’s not just tricky in economics, is the wrong methodology.

    The concepts of “falsify” and “confirm” presuppose the claim that the essence of things, the nature of things, the domain of what’s true, is constant over time. That’s implied when you propose a theory, then spend time collecting data, then spend some more time analyzing the data, then spend some more time comparing the outcome to the original theory, and then spend some more time deciding whether your original theory is falsified or confirmed.

    Only if the truth of what you are studying did not change throughout this process, over time, can you possibly claim that a previously proposed theory is falsified or confirmed.

    And here’s the kicker about that assumption of constancy. While the assumption of constancy may be valid for chemicals, and atoms, and molecules, and physical matter, when it comes to the subject matter of economics, human action, that assumption is WRONG. Human action is NOT constant. Humans learn over time, and humans act on the basis of what they learn over time. You cannot possibly deny this lest you undercut the very purpose of engaging in these falsifying experiments. To learn something you did not know before.

    Well, when humans learn new things that they did not know before, they act differently. Our knowledge influences what we do. Because of this, because it is wrong to assume constancy in human action, it is therefore ABSURD to utilize any methodology of inquiry that presumes constancy, including falsification/confirmation based methodologies.

    Austrianism makes no falsifiable predictions that i know of, its all assumptions. That makes it dogma, not a theory.

    You mean if Austrians don’t use astrology like most economists, that Austrians are the dogmatists? Do you even know what dogma means?

    Pure mathematicians, and logicians, don’t make empirical predictions. Are they “dogmatic”? No? Well Austrian economics is based on the same thing that mathematics and logic are based on, so it’s not a dogma.

    You’re just spewing insults because you can’t address the actual theory.

    The more I debate anti-Austrians, the more I am convinced that anti-Austrians just don’t have the intellectual ability to understand it or critique it. Austrian economics is one of the most intellectually rigorous fields of inquiry, because it requires holding many propositions at once in one’s mind, and apparently most economists cannot do this. Most can only hold two concepts at once, tops. But three or more, no way. Case in point, the Keynesian penchant for being able to only grasp consuming and saving, and then investment and cash holding, but not consumption plus investment plus cash holding all at once. Hence the typical conflation of saving with hoarding.

    Certainly not a theory grounded in observation.

    And from where is the assumption of constancy, which fully supports falsificationism, derived? Or what of the concept of observation itself? Where is that derived?

    Here’s what’s going on. Empiricism presupposes the non-empirical proposition of constancy over time. Empiricism after all cannot possibly be justified, or grounded, in empiricism. It would be circular logic if it were.

    Well, Austrianism is also based on non-empirical propositioning. The only difference is that whereas empiricist economics presumes the non-empirical constancy assumption, Austrian economics presumes the non-empirical non-constancy assumption.

    This is why Austrians laugh when Keynesian and monetarist economists use methods that presume constancy, such as falsification empiricism. They laugh because only Austrians seem to grasp the fact that the reality of human action is not constant over time. Humans learn over time, and because their actions depend on what they know, their actions change over time too. There is no constancy in human action, so any constancy based methodology is an incorrect methodology.

    And yet there you are smearing Austrians as dogmatic, for doing nothing except refuse to use an incorrect methodology. How’s that for intellectual justice?

    Some of those assumptions i agree with (that inflation and deflation distorts relative prices) others i do not , mainly because they are empirically false (the bulk of the evidence for example shows wages are sticky).

    For the millionth time, Austrians do not hold that prices adjust instantaneously.

    Austrians also do not deny that wages take time to fall, especially in an inflationary economy where people become accustomed to rising or “stable” prices all the time.

    Saturos

    dwb,

    ABC is a falsified theory, as far as I’m concerned

    ABCT has never been falsified. It has a 100% success rate.

    Same with Marxism, so long as you don’t keep shifting the goalposts. Social science isn’t philosophy – we do get clear results, sometimes.

    Non-falsifiable economic theories such as Keynesianism, Monetarism, and Austrianism, cannot be empirically falsified. They can only be settled logically and from first principles. Austrianism wins that battle hands down.

  102. Gravatar of Major_Freedom Major_Freedom
    25. April 2012 at 00:03

    Typo:

    Pareto was an economist from the 1930s. He wasn’t a classical.

    Should read

    Pareto was an economist from the early 1900s. He wasn’t a classical.

  103. Gravatar of Rien Huizer Rien Huizer
    25. April 2012 at 04:55

    MF:

    Pareto was a civil engineer..

  104. Gravatar of Brito Brito
    25. April 2012 at 06:49

    “Typo:”

    Ahahahahahaha, you called Pareto a Keynesian, he was born in 1848 and died more than 10 years before the general theory was published, and all of his major works were published before Keynes published any stuff that could ever be described as Keynesian. Only someone with extreme arrogance would try and cover that up as a typo, you don’t know what you’re talking about kid, all of your arguments are meaningless convoluted rubbish that displays a severe lack of understanding of basic epistemology, as I said I’m done with you, it’s just back and forth now, I’m not getting anything back.

  105. Gravatar of Brito Brito
    25. April 2012 at 06:59

    “They laugh because only Austrians seem to grasp the fact that the reality of human action is not constant over time.”

    Everything you say is the exact opposite of this, you speak as if there are extremely rigid laws of human action that cannot be broken. You have the most religiously dogmatic approach to economics I have ever seen in my entire life. There are no maybes, or possiblies or any indication of uncertainty in your analysis, everything is 100%, everything is always and exactly true according to you, nothing you says even indicates a hint of non constancy in the slightest. You are the worst PR person for Austrian economics I have ever seen in my entire life. Austrians act as if they treat the economy as a complex organic mechanism, and yet use the most vulgar, simplistic theories of recessions (‘artificially’ low interest rates), with absolutely no nuances, no flexibility, and no margin for error (compared to every other economic school). Austrians are all talk. Austrian economics is pretentious verbiage without any actual economics.

    But it’s all they can rely on, they can’t actually rely on economics, because economics using the first principles that Austrians has completely disproves the Austrian theory. So they have to resort to horrible bastardizations of epistemology and philosophy of science, attacking the use of mathematics, making every actual philosopher of science and entomologist squeem in agony.

  106. Gravatar of Brito Brito
    25. April 2012 at 07:08

    epistemologist*

  107. Gravatar of Rien Huizer Rien Huizer
    25. April 2012 at 19:04

    Brito,

    The biblical economist (Proverbs 6:6-11) has clear entomological perspectives. Entomologists deserve a place in your vector of epistemological authorities…

  108. Gravatar of Rien Huizer Rien Huizer
    25. April 2012 at 19:13

    MF,

    Who are you trying to convert? You remind me of a religious sect that likes to make house calls on weekend mornings that tend to not make the respondent more receptive to the message. The only rational explanation for that behaviour is that the sect member is aware of her unwelcomeness and sees the usual (tacit) abuse at each door as a trial she must pass on in order to be saved. However, what is the reward for the poor respondent?

  109. Gravatar of Saturos Saturos
    25. April 2012 at 20:18

    Brito,

    I know it’s hard to go cold turkey, but just leave him be.
    (Actually I don’t know if Major Freedom is a he – accidental sexism alert).

  110. Gravatar of Saturos Saturos
    26. April 2012 at 04:28

    Michael Woodford already explained my argument against this post better than I did:

    “If QE2 had any impact, it probably came from the signal it sent about future Fed policy. Inflation expectations increased after the announcement, because those Federal Open Market Committee members who wanted a return to more orthodox policies seemed to have lost the argument. But this is surely not an ideal way to send a signal: expectations can be shaped far more effectively by speaking directly about future policy, rather than leaving it to be inferred from actions that have no definite implications for the future.”

    from http://www.ft.com/cms/s/0/aa41c0f2-ce78-11e0-b755-00144feabdc0.html#ixzz1t9Hwt3Zz

  111. Gravatar of ssumner ssumner
    27. April 2012 at 12:00

    Steve, I agree.

    Saturos, I’d put it this way. The market was used to their absurd way of communicating, so keep using it until you come up with something better. I’d be thrilled if they came up with something better, like NGDP futures, but they haven’t.

    Ben J. Money illusion is one problem, sticky nominal contracts is another.

    Negation of Ideology, They can’t create significantly negative market yields on T-securities. Not for T-bonds that one person sells to another.

    Saturos, I completely agree with that, but the Fed has made it clear that they won’t do that. So what’s the second best policy?

  112. Gravatar of Major_Freedom Major_Freedom
    27. April 2012 at 19:51

    Brito:

    “Typo:”

    Ahahahahahaha, you called Pareto a Keynesian

    Yes, he was an intellectual Keynesian, just like the mercantilists before Keynes were Keynesians.

    he was born in 1848 and died more than 10 years before the general theory was published, and all of his major works were published before Keynes published any stuff that could ever be described as Keynesian. Only someone with extreme arrogance would try and cover that up as a typo, you don’t know what you’re talking about kid, all of your arguments are meaningless convoluted rubbish that displays a severe lack of understanding of basic epistemology, as I said I’m done with you, it’s just back and forth now, I’m not getting anything back.

    It was a typo. I was involved in another conversation on another blog, and I had 1930s in my mind. As soon as I posted it, I knew I goofed, ergo the correction.

    It’s funny how you are so out of ammo that all you could do was focus on that one typo.

    “They laugh because only Austrians seem to grasp the fact that the reality of human action is not constant over time.”

    Everything you say is the exact opposite of this, you speak as if there are extremely rigid laws of human action that cannot be broken.

    There is nothing I said that is the exact opposite of this. You just don’t understand the implications of non-constancy. The fact that human action is not constant is itself a rigid law of human action that cannot be broken. Rigidity does NOT mean constancy. Rigidity means unchanging. A permanent attribute of non-constancy is an unchanging, hence “rigid”, attribute of human action.

    You have the most religiously dogmatic approach to economics I have ever seen in my entire life. There are no maybes, or possiblies or any indication of uncertainty in your analysis, everything is 100%, everything is always and exactly true according to you, nothing you says even indicates a hint of non constancy in the slightest.

    This is EXACTLY what characterizes YOUR entire worthless worldview. There are no maybes concerning your arguments. You flatly, dogmatically insist that your claims are correct. Everything you have said on this blog clearly shows an attitude of no uncertainty, and 100% certainty.

    There is not the slightest evidence that you are acting in accordance with your own professed values.

    And you are simply clueless about the concept of non-constancy. The argument that there are no constancies in human action, is not the same thing as claiming that human action might be constant after all, or that I have to be uncertain about it. I am sure that there are no constancies, because there in fact no constancies. I defy you to show me just ONE constant in economics, the kind of constant as exists in the physical sciences like the boiling point of water at 1 atmosphere, or the critical mass of uranium 238, or the speed of light.

    If you cannot show me a single constant in economics as exists in the physical sciences, then for the love of everything true, just friggin admit that what I am saying is true, and that economists who develop models that assume or presume constancy in human action, are bogus.

    You are the worst PR person for Austrian economics I have ever seen in my entire life.

    You are the most superlative using, blowhard I have ever ever met in my entire life, ever.

    Austrians act as if they treat the economy as a complex organic mechanism, and yet use the most vulgar, simplistic theories of recessions (‘artificially’ low interest rates), with absolutely no nuances, no flexibility, and no margin for error (compared to every other economic school).

    The Keynesians and Monetarists are identical in this respect. There are vulgar, simplistic, theories of recessions (‘failure’ of aggregate demand), with absolutely no nuance, no flexibility, and no margin for error.

    Austrians are all talk. Austrian economics is pretentious verbiage without any actual economics.

    You’re all talk. Your claims are pretentious verbiage without any actual economics.

    But it’s all they can rely on, they can’t actually rely on economics, because economics using the first principles that Austrians has completely disproves the Austrian theory.

    No, it doesn’t. Austrian economics is based on the irrefutable axiom of individual action. This has never been disproven, and never will be, because disproving anything is itself an action.

    So they have to resort to horrible bastardizations of epistemology and philosophy of science, attacking the use of mathematics, making every actual philosopher of science and entomologist squeem in agony.

    You might as well have just stuck your fingers in your ears and said “I’m not listening!” because the utter vacuousness of your imbecilic rants are just as sophisticated.

    epistemologist*

    Hahahahaha

    “epistemologist*”

    Typo!

    Rien Huizer

    “Who are you trying to convert? You remind me of a religious sect that likes to make house calls on weekend mornings that tend to not make the respondent more receptive to the message. The only rational explanation for that behaviour is that the sect member is aware of her unwelcomeness and sees the usual (tacit) abuse at each door as a trial she must pass on in order to be saved. However, what is the reward for the poor respondent?”

    I know you adhere to a religion, but my rejection of it does not mean I aim to replace it with another religion.

    Saturos

    Brito,

    I know it’s hard to go cold turkey, but just leave him be.
    (Actually I don’t know if Major Freedom is a he – accidental sexism alert).

    Yes, it’s better to not have to have one’s views demolished. It’s hard on the religious person’s soul isn’t it?

  113. Gravatar of TheMoneyIllusion » Great minds think alike TheMoneyIllusion » Great minds think alike
    20. June 2012 at 07:28

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