What’s on Chairman Bernanke’s mind?
I haven’t seen anyone comment on this odd exchange at the Bernanke press conference:
STEVE BECKNER: Steve Beckner of MNI, Mr. Chairman. There have been concerns, raised questions raised by people like Columbia Professor Michael Woodford and others about the credibility of your forward guidance on the path, future path of the federal funds rate. The idea being that to the extent it’s conditional, it’s not really convincing and doesn’t provide the kind of confidence that you referred to. Now on this latest statement you’ve removed some of that conditionality. I am particularly struck by the statement that the committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. I assume that was done to make your forward guidance more credible and yet the question remains whether, you know, as the economy picks up steam, whether the FOMC will really follow through and keep rates low or whether you will do as the Fed has always done and begin to raise the funds rate.
CHAIRMAN BERNANKE: Well, that’s an important question. Michael Woodford who by the way is my former colleague and co-author and friend so I know him quite well and I know his works quite well. I think, actually, the thrust of his research is that forward guidance communication about future policy is in fact the most powerful tool that central banks have when the interest rate is close to zero. And he advocates policies like nominal GDP targeting for example that would essentially require a credibility lasting many years. The implication being that the Fed would target the nominal level of GDP. And promise to do that for many years in the future even if inflation, you know, rose as part of that policy. So his own perspective is that credibility is the key tool that central banks have in order to get traction at the zero lower bound. Whether we have the credibility to persuade markets that we’ll follow through is an empirical question. And the evidence which I also again discussed in my remarks recently is that when we’ve announced extended guidance that financial markets have responded to that, that private sector forecasters have changed their estimates of what unemployment and inflation will be when the Fed begins to remove accommodation. So the empirical evidence is that our announcements do have considerable credibility. And I think there’s good reason for that, which is that we have talked a lot both publicly and privately about the rationale for maintaining rates low even as the economy strengthens, and I think the basic ideas are broadly espoused within the Committee. And so there is a consensus that even as the personnel change and so going forward, that this is the appropriate approach, and that by following through, we will have created a reserve of credibility that we can use in any subsequent episodes that occur.
1. The reporter asks about Woodford’s claim that level targeting can add credibility to Fed policy, but that the markets have to believe the Fed will actually carry through with the promises. Note that the Fed didn’t adopt the sort of explicit level targeting that Woodford wants, so you might have expected Bernanke to defend the Fed’s decision to refrain from doing so. (Level targeting would have required a higher short run inflation target, and hence would have been very controversial.) But Bernanke’s answer basically defends Woodford’s argument, as he went out of his way to insist that the Fed’s promises (to keep money accommodative well into a recovery) will definitely have credibility in the markets. He’s on Woodford’s side.
2. Even more surprisingly, much of the answer is devoted to NGDP targeting, even though the reporter never even mentioned NGDP, indeed it wasn’t really even alluded to. And the entire answer is 100% pro-Woodford. There’s not even a hint of disagreement with Woodford in the answer. Why doesn’t Bernanke say the Fed avoided NGDP targeting because it’s a bad idea?
Perhaps because he’s privately hoping that the markets interpret the Fed’s recent action as NGDPLT in disguise?
Or perhaps that’s just the deluded fantasy of a blogger whose ego has been inflated to Hindenburg zeppelin proportions by some overly generous press coverage.
In late 2010 the Fed was concerned that inflation had fallen below 2%, and thus they adopted the QE2 program. When the Fed announced that the intention was to raise inflation, there was a firestorm of criticism from the public. I did about 20 posts arguing that the Fed shouldn’t announce the goal of raising the public’s cost of living, but rather they should say the goal is to raise peoples’ incomes, with the ultimate goal being more real output. Not to deceive the public, but because that’s what they were actually trying to do. The Fed has forecast that inflation will gradually rise to 2% over the next few years, but note that Bernanke no longer points to higher inflation as a policy goal:
STEVE LIESMAN: Mr. Chairman, I want to talk about that same line in the statement. Does that mean that your tolerance for inflation will be higher in the coming years in the middle of the recovery? And if not, what good is that language there if it doesn’t tell people that the reaction function relative to inflation has changed? Secondly, stock prices are up today, so are oil prices and gold. Why aren’t those part of the same reaction to the Fed’s acts today?
CHAIRMAN BERNANKE: Well our policy approach doesn’t involve intentionally trying to raise inflation. That’s not the objective. The idea is to make sure we provide enough support so the economy will grow fast enough to bring unemployment down over time.
That’s close enough for me, although I prefer he use the term ‘NGDP’ rather than “the economy.”
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17. September 2012 at 11:39
“I haven’t seen anyone comment on this odd exchange at the Bernanke press conference”.
If something along the lines of Bernanke´s answer had been present in the statement, it would have been “noticed”.
As things came out, there´s a lack of “firm commitment”.
It´s BBS again: “Bernanke´s Baby Steps”
17. September 2012 at 11:50
Robin Harding was probably the most MM-sympathetic reporter at the conference. (I think his tweet was the one I saw first to figure out what was going on). He went pretty early, and his question did seem pretty hard-hitting. But in retrospect, it probably would have been better if he’d gone last and asked, point blank, “Mr. Bernanke why doesn’t the Fed fully adopt Michael Woodford’s proposal at Jackson Hole, Nominal GDP level targeting, and wouldn’t the Fed’s goals of minimizing unemployment within a context of price stability have been more effectively achieved that way?”
17. September 2012 at 11:50
Beckner’s concept of “conditionality” still seems pretty strange to me.
17. September 2012 at 12:13
Ben isn’t pointing to raising inflation anymore. He is, however, apparently pointing to lowering mortgage rates as a reason. I have kind of mixed feelings about using mortgage securities as the only thing to buy. On the one hand, I suppose that they’re already guaranteed by the government in this case, so people can say that it really doesn’t add to government risk. Yet OTOH it does seem a bit like manipulating the various sectors of the economy a bit.
17. September 2012 at 12:43
Scott
I’ve read from some bloggers with post-Keynesian sympathies that credit is also money. It can be illustrated with the utterly banal example of paying for everyday expenses with credit cards. Thoughts?
17. September 2012 at 13:26
ssumner:
When the Fed announced that the intention was to raise inflation, there was a firestorm of criticism from the public. I did about 20 posts arguing that the Fed shouldn’t announce the goal of raising the public’s cost of living, but rather they should say the goal is to raise peoples’ incomes, with the ultimate goal being more real output. Not to deceive the public, but because that’s what they were actually trying to do.
This is in fact deceitful, because it does not make clear WHOSE “incomes” are going to rise, and when they are going to rise, and what happens in between the time of the Fed creating money, and a given individual’s “income” rising by virtue of this creation of new money.
If Market monetarists want to be open and not deceitful, then they wouldn’t use the phrase “raising the incomes” of “people.” They would say “raising the incomes” of “those who receive the new money first.” Then he would say that during the “in between time”, the average wage earner would experience the inflation in the form of rising prices and thus a lower standard of living, while the average wealthy person would experience inflation in the form of rising incomes and thus a higher standard of living.
An honest and not deceitful person would not lump every single individual into one monolithic group and say that the creation of new money would “raise people’s incomes.” Actually, I will rephrase. An educated and informed person who understands the mechanics of inflation would not lump every single individual into one monolithic group.
Inflation is typically, and unfortunately, treated as a macro-economic concept that only has significance at the aggregate level, as if the mere heuristic habit of reporting inflation as a single digit (CPI, etc) somehow means that the mechanics of the creation of new money ONLY affects such aggregate statistics, and has no relative demands, relative prices, or relative incomes implications.
In reality of course, inflation Is best understood as a “micro-economic” phenomena in the sense that inflation does not raise everyone’s incomes, but only a select group of individuals’ incomes. THEN, after these people outbid others for scarce goods and services, or, in other words, as the first group of people trade this money to others for their goods and services, this money then raises nominal incomes of the second group of people. Then this second group of people outbid others for scarce goods and services. And so on, step by step, person by person, as real goods and services “travel” in the direction of last receivers to first receivers of inflation, and as money “travels” from first receivers to last receivers.
So at each step, while we can mathematically say that “average income is higher now than it was in the past”, we CANNOT say that every single individual’s income is rising by that percentage increase. Indeed, because inflation affects the real side of the economy, and thus affects competitive factors, it is very likely that some people’s incomes will FALL because of inflation. As an example, consider the case of a wealthy primary dealer bank receiving the new money first, and how this may enable them to expand their business in real terms which then attracts revenues away from their less politically connected competitors. This example is likely to be a microcosm for why the biggest 5 banks in the country actually GREW in market share terms after the crisis and inflation from the Fed. These banks used their funds to buy up smaller competitors, as well as expand their own operations, which affected the relative revenues between the firms in the industry. Some competitor’s revenues fell. But for the primary receivers, their revenues grew by more than the competitor’s fal in revenues, which crude aggregate statistic trackers (like market monetarists) would overlook.
The only way that the statement “inflation from the Fed raises people’s incomes” can be honest and not deceitful, or educated and informed, whatever the case may be, is if the Fed sent checks to every individual who uses the dollar, and not just a select few individuals only and then hope that they spend the money after. Only in this way can the quoted statement above actually apply to every individual who is told that inflation affects them in the form of a rising income.
Short of this, the statement recommended by Sumner is fact deceitful, and the people market monetarists despise, namely the “ignorant voters”, who ignorantly complain about inflation, who ignorantly attempt to curb it via political pressure, after which ignorant politicians then put pressure on central bankers, who then ignorantly do not inflate as much as market monetarists want them to inflate, are n fact justified in reacting to inflation in the way that Sumner regrets.
17. September 2012 at 13:47
Then there is the importance of differentiating between intentions and results when it comes to inflation. Regardless of the intentions of inflation, be it increased production, employment, or whatever, there are the distortive effects of inflation on economic calculation, which, as far as I can tell, is never seriously addressed by any market monetarist.
These effects entail a reduction of productivity and employment, in the sense of necessitating a future correction to the capital structure, which takes time, and includes (temporary) unemployment and reduced output. These effects typically carry with them a heightened demand for money holding, as individuals of course naturally seek to increase their savings to sustain them during the correction process. And quite unfortunately, one dimensional thinking market monetarists and virtually all other economists view this as the Fed “tightening up”, due to incorrect inferencing from empirical statistics. So they sloppily recommend MORE inflation, as if the prior trends were normal and healthy and proper. The characteristic feature of our age in the field of economics is a pathological obsessiveness in the insistence that economists believe themselves intellectually capable of knowing what the proper monetary statistics ought to be, from money supply to aggregate spending.
One economist will consider themselves gifted by the Gods in knowing that prices should rise by 2% per year, while another will consider themselves gifted by the Gods to know that aggregate spending should rise by 5% per year. In all cases, they are as deluded as communist economists in the old Soviet Union who made absurd statements to the effect that they know how many tires should be produce this year, or how many bricks. In all cases, their inability or unwillingness to accept a radical position vis a vis the monopolists have lead them to believing that there exists “stable” second and third best options that the monopolists can control, all the while failing to show that they even understand the first best solution so that their claims to being “pragmatic” and wanting “politically feasible” solutions are in fact a product of something other than ignorance.
17. September 2012 at 13:53
Scott. I think most of your regular readers had spotted the NGDPLT comment. However, Bernanke did say a lot of other stuff too. Much was creditism and obsessed with the housing market. Hence the agency debt purchases. Something for everyone might be a better expression of his press conference. But especially practical help for the socialised housing finance market in the US, which seems horribly central-planner like.
17. September 2012 at 14:08
@Major_Freedom
+1
17. September 2012 at 14:30
Scott, why would nominal wage targeting be a superior policy? It sounds like a political nightmare. Also you have to factor in productivity changes.
17. September 2012 at 15:17
Scott,
http://www.bloomberg.com/news/2012-09-17/defining-bernanke-s-new-fed-target.html
They make mention of your NGDP target.
17. September 2012 at 15:17
If you’ve been unable to tell, IMO that’s your own fault. You, MF, are the one arguing for serious distortive effects on economic calculation, as Scott has demonstrated.
Scott, and others, have repeatedly offered the argument that it’s unexpected changes in NGDP that has a distortionary effect on economic calculation. Indeed, I think that all economists would agree that unexpected inflation is far more distortionary. However, it then follows that unexpectedly low NGDP growth, or inflation (as well as the extreme version, deflation) distorts economic calculation.
(It’s better to use NGDP because there is “good” deflation caused by real GDP growth, as Scott has also explained.)
Surely you can see that if all people expect 5% inflation per year, they will calculate their business and sign long term contracts taking that into account? And if inflation suddenly plunges below that level, then there will be a tremendous amount of misallocation of goods and resources, and a great upheaval? (A smaller version of this can be seen in individual industries, such as long term contracts in the solar industry that didn’t forsee the plunging of prices.) If it is predictable, then calculation has proceeded.
Scott has repeatedly made this argument. He’s specifically invoked it when talking about the problems that having some, primarily government workers, on long term contracts expecting certain wage increases based off of higher NGDP growth. Unexpected shortfalls cause the pain to be pushed on people not on contract. Similarly, real estate deals based on a different amount of NGDP growth (or, ugh, inflation) will also collapse.
Scott’s entire argument is based on the problems of unexpected shortfalls in NGDP growth. A priori, with enough time to have all contracts adjust, there is no reason to prefer one rate of NGDP versus another (other than the problems that occur when the natural rate of interest is below zero– people really do seem to have a psychological problem with wage cuts or saving interest rates below zero, particularly for the latter when cash is an option.)
People who favor sudden unexpected plunges in NGDP growth (or not reacting to them, which amounts to the same thing), as MF does, are calling for sudden and severe distortions in economic calculation.
17. September 2012 at 15:36
The BBC just broadcast a documentary on Keynes. Predictably full of hilarious moments-
1. I would have hoped that even those of us in Britain would know that the Hoover Dam began construction under President Hoover, not President Roosevelt, and that it was not part of the New Deal.
2. I would be interested to see what evidence the Oxford professor had for saying that Keynes would be very concerned with inequality. Keynesians are, but we should all know by now that there is Keynesian Economics and then there is the Economics of Keynes.
3. Stiglitz said with typical certainty that UK unemployment should be rising. Unfortunately for him, but fortunately for us (by which I mean Britain) it isn’t.
4. Poor Phil Booth from the IEA began to voice his criticisms of Keynesian stimulus, before being cut off just after he announced his disagreement. I would be very concerned about being interviewed for such a programme.
17. September 2012 at 15:53
John thacker right on,
MF is up to his usual pathetic nonsense:
I’ll repost I response to his earlier hackery the Bernanke Press Conference Post.
“MF,
“ I am concerned with the right activity, or “rational” activity, or “sustainable” activity, or whatever you want to call the economic activity that is subject to certain constraints that justify the activity’s expansion relative to the rest of the economic system, such that the whole economic system is sustainable in the real sense.”
How do you know and presume to lecture market particpants that the choices they make are not “sustainable in the real sense?!!?” Its just another mindless assertion of the Austrians that doesnt have any real proof to back it up. The inflationary boom might have financed investment and consumption that would have taken place down the road, only with prior saving to back it up. Why is this shortcut a bad thing? In fact, you might even say that the printing press is a productivity enhancing technology because it allows us to do more in less time. Isnt that what labor saving devices are all about?! Who CARES if the boom is not backed by prior real saving. Real saving is not a fixed lump, it can come afterwards it can fluctuate downward (or upward!) with increases of income and production.
“Inflation merely tricks them into selling at a lower real price, and in the process, encourage activity that is NOT in line with the rest of the economy in the real sense.”
Another feeble and simpleminded assertion.
“You are committing a classic example of ignoring the unseen and the consequences of activity on those parties related to the activity in question once, twice, three, … times removed. You only consider the activity in the narrow sense, and you ignore what otherwise would have taken place, and you ignore the effects on other parties.
“
All of us understand the broken window fallacy and understand Bastiat. What you don’t understand is that counterfactuals are only useful up to a point. When they become wildly detached from reality (I hope u see where I’m going with this) they cease being useful.
“Sure, fences can be built, drinks can be bought, and so on, but this “activity” would almost certainly be wealth destroying on net.”
Okay, Either you’re 1. High on some drugs, 2. A complete moron or 3. Just utterly bats**it crazy.
You’re paralleling the mistake that Hayek made when he answered the question in the ’30s, by a student about buying a coat, whether it would increase economic activity. He said that it wouldn’t for complex reasons.
Occam’s razor people. Haeyks answer was nonsense then it its nonsense now.
(Some of you keep wondering why we bother with this boorish knave? Its because we can’t let bulls***,t which I’m allergic to by the way, stand. Right, everyone?)
“The reason is because those who earn money and have cash, did not value the activity of producing more fences and more drinks. As such, the gains to the consumers in question, came at a loss to those whose money balances and incomes are denominated in that currency.”
How do you know they didn’t value it? How do you know they werent just delaying and delaying and delaying hoping for a lower price? Youre presuming, AGAIN that cash holders have the unconditional privelege and right to a free return on their cash at the expense of the rest of the economy going to hell. They don’t. (Neither do government bond holders but that’s a separate point?) How many times must we educate you before this penetrates your thick skull?
Oh and buy the way, the Fed is aiding buyers when it creates stable expected inflation because the only way to tell when there’s a floor on prices is to notice that prices are rising or more importantly, are EXPECTED to rise Ever notice the phenomenon of a “temporary sale?” You even get the mechanism by which deflation works wrong. The effects of demand deflation dont work DURING the deflation, they work AFTER when prices hit a floor and are expected to RISE thus generating future expected inflation (or NGDP growth)
“What if production doubles and prices and costs would have fallen by half? If someone inflates so much that prices remain flat, then that would represent a huge loss to those who have to pay twice the prices than they otherwise would have paid. It would be a gross error in judgment to claim that because the price level didn’t rise, then everybody is no worse off.”
NGDP level targeting takes care of that genius. Haven’t you learned ANYTHING yet? The fed is not supposed to respond to a signal a that prices fall durinng a productivity deflationary blast. Theyre only supposed to respond in declines of nominal spending. And even if price levels were targeted, what is the essential differance between an increase of nominal wages by 11% with the price level at zero, and a zero increase in wages and a fall of the price level by 10%?
17. September 2012 at 15:58
Scott
Here is the real yield curve in the past few days.
http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield
Every maturity has declined since QE. Every single on, without fail.
Nominal rates have gone up. Real rates have declined. The New Keynesian model.
17. September 2012 at 17:08
Looks like the longest maturity real rates ticked up a bit while shorter duration real yields fell. Thus, the real yield curve steepened: http://research.stlouisfed.org/fredgraph.png?g=aNq
With five-year breakeven spreads widening and real rates at the same horizon falling to new lows it looks like the Fed is getting some traction: http://research.stlouisfed.org/fredgraph.png?g=aNp
Critically, Bernanke has communicated a willingness to ‘accommodate’ positive shocks but refrain from tightening and leaning against negative shocks with more (or longer lasting) QE.
I think Bernanke has thus shifted the Fed toward an implicit NGDPLT. Presented in Evansian dual mandate terms instead of Woodford/Sumner terms.
17. September 2012 at 17:38
Jason Odegaard:
Not surprising that that Bloomberg piece mentions Scott, considering its author is market monetarist Evan Soltas.
17. September 2012 at 18:29
Does this mean that we can officially declare the liquidity trap dead? I.e. monetary policy CAN reduce the long-term yield on government bonds, even when under current circumstances?
(Of course not: the liquidity trap is like love, it means all things to all people.)
17. September 2012 at 19:46
Edward: (to MF)
“You’re presuming, AGAIN that cash holders have the unconditional privelege and right to a free return on their cash at the expense of the rest of the economy going to hell. They don’t.”
So let me get this straight. With a fiat currency that one must use for tax payments and many transactions by law, one can have no expectation of stability of the value thereof other than via the good graces of the central bank? Kind of harsh! Heck now even Tom Sargent can’t form a rational expectation of CD rates in two years, even with Ben’s forward guidance!
17. September 2012 at 19:52
gofx
So let me get this straight. With a government and congress that one is beholden to by law, one can have no expectation of stability of the right to free speech than the good graces of the Fist Amendment of the United States
Kind of harsh, eh?
🙂
17. September 2012 at 20:10
Edward,
Don’t forget the good graces of the Second Amendment of the Constitution!
But it is precisely the Consitution that (used to) restrain “a government and congress” so that you are NOT beholden to every action of “congress and government”.
17. September 2012 at 20:26
“If Market monetarists want to be open and not deceitful, then they wouldn’t use the phrase “raising the incomes” of “people.” They would say “raising the incomes” of “those who receive the new money first.” Then he would say that during the “in between time”, the average wage earner would experience the inflation in the form of rising prices and thus a lower standard of living, while the average wealthy person would experience inflation in the form of rising incomes and thus a higher standard of living.”
Yes, if demand were to increase, somebody would decide how that new demand gets doled out. In some bizarro world, the Fed could pay $100 billion to the Goldman Sachs CEO for one hour of work. Since that one hour of work goes to GDP, it increases demand by at least $100 billion.
Except that’s not what asset purchases are. No Treasury owner becomes wealthier due to an asset purchase. The Fed buys the asset over the open market and therefore, as far as the Treasury owner is concerned, it has no idea the Fed bought the Treasury from them. The only difference is that the cash does not come from the existing monetary base. It’s cash added to the monetary base. That’s it.
It’s credible to ask how exactly the new cash would increase demand. But if it actually works in increasing demand, the mix of new demand will be decided by the private market. With no expectations channel, the new cash will push down rates, which encourages consumption and increases loan volume. With the expectations channel, more investments make sense since future expected cash flows are higher and consumption is encouraged since inflation expectations are higher. In either case, the private market is the arbiter of who gets the new demand.
17. September 2012 at 20:33
Communications failure?
http://blogs.wsj.com/economics/2012/09/17/qe3-not-getting-a-lot-of-likes-on-facebook/
17. September 2012 at 20:42
Edward:
MF is up to his usual pathetic nonsense:
I see Edward is up to his usual attempt at trying to convince the readers here that he has previously successfully shown that my arguments are indeed “nonsense”. Rather than actually showing this to be the case, he relegates himself to appealing to people’s ignorance and hoping that they take his claim on faith, much like his own arguments concerning political economy. So it’s business as usual…
<i
I’ll repost I response to his earlier hackery the Bernanke Press Conference Post.
“MF,
“ I am concerned with the right activity, or “rational” activity, or “sustainable” activity, or whatever you want to call the economic activity that is subject to certain constraints that justify the activity’s expansion relative to the rest of the economic system, such that the whole economic system is sustainable in the real sense.”
How do you know and presume to lecture market particpants that the choices they make are not “sustainable in the real sense?!!?” Its just another mindless assertion of the Austrians that doesnt have any real proof to back it up. The inflationary boom might have financed investment and consumption that would have taken place down the road, only with prior saving to back it up. Why is this shortcut a bad thing? In fact, you might even say that the printing press is a productivity enhancing technology because it allows us to do more in less time. Isnt that what labor saving devices are all about?! Who CARES if the boom is not backed by prior real saving. Real saving is not a fixed lump, it can come afterwards it can fluctuate downward (or upward!) with increases of income and production.
“Inflation merely tricks them into selling at a lower real price, and in the process, encourage activity that is NOT in line with the rest of the economy in the real sense.”
Another feeble and simpleminded assertion.
“You are committing a classic example of ignoring the unseen and the consequences of activity on those parties related to the activity in question once, twice, three, … times removed. You only consider the activity in the narrow sense, and you ignore what otherwise would have taken place, and you ignore the effects on other parties.
“
All of us understand the broken window fallacy and understand Bastiat. What you don’t understand is that counterfactuals are only useful up to a point. When they become wildly detached from reality (I hope u see where I’m going with this) they cease being useful.
“Sure, fences can be built, drinks can be bought, and so on, but this “activity” would almost certainly be wealth destroying on net.”
Okay, Either you’re 1. High on some drugs, 2. A complete moron or 3. Just utterly bats**it crazy.
You’re paralleling the mistake that Hayek made when he answered the question in the ’30s, by a student about buying a coat, whether it would increase economic activity. He said that it wouldn’t for complex reasons.
Occam’s razor people. Haeyks answer was nonsense then it its nonsense now.
(Some of you keep wondering why we bother with this boorish knave? Its because we can’t let bulls***,t which I’m allergic to by the way, stand. Right, everyone?)
“The reason is because those who earn money and have cash, did not value the activity of producing more fences and more drinks. As such, the gains to the consumers in question, came at a loss to those whose money balances and incomes are denominated in that currency.”
How do you know they didn’t value it? How do you know they werent just delaying and delaying and delaying hoping for a lower price? Youre presuming, AGAIN that cash holders have the unconditional privelege and right to a free return on their cash at the expense of the rest of the economy going to hell. They don’t. (Neither do government bond holders but that’s a separate point?) How many times must we educate you before this penetrates your thick skull?
Oh and buy the way, the Fed is aiding buyers when it creates stable expected inflation because the only way to tell when there’s a floor on prices is to notice that prices are rising or more importantly, are EXPECTED to rise Ever notice the phenomenon of a “temporary sale?” You even get the mechanism by which deflation works wrong. The effects of demand deflation dont work DURING the deflation, they work AFTER when prices hit a floor and are expected to RISE thus generating future expected inflation (or NGDP growth)
“What if production doubles and prices and costs would have fallen by half? If someone inflates so much that prices remain flat, then that would represent a huge loss to those who have to pay twice the prices than they otherwise would have paid. It would be a gross error in judgment to claim that because the price level didn’t rise, then everybody is no worse off.”
NGDP level targeting takes care of that genius. Haven’t you learned ANYTHING yet? The fed is not supposed to respond to a signal a that prices fall durinng a productivity deflationary blast. Theyre only supposed to respond in declines of nominal spending. And even if price levels were targeted, what is the essential differance between an increase of nominal wages by 11% with the price level at zero, and a zero increase in wages and a fall of the price level by 10%?
17. September 2012 at 20:49
Edward:
MF is up to his usual pathetic nonsense:
I see Edward is up to his usual attempt at trying to convince the readers here that he has previously successfully shown that my arguments are indeed “nonsense”. Rather than actually showing this to be the case, he relegates himself to appealing to people’s ignorance and hoping that they take his claim on faith, much like his own arguments concerning political economy. So it’s business as usual…
I’ll repost I response to his earlier hackery the Bernanke Press Conference Post.
Again? Haven’t you put the poor readers through enough?
“MF,
How do you know and presume to lecture market particpants that the choices they make are not “sustainable in the real sense?!!?”
They are not decisions based on market price signals, but rather Fed distorted price signals. This is not “lecturing” market participants. This is explaining that market participants are not able to observe and work with market based pricing signals. Market based money supplies, market based interest rates, market based relative demand and relative prices, none of these exist for market participants to coordinate their actions given that. They are almost entirely ignorant of each other’s preferences and behavior.
For actors across the country from each other, the only communication
Its just another mindless assertion of the Austrians that doesnt have any real proof to back it up. The inflationary boom might have financed investment and consumption that would have taken place down the road, only with prior saving to back it up. Why is this shortcut a bad thing? In fact, you might even say that the printing press is a productivity enhancing technology because it allows us to do more in less time. Isnt that what labor saving devices are all about?! Who CARES if the boom is not backed by prior real saving. Real saving is not a fixed lump, it can come afterwards it can fluctuate downward (or upward!) with increases of income and production.
“Inflation merely tricks them into selling at a lower real price, and in the process, encourage activity that is NOT in line with the rest of the economy in the real sense.”
Another feeble and simpleminded assertion.
“You are committing a classic example of ignoring the unseen and the consequences of activity on those parties related to the activity in question once, twice, three, … times removed. You only consider the activity in the narrow sense, and you ignore what otherwise would have taken place, and you ignore the effects on other parties.
“
All of us understand the broken window fallacy and understand Bastiat. What you don’t understand is that counterfactuals are only useful up to a point. When they become wildly detached from reality (I hope u see where I’m going with this) they cease being useful.
“Sure, fences can be built, drinks can be bought, and so on, but this “activity” would almost certainly be wealth destroying on net.”
Okay, Either you’re 1. High on some drugs, 2. A complete moron or 3. Just utterly bats**it crazy.
You’re paralleling the mistake that Hayek made when he answered the question in the ’30s, by a student about buying a coat, whether it would increase economic activity. He said that it wouldn’t for complex reasons.
Occam’s razor people. Haeyks answer was nonsense then it its nonsense now.
(Some of you keep wondering why we bother with this boorish knave? Its because we can’t let bulls***,t which I’m allergic to by the way, stand. Right, everyone?)
“The reason is because those who earn money and have cash, did not value the activity of producing more fences and more drinks. As such, the gains to the consumers in question, came at a loss to those whose money balances and incomes are denominated in that currency.”
How do you know they didn’t value it? How do you know they werent just delaying and delaying and delaying hoping for a lower price? Youre presuming, AGAIN that cash holders have the unconditional privelege and right to a free return on their cash at the expense of the rest of the economy going to hell. They don’t. (Neither do government bond holders but that’s a separate point?) How many times must we educate you before this penetrates your thick skull?
Oh and buy the way, the Fed is aiding buyers when it creates stable expected inflation because the only way to tell when there’s a floor on prices is to notice that prices are rising or more importantly, are EXPECTED to rise Ever notice the phenomenon of a “temporary sale?” You even get the mechanism by which deflation works wrong. The effects of demand deflation dont work DURING the deflation, they work AFTER when prices hit a floor and are expected to RISE thus generating future expected inflation (or NGDP growth)
“What if production doubles and prices and costs would have fallen by half? If someone inflates so much that prices remain flat, then that would represent a huge loss to those who have to pay twice the prices than they otherwise would have paid. It would be a gross error in judgment to claim that because the price level didn’t rise, then everybody is no worse off.”
NGDP level targeting takes care of that genius. Haven’t you learned ANYTHING yet? The fed is not supposed to respond to a signal a that prices fall durinng a productivity deflationary blast. Theyre only supposed to respond in declines of nominal spending. And even if price levels were targeted, what is the essential differance between an increase of nominal wages by 11% with the price level at zero, and a zero increase in wages and a fall of the price level by 10%?
17. September 2012 at 21:23
gofx
my point was that the constitution is just a piece of paper if its not meaningfully believed in and acted on by all members of society . Convince enough people that there should be a law mandating that the Fed do something or not do something, and it will perform. Having reasonably stable NGDp growth at 4-5% a year puts a cap on inflation but not on real growth. Theres the closest thing to stability right there.
Ultimately COMPLETE stability is a chimera. Even in a gold standard money is changing its value day by day, as goods and services increase or decrease
17. September 2012 at 21:31
Evan Soltas shows Bernanke the next step – targeting his own forecast: http://www.bloomberg.com/news/2012-09-17/defining-bernanke-s-new-fed-target.html
Contemplationist, do you pay your credit bills in loaves of bread? And how does your bank pay the stores you shop at? Note that it is conceivable that the workers at Walmart could be paid with their monthly consumption baskets, while you swiped a card and paid on credit – which shows that we’re talking about two different things here. Some people claim that all money is IOUs, which get passed around as a medium of exchange. But it’s the fact that it’s a medium of exchange that makes it money, and the “IOU’s” may never be redeemed – as with Federal Reserve notes.
17. September 2012 at 22:55
Edward:
MF is up to his usual pathetic nonsense:
I see Edward is up to his usual attempt at trying to convince the readers here that he has previously successfully shown that my arguments are indeed “nonsense”. Rather than actually showing this to be the case, he relegates himself to appealing to people’s ignorance and hoping that they take his claim on faith, much like his own arguments concerning political economy. So it’s business as usual…
I’ll repost I response to his earlier hackery the Bernanke Press Conference Post.
Again? Haven’t you put the poor readers through enough?
“MF,
How do you know and presume to lecture market particpants that the choices they make are not “sustainable in the real sense?!!?”
They are not decisions based on market price signals, but rather Fed distorted price signals. This is not “lecturing” market participants. This is explaining that market participants are not able to observe and work with market based pricing signals. Market based money supplies, market based interest rates, market based relative demand and relative prices, none of these exist for market participants to coordinate their actions given that. They are almost entirely ignorant of each other’s preferences and behavior.
For actors across the country from each other, the only communication system available is the pricing system, and the pricing system is systematically altered by the Fed’s NON-market information introduction.
It’s just another mindless assertion of the Austrians that doesnt have any real proof to back it up.
There is a difference between talking of Austrian concepts, talking around Austrain concepts, pretentiously condescending Austrian concepts…and actually understanding, engaging, and refuting Austrian concepts.
You are only doing the former. You are not doing the latter. Your facile attempt is easily seen as empty, mindless antagonism.
The inflationary boom might have financed investment and consumption that would have taken place down the road, only with prior saving to back it up. Why is this shortcut a bad thing?
It is a bad thing because it is not a shortcut at all, but is rather the beginning of a trajectory of projects that cannot be physically completed because the quantity of real savings simply does not exist. If there is not enough real savings to complete projects that have been started, then there is no possible way to go from A to B using inflation. Inflation does not enable a shortcut, but rather a dead end road.
In fact, you might even say that the printing press is a productivity enhancing technology because it allows us to do more in less time. Isnt that what labor saving devices are all about?! Who CARES if the boom is not backed by prior real saving. Real saving is not a fixed lump, it can come afterwards it can fluctuate downward (or upward!) with increases of income and production.
You are a true believer aren’t you?
The printing press is not a productivity enhancing technology, it is a productivity hampering technology, because it is a technology that eliminates the pricing signals that derive from actual individual market particoant preferences, and replaces them with pricing signals that derive from the choices of non-market actors who do not have the requisite information to “improve” the pricing signals, and they do not own the property that carries prices in accordance with individual marginal utilities.
The key to a healthy market is not lots of spending and high prices, but prices that most closely reflect actual individual market participant preferences, even if such prices are associated with less spending and lower prices than you or the ivory tower technocrats at the central banks subjectively believe is optimal. You don’t know optimal prices. Central bankers do not know optimal prices. Yet your claims regarding “productivity enhancing technology” presumes that you or some other holier than thou non-market advocate do in fact know optimal prices.
You need to learn that money is a tool for economic calculation of real goods and services traded for other real goods and services. It is a tool that facilitates production by being valued as a commodi for calculating gains and losses. It does not “generate” production.
“Inflation merely tricks them into selling at a lower real price, and in the process, encourage activity that is NOT in line with the rest of the economy in the real sense.”
Another feeble and simpleminded assertion.
This is noven a proper rebuttal. It is just another example among many of your empty, mindless antagonism.
“You are committing a classic example of ignoring the unseen and the consequences of activity on those parties related to the activity in question once, twice, three, … times removed. You only consider the activity in the narrow sense, and you ignore what otherwise would have taken place, and you ignore the effects on other parties.”
All of us understand the broken window fallacy and understand Bastiat.
A completely unwarranted assumption. Not only are nowhere close to being a judge of who does and does not understand Bastiat’s parable of the broken window, but you are nowhere close to grasping the fact that I was actually referencing Hazlitt’s lesson of economics, not the broken window fallacy per se. No windows need to be broken in order for the economist to trace not only the immediate effects on the primary parties in question, but also the secondary and tertiary effects on other parties. The reason I brought this up is because the argument made by another, to which I responded, only considered the immediate effects on the primary parties.
What you don’t understand is that counterfactuals are only useful up to a point. When they become wildly detached from reality (I hope u see where I’m going with this) they cease being useful.
You are also nowhere close to being a judge on how far such counter-factual analysis can go. Merely saying that there is a limit to how useful they can be, does not stand as equivalent to a demonstration that I personally went to far, by showing that I made illogical statements, or statements that contradict economic laws built on axioms not easily shaken. Your claim is vacuous.
“Sure, fences can be built, drinks can be bought, and so on, but this “activity” would almost certainly be wealth destroying on net.”
Okay, Either you’re 1. High on some drugs, 2. A complete moron or 3. Just utterly bats**it crazy.
This comment is only more evidence to me that you lack the cognitive capacity to engage in an intellectual discussion. It’s clear that you are e type of person who when confronted with arguments you don’t understand, and don’t know how to respond to with economic arguments of your own, your only recourse is to relegate yourself to rather primitive, neanderthal-like behavior of hostile aggression. Your amygdala is taking the place of your hippocampus because the latter cannot locate the required knowledge to counter what I am saying, because such knowledge simply does not exist in your brain. It’s like I am talking to a person who is not evolved to a level that would enable coherent communication with others.
You’re paralleling the mistake that Hayek made when he answered the question in the ’30s, by a student about buying a coat, whether it would increase economic activity. He said that it wouldn’t for complex reasons.
Much like your other posts, you have not actually shown how what I said contains a “mistake”.
Occams’s razor people. Haeyks answer was nonsense then it its nonsense now.
(Some of you keep wondering why we bother with this boorish knave? Its because we can’t let bulls***,t which I’m allergic to by the way, stand. Right, everyone?)
You haven’t shown that what I said, or what Hayek said, is indeed “nonsense.”
I see you are continuing your predilection of considering yourself welcome to speak on behalf of others, as if the mere appearance of me being outnumbered is going to in any way intimidate me. Apparently you are also ignorant of the type of person I am, which is someone who is USED to standing intellectually alone on this blog.
“The reason is because those who earn money and have cash, did not value the activity of producing more fences and more drinks. As such, the gains to the consumers in question, came at a loss to those whose money balances and incomes are denominated in that currency.”
How do you know they didn’t value it?
Precisely because new money that did not exist before was required in order for the fence and drinks to be sold for more money than the costs of the resources used up!
This is economics 101. When a project costs more than the revenues it is able to subsequently earn, it is a signal that the resources are more highly valued in mother deployments. It’s why the factors of production carry prices in the first place. The value of the factors of production derive from the value of the output that require such factors.
If the resources required to build a fence are priced at $1000, say, but the completed fence is only able to earn $800, say, then this is a signal that the resources are more highly valued as factors for other uses at DO earn more than $1000. The reason why the factors are priced at $1000, rather than $600 or $700, is because entrepreneurs have raised the price of such factors for use in other projects that earn more than $1000. The RELATIVE valuation between the various alternative projects, given the scarce resources available, makes $1000 the minimum break even price.
What inflation does is it deludes factor owners into producing products that are less highly valued and thus making it impossible to produce products that are more highly valued due to the fact that given scarce resources cannot be used in more than one deployment.
How do you know they werent just delaying and delaying and delaying hoping for a lower price?
They don’t have to delay if they are hoping for a lower price. If all they want is a lowest price, then they can sell it for whatever price the market will bear, including zero price.
I assume that what you meant to rhetorically ask in your miasma of stupidity, is how do I know that they weren’t delaying and hoping for a HIGHER price. Well, to answer that banal question, economists typically assume that those we have goods to sell, prefer to sell their goods to not selling their goods, and that they hold back from selling because the market price is lower than the price they would like to sell their goods for.
This then leads to my argument that inflation tricks owners into selling their goods for a lower real price.
You are presuming, AGAIN that cash holders have the unconditional privelege and right to a free return on their cash at the expense of the rest of the economy going to hell. They don’t.
You are presuming that those who earn cash by being productive do not have a right to buy goods in the future from willing sellers, for a lower price than what currently exists. They DO.
You are presuming that those who earn cash by being productive must have their purchasing power reduced by coercive, violence backed non-market monopoly monetary system if they dare abstain from consuming, and dare accumulate cash for a period of time longer than 2 weeks, or whatever period of time elapses between income receipts.
Neither you nor anyone in the state has any right to use force against innocent, peaceful people so that their accumulated cash holdings constantly reduce in value, the gains of which accrue to those who are the initial receivers of inflation.
This sociopathic attitude you and other inflationists have against poor people who tend to delay their consumption not by way of investing in complex, risky financial securities, but rather in the form of cash accumulating, is very destructive and quite frankly off putting to those of us who do not wish to harm peaceful people who dare earn money and then buy goods at a lower price. The real gains that cash holders make do not come at the expense of those who produce. The gains cash holders make are matched by the gains that they themselves give to others in the form of the productivity that enabled them to earth at cash in the first place. Just because producers are able to raise their own productivity, and sell more goods at lower prices, does not mean that those who hold cash are the sole gainers. ANYONE who earns any cash whatever, Will be able to by goods at lower prices. Everyone who earns money, ends up holding money. There is no such thing as a “duty” that people have in spending their earnings within a certain period of time that is determined a central planner wannabe such as yourself, as if you are the final judge as to the “proper” cash holding times for everyone.
Don’t make me laugh. You are in no position of judging that someone is committing an unforgivable sin in holding into their earnings for 4 months instead of 4 weeks.
There is no such thing as an unconditional privilege or right for you or anyone else to use force to devalue other people’s cash holdings just because you can’t stand it that poor people make real gains due to abstaining from consuming as soon as they receive their paychecks. If someone wants to wait 4 months or 4 years before spending $1000, then who the hell are you to introduce violence into their lives so that wealthy people on Wall Street earn gains at the poor people’s expense?
You are an anti-social coward, who almost certainly does not have the courage or moral fortitude to act on your professed ideology and go out and purposefully devalue other people’s cash holdings by sticking a gun in their face and coercing them into using a fiat toilet paper money, and then printing off more bills in your basement to ensure that cash holders never make any gains.
The burden is on you to show why the perfectly peaceful activity of earning money, and holding onto the money for a longer period of time than you subjectively claim is justified, is such an evil that you or some other central planner wannabe all of a sudden acquires an unconditional privilege and right to devalue those people’s cash holdings. From where did THAT privilege and right originate?
(Neither do government bond holders but that’s a separate point?) How many times must we educate you before this penetrates your thick skull?
I cannot be “educated” on a falsehood that is based on nothing but naked aggression. How many times do I have to tell you that asserting X is not the same thing as having shown X?
You talk as if you or someone else has actually demonstrated that falling prices and thus positive real return on cash balances is an evil of which a justified response is aggression against peaceful people.
Oh and buy the way, the Fed is aiding buyers when it creates stable expected inflation because the only way to tell when there’s a floor on prices is to notice that prices are rising or more importantly, are EXPECTED to rise
False. You are conflating your own inability to compete in a free market price system with a universal inability on the part of everyone, who are so ignorant that they cannot know how to set market clearing prices?
It is a myth that entrepreneurs require “stable” prices so that they know of a price “floor.” In a free market price system, if prices are lower than what clears the market, then shortages will develop, and prices will rise as sellers realize that they can sell their goods for higher prices. Similarly, if prices are higher than what clears the market, then surpluses will develop, and prices will fall as sellers realize that they can’t sell their goods for as high of a price.
Entrepreneurs do not require stable prices. They require prices that are a function of actual relative marginal utilities along with prevailing supply and demand conditions.
Ever notice the phenomenon of a “temporary sale?” You even get the mechanism by which deflation works wrong. The effects of demand deflation dont work DURING the deflation, they work AFTER when prices hit a floor and are expected to RISE thus generating future expected inflation (or NGDP growth)
What a piss poor argument.
Demand deflation DOES in fact “work” during deflation. Prices cannot keep falling past the point at which shortages develop. Entrepreneurs and capitalists are not as dull as you. They can find out very quickly if their chosen prices leads to line ups and unsatisfied customers who have to be turned away.
I notice that every time statists defend their violence advocating destructive behavior, they always paint the victims as so stupid that only violence against them can “help” them. I don’t know what’s worse. The incredible cavalier and sociopathic mentality that is required to believe such thing, or the actual destruction that is unleashed when such a vicious mentality is put into practice.
Serius question: Were you breast fed as a baby? Studies show that babies that were not breast fed end up with underdeveloped pre-frontal cortexes, which hampers their cognitive abilities later in life, which is typically manifested as aggression against the world, even though reason and intelligent behavior are really the only means by which the particular problems faced can be solved.
Youmremind me of an unfrozen troglodyte who found himself in a modern world that he cannot understand or deal with, because he is mentally impaired.
Your garbage masquerading as intelligent discourse is, at the end of the day, providing me with nothing but fodder, but I doubt whether you are even going to be able to grasp what I am telling you. It is like I am playing chess with a pigeon. You have no clue what you’re even doing, you crap on the chessboard, you knock over the pieces, and then you fly away believing you actually participated in, and won, the match.
“What if production doubles and prices and costs would have fallen by half? If someone inflates so much that prices remain flat, then that would represent a huge loss to those who have to pay twice the prices than they otherwise would have paid. It would be a gross error in judgment to claim that because the price level didn’t rise, then everybody is no worse off.”
NGDP level targeting takes care of that genius.
The “problem” you believe is a problem, isn’t even a problem. You are solving a non-existent problem by introducing a new problem, and then you ignorantly believe the new problem is the fault of the free market process, thus reinforcing your own anti-market prejudice that is founded on naked aggression, and entrenching the problem creating systematization, and thus you chase your own tail.
Haven’t you learned ANYTHING yet?
Now that’s funny. You are in no position of educating me on economics.
The fed is not supposed to respond to a signal a that prices fall durinng a productivity deflationary blast.
Not “supposed to” according to what?!?
They’re only supposed to respond in declines of nominal spending.
According to what? Your own false conception of what central bankers “should” do? Why should your “should” coercively overrule other people’s peaceful shoulds? Where in the hell did you acquire this privilege? Your ass or a hole in the ground?
And even if price levels were targeted, what is the essential differance between an increase of nominal wages by 11% with the price level at zero, and a zero increase in wages and a fall of the price level by 10%?
If the former is the result of inflation, then the essential difference is the distortion to the price system, and hence the hampering of economic calculation, and hence the sustainability of a given set of investment trajectories.
You know, it would help of you actually familiarized yourself with the Austrian concepts BEFORE you attempt to criticize them. It will reduce the appearance of utter ignorance that you seem to enjoy portraying for yourself.
Cheers.
17. September 2012 at 23:01
Please excuse the copious spelling errors above. I am using an iPad for the first time and the auto correction is a pain in the rear.
17. September 2012 at 23:27
A comment I left over at economist’s view. Graphs and supporting links can be found there:
So far QE3 has had effects that were the same as if the FOMC had reduced the policy rate. In particular, the dollar depreciated, real interest rate expectations declined, and inflation expectations rose.
These are the classic financial market effects one might observe when the Fed eases monetary policy away from the zero lower bound. Thus QE3 is basically expansionary monetary policy, no different in its effects from reducing the policy interest rate, which increases domestic demand, and if done to a sufficient extent, will reduce unemployment and raise the rate of real wage growth.
The standard deviation of changes in the trade weighted US dollar index over the period since 1995 is 0.328. On 9/14 the dollar index declined by 0.849 or 2.59 standard deviations, a decline that is significant at the 1% level. This was the 34th largest decline out of 4442 possible observations and the largest decline since June 29, 2012 when EU officials meeting in Brussels agreed to drop the condition that emergency loans to Spanish banks give creditor governments preferred status.
The standard deviation of changes in the 5-year Treasury Inflation Protected Security (TIPS) over the period since 2003 is 7.75 basis points. On 9/13, the 5-year TIPS declined by 16 basis points or 2.06 standard deviations, a decline which is significant at the 5% level. This was a larger decline than all but 22 out of 2331 pssible observations and the largest decline since August 10, 2011, the day after the first time ever the FOMC gave an explicit timeline (two years) for how long it would maintain its zero interest rate policy.
The standard deviation of changes in 5-year inflation expectations over the period since 2003 is 6.26 basis points. On 9/13, 5-year inflation expectations increased by 11 basis points or 1.76 standard deviations, an increase which is significant at the 10% level. On 9/14, 5-year inflation expectations increased by 16 basis points or by 2.56 standard deviations, an increase which is significant at the 1% level. This was the fifth largest increase in inflation expectations in any two day period over 2331 daily observations and the largest increase since February 10th, 2009 when the US Senate closed debate and advanced the fiscal stimulus bill by a slim margin.
The other three two-day periods were September 18-19, 2008 when the Fed announced its initiatives to extend non-recourse loans via the asset-backed commercial paper facility (ABCP) and purchase Agency securities, and a single four day period that overlapped December 1-2, 2008 when the Fed announced it would offer credit through the Term Auction Facility (TAF) and that it would extend its three liquidity facilities until May, 2009.
http://economistsview.typepad.com/economistsview/2012/09/fed-watch-getting-off-the-zero-bound.html#comment-6a00d83451b33869e2017744cfe8b4970d
18. September 2012 at 00:32
John Thacker:
If you’ve been unable to tell, IMO that’s your own fault. You, MF, are the one arguing for serious distortive effects on economic calculation, as Scott has demonstrated.
Sumner has demonstrated no such thing. It is I who demonstrated that central banks, and thus monetarists of all stripes, are arguing (and practicing) serious distortion effects on economic calculation.
The term “distortions” refers to the extent to which prices deviate from totally unhampered, unadulterated free market prices. Since I, contrary to Sumner and yourself, advocate for a free market price system (which entails total privatization of the monetary system), what I advocate is by definition unhampered, non-distorted prices and this non-distorted economic calculation.
Nice try on your attempt to turn my own argument against me and present yourself and Sumner as the advocates of non-distorted economic calculation. You have the dubious honor of being the first intellectual opponent of mine who tried that hilarious tactic. It’s like George Bush telling me “No, you’re the war-monger!”
Scott, and others, have repeatedly offered the argument that it’s unexpected changes in NGDP that has a distortionary effect on economic calculation.
Myself and others have repeatedly offered the argument that it’s non-market based pricing signals that has the distortive effect on economic calculation, and that the “unexpected” changes in NGDP are actually the market’s way of “telling” us that the previous NGDP was sub-optimal.
I see no market monetarist even attempting to explain WHY it is that NGDP suddenly fell in 2008, despite the fact that the Fed was not destroying dollars, and despite the fact that the Fed never stopped creating dollars for any significant period of time.
So I will again ask the same question I always ask but is never answered: WHY did the aggregate money supply decline (as can be inferred from private charts that track M3), and why did NGDP decline, despite the fact that the Fed did not destroy dollars? Why did people all of a sudden act in such a way that spending declined from what it was previously?
And alongside this, why was it that so many entrepreneurs and sellers made gross errors in forecasting future revenues, all at the same time? Why was there a cluster of errors, as opposed to periodic errors of disparate economic agents in a staggered like fashion? Why did so many entrepreneurs not foresee actual future demand?
Moreover, why were there relatively more problems suffered in the construction and durable goods industries as compared to the retail and service sector industries? Why weren’t the losses more or less spread out evenly across all sectors, as the “insufficient aggregate demand” story would require?
NGDP falling simply is not a sufficient explanation. It doesn’t explain the empirical facts.
Indeed, I think that all economists would agree that unexpected inflation is far more distortionary. However, it then follows that unexpectedly low NGDP growth, or inflation (as well as the extreme version, deflation) distorts economic calculation.
Distorts it compared to what standard of economic calculation? The more you dig and analyze the premises of your worldview, the more you will find that your worldview is based on a completely arbitrary standard, such as “stable employment” and “stable output”. You can only introduce various means that individuals utilize to achieve their ends, as the standard by which to judge means to those means. There is no objective standard that is the individual as an end in himself. You believe tht as long as an individual is “working”, and as long as resources are “utilized”, that this is enough to judge any deviations from this as “distortive”.
Even if the employment and resource utilization is unsustainable in the real sense, and even if a correction to this requires falling prices for certain key resources and labor, and even if correction requires increases in cash holding by way of reduced spending on specific resources and labor but no others, so that relative prices are back in their optimal proportions, you nevertheless view voluntary individual behavior in accordance with free market processes as “distortive”.
You view money mechanically, as having a life of its own, whereas I view money as a tool of human purposeful behavior. You want humans to be subjected by money, whereas I want money the subjected by humans. That is the key difference. Thus, when market actors begin to gain the upper hand on money, and money is more and more subjected by humans, you believe this is “distortive”, on the basis that non-distortive money entails humans being subjected by money, such that regardless of what market actors as a group desire, total spending can never ever fall, even if it requires introducing state violence into otherwise peaceful market behavior.
Individual market actors correct previously sub-optimal NGDP (as what occurred in 2008), and you view this as sub-optimal and “distortive.”. EVEN IF many entrepreneurs and investors correctly anticipated a fall in their revenues, or, tangentially, a fall in NGDP, then we’re supposed to believe that the fall was “unexpected” a priori.
There were these of us who expected NGDP to fall, due to the fact that previous NGDP consisted of too much credit and thus at some point, the market would correct it as soon as the Fed “fell asleep”. The market did correct the previously sub-optimal NGDP, and yet you market monetarists STILL believe that the fall was “distortive” relative to your totally arbitrary standard of 5% NGDP growth come hell or high water.
See, you cannot help but utilize an arbitrary standard for what constitutes non-distortive prices, because you have rejected the non-arbitrary free market process that gives meaning to prices in the first place. Non-market prices is really a contradiction in terms. This is why the true standard for non-distortive prices is not whatever prices would exist in 5% NGDP growth, but whatever prices would exist in market process determined NGDP growth.
A non-distortive price system is one in which prices are a function of free market forces not only in goods and services, but in money production as well. A free market in money production would certainly not contain 5% NGDP growth come hell or high water, or even 5% NGDP growth per capita, or even 5% no,inal wage growth. All these constant growth targets are non-market based, and hence market DISTORTIVE, activities.
(It’s better to use NGDP because there is “good” deflation caused by real GDP growth, as Scott has also explained.)
It’s “better” relative to WHAT? Every other central banking targeting rule? Ok, let’s suppose for the sake of argument that NGDP targeting, or nominal wage targeting, or nominal wage targeting per capita, or whatever other “optimal of the optimal this time I swear”, really this is it, “the best of the worst”, so to speak. What then? Live with it forever? Never improve on it by utilizing some means that is an alternative to central banking altogether? Or leave such a thing to future generations, who you expect to do what you refuse to do, which is advocate, and succeed in abolishing, central banking?
I don’t understand why you market monetarists are willing to go to your graves knowing that you could have achieved more if only you had the moral courage, but refusing to try. I don’t understand. Why you feel fulfilled in getting something that you yourselves expect future generations to judge as terrible and nowhere close to the best of the best. I don’t understand why you want future generations to do what you refuse to do.
If it’s because too many people are too stupid in your opinion, then why not educate them instead of deceiving them? How would you feel if you were being purposefully educated with second or third best solutions because your educators considered you to be too stupid to be able to understand the best of the best?
If you consider yourself intellectually capable of understanding the best of the best, but as a matter of pragmatism you publicly speak to others the second or third best, then trust me when I say this, even the common man will be able to understand the best of the best. None of you are all that intellectually deep or profound…no offense. I think it’s rather amusing that you have taken it upon yourselves to judge yourselves to be in a position of relative intellectual superiority relative to the masses, so much so that you won’t talk about the best of the best to them, but only the second or third best. In my many years of education and debating and engaging every level of intelligence in various people, from dimwitted imbecile to brilliant genius, I have found that this ivory tower mentality is completely unwarranted.
Surely you can see that if all people expect 5% inflation per year, they will calculate their business and sign long term contracts taking that into account?
Surely you have asked yourself why people would come to expect 5% inflation per year in the first place, and that the cause of it is conditional, rather that some objective law of the universe?
And if inflation suddenly plunges below that level, then there will be a tremendous amount of misallocation of goods and resources, and a great upheaval?
Surely you know that inflation does not affect all goods equally to the same extent, right? Surely you know that no individual investor or seller actually believes that they will receive a constant 2% increase in revenues each and every year just because the Fed declares, and follows through on, a 2% price index inflation target?
Individual investors and sellers make expectations concerning their own particular markets, and sometimes they’re right, and sometimes they’re wrong. Nobody should expect every investor to make correct expectations all the time, so why do you guys get so up in arms due to investors making incorrect expectations in 2008, that all of a sudden justifies central banks inflating to ensure that investor expectations are made good?
Is it because there is a cut off level of “tolerable” employment or resource usage? Why that level but not 1% higher or lower? What is the justification for why a country level economy can never experience a correction, but a state level economy can experience a correction? Why can California go bankrupt, but the
(A smaller version of this can be seen in individual industries, such as long term contracts in the solar industry that didn’t forsee the plunging of prices.) If it is predictable, then calculation has proceeded.
Scott has repeatedly made this argument. He’s specifically invoked it when talking about the problems that having some, primarily government workers, on long term contracts expecting certain wage increases based off of higher NGDP growth. Unexpected shortfalls cause the pain to be pushed on people not on contract. Similarly, real estate deals based on a different amount of NGDP growth (or, ugh, inflation) will also collapse.
Scott’s entire argument is based on the problems of unexpected shortfalls in NGDP growth. A priori, with enough time to have all contracts adjust, there is no reason to prefer one rate of NGDP versus another (other than the problems that occur when the natural rate of interest is below zero- people really do seem to have a psychological problem with wage cuts or saving interest rates below zero, particularly for the latter when cash is an option.)
People who favor sudden unexpected plunges in NGDP growth (or not reacting to them, which amounts to the same thing), as MF does, are calling for sudden and severe distortions in economic calculation.
18. September 2012 at 00:48
argh…My iPad glitches and sent the post prematurely before I finished responding to all your comments.
John Thacker:
Scott has repeatedly made this argument. He’s specifically invoked it when talking about the problems that having some, primarily government workers, on long term contracts expecting certain wage increases based off of higher NGDP growth. Unexpected shortfalls cause the pain to be pushed on people not on contract. Similarly, real estate deals based on a different amount of NGDP growth (or, ugh, inflation) will also collapse.
So inflation makes wages more sticky. I agree. So a monetary system that sees falling prices would not have such wage rigidity, because people will come to expect falling prices and would thus before amenable to falling wage rates.
Scott’s entire argument is based on the problems of unexpected shortfalls in NGDP growth. A priori, with enough time to have all contracts adjust, there is no reason to prefer one rate of NGDP versus another (other than the problems that occur when the natural rate of interest is below zero- people really do seem to have a psychological problem with wage cuts or saving interest rates below zero, particularly for the latter when cash is an option.)
No investor or seller cares a lick about NGDP. They care about their own particular markets, their own particular revenues. No investor or seller would put NGDP expectations above their own revenue expectations. If an investor expects 5% growth in revenues, but a 1% fall or rise in NGDP, then their own revenue expectations will dominate their current behavior.
People who favor sudden unexpected plunges in NGDP growth (or not reacting to them, which amounts to the same thing), as MF does, are calling for sudden and severe distortions in economic calculation.
No, this is not correct. If NGDP falls and the Fed did not destroy money, in other words, if market participants voluntarily acted in such a way that the collective outcome is a fall in NGDP, then any attempt to reverse this by inflation would be the thing that is distortive to economic calculation.
You simply have to accept that just because you or some other investor expects 5% NGDP but it does not occur, it doesn’t mean that NGDP should have actually risen by 5%. There is simply no such thing as a single NGDP expectation that is shared, I.e. agreed to, by all individuals in the market.
NGDP did not suddenly fall for every last person.
18. September 2012 at 00:58
MF: Where are you building your own homestead? Stop squatting on other people’s.
18. September 2012 at 01:00
MF: It’s very hard to find the interesting stuff if you keep posting like you do. Is your true aim to turn people off reading the comments section altogether? It’s certainly an unintended consequence.
18. September 2012 at 01:04
John Thacker:
The key thing I am arguing is that just because individual market actors have expectations of 2% increase in revenues, or prices, it doesn’t mean that the Fed has to inflate in such a way that these expectations are met. This is because the actual relative price structure is influencing economic behavior in such a way that the collective capital structure is ntphysically sustainable.
Your approach to this problem is based on the dubious foundation that expectations have to be met, even if the expectations relative to each other are influencing production in the division of labor to be out of coordination.
Have you ever asked why a given set of expectations have to be met come hell or high water? Have you ever considered the possibility that the expectations are not correct in terms of what is physically possible?
18. September 2012 at 01:06
James in London:
I thought I educated you on the proper meaning of the term squatting? Memory like a fish, huh?
If my comments turn you off, if you don’t find them interesting, the please understand my sincerity when I say that comng from you, this is strong evidence for me that I am on the right track, and that I should to waver from what direction I am taking.
Cheers.
18. September 2012 at 01:11
James in London:
If you can’t respect the property rights of complete strangers, then perhaps you can at least respect Sumner’s property rights enough to afford him the damn courtesy of respecting HIS decisions on whether or not comments are welcome or unwelcome.
It’s like your disrespect for property rights knows no bounds. You consider yourself owner and judge of Sumner’s blog even. How disrespectful.
18. September 2012 at 02:13
Major, aren’t you concerned at the fact that you haven’t convinced anyone? I would be!
18. September 2012 at 04:01
MF:
You do have a propensity to abuse the license Dr. Sumner has been gracious to allow, all while taking your criticism of him nearly to the extreme. There is a difference between doing something that is being allowed and being consistent with etiquette, and you do cross the line, in my opinion.
You have posted here, strewn throughout Sumner’s comment section, taking up copious amounts of space, an enormous amount of information that someone might find valuable, but wouldn’t be able to find. Perhaps it would be more in line with social graces and of more benefit to consumers of information if you started your own blog. It’s free and very easy to do. That way you could thoroughly argue your case and say whatever you like about Dr. Sumner using your own resources, and spot argue your case in the comment section here.
18. September 2012 at 04:26
Hey, MF. GET YOUR OWN BLOG! LINK AND CRITIQUE! STOP LITTERING IN THE PARK!
18. September 2012 at 04:33
Yes MF, why don’t you have a blog? Clearly it’s not for a lack of things to say…
Scott, Clive Crook has an article:
I’m afraid you may have to do a reply, repeating what you’ve said about NGDPLT not being a “promise to be irresponsible”. Becuase he still hasn’t got it, and is still advocating fiscal policy (a Krugmanite, clearly). I tried to explain in the comments. He reads the blog, you can still reach him. Otherwise you have a prominent outlet countering Derek Thompson’s (perhaps excessive) enthusiasm with misleading skepticism. Although he still clearly favors NGDP growth-rate targeting, just not level path targeting.
On another note, Scott, if you do shift the blog to another platform, please incorporate an interface which not only can be searched more easily, but also has “tags” at the bottom (like Lars Christensen’s blog), so that people can find posts directly by topic, eg. “credibility/promising to be irresponsible”. Also if you could make the display of MF posts optional that would be great.
18. September 2012 at 05:25
I’m hearing a lot of arguments now about how QE3 will just end up inflating another bubble. As a long time reader of this blog I know you have addressed the idea of bubbles time and time again but I can’t remember seeing the specific counterargument to “QE (buying mortgages) just causes bubbles (probably in housing),” (nor can I find it with a search). If you did such post, can you bring it up again, maybe with updates for the actual implementation of QE3 (as based on Woodford’s paper as opposed to NGDP targeting, etc.), or if you never wrote it, could you do so now? You are truly doing God’s work 🙂
18. September 2012 at 06:10
Sorry, here’s the link: http://www.theatlantic.com/business/archive/2012/09/where-the-fed-stands-on-monetary-policy/262426/
18. September 2012 at 06:29
Charles Evans is “optimistic”: http://blogs.wsj.com/economics/2012/09/18/feds-evans-fed-running-flat-out-with-accommodative/
18. September 2012 at 09:56
MF,
You really should get you own blog…
Anyway I noticed that a typical modus operandi of yours is to spout some nonsense, and when somebody comes up and refutes it, you respond to the refutation by saying “you have not refuted x or y!” And completely ignoring what that person says. Thats fine, but dont claim “you have not refuted x or y” We have. Dozens of times. You just refuse to listen. Its like the Republicans who keep repeating the zombie lie that 47 million Americans pay no income tax, as if income taxes were the only taxes there are.
SO… lets try this again.
On “real” saving versus money inflation.
I noticed that Austrians have this amusing tendency to assume that savings have to proceed investment and production, as if savings were some fixed lump. Its similar to the lump of labor fallacy. Savings can rise, (Both percentage wise and in total with rises in production income, and monetary inflation. ) The 1950’s were a time when America’s private sector was incredibly UNDER-leveraged and Saving was high, in the 10% range. Were those signals false? (Of course they were. The market is ALWAYS wrong, and weak if there is even the slightest hint of government involvement.. {thats sarcasm for you, in case u dont understand and say Ive acknowledged your point or soemthing})
On cash holders…
People have the right to save cash. I DO NOT AGREE with Keynes who said a literal tax on cash holding would solve AD problems. What cash holders do not have is a right to gain at the expense of the rest of the economy. Purchasing power is not an absolute entity! Its a jointly shared phenomenon! If I have three hundred dollars in my wallet, those pieces of paper are my property. But purchasing power involves an outside relationship between that $300 and say, groceries, or ipads,iphones computers or mall items. I haven’t bought those things yet, So how in God’s good name do I have a right to profit by demanding that the Fed not print the agreed upon consensus by all rational market particpants , thus forcing those sellers to lower their prices in an unstable way at a loss. there is no initiation of force, none whatsoever in the Fed printing more dollars, anymore than there is an initiation of force of a silver mine producing more silver. Yes there are legal tender laws (but remember, legal tender laws do not forbid other currencies, what they do is to mandate the settling of DEBTS in one currency) but the mechanics are the same.
“How do you know they werent just delaying and delaying and delaying hoping for a lower price?
They don’t have to delay if they are hoping for a lower price. If all they want is a lowest price, then they can sell it for whatever price the market will bear, including zero price.
I assume that what you meant to rhetorically ask in your miasma of stupidity, is how do I know that they weren’t delaying and hoping for a HIGHER price.”
I was talking about BUYERS my doltish friend! Buyers! You originally mentioned “consumer preferences” which I assumed meant buying, because a consumer qua consumer is a buyer. You do understand that deflation is a friend of buyers, dont you? Buyers postpone purchases until a floor has been reached, Surpluses develop because the price is not low enough, and they’re not so easy to get rid of!. after all, target, and dominicks and office max and home depot don’t conduct buyers auctions to get bids on their merchandise, so price discovery isn’t that easy. (And you wonder why I get angry, its like you’re deliberately ignorant)
“The fed is not supposed to respond to a signal a that prices fall durinng a productivity deflationary blast.
Not “supposed to” according to what?!?”
According to NGDP level targeting
They’re only supposed to respond in declines of nominal spending.
According to what? Your own false conception of what central bankers “should” do? Why should your “should” coercively overrule other people’s peaceful shoulds? Where in the hell did you acquire this privilege? Your ass or a hole in the ground?”
How about truth and reality MF. how about what closely approximates a free market in money production, which I support by the way.
And even if price levels were targeted, what is the essential differance between an increase of nominal wages by 11% with the price level at zero, and a zero increase in wages and a fall of the price level by 10%?
If the former is the result of inflation, then the essential difference is the distortion to the price system, and hence the hampering of economic calculation, and hence the sustainability of a given set of investment trajectories..
You were supposed to say zero. (Sigh) there is zero difference between an 11% increase in nominal wages and a 10% decrease in prices holding wages constant.
26. September 2012 at 06:14
Edward:
I noticed that Austrians have this amusing tendency to assume that savings have to proceed investment and production, as if savings were some fixed lump. Its similar to the lump of labor fallacy. Savings can rise, (Both percentage wise and in total with rises in production income, and monetary inflation. ) The 1950″²s were a time when America’s private sector was incredibly UNDER-leveraged and Saving was high, in the 10% range. Were those signals false? (Of course they were. The market is ALWAYS wrong, and weak if there is even the slightest hint of government involvement.. {thats sarcasm for you, in case u dont understand and say Ive acknowledged your point or soemthing})
The word is “precede”, and no, Austrians do not assume that savings is a FIXED lump sum, just that at any given time, savings is finite, and that the totality of investment plans made, are not capable of being completed given the quantity of savings available (which itself may change).
Savings do have to precede investment, because in order to make an investment, one cannot consume with those same resources.
During the 1950s, interest rates were not market driven, so yes, those signals were “false”, if “false” means “not in line with actual market actor preferences”
People have the right to save cash. I DO NOT AGREE with Keynes who said a literal tax on cash holding would solve AD problems. What cash holders do not have is a right to gain at the expense of the rest of the economy. Purchasing power is not an absolute entity! Its a jointly shared phenomenon! If I have three hundred dollars in my wallet, those pieces of paper are my property. But purchasing power involves an outside relationship between that $300 and say, groceries, or ipads,iphones computers or mall items. I haven’t bought those things yet, So how in God’s good name do I have a right to profit by demanding that the Fed not print the agreed upon consensus by all rational market particpants , thus forcing those sellers to lower their prices in an unstable way at a loss. there is no initiation of force, none whatsoever in the Fed printing more dollars, anymore than there is an initiation of force of a silver mine producing more silver. Yes there are legal tender laws (but remember, legal tender laws do not forbid other currencies, what they do is to mandate the settling of DEBTS in one currency) but the mechanics are the same.
Holding cash that has been earned does not derive benefits gained “at the expense of others.”
Inflation does not have a consesus agreement. Many people are against it.
You do understand that deflation is a friend of buyers, dont you? Buyers postpone purchases until a floor has been reached, Surpluses develop because the price is not low enough, and they’re not so easy to get rid of!.
This is false. Buyers do not necessarily wait until a price floor. Buyers buy electronics, and those prices keep decreasing.
How about truth and reality MF. how about what closely approximates a free market in money production, which I support by the way.
Productivity norm would approximate a free market even more than NGDP targeting.
And even if price levels were targeted, what is the essential differance between an increase of nominal wages by 11% with the price level at zero, and a zero increase in wages and a fall of the price level by 10%?
“If the former is the result of inflation, then the essential difference is the distortion to the price system, and hence the hampering of economic calculation, and hence the sustainability of a given set of investment trajectories..”
You were supposed to say zero. (Sigh) there is zero difference between an 11% increase in nominal wages and a 10% decrease in prices holding wages constant.
There is a difference that you are overlooking, and that is the affect on the structure of the economy.