Why macro stabilization policy rarely fixes problems

A big demand slump isn’t just an economic disaster; it’s also a prediction of an economic disaster. And that means it’s a prediction of policy failure.   At least that’s the implication of the Woodfordian view of macro (which I accept.)  Changes in current AD are mostly driven by changes in the future path of AD.  Changes in near-term NGDP are mostly driven by changes in expected NGDP 1, 2, 5 and 10 years out in the future.  Call it the term structure of NGDP.  And those are driven by the future expected path of monetary policy.

And of course whenever we have crashes like 1920-21, 1929-30, 1937-38, 2008-09, we also tend to have asset market crashes.  Asset markets aren’t perfect (1987) but when there’s a very big economic slump on the way they are pretty good at sniffing it out.

So here’s the problem for macro policy.  It’s good at preventing disasters, as we saw with the Great Moderation.  But when it fails, it’s really, really hard to fix the problem, because doing so requires policymakers to be more effective than the markets predict.  I won’t say that things are hopeless when markets predict disaster, but I wouldn’t put much hope on stabilization policy.  In the textbooks, the purpose of stabilization policy is to “fix problems.”  In reality it will usually fail at that.  Rather it’s good at preventing problems.  If you’ve got a problem, you’ve already failed.  Like the old joke—“if you are headed there, I wouldn’t start from here.”

I was reminded of all this while reading a Brad DeLong post that discusses a debate between Nick Rowe and Simon Wren-Lewis.  DeLong looks at the possibilities offered by monetary and fiscal stimulus when you have a “deficiency in demand.”

Let’s look at this from a different perspective.  The problem is not “demand deficiency” it’s expected demand deficiency.  Policymakers try to steer the nominal economy, they implicitly or explicitly target NGDP one or two years out in the future.  If 12 month forward expected NGDP is right on target, then no policy changes are needed.  And if 12 month forward NGDP is below target, then the markets have predicted policy will fail, and their forecast counts for far more than the views of any academic economist or government policymaker.  At that point, we really shouldn’t expect much from macro policy.  It’s likely to fail.  No wonder people are so pessimistic about monetary policy! Markets have observed the behavior of the relevant central bank (Fed, ECB, etc.) and come up with the optimal forecast of the result.  If there’s an expected demand shortfall, markets have already given a vote of no confidence to the policymaking apparatus.

From that perspective, DeLong is asking the wrong question.  It’s not, “how do we fix this problem?”  It’s, “how to we make it so that Brad DeLong and Simon Wren-Lewis never ask, ‘how do we fix this problem.'”  I see two ways, and only two ways of doing that.  Both methods involve abandoning the Keynesian policy of interest rate targeting.  Interest rate targeting doesn’t work at the very moment when good monetary policy is most essential—in a very deep demand slump. Would you buy a car that had a brake that failed just 1% of the time—only on twisty mountain roads with no guardrail? Then why do you (Keynesians) buy interest rate targeting as the appropriate policy instrument?

1.  One method would have the central bank peg the price of one year forward NGDP futures, and do OMOs until the market price is right on target.  Now you don’t have to worry about what to do if there is an expected demand deficiency, because there never is an expected demand deficiency.  At least not one expected by the market.  There may be a current demand deficiency, but if it isn’t expected to persist, then stabilization policy is right on target.

2.  Let’s say you don’t buy the “market” part of market monetarism.  You think markets are irrational.  “Better leave this to the wise mandarins who will control policy in the optimal fashion.” What then?  It’s very simple, you do what Lars Svensson suggested, you set the monetary instrument at a position where the central bank’s internal forecast is equal to the policy target.  But which instrument?  Recall that we have abandoned interest rate targeting.  Don’t ask me, I’m the NGDP futures market guy–ask the mandarins.  Anything with no zero bound.  It might be the monetary base, it might be the trade-weighted exchange rate, it might be the nominal price of zinc. There is an infinity of possible choices.  (Now do you see why I’d rather let the markets set policy?)

In his post, DeLong cites Wren-Lewis saying he’s heard the MM arguments, but doesn’t buy them. Then he goes on to conclusively show he has not heard the MM arguments, by using the metaphor of employing both a regular brake and an emergency brake in a car careening down a hill.  This metaphor is supposed to provide justification for using fiscal stimulus “just in case” to back up monetary stimulus.

But that won’t work if you have monetary offset.

In any case, monetary policy is a brake that never fails, and if it does fail you don’t end up crashing, you end up with the Bank of England owning the entire world.  A level of global domination that makes Victorian-era Britain seem like a 98 pound weakling by comparison.  Global GDP is around $100 trillion.  So Piketty would say that global wealth must be around $500 trillion.  Could the Brits live on 5% of that?  I think so.  But wait until the Scots secede, those ingrates don’t deserve any of it.

As Dylan said on his greatest album:

.  .  . there’s no success like failure . . .


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62 Responses to “Why macro stabilization policy rarely fixes problems”

  1. Gravatar of CMA (@CMAMonetary) CMA (@CMAMonetary)
    3. August 2014 at 05:54

    What makes ngdp futures targeting a market approach? Could the fed look at other indicators in the market to gauge ngdp expectations without creating an NGDP futures market? Cant the fed survey the market for ngdp expectations or is an ngdp futures market the best way to do this?

  2. Gravatar of Market Fiscalist Market Fiscalist
    3. August 2014 at 06:00

    “In any case, monetary policy is a brake that never fails”

    If I understand what DeLong is saying it is that there are in fact circumstances where monetary policy will fail to work. These are situation where deficient AD isn’t caused by an excessive demand for money relative to other goods, but where it is caused by excessive demand for safe assets generally, of which money is just one form. Monetary policy can convert other safe assets into money, but fiscal policy is needed to increase the total qty of safe assets.

    Do you accept the theoretical possibility of these “non-monetary” slumps ?

    (I don’t see how taking the long view with NGDP targeting can guarantee to avoid such scenarios , a sudden and unexpected exogenous demand shock could create a recession even in a perfect monetary regime).

  3. Gravatar of Ralph Musgrave Ralph Musgrave
    3. August 2014 at 06:16

    I agree with Scott’s claim that interest rate adjustments are a poor method of regulating economies. However I doubt anyone will be persuaded of that by Scott’s two sentence “twisty mountain road” analogy.

    I set out a more detailed case against interest rate adjustments here:

    http://ralphanomics.blogspot.co.uk/2012/03/sixteen-reasons-why-mmt-is-right-on.html

    Plus two bits of recent empirical research back the idea that interest adjustments are pretty ineffective:

    http://www.federalreserve.gov/pubs/feds/2014/201402/201402pap.pdf

    http://nakedkeynesianism.blogspot.co.uk/2014/02/investment-interest-rates-and.html

  4. Gravatar of benjamin cole benjamin cole
    3. August 2014 at 06:19

    Interesting and aggravating post.
    Still, I suspect if the Fed in 2009 announced $100 billion a month in QE and that it would ramp up by $10 billion a month until we hit “4+4”—that is four percent inflation and unemployment—we would have seen recovery pronto. Maybe shrink IOER too.
    But timid or extremist Fed officials were ever jibber-jabbering about inflation…

  5. Gravatar of Philippe Philippe
    3. August 2014 at 06:54

    “I suspect if the Fed in 2009 announced $100 billion a month in QE and that it would ramp up by $10 billion a month until we hit “4+4″³””that is four percent inflation and unemployment””we would have seen recovery pronto.”

    Why? Don’t MMs claim that QE will have little effect unless the increase in monetary base is expected to be ‘permanent’?

    In other words, expectation of future policy is supposedly more important than the amount of QE in the present.

  6. Gravatar of Don Geddis Don Geddis
    3. August 2014 at 10:18

    Philippe: “…ramp up $10B/mo until…” is “an expectation of future policy.”

  7. Gravatar of bill bill
    3. August 2014 at 10:35

    I’m leery of a private market for NGDP futures for this reason. I see a natural group for the side of the trade that gets paid if NGDP comes in under target. It’s like insurance. A bank could use a security that pays well if the economy is under-performing. But who is the natural seller of that insurance? It feels like we’re trying to find someone to play the role that AIG played in the CDS on MBS. Would it not be sufficient to announce, say a 5% NGDPLT and then the Fed could sell insurance for if NGDP 3 and 5 years out came in at rates of 4.5% compounded growth or less? And the Fed could conduct OMO whenever it notices a bulge in demand for the insurance?

  8. Gravatar of ssumner ssumner
    3. August 2014 at 11:23

    CMA, Markets are generally the best way to derive information.

    Market fiscalist, I don’t see how you could have an demand deficiency that is non-monetary, but you could certainly have a recession that is non-monetary.

    Bill, There is currently no NGDP futures market, which suggests there is very little interest in hedging NGDP risk.

  9. Gravatar of benjamin cole benjamin cole
    3. August 2014 at 16:16

    Philippe–Excellent point. The Fed should make clear it will never sell off its balance sheet.

  10. Gravatar of Major.Freedom Major.Freedom
    3. August 2014 at 17:36

    ssumner:

    “CMA, Markets are generally the best way to derive information.”

    There it is.

    Sometimes pointing guns at innocent people are a better way to “derive information”. What kind of information? Not the information of what they value in voluntary cooperation with others, for that requires a market process to reveal. The kind of information referred to is the information the government needs to hopefully maintain their power over project X for another paradigm-day.

    Incidentally, market predictions of NGDP in an NGDPLT world is information derived from pointing guns at innocent people. It is information important to central banks. MMs would have to say “generally”, and not “only”. Too bad it’s not only.

  11. Gravatar of Market Fiscalist Market Fiscalist
    3. August 2014 at 18:34

    “Market fiscalist, I don’t see how you could have an demand deficiency that is non-monetary”

    What about if people decide to spend less because they want to build up their savings in response to increased uncertainty, and as they build up their savings they plan to hold a higher % of it in bonds than before?

    In this case any attempt to use OMO to swap bonds for new money would fail to address the AD deficiency wouldn’t it ?

  12. Gravatar of CMA (@CMAMonetary) CMA (@CMAMonetary)
    3. August 2014 at 19:42

    “What about if people decide to spend less because they want to build up their savings in response to increased uncertainty, and as they build up their savings they plan to hold a higher % of it in bonds than before?”

    I think that’s part of the problem with asset purchases. People may want to hold higher savings in safe assets such as cash and bonds. The fed takes away a safe asset and replaces it with another when expanding MB. I think it would be better if they left the safe assets (treasuries) in the market and just expanded money as well. That way the fed provides the market with greater safe assets and people will spend a portion of the new money created.

  13. Gravatar of tesc tesc
    3. August 2014 at 22:19

    Market Fisc

    The FED would just anounce that it will buy all of planet earth until there is a 5% increase in MV = NGDP.

    People would use the money at some point because V is impossible to be zero. The FED just increases M that multiplied by any positive number V gives you the desired outcome.

  14. Gravatar of CMA CMA
    4. August 2014 at 00:26

    “The FED would just anounce that it will buy all of planet earth until there is a 5% increase in MV = NGDP.”

    Before the fed pursues a policy it should determine whether it is effective. The fed can generate growth without expanding the MB any faster than historically. Asset purchases are more questionable though.

  15. Gravatar of J.V. Dubois J.V. Dubois
    4. August 2014 at 01:44

    This is a very well put argument. And I think that deep down it is all about “unconventional monetary policy”. There seems to be a huge mismatch in all three words

    1) What is conventional? (interest rate targeting as opposed to anything else, difference between instrument and target

    2) What is “monetary”? (as opposed to fiscal)

    3) What is policy (as you put it here, should we be “fixing” or “preventing”

    If I would go to great lengths avoiding any of these word mines when explaining the best New Keynesian advice, it would be that they prefer that CB “reacts” to insufficient demand by lowering interest rates and at ZLB some government entity automatically starts fiscal stimulus. Let’s call this thing a “aggregate demand policy”

    I personally think that the most crucial point for MMers is the NGDP targeting. Let’s not engage New Keynesians on the fiscal policy front. Let’s talk to them why they oppose NGDP targeting and why they prefer inflation targeting. Let them focus on why they think interest rate targeting is “conventional” and why “unconventional” may never be tried. Or why Krugman and company actually sometimes even favor QE (which is clearly “unconventional” in their speak) but they were never heard to be favoring NGDP targeting.

  16. Gravatar of J.V. Dubois J.V. Dubois
    4. August 2014 at 01:51

    Or to put it in other words, New Keynesians are pretty active defending “conventional monetary policy” when we take into account that they basically says that it is helpless for many consecutive years. When ZLB hits (and it can be as soon as 1.5% interest rate level according to some) they should not care less what is happening.

    For them it should be no great concession to have a hybrid policy – let CB use interest rate instrument and when interest rates are too low by some measure let’s officially declare ZLB (and thus Monetary Policy is helpless and all that) and then just switch to NGDP targeting.

  17. Gravatar of Daniel Daniel
    4. August 2014 at 02:09

    JV,

    The way I see it, it’s a bit more complicated.

    Despite what some political operatives insist, humans are not born with a blank slate. Humans have innate ways they think of things.

    One of these things is money – humans instinctively consider their scarcity as something that cannot be overcome.

    That’s why Keynesianism is so appealing – because it operates under the assumption that you’re on a fixed exchange rate (or even on something of a gold standard).

    And indeed, under a gold standard, when interest rates and reserve requirements hit zero – monetary policy is powerless.

    Likewise, on the right, you have the gold-nuts.

    The same gut feeling, coupled with different temperaments, leads to vastly different policy recommendations.

    Meanwhile, the slightly autistic folks who rightly insist that fiat money means monetary policy ALWAYS works are treated like weirdos.

    Monetarism has to fight an uphill battle against what Scott referred to the other day as “atavistic urges”. Atavistic they are. They’re also very strong.

  18. Gravatar of Daniel Daniel
    4. August 2014 at 02:17

    Also, think of how the lessons of corporate governance are totally lost on public decision-making.

    It would be very simple – give the central bank a nominal objective and make their wages conditional on meeting said objective.

    Meet it ? Get paid a hefty sum at the end of year.

    Failure ? Contract terminated with no pay, banned from ever working for the central bank again.

    But no, we have morons like Richard Fisher who see inflation in every bush and academics who make excuses for failure while taking credit for accomplishments.

    People say one thing and do another. It’s human nature.

  19. Gravatar of Philippe Philippe
    4. August 2014 at 03:42

    Benjamin Cole/ Don Geddis,

    once inflation approaches the 4% target, the Fed would begin to raise the overnight interest rate, meaning that it would have to undo practically all of that QE.

    So, given that most of that QE would not be expected to be ‘permanent’, what purpose would it serve?

  20. Gravatar of Philippe Philippe
    4. August 2014 at 03:44

    Daniel,

    “That’s why Keynesianism is so appealing – because it operates under the assumption that you’re on a fixed exchange rate (or even on something of a gold standard).”

    Why do you think that’s the case?

  21. Gravatar of Daniel Daniel
    4. August 2014 at 04:05

    Ummm … because that’s the assumption behind Keynes’s “General Theory” ?

  22. Gravatar of ssumner ssumner
    4. August 2014 at 04:31

    Market Fiscalist, You asked:

    “For example, is sluggish lending weakening demand? Do the weak price developments reflect necessary adjustment processes in the crisis countries?”

    That doesn’t affect AD, if the Fed is targeting NGDP.

    JV, Yes Keynesians talk about “fixing” problems. They talk about what to do if (expected) demand growth falters. They don’t realize that if this happens the Fed caused it. The Fed doesn’t need to fix problems, it needs to stop causing them.

    Daniel, Back around 1999 I did a paper in Economic Inquiry arguing that Keynesianism was a gold standard model.

  23. Gravatar of Philippe Philippe
    4. August 2014 at 05:25

    so why did Keynes refer to the gold standard as a barbarous relic and advocate getting rid of it?

    https://www.youtube.com/watch?v=U1S9F3agsUA

  24. Gravatar of Market Fiscalist Market Fiscalist
    4. August 2014 at 05:46

    Take this scenario.

    I earn $1000 a year and I spend it all. I maintain savings of $10000 ($2000 in money and $8000 in bonds).

    Something happens that makes less confident about the future and I decide I need to increase my savings to $11,000 and to get there I will start saving $100 a year. I will keep the new savings in bonds.

    The CB is targeting me spending $1000 a year. Using monetary policy it starts to buy bonds off me. This will perhaps cause me to save less (because the lower interest rates will cause me adjust my inter-temporal plans), but if rates hit zero and I’m spending less than before we still have a recession. No amount of converting my assets into cash is going to make me spend more (as far as I can see). I will hold all my savings in cash and still not spend out of them.

    If however the govt uses fiscal policy to increase my income until I spend as much as before then this seems like a policy that can’t fail. I save out of this additional income and swap cash for bonds with the CB to get my optimal cash/bonds mix at current interest rates. When my confidence returns then fiscal policy can be used to adjust income to target the desired level of spending.

    What is wrong with above picture ?

  25. Gravatar of Daniel Daniel
    4. August 2014 at 06:06

    Keynes disliked the gold standard, but that doesn’t mean he was in favour of floating exchange rates. Quite the opposite.

    He was the architect behind the Bretton-Woods system, remember ?

  26. Gravatar of Philippe Philippe
    4. August 2014 at 06:30

    Keynes was in favour of a managed international exchange rate system with capital controls, but that doesn’t mean his analysis doesn’t apply to free-floating exchange rate systems.

  27. Gravatar of Philippe Philippe
    4. August 2014 at 06:35

    “He was the architect behind the Bretton-Woods system, remember?”

    Not exactly. His plan wasn’t adopted, though he did influence aspects of the plan that was adopted.

  28. Gravatar of Daniel Daniel
    4. August 2014 at 06:55

    Right, my bad.

    But no, his analysis doesn’t apply to floating exchange rates. For the very simple reason that under a floating exchange rate you can always devalue – therefore, you will never be in a “liquidity trap”.

  29. Gravatar of Philippe Philippe
    4. August 2014 at 07:16

    “under a floating exchange rate you can always devalue”

    you can devalue under a fixed exchange rate system. In fact the term ‘devaluation’ specifically refers to fixed exchange rate systems:

    “Devaluation: A deliberate downward adjustment to the value of a country’s currency, relative to another currency, group of currencies or standard. Devaluation is a monetary policy tool of countries that have a fixed exchange rate or semi-fixed exchange rate. It is often confused with depreciation, and is in contrast to revaluation.”
    http://www.investopedia.com/terms/d/devaluation.asp

    “‘Devaluation’ means official lowering of the value of a country’s currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency.”
    http://en.wikipedia.org/wiki/Devaluation

  30. Gravatar of Daniel Daniel
    4. August 2014 at 07:19

    You do know that you’re basically proving my point about the mental blocks regarding the alleged inability to overcome the scarcity of money, right ?

  31. Gravatar of Philippe Philippe
    4. August 2014 at 07:42

    Not sure. It seems you think the Fed should ‘devalue’ the dollar by committing to an NGDP target, which implies that the Fed will allow a higher than 2% rate of inflation in the future. But people like Krugman have also advocated a higher inflation target..

  32. Gravatar of Daniel Daniel
    4. August 2014 at 07:59

    I think the Fed should aim for something like 4% wage inflation.

    But people like Krugman have also advocated a higher inflation target..

    Keynesians say dumb crap – anything other than interest rate targeting is “unconventional”, and because it’s “unconventional”, we don’t know if it works.

    “We assume A in order to prove A”. How impressive.

  33. Gravatar of Major.Freedom Major.Freedom
    4. August 2014 at 08:50

    Daniel:

    “you’re basically proving my point about the mental blocks regarding the alleged inability to overcome the scarcity of money”

    That which is intended as a money could even serve as a money unless it were scarce. The “mental block” is the religion based prophecy of middle age mystics of which you subscribe that the end times, the final utopia for mankind, is one of material world transcendence and spiritual infinity.

    Economic scarcity is derived from the existence of practically unlimited human desires and wants in a world of finite material resources. Scarcity cannot be overcome as long as humans act.

    Money scarcity is ubiquitous. If that which is money were to cease being scarce, it would cease serving as a money.

    States monopolizing money through violence and being technically unconstrained in the amount of toilet paper notes it can print, or digital numbers it can enter into networked workstations and servers, does not and cannot overcome money scarcity. A rule of print money for oneself to whatever degree that will bring about 4% nominal aggregate wage growth, or 5% NGDPLT, all of these imply money remains scarce. For with those rules, there will likely always be people whose desire for more money exceeds their current ability to earn it. Virtually every individual would accept double the money income if offered, even though it will put wages or NGDP above the “rule” of money scarcity you want to have imposed on them by force. You want morons with guns to impose the rule of money scarcity by initiating force, rather than voluntary production and trade determining the rules of money scarcity.

  34. Gravatar of Daniel Daniel
    4. August 2014 at 09:05

    Go away, moron.

  35. Gravatar of Doug M Doug M
    4. August 2014 at 09:24

    Markets are unstable.

    This does not mean that they are irrational, or inefficient. But they are unpredictable and at times chaotic.

  36. Gravatar of Tom Brown Tom Brown
    4. August 2014 at 11:42

    Doug M,

    You write: “Markets are unstable. This does not mean that they are irrational, or inefficient. But they are unpredictable and at times chaotic.”:

    Perhaps it’s an illusion that human behavioral biases matter much in the end: a consequence of us being too close to the problem. Maybe we should instead consider a non-human-centric approach.

  37. Gravatar of Major.Freedom Major.Freedom
    4. August 2014 at 12:10

    Daniel:

    Money is a tool of economic calculation. If this tool is to change, then the only way anyone can know how it is to change, would be if money were subjected to free market forces, that is, priced in a free market.

    Declaring from your armchair that the money supply should grow to whatever extent that would make a particular class of income rise by a particular rate over a particular period of time, is you fumbling about in the dark because you just can’t admit that you don’t know how much money others are to have and you don’t know how much they should spend.

    Instead of being humble and honest with yourself, and admit that the only way you can know is by participating in the free market and watching what others do in a free market, you instead, much like your ideal money, with some ridiculously myopic and naive assessment of history, pull a number out of thin air and pretend it is some miracle gift nature hath revealed to you and your inner claque of like minded violence advocating ideologues. 4% wage growth? Why not 3%? Why not 5%? You have no rational answer for why any number should be picked and not 1 bps less or more. You only have what you hope others agree with you on faith, “My way for you and your life, or the highway. You are too stupid to know what is good for you. Deal with it.”

    That’s it, that is all your prattle on awkwardly pretending to appear intellectual boils down to. My way for you and your life, or else. There is no asking. There is no what do you prefer with your own life? You are so anti-social that the mere thought of this makes you cringe and recoil. If your life was treated so horribly by your guardians/parents, then who the hell is anyone to think themselves worthy enough for me to ask them what they prefer for themselves?

    At the very least, reading you and Philippe talk economics is providing me with lots of circus-like entertainment.

  38. Gravatar of Major.Freedom Major.Freedom
    4. August 2014 at 12:36

    Tom Brown:

    A non-human centric thought is an impossibility for humans. All human thought is human thought.

    Platonism sees ideal forms as the real reality, and individual humans and all material objects as “examples of” these ideal forms. Smith is imputing the notion of ideal forms on “macro” variables, and each individual “micro” concept to be subsidiary.

    His theory requires me to think I am something I am not, an alien. This is just whimsical posturing. Even if one tried to think like an alien, oje would still be thinking their own human conception of what an alien is.

    The final quoted comment in the article regarding stochastic processes, and indeterminancy, seems to be written by someone who does not know the difference between unpredictability of a process, and the inherent indeterminancy of that process.

    Itnis of course possible for a process to be completely non-random, such as me purposefully planning to go the store on certain days in the upcoming month, but still not be predictable from the perspective of an outside observer who was trying to model it by seeking out causal constants, e.g. when it rained he did not go to the store. I as the thing being observed can have a plan all mapped out, that when executed may look totally random to someone else. It isn’t random to me at all. Just because someone else lacks the superhuman ability to predict what I will do, does not mean I behave randomly. Everyone taken together? Same thing. We may have no way to predict how a macro variable will change, but that doesn’t mean everyone are acting randomly.

  39. Gravatar of Philippe Philippe
    4. August 2014 at 13:06

    “If this tool is to change, then the only way anyone can know how it is to change, would be if money were subjected to free market forces, that is, priced in a free market.”

    but money is ‘priced’ in markets.

  40. Gravatar of Major_Freedom Major_Freedom
    4. August 2014 at 14:06

    Philippe:

    “but money is ‘priced’ in markets.”

    I knew either you or Daniel would say that.

    Money priced in a free market is only one aspect. Money being produced in a free market is the key aspect. That is what “money being subjected to free market forces” really means. That process allows individuals to value the production of more versus less money, relative to other goods. State monopolies of money require more than just the cotton and linen the fed note dollar sums are printed on. They require all that is needed to sustain a monopoly in money, i.e. police forces, weaponry, etc.

    If it is economically viable for people to use a less costly money, or a more costly money, then we can learn this only through the market.

    Without money being subjected to market forces, nobody can know what the proper supply should be, nor what the proper spending should be, nor what price levels should be. Money production must be open to individual economic competition, not political competition, for us to know if people value more or less money relative to other goods.

  41. Gravatar of Major_Freedom Major_Freedom
    4. August 2014 at 14:07

    And not only in terms of quantity, but WHO should produce money, WHERE it should be produced, and by what means. Total supply is also but one aspect. A derivative aspect in fact.

  42. Gravatar of Tom Brown Tom Brown
    4. August 2014 at 14:52

    Major.Freedom, why don’t you address your concerns to Jason directly. He’s good about answering questions. (Jason, if you’re reading this, I apologize… I can’t help myself :D).

    And not only that he’s “projecting” readership parity with themoneyillusion by the end of 2015, so consider it a chance to influence an idea on the “ground floor” so to speak 😀

    But here’s a bit more on the central analogy he’s trying to get across:

    http://informationtransfereconomics.blogspot.com/2014/06/what-if-money-was-made-of-vinegar.html

    I found it interesting that the physics of water is not needed to use techniques related to the ones Jason is using to accurately describe the Earth’s water cycle. In a similar manner, how can we say ahead of time that the “physics” of individual human decision making has any bearing on the measurable parameters of a huge ensemble of humans?

    Here’s a bit more on the philosophy of the technique Jason is applying:

    http://informationtransfereconomics.blogspot.com/2014/07/information-transfer-is-state-of-mind.html

    And how the underlying theory has been used for several different problems in the sciences:

    http://arxiv.org/abs/0905.0610

    I’m personally intrigued by this non-reductionist “emergent” view of macro scale behavior. The 19th century statistical mechanics advocates (like Boltzman), who knew almost nothing about molecules, were still able to use statistical mechanics to explain the relationships between pressure, volume and temperature of a large ensemble of molecules in a human scale container of gas. Maybe we’re fooled by our gut reaction into thinking individual human behavior is important for describing the macro economy. Remember a single molecule doesn’t have a “pressure” for example: that’s strictly a macroscopic “emergent” variable of a large collection of them.

    I ascribe no special physical significance to individual human decision making, which would somehow put it outside the realm of normal scientific investigation. Perhaps it’s not important whether or not individual human behavior is truly random or not: only that it can be usefully described as such on the macro scale. From a reductionist’s point of view, human decisions are just a chemical reaction like any other. Intractable perhaps, but that’s why the information transfer model is potentially so useful: with it you can still build a useful model of ensemble behavior w/o having to model the behavior of individuals.

  43. Gravatar of Philippe Philippe
    4. August 2014 at 15:08

    “They require all that is needed to sustain a monopoly in money, i.e. police forces, weaponry, etc.”

    A typically stupid comment. Police forces exist to enforce the law. Weapons exist for the various obvious reasons they exist.

    Your comment is the usual circular argument that ancapistan is necessarily the best of all possible worlds, simply because you have defined it as such. You simply rule out the possibility that ancapistan could be shit or suboptimal in any way. You define that possibility out of existence.

    Of course you’re not just talking about ‘free markets’ in the normal sense of the term, you are talking about a totally different political and social system which only exists inside your head. You keep telling us how things actually work in this imaginary world of yours, which indicates that you are a fantasist who doesn’t know how to distinguish between the real world and your imagination.

    Anyway, so long as the state exists there will be ‘state money’ in one form or another, i.e. the legally recognised money which can be used for public and private debts.

    Of course ancapistan is really a type of state, it’s just your fantasy state where people like you make the rules.

  44. Gravatar of Lorenzo from Oz Lorenzo from Oz
    4. August 2014 at 15:17

    Scott, this is why you should keep blogging. Because someone clever posts something and your response beautifully crystallises the response that makes things clear.

    (I am also feeling good about this post as it is further and better particulars about my brief response to DeLong’s piece.)
    https://www.themoneyillusion.com/?p=27205#comment-360025

    This is a “keeper” post, that folk should be directed to as explaining a key point/perspective.

  45. Gravatar of Doug M Doug M
    4. August 2014 at 17:32

    “Maybe we should instead consider a non-human-centric approach.”

    Are you suggesting that humanity obeys the laws of gasses?

    Actually, I am okay with that… gasses exhibit chaotic behavior… just look at the weather.

    Which means that psychohistory is bunk.

  46. Gravatar of Larry Larry
    4. August 2014 at 17:36

    “But when it fails, it’s really, really hard to fix the problem, because doing so requires policymakers to be more effective than the markets predict. I won’t say that things are hopeless when markets predict disaster, but I wouldn’t put much hope on stabilization policy.”

    This seems quite fatalistic. So if the monetary authority blows it there is nothing to be done? Does this pessimism apply to both monetary and fiscal policy?

  47. Gravatar of Major_Freedom Major_Freedom
    4. August 2014 at 17:59

    Philippe:

    “Police forces exist to enforce the law. Weapons exist for the various obvious reasons they exist.”

    It is also needed to enforce the federal reserve monopoly.

    “Your comment is the usual circular argument that ancapistan is necessarily the best of all possible worlds, simply because you have defined it as such.”

    That isn’t the argument I made about the information needed to know how much money there should be, who should make it, where, and using what means. Your comment here is just the same old tired worn out prattle that I have already refuted a thousand times over.

    Once again, no, I do not merely “define” non-violence and respect for private property rights as the best. It is what ENABLES individuals to do what they want without being infringed upon by others. It allows the individual to “define” what is best for them, according to their values, their desires, their self-determination. If you want to use toilet paper for money, then you should be free to use it. Just don’t impose it on others against their will through the myriad of coercive measures that maintains the dollar monopoly.

    Every time you bring up that silly “circular, you’re just defining, blah blah blah” mantra, it proves that you don’t know how to give any substantive rebuttal. Just look at what you wrote. I made an argument about information, and what is needed to provide such information, and you fall back on “You think peace is the best because you’ve defined it the best.”

    “You simply rule out the possibility that ancapistan could be shit or suboptimal in any way.”

    You simply rule out that the only way respect for private property rights can be “shit”, is if it is shit for those who refuse to live peacefully. It is not shit at all for those who don’t want overlords telling them what to do with their own property.

    “You define that possibility out of existence.”

    You define the counter possibility out of existence.

    “Of course you’re not just talking about ‘free markets’ in the normal sense of the term, you are talking about a totally different political and social system which only exists inside your head.”

    The normal sense of the term? Oh yay, now you fall back on semantics once again. You lost again.

    “You keep telling us how things actually work in this imaginary world of yours, which indicates that you are a fantasist who doesn’t know how to distinguish between the real world and your imagination.”

    I keep telling you how the real world works, but you don’t want to think about it. You’d rather live in this fantasy land where government knows more than it can, where government pointing guns at innocent people makes the world a better place, where socialist money can someday work, if only the right people were in charge with the right absolutist rule.

    You are a fantasist who refuses to accept the reality of our monetary system, what it lacks, and what you think you know about it.

    “Anyway, so long as the state exists there will be ‘state money’ in one form or another, i.e. the legally recognised money which can be used for public and private debts.”

    False. States can “legally recognize” the one or two monies that arise in a free market as legal tender. Legally recognizing a free market money to steal is not the same thing as imposing a monopoly fiat currency and demanding people pay taxes in it even though they did not arise in a free market.

    Of course ancapistan is really a type of state, it’s just your fantasy state where people like you make the rules.

  48. Gravatar of Major_Freedom Major_Freedom
    4. August 2014 at 18:24

    Tom Brown:

    “why don’t you address your concerns to Jason directly. He’s good about answering questions.”

    Perhaps I will.

    “I ascribe no special physical significance to individual human decision making, which would somehow put it outside the realm of normal scientific investigation.”

    What about the science of sciences? If “normal scientific investigation” is to be grounded on reality, then there has to be a connection between reality and the normal science itself. Normal science cannot prove the truth of normal science.

    Incidentally, both myself and every other scientist, not all of us cognizant of it, “ascribes special significance to individual human decision making, that puts it outside the realm of the normal sciences.”

    For example, when a scientist uses the normal scientific procedure of hypothesis, observation, test, falsify/confirm, they are ascribing a different ontology to what they are seeking to learn about, in comparison to themselves: For the subject matter they are “testing” their hypotheses against, they are seeking out a regularity in the connection between A, the hypothesis, and B, the observation. The intent is to find regularities in nature, so that if A occurs, they will know that B will occur. Yet for themselves, which is what the science of sciences deals with, they are presupposing a different, indeed opposite ontology. The method of hypothesis testing requires the researcher’s own knowledge to NOT be logically constrained in that way. It presupposes knowledge as being unpredictable and subject to change. If the human mind were ever actually understood in the same way as that which is observed, consciousness would cease to exist. It would be humans assimilating the objective world until there is nothing left but reality knowing itself and nothing else. But the normal scientific procedure requires reality to be split into the object and the subject. As long as this is the case, all science will require understanding “external reality” differently from the “internal reality”. If you sense roughness, it is only because there is a smoothness to you. If you sense a constancy in relations, i.e. E=mc^2, it is only because there is a non-constancy to you. If you sense predictability in nature, it is only because there is an unpredictability to you. If you sense something not you, it is only because there is a you.

  49. Gravatar of ssumner ssumner
    4. August 2014 at 18:37

    Philippe, He favored a flexible gold standard, something like Bretton Woods. Don’t forget that Keynes also said fiat money would be worse than even a rigid gold standard. So he hated fiat money.

    Market Fiscalist, You are thinking in terms of real spending, but the Fed controls nominal spending. You need to think about how monetary policy affects nominal spending.

    Also, don’t forget that “spending” isn’t C, it’s C+S=Y.

    Thanks Lorenzo.

    Larry, No, something most certainly can be done. What makes me pessimistic is that the markets are predicting that the something that can be done, won’t be done (monetary or fiscal). The markets predict insurmountable political obstacles.

  50. Gravatar of Philippe Philippe
    5. August 2014 at 03:09

    Scott,

    Keynes’ proposed system was the bancor, managed by an international clearing union. This was quite different to Bretton Woods in a number of ways. Bancor was a ‘fiat’ currency, though the system was based on fixed and adjustable exchange rates rather than free-floating exchange rates.

    “Keynes also said fiat money would be worse than even a rigid gold standard”

    By ‘fiat money’ do you mean floating exchange rates?

  51. Gravatar of Daniel Daniel
    5. August 2014 at 04:06

    Philippe

    How about you stop contradicting yourself ?

    Keynes didn’t like floating exchange rates. And the wrote his “General Theory” with that in mind.

    Keynesian models assume you have fixed exchange rates. So they love their validity under a floating exchange regime.

    Stop weaseling and admit the obvious.

    Keynesianism appeals to some people because of their mental blocks regarding money and their hunter-gatherer egalitarian values.

    Austrianism appeals to other people because of their mental blocks regarding money and their farmer-like fear-driven values.

  52. Gravatar of Philippe Philippe
    5. August 2014 at 04:33

    “How about you stop contradicting yourself ?”

    How have I contradicted myself?

    “Keynes didn’t like floating exchange rates”

    I know.

    “Keynesian models assume you have fixed exchange rates”

    Which ones?

    “Keynesianism appeals to some people because of their mental blocks regarding money”

    Most Keynesian economists who disagree with monetarists would give you reasons for their disagreement. You might disagree with their reasons, but simply saying they have a ‘mental block’ doesn’t achieve much other than maybe making you feel better.

  53. Gravatar of Daniel Daniel
    5. August 2014 at 04:46

    Believe me, I know the arguments Keynesians give. And they’re mental blocks, pure and simple.

  54. Gravatar of ssumner ssumner
    5. August 2014 at 05:03

    Philippe, It was not exactly like Bretton Woods, but it was in the same ballpark. In any case Keynes said fiat money regimes were the worst possible monetary regime. That point is clear. My 1999 Economic Inquiry paper discusses Keynes’s views on unconstrained fiat money, if you are interested.

    A fiat currency with a fixed exchange rate to the gold backed dollar is effectively a gold backed currency.

  55. Gravatar of Philippe Philippe
    5. August 2014 at 05:58

    Scott,

    can I read your paper online?

  56. Gravatar of Philippe Philippe
    5. August 2014 at 06:17

    “Keynes said fiat money regimes were the worst possible monetary regime”

    where does he say that?

    “A fiat currency with a fixed exchange rate to the gold backed dollar is effectively a gold backed currency.”

    Only central banks were able to convert dollars to gold under the Bretton Woods system though. The gold-backed dollar system was actually the design proposed by the US and Harry Dexter White, not Keynes.

  57. Gravatar of Don Geddis Don Geddis
    5. August 2014 at 11:53

    MF/M.F/Geoff: “4% wage growth? Why not 3%? Why not 5%? You have no rational answer for why any number should be picked and not 1 bps less or more.”

    I know you’re only here to leech off the visitors that Sumner’s brilliant insights bring to this site, and attempt to shout over intelligent commentary with your same repetitive tired lectures in huge walls of text.

    But really, after all this time, all the words you’ve typed, all these years. You haven’t bothered to actually understand what Sumner is proposing? Do you even read the posts at all? Or are you really just a write-only device?

    The proposal is to have a predictable annual growth in NGDP (with level targeting to correct for errors). What’s important is to pick SOME number, and then stick with it. The actual number chosen hardly matters at all. Surprisingly, you’re actually correct that there are only weak reasons to choose between 3%/4%/5%. (Well, you actually said “no rational answer”, so I guess you’re wrong about that too. There are some weak hints that would favor some numbers over others.)

    It’s amusing that you attempt to mock a claim that Market Monetarists don’t actually make. Do you think you might be able to spend 1/10th (or even 1/100th) of the effort you spend lecturing us, on actually trying to understand what Sumner is saying? At least then your incoherent ramblings would be just ever so slightly more on target.

  58. Gravatar of Maurizio Maurizio
    5. August 2014 at 12:19

    when macro policy fails, it is very hard to fix the problem, because doing so requires policymakers to be more effective than the market predicts.

    But according to MM, policymakers have the power to _change_ the market predictions as they like. Just do OMOs until the market predicts what they want it to predict (about NGDP)! But then, I don’t see why is should be hard for them to fix a problem, even if in the past they made a policy mistake.

  59. Gravatar of Major.Freedom Major.Freedom
    5. August 2014 at 13:56

    Don Geddis:

    It would help your case if you refrained from prefacing your posts with hypocritical and inaccurate antagonism.

    Regarding “leeching”, what does that even mean? To me a leech is someone who takes what belongs to others. A slug like animal sucking blood from a host, for example. Yet if you had bothered to understand anything I wrote, the same way you tell me I should understand what Sumner writes (which I do, we’ll get to that in a minute), then you would have known that I am an anti-leech. A leech fighter, if you will. I even advocate for you to not be leeched off of by force and coercion, even though you said on this blog you would welcome me being shot. In life, you advocate for some (government and politically connected bankers) to leech off of others through political, as opposed to just petty street, force and coercion. You want what belongs to homesteaders to be leeched from them. I point that out all the time. I won’t stop as long as others don’t stop trying to increase leeching. You are not going to win the argument because you don’t even have an argument. You only have threats of initiating gun violence covered up with contradictory gobbledygook and hand waving hoping that people get brainwashed into conceding,and if they don’t, then the guns really will come out and your overlords will force the issue against people’s persons and property.

    So let’s make this clear. I am someone who, contrary to you, actually has an argument, and the only way you can disagree with me, in practise, would be for you to actually do what you only internet tough guy prattle on about here: you will have to initiate violence against my person or property.

    You are a leech in waiting. I am anti-leech.

    Regarding your claim that I don’t understand Sumner’s proposal, I know and understand more than you about what he proposes. In fact, if we go by what is written, I can tell you that I understand what he’s proposing more than he does.

    Yes, the proposal is to pick SOME number for NGDP. That is NGDPLT 101. But that does not answer the question. Picking SOME number doesn’t tell us which number to pick. You say the number picked “hardly matters at all”, but that is only an ex post rationalization for you not having any rational reason to “pick” one number over another.

    You claim there are “weak hints” of which number is “right” which suggests there is a rational reason to pick one or some over others. But this is data mining and flawed reasoning from history. The flaw is the assumption that history must repeat, that if something occurred in the past, it is therefore rational. You are begging the question. You are saying we should “pick” a number based on history, and you tacitly assume history has been rational. But the history you are trying to repeat, is itself a result of the very issues you claim to be solving with picking “a” number and sticking with it. You have absolutely no clue whether picking a number and sticking to it will have catastrophic consequences in the long run. Reasoning from history is even worse than reasoning from a price change, in the framework of knowledge and actions. You are prejudicially imputing assumptions from physics and chemistry, into a social science. Geez Louise, like what century are you from? Where is your understanding of the science of sciences? Of thr history of philosophical thought? Of the the influences into economic thought? What do you have? A historical chart that shows a correlation between NGDP and employment, and you think you have done your due diligence to believe that your preferred rule can be, and shoild be, forced on society and will affect millions of people you have never even met? You’re mad!

    You then claim to be “amused” that I allegedly “mock a claim that Market Monetarists don’t actually make.” Yet you make no mention of it. You then say my arguments are “incoherent”, which makes no sense at all because if they were incoherent, you could not claim to know that what I say is wrong. You’re just spewing vitriol.

    Is there anyone who actually understands what Geddis clearly doesn’t? Anyone? Or are the lapdogs the holders of the intellectual fort?

  60. Gravatar of Major_Freedom Major_Freedom
    5. August 2014 at 15:59

    I’m looking for a better answer than “We purposefully ignore any rational explanation for why a particular number is chosen, and ridicule anyone who inquires as to why that number is chosen and not another.”

    Maybe this “what NGDP number is chosen hardly matters at all” has just been lazily adopted from past “just pick a price inflation number and stick with it” status quo. No rational explanation for picking a CPI number, so why would NGDP be any different? Let’s ride this train of ignorance as far as it goes.

  61. Gravatar of am am
    6. August 2014 at 07:38

    The Scots will not secede from the Union, according to current polls. Yes(secede) is at 46 per cent and No(stay in) is at 54 per cent. Six weeks remain until the actual vote so things can still change. But the idea abroad that the independence move is a shoe in is just not accurate. Last night, in the first TV debate, the main speaker for the yes vote, Alex Salmond, was booed by the TV audience, when he couldn’t answer the question on the currency.

  62. Gravatar of ssumner ssumner
    6. August 2014 at 09:48

    Philippe, What matters is the free market price of gold, which was $35/oz. until April 1968.

    This is a link to the paper, I think you have to pay.

    http://econpapers.repec.org/article/oupecinqu/v_3a37_3ay_3a1999_3ai_3a3_3ap_3a527-40.htm

    Maurizio, See my newer post on the distinction between being technically easy and politically difficult.

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