More middle of the night blogging.
My economics is classical. The almost perfect overlay of my own book can be found in a series of notes taken by Nicholas Kaldor at the LSE in 1927-29 from lectures delivered by the great American economist, Allyn Young. These notes were only published around a decade ago but are themselves a near perfect reflection of the economics of Young’s own time. This publication also includes Young’s entries for the Encyclopedia Britannica which he did in the 1920s. This was discussed in an earlier post.
Austrian economics was one of the main branches of classical theory. Young would have been a colleague of Hayek’s at the LSE and no doubt had very pleasant chats about various matters. But for historical reasons of longevity, perhaps – Young dies in 1929 while Hayek lives on until 1992, writing the brilliant Road to Serfdom along the way – the result is that the counter to Keynesian economics is the Austrian version of classical theory which in 1936 was part of a much broader tradition almost all of which we now ignore.
I have met on this trip many of the most important Austrian economists in the world. And I and they both being from the classical tradition, there is a very strong overlap in our respective views. But our views are not the same. To some degree it is emphasis but on some matters it is not.
And one area in particular where it is not is in relation to central banks, and the significance of the American Federal Reserve in particular. Not all recessions are caused by bad monetary policies nor are the all caused by the Federal Reserve in the United States. The Asian Financial Crisis, to take just one example, had origins quite distant from Fed policy as such.
When I look at things, I look at the role of government policy in general in misdirecting economic activity. I further agree that monetary policies are often disastrous. But I don’t stop there. I especially do not think all recessions necessarily even begin in government economic policy, with the oil boycotts of the 1970s an obvious case in point.
Fiscal policy and government misdirection of resources remains for me the central issue. The Japanese “ten lost years” (now twenty and counting) were lost not because of poorly designed monetary policies, although they no doubt contributed. The prolonged and on-going recession was a product of fiscal policy and deficit spending. Every economy had a recession 1991-92 – and they were caused by monetary policy – but it was only the Japanese who never recovered for reasons almost entirely unrelated to central bank policy in either America or Japan.
Update: A bit more reading and I come across this. No name, but while I think extreme, it is representative of some of what I read:
Although Greenspan lamented ‘irrational exuberance,’ his Federal Reserve provided a broad basis for irrationality: liquidity. In one dip in the financial markets after another – from the Asian crisis, to the Long Term Capital Management (LTCM) bankruptcy, to the Russian and Argentinian defaults, to the imaginary Y2K glitch, to 9/11 – Greenspan’s central bank lowered the interest rate and opened the floodgates of the money supply. As a result, financial markets moved from one bubble to the next. Prudence vanished in favor of a mentality to ‘go for it,’ and soon financial markets discovered the largest bubble of all, the real estate market.
Now he may not be saying that all of these foreign events in Asia, Russia or Argentina were caused by the Fed but that they were an excuse for loose policy in the US. That may well be true. But either such recessions were not caused by the Fed and therefore the base thesis falls, or he thinks they were which would be absurd.
And even with the real estate market, the result was driven by Congressional legislation, and were it not for the CDOs which were issued by American banks and not the Fed, the contagion would have been much less than it was.
Recessions are caused by a failure of coordination that comes in many varieties only some of which are caused by poor monetary policies at the American Federal Reserve.
No one would say that the US Fed is somehow responsible for every recession that has ever happened in any country. And, of course, real shocks can and do cause recessions. But faulty monetary policy – such as what you seem to advocate – can cause recessions and make bad recessions worse.
Most countries embarked on large fiscal stimulus programmes in the early 1990s, including Australia. Japan was different because Japan experienced deflation. This increased the level of real debt and prevented the necessary adjustments from being made to relative prices. Every time the Japanese economy has shown the slightest signs of life thanks to QE (1999, 2005), the BoJ has stamped it out with a tightening of monetary policy. Chronic deficit spending has left Japan with a mountain of debt for not much in return, but it did not cause 20 years of stagnation.
Sleetmute
10 Feb 12 at 11:22 pm
thanks for the reminder on Young. his name crops up in all the important places.
Jim Rose
10 Feb 12 at 11:27 pm
Steve, you are one complex character. Always – ALWAYS – making me think…interwar business cycle theory is so rich…goddamn Keynes made the profession discard it!
Skuter
11 Feb 12 at 12:08 am
Steve
Japan had a massive credit bubble and the private sector has been deleveraging ever since.
Credit booms lay the ground work for financial crisis. Credit booms ar invariably the result of easy money.
sdfc
11 Feb 12 at 12:08 am
What was the reason for the push for the return to the gold standard at that classical time then (20′s)? Before the Fed it was the BoE causing recessions wasn’t it? I thought that the Brits blamed the depression on the Yanks and their new fangled ways of raising and securing loans while not controlling the exchange rate.
Simon
11 Feb 12 at 12:53 am
sdfc is correct. Japan experienced a balance sheet recession.
If you look at figures 1 , 4 & 5 in this paper you will see the largest fiscal actions were actually contractionary fiscal policy.
So although fiscal policy was the problem it was contractionary fiscal policy not fiscal stimulus that was the culprit. highly ironic
Japan had three recessions in the 90s and this is the reason for its budget deficits.
Recessions and lack of sustained growth has that effect on budgets!
Japan hasn’t had two lost decades. You do realise the period of growth in the 2000s was the longest period of sustained growth since the war!
It gets rather boring demolishing these myths.
The one big thing we have learnt from the GFC is that systematic risk is a much much larger problem than moral hazard.
Read Too Big to Fail if you do not believe that
On your Marx
11 Feb 12 at 11:38 am
Homer,
Shut up, stay on topic, stop peddling the myth that the Japs have never had it so good. They have a generation whom job opportunities, payrises and affordable housing is non-existent.
But this could have been avoided if they spent more money. Which just happens to be the ALP’s current policy.
Just shut up and stay on topic you myopic clown.
.
11 Feb 12 at 11:42 am
You have the wrong person and it is not surprising that you have no facts on your side mere assetions.
On the other hand I have shown the myths to be totally untrue. This is particulary easy if one observes the Japanese GDP figures and their budger figures.
When you have some facts I will be happy to read them.
I did NOT say the Japs have never had it so good.
On your Marx
11 Feb 12 at 12:01 pm
Yes Homer I’m sure job opportunities and asset prices are all evident in the “budger” figures.
.
11 Feb 12 at 12:03 pm
it is good to see you can admit to being wrong and being on the wrong topic.
It is highly ironic that people here simply do not wish to look at evidence.
As I have shown and John Quiggin has written, the authors must have known the problems that emanated from the A7 A paper.
It should have given them some thought that Perotti who was a co-author with one of the A’s, has written a paper for the BIS showing A&A’s conclusions are wrong ,badly wrong.
Is there anyone who wishes to debate why and how A&A got it so wrong.
It appears not. The IMF and BIS papers have never existed.
On your Marx
11 Feb 12 at 2:43 pm
I am an overinvestment guy, but I believe that both monetary and non-monetary factors can lead to such a state…basically a mix of German, Swedish and Austrian economics. All based on a Wicksellian framework, but with differing explanations for deviations between natural and market rates. For me, the real debate is whether elastic money/credit supply is an active or passive factor in driving production imbalances…
Skuter
11 Feb 12 at 10:01 pm
http://www.cobdencentre.org/2012/02/digression-on-keynes/
Steve, slightly OT but I thought you’d appreciate this rather eloquent exposition and defence of Say’s law…
Skuter
11 Feb 12 at 10:06 pm
The established doctrine in the 20s and early 30s was liquidation, hence little was done to prevent the crisis. That proved a disaster.
sdfc
12 Feb 12 at 12:53 am
SDFC
Stop being an idiot.
There’s no free lunch. If there needs to be a drop in the living standard you can’t defy the laws of economic physics. You either take it through a liquidation or you take it through inflation.
Prior to the FDR scourge economies were far more flexible whereas we aren’t now, which suggests the hit needs to be taken through inflation.
However the most efficient way to take the take has always and will always be through liquidation.
JC
12 Feb 12 at 1:03 am
Reary, Marx. So bond holders should always be protected like they were during the GFC?
Do go on… and no footnote readings please.
JC
12 Feb 12 at 1:07 am
Liquidation means higher unemployment and greater lost output. It’s crankery.
sdfc
12 Feb 12 at 1:13 am
That’s the reason for the dole.
Look SDFC, there are no free lunches, as I said, which you seem to want to ignore.
Liquidation events, if left alone are always quick and the return is sharp as we witnessed in he early 80′s. More importantly the long term arrow always keeps pointing up instead of this dog’s vomit we have now in the West.
If had the same thing it would be two years of hardship in Europe and the economy would come back stronger and meaner than ever.
Of course the central bank could help.
Shifting money around to plug holes will not work. It prolongs the agony and sets the economy into a low growth phase for an extended period of time.
Short, sharp and always have the long term arrow pointing up.
JC
12 Feb 12 at 1:28 am
“They have a generation whom job opportunities, payrises and affordable housing is non-existent.”
Unemployment in Japan is 4.6%. I don’t know where you get your figures on payrises, can’t comment. Japanese house prices have dropped 50% in the last 20 years, while wages have dropped 10%.
I think you need to look at the figures more closely, Punctuation Mark.
Jarrah
12 Feb 12 at 1:32 am
JC
Debt changes the dynamic. Falling income reduces the ablity of the private sector to meet pre-existing financial obligations.
sdfc
12 Feb 12 at 1:36 am
Jazza
At face value Japan looks fine. Unemployment is half that of the US and if you take into account deflation along with their extremely strong currency things look okay.
One fucking problem. Their debt is 230% of GDP and it is unsustainable.
Let’s not be under any illusions. Japan or the Japanese people chose deflation as a policy choice. However it’s an old persons policy choice and does not offer the young any future.
The oldersters are basically protecting their net worth, allowing their governments to borrow in order to fund their services at the expense of the young.
The economy is long term fucked big time. The best scenario is that they keep dropping off the per capita league tables relative to everyone else and in 30 odd years, someone will write a few paras on the demise of Japan.
The worst case and the most likely although unpredictable is that their domestic capital markets finally decide not to lend the government any money and they then have two choices. These are.. haircut the capital value of the debt, or the place goes into hyperinflation. I think they eventually go into hyperinflation as the pension fund finally turned into a net bond seller early last year.
look at the numbers. Japan can only afford bond rates at 1 to 2% max. If their bond rates go to 4% they are fucked.
JC
12 Feb 12 at 1:44 am
Let’s not be under any illusions. Japan or the Japanese people chose deflation as a policy choice.
That is the biggest load of bullshit. They’ve got zero population growth and massive private sector debt outstanding.
sdfc
12 Feb 12 at 1:47 am
Always does, Anabel.
So you always choose inflation as the exit. The only problem is that it’s distorting to the capital structure of the economy as it mis-allocates resources setting up the next bust and causing the long term arrow to drop.
I don’t understand why you’re so worried about bankruptcies, SDFC. If a business is good someone will buy it on the cheap and the thing becomes more sustainable under better quality management.
Don’t be scared.
JC
12 Feb 12 at 1:49 am
Oh.
Anabel, Japan has a high savings rate and until recently enjoyed a trade surplus which be definition means they have a capital account deficit. In other words the rate of return is inadequate in Japan as Japanese at the margin chased higher returns overseas.
It’s the government that has a massive debt problem, not the private sector any longer, you idiot.
Stop talking shit.
JC
12 Feb 12 at 1:53 am
Inflation is the most efficient method of reducing the real value of the debt Mary (should we really be calling each other girls names like a couple of old queens?).
Delation simply costs too much in terms of lost output.
The private sector has been deleveraging for around 20 years but still has historically high levels of debt. Deflation means that NGDP has been pretty stagnant over the last two decades. It is no advertisement for deflation.
sdfc
12 Feb 12 at 1:56 am
“One fucking problem. Their debt is 230% of GDP and it is unsustainable.”
Yes. But PM didn’t mention that, did he? Apparently the problems – according to him – are elsewhere.
“The economy is long term fucked big time. ”
I happen to agree. Unless our modelling of economies is flawed, Japan is setting itself up for tremendous problems in the medium to long term. But you have no beef with mathematical modelling into the future, do you?.. Do you?
Jarrah
12 Feb 12 at 1:59 am
“(should we really be calling each other girls names like a couple of old queens?)”
JC is a classic bully, and makes school-yard fun with names as a first resort. It’s symptomatic of his insecurity and suppressed inadequacies. It’s not fair to make fun of them.
Jarrah
12 Feb 12 at 2:02 am
Real rates on JGBs are higher than those on bunds, treasuries or gilts.
sdfc
12 Feb 12 at 2:03 am
I’m happily hetro, SDFC, dunno about you.
Inflation is not the most efficient way out. see above the reasons why. However in the current environment it’s probably the best way out.
tell me. a flat screen TV in the early 90′s cost around $40,000 vs 1,000 bucks today. Who is being being hurt? Who is benefiting?
the private sector is in net surplus you dumbo. Stop it with the bullshit.
As i said the Central bank’s job is to ensure NGDP doesn’t collapse like it did in Japan and the US (for a short period of time). It doesn’t have to create high levels of inflation in order to raise NGDP higher.
Unless of course you’re telling us the CB cannot influence NGDP and therefore AD. Are you?
JC
12 Feb 12 at 2:04 am
Really Jarrah. I thought he was trying to crack on to me. I was trying to think of the most delicate way of letting him know I’m straight.
sdfc
12 Feb 12 at 2:05 am
lol. I’m offended and chagrined. I’ve never been spoken to like that before. Is it new age babble you’ve been learning and that house of horrors?
Please, stop the new age psychobabble stuff as it throws me off a little.
JC
12 Feb 12 at 2:07 am
I have to give you reasons why inflationist policies are the most efficient method of recovering from a financial crisis? Fuck me, I thought a preference for rising income over falling income was obvious.
sdfc
12 Feb 12 at 2:08 am
That’s a pretty disturbing comment, Horace. I’d expect that sort of crap from Mrs. Steve, but not you.
JC
12 Feb 12 at 2:09 am
“I’m offended and chagrined”
Kudos – I didn’t think you knew the word.
“I’ve never been spoken to like that before.”
I highly doubt that. Unless you’ve been surrounded by sycophants and fellow travellers until now.
“the new age psychobabble stuff”
Actually, it’s ancient psychobabble, but what would you know?
Jarrah
12 Feb 12 at 2:12 am
Nice lefie trick, SDFC, but it doesn’t work here. The ” I can’t be bothered to look down my nose”, is the oldest leftie trick in the book.
You’re mis-characterizing what I said, which is never unexpected from you, because that’s how you slink out of an argument.
Inflationist policy is distorting and destroys the trajectory of the long term arrow. It also hits the least able in our society to be able to handle it.
Over the long term, of course. However your policy prescription fucks the long term.
JC
12 Feb 12 at 2:14 am
Jazza
I think you’re confusing bullying with a general lack of tolerance of idiots and moronic comments.
I think deep down even you must admit in a quiet reflective moment ” I shouldn’t said that”. Think how we feel. Do you?
And by the way, I’m still shitty at you for helping to insert Rhiannon in the senate. That act alone deserves a decade of scorn unless you publicly apologize.
How could you?
JC
12 Feb 12 at 2:20 am
Nice lefie trick, SDFC, but it doesn’t work here. The ” I can’t be bothered to look down my nose”, is the oldest leftie trick in the book.
What a load of shit I have given reasons ad nauseam as to why I believe inflation is the best course of action.
I am yet to hear a coherent argument for the other side.
sdfc
12 Feb 12 at 3:03 am
That’s a pretty disturbing comment, Horace. I’d expect that sort of crap from Mrs. Steve, but not you.
And you’re a dickhead who thinks name calling is cool.
sdfc
12 Feb 12 at 3:10 am
Note to Jarrah – well-adjusted people generally attempt not to sound like condescending c***s.
[Edited. Sinc]
Oh come on
12 Feb 12 at 5:36 am
Yes you do, because the empirical evidence doers not support it. “Fuck me”? Watch your language!
.
12 Feb 12 at 8:58 am
Actually the empirical evidence shows debt is easier to service under inflation but harder under deflation.
the BOJ spent at least a decade trying to get rid of deflation and we are still do not know how you get rid of it properly.
Deflation is much worse than inflation which is why Central Banks fear it much more than inflation.
Inflation by contrast is rather easy to reduce.
On your Marx
12 Feb 12 at 12:40 pm
Reary, Marc? So Apple operating in an industry sector that experiences significant deflation is doing badly? Oh hang on, no it isn’t and in fact has more cash on its balance sheet than God.
Not true. That’s a complete lie.
Depends, Marc. It depends on debt levels of course. It also depends on how the capital structure of an economy looks like. 19th Century Britain was the opposite of a basket case and enjoyed an industrial revolution under a deflationary backdrop.
Marc, you’re an imbecile.
No it’s not.
JC
12 Feb 12 at 12:50 pm
Marx:
Let’s be clear on something. The only reason we’re geared towards preferring inflation over deflation is because of our economic backdrop.
The real question ought be if we should restructure with far more flexibility in our labor and goods markets.
Now get back to reading the footnotes on page 13 of the 1957 Treasury bulletin you leftwing whackjob.
JC
12 Feb 12 at 12:53 pm
OCO is right Jazza. You are a condescending twit. You’re always playing these pedantic word games invariably leading to checking word definitions leading to a cul de sac of unreason.
You get whacked across the ears for being a dolt at times. Pull your socks up.
—– SDFC
You will be treated with respect when you deserve respect. If you continue arguing dishonestly you will continue to be scorned and treated with contempt.
Change yourself Horace.
JC
12 Feb 12 at 1:00 pm