Oliver Hartwich has a thoughtful piece on how the EU is using monetary policy to circumvent restraints on the use of deficit financing in what is a de facto Keynesian stimulus. He is right in regarding the resulting transfer from the frugal north to the profligate south as being theft. Dan Hannan describes it more colourfully as
The European Central Bank is .. transferring money from North to South without openly saying so. Robbing Peter to pay Paul is one thing; robbing Pieter to pay Paulo another. Pieter becomes resentful. Why, he asks, should he work longer hours so that Paulo can retire early? Why should his government be punished for thrift so that Paulo’s can be rewarded for profligacy?
This monetization of debt has been underway for a few years now. Until recently most decent economists would have said the upshot will be inflation. Indeed, Anna Schwartz said this a couple of years ago in one of her last public appearances at the Mon Pelerin meeting in New York.
But on conventional measures this has not really happened. Money supply has not led to inflation as measured by CPI or GDP deflators. There is the familiar equation of money, its velocity of circulation, the price level and the quantity of goods and services sold (MV=PQ) but in the face of a stagnant Q, an expanded M has not brought an increase in Prices.
The possible explanations are that prices have increased but we are not measuring them or that the velocity of circulation has fallen (we are stuffing our money under mattresses or in bank accounts). It is likely that the inflation in the 1920s prior to the Wall Street crash was disguised in asset price inflation, especially in shares, which once prices collapsed led to a massive fall in velocity as people repaired their liquidity levels (exacerbated by the US authorities’ squeeze on money supply).
Oliver suggests something similar is currently taking place when he says
What we will see, however, is the continuation of a pattern that has already emerged over the past few years. Prices in all sorts of asset classes will go up because that is where the smart money flees as it tries to avoid being devalued by monetary activism. Property in prime locations, vintage cars, precious metals, rare wines, paintings and sculptures – in short: everything with a limited supply – will increase in price.
And yet this does not appear to have happened. Of the assets mentioned, gold has been falling over the past year or so; real estate prices have also markedly dropped in most places and especially in the “positional goods” of natural scarcity; art prices have also fallen from their 2008 levels.
One explanation is that people are desperate to avoid losses and are therefore placing their money in secure deposits which invest in government bills and governments are obligingly printing more of these bills. Hence the savings are being used to finance government consumption – forget about all the “shovel ready” income enhancing investments, the money all around the world is being allocated to those who the government think will return them to office and finds its way into low income groups’ pockets and thence to the poker machines.
The result is the great stagnation as money that previously would have gone into investment is siphoned into consumption. When will this end? Can it continue indefinitely?
The huge quantity of money produced by the US government hasn’t produced inflation as yet. Where has it all gone? Is the situation the same as described above in Europe?
In the long term it can’t continue. It must end eventually in inflation. The longer it takes the worse it will be.
Stephen Williams
2 Aug 12 at 10:43 am
Is not the simplest situation that the money largely hasn’t left the banks – becoming bank reserves rather than increasing lending?
Driftforge
2 Aug 12 at 11:17 am
Printing money should produce inflation. Ever increasing Govt debt without inflation should result in default.
The new paradigm is Govt interest rates of about zero. i.e. negative real interest rates even with low inflation. Defacto default.
The EU is moving to meet this with increasing govt reguation especially green regulation.
The only possible resolution is political if not military.
On the other hand the vintage car market is not bad, especially at the upper end.
Rodney
2 Aug 12 at 11:19 am
I think Driftforge is right. Much of that additional money has been channelled into insolvent banks, in the US and Europe. We only need to look at Japan to see this could continue for decades. I’m growing increasingly sceptical of the “inflation is coming” meme.
Capitalist Piggy
2 Aug 12 at 11:23 am
It has gone in to bank reserves. In that way it has not yet made a blind bit of difference to the real economy. The only effect has been in changing the banks’ liquidity and (some) capital ratios.
The question is “What happens next?” To me, there are three options:
1. The central banks mop the liquidity back up when they believe the crisis has passed.
2. The banks go on a lending spree once they are convinced they are not going bust.
3. Permanently higher liquidity ratios at the banks.
Personally, I think it will be a mix of all three. The news Basel III regulations are raising liquidity requirements (as well as capital), so we are looking at having more cash sitting around doing nothing in the banks. Some banks will start lending – after the bust the banks will resume lending to governments, funding yet another fiscal boom. The central banks will mop some of it back up again by issuing bonds, allowing yet more spending by governments.
In short – inflation will happen again, but it will not be as bad as the current figures and past history would suggest. Final result? More inflation and slower growth than we otherwise have had. Yet again, another monetary stuff up.
My best guess, at least. Can someone please let money be neutral?
Andrew Reynolds
2 Aug 12 at 12:05 pm
Andrew – I’d suggest 1) is the intent; 2) is the danger; 3) is the hope.
There simply isn’t an appetite for debt out there. That won’t change until interest rates rise and governments and monetary systems fall.
At some point the system will earth out. Volatility will increase until it does.
Driftforge
2 Aug 12 at 12:40 pm
As in 1989 when the USSR collapsed from internal contradictions, so too the ESSR once this fiscal silliness washes through the system.
What did Einstein describe lunacy as, again?
Louis Hissink
2 Aug 12 at 1:29 pm
From what I hear from German friends is the property prices are on the way up in Germany, not dropping. They were previously very stready for around 20 years.
Luke
2 Aug 12 at 1:29 pm
Andrew gets it right, except for hoping that money can ever be neutral. Just not possible, even under free banking.
The monetary aggregate that matters is (broad money = base money * credit multiplier * velocity). While base money has increased significantly, the credit multiplier has decreased significantly (ie banks lending less per dollar deposited) leaving the broad money aggregate relatively stable.
This important part will be, as Andrew says, “what next”? My first suspicion is that banks will eventually start to increase the credit multiplier, requiring reserve banks to be more conservative. I doubt that the US fed will have the guts to do the right thing, and so I suspect we will see worrying inflation in the US at some point in the next 5-10 years if/when they re-discover economic growth. I *hope* that Australia’s RBA will make better decisions, and will be able to up interest rates when the need arises… and so I still think there’s a chance Australia could avoid worrying inflation.
A nice (but unlikely) alternative is that governments around the world start allowing banks to fail, thereby reducing moral hazard and improving future capital allocation, and also reducing the scope for bank credit expansions in the future since banks will need to be more conservative.
A nasty (likelihood unknown) alternative is that the current crisis keeps trickling along for a long time with over-regulation and unsolvable over-spending undermining the western world’s growth engine. The government will continue using money as a tool, eventually adding inflation to no growth and creating stagflation… while the political dynamic refuses to allow tough reforms. This is the “end of the west” option, as we stagnate for decades and become side-shows to the China-Indian future.
My best guess is that the current crisis is *not* the end of the west… but that will come in about 10-20 years.
John Humphreys
2 Aug 12 at 1:52 pm
None of the long term indicators such as Tips, 10 or 30 year bond prices are suggesting this. In fact the TIPS market is implying an inflation rate of 1.5% for the next 10 years in the US.
John,
We’ve had people predicting the inflation genie …and even hyper inflation over the past 4 years and it hasn’t happened.
JC
2 Aug 12 at 2:03 pm
John – Up until this latest double round of cuts to the interest rate, I had hope that Australia would avoid the same problems. Unfortunately, it appears not to be the case.
Europe has a way out – they just have to let countries default. It doesn’t require being kicked out of the Euro, it the way the Euro was supposed to work.
Japan is nearly as much of a worry, more for 2013/14 than now.
Eventually the US will be called to account as well, but probably not for another five years or so.
Unfortunately here we don’t really have the structures in place, nor the political will (except in Queensland by the looks of it) to get out of the pickle we are in.
The critical weakness in our system is that we let public servants and welfare recipients vote in upper house elections. Not sure we can manage this next part without that in place.
Driftforge
2 Aug 12 at 2:06 pm
And it won’t for some time yet. The Euro is to a great extent preventing hyperinflation in the PIIGS. The consequence is that actual defaults need to occur.
Driftforge
2 Aug 12 at 2:11 pm
People get defensive when critics ask, “where’s the hyperinflation”?
The antecedents have occurred or turned up. The theory is not incorrect. The assumption is that the transmission occurs en masse.
The explanation is if it doesn’t, there will be persistent and nefarious malinvestments that occur over the natural rate under free banking or very well behaved central banking.
The soft landing turns into a decadal ordeal of market driven austerity and low growth on a wretched desert island of business failures.
.
2 Aug 12 at 2:25 pm
I think it’s wrong to look at interest rate levels as the prime indicator of tight or loose monetary policy, Dot. I think Scot Sumner is bang on there. Low interest rates are a sign of serious weakness and deflationary tendency in the economy, whereas high interests generally are a sign of out of control NGDP.
If people accept this proposition then central bank action at zero bound is acceptable.
JC
2 Aug 12 at 2:30 pm
Hmmm
What you said is probably better directed to my criticism of dropping rates to accommodate for the carbon tax.
My view is you have to look at all of the variables. The most important is the magnitude of inflation and the persistence and predictability thereof, then aggregates. The interest rates of course only make sense if you know the tone of the market in terms of aggregates, prices and FI assets. High productivity countries will have a higher natural interest rate anyway.
.
2 Aug 12 at 2:35 pm
Let me clarify.
A central bank has two objectives which are equally important.
To maintain liquidity and long term price neutrality of money.
.
2 Aug 12 at 2:42 pm
Dot:
But the law in the US is price stability and aim for full employment. That’s the law and it’s obvious the Fed is not holding up one side of that law.
JC
2 Aug 12 at 2:44 pm
Tell me how you interpret this:
http://www.austlii.edu.au/au/legis/cth/consol_act/rba1959130/s10.html
the Reserve Bank Board, will best contribute to:
a) the stability of the currency of Australia;
b) the maintenance of full employment in Australia; and
c) the economic prosperity and welfare of the people of Australia.
Given we have a floating currency and a large pool of discouraged workers and a participation rate that could improve, I’m doubtful we’re following the law with regard to a) and b). I think that is good, however.
.
2 Aug 12 at 2:51 pm
Thanks folks, for an economics illiterate it is great to see the sort of serious discussion that I look for at the Cat. I guess our resident spoil-sports will turn up soon though!
Biota
2 Aug 12 at 3:08 pm
Dot, here’s your answer.
Skuter
2 Aug 12 at 3:11 pm
This is the one that worries me. It could all end in tears.
In personal terms, everyone I know seems to be doing crazy stuff at the moment, some buying things, some selling things, some stashing it away in some bank, or bonds, or mattress equivalent. A lot of people have turned off buying shares, but some few boast of the bargains they are getting. At dinner parties of the well-off and around the traps of the pubs everyone has a different viewpoint on what to do, and hoping they are putting up the right shields, saying ‘let it not be me, keep me safe’.
Interesting thread.
Elizabeth (Lizzie) B.
2 Aug 12 at 3:16 pm
JC, if you take a Sumnerian view (as you seem to) then aren’t you implicitly accepting that velocity has collapsed and so current monetary policy settings, if anything have failed to offset that? Certainly if we accept Sumner’s basic view that velocity is positively related to the five year bond yield, then that is what the low yields are telling us. In those circumstances more monetary expansion is called for.
However, should we be at all concerned that monetary expansion on the scale you seem to be asking for will lead to malinvestments and stagnation due to savings being consumed by governments?
Skuter
2 Aug 12 at 3:17 pm
What is the basis for targetting 2% instead of 0% inflation?
Is it just wage ‘stickyness’?
Driftforge
2 Aug 12 at 3:18 pm
The Fed like other Reserve Banks has a set of objectives (maximise employment, price stability and moderate long term interest rates) but the first of these is impossible unless it were to also control wages.
One sad outlook scenario is for a continued almost indefinite great stagnation rather like Japan in the years since it lost interest/forgot how to achieve growth after 1979.
In that event the great indebtedness could continue for many years with the cycle punctuated, as always, by individual country crises of devaluation.
As long as savers are risk averse and governments offer them safe refuges in loans that recycle savings to consumers, an economy will not improve its productivity and stagnate. As the current debate on the NDIS demonstrates, we will always find additional worthy causes for the government to spend money on and therefore seemingly justifiable reasons to run deficits. And to the extent that real wages don’t adjust, unemployment will steadily increase but with the adverse effects of this cushioned by dole hand-outs.
Alan Moran
2 Aug 12 at 3:24 pm
This.
What worries me more are the people going around who are just getting on with things not realising that the time for restraint and preparation has arrived.
And the government acting to counteract the people getting their houses in order.
It’s part of the beauty I see in the concept of full LVT – a market limit to the total value community provides the individuals within it: a justifiable ‘absolute maximum’ to taxation.
Driftforge
2 Aug 12 at 3:25 pm
Driftforge, I would say yes. However, I think this is somewhat misguided as it ignores the composition of wages and the need for any structural issues to addressed through changes in relative wages. Monetary expansion cannot address this (at least not in a predictable or controllable way). It can only really be used to change the absolute level of wages.
Skuter
2 Aug 12 at 3:27 pm
Skuter’s post @ 3:11 refers to the cycle. I get the impression that we are no longer in the cycle but in unproven territory.
Biota
2 Aug 12 at 3:30 pm
Skuter – I just don’t see that as being a sufficient basis for the ongoing rent taking.
My sense is that maintaining a level of inflation leads to a tendency towards short sightedness and an societal bias towards debt over savings; neither to our benefit.
Driftforge
2 Aug 12 at 3:36 pm
I’d say uncommon, not unproven. The scale is different, but its a classic batten the hatches while she blows over financial earthing that is taking place.
Driftforge
2 Aug 12 at 3:38 pm
I agree with you drift. We should be targeting zero inflation…I’m all for encouraging saving!
Skuter
2 Aug 12 at 3:42 pm
Unfortunately like most things, the transition is going to be uncomfortable.
Driftforge
2 Aug 12 at 3:43 pm
I concur, Skuter.
.
2 Aug 12 at 3:50 pm
This is the greatest time to be taking on more debt than you could possibly handle.
If there is a financial Armageddon, no way on earth will they ever be able to recover it from you. It’s free money.
Infidel Tiger
2 Aug 12 at 3:53 pm
Apologies if a similar comment turns up later – I typed up a response to JC but it hasn’t been posted…I’ll add in a bit of a response to driftforge…
JC, if you take a Sumnerian view of the world, that is velocity is positively related to bond yields, then we have indeed seen a fall in velocity and further monetary expansion is called for. It is certaionly doable on the part of central banks. Whilst I think this is broadly correct in the sense that we need to get into the region of monetary equilibrium, I am still wary however of accepting the market monetarist view of the world that essentially ignores the distortionary effects of monetary expansion on production structure. Some monetary expansion will bring us back to a situation where changes in relative prices are a good guide to entrepreneuerial decisions. It may help to restore some sort of confidence that price signals are accurate and meaningful again. But there is a significant danger that prolonged monetary expansion will muffle relative price signals and destroy confidence.
If you see monetary expansion combined with fiscal expansion, then Alan’s warning about savings being consumed away is correct – it is a recipe for stagnation. Hence the reason I am against targeting a positive rate of inflation. Driftforge’s concerns about shortsightedness and a societal bias towards debt is especially applicable to governments in that environment. I don’t think monetary expansion is sufficient to restore some sort of equilibrium level of real wages because it is not just the level, but the relativities between different wage levels that is important.
Skuter
2 Aug 12 at 4:00 pm
Here is a long discussion on Labour and Business power. It covers a lot of the ground that this thread is about. The comments string is long indeed but I reckon well worth the read.
http://crookedtimber.org/2012/07/25/a-short-note-on-labour-and-business-power/comment-page-2/#comment-423873
Xevram
2 Aug 12 at 4:00 pm
I have a couple of comments that have disappeared into the ether…
Skuter
2 Aug 12 at 4:02 pm
Heh. Won’t say it’s something I haven’t pondered. All in (high debt) or all out (no debt) are pretty much the options. I’ve gone all out; will see how it plays out.
But.. even choosing that path, it’s still a matter of whether you fold before or after ‘armageddon’.
Driftforge
2 Aug 12 at 4:10 pm
Xevram – interesting thread. Seems to be a thoughtful place, if with a different perspective than here.
The jargon being used is quite different too.
Driftforge
2 Aug 12 at 4:24 pm
@Dforge
well my starting point is always of course that open minded people are found everywhere and the human need to undertsand more is universal.
This quote stuck with me:
Everywhere, we are locked into competition to destroy our own productive economy. Our financial sector is absurdly large, and dedicated to predation. Our medical care sector, ditto (on the margin, at least). And, our energy sector is poisoning the ground water and oceans, and exhausting a finite reserve of fossil fuel stores and planetary carrying capacity, in a one-two punch of self-destructive fury.
Surely, we can intelligently articulate a path toward managing decentralized conflict and cooperation, which isn’t self-destructive to the community and its commonwealth?
Xevram
2 Aug 12 at 4:45 pm
Sheer abject stupidity.
Less medicine! Less energy!
Yes we can. You can fuck off and stop trying to thieve more money off taxpayers.
Ooh! Interesting! Apolitical!
.
2 Aug 12 at 4:48 pm
Alan, forgive my innocence but on the face of things your equation MV=PQ cannot be right. The thing on the right I take to be a sum of prices multiplied by quantites of goods. That is, a sum of money, in principle a big pile of dollar notes. The thing on the left is a quantity of money, the dollar notes again, multiplied by a rate of transactions. So the thing on the left isn’t the same sort of thing as that on the left.
Physicists call this dimensional analysis. It works.
What am I doing wrong?
DrBeauGan
2 Aug 12 at 4:53 pm
Ooh! Interesting! Apolitical!
WOW Dot, it seems you are progressing in your openmindedness. I am gratified that you find the thread and the posters interesting and apolitical.
GJ and WD
Xevram
2 Aug 12 at 4:55 pm
You’re a very boring, unconvincing idiot and left wing troll.
Fuck off.
.
2 Aug 12 at 4:59 pm
Dot, don’t be drawn further into the empty void that is that troll’s mind.
He is not quote Hammy stupid, but he is in the A grade.
Token
2 Aug 12 at 5:00 pm
Linking to Crooked Timber should see a punishment of death by acid and your firstborn child given to the Koch Foundation to raise properly.
Infidel Tiger
2 Aug 12 at 5:08 pm
Dr BeauGan, you are not quite correct but you have introduced a significant point of debate. In times gone by, the equation of exchange was defined as MV=PT, with T representing transactions (which includes purchases of goods, services and assets) rather than real GDP (Q). However, the quantity on the right is a big pile of dollar notes transacted per period. Ergo, your problem disappears. But whether we include all transactions or just those that contribute to real GDP is an importnat point. Thus, because of the way monetary expansion enters the system, we are seeing inflation for particular assets and not so much in goods and services.
Skuter
2 Aug 12 at 5:11 pm
Thanx skuter.
DrBeauGan
2 Aug 12 at 5:15 pm
Effective monetary accommodation requires a clear nominal anchor. The Fed needs to come out and say they will keep printing until the market expected 2%+ inflation for the foreseeable future (which it presently does not). Temporary monetary stimulus doesn’t do much, as we have seen.
Sleetmute
2 Aug 12 at 5:35 pm
Xevram – as with anything, each perspective highlights certain aspects of truth and tends to blind itself to others.
The problem at the moment is best described as rent seeking gone overboard. This covers everything from welfare to bank finance to currency manipulation to crony capitalism to real estate inflation.
Whenever wealth is diverted from labour and capital into rent, both labour and capital lose.
Everyone likes their bit of something for nothing, and we all lose because of it.
Driftforge
2 Aug 12 at 5:43 pm
This way lies ruin and damnation.
Driftforge
2 Aug 12 at 5:44 pm
So the central bank just keeps printing until it holds all financial assets on its balance sheet? Or does the government just keep issuing bonds? Permanent monetary expansion would destroy the incentive to save, no?
Skuter
2 Aug 12 at 6:23 pm
That sounds like absolute lunacy to me. How accurate are the measurements defining inflation? Considering inflation doesn’t seem to have a permanent defined meaning in the political sphere, what’s to prevent the issuing of money going too fast?
Maybe some of the big brains are assured it is all safe, but I am sure as shit not.
Winston Smith
2 Aug 12 at 6:51 pm
We have a thread recently showing some serious deficiencies in various measures of inflation.
My little brain is with you, Winston.
Elizabeth (Lizzie) B.
2 Aug 12 at 8:09 pm
Skuter:
This is where I come out. I’m a hard currency man. I think that everything Drift and Dot say are essentially right. However I think you guys are putting the cart before the horse which is why I think Scott Sumner is right. We don’t have fully liberalized markets for labor, nor good and services. We don’t have a banking system with anywhere near enough equity and commensurately we have economies that are very leveraged. Drift made the the observation earlier that wages are sticky and yes they are.
This is why I think Sumner’s model is the right one for the economies we have.
If we liberalized our economies to the Austrian model I would say that a zero inflation objective would be the right one. This leads me to believe that you can only have the monetary policy or system which best suits the economy. Do all the reforms to get to the Austrian model and then overlay it with the appropriate monetary policy at that time. Until such time then Sumner’s thesis we should target NGDP at around 5 to 5.5% is about right I think. Don’t forget that we could also lower the target as those liberalizing reforms are being made too by the way.
JC
2 Aug 12 at 9:37 pm
The hardest question with any different system is how to get there. I’m not a hard currency fan myself – currency should be soft, but the roles of currency and wealth storage must be separated. Hard wealth, soft currency.
But how to get there ? If you listen to some, ‘there’ will just be there one day when we wake up; the only way transitions like this occur is almost instantaneously.
But you can’t just wait on ‘there’ happening. I think the change required is more cultural than regulatory. Yet here in Australia, the dollar has never collapsed. We have no cultural understanding or recollection of what a currency collapse is like; oddly I suspect this makes it less likely for one to occur as the control exerted over teh monetary supply is more complete.
Interestingly for the hard money folk, our states have the same capacity to establish gold and/or silver as an alternate currency that they do and have recently enacted in a number of states in the U.S.
Driftforge
2 Aug 12 at 9:55 pm
Drift:
Believe me, the fall to 48 cents felt like it was a currency collapse. There was talk of the Aussie Dollar at the time falling to 30 cents. Of course the laggards are always at the extremes at the end of the cycle, but it really did feel like it was just collapsing.
Frankly I really don’t like the idea of the RBA’s policy which I would regard as a relatively hard currency objective with the very regulated labor markets. It’s literally wrecking our non mining sectors.
JC
2 Aug 12 at 10:03 pm
Agreed, JC, I think you speak a lot of sense but I don’t think it follows that monetary expansion is a good enough substitute for rectifying these things. Yes, wages are sticky, but we need changes in relative wages to adapt to structural change. Now perhaps you might argue that nominal wages will rise at different rates in response to inflation but I’m not so sure. Our unions tend to resist changes in real wages…in either case, (zero inflation target or 2-3 percent), decentralisation of wages needs to happen.
I also think we need to fix our tax system to encourage saving and increase the equity held within the banking system. Monetary expansion should only occur in response to a fall in velocity, as it is akin to a painkiller that should be used sparingly…
Skuter
2 Aug 12 at 10:30 pm
Velocity rises and falls all the time. A temporary expansion – like they do every Christmas and every Easter – is a good use of expansion. You need something that performs that role.
Real Bills would work too, which is one of the few workable hard money schemes I’ve seen.
But… Really, it’s the constant erosion that is a problem given a combined currency / wealth unit.
Driftforge
2 Aug 12 at 11:38 pm
Velocity rises and falls all the time. A temporary expansion – like they do every Christmas and every Easter – is a good use of expansion. You need something that performs that role.
Real Bills would work too, which is one of the few workable hard money schemes I’ve seen.
But… Really, it’s the constant erosion that is a problem given a combined currency / wealth unit.
Driftforge
2 Aug 12 at 11:38 pm
Oh, how I dream of a 48c dollar again. In my little world that would be like receiving a 100% pay rise.
If you’re going to have a monetary system where the currency floats but you can store wealth in something hard, you’re just going to get people running to the thing that stores wealth better.
I’ve often thought about what it would be like if Australia created a gold backed dollar that could be used to settle international payments like the original gold standard was. But then, what would be the incentive to use the non-gold backed dollar? I would be busily converting all my savings into gold backed dollars, and so would everyone else, which would just collapse the existing dollar.
The only way to stop that is to put some sort of tax/regulation/distortion on the gold backed dollar, which is what FDR did to forcibly devalue the USD back in the day. Which I don’t agree with.
In any situation, any place in history, you have to ask what you’re not allowed to say. What you can’t say defines a societies taboos, and also it’s blind spots. And the thing you absolutely are not allowed to say is that deflation might not be the end of the world. I mean, the stated goal of the central bank is to make sure your money, your surplus labour, is worth less than it was last year. The idea is so that you don’t sit on it, and get it out into the marketplace.
But sometimes I ponder would deflation really be that bad? Everyone says it would be the end of the world, but I think they’re confusion deflation with lack of liquidity. We are used to deflation every day – the first plasma TV I saw cost $30k, now you can buy them for less than $1k. We all love the fact we can buy a monster TV for less money each year. But we mustn’t let currencies gain in value – we’re told they must decrease in value. I’m not arguing for deflation, but it just seems weird to me that everyone says it is verboten. Like currency strength or weakneess, surely it’s a case of winners and losers. I mean, pensioners and savers would love a bit of deflation. Debtors and not so much. But nobody even talks about it – it is verboten. It’s like everyone saying that the AUD must be higher against the USD each year. Sure, that creates winners, but it also creates losers. Every action has an opposite. Surely we could risk a bit of deflation in order to aim for a 0% inflation rate?
Getting back to asset-backed currencies, the argument goes that there isn’t enough gold/silver/whatever to back the currency – when this seems very odd to me. There is only not enough gold/silver/whatever now because the paper value has been watered down so much – the USD is something like 90% down since 1931 or whatever. But the actual amount of gold shouldn’t really matter as long as the price/unit is agreed.
I get the need for central banks to introduce liquidity and backstop banks when panics are on – I get that a gold backed currency makes this difficult.
But there has to be some way of stopping the rampant money printing going on. I don’t think there is a way to transition. It’s like the postwar DM – they just distributed the lot and sprung it on people, and said ‘get on with it’. I think sometimes you just have to do it that way.
brc
2 Aug 12 at 11:58 pm
sorry about the long post I spend idle time thinking about these things a lot. I don’t ever get any answers, just more questions.
brc
2 Aug 12 at 11:59 pm
Driftforge – sorry, the Real Bills doctrine is a nonsense. The assumption in it is that you can change the liquidity (and/or term structure) of assets without any real monetary impact. Sorry – can’t see that as correct.
John Humphries,
I would have to say that I find your nasty alternative the more likely at the moment. The EC, ECB, US Fed and Congress all seem hell bent on taking the Japanese path to a “solution” to the current jam.
That said – I can’t see China as the future either. I look there and see a system tottering. India, for all its evident faults, is IMHO the more likely to prove long term sustainable. China will need a full scale revolution to get onto a sustainable growth path. That will not be pretty.
Andrew Reynolds
3 Aug 12 at 12:58 am
Skuter:
According to Sumner, the US real estate market began to fall in the beginning of 2006, yet unemployment for those years remained under 5%. He argues that it wasn’t until the sudden drop in NGDP in the latter part of 2008 that we to see economic problems. It may be difficult to believe therefore that a drop in real estate caused the deep recession. This was a drop in very localized markets financed with sub-prime.
Look, I tend to think he’s on the ball here. I had a trader’s hunch at the time the Fed and the other big central banks were majorly well behind the ball in 08. They didn’t realize the gravity of the problem they were facing. The ECB, as always is so far behind you can’t see them because of the horizon. They raised rates in midyear in 08 (I think) talking about their concerns about inflation. The Fed was talking about inflation concerns even just after the Lehman collapse! The big CBs were too tight to begin with and too slow to react. They tightened because of inflation concerns brought about by a mid decade rise in commodity prices, which they confused with inflation that Sumner correctly reads as a change in relative prices (caused by sustained and heavy duty demand from the developing world). This would be accurately described as bottlenecks. Then when the damage was done they by their tightening they then were oblivious to their economies collapsing or about to collapse around them.
Even sub prime at the time seemed to be a material problem but a localized/specialized one in the bond market that could have been contained if the central banks had understood the thing in context and were looking and properly understanding economy. Furthermore these were localized markets where sub-prime was focused, yet the US experienced a generalized collapse across the continent. I clearly recall for instance the 30% drop in the NY market (also most of the North East) brought on by a number of factors in the early 90’s. Yet the broad US real estate actually went up those years. So there is a case to believe that sub prime could have been contained in those specialized markets.
Perhaps he has a real argument to make here. If Sumner does, as it looks like he does, then there is a case to really look hard at NGDP targeting which would entail the fed leaving interest rates alone thereby letting the market set them and simply buy or sell bonds to signal or aggressively act when the target NGDP needs to be achieved.
Skuter, Sumner makes a great point too. The Lehman collapse seems him to be misunderstood. He argues that the stock market began to collapse after Lehman failed and it happened because the market correctly figured the Fed as not understanding the sudden drop in NGDP that was happening by signaling its ignorance to the markets in late September. He also suggests we may have avoided the failures in banking if the Fed had got a grip much earlier than Bear Stern.
JC
3 Aug 12 at 3:25 am
I think you lot are a bunch of wankers.
When the capital pulls out, where go the jobs?
You want 48% currency re-rate?
Guess what….we are back to banana republic time.
And who have we got to lead us, 25 secret crony controlled unionist apparatchiks!
All singing, all dancing, all mates!
Wake up you d*ckfaces!
If someone, somewhere, is not producing something then there is NO economy.
NoFixedAddress
3 Aug 12 at 4:50 am
You have kind of encapsulated the problem JC. It is very difficult for central banks to read these situations in real time. If we take Sumner’s view as a given, just as the central banks failed to expand the money supply adequately and in a timely fashion, the chances they will withdraw it in time are small. The NGDP scheme you describe still relies on the central bank expanding and contracting their balance sheet at the right times and to the correct extent. I am sceptical…that’s all I’m saying. Flexibility of wages and prices and the removal of discretion are key…
Skuter
3 Aug 12 at 8:29 am
An Example of the Mitt Romney economic credentials? :
From the Washington Post:
See any similarities to Tony Abbott?
The problem is, even when you do take the economic stimulus of tax cuts into account, Romney’s tax reductions still don’t come close to making up for the lost revenue. The Tax Policy Center used a “dynamic scoring” model that factors in the impact of economic growth brought on by tax cuts, devised by Romney adviser and Harvard professor Greg Mankiw and Harvard’s Matt Weinzierl. It’s exactly the kind of analysis that Republicans have been clamoring for, and the TPC finds that Romney’s individual tax cuts wouldn’t come close to paying for themselves. His tax cuts for individuals would spur economic growth that would ultimately bring $53 billion more to the government. But they would still cost the government about $307 billion in revenue, according to the study.
Xevram
3 Aug 12 at 8:55 am
The benefit of a split system is that hard money and soft money actually complement each other. The whole point is that you want people to run to the hard money for wealth storage. You want the soft money used as a medium of exchange. This is not a problem, its a feature.
The ‘design drivers’ for each are markedly different. There remains nothing better than electronic fiat as a medium of exchange. There also remains nothing better than physical gold as a medium for the storage of wealth.
Driftforge
3 Aug 12 at 8:58 am
Maybe you are thinking of something else?
Real Bills doctrine utilises both a discount rate for short term ‘Real Bills’ and an interest rate for long term return. In doing so it provides the same degree of flexibility that is provided by having a flexible monetary supply and an interest rate.
One of its primary tenets is in matched maturities – so no idea where your concept of changing term structure comes from.
Driftforge
3 Aug 12 at 9:03 am
Wait – you think reducing government revenue by $250B is a bad thing?
Driftforge
3 Aug 12 at 9:09 am
Skuter, not at all. Once the central bank is credible, it will barely need to print at all. One of the market monetarists, Lars Christensen, refers to this as the “Chuck Norris effect“.
Sleetmute
3 Aug 12 at 9:32 am
Continuing to print money does not make one credible. Any central bank can print money.
Showing restraint from doing so is what builds credibility.
Driftforge
3 Aug 12 at 11:26 am
Agree, Driftforge, printing money per se does not build credibility. Credibility is built by saying something (eg our inflation target is 2%) and then doing whatever is necessary – including printing money – to follow through on what you said. Instead, what we see is the Fed keeps teasing and the ECB talks tough but doesn’t follow through. Both are undermining their credibility more every day.
Sleetmute
3 Aug 12 at 12:22 pm
They can pull out buildings and machinery?
LOLs
Caused by strong US growth and monetary accommodation here…which led to a boom in inward FDI.
Get of the metho sunshine.
.
3 Aug 12 at 12:31 pm
X can you get the fuck off this thread. No one wants to read your stupid crap. Seriously go away.
JC
3 Aug 12 at 12:37 pm
True, but Sumner suggests starting an NGDP futures market.
No , that fine.
Yep.
JC
3 Aug 12 at 12:40 pm
oops
and the Fed targets off that.
JC
3 Aug 12 at 12:41 pm