On the subject of Stimulus, can any proponents explain when you know to start/stop it? I mean, they changed the definition of recession to kickstart start the great recession before the elections. What would you use as a guide?
The only cases for it I've seen just speculate it "woulda been So Much Worse" if they hadn't helicoptered in, but as near as I can tell, recessions are a "never let a crisis go to waste" opportunity for Keynesians.
Economic Fallacies
@Seneca:
On the car, cash and keystroke thing:
Wray is saying that it makes little sense for a bank to change reserves (which receive interest) into cash (which doesn't). Also, banks can give out loans without requiring cash. They just credit your account.
But back to the real issues here:
If the US government is at risk of default, why can it issue government debt which pays less than one percent interest at auctions? Why are these auctions still oversubscribed by a factor of 7? Why could the Fed lower interest rates even when the government goes deeper into debt. Why didn't Quantitative Easing and the massive bailout destroy the value of the dollar? If that theory were right, the dollar should be worthless paper by now. None of that even remotely happened. Interest rates actually went down! The dollar index is doing fine. No sign of debasing the currency. Instead there still is massive unemployment and so much lack of demand that businesses see no need to invest in new ventures that could employ people.
The US government is a currency issuer, not a currency user. That's a fundamental difference. It's the difference between the US and Greece. The US can keep low interest rates while Greece has to pay 20%. The US can go for a massive stimulus while Greece has to beg for money (and doesn't get it). Greece can default on its debt and the US can't.
You're right that there are issues of wrong allocation and overconsumption of real resources. But don't mix this up with financial issues.
There could be stronger investments in oil independency, alternative energy, technology, education, fighting unemployment, infrastructure, environmental sustainability, etc. More allocation of resources to Main Street, less to Wall Street. None of this happens. These are policy issues. And many of these are real crises unlike the fake fiscal one.
Austerity leads to none of these things. It leads to rising unemployment of people willing to work, vacant houses due to foreclosures and low business investment due to lack of demand. I don't see this making much economic sense to let a massive amount of resources remain idle.
That the government shouldn't "print money" is completely sidetracking the issue. The government has to spend money into existence. That's the only way it spends. Sure, in terms of public investments, this spending is bound to a contract to build houses. But from an monetary point of view it's a matter of keystrokes. That's simply how it works.
Your economist friend is right. It's a new thing. But the MMT crowd are the only group which has an understanding of how this new thing actually works. I know of no other economic theory that has even a remote understanding of modern monetary operations. And that usually leads to nonsensical predictions and policy proposals for the current economic environment.
I guess the biggest failure of austerity measures is that they don't even achieve what they were planned to achieve. All governments which tried it are deeper in debt than before and in a worse standing real-economy-wise.
@ Riggerjack:
MMT offers many new insights:
- the government can't default on the currency it issues
- the government doesn't need to borrow its own money from china
- the government, the private sector and the foreign sector can't all save at the same time
- the dollar has value because you can pay your taxes with it
- loans create deposits, not bank reserves
- The government needs to spend money into existence before it can take it back in taxes (otherwise there's no money around to tax)
The reason for raising government spending comes from the fact that not all sectors can save at the same time. The US has a trade deficit, the public saves and cuts back, so the US has to go into a deficit. Someone has to keep demand up.
And it would have been worse. Look at all the examples of countries that have implemented austerity measures.
Please look at what austerity did there and what the research shows:
http://www.voxeu.org/article/panic-driv ... plications
Especially figures 4 and 5 here. The data suggests a direct relationship between the degree of austerity measures and negative results in terms of GDP growth and debt-to-GDP ratios.
On the car, cash and keystroke thing:
Wray is saying that it makes little sense for a bank to change reserves (which receive interest) into cash (which doesn't). Also, banks can give out loans without requiring cash. They just credit your account.
But back to the real issues here:
If the US government is at risk of default, why can it issue government debt which pays less than one percent interest at auctions? Why are these auctions still oversubscribed by a factor of 7? Why could the Fed lower interest rates even when the government goes deeper into debt. Why didn't Quantitative Easing and the massive bailout destroy the value of the dollar? If that theory were right, the dollar should be worthless paper by now. None of that even remotely happened. Interest rates actually went down! The dollar index is doing fine. No sign of debasing the currency. Instead there still is massive unemployment and so much lack of demand that businesses see no need to invest in new ventures that could employ people.
The US government is a currency issuer, not a currency user. That's a fundamental difference. It's the difference between the US and Greece. The US can keep low interest rates while Greece has to pay 20%. The US can go for a massive stimulus while Greece has to beg for money (and doesn't get it). Greece can default on its debt and the US can't.
You're right that there are issues of wrong allocation and overconsumption of real resources. But don't mix this up with financial issues.
There could be stronger investments in oil independency, alternative energy, technology, education, fighting unemployment, infrastructure, environmental sustainability, etc. More allocation of resources to Main Street, less to Wall Street. None of this happens. These are policy issues. And many of these are real crises unlike the fake fiscal one.
Austerity leads to none of these things. It leads to rising unemployment of people willing to work, vacant houses due to foreclosures and low business investment due to lack of demand. I don't see this making much economic sense to let a massive amount of resources remain idle.
That the government shouldn't "print money" is completely sidetracking the issue. The government has to spend money into existence. That's the only way it spends. Sure, in terms of public investments, this spending is bound to a contract to build houses. But from an monetary point of view it's a matter of keystrokes. That's simply how it works.
Your economist friend is right. It's a new thing. But the MMT crowd are the only group which has an understanding of how this new thing actually works. I know of no other economic theory that has even a remote understanding of modern monetary operations. And that usually leads to nonsensical predictions and policy proposals for the current economic environment.
I guess the biggest failure of austerity measures is that they don't even achieve what they were planned to achieve. All governments which tried it are deeper in debt than before and in a worse standing real-economy-wise.
@ Riggerjack:
MMT offers many new insights:
- the government can't default on the currency it issues
- the government doesn't need to borrow its own money from china
- the government, the private sector and the foreign sector can't all save at the same time
- the dollar has value because you can pay your taxes with it
- loans create deposits, not bank reserves
- The government needs to spend money into existence before it can take it back in taxes (otherwise there's no money around to tax)
The reason for raising government spending comes from the fact that not all sectors can save at the same time. The US has a trade deficit, the public saves and cuts back, so the US has to go into a deficit. Someone has to keep demand up.
And it would have been worse. Look at all the examples of countries that have implemented austerity measures.
Please look at what austerity did there and what the research shows:
http://www.voxeu.org/article/panic-driv ... plications
Especially figures 4 and 5 here. The data suggests a direct relationship between the degree of austerity measures and negative results in terms of GDP growth and debt-to-GDP ratios.
Maybe this example can help clarify what it means if the government starts saving its own currency:
http://bilbo.economicoutlook.net/blog/?p=1075
This is then fleshed out with more detail here:
http://bilbo.economicoutlook.net/blog/?p=7864
and here:
http://bilbo.economicoutlook.net/blog/?p=8013
From this perspective, the notion of "being fiscally responsible" like the government were a household indeed seems outdated and strange. It doesn't really apply. It does apply to private households (no need to argument this on this forum, I guess), but not to a money-issuing governments. What's it going to do? Retire early? It doesn't even need the tax revenue to spend money.
Also, here's a more detailed analysis of hyperinflation in Zimbabwe:
http://bilbo.economicoutlook.net/blog/?p=3773
http://bilbo.economicoutlook.net/blog/?p=1075
This is then fleshed out with more detail here:
http://bilbo.economicoutlook.net/blog/?p=7864
and here:
http://bilbo.economicoutlook.net/blog/?p=8013
From this perspective, the notion of "being fiscally responsible" like the government were a household indeed seems outdated and strange. It doesn't really apply. It does apply to private households (no need to argument this on this forum, I guess), but not to a money-issuing governments. What's it going to do? Retire early? It doesn't even need the tax revenue to spend money.
Also, here's a more detailed analysis of hyperinflation in Zimbabwe:
http://bilbo.economicoutlook.net/blog/?p=3773
@Felix:
I'm not entirely understanding you. Please follow my logic and help me figure out where that is:
Among many other cool and marginally ethical things, the US government creates "federal reserve notes," more commonly referred to as dollars. No one ever knows for sure exactly how many of these there are. For our purposes, there are X dollars in circulation, either physically or electronically, at any given time.
Dollars are implicitly guaranteed to be of face value by the US government. However, the government only has Y assets - gold, land, buildings, bonds that we own, etc. - with which to back up those dollars. We're off the gold standard... well and good. But in order for dollars to be legal tender in the first place, they must have mutually understood worth to both parties in a transaction. That worth implies the existence of an underlying asset. (Am I making sense? My education is sadly lacking in this area.)
If X is continually increasing by means of QE, the printing press, or some other form of Fed mojo, yet the Fed is NOT increasing the government's real net worth by either asset purchases or tax increases, then logic says that each dollar in the X pool is worth slightly less every time a new one comes into being.
Now, as a member of our society, I know that I'm unlikely to feel the impact of X + 1 million, or even X + 1 billion. But X + 1 trillion is a problem. I don't dispute that the Fed is perfectly capable of issuing dollars enough today to pay off every debt in existence. But for anyone who has "full faith and trust" in US currency (or US debt, as they are basically twins in that they both inherently represent an underlying asset), to the extent that they have saved some of it for their own future use, this would be very bad news.
So while the Fed CAN do that, it's a lot like saying you CAN drive off a bridge if you want. Ask yourself who owns the most US dollars? The most US debt? And how likely are they to want to take that hit? And what would/wouldn't they do to stop it.
And while I get that the government isn't like a household, the fact that it represents a collection of households means to me that the paradigm isn't as far removed as you imply.
Again, please poke holes in my thinking. This is by no means my pet subject and I'm sure there are big gaps in my knowledge that others here don't have.
I'm not entirely understanding you. Please follow my logic and help me figure out where that is:
Among many other cool and marginally ethical things, the US government creates "federal reserve notes," more commonly referred to as dollars. No one ever knows for sure exactly how many of these there are. For our purposes, there are X dollars in circulation, either physically or electronically, at any given time.
Dollars are implicitly guaranteed to be of face value by the US government. However, the government only has Y assets - gold, land, buildings, bonds that we own, etc. - with which to back up those dollars. We're off the gold standard... well and good. But in order for dollars to be legal tender in the first place, they must have mutually understood worth to both parties in a transaction. That worth implies the existence of an underlying asset. (Am I making sense? My education is sadly lacking in this area.)
If X is continually increasing by means of QE, the printing press, or some other form of Fed mojo, yet the Fed is NOT increasing the government's real net worth by either asset purchases or tax increases, then logic says that each dollar in the X pool is worth slightly less every time a new one comes into being.
Now, as a member of our society, I know that I'm unlikely to feel the impact of X + 1 million, or even X + 1 billion. But X + 1 trillion is a problem. I don't dispute that the Fed is perfectly capable of issuing dollars enough today to pay off every debt in existence. But for anyone who has "full faith and trust" in US currency (or US debt, as they are basically twins in that they both inherently represent an underlying asset), to the extent that they have saved some of it for their own future use, this would be very bad news.
So while the Fed CAN do that, it's a lot like saying you CAN drive off a bridge if you want. Ask yourself who owns the most US dollars? The most US debt? And how likely are they to want to take that hit? And what would/wouldn't they do to stop it.
And while I get that the government isn't like a household, the fact that it represents a collection of households means to me that the paradigm isn't as far removed as you imply.
Again, please poke holes in my thinking. This is by no means my pet subject and I'm sure there are big gaps in my knowledge that others here don't have.
Hey GandK, welcome to the discussion. That's a very good question that can shed a lot of light on this issue. If I understand you correctly, your position is this:
There's X Dollars in existence for a certain amount of goods Y available right now. If the government creates more Dollars to X+Trillions (maybe amounting to 2X or more) with the same amount of goods on the other side, then that's a problem in that it would cause inflation and a devaluation of the Dollar.
Okay, there are some things to consider here. Let's say there's X Dollars in existence. Now the government can create any amount more than X it likes and spend it in the economy. What would happen then? That depends upon the state of the economy. IF the economy already ran at full capacity with full voluntary employment and maximum efficiency in terms of the use of real resources THEN the adding additional Dollars to those already existing in circulation would not result in additional real wealth (added to the existing wealth Y). Then you would have inflation to be seen in rising price levels and would need to lower spending and/or raise taxes to take money out and prevent inflation.
Now let's say we live in a state of the economy where there's massive unemployment, houses are vacant, businesses on aggregate can't sell all the goods they produce and even consider firing people, people are already in debt and can't and probably won't in this dire environment go deeper into debt. They try to save more, further reducing general demand for the goods and services offered by businesses.
Imagine the government spends money in this situation. Let's arbitrarily pick 1000$ per person on top of existing government spending. That means that every person can now go into stores and demand 1000$ more of goods. This means that there is suddenly more demand for what businesses produce, so more needs to be produced to meet the demand. This requires hiring people to produce it, which provides them with income which they can then spend (and get off welfare programs). This can happen to the point where everyone who wants to work does. Where houses, factories are not vacant or idle, where more is produced with the money that enters the economy, rendering previously idle resources productive. This does not raise the price level, but ensures that more things are created, adding to the existing level of wealth Y. So you increase X, but you also increase Y. In fact, depending on through how many hands that new money flows and how it is used, the end result may actually be that you suddenly end up getting more wealth for the dollars that you have, if Y has risen more than X making this deflationary and requiring a further stimulus (or tax reduction) to maintain price stability.
As you can see, the effect of government spending depends on the state of the economy when the money is spent. It is true that governments can screw this up in the way you described. But right now the economy needs more government spending, not less. At high inflation more taxes and less spending are needed to counter it.
A side issue here is QE, often deemed to be inflationary by "increasing the money supply". It doesn't really work that way as you can see in the minimal results in terms of money in the real economy that QE resulted in. What QE does is that the Fed buys securities - government debt, mortgages, commercial loans, even stocks — from banks’ balance sheets and credits their reserve accounts accordingly, which receive - currently 0-.25% interest. This is simply a change of assets. The Fed takes away X amount of assets and replaces them with X amount of assets. No additional assets are generated here. Now the banks have more reserves (for each loan they give out, by law they need to hold an amount of a certain % of that loan in their reserves account), so they could theoretically lend more, but they are not practically restrained by reserves. If you go to the bank and want a loan, the main concern is your credit rating as the bank can get the reserves it needs from the Fed on demand. Basically, this means that QE can't be inflationary and - as you could see - it wasn't.
There's X Dollars in existence for a certain amount of goods Y available right now. If the government creates more Dollars to X+Trillions (maybe amounting to 2X or more) with the same amount of goods on the other side, then that's a problem in that it would cause inflation and a devaluation of the Dollar.
Okay, there are some things to consider here. Let's say there's X Dollars in existence. Now the government can create any amount more than X it likes and spend it in the economy. What would happen then? That depends upon the state of the economy. IF the economy already ran at full capacity with full voluntary employment and maximum efficiency in terms of the use of real resources THEN the adding additional Dollars to those already existing in circulation would not result in additional real wealth (added to the existing wealth Y). Then you would have inflation to be seen in rising price levels and would need to lower spending and/or raise taxes to take money out and prevent inflation.
Now let's say we live in a state of the economy where there's massive unemployment, houses are vacant, businesses on aggregate can't sell all the goods they produce and even consider firing people, people are already in debt and can't and probably won't in this dire environment go deeper into debt. They try to save more, further reducing general demand for the goods and services offered by businesses.
Imagine the government spends money in this situation. Let's arbitrarily pick 1000$ per person on top of existing government spending. That means that every person can now go into stores and demand 1000$ more of goods. This means that there is suddenly more demand for what businesses produce, so more needs to be produced to meet the demand. This requires hiring people to produce it, which provides them with income which they can then spend (and get off welfare programs). This can happen to the point where everyone who wants to work does. Where houses, factories are not vacant or idle, where more is produced with the money that enters the economy, rendering previously idle resources productive. This does not raise the price level, but ensures that more things are created, adding to the existing level of wealth Y. So you increase X, but you also increase Y. In fact, depending on through how many hands that new money flows and how it is used, the end result may actually be that you suddenly end up getting more wealth for the dollars that you have, if Y has risen more than X making this deflationary and requiring a further stimulus (or tax reduction) to maintain price stability.
As you can see, the effect of government spending depends on the state of the economy when the money is spent. It is true that governments can screw this up in the way you described. But right now the economy needs more government spending, not less. At high inflation more taxes and less spending are needed to counter it.
A side issue here is QE, often deemed to be inflationary by "increasing the money supply". It doesn't really work that way as you can see in the minimal results in terms of money in the real economy that QE resulted in. What QE does is that the Fed buys securities - government debt, mortgages, commercial loans, even stocks — from banks’ balance sheets and credits their reserve accounts accordingly, which receive - currently 0-.25% interest. This is simply a change of assets. The Fed takes away X amount of assets and replaces them with X amount of assets. No additional assets are generated here. Now the banks have more reserves (for each loan they give out, by law they need to hold an amount of a certain % of that loan in their reserves account), so they could theoretically lend more, but they are not practically restrained by reserves. If you go to the bank and want a loan, the main concern is your credit rating as the bank can get the reserves it needs from the Fed on demand. Basically, this means that QE can't be inflationary and - as you could see - it wasn't.
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RealPerson
- Posts: 875
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I am confused. If pumping money in a stagnant economy is good for the economy because there are no inflationary pressures, how did Jimmy Carter end up with a severe recession with 7.5% unemployment and at the same time a whopping 13.5% inflation rate? Reading the above explanation, that seems impossible. Nevertheless, it happened. What gives?
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RealPerson
- Posts: 875
- Joined: Thu Nov 22, 2012 4:33 pm
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jacob
- Site Admin
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- Contact:
Just adding this in ...
Don't confuse "tax notes"(*) or other financial instruments with actual wealth (stuff, machines, relationships, knowledge). They are a claim on wealth. Creating more claims on wealth does not create more wealth. Rather it decreases the wealth/claim ratio. Politics (which is what you guys mostly seem to be discussing) is an attempt to decide how to _subtly_ shift these claims around by changing the deficit, interest rates, monetization, and tax rates.
Other means of shifting them (first order zero sum games, but perhaps not second order) are advertising and trading.
Each of these four levers will have a different effect depending on whether you're (fixed income, variable income) x (closely linked government spending, distantly linked to government spending). That's four kinds of economic players.
Show me which player, and I'll show you their preferred politics.
Also see
http://en.wikipedia.org/wiki/Fundamenta ... tion_error
(*) Legal tender, that is, an instrument you need to posses to avoid being put in jail for not paying your taxes. The government can through force designate anything as that particular instrument: stamped slips of paper, blueberries, sea shells, ... and that thing will attain value simply for that reason. It's tradeable because other people also need it to pay taxes which has value to them because they don't want to go to jail.
Don't confuse "tax notes"(*) or other financial instruments with actual wealth (stuff, machines, relationships, knowledge). They are a claim on wealth. Creating more claims on wealth does not create more wealth. Rather it decreases the wealth/claim ratio. Politics (which is what you guys mostly seem to be discussing) is an attempt to decide how to _subtly_ shift these claims around by changing the deficit, interest rates, monetization, and tax rates.
Other means of shifting them (first order zero sum games, but perhaps not second order) are advertising and trading.
Each of these four levers will have a different effect depending on whether you're (fixed income, variable income) x (closely linked government spending, distantly linked to government spending). That's four kinds of economic players.
Show me which player, and I'll show you their preferred politics.
Also see
http://en.wikipedia.org/wiki/Fundamenta ... tion_error
(*) Legal tender, that is, an instrument you need to posses to avoid being put in jail for not paying your taxes. The government can through force designate anything as that particular instrument: stamped slips of paper, blueberries, sea shells, ... and that thing will attain value simply for that reason. It's tradeable because other people also need it to pay taxes which has value to them because they don't want to go to jail.
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Riggerjack
- Posts: 3191
- Joined: Thu Jul 14, 2011 3:09 am
Felix. I can't agree with you on the inflation/QE thing. The full and complete purpose of QE was to drop the interest on treasuries, thus the 16T debt. You said it yourself:
"What QE does is that the Fed buys securities - government debt, mortgages, commercial loans, even stocks — from banks’ balance sheets and credits their reserve accounts accordingly, which receive - currently 0-.25% interest. This is simply a change of assets. The Fed takes away X amount of assets and replaces them with X amount of assets. No additional assets are generated here. Now the banks have more reserves (for each loan they give out, by law they need to hold an amount of a certain % of that loan in their reserves account), so they could theoretically lend more, but they are not practically restrained by reserves."
So, QE isn't to bail out banks, or "force banks to lend". Banks don't need it, and the Fed doesn't need the MBS's. It is to drop the interest on treasuries. Now, since the biggest holders of Treasuries is senior citizens and retirement accounts, this seems like a nice transfer from poor to rich, but I see you are all for it.
Me, I'm all for cheap mortgages, as I'm still in my acquisitions phase of life, and leveraging real estate is my preferred means to retirement.
But to say that QE is not inflationary, while the purchases are driving down interest rates is only looking at half the picture. Eventually, QE will end. Eventually, the debt from the stimulus will need to be paid. At that time or before, interest rates will return to normal. What do you think 8% interest on a 20T debt is going to do to the budget? and when politicians balk, what do you think it'll look like? 13%, 15%, 18%?
You seem to have this idea that because the treasury has "keystroke technology", it'll somehow be immune to the economic forces you want stacked against it. How does the keystroke fix the hole in the budget when the interest on the debt is more than the treasury can tax?
I understand that you believe in Keynsian stimulus multipliers, but spending doesn't get more efficient when the government does it. Quite the opposite, as anybody who has worked with the spending side of any large organization will tell you.
"Imagine the government spends money in this situation. Let's arbitrarily pick 1000$ per person on top of existing government spending. That means that every person can now go into stores and demand 1000$ more of goods. "
That is patently ridiculous. How would this happen? Cut each taxpayer a check? It's been tried, no multiplier. Gov Spends it for us? Solyndra. Not getting anyone a shopping spree. Buy a subway from NYC to LA? Direct transfer from taxpayers to Halliburton and unions, with kickbacks back to the Democratic party? Politically useful, and typical of stimulus spending, but still no multiplier.
Recessions are a natural way for assets to go from less efficient allocation to more efficient allocation. The deeper the recession, the more this happens, as successively stronger entities are creatively destroyed. Fighting recessions with stimulus extends recessions and puts the brakes on recovery.
It doesn't matter how many keystrokes are massaged in the process.
"What QE does is that the Fed buys securities - government debt, mortgages, commercial loans, even stocks — from banks’ balance sheets and credits their reserve accounts accordingly, which receive - currently 0-.25% interest. This is simply a change of assets. The Fed takes away X amount of assets and replaces them with X amount of assets. No additional assets are generated here. Now the banks have more reserves (for each loan they give out, by law they need to hold an amount of a certain % of that loan in their reserves account), so they could theoretically lend more, but they are not practically restrained by reserves."
So, QE isn't to bail out banks, or "force banks to lend". Banks don't need it, and the Fed doesn't need the MBS's. It is to drop the interest on treasuries. Now, since the biggest holders of Treasuries is senior citizens and retirement accounts, this seems like a nice transfer from poor to rich, but I see you are all for it.
Me, I'm all for cheap mortgages, as I'm still in my acquisitions phase of life, and leveraging real estate is my preferred means to retirement.
But to say that QE is not inflationary, while the purchases are driving down interest rates is only looking at half the picture. Eventually, QE will end. Eventually, the debt from the stimulus will need to be paid. At that time or before, interest rates will return to normal. What do you think 8% interest on a 20T debt is going to do to the budget? and when politicians balk, what do you think it'll look like? 13%, 15%, 18%?
You seem to have this idea that because the treasury has "keystroke technology", it'll somehow be immune to the economic forces you want stacked against it. How does the keystroke fix the hole in the budget when the interest on the debt is more than the treasury can tax?
I understand that you believe in Keynsian stimulus multipliers, but spending doesn't get more efficient when the government does it. Quite the opposite, as anybody who has worked with the spending side of any large organization will tell you.
"Imagine the government spends money in this situation. Let's arbitrarily pick 1000$ per person on top of existing government spending. That means that every person can now go into stores and demand 1000$ more of goods. "
That is patently ridiculous. How would this happen? Cut each taxpayer a check? It's been tried, no multiplier. Gov Spends it for us? Solyndra. Not getting anyone a shopping spree. Buy a subway from NYC to LA? Direct transfer from taxpayers to Halliburton and unions, with kickbacks back to the Democratic party? Politically useful, and typical of stimulus spending, but still no multiplier.
Recessions are a natural way for assets to go from less efficient allocation to more efficient allocation. The deeper the recession, the more this happens, as successively stronger entities are creatively destroyed. Fighting recessions with stimulus extends recessions and puts the brakes on recovery.
It doesn't matter how many keystrokes are massaged in the process.
Well said, j.
The other fundamental problem with the above discussion is that you are all making implicit assumptions about the concept known as the "velocity of money" that none of you appear to be acknowledging, but that determine the outcome of your reasoning.
A true monetarist or classical economist would assume that V is constant giving you the classic idea that more money affects price inflation proportionally. A Keynsian assumes its variable, so that sometimes more money is inflationary and sometimes its not. An Austrian rejects the concept and says that velocity is merely the outcome of the sum of individual economic actors' expectations of future inflation. All of the various results you propose are just extensions of these assumptions. Not that any of them can predict jack.
But if you would like to look at the actual data, you can find it here: http://research.stlouisfed.org/fred2/se ... ?cid=32242
If anyone can tell me accurately where this line is going using whatever theory they like, we can all buy a few options and retire (whatever that means
) tomorrow.
The other fundamental problem with the above discussion is that you are all making implicit assumptions about the concept known as the "velocity of money" that none of you appear to be acknowledging, but that determine the outcome of your reasoning.
A true monetarist or classical economist would assume that V is constant giving you the classic idea that more money affects price inflation proportionally. A Keynsian assumes its variable, so that sometimes more money is inflationary and sometimes its not. An Austrian rejects the concept and says that velocity is merely the outcome of the sum of individual economic actors' expectations of future inflation. All of the various results you propose are just extensions of these assumptions. Not that any of them can predict jack.
But if you would like to look at the actual data, you can find it here: http://research.stlouisfed.org/fred2/se ... ?cid=32242
If anyone can tell me accurately where this line is going using whatever theory they like, we can all buy a few options and retire (whatever that means
) tomorrow.@rj: Hm. If you hold government bonds and those bonds' interest rate goes down, their value rises.
http://www.investopedia.com/ask/answers ... z2M4r3jbXL
Also, I see QE as a pointless exercise. It's not that the purchases drove down interest rates. The interest rates were set lower. Also, as I said, even at the currently low yields, the auctions are still oversubscribed by a large factor. The government doesn't need to borrow money. It can print it or create it on account. It does not require financing to spend. There is no normal interest rate to return to. The government sets the interest rate. It need not issue any debt at all to begin with. Again, this is the difference between the US and Greece. Greece needs to borrow its currency with interest rising to 20%. The US offers investors a chance to receive interest on their money. It need not do this.
Japan has kept its interest rate at about 0 for over a decade now. This is something Greece or any country from the EU could never do. But the US can.
See here:
http://moslereconomics.com/wp-content/g ... s-zero.PDF
Spending is not more efficient when the government does it. But there are times, like now, when government is the only one that can spend. Private households save, businesses don't invest. And there are idle resources not producing output. High unemployment, vacant houses, etc. would benefit real wealth creation when used. In this case, instead of taking resources away from the private sector, where they may be more productive, they are taken from a place where they sit idle and produce nothing.
I'm also not sure what your position is on interest rates. Is it good that they are high (to pay interest to the seniors holding them) or low (to keep the amount of money needed to pay for it low). You presented arguments for both.
@realperson: My understanding of this is that there are more reasons for price increases in a country than excess government money printing. One reason can be an increase in worldwide demand for common goods (or less production of these goods or restriction of availability) like the Oil price spike in the 70s as well as food harvest failures. Let's say China, India and Africa reach new levels of overall wealth, then they increase demand for goods worldwide, increasing real prices for people in the first world independent from what their governments do in terms of fiscal or monetary policy. My understanding was that Carter kicked in a recession by appointing Volcker and reducing the money supply, but I admit that my knowledge on that area is limited. I would need to look deeper into this for a better response.
http://www.investopedia.com/ask/answers ... z2M4r3jbXL
Also, I see QE as a pointless exercise. It's not that the purchases drove down interest rates. The interest rates were set lower. Also, as I said, even at the currently low yields, the auctions are still oversubscribed by a large factor. The government doesn't need to borrow money. It can print it or create it on account. It does not require financing to spend. There is no normal interest rate to return to. The government sets the interest rate. It need not issue any debt at all to begin with. Again, this is the difference between the US and Greece. Greece needs to borrow its currency with interest rising to 20%. The US offers investors a chance to receive interest on their money. It need not do this.
Japan has kept its interest rate at about 0 for over a decade now. This is something Greece or any country from the EU could never do. But the US can.
See here:
http://moslereconomics.com/wp-content/g ... s-zero.PDF
Spending is not more efficient when the government does it. But there are times, like now, when government is the only one that can spend. Private households save, businesses don't invest. And there are idle resources not producing output. High unemployment, vacant houses, etc. would benefit real wealth creation when used. In this case, instead of taking resources away from the private sector, where they may be more productive, they are taken from a place where they sit idle and produce nothing.
I'm also not sure what your position is on interest rates. Is it good that they are high (to pay interest to the seniors holding them) or low (to keep the amount of money needed to pay for it low). You presented arguments for both.
@realperson: My understanding of this is that there are more reasons for price increases in a country than excess government money printing. One reason can be an increase in worldwide demand for common goods (or less production of these goods or restriction of availability) like the Oil price spike in the 70s as well as food harvest failures. Let's say China, India and Africa reach new levels of overall wealth, then they increase demand for goods worldwide, increasing real prices for people in the first world independent from what their governments do in terms of fiscal or monetary policy. My understanding was that Carter kicked in a recession by appointing Volcker and reducing the money supply, but I admit that my knowledge on that area is limited. I would need to look deeper into this for a better response.
@Dragline: Yes, the V in the equation is the one making it complicated. I would guess that money moves through more hands before it's either saved or taxed when given to poor people than when given to rich people, but quantifying that in a meaningful way seems difficult. I also need to check out that book you mentioned. Thanks a lot for the recommendation.
I'd say its probably well-nigh impossible in a modern, complex economy. Kind of like trying to predict earthquakes.
You certainly could run computer simulations with model actors in a model economy, but even those are not a good substitute for reality. Moreover, what you really learn from them is that small changes in initial conditions often yield bizarre and unpredictible outcomes (variants on chaos theories).
If you've never studied the Worgl experiment (see http://alt-money.tribe.net/thread/70e5e ... 89d1757037), it is along the lines of what you are talking about, but its never been tried in a large economy or for an extended period of time.
It would be interesting to me if the states in the US were allowed to experiment with various money regimes to see what would happen. I think we would learn a lot. But the experiment is not worth conducting unless taxes must be paid with the money in question, because that is what ultimately creates demand for an untested fiat currency.
On the other hands, as jacob points out, all of this fiddling with money and monetary policy may be an exercise in rearranging deck chairs on the Titanic if there is no wealth creation. The idea of and sources of wealth creation was one of the main focal points of 17th and 18th century thinkers (its the land! its the labor! its the capital!). Ultimately, at its most basic level it involves the use of energy to turn matter and energy into more useful forms of matter and energy -- essentially a fight against the second law of thermodynamics re entropy. But just knowing that does not yield a useful predictive model either. Yet the lack of an analogous "entropy" component to mainstream modern economic theories has been noted as one of its major failings by Steve Keen and others. See http://bayes.wustl.edu/etj/articles/ent ... nomics.pdf and http://en.wikipedia.org/wiki/Thermoeconomics
You certainly could run computer simulations with model actors in a model economy, but even those are not a good substitute for reality. Moreover, what you really learn from them is that small changes in initial conditions often yield bizarre and unpredictible outcomes (variants on chaos theories).
If you've never studied the Worgl experiment (see http://alt-money.tribe.net/thread/70e5e ... 89d1757037), it is along the lines of what you are talking about, but its never been tried in a large economy or for an extended period of time.
It would be interesting to me if the states in the US were allowed to experiment with various money regimes to see what would happen. I think we would learn a lot. But the experiment is not worth conducting unless taxes must be paid with the money in question, because that is what ultimately creates demand for an untested fiat currency.
On the other hands, as jacob points out, all of this fiddling with money and monetary policy may be an exercise in rearranging deck chairs on the Titanic if there is no wealth creation. The idea of and sources of wealth creation was one of the main focal points of 17th and 18th century thinkers (its the land! its the labor! its the capital!). Ultimately, at its most basic level it involves the use of energy to turn matter and energy into more useful forms of matter and energy -- essentially a fight against the second law of thermodynamics re entropy. But just knowing that does not yield a useful predictive model either. Yet the lack of an analogous "entropy" component to mainstream modern economic theories has been noted as one of its major failings by Steve Keen and others. See http://bayes.wustl.edu/etj/articles/ent ... nomics.pdf and http://en.wikipedia.org/wiki/Thermoeconomics
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RealPerson
- Posts: 875
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@Dragline: "The idea of and sources of wealth creation was one of the main focal points of 17th and 18th century thinkers (its the land! its the labor! its the capital!)."
I suppose that now, a lot of the new wealth creation sources are virtual instead of physical, e.g. Facebook. This theoretically removes a lot of limits - there is, after all, only so much gold on Earth to mine/possess - but it opens us up to some cataclysmic forms of wealth destruction. A few keystrokes later and your virtual entity, the source of your "wealth," has been completely wiped out by a malicious competitor.
I suppose that now, a lot of the new wealth creation sources are virtual instead of physical, e.g. Facebook. This theoretically removes a lot of limits - there is, after all, only so much gold on Earth to mine/possess - but it opens us up to some cataclysmic forms of wealth destruction. A few keystrokes later and your virtual entity, the source of your "wealth," has been completely wiped out by a malicious competitor.
Well, yes and no. In the Facebook example, the product is the users themselves (hungry consumers), which is sold to the advertisers. "Information" has had value even going back to ancient economies involving artisans and apprentices.
But it is certainly true that economists have had a hard time putting this into their models -- usually it is just assumed that everyone in the market already knows everything worth knowing, include who all of their potential customers are and what they want, which is equivalent to assuming that the value of such information is zero. Facebook would probably be a complete failure in that kind of world and thus would not exist in the model. That's why you need a model with partially ignorant and partially otherwise irrational participants before you can model reality. But then the math gets too messy (like right away) and the models have difficulty even describing outcomes, let alone predicting them.
But it is certainly true that economists have had a hard time putting this into their models -- usually it is just assumed that everyone in the market already knows everything worth knowing, include who all of their potential customers are and what they want, which is equivalent to assuming that the value of such information is zero. Facebook would probably be a complete failure in that kind of world and thus would not exist in the model. That's why you need a model with partially ignorant and partially otherwise irrational participants before you can model reality. But then the math gets too messy (like right away) and the models have difficulty even describing outcomes, let alone predicting them.
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Riggerjack
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@ dragline: your critique of economic models reminds me of the line:
In theory, there's no difference between theory and practice.
In practice, there is.
Like climatology, the modeling can accurately model the past, but flies off on wild tangents when run into the future. Models are tools, for understanding underlying principles, not for prediction. Maybe someday, but not today.
Felix: if I understand you correctly, MMT calls for stimulus spending whenever there's a recession. So, if the private sector's share of GDP drops, the government should increase spending by an amount equal to the loss? More than the loss? Close to the loss? Completely unrelated to the loss? I ask because stimulus proponents seem to only advocate more.
How much is the right amount?
In theory, there's no difference between theory and practice.
In practice, there is.
Like climatology, the modeling can accurately model the past, but flies off on wild tangents when run into the future. Models are tools, for understanding underlying principles, not for prediction. Maybe someday, but not today.
Felix: if I understand you correctly, MMT calls for stimulus spending whenever there's a recession. So, if the private sector's share of GDP drops, the government should increase spending by an amount equal to the loss? More than the loss? Close to the loss? Completely unrelated to the loss? I ask because stimulus proponents seem to only advocate more.
How much is the right amount?
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jacob
- Site Admin
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- Contact:
@RealPerson - http://en.wikipedia.org/wiki/Entropy_and_life
@Dragline - http://en.wikipedia.org/wiki/Lucas_critique
Also http://en.wikipedia.org/wiki/Rational_expectations ... apparently economists aren't big on crossvalidation (stagflation isn't explained by Keynesian theory for example) http://en.wikipedia.org/wiki/Cross-vali ... tistics%29
to check against model snooping http://en.wikipedia.org/wiki/Data_dredging
Since no money is on the line, intellectual integrity can be retained by simply admitting loud and clear that "my economic theory is a model that may stop working tomorrow since my underlying assumptions have changed!" ... but alas, economics thinks it's like physics.
Here's a more colorful illustration of how economical problems develop http://www.slideshare.net/ssulistyo/rolling-shit ... now which is a more accurate description of how humans interact? That slideshow or rational expectations?
@Dragline - http://en.wikipedia.org/wiki/Lucas_critique
Also http://en.wikipedia.org/wiki/Rational_expectations ... apparently economists aren't big on crossvalidation (stagflation isn't explained by Keynesian theory for example) http://en.wikipedia.org/wiki/Cross-vali ... tistics%29
to check against model snooping http://en.wikipedia.org/wiki/Data_dredging
Since no money is on the line, intellectual integrity can be retained by simply admitting loud and clear that "my economic theory is a model that may stop working tomorrow since my underlying assumptions have changed!" ... but alas, economics thinks it's like physics.
Here's a more colorful illustration of how economical problems develop http://www.slideshare.net/ssulistyo/rolling-shit ... now which is a more accurate description of how humans interact? That slideshow or rational expectations?