Greetings, all. I've lurked around quite a bit on this site, and I must say that the Austrian perspective is quite refreshing.
Anyways, in my Congressional District there's a guy named Richard Carter; running in the Democratic primary (yeah, I know). He's certainly not a Hayek or Mises, but one thing I did notice in his economic policy plans; which I found interesting, since there is a bit about money:
Monetary Stability
As a trained economist, I know how vital sound money is to the health of our economy; unfortunately, this is important issue is rarely discussed. Our current monetary policy needs to be modernized to reflect the changes globalization has brought about. Due to these developments, the Federal Reserve has been able to expand the supply of money very rapidly without proportional increases in the Consumer Price Index. Loose monetary policy makes for a temporary boom, but it also misleads investors, creating unsustainably high asset prices. This always leads to a painful correction, such as the recent collapse of the housing market and the bursting of the dot com bubble. By passing legislation to strengthen the Fed’s independence, and include asset price stability to the Federal Reserve’s legal mandate, we’ll restore investor confidence in the US economy and ensure strong, stable, long-term economic growth.
I was wondering what you Austrians have to say about that. Would, say, factoring equity prices into the "price stability" mandate of the Fed help to minimize the boom-bust cycle?
I've gotten the chance to talk to the guy several times, and he's told me that he's not a purest liberterian, but he has been influenced by Hazlitt and Hayek. I'll certainly vote for him over the current neo-con incumbent Lee Terry.
TylerFromNE:Due to these developments, the Federal Reserve has been able to expand the supply of money very rapidly without proportional increases in the Consumer Price Index.
I'm not entirely sure, but it sounds like he wants to limit increases in the money supply to increases in production, which I think would minimize the boom-bust cycle. But I'm not sure that linking it to CPI is the best way of doing that. However, anything that limits the inflation of the money supply is better than no limits.
And, according to Rothbard, the Democrats of the 19th century used to be the sound money party. Maybe this guy can educate his fellow Democrats, and start a renaissance of that idea.
Be very very careful there. The correct policy prescription should be ". . . include money supply growth stability to the Federal Reserve's legal mandate" i.e. a 1-2% per year M3 growth rate. His proposed "asset price stability" as legal mandate could well be used as a justification for wholesale FED purchase of stocks and real estate. Asset price stability and consumer goods price stablity can not and should not be maintained at the same time: consumers preference can swing back and forth between immediate consumption vs. higher order capital goods. That's the very nature of uneveness of technological advances. What needs to be held relatively constant is total money supply growth rate.
macsnafu:I'm not entirely sure, but it sounds like he wants to limit increases in the money supply to increases in production, which I think would minimize the boom-bust cycle.
I talked to him about it, and he said that since new money enters the economy through the financial markets, the best way to prevent an artificial boom is to prevent asset prices from getting out of control, since it takes a while for an increase in asset prices to cause an increase in consumer demand.
macsnafu:But I'm not sure that linking it to CPI is the best way of doing that.
I think he wants to the fed to look at the CPI, PPI, and create an API (asset price index). I agree that just looking at CPI is a fairly stupid way for the Fed to base its policy decisions.
macsnafu:However, anything that limits the inflation of the money supply is better than no limits.
I agree!
macsnafu:And, according to Rothbard, the Democrats of the 19th century used to be the sound money party. Maybe this guy can educate his fellow Democrats, and start a renaissance of that idea.
Indeed, I always say that liberals (as in Democrats) ought to be outraged about how the Fed and the banks inflate the currency. Hopefully this guy can win the primary, if he does, I'm pretty sure he'd beat the d-bag incumbent. He has a donation page if anyone can spare a few bucks.
JimS:Be very very careful there. The correct policy prescription should be ". . . include money supply growth stability to the Federal Reserve's legal mandate" i.e. a 1-2% per year M3 growth rate.
But that aggregate doesn't even exist anymore! ;)
Seriously though, didn't Volker try that with terrible results? Or did he try to target M2 too precisely? I shouldn't think it'd be too tough to target the overall trend, maybe on a quarterly basis, even with the huge amount of short-run variation.
JimS:His proposed "asset price stability" as legal mandate could well be used as a justification for wholesale FED purchase of stocks and real estate.
Good point. That's another thing that I think should be changed - no Fed purchase of any assets other than Treasuries. The Fed's recent "loans" to the big banks secured by overvalued CDOs is particularly disgusting. There's no doubt in my mind that the public would be outraged if they realized what the Fed was doing.
JimS:Asset price stability and consumer goods price stablity can not and should not be maintained at the same time: consumers preference can swing back and forth between immediate consumption vs. higher order capital goods. That's the very nature of uneveness of technological advances. What needs to be held relatively constant is total money supply growth rate.
True, but if time preference changes, then one will fall and the other will rise. So I guess what I'm trying to say is, if you include all prices, isn't it tantamount to controlling the overall growth in the money supply (assuming constant velocity)? I mean, the new dollars have to go somewhere, driving up prices of something. It seems to me that money supply targeting has gotten a bum wrap, and this is just a more politically palatable way of saying what essentially amounts to the same thing. Or am I missing something here?
TylerFromNE: But that aggregate doesn't even exist anymore! ;)
LOL, yes, the word choice was deliberate . . . and for a good reason: M3 includes repurchase agreements, which has been the FED's favorite method of flooding the banking system with money lately. M3 is growing much faster than M2 over the past year and half after FED stopped publishing official M3 numbers.
TylerFromNE:Seriously though, didn't Volker try that with terrible results?
Paul Volker saved the Dollar by reducing inflation from 13.5% in 1981 to 3.2% in 1983 (both BLS numbers, for what they are worth). His policy laid the foundation of the American prosperity for the next two decades. To reduce the pain on over-leveraged borrowers, we can perhaps consider targetting M3 to a declining growth rate: from todays 12.5% to an eventual 2% over 5 years, with 2% reduction in growth rate each year until 2% M3 growth is achieved in 2014, then stay there.
TylerFromNE:So I guess what I'm trying to say is, if you include all prices, isn't it tantamount to controlling the overall growth in the money supply (assuming constant velocity)? I mean, the new dollars have to go somewhere, driving up prices of something.
You are correct as far as what we know today is concerned. My fear is who knows what new financial engineering may come up next to have yet another place to form a cancerous bubble (like derivatives?). . . not to mention all the shenanigans with "representative baskes" when caculating price indices. I don't think targetting money supply really has a bad rep, given the economic prosperity that followed after Volker's policy.