In The Conservative Case for QE2, David Beckworth provides a quasi-monetarist defense for the second round of quantitative easing.
He states that the purpose of QE2 is "about fixing a spike in the demand for money that has significantly hampered spending." He elaborates, "Because the monetary base has been increasing so rapidly and there has been very little inflation, it must be the case that demand for the money must be increasing even more. In fact, money demand has been so pronounced that even the previous $1.2 trillion increase in the monetary base was not enough to prevent outright deflation in 2009 or a sustained decline in core inflation (which shows the trend path of inflation) over the past two years. Thus, a significant portion of the money supply is being hoarded and not spent. This is the excess-money-demand problem."
In essence, the Federal Reserve has failed in the same regard that Milton Friedman blamed it for the Great Depression: "The fact that total current-dollar spending has remained depressed for so long means that the Federal Reserve has failed to do its job and effectively has kept monetary policy too tight." The solution is produced by the new monetary policy: "QE2, then, is a long-overdue attempt by the Federal Reserve to address the excess-money-demand problem. It will do so in two complementary ways. First, QE2 will increase inflation expectations, which should reduce the demand for money. Knowing that prices will be higher in the future will motivate creditor households, firms, and banks to start spending their money today while prices are lower. Second, QE2 will increase the monetary base, and this should begin to satiate excess money demand. Together, these developments should provide the catalyst needed to get the virtuous spending cycle started."
And, of course, lowered-interest rates are not necessarily problematic: "Note that lower long-term interest rates are not the key to QE2 working. Yes, long-term interest rates may initially drop as the Federal Reserve buys up long-term Treasury securities to increase the monetary base. But this effect will be fleeting if QE2 is successful. Once the economy starts recovering, interest rates will start increasing. Similarly, QE2 may initially cause the dollar to lose value, but by spurring a recovery QE2 will ultimately put upward pressure on the dollar."
Bob Murphy responds to Beckworth's quasi-monetarism with several Austrian challenges.
In turn, Bill Woolsey responds, once again pleading the quasi-monetarist case. David Beckworth, too, responds to Bob Murphy. He summarizes his key points skillfully: "During 2008 there emerged a surge in money demand as the housing fiasco began to unfold. This spike in money demand got even more pronounced in late 2008 with the uncertainty created by the financial crisis. Given that we have a central bank — and this is not an endorsement of the Fed — its job should be to offset and stabilize such money demand shocks. The Fed failed on this count and, as a result, what should have been an ordinary recession got turned into the 'Great Recession' of 2007-2009. Yes, this Fed failure — like its failure to raise the federal funds to its natural rate level sooner in the 2002-2004 period — is another indication the Fed is flawed. Nonetheless, we are stuck with this monopoly producer of money and have to work with it. This means the Fed should have done more to prevent the surge in money demand. Because it did not, the Fed effectively tightened monetary policy in 2008. Moreover, despite the large increases in the monetary base to date, money demand remains elevated. From this perspective, then, monetary policy is still relatively tight. QE2 is an attempt — a flawed one as I will discuss later — to address it."
He adds, "Appreciating the importance of money demand shocks also helps explain why conservative economists like Scott Sumner, Bill Woosley, Josh Hendrickson, and I are sympathetic in spirit (if not in form) to QE2. It would do all hard-money advocates some good to wrestle with the monetary disequilibrium literature and its implication for a commodity standard. It is worth noting that there are prominent Austrians like George Selgin and Steve Horwitz who take the monetary disequilibrium seriously."
I think the money demand shock, given our monopolized currency, can only be treated through the machinery of the Federal Reserve; given the excess money demand, greater supply is required.
P.S. I fully endorse free banking.
"I'm not a fan of Murray Rothbard." -- David D. Friedman
"about fixing a spike in the demand for money that has significantly hampered spending." He elaborates, "Because the monetary base has been increasing so rapidly and there has been very little inflation, it must be the case that demand for the money must be increasing even more.
Of course the problem with this analysis is that it ignores the fact that Bernanke is paying interest on reserves and is therefore intentionally preventing the expansion of the monetary aggregates (in the short run) which, if allowed to expand, would easily satiate the demand for money as money (and then some). Bernanke's monetary policy is contradictory; it's simultaneously expansionary and contractionary. This leads me to believe that Bernanke is not at all interested in satiating the elevated demand for money but is rather attempting to elevate asset prices (the wealth effect), especially bond prices (lessen the burden on the federal government), and alleviate deflationary expectations (which no longer exist).
In other words, he's fighting the deflation boogey-man and trying to inflate another bubble.
In fact, money demand has been so pronounced that even the previous $1.2 trillion increase in the monetary base was not enough to prevent outright deflation in 2009 or a sustained decline in core inflation (which shows the trend path of inflation) over the past two years.
Alternative and older measures of consumer price inflation show an inflation rate of around 7%. The CPI-U says that the inflation rate is around 2%. Energy, food, and commodity prices are at, or near, all-time highs (and the core CPI measure entirely ignores them).
In essence, the Federal Reserve has failed in the same regard that Milton Friedman blamed it for the Great Depression:
Absolutely incorrect. Milton Friedman criticized the FED during the 30s because it allowed something like 9,000 banks to fail in a matter of weeks (failed to perform its function as the lender of last resort--demanded sound collateral in the middle of a financial crisis), which led to a liquidity crisis, a massive credit contraction, and ultimately 30% deflation. Anna Schwartz warns that Bernanke's actions may potentially yield hyper-inflation somewhere in the future.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Excellent (and helpful) reply, Esuric.
I'm days away from beginning Man, Economy, and State. I was considering buying Microfoundations and Macroeconomics: An Austrian Perspective by Steven Horwitz after that (when I'm actually finished with Rothbard's large tome!). Have you read it before? (I believe I've asked for recommendations from you on Austrian macroeconomics before, but I misplaced the list.)
StrangeLoop: Excellent (and helpful) reply, Esuric. I'm days away from beginning Man, Economy, and State. I was considering buying Microfoundations and Macroeconomics: An Austrian Perspective by Steven Horwitz after that (when I'm actually finished with Rothbard's large tome!). Have you read it before? (I believe I've asked for recommendations from you on Austrian macroeconomics before, but I misplaced the list.)
I have and I would recommend it to anyone interested in macro-economics, with some knowledge of the mainstream. I liked the book - especially the summaries on Austrian economics - but must, ultimately, admit that I'm not entirely convinced of the argument. But I'm perfectly willing to attribute it to my lack of understanding.
The state is not the enemy. The idea of the state is.
Have you read it before?
No, unfortunately I haven't.
StrangeLoop,
How can you have made over a thousand posts here and fallen for that nonsense? Have you not picked up the basics by osmosis hanging around this site?
This whole "money demand shock" problem is about as real as vampires.
You will note that what it really means is that people are not spending money and banks think they will lose money if they lend it to deadbeats and incompetents, and that's all they see coming into their office. So to turn it into a boogeyman, you have to postulate that spending is what drives the economy, which is of course nonsense. Production is what drives it.
Also, he creates the mythical problem of deflation, which is both factually untrue [we have constant inflation all the time and the CPI is laughably twisted to hide that fact] and not a problem [how can increased purchasing power for all be a problem?].
Finally his solution is to rob every man and woman and child in the USA [and those abroad who have dollars] of their wealth, because that is what QE [=money printing] does.
I have only asserted the flaws in his thesis, not proved them, because I am in a Liberty Student frame of mind. I won't do your research for you. 1,089 posts. You should know your way around here by now, find the places that support my contentions.
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It's easy to refute an argument if you first misrepresent it. William Keizer
Smiling Dave:This whole "money demand shock" problem is about as real as vampires.
You don't believe an excess demand for money is possible?
Good to have you back, StrangeLoop.
"Excess demand" in terms of what, exactly?
The keyboard is mightier than the gun.
Non parit potestas ipsius auctoritatem.
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StrangeLoop:I was considering buying Microfoundations and Macroeconomics: An Austrian Perspective by Steven Horwitz
Not that you're asking for one, but my recommendation would be for you to tackle Mises' Human Action right after MES. There is no substitute for Human Action!
Horwtiz's book is highly recommended. It is a well written and excellent exposition of the Monetary Equilibrium perspective usually associated here with the "free banking" school. It is a also a marvelous example of how when the rigorous deductive method of praxeology is abandoned, proclaimed Austrians become monetarists.
To build upon my last post, I fail to see how demand for money is really any different from demand for other commodities. In the absence of a price ceiling, is there ever any "excess demand" for a particular commodity? No -- as the demand for the commodity rises, ceteris paribus, the price will rise.
Of course, that seems to beg the question: what's the "price" of money? My answer is that, since all other commodity prices are in terms of money, the "price" of money is therefore in terms of other commodities. Thus, as people's demand for money increases, ceteris paribus, more commodities will need to be exchanged for it. As a result, prices of commodities will decrease.
However, I think what's really meant by "excess demand for money" is that people have found themselves holding assets which they thought were (relatively) liquid, but have turned out to be (relatively) illiquid. I fail to see how they're entitled to any (further) liquidity in such situations.
Autolykos,
You presented my thoughts more eloquently than I could have.
Steven Horwitz:The key point for reconciling Yeager's approach with that of the Austrians is to recognize that the former case, that of the insufficient supply, corresponds to the traditional monetary disequilibrium theory explanation of depressions, while the latter case, that of the excess supply, corresponds to the Austrian concern with inflation and the possibility that it could generate a business cycle and eventual depression, These two theoretical approaches can fruitfully be seen as two elements of the same underlying theory.
You both fully rebuke this extension of Austrian theory?
To be honest, I'm not familiar with "Yeager's approach", nor with how Horwitz reconciles it with that of the Austrians. What I will say is that the ABCT essentially describes putting price controls on interest rates. My comments above weren't about this, however -- they were about demand for money vis-à-vis supply.
for what its worth, I do. Its like saying just as being poor is bad, so is being rich
A timely contribution from Horwitz.