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
Hi Filc, maybe I can help sort things out.
filc:Your missing the point. Do you agree, or disagree, that radical changes in the ratio from goods and services to the money that represents that supply of goods and services, must necessarily cause adjustments in calculation. And that if done too quickly, or done in such away that it does not properly represent the available supply of goods and services available on the market, you will likely have mal-investment.
Do you agree, or disagree, that radical changes in the ratio from goods and services to the money that represents that supply of goods and services, must necessarily cause adjustments in calculation. And that if done too quickly, or done in such away that it does not properly represent the available supply of goods and services available on the market, you will likely have mal-investment.
I think an important distinction should be made between money per se and loanable funds. Also keep in mind that, where dramatic deflation has occurred in history, it has typically been credit deflation which followed periods of credit inflation.
filc:Obviously cash-induced deflation is much more difficult to concert amongst a cartel of banks, it's also not infinite, where as inflationary expansion can be. But thats beside the point. The point is that the structure of production, and the ratio of goods and services represented as represented in money-prices is being mis-represented. It doesn't matter in which way the mis-representation occurs.
I don't see how any misrepresentation is being done if not all of the money supply is being spent and/or invested. Hopefully that makes sense -- let me know if I need to clarify.
filc:If a central authority tries to hold interest rates high during a period that consumer are more thrifty, there will be mis-allocations in resources. The same applies when the fed tries to hold interest rates low, during a period when consumers are less thrifty. Obviously the problems they cause are not identical, the point I am making is that problems are caused.
As I tried to explain to Kaz in another thread, the effects are not equal in magnitude yet opposite in direction. In the former scenario, the economy (i.e. the structure of production) will not grow as much as maybe it could have otherwise, given people's time preferences. In the latter, however, the economy tries to "over-grow" and ultimately goes through a correction, whereby much of the growth is revealed to have been wasted time and effort. So it seems to me that, while centralized credit deflation is hardly a good thing, centralized credit inflation is much worse.
Regardless, I think all of us are opposed to centralized control of money and credit. :)
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Non parit potestas ipsius auctoritatem.
Voluntaryism Forum
Esuric:I refuse to repeat myself on this forum. If you don't understand my arguments, then that's your problem. People think that they're somehow entitled to an education.
Why the rudeness? Did I offend you somehow? That was not my intention at all.
With that said, I think you're abandoning intellectual honesty with this statement. Apparently you're not interested in convincing me of the correctness of your viewpoint. I don't see how that's the same as saying I'm "entitled to an education". Although I can't make you change your mind here, this does diminish your credibility in my eyes. Sorry.
DD5: filc: @DD5, Don't repeat my argument to you, back to me. Thanks. Resorting to such Argumentum Ad Hominem is only hurting your credibility,
filc: @DD5, Don't repeat my argument to you, back to me. Thanks.
@DD5,
Don't repeat my argument to you, back to me.
Thanks.
Resorting to such Argumentum Ad Hominem is only hurting your credibility,
I think it's also very important to show what response has apparently instigated these series of personal attacks.
http://mises.org/Community/forums/p/22235/393608.aspx#393608
Autolykos: it has typically been credit deflation which followed periods of credit inflation.
Correct.
Aytoklykos:s I tried to explain to Kaz in another thread, the effects are not equal in magnitude yet opposite in direction.
I believe my points are being over-examined. I was simply making a point to Smiling Dave, alone, that there is alot more to the problem then just "inflation", period.
Autolykos: centralized credit inflation is much worse.
The discussion has never been about what is worse.
Autolykos:Regardless, I think all of us are opposed to centralized control of money and credit. :)
Yes, this is why I get frustrated at DD5 when I catch him desperately looking for an argument where one doesn't exist.
Many of us would actually be in agreement, but it's the opportunities in misunderstandings which grant certain individuals excuses to go nuts. The ole bait n switch. I'm not referring to you ofc.
filc:I believe my points are being over-examined. I was simply making a point to Smiling Dave, alone, that there is alot more to the problem then just "inflation", period.
I'm sorry if I've overstepped any bounds.
filc:Many of us would actually be in agreement, but it's the opportunities in misunderstandings which grant certain individuals excuses to go nuts. The ole bait n switch. I'm not referring to you ofc.
Agreed. Communication is the key, as far as I'm concerned.
filc: Yes, this is why I get frustrated at DD5 when I catch him desperately looking for an argument where one doesn't exist. Many of us would actually be in agreement, but it's the opportunities in misunderstandings
Many of us would actually be in agreement, but it's the opportunities in misunderstandings
I don't see any misunderstandings here, but what I do see is people refusing to engage their own arguments when challenged on paraxelogical grounds. Now, it is in their (or your) perfect right to do so or to disagree, but it is quite shameful to resort to personal attacks.
Edit: Instead of addressing perfectly valid questions and perhaps clarifying your position, you've decided to evade them (your right to do so) and resort to personal attacks. It doesn't look good for you. It just looks like you're being evasive and afraid to reavaluate the validity of your premises and reasoning.
Although I can't make you change your mind here, this does diminish your credibility in my eyes. Sorry.
There's no need to apologize.
"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."
DD5:but what I do see is people refusing to engage their own arguments when challenged on paraxelogical grounds.
Ok so here is a great of example of you just mouthing off without having a clue as to what your arguing against. Your chasing down boogymen, trying your best to find flaws in my wording, when in reality you likely agree with my premise. In the process you are basically being patronizing, finding it more important to critique my representation of the material, rather then the material itself.
So please indulge me, what part of my points below are counter-praxeological?
Point A.
Changes in the ratio of goods and services to money which represents that supply of goods and services, must necessarily cause adjustments in monetary calculation.
Point B.
That the changes in point A occur non-uniformly and un-evenly and at different times and intervals.
Point C.
That the problem is not just that prices will rise in the long run, which, as Esuric points out, is only problematic with long-term interest rates. But that the un-even distribution of new money or credit is one of the first keynotes to understanding business cycle theory. It explains why inflation benefits some, while being a cost to others.
How are these points challenged by Praxeology, and if you agree to the points, why did you waste your time patronizing me in the first place?
sorry charlie, that paragraph isnt talking about your kind of demand for money. increases in population are not your kind of increase in dmeand for money, nor are any of the other reasons he lists on page 300-1.
BTW found a book by Mises called Money and Inflation. So I am putting this on hold till I see it
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It's easy to refute an argument if you first misrepresent it. William Keizer
filc: Smiling Dave:How is non market driven deflation done? Tossing big piles of paper money in the incinerator? Is that what you guys are talking about? Your missing the point. Do you agree, or disagree, that radical changes in the ratio from goods and services to the money that represents that supply of goods and services, must necessarily cause adjustments in calculation. Sure And that if done too quickly, or done in such away that it does not properly represent the available supply of goods and services available on the market, you will likely have mal-investment. Nope, because the money isn't there to malinvest, since we have deflation. Only when there is tons of printed money around to spend are there grand scale malinvestments. Obviously cash-induced deflation is much more difficult to concert amongst a cartel of banks, it's also not infinite, where as inflationary expansion can be. But thats beside the point. The point is that the structure of production, and the ratio of goods and services represented as represented in money-prices is being mis-represented. changed is not the same as misrepresented It doesn't matter in which way the mis-representation occurs. It does, as above. If a central authority tries to hold interest rates high during a period that consumer are more thrifty, there will be mis-allocations in resources. The same applies when the fed tries to hold interest rates low, during a period when consumers are less thrifty. Obviously the problems they cause are not identical, the point I am making is that problems are caused. The point I made, and have been making, is that you presented an oversimplification of the problem, and a mis-understanding of the ABCT, when you just ad-hoc claim that inflation is evil end of story, period. I beg to differ, still. And I challenge you to find a quote from Mises [or even Hayek] that says inflation is ever good or harmless, or that deflation causes a business cycle.
Smiling Dave:How is non market driven deflation done? Tossing big piles of paper money in the incinerator? Is that what you guys are talking about?
Your missing the point.
Do you agree, or disagree, that radical changes in the ratio from goods and services to the money that represents that supply of goods and services, must necessarily cause adjustments in calculation.
Sure
And that if done too quickly, or done in such away that it does not properly represent the available supply of goods and services available on the market, you will likely have mal-investment.
Nope, because the money isn't there to malinvest, since we have deflation. Only when there is tons of printed money around to spend are there grand scale malinvestments.
Obviously cash-induced deflation is much more difficult to concert amongst a cartel of banks, it's also not infinite, where as inflationary expansion can be. But thats beside the point. The point is that the structure of production, and the ratio of goods and services represented as represented in money-prices is being mis-represented.
changed is not the same as misrepresented
It doesn't matter in which way the mis-representation occurs.
It does, as above.
If a central authority tries to hold interest rates high during a period that consumer are more thrifty, there will be mis-allocations in resources. The same applies when the fed tries to hold interest rates low, during a period when consumers are less thrifty. Obviously the problems they cause are not identical, the point I am making is that problems are caused.
The point I made, and have been making, is that you presented an oversimplification of the problem, and a mis-understanding of the ABCT, when you just ad-hoc claim that inflation is evil end of story, period.
I beg to differ, still. And I challenge you to find a quote from Mises [or even Hayek] that says inflation is ever good or harmless, or that deflation causes a business cycle.
filc:How are these points challenged by Praxeology
So you don't come off as being evasive again, why don't you address the specific questions here (specifically the first two comments):
Perhaps your position simply needs to be clarified and nothing more. I have interpreted them in the context of your somewhat defense of Esuric's position. I'm not arguing semantics. I never do.
filc:why did you waste your time patronizing me in the first place?
When somebody says that uneven changes in market data is 'problematic' or occurring "too quickly", or whatever, then it is not a waste of time to point out that such assertions are not compatible with praxeology.
DD5:So you don't come off as being evasive again, why don't you address the specific questions here (specifically the first two comments):
Because your constructing an argument from nothing. I don't need to address your questions, as they have nothing to do with the 3 points I posted above. Your desperately trying to find something to argue about, this is who you are. I could just as equally as call you evasive for ignoring them.
Lets make one thing straight here. Your not arguing against my premise, but of a perhaps poorly worded explanation of it. That in and of itself is not wrong, what bothers me is that I think you knew what my premise was, and agreed to it, prior to nit-picking. As such your just trying to find a reason to argue.
Now as for your comments addressed to me. Your first statement is entirely incoherent. The second statement about "too quickly" I can see your issue here, but this nitpicking misses the objections my 3 positions above raised. Your not actually addressing my core objections, just a specific wording of it.
Furthermore if it were true that un-even changes in the market did not cause issues in the capital structure amongst certain cases then there would not be a business cycle theory in the first place. I'd like you to explain the ABCT where un-even changes in the market did not exist. IE, taking the monetarist homogenous capital pool position.
So you see, in certain cases this keynote of ABCT is problematic. Specifically when the case is the printing of new money, and the ratio to goods and services to money is changed to such a degree that the historical data that is used to create money-prices is now in-adequate, and making safe economic calculations are impossible moving forward.
The reason why you set me off is because it's apparent that your
A) Patronizing
B) Nit picking for no reason
Though since I have known you on these forums, I come to expect this behavior from you.
By the way, Filc, do you agree with my distinction between money per se and loanable funds?
Autolykos:By the way, Filc, do you agree with my distinction between money per se and loanable funds?
Does one buy a loaf of bread where the other does not?
That wasn't the distinction I was making. By "money per se", I meant the entire money supply, including loanable funds. I don't think the latter includes the money that people save outside of banks (e.g. under mattresses).