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
A few quotes from our man Mises; all the bold font is his words, my bolding.
Dig yourself a hole, those who disagreed with me. You will need it to hide in.
When the gov- ernment prints a piece of paper, it doesn’t cost more to print “100” than it does to print “10” or “1” on this same piece of paper. And the market situation, the situation for all human exchanges, the whole economic sys- tem is undermined, destroyed, by the governments when they consider it advisable to increase the quantity of money by increasing the quantity of government money.
In fact, all of Chapter Four, on the gold standard, breathes not a word of the mysteries of the trade cycle, but hammers home again and again that the sheer act of money printing destrys an economy. Go, my children, and read to your satisfaction. "Money and Inflation", that's the book.
Oh, here's another:
The main thing with regard to money is the question, how to restrict, how not to increase, its quantity.
See that, guys? Inflation and deflation are not equal boogey men. Inflation= bad. Deflation= not a problem.
Another priceless one:
Now there is a doctrine that says there is not enough gold. The rea- son why these critics of gold are against the gold standard is due to their belief that the quantity of moneymust be increased. Now the quantity of money adjusts itself necessarily through prices to the demands of thepub- lic. Yet, there are authors, professors, textbookwriters, who tell us there is not enough money...
And he goes on to dismiss them as nutjobs.
Gem the next:
The problem is not to increase the quantity of money.The problem is to increase the quantity of those things which can be bought with money. And if you are increasing the quantity of money, and you are not increas- ing the quantity of things which can be bought withmoney, you are only increasing the prices which are paid for them. And in time, if the in- crease in money continues, the whole system becomes a system without any meaning and really without any possible method of dealing with it.
Tell me how that means rising prices is benign.
For those who like cute anecdotes:
In the years after the First World War, American economists frequently visited Vienna and I had the pleasure of talking with them, and explaining inflation and conditions as they prevailed at that time in Austria and in other European countries. And, as you know, when people are talking about economic problems, they are talking and talking until finally it is late in the evening, very late in the evening. And so it was. Then I told them, “I will now give you an explanation as to why conditions in the country are not so satisfactory. I will takeyou for a little walk to the center of the city, past a definite building.”This was at 11 o’clock or midnight. And we went. It was very quiet. But then they heard a noise, the sound of the printing machines that were printing banknotes day and night for the government. The result in Vienna was very modest you know; the American dollar which had been five Austrian crowns became 14,000 or 17,000 Austrian crowns. The inflation was bad, you are right. But this was a very modest inflation; the achievement of inflation in Germany was much greater you know. It took billions of marks to make one U.S. dollar. You consider this a joke, but it was a tragedy of course. For the people whose property it destroyed, it was a catastrophe.
Want more about how "benign" inflation is?
Inflation today is probably the most important phenomenon in polit- ical life and political conditions. Fortunately there is still in this country, and I hope it will succeed one day, a very reasonable opposition against inflationary measures. But for many governments it is simply a question of being in a situation of needing more money and they think it is per- fectly reasonable to increase the quantity of money. If we want to have a system of money that works and operates, one must not increase the quan- tity of money without realizing at every step that one is approaching a very dangerous point, the point at which the whole thing breaks down.
More:
Where does inflation start? It starts as soon as you increase the quantity of money. And where does the danger point begin?That is another problem.The question cannot be answered precisely. People must realize that you cannot give a statesman advice: “This is the point up to which you may go and beyond this point you may not go” Life is not as simple as that. But what we have to realize, what we have to
know when we are dealing with money and monetary problems, is always the same. We have to realize that the increase in the quantity of money, the increase of those things which have the power to be used for monetary purposes, must be restricted at every point.
Got that, Mr Inflation is Benign?
OK enough is enough. I won't do your research for you. But know this, our man Mises constantly hammers home that PRICE INFLATION, not the trade cycle, is the biggest problem on Earth. He repeats this over and over and over, so that even the meanest intelligence can get it. This may be very useful to some here with exaggerated ideas of their intellectual capacity, or who think Mises didn't "pay attention" to price inflation.
OK, the hard core nutjobs here won't be moved, Their silly minds are frozen into zombie states, unable to learn. But those who really want to know something, those who are curious, spend the half hour or so needed to read this 95 page book. Learn something.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
Your just doing what I commented about above. You just searched Human Action for "Inflation". Then posted what fit your argument, highlighting the comments which best agree with your opinion.
Meanwhile nothing of what I have said(And I doubt much of if any of what Esuric has said) is disagreeable with the quotes you've provided.
Furthermore, why not reason together rather than constant appeals to authority. Pitting one quote out of context against another, Making Mises appear to be bi-polar! lulz...
Sorry Autolykos I don't know if I follow.
Esuric: It's not irrelevant, you moron. (...) Are you really this unforgivably stupid?
It's not irrelevant, you moron. (...)
Are you really this unforgivably stupid?
Esuric, please let your superior understanding of the topic stand on its own merit. Language like this is unnecessary, distracting, and contrary to the forum's rules.
More from our man Mises:
But one should not exaggerate the difference in the effects brought about by the greater inflations as against the smaller inflations. The effects of the “smaller inflations” are also bad.
And here he is, that naughty scamp Mises, saying what I did almost word for word. The very phrase that got Esuric into a lather when I said it. That when money supply is increased, prices go up. And here it is in bold:
The important point to remember regarding inflation is that, while the money in circulation is increased, other things remain unchanged. This inflation is very cheap, you know; it is a very cheap procedure. What happens then? Prices go up. The government, of course, wants a way out, a solution, so it is apt to try price-fixing. The government fails to recognize the fact that if the public really obeys its price-fixing orders, sellers will sell their entire supply of commodities to regular customers at the former or fixed prices with the result that those into whose pockets the additional money goes will find nothing to buy.
Give him the beat down Esuric, how dare he say that?
Oh, look at this. A whole chapter, 13, devoted to Esuric's thesis. The title?
Many Economics Professors Believe the Quantity of Money Should be Increased
Spoiler alert: Mises disagrees. And he lets loose with this one:
From the point of view of most people, of the masses, an increase in the money supply is bad.
In HA he went a step further and called it evil.
BTW, half the book is gone and not a single word about the trade cycle.
I apologize for my honesty.
"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."
Danny Sanchez: Esuric: It's not irrelevant, you moron. (...) Are you really this unforgivably stupid? Esuric, please let your superior understanding of the topic stand on its own merit. Language like this is unnecessary, distracting, and contrary to the forum's rules.
TY Danny, I was waiting.
And though I don't think his understanding is superior to mine, but inferior, as I have provided evidence for, you are entitled to your opinion.
*****
A quick shout out to those think my quotes are out of context. How 'bout if you read the book? After all any quote can be laughed off as out of context. But that's not enough. You have to PROVE that it is out of context. And also say what it really means.
And Mises isn't bipolar, because there are no quotes where he says inflation is harmless, or that deflation is bad. Not one.
All the quotes are very relevant to those who said here that Mises didn't "pay attention" to price inflation, and to Esuric who said it's "not a problem", as I have gathered 7 quotes from him earlier from this thread alone saying so.
I don't know why I'm still responding to you but,
Mises: In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur.
And Mises isn't bipolar, because there are no quotes where he says inflation is harmless
............ I've never seen someone this lost...................
or that deflation is bad
Mises' wouldn't use such clumsy terminology but he devotes an entire section in TMC towards refuting deflationists, and claims (again in chapter 17),
Mises: “In fact, the development of the clearing system and fiduciary media has at least kept pace with the potential increase of the demand for money brought about by the extension of the money economy, so that the tremendous increase in the exchange value of money, which otherwise would have occurred as a consequence of the extension of the use of money, had been completely avoided, together with its undesirable consequences (pp. 333).”
“In fact, the development of the clearing system and fiduciary media has at least kept pace with the potential increase of the demand for money brought about by the extension of the money economy, so that the tremendous increase in the exchange value of money, which otherwise would have occurred as a consequence of the extension of the use of money, had been completely avoided, together with its undesirable consequences (pp. 333).”
Also, and I've said this to you about 15 times now, there are two different types of deflation. One is considered "good," while the other is considered "bad."
what are these undesirable consequences?
Mises:If it had not been for this the increase in the exchange-value of money, and so also of the monetary metal, would have given an increased impetus to the production of the metal. Capital and labour would have been diverted from other branches of production to the production of the monetary metal. This would undoubtedly have meant increased returns to certain individual undertakings; but the welfare of the community would have suffered. The increase in the stock of precious metals which serve monetary purposes would not have improved the position of the individual members of the community, would not have increased the satisfaction of their wants; for the monetary function could also have been fulfilled by a smaller stock.
I don't think this is Mises's finest moment, the community has 'decreased' welfare because they mined gold and not steel? because more steel is useful to them but more gold isn't.... well then... why did they dig up the gold? are we going to second guess consenting capitalist acts between adults under free trade where force are fraud are nowhere to be seen? Is minting coins from gold when there already exist some coins in circulation a case of 'market failure'?
for more scholarly investigation than I can offer see Barnett and Block https://mises.org/journals/qjae/pdf/qjae7_1_4.pdf
De Soto: 119Selgin himself recognizes that Mises’s support for free banking is based in part on his agreement with Cernuschi, who (along with Modeste) believed that freedom of note issue would automatically lead to 100 percent reserve banking; and also that Mises “believed that free banking will somehow lead to the suppression of fractionally-based inside monies.” See Selgin, The Theory of Free Banking, pp. 62 and 164.
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
Esuric: Mises: In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur. And Mises isn't bipolar, because there are no quotes where he says inflation is harmless ............ I've never seen someone this lost................... or that deflation is bad Mises' wouldn't use such clumsy terminology but he devotes an entire section in TMC towards refuting deflationists, and claims (again in chapter 17), Mises: “In fact, the development of the clearing system and fiduciary media has at least kept pace with the potential increase of the demand for money brought about by the extension of the money economy, so that the tremendous increase in the exchange value of money, which otherwise would have occurred as a consequence of the extension of the use of money, had been completely avoided, together with its undesirable consequences (pp. 333).”
First of all, all your quotes are from TMC, his earliest work, and he is known to have changed his mind in later works about this very question, whether you have to keep the money supply at some arbitrary high.
From the book Money and Inflation [1969] [which I quoted before, but you are reluctant to address]:
Now there is a doctrine that says there is not enough gold. The rea- son why these critics of gold are against the gold standard is due to their belief that the quantity of moneymust be increased. Now the quantity of money adjusts itself necessarily through prices to the demands of the pub- lic.
Yet, there are authors, professors, textbook writers, who tell us there is not enough money and they suggest a paper currency and regular yearly increases in the quantity of money.They don’t know what they are talking about.
Second of all, as I pointed out before but you are reluctant to address for some reason, he is not talking about increased demand for money in the sense you were using. I told you about this before, and you were reluctant to address it. See page 300-1 of TMC.
Third, Chapter 17 is not about refuting deflationists. What sophistry to make such an absurd claim.
Finally, your last quote is a cheap attempt at deception, as I will show. Either you did not bother reading the very next sentence, or you intentionally omitted it. I think I caught you at this once before, in fact with this very piece of quote from TMC. But maybe it wasn't you. Maybe two people tried the same piece of sophistry.
Because Mises goes on to describe what the horrific consequences are: People will start mining for gold, instead of working at their jobs. Less gold would be available for dentists to fill teeth. Stuff like that.
He then goes on to say that none of those disadvantages of deflation exist with fiat money.
Thank you for agreeing with me, at least partially. I count not 15, but zero times you have made any such distinction
And as your reward, look at this:
Many famous professors of economics think that the supply of money is insufficient. It’s unbelievable but we have now already for a long time, for many years, textbooks that say, in every new edition, that the quan- tity of moneymust increase by 2%, or 5%, or 7%. They change it from year to year—this is without any importance, what quantity they recom- mend is not so important—what is important is that they say that such an increase is good from the point of view of their policies. Wonderful! The government, the banks, can distribute more money, but they cannot distribute more goods. And this is the problem. As this additional money will raise the prices of goods, those who do not get any of this additional money are hurt. And this is what people don’t realize, what they don’t see.
Still not a word about the trade cycle yet.
Man, that Mises was something else. They keep on coming:
An increase in the quantity of many things is very good—yes, an in- crease in the supply of those things whichareuseful. But an increase in the supply of, let us say rats and mice, would not be very useful. Fortunately this is not a problem men have to decide because the interests of all people agree in this regard.
But their interests do not agree with regard to money. What misleads the thinking of many people, and unfortunately also the thinking of those peoplewho are operating our governmental and politi- cal activities, is the idea that the quantity ofmoney counts. It is certainly better for the individual to have more money than less. But it isnot better for the whole economic system to havemore money than less. Money is a medium of exchange. And that means, first of all, that its quantity is without any importance for the perfection of its functions. If you increase the total quantity of money, the total quantityof the medium of exchange, you do not improve conditions generally; you only change exchange ratios between the individuals’ evaluations of goods and services and of the thing used as money.
Can it be any clearer?
nirgrahamUK: what are these undesirable consequences? Mises:If it had not been for this the increase in the exchange-value of money, and so also of the monetary metal, would have given an increased impetus to the production of the metal. Capital and labour would have been diverted from other branches of production to the production of the monetary metal. This would undoubtedly have meant increased returns to certain individual undertakings; but the welfare of the community would have suffered. The increase in the stock of precious metals which serve monetary purposes would not have improved the position of the individual members of the community, would not have increased the satisfaction of their wants; for the monetary function could also have been fulfilled by a smaller stock.
This is one undesirable consequence, but Mises's explicitly says, "all of the undesirable consequences."
Smiling Dave: Third, Chapter 17 is not about refuting deflationists. What sophistry to make such an absurd claim.
When did I make this claim? He has a small part devoted to deflationism/restrictionism. Also, you continuously conflate price-stabilization mandates with monetary equilibrium theory. The latter does not intend to stabilize prices, and it does not oppose general price deflation. But I can't expect you to understand such subtleties. This will be my last response because I’ve literally had more fruitful conversations with my 3 year old niece.
The major and most profound problem associated with inflation, i.e., an expansion in the supply of money beyond the demand for money, is not that “prices go up,” but rather that some prices go up faster than others, while some prices remain unchanged, or actually fall. This is what causes a misallocation of resources towards ultimately untenable productions and an arbitrary distribution of wealth from those who receive the money later, towards those who receive it earlier.
The focus on the relative structure of prices, and the uneven adjustments, is a major Austrian insight that is lost amongst many mainstream economists. Additionally, this uneven adjustment process occurs for deflationary episodes as well:
Mises:The converse of what is true of a depreciation in the value of money holds for an increase in its value. Monetary appreciation, like monetary depreciation, does not occur suddenly and uniformly throughout a whole community, but as a rule starts from single classes and spreads gradually. If this were not the case, and if the increase in the value of money took place almost simultaneously in the whole community, then it would not be accompanied by the special kind of economic consequences that interest us here." (pp. 243, TMC)
Now there are other effects of inflation, which I’ve already mentioned. The most serious of which (if we exclude the influence it exerts over relative prices) is inflationary expectations which elevates yields and may lead to a hyperinflation (when the demand for money collapses). The other effects, namely menu costs and shoe leather costs, are, when compared to the other affects, relatively inconsequential. Now it’s important to keep this in mind because many neoclassical economists, who are unfamiliar with Austrian insights, actually believe that inflation is a minor problem, a mere nuisance (they are aware of hyperinflations but believe that they are highly improbable).
Next, to claim that deflation is “good” because it “lowers prices” is not only overly simplistic, but entirely ignores monetary theory altogether. It is armchair economics. If this were true, than central banks would be extremely efficient social institutions which could intentionally pursue perpetual deflationary mandates, and make all of society wealthier. Additionally, the 30% deflation rates during the great depression should have acted as a major economic stimulus, promoting general economic activity.
A few other ridiculous accusations that I will now address:
Okay so stop saying that "mises never claimed" x. And your endless appeals to authority reveal how intellectually feeble you are, not only because you fail to see that you're consistently engaging in an argumentative fallacy, but because you don't understand the quotes that you're providing (Mises is attacking the Monetarists and their price-stabilization mandate in almost all of those quotes).
Where is this quote from?
The state is not the enemy. The idea of the state is.