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
http://mises.org/daily/2030
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
Oh happy day. Mises goes out of his way to explain to all why changing the quantity of money doesn't achieve anything:
The most outspoken defender and preacher of inflation in our age, Lord Keynes, was right from his point of view when he attacked what is
called “Say’s Law.”Now Say’s Law is one of the great achievements of the early days of economic theory. The Frenchman, Jean-Baptiste Say, in the so-called Say’s Law, said you can’t improve conditions by increasing the quantity of money generally; when business is not good, it is not be- cause there isn’t enough money. What Say had in mind, what he said when he criticized the doctrine that there should be more money, was that everything that somebody produces is at the same time a demand for other things. If there are more shoes produced, these shoes are something that is offered on the market in exchange for other goods. Ultimately goods are not exchanged against money—money is only a mediumof ex- change—goods are exchanged against other commodities. And if you in- crease the quantity of money you do not improve anybody’s situation ex- cept the definite man to whom you give it; this man can then buy more, can then withdraw more things from the market.
Couldn't have said it better meself.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
Smiling Dave, you're not helping things with the cheeky swagger. Quote your quotes and make your case without the needling.
All the quotes are from the free book, Money and Inflation, available right here at mises.org
Ok no more needling
Smiling Dave: Third, Chapter 17 is not about refuting deflationists. What sophistry to make such an absurd claim. When did I make this claim?
Smiling Dave: Third, Chapter 17 is not about refuting deflationists. What sophistry to make such an absurd claim.
When did I make this claim?
OOPs, my bad. You said an entire section, not an entire chapter. But of course that section said clearly that all the problems of deflation do not exist with fiat money.
Where is this quote from?
It comes from a person who claims to have heard Mises say this in a lecture at the FEE in the 1960s. She promises that Mises actually said this:
Bettina Bein Greaves: Mises did not like to have his oral remarks quoted or published because, obviously, they did not represent the care and precision he devoted to his writings. However, it does not seem to me that these lectures, as I have edited them, misrepresent his ideas in any way.
Either way, whether Mises said it or not is entirely inconsequential; it's simply incorrect.
"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."
Esuric: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.
Even if all prices were to go up in unison and uniformly, this would present a redistribution from money-holders to debtors -- a problem for the former and a benefit for the latter. The second bolded section above ("arbitrary distribution") occurs regardless of whether the prices had risen uniformly or not.
EDIT: How would a free market discern this mythical "demand for money" so it knows when to stop expanding the money supply? At some point, everyone just stops demanding more money ("Had enough!") and banks just stop printing right then and there?
Z.
Aren't all those quotes given in a context of Mises commenting on fiat money?
The state is not the enemy. The idea of the state is.
The redistribution caused by altered monetary conditions, either inflation or deflation, between creditors and debtors, is well understood even amongst the mainstream. Mises' goes beyond this and reveals that this redistribution process occurs throughout the entire economy. This process could not exist if prices rise simultaneously and uniformly. All would increase their nominal cash balances proportionately. This (Cantillon effects) can only occur when there are uneven and delayed price adjustments.
See my post above. Again, most of those quotes come from a person who claimed to have heard Mises say this at a FEE lecture in the 60s. I can't find where some of the other quotes came from.
>> Again, most of those quotes come from a person who claimed to have heard Mises say this at a FEE lecture in the 60s. I can't find where some of the >>other quotes came from.
You can't have any serious reason to doubt her apart from any prejudice you might hold against what she attributes to him...
Bettina is a serious scholar with tremendous respect for her mentor and colleague.
Esuric, I edited my previous post to add another question.
Here are a few more... Why are "altered monetary conditions" any more cause for concern (thus in need of fine-tuning by manipulating supply) than, say, altered iPod conditions, altered bread conditions, or altered shoe conditions? Why is it a problem when there's not enough money to meet everyone's demand for it, but it is not a problem when there aren't enough Ferraris to meet everyone's demand for them? Isn't this why markets and prices exist in the first place?
If there's not enough of X, the price of X goes up, thus demand for it goes down to meet supply.
I can because it directly contradicts Mises' seminal work on money, and because there's no evidence that Mises ever said it. It's also extremely misleading to present such quotes as if they came from Mises' published works. At this point, I'm forced to take her on her word. Either way, whether Mises said it or not is entirely immaterial. It's simply incorrect to proclaim that if the government pursued a forced deflationary policy, where they reduced the supply of money by 99% tomorrow, that it would not lead to a major economic catastrophe, and I won't believe that Mises ever held such a position without actual proof.
No, it doesn't contradict Mises, nor does it contradict Rothbard, if you would consult The Block and Barnett article it is spelt out in detail, but Mises and Rothbard were 'wrong' about 'optimality' of the quantity of money. Now perhaps, they could be more sophisticated if pushed at the margin on the question of a vast project to destroy money 'would not then more money be better than less, if we get rid of 90% of the money, and then ask you', but their written text on the topic does not fully represent this view with meat on the bones, but rather does seem to embody the fallacy you and block and barnett and I have noticed, the fallacy that some existing quantity of money, is optimal for the future too. (i.e. contradicting the Blockian/Barnettian theory I agree with that the optimal quantity of money is that brought about by the operation of a free market and that changes in the quantity of money within that framework are not 'sub-optimal')