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
@DD5, & Smiling Dave
To suggest that non-market driven changes in the money supply only harm things in one direction(inflationary) is to ignore the entire Austrian position on capital theory and interest as it pertains to catallictics and economic calculation.
You guys have some more reading up to do imho. I won't go down the argumentative road with you DD5. You already proved your inability to reason with me months ago when you stubbornly refused to admit that the Hayekian explanation of economic calculation offered different but equally valid insights from the Misesian explanation. Conflating the two as one, and ignoring the individual beneficial points of each. I have an expectation of you out of observation, which I expect will be upheld, that you take issue with being incorrect, and relish in being right all of the time. Even when the error will cause great harm in your cognitive understanding of Austrian Concepts.
It is a common practice to google search, and PDF search quotes from various Austrian Economists in an effort to refute one's argument on these forums. The error arrives when this practice is done by one who is not knowledgable in the Austrian position, therefore taking every quote out of context, in hopes that it will serve their argument best. Like Smiling Dave forgetting the points I posted above.
P.S. IDK who is saying that money is netral. You guys are building a whole army of strawmen(and tbh just putting alot of words in our mouths), likely due to mis-understanding, that I haven't the energy to run around and tackle them all.
I'm sorry but you cannot offset a deflationary effect by an equal inflationary effect. The forces do not cancel each other out, but are compounded!
It's not inflation, by definition. Inflation is defined, by everyone but Rothbard and Keynes, as an expansion in the supply of money (in the broader sense) beyond the demand for money. Inter-temporal equilibrium is contingent upon monetary equilibrium.
Now, what you are implying (or even proposing) is something that is a totally self-contradictory idea. A neutral money of some form.
I don't believe that money can ever be made neutral, or that the economy can ever reach and sustain general equilibrium, and I haven't proposed anything. You keep trying to turn this into a debate about free banking but my argument, which you've completely ignored (you haven't explicitly addressed anything in my OP to Autolykos), deals exclusively with the effects of monetary disequilibrium. You need to acknowledge that such a condition exists before we can talk about ways to ease it, but I'm not really interested in have that debate.
Again, I merely wanted to explain the effects of such a condition, that there is a demand for money, that the market rate of interest can rise above the natural rate (which has very real consequences), and that it's not true that any supply of money is optimal. This is what I'm interested in (pure theory), much more so than potential prescriptive remedies.
"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."
filc:To deny that non-market driven changes in the money supply only harm things in one direction(inflationary) is to deny the entire Austrian position on capital theory and interest.
If you're going to make such an outrageous accusation about my position, which is nowhere to be found on this thread, or anywhere probably on this forum history, then I might as well accuse you of dishonesty or extreme laziness on your part.
DD5:If you're going to make such an outrageous accusation about my position, which is nowhere to be found on this thread, or anywhere probably on this forum history, then I might as well accuse you of dishonesty or extreme laziness on your part.
It is lazyness. Because your responding to me in argumentation, of which I don't know why. Because based on what you'ev wrote, you have nothing to disagree with. The point is you like to argue, where there is no argument to be had.
Which comes back to my point. I've no time or energy to even remotely try and reason with you. Your issue is with yourself, and the unhealthy need to be right, all of the time.
Esuric:I don't believe that money can ever be made neutral,
Because what is being practiced here is strawman creation. An attempt to trick the opponent into an argument that they don't even themselves agree with. Putting words in one's mouth is DD5's expertise. I never read this out of your position, and I don't know how he did. So I can only conclude that he is:
A) He is confused or
B) He wants to argue and is trying to fabricate ways to display his haughtiness.
This is why I won't pretend the notion of continuing any type of intelligent conversation with him. This is now the second time I've had to do this with him. It's sad because there is no reason for him to really be in disagreement with us.(Or at least me)
filc,
How is non market driven deflation done? Tossing big piles of paper money in the incinerator? Is that what you guys are talking about?
Esuric was talking about a market driven decision. People decide they want to spend less. He also decided he can read minds and know if they are doing it to save for later, or out of sheer cussednes. In any case it is a market driven decision on their part, and not made by aliens from outer space, but by market participants of their own free will.
I can read oceans of Mises and Rothbard and others and never see what Esuric claimed. He himself admits he got his stuff only from misunderstanding Hayek.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
Esuric: I'm sorry but you cannot offset a deflationary effect by an equal inflationary effect. The forces do not cancel each other out, but are compounded! It's not inflation, by definition. Inflation is defined, by everyone
It's not inflation, by definition. Inflation is defined, by everyone
Who cares what the definition of inflation is. It's not the point. The point is the idea of offsetting any increase in cash holdings by injecting an equivalent amount money. Who cares what you call it.
Esuric: deals exclusively with the effects of monetary disequilibrium.
deals exclusively with the effects of monetary disequilibrium.
I am also only talking about monetary equilibrium/disequilibrium.
Esuric: Again, I merely wanted to explain the effects of such a condition, that there is a demand for money, that the market rate of interest can rise above the natural rate (which has very real consequences), and that it's not true that any supply of money is optimal. This is what I'm interested in (pure theory), much more so than prescriptive remedies.
Again, I merely wanted to explain the effects of such a condition, that there is a demand for money, that the market rate of interest can rise above the natural rate (which has very real consequences), and that it's not true that any supply of money is optimal. This is what I'm interested in (pure theory), much more so than prescriptive remedies.
Because you equivocate the concept of disequilibrium with the concept of distortion. That cannot be. The two are equivalent only in the unique case when the economist intentionally assumes for simplicity of analysis that equilibrium is the present desirable state of the market, so that any divergence from this equilibrium resting point must now represent some exogenous [undesirable] force, and therefore, a distorting element on the market.
When the demand for money rises but is not satiated by an expansion in the supply of money in the broader sense because there isn't actual competition within the banking system due to government cartelization, extreme regulation, and monetary central planning.
Esuric was talking about a market driven decision. People decide they want to spend less.
First, it's not that they "want to spend less," but rather demand additional real money balances. Next, and as I've already mentioned, the banking system cannot respond to this elevated demand for money (by creating fiduciary media) because of arbitrary government interventions.
Either way, this is not what I want to talk about. The fact that your reading comprehension, or lack thereof, and your ignorance of economics in general, prevents you from understanding my theoretical arguments has proven to be a major distraction.
I can read oceans of Mises and Rothbard and others and never see what Esuric claimed.
No you haven't, and you have completely misunderstood what little you have read. I suggest you read Mises' Theory of Money and Credit, especially chapter 17.
Mises: Of course, all of this is true only under the assumption that all banks issue fiduciary media according to uniform principles, or that there is only one bank that issues fiduciary media. A single bank carrying on its business in competition with numerous others is not in a position to enter upon an independent discount policy… Thus the banks may be seen to pay a certain amount of regard to the periodical fluctuations in the demand for money. They increase and decrease their circulation pari passu with the variations in the demand for money, so far as the lack of a uniform procedure makes it impossible for them to follow and independent interest policy. But in doing so, they help to stabilize the objective exchange value of money. To this extent, therefore, the theory of the elasticity of the circulation of fiduciary media is correct; it has rightly apprehended one of the phenomena of the market, even if it has also completely misapprehended its cause (pp. 347).
Of course, all of this is true only under the assumption that all banks issue fiduciary media according to uniform principles, or that there is only one bank that issues fiduciary media. A single bank carrying on its business in competition with numerous others is not in a position to enter upon an independent discount policy… Thus the banks may be seen to pay a certain amount of regard to the periodical fluctuations in the demand for money. They increase and decrease their circulation pari passu with the variations in the demand for money, so far as the lack of a uniform procedure makes it impossible for them to follow and independent interest policy. But in doing so, they help to stabilize the objective exchange value of money. To this extent, therefore, the theory of the elasticity of the circulation of fiduciary media is correct; it has rightly apprehended one of the phenomena of the market, even if it has also completely misapprehended its cause (pp. 347).
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. 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.
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.
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.
Esuric, did you miss my last post in this thread?
Esuric:First, it's not that they "want to spend less," but rather demand additional real money balances.
I'm sorry, but really, what is the difference here? Maybe you're talking about investors and I'm (along with Smiling Dave and DD5) talking about wage-earners? As far as I can tell, if someone wants a higher real-money balance, he will spend less of his income.
The keyboard is mightier than the gun.
Non parit potestas ipsius auctoritatem.
Voluntaryism Forum
filc:Because what is being practiced here is strawman creation. An attempt to trick the opponent into an argument that they don't even themselves agree with. Putting words in one's mouth is DD5's expertise. I never read this out of your position, and I don't know how he did. So I can only conclude that he is:
What you and many others here don't want to accept is that there is often a difference between the positions people claim to be holding (usually in all sincerity) and the arguments and theories they expound in defense of those claims. The two can be (and are often) incompatible. For example, it would be a non-sequitur to claim that you are not ignoring microeconomic effects simply because you tittled your book "micro-foundations, an Austrian perspective ....."
You have yet to show us here where a strawman has been set up (by me). I don't care about what you or anybody formally declare to believe in. I only care about the logical reasoning behind your arguments.
@DD5,
Don't repeat my argument to you, back to me.
Thanks.
Esuric:No you haven't, and you have completely misunderstood what little you have read. I suggest you read Mises' Theory of Money and Credit, especially chapter 17.
And I am by now convinced that this is almost the only thing you're apparently familiar with by Mises.
filc: @DD5, Don't repeat my argument to you, back to me. Thanks.
Resorting to such Argumentum Ad Hominem is only hurting your credibility,
Autolykos: Esuric, did you miss my last post in this thread?
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.
DD5: And I am by now convinced that this is almost the only thing you're apparently familiar with by Mises.
awesome.