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
Esuric: A higher demand for money, again even in an economy consisting of multiple phases of production, will elevate the market rate of interest above the natural rate, constricting general economic activity. .... This will yield a condition which resembles inadequate effective demand until prices adjust (which will take time and the adjustments will be uneven).
As if there was really such a real thing as "natural" rate and it wasn't just a mental construct (like equilibrium).
Notice: Nothing works any longer "until prices adjust" (Esuric's own words). The market, once again, is considered only functional in some equilibrium (monetary equilibrium IS equilibrium), but is in some apparent disarray when voluntary actors are disturbing it.
Equilibrium is considered a benchmark according to this analysis. Equilibrium is not a benchmark. It's a mental construct that shows us the direction in which market forces act upon and would be brought about if no further changes in market data were to take place.
This analysis, and I am happy you took the time to write it, contains the same fallacies that the mathematical economist commits. You just didn't model the above in mathematical form.
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Wouldn't scarcity imply that this would be all people? Who doesn't demand more money than they presently have?
Don't confuse the demand for money with the demand for wealth. They are entirely different and the latter is insatiable while the former exists in order to facilitate exchange (and is elevated during times of extreme uncertainty). The demand for money is the demand for liquidity. If you had an infinite demand for money then you would sell off all of your assets and never spend a single dollar. You would just hoard cash at all times and die of starvation.
Equilibrium is considered a benchmark according to this analysis. Equilibrium is not a benchmark. It's a mental construct that shows us the direction in which market forces act upon and would be brought about if no further changes in market data were to take place. This analysis, and I am happy you took the time to write it, contains the same fallacies that the mathematical economist commits. You just didn't model the above in mathematical form.
This is what economic analysis (pure theory) is. You compare the real world with a hypothetical and perfect world in order to identify and analyze the relationships between certain variables, while realizing that such a state is completely illusory and unattainable. The monetary equilibrium theorist's don't claim that any deviation from Pareto efficiency is a market failure which requires government intervention, as the mathematical economists do; they merely reveal and explain the effects of a certain type of disequilibrium, which, whether you acknowledge it or not, exists and has profound implications, the same way that other Austrians focus on the effects of inter-temporal equilibrium and disequilibrium.
I mean, should we just abandon Austrian business cycle theory because inter-temporal equilibrium can never be attained in perpetuity within the real world? I would say no. Furthermore, the level of monetary disequilibrium that exists and has existed is not the result of natural market processes; it is the direct result of certain government interventions and institutions. Why should economists ignore it?
"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."
z1235:Wouldn't scarcity imply that this would be all people? Who doesn't demand more money than they presently have?
Don't conflate demand in the colloquial sense (desire) with demand in the economic sense (which takes the cost of acquiring the good into account). We might not demand more money (or, as Esuric points out, wealth) than we currently have if that comes at the cost of giving up leisure time.
Esuric:Don't confuse the demand for money with the demand for wealth. They are entirely different and the latter is insatiable while the former exists in order to facilitate exchange (and is elevated during times of extreme uncertainty).
Doesn't wealth also exist to facilitate exchange? Can't money be exchanged for wealth and vice versa? Money is not wealth? What's the difference?
Esuric:If you had an infinite demand for money then you would sell off all of your assets and never spend a single dollar. You would just hoard cash at all times and die of starvation.
So who's stopping you from selling whatever assets you want and receive whatever money the market will give you for them? Just curious. Could your demand for money exceed the market value of all your assets?
Michael J Green:Don't conflate demand in the colloquial sense (desire) with demand in the economic sense (which takes the cost of acquiring the good into account).
What's the difference?
Michael J Green:We might not demand more money (or, as Esuric points out, wealth) than we currently have if that comes at the cost of giving up leisure time.
Of course, no one is stopping you from using (consuming, exchanging, etc.) your property (assets, money, labor) toward satiating whatever demand you have. What if money didn't cost anything, as in Bernanke throwing it out of helicopters? Or as in a "free" banker pressing the "0" key on his computer a few times? What would your estimate for the "demand for money" be then?
This is starting to feel like a Twilight Zone episode.
Z.
Demand for money is probably best thought of as the inverse of the demand for goods. If you increase your consumption you increase your demand for goods and decrease your demand for money. If you increase your saving you decrease your demand for goods and increase your demand for money.
Do you wish to hold more of your wealth in goods or in money? Your demand for money determines the answer to this question.
JohnyFive:Do you wish to hold more of your wealth in goods or in money?.
Do you wish to hold more of your wealth in bonds or stocks? Apples or oranges? Skis or snowboards? A or B? You can't have everything. You must make a choice -- a preference. You must trade. This is scarcity. This is economics. Demand for money is no different from demand for anything else that is freely traded in the market.
z1235: JohnyFive:Do you wish to hold more of your wealth in goods or in money?. Do you wish to hold more of your wealth in bonds or stocks? Apples or oranges? Skis or snowboards? A or B? You can't have everything. You must make a choice -- a preference. You must trade. This is scarcity. This is economics. Demand for money is no different from demand for anything else that is freely traded in the market. Z.
And if the demand for a good rises, supply adjusts. So what's the problem? :x
The state is not the enemy. The idea of the state is.
AdrianHealey:And if the demand for a good rises, supply adjusts. So what's the problem? :x
Then, Mr. Zeitgeist, until further notice, I'll have three Ferrari 458 Italia and an 80ft sailboat in the Caribbean with an all-blonde-female crew. Supply away.
How do you intend to pay?
You mean, what can I forgo (trade, exchange) in return? Welcome to scarcity. Now explain how satisfying someone's demand for money works, again?
z1235: AdrianHealey:And if the demand for a good rises, supply adjusts. So what's the problem? :x Then, Mr. Zeitgeist, until further notice, I'll have three Ferrari 458 Italia and an 80ft sailboat in the Caribbean with an all-blonde-female crew. Supply away. Z.
Here I am giving you basically a home run and you blew it with such a comment.
What you meant to say - I take it to be, but I could be wrong - is something like this: the MIT people emphasize that 'the demand for money' (as liquidity) makes sense. But it doesn't follow that we have to supply it in the absence of them giving up stuff. If you want more money as liquidity: save less or earn more. There is no real need to adjust the monetary quantity in the absence of these sacrifices. And this makes sense.
So, what the MIT people ought to proof is: why would we want to increase the supply of a good in the absence of people having to make sacrifices for it? (If you want more boats, you have to give up some cars. If you want more money as liquidity: save less or earn more.)
As far as I take it: the MIT people would argue that the increase in the supply of money is actually good, because people just want more liquidity as such, so there is no need to adjust the capital structure as such. (Again: this is my interpretation. Could be wrong.) But why would that be? People's preferences actually say: given the circumstances, we would rater have more liquidity thatn the stuff generally on the market/investment projects going on. Why should we 'protect' entrepreneurs from making these adjustments to the consumer preferences?
JohnnyFive: Demand for money is probably best thought of as the inverse of the demand for goods. If you increase your consumption you increase your demand for goods and decrease your demand for money. If you increase your saving you decrease your demand for goods and increase your demand for money. Do you wish to hold more of your wealth in goods or in money? Your demand for money determines the answer to this question.
The demand for money is _not_ the same as the demand for savings.
'Savings', 'liquidity holdings' and 'consumptions' are three different ways of using your money.
AdrianHealey:Here I am giving you basically a home run and you blew it with such a comment.
I thought I hit it straight out of the park, sarcastically so. My comment implied exactly what you just explained.
Esuric: Now let's consider what actually happens when the demand for money rises. Individuals, as I've mentioned, will cut consumption and they will withdraw money from the bank, from their savings. They will also sell off their securities (bonds and stocks) for liquidity. This will lower (a) the total supply of loanable funds and (b) the demand for securities, which forces financial intermediaries to charge higher rates of return in order to increase QD. In other words, the market rate(s) of interest will rise, but the natural rate of interest will remain unaltered (because the only thing that has changed is monetary conditions).
Now let's consider what actually happens when the demand for money rises. Individuals, as I've mentioned, will cut consumption and they will withdraw money from the bank, from their savings. They will also sell off their securities (bonds and stocks) for liquidity. This will lower (a) the total supply of loanable funds and (b) the demand for securities, which forces financial intermediaries to charge higher rates of return in order to increase QD. In other words, the market rate(s) of interest will rise, but the natural rate of interest will remain unaltered (because the only thing that has changed is monetary conditions).
This is the part that doesn't make sense to me. You say 'the natural rate of interest remains unaltered', but how can this be true?
People have 3 ways to spend their income: spend it, keep it for liquidity or save it. If one of these raises, one (or both) of the others have to go down. If people save less because their demand for liquidity raises, how can you possibly say that 'the natural rate of interest will remain unaltered'? Doesn't their demonstrated preference imply that it has to change?