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
Dear filc,
TY for your kind words. I, too, certainly mean nothing personal. And I am glad someone thinks my contributions here of value. I feared my colloquial style might be raising eyebrows.
A word about how to tell what is my reply to your latsest post, quted here. I will use italic font this time, the bold already being all over the place.
filc: Smiling Dave:That said, your q seems to be a point of debate between Walter Block and Mises and Rothbard, so I reserve opinion on that matter. But they all agree that it is wasteful to print fiat money. As far as ABCT is concerned, this is irrelevant. It is relevant to the q you asked me, which was do i diapprove of gold mining etc. My reply was that I leave that for the big guns, Mises and Block, to settle among themselves. But the world we live in now is one of fiat money, where of course it is bad to print more. Smiling Dave:It steals our purchasing power. When you read Human Action, and got to the part where Mises writes that rising prices are evil, did you write in the margin of your copy that Mises fails to explain why rising prices are evil? The purchasing power is not stolen if the inflation occurs uniformly. Maybe in theory this is true. I don't know. But it never happens in the real world. So it is not inflation alone that is "Evil". That's like saying "In a world where there is no electricity, an electric chair will kill no one. So an electric chair alone is harmless." We live in a real world, where inflation has caused and will continue to cause untold woe. Are we disagreeing about this? You admit in this statement that it is not that inflation alone is what is evil(whatever that means) When I call it "evil", I am using Mises' phrase. but the consequences it causes. Something Esuric was trying to further expand on. With this new twist on what Esuric was saying is "In a world with no electricity, an electric chair will harm no one. So when there is deflation, let's put someone in an electric chair." Which is sophistry. Because we live in a world where there is electricity and printing money causes great harm. The issue here is an oversimplification by you, that Esuric was correcting. That's not the issue. He was coming out in defense of QE2, the topic of this original post. I disagree. QE2 is not taking place in a world with no electricity. Further, he admitted reluctantly that printing money does raise prices. So that we are now not talking about a world with no electricicty , where inflation is benign. His argument was that it indeed causes prices to rise, but only a teeny weeny bit. And he was saying that this is true praxeologically, that it is the great discovery of the brilliant later Austrians. Long live the trade cycle, death to the mythical price inflation. That being his argument, Zimbabwe is very relevant. As is the quote from Mises that people seem to be ignoring. I believe you took issue with it, as most people on this forum take issue with people disagreeing with them. I can live with people disagreeing with me. It's the personal comments I find offensive. I never read a part of HA where Mises said that inflation was evil, period, end of story. filc, are you denying the existence of my quote? Such a statement is out of context for HA. No it's not. It's a simple truth. And I quoted the whole piece at great length, lest someone toss out the "out of context" wheeze. A large portion of the book is dedicated to catallactics and economic calculation. Saying that inflation is evil, end of story, is a mis-characterization of the lessons that HA has to offer. I fear you missed the boat, big time. So what if it is devoted to catallectics? Rising prices are a catallectic thing. And should be part of anyones economic calculation. And it is a huge part of the lesson that HA has to offer, that printing money raises prices in this real world of ours, that the latter is a great evil in this real world of ours, and my mind boggles that people don't get it. Smiling Dave:Did you decide Mises was in error when you read HA because of that q? I already explained why it is an evil. I never decided that Mises was in error on this specific aspect. I decided that you were. But I was quoting him. So we are either both right or both wrong. You can't have your cake etc. Furthermore you have to stop using the word "evil". It's incoherent as far as the discussion is concerned. I stand by my right to quote Mises, who used the word evil. Are you saying he was being incoherent? And it is very relevant and important here. I want Esuric, when his hand is about to start the printing press, to see Mises in his mind's eye, standing before him like an Old Testament prophet and saying, "Esuric my son, what you are about to do is EVIL EVIL EVIL" The rest of your comments are just back peddling trying to find ways to cover the fact that you missed crucial parts of ABCT, HA, and other Austrian tennats before arguing with Esuric. filc, that's a low blow, imputing unworthy motives to me. I was not back peddling at all. Back peddling means saying something different that one said originally, which is not at all the case. Sheesh. Furthermore when you make comments like the following Smiling Dave:The truth is more beloved to me than is Esuric. You pretty much send your own credibility down the drain. I give zero credibilty and respect to the overlly aarogant. 1. filc, you reach that conclusion by being overly generous. I was stating an inequality. On the left side of the scale was truth, on the right side Esuric. You thought I was raising the left side of the scale, which may be considered arrogance. You can guess the rest. 2. I will refrain from discussing how arrogant Esuric is. Especially someone who naively believes that they have the best interest of truth, while their opponent does not. As far as I know, I'm not trying to lie. As far as I have seen Esuric's debating tactics... well I'll drop that hot potato. At any rate my point was only that you either mistakingly forgot this specific aspect of the Austrian Capital theory. That Esuric was correct in his earlier responses to you, and you were either looking to argue with him, did not understand his responses, or do not understand ABCT all together. None of the above. You seem to be dragging me away from the discussion which should involve capital theory and the structure of production. The topics were "Is QE2 good or bad?" "Is deflation good or bad?" "Is printing money good or bad?" 'What is the view of the great Austraians on money printing?" These call for more than capital thoery and the structure of production. I am remeinde dof the old saying, when all you have is a hammer, everything looks like nails. And my response was large, but every part of it was relevant to the topics at hand. I haven't the time or interest to debate on anything else at the time. Then I thank you for your valuable input thus far.
Smiling Dave:That said, your q seems to be a point of debate between Walter Block and Mises and Rothbard, so I reserve opinion on that matter. But they all agree that it is wasteful to print fiat money.
As far as ABCT is concerned, this is irrelevant.
It is relevant to the q you asked me, which was do i diapprove of gold mining etc. My reply was that I leave that for the big guns, Mises and Block, to settle among themselves. But the world we live in now is one of fiat money, where of course it is bad to print more.
Smiling Dave:It steals our purchasing power. When you read Human Action, and got to the part where Mises writes that rising prices are evil, did you write in the margin of your copy that Mises fails to explain why rising prices are evil?
The purchasing power is not stolen if the inflation occurs uniformly.
Maybe in theory this is true. I don't know. But it never happens in the real world.
So it is not inflation alone that is "Evil".
That's like saying "In a world where there is no electricity, an electric chair will kill no one. So an electric chair alone is harmless." We live in a real world, where inflation has caused and will continue to cause untold woe. Are we disagreeing about this?
You admit in this statement that it is not that inflation alone is what is evil(whatever that means)
When I call it "evil", I am using Mises' phrase.
but the consequences it causes. Something Esuric was trying to further expand on.
With this new twist on what Esuric was saying is "In a world with no electricity, an electric chair will harm no one. So when there is deflation, let's put someone in an electric chair." Which is sophistry. Because we live in a world where there is electricity and printing money causes great harm.
The issue here is an oversimplification by you, that Esuric was correcting.
That's not the issue. He was coming out in defense of QE2, the topic of this original post. I disagree. QE2 is not taking place in a world with no electricity.
Further, he admitted reluctantly that printing money does raise prices. So that we are now not talking about a world with no electricicty , where inflation is benign. His argument was that it indeed causes prices to rise, but only a teeny weeny bit. And he was saying that this is true praxeologically, that it is the great discovery of the brilliant later Austrians. Long live the trade cycle, death to the mythical price inflation.
That being his argument, Zimbabwe is very relevant. As is the quote from Mises that people seem to be ignoring.
I believe you took issue with it, as most people on this forum take issue with people disagreeing with them.
I can live with people disagreeing with me. It's the personal comments I find offensive.
I never read a part of HA where Mises said that inflation was evil, period, end of story.
filc, are you denying the existence of my quote?
Such a statement is out of context for HA.
No it's not. It's a simple truth. And I quoted the whole piece at great length, lest someone toss out the "out of context" wheeze.
A large portion of the book is dedicated to catallactics and economic calculation. Saying that inflation is evil, end of story, is a mis-characterization of the lessons that HA has to offer.
I fear you missed the boat, big time. So what if it is devoted to catallectics? Rising prices are a catallectic thing. And should be part of anyones economic calculation. And it is a huge part of the lesson that HA has to offer, that printing money raises prices in this real world of ours, that the latter is a great evil in this real world of ours, and my mind boggles that people don't get it.
Smiling Dave:Did you decide Mises was in error when you read HA because of that q? I already explained why it is an evil.
I never decided that Mises was in error on this specific aspect. I decided that you were.
But I was quoting him. So we are either both right or both wrong. You can't have your cake etc.
Furthermore you have to stop using the word "evil". It's incoherent as far as the discussion is concerned.
I stand by my right to quote Mises, who used the word evil. Are you saying he was being incoherent? And it is very relevant and important here. I want Esuric, when his hand is about to start the printing press, to see Mises in his mind's eye, standing before him like an Old Testament prophet and saying, "Esuric my son, what you are about to do is EVIL EVIL EVIL"
The rest of your comments are just back peddling trying to find ways to cover the fact that you missed crucial parts of ABCT, HA, and other Austrian tennats before arguing with Esuric.
filc, that's a low blow, imputing unworthy motives to me. I was not back peddling at all. Back peddling means saying something different that one said originally, which is not at all the case. Sheesh.
Furthermore when you make comments like the following
Smiling Dave:The truth is more beloved to me than is Esuric.
You pretty much send your own credibility down the drain. I give zero credibilty and respect to the overlly aarogant.
1. filc, you reach that conclusion by being overly generous. I was stating an inequality. On the left side of the scale was truth, on the right side Esuric. You thought I was raising the left side of the scale, which may be considered arrogance. You can guess the rest.
2. I will refrain from discussing how arrogant Esuric is.
Especially someone who naively believes that they have the best interest of truth, while their opponent does not.
As far as I know, I'm not trying to lie. As far as I have seen Esuric's debating tactics... well I'll drop that hot potato.
At any rate my point was only that you either mistakingly forgot this specific aspect of the Austrian Capital theory. That Esuric was correct in his earlier responses to you, and you were either looking to argue with him, did not understand his responses, or do not understand ABCT all together.
None of the above.
You seem to be dragging me away from the discussion which should involve capital theory and the structure of production.
The topics were "Is QE2 good or bad?" "Is deflation good or bad?" "Is printing money good or bad?" 'What is the view of the great Austraians on money printing?" These call for more than capital thoery and the structure of production. I am remeinde dof the old saying, when all you have is a hammer, everything looks like nails.
And my response was large, but every part of it was relevant to the topics at hand.
I haven't the time or interest to debate on anything else at the time.
Then I thank you for your valuable input thus far.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
Hi Esuric,
Thanks for posting a challenging response to my explanation.
Esuric:It's far more complicated than this and I don't fully understand it myself. But before I get into my explanation I think it's important to go over Mises' typology of economic goods. Mises breaks it down into three distinct categories; first, there are the consumer goods, then there are the producer goods, and finally there are "media of exchange," i.e., money. This third and final category is a good and class in itself. The natural rate of interest is determined solely by the ratio of demand between consumer goods (consumption) and producer goods (saving), but is not affected by alterations in monetary conditions.
That begs the question: why isn't the natural rate of interest (which I understand is a conceptual device) affected by alterations in monetary conditions?
Esuric:Okay, so let's imagine a simple two good economy where individuals can choose between either x1 or x2. In period t1, the total supply of x1 equals 20 and the total supply of x2 equals 20 as well. As the demand, and therefore price of x1 rises (say by 50%), the demand (and therefore price) of x2 must necessarily fall (by 50%). But the process doesn't end here. The alteration in the relative structure of prices will cause capital to "flow" from sector x2 towards sector x1 so that the supply of x1 in period t2 will equal 30, and the supply of x2 in period t2 will equal 10 (equalizing profits across both industries). Prices guide production. In the aggregate, though, there is no change in total output; the only thing that has changed is the direction of investment, and the composition total consumer goods produced.
Why must x1 and x2 be mutually exclusive? Or is that a hidden assumption on your part?
If they aren't mutually exclusive, then can't demand for x1 rise with demand for x2 staying the same?
As an aside, I wonder if this kind of thing is why many people support zero-sum policies -- it seems easier to them to "take" more of the existing stock of capital/wealth than it does to generate new capital/wealth.
Esuric:Now let's include another good into our simple economy, call it x3, and it will represent money. What happens when the demand for x3 rises? Individuals will limit their consumption and increase sales in order to satiate their demand for money. The demand, and therefore price, of either good x1 and x2 must fall; in fact, the demand and price of both x1 and x2 may, and probably will fall until the price of money adjusts (when the price of x1 and x2 fall enough). But now the marginal producers in industries x1 and x2 will no longer be profitable and this will yield disinvestment.
Why won't they be profitable anymore?
What do you mean "disinvestment"? Do you mean "withdrawal/liquidation of investment" or do you mean "malinvestment"?
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). I'm assuming that the demand for consumer goods (consumption) and the demand for producer goods (savings) fall in a proportionate manner for the sake of simplicity. It could very well be the case that they change unevenly which would alter the natural rate of interest.
Isn't holding onto actual money itself a form of savings? It just isn't savings in a bank.
Otherwise, I agree that this will, ceteris paribus, lower the supply of loanable funds and the demand for securities. By "QD", do you mean "quantity demanded"? Which class of economic goods do securities belong to? Since they aren't money themselves, it would seem that they're either consumer or producer goods. And what about loanable funds? Are they part of the money stock, or are they producer goods?
Esuric:My model, though, assumes an economy consisting of a single phase of production. With such an assumption, an elevated rate of savings would produce a similar type of effect except for the fact that interest rates would fall, saving the profitability of a few marginal producers. But when we lax this assumption, and consider an economy consisting of multiple phases of production, than an elevated savings rate actually increases total profit in the aggregate (the stock of profits, so to speak) and total output. Let's now consider the effects of saving in an economy consisting of multiple phases of production:
Let's now consider the effects of saving in an economy consisting of multiple phases of production:
Again, I have to ask whether you're including "money-hoarding" as a form of savings. I imagine that people who take money out of banks aren't thinking "I don't want to save this money anymore", they're simply changing the way in which they're saving it.
Esuric:This is not the case when there's an elevated demand for money, even in an economy consisting of multiple phases of production. 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).
If most people's demand for money rises vis-a-vis other goods, then aren't they indeed signalling a constriction of general economic activity -- at least in the present? What's the problem here?
Esuric:I believe this is why MET support "keeping MV stable," i.e., satiating the demand for money as money when it rises. And you can basically find this argument in Hayek's Prices and Production. In other words, Warlas' law, and a crude version of Say's law, only holds when there is monetary equilibrium (savings will not equal investment when there's monetary disequilibrium).
To be honest, I wonder whether this isn't just an attempt at having one's cake and eating it too. In other words, the idea is to satiate people's demand for money without a corresponding contraction in economic activity. Of course, the question is why such a contraction is necessarily a bad thing.
The keyboard is mightier than the gun.
Non parit potestas ipsius auctoritatem.
Voluntaryism Forum
Esuric: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, .......
This is economic analysis misconstruing its objects under investigation. You are misapplying the imaginary construct of static equilibrium or the ERE. Equilibrium is not a "hypothetical perfect world"as you ascribe to it, but a hypothetical mental and imaginary construct that would be brought about if and only if no further change in market data was ever to occur. Equilibrium means no change and no further human action.
Its only use is to aid us in analyzing change, that is, the market process. Only in this respect, is it valid to say that we compare the real world to equilibrium,i.e., we study change by comparing it to the static. It is not comparing the imperfect world with the perfect equilibrium world.
Esuric:I mean, should we just abandon Austrian business cycle theory because inter-temporal equilibrium can never be attained
What you're basically saying makes no sense. You're basically saying that a discrepency of market data from some imaginary equilibrium point is disturbing, and that's your basis for using equilibrium analysis. You got it all wrong! That's the fallacy behind "perfect competition" and all the mathematical equilibrium analysis. The disturbance is always on entrepreneurial forces working to bring about some imaginary equilibrium point, not a discrepancy from the equilibrium point itself. Big big difference.
You're basically saying that since market data is diverging from equilibrium, this or that is below or above some equilibrium "natural" rate or price. In other words, the market never works!
AdrianHealey: Smiling Dave:Did you decide Mises was in error when you read HA because of that q? I already explained why it is an evil. It gives Obama and pals the means to gobble up our resources without having produced anything. I suspect you know this, how could you not? Smiling Dave, there is one point you're clearly missing. Nobody is saying that, given the world we live in, that inflation is bad. Indeed: because it raises prices and so on. If that is the case, I'm fine. My impression was that Esuruc is saying that it's just an insignificant lil thing, a speck of dust in the wind. The real problem is the trade cycle. But in a world where all prices _immediately_ would adjust to this 'new' money, inflation wouldn't be a problem. The problem is thus _not_ inflation 'in itself', but the Cantillon-effects that _necessarily_ happen (in this world) where money enters in the economy. That's the real crux of relative price differences and so on and so forth. Not the pure element of 'inflation' in and of itself. One can construct as many theoretical worlds as one wishes, and I have no quarrel with it. Remember where Esuric, originally, responded too: "When someone engages in printing money. prices will certainly adjust. The problem is, we know which way they will adjust. Up" Since we were discussing the real world, I take it you agree with my stattement, that they will go up, and that that is a big problem. Regarding the businesscycle; the relevant issue is price coordination, not the fact that 'prices rise'. Who was discussing the business cycle, we were discussing the real world. <= You are suggesting that these prices raises are a problem. Esuric, correctly, states: " Simply put, if prices were perfect, i.e., if they instantaneously and simultaneously adjusted to alterations in the supply of money, then inflation and deflation wouldn't really be a problem at all" <= The Cantillon-effects; those are what hamper the economy. If prices just adapt instantly, there wouldn't be a problem But that would be impossible in this world. He goes on to discuss the real world and say deflation sucks, because it changes prices, and that we need to print fat oodles of money to "solve the problem" of deflation Furthermore; invoking the Weimar republic and Zimbabwe isn't an argument. The argument isn't 'we should print money'. Of course it is. Esuric stated quite clearly that [to his understanding] brilliant Austrian minds have discovered that rising prices are a mere bagatelle, nothing to worry about IN THE REAL WORLD. But perhaps I misunderstand you. maybe you are saying "Forget about Esuric. I am about to present a different version of things, where printing money in the real world is bad, but where other parts of Esuric's thesis are true. OK, I'll give a listen. The argument is that we should match the demand for money as liquidity as an variable, First of all, Why? Second of all, that is impossible, because you ruin the value of the currency everyone is holding, gaining nothing. See the story above of cutting apples in half. where market forces should work to match supply and demand. Oh, I'm all for market forces. But printing money is not market forces. Inflation is thus possible, as a increase in the supply of money in excess of the demand for money, which would show up in price inflation and inflationary gdp numbers (as has happened in Zimbabwe and the Weimar republic). When you want to engage in an argument, it helps when you can argue against the argument itself and not some straw man version of it. Esurioc stated quite clearly that even in the real world, rising prices is a trivial ole thing, nothing to worry about, really. The great Austrian minds discovered this, he thinks. Thus Zimbab and Weimar are totally relevant. You think printing money is fine in a free market absent a central bank? You think everyone should be allowed to counterfeit freely? The problems that counterfeiting raises when done on a massive scale are exactly the problems raised by money printing. In fact they are identical [but for some arbitrary law declaring one legal and the other not]. <= This is called 'beggin the question'. Nobody supports counterfeiting. So you might want to assume that's not what they mean. Maybe you should criticize the arguments themselves in stead of, again, a straw man fallacy of it? The q was do I thin printing money is OK in a free market absent a cenbtarl bank. My reply was that printing money is exactly the same, catallecticaly, as counterfeitng. There is only an irrlevent legal distinction between them. If you think they are not identical, tell me why.
Smiling Dave:Did you decide Mises was in error when you read HA because of that q? I already explained why it is an evil. It gives Obama and pals the means to gobble up our resources without having produced anything. I suspect you know this, how could you not?
Smiling Dave, there is one point you're clearly missing. Nobody is saying that, given the world we live in, that inflation is bad. Indeed: because it raises prices and so on.
If that is the case, I'm fine. My impression was that Esuruc is saying that it's just an insignificant lil thing, a speck of dust in the wind. The real problem is the trade cycle.
But in a world where all prices _immediately_ would adjust to this 'new' money, inflation wouldn't be a problem. The problem is thus _not_ inflation 'in itself', but the Cantillon-effects that _necessarily_ happen (in this world) where money enters in the economy. That's the real crux of relative price differences and so on and so forth. Not the pure element of 'inflation' in and of itself.
One can construct as many theoretical worlds as one wishes, and I have no quarrel with it.
Remember where Esuric, originally, responded too: "When someone engages in printing money. prices will certainly adjust. The problem is, we know which way they will adjust. Up"
Since we were discussing the real world, I take it you agree with my stattement, that they will go up, and that that is a big problem.
Regarding the businesscycle; the relevant issue is price coordination, not the fact that 'prices rise'.
Who was discussing the business cycle, we were discussing the real world.
<= You are suggesting that these prices raises are a problem. Esuric, correctly, states: " Simply put, if prices were perfect, i.e., if they instantaneously and simultaneously adjusted to alterations in the supply of money, then inflation and deflation wouldn't really be a problem at all" <= The Cantillon-effects; those are what hamper the economy. If prices just adapt instantly, there wouldn't be a problem But that would be impossible in this world.
He goes on to discuss the real world and say deflation sucks, because it changes prices, and that we need to print fat oodles of money to "solve the problem" of deflation
Furthermore; invoking the Weimar republic and Zimbabwe isn't an argument. The argument isn't 'we should print money'.
Of course it is. Esuric stated quite clearly that [to his understanding] brilliant Austrian minds have discovered that rising prices are a mere bagatelle, nothing to worry about IN THE REAL WORLD.
But perhaps I misunderstand you. maybe you are saying "Forget about Esuric. I am about to present a different version of things, where printing money in the real world is bad, but where other parts of Esuric's thesis are true.
OK, I'll give a listen.
The argument is that we should match the demand for money as liquidity as an variable,
First of all, Why?
Second of all, that is impossible, because you ruin the value of the currency everyone is holding, gaining nothing. See the story above of cutting apples in half.
where market forces should work to match supply and demand.
Oh, I'm all for market forces. But printing money is not market forces.
Inflation is thus possible, as a increase in the supply of money in excess of the demand for money, which would show up in price inflation and inflationary gdp numbers (as has happened in Zimbabwe and the Weimar republic). When you want to engage in an argument, it helps when you can argue against the argument itself and not some straw man version of it.
Esurioc stated quite clearly that even in the real world, rising prices is a trivial ole thing, nothing to worry about, really. The great Austrian minds discovered this, he thinks. Thus Zimbab and Weimar are totally relevant.
You think printing money is fine in a free market absent a central bank? You think everyone should be allowed to counterfeit freely? The problems that counterfeiting raises when done on a massive scale are exactly the problems raised by money printing. In fact they are identical [but for some arbitrary law declaring one legal and the other not].
DD5:This is economic analysis misconstruing its objects under investigation. You are misapplying the imaginary construct of static equilibrium or the ERE. Equilibrium is not a "hypothetical perfect world"as you ascribe to it, but a hypothetical mental and imaginary construct that would be brought about if and only if no further change in market data was ever to occur. Equilibrium means no change and no further human action. Its only use is to aid us in analyzing change, that is, the market process. Only in this respect, is it valid to say that we compare the real world to equilibrium,i.e., we study change by comparing it to the static. It is not comparing the imperfect world with the perfect equilibrium world.
Indeed. I think of "market equilibria" as being like asymptotes: points which things move toward but never actually reach. Markets are more complicated than math, furthermore, because the equilibria are both interdependent and in constant flux.
DD5:What you're basically saying makes no sense. You're basically saying that a discrepency of market data from some imaginary equilibrium point is disturbing, and that's your basis for using equilibrium analysis. You got it all wrong! That's the fallacy behind "perfect competition" and all the mathematical equilibrium analysis. The disturbance is always on entrepreneurial forces working to bring about some imaginary equilibrium point, not a discrepancy from the equilibrium point itself. Big big difference. You're basically saying that since market data is diverging from equilibrium, this or that is below or above some equilibrium "natural" rate or price. In other words, the market never works!
Very good point. If "market failure" is defined as "not reaching an equilibrium condition", then all markets are always in a state of failure.
filc:A radical reduction in the money supply would equally distort the structure of production.
Do you agree that money is always at work no matter what the magnitude of one's cash balance is, or some aggregate cash balances?
If so, how do changes in average cash balances constitute "distortions"? How can it be distortion any more then the perpetually endless changes in market data that occur always and everywhere? Distorted from what? What is the point of reference for your "measurement"?
filc:It's basing it's judgements based on the historical data of yesterday, if the data moves relatively too quickly, there will be problems.
"too quickly" is not a category of action. It is a personal value judgement. It has no place in scientific inquiry and economic science.
filc: Assuming Banking occurs on the free market, with no central coercive authority, do you think we would have the same problems at hand? I personally think we would not.
non-sequitur. It doesn't follow from this that anything that MET (it's not MIT) has to say is correct.
AdrianHealey: 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?
I’m holding the ceteris paribus condition. I’m analyzing the effects of an elevated demand for money, all other things equal. It’s true that an elevated demand for money will reduce total consumption and total savings, but the ratio between the two remains unaltered (as long as we maintain the ceteris paribus condition). So for example:
As long as the ratio of demand between consumption and savings remains unaltered then there is no change in the natural rate of interest (time preference). Now of course consumption and saving patterns may change in relative terms as well, due to a change in the demand for money, and this would indeed alter the natural rate of interest, but then we’re no longer holding the ceteris paribus condition.
flic: IMHO, I think it stands that Esuric will have to clarify his position, because something tells me you are mis-representing him to some extent.
Of course he’s misrepresenting my position. This guy is totally lost. For some reason he believes that I support government printing money, and that I’m unaware of the fact that inflation is solely caused by an expansion in the supply of money beyond the demand for money (I reject cost-push theories of inflation and/or other endogenous explanations).
What I support is a free and competitive banking system without arbitrary regulations.
Autolykos: That begs the question: why isn't the natural rate of interest (which I understand is a conceptual device) affected by alterations in monetary conditions?
Because the natural rate of interest reflects time preference, not liquidity preference. Familiarity with Austrian capital theory is required in order to understand my argument.
Autolykos: Why must x1 and x2 be mutually exclusive? Or is that a hidden assumption on your part?
Yes, I’m employing static analysis (general equilibrium) with an economy consisting of only two markets and two goods (there is no economic growth). Under such circumstances, a higher demand for x1 must necessarily mean a proportionately lower demand for x2. There are only so many resources available at any given time; you can't elevate the demand and therefore production of both x1 and x2 without additional savings and investment.
Autolykos: Why won't they be profitable anymore?
Because there’s a lower demand.
Autolykos: What do you mean "disinvestment"? Do you mean "withdrawal/liquidation of investment"…?
Yes.
Autolykos: Isn't holding onto actual money itself a form of savings? It just isn't savings in a bank.
No. Savings constitutes a higher demand for future goods while the demand for money is the demand for liquidity. Here’s a more precise definition,
“Simply put, it means that people's demand to hold real money balances at the current price level is in excess of the supply of such balances.”
DD5: You are misapplying the imaginary construct of static equilibrium or the ERE. Equilibrium is not a "hypothetical perfect world"as you ascribe to it, but a hypothetical mental and imaginary construct that would be brought about if and only if no further change in market data was ever to occur. Equilibrium means no change and no further human action.
By perfect, I mean a world where any further change must necessarily yield Pareto inefficient outcomes; a world where individuals are no longer willing to alter the state of affairs. This condition is, of course, entirely illusory, but quite useful for economic analysis (as Mises explains).
DD5: What you're basically saying makes no sense. You're basically saying that a discrepency of market data from some imaginary equilibrium point is disturbing, and that's your basis for using equilibrium analysis.
So then do you dismiss the concept of inter-temporal equilibrium as entirely fruitless or do you merely condemn the concept of monetary equilibrium? Austrian business cycle theory is merely the investigation of the ramifications associated with inter-temporal disequilibrium; inter-temporal equilibrium is just as unattainable as monetary equilibrium. Why should we abandon the latter but not the former? You’re being inconsistent, and quite frankly, incoherent.
DD5: You're basically saying that since market data is diverging from equilibrium, this or that is below or above some equilibrium "natural" rate or price. In other words, the market never works!
Non sequitur. Stop putting words in my mouth. I’m merely identifying and analyzing the effects of monetary and inter-temporal disequilibrium, that’s all. The market rate of interest can fall below the natural rate, and it can rise above the natural rate. I don't know why some are so bent on ignoring the latter condition.
"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, I'm disappointed that you didn't respond to all of my last post. Why didn't you? Can you please do so?
Esuric:Because the natural rate of interest reflects time preference, not liquidity preference. Familiarity with Austrian capital theory is required in order to understand my argument.
Are you implying that I'm not familiar with Austrian capital theory? If so, why?
You took the time to write a lengthy response to part of an earlier post of mine, and I appreciate that. However, if you're not going to help me fully understand your argument, what's the point?
With that said, I think my questions about which categories securities and loanable funds fall into are relevant here. I'd greatly appreciate it if you'd address them.
Esuric:Yes, I’m employing static analysis with a general equilibrium economy consisting of only two markets and two goods (there is no economic growth). Under such circumstances, a higher demand for x1 must necessarily mean a lower demand for x2. There are only so many resources available at any given time; you can elevate the demand and therefore production of both x1 and x2 without additional savings and investment.
Okay, so all resources are being employed to provide either x1 or x2. Thanks for the clarification.
Esuric: Autolykos: Why won't they be profitable anymore? Because there’s a lower demand.
As someone else pointed out, lower demand for x1 and x2 would mean lower demand for their inputs, correct? So the prices of the inputs should adjust downward as well. Hence I fail to see how lower demand necessarily leads to any firms (let alone the most marginal) becoming unprofitable.
Esuric: Autolykos: What do you mean "disinvestment"? Do you mean "withdrawal/liquidation of investment"…? Yes.
Thanks. So I guess I don't see the problem with such disinvestment.
Esuric: Autolykos:Isn't holding onto actual money itself a form of savings? It just isn't savings in a bank. No. Savings constitutes a higher demand for future goods while the demand for money is the demand for liquidity. Here’s a more precise definition, “Simply put, it means that people's demand to hold real money balances at the current price level is in excess of the supply of such balances.”
Autolykos:Isn't holding onto actual money itself a form of savings? It just isn't savings in a bank.
I think I addressed that definition already. My point was that there's no reason for the current price level to remain the same.
Are you defining "savings" as "higher demand for future goods" in the above?
What are the reasons why demand for liquidity would rise? It seems to me that, when people don't spend their money right away, they are signalling a higher demand for future goods. Does it really matter whether they put that money in bank savings accounts or under their mattresses? If so, why?
It's not. It's entirely irrelevant, but if I had to categorize them, I would say that they're future goods (since they are claims to future goods, i.e., capital goods).
As someone else pointed out, lower demand for x1 and x2 would mean lower demand for their inputs, correct?
As I've mentioned in my original response to you, i originally assumed an economy consisting of a single phase of production. There are no inputs. Either way, if we assume an economy consisting of multiple phase of production (a structure of production), a higher demand for money, which elevates the market rate of interest above the natural rate, would make it so that the prices of final outputs would all faster than the prices of inputs, because the structure of production is either contracting, or not expanding enough to restore profitability (as is the case when there's a higher rate of savings).
You don't see a problem with a contraction in total output and lower wage rates (society becoming poorer)? Okay.
Of course. You can restore real cash balances by allowing prices to adjust (fall), but, as I've mentioned, this can be problematic (uneven adjustments, certain lags, etc).
What are the reasons why demand for liquidity would rise?
This is an interesting question. Personally, I believe that the demand for money only truly rises by any significant degree during a recession, i.e., a period of extreme uncertainty (people tend to demand liquidity, the safest asset, during such circumstances). Severe monetary disequilibrium, when the demand for money rises above the supply of money (this is merely one type of monetary disequilibrium, of course), is a potential consequence of a recession. During "normal times," the demand for money is fairly stable as transactions are routinized.
It seems to me that, when people don't spend their money right away, they are signalling a higher demand for future goods.
Why would you say that? They're not demand goods in the future; they're demanding liquidity.
Does it really matter whether they put that money in bank savings accounts or under their mattresses? If so, why?
Yes, and I've already explained why.
Esuric:So then do you dismiss the concept of inter-temporal equilibrium as entirely fruitless or do you merely condemn the concept of monetary equilibrium?
How can I dismiss it when I carefully elaborated on its proper and improper use. And I also explained how it is valid in explaining ABCT:
DD5: "The disturbance is always on entrepreneurial forces working to bring about some imaginary equilibrium point, not a discrepancy from the equilibrium point itself. Big big difference."
Esuric: Why should we abandon the latter but not the former? You’re being inconsistent, and quite frankly, incoherent.
I have defined my terms above about equilibrium. You have yet to show how I have been inconsistent. In fact, right now, you are beginning to construct an argument that equivocates "distortion" with "disequilibrium".
Esuric: Austrian business cycle theory is merely the investigation of the ramifications associated with inter-temporal disequilibrium;
This cannot be so if the above is to be taken literally, for everything is in disequilibrium. The above is at best, very poor wording used to describe the problem by MET theorists, and at worse, totally fallacious.
ABCT is about inter-temporal distortions, and not inter-temporal disequilbrium. Again, if you're going to equivocate distortions with disequilibrium, then I'm afraid we're going to have to abandon all hope for the possibility of a consistent logical argument.
Esuric: DD5: You're basically saying that since market data is diverging from equilibrium, this or that is below or above some equilibrium "natural" rate or price. In other words, the market never works! Non sequitur. Stop putting words in my mouth.
Non sequitur. Stop putting words in my mouth.
I'm not putting any words in your mouth. You just said it again. How is this:
"Austrian business cycle theory is merely the investigation of the ramifications associated with inter-temporal disequilibrium"
not saying that market data is diverting from equilibrium?
No I'm not. here are a few Esuric gems, from this thread alone:
1. Bernanke is paying interest on reserves and is therefore intentionally preventing the expansion of the monetary aggregates (in the short run) which, if allowed to expand, would easily satiate the demand for money as money (and then some).
Translation. That fool bernanke is not printing enough money.
2. "When someone engages in printing money. prices will certainly adjust. The problem is, we know which way they will adjust. Up"
This is not the problem at all. In fact, general price inflation is essentially irrelevant [except for raising interst rates. In a non existent world bla bla]
Translation: Price inflation is no problem at all. Long live Zimbabwe.
3. " those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation-the rise in prices-are disguising their endeavors as a fight against inflation. While merely fight- ing symptoms, they pretend to fight the root causes of the evil." [Mises in HA]
It's not the case that inflation "increases prices and that's bad," nor is it the case that "deflation lowers price and that's good."
Translation. Inflation either does not increase prices, or else it does but thats fine, Mises be damned.
4. The mainstream focuses on a few and relatively unessential effects of inflation
Inflation may raise prices, but who cares. leave that to the mainstream to worry about.
5. Either way, the fact that prices (tend to) adjust upwards (as a result of inflation) is the most insignificant problem.
What Zimbabwe and the Weimar Republic and Argentina and others experienced an insignifacnt problem. Mises called it evil, I call it insignificant.
6. "When someone engages in printing money. prices will certainly adjust. The problem is, we know which way they will adjust. Up.'
is incorrect from an Austrian point-of-view.
Translation: Printing money does not cause rising prices.
7. MET's don't support the government printing money. They oppose central banks, i.e., monetary central planning, and favor a free-banking system (a free market in banking).
Translation; But of course we must "fight deflation" [see earlier posts of his]. So as long as the decentralized banks print the money, that's fine.
Reming me never to hire you as a translator. :/
The state is not the enemy. The idea of the state is.
As I've mentioned in my original response to you, i originally assumed an economy consisting of a single phase of production. There are no inputs.
Wow, just wow. There are no inputs. So television sets are being produced from nothing. And you consider this to have relevance to reality somehow. You can "prove" from such a model that every business will walways succeed. There are no inputs, no costs, and only profits. No economist has ever constructed so absurd a model.
Either way, if we assume an economy consisting of multiple phase of production (a structure of production), a higher demand for money, which elevates the market rate of interest above the natural rate, would make it so that the prices of final outputs would all faster than the prices of inputs, because the structure of production is either contracting, or not expanding enough to restore profitability (as is the case when there's a higher rate of savings).
Says you. In any case, historically people don't hide money under the matress, [especially in inflationary times] so you have nothing to worry about.
Esuric:It's not. It's entirely irrelevant, but if I had to categorize them, I would say that they're future goods (since they are claims to future goods, i.e., capital goods).
I'm sorry but how is it irrelevant? If you're categorizing them as future goods, then wouldn't that imply a fourth category of economic goods? Or am I missing something here?
Esuric:As I've mentioned in my original response to you, i originally assumed an economy consisting of a single phase of production. There are no inputs. Either way, if we assume an economy consisting of multiple phase of production (a structure of production), a higher demand for money, which elevates the market rate of interest above the natural rate, would make it so that the prices of final outputs would [fall] faster than the prices of inputs, because the structure of production is either contracting, or not expanding enough to restore profitability (as is the case when there's a higher rate of savings).
Fair enough with your original example. But wouldn't a higher demand for money mean a lower demand for loanable funds? I'm not saying that lower demand would perfectly match the lower supply, of course.
Esuric:You don't see a problem with a contraction in total output and lower wage rates (society becoming poorer)? Okay.
How does society become poorer when the structure of production adjusts to changes in monetary demand? That would seem to imply a kind of "market failure" on the part of those who now have higher demand for money. Is the idea that they don't realize the consequences of this higher demand?
Esuric:Of course. You can restore real cash balances by allowing prices to adjust (fall), but, as I've mentioned, this can be problematic (uneven adjustments, certain lags, etc).
Do you consider it problematic whenever a business folds? Or when a debtor defaults on his debt?
Esuric:This is an interesting question. Personally, I believe that the demand for money only truly rises by any significant degree during a recession, i.e., a period of extreme uncertainty (people tend to demand liquidity, the safest asset, during such circumstances). Severe monetary disequilibrium, when the demand for money rises above the supply of money (this is merely one type of monetary disequilibrium, of course), is a potential consequence of a recession. During "normal times," the demand for money is fairly stable as transactions are routinized.
My understanding is that financial panics happened due to one or more banks being exposed as insolvent. People understandably ran to the bank(s) to hopefully get their actual money back while they still could. I wouldn't call this "excessive demand for money", I'd call it people realizing that there's not as much money as they had been led to believe. In other words, financial panics and recessions are caused by the unraveling of systemic fraud.
Esuric:Why would you say that? They're not demand goods in the future; they're demanding liquidity.
Maybe I don't see the difference, then. From what I can tell, a person saving up money either in a bank or under his mattress is doing so for a reason. If he's saving up to buy a new car, for example, then his demand for liquidity is also a demand for goods in the future (namely, the car).
Esuric: Autolykos:Does it really matter whether they put that money in bank savings accounts or under their mattresses? If so, why? Yes, and I've already explained why.
Autolykos:Does it really matter whether they put that money in bank savings accounts or under their mattresses? If so, why?
Then I'm sorry, but I don't quite understand your explanation. Are you actually interested in helping me understand it? Or are you actually conversing with other people through me?
uneven adjustments, lags, etc.... simply means money is not neutral, by definition.
That money is not neutral is not a problem, but simply in the nature of money and how it functions.
Now, what you are implying (or even proposing) is something that is a totally self-contradictory idea. A neutral money of some form. How else do you plan to battle this alleged problem of "uneven adjustments, lags,et...." and I'll even add to that - "complete price revolution" (Mises), without embarking on the idea of neutral money?
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!