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
Block 1998, pp. 1–50). However, in a fiat-money-using society, the optimal quantity of fiat money is whatever is in existence, and, from an Austrian perspective, that quantity should never be changed, either increased or decreased, save for its complete elimination in shifting to a commodity money.2
I don't support fiat money and I'm not talking about fiat money, but either way, there's no reason to believe that we should elevate the supply of money when the demand for money rises in a monetary system which employs commodity money, but that we shouldn't elevate the supply of money when the demand for money rises in a monetary system that employs fiat money.
And why am I the only one trying to remedy Smiling Dave's torrential confusion? Am I the only one that's aware of the fact that the main problem with inflation is that it causes relative price distortions, business cycles, and an arbitrary redistribution of wealth (that has nothing to do with general price inflation)? Can someone please tell him that I'm right so that he can shut up and educate himself?
"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."
Smiling Dave: The government increases the quantity of money. All the evils under which we are suffering in our market conditions everyday are due to the fact that governments believe that it is permissible and natural toproduce money to increase the power of the government to spend. In order to spend more, the governments have to do practically nothing but give an order to a printing office: “Print a quantity of money and give it to us.” If private citizens do this, the government doesn’t like it. There aremany printing offices in the country; most of these printing offices are in the position to print dollar bills. What prevents the individual citizen from printing dollarbills, banknotes, is a series of laws whichmake this a crime, and the government is powerful enough to prevent it by arresting the peo- ple and imprisoning them, and so on. But if the government itself prints additional dollars, then it is legal and it increases the quantity of money. And this is the monetary problem. Apart from the fact that this brings about a very bad situation for those peoplewhowere not receivers of the new additional money, because they have not received more money, they now face higher prices. YES!
The government increases the quantity of money. All the evils under
which we are suffering in our market conditions everyday are due to the fact that governments believe that it is permissible and natural toproduce money to increase the power of the government to spend. In order to spend more, the governments have to do practically nothing but give an order to a printing office: “Print a quantity of money and give it to us.” If private citizens do this, the government doesn’t like it. There aremany printing offices in the country; most of these printing offices are in the position to print dollar bills. What prevents the individual citizen from printing dollarbills, banknotes, is a series of laws whichmake this a crime, and the government is powerful enough to prevent it by arresting the peo- ple and imprisoning them, and so on. But if the government itself prints additional dollars, then it is legal and it increases the quantity of money. And this is the monetary problem. Apart from the fact that this brings about a very bad situation for those peoplewhowere not receivers of the new additional money, because they have not received more money, they now face higher prices.
YES!
You have no idea why this is irrelevant, do you?
Nobody denies that, given a fiat standard, printing new bills can have the same effect as counterfeiting.
Nobody, however, is arguing for counterfeiting, i.e. printing new bills of money, just because.
Note: I'm not convinced by the argument Esuric is making. But if you keep misunderstanding the position, you'll keep making irrelevant posts like this.
The state is not the enemy. The idea of the state is.
Finally, finally, we get to the trade cycle. In Chapter 17 of this jewel of a book.
Now what is credit expansion? Credit expansion is inflation also...
With credit expansion the additional quantities of money enter the eco- nomic system, not through government spending, but through loans of newly created credit to businessmen by the banks. So the prices of the things businesses buy go up.
This brings about a “boom” in business. If this boomis not stopped in time, it develops into a great economic crisis. This is the trade cycle, the most interesting phenomenon of the capitalistic system.
OK guys, we have arrived. Uncle Mises is finally going to exonerate Esuric of all my criticism. He will get right out there and talk about how inflation makes some prices go up, some go down, and generally "distorts" the true state of affairs, right? After all, this whole book is about inflation. and the most significant part of inflation is, according to Esuric, all these "distortions", right? Even though in the previous paragraph he only talked about prices going up, not some up, some down, some left , some right, surely he will listen to Esuric and correct this state of affairs right now, no?
Nope. Most disappointing, but he TOTALLY IGNORES every thing Esuric said was the "real" problem caused by inflation.
The trade cycle is due to the fact that banks expand credit and this credit expansionbrings about an expansion of business. But as the quan- titiesofproducers’ goods, capital goods, arenot increased, there is anover- expansion of some businesses, but not a general over-investment, as it is called by some finance brokers, throughout thewhole economy. The sig- nificant characteristic of the boom is this over-expansion by the artificial lowering of the interest rate in order to create the credit expansion. This misleads businessmen into thinking that there is a greater amount of cap- ital goods available than actually exists, and that certain projects are now possible which would have been impossible with a higher rate of inter-
est. In fact the only thing that is newly available is an increasedamount of credit created precisely for this purpose.This system, this “boom,”goes on until finally it breaks down when it becomes apparent that the so-called “over-investment” is actually mal-investment or over-expansion in some areas of the economy.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
Note: I'm not convinced by the argument Esuric is making.
Did you read my comment explaining why changes in monetary conditions alter the money rate of interest but do not alter the natural rate of interest (if we hold the ceteris paribus condition). Also, what other problems do you have? I have some problems with my analysis as well and I would like to discuss them.
But if you keep misunderstanding the position, you'll keep making irrelevant posts like this.
Thank you. I'm trying to ignore him but it's becoming increasingly difficult. He simply never stops. This is worse than his attempt to refute Ricardo's law of association, and when he tried to prove that debt is inherently "bad."
Esuric:We shouldn't prevent the supply of money from reacting to the demand for money anymore than we should prevent the supply of shoes reacting to the demand for shoes.
?
So, if I need shoes, I could make myself a pair. And if I need money, I could just print myself some money?
Z.
Esuric: Block 1998, pp. 1–50). However, in a fiat-money-using society, the optimal quantity of fiat money is whatever is in existence, and, from an Austrian perspective, that quantity should never be changed, either increased or decreased, save for its complete elimination in shifting to a commodity money.2 I don't support fiat money and I'm not talking about fiat money, but either way, there's no reason to believe that we should elevate the supply of money when the demand for money rises in a monetary system which employs commodity money, but that we shouldn't elevate the supply of money when the demand for money rises in a monetary system that employs fiat money
I don't support fiat money and I'm not talking about fiat money, but either way, there's no reason to believe that we should elevate the supply of money when the demand for money rises in a monetary system which employs commodity money, but that we shouldn't elevate the supply of money when the demand for money rises in a monetary system that employs fiat money
Esuric,
I read your posts as endorsing that you support a basically free banking system (as defended by White, Horwitz and others).
This means that there is a 'base' of gold money, but that the bankliabilities at any given time in that system could be higher than the amount of gold in the vaults. But this also means that people have loans to pay of to the bank - so that in the 'long run' bank liabilities will be equal to the amount of gold. (If all loans are paid out to the bank.)
This means that 'a increase in the supply of money' means that bank have to write down more bank liabilities - that people have to pay back, eventually. So the supply of money increases and decreases, according to market forces.
Is this interpretation of your vision correct?
If correct, this might be important for the people opposing your views, to understand this mechanism. That it is not 'just' printing more money; but adjusting the supply of money (bank liabilities) to the demand people have for it, and that this can raise and go down again.
So the banking system can adjust to demands people have by increasing, basically, loans (increase bank liabilities) but these have to be paid back to people.
Is this interpretation correct?
Adrian,
I was not referring to Esuric this time, but to another poster. I implied earlier that the govt is just a bunch of counterfeiters, and that just as nobody thinks counterfeiting is good, so too nobody should think money printing is good. I was told not to conflate the govt and counterfeiters. This quote was to show that Mises says they are identical, too.
Straw man strikes again. I never said anything of the kind. I explicitly said that it depends WHY you are borrowing the money.
Smiling Dave: Finally, finally, we get to the trade cycle. In Chapter 17 of this jewel of a book. Now what is credit expansion? Credit expansion is inflation also... With credit expansion the additional quantities of money enter the eco- nomic system, not through government spending, but through loans of newly created credit to businessmen by the banks. So the prices of the things businesses buy go up. This brings about a “boom” in business. If this boomis not stopped in time, it develops into a great economic crisis. This is the trade cycle, the most interesting phenomenon of the capitalistic system. OK guys, we have arrived. Uncle Mises is finally going to exonerate Esuric of all my criticism. He will get right out there and talk about how inflation makes some prices go up, some go down, and generally "distorts" the true state of affairs, right? After all, this whole book is about inflation. and the most significant part of inflation is, according to Esuric, all these "distortions", right? Even though in the previous paragraph he only talked about prices going up, not some up, some down, some left , some right, surely he will listen to Esuric and correct this state of affairs right now, no? Nope. Most disappointing, but he TOTALLY IGNORES every thing Esuric said was the "real" problem caused by inflation. The trade cycle is due to the fact that banks expand credit and this credit expansionbrings about an expansion of business. But as the quan- titiesofproducers’ goods, capital goods, arenot increased, there is anover- expansion of some businesses, but not a general over-investment, as it is called by some finance brokers, throughout thewhole economy. The sig- nificant characteristic of the boom is this over-expansion by the artificial lowering of the interest rate in order to create the credit expansion. This misleads businessmen into thinking that there is a greater amount of cap- ital goods available than actually exists, and that certain projects are now possible which would have been impossible with a higher rate of inter- est. In fact the only thing that is newly available is an increasedamount of credit created precisely for this purpose.This system, this “boom,”goes on until finally it breaks down when it becomes apparent that the so-called “over-investment” is actually mal-investment or over-expansion in some areas of the economy.
I'm sorry, but this quote proves Esuric being correct in his assessment (about the importance of relative prices being the cause of the business cycle/problems.)
Mises is saying that relative price changes are the problem. Just because he doesn't explain in the same words as Esuric is using, doesn't mean Esuric is making the same point as Mises is making. Mises is implicitly (and correctly) assuming that there will be Cantillon-effects, and therefore we will have these problems. That's what Esuric saying the whole time...
Do you know/understand the concept of 'Cantillon-effects'? Do you understand that there would be no businesscycle in a world (1) with inflation but (2) without cantillon-effects? Than you understand that Esuric is correct.
Esuric:Money is not like other economic goods; it is both a good and class in itself, and alterations in monetary conditions effect all prices.
This paper by Barnett and Block suggests that money is a producer's good. YMMV, of course.
(Thanks to the Nirgraham of 2009!)
The keyboard is mightier than the gun.
Non parit potestas ipsius auctoritatem.
Voluntaryism Forum
Smiling Dave: Thank you. I'm trying to ignore him but it's becoming increasingly difficult. He simply never stops. This is worse than his attempt to refute Ricardo's law of association, and when he tried to prove that debt is inherently "bad." Straw man strikes again. I never said anything of the kind. I explicitly said that it depends WHY you are borrowing the money.
You tried to disprove the Ricardian law of association?
tsk tsk. "Shut up"? You listening Danny?
Smiling Dave: Adrian, I was not referring to Esuric this time, but to another poster. I implied earlier that the govt is just a bunch of counterfeiters, and that just as nobody thinks counterfeiting is good, so too nobody should think money printing is good. I was told not to conflate the govt and counterfeiters. This quote was to show that Mises says they are identical, too.
I must have missed that post: I didn't see anyone saying that government (today) doesn't have the same economic consequences of counterfeiters.
No I did not try to disprove Ricardo at all. He is misstating my position.
By the way, does anyone agree that a distinction should be made between the total quantity of money and the quantity of money in circulation (i.e. being spent and invested)?