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
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.
Loans are assets for banks, not a liabilities. What I support is what Mises supported, namely a competitive banking system. If 100% reserves naturally emerge, then so be it, but there's no reason to believe that this would be the case. There's a natural organic adjustment mechanism that exists within competitive banking systems which prevents over-expansion of money and credit--Mises spends a lot of time dealing with this issue, but this is not what I want to talk about. What I want to talk about is the theoretical interconnectedness between inter-temporal disequilibrium and monetary disequilibrium.
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.
This the problem. People are focusing on the normative implications of my purely theoretical argument rather than the actual argument itself, and it's causing emotional knee-jerk reactions. This is the problem with fusing ethics with economics.
"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."
So, if I need shoes, I could make myself a pair. And if I need money, I could just print myself some money?
Who would accept your money? And if no one accepts your money, then it's not money. This question is nonsensical. Do you understand what money is? You're free to open up a bank and compete with other banks, by providing sound money and issuing sound loans.
Also, please stop avoiding my point about the effects of monetary disequilibrium on the capital structure. We all agree (with the exception of Dave) that inflation yields relative price distortions, inter-temporal disequilibrium (the money rate of interest is pushed below the natural rate), and distorts the capital structure. I'm merely asking you to investigate the ramifications of the inverse situation, when the supply of money falls below the demand for money, and when the money rate of interest rises above the natural rate.
Esuric: 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. Loans are assets for banks, not a liabilities. What I support is what Mises supported, namely a competitive banking system. If 100% reserves naturally emerge, then so be it, but there's no reason to believe that this would be the case. There's a natural organic adjustment mechanism that exists within competitive banking systems which prevents over-expansion of money and credit--Mises spends a lot of time dealing with this issue, but this is not what I want to talk about. What I want to talk about is the theoretical interconnectedness between inter-temporal disequilibrium and monetary disequilibrium.
Of course a loan is a an asset and not a liability, but what does the bank 'loan out', i.e. 'give away'? Bank liabilities ('money', in White/Horwitz terminology), i.e. demands at the bank. So the bank 'loans' 100 ounces of gold out, but that means the person who takes the loan, has 100 ounces of gold in bank liability. This is the increase in amount of 'money' - there are more bank liabilities than there is 'gold'. But this increase also implies that the amount of money (bank liabilities) will go down again - at least 'in the long run', when all the loans are paid back to the bank.
If people get that it's not just 'inflating' the money supply, but an interconnection between raising and lowering the amount of money, relative to the amount of gold, they might get where you are coming from a bit more.
So; given this perspective. If the demand for money raises, banks can react by increasing the supply of money through loans - but these loans have to be paid back (and, probably, with an interest on them).
if everything I said so far is correct, than some of the criticisms disappear. People have attributed to your position 'well, we'll just print more money!' implying that there is no cost. But given this vision of the increase of money, there is, in fact a cost - so it's not just 'inflating' or 'printing more money' without any relationship to scarcity as such.
So given this perspective; imagine the demand for money goes up and, ceteris paribus, the time preference rate doesn't change. Banks could increase the supply of money (through loans) so people don't have to sell stuff or save less. But this can't go on indefinitely: people have to 'lower' their demand for money again - or really lower consumption or savings.
But because of this mechanism, people can increase their demand for money, without any need to adjust the entire structure of production. The only thing that changes is the amount of money.
This makes some sense, to me.
The state is not the enemy. The idea of the state is.
This is what I have about Cantillion effects, from Mark Thornton:
Cantillon effects are named for their discoverer, Richard Cantillon, who is widely credited as the first economic theorist, and in particular, was the first
to show that changes in the money supply and credit have important impacts on the economy by changing relative prices.7 Cantillon showed that an increase in the supply of money would cause economic expansion, but that ultimately the process would be self-reversing as prices would rise and imports would increase, sending money back out of the economy. Cantillon further showed that monetary inflation does not affect all prices equally or at the same time, but in sequences that depend on the spending behavior of money holders all along the channels of monetary flows. These ideas have been adopted and extended by Knut Wicksell, Ludwig von Mises, and F.A. Hayek and more recently by McCulloch (1981) and Garrison (2001).
Cantillon effects are the real fundamental changes in resource allocation that result from changing relative prices between the time of the creation of new money and the full adjustment to the increase in supply. ...
Most importantly, changes in the supply of money can have effects on the interest rate and once again the effect will depend on how the money enters the economy. On the one hand, if it comes into the hands of traditional bor- rowers or lenders, such as developers, the rate of interest would initially fall. This is similar to the Austrian theory of the business cycle in that when banks expand the money supply and lower the interest rate below what it would have been borrowers invest in longer term capital projects. On the other hand, if the money came into the hands of consumers, the rate of interest might rise as suppliers attempt to meet the new demand for goods. In the Austrian view, changes in the interest rate change the relative price between longer-term cap- ital projects and shorter-term capital projects. A lowering of the interest rate raises the prices of longer term capital goods relative to shorter term capital goods. In response to the change in relative prices, more resources are allocated to long-term capital goods. Unlike other aspects of the self-adjusting market process, such as money, land, labor, and short-term or intermediate capital goods, these resources become suspended or fixed in long-term fixed capital goods. These resources become formulated in a highly-specific capital good that may not be well-suited to the alternative production processes of the post-adjustment economy. As a result, all of the adjustment in these long-term fixed capital goods must come from a change in price and this will entail large losses and possible bankruptcies by the owners of these capital goods. To the
extent that these types of adjustments are widespread, they pose a threat to capital markets and the banking system.
OK, so bottom line:
1. After allowing for all the Cantillon effects in the world, money, land , labor, and short and intermediate capital goods will take care of themselves. No need for meddling by anyone. And they have no influence on ABCT.
2. The two Cantillon effects that matter in ABCT are low interest rates and the resulting change in long range capital goods. Note the second is a direct consequence of the first.
3. This is in direct contradiction to Esuric's absurd claim that "distortions" of prices of everything, some up, some down, are responsible for ABCT. All that matters is one thing, and one thing only. Interest rates. That's it.
4. Also notice that this distortion of interest rates is not an inherent part of money printing, but is a coincidental result of the way money is printed and distributed in the USA today. If the Treasury just printed the money outright and handed it in a big valise to Obama to divvy out to his pals, with the banks getting nothing, interest rates would not go up, just as in the other case Prof Thronton mentions. With deflation, the banks also would have no new money to lend, and thus interest rates would not drop. On the contrary, they might rise, since money is so hard to find. meaning no ABCT will get off the ground, refuting Esuric's claim that deflation can cause an ABCT.
5. Fimally, an integral part of an ABC is HAVING THE MOINEY TO SPEND IN THE FIRST PLACE on long range capital investments. When there is inflation, they have the money from the printed stuff. With deflation, where will it come from? Esuric refuted once again.
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It's easy to refute an argument if you first misrepresent it. William Keizer
Smiling Dave: 3. This is in direct contradiction to Esuric's absurd claim that "distortions" of prices of everything, some up, some down, are responsible for ABCT. All that matters is one thing, and one thing only. Interest rates. That's it.
Quoting Esuric: "We all agree (with the exception of Dave) that inflation yields relative price distortions, inter-temporal disequilibrium (the money rate of interest is pushed below the natural rate), and distorts the capital structure"
I think that your assessment of his views is not substantiated by his own words.
AdrianHealey: Smiling Dave: 3. This is in direct contradiction to Esuric's absurd claim that "distortions" of prices of everything, some up, some down, are responsible for ABCT. All that matters is one thing, and one thing only. Interest rates. That's it. Quoting Esuric: "We all agree (with the exception of Dave) that inflation yields relative price distortions, inter-temporal disequilibrium (the money rate of interest is pushed below the natural rate), and distorts the capital structure" I think that your assessment of his views is not substantiated by his own words.
I'm not sure what you mean. I was attributing to him that there are distortions, with some up, some down, and that all these are responsible for an ABC. I disagreed and sais, nope , it's only interets rates that count.
Please elaborate on what you see in that quote from him.
BTW, stay tuned for the next post, where Uncle Mises explains in detail why Esuric is wrong yet again. when he wrongly asserts that inflation causes low interest rates. Note that Prof Thornton has already disagreed with him. But it's Mises also. And remember, both explain why, so it's not a q of appealing to authoority.
Autolykos: 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)?
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)?
Rothbard, MES:
That money in one’s cash balance is performing a service demonstrates the fallacy in the distinction that some writers make between “circulating” money and money in “idle hoards.” In the first place, all money is always in someone’s cash balance. It is never “moving” in some mysterious “circulation.” It is in A’s cash balance, and then when A buys eggs from B, it is shifted to B’s cash balance. Secondly, regardless of the length of time any given unit of money is in one person’s cash balance, it is performing a service to him, and is therefore never in an “idle hoard.”
Esuric his opinion, as far as I see it, is that relative price differences cause discoordination. Inflation causes these kinds of discoordination. . One example of this - 'the business cycle' - is caused by the money rate of interest pushed below the natural rate.
What part of this is wrong, according to you?
Dave, read the chapters of Human Action on interest. A market rate of interest is a function of the relative prices of "sooner" goods vs. "later" goods. Distortions in relative prices do bring about the ABCT.
Interest rates must go up when there is a general tendency for prices to go up because, if you buy commodities instead of lending money and hold the commodities, you make an extra profit in such a situation by the increase in the prices of the commodities you have bought.Therefore, people will prefer not to lend money to anybody if there is not an in- demnification in the rate of interest which they are receiving for the profit they could make by buying commodities or stocks themselves and keeping them for a time until their prices went up.Therefore, the stateof affairs in which prices are going up is necessarily a stateof affairs in which the rate of
interest will goup also, because under such conditions the rate of interest must contain an element which I have called the “price premium,” that is an indemnification for the profit the money lender could earn himself by buying commodities instead of giving a loan.
Bottom line; Inflation produces a tendency for prices to go up, which means people can make money buying and selling commodities, which menas why should they lend you money when they can use it to buy commodities, which menas yiou will have to pay higher interest to get a loan.
This refutes for a second time [once by Prof Thornton, and now by Mises] Esuric's assertion that inflation lowers interest rates.
Since I trust the good Prof Thornton when he says the only thing that will start and ABC is low interest rates, Esuric stands refuted on his claim that inherent in inflation is an ABC. It is not so. Also refuted is his claim that deflation can cause an ABC, for the same reason.
OK, I have to take a break and read HA on interest, because Mises says clearly here that inflation makes interest rates go up, not down. Which is of course common sense. People will charge higher interest so as not to lose from inflation.
Cy'all later.
BTW Adrian, my post on Cantillion and this last one show in detail why I disagree with Esuric.
Smiling Dave: Interest rates must go up when there is a general tendency for prices to go up because, if you buy commodities instead of lending money and hold the commodities, you make an extra profit in such a situation by the increase in the prices of the commodities you have bought.Therefore, people will prefer not to lend money to anybody if there is not an in- demnification in the rate of interest which they are receiving for the profit they could make by buying commodities or stocks themselves and keeping them for a time until their prices went up.Therefore, the stateof affairs in which prices are going up is necessarily a stateof affairs in which the rate of interest will goup also, because under such conditions the rate of interest must contain an element which I have called the “price premium,” that is an indemnification for the profit the money lender could earn himself by buying commodities instead of giving a loan. Bottom line; Inflation produces a tendency for prices to go up, which means people can make money buying and selling commodities, which menas why should they lend you money when they can use it to buy commodities, which menas yiou will have to pay higher interest to get a loan. This refutes for a second time [once by Prof Thornton, and now by Mises] Esuric's assertion that inflation lowers interest rates. Since I trust the good Prof Thornton when he says the only thing that will start and ABC is low interest rates, Esuric stands refuted on his claim that inherent in inflation is an ABC. It is not so. Also refuted is his claim that deflation can cause an ABC, for the same reason. Dave, the price premium is only one component of the market rate of interest. The market rate of interest is more fundamentally about relative prices of sooner vs. later goods. If the prices of later goods go up relative to sooner goods, the market rate of interest will go down. "the obligation to justice is founded entirely on the interests of society, which require mutual abstinence from property" -David Hume | Post Points: 20
Just got back from the gym so I've spome catching up todo. Still I noticed the following.
Z1235:Even if all prices were to go up in unison and uniformly, this would present a redistribution from money-holders to debtors -- a problem for the former and a benefit for the latter.
All you've done here is shown the contradiction that Mises has elaborated on, it's entirely impossible for prices to go up in unison. If by some magic they could however, the problems that the ABCT presents would not exist.
Z1235:Why are "altered monetary conditions" any more cause for concern (thus in need of fine-tuning by manipulating supply) than, say, altered iPod conditions, altered bread conditions, or altered shoe conditions?
Actually the end result really is an altered ipod condition, an altered bread condition, and altered shoe conditions. If this discoordination did not do anything real, we would have no reason to be concerned.
The point is that new money enters the economy unevenly at specific entry points. Some goods and services are bid up in price immediately while others lag or even show a sudden lack of interest causing a drop in relative prices. The relative ratios between goods and services are suddenly altered. This is what has been discussed for now several pages, and I am somewhat aghast that everyone takes such an issue with it.
As I posted above for Smiling Dave, I'll post again for you as well.
Mises:The essence of monetary theory is the cognition that cash-induced changes in the money relation affect the various prices, wage rates, and interest rates neither at the same time nor to the same extent. If this unevenness were absent, money would be neutral; changes in the money relation would not affect the structure of business, the size and direction of production in the various branches of industry, consumption, and the wealth and income of the various strata of the population.
Mises:But even in setting aside all these things, we must never forget that changes in the quantity of money affect prices in an uneven way. It depends on the data of each particular case at what moment and to what extent the prices of the various commodities and services are affected. In the course of a monetary expansion (inflation) the first reaction is not only that the prices of some of them rise more quickly and more steeply than others. It may also occur that some fall at first as they are for the most part demanded by those groups whose interests are hurt.
Those are from HA posted here.
Danny,
Are you asking me to defend what I quoted from Mises?
It will need a lot of work, but I imagine the simplest explanation is that he is saying that given a general tendency for prices to rise, interest rates will be higher than they would have been otherwise, all other things being equal.
Am interested in your response.
Dave, I'm saying that whatever effects the price premium may have on interest rates, it doesn't discount the fact that distortions in relative prices effect market rates of interest and bring about the business cycle.