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
Danny,
I admit I'm tentative here, waiting to read HA on interest. FWIW:
To have a business cycle, you need interest temptingly low. Otherwise the businessmen would not borrow to invest in long range capital goods. They would not have the money to do it, and would not think they will keep on having the money to continue for the many years they need to finish.
So we need these distortions to create a low interest rate, which I doubt they can do, for two reasons.
Firstly, they do not guarentee a lower rate, for who knows which way they will distort. It all depends on what the guys who get the money first will do with it. Not only that, I imagine they will want sooner goods. That's why the money was printed in the first place, to pay for the war, to give people their welfare and SS checks, all things meant to be used right now. To convince people to part with their dough and lend it at interest, it would have to be a higher rate of interest.
Also, if the price premium is high enough, it will offset any lowering of interest rates caused by those distortions.
Bottom line, it is impossible to say with certainty that inflation will cause an ABC because of price distortions. Moreover it is unlikely to do so.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
filc:Because your constructing an argument from nothing. I don't need to address your questions, as they have nothing to do with the 3 points I posted above. ........Lets make one thing straight here. Your not arguing against my premise, but of a perhaps poorly worded explanation of it.
Do you reject what you said before? Do you want me to discard it for its poor wording? If it is poor wording, why are you being so evasive and hostile. Clarify your position and consider my remarks as constructive.
filc:Furthermore if it were true that un-even changes in the market did not cause issues in the capital structure amongst certain cases then there would not be a business cycle theory in the first place.
The issue here is not about a dispute whether cash-induced changes in the purchasing power affect or not affect economic calculations, for they certainly do. It is about two false ideas being advanced here:
1. That in the general case, a divergence from some imaginary equilibrium is "problematic" and is the cause for inter-temporal distortions. - This cannot be correct, unless one commits the fallacies of the mathematical economists and misconstrues entirely equilibrium analysis and the market process. This isn't just wording or nit picking.
2. That the affects on the structure of relative prices of a a cash-induced change in one direction can be canceled out (or minimized in practice) by an equal cash-induced change in the other direction.
filc:Though since I have known you on these forums, I come to expect this behavior from you.
And you continue to make personal attacks, which is unfortunate.
Smiling Dave:I admit I'm tentative here, waiting to read HA on interest.
If you're that admittedly tentative, why have you been so aggressive and swaggering in debating Esuric, who has demonstrated so copiously on this forum such an impressively firm grasp on economic science?
DD5:2. That the affects on the structure of relative prices of a a cash-induced change in one direction can be canceled out (or minimized in practice) by an equal cash-induced change in the other direction.
DD5 can you quote where I, or anyone, endorsed point #2?
Do you remember us talking about you putting words in people's mouths?
Ignoring point 1 for now, the rest of your post offers nothing constructive. Whether I am being rude, or you. We can go down this road infinitely, it's pointless. I have stated my position, and gone out of my way to clarify myself for you once already. You are not my nanny, or my teacher. If you'd like to grade my post, gladly give me an F and move on.
For these reasons, I will remain, not hostile, but apprehensive to you my friend. I believe that:
A) You do not understand what is being discussed(And that is not a bad thing) OR
B) Your looking for mistakes in my wording to specifically instigate an argument, one that will bring about nothing constructive or positive.
EDIT:
@DD5. In my effort to mend any relationship we may have. You should know that I at least think that it is most likely that either you, or myself are mis-understanding each other. My history with you is nothing short of disappointing, but I am willing to ignore it and move forward for now. What I want to express to you is that needlessly attacking a mispoken statement(Of which I am not exactly sure which statement you take issue with), a statement that may not even be my position is not helpful to anyone here.
I have stated my points several times now. If you have a problem with those specific points, the ones I most recently clarified to you, then please address those. Everything else to me just seems like strawmanning, whether intentional or un-intentional.
Esuric: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.
You're asking to do much more. You're asking to ignore the causal elements in the changes in the money supply. In this particular case, a contraction, but it is just as well the case for expansion.
The use of "above the natural rate" or "below the natural rate" are valid in explaining the discoordination only on account of the economist's assumption, made for simplicity of analysis, that the "natural rate" , as a given, is the present desirable rate of the market. (emphasis on desirable). Therefore, it automatically follows that any divergence from this "natural rate" (market rate) constitutes a disruptive divergence, or distortion. However,it also logically follows that this disruptive force must be exogenous. Assuming that the cause can also be indigenous, such as voluntary changes in cash holdings, results in a logical self-contradiction, i.e., if "natural rate" is the rate of the free market, how can there be a divergence from it in the free market?
filc:DD5 can you quote where I, or anyone, endorsed point #2?
That's basically the crux behind MET, which is what this thread is basically about. Esuric has made his sympathetic case for MET analysis and its various conclusions such as MV stabilization, etc....
As for you, I don't know what your position is. You're being evasive and simply resorting to personal attacks. Frankly, I don't care.
DD5: As for you, I don't know what your position is.Frankly, I don't care.
Im glad that my attempt at reconciliation with you was fruitful. This is why I hold you in the esteem that I do. Your a bully. Ironic too since you seemed to think you knew what my position was prior to this post.
DD5:You're being evasive
So evasive that I politely spelled out my position to you a second time. The very points you insisted were counter-praxeological.
Filc:So please indulge me, what part of my points below are counter-praxeological? Point A. Changes in the ratio of goods and services to money which represents that supply of goods and services, must necessarily cause adjustments in monetary calculation. Point B. That the changes in point A occur non-uniformly and un-evenly and at different times and intervals. Point C. That the problem is not just that prices will rise in the long run, which, as Esuric points out, is only problematic with long-term interest rates. But that the un-even distribution of new money or credit is one of the first keynotes to understanding business cycle theory. It explains why inflation benefits some, while being a cost to others. How are these points challenged by Praxeology, and if you agree to the points, why did you waste your time patronizing me in the first place?
How are these points challenged by Praxeology, and if you agree to the points, why did you waste your time patronizing me in the first place?
Oh yes, oh so evasive!
Filc,
You're being somewhat dishonest.
First, your previous (original) post contained remarks absent from your new revised post. So how was I being a "bully" when your personal attacks started before your new revision?
Second, you are misrepresenting Esuric's position in your new "revised" post, for he is saying much much more then this.
Third, I think this is the 6th or 7th consecutive post you have made a personal attack against me.
DD5:First, your previous (original) post contained remarks absent from your new revised post. So how was I being a "bully" when your personal attacks started before your new revision?
My original post, which you did not respond to, was directed at Smiling Dave, regarding his argument that inflation is "evil" end of story.
The post is found here.
You butted into the middle of a dialogue between Smiling Dave and I and inherently became confused.(Not my fault)
DD5:econd, you are misrepresenting Esuric's position in your new "revised" post, for he is saying much much more then this.
I do not represent Esuric's position, he represents his own.(Honestly he doesn't need my help) This behavior is extremely foolish.
In both cases you have allowed yourself to be confused. Neither of which is my fault.
DD5:Third, I think this is the 6th or 7th consecutive post you have made a personal attack against m
Well let me help you bring your evening to closure. Now I may have been harsh with you, but I have absolutely no reason, which is confirmed above, to treat you with anything other then contempt. Especially after making an attempt at reconciliation with you. Please don't act surprised by this considering my entire history with you has been on the receiving end of dis-respect. You reap, what you sew in this case. You have a very prominent history of being brash and crude. I hold the opinion that these methods are not appreciable and do not conduct affairs in a positive manner. Strawmanning an argument, whether intentional or not intentional does not progress the discussion any. By Strawmanning I mean, building an argument that is irrelevant or un-related to the point at hand. In my case, my argument against Smiling Dave was interrupted by you. I clarified my position to you, and you continued to call me evasive and dishonest. What did you expect exactly? I have observed this behavior from you directed at others as well. This is why I think your a bully who enjoys argumentation, more then the discovery of truths.
All I'll concede to you is that I may have been harsh. That concession however is more then I can ever hope to receive from you.
Autolykos: Of course, that seems to beg the question: what's the "price" of money?
Of course, that seems to beg the question: what's the "price" of money?
A note: begging the question is when the proposition to be proven is assumed in the premise. It's not the same thing as "raising the question".
Dave, I don't know much about your history with Esuric in other debates, but with regard to this discussion in particular it seems to be you who have started the degradation of the dialogue, both by being the first person to be disrespectful (with your "Don't be silly" comment) and by being the first person to misunderstand the other's position.
You said,
"Don't make Esuric's incredible mistake of thinking that they also said or implied that money printing does not cause price rises, or that rising prices caused only by money printing are not an evil."
Your above misunderstanding could have been easily prevented by just reading the following previous statement by Esuric carefully and in context.
"The mainstream focuses on a few and relatively unessential effects of inflation, such as inflationary expectations, menu costs, shoe leather costs, and arbitrary redistribution of wealth (from creditors to debtors), while the Austrians tend to focus on the effects that inflation has on the relative structure of prices (Austrians don't deny that the other effects exist)."
Esuric is clearly not denying that monetary expansion causes price increases. If the thought that someone as well-informed as Esuric entirely denies the quantity theory of money even crossed your mind, that should have been a clue that you are at least possibly misinterpreting him, and should look more closely at the matter.
Neither is he saying that any such price rises would be harmless. Yes, he also said that the "other effects" weren't really "the problem". But the context of this whole conversation is the business cycle. He's making the insight that, with regard to the business cycle, the problem that causes intertemporal malinvestment is not a general rise in prices, but the distortion in relative prices.
A theoretical framework does not have set in stone conclusions...
edit: And you failed to answer his question, you just evaded it.
Why do you post a caricature of the "crux" of monetary disequilibrium theory when you do not have a coherent understanding of it?
if "natural rate" is the rate of the free market, how can there be a divergence from it in the free market?
Mises borrowed from Wicksell the idea that the banks rate of interest (subject to monetary manipulation) may diverge from the natural rate of interest (that rate which excludes all monetary influences and is consistant with consumers' time preferences).
More here:
http://www.auburn.edu/~garriro/e3mises.htm
Emphasis added...
Esuric: How is non market driven deflation done? Tossing big piles of paper money in the incinerator? Is that what you guys are talking about? When the demand for money rises but is not satiated by an expansion in the supply of money in the broader sense because there isn't actual competition within the banking system due to government cartelization, extreme regulation, and monetary central planning. Esuric was talking about a market driven decision. People decide they want to spend less. First, it's not that they "want to spend less," but rather demand additional real money balances. Next, and as I've already mentioned, the banking system cannot respond to this elevated demand for money (by creating fiduciary media) because of arbitrary government interventions.
How is non market driven deflation done? Tossing big piles of paper money in the incinerator? Is that what you guys are talking about?
When the demand for money rises but is not satiated by an expansion in the supply of money in the broader sense because there isn't actual competition within the banking system due to government cartelization, extreme regulation, and monetary central planning.
Esuric was talking about a market driven decision. People decide they want to spend less.
First, it's not that they "want to spend less," but rather demand additional real money balances. Next, and as I've already mentioned, the banking system cannot respond to this elevated demand for money (by creating fiduciary media) because of arbitrary government interventions.
Esuric,
This is the part that doesn't make sense to me. When we're talking about people demanding, "additional real money balances", we're talking about demanding more purchasing power, right? But how can wanting more purchasing power be "satiated by an expansion in the supply of money" when expanding the supply of money does not expand total purchasing power, since at any given moment, there is a definite stock of commodities (that which one can have the power to purchase) in the market, and therefore there is a fixed, definite amount of purchasing power to go around?
When there is an increase/decrease in the money stock, and the demand for purchasing power remains the same, there will be an increase/decrease in the general market demand for the monetary unit (nominal cash balances). And that can be satiated by dishoarding/hoarding, while purchasing power/real cash balances remain the same. An increase/decrease in an individual's demand for purchasing power itself (real cash balances) can be satiated by liquidating/building up assets. But an increase/decrease in the whole market's demand for purchasing power cannot be satiated in this way. What could it possibly mean for an entire market to "liquidate" its assets? Everyone sells their stuff. But to whom? Each other? That clearly would not increase the market's total purchasing power in the way that an individual liquidating his assets does so for him.
The exchange-facilitated productive process across time is not a zero-sum game, but atering real cash balances, in any given snapshot in time, is. To repeat, at any point in time, there is a definite stock of commodities (more production would mean you're not talking about a snapshot in time anymore), and therefore a fixed amount of purchasing power. So at any point in time, one person can only increase his aliquot of the goods and services he can command with his cash balance (in other words sell assets in exchange for purchasing power) if other people decrease their aliquot (in other words, buy assets in exchange for purchasing power) to the same extent.
Danny Sanchez: 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.”
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.”
Thanks for that, Danny. Rothbard is spot-on, of course. I suppose the only useful distinction to make here is between money that is part of the supply of loanable funds and money that is not.
Regarding higher demand for money (i.e. higher demand for cash balances), could it be said that it's motivated by a rise in time preference?
The keyboard is mightier than the gun.
Non parit potestas ipsius auctoritatem.
Voluntaryism Forum