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 Sanchez: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".
Good point. I fear I've been less than accurate in my use of the phrase "begs the question".
The keyboard is mightier than the gun.
Non parit potestas ipsius auctoritatem.
Voluntaryism Forum
Horwitz says this about monetary disequilibrium characterized by excessive demand:
(Emphasis added) "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. Hence, an excess demand for money."
"Real money (cash) balance" is just another way of saying "purchasing power". So, by talking about a "real cash balance disequilibrium" characterized by "excessive demand", he can only be saying that the quantity of purchasing power demanded exceeds the quantity of purchasing power supplied. But, you can't meaningfully call a greater QD for purchasing power than the QS of purchasing power a "disequilibrium", because a "disequilibrium" refers to a situation in which, given a certain stock of goods, more mutually beneficial exchanges could have occurred than really did occur. That is obviously not the case here, because more total purchasing power can only be brought to market through more production, and thus a greater stock of that which can be purchased; and then you would no longer be talking about the same given stock of goods. And as I argued in my last post, fiduciary media would not help at all, because it cannot create any more purchasing power than existed without it, because total purchasing power on the market is fixed for any given definite stock of commodities.
Esuric: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.
The question makes sense. If you make what you think are "shoes", and no one accepts them as such, then they won't be shoes either. Shoes are no different from money or anything else freely traded in the market. I don't have to open a bank in order to start issuing claims to my gold stored in my basement. And I bet you that such "non-bank" money would be accepted by the free market as much sounder than the paper issued by some 10% reserve "bank".
And stop "educating" me and everyone else in this thread about ABCT. The discussion in this thread is not about what causes the business cycle, but whether adjusting the money supply (i.e. printing money by government or "free but sound" banks) has ANY benefit whatsoever toward alleviating the effects from the bust.
Z.
1. Tentative in one area does not mean in all areas. I have stated logical arguments for all my claims, backed them up with quotes from Mises and other respected Austrians. I have caught him out often. He always responds to my arguments and proofs with evasiveness, ad hominems, or ostrich like ingoring. So he is not that bright IMHO.
2. Remember your warning to Esuric? That offensive manner of his is typical, especially to me. He deserves to be treated in kind. Of course my "aggressive swagger" did not include personal attacks on his character and intelligence, merely expressing abit of joy that i am right and he is wrong yet again.
3. So you started the discussion with me as a bait, not in the interest of examining the topic? For you offered no reply to the actual content of the post.
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It's easy to refute an argument if you first misrepresent it. William Keizer
1. yes, in this thread I made that comment first. But we go back a ways.
2. The OP was not about the business cycle. In fact, not a word was mentioned of the business cycle when he posted. It is not the context of this conversation at all. Certainly scineram's post and my reply to it, which set Esuric off, were not discussing the business cycle. He made a bald statement that rising prices weren't really the problem. Ever. If he meant what you iumpute to him, he could have sent off a one liner "Guys I'm talking about the effect of proce rises on the ABC, not on the economy as a whole." Instead he tells us Bettina Greaves is a liar, and Mises is wrong, and that he can't find half the quotes.
3. I mad a simple statement, that inflation makes prices go up. It's a simple fact. That book of Mises says the same thing dozens of times. What did he see in my simple statement that set him off? That I didn't write a book with all the qualifications?
4. My impression of Esuric is that he read a lot of books, but is weak on common sense. In fact he expressed disdain for it. I think he'll get in big trouble as an economist with that atitude.
5. If the bottom line here is that everyone agrees that inflation makes prices go up, and it's a huge problem, I'm fine with that. All's well that ends well.
Of course I still disagree with the notion that deflation can set off a business cycle, or that Mises was wrong when he said that whatever amount of money there is is just fine [except perhaps when gold is money, which is what he's talking about in TMC].
Danny,
About your remarks on Hurwitz. I had similar objections to his thesis earlier in this thread, though of course in less impressive language.
Oops, I forgot my own policy. Okay, any further discussion about who is being rude to whom needs to only happen in this thread in the Member Issues forum henceforth. Like I say in the OP there, so that we can generate more light than heat regarding this important and fascinating topic, I encourage people to focus on discussing the topic with people they don't find intolerably aggravating.
Danny Sanchez:Horwitz says this about monetary disequilibrium characterized by excessive demand: (Emphasis added) "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. Hence, an excess demand for money." "Real money (cash) balance" is just another way of saying "purchasing power". So, by talking about a "real cash balance disequilibrium" characterized by "excessive demand", he can only be saying that the quantity of purchasing power demanded exceeds the quantity of purchasing power supplied. But, you can't meaningfully call a greater QD for purchasing power than the QS of purchasing power a "disequilibrium", because a "disequilibrium" refers to a situation in which, given a certain stock of goods, more mutually beneficial exchanges could have occurred than really did occur. That is obviously not the case here, because more total purchasing power can only be brought to market through more production, and thus a greater stock of that which can be purchased; and then you would no longer be talking about the same given stock of goods. And as I argued in my last post, fiduciary media would not help at all, because it cannot create any more purchasing power than existed without it, because total purchasing power on the market is fixed for any given definite stock of commodities. I think the MET crowd would claim that more mutually beneficial exchanges could indeed have occurred -- namely, more liquidation of assets could have occurred. Of course, this ignores your essential point of "given a certain stock of goods", as what the MET crowd envisions necessarily leads to a contradiction. For more assets to be liquidated than actually were, more real money would have to exist than actually did. To put it more bluntly, the MET seems to be an attempt to rationalize the notion that, in a recession, no one should be left "holding the bag". The keyboard is mightier than the gun. Non parit potestas ipsius auctoritatem. Voluntaryism Forum | Post Points: 5
I think the MET crowd would claim that more mutually beneficial exchanges could indeed have occurred -- namely, more liquidation of assets could have occurred. Of course, this ignores your essential point of "given a certain stock of goods", as what the MET crowd envisions necessarily leads to a contradiction. For more assets to be liquidated than actually were, more real money would have to exist than actually did.
To put it more bluntly, the MET seems to be an attempt to rationalize the notion that, in a recession, no one should be left "holding the bag".
Zachary Plaxco:Mises borrowed from Wicksell the idea that the banks rate of interest (subject to monetary manipulation) may diverge from the natural rate of interest
No kidding.
Put a little more effort in trying to understand what people are claiming and what they're not.
Autolykos: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?
Demand for money is time neutral. Esuric is correct in this respect, however, he fails to realize that changes in cash balances can (and are) accompanied by changes in other relative preferences between the vendible goods and services, and of course between present goods and future goods, i.e., time preference.
Edit: There is the "price revolution" that Mises refers to. MET theorists think they can eliminate such "price revolutions" by the spurious idea of stabilizing MV.
DD5:Demand for money is time neutral. Esuric is correct in this respect, however, he fails to realize that changes in cash balances can (and are) accompanied by changes in other relative preferences between the vendible goods and services, and of course between present goods and future goods, i.e., time preference. Edit: There is the "price revolution" that Mises refers to. MET theorists think they can eliminate such "price revolutions" by the spurious idea of stabilizing MV.
Does the following excerpt from Human Action refute or support the idea that demand for money is time-neutral? I'd say the former, but I could be wrong.
Human Action: The deliberations of the individuals which determine their conduct with regard to money are based on their knowledge concerning the prices of the immediate past. If they lacked this knowledge, they would not be in a position to decide what the appropriate height of their cash holdings should be and how much they should spend for the acquisition of various goods. a medium of exchange without a past is unthinkable. Nothing can enter into the function of a medium of exchange which was not already previously an economic good and to which people assigned exchange value already before it was demanded as such a medium. But the purchasing power handed down from the immediate past is modified by today's demand for and supply of money. Human action is always providing for the future, be it sometimes only the future of the impending hour. He who buys, buys for future consumption and production. As far as he believes that the future will differ from the present and the past, he modifies his valuation and appraisement. This is no less true with regard to money than it is with regard to all vendible goods. In this sense we may say that today's exchange value of money is an anticipation of tomorrow's exchange value. The basis of all judgments concerning money is its purchasing power as it was in the immediate past. But as far as cash-induced changes in purchasing power are expected, a second factor enters the scene, the anticipation of these changes. He who believes that the prices of the goods in which he takes an interest will rise, buys more of them than he would have bought in the absence of this belief: accordingly he restricts his cash holding. He who believes that prices will drop, restricts his purchases and thus enlarges his cash holding. As long as such speculative anticipations are limited to some commodities, they do not bring about a general tendency toward changes in cash holding. But it is different if people believe that they are on the eve of big cash-induced changes in purchasing power. When they expect that the money prices of all goods will rise or fall, they expand or restrict their purchases. These attitudes strengthen and accelerate the expected tendencies considerably. This goes on until the point is reached beyond which no further changes in the purchasing power of money are expected. Only then does this inclination to buy or to sell stop and do people begin again to increase or to decrease their cash holdings.
The deliberations of the individuals which determine their conduct with regard to money are based on their knowledge concerning the prices of the immediate past. If they lacked this knowledge, they would not be in a position to decide what the appropriate height of their cash holdings should be and how much they should spend for the acquisition of various goods. a medium of exchange without a past is unthinkable. Nothing can enter into the function of a medium of exchange which was not already previously an economic good and to which people assigned exchange value already before it was demanded as such a medium.
But the purchasing power handed down from the immediate past is modified by today's demand for and supply of money. Human action is always providing for the future, be it sometimes only the future of the impending hour. He who buys, buys for future consumption and production. As far as he believes that the future will differ from the present and the past, he modifies his valuation and appraisement. This is no less true with regard to money than it is with regard to all vendible goods. In this sense we may say that today's exchange value of money is an anticipation of tomorrow's exchange value. The basis of all judgments concerning money is its purchasing power as it was in the immediate past. But as far as cash-induced changes in purchasing power are expected, a second factor enters the scene, the anticipation of these changes.
He who believes that the prices of the goods in which he takes an interest will rise, buys more of them than he would have bought in the absence of this belief: accordingly he restricts his cash holding. He who believes that prices will drop, restricts his purchases and thus enlarges his cash holding. As long as such speculative anticipations are limited to some commodities, they do not bring about a general tendency toward changes in cash holding. But it is different if people believe that they are on the eve of big cash-induced changes in purchasing power. When they expect that the money prices of all goods will rise or fall, they expand or restrict their purchases. These attitudes strengthen and accelerate the expected tendencies considerably. This goes on until the point is reached beyond which no further changes in the purchasing power of money are expected. Only then does this inclination to buy or to sell stop and do people begin again to increase or to decrease their cash holdings.
Autolykos:Does the following excerpt from Human Action refute or support the idea that demand for money is time-neutral? I'd say the former, but I could be wrong.
No, there is nothing that refutes it. On the contrary: 'He who buys, buys for future consumption and production. "
Therefore, one enlarges his cash holdings by restricting his purchases of both present and future goods. If his restriction does not alter his previous proportion in his allocation between present and future goods, time preference is not altered on account of his increase in cash holdings.
But if for example, he increases his cash balance by restricting his spending on present goods more then on future goods, then his cash holdings is accompanied by a fall in time preference. And there is obviously another 3rd possibility. But you see, demand form money is indeed time neutral.
DD5:No, there is nothing that refutes it. On the contrary: 'He who buys, buys for future consumption and production."
However, all future points in time are not created equal. Otherwise, time preference would not exist.
DD5:Therefore, one enlarges his cash holdings by restricting his purchases of both present and future goods. If his restriction does not alter his previous proportion in his allocation between present and future goods, time preference is not altered on account of his increase in cash holdings. But if for example, he increases his cash balance by restricting his spending on present goods more then on future goods, then his cash holdings is accompanied by a fall in time preference. And there is obviously another 3rd possibility. But you see, demand form money is indeed time neutral.
Praxeologically speaking, actions reveal preferences. So his action to reduce spending more on present goods than on future goods reveals a decreased time preference. Correspondingly, his action to reduce spending more on future goods than on present goods reveals an increased time preference. Therefore, it would seem that demand for money is not time-neutral.
Autolykos:Praxeologically speaking, actions reveal preferences
And this preference for increasing one's cash balance is time neutral as I have shown when the reduction in spending affects both present and future goods so that the final state of allocation between the two remains unchanged. The preference for the amount of cash blance is independent from time preference. One can occur without affecting the other. That's what is meant by time neutral.
Hey Esuric,
Especially if you've already addressed my objections beforehand, I don't expect you to respond to my last 2 posts about monetary disequilibrium, but can you let me know whether (A) you have indeed already addressed them, (B) you think I'm fundamentally confused or (C) you think I have a point? Thanks. :)