Money. Doing it Right this Time.

Except this isn't how the Fed has functioned for three decades now. In most cases the fed is acting as a surrogate for what congress and the president wish to see happen. The notion of independence is tenuous at best.

If the Fed was responsible for LONG TERM decisions then they wouldn't have focused on monetary policy which fostered gross debt accumulation as a means of growing the economy from the 80s onward. Nor would they focus on liquidity injections to solve a structural economic crisis.

There's nothing really wrong with the Fed as an entity. The problem with the Fed is usually the people piloting the ship.


Not necessarily. During the early years of the Reagan administration, Paul Volker was chairman of the Fed, and he notably did not particularly concern himself with what Reagan or Congress wanted. Which is why Reagan choose to appoint Greenspan in his place. Greenspan, on the other hand, was the choice of Wall St. And what Wall St wanted, not what Washington wanted, was what Greenspan did. Now many in Washington may have benefitted from that or gone along with it. But the truth is that for the most part Washington did not understand what Greenspan was doing. And Greenspan was extremely secretive with Washington. He deliberately obscured what he was doing, and why he was doing it, from Congress and the presidents. So as long as Wall St kept insisting that they wanted Greenspan, Washington kept giving him the job again.

So it isn't really fair to say that the Greenspan Fed served current politics. However, it is fair to say that the Greenspan Fed was a Captured Regulatory Agency. So the Greenspan Fed was not doing, in your phrase, "acting as a surrogate for what congress and the president wish to see happen." But rather what Wall St wanted to happen.

Now both of those possibilities, lack of acting as politically independent, and regulatory capture, are real dangers to be aware of and avoided to the greatest extent possible. And the way that you avoid them is in greater knowledge on the part of elected officials on what the agency does, and greater care that it does it as intended. If it had been me in office, for example, I would never have tolerated Greenspan's obfuscations.

So the failure was not the failure of a Fed serving current politics. The failure was the failure of the elected government to exercise its oversight responsibility. And that also is a deeper political failure. The vast money in politics now means that what Wall St wants, Wall St got. And what Wall St wanted was Greenspan and his policies.

So you are right that it is who is piloting the ship that is a critical issue. But then again, that's really always true. You can never solve structurally the problem that good or bad government cannot be separated from good or bad people running the government.

For the other parts of your post, you have to understand that the Fed has limited tools to use for often conflicting purposes. And sometimes there is no one right answer. And that is particularly true when Congress is failing in doing its part of the job.
 
Cutlass said:
So the Greenspan Fed was not doing, in your phrase, "acting as a surrogate for what congress and the president wish to see happen." But rather what Wall St wanted to happen...

The vast money in politics now means that what Wall St wants, Wall St got...

:confused:

It's really simple. Wall Street wants the economy to grow at all costs for their own personal profit. Politicians want the economy to grow at all costs to stay in office and garner power. The Fed is seen as the entity to engineer economic growth and manipulate society into spending. The policies you've discussed for a few years around here are synonymous with what the Fed, government, and other institutions have done. And that is - keep people spending, whether they have the money or not.

We're just now "running out of tools" to keep the economy rolling along and keep people spending and keep acquiring debt. The real costs of debt have finally emerged.
 
:confused:

It's really simple. Wall Street wants the economy to grow at all costs for their own personal profit. Politicians want the economy to grow at all costs to stay in office and garner power. The Fed is seen as the entity to engineer economic growth and manipulate society into spending. The policies you've discussed for a few years around here are synonymous with what the Fed, government, and other institutions have done. And that is - keep people spending, whether they have the money or not.

We're just now "running out of tools" to keep the economy rolling along and keep people spending and keep acquiring debt. The real costs of debt have finally emerged.

Wall St doesn't give a flying frak whether the economy grows or not. What Wall St wants is to concentrate as much of the nation's wealth on Wall St as possible. If this means growth, fine. If this means stagnation, fine. If this means bubbles, fine.

Politicians, when they aren't too thoroughly bought and paid for, care about the country as a whole. Wall St does not.
 
You're nuts if you think Wall Street doesn't care about economic growth. Nor do they care about the concentration of wealth. We've been over this and over this. All rich people care about is getting more wealth. We get more wealth when the economy grows, and when everyone else prospers along with us.

I don't think you could find a single solitary person on Wall Street, not a single business owner, or CEO anywhere that would rather have less money with more wealth concentrated in their hands, than more real wealth and less concentration of it. Otherwise they'd be doing business or trading stocks exclusively in the third world.

You're venturing off into conspiracy theory land.

There was a day when I was childishly naive and believed in politicians too. But I did some growing up over the last two years and can now see the forest for the trees. The politicians are far more of a problem than the people on Wall Street, as they are the group with the monopoly on regulation, law creation, and force.
 
I don't think you could find a single solitary person on Wall Street, not a single business owner, or CEO anywhere that would rather have less money with more wealth concentrated in their hands, than more real wealth and less concentration of it. Otherwise they'd be doing business or trading stocks exclusively in the third world.
You'd be surprised how much weight some of them place on beating out the competition. Being a big fish in a small pond is only stupid if there's no possibility of you increasing the size of the pond later. It's not really any more realistic to say that the wealthy earnestly foster economy-wide growth than to say that they narrow-mindedly pursue proportional control of the market.
 
I don't think you could find a single solitary person on Wall Street, not a single business owner, or CEO anywhere that would rather have less money with more wealth concentrated in their hands, than more real wealth and less concentration of it. Otherwise they'd be doing business or trading stocks exclusively in the third world.

Actually, that's the normal state of affairs with people. And that is because so many people inherently have a zero-sum-game view of the world. Many people see any gain for someone else as only a loss for themselves. And they do not see what the effects on growth are of various policy choices. Supply Side economics is at heart a zero-sum-game view of the world. And look how popular it is.

The simple truth is that for many, many, people the question is not "how big is the pie?", but rather "how big is my slice of the pie?"

Now we are veering off the subject of money again. I am willing to discus things like this to the extent that they have a bearing on the understanding of money itself. Beyond that, start a different thread.
 
You make one faulty assumption, that Wall St cannot gain in a stagnant or contracting economy. If the increase in concentration gains them more than the loss due to contraction then they are still better off.

Wall St doesn't care where its growth comes from, by concentration or overall growth. It prefers both and, all else being equal, economic growth is superior as it provide for long term benefits, but if concentration is better at the moment, it is preferable.
 
You'd be surprised how much weight some of them place on beating out the competition. Being a big fish in a small pond is only stupid if there's no possibility of you increasing the size of the pond later. It's not really any more realistic to say that the wealthy earnestly foster economy-wide growth than to say that they narrow-mindedly pursue proportional control of the market.

You're right that we want to beat out our competitors. Of course we want to beat our competitors, but we don't want them in the poor house. If they're in the poor house then we have one less customer for ourselves, less opportunity to grow, and a lower standard of living in general. We may want to monopolize our sector, but we certainly don't want people to be poor. We want them to be successful in a different area of the economy and for the economy to grow. We also understand that natural monopolies are unrealistic.

Cutlass said:
Actually, that's the normal state of affairs with people. And that is because so many people inherently have a zero-sum-game view of the world. Many people see any gain for someone else as only a loss for themselves.

You're really going out of your way to stretch things here. It's one thing to say that people see a gain for someone else as only a loss for them, but it's another to suggest that this results in a situation where they actually desire for those people to be less better off, or for the economy to not grow in lieu of concentrating more wealth in their hands.

Do I wish I had thought of those gay hair feather things you see advertised all over right now? I sure do! Do I see it as my own loss? In a way, I sure do! I could have capitalized on that opportunity. But this is in no way indicative of the fact that I begrudge their success and wish to see the economy languish to concentrate more wealth in money in my purse.

And the board thinks I have a negative Hobbesian view of the world?!

Cutlass said:
The simple truth is that for many, many, people the question is not "how big is the pie?", but rather "how big is my slice of the pie?"

But people don't view things in terms of how much percentage of the pie they have. They just look at the size of the slice. Nobody sits there and tries to figure how they can get a higher percentage of the slice in abject terms. Nor do they desire to see other people hurt in an effort to get a bigger slice. The slice is viewed in terms of what you have and how comfortable you are with it. It isn't viewed in terms of percentages in comparison to everybody else. You couldn't find a person, not even a small child, that would trade in a piece of pie with larger volume, but a smaller percentage, than take a smaller whole pie that was smaller than the original piece. That's not how anybody views the world. Not even the super rich.
 
Again, you're going well outside the discussion of money itself. Get back on the subject of money, or start another thread.
 
Again, you're going well outside the discussion of money itself. Get back on the subject of money, or start another thread.

I'm responding directly, and on topic, to the statements you made in your precious red diamond thread. So whatever.
 
I am trying to discuss money and its effects on things. I'm willing to do small tangents, so long as they are relevant. I am trying to avoid derailing the main subject.
 
If in economics, the business is about optimization of utility for consumers, then why do economists with power do so many manipulative things to the money supply that are counter-intuitive to this point? Economics has become much more about sociology than it has about pragmatic optimization of utility. Contemporary economic theory, particularly today, has little more to do with anything other than getting people to spend at all costs, whether they have the money or not.

Your point about deflation seems to run against the stream that I've read so frequently on this board about deflation. It wasn't long ago where I brought up the point to the board that an economy will be naturally deflationary (through competition and gains in efficiency) and it was poo poo'd by everyone: Mise, Cutlass, JerichoHill (who I'm pretty sure is an economist), and yourself.

The mantra espoused was that in a deflationary environment people don't invest and debtors get killed (you mention this in number 3). A slow deflationary economy wouldn't make the monetarists and Keynesians of the world very happy. Debt spending would slow, and they'd be less able to manipulate the economy for their own interests.

Inflation should be zero. It shouldn't favor savings, nor should it favor debt. This is the only way for banks, lenders, and investors to accurately price risk within the marketplace and reduce speculation.

This is a reasonably good objection, actually, because it does expose what appears at first to be a contradiction in mine and other economists' posts here. I will not claim to speak for them but here is my view on the situation.

1. Begin by distinguishing between the cause of the inflation/deflation. Supply-side induced deflation tends to be "good" and that's the kind that Friedman likes to talk about. I indeed have no problem with this sort of deflation; however note that it's hard to find any good cases of broad-based supply-induced deflation in recent memory.

However, demand-induced deflation is associated with low growth and high unemployment. It is this kind of deflation that one must guard against, because it is legitimately dangerous.

In brief: never reason from a price change (this is an admonishment to fellow economists as well!). Look to what caused the price change. If demand were stable and all deflation came through increased productivity, then bring on the deflation. But if deflation comes through slack demand and carries with it recession, then my own view is that a little bit of inflation is small price to pay.

2. Now (1) only talked about changes in inflation/deflation. What about equilibrium? Most of the time, zero inflation is a reasonably good outcome. However, again, we're bad at measuring inflation so measured inflation ought to be low and positive.

I don't really have time for your second question, my apologies; I will get to it when I can. :)

--

Note: money is on-topic. Inflation is a monetary phenomenon and on-topic. Interest rates are okay and so is general talk about the interaction between money and assets. Monetary policy, narrowly construed, is okay. Currency areas are of a monetary nature and I'm gonna write a long post on that shortly. Broader discussion of the economy must sadly go in another thread. I'd also personally like to avoid finance proper if I could help it, but that's Cut's decision.

Example: soon I'm going to write a post on optimal currency zones and I might touch on how the Eurozone fits into that picture. But I'll leave long comments on the current proceedings in the EZ to another thread.
 
Actually, that's the normal state of affairs with people. And that is because so many people inherently have a zero-sum-game view of the world.

And they are absolutely correct. In terms of power among people, it is a zero-sum game. And money is just a tool and a scorekeeper, a means to that goal: power over others. We value it for its buying power, it buys products and services provided by other people. What matters is the share of the total buying power, not the name or type of the currency used.
 
Integral said:
1. We are really bad at measuring inflation and probably overstate it somewhat. So aiming for positive CPI inflation means that "real" inflation is actually close to zero.

Integral said:
2. Now (1) only talked about changes in inflation/deflation. What about equilibrium? Most of the time, zero inflation is a reasonably good outcome. However, again, we're bad at measuring inflation so measured inflation ought to be low and positive.

What makes you say measured inflation tends to overstate the real inflation rate? Your opinion on this stands in rather stark contrast to what I more commonly come across in informal financial discussion circles. I assume you don't take John Williams of shadowstats' claims very seriously? could you elaborate on your reasoning?
 
Shadowstats claims that we underestimate inflation via the CPI. I claim instead that we overestimate it, so that "real" inflation is lower than is reported, primarily due to the imperfections in measuring product quality.

I think Shadowstats is silly and pretty useless. His inflation numbers are nearly impossible to replicate despite claims that they are merely the raw data adjusted for pre-Boskin methodology.

I'll try to dig up my notes on the pre-94 and post-94 methodologies to explain my reasoning soon. :)
 
2. Downward wage rigidity. [...] I don't think this is a particularly strong argument but it is a major one in the literature.

[...]
4. ZLB. [Zero Lower interest rate Boundary] I think this is an awful argument on its own terms (though can be made very strong), but it's perhaps the primary justification of low-but-positive inflation rates out there.

:confused: In today's economy, don't we have ample proof of the importance of both the above?
 
Not of ZLB
 
Good thread, rated it five stars. :goodjob: Integral and Cutlass, keep the posts coming.
 
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