Money. Doing it Right this Time.

[Monsterzuma]

A small question to Integral if I can get him to read this: under Scott Sumner's theories, all this clamor about the fiscal cliff is largely unwarranted, right, considering he believes the Fiscal Multiplier is zero even when the Federal Funds Rate is at zero? If there is a large reduction in fiscal spending, the Fed would just offset it with extra QE to reach it's inflation target, and it would have the leeway to do so because the shortfall in demand would make inflation drop correspondingly?

 

[Hygro]

QE isn't really doing anything to adjust inflation. I forget their main way of causing inflation but we could possibly shock our economy into equilibrium with an inflation shock. It has its downsides.

 

[Cutlass]

The fiscal cliff is not all about the money in circulation. It's about the confidence of markets in what the government is doing, and it's about the distribution of income. Basically it will take from consumers and give to savers at a time when the lack of consumption is the primary problem.

 

[Monsterzuma]

A small question to Integral if I can get him to read this: under Scott Sumner's theories, all this clamor about the fiscal cliff is largely unwarranted, right, considering he believes the Fiscal Multiplier is zero even when the Federal Funds Rate is at zero? If there is a large reduction in fiscal spending, the Fed would just offset it with extra QE to reach it's inflation target, and it would have the leeway to do so because the shortfall in demand would make inflation drop correspondingly?

The fiscal cliff is good news
http://marketmonetarist.com/2012/11/16/the-fiscal-cliff-is-good-news/

Judging by this post from Lars Christensen, it looks like the answer is yes.

 

[Integral]

Lars is even more bullish on the efficacy of monetary policy than I am!

 

[Integral]

A small question to Integral if I can get him to read this: under Scott Sumner's theories, all this clamor about the fiscal cliff is largely unwarranted, right, considering he believes the Fiscal Multiplier is zero even when the Federal Funds Rate is at zero? If there is a large reduction in fiscal spending, the Fed would just offset it with extra QE to reach it's inflation target, and it would have the leeway to do so because the shortfall in demand would make inflation drop correspondingly?

Yep yep!

And see Lars' post for the reasoning.

 

[Cutlass]

Lars is even more bullish on the efficacy of monetary policy than I am!

I'm not. I don't happen to think monetary policy is at all a good tool for these situations.

 

[Monsterzuma]

I personally don't doubt that if you print fanatically enough you would at some point rein in the demand gap, but the question is whether that would not give you more than you bargained for in terms of long term inflation and unproductive debt and asset bubble growth.

Then again, deficit spending has some obvious weaknesses on that front as well.

 

[Cutlass]

The thing is that printing is not a sufficient condition. Having money out there only adds to AD if the money is in the hands of consumers. And monetary policy does not cause that to happen.

 

[Monsterzuma]

well, there is the Wealth Effect: if the Fed bid's up asset prices using "printed" money, this will increase the nominal value of people's savings, inducing them to consume more. It just seems to me like a painstakingly slow process that requires disproportionately much more "printing" than it would if the money multiplier hadn't broken down. And that's why the effects are dangerously hard to predict despite that it could very well work on it's own at a certain point.

 

[Cutlass]

You have to consider what the limitations of that are. First, most Americans don't have savings, and have no real expectations that they ever will have savings. So no wealth effect for the majority of the populace that has the greatest marginal propensity to consume. Right there that tells you that the concept is a forlorn hope at best. Second, those that it might help are the same people who just got burned in the housing crisis. Taking on debt for consumption is not something this group is going to be doing a lot of in the near future. So now you've eliminated 80% of Americans from that strategy. And no matter what the remaining 20% do, you'll never get a consumption driven boom out of 20% of the population that will create jobs.

 

[Monsterzuma]

Well, on an illustrative note, I sometimes joke about it that for the US economy to "right" itself, something needs to happen that people on the left tend to think of as quite repugnant: the rich, those 20% you mention, have to go on a conspicuous consumption binge. It's kind of an "ugly" way for the situation to be resolved, but not impossible.

 

[Cutlass]

What on god's green earth made you miss the fact that the rich have been on a conspicuous consumption binge for the past 20 years....

 

[Monsterzuma]

Well that's a matter of degree. But if you look at how people like Krugman describe the problem they quite explicitly state that the rich don't consume enough even at current levels of expenditure.

 

[Monsterzuma]

OK, on another note entirely, how do the relatively disappointing results from Europe in the wake of the implementation of austerity policies relate to Market Monetarism? Shouldn't the arguments that are used to downplay the seriousness of the fiscal cliff problem apply to the European situation as well? Also is the recent IMF paper that argues for a positive fiscal multiplier under liquidity trap conditions a reason for a rethink of Market Monetarism?

 

[Kaitzilla]

Since we are already printing $1 trillion a year to cover our budget defecit, why not just print $3.8 trillion more dollars and mail everyone $1000 per month for a year?

Everyone would get out of credit card debt. Sales would explode!

It wouldn't have to be in your face either. The government simply borrows money as usual issuing $3.8T in 100 year bonds. Then the primary dealers all buy them up if the auction has some leftover. The Fed purchases them in its latest QE program. The interest the Fed earns goes straight to Treasury as mandated by law and when the bonds mature in 100 years the Fed buys an identical amount of debt for another 100 years.

In fact, I don't see why we have taxes at all. We should abolish taxes and see how much funding we can get from huge sales taxes. That way we could abolish the IRS and accounting industry. Any shortfalls can be printed to promote inflation and balance the budget.

 

[Cutlass]

Well that's a matter of degree. But if you look at how people like Krugman describe the problem they quite explicitly state that the rich don't consume enough even at current levels of expenditure.

It will never be enough. Conspicuous consumption would never be a true economic driver. The problem is that once wages start to rise, the CC will level off. There's a limit to how many domestic servants these people will hire other than at 3rd world wages. And how many multi-million dollar vacation homes and yachts can someone make use of? The answer is, not nearly enough.

There's no way around it, a mass production economy has to have a mass consumption base.

OK, on another note entirely, how do the relatively disappointing results from Europe in the wake of the implementation of austerity policies relate to Market Monetarism? Shouldn't the arguments that are used to downplay the seriousness of the fiscal cliff problem apply to the European situation as well? Also is the recent IMF paper that argues for a positive fiscal multiplier under liquidity trap conditions a reason for a rethink of Market Monetarism?

Well, I would rethink monetarism under any condition. But Integral and I don't see eye to eye on the subject.

Since we are already printing $1 trillion a year to cover our budget defecit, why not just print $3.8 trillion more dollars and mail everyone $1000 per month for a year?

Everyone would get out of credit card debt. Sales would explode!

It wouldn't have to be in your face either. The government simply borrows money as usual issuing $3.8T in 100 year bonds. Then the primary dealers all buy them up if the auction has some leftover. The Fed purchases them in its latest QE program. The interest the Fed earns goes straight to Treasury as mandated by law and when the bonds mature in 100 years the Fed buys an identical amount of debt for another 100 years.

In fact, I don't see why we have taxes at all. We should abolish taxes and see how much funding we can get from huge sales taxes. That way we could abolish the IRS and accounting industry. Any shortfalls can be printed to promote inflation and balance the budget.

You have to consider both the problems with the economics and the problems with the politics. To stick with the economic problem, giving the broad tax cuts as part of the Stimulus package was supposed to accomplish the first part of your idea. It didn't work. Why? Because people used a lot of it to pay down existing debts or avoid running up new debts instead of increasing consumption. People don't see it as continuing income, and so don't adjust their consumption patterns in response. What that meant in practice was that private debt was turned into public debt, not that consumption increased enough to help anything.

Many economists prefer the idea of a consumption tax over an income or other forms of taxes. But the problem is with the implementation of the idea. Now in theory the economists that support the idea want to increase savings and decrease consumption. But the real world economy needs us to reduce savings and increase consumption. So it moves us in the wrong direction. The second problem is that consumption taxes are regressive in nature, and so some effort has to go into countering that. But any such efforts introduce a too much complexity into the system and makes cheating the system very easy. Noncompliance with consumption taxes can get very high when the tax rate is high.

 

[Kaitzilla]

Ya, I can see how a consumption tax would be avoided like the plague. Buy everything off Amazon who still doesn't pay sales tax in most places. Drive to Canada. Cash discount under the table. Would have to eliminate physical currency and go all digital with cards but I shudder at that idea.

2% inflation seems enough by me to get rich people to spend/invest instead of just hold onto their money and swim in it like Scrouge McDuck. Pushing interest rates below the inflation rate seems disasterous though. Encouraging savers to invest is one thing but slaughtering them destroys capitalism. Capital formation is step #1 of capitalism working correctly

Right now we are slaughtering savers to get just a little more consumption and eating our seed corn so I forsee a couple of lost decades just like Japan in store for everyone if we are lucky. My original perscription was a debt jubilee for every U.S. citizen with printed money that is only technically more debt until you look at it closer.

The economy can no longer grow because everyone is maxed out on debt because a great deal of bankruptcies have not been allowed to happen to reduce debt to reasonable levels. Of course, Wall Street has arranged things so that any such bankruptcies will blow up the world through derivative contracts. On second thought, there won't be any lost decades the entire system will detonate.


Get it? Mathmatically the only way to keep a debt-based monetary system in balance is through steady bankruptcies to keep debt in balance with real wealth. Otherwise the interest payments and debt builds until everyone is strangled. Wall Street has lobbied to make bankruptcies harder, made student loans immune to bankruptcy, invented Too Big To Fail Banks to threaten the world if even one goes bankrupt, and a $600 trillion dollar unregulated derivatives market to cement bankruptcies from occuring in a controlled way ever again. They are just too dangerous. Weapons of financial mass destruction I think they were called. http://theeconomiccollapseblog.com/...and-it-will-u-s-taxpayers-will-be-on-the-hook

Now you know why the word Bailout was invented in 2007. It's the most increasingly used word in the English language now. The world is in a grand experiment to find out what happens when everyone prints money at the same time and no ones' currency depreciates as a result against the other printed currencies. Even the steady Swiss were forced to abuse their fiat to keep exports from dropping to zero.

I wonder if the present system has any way of surviving at all on paper. The Fed is already doing unlimited printing. The crises in Europe are coming more frequently. Can the next downturn be stopped again? Glad I'm not in charge.

 

[Monsterzuma]

http://www.bloomberg.com/quote/USGGBE02:IND/

US 2 year breakeven rate is only just above 1% right now. Is the market calling for more QE in the face of fiscal cliff headwinds? Is it at all realistic for the Fed to cater to this demand?

 

[Integral]

Five-year breakeven's down from 2.5% to 2.0%. Any lower and the Fed will be obliged to act.

I don't follow the 2-year inflation forecast as much (my daily TIPS code is set up to run the 5-year spread and I'm lazy). It's not good that it's this far below 2%.