Money. Doing it Right this Time.

[Hygro]

It started in November 2008 and is continuing now, over 4 years later. It is promised to continue for at least another year until unemployment drops to 6.5%. It is currently at 7.9% I think.

5+ years looks like permanent to me, especially when I see calls to expand by the Fed's balance sheet by a factor of x10. At current printing rates that would take about 30 years I think.

Well, you said it yourself, it will go until we reach a semblance of full employment. We have that sort of full employment all the time, no reason to think this will stay forever.

 

[Cutlass]

So intrepid money printers, apprently $80 billion per month isn't enough for some people. Business Week has an article calling for much more printing.

http://www.businessweek.com/article...odest-proposal-for-more-fed-buying-a-lot-more




The rest of the article continues in a similiar vein. It floats the idea of the Fed buying up $30 trillion more in debt.

Good on them. If anything, they are all still being excessively conservative.

Is the Fed "earning" twice as much money as America's most successful company a good and healthy thing?

Why wouldn't it be? The private sector is still refusing to work. So they don't deserve any profits.

Does the thought of the Fed buying up all the US debt and moving on to things beyond MBS like corporate debt instill even a little fear of the consequences?

Nope. Not a bit. Again, they are still being excessively conservative.

Apparently the accounting games are endless when you can print money. If the pendulum ever swings the other way and the Fed is losing $90 billion per year from selling bonds, they can print more money to cover the losses and count it so that any future profits will go to repay the losses back towards the breakeven point before they will send profits back to Treasury again.

http://online.wsj.com/article/SB10001424127887323644904578272272295294896.html


And just as a thought puzzle, if we can't reduce federal spending to balance the budget because it will destroy the economy, what makes everyone think we can stop printing money?
The stimulus was supposed to be temporary, but it became permanent.
QE was supposed to be temporary, but it became permanent.
Don't tell me QE++++++ is going to be temporary too


If this whole Business Week article was just satire, guess I fell for it

The whole point is that we should be increasing spending, and by a really huge amount. In the absence of sound policy on the part of Congress, the Fed has no choice but to either constant pump the money supply, or accept an economic depression. As is, as I keep pointing out, they are excessively, and I do mean EXCESSIVELY, conservative in what they are willing to do.

And that conservatism cannot do anything other than make essentially everyone worse off in the long run.

It started in November 2008 and is continuing now, over 4 years later. It is promised to continue for at least another year until unemployment drops to 6.5%. It is currently at 7.9% I think.

5+ years looks like permanent to me, especially when I see calls to expand by the Fed's balance sheet by a factor of x10. At current printing rates that would take about 30 years I think.

Look, here's how economic policy works. There are 3 basic tool sets that government can use. Monetary policy, which is the central bank's manipulation of the money supply and interest rates. Fiscal policy, which is taxing, borrowing, spending, and the various things that can be done with spending. And regulatory policy, which you falsely called "central planning", but which is actually just the setting of the rules under which the actors in the economy are able to act.

Now over the past 30 years the regulatory policy tool set of the US government has been dismantled and crippled. And it continues to be under assault by people who, among other things, call it "central planning" and "communism". What that means is that the regulatory tools that should have, and could have, make no mistake about that, they absolutely could have, prevented all of the economic problems of recent years, are removed, broken, or at least heavily constrained against action.

Further, fiscal policy is also crippled. By politics. Republicans have determined that they reject responsible economic policies, not to mention responsibility generally, and even sanity, and instead of running deficits in bad times and surpluses in good times, as economics tells them to do, they want to run deficits in good times and surpluses in bad times. That's called "Supply Side Economics", and it is the most irresponsible thing the US government has done since failing at Reconstruction.

Now given that regulatory policy and fiscal policy have been crippled by irresponsible politicians, what is left? Monetary policy, which the most irresponsible politicians in the country, like Ron Paul and Rick Perry are trying to cripple. And so the Fed is acting, and it is acting as the only adult in the country. Just as an extreme excessively conservative one.

Now, to be fair to the Fed, sound economic policy under these circumstances in fiscal and regulatory policy, not monetary. Quantitative easing in this situation is the hosing down the buildings down the block from the building which is on fire, but not hosing down the building which is actually on fire, or even the buildings immediately adjacent to the building that is on fire. But they aren't fighting the fire itself, and that is because they don't have the right tools. Their fire hoses don't reach. So they are working containment. Not extinguishing the problem.

The economically correct thing to do is use fiscal policy to end the excessive unemployment. Everything else is secondary to that. And anything less is irresponsible on the part of the people making the decisions.

If the fiscal and regulatory policies would act responsibly, then the Fed could act in a more normal long term manner.

 

[Cheetah]

So... If trickle-down doesn't work, why is new money loaned out to banks and companies for almost no interest, instead of loaning it out to every single citisen (Crudely put: a check in the mail)?

If everyone suddenly got some of the money they need to buy groceries and cars and pay their mortgages and go out to eat and order New Stuff then demand would start rising and things would start fixing itself, no?

Or would that just lead directly to inflation, because production or trade or something wouldn't be able to handle it?

 

[Cutlass]

Inflation is not an issue, no matter how many people the hedge fund managers pay to write blogs warning about the coming hyperinflation and how low interest rates "hurt the poor".

That said, first thing to keep in mind, this is bankers that we're dealing with, including central bankers. What that means is that accounting rules all. It's the old double entry bookkeeping that we can never get away from here.

Where I am going with this is that the credit and debit columns have to be in balance. Always.

This is why the government doesn't just "print money". No matter what the rhetoric being used calls it.

So the way that works in practice is that the central bank buys assets when it wants to put more money into circulation. Those assets are most commonly the debt bonds of their government. With the US Treasury bond being the premier asset to hold world wide.

So, to answer your question: Why not give it straight to the people at the bottom that need it? Because those people haven't got a vault filled with Treasury bonds to trade for it. Banks do. To keep the ledger balanced, the Fed can only trade cash to someone who has financial securities that the Fed is willing to own.

So monetary policy is handicapped from doing what you suggest. It is simply the wrong tool for the job. It would take fiscal policy to do that. And that means an act of Congress (or the legislature or government of your choice in other nations).

Now it would be the, or at least a, right thing to do from a purely economic standpoint. But politics rarely does what is good economic policy.

 

[innonimatu]

It would also be a very good thing to do from a political point of view if a majority of voters voters were actually looking out for their own interests.

What screws things up is the warped views these voters have been given of the reality of things. They find and fear bogeymens everywhere. Roosevelt got one thing very right in the last big depression when he (or his speechwriter or whomever) sair that the only thing people had to fear was fear itself.

 

[Cutlass]

Well, the general public knows very little about economics. And politicians don't know even that much. Politicians know what lobbyists tell them to vote for. So there really is no constituency for change.

 

[Borachio]

So instead of pushing money in at the bottom to stimulate demand and encourage economic recovery, governments are instead pulling money out from the bottom - in order to balance the books and hopefully reduce the deficit and, in the end, the debt? And therefore they are reducing demand, discouraging recovery, and prolonging the crisis?

 

[Cutlass]

That's called conservatism.

A less snarky answer is, yes, that is what is happening. Austerity is the idea which is stronger these days. Not that the "hawks" are getting all the cuts they want. But they are getting enough cuts so that the economy is not improving very much on its own and the poor are paying the price for the excesses of the rich so that the rich don't have to face any inconvenience of their own.

For some recent articles on what is happening:

http://conversableeconomist.blogspot.com/2013/06/labors-falling-share-everywhere.html

http://qz.com/90243/wealthy-countries-are-creating-more-jobs-by-creating-worse-jobs/

http://www.washingtonpost.com/blogs...he-most-depressing-jobs-chart-in-a-long-time/

http://www.nytimes.com/2011/11/11/opinion/legends-of-the-fail.html

http://www.washingtonpost.com/blogs...a-from-the-imfs-chief-economist-on-austerity/

http://www.nytimes.com/2012/06/01/opinion/krugman-the-austerity-agenda.html?_r=0

http://www.businessinsider.com/why-...devastating-for-the-austerity-movement-2013-4




So, given that this idea is an utter failure in economics, why is it so popular? 2 factors, really. Economic conservatism, which sees the elite as the important part of the equation, and bend everything to serve them. Political conservatism, which sees serving the elite as it's reason for existence. And social conservatism, which equates economic success with moral superiority and economic failure with moral failure. And so the "deserving rich" should be helped while the "undeserving poor" should be punished for their sins.

 

[Borachio]

From one of your links:

the austerity drive in Britain isn’t really about debt and deficits at all; it’s about using deficit panic as an excuse to dismantle social programs

For economic recovery was never the point; the drive for austerity was about using the crisis, not solving it.

http://www.nytimes.com/2012/06/01/opinion/krugman-the-austerity-agenda.html?_r=1&

 

[Monsterzuma]

Actually a lot of opponents of austerity were saying that the recent major budget cuts ("sequester", etc) would create a massive slump of job and GDP growth, but the incoming data has failed to confirm that view. The data wasn't particularly strong - not strong enough to make any headway towards closing the output gap* - but there was nothing along the lines of an Armageddon outcome.

* not talking about the bogus U-3 unemployment number; you gotta adjust that for (cyclical) labor force dropouts.

I think this was a victory for the Market Moneterist view. However, the lackluster effect of QE infinity on AD and inflation reflects that QE on a really massive scale is needed to a initiate a real recovery. And right now the debate has focused on the Fed rolling back QE. Which seems like the opposite of what the data indicates is necessary.

I've been thinking of ways to reconcile Steve Keen's views with market monetarism, and the result is a theory where QE basically works if it simulates a debt jubilee. In other words, it works in as far as the monetary injections are repeated every time debt has to be rolled over, and the balance sheet expansion of the Fed is never retracted. It'll take a major political shift for action on that scale to become realistic.

Right now it seems like a sensible thing to expect the lackluster economic performance and "permanent output gap" situation to continue. Although it should be pointed out that this is a very vulnerable place for an economy to be and we should really not be comfortable with it when it persists for another few years.

 

[Cutlass]

The sequester in the US has not had much of an effect yet really for 2 reasons. 1, most of it didn't even kick in until May and June, and so it hasn't appeared in the statistics yet, and 2, it really wasn't as large as all the rhetoric was talking about.

 

[Traitorfish]

That's called conservatism.

words have meanings

 

[Cutlass]

words have meanings

And usually more meaning than political scientists allow for.

 

[innonimatu]

From one of your links:

the austerity drive in Britain isn’t really about debt and deficits at all; it’s about using deficit panic as an excuse to dismantle social programs

For economic recovery was never the point; the drive for austerity was about using the crisis, not solving it

http://www.nytimes.com/2012/06/01/opinion/krugman-the-austerity-agenda.html?_r=1&

The NYT published that? I'm surprised. Must be getting so obvious that they're willing to admit it.

 

[sophie]

The NYT published that? I'm surprised. Must be getting so obvious that they're willing to admit it.

Dude. It's Paul Krugman, the mainstay of the NYT Op-Ed section.

He's like, contractually obligated to publish one of these a week. And if it's not austerity it's goldbuggism.

 

[Bootstoots]

Let's suppose Bernanke and a majority of the Federal Reserve board wanted to cause a very high inflation rate. Perhaps not Weimar or Zimbabwe style hyperinflation, but inflation of 10+%, maybe 50+%. What would they do? Or in general, what sorts of policy mistakes (on the part of reserve banks or national governments) tend to lead to high inflation? And how do they differ from quantitative easing?

 

[Borachio]

Wouldn't raising interest rates lead to higher inflation?

 

[Monsterzuma]

Let's suppose Bernanke and a majority of the Federal Reserve board wanted to cause a very high inflation rate. Perhaps not Weimar or Zimbabwe style hyperinflation, but inflation of 10+%, maybe 50+%. What would they do? Or in general, what sorts of policy mistakes (on the part of reserve banks or national governments) tend to lead to high inflation? And how do they differ from quantitative easing?

depends on how long. but one of the side effects would be that the central bank loses a large part of its credibility and it will have trouble limiting inflation again in the future, cause everybody is thinking "they could do it again".

positive effects it would have:
- erodes a lot of the debt (private and public) that the economy is currently saturated with and being held down by
- raises nominal wages and prices so that these adjust properly in real terms without being obstructed by downward nominal wage/price rigidity

I think it can well be argued that a little bit of higher inflation, matched by a commensurate inflation-boosed burst of income growth*, is exactly what Europe and USA need, but it's hard to say what the precise consequences of doing so are.

* bolded part is important; I don't think it's a 100% straightforward thing that income growth and CPI inflation are linked; which poses another risk

Wouldn't raising interest rates lead to higher inflation?

nope. other way around.

 

[Monsterzuma]

Or in general, what sorts of policy mistakes (on the part of reserve banks or national governments) tend to lead to high inflation? And how do they differ from quantitative easing?

It's mainly caused when loose monetary policy (i.e. low interest rates, lots of "printing" like QE) is used when an economy is already at full output. However this is not a strict necessity. Under some circumstances there is stagflation (high unemployment and high inflation). Usually this involves cost-push influences on inflation such as rising oil prices.

 

[Cutlass]

Wouldn't raising interest rates lead to higher inflation?

Umm. No. The opposite is true. High interest rates put the brakes on inflation.

Let's suppose Bernanke and a majority of the Federal Reserve board wanted to cause a very high inflation rate. Perhaps not Weimar or Zimbabwe style hyperinflation, but inflation of 10+%, maybe 50+%. What would they do? Or in general, what sorts of policy mistakes (on the part of reserve banks or national governments) tend to lead to high inflation? And how do they differ from quantitative easing?

The hyperinflations of Weimar and Zimbabwe came out of fiscal policy, not monetary policy. Essentially printing money and paying all the government's bills without taxing or borrowing. Inflation like the US 1970s comes out of the real economy. The price of oil goes up, and it makes the price of everything else go up.

Now money has to be there in the long run for prices to go up. So in the 70s the Fed had a choice: Accommodate the price increases which were coming out of the real economy, or cause a massive long term recession. We had inflation not because of a policy initiated by the Fed, but because of a policy choice in response to the real economy by the Fed.

Now if the Fed wanted to cause inflation, that's a harder proposition. Because it would require the real economy to react to policy as intended. They would have to do something like QE, only a hell of a lot more of it, and they would have to do it while the economy is strong, rather than while it is weak.

The problem being that no matter what the money supply looks like, the real economy faces different constraints. When the economy is competitive, and companies around the world have more capacity than they can use, any company that raises prices risks losing sales volume. So unless they act all together, it's difficult for a seller to make themselves better off by raising prices. So you really need massive work on the monetary side to cause big inflation. Much easier on the fiscal side.