Money. Doing it Right this Time.

[Monsterzuma]

Here's an attempt to criticize keynesian logic, both on the monetarist and neo-keynesian side:

In a situation where a demand gap threatens to continually widen under influence of the fact that too much saving is taking place and too little consumption, such that investments begin to fail due to a lack of sales in the short term situation, what do investors do?

Why do investors KEEP their money potted up in savings vehicles that, due to the impending economic collapse are now poised to break down and lose them their money?

Once it is clear that the "tipping point" is reached, savers/investors begin to panic and frantically start looking for other uses of their money. Where do they have left to run with it? They can of course put their money into commodities, but they realize that this will just create a bubble with respect to "normal" conditions, such that once the bubble deflates they will have paid a premium on these resources and made a losing deal, so this is far from ideal to them.

The same applies for investment in foreign economies: these were already priced at a fair equilibrium level with respect to normal conditions and to suddenly flood them with new investment capital is to overpay for them.

I argue that, given prices that are freely allowed to fall, consumption will be the thing that investors will fly into. If you have no means left of preserving your capital, you're much better off just making use of it while you can. And the consumption is now actually priced favorably due to the falling prices. In other words, the deflation is not positive feedback loop but a negative one.

 

[Integral]

Well, if "prices are freely allowed to fall" then we aren't even in a Keynesian world anymore, we're in a flexible-price world, and things like output gaps don't even properly exist. Prices adjust to provide incentives to clear all the relevant markets.

As for the rest, I'm having trouble parsing the scenario (" In a situation where a demand gap threatens to continually widen under influence of the fact that too much saving is taking place and too little consumption, such that investments begin to fail due to a lack of sales in the short term situation, what do investors do?") properly tonight. Must be too tired.

 

[Cutlass]

Why would they consume? It's not really a rational choice. With savings there's always the possibility that you won't lose it all. And you might even get deflation, which makes savings a lot more valuable. With commodities at least you have something to sell afterwards. With consumption the money is, for the most part, just gone.

 

[Monsterzuma]

Consumption is ultimately the only real "use" of capital. Investment is just deferred consumption. So I would argue it is the other way around. Consumption is a guaranteed benefit whereas investment is without such a benefit of the doubt.

Well, if "prices are freely allowed to fall" then we aren't even in a Keynesian world anymore, we're in a flexible-price world, and things like output gaps don't even properly exist. Prices adjust to provide incentives to clear all the relevant markets.

Fair point. I guess I'm having some trouble wrapping my head around the idea that prices and wages are "sticky" under any circumstances. You'd think that if conditions get bad enough for labor at a certain point people will sell their labor at any price available. The only thing complicating things is the size of the "jumps" they take to get where they need to be.

Does anyone really prefer being unemployed over taking a bit of a wage cut?

 

[Cutlass]

Except when you have nothing you really want or need to consume. Then you're just piling up stuff that will be thrown away later.

 

[Hygro]

Here's an attempt to criticize keynesian logic, both on the monetarist and neo-keynesian side:

In a situation where a demand gap threatens to continually widen under influence of the fact that too much saving is taking place and too little consumption, such that investments begin to fail due to a lack of sales in the short term situation, what do investors do?

Why do investors KEEP their money potted up in savings vehicles that, due to the impending economic collapse are now poised to break down and lose them their money?

Once it is clear that the "tipping point" is reached, savers/investors begin to panic and frantically start looking for other uses of their money. Where do they have left to run with it? They can of course put their money into commodities, but they realize that this will just create a bubble with respect to "normal" conditions, such that once the bubble deflates they will have paid a premium on these resources and made a losing deal, so this is far from ideal to them.

The same applies for investment in foreign economies: these were already priced at a fair equilibrium level with respect to normal conditions and to suddenly flood them with new investment capital is to overpay for them.

I argue that, given prices that are freely allowed to fall, consumption will be the thing that investors will fly into. If you have no means left of preserving your capital, you're much better off just making use of it while you can. And the consumption is now actually priced favorably due to the falling prices. In other words, the deflation is not positive feedback loop but a negative one.

The reason for this investor irrationality is multifold and better answered by people like David Harvey, who goes outside the realm of "people want more material wealth" and talks about accumulation of power via wealth, and that therefore employing Keynesian policy for the betterment of the rich and their investments is missing the point--the rich are trying to get richer relatively, and not at all in absolute.

 

[Cutlass]

The reason for this investor irrationality is multifold and better answered by people like David Harvey, who goes outside the realm of "people want more material wealth" and talks about accumulation of power via wealth, and that therefore employing Keynesian policy for the betterment of the rich and their investments is missing the point--the rich are trying to get richer relatively, and not at all in absolute.

Which is what I've said in many other places. It's a zero-sum-game mentality. The fundamental opposition to Keynesian economics, to unions, to the social safety net, to everything which benefits the middle class really, is not and never has been about economic growth. It has always been about the distribution of wealth. And, it has always been at the expense of the creation of wealth.

 

[innonimatu]

Why do investors KEEP their money potted up in savings vehicles that, due to the impending economic collapse are now poised to break down and lose them their money?

Once it is clear that the "tipping point" is reached, savers/investors begin to panic and frantically start looking for other uses of their money. Where do they have left to run with it?

Ah, people today... there was a reason why Keynes became popular at a certain time in history. Because his theory followed on two experiences: the deflation/depression of the 30s, and the hyperinflation of the early 20s in part of post-war Europe. Those were not contradictory. They were complementary.

Investors do keep their money potted up, because they see no application for which good returns are expected: in a depression situation, where consumption keeps getting reduced, investment probably will produce losses. Whereas keeping the money will, merely due to deflation, increase its value.

If the process is allowed to run long enough this will of course totally wreck the real economy (that which doesn't merely shuffle money around but actually produces services and goods for consumption) and finally the currency. At some point "confidence" in the currency and/or the banks breaks, usually because financial institutions finally collapse under the stress of the losses in the real economy, but it may also happen because governments are forced into "printing" just to run basic state operations as tax receipts crash. Then and only then you get all those savers suddenly looking to convert their money into some asset. But for most it will be too late: with a flood of saved money being released in a much reduced pool of available assets hyperinflation strikes fast. Some will buy good assets early on and become filthy rich. Most will see all their savings destroyed. This process will also depend on who the saved money is distributed, of course. Hyperinflation happens if it is somewhat evenly distributed, because people will be buying all kinds of assets. If it is highly concentrated then you can get just the asset bubbles you mentioned: commodities, securities, whatever trikes the fancy of those people at the time.

There are two reasons, btw, why wealthy conservatives dislike this process. They usually own assets as well as money and so never lose everything. But they do lose the credits (hyperinflation erases all debt) and with it the leverage they had over debtors. That's one reason. The other is that the new filthy rich people which these crisis create are not necessarily of their club, with the "right pedigree" or from the right circles.
Small savers, who are usually financial creditors more than owners of real assets, are obviously totally screwed and so should dislike this. Debtors should like it, as they get to repay their debts with worthless money. One curious thing during periods of high inflation was that creditors have been known to hid from debtors in an attempt to avoid receiving repayment of debts! Usually it's the other way around.

People are long-term irrational about money. That much history has shown. And money is all about confidence. A confidence trick we keep playing on each other...

 

[Cutlass]

Why the Gold Standard Is the World's Worst Economic Idea, in 2 Charts
By Matthew O'Brien
Aug 26 2012, 9:52 AM ET

Whether it's 1896 or 2012, it doesn't make sense to crucify our economy on a cross of gold

The greatest trick Ron Paul ever pulled was convincing the world that the gold standard leads to stable prices.

Well, maybe not the world. Just the Republican Party. After a 32-year hiatus, the party's official platform will include a plank calling for a commission to look at the possible return of the gold standard. There might be worse ideas than this, but they generally involve jumping off the Brooklyn Bridge because everybody else is doing it.

Economics is often a contentious subject, but economists agree about the gold standard -- it is a barbarous relic that belongs in the dustbin of history. As University of Chicago professor Richard Thaler points out, exactly zero economists endorsed the idea in a recent poll. What makes it such an idea non grata? It prevents the central bank from fighting recessions by outsourcing monetary policy decisions to how much gold we have -- which, in turn, depends on our trade balance and on how much of the shiny rock we can dig up. When we peg the dollar to gold we have to raise interest rates when gold is scarce, regardless of the state of the economy. This policy inflexibility was the major cause of the Great Depression, as governments were forced to tighten policy at the worst possible moment. It's no coincidence that the sooner a country abandoned the gold standard, the sooner it began recovering.

Why would anyone want to go back to the bad old days? The gold standard limited central banks from printing money when economies needed central banks to print money, and limited governments from running deficits when economies needed governments to run deficits. It was a devilish device for turning recessions into depressions. The answer is that some people aren't worried about depressions. Some people are worried about inflation. Even when none exists. To them, these fetters are the feature, not a bug.

It's a simple idea. If governments can't print or spend too much money, prices should be stable. Simple, but wrong. Consider the chart below, which shows headline CPI inflation under the gold standard from June 1919 to March 1933*. Not exactly an, ahem, golden age of price stability.

The gold standard should guarantee price stability in the long run, but you know what they say about the long run -- we're all dead. In the short run, prices can change violently under the gold standard, as the balance of trade changes or the physical stock of gold changes. Remember, price stability isn't just about avoiding inflation; it's about avoiding deflation too. The gold standard wasn't good at either -- especially compared to our modern inflation-targeting system. Consider the same chart of headline CPI inflation, this time since the Federal Reserve began quantitative easing in November 2008.

Now that's what stable prices look like. There's been 23 times less variance in prices since the Fed started quantitative easing than there was under the gold standard. Read that again. It's hard to understand why conservatives have been so up in arms about quantitative easing when you look at the reality. Yes, the Fed has expanded its balance sheet to unprecedented levels, but if it hadn't done that prices would probably be falling a bit now. But how will the Fed eventually mop up all this liquidity it's created -- hasn't it lit the fuse of an inflation time-bomb? No. The Fed can increase the interest it pays on reserves, do reverse repos, or use term deposit facilities to prevent banks from lending out too much money, if it comes to that.

The gold standard is a solution in search of a problem. Actually, it's worse than that. It's a problem in search of a problem. Prices would have to fall a great deal if we adopted the gold standard today. In other words, it would turn the imagined problem of price stability into a real problem of price stability. And, of course, this ensuing deflation would send the economy into a death spiral due to still high levels of household debt.

Whether it's 1896 or 2012, it doesn't make sense to crucify our economy on a cross of gold.

-------------------------
* It's not clear cut when exactly the U.S. was on or off the gold standard. We suspended it in July 1914 when the onset of World War I precipitated a domestic financial crisis. We then re-established the full gold standard in December 1914 after an aggressive policy response stabilized the financial system. This continued until we entered the war, and subsequently partially embargoed gold exports starting in September 1917. The gold standard was still in effect domestically -- meaning people could trade dollars for specie -- but not internationally. These restrictions on gold exports continued until June 1919, at which point we returned to the full gold standard. I have started from this last date, because there is no question that we were operating under the gold standard at this point. For more, read this superb Federal Reserve paper on the history of the gold standard from World War I through the Great Depression.

http://www.theatlantic.com/business...orlds-worst-economic-idea-in-2-charts/261552/

 

[Monsterzuma]

How well can it be argued that the Bretton-Woods system was the most successful monetary system in history?

Say that we take an endogenous money view on the role of credit, thus viewing a rising level of private debt in aggregate over time as an unambiguously bad thing. Most of the rise in private debt in OECD economies took place after the relinquishment of Bretton-Woods. Also, much of the time after Bretton-Woods' cancellation was plagued by conditions of high inflation (1971-1983) and/or asset market volatility and financial crisis (2000-2008). Worker compensation also began to disconnect from productivity growth right around 1971. The 1945 to 1970 period saw both higher economic growth in OECD countries and fewer problems of these kinds. What's to keep us from stating plainly that Bretton-Woods was the better system?

 

[Monsterzuma]

http://www.zerohedge.com/news/2012-...set-almost-all-next-year’s-government-deficit

J.P. Morgan is implicitly stating that the Fed is monetizing government debt.

 

[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?

OK, Scott Sumner answers this question in one of his recent posts. Apparently NGDP growth was severely lacking in Europe in the last few years:

Recently I decided to take a look at the European numbers, but I never seem to be able to find NGDP numbers for the eurozone. Fortunately one of my best students ever (Garrett MacDonald) sent me the data. I knew it would be bad, but I expected bad like the US, not bad like Japan.

Eurozone NGDP is up only 2.47% since 2008:2. The ECB expects contraction in 2013. I could not find NGDP forecasts, but the deflator has been rising about 1.1% per year over the past nine quarters. So NGDP growth will probably be very low. A reasonable guesstimate is that three quarters from now the eurozone NGDP is likely to be up about 3% from 2008:2.

If you think that the 12.9% number for the US 5 year NGDP growth rate is horrible, how can we even begin to describe 3% NGDP growth over 5 years? Even accounting for the fact that American trend NGDP growth is a bit higher (4.7% per year over the 8 years before 2008:2, whereas in the eurozone the previous 8 years saw 4.1% annual NGDP growth), these numbers are simply astonishing.

http://www.themoneyillusion.com/?p=18161

 

[Kaitzilla]

http://www.zerohedge.com/news/2012-...set-almost-all-next-year’s-government-deficit

J.P. Morgan is implicitly stating that the Fed is monetizing government debt.

Monetizing the debt? Didn't Bernanke testify under oath to Congress that he would not?

Pretty sure you can go to jail for lying to Congress since it is a felony.

http://www.youtube.com/watch?v=n6qo2S84r5w

 

[Monsterzuma]

If they *can* monetize debt without sending inflation soaring that is actually an optimistic scenario for the economy as a whole. But yeah, they'd have to break a promise or two.

In Steve Keen's model, the final situation is one in which both GDP and inflation go sharply and increasingly negative while private debt-to-GDP goes to infinity. If the effect of monetary policy ends up being that the Great Moderation is for all intents and purposes restored and the trend in private debt is sent back to it's exponential curve, the resulting extreme deflation would in my estimation make non-inflationary monetization of debt possible. Maybe this is what we're beginning to see unfold.

 

[Hygro]

LMFAO buying corporate debt and then selling government debt to corporations is not a particularly sneaking way of monetizing debt. Bernanke is getting around his oath on a technicality.

 

[Monsterzuma]

Anyone know what caused the sudden spike in 2 year inflation expectations in the last few days?

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

Any fed statements? Fiscal cliff deals?

 

[krikav]

Anyone know what caused the sudden spike in 2 year inflation expectations in the last few days?

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

Any fed statements? Fiscal cliff deals?

Only dramatic thing I can think of is the election in Japan.
The new goverment seems hellbent on increasing inflation, could it be spillover on US as well?

 

[Monsterzuma]

That could make sense, although there were already fairly high expectations that those elections would go as they did before they happened.

 

[Monsterzuma]

http://www.clevelandfed.org/research/commentary/2004/nov.pdf

I was alerted to this Fed paper which (I've been explained) argues that TIPS spreads understate inflation expectations because regular treasuries sometimes have a liquidity premium due to conditions under which people look for nominal rather than real revenue, for example to service debts.

I may comment on it further as I analyze it more elaborately.

 

[wujinlong]

i want to joint this social groups