Why Is Youth So Left-Wing?

[bigfatron]

The 19th Century? Perhaps you never heard of our friends the Monetarists?

If you think that increasing the supply of money through the Central Bank has no effects on the economy, you ought to be taken some very potent toxine
Money matters.

It's quite simple, actually.
With a greater supply of money M1, but not a proportional increase in goods and services, the only possible result, on the mid and long term, is inflation
Of course, what will ultimatily cause this inflation will be an increase in demand. But what caused this artificial increase? The expansion of the monetary base, obviously.

As for the decrease in Interest Rates, of course it decreases the cost of money for the government, but not for the economy as whole. A government decision cannot change day over night the dynamics of an Economy. This contradiction will lead to inflation, and is typicall monetary irresponasbility. Interest rates can only be safely reduced when a decrease in the cost of money already took place. I admitt that decreasin Interest Rates has an almost instantaneous effect of heating the economy, but the cost is inflation and an eventual bust.

All Central Banks in the civilised world took the Monetarist advices, and don't go printing money like crazies.

Luiz, we went through (endured would be the best word) the experiment of economic management through control of the money supply (M0, M2 or M3 depending on your monetarist taste) in the eighties - the result was generally a complete disaster, with an appalling sequence of stop-go-stop changes in ecnomic growth, massive price inflation and then slump in the price of capital assets and gyrating interest rates.

Fortunately we were insulated from the worst excesses of this policy by the income from North Sea Oil which peaked in these years, but it was an economically scary time.

things improved as Lawson matured in the job and started ignoring the strict monetarists, but our economy has REALLY taken off when we have had a non-monetarist, Gordon Brown, in charge - funny that......

Strict monetarist theory is like socialism or free market theory - it's a theory and it has significant flaws in practice. Useful to know about but stupid to apply in isolation or depend on.

 

[Mise]

In addition to bigfatron's observation, it should also be noted that there are MANY causes of the stagflation in the 1970's. An increase in M1 will not induce inflation directly or solely. Nor will a decrease in M1 cause the opposite of stagflation we are currently seeing in the US (i.e. low inflation, low unemployment).

A major cause of stagflation in the 1970's was OPEC quadroupling its prices. I don't know what happened in Brazil, but certainly in the US and UK, OPEC was the major cause.

And the anti-stagflation in the 1990's was caused by a shift in bargaining power from the workers to the employers (i.e. the workers were forced to work for less wages than before, increasing employment and reducing prices). This had several causes.
-An increasingly globalised economy put local workers in direct competition with cheaper foreign workers.
-The 1980's and 90's also saw a reduction in the size and comprehensiveness of the welfare state in the UK (thanks to Thatcher ) which increased their dependence on a fixed income at the same time that local workers' jobs were under threat from foreign workers.
-The Thatcher government (and Regan too) had been systematically eroding the legal rights of workers to organise, bargain collectively, and strike.

These factors should not be ignored, which is why I said it was unfair to say that monetary policy causes inflation. The above were all fiscal policy and politics.

 

[luiz]

Luiz, we went through (endured would be the best word) the experiment of economic management through control of the money supply (M0, M2 or M3 depending on your monetarist taste) in the eighties - the result was generally a complete disaster, with an appalling sequence of stop-go-stop changes in ecnomic growth, massive price inflation and then slump in the price of capital assets and gyrating interest rates.

Fortunately we were insulated from the worst excesses of this policy by the income from North Sea Oil which peaked in these years, but it was an economically scary time.

things improved as Lawson matured in the job and started ignoring the strict monetarists, but our economy has REALLY taken off when we have had a non-monetarist, Gordon Brown, in charge - funny that......

Strict monetarist theory is like socialism or free market theory - it's a theory and it has significant flaws in practice. Useful to know about but stupid to apply in isolation or depend on.

But my main point was that money supply is responsible for inflation, not the perfection of Monetarism.

And I think you're refering to Tatcher's policies?
Well, if at first they created a recession, certainly it was the market correcting itself over a previously irresponsible monetary policy. And Tatcher was quite successful at fighting inflation, and that is the true monetaris goal.

 

[luiz]

In addition to bigfatron's observation, it should also be noted that there are MANY causes of the stagflation in the 1970's. An increase in M1 will not induce inflation directly or solely. Nor will a decrease in M1 cause the opposite of stagflation we are currently seeing in the US (i.e. low inflation, low unemployment).

A major cause of stagflation in the 1970's was OPEC quadroupling its prices. I don't know what happened in Brazil, but certainly in the US and UK, OPEC was the major cause.

And the anti-stagflation in the 1990's was caused by a shift in bargaining power from the workers to the employers (i.e. the workers were forced to work for less wages than before, increasing employment and reducing prices). This had several causes.
-An increasingly globalised economy put local workers in direct competition with cheaper foreign workers.
-The 1980's and 90's also saw a reduction in the size and comprehensiveness of the welfare state in the UK (thanks to Thatcher ) which increased their dependence on a fixed income at the same time that local workers' jobs were under threat from foreign workers.
-The Thatcher government (and Regan too) had been systematically eroding the legal rights of workers to organise, bargain collectively, and strike.

These factors should not be ignored, which is why I said it was unfair to say that monetary policy causes inflation. The above were all fiscal policy and politics.

I'll answe with a very useful equation, one that both the European Central Bank and the Fed know very well(and that the Brazilian Central Bank learned since 1994)

velocity * money supply = real GDP * GDP deflator

obs:
velocity = the number of times per year that money changes hands(relatively stable)

GDP (Gross Domestic Product) deflator = measure of inflation

 

[Mise]

That equation implies (assuming GDP deflator is proportional to inflation) that the percentage increase in inflation is always equal to the percentage increase in money size. However, a percentage increase in money supply is also equal to the same percentage increase in interest (i.e. % increase in M1 = increase in interest rate of same %). So, if the money supply increases by 1%, interest rates increase by 1%, and inflation increases by 1%. So if I borrowed some money and had to pay back $100 before the increase, I would now have to pay back $101. BUT, inflation has also increased by 1%, so this NEW $101 is actually equivalent to the OLD $100 that I would have had to pay back before! So an increase in money supply has NO effect on the economy, according to this equation.

When the government makes available more money, there is (normally) an equivalent increase in the demand for money. This does not cause inflation. Increasing M1 only causes inflation if it is not met by an equivalent increase in the demand for money. This, I believe, is standard monetarist thinking. Keynesian economists take this for granted (it's basic supply and demand curves).

 

[luiz]

That equation implies (assuming GDP deflator is proportional to inflation) that the percentage increase in inflation is always equal to the percentage increase in money size. However, a percentage increase in money supply is also equal to the same percentage increase in interest (i.e. % increase in M1 = increase in interest rate of same %). So, if the money supply increases by 1%, interest rates increase by 1%, and inflation increases by 1%. So if I borrowed some money and had to pay back $100 before the increase, I would now have to pay back $101. BUT, inflation has also increased by 1%, so this NEW $101 is actually equivalent to the OLD $100 that I would have had to pay back before! So an increase in money supply has NO effect on the economy, according to this equation.

When the government makes available more money, there is (normally) an equivalent increase in the demand for money. This does not cause inflation. Increasing M1 only causes inflation if it is not met by an equivalent increase in the demand for money. This, I believe, is standard monetarist thinking. Keynesian economists take this for granted (it's basic supply and demand curves).

I don't think you understood what I have to say.
If the ammount of wealth increases, the government CAN increase the ammount of money in circulation without inflation.

You were saying that the ammount of money does not matter, what is an assumption of Keynesian Economics that is vastly disproved.

The Equation is:Velocity*Money Supply=real GDP*GDP deflator

As such, if the real GDP increases, it's possible to increase the money supply without increasing the GDP deflator

 

[Mise]

A change in the amount of money in circulation affects interest rates first and foremost. The assumption is that it's effect on inflation is small, so small compared to the effect on interest rates that it is ignored by Keynesian economics. For the better part of this century, Keynesian economics has been proven correct. And Keynesian economics STILL can explain anomalies in the 1970's and 1990's (I described them on the second post on this page). Monetarists cannot explain these things, all they can say is that money supply = a constant * inflation, which is true, but it is not the entire picture by far. You are obviously a monetarist, which I respect. But I cannot respect someone who dismisses all other theories out of hand. Just because Keynesian economics has pitfalls does not mean that it is entirely wrong, nor that supply side economics is any better. IMO the Keynesian explainations for the anomalies in 1970's and 90's are far more acceptable than taking the Quantity theory of money literally, as they did in the 19th Century.

(Something interesting is that Karl Marx was also a supply side economist!)

 

[luiz]

A change in the amount of money in circulation affects interest rates first and foremost. The assumption is that it's effect on inflation is small, so small compared to the effect on interest rates that it is ignored by Keynesian economics. For the better part of this century, Keynesian economics has been proven correct. And Keynesian economics STILL can explain anomalies in the 1970's and 1990's (I described them on the second post on this page). Monetarists cannot explain these things, all they can say is that money supply = a constant * inflation, which is true, but it is not the entire picture by far. You are obviously a monetarist, which I respect. But I cannot respect someone who dismisses all other theories out of hand. Just because Keynesian economics has pitfalls does not mean that it is entirely wrong, nor that supply side economics is any better. IMO the Keynesian explainations for the anomalies in 1970's and 90's are far more acceptable than taking the Quantity theory of money literally, as they did in the 19th Century.

(Something interesting is that Karl Marx was also a supply side economist!)

Keynesia Economics do NOT explain the anomalies of the 70's. The fact that the oil crisis was the main cause is undisputed, the issue is the remedy. On the one hand, higher unemployment seemed to call for Keynesian reflation, but on the other hand rising inflation seemed to call for Keynesian deflation.

Monetarism, even if not perfect, could explain the causes and suggest a remedy, that ultimately worked.

The efect of the money in circulation on the interest rates is at best similar to the effect in inflation.

Orthodox Keynesian believed that money had no impact on inflation, what is completely false. Inflation is first and foremost a monetary problem.

I am not a monetarist, but I recognise that they were right in MANY subjects. I don't discredit other schools of thought, in fact I subscribe to plenty of notions from the Neoclassical and Austrian schools. Orthodox Keynesians are the ones that believe that a couple of forumals written in the 30's can explain all economic phenomenoms.

(Marx was a moron, he believed in the labour theory of value for Christ sake!)

 

[Akka]

Ok Newfangle, I've finally answered your previous post about honesty and self-interest ^^

Go here.

 

[fazzoletti]

That equation implies (assuming GDP deflator is proportional to inflation) that the percentage increase in inflation is always equal to the percentage increase in money size. However, a percentage increase in money supply is also equal to the same percentage increase in interest (i.e. % increase in M1 = increase in interest rate of same %). So, if the money supply increases by 1%, interest rates increase by 1%, and inflation increases by 1%. So if I borrowed some money and had to pay back $100 before the increase, I would now have to pay back $101. BUT, inflation has also increased by 1%, so this NEW $101 is actually equivalent to the OLD $100 that I would have had to pay back before! So an increase in money supply has NO effect on the economy, according to this equation.).

What you state here (correctly) is known as the Fisher equation (r=i+π, where r is the real interest rate, i is the nominal one and π is the inflation rate). Your conclusion that monetary growth does not influence the economy is incorrect however. I would like to restate it into: So an increase in money supply has no effect on the return of the money I'm about to lend.

When the government makes available more money, there is (normally) an equivalent increase in the demand for money. This does not cause inflation. Increasing M1 only causes inflation if it is not met by an equivalent increase in the demand for money. This, I believe, is standard monetarist thinking. Keynesian economists take this for granted (it's basic supply and demand curves).

When economists talk about the demand for money, they mean the amount of money that people wish to hold as zero-return assets (put simply: the money in your wallet or checkings account). Economists believe (and so do I) that this parameter is determined by the interest rate (negative correlation) and the national income (pos correlation, because of transaction motive). Monetary policy in itself ("printing more notes") can therefore not affect the demand for money in the short term. The result of monetary policy (on interest rates or GDP growth) can though.

 

[Mise]

Keynesia Economics do NOT explain the anomalies of the 70's. The fact that the oil crisis was the main cause is undisputed, the issue is the remedy. On the one hand, higher unemployment seemed to call for Keynesian reflation, but on the other hand rising inflation seemed to call for Keynesian deflation.

The problem is, monetarist theories don't always work. I think this arguement all started when you said that inflation was caused as a direct result of increasing the money supply. I argued against that by saying it was not a direct result (a monetarist theory), but rather that an increase in money supply primarily affects the economy through a reduction of interest rates. The events of the 1970's and 1980's cast a shadow on the theory that an increase in money supply primarily affects the economy through a reduction in interest rates. But the events of 1900 - 1970 cast a shadow on the theory that inflation is caused by money supply, and that money supply affects inflation simply because there is more money in circulation.

What you state here (correctly) is known as the Fisher equation (r=i+π, where r is the real interest rate, i is the nominal one and π is the inflation rate). Your conclusion that monetary growth does not influence the economy is incorrect however. I would like to restate it into: So an increase in money supply has no effect on the return of the money I'm about to lend.

That's the problem with having no formal education in economics and just trying to muddle through things based on what I read in the newspapers and what people tell me. Thanks for clearing that up.

When economists talk about the demand for money, they mean the amount of money that people wish to hold as zero-return assets (put simply: the money in your wallet or checkings account). Economists believe (and so do I) that this parameter is determined by the interest rate (negative correlation) and the national income (pos correlation, because of transaction motive). Monetary policy in itself ("printing more notes") can therefore not affect the demand for money in the short term. The result of monetary policy (on interest rates or GDP growth) can though.

This is actually what I meant. "Monetary policy drives up demand for currency through interest rates and this is taken for granted in Keynesian economics" is what I was trying to prove, in order to prove that "Monetary policy affects the economy primarily through interest rates". The former was intended to show that there was a strong leg for the latter to stand on.

EDIT: btw luiz, I'm sorry if I accused you of being narrow minded! I disagree with you, but do respect you for your willingness to consider all schools of thought.

 

[fazzoletti]

That's the problem with having no formal education in economics and just trying to muddle through things based on what I read in the newspapers and what people tell me. Thanks for clearing that up.

Maybe it's time to get that formal eduction, you seem to be openminded and quiet interested in the subject... Just dont forget to mention my name as a source of inspiration once you get that Nobel prize.

If the central bank (which is independand of the goverment in a modern country) increases the money supply, than that will lower interest rates (that's straightforward enough: they buy bonds from market parties, so bond prices rise, which implies yields decrease). A lower interest rate will kick-start the economy, because it stimulates consumption (you are more likely to purchase that nice car and loan money for it) and investment (more projects become profitable, because financing it is cheaper).

An increase in either or both consumption and investment will stimluate the economy in the short run and bring it closer to the theoretical point of full employment. In the medium term, inflation will increase due to 2 factors:
1. demand pull (you (and/or your company) buy more products, pulling prices up)
2. supply push (workers have more negotiating leverage, labor becomes more expensive and business-to-business purchases cost more money because of demand pull)
Another way of grasping this process is by simply looking at the entity that has been discussed before: M*V=P*T. This entity is by it's very definition true, else it would be an equation rather than an entity.

So as you can see, an expansionist monetary policy can help in the short run. If you want to increase GDP in the long run though, you have to increase the production capacity, there is simply no other way. So you should tell lazy people to go to work (Germany), create more (human) capital (China) or make sure your nation will obtain more working age people (Europe at large) and in the mean time, make sure your current balance is at least sort of stable (USA).

Luiz would reply that an expansion of the monetary base might in some cases well be accompanied by a stable price level. That is true in the situation where the monetary expansion equals the expansion in the production capacity of your nation. Since most nations have an ever expanding production capacity they also have a steady increase in their monetary base as their policy (so expansionist monetary policy should be defined as: an increase in the RATE at which the monetary base is enlarged by the CB).

On Keynes: he did believe (and convincingly show the world that money is NOT neutral (as most classic economists presumed at the time) so that an alternation of the monetary base does influence short term growth. Along with this came the notion that prices are sticky in the short run (I'm sure you heard that one before).

On stagflation in the 70s: most people agree it was the adverse supply shock (oil price increase) that caused it. I believe that it certainly wasn't the result of monetary or fiscal policy, the latter having been quiet loose at the time IIRC. The whole question here is: where do the swing in the business cycle (and unemployment) come from. This is similar to the question if there is life after death; everybody has a different opinion. Monetarists would say: it's because central banks screw up. Keynesians say: it because of 'animal instincts' of investors. My personal view is that political changes, market particapants' behavior and most notably technological progress (which is a great thing in itself btw) causes the world to change constantly, thereby causing frictional unemployment. Sometimes these forces can, by coincidence, work in concert and cause unemployment. This is only my view though and by no means 'generally accepted' or an economic law.

On my last post: I made a mistake in the formula! I said it was r=i+π, it should have been r=i-π.

 

[HounddogLGS]

They don't have to work for what they have.

You forgot to mention they don't want to take responsibility for anything either.

 

[Pasi Nurminen]

This thread was dug up....why?

 

[Babbler]

Because it that time of the OT cycle!

 

[newfangle]

And it was dug up to reply to one of RMS's zingers. A good reason, but not good enough, I'm afraid.

 

[amadeus]

Quite. The reasoning of leftism has been dead and buried for some time now.

 

[LordRahl]

I believe it was Roosevelt (not sure though) that said:
"If you're in your 20's and not a liberal, you have no heart
If you're in your 40's and not a conservative - you have no brain..."

 

[amadeus]

Heart free and proud.

 

[sysyphus]

I believe it was Roosevelt (not sure though) that said:
"If you're in your 20's and not a liberal, you have no heart
If you're in your 40's and not a conservative - you have no brain..."

Actually it was Winston Churchill.

I disagree with that point of view. I believe that maturing means going from an absolutist way of thinking to moderation.