17 Dec 2012

Rowe Ruh Roh

Debt, DeLong, Economics, Federal Reserve, Krugman, Market Monetarism, Nick Rowe 94 Comments

Sorry, I was trying to come up with the analog of a Krugman Kontradiction for Nick Rowe, and this was it…

Some of you may recall that I happily linked to Nick Rowe explaining just how nutty was Paul Krugman’s praise of a hypothetical bond vigilante attack on the US. (Remember, Brad DeLong had to chime in, to defend Krugman from Rowe’s post.)

Well, today Nick said that Japan should welcome a debt crisis. Then he and I had this exchange in the comments:

Nick, I’m having trouble reconciling this with your critique of Krugman on the bond vigilante stuff. A naive reader would have thought you believed his post saying bond vigilantes would help, was borderline dangerous. And yet, a naive reader would also think you were here saying Japan should welcome a debt crisis.
Posted by: Bob Murphy | December 17, 2012 at 08:16 PM

Bob: it wasn’t really a critique of Krugman. More of a qualification and extension.
I really wish I could find the right metaphor. Andrew’s “avalanche” helps a bit, but it’s not quite right, because….we are short of snow down here in the valley.
Japan should welcome a debt crisis. Just not too big a crisis.
Posted by: Nick Rowe | December 17, 2012 at 08:39 PM

Nick, OK, let me try it this way: Should the US welcome a debt crisis too?
Posted by: Bob Murphy | December 17, 2012 at 11:36 PM

Bob: yes. Not too big a one. Just like Japan.
Posted by: Nick Rowe | December 17, 2012 at 11:52 PM

Sometimes I pause and think, “Is it really possible that all these sharp guys–who clearly have studied macroeconomics more than I have, in some cases for longer than I’ve been alive–are so totally wrong about monetary policy? Do I really want to be constantly criticizing a Nobel laureate?”

But then I think, “Well, these guys are saying the problem with the world economy is that Bernanke has had an ultra-tight monetary policy, and they are hoping for a debt crisis.” And that reassures me that something is screwed up with their worldview.

94 Responses to “Rowe Ruh Roh”

  1. Jason B says:

    “that Bernanke has had an ultra-tight monetary policy”

    This is where I have the biggest problem. What metric do they use to believe this? Am I looking at the wrong money supply graphs? If we can’t even come close to agreeing on reality then how the hell can we discuss theoretics or policy?

    • Bob Murphy says:

      Jason B, Scott Sumner thinks the only sensible criteria for determining tight vs. loose monetary policy is to look at NGDP growth and price inflation. Things like monetary aggregates and interest rates can be misleading. Scott claims Bernanke in 2003 (as an academic) was totally on-board with this framework.

      • Jason B says:

        Thanks for the reply Bob. I see what he’s doing there, but he thinks we had ultra tight monetary policy from ’03 yet we got a massive housing bubble. What is his method for explaining that?

      • Unlearningecon says:

        As I’ve been emphasising, this approach is circular. We say the fed controls NGDP. We then measure whether or not the fed is doing the right thing to NGDP by looking at…..NGDP!

        So we are right back where we started, and we have not explained anything.

        • Bob Murphy says:

          Unlearningecon, for once we agree.

        • Anonymous says:

          +1

        • skylien says:

          +1

        • Gene Callahan says:

          WTF? “We say my thermostat controls my apartment temperature. We then measure whether or not my thermostat is doing the right thing to my apartment temperature by looking at… my apartment temperature!”

          OF COURSE that is how we see if my thermostat is doing the right thing. And sure, we haven’t “explained” anything: we have simply kept my apartment an even temperature.

          What the heck is Bob agreeing with here?

          • Major_Freedom says:

            The same thing you agreed to? That it doesn’t explain anything?

          • Bob Murphy says:

            Gene, perhaps Unlearningecon was saying something different, but what I thought he was getting at–and which is my #1 critique of Sumner–would go like this:

            “My furnace burned more natural gas last night than it has done in the prior 10 years total, and yet my thermostat is showing that it’s still 50 degrees in here. So clearly this is the lowest setting of my furnace since the Hoover Administration. It’s so cold in here because I haven’t jacked up my thermostat enough.”

            • Major_Freedom says:

              That’s easy to explain.

              It just means there was a sudden “heat capacity shock” of your furniture, appliances and walls. They are inexplicably screaming for more ambient heat, and it’s unproductive to ask why. You have to simply accommodate them. But you’re falling asleep at the thermostat. You are in the deepest sleep since the Hoover Administration.

              If you had supplied your furniture, appliances and walls with more ambient heat, then your house would not have turned to ice. This is a typical Keynesian temperature problem, not an Austrian furniture, appliance, and wall problem.

            • Ken B says:

              So what you mean by looking at the thermostat is looking at gas meter?

          • skylien says:

            Or as I would put it. The PID-Controller of the heating system has some malfunction and the temperature falls to 0°C in the room. So the thermometer doesn’t show the temperature we like (20°C). So we use a lighter to heat the thermometer up where we would like to have it, and then conclude. The temperature must be fine in the room now.

            • skylien says:

              Of course instead of the PID-Controller just the thermostat might be broke..

          • guest says:

            I don’t know much about NGDP vs. GDP, or why the former is considered by Austrians to be a better (if also inadequate) guage of … something or other.

            But structurally, the argument isn’t circular.

            It can only be circular if the Fed were controlling the NGDP number directly – like making the number up.

            The Fed controls NGDP by changing the things of which it is comprised; and they have a belief about where NGDP should be, which is why they look to it to see if they got it right.

            • Matt Tanous says:

              “why the former is considered by Austrians to be a better (if also inadequate) guage of … something or other.”

              They do? I always got the impression that GDP was bad, and NGDP was even worse.

          • Ken B says:

            “And sure, we haven’t “explained” anything”
            Well not if we take a dualist view of the thermostat. “We told it to keep the temp at 68, it understood and chose to act accordingly …” From that we get nothing. Now if we reduce the thermostat to a physical system with states, feedback, and digital logic, *then* we start to get an explanation that’s meaningful to jumped up monkeys.

          • Matt Tanous says:

            Gene, it’s more like defining “raising the thermostat temperature” not as “moving the thermostat dial up in temperature”, but as actually warming the room. Thus, monetary policy is always “tight” unless it brings about the desired effects. Instead of previously, when it was claimed that looser monetary policy would lead to desired effect X, now desired effect X DEFINES what constitutes “loose” monetary policy. Thus, what little falsifiability existed was thrown out the window entirely – you no longer have to even claim that you just missed some other factor or misjudged some criteria.

          • Unlearningecon says:

            “We say my thermostat controls my apartment temperature. We then measure whether or not my thermostat is doing the right thing to my apartment temperature by looking at… my apartment temperature!”

            If this were the only justification (i.e. none) given for the thermostat controlling temperature, it would indeed be circular. But we know from actual mechanics the thermostat directly controls the heating, it is not.

            Contrast this with statements from NGDPers such as:

            “We should abandon attempts to find a monetary policy transmission mechanism. It’s too complicated. ”

            http://www.themoneyillusion.com/?p=13774

            And subsequent reliance on expectations fairies, which again are unfalsifiable.

        • RPLong says:

          Yes, exactly! I made the same point somewhere on my blog once. But yes, absolutely.

      • Silas Barta says:

        I thought their metric was the one that assumes the validity of their view: that if we don’t get out of the slump, it’s too tight, and if we got out of the slump, it wasn’t.

        No room for the possibility that “gee, maybe NGDP isn’t the be-all-end-all of prosperity”.

  2. Chris B says:

    “But then I think, ‘Well, these guys are saying the problem with the world economy is that Bernanke has had an ultra-tight monetary policy, and they are hoping for a debt crisis.’ And that reassures me that something is screwed up with their worldview.”

    That was great.

  3. RPLong says:

    Bob, have you spent much time reading John T. Cochrane’s, Steven Williamson’s, or John Taylor’s blogs? They can be a dose of fresh air when you’re tired of bouncing around the New Keynesian echo chamber and you’ve already done the rounds at EconLog, CafeHayek, and Mises.org. At least to my layman eyes, there tend to be fewer outright contradictions…

    • RPLong says:

      …aaaand I just scrolled down on my Google Reader to see that you have already blogged about Williamson. Okay. Point taken.

  4. Nick Rowe says:

    Hi Bob!

    Suppose that people decided that bonds were the only asset they wanted to hold, and the only good they wanted to buy.. And if the rate of interest on bonds fell to 0%, they would switch to holding money instead. Let’s call that a “bond bubble”. That would be bad news. Because it would cause recession and deflation. And that recession and deflation would make bonds and money even more attractive to hold.

    We want to burst that bond bubble. We want people to stop liking bonds so much. We want to create a bond crisis, if you like.

    Don’t get hung up on the names of things. See through the names. The names of things can really mess with your way of seeing the world.

    • Bob Murphy says:

      Nick, well instead of calling it a “recession and deflation” let’s just call it “rainbows and lollipops.” :)

      I had praised your earlier post about Krugman and the bond vigilantes, because I thought you were effectively saying, “This is a dangerous game Krugman is playing. You can’t have a ‘controlled attack from the bond vigilantes.’ Instead of telling people a bond crisis would be a good idea, we should instead adopt appropriate monetary policy and *stop* building up the debt.”

      But now you are saying, “Yes, let’s have a bond crisis, but let’s be careful about it.” That seems incredibly reckless to me, even putting aside the minor fact that I disagree with your economic model.

      • Ken B says:

        This is a bit abstract so far guys. What would count as a mild crisis? Could you define a mild run on a bank similarly?

        • Bob Murphy says:

          Ken B. I imagine they can do it like with NGDP. If the crisis improves the economy, then it was mild enough. If the crisis leads to a world depression, then it was too big.

          • Ken B says:

            Cool. That’s exactly how I test to see if it’s safe to yell “FIRE” in a crowded theatre.

          • Yancey Ward says:

            Or perhaps it wasn’t big enough.

        • Major_Freedom says:

          The definition of “a mild crisis” is what Rowe has in mind. Trust him. All others are too much or too little.

          If it ends up being too much, Rowe is right. If it ends up being too little, Rowe is right. If it ends up being exactly how Rowe envisions it, and things are better than they were, then Rowe is right. If it ends up being exactly how Rowe envisions it, and things are still bad, or worse, then Rowe is still right because the economy was worse than he thought, and the mild crisis made things less bad than they otherwise would have been.

          QED. Etc. Flippity floppity boo. Razzle dazzle Uncle Befrazzle.

          • Greg Ransom says:

            This.

          • Gene Callahan says:

            The definition of “jerk” is Major Freedom. Trust me.

            • Major_Freedom says:

              Callahan is like Ted Haggard screaming obscenities at homosexuals.

            • Jason B says:

              Gene, aren’t you forgetting about DeLong, or do you have something more descriptively accurate in mind?

            • Ken B says:

              On this topic Gene you are a reliable and trustworthy guide.

              • Major_Freedom says:

                Yes, and only where you agree with Hitler, is Hitler a reliable and trustworthy guide.

                Because the trustworthiness and reliability of a person derives from that person’s listeners beliefs, not the person themselves.

                For example, Obama is trustworthy and reliable because I agree with him about soaking the rich. He can be trusted not to send drones that kill middle eastern children, and then wipe away non-existent tears when American children are killed. He was set up.

              • Ken B says:

                Correction. On this topic Gene you are a reliable, trustworthy and amply vindicated guide.

              • Major_Freedom says:

                Yes, and the more you agree with a person, the more they become a means for your own self-affirming reinforcement.

                Such as the belief that “jerks” are those who dare mock those who choose the route of churlish schoolboy insults, and who dares enjoying said mocking.

                That person is the real jerk.

              • guest says:

                Yes, and the more you agree with a person, the more they become a means for your own self-affirming reinforcement.

                Bob Murphy completes me.

              • Bob Murphy says:

                You had me at fake dog poop.

            • Tel says:

              MF, let me tell you a secret about Internet slanging matches.

              You need to be more sarcastic and witty than the other guy, because no one cares who is actually “right” they only want to have a giggle at someone else’s expense.

              Once it becomes obvious that you take yourself seriously, you’re a goner.

              • Major_Freedom says:

                But I am not always writing for a wider audience. If I lose a battle I am not even fighting, then no skin off my back.

      • Nick Rowe says:

        Bob: the US and Japan have a (government) bond bubble. Eventually, like all bubbles, the bond bubble will burst. When the bond bubble bursts there will be a recovery.

        Like all bubbles, when it bursts, there may be an overshoot in the opposite direction. If it’s only a mild burst, people will talk about a “bond vigilante attack”. If it’s a big burst, people will talk about a “bond market crisis”. But these are all just different names for the same thing.

        The longer it takes for the bubble to burst, the bigger the debt/GDP ratio will rise, and the harder it will be to control it when it does burst.

        So. Let’s burst the bond bubble now! Let’s goad the bond vigilantes into action! We want the crisis to happen now, not later.

        Hmm. Sounds almost Austrian, doesn’t it? Only in reverse.

        • Major_Freedom says:

          the US and Japan have a (government) bond bubble. Eventually, like all bubbles, the bond bubble will burst.

          So to be clear, you’re saying the low prevailing bond yields are not just due to low expected inflation going forward? There is a “bubble” demand component that is pushing prices up?

          • Nick Rowe says:

            MF: see my next post. A bond bubble causes deflation. Expected deflation feeds the bond bubble.

            • Major_Freedom says:

              If I may,

              What causes the initial bond bubble, that causes the deflation that feeds the already caused bond bubble?

              How does a bond bubble cause deflation? If bond prices rise, doesn’t that increase the incomes of bond sellers? Why would higher bond prices cause a decrease in the quantity of money and/or volume of spending? Do bond sellers hoard cash?

              • Ken B says:

                “What causes the initial bond bubble[?]”

                What caused the tulip bubble?

                What causes bubbles is a big question. Nick doesn’t need to answer that to discuss what will happen if we’re in one.

              • Major_Freedom says:

                Why are you protecting Nick?

                He is strong enough to fight his own battles.

                Who said anyone HAS to answer any questions on this blog? Questions are posed, by me at least, on a contingent basis.

                Nick doesn’t need to answer that to discuss what will happen if we’re in one.

                But he isn’t just discussing what will happen if we’re in one. He’s making positive proposals as what ought to be done. Because of that, because he’s talking about actions going forward, it means his proposals have to at least be closely analyzed on whether or not it will cause more harm than good, no?

                What are you afraid of, Ken B? What are you trying to cover up?

              • Ken B says:

                My role in the Great Train Robbery.

              • Major_Freedom says:

                Wow, you feel so guilty you even admit to crimes you did not commit. Guess I hit a nerve.

              • guest says:

                What caused the tulip bubble?

                Here, check these out:

                The Truth About Tulipmania by Doug French
                http://mises.org/daily/2564

                The story of Tulipmania is not only about tulips and their price movements, and certainly studying the “fundamentals of the tulip market” does not explain the occurrence of this speculative bubble. The price of tulips only served as a manifestation of the end result of a government policy that expanded the quantity of money and thus fostered an environment for speculation and malinvestment.

                Early Speculative Bubbles and Increases in the Supply of Money by Doug French
                http://mises.org/document/3628/Early-Speculative-Bubbles-and-Increases-in-the-Supply-of-Money

                I’m still trying to understand some of the concepts he’s talking about, but from what I can tell, it looks like what happened is that there was a bunch of precious metals being introduced into the economy in and around Amsterdam (due to free coinage laws, more or less sound banking practices, and because other countries were not doing these things), which caused a general price inflation.

                It seems that this inflation gave people in the tulip futures market an elevated level of risk tolerance, such that:

                … tulip bulb futures could be traded with no margin required …

                - The Truth About Tulipmania

                Then, it seems that when the free coinage law went away (for silver), this stopped the price inflation and, therefore too, the lax standards in the tulip futures market.

                I probably messed up something, so it’s worth reading it for one’s self.

                So, it looks like it wasn’t price inflation, per se, that caused the Tulip Bubble (since it was due to an ACTUAL increase in the precious metal supply).

                I get the feeling I’m still not getting something, though. Like maybe I’m overlooking the premium that Amsterdam bank notes had over coins on the market (except that it seemed to be a legitimate premium, from what I read).

                I don’t know. Maybe Doug French will come in here and help with this one.

    • skylien says:

      “The first is monetary policy. Something like a level path target for nominal GDP would make real assets and goods more attractive relative to nominal bonds and money, so people would want to sell bonds and money to buy real goods.”

      With that you mean (price) inflation I guess. How much do you have in mind? You have no concerns of getting out of control inflation or risking a real debt default by government when trying to control inflation?

      What confuses me most is: Why do you assume that as soon as people start to get rid of bonds and money to protect themselves from loss of wealth that this will lead to a sustainable growing economy? I just fail to see the connection.

      Would you also argue for capital controls and other measures of financial repression to stop people from getting their wealth out of Japan?

      • Gene Callahan says:

        “Why do you assume that as soon as people start to get rid of bonds and money to protect themselves from loss of wealth that this will lead to a sustainable growing economy? I just fail to see the connection.”

        Well, because they will buy goods instead, and the purchase of goods is how we currently define a growing economy.

        • Bob Murphy says:

          Gene wrote:

          …and the purchase of goods is how we currently define a growing economy.

          No, the definition of a growing economy is the production, or the output of, (newly finished) goods and services. There are various theories of macroeconomics in which growing demand can be necessary to get rising production.

          • Matt Tanous says:

            I thought everyone knew that a growing economy meant we were making more stuff. Except Krugman and his followers. They seem to think a growing economy is when government spends more to buy the same stuff.

            • Tel says:

              We do keep coming around to the same sticking points.

              The problem with Gene’s definition of growth by measuring purchases is you can have the same two guys passing the same goods back and forth at higher and higher prices each time… and Gene would call that growth.

              The problem with Bob’s definition of growth by measuring production is that you need an objective way to decide how much better an iPhone-5 is compared to an iPhone-4 as one model goes out of production and the other model comes into production.

              • Matt Tanous says:

                You can’t measure how much an economy grows in any sensible way. You can only point out that people value the iPhone 5 more than the other options, as they are getting rid of their older phone to get it.

              • Tel says:

                Sure, but let’s say (totally bogus figures) that Apple sells 2 million iPhone-4 units, then takes the iPhone-4 off the market and sells 1 million iPhone-5 units. Is that growing or shrinking?

        • Major_Freedom says:

          the purchase of goods is how blockheads currently define a growing economy.

          That’s better.

        • skylien says:

          An hyper inflating economy meets this definition. You don’t see a problem with that?

          • Major_Freedom says:

            Zimbabwe and Weimar had the fastest growing and largest economies ever. It’s why the Zimbabwean and German cultures are globally dominant right now. Oh, and don’t forget the powerhouse Argentineans.

            • Matt Tanous says:

              Not Germany. They turned to austerity and stricter fiscal and monetary policy after WWII for some stupid reason.

            • Silas Barta says:

              You forgot Hungary their economy was so great that they set the record for biggest denomination issued. They blew everyone’s expectations out of the water on NGDP growth. That economy was on FIRE, let me tell ya.

              Also, in Weimar, people were *really* able to abandon that terrorist “hoarding” mentality — why, they spent money the moment they earned it. That refusal to take their cash out of the economy’s nice circular flow ensured economic prosperity for all. They proved that holding on to cash is pure waste, and thus why we can eliminate it with only positive consequences.

              (Am I laying it on too thick? *checks writings of respectable economists*. Nah, this is completely warranted.)

        • skylien says:

          Additionally:
          First there is not only no reason to assume that production of newly finished goods and services must increase, and the second and much more severe problem is that even greater production doesn’t mean it is a SUSTAINABLE growth. Keyword to the former: “Stagflation”, for the latter “Housing Bubble.”

          • skylien says:

            dang..

            cut the “and” in:
            “…increase, and the second…”

            • guest says:

              Don’t forget the semicolon:

              “… increase[;] the second …”

              • skylien says:

                Thanks ;)

          • Tel says:

            Sure, but if you listen to the environmentalists, 99% of human economic activity on Earth is not sustainable (based on them deciding what they think might be sustainable).

            We don’t even have a reliable way to measure bubbles in retrospect, let alone see them coming.

            • skylien says:

              I speak of it in the economic sense. The sense in which environmentalists use it (as I also saw it in the past) is a different one.

              “We don’t even have a reliable way to measure bubbles in retrospect, let alone see them coming.”

              Well I think there is; It is called profit and loss. Excessive losses after a long period of growth in one sector are a quite good indicator for unsustainable past growth. Else how could we speak of a housing bubble now?

              • Tel says:

                There was a long profitable period in the ice delivery industry, but since then it has shrunk down considerably.

                There was a boom in pianola construction at one stage, but you hardly see one these days.

                Must have been unsustainable bubbles.

                Things change, so if you want to predict that in future we will be doing things differently to how we are doing things now then that’s an excellent prediction, but not particularly useful.

                The housing bubble is nothing more than personal opinion. Seems like something changed there, but could we have done better? Maybe. Guess so.

              • skylien says:

                An industry doesn’t have to suffer sudden and severe losses to shrink, does it? If entrepreneurs anticipate a decline in demand for their products, they might reduce output even before writing red numbers. I don’t call such a decline in production the bursting of a bubble.

                A bubble is an extreme overshoot of investment through expectations for higher and higher future demand of a certain product (based mainly on the reason of its rising price due to increased investment) that at some point becomes suddenly obvious that it is not through heavy losses.

                Is this such a bad or arbitrary way to classify a bubble?

        • Nick Rowe says:

          Gene: Yep. And if the sales of goods is currently limited by the demand for goods rather than the supply of goods (which I believe it is), that increased desired purchases of goods is what we need to get increased production of goods.

          • Major_Freedom says:

            You mean my fake dog poop factory operation has no demand because consumers just don’t have enough dollars in their wallet? It has nothing to do with my investment choice? Like, there are consumers screaming for more fake dog poop, they just aren’t getting paid enough?

            • Tel says:

              Once again, the problem of measuring the hypothetical.

            • Nick Rowe says:

              MF: You mean the recession was caused by firms suddenly switching to producing fake dog poop, which nobody wanted to buy? So they all decided to quit working because there wasn’t anything worth buying with their income?

              • Major_Freedom says:

                Nick:

                You mean the recession was caused by firms suddenly switching to producing fake dog poop, which nobody wanted to buy?

                Yes, that is exactly what I am saying, Nick. I actually believe recessions are caused by everyone suddenly switching to investing in fake dog poop that nobody wants to buy.

                So they all decided to quit working because there wasn’t anything worth buying with their income?

                Quit working? They were laid off because of a collapse in investment, particularly in labor. That decline in investment is what caused the decline in aggregate spending, because businesses don’t consume more just because they invest less. What the Fed does in response to this is secondary to the process of declining investment.

                ————————-

                OK, I’ll ask the same questions in a slightly different way. Are you saying that when an investor finds that he doesn’t have the demand for his products he thought he was going to get, that the problem is necessarily one where his customers don’t have the required money to profitably cover his costs? That his investment choices, the requirements of complimentary real resources, the physical sustainability of his investment vis a vis available capital, had nothing to do with it?

                How do you distinguish between a physically unsustainable investment decision, and a sustainable investment decision that doesn’t have sufficient nominal demand?

                To me, recessions are just periods of abnormally high frequencies of business problems, which is caused by discoordination between investments. It isn’t a clear cut “yesterday is not recession, today is recession”.

                I am sure you will agree that it would be absurd to argue that an individual business owner who experiences problems should be bailed out by inflation.

                I am sure you would also agree that it would be absurd to argue that if business A earns a nominal demand that doesn’t earn profits, that there is some objective law of the universe that says business B must experience an offsetting increase in nominal profits, regardless of what A or B are doing in physical resource usage terms.

                This is why I brought up the fake dog poop scenario. Suppose that is what I actually invested in. Would my difficulties be the result of an insufficient quantity of money, or because it is a physically unsustainable activity on the basis that the needed capital and labor are more highly valued elsewhere to make other more highly valued products?

              • Tel says:

                The firms were selling the same product right from the start… but for a long time no one figured out it was fake.

              • Silas Barta says:

                Hot dang, Major_Freedom. What I just said about skylien’s post applies doubly to your comment here!

                (Just to be clear, and because I don’t want to put a second link in this post, I’m referring to the one that has a divider bar and starts with “OK, I’ll ask the same questions …” after that bar.

          • skylien says:

            Nick,

            This is not a very reassuring answer. Are you saying, that you think people want the products for the prices offered; they are only too irrational to realize it? So you need to think of some scheme to manipulate them. Like destroying the qualities of what they actually chose to buy/hold instead.

            Again this just doesn’t explain how we get a sustainable humming economy. I try to spell the problem out in more detail:

            1: Normally if I want to buy goods, I buy them because of the use that they render to me, like a car for driving.

            2: However when I buy a car because I fear that the money is no safe place any more as a store wealth, then I am not really demanding the car’s service it directly renders (albeit I might use it anyway if I already have it), but mainly I use its ability as a store of value. This means it is only a makeshift purchase.
            So people don’t look at the services the goods render as the first quality but as store of value/option value, because money suddenly is useless or less capable of doing it.

            How do you think we can get a sustainable growing economy in which people try to get rid of money by making makeshift purchases?

            • Silas Barta says:

              Thanks, skylien. It’s reassuring for someone to speak sanity like this when economists seem to believe the opposite. It’s the feeling I would get from hearing someone say, “But … you know, if most people can’t see the clothes, that’s really the same as being naked, isn’t it?”

              • skylien says:

                Well, thanks Silas. I have to give that compliment back!
                :)

                I am just asking questions, basically the same things you and MF are saying/asking… And I won’t stop until I get an answer or they admit they do not have one except for meaningless definitions as the one given by Gene above.

                (Or I will stop if I get tired of questioning of course.)
                ;)

              • Major_Freedom says:

                I think this solution is going to be in the sphere of being able to hold more than one or two concepts in one’s mind.

                This is how I begin thinking about this “is it a demand problem or is it a real problem?” question: I do not abstract away from myself. What I mean is, I don’t look at total nominal demand apart from me, nor total supply apart from me, such that I ask whether there is too much real supply or not enough nominal demand apart from me.

                I instead consider my own relationship in the division of labor itself, and then understand everyone else as integrated as well. So I look to my OWN production on the real side. I ask myself: Is what I am doing in real terms, physically sustainable in the division of labor, in the sense of how many complimentary resources I require to complete my given set of goals?

                Am I for example utilizing too many bricks for potential offer to others later on, while other people actually want more of something else first before they want more bricks?

                If the answer is yes, that I am producing too many bricks, then, and this is key, I must accept that I should not be receiving whatever nominal demand is able to cover my costs and prolong my malinvestment.

                I ought to receive fewer revenues that incur me with losses, so that I stop doing what I am doing. Or, at the very least, I should be in a situation where I expect future losses if I do go out and unduly expand the production of bricks.

                Now, and this is the second key part, given that we agree that I ought not receive sufficient nominal demand to cover my costs, the next question to address is how other people’s production should be affected given that little old me happens to be producing too many bricks and preventing these resources from being allocated elsewhere where they are more valued. Do other producers have to receive more revenues and higher profits, if I am to incur losses in my relative overproduction of bricks? If so, how are those additional revenues to be brought about? Should myself and other producers decide relative spending, or should there be a money printer that brings about its own relative spending patterns?

                If we assume no money printer, then my losses need not be accompanied by an equal and offsetting nominal gain elsewhere. The drop in my profitability will all by itself generate a relative change to profitability in rock usage (bricks plus what others might produce with the same rock).

                If there is a money printer, then either the money printer buys my bricks, thus prolonging my malinvestment, or it buys the goods of others and increases their revenues and profits. Thus we can say that the money printer, if it not to be a nuisance to the division of labor, must at least refrain from printing money that increases my revenues. It ought to at least increase only the revenues of other producers.

                So is this the answer? Here’s now the final key: IF the money printer is to print money to boost the revenues of other producers, to offset the losses that I ought to incur, then to the extent those other producers do additional nominal demand business with me in the division of labor, that money printer is prolonging my malinvestment even if it didn’t intend to do so.

                In other words, money printing cannot do what market monetarists presume it can do, which is offset all malinvestment losses with equivalent increased profits for other projects, such that total spending rises, and at the same time ensure labor and resource coordination in the division of labor.

                They believe that gradual increases in aggregate spending will enable myself and other producers to coordinate our actions in real terms, in the presence of nominal spending and profits that offer no incentive to doing so.

                This is easily seen in cases of severe money printing. In these cases, virtually everything can be sold at a nominal profit, because even the most outlandish projects will tend to earn current revenues that vastly exceed prior costs, precisely because the rate of inflation is so high and more and more things become more and more valuable relative to money itself.

                In this situation, coordination in real terms becomes all but impossible. Someone could produce my favorite toy of fake dog poop, and there will be no monetary signal that what I am doing is not physically sustainable in terms of required complimentary resources that are more highly valued elsewhere.

                What is true for severe inflation, is also true, but to a smaller degree of course, for what we have now. Instead of permanent and virtually absolute discoordination, there is discoordination to a smaller degree.

                This is what all nominal demand economics does not include. There is this unwarranted assumption that non-division of labor money printing can be introduced into the division of labor and be accommodated in terms of myself and other producers making choices that lead to sustainable resource usage in the presence of what people actually want to do with those resources.

                Finally, all that is needed for the final nail in the MM coffin is to realize that to the extent a country is in the world market division of labor, then instead of only myself to ought to incur lower nominal demand, to the extent that an entire country relatively overinvests as compared to other countries, in terms of resource utilization and what consumers of the world actually want, what country level NGDP targeting will do is prolong an entire country’s malinvested structure by allowing producers who should do something else, to keep doing what they are doing.

                Furthermore, to the extent that my unjust earnings, or a country’s unjust earnings, lead to the income earners to alter their own spending and consumption patterns, those spending and consumption patterns are unwarranted as well, so what we also have to take into account is that to the extent my fake dog poop customers are receiving unwarranted earnings, I ought to incur losses to the extent they incur losses. For my productive activity was unduly increased on the basis of prior unduly expansion of other people’s production.

                This is why it is not wrong to say that should a country’s banking system collapse, and those losses then lead to lower banker spending elsewhere, in main street for example, then the losses main street producers incur is fully warranted. They should not have expended the way they did because their expansion was founded upon prior undue expansion in the banking sector.

                Thus, aggregate demand collapses are warranted, when it is done by the division of labor (market) process. The undue expansion in finance in the US, generated an undue expansion in capital goods in the US, which generated an undue expansion in consumer goods. All of this expansion is relative and partial, as compared to the counter-factual of how finance should have otherwise been expanded, how capital goods should have otherwise been expanded, and how consumer goods should have otherwise been expanded.

                It is certainly justified that an entire country should experience falling revenues to the extent that they unduly expanded relative to the world, in a world market!

                This insight by the way is one Hayek I think grasped in his book Monetary Nationalism and International Stability , but he sort of just mentioned it.

        • Silas Barta says:

          It’s good to hear that you accept this definition, never question it, and criticize Bob for having a position that would be stupid if he accepted it.

          I figured you’d be the first to criticize that definition, recognizing when it departs from the more abstract sense in which we determine whether an economy is “doing well”, rather than buying into the Keynesian line that we somehow need to get spending up to have a better economy … but with you, it’s always a toss-up.

  5. Ken B says:

    Purely on the issue of rhetoric and Scooby-doo. If you want the analog of Kontradiction, rather than error, then how about “Rowe reversal”?

  6. Ken P says:

    What about the theory that the increased reserve requirements brought on by the Basel agreement and the loan requirements from Dodd Frank are causing “tight money” ?

  7. Bala says:

    Talking of what constitutes a “growing economy”, I just can’t escape the feeling that the only economy that is really growing is that one that has increasing real gross savings. Any thoughts, anyone?

  8. K Sralla says:

    ” that increased desired purchases of goods is what we need to get increased production of goods.”

    You don’t mean that we need to somehow increase people’s desire to purchase consumer goods by printing gobs more money? Comon Nick, say it ain’t so. You know better than that. And you are so smart on sovereign debt!

    People’s desire to purchase consumer goods is virtually unlimited. They simply cannot afford to do so or they would already be doing so.

    They will only begin to spend more money on things they “want” when the market is first more productive in providing them the things they believe they *need* less expensively. For instance, when their heating bill goes down because more natural gas is being produced, then there is more money in their pocket to go buy that new fancy computer, which then helps the retailer, the manufactuer, and the producer of the raw materials. Folks also save more, and the banker lends more money to help fuel more production. So it is easy to see how increased productivity by the market of goods perceived to be most important to the consumer spurs more spending and investment on other things wanted, and this spurs real economic growth and the increase in wealth.

    Or perhaps we can just shortcut all of this by dropping money from helicoptors and satiating the demand for money, then folks will magically begin spending again??? Or perhaps the government can demand wage hikes or simply subsidize the enhanced production of goods nobody needs or wants so everyone has more money to spend???

    As Douglas North teaches us, nations which are getting wealthier have increasing productivity, and nations which are getting poorer have declining productivity, period. No nation has a deficit of desire to spend money on things they wish they could afford.

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