12 Feb 2014

The Fed and Conspiracies

Banking, Conspiracy, Federal Reserve, Rothbard, Steve Horwitz 173 Comments

One of the quickest ways to assess a person’s worldview is to ask, “How do you feel about conspiracy theories?” Murray Rothbard considered the very term to be loaded, used to discredit what were often sober and factual analyses of why certain government policies were actually implemented. In a recent post, Austrian economist Steve Horwitz takes the completely opposite tack, telling his readers that there is no need to invoke “conspiracy” when discussing the Federal Reserve. I think Horwitz’s argument falls flat, however; I still think there was a conspiracy behind the Fed, and that it’s not enough to merely discuss the technical problems of monetary policy and its “unintended consequences.”

For our purposes, I can summarize the strength and weakness of Horwitz’s post with this single paragraph:

Like other legislation of that era, the Fed was a government intervention supported both by ideologically-motivated and well-meaning reformers and by the industry being regulated. Rather than being this as some sort of unique conspiracy to take control of the US monetary system, it was a story very similar to those found in the history of everything from railroad regulation, to meatpacking regulation, to the regulation of monopolies and trusts as historians from Gabriel Kolko onward have documented. Unique historical factors in the monetary system affected the particular form the Fed took, but its broad history places it squarely in the tradition of the Progressive Era. If the Fed is the product of some nefarious conspiracy, so is a whole bunch of other legislation passed around that time. [Bold added.]

The last sentence–which I have put in bold–will not placate those who suspect skullduggery, and it shouldn’t. It is an odd strawman that Horwitz sets up in this paragraph; I don’t know of anyone who says the Fed is “some sort of unique conspiracy.” Indeed, the very thing that supposedly discredits the stereotypical conspiracy theorist is that he thinks “they” are behind everything, and sees connections and patterns between major events throughout history. So it would hardly put to bed the notion that a conspiracy is behind the creation of the Fed, to note that similar forces would describe the passage of the 16th Amendment, the Food and Drug Administration, and so on. I mean, if an elite group of international aristocrats wanted to run the world, sure they would want to control the money, but they’d also want to be able to seize upstarts’ incomes and to control the food supply.

But even taking Horwitz on his own terms, we can say no, there is something qualitatively more sinister about the Fed, even on purely structural grounds. The Federal Reserve is an organization that regulates the banking sector. And yet, the Federal Reserve banks are literally owned by the commercial banks they oversee, and key personnel decisions for the Fed are made by these same subjects of their regulation. This isn’t a conspiracy theory; you can read about it at the Fed’s own website.

To appreciate just how diabolical this arrangement is, imagine if two-thirds of the managers of various branch offices of the FDA were quite openly picked by the major agricultural and pharmaceutical companies, which literally owned shares of stock in the FDA. That would be analogous to the naked corruption of the Federal Reserve System. To point this out isn’t to excuse the way the FDA (or EPA, DHS, etc.) are set up, it’s just to underscore how incredible the Fed is.

Horwitz is right when he points out that the problem with the Fed isn’t that it’s “private,” and Horwitz is also correct that the Fed is a very odd type of “private” entity where the “owners” can’t keep their surplus earnings (the Fed remits its profits to the Treasury) or sell their shares. But nonetheless, something is qualitatively more corrupt about the Fed than the typical government agency, putting the Fed in a category by itself.

I can remember being disappointed many years ago when I first read Murray Rothbard’s slender volume, The Case Against the Fed. At the time, as a young scholar I had wanted an abstract, timeless critique of the very nature of central banking. Yet what Rothbard gave was mostly a specific historical account to show that in practice this particular central bank–the Federal Reserve of the United States–was indeed the product of insidious insiders, and not at all the accidental outcome of well-meaning college professors.

But now that I’m older (and wiser, I hope!), I see why Rothbard wrote his book the way he did. Different people respond to different types of arguments, and I think the “man on the street” cares very much about the types of details that Horwitz considers irrelevant. To give a personal anecdote, since 2008 I have been touring the country, giving dozens of talks to the public about the dangers of Ben Bernanke’s (and now Janet Yellen’s) policies. It’s true that people are horrified when I show them charts like this (the “monetary base” as displayed at the Fed’s own website):

But I have to say that the single most infuriating thing to most audiences is when I tell them that the Fed began paying commercial banks in the fall of 2008 to not make loans to people. Even though, in the grand scheme, this policy of “paying interest on excess reserves” is probably not that big of a deal, it infuriates people to hear it because it proves that Henry Paulson, Ben Bernanke, Timothy Geithner, and all the other suits on TV were lying through their teeth: The bailouts had nothing to do with “keeping credit flowing to Main Street.”

Yes, the objective consequences of monetary policy are the same, and the Austrian theory of the business cycle is correct, whether or not the people in charge are nice guys or villains.

But it still helps to remind people that they are villains, for the record.

173 Responses to “The Fed and Conspiracies”

  1. Robert A. McKeown says:

    Great article Bob. I was thinking about writing a response to Horowitz myself. What popped out in Horowitz ‘ paragraph was the notion that the Federal Reserve System was “well meaning”. The whole secretive Jekyll Island meeting and the deception behind the intent of the legislation screams conspiracy.

  2. andrew' says:

    Bankers don’t want all the money? They wouldn’t go where the money is? That’s an odd public choice theory.

  3. Bob says:

    “Who controls the food supply controls the people; who controls the energy can control whole continents; who controls the money controls the world.” Henry Kissinger ( Spokesperson and Member of Power Elite Brain Trust)

  4. Benjamin Cole says:

    Well, as Thomas Jefferson said, nothing is more dangerous to liberty and prosperity than a standing military or a central bank controlled by bankers. For some reason, my fellow right-wingers always dismiss the first sentiment (excepting Ron Paul) but often embrace the second (unless they are bankers).

    But is the Fed controlled by bankers? Or central bankers? Or does it cower before Congress? Or pay too much homage to inflation-hysterics?

    And setting aside Fed origins (the origins of even many excellent churches are probably best left unexamined), what is the right Fed policy now?

    My best guess now is that a Fed should target steady growth in nominal GDP.

    Measuring inflation has become more and more dubious; we may be in deflation now, as suggested by the George Mason crowd and their reviews of product improvements. I add on incredible improvements in the environment in the last 40 years. Los Angeles has gone from a smog-pit to pretty nice. How much is a clean breathe of air worth? (Is there is a right to clean air, btw?).

    There is still truth in the sentiment we need a banker of last resort, and a single currency for the nation. Private-sector insurance can fail, as seen by AIG. A central bank cannot fail. Why have other nations developed central banks? They all had similar conspiracies? Maybe so, but there is also logic behind the need for a central bank.

    We could have a gold standard, and banks could lend out gold, but that does not make lending risk-free.

    I also wonder who would lend in deflationary epochs, but deflation seems to natural result of a gold standard.

    The possibility for snowballing disintermediation is ever present with free banking. To steal a current pet-phrase, “there are unforeseeable, unintended and potentially catastrophic risks with going back to free banking and the gold standard.”

    I like less regulations and taxes, the less the better. But central banks may be a necessary evil. For now, we should concentrate on making the best central banks, and I think that means targeting of nominal GDP growth, or Market Monetarism.

    • Tel says:

      But is the Fed controlled by bankers? Or central bankers? Or does it cower before Congress? Or pay too much homage to inflation-hysterics?

      We will learn the answer as soon as (price) inflation in the USA picks up to the point that it can no longer be hidden from the people. Obama will keep asking for QE money in order to run deficits and Fed Chair Yellen will need to decide between inflation and government spending.

      She will choose in favour of government spending (that’s my prediction) but we will see who wears the shorts. Maybe she will toss Obama a knock back. Maybe, but not likely.

      • Benjamin Cole says:

        Tel-
        So far we are seeing declining inflation and maybe deflation (the George Mason boys say so). What inflation…with more disposable income and bigger populations we are seeing signs of prosperity in real estate—but is that inflation?
        Commodities have been dead for years…unit labor costs flat…and what about clean air? Worth a lot in my book…the Fed may be practising monetary asphyxiation…

        • Matt Tanous says:

          Right up until it stops that whole “paying banks not to loan money” bit….. then see the inflation numbers hit the roof. Excess reserves already got so high the Fed stopped tracking them….

          • skylien says:

            “Excess reserves already got so high the Fed stopped tracking them….”

            How can it stop tracking them if it is commited to pay interest on them?

          • Benjamin Cole says:

            Matt-

            Maybe so. But in other nations, the use of QE has not been associated with inflation—indeed Japan has had the opposite problem, of deflation.
            I have to say, a boost in lending by banks is not what keep me up at night. Some boom times would be nice.

            Would there be a huge surge in bank landing? Maybe so, but there has to be demand for the loans remember.
            And private-sector banks are supposed to have some sort of underwriting criteria (I concede that moral hazards have lessened).

            Worth pondering is whether the Fed is suffocating the economy now with money that is too tight. We see measured inflation falling,and very slow growth.

            • Tel says:

              Overall consumer prices rose 1.6 percent on year, with the cost of fresh food jumping 13.6 percent. Cabbages — a staple in the country’s diet — soared 91.7 percent. Electricity was up 8.2 percent.

              Incomes haven’t kept up with inflation, squeezing the spending power of households. Wages excluding bonuses and overtime fell 0.6 percent in November from a year earlier, an 18th straight drop.

              http://www.bloomberg.com/news/2014-01-30/japan-inflation-exceeds-estimates-as-abe-aims-to-end-deflation.html

              … and note what I said about how long it can remain hidden, the prices of the things you need (food and electricity) have all gone up a lot, but the prices of things you don’t need have gone down. There’s only so long people will be fooled by this.

              It’s just the classic Keynesian way of bringing wages down by stealth. They all admit that’s the plan, but they just don’t spell it out to the punters.

        • peter says:

          What’s so bad about deflation?

    • Major_Freedom says:

      The right Fed policy now is for the Fed to be abolished.

      No good reason to keep it. If you can pretend that the only answer is to keep it plus a different rate of money printing, then you’re no different from someone who says we should keep the NSA plus a different rate of spying, or keep the executive assassination program plus a different rate of assassination.

      It is unreasonable to want to keep a choice based institution by pretending there is no choice.

      Who would land when there is price deflation? By asking that question rhetorically shows that you don’t know the difference between prices and revenues/incomes. It still pays to lend in a context of price deflation. Prices rising is not the engine of lending and borrowing. What you are realizing by using the “inflation premium” interest rate models is that the model is flawed, not that people will stop lending if there is price deflation.

      If prices fall 5% per year say, and I have 100 and you want to borrow it, we could agree to an interest rate that makes us both better off. If I don’t lend it, I miss out on interest income. If you don’t borrow, then you or someone else misses out on present consumption. So it will be worth while for us to trade, even if prices will be 5% lower next year. What rate might we agree to? That depends on just how urgent I value future consumption and just how urgent you value present consumption. Just because the prices of electronics will be lower next year, it doesn’t mean you have absolutely zero incentive to buy and consume electronics now. If you want to buy electronics now, then there is an opportunity for someone else who is willing to wait, to lend to you.

      Central banking is not a necessary evil. You line of thought is flawed. Correct it, and you will understand that if you’re for less regulation, central banking is not untouchable.

    • Ben B says:

      If central planners can’t determine the “right supply” of bread chairs, electronics, etc, then what makes you think they can determine the “right supply” of money?

      • Benjamin Cole says:

        Ben B-

        From one Ben to another, I think central banks have struggled with this very question. Market Monetarists say the central bank should shoot for steady growth in nominal GDP, and I think that is right.

        I am not sure in free banking we get a perfect money supply either, and indeed we may see epochs in which the effective monitor supply radically contracts due to scare-disintermediations.

        My big view is that the money supply is important, but good enough is good enough. That is, we want to expand the money supply enough to promote growth Some inflation is okay.

        The worst thing is being too tight. and the second-worst thing is too loose.

        But remember, in real terms, real per capita incomes rose by one-third in the 1960s. I will take a decade like that over and over again, and if if requires 5 percent inflation, then so be it.

        • Ben B says:

          “we want to expand the money supply enough to promote growth.”

          If you want to promote growth, why don’t you try to convince people to lower their time preferences? That way they can spend their incomes on more investment.

          And what if people don’t want growth? What if they prefer present consumption much more than future consumption? Why would growth be good if people don’t want economic growth?

          • Benjamin Cole says:

            People who not want growth can migrate to Venezuela or Cuba.

            • Ben B says:

              Migrate or be deported?

              Why would someone who doesn’t want growth move to Venezuela or Cuba? Not wanting growth is not the same as wanting to have your property confiscated to the point where you can’t even make the decision to grow or not. I think what you mean is “People who not want property can migrate to Venezuela or Cuba.”

              BTW, did you purposely write the above statement so that it should read as if it were being said in broken English by a Cuban or Venezuelan?

        • Major_Freedom@hotmail.com says:

          If central planners can’t determine the “right supply” of bread chairs, electronics, etc, then what makes you think they can determine the “right supply” of money as a fixed rate of growth in NGDP?

          You think it’s “right”? Based on what?

  5. Tel says:

    There’s this conspiracy theory going around that Al Capone was a gangster… pffft people will believe anything.

    I can remember being disappointed many years ago when I first read Murray Rothbard’s slender volume, The Case Against the Fed. At the time, as a young scholar I had wanted an abstract, timeless critique of the very nature of central banking. Yet what Rothbard gave was mostly a specific historical account to show that in practice this particular central bank–the Federal Reserve of the United States–was indeed the product of insidious insiders, and not at all the accidental outcome of well-meaning college professors.

    I must admit I read that book and just thought, “Does what it says on the box.”

    What I find disturbingly fascinating is that John Quiggin (who obviously never read Rothbard, but felt the need to have an opinion) criticized Rothbard along somewhat similar lines, i.e. failing to deliver an abstract, timeless critique of the very nature of central banking. This would seem perfectly normal to me, if you hadn’t come up with a shockingly similar criticism, suggesting some common false advertising perhaps? At any rate, you had time to contemplate and study and make sense of the situation, hopefully others can emulate that.

    Different people respond to different types of arguments, and I think the “man on the street” cares very much about the types of details that Horwitz considers irrelevant.

    I think we all should. Details are important, the world is complex and Economics as a science is far from having a “general theory” despite what some blood suckers would pretend.

  6. Daniel Kuehn says:

    “Even though, in the grand scheme, this policy of “paying interest on excess reserves” is probably not that big of a deal, it infuriates people to hear it because it proves that Henry Paulson, Ben Bernanke, Timothy Geithner, and all the other suits on TV were lying through their teeth: The bailouts had nothing to do with “keeping credit flowing to Main Street.””

    Should the bold read “because I allowed them to think it proves”? I don’t like paying IOR right now but I don’t see how it proves that.

    • Daniel Kuehn says:

      The bailout/credit to Main Street thing is of course a more indirect link. It helps to keep credit flowing to Main Street insofar as it keeps the banking industry from collapsing.

      • Major_Freedom says:

        Not true. Paying banks not to lend inflation of reserves, prevents the bank from collapsing yes, but that does not necessarily imply better lending to borrowers, nor even more lending to borrowers.

        Bad banks should go bankrupt. Bad managers should be replaced with better managers. Rescuing bad banks results in Japanese style stagnation.

      • Major_Freedom says:

        Banks going bankrupt leads to new management, not necessarily bulldozers taking down the bank buildings.

  7. Daniel Kuehn says:

    One criticism of conspiracy theories I always hate is “the government would never be able to keep a secret like that”. It makes no sense. You are evaluating whether the government could keep a secret “like that” based on all the secrets you know the government has not been able to keep, which of course is a highly selected sample.

    Since nobody has ever observed the secrets that have been successfully kept, how could anyone possibly know the relative difficulty of keeping secrets by the government?

    • Scott H. says:

      Well, it does seem logical to conclude that the difficulty of keeping a secret increases as you increase the number of people in on the secret. It also seems logical to conclude that the difficulty of keeping a secret increases with the maliciousness of the secret. I think that morally it’s easier to keep secrets from Nazis about when you plan to bomb them than to keep secret the oligarchy’s plans to enslave mankind. Even then, you don’t have to keep the Nazi bombing secret for forever.

      Secrets “like that” tend to have an large number of collaborators and a definite sinister motive. There are probably even more reasons those types of secrets are very hard to keep.

      • Daniel Kuehn says:

        I have absolutely no doubt whatsoever that difficulty in keeping a secret is increasing in the number of people in on the secret. I hope nobody misconstrues my comment to be a doubt about that. Yes.

        This doesn’t really get us anywhere tangible of course. But it does give us a way to rank plausibility of conspiracy theories (at least on this facet of the question).

        • Ken B says:

          Huh? Of course I construe it like that.
          ” how could anyone possibly know the relative difficulty of keeping secrets by the government?”
          How else can I construe it?
          “Ken B you can’t claim it’s implausible that every government employee is issued with lizard anti-venom in preparation for unleashing the giant gila monsters on the populace, because damn it you don’t know how many secret lizard conspiracies they’ve hidden already.”

          • Daniel Kuehn says:

            What percentage of secrets is government able to keep indefinitely, and how do you estimate it?

            Saying difficulty increases with the number of people involved does not pin down a rate of difficulty at all.

            To say it like an economist, knowing that production functions are likely characterized by diminishing returns does not tell you what the production function is.

            We could have a dozen major, earth shattering conspiracies kept secret by the government or we could have zero. Nothing we observe can arbitrate between those two. Your sense of how well the government can keep secrets is informed by data on things you know, not data on things you don’t know and by definition a successfully kept secret is something you don’t know.

            • Ken B says:

              And the war on Bayes’s Theorem continues. They’ll make an Austrian of you yet!

              Let the number of conspirators be n, the population of the country be N.
              We know the probability of a leak will be approximately linear in n for n << N. Probably, due to increasing variety of viewpoints of conscripted conspirators, it will grow fater than n. But let's just take low level disease transmission as a model.
              So we can say, to a first approximation. that a conspiracy with 100K participants is 10,000 to 1,000,000 more likely to leak than one with two conspirators.
              You just threw that out the window.

              • Daniel Kuehn says:

                I see. Then I take back the word “relatively”. That was indeed sloppy language. But you really can’t know the difficulty of it.

                Keep in mind my comment immediately below too. Sometimes a leak isn’t a leak.

                Let’s say someone working for the NSA comes on Glen Beck’s show tomorrow and leaks to him that FEMA is really building concentration camps to hold U.S. citizens. I want to be clear that I’m not saying that a person goes on Glen Beck and claims that – I’m saying that an actual NSA employee that is actually telling the truth about a secret government internment camp program comes on and says this. You don’t know whether he’s for real or not as a viewer, of course. Thought experiments that depart too far from reality aren’t very useful after all.

                What would you think and what would you do if you saw that?

                For that matter, what would the NSA think and do if they saw their employee do that?

              • Daniel Kuehn says:

                What I’m getting at with the second question is that I don’t think it is unrelated to the answer to the first question.

              • Ken B says:

                Are you asking, do I carry around my laptop and rigorously update all my priors on all issues? No I do not.
                Do I intuitively estimate P(whack job) vs P(entire state of Utah fenced in and no-one noticed)? Yes I do.
                Are you asking, do I think govt personnel like filing clerks are so much better at keeping secrets than private sector price fixers at ADM that I should credit every conspiracy charge against them? No I do not.

                You seem to be asking whaT i would think *without any relevant evidence* other than the charge when I think *the evidence would be hard to hide*.

                [Apologies to Bob for using the "e" word on his blog. ]

              • Daniel Kuehn says:

                I’m just asking what you would think and do – nothing more complicated than that.

                I would assume he’s a whacko. I could probably have a dozen such NSA agents parade past me leaking information and I would probably assume they’re all whackos.

                I’m just pointing out that evaluating this stuff is tougher than a lot of people suggest. People say there is no evidence for aliens, but thousands of people report contact of various sorts.

                What do I usually think when I hear about that? Whacko. But I’m making that assessment off of very low levels of information. On average my “whacko” assessment serves me well, but it can serve us very poorly when it comes to actually making use of leaked information, particularly for a phenomenon where there’s a lot of pre-existing noise to deal with.

                As I said below, the point is not “believe every conspiracy theory you hear”.

                The point is, you should respond to conspiracy theories by saying “I have no reason to think that” rather than by saying “I have good reason to think that’s wrong”. Because the fact is in most cases you don’t.

              • Daniel Kuehn says:

                There’s probably a fourth, fifth, sixth, etc. but I’ll stop there.

              • Ken B says:

                Let’s rewind a bit Daniel.

                ‘One of the quickest ways to assess a person’s worldview is to ask, “How do you feel about conspiracy theories?”’

                Here’s the reactions I see.

                Ken B, Blackadder, Tony N: “Ya got evidence?”

                Bob Murphy: “I *knew* it!!”

                Daniel Kuehn: “Bob has a point. But evidence is good too.”

              • Daniel Kuehn says:

                I don’t recall writing that or even responding to that statement of Bob’s for example.

                Should I do a word search or can you save me the trouble by assuring me you completely fabricated that?

              • Ken B says:

                The word of the day is paraphrastic. Use the word in a sentence: “Ken B is a paraphrastic sod isn’t he?”
                http://consultingbyrpm.com/blog/2014/02/the-fed-and-conspiracies.html#comment-244262

              • Daniel Kuehn says:

                So that’s a great example of a comment that would NOT be well paraphrased by what you wrote.

                Is that all we’ve got?

            • Tony N says:

              I have no idea what happens when a weight lifter tries to lift Jupiter. I’ve seen him lift all kinds of weight here on Earth, and I’ve seen him struggle more and more as the weight increases. I’ve even seen him fail to lift objects considerably lighter than Jupiter. But I don’t know how he would handle lifting Jupiter so I can’t rule out the possibility that he can. I should probably be careful in merely speculating that he can’t.

              • Ken B says:

                “By Jove I think she’s got it!”

              • Daniel Kuehn says:

                That seems like a dumb analogy.

                For one thing we have all the information we need and knowledge of the physical laws we need to infer. In the case of conspiracy theories we MIGHT have all the social science we need (maybe not, but I’ll give you that for the sake of argument), but we do not have all the information we need to apply those laws.

                Governments do nefarious things. People keep secrets. Governments have substantial resources at their disposal to both do nefarious things and keep them hidden. Singular events are really hard to fit probability distributions to.

                That’s all I’m saying.

              • Daniel Kuehn says:

                The point is not “believe every conspiracy theory you hear”.

                The point is, you should respond to conspiracy theories by saying “I have no reason to think that” rather than by saying “I have good reason to think that’s wrong”. Because the fact is in most cases you don’t.

              • Ken B says:

                Actually what you shouldn’t do is what Bob and the claque does, which is to see the accusation as additional evidence that the government, while maybe not doing what is alleged, is surely up to *something*. And you do see that, pretty explicitly here.

                And of course you’re wrong about most of the conspiracies. rare it is we don’t have some relevant evidence, as Tony N suggests. We know Kristen Meghan was wrong about contrails and their properties. We know that there are lots of reasons why a clerk might not know everything about every shipment. If the accusation isn’t just a random sequence of words, in which case your judgment stands, we can evaluate the balnce, judgment, and motives of an accuser. We can know that if all the conspiracies were true the govt would not have time to do them all (much less create that spiffy Obamacare website). There’s usually a lot of evidence Daniel.

              • Daniel Kuehn says:

                So I’m a little lost because I agree with most of that.

                First, the claim is not that all conspiracy theories are true. Probably all aren’t true. Maybe one or two are.

                Second (and this is my fault for not clarifying) conspiracy theories are baroque things. I am not saying every detail is going to be true. Every detail is even LESS likely to be true. Take Sitchin and ancient astronauts. He’s got a lot of crazy stuff about aliens coming here to mine gold – something for their atmosphere, etc. It’s not just historical evidence that we have against him, it’s chemical understanding of what he was proposing they used gold for, etc. too. That’s rubbish. But ancient alien visitation? Plausible. Not probable. But plausible. And no real way to say either way. So when I talk about the possibility of these conspiracy theories I am not talking about all the bells and whistles the true believers attach.

                Third, on the whole contrails thing – sure, I’m not saying we never have good evidence. That is a particularly debunkable one because the claim is that you can look up in the sky and see it. Anyone can. We do have more evidence on stuff like that. But somebody else shooting Kennedy? A spaceship crash in a remote desert area whisked off to a base somewhere. These things may not be probably but it’s much more difficult to say we have the sort of proof against them that we have against contrails, 9-11 truthers, Fed conspiracy theorists, faked moon landing, face on Mars, etc. types of people.

                Again, I can’t reiterate enough – the point is not to validate them, the point is to be careful in our articulation of exactly why we doubt them.

              • Tony N says:

                Daniel Kuehn would crush Karl Popper with an iron fist of obstinacy.

      • Daniel Kuehn says:

        Actually I want to temper my response a little. I generally agree with you, but it’s probably not strictly necessary. If you can convince people that an conspiracy theory is goofy or insane, then leaks won’t necessarily have the effect you describe. They will just be dismissed as one more crazy person. And as the “crazy” people rack up while the secret itself is still kept in a warehouse or underground somewhere, people start to feel like the original theory that the leaks were just crazy people is confirmed.

  8. Matt Tanous says:

    “Even though, in the grand scheme, this policy of “paying interest on excess reserves” is probably not that big of a deal”

    It’s not? Because to me it seems like a bottleneck. It causes the monetary growth to be primarily in the monetary base, leading to – once the excess reserves don’t earn interest anymore – a huge and rapid increase in the money supply causing drastic inflation.

    As I see it, either the Fed pays that interest forever, and we have the attendant problems from that, or it stops and the dollar is kaput.

  9. Bill Woolsey says:

    The Fed replaced a status quo of bank-owned private clearinghouses that illegally issued currency in financial emergencies.

    The plan that the large bankers developed to legalize existing practice and obtain the benefits of a Bank of England style central bank was not what was instituted. The actual institution was dominated by the government.

    I think the best interpretation of the private elements of the Fed was a fraud–against small bankers to try to convince them that this government-dominated institution was a sound private institution like the clearinghouses it replaced.

    At the time, there was worry that most banks would refuse to participate. While all national banks were compelled to join, it was easy for banks to shift from a national to state charter. If the banks refused to participate, the Fed would have no members (or too few.)

    The plan the banker/lobbyists developed would have been more private and more centralized. More like the Bank of England of the day.

    The Fed was not set up to regulate banks. It was set up to serve as lender of last resort in financial panics. It was supposed to issue gold redeemable currency and lend it to banks against real bills. Again, it was replacing what bank-owned clearinghouses were already doing on an emergency basis.

    Free bankers argue that what should have happened instead is permitting nationwide branch banking, allowing banks to issue their own currency against the same assets as deposits, and an option clause for suspension, all while keeping private clearinghouses.

    The small bankers were dead set against the first reform. Having regional Feds appealed to them more than competing with branches of Wall Street based mega banks.

  10. Bob Roddis says:

    I’ve said that DK’s paper on the 1920 depression was “consistent with the Rothbardian narrative that the Fed was created by the elite for the elite and to allow them to fund wars without real time taxation of the public”.

    DK agreed.

    http://factsandotherstubbornthings.blogspot.com/2013/01/poor-kid-was-just-couple-years-too.html?showComment=1359027254446#c4705199555426053009

    • Daniel Kuehn says:

      You should not have quotes around that and then link to my agreement because what you actually said and I agreed to is not that statement at all.

      • Bob Roddis says:

        Then clarify.

        • Daniel Kuehn says:

          Given your reproduction of the exchange I assume there is no further need to, right?

          • Ken B says:

            Daniel, Just because Roddis has kept his deep understanding secret over thousands of comments, hundreds of posts, dozens of blogs, for year is no grounds for doubting it exists. You don’t know how many good thoughts Roddis has successfully kept secret all this time.

          • Ken B says:

            Tsk, tsk. “Know your audience.”

      • Bob Roddis says:

        This is the exchange at issue:

        Bob RoddisJanuary 23, 2013 at 9:33 AM
        Kuehn’s paper is consistent with the Rothbardian narrative that the Fed was created by the elite for the elite and to allow them to fund wars without real time taxation of the public. Further, Kuehn demonstrates that the problems of 1920 were caused when the government changed gears after the war in attempting to unwind its massive wartime interference in the market. Those problems of price distortion were repaired fairly quickly without significant government interference by the market actors themselves.

        The lesson to be learned from the event was that, as always, the market does not and did not fail and that these types of problems are always caused by government interference in the market. Further, these government inflicted problems must be and can be repaired fairly quickly by market actors. The statists that infest the educational system and media do not even want to think about such an analysis and that is why it is rarely publicized.

        noiselullJanuary 23, 2013 at 10:12 PM
        Roddis, you need to learn basic comprehension skills and logical reasoning. You don’t understand Kuehn’s paper, and even if your interpretation was correct, it would by no means prove that “the market does not and did not fail and that these types of problems are always caused by government interference in the market.”
        *
        Bob RoddisJanuary 23, 2013 at 10:23 PM
        I understand the paper completely. He’s trying to show that what happened in 1920 was consistent with the Keynesian creed so that one cannot say that Keynesianism was disproved by the event and reaction thereto. Nevertheless, he blames the 1920 depression on the government changing gears from its wartime interventions. That’s not market failure. Absent proof that the market fails, Keynesianism makes no sense as a cure for something that does not exist.
        *
        Bob RoddisJanuary 23, 2013 at 10:32 PM
        noiselull:

        You must have a problem with basic compehension skills. I wrote:

        1. Kuehn’s paper is consistent with the Rothbardian narrative;

        2. Kuehn demonstrates that the problems of 1920 were caused when the government changed gears after the war in attempting to unwind its massive wartime interference in the market; and

        3. THE LESSON TO BE LEARNED FROM THE EVENT was that [not "Kuehn's paper shows that"], as always, the market does not and did not fail and that these types of problems are always caused by government interference in the market.
        *
        Daniel KuehnJanuary 24, 2013 at 6:34 AM
        For what it’s worth (hopefully worth something!) I agree with Roddis’s #1, somewhat agree with #2 (government was not the only cause, and the governmental cause I cite is far more Friedman and Keynes than it is Rothbard!), and I strongly disagree with his #3.

        • Lord Keynes says:

          No, Roddis, (3) is a ridiculous non sequitur:

          “3. THE LESSON TO BE LEARNED FROM THE EVENT was that [not "Kuehn's paper shows that"], as always, the market does not and did not fail and that these types of problems are always caused by government interference in the market.”

          (3) does not follow from (1) or (2).

          And Daniel’s agreement/partial agreement with (1) and (2) does not support your bizarre claim that DK agrees that the “Fed was created by the elite for the elite and to allow them to fund wars without real time taxation of the public”.

          Lack of basic skills in logic is a perennial problem you suffer from.

          • Bob Roddis says:

            The continuous attribution of the problems caused by prior violent interventions to “market failure” and/or “capitalism” is strong evidence of avoidance of the truth by statists.

            • Ken B says:

              No-one listens to Bob on this. It’s a conspiracy I tell ya.

  11. RPLong says:

    Bob, what do you make of that whole “nominal tomato” fiasco at The Money Illusion?
    http://www.themoneyillusion.com/?p=5893

    If the commenters – who are widely believed to have bested Sumner in this discussion – are correct, then that calls into question the idea that paying interest on reserves is the same thing as paying banks not to make loans.

    I can’t make the case as well as they did. If you haven’t read it, give it a quick read. They are basically making the case that – in the real world – banks don’t lend out reserves, they just lend out whatever amount of money will net them a good return and let the Fed make up the difference overnight.

    Seems surprising at first, but then it makes sense. Or else they have really suckered me with their prose.

    The home-run comment is this one:

    Banks, at system level, do not lend out reserves. They simply do not. Therefore, quantity of reserves do not impact whether banks make loans or not. OIR has no impact on bank lending.

    I have shown very clearly how, in case of simple car loan, reserve is debited at one bank and credited at another bank by exact same amount. This blows great smoking hole in “banks lend reserve” at system level. It leaves entire Sumner position as smoldering wreck. It is not first time this has been pointed out to Sumner, and he is lost cause for obvious reason, but you as commenter maybe interested in learning something new should be able to smell the stinky fish.

    …I mean hecks. Enough people develop appetite for Scott Sumner vault cash with ketchup, and walk out with suitcase of money from deposit account, system could hit reserve constraint (and not there has been no lending). Ben Bernanke says “oh no, do I do my job or let system blow up?! People want to eat dollar bill with ketchup! Let me call Scott Sumner so he can tell me whether I should act normal or destroy interbank market, and with it, banking system”.

    Scott sumner will write post on nominal tomato.

    Brilliant.

    http://www.themoneyillusion.com/?p=5893#comment-23092

    • skylien says:

      “I can’t make the case as well as they did. If you haven’t read it, give it a quick read. They are basically making the case that – in the real world – banks don’t lend out reserves, they just lend out whatever amount of money will net them a good return and let the Fed make up the difference overnight.”

      It is true that banks are not bound by reserves per se but they are capital constraint. To already have reserves means your costs of making a loan is lower than not having them on hand and you need to borrow them overnight. Hence paying IOER increases costs for banks to lend and therefore is an incentive not to lend…

      I mean how hard can it be. Imagine the Fed paid 1000% on excess reserves. What would happen? Banks would liquidate as many loans to customers as possible to max out their excess reserves..

      • RPLong says:

        If I understand zanon’s reasoning, I think you’d have to pay something like 1000% on reserves to induce this behavior, otherwise banks can make more money by just issuing the loan and borrowing the shortfall from the Fed.

        I’m not a banking insider, so I can’t really say. Interesting nonetheless.

        • skylien says:

          Banks never ever want to borrow from the Fed directly. That is a nono because it would indicate to others that no one else in the private market is willing to lend money to that bank for a reasonable rate. It is a stigma. That is because the overnight rate is lower than the Fed’s discount rate at which the Fed would lend to you directly. (I guess the discount rate is 0.75% currently compared to 0-0.25% for the overnight rate).

          They either want in such a case to sell their crap assets to the Fed getting new reserves this way or borrowing them from other banks.

          0.25% isn’t much but the same principle works as with 1000%. BTW the overnight rate only is between 0 and 0.25 because the Fed pays 0.25% IOER. If it wouldn’t do that then it would be at 0 flat.

          • skylien says:

            I want to add that this overnight rate of 0-0.25% is the interest that the banks charge each other for reserves in case a bank needs it. The Fed tries to target this rate by increasing or decreasing the amount of reserve money in the system. Hence having excess reserves means this rate is at 0 except the Fed pays IOER.

          • RPLong says:

            Okay, you got me there re: who banks borrow money from. Like I said, i don’t know a lot about it.

            But you don’t appear to have addressed zanon’s point, which is what I was really getting at. I mean, everything you’re saying was already thoroughly discussed at The Money Illusion. Ultimately, I feel that zanon won that debate, at least until I read something new that would lead me to believe that some of what he said was wrong.

            Which of his claims do you think was wrong?

            • skylien says:

              I thought that “0.25% isn’t much but the same principle works as with 1000%.” made it clear.

              0.25% riskless income are (opportunity) costs for the bank who wants instead to use it for a loan with risks. The higher the IOER the higher the opportunity costs to make a loan with risk involved. A bank cannot use 1 reserve dollar both ways at the same time, at least the Fed doesn’t allow it. It can’t have it as actual reserve and at the same time as excess reserve.

              Zanon’s kicker argument is that the Fed can always supply more reserve money to keep overnight rates from rising (expand credit). Yes of course, but as soon as you have excess reserves and interest payments on them, this mechanism is broken and it creates just more reserve dollars, each able to earn risk free 0.25% as well. The incentive to make a loan instead to a given customers doesn’t change because of even more reserves with the same opportunity costs.

              That is how I see it. Tell me where you think I am wrong.

              • RPLong says:

                I am not sure I understand. i will have to think about it.

              • RPLong says:

                Wait, i think I get it.

                A bank cannot use 1 reserve dollar both ways at the same time, at least the Fed doesn’t allow it.

                Lending out reserves is precisely what zanon argues doesn’t happen.

                Say I pay 3% on a car loan and the overnight rate is 0.25%. Yes, there is “risk” attached to my car loan, but that is still a good spread for the bank. I don’t see how the bank would ever be constrained in that kind of environment. The overnight rate would have to increase high enough to make the spread uninteresting. Maybe that’s possible, but I don’t see how that scenario is relevant to current real-world circumstances.

                Or maybe I just don’t get anything at all.

              • skylien says:

                Right they don’t loan reserves (which is true to the extent that customers don’t take it in cash and keep it out of the banking system) but they have to allocate their total amount of reserves to actual reserves or excess reserves held at their bank account with the Fed.

                And of course if the spread is good enough, the bank will make the loan, no matter how much excess reserves they have, or even if they have none at all (because they can borrow the reserves overnight). But what matters is the IEOR. If the IEOR changes (and with it the overnight lending rate changes at which banks are willing to lend reserves to each other) then the spread might not be good enough anymore. Maybe an increase to 0.75% IEOR was enough do discourage the bank to make the car loan for 3%. Vice versa a decrease of the IEOR to 0 might induce the bank to give a car loan for even 2.5%..

                If you agree that 1000% would do that then 0.25% must have the same, albeit respectively smaller, effect.

              • RPLong says:

                I see your point, but I see the underwriting/credit-worthiness decision as the binding constraint, not the IOER. I am probably wrong.

              • Jason Quintana says:

                Just as a side note to this discussion. I think the Fed actually plans to do something a little bit different than simply paying high interest rates on excess reserves.

                http://online.wsj.com/news/articles/SB10001424052702303330204579250582491040034

                “”The Federal Reserve has never tightened monetary policy, or even tried to maintain short-term interest rates significantly above zero, with such abundant amounts of liquidity in the financial system,” according to a draft of a new research paper by Brian Sack, the former head of the New York Fed’s markets group, and Joseph Gagnon, an economist at the Peterson Institute for International Economics and a former Fed economist.

                Short-term rates—which serve as a benchmark for long-term rates for mortgages, car loans and other borrowing—are now near zero and the Fed doesn’t plan to raise them for a couple of years. In normal times, the Fed cuts short-term rates to spur growth and raises them when it wants to slow growth.

                When it does want to raise rates, the Fed under the repo program would use securities it accumulated through its bond-buying programs as collateral for loans from money-market mutual funds, banks, securities dealers, government-sponsored enterprises and others.

                The rates it sets on these loans, in theory, could become a new benchmark for global credit markets.”

                ………..

                “The idea for the repo program bubbled up from the New York Fed’s market group in part because another tool wasn’t working well. Officials had seen a program known inside the Fed as IOER, for “interest on excess reserves,” as the main avenue for managing short-term rates amid the flood of money in the system. Under this program, the Fed pays banks 0.25% for cash they keep at the central bank. In theory, when the Fed wants to raise short-term rates, it would raise this interest rate. Rather than lend out money, banks should want to keep it with the Fed.

                In reality, the IOER program hasn’t worked well, in part because some big market players including Fannie Mae and Freddie Mac can’t participate. The fed funds rate has hovered well below the Fed’s 0.25% floor for years. That isn’t a problem now because the Fed wants to hold rates very low, but it raises concerns that the central bank won’t have tight control of rates when the time comes to raise them.

                The reverse-repo program extends the Fed’s reach beyond traditional banks to Fannie, Freddie and others, and in theory should give the central bank more control over interest rates. Mr. Sack and Mr. Gagnon say the Fed should use the IOER program in conjunction with the reverse-repo program to set rates.”

  12. Wonks Anonymous says:

    “is probably not that big of a deal”
    Scott Sumner would disagree.

  13. Blackadder says:

    One of the quickest ways to assess a person’s worldview is to ask, “How do you feel about conspiracy theories?”

    I don’t think I’ve ever agreed more strongly with a sentence Bob has written than I do with this sentence. Unfortunately, he seems to draw the wrong conclusions from it.

    • Ken B says:

      +1

      But keep this a secret; I don’t want to be earmarked for the black helicopters.

      • Gamble says:

        But Ken they did fly black helicopters, so much so it drove some Oklahoma residents crazy. The backlash is why we now have invisible surveillance…

  14. Gamble says:

    Go watch the new Lego movie. It has all the answers to all the conspiracies. :)

    Surprised nobody from libertarian circles has not produced a critique of that movie. I think it is stronger and more relevant than Hunger Games. Kicks fascism ( President Business is the villain)square in the teeth. Clearly advocates horizontal voluntary cooperation and chastises top down, heavy handed hierarchy. The dual nature of sale-out cops is , well, priceless… Check it out and tell me what you think.

    • Matt M (Dude Where's My Freedom) says:

      Jeffrey Tucker has been talking about it quite a bit on Facebook. I wouldn’t be surprised if he has a piece on it out there somewhere (or possibly in the works).

      • Gamble says:

        Hi Matt,

        You motivate dme to search Tucker Lego. I came up with some stuff, but dated. Tucker did promote the following video but it is not the same as the movie in theaters now. IT was a good movie for my kid and I was joking about the depth/plot but it does touch upon many issues of hierarchy, society , etc. IT may come off as anti-business, therefore leftist, but I did not see it this way. I think it was only critical of business that was merged with government, ultimately totalitarian in nature. Who knows, I am curious to see what others think. Not mainstream others, but others from this blog, etc.

        Here is the 15 minute story of Lego that Tucker advocates.
        http://www.youtube.com/watch?v=NdDU_BBJW9Y&feature=player_embedded

  15. Andrew_FL says:

    Is the invisible hand a conspiracy theory?

    • Blackadder says:

      Is the invisible hand a conspiracy theory?

      No, the opposite.

      • Ken B says:

        Exactly. That’s what makes Bob’s conspiracism so interesting. It’s usually based on cui bono and apparently purposive actions. But both are slender reeds. Is Paris fed by a giant conspiracy?

        The reference to Schelling is apposite. In one of the books I read he gives several very interesting conspiracy-free examples of things like how seats fill up, and other planned looking behaviour.

        • Tel says:

          The meaning of conspiracy is that a group of people commit a crime and keep it secret.

          If they aren’t committing a crime, or they aren’t bothering to keep it secret then there is no conspiracy by definition.

          • Ken B says:

            No, that’s the common law definition. Illegality is not required for the common use of the term. Journolist was a conspiracy. Faking the protocols of the elders of zion was a conspiracy.

            • Tel says:

              Many people in common usage substitute their own judgement on immorality for what they think should be illegal. I think that’s quite a reasonable thing to do, given that the exact definition of legality has now reached the point where it is literally impossible to determine.

              Thus, a group of people committing theft in secret would very clearly be a conspiracy. Even though there are surprisingly often situations where theft turns out to be legal.

              A group of people who organize amongst themselves to meet at the park and eat lunch together would not on the face of it be a conspiracy, even though there is a small but realistic chance that a sufficiently diligent city ranger could find something they did that was illegal (sharing their lunch with a homeless person for example).

              A group of people systematically taking away people’s savings and devaluing their wages , all the while telling them not only that inflation is not happening but also that this is all for their own good and will make everyone better off, is arguably immoral depending on where you stand. It might be considered that deliberately misleading people is quite similar to secretly committing a crime.

              • Gamble says:

                Tell, both the Bible and the State forbids theft.

                Therefore you described the ultimate conspiracies,

                “A group of people systematically taking away people’s savings and devaluing their wages , all the while telling them not only that inflation is not happening but also that this is all for their own good and will make everyone better off, is arguably immoral depending on where you stand. It might be considered that deliberately misleading people is quite similar to secretly committing a crime.”

      • Andrew_FL says:

        I was a rhetorical question.

  16. Gamble says:

    Was it somebody here talking about hidden inflation? They were saying how much water is in meat these days. I sort of shrugged it off but for about a month I have been paying attention. Seriously, meat is about 15-35% water these days. I know they say 5% solution but weigh before and after, you will see.

    Everything is shrinking and being substituted with lower quality. I just tried on all my old suits, none of them fit( good thing). So I went and bought a new department store suit. They are paper thin and also cost 25 bucks more.

    If you think CPI and GDP( most of GDP is government activity) have any meaning and any worth,what so ever, sorry to say this but you really are a brainless moron.

    • Andrew_FL says:

      40% is way too much, but it’s not “most.”

      But yeah, the GDP is highly misleading as an indicator of growth lately. My advice to anyone looking at it would be, at the very least, subtract the government spending first. You do that, and the situation looks pretty bad.

      • Gamble says:

        Thanks for keeping me honest.

  17. joe says:

    If you are “horrified” when seeing a chart like that, it’s probably because you slept through 8th grade math.

    Data spread out over 100 years needs a log scale.

    http://research.stlouisfed.org/fred2/graph/?g=s5E

    Monetary base is growing as fast as it did after FDR took the country off the gold standard. Don’t recall the economy collapsing or hyperinflation taking place. The periods of high inflation (post WW I and 70s) saw the monetary base grow much slower than what we are seeing now.

    • RPLong says:

      C’mon, joe, even by your graph the increase over the most recent recession is unparalleled.

      • Daniel Kuehn says:

        “Unparalleled” is a strong word for what is just a discontinuous jump. I’m not saying it’s literally wrong, but as you said to joe – “c’mon”.

        • Ken B says:

          Are you MF kidding? And I do not mean Major Freedom. I mean that after the big jump the slope, in a log scale!, is a lot steeper.

          • Daniel Kuehn says:

            Yes, it is. “Unparalleled” is still a little excessive given what we all know about the macro environment during the times that it grows faster and the times that it grows slower.

            Not literally wrong like I said (I can find no other jump like that), but c’mon.

            We are hyping monetary policy reaction functions here.

            That’s stupid.

            • Daniel Kuehn says:

              You may say you don’t like a given reaction function but it’s not like some kind of extreme event has transpired given the context that we all know.

            • Ken B says:

              No, I’m “hyping” the idea that making it look better by using a log scale means it is better. Lets use log base 1000 and see how flat it looks. That was joe’s dodge, RPL called him on it, kinda.

              • Daniel Kuehn says:

                Wait wait back up. What would the point of log base 1000 be?

                You realize the choice of natural log wasn’t just random, right? That there’s a reason why we give that one a special name?

              • Daniel Kuehn says:

                It was not a dodge. There was nothing to be called out on.

              • Ken B says:

                Would it LOOK flatter with a higher base?

                Does ALL long period data need a log graph? (Its not log log I note.) which is his claim.

              • Daniel Kuehn says:

                If you want to comment on growth in a series you should log it.

                If you’re interested in growth of the growth, by all means log the log.

                We are, I think, discussing the growth of the monetary base under Bernanke are we not?

                Do you give a damn about levels? I don’t think we do since not a single person has referenced levels and nobody typically cares about levels in this sort of thing (Hume and all that).

                So what is the problem?

              • Ken B says:

                The log graph shows the requisite indication of growth I believe. And the jump.
                Joe’s claim was NOT oh you should log it, and the you see the effect more clearly. It was you should log it and the the effect looks so much smaller, fret not. Then Ryan observed the effect was still pretty clear in the log graph. And it is, if you can read a log graph. And it’s still clear even if you can’t!
                Frankly I don’t know if Ryan can or if he just noticed it despite the flattening.

              • Daniel Kuehn says:

                Am I going crazy or something? He didn’t once say that it looked smaller much less that he was doing it because it looks smaller.

                He did point out that you could compare growth rates after you log it.

                Where are you getting this “he did it because it looks smaller” stuff???

              • Ken B says:

                “If you are “horrified” when seeing a chart like that, it’s probably because you slept through 8th grade math. [use log].”

                Translation: dolt. It only looks bad because you didn’t draw it right.

                I think if I said you don’t see it because you missed grade 8 English you’d think I called you a dolt who missed something easy and important. Which is that if you log graph it your worry bead goes away.

                You gonna deny THIS too?

              • Daniel Kuehn says:

                So the result is that it’s not as horrifying… but you are acting like he’s picking out a transformation out of a hat for the purpose of generating a flatter series.

                It is less horrifying not because it is flatter but precisely because we have a better sense of what’s going on when we log it.

                You are acting like he is saying “well if you divide by four trillion and round up there’s not much going on”.

                Surely you can see you are probably representing RPLong OK but you are completely misrepresenting joe’s argument.

        • RPLong says:

          Daniel Kuehn, Language Constable strikes again. This time “unparalleled” has been deemed an infraction!

          CF. any of the following:
          http://econlog.econlib.org/archives/2014/02/steve_horwitz_o_1.html#318069
          http://econlog.econlib.org/archives/2014/02/robert_murphy_o_4.html#317515

          and on and on it goes. Give it a rest already. We are talking about slopes of lines – “unparalleled” is not only totally appropriate, but LITERALLY TRUE. What is wrong with you?

          • Ken B says:

            If it’s unparalleled it might be amunition for critics of the *policy*. Look at all Daniel’s responses here. He is blurring the distinction between description and evaluation. he cannot even admit that all of joe’s *positive statements* are wrong, because he wants to defends joe’s *policy preference*.

            This is an example of the kind of thing Bob complains about. One example. DK said that the natural log was special in a way log base 10 was not. As I and Tel pointed out, and Tel’s explanation is crystal, that’s not so. But then DK backtracked without admitting the error.

            • Daniel Kuehn says:

              Mmmm… I don’t think I backtracked on that did I? Natural log does give you something that log base 10 doesn’t.

              Then you said something about how they’re mathematically related, which of course I completely agree with and never suggested anything to the contrary.

              • Ken B says:

                What exactly in a graph is it then? Read Tel’s comment about resizing.

          • Daniel Kuehn says:

            Language constable because I disagree with you? You’ve got a short fuse. Feel fee to disagree with me back! There will be no whining about language constables, I assure you.

            • RPLong says:

              Language constable because you go around dictating to others what their own words mean. Preposterous. Ken B has your number exactly right – the only reason you dislike the word “unparalleled” here is because you prefer joe’s policy preference. Otherwise it would be a non-issue.

              Shame on you, Daniel.

        • Tel says:

          “Gentlemen of the Jury, my client caused the location of another man’s cranium to merely undergo a discontinuous jump, no biggie. This whole affair has been blown out of all proportions”

          • Ken B says:

            :)

            There does seem to be a discontinuity in DK’s logic.

            • Tel says:

              Dielectric breakdown? Just a wild guess…

    • Ken B says:

      Relax children, if you plot logs all you notice is that sudden leap followed by back to a nice rise with a steeper slope than before so …

      Oh, wait. Big jump. Logs, steeper slope. Never mind.

      • Tel says:

        Actually, all snark put aside (yes it can happen!) I think log graphs are the correct way to display these things. A straight line (e.g. from about 1975 to about 1995 implies exponential growth and a constant rate of (monetary) inflation. That’s useful information right there.

        Try plotting the same graph from 1918-01-01 to 1960-01-01 also in log scale. See how clearly the policy stands out?

        Mind you, the fact that we are entering a similar period of history has been pointed out plenty of times without me… and the fact that the graph in log scale could almost drop into the current situation is both an excellent reason to sing and dance about Napier and also an excellent reason to be pessimistic about the economic outcome.

        • Ken B says:

          Indeed. But that’s not because it’s 100 years of data, it’s because a log graph normalizes out exp growth.

          • Daniel Kuehn says:

            I would have thought it’s both reasons.

            • Ken B says:

              So then you think that if I plot average height or sex ratios over 100 years I need to use a log graph? Or that if I have exp growth over an hour, like viruses,
              Because these are the horns of the dilemma you are on. Either ‘both’ means the conjunction, in which case my virus example holds, or it means the disjunction, in which case the sex ratio example holds.

              • Ken B says:

                viruses, I don’t.

              • Daniel Kuehn says:

                If you need to normalize out exponential growth and if you are dealing with periods of time that make that concern relevant, you should use logs. “Both”.

                Sex ratios over a hundred years only satisfies one – not both.

                Virus growth satisfies two – both.

                I suppose if you were concerned about the growth rate of the sex ratio you could do it, but you’ll find out pretty quick what your answer is if you were odd enough to think such an investigation was warranted.

              • Daniel Kuehn says:

                Well I suppose as I’ve put it here “periods of time that make that concern relevant” sex ratios satisfy neither.

              • Daniel Kuehn says:

                You are trying to argue that joe has said that lengths of time are not relevant.

                That’s what this exchange is about. We both know we agree on the fundamentals.

                You just think joe is a bonehead and add claims he does not make accordingly, and I see no evidence he’s a bonehead and add claims he does not make accordingly.

              • Daniel Kuehn says:

                *lengths of time are not RELATIVE

              • Ken B says:

                ” if you are dealing with periods of time that make that concern relevant, ”

                Right. That, if you look back is EXACTLY my position. That’s why I said it’s not the 100 years, for viral growth it’s an hour.

                Joe’s position was different.

              • Daniel Kuehn says:

                Joe’s position is not different.

                The idea that joe was suggesting that no matter what you’re looking at if it takes 100 years you have to log it is not credible.

                He left context out. But by the same token he left out the “no matter what you are looking at” part that you are relying on.

                Your contention is that on an economics blog all the details that most people have as common denominators need to be spelled out every single time. That is not a very defensible position, I don’t think.

  18. Ken B says:

    Let me head off foolish debate. I am not arguing economics with the log graph. I am arguing math. I am pleased to do, being in a bloodthirsty mood today. Even if joe finished *ninth* grade math I’m ready to rumble.

  19. Ken B says:

    RPL: That pile is 10 times the size of the other.
    Joe: Fool! Why take log base 10 and it only looks twice the size!

    • Daniel Kuehn says:

      Explain in your own words why you think he is taking logs.

      • Ken B says:

        You mean like he’s compounding due to inflation?

        That’s speculation, he just said a long time. Personally I think he’s doing what he said he’s doing, trying to make it LOOK better.

        But you tell me in your own words, what does a steeper slope mean in such a graph?

        • Daniel Kuehn says:

          It means it was growing faster. My point is we are not indifferent between base 1,000 and natural log. If a series has a constant growth rate over long stretches of time you visibly represent departures from that growth rate with the natural log. The slope of a logged series has an actual interpretation which is why we use it.

          • Ken B says:

            Daniel, there is a simple multiplicative relationship between log e and log n. The only difference will be the appearance of the graph, flatter or steeper. Log e is special for other reasons but qualitatively all log graphs are the same. Using log one trillion makes it look flatter is all.

            • Daniel Kuehn says:

              Right, there is a relationship – the claim has never been that there is not a mathematical relationship between different bases. You’re being deliberately obtuse here. Why do you see people using natural log all the time and you rarely ever see log base one thousand? C’mon.

              • Ken B says:

                You see natural log, and base 10 frequently, and sometimes base 2. All are qualitatively the same thing.
                Joe picked whatever log the FRED graph was available in. Joe’s claim was not that growth data should be log graphed (I predict after reading this he,ll say he meant that). It was that a long series of data points should be. And as I explained earlier with the dolt comment the clear implication that once you log graph the “horror” disa ppears.

              • Daniel Kuehn says:

                It was my impression reading him that he was saying that. You seem to be making up a different line of argument for him. Ah well – I don’t think I’ll convince you otherwise.

                The horror does disappear. We see increases in the growth rate of the base in periods of weaker demand. There is nothing particularly special about the Bernanke years except that he did not drag it out quite so much (thankfully).

              • Tel says:

                You see natural log, and base 10 frequently, and sometimes base 2. All are qualitatively the same thing.

                You don’t say… I used to think that was really amazing once upon a time.

                Joe picked whatever log the FRED graph was available in.

                And there’s a good reason why the FRED people only offer one choice of log scale, and why they don’t bother to mention what base it is in.

                Note that the left hand axis remains in the original units. Further note that the graph is always resized to fit the window.

                Why do you see people using natural log all the time and you rarely ever see log base one thousand?

                I think probably Decibels get used a lot more than any other log unit, but for purpose of drawing a graph, how would you figure out what was being used? That’s the whole point of logs is that you can’t figure it out.

              • Ken B says:

                Q: What do you get when Sviatoslav practices the piano?

                A: The Richter scale.

    • Daniel Kuehn says:

      No goofy Ken B stuff. I will not sleep well tonight if I don’t get a sensible answer.

    • RPLong says:

      Kuehn’s point is stupid. I just posted a comment on this, but because I supplied links to previous Kuehn linguistic prestidigitation, it’s stuck in moderation.

      The key point is that we’re talking about slopes of the curve: “unparalleled” is not only an appropriate word, it is in this case literally true! I have no idea what goes through Kuehn’s head some days.

      • Daniel Kuehn says:

        No disputing on the literally true part. I had said that.

        I do dispute the stupid point part.

        • Major_Freedom says:

          You disputed the literal part when you said unparalleled was “too strong” of a word.

          Now you’re writing as if you never disputed its accuracy.

      • Ken B says:

        Here’s the exchange AGAIN for Daniel
        RPL that looks big.
        Joe It looks smaller in a log graph. Hey, anything long term needs a log graph. Like average height for instance.

        • Daniel Kuehn says:

          Jesus your paraphrasing is Roddis quality today.

          • Ken B says:

            “Data spread out over 100 years needs a log scale.”

            That,s the entire paragraph. How is it roddisian to apply that to, well, data spread out over 100 years. Like average height, number of bees, surface temperature?

            • Daniel Kuehn says:

              Well it was the first sentence that was the issue.

              We’re on an economics blog. Don’t you suppose he figured he didn’t have to elaborate? Like I said, that wasn’t the sentence I thought was dumb. Granted, it’s not all that damning either precisely because everyone knows why you use a log scale (I think).

              • Ken B says:

                Do you see the contradiction here Daniel? Joe addresses this advice to those he says missed grade 8 math. In other words, he is saying “I know you don’t have much mathematical sophistication but long time series data should be log graphed [wrong as I kb explained] and when you look at the picture it looks a lot less scary.” So he presents it to someone he thinks deficient in math, does it wrongly, and explains nothing.

              • Daniel Kuehn says:

                Do you think he actually thinks anyone missed 8th grade math or do you think it was a burn?

              • Ken B says:

                I think it was a snarky way of saying worriers didn’t have a clue, mathematically speaking.

      • Ken B says:

        “because I supplied links to previous Kuehn linguistic prestidigitation, it’s stuck in moderation.”

        It might be a conspiracy. You don’t know how many comments disappear down the rabbit hole.

  20. Ken B says:

    For spectators. Sometimes a curve shooting upwards really does look worse than it is. In any case it can be hard to draw or eyeball. Graph y = exp (x) for example. It can be hard to judge or visualize what,s happening. This is particularly true in cases where there is growth/compounding. In those cases a log graph is clearer. It can show rates of growth nicely.

    It is not true as joe says that the length of time matters. Plot viral cell growth over an hour, use a log scale. Plot number of bees in the typical hive over a thousand years, don’t.

    And you need to know how to read one. A change in slope means a change in growth rate. So while the graph may to the uninitated look less alarming, it might not be.

    • Daniel Kuehn says:

      Of course length of time matters.

      What you mean I think is that the length of time that is relevant to any particular case varies.

      I am not sure I agree with you on the bees, in that I wouldn’t characterize a log scale as inappropriate for them. Unnecessary perhaps, but not inappropriate. If all you meant was unnecessary, fine.

      • Ken B says:

        A/b matters. So its just wrong to say that if a is large then … I think my examples show that the length of time depends on what you’re measuring.

        • Daniel Kuehn says:

          Right… which is quite different from saying length of time doesn’t matter.

          In fact it says the opposite.

          • Ken B says:

            Daniel, the assertion was data over 100 years requires a log. Wrong. Simply wrong. First data that has no growth, a log probably obscures. Second, if it’s exp growth then in theory a log is always good. Finally is tghe concern is practical then it’s a matter of scale, not a alone. Your claim is equivalent to this: if you measure distance in meters not light years you need a log graph. Um, no.

            • Daniel Kuehn says:

              So you are saying you do want him to spell out all the conditionals about using logs in a blog comment on a blog where everyone ought to be familiar with this stuff.

              I disagree.

              But don’t say that length of time doesn’t matter because that’s clearly not true.

              • Tel says:

                Mentioning exponential growth is generally considered sufficient amongst purists.

              • Ken B says:

                Which of course he did not do. Not in any way at all. He only said it was a long time so needed a log graph.

              • Tel says:

                When Joe said, “100 years” I gave him the benefit of the doubt and presumed he was trying to say, “exponential growth”.

                Kids at home, if you need to lose weight then hire Ken, because he’s very strict and tough. If you need help with your tax accounting, hire me, because I understand what you really mean. :-)

                Hey, on that note, we have this court case where a guy called Craig Thompson was spending his union credit card on hookers and porn (some tens of thousands of dollars worth of hookers and porn) and he is not contesting the transactions (way too much evidence) yet he still doggedly claims innocence (hookers are legal here, but fraud is not, it wasn’t his money, it was the member’s money), but now it seems he might slip out on a loophole because something about the prosecution case was badly worded. This is going to shock people I suppose…

              • Bob Murphy says:

                If you guys could wrap up this argument over terminology within 100 years, that would be super.

              • Ken B says:

                No Bob, it would be ln(super).

              • Bob Murphy says:

                Naturally.

  21. Ken B says:

    I’m curious Murphy. Did I spank DK, or did he spank me? No “both”. But i doubt anyone here can claim you’ll show partiality to me. Especially if I toss in a gratuitous god joke, like “Who paid for last supper? Jesus got nailed for it.”

    • Gamble says:

      That’s a good 1 right there. Thanks for the laugh.

  22. Harold says:

    Quite a striking graph. Looks a lot like a hockey stick, wouldn’t you say?

  23. Ken B says:

    Wel, well, well. http://www.infowars.com/u-s-army-builds-fake-city-in-virginia-to-practice-military-occupation/

    I don’t vouch for the accuracy. I might think, wow, sounds like your usual boondoggle military featherbedding waste and graft. But then someone here will remind me I don’t actually know how many secret cities the government has built. There could be thousands of them. So maybe this is where the government approved survivors will live after the planned zombie apocalypse. Or alternately it could be the death camp for Fed critics. Sanctuary/death camp. Why, it could be both!

    • Gamble says:

      Ken, government is a spotless lamb. You are crazy.

      http://www.youtube.com/watch?v=gqFSi-cOQtk

    • Tel says:

      Sanctuary/death camp. Why, it could be both!

      The Masters will always be needing a bit of help around the house.

    • Gamble says:

      Hey Ken I just visited that link you provided. Alex Jones and crew is dumfounded as to what the purpose could be. Info-wars theorize some type of homeland insurgent training. I thin I have a more accurate theory.

      That fake city is where guberment will create social media and other internet propaganda. They know they are losing the internet war.

    • Ken B says:

      I apologize to MF for linking to such a statist site as Reason, or lamenting the death of a man who was probably “just a statist.”

      • Major_Freedom says:

        It seems to be helping you to self-reflect, which is, ultimately, my main motivation in every debate I have in economics and politics.

        You are now doing it. Blaming me and bringing me into that, yes, but doing it nonetheless. Sort of like me thinking this about my 4th year calculus of manifolds class prof after months of struggle: “I know! It’s the kernel…you insufferable and pedantic math Nazi!”

  24. Emanuele Costa says:

    I do not believe that there is a conspiracy behind the Federal Reserve’s policy. Maybe it is possible that the behaviour of the Central Bank of USA is influenced from other “powers” which have a significant impact on the choice about the appropriate monetary policy.

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