Every once in a while it occurs to me that it’s possible my worldview has a serious flaw in it, and that the people who really drive me through the roof might actually be right. Fortunately, such moments soon pass and I can get back to blogging.
But just to make sure you guys realize that our opponents aren’t morons, let me quote from a recent Brad DeLong essay in which he discusses the thought of John Hicks. After explaining the conventional mechanism through which central bank operations can stimulate an economy, DeLong says:
A little thought, however, will lead us to the conclusion that such open-market operations may fail. In them, the Federal Reserve is buying bonds, shrinking the supply of bonds out there–and thus pushing up their price and pushing down interest rates. For each amount that the Federal Reserve expands the money stock, therefore, it puts downward pressure on interest rates and thus on monetary velocity. In the limit where interest rates are so low that people don’t really see a difference between cash and short-term government bonds like Treasury bills, open-market operations have no effect because they simply swap one zero-yielding government asset for another.
It is in this situation that a government deficit can be useful. A government deficit means that the government is printing and issuing a lot of bonds at exactly the same moment that private investors are looking for a safe asset to hold. As these bonds hit the market, people who otherwise would have socked their money away in cash–thus diminishing monetary velocity and slowing spending–buy the bonds instead. A large and timely government deficit thus short-circuits the adjustment mechanism, and avoids the collapse in monetary velocity that was the source of all the trouble.
Lately I have come to believe that the notorious “liquidity trap” is a legitimate phenomenon. The closer nominal interest rates approach zero, the more that government debt begins to resemble government fiat money. This surely can’t be a good thing.
Think of it: The central government and central bank conspire to take the distinct markets of debt and money, and merge them into a common reality. It’s like they divided by zero.
Naturally, I’m not endorsing the Keynesian policy prescriptions for “what to do when you’re in a liquidity trap.” But I’m saying that Keynesians have been saying for more than a year that something funky happens when central banks drive interest rates down to zero. And unfortunately, their Chicago School / monetarist critics have largely ignored their insights.
Lately I have been giving economic arguments that suggest the government will soon have to legalize marijuana. I’ve come up with an independent argument.
The authorities over the next few years will need to legalize marijuana in order to clean out the prisons. They will need to make room for people like you.
Walter Block sends along this amazing video. (If you aren’t into it by 2:00, then you should stop it. But many of you will be hooked by that point.) Does anyone recognize this guy? Is this clip part of a show?
In a recent post, I discussed Robert Lucas’ defense of mainstream macroeconomics. Lucas made excuses for why economists couldn’t have predicted the housing crash, excuses that drove me to declare, “I’m starting to think the efficient markets hypothesis is a state of mind, a consciously chosen way of looking at the world. I’m not sure what it would mean to really falsify it.”
I’m going to take another swipe at this, since others are adopting Lucas’ line. For example, William Easterly recently wrote:
[E]conomists did something even better than predict the crisis. We correctly predicted that we would not be able to predict it. The most important part of the much-maligned Efficient Markets Hypothesis (EMH) is that nobody can systematically beat the stock market. Which implies nobody can predict a market crash, because if you could, then you would obviously beat the market.
Picture a man who had watched CNBC faithfully through 2004 and 2005, and who had borrowed against his pension in order to buy six condos in Las Vegas. Then, after everything blew up in his face–what he had previously been assured was a “six sigma” event–the man asked, “How did you economists fail to see this coming?!” Can you imagine what that guy would do, if William Easterly happened to be there to give him the above answer?
Easterly, Lucas, and other economists think they are oh so clever, yet they’re merely assuming their conclusion. They look out at the world, and see that it can be made consistent with the EMH if we assume certain other things about how the world works.
But by the same token, suppose that the critics of the economic forecasters are correct, and that groups of people–including economists and investors–are capable of making systematic errors for years at a time. Now if that alternate view of the world were correct–meaning the EMH had to be false–then what would the last five years have looked like? Well gee, they would have looked like what just happened. In other words, we can quite easily make the theory of “not-EMH” consistent with the observations.
For example, right now there are some people who are quite convinced that very large price inflation is imminent, while there are other people who are quite convinced that very large price deflation is imminent. The prices for gold, silver, and 30-year Treasurys are constantly shifting, but at any given time they do their part to balance the speculative powers in the camps of the dollar bulls vs. dollar bears. Especially in these unprecedented times, when people are unsure even what framework to use when anticipating the future, it is rather misleading to think in terms of an “equilibrium price” for a one-year put on oil futures. At any time, the put’s price should be interpreted as a ceasefire, not as a “best guess.”
Now let’s suppose that the people worried about collapsing credit lines (e.g. Mish) turn out to be right. The CPI falls by about 10% a year for the next four years. If that happens, I promise that I will say, “I was wrong and Mish was right.”
I’m not going to say, “I didn’t predict this coming, but then again no one did. If Mish thinks he predicted it, he’s sadly mistaken. His arguments and graphs were all taken up by the market, and yet gold remained above $900. Therefore Mish just got lucky; he really couldn’t have known for sure that this would happen.”
I am not being cute or making an analogy; I think the above paragraph is literally what Lucas and Easterly have done, albeit they could point to formal models with Greek letters to make their case less blatant. Even so, they are imposing the EMH on the world, and they don’t even realize it.
Robert Wenzel sends me this tale of a Syracuse mom getting tased and arrested. She had been pulled over for talking on her cell phone, which made her indignant because she didn’t have a cell phone in the car. (She had been holding her hand to her cheek while driving.) Apparently, the cop took her to jail and left the 15- and 5-year-old kids in the minivan on the road, where they sat for 40 minutes. This happened back in January, when it is friggin’ freezin’ in Syracuse.
(For you voyeurs, there is a video showing the arrest, narrated by the woman.)
* Here is a 15-minute interview with Lew Rockwell. (Remember, the LRC podcasts are regular hyperlinks that take you to a new page. Then you play the interview from the page.)
* Here [.mp3] is my Mises Circle talk on the first full day of this year’s Mises University. It’s about 45 minutes long, but if you’re borderline, I’d nudge you over the edge to go ahead and listen to it. There were some good jokes, as far as a talk on monetary policy goes.
UPDATE: Oops I forgot to mention, the Mises Circle talk was held outdoors. So I was mic’ed and standing at the top of a short staircase, looking out to a crowd of 180 students as they wrapped up dinner. That’s why I’m talking loudly in the beginning, because it took a few minutes for the young punks to settle down and start lapping up my wisdom. Tom Woods had to lay down the law for one group of chatterboxes near the back.
The CPI numbers came out today, and there was no smoking gun upon first glance. I still need to go through and make sure there was no hanky panky, but it seems that they did bump up the raw number. The reason the headline is flat is that (the BLS claims) raw prices actually fell from June to July, so that with their seasonal adjustment the headline number was the same.
Reader Joseph Webb emailed me the below video, and said I should watch near the end. They claim that the BLS is adjusting car prices down because of the “cash for clunkers” program.
However, I called the BLS myself and talked to Stephen Reed, the technical contact listed in the BLS press release. He sounded like he knew what he was talking about, and he said that the BLS is counting the actual price consumers pay for cars. Now the cash for clunker program could have an indirect effect, because dealers will presumably be willing to sell a given car at a lower price, if they are getting a check from the government for qualified transactions. But if you pay, say, $15,000 for a car, and the dealer gets a $4,500 check from the government because of your clunker trade-in, I understood Reed to say that the BLS counts that car’s price as $15,000.
So, I have no smoking gun to report right now. My overall view remains the same: Last year Bernanke increased M1 at the fastest annual rate since the mid-1980s. Back then, there was a plausible reason that the Fed could expand the money supply without causing large price inflation: Volcker had killed the late 1970s inflation, and Reagan cut taxes. So there were plenty of objective reasons for the worldwide demand for dollars to go up. In our time, the demand for dollars went up, especially in September 2008, because of the financial panic. But as that subsides, people are going to reduce their demand for USD. I still think that is the big picture here, and it’s why I still expect the BLS to pull rabbits out of hats in order to keep the CPI from going through the roof during the rest of this year.
I realize I can’t gloat until my unorthodox views have been fulfilled. In the meantime, let me just note the following excerpt from the CNBC article:
Even as the worst recession since the Great Depression starts to bottom, inflation pressures will likely remain contained given high unemployment and weak demand, analysts said.
If I’m right, five years from now that will look like a particularly silly thing to be saying right now.
Try defining freedom as a situation in which everyone’s property rights are respected. Discuss.