Sumner, Like All of Us, Wants a KISS
I refer to types of Fed policy, of course.
In a recent post criticizing the mental gymnastics Bernanke engages in regarding helicopter money, Scott writes:
Or we could just raise the inflation target to 3%.
Or even keep it at 2% and do level targeting. Or NGDPLT. All these epicycles to make helicopter drops work make me dizzy. The simple truth is that monetary policy is all we need if used intelligently, and if not used intelligently (as in Japan pre-2013), even helicopter drops won’t get the job done. So let’s K.I.S.S., and work out fallbacks that don’t require wildly unrealistic assumptions about cooperation between the Fed and a GOP-controlled Congress. Instead let’s simply shift the target slightly (4% NGDPLT anyone?), and perhaps add to the securities that the Fed is eligible to buy.
Yes, by all means, let’s switch from the Fed focusing on (price) inflation and unemployment, and instead have the Fed target the growth in the total amount spent on value-added in each stage of production (to avoid double counting), with a provision of catching up to the constantly rising level, where the Fed turns over day to day operations to a futures market in contracts that can only exist through subsidies from itself, and where the Fed is allowed to buy other types of assets from what is currently legal. Like the man said, simple. None of this newfangled stuff like “printing money and spending it.” (What?!)
I always had a huge quibble with the measurement of the money supply. Some want to use M2 as a measurement for what money is actually in the system, but according to you Dr Murphy, you make a great case about the money stock in suggesting that excess reserves are money. I always remember Rothbard suggesting that money is a rise in the money stock, and indeed his measurement of money is most accurate in the Austrian sense.
I always believed that attempting to reduce the money stock (excess reserves) would cause deflationary pressures that would result in a bust. It seems to me that the excess reserves is commercial bank money and not Fed money. As the Fed unwinds it’s balance sheet it seems loans will be called back and thus certain businesses and home owners that own these loans will not have money to either finish their projects or pay for their house. Is this correct? Wouldn’t an unwinding or selling of treasuries force this type of scenario?
Thus I was always under the impression that albeit banks are not loaning out all excess reserves, they are still making loans. This false perception of “no” rise in prices is indeed going to witness a deflation when that money stock will be reduced. Hence suggesting M2 is the money stock is already missing the fact that the money stock also includes excess reserves because excess reserves are what fueled the boom. As per certain sources some great cases have been made that support the conclusions I just made and thus legitimate your Austrian conclusions Dr Murphy.
See here: http://www.zerohedge.com/news/guest-post-truth-about-excess-reserves
Here: http://www.zerohedge.com/article/over-1-trillion-excess-reserves-not-problem-according-goldman-sachs
Another interesting finding is that the excess reserves are propping up dying banks from 2008: http://www.zerohedge.com/news/2013-08-11/where-feds-excess-reserves-are-going-51-foreign-banks-49-domestic
One further quibble with the measurement of the monetary base, is it not true that even the issuance of a Treasury can be assumed to not be debt, but a form of capital consumption and thus likened to an increase in the money stock in the sense that Rothbard suggests. I remember one of your blog posts dealt with this very issue. Indeed the standard idea among mainstream economists and global investors alike is that Treasury notes are virtually “risk-free.”
Doesn’t this presume that US government debt in essence is redeemable on demand? In this case would it not be safe to suggest that since US Treasuries have this uniquely coercive disclaimer, they do indeed increase the money stock, not just in the sense which is universally accepted among erudites of the economics field (where the Fed purchases treasuries and thus increases reserves/excess reserves), but also in the sense that they carry “no risk” and thus can be redeemed “on demand?”
Indeed it makes one wonder the mainstream understanding of government debt, and debt per se, as government debt seems to be more of a coercive tool that will lead to capital consumption in various facets–either the government monetizes debt which consumes capital, or it expropriates funds from the private sector which also consumes capital. It seems that government debt is in no sense related to debt per se, as the laws of the free market would dictate to what extent a private business could render himself flush with obligations. We have thus arrived at the Socialist Economic Calculation problem.
Sumner has an incentive to ridicule and dismiss the “print money and spend it” helicopter drop method, because it would expose his own worldview for what it is. Since free money helicopter drops would also accomplish the goal of raising NGDP at whatever rate the Fed wanted, it would do what Sumner’s socialist plan would be better at hiding: it would encourage more and more people to realize fist money is ultimately worthless.
There has to be a…ahem…money illusion, to keep the masses believing that their money has worth because they earned it, unlike the Treasury which as of now is the only receiver of free money from the Fed (interest and principal on treasury securities held by the Fed from its previous “OMOs” are remitted right back to the Treasury for free).
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Hey Murphy, did you see this video of Alex Epstein in Congress, talking about climate change?
https://www.youtube.com/watch?v=R5KoYJ64vjA#t=7m20s