Follow-Up on GDP and “Potential GDP”
Karl Smith graciously gave an answer to my earlier request, asking for clarification of how government economists would handle a scenario in which “real GDP” had shot up 10% because of massive investment in oil drilling infrastructure. Specifically, when people discover next year that there’s no oil there after all, then obviously (other things equal) real GDP falls back to its previous level or even a bit lower.
So my question was, would the people working in the BEA or CBO or whatever, revise that earlier figure? Would they say, “Even though the companies spent $150 billion on all these newly produced drilling equipment, paving the roads, etc. etc., they spent that money erroneously. Had they known the real situation, they would not have spent that money.” ?
Karl doesn’t think they would do that (and neither do I). Here’s Karl:
The short answer is no. Real output in the year in question was 1.1 Trillion. Gross Domestic Product is our attempt to measure real output and it would reflect that.
I think there are a few important concepts related to Bob’s question. One is Net Domestic Product, which according to Bob’s description did not rise as fast as Gross Domestic Product and could possibly have fallen.
Net domestic production is Gross Domestic Production minus the Consumption of Fixed Capital.
…
Now in fairness to Bob’s point the consumption of fixed capital is measured using the perpetual inventory method. Key in this calculation is economic service life, which must be imputed based on historical measures. Yet, Bob is postulating a strong shift in economic service life.This would not be picked up immediately in Net Domestic Product calculations but would be picked up as the series was revised over time.
Essentially the BEA must wait until the capital has actually worn out early before going back and saying that it was wearing out at a faster than average rate.
However, the oil in the ground in would not factor into any of these statistics at all.
This is GDP and its cousins are attempting to measure productive output and income. The oil was not produced by human beings. Instead it is a measure of wealth. It would be captured in the Federal Reserve’s Flow of Funds report. [Bold added.–RPM]
I am fine with everything Karl says in the above, meaning that I agree with him on how the BEA deploys standard national income accounting. However, especially with his offhand remark about the capital becoming “worn out,” I’m not sure Karl is really seeing where I’m going with this.
In this hypothetical scenario, potential GDP would have gone up 10% in one year. Then real GDP would have crashed 10% (or so) the next year. So if the CBO looked at output in the year that the drills etc. were being produced, they would have plotted a dotted line from that point to the right, and then wondered what the heck happened to Aggregate Demand in the subsequent year to make real GDP crash. After all, the economy would have had the same number of workers and machines.
In this scenario, there’s no “technology shock” or “resource shock” or anything like that. What happened is that people falsely valued goods produced in the boom year. The economy actually wasn’t capable of producing $1.1 trillion of real GDP that year. Yes, businessmen paid $150 billion for the infrastructure to be created and installed, and yes consumer prices in the economy didn’t shoot up to offset the rise in nominal GDP. But those businessmen paid too much for the equipment.
This is a crucial point. When Paul Krugman dealt with the claim that the US economy was in a bubble during the housing boom, and therefore we shouldn’t take output from those years as being the economy’s potential, he said:
Just a brief note: one thing that keeps appearing in comments is the notion that because we had a bubble, in which some people were borrowing too much, the economic growth of 2000-2007 wasn’t “real” — that it was all a figment of our imagination.
This is confusing demand with supply.
We really did produce all the goods and services counted in GDP; we were able to do that because we had willing workers, a sufficient capital stock, the right technology, and so on.
What is true is that some of the spending that created demand for those goods and services was debt-financed, and those debtors can’t continue to spend the way they did. But that doesn’t say that the capacity has somehow ceased to exist; it only says that if we want to keep the capacity in use, someone else has to spend instead. In other words, past growth wasn’t an illusion, or a fraud; but we need policies to sustain aggregate demand.
No no no, this won’t do. I can’t speak for all of the commenters of course, but some of them are probably thinking the way I am on this. We’re not conceding that the high “real GDP” figures from 2005 and 2006 were legitimate. They were partly fueled by people making purchases based on erroneous expectations of the value of the goods they were buying.
If my oil example isn’t doing it for you, try this: First, suppose that a great new musician comes along. He plays to sold-out crowds, and people think he’s amazing. He actually earns $1 billion touring the country in a single year; that’s just how awesome and entertaining he is.
Now, did he “really” add anything to the economy? I mean, he’s going around, buying cars and food and houses–tangible things–and yet the economy can’t physically produce more of that stuff. So surely he hasn’t increased real GDP…?
Yet that’s not right at all. The musician clearly did create a flow of new services. People enjoyed his performances, and they voluntarily paid the extraordinary ticket prices to see him. For the purposes of calculating real GDP, the musician “created” $1 billion worth of entertainment, just as surely as a farmer created food with a market value.
OK now change the scenario. Instead of people paying to see a musician, instead they believe that there is a fortune teller who’s always right. He tours the country, and ends up earning $1 billion for giving his services.
Next year, his predictions all turn out wrong. Nobody buys his services anymore.
Now we can quibble about whether that original $1 billion was “really” part of output or not, before everyone realized the guy was a fraud. I could go either way on that count.
What I want to focus on, is that if you do count it as part of real GDP, then when real GDP falls by $1 billion the next year, you can’t say, “Holy cow, what happened to Aggregate Demand! Why is there now this huge gap between actual and potential GDP? Don’t tell me output last year was illusory. People really did buy valuable goods and services last year.”
I hope I’ve made my point. My concern is that when the CBO gives us those nice pretty charts of potential GDP–which is a dotted line going up and to the right from the peak of calculated “real output” at the height of the boom–and then Krugman et al. complain about how much in forfeited output we are now suffering, that they are ignoring the possibility that official real output in 2006 or 2007 was indeed unsustainable. It was based on erroneous expectations. So we can either mark down that output, or we can say that potential GDP dropped sharply once reality set in, or we can go through and try to figure out how much of 2006-2007 “real output” was based on an illusion. But we can’t methodologically just rule it out from the get-go, the way Krugman does above.
I think the point is that in a full employment economy “bubbles” just draw resources out of other sectors. The potential GDP is not an endorsement of the bubble so much as a recognition that the full productive capacity of the economy is being utilized (if anything, the peak-to-peak projection is an underestimate since we know bubbles can hurt efficiency). This is the whole point of Friedman’s “plucking model” observation about the business cycle.
The example you provide assumes away the empirical observation of “plucking”. If your example actually happened in reality – bumping along at a full employment output level and then spikes up as well as down, then I think Krugman’s approach would be more questionable. But my understanding is (and this is not a literature I’ve delved very deeply into), the plucking model is basically right and busts predict subsequent booms much better than booms predict subsequent busts.
In fact I’d be interested in hearing what readers think of Garrison’s attempted reconciliation of ABCT with the plucking model… I always thought that was a little strange, but perhaps people can explain his point to me.
http://www.auburn.edu/~garriro/fm1pluck.htm
In case anyone wants to read it.
Thanks. There is also a treatment in Time and Money – I imagine it’s very similar to this though, and I think at some point I might have read this one too.
Friedman’s “plucking model” is really just a plea that a credit financed boom is the economy’s movement back to “trend”, and that busts are just “random” absences of credit financed booms brought about by stingy central banks.
In the series 1,0,1,0,1,0,…one could argue that 0’s precede 1’s, and one could argue that 1’s precede 0’s. Empirically they are the same thing. Friedman is saying that we should say 1’s precede the 0’s, while Austrians are saying the 0’s precede the 1’s.
The issue then is one of theory. Austrians are saying that credit expansion distorts the economy and credit contradiction puts it back to trend, and Friedman is saying that credit contraction distorts the economy and credit expansion puts it back to trend. So the question then becomes “what should be the trend?” Who should define it? Since Austrian economics is based on the individual, they say the process of individual exchange should define trend. Since Monetarism is based on the group, they say that the central bankers should define trend.
I hold that the individual should define “trend” for themselves based on their own utility and preferences, and the aggregated result of all individual trends should be treated as the “economy’s” trend. On the other hand, those who view the economy as a single firm with a single management, they want management, i.e. government, to define and decide what is “trend.”
I think the point is that in a full employment economy “bubbles” just draw resources out of other sectors. The potential GDP is not an endorsement of the bubble so much as a recognition that the full productive capacity of the economy is being utilized (if anything, the peak-to-peak projection is an underestimate since we know bubbles can hurt efficiency). This is the whole point of Friedman’s “plucking model” observation about the business cycle.
The Austrian position is that what you are calling “full utilization” is unsustainable, the same way that Bob’s example of the oil miners were engaging in an unsustainable project despite “full utilization” of resources and labor. Bob is saying that because people can be mistaken, or, more accurately, misled, into thinking that a given full utilization is sustainable, it means that it is not enough to simply look at full utilization of resources and labor and conclude “this is “the” trend, and any stinginess on the part of the central bank in not facilitating this by creating sufficient amounts of new money will just create an unneeded recession, or in Friedman’s terminology, “plucking.”
You want the central banks to decide what is “trend” by defining their credit expansion and the resulting economic structure as what “should” be taking place. You think this because you hold a collectivist view of the economy and not a methodological individualist conception of the economy. You hold humans to be mere cells in a greater organism called “society” or “the economy.” But not all cells are means to some greater end of course. Some cells (the state) are ends in themselves, and all other cells are the means (taxpayers) to that end, which in other words just means some people are initiated with force by other people, all in the name of “society.”
The example you provide assumes away the empirical observation of “plucking”. If your example actually happened in reality – bumping along at a full employment output level and then spikes up as well as down, then I think Krugman’s approach would be more questionable. But my understanding is (and this is not a literature I’ve delved very deeply into), the plucking model is basically right and busts predict subsequent booms much better than booms predict subsequent busts.
Your understanding that the plucking model is right is based on your core principles and values, and not on the empirical record. Empirically, we’re all looking at the same data. We see a boom bust (or bust boom) cycle. You are presenting a false conception of the Austrian theory when you say that there should be full employment and output AND THEN “spikes” upward. The Austrian theory does not claim that this is what should happen. The Austrians are saying that even if you have full employment and output, it is in an unsustainable boom phase because the capital and labor are being allocated in a way that makes the overall structure unsustainable. This unsustainability cannot be picked up by any one individual because any one individual cannot plan the entire economy.
Think of a homebuilder who is building a home using 40,000 bricks but he thinks he has 50,000 bricks. As he is building the home, there is full employment and full utilization of resources. But his project is unsustainable nonetheless because his project requires more capital (bricks) than he actually has on hand.
Empirically, you will see full employment and output (monetarist “trend”) and then you will see a collapse once he finds out he doesn’t have enough bricks. Since the central bank has always historically tried to reinflate preceding booms, what you would see is yet another set of houses being built where the builders think they have more bricks than they really have.
The plucking model and the Austrian model are both consistent with the empirical data. They just interpret it differently.
re: “In the series 1,0,1,0,1,0,…one could argue that 0′s precede 1′s, and one could argue that 1′s precede 0′s. Empirically they are the same thing. Friedman is saying that we should say 1′s precede the 0′s, while Austrians are saying the 0′s precede the 1′s.”
I think you’re misunderstanding what Friedman (and others) are doing. He’s testing it both ways and finding that predictive power runs from bust to boom, but not vice versa.
This is not just him picking the one he likes out of two equally plausible interpretations of the time series.
Now – endogeneity to expectations pervades empirical economics. If you can think up a story wheret his is relevant here, I’m all ears. But until you do that you’re demonstrating you don’t understand the claim that Friedman is making.
I think you’re misunderstanding what Friedman (and others) are doing. He’s testing it both ways and finding that predictive power runs from bust to boom, but not vice versa.
That’s impossible. If the economy continually goes through a boom bust cycle, then all booms would follow busts and all busts would follow booms, or, equivalently, all busts would precede booms and all booms would precede busts.
Just because it could perhaps be more easier to predict a boom after a bust, rather than a bust after a boom, it doesn’t mean that Friedman’s model proves the Austrian model wrong. It just means that the nature of the credit expansion (or contradiction) cycle makes it easier for people to anticipate future events after a bust occurs than after a boom occurs.
No Austrian claims to have a model of predicting when a bust will occur after a boom is set in motion, so you cannot possibly say that Friedman finds more evidence of the predictive power of the plucking model than he does with an Austrian model.
Unless you want to argue that busts do not follow booms chronologically, then you have no argument against the Austrian theory.
It’s funny watching Keynesians and Monetarists go at each other’s throats, but then become best buds when considering Austrian theory. It kind of reminds me of medieval Protestants and Catholics throwing each other high fives as they burn the witches.
This is not just him picking the one he likes out of two equally plausible interpretations of the time series.
But it must be, because both are in fact plausible explanations of the empirical data.
Now – endogeneity to expectations pervades empirical economics. If you can think up a story wheret his is relevant here, I’m all ears. But until you do that you’re demonstrating you don’t understand the claim that Friedman is making.
And again the burden of proof is shifted onto the Austrians when there is disagreement.
You don’t seem to realize that the Austrian theory has empirical “support” as well, even though it is not derived empirically. Maybe you weren’t awake when Austrians were predicting a bust during the last boom bust cycle, but I wasn’t.
If the bust is driven by forces building up in the prior boom, you’d expect some symmetry between the two.
The fact that you DON’T see that requires explanation.
There are explanations, of course. But you don’t see many people making them and they do come across as a little contrived since “focus on the boom” is always such a big mantra.
I’m not out to get ABCT. You always act as if I am. I’m on record lots of places saying that I like ABCT.
But Keynesianism and monetarism do a much better job explaining the plucking phenomenon. ABCT needs to be twisted in a way that’s unfamiliar to most Austrians to explain it.
If the bust is driven by forces building up in the prior boom, you’d expect some symmetry between the two.
You do see symmetry. You see booms following busts, and you see busts following booms; you see booms preceding busts, and you see busts preceding booms.
The fact that you DON’T see that requires explanation.
I think you don’t see it because it is taking place. In a cycle, both phases both precede and follow the other.
It’s not necessary that you see either a plucking trend line or a spiky trend line. In Friedman’s model, just transpose the trend line downwards so that instead of the trend line being above thus creating plucks, put them below thus creating spikes.
There are explanations, of course. But you don’t see many people making them and they do come across as a little contrived since “focus on the boom” is always such a big mantra.
Well, the standard for me is not how to make government work, but how to make the economy work. As Hayek noted, in order to know how an economy can go wrong, you first have to know how it can go right. Folks like you don’t accept that the economy can even be right without the government, so you start with the notion that the government is right and that the economy is wrong.
I’m not out to get ABCT. You always act as if I am. I’m on record lots of places saying that I like ABCT.
I don’t understand what you mean by “always act as if I am.” I can only go by what you have written.
But Keynesianism and monetarism do a much better job explaining the plucking phenomenon. ABCT needs to be twisted in a way that’s unfamiliar to most Austrians to explain it.
Not at all. Austrian theory does not require any changes just because you see economic output prolonged during a boom with short busts. We know that booms can last for a very long time and that busts can be short, thus manifesting the plucking output line. It’s not necessary that we see a trend line with occasional spikes instead of plucks.
The plucking model does not take into account purposeful human behavior. It is a mechanical conception of the economy.
I just the read the Garrison link and I think he does a pretty good job of explaining how the ABCT is consistent with the data that supports the “plucking model”.
Because of the way output data is aggregated it does not show that just before the busts some investment is in fact mal-investment (the total level of output is rising at trend – it is just some of it is from unsustainable investments that will eventually fail and cause output to fall back again).
When the boom turns to bust however output falls both because of the liquidation of the mal-investment and because of the “secondary deflation” caused by increased demand for money during the bust.
It is this secondary deflation that Friedman sees as due to central banks running a too-tight monetary policy and causing deviations from long-term GDP trend.
Garrison accepts the data – he just puts an Austrian spin on it.
Ya I don’t think it’s entirely off-base, but the fact that that’s how few people understand or explain ABCT is a little disconcerting for me.
My first complaint against ABCT certainly wouldn’t be “it doesn’t conform to the plucking model”.
I do think the plucking model justifies peak-to-peak trend drawing though. If the booms weren’t returning to full employment output levels, then you’d have to assume a much more erratic stable growth path and THAT doesn’t seem realistic.
Daniel Kuehn wrote:
If the bust is driven by forces building up in the prior boom, you’d expect some symmetry between the two.
The fact that you DON’T see that requires explanation.
There are explanations, of course. But you don’t see many people making them and they do come across as a little contrived since “focus on the boom” is always such a big mantra.
I’m not out to get ABCT. You always act as if I am. I’m on record lots of places saying that I like ABCT.
But Keynesianism and monetarism do a much better job explaining the plucking phenomenon. ABCT needs to be twisted in a way that’s unfamiliar to most Austrians to explain it.
For what it’s worth, Daniel, I can agree that my exasperation and disbelief in your above statement, must be exactly what you experience when you read Don Boudreaux talking about how Keynesians just focus on consumption.
Anyway, I recently wrote a piece entitled, “A Primer on the Never Ending Bust.”
More generally, you are fully aware that Austrians discuss why the slump is lasting so long. They say the stimulus was bad, and that regime uncertainty is choking business investment. I know you know of these explanations, because you regularly rip the heck out of them on your blog.
So make up your mind. You can say libertarian Austrians have no theory as to why the slump lasts so long, or you can say they give dumb theories. But not both.
How do you respond to Krugman’s claim that businesses when polled say they don’t expand due to lack of demand? Are the polls biased, or do businesses not understand their own actions? The latter possibility seems somewhat plausible, because humans often don’t know why they do what they do.
Bob – I think we were talking about the correlation of booms with prior busts, not why recessions last so long. I know you have ideas about why it lasts so long.
How do you respond to Krugman’s claim that businesses when polled say they don’t expand due to lack of demand?
By realizing that it is a fallacy of composition to take what’s true for individual businessmen, and extrapolate it to the economy as a whole.
An individual businessman who won’t expand unless there is an increased demand for his products, is a businessman who cannot expand production by decreasing his costs, increasing his productivity, and selling more product into the same demand. But that doesn’t mean it is impossible.
“The plucking model and the Austrian model are both consistent with the empirical data.”
I dont think so. There is a clear causal relationship between production and consumption. Production always precedes consumption. Fundamentally, nature requires that ones time be paid in advance, so any theory that purports to describe the business cycle as one that begins with “credit expansion” or “consumer demand” is putting the cart before the horse and fails to respect the very real and natural fact that one cannot eat a cake before making it.
re: “one cannot eat a cake before making it”
I suppose this means that when I eat the cake batter I’m guilty of capital consumption, huh?
Only if you treat fully baked cake as “trend” and expect there to be baked cake even though you’re eating the batter.
Daniel Kuehn = Hair that is Split
re: “You are presenting a false conception of the Austrian theory when you say that there should be full employment and output AND THEN “spikes” upward.”
I never said that’s what Austrian theory requires – I said that’s the example Bob furnished.
Austrian theory does seem to imply that busts be correlated with prior booms, not with subsequent booms. Garrison thinks differently, although I’m not sure how convincing that is. Certainly OTHER Austrians have emphasized and re-emphasized that it’s a boom-bust theory.
Garrison’s argument, as I understand it, is that it’s not a boom so much as a discoordination of capital used in unsustainable ways. That’s fine. I suppose that is consistent with the plucking model. But if you think that the capital structure elongation process isn’t a “boom” that leads to a “bust” (which is essentially the claim), then you also shouldn’t have a problem drawing trend lines peak to peak.
The peak-to-peak logic is contingent on the plucking model. If one would want to argue that ABCT is consistent with the plucking model you can make a case for that, but then you really don’t have any reason to complain about peak-to-peak trends. If one wants to take issue with peak-to-peak trends then somehow you have to grapple with the empirical observations motivating the plucking model.
re: “You think this because you hold a collectivist view of the economy”
No, I don’t.
I never said that’s what Austrian theory requires – I said that’s the example Bob furnished.
But he didn’t. He didn’t invoke an example where employment and output is full and THEN there is a “spike.” He said there is a spike in oil drilling, which of course requires that resources not be used elsewhere.
His example just didn’t make it clear what the supply of money and volume of spending and hoarding were preceding the oil project, because he assumed that total GDP spending will increase on account of investors investing in oil production. That means that either there was previously hoarded money that was not used for spending, but then does get used for spending in the oil production, existing money was already “maxed out” in terms of usage, and there was an increase in the quantity of money, i.e. inflation.
In real terms however, in the short run there was a decrease in consumption (since $1 billion was saved and invested) with an expectation of future increase in production and hence consumption.
The spike in GDP Bob alluded to is confusing because in an economy with a commodity money, or even a fixed supply of money, any and all production cannot make total GDP spending rise by whatever is spent, because total GDP spending would come to match the quantity of money, not the size of output. In principle, a fixed supply of money can facilitate a growing real economy if prices fall. And yet GDP would not keep rising at all because total spending would not rise. GDP would max out at the supply of money multiplied by the number of times dollars are used over time.
Bob wrote that GDP increased by $1 billion because that is the way the BLS would have calculated it, not because he himself wants to argue the case that there is a “spike” during full employment.
Austrian theory does seem to imply that busts be correlated with prior booms, not with subsequent booms.
If current busts are correlated with prior booms, then current booms are also correlated with prior busts by definition. Correlation means both are related, but it does not imply a causation mechanism.
The Austrian theory implies a causation mechanism of production to consumption, not the other way around.
Garrison thinks differently, although I’m not sure how convincing that is.
Garrison does not think differently. He holds the Austrian boom bust cycle order.
Certainly OTHER Austrians have emphasized and re-emphasized that it’s a boom-bust theory.
So does Garrison.
Garrison’s argument, as I understand it, is that it’s not a boom so much as a discoordination of capital used in unsustainable ways. That’s fine.
That’s what Austrians refer to when they say “boom.” Garrison emphasizes that it’s not overinvestment but rather malinvestment.
I suppose that is consistent with the plucking model. But if you think that the capital structure elongation process isn’t a “boom” that leads to a “bust” (which is essentially the claim), then you also shouldn’t have a problem drawing trend lines peak to peak.
But I don’t buy into the “trend” story at all. All data, I hold, is a product of past human ideas and actions. There is no inevitability such that you should see a nice straight trend line on way or the other. You’re just not able to think like an Austrian, which is why you keep misinterpreting it.
The peak-to-peak logic is contingent on the plucking model. If one would want to argue that ABCT is consistent with the plucking model you can make a case for that, but then you really don’t have any reason to complain about peak-to-peak trends. If one wants to take issue with peak-to-peak trends then somehow you have to grapple with the empirical observations motivating the plucking model.
All past economic data cannot create their own theories via induction. It must be interpreted using a pre-existing theory using deduction.
re: “You think this because you hold a collectivist view of the economy”
No, I don’t.
Uh huh, sure.
The point is this – Bob theorized a situation where there was an increase above trend and a fall back to trend.
If that’s not how the actual world works, it’s unclear exactly how meaningful his thought experiment is.
Come on, it was a thought experiment for crying out loud! It was meant to isolate certain ideas and principles, not act as a predictive model of the economy.
One could “tweak” Bob’s example and fit it to the real world by just imagining many such projects taking place, and not only that, but taking place over a relatively long period of time than just a year.
Suppose the car industry, the real estate industry, the clothing industry, and many other industries, all going through the same kind of false expectation trajectory, over a period of years.
And oh, just for the sake of argument, suppose that many industries make these false expectations because of what the central banking system has done to general market interest rates and general credit expansion.
As the years go by, Friedman and others would say “this is trend”, because yes, it looks like everything is running along nicely. You see gradually growing GDP spending on account of inflation of the money supply. You see more or less full employment and utilization of resources.
But then something happens. Everyone seems to go bankrupt at the same time. The car industry sees that their cars are collapsing in sales, the real estate market cannot find as many buyers at a profit, and the clothing stores see a huge drop in patrons.
The central bank responds by flooding the market with more money, and the government spends more money.
Spending and nominal profitability return, and the “trend” line goes back up.
The economy looks to have gone through a “pluck” didn’t it? And yet, Austrians can still explain what happened despite there not being a spike as in Bob’s example. Why? Because of the principles Bob wants to isolate in his thought experiment.
I understand it’s a thought experiment – but that’s my point. If the thought experiment isn’t useful for illustrating principles about the economy, it’s not a helpful thought experiment.
The fact that something is a thought experiment doesn’t give it intellectual cover.
It’s like the gnome thing. Yes, if you have a thought experiment where we’re completely ignorant of everything then we will all look very dumb. Congratulations. So? What does that tell us? Nothing.
In other words, I am fully willing to concede that if we are restricted (for the purposes of the thought experiment) from doing anything other than looking at aggregates, the results will be bad. So?
I’m also fully willing to concede that in a thought experiment that jettisons the preconditions for following trends from peak to peak, it doesn’t make sense to follow trends from peak to peak.
So? This is tautological.
I understand it’s a thought experiment – but that’s my point. If the thought experiment isn’t useful for illustrating principles about the economy, it’s not a helpful thought experiment.
But Bob’s thought experiment DOES “illustrate principles about the economy.” You’re getting massively confused because you think his thought experiment is a model of of the economy. It isn’t.
The fact that something is a thought experiment doesn’t give it intellectual cover.
The fact that it’s not a model of the economy doesn’t give you intellectual cover in denying the core principles addressed.
It’s like the gnome thing.
Yes, you were wrong about that one as well, and in that example, you fell for it hook line and sinker.
Yes, if you have a thought experiment where we’re completely ignorant of everything then we will all look very dumb. Congratulations. So? What does that tell us? Nothing.
Right, because when it makes you look dumb, IT’S dumb. Gotcha.
It’s interesting reading you deal with being proven wrong.
In other words, I am fully willing to concede that if we are restricted (for the purposes of the thought experiment) from doing anything other than looking at aggregates, the results will be bad. So?
He wasn’t challenging you on this, he was asking how the CBO would account for his thought experiment, because he wants to make a larger criticism.
I suspect you know you are guilty of it, which is why you think you’re the target here.
I’m also fully willing to concede that in a thought experiment that jettisons the preconditions for following trends from peak to peak, it doesn’t make sense to follow trends from peak to peak.
But you side with the plucking model more than the Austrian model, which means looking at peak to peak should just be a looking at the long term “trend” for you. No preconditions need to be explicitly stated for you because you yourself have already accepted them.
So? This is tautological.
Not quite.
re: “But you side with the plucking model more than the Austrian model”
What does this even mean?!?!? ABCT is a theoretical model. It’s an idea. The plucking model is an empirical relationship. Booms are coorelated with prior busts but busts are not correlated with prior booms. You’re acting as if the plucking model and ABCT are both theoretical models that we can argue the merits of. The plucking model is an empirical regularity that we have to grapple with.
What does this even mean?!?!?
ARE YOU SERIOUS?!?!?!?!
You wrote:
“But my understanding is (and this is not a literature I’ve delved very deeply into), the plucking model is basically right.”
ABCT is a theoretical model. It’s an idea. The plucking model is an empirical relationship.
No, the plucking model is a theoretical explanation for empirical data. It is not merely an observation of what happens to lines on charts.
Garrison notes about the theoretical underpinnings of the plucking model:
“But periods of presumably healthy economic growth are occasionally interrupted by an extramarket force, namely, an inept central bank that allows the money supply to contract relative to output. Real output is thus plucked loose from its trend. During the economy’s temporary departure from trend, the outputs of both sectors move together, first down and then up. This temporal pattern of output, which involves no significant relative movements of investment and consumption, seems to justify the use of a single output aggregate.”
An economic model without a theoretical foundation is a naked model.
Booms are coorelated with prior busts but busts are not correlated with prior booms.
No, no, no, no, no. You can group current busts with prior booms with no denying of the context of correlation between boom and bust. You are making a grave error when you say “prior” and conflating that with “initial.”
In a continuous cycle, empirically, each boom is a “prior” and each bust is also a “prior.” You just have to shift your focus from bust then boom, to boom then bust.
You’re acting as if the plucking model and ABCT are both theoretical models that we can argue the merits of. The plucking model is an empirical regularity that we have to grapple with.
No. The plucking model contains a theoretical explanation for WHY we should see it as opposed to a series of short spikes above some underlying trend.
I think Garrison’s model uses a standard Austrian analysis to show how ABCT fits with the “plucking” data.
It seems fairly intuitive to me that peak output over time would grow consistently with productive capacity, with troughs of varying depth along the way to reflect recession where output moves away from capacity.
I imagine that most schools of economic thought could build this into their models so I’;m not sure why this is so controversial.
I’m not sure it is controversial. It’s just not how most Austrians talk about their theory, so while Garrison makes decent sense one wonders what to do with that.
What the plucking analysis really is problematic for is this concern of Bob’s about measuring potential GDP from peak to peak.
I can’t quite see where Bob is going with that since during the boom years the GDP is just going to measure the $ value of what is being produced and sold. ABCT tells us that its the wrong kind of goods being produced and utility is not being maximized but that is not measurable in $ terms. Then the bust comes and the money supply falls and with it GDP. I just can’t see (I may be missing something) how the $ value of the mal-investments is going to measured.
I think this is really good Bob. Trend GDP and output gaps drive me crazy.
Why?
Because they are some of the pavlovian triggers of austrian poodles.
I was going to say because they rest on an unobservable counter-factual world that is based on Pavlov’s dogs believing they are Pavlov.
Good you didn’t say it, because you say enough nonsense every time the bell chimes.
To have an MMTer say someone argued nonsense, is a badge of honor in my books.
What is true is that some of the spending that created demand for those goods and services was debt-financed, and those debtors can’t continue to spend the way they did. But that doesn’t say that the capacity has somehow ceased to exist; it only says that if we want to keep the capacity in use, someone else has to spend instead. In other words, past growth wasn’t an illusion, or a fraud; but we need policies to sustain aggregate demand.
If this passage isn’t an excellent example of someone starting with a desired conclusion, and then pretending to reason his way from first principles in order to get to the desired conclusion, I don’t know what is.
Notice how Krugman just takes any and all economic structures as “trend,” and then presumes that the only way that all resources can be used is if they stay where they are, no reallocation, no pain, and we just ask the benevolent government to act as ultimate buyer for anything that is produced out of the “trend” structure so that we don’t have to feel any effects of reallocation of resources and labor through recession. Krugman just wants himself and everyone else to stay drunk so that they don’t feel the effects of a hangover, and anyone who tries to take away the punch bowl are just evil misers who have a political agenda.
The economic philosophy Krugman is advancing here is the mythical belief that there can be a general overproduction of wealth, (which JB Say refuted hundreds of years ago, and no, Keynes did not “refute” Say at all, because he misunderstood what Say’s Law actually implies) and that in order for this excessive production to find a profitable outlet, there needs to be an external entity that does nothing except spend money it did not earn.
OK, if that were true, then why doesn’t Krugman support a system where any individual can create and then spend their own money? After all, if the only problem is that existing production cannot be profitable due to a lack of enough money floating around, then surely if 300 million individuals had the ability to create and spend their own money, then this alleged “problem” can be overcome, and not only that, but be overcome at a much faster pace than central banking, since people won’t have to wait for the money the central bank creates to spread throughout the economy, ensuring that all production processes in all industries have a profitable outlet.
And wouldn’t you know it? A system where anyone can create and spend their own money would be a commodity money standard. In other words, even the NON-EXISTENT problem Keynesians and Monetarists are imagining takes place, has a solution in the free market process, which means not only are Austrians solving real world problems, they’re also solving the make believe problems of Keynesians. How utterly satisfying.
Secret Agent said this earlier and I did not want it to get lost in the narrow thread:
“If current busts are correlated with prior booms, then current booms are also correlated with prior busts by definition. Correlation means both are related, but it does not imply a causation mechanism.”
This is wrong. The whole point is that current busts are NOT correlated with prior booms, but current booms ARE correlated with prior busts.
Obviously correlation does not imply causation, but that’s NOT the issue here. The issue is that correlation only runs in one direction. You cannot predict busts with prior booms. You can predict booms with prior busts. What you make of that predictability as far as telling a causal story is another matter entirely, but the correlation does not run both ways as Secret Agent suggests, and that’s exactly the point.
“You can predict booms with prior busts”
Japan is eagerly awaiting this news. I suggest that you go tell them immediately as they dont seem to understand.
This is wrong. The whole point is that current busts are NOT correlated with prior booms, but current booms ARE correlated with prior busts.
You’re conflating correlation with causation, and you’re confusing the Austrian theory of the boom with what the central bank does in practice after a bust.
The Austrian theory proper does not argue that booms follow busts causally, but rather that busts follow booms causally, but it nevertheless still does explain why booms should follow busts empirically in the real world. It’s because either the market is allowed to correct the malinvestments, thus making a true recovery, or the central bank and government flood the economy with funny money, thus making a false recovery, even though both real and fake recoveries appear the same in terms of nominal empirical statistics.
As for mistaking correlation for causation, when you say “The whole point is that current busts are NOT correlated with prior booms, but current booms ARE correlated with prior busts,” what you meant to say is that “the whole point” of the Austrian theory is that busts are CAUSED by booms. But empirically, both are correlated with each other chronologically. You do see booms both precede and follow busts.
Obviously correlation does not imply causation, but that’s NOT the issue here.
Then why did you just mistake them?
The issue is that correlation only runs in one direction.
But in a boom bust cycle, over time, if you keep looking in one direction, in the positive direction of time, then you do see BOTH phases follow the other, depending on which phase you start with. If you start with a bust, you see a following boom. If you start with a boom, you see a following bust.
You cannot predict busts with prior booms. You can predict booms with prior busts.
No, you cannot predict booms with prior busts. A boom is made by choice of the central bank. A bust is what is economically necessary once a boom is set into motion. At some point, the home builder will learn he doesn’t have enough bricks. But that doesn’t mean I can predict when he finds that out.
You cannot predict what the government and central bank will CHOOSE to do in the future such that you can predict that a bust will be followed by a boom.
What you make of that predictability as far as telling a causal story is another matter entirely, but the correlation does not run both ways as Secret Agent suggests, and that’s exactly the point.
I said the correlation runs both ways EMPIRICALLY, not causally. Causally, busts follow booms, not other way around. Busts are not primary. They are secondary.
Secret Agent stop saying that. Nothing I have said here confuses correlation with causation. Stop indiscriminately flinging around obvious points that were semi-profound when we were all in grade school as if you’re actually producively participating in this conversation.
You said: “If current busts are correlated with prior booms, then current booms are also correlated with prior busts by definition”
And I am telling you that your second clause is NOT IMPLIED AT ALL by your first clause. The fact that this is not implied is Friedman’s whole point. Causality hasn’t even entered the picture yet. You don’t even understand the claims about correlation.
re: “No, you cannot predict booms with prior busts. “
You really have no clue what the plucking model is, do you?
re: “I said the correlation runs both ways EMPIRICALLY, not causally.”
But the correlation DOESN’T RUN BOTH WAYS EMPIRICALLY. That’s the whole damn point.
That doesn’t prove anything in terms of causality, obviously. But it sure as hell oughta shift your priors.
Secret Agent stop saying that.
Do you demand that I “pass that bill”?
Nothing I have said here confuses correlation with causation.
You sure about that? You said above that
“The whole point is that current busts are NOT correlated with prior booms, but current booms ARE correlated with prior busts.”
If booms and busts are correlated, then that means you CAN’T say the above. Saying the above implied an appeal to causation. If you say it wasn’t, then I’ll accept that at face value, but the way you stated it was very strongly implying a causation relationship.
Stop indiscriminately flinging around obvious points that were semi-profound when we were all in grade school as if you’re actually producively participating in this conversation.
Pass that bill!
You said: “If current busts are correlated with prior booms, then current booms are also correlated with prior busts by definition”
And I am telling you that your second clause is NOT IMPLIED AT ALL by your first clause.
Then I will tell you that you have no clue what correlation means. Correlations to not imply any hierarchies, either in terms of time, or influence to each other. By saying that current booms are correlated with prior busts, but that current busts are not correlated with prior booms, you are demolishing the very meaning of the term correlation, and are delving into what I thought was, but you maintain is not, a causative relationship.
The fact that this is not implied is Friedman’s whole point. Causality hasn’t even entered the picture yet. You don’t even understand the claims about correlation.
No, YOU don’t understand the nature of correlation. You can look at Friedman’s plucking chart and “correlate” a bust with a preceding boom and group “boom then bust” together. That’s what correlation allows one to do for a chronological correlation.
Unless you argue that the relationship is causal in one direction only, you cannot at all tell me that grouping the line into “boom then bust” groupings is wrong.
You simply do not understand the implications of what it means for two variables to be correlated over time in a repetitious fashion.
re: “No, you cannot predict booms with prior busts. “
You really have no clue what the plucking model is, do you?
I understand it just fine. You really have no clue what it means to be able to say you can predict something is, do you?
re: “I said the correlation runs both ways EMPIRICALLY, not causally.”
But the correlation DOESN’T RUN BOTH WAYS EMPIRICALLY. That’s the whole damn point.
FALSE. THEY DO RUN BOTH WAYS.
Go and look at the chart in the link I sent above on the plucking model. Look at the line and then take each boom and group it with a subsequent bust. If one says that booms and busts are correlated, that means you can say boom then bust or bust then boom, EQUALLY with no violation of context.
That doesn’t prove anything in terms of causality, obviously. But it sure as hell oughta shift your priors.
Since correlation does not mean causation, that means that I am not obligated to group each boom and bust into a “bust then boom” set. I can group them into “boom then bust” sets, and not lose the original “busts are correlated with booms” framework.
Correlation is, incredibly, something that you seem to be completely ass backwards about. How can you now know this?
re: “Then I will tell you that you have no clue what correlation means. Correlations to not imply any hierarchies, either in terms of time, or influence to each other. By saying that current booms are correlated with prior busts, but that current busts are not correlated with prior booms, you are demolishing the very meaning of the term correlation, and are delving into what I thought was, but you maintain is not, a causative relationship.”
Fuck it – forget this. Don’t believe me. Don’t believe basic math. Try it out.
Take a time series of GDP changes trough to peak and peak to trough and assign a series number to each to do lags. Correlate bust at time t with boom at time t-1 and correlate boom at time 1 with bust at time t-1.
Tell me what you get.
I’ve never done this but very smart people have, and they’ve consistently found what Friedman found. You certainly don’t need correlation to work both ways.
Fuck it – forget this. Don’t believe me. Don’t believe basic math. Try it out.
This isn’t about basic math. This is about how often booms and busts are correlated. Correlation implies repetition of observations. Repetitions of observations over time means that you can say that there are either boom bust groupings, or bust boom groupings.
Take a time series of GDP changes trough to peak and peak to trough and assign a series number to each to do lags. Correlate bust at time t with boom at time t-1 and correlate boom at time 1 with bust at time t-1.
I’ll just substitute “t-1” INTO the variable “t” that is in the formula “t-1”.
Do you understand the point now?
Tell me what you get.
I get “t-2”, which means what you initially called a “prior bust” is in fact a “prior boom”.
I’ve never done this but very smart people have, and they’ve consistently found what Friedman found. You certainly don’t need correlation to work both ways.
The empirical finding of booms following busts does not in any way invalidate anything about the Austrian theory, and it certainly does not require any tweaking of Austrian theory. Garrison showed that both theories are consistent with the data. Why? Because of what I have been saying to you, which is that in a binary variable correlation, it doesn’t matter which phase goes first and which goes second. They can be both first depending on which “t” you select.
Just as a side note: I don’t mind the swearing, so please fell free to rage. I have found that some people only learn when they go through some raging.
“Take a time series of GDP changes trough to peak and peak to trough and assign a series number to each to do lags. Correlate bust at time t with boom at time t-1 and correlate boom at time 1 with bust at time t-1.
Tell me what you get”
I’ll guess you get what Friedman did, but I don’t think that is a sort of “nail in the coffin” in ABCT. Austrians say, in a nutshell, that busts are the correction of all the malinvestments in the previous boom but governments and central banks can take different actions during the slump and that will affect the lenght of the recession and the magnitude of the recovery.
As Bob wrote several times, if you follow a laissez-faire approach and let malinvestments be “liquidated” you will have a awful but short slump, followed by a sharp and genuine recovery. (like in 1920-1921)
In you instead try to get a soft landing, make the bust never end, try to save all the banks and so on, probably you will have a softer decline but a slower recovery.
What will data show? Exaclty what Friedman found, great correlation between busts and following booms.
Marco
re: “I’ll guess you get what Friedman did, but I don’t think that is a sort of “nail in the coffin” in ABCT. “
No – it’s definitely not a nail in the coffin.
Why does everybody think I’m always out to get ABCT???
Sorry for the language – Bob. Feel free to delete that if you want.
Bust – 8
Boom – 8
Bust – 4
Boom – 4
Bust – 10
Boom – 10
Bust – 1
Boom – 1
This is an example of a time series where there is high correlation of a boom with a prior bust but low correlation of a bust with a prior boom.
Boom – 8
Bust – 8
Boom – 4
Bust – 4
Boom – 10
Bust – 10
Boom – 1
Bust – 1
This is an example of a time series where there is low correlation of a boom with a prior bust but high correlation of a bust with a prior boom.
Now please stop writing things like this: “By saying that current booms are correlated with prior busts, but that current busts are not correlated with prior booms, you are demolishing the very meaning of the term correlation”
Or this: ““If current busts are correlated with prior booms, then current booms are also correlated with prior busts by definition”.
You are wrong.
Bust – 8
Boom – 8
Bust – 4
Boom – 4
Bust – 10
Boom – 10
Bust – 1
Boom – 1
This is an example of a time series where there is high correlation of a boom with a prior bust but low correlation of a bust with a prior boom.
No, it is a series of meaningless symbols that do not relate to the real world.
Boom – 8
Bust – 8
Boom – 4
Bust – 4
Boom – 10
Bust – 10
Boom – 1
Bust – 1
This is an example of a time series where there is low correlation of a boom with a prior bust but high correlation of a bust with a prior boom.
No, it is yet another series of meaningless symbols that do not relate to the real world.
Now please stop writing things like this: “By saying that current booms are correlated with prior busts, but that current busts are not correlated with prior booms, you are demolishing the very meaning of the term correlation”
No, I won’t stop writing that, because it’s not wrong, it proves you wrong, and not only that, but has nothing to do with any of the nonsense you wrote above.
What the heck do those numbers mean? Occurrences? I’ll just group them differently. I’ll instead pair up each boom with a subsequent bust. Since boom and bust are binary and occur one at a time, I can do this.
Or this: ““If current busts are correlated with prior booms, then current booms are also correlated with prior busts by definition”.
No, I’ll keep saying that too because it is also correct and also proves you wrong.
You are wrong.
No, YOU’RE wrong, again.
“I’ll just group them differently”
OK – conversation over. I’m going to break my laptop if I keep doing this.
lol
Daniel is right. You were insisting he didn’t understand correlation, but it really sounds like you need to take a statistics class.
His numbers refer to the size of the boom/bust (in most of your comments you seem to be referring to their mere occurrence, and with just alternating 1s and 0s you’d be right about symmetry). We might intuitively expect that larger booms result in larger busts. He is pointing out that empirically, it is the other way around. If you see a large boom, you cannot predict a large bust. But with a large bust you can predict (not all the time, this is a statistical tendency) that the subsequent boom will be large.
“We might intuitively expect that larger booms result in larger busts.”
We would see larger busts but the Fed and the government never allow the necessary correction to occur. Every time the correction begins the government steps into action and kicks the can down the road.
I’m not sure why this topic would be a problem at all for Austrians?
OK – conversation over. I’m going to break my laptop if I keep doing this.
OK, better luck next time.
Daniel is right. You were insisting he didn’t understand correlation, but it really sounds like you need to take a statistics class.
Great, another person who doesn’t understand correlation for a binary variable. Did you all go to the same school?
His numbers refer to the size of the boom/bust
Neither the Austrian nor the plucking model considers size of boom and bust.
(in most of your comments you seem to be referring to their mere occurrence, and with just alternating 1s and 0s you’d be right about symmetry). We might intuitively expect that larger booms result in larger busts. He is pointing out that empirically, it is the other way around. If you see a large boom, you cannot predict a large bust.
It works both ways. If you see a large bust, you can’t predict when a boom will take place. Consider the bust of 1929. A boom didn’t begin again until 1946.
But with a large bust you can predict (not all the time, this is a statistical tendency) that the subsequent boom will be large.
It works the other way as well. With a large boom, there will be a large bust thereafter. The larger the boom, the larger the bust.
Size, but more importantly TIME ORDERING. To do any correlation you have to work with order pairs. The ordered pairs we have been arguing about are:
(boom at t, bust at t-1), and (boom at t-1, bust at t).
Those are the relevant ordered pairs for the discussion.
You are right – if you just “group them differently” you might get a completely different result – and you will also abdicate your role as a rational debate partner who can stay on subject (granted, I’m pretty sure you abdicated that several comments up).
Size, but more importantly TIME ORDERING. To do any correlation you have to work with order pairs. The ordered pairs we have been arguing about are:
(boom at t, bust at t-1), and (boom at t-1, bust at t).
Those are the relevant ordered pairs for the discussion.
There is no obligation on anyone’s part to pick any particular bust-boom or boom-bust pairs.
If you pick boom at t, bust at t-1, then I’ll just pick boom at t-1, and bust at t.
Because they alternate, because they repeat, one can do any groupings one wants. The only limitation here is one of theory, not what is empirically the case.
You are right – if you just “group them differently” you might get a completely different result – and you will also abdicate your role as a rational debate partner who can stay on subject (granted, I’m pretty sure you abdicated that several comments up).
Not even close. It is not irrational to group the pairs into boom-bust pairings instead of bust-boom pairings. You’re just fallaciously assuming that because busts are “close” to previous booms, that we should group them into bust-boom pairings. But that is arbitrary. It is arbitrary to group events solely on account of their proximity in time.
If I told you that we should group them into boom-bust pairings, and then you came back and said “No, we should group them “differently” into bust-boom pairings,” then it would also be silly for me to say “you’re not being rational.”
“If you pick boom at t, bust at t-1, then I’ll just pick boom at t-1, and bust at t.”
It’s fine if you “pick” boom at t-1, bust at t. That’s one of the options Daniel specified. Friedman (and others) tested out both options. They found that the size of bust at t-1 correlates with boom at t, but the size of boom at t-1 DOES NOT correlate with bust at t. This is not someone making an arbitrary choice, it is two simplified theories (size of booms predict the size of subsequent busts vs the reverse) being tested against the data.
I think part of the confusion is that Daniel might have thought you were saying that the size of the boom at time t should be compared with the size of the bust at time 1 + 2x, (where x is an integer from 0 to infinity). He thought that was so ridiculous there’s no point in talking. But my read is that you want to compare booms to the busts that follow directly after (regardless of how long the boom lasts), is that right?
“If you pick boom at t, bust at t-1, then I’ll just pick boom at t-1, and bust at t.”
It’s fine if you “pick” boom at t-1, bust at t. That’s one of the options Daniel specified.
Yes, I know, but Daniel REJECTS the boom-bust order. He claimed that “the plucking model is right.”
Friedman (and others) tested out both options. They found that the size of bust at t-1 correlates with boom at t, but the size of boom at t-1 DOES NOT correlate with bust at t.
The sizes do not have to correlate with each other in order to conclude that a boom is connected with a prior bust rather than a future bust. If the Fed keeps inflating right away right after a bust, thus making empirical history look like the plucking model, that doesn’t mean the Austrian model is wrong.
If the Fed did not inflate at all after the crash in 2008, and the government did not spend any more money, what do you think would have been the size of the collapse? Most Austrians would say about the size of the dollar boom that started since the 1970s, which means HUGE.
The continuous upticking in the long run, the trend, is not “normal” to the Austrians, contrary to Friedman who implicitly held that long term booms are “normal.”
This is not someone making an arbitrary choice, it is two simplified theories (size of booms predict the size of subsequent busts vs the reverse) being tested against the data.
Not at all. Both theories are exactly consistent with the data. The Austrian theory does not say that in practice, the Fed will necessarily allow a bust to match the previous boom. It is not intrinsic to the Austrian theory that the Fed do anything after a bust. The Austrian theory is of the boom.
I think part of the confusion is that Daniel might have thought you were saying that the size of the boom at time t should be compared with the size of the bust at time 1 + 2x, (where x is an integer from 0 to infinity). He thought that was so ridiculous there’s no point in talking. But my read is that you want to compare booms to the busts that follow directly after (regardless of how long the boom lasts), is that right?
Bingo. How did you infer that Daniel was talking about the size of them? I see no size implications in anything he said, and I am not getting why size matters (haha, that’s funny).
re:“But my read is that you want to compare booms to the busts that follow directly after (regardless of how long the boom lasts), is that right?
Bingo.”
I want to compare this too.
Friedman looked at this.
They are uncorrelated.
Many people have verified it.
You say “bingo”. Fine. Then accept the findings. There are several ways to interpret it but don’t keep telling me that one correlation implies the other. It doesn’t.
re:“But my read is that you want to compare booms to the busts that follow directly after (regardless of how long the boom lasts), is that right?
Bingo.”
I want to compare this too.
Friedman looked at this.
They are uncorrelated.
Impossible. If booms and busts are correlated, then because they are binary variables, it doesn’t matter, empirically, whether you say booms precede busts or busts precede booms.
It is nonsensical to say that booms and busts are correlated, but only in the bust-boom order.
Many people have verified it.
Many people have verified the boom then bust order as well.
Verifying the bust-boom order is an unintended verifying of the boom-bust order, and vice versa.
You say “bingo”. Fine. Then accept the findings. There are several ways to interpret it but don’t keep telling me that one correlation implies the other. It doesn’t .
But it does. I won’t stop saying that they don’t when that’s not true.
For two variables that alternate (boom, bust, boom, bust, etc), then finding that booms follow busts is the same thing as saying busts follow booms, and vice versa.
“they are binary variables”
He is not talking about binary variables, but scalars. For example, in a comment a while back.
“Take a time series of GDP changes [emphasis added] trough to peak and peak to trough”
He then made up some example data where booms and busts are assigned numbers. Those numbers represent the size of the change in GDP (possibly relative to a long-run trend). It should not be at all difficult for a careful reader to realize sizes are being discussed. If you think the plucking model doesn’t refer to sizes, then you don’t know the plucking model.
You ask why care about size. Well, a lot of people already care about it but you are free to care or not care about whatever you feel like and then people who care about different things may discuss them with each other. An intuitive reason why people care about size is that the larger the recession, the worse all the things we dislike about recessions are. And conversely, as the size approaches zero it loses any recessionary features.
Bob:
Why do you thik that measured potential income would rise because of the additional oil equpment?
I am not even sure that measured real GDP would rise if there was full employment.
If we imagine that there is excess capacity in the oil industry, and they believe there is a big oil pool somewhere, and start producing oil equipment, using that excess capacity, then real GDP would rise. Potential GDP would not rise. Real GDP would be rising to potential or above potential–as measured.
If, on the other hand, we imagine that we have full employment of resources, then production of other capital goods, or maybe consumer goods, would fall, to free up labor and capital to produce extra oil rigs to exploit the supposed oil. This doesn’t impact real GDP.
But persumably the oil equipment is going to be worth more than the other goods being sacrificed. I think you are seeing a favorable productivity shock here. (And it seems plausible enough to me.) But what will happen is that capital goods will have higher prices on net, (firms are bidding up the prices of the oil rigs to get at the big imaginary pool of oil.) This doesn’t raise measured real GDP. The higher prices of the capital goods makes the investment goods deflator higher, and this offsets the higher nominal investment. To me, it seems like real GDP doesn’t capture this effect of the capital goods “really” being worth more.
But even if somehow real GDP did increase, the most likely scenario is that there woudl be no effect on the CBO estimate of potential output. The most likely result is that real GDP would show, perhaps wrongly, to have changed relative to potential.
Now, if the oil actually materialized, and the result were lower gasoline prices, this would result in a lower GDP deflator and so real GDP will be higher. If, somehow, nominal GDP had risen enough so that the deflator didn’t fall because of the lower gasoline prices, then real GDP would still be higher.
Now, these real GDP figures will effect estimates of labor productivity. And those, along with estimates of labor force growth, will impact CBO estimates of potential output.
And, I think that the CBO does go back and make readjustments to past values of data series, but not very quickly.
But I don’t think that productivity estimates from the past are readjusted according to what we determine were the “true” value of the capital goods produced at those past times, determined by looking at the actual value of the products generated by those capital goods.
In the case of housing, or any durable good, the idea is simpler. Do we go back and value the houses produced in 2005 at there 2011 prices? And then… use the same deflator from then and show reduced real values? I don’t think so.
I think the way you show reduced productive capacity due to malinvestment is that if nominal GDP is the same, and we have made malinvestments, then the actual capital goods we not be very well suited to produce the goods and services we want. The prices of those goods rise. The deflator rises. And real GDP falls.
If nominal GDP falls enough so that the deflator doesn’t rise, then real GDP has still fallen. This feeds back into labor productivity estimates, and given labor force estimates, that reduces estimates of potential output.
Again, while they might go back and change past figures, it won’t be to say that the bad investments really werent valuable output.
And I don’t think it makes sense to say that this reduces potential output in the past. It doesn’t. It is just that some of the output produced in the past was invested in poorly.
Bill, nice comment, and I grappled with those issues (at first) too. But here is the crucial part:
But persumably the oil equipment is going to be worth more than the other goods being sacrificed. I think you are seeing a favorable productivity shock here.
Right, so if the people (and machines) that create those goods see their productivity go up, then potential GDP is higher, right? It’s a positive productivity shock. (Yes, there’s a wealth effect going on too, but there’s also a positive productivity shock when people think they can now all of a sudden crank out $150 billion worth of drilling equipment when before, they thought with those resources they would only be able to crank out $10 billion of drilling equipment).
This is why I brought up the fortune teller example, since that isolated it better. Clearly a person can provide an intangible service that raises real GDP; the musician shows that. You wouldn’t say that people just spend less on everything else, and so therefore total real GDP is the same. No, the musician’s services really are valuable and count as “real output.”
But with the fortune teller, it’s not as obvious. Superficially it’s the same thing, but people only indirectly value the services. In a sense it’s an investment, not consumption, to see the fortune teller.
Either way, in all of this I’m just trying to show that when people spend money not directly on consumption goods (or services), but on things that involve expectations, then “real GDP” might be pushed up to an unsustainable level. So it is wrong to take output at the height of the boom as sustainable, the way Krugman so casually did.
In his latest post Karl brought up the fact that even the BEA says real output can be higher than potential output; in fact the BEA thought as much during 2005 and 2006. So I’ll have to look into that. I had assumed that potential output was by definition the maximum of real output.
Bob,
Perhaps this is a bit off topic but I could not help to see a “correlation” (just to agitate DK so he breaks his laptop and stimulates the economy!! ;-)) between the “expectation” of future production in oil rig investments example and the same type of future expectation that a banker has when he makes a loan. If the loan goes bad it is just as if the oil dissapeared and the GDP would drop, if it performs then GDP is sustained. Add the fractional reserve element into the mix and there is a greater potenial for growth but also greater potential for waste too.
Hayek:
“The primary cause of the appearance of extensive unemployment, however, is a deviation of the actual structure of prices and wages from its equilibrium structure. Remember, please: that is the crucial concept. The point I want to make is that this equilibrium structure of prices is something which we cannot know beforehand because the only way to discover it is to give the market free play; by definition, therefore, the divergence of actual prices from the equilibrium structure is something that can never be statistically measured.
****
In contrast, the modern fashion demands that a theoretical assertion which cannot be statistically tested must not be taken seriously and has to be discarded. As a result of this belief, a theory which, in my opinion, is the true explanation has been discarded as not adequately confirmed, and a false theory has been generally accepted merely because it happens to be the only one for which statistical evidence, even though very inadequate evidence, is available.”
Bob:
I think you are right about expectations raising real income.
But I don’t think that measured real GDP does a good job of capturing this effect.
Investment is deflated by an index of capital goods prices. If instead you used consumer prices, then maybe this effect would show up in the statistics.
Also, think about the issue of correcting the CPI for quality improvements.
Perhaps the clever BEA economists correct the capital goods deflator for the future productivity generated
by the capital goods. But I don’t think they do.
I don’t remember about the fortune teller.
Matthew Yglesias says the stuff Ron Paul says about inflationary booms followed by big crashes is right…about the Eurozone:
http://thinkprogress.org/yglesias/2011/09/15/320035/can-the-european-central-bank-implement-different-monetary-policies-in-different-regions-of-europe/
Hey Bob and everyone else,
I think it’s funny how you claim to have never predicted hyperinflation. Yet, in two separate articles in 2009/2010 you clearly did. The first was titled “Will the Fed’s new tools avert hyperinflation?” In that piece you said:
“How does this avert the threat of hyperinflation? Simple, according to Woodward and Hall. If banks ever start loaning out too much of their (now massive) excess reserves, and thereby start causing large price inflation, then the Fed can simply raise the interest rate it pays on reserves. ”
Then, in 2010 you wrote a piece asking if those dreaded excess reserves (which would cause the hyperinflation as per your 2009 article) were leaking out:
“Now here’s the really interesting thing: Excess reserves fell about $41 billion in March. I don’t have the time to check all the possibilities, but it looks to me that my doomsday scenario is starting to play out.”
That doomsday scenario is hyperinflation as your first article EXPLICITLY states.
So, at least we have you on the record as having predicted hyperinflation – contrary to your repeated lies about having done so. Unfortunately, you don’t know how a modern banking system works and that banks don’t lend reserves so you’ll continue to look like a fool as your hyperinflation prediction doesn’t come true.
Can you give links? I’m not saying you are making up quotes, but I want to see the context.
It’s from the 2009 article titled “Will the Fed’s new tools avert hyperinflation?” That’s a direct quote from your title. In the article you clearly explain why the Fed’s new tools won’t work and then in the piece one year later you refer to your doomsday scenario. So, unless “doomsday” is moderate to high inflation (you’re not fooling anyone here Bob if you say that) then we all know you predicted hyperinflation and now look very wrong.
But please – I am sure you can figure out a way to alter the past and make it seem like you never predicted it…..I am eager to watch you back pedal your way out of this one.
That’s pretty funny. The article has some good quotes by you on your predictions for the economy and at the end of it you give a recommendation to buy precious metals close to the bottom of the market for most. You don’t predict hyperinflation although you do use the word once in the article. You would really have to stretch that for it to be an outright prediction of hyperinflation. All in all a great article.
http://www.lewrockwell.com/murphy/murphy156.html
Ha! The title of the article is “Will the Fed’s new tools avert hyperinflation?” And then Bob goes into some diatribe about how controlling interest on reserves won’t fend off the inevitable inflation when the banks start lending their reserves.
He EXPLICITLY affirms this position in the piece one year later when he refers to the “doomsday” scenario and what he thought was reserves being lent out. You can sugarcoat this and try to mislead people all you want, but anyone with a brain can connect the dots and conclude what your worst case scenario is when you clearly referred to it as hyperinflation in the 2009 article.
As for market calls – he also told people to sell corporate bonds and US bonds. Since then, high yield corporate bonds are up 50% and treasuries are up 20%. Gold is up 90%. On a risk adjusted basis, both bond calls look pretty atrocious even though the gold call was very good – to Mr. Murphy’s credit.
All in all though, he was right for the wrong reasons. His hyperinflation call has been horribly wrong and his misunderstanding of the banking system is the primary cause.
But I don’t expect you Austrians to understand this because you don’t understand how reserve accounting works in a fiat system. Oh well. Back to worshipping at the altar of false gods. Enjoy that.
“As for market calls – he also told people to sell corporate bonds and US bonds. Since then, high yield corporate bonds are up 50% and treasuries are up 20%. Gold is up 90%. On a risk adjusted basis, both bond calls look pretty atrocious even though the gold call was very good – to Mr. Murphy’s credit.”
Answer me this, master of the banking system, would someone have made more or less if they sold all their corporate and treasuries and then put it into to gold? I know you don’t expect us stupid Austrians to be good at math but I’m pretty sure 90% is better than 50% or 20%.
My God, you are going to give Dr. Murphy a big head if you keep pointing to great calls he made as your ammo to take him down. I’m starting to think maybe you are just being sarcastic and making fun of all the horrible take down attempts by others against Dr. Murphy.
Gold is always the last resort of the dead end Austrian arguments. This isn’t about gold. Bob Murphy didn’t ask if he bought gold. We all know he did. Good for him. He said he didn’t predict hyperinflation. That’s what this conversation is about. He was wrong. He misunderstood how the banking system works. End of story.
God. It’s like arguing with a permabull who continually points out that stocks have risen since 1950 as if that proves their thesis…..
You brought up gold genius. I didn’t mention gold anywhere before you did. I just pointed out how bad your critique of his sell bonds and buy precious metals was. If you did what he said you made a lot of money. More than you would have made if you sold precious metals and bought bonds waiting for deflation.
Jesus. Beating Austrians in an argument is like beating retarded kids in a math test. In your second response to me you said: ” that you should buy precious metals in April 2009, and they think this is a take down of your predictions.”
Yeah, that’s right. Go back and read it again genius. You brought up precious metals because your line of argument was weak to begin with.
Ok, and you condensed that down to gold. Or do you think gold is the only precious metal out there? Saying gold is the last resort of Austrians after you brought up the 90% performance of gold on your own is funny.
How old are you by the way? You act like a child.
My favorite quote from the article.
“Once people get over the shock of the financial crisis, the new money Bernanke has pumped into the system will begin pushing up prices.”
So lets look at the tape. M2 started to fall after QE1 and was in a negative to 1% range between the March 2010 to early July 2010 H.6 reports. At this point rumors of QE2 began to swirl and M2 started to climb and got up to 7% by the end of the year. Then maintained at about 5% for the first half of 2011.
Now lets look at CPI. CPI fell from 2.2% YOY from March 2010 to 1.1% by Nov. 2010. Since M2 started to rise so has CPI from 1.1% to 3.8% YOY for August.
The biggest change now though is that M2 is soaring even with the end of QE2 over the last few months. M2 is growing at 17% SA the last 13 weeks. We are finally starting to see the excess reserves falling and required reserves skyrocketing.
Dr. Murphy said once the new money finally entered the economy that prices would start to rise. Great call and probably going to be very spot on now that M2 is truly soaring.
It is really eye opening that someone would use an article where you warned that once the new money started to enter the economy that prices would begin to rise and that you should buy precious metals in April 2009, and they think this is a take down of your predictions.
M3 is rising at a 2.5% pace according to your favorite site Shadow Stats. Well below the historical average. You guys missed the boat here Admit it. You were wrong. The hyperinflation never happened and it’s not going to happen.
M3 has also soared in the last year. It was negative 5% or 6% about a year ago. So all money supply figures have seen a big jump over the last year and we’ve seen the CPI more than triple. This is what Dr. Murphy and other Austrians said would happen when the new money finally started entering the economy.
I couldn’t care less about whether we get hyperinflation or severe inflation. Either way it will be awful and either way all the other schools will have some major back pedaling to do. So when inflation is in double digits are you guys going to be saying, “oh those stupid Austrians thought inflation was going to get bad, how dumb are they?” There are still over $1.5 trillion in excess reserves and you have central banks the world over talking about stepping up the printing of money. There is a long way to go before this is over.
It again amazes me that you can point to an article where Dr. Murphy said that prices would start to rise when the new money started entering the economy and to invest in precious metals at a time when you could have made a lot of money and think you got him.
The money supply always rises. It’s like predicting that there will be more people on the earth in 20 years than there are today. You act as if he made some prescient call when in fact, at the printing of his hyperinflatlation article, the money supply did something that is almost unheard of. M3 WENT NEGATIVE FOR A YEAR AND STILL HASN’T RECOVERED ITS HIGHS!!! http://www.shadowstats.com/imgs/sgs-m3.gif?hl=ad&t=1315601350
It wasn’t a good call. It was an awful call. His prediction that the money supply would rise was 100% wrong. He made a prediction that comes true 99.5% of the time and he was wrong.
It’s comedic that you defend this man who is a blatant liar and fraud.
Ok, one last time. Dr. Murphy said, “Once people get over the shock of the financial crisis, the new money Bernanke has pumped into the system will begin pushing up prices.”
So ONCE the new money started to enter the economy did prices start to rise? Answer is they more than tripled. His prediction was that WHEN the new money started to enter the system that prices would rise. Even if you change it to a prediction that money supply would rise he is right. Just look at the numbers from the latest H.6 report.
It’s comedic you are so bad at this.
Prices always rise during an economic recovery. You’re praising a man who told you the sun would rise tomorrow and you’re slurping him as if he is some God. CPI averages almost 4% since 1950. There’s no genius in predicting price increases. But what Bob Murphy predicts is not just price increases but hyperinflation. That has been wrong. Will it happen? We’ll see I guess, but he’s been wrong so far.
And there it is, the last refuge of a desperate man, the offensive insult. Now I know you are not worth debating. I mean you’re not even good at witty insults. You are really bad at this.
If that makes you feel like a winner then by all means go for it. I am just calling a spade a spade. Dr. Murphy misunderstands some very basic facts about modern banking and it led him to make some very bad predictions. It is what it is. His analysis is dangerous and borders and incompetent.
His entire idea of reserves and their function in the banking system is flat out wrong. But people like you read his political garbage and slurp him up like he’s some sort of genius. And then when he blatantly lies to you about his past predictons you protect your leader like any good servant should. You should buy his book. With the dollars he thinks are worthless of course.
Hahahahahahaha.
Did your mom turn off your World of Warcraft account today? Just clean your room in the basement and I’m sure she’ll turn it back on.
Just doing 1 google search brings up not only a hyperinflation prediction, but a prediction that the Amero might replace the US Dollar. Again, a very bad call on bonds and a very good call on metals. But dead wrong in the general thesis and a total misunderstanding of how the banking system works. To his credit, he’s pretty slick about not attaching his name to the actual word hyperinflation, but we all know what “killing the currency” and prices increasing by the week really means.
“They will see the prices of milk, eggs, and gasoline increasing by the week, yet their paychecks will remain the same for months or longer. If the dollar crashes in the foreign exchange markets, gold and silver would see their prices (quoted in U.S. dollars) increase in the opposite direction.”
http://www.theamericanconservative.com/blog/killing-the-currency/
Lots of fearmongering. Short on good and accurate analysis. But hey, I am sure that rising gold prices justify every bad call an Austrian ever made, right? Right?
And for those keeping tabs, the trade weighted dollar is perfectly flat since the date this was printed. So his whole, dollar collapse, gold rise thesis was also wrong. Oh well, I am sure someone can think of a good excuse for Bob’s pitiful analysis.
Incidentally, is MarkS the same person as David S.? Even scarier, what if Major Freedom = Secret Agent = DavidS = MarkS? That would be like the ending scene in Psycho.
If you belittle me enough your loyal minions will gather around you like the slaves that they are rather than abandoning you. Good tactic. But the truth here is not borne out in who is Mr. Funny man or who can belittle who. The truth is borne out by what we have said in the past and whether that analysis was right.
Your hyperinflation prediction and general understanding of reserve and banking are not just wrong. They are amateurish.
Go sell some books to your readers. If you scare them bad enough they’ll certainly buy almost anything you throw at them….And enjoy the new boat. I am sure you’re eager to acquire dollars so you can pay for it. Ie, you’re a fraud AND a liar.
“If you belittle me enough your loyal minions will gather around you like the slaves that they are rather than abandoning you.”
Dr. Murphy, MarkS has a point here. You shouldn’t belittle such a decent and kind gentleman. He has been nothing but courteous to you, the fraud and liar, and all of us loyal minions. If someone deserves to be treated the way he treats others it is clearly MarkS.
Oh, by the way, I didn’t know you were rolling in an Escalade to your new home in the mountains as you buy yet another new boat. Sales must be amazing for the books you give away for free online. I didn’t even know you were so famous.
But…but…I am a supporter!
To his credit, he’s pretty slick about not attaching his name to the actual word hyperinflation, but we all know what “killing the currency” and prices increasing by the week really means.
I couldn’t have said it better.
We should also mention his call to get rid of all dollar denominated assets, which is nothing else than a call to kill the currency.
Sure you could have said it better, MamMoTh. At least you have a sense of humor.
Do you think it’s funny that an academic such as yourself can so blatantly predict things and then come back here and try to repaint the past? Is that funny? Should your readers find it funny when you’re this wrong? Should your readers think you’re a good and honest man when you blatantly lie to their faces?
Humor is not the solution here Bob. Honesty is. And you have been exposed as a liar and fraud.
“M3 is rising at a 2.5% pace according to your favorite site Shadow Stats.”
MarkS, you said my favorite site is Shadow Stats. Do you think it’s funny that a banker such as yourself can so blatantly predict things that are untrue? Is that funny? Should I think you’re a good and honest man when you blatantly lie to my face? I never go to Shadow Stats so it is clearly not my favorite site.
Humor is not the solution here MarkS. Honesty is. And you have been exposed as a liar and fraud.
The primary problem with funny money dilution is the impairment of economic calculation and the resulting distortion of the price, investment and capital structure, together with Cantillon Effects and the destruction of private property, contracts rights and due process of law.
No wonder clowns like MarkS always wish to focus upon price inflation predictions while ignoring the essential depravity of fiat money.
Bob,
Your analysis has proven to be an even bigger joke than Murphy’s. Shouldn’t you be cleaning your kings feet or something? Surely you can grovel at the altar of Murphy better than this. Or why not just pay the Murphy tax where you buy his book and getting dumber? He only accepts dollars of course. You know, the Amero is not available yet and Bob needs to fill up his Cadillac Escalade with some gasoline so he can get to his vacation home in the mountains. Your generous donations would be appreciated.
I expected higher inflation to take longer to show up than Bob Murphy did due, in part, to the deflationary effects of the housing collapse, which I predicted and apparently Bob Murphy didn’t. Also, I knew a guy who predicted imminent hyperinflation back in 1983. Things seem to play out over the longer term.
Predictions are difficult because you are dealing with human beings. Different people have made and continue to make different predictions based upon Austrian concepts about which you have no clue.
You’re just another half-wit pedestrian statist of the type I’ve seen for four decades. We can spot your ignorance from blocks away. Keep blabbing.
Oh please Bob. Spare me your lectures. You don’t even understand how a fractional reserve banking system works yet you feel the need to lecture everyone about it. You made the same dire predictions Murphy did. The same predictions based on the same misunderstanding of the modern banking system.
Don’t lecture me. I work in a bank. I actually understand this stuff. I am not some hack wasting his days away as a fraudulent academic or slurping some pretend academic on a website (as you clearly do all day). I am out here in the real world and I can tell you definitively that Bob Murhpy has close to no idea how a modern banking system works. Your support of him tells me that you don’t either.
So spare me the lectures. I’ve heard quite enough from you people who feel the need to lecture the rest of us on the ways of the world when you clearly don’t know your first from your face.
Don’t feel bad Roddis, I don’t know my first from my face either. It must be because we buy his book and getting dumber as the brilliant banker MarkS likes to say.
Oh look. I made a typo. That’s hilarious. If you point it out and belittle me it will divert the other readers from the fact that Bob and the gang don’t understand modern banking and can’t predict their way out of a wet paper bag!!!!! but that doesn’t matter. If we focus on other things we can all forget the fact that Bob Murphy and most of his readers have no idea what they’re talking about!
Yeay!!! Whhheeeeeeeeee!!!!!! Get back on the ignorance merry go round. It’s so fun!!!!!!!!!!!
I apologize to you MarkS. How dare I not take seriously the arguments of a person like you who shows such decency and tact.
I detect an MMT’er with this markS character
re: “Oh please Bob. Spare me your lectures”
The man can’t help lecturing people. Just ignore him.
“Or why not just pay the Murphy tax where you buy his book and getting dumber?”
Were you trying to be ironical here?
MarkS, writers don’t pick their titles. The one time I used “hyperinflation” in that article, was me saying that the tools of the Fed wouldn’t work the way the proponents said they would. If you want to construe that as me saying, “Hyperinflation is coming!!” go ahead, but it’s weird that I would explicitly chastise Marc Faber for predicting hyperinflation in the same time period.
I can’t think of an econo-pundit who has been more forthright about my botched predictions on CPI than me. Yes, price inflation thus far in consumer goods has been a lot lower than I thought it would be. But I never said, “Hyperinflation!” I thought we’d be hitting double-digit rates easily by now, and that’s why I thought people should get out of dollar-denominated assets.
You’re not fooling anyone Bob. We all know what “currency collapse” means. We all know what you meant when you said prices would be rising on a weekly basis. We all know what you meant when you explicitly predicted that the Amero would replace the dollar. “The same will be said in future history books, when they explain matter-of-factly the economic crisis that gave birth to the amero.” If that doesn’t smack of conspiracy theory and fearmongering madness then I don’t know what does.
You’re a fearmonger. Nothing more. And you’ve been exposed as someone who doesn’t understand basic banking. You’re a wolf pretending to be an economist. Some people have fallen for your disguise, but not all.
But don’t let me impede on your sermons. You have servants here who need someone to look up to. And apparently, your message of fear is just what the doctor ordered for them. So by all means – back to brainwashing these poor souls with your misleading message.
Haven’t we established Murphy never explicitly called for hyperinflation? why are you still harping on it?
Hey Mark S, Care to share any of your predictions?
Are you an aggregate demander? How come were still in a recession despite consumer spending being higher than its pre recession levels? I thought people blowing wads of cash was supposed to “stimulate” the economy to “full employment?”why are we not at full employment?”
Bob Higgs has a great piece out today that explains this:
http://mises.org/daily/5641/Its-Not-about-Consumption
You a deflationist? Where the deflation? Other than housing, prices have been gradually rising.
Given unprecedented levels of both fiscal and monetary stimulus, why hasn’t the economy recovered? I thought the government and the Fed can wave a magic wand and stimulate the economy by either printing money, pushing buttons on a computer, or spending OPM? right?
The Keynesians/ statists have a lot more to explain than the Austrians, most of whom, did not predict hyperinflation. They come on these blogs and try to say that because some Austrians WARNED about hyperinflation, well, that somehow means they ALL claimed it would happen by NOW? No way, not even close.
Bob Murphy didn’t just predict hyperinflation. He explicitly predicted the rise of the Amero. That’s not just hilarious. It’s reckless. Further, it’s embarrassingly wrong.
Go back and read the quotes. Murphy is the one who wrote it. Not me.
““The same will be said in future history books, when they explain matter-of-factly the economic crisis that gave birth to the amero.””
Go ahead, keep protecting your master like any good slave should.
MarkS didn’t just call Dr. Murphy’s call to dump bonds atrocious. He explicitly pointed out how much more money you would have made if you listened to him and bought precious metals instead. That’s not just hilarious, it’s super hilarious.
Go back and read the quote. MarkS is the one who wrote, not me.
“As for market calls – he also told people to sell corporate bonds and US bonds. Since then, high yield corporate bonds are up 50% and treasuries are up 20%. Gold is up 90%. On a risk adjusted basis, both bond calls look pretty atrocious even though the gold call was very good – to Mr. Murphy’s credit.”
Here we go again. When you misunderstand the facts behind the argument or your understanding of the banking system leads you to make wildly wrong predictions, just point to the price of gold and all will be proven right!!!!!
Don’t get mad because you brought up on your own how much gold outperformed bonds. I know it was a bad tactic but just own up to it.
I was trying to give Bob some props on a good investment call. Too bad the whole point of the comment went straight over your head. Misunderstanding things seems to be a problem that is consistent across Austrian economics.
Ouch MarkS, ouch. Here I go thinking we were fast becoming great friends and respectfully disagreeing with each other and then you throw in an insult. I’m shocked! After defending the tactful and respectful way you have disagreed with us on this blog, you go and do something like that? I take it all back. You are not my friend anymore.
Bob Murphy didn’t just predict hyperinflation. He explicitly predicted the rise of the Amero. That’s not just hilarious. It’s reckless. Further, it’s embarrassingly wrong.
“Reckless”? Why reckless? The Amero has been talked about for many years.
http://en.wikipedia.org/wiki/North_American_currency_union
At this point it seems to be just talk, but if European policy makers made the Euro, why would the Amero be silly?
Well, if Wikipedia has an entry on it then we should all start trying to accumulate Ameros!!!!
Will Bob sell me a copy of one of his books for an Amero? Or will he continue predicting the collapse of the dollar as he charges you for your time and new book in the same dollars that he is buying new boats with???????
Well, if Wikipedia has an entry on it then we should all start trying to accumulate Ameros!!!!
I didn’t argue that BECAUSE there is a wiki entry that it must be in the works.
I pointed to it to show you that the concept is not just made up.
Will Bob sell me a copy of one of his books for an Amero? Or will he continue predicting the collapse of the dollar as he charges you for your time and new book in the same dollars that he is buying new boats with???????
Are you predicting that the dollar will remain the world’s reserve money for a specific future time period?
I can’t think of an econo-pundit who has been more forthright about my botched predictions on CPI than me.
Krugman was humble enough to subtract half a point from his otherwise perfect score of himself:
http://krugman.blogs.nytimes.com/2011/06/28/3-5-out-of-4/
Bob Wenzel said this:
MMT’ers are gaining in popularity and they hold policy views that could easily lead us toward hyper-inflation. If the MMT view gains popularity, I could easily see a period of hyper-inflation in the US.
http://www.economicpolicyjournal.com/2011/09/putting-hyper-inflation-cart-before.html
I’m not so sure. Average people simply do not understand that the Fed causes inflation. Being so explicit in their insanity, the MMTers would teach them. Once they understand, I think they will be appalled. Of course, if they aren’t appalled, run for cover.
The Fed doesn’t print money. They don’t fund government spending. You can’t criticize MMT when you blatantly fail to understand it.
Shouldn’t you be buying Murphy’s book or something?
Someone should tell Alan Greenspan that the Fed doesn’t print money.
http://www.youtube.com/watch?v=q6vi528gseA
Oh my God. Now you worship at the altar of Alan Greenspan? It gets worse with you people every waking second….
What do you mean “you people”!
http://www.youtube.com/watch?v=nSNnuiT0qek
The Fed doesn’t print money.
It’s a euphemism for the Fed’s ability to create new money (reserves).
They don’t fund government spending.
They do if they buy government debt.
You can’t criticize MMT when you blatantly fail to understand it.
MMT is inherently fallacious. It should not be surprising when so many people unfamiliar with it assume it is not fallacious, thus not understanding it.
Oh well, if you say it’s fallacious then it must be so! Unlike Austrian econ which has been around for a hundred years and studied thoroughly by the public and mainstream economics only to be entirely rejected by the economics community!!!!
To be rejected by people who don’t understand economics is not anything to worry about.
Scientists were persecuted and marginalized for hundreds of years by religious demagogues.
Today is no different.
Oh, so now Austrian econ is comparable to a science? Even though you guys don’t understand the very most basic facets of banking? Weird.
Oh, so now Austrian econ is comparable to a science?
Of course. Just like mathematics and formal logic are considered sciences.
Economics is not an empirical science, because empirical data in economics is necessarily a product of past ideas and past actions of people, none of which is necessarily connected to future ideas and future actions in the way the hard sciences assume is the case.
Even though you guys don’t understand the very most basic facets of banking?
Ironic, since it is us Austrians who constantly correct you MMTers on the reality of banking.
So says the genius who thinks reserves put upward pressure on interest rates. HAHAHAAHAHAH!!!!!!!!!!!!
So says the genius who thinks reserves put upward pressure on interest rates. HAHAHAAHAHAH!!!!!!!!!!!!
I ever claimed that you moron.
never.
Freudian slip. How’re those legs feeling. You’re back pedaling awfully hard now!!!!
Freudian slip.
Not Freudian. Typo. As it stands it makes no sense. “I ever made that claim”?
You don’t understand Freudian slips.
How’re those legs feeling. You’re back pedaling awfully hard now!!!!
Funny, since I’m leaving you in my dust. You’re struggling to catch up.
So says the guy who claims 10 is lower than 1.5
So says the guy who claims 10 is lower than 1.5
I never claimed 10 is lower than 1.5.
I argued that the money the banks earn in the IOR is risk free profit, and that the money the Fed pays for Treasuries is greater than the market value (It’s to keep the rates lower than market you moron).
Keep eating that dust!!!!!
The MMTers are on a roll today. We just don’t get MMT because we don’t get math. Like Rothbard with his math degree from Columbia.
http://mikenormaneconomics.blogspot.com/2011/09/how-every-brain-is-hardwired-for-math.html
Actually, the real reason you don’t get MMT is because you guys don’t understand how fractional reserve banking works. So you go off and say things like excess reserves might lead to an explosion in inflation. And that leads you to say that hyperinflation is coming and that the Amero is right down the line from there. And then 3 years later when those 1.5 trillion excess reserves haven’t generated much if any inflation, you look all silly and stupid and point to the price of gold and try to convince your unwitting followers that you weren’t actually wrong…..
Time is running out on your little charade here.
When have I EVER said anything about excess reserves? Austrian Mish Shedlock disagrees on the excess reserves issue.
http://globaleconomicanalysis.blogspot.com/2009/12/fictional-reserve-lending-and-myth-of.html
I don’t see the “system” as mechanical. If they want to inflate, they’ll find a way and will do it. If not, they won’t. They’re a bunch of criminals. I don’t pretend to know what they are thinking. We don’t even know if they are destroying the economy on purpose or merely through idiocy.
If you have insight regarding from which to which orifice the funny money will be or is being squirted, by all means, inform us. That all has nothing to do with Austrian theory, about which you have no clue.
Austrian economics is not nearly as complex as you like to think. But it entirely misrepresents the actual workings of a fiat monetary system’s banking system.
This has been proven over the last few years as your most ardent supporters all said the added reserves would be inflationary because of their fractional reserve nature.
Oh well. Keep your head in the sand. What the hell do I care.
This has been proven over the last few years as your most ardent supporters all said the added reserves would be inflationary because of their fractional reserve nature.
Austrian economics does not predict that adding to reserves will necessarily inflate prices.
You don’t even understand Austrian economics when you say Austrian economists don’t understand money.
No, Austrians hold the theory that IF there is going to be a sustained general increase in prices over time, then inflation of the money supply is the only explanation.
You have your head up your ass.
Austrian economics does not predict that a rise in reserves will necessarily increase prices. This is because Austrian economics takes demand for money into account.
No, Austrian economics instead says that if there is a sustained, general increase in prices, then inflation of the money supply is the only explanation.
It’s ironic. You don’t even understand Austrian economics and yet you say that Austrians don’t understand money. You have to know Austrian economics before you can understand whether or not Austrians understand money.
No Austrian has said “these excess reserves will necessarily be used to pyramid more lending, by the year 20XX, and we will see at least Y% price inflation as a result.”
No, they have always said that a rise in reserves HAS THE POTENTIAL to lead to rising prices down the road.
That’s just it though. A rise in reserve never has the potential to lead to inflation. You have no idea what you’re talking about.
That’s just it though. A rise in reserve never has the potential to lead to inflation.
Yes it does you fool. Banks are operationally capital constrained, but ultimately they are reserve constrained if reserves do not keep increasing.
A rise in reserves allows banks to lend more money than would otherwise have been the case.
Even if you argue that banks inflate loans first and then the Fed increases reserves after, the causal relationship is still reserves then loans, because banks can’t keep increasing their loans without a corresponding reserve increase. They’ll eventually face higher redemptions than deposits.
You have absolutely no clue how our banking system works.
Banks don’t lend reserves. Keep trying. The Fed just supplies the reserves to meet the reserve requirements set about by the Fed. That’s why several countries don’t even have reserve requirements and can still lend money through the banking system.
This is all very basic banking. But when you guys saw the rise in M1 after quantitative easing you started making all sorts of dire predictions about inflation and hyperinflation and the rising money supply.
Ha. You were wrong. You misunderstand how things work.
Banks don’t lend reserves.
I didn’t claim they did lend reserves.
Try again.
Keep trying. The Fed just supplies the reserves to meet the reserve requirements set about by the Fed.
No, the Fed keeps increasing reserves or else the overnight market interest rate will keep rising as banks inflate more and more, and with a rising overnight rate, eventually the banking system will not be able to expand any more loans, which means an end to inflation, and economic correction as well as bank failures.
That’s why several countries don’t even have reserve requirements and can still lend money through the banking system.
No, the reason they don’t have reserve requirements is that it is a practical matter. They have capital requirements which act as operational constraints to bank lending. But that doesn’t mean that reserves aren’t the ultimate barrier to further lending.
This is all very basic banking. But when you guys saw the rise in M1 after quantitative easing you started making all sorts of dire predictions about inflation and hyperinflation and the rising money supply.
I didn’t make any predictions about hyperinflation. Try again.
Geez. Let’s try this again. With the Fed paying interest on reserves they don’t need to reduce or add reserves. The IOR serves as the point of control for the overnight lending rate. Reserves don’t put upward pressure on the overnight rate as you claim. In fact, they put downward pressure on the rate as we bankers try to compete in the overnight market to lend them out. But we stop at the IOR rate of 0.25% for reasons that should be obvious to you.
You very clearly have no idea what you’re even talking about here.
Shall we keep going here? Or are you some sort of masochistic freak?
Geez. Let’s try this again.
You must like getting refuted again and again.
With the Fed paying interest on reserves they don’t need to reduce or add reserves.
I never said they do “need” to add or reduce reserves. As long as reserves are available, either newly created by the Fed, or held by the Fed, it doesn’t matter in principle.
The IOR serves as the point of control for the overnight lending rate.
No, the interest on reserves does NOT serve as a point of control on overnight lending. The overnight lending is controlled by the Fed’s increase or decrease of reserves by buying treasuries and other securities from the banking system.
The Fed is paying interest on reserves in order to enable the banks to make free risk free money, and probably to control inflation as well.
Reserves don’t put upward pressure on the overnight rate as you claim.
Changing reserves does put pressure on the overnight rate because it is the excess reserves that banks borrow and lend from each other in the overnight market.
In fact, they put downward pressure on the rate as we bankers try to compete in the overnight market to lend them out.
Oh, no wonder you don’t understand banking. You’re a banker! Now it all makes sense. Almost every banker has no clue how banking actually works, because they are only trained to understand the isolated markets in which they operate, and they do not understand the interconnected concepts that require more than just working 9-5 in an office dealing with lending money.
The only way any bank can compete in the overnight market is by paying higher interest on borrowing. But in order to do that, they have to make it profitable, which means they have to be able to borrow at no more than what they can lend at, which means if they can’t lend more due to their withdrawals and redemptions being too high, which will be the case eventually if the fed stops increasing reserves and the banks keep increasing their lending.
But we stop at the IOR rate of 0.25% for reasons that should be obvious to you.
It should be obvious that in order for the Fed to keep the rates this low, they have to increase bank reserves at a specific rate.
You clearly have no idea how the banking system works. You’re totally clueless.
Jesus. Even a basic banking course teaches its students that the Fed removes reserves when it wants to increase the overnight rate and adds reserves when it wants to reduce the rate. The reason they started paying IOR was because they needed to control the rate at 0.25% when they started QE and flooded the banking system with reserves.
Of course, the level of reserves doesn’t matter because they’re paying IOR now. So reserves aren’t constraining lending in any way.
This is the most basic of Fed operations. You’ve been tricked by your slave master Bob Murphy.
Jesus.
My name is Secret Agent. But thanks for divination?!?
Even a basic banking course teaches its students that the Fed removes reserves when it wants to increase the overnight rate and adds reserves when it wants to reduce the rate.
That’s what I have been arguing the whole time you moron. Were you born this stupid or did your mother drop you on your head?
The reason they started paying IOR was because they needed to control the rate at 0.25% when they started QE and flooded the banking system with reserves.
It’s not required that the Fed pay interest on excess reserves in order to control the overnight rate at 0-0.25% you idiot. It could have accomplished that by straight up increasing reserves at whatever rate would have been necessary for the banks to charge each other 0-0.25%.
Paying interest on reserves is a relatively new operation the Fed has been engaging in. Prior to that, they still controlled the overnight rate by increasing/decreasing reserves.
Of course, the level of reserves doesn’t matter because they’re paying IOR now.
It still matters because that money always has the potential to be used to facilitate expansion of more loans.
So reserves aren’t constraining lending in any way.
Non sequitur. Yes, they are. They always are. Cash on hand is always the limiting factor for banks and their credit expansion. It doesn’t matter what the laws are. You can’t change what is economically necessary.
This is the most basic of Fed operations.
Yet you don’t understand it. That’s funny.
You’ve been tricked by your slave master Bob Murphy.
No, I knew this before visiting this blog.
You’re so wrong it is laughable.
Now you’re conflating reserves and capital. Reserves aren’t capital. They are an asset.
Is this conversation really happening? Are all Austrians this ignorant on basic banking?
Now you’re conflating reserves and capital.
Not at all. I kept them separate.
It’s why I introduced the concept of capital constraints in addition to reserve constraints.
This straw manning you do is hilarious to watch. It’s proof positive you can’t argue rationally.
Reserves aren’t capital. They are an asset.
Reserves are just dollars.
Is this conversation really happening? Are all Austrians this ignorant on basic banking?
Not only are you ignorant on banking, but you can’t even read the English language properly. You’re hopeless.
Uh, wrong again. I like watching you back pedal faster and faster.
Capital is equity. That’s assets minus liabilities. Reserves are an asset. Only one part of the equation.
You don’t get this because you’re not very good at being smart. But you’re great at back pedaling so speed it up fat boy!
So, when you said that the overnight rate would rise if reserves fell – that was not really right?
No, it was really. It will rise from where it otherwise would have gone. I assumed you would have understood that that was the context because that’s how economics works. You can’t say “hey, reserves decreased yesterday but the overnight rate today decreased!” You can’t say this because the increase and decrease is not chronologically, but from where things would have been had the Fed not did what they did.
Right. Can you back pedal any faster?
I am peddling forward the whole time, into your face. You keep back peddling which is why you keep straw manning me.
Who said Austrian economics was complex? It’s true and self evident which is why it’s such a mystery why no statist can comprehend it. And didn’t I just say:
“If you have insight regarding from which to which orifice the funny money will be or is being squirted, by all means, inform us. That all has nothing to do with Austrian theory, about which you have no clue.”
If banks are indeed capital constrained, so be it. They are allegedly constrained by law and the law can change.
MMTers differentiate between self inflicted constraints by the government on itself (such as a legal reserve requirement) and the unconstrained wonder of an unconstrained government. To explain their basic concepts, here is a quote from “Modern Monetary Theory—A Primer on the Operational Realities of the Monetary System” by Scott Fullwiler, Associate Professor of Economics at Wartburg College:
Having said that, MMT’ers are keenly aware that governments can and do write laws that their treasuries’ operations be legally bound in certain ways. For instance, the Fed is constrained by law to only purchase Treasury securities in the “open market,” is thereby forbidden from directly lending or providing overdrafts to the Treasury. In other words, “specific” cases can and do differ from the “general” case MMT’ers describe for a sovereign currency issuer under flexible exchange rates in the sense that self-imposed constraints specify particular operations.
Actually, the real reason you don’t get MMT is because you guys don’t understand how fractional reserve banking works.
MMT is inherently fallacious. It conflates money supply inflation with net savings, it conflates private sector savings with government debt, and it fails to understand the very tautological accounting equation it keeps harping on.
So you go off and say things like excess reserves might lead to an explosion in inflation.
Increasing reserves are the ultimate fuel of monetary inflation. Without it, banks will eventually face withdrawals to be larger than deposits, thus preventing them from further credit expansion.
Austrian economics does not predict that a given round of reserve increase will necessarily lead to credit expansion and price inflation. It’s the other way around. It’s that credit expansion cannot keep rising unless reserves keep rising by the Fed.
One of the major reasons why the $1.5 trillion in excess reserves has not left the banking system, contrary to many people’s expectations, is that the Fed surprised everyone by doing what they have not done in the past, which is pay the banks interest on excess reserves.
Just because the Fed changed their policy which changes the necessary requirements of a prediction to take place, doesn’t mean the prediction is wrong. It means that the premises assumed in the prediction are wrong.
Oh lord. Some countries don’t even have reserve requirements. So your whole argument is clearly wrong. Reserves don’t lead to inflation. End of story. You make the whole Austrian school look bad when you say crap like this.
Oh lord. Some countries don’t even have reserve requirements
That doesn’t mean every single one of those countries are ultimately reserve constrained.
So your whole argument is clearly wrong.
That does not follow. Just because some countries don’t have legal reserve requirements, that doesn’t mean they are not economically limited by reserves.
Reserves are needed to finance redemptions and withdrawals and transfer requests. A bank that loans too much will eventually face the reality that their withdrawals come to match, and then exceed, the cash they have on hand.
Reserves don’t lead to inflation.
Causally, yes they do. Operationally, it does not have to.
You simply don’t understand how banking works.
I can prove your entire line of thought wrong with one simple statement you made previously:
“Fed keeps increasing reserves or else the overnight market interest rate will keep rising as banks inflate more”
This is categorically false. Anyone in banking knows that reserves drive the overnight rate DOWN. This is why the Fed set a floor at 0.25. If they didn’t the rate would go to o% and cause problems in the payments system. You have an even more basic misunderstanding than Bob does.
You’re wrong bud. Keep trying.
I can prove your entire line of thought wrong with one simple statement you made previously:
But you were proven wrong then, so how can it serve to prove you right if you repeat it?
“Fed keeps increasing reserves or else the overnight market interest rate will keep rising as banks inflate more”
This is categorically false.
No, it is categorically true. If banks keep inflating loans, then that will increase their deposit liabilities, and as these increase, withdrawal and transfer requests will keep rising until they start to infringe on the cash banks have on hand. At that point, any further lending will bankrupt the bank as withdrawal requests are made that the banks cannot satisfy.
The fact that you have no argument to make other than “nah nah nah it’s false” is testament to your profound ignorance.
Anyone in banking knows that reserves drive the overnight rate DOWN.
Nothing of what I said suggests otherwise you moron, and in fact it is consistent with my point. Of COURSE increasing reserves drives the overnight rate down. THAT’S MY POINT.
If reserves didn’t keep increasing, then as banks keep expanding credit, they will find that they will have to dip into the overnight market more and more in order to satisfy their withdrawal and transfer requests. As more and more banks become net borrowers, the overnight market will eventually dry up or become maximized, and at that point, banks could not make further loan expansions. They will have to make do with a capped amount.
This is why the Fed set a floor at 0.25. If they didn’t the rate would go to o% and cause problems in the payments system.
No, the Fed is setting rates at 0.25% because the banking system is so fucked up that if the overnight rate were higher, banks could either nor afford it, or they could, but then that would cut into their ability to expand credit, which is what the Fed desperately wants.
You are so clueless, you are even clueless about the clueless claims you are making, and you are not even able to read the English language properly. You’re attributing arguments to me that I never made, which means you’re either a troll or an idiot.
Try again fool.
Let’s look at the facts. You claim rates would rise if reserves fell. But we know this is false because reserve balances fell in 2010.
Data from the NY Fed shows that reserves were 1120.369 on 2010-03-01. On that same day the effective Fed Funds rate was 0.16%.
9 months later reserve balances fell by almost 15% to 971.995. What happened to the overnight rate? It stayed almost perfectly flat.
Game, set, match.
Let’s look at the facts.
You mean you just started that NOW? LOL Now it makes sense.
You claim rates would rise if reserves fell. But we know this is false because reserve balances fell in 2010.
Data from the NY Fed shows that reserves were 1120.369 on 2010-03-01. On that same day the effective Fed Funds rate was 0.16%.
9 months later reserve balances fell by almost 15% to 971.995. What happened to the overnight rate? It stayed almost perfectly flat.
You idiot. When someone says that reserves falling makes the overnight rate increase, or vice versa, it means that it will increase or decrease it from what it otherwise would have been, not what it was in the direct past through history.
Economics is not a science like the natural sciences. It is a science like mathematics and formal logic.
Jeepers. You’re dumber than I thought. You’re downright imbecilic.
Oh, so it doesn’t matter that rates didn’t rise when reserves fell. It matters what they “would have been”.
Hahaha. The truth hurts. I just finished off on your face. Lick it up fat boy.
Oh, so it doesn’t matter that rates didn’t rise when reserves fell. It matters what they “would have been”.
Of course. Economics is not a controlled science where you can perform controlled experiments in a laboratory where you change only one variable and then observe the outcomes.
We all have only one set of historical data. That data must be interpreted. You cannot say that at time 1 event X happened and then at time 2 event Y happened therefore X did or did not cause Y. That’s post hoc ergo propter hoc.
You can only use economic logic to infer what would have happened had things been different.
Hahaha, you’re so wrong that you are proving great entertainment for those of us who actually understand economics.
So, when you said that the overnight rate would rise if reserves fell – that was not really right?
Right. Can you back pedal any faster?
Uh, wrong again. I like watching you back pedal faster and faster.
No, it’s right again. No back peddling.
Capital is equity.
Equity is one kind of capital you moron. Real assets are another, which could either be residual equity property or collateral for debt holders.
That’s assets minus liabilities. Reserves are an asset. Only one part of the equation.
If I wanted a layman’s painful attempt at understanding accounting, I would have asked Mammy.
You don’t get this because you’re not very good at being smart.
You cannot claim I don’t get that because I have no arguments one way or the other about it.
But you’re great at back pedaling so speed it up fat boy!
Nope. No back peddling. You’re still painfully wrong and you still have no clue how banking works.
“Hahaha. The truth hurts. I just finished off on your face. Lick it up fat boy”
Secret Agent, when someone makes comments like this it is pointless to try and debate them. He acts like a child and does a great job of embarrassing himself with his own comments.
One last thing: I still think it’s possible a lot of what has happened is part of a deliberate strategy to get the US into a more regional currency. (Stuff like this is par for the course.) I didn’t say the dollar would collapse in 2010 did I? I didn’t put a time frame on the “fear mongering stuff.” I made more modest predictions about what CPI would do by certain dates, and those were wrong.
We know Bob. You’re a wise economist. You give people a prediction, but never attach a timeframe to it. That way, you can never be wrong and by the time you are, most people will have forgotten the prediction.
No one ever said you weren’t clever. After all, look at all these people who send you US dollars for your services. And you run out and buy all the things you love with their dollars. It’s a brilliant little scam. Genius really. And they keep crawling back for more on a daily basis.
Sounds like someone is jealous.
I am jealous. I wish I could run a business where I sell fear and misinformation to unwitting fools on a daily basis. I wish I could tell all of my readers that I think the US dollar is worthless and still convince them that they should buy my services by sending me THEIR US dollars so I can go buy new homes, nice suits, new boats, new cars and on and on.
Sounds like Bob is living the dream. And you suckers are the main characters in it!!!!!!!!!!!
I am jealous.
You’re not only jealous, but mad too.
I wish I could run a business where I sell fear and misinformation to unwitting fools on a daily basis.
You’re just mad because nobody is paying you for your fear and misinformation.
I wish I could tell all of my readers that I think the US dollar is worthless and still convince them that they should buy my services by sending me THEIR US dollars so I can go buy new homes, nice suits, new boats, new cars and on and on.
Murphy never argued the dollar is worthless.
Sounds like Bob is living the dream. And you suckers are the main characters in it!!!!!!!!!!!
Yeah, you’re mad.
I already admitted I am mad that I don’t have thousands of followers of a scam I am running that makes me rich. Who wouldn’t be? At least you seem to grasp this part. Now back to slurping Bob Murphy will you. He needs a new car.
I already admitted I am mad
Where?
that I don’t have thousands of followers of a scam I am running that makes me rich.
Yeah, you’re really jealous. Nobody is paying you your scams!
Now back to slurping Bob Murphy will you.
Right after I finish with your mom.
Wow, you’re gonna “finish with my mom”. Do you always bang old dead ladies? Gross.
Wow, you’re gonna “finish with my mom”. Do you always bang old dead ladies? Gross.
It’s why she died with a smile on her face.
Gosh, I am afraid I’m gonna run out of popcorn.
So, just to summarize here – the Austrians in this comment section think reserves lead to higher overnight rates. They think IOR serves no role in helping to set the overnight rate. And they don’t differentiate between reserves as an asset and what capital is. And they also think banks are reserve constrained.
All of these idea are wrong. Not in theory, but in reality. And it is why we have people like Bob Murphy making wild predictions about hyperinflation and the emergence of the Amero.
So, just to summarize here – the Austrians in this comment section think reserves lead to higher overnight rates.
Since you’re no doubt referring to what I said, I will say that no, that’s not what I argued. The importance is the CHANGE in reserves.
The change in reserves MUST influence the overnight rate, because if it didn’t then the Fed would not be able to control the overnight rate by changing bank reserves. The very fact that changing bank reserves is the means by which the Fed targets the overnight rate, proves you’re a moron who has not the faintest clue how banking works.
They think IOR serves no role in helping to set the overnight rate.
The Fed sets BOTH rates. One cannot possibly “help” in setting the other, because both are independent variables the Fed controls.
And they don’t differentiate between reserves as an asset and what capital is.
No, that was you committing a straw man against me. I never conflated reserves and capital. I introduced capital constraints for the precise reason that I hold them as separate from reserves constraints and thus from reserves per se. You’re just not able to read English.
And they also think banks are reserve constrained.
Ultimately they are reserve constrained, despite the operational constraints of capital, despite the fact that the Fed increases reserves after the banks have already inflated. The causal relationship will never change as long as banks use money and need money on hand to satisfy withdrawal and transfer requests, both of which increase over time as they expand loans ex nihilo.
All of these idea are wrong.
No, they are all right (except for the straw man argument of course).
Not in theory, but in reality. And it is why we have people like Bob Murphy making wild predictions about hyperinflation and the emergence of the Amero.
No, that’s why we have MMTers who have no clue how the banking system works.
Gosh. This is getting tiresome. Who are we to believe on Fed operations? You or the NY Fed? Here’s their commentary on the necessity of pay IOR:
“3. Why is the payment of interest on reserve balances, and on excess balances in particular, especially important under current conditions?
Recently the Desk has encountered difficulty achieving the operating target for the federal funds rate set by the FOMC, because the expansion of the Federal Reserve’s various liquidity facilities has caused a large increase in excess balances. The expansion of excess reserves in turn has placed extraordinary downward pressure on the overnight federal funds rate. Paying interest on excess reserves will better enable the Desk to achieve the target for the federal funds rate, even if further use of Federal Reserve liquidity facilities, such as the recently announced increases in the amounts being offered through the Term Auction Facility, results in higher levels of excess balances.”
http://www.newyorkfed.org/markets/ior_faq.html
Unless you want to try to convince us all that you know more about reserve accounting than the Fed then it’s time for you to just shut your big mouth and stop trying to mislead everyone here.
Read it and weep idiot. Game over man.
Gosh. This is getting tiresome.
You must be the same out of shape “fat boy” person you accused me of being, LOL.
Who are we to believe on Fed operations? You or the NY Fed?
Oh, now it’s an appeal to authority fallacy. Can you get any more pathetic?
Here’s their commentary on the necessity of pay IOR:
“3. Why is the payment of interest on reserve balances, and on excess balances in particular, especially important under current conditions?
Recently the Desk has encountered difficulty achieving the operating target for the federal funds rate set by the FOMC, because the expansion of the Federal Reserve’s various liquidity facilities has caused a large increase in excess balances. The expansion of excess reserves in turn has placed extraordinary downward pressure on the overnight federal funds rate. Paying interest on excess reserves will better enable the Desk to achieve the target for the federal funds rate, even if further use of Federal Reserve liquidity facilities, such as the recently announced increases in the amounts being offered through the Term Auction Facility, results in higher levels of excess balances.”
The Fed’s overnight target is 0-0.25%. Tremendous excess reserves that put extraordinary downward pressure on the overnight rate would have accomplished this on its own. Paying IOR can only increase the overnight rate because it removes money from the overnight lending market. As I said, the Fed pays IOR for two reasons. One is to give the banks free risk free profits, and second is to do exactly what you just quoted the Fed as doing, which is having another control mechanism for inflation.
You’re now doing my job for me. This is great.
Unless you want to try to convince us all that you know more about reserve accounting than the Fed then it’s time for you to just shut your big mouth and stop trying to mislead everyone here.
Hahaha, you don’t even know what you’re arguing over any more.
This is fun. It’s nice to know that you understand this all better than the NY Fed. Very reassuring. And yes, they are THE authority on these matters. Literally. So that whole line doesn’t fly here.
You keep back pedaling into a deeper and deeper hole. So, when the the Fed removed Treasuries from the bank balance sheets and replaced them with reserves through QE, they were doing them a big favor by increasing their risk free profits?
That’s strange because the avg duration they removed from the banks was 7 years. During QE, the rate on 7 year paper was 1.5% to 2%. So they removed interest income of roughly $10 billion and replaced this with interest income of $1.5 billion.
Hmmm. Last time I checked 10 was bigger than 1.5. Could there be another hole in your line of thought?
NOOOOOO!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
This is fun. It’s nice to know that you understand this all better than the NY Fed. Very reassuring. And yes, they are THE authority on these matters. Literally. So that whole line doesn’t fly here.
What the Fed says and what is economically implicated are two separate things you credulous dolt.
You keep back pedaling into a deeper and deeper hole.
Nope. You’re still seeing my dust as you desperately find straw manning and fallacy-overflowing ways to catch up. Sorry you don’t understand banking.
So, when the the Fed removed Treasuries from the bank balance sheets and replaced them with reserves through QE, they were doing them a big favor by increasing their risk free profits?
Yes, because the Fed pays more than the market value of the treasuries.
That’s strange because the avg duration they removed from the banks was 7 years. During QE, the rate on 7 year paper was 1.5% to 2%. So they removed interest income of roughly $10 billion and replaced this with interest income of $1.5 billion.
No, they replaced what would have been a declining principle with money that enabled them to sell the debt at a higher principle.
That’s weird. The Fed reported ~70 billion in profits last year. Where do you think that money comes from?
It comes directly from the banking sector and the interest that they earn from their balance sheet – income the banking sector itself COULD have earned but isn’t.
Keep pedaling!!!!!!!
That’s weird. The Fed reported ~70 billion in profits last year. Where do you think that money comes from?
From the Fed. They print money, they buy bonds, and the Treasury, which has money the Fed created prior, uses that money to pay interest on the debt. The Fed remits all the money they earn in this way back to the Treasury save mandatory dividends, salaries and other expenses.
It comes directly from the banking sector and the interest that they earn from their balance sheet – income the banking sector itself COULD have earned but isn’t.
The banking sector gets their money from the Fed as well.
Keep pedaling!!!!!!!
Nope. Still no back peddling at all. You’re still choking on the dust and are now seeing delusional images of others peddling.
Is Amero another of those movies directed by Mel Gibson?
No, the Amero is the new currency that Bob Murphy says will replace the US Dollar. Until then, he needs his loyal readers to keep sending him US dollars so he can buy new cars and new boats.
You’re still jealous and mad.
The bottom line is, Bob not only predicted hyperinflation, but also predicted the emergence of the Amerco. So now, one of the high priests of Austrian econ has some very foolish looking predictions on his resume.
Tsk tsk. You guys have been very bad boys in recent years. But don’t let that stop you from bowing at the altar of Murphy like any good dog would do.
The bottom line is, Bob not only predicted hyperinflation, but also predicted the emergence of the Amerco.
It’s already been shown that Bob did not predict hyperinflation, as if evidenced by his historical posts, and as for the Amero, he suspects that the continual devaluation of the US dollar may not be solely due to trying to rescue the US economy, but to rather usher in a new monetary system, much like the Euro.
Both of these notions have not been DISPROVEN, because Bob never gave a timeline. You can say that he did this on purpose so as to not be proven wrong, but I don’t care. At least he has went on the record as expecting something, unlike you whose only “contribution” here has been to look like a total fool when it comes to our banking system, as well as economics in general.
But don’t let that stop you from bowing at the altar of Murphy like any good dog would do.
Your view of human thinking is depraved and twisted. Not everyone thinks like your mental dog.
Yeah, you’re really mad.
We all know what killing the currency and prices increasing by the week mean. All but you.
We all know what killing the currency and prices increasing by the week mean. All but you.
We all know what eventually killing the currency and eventually prices rising by the week means, and we also know what it means to make predictions given the Fed is not paying interest on excess reserves, and we all know what it means to make predictions without a time line that is “September 2011”.
Everyone but you fools who do not make any predictions yourselves.
We all know that making predictions without an approximate timeline is useless, unless the only purpose was scaremongering.
We all know that making predictions without an approximate timeline is useless,
Then you shouldn’t be all up in arms and saying Murphy was wrong about what you are now calling “useless.”
LOL
“Useless” statements cannot be solid predictions, nor can they serve as a standard for Murphy to live up to.
unless the only purpose was scaremongering.
False dichotomy. Murphy is not a scare monger.
No, it means that either the prediction is plain scaremongering, or there is an implicit timeline that the prediction is for the near future, and not in 300 years from now.
You should really have some dignity and stop this sycophantic defence of Murphy’s wrong predictions (unless he pays you to do it).
No, it means that either the prediction is plain scaremongering, or there is an implicit timeline that the prediction is for the near future, and not in 300 years from now.
No, that can’t be right if the statements are “useless.” And no, there is also no implicit timeline either, or else he would have given one.
You should really have some dignity and stop this sycophantic defence of Murphy’s wrong predictions (unless he pays you to do it).
You should really have some dignity and stop this sycophantic attack of Murphy’s allegedly “useless” statements (unless you need money and you want to be paid for your statements) LOL.
Do you know why I always imagine your on your knees, with your head buried between Murphy’s legs?
OK guys let’s chill out… Ladies and children might be reading.
Mammoth, I think the fact that you always imagine that says more about you than anything else.
Dan, you only have 3 options.
1) you admit Murphy’s predictions were just scaremongering
2) you admit those predictions have an implicit timeline in that they apply to the short run, and they were wrong
3) you wait for your turn in line behind MF.
You should seek help for these fantasies you have of Dr. Murphy. Or at least don’t admit them online.
Me? No, I go for option 1. Too many people queuing anyway. Although I do share his coconut fetishism.
Do you know why I always imagine your on your knees, with your head buried between Murphy’s legs?
Two reasons. One, because you yourself have such visual fantasies and are curious about them which makes you find excuses to connect them to completely irrelevant debates about economics, and two, because you yourself are a mindless, irrational follower who can only conceive of others behaving in the same way as you.
Do you know why I always imagine your on your knees, with your head buried between Murphy’s legs?
Two reasons. One, because you yourself have such fantasies and are curious about them, which makes you seek excuses to connect those images to otherwise completely separate topics like economics, and two, because you cannot help but conceive of other people through the same prism as your worldview, which is irrational and mindless following of others.
Dan, you only have 3 options.
No, you ignored the option of Murphy not making a prediction concerning hyperinflation.
1) you admit Murphy’s predictions were just scaremongering
Murphy is not a fear monger. He is not the government and has no personal incentive in scaring people.
2) you admit those predictions have an implicit timeline in that they apply to the short run, and they were wrong
No, predictions do not need to “apply to the short run.” They can apply to however long it will take for people to make choices, which is unpredictable. You just NEED for his predictions to only apply in the short run so that you have an excuse to say that they are wrong.
3) you wait for your turn in line behind MF
Again with such imagery. You sound like a confused person who is struggling with his own identity.
Dan, in case you are still interested in option 3) it seems you’ll have to wait a little longer.
Dan, in case you are still interested in option 3) it seems you’ll have to wait a little longer.
It’s Saturday, Mammy’s lonely, and he has these images in perpetually eating away at his mind.
http://www.youtube.com/watch?v=teMlv3ripSM
No you aren’t. You are Major Freedom’s doctor.
This is the greatest comment section I have ever read.
This blog is superlative in many respects.
I’d say in most respects except in economics.
MamMoTh, just wondering, if you think that this blog mostly devoted to economics is so low quality in terms of economics, why the hell do you read it and participate in discussions?
For all the other respects, obviously.
Soliciting offers to men to dive between their legs?
You have some nerve saying this after this
http://consultingbyrpm.com/blog/2011/09/more-mmt-wisdom-on-how-debt-works.html#comment-24932
You didn’t know “at some point” is a solidly grounded timeline for a prediction…
+1
Big ideas clashing flavoured with just a “bit” of soap-opera.
Absolutely a hell of a blog! (Even literally for some people at least).