Scorn’s Boomerang
When I say that Jesus is a fount of wisdom, saying things that at first seem like non sequiturs but grow deeper with age, Exhibit A is this:
Judge not, and you shall not be judged. Condemn not, and you shall not be condemned. Forgive, and you will be forgiven. Give, and it will be given to you: good measure, pressed down, shaken together, and running over will be put into your bosom. For with the same measure that you use, it will be measured back to you.–Jesus Christ
When I was younger, I just assumed Jesus meant that if you go around shaking your finger at people on Earth, then uh oh you’re in for a nasty surprise when you get to heaven and God gives you a taste of your own medicine.
But as I get older, I think Jesus is telling us how our minds have been designed. If you construct mental weapons with which to blow up people around you, you can’t help but turn them on yourself.
So when I encounter really critical people–like the guy on Facebook who saw the zombie video and told me matter-of-factly that the makeup job was worse than a 12-year-old’s on Halloween–I try not to be insulted. Instead, I focus on pitying that poor guy. Can you imagine how hard it must be to live in his shoes, using that framework to evaluate his life’s accomplishments up till that point?
And don’t say, “Bob, what are you talking about? Some of the most arrogant people I know, are hyper-critical jerks when it comes to others.” Exactly–I conjecture that they are compensating. They need to constantly praise themselves, in order to fend off that merciless voice within them that they have cultivated for decades. After all, they’ve seen firsthand its vicious power to shred anyone in its path.
So heed Jesus’ teaching. It’s not just to gain bonus points once we leave this planet. It’s to improve your life right now.
The End of QE2 and Interest Rates
Hmm another Krugman Kontradiction? Possibly, though if so, not as bad as some of the others I’ve documented. When (understandably) running a victory lap recently about his predictions on US interest rates compared to the deficit hawks, Krugman said that they came up with a bunch of ad hoc explanations after the fact, for why their predictions of crowding out etc. were so wrong:
The apologists offer a series of special explanations; it was the Greek debt crisis driving investors into the dollar safe haven; it’s the Fed’s purchases; whatever. We’ll [see] what happens when the latter end at the end of this month, by the way.
Now just read that a couple of times. It seems to me that Krugman is arguing, “At the end of this month, QE2 will end, and I bet you interest rates don’t zoom up. So that will be one less excuse that the deficit hawks can use to wipe the egg off their faces.”
And yet, even if you thought Fed purchases of bonds drove down interest rates, you wouldn’t necessarily think that the end of QE2 would make them zoom back up. Apparently, there is a whole school of respectable economic thought that says the stock of Fed purchases matters, not the flow. You know who explained this the best to me? Paul Krugman, back in April:
I’ve been getting questions about what happens when the Fed wraps up QE2 — related especially to Bill Gross’s public view that interest rates will shoot up. This is related to the question of the extent to which QE2 has kept interest rates low. So a quick exposition of my theoretical position, which also happens to be more or less standard economics.
So: I basically think of asset prices in a Tobin-type stock equilibrium framework (pdf). People make portfolio choices, allocating their wealth among bonds, stocks, etc.. Asset prices – including the famous “q” – rise and fall to match these portfolio choices to the actual asset supplies.
On this view asset purchases matter because over time they change the stocks of assets available : by buying long term federal debt, the Fed takes some of that debt off the market, and hence drives up the price of what’s left, reducing interest rates. The flow – the rate of purchases – matters only to the extent that it affects expected returns.
On this view, the fact that the Fed is currently buying some large fraction of debt issuance is irrelevant; interest rates are determined by the willingness at the margin of private investors to hold the existing stock of debt, regardless.
…
I’d also add that if flows matter a lot — if it’s hard to persuade investors to buy a suddenly increased quantity of newly issued Treasuries per month, as opposed to being willing to hold the total amount of Treasuries outstanding — the big shift into budget deficits and the corresponding increase in Treasury issuance should have led to sharply rising interest rates. And as you may recall, some people did predict just that — and ended up not just with egg on their faces, but losing a lot of money for their investors.So I don’t buy the notion that rates are low only because the Fed is doing QE2; if there were really a problem with the marketability of US debt, rates would be high regardless. And so I don’t expect rates to spike when QE2 ends unless there’s good economic news that gives us a reason to believe that the zero-rate policy on short-term rates will end sooner than expected.
I’ve included the full discussion to be fair to Krugman; his underlying position here has been consistent: He doesn’t think QE2 is a big reason for low interest rates. However, I’m pretty sure there are economists out there who think QE2 (and QE1) did push down interest rates–after all, that was one of the original justifications I heard for QE1. To wit: “We can’t push down short-term rates any more, because we’ve hit the zero lower bound. So the Fed should buy longer-term Treasuries to push down yields further out on the curve.”
(Note that this gets really nuanced really quickly. There are a lot of people–especially the quasi-monetarists–who have argued that a successful QE program would raise interest rates, as people start expecting stronger economic growth.)
So my point here is this: Somebody who believed in the original, standard justification for QE1 and QE2, could think that Treasury yields would be significantly higher if the Fed dumped its holdings next week. At the same time, such a person could think that yields wouldn’t zoom upward, just because the Fed stops adding to its stockpile at the end of June. And the reason for this view is the whole stock/flow analysis Krugman described above.
Last point: Am I missing something? I don’t see that there is a huge distinction between the stock/flow approach. Suppose Batman and Robin are tied up by the Joker’s goons, and are standing in a pool that’s being filled with water. Robin says, “Holy suffocation, Batman, that flow is pretty fast. We’re goners if you can’t reach your acid pack!” But Batman says, “Easy there, chum. Our impending death is no reason for imprecision. The flow of the water is irrelevant. It’s when the depth of the water equals our noses, that we need to panic.”
More Gaffes From the Would-Be Rulers
Eh, I’m sorry, but I don’t think this allegedly outrageous Sarah Palin gaffe regarding Paul Revere is so terrible.
I really think if you followed anybody around for a long time–and the person was trying to get people riled up, as any politician does–that person would eventually say a list of really dumb things. I stand by my opinion from the campaign: I don’t want Sarah Palin tutoring my son, but she’s not nearly as dumb as everybody is making her out to be.
Remember, during the campaign Obama said–and he was being really pensive about it–that he had visited 57 U.S. states, and just the other day he botched a joke saying they were celebrating “Cinco de Quatro.” Can you imagine the cries of racism and uptight-whitey-hood that would have ensued, had Sarah Palin or Mitt Romney made the same mistake?
Was the US Gold Standard a Promise, a Pledge, a Platitude…?
[UPDATE to the description of Mises’ views.]
You gotta love the internet. In the comments of a previous post we have somehow begun a fierce debate over whether, in an alternative universe in which FDR didn’t confiscate gold coins under threat of 10-year prison sentences, “going off gold” would have amounted to theft. There’s analogical fun for the whole family. We talk about checking your coat in a restaurant, giving someone money for a car only to have him speed away, having your refrigerator taken and being prohibited from buying another one…we cover all the bases, as you would expect in any discussion of monetary and legal theory.
Anyway, there is a line of argument saying that the U.S. government never reneged on anything in 1933. As a matter of policy, up till then the government had pegged the dollar at $20.67 per ounce of gold, and then it changed its mind in 1933, sort of like raising the speed limit. What’s the big deal? When the facts change, I change my redemption policy–what do you do?
I’m admittedly biased since I thought the classical gold standard was pretty swell, but even so I think that this line of reasoning is demonstrably false. I am not a legal scholar so I can’t say whether the USD’s tie to gold pre-1933 was of the same status as, say, a Treasury bond. But here are some points:
* In reading Mises’ Theory of Money and Credit (first written in 1912), it’s almost cute how in his mind, money just is the precious metals. He grudgingly concedes the theoretical possibility of a true fiat currency, but he is skeptical it would ever get off the groundthat it had ever existed historically, because he thinks even those currencies that had suspended convertibility were “credit money” because people thought they would eventually be linked back to metal. (Quote below.) And he points out with pride how real businesspeople don’t care about the markings the State puts on coins; all anyone cares about, duh, is the weight of the metal.
* When the government went off the gold standard, FDR’s budget director supposedly said it was the “end of Western civilization” and resigned. (Good for him, though Wikipedia makes it sound like the resignation was for deficit spending, not going off gold. A bit weird, that you could tolerate your boss destroying Western civilization, and then later put your foot down.)
* Here are some excerpts from the Gold Standard Act of 1900:
An Act To define and fix the standard of value, to maintain the panty of all forms of money issued or coined by the United States, to refund the public debt, and for other purposes.
Be it enacted . ., That the dollar consisting of twenty-five and eight-tenths grains of gold nine-tenths fine, as established by section thirty-five hundred and eleven of the Revised Statutes of the United States, shall be the standard unit of value, and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard, and it shall be the duty of the Secretary of the Treasury to maintain such parity.
SEC. 2. That United States notes, and Treasury notes issued under the Act of . . . [July 14, 1890] . . ., when presented to the Treasury for redemption, shall be redeemed in gold coin of the standard fixed in the first section of this Act, and in order to secure the prompt and certain redemption of such notes as herein provided it shall be the duty of the Secretary of the Treasury to set apart in the Treasury a reserve fund of one hundred and fifty million dollars in gold coin and bullion, which fund shall be used for such redemption purposes only, and whenever and as often as any of said notes shall be redeemed from said fund it shall be the duty of the Secretary of the Treasury to use said notes so redeemed to restore and maintain such reserve fund in the manner following, to wit: First, by exchanging the notes so redeemed for any gold coin in the general fund of the Treasury; second, by accepting deposits of gold coin at the Treasury or at any subtreasury in exchange for the United States notes so redeemed; third, by procuring gold coin by the use of said notes, in accordance with the provisions of section thirty-seven hundred of the Revised Statutes of the United States. If the Secretary of the Treasury is unable to restore and maintain the gold coin in the reserve fund by the foregoing methods, and the amount of such gold coin and bullion in said fund shall at any time fall below one hundred million dollars, then it shall be his duty to restore the same to the maximum sum of one hundred and fifty million dollars by borrowing money on the credit of the United States…
…
SEC. 6. That the Secretary of the Treasury is hereby authorized and directed to receive deposits of gold coin with the Treasurer or any assistant treasurer of the United States in sums of not less than twenty dollars, and to issue gold certificates therefor in denominations of not less than twenty dollars, and the coin so deposited shall be retained in the Treasury and held for the payment of such certificates on demand, and used for no other purpose. Such certificates shall be receivable for customs, taxes, and all public dues, and when so received may be reissued, and when held by any national banking association may be counted as a part of its lawful reserve.
Short of saying, “Cross our heart and hope to die,” I don’t know what more the Act could have said, in order for FDR to have reneged in 1933. For those who continue to claim that FDR did not violate any legal obligations to the people holding US dollars in 1933, let me ask this: Is it possible for him to have been so beholden, in your mind? Or by definition, can the State do whatever it wants with respect to its paper notes, at a moment’s whim, regardless of what it has done in the past?
UPDATE: Here is the full Mises quote I had in mind:
It can hardly be contested that fiat money in the strict sense of the word if theoretically conceivable. The theory of value proves the possibility of its existence. Whether fiat money has ever actually existed is, of course, another question, and one that cannot off-hand be answered affirmatively. It can hardly be doubted that most of those kinds of money that are not commodity money must be classified as credit money. But only detailed historical investigation could clear this matter up. [Mises, TOMC, p. 61]
So that’s what I had in mind. What I wrote originally was clearly going beyond Mises’ words here. From many other scattered remarks, I still stand behind my view that I don’t think Mises believed there would be fiat money as a worldwide phenomenon, but I have no smoking gun quotation.
Adventures in Wikipedia
Not sure how long it will stay there, but the entry for “Backwardation” in Wikipedia seems to be OK to me. Yet someone appended in the beginning of the article:
“Backwardation and contango are the opossite [sic–RPM ]of what is being described below. The graph shown is wrong.”
If Goldfingermember* were here, I’m sure he would ask, “Ishn’t zhat weird?”
* Oops I unparodied the parody. If Goldfinger were here, he would probably say, “Is Bond still alive?”
Murphy Twin Spin on International Trade and Currencies
To get you warmed up, I tell people to stop worrying about the yuan in the Freeman. An excerpt:
When Krugman and others complain about the Chinese keeping their currency “artificially weak,” what they really mean is that the Federal Reserve—under both Alan Greenspan and Ben Bernanke—has been out-inflating the rest of the world. Under those circumstances the dollar ought to be sinking against other currencies. (Indeed, from February 2001 to February 2011, the dollar fell 31 percent against a trade-weighted basket of currencies.) In this context, if the Chinese stubbornly refuse to let the dollar weaken against their own currency, they are accused of “manipulation” to benefit themselves at the expense of the world.
To add yet more irony to the situation, notice that since June 2010 the Chinese have in fact been allowing their currency to steadily strengthen against the dollar. (This is the falling squiggly line at the end of the chart.) This has gone hand in hand with their slowdown in purchases of new debt issued by the U.S. Treasury. Yet rather than praising the Chinese for creating American jobs, most analysts are fretting over the fate of the dollar and U.S. interest rates if the Chinese don’t resume financing more of Uncle Sam’s deficits! If U.S. officials really want to eliminate an “overvalued dollar,” they should tell Bernanke to stop printing so many dollars.
Then I take it to the next level at Mises.org, where Mises refutes Dean Baker from the grave:
Last week I testified before a Congressional subcommittee on the Fed’s role in rising gasoline prices. All of the economists on the panel agreed that oil prices were rising (partly) because of the dollar’s fall against other currencies. However, Dean Baker — prominent Keynesian pundit and codirector of the Center for Economic and Policy Research — testified that the dollar’s fall was inevitable, and even a good thing in light of the US trade deficit.
At the time, I knew I disagreed with Baker, but I didn’t get a chance to explain why. A few days later, while working on the Mises Institute’s study guide to The Theory of Money and Credit, I was amazed to discover that Mises had devoted an entire section to this very issue.
Incidentally, our own Bob Roddis in the comments to my Mises article found this interesting quote from Baker from his own book Meltdown (not to be confused with Tom Woods’ volume of the same name):
Tax cuts directed at low and moderate-income families are a good way to jump-start the economy, as would be government investment aimed at neglected infrastructure needs, such as re-building New Orleans and preventing the collapse of more bridges. Pushing down the value of the dollar should also be a top priority. There is no way to correct our trade imbalance with an overvalued dollar providing a massive subsidy for imports and imposing a tariff on U.S. exports. A lower dollar will make U.S. manufactured goods far more competitive in the [p.130] world economy, and will thus create a large number of relatively high-paying jobs. One benefit of the housing meltdown is that it should be much easier to get our trading partners to go along with a lower dollar now that we can show them how much money they lost by investing in U.S. financial assets that have gone bad.
I’m not sure why by that last point strikes me as really funny.
Is Krugman a Keynesian?
I had toyed with the idea of mentioning that the day after I mentioned here that Austrians theory could explain a stock market crash better than the Keynesians, the stock market fell more than 2 percent. But I think some of my critics wouldn’t have realized I was being humorous, so I rejected the idea…
Anyway, today Krugman illustrates exactly what I was getting at. In a post entitled, “Awesome Wrongness” Krugman writes:
About a year and a half ago, all the Very Serious People said that it was time for a pivot in economic policy. Recovery was underway, so no more efforts to stimulate demand; the big threat was the bond market vigilantes, so it was urgent to slash the deficit now now now.
Then Krugman goes on to show that the employment situation is still bad, and that interest rates are still low.
Now in fairness, Krugman does have a point about interest rates–people (including me) have been worried about spiking rates, and thus far that hasn’t materialized.
But regarding unemployment, an innocent bystander would get the idea from Krugman’s writing that the “Very Serious People” have been heeded and that the nutjob Tea Party people have slashed spending, thus stalling the recovery. (It’s true, he didn’t literally say that, but that’s definitely the message he conveys.)
In other words, I think many of Krugman’s fans would conclude that we had some big deficit spending for a while there, things started to turn around, and then dangit we’ve begun repeating those awful mistakes of 1937, which Krugman has repeatedly warned about, including today.
So for the record, here is “Net Federal Government Saving” (meaning a negative number is a deficit) for the past few years. Do you see a big surge in deficit spending that averted another Great Depression, but then a big drop starting some point after “a year and a half ago” because the Very Serious People got their way?
2008-01-01 -376.7
2008-04-01 -761.6
2008-07-01 -646.7
2008-10-01 -680.0
2009-01-01 -1003.2
2009-04-01 -1336.8
2009-07-01 -1356.7
2009-10-01 -1310.3
2010-01-01 -1314.2
2010-04-01 -1336.5
2010-07-01 -1343.4
2010-10-01 -1339.7
2011-01-01 -1288.4
(To handle a possible objection: Yes state and local spending fell during this period, but the fall happened early on. Total government deficits were virtually identical in 1q 2010 and 1q 2011.)
Did the People Reject the Gold Standard?
When I was googling something on the classical gold standard, I came across Brad DeLong’s book (?) on the economic history of the 20th century. In his discussion of the gold standard before World War I, he writes:
It is important to recognize that the gold standard was a historically-specific institution. The cornerstone of the gold standard was the commitment by all industrial-economy governments and central banks to maintaining convertibility of their currency. The pressure that twentieth-century–democratic–governments would feel to abandon currency convertibility and the stable exchange rate peg in order to boo[s]t employment or attain other economic objectives was simply absent. The credibility of the government’s commitment to the gold standard rested on the denial of the franchise to the working class. As long as the right to vote was still limited to middle and upper-class males, those rendered unemployed when the central bank raised [its] discount rate and tightened monetary policy had little voice in politics. As long as union movements remained relatively weak, the flexibility of wages and prices that would allow the gold-standard system to quickly readjust to equilibrium was present.
Later on these two preconditions for the functioning of the gold standard would erode, and the gold standard would cease to be a politically and economically-feasible institution.
Although DeLong writes in a neutral tone, as if he is simply reporting facts, there is clearly a dig at the gold standard here. He isn’t simply saying that it failed because of XYZ, DeLong is also saying that the only way the gold standard “works” is to screw over the powerless.
In any event, I think his history is simply wrong, at least with respect to the United States. FDR didn’t campaign on ending the gold standard. Here was the Democratic platform for the 1932 election, as reported by Scott Sumner:
The Democratic Party solemnly promises by appropriate action to put into effect the principles, policies, and reforms herein advocated, and to eradicate the policies, methods, and practices herein condemned. We advocate an immediate and drastic reduction of governmental expenditures by abolishing useless commissions and offices, consolidating departments and bureaus, and eliminating extravagance to accomplish a saving of not less than twenty-five per cent in the cost of the Federal Government. And we call upon the Democratic Party in the states to make a zealous effort to achieve a proportionate result.
We favor maintenance of the national credit by a federal budget annually balanced on the basis of accurate executive estimates within revenues, raised by a system of taxation levied on the principle of ability to pay.
We advocate a sound currency to be preserved at all hazards and an international monetary conference called on the invitation of our government to consider the rehabilitation of silver and related questions.
And Scott’s post itself is a discussion of the (famous) problem that nobody knew what was going to happen to the gold standard after the election in November but before FDR’s inauguration (which was in March in those days). So at best FDR was being coy about the gold standard. He certainly didn’t get elected on a promise to end it. (Even this site, which is definitely coming from a different political angle compared to Sumner, at most can say that although FDR campaigned on a sound currency, he never promised to stay on the gold standard.)
Furthermore, when the US did “go off gold,” people were forced to turn their gold over under threat of a 10-year prison sentence and a huge fine. Sure, a lot of fat cats were inconvenienced, but I imagine a lot of regular Joes had to turn in their gold too. So this wasn’t the analog of a South American land redistribution.
These tendencies carry through to our times, as well. If you ask the man on the street, “Do you favor a strong or a weak dollar policy?” what is he going to say? Furthermore, if you ask, “Most economists agree that TARP and the Federal Reserve’s injection of more than $1 trillion into big banks saved the financial system and averted a second Great Depression. What do you think?” I suspect a lot of the “working class” would say, “Screw the bankers!”
So my point is, I think the general public, even the working class, is OK with a strong currency as epitomized by the gold standard. They might be wrong in that view (I don’t think so), but DeLong’s narrative doesn’t really work for the U.S.
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