03 Jul 2010

More Post-Modern Financial Analysis From Scott Sumner

Financial Economics 7 Comments

Why do I keep torturing myself by going back to Scott’s blog? (Actually I have an answer: because I have a paper due tonight, that’s why.)

Here’s Scott on those nutty goldbugs:

I learned an important lesson by reading newspapers from 1933 showing Wall Street’s reactions to FDR’s New Deal policies.  They were sort of OK with his outrageously statist NIRA, which had the government herd companies into cartels in order to raise prices (although interestingly they weren’t too crazy about the later high wage add-on.)  But Wall Street was absolutely apoplectic about the one FDR policy that actually worked–dollar depreciation.  Tinkering with the value of the dollar–which had been fixed to gold for 54 years–was considered an outrage.  But then I noticed something interesting; every time the dollar fell a bit more after some sort of action and/or signal from the Administration, stock prices soared.  Wall Street was like some sort of masochist.  Ow! . . . hmmm, I like that, hit me again.

Later on Scott gives his punchline:

My theory is there are two kinds of economists:

1.  Those who look smarter than they really are, because they rely on the EMH to predict

Paul Krugman

Scott Sumner


2.  Those who look dumber than they really are because they rely on their own models to predict:

Conservatives predicting inflation based on Quantity Theory models or Fiscal Theory models.


I bet you never thought you see a list that had Paul Krugman in the pro-EMH camp.  But just as with Wall Street in 1933, look at what people do, not what they say.

Now of course, my immediate reaction to this was, “Are you kidding me Scott? When people think the dollar is getting devalued, they bid up the most flexible dollar-prices of financial assets…and you think this is a contradiction?”

But forget that. Take a step back and look at what Scott is saying. He thinks he is refuting the people who said going off gold would be a disaster…by surveying the implicit predictions (versus their explicit, spoken predictions) of investors on Wall Street in 1933.

But Scott, we don’t need to use expectations of Wall Street investors in 1933 to see if FDR’s plans worked. We can just look at what actually happened.

And guess what? The US, and the rest of the world, went through the most agonizing and sluggish economic recovery in history. What would have had to happen for FDR’s critics to have been deemed right?

And it’s the same thing in our time. After Bernanke doubled the base in 2008-2009, suppose unemployment dropped to 3 percent while price inflation stayed modest, and all other indicators went back to normal. Surely Scott would have been saying, “I told you Austrians so! Jeez you guys are so 19th century.”

But instead, we’re still stuck in a rut 18 months later, and things look like they are about to fall off a cliff (again). (By the way, just how sticky are those wages? I would have thought 18 months would be enough time to pry them loose.) This is just further evidence for Scott that he has been right.

(Normally I email my posts to Scott, but I am going to stop doing that. What usually happens is that he will answer my email, rather than posting his comment here. For some reason this offends me, as if he is afraid he will get Rothbardian cooties if he posts in the comments.)

7 Responses to “More Post-Modern Financial Analysis From Scott Sumner”

  1. Scott Sumner says:

    I put on my surgical mask and rubber gloves, and am ready to comment. My point about the dollar was watch what people say not what they do. Industrial production rose 57% in the first 4 months of the dollar program, then the recovery was aborted when FDR raised all wages by over 20%.

    I don’t see sticky wages as the only problem, but the 18 months figure is misleading. Wages may have adjusted to the initial shock, but not shocks that came later. It’s not like the collapse in NGDP all happened in one microsecond 18 months ago.

    But I do agree with the Austrian view that modern labor market interventions make recovery much slower than in 1922. My point is that even in 1921 we had a severe recession (albeit quite short.) So I still think wage stickiness best explains why nominal shocks have real effects in the short run. And some of the labor market interventions that are impeding recovery (99 weeks extended UI benefits, etc) were enacted precisely because of the original nominal shock.

  2. Bob Roddis says:

    What about the blatant immorality of a quasi-government agency surreptitiously reducing everyone’s wages (and/or prices) through money dilution? Isn’t that the essence of the Keynesian trick of the 1930s as Hayek explained it?

  3. Bob Roddis says:

    Let’s not forget that the 1933 cartelization scheme was Wall Street’s idea for the benefit of Wall Street. Antony Sutton explains:



    Just like the Fed was the big banker’s idea for the benefit of the big bankers. Murray Rothbard explains:


  4. Yancey Ward says:

    Industrial production rose 57% in the first 4 months of the dollar program

    As measured in what?

  5. Silas Barta says:

    And, of course, the whole idea that making lots of bad, wasteful loans to prop up the fake ngdp metric can do anything but delay needed adjustment…

    First post from my first smartphone btw

  6. fundamentalist says:

    “Industrial production rose 57% in the first 4 months of the dollar program”

    That is an example of the post hoc fallacy unless Sumner can explain what would cause industrial production to rise so dramatically just because the guv devalued the dollar? Such an increase would require that producers had huge amounts of cash sitting around just waiting for the devaluation. My guess is that something else caused the burst in activity in spite of the devaluation.

  7. fundamentalist says:

    PS, even if producers were waiting for the devaluation to occur (hoping for increased exports), wouldn’t it take longer than 4 months for their investments to produce a measurable increase? And all producers wouldn’t be exporters, so you would have to believe that exporters expected a huge bonanza from increased exports in order for the average (including non-exporters) to be 57%. My guess is that prices had quit falling so that even domestic producers saw a chance for a recovery. Then there is the Ricardo Effect, too. Sumner wants to ignore everything that might have caused the jump and production and give all of the credit to the one unlikely source – devaluation.