18 Jan 2011

There’s No Such Thing as Bad Publicity

Federal Reserve, Shameless Self-Promotion 9 Comments

This is good, I was going to go streaking if I didn’t start getting more links…

In response to my critique of David Beckworth, Bill Woolsey, Josh Hendrickson, and Beckworth himself (here and especially here) triple-teamed me.

I will digest their responses and probably post another Mises Daily on all this. Let me say one thing though: I was not inventing positions and attributing them to Beckworth. I quoted what he wrote, and then responded. (You can see my comment to Woolsey to get a sense of what I mean.)

Beckworth and I agree about one thing: The picture the Mises guys made of him for my article, was much cooler than my article. I can’t control that.

9 Responses to “There’s No Such Thing as Bad Publicity”

  1. Bob Roddis says:

    Last week we learned that Friedman was a “left of center” money guy.


    Maybe Hayek is too.

    I guess it’s all come down to Rothbard vs. The World.

  2. Bill Woolsey says:

    Thanks for the comment.

    You have a new follower.


    A bit harsh, I think.

    Beckworth has written a number of posts explaining how lower interest rates and increased bank lending are not essential for QE2 to be efffective. If only Bernanke would endorse that position.

  3. David Beckworth says:


    Thank you to you too for the publicity! Based on your comments at Josh’s blog I look forward to your reply on the whole monetary disequilibrium issue.

    Let me add one point of clarification here on the interest rate issue. Yes, I said QE2 should lower interest rates. I also said in the article that ultimately interest rates should go up. I think down-up pattern has been borne out in the data as seen here.

    What happens to interest rates, however, is of secondary importance. That was a point I was trying to make in the article and one that I have made extensively on my blog. In fact, I have been very vocal about criticizing Bernanke and the Fed for selling QE2 as working solely through the lowering of rates. See this post for example.

    For me, the key mechanism through which QE2 could work is through the rebalancing of portfolios–it will help undo the excess money demand problem Here is one good explanation of it.

  4. Captain_Freedom says:

    Hi Dr. Woolsey,

    I’ve been following this back and forth with interest, and I am enjoying the discussion very much. I don’t want to intrude *too* much here, which really means I want to :), so perhaps you can clear some things up regarding your particular response to Murphy.

    >Beckworth doesn’t think the purpose of the policy is to lower interest rates or expand industrial or commercial bank loans. Murphy’s statistics about interest rates on government bonds and the volume of commercial and industrial loans are irrelevant.

    I thought it was very clear that Murphy was only criticizing Beckworth’s initial remarks regarding interest rates and bank lending. Beckworth DID in fact make an assertion concerning these two things, and so in fairness to Murphy, it is not flawed to respond to these claims with corrections. Beckworth did in fact claim that although he holds the purpose of QE2 to be something more important than interest rates and bank lending, namely aggregate spending, Beckworth did make the claim:

    “It is not solely about lowering interest rates, increasing bank reserves, and encouraging bank lending, **though all of those will occur**. Rather, it is about fixing a spike in the demand for money that has significantly hampered spending.” (emphasis mine).

    Murphy just took what Beckworth actually wrote about interest rates and bank lending, and CORRECTED the erroneous claims. Murphy provided charts that showed interest rates ROSE and bank lending FELL, with the important caveat that he is graciously giving Beckworth the benefit of the doubt and emphasizing that cause and effect are difficult to fully “disentangle”. In other words, he HUMBLY corrected Beckworth’s errors knowing full well that as an Austrian, Murphy does not attach a mechanistic view of the market where one thing takes place at the Fed, and then individuals in the market react like automatons.

    I honestly don’t see how his correction could have been said any better.

    My suspicion for your red herring here is that you know Beckworth was wrong about interest rates and bank lending, but you want everyone to just focus on the “true spirit” of QE2, which is to stimulate aggregate demand. OK, fine, that’s the core issue of your position, but the least Beckworth can do is admit he was wrong, at least in terms of the data, regarding interest rates and bank lending.

    >As I have explained before, quantitative easing can increase spending on goods and services while real interest rates rise and lending by banks or even total lending falls. All it requires is that some of the households and firms that reduce lending use the funds they would have lent to instead purchase consumer or capital goods.

    Sure, that’s what YOU said, which is consistent with real world events, but that’s not what Beckworth said, which is who Murphy responded to.

    In any event, why should an individual spend more money when his preference is not to spend more money? Would you be happy if I observed your spending patterns, then subjectively found it to be “unsatisfactory”, which leads me to then do the Woolsey/Beckworth solution of printing money in my basement and using that money to buy the same goods and investments you buy, which compels you to start spending more now because you don’t want to lose out? This is what you are calling for when you advocate for QE2 the way you explain it.

    You essentially want individual human beings to be treated as means to other individual’s ends. You don’t want the individual to be their own end of course, because that would be the actual economically conservative position to take. The NEOconservative position is for the individual to be treated as a means to satisfy some end that is not the individual’s according to their own choice patterns. Your desired end is to see a line look all pretty on a graph, that is, to follow a nice, gradually increasing, mathematically derived “aggregate demand” trend line. To achieve that desired end, the MEANS you select are to support the continued enforcement of a government backed monopoly, a central planning agency, called the Federal Reserve, who are to counterfeit paper money, and through legal tender laws backed by gunpoint, coerce and compel American citizens to do what they otherwise don’t want to do in the absence of the coercion, which is spend more money on consumption and/or capital goods, to experience rising prices for those on fixed incomes, to experience wealth transfer away from those who receive the new money last to those who receive it first, and to experience even more economic distortions.

    Why can’t you just allow the individual to decide for him or herself what to hoard, what to consume, what to invest? Why do you call for individuals to be victimized by inflation? Is looking at a pretty line on a graph more important than allowing individuals to decide for themselves what their spending and investing patterns should be relative to each other without any external coercive influence from the Federal Reserve System?

    >Murphy’s argument against the desirability of expanded spending is almost nonexistent. Neither Beckworth nor any quasi-monetarist claims that spending creates wealth without production. Further, we understand the importance of expanding the productive capacity of the economy through saving, investment, and technological innovation However, we also recognize that in a market system, productive capacity will do no good if firms cannot sell what they produce.

    Wow, Keynesians could not have said it any better. The problem with this view is that the reason why so many firms find themselves to be unable to sell more goods and services is BECAUSE of past credit expansion induced inflation. You are fallaciously taking the current productive structure as the “correct” productive structure. It is not correct because it has been highly distorted by the very thing that you believe is needed now to solve the economy’s woes, i.e. inflation and credit expansion!

    If a producer finds that he cannot sell his goods, then he will of course believe that the problem is, in part, not enough demand for his products.

    But if you then interpret this in such a way as to believe that the economy as a whole faces this problem, then you are committing the fallacy of composition. It is not the case that you can just add up all individual firms, and their inability to earn enough revenues, and then conclude “AHA! The problem is not enough aggregate demand”. You can’t do this because all the different firms and products for sale actually represent mutually exclusive *alternatives*. They cannot be added together.

    The current supply of money and volume of spending that exists is FULLY CAPABLE of financing and buying all that can possibly be produced. The crucial requirement for this to be able to take place is for all the various industries, firms, and individual producers to be in the correct balance and orientation relative to each other. If there are too many construction workers in Nevada, or too many nails and lumber in California, then what this means is that there is NOT ENOUGH production elsewhere in the economy.

    You have to accept that our economy is NOT in the correct physical orientation right now, correct meaning the physical productive structure is in line with real consumer demand for physical consumer goods and services. The US economy was thrown way off course in terms of productive structure.

    Unfortunately, you, Beckworth, et al, are not viewing the economy the way it needs to be viewed. You are viewing it in much too aggregative a manner, much too singular, and thus you are blind to the real economy that contains stages, time structure, and most importantly, a complex structure that produces a plethora of consumer goods in the physical proportion and balance that consumers prefer.

    What you are really asking for is for the current productive structure to be maintained, even though it is not representative of real consumer preferences. You see problems, and you don’t accept that the problems are here BECAUSE of the Federal Reserve’s actions in the past. You want a short term fix from the government (Fed) to a problem that really requires individual choice to be respected and allowed to function.

    >And so, real expenditure must grow with the productive capacity of the economy. That requires that money expenditures grow or else the level of prices and wages fall. Our view is that growing money expenditures is a better way to allow firms to sell what they are able to produce than requiring a deflation of prices and wages, particularly a deflation made necessary by a large drop in money expenditures.

    Your view is flawed. What you consider to be “better” for other people is not up to you. It is up to the individual. If in a free market society, with a free market in money production, prices and wages tended to fall in nominal terms over time, then that IS the “better” economy, because by definition, what is “better” for the individual is what results from individual choice in a private property, free trade society.

    It is a dogma to believe that prices MUST rise over time. I don’t see the electronics industry experiencing chronic problems on account of the fact that prices tend to fall in that industry over time. In fact, I see tremendous innovation, and productivity. Do you know why even the most destitute people in society own cell phones? It’s because they are so inexpensive and continue to fall in price, and this is DESPITE the Fed’s maniacal printing of money in the last few generations. Can you imagine if virtually all goods and services behaved in price like electronics? That’s what a free market gives people. More goods at lower prices. So what if prices and wages nominally decline over time? Their REAL incomes would grow!

    >We cannot “inflate” ourselves into jobs, says Murphy. If we assume that the prices and wages are at the level where the real quantity of money equals the demand to hold it, then expanding the quantity of money will do no good. But if the prices and wages remain too high for the real volume of expenditure to match the productive capacity of the economy, increasing the quantity of money means that prices and wages don’t have to fall as much as they otherwise would. In the limit, prices and wages don’t need to fall at all and, in fact, can continue to rise at their previous trend.

    You are ignoring the further distortions, the wealth transfer, and the loss in purchasing power, that arise out of your solution to the problem. If prices and wages remain “too high” according to you, then the solution for your problem would be for you to go out and convince people who are asking for too high a price and paying too high a price, in a peaceful manner, to lower prices voluntarily. The solution is definitely not to support the continued coercion against them via legal tender laws, debasement of the currency, wealth transfer, and further economic distortions, ultimately all backed at the point of a gun, in order to compel them to spend money they otherwise do not want to spend, on goods that they otherwise would not want to buy, at prices they otherwise would not want to accept.

    If prices are “too high”, then how in the world could creating more money solve that alleged problem? Call me wrong, but printing money will tend to make prices rise, not fall. If you want prices to fall, then shouldn’t you be anti-QE2?

    >In the end, Murphy criticizes quantitative easing because when the Fed purchases $600 billion in government bonds, it is purportedly distorting the market by providing the Federal government with funds at preferential rates. By lending to the government, the Fed is distorting the market by directing credit towards the government rather than the private sector.

    That is a straw man. Murphy is not criticizing QE2 for these reasons, although I expect him to actually agree with this straw man. No, Murphy, as do all other Austrians, criticize QE2 because it is distorting market interest rates, because it is just more inflation of the money supply, because it is an action that creates the very economic problems you see around you now. At this point in the debate, I really can’t see how you are not yet referring to, at least in passing, the Austrian theory of the business cycle. Austrians hold, correctly, that when central banks create new bank reserves, which enter the banking system, which is used pro-actively or retro-actively (it doesn’t matter) to pyramid new loans out of thin air, to expand credit, THIS IS THE FUNDAMENTAL PROBLEM.

    Murphy is criticizing QE2, fundamentally, because of this. Yes, it is also wrong to give the US government free money, who will then spend a large portion of it on neoconservative agendas like maintaining our empire overseas, and financing more police state measures at home, as well as liberal agendas of course, but this is not Murphy’s main concern. It is the Misesian/Hayekian effects of inflation and credit expansion on the structure of economy. It distorts it and sets it up for yet another bust once the inflation slows, or does not increase as fast as it needs to in order to maintain the non-consumer determines productive structure of the economy.

    >At first glance, the argument is absurd. Does Murphy really think that the U.S. government will spend $600 billion more in 2010 and 2011 because the Fed is purchasing $600 billion more government bonds? That if the Fed instead purchased a portfolio of private securities, the U.S. Treasury would have to sell fewer bonds over the next year because it couldn’t find buyers? And so, the U.S. government would have to limit its spending because of a lack of funds?

    Wow, what nonsense. QE2 is a POMO operation. The Fed is buying bonds from the primary dealers, not the Treasury directly, although the primary dealers are sending the soon to be worthless US bonds right back to the Fed, who then remits the money to the Treasury. The slush fund cycle is allowing the government to spend more money, with a free haircut to the PDs, all at the expense of as yet unborn children, who will have to pay more taxes to pay off the debt.

    >I think a much better vision of the current fiscal situation in the U.S. is that the government spends what it likes, collects taxes as it can, and borrows the difference. The U.S. government has no problem finding buyers for its bonds, and is able to borrow at historically low rates.

    That’s because the Fed is now the largest buyer of US government debt! If the Fed did NOT monetize the debt, then US government interest rates would soar. The PDs, as well as secondary market buyers, know that the Fed is monetizing debt, and so they know they can make free profits by buying the US debt. Take a look at the last few months of which US debt securities the Fed is buying. The PDs are holding on to the debt they buy for usually no more than a week or so, after which they sell a VERY large portion of them back to the Fed.

    This shell game cannot possibly last.

    >However, there is probably one element of truth in Murphy’s argument. If quantitative easing did lower interest rates on government bonds, then this would reduce the government’s interest expense. Because of public concern about budget deficits (which I share,) this reduction in interest expense will reduce the pressure on the government to hold the line on other elements of government spending or increase taxes.

    What happens when interest rates eventually rise, which they will invariably do? Print more money, monetize more debt? Or let interest rates rise, then see the US government budget all of a sudden become mostly interest payments on massive quantity of debt you believe can remain cheap? The US is on a path of fiscal and monetary breakdown. Why? Because there are too many people like you out there calling for more of what got us here in the first place.

    >Still, I am not certain that the alternative of the government paying its bond holders more and spending less on other government programs is especially desirable. I am sure that paying its bond holders more and raising taxes would be worse. My own preference is that other government spending should be cut regardless of what happens to the government’s interest expense. If there is any change made to the budget due to lower interest expense, it should be lower tax rates.

    How about a cut to bad economist’s research programs?

    >However, as explained above, quantitative easing might actually raise interest rates and the expense of funding the national debt. When the economy is depressed, investors seek safety, which includes government bonds. Since the point of quantitative easing is to increase spending by households on consumer goods and spending by firms on capital goods, and so, generate an economic recovery, investors should feel less need for safety and may move away from government bonds. That the interest cost on the national debt might rise is a cost well worth paying for economic recovery.

    Yet more Keynesian nonsense.

    Consumer spending DOES NOT generate economic recovery, or prosperity. Consumption is the REWARD, the END, to the means which is saving, thrift, investment, and production. You complain that production cannot take place if there is no demand for what is produced? I agree, but by “demand” you must understand it to mean REAL CONSUMER demand, which sets the productive structure in a way that what is produced WILL be sold, because what is being produced, where, and in what quantity, is the preferred pattern of PHYSICAL production according to the consumer.

    Right now, the economy’s productive structure is NOT conducive to real consumer demand. It is not representative of what consumers want if they had the freedom to choose what to buy without coercion. What they are seeing in terms of production now is the result of coercive central planning in money production. Entrepreneurs and capitalists as a class cannot know what the consumers really want, when they want it, because the consumer’s consumption patterns is not able to send signals via interest rates. The consumer is not generating interest rates, the Federal Reserve is. This means that entrepreneurs and capitalists are making decisions according to what the Fed dictates, not what the consumer dictates.

    Why is it so unsettling to you that you aren’t seeing consumers doing what you believe they ought to be doing? It’s precisely because the consumers are telling you and me and everyone else, via their “hoarding”, that they are not satisfied with the current productive structure. They are hoarding money because their economic wants are not coinciding with what is available.

    Let them hoard money, let them do what they find is in their best interests, and you will see all the malinvestment and unproductive structure flush the bad stuff out like feces down a toilet. At that point, real consumer demand will make its needs met through the MARKET rate of interest, which of course means the Fed has to stop manipulating interest rates, and so the decisions entrepreneurs and capitalists make are in line with real consumer demand.

    Why can’t households decide for themselves how much to spend and invest without being coerced by continued inflation and victimized by economic distortions on account of credit expansion?

    >However, having a monopoly central bank direct investment is problematic. The solution is simple. Privatize the issue of hand-to-hand currency, abolish reserve requirements, and set the interest rate paid on reserve balances below the interest rate that can be earned on short term government bonds. This would greatly reduce the demand for base money, and so, minimize the impact of the Fed on investment decisions. The investment decisions would be made by the banks that issue the private currency and deposits used as money or for saving purposes.

    Hahahaha, sorry, but you can’t say that you want the Fed to be involved in investment decisions in one breath, but then advocate for the Fed to not be involved in investment decisions in the next breath. QE2 IS affecting investment. It is affecting investment precisely by coercing the population into making spending decisions they otherwise would not do in the absence of QE2.

    The solution is even simpler. Abolish the Federal Reserve.

    >The worst possible situation is for the Fed to pay high interest on reserves, causing an increase in the demand for base money, and then directing credit where it thinks best.

    That is not the worst solution. That is actually a better solution than not paying interest on reserves. The problem IS credit expansion, which QE2 facilitates. The demand for money in the US is much, much too low. Yes, you read me correct. The rate of savings in this country has, over the generations, plummeted. It has plummeted for many reasons, but a major reason is the Federal Reserve chronically holding interest rates continually below the true market rates of interest. This has lowered the incentive for many to save and invest, and it has increased the incentive for many to borrow in order to consume. It has NOT increased the overall quantity of investment relative to consumption.

    >In other words, the worst possible policy was the misnamed QE 1, really an effort by the Fed to “fix” credit markets. While QE 2 is far from prefect, combined with a commitment to fiscal responsibility, it does not manipulate credit markets in the favor of the government, and is better than leaving the quantity of money below the demand for hold money and real expenditure below productive capacity.

    The current productive capacity is not in line with real, uncoerced, consumer demand. It is a product of Fed manipulation. Investors have made a tremendous amount of “bad” decisions over the years, but they can’t be blamed, because they had no friggin clue what the real market rates of interest are. They haven’t known it since at least 1913. They have only been guessing it. It’s what they are forced to do, because the free market, real consumer preference, is not setting interest rates, but rather the Fed is setting them. Once the Fed changes its policy, real consumer demand is manifested in a different way, and that causes depressions.

    The worst possible solution to our economic woes is more inflation, more credit expansion, continued artificially low interest rates, and continued calls for anti-conservative central economic planning by the Fed.

  5. Lee Kelly says:


    The demand for money is not the demand for saving; demand for money can fall while total saving is actually rising.

    • Captain_Freedom says:

      >The demand for money is not the demand for saving; demand for money can fall while total saving is actually rising.

      I fully agree with you.

      Did anything I say contradict this? I reread what I wrote and I don’t see where you could have got that from. Maybe I goofed somewhere?

      Regarding your points: when people abstain from consuming and hoard cash, say, then this generates a changed relative price structure and thus profitability across the consumption stage and the first order, second order, and third order stages, and beyond.

      It makes the relative profitability of higher order economic stages higher compared to consumer goods profitability. Note that this can even take place if both changes or one changes in nominal terms. The important thing is that the *relative* profitability of consumer companies vis a vis capital goods companies declines. This results in a release of scarce factors, resources, labor, etc from the consumption stage, and invested in the higher order stages (See De Soto’s “Money, Bank Credit and Economic Cycles).

      So hoarding money by reducing consumption generates a more capital intensive economic structure just like reducing consumption AND investing would.

      The end result in terms of aggregate economic profitability is that the rate of profit will rise (see Reisman’s Net Consumption/Net Investment analysis in “Capitalism”).

      This kind of hoarding is the result of a decreased time preference.

      If on the other hand time preference does not change, and the demand for money rises such that both consumption and investment spending are reduced, leaving the ratio unchanged, then this will not make the economy more capital intensive.