31 Mar 2011

Murphy Triple Play

Shameless Self-Promotion 14 Comments

I’m finally emerging from a hectic workload–and yet I’m going to Brazil next week. But in the short window we have, I’ll try to catch up on my blogging. For right now, here are three Mises Daily articles that have accumulated on my browser:

* “The Japanese Currency Intervention.” This was a case where I had to write the article that I wanted to read. I.e. nobody was really analyzing from first principles what the deal was with the central bank interventions to weaken the yen after the earthquake. So I took a stab at it. I’m either a fool or a genius.

* “Where is QE2 Taking Us?” This is probably old hat for many of you, but perhaps you haven’t seen the recent monetary base charts, and how they’ve spiked since QE2.

* “The Hathaway Effect and Automated Trading Programs.” They can’t all be artsy films; sometimes you have to pay the bills. This article has a cover photo of Anne Hathaway and an example using VCU. It is so pop econ that I toyed with bringing Jim Cramer on as a co-author. I feel dirty.

P.S. I think I’ve got the comments back to normal (again). I have no idea what keeps happening.

14 Responses to “Murphy Triple Play”

  1. AP Lerner says:

    “This was a case where I had to write the article that I wanted to read”

    Usually, if it’s an article you want to read, chances are, it’s going to be biased and inaccurate. After reading your article, my suspicions were confirmed.

    To anyone that believes charitable donations and swapping USD denominated tractors for Yen is what drove the Yen higher, I have some Lehman stock to sell you. How a few billion in charitable giving can move the FX of the third largest economy in the world is beyond me?

    The real reason they Yen spiked so quickly after the disaster: 1) local liquidity hoarding and increased savings combined with 2) threats of higher taxes to ‘pay’ for reconstruction.

    On the first point, for those that may not be aware, there is a large global carry trade that originates in Japan and is common even among retail investors in Japan. The disaster promoted massive unwinds of this trade, prompting the increased demand for Yen.

    On the second point, the silly fears that Japan represents a credit risk has people convinced taxes must be raised to pay for reconstruction. Of course, higher taxes remove Yen from the private sector if done in a deficit neutral or deficit shrinking manner, making Yen ‘harder to get’. Japanese policy makers’ silly fears of Japan becoming Greece is promoting a deflationary outcome, and will make Japan even more Japan like.

    In short, the demand for Yen went up as the carry trade unwound and the supply is being reduced by higher taxes.

    The repatriation theory is complete and utter nonsense. Your disdain for central banking, while at times appropriate, is blinding you from the reality of the situation.

    “but perhaps you haven’t seen the recent monetary base charts, and how they’ve spiked since QE2”

    I have. Perhaps you have not seen the charts showing consumer credit growth and M2 and M3 lately? FYI – reserves are not required for credit transmission, so the spike in the monetary base is meaningless for future credit creation.

  2. Bob Roddis says:

    Disdain for central banking and/or Austrian analysis have absolutely nothing to do with any difference of opinion of the “operational reality” here. You simply may or may not have better information as to what the various parties are actually doing.

    Whether or not reserves are practicaly required for fiat credit expansions in the present day is purely a factual question and has absolutely nothing to do with Austrian analysis. Austrian principles do not maintain that reserves are in fact required for present day central bank credit expansion. Austrian analysis examines the effect of that credit expansion upon individual ignorant acting human beings.

  3. Daniel Hewitt says:

    When banks’ capital is exposed as being worthless, increased reserves are needed to recapitalize so they can create credit.

    • AP Lerner says:

      “When banks’ capital is exposed as being worthless, increased reserves are needed to recapitalize so they can create credit”

      Sorry, but this is completely false and a fundamental misunderstanding of how the banking system operates. Reserves are not capital. I have seen Mr. Murphy and make this mistake at times as well.

      Reserves regulate bank balance sheet liquidity, and requirements (if they exist) can always be met in a fully functional inner bank market.

      Capital regulates bank solvency, and additional capital is always required to grow a banks balance sheet.

      Reserves are never required for a bank to make loans, and reserve requirements are ALWAYS met after a bank makes all loans that are deemed profitable up to its capital position.

      Capital is always required PRIOR to a bank making a loan.

      By your rational, the Canadian banking system would have zero capital, since it has zero reserve requirements.

      • Bob Roddis says:

        To the extent it is true that modern day fiat money banks can get away with making loans ex nihilo with no reserves whatsoeverr does not in any way refute Austrian School analysis. It is merely an issue of fact.

        • AP Lerner says:

          Wow, Bobby Boy admits the banking system is never reserve constrained. Do you even realize this destroys your views on inflation? Score another for AP Lerner

          • Bob Roddis says:

            It does not destroy my views on inflation. There isn’t enough stuff to go around to satisfy all of the government’s obligations. I think Austrians have been saying that the government will end up paying its obligations with diluted funny money instead of a formal “whoops — we’re broke!!”. We only disagree on the results of such an endeavor.

            If inflation is solved under MMT, why was Abba Lerner concocting this wacky scheme in 1980?:
            Initially he toyed with various administrative wage and price control policies, but he found those lacking and soon gave them up. He replaced them, first, with a tax based incomes policy and ultimately, a market based[!!!] incomes policy in which property rights in prices are set and individuals have to buy the right to change prices from others who change their price in the opposite direction. It was this idea that formed the basis of our market [!!!!!!] anti inflation (MAP) book. (Lerner and Colander 1980) Under MAP, rights in value added prices would be tradable so that any firm wanting to change its nominal price would have to make a trade with another firm that wanted to change its nominal price in the opposite direction. Thus, by law, the average price level would be constant but relative prices would be free to change [page 12]


  4. Bob Roddis says:

    Deep thought regarding the “progressives” and their “thinking”.

    If the purpose of diluting the funny money supply is to lower real wages and prices to boost employment then minimum wage laws must cause unemployment. Right? Lower wages boost employment while higher wages cause unemployment.