16 May 2011

Question for David Beckworth

Economics 79 Comments

David Beckworth is the poor man’s Scott Sumner, now that the Great Insane One has retired. (Scott himself knows that I say that with respect.) David actually knows quite a bit of Misesian theory (he studied under George Selgin), and so in that respect his defense of Bernanke makes him the Count Dooku of Austrian Economics.

All joking aside, I was dismayed to see David repeating a standard Krugman take in a recent post:

The problem is that the hard money approach–which means tightening monetary policy–makes it next to impossible to stabilize government spending. It also makes it likely the economy will further weaken.

How do we know this? First, in almost all cases where fiscal tightening was associated with a solid recovery monetary policy was offsetting fiscal policy. Last year there was a lot of attention given to a study by Alberto F. Alesina and Silvia Ardagna that showed large deficit reductions were often followed by rapid economic expansion. Further digging by the IMF and by Mike Konczal and Arjun Jayadev found, however, that this was only true when monetary policy was lowering interest rates. Fiscal tightening coincided with a recovery only because monetary policy was easing.

This annoys me for two reasons:

(1) In a standard “crowding out” critique of government deficit spending, the mechanism through which the government siphons resources out of private investment is higher interest rates. (The fact that we have very low interest rates right now is Krugman et al.’s evidence that there is no crowding out!) So how the heck is it a critique of fiscal tightening, to point out that the several successful episodes of it went hand in hand with lower interest rates?! That’s like me saying of Krugman, “Sure, he’s right that rising deficits can sometimes bring an economy out of recession, but those were only in cases where the Fed allowed Aggregate Demand to rise.” (Scott Sumner I think has said that, but again, this is evidence of his insanity, which I define to mean, “Thinking in ways totally foreign to my own approach.”)

(2) I sure hope David isn’t saying that these periods were ones of loose monetary policy because of the falling interest rates. Scott and other quasi-monetarists have bitten my head off several times for making this apparently fallacious leap, and they quote Milton Friedman to beat us Austrians over the head.

The two points are actually related: When David and others say that central banks loosened monetary policy in order to offset the contractionary effects of government fiscal austerity, did they actually look at, say, the scale of central bank asset purchases, or things like M2 etc.? Because the textbook theory of pro-growth austerity would mean that, holding monetary policy constant, a drop in deficit spending would reduce interest rates and thus increase private sector investment.

79 Responses to “Question for David Beckworth”

  1. Avram says:

    I always through tyler cowen was count dooku

  2. AP Lerner says:

    “In a standard “crowding out” critique of government deficit spending, the mechanism through which the government siphons resources out of private investment is higher interest rates”

    Mr. Murphy, could you please explain how savings are finite and the government is financially constrained when it is the sole issuer of the currency it uses to pay for goods and services? How can a government borrow and/or tax to ‘fund’ its spending when it must spend first in order to borrow and/or tax?

    The entire concept of crowding out can only be described as ‘gibberish’ under a fiat monetary regime.

    • Major_Freedom says:

      …explain how savings are finite and the government is financially constrained when it is the sole issuer of the currency it uses to pay for goods and services

      Wait, are you are saying savings can be infinite if there is an entity that can create new money? How are you thinking of savings here? In real terms or in money terms?

      If in money (nominal) terms, then infinite savings is equivalent to hyperinflation and a collapse of the currency. So in money (nominal) terms, savings would have to be finite for the fiat paper to even function as a money.

      If in real terms, then it should be obvious why savings are finite. There’s only a finite supply of goods that can be saved and not consumed at any given time. The more the government spends and consumes, indeed the more that any entity consumes, the smaller will the pool of resources available for savings and investment become. If there is a brick, then it can either be bought for the purposes of consumption (e.g. doghouse) or for the purposes of investment (e.g. office building). It can’t be used for both.

      How can a government borrow and/or tax to ‘fund’ its spending when it must spend first in order to borrow and/or tax?

      This question is a result of failing to understand the evolution of money. You should read up on Mises’ money regression theorem. Money does not arise from government decrees or printing presses. Money arises from the market process. When a government then takes control over the market’s money supply, where from then on they create money, then the money that already exists and already owned by the market participants doesn’t just disappear, such that the government prints and issues an entirely new supply of money by spending first, *then* borrowing/taxing, where the only way they can borrow/tax is by spending first.

      What you MMTers are doing when you consider the government’s monopoly of money production is taking the superficial fact that the government is the creator of money today, and then fallaciously concluding that the only way money can exist in the economy at all, such that the government can borrow and tax, is if the government prints and then spends money into circulation first.

      That is not how governments come to have control of an economy’s money supply. Governments had to wait for money to exist in the market first, before they could take it over. This means that for the money the government borrows and taxes today, not all of it has come from fiat money the government created and spent in the past. In 2011, sure, the overwhelming majority of money the government borrows and taxes today was first created by the government printing and then spending it. But you cannot then leap to the conclusion that the only way a fiat money government could ever borrow and tax is by first printing and then spending money. That is imagining the government to have a power that it does not have and never did. It is impossible for a government to decree, from scratch, that “this” is the money and everyone must use it, such that they print and spend, then borrow and tax. No, in order for governments to even form, there has to be an existing market, and an existing free market monetary system, etc. This means that in the beginning, governments had to borrow and tax first, *before* they could spend anything.

      The fact that over 100 years have passed since the government has had control over money creation does not change the direction of dependency.

      If a government has total control over an economy’s money supply, then it’s still the case that they depend on borrowing and taxing in order to “fund” their financing. You can see this by imagining what would happen if a fiat money government stopped borrowing and taxing. If a government stopped borrowing and taxing, and ONLY printed and then spent newly created money to finance its activities, then what will happen is that that the government’s money would be completely rejected by the people. This is because if people did not have to pay taxes denominated in the government’s currency, then there would be no reason for anyone to use the government’s money in their business dealings.

      It would be exactly like me, Major_Freedom, printing off my own paper money and then trying to spend it into circulation, expecting to be able to tax the people who use it, and then borrow from them if I want to borrow. What affect will I have if I did not tax them and did not borrow from them in my paper money? How will I get people to use this money in their own dealings with each other? I would have no way of stopping anyone who used gold and silver as money.

      Only if I had a great enough power of physical force, only if I had an armed police force, who demanded that everyone pay me taxes in my own paper currency, could I coerce people into using my money in their own dealings. But the only way I could even create such an armed force would be if there already was a functioning market to begin with, where people were already using a free market money (that is, a money that they did not ask me for permission first).

      The entire concept of crowding out can only be described as ‘gibberish’ under a fiat monetary regime.

      It’s not gibberish if you understood the basic economic fact that resources are scarce, which means no amount of money printing can make savings anything other than finite. If the government prints, borrows, taxes, and spends money, then that means fewer resources are available for the private market to use for investment purposes.

      • MamMoTh says:

        There is no financial crowding out which is what the mainstream refer to in their articles and textbooks.

        Government spending can crowd out real resources although it is unlikely when so many resources sit idle, unless of course you take the stupid austrian approach that idle resources can be crowded out.

        • Major_Freedom says:

          There is no financial crowding out which is what the mainstream refer to in their articles and textbooks.

          You should read what I just said again.

          “If in money (nominal) terms, then infinite savings is equivalent to hyperinflation and a collapse of the currency. So in money (nominal) terms, savings would have to be finite for the fiat paper to even function as a money.”

          Even if the government has the power to create its own money, then in order for the money to even *be* a money, it would have to be an object of action, it would have to be scarce, and not like atmospheric air.

          Because money has to be scarce to even function as a money, it means that there is an inherent trade-off to spending money. If one entity spends more money, it means other entities spend less money, all else equal.

          Money is a scarce commodity just like every commodity is scarce. Having an ability to create, in principle, an infinite sum of money, doesn’t change this.

          Government spending can crowd out real resources although it is unlikely when so many resources sit idle, unless of course you take the stupid austrian approach that idle resources can be crowded out.

          The Austrian approach is not to consider that idle resources can be crowded out. Where the heck are you even getting that notion?

          Furthermore, if you want to talk about idle resources and its connection to government spending, then you ought to read Murphy’s article here:

          http://mises.org/daily/3290

          For an in depth discussion about idle resources, see Hutt’s book here (Warning: PDF):

          http://mises.org/books/theory_of_idle_resources_hutt.pdf

          In short, the presence of idle resources does not mean that the market is “failing,” such that it requires government spending to put those resources “back into use.”

          Idle resources are evidence that they should not have been produced in the first place. Interventionist economists playing the concerned “there there, it’s not your fault, let me help you out” card, is I think the result of a psychological need to feel like a paternalistic guardian, to feel like one can make the world a better place by imposing one’s own authority on everyone, such that the world starts to function the way the paternalist wants it to function. “Oh, I’m just trying to help” doesn’t cut it, because you can’t claim to be wanting to help people by not first respecting and listening to what they want, then using peaceful means to help them solve their problems. Keynesian spending is pointing guns at some people whose resources are not idle, then giving that stolen money to the owners of idle resources.

          Doing this isn’t “helping people.” It is exploiting some to benefit others. It is a very primitive, ancient, and destructive method that people achieve gains.

          The Austrian economic argument is that the presence of idle resources calls for those resources to be sold for either scrap, or for some other use, at whatever price is available, NOT to be financed and attempted to be put into the same purpose as before. Not all resources that are idle should be put back to their original use. So how do we know whether an idle resource should be put back to its original use, financed at the taxpayer’s expense, or sold for scrap or for some other productive use? You simply observe what people do with those resources on their own, without getting bailed out by the government at taxpayer expense. You see what the process of voluntary interaction generates.

          If the process of voluntarism keeps a resource idle, then let it be idle. If the owner would rather own a useless resource than owning money, then let him. It’s his property. It’s his choice. Let him incur the costs of making that choice. It is economically silly to take the costs of idleness and then impose them on the taxpayer. What did the taxpayer do to deserve having their money stolen just to see the owner of an idle resource make money from it that he can’t make from the voluntary process of the free market? It makes no economic sense whatsoever.

        • Bob Roddis says:

          “Idle” resources that belong to neither you nor the government are none of your business. That should be an insurmountable hurdle to further seizure of the assets of others.

          One of the major purposes of Keynesianism is to obscure the concepts of private property and contracts while making extra-judicial government thievery without due process sound hip and pseudo-scientific.

          • MamMoTh says:

            You should first stop squandering stolen gas in order to give meaning to your life before giving any opinion about seizing the assets of others.

            • Major_Freedom says:

              Bob Roddis is stealing gas?

              • MamMoTh says:

                That I do not know. He only admitted to squandering gas stolen by SWAT teams to give meaning to his life.

              • Bob Roddis says:

                Basically, I admitted that I like to drive my car. MamMoTh took off with it from there. He’s been coy regarding the basis of his analysis.

                Accusing me of gas theft for driving my car is now his standard response to issues derived from Cantillon Effects.

              • MamMoTh says:

                You admitted to like squandering gas driving to give meaning to your life. We all know that that gas is stolen from their rightful owners by your SWAT teams.

                Hence my point and your hypocrisy.

              • Major_Freedom says:

                We all know that that gas is stolen from their rightful owners by your SWAT teams.

                Mammoth, what do you consider to be “rightful ownership”? If it’s anything other than original appropriation, production, or free trade, then you can’t say that an ethnic group owns a resource just because their government happens to enforce illegitimate ownership over it.

              • Bob Roddis says:

                A decades-old Rothbardian theme is that we don’t need an empire to get foreigners to sell us oil.

                As usual, MamMoTh is barking up the wrong tree.

              • MamMoTh says:

                The fact is Roddis that the gas you’ve been squandering your whole life to give meaning to it has been stolen by your SWAT teams.

                What you or Rothbard say or said does not change that fact.

              • Major_Freedom says:

                The fact is Roddis that the gas you’ve been squandering your whole life to give meaning to it has been stolen by your SWAT teams.

                As opposed to the money you’ve been squandering your whole life to give meaning to it has been stolen by your government banker?

              • MamMoTh says:

                As opposed to the money you’ve been squandering your whole life to give meaning to it has been stolen by your government banker?

                Even if that were true it wouldn’t make me a Rothbardian hypocrite like Roddis.

              • Major_Freedom says:

                Even if that were true it wouldn’t make me a Rothbardian hypocrite like Roddis.

                No, you’re right. But it would make you a MMT’ian hypocrite.

              • MamMoTh says:

                it would make you a MMT’ian hypocrite.

                sorry, what would the hypocrisy be?

              • Major_Freedom says:

                sorry, what would the hypocrisy be?

                The same kind you accuse Bob Roddis as being.

    • Jonathan M. F. Catalán says:

      The capital goods that constitute real savings certainly are finite.

  3. Major_Freedom says:

    The first question is more a critique against Keynesians, but the second, yeah, that does not look good for the quasi-monetarists. it’s like when Austrians are making an argument, we get slapped with “lower interest rates does not mean easy monetary policy!” When quasi-monetarists are making an argument, they use “lower interest rates means easy monetary policy!”

    On a side note, Bob, are you “favorably” quoting the following “textbook” passage:

    “Because the textbook theory of pro-growth austerity would mean that, holding monetary policy constant, a drop in deficit spending would reduce interest rates and thus increase private sector investment.”?

    If you are not, then ignore the following: Isn’t it true that in the Austrian conception, lower or higher interest rates does not increase or decrease aggregate investment, it just changes the nature of investment, that is, the temporal structure of investment? You know, the whole “malinvestment NOT overinvestment” thing?

  4. Blackadder says:

    I sure hope David isn’t saying that these periods were ones of loose monetary policy because of the falling interest rates. Scott and other quasi-monetarists have bitten my head off several times for making this apparently fallacious leap, and they quote Milton Friedman to beat us Austrians over the head.

    It seems to me that there is a difference between pointing to low interest rates as evidence that monetary policy is too loose and pointing to falling interest rates as evidence that monetary policy is getting looser.

    • Major_Freedom says:

      Actually there is no difference to the Austrian. To the Austrian, “monetary policy getting looser” is by definition “monetary policy is too loose”.

      In addition, to the Austrian, falling interest rates is not evidence that monetary policy is getting looser, if the free market rate of interest is lower still. It is conceivable, in principle, for the Fed to target a falling interest rate over time, by actually tightening up, i.e. selling Treasuries, but tightening up by not as much as would be required to generate a stable, or increasing interest rate.

      When the Austrian says something like “The darn Fed put interest rates at a ridiculously low 1% for years, and that fueled the housing bubble” they are not saying that 1% is proof that monetary policy was easy. They are saying that monetary policy was easy (as is seen by M3 for example) and that is what put the interest rate at 1% instead of, say 10%.

      The Austrian just goes one step further than the quasi-monetarist. The quasi-monetarist will say that the Fed creating new funds to target a lower interest rate is not necessarily loose monetary policy, if targeting that lower rate results in enough new funds to enable a sufficient increase in the quantity of money and volume of spending such that aggregate demand does not skyrocket, but only just gradually rises according to the quasi-monetarist’s opinion. They usually use the short term t-bill interest rate as a benchmark for inflation. If the targeted rate is lower than the t-bill rate, then the quasi-monetarist will say that monetary policy is “loose.” If the targeted rate is higher than the t-bill rate, then the quasi-monetarist will say that monetary policy is “tight.” They will say these two things, depending on rates, regardless of whether or not the Fed is creating new funds over time.

      The Austrian will say that BOTH cases are cases of loose monetary policy, if it was the case that the Fed is increasing the amount of money. As a proxy for what is the “correct” amount of new funds should be, Austrians don’t use t-bill rates like the quasi-monetarists, they typically use the rate of precious metals discovery, for that is what would most closely match the “free market” rate of money production, in a world where we do not know what the free market money would be during the time that fiat is enforced.

      If the quasi-monetarist is permitted to point to falling interest rates as evidence that monetary policy is getting looser, then they cannot chastise the Austrian for even hinting at there being a connection between interest rates and monetary policy loosening or tightening. But they do chastise Austrians for this, all the time.

      • Blackadder says:

        Actually there is no difference to the Austrian. To the Austrian, “monetary policy getting looser” is by definition “monetary policy is too loose”

        Austrians do often speak this way. I find it bizarre. It’s like saying that if a cup of coffee is getting cooler then by definition it’s too cold (even if it’s still boiling).

        It is conceivable, in principle, for the Fed to target a falling interest rate over time, by actually tightening up, i.e. selling Treasuries, but tightening up by not as much as would be required to generate a stable, or increasing interest rate.

        Sure, that’s possible. But then you would expect to find at least some instances where fiscal contraction was followed by recovery and rates were not falling.

        • Major_Freedom says:

          Austrians do often speak this way. I find it bizarre. It’s like saying that if a cup of coffee is getting cooler then by definition it’s too cold (even if it’s still boiling).

          Aha, indeed they would, but only if the process of the free market, where coffee makers and coffee drinkers make choices that result in a temperature of “oh my god this coffee is melting my face”, then yes, a gremlin that monopolized setting coffee temperature, who started to drop ice cubes into the coffee cups, yes they would in fact be making the coffee “too cold,” because it’s not the higher temperature that results from voluntary temperature preference.

          What you are saying, I think, is that Austrians who say that the interest rate is “too low,” even when it is, let’s say, 25%, they are using a bad terminology, because 25% seems “high” and not “low.”

          But the benchmark Austrians are using when they say “too low” is not their own psychological feelings of what is “just right.” When Austrians say “too low” what they mean is “too low relative to the free market rate, regardless of what the free market rate happens to be in nominal terms.”

          So if the free market rate is 99.99%, then if the Fed is targeting a rate of 99.98%, then that would be “too low.”

          It should be noted that Austrians are not claiming to know what the free market rate of interest actually is. We can infer the following: If the Fed has to positively act to change the interest rate, such that an absence of their action would not change the interest rate, then if they do act, then the free market rate is different than the rate they target. If they have to act to lower the rate, then the free market rate is higher. If they have to act to raise the rate, then the free market rate is lower.

          Of course the rate could change the next day, in which case we’ll just ask the same question.

          Sure, that’s possible. But then you would expect to find at least some instances where fiscal contraction was followed by recovery and rates were not falling.

          Not necessarily. Not if there are other factors that would negatively affect recovery. You cannot deduce economic principles from looking at past data. Past data is too complex, and there are way too many unobservable factors that affect observable data.

          Having said that, there are in fact cases in history where fiscal contraction and no monetary loosening were followed by economic recovery. After the collapse of 1920-1921, the government did not increase spending, and the Fed did not engage in loosening monetary policy, and yet the economy recovered relatively quickly (compared to after the crash of 1929 and subsequent depression).

          After the Fed inflated the money supply during the 1910s to pay for the war, consumer price inflation was running at 20% by 1919. In response, the New York Fed raised its discount rate by 125 bps in one month. Then half a year later, they raised it again by 100 bps, to 7%, which was a record high at the time. This of course exposed all the malinvestments, and the economy went into correction mode. Unemployment averaged around 12% in 1921. But the Fed did not cut rates. They held the 7% for almost a full year. By the time they cut rates, in mid 1921, the depression was already over.

          • Major_Freedom says:

            Oh, and a minor quibble:

            If water is boiling, then it remains at 100C. Water that is boiling cannot heat up or cool down, even if heat is being added or being taken away.

          • Blackadder says:

            What you are saying, I think, is that Austrians who say that the interest rate is “too low,” even when it is, let’s say, 25%, they are using a bad terminology, because 25% seems “high” and not “low.”

            This is not what I’m saying. Presumably the free market interest rate is not infinite. Therefore, it is at least theoretically possible for the actual interest rate to be above what the rate would be in a Rothbard approved free market system. And, if the actual rate were above the free market rate, then lowering the rate would not, by definition, mean that the rate was too low.

            We can infer the following: If the Fed has to positively act to change the interest rate, such that an absence of their action would not change the interest rate, then if they do act, then the free market rate is different than the rate they target.

            There’s no such thing as Fed inaction in a fiat monetary system.

            Consider the parallel case of price controls. The government sets the price of gas at $6 a gallon. Later, it decides to lower the price to $5.75 a gallon. The fact that the government took positive action to lower the price doesn’t mean that the new price is below the market rate.

            LIkewise, in 2006 and 2007 the Fed took positive action to raise interest rates, but this doesn’t prove that the new rates were too high.

            After the collapse of 1920-1921, the government did not increase spending, and the Fed did not engage in loosening monetary policy, and yet the economy recovered relatively quickly (compared to after the crash of 1929 and subsequent depression).

            I don’t believe that’s accurate. The beginning of the recovery in 1921 coincided almost exactly with the decision of the Fed to start cutting the discount rate (just as the beginning of the downturn coincided almost exactly with the decision of the Fed to raise rates). I would refer you to Daniel Kuehn’s paper “A Critique of the Austrian School Interpretation of the 1920-21 Depression” which is available via SSRN.

            • Major_Freedom says:

              This is not what I’m saying.

              Presumably the free market interest rate is not infinite. Therefore, it is at least theoretically possible for the actual interest rate to be above what the rate would be in a Rothbard approved free market system. And, if the actual rate were above the free market rate, then lowering the rate would not, by definition, mean that the rate was too low.

              Sure, but you have to understand that when Austrians say “too low” they mean lower than the voluntary free market rate of interest.

              Similarly, if the real market rate were lower than the targeted rate, and the target was lowered over time, but always remaining above the free market rate, then Austrians would say that the Fed’s rate is “too high.”

              As a side note, the phrase “Rothbard approved free market system” gives the impression that there is more than one free market system. There isn’t. There is only one free market. Rothbard, along with many other Austrians, just understand what the free market is about. It is not the “free market” that most Monetarists and Keynesians consider to be free market.

              There’s no such thing as Fed inaction in a fiat monetary system.

              In principle, there is. The Fed can immediately cease and desist all buying and selling, all discount window lending, and all swaps with foreign central banks. They can simply house a particular sum of money voluntarily given to it by the banks, and then utilize that money as a safety resource for future bank shocks.

              But you’re right, in our regime, the Fed does not not act. But that is precisely why there are booms and busts.

              Consider the parallel case of price controls. The government sets the price of gas at $6 a gallon. Later, it decides to lower the price to $5.75 a gallon. The fact that the government took positive action to lower the price doesn’t mean that the new price is below the market rate.

              That’s not how the Fed sets interest rates. They don’t decree to the banks:

              “First shalt thou take out the Holy Pin, then shalt lend at 0.25%, no more, no less. 0.25% shall be the rate thou shalt lend, and the rate of the lending shall be 0.25%. 0.50% shalt thou not lend, neither count thou 0.00%, excepting that thou then proceed to 0.25%. 3% is right out. Once the rate 0.25%, being the first rate, be reached, then lobbest thou thy Holy lending rate of Bernank towards thy economy, who being naughty in My sight, shall snuff it.”

              The Fed creates enough additional reserves in the banking system such that they set a rate of 0.25% themselves. Thus, if the Fed acts to lower the rate, then we can infer that they are creating more funds than what would have otherwise been the case without acting to lower the rate.

              LIkewise, in 2006 and 2007 the Fed took positive action to raise interest rates, but this doesn’t prove that the new rates were too high.

              According to the Austrians, if they were higher than the free market rate, then they were too high. But more than likely they were lower than the free market rate, despite them being increased.

              I don’t believe that’s accurate. The beginning of the recovery in 1921 coincided almost exactly with the decision of the Fed to start cutting the discount rate (just as the beginning of the downturn coincided almost exactly with the decision of the Fed to raise rates). I would refer you to Daniel Kuehn’s paper “A Critique of the Austrian School Interpretation of the 1920-21 Depression” which is available via SSRN.

              Yikes, I thought it was common knowledge by now that Kuehn’s paper is riddled with misrepresentations and rather dubious claims.

              The Fed started to decrease rates after the economy had already began its recovery. Kuehn thankfully realizes that the recovery started in the first half of 1921, before the Fed started to decrease rates again.

              Sure, you can say that the timing of decreasing rates occurred around the time that the economy recovered, but that would be like claiming sending balloons to a cured cancer patient at the time of their recovery is responsible for their cure.

              By the time the Fed decreased its discount rate, the credit conditions in the market had already improved. It’s one of the reasons Strong decided to lower the discount rate to banks.

              • Blackadder says:

                if the real market rate were lower than the targeted rate, and the target was lowered over time, but always remaining above the free market rate, then Austrians would say that the Fed’s rate is “too high.”

                Okay, good. But recall that originally you said:

                To the Austrian, “monetary policy getting looser” is by definition “monetary policy is too loose”.

                If you are now willing to concede that it is not true by definition that the Fed lowering interest rates means that rates are too low, I am prepared to declare victory and go home.

              • Major_Freedom says:

                Okay, good. But recall that originally you said:

                To the Austrian, “monetary policy getting looser” is by definition “monetary policy is too loose”.

                I see the confusion now. We’re bouncing back and forth between a pure free market, and a free market beginning after the Fed did something in the past, only to stop today.

                That argument you quoted rests on the assumption that if the Fed wants to lower rates, and has to increase reserves to do so, then that means the free market rate would have been higher without the Fed’s action. So it’s too low by implication.

                If on a given day, the Fed has to increase reserves to achieve a lower rate than what would exist without their action, then here, the “free market” rate would be the rate that would have existed absent their action. The free market “absorbs” what the Fed does over time.

                So if the context is that the Fed is acting, that they are creating new reserves to achieve a lower rate than what would exist absent their action, then the initial mentally higher rate is what I was referring to as “the free market rate” taking effect.

              • Blackadder says:

                If on a given day, the Fed has to increase reserves to achieve a lower rate than what would exist without their action, then here, the “free market” rate would be the rate that would have existed absent their action. The free market “absorbs” what the Fed does over time.

                If you believe this, then you can’t really believe that rates were too low during the mid 2000s, since it took positive action by the Fed to raise them.

              • Major_Freedom says:

                If you believe this, then you can’t really believe that rates were too low during the mid 2000s, since it took positive action by the Fed to raise them.

                You have to be aware of what kind of positive action is being done.

                In the mid 2000s, the positive action was SLOWING DOWN the creation of new fund, but maintaining a positive creation of new funds. Thus we can infer that because it still took a positive injection of funds to result in gradually increasing rate, the free market rate would have been higher still.

  5. Bob Roddis says:

    From the mouth of babes. MMTer Ralph Murgrave explains the essential extra-judicial anti-due process nature of MMT:

    “The answer is to have central banks (or indeed any committee of independent economists) responsible for deciding whether inflation is sufficiently subdued to warrant more net spending. The latter is an entirely technical question, and is best taken by technically qualified people, independent of politicians.

    http://blog.mises.org/16854/the-upside-down-world-of-mmt/#comment-778920

    In the short run this is the cause of the madness behind denying our current inflation crisis, so that more “STIMULUS” might be inflicted upon the defenseless populace. However, in the bigger picture, this is really just about establishing a totalitarian wonkocracy.

    • Major_Freedom says:

      “The latter is an entirely technical question, and is best taken by technically qualified people, independent of politicians.”

      Ah. It’s not socialism when the central planners are not called government. When they are called “central banks” and the people running them are “technically qualified,” whatever that means, then it’s not central economic planning. That’s capitalism. When things screw up, it’s the fault of capitalism and not central planning.

      It makes perfect sense. “We’re not socialists, we’re socialists!”

    • MamMoTh says:

      That is not the standard MMT proposal which is actually for the Fed to set interest rates to 0 and stop providing the private sector with a risk-free interest bearing asset, and let the market set the other interest rates. Fiscal policy should be set by a democratically elected congress that decides the level of spending corresponding to what people want, and the appropriate level of taxation to maximize employment with stable prices.

      Socialism is about the ownership of the means of production not about decisions taken by democratically elected congressmen. There is central planning everywhere, even within the private sector, in which case socialism will be everywhere, just on a different scale.

      • Major_Freedom says:

        That is not the standard MMT proposal which is actually for the Fed to set interest rates to 0 and stop providing the private sector with a risk-free interest bearing asset, and let the market set the other interest rates.

        This is just more evidence of the intellectual bankruptcy of MMT.

        Borrowing at zero percent is just another way of saying “getting free money.”

        If you have access to free money, then the rate you are willing to offer on your loans to others is not going to be independent of your ability to acquire free money. If I have access to free money, then I will set an interest rate that enables me to outcompete other lenders, which means I will not just lend at the rate that would exist absent my access to free money. I have access to free money so to then say that I should decide what rate to lend at is like saying let’s pump up a sprinter with steroids, but then let him decide what speed to run at, as if pumping him up full of steroids has no affect on his speed.

        Fiscal policy should be set by a democratically elected congress that decides the level of spending corresponding to what people want, and the appropriate level of taxation to maximize employment with stable prices.

        What people want? Which people? It’s obviously not the minority, or those who reject the government on principle. But whatever is decided will nevertheless be imposed on them. Why should some people impose their will on others simply because they outnumber them?

        The only appropriate amount of taxation is zero.

        Prices should not be stable. They should be whatever buyers and sellers want them to be in voluntary trade.

        Socialism is about the ownership of the means of production not about decisions taken by democratically elected congressmen.

        When the decisions of the democratically elected Congressman result in a control of a means of production, that’s socialism by definition.

        Socialism does not necessarily imply an unelected dictatorship. It means government ownership of the means of production. That means the government can be fascist, communist, or democratic. It’s still socialism.

        There is central planning everywhere, even within the private sector, in which case socialism will be everywhere, just on a different scale.

        There is no central planning within the private sector. Central planning is by definition centrally planning an entire economy. If planning takes place by private property owners, then that’s not central planning. That’s capitalism.

        • MamMoTh says:

          Most of your concerns are political ones. The fact is government arise when people organize themselves. What is the best or the least bad way to do it is indeed debatable.

          However there is central planning within the private sector anyway, it’s just a matter of scale as I previously said.

          And banks do not get free capital which is what actually constrain bank loans regardless of the interest rate set by the Fed.

          • RG says:

            Ohhh, so people organize by willingly turning over their rights to protect themselves.

            Brilliant analysis.

            Next you’ll be making some absurd remark about how private trade partners use military intervention to perform exchanges.

            Sorry, you already did that as well.

            • MamMoTh says:

              Do you have any example of people organizing without some kind of government?

              Even Roddis admitted SWAT teams are necessary in order to enforce contracts.

              • RG says:

                The North and South American continents were organized nearly exclusively without governement but rich with community until the 16th century – about 20,000 years worth.

                That’s just one small example among countless.

              • MamMoTh says:

                Do you really think those communities didn’t have any kind of government? You can’t be that clueless.

              • Major_Freedom says:

                Do you have any example of people organizing without some kind of government?

                Have you even researched the topic of anarchist communities?

              • MamMoTh says:

                Have you even researched the topic of anarchist communities?

                Not enough, but I am sure they were all small communities and if you look closely enough you will find some kind of government to ensure their social contract is respected, whatever it might be.

              • RG says:

                You see Major, slavery is perfectly normal and has been as natural an occurrence as the seasons. People have been voluntarily organizing themselves into slaves and non-slaves for dozens of years.

                The muddled mind of the zombie has difficulty understanding the difference between leadership and dictatorship.

              • Major_Freedom says:

                Not enough, but I am sure they were all small communities and if you look closely enough you will find some kind of government to ensure their social contract is respected, whatever it might be.

                Why should your faith or guess substitute for actual history and reality?

                You should research the issue, because you will find that whole countries were anarchist.

                Secondly, and more importantly, even if we could not find any examples of anarchist societies in the past, how in the world can this serve as a justification for its impossibility? Before humans created flight, it was impossible for humans to fly. Before humans established democracy, it was impossible for democracy to be practiced.

                You need to place ideas above history in terms of primary driver of human society. History doesn’t serve as a primary driver for what humans can do. Our minds take that role.

                Secondly, almost everyone in the world are already libertarian anarchists in practice. Most people not seek to impose their subjective laws on their fellow human beings by force. Most people do not seek to tax others in exchange for monopoly protection and security. In most people’s daily lives, they live exactly how an anarchist community would function if people had the mind for it.

              • Major_Freedom says:

                You see Major, slavery is perfectly normal and has been as natural an occurrence as the seasons. People have been voluntarily organizing themselves into slaves and non-slaves for dozens of years.

                The muddled mind of the zombie has difficulty understanding the difference between leadership and dictatorship.

                If only that was the only difficulty.

                Many people actually believe that in order for any social interactions to take place at all, people have to be threatened with violence in some capacity.

                If there is the idea of one person giving another person charity, then the only alleged way this will take place is if the giver is pointed with a gun and told “you…give…him.”

                If the idea is one person paying another a sum of money in exchange for labor, then the only way this will take place is if the giver of money is pointed with a gun and told “you…give…him.”

                Evil is easily vanquished. The problem is when evil masquerades as the good. That makes it very hard to vanquish, because people think you’re trying to take away the good, and replace it with evil. This explains the hostility towards those who are against minimum wage, government welfare, public schooling, government in general, etc.

                Only when people realize these types of things are evil, can people finally accept a vanquishing of them. Not before.

              • MamMoTh says:

                I am not saying it’s impossible just that it didn’t happen for some reason. So it’s just a utopian dream that you are free to try to make it true.

                Most people have a libertarian anarchist side, but also most people take government for granted to ensure their social contract, and democracy the best way to change the contract.

              • Major_Freedom says:

                I am not saying it’s impossible just that it didn’t happen for some reason. So it’s just a utopian dream that you are free to try to make it true.

                Like ending slavery was a Utopian dream in 1700AD?

                Most people have a libertarian anarchist side, but also most people take government for granted to ensure their social contract, and democracy the best way to change the contract.

                Best according to what standard?

              • Blackadder says:

                Like ending slavery was a Utopian dream in 1700AD?

                On your view, Major Freedom, isn’t slavery still going strong?

              • MamMoTh says:

                MF, best according to those who witnessed other ways that have been tried. But I am not interested in arguing the virtues of democratic societies here.

              • bobmurphy says:

                Mammoth, I’m not being a wiseguy, I’m seriously asking you: Does your approach require the central banker to evaluate the collateral of a bank before lending reserves (at 0%)? Don’t you think that sets up a problem?

              • Major_Freedom says:

                On your view, Major Freedom, isn’t slavery still going strong?

                Not in the sense of civilians “legally” coercing other civilians into performing involuntary labor.

              • Major_Freedom says:

                MF, best according to those who witnessed other ways that have been tried.

                So best is what some random people’s opinions happen to be about the society they live in. Gotcha.

                But I am not interested in arguing the virtues of democratic societies here.

                But you’re presuming it is virtuous, which I do not, so you cannot expect your presumptions to match mine.

          • RG says:

            Current list of terms MamMoTh demonstrably cannot grasp:

            money
            trade
            market
            capital
            interest rate
            private
            political

            Please refer to said list when trying to decipher the communications poised by our new resident zombie.

            • MamMoTh says:

              Do you also have adult conversations?

              • RG says:

                “Also” would require you to have one, and I don’t think the living dead qualify.

              • MamMoTh says:

                You don’t think the living ded qualify?

                That’s weird because this blog is mostly about some dead man who allegedly resurrected, and whose main (involuntary?) contribution was to give rise to the most coercive and undemocratic form of government for centuries.

              • RG says:

                How progressive. You regurgitate the standard brain eater playbook quite well.

                Bob and I, as well as a lot of others that have consistently frequented the blog, have significant disagreements about the role of religion (most commonly Christianity) in social order.

                However, we do not disagree that it is OK to force or coerce someone into making any decision.

              • RG says:

                Dammit, got caught not tripling my negative.

              • MamMoTh says:

                Just a freudian slip RG…

          • Major_Freedom says:

            Most of your concerns are political ones.

            ALL of your advocacies were political.

            The fact is government arise when people organize themselves.

            No, government arises when some individuals use force to impose their will on others on a large enough scale, that they establish a monopoly of such impositions of violence.

            It is a myth that government forms voluntarily. See Rothbard’s criticism of Nozick’s “immaculate conception of the state.”

            What is the best or the least bad way to do it is indeed debatable.

            It’s debatable, but the state isn’t letting it be debated in any real sense. Neither the state nor its supporters allow any real debate and then acting on that debate. They just impose their will on others. Sure, they let people “debate,” the same way a robber let’s his victim “debate” his victimization.

            However there is central planning within the private sector anyway, it’s just a matter of scale as I previously said.

            No, there is not. You’re totally misunderstanding the meaning of central planning. The private sector does not centrally plan. Each individual and separate producer only plans for his own production, in competition with other producers. That is not central planning. Central planning is planning the entire population of producers from a central location who have the authority to impose their will on individual producers, and hence consumers.

            And banks do not get free capital which is what actually constrain bank loans regardless of the interest rate set by the Fed.

            I realize they don’t get free capital in the real world. But you provided the example of banks borrowing at 0%. That is just another word for free money. Money that is lent at 0% means the money never has to be paid back, because there is no change to not paying it back. That is free money.

            • MamMoTh says:

              Good, you make my point that government and central planning is just a matter of scale. A CEO is a central planner.

              A 0% rate policy is not free capital. The market is free to set the interest rate at which money is loaned. If banks make bad loans and didn’t price them correctly, they lose their capital and fail. That’s it, no government involved.

              • RG says:

                Capital is not what you believe it to be. Capital is any form of savings.

                My CEO asked me to work for him and I agreed. There was no threat of violence involved in our trade.

              • RG says:

                What about monies that aren’t currencies?

              • Major_Freedom says:

                Good, you make my point that government and central planning is just a matter of scale.

                No, it is not just a matter of scale. It’s a matter of property rights and whether they are violated.

                A private producer who plans his own production is not violating anyone’s property rights. A central planner that imposes violence on producers is violating people’s property rights.

                A 0% rate policy is not free capital.

                Yes, it is. Money that can be borrowed for zero interest is free money.

                I loan you $10 and say you can pay me back at anytime, and I will charge you 0% interest on that loan, then I just gave you free money.

                The market is free to set the interest rate at which money is loaned.

                But the rate they decide will be affected by the presence of a free money source.

                If banks make bad loans and didn’t price them correctly, they lose their capital and fail.

                They can just borrow whatever they need at 0%. They won’t fail if they can borrow at 0%.

                That’s it, no government involved.

                It’s government that is setting 0%.

              • MamMoTh says:

                Sorry but you don’t understand what being constrained by capital means.

                Even at 0% banks borrow money using capital as collateral.

              • Major_Freedom says:

                Even at 0% banks borrow money using capital as collateral.

                Bank capital is priced in dollars, the same dollars that are being loaned at 0%.

                If the Fed loans money at 0%, then as more and more money is lent by the banks on the basis of easier money, then the prices of capital assets will start to rise, creating a perpetual feedback loop of increased asset prices, lending more money, increased asset prices, lending more money, etc.

              • MamMoTh says:

                And if asset prices collapse the bank goes bankrupt.

                And no, no MMTer approves of bailing out failed banks.

              • Major_Freedom says:

                And if asset prices collapse the bank goes bankrupt.

                If asset prices keep rising on the foundation of easy money from the Fed, then the banks that are operationally constrained by capital assets can keep expanding loans, until the economic bubble they generate bursts.

                And no, no MMTer approves of bailing out failed banks.

                No, they just approve of the government printing money and bailing out nameless faces in order to increase aggregate demand. In other words, political friends.

              • MamMoTh says:

                No they don’t. If you don’t have a clue about what they say, why do you pretend to know? There are better ways to constantly ridicule yourself.

              • Major_Freedom says:

                No they don’t.

                Yes, they do. It is impossible for everyone to get an equal quantity of money when the MMT government inflates the currency, which means they have choose who to give the new money to.

                If you don’t have a clue about what they say, why do you pretend to know?

                You know, the line of “you don’t understand MMT” can only be taken so far. At some point, you’re going to have to accept the fact that I know MMT, and in your case, I know more about it than you do.

      • Bob Roddis says:

        Fiscal policy should be set by a democratically elected congress that decides the level of spending corresponding to what people want, and the appropriate level of taxation to maximize employment with stable prices.

        “Democracy is the theory that the common people know what they want, and deserve to get it good and hard.” H. L. Mencken

  6. Jon O. says:

    “So how the heck is it a critique of fiscal tightening, to point out that the several successful episodes of it went hand in hand with lower interest rates?!”

    Maybe I’m missing something but isn’t it simply a critique of monetary tightening?

    btw, a drop in nominal rates doesn’t necessarily mean policy is (more) accommodative.

    • bobmurphy says:

      Jon, right, that’s my point. Beckworth (and Krugman et al.) are saying that the only reason those episodes of fiscal austerity went hand-in-hand with economic growth is that central banks loosened in order to offset the fiscal contraction. But as you and I note, falling interest rates aren’t proof of monetary loosening. In fact, that’s exactly how a textbook expansion from fiscal austerity would play out.

  7. Rick Hull says:

    Could it be that EMH + ZIRP = HE PRIZM?

    No, seriously: that bubbles are effectively malinvestment, driven by relentless (and especially, acute) monetary expansion. All those dollars feel safe in numbers until it goes critical, and by then the nimble ones have chosen the new asset du jour.

    I guess I need to deep dive into EMH — can it account for fiat expansion?

  8. K Sralla says:

    Beckworth is not Count Dooku. That would be Bill Woolsey.

    Beckworth is young Anikan Skywalker. The young promising padawan of a somewhat rebellious Jedi master, yet the youngster was prophesied to one day balance out the force. Against all expectations, he turned to the darkside. I sense good in him though, and much conflict and fear.

    Will he one day return to fulfil the prophesy?