11 Oct 2011

Sumner Plugs the Last Chink In His Inflationist Armor

Economics, Federal Reserve, Inflation, Krugman 48 Comments

I know many of you are probably getting sick of my obsession with econo-blogger Scott Sumner, but he is really something else. In previous posts I have shown that Sumner has explicitly declared that even if his policies lead to nothing but rising price inflation, he will have no regrets. Yesterday he made his views even more explicit by declaring:

I often argue that if we do eventually get high inflation, the cause will most likely be tight money over the past few years.

If you’re a “fair” person who likes to read people in context, by all means click on the link; Scott is talking about Sargent and Sims winning the Nobel (Memorial) Prize, and how their work on expectations leads to the line quoted above.

I am bringing this up just to bolster the Austrian faithful. Perhaps you’ve been huddled in your treehouse, double- and triple-checking that you have a can opener to go with your three years’ supply of tuna fish and spam. You’ve been checking the monthly BLS releases, saying, “It’s taken longer than I would have guessed, but eventually even the government won’t be able to hide the skyrocketing prices I see at the grocery store. Then Sumner will admit he’s been wrong all along!”

No he won’t. It will be further proof that Bernanke had a “contractionary” monetary policy from 2008-2011.

* * *

On a more serious note, just a comment on the Sumner/DeLong exchange: Scott comes back and defends his approach in this post. If I may paraphrase, Scott is saying that we should define terms like “easy money,” “tight money,” “contractionary monetary policy,” etc. with reference to the goals of the policymakers. In this approach, since Scott thinks the Fed should be aiming to make nominal GDP grow at a steady 5% rate, then Bernanke’s Fed has clearly been too “tight” the last three years.

I understand where Scott is coming from, but I reject his arguments. The primary reason is that what if Sumner’s worldview is totally wrong? By interpreting the policies of the central bank through the prism of Sumner’s preferred goals, we begin to lose touch with reality. It makes it harder for economists to decide whether the goals are the right ones to adopt.

For example, since 2009 Paul Krugman has famously said that the Obama Administration’s fiscal expansion wasn’t expansionary enough. Yes, they ran a big deficit, but not big enough.

OK fair enough. We can debate that (and we have, ad nauseum).

But in Sumner’s approach, we would no longer say that. Instead, we’d say that Treasury Secretary Geither by definition implemented a contractionary fiscal policy since assuming power, because unemployment is below the policy goal. The only way we could classify a deficit plan as “expansionary” is if we got back to full employment.

Does anybody think that would make sense? I hope not. It would be way too confusing, especially since a bunch of economists disagree with the Keynesian approach of using big fiscal deficits to reduce unemployment.

So by the same token, since many Austrians (among others) TOTALLY DISAGREE that expansionary monetary policy is needed for economic recovery, it would be crazy to classify Bernanke’s policies as “tight money.” As DeLong has said, we have plunging nominal and real interest rates, and a tripling of the monetary base. What else would qualify as easy money?

48 Responses to “Sumner Plugs the Last Chink In His Inflationist Armor”

  1. Bill Woolsey says:


    Nothing in Sumner’s approach prevents you from proposing an alternative regime.

    My view is a bit differrent from Sumner’s. I think in terms of excess supplies or demands for money. And while I don’t usually use the terms “easy” or “loose,” or “tight,” if and when I do, they relate to an excess supply or demand for money.

    The monetary base tripled? If the demand to hold that base more than tripled, the result is an excess demand for base money–what might be called “tight money.”

    While Sumner is really down on using interest rate lingo, I don’t really mind. Excess supplies of money push the market rate below the natural rate, and excess demands raise it above.

    Interest rates have fallen alot over the last several years? If they are above the natural rate, it is “tight money.”

    Of course, the effect of excess supplies or demands for money is changes in nominal expenditures on output. And so, there is a relationship between nominal GDP and excess supplies or demands for money.

    Anyway, if you think base money should be constant, then using Sumner’s perspective, you could say we had loose money.

    Sumner, on the other hand, does switch over to talking about what the Fed’s own goal. It is something like monetary policy impacts inflation by impacting the nominal GDP. With the Fed having a 2% inflation goal (along with trying to avoid flucatuations in employment,) then keeping nominal GDP on a stable growth path is the way to achieve the Fed’s own goal. And so, tight or loose money is defined relative to the Fed’s goal which is “really” nominal GDP growth.

    By the way, I Sumner’s point on the future inflation is that tight money created the recession. This led to deficits both due to lower taxes and unemployment spending and the like, as well as fiscal stimulous packages. The resulting jump in the national debt will eventually result in efforts to inflate it away.

    If nominal GDP had been kept on target all along, then budget deficits wouldn’t have exploded, the national debt would be lower, and so, attempts to inflate them away would be less likely. I think there is something to that.

    Given the Fed’s own policy of 2% inflation and stable employment growith, monetary policy was too tight.

    Given an alternative regime of a fixed quantity of base money, monetary policy was too loose.

    How hard is that?

    My view has long been that the growth path of nominal GDP should be 3%. But I generally think in terms of going forward with that new growth rate. And so, in 2008, when nominal GDP started falling, monetary policy turned “tight” relative to both the Fed’s policy and my preferred alternative.

    Right now, however, I favor a “reagan-volker” policy like in 1982 and 1983, with nominal GDP growing at a 9% annual rate, and then shifting returning to a 5% growth path (or better, a 3% one.)

    • jjoxman says:


      That sounds (to me) like monetary equilibrium theory. Am I wrong?

      Here’s a question: If output is not expanding, or not very quickly, how does NGDP targeting cause an improvement such that businesses are more willing to invest and hire people? Because if output growth is slow, NGDP targeting amounts to inflation, am I wrong? Is the expectation that businesses will expand output because they see prices going up?

      • bill woolsey says:

        Draw a supply and demand diagram.

        Demand decreaes (shifts to the left.)

        At the current price, there is a surplus.

        Firms sell less than they would like.

        Suppose the firms cut production to match actual sales.

        The price is now above equilibrium, and output is lower.

        If the firms cut prices (and they have an incentive to do so,) quanttity demanded rises. The firms sell more, and they incease production relative to what they were producing before.

        Now, suppose that before the firms cut prices, demand rises again. The firms produce more and sell more and prices don’t rise.

        What is happening is that the equilibrium price is rising, but it just fell below the already existing price and rose back up.

        Now, moderate this story a bit. Prices actually fall some, just not all the way to equilibrium. And then, when demand rises again, they rise a bit too, but just back to the intial equilibrium.

        For example, the equilibirum price falls 10% and then rises back 10%. The actual price was heading down towards that 10% lower equilibrium price, but it only makes it down 2% before the equilibrium price is back up to where it started, and the price goes back up 2%.

        And, of course, output falls some and then rises back.

        Now, in a single market, if the supply is contant, lower demand leads to a lower equilibrium price and quantity. If the problem is an excess demand for money, then the demand for goods decrease and the supplies increase in money terms. What is supposed to happen is that all prices, including resource prices fall too, so the quantities are about where they started.

        Draw it. Demand to the left, supply to the right, price lower and quantity the same.

        If the quantity of money rises to match the demand to hold money, the demands and supplies go the other way, and the equilibrium price just goes back to where it started.

        If the policy were _prefect_ then there would be no change in supply or demand due to the policy.

    • Vasile says:

      Bill, your mistake is that you confuse excess demand for money with excess demand for nominal money.

      You’re not alone, of course, but in a rather glorious company. And very mainstream. I hope that’s comforting because you’re still wrong. And it may matter to you.

      • bill woolsey says:

        You are so wrong, Vasile.

        I am not confusing nominal and real money balances.

        In truth, just about no one does.

        I can explain this in real or nominal terms.

        Aside from the fact I actually first learned this from reading Rothbard, it isn’t unique to him. It is normal.

        I understand perfectly well how lower prices and wages cause the real quantity of money to rise to meet the real demand to hold money.

        And I also know that it works painfully and slowly.

        It is much better to just have the nominal quantity of money rise enought so that the real quantity of money rises to match the real demand for money without decreases in prices and wages throughout the economy.

        And that is where I disagree with Rothbard. He celebrates deflation. I think deflation to adjust the real quantity of money to the demand for money is very painful. (I don’t mind deflation due to faster than usual growth in productivity.)

        • Vasile says:

          It is much better to just have the nominal quantity of money rise enought so that the real quantity of money rises to match the real demand for money

          Look Bill, if you just assume away the controversy that’s cheating. Look at what you have done here! Look!!! You treat again (increased) demand for money like (increased) demand for nominal money.

          That’s simply not the case. Increased demand for money (to use an/the established term) reflects a shift in consumer preferences, namely a shift of demand from current goods/consumption to future goods/consumption. And since market economy works through price differentials what good effect do you exactly expect from keeping the prices at their old and arguably wrong level?

          it is much better to just have the nominal quantity of money rise enough so that the real quantity of money rises to match the real demand for money without decreases in prices and wages throughout the economy.

          Obviously, I forcibly disagree, but you already know that. The question I have for you is: “What is the thing which will have to give up? Where is the change which will lead to recovery and how?”

          Yes price/wage deflation can be painful and slow. But it is obvious how and why it works. How does your solution (print more money) work? The first step is obvious. Give banks lots and lots of money. Next?

          And if your answer will be just pointing to MV = PQ equation, I… I… I will never call you Bill again!

          • Vasile says:

            Oops. The quoting got wrong.

            • bill woolsey says:

              I don’t understand what this has to do with an increase in the demand for money vs. an increase in the nominal demand for money.


              If people choose to hold more money, they are either saving more or changing the composition of the assets they choose to hold, more money rather than other assets.

              If the quantity of money rises to match the increase in demand, and the issuer of money purchases financial assets, then the incease in the demand for money is matched by an increase in the demand for financial assets.

              In the situation where there was added saving, this this results in added demand for financial assets, exactly as if the person demanding the addtiional money had saved the money and purchased the assets.

              If there is a shift from holding other assets to holding money, then there is a decerase in the demand for the financial assets sold by the person demanding more money and an increase in the demand for the finanical assets purchased by the money issuers.

              In the first scenario, the added saving is a decrease in the natural interest rate and the purchases of finanical assets will raise their prices and lower their yields. The market interest rate falls to match it. The reduced consumption spending by the person demanding more money wil be matched by increased consumption spending due to a lower market intersest rate as well as increased investment spending by firms. The effect is the same as if person saved by purchasing finanical assets.

              In the second scenario, there is no change in the natural interest rate, and the purchases and sales of financial assets offset, and so there is no change in the market rate. There may be some change in the allocation of credit–less towards those borrowers favored by the person choosing to hold more money and more towards those borrowers favored by the issuer of the money.

              Expenditures on some sorts of captial goods might rise and fall for others.

              In my view, there is _nothing_ bad about these adjustments at all.

              On the other hand, having everyone sell less so that they will demand fewer resources, so resource prices will fall, so that all prices, including the price of labor will fall, so that real money balances will rise, is bad.

              When real money balances rise, the result may well be a shift towards financial assets and a lower nominal interest rate. In the first scenario, this is the final result as before, but only after deflation. In the second, the market rate rises above the natural interest rate when assets are sold for the fixed quantity of money, and the painful deflation just sends them back down where they started.

              Or, there is the pigou effect, so that the higher real balances result in more consumption. Kind of like the lower interest rates above may result in people choosing to consumer more.

              Or, worse yet, the price level might fall below its long term value, so that the expectation it will rise again lowers real interest rates, again, as above.

              But, like I said, it isn’t just that it is worse than the effects on credit markets described above. It is that the effects on credit markets that occur when the quantity of money rises to match the demand to hold money are not bad at all.

              They are perfectly consistent with intertemporal coordination.

        • dogmai says:


          “I understand perfectly well how lower prices and wages cause the real quantity of money to rise to meet the real demand to hold money.”

          And what “causes” people to “demand” more money? This is the typical Keynesian reversal of cause and effect as well as the evasion of the undeniable fact that the economy is comprised of choosing individuals.

          Lower prices and wages due to lower demand for consumer goods means that people prefer to save rather than spend. It also means that production is preferable to consumption and JOBS are plentiful.

          If the real demand for money is rising faster than the supply then there must be a “reason” for that. People are obviously trying to “act” in such a way as to satisfy their needs, even if their need is to increase their liquidity by “calling” in their savings, which would increase the cost of capital. People usually do that because they think, for some oh mysterious reason, that it is preferable to consume sooner rather than later. That consumption is preferable to production. That consuming NOW is “better” (i.e. more profitable) than consuming later. That the value of their savings is worth more in real terms today than it will be tomorrow.

          So, your response to this increased demand for liquidity and consumption is to simply provide it by money printing right? Except that this ignores the reason why people shifted their time preference to the here and now in the first place.

          People are reacting to an expectation that their ability to consume in the future will be curtailed and the typical mindless Keynesian response is to increase the rate at which their losses will be realized and thus exacerbate the problem while claiming to be fixing it.

  2. jjoxman says:

    Isn’t the problem with Prof. Sumner’s definition of “tight money” that it is actually a conclusion, rather than a definition?

    I understand where Sumner is coming from, but it seems a lousy way to evaluate the position. It doesn’t allow for micro-level breakdowns in the transmission of money supply increases.

    The Fed can pursue monetary expansion all it wants, but if businesses won’t borrow and/or banks won’t lend, then the buck stops there and doesn’t circulate in the economy.

    Sumner would say “that’s tight monetary policy,” because by his definition it is. But by other definitions it is not.

    Where’s W.H. Hutt with his magnificent definitions when you need him?

  3. Silas Barta says:

    I want to hold infinite money. Therefore, money is tight right now, and anyone who advocates less than infinite injections of dollars is advocating tight money and, dare I say, economic terrorism.

    • Major_Freedom says:

      ^ ^ ^

      This man gets it.

    • marris says:

      Nice. I will support your desire to hold money [and Bill’s]. All I ask in return is your support in my effort to own infinite amounts of stuff. We may not attain my goal in our lifetimes, but I’m willing to cooperate as long as we pursue it with all available means. 🙂

      • bill woolsey says:

        You should be free to work, save, and invest and seek “infinite” amounts of stuff. Unfortunately, scarcity creates a problem with anyone achieving that goal, much less everyone.

        Creating money is much easier, however, I don’t favor creating however much money people want to take as gifts and then hold, much less spend. It is rather that when we add up how much money people want to accumulate by spending less than they earn or sell other goods, then the quantity should be increased.

        Since these activites, like selling other assets or reducing expenditurs on goods and assets, involve a sacrifice, there is little chance that people would want to do an infinite amount of it.

        And, of course, they cannot, because their incomes are limited and assets are limited. And so, the demand for money cannot be infinite. Right now, it is limited by the total value of all the assets that might be sold more money. And over time, it is limited by income.

        I also think that money should pay a competitive yield. And that becomes lower as the demand for money rises.

        I think you need to think a bit more about these things, and understand how you are being just a bit confused about what is being proposed.

        • marris says:

          Maybe I should make my jokes simpler.

          I think the underlying (non-joke) point is that there is no “demand for money” independent of its purchasing power. It’s not clear what diluting purchasing power [which I believe is part of your proposal] will accomplish. I think people will generally prefer more _real_ production to less real production, but it’s not clear why we should jump on board the NGDP-target train. I don’t think you will necessarily see a boost of employment. And there is a good chance of expectations-driven price increases.

          I personally would like to see this crisis resolved through quick liquidation, possibly with some kind of government-backed 50-year mortgage financing for underwater homeowners. Yes, I know. I still have a soft spot for egalitarianism.

    • bill woolsey says:

      Barta, if you want to use your entire income to accumulate money, and sell off everything you own and hold money, we should have a monetary regime that increases the quantity of money enough for you to do it.

      We should not have a monetary regime that provides you with gifts of however much money you want to hold.

      To me, there seems to be a bit of confusion regarding the demand to hold money and the desire to receive gifts of money. I must admit, that giving people money they they just want to hold does little harm, I don’t generally think just giving people money to spend it wise.

      • Anonymous says:

        Barta, if you want to use your entire income to accumulate money, and sell off everything you own and hold money, we should have a monetary regime that increases the quantity of money enough for you to do it.

        But Barta is looking for higher purchasing power of his cash balances relative to his other assets by seeking to hold more cash. If the money supply is increased “as a response” then it would only be going directly against his plan, because by diluting the money supply, you decrease its purchasing power.

        It will result in Barta continually holding more and more cash until others have had enough and start spending so much that Barta’s increasing cash balance will never succeed in getting him the purchasing power he wants.

      • Major_Freedom says:

        Barta, if you want to use your entire income to accumulate money, and sell off everything you own and hold money, we should have a monetary regime that increases the quantity of money enough for you to do it.

        But Barta is trying to increase his purchasing power, i.e. cash on hand relative to prevailing prices, by accumulating cash. By “responding” to Barta’s actions with inflating the money supply, you would be going directly against his plans. You wouldn’t be “accommodating” him at all, because by increasing the supply of money, you would be diluting money’s purchasing power. Barta is trying to increase his purchasing power.

        All inflation will do is result in Barta continually holding more and more cash as you print it, until Barta is satisfied with a level of purchasing power he wants. If you keep printing money in response, then Barta will just keep hoarding more and more of his share until others start spending so much of their money that prices rise so fast that Barta realizes that he won’t be able to get the purchasing power he wants, so he’ll start spending money too.

        If it was only Barta that tried to do this, then no increase in the quantity of money would be necessary because others will be spending, i.e. dishoarding, their money to Barta.

        Now, if most people in the economy are seeking to increase their cash balances, then it would still be the case that no increase in the quantity of money is necessary, because if most people try to hoard cash, then that will decrease the prices of assets, and raise people’s purchasing power, which is what they wanted all along. By inflating into this scenario, people will just hoard most of the inflation money more and more until they get the correct purchasing power for their individual tastes, and not reduce their prices by as much, because the demand for goods isn’t falling as fast as it would without the inflation.

        Responding to hoarding money with more inflation is literally the exact wrong thing to do.

        • skylien says:

          It is all about expectations today. And because so many people expect so many wrong things, we need wise people who know how to make them expect the right things. So lets create a proper wealth effect and everything will be fine again.

          We only need to hope that there aren’t too many wise guys who try to abuse the artificial arbitrage created by this operation, and among other (real) things especially buy Gold. That would undermine our operation.

      • Silas Barta says:

        Who said anything about selling anything off? I want to have my present illiquid possessions, and on top of that, I would like infinite dollars. The monetary regime should accomodate me by loaning infinite (or arbitrary, whatever) amounts of money at efffectively 0% interest.

        Demand, meet supply. What could go wrong?

        To me, there seems to be a bit of confusion regarding the demand to hold money and the desire to receive gifts of money.

        Certainly, but it’s on the part of the inflation advocates. They can’t seem to spell out what people are demanding when they “want more money” in any non-trivial sense. Of course people want money! They always want more money! That doesn’t mean giving them more dollars will fix anything, except perhaps the undersodomization of frugal people.

        • Joseph Fetz says:

          “Demand, meet supply. What could go wrong?”

          LOL, that pretty much nails the point to their forehead. They still won’t get it.

      • Silas Barta says:

        Also, bill_woolsey, to add on to what Major_Freedom said, people who hoard money are trying to satisfy some desire. Usually, it’s uncertainty about whether they’ll be able to earn more money in the future (i.e. whether they’ll be able to find a way to enter sustainable production patterns and exploit comparative advantage).

        If printing money (or any other remedy) does nothing about this fundamental, structural uncertainty, it just makes people worse off, and acts like desire to hoard is some pesky act of economic terrorism rather than a rational response to real factors.

        • bill woolsey says:

          If you choose to accumulate more money, then you can succeed, even if the quantity of money rises to match the demand.

          If you are accumulating more money, hoping that this will cause the price level to fall, so that you will earn a real capital gain on that money, then it will fail.

          This is, exactly like purchasing stock, hoping that your purchase of stock will raise the price, and so you can make a capital gain.

          Something like this is what anti-capitalists describe as “cornering the market.” It isn’t something I would worry about at all, and certainly not in the context of holding money. It is really kind of crazy.

  4. Jeremy says:

    Am I understanding correctly that Sumner wants top define whether policy is “tight” based on whether the targeted goals were attained, regardless of what policy actually was?

    So if the Fed dumped a few trillion into the system today, and for whatever reason GDP didn’t rise to the targeted goal, then it would still be defined as “tight”?

    • Major_Freedom says:


      I’m glad so many are aware of what Sumner is actually saying.

      Sumner can’t be wrong. If the Fed printed $100 trillion, it can’t be labelled “tight” unless the conclusion of rising NGDP of 5% takes place.

      Printing $1 billion that is followed by a rise of 5% NDGP means policy was “too loose”, whereas printing $100 trillion that is followed by 0% rise in NGDP means policy was “too tight.” Moreover, and more importantly, if we start with NGDP and observe that it has stagnated, then it’s BECAUSE policy was “too tight.”

      In other words, Sumner holds his own conclusion as one of the premises for that same conclusion: NGDP has not grown by 5%. Why? Because policy has been “too tight.” How do we know policy has been “too tight”? It’s because NGDP has not grown by 5%.

      And around and around we go. It reminds of that t-shirt that contains a continuous circle of words saying: “…people are bad so we need a government made up of…”

      Sumner should wear a circle t-shirt saying: “… policy has been too tight because NGDP hasn’t risen because…”

      • Jeremy says:

        Thanks. Its tough to read some of these guys without the education in all the technical stuff. I’m literally a few weeks into my intro to micro (taking macro next semester) class. The Austrians are so much better at explaining things for the layman so I can see through a lot of it, but I’m hoping these classes will help me form better arguments and just better understand the mainstream positions.

        • Joseph Fetz says:

          Good luck, Jeremy. Economics isn’t the easiest of sciences, but the knowledge of it pays off in dividends. For most people, you really have to love the subject (or, just plain love knowledge of any subject) to really get into it. Most professional Austrians went through the same “mainstream” type of schooling that you are, so they can be very helpful in explaining things for you. Just ask.

          Unfortunately, I am not one of those people to ask. I’ve read Keynes’ works, as well as that of other Keynesians and Monetarists, but I am completely self-taught and have never gone through practical applications of the equations and models; I do keep learning everyday.

          Between this blog, other econ blogs and your classes, I am sure that you’ll find more than enough info to fill in any gaps. What’s your major by the way?

          • Jeremy says:

            Thanks for the encouragement and advice.

            I’m majoring in Biomedical Engineering. I need a social science credit so I chose economics. It also just fascinates me. I started reading Rothbard after hearing Ron Paul speak on the 08 election trail and I was hooked. Its already paying dividends in helping understand the material.

            I finally decided to quit my job and pursue a career. My girl getting a promotion has allowed us to afford to lose the income. While I’m there I figured I’d use any available credit needs to learn more of the mainstream position.

        • MamMoTh says:

          Why study economics instead of doing something useful with your life?

          In any case, to contain the damage, check Mosler’s mandatory readings


          • Major_Freedom says:

            Did anyone else see the Freudian slip?

            “Don’t study economics, do something useful, like reading Mosler’s blog.”

            That’s funny.

            • MamMoTh says:

              So you don’t know anything about economics, but you also don’t know what a Freudian slip is Major_Clown?

              • Major_Freedom says:

                I know more economics than you, and yes I do know what a Freudian slip is, and you just made one.

              • MamMoTh says:

                You are so funny when you don’t intend to!

                Why don’t you help Roddis provide the graph showing the correlation between deficit spending and inflation for a nation with a non convertible floating currency?

              • Bob Murphy says:

                Zimbabwe had a convertible currency? (I’m seriously asking you.)

              • MamMoTh says:

                Finally an answer!

                Not sure Zimbawe’s currency was a traded in international markets. It certainly did have a USD denominated debt.

                Now, you can join Roddis and MF in providing a graph showing the correlation between deficit spending and inflation for a country with a non convertible free floating currency without debt denominated in a foreign currency.

              • Bob Murphy says:

                But what is the point of that? Even the Fed has euro-denominated debts. So what are you saying? That Roddis and MF are only able to apply their theory to every country in the history of the actual world?

            • Joseph Fetz says:

              Well, you know MF, the study of T-accounts is far more informative. Just so long as they reconcile, everything is gravy. 🙄

              • Joseph Fetz says:

                Oh, and all of that mumbo-jumbo that happens in between, never mind that, it is entirely unimportant. Let’s just focus on getting the left side to match up to the right side, and then go from there.

              • MamMoTh says:

                Understanding the monetary system contains the damage done by pseudo economists, like Murphy’s ideological rant on the Euro as fiat money, and Roddis’ inability to provide the graph showing the correlation between deficit spending and inflation.

              • Joseph Fetz says:

                Yes, understanding the monetary system is very important. But, that is a far cry from understanding money, its origin, it purpose, how it develops, and how it is administered.

              • Bob Roddis says:

                I’ve never said there was a necessary correlation between deficit spending and inflation. What I have said is that people who purchase bonds expect to be able to sell the bonds for money that buys something. If the government over-promises, it will be compelled to pay off the debt with massive amounts of funny money.

  5. bill woolsey says:

    Nominal GDP is the flow of spending on output.

    Sumner’s view is that there is some quantity of money, created by purchasing or selling assets, that will make the flow of spending on output at whatever level is desired. More money, more spending. Less money, less spending.

    He believes the real output is generally not impacted by this in the long run. Only inflation.

    However, if the flow of spending falls or slows, real output will grow more slowly or fall for time. Only gradually will prices and wages slow, or even fall, enough, for real output to recover.

    To avoid that gradual adjustment process he favors keeping nominal GDP growth from slowing or falling.

    And the quantity of money should just rise whatever amount it takes to keepi nominal GDP growth from slowing or falling.

    And, of course, it should be reduced however much is necessary to keep GDP growth from rising.

    Keep money expenditures on output growing at a slow steady rate is the goal.

    My views are similar, but I favor 3% growth in the flow of spending on output. If it falls below the target path, raise the quanity of money enough to get it back on it. If it rises above the target path, lower the quantity of money enough to get it back on the path. Today, we should be able to expect that a year from now, the level of spending on output will be at a particular level.

    The purpose is not to have interest rates lower than they otherwise would be. I don’t think it will have much effect on real interest rates.

    One common error among the Austrian amateurs is the notion that nominal expenditure can only rise if interest rates are low–too low. This is mistaken. At higher levels of monetary expenditures on output, the demand for credit is higher, and that raises interest rates. And when higher interest rates are the result of a higher demand for credit, they dont’ reduce spending.

    Think about the market for apples. A higher demand for apples raises the price of apples. But the quantity of applies is higher too. The higher price didn’t lead to less demand for apples. The quantity demanded falls as part of the process of correcting or anticipating the shortage that would have occured if the price didnt’ rise..

    The purpose isn’t to permanently lower the unemployment rate from where it would otherwise be. It does have a purpose of avoiding and dampening increases in the unemployment rate caused by reductions or slower growth in the flow of spending on output. But unemployment might rise or fall for other reasons. If the flow of spending on output is stable and unemployment rises, then nothing is done about it.

    It is true that slow steady growth in the the flow of expenditures on output is supposed to keep inflation low and stable on average. (in my version, at zero.) But inflation can change for reasons other than more rapid or slower growth in nominal expenditures on output, and inflation or deflation from those sources would still exist.

    If there is a bad harvest, then the prices of some food items will rise. Inflation will be higher. And when weather is better next year, the prices will fall again. The prices of those goods, and the price level will fall. If there is a bumper crop, the price of that good will fall, and so will the price level. Next year, when we aren’t quite so fortunately, the price will rise again, and so will the price level–inflation.

    It is just about adjusting the quantity of money to meet the demand to hold money–a demand that is geneated by people saving by accumulating money or else selling other assets for money. It is perfectly consistent with paying a competitive interest rate on money, and that will, of course, impact how much money people want to hold rather than hold other assets or consume.

    • Silas Barta says:

      More money, more spending. Less money, less spending.

      Does it matter if that spending goes toward sustainable patterns of production and satisfies real economic wants? Or is it sufficient that the money changes hands?

      Can I satisfy NGDP targets by “buying” friendship back and forth between a friend of mine until the total amount of each transaction = target NGDP? Then it’s probably the wrong measure to watch.

      Should NGDP be a yearly target? Monthly? Weekly? Secondly? Is it a failing of the economy if there aren’t $13 trillion / (365*24*60*60) worth of transactions in the US every second?

      Has any NGDP targeter thought that far?

    • marris says:

      > One common error among the Austrian amateurs… Think about the market for apples…

      Isn’t the confusion here between offer (seller) prices and the equilibrium price?

      Of course you cannot, given a rise in equilibrium price, conclude that equilibrium quantity is lower. Nor state that the demand schedule has shifted right. Nor state that the supply schedule has shifted left. You can only state that _either_ the demand schedule shifted right OR the supply schedule shifted left.

      This scenario is not what people describe when they say “high prices will lead to lower quantity demanded.” The latter statement is just saying that when sellers offer goods at higher prices [when we presuppose a leftward shift in the supply schedule], buyers will (all else equal) purchase fewer units. EQ price will rise, and EQ quantity will fall.

      > If there is a bad harvest, then the prices of some food items will rise. Inflation will be higher. And when weather is better next year, the prices will fall again.

      You’re saying that it is better to pump money through the food production line to “keep it running” for next year, right? Otherwise we end up with a collapsing structure or something. How do you _know_ that this particular structure should be kept afloat? Maybe it’s a bad idea to grow food using this structure. Maybe we should be importing this particular crop from somewhere with more stable harvests. Or maybe the higher prices will attract capital investment which make the production lines more robust.

      I think you’re presupposing that there are “really” all these sustainable production opportunities out there and the government actors can “see them” while private investors cannot. If you presuppose that government actors are savvy entrepreneurs who are specially skilled at spotting these temporary bad conditions and channeling money to them, then sure, what you describe sounds like a great idea. But what is the evidence that they have this knack for long-term profitable production? Isn’t it more likely that you will see them simply dump money on the most politically connected groups?

      • bill woolsey says:

        I understand supply and demand quite well.

        My point was that higher nominal GDP doesn’t require lower interest rates. It has no effect on interest rates in equilibrium.

        As for the impact of a nominal GDP regime when there is “supply side” inflation, I am making no claims about whether or not more or less money will flow through food markets.

        What will happen depends on the elasticity of demand. If there is a bad harvest, supply decreases. The price rises, and the immediate and direct effect is a higher price level. Moving from a lower to a higher price level is inflation. And so, the immediate and direct effect is inflation.

        If demand is unit elastic, then total spending on the product is the same. Ceteris paribus, spending in the rest of the economy is unchanged too. (With a nominal GDP target, nothing happens.)

        If demand is inelastic for the good, then spending on the product actually rises. People spend less in the rest of the economy and more on this particular product. This will tend to result in lower prices in the rest of the economy. Nominal GDP targeting lets this happen.

        If demand is elastic for the good, spending on the good falls, and spending rises in the rest of the economy. This tends to result in higher prices elsewhere. Nominal GDP targeting allows this to happen.

        The notion that somehow nominal GDP targeting involves injecting money into particular markets where supply decreased is wrong. Imagining that there is some kind of worry about a collapse if this fails to occur are beside the point.

  6. StatsGuy says:

    There is a fundamental difference between relativistic monetary policy (Scott) and relativistic fiscal policy.

    What Scott has done is taken the definition of money to its logical extreme – money is essentially about expectations, so the optimal monetary policy is one that specifically targets expectations. In other words, if I think the money supply will be cut in half tomorrow, I don’t care much about the quantity of money today, do I? Money, since it has no inherent value, is valued at precisely what we think it can be exchanged for, and that’s about expectations. (The same is very nearly true for gold, right?)

    If a monetary authority deliberately sets expectations on a trajectory, and fails to meet that trajectory, then money is tight. If you lived in the real world with a “median” income (which fell in the last 4 years though average incomes did not), you would feel that it’s tight. You might observe “but corporations have massive cash reserves, so how can money be tight?”

    THAT IS THE POINT. Why are corporations, which have more access to “cheap” money than anyone, building massive cash reserves? BECAUSE money is tight… Sure, maybe they can’t find any good investments because they perceive an AD shortfall or a skills mismatch or whatever, but then WHY NOT RETURN THE MONEY TO SHAREHOLDERS? If they needed more cash, they could always just borrow “cheap” money in the bond market, right? Except, no they can’t… Why? Because money is tight, so they hold onto it, and that helps make it tight for everyone else.

    The austrians have consistently confused cause and effect, which is why after sounding the hyperinflationary alarm in 2008 (commodity surge), and in 2009 (QEI), and in 2010 (QEII), we’re looking at a spike in Dollar vs other currencies, and 10 year T-bill rates of 10% a year and real at>5% a year.

    It seems your primary reason for disliking Scott’s definition of easy/tight money is that “we begin to lose touch with reality”.

    I imagine that it certainly feels like that from an Austrian perspective.

    “Rather than being an interpreter, the scientist who embraces a new paradigm is like the man wearing inverting lenses.”

    Thomas Kuhn

  7. Cahal says:

    As far as I’m aware, Sumner’s argument is, and always has been, circular. The CB contros NGDP so they should control NGDP. He has yet to convince me of the first proposition and how it is compatible with the endogenous money theory.

  8. John Hall says:

    There are a lot of posts here, so I hope mine isn’t lost.

    Anyway, I would distinguish between ex ante and ex post evaluations of monetary policy. Ex ante, Scott is more-or-less correct in his analysis. The reason is that the question of whether monetary policy easy or tight implies something about what monetary policy SHOULD be doing. By the standards of a 5% growth path of nominal GDP, a 1% rate suggests that monetary policy is too easy, on the basis of the stated goal, and should be easier. The question of whether the goal is ex ante optimal or not, is almost irrelevant to the question of whether monetary policy is meeting the goal or not.

    Ex post, you have two sources of analysis. After revisions and a better sense of the data, did the economy perform as the central bank pledged to? Ex post, you could identify periods where nominal GDP grew faster than its goal or slower than its goal and say the policy was loose or tight.

    Another question entirely is if the central bank would have pursued a different goal would the economy be better off today than it was under the existing goal. That’s a tricky question to answer, but it is the only way to evaluate the point you raise with regards to having the wrong underlying worldview.