OK Sumner, You Win This Time…
…but we’ll be back!
Recently David R. Henderson had a very gallant post in which he admitted that he thought he was going to catch somebody in a bout of hypocrisy, but had been wrong. So let me do the same thing here.
This morning, I read Scott Sumner really letting people have it for arguing that a currency depreciation could help a country’s real GDP by boosting its (net) exports. “Oh boy, here we go,” I thought. “Another example of Scott wagging his finger at people for making ceteris paribus assumptions and taking a shortcut, when he himself has done the same thing a dozen times on his blog while touting the virtues of looser money.”
Well, I spent ten minutes looking and couldn’t find an example of Sumner making the same “mistake,” and what’s worse I found several examples of him making the same (correct, in terms of the framework he’s using) point in the EconLog post. Namely, Scott was pointing out that if currency depreciation occurs because of looser monetary policy in a situation where that promotes growth, for all we know net exports might FALL (even as real GDP rises), because the richer population now buys more imports.
So, I am happy to report that Scott has been pretty consistent on this point. However, I still will die on the hill for my claim that Scott “reasons from a price change” when it comes to interest rates all the time.
This statement Sumner made contradicts his other statements:
“Like other northern European countries, Germany saves much more than it invests.”
He has also repeatedly claimed that savings always equals investment, and chided those who say otherwise, for example here:
http://www.themoneyillusion.com/?p=20665
Don’t worry Murphy, virtually every post he makes contains a contradiction.
Worldwide savings=worldwide investment, MF. No contradiction, as usual.
Don’t think so, because on a worldwide scale, savings and investment don’t occur in Euros only.
Sumner wasn’t disputing the “worldwide” version of the argument that savings can exceed investment. The argument he was disputing comes from people who are thinking on a national scale.
But I’ll grant that since it is possible for Germany to save more than it invests as long as we don’t ignore other Euro using countries or individuals investing in Germany more than saves, or at least spending more on German products than it saves, in Euros, then Sumner need not necessarily have contradicted himself.
But I doubt that is what he did in fact have in mind. I am almost positive his thinking was constrained to “national” terms, as he wrote this other post:
http://www.themoneyillusion.com/?p=12617
Contradiction, as usual.
Bob, did you see this reply to you by Sumner?
http://econlog.econlib.org/archives/2015/07/raising_rates_t.html
“This invisible rise in the natural interest rate is what causes confusion. It looked like the Fed was steadily tightening monetary policy during the 1970s, and yet inflation kept rising. (That’s because the natural rate was rising even faster.)”
The Austrian position is that the “rise in the Wicksellian natural rate of interest” is actually speculation ramping up before the crash.
If I remember correctly, Wicksell had a single rate in mind, which is not the Austrian paradigm (I think Bob might disagree with me, here, if I remember that one as well). Rather, it is a further distortion of market interest rates, making the correction to come that much more painful.
“The Austrian position is that the “rise in the Wicksellian natural rate of interest” is actually speculation ramping up before the crash.”
Damnit, no it’s not.
It means that markets are trying to correct, but the Fed won’t let it.
I’ll go away now.
It’s not a rise in the natural rate which indicates the coming crash, it’s the rise of the “bank rate” towards the natural rate. The rising natural rate rate Scott was talking about was due to high inflation premiums (and I think high risk premiums?) during the 1970’s. The “Fisher effect” basically.
I guess I was seeing the rising natural rate as a response to monetary inflation, and therefore as unnatural, if that makes sense – the natural rate being “otherwise natural” in the context of money printing.
But I see how the rise could be seen as natural for those circumstances, in that the rate is communicating information about the reduced marginal utility of each dollar, but people haven’t been made aware of that so they didn’t adjust their valuation of the dollar when the printing happened, and are now caught off guard.
Thank you for your assistance.
“Namely, Scott was pointing out that if currency depreciation occurs because of looser monetary policy in a situation where that promotes growth, for all we know net exports might FALL (even as real GDP rises), because the richer population now buys more imports.”
Looser monetary policy promotes growth in malinvestments, not real growth (i.e., growth from the perspective of consumers who can pay).
Also, wasn’t Sumner’s point that currency depreciation was supposed to raise the real GDP of the population that depreciated, rather than the richer one who can now buy more imports?
Like.
So loose monetary policy creates real wealth?
I don’t think so.
ssumner is confusing me.
Are we told by him that we “shouldn’t reason from an interest rate change”,
then that “There is no justification for raising interest rates when hourly nominal wage growth is below 2.3% on a 12-month basis. None”.
then also that “if the Fed action pushed rates from below the Wicksellian equilibrium to above the Wicksellian equilibrium, then the stance of monetary policy would flip from expansionary to contractionary”(from the above linked E.Harding post)
And all this in light of the fact that “interest rates are not a good indicator of monetary policy”?