05 Feb 2016

Am I Just a Permabear?

Efficient Markets Hypothesis, Federal Reserve, Financial Economics 94 Comments

In the comments of this post, Gene Callahan doesn’t shirk his duty of constantly assuming I started reading financial economics last Tuesday:

But Bob, weren’t you predicting market disaster when the Dow was at 6000? (I was buying at that point, fwiw.) Weren’t you predicting it through the whole rise of the last seven years?

If I predicted the death of David Bowie every day for the last 7 years, do I get to crow this month when he actually dies?

If the Dow gets back down to 15,000 it is buy time again. Do you want to write a derivative contract on whatever position I take so you can short my position?

No, I don’t think I was predicting a stock market crash when the markets bottomed out in March 2009. I’m not betting my life on that, but I don’t remember doing that. I think instead what happened is that I was adamantly against the Fed’s policies from the fall of 2008 onward (actually from the fall of 2007 onward…), and then when various mockers pointed at the booming stock market as proof that guys like me were idiots, at that point I started saying the boom in equities was built on quicksand. However, if Gene can find me saying the stock market was overvalued in March 2009, I will note it here as a correction.

Now, the broader issue is that I don’t think I’m grasping at straws, or merely chanting “Disaster looms!” when I say that the stock market (I normally use S&P500 but below I use the DJIA for Gene) has been driven by the Fed:

I want to be clear that Austrian theory per se doesn’t posit a mechanical connection between the stock market and the Fed’s balance sheet. I have been using that graphical device to get people to see that there is an obvious connection if you are willing to use your eyes.

Now if the connection holds–which it might not, for example if everyone suddenly thought I was a genius then the market would tank instantly–then for the Dow to go back to 15,000, the monetary base would be “only” $3.2 trillion, still 4x the height it was eight years ago.

Does anyone think that is sustainable? Maybe that’s what is throwing people here. I am assuming throughout this discussion that the Fed eventually has to let its balance sheet (as a share of GDP if you prefer) go back to pre-crisis levels. That was what Bernanke said in the beginning when he unleashed this genie.

Beyond that, I am really puzzled by how many generally free market economists (not saying anarcho-capitalists but people who generally respect markets absent a compelling reason otherwise) think that trillion dollar deficits, massive government expansion in health care and health insurance, regulations on power plants and potential big carbon tax in the wings, and the list of horrible presidential candidates all lead to a record breaking stock market. When Krugman celebrates the Obama Boom that somewhat makes sense, because he thinks what this economy needs is more government. But it baffles me how many generally free-market economists think the booming stock market of the last few years makes perfect sense.

Here’s the long term picture. I don’t see why people warning that the market is poised for a big drop are being treated like kindergartners.

DJIA long term

94 Responses to “Am I Just a Permabear?”

  1. skylien says:

    Is someone who from day 1 of the start of a ponzi scheme warns about its inevitable blow up a perma bear? Clearly if he predicts its blow up every day, then he is none the less wrong most of the time. But there is a difference between this and just warning of something unsustainable.

    • Major.Freedom says:

      Those with faith and optimism in socialism tend to perceive realism as pessimism.

  2. skylien says:

    BTW: How can any economist who subscribes to the inductive method in economics look at chart above and reason that the monetary base doesn’t drive the stock market (yet)?

      • skylien says:

        Well, that is exactly my argument. Those economists correlate (N)GDP with a well working economy.

      • Major.Freedom says:

        Is it really “spurious” though, given there is a good reason for inferring a causation?

        • DMS says:

          That’s the point I would like to tease out with Bob, i.e. what is the mechanism in ABCT by which monetary increases could create asset price inflation?

          I don’t know enough of the advanced literature, but at the risk of doing violence to ABCT, one generally hears the following:

          1. All that money printed by the Fed is “sloshing around” and has to go somewhere, and it has flowed into asset prices, specifically the stock market, pushing the market ever higher. (not strictly ABCT, but often trotted out in conjunction with it)

          2. Fed manipulation of interest rates distorts consumer and producer time preferences, resulting in mal-investments galore, including the desire to hold equities at certain prices.

          Point #1 is manifestly false – all that money printed by the Fed is sitting at the Fed. Hence the strict causality of the graph cannot hold in this case.

          Point #2 is where true economic insight might occur through ABCT, but I just don’t follow it that well. I can only detect (admittedly without much literature sophistication on my part) a hand-waving reference to the loanable-funds rate being manipulated below the natural rate, but it is clearly more complicated than that, using Austrian thinking on its own terms.

          But I will be so bold to say that even with a more detailed description and elucidation of the above, Bob would do himself well to stop saying the market is due for a crash/correction – that conclusion simply does not follow from his premises, as I understand them.

          • Bob Murphy says:

            DMS, in point #1 of this piece, I criticize the “money going into Wall Street” idea also.

            • DMS says:

              That’s good to note, and half the puzzle is clearer, but then what are you saying is going on?

            • Guest says:

              Your linked example makes since in the specific scenario but I don’t think it applies to what DMS is suggesting.

              He is suggesting when the FedR purchased 4.5T in assets during its QE orgy, this money never left the FedR and never increased or effected total money supply in any way shape or form.

          • Major.Freedom says:

            For point #1, while the Fed physically possesses a large portion of the money supply it itself issued, it is not the case that all of it has.

            It is not wrong to say that when the Fed gives more money to those who buy stocks for a living, in “exchange” for government debt, that the demand for stocks will be higher, ceteris paribus. Sure, they can park a substantial portion of it with the Fed, but that still leaves the portion that wasn’t to push up stock prices.

            It is physically impossible for stock prices to have risen as much as they have, on the basis of nothing but a pure increase in the savings rate. The savings rate has not increased sufficiently to facilitate it, and the supply of stocks has not decreased sufficiently. It is incontrovertible that the increase was caused by inflation/credit expansion.

            • DMS says:

              The delta between bond purchases by the Fed (outflows of its printed cash) and Excess Reserves (inflows of cash), to the extent it even exists, is tiny in comparison with the overall stock market, and asset markets generally.

              A changing discount rate over time can explain stock price increases quite easily, and arguably quantitatively, independent of savings rates, cash sloshing, animal spirits and other such suggestions. I’m not sure it is the only answer, but it is a plausible answer nonetheless.

              • Major.Freedom says:

                “The delta between bond purchases by the Fed (outflows of its printed cash) and Excess Reserves (inflows of cash), to the extent it even exists, is tiny in comparison with the overall stock market, and asset markets generally.”

                Excess reserves are not “inflows of cash”. They are reserves held by member banks in excess of required reserves.

                “A changing discount rate over time can explain stock price increases quite easily, and arguably quantitatively, independent of savings rates, cash sloshing, animal spirits and other such suggestions.”

                The Fed affects interest rates by way of inflating the money supply at varying rates.

                “I’m not sure it is the only answer, but it is a plausible answer nonetheless.”

                You sound sure.

              • DMS says:

                Let’s say you and I set up a hedge fund, call it MFDMS. We offer short-term, floating-rate notes at 25 bps, which is attractive to the marketplace versus zero percent otherwise. We take whatever money we are able to raise, and we buy long-dated securities, at roughly 250 bps, specifically Treasuries and MBS. We show great profits and attract lots of money, say $4 trillion – stay with me here.

                While completely granting that you and I could not do this and we could only attract the original capital if we had a government-sponsored right to print money, the end result is still the same. There has been no introduction of government “printed” money into the economy – all that has occurred is asset-shuffling. I am not defending the Treasury or the Fed, both of whom are arguably corrupt, but we go off the rails when we ignore the actual financial math.

              • Major.Freedom says:


                If it was merely a swap, then prices and wages would be the same today as they have been since 1913.

                Obviously your math is not your confusion.

              • Bob Roddis says:

                What problem was all of that non-activity by the Fed trying to solve?

          • Guest says:

            “Point #1 is manifestly false – all that money printed by the Fed is sitting at the Fed. Hence the strict causality of the graph cannot hold in this case.”

            I am sorry but you are going to have to prove this assertion before you make 1 more silly comment.

            • DMS says:

              Consider these steps:

              1. The Fed literally prints $4T and puts it in a pile in its vault with a tag that says “Property of the Fed”

              2. It then moves this pile from one side of the vault to the other, and in the open space behind it puts a pile of $4T worth of Treasury Bonds and MBS, which it has purchased from banks

              3. As it does this, it removes the tag that said “Property of the Fed” and puts a new tag on the pile of money that says “Property of Banks X,Y,Z etc” in proportion to their sales of the bonds and MBS to the Fed

              4. Banks involved in this purchase/sale are exactly as before, save for differing entries on the asset side of their balance sheets, with a debit to “Treasuries and MBS” and a credit to “Reserves Held at the Fed”

              Yes, there could be Cantillon effects depending on where/how the original purchases occurred. Also the interest rates on those securities (and other similar bonds and MBS perhaps) certainly are distorted downward by all that excess buying. But that is it. There cannot be any overall asset price increase (or CPI increase for that matter) from a source of too much money chasing too few goods, i.e. “monetary sloshing”. Where is the money to effectuate that if it never left the pilea in the vault at the Fed (or actually in an electronic ledger of the Fed to the same effect)? What would be the mechanism for stock prices to rise as a consequence of an asset swap on the balance sheet of commercial banks? It’s nonsensical, and I cannot find it anywhere in ABCT.

              Excess Reserves at the Fed almost exactly match the amount of bond and MBS purchases under QE – any delta at any point in time (so far at least) is de minimus and can’t possibly be considered monetary stimulus.

              One could justifiably fear the consequences of all those reserves at some later date, or one could bemoan the distortions to the credit markets caused by all that buying by the Fed, but those are different issues. Hence I am driven to Point #2 in the original post, where either the stock market is rising and falling of its own accord, or the distortions are such as to create a stock market “bubble” in some unspecified way. I am only saying two things: i) the distortion argument seems implausible, which I grant I cannot disprove, but that is because I’ve not seen any mechanism proposed for it; and ii) the monetary stimulus argument is manifestly false, which I think I did just prove.

              N.B. Per Major.Freedom’s comment, QE is indeed only an asset swap – QE differs from other FOMC actions historically because of IOR. Unsterilized activities since 1913 are very different than sterilized ones from 2008 onward.

              • Arius says:

                You ignore the most important step. The ste that places this money onto the members balance sheet, the loans that are then created and the required reserves that are then sent back to the FedR bank.

                If 4.5T did only move from 1 side of vault to other, that would have been great.

              • Guest says:

                Consider these steps.

                The FedR changes the digits of several large banks, to the tune of 4.5T, in return the banks give FedR 4.5T junk assets.

                The banks use this new money to make 45T worth of new loans, mainly stock market related loans.

                The banks then repay the FedR the original 4.5T.

              • Anonymous says:

                To Arius and Guest –

                Excess Reserves are by definition reserves held by the banks beyond the Fed-mandated minimum. In other words they are definitionally idle funds, not used in the fractional reserve system for loan-generation.

  3. Craw says:

    Here’s the problem. When you write that some investors will now be thinking
    “Wow I wish I had taken these guys more seriously when they sounded so alarmist a couple of months ago”
    it sure looks like you are taking the recent drop as vindication, And in that case — claiming “That day on the market proves how tight I was” — Gene Callahan’s point is well-taken, To judge your prognostications we need to know your entire track record.

    The objection raised by some of the choir that this isn’t like death are ill-taken. No-one here can point to an asset market that hasn’t had busts over a long span. Nothing is certain but death, taxes, and asset market swings.

    And Gene’s object has nothing to do with whether the Fed policy is wise or markets beat planners.

    • skylien says:

      “The objection raised by some of the choir that this isn’t like death are ill-taken. No-one here can point to an asset market that hasn’t had busts over a long span. Nothing is certain but death, taxes, and asset market swings.”

      On the flip side of this argument is: How do you justify the existence of the FED and its policies then?

      • Craw says:

        Irrelevant to the point. And it assumes I do.

        • skylien says:

          No, obviously an argument cuts both ways and because the ultimate point always in the end is do we need a Fed or not, it is definitely not irrelevent.

          I am sorry, should have written “How would you”.


    • Major.Freedom says:

      It is you who is adhering to ill-taken beliefs, Craw.

      “The objection raised by some of the choir that this isn’t like death are ill-taken. No-one here can point to an asset market that hasn’t had busts over a long span. Nothing is certain but death, taxes, and asset market swings.”

      And no one can point to any decade since the 1960s where there hasn’t been a main episodic Star Wars movie. Does this mean you should add “Star Wars” movies to certainties occurring every decade, like death? (Not even taxes are inevitable).

      You are just digging a deeper hole by trying to convince others (yourself?) that your false analogy is indicative of the Austrian argument about the cause of business cycles. To explain the why behind the business cycle, is not at all a repetitive like, “This is the year the correction will occur, just you wait!” type argument.

      Not only is not true that taxes or business cycles are inevitable, but to say the Austrian argument boils down to predicting people are going to die at some point, proves you don’t even understand the argument.

      At any rate we can’t even say death is certainly inevitable. Your subjective beliefs are not laws of nature. You’re not fooling anyone.

    • Bala says:

      Where’s a good, solid brick wall when you desperately need one to bang your head on? Care to point me to one?

      ‘Coz I thought Bob’s point was that he was not predicting the market’s imminent collapse all these years but merely criticising the Fed’s policies of 2008 and, when ridiculed by those pointing at rising stock indexes, to say that the move up was built not on strong foundations but on quicksand. He was saying that he was not screaming doomsday all those years, is now inviting anyone who thinks otherwise to point to where he has and is ready to be corrected if evidence to the contrary is produced.

      Gene’s ridiculing of Bob consists of just this mistake that I am pointing out (at the risk of sounding like a parrot) and so does your current reply. Now! Where’s that brick wall my head needs???

      • Bob Murphy says:

        Bala, just to be clear, I *was* warning that the stock market was built on quicksand (and implicitly telling people it was overvalued, though I don’t know when I put it exactly like that) at a point when it was lower than it currently is. I was merely saying that Gene is exaggerating (I believe) when he says I was saying that at the market bottom in March 2009.

        So here’s the progression as I see it, and in my admittedly biased timeline you can see why I am so exasperated with certain critics:

        1) The Fed responds to the financial crisis like it did to the dot-com crash, and I start warning that it’s repeating the same mistake and it will end in disaster just like Greenspan’s policies gave us housing bubble.

        2) Stock market starts zooming up in March/April 2009, and critics occasionally point to guys like me and say “Ha! Glad I didn’t listen to you and stay out of the market. Obama FTW.”

        3) I point out that the stock indices are eerily following the Fed’s balance sheet, and that even the Fed admits it is beginning new rounds of QE in part based on stock market falling.

        4) In June (maybe July) of 2015, I start a 3-part seminar on “The Coming Storms.” Carlos Lara and I paint a very bleak picture and say there is going to be a market crash though we of course can’t tell them exactly when.

        5) In August 2015 the market tanks. A lot of normal people are astonished by this. The people at our seminar are thinking, “Huh, well those guys were certainly saying the market was in a bubble last month. I’m curious to see what they will say in September at the final part of the series.”

        6) In the September session I say, “Now you might be kicking yourself, thinking you missed it, but actually look at this chart. The last two crashes were slow-motion train wrecks. So if you buy the analysis that Carlos and I have been giving you, there’s still a lot more room for the market to fall and so don’t feel paralyzed.”

        Now my critics look at the remarks in point (6) and say, “Bob you dolt, the market is still way higher than when you began issuing predictions. It would have to fall a lot more before you can open your mouth. For all we know, this is just a volatile market bouncing up and down. Haven’t you read anything about efficient markets? Don’t you know if a billion guys flip quarters, one of them will get heads 30 times in a row?”

        • Bala says:

          Thanks Bob. This was definitely the picture I had in mind as a regular reader. Still, having it laid out like this makes it clearer.

        • DMS says:

          But your starting premise is incorrect. The Fed has NOT responded to the financial crisis like it did to the dot-com crash. This time it is paying Interest on Reserves, which has the effect of sterilizing its FOMC purchases so that no new money actually enters the system. It has twisted the yield curve, and caused marketplace distortions to be sure, but it has not propped up stock prices artificially with excess money – there is no excess money. In a reply post above I walk through the steps that demonstrate the Fed has merely effectuated an asset swap on banks’ balance sheets and that is all. I am quite sure I have read only a fraction of Austrian Theory that you have, but I can find no mechanism in ABCT that explains how such a duration/liquidity swap of commercial bank assets somehow triggers a run up in other asset prices, specifically the stock market.

          • Anonymous says:


            You do realize that not every dollar the Fed prints gets deposited with the Fed, right?

          • Major.Freedom says:


            You do realize that not every dollar the Fed prints gets deposited with the Fed via IOR, right?

            • Anonymous says:

              I keep talking past you with sloppy references and without supporting data – that’s my fault. Here:

              Until the crisis (2008) the Fed has always had total assets nearly equal to securities held (i.e. Treasuries, usually short-duration) and liabilities almost solely of currency in circulation. With QE, the balance sheet has exploded, with the increase in Excess Reserves virtually equalling the increase in securities, relative to trend.

              Specifically, at the start of 2008, Total Assets were $880B of which $730B was in Securities, the rest in Other. Liabilities were $880B with $820B in Currency in Circulation, and $10B was in Required Reserves (Excess was zero). There was $50B in Other.

              Now, nearing the end of 2015, there was $4500B in Total Assets, with $4300B in Securities, the rest in Other. Liabilities were $1400B in Currency in Circulation, and $2700B in Reserves, essentially all Excess Reserves. About $400B was in Other.

              And yes, Currency in Circulation has risen, but not in any unusual way. It has risen roughly 6.8% per year since 1985, while having risen 6.9% per year since 2008-2016, i.e. essentially no change. We can argue about the virtues/evils of a roughly 7% rise in currency every year – with ourselves, or with Krugman, or with MM proponents, but we cannot argue that is unusual since 2008.

              Therefore, relative to historical trends, nearly every new security purchased by the Fed from QE has resulted in a roundtrip of dollars back to the Fed’s balance sheet. That is specifically what I meant when I said any unusual monetary effects from QE outside of Excess Reserves buildup must be considered immaterial.

              • Guest says:

                Hi Warren Mosler,

                What would have been the currency expansion rate or contraction rate if FedR had not purchased all those securities?

                Also, when member banks choose to send excess reserves back to FedR, instead of lending more, how much did the FedR Emergency QE policy of paying IOER, effect member bank lending decisions?

                Finally, could have the credit market in 07,08 simply have been saturated? Meaning, lending was attempting to outpace production and possibly consumption?

                Hopefully a light just went on.

                Sorry for posting as Arius and Guest, the new Arius name I was attempting to implement did not appear for more than 1 hour, so I reposted as my original Guest moniker.

                I am absolutely amazed how much your line of thinking resembles the 49 minute mark of this debate between Bob Murphy and Warren Mosler..Either you are he, or all MMT nuts have the same blind spots?

              • DMS says:

                Guest –

                Sorry, I am Anonymous above – I am evidently a moron who can’t seem to work the posting mechanics. However, I am not Warren Mosler, of whom I was unaware. Perhaps unfairly, as I only saw a few minutes around the 49-minute mark you indicated, but he seems a bit of a jerk. But that doesn’t mean his diagnosis of QE sterilization is incorrect. Interestingly, I note Bob didn’t disagree, but instead makes all the points I agree with about Fed intervention. They just don’t happen to be germane relative to the money supply question. Just as Mosler can be right on this point while being kind of jerky, Bob can be wrong on a point or two while generally being right, and definitely not a jerk.

                There are many, many legitimate complaints to have about the activities of the Fed, even about its very existence. But we shouldn’t inappropriately contort ABCT just because we distrust the Fed and because ABCT works better than most theories in other respects. When Mosler asks to be shown what channel exists by which sterilized QE monies are flowing into the economy, I am completely sympathetic – you are correct there. Having Bob respond that bondholders and banks were egregiously bailed out does not suit the ABCT cause well – it is correct, but also a non sequitur.

          • guest says:

            DMS, this might help:

            [Time stamped]
            So Where’s the Inflation? Tom Woods Talks to Mark Thornton

            • Arius says:

              Excellent link.

            • DMS says:

              That is helpful, thanks, but actually goes to prove the point. At 11:25 he basically makes my argument, there is no CPI since the money hasn’t moved out of the Fed into the economy, but sits idle in Excess Reserves, but prior to that he lists a host of assets that have seen rising prices somehow without any excess money in the economy. No mechanism for how this could be possible is provided. Worse, the logic is akin to climate alarmists citing a recent year as warmest on record, when in any rising time series this is a likely, even near-certain event. Note also that somehow the widespread asset inflation he cites in the first 11 minutes has abated in the last 3 years – gold, oil, commodities, art, emerging markets, junk bonds, etc. are all off their prior highs, some significantly. And yet QE has been in full force throughout.

              I am repeating myself all over this blog because this is a big point. The ABCT is a powerful framework, one of the best we have, but is being misapplied currently, and weakens the case when very bright proponents like Thornton, Murphy, Woods, etc. beat this drum. And Bob, who is as good as anyone on this stuff, appears to me at least, to be one of the worst in this regard. By the way, Krugman is wrong too (surprise!) – ABCT has not been disproven because of the failure of CPI to rise, but because of Fed sterilizations, which can easily be accommodated within ABCT. I hope Bob reads this stuff and does so, or explains what I’m missing.

              • Guest says:

                I here you, you are claiming there is no channel for the FedR to inject this money, therefore it never happened. Per the Fed reserve Act of 1913, FedR cannot create money, they only influence money. So there is no actual channel to inject, slosh, print, handout, etc. real money. What they did do it clean up the toxic assets of the member banks, which encouraged the banks to lend more than they otherwise would off. And of course, after all of this lending, member banks had new and excessive reserves that they sent back to FedR to collect interest. You even said lending creates deposits. That 11:25 mark is a mistake by both Tom And Mark, bold of me to say, I know.

                We should meet, I am a total gear head. I would love to see your auto collection, etc.https://en.wikipedia.org/wiki/Mosler_Automotive

              • Guest says:

                Oh and regarding CPI, inflation etc. CPI does not contain any goods or services that would be directly affected by QE, therefore CPI increase has not reflect the true effects QE did not purchase CPI, QE purchased troubled assets.

                On a side note: I do think CPI is downplayed by a few points. Bob Murphy made a bet founded on misinformation and moreso
                naivety. He thought a bailout was bailout of the populous, not just equity holders, bankers., etc. It takes awhile to realize all those pledge of allegiances and national anthems are total garbage. Bob knows better now.

              • guest says:

                ” At 11:25 he basically makes my argument, there is no CPI since the money hasn’t moved out of the Fed into the economy”

                It’s moved out of the Fed, just not into consumer goods, yet.

                It’s going into other things, such as stocks, at the moment.

  4. DMS says:

    No, I don’t think you are a permabear, but I think you conflate two distinct points.

    1) Massive Fed operations inevitably (maybe even definitionally) create marketplace distortions and set the stage for some equally inevitable rearrangement of the prior malinvestment. I would assert this is stripped-down, standard ABCT. For now, put aside exactly how the distortions are created or what they might look like (a more debatable element of ABCT in my opinion, i.e. it doesn’t have to follow the classic Hayekian Triangle).

    2) No one knows when, or how, the inevitable rearrangement may occur – there are too many variables at play, or better stated, too many interacting distortions to work themselves out cleanly, let alone predictably. I think this is both basic Austrian theory as well as consistent with the EMH.

    So we can be in the midst of an ABCT “runup” phase (doesn’t feel like a “boom”) right now, owing to classic ABCT arguments of Fed manipulations, while simultaneously not seeing a rising CPI, or other obvious indicators of malinvestment. Similarly, we might face a “cleansing” phase that involves a rising, or merely plateauing stock market (for other reasons), along with other non-obvious adjustments that would still be consistent with ABCT at its most basic level.

    Why shouldn’t the Fed be able to continue QE indefinitely? If we erroneously think of the Fed as flooding the economy with excess money, then that certainly feels unsustainable, I grant. But if we instead think of the Fed as a giant hedge fund operating a carry-trade (borrowing short with immediately redeemable floating-rate notes, i.e. Reserves with IOR) and lending long (buying long-dated treasuries and MBS), then why must that necessarily collapse? By the way, it is a very successful hedge fund in that regard, sending $100 billion in profits to the Treasury annually. It absolutely could collapse, just as many such carry-trade hedge funds have historically, but it also might keep on going indefinitely, as other carry-trade hedge funds have historically.

    By the way, this doesn’t leave ABCT open to the charge of non-falsifiability in my opinion, but it does mean ABCT proponents should be crisper about some of the underlying mechanisms. What is really going on in the “loose joint”, and does it behave in a determinably “loose-like” manner whenever we experience it? If not, why not?

    I am not advocating the Fed’s giant balance sheet, but one can oppose it without irrationally fearing it.

    • Major.Freedom says:

      Pretty sure Murphy knows the origin and ideas behind those 2 points better than you do.

      • Anonymous says:

        That is also my governing assumption.

        As is the assumption that Bob does not reason from authority, and is unlikely to think he is exempt from the Knowledge Problem, which is in essence the only real point I am making.

      • DMS says:

        That is my governing assumption.

        As is the assumption that Bob doesn’t reason from Authority, nor believe he is exempt from the Knowledge Problem, which is really the only point I am attempting to make.

    • Guest says:

      You are definitely a hardcore MMT nut. I get that we don’t have fixed rates and instead floating rates so the old rules do not apply etc. I scream at Mises.org more than any other Rothbardian. However you must realize although the rules of the game have changed, the laws of economics will never change. Scarcity, production, supply, demand. mal investment.. These things effect all humanity no matter what you call the system and what rules you try to implement.

      Finally, a fixed rate is not a true gold standard. That fixed rate at 35 was fiat pretending to be gold. A real and honest gold, would require gold in the hands of the people and there would be no fixed rate. There would be no central bank. There would be no monopoly. And the only government spending would be from the gold we gave them or the gold they confiscate. I only mention all of this gold stuff because it sure seem to trip up Mosler in the debate. Murphy should have criticized the fake gold standard, fixed rate concept. That fixed rate was only after the FedR Act of 1913. $35 per ounce, lol. You don’t need a fixed rate to make gold a storage of value, just look at it. It is shiny.

      • DMS says:

        Not at all – I must be mis-speaking in some way to give that impression.

        I am Austrian through-and-through, in the sense of favoring analytics into genuine structures of production, variegated markets for capital and labor, the importance of time and uncertainty on decision-making by purposive agents, and general methodological individualism. I have no taste for excessive aggregation, nor for elevating accounting identities and observational correlations into “laws” of economics. I think the knowledge problem is paramount, and want to see less government activity, less Fed activity and correspondingly reduced distortions of volitional catallactics. That feels pretty Austrian to me, but I don’t feel the need to wear any particular cloak or badge of identification. I’m no expert, but Modern Monetary Theory seems deeply problematic on many of these fronts.

        Having said that, I also oppose dogma of every kind. And it just seems to strike me as unreflective dogma to assert that Austrian Business Cycle Theory demonstrates we have a rising stock market owing to Fed QE. The basic financial hydraulics and bank accounting simply do not support that assertion, and therefore the power of Austrian theory to change hearts and minds is reduced when its proponents make such blatant errors.

        Off my soapbox now…

        • Anonymous says:

          Okay, for arguments sake you are not an MMT and you do want to learn Austrian Economics.

          If the Fed does not influence monetary supply, then what does the Fed do? I mean you keep saying QE did nothing. In essence, you are an inflation denier and also denying ABCT. The root of ABCT is the Fed.

          Prove to me the QE never influenced credit supply. Just because excess reserve balances happened to be similar to the amount of assets purchased, does not mean there was no effect. Wet sidewalks does not mean it rained. I called you Warren Mosler because he makes the exact same claim. Him and a few thousand other MMT and Keynesians. They all claim QE was nowhere close to enough.

          So explain to me how QE never left Ben Bernanke’s imagination.

          If it never left, why did he do it?

          If it has no effect, why is there a FedR?

        • Guest says:

          “And it just seems to strike me as unreflective dogma to assert that Austrian Business Cycle Theory demonstrates we have a rising stock market owing to Fed QE. The basic financial hydraulics and bank accounting simply do not support that assertion, and therefore the power of Austrian theory to change hearts and minds is reduced when its proponents make such blatant errors.”

          Listen. I never said the entire stock market increase is all because of the Fed. We are talking about QE and whether is stayed at the FedR or made a trip into the banks and then back to the FedR as excess reserves, expanding the credit supply in the process. The only proof you have offered is that the FedR balance stayed similar to the QE amount. Your proof is equivalent to saying the sidewalks are wet therefore it rained. Member bank says ” Geez Billy, Ben bought all that toxic debt from us, what should we do with the money? ” Maybe we should give it back” OR Geez Billy, Ben bought up all our toxic debt, lets go lend 10 times more, and then send the reserve requirement of 10% back to Ben.” You prove to me, if it was case example 1 or case example 2. All I am doing is showing you how the banking system operates by law. You are asserting something different. Prove it to me.

          You are also contradicting yourself or just being deceptive when you say you support ABCT, then you turn right around and claim the FedR does not cause excessive credit expansion nor inflation. You have to decide for yourself. QE, FOMC, suppressed interest rates, interest on reserves, 10% reserve requirement as compared to a possible 100% reserve requirement and a myriad of other tools. And yet you claim the FedR has no impact on credit supply. If the FedR is so benign, then abolish it immediately and recoup Bens/Janets salary of 190K+. It is finished.

          • Anonymous says:

            But Bob Murphy, whom I think is absolutely excellent on Austrian theory, does say that QE has led to stock price increases, and he is wrong. I don’t mean to put words in your mouth, but Bob’s explicit position (he is not alone, btw) is quite clear and is what is triggering my response.

            So, okay, I’ll take a stab at it, which may reveal my ignorance, biases or both. But it also might explain what is really going on, if I am correct. If am not correct, please let me know precisely where.

            To cut through all the fog of FOMC operations, in essence the Fed and the Treasury are in an unholy alliance, with the commercial banks acting as intermediaries only (and collecting some fine fees along the way, I grant). That is, when the Treasury issues bonds into the open market for cash, and then the buyer of that bond turns around and sells it to the Fed for cash (granted, maybe not immediately, but effectively), the net result for the banking system is neutral. But the net effect is also that the Treasury basically owns a printing press through the Fed, and has printed money to fund government operations, indirectly by way of “open market” operations of the Fed. This is basic accounting and funds flow – it doesn’t require a conspiracy theory per se, nor does it rule one out.

            This is scandalous and never discussed nearly enough, but from a bank accounting standpoint is neutral, and I sort of understand why the MMT guys get lost here because they seem to only think in aggregates. But it is of course not economically neutral – the government is buying all sorts of crap in non-economic ways and distributing all sorts of other crony favors in a distorting fashion. There is genuine monetary sloshing here, with prices potentially going haywire, whether it is goods/services (i.e. the CPI), commodities, stock markets, housing, dot-coms – that is mostly indeterminate, but real, i.e. the money has to go somewhere. From the Austrian perspective, false savings have entered the credit market, distorting investment decisions so that long-term plans are increased, while short-term consumption remains unaffected, or even could grow. Both are unsustainable, of course.

            And that I believe is what has obtained through 2008, i.e. the ABCT in action. But QE-with-IOR is NOT the above. And this is not to say QE-with-IOR is a good thing, only to clarify what is actually going on. QE-with-IOR differs as follows:

            – Per the above, the Treasury sells bonds into the open market
            – Banks buy those bonds for cash
            – The Fed prints up cash and buys those bonds
            – BUT, instead of the banks remaining neutral (i.e. being in the same position as before), they are induced through IOR to park that extra liquidity at the Fed, that is the cash they received from the bond sale
            – The Fed is still funding the Treasury as before, but it is essentially now offering a new security for sale itself, call it an “IOR-Note”, which drains cash out of the banking system. Btw, this is why Market Monetarists can say money has been tight since 2008

            So everything after 2008 is different from before 2008 – in the earlier years extra cash is sloshing around and distorting the economy (i.e. basic ABCT if you like), but after 2008 no extra cash (above trendline) is flowing – it has been drained (i.e. sterilized) out of the system by these newfangled IOR-Notes.

            QE-with-IOR may be worse for the overall economy, for business investment, for innovation, for politics – I can’t say, it is indeterminate. But it is NOT a channel by which new stimulus to asset prices has been introduced, other than potentially through the overall twisting of the yield curve, which I would argue is indeterminate. I think highly of Bob Murphy, but when he puts up a chart of the the monetary base (which includes these Excess Reserves) rising along with stock prices, it raises my hackles.

            This is no defense of Fed actions, either prior to 2008 or after 2008, nor is it praise for a bang-up job by Bernanke, Yellen et al. But it is an attempt to sort the wheat from the chaff, and figure out what the heck is actually different. And this is what I have concluded. Tell me what I have mischaracterized, or otherwise just plain missed? Calling me an MMT nut doesn’t suffice.

            • Bob Murphy says:

              Hey guys, I can’t follow your debate, but a quick thing to clarify: It is not ABCT that says Fed bond purchases leads to a rising stock market. ABCT says Fed bond purchases will cause an unsustainable boom that must eventually lead to a bust in real terms, but there’s nothing in Austrian theory per se that says you will see Fed’s balance sheet and stock index move like they have. In fact charts probably wouldn’t look like that during previous boom-bust cycles, though I admit I haven’t checked.

              • DMS says:

                That is fair, and thanks for chiming in. You prompted me to go back to your original post before I decided to go off the rails. Again to be fair, you explicitly said, “I want to be clear that Austrian theory per se doesn’t posit a mechanical connection between the stock market and the Fed’s balance sheet.” That is thoughtful and sufficiently justified and overlooked by me, but also a tad disingenuous. You also say, “But it baffles me how many generally free-market economists think the booming stock market of the last few years makes perfect sense.”

                All I am saying is that as a self-defining, rock-ribbed free-market economist, I would not say that it makes perfect sense, but it makes as much sense as any other free-market activity ever does. You seem to feel otherwise, which may be a misperception on my part, but my interpretation/advice is that you are better off not treading into discussing the proper level of asset prices using implied Austrian theory as support.

                Some small advice from a friend you have never met, but please trust me, does mean well…

              • Bob Murphy says:

                That is thoughtful and sufficiently justified and overlooked by me, but also a tad disingenuous.

                How is it disingenuous?

                All I am saying is that as a self-defining, rock-ribbed free-market economist, I would not say that it makes perfect sense, but it makes as much sense as any other free-market activity ever does.

                If Obama announced that he was going to impose a $100/ton carbon tax, and then the share prices of coal companies shot up 400%, you’re saying that would make as much sense to you as if they dropped 50%? (Assuming the news hits tomorrow; we’re not talking about a world where everybody had been expecting him to announce a $200/ton carbon tax.)

              • DMS says:

                Seems like an inapt analogy. No one I know says that stock prices don’t incorporate available information, even predictably so.

                The argument is what is the specific informational content of QE-with-IOR? Said differently, what is the informational content of a measured increase in the Adjusted Monetary Base on overall stock prices, when the constituents of that base are very different before 2008 and after 2008 (i.e.the existence of Excess Reserves in the Base)?

                I say indeterminate; you say predictable – stock prices have risen owing to the Monetary Base rise, even unsustainably so. I say there is no mechanism for such a rise; you say it must be the Monetary Base because the stock market shouldn’t be rising with all the government distortions you cite. I say that I completely agree that these are all crazy and unproductive distortions we shouldn’t have, but I also say there are many other intermediating variables in addition to such distorting headwinds (corporate earnings are up, discount rates are down to name two over the last 5, 10 or 25 years); you say that when QE unwinds, as it must, then there must be some collapse in stock prices. I say unwinding QE is indeterminate to stock prices, both because I don’t see it relating to stock prices originally (per the above), nor do I know how QE will be unwound to make such a prediction.

                In sum, and I completely grant you know this far better than I do, but you say “ABCT says Fed bond purchases will cause an unsustainable boom that must eventually lead to a bust in real terms”. I say I completely agree, but I can find no discussion anywhere in the ABCT literature of the current situation, i.e. QE-with-IOR, or sterilized bond purchases. This makes all the difference in the world, for all the reasons I’ve been blathering about.

                Again, I am not defending the Fed, QE, the Treasury, the Congress, etc. – quite the contrary. Good economic theory, such as the Austrian school, tells us that all the distortions to the free market from the above actors are bad, arguably even unsustainable. I assert it does not tell us however, that there must be a particular reckoning (over and above continued malaise, even perhaps increased headwinds), or that if such a reckoning comes, what form it will necessarily take, say a stock market decline or crash.

                I don’t think I am unfairly putting words in your mouth, but please correct me if I am.

              • guest says:

                “That is thoughtful and sufficiently justified and overlooked by me, but also a tad disingenuous.”

                As Robert Wenzel said to one of the economists at his speech at the Fed, wherever the printed money goes after it’s injected into the banking system, that’s where the false boom is:

                New York Fed: Leave the Building!

                “One economist asked me how I knew the housing market was going to crash. I responded that because of Austrian theory, I understood that money created by the Fed enters the economy at specific points and that it was obvious the housing market was one of the those points.”

                It just happened to go into stocks, is what Bob is saying.

                (Aside: I would also add that even the initial injection into the banking system is a false boom in income / savings that affects the bankers’ perception of their own wealth. Printed money doesn’t just cause a false boom only when it leaves the banks.)

            • Guest says:

              I am still waiting for you to prove QE had no effect on credit supply, as you have previously claimed multiple times. Back up your assertion.

              • Anonymous says:

                DMS, this quote is from you way above. The format of Bobs comment section is not as easy to navigate as Disqus , nor can I edit but here goes. You said : ” When Mosler asks to be shown what channel exists by which sterilized QE monies are flowing into the economy, I am completely sympathetic – you are correct there. Having Bob respond that bondholders and banks were egregiously bailed out does not suit the ABCT cause well – it is correct, but also a non sequitur.”

                Your quote tells me you still dot get what my position and what I am asking you.I was trying to explain that the FedR cannot create credit directly, there is no channel nor law however this is not the same as saying the FedR does not influence the size of credit supply. Banks are the origin of credit when they lend, but the FedR is the multiplier. So in essence the Fed does create credit, albeit stealth with no obvious channel. When you say the FedR QE funds were sterilized, those are your words, not mine. You have yet to prove QE funds were indeed sterilized. You keep making the same non sequitur, reserve balance mimics QE amounts, therefore QE never made it out of the FedR vault. Sidewalk is wet, it must have rained. When really, the kids were playing with the hose. Or the dog peed. Or…

                So just prove the QE never influenced credit supply, that is all I am asking. Stop weaving, bobbing and dodging.

                Just prove it. Prove QE never influenced credit supply. It is really simple request and completely reasonable since you are the one making the assertion. This is the entire crux of your argument, it is only fitting that you back it up.

              • DMS says:

                I think it’s simple, or perhaps I am simple-minded. In abbreviated version:

                – Prior to 2008, when the Fed purchased a Treasury bond, there would be two effects. First, bond prices would clear at a slightly higher price (lower interest rate), owing to basic supply and demand. This is not the ABCT mechanism as I understand it. Second, the printed money to buy the bond distorts price signals in the market, i.e. the loanable funds rate, as the “false” savings injected from printed money exceeds the prior market-clearing rate. Mal-investment ensues, there is a boom, a bust, etc.

                – After 2008, when the Fed purchases a bond the same first effect holds, i.e. supply/demand increase of the bond price (lowering of the interest rate). But the printed money does not flow into the credit market to provide any distorted price signal. Instead, the Fed simultaneously offers a new policy, to pay Interest on Reserves, which has the effect of sopping up these false savings and putting them back on the Fed’s balance sheet. It is as if the Fed issued its own “security”, what I call an IOR-Note, in direct exchange for the bond, without ever printing money in the first place. Without any extra printed money in the credit market, there is no new imbalance of savings to misperceive, i.e. distort the loanable funds rate.

                To be precise, I do think the yield curve has likely been distorted since 2008, but in a twisting fashion. One, the first mechanism I described above pushes long-term rates down slightly. Two, the new IOR policy pushes short-term rates above the market-clearing rate (otherwise the monies would not flow back to the Fed). This two-step process twists the yield curve somewhat.

                I grant that were those Reserves to flow out as new marketplace credit, we would be just as we were prior to 2008, and standard ABCT would apply. But that is a Sword of Damocles argument, not an actual, current distortion of the loanable funds rate.

                So again, there is no impact on credit supply, because there is nothing to provide any sort of signal to trigger a change in credit provision (apart from whatever effects the twist has).

              • Guest says:

                Not sure where you are missing it. I will throw a few things out and see if they stick.

                1. FedR, via normal policy, not QE, requires 10% reserve and then uses this reserve from banks to lend to each other over night. There is normally and small interest charge with this.
                2. Excess reserves( more than 10%) as of QE, actually pay the bank for parking it, no interbank lending required. prior to 2008, there really was never any excess reserves. Excess reserves are a very recent activity as is FedR paying interest directly to member banks for them.
                3. QE was above and beyond normal FOMC operations. Extraordinary. Not open market, outright direct purchase of toxic assets.
                4. What are banks to think and do with this new found liquidity? What would you do tomorrow, if today all your debt magically was paid in full, yet your income remained similar? Would you really simply give all that money back and cling to your debt? Really? IF it were, me I would go buy some stuff and take on some more debt.

                Finally, I think yo have a fundamently misunderstanding of how new credit is actually created. New credit does not come from FedR nor reserves, nor FOMC, nor QE. New credit comes when a borrower request a loan and bank writes the loan.(loan may be many forms such as equity margin account) Magic baby, new credit. Next step, deposit 10% of that new credit at FedR per US law. Then that new loan, can be used to generate additional new loans, so on and so forth. A 10% reserve requirement on a 1 Billion dollar loan can easily manifest as 100 Billion of new credit and 10B reserves.

                What I am trying to say is, the QE amount of approx. 4.5T does not guarantee even 1 new dollar of credit will be created however, there is the possibility of 45T or more, new credit being created. That’s frac banking for your. IT is all a confidence game, there is no direct nor intrinsic causation. IN a way, Keynes was right, spirits rule the day when you are in a fiat frac system. Just imagine the exact same scenario with a 100% reserve requirement.

                Is any of this sticking?

              • DMS says:

                I admit I am at a bit of a loss. Is there something I am saying that is particularly heterodox? It all seems like Banking 101, Finance 101, ABCT 101, Monetary 101, etc.

                Rather than repeat myself again in a limited space, why not go to Alt-M and read George Selgin on Interest on Reserves? I am not suggesting that we reason from authority, nor that he is the sole authority, only that his verbiage may be much clearer than mine. And it certainly is consistent with my interpretation, suggesting at least some support, though I recognize I am making different points in the context of ABCT. I would particularly note where he quotes Bernanke directly on Bernanke’s own desire for IOR to sterilize the Fed’s FOMC purchases…

              • Guest says:

                You are assuming Ben knows wtf he is doing. Maybe Ben was thinking, “lets clean up their books, give them some liquidity and provide a small future stream of revenue(IOER) that will bode well with various future FedR actions.” Future actions that may have never been carried out. Plans change.

                But to assert QE was 100% sterilized is contra logic. I just explained to you how new credit is created. Why are you ignoring reality? Seriously, if you were given 500K, how much new credit would you go and create in the form of borrowing? You may purchase a $3M home for 30 years@4.5%. That’s a lot of credit. You are trying to convince me you would return the 500K gift. and no new credit would result. Really?

              • Guest says:

                Okay. I visited Alt-M, Cato/Selgin.

                Selgin is basically doing a book report of Bernakes book, The Courage To Act. Selgin is using the following quote from the book, as his main inspiration. “We had initially asked to pay interest [in 2006] on reserves for technical reasons. But in 2008, we needed the authority to solve an increasingly serious problem: the risk that our emergency lending, which had the side effect of increasing bank reserves, would lead short-term interest rates to fall below our federal funds target and thereby cause us to lose control of monetary policy. When banks have lots of reserves, they have less need to borrow from each other, which pushes down the interest rate on that borrowing — the federal funds rate.

                Until this point we had been selling Treasury securities we owned to offset the effect of our [emergency] lending on reserves (the process called sterilization). But as our lending increased, that stopgap response would at some point no longer be possible because we would run out of Treasuries to sell. At that point, without legislative action, we would be forced to either limit the size of our interventions…or lose the ability to control the federal funds rate, the main instrument of monetary policy…[By] setting the interest rate we paid on reserves high enough, we could prevent the federal funds rate from falling too low, no matter how much [emergency] lending we did (Courage to Act, pp. 325-6).”

                Selgin then sites another publication as a near identical account from a different source. I strongly suggest you read the second source for a more complete understanding of what these Monetarist are attempting to accomplish and how they describe what is happening.

                I have always said FedR policy is nothing more than dog chasing his tail. After reading this Richmond Fed link, I am more convinced than ever, these fuckers are drunk.

                It will make any sane man dizzy.

                Sterilization? Ben and his minions cant even agree on the definition and what they are trying to accomplish. Further more, they all show a failure to understand how fiat credit is actually created. The banks create loans first, deposits second. I guess a god complex will tend to blind a fellow.

                Read that Richmond publication, not Selgins book report, and get back to me. Tell me what you think with your own discernment.

                Oh and BTW, IOR is just more Friedman central planning. IOR was implemented 2006, prior to any crisis, only to further install the Freidman monetarist dream utopia.

                Sorry for my crass tone, but trying to make sense from nonsense is not my favorite past time.

                Austrians are not Monetarist and no matter how much you post here or at Mises, we will never budge.

                What is Cato? Who the hell knows. Cato the Elder, Cato the Junior, I like these two. Cato.org, not so much.

              • Guest says:

                I am posting a comment from George Selgin he posted under part3 of his 3 part series titled Interest on Reserves PartIII

                George Selgin > JKH • a month ago

                By the way, I think our understandings are converging pretty rapidly here.

                “FWIW, John Allison, my former boss, and someone who knows a bit about banking,has also been very critical of my claims regarding IOR, especially my blaming it for discouraging bank lending (as opposed to merely causing banks to prefer reserves to low-risk securities.)”~George Selgin

                Central planning never ends. IT is a continuous loop of stupidity. Even George is not immune.

              • Guest says:

                I don’t have time to post on this tread anymore. This is how statist usualy win, they wear you down with BS, that you have to go and do real work for otherwise you will be shot/caged for not paying taxes. So you win if only by default. I will however paste the last comment at the bottom of Selgins comment page I referenced above. The comment says everything that needs to be said.

                Milton Churchill • a month ago

                “5. Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.” Karl Marx; Friedrich Engels (2015-12-02). The Communist Manifesto (p. 20). Skyros Publishing. Kindle Edition.

                The goal of the Fed is to make certain that selected privileged groups of people are made wealthy and stay wealthy, beyond anything imagined (in 1848) at the expense of others. The “workers” were, and still are, stooges, tools, whatever you want to call them. Workers, 167 years later, are still fighting it out with barely a penny to their names, while their share of Marxist government debt burdens continue to balloon. And, if that were not enough, their children and the unborn will inherit the only possible position left for them, preordained debt slavery. Bernanke is an idiot, a useful idiot, nothing more or less.

              • Anonymous says:

                Too bad, I finally get it.

                Anti-state vitriol, anti-Fed distrust, anti-Monetarist skepticism – let’s say we all share those sentiments. I am not saying I have the answer, only that I would not grant that all the actors above are 100% incompetent, 100% of the time in setting out to accomplish their explicit goals, no matter how much I might disagree with both the goals and the methods. You seem to take that position, which is fine, but it makes it dialogue difficult.

                Admittedly it has been a brief survey, but I can find no Austrian literature that incorporates Interest on Reserves. That doesn’t mean the theory can’t handle it – I’ve been trying to do just that with my ramblings here, but I recognize you remain unpersuaded. So I agree, let it be.

              • guest says:

                “But the printed money does not flow into the credit market to provide any distorted price signal.”

                The banks / managers don’t spend / invest more based on their perceived increase in savings at the Fed?

              • guest says:

                “I don’t have time to post on this tread anymore. This is how statist usualy win, they wear you down with BS …”

                Another one bites the dust.


                Just kidding. We’ve all been there.


                “(p. 20). … Kindle Edition.”

                Thanks for citing that for us. *Facepalm*

  5. E. Harding says:

    “I am assuming throughout this discussion that the Fed eventually has to let its balance sheet (as a share of GDP if you prefer) go back to pre-crisis levels.”

    -This assumption is probably wrong (I give it 70%). So Bernanke is probably wrong.

    “But it baffles me how many generally free-market economists think the booming stock market of the last few years makes perfect sense.”

    -It does, because of reasonably credible monetary policy.

    • Dan says:

      What do you think the State would have to do to make reasonably credible monetary policy ineffective?

      • E. Harding says:

        ? If it wasn’t reasonably credible it wouldn’t be effective.

        • Dan says:

          I think you misunderstood what I was asking. I was basically asking how big and interventionist can the government get before the Fed’s reasonably credible policies became ineffective at providing the desired result. Or are you saying a socialist economy would work just fine as long as it had reasonably credible monetary policy?

          • E. Harding says:

            Oh, the state could do lots of things to ruin the economy without affecting the stance of monetary policy. Institute a $20 minimum wage, abolish foreign trade, stop paying the interest on the debt, place restrictions on foreign investment, subsidize failing companies, enforce mass unionization, massively expand the welfare state, place confiscatory taxes on capital, enforce income and wealth equality, ban speculation.

            But keeping inflation at 2% or NGDP growth at 5% should never be a problem for the Fed, even in such circumstances.

            The best realistic socialist economy is bound to work worse than the best capitalist one, but both can have optimal monetary policy.

            • Tel says:

              Can you honestly say the Fed has kept monetary policy independent of the state though?

              I mean, yes, Fed independence is an excellent idea in theory… just questioning how often it happens in practice.

  6. Silas Barta says:

    My concern is that, if some economic crisis really is going to happen, then one of these drops will be preceding the “real” “big one”. In that case, the strategy of “just buy on the downs”/”be greedy when others are fearful” will blow up hard.

    Other than parroting hindsight bias and “it’s never failed before!”, I don’t know how to distinguish which world we’re in, of one with guaranteed secular growth vs one where the permabulls will get burned hard in a black swan.

    I also worry about the world in which *everyone* buys into the belief that buy-and-hold a US large-cap index is guaranteed to give long-term strong returns. In that case, the political system will become heavily skewed in favor of anti-market, crony policies that favor those specific companies at the expense of real, sustainable market competition.

    • skylien says:

      Absolutely agree.

    • skylien says:

      It is an art to find out when an unsustainable scheme actually is near its actual unsustainable moment. Especially if many unsustainable schemes are intertwined.

    • Tel says:

      You would have to presume the people stacking gold and silver must also be getting prepared for a “buy into the dip” strategy, they just happen to be waiting around for a larger than usual dip (which requires a longer than usual wait).

  7. Kevin Erdmann says:

    Question: if monetary policy had been too tight, then would markets rise when the Fed provided accommodation, or fall? Would markets rise when a rate hike was implemented or fall?

    • baconbacon says:

      That could go either way.

    • Major.Freedom says:

      Rise or fall temporally, or rise or fall from what it otherwise would have been?

      • Bala says:

        Oh, Major! You and your nasty habit of reminding people that the comparison in economic propositions is with respect to the counterfactual universe…..

        Incidentally, you may find the story of Birbal and the six fools quite useful in this regard, especially the one involving the fool looking for his lost ring in a garden. It’s on this link


        The formatting is awful, but I thought it was a good analogy to the arguments of most Austrian school opponents.

    • Bob Murphy says:

      Erdmann right, that’s what’s so funny about this. When the Fed was getting ready to hike rates in September and the market dropped in August, and I pointed out how I had been warning the market was in a bubble, Scott Sumner accused me of being a permabear the same way Gene did here.

      But when markets fall on monetary tightness, or when markets soar when BOJ announces monetary easing, Sumner says, “See I told you so.”

      So even though both Scott and I predict that the Fed tightening will lead to stock fall and recession, if that happens it only proves that he was right. I was just lucky because of the Efficient Markets Hypothesis.

      (BTW I’m not accusing Scott of inconsistency. I could write a 1,000 word essay explaining his worldview and why the above pops out of it. I’m just saying, it’s kind of frustrating when he points to stock moves as further evidence of how right he is, but when I’m warning the market is in a bubble, it drops violently, and then I say, “It has farther to fall people, watch out,” that I’m an idiot because the market needs to fall further to prove I’m right.)

      • DMS says:

        Is it also possible that you are both incredibly bright, earnest and intellectually honest people that each has no clue what the asset markets are likely to do?

        • E. Harding says:

          At least Sumner admits it.

  8. khodge says:

    At what point do Austrians get to post normative blogs? It seems that the arguments are quite compelling that the Fed has put itself in an untenable position but is it reasonable for the Fed to just stop its open market operations? Are you a Permabear because there is no way to implement a change or are you a Permabear because you know the Fed is not going to try?

    • E. Harding says:

      To strengthen prospects for economic growth, the Fed needs to firmly expand its OMOs until the inflation rate is above 2%.

    • Guest says:

      From all these post, yours is best. You ask the correct question. However I would like to put your question in a larger context. Fiat banking is a confidence game. This is why nobody can agree what a particular Fed action will do. This is why the same Fed action will do 1 thing 1 time and something else the next time. Regarding money sloshing around or never making it in, etc., mot any of you, I mean nobody on earth cane tell me what would have happened absent said Fed action. Some say ” Look, the money only expanded this much” so no inflation etc., fed money never left their desk even though they offered it. You have no idea what would have happened absent. For example banks may have stopped making any loans, period and maybe even called in a few, causing MASSIVE contraction. Sorry my answer does nothing for those that claim to understand fiat economics and attempt to make a living guessing. Fiat is a confidence game. I can say 1 thing, QE most certainly propped this confidence for just a little longer, so to say it never entered is patently false. QE cleaned the books, giving banks some more leeway. The numbers may appear to be the same, but QE swapped bad books for clean books. Confidence. Just look at yourself. If you were paying a large loan payment for a capital good that had been lost in a tornado versus a large loan payment for a working asset, your forward thinking and action will be totally different yet your books appear identical. Confidence.

  9. Innocent says:

    Okay, I am not an expert… and based on the comments of experts I would venture to say they are not experts either lol. But all kidding aside Dr. Murphy you are not a perma-bear as that would mean you do not think the market will ever go up. What you are is an Austrian, That manes you recognize that market cycles EXIST and that you are the voice saying to people, “Just don’t think that there will not be another down turn.”

    Now I would suggest that the reason Austrians sound a little like ‘downers’ is the same reason an architect might be a bit of a downer when a group of contractors develop property on beachfront that is eroding into the ocean. He sees the structural inconsistencies and says that by building how they are building and where they are building EVENTUALLY the building will be swallowed by the sea.

    Since we are playing with a ‘stacked deck’ and currency is nothing more than an ‘illusion’ I would suggest that we are in a great deal of trouble.

    If the Federal Reserve wanted to create a STABLE monetary policy they could do so fairly easily. Simply create a consistent supply of currency per individual. If the population is 300 Million and the average income is 50,000 per household and there are 115 Million households your equation for monetary stability becomes pretty simple at that point. Then you really do have market forces working on money rather than policy forces.

    I can hear Krugman yelling in my ear right now ‘Liquidity trap’ – But the issue with a liquidity trap only exists if you do not allow for DEFLATION. Also we bundle money to have ‘LARGER’ values now – paying someone a thousand dollars a week was unheard of 100 years ago. Now if you do you are making the median income. Well make it so that you create SMALLER certificates that people can use and allow the damnable deflation to exist.

    Stop rigging the game so that only one group of people can win it. As for myself I am a buy on the decline sort of buyer and keep hoping for a larger devastation to the markets. I still do not think we will enter into recession for another 4 months to 2 years and 4 months ( some time in this are a is the highest likelihood ) But it may take longer than that.

    Also when you see a drug addict using drugs it is not hard to see where the outcome will eventually go. Right now the market, and to be honest the world, are addicted to a fiscal policy that seems to say that there are no repercussions. This is of course silly as to there ALWAYS being consequence ( good or bad ) to choices made. Sometimes it can take 100 years for decisions to come to full ‘consequence’ sometimes it is immediate. The choice for easy money is going to have a consequence eventually. It is when, not if.

    • Guest says:

      “If the Federal Reserve wanted to create a STABLE monetary policy they could do so fairly easily. Simply create a consistent supply of currency per individual. If the population is 300 Million and the average income is 50,000 per household and there are 115 Million households your equation for monetary stability becomes pretty simple at that point. Then you really do have market forces working on money rather than policy forces.”


      • Innocent says:


        You keep the money supply constant on a per capita basis.

        • Tel says:


          monetary growth ~= population growth.

          The implication being that people are both the producers and consumers of real wealth and money is an accounting token to represent that.

          However, if you want the Fed to support this concept, you are going to have to get rid of their “dual mandate” and then get rid of their 2% inflation target. After that you have another problem… suppose government wants to borrow while the interest rates on bonds are rather too high. They might look for ways to be “accommodated”. Difficult for the Fed Chair to say no, all things considered.

        • Arius says:

          How about this, you bring gold to the Treasury, the stamp it, give it back to you.

          • Guest says:

            This was the original Constitution. You bring gold to the treasury, they mint it, give it back to you, you now have standardized money. They may charge a small fee however do not confuse this with taxation. Taxation would only be the portion of your gold, they can get from you later via representative government. There is no exchange rate nor government contrived limits. The limit to this money supply would be how much gold you bring to the treasury. The only government spending would be the portion they taxed you via representative republic. No public debt. The value of this gold was not because government set an exchange rate, spent it or taxed it or debited into existence. The value was spontaneous.
            MMT people and Keynesian people are weird. Fiat is the devil. Government tokens are silly. Stimulus is garbage. Monopoly interest is serfdom. Debt credit money Slavers must die.

  10. Guest says:

    Does paying interest on reserves prevent banks from lending?

    This claim, made even by some good economists, is puzzling. Before December, the Fed paid banks one-quarter of one percent on their reserves. If the Fed had not paid interest, the return to reserves would have been zero. Accordingly, the only potential loans that would have been affected by the Fed’s payment of interest are those with risk-adjusted short-term returns between precisely zero and one-quarter percent—surely a tiny fraction of the total. In fact, over the last four years bank lending has increased at about a 5 percent annual pace (including around a 7 percent annual rate the past two years), with only residential mortgage lending lagging in the aftermath of the housing bust.~ Ben Bernanke February 2016

    I may just be a country Bumpkin but this appears to be an entirely new claim that what Ben wrote in his book regarding sterilization.

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