To start provocatively, if your original chart of monetary base vs. stock prices was instead Al Gore’s long-term CO2 vs. temperature chart, would you draw the same causal conclusion? I’m not attacking you, nor even saying you’re wrong, only it is not as obvious as your verbiage indicates.
I say this as a big fan, and Austrian proponent, but I think you are too dismissive of MMT, and ABCT is too vague on interest rate distortions. Specifically, help me understand where I might be wrong in these assumptions:
1) Does ABCT allow for Fed actions to differentially impact the yield curve? That is, suppose the distortions to the credit market are not uniform, and that perhaps QE has flattened the yield curve (specifically the IOR part of QE). I am not nearly as well-versed as you, but I would think this would be an integral part of ABCT, i.e. just as economic activity can’t be lumped into aggregate K and L, the credit markets are not an aggregate i (for interest rate). Though I don’t here it discussed much.
2) Is it possible that the Fed, which is following some New Keynesian DSGE model, believes itself to be performing well, in that unemployment is at target and inflation (and inflation expectations) are subdued? So every time it meets it basically plans more of the same?
3) Is it possible that investors attempt to forecast likely Fed actions in the future, and worry about the Fed reversing policies, which might raise rates generally, specifically longer-term rates? And wouldn’t that expectation depress stock prices, that is a forecast in rising discount rates over time would cause asset prices to clear at a lower level than with a reduced discount rate forecast? And as time progresses and the probability of that reversal occurring passes (or is postponed), wouldn’t stock prices (asset prices generally) steadily rise along (with a steady decline in forecasted discount rates)?
4) While the Fed almost certainly has distorted long-term rates (by being a large buyer of long-term bonds), could it be that the IOR policy in fact has propped up short-term rates above a natural, market-clearing level? In other words, per #1 above, is it possible that Fed actions (specifically QE with IOR) have pushed down but also flattened the yield curve?
5) If short-term rates are actually above a natural, market-clearing rate (perhaps a negative one), aren’t the MMT folks (Sumner, Beckworth, Rowe, etc.) correct? Aren’t we in fact experiencing tight money, notwithstanding “low” or “lowered” long-term interest rates?
6) Doesn’t 1 through 5 above represent some reconciliation of ABCT and MMT, and with the empirical data as we have them? That is, the distortion of the credit markets has all sorts of unforeseen consequences in the real economy (malinvestment – ABCT), and the economy is sluggish owing to tight money (MMT) and owing to distorted credit conditions (ABCT, if accounting for yield-curve flattening, not the strict Hayekian Triangle analysis), and inflation is unseen owing to lack of excess money (IOR causing those monies to remain parked), while asset prices are rising as discount rate estimates decline (standard financial theory) and as inflation expectations remain low (above)?
7) Related to your Beckworth back-and-forth, the market wasn’t “continuously expecting easier policy as 2008 passed.” The market was expecting increasingly less tight policy, but still a relative tightening. Here too I think the MMT proponents are correct, at least in this analysis.
I am deeply sympathetic with the Austrian position that promotes solutions involving less Fed interference in the first place, but that doesn’t mean the MMT crowd is wrong in its analysis, though you may debate their normative prescriptions.
DMS thanks for the feedback, I can’t answer much right now unfortunately. But just to clarify: Are you saying MMT = Market Monetarists or do you mean MMT = Modern Monetary Theory?
Thanks for paying attention, and sorry, I was trying to line up the nomenclature without typing it out, so ABCT corresponds to Austrian Business Cycle Theory and MMT is Market Monetarist Theory. I had completely forgotten that Modern Monetary Theory has that acronym.
To start provocatively, if your original chart of monetary base vs. stock prices was instead Al Gore’s long-term CO2 vs. temperature chart, would you draw the same causal conclusion?
Heh it’s funny you say that, in my written piece for Mises.org (which might not be on their website for a month or so) I used this exact analogy. And then I followed up with “We’re not just looking at mere correlations, we have theory to guide us…”
Yes, and not to nitpick because it is a small point, but also at the core of my argument – Gore et al certainly have a theory as well.
My point is that there is a boatload of intervening factors that can push the observations in indeterminate directions relative to the theory, and while I almost uniformly support the Austrian viewpoint (because at its essence it grants this very point!), I don’t believe it is dispositive, and that the analysis of the Market Monetarists is as equally supportable by these particular data (generally, not particularly the stock chart).
If short-term rates are actually above a natural, market-clearing rate (perhaps a negative one), aren’t the MMT folks (Sumner, Beckworth, Rowe, etc.) correct? Aren’t we in fact experiencing tight money, notwithstanding “low” or “lowered” long-term interest rates?
I understand that a central authority might attempt to impose negative rates, especially if they can also maintain a “War on Cash” to force people into electronic accounts.
However, a natural negative rate? What is that?!?
Suppose we had no central bank, no banking at all, people just use a medium of exchange like silver coins… go and describe this “natural” negative rate. How does it work?
Cash, whether it is pieces of fiat paper, or blocks of precious metal, is not costless to hold. The former is flammable, the latter is bulky and costly to store and transport, and both are susceptible to theft. Therefore one could easily imagine paying a third-party, non-state entity to store one’s cash balances, i.e. negative natural interest rates developing in a purely market economy. That was not my central point, but that is your answer.
Sure, there’s storage and security costs, provided by the lowest bidder. That’s related to the physical cost of building a safe or whatever… and it’s just like any technology it gets cheaper as people refine ways to do it.
So storage costs might be a very small negative interest rate on a physical asset, but you described “a natural, market-clearing level”.
Yes storage costs are natural, but they are small and unrelated to any money market clearing that I can think of. Also, storage costs are completely outside the scope of what a central bank can set. The cost of a safe is what it is depending on production, and I guess presuming there’s a competitive market in security (maybe the central bank is going to take over the security industry now, that might be interesting).
Cash balances, whether in fiat scraps of paper, or in blocks of precious metal, are not costless to hold. The former is flammable, while the latter is bulky and difficult to store and transport. Both are susceptible to theft. One could easily decide rationally, and in an optimizing fashion, to pay a third-party, non-government market participant to hold and guarantee one’s cash balances. Hence negative interest rates would obtain naturally in a market environment. That’s not really the point of the post, but there’s your answer.
But you just described a pure storage facility versus a banking system. Even in a 100% reserve environment, bank would still lend and then offer some interest .
So no, there is never ever an honest negative interest rate.
BTW, the cost of storing gold is minuscule. Whether it be 1 ounce hidden in your floor or 200 tonne in a vault. The taxpayer offsets most of the cost related to force, so in an alter world, yes, armed guards would cost a lot but that depends on the makeup of the larger populace. If they are NAP self governing God fearing folk, I doubt any guards would be need. A lock would suffice because we all know, locks only keep honest men honest. On the other hand if the large populace is all part of the free shit army(FSA), there may not be enough guards in the world to effectively store gold.
The interest rate for any asset, including a pile of cash or gold, is the opportunity cost of holding that asset. It is the price I must receive in order to induce me to part with it, foregoing current holding for future holding. The source of that opportunity cost is irrelevant – whether the counter-party is lending it out, making products, managing a hedge fund, or providing a service, e.g. storage and protection. In the former cases opportunity costs are presumably positive (I would not part with it unless compensated), and in the latter case they are negative, i.e. the price that clears the market is one in which I pay the counter-party.
Of course, this is very uncommon economy-wide, but that is different from impossible or unimaginable. In your FSA apocalyptic example, the opportunity cost would clearly be negative, and large too. So interest rates could in fact be negative economy-wide.
The interest rate for any asset, including a pile of cash or gold, is the opportunity cost of holding that asset.
Storage and protection are not opportunity costs, they are real costs… you actually have to pay the guard.
If the guy down the road is offering to pay you 5% interest, but you decline the offer, then that would be an opportunity cost (i.e. the action you did not take).
what deos it mean to have a negative natural interest rate?
The other answers you got treat interest rate as just the returns you get from cash. No mention of the capital structure and the stages of production.
What does it really mean to have a negative natural interest rate? It means that if you give up consumption today and you invest that money instead, to build capital, then, when you have finished, that capital gives you back *less* money than you invested. i.e. if you give up consumption today, you consume *less* tomorrow, not more. This is puzzling. How can it be possible that by giving up something today you do *not* get more tomorrow? This means in other words that capital is improductive. We have built so much useless capital, that building more is a bad idea.
I asked to Sumner how it was possible, and he said: “we are talking about the *risk-free* interest rate. There is nothing strange with the risk-free interest rate being negative.”
To me this answer does not make sense. I want to know how the economy structure got so messed up that capital is totally improductive.
And the answer can only be, IMHO, that something yesterday caused the wrong capital to be built. Something fooled entrepreneurs into building capital that is actually improductive. And what can it be?
We can look at Austrian theory for the answer: it could be that too low interest rates yesterday caused so much useless capital to be built. Capital that today we realize has negative returns.
If we summarize the above, we get that too low interest rates yesterday produced negative natural interest rates today.
But if today natural rates are negative, and the fed rates are not negative, this means that today interest rates are too high.
So we can conclude that too low interest rates yesterday caused too high interest rates today.
There is such thing as a negative interest rate. Ever. Never ever.
What we are talking about is a simple action by central banks that is used to encourage banks to never store any reserves. Motivation to lend. Motivation to pass this storage penalty to the simple saver. In effect, encouraging you and me to spend/consume or gamble at wstreet. You can call it a negative rate but really it is a little carrot or whip, that is hoping to increase velocity.
There are many examples of capital projects that have made a loss.
When Sumner says “risk free” the implication of that is the investor immediately can see the future, and knows exactly what profit or loss all potential projects will make. If the investor is thinking about investing, and hypothetically can see the future outcome of all possible investment, clearly she will take the investment with the highest return (anyone would right?).
But what if all possible investments make a loss? Would our hypothetical investor still pick the best of a bad bunch? Probably not, better to just not invest at all… all your potential projects are junk, don’t do them, doing nothing is better.
Something fooled entrepreneurs into building capital that is actually improductive. And what can it be?
Right, so the “risk free” example presuming investors can see the future is not plausible in the real world. The answer to Sumner is that investors *MUST* take a risk. There is no such thing as risk free returns. Government bonds are certainly not risk free — just look at Greece where they outright defaulted on the bondholders (while pretending in the news that there was no default) or consider the USA back in the 70’s where inflation and money printing was used to nominally pay those bonds but really that’s just another type of default.
So if you really, really want risk free interest rates for a pile of silver coins, then you cannot lend it out to anyone and you just have a small negative return which is paying for security and storage cost (even that is not entirely risk free).
But that has nothing to do with the money market rate where people wanting to save meet up with people wanting to invest and they undertake an exchange. In that kind of market you always have risk, but the savers will expect positive returns, and if the investment turns out to be a failure then we do the accounting, calculate the loss, wind up the business and the savers understand that they made a poor choice.
“The answer to Sumner is that investors *MUST* take a risk.”
Right, because the profitability of investments rely on future consumer demand, which is technically always unknowable (good educated guesses are still guesses).
I think Bob gets a pass on this because when he introduces the correlation he does so in a way that does not demand that you accept the causality. Given the limited time (check the watch), he is offering a theory that supports causation.
My post is not intended as any kind of gotcha, but rather I think this is a deeply substantive point that Bob doesn’t quite grasp (or admittedly, that I don’t quite grasp Bob’s perspective).
To say that the market has risen directly as a response to QE is to beg the question of how. I posted this elsewhere, but an argument that excess money balances are flowing into assets is very naive, and manifestly false. Virtually every dollar of “printed” money by the Fed still resides at the Fed (in Excess Reserves, earning interest). It is not clear if Bob is really subscribing to this sloshing cash model or not. If the argument is that the “loanable funds rate” has been distorted by QE, then I quite agree, but it also begs the question of in what fashion and to what end? I believe there are highly plausible mechanisms (per my original post) that are consistent with both ABCT and MM Theory, and that the economy might rebalance from these distortions in a variety of ways that are essentially indeterminate. I would argue that it is a coin-toss as to whether that rebalancing involves a decline in stock prices or not. Arguing strictly against the MM folks seems to me somewhat tangential to a very important question.
“Virtually every dollar of “printed” money by the Fed still resides at the Fed (in Excess Reserves, earning interest)”
That can’t be true because NGDP has increased every year since 2010.
There really is more and more money “sloshing around” the economic system due to inflation of the money supply.
It is not true that “virtually all” the money created since 2010 has been parked with the Fed.
And as we know, inflation of the money supply does not affect all prices equally. It can very well affect the prices of stocks more than say the prices of salt or rice.
That’s just not right. Saying it can’t be true when the math tautology says it’s true is not helpful.
Increases in assets on the Fed’s balance sheet (Treasuries and MBS) match nearly dollar-for-dollar liabilities in the form of deposits from banks, i.e. Excess Reserves. What, therefore, could the source of any “cash sloshing” be that could theoretically drive up asset prices?
Stock prices may be affected by the Fed’s actions, but not by an introduction of excess money, as there has not been any such introduction.
“That’s just not right. Saying it can’t be true when the math tautology says it’s true is not helpful.”
But it isn’t a mathematical tautology.
“Increases in assets on the Fed’s balance sheet (Treasuries and MBS) match nearly dollar-for-dollar liabilities in the form of deposits from banks, i.e. Excess Reserves.”
The Fed’s assets include Treasuries which when paid, are mostly remitted back to the Treasury.
It is not the case that the increase in the Fed’s balance sheet has not been accompanied by any money outflows.
You are conflating the increase in assets as a one way street.
“What, therefore, could the source of any “cash sloshing” be that could theoretically drive up asset prices?”
Obviously the increase in the supply of money, the same cause for why NGDP has been increasing.
“Stock prices may be affected by the Fed’s actions, but not by an introduction of excess money, as there has not been any such introduction.”
But there has.
The Fed only “affects” things by way of inflation.
The “supply of money” needs to be defined. The Fed swaps short term bonds (the interest-paying reserves) for long-term bonds. The effect on money flows in the economy is entirely neutral. This may be a bad thing on many fronts, but either:
1. The swap is one for one and literally no new money enters the economy, or
2. The swap is not one for one, and the discrepancy is measurable and significant.
The math is close to number one and no where near number 2. I just don’t see where the money creation is.
The Fed can affect the economy in lots of ways, inflation, inflation expectations, interest rates, interest rate expectations, structure of the yield cure, expectations of the structure of the yield curve, etc.
My own understanding, though not as deeply rooted as Bob’s, is that the FOMC is buying securities:
– the cash goes to the sellers (let’s say banks)
– banks now hold cash (on their balance sheet)
– which is now available for lending
OR
– which can be kept – interest earning – at the Fed
– the money is not being productive (mal-invested)
– businesses cannot grow (banks hold cash)
– business profits go to stocks (eg buybacks)
SO
Bob’s CPI bet fails because stock prices are rising because business growth is hamstrung by “greedy” banks who make money by doing nothing with their cash rather than pushing out medium risk loans.
“– the money is not being productive (mal-invested)
“– businesses cannot grow (banks hold cash)”
Regarding saved money, the productivity which you’re seeking has already happened in the past. The reward for that productivity is the ability to consume (or invest) in the future.
Alternatively, the productivity of the saved money, itself, is to secure the individual saver’s ability to consume/invest in the future, so it’s being plenty productive just sitting there.
The real problem is that the “interest” being earned at the Fed is printed money.
Regarding businesses not growing, businesses are not supposed to grow unless there will be sufficient consumer demand to justify it.
So, as long as consumer demand is satisfied, businesses don’t have to grow, and should not.
A healthy economy does not grow businesses, per se, but rather satisfies consumer preferences.
To say otherwise is to say that consumers have a duty to buy the “right” things such that businesses can continue to grow.
But consumers’ scarce resources belong to them alone, and so have no obligation to spend it at any particular business.
Consumers and producers aren’t classes in competition – production is *for* consumption. One must produce in order to continue consuming, and that’s the only reason to produce.
So it’s producers who must produce the right things if they want what consumers are willing to pay.
No, Bob’s CPI bet fails because there is no change in the money supply, correctly considered. Your stepwise consideration skipped the original condition, which is banks holding long-term bonds. When they receive cash for those assets, and then effectively immediately “re-invest” that cash back at the Fed in Reserves bearing interest, they have essentially just made an asset swap, exchanging fixed-rate, long-duration bonds (Treasuries and MBS) for floating-rate, immediately redeemable notes (the Reserves with IOR).
There has been NO money creation, hence no inflation. The CPI bet doesn’t work, and similarly neither does any money-creation explanation of stock and asset prices.
Virtually every dollar of “printed” money by the Fed still resides at the Fed (in Excess Reserves, earning interest).
Really? The Fed owns $2.4 trillion worth of U.S. Treasury securities. You saying the U.S. Treasury carefully put that cash back into reserve accounts, rather than spending it? I doubt that.
The Fed also owns $1.7 trillion in Mortgage Backed Securities… well I suggest that might have had an effect on the market price of MBS. Thus, also effecting the balance sheets of other MBS holders.
He does not understand what reserve are although Major Freedom already explained it to him. I know this guy and I can tell you right now, he will never ever admit The FedR increased money supply. Ignoring the 4.5T assets the FedR held at the peak of QE. Ignoring the FOMC suppressing interest rates. Ignoring the interest being paid to banks for their reserves, etc. Despite all the FRED graphs that show credit has increased. He will probably then say M0 is the same 1.39T is has always been, never fully understand M0 is merely the portion of credit that has been converted to physical.
I submit that the statists have the burden of proof to show that market fails and that violent intervention of both the Keynesian and monetarist variety is necessary. They cannot and will not do that. It is a mistake to let them off the hook regarding that proof.
Back in 2009, Tom Woods gave a talk on the 1920 depression. During that talk, Tom mentioned that at the end of Wilson’s term, spending was slashed due to Wilson being incapacitated by a stroke. He jokingly called it “the stroke of luck”:
Around the same time, Tom wrote a short piece about the 1920 depression that failed to mention Wilson at all. Daniel Kuehn jumped on that latter omission and wrote a paper (that costs $29) claiming to have refuted the Austrian analysis of 1920 due to the failure of Tom Woods to mention that most of the postwar spending cuts occurred under Wilson . Krugman cited Kuehn’s paper on his blog in January 2012:
Yesterday I mentioned that they’re still flogging the old line that Warren Harding proved that austerity works. I linked to my old demonstration that the 1921 economy was nowhere near the liquidity trap, and that there was substantial monetary easing, making comparisons to the current situation nonsense.
Daniel Kuehn has more. it turns out that the Austrians/Austerians have their timing all wrong:
Austerity proponents depend on the argument that substantial cuts to federal spending moved the economy to a recovery in 1921, but this understanding fails on multiple counts. The bulk of both fiscal and monetary austerity occurred immediately prior to the onset of the depression. Any austerity in policy decisions by the Wilson administration, the Harding administration or the Federal Reserve Board after the depression began were moderate compared with the considerable austerity measures taken by the Wilson administration and the Federal Reserve before the downturn. The evidence seems to suggest, even more clearly than in the case of the Great Depression, that postwar austerity may have even helped cause the 1920–21 depression. Subsequent monetary easing by the Federal Reserve occurred concurrently with the economic recovery, which itself was underway by the time Warren Harding took the oath of office.
Since we are forever being told by the statists that our AnCap “utopia” has never existed, I am always anxious for the statists to show with evidence when, where and how it failed (especially since it never existed). They never even try. Why do we need violent intervention in the market, including funny money, central banks and spending sprees if the market does not fail? How can what Kuehn has described as leading up to and causing the 1920 depression be deemed a failure of the market? We are talking about the slashing of wartime spending and inflation. He refers to it as “The austerity depression of 1920-21”:
2. The austerity depression of 1920–21 – During WorldWar I federal expenditures ballooned and although the new income tax was able to partially finance the war effort, most of the financing was done through federal borrowing and by the highly accommodating monetary policy of the Federal Reserve. The role of the Federal Reserve at this time was expressed unambiguously by the New York Federal Reserve Bank Governor Benjamin Strong, who told a Congressional committee in 1921 that ‘I feel that I, or the bank at least, was their [the Treasury’s] agent and servant in those matters’ and further added that the wartime inflation caused by the low interest rates maintained by the bank were ‘inevitable, unescapable, and necessary’ for prosecuting the war (Strong, 1930).
Three years ago, Daniel Kuehn conceded to me in comments to his blog that his “paper is consistent with the Rothbardian narrative”. I then asked him to prove that the market fails. I’ve never heard back.
The same problem appears in statist analysis of the 1929 depression because, to a certain extent, it was also the result of central bank monetary shenanigans leftover from WWI and not a failure of the market. The statists do not want to mention this.
I think it is a mistake to ever fail to challenge the statists and make them prove that there is a market failure that requires their prescription of violent government interference to cure the problem that does not exist.
Everyone already lives their daily lives in the USA with a small version of AnCap and the NAP, including the “progressives” monetarists and Neocons. We do not attack our neighbors or their property. These debates should be like legal cases where it is explicitly stated which party has the burden of proof. Since the NAP is the default position of our daily lives, insist that the statists have the burden of proof to show that the market fails or that it failed, especially since they already live pretty much according to AnCap rules. Demand that they justify the necessity of the initiation of violence. They must show that there is a problem AND that their violence will solve it. Further, they really do not want to think too much about the fact that they are proposing violence as a solution. Rub their nose in it.
For example, we grant too much credence to Krugman and/or Sumner by debating them in the middle of the story as opposed to demanding (every time) that they first prove the market fails in order to justify an alleged cure for a problem that does not even exist. Keynesians and monetarists simply will not do this. They will either act up or ignore you.
I really never knew anything about the 1920 depression until April 2009. I was driving back to Michigan from Texas. I saw the Tom Woods Youtube on my laptop at a Louisiana motel and listened to the audio in my car. The point I remembered most was the mention of Wilson’s “stroke of luck” which allowed for the slashing of war spending without his pesky interference.
Years later, Daniel Kuehn wrote his paper (which gets published, costs $29 and is lauded by Krugman) claiming the Austrians have ignored Wilson’s spending cuts. The paper also quotes Benjamin Strong stating to Congress that the Fed funded the war with funny money. Ending that spending and funny money inflation is clearly going to cause hard times, but it has nothing to do with the market failing. So not only does Kuehn get the part about us ignoring Wilson wrong, he demonstrates with the Strong quote that the Fed caused the inflation which eventually ended badly (as we would predict). So how is this a market failure (again)?
In a further analogy to court cases, we are never going to get our opponents to admit they are wrong. The point of litigation is to get a third party (judge or jury) to see that your opponent is full of prunes (as my grandma used to say). Calmly demanding that your statist opponent demonstrate when the market failed and then watching him pitch a fit or ignore you helps in that regard. They will be simultaneously claiming that AnCap never existed in history [unicorns!!!] AND then claim they have proved it failed using historical examples from periods rife with artificial credit expansion. Really.
When I argue online, mostly I am thinking about what others see, not making the opponent submit. Sometime I do take it to serious but not often. I normally try to keep my cool and mainly teach the curious onlookers knowing the commie I am arguing with, will go to his grave believing his own lies.
To start provocatively, if your original chart of monetary base vs. stock prices was instead Al Gore’s long-term CO2 vs. temperature chart, would you draw the same causal conclusion? I’m not attacking you, nor even saying you’re wrong, only it is not as obvious as your verbiage indicates.
I say this as a big fan, and Austrian proponent, but I think you are too dismissive of MMT, and ABCT is too vague on interest rate distortions. Specifically, help me understand where I might be wrong in these assumptions:
1) Does ABCT allow for Fed actions to differentially impact the yield curve? That is, suppose the distortions to the credit market are not uniform, and that perhaps QE has flattened the yield curve (specifically the IOR part of QE). I am not nearly as well-versed as you, but I would think this would be an integral part of ABCT, i.e. just as economic activity can’t be lumped into aggregate K and L, the credit markets are not an aggregate i (for interest rate). Though I don’t here it discussed much.
2) Is it possible that the Fed, which is following some New Keynesian DSGE model, believes itself to be performing well, in that unemployment is at target and inflation (and inflation expectations) are subdued? So every time it meets it basically plans more of the same?
3) Is it possible that investors attempt to forecast likely Fed actions in the future, and worry about the Fed reversing policies, which might raise rates generally, specifically longer-term rates? And wouldn’t that expectation depress stock prices, that is a forecast in rising discount rates over time would cause asset prices to clear at a lower level than with a reduced discount rate forecast? And as time progresses and the probability of that reversal occurring passes (or is postponed), wouldn’t stock prices (asset prices generally) steadily rise along (with a steady decline in forecasted discount rates)?
4) While the Fed almost certainly has distorted long-term rates (by being a large buyer of long-term bonds), could it be that the IOR policy in fact has propped up short-term rates above a natural, market-clearing level? In other words, per #1 above, is it possible that Fed actions (specifically QE with IOR) have pushed down but also flattened the yield curve?
5) If short-term rates are actually above a natural, market-clearing rate (perhaps a negative one), aren’t the MMT folks (Sumner, Beckworth, Rowe, etc.) correct? Aren’t we in fact experiencing tight money, notwithstanding “low” or “lowered” long-term interest rates?
6) Doesn’t 1 through 5 above represent some reconciliation of ABCT and MMT, and with the empirical data as we have them? That is, the distortion of the credit markets has all sorts of unforeseen consequences in the real economy (malinvestment – ABCT), and the economy is sluggish owing to tight money (MMT) and owing to distorted credit conditions (ABCT, if accounting for yield-curve flattening, not the strict Hayekian Triangle analysis), and inflation is unseen owing to lack of excess money (IOR causing those monies to remain parked), while asset prices are rising as discount rate estimates decline (standard financial theory) and as inflation expectations remain low (above)?
7) Related to your Beckworth back-and-forth, the market wasn’t “continuously expecting easier policy as 2008 passed.” The market was expecting increasingly less tight policy, but still a relative tightening. Here too I think the MMT proponents are correct, at least in this analysis.
I am deeply sympathetic with the Austrian position that promotes solutions involving less Fed interference in the first place, but that doesn’t mean the MMT crowd is wrong in its analysis, though you may debate their normative prescriptions.
DMS thanks for the feedback, I can’t answer much right now unfortunately. But just to clarify: Are you saying MMT = Market Monetarists or do you mean MMT = Modern Monetary Theory?
Thanks for paying attention, and sorry, I was trying to line up the nomenclature without typing it out, so ABCT corresponds to Austrian Business Cycle Theory and MMT is Market Monetarist Theory. I had completely forgotten that Modern Monetary Theory has that acronym.
To start provocatively, if your original chart of monetary base vs. stock prices was instead Al Gore’s long-term CO2 vs. temperature chart, would you draw the same causal conclusion?
Heh it’s funny you say that, in my written piece for Mises.org (which might not be on their website for a month or so) I used this exact analogy. And then I followed up with “We’re not just looking at mere correlations, we have theory to guide us…”
Yes, and not to nitpick because it is a small point, but also at the core of my argument – Gore et al certainly have a theory as well.
My point is that there is a boatload of intervening factors that can push the observations in indeterminate directions relative to the theory, and while I almost uniformly support the Austrian viewpoint (because at its essence it grants this very point!), I don’t believe it is dispositive, and that the analysis of the Market Monetarists is as equally supportable by these particular data (generally, not particularly the stock chart).
I understand that a central authority might attempt to impose negative rates, especially if they can also maintain a “War on Cash” to force people into electronic accounts.
However, a natural negative rate? What is that?!?
Suppose we had no central bank, no banking at all, people just use a medium of exchange like silver coins… go and describe this “natural” negative rate. How does it work?
Cash, whether it is pieces of fiat paper, or blocks of precious metal, is not costless to hold. The former is flammable, the latter is bulky and costly to store and transport, and both are susceptible to theft. Therefore one could easily imagine paying a third-party, non-state entity to store one’s cash balances, i.e. negative natural interest rates developing in a purely market economy. That was not my central point, but that is your answer.
Sure, there’s storage and security costs, provided by the lowest bidder. That’s related to the physical cost of building a safe or whatever… and it’s just like any technology it gets cheaper as people refine ways to do it.
So storage costs might be a very small negative interest rate on a physical asset, but you described “a natural, market-clearing level”.
Yes storage costs are natural, but they are small and unrelated to any money market clearing that I can think of. Also, storage costs are completely outside the scope of what a central bank can set. The cost of a safe is what it is depending on production, and I guess presuming there’s a competitive market in security (maybe the central bank is going to take over the security industry now, that might be interesting).
Cash balances, whether in fiat scraps of paper, or in blocks of precious metal, are not costless to hold. The former is flammable, while the latter is bulky and difficult to store and transport. Both are susceptible to theft. One could easily decide rationally, and in an optimizing fashion, to pay a third-party, non-government market participant to hold and guarantee one’s cash balances. Hence negative interest rates would obtain naturally in a market environment. That’s not really the point of the post, but there’s your answer.
But you just described a pure storage facility versus a banking system. Even in a 100% reserve environment, bank would still lend and then offer some interest .
So no, there is never ever an honest negative interest rate.
BTW, the cost of storing gold is minuscule. Whether it be 1 ounce hidden in your floor or 200 tonne in a vault. The taxpayer offsets most of the cost related to force, so in an alter world, yes, armed guards would cost a lot but that depends on the makeup of the larger populace. If they are NAP self governing God fearing folk, I doubt any guards would be need. A lock would suffice because we all know, locks only keep honest men honest. On the other hand if the large populace is all part of the free shit army(FSA), there may not be enough guards in the world to effectively store gold.
The interest rate for any asset, including a pile of cash or gold, is the opportunity cost of holding that asset. It is the price I must receive in order to induce me to part with it, foregoing current holding for future holding. The source of that opportunity cost is irrelevant – whether the counter-party is lending it out, making products, managing a hedge fund, or providing a service, e.g. storage and protection. In the former cases opportunity costs are presumably positive (I would not part with it unless compensated), and in the latter case they are negative, i.e. the price that clears the market is one in which I pay the counter-party.
Of course, this is very uncommon economy-wide, but that is different from impossible or unimaginable. In your FSA apocalyptic example, the opportunity cost would clearly be negative, and large too. So interest rates could in fact be negative economy-wide.
It wouldn’t be negative relative to what you would otherwise be able to get.
If you don’t pay for security, you believe you will lose more.
That’s a positive interest rate.
Storage and protection are not opportunity costs, they are real costs… you actually have to pay the guard.
If the guy down the road is offering to pay you 5% interest, but you decline the offer, then that would be an opportunity cost (i.e. the action you did not take).
There is no such thing as negative interest rate. Never ever. There are taxes, fees, penalties, guard cost, etc.
There are also gifts, I suppose you may be talking about giving.
.
what deos it mean to have a negative natural interest rate?
The other answers you got treat interest rate as just the returns you get from cash. No mention of the capital structure and the stages of production.
What does it really mean to have a negative natural interest rate? It means that if you give up consumption today and you invest that money instead, to build capital, then, when you have finished, that capital gives you back *less* money than you invested. i.e. if you give up consumption today, you consume *less* tomorrow, not more. This is puzzling. How can it be possible that by giving up something today you do *not* get more tomorrow? This means in other words that capital is improductive. We have built so much useless capital, that building more is a bad idea.
I asked to Sumner how it was possible, and he said: “we are talking about the *risk-free* interest rate. There is nothing strange with the risk-free interest rate being negative.”
To me this answer does not make sense. I want to know how the economy structure got so messed up that capital is totally improductive.
And the answer can only be, IMHO, that something yesterday caused the wrong capital to be built. Something fooled entrepreneurs into building capital that is actually improductive. And what can it be?
We can look at Austrian theory for the answer: it could be that too low interest rates yesterday caused so much useless capital to be built. Capital that today we realize has negative returns.
If we summarize the above, we get that too low interest rates yesterday produced negative natural interest rates today.
But if today natural rates are negative, and the fed rates are not negative, this means that today interest rates are too high.
So we can conclude that too low interest rates yesterday caused too high interest rates today.
How does this sound?
There is such thing as a negative interest rate. Ever. Never ever.
What we are talking about is a simple action by central banks that is used to encourage banks to never store any reserves. Motivation to lend. Motivation to pass this storage penalty to the simple saver. In effect, encouraging you and me to spend/consume or gamble at wstreet. You can call it a negative rate but really it is a little carrot or whip, that is hoping to increase velocity.
You are keen in a sea of dullards.
There are many examples of capital projects that have made a loss.
When Sumner says “risk free” the implication of that is the investor immediately can see the future, and knows exactly what profit or loss all potential projects will make. If the investor is thinking about investing, and hypothetically can see the future outcome of all possible investment, clearly she will take the investment with the highest return (anyone would right?).
But what if all possible investments make a loss? Would our hypothetical investor still pick the best of a bad bunch? Probably not, better to just not invest at all… all your potential projects are junk, don’t do them, doing nothing is better.
Right, so the “risk free” example presuming investors can see the future is not plausible in the real world. The answer to Sumner is that investors *MUST* take a risk. There is no such thing as risk free returns. Government bonds are certainly not risk free — just look at Greece where they outright defaulted on the bondholders (while pretending in the news that there was no default) or consider the USA back in the 70’s where inflation and money printing was used to nominally pay those bonds but really that’s just another type of default.
So if you really, really want risk free interest rates for a pile of silver coins, then you cannot lend it out to anyone and you just have a small negative return which is paying for security and storage cost (even that is not entirely risk free).
But that has nothing to do with the money market rate where people wanting to save meet up with people wanting to invest and they undertake an exchange. In that kind of market you always have risk, but the savers will expect positive returns, and if the investment turns out to be a failure then we do the accounting, calculate the loss, wind up the business and the savers understand that they made a poor choice.
“The answer to Sumner is that investors *MUST* take a risk.”
Right, because the profitability of investments rely on future consumer demand, which is technically always unknowable (good educated guesses are still guesses).
I think Bob gets a pass on this because when he introduces the correlation he does so in a way that does not demand that you accept the causality. Given the limited time (check the watch), he is offering a theory that supports causation.
Fair enough.
My post is not intended as any kind of gotcha, but rather I think this is a deeply substantive point that Bob doesn’t quite grasp (or admittedly, that I don’t quite grasp Bob’s perspective).
To say that the market has risen directly as a response to QE is to beg the question of how. I posted this elsewhere, but an argument that excess money balances are flowing into assets is very naive, and manifestly false. Virtually every dollar of “printed” money by the Fed still resides at the Fed (in Excess Reserves, earning interest). It is not clear if Bob is really subscribing to this sloshing cash model or not. If the argument is that the “loanable funds rate” has been distorted by QE, then I quite agree, but it also begs the question of in what fashion and to what end? I believe there are highly plausible mechanisms (per my original post) that are consistent with both ABCT and MM Theory, and that the economy might rebalance from these distortions in a variety of ways that are essentially indeterminate. I would argue that it is a coin-toss as to whether that rebalancing involves a decline in stock prices or not. Arguing strictly against the MM folks seems to me somewhat tangential to a very important question.
“Virtually every dollar of “printed” money by the Fed still resides at the Fed (in Excess Reserves, earning interest)”
That can’t be true because NGDP has increased every year since 2010.
There really is more and more money “sloshing around” the economic system due to inflation of the money supply.
It is not true that “virtually all” the money created since 2010 has been parked with the Fed.
And as we know, inflation of the money supply does not affect all prices equally. It can very well affect the prices of stocks more than say the prices of salt or rice.
Stock prices are affected by the Fed’s inflation.
That’s just not right. Saying it can’t be true when the math tautology says it’s true is not helpful.
Increases in assets on the Fed’s balance sheet (Treasuries and MBS) match nearly dollar-for-dollar liabilities in the form of deposits from banks, i.e. Excess Reserves. What, therefore, could the source of any “cash sloshing” be that could theoretically drive up asset prices?
Stock prices may be affected by the Fed’s actions, but not by an introduction of excess money, as there has not been any such introduction.
“That’s just not right. Saying it can’t be true when the math tautology says it’s true is not helpful.”
But it isn’t a mathematical tautology.
“Increases in assets on the Fed’s balance sheet (Treasuries and MBS) match nearly dollar-for-dollar liabilities in the form of deposits from banks, i.e. Excess Reserves.”
The Fed’s assets include Treasuries which when paid, are mostly remitted back to the Treasury.
It is not the case that the increase in the Fed’s balance sheet has not been accompanied by any money outflows.
You are conflating the increase in assets as a one way street.
“What, therefore, could the source of any “cash sloshing” be that could theoretically drive up asset prices?”
Obviously the increase in the supply of money, the same cause for why NGDP has been increasing.
“Stock prices may be affected by the Fed’s actions, but not by an introduction of excess money, as there has not been any such introduction.”
But there has.
The Fed only “affects” things by way of inflation.
Sorry, but you lost me.
The “supply of money” needs to be defined. The Fed swaps short term bonds (the interest-paying reserves) for long-term bonds. The effect on money flows in the economy is entirely neutral. This may be a bad thing on many fronts, but either:
1. The swap is one for one and literally no new money enters the economy, or
2. The swap is not one for one, and the discrepancy is measurable and significant.
The math is close to number one and no where near number 2. I just don’t see where the money creation is.
The Fed can affect the economy in lots of ways, inflation, inflation expectations, interest rates, interest rate expectations, structure of the yield cure, expectations of the structure of the yield curve, etc.
My own understanding, though not as deeply rooted as Bob’s, is that the FOMC is buying securities:
– the cash goes to the sellers (let’s say banks)
– banks now hold cash (on their balance sheet)
– which is now available for lending
OR
– which can be kept – interest earning – at the Fed
– the money is not being productive (mal-invested)
– businesses cannot grow (banks hold cash)
– business profits go to stocks (eg buybacks)
SO
Bob’s CPI bet fails because stock prices are rising because business growth is hamstrung by “greedy” banks who make money by doing nothing with their cash rather than pushing out medium risk loans.
“– the money is not being productive (mal-invested)
“– businesses cannot grow (banks hold cash)”
Regarding saved money, the productivity which you’re seeking has already happened in the past. The reward for that productivity is the ability to consume (or invest) in the future.
Alternatively, the productivity of the saved money, itself, is to secure the individual saver’s ability to consume/invest in the future, so it’s being plenty productive just sitting there.
The real problem is that the “interest” being earned at the Fed is printed money.
Regarding businesses not growing, businesses are not supposed to grow unless there will be sufficient consumer demand to justify it.
So, as long as consumer demand is satisfied, businesses don’t have to grow, and should not.
A healthy economy does not grow businesses, per se, but rather satisfies consumer preferences.
To say otherwise is to say that consumers have a duty to buy the “right” things such that businesses can continue to grow.
But consumers’ scarce resources belong to them alone, and so have no obligation to spend it at any particular business.
Consumers and producers aren’t classes in competition – production is *for* consumption. One must produce in order to continue consuming, and that’s the only reason to produce.
So it’s producers who must produce the right things if they want what consumers are willing to pay.
No, Bob’s CPI bet fails because there is no change in the money supply, correctly considered. Your stepwise consideration skipped the original condition, which is banks holding long-term bonds. When they receive cash for those assets, and then effectively immediately “re-invest” that cash back at the Fed in Reserves bearing interest, they have essentially just made an asset swap, exchanging fixed-rate, long-duration bonds (Treasuries and MBS) for floating-rate, immediately redeemable notes (the Reserves with IOR).
There has been NO money creation, hence no inflation. The CPI bet doesn’t work, and similarly neither does any money-creation explanation of stock and asset prices.
There has been a change in the money supply, what are talking about?
Bobs CPI bet failed because the new money is seen in equity prices which are not part of CPI. Also Ferraris and high class call girls.
“To say that the market has risen directly as a response to QE is to beg the question of how.”
Confidence. Fiat is a game of confidence.
Really? The Fed owns $2.4 trillion worth of U.S. Treasury securities. You saying the U.S. Treasury carefully put that cash back into reserve accounts, rather than spending it? I doubt that.
The Fed also owns $1.7 trillion in Mortgage Backed Securities… well I suggest that might have had an effect on the market price of MBS. Thus, also effecting the balance sheets of other MBS holders.
He does not understand what reserve are although Major Freedom already explained it to him. I know this guy and I can tell you right now, he will never ever admit The FedR increased money supply. Ignoring the 4.5T assets the FedR held at the peak of QE. Ignoring the FOMC suppressing interest rates. Ignoring the interest being paid to banks for their reserves, etc. Despite all the FRED graphs that show credit has increased. He will probably then say M0 is the same 1.39T is has always been, never fully understand M0 is merely the portion of credit that has been converted to physical.
I submit that the statists have the burden of proof to show that market fails and that violent intervention of both the Keynesian and monetarist variety is necessary. They cannot and will not do that. It is a mistake to let them off the hook regarding that proof.
Back in 2009, Tom Woods gave a talk on the 1920 depression. During that talk, Tom mentioned that at the end of Wilson’s term, spending was slashed due to Wilson being incapacitated by a stroke. He jokingly called it “the stroke of luck”:
https://www.youtube.com/watch?v=czcUmnsprQI
Around the same time, Tom wrote a short piece about the 1920 depression that failed to mention Wilson at all. Daniel Kuehn jumped on that latter omission and wrote a paper (that costs $29) claiming to have refuted the Austrian analysis of 1920 due to the failure of Tom Woods to mention that most of the postwar spending cuts occurred under Wilson . Krugman cited Kuehn’s paper on his blog in January 2012:
Yesterday I mentioned that they’re still flogging the old line that Warren Harding proved that austerity works. I linked to my old demonstration that the 1921 economy was nowhere near the liquidity trap, and that there was substantial monetary easing, making comparisons to the current situation nonsense.
Daniel Kuehn has more. it turns out that the Austrians/Austerians have their timing all wrong:
Austerity proponents depend on the argument that substantial cuts to federal spending moved the economy to a recovery in 1921, but this understanding fails on multiple counts. The bulk of both fiscal and monetary austerity occurred immediately prior to the onset of the depression. Any austerity in policy decisions by the Wilson administration, the Harding administration or the Federal Reserve Board after the depression began were moderate compared with the considerable austerity measures taken by the Wilson administration and the Federal Reserve before the downturn. The evidence seems to suggest, even more clearly than in the case of the Great Depression, that postwar austerity may have even helped cause the 1920–21 depression. Subsequent monetary easing by the Federal Reserve occurred concurrently with the economic recovery, which itself was underway by the time Warren Harding took the oath of office.
http://krugman.blogs.nytimes.com/2012/01/23/more-than-you-want-to-know-about-warren-harding/?_r=0
Since we are forever being told by the statists that our AnCap “utopia” has never existed, I am always anxious for the statists to show with evidence when, where and how it failed (especially since it never existed). They never even try. Why do we need violent intervention in the market, including funny money, central banks and spending sprees if the market does not fail? How can what Kuehn has described as leading up to and causing the 1920 depression be deemed a failure of the market? We are talking about the slashing of wartime spending and inflation. He refers to it as “The austerity depression of 1920-21”:
2. The austerity depression of 1920–21 – During WorldWar I federal expenditures ballooned and although the new income tax was able to partially finance the war effort, most of the financing was done through federal borrowing and by the highly accommodating monetary policy of the Federal Reserve. The role of the Federal Reserve at this time was expressed unambiguously by the New York Federal Reserve Bank Governor Benjamin Strong, who told a Congressional committee in 1921 that ‘I feel that I, or the bank at least, was their [the Treasury’s] agent and servant in those matters’ and further added that the wartime inflation caused by the low interest rates maintained by the bank were ‘inevitable, unescapable, and necessary’ for prosecuting the war (Strong, 1930).
Three years ago, Daniel Kuehn conceded to me in comments to his blog that his “paper is consistent with the Rothbardian narrative”. I then asked him to prove that the market fails. I’ve never heard back.
http://tinyurl.com/zy7jvnz
Sumner has never bothered to explain why we need such violent intervention either.
http://www.themoneyillusion.com/?p=17692&cpage=1#comment-205612
The same problem appears in statist analysis of the 1929 depression because, to a certain extent, it was also the result of central bank monetary shenanigans leftover from WWI and not a failure of the market. The statists do not want to mention this.
I think it is a mistake to ever fail to challenge the statists and make them prove that there is a market failure that requires their prescription of violent government interference to cure the problem that does not exist.
Some related resources:
Hazlitt, My Hero | Jim Grant
https://www.youtube.com/watch?v=FSPlT8o5ZKM
(Relevent part starts at 22:04)
Jim Grant on the Forgotten Depression that Cured Itself
[www]http://tomwoods.com/blog/jim-grant-on-the-forgotten-depression-that-cured-itself/
Was the Fed Expansionary from 1921-1924?
http://tomwoods.com/blog/was-the-fed-expansionary-from-1921-1924/
Excellent post. By nature, we are agreeable and peaceful but this will also be our demise.
Never ever give these turds the benefit of the doubt.
Everyone already lives their daily lives in the USA with a small version of AnCap and the NAP, including the “progressives” monetarists and Neocons. We do not attack our neighbors or their property. These debates should be like legal cases where it is explicitly stated which party has the burden of proof. Since the NAP is the default position of our daily lives, insist that the statists have the burden of proof to show that the market fails or that it failed, especially since they already live pretty much according to AnCap rules. Demand that they justify the necessity of the initiation of violence. They must show that there is a problem AND that their violence will solve it. Further, they really do not want to think too much about the fact that they are proposing violence as a solution. Rub their nose in it.
For example, we grant too much credence to Krugman and/or Sumner by debating them in the middle of the story as opposed to demanding (every time) that they first prove the market fails in order to justify an alleged cure for a problem that does not even exist. Keynesians and monetarists simply will not do this. They will either act up or ignore you.
I really never knew anything about the 1920 depression until April 2009. I was driving back to Michigan from Texas. I saw the Tom Woods Youtube on my laptop at a Louisiana motel and listened to the audio in my car. The point I remembered most was the mention of Wilson’s “stroke of luck” which allowed for the slashing of war spending without his pesky interference.
Years later, Daniel Kuehn wrote his paper (which gets published, costs $29 and is lauded by Krugman) claiming the Austrians have ignored Wilson’s spending cuts. The paper also quotes Benjamin Strong stating to Congress that the Fed funded the war with funny money. Ending that spending and funny money inflation is clearly going to cause hard times, but it has nothing to do with the market failing. So not only does Kuehn get the part about us ignoring Wilson wrong, he demonstrates with the Strong quote that the Fed caused the inflation which eventually ended badly (as we would predict). So how is this a market failure (again)?
In a further analogy to court cases, we are never going to get our opponents to admit they are wrong. The point of litigation is to get a third party (judge or jury) to see that your opponent is full of prunes (as my grandma used to say). Calmly demanding that your statist opponent demonstrate when the market failed and then watching him pitch a fit or ignore you helps in that regard. They will be simultaneously claiming that AnCap never existed in history [unicorns!!!] AND then claim they have proved it failed using historical examples from periods rife with artificial credit expansion. Really.
When I argue online, mostly I am thinking about what others see, not making the opponent submit. Sometime I do take it to serious but not often. I normally try to keep my cool and mainly teach the curious onlookers knowing the commie I am arguing with, will go to his grave believing his own lies.