Cafe Hayek - Latest Comments in A New Monetary Theory

Re: A New Monetary Theory

vikingvista — Sat, 20 Dec 2008 23:01:49 -0000

Although it would probably still be descriptive, I wonder if the exchange equation would be relevant under a market system where M is controlled by the invisible hand rather than a single human decision maker.

Thanks for the article--a good read.

Re: A New Monetary Theory

Sam Grove — Sat, 20 Dec 2008 16:33:50 -0000

then increasing the money supply can maintain price stability and prevent deflation

Provided the agency controlling the money supply is able to anticipate growth and will manage the money supply accordingly.

However, we are talking about a money supply managed by political forces.

I refer you to this article on Milton Friedman's latter thoughts on the possibility of effective monetary management by political agency.

Re: A New Monetary Theory

vikingvista — Sat, 20 Dec 2008 14:28:10 -0000

Some seem to be confusing inflation with increasing the money supply. If a growing economy is not matched by increased reuse (velocity) of the existing money supply, then increasing the money supply can maintain price stability and prevent deflation. It doesn't seem appropriate in that case to refer to it as an "inflationary policy".

A million $1 notes may be sufficient for an economy of 100 people, but obviously the money supply would have to grow to accommodate 250 million people.

Re: A New Monetary Theory

Oil Shock — Fri, 19 Dec 2008 08:09:50 -0000

From Mystery of banking by Murray N. Rothbard...

The crisis of 1839 ushered in four years of massive monetary
and price deflation. Many unsound banks were finally eliminated,
the number of banks declining during these years by 23 percent.
The money supply fell from $240 million at the beginning of
1839 to $158 million in 1843, a seemingly cataclysmic drop of 34
percent, or 8.5 percent per annum. Wholesale prices fell even further,
from 125 in February 1839 to 67 in March 1843, a tremendous
drop of 42 percent, or 10.5 percent per year. The collapse
of money and prices after 1839 also brought the swollen state
government debts into jeopardy.
State government debt had totaled a modest $26.5 million in
1830. By 1835 it had reached $66.5 million, and by 1839 it had
escalated to $170 million. It was now clear that many states were
in danger of default on the debt. At this point, the Whigs, taking
a leaf from their Federalist forebears, called for the federal government
to issue $200 million worth of bonds in order to assume
all the state debt.
The American people, however, strongly opposed federal aid,
including even the citizens of the states in difficulty. The British
noted in wonder that the average American seemed far more concerned
about the status of his personal debts than about the debts
of his state. To the worried question, Suppose foreign capitalists
did not lend any further to the states? the Floridian replied, “Well
who cares if they don’t. We are now as a community heels over
head in debt and can scarcely pay the interest.”6

The implication was clear: The disappearance of foreign

credit to the states would be a good thing; it would have the

healthy effect of cutting off their further wasteful spending, as

well as avoiding the imposition of a crippling tax burden to pay

for the interest and principal. There was in this astute response an

awareness by the public that they and their governments were

separate and sometimes even hostile entities rather than all part

of one and the same organism.

The advent of the Jacksonian Polk administration in 1845 put

an end to the agitation for Federal assumption of the debt, and by

1847, four western and southern states had repudiated all or part

of their debts, while six other states had defaulted from three to

six years before resuming payment.7

Evidently, the 1839–43 contraction and deflation was a

healthy event for the economy, since it liquidated unsound investments,

debts, and banks, including the pernicious Bank of the

United States. But didn’t the massive deflation have catastrophic

effects—on production, trade, and employment—as we have generally

been led to believe? Oddly enough, no. It is true that real

investment fell by 23 percent during the four years of deflation,

but, in contrast, real consumption increased by 21 percent and

real GNP by 16 percent during this period. It seems that only the

initial months of the contraction worked a hardship. And most of

the deflation period was an era of economic growth.8

Re: A New Monetary Theory

Sam Grove — Fri, 19 Dec 2008 08:01:32 -0000

That's why an inflationary policy isn't a blunt tool which we can use to extricate ourselves from any situation.

The problem is that when politicians have access to that power, they will use it to maintain their power, thus monetary policy is not used wisely, but rather is used constantly such that corrections are pushed back until the situation becomes inexorable.

And who's to say when reluctance to invest/lend is irrational?

Perhaps all that is needed is to get politicians out of the way and a little time so things can be sorted out.

Promotion of fear is the politicians main tool for acquiring power.

Re: A New Monetary Theory

johnleemk — Fri, 19 Dec 2008 07:35:27 -0000

Sam Grove:

Correct! That's why an inflationary policy isn't a blunt tool which we can use to extricate ourselves from any situation. Having said that, I think it generally makes sense to have an inflationary policy in a liquidity trap, since in such a case banks and people would be irrationally afraid of lending. One thing that economics hasn't really considered, though, seems to be the method of inflating the monetary base. There's an argument to be made that traditional methods just give more money to the banks instead of directly stimulating investment. It's all very complex, and I don't pretend to know much about this - I'm just saying that an inflationary policy is the textbook prescription for a liquidity trap, and the orthodox reason why is the irrational fear of investment/lending.

Re: A New Monetary Theory

Sam Grove — Fri, 19 Dec 2008 06:43:26 -0000

Monetary inflation and deflation is always a matter of government/central bank policy.

Deflation due to increasing productivity is a positive, or would be, if it didn't lead to people clamoring for government to do something about it.

Re: A New Monetary Theory

Russ Nelson — Fri, 19 Dec 2008 03:46:38 -0000

Inflation and deflation in modest amounts are fine. The problem occurs when they're large, or changing. Consider that computer prices have been deflating for twenty years now. Nobody is going to argue that the PC industry is non-functional, are they??

Re: A New Monetary Theory

Gil — Fri, 19 Dec 2008 01:55:12 -0000

Oh well at least people here aren't taking the opposite take and saying "deflation is therefore good". Robinson Crusoe can't make food appear on his plate by plucking leaves off trees and 'inflate' his way to food and more than taking the same leaves and burning them 'deflates' his way to food. :\

Re: A New Monetary Theory

Jacob Oost — Thu, 18 Dec 2008 23:33:34 -0000

I think that what is absurd (or supposedly absurd) about this film is that it makes a sort of broken window argument about the effects of inflation.

That being said, yes, the money supply shrank out of all proportion with production, leading to the Great Depression. I don't think Friedman would have said "inflation is the answer!" so much as he would have said "the deflation should never have happened in the first place!"

Re: A New Monetary Theory

Charlie — Thu, 18 Dec 2008 21:04:17 -0000

-Russ

What in this video do you think Milton Friedman would disagree with? (the video said "3 million will be inserted into the economy," I'm guessing that is fiscal and not monetary in practice, which MF would not like, but the video doesn't specify). But everything else is pretty straight forward macro. I'm kind of surprised they knew it all back then.

Ask most high school students (even most people) if there was inflation in the great depression, and they will say "yes." Why? Because they know the great depression was bad and they know inflation is bad, and they assume that the two must be one in the same.

Of course, we know that is not true. If FDR had a goal of modest price inflation, he was not able to achieve it:

Year Inflation Rate

1929 0.00

1930 -2.51

1931 -8.80

1932 -10.31

1933 -5.12

1934 3.32

1935 2.54

1936 0.95

1937 3.61

1938 -1.88

1939 -1.42

1940 1.01

From 1933 to 1940, CPI rose about a third of a percent on an annual basis. In 1940, prices were 2.7% higher than 1933. In a well functioning modern economy, prices would be about 17% higher.

Would really like to hear further comment on this. Cheers,

Charlie

Re: A New Monetary Theory

Niccolo — Thu, 18 Dec 2008 20:09:18 -0000

One of the previous comments said it best, it really is almost straight from an undergrad textbook.

That being said, though, I can see where they're coming from, just not with the same understandings.

An inflation in the money supply is fine, as long as it matches the demand for money. That shouldn't necessarily result in higher prices, though.

Re: A New Monetary Theory

Greg Ransom — Thu, 18 Dec 2008 18:08:03 -0000

The ideas in the MGM movie and in FDR's 1938 fireside chat were _extremely_ popular, and go back to the writings of William Foster and Waddill Catchings.

The ideas of Foster and Catchings turn out to be an early version of Keynes, and there is some good chance that Keynes took some of his thinking after reading Hayek's debunking of Foster and Catchings in his 1929 essay, "The Paradox of Savings".

Read about Foster and Catchings here:

http://mises.org/story/2804

Re: A New Monetary Theory

Greg Ransom — Thu, 18 Dec 2008 18:00:15 -0000

Is this any more idiotic that the thinking behind the "secular stagnation" of the original American Keynesian, Alvin Hansen?

Note well that such economic idiocy was standard fair among the citizens and academic economists who readily embraced "Keynesian economics" -- perhaps explaining much of the phenomena.

FDR said:

"Over-speculation in and over-production of practically every article or instrument used by man .... millions of people, to be sure, had been put to work, but the products of their hands had exceeded the purchasing power of their pocketbooks."

Re: A New Monetary Theory

Lowcountry — Thu, 18 Dec 2008 16:18:36 -0000

Crusoe rides his imaginary horse into the sunset

Yeah, for now. But just wait until he starts crapping out all that porcelian shards from the gormet dishes he ate.

Re: A New Monetary Theory

Sam Grove — Thu, 18 Dec 2008 13:42:38 -0000

that inflation can be a way to get the economy moving again

You have to ask why the economy has stalled.

If it is a result of resource mis-allocation due to previous stimulation (inflation), then further inflation will bring yet another stall.

Re: A New Monetary Theory

johnleemk — Thu, 18 Dec 2008 13:07:29 -0000

I think the point that is often missed is that this argument about inflation only applies in unique situations. No serious thinker can honestly believe that the more inflation you have the better things will turn out. Rather, it's when circumstances are right - for instance, in a liquidity trap - that inflation can be a way to get the economy moving again.

Re: A New Monetary Theory

Oil Shock — Thu, 18 Dec 2008 12:30:24 -0000

Robinson Crusoe gets marooned on an desolate island. he finds a dining table set out with gourmet dishes and starts eating. Island's economy gets stimulated. He leaves a magic IOU ( money ) as a tip on the table. Ponzi Multiplier effect of the IOU sends the economy soaring into the sky.

4 hours later Crusoe comes to the table, eats another set of gourmet dishes and leaves another IOU on the table. IOU's ponzi multiplier effect sends the economy into a tizzy.

Next day Crusoe comes to the table eats a gourmet breakfast and leaves another IOU as tip on the table. Now the ponzi effect send the economy soaring into the orbit.

So on and so forth.

Crusoe rides his imaginary horse into the sunset

The end.

Re: A New Monetary Theory

Charlie — Thu, 18 Dec 2008 12:02:33 -0000

Funny, there are lots of economic models built around the Robinson Crusoe economy or so called representative agent economies. Unsuprisingly, it is hard to make Robinson Crusoe hold money.

Re: A New Monetary Theory

Charlie — Thu, 18 Dec 2008 12:02:27 -0000

Funny, there are lots of economic models built around the Robinson Crusoe economy or so called representative agent economies. Unsuprisingly, it is hard to make Robinson Crusoe hold money.

Re: A New Monetary Theory

Oil Shock — Thu, 18 Dec 2008 11:34:24 -0000

Robinson Crusoe gets marooned on an desolate island. All he has to do is to find the dining table set out with gourmet dishes and start eating, that will stimulate the island's economy.

Re: A New Monetary Theory

Oil Shock — Thu, 18 Dec 2008 11:26:30 -0000

Bankster Madoffs run inflationary ponzi schemes of credit that is destined to fail at some point, and when it does, Fed comes in and rewards the Madoffs at the cost of all their victims. Sure, Fed, and its apologists all agree that it is a fair and balanced scheme.

Thank you Fed, Krugman, Mankiw

Re: A New Monetary Theory

Sam Grove — Thu, 18 Dec 2008 11:25:18 -0000

So we don't have to work, only spend, to become better off?

That seems to be the thrust of spending economics.

Re: A New Monetary Theory

Anonymous — Thu, 18 Dec 2008 11:24:34 -0000

So we don't have to work, only spend, to become better off?

That seems to be the thrust of spending economics.

Re: A New Monetary Theory

Charlie — Thu, 18 Dec 2008 11:09:18 -0000

Maybe the video is dumb I'll watch it when I get home. But using inflation to get out of a liquidity trap (or deflationary trap) is mainstream economics. I mean, Paul Krugman and Greg Mankiw agree on it. The intersection of policy ideas they agree on are quite likely to be good ideas.

Here is a brief primer from the Dallas Fed on the topic:

Dallas Fed

Krugman Blog

Mankiw Blog