Thursday, June 7, 2012

Michael Sankowski — The Distributional Consequences of Monetary Policy


Mike responds to a recent Nick Rowe post. Nice quote from Wynne Godley, too.

Read it at Modern Monetary Realism
The Distributional Consequences of Monetary Policy
by Michael Sankowski

What I would add to it is that cb's running a NAIRU-based monetary policy raise rates to quell inflation, which typically happens as they see wage pressure developing in addition to rising CPI. This provokes an economic contraction that increases the buffer of unemployed and reduces labor bargaining power, decreasing wage pressure.

Then to stimulate the economy when sufficient consolidation has taken place, the cb lowers rates to spur borrowing and spur a new cycle of investment and consumption.

However, as Mike notes the lowering of interest rates translates first into rising asset prices with the distributional effects he notes. The as consumer borrowing increases, price pressures increase, which then results in wage pressure in reaction. Then, the cycle is repeated.

So the outcome is higher asset prices at the beginning of the cycle, then increasing consumer indebtedness, and then falling real wages resulting in increasing worker demands for increased wages to keep up with inflation.

So, yes, monetary policy does have distributional effects. There are winners and losers. See if you can identify them.

10 comments:

Bob Roddis said...

That's the whole point behind the unconstitutional and immoral fiat funny-money regime: To steal purchasing power without the victims knowing what hit them.

Hello.

Tom Hickey said...

The problem is that so-called sound money has a deflationary bias that favors creditors. Fiat has an inflationary bias, so it favors debtors over creditors.

The way through the horns of this dilemma is not through the type of money selected, but rather through economic policy that recognizes biases and works to offset them.

Bob Roddis said...

People can easily account for and prepare for the slow increase in value of their money when they don't have to worry about having their purchasing power stolen from them. There is no problem here that needs to be "solved". Bubbles caused by fiat funny-money dilution leave people with massive unpayable debt after the prices of the assets purchased with the funny money naturally collapse. Your "solution" to the non-problem of a slow and predictable increase in the value of real money is the CAUSE of the problems that heretofore did not exist.

Dan Kervick said...

If we could steal relative purchasing power from Jamie Dimon and give it to others, without him knowing what hit him, then I am for it!

Tom Hickey said...

And depressions/panics due to "sound money" leading to debt-deflation have also been recurrent in history.

You think it is all one way, Bob. It isn't. There are no perfectly balanced systems just as there are no perpetual motion machines. All system are subject to "entropy" in on form or another.

It's interesting that even knowledge is entropic in the sense that the more one knows, the more one realizes that one doesn't know. That is, uncertainty increases, both in terms of known unknowns and appreciation of unknown unknowns. Instead of leading to ever-greater organization, increasing knowledge just reveals the impossibility of greater organization because uncertainty increases with scale, until one is flailing in the dark.

Ralph Musgrave said...

Bob Roddis says, “People can easily account for and prepare for the slow increase in value of their money when they don't have to worry about having their purchasing power stolen from them.”

That statement can perfectly well be turned on its head: “People can easily account for and prepare for the slow DECREASE in value of their money….

Moreover, a slow decrease in the value of money is effectively a tax on people who have excess wealth and can’t think of anything useful to do with it, like invest in a business. I’m all in favour of taxing or “stealing purchasing power” from that sort of person.

Taxes are inevitable, and no tax is perfect. The above tax is not a bad one, I reckon.

JK said...

Tom…

http://www.youtube.com/watch?v=GiPe1OiKQuk

:)

Anonymous said...

"a slow decrease in the value of money is effectively a tax on people who have excess wealth"

How about, "a slow increase in the value of money is effectively a tax on people with little or no wealth."

Anonymous said...

"Fiat has an inflationary bias, so it favors debtors over creditors."

Not under the current system, in which it is the international investor class who push up asset prices whilst simultaneously seeking to clamp down on wages, thereby generating increased indebtedness in the absence of adequate government deficit spending.

Tom Hickey said...

Anonymous: ""a slow decrease in the value of money is effectively a tax on people who have excess wealth"How about, "a slow increase in the value of money is effectively a tax on people with little or no wealth.""

Good point. While the wealthy can dip into savings to pay for increasing prices, the poor starve.

Conversely, in a deflation, the assets of the wealthy lose value, the middle class loses its assets like its homes and other assets on which the debt is not yet paid off.

That's why price stability is central to macro, and MMT is still the only credible theory on the table that addresses the trifecta of production (innovation, growth), full employment, and price stability in a way that sacrifices none to gain the others.