Saturday, July 9, 2016

Will Monetarist thinking never die?

JP Koning is someone who I think does a pretty good job talking about economics and monetary ops, which is why I was pained to see this line in his post from yesterday:
Hyperinflation 2.0?

To understand what I mean by 'Zimbabwean version of the U.S. dollar', we need to take a quick tour of the Zimbabwean banking system. A nation's central bank usually runs the plumbing that connects local banks. These banks keep accounts at the central bank—in Zimbabwe's case the Reserve Bank of Zimbabwe(RBZ)—and use balances held in these accounts to clear and settle among each other. These accounts, along with central bank-issued banknotes, constitute a nation's supply of base money, the quantity of which determines its price level. When Zimbabweans spontaneously stopped using the local currency, the Zimbabwean dollar, in late 2008, RBZ accounts (and cash) became worthless. The RBZ-managed plumbing system had imploded.

My Bold

Say what? Doesnt 7 yrs of QE mean anything? Hasnt the notion that "printing money causes inflation", at least in the way the mainstream uses the term, been discredited completely?  By ignoring that deficit spending is where the money is really "printed" and that the type of Govt IOU the Non-Govt saves in (Reserves\checking accounts or TSY Cds at the Fed) is largely irrelevant to the macro economy, people get themselves so confused due to QE. If you dont consider TSY Cds "money" but instead only as "debt" (even though all commercial bank CDs are considered "money") then when CBs do QE, you have a hard time trying to rationalize away why "printing money" isnt inflationary, or just ignore the whole thing like maybe JP did above. It is very easy to avoid this confusion by simply using the most accurate and reasonable definitions, that all Federal Govt IOUs are "money", and so of course exchanging one type of Govt money (TSY Cds) for another type of Govt money (reserves) in the process of QE isnt likely to have much of an impact.

And the mirror image of that is when the Govt issues TSY Cds when it deficit spends, (converting one type of Govt money, Reserves, to another type of Govt money, TSY Cds) this doesnt sterilize anything and doesnt prevent inflation.

IOW if QE doesnt cause inflation then issuing TSY CDs while deficit spending doesnt prevent inflation

Here's the comment I left over there, if he responds, I'll edit in his comment later:

JP-

What do you mean with this line?

"constitute a nation's supply of base money, the quantity of which determines its price level."


Since 2009 the US supply of reserves has increased by more than 400% ($900B to $3.7T) and yet the price level (CPI) has gone up just 11% (211 to 236)

In the equivalent 7 year period before 2009 the supply of reserves in the US dollar system went up 22% ($670B to $870B) and the price level (CPI) had gone up 16% (177 to 211)

QE has definitively proven that base money does not drive anything, least of all the price level. 

https://fred.stlouisfed.org/graph/?graph_id=187334&category_id=

17 comments:

Matt Franko said...

"JP Konig is someone who I think does a pretty good job talking about economics and monetary ops, which is why I was...."

Auburn c'mon this is not true... you have to challenge this guy...

This is like NRO's Andrew McCarthy the other day taking issue with Comey on the emailgate thing... McCarthy says: "I am a former colleague of Jim Comey and have the utmost respect for him personally and professionally, BUT... blah blah...."

This approach where we try to be "nice" doesnt work... if we are right and they are wrong, then sarcasm and ridicule have to be fair game...

Ignacio said...

"Will Monetarist thinking never die?"

Auburn, economists are still using books from the XVIII century as guidelines to formulating their axiomatic closed logic systems with no basis in reality.


Could take a while...

Greg said...

Those who control the money or provide intellectual cover for those who do will always think like monetarists.

Andrew Anderson said...

These accounts, along with central bank-issued banknotes, constitute a nation's supply of base money, the quantity of which determines its price level. JP Koning

No, because currently the population cannot deal with base money, fiat, except in the form of unsafe, inconvenient physical fiat (bills and coins). Instead it must use the liabilities of what is essentially a government privileged usury cartel or be limited to said unsafe, inconvenient physical fiat.

With the allowance of accounts for all citizens, their businesses, etc. at the central bank and the end of government-provided deposit insurance and other privileges for the banks then the population WOULD deal much more with base money, mostly in the form of their account balances at the central bank.

Andrew Anderson said...

See how easy it is to defeat monetarist thinking?

Except the allowance of accounts for all citizens at the central bank is unthinkable to most economists including the MMT crowd so they can't even run a simple thought experiment to discredit monetarism?

Auburn Parks said...

Aa

Once again deposit insurance is a protection for depositors not a great privilege for banks. Allowing people to have checking accounts at the fed instead of just cd accounts wouldn't really help anyone.

Andrew Anderson said...

Allowing people to have checking accounts at the fed instead of just cd accounts wouldn't really help anyone. ap

Once again, the proper abolition of government provided deposit insurance would mean that $20,000+ could be distributed to every US adult citizen WITHOUT increasing total purchasing power (MB + M1).

I'd say that's considerable REAL help and to those who need it most.

Postkey said...

“Thank you for posting a reply, . . . . Again, however, I’m afraid I don’t see a direct answer to my question. I asked what mechanism in the real world the Fed has available to raise money supply above money demand (something that you said above is necessary if inflation is to occur). Money supply can rise if the Fed buys assets or if loans are made from available reserves. To my way of thinking, neither of these can occur without the full and conscious participation of the other side of the transaction. Hence, the supply of money cannot be increased in the absence of demand.
Yet you say (above) that inflation only occurs when money supply is in excess of money demand. You have defended this with analogies, but not with real-world examples of the underlying process. I am a huge fan of using analogies to get the essential idea across; however, unless these mirror something that is going on in the real world (and in a very real and tangible sense), then recommending policies based on such stories is dangerous to say the least.
I hope you don’t think I’m being rude, but I think this is a key question and one that I have never found a monetarist able to answer: how is it in the real world that the central bank raises money supply above money demand? Can you please tell me this and in the context of actual Federal reserve policy tools?
This is not a trivial question. The entire monetarist superstructure rests on it. If the answer is that in reality this cannot happen, then I’m not sure how the rest of the monetarist analysis survives.”

http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/4/#6e38191ef9f8

Roger Erickson said...

"Will Monetarist thinking never die?"

Not until the bulk of a given electorate is comfortably familiar with one of the principles of calculus-101, i.e., that GROWING systems denominate their actions with a CONSTANTLY GROWING currency system.

It's sobering to remember that Marrines Eccles dealt with this same question back before 1933
http://mikenormaneconomics.blogspot.com/2015/04/if-all-america-only-knew-what-some.html



and Abe Lincoln dealt with it in 1863,
and Ben Franklin wrote about it in 1729.

Auburn Parks said...

ONce again AA you are entirely confused. Eliminating deposit insurance protection for citizen depositors is in no way related to giving everyone $20K. This is just another meaningless point you keep making.

Matt Franko said...

AA,

What if the person already has a lot of munnie?

Do you still want to do an equal distribution?

Matt Franko said...

"familiar with one of the principles of calculus-101,"

Is Konig?

Philippe said...

I gave up on JP Koning a long time ago.

Andrew Anderson said...

ONce again AA you are entirely confused. Eliminating deposit insurance protection for citizen depositors is in no way related to giving everyone $20K. AP

Let's assume for the sake of argument that the reserve (required + excess) position of US banks in aggregate is 10%* of their insured liabilities/deposits. Then the banks do not have 90% of the reserves necessary to transfer those deposits to inherently risk-free individual citizen, business, etc. accounts at the Federal Reserve should government-provided deposit insurance be abolished.

Thus without increasing total purchasing power, the new reserves needed for the deposit transfers could be distributed equally to all US adult citizens since increases in MB would be matched by decreases in M1.

Otoh, handing out $20,000+ to every US adult citizen without deprivileging the banks would likely trigger another boom-bust cycle and even more wealth transfer from the poor to the rich.

Steve Keen says much the same thing in his "A Modern Jubilee" - that restrictions on new liability/deposit creation by the banks should be combined with large fiat distributions to prevent a new boom-bust cycle.

*The banks are currently awash in reserves so their reserve position is much higher than 10% but that can be remedied with asset sales by the Federal Reserve to sop them up.

Andrew Anderson said...

What if the person already has a lot of munnie? Franko

Let's say A has $250,000 and B has $1000 then A has 250 times what B has.

Now let's give A and B $20,000 each so that A has $270,000 and B has $21,000. Now A has only 12.86 times what B has - a huge reduction in relative wealth.

So equal fiat distributions to ALL adult citizens including the rich will reduce relative wealth inequality. And who will dare complain about equal distributions?

Auburn Parks said...

Aa

Well thankfully nobody but you thinks its a good idea to move to a fed only risk free retail banking system. And giving everyone 20k in your silly plan would be no different economically from just giving everyone the 20k without going to a full communist retail banking system

Andrew Anderson said...

Well thankfully nobody but you thinks its a good idea to move to a fed only risk free retail banking system. AP

You're out of luck there since "Jamie" (James K Galbraith?) at NEP has said:

aka you have been proposing this here for some time and I finally get what you are talking about… it’s an interesting idea. But having an account and having easy access to it are two different things. That is what neighborhood banks currently provide (imperfectly: impoverished communities are lamentably under served). Coupled with the notion of the Post Office Bank, though, this could provide a real solution to many ills, I think. In any event, some thought must go into how such accounts would be accessed (especially by people without computers and internet) and what infrastructure would be needed to be built out to make them widely useful. http://neweconomicperspectives.org/2016/01/money-banking-part-3.html#comment-1232620 [bold added]


And giving everyone 20k in your silly plan would be no different economically from just giving everyone the 20k AP

Then you apparently don't understand the difference between reserves and bank credit.

without going to a full communist retail banking system AP

What's the equivalent of Godwin's Law when communism is used instead of Hitler?

Besides, 100% private banks with 100% voluntary depositors would still exist and like any other business could (rather, continue to) have inherently risk-free accounts at the central bank too.