tag:blogger.com,1999:blog-2761684730989137546.post8931906431129947423..comments2024-03-28T07:50:06.102-04:00Comments on Mike Norman Economics: Orthodox vs MMT on Methodmike normanhttp://www.blogger.com/profile/03296006882513340747noreply@blogger.comBlogger73125tag:blogger.com,1999:blog-2761684730989137546.post-44972721117737890192011-05-31T17:00:05.931-04:002011-05-31T17:00:05.931-04:00Wait, Vimothy, don't go yet. I'm still cur...Wait, Vimothy, don't go yet. I'm still curious for the answer to John Harvey's question. It should be entertaining...<br /><br />"VIMOTHY: "No, the fact that inflation is a monetary phenomenon does not rely on the ability of the central bank to exogenously set the supply of inside money wherever it likes."<br /><br />John Harvey understandably asked:<br /><br />"Then what does it rely on." (????)<br /><br />And you never answered. Why?Daniel Conceicaohttps://www.blogger.com/profile/00012466257310084977noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-66340563809836374552011-05-31T15:00:50.056-04:002011-05-31T15:00:50.056-04:00Vimothy: I hope you've had fun trolling here, ...Vimothy: I hope you've had fun trolling here, but some of us know that you're simply trying to become a defender of an indefensible neoclassical economics against a group of people who deem you rational in your conversations due to whatever intelligence you may exhibit. But you are nothing but a troll, and nothing but a neoclassical hack(of the worst variety, too). Get your sorry ass out of here, if you want to troll about something try not to make it about economics.Deus-DJnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-25800620416515633932011-05-30T17:14:24.810-04:002011-05-30T17:14:24.810-04:00"If I hold its debt, this is not something th..."If I hold its debt, this is not something that fills me with confidence about the govt's ability to honour its obligations in real terms."<br /><br />But that does not allow you, as a vendor, to raise your prices. Nor for that matter do you, as a vendor, particularly care.<br /><br />A vendor can only raise his prices when more people want to buy his goods than his competitors can reliably supply.<br /><br />""Yes, a collapse of the real, productive economy can cause inflation"<br /><br />How?"<br /><br />Typically through an inability to procure strategically important imports, or honour hard-currency obligations.<br /><br />"Given that fact, if govt cannot cover its debts in real terms, people will expect the value of money to fall and hold less of it."<br /><br />Eh, no.<br /><br />First, you are implying that people will divest themselves massively of government securities if the interest rate drops from 5 % to 0 %. This is simply not observed in the real world.<br /><br />And that is the only effect of the government unilaterally deciding to not roll over bonds. The nominal interest rate drops to zero. In fact, it doesn't even have to do that, because the CB can pay a support rate.<br /><br />There is nothing magical about cash that distinguishes it from a zero per cent interest bond in terms of contributing to aggregate demand. If having bond interest rate drop from 5 % to 2½ % does not cause bondholders to go on a massive spending binge, there is little reason to believe that having bond interest rates drop from 2½ % to zero will cause them to do so either.<br /><br />Further, the bulk of all money is bank money. Since government money can crowd out bank money, you'll get demand-pull inflation from the real resources that the government procures with its spending (and from the Keynesian multiplier effect) long before you'll get a loss of value due to excess liquidity, unless you are spending the money in highly peculiar (and criminally stupid) ways.<br /><br />If I have a € 100 business plan that is remunerative in real terms and I have € 20, then I need to borrow € 80 from the bank. If the government pays me € 10, I only need to borrow € 70 from the bank, but the end result is still that I invest € 100. The share of bank money in the total money supply drops, but my contribution to aggregate demand remains the same: € 100. And since only demand can drive inflation (remember, the vendor only sees his sales volume at the price he charges - he cannot raise prices just because he is an inflation chickenhawk), those € 10 of government payments do not create any inflationary pressure. The real goods and services that the government bought from me with those € 10 can create inflationary pressure, but only if the economy is operating at capacity.<br /><br />The government paying me € 10 ticks off the banksters, of course, because they accrue money and power from controlling my ability to invest. But ticking off the banksters is not a problem for the productive economy.<br /><br />Running a deficit today will not create inflation tomorrow. It may create inflation today, if the economy is operating at capacity, but there's simply no mechanism for it to create inflation tomorrow.<br /><br />"For the period 1970-2000, we averaged 4 sovereign defaults a year."<br /><br />On hard or soft currency debts?<br /><br />Nobody disputes that countries can be insolvent in hard currency. But that is hardly relevant to the present discussion.<br /><br />- JakeJakeShttp://www.eurotrib.comnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-52481149996895718442011-05-30T16:33:10.248-04:002011-05-30T16:33:10.248-04:00VIMOTHY: "No, the fact that inflation is a mo...VIMOTHY: "No, the fact that inflation is a monetary phenomenon does not rely on the ability of the central bank to exogenously set the supply of inside money wherever it likes."<br /><br />Then what does it rely on.John Harveyhttps://www.blogger.com/profile/03555187626769532267noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-45548745524155787372011-05-30T16:31:07.369-04:002011-05-30T16:31:07.369-04:00"But that is irrelevant to its ability to pay..."But that is irrelevant to its ability to pay soft-currency debts."<br /><br />No it isn't. Of course, the govt can issue as much currency as it likes. So what? If I hold its debt, this is not something that fills me with confidence about the govt's ability to honour its obligations in <i>real terms</i>.<br /><br />"Yes, a collapse of the real, productive economy can cause inflation"<br /><br />How?<br /><br />"Sovereigns do not typically default on cash." <br /><br />Who said anything about defaulting on cash? The issue is its real value. If the govt cannot honour its debts in real terms then it must create new money to do so by definition. Indeed, you seem to champion this as a positive feature! Given that fact, if govt cannot cover its debts in real terms, people will expect the value of money to fall and hold less of it.<br /><br />"They occasionally default on bonds, and "the market" may believe that they will do so based on animal spirits."<br /><br />Occasionally? For the period 1970-2000, we averaged 4 sovereign defaults a year. See e.g. De Paoli and Saporta (2006), ‘Output costs of sovereign defaults: some empirical estimates’.vimothynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-66932750867359023872011-05-30T16:08:19.907-04:002011-05-30T16:08:19.907-04:00"Er, wat? Obviously, a government can experie..."Er, wat? Obviously, a government can experience a collapse in its ability to aquire real assets via taxation."<br /><br />But that is irrelevant to its ability to pay soft-currency debts.<br /><br />Yes, a collapse of the real, productive economy can cause inflation. But as a practical matter, economic collapse is usually associated with (and caused by) deflation.<br /><br />"But it's irrelevant in any case. Even if we're in your MMT derived alterna-world where the govt faces no real constraint (I'm pretty sure that this is not actually an MMT position, BTW),"<br /><br />No, the MMT position is that the government faces <i>only</i> real (and political) constraints - which means that soft currency debt (which is only nominal, not real) is never a constraint on government behaviour in and of itself.<br /><br />"all that it would take would be a market belief that the govt is going to default, and people would try to economise on their holdings of its money."<br /><br />Uh, no.<br /><br />Sovereigns do not typically default on cash. They occasionally default on bonds, and "the market" may believe that they will do so based on animal spirits.<br /><br />But, well, that doesn't matter. If people shift out of government bonds into cash, then the CB will just supply that cash and then absorb it again through the support rate on excess reserves.<br /><br />If people want to shift out of the currency altogether, then you do get inflation. But that's from deteriorating terms of trade, not from an excess of soft currency. (This, by the way, is an empirically testable claim - if the price increases on imported goods lead price increases on local goods, the inflation is imported; if the reverse, the inflation is local.)<br /><br />- JakeJakeShttp://www.eurotrib.comnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-4745746603025033662011-05-30T15:54:43.750-04:002011-05-30T15:54:43.750-04:00"Because the premise is false. Governments ca..."Because the premise is false. Governments can by definition never experience a collapse in their ability to serve debts denominated in the currency they themselves issue"<br /><br />Er, wat? Obviously, a government can experience a collapse in its ability to aquire <i>real</i> assets via taxation. <br /><br />But it's irrelevant in any case. Even if we're in your MMT derived alterna-world where the govt faces no real constraint (I'm pretty sure that this is not actually an MMT position, BTW), all that it would take would be a market belief that the govt is going to default, and people would try to economise on their holdings of its money. I.e., this could happen based purely on animal spirits and without any basis in fundamentals.<br /><br />You asked for a plausible mechanism. I gave you one.vimothynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-10294901135028675432011-05-30T14:54:31.120-04:002011-05-30T14:54:31.120-04:00VIMOTHY: "No, the fact that inflation is a mo...VIMOTHY: "No, the fact that inflation is a monetary phenomenon does not rely on the ability of the central bank to exogenously set the supply of inside money wherever it likes."<br /><br />Then what does it rely on.John Harveyhttps://www.blogger.com/profile/03555187626769532267noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-65908657259789019382011-05-30T14:31:15.684-04:002011-05-30T14:31:15.684-04:00"So let me get this straight: govts whose abi..."So let me get this straight: govts whose ability to service their debts collapses tend to experience an increase in the real value of the money they issue?"<br /><br />No, of course not.<br /><br />Because the premise is false. Governments can <i>by definition</i> never experience a collapse in their ability to serve debts denominated in the currency they themselves issue. Governments can only experience inability to service debts in <i>hard currency</i> - that is, currency that other people issue.<br /><br />So right out of the gate, your premise is nonsense.<br /><br />Now, what actually happens during a currency crisis is:<br /><br />1) Country accumulates hard currency debts.<br /><br />2) Country loses access to hard currency credit.<br /><br />3a) Country decides to defend currency against depreciation.<br /><br />3b) Country raises interest rates and/or engages in Austerity(TM) to defend against depreciation. This is deflationary (that, in fact, is the whole point of the exercise - it would not work to temporarily defend the exchange rate if it were not deflationary).<br /><br />3c) Country's economy goes down the crapper due to the deflationary effects of interest rate increases and Austerity(TM).<br /><br />3d) Country calls the IMF. The IMF does what the IMF does best: Turns the disaster into a catastrophe.<br /><br />4) Country gives in to the inevitable and permits currency to depreciate.<br /><br />5) Country experiences imported inflation from deteriorating terms of trade.<br /><br />(3a-d are optional, but frequently observed.)<br /><br />For an example of the whole chain of events, see Indochina in the '90s. Russia skipped over the deflation bit and went straight to the catastrophe merchants at the IMF (with predictable results), while Greece has not yet dropped its overvalued currency peg, and so is still in the deflation phase.<br /><br />The inflation here is caused by deteriorating terms of trade and has nothing to do with domestic supply and demand except inasmuch as it touches upon the foreign balance.<br /><br />- JakeJakeShttp://www.eurotrib.comnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-21093255689772266362011-05-30T14:11:24.509-04:002011-05-30T14:11:24.509-04:00"No, that is not the historical experience. H..."No, that is not the historical experience. Historically, that creates deflation."<br /><br />So let me get this straight: govts whose ability to service their debts collapses tend to experience an <i>increase</i> in the real value of the money they issue? Are you sure?vimothynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-48732518654422462982011-05-30T14:06:46.457-04:002011-05-30T14:06:46.457-04:00"or relative price confusion (supply shocks, ..."or relative price confusion (supply shocks, market power)."<br /><br />No, this isn't "relative price confusion."<br /><br />In the context of downward nominal price and wage rigidity, strategic resource bottlenecks will result in general price increases, because relative prices tend to adjust by some prices going up rather than some going up and others down.<br /><br />And in case you were wondering, there are excellent fundamental reasons for nominal downward price and wage rigidity in the credit economy. Namely that interest and amortisation expenses have strong nominal downward rigidity.<br /><br />If I make oil and you make cars and we are both geared 2:1 (fairly conservative gearing), and the real cost of oil increases, then it is <i>much</i> easier for us to make the relative price adjustment by me raising nominal prices than by you lowering nominal prices. Because me raising nominal prices screws the bank without costing me anything, while you lowering prices screws you directly.<br /><br />"I’m not sure what you mean by this, though: “Inflation can be caused by the industrial planning system planning for inflation”."<br /><br />Large, capital-intensive industrial firms benefit from moderate inflation, because it reduces the power of banks to obtain concession and makes it easier to satisfy shareholders' growth requirements (which are formulated in nominal terms).<br /><br />So if large, capital-intensive industrial firms are the dominant power in the political economy, they have both the means (oligopolistic price-fixing), motive (greater independence from banks and shareholders) and political air cover (from rented politicians and bought pundits) to ensure moderate, planned inflation.<br /><br />"That doesn’t seem like a particularly responsible attitude for a policy maker to take, if they don’t actually know why inflation has been low."<br /><br />Why not?<br /><br />Inflation is fairly harmless until it passes the double digits. As long as the money held for ordinary transactions does not depreciate appreciably during the time it is held in the course of ordinary transactions, inflation is of very little concern to the productive economy.<br /><br />Or, to put it in simpler terms, any inflation below 10 % p.a. is a tax on lazy money, and I fail to see why policymakers should care about the well-being of lazy money.<br /><br />- JakeJakeShttp://www.eurotrib.comnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-76923320794292938982011-05-30T14:06:16.045-04:002011-05-30T14:06:16.045-04:00"Imagine a situation in which the market rece..."Imagine a situation in which the market receives some information regarding the ability of the government of a country to pay its debts.<br /><br />[...]<br /><br />Something like that would do it, I think."<br /><br />Create inflation?<br /><br />No, that is not the historical experience. Historically, that creates deflation. See, e.g., Greece and Indochina.<br /><br />(And the reason it does that is that what you're actually observing here is a positive shock to hard currency demand in the target country, to pay down hard currency obligations that its residents cannot roll over.)<br /><br />If the target country attempts to maintain an overvalued currency peg, the resulting economic collapse may cause a currency collapse with (if the target country has a structural import dependency and a negative foreign primary balance) accompanying hyperinflation. But that is a very different story from the one you were telling.<br /><br />"Seems to boil down to “because they rise” again (price-wage spirals; excess demand)"<br /><br />Uh, no.<br /><br />Price-wage spirals involve an explicit cause-and-effect story. It's just not a cause-and-effect story about supply and demand, because price-wage spirals have nothing to do with supply and demand and everything to do with power relationships in the industrial planning system.<br /><br />During price-wage spirals, prices rise because both firms and labour have the power to fix prices on their own products, and are in a political conflict over the distribution of added value. Firms increase prices to capture a larger share of value added, and labour demands higher wages to restore their share of the value added. Because firms coordinate prices within but not across sectors, the Nash equilibrium of that process is (potentially accelerating) across-the-board price increases.<br /><br />[TBC]JakeShttp://www.eurotrib.comnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-47892255517189297902011-05-30T14:02:31.740-04:002011-05-30T14:02:31.740-04:00"Of course they are not "at equilibrium&...<i>"Of course they are not "at equilibrium"</i><br /><br />The issue is (or was), "How can Ms > Md given endogeneity of M?"<br /><br />If Ms=Md then the market for M can be said to be at equilibrium. In other words, if the it cannot be the case that Ms > Md, then either Ms < Md or Ms=Md. Ignoring the former (since the endogeneity argument applies to it equally), the claim that Ms cannot exceed Md is equivalent to the claim that the market for M is always in equilibrium, where equilibrium means Ms=Md.<br /><br />I'm not making any grandiose statements about the nature of reality here.<br /><br /><i>the financial system is fundamentally not an equilibrium system (more appropriate analogies would be biological homeostasis, or electrical grid load-balancing).</i><br /><br />You can use whatever metaphors you like to describe its behaviour.<br /><br /><i>But what you meant to say with "disequilibrium" is actually "failing to clear."</i><br /><br />What I meant to say was what I did say. If there is excess supply, then given p and a demand function, the public holds a quantity q greater than desired.<br /><br />If people hold more money than they want, they will try to get rid of it, and this will contribute to aggregate expenditure. Steve Waldman has been developing a model that you might find interesting here: http://www.interfluidity.com/v2/1699.html#comments<br /><br /><i>If you don't have a plausible cause-and-effect story, you're doing tooth fairy science.</i><br /><br />Orilly?vimothynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-1522633885668974142011-05-30T13:34:03.228-04:002011-05-30T13:34:03.228-04:00"No, don't just say that. Specify the mec..."No, don't just say that. Specify the mechanics of this postulated "shock to money demand.""<br /><br />I just did:<br /><br /><i>Imagine a situation in which the market receives some information regarding the ability of the government of a country to pay its debts. All of sudden, people say, "By Toutatis! I have all these money claims against that government. I need to get rid."<br /><br />Something like that would do it, I think. I'm sure I could come up with other scenarios that might explain why demand for a type of claim against a particular type of entity might shift.</i>vimothynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-27949163758835244712011-05-30T13:31:38.978-04:002011-05-30T13:31:38.978-04:00"Say that there is a negative shock to money ..."Say that there is a negative shock to money demand."<br /><br />No, don't just say that. Specify the mechanics of this postulated "shock to money demand."<br /><br />"So, to recap: Supply and demand for liquid bank deposit is not always at equilibrium."<br /><br />Of course they are not "at equilibrium" - the financial system is fundamentally not an equilibrium system (more appropriate analogies would be biological homeostasis, or electrical grid load-balancing).<br /><br />But what you meant to say with "disequilibrium" is actually "failing to clear." And you need a mechanism for such clearing failures that is capable of causing inflation. There exists a both plausible and observed mechanism for financial clearing failures that cause <i>deflation</i> (Fisher-Minsky debt-deflation spirals). But I am not aware of any proposed (let alone observed) causal mechanism for <i>inflation</i>-causing clearing failures.<br /><br />"Think about it in terms of supply and demand for any good."<br /><br />Money is not a good. It is a representation of power relationships. It turns out that this distinction is not vital to the present argument, but it is sufficiently important to be worth mentioning anyway.<br /><br />"Call this good "potato chips". Now, the supply of potato chips is endogenously determined by private supply and demand. Does this imply that this market is always in equilibrium? Hell no. Say there is a shock to supply or demand--there you go. And this despite its obvious endogeneity."<br /><br />However, it is easy to specify the causal mechanism behind shocks to potato chip supply or demand (crop failure, trade agreements, economic depression), and how they interact with the mechanics of production and distribution of potato chips to cause price adjustments and clearing failures.<br /><br />So what's the mechanism by which you get an inflation-causing clearing failure in the money markets?<br /><br />If you don't have a plausible cause-and-effect story, you're doing <a href="http://www.skepdic.com/toothfairyscience.html" rel="nofollow">tooth fairy science</a>.<br /><br />- JakeJakeShttp://www.eurotrib.comnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-12222352648784059502011-05-30T13:16:08.066-04:002011-05-30T13:16:08.066-04:00"So no real-world mechanism exists to allow t..."So no real-world mechanism exists to allow the central bank to create the Ms>Md that Neoclassicism says causes inflation?"<br /><br />How many millions of times?<br /><br />No, the central bank cannot exogenously set the supply of inside money wherever it likes.<br /><br />No, the fact that inflation is a monetary phenomenon does not rely on the ability of the central bank to exogenously set the supply of inside money wherever it likes.<br /><br />It's a straw-man argument.vimothynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-78382277037485574562011-05-30T13:10:17.172-04:002011-05-30T13:10:17.172-04:00Jake,
"Has a negative shock to money demand ...Jake,<br /><br />"Has a negative shock to money demand ever actually been observed in the real world? Where and when?"<br /><br />Imagine a situation in which the market receives some information regarding the ability of the government of a country to pay its debts. All of sudden, people say, "By Toutatis! I have all these money claims against that government. I need to get rid."<br /><br />Something like that would do it, I think. I'm sure I could come up with other scenarios that might explain why demand for a type of claim against a particular type of entity might shift.<br /><br />"The proximate cause [of inflation] is that vendors raise prices."<br /><br />Yes, but that's what inflation is, so that's a circular argument. We want to understand <i>why</i> prices rise. "Because they rise" is not much help. We know already that they do.<br /><br />"The ultimate cause can be lots of different things.<br /><br />Seems to boil down to “because they rise” again (price-wage spirals; excess demand) or relative price confusion (supply shocks, market power). <br /><br />I’m not sure what you mean by this, though: “Inflation can be caused by the industrial planning system planning for inflation”.<br /><br />What is the industrial planning system? How does it cause inflation?<br /><br />“And as long as inflation is below the double digits, it is a historical question of very little practical relevance for economic planning.”<br /><br />That doesn’t seem like a particularly responsible attitude for a policy maker to take, if they don’t actually know why inflation has been low.vimothynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-11467066187507083532011-05-30T13:07:44.020-04:002011-05-30T13:07:44.020-04:00So no real-world mechanism exists to allow the cen...So no real-world mechanism exists to allow the central bank to create the Ms>Md that Neoclassicism says causes inflation?<br /><br />I didn't think so.John Harveyhttps://www.blogger.com/profile/03555187626769532267noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-58329627507735784742011-05-30T12:55:08.012-04:002011-05-30T12:55:08.012-04:00I have already responded to that:
Say that there ...I have already responded to that:<br /><br /><i>Say that there is a negative shock to money demand. As long as the supply does not adjust instantaneously, there will be some period during which the private sector is holding "excess" money. How will it get rid of it?<br /><br />Or let's say there is a positive shock to money demand and supply doesn't adjust instantaneously. You personally can increase your holdings of money by either not spending your income or by selling something. If everyone does this there will be aggregate expenditure effects.</i><br /><br />[That's what Jake is referring to in his post at May 30, 2011 12:21 PM]<br /><br />Whereupon you responded, ignoring my explanation,<br /><br />"For the nth time, tell me how they do X!"<br /><br /><i>One more time to be absolutely, crystal clear: by what specific, real-world process does the central bank increase money supply above money demand?</i><br /><br />So, to recap: Supply and demand for liquid bank deposit is not always at equilibrium.<br /><br />Think about it in terms of supply and demand for <i>any</i> good. Call this good "potato chips". Now, the supply of potato chips is endogenously determined by private supply and demand. Does this imply that this market is always in equilibrium? Hell no. Say there is a shock to supply or demand--there you go. And this despite its obvious endogeneity.vimothynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-65662659965323159242011-05-30T12:41:47.893-04:002011-05-30T12:41:47.893-04:00Nice post, Jake!Nice post, Jake!John Harveyhttps://www.blogger.com/profile/03555187626769532267noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-41557273881433900652011-05-30T12:30:23.522-04:002011-05-30T12:30:23.522-04:00VIMOTHY: In other words, you've claimed that n...VIMOTHY: In other words, you've claimed that neoclassicals believe the central bank can do X. I've claimed that they don't believe that at all. You have responded by saying, "For the nth time, tell me how the central bank can do X!"<br /><br />Vimothy, you are completely misunderstanding the argument. I never said that Neoclassicals do believe that the central bank has complete control of an exogenous money supply. I said that they need to to make their explanation work, making their argument inconsistent. In fact, we went over this very ground before. Here is our earlier exchange:<br /><br />“VIMOTHY: (quoting JTH) “Now ask a Neoclassical economist how that can happen in the real world.” (Now Vimothy) A testable proposition, eh! Actually, I’ve already done this: I asked our lecturer in monetary theory, and he said that the Fed can’t directly control any of the broader monetary aggregates, which is why they don’t bother trying. He also told me that there was no stable velocity multiplier. In fact he explicitly contradicted all four of the assumptions that you wrote about in your Forbes article. <br /><br />JTH: This is actually an excellent example of what I’m talking about. Did you ask if he believes that excess monetary growth causes inflation? Because with the above explanation, it can’t. And yet, that’s the Neoclassical theory. So they know very well that in terms of real world mechanisms, it’s impossible. But their method allows them to say this at the end: “Yes, but the real world acts as if it were possible.”“<br /><br />How can the Neoclassical explanation of inflation, based on Ms>Md, survive in an endogenous-money world? And yet they do.John Harveyhttps://www.blogger.com/profile/03555187626769532267noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-39686108473878830842011-05-30T12:21:01.400-04:002011-05-30T12:21:01.400-04:00"Say that there is a negative shock to money ..."Say that there is a negative shock to money demand."<br /><br />Has a negative shock to money demand ever actually been observed in the real world? Where and when?<br /><br />Positive shocks to money demand have been observed, and institutionalists have a cause-and-effect explanation for how those comes about (see, e.g. Hyman Minsky, <i>Stabilizing an Unstable Economy</i>). But off the top of my head, I can't think of any historical example of a negative shock to money demand.<br /><br />"As long as the supply does not adjust instantaneously, there will be some period during which the private sector is holding "excess" money. How will it get rid of it?"<br /><br />What is the proposed mechanism behind this postulated negative shock to money demand? It can't be an inverse Minsky Moment, because the cause-and-effect explanation of Minsky Moments involves fundamental asymmetries between expanding and contracting credit.<br /><br />If the mechanism is reduced savings, then the money supply *will* change instantaneously to accommodate it. The cause of inflation (if in fact there is any) under this scenario is greater aggregate demand from reduced savings under constant or increasing short-term income. Money supply has nothing to do with it.<br /><br />"While we're sharing, I'm intrigued as to what you think causes inflation if not growth in the money supply?"<br /><br />The proximate cause is that vendors raise prices.<br /><br />The ultimate cause can be lots of different things.<br /><br />The price increase can be due to increased market power by sellers, in which case you will find that sellers increase their markup.<br /><br />The price increase can be due to unresolved power struggles in the political economy - the price-wage spiral is the canonical example here.<br /><br />The price increase can be due to real scarcities that the political economy is poorly equipped to deal with. This will be characterised by constant or declining margins and wages at the same time as inflation (stagflation).<br /><br />The price increase can be due to an excess of demand over what the political economy is capable of satisfying.<br /><br />Inflation can be caused by the industrial planning system planning for inflation, because moderate inflation increases the stability and power of the industrial planning system (by reducing real debt burdens and by making nominal growth easier).<br /><br />And so on and so forth.<br /><br />It's essentially a historical question, not a predictive one. And as long as inflation is below the double digits, it is a historical question of very little practical relevance for economic planning.<br /><br />The central bank cannot, as a practical matter, increase inflation. It can refrain from suppressing inflation. But the only way in which the central bank can suppress inflation in the first place is by generating idle capacity in the productive economy by creating an artificial minimum required return on investment.<br /><br />And I am not wholly certain why it should be the central bank's job to make business plans that are profitable on their merits unprofitable simply by policy fiat. That strikes me as a fairly crude and dumb way to control inflation, compared to addressing the underlying causes (such as unresolved power struggles or strategic resource bottlenecks).<br /><br />- JakeJakeShttp://www.eurotrib.comnoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-3060070732307140402011-05-30T11:53:27.437-04:002011-05-30T11:53:27.437-04:00"Vimothy, let me point out that I am not the ..."Vimothy, let me point out that I am not the only person reading this exchange who believes that you are now changing your mind about what you said"<br /><br />Another solid argument. Far be it from me to tell you what I did or didn't mean.<br /><br />I certainly agree that we've done this to death now.<br /><br />"With respect to answering my question, no you most certainly have not."<br /><br />I have answered it several times.<br /><br />If the central bank does not control the supply of bank deposits then by definition it can't directly change the supply of bank deposits. What else is there to say?<br /><br />Things that the central bank can do can affect liquid bank deposit supply and demand functions, but there is no simple way that the central bank can control an aggregate like M4. This is why monetarism was abandoned as a practical endeavour decades ago. <br /><br />Indeed, in my own neoclassical monetary theory classes, this is exactly what we were taught.<br /><br />In other words, you've claimed that neoclassicals believe the central bank can do X. I've claimed that they don't believe that at all. You have responded by saying, "For the nth time, tell me how the central bank can do X!"<br /><br />It's a false-flag / false dichotomy / straw man type argument. Nobody believes that the central bank can directly control the money supply. If they did, we would see central banks attempting to directly control the money supply. However, we do not.vimothynoreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-37278263994800743632011-05-30T11:08:20.369-04:002011-05-30T11:08:20.369-04:00Vimothy, let me point out that I am not the only p...Vimothy, let me point out that I am not the only person reading this exchange who believes that you are now changing your mind about what you said. So if I have a talent for misreading posts, apparently I am not alone. I have answered your questions completely and directly, I just don’t think you want to believe that you are wrong. Okay. Nothing else I can do on that front.<br /><br />With respect to answering my question, no you most certainly have not. I asked a very, very simple question (in fact, I’ve asked it 8 times now, including the exchange with the monetarist at Forbes.com, and have yet to see response): by what specific, real-world process does the central bank increase money supply above money demand?<br /><br />You say: “The central bank does not increase the "money supply" at all. The central bank engages in OMOs, which determine a policy rate and the stock of outside money. (Excepting some unconventional operations like QE, which can affect broad money directly). The money supply in terms of the stock of liquid bank deposits is endogenously determined by the private sector. “<br /><br />So, are you saying that it can’t? If so, please say so–give me a direct answer to my question: “Actually, the central bank cannot act to increase the supply of money above the demand.” Although, if that’s the answer, them I’m awfully curious about how the Neoclassical story of Ms>Md actually works. And THAT has been the point all along, the fact that Neoclassicism is perfectly willing to accept as a major premise something that is not just a simplification. It specifies a process that cannot occur in the real world.<br /><br />So, for the ninth time: by what specific, real-world process does the central bank increase money supply above money demand?<br /><br />Unless I’m missing something here, the answer has to be either, “It happens like this...” or “It can’t happen.” Which one is it?????John Harveyhttps://www.blogger.com/profile/03555187626769532267noreply@blogger.comtag:blogger.com,1999:blog-2761684730989137546.post-46026029822045985392011-05-30T10:22:30.075-04:002011-05-30T10:22:30.075-04:00"I’m going to drop the whole thing about the ..."I’m going to drop the whole thing about the research since you have obviously somehow convinced yourself that you did not type what I can read in the posts above."<br /><br />Erm, no John, obviously I typed what you can read in the comments above, but the words do not mean what you think they mean.<br /><br />You have a remarkable talent for misreading posts. You've managed to avoid engaging with anything substantive that I've written and spent most of the conversation banging on about this, despite the fact that I’ve clarified it several times. No, I’m not suggesting that you haven’t done any research. No, I don’t actually care if you have done a survey. It's particularly ironic given that you yourself wrote the words you object to so vehemently. You brought the survey up in the first place, remember?<br /><br />“Did some economist do a study or survey to determine this? No.”<br /><br />Of course, neoclassical economists just make it up. It’s what they do. On the other hand, PK economists make sure that they can point to real world processes. Right. The fact that you are a PK economist and this distinction makes PK economists look good relative to neoclassical economists is unrelated to the distinction itself, I’m sure.<br /><br />You wrote in the OP that,<br /><br />Neoclassical economists <i>"believe that knowledge gained from introspection and the generation of “obviously true” premises is superior to that based on observation of the real world."</i><br /><br />Can you point to something in the real world to back this up? You don’t in the OP. Did you, in fact, do a survey to verify it? No. So, quite regardless of anything else you may or may not have done (apparently, it was a major side interest of yours for 25 years, before you decided that "Neoclassical economics is poorly done"—thanks for that) and regardless of its truth or falsity, that's something you share with the straw man microeconomist that you wrote about, who didn’t do a survey either and who doesn't know for certain whether or not firms in the real world maximize profits. There is a sense in which you are both alike.<br /><br />Again, your claim was that neoclassical arguments have property X, and PK arguments have property Y, where Y > X. I have suggested that your claim is itself a PK argument, and that it shares some of property X, which is a contradiction. For your part you have stated at length how offended you are that anyone should have the temerity to suggest that one of your arguments has the property X. You are actually offended! I mean, really. It’s too much.<br /><br />"No, that’s not my question. I wrote it out twice so there would be no misunderstanding. But, I’ll write it again: by what specific, real-world process does the central bank increase money supply above money demand?"<br /><br />Well, I already answered it. The central bank does not increase the "money supply" at all. The central bank engages in OMOs, which determine a policy rate and the stock of outside money. (Excepting some unconventional operations like QE, which can affect broad money directly). The money supply in terms of the stock of liquid bank deposits is endogenously determined by the private sector. <br /><br />Other things are also endogenously determined by the private sector. For instance, the supply of potato chips. How does the central bank increase the supply of potato chips so that PCs>PCd? Can it ever be the case that PCs>PCd? How, if potato chips are endogenous? Crazy world, ain’t she.vimothynoreply@blogger.com