Thursday, November 29, 2012

John Carney — Monetarists at the Gate: Krugman Vs Austrian School

Mentions MMT, but mostly about Austrian economics. John explains the difference between the usual meaning of "inflation" in economics and how  Austrian economics uses the term. They are conceptually different and this leads to confusion not only for critics of Austrian economics but also by some who profess to be following the principles of Austrian economics.

Monetarists at the Gate: Krugman Vs Austrian School
John Carney


Matt Franko said...

"A combination of a growing fiscal deficit and an accommodative monetary policy have helped prevent the housing slump and financial crisis from depressing prices generally. This is entirely in keeping with the Austrian approach to economics."

I guess OPEC/SaudiArabia doesnt have anything to do with it??? Please...

Tom Hickey said...

""A combination of a growing fiscal deficit and an accommodative monetary policy have helped prevent the housing slump and financial crisis from depressing prices generally. This is entirely in keeping with the Austrian approach to economics.""

In keeping with MMT, too, as far as I can see. Without the increased deficits there is a good chance that the US would have lipped into deflation, and monetary policy contributed to keeping mortgage rates low to support the housing market. While there was a crash it has generally been contained without creating a full-on depression.

I'm not so sure that OPEC/Saudis did all that much to keep the price of oil down, tho.

paul meli said...

"A combination of a growing fiscal deficit"

Bob Roddis consistently says this is evil. Are there multiple disciplines of Austrian or is he just bonkers?

Silly question. :-)

Unknown said...

An increase in the potato supply is "potato inflation".

Potato inflation INEVITABLY leads to a fall in the price of potatoes.


JK said...


Did the massive spending for the New Deal and for WW2 lead to all sorts of problems after the war? My less than elementary understanding of this time is that the U.S. saw a few pretty great decades as a result. Or maybe that's just because much of the world's productive capacity had be demolished? Even if that's true… it seems the MMT point remains.. if/when their is an output gap / under-utilized productivie capacity… "funny money" stimulation can be very useful.

Thoughts? (anyone)

Matt Franko said...

I would also point out that prior to fall 2008 petroleum was trading at like $145 a barrel and the "money supply" was at like $20B (reserves) then after the GFC the Fed "increased the so called "money supply" like 13,000 percent and the price of oil collapsed to like $33...

If one can see the contradiction:

You witness a time domain response like this to some sort of data... AND THE EXACT OPPOSITE OF WHAT WAS PREDICTED HAPPENS... that is the textbook definition of being "full of shit"...


Tom Hickey said...

But few people think that the price of oil is purely a function of supply and demand for actual use since oil became an asset. The oil bubble burst as an integral aspect of the GFC when the speculators bailed. It rose again as the speculative side of the market heated up and low rates would have enabled greater use of margin.

SchittReport said...

paul krugman takes pleasure in cullen roche mocking peter schiff's hyperinflation fail:

Tom Hickey said...

By mentioning Cullen is PK sending another signal he has taken monetary economics seriously.

At Krugman's blog Ron T comments on the post, Varieties of Error:

Now you say "the CB sets the rates, so what can adjust is the exchange rate". In 2003 you said that interest rates are set by the market for loanable funds. You cannot get your 2012 model from any IS-LM you were using in 2003, it has to be put in as an insight from understanding how the CB sets rates. The model from 2003 could not, even if taken very seriously, give you that, because only in 2011 you started asking questions why sovereign nations have stable yields which led you to conclude that having own currency is all that matters.

SchittReport said...


it probably means that krugman revisited & developed a more precise understanding of the monetary system and monetary policies after several encounters with the MMT crowd (and perhaps after that debacle with steve keen).

after all you can't be an expert in everything and we all know this was not originally krugman's field of expertise.

good to see that smart, rational people can accommodate ideas and facts which were not originally part and parcel of their 'thinking'.

***wink wink***

Critical Tinkerer said...

After the war there was even more deficit spending. Eisenhower Interstate requiered huge financing. It was done partly out of the fear that reduced deficit spending will cause another depression. There was also G.I. bill to keep large number of returned soldiers from seeking a job imedietly after the war.
If large part of the world was demolished then it was demolished large part of their buying power too, so trade did not play large part in preventing the after WII depression. It was the Marshall plan that enabled the trade and exports. Marshall plan was a huge givaway of $US to ruined countries with which they bought US products.
Without Marshall plan demolished world would not be able to import from US. Krugman gave a good post about that recently.

googleheim said...


are you saying that there is a fourier transformation going on here ? synthetically imposed on the system by analysts ?

Unknown said...
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Unknown said...

"prices would have fallen further to their unadulterated level"

You mean to the level at which they would have been had paper money or credit never been invented and we had stuck with using only gold or silver - i.e. to the level at which they would have been in an imaginary world that has never and could never have existed, but that you fervently believe in because reality is irrelevant to your ideology. Is that what you mean?

Unknown said...

"years of further bad times caused by artificially low interest rates"

You mean interest rates not set by the demand for and supply of gold, which is completely irrelevant because that has nothing to do with the real world whatsoever. Is that what you mean by "artificial"?

"and general overall government interference in the pricing process which is fatal to informed economic calculation"

You mean that anything which the government does automatically makes "informed economic calculation" impossible because in your tautological world which bears no resemblance to reality whatsoever economic calculation is by definition only possible in the absence of any government "interference", but only if people only use gold or silver and there is no paper money or credit in existence, which again is completely meaningless because that's an imaginary parallel universe which has nothing to do with reality whatsoever. Is that what you mean?

mike norman said...

In other words, Austrians will insist that any increase in the money supply is inflation—as a matter of definition. But Austrian economics does not insist that this kind of inflation necessarily results in higher prices. -Carney

Carney doesn't know what the hell he's talking about.

Matt Franko said...


That looks like the time domain response of a Nuclear EMP or a 100,000 Amp lightning strike....

This would be like getting struck by a main lightning ground stroke and instead of becoming a human cinder you actually survived and felt better for it!

Monetarism is completely absurd LOL!


Unknown said...
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Unknown said...

From now on I'm going to refer to an increase in the supply of anything as "inflation", just to be consistent with the austrian school.

An increase in the supply of potatoes: "pototo inflation".

An increase in the supply of cars: "car inflation".

An increase in the supply of houses: "house inflation".

An increase in the supply of water: "water inflation".

An increase in the supply of medicine: "medicine inflation".

An increase in the supply of air: "air inflation".


paul meli said...

"with the seller perhaps going bankrupt…"

That's right Bob, a large swath of businesses going bankrupt suddenly.

As usual, Austrian economics results in scorched earth.

So a handful of "true believers" can get what exactly?

If you want to sell this crap I suggest you try to paint a prettier picture.

Tom Hickey said...

@ SR November 29, 2012 11:50 PM

I think that is true about Krugman. Looking back at his earlier work on trade, he exhibits a good understanding of currencies, BOP, etc. But he was also captured by Samuelson's neoclassical synthesis, and he probably didn't make the connections he needed to make. Now he is putting two and two together, and the light seems to be dawning.

Unknown said...

Bob you're a tiresome idiot. Just repeating your crap over and over doesn't magically turn it into non-crap, you know.

paul meli said...

"there would be no boom/bust cycle" - Bob

Very few people would be working. We would have an economy similar to Bangladesh or Somalia.

Let's see Bob sell vacation packages to those countries.

John Zelnicker said...

Tom -- I just got this post in my RSS. I think it's interesting because I have seen here and elsewhere that physicists seem to get MMT as soon as they see it as a closed system. This new Congressman may be someone who could be approached and perhaps educated in MMT.

paul meli said...


Bob, why does this matter if the vast majority of participants enjoy an ever-increasing quality of life and standard of living?

Why must you be so obnoxious?

Tom Hickey said...

@ Mike November 30, 2012 7:16 AM

What John may mean is that expansion of M doesn't necessarily lead to a rise in the price level (goods) but does increase the value (marginal price) of assets. But the rest of the argument is usually that increasing value of assets eventually leads to a rise in the price level and a demand fof increased wages as the real wage falls.

Tom Hickey said...

@ y November 30, 2012 8:10 AM

Don't forget ego inflation. :)

Unknown said...

I couldn't care less Bob.

We've heard your stories about "artificial" this and "artificial" that. We've heard your garbage about the evils of Keynesianism and the wonders of permanent deflation. We've heard your crappy barter stories and all about your bizarre obsession with shiny metal. We've heard you describe your imaginary little world over and over again. The story never changes, each re-telling is as ridiculous as the last.

paul meli said...


The problem with closed system concepts seems to be that it's just too simple. Any object that can be described as a "container" or viewed within a closed boundary, real or imagined is a closed system if it isn't allowed to exchange mass or energy (or numbers) with it's surroundings.

A pail, your wallet, your checkbook, a household the list is endless.

I think people have trouble seeing this as having any importance, or the idea that it matters doesn't occur to them.

If you were to ask someone if they could put two balls in a pail and take three out they would say it's impossible.

Make a similar argument wrt money and confusion ensues.

This isn't a difficult concept. I believe it is a consequence of our education system. People are not taught to think critically, they are taught to memorize things. Abstraction is avoided.

paul meli said...

"increasing value of assets eventually leads to a rise in the price level"

Tom, I'm pretty sure it can be proved, but if not it can at least be demonstrated that increasing value of assets is contingent upon or a function of an increase in NFA.

Essentially without an increase in NFA, any rise in values would have to be a result in increasing leverage, i.e. debt (credit) leverages value by leveraging itself off of NFA.

As NFA approaches zero leverage approaches infinity.

Tom Hickey said...

@ John November 30, 2012 10:51 AM

Right, we need a liaison committee of people in or near DC to go over and lobby likely prospects and their staffs.

Tom Hickey said...

@ paul,

Financial asset price increases not due to additional value of underlying assets are the result of leverage, and the value of RE is dependent on what banks will lend on RE as collateral. Since the value of construction is easily appraised, the value add is land value.

As Bob Roddis continually reminds us, if people had to pay in specie up front, prices would be much more stable and there would not be the financial (credit) cycles that we now experience. Of course, demand would be a lot lower, too, and as a result, so would investment, meaning lower growth. So it is a trade-off.

Matt Franko said...


To you point, all speculation is financed in margin accounts...

iow if the govt wants to allow it's banks to lend people $NFA balances to take long positions on oil at $145/bbl like the govt did in 2008, then that is where the price level goes...

Cannot happen without the access to credit...


John Zelnicker said...

paul -- I even read (maybe here) someone responding to MMT by saying something like: "It can't be that easy..."

paul meli said...


I'm not sure I follow your point completely.

It is also important to differentiate between consumer credit and business credit - completely different animals.

Another distinction is that all business credit is ultimately settled by consumer spending.


"if people had to pay in specie up front, prices would be much more stable"

Specie or fiat, I don't think it matters much, prices would likely be more stable. That isn't what I'm saying.

I'm saying values, relative or otherwise could not increase without an increase in NFA, unless leverage were unlimited, more or less.

Also keep in mind that we have not always had huge amounts of consumer credit and the system performed just fine.

mike norman said...

@Tom: that's the same thing as saying, "there's more money."

What Carney (and the Austrians) is inferring is that it devalues the currency, but that is not a given. Look at the expansion of Japan's base and the yen has been strong as hell.

Tom Hickey said...

paul Also keep in mind that we have not always had huge amounts of consumer credit and the system performed just fine.

Right, prudent use of credit is expansionary without being overly so and stressing the system. More limited use of credit is contractionary.

This is the problem with the financial cycle. At the crest debt becomes unsustainable based on ability to service it, and there is a contraction. The contraction is exacerbated and prolonged by tightening credit standards.

What Minsky says is that finding a happy medium between tight and loose credit is well nigh impossible and the result is financial instability. Financial markets alone are insufficient to eliminate the problem due to "irrational exuberance" (Robert J. Shiller) resulting from "animal spirits" (J. M. Keynes, George A. Akerlof and Robert J. Shiller). See also Charles P. Kindleberger.

The solutions proposed from "sound money," reforming the financial sector, and limiting lending through higher standards, to tighter regulation and enforcement by govt.

Tom Hickey said...

John paul -- I even read (maybe here) someone responding to MMT by saying something like: "It can't be that easy..."

It's simple but not easy. :)

paul meli said...

Matt, I just noticed this:

"iow if the govt wants to allow it's banks to lend people $NFA balances"

Banks don't lend $NFA balances…that's part of the point I was trying to make.

Matt Franko said...


My comment concerned the role of speculation in derivatives being facilitated by bank credit that allows the prices of commodities to rise...

As Warren sez: "all prices are necessarily A FUNCTION OF what price the govt agrees to pay for things and what price they allow their banks to lend against things... derivative positions are financed at the exchange price...

Mike has talked about how the govt can call a "liquidation only" market and force the closing of all positions and collapse the prices as they take away the finance of derivative positions in commodities....

"money supply" doesnt have anything to do with prices.... it's a function of the govt acting as "price setter"...


Matt Franko said...


Perhaps Mike and I would be retired if in 2008 the Fed allowed the "free market" to price EUR/USD instead of price setting via agreeing to swap unlimited amounts of the USD currency with the Euro banks at like $1.25.... (I may exaggerate a bit;)


paul meli said...


I'm referencing "value" not "price". Tom I think mentioned the term "price".

I'm trying to demonstrate a relationship between "value" and NFA if there is one. I believe there is.

Tom Hickey said...

Some economists take price = value. Traders and "value investors" know that price fluctuates wrt value .e.g., technical analysis v. fundamental analysis.

paul meli said...

"Some economists take price = value"

Tom, that's probably true. I'm trying to make the argument that neither can rise without a corresponding rise in NFA.

Unless leverage can increase without limit.

Matt Franko said...

"Unless leverage can increase without limit."

That more or less describes the futures markets imo Paul...


paul meli said...


I'll show you something that may change your mind.

I'll e-mail it to you this weekend when I'm finished with it.