The Conservative Case for QE2, Or, Why I Still Will Not Be an Austrian.

Economics Economics Questions
181

I don’t support fiat money and I’m not talking about fiat money, but either way, there’s no reason to believe that we should elevate the supply of money when the demand for money rises in a monetary system which employs commodity money, but that we shouldn’t elevate the supply of money when the demand for money rises in a monetary system that employs fiat money.

And why am I the only one trying to remedy Smiling Dave’s torrential confusion? Am I the only one that’s aware of the fact that the main problem with inflation is that it causes relative price distortions, business cycles, and an arbitrary redistribution of wealth (that has nothing to do with general price inflation)? Can someone please tell him that I’m right so that he can shut up and educate himself?

182

You have no idea why this is irrelevant, do you?

Nobody denies that, given a fiat standard, printing new bills can have the same effect as counterfeiting.

Nobody, however, is arguing for counterfeiting, i.e. printing new bills of money, just because.

Note: I’m not convinced by the argument Esuric is making. But if you keep misunderstanding the position, you’ll keep making irrelevant posts like this.

183

Finally, finally, we get to the trade cycle. In Chapter 17 of this jewel of a book.

Now what is credit expansion? Credit expansion is inflation also…

With credit expansion the additional quantities of money enter the eco-
nomic system, not through government spending, but through loans of
newly created credit to businessmen by the banks. So the prices of the
things businesses buy go up.

This brings about a “boom” in business. If
this boomis not stopped in time, it develops into a great economic crisis.
This is the trade cycle, the most interesting phenomenon of the capitalistic
system.

OK guys, we have arrived. Uncle Mises is finally going to exonerate Esuric of all my criticism. He will get right out there and talk about how inflation makes some prices go up, some go down, and generally “distorts” the true state of affairs, right? After all, this whole book is about inflation. and the most significant part of inflation is, according to Esuric, all these “distortions”, right? Even though in the previous paragraph he only talked about prices going up, not some up, some down, some left , some right, surely he will listen to Esuric and correct this state of affairs right now, no?

Nope. Most disappointing, but he TOTALLY IGNORES every thing Esuric said was the “real” problem caused by inflation.

The trade cycle is due to the fact that banks expand credit and this
credit expansionbrings about an expansion of business. But as the quan-
titiesofproducers’ goods, capital goods, arenot increased, there is anover-
expansion of some businesses, but not a general over-investment, as it is
called by some finance brokers, throughout thewhole economy. The sig-
nificant characteristic of the boom is this over-expansion by the artificial
lowering of the interest rate in order to create the credit expansion. This
misleads businessmen into thinking that there is a greater amount of cap-
ital goods available than actually exists, and that certain projects are now
possible which would have been impossible with a higher rate of inter-

est. In fact the only thing that is newly available is an increasedamount of
credit created precisely for this purpose.This system, this “boom,”goes on
until finally it breaks down when it becomes apparent that the so-called
“over-investment” is actually mal-investment or over-expansion in some
areas of the economy.

184

Did you read my comment explaining why changes in monetary conditions alter the money rate of interest but do not alter the natural rate of interest (if we hold the ceteris paribus condition). Also, what other problems do you have? I have some problems with my analysis as well and I would like to discuss them.

Thank you. I’m trying to ignore him but it’s becoming increasingly difficult. He simply never stops. This is worse than his attempt to refute Ricardo’s law of association, and when he tried to prove that debt is inherently “bad.”

185

?

So, if I need shoes, I could make myself a pair. And if I need money, I could just print myself some money?

Z.

186

Esuric,

I read your posts as endorsing that you support a basically free banking system (as defended by White, Horwitz and others).

This means that there is a ‘base’ of gold money, but that the bankliabilities at any given time in that system could be higher than the amount of gold in the vaults. But this also means that people have loans to pay of to the bank - so that in the ‘long run’ bank liabilities will be equal to the amount of gold. (If all loans are paid out to the bank.)

This means that ‘a increase in the supply of money’ means that bank have to write down more bank liabilities - that people have to pay back, eventually. So the supply of money increases and decreases, according to market forces.

Is this interpretation of your vision correct?

If correct, this might be important for the people opposing your views, to understand this mechanism. That it is not ‘just’ printing more money; but adjusting the supply of money (bank liabilities) to the demand people have for it, and that this can raise and go down again.

So the banking system can adjust to demands people have by increasing, basically, loans (increase bank liabilities) but these have to be paid back to people.

Is this interpretation correct?

187

Adrian,

I was not referring to Esuric this time, but to another poster. I implied earlier that the govt is just a bunch of counterfeiters, and that just as nobody thinks counterfeiting is good, so too nobody should think money printing is good. I was told not to conflate the govt and counterfeiters. This quote was to show that Mises says they are identical, too.

188

Straw man strikes again. I never said anything of the kind. I explicitly said that it depends WHY you are borrowing the money.

189

I’m sorry, but this quote proves Esuric being correct in his assessment (about the importance of relative prices being the cause of the business cycle/problems.)

Mises is saying that relative price changes are the problem. Just because he doesn’t explain in the same words as Esuric is using, doesn’t mean Esuric is making the same point as Mises is making. Mises is implicitly (and correctly) assuming that there will be Cantillon-effects, and therefore we will have these problems. That’s what Esuric saying the whole time…

Do you know/understand the concept of ‘Cantillon-effects’? Do you understand that there would be no businesscycle in a world (1) with inflation but (2) without cantillon-effects? Than you understand that Esuric is correct.

190

This paper by Barnett and Block suggests that money is a producer’s good. YMMV, of course.

(Thanks to the Nirgraham of 2009!)

191

You tried to disprove the Ricardian law of association?

192

tsk tsk. “Shut up”? You listening Danny?

193

I must have missed that post: I didn’t see anyone saying that government (today) doesn’t have the same economic consequences of counterfeiters.

194

No I did not try to disprove Ricardo at all. He is misstating my position.

195

By the way, does anyone agree that a distinction should be made between the total quantity of money and the quantity of money in circulation (i.e. being spent and invested)?

196

Loans are assets for banks, not a liabilities. What I support is what Mises supported, namely a competitive banking system. If 100% reserves naturally emerge, then so be it, but there’s no reason to believe that this would be the case. There’s a natural organic adjustment mechanism that exists within competitive banking systems which prevents over-expansion of money and credit–Mises spends a lot of time dealing with this issue, but this is not what I want to talk about. What I want to talk about is the theoretical interconnectedness between inter-temporal disequilibrium and monetary disequilibrium.

This the problem. People are focusing on the normative implications of my purely theoretical argument rather than the actual argument itself, and it’s causing emotional knee-jerk reactions. This is the problem with fusing ethics with economics.

197

Who would accept your money? And if no one accepts your money, then it’s not money. This question is nonsensical. Do you understand what money is? You’re free to open up a bank and compete with other banks, by providing sound money and issuing sound loans.

Also, please stop avoiding my point about the effects of monetary disequilibrium on the capital structure. We all agree (with the exception of Dave) that inflation yields relative price distortions, inter-temporal disequilibrium (the money rate of interest is pushed below the natural rate), and distorts the capital structure. I’m merely asking you to investigate the ramifications of the inverse situation, when the supply of money falls below the demand for money, and when the money rate of interest rises above the natural rate.

198

Of course a loan is a an asset and not a liability, but what does the bank ‘loan out’, i.e. ‘give away’? Bank liabilities (‘money’, in White/Horwitz terminology), i.e. demands at the bank. So the bank ‘loans’ 100 ounces of gold out, but that means the person who takes the loan, has 100 ounces of gold in bank liability. This is the increase in amount of ‘money’ - there are more bank liabilities than there is ‘gold’. But this increase also implies that the amount of money (bank liabilities) will go down again - at least ‘in the long run’, when all the loans are paid back to the bank.

If people get that it’s not just ‘inflating’ the money supply, but an interconnection between raising and lowering the amount of money, relative to the amount of gold, they might get where you are coming from a bit more.

So; given this perspective. If the demand for money raises, banks can react by increasing the supply of money through loans - but these loans have to be paid back (and, probably, with an interest on them).

if everything I said so far is correct, than some of the criticisms disappear. People have attributed to your position ‘well, we’ll just print more money!’ implying that there is no cost. But given this vision of the increase of money, there is, in fact a cost - so it’s not just ‘inflating’ or ‘printing more money’ without any relationship to scarcity as such.

So given this perspective; imagine the demand for money goes up and, ceteris paribus, the time preference rate doesn’t change. Banks could increase the supply of money (through loans) so people don’t have to sell stuff or save less. But this can’t go on indefinitely: people have to ‘lower’ their demand for money again - or really lower consumption or savings.

But because of this mechanism, people can increase their demand for money, without any need to adjust the entire structure of production. The only thing that changes is the amount of money.

This makes some sense, to me.

199

This is what I have about Cantillion effects, from Mark Thornton:

Cantillon effects are named for their discoverer, Richard Cantillon, who is
widely credited as the first economic theorist, and in particular, was the first

to show that changes in the money supply and credit have important impacts
on the economy by changing relative prices.7 Cantillon showed that an
increase in the supply of money would cause economic expansion, but that
ultimately the process would be self-reversing as prices would rise and
imports would increase, sending money back out of the economy. Cantillon
further showed that monetary inflation does not affect all prices equally or at
the same time, but in sequences that depend on the spending behavior of
money holders all along the channels of monetary flows. These ideas have
been adopted and extended by Knut Wicksell, Ludwig von Mises, and F.A.
Hayek and more recently by McCulloch (1981) and Garrison (2001).

Cantillon effects are the real fundamental changes in resource allocation
that result from changing relative prices between the time of the creation of
new money and the full adjustment to the increase in supply. …

Most importantly, changes in the supply of money can have effects on the
interest rate and once again the effect will depend on how the money enters
the economy. On the one hand, if it comes into the hands of traditional bor-
rowers or lenders, such as developers, the rate of interest would initially fall.
This is similar to the Austrian theory of the business cycle in that when banks
expand the money supply and lower the interest rate below what it would have
been borrowers invest in longer term capital projects. On the other hand, if
the money came into the hands of consumers, the rate of interest might rise
as suppliers attempt to meet the new demand for goods. In the Austrian view,
changes in the interest rate change the relative price between longer-term cap-
ital projects and shorter-term capital projects. A lowering of the interest rate
raises the prices of longer term capital goods relative to shorter term capital
goods.
In response to the change in relative prices, more resources are allocated
to long-term capital goods. Unlike other aspects of the self-adjusting market
process, such as money, land, labor, and short-term or intermediate capital
goods, these resources become suspended or fixed in long-term fixed capital
goods. These resources become formulated in a highly-specific capital good
that may not be well-suited to the alternative production processes of the
post-adjustment economy. As a result, all of the adjustment in these long-term
fixed capital goods must come from a change in price and this will entail large
losses and possible bankruptcies by the owners of these capital goods. To the

extent that these types of adjustments are widespread, they pose a threat to
capital markets and the banking system.

OK, so bottom line:

  1. After allowing for all the Cantillon effects in the world, money, land , labor, and short and intermediate capital goods will take care of themselves. No need for meddling by anyone. And they have no influence on ABCT.

  2. The two Cantillon effects that matter in ABCT are low interest rates and the resulting change in long range capital goods. Note the second is a direct consequence of the first.

  3. This is in direct contradiction to Esuric’s absurd claim that “distortions” of prices of everything, some up, some down, are responsible for ABCT. All that matters is one thing, and one thing only. Interest rates. That’s it.

  4. Also notice that this distortion of interest rates is not an inherent part of money printing, but is a coincidental result of the way money is printed and distributed in the USA today. If the Treasury just printed the money outright and handed it in a big valise to Obama to divvy out to his pals, with the banks getting nothing, interest rates would not go up, just as in the other case Prof Thronton mentions. With deflation, the banks also would have no new money to lend, and thus interest rates would not drop. On the contrary, they might rise, since money is so hard to find. meaning no ABCT will get off the ground, refuting Esuric’s claim that deflation can cause an ABCT.

  5. Fimally, an integral part of an ABC is HAVING THE MOINEY TO SPEND IN THE FIRST PLACE on long range capital investments. When there is inflation, they have the money from the printed stuff. With deflation, where will it come from? Esuric refuted once again.

200

Quoting Esuric: “We all agree (with the exception of Dave) that inflation yields relative price distortions, inter-temporal disequilibrium (the money rate of interest is pushed below the natural rate), and distorts the capital structure”

I think that your assessment of his views is not substantiated by his own words.