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

[Smiling_Dave]

Let me first make very clear that I appreciate your tone, and will try to be equally civil. Which will force me to be brief, given how hepped up I am about this.

@Michael J Green

What happened to our good friend, the Law of Supply and Demand, which will ensure that prices go up in such a case? … And yet suddenly, when we get to money, this situation supposedly happens “by itself”, with no “price controls”.**

**

Yes, if the demand/supply for a good jumps/plummets, the price for that good will change to accomodate the new circumstances. Certainly, though, you can see the problems when the good is money itself, right?

Nope.

Then, instead of one good changing in price, all goods bought with money must change in price to reflect the new circumstances. That takes time to work itself out and, since money coordinates economic activity, can cause a bunch of discoordination and general economic harm.

Says who?

There can be discoordination due to the sudden surge in demand for a particular good

So? That’s the way of the world. Surges happen.

• entrepreneurs’ otherwise sound plans could be ruined because of the unanticipated rise in demand towards this good and thus away from the entrepreneurs’ goods

Yep, that’s called risk. Which is why a businessman deserves a nice profit, as we both know.

• but it is nothing compared to the problems borne from a radical change in the supply/demand for money itself.

Such as? And even if we grant that there are problems, so what? The world is full of problems all the time. In the economic universe, they sort themselves out if left to themselves.

But the big problem with the whole story line you present is that you seem to assume this increased desire to save happens instantaneously to everyone. It happens gradually, in normal circs. [We’ll get to abnormal circs later].

“Excess demand” may not be an appropriate term, just as “market failure” has problems, but we can agree on the point being made, right?

Nope.

In the wake of a hurricane, there can be an “excess demand” for bottled water, can’t there?

The problem here is that the economic universe has taken over the phrase “excess demand” to mean a very special situation, that there is a shortage due to the price not adjusting upward. See the wiki on “economic shortage”. In that technical sense, if the price of bottled water goes up to the price of a yacht, and thus people cannot afford it, that is not considered excess demand in the technical sense. Only if the price is somehow still 10 cents a bottle, and everyone has plenty of money, but there is no bottled water around, that is called excess demand for bottled water.

That is why I wrote that in that technical sense, there cannot be an excess demand for money. You quoted the heart of my argument for that.

Demand skyrockets and though suppliers may raise their prices, there may still exist a shortage. Even if there is no literal shortage (each water bottle vendor still has product to sell), we can agree that there is something abnormal, something special, about the demand for bottled water in this situation, right?

Even in this non technical sense, I deny that that there can be a shortage of money. Let’s see your case:

Similarly, in the wake of bank failures and a financial panic, the demand for holding money can skyrocket

[From here to the end is the promised discussion of abnormal circs, like a wave of bank failures etc].

I am not sure what you mean by the “the demand for holding money”. So my argument that follows may not adress what you are really saying. But here goes:

Let us not confuse wishful thinking with an economic situation. I wish I had a ton of gold right under my bed right now. So what? I can’t afford it. Similarly when a bank fails, people may decide to hide some of the money they have under the mattress. Nothing wrong with that. It’s good, it’s prudent. Now they may wish they had more to hide under the mattress, but so what?

and, since you’re dealing with money, it’s not as simple as a small number of vendors adjusting their price for a certain good - everyone must adjust their price.

There is no “must” involved. It happens by itself, on a case by case basis. The butcher, the baker, the candlestick maker, each adjusts his price as needed. This happens all the time. Why is the day after a bank failure any different?

One can accept all this while still believing the government would only do more harm than good through ‘quantitative easing’ or anything else through a central bank. One can believe this is a very serious problem while believing that the best/least worst solution is indeed to let prices adjust without issuing a single additional unit of money

If you are saying that bank failures hurt people, sure they do. They lose money. But the problem they face has nothing to do with excessive demand for money. They gambled [by putting their money in a bank], and lost. Now they are broke. Nothing to do with excessive demand for money.

Finally, let me point out that from the Hurwitz article you pointed me to [and TY for that], the problem of excessive demand is not what you describe. His original version assumes some mythical price control, and addresses the technical term “excess demand” [privy only to those who major in economics, remember?], and his final version identifies the problem as lowered prices for everything.

[Smiling_Dave]

scineram,

First, TY for the compliment. I am especially flattered that you wrote it in the longest post I have ever seen from you.

When someone engages in printing money. prices will certainly adjust. The problem is, we know which way they will adjust. Up. Meaning you and I will have to pay more for everything, just because Obama decided to print money to buy Michelle a new dress. What right do they have to do this to us? That is the problem.

[scineram]

That is fine. But you should have made clear at the beginning that you disagree with ABCT. It would have saved some needless discussions both here and at CoordProb.

[Smiling_Dave]

One of us doesnt get ABCT, cause I agree with my understanding of it.

[Esuric]

When someone engages in printing money. prices will certainly adjust. The problem is, we know which way they will adjust. Up

This is not the problem at all. In fact, general price inflation is essentially irrelevant except for the fact that it may, and eventually will, yield high long-term interest rates. Simply put, if prices were perfect, i.e., if they instantaneously and simultaneously adjusted to alterations in the supply of money, then inflation and deflation wouldn’t really be a problem at all (if we ignore the effects of inflationary and deflationary expectations).

[Smiling_Dave]

@Esuric

When someone engages in printing money. prices will certainly adjust. The problem is, we know which way they will adjust. Up

This is not the problem at all. In fact, general price inflation is essentially irrelevant except for the fact that it may, and eventually will, yield high long-term interest rates. Simply put, if prices were perfect, i.e., if they instantaneously and simultaneously adjusted to alterations in the supply of money, then inflation and deflation wouldn’t really be a problem at all (if we ignore the effects of inflationary and deflationary expectations).

Don’t be silly

[Esuric]

Don’t be silly

How am I being “silly?”

[Smiling_Dave]

How am I being “silly?”

From Human Action:

What many people today call inflation or deflation is no
longer the great increase or decrease in the supply of money, but its inexo-
rable consequences, the general tendency toward a rise or a fall in com-
modity prices and wage rates.

Again:

those engaged in futile and hopeless attempts
to fight the inevitable consequences of inflation-the rise in prices-are
disguising their endeavors as a fight against inflation. While merely fight-
ing symptoms, they pretend to fight the root causes of the evil. Because
they do not comprehend the causal relation betw-een the increase in the
quantity of money on the one hand and the rise in prices on the other, they
practicalIy make things worse.

You do not seem to comprehend the causal relation between the increase in the quantity of money and the rise in prices. Mises pronounces his verdict upon you, Esuric: you will practically make things worse. Or in my more refined way of saying it, you are being silly.

Lest ye say it’s expectations that do it, or that it effects all prices and people equally, I suggest you read the whole section on inflation, say from page 405.

[Esuric]

None of those quotes support your argument and none of them invalidate my position (I’m not sure that you understand what I’m saying). Also, since we’re appealing to authority, here’s Hayek:

@Hayek

General price changes are no essential feature of a monetary theory of the trade cycle; they are not only unessential, but they would be completely irrelevant if only they were completely “general” –that is, if they affected all prices at the same time and in the same proportion (pp. 64, Monetary Theory and The Trade Cycle).

It’s not the case that inflation “increases prices and that’s bad,” nor is it the case that “deflation lowers price and that’s good.” One could just as easily (and mistakenly) proclaim that “inflation is good because it increases wages and asset prices, which makes everyone wealthier.” These are the naive types of arguments that you consistently make and they completely ignore major theoretical breakthroughs made by the Austrian school, breakthroughs which distinguish it from the mainstream and other schools of thought. Furthermore, I believe that this is causing a great deal of confusion for you and it’s why you continuously downplay the potential negative effects of deflation.

The mainstream focuses on a few and relatively unessential effects of inflation, such as inflationary expectations, menu costs, shoe leather costs, and arbitrary redistribution of wealth (from creditors to debtors), while the Austrians tend to focus on the effects that inflation has on the relative structure of prices (Austrians don’t deny that the other effects exist).

The fact is that prices do not instantaneously and simultaneously adjust, and when they do adjust, they do so in ways which actually perpetuates disequilibrium and yields a misallocation of resources towards ultimately untenable productions (what are known as malinvestments). Simply put, an expansion in the supply of money beyond the demand for money, say by 10%, does not yield 10% general price inflation (I’m assuming that total output is constant): some prices may rise by 10%, some may rise by greater than 10%, some prices may not rise at all, and other prices may actually fall (there are time lags between the various price adjustments). It is this uneven adjustment that causes the major problems, namely the trade cycle.

Similarly, deflation, caused by a reduction in the supply of money below the demand for money, also leads to uneven adjustments. Some prices fall further than others, sometimes wages don’t fall fast enough (causing unemployment) and some prices may actually rise. This is due to the fact that money enters (or leaves) the economy at certain points and then permeates amongst the rest of society, altering preferences and expectations.

Either way, the fact that prices (tend to) adjust upwards (as a result of inflation) is the most insignificant problem. I hope you realize this now.

I highly suggest Hayek’s Monetary Theory and The Trade Cycle.

[Esuric]

Reread my comment above. I had some problem editing it the first time around.

[AdrianHealey]

In short: the problem with inflation are the Cantillon-effects that happen when prices change, not the pure fact that prices change.

[StrangeLoop]

@Michael J Green

A timely contribution from Horwitz.

Great! Thanks!

[Autolykos]

@Michael J Green

Yes, if the demand/supply for a good jumps/plummets, the price for that good will change to accomodate the new circumstances. Certainly, though, you can see the problems when the good is money itself, right? Then, instead of one good changing in price, all goods bought with money must change in price to reflect the new circumstances. That takes time to work itself out and, since money coordinates economic activity, can cause a bunch of discoordination and general economic harm. There can be discoordination due to the sudden surge in demand for a particular good - entrepreneurs’ otherwise sound plans could be ruined because of the unanticipated rise in demand towards this good and thus away from the entrepreneurs’ goods - but it is nothing compared to the problems borne from a radical change in the supply/demand for money itself.

I guess the question to ask is what would cause a significant or radical change in people’s demand for money.

Otherwise, as you yourself imply, discoordination happens all the time in a market economy. It’s basically a fact of life. The thing is, the discoordinations don’t happen all at the same time and aren’t systemic in nature.

@Michael J Green

“Excess demand” may not be an appropriate term, just as “market failure” has problems, but we can agree on the point being made, right? In the wake of a hurricane, there can be an “excess demand” for bottled water, can’t there? Demand skyrockets and though suppliers may raise their prices, there may still exist a shortage. Even if there is no literal shortage (each water bottle vendor still has product to sell), we can agree that there is something abnormal, something special, about the demand for bottled water in this situation, right? Similarly, in the wake of bank failures and a financial panic, the demand for holding money can skyrocket and, since you’re dealing with money, it’s not as simple as a small number of vendors adjusting their price for a certain good - everyone must adjust their price.

Even if everyone must adjust their price, so what? You’re also assuming that everyone’s demand for money has changed by the same proportion – how can that happen in a free market with commodity money?

@Michael J Green

One can accept all this while still believing the government would only do more harm than good through ‘quantitative easing’ or anything else through a central bank. One can believe this is a very serious problem while believing that the best/least worst solution is indeed to let prices adjust without issuing a single additional unit of money

At the very least, I can go along with this.

[Autolykos]

@Esuric

When someone engages in printing money. prices will certainly adjust. The problem is, we know which way they will adjust. Up

This is not the problem at all. In fact, general price inflation is essentially irrelevant except for the fact that it may, and eventually will, yield high long-term interest rates. Simply put, if prices were perfect, i.e., if they instantaneously and simultaneously adjusted to alterations in the supply of money, then inflation and deflation wouldn’t really be a problem at all (if we ignore the effects of inflationary and deflationary expectations).

You are correct here. Inflation and deflation cause economic distortions because prices aren’t what you call “perfect”. In particular, inflation is an indirect tax levied by those who receive the new money on those who don’t (until after they’ve already felt the effects).

On another note, an important distinction should be made between the supply of money and the supply of loanable funds.

[DD5]

@Michael J Green

“Excess demand” may not be an appropriate term, just as “market failure” has problems, but we can agree on the point being made, right? In the wake of a hurricane, there can be an “excess demand” for bottled water, can’t there? Demand skyrockets and though suppliers may raise their prices, there may still exist a shortage..

There is no longer any shortage. All who are ready to pay for water can buy it at the new updated price. “Still exist a shortage” is not economics. It’s a fantasy to get rid of scarcity.

Now, you may be implying that an increase in production for water bottles should follow. This may or may not be true depending on the circumstances, i.e., is the increase in demand temporary or permanent? However, money is different from water bottles in one very important way: More of it does not confer any social benefit , therefore, once the price of money adjusts to meet its new demand, no increase in production needs to follow.

@Michael J Green

"everyone must adjust their price..

non-sequitur if you are implying that this justifies an increase production of fiat money or fiduciary media. " Everyone must adjust their price" is practically the natural state of the market.

[DD5]

@Autolykos

You are correct here. Inflation and deflation cause economic distortions because prices aren’t what you call “perfect”

It has nothing to do with the “imperfection” of prices (whatever that can possibly even mean). it has to do with the fact that money is not neutral. Every change in the money supply in circulation constitutes a transfer of wealth which permanently affects the entire structure of prices, leading to a permanent change in the capital structure of the economy. Things will never return to the way they were or would have been absent the change in the money supply.

[Autolykos]

@DD5

It has nothing to do with the “imperfection” of prices (whatever that can possibly even mean).

Did you not understand Esuric’s definition of “perfect price”?

@DD5

it has to do with the fact that money is not neutral. Every change in the money supply in circulation constitutes a transfer of wealth which permanently affects the entire structure of prices, leading to a permanent change in the capital structure of the economy. Things will never return to the way they were or would have been absent the change in the money supply.

How does a change in the amount of money currently in circulation constitute a transfer of wealth?

[Smiling_Dave]

@Esuric

None of those quotes support your argument and none of them invalidate my position

All of them do both. Read them. Do you think mere assertion makes you right, or convincing?

Tell you what, I’ll lay it all out for you:

Here is the second quote in full, with more context. Anything in brackets is my addition, either to clarify a minor obscurity, or to point out the parts you must have skipped.

The second mischief [of using “inflation” to mean “price inflation”] is that those engaged in futile and hopeless attempts
to fight the inevitable consequences of inflation-the rise in prices-

[He just said it, black on white. Inflation makes prices go up. Got that?]

are disguising their endeavors as a fight against inflation. While merely fight-
ing symptoms, they pretend to fight the root causes of the evil.

[here is point the second. The rise in prices is an “evil”. No mention of trade cycles, of interest rates, of Hayek, nothing. The rise is prices is an “evil”. Yep, he said it.]

Because
they do not comprehend the causal relation betw-een the increase in the
quantity of money on the one hand and the rise in prices on the other, they
practicalIy make things worse.

[The politicians’ error is NOT some misunderstanding of Hayek, or of interest rates, or trade cycles, or anything else. Their misunderstanding is yours. They think money printing does not make prices go up.]

The best example was provided by the sub-
sidies granted on the part of the governments of the United States, Canada,
and Great Britain to farmers. Price ceilings reduce the supply of the com-
modities concerned because production involves a loss for the marginal
producers. To prevent this outcome the governments granted subsidies to
the farmers producing at the highest costs. These subsidies were financed
out of additional increases in the quantity of money. If the consumers had lndirect Exchange 42 1
had to pay higher prices for the products concerned, no further inflation-
ary effects would have emerged. The consumers would have had to use for
such surplus expenditure only money which had already been issued pre-
viously. Thus the confusion of inflation and its consequences in fact can
directly bring about more inflation.
It is obvious that this new-fangled connotation of the terms inflation and
deflation is utterly confusing and misleading and must be unconditionally
rejected.

(I’m not sure that you understand what I’m saying).

Your first post said something different than this one seems to do. In any case, you misunderstand all you have read of AE, and I will enlighten you later on in this post.

Also, since we’re appealing to authority,

Quoting Mises between two Austrians is not the logical fallacy of an appeal to authority. It shows that the accepted position of the AE community is what I said [assuming for the moment that the quote supports me, which it does], and places the burden of proof on you, a neophyte, to show why Mises is wrong.

The accepted manner in which this is done is to summarize the accepted position [which among other things shows you have understood it in the first place], and then present your evidence. Mere assertion that the accepted position of the community is appeal to authority doesn’t cut it.

Also, pointing to you exactly where he makes his logical argument is not an appeal to authority. It is pointing to where you should read to see and understand my argument [= identical to his].

here’s Hayek:

@Hayek

General price changes are no essential feature of a monetary theory of the trade cycle; they are not only unessential, but they would be completely irrelevant if only they were completely “general” –that is, if they affected all prices at the same time and in the same proportion (pp. 64, Monetary Theory and The Trade Cycle).

I hope you agree by now, given the above, that inflation makes prices go up, and hopefully agree that our man Mises was saying exactly that. You also must agree by now [given the above] that Mises in the second quote was saying that rising prices is an evil. Actually you don’t have to be a Mises or an Albert Einstein to get this. Anyone who stops living rent free in Mama’s basement and goes out into the real world for awhile, where they have to work for a living and pay their own bills, gets it. As a thought experiment, imagine paying double for everything and see how you like it.

You also agree that Mises said that failing to understand the one single point that money printing makes prices go up, regardless of anything to do with the trade cycle or Hayek or interest rates, is what makes politicians cause incredible damage to the economy, as explained above.

It’s not the case that inflation "increases prices

Of course it is. See above.

and that’s bad,"

Of course it is. See above.

nor is it the case that "deflation lowers price

Of course it is. see first Mises quote.

and that’s good."

Of course it is. But I tire of doing your research for you.

One could just as easily (and mistakenly) proclaim that "inflation is good because it increases wages and asset prices, which makes everyone wealthier.

Why did you introduce this irrelevancy? Oh, I get it, it’s your straw man.

These are the naive types of arguments that you consistently make

“Inflation makes prices go up and that’s bad”, is not me, it’s Mises [as shown above] and any sane person [won’t do your research for you].

“Inflation is good bla bla” is not me, it’s your straw man.

and they completely ignore major theoretical breakthroughs made by the Austrian school, breakthroughs which distinguish it from the mainstream and other schools of thought.

This line made me get what your retarded error is. You think the only problem caused by printing money is the business cycle. You quote Hayek as saying that rising prices don’t have much to do with the business cycle. Ergo, you fallaciously conclude, rising prices is not bad, [and may not even exist, you might think. Not sure how far your error has gone.]

To make it clear to all, let us say that a country is suffering from a business cycle, and at the same time, a meteor falls on it, killing everyone. Esuric is saying that the falling meteor is not an evil, or may not even exist, because it has nothing to do with the business cycle, and Hayek only wrote about the business cycle. Anyone who disagrees is completely ignoring major breakthroughs, bla bla.

What do you think destroyed the Weimar Republic? Business cycles? What wiped out Zimbabwe? Business cycles?

Money printing causes two evils, rising prices and business cycles. I’ll accept for now that Hayek said they are unrelated, that rising prices don’t drive the business cycle. The great Austrian breakthrough was discovering that money printing causes the business cycle. Don’t make Esuric’s incredible mistake of thinking that they also said or implied that money printing does not cause price rises, or that rising prices caused only by money printing are not an evil.

Furthermore, I believe that this is causing a great deal of confusion for you

One of us is confused, and it isn’t me. Reread the Mises’ quotes.

and it’s why you continuously downplay the potential negative effects of deflation.

My downplaying of the [nonexistent] potential negative effects of deflation are based on Hazzlitt’s works on the subject, where he says exactly what I am saying. Read them and learn something.

The mainstream focuses on a few and relatively unessential effects of inflation, such as inflationary expectations, menu costs, shoe leather costs, and arbitrary redistribution of wealth (from creditors to debtors), while the Austrians tend to focus on the effects that inflation has on the relative structure of prices (Austrians don’t deny that the other effects exist).

What a silly thing to say. For example, when Cantor wrote exclusively about the infinite levels of infinity, and never once in his brilliant works discussed simple arithmetic, that does not mean he thought simple arithmetic is wrong, or not important in the real world. I challenge you to quote an Austrian who says “Rising prices are fine. Move to Zimbabwe.” Your quote from Hayek above certainly does NOT say that. My quote from Mises explicitly says the opposite.

The fact is that prices do not instantaneously and simultaneously adjust, and when they do adjust, they do so in ways which actually perpetuates disequilibrium and yields a misallocation of resources towards ultimately untenable productions (what are known as malinvestments). Simply put, an expansion in the supply of money beyond the demand for money, say by 10%, does not yield 10% general price inflation (I’m assuming that total output is constant): some prices may rise by 10%, some may rise by greater than 10%, some prices may not rise at all, and other prices may actually fall (there are time lags between the various price adjustments). It is this uneven adjustment that causes the major problems, namely the trade cycle.

All this is irrelevant. You are denying the existence of the meteor that killed everyone by explaining why it did not cause the trade cycle.

Similarly, deflation, caused by a reduction in the supply of money below the demand for money,

Here you reveal that you misunderstood Eco 101. There is no such thing as supply of money and demand for money. There are supply and demand curves. It is nonsense to speak about supply of money “falling below” demand for money. You forgot about the concept of “price” here.

also leads to uneven adjustments. Some prices fall further than others, sometimes wages don’t fall fast enough (causing unemployment) and some prices may actually rise. This is due to the fact that money enters (or leaves) the economy at certain points and then permeates amongst the rest of society, altering preferences and expectations.

This is apparently your attempt at explaining why deflation is “bad”. You reason by analogy. Just as printing money changes things, which is bad, so too deflation changes things, which must therefor also be bad.

I challenge you to show me one person, Mises, Hayek, anyone, who writes that a trade cycle [which according to you is the only economic evil that exists] can be caused by deflation. Or to show me one single historical case.

Let me explain why inflation and deflation are different. When the govt prints money, it gobbles up our resources, leaving less for everyone. It also gives money to people to gobble up resources for schemes that cannot succeed, leaving less for everyone. The latter is the essence of the trade cycle. But when the govt has less money to gobble resources, and people have less money to spend on wild schemes, then of course they will gobble up less resources. That’s why inflation and deflation are different. One is good, one is bad.

Either way, the fact that prices (tend to) adjust upwards (as a result of inflation) is the most insignificant problem.

You conflate “not being discussed in Hayek’s highly specialized works” with “insignificant”. The meteor still exists, it killed the whole town, even though Hayek didn’t write about it.

I hope you realize this now.

I hope you realize why you are so horribly wrong.

I highly suggest Hayek’s Monetary Theory and The Trade Cycle.

I highly suggest common sense.

[Smiling_Dave]

How does a change in the amount of money currently in circulation constitute a transfer of wealth?

Because who gets that new money? Everyone? Nope, only the govt and its friends. And they spend it to gobble up resources, which is by definition a transfer of wealth.

[Autolykos]

@Smiling Dave

Because who gets that new money? Everyone? Nope, only the govt and its friends. And they spend it to gobble up resources, which is by definition a transfer of wealth.

There’s a difference between the quantity of money in circulation and the quantity of money period*.* The former can change not only due to government and/or central-bank machinations, but due to changes in the demand for money. When demand for money increases, ceteris paribus, the amount of money in circulation goes down, and vice-versa.