To the OP. Why did you arbitrarily decide to divide time into two periods? Why 59’-79’ compared against 80’ to the present? What about prior to 1959? Why not compare thirds or quartiles, or quintiles?
Smiling Dave,
They’re not actually ad hominems. Though, since you bring it up, your argument in response to my “when has the Fed every broken a policy promise” question is a very special kind of ad hominem. It’s called poisoning the well. It also happens to be an association fallacy.
The thing you don’t seem to understand about inflation is that if it’s expected, it has no effect at all. 2% inflation per year doesn’t matter. Everybody will be expecting 2% inflation a year, they’ll negotiate wage rises of at least 2% to compensate for inflation (yes, everybody seems to forget that nominal wages adjust upwards to restore the real wage), and savers will demand a 2% inflation premium (increasing the nominal interest rate by 2% and restoring the real interest rate). Expected inflation does nothing, it’s unexpected inflation that’s dangerous, in that it temporarily reduces the real wage and real interest rate until nominal variables adjust to restore them (if you believe in monetary neutrality, this happens extremely quickly).
TIPS spreads are determined by the market, not the government. If the market thinks the CPI-U measure of inflation drastically understates their losses due to inflation, guess what? They’ll demand higher yields and increase the spread! Do you even think for half a second before you say things?
“University brainwashing”. I’m gonna go ahead and tell you to fuck off right about here. The fact that you think you’re in a position to make these kinds of ignorant, moronic claims tells me that you have no interest at all in pursuing a discussion with any kind of intellectual integrity. If you want to cling to dogmas and biases you hold because of your ideology to the point where you’re unable to listen to and rationally appraise conflicting ideas, then don’t even bother talking to me. I’m open to heterodox ideas and luckily there are plenty of reasonable people on here with interesting things to say. But I don’t want my experience here ruined by people like you thumping their religion at me.
The thing you don’t seem to understand about inflation is that if it’s expected, it has no effect at all. 2% inflation per year doesn’t matter. Everybody will be expecting 2% inflation a year, they’ll negotiate wage rises of at least 2% to compensate for inflation (yes, everybody seems to forget that nominal wages adjust upwards to restore the real wage), and savers will demand a 2% inflation premium (increasing the nominal interest rate by 2% and restoring the real interest rate). Expected inflation does nothing, it’s unexpected inflation that’s dangerous, in that it temporarily reduces the real wage and real interest rate until nominal variables adjust to restore them (if you believe in monetary neutrality, this happens extremely quickly).
Easy to say, harder to do. Since when has there been a static rate of inflation employed by the fed? I doubt employers are going to make quarterly readjustments to their wages to compensate for inflation. From where do savers get an inflation premium? Saying expected and unexpected is kind of a cop-out because it relinquishes responsibility. Ex: “Oh well that was unexpected inflation. If it were expected it would be totally cool.” Inflation isn’t static and can’t be reliably expected, especially considering that there is an actual speed with which money moves through the economy.
TIPS spreads are determined by the market, not the government. If the market thinks the CPI-U measure of inflation drastically understates their losses due to inflation, guess what? They’ll demand higher yields and increase the spread! Do you even think for half a second before you say things?
Appeal to popularity fallacy and Ad hominem. Do you acknowledge that the market can easily be misled, especially through federally imposed rates?
“University brainwashing”. I’m gonna go ahead and tell you to fuck off right about here. The fact that you think you’re in a position to make these kinds of ignorant, moronic claims tells me that you have no interest at all in pursuing a discussion with any kind of intellectual integrity. If you want to cling to dogmas and biases you hold because of your ideology to the point where you’re unable to listen to and rationally appraise conflicting ideas, then don’t even bother talking to me. I’m open to heterodox ideas and luckily there are plenty of reasonable people on here with interesting things to say. But I don’t want my experience here ruined by people like you thumping their religion at me.
http://www.huffingtonpost.com/2009/09/07/priceless-how-the-federal_n_278805.html
And that’s coming from a fairly left-leaning publisher. Again, more ad hom. Do you deny that the study of economics is heavily politicized and influenced towards central banking.
That argument to me basically sounds like “yeah in all of history whenever I’ve put my hand in boiling water I burnt myself. That happened every day for over a decade. But, you know, if we do the same experiment tomorrow… maybe that won’t happen?”. Kinda grasping at straws isn’t it?
I mean Australia, New Zealand, Canada and the UK have used an interest rate corridor system for controlling the overnight interbank rate (and so inflation) every day for over a decade.
The parachute is their announced strategy for rolling back QE and their (newish) ability to control the fed funds rate (and so inflation) irrespective of the size of their balance sheet.
No. Nobody can prove anything about the physical world. I think it’s highly likely, and I don’t think the idea that the Fed just doesn’t give a shit at all about inflation makes any sense. That’s the best I can offer.
Look, this whole thing with separate definitions is dumb. Everybody else defines inflation as “a sustained increase in the general level of prices”. Saying “oh, well in our club, we define inflation as an increase in the money supply” is just asking for trouble. Using the same word to mean two different things in the same field is only going to result in miscommunication and confusion. Austrians could easily say “increase in the money supply” or “monetary injection” or “monetary expansion” like the rest of us do. Compare with “sustained increase in the general level of prices”, that’s the kind of concept that gets its own word since it doesn’t exactly roll off the tongue.
I don’t call it “money” because it’s a special kind of money. It’s highly liquid money, or base money, or high powered money, or whatever you want. It also doesn’t necessarily make its way into broader monetary aggregates and its liquid nature is extremely important.
Well the announcement is that the liquidity will be removed. So… yeah they could be lying. I don’t think they are. Nobody else does either (as reflected in market expectations).
That they have a tried and true method for controlling the interest rate even while shrinking their balance sheet. That if they lie about this their ability to shape expectations will be lost forever.
They’ll be ridiculed by the rest of their field for not being able to do such a simple job. Their name will go down in history as a joke. I think their reputations are extremely important to them. More importantly, if they pursue idiotic policy for no reason, they risk losing the independence of the central bank. Lots of the board members are academics who recognise the extreme importance of independence, and I think this is one of the reasons they’re not doing more expansion now when many people in the field are saying it’s necessary.
Well a prevailing real interest rate is the nominal interest rate - inflation rate (fisher equation). Now if inflation falls by 2%, the nominal interest rate will have to fall by 2% to maintain the market real rate. But the nominal interest rate can’t go below zero. So if the market real interest rate is r, the fisher equation puts an upper bound of -r% on inflation, in other words r% deflation. So since r% is the maximum amount of deflation you can have, the price level must only go so high as to be consistent with that, irrespective of the amount of money temporarily injected.
With a GDP deflator.
Fair enough, take it up with sumner. Price controls weren’t used during any of the QEs.
Why can’t I just call it something long and ridiculous rather than two simple letters? Well, I guess I just have a preference for brevity.
Yeah the Riskbank started charging negative interest on reserves. I’m aware of what’s happening.
The point of the liquidity trap is that just crediting banks reserves doesn’t have expansionary effects, because they just hold on to it as excess reserves. Interest rates have gone down as far as they can. You can’t stimulate any more lending because any lending that would have happened has been done already. So simple expansions of the money base do nothing. They don’t get loaned out, they don’t get spent. They just sit there. (note, it doesn’t necessarily mean monetary policy is uneffective).
Not exactly. The point of QE is to lower the interest rate (make it more attractive to invest) on longer term debt. The problem isn’t lack of financial capital at all. It’s that investment demand is so low and savings supply is so high that the rate which equilibrates them is less than zero. But since interest rates can’t go below zero, they can’t be equilibrated. There’s an excess of financial capital lying around.
I believe that the most reasonable expectation is that the Fed will do exactly what they say and remove the liquidity from QE. That’s what everybody else seems to think as well. If you expect otherwise, then you could stand to make a lot of money shorting treasuries. I wish you the best of luck.
There are CDS on sovereign debt, yes. http://www.cnbc.com/id/38451750
The spread on TIPS is a measure of what the market expects inflation to be. So inflation protected bonds, TIPS, compensate you for CPI inflation, but regular treasuries don’t. So when you’re buying a regular treasury you have to add in a premium for what you expect inflation to be. So the difference in yields tells you what most people are expecting the inflation rate to be.
When the Fed runs inflation at at least 2% every year and is likely to continue next year, then that 2% is expected and factored in to wage negotiations, the remaining inflation is unexpected and results in temporary loss of purchasing power. This is made much easier when a country has an inflation targeting central bank. The central bank is mandated by law to keep inflation between some range over a given timeframe. This makes forming expectations about inflation relatively easy and the purchasing power losses minimal.
Where do savers get the premium? They demand it. They say “the real value of this money is gonna be worth 2% less next year, so you need to pay me a 2% premium if you want to borrow these funds”. The borrowers oblige, because next year the funds become 2% easier to pay back. Ie, it’s real variables which are important, not nominal variables.
It’s not an appeal to popularity at all. It’s claiming that markets are somewhat efficient (ie, price in relevant information). So if you’re expecting something radically different from the market, either you have information they’re ignoring or they have information you’re ignoring. Now when it comes to whose opinion I’m gonna side with, should I go with a vast group of people all of who have the appropriate incentive to correctly gather and analyse all available information to form a best estimate, or will I go with an armchair speculator?
Jesus christ! It’s not an ad hominem! It’s just an insult. It’s great that everybody here has learnt the names of a couple of logical fallacies, but please learn when they actually apply.
That article makes no sense given the extreme prevalence of Real Business Cycle theory. I do deny that the study of economics is heavily politicised and influenced towards central banking. I went to university and got a degree in economics, so I can say from experience that that’s not the case.
Your writings suggest complete unawareness of economic universes devoid of central/fractional-reserve banking. Your very ability to discern this influence (towards central banking) has been completely erradicated as your whole economic playground has been defined by it. You are completely oblivious to the universally destructive effects produced by centrally planned price regulation of a good/asset which comprises one side of every transaction in the economy!Your university brainwashing has been utterly complete.
It’s extremely difficult for someone like you – who has invested so much into a certain view/position – to accept this reality, and to objectively analyze the damage it has done to you. The choice is always yours, though: Take the red pill and become enlightened about your bleak predicament, or take the blue pill and reinforce your bond with the blissful Matrix.
Or you can take the red pill and admit the empirical contradictions of M2 monetary data and proposed scale of events by ABCT. ABCT is largely problematic as far as relevancy to the real world is related, despite whatever a priori mechanisms the austrians have constructed to reinforce it.
“The thing you don’t seem to understand about inflation is that if it’s expected, it has no effect at all. 2% inflation per year doesn’t matter. Everybody will be expecting 2% inflation a year, they’ll negotiate wage rises of at least 2% to compensate for inflation (yes, everybody seems to forget that nominal wages adjust upwards to restore the real wage), and savers will demand a 2% inflation premium (increasing the nominal interest rate by 2% and restoring the real interest rate). Expected inflation does nothing, it’s unexpected inflation that’s dangerous, in that it temporarily reduces the real wage and real interest rate until nominal variables adjust to restore them (if you believe in monetary neutrality, this happens extremely quickly).”
You seem to be confounding inflation with the effect of inflation. Inflation is an inrease in money in circulation. Rising prices are the consequence of an inflation. Whether or not the increase in money is expected does not matter. Expectations do not change the fact that there is more money now than there was before.
It also is not so simple as everyone only need to negotiate for a 2% increase in pay. What about people who work for companies that only give a standard raise? What about those on fixed incomes?
Where do you get this notion that people simply demand an “inflation premium” and they get it? Last time I checked, savings accounts pay around 1%. Go to your bank and try and negotiate an “inflation premium” for your savings account… Go look at what CD’s are paying and tell me where I can find ONE that is paying high enough interest right now that will pay me a decent rate of return and your ever elusive “inflation premium.”
“TIPS spreads are determined by the market, not the government. If the market thinks the CPI-U measure of inflation drastically understates their losses due to inflation, guess what? They’ll demand higher yields and increase the spread! Do you even think for half a second before you say things?”
Deterrmined by the market you say? Then what about the part where the Bernank said the point of the last QE was to adjust the spread and lower the rates on longer term debt? Is the Fed attempting to manipulate the spread the result of “the market”?
"The CPI is a government statistic, and since the government’s expansionary monetary policy creates the inflation, officials have an incentive to underestimate these numbers. Underreporting inflation helps government officials in at least three ways.
First of all, it provides more favorable economic news. Elected officials want to report and take credit for any positive economic announcements.
Second, if the government reports a rate of inflation that is lower than the actual inflation rate, this will increases tax revenues through bracket creep. If the actual inflation rate is 10%, but the measured rate of inflation is 4%, some taxpayers will be pushed into higher tax brackets even though their real income has not increased.
And third, a lower reported inflation statistic reduces government spending by limiting the spending increases that are tied to inflation. The state can take credit for cost of living adjustments that are allegedly keeping up with inflation although in real terms the payments are falling.
My point is that given the incentives facing government officials, we should be reluctant to put any credence in government statistics."
Don’t worry folks. We will use these government CPI numbers to demand our “inflation premium” component of the interest rate.
What “contradictions”? Do you even read the threads which you start?
As for you choosing to accept something or not: “One can lead the cow to water, but one can’t make it drink.”
When the Fed runs inflation at at least 2% every year and is likely to continue next year, then that 2% is expected and factored in to wage negotiations, the remaining inflation is unexpected and results in temporary loss of purchasing power. This is made much easier when a country has an inflation targeting central bank. The central bank is mandated by law to keep inflation between some range over a given timeframe. This makes forming expectations about inflation relatively easy and the purchasing power losses minimal.
Where do savers get the premium? They demand it. They say “the real value of this money is gonna be worth 2% less next year, so you need to pay me a 2% premium if you want to borrow these funds”. The borrowers oblige, because next year the funds become 2% easier to pay back. Ie, it’s real variables which are important, not nominal variables.
You didn’t really address any of my concerns. Maybe in fantasy land workers and social security pensioners are immediately compensated for inflation adjustments. Anyways the government lies about true inflation so it wouldn’t be to much benefit even if they were compensated for the official figures. I think you and I both know that it is ludicrous to expact that savings banks are going to give an inflation premium especially when the official figures vastly underestimate it so there is a lack of inflation-urgency in the market.
It’s not an appeal to popularity at all. It’s claiming that markets are somewhat efficient (ie, price in relevant information). So if you’re expecting something radically different from the market, either you have information they’re ignoring or they have information you’re ignoring. Now when it comes to whose opinion I’m gonna side with, should I go with a vast group of people all of who have the appropriate incentive to correctly gather and analyse all available information to form a best estimate, or will I go with an armchair speculator?
Jesus christ! It’s not an ad hominem! It’s just an insult. It’s great that everybody here has learnt the names of a couple of logical fallacies, but please learn when they actually apply.
If you go by that reasoning, you would have been bankrupt many times over by the time you die. The masses are always fooled by the booms and busts, if they weren’t then the booms simply wouldn’t happen. You can side with your “vast group of people all of who have the appropriate incentive to correctly gather and analyse all available information to form a best estimate” all you like, but simply their numbers and lack of understanding make the opposite of a compelling case.
http://www.huffingtonpost.com/2009/09/07/priceless-how-the-federal_n_278805.html
That article makes no sense given the extreme prevalence of Real Business Cycle theory. I do deny that the study of economics is heavily politicised and influenced towards central banking. I went to university and got a degree in economics, so I can say from experience that that’s not the case.
Did you read the article at all? You’re arguing backwards. Schools are Fed-ized, THUS RBCT is prevalent. You don’t think they’re biased BECAUSE got your education at one of these mainstream Fed-ized schools. If you asked a Nazi eugenicist they would also tell you they didn’t think they were biased.
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You don’t understand what poisoning the well is. If Mr A presents a logical argument or concrete evidence, and B does not address them but rather presents adverse info about Mr A, that is poisoning the well. But if Mr A says “I promise to do this”, and evidence is presented that he has lied in the past, that is not poisoning the well. Nor is it an ad hominem attack. Think about it.
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You also don’t understand what an association fallacy is, aka guilt by association. But when you say the Fed has never lied about specific detail X, sub detail Y, point Z, and I point out that they have made admittedly made a policy of constantly lying, and cheer when they succeed, and when they have been caught flat out contradicting themselves, that is not an association fallacy.
Which university did you go to btw? Did you study elemenatry logic there?
- The thing you don’t seem to understand about inflation is that if it’s expected, it has no effect at all.
This is patently false. No matter how you define inflation. The burden of proof is on you to back up such a surprising statement. The argument you presented is flawed, the key silliness being “Everybody [will] negotiate wage rises of at least 2%…”
Have you ever worked for a living? Have you ever tried to negotiate a 2% wage rise for yourself? Do you think “everybody” is capable of doing it? Even those who live on fixed incomes and are not employed? Or those who are poor negotiators?
Another foolish statement is that “Everybody will be expecting 2% inflation a year.” Do you think “Everybody” reads the Wall Street Journal? Or has a university education in economics? I know quite a few people who have no clue whatsoever about what inflation is, and barely grasp what “2%” means.
Do you read the papers? Have you read about the NBA lockout, where the players are being “negotiated” into a cut in salaries? Do you think they expect deflation, and that’s why they are doing it?
- If the market thinks the CPI-U measure of inflation drastically understates their losses due to inflation, guess what? They’ll demand higher yields and increase the spread!
Not if they believe the govt stats, as most people, even Nobel Prize winning economists, do. Their naive belief in govt stats will blind them to what the inflation will really be.
- About your last paragraph, and the various attacks on me, I’m sorry you feel that way. You would, however, be better served refuting the logic of my arguments and the veracity of my evidence [if you can], the better to educate me and others. So far I haven’t seen anything of substance, but maybe that’s just me.
If reading my posts bother you, I think a person with a university education can find a solution. Don’t read them. I write for other people here to read as well, not just for you.
As for the point in question, of course you have been brainwashed at the university. How many courses did they offer in Austrian Economics? How many works of Austrians were used as textbooks, or as assigned readings? None, right? Hayek won a Nobel Prize. Were you assigned any of his major works to read? Were they on a reading list of any sort?
Proof that you were brainwashed is your saying that the Austrains who predicted various things just made “lucky guesses”. And, since you seem bright enough to put together a paragraph, yet fill that paragraph with incredible blunders of reasoning and acceptance of pseudo-evidence [like that Peter Schiff google page], I can only assume you have been brainwashed. Maybe I’m wrong. Maybe you’re being paid to write stuff you know is ridiculous on the face of it, of have some other ulterior motive, like Greenspan admitted he had.
aervew,
Do you think you might want to explain in your own words why you think that M2 is a superior measure of money supply over TMS, or is it really nothing more than an appeal to authority?
Austrians differentiate between general price inflation, on the one hand, and relative price inflation (which may or may not translate into some degree of general price inflation) on the other. They realize that monetary injections (a) do not increase cash holdings across the board proportionately (reject the helicopter theoretical construct) and (b) alter consumption/investment patterns and therefore the “structure of production.” Newly created money enters the system in certain “inflection points” and then permeates amongst the entire economic system.
If monetary expansions truly and only increased prices in such a general and uniform way then it really wouldn’t be problematic and your analysis would be sound. The Austrian understanding of this phenomenon (monetary expansion) and its effects, leads them to reject the classical strict nominal-real distinction, realizing that monetary variables can and often do affect real variables (for the reasons just mentioned).
I too went to university and got a degree in economics and i can say, from experience, that that is precisely the case.
I already explained why your analysis is theoretically problematic in my previous post. Additionally, the Austrian theory of cycles is in fact the only trade cycle theory that can coherently explain the phenomena that we perceive today, in the real world. Why an extended period of “price stability” and enormous aggregate demand lead to an accumulation of malinvestments throughout the entire economy, but particularly in a few sectors, which collapsed and brought a dramatic fall in investment and therefore output. It is also the only theory which can explain why traditional counter-cyclical remedies have been entirely ineffective (treating a miscoordination problem as if it were an aggregate demand problem is, well, problematic).
Yeah this is one of the things I’d like to learn about (relative price distortions from monetary expansion). So first off, what’s the deal with “inflection points”? The money gets injected as bank reserves, which can either be held or loaned out. Why is it that some industries systematically get this new money first? Surely everybody has access to it and it’ll just seek the highest return? Also, lending of new reserves isn’t the only transmission mechanism of monetary policy. For example, somebody with a flexible rate loan immediately feels an increase in their income due to the interest rate falling. They don’t even need to touch any of the new money for their disposable incomes to increase. Next, how long does this process take (that is, how long does it take for money to work its way through and finally raise all prices/wages in proportion)? Finally, is there evidence for extreme relative price distortions? I mean, the disaggregated CPI data is on the BLS website and the money base data is on the St Louis Fed website, so somebody would have done the analysis right?
Oh. What was it like? We only got taught positive, not normative economics. We payed equal attention to Keynesian and Real Business Cycle models, and the lecturer never tried to tell us one was better or more correct than the other.
Well NGDP dropped to a 10% lower path, so the Keynesian/Monetarist model does pretty well (together with the fact that slack is in almost every sector). How does ABCT explain such a fall in nominal income, since relative price distortion should keep total nominal income constant and just reallocate where it’s spent.