Strangled by Tight Money

Inflation-phobes resemble someone stranded in the desert without water who spends his time frantically searching for a life preserver.


Remember the guy who ran for governor of New York as the candidate of the Rent Is Too Damn High Party? We need a new one, called the Money Is Too Damn Tight Party. It would get my vote.

But the vote it needs belongs to Federal Reserve Chairman Ben Bernanke, and he isn't giving it. On Wednesday, the Fed indicated it would stick to its current course, declining to embark on another "quantitative easing" that would inject a lot more money into the economy.

He and many other people have awful memories of high inflation from the late 1970s and early 1980s. No one wants to repeat that experience. But inflation-phobes resemble someone stranded in the desert without water who spends his time frantically searching for a life preserver.

Plenty of people, including several Republicans who ran for president, think money is too loose. But what would the world look like if the opposite were true?

Commodity prices would fall. Unemployment would be painfully high. People would be reluctant to buy houses for fear they would lose value. Economic growth would stall.

Sound familiar? Those signs are a tipoff to our real economic problem: too few dollars in circulation.

The U.S. economy is not experiencing actual deflation. But a person who has a cold doesn't take great comfort in not having pneumonia. Right now, the economy is showing signs of a malady that looks like deflation's close relative.

Inflation occurs when there is too much money chasing too few goods. Deflation occurs when there is not enough money. For years, inflation alarmists have been forecasting runaway prices as a result of the Fed's efforts to expand the money supply. But prices have remained stable, with the Consumer Price Index down last month and up just 1.7 percent in the past year.

Don't believe the official numbers? The Billion Prices Project at MIT says lately, inflation is actually lower than the government estimates.

By now, it should be obvious that the problem is not that the Fed has injected too much money into the economy but too little. The price of gold—which jumps at the slightest whiff of inflation—has plunged from more than $1,900 an ounce last year to less than $1,630.

The commodity price index is down 7 percent from a year ago. Home sales have been tepid despite mortgage rates lower than anyone could ever have dreamed.

When lenders anticipate debasement of the currency, they demand higher interest rates to compensate for the risk. But currently, five-year Treasury bills are paying 0.71 percent, and 20-year bonds offer only 2.33 percent. In the mid-90s, a period of low inflation, those rates ranged well north of 5 percent.

Inflation hawks have been predicting a severe outbreak for years. But David Henderson, an economist at Stanford University's Hoover Institution and the Naval Postgraduate School, has been skeptical enough to put his money where his mouth is.

In December 2009, he publicly bet economist Robert Murphy of the Pacific Research Institute $500 that by January 2013, there would not be a single point at which the CPI would be up 10 percent or more from a year before. So far, it hasn't been, and it shows no sign it will.

Another economist who thinks inflation is the least of our worries is Scott Sumner of Bentley University in Massachusetts. He says the increase in the money supply has not unleashed inflation because the demand for dollars has risen as well.

When banks or individuals hold on to cash, he notes, the effect is the same as if the Fed were shrinking the money supply. By refusing to spend or invest, they stifle economic activity.

That effect is apparent in the slowing of the economy, which was not exactly galloping to start with. That has put job growth on a glacial pace. Three years after the recession officially ended, we have five million fewer jobs than we had before it began.

The Fed's past quantitative easing programs have helped, but they haven't been big enough or lasted long enough. Sumner argues the central bank should commit to sticking with that tactic as long as it takes to get growth back to a healthy pace—backing off only if inflation gains a real foothold.

Could inflation make a comeback? Sure. So could the Soviet Union. But until it does, we should deal with dangers that are not imaginary.

Steve Chapman blogs daily at

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  1. I feel bad for what is about to come Steve. Truly I do.

    1. Why?

      He could have paused for a moment and thought about why all that newly created money given to the banks to shore up their balance sheets is not circulating.

      Instead he went full speed ahead and wrote something as stupid as the assertions that Obama is a frugal president.

      He deserves the harsh schooling he’s going to get.

      1. He could have paused for a moment and thought about why all that newly created money given to the banks to shore up their balance sheets is not circulating.

        Or, perhaps, pondered why that money is on their balance sheets in the first place. Hint: its because the Fed bought garbage assets at full value, thus, effectively socializing the loss on those assets.

        And what happens when that money does start circulating? Inflation, perhaps?

        1. not w/o demand

          1. Why would anybody want to participate in the current economy? I have enough saved to buy shit I want, but I won’t. Not till all the fucktards in washington start hanging themselves.

            1. I will put up some money for hemp ropes.

        2. When the money starts circulating, the demand for output rises. Production and employment rise, and perhaps prices too. When spending on output reaches the trend from before 2008, then the Fed starts reducing the quantity of money so that inflation is limited.

          The goal is to adjust the quantity of money according to how much people want to hold with spending on output remaining on a slow, stable growth trend.

        3. I don’t get your hint.

          While I think bailing out banks was a bad idea, that isn’t an explanation as to why the banks are holding large amounts of reserves.

          The actual explanation is that the banks are being paid low interest on those reserves, and also there is low credit demand and so the interest they can earn is low.

          However, lending has nothing to do with it. It is the other side of the banks’ balance sheets–how much checkable deposts people hold with the banks, compared to what they would like to hold, that is key.

          The quantity of money that exists–currency, checkable deposits, etc. is too lower relative to the amount that people want to hold.

      2. He deserves the harsh schooling he’s going to get.

        He indeed does deserve what he is going to get. But those that don’t feel like he does and who have saved do not deserve it.

      3. Well maybe I was exaggerating, but he is about to get called every name in the book and probably get a few invented as well.

        It’s going to be harsh and that makes me cringe a little.

        1. He deserves it. So does everybody who suggests we need more “economic activity.” We had a lot of economic activity in the bubble years. Where did it get us?

          Investment is not good in and of itself. It is only good if it leads to an increase in productivity.

          1. Nearly all of the economic activity during the Great Moderation of 1984 to 2008 involved people producing goods and services, earning income, and then spending that income they earned on goods and services they produced. _Nearly all of it.

        2. He deserves it. So does everybody who suggests we need more “economic activity.” We had a lot of economic activity in the bubble years. Where did it get us?

          Investment is not good in and of itself. It is only good if it leads to an increase in productivity.

        3. Stupidity should be painful, Voros.

          OT, but in your area of expertise: How unprecedented was Roger Clemens’s 2005 pitching season, taking into account his age and that ridiculous shoebox he played in Houston?

          I honestly can’t think of a similar year, and my limited skill at manipulating BR’s Play Index doesn’t help. I guess Nolan Ryan’s 1987 or 1991 campaigns come close? Just trying to figure out if such a thing is feasible absent a truckload of HGH. Thanks.

          1. The thing is with pitching is that how age affects it differs thatn hitting. Hitting involves the use of a very wide range of physical and mental abilities, while pitching represents a relatively narrow one by comparison. In particular, the natural slowing of reaction times as we age has a far greater effect on hitters than pitchers.

            And so pitcher’s breaking down is much more a function of health than age. Now pitching is apparently a far more destructive activity to physical health than hitting, it seems just to shred elbows and shoulders.

            If Clemens’ arm holds up, there’s no reason why he couldn’t be effective into his 40s. It’s rare that an arm does hold up after all those innings, but it has happened before (Walter Johnson, Nolan Ryan, Steve Carlton and Warren Spahn all faced more batters than Clemens).

            Now whether taking banned substances helped Clemens be one of the exceptions, I don’t know. But if so, then I think it’s worth discussing whether banning them is a good idea. Star players playing longer and more effectively with less physical damage taken represents a substantial upside to weigh against the potential downsides.

            I’d rather we have that discussion rather than go straight to “ban forever.”

    2. Reason needs page views or something. Surprised they didn’t stretch the article out into 5 pages.

  2. Um, am I reading this right? It isn’t a parody or anything?

    1. It’s one step above journalism by echoing a press release.

      1. above = below?

    2. Yeah, pretty sad. From the St. Louis Fed: M0, M2.

      1. Ouch. So now that a bit of cursory ressearch done by a random internet guy has proven that the supply of money is staggering, I guess his argument will move onto why those greedy bastards won’t circulate the money?

        Communism would work, if it wasn’t for those anti-revolutionary hoarders!

        1. as greenspan testified, his econ model was broken because it assumed execs would act in the best interests of shareholders. in fact, the crash took down the entire chicago school of econ

          1. Greenspan fucked up big time, because he was clueless, but we’re going to trust his testimony as gospel (and it was not exactly just musing, but his defense of his culpability for fucking the US and world economy)? Uh, yeah.

            1. o3’s entire worldview is based on confirmation bias.

              1. So is he a conservative or a liberal?

                1. Republikeynsian or Demokeynsian?

                  What’s the difference, really?

          2. With all of the government incentives to make bad loans and (potential) punishment if you didn’t, it did make sense for them to grab the short term profits and then let Freddy and Fannie buy up all their bad loans.

            Greenspan was old and confused by the time he was on his way out. And since he could not fight back against all of congress’ nonsense, he gave in a long time ago and like most of us got fooled several times in a row when we kept having new stock or real estate bubbles.

            1. Read some of Greenspan’s early writing; he was more of a capitalist than Milton Freedman or Ayn Rand.

              1. I would have liked that Alan Greenspan.

          3. Why didn’t Sugar Coated Barry O ‘s bring the banking establishment to heel when he had them by the balls?

            1. He pretended to have them by the balls, they pretended he had them by the balls, and they paid him for it. He’s not so useful to them now, so O campaign donations are off a bit…

      2. This is more relevant than absolute numbers GDP/M2

        1. That’s scary, actually. M2/GDP would be even scarier.

  3. Ok, we know what Chapman says, now what does Krugman say?

  4. The price of gold — which jumps at the slightest whiff of inflation — has plunged from more than $1,900 an ounce last year to less than $1,630.

    Nobody who follows the gold market has the slightest doubt that it is heavily suppressed by the biggest financial guns on the planet – the central banks.

    The commodity price index is down 7 percent from a year ago.

    Yeah, economic slowdowns will do that. What isn’t clear is how printing up more paper money will reverse an economic slow down in real (not nominal) terms.

    Inflation occurs when there is too much money chasing too few goods. Deflation occurs when there is not enough money.

    Too simplistic. Does not take into account the velocity of money (which is dead slow right now) or the way that leverage plays in to both the creation of money, and how debt default is a driver of deflation.

    1. The commodity price index is down 7 percent from a year ago.

      In Seattle, gas prices have finally begun to fall from the Outrageous to the merely ridiculous.

      1. Fuel and food don’t count. No one really needs those, do they??

        1. And since nobody needs them, they have no impact whatever on disposable income, or the consumer purchases that make up what, almost 3/4 of the US economy, either. Nothing to see here…

          1. The proper way to consider monetary conditions is spending on output. A monetary regime cannot provide you with cheap food or oil. All it can do is drive down other prices and wages to offset the net effect of higher food and oil prices.

    2. Inflation occurs when there is too much money chasing too few goods. Deflation occurs when there is not enough money.

      Would it be more accurate to say inflation is when supply of money is greater than demand, and deflation is the opposite? Would this take into account the velocity of money?

      1. Inflation represents a loss in purchasing power. Deflation represents a gain in purchasing power. So yeah, you’re not wrong, but I don’t think that grabs the whole picture.

        1. And nothing sucks more than when the average Joe gains purchasing power. We must do everything we can to make sure he loses it continuously, never gains it.

    3. Deflation occurs when there is not enough money.

      And, used in the parlance of pricing, what role does technology/efficiency play in deflation? And how does a bank or a consumer ‘plan’ for that on its balance sheet?

      1. And, used in the parlance of pricing, what role does technology/efficiency play in deflation?

        gaijin, this is always the problem when discussing inflation/deflation: how to use the terms. Consumer prices in(de)creasing is called in(de)flation by many people. Others, myself included, use the price of money when referring to in(de)flation. Steven Horwitz (@2:03)below describes it very well.

        So, to answer your question, technology reduces the price you pay for products, but is not properly deflation.

    4. Deflation occurs when there is not enough money.

      also don’t forget : Higher productivity should imply lower prices. Not Higher.

      1. Productivity results in higher real incomes. This could occur through higher money incomes or lower prices or a combination of the two.

        If the demand to hold money rises more than the quantity of money, this results in reduced spending on output. To the degree this results in price and wage cuts, it is not due to improved productivity

    5. Real GDP is higher than it was a year ago, so that doesn’t explain the drop in the commodity price index.

      1. Would it be more accurate to say inflation is when supply of money is greater than demand,

        Maybe. Demand is what creates velocity, which is effectively a multiplier of the “static” money supply.

      2. Oops, sorry.

        Mo, are you sure “real” GDP is higher than it was a year ago?

        To me, real GDP is net of government borrowing (which is money printing, especially when the Fed is buying most of the debt), and net of inflation.

        1. Real GDP is nominal GDP divided by the price level.

          Nominal GDP adds up the dollar values of all the final goods and services produced.

          I am not sure how “net” of government borrowing fits in.

      3. Real GDP is higher than it was a year ago, so that doesn’t explain the drop in the commodity price index.

        We’ve been running 8-12% of GDP in deficit spending the last three-four years.

  5. Anyway to filter out Chapman’s articles on Reason? He’s wasted my time again…

  6. Is this guy serious? Chapman you just lost all economic credibility.

    You should be writing for MSNBC. I have news for you, runaway inflation is alreadying happening!

    Commodities prices are so high. We are seeing predictions that gas will reach an all time high this summer. Food pricing is still increasing.

    Adding fiat cotton currency to this mess is only going to drive inflation.

    Everybody knows the cpi is not a great measure of the basket of goods available given x quanitity of money.

    This post seriously belongs on George Soros’ webpage, not to mension the mechanisms that the fed uses to give said cast to big players (banks foreign and domestic etc…)

    1. I seriously think that Chapman and the editors who aproved this article need to come on the comment section and address this absolutely statist opinion and how in the fuck it can pass as libertarian thought.

      Seriously, does Chapman even realize that at its most basic, cotton currency as is today is totally unconstitutional?

      Welch, Gillespie, De Rugy, any of you care to weigh in?

      1. We don’t have inflation yet despite the FED trying like crazy for a few years. So let’s really inflate the money supply so that when it finally kicks in, it will be double digit. What a maroon.

        1. That’s what worries me. We have some weird things going on economically, on par with (but totally different than) stagflation in the 70s/80s. If we over meddle with inflationary pressures, we could well find ourselves in a disastrous inflationary spiral.

          1. I dont think so (yet). As that ludicrous M0 increase slowly creeps into M2 and the M2 monetary inflation eventually converts to price inflation, it will kill the economy, destroying velocity of money again and plunging us back into recession.

            That chart of M0 pretty much guarantees no real recovery for the next decade.

            1. If only we had a cautionary example to make us, well, cautious. Like an island nation off the coast of Asia, maybe.

              1. What does the Philippines have to do with anything?

                1. I dunno. I was just positing some fictional island, with a largely homogenous population with lots of government stimulations that didn’t work. Called Napaj.

                  1. Fucking naps.

                    1. But will they ever release Bugs Bunny Naps the Naps? They will not. Fuckin’ Warner Bros.

                  2. Sorry, I was imagining Whore Island.

                    1. That’s funny, because that Napaj’s nickname.

              2. PL, their problem is they didn’t spend enough fast enough. WE know better.

        2. We don’t have inflation yet

          Inflation is monetary. Look at the link to M2 above. That is inflation.

      2. What? when I swore the Libertarian creedal vows it didn’t contain orthodox monetary policy. I take you as an Austrian, but since we have a Fed that doesn’t really work, right? Another libertarian, Milton Friedman, agrees with Chapman and since their conclusions contain only implications implied by the subject matter (i.e., a Fed monopoly on money), he’s worth a listen. Look for his WSJ op-ed on Japan.

    2. When the price level is stable, some prices rise and others fall. It is quite possible that the prices of the things you think are important might rise, and the prices of things you don’t care about might fall. That is not a problem due to an excessive quantity of money.

  7. By now, writes Steve Chapman, it should be obvious that the problem is not that the Fed has injected too much money into the economy but too little.

    This is a joke, right?

    1. No, and it’s quite possibly accurate.

  8. Funny how economists and columnists can draw ridiculous conclusions when they obsess on a single economic indicator.

    Printing more cash isn’t going to make businesses or individuals forget the massive tax increases scheduled for year-end. It won’t offset the effect of Dodd-Frank, the uncertainty of ObamaCare, the crowding out of runaway government spending, etc…

  9. Did a “libertarian” really just write this article?

    1. Chapman is widely known around here for going off the reservation.

    2. No.

      Reason has a lot of non-libertarian editors and contributors.

      Quite a few ex-ediotor/contibutors have gone out of there way to make it clear they aren’t, or never were libertarian. Postrel for example.

      1. Postrel for example.

        I need a judge’s ruling.

        1. I base that on her own disavowal rather than the ideas she continues to put forth. She remains much more libertarian than the current “top two” editors.


          1. You’re almost as tiresome as the morons that use idiotic words like cosmotarian, wait, you are one of those idiots. When is the last time you actually added anything to the discussion other than constant bitching and moaning about purity?

            1. I add infinitely much more quality than you douchebag.

              1. Your bitchiness adds nothing. Aside from showing us all what a pathetic little tool you are.

      2. Postrel for example.

        That’s incorrect. Just a simple search turns up instances of her talking about libertarianism and defending it.

        Postrel discussing what sort of libertarian she is.

        Postrel talking about people’s misconceptions of libertarianism.

        And Wikipedia’s page on Postrel is part of their series on libertarianism.

    3. This never would’ve happened if Gillespie were still alive.

    4. Did a “libertarian” really just write this article?

      No, Chapman did.

  10. Please, God, don’t destroy my entire savings. Thank you.

    1. God won’t…Bernanke, on the other hand…

      1. I’ve been told by some here that Bernanke is God’s Official Agent on Earth.

        1. You blaspheme against Barry Obama.

    2. Please, God, don’t destroy my entire savings. Thank you.

      The government needs it.

      1. Well, I don’t need the government, so there.

    3. God helps those who invest in metals…

      1. That’s bullshit. I invested in hair bands in the 80s and lost my shirt.

        1. Yeah, but so did all those groupie chicks, so, score!

        2. Same with Kennedy. She often appears on Reason TV wearing a hair band, and no shirt.

    4. Heh I got them beat, I don’t have any savings, just debt so inflate away baby.

    5. By returning spending on output to the pre-recession trend, the real interest rate you can earn on your savings will rise.

      The quantity of money needs to adjust with the demand. If the demand to hold money rises, then the quantity of money should rise. If and when the demand to hold money falls, the quantity of money should fall again.

  11. Chapman, slap yourself around a bit, pour a bucket of icewater over your head, then try writing this again.

  12. Not only did a libertarian write it, a libertarian like David Henderson was interviewed for it. The position being articulated by those who believe the supply of money is currently below the demand to hold it has deep roots in the classical liberal tradition.

    The question here is empirical: no matter how much the supply of money has grown, the question is how it compares to the demand to hold it. If that demand is greater than the supply, we get deflationary pressure. The debate is the empirical question of what the demand for money (the inverse of velocity) looks like right now.

    There’s nothing “unlibertarian” about believing that increases in the money supply are not necessarily inflationary and that such increases might be necessary to head of deflation.

    1. Except when it is patentedly unconstitutional that the fed gets a monopoly to print cotton currency without any backing by gold or silver.

      There is no comeback to that:
      1) Constitution is supreme
      2) Constitution says nothing but coining gold/silver
      3) This QE printing fails on the above premises alone.

      argument closed

      1. You’ve chosen to be irrelevant in all policy conversations.

      2. Nothing in the Constitution requires “backing” by gold or silver.

        The power to coin and regulate the value of money is vacuous. It gives Congress the power to inflate at will. At most, they just have to make the fiat currency out of metal. Take a penny, and put $1,000 on it. Use them to purchase government bonds.

        If you want to claim that it must be silver or gold, because states can only make that legal tender, then fine. Make them out of silver. A few dollars worth of silver to make a $1,000 coin.

    2. Sounds like a lot of central planning to me.

    3. Understood, but if the Fed isn’t created to try to determine these things, problem solved. Why advocate for Bernanke to figure out the supply and demand for money?

    4. The unlibertarian part is the idea that there should be one guy who determines this for everyone. There nothing unlibertarian about “Bernanke-bucks,” as long as there are “Allison dollars” and “Marx scrip” and what have you.

      That isn’t to say that competing currency is necessarily a _good_ idea (I haven’t the slightest idea), but it’s definitely a far more libertarian one than having the gov’t enforce a monopoly on the money supply.

      1. I define good ideas as those that maximize liberty. As competing currencies clearly are a pro-liberty concept, then it is a good idea.

        1. How do you define liberty though? Ay, there’s the rub.

          1. No rubbing necessary.

            Liberty is the freedom to engage in behavior not proscribed by the NAP.

        2. No, currency competition is not a good idea, it is the ONLY idea.

          The governemtn should mint gold and silver and let people trade with whatever they want.

          That simple.

          Bring back Bitcoin articles!!!!

          This has gone away, I need more articles to show my friends/family regarding monetary poicy and competition.

          1. This has gone away, I need more articles to show my friends/family regarding monetary poicy and competition.

            Have them read Hayek (Friedrich, not Salma). He has some very good books on the subject. Look here .

            1. I believe that banks should be free to issue alternative monies if they want. But the most common view among libertarian monetary economists is that it would have very little effect. Money has a very strong network effect and so there is very little chance that people will use a variety of independent monies.

              Allowing banks to issue their own monies will just result in people using the existing money. Some plan for privatizing the existing system is the only way it will get privatized.

              Regardless, in the meantime, having the Fed adjust the quantity of the money it issues according to the demand to hold it is the best approach. This will tend to keep spending on output growing at a slow, steady rate.

              I think banks should be free to issue whatever money they want, including money redeemable in Federal Reserve notes.

      2. The unlibertarian part is the idea that there should be one guy who determines this for everyone.

        Agree totally. Competing currencies would put an end to this farce very quickly.

    5. It is unlibertarian to believe that deflation is bad.

      1. No, it’s unlibertarian to think that the state has a major role to play in managing the economy, regardless of whether that state supports inflationary or deflationary programs. One could even argue for a role for the Fed (or something like it) in a libertarian society and still be considered libertarian as long as they saw it as one of a few areas in which they believed a very limited government has a role.

        What makes Chapman’s article so profoundly anti-libertarian is not his lust for inflation, but his faith in the right kind of intervention: “If the Fed would do what I think, we would all be better off.” It would still be anti-libertarian if he argued for deflationary action by the Fed.

        1. That too, but I stand behind my statement. Inflaton/deflation are neither good nor bad, they just are.

    6. What would you know about “libertarian” Steve?

      You’re a utilitarian.

      1. There are utilitarian libertarians out there.

        1. If you define utility in terms of liberty sure, but I think that defeats the whole point of utilitarianism.

        2. Don’t forget “libertarian socialists”, “libertarian communists”, “libertarian paternalists”, I could go on but the point is made.

        3. Don’t forget “libertarian socialists”, “libertarian communists”, “libertarian paternalists”, I could go on but the point is made.

          1. No please, go on.

          2. Do go on

            1. “libertarian Democrats” “collectivist libertarians” “libertarian feminists”
              “bleeding heart libertarians”…

        4. And Caribbean amphibians.

    7. The ‘deflation’ the talking heads are worried about is actually just lowered prices. It would be a symptom of a weak economy getting weaker, not a cause.

      As robc pointed out, inflation is a monetary event. The chance that Bernanke will remove any money from circulation is 0%.

      1. I disagree. While I don’t like Bernanke much, it is almost certain that he will remove money from circulation.

        1. Based on what?

          1. Inflation targeting.

            If an when inflation begins to rise, the will raise the target for the interst rate, and the guys at the open market trading desk will sell bonds, and the quantity of money will fall.

            Why not?

            1. Bernanke has as much as stated that he’s targeting an inflation rate higher than current, if anything. He may, if he retains his position long enough, eventually pursue an inflation-reducing strategy, but I don’t see any indication of it in the near term. 2014 is the earliest date he has suggested changing the interest rate target.

    8. The debate is the empirical question of what the demand for money (the inverse of velocity) looks like right now.

      Steven, I’m not sure how disaggregate the demand for money to be used in transactions from the demand for money to be put under your mattress.

      Saying that the demand for money is the inverse of velocity assumes that the only reason people want money is to put it in their mattress. I’m pretty sure that’s not true.

      I would think that the demand for money for transactions would positively correlated with velocity.

      1. Velocity is the reciprocal of the the demand to hold money relative to real income.

        There is no need to separate it into “put in mattress.”

        The demand for money is how much money people want to hold. I think you are reading “demand for money” as how much money people want to borrow. That has nothing to do with it.

    9. The problem is most of us recognize that attempting to combat “deflationary pressure” caused by peoples unwillingness to spend, an unwillingness borne at least partly by extensive over leveraging in every sector of the economy, by printing more money might not be such a good idea. Sure it might give the economy a short term boost and make the numbers look better over the next 3 – 5 years but then when eventually people do start to open the purse strings you have created instant hyperinflation.

      Here is the problem and it is really simple, we have too much debt, not just government debt, too much debt EVERYWHERE. Worse people are starting to realize it and since every debt is considered an asset by someone it is starting to create the situation where people are wondering just exactly how much their assets are worth if the debts backing their value fail. Printing more money by definition cannot help this situation because it just shifts the worry from outright default to default by collapse in the value of the money they’ll be paid in. The ONLY solution is delveraging and until the debt level is deleveraged sufficiently monetary velocity will not pick up but that means taking our medicine and living through a painful decade while we pay down the debt load.

      1. This is false.

        Nearly all spending is funded out of current income.

        The amount produced generates an equal income. It is always possible to buy all that can be produced out of current income.

        There is no need to borrow more money to buy everything that can be produced.

        Also, it is possible to expand the quantity of money, pay down debts, increasing spending on output, and produce more and employ more.

        What you are ignoring is that those who receive the debt repayments have more money to spend.

        Not all bank deposits are money. Not all debt is bank debt. So, total debt can fall, while the amount of money available for people to hold can expand.

        1. Nearly all spending is funded out of current income.

          At a household level or are you referring to government? In either case, do you have any citation? Any data at all that would remotely suggest that? Household and government debt seem to suggest quite the opposite.

          What you are ignoring is that those who receive the debt repayments have more money to spend.

          Not if they are repaid in dollars that have significantly decreased in value since the origination of the debt. Which is part of the reason why governments love inflation so much – it allows them to discharge debt denominated in the same currency even though the value has diminished.

          Using your logic, we could create 15 trillion new dollars tomorrow, pay off the entire national debt, and all of our creditors should be delighted because they have so many new dollars to spend.

          1. I am refering to the private sector in aggregate.

            Each firm funds most of its gross investment out of current revenue.

            Each household funds most of its consumption out of current income.

            The total debt is a stock that accumulates out of time. Production, spending, and income are flows over time.

            I have said nothing that suggests that paying off the entire national debt with newly created money would be a good idea. It is true that it would result in plenty of spending on output. Too much, in fact.

            If the government cuts its current spending to pay back debt, then those receiving the debt repayments have more money to spend on output. If a business reduces current purchases of capital goods to pay down debt, then those who receive the debt repayments have more funds to spend on consumer or capital goods. When a household spends less out of income to pay down debt, those receiving the debt payment have more money to spend on consumer or capital goods.

            1. Historically large debt loads for both households and government would suggest otherwise in this particular instance, I would argue, which is part of what makes this particular recession unique and why orthodox policy approaches have not produced the results that models suggest they should.

              And anyway, the caveat I mentioned above still stands. The government is a unique debtor in that it can reduce the value of the instrument in which it repays its debts by simply increasing its quantity. In point of fact, the government is not reducing and will not reduce its spending in order to pay its debt, nor will it reduce the money supply if/when the demand for dollars falls.

    10. But that begs the question as to the necessity of heading off deflation. Deflation is not some monster to be slayed; it’s an acknowledgement that prices have risen far above the demand.

      The Obama administration put a ton of effort into keeping the housing market bubblicious, and failed miserably because housing prices went way beyond traditional income/price ratios during the bubble years. House price deflation sucks for the fools who bought at the top of the bubble–especially if they were looking to get out after a few years–but it’s great for people who otherwise wouldn’t have been able to afford to buy a house in the mid-late 2000s.

      And can anyone honestly tell me that deflation in the cost of healthcare wouldn’t be desireable?

      1. Prices are above demand… hmmm.

        Well, you are taking nominal incomes as constant. And then saying that wouldn’t it be great if product prices fell.

        However, when spending on output falls, then this reduces nominal incomes. At best, when prices fall, that means that real incomes stay the same.

        And what good is that?

        Improved productivity is great. Total productive capacity in the U.S. grows about 3% each year. Spending on output should grow 3% too. This will keep prices steady.

        Now, if we get lucky and the health industry gets more productive, and prices charged by hospitals and doctors go down, then this will be great. Spending growth of 3% per year would result in deflation.

        But we could get health costs down as low as you like. Just drop the money supply alot. But this would reduce people’s money incomes too by just about as much as health care costs dropped.

        This is pointless.

        Keeping spending growth at the trend rate of productive capacity is the least bad approach.

    11. Except that even by Chapman’s own reasoning, prices are increasing, not decreasing, even according to the CPI, which is the 2nd biggest piece of government horseshit next to the U3 unemployment number. If inflation is actually at a comfortable 1.7% rate, and precious metals and commodities are relatively stable coming off of their historic, astronomical highs of 2011 (which can’t possibly be because of the relative stability of the US dollar compared to the crumbling and increasingly-unstable Euro zone – no siree), what indication do we have that a larger quantity of money is demanded?

      This is nothing more than typical, unthinking, Phillips Curve bullshit. It’d be kinda cute if this was 1972 instead of 2012.

  13. You know, recently I’ve been looking at my expenses to see what I should be cutting back. I received the new Reason magazine in the mail the other day, and I began wondering to myself whether I should continue my subscription.

    This article is helping my thought process quite a bit.

    1. Drink?

      1. This thread is chalk full of “drink.”

        1. You know, ClarkA, The New Yorker is having a sale. You should probably check them out.

  14. The 10-year notes at all-time low yields is not a sign that we don’t have inflation. Instead, the demand for US Treasuries is a “least worst option” for investors. Investors are willing to accept negative real interest rates, because they figure the US will at least make good on the bonds (as opposed to India, Greece, or Spain which could simply discharge it’s debt obligations). It doesn’t mean investors aren’t anticipating, or experiencing inflation. They are just putting dollars where it seems safest.

    This article, much like recent Fed policy, is a joke.

    1. How old are you?

      There are plenty of inflation hedges.

      If you expect inflation, buy gold.

  15. 20 years ago I bought 67 acres of timberland that was clear-cut for $400/acre.

    Today, timberland (dirt with trees on it, or no trees) is $10,000 / acre which is insanely overpriced. Magically, the value of land rose 2500% in 20 years. Right. Ditto almost every piece of real estate in the country. For Sale signs are rotting down everywhere.

    My ex is looking for houses. She looked at a 1850 sq.ft. new spec house jammed into a sub-division, choc-a-blok with others just like it and was told the price was $320,000. I woulda laughed in the guy’s face. ( She isnt very financially savvy)

    Not enough money- my ass.

    1. Depends on where that acre of trees is at. If it is right near where development is about to occur, then $10K per acre could seem insanely cheap in a few years, since that works out to $2,500 to $5,000 per lot for the land for those $320K houses.

  16. So wait…

    Whenever there’s a bubble, and it bursts, we have to print more money?

    Gold shot up irrationally, and when it drops back down to a still-irrational price that isn’t quite as high, we have deflation?!? Ditto for housing, oil, and plenty of other things.

    That’s cherry-picking data points. Gas in my area costs 3 times what it did 3 years ago, but since it dropped back a few cents recently, we have a problem with deflation?!?

    Ludicrous conclusions, based on ludicrous assumptions.

    And what was devastating about the late ’70s and early ’80s was not simply that there was inflation. The problem was “stagflation”, where the money supply increased, prices shot up, and the economy stayed in the shitter anyway.

    Selective data points, and selective memory.

    1. WRT Gold, see:

      Look at the 10 year chart. Gold has gone up, up, up, up. The current price drop is merely the price reverting back to the mean increase, which has been pretty big. Gold dropped almost $50/ounce today, but still sells for 146% of its price 5 years ago.

    2. (I’m not a gold bug; my point is that a diagnosis of money-supply deflation has to be based on something more than just short-term price fluctuation around the moving average.)

      1. It’s not anticipating Europe discharging/writting off its debt? That would be a huge drop in the money supply.

        1. I don’t think it’s that simple. All the markets dipped today. Expectations of a European depression are not just about the money supply.

        2. I don’t think it’s that simple. All the markets dipped today. Expectations of a European depression are not just about the money supply.

    3. I agree Barry. I really want to see half of the EU countries try austerity with some deregulation and half try stimulus and see what actually happens, then we don’t have to argue about it any more.

      But it would have to be a mix of countries try each, not all the solid ones like Germany try one and the PIGS try something else. If the PIGS were to go the deregulation/austerity route and did well while Germany and the others spent like crazy and did poorly, that would be a true demonstration. Sadly, it would more likely be the other way around where the PIGS keep trying to spend.

    4. The current price drop is merely the price reverting back to the mean increase, which has been pretty big.

      Try mapping gold prices against global leverage, and see if that big increase really looks irrational.

      As of 2010, global debt had increased by 266% since 2000.

      The overall amount of global debt outstanding grew by $5 trillion in 2010, with global debt to GDP increasing from 218 percent in 2000 to 266 percent in 2010.…..rkets_2011

      Gold prices have increased by 500% (give or take) since 2000. However, gold prices also reflect expectations that global leverge will continue to increase.

      Really, what we are looking at is gold prices increasing at around twice the rate global leverage is increasing. That’s a multiple, but is it irrational on a forward basis? Reasonable minds can differ on that one, I suppose.

      1. Have other commodities tracked global leverage?

        You’re assuming that gold is, ultimately, reserve money. Maybe it is. I’m not sure how rational that is, but I can’t say it’s not.

        If one looks at gold as a commodity metal, the price spike isn’t the most rational thing.

        1. (The point is that if it drops to a price that reflects global leverage more closely, that still doesn’t mean we have a deflation problem, the subject at hand.)

    5. It has nothing to do with bubbles. It has to do with how much money people want to hold and spending on goods and services. The quantity of money should always adjust to the demand to hold it, and spending on output should grow at a slow, steady rate.

      If a bubble develops, then don’t invest into it. People who do, will lose money. But that doesn’t mean that the quantity of money cannot adjust to the demand to hold it and spending on output continue to grow at a slow steady rate.

      If people lose money and want to save more, that is fine. It must means that rather than produce consumer goods now, more capital goods need to be produced. But total spending on both consumer and capital goods should continue to grow at a slow, steady rate. If the quantity of money adjusts to the demand to hold money, then that will happen.

      1. We still don’t have any indication that there is a mismatch between supply and demand considering that, with a 1.7% CPI, according to your logic, we’re following exactly the right strategy right no.

        I’d also be curious as to how you can square the idea that the money supply should always track demand with the idea that it should never decrease. If the demand for dollars were to decline, which rule would you break?

        1. If the demand to hold money should fall, then the quantity of money should fall. Spending on output should continue to grow at a slow, steady rate.

          The economy can settle into an inflationary equilibirum–which it did for more than 20 years. The reason prices rose at 2.4 percent wasn’t that there were constant shortages. It is rather than spending on output grew about 5.4 percent each year and raising prices 2.4%, with production expanding 3% cleared markets.

          There are not shortages of goods and services today forcing up prices.

          1. That still doesn’t answer the question of what it is right now that convinces you there is a dramatic mismatch between the current supply of dollars and the demand for them when there is, by anyone’s measure, a positive inflation rate.

            That aside, the only real way to ensure constant spending despite deflation would be totalitarian central planning. And since most of the current economic orthodoxy calls for massive fiscal or monetary stimulus to prevent “deflationary spirals”, the practicality of the matter is that shrinking the money supply to match depressed demand will never, ever happen.

  17. If were talking about the desire of people to hold dollars shouldn’t we reflect on the fact that Japan an China are now trading in their own currency rather than U.S. dollars? In a global economy doesn’t that show a negative correlation with our monetary policy? Whats going on here Horowitz?

    1. That’s what’s called “sundering” of the dollar as a reserve currency.

      The Chinese are executing a plan to replace the dollar as the reserve currency.

      That will drive the dollar down on the forex markets, which is inflationary.

      But, you say, the Chinese hold lots of dollars!

      Yes, they do, and they are fed up with watching those dollars get debased. They probably figure they are going to take a loss on them anyway, so its a small price to pay to dislodge the US as the center of the financial universe.

      1. If the Chinese choose to hold less money, that would be a decrease in the demand for money. If the demand falls below the current quantity, then the quantity of money needs to fall.

        If the dollar falls on foreign exchange, this makes imported goods (Chinese goods, for example) more expensive. This raises the demand for U.S. products. It also makes U.S. exports cheaper to the Chinese. These things raise spending on U.S. output. When spending is back on trend, that is when the demand for money has reached the quantity. And to prevent spending growing faster than trend, the quantity of money needs to fall with the falling demand.

        Keeping spending on output growing at a slow, steady rate requires that the quantity of money be adjusted with the demand to hold money.

  18. The price of gold — which jumps at the slightest whiff of inflation — has plunged from more than $1,900 an ounce last year to less than $1,630.

    Of course, the price of gold at the beginning of 2008 was $833.70/oz., roughly half of what it is now.

  19. It’s another golden shower from the Chicago Tribune birdbrain.

  20. I agree with the author inflation is not the main worry, but then again nor is inflating away going to solve anything either. If the author thinks that the solution is to simply inflate, one would think that every country in the world would have adopted this by now and the world be undergoing endless prosperity.

    1. Good point.

      All else aside, “inflation hasn’t been a problem” does not equate to “printing money will cause real growth”.

      1. The goal is to keep spending on output growing at a slow, steady rate. If spending on output falls relative to that trend, then the quantity of money needs to rise to match the increase in the demand to hold money. Increasing the quantity of money beyond that amount, so that spending on output grows at a persistently faster rate will do no good.

        If spending falls below trend, getting it back to trend is what is needed. There is too little money. Shifting a more rapid growth rate of spending on output just leads to higher trend inflation.

        1. The goal is to keep spending on output growing at a slow, steady rate.


          1. It is the least bad envirnoment for microeconomic adjustments.

            The point of the market system is to allocate resources to produce what people want most. Slow growth of spending creates an environment where the spending on those things people want relatively more grow, their prices rise, profits rise, and production and employment rise. Those things they want less, spending grows more slowly or falls, prices fall, profits fall or losses occur, and production and employment slow or fall.

            If spending on output falls, then what has to happen is that wages and other costs fall. Those areas where spending falls relatively less have prices fall less and when costs fall even more, profits, production and employment all rise. Those areas where spending falls more continue to suffer losses because prices fall more than the falling costs, they lose money and hence don’t recover.

            This relates to money because the lower prices and wages make each dollar with more, so they real quantity of money rises to meet the demand. As that occurs, real expenditure rises to match productive capacity.

  21. Has anyone told the slaver, Chapman, to fuck off?

  22. Is it possible that demand for money is higher than it should be because interest rates are lower than they should be?

    1. You are confusing money and credit.

      The demand for money is how much people want to hold, not how much money people want to borrow.

      It is possible that low interest rates on assets other than money will tend to cause people to want to hold more money.

  23. When lenders anticipate debasement of the currency, they demand higher interest rates to compensate for the risk. But currently, five-year Treasury bills are paying 0.71 percent, and 20-year bonds offer only 2.33 percent.

    Pay no attention to the fact that the Fed has been buying these notes at record levels to push rates down.

  24. There is a grain of truth in the ‘pump out more money’ argument: People are not spending. This is partly due to many wanting to pay down the debts they have already incurred and partly due to a desire to have cash on hand if their job goes south, which many feel could happen given present economic uncertainty.

    Increasing the money supply will put a further penalty on savings, thus encouraging people to spend rather than save. The problem with this is that, the next time the cycle goes around, they are even less likely to spend.

    So aside from the possibility of igniting inflation, increasing the money supply will ultimately increase, rather than decrease, economic uncertainty and thereby prompt people to spend even less.

    The whole aim of government policy over the last 70 years has been to ‘avoid a recession’ rather than recognizing that recessions are part of the normal economic cycle and allowing them to happen. By attempting to endlessly ‘stimulate away’ recessions, governments have made it inevitable that, when one finally happens, it is going to be huge. (And what we saw from 2008 onwards is mild compared to what is coming.)

    1. A major aim of government policy over the past 70 years is to encourage borrowing. We may have to clear out more of that debt before we see people spending money, as you wrote at the top.

    2. There was a Next Generation episode that addressed this. They were going through some sort of energy waves, that kept getting worse and worse, so they kept putting more and more power into the shields.

      Eventually the ship was about to get destroyed, and somebody figured out that the more they pumped up the shields, the stronger the next wave was going to be. So they clinched their sphincters and lowered the shields, and just rode out the remaining waves w/ no problem.

      That episode was specifically forseeing this economic circumstance and trying to warn us!

      1. So Ron Paul is Data and Peter Schiff is that weird kid who wanted to be Data.

        I guess that makes Krugman Riker and Pelosi Crusher.

        1. He does have the beard for it…

      2. Given Roddenberry’s big-government-as-nanny-to-us-all outlook, I doubt the implication you suggest even occurred to him.

    3. People spending less money is not necessarily a problem. If they are rebuilding perilously low balance sheets, then they are doing the right thing, and any government intervention to change this will have perverse negative effects.

      1. Depends on how things go down. If the Fed inflates away they’re better off with useful goods than dollars.

        1. Define “useful goods”.

          If you say ‘a house and car’, what if you already have a house and car? Is there enough marginal utility in a larger or newer house and car to make it worth depleting your savings?

          There are three reasons to save: 1) To invest and build future income, 2) To provide a reserve in case of income loss or unexpected expenses, and 3) To make a future purchase where the present marginal utility of the purchase is greater than the future marginal utility of the purchase less the cost of the payments you will have to make between the present and whatever future date you might choose to make the purchase.

          1. The notion that the reason we aren’t producing things is because everyone has everything they want is wrong.

            The problem is that people want more money, and not enough is being creaed to match what they want.

            Now, when people accumulate money, they are saving, and want to be able to spend it in the future. For them to be able to do so, it is necessary to be able to produce things in the future and so investment is needed–more purchases and production of capital goods.

            Of course some people can save more if others save less. And so, some people can accumulate more money, while others reduce their money holdings by spending it on consumer goods. If that is what they want.

            What capital goods and what consumer goods? Whatever they like best. But the notion that the “problem” is that no one has anything they want to buy is absurd.

        2. If the Fed inflates away they’re better off with useful goods hard assets than dollars.

          Now, those hard assets can be useful goods, but they can also be the sorts of things that have always done well during inflation: precious metals, land, that kind of thing.

          1. Weapons and ammunition…

            1. Lead, the other precious metal.?

      2. You are ignoring the people receiving the debt repayments.

        What should happen is that they should purchase capital goods. The interest rate that they can receive and most pay should adjust so they get that signal, but it is important that they are confident that spending on output will remain on a slow steady growth path so they believe they will be able to sell the extra output they can produce with the extra capital goods.

        This reduces total debt, and keeps investment matched with saving.

        There is no benefit to just having less spending on everything and less production and employment. That doesn’t help reduce debt.

    4. Increasing the money supply will put a further penalty on savings,

      Yeah, that’s what we need to do: penalize capital formation.

    5. Recessions are not part of a normal economic cycle.

      There is no reason why spending on output cannot permanently grow at a slow steady rate, reflecting the trend growth rate in population and productivity. There never has to be a problem where on the whole, people can’t sell what they can produce.

      Now, it is quite possible that some markets will have surpluses and others shortages. It happens all the time.

      Also, productivity can grow faster sometimes (which would tend to result in deflation) and more slowly other times, (resulting in mild inflation.)

      But there is nothing “natural” about having the quantity of money grow faster than the demand for a time, so that spending on output grows extra fast, and there is a boom, and then the opposite situation, where the quantity of money falls, or at least fails to grow with demand, so that spending falls on net, with sales, production and employment all falling.

      1. Market failures and information asymmetry guarantee that there will be recessions in an actual economy as opposed to a purely theoretical one that is perfectly efficient.

        Booms and busts of the type you describe, fueled by monetary policy mismatches with the market, ironically enough, originate in the apparatus whose mission is to prevent them from happening.

        1. Market failures and information assymetries imply that actual output is less that some kind of perfectly efficient ideal. That isn’t the same thing as an inability to sell.

          While I have little doubt that Fed incompetence is a problem, the current problem is a failure to keep the quantity of money growing to match the demnd for money and allowing spending on output to fall to a substantially lower growth path.

          1. There certainly hasn’t been any failure to keep the money supply growing. So the problem, then, is that it is ostensibly mismatched with demand. But you still haven’t explained to us what market indicators suggest that the mind boggling quantity of American money is lower than the demand to hold it (it’s almost as if there aren’t effective price indicators in the market for money because it is centrally controlled…) A low-positive inflation rate, as the CPI suggests, would seem to indicate pretty much an ideal situation using your metrics.

            As I mentioned below, “Debase the money until people are so afraid to hang onto it that they rush out to spend it before it becomes completely worthless” seems like a recipe for a positive loop cycle of bank runs and hyperinflation to me.

  25. Chapman needs to be man handled by a well endowed man whore in order to increase the size of his bung hole so shit stops flowing out the other end.

    1. He’d probably like that though.

      1. Yes, he’d probably be right at home in a donkey show.

        1. The New York Times?

  26. Chapman’s BS aside, a case can be made that the inflation situation is not one of a realized event, but one in which we’re sitting atop a giant powder keg soaked in gasoline. Just a slight uptick in velocity would set the entire thing off.

    1. The powder keg being the large stack of toxic assets the Fed is sitting on.

      WTF is anyone doing about them?
      Are they ever going to unwind that shit?

    2. The quantity of money needs to be decreased when the demand to hold it falls.

      1. The quantity of money needs to be decreased when the demand to hold it falls.

        Why? So that nominal growth can maintain this magical small rate that you say is good?

        1. Yes, exactly. So spending on output continues to grow at a slow steady rate.

          A failure to reduce the quantity of money in that circumstance will result in more rapid growth in spending on output. This results in shortages of goods and services. While it is desirable to have shortages of things people want relatively more and surpluses of those things they want less, so that production and resources will shift from what people want less to what they want more, shortages of everything does no good. This is cleared up by an increase in the price level. Under current contitions, a temporary spike in inflation and then inflation returns to its previous trend rate.

          This is disruptive and undesirable.

          1. What happens when growth allows wages for everyone to be $1M/hr? Is slow growth still the answer? Won’t the lenders of the world to the US eventually decide the currency is too debased? The only way I could see a government controlled currency make any sense is if it was pegged to population growth. In which case money supply is stagnant per person. So if you want to peg some growth number, eventually, the numbers we’re talking about are ridiculous, like trillions of dollars, right?

            1. I favor 3% growth in spending on output. This implies about 2% growth in wages.

              In about 582 years, this would result in $10 an hour being equal to $1,000,000.

              This would be an annual income of about $2 billion per year.

              Prices would be about the same, and the typical person could spend like the world’s richest people today.

              I don’t know why foreign lenders would have a problem with this.

              Of course, if it is impossible for productivity to continue to grow at 3% a year for the next 582 years, then at some point centuries from now, an adjustment might be appropriate.

              But I don’t think there is any reason to adjust the trend growth rate of spending on output downward at this time based upon specuation about what will happen in a century.

              1. Is there any special reason why growth must be restrained at 3% annually? I mean, is it just an arbitrary number, or is there some empirical reason why 3% is just-right and economic behavior must be manipulated through currency valuation to maintain it? What is the significance of this number? It seems like you’ve got the tail wagging the dog: you set a growth rate and then adjust the money supply to create it rather than, as you have suggested previously, allowing the money supply to fluctuate upwards and downwards based on actual demand (leaving aside how actual demand is to be determined in the absence of a functioning price mechanism in the free market sense).

                1. Very excellent rebuttals, PM. Unfortunately, it looks like Bill Woolsey is just drive by commenting. He probably ain’t coming back to explain why 3% is the magic number. Wouldn’t the best solution be to not tinker with the fucking economy, and let growth, interest rates, money supply, manufacturing supply/demand reach their natural, free-market driven levels? No matter how many critiques he had of our arguments, he has yet to justify his argument.

  27. The Demand for shoes is high. Therefore, the central shoe commissar has decided that for the next five years, we will increase our shoe production.

    Why would all you purist consider this un-libertarian?

    1. The Demand for shoes is high. Therefore, the central shoe commissar has decided that for the next five years, we will increase our shoe production.

      The demand for shoes is 100 pairs/year. We will produce 200 pairs/year. What happens to the price of shoes?

      1. The price of shoes is equal to the price of labor that went into their production.

        Re-read your Marx, Keynes, Clinton, Obama etc.

    2. …the central shoe commissar…
      Why would all you purist consider this un-libertarian?

      Why do you think?

      1. You might want to check your sarcasm detector.

        1. You might want to check your sarcasm detector.

          Sorry, it’s been a long day already.

    3. If the government runs a shoe factory, and the demand for shoes rises, they should produce more.

      If the government monopolizes the producion of shoe soles, and the demand for shoes rises, it is really important that the government produces more soles.

      I support changing the monetary regime. But right now, the Fed should adjsut the quantity of the money it creates according to the demand to hold it, which will keep spending on output growing at a slow, steady rate.

  28. This piece is even stupider than the headline indicated. It reads like one of those 1930s depression-era propaganda short films explaining why the government need to implement price floors.

  29. Congrats to Reason for showing some diversity of opinion for once, instead of more and more Tim “Inflation is skyrocketing” Cavanaugh.

    1. Via Alan Vanneman: Sherlock Holmes and the Giant Printing Press of Bernanke.

  30. The problem is the cash was doled out top down (to the banks) instead of bottom up (to us). Send everyone a check for $100,000 and watch the economy super-heat as everyone dashes to spend it while it’s still worth the paper it’s printed on.

  31. (*barf*)

  32. Steve Chapman is why nobody takes libertarians seriously.

    1. He’s a cunt.

    2. Maybe he’s the token slaver and they just post his stuff to remind us of how good we have it over here?

      1. It’s meta-trolling. They see how much response a lot of people here give trolls, and so they figure why not print a few articles that will troll the readers?

    3. If Chapman ran a food truck that constantly got ticketed by RLCs, you guys would totally change your mind.

      1. Only if he also parked perpendicular to traffic.

      2. On food trucks? Not likely, I still would stand by their ability to move and sell unimpeded. Why would that change my mind?

        1. I’ve been thinking about this. I’m one of those people who doesn’t like to stop on long trips. Why not have, on interstates, mobile restaurants and bathrooms? Your car could dock with the mobile service provider, then you could, while still moving towards your destination, get food and/or use the bathroom.

          1. There would have to be a lot of bathroom docks.

            1. Probably better to keep them separate from the food trucks, right?

              I suppose the best way to dock is some sort of train, with the access tunnel going alongside the cars.

              1. Figure you could do that with maybe 4-5 cars at a time.

                1. Maybe instead of actually getting out of the car, the mobile bathroom could simply provide tubes with disposable access ports for use. Food could be delivered by completely separate tubes. All pneumatic, of course.

                  1. Ah, the Tube Technology.

              2. Just drive right up a ramp on the back, then off a ramp in the front when your done.

                1. That’s a nice enhancement. Can you actually do that safely, or is that one of those Hollywood things?

                  1. I’m sure the technology could be developed.

                    1. You could also lift the cars into the food truck with a magnet. Though that might wreak havoc on any electronics in the car. Maybe a claw?

                      I’m leaning towards the tube system as the most practical idea so far.

                    2. DON’T CROSS THE TUBES!!!

                    3. I’m not sure a claw would do less damage than a magnet…

                      I think the tube system would work. Maybe we all get special travel pants for the hookup?

                    4. Yes. Which you can buy ahead of time or on the spot. In the latter case, it will be delivered to you via tube.

                    5. I think we have just written the back story to the movie Brazil.

                    6. Knight Industries already had this in the 80s. You’re way late to the party, dumbass.

                    7. That required an AI in the car, though. We don’t really have that yet.

                    8. No it didn’t. Michael was usually driving when they got on or off the truck.

                      Just face it, you were beaten to the idea. Come up with a different one, like mobile massage parlors. If you know what I mean.

                    9. There’s really no limit to the possible applications. Getting tired but need to keep moving? Mobile hotel.

                      You’re a truck driver but are behind on your gig and need a hooker? Mobile truck stop.

                    10. Seems like this all comes back to … High Speed Rail!!!!

                    11. What? No. That’s too fucking expensive and freedom-inhibiting. This is America.

                    12. Actually they had the full blown idea on an episode of Phinneas and Ferb (a kids cartoon about 2 super genuis kids who invent some cool new thing every day to find some way of occupying themselves during summer vacation) They had a full blown mobile diner.

                  2. I think Mythbusters did that once.

                    It would also be much better for the mobile bathroom, especially for women.

                    1. PL – You know some employee would “accidentally” use a food tube as a bathroom tube and vice versa.

                    2. Clearly, we’ll need government regulation. Since this involves interstate commerce, we’ll need a federal agency. The Department of Tubes.

                    3. The Department of Tubes.


                    4. Sure, why not? Not like they serve any useful purpose now. Protecting us from getting food through shit tubes–that’s useful. And no pesky First Amendment issues!

                    5. Zombie Senator Ted Stevens agrees.

                    6. Try the Dilbert Cueborg 5000.

                    7. I was thinking I saw them do that. Did it work? Was it easy? Perhaps a remote capture system could bring the car on board?

                      Once we have Episiarch’s AI system, then this will be easy.

                    8. I think I might have needed a non-mobile bathroom when I saw that episode to get rid off 7 or 8 beers, so I can’t really answer you. It’s a bit… foggy.

                    9. See my answer above, and in any case, I have pledged to myself never to invent an AI, as any AI I would invent would be evil, and would enslave the human race. Now, that would be great, except that no AI I create would ever accept me controlling it, so I’d be enslaved too and probably killed.

                      It’s all very complicated.

                    10. Agreed. It should be a non-Episiarchian intelligence.

                    1. There you go! Piece of cake! Man, I’m going to make billions from this one.

          2. Duh, you piss in the empty beer bottles and toss them out the window.

            1. This may shock you, but that’s technically illegal. Yeah, I know.

              1. You call it illegal, I call it contributing to wetlands development.

                1. Look, I don’t think it would cost much to hook up to a tube and piss, all while traveling towards your destination at high speed. Perhaps it could be a subscription service, like Amazon Prime.

                  Your method, I’ll note, could run afoul of EPA wetland rules, which is technically treason, I think.

                  1. Did someone mention this already? It seems like a pretty good use of drones. You slow down, a small helicopter drone docks and picks up waste, a taco drone docks (in a separate place, of course). The drones are operated efficiently within a small radius, perhaps two miles.

                    1. Huh. What kind of payload capacity does a drone have? Could it deliver pizzas? Even without the highway option, having drones deliver pizza would save thousands of lives a year.

                    2. I think a helicopter style drone would be fairly energy efficient if you slowed down to, say, 35-45. And they wouldn’t have to be drones, they could just operate on GPS and some sort of car beacon. And surely a helicopter drone could deliver a home pizza more efficiently than a 3500 lb car forced to (usually) stop and start in traffic.

                    3. What if the pizza restaurant were housed in zeppelins, maybe one or two per zip code? The helidrones could descend from the zeppelins, delivering pizza really to any location.

                      As the technology matures, high-speed delivery drones could get pizza to moving vehicles, like cars, boats, trains, even airplanes.

                    4. I think zeppelins would be an unnecessary expense for such a competitive, low margin sector. Although I love the concept.

                    5. Are zeppelins really that expensive? Besides, think about the dual function they could serve–kitchen and flying billboard!

                    6. Yes, come to think of it, they could be cheaper than fixed property, certainly in places like NY. Sort of food trucks in the sky. Of course they’ll need to be regulated, heavily regulated. What if they were to park perpendicular to the prevailing winds or something?

                    7. No, I have a way around that problem. The restaurants could rent the unused space to DHS for anti-terrorism purposes.

          3. Do not look up car docking on Urban Dictionary

    4. Why would his opinions effect people’s perceptions of libertarians?

      I just don’t see the connection.

        1. ya. I wooshed.

        2. Although, upstream (ctrl-f commissar) I was the woosher instead of the wooshie, so I feel like I’m still breaking even on this thread.

          1. ya, I wooshed.

      1. I think CN was joking, a running thing around here is “this is why nobody takes libertarians seriously…”

        1. No, see, THAT’S why nobody takes libertarians seriously. Too many jokes about nobody taking us seriously.

  33. But prices have remained stable, with the Consumer Price Index down last month and up just 1.7 percent in the past year.

    “Stable” does not mean “higher”, Steve. 1.7% inflation is 1.7% too much price inflation caused by counterfeiting, aka “expansion in the money supply”.

    Oh, and all that newly minted money sitting in banks gathering interest? Sooner or later that will come flooding out and cause massive price inflation.

  34. If I wanted to read unsubstantiated technocratic musings about how best to centrally plan our financial system, I’d read Paul Krugman. Instead, I’m here at reason and they give me Steve Chapman the “libertarian” central planner extraordinaire.

  35. All the newly created money seems to be going to banks which are simply using it to increase their reserves (it doesn’t help that the Fed started paying interest on reserves). Money is being created, but it’s essentially being stuffed under a mattress.

    Stop paying interest on reserves and stop bailing out/subsidizing banks. Then we’ll see what the money supply and inflation look like.

  36. Does Chapman live in the same world as the rest of us? Or does he live in some fantasy world were he is not paying more for just about everything that matters? Am I’m sure he has no issues with eating burgers instead of steak as after all the burger costs the same as the steak did three years ago.

    Take a look at shadowstats idiot.

    Honestly expect far better from

    1. So, would you say “For a magazine called Reason…”
      No, really. Would you say it? Please?

      1. For a magazine called Reason…

          1. CN must be absolutely hammered by now.

            1. Whayyt teh fuhk yuou talkig bout, VM? aaad

  37. People haven’t commented on one of the main reasons that inflation is quite low in the US. The US dollar is extremely strong right now, mainly due to the problems in Europe and the fact that American bonds are still used as a safe haven for assets in these very risky times.

    When the US has a trade deficit as large as it has, inflation will rise as the dollar devalues. It might not be for the next 2 or 3 years but wait until the dollar goes down by 20% or 30% and watch out. Chapman comes close to touching on this point when quoting Scott Sumner but somehow misses its significance.

    1. In short, our saving grace has only been that other countries’ fiscal and monetary policies are even worse than ours.

      1. Best horse in the glue factory!

  38. Bernanke has two masters:

    (1) The banks. To serve them, he has been printing money to buy garbage off their books at full price.

    (2) The State. To serve it, he has been printing money to keep interest rates down.

    Notice who’s not on this list? That’s right: the public. Which is seeing its purchasing power destroyed by inflation in consumables and its savings destroyed by financial repression.

    Now, if anyone can explain how destroying the purchasing power and savings of the public is a recipe for economic health, I’m all ears.

    1. Obviously, it’s not.

      The big mistake all of us in the west made was we somehow became convinced that we can have an endlessly increasing standard of living on an economy based on debt and consumption.

      Well, the west is now finding out the hard way that this was a Big Lie that we sold ourselves on. And the more global and interconnected the world economy became, the more ludicrous the idea should have seemed in retrospect.

      There are only two scenarios for the upcoming future generations of the west: they’re either going to have a significantly decreased standard of living, or they’re going to have to relearn how to get off their lazy behinds and build a real economy based on hard work and production.

      1. The production of goods and services in the U.S. has been growing.

        Firms in the U.S. have continued to purchased plenty of capital goods to expand their productivity.

  39. Holy fuck. I can’t believe more reasonoids aren’t ripping this guy a new asshole. It’s currently at about 98% when it really should be much higher.

    1. I didn’t realize I had this much of a purist streak in me. I can tolerate a pretty wide tent of libertarianism in the comso vs LRC direction at least.

      But when some shit head gets on here with technocratic advice for the banking cartel/commissar and it is anything except : “stop being a communist fuckhead”, I kind of run out of tolerance. Tar and feather his ass and run him out of libertarianville, like pronto er somethin. I hope he never gets another dime from reason. If they are going to publish that bullshit, might as well pay Krugman for his articles and cut out the middle man.

      1. Well said.

  40. So despite all evidence to the contrary, we simply must be near the precipice of hyperinflation, because… seems like a matter of pure dogma to almost everyone here.

    1. You forgot to interject your own dogma of more government and the belief that a five-cent-on-the-dollar tax hike will solve our fiscal problems.

  41. I think more and more about deflation as time goes on, and I conclude more and more that deflation is actually a good and necessary thing, that it’s a critical part of raising living standards over time, and that the reason we are told we have to “fight” it is half superstition, half political preference for the interests of debtors.

    For example:

    Let’s say that between today and tomorrow there was some kind of bizarre apocalyptic deflation event. Prices deflate by a factor of 99%. What cost $100 yesterday costs $1 tomorrow.

    That should destroy debtors, sure. Instant insolvency for a lot of them.

    But anyone who is balance-sheet positive suddenly can afford to buy 100 times as much stuff.

    So wouldn’t we see a sharp contraction as debtors fail and are liquidated, followed by one hell of a snap back as everyone who was in cash runs out to buy $500 Porsches and $10 hookers?

    1. In addition, deflation is a necessary result of a bubble. Real estate prices are too high. The only way to correct that is with deflation.

    2. half political preference for the interests of debtors.

      At least. More voters borrow money than loan money, after all.

      1. Well now, the lenders don’t like debtors to fail, either. Wall Street supports the same BS policies.

        Here’s the thing… I think we’d be better off in the long term (and even the medium term) if we took the short-term pain and just let the correction happen. That’s the elephant in the room. We all know that we’re living on a big bubble, that goes beyond housing while operating on the same principle.

        Sooner or later, it’s going to burst.

        Those who have the most to lose, will do anything to prolong the bubble. But in the long run, we all lose.

        That’s all that printing money does: prolong the bubble.

        “Deflation” and “reverting to the mean” are the same damned thing, if you have been in a bubble! Fighting deflation can, in that case, be fighting reality. Sooner or later, you lose. The question is, what will it cost, to put off reality?

        1. If the demand for new houses fall, then that leaves more income to buy other things. The demands for those other things, whatever it is people want to buy should rise.

          The resources no longer producing the houses will be demanded to produce those other goods.

          Spending on output should grow at a slow steady rate, matching the ability to produce goods and services.

          Just because people foolishly paid too much for some real or finanical asset, and take a loss, doesn’t mean that spending on output cannot and shouldn’t continue to rise.

          What people buy might change. And as that happens, what is produced should change.

    3. anyone who is balance-sheet positive

      LOL!!! That’s like believing in fairies!

      1. If we continue our policy of a debt-based economy, we’re screwed. Sooner or later, we take the pain before we come out of it. The sooner, the less pain.

        A debt-based economy is believing in fairies. It was what I MOST objected to about Bush’s policies, and Obama’s doubling down on this is a big mistake that we will all pay for.

        1. For every borrower there is a lender.

          When borrowers spend less to pay back debt, the lenders have more to spend.

          This is simple.

          Too little spending in the economy is a problem of there being less money than what people want to hold. It has nothing to do with previous bubbles or too much debt.

          If people want to save more than firms want to invest, interest rates need to be lower to coordinate saving and investment.

          1. How much lower can they be?

            A statement like “this is simple” is equivalent to “this model only works in the absence of real data.”

            Did you just arrive on a time machine from the 1930s or something? Or maybe 1990, before Japan had TRIED this for so many years?

            1. And BTW just how much lower than what we currently see would interest rates need to be, in your cartoon world?

              1. They need to go negative, of course!

                1. My prediction is that if the Fed were to start adjusting the quantity of money according to the demand to hold it and return spending back to its previous trend, then credit demand would rise, credit supply would fall, and nominal interest rates would rise faster than inflation.

                  But, leaving that aside–

                  The interest rates that are very low are interest rates on government debt, interbank loans between government backed banks, and government insured bank deposits.

                  (Well, AAA short commerical paper has really low interest rates too.)

                  The interest rates that most business borrow at are not close to zero.

                  I do think that interest rates on government guaranteed investment vehicles should be negative now. If you want the taxpayer to guarantee you against any risk of loss, you should pay. If you want to earn interest, you should take risk.

                  Ideally, these government guarantees should be abolished. And, as I said, I don’t think that short and safe interest rates really need to be negative with a decent monetary regime.

          2. Except when the lender is also a borrower. So that all the borrowers keep lending eachother money in order to help each other pay off their debts and keep spending. It’s especially nice if there is one lender who can just print money to start the cycle of mutual debt exchanges off.

            Technically, I think the Federal Reserve might be the only balance-sheet positive financial institution in the western world.

            1. Your account is off. The Fed does have capital, but it isn’t that much. Your notion that everyone else is in debt to the Fed is completely off.

              If everyone has debts and assets that are more or less equal, then paying them all off allows people to continue to spend an amount equal to their income.

    4. the reason we are told we have to “fight” it is half superstition, half political preference for the interests of debtors.

      I’m pretty sure it’s because people like having more money, and the easiest way for the gub to placate this desire(and get re-elected) is to give people moar moneyz. Why use critical thinking when your salary rises 2%/yr? “I’m 2% richer, bitches!”

    5. Actually, you are ignoring the default of debtors. The creditors wipe out the debtors’ net worth. But any more deflation than that is just a waste. You end up with a partial payment, but the creditors’ real wealth is higher. (They grapped the debtors’ net worth.)

      Anyway, this really isn’t that hard.

      Spending on output drops a lot. What needs to happen to get real expenditure back up to the productive capacity of the economy is for all prices and wages to fall roughly in proportion. The creditors strip the debtors’ of their net worth, so there is a transfer. The former debtors have nothing. The creditors are better off. Production and employment are back where they were. But prices and wages are really low.

      Why is this a good thing?

      Why not just adjust the quantity of money to the demand to hold it and keep spending growing at a slow, steady rate?

  42. Any time the government interferes with the free capital movement of money it creates more problems than it resolves. We ended up here by Federal interference and adding more interference on top of that will only exasperate the situation. Two wrongs never make a right.

  43. “Inflation-phobes resemble someone stranded in the desert without water who spends his time frantically searching for a life preserver.”

    Inflation-philes resemble a prisoner with a roommate named “Bubba” who can’t seem to figure out why his butt hurts every morning.

  44. Reason really needs to review it’s policy of reposting whatever Chapman writes.

  45. Excellent post by Chapman.

    Spending on the production of goods and services in the U.S. is approximately 12% below the trend from 1984 to 2008. The reason is that the demand to hold money grew much more rapidly than the quantity of money. The solution is for the Fed to commit to increase the quantity of money however much it takes to get spending on output back up to that trend and then keep it there. Paradoxically, the result would likely be a rapid increase in spending, production, and employment, combined with an increase in interest rates and a reduction in the quantity of base money.

    1. Actually the demand to borrow money just reverted to the status quo ante. 1984 is when the total debt in the US economy started growing at a rate much faster than growth, and that growth rate began growing as well.

      Look at some historical charts. We have been in a growing debt bubble for almost 3 decades. Trying to re-inflate the bubble will not work — we have BEEN trying to do that since 2008.

      1. The demand to borrow money has nothing to do with it.

        The demand to hold money and the quantity of money is what is important.

        Nearly all of expenditure is funded by current income. There is always sufficient current income to purchase current output.

        Debt involves shifting money from lenders to borrowers. It is a reallocation of expenditure. When debts are repaid, the borrower spends less, but the lender has more to spend.

    2. “The solution is for the Fed to commit to increase the quantity of money however much it takes to get spending on output back up to that trend and then keep it there.”

      Well, I’d rather the Fed just shriveled up and died.
      Seems you think some central planning is superior to the distributed knowledge of the market.
      Have you read any history at all?

      1. Yes, I have read a good bit of history. I know a good bit of monetary economics too.

        I don’t think central planning is desirable at all.

        Adjusting the quantity of money (that the government issues) to match the demand to hold it is nothing like trying to centrally plan the economy. Slow growth in spending on output does not involve choosing how much of which goods are produced or their prices.

        I favor allowing banks to issue whatever money they wish, so that they may adjust their particular monies according to the demand to hold them. But the government should adjust any money it issues in that same fashion.

        It is a bit like having a public electricity company. While privatizing it is probably a good idea, having it avoid blackouts and not create power surges is a good idea. And it isn’t the same thing as trying to centrally plan all economic activity.

        1. You still haven’t explained what indication we have that the demand to hold dollars is currently mismatched with supply when, even by the government’s horseshit CPI, we have 1.7% inflation. When 1.7% inflation equals deflation you’ve set up a situation where the money supply must always increase.

          The demand to hold dollars is also highly contingent on their relative value. If the Euro zone wasn’t bleeding the demand for dollars would likely be lower. Creating more and more dollars until you eliminate the demand to hold them is likely to ignite massive inflation in an environment where interest rates have been effectively zero for half a decade. The increase in output and consumer demand likely wouldn’t come close to absorbing the excess supply of money even at full employment overnight. Shrinking the money supply at that point when the demand to hold dollars falls would result in recession and deflationary fears, which would indicate an even larger money supply by your reasoning. You end up with a money supply growing to meet the needs of a growing money supply.

          Or in other words: central monetary planning runs into the same information problem that affects all central planning.

  46. From Rothbard’s America”s Great Depression (I’m sure we are here):

    …bank credit expansion creates its mischievous effects by distorting price relations and by raising and altering prices compared to what they would have been without the expansion. Statistically…we can only identify the increase in money supply, a simple fact. We cannot prove inflation by pointing to price increases. We can only approximate explanations of complex price movements by engaging in a comprehensive economic history
    of an era…Suffice it to say that the stability of wholesale prices in the 1920s was the result of monetary inflation offset by increased productivity, which lowered costs of production and increased the supply of goods. But this “offset” was statistical; it did not eliminate the boom?bust cycle, it obscured it. The economists who emphasized the importance of a stable price level were especially deceived, for they should have concentrated on what was happening to the supply of money. Consequently, the economists who raised an alarm over inflation in the 1920s were largely the qualitativists. They were written off as hopelessly old-fashioned by the “newer” economists…The trouble did not lie with particular credit on particular markets [e.g. stock or RE]; the boom in the stock and RE markets reflected Mises’s trade cycle: a disproportionate boom in the prices of titles to capital goods, caused by the increase in money supply attendant upon bank credit expansion.

    1. Rothbard’s analysis is wrong.

      Bank credit expansion almost certainly has some effect on the allocation of resources, but why is the the allocation of resources without the credit expansion better?

      When the demand to hold bank deposits rise (that is, the demand to hold money,) then those accumulating money spend less on something else. This frees up resources to produce whatever is demanded by those who borrow from the banks. Those wanting to accumulate more money do so–they end up with more money balances. And those borrowing from the banks spend on what they want.

      Those who would have sold to those who are accumulating money sell less. Those selling to those borrowing from the banks sell more. There is a shift in the allocation of resources.

      The alternative is that the demand for money rises, those show would have sold to those accumulating money sell less. They buy less, and so on. Prices fall. The value of money balances rise. This real capital gain is then spent by people who have more real money balances than they want. The real demand for want they want to buy instead of hold money rises.

      Why is this better?

  47. Article in response to this article:

    Reason Magazine: We Need To Print More Money…..ore-money/

  48. It’s not inflation-phobia as much as oligarch-phobia. Printing money then lending it to too-big-to-fail firms distorts the investment market by incentivizing the borrowers

    1. to over- invest in commodities, knowing that they will inflate eventually. This causes a short term commodity surplus.

    2. to over-invest in higher risk projects, knowing that bailouts or another round of easy money will keep them afloat.

    This means low risk /low return capital projects get ignored, because the oligarchs want the high returns.

    Crash-proofing the oligarchs causes malinvestment, patronage/corruption behavior, and therefore uncertainty by smaller investors, who siely hold their money while the govt and oligarchs destroy the currencies.

  49. The only reason our dollar hasn’t weakened more is that Euro-banks are more concentrated and incompetent oligarchs than ours are. Their collectivist EU experiment has failed, and we are benefitting from their failure, similar to our post WW2 boom. That doesn’t make our policies right, it just makes them less bad than Europe’s.

    Mussolini would be proud of our banking oligarchy, esp. the Fed/Fannie/Freddie monster and the bailout-captured wall street firms.

    Benito believed, as Obama and his gang do, that the State is the essence of a nation:

    “The Liberal State is a mask behind which there is no face; it is a scaffolding behind which there is no building.”

    The Fascist State is an abomination of human creativity, an insult to human ingenuity when a small group of collectivist radicals innovates a genocide machine like an Oligarchy.

    When an oligarchy gets too strong adn abusive, it must be violently destroyed. Let’s hope our democracy allows us to dismantle it peacefully before it grows to Godzilla proportions.

  50. Reason: A continuing embarrassment to Libertarianism.

  51. This is essentially a progressive’s argument. The presumption that the central bank can control a large and diverse economy mearly by adjusting the amount of currancy is nonsense. While it is true that the easy money of the 00’s was a major contributor to the bust, the corolary, that tight money is the cause of a recession is a fatal conceit. It is a symptom, not a cause. There was mal investment. Lots of people got burned. The whole economy went from “bull” to “bear” mode. Greed has been replaced by fear.In addition, increased regulations have been put in place making market entry and expansion more difficult.
    The psychology has to change and the players need to get fired up enough to get back into the game. A bunch of pointy headed economists at the fed can only screw things up.

  52. The interest rate you receive on your reverse mortgage loan will be to most important factor in determine how much you will be able to borrow/receive today and how much will build up over the course of the loan. Just as with a forward mortgage (think of a refinance) where you would want to secure a low fixed rate this is the same concept with the reverse mortgage. The interest rates and fees are all determined based upon home value and what loan you decide to go with. I know a lender that is very competitive in regards to rates and fees.


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