Further Inside the Brain of the Sound Money Advocate

Bloomberg's recently (and quite rightly) christened "Forbes 30 Under 30" superstar Josh Barro is inside my head. Or at least that's what the title of his recent post for The Ticker implies. But since he kindly didn't dig deeper in exploring the depths of our depraved "Hard-Money Advocate" Brains, let me clear up a few things.

Bloomberg's recently (and quite rightly) christened "Forbes 30 Under 30" superstar Josh Barro is inside my head. Or at least that's what the title of his recent post for The Ticker implies. But since he kindly didn't dig deeper in exploring the depths of our depraved "Hard-Money Advocate" Brains, let me clear up a few things.

There is an implicit assumption that more QE will lower unemployment, and that QE has some direct relationship to the decline in the official unemployment rates. I am not as far inside the heads of the easy money advocates as Josh is into mine, so perhaps he can explain the causation again, but there does not seem to be much evidence for cheap money demand in the economy right now, meaning more easy money is not going to do much to fix the economy. So any supposed benefits of QE that might be worth while trade offs to problems we see just don't exist in our minds. 

On the flip side there are concerns about asset bubbles forming as a result of QE distorting resources that are quite front and center in my brain. Josh uncovers that we sound money advocates (as we like to call ourselves) are not fully aware of the opposite effects of QE: the terrible impact of austerity in Europe. That assumes we care. This is the part where avoiding the label of cold-hearted libertarian is really hard because I do think there is long-term gain from the creative destruction of austerity that is worth the short-term pain. Even if easing can be successfully deployed to create short-term stimulus, that misses the point of what austerity is trying to accomplish. And I think there is a long-term harm from resources flooding assets they otherwise would not because of cheap money. Not only do savers not get the trade off of a sound economy from QE, but they are forced to put their money into alternative financial vehicles which inherently makes QE an asset bubble inflator. 

Sure, it is easy to point at economic turmoil in Europe in blame it on austerity, but that is like blaming heroin withdraw on a lack of heroin. The austerity pain is sort of what we are going for. Josh is correct, we do endorse the results. It's al that creative destruction and resources needing to be reallocated stuff in our sound money heads that makes the pain feel worth it for the end.  

Now, where the fears of asset bubble creation as a result of QE distortion of resources are probably understated, the fear of inflation is admittedly overstated. It is true that Reason did a whole issue devoted to inflation mongering back in 2009. And yes, I carry some concern that all of the cheap money from QE sitting on bank balance sheets in the form of alternative investments to MBS and Treasuries could spill out rapidly into the economy and the Fed would fail to mop it up by responding fast enough. It makes perfect sense to question the technical prowess of the Fed and is more than generous to just give them the benefit of the doubt. But while I do think that is a possibility, I don't really see it happening in the immediate future—because there is no where in the economy for the banks to put that money, and those opportunities will only slowly appear. 

That said I do fear we are currently experiencing higher inflation than the bond-markets reflect or that CPI reports. Housing costs make up a large component of the inflation numbers, but with falling housing prices and rising commodities prices, you can have the cost of staples at the check out counter masked in the headline figures by an off setting housing price decline. I don't think CPI measures this challenge accurately and so my inflation fears are more nuanced than in-my-head-Josh lets on. (Of course housing prices stopped falling rapidly and commodities prices are all over the place so even this fear is tempered at the moment.)

Finally, Josh hopes Japanese Prime Minister-elect Shinzo Abe will easy Japan to recovery, but this fantasy must dwell in the ominous clang of the history of the Japanese Lost Decade—which was marked by several failed rounds of quantitative easing. 

(And yes, this is way easier for me to say from my comfortable Astoria apartment and MacBook Air while sipping a whisky and cider, than it would if I had half my salary, limited job prospects, and only an IMB Thinkpad to write from. But if the argument for easing is that it is inhumane to let unemployment get that high in exchange for long-term gain, just be clear about that argument and then we can discuss the morality of easing instead of whether or not it "works" in the abstract.) 

Comments

[Hugh Akston]

So you're saying its time to stop buying toilet paper at Target and start getting it at the bank?

[Tulpa (LAOL-PA)]

Careful, you don't know where that stuff's been.

[C. Anacreon]

Perhaps time to dust off my old "Whip Inflation Now" button.

[Libertarius]

This is why I am a sound money advocate: money only has value if it represents actual production, like an ounce of gold. It is in addition to its physical characteristics (divisibility, homogeneity, and zero corrosiveness) that gold becomes the superior currency. But the value of gold is not intrinsic, as most sound money advocates hold; even Aristotle made this error. The value of gold is objective because a weight of gold represents an objective amount of actual production.

As a farmer cannot sell air to the co-op, or Caterpillar (hopefully) cannot sell you a non-existent bulldozer, so an economic transaction is only real when production is exchanged for production. That's why gold always wins--precisely because it cannot be printed out of thin air.

[Brandybuck]

Douchebags also represents objective amounts of actual production. Next fallacy please.

[An0nB0t]

Hey, is this where folks who accuse others of logical fallacies while they themselves commit fallacies come?

[Tulpa (LAOL-PA)]

I doubt the Fed has the tools to get a hold on inflation once the economy starts growing again. And if they do have them, and use them, they'd strangle the recovery in the crib.

What a tangled web we create, when first we practice to inflate.

[Pound. Head. On. Desk.]

Are you old enough to remember stagflation? I went to college after that, and learned stagnation and inflation often go together.

[Tulpa (LAOL-PA)]

No, I was born during that era. And disco.

[Drave Robber]

This is why the economy won't be allowed to start growing again.

[SIV]

And yes, this is way easier for me to say from my comfortable Astoria apartment and MacBook Air while sipping a whisky and cider, than it would if I had half my salary, limited job prospects, and only an IMB Thinkpad to write from

I haven't checked lately but the last time I looked you could spend a lot more on on certain configurations of the Thinkpad than a MacBook Air costs. Of course it might be that some Chinese factory is badly counterfeiting Lenovo products and marking them as IMBs for dyslexics.

[C. Anacreon]

I think IMB stands for Ima Major Badass.

[Marty Feldman's Eyes]

not going to do much to fix the economy

[Marty Feldman's Eyes]

Wow, the squirrels were fucking hungry. Ate nearly the whole damn comment in one gulp.

[db]

Can someone explain why the QE fans think it will reduce unemployment? To me the logic seems to be that enterprises are supposed to borrow cheap money to finance operations to avoid job cuts. From my perspective it seems more likely that an enterprise faced with a difficult economy and stagnant sales would either cut borrowing to a minimum or use cheap loans to fund capital improvements that would allow workforce reductions auch as adding new automated equipment.

[Mike M.]

QE has next to do nothing to do with lowering unemployment (either the true rate or the bullshit rate) or improving the economy. It's almost entirely about funding the federal government's trillion dollar annual deficits indefinitely.

[Bill Woolsey]

The deficits are funded with new government debt, but the government is constantly selling new debt to pay off the old debt as it comes due.

All of these bonds are more or less the same. Most of them are being purchased by private investors.

The government is having no problem selling bonds. The notion that the Fed is buying them because no one else will is nonsense.

It is possible that this could be an issue in the future. That would be when firms and households decide they want to sell government bonds and buy consumer or capital goods, or else buy stocks or private bonds.

Especially if people start buying goods, the Fed will need to sell off many of the government bonds it purchased to avoid inflation.

You predict this won't happen. I disagree. I expect them to sell all of this off.

[Bill Woolsey]

The way it is supposed to work has nothing to do with interest rates and lending.

The goal is for the amount of money (currency and checkable depsosits) to be higher than the demand for money (how much currency and deposits people want to hold) given current depressed levels of spending on output.

When firms and households have more money than they want to hold, they will spend it--at least some of it on output. This will bring spending on output back up towards is previous trend.

When people spend more on output, firms sell more products. They will respond by producing more productions, and will hire more workers to do so.

They will also sell off bonds to fund purchases of capital goods to help produce the extra output. This will raise interest rates.

Firms might also choose to borrow more (sell newl issues of bonds) to fund more capital goods to produce more output. This would also raise interest rates.

The notion that monetary poilcy is about interest rates and lending is wrong.

[Bill Woolsey]

Spending on output is 15% below the trend of the Great Moderation.

The Fed causes inflation by causing spending on output to grow too much.

Spending is too little at this time, not too much.

The quantity of money created by the shadow banking system fell in 2008. Much of this was not measured. The quantity of money made by the official banking system rose modestly. That part of money directly created by the Fed rose tremendously.

What about interest rates?

The fundamentals of the interest rate depends on saving and investment. It is true that a surplus of money can cause interest rates to fall in the short run. However, relative to what?

Is saving low and investmnet high, but the Fed is forcing interest rates down despite these fundamentals?

Or is saving high and investment low, so the interest rate determined by the fundamentals is low?

Well, the reality is that saving is very high and investment is very low, and so equilibrium interest rates are low.

I support sound money. A sound monetary regime adjusts the quantity of money with the demand to hold money, and keeps spending on output growing at a slow steady rate.

Looking at short and safe interest rates and obsolete measures of the quantity of money is foolish. And that is what we have here.

[Jordan]

Well, the reality is that saving is very high and investment is very low, and so equilibrium interest rates are low.

That is absolutely wrong. The savings rate is once again near zero, thanks to the Fed, and the stock market is at artificially inflated highs.

I support sound money. A sound monetary regime adjusts the quantity of money with the demand to hold money, and keeps spending on output growing at a slow steady rate.

So, either you don't actually understand what sound money is, or you believe that central planners have discovered the secret of alchemy.

[Bill Woolsey]

Personal saving is $400 billion per year. There is also business saving and the net capital inflow (foreign saving coming into the U.S.) Of course, the government is massively dissaving (the budget deficit.)

Too little saving is the same thing as too much consumption. Consumption remains well below the growth path of the Great Moderation.

However, too little investment is the real problem. Spending on capital goods is well below the level of the Great Moderation, much less the growth path.

The U.S. is nothing like in a situation where spending on consumer goods is too high to allow sufficient resources to produce capital goods.

Investment is spending by firms on capital goods, not purchases of stocks and bonds.

Sadly, you don't even understand the basics of economics.

I am a free market economist. Ph.D. from George Mason University.

I support sound money. I don't think that is the same thing as gold. I don't think that the accumulation of money (whether gold or paper) is the same thing as wealth.

[MOFO.]

We should probably avoid using the word 'austerity' as it has come to mean "anything that Paul Krugman does not like"

[waaminn]

Sounds like a pretty crazy idea to me dude. Wow.

http://www.PrivacyRules.tk

[ant1sthenes]

So the anti-austerity movement is Amy Winehouse economics?

[hrsdty]

Did you use "easy" as a verb?