Simple points about central banking and monetary policy

by on February 19, 2016 at 9:25 am in Current Affairs, Economics, Uncategorized | Permalink

Central banks around the world could raise rates of price inflation, and boost aggregate demand, if they were allowed to buy corporate bonds and other higher-yielding assets.  Admittedly this could require changes in law and custom in many countries

There is no economic theory which says central banks could not do this, as supposed liquidity traps would not apply.  These are not nearly equivalent assets with nearly equivalent yields.

Or the central bank could monetize government purchases, such as purchases of infrastructure.

These possibilities may not be useful or beneficial in every country, but they could be done.

Just ask Master Yoda.

Yet governments do not wish, and that is what we must think more deeply about.  Not “why can’t central banks halt deflation?”  So if in a monetary policy or macroeconomic analysis you read the phrase “out of options,” you would do well to substitute in “governments do not wish to pursue their remaining options.”

1 JM February 19, 2016 at 9:31 am

Venuzuelian central bank is very competent on creating inflation (180% in some conservative estimates) . And I believe their procedure is very simple. We need to ask them how they do it.

2 anon February 19, 2016 at 9:41 am

Actually, we need an example of someone who can create a little inflation without it becoming too much.

My fear has been that fine control is more fiction than reality.

Re. Tyler’s idea that “we could” but we “don’t want,” I think it is more choice architecture at this point.

3 cowboydroid February 19, 2016 at 10:02 am

Why do we need “a little” monetary inflation?

Restated, why do we need “a little” currency devaluation?

4 anon February 19, 2016 at 10:16 am

I am an amateur, but I think I accept the conventional idea that a little inflation stimulates growth and efficiency.

This BBC page is superficial but hits the usual arguments:

http://www.bbc.com/news/business-30778491

5 Brian February 19, 2016 at 10:47 am

+1 for relevant post to comment hoping to inform the commenter, link to understandable (even if oversimplified) source, and the humility to acknowledge that neither you nor the source are the final word on the topic.

6 cowboydroid February 19, 2016 at 10:49 am

Why do you accept the monetarist argument that “a little” currency devaluation stimulates economic growth and efficiency?

7 anon February 19, 2016 at 10:59 am

That a little devaluation improves exports and therefore employment seems simple enough.

But getting back to my skepticism above that such fine control is even possible – we have many nations seemingly trapped in low inflation, a few troubled by high inflation and

None successfully managing 2% on purpose?

8 Brian Donohue February 19, 2016 at 11:05 am

@cowboydriod,

sticky wages.

Note- Ray Lopez disagress.

9 Different T February 19, 2016 at 11:10 am

But getting back to my skepticism above that such fine control is even possible… None successfully managing 2% on purpose?

Motivation is always murky. Effects, less so. Who is receiving benefit from current policy (as distinct from benefit by successfully out-competing in the market)?

10 cowboydroid February 19, 2016 at 11:15 am

Boosting exports does not boost real economic growth. Imports are what boost economic growth.

2% has been the “goal” for decades now. That the Fed is incapable of maintaining a stable rate of monetary inflation – one that would halve the value of the currency in just 35 years – should be telling enough that this might not be an effective policy for managing economic growth, much less economic stability.

My point in responding to you was to challenge your acceptance of the proposition that we “need” currency devaluation to boost economic growth. The logic seems to be that consumers will be frightened into spending their money for fear that it will lose value and their spending power will fall in the future. The theory that this leads to a net economic gain is specious. What it actually produces is a net concentration of wealth in the hands of those who are first-spenders of the Fed’s new credit, and it actually serves as a tax on the savings and earnings of those who are furthest removed from that new credit.

Artificially enriching the rich does not lead to economic growth.

11 chuck martel February 19, 2016 at 11:45 am

“That a little devaluation improves exports and therefore employment seems simple enough.”

Typical macro fantasy thinking. In order for exports to improve someone actually has to want those particular exports, regardless of their price. If a manufacturer makes buses that aren’t as good as its foreign competitors, devaluing the currency won’t help that manufacturer but will foul up everyone that holds that currency.

12 Nathan W February 19, 2016 at 1:25 pm

“Why do you accept the monetarist argument that “a little” currency devaluation stimulates economic growth and efficiency?”

It seems to work fine with just a little (Brian’s point on sticky wages). But when inflation is high, it tends to bounce around a lot (a 50% change is no big deal at 1%, but at 10% this makes planning very difficult), and this unpredictability of future price levels messes with the ability to make profit-maximizing production decisions.

“Boosting exports does not boost real economic growth. Imports are what boost economic growth.”

I don’t understand why the second would hold. But as for the first, my understanding was that the effect was expected to primarily occur as a function of production and consumption decisions in the present market. Contrary to what theory tells us about real vs. nominal prices, however, it does seem that many countries have managed to achieve at least short term gains by intentional currency devaluation (think about it more as changes in exchange rates rather than domestic nominal prices).

“The logic seems to be that consumers will be frightened into spending their money for fear that it will lose value and their spending power will fall in the future.”

Funny that these should be precisely the same thing, but I think the concern is rather that they will wait longer to spend money at lower inflation levels. Mathematically identical (right?) but I think that it reflects more how people would think. E.g. “Buy now, don’t buy in six months when the price is 5% higher” not “my money will be worth less in six months, therefore buy now”.

“it actually serves as a tax on the savings and earnings”

In a sense this might be true sometimes. But an econ 201 professor would remind you to subtract the nominal interest rate. Under the assumption that the real interest rate cannot be influenced by monetary policy, and only the nominal rate rate can be influenced, in which case savers earn higher interest and the intuitive “tax on the savings and earnings” effect should not exist.

“devaluing the currency won’t help that manufacturer”

If the central bank doubles the monetary supply, the exchange rate falls by half but domestic prices are sticky, which means a short-to-medium term gains can occur. However, only small economies seem to get away with this (e.g. 1990s West Africa Monetary Union), presumably because if a major economy did it there would be too much temptation for everyone to do the same in which case you just have a bunch of high inflation which is bad for everyone.

13 Thomas February 19, 2016 at 8:20 pm

“Under the assumption that the real interest rate cannot be influenced by monetary policy”

A basic supply and demand model suggests that an increase in dollars seeking debt (monetary expansion via purchasing debt) will lower the price of debt (interest rates), why is this not true?

14 Nathan W February 20, 2016 at 2:03 pm

Thomas – Because inflation will rise and the real rate will stay the same. The real rate should remain unchanged. The policy should affect the nominal rate but not the real rate. That’s the theory anyways.

15 Heorogar February 19, 2016 at 10:46 am

I believe the central bankers have the need to target, say 2%, inflation because the greater fear is deflation/recession.

16 cowboydroid February 19, 2016 at 11:04 am

The fear of deflation – or currency valuation – really only exists among central bankers. It does not exist among consumers, who are generally delighted to find their real spending power has increased.

17 Brian Donohue February 19, 2016 at 11:09 am

@cowboydroid,

There is a lot to dislike about deflation. If I can’t pass price decreases through to employees in the form of lower wages, I go out of business or they lose their jobs.

What I hate most of all about deflation is the fact that a miser tucks a dollar under his bed and enjoys a positive real rate of return. Why on earth should such behavior be rewarded? I like they idea of people saving money, but they need to DO SOMETHING with that money in order to earn a return.

18 cowboydroid February 19, 2016 at 11:23 am

If you can’t pass price decreases through to employees in the form of lower wages, you have a political problem, not a monetary problem.

Regardless, there’s an important distinction to be made between price deflation associated with normal gains in productivity, and price deflation associated with sudden economic contraction. Central bankers like to conflate the two, as it serves their argument.

What does it matter to you what someone else does with their increase in spending power? That seems an odd thing to be concerned about from your own perspective. It also seems like an odd practice to threaten savers with devaluation unless they spend it or invest it how YOU see fit.

19 Brian Donohue February 19, 2016 at 11:33 am

People shouldn’t receive dividends for holding currency. That’s practically the definition of rent-seeking.

People can protect the value of their wealth today without taking much risk, and even earn a positive rate of return, by lending the money to the government in the form of TIPS, for example.

20 The Anti-Gnostic February 19, 2016 at 11:40 am

Saving is just delayed consumption. There are many salutary effects to deflation: it sorts the wheat from the chaff; it lengthens time preference; it affects everyone equally, as opposed to inflation, which benefits the early recipients of the new money.

The hilarious and illogical Disney propaganda of Scrooge McDuck swimming in pools of gold coin seems to have influenced a lot of economists as children.

21 anon February 19, 2016 at 11:45 am

It is not politics, it is Behavioral Economics. People hate a 2% salary cut much more than old theory said they should. We are not Econs.

22 cowboydroid February 19, 2016 at 11:52 am

An increase in spending power fueled by an increase in the value of currency is not – in any sense – “rent-seeking.” Rent-seeking is a gain coming at the expense of some other party. The increase in spending power is not coming at anyone’s expense. Additionally, it disproportionality benefits the poor.

Savings are what fuel investing, anyway. People should be rewarded for increasing the money stock by saving up and being paid interest commensurate with the value they have produced to investors. In a real market environment of price deflation, maybe some people would be motivated to stuff their cash under their mattress, but they would earn more from a savings account that actually paid interest.

People holding their money in a savings account today are losing wealth, as most savings accounts pay next to nothing. Why? Because the money stock is inflated. It costs practically nothing for an investor to get a loan – he doesn’t need your savings. Artificially inflating the money stock disproportionately benefits the wealthy at the expense of frugal savers. THAT is the definition of rent-seeking.

23 Brian Donohue February 19, 2016 at 11:53 am

@Anti-gnostic, everything you say here is wrong.

We had deflation. Between July and December of 2008, CPI fell by 4.4%. And all the salutary effects you identified came rushing to the fore. The wheat was separated from the chaff (8 million people out of work. Goodbye forever, ZMPers!)

At long last, the evil socialist Fed jumped in, cutting short the wonderful cleansing, leaving the job undone. And now, more than half of those ZMPers are back at it.

Is that what you’re going with?

24 chuck martel February 19, 2016 at 11:55 am

So somebody that saves their money, rather than trust it to others, is a “miser”. Actually, since theoretically the money belongs to the miser (the government seems to take a different view), in a free society he should be able to what he wishes with it. Perhaps he might want to use his hoard as fuel for a weekend bonfire. Would that have a negative effect on the economy? It would increase the value of the money in circulation, would that be bad? Or he could wallpaper his library with $2 bills, would that be a grave mistake?

25 cowboydroid February 19, 2016 at 11:56 am

@anon

People may hate a 2% salary cut, but they’ll be a lot more understanding if their spending power increased 10% and/or they realized they weren’t going to be laid off. Salary cuts would only take place during a recession, anyway. In a normal economic environment, productivity gains benefit the employer as much as the employee, which means the employer also sees his spending power increase, which means he doesn’t actually need to cut wages to maintain profitability.

26 Bob from Ohio February 19, 2016 at 12:10 pm

“If I can’t pass price decreases through to employees in the form of lower wages, I go out of business or they lose their jobs.”

What stops you from cutting wages?

Minimum wage laws (and sometimes union contracts) install a floor on wage cuts but hours can be cut or the number of workers reduced. Happens all the time.

27 Brian Donohue February 19, 2016 at 12:52 pm

@Bob from Ohio,

Do you employ people? How often do you cut the wages of your employees?

28 Nathan W February 19, 2016 at 1:46 pm

“The fear of deflation … does not exist among consumers, who are generally delighted to find their real spending power has increased.

The point that Brian raises is relevant, since most people will get pretty uppity about a pay cut even if their real income remains the same. But my understanding was that the main problem is that people simply are not “rational”, or fail to suitably incorporate this knowledge in their decision making. They may put off spending to pay less in the future, even though their real income is increasing (in absence of paycuts) and can better afford to spend now.

“If you can’t pass price decreases through to employees in the form of lower wages, you have a political problem, not a monetary problem.”

Most people don’t work for the minimum wage, so at the macro level a wage floor shouldn’t be too big of a deal. The problem is that people start looking for other work when rumours of pay cuts go around, and businesses know this.

“there’s an important distinction to be made between price deflation associated with normal gains in productivity, and price deflation associated with sudden economic contraction.”

In the first case (productivity gains) you would think that people should be enjoying their higher real income and spend more. But the two above points (businesses struggle to reduce nominal wages and people are not “efficient” in updating their spending in response to price changes) still hold. Between these two effects, central bankers have basically similar causal concerns to address.

“There are many salutary effects to deflation: it sorts the wheat from the chaff;”

Consider how much human capital is lost in the process. This can have strongly negative effects on the long-term growth potential of a country, enduring as long as a generation or two.

” the employer also sees his spending power increase”

Except not (or less so) on wages, which is a cost, which if true implies lower spending power overall despite higher spending power in non-wage costs.

29 Cliff February 19, 2016 at 2:02 pm

Deflation is horrible for the middle and lower classes because they have little savings and many debts. In any case, it is NGDP that we want, not inflation per se. If RGDP growth is 4% we can do without inflation. If RGDP growth is 6% we can even have deflation without economic destabilization. But we don’t have that.

30 mpowell February 19, 2016 at 2:49 pm

You know if people are going to argue that deflation is a good thing, they are free to do so, but that’s not really what this post is about.

31 Thomas February 19, 2016 at 8:23 pm

“What I hate most of all about deflation is the fact that a miser tucks a dollar under his bed and enjoys a positive real rate of return. Why on earth should such behavior be rewarded? I like they idea of people saving money, but they need to DO SOMETHING with that money in order to earn a return.”

Investment opportunities already exist and offer as sure a real rate of return as any possibility of future deflation would, and yet, people continue to spend the vast, vast majority of their money and ignore real rates of return. In my view, deflation fear-mongering is baseless.

32 Ray Lopez February 19, 2016 at 12:09 pm

@cowboydroid – according to the high priest of monetarism, S. Sumner, you don’t need “a little” or “a lot” of monetary inflation (note: it’s not the same as PRICE inflation; monetary inflation is the amount of money created). He’s expressly said the central bank must print currency until such time that an Nominal GDP figure is reached. It’s full ‘pedal to the metal’ until such a target is reached. That’s a bit scary, even if you believe, as I do, that money is neutral.

@Brian Donahue – I’m touched you are now citing me. I’m just a science/ coder type who’s semi-retired doing chicken farming in the Philippines with a girl half my age and rich parents who send me an allowance. Then again, that might be more qualified to comment on economics than a professional economist. Question for the group: I do believe in slight sticky wages, but argue it should not really matter as firms will lay off workers to adjust for such wages. Unless you believe that the slight (5%-7% maximum typically) jump in unemployment during a severe recession and the resulting drop in GDP from having these people unemployed and not consuming as much as before warrants printing money –which anyhow will not matter much since money is largely neutral and wages are adjusted yearly anyway–I don’t see how GDP will be affected by sticky wages. Just do the math in your head and see what I mean. Remember, money is neutral long term says even S. Sumner, so what you’re arguing is the ‘short term’ affect of businesses having to lay off ZMP (slacker) workers and the resulting drop in the economy from these people going on ‘welfare’ / unemployment insurance rather than spending their paycheck as before, until such time that prices/ wages “catch up” (since they are short-term sticky say monetarists), as TC has implied in his other posts here. That’s quite a small residual – difference, even after you run it through some sort of multiplier. See Ben S. Bernake’s 2002 FAVAR paper and note the 3.2% to 13.2% figure (i.e., money is largely neutral).

33 I am responding to an idiot February 19, 2016 at 1:00 pm

You really are dumb, aren’t you?

34 Nathan W February 19, 2016 at 1:54 pm

“sticky wages … should not really matter as firms will lay off workers to adjust for such wages.”

Talent retention is a huge deal for most positions more than a few dollars an hour above the minimum. Firms will often take the hit out of fear that they will have insufficient competent staff when the good times return.

Also, money should be neutral long-term, but for reasons described above is not in the short-term, which means that monetary policy should work in a recession (Sumner would disagree, I think).

35 Thomas February 19, 2016 at 8:27 pm

Deflation is negative inflation. Arguments that work against deflation are negatives arguments that work against inflation. Math is king, and deflation fear-mongering seems the purview of the benefactors of seignorage and those who wish to signal their social status by agreeing with very important and serious people.

36 Ray Lopez February 19, 2016 at 10:37 pm

@Nathan W who says: “Talent retention is a huge deal for most positions more than a few dollars an hour above the minimum. Firms will often take the hit out of fear that they will have insufficient competent staff when the good times return.” – I agree, but my point is for the GDP as a whole, it shouldn’t matter (sort of like Coase’s law). Firms are less profitable during a recession, and/or workers might get laid off, so what? Money illusion will hardly affect this, for the reasons I outlined above. Sorry this forum is not set up for a proper thread debate due to the inferior Wordpress.

37 Nathan W February 19, 2016 at 12:41 pm

So you consumer/invest today, instead of tomorrow. Bring future consumption/investment into the present, speeding things up a bit, I think is the nature of the effect, but I’m not sure that the exact reason for its enduring effect is well understood.

Some monetary theory suggests economic actors should be indifferent to nominal prices, and only respond to real prices, which is not the case in the real world. Apparently at a low interest rate, we can be fooled in the long run?

38 Ray Lopez February 19, 2016 at 10:43 pm

@Nathan W – yes, the famous ‘money illusion’, but you could also argue that even with a hard currency, firms will be reluctant to lay off people during a recession because of the reason you cited earlier: re-hiring people is costly. So firms, even with a hard-currency regime, will ‘bring future consumption/ investment into the present’ by not firing workers quickly. So we would have ‘shock absorbers’ even with hard currency. And let’s not forget, as I said above, welfare and unemployment insurance for fired workers. We already, de facto, have cushions in recessions; what makes you think monetarism will give us an even better cushion?

39 Nathan W February 20, 2016 at 7:57 am

Sumner’s ideas on NGDP targeting have confused me enough so as to (not entirely) lose confidence in traditional monetary approaches, and in this case, whether they positively add to the automatic stabilizers provided by welfare and unemployment insurance.

40 Hazel Meade February 19, 2016 at 9:41 am

I wouldn’t want central banks purchasing corporate bonds because of the potential for corruption.
Who decides which corporation’s bonds to purchase?

41 cowboydroid February 19, 2016 at 10:05 am

We could just consolidate all the corporations into one giant corporation, then the central bank wouldn’t have to burden itself with choices.

42 Effem February 19, 2016 at 10:26 am

Why corporate bonds? Why not commercial mortgage-backed securities? Why not muni bonds? Why not auto loans? Why not peer-to-peer lending pools? No matter what, this entails the “experts” at the Fed choosing whose cost-of-capital should be lower. I favor market mechanisms.

43 cowboydroid February 19, 2016 at 11:05 am

So do I.

44 HazelMeade February 19, 2016 at 3:16 pm

No matter what, this entails the “experts” at the Fed choosing whose cost-of-capital should be lower.

This sums it up perfectly. It would descend into corruption nearly immediately, and (which is almost saying the same thing) be essentially the institutionalization of privilege and inequality. And people complain that the system is rigged NOW.

45 connell February 19, 2016 at 11:32 am

[][][] “governments do not wish to pursue their remaining options.”

Yes, governments have many many options with their central banks and economic interventions generally. Why indeed any reticence implementing more of them ?

@Hazel Meade suggests a fear of corruption in expanded central bank corporate activity– is there the slightest historical evidence of corruption in central banks or governments ☺

Why just tinker an economy via central banks — when governments have the ‘option’ of socializing all or segments of a national economy and thereby exert strong direct control of that economy.
What could be wrong with that or cause any governments hesitancy pursuing such bountiful ‘remaining options’ ?

{Hard to believe MR is reputed as a libertarian flavored blog with posts like this “Simple points about central banking and monetary policy”. Central Banks are a cancer on any economy and should be abolished, not expanded and fine tuned}

46 cowboydroid February 19, 2016 at 11:41 am

The problem with the economics “profession” is that to be accepted, you must toe the line. There is little room for academic dispute. And given the line often favors government intervention, this means libertarian-flavored economists who desire this acceptance – however motivated to do so – find themselves making inconsistent arguments.

Many may feel they need to do this to build and maintain credibility. In my opinion, this dilutes their credibility.

47 I am responding to an idiot February 19, 2016 at 1:02 pm

Fortunately, your opinion is irrelevant. And the reason your “libertarian economists” is that they are unscientific charlatans you refuse to use data, instead making arguments based on “praxeology” and other nonsensical terms that amount to “this is true because I wish it to be”.

48 Different T February 19, 2016 at 11:42 am

Central Banks are a cancer on any economy and should be abolished, not expanded and fine tuned

Central Banks are a technology and as such can be used to accomplished goals. This tells us nothing about which goals to pursue. Your position is similar to unilateral nuclear disarmament. The only expected “cure” for people with your world view is to give you your “freedom” and allow you to compete against people who aren’t so ignorant.

To state it another way:

This line of reasoning sounds like anti-gun rhetoric.

“Guns are made for the purpose of killing people, people are killing people, you think the existence of guns is good thing; ergo, you want to kill people.”

“Central banks are made for the purpose of intervening in the economy, central banks have been propping up shitty value judgments and decay, and you think the existence of central banks is a good thing; ergo you want to prop of shitty value judgments and decay.”

49 cowboydroid February 19, 2016 at 11:59 am

“Central Banks are a technology and as such can be used to accomplished[sic] goals.”

Central banks are a monopolist issuer of bank credit and/or manager of the price of money. There is nothing “technological” about monopolism.

50 Different T February 19, 2016 at 12:07 pm

Central banks are a monopolist issuer of bank credit and/or manager of the price of money. There is nothing “technological” about monopolism.

False.

Technology: the application of scientific knowledge for practical purposes, especially in industry.

If prior to the invention of CBing, there did not exist a way for the monopolist to issue/manage money with the same degree of efficiency; CBing is, by definition, a technology.

51 cowboydroid February 19, 2016 at 1:26 pm

“If prior to the invention of CBing, there did not exist a way for the monopolist to issue/manage money with the same degree of efficiency; CBing is, by definition, a technology.”

Central banking is not an “invention.” It is not a technology. It is an institution.

There has existed a method for a monopolist to issue a currency with “efficiency” for as long as money has existed. The Romans were “efficiently” increasing the money stock by reducing the amount of silver in a denarius millennia before the Fed instituted “quantitative easing.”

52 Hazel Meade February 19, 2016 at 1:22 pm

Why hasn’t government left the most direct inflation-generating mechanism on the table: price controls? Why don’t we just mandate that prices rise a certain percent every year?

53 Nathan W February 19, 2016 at 2:03 pm

They could provide monetary resources to some for-profit third party, who would then have motive to avoid corruption. Which … is basically what we do now (target the ability of banks to lend). I don’t actually understand why there should be a big difference between the current strategy and a corruption-free purchasing of corporate bonds. Direct purchase of corporate bonds seems like a recipe for poor allocations (even in the corruption-free scenario), since central banks do not have the same tools and human resources to evaluate corporate bonds as private banks.

54 HazelMeade February 19, 2016 at 3:28 pm

Well, yeah, what we do now puts a firewall in between the government and the people deciding what to invest in, thereby making it harder to corrupt. That’s the difference – one is much more easily corruptible than the other.

However, arguably, what we do now is just institutionalized corruption since the Fed of course chooses which banks get to access it’s special lending rates. It’s not like I can go sign up for a mortgage at the closest Federal Reserve branch. It’s really kind of a government-sanctioned banking cartel. There’s a small group of very privileged corporations that are exclusively granted the right to borrow money from the Fed. But at least the corruption is limited to just that area of high finance. Once the government starts purchasing securities directly … it would corrupt the entire market. There would be massive dysfunction.

55 Different T February 19, 2016 at 9:43 am

Central banks around the world could raise rates of price inflation, and boost aggregate demand, if they were allowed to buy corporate bonds and other higher-yielding assets.

No. No! NO! This is flatly incorrect. We can argue about the reasons (or more accurately, some could explain how CBs operationally work and the other side can continue to act as if they understand how CBs operate and betray themselves in the analysis), or we can point at a counterexample.

Tyler, you had a conversation with Clifford Asness back in November in which Asness stated: “But I think counterexamples are probably more powerful than anything else.”

And just like in that conversation, the counterexample to your hypothesis is JAPAN.

56 wiki February 19, 2016 at 10:34 am

Japan is a poor counterexample. My understanding is that the BOJ has raised interest rates in the previous 10-15 years virtually every time inflation hit 1%. This seems inconsistent with a policy of getting to 2% inflation.

57 Different T February 19, 2016 at 10:51 am

Care to expand on your claim?

<a href="https://research.stlouisfed.org/fred2/series/INTDSRJPM193N"Here is a chart of the official discount rate for the BOJ. Note the past 20 years.

58 Different T February 19, 2016 at 10:52 am
59 Quite Likely February 19, 2016 at 9:48 am

Just divide the money they’d spend on corporate bonds up and give an equal share to everybody. Much more stimulative, and much more fair.

60 Harun February 19, 2016 at 12:41 pm

Previously, the argument against this was that people might just save it or pay down debts, and not consume it, so it won’t stimulate.

I don’t get that now, especially after a financial crisis with lots of leverage…don’t you want paying down debt faster?

61 HazelMeade February 19, 2016 at 3:31 pm

If people pay down debts, the banks get it, and then have more money to lend. So what difference does it make?

62 Nathan W February 19, 2016 at 2:10 pm

Since much of that would go to consumption, there would be leakage of the effect to imports. I think they prefer a strategy which impacts production, more so, with a view to hopefully having a positive impact on exports.

63 Cooper February 19, 2016 at 6:31 pm

Isn’t that a mercantilist attitude? Even if the money goes overseas chasing goods we’re still stimulating the global economy.

Just have the Fed print $25 billion. Give every adult American a check for $100.

Repeat every month until inflation hits 2%. Then stop.

If we want a simple, popular policy to boost the economy, it’s hard to beat.

64 Nathan W February 19, 2016 at 6:46 pm

I guess so. I think most countries still have somewhat mercantalist attitudes around, but are aware that if, taken too far, they can undermine benefits of existing trade agreements.

Me personal preference last time around (2008) was to spend it on wind, solar and trains. Limited bailouts of certain manufactuters could minimize long-term loss of human capital. But your suggestion was a second favourite, far above additional monies pumped into the banks. I mean whose going to lend to who, or even want to take out a loan, in a situation like that? I still side with the view that demand is too low (inequality and corporate cash hoarding may be relevant), and what you propose would definitely address that.

65 Thomas February 19, 2016 at 8:35 pm

Can every country increase exports by lowering the cost of their currency? I think not. This is a zero-sum game.

66 Nathan W February 20, 2016 at 8:03 am

I’m not talking about currency devaluation in any sort of form, rather, observing the apparent preference for post-2008 stimulus allocations targeted to production (supply) rather than consumption of finished goods and services (demand).

67 Bill February 19, 2016 at 9:48 am

Didn’t central banks purchase assets from banks as part of Tarp. Oh, why dont we create a sovereign wealth fund using social security funds to prop up stock prices as well. No way there could be any risk, right, Singapore.

Can’t imagine anything going wrong here.

As for partial ownership of public infrastructure, sure, that could work, particularly if the infrastructure benefits businesses and if the public/private entity could asses tolls or other usage dependent fees on the user. You do have valuation issues, potential for inflating costs of infrastructure if interested parties (construction companies) are part of the project.

In fact, instead of buying bonds, stocks, etc. or doing public/private projects which could have corruption possibilities, let’s instead re-examine charging for usage of government infrastructure. In the past, the transactions costs of monitoring usage of infrastructure was prohibitive and/or impossible. But, today, with RFID technology, cameras that can scan truck license plates, car license plates, etc. we could move toward fee based infrastructure to reduce or allocate costs.

68 Different T February 19, 2016 at 10:29 am

Can’t imagine anything going wrong here.

Tyler is a representative of GMU’s Mercatus center. The Booth School in Chicago is looked at as leader in macro. We can come up with many other institutions whose reputations are dependent, at bottom, on being correct to survive.

The issues being discussed highlight a significant ignorance on behalf of those institutions. If this were a market wide ignorance, the significance would be lessened. But it is not.

A certain group of socialists have a major information/knowledge advantage over Mercatus/Booth, etc. And they absolutely plan to use that advantage to implement their world view. The stakes are that high.

And every article like this, flaunting Mercatus/Booth, etc. ignorance damages that most important attribute of these institutions: their reputations.

69 cowboydroid February 19, 2016 at 3:17 pm

I can’t tell if claiming socialists have an information/knowledge advantage over market economists is supposed to be sarcasm or not…

70 Nathan W February 19, 2016 at 2:14 pm

Very interesting point that new technologies make it feasible to charge users now. Would that apply to anything other than roads?

71 Nathan W February 19, 2016 at 4:26 pm

On second thought, the anti-spy state people (I am one) would be up in arms at the potential for the spy state to so easily monitor the movement of the population. At least with cell phone tracking there are some barriers.

Good idea. But I don’t think the efficiency savings or fairness benefit are worth the potential (likely?) cost of living in an Enemy of the State world. I don’t mind if a few drugs dealers or terrorists get away, if this means that political hacks embedded in the spy service cannot use such information to dredge for scandal, or for information that they can use to variously blackmail people.

72 Handle February 19, 2016 at 10:05 am

In the US the Fed could buy all debts owed to the government from the Treasury, at face value, so long as the Treasury agrees to act as servicer, indemnifier, and surety. Student loans. There’s a trillion dollars right there.

73 Different T February 19, 2016 at 10:21 am

Why do you think this would be dissimilar to QE? During QE, the Fed purchased MBS.

74 Ray Lopez February 19, 2016 at 10:26 am

Yes, I was going to say the same thing. I think TC forgot the Fed did buy ‘junk paper’ from member banks in the form of Mortgage Backed Securities on arguably bad tranches (junk mortgages). Also if the “Plunge Protection Team” rumor is correct, the Fed already intervenes in stock markets.

75 Handle February 19, 2016 at 5:52 pm

I didn’t say I thought it would be dissimilar. The trouble is that the Fed is reluctant to (1) push treasury bond rates even lower, (2) buy private bonds not backed by the government, and (3) buy non-financial assets like ‘infrastructure’.

Fortunately, there are lots of assets that could be readily turned into de facto government-backed bonds of the sort the Fed is willing to buy. The student loan portfolio is one that is particularly large which could quickly put a lot of hot money out there quick.

Trouble is, the Fed would want fixed interest rates and the ability to redeem the value of any amount at any time. Now, that’d be easy if the securities were tradable in the open market, as they ought to be. But it would … complicate … political fights over changing the interest rates, making the subsidies explicit as a budget item.

76 The Anti-Gnostic February 19, 2016 at 11:23 am

I once asked on this board why, if the Fed can just print money and buy debt with it, we bothered with taxes or UST’s. The only answer I got, as best I can remember, was “Institutional structures are needed to assure optimal outcomes.”

77 cowboydroid February 19, 2016 at 11:27 am

Monetizing debt is just another form of taxation. The IRS form of taxation is not about raising revenues, but about intimidation and control. I suppose the “optimal outcome” is preservation of authority.

78 I am responding to an idiot February 19, 2016 at 1:04 pm

Does your tinfoil hat burn in the sun? If so, take if off. You might start making more sense. Or did you drink some Flint water?

79 Thomas February 19, 2016 at 8:41 pm

“did you drink some Flint water?”

Flint water poisoned by the wanton disregard of Top Men: high-priests of your religion of State.

80 Cliff February 19, 2016 at 2:05 pm

Not if no inflation results

81 cowboydroid February 19, 2016 at 7:44 pm

It is impossible to inflate the money stock without affecting the price of money. The Law of Supply cannot be dismissed by fiat.

82 Boonton February 19, 2016 at 1:46 pm

The Fed also wants to be able to sell that debt if it sees there is too much inflation. The purchase and sale of assets therefore takes place in the market and the Fed is a player in the market. When it purchases T-bills, for example, it is purchasing not from the Treasury directly but from people in the market who happen to be selling. That could be an investor, a pension fund, a hedge fund, a business or anyone.

The nice thing about bills is that they ‘automatically self destruct’. The Fed doesn’t have to worry about selling them for a good price. If you hold onto a bill for a few months it will mature and the Treasury will send you cash. If the Fed wants to pull cash out of the economy it can simply collect and not buy more bills from the market. Other types of private bonds get trickier since they take longer to mature and their market price can move up and down a lot. In the case of corporate bonds they can become worthless if the company goes bankrupt. In that case the Fed would have no way to pull money out of the economy that it created to buy that bond.

83 Nathan W February 19, 2016 at 2:38 pm

I’m not sure if this directly applies. Ignoring that just printing money all the time would create inflation problems, an identifiable issue is that the need for government to increase the productive potential of the economy in order to raise additional future tax resources would no longer exist.

This is a common critique of high aid contributions (or very high shares of resource extraction) to small economies. This can negatively affect the legitimacy of a democratic government if the resources are directed by aid agencies, but the relevant part here is that the government has little incentive to invest in the productive potential of the population. An additional problem is that breaking the link between taxpayers and public spending removes the democratic check against profligate abuse (or less bad, allocations which are socially suboptimal or do not reflect the will of the population).

84 Boonton February 19, 2016 at 3:23 pm

Nathan

“I’m not sure if this directly applies. Ignoring that just printing money all the time would create inflation problems,…”

I don’t think this is correct. You could ‘just print money’ and have stable inflation if you only printed enough money to keep pace with actual transactions in the economy. In fact this is what essentially the Fed has been doing since inflation has more or less been 0% for years now.

So you could in theory ‘just print money’ and give it to the government and government spending would just happen from there and you would have no need for taxes. The only problem is the gov’t budget would have to be kept to just the amount of money the central bank prints and that amount would be the amount needed to keep inflation stable. Whether that would be enough or too much for the needs of government wouldn’t matter in that system.

85 Nathan W February 19, 2016 at 4:30 pm

But if the government spends the money, it is in someone else’s hands and they don’t have any more cash. In a taxless system where government spending is entirely by printing money, the only way to get more cash into government hands would be to print more money. Well, unless it were mandated that various private sector actors must purchase enough government goods (perhaps regulatory rights?) to put that money back in the government’s hands, for them to spend it again.

86 Boonton February 20, 2016 at 12:57 pm

Good point, then it would only work if the amount of *new* money printed every year was just enough to keep inflation stable and at the same time happened to be the gov’t budget.

87 derek February 19, 2016 at 10:20 am

If only those damn Ukrainians would cooperate we could get our five year plans to work. Let’s kill a bunch of them to encourage cooperation.

88 derek February 19, 2016 at 10:42 am

This may sound like a cheap shot, but what you are proposing is to give unlimited power to a bunch of politically appointed unaccountable jackasses to do whatever the whim of the moment tells them to do.

Oh, sorry. That is what we call them when the other party is in power. If mine is in power they are enlightened and careful stewards with nothing but the interest of others in their heart.

Is there any study that tries to figure out why highly educated people are so attracted to authoritarian schemes?

89 Nathan W February 19, 2016 at 2:49 pm

“Is there any study that tries to figure out why highly educated people are so attracted to authoritarian schemes?”

People who KNOW they are smart, and then extend their overconfidence broadly. I wouldn’t suggest it as a matter of generalizability across highly educated people, but I do believe there is a certain effect in that direction. At risk of drawing ire, I suggest that Trump can be easily placed in that category.

90 George February 19, 2016 at 10:30 am

This is terrifying… you honestly don’t see any issues with central banks operating in the open market? I get the premise that this is off-beat monetarist alternative to the current flat growth. However don’t you think this is more of a demand side problem in USA? The issue in Europe is the Euro, and that the member countries don’t have control of their own monetary policy to go along with their fiscal policy. Simply stimulating velocity of money by having the Central bank buying up asset would more likely cause another crisis before helping the situation at all.

91 mulp February 20, 2016 at 4:37 am

The only response to mention velocity, and you get it wrong…

Buying existing “assets” ie debt lowers velocity. If velocity is rising, central banks not only need to stop buying debt, but also need to require it’s banks to increase their capital reserves which cuts the increase in supply of debt securities outstanding.

92 tedm February 19, 2016 at 10:36 am

Institutions matter.

I agree with the larger point that I believe TC is trying to make, which is that the entity with the power to issue new medium of exchange, which must be accepted as legal tender, as a means of payment has the power to directly increase aggregate demand. However, TC’s own post recognizes that in some countries existing law does not grant this power to the central bank.

What is often called monetary policy, swapping debt of one maturity for debt of another maturity, does not meet this condition. There is nothing inherent in a central bank which means that it necessariy has the power to issue new legal tender to cover direct purchases – or to sterilize others who do. In the US, Congress could delegate the power to issue new legal tender to the Department of Transportation when the DOT contracts for roads and bridges, or to other agencies to cover their expenses. How effective the central bank’s attempts at sterilization will be depends in part on which powers the central bank has. Can’t just assume central banks can be effective if they were just determined enough without consideration of the institutional framework within which that central bank is placed.

The actual powers of central banks are expanded or constrained by the governments which created them. See Dodd-Frank, Title XI. See the Glass-Steagall amendment (1932, not 1933). See the failure to recharter the 2nd Bank of the United States. Furthermore, sometimes a government bypasses the central bank in order to directly affect legal tender. See the appropriately called “legal tender cases” of the 19th century. See the gold clause cases of the 1930s.

Acquiring corporate bonds is not sufficient.

93 Different T February 19, 2016 at 11:18 am

Your alternative version of central banks are a bastardization of the very concept “bank.” You are essentially stating “free from double entry bookkeeping.” As someone who considers such accounting measures as incredibly valuable and as representative of reality, your alternative conceptions of central banking simplifies to “free from reality.”

94 tedm February 19, 2016 at 2:49 pm

Nothing is “my” concept of a central bank. Central banks don’t grow on trees. They are created by governments and endowed with various missions, powers, and obligations.

My point is a very simple one, grounded completely in reality and history. Any particular central bank only has the powers that it has been granted.

Regarding corporate bonds (or any other asset) – whether or not the central bank can provide a loan collateralized by the bond, or purchase the bond in the open market, or… is completely up to the government that created the central bank.

As a matter of factual history, those powers have been changed over time. I provided multiple specific examples.

95 Different T February 19, 2016 at 4:51 pm

Apologies if you’re comment was mis-interpreted. This is from whence the confusion stems:

“Congress could delegate the power to issue new legal tender to the Department of Transportation when the DOT contracts for roads and bridges, or to other agencies to cover their expenses.”

“the entity with the power to issue new medium of exchange, which must be accepted as legal tender, as a means of payment has the power to directly increase aggregate demand.”

and especially this, “Furthermore, sometimes a government bypasses the central bank in order to directly affect legal tender.”

All of these statements seem to imply the creation of liabilities against either the CB or Treasury, with no corresponding asset on the books. That would not be “banking” by any accepted definition.

Maybe that’s your point…?

96 tedm February 20, 2016 at 10:31 am

Yes – I think we are almost on the same page (meaning only that my point seems to be more clear now, not that you necessarily agree). Sorry if the initial post was not clear.

Some of my examples were not necessarily central banking, but they all affect monetary policy and inflation/deflation anyway – and that is the point.
So, does every central bank have the ability to completely sterilize actions by other agencies simply by virtue of being a central bank? What about private creation of transaction accounts outside of the banking system? Etc., etc., etc. Is a central bank’s sterilization toolkit limited? Even if the central bank has an expansive sterilization toolkit, are there any other agencies with anti-sterilization toolkits (tools that blunt a specific tool that the central bank might use to try to sterilize)? For example, prudential bank regulators might be able to directly affect bank deposits and balance sheets. Or, another agency might be able to affect private nonbank transaction accounts. Or another agency might be able to directly affect currency held by the public.

If modern macro is once again looking at monetary policy from a big picture perspective, such as the relative emphasis on “safe assets” and the shadow banking system, then we have to look at the powers any particular central bank actually has over assets used to satisfy transaction and precautionary demand. We also have to look to see if any institution other than the central bank has powers related to those assets. Who says that the central bank is the only entity with helicopters full of cash? Well, the government with the power to destroy the central bank has the final say. At the end of the day, Andrew Jackson was more powerful than Nicholas Biddle.

Institutions matter. To TC’s post, it is true that central banks COULD be given the power to purchase corporate bonds in the open market, and some central banks already have that power. Rather than illustrating that central banks can do anything they want, it shows that they are limited by law.

97 Ted Craig February 19, 2016 at 10:45 am

There’s a good chance the Great Recession could have been blunted somewhat if the Fed had become a securitized of last resort.

98 Ted Craig February 19, 2016 at 10:46 am

“securitizer” Thanks for nothing, autocorrect.

99 cowboydroid February 19, 2016 at 11:31 am

There’s a good chance the Great Recession could have been prevented if the Fed had…

100 Brian Donohue February 19, 2016 at 11:59 am

Prevented? Said by nobody, ever.

101 cowboydroid February 19, 2016 at 12:07 pm

Well, now that’s simply false. Your definition of “nobody” is debatable.

102 Brian Donohue February 19, 2016 at 12:10 pm

*Said by many nobodies, for sure.

103 Nathan W February 19, 2016 at 4:33 pm

If it’s false, then back up your claim with facts.

104 cowboydroid February 19, 2016 at 7:40 pm

There are entire schools of economics devoted to business cycle theory that claim the Fed can prevent a recession by maintaining certain policies. So the claim that “nobody” says the Fed is capable of preventing a recession is patently false.

105 Nathan W February 20, 2016 at 8:09 am

“entire schools of economics”

Then name one. You’re being vague.

Also, I think the question is not whether a central bank with perfect foresight CAN do this, but whether we should attribute 20/20 hindsight to evaluating what the central bank COULD have done.

In early 2008, what percentage of economists were predicting the sort of collapse that occurred, within the 12-month timeframe? 0.1%?

106 cowboydroid February 20, 2016 at 5:31 pm

And which school of business cycle theory did that 0.1% of economists belong to?

107 Nathan W February 19, 2016 at 3:10 pm

That’s basically what the Chinese do, right?

108 Heorogar February 19, 2016 at 11:08 am

“Central banks around the world could raise rates of price inflation, and boost aggregate demand, if they were allowed to buy corporate bonds and other higher-yielding assets.”

Do you mean junk bonds, too?

As a practical matter, how would the Fed pay? Would it create reserves in a Fed member’s deposit account? Would it issue additional Federal Reserve Notes (FRN)? If so, both would be inflationary.

Does the Fed carry sufficient FRN among its assets to make the purchases? If so, that would not be sufficiently inflationary.

The US Treasury, in the Capital Purchase Program (CPP) a part of TARP, purchased hundreds of billions of special-purpose common stock (they made it to count as regulatory capital despite the high dividend and maturity features) in US banks and GM.

Eurozone nationalized (added to their national debts, made the losses the citizens’ losses) losses in insolvent, systemically important financial institutions.

In 2008, in several bail-out deals, agreed to take as collateral for discount window loans, garbage/depreciated/hard-to-value debt securities at par value.

109 Boonton February 19, 2016 at 1:56 pm

“As a practical matter, how would the Fed pay?”

The Fed would simply purchase bonds from their market trading desk. This would be no different than how a hedge fund or pension fund would purchase stocks and bonds.

110 The Anti-Gnostic February 19, 2016 at 11:16 am

Economists who would laugh you out of the room for proposing wage and price controls think the money supply and price of credit can and should be set by a central committee.

111 Different T February 19, 2016 at 11:22 am

Consider that those economists have a vague intuition that there is something fundamentally different about “money” in comparison to wages and prices denominated in said “money”.

112 The Anti-Gnostic February 19, 2016 at 11:35 am

Money is a commodity like any other commodity, it’s just the commodity in ultimate demand.

113 Different T February 19, 2016 at 11:46 am

False.

114 cowboydroid February 19, 2016 at 12:00 pm

The Anti-Gnostic is correct. Money is a commodity.

115 Different T February 19, 2016 at 12:03 pm

No. Depending on your concept of commodity, you might classify it as such. But it is certainly not “a commodity like any other commodity.”

Regardless, the comment is for archival integrity.

116 cowboydroid February 19, 2016 at 12:06 pm

It is indeed a commodity like any other commodity in the sense that is a substantially fungible marketable item that is widely bought and sold. Money has the distinction of being the most marketable commodity.

117 Different T February 19, 2016 at 12:14 pm

in the sense that is a substantially fungible marketable item that is widely bought and sold. Money has the distinction of being the most marketable commodity.

Why the qualifier? Lazy conception and integration?

118 cowboydroid February 19, 2016 at 1:29 pm

There is no “qualifier” in my statement. Perhaps you can add clarity to why you don’t believe money is a commodity. At this point, it seems you’re just being argumentative.

119 Different T February 19, 2016 at 1:42 pm

There is no “qualifier” in my statement

Qualifier: a word or phrase, especially an adjective, used to attribute a quality to another word, especially a noun.

the phrase beginning with “in the sense that” is exactly a qualifier.

At this point, it seems you’re just being argumentative.

Fair interpretation. As stated, the original comment “False” was for archival integrity. Not as an attempt to educate rebellious helots whose only indication of inclination towards education is to learn to destroy.

120 Nathan W February 19, 2016 at 3:27 pm

Money is a means of exchange, not a commodity. A commodity is a standardized good, such as lentils or iPhones. I’m not sure if you’re just using the words incorrectly however and mean something different from what we think you mean.

121 cowboydroid February 19, 2016 at 6:24 pm

Implicit in your claim is the claim that a means of exchange is mutually exclusive from a commodity. Why?

And what is a “standardized good?” Isn’t money standardized? Can you offer a definition of ‘commodity’ and why you think money doesn’t fit?

122 Nathan W February 19, 2016 at 6:50 pm

Let me know when you figure out how stay alive eating money or make fighter jets out of dollar bills.

See the difference? Money has no underlying economic value, especially a fiat currency.

For “commodity”, think of widgets. If you tailor make it, it’s not a commodity, if one unit is just as good as another, it’s a commodity.

123 cowboydroid February 19, 2016 at 7:38 pm

So your argument seems to be that a commodity is something that must either be consumable as food or as a material component of a fighter jet.

What does that make cotton? As far as I’m aware, nobody eats cotton for sustenance, and it isn’t used to manufacture fighter jets. But I think it is considered a commodity. At least it is by the New York Mercantile Exchange.

And for your second argument, “if one unit is just as good as another, it’s a commodity,” isn’t one dollar bill just as good as another? Yes, and uniformity is one of the several properties of money.

Money most certainly does have “underlying economic value,” or probably what you mean to say is *intrinsic value.* All money has intrinsic value. That’s what a commodity needs to become money.

Fiat paper currency does have intrinsic value, but only as much as the paper it is printed on (ie, not much). However, paper is not a commodity well-suited to become money. So how did it gain its present value? By at one time serving as a note redeemable in specie, which does have intrinsic value. There are no fiat currencies in existence that did not have their origin in serving as a note redeemable in specie.

124 Nathan W February 20, 2016 at 8:25 am

I never said a commodity has to be a final product. Cotton is a commodity because it is a non-differentiated (yes, there are different grades) thing entering the production process. The intrinsic value is in the ability to transform it into something that is a final good/service.

There is no intrinsic value to a fiat currency. By definition. OKOK, like the Germans did with 1920s hyperinflation you can burn it, but I don’t think you’re talking about the value of the paper, which is essentially zero relative to what it represents as a means of exchange.

Unless you’re making art with $100 bills, burning currency, etc., fiat money plain and simply is not a commodity by any sort of commonly used definition. This is different from gold, which also had final output uses in jewelry (and now electronics). In the case of gold, it was its value as a final output (jewelry), plus scarcity, and not its intrinsic characteristics which made it a means of exchange, in which case it was both a commodity AND money (means of exchange) at the same time. The same does not apply to fiat currency.

125 The Anti-Gnostic February 20, 2016 at 11:42 am

Money is a proxy for all the goods and services available for exchange, which makes it the commodity in ultimate demand and hence useful as the means of exchange. When the currency or electronic digits lose their purchasing power, something else will be used as money.

126 Unanimous February 20, 2016 at 4:48 am

Money is what people use to buy things with. In the modern world this is either legal tender or a bank account balance. Legal tender is a standardised form of promisory note – i.e. modern money is a form of debt, it is not a commodity. The paper note is not the money. The money is what the bearer of the note is owed. Modern money is a legaly binding agreement between a central bank and the bearer of the note, or in the case of money in a bank account, it is a similar agreement between a commercial bank and the owner of the bank account. Agreements are not commodities.

127 The Anti-Gnostic February 20, 2016 at 11:43 am

Right. That’s why there’s no market for debt instruments.

128 Nathan W February 19, 2016 at 3:23 pm

Wage and price controls are generally associated with economic inefficiency, whereas controlling money supply and price of credit allows them to take advantage of our poor optimizing skills (in which case excessive dogmaticism about the first point should be questioned) in revising their decisions in response to NOMINAL changes in the general price level, in particular to reduce the magnitude of the business cycle and avoid “too much” creative destruction which may reallocate human capital to the “wrong” place and the heavy social costs of unemployment.

129 Boonton February 19, 2016 at 3:31 pm

Except the ‘price of credit’ is not set by the Fed. Yes the Fed can control the short term, 3 month T-bill rate by deciding to print enough money to buy T-bills until the rate is what they want it to be. That doesn’t control all the other interest rates in the economy. If people think the 3 month rate is too low and the Fed’s money printing is going to cause inflation then they will demand higher interest rates for long term loans. Despite the ‘central committee’ deciding credit should be cheaper, the reality is the market will set the price of credit.

AS for the central bank controlling the ‘money supply’, there’s a big contrast between that and the analogy of ‘wage and price controls’ Wages and prices are the result of the bargaining between actors in the economy. The money supply however is not so much transactions but a vehicle that facilitates transactions.

130 Yog Sothoth February 19, 2016 at 11:19 am

Why buy corporate bonds when there are so many government bonds to buy?

131 Brian Donohue February 19, 2016 at 11:27 am

Tyler,

Interesting post.

I propose we carve this up: one conversation about government finance and a separate conversation about the size of government.

Perhaps this is not possible. For example, the method of government finance may inherently affect the size of government.

Putting this aside, there are three methods of government finance: (a) taxation, (b) borrowing, (c) printing money. We use all three.

An exploration of the pros and cons of each method of finance may be useful.

132 Brian Donohue February 19, 2016 at 12:08 pm

My gut says that the bulk of finance should come from taxes, on the ‘matching principle’ that costs be recognized alongside benefits.

Infrastructure might be a candidate for borrowing.

Seigniorage from printing money goes on in the background all the time, at a couple percent per year.

But to me, printing money, at it’s most basic, devalues every dollar out there. It’s good for debtors and bad for creditors. Printing money is a tax on people who have money: i.e. rich people.

Friedman always thought a wealth tax was the best tax. I agree. That’s what printing money is.

133 The Anti-Gnostic February 20, 2016 at 9:49 am

That’s why there are so many Zimbabwean and Venezuelan millionaires. (Literally).

134 Nathan W February 19, 2016 at 3:34 pm

I’m so used to seeing aid in that list of sources of government funds that for a second or two I thought you’d made a mistake 🙂

135 The Anti-Gnostic February 19, 2016 at 11:30 am

Banana republic economics:

1. The rich are to be protected from becoming poor..
2. All prices must slowly rise, except the price for labor.
3. Debt doesn’t matter; after all, we just owe it to ourselves.

136 Brian Donohue February 19, 2016 at 11:47 am

Yours is an astonishingly ignorant comment in the context of this post.

137 The Anti-Gnostic February 19, 2016 at 2:18 pm

Labor is expected to retool, take a pay cut, relocate, etc. Asset owners are to be protected from the consequences of their poor investment decisions.

Banana republic economics: the rich will not be allowed to become poor.

138 Boonton February 19, 2016 at 3:43 pm

Question: If in 2008 you were rich and had all your wealth in Lehman Bros, GM, Countrywide, MBSs and CDOs would you have weathered the crash with no impact to your wealth? If you had put everything in those baskets why wouldn’t you be poor today?

139 The Anti-Gnostic February 19, 2016 at 6:02 pm

AIG, Goldman Sachs and GM should have been bankrupted and their assets distributed to savvier operators. Why not have the Fed underwrite all business risk? You must see the problem with this.

140 Boonton February 20, 2016 at 1:01 pm

Anti-Gnostic,

That’s essentially what happened. If you owned lots of shares of GM or AIG or Goldman Sachs you were wiped out by the crash.

141 Brian Donohue February 19, 2016 at 3:45 pm

You are so upside-down on this. 8 million people lost their jobs because the Fed indulged your precious deflation.

Hooray for the little guy.

142 The Anti-Gnostic February 19, 2016 at 6:05 pm

The funny money enables absurd activities, like $500K McMansions miles away from economic centers and degree mills like American Intercontinental University. We may as well pay people to dig up buried jars of money.

143 cowboydroid February 19, 2016 at 6:25 pm

8 million people lost their jobs because the Fed inflated asset prices and created an asset bubble, which eventually burst.

144 Brian Donohue February 20, 2016 at 9:43 am

The housing “bubble” peaked in early 2006.

Employment peaked in January 2008.

Try again.

145 Nathan W February 19, 2016 at 3:38 pm

These perspectives reflect reality altogether too closely, but what on earth does that have to do with the post?

146 Brian Donohue February 19, 2016 at 11:58 am

Going forward, I’m bracketing the “Inflation is good for rich people” crowd with the “minimum wage increases don’t cost jobs” crowd.

The best part is: these groups mostly hate each other.

147 cowboydroid February 19, 2016 at 12:03 pm

You can do that, but your logic, whatever it is, would be inconsistent. Both inflation and minimum wages are economic interventions. Interestingly, both have the same effect – to cause a concentration of wealth and a reduction in the social welfare of the least well off.

148 Cliff February 19, 2016 at 2:07 pm

How do you come to that conclusion? Inflation in and of itself is good for the least well off and bad for the wealthiest, right?

149 cowboydroid February 19, 2016 at 3:22 pm

Other way around. Monetary inflation is a tax on the spending power of the least well off, and an economic benefit to the wealthy, who are generally the first recipients of the new credit.

150 Nathan W February 19, 2016 at 3:56 pm

Setting a price floor for marijuana and building the Hoover Dam (snicker … they`re both “hydro”) are both economic interventions too.

151 Nathan W February 19, 2016 at 3:46 pm

I always argue that minimum wage increases will have different effects depending on the economy. If the labour supply effect (people coming out of the woodworks, willing to work longer, etc., so a larger candidate pool implies better matching) exceeds the labour demand effect (marginal positions will be eliminated), then a minimum wage hike can even CAUSE GROWTH in employment.

Obviously that would never apply to a recessionary period, however.

I argue against dogmatic acceptance of econ101 logic on the matter, not that marginal jobs will not be lost (they will be lost).

152 Bob from Ohio February 19, 2016 at 12:03 pm

We know from bitter experience that government cannot successfully plan an economy.

Yet we call a branch of government a “Central Bank” and then some expect said “bank” to successfully plan an economy.

Madness.

153 Nathan W February 19, 2016 at 4:01 pm

Well, technology and management abilities are far superior to those of 1920. China seems to be making a pretty bloody good run of it under a mixed system. If the government had strong ability to estimate what everyone wanted, it could be entirely feasible in the future, but I find this scary because knowing exactly what people want is also the best way to milk them completely dry.

Soonish (50 years?) feasible, and it could work well with a benevolent dictator, but since there is not such thing it remains an utterly horrible idea.

154 chuck martel February 19, 2016 at 12:07 pm

What would happen to Jethro down on the farm if the Fed, Goldman Sachs, et al, disappeared from the face of the earth tomorrow?

155 Different T February 19, 2016 at 12:18 pm

China and Russia (or more accurately, the PBOC and Sberbank) would be here the day after tomorrow, eager to extend him “a helping hand.”

156 Different T February 19, 2016 at 12:18 pm

Comrade.

157 chuck martel February 19, 2016 at 12:17 pm

This is what Minneapolis Fed president Neel Kashkari has to say:

“almost by definition, we won’t see the next crisis coming, and it won’t look like what we might be expecting. If we, or markets, recognized an imbalance in the economy, market participants would likely take action to protect themselves.”

“Following the symposiums, we will publish a series of policy briefs summarizing our key take-aways on each issue, so that all can provide feedback. And feedback can start now. We have established a website where anyone can share with us their ideas on solving TBTF. If you are a researcher—if you work in the financial sector—if you just have a good idea for solving TBTF, wherever you are, please share it with us at minneapolisfed.org. ”

http://nailheadtom.blogspot.com/2016/02/larry-summers-wants-to-eliminate-cash.html

They really don’t know what happened and don’t know how to keep it from happening again.

158 Nathan W February 19, 2016 at 4:06 pm

Funny how many grand conspiracies are attributed to central banks, when for the most part they are in over their heads just trying to achieve one or two “simple” goals.

159 cowboydroid February 19, 2016 at 7:27 pm

The fact that they fail so miserably at those “goals” is probably what leads people to believe those “goals” are not their honest objectives.

160 Nathan W February 20, 2016 at 8:33 am

I find it hard to believe that central bankers are being completely played by someone(s) with vast and superior knowledge. But … I’m not completely closed to the idea. At the very least, bankers, traders, etc., are not naive of their own interest in diffusing their recommendations.

161 cowboydroid February 20, 2016 at 5:26 pm

Not sure if you understood my statement… I didn’t suggest central bankers are being “played” by anyone.

162 Nathan W February 21, 2016 at 1:53 pm

It wasn’t a very direct response. I was thinking of other ways that they could miss their goals and satisfy the apparent psychological need for a grand conspiracy theory which somehow involves central bankers.

163 cowboydroid February 21, 2016 at 2:27 pm

It’s not complicated. It’s as simple as “say one thing and do another.” Observing their actions, it’s easy enough to realize their stated objectives don’t match up. They need some elaborate and inconsistent economic theory to tie the two together, and most people just throw up their hands and accept it. It takes a little effort to look past the thin veil.

164 Different T February 19, 2016 at 12:22 pm

If you are a researcher—if you work in the financial sector—if you just have a good idea for solving TBTF, wherever you are, please share it with us at minneapolisfed.org.

They really don’t know what happened and don’t know how to keep it from happening again.

LOL. Translation: “We don’t really do very well at our jobs, but if you want to take some the responsibility and obligation while receiving none of the rights, privileges, and compensation; we would greatly appreciate it. We promise!

165 I am responding to an idiot February 19, 2016 at 1:07 pm

The economists, especially the research economists, at the Minneapolis Fed would run circles around you intellectually. Of course, so would the janitors. I shudder to think about the ill-reasoned garbage this solicitation will generate, and I feel bad for the poor bastard who has to read it.

166 Different T February 19, 2016 at 1:09 pm

Thank you. Finally, the inklings of honesty.

167 Nathan W February 19, 2016 at 4:09 pm

There could be a diamond in the mountain of coal somewhere.

168 GOD ✓ᵛᵉʳᶦᶠᶦᵉᵈ ( ͡~ ͜ʖ ͡°) February 19, 2016 at 12:23 pm

we need more inflation–people need to pay more for what the corporations are selling….

169 Kevin February 19, 2016 at 2:05 pm

This just has corruption and cronyism written all over it. Somehow with every new scheme to funnel resources to favored private actors the rate of growth falls. For every new government proposal the first question asked should be how will this be used by insiders to loot the treasury.

170 The Anti-Gnostic February 19, 2016 at 2:24 pm

This is how we know we’re in late stage empire: The insiders begin looting the treasury.

171 Unanimous February 19, 2016 at 11:53 pm

It already happens, and it has been used in many countries at some point in their history.

One recent example: the Reserve Bank of Australia sold all its government bonds during the early 2000s and bought bank bonds. In this case, it was due to persistent government surpluses resulting in an insufficient amount of government debt for many parts of the private sector to function well. The government could have invested in something and kept their bond issuance high enough but it suited their politics not to. If the government continued the policy the reserve bank would have had to get political at some point to stop it.

The Japanese central bank even owns listed shares.

Doing this doesn’t produce inflation without an inflation prone economy.

172 ChrisA February 20, 2016 at 4:18 am

Would the people who are concerned over the risk of corruption by buying company bonds be OK if the assets purchased with printed money be foreign currencies and gold? Surely every gold bug would be happy if the US treasury was stuffed with swiss francs and gold bars obtained by printing money.

In any event, I think the risk of corruption is fairly minimal if the policy was announced in the right way by properly setting expectations and committing to the policy, because if people truly believe that the Fed were going to do this, it wouldn’t need to do it because the market will assume it will do it and the benign effects of the policy will already be effective before a single asset is purchased.

A good historical example is the purchase by the Hong Kong central bank of stocks http://blogs.ft.com/gavyndavies/2015/07/07/stock-market-intervention-china-now-hong-kong-then/

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