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The Credit Crisis Financial Stocks Short Journal
- Thread starter Daal
- Start date
Now Hussman who seems to be in the QE wont create inflation camp is saying this
Equally disturbing is that Bernanke apparently has no problem confusing fiscal policy with monetary policy when it suits him. In the same paper, Bernanke purports to explain why the central bank always has the ability to increase aggregate demand, even in a liquidity trap:
"The general argument that the monetary authorities can increase aggregate demand and prices, even if the nominal interest rate is zero, is as follows: Money, unlike other forms of government debt, pays zero interest and has infinite maturity. The monetary authorities can issue as much money as they like. Hence, if the price level were truly independent of money issuance, then the monetary authorities could use the money they create to acquire indefinite quantities of goods and assets. This is manifestly impossible in equilibrium. Therefore money issuance must ultimately raise the price level, even if nominal interest rates are bounded at zero. This is an elementary argument, but, as we will see, it is quite corrosive of claims of monetary impotence."
The only thing that is corroded here is Bernanke's economic reasoning. In this example, the central bank is not engaging in monetary policy, but fiscal policy. Creating government liabilities to acquire goods and assets, unless those assets are other government liabilities, is fiscal policy, pure and simple.
This is useless semantics, bottom line is that the Fed can raise prices and raising the base in the process wont lead to an 'equal fall in velocity' like he claims
Equally disturbing is that Bernanke apparently has no problem confusing fiscal policy with monetary policy when it suits him. In the same paper, Bernanke purports to explain why the central bank always has the ability to increase aggregate demand, even in a liquidity trap:
"The general argument that the monetary authorities can increase aggregate demand and prices, even if the nominal interest rate is zero, is as follows: Money, unlike other forms of government debt, pays zero interest and has infinite maturity. The monetary authorities can issue as much money as they like. Hence, if the price level were truly independent of money issuance, then the monetary authorities could use the money they create to acquire indefinite quantities of goods and assets. This is manifestly impossible in equilibrium. Therefore money issuance must ultimately raise the price level, even if nominal interest rates are bounded at zero. This is an elementary argument, but, as we will see, it is quite corrosive of claims of monetary impotence."
The only thing that is corroded here is Bernanke's economic reasoning. In this example, the central bank is not engaging in monetary policy, but fiscal policy. Creating government liabilities to acquire goods and assets, unless those assets are other government liabilities, is fiscal policy, pure and simple.
This is useless semantics, bottom line is that the Fed can raise prices and raising the base in the process wont lead to an 'equal fall in velocity' like he claims
I'm puzzled by some of the critics of QE and the Fed. The Fed is ALWAYS doing open market operations in the UST market and in the long-run is a net buyer of USTs(the balance sheet always grows). There is nothing new about QE, the scale is much larger now because the banking system is not lending as freely so in order to achieve the same old broad money growth they need to do more open market operations
But the bottom line is that the Fed through its history has always monetized US debt
But the bottom line is that the Fed through its history has always monetized US debt
Quote from Daal:
I said that the QE didnt disrespect rights anymore than the hard money way. The truth is that the hard money way disrespect rights much more than the QE way because it puts the value of pieces of paper and electronic cash(and a small minority that will profit from it,, no baby killing or slavery here) above human living standards and most of the people. I can't see how this is a close one
Living standards aren't rights though - it is quite possible to be poor without anyone having done anything wrong to you, without anyone having coerced or tricked you in any way.
How does a gold standard or any other non-coercive monetary system violate someone's rights? All transactions under a gold standard or free money/banking are consensual - if you don't like it, you are free to set up your own fiat money supply, or trade in cows or cigarettes or silver bars or any other alternative forms of money. No one is stopping you doing that. Whereas under a fiat system you have legal tender laws which mean you either accept the money or go to prison. One is voluntary, the other is coercive, it's a pretty clear distinction.
Quote from Daal:
Now, maybe some people disagree with QE on technical grounds(As I said I have no problem debating it on that level) so they would disagree with my assumptions(50% NGDP decline) but thats the assumption I'm making in order to say QE is right course to take from philosophical perspective
If I thought QE was mindless inflation that would only hurt people I wouldn't support it but I'm not in that camp
Your assumptions are obviously wrong - no country is going to see GDP fall 50% just because it doesn't implement quantitative easing. Where did you get this figure from? In any case, living standards are based much more on real GDP than nominal.
On the other hand, we have seen many, many cases where QE/deliberate inflation getting out of hand *has* led to huge falls in real GDP e.g. Weimar Republic, post WWII Hungary, post-USSR Yugoslavia, Zimbabwe etc.
To support QE, you have to give both a convincing theoretical case why increasing the money supply is going to make the economy more productive and living standards increase more than would happen otherwise - I have yet to see you, Bernanke, or anyone else present such a case. And it would help if you could point to occasions from the past where deliberate monetary debasement has been tried and worked successfully in raising living standards - so far, I am not aware of any such case, in fact the opposite seems to have been the norm.
To adopt a radical policy that has neither empirical nor theoretical support seems to be extremely risky, to say the least. The fact that it is being proposed by a group of people who flat-out failed to spot the biggest and most obvious real estate bubble in western history makes it all the more worrying - the chance of these incompetents being right, and then implementing it successfully, cannot be very high. Even if you have a cast-iron theoretical and historical case for QE, as opposed to zero theoretical or empirical support, the present Fed members are highly likely to fuck it up spectacularly due to their basic inability to make accurate economic forecasts.
Another immense risk that is being ignored is the dangerous precedent that this sets. Once you accept flat-out debasement of a moderate amount e.g. 10, 20% increase in the money base, there is no qualitative distinction between that and a 100%, 200%, 1000% increase, it is simply a matter of degree. The principle of deliberately debasing the currency has been accepted. Today, we hope, Bernanke and co will not be irresponsible enough to totally destroy the dollar. But what about tomorrow? What if a more lax administration comes in? We've seen such inflationary spirals driven by cynical politicians happen many times before. It is reminiscent of the introduction of an income tax. First it was about 2% on very high incomes (IIRC something like $500k+, and this was 100 years ago when that was a lot of money. At the time, people warned that once introduced, the income tax would creep inexorably higher. Within a mere 3 decades the top rate was around 70%, and nowadays even the working class pay a decent chunk in income tax, in Europe it's even worse.
Quote from Debaser82:
Any thoughts on the Ireland debacle, Daal?
Cheers.
Frankly with all this QE talk I haven't been following europe much. But I'm still on the camp that can't see how this ends well. Buiter from Citi made a strong argument that the default incentive is at the highest when the country has a primary surplus(a fiscal surplus ex-interest payments) but the levels of gov debt are high. If you default you won't need the market anymore because you stop paying interest and thus now is running a surplus. Austerity is leading to both things and is looks like Ireland is strongly committed to more austerity
It remains to be seen for how long politicians there will put debt holders infront of their voters
Quote from Ghost of Cutten:
Living standards aren't rights though - it is quite possible to be poor without anyone having done anything wrong to you, without anyone having coerced or tricked you in any way.
How does a gold standard or any other non-coercive monetary system violate someone's rights? All transactions under a gold standard or free money/banking are consensual - if you don't like it, you are free to set up your own fiat money supply, or trade in cows or cigarettes or silver bars or any other alternative forms of money. No one is stopping you doing that. Whereas under a fiat system you have legal tender laws which mean you either accept the money or go to prison. One is voluntary, the other is coercive, it's a pretty clear distinction.
Perhaps I shouldn't have used the word rights. Yet there is something wrong if a government willingly chooses a path that would lower net standards of living, a violation of trust maybe a better term