UMH [Universal Manhour]

[sjfan]

You are throwing around enough technical terms to make me think that you've had some training in economics. But then, as someone who has had graduate level training in economics, what you say is gibberish. To wit, in a macro monetary model, why would you model economic growth as trend+stochastic component? This simplification makes the whole discussion moot. Even a simple Solow model introduces randomness in the technical innovation, not in the growth itself. Further, you clearly either ignore or are ignorant of intertemporal consumption models that are at the core of monetary models.

So, in short - stop throwing around words you don't understand.

Quote from PragmaticIdeals:

The growth caused by any "capital" creation (credit) in excess of the rate of saving of the economy is, by construction, unsustainable. It will cause inflation for those not "in the loop" of the credit, it will cause asset bubbles and periods of rapid deflation.

Imagine a stable, upward sloping line. That is theoretical economic growth, given a stable monetary supply (adjusted for innovation).

Then imagine a variable, stochastic process revolving around that line. That is the path of economic growth if we allow private institutions to create the money supply based on short / mid term profit objectives and based on the Nash equilibrium that such a player in a capitalist society may, at times, over-produce money with the specific aim of perpetuating asset bubbles and over-investment only because the effects will predominately be felt by all of society and not simply the singular agent.

Further, and perhaps more importantly, the ability of banks to create money out of thin air runs counter to any fundamental stance on systemic fairness in regards to risk/return opportunities being equal for all participants.

 

[PragmaticIdeals]

Quote from sjfan:

You are throwing around enough technical terms to make me think that you've had some training in economics. But then, as someone who has had graduate level training in economics, what you say is gibberish. To wit, in a macro monetary model, why would you model economic growth as trend+stochastic component? This simplification makes the whole discussion moot. Even a simple Solow model introduces randomness in the technical innovation, not in the growth itself. Further, you clearly either ignore or are ignorant of intertemporal consumption models that are at the core of monetary models.

So, in short - stop throwing around words you don't understand.

I've had training in graduate economics (a few phd-level courses, I'm a finance graduate student), and I've studied the Solow model and understand intertemporal consumption models.

These have nothing to do with the basic idea I'm trying to communicate.

And when I said to model GDP stochastically, you're right, it was a misuse of the term. I don't mean random component + trend, but more of a system of exogenous shocks brought about by manipulation in the money supply for non-optimal purposes.

 

[sjfan]

Okay. Maybe I erred too harshly on my judgement. However, I still find what you are saying incoherent. Here's why:

You talk about exogenous shocks created by "manipulation" of the money supply. Yet, early, you spoke of nash equilibrium. So is it an exogenous shock or is it a endogenous choice?

Moreover, your entire premise is base on accomplish a great theoretical feat: being able to compute the optimal money supply requirement. Most of this is ground well treaded by Taylor (of the Taylor's Rule's fame). What exactly is your new angle here?

Finally, you failed to explain why requiring 100% reserve (let's leave alone the rhetoric of "creating money" to the technically uninitiated) wouldn't result in a defacto destruction of money supply.

Quote from PragmaticIdeals:

I've had training in graduate economics (a few phd-level courses, I'm a finance graduate student), and I've studied the Solow model and understand intertemporal consumption models.

These have nothing to do with the basic idea I'm trying to communicate.

And when I said to model GDP stochastically, you're right, it was a misuse of the term. I don't mean random component + trend, but more of a system of exogenous shocks brought about by manipulation in the money supply for non-optimal purposes.

 

[PragmaticIdeals]

Quote from sjfan:

Okay. Maybe I erred too harshly on my judgement. However, I still find what you are saying incoherent. Here's why:

You talk about exogenous shocks created by "manipulation" of the money supply. Yet, early, you spoke of nash equilibrium. So is it an exogenous shock or is it a endogenous choice?

Moreover, your entire premise is base on accomplish a great theoretical feat: being able to compute the optimal money supply requirement. Most of this is ground well treaded by Taylor (of the Taylor's Rule's fame). What exactly is your new angle here?

Finally, you failed to explain why requiring 100% reserve (let's leave alone the rhetoric of "creating money" to the technically uninitiated) wouldn't result in a defacto destruction of money supply.

1) When I say exogenous, I'm referring to bodies such as the Federal Reserve, which often base their decisions on short-term, meaningless data and erroneous assumptions.

You could call the decisions of bankers endogenous in that it is based on a Nash equilibrium. The point I'm trying to make is quite simple: Private bank ceo's, whose compensation is based on short-term bank-wide measures (and not the performance of the real economy), have no incentive to even come CLOSE to creating money at the rate of technological innovation. Indeed, they generally have motivation for creating massive systemic bubbles as well as excessive inflation.

2) My premise is not based on being able to calculate the optimal rate of money supply growth. It is based on approximating it. Even if the approximation is off by hundreds of basis points, it's still superior to the bubble-prone and UNFAIR system that exists (private banks dictating money supply).

3) Requiring 100% reserve requirement (this is just a fancy phrase for "requiring banks not to artificially create money out of thin air for themselves") would obviously destroy the money supply if it was done too rapidly.

Hence, it should be completed in a graduated fashion and supplemented by government-budget / debt monetization (no, this wouldn't be inflationary if it was accompanied by forcing banks out of the Fraud Business) initiatives in case the deflation is incurred too rapidly.

--

It all comes down to one simple non-economic fact, the reasoning of which should ring true with anyone:

Should I be able to lend you $100,000 that I don't currently possess?

And then have the full legal right to assume your possessions and extract whatever liquidity I can from you, should you be unable to repay the loan?

The answer is no, and the same logic applies to "banks."

--

You may say "yes but the banks are the engine of capitalism"

To which I reply: They can still be the engine of capitalism with 100% reserve requirement, albeit a weaker one.

But think of opportunity costs that we will no longer experience under my system:

1) Government could practically be fully funded through printing money = Minimal Taxes

2) There will no longer be excessive boom/bust cycles, which generally wreak havoc upon the lower classes while leaving the upper classes largely intact (or profitable).

 

[Enginer]

Quote from PragmaticIdeals:


You may say "yes but the banks are the engine of capitalism"

To which I reply: They can still be the engine of capitalism with 100% reserve requirement, albeit a weaker one.

Reminds me of Thomas Jefferson saying that banks (that could issue money) were more dangerous than a standing army.

My point, gentlemen, is that NO OTHER idea provides anything like a stable index of "value." Gold doesn't, and would have to be several billion dollars an oz to be an effective reserve standard.

Pegging fiat currencys to gold will not work, but the cost to maintain and feed and house cetain classes of workers in a statistically average fashion would.

I'm looking for something less painful than a Weirmar currency

 

[sjfan]

(1) Central banks (especially the Fed) are extremely research and data oriented. There is a huge amount of excellent scholarship conducted by the Fed pertaining to this exact problem. See Taylor's rule. So, no. they aren't trigger happy. At the same time, they have to react to a local problem that may or may not fit with known models.

(2) Again, you presupposes the existence of such a model. It does not. There are some - but none will get you within a hundred basis points. (I recall the fed in the 70's used to run huge simulation program with thousands of equations modeling neoclassical supply + demands; didn't manage to get much out of that).

After that, you jumped into the deep end of political rhetoric. If we are having an economics discussion, the notion of "fair" is outside of our discussion. Fair is your (and my) subjective moral judgement. There is nothing inherently unfair about counterparty risk same as there is nothing inherently unfair about any risk. The only way they are unfair (and I use this term not in your sense) is if they are not priced in approperiately.

You may want to get a refund on your financial engineering degree (this is tongue in cheek; I was at the princeton one for a semester before transferring to do PhD work; the problem is that financial engineer's overview of hard economics is pretty weak; but they do a decent job with stochastic calc though).

Quote from PragmaticIdeals:

1) When I say exogenous, I'm referring to bodies such as the Federal Reserve, which often base their decisions on short-term, meaningless data and erroneous assumptions.

You could call the decisions of bankers endogenous in that it is based on a Nash equilibrium. The point I'm trying to make is quite simple: Private bank ceo's, whose compensation is based on short-term bank-wide measures (and not the performance of the real economy), have no incentive to even come CLOSE to creating money at the rate of technological innovation. Indeed, they generally have motivation for creating massive systemic bubbles as well as excessive inflation.

2) My premise is not based on being able to calculate the optimal rate of money supply growth. It is based on approximating it. Even if the approximation is off by hundreds of basis points, it's still superior to the bubble-prone and UNFAIR system that exists (private banks dictating money supply).

3) Requiring 100% reserve requirement (this is just a fancy phrase for "requiring banks not to artificially create money out of thin air for themselves") would obviously destroy the money supply if it was done too rapidly.

Hence, it should be completed in a graduated fashion and supplemented by government-budget / debt monetization (no, this wouldn't be inflationary if it was accompanied by forcing banks out of the Fraud Business) initiatives in case the deflation is incurred too rapidly.

--

It all comes down to one simple non-economic fact, the reasoning of which should ring true with anyone:

Should I be able to lend you $100,000 that I don't currently possess?

And then have the full legal right to assume your possessions and extract whatever liquidity I can from you, should you be unable to repay the loan?

The answer is no, and the same logic applies to "banks."

--

You may say "yes but the banks are the engine of capitalism"

To which I reply: They can still be the engine of capitalism with 100% reserve requirement, albeit a weaker one.

But think of opportunity costs that we will no longer experience under my system:

1) Government could practically be fully funded through printing money = Minimal Taxes

2) There will no longer be excessive boom/bust cycles, which generally wreak havoc upon the lower classes while leaving the upper classes largely intact (or profitable).

 

[PragmaticIdeals]

Quote from sjfan:

(1) Central banks (especially the Fed) are extremely research and data oriented. There is a huge amount of excellent scholarship conducted by the Fed pertaining to this exact problem. See Taylor's rule. So, no. they aren't trigger happy. At the same time, they have to react to a local problem that may or may not fit with known models.

(2) Again, you presupposes the existence of such a model. It does not. There are some - but none will get you within a hundred basis points. (I recall the fed in the 70's used to run huge simulation program with thousands of equations modeling neoclassical supply + demands; didn't manage to get much out of that).

After that, you jumped into the deep end of political rhetoric. If we are having an economics discussion, the notion of "fair" is outside of our discussion. Fair is your (and my) subjective moral judgement. There is nothing inherently unfair about counterparty risk same as there is nothing inherently unfair about any risk. The only way they are unfair (and I use this term not in your sense) is if they are not priced in approperiately.

You may want to get a refund on your financial engineering degree (this is tongue in cheek; I was at the princeton one for a semester before transferring to do PhD work; the problem is that financial engineer's overview of hard economics is pretty weak; but they do a decent job with stochastic calc though).

1) This is my point exactly. The Fed's "research" just exacerbates the issue, whereas a stable and consistent rate of money growth (could fluctuate within a small band) would, in the long run, be the optimal and less rocky road. Instead of focusing on short run disturbances and sacrificing long run stability, the Fed should just step back and allow money growth at a more consistent and realistic (i.e., not incredibly low rates for 20 years) level.

2) There are general methods of deriving the rate of innovation from an economy by using 1 formula.... And backing out the rate of innovation after computing the other variables. You're right, it's the cutting edge of research and it's not very determinate, but most economists will tell you there is a certain range it can be around. And it's no where near how the Fed operates.

3) The fact that you are attempting to seperate politics and economics lead me to believe you should get a refund on your degree. Economics is intricately intertwined with politics, only it's under the guise of maximized social utility. Or pareto optimality given some level of utility maximization for the lower-income agents in the economy, or whatnot.

Further more, I am not merely talking about fairness as in 'equity of result' but in 'equity of system,' something that economics generally holds dear. It isn't a fair system when banks can create money and others can't.

And perhaps most importantly, when I discuss "politics" as you claim, I am talking of agency costs and the capability of agents to operate against the goal of society, both concepts heavily involved in micro-economics. You haven't studied a lot of micro or the general concepts haven't sunk in for you, or?

 

[sjfan]

Alright. Provide citation for point (2) please. Fed economist tend to work very close with academic economists. Who are the credible researchers who completely disagree with the Fed's methodology? What is this one equation that you speak of?

And yes, you are arguing agency costs (not that it matters, but I concentrated in game theory and agency problems). So we are no longer arguing about macro methodology but the agency theory of fed action vs market participants, etc. This is a legitimate issue - and one at the very heart of what you are proposing - in fact, it precludes the use of a static monetary policy (remember, both side need to reach their min-max, not just one side).

And no. I don't see your point about politics. Economics is not divorced from politics but optimal monetary policy (in the sense that we are talking about) is. You keep harping on a point about the "unfairness" of required reserve less than 100%. I'm not sure how this "unfairness" is anything but a moral judgement. You fail to address my point that counterparty risk is the same as any risk - which in turn is priced (approperiately or not) So where is the fairness question outside of risk-cost-valuation context?

(I might have gone too far my comment about your fin eng degree. I meant it as tongue-in-cheek; where did you go?)

Quote from PragmaticIdeals:

1) This is my point exactly. The Fed's "research" just exacerbates the issue, whereas a stable and consistent rate of money growth (could fluctuate within a small band) would, in the long run, be the optimal and less rocky road. Instead of focusing on short run disturbances and sacrificing long run stability, the Fed should just step back and allow money growth at a more consistent and realistic (i.e., not incredibly low rates for 20 years) level.

2) There are general methods of deriving the rate of innovation from an economy by using 1 formula.... And backing out the rate of innovation after computing the other variables. You're right, it's the cutting edge of research and it's not very determinate, but most economists will tell you there is a certain range it can be around. And it's no where near how the Fed operates.

3) The fact that you are attempting to seperate politics and economics lead me to believe you should get a refund on your degree. Economics is intricately intertwined with politics, only it's under the guise of maximized social utility. Or pareto optimality given some level of utility maximization for the lower-income agents in the economy, or whatnot.

Further more, I am not merely talking about fairness as in 'equity of result' but in 'equity of system,' something that economics generally holds dear. It isn't a fair system when banks can create money and others can't.

And perhaps most importantly, when I discuss "politics" as you claim, I am talking of agency costs and the capability of agents to operate against the goal of society, both concepts heavily involved in micro-economics. You haven't studied a lot of micro or the general concepts haven't sunk in for you, or?