Emphasis added: I didn’t quite say that, and I don’t think I believe it. I’d have to consider it more carefully.
What I said was that I was willing to posit it as true. This was in order to ignore that point for the moment and drive at a deeper issue: that even if it’s true, it doesn’t matter if the Fed is going to yank back on the chain. The underlying issue that really matters is which institution is more powerful when driving nominal aggregates like the inflation rate.
More broadly: I was comparing two different methods of financing government spending. Those two methods are printing new base money or borrowing and issuing Treasuries. Financing with new base money is (ordinarily) going to be hotter than financing with Treasuries. People will sit on Treasuries (and I specified Treasuries, not “money”) a lot longer than they’ll sit on cash. Cash comes with a higher opportunity cost. Even if you think Treasuries can be a hot potato, cash is a much hotter potato. That was my point.
You’re right. It’s not ideal.
So if the monetary authority has all the nominal mojo, then obviously the fiscal authority should stop trying to dick around with stimulus. They won’t, though. Too politically popular.
Those deficits were created simultaneously with massive influxes of new money, most importantly starting with the abandonment of the gold peg in 1933. Congress did try to bring the debt under control later in 1937, simultaneous with a contraction of monetary policy. The tight fiscal policy was abandoned soon after, and again, this was simultaneous with another loosening of monetary policy as things improved again. The war of course required both a lot of new money and higher deficits.
You don’t have the natural experiment you’re looking for with your handy little narrative there. In order to understand which is more powerful, you have to make an attempt to separate the effects of new money from the effects of deficits.
Well, economists have tried to do that. Friedman and Schwartz argued that a closer look at the Great Depression seems to reveal the relatively greater importance of monetary policy. There are plenty of other examples. The 1970s and 1980s are illustrative. The oil shocks make things more difficult, but even given those shocks, we see a clear demonstration of loose money in the 1970s (especially from the Vietnam war and in the aftermath of the collapse of Bretton Woods) exploding inflation even given relatively tame deficits. Then in the 1980s, we see the debt exploding under the Reagan administration, and yet inflation coming down. Of course, we can keep going. The modern eurozone is another example. Japan in their own Lost Decade is another example. Japanese debt has gone over 200% of GDP in their many and varied efforts at fiscal stimulus, and it’s only now that the Bank of Japan is actively trying to hit a positive inflation target that they’ve finally escaped the deflation. Every governor before Kuroda was pulling back on the chain, pushing the country into deflation despite the largest debt in any advanced country. When they were threatened with a positive inflation rate, the BoJ raised rates. Conditional Chekhov’s gun, firing at the wrong time.
If you think the big deficits have more oomph than the central bank, then you simply haven’t looked at the data.
Maybe, maaaaaaaybe in our very strange present situation of near-zero interest rates, deficits will gain some traction. I doubt it, though. I was a bog-standard Keynesian before 2008, and it’s what I’ve seen since then that has changed my mind. I don’t think US deficits of 10% of GDP have had any appreciable effect, because other countries have had similar deficits with no appreciable effect. The difference in the US is the Fed. The difference in Japan right now is Prime Minister Abe giving the go-ahead to Governor Kuroda.
The countries that have been most successful in stimulating their economies have not been the ones pursuing big deficits. They’ve been the countries with the most “sensible” central bankers. It’s especially noteworthy that the ECB didn’t hit zero until relatively recently, and they tried (twice!) to raise rates only to see that stupidity backfire.
The debt is not a burden for the naive reasons that many people seem to believe.
Yet it is still a burden for more complex reasons.
But if more and more debt isn’t the answer – as it has not been in apparently every historical case – then you’re stuck forcing the wrong medicine into the patient’s mouth.
This is the absolute biggest thing that the current crop of American left continually gets wrong. A lot of them think they should win precisely because their intentions are pure. They mean well. They focus on the big problems. And sure, they do. Big chunks of the current GOP are nothing more than raging id of hatred and sadism, barely concealed by the slimiest and thinnest of veneers. They don’t mean well and they’re loud and clear about it. The American left by and large does mean well. By my standards, anyway.
But that means nothing. Intentions are worthless. The road to hell is paved with that shit.
People fueled by their own good intentions are the most dangerous fuckers on the planet. Moral righteousness is not a substitute for calm, methodical, careful thinking and deep consideration of the available evidence. I’d rather have the competent surgeon in it for the paycheck than the naive fool who thinks their one magical elixir is the cure to cancer, hiccups, and the common cold.
You have correctly identified a serious problem with US policy. I share your concerns about this serious problem with US policy. Your heart’s in the right place.
And that just doesn’t matter a whit.
Pretty sure there were over a hundred views since my last post, maybe 120.
I tend to keep half an eye on that number in these sorts of threads. As I said in a previous GQ thread:
And this thread’s topic is way more important than the NIPAs, which exist only in order to shed light on questions like these. This is the real deal.
Yes. Flatly wrong.
You can’t get a wealth effect (which is a change in wealth) by looking at a static transaction or financial statement without time.
The problem, of course, is that you were using this static device as a metaphor in an attempt to describe an inherently dynamic process.
If you want to describe a wealth effect, which is all about changes in wealth over time, then it is beyond absurd to use an analogy that doesn’t incorporate change over time.
But you have now acknowledged that Fed announcements, including the very wording of their press releases, can have important effects on asset prices. I see that admission as directly contrary to your statement above which I called flatly wrong. That is a wealth effect. If you think your position has been entirely consistent, and there is no contradiction, then that’s fine, but in that case I would suggest a much different phrasing.
But they could record what the balance sheet looked like two weeks ago and compare it to today. Or they could compare what the balance sheet looked like before a Fed announcement vs after.
A lot of economic research goes into this. In order to get a dynamic look, you have to compare different times to look at the change in asset prices. And it would be even more accurate if we could do a sort of super-idealized always-mark-to-market for assets like Treasuries.
You have acknowledged the effect, so I don’t mean to beat this too much but I see this mistake all the time and it is a fundamental error. Nothing makes sense without realizing this. And we can take an even broader view. For another example: You think the government issuing Treasuries increases the financial wealth. People have more Treasuries and all that. There’s some justification for that belief, but in the super-idealized world of fictionally perfect balance sheets it might not be true. More Treasuries are new assets, but they also imply a new liability in the form of a higher future tax burden (whether through standard taxation or even inflation). There is a visible asset that was created, but there’s also an implicit liability that lies over the economy. There is no real-world balance sheet that records this liability (and for good reason) but it still exists. The actual net change in wealth – everything properly considered – might be positive as you think but it might be zero or might even be negative. But that is yet another difficult topic that would take another multi-page thread to work through.
Yes.
And this is why purpose is so important.
And yet on the first page of this thread, I pointed out several places where I basically agreed with what you were saying.
I only started nitpicking you when you unjustifiably starting nitpicking others. I would agree, you’re probably not going to win a nitpicking contest with me. (Which should tell you something, yes?) But there’s an easy solution to this.
Here is another thing I said on the first page:
I don’t know how my arguments look to other people.
But I haven’t been claiming some shield of infallibility. I haven’t been waving a banner of authority to which all onlookers must kneel in awe. (Which would be especially ridiculous in economics, of all fields.) I have been making arguments. I have been citing evidence. I have been explaining theory. I haven’t just been saying WRONG WRONG WRONG. I have been giving the reasons why these things are errors.
There is a relationship between monetary-base growth and the inflation rate, an especially strong relationship in high-inflation countries. In the low-inflation countries, the effect is still present (obviously) but less strong for the reasons I already explained.
I went through all this.
I’m not quite sure what’s so confusing about it, unless you’ve never actually looked at a data set before. I grabbed this one out of super convenience.
Looking at numbers yourself would be an improvement.
Look at your Great Depression example. That was actually a huuuuge improvement over most of your posts because it was citing a real-world example. Most of your posts are just blue-sky imaginings, but in that moment, you actually reached toward reality and cited something that was true. It’s absolutely true that deficits were increasing under FDR when the economy was improving. It’s true that when they tried to cut the deficit, things got worse. It’s true that when deficits expanded, the economy improved again. This is all true stuff. Maybe it looks like X caused Y from this historical example.
Ah, but now I have stepped forward and pointed out the other argument. Maybe Z caused Y. Z and X were happening at the same time, so how do we know it was the one instead of the other? Maybe it was money that was the primary stimulus and not the deficits. In order to back up that argument, I cited other examples outside the Depression where X and Y don’t actually move together but Z and Y do. Huge 1980s deficits accompanied lower inflation.
I used to argue the Depression example exactly as you do. Now I don’t. This new argument won me over. I changed my mind.
No one’s asking you to do the same right now. You don’t have to conform like a robot. But at the same time, if you don’t have a new argument to explain the discrepancy between your beliefs and the apparent evidence, then just maybe there is some problem with what you believe. You are free to believe you can’t “win”. The “game” apparently isn’t fun against someone who offers data, historical example, and an understanding of modern theory.
But if the “game” is actually, you know, trying to figure out how the world works, then changing your mind is not actually losing, as you seem to believe. Changing your mind is actually winning if what’s fun is learning new things.