The Bishop and the Butterfly: Murder, Politics, and the End of the Jazz Age
    cmaukonen's picture

    Monetary Power to The People

    By cmaukonen on Wed, 05/04/2011 - 8:06pm |

    I've been sort of mulling things over concerning our current economic state of affairs and reading some blogs.  I came across this piece by Stephen Zarlenga co-founder of the American Monetary Institute concerning some legislation being introduced, for the second time, by Rep. Dennis Kucinich to make some much needed reforms in out monetary system.  To reduce our dept and improve our jobs outlook.

    The basis of the bill are three essential monetary measures proposed by the American Monetary Institute in their American Monetary Act (AMA). The AMA's recommendations are based on decades of research and centuries of experience; are designed to end the current fiscal crisis in a just and sustainable way, and are aimed to place the U.S. money system under our constitutional system of checks and balances.

    The three essential measures include:

    1. Moving the mostly private Federal Reserve System under the US Treasury Department. The Fed would no longer be a virtual fourth branch of government, unaccountable to the public. Their important financial research functions would continue. But the Fed would no longer make unilateral monetary policy decisions beyond the reach of We the People.
    2. Making the power to issue money a public function -- bypassing the current system which invited the careless and risky lending that led to the global economic crisis. The U.S. government would be authorized to issue dollars debt free. This power would replace the current undemocratic and unstable "fractional reserve" system in which money is created as debt through loans by financial corporations who lend many more times what they possess. Banks would no longer have this privilege to create our money supply!
    3. Enabling the U.S. government to use its money power -- creating and spending money into circulation -- to address pressing infrastructure needs such as repairing our crumbling roads, bridges, rails and highways. The government also would be enabled to invest in health care and education. These projects would provide a huge numbers of jobs without going into debt and having to repay interest on debt to financial institutions. Economist Kaoru Yamaguchi's computer model has shown that a public-based money system and spending government money on jobs fixing our infrastructure is the best form of economic growth.

    The irony is that these three provisions would institutionalize what most Americans falsely believe already exists: That the Federal Reserve is public. That banks only loan money that they possess. That the government creates our money. Wrong on all counts.

    This to me sounds like an idea whose time has come.

    Comments

    Easy there, tiger. Sure, we can easily print our way out of debt. We just won't be able to afford lunch with our wheelbarrels full of cash. It's not as if this hasn't been tried before. If you can get some economists behind it besides Kaoru Yamaguchi and his magic computer model, let's discuss.

    PS As for empowering the people, these are the same people who apparently don't know what the Fed does, the same ones who let George Bush, Tom DeLay, and their buddies run amok for most of a decade. I don't want these people anywhere near my money supply. They're nuts!


    by Michael Wolraich on Wed, 05/04/2011 - 10:50pm

    Well I do not agree. I detest the current system and screw job we have been getting from the banks ever since Woodrow Wilson.

    ..progressive Democrats favored a reserve system owned and operated by the government; they believed that public ownership of the central bank would end Wall Street's control of the American currency supply.[2

    http://en.wikipedia.org/wiki/Federal_Reserve_System#Federal_Reserve_Act


    by cmaukonen on Wed, 05/04/2011 - 11:03pm

    Back atcha...

    As noted, in countries experiencing hyperinflation, the central bank often prints money in larger and larger denominations as the smaller denomination notes become worthless. This can result in the production of some interesting banknotes, including those denominated in amounts of 1,000,000,000 or more.

    • By late 1923, the Weimar Republic of Germany was issuing two-trillion Mark banknotes and postage stamps with a face value of fifty billion Mark. The highest value banknote issued by the Weimar government's Reichsbank had a face value of 100 trillion Mark (100,000,000,000,000; 100 million million).[14][15] At the height of the inflation one U.S. dollar was worth 4 trillion German marks. One of the firms printing these notes submitted an invoice for the work to the Reichsbank for 32,776,899,763,734,490,417.05 (3.28×1019, or 33 quintillion) Marks.[16]
    • The largest denomination banknote ever officially issued for circulation was in 1946 by the Hungarian National Bank for the amount of 100 quintillion pengő (100,000,000,000,000,000,000, or 1020; 100 million million million) image. (There was even a banknote worth 10 times more, i.e. 1021 pengő, printed, but not issued image.) The banknotes however did not depict the numbers, "hundred million b.-pengő" ("hundred million billion pengő") and "one milliard b.-pengő" were spelled out instead. This makes the 500,000,000,000 Yugoslav October dinar and 100,000,000,000,000 Zimbabwean dollar banknotes the notes with the greatest number of zeros shown.

    http://en.wikipedia.org/wiki/Hyperinflation


    by Michael Wolraich on Wed, 05/04/2011 - 11:28pm

    Apples and kumquats.


    by cmaukonen on Wed, 05/04/2011 - 11:52pm

    Both grow on trees, unlike money.

    Printing money to counter deflation is a good thing. But the U.S. isn't suffering from deflation.

    Printing money to pay for infrastructure projects, as Kucinich appears to propose, only produces inflation, which makes those infrastructure projects more expensive in rough proportion to the increased money supply. Unless you have a magic computer model that negates inflation.


    by Michael Wolraich on Thu, 05/05/2011 - 12:19am

    I'm sorry, but this is way off.

    In normal economic times, even during stagnant periods, the economy is growing.  As the production of goods and services increases,  the money supply needs to increase along with the growth in output, for the sake of price stability.  So it's just dead wrong that printing money automatically produces inflation.  The continuous production of new money is a normal function of a growing modern economy.

    Money creation only generates inflation when it is not matched by an increase in the production of goods and services.  In that case you have too much money chasing too few goods.  But when an economy is running massively below capacity - as ours is with double digit real unemployment and low capital investment - a government can spend money into existence on the production of new goods and services without causing inflation, since the new money is matched by new products from the real economy.

    The only issue about how increases in our money supply should be managed is whether the increase should come about solely as a result of free market decisions by banks responding to private sector demand for credit, and creating money endogenously in response to that demand, with central bank accommodation; or whether the government should also play a more activist role in creating the money centrally and targeting it at specific public spending projects.

    We are currently in a period in which, it appears to me, there is a tremendous shortfall in necessary public investment on national-scale projects, and in which private sector investment is stagnant due to the fact that so many Americans are either unemployed, overly-indebted, or both.  Since the kinds of large investment projects that need to be carried out are not the sort of things that can managed, finaced or organized profitably by the decentralized and uncoordinated firms in the private sector - something that has been recognized since the time of Adam Smith - government action is called for.

    There is not the slightest indication that we are anywhere in the ballpark of hyperinflation.  And if the governments of Europe and the US continue to pursue austerity programs, we will probably be looking at <i>deflation</i> again.


    by Dan Kervick on Thu, 05/05/2011 - 12:55am

    I knew that my glibness would get me in trouble. Thank you for the correction.

    Yes, the money supply must continue to grow in order to prevent inflation--which it already does, correct? That is, we generally have modest inflation under 5 percent. The impact of increasing the money supply would inevitably create more inflation. If we are facing deflationary pressure, despite our current 2.7% inflation rate, then that's exactly what we should do.

    Similarly, if we require additional public investment to boost the economy, that's what we should do.

    But these two are distinct, and coupling them is very dangerous. If we use monetary policy to fund public works, as the Kucinich bill seems to propose, it necessarily increases inflationary pressure. And the larger the public works project, the greater risk of sparking an inflationary spiral.

    How much exactly do you or Kucinich propose to spend? If 800 billion wasn't enough, are we talking another trillion? Two trillion? Are you suggesting that increasing the money supply by an additional 10 to 20 percent above the current rate of growth will not produce profound inflationary pressure?


    by Michael Wolraich on Thu, 05/05/2011 - 8:50am

    Did FDR's public works spending spark an inflationary spiral?

    The worst inflation I see is in commodities. Food inflation is driven by speculation, which is enabled by QE2, though bad weather figures, too. Energy inflation is partially driven by speculation, though peak supply certainly figures.

    As others have noted there is plenty of deflation in wages and services.


    by Donal on Thu, 05/05/2011 - 9:30am

    FDR funded his public works with debt, following the Keynesian model.

    The U.S. did, however, go off the gold standard in 1933, which resulted in a very rapid 15 point rise in the inflation rate, from under -10% to over 5%.


    by Michael Wolraich on Thu, 05/05/2011 - 12:32pm

    Compared to the 13% I recall in 1979, when I was trying to buy a townhouse, 5% doesn't seem like much.


    by Donal on Thu, 05/05/2011 - 3:16pm

    Right, but the point is that it started at -10% and shot up to 5% within a year. Believe me, if we had -10% inflation, I would be clamoring much harder for inflationary action.


    by Michael Wolraich on Thu, 05/05/2011 - 4:00pm

    Well, I'm guessing that -10% inflation is the same as deflation, and as others have noted, though the official line is that we are in inflation right now, we actually have a lot of wage deflation.


    by Donal on Fri, 05/06/2011 - 8:17am

    Yes, the -10 percent inflation rate during the Great Depression represents the most severe deflationary spiral the U.S. has experienced in 100 years, probably ever.

    The current U.S. inflation rate is 2.7, up from around 1 percent last fall and buoyed, as some have noted, by QE2. At the peak of the recession in summer 2009, it was around -2 percent.

    My original point was that printing additional currency is very inflationary. Clearly, the U.S. needs some inflationary pressure. That's why the Fed executed QE2. But printing money is a very blunt instrument for achieving that, and it can have very bad consequences.


    by Michael Wolraich on Fri, 05/06/2011 - 8:55am

    Unfortunately QE2 is driving inflation, or speculation, overseas more than here. Had they printed money to work on our infrastructure instead, we could have put people to work and bypassed the banks that would rather speculate than lend.


    by Donal on Fri, 05/06/2011 - 9:50am

    Sure, and had they nuked Pakistan, they could have killed Osama 8 years ago.

    As I wrote before, go find me a serious economist who thinks that it would be a good idea for the government to print more money to fund infrastructure projects.


    by Michael Wolraich on Fri, 05/06/2011 - 10:34am

    The Economist says we'd better find the money somewhere. An Infrastructure Bank like the EIB is a possibility.


    by Donal on Fri, 05/06/2011 - 11:11am

    Btw, what people are calling wage deflation is not the same as deflation. It basically means falling wages relative to the inflation rate. Usually, that happens when wages stagnate and so don't keep up with the rate of inflation. With high inflation, you could have wages that are going up and yet still have wage deflation.


    by Michael Wolraich on Fri, 05/06/2011 - 9:04am

    And that was a good thing, right?


    by Dan Kervick on Thu, 05/05/2011 - 4:36pm

    Definitely


    by Michael Wolraich on Thu, 05/05/2011 - 5:32pm

    The impact of increasing the money supply would inevitably create more inflation.

    No.  It wouldn't.  It all depends on how the new money is spent, and on the prevailing macroeconomic conditions.  If the economy were already close to full employment and full capacity, and we just printed new money and distributed it promiscuously throughout the economy, the added money would do little but drive up prices.   But if we fund valuable production with the new money - something we can certainly do under the circumstances since we have so much unutilized and underutilized labor and capacity out there - then we get a whole bunch of new stuff along with the new money, and in consequence the expansion of the money base is not inflationary.  We have more money, but it's chasing more goods.

    Similarly, if we require additional public investment to boost the economy, that's what we should do.

    We do require additional public investment.   The issue is how to create it.  The private sector is not doing the investment, and won't do it.  QE2 appears to have been a failure; and even if it had worked it wouldn't have done much about infrastructure and national-scale investment.  If we fund the latter through the government, we can rely on the redistribution of existing money through taxation and borrowing.  There is no point in adding to our debt obligation at this time.  And although fixing our taxation system and making it more equitable is a great idea in itself, its not clear that is the best way to go in the present circumstances.

    <i>How much exactly do you or Kucinich propose to spend? If 800 billion wasn't enough, are we talking another trillion? Two trillion? Are you suggesting that increasing the money supply by an additional 10 to 20 percent above the current rate of growth will not produce profound inflationary pressure?</i>

    Since we have so many unemployed people, I assume that the national government could hire most them to do something productive and fund that hiring through money creation.  This is a technical question and not just something that can be eyeballed from a blog, but my assumption would be that we could engineer at least a 10% expansion in economic activity through aggressive governmental action.  As long as the people we pay are creating new goods and services with the expenditure, that need not be inflationary.

    The barrier to doing this is entirely ideological.  Permitting the national government to play such a direct role in the economy when the private sector drops the ball is something that we laissez faire Americans have been trained to think is "just something we don't do".


    by Dan Kervick on Thu, 05/05/2011 - 10:13am

    By the way, I am not a full supporter of the Kucinich bill.  I do agree that our central bank operations need to be brought under greater control of the national government, and subject to more democratic accountability.

    But I don't understand the AMI's opposition to fractional reserve banking and credit-produced money.  The advancement of credit, and the endogenous creation of monetary instruments that occurs thereby, is a perfectly normal and healthy part of a dynamic and enterprising economy.  We need government to supplement the private sector, and do the things that the private sector doesn't do well.   But we still need economic growth and development to be driven for the most part by innovative people with ideas about something productive that can be done, and with a demand for financing to put those plans into action.  A well-regulated private sector credit market still strikes me as the best way of handling the majority of our financial needs, as it remains the best way to handle most of our other needs.


    by Dan Kervick on Thu, 05/05/2011 - 10:23am

    We have more money, but it's chasing more goods.

    The thing is, we get more money before we get any more goods. So first off, you get an inflationary jolt long before any GDP impact. Then what if you don't get as much growth as you'd hoped for? Trouble, it would seem.

    That said, I'm well out of my expertise here. Do you have serious economists arguing that a significant expansion of the money supply would not be inflationary? I'm certainly not ideologically opposed to government playing a role in the economy, nor are Keynesian economists, but what you're suggesting sounds contrary to all principles of economics that I've ever heard.


    by Michael Wolraich on Thu, 05/05/2011 - 12:09pm

    Do you have serious economists arguing that a significant expansion of the money supply would not be inflationary?

    I'm likewise out of my expertise, but I'm not sure how "significant" the proposed expansion would be.


    by Verified Atheist on Thu, 05/05/2011 - 12:16pm

    That's why I asked earlier about how much. The last stimulus was $800B, and it sounds like Kucinich wants even more for infrastructure. MZM is under $10 trillion, growing at around $500B or so per year. An extra $800B or so on top of that sounds significant to me. Moreover, total currency in circulation is less than a trillion, so if we're literally talking about printing money, $800B would just about double it.


    by Michael Wolraich on Thu, 05/05/2011 - 12:49pm

    I can't see inflation being as bad as watching more of our bridges collapse:

    America’s transportation infrastructure is suffering, and few subsections are hurting more than highway bridges. Earlier this year Transportation for America released a comprehensive national report on the country’s bridges, as well as individual state reports. The findings are rather frightening: Roughly 69,000 bridges — more than 11 percent of the total amount — are classified as “structurally deficient,” according to the Federal Highway Administration.

    All told, an average of more than 282 million cars drive on these “deficient” bridges every day.


    by Donal on Thu, 05/05/2011 - 12:55pm

    Genghis - the name everyone trots out as the main advocate of massive expansion of money supply is Joe Gagnon (see here and here). Krugman, Delong, and a few others have mentioned him and supported his policy, and some have suggested him as a candidate for the FOMC seat.

    Roughly his suggestion has consistently been to have the Fed buy up 2 trillion more in Treasuries. The idea is that there is so much slack in the economy that it won't be inflationary. If you see how there is approximately 2 trillion in output gap, that should make the claim credible.


    by Obey on Thu, 05/05/2011 - 1:11pm

    Thanks. Gagnon's approach sounds like a difference from Bernanke in his assessment of the weakness of the economy and the severity of the steps required to address it but not in the core responsibilities of the Fed.

    Had this blog post been about the fact that Bernanke should be replaced, I wouldn't have objected. But Kucinich's bill proposes a radically different role for the Fed in its relationship with the government, one that sounds dangerous to me. And unnecessary--Obama already has the power to replace Bernanke with Gagnon if he chose to use it.


    by Michael Wolraich on Thu, 05/05/2011 - 1:30pm

    The problem isn't the Fed.  Monetarism is dead, and the neoclassical love affair with pure monetary policy has been shown up as a superstitious belief in voodoo.  The Fed can't make the economy grow, no matter what it does to interest rates and liquidity in this environment.   We need a return to progressive fiscal policy activism, and our monetary policy - when it is not just regulating price stability - should be a servant support to fiscal decisions.

    Democrats should be leading the charge on this.  But the leadership is asleep at the switch, and playing idiotic negotiating games with obtuse morons like Paul Ryan over how deep a second recession to push us into.   How much more economic misery do we need before centrists admit that the dimwitted leadership of Obama, Cameron and the other empty suits of this depressingly obtuse neo-Hooverite era are killing us.   UK growth was just revised sharply downward, and the UK economy is headed into a second dip.  US unemployment just spiked upward again. The Australian economy also just reported a sharp downtur in consumer spending and confidence.   The Euro zone can't get its act together to restructure debt.   We are having the same prolonged balance sheet recession here, and yet our economic titans refuse to take active steps to fix it.   <i>We are headed for disaster.</i>  Someone needs to shake Obama by the lapels and tell him to <i>wake up!</i>.


    by Dan Kervick on Thu, 05/05/2011 - 5:10pm

    below


    by Michael Wolraich on Thu, 05/05/2011 - 5:46pm

    Just wanted to insert a caveat about the chart you link to.  While it may or may not make your point about inflation, the title itself is misleading.  The chart leaves out the component that is the  broadest measure of the US money supply, MZM which replaced M3 after March 2006.  

    I have no idea why Autopilot, the Wikipedia contributor who made the charts, left it off since that is where the money that is causing most of our current grief shows up.   That is, some of it shows up there.  There are ongoing arguments about whether M3 should have been discontinued and whether MZM is including everything it should.

    A generally accepted definition of what is and is not money would be very helpful in all these discussions. :)

     


    by EmmaZahn on Thu, 05/05/2011 - 11:41am

    Thanks for the caveat Emma. I just looked around for another graph with MZM but couldn't find one easily.


    by Michael Wolraich on Thu, 05/05/2011 - 12:21pm

    Here is link to data and charts from the St. Louis Fed

     MZM Money Stock (MZM) - FRED - St. Louis Fed

    Doubt that what you find will there will correlate directly to Autopilot's charts but you can find charts of M1 and M2 there as well.   And if you have the knack for it, which I do not, you can build your own from the data files available there. :D

    Graph: MZM Money Stock


    by EmmaZahn on Thu, 05/05/2011 - 12:45pm

    Alright this is insane. We had deflation LAST month - remember QE2? Now we have the delightfully predictable inflation to fight. Bernake has you chasing your tail.

    Lets build some fucking roads and shit. They are printing money for themselves like crazy - and then telling you the results mean they can't spend any money.


    by kgb999 on Thu, 05/05/2011 - 1:22am

    QE2 is exactly what the Fed is supposed to do--using monetary policy to manage price stability. What Kucinici is proposing is something else, using monetary policy to fund government spending at the cost of price stability. See my comment above.


    by Michael Wolraich on Thu, 05/05/2011 - 8:59am

    I haven't paid any close attention to Kucinich's bill, but if we're battling anything, it's plain as day that it's deflation, not inflation. Massive unused capacity, a collapsed construction sector, un and underemployment of 20%, corporations sitting on hundreds on billions in excess cash, interest rates at the floor --- it's deflation. No magic computer model needed. 

    "Printing money" is just one of those stupid phrases that we've all learned to react to. The banks print it and unprint it in enormous quantities, all the damned time. Just... not when the economy needs it. 


    by quinn esq on Thu, 05/05/2011 - 1:27am

    By all laws of math and economics this should be true. Thankfully - the taxpayers are dumping a ton of cash into corporations so they can grow to sitting on hundreds of trillions .... executive salaries are percentage based dontcha know. Feels like inflation when buying food - I'll tell you that.


    by kgb999 on Thu, 05/05/2011 - 1:35am

    I think the current mix of rising prices on necessities and dropping prices on wages and gadgets, with persistent unemployment to boot, goes beyond traditional definitions of inflation, deflation, or even stagflation. As I noted in Commodeflation, Early Warning calls it misflation, and I just ran across Minyanville calling it stankflation.

    In any case printing money for infrastructure makes more sense to me than printing it for speculators.


    by Donal on Thu, 05/05/2011 - 8:41am

    You're focusing on #3, which I agree is mildly problematic, but it seems to me the real revolutionary parts are #s 1 and 2, and which I agree whole-heartedly. Also, I'll point out that you're showing your bias against the American Monetary Institute (and kudos to you for being honest about it), but my bias is in favor of Kucinich. Of course, they're two different kinds of bias, I suppose.


    by Verified Atheist on Thu, 05/05/2011 - 7:30am

    The situation as I see it is that we really really need to give up this fiction of an "independent Fed" which sets monetary policy based purely on divine omniscience and altruism.

    In theory what we have is two groups of people with opposing incentives on monetary policy: on the one hand politicians will tend towards creating excessive inflation as they try to pump up the economy before elections. This happened regularly in Britain before the BoE was made independent. On the other hand bankers will tend towards creating deflation as their profits depend on a disinflationary trend over time - the banks incredible growth in profits over the past 30 years is linked the bull market in bonds and credit. Bond prices rise as inflation rates - and hence interest rates on bonds - fall.

    Right now who controls the Fed and hence the setting of monetary policy? Not politicians. Actually they have no influence on monetary policy and act with an incredible amount of deference towards central bankers. Actually the majority of the votes on the monetary policy committee represents the banks. Not commerce in general. Not consumers. Just bankers. So inevitably the committee loves disinflation (a positive but falling inflation rate) and has done so for the past 30 years. This has now become a problem as inflation has fallen from the reasonable rate of 4% to 1% now and still trending downwards. As inflation trends negative, that poses a real problem for the economy as consumption falls and savings rise - causing production to fall, in turn causing more deflation, and so on.

    The upshot is that this balance of power between two groups with opposed incentives needs to be ... rebalanced. There should be more political input into decisions concerning money supply.

    That at least was my theory ... until I realized that now politicians work for the bankers even more zealously than the Fed's Open Markets Committee that sets monetary policy. The banks' incredible run of profits and growth over the past 30 years thanks to their control of the Fed has now given them total control over politicians as well. So much so that politicians love deflation even more than the Fed does. All the political pressure now is for the Fed to squeeze the current 1% inflation rate even tighter. Continued bank profits depend on it. Because if inflation rises the banks will go bankrupt - the value of their assets will drop and crash through their still razor thin capital buffer. 

    So I don't know if this is a good idea. I like the idea of taking monetary policy-setting power away from the bankers. But giving it to the current batch of politicians won't help matters. At all.


    by Obey on Thu, 05/05/2011 - 2:41am

    The only logical way to rectify this situation: elect more of the Democratic politicians!  When they hit 62 in the senate pixie dust will fly out of everyone's arse and suddenly they'll all be free ... Free ... FREE, I say! (oh .... soooo close in '08) You know what must be done America.

    Seriously. This feels like it is getting absurd.  So, are they going to jack inflation every other quarter with these easing things (that *is* what the easing is for, right?) Annnd ... then collect it as profit over the next as it falls back to deflation ... creating, what? Wild price fluctuations for those of us stuck in the real economy? Should we take to strategic stockpiling of non-perishables? The policy isn't making ANY sense. It seems like something has got to give.


    by kgb999 on Thu, 05/05/2011 - 3:22am

    Well there is that - the banks love nothing more than volatility. Nothing much to do about that other than regulate derivatives in commodities. But that is the banks' profit center now. So regulators, who are primarily concerned with keeping the banks solvent, are loath to shut them out of that market.

    Another fucked up incentive structure. And/or rank corruption, depending on your view of human nature.

    That aside, I'm actually a fan of QE2, personally. The problem, like with the original Stimulus bill, was that it was designed too small. The Stimulus ended up looking like a failure because it didn't spark a growth trend, it just did barely enough to stop the output freefall. Which wasn't nothing. QE2 similarly didn't do enough to scare all the hoarders off the sidelines and push their cash back into circulation, it did juuuust enough to halt the deflationary (or more accurately 'disinflationary') spiral. In both cases the powers that be seem happy with the current situation - it's that perfect sweet spot for the elite, no falling output, no massive growth, but just economic stagnation paired with massive upward redistribution of income and wealth.


    by Obey on Thu, 05/05/2011 - 3:58am

    My understanding is that the structure of QE2 was pretty much designed for the cash to be rolled into currency speculation and building a housing bubble in China. No? I don't think anyone expected increased anything as far as the American economy goes - unless you count finance as a part of the economy, which it totally doesn't seem to be. It's a management function that produces nothing. With today's structure in order for there to be a profit in finance there must be an offsetting loss somewhere in the real physical economy. IMO, we need to be *subtracting* banking profits from the GDP instead of adding them to give an accurate picture of where the nation's economy really sits.

    But I'm still left with a fundamental question. From where I sit deflation means falling prices whereas inflation means rising prices. If the purpose of QE2 is to stop deflation, doesn't the converse mean that employing the tool must result in higher prices?


    by kgb999 on Thu, 05/05/2011 - 2:29pm

    It wasn't that QE2 was designed to ship the money overseas, imho. What it did - directly - was lower borrowing rates. So either the government could have used the lower rates to do more deficit spending, or the banks could have used the lower borrowing rates to let households refinance their mortgages and get out of their current debt spiral. But the political system is too fucked up to do deficit spending for some reason, and the financial system is too fucked up to in terms of incentives to have any interest in letting their debtors out of the hole they're in, they'd rather see them default and foreclose. All of which is a huge problem for the economy, and a HUGE missed opportunity for the Obama administration who could have designed a decent HAMP program to push restructurings through. But alas...

    That said, shipping money overseas lowers the dollar's value vis a vis other currencies which helps exports and, importantly, import substitution. So there's a big boost to the economy right there. There's some argument about what's going on in the commodity markets though, and if the money is just getting funneled into commodity speculation that may perhaps be driving up those prices and throttling the economy. But I can't quite see how that last argument is supposed to work.

    On the banking sector and GDP, it doesn't quite work that way. Financial services are usually regarded as an intermediate output, not final output, so figures for their contribution to GDP are rough estimates. This means that if we think they're not contributing as much that just implies some other sector of the economy - eg. manufacturing - is producing more than we thought. It doesn't affect the overall GDP number.

    As for your last question, yes, it does produce inflation. But apparently we need a lot more inflation. Corporations and the moneyed classes in general are retaining all that cash on the sidelines because they can't find any useful investment for it, and at current rates of inflation don't see it losing value when just held as cash. I.e. they're not doing their job as capitalists - investing in productive plant and equiipment and research, etc. What that indicates is that they'd get a negative return on any investment they made. So what we need to do is make the negative return on cash greater than the negative return on investment. It'd function like a tax on cash holdings. Which presently amounts to a tax on wealth.


    by Obey on Thu, 05/05/2011 - 3:29pm

    I've got to mull much of this. Thanks for the reply. I don't think that the problem is they would get a negative return from investing in the real economy. The problem is that they have rigged a game that specifically involves not investing which results in money pouring into their own pockets ... and they don't even have to "share" with any of those pesky business owners or workers.

    One observation as someone who's been stuck on food assistance for a little while. You realize that intentionally creating inflation means people on a fixed budget literally don't have as much to eat ... right? How is this NOT just letting the corporations put all that assistance money right into their own pockets? The poor are pretty much where the rich get their money. It's fucked up.

    I guess it's our current relative financial conditions impacting how we view financial moves that help the "economy" at the expense of those who are barely getting by.  Having now seen both sides, it sure ain't like making six figures, man. Strangely, being poor costs a bit more for almost everything it turns out. The danger I see for those who like this way of doing things is that now they are treating an awful lot of people that used to be the buffer keeping the poor from smashing their blue-blooded teeth in in such a way we are about to pick up a baseball bat and start in at the knees. I have employed people my entire adult life - and could be right now. There are jobs out there waiting to be ... there simply isn't a viable economic system supporting free enterprise.


    by kgb999 on Fri, 05/06/2011 - 1:11am

    I agree about the Fed.


    by Flavius on Thu, 05/05/2011 - 3:57am

    Reply to DanK above:

    I agree that the problem isn't the Fed, which was more or less the point of my objection to the post.

    Look, there are two main points of disagreement that are often conflated. One concerns the seriousness of economic conditions. The other concerns the appropriate way to address them. There are plenty of rightwingers who would agree with you about the economic conditions but disagree about the solutions. Obama more or less agrees about the solutions--that's why we had a stimulus--but disagrees about the conditions.

    This post advertised a whacked out solution that I challenged, but that doesn't rule out aggressive action of the sort promoted by Gagnon to address the conditions.

    As for those conditions, there is simply a lot of disagreement out there between smart people over the state of the economy. Just because you disagree with them does not mean that they are blinded by ideology or beholden to Wall Street. They might just be wrong.

    Or they might be right. Speaking for myself, I have no damn clue, and I don't understand how people can be so sure of themselves. All I know for certain is that a large number of people who are very certain about where this economy is headed will turn out to be wrong.


    by Michael Wolraich on Thu, 05/05/2011 - 5:46pm

    Obama told me a lot about what makes him tick when he gave his State of the Union speech.  He barely mentioned unemployment, even though the problem of high and persistent unemployment is worse than it has been since the end of the Great Depression.  Not only did he not offer a plan to lick unemployment; he also didn't offer a plan to create prosperity in the near term.  It was all about his grand, long-term plans.  He basically said the recesssion is over and it is time to move on.   He's a cold, aloof and selfish elitist - and out of touch.   I think he is inwardly contemptful of people who are struggling, because they are not super-competent asnd successful achievers like him.   Lately, I feel revulsion every time I see his smug, do-nothing face on television.

    Conditions are awful.  I see people struggling everywhere.  It's not just the people who are unemployed and underemployed, but a very large component everyone else who is struggling as a result of the stagnation.  I don't think Obama really gives a shit.  He's all about getting re-elected.  He's a politician, and the people who are suffering don't pay his salary.


    by Dan Kervick on Thu, 05/05/2011 - 6:45pm

    He was also only the second President since Truman not to mention the poor in his SOTU, and Carter did with his jobs programs mention, others mentioned the problems of the poor without that exact word. 

    Charles Blow was pissed, and said:

    "So how is it that this Democratic president has the temerity to deliver a State of the Union address that completely neglects any explicit mention of the calamitous conditions now afflicting his staunchest supporters: the poor?

    (In 2008, Obama won 73 percent of the vote of those earning less than $15,000 a year, 60 percent of those earning between $15,000 and $30,000 and 55 percent of the vote of those earning $30,000 to $50,000. Those were his widest margins of victory of any income group and helped to propel him to victory.)"

    Then some more hopeful stuff, and ended:

    "President Truman wrote in 1953 that, “ultimately, no President can master his responsibilities, save as his fellow citizens — indeed, the whole people — comprehend the challenge of our times and move, with him, to meet it.” But, it is sometimes hard to follow — indeed, to chase — a president who appears to be moving, often at a full sprint, away from the people who once carried him."


    by we are stardust on Thu, 05/05/2011 - 7:31pm

    Maybe so, but I never assume that the people who talk about the poor or claim to feel their pain care about them any more than a guy with a Texas twang who cuts brush is a man of the people. They're all politicians.


    by Michael Wolraich on Thu, 05/05/2011 - 10:20pm

    Always interesting to read different takes on problems and their solutions.

    1) Taking the Fed into Treasury does not seem like a great idea as it practically runs Treasury now.. It would be more like making the Fed take over of Treasury legit.  If recent events have proved anything, it is that very, very few people outside the FRBNY and its Primary Dealers seem understand how it works, including me.  I do however know enough to know it is not like the textbooks or many economics teachers thought pre-crisis.   

    What is really needed is some countervailing power(s) to break the stranglehold the FRBNY's Primary Dealers have over our money,  our economy; and, as a result, our government.  Bernanke has been working to expand the Fed's counterparties outside that little circle and Treasury Direct has expanded.  However these are in no way designed to create true countervailing powers but only other ways to defend their own.  

    2&3) At present who creates money is less a problem than how to destroy some of it or make it circulate. Few seem willing to recognize investment losses and apparently we will not tax it away.  Bernanke accurately described the problem of creating more money under present circumstances as like pushing on a string.   Spitting into the wind seems more accurate. It is truly amazing how quickly digital money ends up right back where it started nowadays -- almost like it never left. :)

     


    by EmmaZahn on Thu, 05/05/2011 - 8:48pm

    Emma, what's your take on the state of economy? Or how do you think that one should go about assessing various economists' takes if one were trying to figure out what the hell we should be doing?


    by Michael Wolraich on Thu, 05/05/2011 - 10:40pm

    Oy!  Can I get back to you?  Nevermind.  But remember, you asked. 

    I think the economy is very, very fragile. It is in a between state akin to LarryH's underground.  So much of what we do is faith-based in that it works because we believe and our faith, our confidence has been shaken.  We are also in transition from one type of major economy to another.  There are just so many of us, far more than are needed for what jobs are available.  We need to find some other way for more people to get if we expect them to spend.   There are aspects of monetarism and financialization that could be useful in this regard.

    Wish I could point you to an economist with a great take but I have not found many, maybe none, who are thinking more about the future than the past.  Non-economist Matt Yglesias asks the best questions and blogs more about the shape of thiings of things to come than most.  Also, people with actual experience in finance like Yves Smith and Steve Waldman are very knowlegeable about economics as well.   The ones I learned the most from post crash have unfortunately been co-opted by banks,  John Jansen; Willem Buiter and Brad Setser, but some of their old stuff may still be online.

     


    by EmmaZahn on Thu, 05/05/2011 - 11:47pm

    Good reply and honest. Probably the best that could be said.


    by cmaukonen on Thu, 05/05/2011 - 11:51pm

    What is that?  Faint praise?  LOL.

    Do you have any idea how hard that question was?

     


    by EmmaZahn on Thu, 05/05/2011 - 11:54pm

    Well ...... ok, great reply then. Laughing


    by cmaukonen on Thu, 05/05/2011 - 11:58pm

    OK, thanks. That's thought provoking. If I may paraphrase a Passover tradition: How is this recession different from all other recessions? Unemployment now is slightly lower than it was in '83. Then, as now, there was much soul-searching about the decline of America. What makes our state now different from then?


    by Michael Wolraich on Fri, 05/06/2011 - 12:05am

    Just fixed broken link --nothing new

    Sorry it has taken so long to get back to you.  Had some personal stuff to take care of and then blogger ate my homework.  Glad to see you all continued without me.  :)  

    My initial thought was that the chief differences between then and now are demographics and timing.   Early boomers were just reaching mid-life and beginning to think about saving for retirement and a 20+ year bear market bottomed out: 

    A couple of investment discussions among institutional investors were memorable.  Then at least, they thought long-term 30+ years out, especially the pension funds.  The healthcare sector* was expected to do well as were technology stocks including or maybe especially biotech.  There was some excitement in telecommunications too about what breaking up AT&T might mean.  

    Lots of creative destruction in real time.  And it was not just new stocks in which to invest but new mediums as well.  Fidelity Select began offering sector funds and index derivatives were just beginning.   Technical analysis with its emphasis on market timing offered both brokers and professional investors a rationale to invest in more and more volatile products.  And the deadly combo of index derivatives and programmed trading was being born.

    Enough nostalgia for now. Almost.   While surfing around to refresh my memory I realized Reagan* was maybe right:  1984 was Morning in America.  A bright new dawn after the long-fitful night that was the 60s and 70s.  Found this discussion as a sort of backup to that claim.  Revisiting 1984 at kottke.org.

     

    *Always remember:   there is a reason companies prefer former cheerleaders to staff their marketing and sales departments. 


    by EmmaZahn on Wed, 06/01/2011 - 12:45am

    I think the traditional economics answer is that the recession in 83 was induced by the Fed when Volker raised interest rates to quell inflation. This choked off credit, but as the Fed lowered inflation everybody went back to work relatively quickly.  This time the catalyst was a massive worldwide financial crisis that has come with a prolonged debt overhang (housing is huge componet of our economy, although our overhang extends to all forms of credit). This will take much longer to work out, and nobody is really sure.  Even the most optimistic economists understand that housing/real estate will continue to fall for some time (without inflation), they need to return to affordable rates.  We are more like 1935, than 1983, and it was the late 40's before household's had accumalted enough savings to spend on consumer goods again (with the WW2stimulus inbetween).

    Inflating our way out of the debt might actually be a viable solution, but, as Emma points out, the current difficulty of getting money to circulate in our topdown fractional reseve model is preventing the effectiveness of any Monetary expansion.  You need to increase Agregate Demand, and that is where some of the other unorthodox solutions might work (like having the fed send money directly to households), this would solve the problem of leakages to foreign markets (where QE2 has lead to inflation) and corporations simply sitting on cash.  Alternatively you could set up an infrastructure bank as Donal would like, and than stuff it with cash. However that is poltiically very difficult, as congress appears unwilling to give up the power of the purse strings.  But many economists think very highly of an infrastructure bank.  

    I think that Emma is right to point out the demographic difference between now and the 80's. Babyboomers were just starting to hit peak earning years, and they were not burdened by debt. (in contrast to Today's echoboomers).  The Computer productivity revolution was just getting going, today computers remember everybodies debt forever, and the easy productivity gains have evaporated. The internet has not actually created many jobs.  

    I would go farther and state that many new upper class jobs are things that actually add siphon off productivity, rather than creating them, think of scores of well paid bankers,consultants, lawyers, etc. They are basically well paid middleman. They make more money by controlling information, creating barriers that you need them to navigate, raising costs--frankly not really delivering much value.  They are scores of examples, but the financial innovation sector is by far the most dangerous, and it touches everything. Our system requires it for nearly everything, and they know it. 

    To return to C's orginal article, I think he introduces an important philosophical point. If we don't believe in democracy enough that we can trust it to handle our economic system, maybe we should reevaluate. 


    by Saladin on Fri, 05/13/2011 - 9:58pm

    Emma,

    I am curious, what type of economy do you see us transitioning to? 


    by Saladin on Fri, 05/13/2011 - 9:59pm

    I see us transitioning onward to complete state finance capitalism not that that is my preference.

    For a variety of reasons I am quite alone just now and a few months ago I realized that between my automatic bill pays, direct deposits and overdraft protections,  it might be years before anyone found me dead.  Meanwhile those who profit from me now would continue to do so.  They really do not need the actual me at all.  They just need the flow of my funds.  Surreal, no?  

    These guys could care less whether or not we have jobs as long as we have incomes they can financialize and monetize.   There is a lesson for us there if we pay close enough attention.

     


    by EmmaZahn on Fri, 05/13/2011 - 11:35pm