Monday, September 17, 2012

Hating on the Dollar

The late comedian David Frye, known best for his imitations of Richard Nixon, had an excellent monologue to mock Nixon's various economic programs, better known as Phase I, Phase II, and beyond. Frye's "Nixon" announced "Phase 23," a "going out of business sale." (One only could hope....)

Instead of Phase I and beyond, Ben Bernanke and his friends at the Fed have been giving us QE1, QE2, and now QE3, to go along with stimulus and "Operation Twist," more appropriately named by Peter Schiff as "Operation Screw." However, there are those who believe that the more the Fed tries to prop up worthless financial securities by debasing the dollar, the more the Fed is leading us to prosperity -- and anyone who disagrees is a "hater" or a near-criminal. Not surprisingly, Paul Krugman is in that group. He writes:
Mr. Romney’s (critical) language echoed that of the “liquidationists” of the 1930s, who argued against doing anything to mitigate the Great Depression. Until recently, the verdict on liquidationism seemed clear: it has been rejected and ridiculed not just by liberals and Keynesians but by conservatives too, including none other than Milton Friedman. “Aggressive monetary policy can reduce the depth of a recession,” declared the George W. Bush administration in its 2004 Economic Report of the President.
Being that I don't follow this presidential campaign much, I have no idea what Mitt Romney said in response to the latest Bernanke policy. I doubt seriously that Romney has a "plan" except to listen to his Neoconservative advisers like John Bolton and take us off to war again, with the idea that jacking up military spending will "boost" the economy.

One has to understand, however, that since 2001, the U.S. Government under both Bush and Obama have actively pursued an inflationary course, and in case one has not paid attention to the results, we are in a depression. (Oh, I forgot. The meltdown in 2008 came because the Regulation Fairies had been converted to free-market anarchism and failed to do any regulating. It had nothing to do with government and central bank policies to pump as much money into the housing market as possible, an action that was unsustainable.)

Like all good Keynesians, Krugman believes in the wonder and majesty of inflation. He declares:
The Fed’s response to this problem has been “quantitative easing,” a confusing term for buying assets other than Treasury bills, such as long-term U.S. debt. The hope has been that such purchases will drive down the cost of borrowing, and boost the economy even though conventional monetary policy has reached its limit.
Sure enough, last week’s Fed announcement included another round of quantitative easing, this time involving mortgage-backed securities. The big news, however, was the Fed’s declaration that “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.” In plain English, the Fed is more or less promising that it won’t start raising interest rates as soon as the economy looks better, that it will hold off until the economy is actually booming and (perhaps) until inflation has gone significantly higher. 
The idea here is that by indicating its willingness to let the economy rip for a while, the Fed can encourage more private-sector spending right away. Potential home buyers will be encouraged by the prospect of moderately higher inflation that will make their debt easier to repay; corporations will be encouraged by the prospect of higher future sales; stocks will rise, increasing wealth, and the dollar will fall, making U.S. exports more competitive.
In other words, the Fed goes into the markets, purchases securities that the market has declared to be near-worthless, spread dollars all over the place, and out of that will come a booming economy spreading prosperity wherever it may roam. This is about as credible as Aaron's reply to Moses about the shaping of the Golden Calf when Aaron claimed that he threw gold into a fire and the calf magically appeared.

This policy would work if an only if the economy were a mass of homogeneous factors. However, if factors of production are heterogeneous, and that a functioning price system, complete with profits and losses, is the means by which entrepreneurs do economic calculation, then the Keynesian "solution" is only making matters worse in the long run. There is no way around this point, and the longer the Fed and this government try to prop up worthless investments and the longer Bernanke and Obama try to divert scarce resources to those lines of production that are not profitable, then the longer this downturn will last.

Krugman's Keynesianism is based upon a belief that when the economy goes into a downturn, the Law of Opportunity Cost goes into hiatus. That is another way of saying that depressions make scarcity disappear and that the only thing needed is for more spending and more inflation, which will permit us to pretend we are wealthier than we are. Out of that faux wealth will come real wealth.

Get it? Yes, the only thing standing in the way is the dollar, and if we print it into oblivion, we will become rich.

37 comments:

Anonymous said...

"This policy would work if an only if the economy were a mass of homogeneous factors. However, if factors of production are homogeneous, and that a functioning price system, complete with profits and losses, are the means by which entrepreneurs do economic calculation,"
Should the second "homogenous" be "heterogenous"? Should the word "that" be removed?

Pulverized Concepts said...

In the end, an economy is the sum of perhaps a nearly infinite number of transactions based on tangible things. Consumers consume things that they can touch and see, Ford Fiestas, Pink Lady apples and bad television programming. These things are the basis of the economy, where the whole operation begins. They really don't have much of a relationship to the inventive churning of the financial community, which revolves around fiat money. The only reason that the incredibly sophisticated and arcane parallel universe that is the money and banking system can exist is that the monster nation/state requires it in order to stay in power. There is a symbiosis between the two that can require desperate measures to preserve the relationship. Unfortunately, being human, even the big bankers and their counterparts in government make mistakes.

Mike said...

“They really don't have much of a relationship to the inventive churning of the financial community, which revolves around fiat money.”

Very true. Until the day the elite’s abuse of the system is dropped on their heads.

Are we there yet?

William L. Anderson said...

I did change "homogeneous" into "heterogeneous." Thanks for letting me know.

Anonymous said...

I got a question...

Why does Krugman always make fun of the "Confidence Fairy", but yet call upon her name every time he says things like:

Potential home buyers will be encouraged by the prospect of moderately higher inflation that will make their debt easier to repay; corporations will be encouraged by the prospect of higher future sales; stocks will rise, increasing wealth, and the dollar will fall, making U.S. exports more competitive.

Josh S said...

Anonymous, the answer to your question is very simple. Like any good leftist, Krugman mocks ideas when mocking them advances his political agenda, and embraces them when embracing them advances his political agenda.

William L. Anderson said...

I like that, 12:15. We shall call her the Keynesian Confidence Fairy. Yesss!

CPBrown said...

As always, Krugman's column is a shovel ready project.

LK said...

Anderson's post above illustrates perfectly the chief failing of much of his analysis: inability to even accurately report Krugman's opinions.

Anderson:

"In other words, the Fed goes into the markets, purchases securities that the market has declared to be near-worthless, spread dollars all over the place, and out of that will come a booming economy spreading prosperity wherever it may roam."

In fact, Krugman says that nothing like this will happen, certainly not a "booming economy spreading prosperity wherever it may roam."

What Krugman actually said:

"This is very much the kind of action Fed critics have advocated — and that Mr. Bernanke himself used to advocate before he became Fed chairman. True, it’s a lot less explicit than the critics would have liked. But it’s still a welcome move, although far from being a panacea for the economy’s troubles (a point Mr. Bernanke himself emphasized). "

In other words, better than nothing, but far short of what is need and in no way a "panacea".

Typically, Anderson can't even understand that most Keynesians (apart from the most conservative, New Keynesian, N. Gregory Mankiw types) would in fact say that QE3 is yet another misguided and ineffective policy.

Monetary interventions won't work in this type of debt deflationary environment - what is needed is measures to cut down the level of excessive private debt and then large-scale fiscal stimulus.

Apparently, Anderson never heard the phrase "pushing on a string", long used by Keynesians to criticism the feeble nature of monetary policy in such circumstances.

Pulverized Concepts said...

"This is very much the kind of action Fed critics have advocated

I'm a Fed critic and I've never advocated that kind of action. Who are the Fed critics that have?

William L. Anderson said...

It is amazing that LK "knows" what I don't know. Yes, I have heard many times of "pushing on a string" and am quite familiar with the monetary policy-fiscal policy debate.

What you and the Keynesians are advocating is to inflate the dollar as a means of cutting wages. (Remember, Keynes said that workers only care about their "money wages." Yeah, I remember that, too.) Furthermore, as Krugman has said, this has an effect of reducing real debt loads.

However, you cannot ever address the fact that inflation also distorts price relationships and that it creates perverse incentives that come back to hurt the economy. The problem is that you see only the "good effect" of inflation and are blind to everything else.

Zachriel said...

William L. Anderson:
However, you cannot ever address the fact that inflation also distorts price relationships and that it creates perverse incentives that come back to hurt the economy. The problem is that you see only the "good effect" of inflation and are blind to everything else.


Keynes: Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.

Inflation certainly distorts price relations and incentives.

William L. Anderson said...

Gee, then why do Keynesians always endorse inflation as a way to end a recession? Krugman's only complaint with Bernanke is that he has not inflated enough.

LK said...

(1) My "Apparently, Anderson never heard the phrase "pushing on a string ..." was facetious.
Looks like you can't recognise humour when you see it.

(2) Keynesian don't advocate "inflation to end a recession".

They advocate raising real output and employment by increasing private investment and consumption.

This is usually accomplished by fiscal policy, but need not necessarily even involve government stimulus at all: it might be accomplished by tax cuts alone, maintaining spending, and running a deficit.

Inflation is a side effect of expanding real output in a modern endogenous money system.

Inflation can have both negative and positive effects. Even under the gold standard, outside the historically aberrant 1873-1896 period, booms were inflationary, and recessions deflationary.

In the end, a low, but steady rate of inflation is better than deflation, and whatever negative effects are outweighed by positive effects.

Furthermore, if you can't distinguish between

(1) hyperinflation (what Keynes was talking about in the quotation of him above), and

(2) low but steady inflation,

then no one has any reason to take you seriously.

Pulverized Concepts said...

In the end, a low, but steady rate of inflation is better than deflation, and whatever negative effects are outweighed by positive effects.

Sez who? How is it that government, or quasi-government, entities are justified in attempting to manipulate the system of exchange to the advantage of some constituency at the expense of others? And, not only that, it's impossible for you, or anyone else, to prove that a "low rate of inflation" (whatever that might be) is the positive outcome of increasing the money supply.

It's interesting that commentators are pointing to the upward movement of stock prices as a positive when it's just as much of an indication of a flight to assets by players with new money.

Dune said...

All this talk of inflation and asset bubbles...where is it? We've already been through two episodes of QE, Operation Twist, and easy money...so according to Anderson's calculations housing prices should still be sky high, we should be experiencing hyperinflation, and we should be renaming our country to Zimbabwe.

What's happening in reality? Simple...housing prices have fallen to 2002 levels and inflation has remained low. Anderson's fantasy world continues to fail to materialize...but he keeps himself sane by constantly claiming that disaster is just around the corner.

Mike said...

LK said: “Looks like you can't recognise humour when you see it”

That’s probable because you’re not funny. It’s difficult to find humor in someone who’s Statist philosophy hollows out the essence of liberty in society.

“Inflation is a side effect of expanding real output in a modern endogenous money system”

You continue to conflate causes and effects. But I’m sure that is what you were taught and you choose not to expand your knowledge by checking your premise so I wouldn’t expect any better.

Hyperinflation is the consequence of collapse of confidence in a currency. Apparently it is you LK that can’t distinguish. So using your own words, “then no one has any reason to take YOU seriously”

Mike said...

Dune said:
“All this talk of inflation and asset bubbles...where is it?”

Sovereign debt.

There is deflation of prices in debt/credit dependent assets and inflation in prices of necessities.

Your comments reveal you have dearth in understanding of the markets.

Bala said...

"so according to Anderson's calculations housing prices should still be sky high"

When will these moronic trolls understand that when Austrians say "inflation", they mean an increase in the supply of money? When will these idiots understand that when people like Prof. Anderson say "inflation distorts prices", it does not mean that prices will go through the roof but that the structure of prices, especially relative prices, will be distorted? And when will they ever understand that the simple Austrian point is that inflation leaves prices higher than they would have been in the absence of inflation?

So, Dune, the response to your idiotic post is that home prices are very likely far higher than they would have been in the absence of the inflation. The same holds good for many other goods as well. Inflation props up prices and prevents them from falling, you genius. Your precious price indices are a fool's index.

Bala said...

And here's the proof that your post is idiotic, Dune...

"housing prices have fallen to 2002 levels and inflation has remained low."

You clearly still labour under the delusion that inflation is the rise in prices. You do not understand that home prices should have probably fallen more but for the inflation that occurred

Calgacus said...

How is it that government, or quasi-government, entities are justified in attempting to manipulate the system of exchange to the advantage of some constituency at the expense of others?

Because "the system of exchange" IS a manipulation by the government or quasi-government. You cannot have the division of labor without credit, without social organization. Money is just developed credit. "The system of exchange" can't exist, has never existed without & apart from these "manipulations", which by definition, advantage some constituency at the expense of others.

If it is done well, the advantage to the benefitted constituency - money - is given in return for something of definite value, e.g. labor on government projects. And the expense, taxation, is taken from those who have benefitted from the society, the government, the quasigovernment - e.g. a land tax, a rent paid to the government, for something that nobody can create.

It always boils down to the incorrect Austrian theory of money which was a genuine scientific hypothesis - but one which has proved entirely wrong, descriptive of no human society whatsoever.

Money is not really something which can have a "supply". It is like talking about the supply of contracts, of orders in an army, of marriages, of promises. Highly artificial & often not too useful to think about. Some good observations on this point in the extracts here.

Tel said...

Calgacus, if you claim that it is impossible for a system of exchange to exist without government, then I presume you either believe that the entire worldwide illegal drug trade cannot possibly exist?!?

Makes you wonder why so many people get busted then.

Mike said...

Calgacus said:

"Money is just developed credit."

Commodity money is not based on debt. Your entire statement here is nothing but a system of fraud.

"a land tax, a rent paid to the government, for something that nobody can create"

It's not the governments land. There are not entitled to "rent" payments. Sounds more like extortion.

"And the expense, taxation, is taken from those who have benefitted from the society,"

Taken? Thats the first accurate thing you have said. Yes it is taken under threat of force. Benefited? I owe "society" only what is called for in the minimalist obligations of the Federal Government (State is a separate matter) as outlined in the original intent of the Constitution. We jumped the shark on that some time ago. We have rule of man instead of rule of law. As a Statist, I'm sure you are just fine with that.

Those that are net benefactors of government largess have benefited from "society." What is "taken" from them?

Zachriel said...

Mike: Commodity money is not based on debt.

Been a while since people paid their bills in cacao beans.

Mike: I owe "society" only what is called for in the minimalist obligations of the Federal Government (State is a separate matter) as outlined in the original intent of the Constitution.

The U.S. Constitution gives Congress the power to coin money and regulate its value.

Dune said...

"You clearly still labour under the delusion that inflation is the rise in prices. You do not understand that home prices should have probably fallen more but for the inflation that occurred"

Why should they have fallen further than they were pre-bubble? What lies behind this assumption? So you are basically endorsing a tight money policy to distort prices in a downward direction, correct?

Dune said...

By the way. I live in Phoenix, one of the areas hardest hit by the housing bubble, and I must say that they market here is clearing quite nicely after a 50% decline in prices over the past couple of years.

After all of the hand wringing, belly aching, and apocalyptic predictions by the Austrians over highly interventionist Fed policies...things in my neighborhood seem just fine.

Publius said...

"In the end, a low, but steady rate of inflation is better than deflation, and whatever negative effects are outweighed by positive effects." - LK

Why so? Are you saying that technology is bad thing then? Should laptops should still cost > 1,500 bucks and flat screen TVs > 3k? Or is only the "general" level of prices where we should see inflation? Please clarify.

Thanks.

Mike said...

Zac is an intellectual fraud and being ignored.

Zachriel said...

Tel: Makes you wonder why so many people get busted then.

The 'official' currency of the drug trade has pictures of dead U.S. presidents.

Pulverized Concepts said...

Because "the system of exchange" IS a manipulation by the government or quasi-government. You cannot have the division of labor without credit, without social organization. Money is just developed credit. "The system of exchange" can't exist, has never existed without & apart from these "manipulations", which by definition, advantage some constituency at the expense of others.

It's nice to know that it's impossible for one human to make a voluntary exchange with another human without the authorization and mechanisms of the nation/state. Everything you've said is completely in error.

Tel said...

The 'official' currency of the drug trade has pictures of dead U.S. presidents.

How do you know which currency is official? The news reports have been saying that the Mexican drug trade switched over to Euros some years back... but neither US dollars, nor Euros are the government approved currency of Mexico.

Point is that since every single transaction in the entire industry is illegal, and therefore not in any way supported by the government, it is a demonstration that government approval is not a requirement for trade. Trade happens as the primary entity, then government steps in to try and regulate that (or try to stamp it out in some cases).

There are so many other historical examples: flint and amber were traded in Europe right back to the stone age. There was no EU back then in case you didn't realize. At best you had small tribal kingdoms but traded commodities circulated vast distances, well beyond the reach of any local authority.

Copper and tin trade was the hallmark of the Bronze Age, tin from Cornwall was what drove the Romans to invade England, and the Romans knew they would find tin there because they were already trading with the Celts before they invaded. By the way, although Rome used gold and silver coins, they also traded right around the far flung reaches of the world using salt as money. Salt was something even a barbarian would accept as exchange.

The ideas of central banks, fiat currency and income tax are very new concepts in human history.

Bala said...

"So you are basically endorsing a tight money policy to distort prices in a downward direction, correct?"

Ha! Ha! Ha! There you go!!! A "tight money policy" does not "distort" prices. It makes the natural path of prices visible and obvious. You genius!!! You didn't even realise that you have answered the very two questions you posed to me with this idiotic statement.

It is only meddling with the supply of money to increase it that causes a distortion. Leaving it alone is not "distortionary". Nice to see you engaging in contortions to justify your stupid position.

Zachriel said...

Tel: How do you know which currency is official?

'Official'.
http://upload.wikimedia.org/wikipedia/commons/7/7c/Air_Quotes.jpg

Tel: Point is that since every single transaction in the entire industry is illegal, and therefore not in any way supported by the government, it is a demonstration that government approval is not a requirement for trade.

Yet it's interesting that trades are in fiat currency. In fact, it is government disapproval that fuels the drug trade, so it's not the best example.

Tel: The ideas of central banks, fiat currency and income tax are very new concepts in human history.

That is certainly the case. Trade long predates currency, even metal coinage.

Tel said...

Dune: "So you are basically endorsing a tight money policy to distort prices in a downward direction, correct?"

Not that I'm speaking for Bala, nor speaking for anyone other than myselfl; but if you are going to have a fiat currency and a central bank then the only purpose I can think of that makes sense, is for that central bank to focus all its efforts on price stability.

It should print money to fight against deflation, and tighten money to fight inflation.

I'm probably going to have a few Austrians disagree with me on this but there were some Mises quotes that support this... I'd have to dig a bit to find them.

I'll also add that exactly how to measure price inflation is a very open question. I certainly believe that food and fuel must be 100% included in the price inflation calculation (because everyone buys them), and I also believe that a 0% long term target is ideal (1% or 2% inflation is something we can live with, but not ideal). The effect of technological improvements is very difficult to factor in. It is fundamentally impossible to make a direct comparison between my life and that of my great grandfathers.

Also, the central bank will always be a bit behind the curve in terms of the time delay between when the monetary base expands and when prices change in the shops. They will never get it exactly right.

Tel said...

In fact, it is government disapproval that fuels the drug trade, so it's not the best example.

Well in my opinion, if recreational drugs were legalized tomorrow, then the total volume of usage would go up, but the price would go way down. I can't prove that; but it seems kind of obvious. In other words, government interference boosts illegal drug profits, but the industry will always exist. Indeed, drug cultivation is itself a very old industry, long before central governments became powerful.

Maybe there are some people out there who just do it because they have been told not to, but I suspect they are not the majority.

That said, if you want to put forward a better example then be my guest.

Zachriel said...

Tel: Well in my opinion, if recreational drugs were legalized tomorrow, then the total volume of usage would go up, but the price would go way down.

Sure, but the total value would drop substantially. In any case, it's dead presidents before, and dead presidents after.

Tel: That said, if you want to put forward a better example then be my guest.

Cacao beans. In any case, we already granted that trade long predates currency, even metal coinage.

Publius said...

"In the end, a low, but steady rate of inflation is better than deflation, and whatever negative effects are outweighed by positive effects." - LK

LK - Just wondering if you had a chance to look at my question? I question your logic (and the logic of anyone holding that position) that mild inflation is better than mild deflation...especially after a bubble. As we build capital and our technological and productive capacity increases, I would expect prices to decline rather than rise. So my question is: why fight it? Should the Fed target laptops and flat screen TVs - why just commodities and financial assets?