tag:blogger.com,1999:blog-2499715909956774229.post837213953189225340..comments2024-03-22T22:37:02.639-07:00Comments on Stephen Williamson: New Monetarist Economics: The FOMC: Inflation Theory and Inflation ControlStephen Williamsonhttp://www.blogger.com/profile/01434465858419028592noreply@blogger.comBlogger10125tag:blogger.com,1999:blog-2499715909956774229.post-14270536790972388332018-04-27T07:53:03.218-07:002018-04-27T07:53:03.218-07:00All savings originate within the payment’s system....All savings originate within the payment’s system. Saver-holders never transfer their funds outside the payment’s system, unless they hoard currency, or convert to other national currencies, e.g., DFI. The source of commercial bank time/savings deposit accounts, is other bank accounts, originally non-interest-bearing demand deposits, directly or indirectly via the currency route (never more than a short-run situation), or through the DFI's undivided profits accounts.<br /><br />The DFI’s time / savings deposits, e.g., negotiable CDs, rather than being a source of loan funds for the payment’s system, are the indirect consequence of prior bank credit creation. And the source of bank deposits (loans + investments = deposits, not the other way around), can be largely accounted for by the expansion of Reserve bank credit. That there is a close connection between aggregate bank credit and the aggregate volume of bank deposits can be verified by comparing the net changes in commercial bank credit to the net changes in total deposits for any given time period (R. Alton Gilbert was dimensionally confused). <br /><br />When DFIs grant loans to, or purchase securities from, the non-bank public, they acquire title to earning assets by initially paying for them, by the creation, simultaneously and ex-nihilo, of an equal volume of new money - demand deposits -- somewhere in the payment’s system. For the payment’s system, the whole is not the sum of its parts in the money creating process.<br /><br />Net changes in Reserve Bank Credit since the Treasury-Reserve Accord of March 1951 are determined by the FOMC. The DFIs could continue to lend even if the non-bank public ceased to save altogether.<br /><br />Critically, the only way to activate voluntary savings (income not spent), is for the saver-holder to invest directly or indirectly, intermediated through, a non-bank conduit. *Intermediated through* means that funds exchange counter parties within the payment’s system, as no funds are ever extracted. <br /><br />In other words, there is an increase in the supply of loan-funds, but no change in the money stock, a velocity relationship, where savings are matched with investments (a non-inflationary relationship).<br /><br />Unless savings are activated, put back to work, a dampening economic impact, a deceleration in money velocity, is engendered and metastases, resulting in secular strangulation. This is the source of the pervasive error that characterizes all developed countries slower growth rates. <br /><br />The expiration of the FDIC's unlimited transaction deposit insurance in December 2012 is prima facie evidence, i.e., created the infamous "taper tantrum".<br />Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-51007082518590434512018-04-27T07:46:07.918-07:002018-04-27T07:46:07.918-07:00In case you aren't following the markets, targ...In case you aren't following the markets, targeting N-gDp LPT, caps real-output, maximizes inflation, and exacerbates trade deficits (exporting aggregate monetary purchasing power, and importing underemployment).Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-51660581588703985532018-04-27T07:44:48.267-07:002018-04-27T07:44:48.267-07:00Milton was charismatic, engaging, magnanimous, ind...Milton was charismatic, engaging, magnanimous, indeed well-liked, and a competent statistician - but a lousy economist. Friedman was one “dimensionally confused”.<br /><br />In Carol A. Ledenham’s Hoover Institution archives, he pontificated that: “I would (a) eliminate all restrictions on interest payments on deposits, (b) make reserve requirements the same for time and demand deposits”. Dec. 16, 1959. <br /><br />I.e., the iconic Friedman conflated stock with flow (not knowing as well, a debit, from a credit). <br />Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-17734204780093783792018-04-25T04:23:54.374-07:002018-04-25T04:23:54.374-07:00I've predicted every turn, at the Minsky momen...I've predicted every turn, at the Minsky moment. That means ALL economists are don't know what they're doingSalmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-56923439211568521022018-04-23T07:49:39.372-07:002018-04-23T07:49:39.372-07:00This is interesting, thanks.
“Given what we have ...This is interesting, thanks.<br /><br />“Given what we have learned since then, we would not take some of what he wrote seriously - in particular the recommendation that central banks could solve all our problems if they pegged the growth rate in some arbitrarily-chosen monetary aggregate at some arbitrarily-determined constant.”<br /><br />Money supply targeting might not have become such an unpopular idea if Friedman had stuck to the simple money measure that was most prominent in <i>Monetary History of the United States</i>—total deposits plus currency in circulation—instead of cheerleading for M2. Recent data suggests strongly that the simple measure works because it captures money-creating bank credit, whereas M1 and M2 haven’t worked because their connection to bank lending weakened.<br /><br />Put differently, I think Friedman’s biggest mistake was in buying into the mainstream view of money as a central bank–determined exogenous input. He didn’t accept that different types of money growth can have very different effects, and that money growth is most important when it comes from fresh purchasing power being injected into the circular flow, as in commercial bank lending and gold discoveries but not so much open market operations.<br /><br />Here’s an article that discusses and links to data showing Friedman and Schwartz’s conclusions holding up when you stick to their original money measure:<br /><br /><a href="http://nevinsresearch.com/blog/an-inflation-indicator-to-watch-part-1/" rel="nofollow"> An Inflation Indicator to Watch</a><br /><br />Btw, I’m not arguing that money supply targeting “solves all our problems” – I think most advocates saw it not so much as an all-encompassing solution but as a lesser evil, and if they’d focused on money-creating bank credit instead of M1 and M2 they might still be around.<br /><br /><br />Daniel Nevinshttp://nevinsresearch.com/noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-7121636490056711722018-04-22T10:47:43.082-07:002018-04-22T10:47:43.082-07:00NNRI? = “... the level of the federal funds rate t...NNRI? = “... the level of the federal funds rate that is neither expansionary nor contractionary when the economy is operating near its potential”. Nirvana not. Reductio ad absurdum! Interest is the price of loan funds. The price of money is the reciprocal of the price-level.<br /><br />The money stock (& DFI credit, where: loans + investments = deposits), can never be managed by any attempt to control the cost of credit, R *, or Wicksellian: equilibrium/differential real rates, [or thru a series of temporary stair stepping or cascading pegging of policy rates on “eligible collateral”; or thru "spreads", "floors", "ceilings", "corridors", "brackets", IOeR, or BOJ-yield curve control, YCC, of JGBs, etc.].<br /><br />Monetary policy objectives should be formulated in terms of desired rates-of-change, RoC's, in monetary flows, M*Vt, volume X’s velocity, relative to RoC's in R-gDp. RoC's in N-gDp (though "raw materials, intermediate goods and labor costs, which comprise the bulk of business spending are not treated in N-gDp"), can serve as a proxy figure for RoC's in all transactions, P*T, in American Yale Professor Irving Fisher's truistic: "equation of exchange": M*Vt = P*T (where N-gDp is a subset).<br /><br />And Alfred Marshall's cash-balances approach (viz., a schedule of the amounts of money that will be offered at given levels of "P"), viz., where at times "K" is the reciprocal of Vt, or “K” has the dimension of a “storage period” and "bridges the gaps of transition periods" in Yale Professor Irving Fisher’s model. RoC's in R-gDp have to be used, of course, as a policy standard.<br /><br />Neither financial transactions nor “animal spirits” are random: <br /><br />American, Yale Professor Irving Fisher – 1920 2nd edition: “The Purchasing Power of Money”:<br /><br />“If the principles here advocated are correct, the purchasing power of money — or its reciprocal, the level of prices — depends exclusively on five definite factors: <br /><br />(1)the volume of money in circulation;<br />(2) its velocity of circulation;<br />(3) the volume of bank deposits subject to check;<br />(4) its velocity; and<br />(5) the volume of trade. <br /><br />“Each of these five magnitudes is extremely definite, and their relation to the purchasing power of money is definitely expressed by an “equation of exchange.”<br /><br />“In my opinion, the branch of economics which treats of these five regulators of purchasing power ought to be recognized and ultimately will be recognized as an EXACT SCIENCE, capable of precise formulation, demonstration, and statistical verification.”<br /><br />-- Michel de Nostredame (the most accurate economic seer in history bar no one)<br />Salmo Truttahttps://www.blogger.com/profile/13910212017849902362noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-29752115616346766322018-04-20T07:12:54.166-07:002018-04-20T07:12:54.166-07:00"...your article seems to disregard the norma..."...your article seems to disregard the normal lagged relationship between short-term nominal interest rates and inflation."<br /><br />You'll see dynamic responses here: https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsdGRvbWFpbnwxOTU0c3RlcGhlbndpbGxpYW1zb258Z3g6NTM3YTdlNGNjYzUzNjI1NQ<br /><br />"...isn't it common to believe inflation reacts with a 6-8 quarter lag..."<br /><br />People believe many things that may or may not be correct. To the extent that people have been able to identify monetary policy shocks (which is highly problematic in itself), they get nothing of the kind. See for example Valerie Ramey's chapter in the new Handbook of Macroeconomics. One typical result is the so-called "price puzzle," i.e. higher nominal interest rates make prices go up. Certainly not a puzzle for a neo-Fisherian.<br /><br />"With this in mind, isn't the Fed currently raising rates based on its expectation of how monetary policy will influence inflation 6-8 quarters from now..."<br /><br />Sure, but that's the point. I think they have the sign wrong. <br />Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-89640954633514214942018-04-20T06:03:58.881-07:002018-04-20T06:03:58.881-07:00Professor, your article seems to disregard the nor...Professor, your article seems to disregard the normal lagged relationship between short-term nominal interest rates and inflation. <br /><br />For example, your article seems to hint that inflation is rising today in response to the contemporaneous increase in short-term rates. But isn't it common to believe inflation reacts with a 6-8 quarter lag, such that the current rise is more reflective of the monetary policy stance in early 2016 (i.e., before the short-term rate rises were implemented?). <br /><br />I interpret Friedman's comments as a description of this lagged relationship. He says: "low interest rates are a sign that monetary policy has been tight-in the sense that the quantity of money has grown slowly; high interest rates are a sign that monetary policy has been easy-in the sense that the quantity of money has grown rapidly". In other words, low interest rates are an acknowledgement that monetary policy was too tight in the past, such that the monetary authority is now trying to right the ship (and vice versa). <br /><br />With this in mind, isn't the Fed currently raising rates based on its expectation of how monetary policy will influence inflation 6-8 quarters from now (and given that it believes further inflation increases are in the pipeline, given that policy has been accommodative throughout 2016/17)?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-19791170604486571852018-04-18T09:56:12.089-07:002018-04-18T09:56:12.089-07:00Indeed, I think that's how it usually works. T...Indeed, I think that's how it usually works. There is much resistance to increasing R, and the Fed has found a story that seems palatable to the general public. As the story goes, high R is cooling things down, low R is heating things up, and NNRI is just right. Raise R and inflation goes up, then you pat yourself on the back for heading off even higher inflation.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-2499715909956774229.post-84743417481285532582018-04-18T09:22:24.717-07:002018-04-18T09:22:24.717-07:00Ha, I agree that the FOMC should stick with its cu...Ha, I agree that the FOMC should stick with its current policy setting, among other things because I need to refinance my mortgage soon for personal reasons. <br /><br />Having said that, my understanding is that the mindset of he FOMC is that the Fed Funds Rate affects not the level but the path of inflation. A rate below the NNRI puts inflation on a more upward path compared to what it would have been, while a rate below the NNRI puts inflation on a more downward path. Because at current interest rate levels inflation is still on an upward path, rate hikes until it hits the NNRI are needed to flatten that path once inflation reaches 2%. Under this prism, the fact that inflation has risen along with the Fed Funds Rate is not necessarily troublesome since, despite the hikes, the Fed Funds Rate is still below the NNRI. It can be argued that the increase in inflation would have been faster absent the hikes. Not saying that I am endorsing this viewpoint, just pointing out that the data don't necessarily contradict the FOMC's mindset.Constantine Alexandrakishttps://www.blogger.com/profile/03148709241309623293noreply@blogger.com