Thoma is back again with this.
Replies as follows:
Ah, I see, the surge in 2008 is why we are having such a problem with inflation today!
He's talking about the surge in currency in circulation in 2008. Yes, exactly. This is why I'm not an old-fashioned quantity theorist. What has to be going on here is a large increase in the world demand for US currency during the financial crisis. All the more reason to be worried about inflation, as the crisis-driven demand goes away.
o what has been happening to (the log of) M2 (the monetarists' favorite measure of money -- he does call himself a New Monetarist after all)?
No, New Monetarists don't care about broader monetary aggregates. Neil Wallace taught us that.
I also like the contention that calling Bernanke a "wuss" is not "disparaging Bernanke's character."
This seems a bit strange. I'm not sure how Mark comes by all this respect for authority. In this context, I think it's healthy to be skeptical about what these central bankers are telling us. They have a penchant for secrecy, and I don't think we should take everything they say at face value, or necessarily trust them. We've given them an important job, and I think they are taking some big risks. If they screw up, we'll all suffer for it.
Despite Williamson's wishes to the contrary, there's no evidence here that inflation is just around the corner, or even down the street.
Now the guy has me wishing for inflation. In a sense this is actually true. Early last year I bought a load of TIPS, and I continue to put my money where my mouth is. My TIPS have been doing quite well (not quite as well as the stock market, but a pretty good annual return, and particularly nice over the last few weeks). The current TIPS break-even inflation rate has gone up to 2.11% on 10-year bonds, and 2.62% on 30-year bonds. I'm expecting better things in the future. If I were really nefarious, I would be behaving like Mark, and complaining about how tiny the QE2 program is.
Here is my reply to your question, "What do you think causes inflation?"ReplyDelete
1) The amount of dollars being bid per good is high enough that sellers feel confident to raise prices.
2) The bidding may not be there now, the inventories aren't unusually low, but sellers nonetheless think their costs will go up, and they think customers will expect prices to go up so they will not balk at a price raise. Thus, sellers nonetheless raise prices. – Of course, if later reality sets in, the dollars really just aren't there to buy at the higher prices, then inventories will grow and sellers will become skittish about raising prices again.
Now, take (1): Dollars are being heavily bidded on goods. There's a lot more buying of goods, inventories are plunging, so companies are going to have to produce more goods, so unemployment goes down (unless it can't go down because employment is already maxed, but obviously that's not the situation now) and real GDP goes up. I can't see any way (1) could create inflation, without simultaneously making unemployment lower than it would have been otherwise and GDP higher than it would have been otherwise.
Now take (2), people are just bidding prices up in an expectations spiral. This will also bid wages up, as there will be more nominal revenues and potential revenues available to bid for workers. So, one big effect here is that inflation will make debt less and less of a problem for debtors (including the U.S. government). Since debtors have a much higher marginal propensity to spend than debt holders, this should increase real spending, and thus employment and real GDP.
So I can't see any way that you could increase inflation without also making employment and real GDP higher than it otherwise would have been. Can you? If so please explain how.
Also, I think a big issue here is that your loss function is very different from mine or Krugman and Thoma's. You seem to think inflation is far greater of a danger and cost than we do and unemployment far less. To me it's like you won't take penicillin when you have pneumonia because you are concerned about the dangers of penicillin, when the dangers of pneumonia are far greater, not just in odds, but in severity, i.e. a 1 in 10 probability of a small temporary rash versus the same 1 in 10 probability, but for being laid up and out of work for three months and losing your job and your house.
Haven't read all the exchange, but I loved this from Thoma: "I have no problem with [questioning authority]." Actually, anyone who has followed the comments to his blog (and how severely Thoma has deleted some of them) knows that Thoma has a *big* problem with those who question authority. He's not exactly of the spirit "let a thousand flowers bloom." More like, it's my way or the highway.ReplyDelete
I dunno about thatReplyDelete
I've been harshly critical of Thoma on his blog, not just in terms of economic arguments, but also on a personal level, and I've never had a comment deleted. I've read his blog for 4 years and I can only think of 2 people who got banned, and that was only after many warnings.
Now DeLong on the other hand -- he really is a serial comment deleter.
"I've never had a comment deleted."ReplyDelete
I wasn't banned from his site - I left it voluntarily after I put up a comment with no personal remarks linking to Krugman's famous 2004 posting that interest rates were about to go through the roof (this was via Felix Salmon, as I remember). This caused a fair amount of discussion, and Thomas deleted my original comment and all the discussion. Then when I put up a comment asking why on Earth he had deleted a rather reasonable comment, he deleted that. Maybe he has mellowed since I left. I somehow doubt it.
"I can't see any way (1) could create inflation, without simultaneously making unemployment lower than it would have been otherwise and GDP higher than it would have been otherwise"ReplyDelete
To take the most extreme example, what do you think happens in a hyperinflation? Do you think Zimbabwe has a high rate of inflation because the unemployment rate is really low and real GDP is really high?
"Also, I think a big issue here is that your loss function is very different from mine or Krugman and Thoma's."
No, I think we have exactly the same loss function. I'm no happier about the fact that a lot of people are unemployed than you or they are. However, I think that at this point there is little or nothing that the Fed can do about that given what they have done already. I'm taking as given that the Fed seems to have committed to a 2% inflation rate, and I think they should stick to their commitment. The inflation rate is therefore too low relative to what they committed to, and they should try to increase it. I think maybe they went overboard.
On Thoma's behavior,ReplyDelete
The guy seems to think he is very nice and evenhanded, but in my interactions with him he has been rather prickly. Likes to bear a grudge too.
"Do you think Zimbabwe has a high rate of inflation because the unemployment rate is really low and real GDP is really high?"ReplyDelete
At the point of hyperinflation, like in Zimbabwe, you just have chaos, really an end to a currency for all practical purposes. And without a currency it's a lot harder to trade labor for other goods, so you can have high unemployment and high inflation because of a hyperactive printing press.
But if (1) is the case in the US, then you're starting with a really solid long history currency, that no one thinks is remotely worthless, at close to zero inflation. (1) says there is increased bidding of currency for goods, so inventories will shrink and firms will want to hire more to keep up with the increased demand. This will all happen without chaos and the loss of a functioning currency if inflation just goes from about zero percent to three to five percent.
It's really (2) where I could see the possibility of perhaps high unemployment and inflation at the same time. The amount of money is increasing fast and although prices and revenues are increasing fast, employers see and expect wages to increase fast too, so they nonetheless don't hire. They don't see a real gain in quantity sold and profits from hiring.
But, in our situation, there are unique positive effects that would happen even if expectations are driving inflation:
1) Real debt shrivels for people and government, and this causes a large real increase in spending, not just a nominal one.
2) People are also encouraged to spend and not sit on their money just because prices will go up – not down.
3) Real wages can adjust and fall easier, which can make hiring more profitable to employers.
4) Because unemployment is starting out high, the increased real spending will result in increased hiring and thus increased production of goods, blunting the inflation.
Again, I can't think of a way – in our specific situation, not Zimbabwe's – that inflation can be increased without also increasing employment and GDP.
Here's another reason:ReplyDelete
The stronger the economy, or the stronger it looks like the economy will be, the less likely it is that the Democrats will cave in and extend the tax cuts for the rich, or any of the tax cuts.
You HAVE to consider these indirect things if you REALLY want to make the economic decisions that do the most good.
Could you maybe elaborate on why New Monetarists do not care about broader monetary aggregates?ReplyDelete
Take M1 for example. This includes currency outside of banks, which is a public liability, and various private liabilities that are deemed to be widely used in retail transactions. Why would it be useful to add these things up and treat the total as something significant? Are these assets the same? Clearly not, as some are public liabilities and others are private. Are these assets clearly different from other assets in terms of how they are used in exchange? Again, clearly not. All assets are used in exchange to some extent. Liquidity is a question of degree rather of kind. Treasury bills are used extensively in various transactions, so what is the "moneyness" of a Treasury bill? Tobin had some useful ideas about these things. Further, if we think about traditional notions about the relationship between inside and outside money and the "money multiplier," the multiplier is typically just an artifact of a binding reserve requirement, which is not relevant for thinking about the US financial system, even in normal times. The multiplier is an endogenous object, and can't be useful in answering any interesting question that I can think of.
"I wasn't banned from his site - I left it voluntarily after I put up a comment with no personal remarks linking to Krugman's famous 2004 posting that interest rates were about to go through the roof (this was via Felix Salmon, as I remember). This caused a fair amount of discussion, and Thomas deleted my original comment and all the discussion. Then when I put up a comment asking why on Earth he had deleted a rather reasonable comment, he deleted that. Maybe he has mellowed since I left. I somehow doubt it."ReplyDelete
To be perfectly honest, I simply don't believe this. It seems like a lie to me
Belief does not really matter. Either it's true or it is not. There is no good reason to doubt this person and call him/her a liar.ReplyDelete
You know, Stephen, you would be doing a great service to economists as well as the general public if you would finally answer the question asked of you many times, in many ways, how can we get inflation -- in the US, right now, in our current situation, with our current employment level, inflation level, etc. -- without also getting an increase in employment and real GDP.ReplyDelete
As if I'm not answering the question. You're full of questions, but you're not paying attention to what I'm telling you. Inflation is everywhere and always a monetary phenomenon. Take that and run with it.
Too cryptic. I, and I'm sure many others, would understand and be persuaded a lot better if you would go through the causal chain step by step, this leads to this leads to this, of how inflation would be increased now -- without also making employment and real GDP higher than they would be otherwise.ReplyDelete
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