Thursday, November 25, 2010

This is too good to pass up!

From EconomicsJunkie:




Happy Thanksgiving


3 comments:

Gene Hayward said...

Gene Hayward here...I just read this on Steve Landsburg's blog...I like it simplicity but I am wondering about your take on it...I am looking for something VERY simple to give to my students (also for me to understand--I am having a mental block on some of the QE stuff going on. I know when something is presented this simplistically there are enough loopholes to drive a truck through, but again,I am looking fo r a starting point for my students...Any input would help! Thanks...http://www.thebigquestions.com/2010/11/18/qe2/

The Arthurian said...

Gene,

Landsburg's second Q
They’re paying down the debt? I thought they were buying bonds.
and A -- It’s the same thing -- is not a simplification. It is a complication.

At ft.com Gavyn Davies writes, The Fed statement just released indicates that the central bank intends to purchase a net total of $600bn of longer term Treasury securities...

To me, this is simple because it is a plain statement of the Fed's plan. The Fed does not plan to pay down the debt. It plans to buy longer term securities.

The way Landsburg puts it -- paying down debt -- is an interpretation of what the Fed is doing. Actually, I like it. For me, it provides definition for Milton Friedman's phrase "monetizing the debt." And it works with Allan Schmid's interpretation of QE2, which was useful to me. I think I can use Landsburg's interpretation in an upcoming post myself. (Thanks!)

But all of that, in my view, is a complication. The simple fact is, the Fed is buying longer term securities.

Why longer term?

According to Krugman here and point 3 here, the Fed wants to push down longer-term interest rates.

Why? Apparently, the Fed thinks interest rates are too high, long-term rates, and they want to lower them more, so that people will borrow more.

I think that's crazy. I think the economy gave way under the weight of debt. I think debt must be reduced. I think any plan that helps reduce debt is a useful plan, and any other plan serves no good purpose at this time.

The Arthurian said...

[part 2]

The bigger part of Landsburg's post is dedicated to the value of the dollar and how the value is reduced by the creation of additional dollars. This is a pretty good simplification of a wrong-headed notion.

Landsburg explains: When the Fed buys Huey’s bond for a dollar, Huey goes out to buy a blueberry muffin. This (ever so slightly) bids up the price of muffins and so (ever so slightly) reduces the value of everyone else’s money.

In other words, increased demand causes prices to go up, and the increased money allows increased demand to happen. Yeah, that's one version of the cause of inflation. It's the version described by Milton Friedman and Anna Schwartz, who saw it in the 1950s and wrote of it in the 1960s, when it was still the dominant cause of inflation. See my items 4 and 4b here.

Due to our increasing reliance on credit, rising interest costs have been embedded in prices throughout the economy. This embedded cost of interest is the driving force behind "cost-push" inflation. Profits are squeezed. Prices are increased because costs have increased. You can see it here and here and here.

I described the cost-push mechanism here to no avail.

Prob'ly not the "any input" you were hoping for...

Happy Thanksgiving, Gene.
Art