Wednesday, October 5, 2011

Parsing Waldman (5): Selected Comments

Notes on some of the comments following Waldman's post.

In comment #8, JKH writes:

Helicopter money is definitely fiscal. It’s a negative tax with a particular profile, flat or whatever. You can use the central bank as the institutional conduit, but its deficit spending/financing.

May be. Hey, I've read enough remarks by JKH to know he's a smart guy. But still, who cares if you call it monetary or fiscal? Who cares what the label is? The important thing is what the policy accomplishes.

JKH continues:

Your proposal might work for consumer goods financing and credit card financing, but not for residential real estate financing.

That’s because real estate requires multi-year capitalization finance that cannot be replaced by pay as you go finance (e.g. helicopter drops). Consumers can save from past income to purchase HD TV’s much easier than they can do for houses.

Real estate financing and home ownership is the big problem.

I think JKH misses the point. Or, could be, I miss the point of Waldman's post because (as usual) I'm focused on my version of things.

But the point is this: In the pre-crisis economy -- call that the "normal" period, or "late normal" maybe -- we could do residential real estate financing, no problem. We could do it too well, actually, and that *was* a problem. The solution, the thing we should have done before it was too late, is, we should have limited some of that financing. We should have kept the bubble smaller. We should not have let it become a bubble in the first place.

To do that, do what Waldman says: "regulate and simplify banks, impose steep capital requirements, and relish complaints that this will 'reduce credit availability'." Okay, so we don't want to entirely "replace the macroeconomic role of bank credit with freshly issued cash." But we have to find a balance between base money and bank credit. There is an optimum balance, and we've been well beyond the optimum for a long time.

JKH is looking at the opposite extreme. He is looking at insufficient credit. But surely, if we take one step in the direction of "less credit use", we are not suddenly transported to that other extreme. As I said: JKH misses the point.

In Comment 16, JeffreyY writes:

I’ll try to get a handle on the likely sizes of payments:

Assume 2% inflation implies 2% annual money supply growth, in the long run. Before the recent crisis (Jan 2008), M1 was 1.38T ( I’ll assume that the crisis represents only a temporary increase in demand for money. So a 2% increase/year gives 27.6B/year. Divided among the U.S.’s 307M people, that’s $90/person/year. If you want a 4% inflation rate instead, it’d be $180/year. If you think the recent increase in money demand is permanent and also want 4% inflation, it’d be about $230/year.

Even at $230/year, the risk that people would start “living off the dole” seems small. Coming to rely on the payments would be more of a risk, but recall that the payments would only decrease when the economy was booming anyway, so it shouldn’t cause much hardship.

Worst case, $230 per year, per person. Certainly not enough to live on. Barely enough to notice. Not likely to cover anybody's mortgage payment for the month. I agree with JeffreyY that the payments would be small.

I have to say, though, Jeffrey and I come from two different times. He calculates the money increment based on how much inflation "you want". I don't want any inflation. I calculate the money increment based on how much economic growth we want.

A realistic, second-thought approach might allow for both inflation and economic growth. But I still say economic policy is not supposed to have inflation as a goal.

In Comment 18, BSG writes:

Steve – it seems that the problem your proposal is intended to solve is the one created by a debt driven economic system in which ever escalating levels of debt inevitably and invariably lead to destructive and disruptive inflation-deflation (boom-bust) cycles.

Maybe it would be better to eliminate the root problem to begin with...

Yeah, the "ever escalating levels of debt" thing. But it's not simply debt. It's the relation between debt and money, or between credit and non-credit money, or between money-you-have-to-pay-back and money-you-don't, along with the presence or absence of interest costs. It's the debt-per-dollar ratio.

Not sure BSG means what I think he means. But I think by "eliminate the root problem" he might mean "eliminate the use of credit". I say no. I say an economy without credit is a dark-age economy. I say using no credit is as bad for the economy as using too much credit. I say there is a sort of Laffer curve for credit use, and we must find the debt-per-dollar ratio that produces the best economic performance.

BSG also writes:

Longstanding experience with large scale money creation casts doubt on its sustainability as an on-going mechanism for wealth creation and distribution. You say you don’t know what makes fiat currency valuable, but I’m sure you know that regardless of what it is, it can lose its value quite quickly...

In other words: Printing money causes inflation.

Yes. But "credit-financed demand" also causes inflation, as Axel Leijonhufvud says. The goal, since we have gone to such an extreme use of credit, the goal today must be to very consciously print some money and use it as a replacement for some of the credit we use now. The goal must be to regain balance between money and credit-use. The balance we seek will be found at the debt-per-dollar ratio that produces optimum economic performance. We must balance the flexibility we gain by credit use against the drag arising from the cost of credit use.

And we must fight inflation by getting private debt paid off. Not by restricting money.

In Comment 48, Andy Harless writes:

My concern about this proposal is that it might lead to an excessive fraction of our output being devoted to consumption. In the short run (and even the medium run) that’s not a problem, because we’re going to be below full employment anyhow, so there will be resources left over for investment. But in the longer run, I would be concerned that, if the Fed operates by giving money to households rather than by bidding up asset prices, it is creating an incentive to consume rather than invest.

While the economy is underperforming, Harless says, printing money is not a bad idea. But when the economy is healthy again, he'd prefer to see the Fed "bidding up asset prices" rather than "giving money to households".

That's funny. I didn't notice anything in Waldman's post about "households"... Ah! The word is there *once* in his post. Waldman says the Great Moderation "levered and impoverished American households". Other than that, I guess Andy Harless accepts Waldman's view of policy as purposeful suppression of wage growth. I don't.

Anyway, if Andy Harless thinks the plan is to print money in order to "bid up" prices, then he is missing the point entirely. The idea -- in Waldman's words -- is "to replace the macroeconomic role of bank credit with freshly issued cash." (But not to replace *ALL* bank credit. Rather, to achieve balance between cash and credit.)

And if Andy Harless thinks putting down a few dollars of money and picking up a few dollars of credit-in-use will be inflationary, then Andy Harless is one of those people who leaves out "the influence on the price level of credit-financed demand".

In Comment 50, JP Koning writes:

SW: “But a central bank with liabilities in its own notes can never be illiquid, since it can produce cash at will to satisfy any obligation.”

Yes, but no. A central bank can indeed produce cash at will, giving it some semblance of infinite liquidity. But there’s no guarantee that the people on the other side of the transaction will forever take that cash. Especially if its relatively shitty money, which is essentially what you are setting out to create via free gifts and various accounting shenanigans (placeholder asset? C’mon…. Enron shoulda tried that one).

It is these naysayers – and there will be quite a few, given the layout of your scheme – who will eventually destroy the infinite liquidity of your central bank by asking for some sort of alternative form of payment than your central bank’s liabilities. Now the central bank can throw as much force (read: police with big guns) at the problem; a few bullets will coerce a few people some of the time to accept bad money. But in the end the problem of refusing bad money will be too big to police, no matter how much ammo you want to throw at it. Exchange is everywhere and all the time, you can’t stop it. Your central bank will go bust.

JP Koning quotes a line from Waldman that disturbed me as it does Koning. That's the line I had in mind when in Part Four I said that thing about "half-assed arguments, designed to sound good to people who are already liable to opt for such a plan."

However, the U.S. dollar has fallen much in value since the end of World War Two. And all that time, the quantity of money in circulation was being suppressed. And all that time it was credit-use that added to the demand that was causing inflation. And all the while, the cost of using credit was creating additional upward pressure on prices. It was not printing money that caused inflation. The use of credit caused inflation.

Koning, like everybody else, thinks printing money is the cause of inflation. This is the reason he misses the point of the Waldman post. Just like everybody else.

1 comment:

Jazzbumpa said...

Art -

The use of credit caused inflation.

That is a naked assertion, and I beg to differ.