As of late, Eric Lonergan has had negative interest rates in his crosshairs. Helicopter money is a much sounder policy, he says, and goes on to cite a single study “proving” a precise, positive, and unshakable link between tax rebates and spending. The same “proof” is not available for negative interest rates, he says, which will probably reduce demand anyway (see David Einhorn’s Jelly Donut).
As you can tell, I find his argument full of speculation. It is intelligent, well-reasoned speculation, but speculation nonetheless.
I recently debated with an Austrian friend about the causes of macroeconomic cycles. He argued that all macroeconomic distortions result from our unwillingness to let prices (including wages) adjust freely. According to this view, the Great Depression occurred simply because deflation was not allowed to work its way through the system.
Of course, I completely disagree with his position, but that’s not why I’m writing this blog. I’m writing because what stood out most from our conversation was the conversation itself — how almost ninety years after the fact we’re still fiercely debating what happened or didn’t happen or should’ve happened in the 1930s.
Is money expiration fair? Many first time readers of One Month Money have answered this question with a clear “no.” They claim that prohibiting money hoarding is fundamentally unjust, that since we earned our money through hard work we should do with it as we please — splurge, save, stick it under the mattress for forty years, whatever we want.
While I offer a number of counter arguments in the book, one approach was lost in the redrafting process, and it recently came up in a heated discussion with a former colleague. The key question is: why should money I earned forty years ago have value today?
After eight drafts of your book, an unsettling dread creeps up on you. Certain parts that once seemed genius now strike you as half-baked. Your writing is meandering and unstructured. You can spot the places where you resisted the urge to think deeply. You shove in quotes and calls to authority more than you should, all the while laughing obnoxiously at seasoned “experts”— never, ever forget the ironic quotation marks.
Why? Because, well, it feels pretty good to be a gangster.
James Montier, in his latest white paper, tries very hard to be a gangster. But he fails – miserably. I know because I’ve been there. In fact, I often go there. Even so, I know a huckster when I see one. And in his “exposé” on the “myth” of the natural rate, James Montier is nothing more than a charlatan.
In my last post, I wrote that Krugman was wrong to say that the Federal Reserve has no control over the money supply. In the comments section, the astute Barney Rubble pointed out that elsewhere on the blog I stated that central banks have limited control over the money supply. His comment is here:
I think it might be necessary to clarify the apparent contradiction….As in other posts you have mentioned the FED doesn’t have so much control….”In other words, if the central bank wants to boost the money supply from £1 trillion to £2 trillion, it could do so with ease. Today, the central bank does not have this control.”
So am I a hypocrite? No – at least I don’t think I am.
The bubbles foaming from Paul Krugman’s soapbox seem to have gone to his head. As Krugman now claims, the central bank is incapable of directly affecting the amount of money in the economy. All it can do is adjust the level of bank reserves. Whether these adjustments lead to changes in checking deposits is then left to fate and fortune.
He is wrong, clearly.
The Fed is terribly, horrendously, tragically wrong. Or so says David Einhorn.
According to Einhorn, the economy doesn’t need lower rates, but higher rates. Our current low rate environment encourages future retirees to save more, not save less. Raise rates, raise them now, and in short order we’ll see a surge in spending.
Einhorn, in theory, might well be right. But he might also be wrong.
A couple of weeks ago, Paul Krugman wrote a mini take-down of Post Keynesian economics. The tone was acerbic. Krugman was reacting to an excellent Lars Syll piece which claimed that Krugman was not a true Keynesian because his use of the Hicksian IS-LM model implies that the future is certain, while Keynes argued the opposite.
Krugman’s response was troubling.
Commenting on the recent spat between Larry Summers and Ben Bernanke over secular stagnation, Greg Ip from the WSJ wrote that Bernanke has the theory while Summers has the evidence. In fact, Bernanke has neither.