Friday, 19 August 2011

Money Growth does NOT cause Inflation

Money Growth Does Not Cause Inflation! [As published in that hotbed of socialism, Forbes.com]

It is conventional wisdom that printing more money causes inflation. This is why we are seeing so many warnings today of how Quantitative Easing I and II and the federal government’s deficit are about to lead to skyrocketing prices. The only problem is, it’s not true. That’s not how inflation works. Hence, this is yet another of the false alarms being raised (along with the need to balance the budget) that is preventing us from doing what we need to do to recover from the worse recession since the Great Depression.

Explaining inflation would be much simpler if not for the need to first spend so much time debunking the popular view. But, that’s the way it is. And so, let me start with the “money growth ==> inflation” view. This is based on the equation of exchange:

MV = Py

where M is equal to the supply of money, V the velocity of money (or the average number of times each dollar bill is spent), P the average price of goods and services, and y the total quantity of all goods and services sold during the time period in question. Thus, if there were 100 goods and services that sold for $10 each (on average), then that means a total of $1000-worth of transactions took place. Were there 200 one-dollar bills in this economy, then it must be that each was used 5 times (hence the “velocity” of money, or how fast they were spent again).

MV = Py 200 x 5 = 10 x 100

It is important to note here that the above is not the least bit controversial. No economist disagrees with the basic equation MV=Py. The arguments arise when additional assumptions are made regarding the nature of the individual variables. For example, this is what is assumed in the “money growth==>inflation” view:

M: That which is money is easily defined and identified and only the central bank can affect it’s supply, which it can do with autonomy and precision.

V: The velocity of money is related to people’s habits and the structure of the financial system. It is, therefore, relatively constant.

P: The economy is so competitive that neither firms nor workers are free to change what they charge for their goods and services without there having been a change in the underlying forces driving supply and demand in their market.

y: The economy automatically tends towards full employment and thus y (the existing volume of goods and services) is as large as it can be at any given moment (although it grows over time).

Now let’s go through an example, recalling the mathematical example from above:

MV = Py 200 x 5 = 10 x 100

Consider the assumptions made regarding each of the variables. P can’t change on it’s own, y is already as large as it can possibly be given current technology and resources, and V is constant. Only M can change in the short run and it must therefore logically be the starting point of any fluctuation we introduce. Furthermore, according to our assumptions, the central bank has the power to (for example) double the money supply at will. In Milton Friedman’s example from “The Optimum Quantity of Money,” a helicopter is used to accomplish this. Now what happens?

MV = Py 400 x 5 > 10 x 100

There is clearly a problem here which could be solved in one of three ways (assuming we don’t just lower M back to 200): 1) y could rise to 200, but of course it can’t because it’s already at its maximum; 2) V could fall to 2.5, but it is constant (something Friedman takes pains to emphasize in the original article); or 3) P could rise to 20. It is of course the third that proponents of the “money growth==>inflation” view say will occur.

MV = Py 400 x 5 = 20 x 100

Equality again!

Let me reemphasize why this is the only logical outcome. We have assumed that y and V are constant. Friedman says that y is constant at the level associated with the natural rate of unemployment, while V is indirectly related to agents’ demand for cash. When people want to hold more cash, V, the rate at which they spend cash, naturally falls, and vice versa. But, Friedman further specifies that V is relatively constant and so, therefore, is the demand for cash. Thus, when the central bank raised the supply of cash from 200 to 400, this meant that people were holding more cash than they wished to have in their portfolios. The Fed had created a situation in which the supply of money (newly raised) exceeded the demand (still at the original level). The result was that people, in the language of the “money growth==>inflation” view, rid themselves of excess money balances by spending that cash. They hoped to buy more goods and services but since, in aggregate, more did not exist, they only bid up their prices: money growth led to inflation.

This is this standard view. It makes for a great lecture in an intro or even intermediate macro class and I’ve done it many times (in fact, I just did it this week in my summer course). But the problem is that after the course is over, people only remember this:

increase M ==> increase P

What they don’t recollect are all the assumptions we made to get there! And not only are some questionable, they are downright inconsistent with other lectures we make in the very same class.

Take for example y. One need only look out the window to see that it is not currently at the full-employment and therefore maximum level. Hence, given this scenario:

MV = Py 400 x 5 > 10 x 100

there is no reason that this could not lead to the rise in y shown below as those spending their “excess money balances” actually cause entrepreneurs to raise output to meet the new demand:

MV = Py 400 x 5 = 10 x 200

This is, of course, the goal of the government deficit spending that so many economically-ignorant people are trying to stop right now.

In addition, there is a great deal of evidence that the velocity of money IS NOT constant. As one would expect, it tends to decline in recessions when people do, in fact, want to hold more cash. Hence, if we assume that the central bank undertakes the above policy during such a period (as we see today), the final result might be this:

MV = Py 400 x 2.5 = 10 x 100

Or it could be some combination of a rise in y and a fall in V–this would make perfect economic sense. Notice how the process of making the initial assumptions of this approach more realistic is making it far from certain that a rise in M leads to a rise in P, particularly during an economic downturn.

But that’s not the worst of it. There is actually a much more fundamental problem with the “money growth==>inflation” approach. Recall the original assumptions for M:

M: That which is money is easily defined and identified and only the central bank can affect it’s supply, which it can do with autonomy and precision.

What is “money” in a modern, credit-based financial system? Is it that stuff you carry in your pocket, the 1′s and 0′s of the electronic entries in your bank account, the available balance on your credit card, your checking account, your savings account? In practice, this question is so difficult to answer that economists actually offer several possible definitions, just in case! Suffice it to say that for present purposes, the idea that we can precisely identify the current “supply of money” in our economy is suspect. This by itself causes problems for operationalizing the above equation.

To make matters worse, the financial sector can create and destroy money without direct action by the central bank. Every time a loan is made, the supply of money increases. The bank is creating money out of thin air, with only a fraction of the total necessary to have already been in the vault as reserves. And when loans are repaid or there are defaults, the supply of money contracts. Hence, the private sector has a great deal of control over M.

But perhaps the real nail in the coffin of the “money growth==>inflation” view is this: the phenomenon that Milton Friedman identifies as key to the whole process, i.e., the excess of the money supply over money demand, cannot happen in real life. The irony here is that something else we already cover in the intro macro class makes this evident. How is it that the Federal Reserve increases the money supply? Remember that Friedman used a helicopter–indeed, he had to, for there was no other way to make the example work. This wasn’t just a simplifying device, it was critical, for it allowed the central bank to raise the money supply despite the wishes of the public. However, that can’t happen in the real world because the actual mechanisms available are Fed purchases of government debt from the public, Fed loans to banks through the discount window, or Fed adjustment of reserve requirements so that the banks can make more loans from the same volume of deposits. All of these can raise M, but, not a single solitary one of them can occur without the conscious and voluntary cooperation of a private sector agent. You cannot force anyone to sell a Treasury Bill in exchange for new cash; you cannot force a private bank to accept a loan from the Fed; and private banks cannot force their customers to accept loans. Supplying money is like supplying haircuts: you can’t do it unless a corresponding demand exists.

The bottom line is that the “money growth==>inflation” view makes perfect sense in some alternate universe where all those assumptions regarding the variables DO hold, but not here, not today, not in the United States of America in 2011. That’s not how it works. It’s a damn shame, I know, because it’s so simple and intuitively appealing and it would make controlling inflation really simple. But, if we are to develop useful policies then we need a model better suited to the way the modern financial system works.

There’s no reason to throw the baby out with the bath water, so let’s retain the equation. However, we need new assumptions with respect to M, V, P, and y:

M: A precise definition and identification of money is elusive in a modern, credit-money economy, and its volume can change either with or without direct central bank intervention. In addition, the monetary authority cannot raise the supply of money without the cooperation of the private sector. Because central banks almost always target interest rates (the price of holding cash) rather than the quantity of money, they tend to simply accommodate demands from banks. When private banks communicate that they need more reserves for loans and offer government debt to the Fed, the Fed buys it. It’s the private sector that is in the driver’s seat in this respect, not the central bank. The central bank’s impact is indirect and heavily dependent on what the rest of the economy is willing to do (which is, incidentally, why all the QE and QE II money is just sitting in bank vaults).

V: The velocity of money is, indeed, related to people’s behavior and the structure of the financial system, but there are discernable patterns. It is not constant even over the short run.

P: While it is true that factors like production bottlenecks can be a source of price movements, the economy is not so competitive that there are not firms or workers who find themselves able to manipulate the prices and wages they charge. The most important inflationary episode in recent history was the direct result of a cartel, i.e., OPEC, flexing its muscle. Asset price bubbles can also cause price increases (as they are now). The key here, however, is that P CAN be the initiating factor–in fact, it has to be, since M can’t.

y: The economy can and does come to rest at less-than-full employment. Hence, while it is possible for y to be at its maximum, it most certainly does not have to be.

A number of scenarios can be described based on this more realistic alternative and it would be nice to go through each. Unfortunately, as I suggested above, the big problem with this topic is that it takes to long just to reject the popular view! So, I’ll avoid the temptation to write a book here and offer just a quick example (maybe a future post can go over some other interesting possibilities).

As already mentioned, the most important inflationary episode in post-WWII history was that during the 1970s and early 1980s. From 1968 through 1972, consumer price inflation averaged 4.6%. Over the next ten years it was 7.5%. What happened? What caused this sudden and dramatic acceleration in prices? Did the Fed accidentally print too much money? As already explained, that can’t happen–you simply can’t raise the money supply above the demand. M did rise, however, and largely proportionally to the increase in P. This is a much more realistic story of those events.

As the price of oil skyrocketed, so costs of production rose for many, many US businesses. Because there is a lag between purchasing inputs and selling output, most firms have to borrow money (working capital) to bridge the gap. As the ripple effect of the OPEC price increases moved throughout the economy, the demand for cash by these businesses rose. Quite reasonably, private banks and the Fed did what they could to accommodate. These were fair requests on the part of US entrepreneurs. Loans were extended and government debt sold by the private sector to the central bank. This raised the supply of money. Therefore, the rising prices led to an increase in the supply of money and not the other way around. QE, QE II, and the federal government deficit cannot by themselves cause inflation.

And this is how it really works, at least until the Fed starts using helicopters for monetary policy.

SOURCE

51 comments:

Real Truth Online said...

Jesus, you are so fucking wrong I don't even know where to begin. If it MATTERED to prove it to you, I would, but you dont matter, because you're about as irrelevant as the sweat on my balls.

the_last_name_left said...

I didn't write it an economics professor did.

The writer's biog:

I am a Professor of Economics at Texas Christian University, where I have worked since 1987. My areas of specialty are international economics (particularly exchange rates), macroeconomics, history of economics, and contemporary schools of thought. During my time in Fort Worth, I have served as department chair, Executive Director of the International Confederation of Associations for Pluralism in Economics, a member of the board of directors of the Association for Evolutionary Economics, and a member of the editorial boards of the American Review of Political Economy, the Critique of Political Economy, the Encyclopedia of Political Economy, the Journal of Economics Issues, and the Social Science Journal. My research consists of over thirty refereed publications, two edited volumes, and one book (with another in process). I have also been lucky enough to win a couple of teaching awards.
==============

You can't prove it "wrong", that's why you don't bother to even try.

the_last_name_left said...

So tell us how the economics professor is wrong, Larry?

Larry, with no relevant expertise, says this expert (and anyone else saying the same thing) is wrong.

However, Larry believes those saying whatever fits with his own political views are right.

Fair enough, but don't pretend your commitment to right-wing economics is anything more than an expression of your politics - it certainly isn't a product of your objective expertise in economics.

By the same token, I refrain from insisting that I know the answers - I don't. I don't have much confidence in my ability economics-wise.

I am happy to concede that my view on economics is informed by my political views - I am inclined towards economics which support my leftwing politics.

This is in contrast to yourself, Larry, you seemingly have less economics education than I possess - yet you are insistent and dogmatic that your views are "correct".....even to the point of dismissing an economics professor pointing out the simplest of problems with your own beliefs (which you cannot refute, and refuse to attempt - even though you insist otherwise).

What is the extent of your education in economics? Clearly it isn't very extensive - you're a counsellor, not an economist.

So don't go giving me lectures on economics, eh?

Real Truth Online said...

"So tell us how the economics professor is wrong, Larry?"

Are you saying EVERYONE who speaks about economics is RIGHT? Let me ask you something: How many seconds did it take you to type in the words: "Increase in money doesnt cause inflation" into the google search bar and find this story? About 3 seconds?? I bet you read about ONE paragraph of it before you pasted it to your blog. How accurate am I?

Ron Paul is an expert on economics TOO, but you blow him off like he knows NOTHING.

the_last_name_left said...

Ron Paul is a politican and a OB.GYN.

He is no more an economist than I am.

You insisted this professor of economics was wrong. You just won't say why you believe it.

I think RP is wrong because his prescription is so damaging - for employment, for public healthcare, for civic society, for public education, for regulation, for the environment, for most anything one can think of......

Real Truth Online said...

and you wont answer these questions:

Let me ask you something: How many seconds did it take you to type in the words: "Increase in money doesnt cause inflation" into the google search bar and find this story? About 3 seconds?? I bet you read about ONE paragraph of it before you pasted it to your blog. How accurate am I?

Or am I "spamming" again?

the_last_name_left said...

Silly questions, Larry, and you seem to have forgotten that you said "you are so fucking wrong"......and that I then asked if you would "tell us how the economics professor is wrong".

The point is not that he's a professor and therefore absolutely must be right. [Although on the matter of the equation, it should be an objective fact whether he is correct or not]

Maybe he is, maybe he isn't.

Seems to me he is correct.

You won't say why you believe he isn't.

Well, ok, but you are happily accepting Friedman's view then - the one disputed by the professor/writer in this piece.

=====

Friedman was big chief in the "Chicago School", and Pinochet's Chile.

I imagine you would normally be quite opposed to Friedman. I imagine you'd usually deride him as a "neo-liberal". Just saying...

Incidentally, I notice that Larry wrote this in Jan 2011, about Chicago: ".. the people of Chicago are complete morons."

That's some serious stereotyping. lol.

the_last_name_left said...

"How many seconds did it take you to type in the word..."
=====

I didn't - i had it bookmarked from previously. Of course I read it. I posted it because I think it's a very straightforward but powerful argument (that money supply increases do not invariably cause inflation - that increases can raise employment and production esp. during recession.)
====

I think the article is well positioned for inclusion here - it's standard economics, with equations (woo!), but at a level most anyone can understand.

I think it illustrates some of the issues with economics too - how assumptions play such a major part.

I think that's part of what I found so dislikeable about economics - demand and supply graphs are fine.....but it quickly progresses to something more akin to bad geometry (lines and tangents everywhere) and a very inelegant algebra.

How do you trust the numbers when you've made all the assumptions? And the more complicated the formulae and derivation, the further away from any reality you're getting.....but the further into your assumptions you're going. I found that very hard to take. May as well just deal with our assumptions, and leave the econs figure out the objective facts, if any - a super-dreary business to be in imo.

I think I was much more interested in the ideas side of it all - all those assumptions being made. The rest seemed incredibly dull (and dependent on the assumptions). But I've never been able to properly pin-down my issues with economics (which manifest as a vague and general unease and suspicion about the entire shebang) And moreover it's simply so incredibly dreary. It's the dullest subject I've encountered....with the greyest content......diminishing marginal utility blah blah blah.....ugh!

Here's a graph.....ZZZZzzzzzzzz

Show me the same graph about, say, starlight.....and I'd be fascinated.

I found philosophy, politics, sociology and socialism to be far more stimulating than economics - and far less rigorous, I suppose. But I've always had my head in the clouds and have always found the whole thing about money and its pursuit to be a grubby affair.

Anyway, yes, I did read the article before posting it - I have read it a number of times (to get it clear in my head. You should try it.)

It seems nailed-on correct.

You say you don't think it is.

Fair enough.

But you won't say why......so...conversation ends, I suppose.

Real Truth Online said...

"Seems to me he is correct."

A socialist who ADMITTED that you are ignorant of economics? How would you know WHO is correct if you're ignorant about the subject??

Can't wait to see how you weasel around this question.

Ahhhhhh, yes---questions you DON'T WANT TO ANSWER are always "silly" aren't they? LOL

Real Truth Online said...

"I think it's a very straightforward but powerful argument (that money supply increases do not invariably cause inflation - that increases can raise employment and production esp. during recession.)"

LOL---yeah, how's that going so far? How is it raising production when thousands of jobs are being eliminated every single day and unemployment is rising and rising?? They say it's at 9.8%, but it's always higher than what is reported, because they are only going by unemployment CLAIMS, they do not even consider the ones umemployed who CAN'T file a claim.

The guys theory may SOUND good, but it's NOT what's actually happening.

Real Truth Online said...

I counted how many times you said "I think" in your last post:

FIVE

the_last_name_left said...

I say "I think" a lot because I want to make clear that it's my thought - my belief. I'm just trying to distinguish that from "fact", or from whatever anybody else says or believes.

I'm happy to admit my ignorance of economics. But my ignorance is relative, of course. Others are far more ignorant and far less willing to admit it.

I say I am ignorant despite my background and education (in finance, economics, banking, accountancy.) Other people, without even the background and education I have, believe they possess some expertise.

Fine. I'm not surprised at all.

L: A socialist who ADMITTED that you are ignorant of economics? How would you know WHO is correct if you're ignorant about the subject??
-----

Well, exactly. The layman has to trust the expert. I'm prepared to admit my ignorance, but still.....I can choose my expert, and one whose views reflect my own. Just like you do. Right? Or are you saying you got to Ron Paul simply because of your investigations into economics? I doubt it.

Only once you can properly explain to me the transformation problem in Marxism would I believe your grasp of economics equalled my own. My professed ignorance has a context - it's relative as well as absolute.

I know very few people who have the grasp of economics I do. That sounds pretty la-dee-dah.....but you're deriding my ignorance......when most everyone else is even more ignorant. Including yourself.

But it's easy to pretend otherwise, isn't it?

I don't make any great claims for my understanding of economics (or anything else) but it is what it is. If I am ignorant of economics and banking and finance and accountancy, then the general public is just more so. Fact. That isn't to make any great claim for myself, rather it's an objective (critical) assessment of the general public's financial education.

Quite simply, fellow citizens whom profess far more expertise than I possess very rarely have it. fact. It's a general criticism, one you wish to deride me for. But what about your own ignorance? You won't even admit to it.

You claim to loathe dogmatism - in Christianity, for example. Yet your belief in a particular set of economic assumptions is based on no special expertise but rather fits your wider political/ethical view - and you are absolutely determined it is the correct view.

Rather dogmatic, no?

And based on what? It's based on no expertise in economics.

Kinda scary.

Personally, I got to Marxism through materialism and ethics, I think. Certainly not economics. I don't care for the "iron laws" of Marxism - the analysis is fundamentally correct - and that's what I do care about. I really do believe that materialism implies socialism. That human descriptions to properly account for it fail seems a reasonable thing to expect. That Marx's equations to substantiate socialist materialism in detail are "wrong", or problematic....a la transformation problem.....well, who cares? I do care, actually, but I don't see that it's so critical to the entire scheme because I have a greater commitment to materialism and socialism than I do to Marx and any of his equations (let alone anyone else's.)

L: "How is it raising production when thousands of jobs are being eliminated every single day and unemployment is rising and rising??"
------

Simply spending money isn't enough, obviously. There are an infinity of ways one could spend money, some more productive than others.

The bank bailouts are not really stimulus, they're a separate thing. Stimulus / spending should be labour based, and it should put money in the pockets of the poor. The bank bailouts are nothing of the sort. There should be a general shift of resources towards the poor - the bank bailouts don't do that at all, rather they maintain the system which is supposed to produce the resources over which we can argue the spoils.

Real Truth Online said...

"Right? Or are you saying you got to Ron Paul simply because of your investigations into economics? I doubt it."

NO. Im saying Ron Paul's views are in direct agreement with the stances of the founding fathers. How can an economist defend the Fed, when the founding fathers were vehemently AGAINST central banks??

the_last_name_left said...

Well, the founding fathers weren't perfect presumably.

I think it's a bit naive to imagine just getting rid of a central bank solves all the issues. It surely doesn't.

the_last_name_left said...

This founding fathers thing......not only is it some reverential mysticism (akin to the worst of any Stalinist personality cult) it's also implicitly asserting the founding fathers knew all the answers to all the questions of 2090, or 3050 or whatever.

What if they didn't? What if they didn't include something in their sacred dispensation you call The Constitution?

Like the Constitution entitles you to a semi-automatic machine gun but not a helicopter gunship. ......

Real Truth Online said...

"This founding fathers thing......not only is it some reverential mysticism (akin to the worst of any Stalinist personality cult) it's also implicitly asserting the founding fathers knew all the answers to all the questions of 2090, or 3050 or whatever."

Another stupid comment. I've heard this bullshit before. The old "The Constitution doesn't apply now in 2011 because there's so many issues they couldn't have foreseen".

BULL.

I'll give you one example people routinely give as to why the Constitution is outdated, but would be wrong. They say we need to alter the Constitution because of terrorism, because the founders didn't foresee terrorism.

BUT, what they FAIL to realize is, the founders DID address this is a non-direct way. They said we should trade with other countries and not form entangling alliances.

Now, if we HAD listened to this instruction, we wouldn't be over there BOMBING them and creating enemies, hence producing more and more terrorists. In this case, the Constitution would have erased terrorism [at least terrorism against the US].

Real Truth Online said...

Once again, you ignored my question:

"How can an economist defend the Fed, when the founding fathers were vehemently AGAINST central banks??"

Oh that's right. I'm spamming again.

socrates said...

Wingnut conspiracy freaks rarely understand why they aren't responded to too often. They don't realise they debunk and expose themselves without much if any need of rebuttal.

Real Truth Online said...

"Wingnut conspiracy freaks...."

Like YOU? [JFK, chemtrails]

"...rarely understand why they aren't responded to too often. They don't realise they debunk and expose themselves without much if any need of rebuttal."

Ahhh, really? That's why YOU "don't feel the need" to debunk us. Or maybe it's because you can't? And in my case, you never have.

Give me an example of a time I "exposed myself" in any of my stories? Hmmm, can't think of ONE huh? As usual, wingnuts like you LOVE to make the accusation, but cannot provide ONE example.

socrates said...

Sorry, I'm not much into feeding trolls.

the_last_name_left said...

Larry, here's just one very clear example where you have been proven wrong:

Larry lies about Dick Cheney

the_last_name_left said...

Where in the constitution does it prohibit a central bank?

It doesn't. If it did, the Supreme Court would have said so. It hasn't.

Ineterestingly, in regards to LArry's position on economics, money supply and inflation, and central banks.....here's a note from the Congressional background paper on the FED:

"Federal Reserve monetary policy is also the key determinant of inflation. It is well known that, among other economic effects, inflation can adversely affect savings, distort investment decisions, and be used by government to enhance its tax revenue and reduce its real debt. Inflation works to distort the signals of the price system, the signaling mechanism of a free market economy. Partly for this reason, recent research has shown that higher inflation is associated with lower economic growth. Accordingly, the only lasting contribution monetary policy can make toward fostering long-term economic growth is to promote price stability. Consequently, there is a growing consensus among experts that price stability should be the key objective of monetary policy."
-----------

Well, there you go Larry - whilst you pretend otherwise....your own belief about inflation caused by money supply is what the FED believes......ie it is the economic orthodoxy and has been for at least 30 years (Thatcher and Reagan).

the_last_name_left said...

From earlier this year:

"March 21, 2011|Bloomberg News

The Federal Reserve will disclose details of emergency loans it made to banks in 2008, after the U.S. Supreme Court rejected an industry appeal that aimed to shield the records from public view."
------

If the FED was unconstitutional, presumably the Supreme Court would have no authority to rule on its actions.....so....as they did so, it implies the FED is constitutional.

You are not the Supreme Court Larry. The Supreme Court IS constitutional.....as a constitutionalist you should listen to it.

the_last_name_left said...

McCulloch v. Maryland

This fundamental case established the following two principles:

--The Constitution grants to Congress implied powers for implementing the Constitution's express powers, in order to create a functional national government.
---State action may not impede valid constitutional exercises of power by the Federal government.

=====

Real Truth Online said...

"If the FED was unconstitutional, presumably the Supreme Court would have no authority to rule on its actions.....so....as they did so, it implies the FED is constitutional."

The FED is not even a government agency. It is an INDEPENDENT agency that does not answer to ANYONE, even Congress. Want the proof? Please say yes, so I can smoke your ass once AGAIN.

the_last_name_left said...

This has nothing to do with the objective economic point about whether money growth causes inflation.

But anyway, the FED is a legally constituted arm of government, albeit a quasi independent one.

It is subject to the regulation of Congress - they voted it into existence - they have authority over it.

If the FED didn't do what it does, some other agency would be required to do it.

You can pretend you can live in the same world Thoreau's Walden did, but that's an example of how out of touch you are, that's all.

=====

Stick to the point Larry - you were going to "school" me on how wrong that professor of economics was.......you have yet to even attempt it.

Instead, you just cling to your orthodoxy......claiming it is unorthodox....as if it hasn't been the orthodoxy these last 30 years.

It has - I was taught that same orthodoxy in the mid-late 80s.....monetarism....Thatcher...Keith Joseph...Hayek...and the other guy, whatshisface.....keith walters?

From wiki (accurate):

Thatcherism claims to promote low inflation, the small state and free markets through tight control of the money supply, privatisation and constraints on the labour movement. It is often compared with Reaganomics in the United States, Rogernomics in New Zealand and Economic Rationalism in Australia as a key part of the worldwide neoliberal movement. Nigel Lawson, Thatcher's Chancellor of the Exchequer from 1983 to 1989, listed the Thatcherite ideals as:

Free markets, financial discipline, firm control over public expenditure, tax cuts, nationalism, 'Victorian values' (of the Samuel Smiles self-help variety), privatisation and a dash of populism.
--------------

Don't try and make this into something about the FED and the constitution.

the_last_name_left said...

Only thing is.......and this happened AS I WAS STUDYING IT......the money supply figures starting diverging from the inflation figures.....and they ABANDONED the idea they were strictly related, evidenced by their continual changing of definition of money to whatever best suited whatever their theory said the right figure should be. They smudged it, over and over, until eventually the idea was largely abandoned, except "in theory" and in common understanding.

What gauge of money supply did Thatcherism follow?

YOU TELL ME?

the_last_name_left said...

Thinkers closely associated with Thatcherism include Keith Joseph, Enoch Powell, Friedrich Hayek and Milton Friedman.

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Now, you can say that's crap.....but it'd be you talking crap.

From wiki again:

in 1945 the Conservative Party Chairman Ralph Assheton had wanted 12,000 abridged copies of The Road to Serfdom (a book by the anti-socialist economist Friedrich von Hayek later closely associated with Thatcherism), taking up one-and-a-half tons of the party's paper ration, distributed as election propaganda.

--------------

Now, who is that Hayek was close to, intellectually?

Mises.

Who is Ron Paul close to intellectually?

Mises and Hayek.

Stitch that?

Moreover:

Thatcherism is often described as a libertarian ideology. Thatcher saw herself as creating a libertarian movement, rejecting traditional Toryism. Thatcherism is associated with libertarianism within the Conservative Party, albeit one of libertarian ends achieved by using strong and sometimes authoritarian leadership. Andrew Marr has called libertarianism the 'dominant, if unofficial, characteristic of Thatcherism'. However, whereas some of her heirs, notably Michael Portillo and Alan Duncan, embraced this libertarianism, others in the Thatcherite movement, such as John Redwood, became more populist.
-----

You like to paint the last 30 years as socialist or Keynesian......whereas your own intellectual roots are responsible - your icons and heroes have held the reins of power, nobody else's.

the_last_name_left said...

The Mises Institute says of Hayek:

"Hayek is undoubtedly the most eminent of the modern Austrian economists.....protégé and colleague of Ludwig von Mises"

---------

Austrian economists.......Ron Paul follows Austrian economics.....that means Mises....Hayek...Friedman....Lew Rockwell.

Interestingly they also say this about him (and Keynes/Keynesianism):

"Hayek and Keynes had sparred in the early 1930s in the pages of the Economic Journal, over Keynes's Treatise on Money. As one of Keynes's leading professional adversaries, Hayek was well situated to provide a full refutation of the General Theory. But he never did."
-----------

Well, hardly a surprise they lost the argument when their greatest advocate didn't "provide a full refutation of Keynes' General Theory".

LOL. Some regrets there then, perhaps?

So don't pretend your ideas are "new", or that they're significantly different to what has passed over the last 30 years.

You just want to administer MORE of the same poison.....because if we imbibe even more poison it somehow becomes medicine? Like economic Chemo?

Hmmmm.

the_last_name_left said...

wiki:

"Thatcherism is associated with the economic theory of monetarism. In contrast to previous government policy, monetarism placed a priority on controlling inflation over controlling unemployment.

***************According to monetarist theory, inflation is the result of there being too much money in the economy. *********

**********Thus the government should control the money supply to control inflation.*********"


=================

OK?

Thatcher was elected in 1979. Reagan in 80.

Both professed the same idea you do about money supply and inflation - they both sought to reduce public spending, reduce national debt, reduce the size of government, lower inflation (by controlling money supply). Both attacked union laws, weakening collective bargaining, pension rights, blah blah blah.

All the same stuff you want - only you want even more. You're a super hard-line Reaganite, or Thatcherite.

Thatcher said (Blair's) New Labour was her greatest achievement.

She meant she'd turned Labour to rejecting Keynesianism.....in favour of monetarism and what became to be known as "neo-liberalism".

That's what happened across the last 30 years.......the things YOU now want. The only difference is, you want those things EVEN MORE - you ideally wish for the complete destruction of any government social program and the abolition of of taxes. And the removal of a lender of last resort and regulator of the currency and finance. Along with industrial regulation, state-schooling, social healthcare.....

You support all that and yet you've scarcely a clue about it all.

the_last_name_left said...

You rage against communist revolution......and yet it is you opposed to democracy, not communism.

You insist nobody should interfere with your life yet you're agitating to completely abolish a social democracy which has a lot of public support, and has a lot of very greaty achievements.....because you insist your philosophy is correct....and should be made real.

No matter that most people clearly do not agree.

Your economic beliefs are extreme.

Your views stand in direct opposition to what many people want - the insurance of state education, state healthcare, state-pensions, state unemployment, state-housing....etc.

Your views represent what the European rioters have been protesting against. They don't stand with you, Larry.

They riot because their leaders introduced policies far less extreme than those you (and Ron Paul) support.

They did it in the 80s too. Another refutation of your view that your own views are somehow novel rather than orthodox.

You're only unorthodox insofar as you support a very extreme version of Thatcherism/Reaganism - and a completely American one.

You don't have a world-view......you want to withdraw from it. Isolationist, in thought and deed.

Have you ever been outside of USA, Larry?

the_last_name_left said...

The Medium Term Financial Strategy
==========

The Strategy, issued in the 1980 Budget, consisted of targets for reducing the growth of the money supply in the following years. After overshooting many of these targets, the Thatcher government revised the targets upwards in 1982. Analysts have interpreted this as an admission of defeat in the battle to control the money supply. The economist C. F. Pratten claimed:
Since 1984, behind a veil of rhetoric, the government has lost any faith it had in technical monetarism. The money supply, as measured by £M3, has been allowed to grow erratically, while calculation of the PSBR is held down by the ruse of subtracting the proceeds of privatisation as well as taxes from government expenditure. The principles of monetarism have been abandoned.
===================

WHY DID THEY ABANDON THEM IF THEY WORKED SO WELL??????

the_last_name_left said...

Critics of Thatcherism claim that its successes were obtained only at the expense of great social costs to the British population. Industrial production fell sharply during Thatcher's government, which critics believe was the reason for increased unemployment during her early years as prime minister. There were nearly 3.3million unemployed in Britain in 1984, compared to 1.5million when she first came to power in 1979, though that figure had fallen to some 1.6million by the end of 1989.
When she resigned in 1990, 28% of the children in Great Britain were considered to be below the poverty line, a number that kept rising to reach a peak of 30% in 1994 during the Conservative government of John Major, who succeeded Thatcher.[36]
While credited with reviving Britain's economy, Mrs. Thatcher also was blamed for spurring a doubling in the poverty rate. Britain's childhood-poverty rate in 1997 was the highest in Europe.[36]
During her government Britain's Gini coefficient reflected this growing difference, going from 0.25 in 1979 to 0.34 in 1990.

the_last_name_left said...

GINI kept rising......under New Labour it fell a little...only to start rising again.

It's .36 now.

USA is 0.4 - on a par with Mexico.

The policies you advocate would only raise it, right, Larry? That's what you want? No social programs - no redistribution - it's a jungle, man......right?

the_last_name_left said...

A small proportion of the [UK] population, 1.2 million, has earnings above £1,500 a week. [2009]

===

wow.

And the solution is less government and no social program?

Right.

the_last_name_left said...

Sorry, you have to be crazy - and a monster - to advocate such a thing.

the_last_name_left said...

How to cause a riot.......vote for Ron Paul.

the_last_name_left said...

Right......we've just seen how under the Thatcher govt. they failed to control the growth in money supply.

However.........here are the inflation figures for the 1908s.....with the preceding 70s figures (the oil crisis)

1989 7.8% 1.9
1988 4.9% 2.0
1987 4.2% 2.1
1986 3.4% 2.2
1985 6.1% 2.3
1984 5.0% 2.4
1983 4.6% 2.5
1982 8.6% 2.6
1981 11.9% 2.9
1980 18.0% 3.2
1979 13.4% 3.8
1978 8.3% 4.3
1977 15.8% 4.6
1976 16.5% 5.4
1975 24.2% 6.3
1974 16.0% 7.8
-=---------------



So........whilst money supply increased the inflation rate was coming down.....

MONEY SUPPLY INCREASED.......INFLATION CAME DOWN

Do you understand??????

Do you understand??????

Do you understand??????
Do you understand??????
Do you understand??????
Do you understand??????
Do you understand??????

the_last_name_left said...

the Chancellor of the exchequer Norman Lamont, said the ‘unemployment was a price worth paying to tackle inflation’
===============

At the start of 1980, the biggest problem facing the UK (and other countries) was cost push inflation. In the UK inflation reached over 20%. This was caused by:

Rising oil prices
Wage push inflation

The UK government aggressively tackled inflation. But, in doing so caused the severe recession of 1981. Unemployment shot up to 3 million and high unemployment persisted throughout the 1980s.
===========

TADA! Vote Larry!

He will treble unemployment. But it's for your own good! It's medicine you need! Hmmmm.

========
By the late 1980s, the UK economy was again experiencing high inflation. This time it was caused by high economic growth and demand pull inflation.

This boom was followed by another recession as the government sought to control the inflation it had caused.
----------

the_last_name_left said...

Seems clear that much of the failure of the post-war consensus in late 70s was because of the oil price shock, not the failings of supposed Keynesianism.

Without the stagflation caused by the oil crisis, would Thatcher and Reagan have taken power? Without the stagflation as an apparent justification for their economic beliefs, would their argument have been so successful?

Surely not.

If the oil crisis was perhaps the real crisis (and it wasn't one of failure of post-war consensus/"socialism"/Keynesianism)then we ought to be very careful atm when listening to anyone offering solutions geared to the last crisis, but especially those recommending a much more intensive version of the last 30 years - a la RonPaul.

the_last_name_left said...

wiki's basics on Reagan:

The four pillars of Reagan's economic policy were to:

-Reduce Growth of Government spending.

-Reduce Income Tax and Capital Gains Tax.

-Reduce Government regulation.

-Control the money supply to reduce inflation.

===========

William A. Niskanen, one of the architects of Reaganomics, summarizes the policy as "Reagan delivered on each of his four major policy objectives, although not to the extent that he and his supporters had hoped," and notes that the most substantial change was in the tax code, where the top marginal individual income tax rate fell from 70% to 28%
=========e/q

ah....socialism......30 years of it.....errrr....hold on? that's just not true, is it?

The so-called Thatcher and Reagan revolutions held it to be primary that they must

"Control the money supply to reduce inflation."

Neither did successfully manage it, but inflation fell.

Inflation fell....before picking up again towards end of decade as the decimation wrought by unemployment turned into frenzy of speculation as capital recovered and sought advantage from newly liberalised labour conditions (low wages, low benefits)

10 dreadful years and the end result was far greater inequality and another recession. And with a lower industrial base too and the great national assets sold off.

Freedom, right?

Real Truth Online said...

"It is subject to the regulation of Congress - they voted it into existence - they have authority over it."

Not according to Alan Greenspan, former FED chairman. Want the video of him ADMITTING the Fed answers to NO ONE?

"If the FED didn't do what it does, some other agency would be required to do it."

REALLY? Is that why the Fed came into existence by a group of men who met in SECRET in 1910 and they had aliases so no one would know who they were? The staff at Jekyll Island were even REPLACED for those several days the meeting took place to start the Fed. The bill to pass the Federal Reserve Act was snuck through Congress on December 23, while MOST congressmen were away for Christmas vacation. And you say another agency would be REQUIRED to do it, when they had to SNEAK the Fed into existence?

If the job the Fed does is REQUIRED, why the secret meeting to start the fed and why pass the bill during Christmas holiday when everyone was away? If it's REQUIRED, there would have been no need for secrecy, right?

the_last_name_left said...

I thought you'd ignore the last 30 years economic history and the facts of RonPaul's connection to "neo-liberalism", Mises and monetarism which has been dominant orthodoxy.

I thought you'd fail to attempt "schooling" myself and the Professor about inflation.

What you said is irrelevant. Address the topic, please. I don't care about your crazy ideas - this is about inflation and money growth and their relationship (which is demonstrably and historically NOT a direct relationship all times)

Real Truth Online said...

"What you said is irrelevant. Address the topic, please. I don't care about your crazy ideas"

What I said was in DIRECT RESPONSE to you claiming what the Fed does is REQUIRED. Now answer my question:

If it's REQUIRED, there would have been no need for secrecy, right?

Everything I said was FACT. Nothing "crazy" about it. The Fed Reserve Act WAS passed during Christmas holiday and the origin of the Fed WAS created in secrecy. It's not even something that mainstream people refute!

the_last_name_left said...

Larry, here's a point that needs addressing

During the 80s, in both UK and USA

---
"......whilst money supply increased the inflation rate was coming down.....

MONEY SUPPLY INCREASED.......INFLATION CAME DOWN"
----

And whilst Thatcher came into power saying much the same thing as you, the Tories had to abandon monetarism.....their idea was broken on the facts of reality - inflation came down as money supply increased. They didn't reduce the money supply, but nevertheless inflation fell (seemingly because the economy was coming from a low position (the recession the monetarists caused), and there was plenty of overhead to absorb increases in money supply)

As I said, this all happened as I was studying it AT THE TIME. I'm no expert - I am happy to concede it.....and you to mock it.

But where's your understanding of all that? What do you know about Thatcher and Reagan and how inflation fell even as the money supply increased? What do you know about supposed difference between Thatcherism and Ron Paul, and their direct intellectual relationship? What do you know about similar they look, how close to the Austrians they both profess to be, or how Thatcherism quietly abandoned it when reality refused to conform to their theory....

Absent all that, and absent any evidence you have any real understanding, then your comments mocking my economic ignorance apply more to yourself.

And note - I profess my ignorance, you your supposed expertise. Funny.

the_last_name_left said...

L: If it's REQUIRED, there would have been no need for secrecy, right?
=====

no. there's no reason that need be so.

Central banking and the institutional structure of finance and its regulation is irrelevant to the strictly economic question of whether money supply increases (always) cause inflation.

the_last_name_left said...

Well, of course you could go back to living in caves and using barter or force majeur instead.....and then yes, there'd be no need of FED or anything similar performing the functions the FED does today.

the_last_name_left said...

we can always go back to the issue later larry.

and there's simply no need for your issues with the FED to be addressed in this thread BEFORE you address issues over inflation re money supply - which is what the topic is.

You said the dude was wrong. You won't say why.

You also seem to have trouble even addressing the facts - that money supply grew in the 80s whilst inflation fell. That directly contradicts your assertions, and is a recent similar, relevant example.

Like I said - such is our economic ignorance we are left to trust 'the experts'.....and we can pick our experts.....invariably we pick the ones that say whatever we already think. Or we are persuaded by what they say, and come to believe it/support it.

But we, the general public are NOT economists. We don't spend our lives investigating theory and historic example, we don't even possess the language of economics.

So getting all assertive about it....demanding this that and the other....is a dangerous tendency.

There's no serious support for an extreme free-marketeering and privatisation approach.

But there is disappointment with Obama that he didn't do enough for a real stimulus (employment, investment, lowered defence spending).

If Obama had done more in keynesian mould, and leaned more to expansive social policy, likely he'd be more popular.

Real Truth Online said...

"Well, of course you could go back to living in caves and using barter or force majeur instead.....and then yes, there'd be no need of FED or anything similar performing the functions the FED does today."

So, from 1776 to 1913 was "caveman" days? Gee, I thought caveman days went back A LOT farther back than 1776! But, once again, you just rewote history to make your point. So, NOW you claim that the ALTERNATIVE way [from the FED] to deal with money and finance is bartering like in caveman days when we actually existed for 137 years as a country BEFORE the FED? What do you think we did from 1776 to 1913? Used Monopoly money? LOL

Are you on acid?

the_last_name_left said...

Fine, go back to 1776 then?

Address the topic, now?

the_last_name_left said...

Come on, Larry - address the actual topic?

I know you have your other concerns, but if you aren't going to address the topic don't get on your hobby horse.