Euro: 4.77% vs. prior 4.79%; Dollar: 3.03% vs. prior 3.19%; Sterling: 5.84% vs. prior 5.88%
It sure is nice to see these rates continue to move in the right direction.
Euro: 4.77% vs. prior 4.79%; Dollar: 3.03% vs. prior 3.19%; Sterling: 5.84% vs. prior 5.88%
It sure is nice to see these rates continue to move in the right direction.
The rates are changing, but what is the word on the street about banks actually lending each other money?
Basic economics: As the supply of loanable funds increases, the price for loanable funds decreases, and the demand for loanable funds sets the clearing price. Works for styrofoam cups, lumber, and washing machines. Works for money as well.
The Keynesian comes along and says well if low prices are good, lower prices must be better, and thus directs the lender of last resort to lower interest rates respective of demand. Producers are misled into believing there is more wealth in the economy than there actually is. A bubble of economic activity develops that distorts the structure of production in its favor. Resources are pulled from all ends of the production chain and prices begin to rise. The bubble activity, not supported by the pool of real savings to begin with, requires ever larger infusions of artificially cheap credit to be sustained at the inflationary prices. Eventually, economic reality asserts itself as creditors are no longer willing to lend and consumers are no longer willing to buy. The bubble collapses, the pool of real savings begins to refill, and capital flows back to sustainable, wealth-generating activities.
Unless, that is, the Keynesian happens along and says well, look at all this perfectly good stuff and all these workers lying around. Something must be done! And so the central bank must lower interest rates, the government must print money to finance public works, and on and on and on.
Byzantine, since you clearly aren’t a Keynesian, wouldn’t it be more legitimate to find an actual Keynesian to quote rather than to produce this sort of strawman? My level of expertise doesn’t go beyond undergraduate non-major, but even at that this doesn’t strike me as an accurate depiction of Keynesian policy. And while I’m at it, you’re using this statistic as a coatrack.
C. Wingate,
Perhaps you could scan for punctuation as well. I may have included a couple of extraneous commas.
But, if you insist, it just so happens Krugman’s touting the [url=http://www.nytimes.com/2008/10/31/opinion/31krugman.html?_r=2&oref=slogin&pagewanted=print&oref=slogin]same old Keynesian snake oil[/url] this very day.
Byzantine: I’m no Keynesian, but I agree with C. Wingate that your comment #2 offers a caricature of Keynesianism.
“The Keynesian comes along and says well if low prices are good, lower prices must be better, and thus directs the [central bank] to lower interest rates respective of demand” —Byzantine [#3]
If this were true, then Keynesians would always support the loosest possible monetary policy/
But that’s not the case. Indeed, during the Keynesian heyday of the 1950s and early 1960s, the Federal Reserve Board (under William McChesney Martin’s leadership) did a good job of maintaining price stability.
Another basic flaw of Keynesianism: prices are supposed to reflect supply and demand, not a chimeral “stability.” In order to attain this stability, Keynesians urge central bank manipulation of the rate of interest, i.e., the clearing price for loanable funds. Any manipulations of the supply-demand curve create distortions, which are subsequently corrected by economic reality. The Keynesians sees these corrections as calamitous recessions, and so call for more of the same policies that created the distortions in the first place. It doesn’t work. It’s never worked. But it will get you a shiny medal and a check from the Swedish central bank.
Well, um, yeah. I’m only a Keynesian on Tuesdays and Thursdays, but it seems to me that Krugman’s analysis makes a heck of lot more sense than yours does. And after all, one ought to keep in mind that Keynes’s analysis arose out of the observation that monetarist techniques didn’t work in the early 1930s. You may want to call the prescription “snake oil”, but as a layman looking from the sidelines, I’m inclined to call all the solutions “snake oil”, on that basis. The truth, it seems to me, is that macroeconomics is not something that can be teased out as a separate science, and that the psychology of the actors is so important as to defy the kind of strictly numerical approach beloved of classicists and Austrians.
Also, I would take issue with your analogy between cups and dollars. A styrofoam cup is a means to a drink, and also a means to not having to wash dishes. The market in cups, like that of any other material commodity, is based in a flow from production, to distribution, to purchase, to usage, and finally to disposal. Money isn’t that sort of commodity; it is not produced and consumed in the way that cups are. Money comes into existence when a bank writes a check for a loan, and it is consumed when money lent disappears into bankruptcy. But when one talks of loanable funds, one source thereof is indeed loans themselves; the borrower deposits the check, and now his bank has more funds to lend. There is a circularity to the price of money that there is not in the price of cups, so I think it needs to be demonstrated rather than presumed that cups are a good model for dollars. One could indeed say that macroeconomics as a field exists because the model breaks down on a large scale.
Byzantine, calling them “distortions” begs the question. They’re only distortions if there is some norm from which to measure an undesirable deviation. But since the dispute is apparently between controlling or not controlling, you seem to be presuming that not controlling produces better results. Well, what’s the yardstick? I don’t think the question is answerable economically! Some other standard has to be applied to the outcome, like human suffering, for example. If you like the consequences of nice, steady economic growth with stable prices, then I think the only rational arguments are either that what they did in the 1950s was good policy, because that was the outcome; or that what they did in the 1950s wasn’t bad policy, because in “reality” the prosperity of the period was not positively influenced by those policies. To argue that it was bad policy, you need to show an adverse consequence.
Wingate,
The Austrians are not econometrists. In fact, they explicitly reject mathematical equations on the grounds that the economy is not a formula. Rather, it is a computer that is constantly being fed new data.
Also, money is a commodity like any other. It is unique only in that it is the commodity in universal demand, and therefore exchangeable with other commodities. It’s actually just a stand-in for anything you make for sale, except instead of the cobbler trading shoes to get meat from the butcher, he trades money.
At the bottom of it all is a very simple mantra: you have to save before you can produce, and you have to produce before you can consume. Of course, this means low tax rates and balanced budgets, which thwarts the bold, visionary schemes of people like Krugman.
The 1950’s was a good era for the American economy because the Republicans finally managed to junk most of Roosevelt’s schemes and the workforce tied up in government employment during WWII was released to the private sector. We were also able to keep the steel industry out of Truman’s hands. Also, Europe had been used as a bombing range the decade before, so we had little competition.
“The 1950’s was a good era for the American economy” —Byzantine [#12]
That’s irrelevant to whether Keynesians have a fatal urge wish to “lower interest rates respective of demand.” Inflationary monetary policy can wreck even a healthy economy.
_ _ _ _ _ _ _ _ _ _ _
“Another basic flaw of Keynesianism: prices are supposed to reflect supply and demand, not a chimeral ‘stability'” — Byzantine [#8]
“Price stability” is a shorthand way of referring to a low, nonaccelerating rate of inflation. It refers to the general level of prices, not (as you seem to think) the price for particular goods or services.
Alan Greenspan, who likes the term “price stability,” says you have it when people “no longer take account of the prospective change in the general price level in their economic decision-making.”
“Price stability†is a shorthand way of referring to a low, nonaccelerating rate of inflation. It refers to the general level of prices, not (as you seem to think) the price for particular goods or services.
But the price index is made up ONLY of particular goods and services, which I’m sure we all agree can only be set rationally by the market process and not by a central committee. It follows that nobody–not even a roomful of Federal Reserve employees–can know what the aggregate price level “should” be.
And Greenspan’s axiom is incoherent. Supply and demand are unavoidably dynamic, so prices are always going to change. Any efforts to set prices can only lead to malinvestment. Greenspan and his buddies no more know what prices or the rate of interest should be than the old Soviet politburo.
I cannot resist the temptation to rely that the word “mantra” tends to imply an article of faith rather than proven principle. Besides, it seems to me to be vacuous: save what to produce what?
I was a bit obscure when I said “strictly numerical”, so permit me a clarification. Calling the economy a computer is exactly what I meant by “strictly numerical”. Computers, after all, do it all by the numbers. But the computer metaphor carries with it the implication that what is going within it is algorithmic, quantifiable, and deterministic. The perversity of real computers arises mostly from two human frailties: first, that programmers make mistakes, and second, that software tends to become complex in its interactions beyond what human reason is capable of dealing with. Well. If one is going to talk about the economy as a computer, then it is necessary to concede that human beings are among the computational elements. Treating them as external inputs is somewhat acceptable on the microeconomic scale, but in the large, personal perception of the economy drives personal participation in the economy, so that interaction becomes part of the computation. And now as human irrationality and sinfulness are thus part of the process, I find it difficult to accept that its behavior can be treated as it were computational.
It also seems to me that you are continuing to assert without proof that money is like true material commodities. You haven’t responded to my explanation as to why I think it is not so, and indeed you’ve gone on to make more assertions about its character which I think are also not true. It is a simplifying assumption to state that money is in universal demand, but it is not so. And even then, that doesn’t have anything to do with what I said; we are still up against the problem that exchange, rather than consumption, is the ordinary fate of money.
Finally, there’s a limit to how interested in participating in a genuine discussion of 1950s’ economic policy. If nothing else, there seems to be rank disagreement over the facts between you and Irenaeus. What I do see, however, is that you a lot of explanations, but no proof for them. I’ve seen other analyses, for example, which consider the Cold War military expenditures as being in essence exactly the sort of governmental financial incentive that the Keynesians are supposed to hold dear, and all the better since defense is one of those things which it is hard to argue against using economic dogmas. What I do see is that somehow FDR and the Keynesians are responsible for whatever is wrong, and had no influence on whatever went right. I cannot but hear special pleading in this. I’m willing to accept that I don’t understand the thing fully; but failing to address things that it seems to me I do understand is a fatal blown to authority.
Wingate,
Let’s try it from the other end. In order to consume something, you have to pay for it. In order to pay for it, you have to first produce something for sale yourself. In order to produce something yourself, you must first have set aside savings to purchase the means of production. Nothing changes by virtue of the fact that you may accelerate your future earnings to the present by taking out a loan to purchase the means of production. In that event, you are simply using somebody else’s savings.
The basic problem with the US economy is that in addition to the pool of real savings, we create money out of thin air and loan it out: debt unsupported by prior savings. Economic activity that is reliant on this “funny money” is unsustainable without continuing injections of artificially cheap credit. This is what motivates the boom-bust cycle that the FRB is forever one phase behind.
Now, to money. Man originally dealt in direct exchange: I trade my grain for your arrowheads. The problem is I need to find somebody who needs grain and you need to find somebody who needs arrowheads. Barter economies are restrictive and don’t allow for very high living standards so early on, man figured out that he could facilitate trade by using a commodity in universal demand to enable indirect exchange. I can sell my grain for money to a butcher who needs to fatten his livestock in order to buy arrowheads.
Historically, this medium has been precious metals: they are durable, divisible, fungible, relatively scarce. Most importantly, all other things being equal, their supply cannot be increased beyond the pool of real savings, so they retain their purchasing power over time. An ounce of gold bought a fine suit of clothes in the Roman Empire. It still does.
In modern times, we use legal tender laws to make fiat dollars the medium of exchange. There are alot of problems with this but that’s another story so I’ll leave it. But whether we’re talking about pictures of dead presidents or gold coins (or vodka and cigarettes), the concept is the same: money is nothing more or less than a commodity in universal demand.
Byzantine, this goes back to an earlier exchange I had with someone (and it might have been you– I don’t want to take time to look it up) who didn’t understand that banks have to give and take interest in order to be businesses. Your statements here about fiat money are simply incorrect– not that fiat money doesn’t do some of what you complain about, but that fiat money isn’t necessary for those things to happen.
In order to produce things myself, I have to have the means of production– period. If what I’m producing is beans, and I own a farm free and clear, then by careful use of seed saving I can produce indefinitely without cost (more or less). I do not have to purchase that means of production, because there are other ways I can come by it, such as inheritance. So let’s say I want to branch out, so I decide to buy the neighboring cattle farm. I’ve saved up a bunch of money, which I keep at my bank (the only one in town, let’s say, because that will make things a bit more obvious). So I go to the bank, and they decide I am a good risk, and they write me a check for a loan, to be paid back with interest. I’ve done the math and decided that my current income, plus that of the cattle farm, are sufficient to pay the loan; for the sake of argument, let’s assume for now that the assumptions behind my calculations are going to hold, and maybe address later whether that’s going to be true. OK, so now I give the check to my neighbor, who is selling because he just doesn’t want to get up and milk the cows anymore. (Note, BTW, that this isn’t an economic decision; it’s a true external input.) He has calculated that he can live off the interest he’s going to get from depositing the proceeds of the sale into the bank– the same one I use, of course. He takes my check, and gives me the deed, and then goes to the bank and deposits the check. OK, so how much money is there now? Well, there’s more than was when we started! After all, if the bank is so willing, my neighbor could have passed the check to someone else instead of depositing it. As long as it’s serving as a financial medium of exchange, it’s money. Even when we were on the gold standard, this was still true. And yes, this “funny money” is dependent upon continued economic activity, but it isn’t reliant on government action to make it money. And that’s where there is a potential weakness in my scenario, because I’ve not really addressed whether the extra money generated by the loan affects my ability to pay it back, or my neighbor’s ability to live off interest. But unless you are willing to abolish capitalism, that’s part of the deal.
And again, you’re still dancing around the commodity issue rather than ‘fessing up to the issue that money isn’t consumed. Well, species money is, to a very limited extent. Silver is dug up, may be coined, and competes with coin as as a source of the element as a material; consumption of silver for jewelry or photography or mirrors likewise can affect the coin supply. But otherwise, silver and gold coins are not consumed by use. Indeed, I could as well make the argument that hard currency represents government interference in the gold/silver market, by fixing the value of the elements rather than letting the market make that determination.
“The basic problem with the US economy is that in addition to the pool of real savings, we create money out of thin air and loan it out”
—Byzantine [#16]
Any banking system has the potential to “create” money. It is not a quirk of so-called “fiat money.” Our banking system created money even when we were on a strict gold standard. Only crippling regulation can prevent a healthy banking system from creating money.
PS to #18 (adapted from an earlier thread):
This is the essence of banking. There is nothing sinister about it, nor does it result from any government-sponsored cartel. This is how banking worked before governments regulated banks. You can see it in the laissez-faire Scottish banking system praised by Adam Smith. This system had free entry, no monetary policy, and virtually no government regulation.
Irenaeus,
There is nothing wrong with a bank acting, in effect, as an intermediary between people willing to put their funds at risk in order to earn interest and people who need loans. The problem arises when banks leverage loans on top of their assets, secure (or not so secure, as we now see) in the moral hazard created by deposit insurance and artificially low interest rates set by a lender of last resort with a printing press. This is what engenders the business cycle, as new money unbacked by prior savings works its way through the economy with the inevitable result that the artificial prosperity must end.
A great deal of ink has been spilled over the causes of business cycles. A simpler and more obviously correct theory would start from the readily observable fact that people are subject to irrational exuberance and pessimism.
Byzantine [#20]: We had more extreme business cycles before deposit insurance than we’ve had since.
I agree with C. Wingate [#21] that the business cycle has its roots in human nature.