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Posts Tagged ‘Austrian Economics’

Wall Of Shame – Suggestions Welcome!

May 19, 2011 Comments off

I started up a Wall of Shame, where I am collecting quotes from supposed experts who make the claim the U.S. (or any other nation that issues its own fiat currency) can default on its debt.

Default has a specific meaning.  These experts that I list are clearly misinformed about how our monetary system works, and are misinforming the public.

Here is a link to the Wall of Shame.  In general, I will not include entire publications, unless the publication is really adamant about how the U.S. must default and say it over and over. Zerohedge – well, they probably have an article about the U.S. not being able to sell bonds at the end of QE II about 4 times a week, then assorted other claims about the bankrupt U.S. ( and Japan, and ect…) sprinkled into the mix.  Zerohedge makes the cut.

[Update: I almost forgot!!!  Accepting Suggested Candidates for the Wall of Shame in the comments!  Put your worst quotes and offenders there – and we can debate their worthiness to be forever inscribed upon the wall.  ]

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Our Story so far…

May 11, 2011 25 comments

Just to recap the story so far, here at The Traders Crucible:

Government Budget Constraint: I think we put this old horse down.  [Update: More here.  We cannot tell ex ante if we are violating or holding to the no Ponzi assumption with any certainty.  Any violation is and can only be ex post knowledge. We can only act on what we can see today, which is probably inflation and the treasury yield curve. If you think there are unobservable factors and risks, well, how can we know what they are and what should we do about them today besides pray to the gods? If you want to take rational action, you need to act on the observables.]

Solvency vs. Debasement:  We Cannot Become Insolvent.  We Can Debase the Currency. Even Bill Gross – head of Pimco and the largest bond trader in the world – admits it now.

The TC rule: A simple rule that gives a target budget deficit. It will probably be linked to a floating tax holiday.  Needs work – and I have a post/update brewing, but it isn’t all bad as it stands today!

The Meta-Critique: Can we know this information before we make the decision? We cannot make decisions using information we do not know ex ante. Can we know this information at all?  I am seeing this pop up over at Matt Rognlie’s place.

Anti-Democratic Conspiracy in Economics: I’ll have more to say on this, but it is everywhere.

MMT on the move:  Moving to Violently Opposed.  Even Caroline Baum of Bloomberg fame knows about us. Paul Krugman is talking smack at us. The next step must be Self-Evident!

We live in bubble land:  We live in a world where the economy demands credit bubbles. Mr. Rowe disagrees with my interpretation. but I suspect that real rates, and not an unobservable, unknowable natural rate(ex ante and ex post – thanks JKH!), will prove to be the cause of this.

Shadow stats and the Hyperinflation Hoax: Gaining Traction here too.  The myth that we have high inflation right now, but the government won’t report it, is surprisingly common.

Crushing Austrian critiques of MMT: It’s obvious how to do it.  Looking at the comments section at The Pragmatic Capitalist (Cullen is doing gods work over there) and Mises.org reminds me how hard it is to think scientifically.  Some people – smart, educated, talented, productive people – can miss the subtle differences of scientific vs. logical thought, and there is little we can do to remove the scales from their eyes.

Oil demand is inelastic: We cannot impact the price of oil at all – so why bother with targeting it with monetary policy?  Matt Rognlie says something similar here.

More soon!

I just don’t have time to crush Bob Murphy over MMT again

May 9, 2011 10 comments

A few months back, I crushed Bob Murphy and the Austrian take on MMT.  Here is a quick quote:

Discussion of Murphy’s mistakes: Murphy makes two fundamental mistakes.  The first mistake results from his confusion of assets and savings. Murphy doesn’t understand the meaning of the word savings in an national accounting sense, or deliberately confuses real and monetary accountings.

He is making the same mistake today in his new post on MMT.  He just makes it more explicitly, so it is easier to see.

Truth be told, I’ve corresponded briefly over email with Mr. Murphy.  He was a nice and kind person.  He makes a serious mistake in his thinking. And frankly, I think the Austrians would knock it out of the park with a minimalist construction of MMT.  Unfortunately, they are insane because they don’t recognize any government as being legitimate.  Even kind and nice people can be insane.

Update: The always excellent Cullen Roche takes on the same topic over at the Pragmatic Capitalist.   And I’ve got a few trolls!

Two Minutes Hate: Why not accept the Basic Accounting of MMT?

February 22, 2011 4 comments

From the Comments:

Given that, I still cannot understand why it is so hard for people to grok the sectoral balances accounting identity
G-T = S-I + M-X
which makes it clear that for a country with CAD (M-X>0) such as ours government deficit G-T is absolutely necessary for domestic private sector’s surplus S-I. I did not study economics but I had the impression that this equation is taught in every elementary economics course. What is then the objection people might have to this simple fact? What am I missing?

If you look to why people don’t like MMT, Austrians are the leaders of the two minutes hate.  People like Bob Murphy hate the fact that money is and always has been a construct of the state.

Murphy mistakes assets for savings, and he doesn’t understand the fundamental powers of government. I’ll give him a very, very slight break – Austrians confuse the real and monetary economy as a badge of honor.  See the discussion of 1 for more details.

Discussion of Murphy’s mistakes: Murphy makes two fundamental mistakes.  The first mistake results from his confusion of assets and savings. Murphy doesn’t understand the meaning of the word savings in an national accounting sense, or deliberately confuses real and monetary accountings.

Wynne Godley's Matrix of Accounts

The word savings in national income accounting has a very specific meaning, and stock ownership isn’t part of the definition. Stock ownership isn’t part of the definition because of a simple reason – any transaction involving stock simply transfers money from one person to another person, and doesn’t create any money at all.  The amount of money in the system remains the same.

The goal of monetary accounting is to identify where the money is.  It is not to value investments and assets.

Really, he makes two different errors related to this identity, but I’ll roll them up into misunderstanding of the word savings.   (Aside: Wynne Godley does a better job with the accounts in his work and is must read  to further your understanding money.)

Murphy’s confusion of savings and assets can be demonstrated easily.  To have savings in a monetary economy, you must have those savings in money.  Owning and asset worth money is not savings, even though it may be a valuable asset that you could exchange for money.  In national income accounting, we count the money, not the valuable assets.  The total net worth of the United States is roughly $55 Trillion, nobody in their right minds would say we have $55 Trillion of savings, simply because worth and savings are two very different ideas.

His example of a bus driver buying stock is a perfect example of this error.  The bus driver has decreased his savings of $1000 to purchase an asset for $1000.  Somebody else now has the $1000 cash money and the bus driver has some stock that someone else owned, so the savings across the economy are the same.

Nowhere in any national accounting does this transaction make any difference – because the amount of cash and stock in the economy does not change.  There is still $1000 in cash out in the real world.

For any given currency, savings only matters across the entire economy. Yes, my personal savings matters to me. But if I hold my savings, and somebody else has a deficit that exactly equals my savings, overall, there is no savings in the economy.

Re Murphy’s second mistake:  Governments are different than all other entites.  Here is a quote:

But perhaps a clearer way to pinpoint the fallacy in Nugent’s argument is to tweak it ever so slightly. Note that there is nothing special in choosing the US federal government as the financial entity in question. Nugent could just as easily have argued, “The Murphy household deficit = non-Murphy-household savings (of net financial assets).” Then, if the data indicate that right now the Murphy household spends $10,000 more annually than it earns in income, while my wife’s Colombian relatives lend us $10,000 net this year, then US (government and private) net savings (vis-à-vis my household, that is) must be zero. Clearly I need to go buy some more Big Macs and plasma screen TVs lest the nation’s children find it literally impossible to put money in their piggy banks.

He is right – on an accounting level, there is no difference between people and governments.  The accounts are treated the same – debits and credits are debits and credits.

On a practical level, there is a massive difference. Governments have a monopoly on the legitimate use of force within a geographical area.  Murphy understands this as he demonstrates in his next section.  What he fails to understand is that as far as I know, the advance of civilization has been always and everywhere accompanied by  government and government issued money.  There is one non-contacted tribe in the Amazon who doesn’t pay any taxes, and Mr. Murphy is free to live where he chooses – so he could go live with them and not pay taxes on his earnings. But everyplace else on the globe requires the payment of taxes.

It seems like a universal law of human behavior – Humans use speech, use tools, create government, collect taxes.  Didn’t Ben Franklin have something to say about Death and Taxes?

In many ways, the story of civilization is the story of advances in government.  For example, there is an entire sub-discipline of economic history devoted to the investigation of why former English colonies have performed so much better than French colonies.

It appears that when the hand of government is light, modern weaponry allows brutal monsters to take control of the population with ease. See Northern Mexico for what happens when government abdicates responsibility within a region.

Do Austrians like the idea of Freedom, but hate actual Freedom?

Murphy is disgusted by this idea that people like government and are willing to pay for it.  In fact, a leading light of the “libertarian” movement, Peter Thiel has come to a similar conclusion.  Thiel says: “I no longer believe that freedom and democracy are compatible.”  Wow.  He must want a dictatorship where his ideas of freedom are enforced at gunpoint.

One of the more odd things about the Austrian arguments is that in many ways, MMT provides them with a huge tool set to do real research, but because they hate empirical study so much, they won’t bother.  Check out this quote from Murphy:

The standard Misesian/Hayekian explanation of the business cycle is that the commercial banks arbitrarily increase the supply of loanable funds, even though the community hasn’t actually increased its real savings.

That isn’t far from the MMT/Minksy view in some ways.  MMTers also say that banks are not constrained by deposits, and Minsky’s instability hypothesis is that banks increase lending (and go through his 4 levels of financing) due to competitive pressures until small, unexpected shocks make formerly profitable loans massively unprofitable. We’ve just done the accounting to show this is the case, instead of stating it as a truism.

There is another class of 2 minutes haters, and these are people who understand the math and accounting, but wave their hands because they don’t like the conclusions.  This includes people like Jessie over at Cafe American, and a few other people. They either mock the math as being defined as true and therefore meaningless, when nothing can be farther from the truth. As .  or simply don’t like the fact that you can actually do hard work and figure out with math something they’ve spent a lifetime talking about with mushy words.  I’ll have more on Jessie Thursday.

MMTer’s and Austrians kinda sorta agree: China isn’t absorbing that much Inflation

January 13, 2011 1 comment

One of my favorites, Mish, is talking about the impossibility of Cost-Push Inflation, and how China’s price level doesn’t make a difference to the level of Inflation to the United States.  He talks about cost-push inflation from an Austrian perspective.  The argument is that in an economy with a constant supply of money, an increase in the cost of one good immediately means a decrease in the cost of some other good.  I think this is a place where Austrians have a small patch of common ground with the MMT crowd.

But how can we demonstrate this minor agreement?  Well, I used a similar idea in my post to estimate how much inflation China was absorbing.  My model is more useful, and just as easy to understand.

Here is simplified model Mish is using:

Total Money Available:  $100

Good A Price: $50

Good B: Price: $50

If the price of Good A goes up to $60, then there is only $40 left for Good B.  Total cost to live in this society is still $100.  So no matter what happens to the one price, the total cost to live in this society must be $100.

Mr. Shedlock then goes on to add the demand for money to this, so there is really a third commodity, money.  We can put this into the model quite easily.  Imagine the demand for money goes from $0 to $10.  Now the Mish model looks like this:

Money Demand: $10 (aka Demand for Savings)

Good A: $60

Good B: $30

This increased demand for money causes deflation, because the total amount paid in the economy is only $90 for the same goods we had in the first scenario.

MMTers agree with this to an extent.  The major difference is the idea about how money is created. Overall, they (or is it we?) do not disagree about that demand for savings being a huge factor in determining the inflation level in the world.

I think my model is a bit more useful. Instead of just thinking about the U.S., I considered China and the U.S. as one country that could divvy up the inflation between them in a variety of levels.

Here is more on the math:

To do this exercise, I will treat China as a U.S. state that uses U.S. currency exclusively, and size China’s economy at its 2009 Purchasing Power Parity (PPP) size relative to the United States.  If we do this, we just add the two economies together to get the total size of the USD economy.  Then, we take the amount of inflation in each country and multiply it by the size of the economy to get the total amount of inflation.  After that we can play with how much inflation the U.S. would have with various China scenarios.

The math is basic, and it is as easy adding up two pies and dividing them in different ways.  My 3rd grade son was doing exercises like this the other day. I just use real world numbers that he would find more boring than watching a unicorn cartoon, but he could do the math.

The total amount of inflation out there for China and the U.S. is about 4.5%. I even used a high number for China 10% instead of the official inflation rate.  So even if China was to allow us to fully experience the inflation we should, we would have at 4.5% inflation. I think this is so unlikely as to be impossible because China will not allow their currency to float.  A more reasonable assumption – that China will allow a limited rise in the Renminbi – results in roughly 2% inflation.

Whatever China does, Inflation will be tame in the United States.

More on Inflation:

Mish ignores credit in this post.  Mish has a good idea about credit, and he has a regular ongoing dialog with Steve Keen.  Steve Keen is not quite a MMT guy, but closer to MMT with his idea of endogenous money than he is to the Austrians by any measure.   And for the MMT crew, let’s not forget that Randall Wray was a PHD student under Minsky.  Keen also is a huge fan of Minsky.  Credit and its implications are etched on the bones of every MMT person out there.  Mish talks enough about credit that I am not going to call  Mish out for ignoring credit in this one post.

Also, I think this very simple mental model leaves out many important aspects of the real world.  Importantly, it leaves out the ever improving quality of goods, and their relative worth over time.  Is the minivan (I am not a car guy) I drive today worth a huge amount more than the 1967 Buick LaSabre that my uncle gave me?  Even if they  were both new, and I could choose freely between them?

Everything about the Minivan is much, much nicer – except maybe the low purr of the LaSabre engine down the highway on a Tuesday afternoon in the Summer.

But in the $100 total world, if the car gets more valuable, then everything else gets less valuable. Should my food be worth less because my car is worth more?  But what if that other good cannot be produced at for profit at $30? Then, the world stays the same and no innovation happens.  We do not get a better car.

And everyone with kids knows that having the second kid doesn’t make the first kid less valuable.  I know I found a whole bunch of extra value in my world that simply didn’t exist before my second son was born.  To an Austrian, this innovation of the second son made me “value” my first son less.

This gets back to the very reason that Austrians hate inflation – the devaluing of things that have stable value. Should improvements in quality  for one good come at the expense of paying less for unrelated goods?  If the money supply doesn’t grow, then it must.

P.S. Can you imagine the ambulance bills if we were all perfect Austrians?  There is no doubt that the Ambulance drivers would show up and then evaluate the relative need of the person, and then quote a price to the family to take them to the hospital, especially in rural areas without easy natural competition.

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