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Monetary policy and Human misery

September 6, 2011 37 comments

Labor Share of income Plummets in the last Decade

Brad Delong tells good stories.  Here he tells a story about monetary policy and about how monetary policy is supposed to work.

Back before 1990 a typical recession involved the Federal Reserve fighting inflation by imposing a liquidity squeeze on the economy–raising interest rates, making a whole bunch of business models unprofitable, and so inducing businesses then fire their workers But after the excess supply in the labor market registered, wage increases stopped, and inflation expectations fell, the Federal Reserve would simply reverse course and return asset prices to their previous levels. Thus if you were a business it was easy to figure out what you should do after the macroeconomic storm had passed. Since asset prices and interest rates were back at their previous level, what you had been doing three years earlier before the recession would still be profitable. So all you had to do is reproduce your division of labor as it had been three years before.”

The bold’s mine. Monetary policy works by inducing misery on random people and businesses.  Note that his article is a long ode to fiscal policy.

Update: Here is the share of income for Labor from that well known communist columnist, David Frum.  Thx Beowulf!

Also if you need more grapics – go here check out how wonderful modern monetary policy (post Volker) is for workers wages.

 

[Update 11-2-2011: Welcome Zerohedgers! Feel free to walk around and find out how money works!  The red meat can be found here, but I write lots of offensive posts about why monetary policy sucks. Thanks el Veijo!  I used to know someone named oldman before he passed, and he was…worthy.  ]

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Monetary Policy Sucks, Part IV: What do you do during a real estate crash?

August 3, 2011 8 comments

"Buy this house", say monetary policy advocates

Scott Sumner isn’t a bad guy.  He’s a good guy.  He’s smart.  He’s creative.  He’s forceful.  His ideas about NGDP aren’t all wrong.

But someone needs to tell him that monetary policy sucks even during the good times.  It sucks because it uses real estate as the primary vehicle for economic stimulation, which causes all sorts of bad outcomes for our economy.

And someone needs to tell him that right now, monetary policy is particularly bad.  While it sucks even in the good times, right now monetary policy is nearly impotent.

The U.S. real estate market is in the middle what will be a legendary bust.  Real estate prices are going down more than in the great depression.  Nobody wants to borrow money to buy real estate.

But that’s the channel that monetary policy uses.  That’s the part of the economy that monetary policy stimulates.

What monetary policy does is stimulate the economy by inducing people to borrow or not borrow money for real estate deals.  That’s why it works well at all.

So how cheap would money need to be to induce people to buy real estate that’s going down 5% per year?

We can talk about monetary vs. fiscal policy all we want, but until at least one person who is advocating monetary policy identifies the exact group of people who are going to start borrowing enough money to stimulate the economy, why should we bother to respond?

Corporations don’t need to borrow – they are sitting on a record horde of cash (they have more today).   So the only channel left for monetary policy to work is through real estate.

Tell me, advocates of monetary policy, how is this supposed to work?

And why would you want it to work?  There is a good chance real estate will drop another 20% or more in price.  Do you want to saddle more people with houses they cannot sell, and mortgages that are too big?

Update: Parts I, Part II, Part III on why MP sucks.  Note that most of these are too kind to monetary policy in that they assume it actually works!

Why Monetary Policy Sucks, Part III: The full list

July 30, 2011 6 comments

Here is a full list of why monetary policy sucks:

  • promotes debt slavery
  • works very slowly
  • ignores the lowest 30% of earners
  • anti-democratic.  [Update: “why TC – thats crazy talk!”  and I reply  ” You dare doubt me?  look here. “Money Quote: “But the central bank can only achieve that control if it is willing to commit to letting the fiscal authority default.”]
  • difficult to manage
  • It must – must – end in a massive real estate bust – which destroys the primary store of value for the lower 80% of the population.
  • Difficult to observe effectiveness
  • Uses real estate lending as a transmission mechanism
  • Indirect instead of direct action
  • Promotes a rentier class (thanks Neil!)
  • Promotes a massive banking system
  • Zero lower bound
Updated

There’s probably more.  We’ve been blinded by economists talking about monetary policy as some abstract concept that magically makes the economy grow or contract a bit more.  Monetary policy works because it transmits through lending, primarily through real estate lending.  

There are gigantic problems even when the real estate channel is working.  When the real estate channel is broken – like it is today – the problems result in Japan.

[Update: A shout out to Clonal Antibody. We had a discussion a while back that has been sitting in my mind ever since we had it, and this is part of what I’ve been thinking about…]

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Why Monetary Policy Sucks, Part 2: It promotes debt slavery

July 30, 2011 3 comments

I was thinking a ton about debt slavery during the day, and then my ol’ man beowulf chimed in:

“Michael Hudson’s made the point that banks want property taxes as low as possible so they can expand the share of income they can take in mortgage payments (and other monthly credit streams).”

Yep!  What another bad reason to use monetary policy.

I ended up with a whole list of reasons why monetary policy sucks, and Neil Wilson added another.  There will be another post with that full list.

But this post is about how monetary policy promotes debt slavery.

Monetary policy can only work by giving a middle man – banks and lenders – claims on our future income.  This is the expressed goal of monetary policy – increase or decrease the amount of credit in the economy, and therefore stimulate economic activity.

The primary way the economy expands is by people taking on more debt.

Now, I am not an enemy of debt, but I want to be clear.

The way monetary policy works is through increasing debt in the system.  Monetary policy only works by taking a portion of future income and giving it to banks.  

Of course this is great for the rentier class, but for the economy, not so much.  We’re basically taking an ever larger chunk of our earnings and giving it to lenders.

  • So why do we have a real estate tax exemption?  Higher housing prices for banks to lend against.
  • Why do we have banks pushing for low land taxes?  Higher housing prices for banks to lend against.

Higher prices for real estate means more money for banks and less money for people.  And it isn’t just a one off payment – its a stream of payments over years and years!

This is another big reason why monetary policy is a horrible choice to control our economy.

 

 

 

 

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