> Basically, this theory holds that when asset prices rise — home values, stocks and so on — without a break, investors start to believe that this trend represents a new normal. They pile into the asset, pumping up the price even more, and seeming to confirm the idea that the trend will never end. But when the extrapolators’ money runs out, reality sets in and a crash ensues
No credit to libertarians and the Austrian business cycle theory?
They are describing it on the page, but no mention that this idea has existed for decades. Meddling in the economy wins out due to politics, but it always leads to gigantic downturn.
Not a great opinion piece with an overly-dramatic title. The forecasting failures of major world economic bodies leading up to the 2008 financial crisis were (and somewhat still are) widely examined and criticized.
From that article a choice quote from a referenced report:
> "In the United States, for example, it did not discuss, until the crisis had already erupted, the deteriorating lending standards for mortgage financing, or adequately assess the risks and impact of a major housing price correction on financial institutions…As late as April 2006, shortly before U.S. housing prices peaked, the WEO and the GFSR explained away the rising share of non-traditional mortgages in the United States thus: “Default rates on residential mortgage loans have been low historically. Together with securitization of the mortgage market, this suggests that the impact of a slowing housing market on the financial sector is likely to be limited."
So to say that Economists still "don't get" the 2008 crisis is a somewhat heavy rose-colored embellishment of the actual state of the field.
In 20/20 hindsight, someone in some report somewhere pointed at something the WEO and GFSR did and said, "See? Now we know what we did wrong."
It sounds like more of the same. It sounds like more "trust us, we won't mess it up this time around." It doesn't sound like a fundamental re-thinking of our economy.
>Not a great opinion piece with an overly-dramatic title
This is one of those pieces where they claim experts don't understand their own field, so they quote experts from that same field to back up that idea.
The 2008 financial crisis is a pretty expansive event but it's unclear whether or not Economists were "surprised" to the extent the public has been led to believe by somewhat biased media coverage.
For example, the quote from my original comment was from an internal report by the IMF on the IMF's own forecasting/reporting in the period leading up to the financial crisis. It even calls out a presentation made by it's Chief Economist (at the time) which warned against risky behavior that was wholesale ignored by the fund's management (from the Economist article before):
> Even when some of its officials had different ideas, the fund's management seemed not to be listening. Its then chief economist, Raghuram Rajan, concluded a presentation at the annual Jackson Hole conference of central bankers in 2005 by arguing that “we should be prepared for the low probability but highly costly downturn”. But the IMF now admits that:
> "Despite the importance of the Economic Counsellor's position, there was no follow up on Rajan's analysis and concerns— his views did not influence the IMF's work program or even the flagship documents issued after the Jackson Hole speech."
That presentation by Raghuram Rajan is now fairly well known as having fairly accurately predicted the crisis (in 2005) but fell on ears deafened by prosperity (he was the Chief Economist at the IMF and IMF Management completely dismissed it). Here he is on a different list of 6 economists who "predicted the global financial crisis":
He later went on to be the 23rd governor of the Reserve Bank of India.
I am by no means an expert on the subject so take this all as a layman's loose following of the topic...but it seems to me that the lack of recognition of the dangers by Economists is only part of the problem. It also seems that many major organizations were incentivized to turn a blind eye or even actively downplay concerns in the face of overwhelming financial growth. Even before the crisis, there were Economists writing about the dangers[1] (2006); so to say the entire field of Economics were completely blindsided is itself a bit of an exaggeration. In reality, many large Economic organizations were incentivized to downplay concerns by rampant growth. No one wants to be the one that says, "Hey let's slow down," when the economy is booming.
Keynesian Economics are the economics of political convenience. If something goes wrong, we can juice the economy by engaging in extaordinary activities which generate the illusion of wealth resulting in increased spending.
These ideas were very popular until Great Britain encountered stagflation - conditions under which both economic recession and inflation coincided and traditional Keynesian levers and predictions did not function.
Zero Interest Rate conditions are not normal. Never in this history of humanity have interest rates been held this low for so long.
I strongly recommend taking a long walk through the videos on the Mises Institute, reading Daniel DiMartino Booth and listening to several Peter Schiff podcasts.
I don’t recommend buying gold, but if you want a real critique of what is happening, listen to the leading critics and not this weirdly mangled and factually questionable Bloomberg piece.
There are many better people to learn about this from.
We are living in absolutely extraordinary times which will need with a severe economic implosion.
The key thing there isn't the interest rate: it was the deflation rate: 4% in 1930 and a whopping 10% in 1931. The interest rate was more a reflection of the fact that nobody was lending money. The capital markets froze around the world.
Deflation is the key to the Great Depression. And why we had deflation was directly a result of the gold standard.
Indeed, Europe saw stronger deflation earlier than we did because the U.S. economy of the 1920s was (like China today) a net exporter of manufactured goods: radios, washing machines, etc. The gold standard meant that the fixed supply of gold moved [on the books] inexorably from Europe to the U.S. That brought deflation in Europe and even inflation in the U.S. (reflected most spectacularly in the stock market and the social excesses of the day).[1] Deflation in Europe accelerated the trade inbalance (increasingly stronger European currencies) until, one day, European consumers found themselves jobless and unable to afford basic necessities because domestic real prices were so high relative to earnings. When European trans-Atlantic trade and investment slowed the whole house of cards came crashing down. And all of this was a direct result of the rigidity of the gold standard. The gold standard created a feedback loop that accelerated the global economy into a brick wall--the brick wall being the reality of the finite supply of gold.
I can't even begin to do justice to the actual history, which is obviously just a little more complicated than I make it out to be above. For that everybody should read the 2010 Pulitzer Prize for History winning book, Lords of Finance (https://en.wikipedia.org/wiki/Lords_of_Finance)
[1] Gold bugs like to point out the hyperinflation of Weimar Germany. But they were deliberately printing currency to spite the U.K. and France, to whom they owed war reparations. Because of the gold standard reparations were nominally fixed, so the strategy didn't work as you might think. But if they hyper-inflated quickly enough (on the order of weeks or months, the time it took to deliver a payment and before exchange rates fully adjusted), they could technically cheat, not to mention blunt the deflationary impact domestically. Of course, this hyperinflation also created an unstoppable cycle domestically. But because of war reparations and the merciless calculus of the gold standard, Germany was screwed either way. They knew what they were doing. The hyperinflation was knowing and deliberate. It was arguably a consequence of the rigidity of the gold standard.
>...And all of this was a direct result of the rigidity of the gold standard. The gold standard created a feedback loop that accelerated the global economy into a brick wall--the brick wall being the reality of the finite supply of gold.
Agreed, though like you said it is pretty complicated. The US had about 45% of world gold reserve in the early 20's and even though was a net exporter by 1929 had dropped to closer to 37% due in part to large capital lending to Europe.
A major issue though was the hoarding of gold by France:
>...While the tightening of U.S. monetary policy in 1928 is often blamed for having initiated the downturn, France increased its share of world gold reserves from 7 percent to 27 percent between 1927 and 1932 and effectively sterilized most of this accumulation. This “gold hoarding” created an artificial shortage of reserves and put other countries under enormous deflationary pressure.
" If something goes wrong, we can juice the economy by engaging in extaordinary activities which generate the illusion of wealth resulting in increased spending."
This is not what Keynesian economics is. It's perfectly rational for the government to step up their investment in things like bridges and roads as the private sector weakens for a bit. This restores confidence in markets, and keeps money flowing through the economy.
So long as there are savings during the good times, and the projects are not wasted (even though in some extraordinary cases it would actually make sense to dig holes and fill them) ... it makes sense.
Of course the governments ability to 'save' during the good times and to necessarily spend efficiently is questionable.
"Zero Interest Rate conditions are not normal. Never in this history of humanity have interest rates been held this low for so long."
Central banks as we understand them are a very new phenom. Who's to say 'what's normal' when the very construct of our current version of monetary policy is really only a few decades old?
Maybe this is the actual normal.
Maybe because we are getting older, and working an ever decreasing share of our lives, our net productivity is going down and that's being reflected in rates?
Maybe the amount of debt hanging over every economy is a drag on productivity? (Because debt levels are high and this is new)
Maybe surpluses are being pushed into the real economy and captured by consumers who are getting a good deal, so bonds and stocks just aren't getting the great returns they were before.
Maybe we haven't had a war in a long time, which leads to fixed/stagnated human organizations, and without the opportunity for 'ground up renewal' every once and a while, we can't leap forward.
Maybe the benefits of carbon fuels + industrial revolution have mostly been had, or at least, fully priced into stocks.
Maybe we're just measuring inflation the wrong way.
So many maybes.
This could be very normal.
We probably won't know until another 50 years and then only in hindsight.
>in some extraordinary cases it would actually make sense to dig holes and fill them
How is paying people to dig and fill holes better than just giving them money without requiring the useless activity? Even if "dignity of work" is a real thing, there's no way doing useless work could provide it.
You're right, it's the same thing. 'Paying people to dig holes and fill them' is a euphemism for pure redistribution. It's just an old school term used by Keynes himself.
(Though FYI 'the dignity of work' is a very real thing)
Keynes wrote that that would be one way - although, he stressed, not actually a good way - of escaping from a liquidity trap.
The real irony is that he was actually decrying digging gold out of the ground and burying it in vaults as he wrote that and among his critics, that kind of "digging a hole in a ground and filling it up" is typically considered above reproach.
Probably because you aren't literally digging gold out of the ground and reburying it, you are transforming land, labor and capital into a finished product which, in this case, is gold bullion.
Be like saying digging a hole and "planting" a fencepost is a wasteful activity because the wood was nearly in the same state to begin with.
I think the complaint is that the gold bullion will just be hoarded and used as a unit of account. You could have achieved a similar thing with some strokes of a pen.
It's wasted effort in the same sense that bitcoin mining is wasted energy.
I just wane explain what Keynes was thinking, even while I don't agree.
For Keynes it was all about overall spending, Aggregate Demand. If overall Aggregate Demand goes down then you have recession.
Then in some cases monetary policy can not raise AD anymore because of the 'liquidity trap' (interest rate at zero).
In that case the only way to get out of the AD whole is for government to spend more money that they have either saved up, or make debt.
Meaning that government could lower taxes, build roads or even to make his point 'pay people to dig wholes and close them'.
He just tried to make the point that it had nothing to do with the productivity gain of the actual activity.
The reason why Keynes was wrong is that the 'liquidity trap' is not a real thing. Second, even if it were real, the government fiscal policy would be unable by itself to raise AD and keep it raised. Even worse, if you tried to do that you would not only end up with AD shortfall but also with high debt (see Japan).
Good summary of the argument. I'll just note that this:
> The reason why Keynes was wrong is that the 'liquidity trap' is not a real thing. Second, even if it were real, the government fiscal policy would be unable by itself to raise AD and keep it raised.
... is something many people would disagree with, especially as you provided no data to back it up.
It's of course topic for longer discussion, I am just pointing out where is the disagreement.
Well, its a hacker news comment. However I can tell you that evidence of the fiscal multiplier has been a terrible and if you look at where monetary policy was contracting fiscal multiplier is negative.
Also, there are tons of countries who already have successfully eased monetary policy at the ZLB. Switzerland, Denmark, Sweden and so on.
It was also in all monetary textbook before the crisis and was considered standard knowledge by many monetary economist. Even people like Krugman would agree that with setting a higher inflation target the Fed could have been more aggressive.
Suddenly the problem is Keynesian economics and not the proliferation of greed, liberalization of finance, deregulation, lack of accountability of credit agencie, etc.?
> Suddenly the problem is Keynesian economics and not the proliferation of greed, liberalization of finance, deregulation, lack of accountability of credit agencie, etc.?
Keynesian economics doesn't cause those things, true. But Keynesian economics does make it much easier to hide their consequences until they are bad enough to cause a meltdown.
the post-2009 recovery is more attributable to monetarism, than Keynesianism
Peter schiff and other like him have been predicting crisis, recession, bear market, and inflation since 2008 to no avail. they were wrong and have no credibility as far as I'm concerned.
It's actually quite impressive how the central banks avoided a major collapse while walking a tightrope blindfolded carrying their spiked punch bowl and having rabid dogs nipping at their heels.
Then again, "other like him" have always said that the bad things happen when they start to raise interest rates as things that are no longer profitable at the higher rates start to get liquidated and eventually causes the bubble to burst. Don't think anyone could have reasonably predicted the ability to keep interest rates at low as they've been for so long without the "animal spirits" getting restless.
> Never in this history of humanity have interest rates been held this low for so long.
You mean like in the "long" history of modern banking? This is a weak statement. The time during which governments have wielded this much influence over the minutia of the economy is surely small compared to all of the "history of humanity."
I saw it argued recently, by an economist, that tax cuts and increased government deficit spending should have the same effects on the economy. I think the essence of the argument is that either one leads to increased saving as people anticipate future tax increases. I don't know if I believe this is completely true, since the money at least initially goes to different people and people aren't actually rational actors, but I'm willing to accept that it's at least somewhat true.
That led me to the thought that supply-side economics, as the Republicans have been pressing on us for the last 40 years, is essentially Keynesian, or at least shares with it the belief that fiscal policy can be used to heat up the economy at one point in time, with benefits realized at a later point. The difference is that Keynes's recommendation was for fiscal policy to support the economy in recessions, and then cut back on spending (or equivalently, by the above argument, raise taxes) in boom times, while the supply-siders seem to want to cut taxes irrespective of the state of the economy, and never raise them.
I'm not an economist, so I don't know how accurate this is, but I find it striking, given the degree to which Keynesian economics has come under criticism in recent years.
The problem with this whole theory is that first of all, the whole future anticipation of taxes simply does not exist empirically specially not at low levels.
You are correct that Keynesian share some things in particular situation with supply siders but its very superficial and only in very specific circumstances.
In theory tax cuts during a recession are a Keynesian policy but the WASTE majority of Keynesian prefer INCREASE in spending.
So in terms of the real world, there is almost never any overlap. Keynesian hardly ever actually argue for lower taxes (because they are usually leftists who want more government).
At the same time supply sider do not want tax cuts in order to boost Aggregate Demand in a business cycle but rather have a more competitive economy in the long term.
I would also recommend strongly to not look at these as two types of economic theories. Keynesian is a very specific theory about a specific situation. While supply side economics is a general branch of economics that looks at growth.
The terms here are really misleading, most economists including people who call them-self 'supply side' think that demand is equally important. Language really makes this whole discussion incredible complex.
I am a fan of Austrian economics and von Mises and Hayek. However I think you are seriously mis-characterizing them.
The von Mises Instiute is a very finge even within the Austrian tradition. They are essentially Hard Core Southern Rothbardians. They mis-characterize Mises as the perfect pre-Rothbard.
Peter Schiff in particular is not even an Austrian economist and he widely mis-characterizes the Austria Business Cycle theory.
If you want to learn actual Austrian Economics monetary economics go read Selgin, White, Horowitz. In general the GMU Austrians are far better then anything that comes out of the Mises institute.
The Rothbardians seem like the libertarian equivalent of Marxists; a bunch of people who suddenly discovered, "hey, our political ideology sounds a lot less like a political ideology if we tell everyone it's just Economics! Also, the entire field of economics is lying to you because it's a conspiracy."
My own theory after digging sometime into Economics is that no one seems to have a clear idea what on earth we are actually doing. We all seems to have our own theory, and they all seems to answer half of the question. And in practice none of them currently models the world we have now. And it will take a long time before any of those theory are proved to be correct this time around. May be we can finally say Keynesian is wrong. ( At the expenses of our generation )
And it makes things more complicated when people start messing around with how they measure things, and messing with formulas. Numbers like China which are inaccurate. Inflation number which are messed with by FEDs. IMF prediction model which has been wrong every time for years and it seems its only job is to please or more accurately manipulate the market mindset.
They know what they are doing, the main players are extracting wealth. The financial market is one big casino were the bankers can extract as much wealth as possible in the name of providing liquidity. The suckers(masses) are the rest of us via our 401/pension funds. They know what exactly they are doing.
1. Market makers don't make investment decisions or hold positions. They facilitate trading as counterparties to investing parties, but do not drive prices themselves.
2. Market makers would make a terribly poor shadowy cabal, because the amount of capital they collectively manage is in the high single to low double digit billions. Mutual funds, hedge funds and private equity account for trillions.
I think passive investing works, on average, because, on average, companies generate profits and increase in value over time.
Active investing loses because transactions have costs in terms of management fees, commission and spread and is how stockbrokers make their money.
I agree that passive investing works, but the real story, I think, is that the economy is guaranteed to grow on average if the population keeps increasing and innovation keeps happening.
If the population grows 3%, we have to produce roughly 3% more, so revenues go up roughly 3%, number of employed goes up roughly 3%, so the economy grows 3%.
If I invent a steel manufacturing process that makes steel 3% cheaper, expenses go down 3%, profits go up, supply goes up, prices go down, the economy grows.
If all you do is passively invest, then over large periods of time you should on average see returns of, roughly, population growth + innovation. Even if everyone is passively investing, it's the same thing. If you actively invest, but still invest in the whole market (as any diversified investor does), you get the same thing, minus ~1% towards. If everyone was actively investing before, and the market grew ~8% per year, and now they passively invested, why would the market not gain the same?
If 100% of the stocks were passive invested, then the game for banks would be to list companies as fast as possible, with as high capitalization possible. Who cares if its overvalued? nobody is looking. As soon as a stock is publicly listed it gets bought.
IT would not work. Not poorly, it just wouldn't work at all. This tells me that there is a balance on how much active/passive investment can there be, and at some point they will be balance by some criteria.
I don't think he's implying that literally everybody trades passively, of course Zuckerberg is going to actively trade his Facebook shares, I'm going to actively trade my stock options at Public Company X, the guy down the street will still rent his house out instead of selling it and investing passively.
Plus, it's not like passive investing causes securities to never be traded, when I buy into a mutual fund I'm buying stock from someone. That someone is probably retiring and selling their securities.
Lastly, most "active traders" just buy a bunch of Blackrock/Vanguard/SPDR index funds anyway and call it a diversified portfolio that only they could deliver.
I get the sense that that relationship will reverse itself as soon as the market turns down. Bear in mind that a day trader can cash out in a second; you and I will will have to wait two business days.
You can log on to your 401k account and move your position over to treasury bonds or something that looks safer, but they will wait two business days to process the transaction. I know from personal experience; don't see much information online about the phenomenon. My guess is that they are legally allowed to do this, probably because they wrote the law.
> they will wait two business days to process the transaction
This was a decision your 401(k) provider made. The proper person to gripe to is whomever in HR chose a cheap provider. (They make up for reduced administrative costs by (a) being less efficient and (b) capturing float.)
No, but they have different tiers of service. In my account, for example, I can sell and purchase intraday. They do what they do for my personal account, which is credit the cash intraday. TL; DR This is not a legal, but contractual, requirement.
It's a legal requirement to some extent unless you have a margin account. Funds take two days to settle. If you sell, buy, and sell again within two days, your account can be suspended for violating SEC rules.
"When selling a mutual fund to purchase a fund in a different family, you are selling the mutual fund you own and using the proceeds to purchase another fund in a different fund family. Since you are performing a cross family trade, the settlement date for the sale will differ from the settlement date for the purchase. Typically, cross family trades execute over two business days."
The funny thing is, even though they say "up to 2 business days", the trade was executed at 3:59:59 PM on the dot, on the 2nd business day after I made the request. I'm certain they waited until that moment to execute the trade because legally, they can.
Indexing as a strategy implies staying invested through downturns and not trying to time the market. Selling during downturns and buying during boom times is as wrong as an investment algorithm can possibly be.
And the market might recover in 2 days and that day trader would lose money for nothing.
In reality, trying to time the market rarely works out, and when it does it can often be attributed to luck. In general, just investing every month is the best strategy.
Actively managed mutual funds don't tend to outperform the S&P 500 over the long term, when you account for selection biases (i.e. if you look at a set of mutual funds from a given brokerage, most of them will appear to outperform the index because they've cancelled the ones that didn't; if you actually choose some of those funds, however, they're going to eventually underperform and get cancelled and replaced with a new set of funds).
This selection bias works somewhat like the old sports betting scam:
1. You get 16,000 email addresses from people who want to receive your expert tips to predict NFL games. You send each of them your pick for the Monday Night Football game. You tell 8,000 of them that the home team beats the spread and the other 8,000 that the away team beats the spread. Be sure and include complicated rationales that will seem prophetic after the fact.
2. Of the 8,000 who received the "correct" tip, you send 4,000 of them one pick for Thursday Night Football and 4,000 of them the opposite.
3. Repeat for the Sunday Night game.
4. You now have 2,000 people who think that you can accurately predict who's going to win a football game, because you've done so for three nationally broadcast games in a row, and the odds of that are astronomical! (I mean, they're 1 in 8, but the kind of people who sign up for spammy sports betting tip newsletters aren't necessarily that sharp). Con 10% of them into paying you $50 for your expert tips for the next Monday Night Football game and you've made $10,000 out of 16,000 email addresses and a week's worth of making up shit about football.
(the exception being, with mutual funds, it's the funds themselves that are dropped instead of the poor saps who invested in them).
...
On the one hand, when it comes to active vs. passive investing, you have the Bogleheads and the hardcore efficient-market-hypothesis types who will tell you that every possible rationale you could ever have for ever making an active investment decision is already priced into the market. On the other hand, Warren Buffett spent virtually his entire life overperforming the market. How to reconcile this?
Actually, I think it's entirely possible for active investment to beat the market, but with a LOT of caveats:
1. The market isn't 100% efficient, which is logically equivalent to saying that it's possible for active investment to beat the market. This seems pretty obvious when you put it this way--100% efficiency is fucking magical, it's not a realistic expectation to have of the world--but how efficient is it? 95%? At that point, you're spending a ton of time and effort finding a market opportunity where you can realize a return of $100 instead of $95. That's a lot of work, and if you're smart and diligent enough to make your marginal $5 that way, you're probably smart and diligent enough to make $10 doing real work instead.
2. So let's say you follow your passions, and active investing is it. You work long and hard to find $5 opportunity after $5 opportunity, and nothing else matters to you other than your loved ones, your weekly bridge match, and advocating for tax reform because you think it's ridiculous how low your taxes are. See where I'm going with this? If active investing is hard enough, and lucrative enough, you're not going to go around asking bored salary drones to let you invest their retirement money in exchange for commissions and fees. That's ridiculous. If you know how to beat the market, beat it yourself and keep all the money. In other words, active investing only works if you, personally, are the active investor. It's not a justification for buying mutual funds.
3. So let's imagine that you are literally the single most successful person in the world at active investing. You're a household name, a genius, an "Oracle", you go to the White House and play bridge with Bill Gates and you're in the to...
China is not fudging the numbers. otherwise, it would imply that major US companies that do business with China are also fudging their numbers. Trade with china has surged in recent decades.
There will rarely be a perfectly correct model of economics, and there are two main challenges of why that is not something achievable.
First, because economics is the study of exchange, which means the exchange between a human being and another one. Understanding human behavior in its totality is like trying to understand our brains or our own consciousness. It suffers from a halting-problem level dilemma.
Second, because the study of economy tends to be about its application, it will always fail to obtain perfectly predictable results because humans are not perfectly predictable. And humans fight back. It is aking to believing you found the perfect method of making someone fall in love with you: as desirable as it is preposterous to believe you can achieve it.
Whatever model of economics you have, if it has room for 1% of human behavior, rest assured that its enough to take it down.
> My own theory after digging sometime into Economics is that no one seems to have a clear idea what on earth we are actually doing.
I still remember the moment I realized this. It was on the first day of my first class in Economics 101, when the professor began by telling us that economics was a science built upon the assumption that people are rational actors. I thought about all the people I'd ever known, and all the deeply irrational things I'd seen them do, and got the sinking feeling that I had committed myself to studying a field of thought that had chosen the wrong rock upon which to build its church.
> economics was a science built upon the assumption that people are rational actors
You may have taken a statement made in jest literally. Homo economicus is a known fiction. Just as frictionless, airless physics are a known fiction. They're useful, however, for (a) defining a limit or ideal, (b) pedagogical purposes and (c) starting to think about a problem.
Microeconomics makes falsifiable predictions which can be repeated in experiment. (I'll go ahead and quibble over whether macroeconomics is a science. It's closer to an art, like politics. A field with its own rules and lessons worth learning, but without the capacity to experiment and make falsifiable predictions.)
Physics was able to go on from the simplistic models, refine and extend them to both a wide scale and very high quality of theoretical and empirical concurrence in exquisite detail and generality.
On the other hand, economics goes on from Homo economicus into a mass of mathiness with very poor empirical correlation except perhaps in very very narrow circumstances.
> economics goes on from Homo economicus into a mass of mathiness with very poor empirical correlation except perhaps in very very narrow circumstances
If by "very narrow circumstances" you mean setting pricing, organizing distribution, predicting the effects of price increases and decreases, determining capital costs, making portfolios, and a whole bunch of other stuff that microeconomics makes precise and in a wide variety of circumstances predictably-correct predictions, sure. There is no economics on the Sun's surface.
> On the other hand, economics goes on from Homo economicus into a mass of mathiness with very poor empirical correlation except perhaps in very very narrow circumstances.
Can the field of economics give some rationale as to why the dynamics of money has any sort of stable foundation upon which to reason? Physics has at great pains established that indeed god does not play dice with the rules of the universe, but is mass human behavior that consistent? Is there a unified theory of money that predicts economic cycles from the 16th century as well as the 21st?
Depends on what you mean by dynamics of money. Social science usually features two approaches, one micro approach based on individual decisionmaking, and one macro approach trying to find general rules to aggregates (so mass behavior).
In terms of micro, yes there are pretty consistent theories as to why and how people use money. Probably the most relevant application thereof are in the microeconomics of banking and in so called microstructure models in finance.
In terms of macro, there is of course also a lot of monetary theory as to why people use money in a certain way.
What does not yet exist is a unified theory linking micro behavior to all aggregates. Such models typically rely on some sort of representative agent, which is known and recognized to be deeply problematic in scientific terms of aggregation.
Other approaches exist, of course, such as agent based models.
But there is no "theory of everything" yet.
Can economics give rationales? Yes. Peek into any course on the theory of money.
But reasoning from micro behavior to aggregates is difficult in social science. We are currently in the process of figuring out better theories of aggregation, but doing so requires using game theory and decision theory in fully interdependent (so for example networked) contexts trough dynamics, so this as of yet also requires a lot of methodological (read: mathematical) machinery that is not yet developed.
That's a dodge. The point in my asking that question is to see if you're sufficiently well acquainted with any meaningful literature to actually provide an example substantiating your claim.
Inverting the question does not obviate the answer to what I asked you. Moreover, as stated your rebuttal question is underspecified: what do you mean by the "dynamics of money" and "stable foundation"? Can I trivially answer this by talking about the relationship between credit and debts, or are you looking for something more specific? You responded to my (very precise and specific) question with a vague, orthogonal dismissal of the entire field.
Why don't you tell me about the "mathiness" in some peer-reviewed economic paper (preferably in a tier 1 journal) that you perceive to only be correlated with real world conditions in "very narrow circumstances"?
Physics deals with relatively simple things compared to economics, because nature is inherently rational once one discovers the rules.
Humans, on the other hand, can not be grasped so easily because they change the rules. Even if you "discover" a working theory of human behavior, people may just react by not doing that thing anymore to spite you.
So if you want to have some sort of basic theory, any theory at all that really could work with such subjects, you gotta step waaaay back.
The rational actor that actually "works" to build a scientific theory is such a general concept that it has literally zero predictive value. It states that actors make consistent choices, but only for identical choice situations. Thus, even if a microsecond passes, we are not in the same choice situation and all sort of rationality is out of the window.
An actor who chooses chocolate first, and then chooses something else the next second while throwing away the chocolate is can still be rational, it's only about the counterfactual of the first choice situation.
Yet, one was able to show that this sort of very general rationality is a necessary condition to writing a formal model of human behavior, in other words the homo economicus is just answering the question as to what ground rules we need to model human behavior in the first place. It is truly an immaterial, philosophical object that is used in all science dealing with human behavior.
It's more to the credit of economists that they actually wrote this out axiomatically instead of hiding it in implicit discussion.
Then, economists went and tried to write falsifyable theories based on data and observation. This has been done with more or less success, but let's not forget that economic science still replicates much, much better than something like Psychology or Sociology, also concerned with human behavior.
By the way, applying physical approaches to economics is called econophysics and is a thing that exists. It's not really a thing that is successful, cause if you treat humans as mindless particles who are just behaving according to some ruleset, you are working with hyper-hyper rational actors.
But it exists.
It's not billiard physics to general relativity, it's billiard physics to fluid dynamics and predicting the exact route of a stick through a set of rapids.
In economics our biggest complaints are around failure to determine that we're near a singularity and failure to predict behaviour through singularities (in a signal processing sense). It's understandable, as we all strongly care about the path of the stick, yet still unreasonable.
Macro is a decent enough tool most of the time, as are traditional fluid mechanics approaches. What we don't have are ultra precise CFD tools but in our arguments we act like we should/do. Sometimes traders think that they do have a great CFD solution and that's how we get LTCM crashes!
Fluids is a pretty good metaphor, but I would say that today we have sufficiently good reproducible physical understanding of fluids that we can generally fly airplanes at a high level of certainty (e.g. turbulence on the wings is both predictable and controlled in the correct ways that the plane does not crash). In comparison we crash the economy and even sub portions of markets periodically (and the last general crash was worse than many previous recessions) - we don't even have a complete picture of which turbulent areas to be wary of economically.
Or to maybe to a more human point, we can carry humans around on airplanes just fine, but don't know how to carry a payload of a nation of humans on a stable and healthy economic vehicle.
Can we please stop repeating this same old attack on economics. Just because economics 101 introduces people to some simplified assumptions does not mean all economics is like that.
That's like saying, well I was reading a programming book about a Ruby and then I laugh at the professor threw the book in his face and said 'One can never make an Operating system with this'.
Honesty, if you truly believe that about economics then you simply have never spent time to actually learn and engage with a wide verity of economics that exists.
A rational actor is one who is able to decide what he thinks about an option, and who makes decisions that are transitive (ie. consistent).
In that sense, rationality is still the basis of economics, but this is not what a normal person understands as rationality.
Instead, a more narrow view (partly due to difficulties of dealing with uncertainty, partly due to the context of preferences in a dynamic setting) required adding other behavioral theories which are now rightly considered mainstream in economics as well.
All these non-rational actors are still rational in the general sense, in that they make choices based on preferences at some point in time.
There is, by the way, no other science dealing with human behavior that does not assume rationality. In business, this is called "bounded rationality" after Simon, but nowadays is basically and excuse to use rational actors even though we know "they ain't".
All sociological actors are rational as well, even though you will rarely find a sociologist write this as a statement. Still, choices are made as responses to the environment of social forces.
Quite generally, it would be impossible to theorize about human behavior if it were irrational. That, in the general sense, would mean that it is not consistent and not predictable and thereby inherently not accessible to science.
What you econ Professor told you is basically correct, but the correct formulation of this you will probably see the first time when you take a course on decision theory or graduate microeconomics.
Too many critics focus on pure dollar optimizing rather than value optimizing. We all have different value maximization functions - if you understand that dollars are just one type of value so called irrational behaviour is coldly rational. Dynamic time preferences for money are accepted but dynamic preference functions for other things (status, sense of self, stress level..) are ignored.
In my experience, economic conclusions are almost entirely a result of the initial assumptions that their model was built on. Right leaning economists make different assumptions than left leaning economists so they get different conclusions.
I'll be happy if we get the point where we consider Friedman and Hayek to be misguided hacks and put an end to the fundamentalists purveying their damaging economic philisophies.
until the word 'usury' is resurrected and reintegrated into economic thought, nothing changes: there will be cycles of capital concentration followed by credit collapses and, eventually, social unrest
I remember distinctly the moment I realized the housing bubble was going to end badly. I was wondering in the early 00's how house prices, more or less everywhere, could continue rising past what most people could actually afford to pay. I hadn't really being paying much attention to the financial world, but sometime in 2004 or so, I saw an ad on tv for a mortgage deal that seemed to make no sense. I looked it up and discovered they were selling a negative amortization loan. On late-night tv.
I wonder that same thing today. To me, it feels like the bubble burst in 2007. But, that we're still here today, seems to indicate it didn't really pop, but instead it's a side-effect of another system.
Recently in Southern California, listening to the local NPR affiliate, they were covering a candidate race where one candidate accused the other of not hearing his constituents: ~"House prices have fallen, and that's bad for our voters. I hear them, and he doesn't."
I feel like housing in California is unsustainable: pricing, development, etc.
What's strange is that the candidate doing the accusation was a Democrat. I assume he benefits from loose borders (more housing demand), but constituents who can't actually vote and get their voices heard (immigrants wanting affordable housing, not what begins to approach slum-lord style ghettos).
> "House prices have fallen, and that's bad for our voters. I hear them, and he doesn't."
There are a few things that are absolutely essential to life: housing, clothing, food are among the most basic. If the price of clothing or food increased at the same rate as houusing, people would be rioting.
I've got a working theory that I am bouncing around my head. It's basically thoughts about the efficiency of markets and their ability to price in all value provided. The biggest growth is in housing and education. Basically, if moving from Iowa to Silicon Valley will result in a net gain in income, then housing will adjust to consume as much of that gain as possible. If education will result in higher lifetime earnings, then the price of an education will rise to capture as much of this value as possible.
I think the problem in California is that investors can go in and buy housing at unsustainable prices, and just rent it out, since their long term goal isn't to house themselves, but to have an asset that has a fixed return value at a near minimum, especially given the taxes hardly increase year over year.
In germany, the same thing is starting to happen. A week or so ago I had something like this ad in my Facebook feed. "no money, no problem, get your credit now!"
The theory is a bit oversimplified, but not incorrect given that the previous poster isn't alone in seeing the problem in the US, and the experiences of other countries.
Arguing that Australia's 30 year history of no recession is build on 'financial shenanigans and housing' are the arguments of people who defend a theory that is not workable.
Even were that so, why can Australia managed this 'shenanigans' but others can not.
I agree with the Article, the Australian central bank did its job and they didn't have a crisis, the Fed was a disaster and the US suffered the consequences. The Fed however was 10x better then the ECB and that's why Europe is still not recovered.
I don't think it is correct to say Australia didn't have a crisis. I graduated in 2008 there were no jobs at all until about 2012 companies on the East Coast just stopped hiring. I know I lived through it. About 2/3's of my graduating class (Engineering) left the East coast to move West for work in the mining sector. Fly in Fly out was about all there was going it was tough times and hard lifestyle.
Basically resources sector was only part of economy still functioning retail, manufacturing etc had huge contractions and we are still feeling the impact most of those lost jobs won't come back. Holden, Ford, Mitsubishi etc all those plants shut and left the country.
The resource boom which was driven by Chinese demand for Iron ore + Coal propped up large parts of the economy. Lookup all the articles from treasury etc at the time "Two speed economy" was real.
To say Australia was not affected by 2008 is a gross misstatement.
My point there was that Australia did not have an economy based on finance and real estate maneuvering, like the US and much of Europe in 2006.
If, on the other hand, Australia's rising housing prices are supported by increasingly sketchy loan practices, the Australian central bank will have another opportunity to practice its skills.
It's a pleasure to read an article by a writer who understands of the history economic thought, though I suspect I will disagree with him on a lot of things.
Anyway, this is interesting. I'll look up these economists.
On the face of it, I think it's interesting how economists are hesitant to consider money real. Money is fictional to most economists. What's real is consumer surplus, utility or some other abstract way of reasoning about consumption. ...skeptical eyebrow.
I liked David Graeber's book about money. First, because I like his intellectual shit-stirring. Second, because I think he's right about the origin of money. Money evolved from debt. Debt did not evolve from money, as liberal 17/18th century thinkers assumed.
Beyond this relatively simple point, I don't think he had much of anything concrete. But, as he talked about little local revolts and the role debt played... idk. Makes you think.
In any case, from a reactive european perspective in the post financial crisis world... I suspect that what business cycles are is a system wide insolvency. It turns out tat some of the money isn't real. That is, some of the debts floating around the economy are not going to be paid. The dollar isn't worth a dollar, your bank doesn't really have your money, the stock will never pay a dividend, the national debt will never be repaid, someone isn't as rich as they think they are, the mortgages are in arrears.
The crisis, whether it's a on banks, devaluation of assets, currency inflation... this is a bankruptcy proceeding, a negotiation determining who really owes who what, given that not everyone can get paid.
david graeber's book is great, although i too take a lot of the anti-money tone with a grain of salt. If you're in a marginalized subcommunity, a concrete ledger of debts is far better than an informal ledger of debts, as a position to stand on to defend your ground.
You may like "the great wave: price revolutions..." by david hackett fisher for the role of economic conditions on local revolts and global revolution.
To me, the problem with Debt is that while it indicts compound interest as harshly as it deserves, for all its hidden downstream consequences, it does not propose a real alternative to it. He proposes just not paying debts, but this means nobody accumulates capital, even literal seeds.
It is as though he proposed the alternative to sugar be starvation. While those are both equally invalid choices, and are arguably the economic models of capitalism and communism respectively, there is no balance to be struck between the two, and they both lead to death, be it from malnutrition or diabetes. It is only barely better to strike a balance[0].
What we need, really, is bread and fasting, and what this would entail is missing from that book.
[0] Before insulin injections, diabetics, universally having developed the deficiency late in life, were indicated to eat very little, and lived ~5 years at most after diabetes developed, IIRC.
to be fair (and possibly to graber's discredit for not identifying this), we kind of do have a rolling debt jubilee in that events fall off your credit rating every seven years and you can declare bankruptcy.
Also, a lot of the systemic problem with our debt system (like incrementally stealing value from the labor class) derive from its centralized nature; it's been about 150 or so years since decentralized debt economies (free banking in the US and Sweden) have been around and one wonders if with modern technology - mostly in the field of communication and ease of financial transactions - would enable a more robust, resilient, and just economic system.
Hated Graeber's book on debt, but I thought the idea that debt preceded money was uncontroversial. Homer & Sylla go back at least to the Sumerians in 'A History of Interest Rates'
I didn't read the book but here's the way I think about things.
Federal Reserve Notes represent a proxy for some "work" to be done in the future. Gold represents a proxy for "work" that's already been done.
If what Graeber is getting at is the notion that I'll give you these widgets or perform this service now in exchange for some widgets or work to be done later then I would agree, debt did exist before money.
the money replaced barter model is a pretty prevalent just-so story in econ departments. It even made it into a PSA infomercial (starting about 1:30, but the whole thing is a gem) :
> It's a pleasure to read an article by a writer who understands of the history economic thought
He basically wrote two paragraphs with the most oversimplified and honestly often wrong intellectual history of economics.
> First, because I like his intellectual shit-stirring.
You mean you like it if somebody writes a book criticizing another profession even while he clearly has not studied either modern economics or even the history of intellectual thought in economics. I wish more people would do that, sound like a healthy thing for science.
> Second, because I think he's right about the origin of money. Money evolved from debt. Debt did not evolve from money, as liberal 17/18th century thinkers assumed.
That was one of the nice tricks he pulled. If he actually bothered to read the history of economic thought and not the 2min cliff notes he would have found tons of interesting and complex thought about money and its origins.
He later claims that anthropologists had studied gift giving and debt economy then were the once that studied these things, while economist had done so 50 years earlier and were far more nuanced and with greater integration with economics then the the later anthropologists.
However Graeber is so anti-economics that he literally refused to read that literature to such extend he made the incredible embracing mistake and mis-characterizations that I could not take him seriously.
He didn't know the primary economist who wrote about origins of money and when writing about him he claimed 'he only added math to Smith argument'. That is particularly embracing because Carl Menger was known for not using a lot of math. So where did this notion of 'adding math come from'. Well there is another Carl Menger (the son) who was a mathematician.
So quite simply Graeber is so certain that he is correct and all economist are stupid that he never read the most influential economist on the very topic he claims to criticize economist about.
Graeber himself has admitted that money can arrive both from sustained interaction and trade, as well as from debt systems. So his whole me against the economist argument never even made sense, most economist didn't disagree with his main point.
What he did was trying to make this simple point and the argument that debt is not always good (Britain in Madagascar and so on) and then he hoped people would buy the rest wholesale.
>You mean you like it if somebody writes a book criticizing another profession even while he clearly has not studied either modern economics or even the history of intellectual thought in economics. I wish more people would do that, sound like a healthy thing for science.
You do realize that it's a history book and is not actually about economics at all?
I didn't read much in that book that even discusses modern economic thought. The closest he gets is debunking the story about money arising because of a coincidence of wants. That's hardly a lynchpin of modern economic thought though - it's a story told to 19 year olds in econ 101.
A lot of people don't like him because he's left wing, I suppose.
> You do realize that it's a history book and is not actually about economics at all?
The book about money and debt guess what discipline has studied this for 500 years. But of course, when he writes a book about money and debt its not economics. Of course it has other components as well but its still a large part of the substantial argument of the book, even if it doesn't cover as many pages as all his case studies.
It is also very specifically target at economist and telling everybody how stupid they are, there are ton's of references to the failures of economics and historical economists. He almost delights in it.
> The closest he gets is debunking the story about money arising because of a coincidence of wants.
Yes and is it not funny that he has never actually read the book by the economist who most popularized this. He literally doesn't know about it and has not read or studied any of the literature.
So he is 'debunking' something that he has not actually informed himself about. He literally didn't read the book by Carl Menger that made this argument. How can you take somebody like that seriously?
> A lot of people don't like him because he's left wing, I suppose.
There are tons of left wing and even communist economist and thinkers that I respect. However he is basically a charlatan who does not even have the decency to inform himself about what he is criticizing and yet writes with such a superior tone because he already knows that he is correct.
> A lot of people don't like him because he's left wing, I suppose.
I mean, sure, you can can your comment with this. But you're replying to someone who actually gave very specific criticisms of his work. You might not agree with them, but why bring politics into this?
Reminds me of an amusing story I read somewhere a while back:
>It is the month of August; a resort town sits next to the shores of a lake. It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.
>Suddenly, a rich tourist comes to town. He enters the only hotel, lays a 100 dollar bill on the reception counter, and goes to inspect the rooms upstairs in order to pick one.
>The hotel proprietor takes the 100 dollar bill and runs to pay his debt to the butcher. The Butcher takes the 100 dollar bill and runs to pay his debt to the pig raiser. The pig raiser takes the 100 dollar bill and runs to pay his debt to the supplier of his feed and fuel. The supplier of feed and fuel takes the 100 dollar bill and runs to pay his debt to the town’s prostitute that, in these hard times, gave her “services” on credit. The hooker runs to the hotel, and pays off her debt with the 100 dollar bill to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.
>The hotel proprietor then lays the 100 dollar bill back on the counter so that the rich tourist will not suspect anything. At that moment, the rich tourist comes down after inspecting the rooms, and takes his 100 dollar bill, after saying he did not like any of the rooms, and leaves town.
>No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism.
> they might be out of debt but they are also out of creditors
Or now have access to credit again. Given they were each other's creditors they may not have been willing to extend credit past $100. Now being paid they are likely to offer that same credit again as Thier confidence of being repaid is stenghened.
So this example also shows the requirement for confidence in markets whether the fundamentals support it or not. If one link refused credit it could snowball through the town grinding the flow to a halt.
And to take this full circle, this keeping confidence and flow was the QE program.
This is exactly the sort of reason I enjoyed the book. Its interesting how the story adapts to being told backwards. In most economic stories, the man would spend the dollars and stuff would happen.
Does it not seem more likely that the hotel proprietor would find a dollar bill in the couch, then pay part of his debt the butcher, who pays part of his debt to the farmer, who pays part of his debt to the store owner, who pays part of his debt to the prostitute, who pays part of her debt to the proprietor, who pays another part of his debt to the butcher....
For the town to maintain that debt for an appreciable amount of time seems the most precarious of contrived scenarios. It's like contemplating the effects of butterfly wings on a house balanced on a nail. It makes for a great story, but it took a lot of unrealistically meticulous effort to balance the house in the first place.
I liked Debt until I got up to the chapter on the 20th century where I knew something about the history involved and, well, you have stuff like "Apple Computers is a famous example: it was founded by (mostly Republican) computer engineers who broke from IBM in Silicon Valley in the 1980s, forming little democratic circles of twenty to forty people with their laptops in each other's garages." The whole chapter was filled with stuff like that and made me realized I shouldn't have been trusting the rest of the book.
the post-2009 recovery is now the longest ever ,exceeding the 90's even, and I think it will last much longer given how low interest rates still are and the absence of any problems. I think this calls into doubt business cycles and other concepts economists take for granted. The steady-state economy (similar to that of Australia) where there are few, if any, recessions may be the applicable model. People get too hung up on 2008 and forget that although it was bad, it was brief, relativity speaking, and the economy has not only recovered but made huge gains too.
Granted, the paper is from 2001, but it describes what's unique about the Australian cycle--symmetry between growth and recession periods. Rather than short, sharp recessions with prolonged growth, Australia has extended periods of growth followed by extended periods of recession. Moreover, it says that Australia's cycle strongly correlates with changes in supply, which I suppose isn't shocking considering that Australia in many respects has an island economy.
That paper looks at the 41 year period from 1959 to 2000, so the fact that Australia hasn't had a recession for the 17 years after that is fairly significant.
I think they just don't understand almost anything.
I have a real problem with the economists. Take four professors of economics into a room and ask a simple question. A question like "is this a good thing for X to implement Y", like "is this good for the Great Britain to exit the EU" or "is this a good thing to increase taxes for the rich".
Just ask - you will get at least 5 different answers to every question. Those answers will usually exclude each other.
So now me: I listen to those professors and who's right? I'm sure some of them are not. Some of them are simply saying the truth, some are lying.
And now take just one professor - ask him/her something - you will get answers. How should I know that they are right? I simply cannot. I simply don't believe them.
> Take four professors of economics into a room and ask a simple question. A question like "is this a good thing for X to implement Y", like "is this good for the Great Britain to exit the EU" or "is this a good thing to increase taxes for the rich".
Just ask - you will get at least 5 different answers to every question. Those answers will usually exclude each other.
Have you actually done this? Survey results from people who have done this (such as [1]) suggest that economists frequently do come to a majority consensus.
Furthermore, if you ask a group of software engineers how to design or implement complex software. you'll find many conflicting suggestions about which languages, libraries, programming models, databases, etc to use. Does that mean none of them know what they're doing, or does it suggest that complex systems don't have simple, straightforward solutions?
I'd like to gently suggest that you might not know as much about economists and what they know as you think you do.
I like your point about software engineers. Economics, like software engineering, is a dynamic field where knowledge advances at an irregular pace.
IGM Economics Experts Panel is interesting to read example of an expert survey. Economists also self-report their confidence and how strongly they agree with a statement.
There certainly are consistent answers in economics. But they tend to read more like safety rules than active policy measures. E.G. Regulatory price fixing below market rates will create shortages. The runaway printing of money will simply cause the value of money to fall relative to commodities (inflation).
Questions such as "What is leaving the EU going to cost the UK economy?" Or "When will we have the next recession and what will cause it?" Are much more nuanced questions. Mostly because markets are predictive, and any new information is immediately incorporated into those predictions. It is like asking "what sort of software failure is going to cause the next major computer breach?" If we knew the answer, we would fix it and our prediction would be immediately invalidated. Computer experts were predicting the rise of cryptolocker variants when Heartbleed & Shellshock happened. Then you had everyone auditing all their OSS stacks, when out of left field we get big news from Intel on Meltdown/Spectre.
Your impression comes from the media's tendency to try and present "both sides" of a story. So when reporting on an issue that 99% of professors are one side, they'll select one of the 1% and one of the 99% to give interviews.
> Just ask - you will get at least 5 different answers to every question.
That's because you asked a normative rather than a descriptive question.
Admittedly, econ is a field where there can also be a problem with descriptive questions, but blaming the field of economics for the fact that normative questions involve subjective value judgements and every person has a different framework for making those is quite unfair.
>The Great Depression discredited the idea that economies were basically self-correcting, and the following decades saw the development of Keynesian theory and the use of fiscal stimulus.
THIS, is a complete fabrication and lie to reinforce the status quo.
The Great Depression was caused AND sustained by manipulation of a centrally planned currency by the Fed. Read their deliberations and documents to see.... it didn't "come out of nowhere" but with calmly decided well in advance.
Anyone who studied The Great Depression knows that there was nothing free about it in any sense.
This article is a big proganda peice pushing Keynesian economics and continuing to pretend that the Fed is not a central planner who intentionally caused that depression.
Monopoly over currency and price fixing the interest rate is tantamount to central economic planning, as was done in the earliest Communist countries.
The boom and busts are happening because people have the vanity to think "they know better" to mess with markets and the bust happens as a way to "snap back".
Take away the state's forceful use of currency and manipulation.... and you will take away irregular boom and busts.
Or more simply put...unregulated greed eventually runs out of buyers and the sellers are left with overpriced junk.
Of course I still don't get why the three ratings agencies are allowed to continue without actually doing their jobs or how banks pay the ratings agencies and _tell_ them what their "paper" ratings should be.
It's all a trust game and when one of the players decides (inevitably) to game the game, the house of cards collapses....and those of us that rely on a normalized system of monetary policy are screwed.
I've been reading through Anna Schwartz's papers on monetary economics and I think they're the real story on what economists still don't get about the 2008 crisis.
If you read through the old monetarist research, you see that change in money supply has a better correlation with recession than basically anything else. This holds true even when you control for the possibility of reverse causation, when you make sure that you're actually dealing with a leading indicator of this cycle rather than a lagging indicator of the next cycle, etc, etc.
Keynesians think that the only measure of how tight or loose monetary policy is comes from interest rates, so they can't wrap their heads around how 1% interest rates can still be tight money. The real story of the economics crisis is that the banking crisis deposit:reserve ratio through the floor. This means that a bunch of money disappeared as banks preferred liquidity. The central bank didn't do enough to replace this money, so people couldn't hold the money balances they wanted and stopped spending. The Fed said they were doing all they could to spur inflation, but that's obviously false. The central bank can always inflate the currency and the fact that they weren't hitting their inflation targets shows that they had tight money.
Keynesians ultimately don't think money is important enough to model and until they change that, they're going to be confused.
Totally agree with your post, I explain it like this:
The problem with the old monetarists was always that they assumed a constant demand of money (or velocity) how they called it. Now they had some empirical reasons for this (see PhD under Friedman) but they missed something that earlier economists had already figured out. Namely that monetary demand can shift for all kinds of reasons and that any good monetary system needs to adjusts to that.
However they were totally correct on interest rate and that interest rate are a terrible guide for monetary policy.
When you actually study New-Keynesian it is perfectly clear that it is not the interest rate that sets monetary policy (or indicts it) but rather interest rate relative to the natural rate. Why New-Keynesian never explain this to anybody when giving interviews or anything like that boggles my mind sometimes.
So in New-Keynesiansim everything hinges on your assumption of the natural rate. 1% interest rate can be contracting or expeditionary depending on the natural rate.
What happened in 2008 is actually quite simple, the Fed had the interest rate fixed and didn't lower it (inflation fears because of oil prices, see FOMC meeting late 2008).
While in the real economy the natural rate was making the Fed policy more and more contractility.
Modern monetarists (Market Monetarists) like Scott Sumner have been point this out since 2009 of course.
So, by their theory what happens if the central bank collapses NGDP by 20% tomorrow? Would that not cause a recession?
I simply don't see the need for a new theory. If you have a monetary contraction its gone cause a huge problem with wages and prices and that has been the most solid empirical result in economic history. It explains tons of stuff that simply could not be explained by this high debt theory.
So lets just look at some basic evidence for that.
Is is totally clear that in order to go back to the original trend inflation would have to be above 2% for a short time to get back to the level. However the Fed and the ECB were simply not willing to do that. The Fed often repeated that they would do 'everything' but then followed it up with 'but if inflation goes up we stop'
However that policy does not make any sense. The monetary disruption has already happened and then they are massively below trend and are unwilling to go back to the original trend.
This policy however is totally mistaken because it makes macro economic sense to go back to the trend as you want to stabilize long term wages and prices and not force the whole economy to adjust to a new level.
(Btw this is called 'level targeting' and has huge support from many monetary economist)
Now, some New Keynesian agree that this should be the policy, they like the term 'flexible inflation tarting' because they assume perfectly rational central bankers that will figure out the right number but essentially the agree that 'the right number' is going back to trend.
However some of them believe this is not possible because of the 'liquidity trap'. However here is where this recession actually showed that their assumption is simply false. Many countries, like Switzerland have shown that if the central bank is willing boosting NGDP with zero interest rate is no problem. This was actually tough in mainstream monetary macro books before the crisis but somehow this was ignored because 'fiscal stimulus' was the politically favored narrative.
Lets look at one economy that didn't have a recession. Australia is a good example, they never had a drop in NGDP and they didn't have a recession even when their housing 'bubble' and many other things are not that different from many other countries that had a recession.
One more thing:
> other measures are needed. These could include quantitative easing, forward guidance ...
Well, if funny how nobody remembers history. Before the New-Keynesian revolution some of those tools were called 'monetary policy'. This nothing new, but rather the way monetary policy has been practiced for a long time. Central banks that didn't build their entire operational model New Keynesian interest rate theory were perfectly able to act at the Zero Bound.
By the way this is in many way the same problem as in the early 1930s, the theory for this is nothing new. R. G. Hawtrey spend the whole 20s to try to explain people what would happen if there was a nominal contraction and he was exactly 100% on point.
To me the biggest mystery about the 2008 crisis is why so much QE has resulted in so little inflation.
The only convincing arguments I have heard so far is that:
1. at the same time banks were forced to significantly deleverage, so while the fed was pouring money into the systems, banks were effectively pouring money out of the system.
2. inflation happened but it was all concentrated into financial assets, real estate, and salaries for the upper middle class, which expenses (college tuition, luxury flats and houses, restaurants, etc) have seen a double digit inflation (my FT subscription must have doubled in 10 years!). These aren't really measured by CPI indices.
I guess it may also have to do with how the QE was introduced. If it was money printed to pay civil servants it might have had a different effect than introduced in the bond market.
But I don't know if it is reproducible. It feels like we are at the end of the current cycle (it's hard not to be nervous when looking at a 30y chart of the S&P500). QE is pretty much all the way in, rates are low. There isn't going to be much more central banks can do than print even more money. Inflation should show its ugly head sooner or later.
This is the correct answer. Bank deposits at the USFED skyrocketed. It was FED money, lent to banks to be redeposited with the FED, on which deposits the banks earned interest I might add. It was a both a liquidity injection and a handout. And, it wasn't just provided to US Banks.
If money isn't directly pumped into the system by receiving banks, then the only direct impact is on those banks balance sheets, which affects their choices and decisions. So the effects to the overall economy are second order, and don't have the same fractional amplification like changing the reserve ratio has.
While I'm an economist, and have training on the model you are mentioning, I'm not speaking from a formal model. Rather from what I've seen in a large bank's treasury while it happened.
Another impact I've not seen considered is what happens when different banks have different effective reserve requirements.
When a bond is initially offered someone pays money for it, and the offering party gets the cash, and buys things with it.
That equation is independent of the form of money. Bonds can switch hands easily. Of course, if it turns out that the bond is junk, then it becomes hard to sell, so that slows down V indeed. (Which means the economy takes a moment to think when a lot of things turn out to be shit instead of gold. Credit becomes thin, etc.)
When Schwartz and Friedman wrote their monetary history, they found three variables that contributed to the total money supply:
1) High powered money supply produced by the central bank
2) Money held in deposits, available to be increased via the fractional reserve multiplier effect
3) The deposit:reserve ratio, which shows the strength of the fractional reserve multiplier effect
The financial crisis seems to have tanked 2 & 3, such that the Federal Reserve would have needed to do much more QE than it did to keep up with demand for money.
They also found that price growth and wage growth are affected by history: a history of slow money growth predicts an increase in money supply will be absorbed by more output. A history of high money growth suggests that more money growth will lead to modest output changes and an increase in inflation.
Scott Sumner echoes your fear about a coming recession, but thinks that appropriate NGDP growth via the right amount of money printing can lead to a soft landing without inflation. Given that this has been his entire career, I think it is very possible that we won't necessarily see renewed high inflation.
> at the same time banks were forced to significantly deleverage, so while the fed was pouring money into the systems, banks were effectively pouring money out of the system.
That's not an "argument", it's an observation. Almost all of the QE "new money" was never used by the banks to make loans; it just sat in their accounts at the Fed. Why? Because the banks weren't fools: they knew they had way too little reserves for the loans they already had outstanding, so they just used the QE funds to increase their reserves. That equates to "significantly deleverage".
> I guess it may also have to do with how the QE was introduced. If it was money printed to pay civil servants it might have had a different effect than introduced in the bond market.
Or money printed to pay ordinary people whose retirement savings had collapsed through no fault of their own. And yes, that would have caused inflation, because you would have had a greatly increased quantity of money chasing the same quantity of goods and services. It might also have stimulated some economic growth which could have offset that effect, but that's a chancy thing to rely on.
Which I believe is the entire point of QE. I find the current incarnation of QE (buying bonds) unimaginative at best. I get that helicopter drops are politically hard, but there's gotta be something better than this.
Not really. The point of QE is to stimulate economic activity. Unfortunately, buying bonds doesn't do that either if banks don't use the newly printed money to make loans.
It allowed them to create more money. Fractional reserve requirement is something like 1/20, no? But usually the capital (bank company equity) requirements (like Basel III) were the harder to meet, so who knows how much new money banks created. (Actually it can be easily looked up, and not much, because inflation did not jump.)
Usually QE allowed banks to roll over mark-to-market assets that turned into garbage into sane cash to satisfy solvency and liquidity requirements. And of course this led to price stability.
> Or money printed to pay ordinary people whose retirement savings had collapsed through no fault of their own. And yes, that would have caused inflation
We did exactly that. The Fed orchestrated the greatest ordinary person bailout the world has ever seen: it reinflated the US housing market and salvaged the net worth of the entire middle class in the process.
It did cause vast inflation. Just look at the cost of a house in 2012 vs 2018 or the equity situation then vs now:
Average gain on a home sale in 1Q04: positive ~$50,000.
Average gain on a home sale in 1Q12: negative ~$50,000.
Average gain on a home sale in 1Q18: positive ~$55,000.
Those recent gains are very heavy with inflation courtesy of the Fed, and they are entering the real economy slowly but surely with every exit. That's also why the Fed is being forced to raise interest rates when it's the last thing the economic party wants.
The artificially juiced stock market (artificial courtesy of the low rates), which has created millions of new millionaires in the last four or so years, is also inflationary. It has also helped to salvage countless pension funds for large numbers of ordinary persons, funds that were badly under water. Every time someone sells their hilariously inflated Netflix stock at 200 times earnings, they can thank the Fed, and when they dump that into the economy (consumer goods or housing) it's inflation in action.
> The Fed orchestrated the greatest ordinary person bailout the world has ever seen: it reinflated the US housing market and salvaged the net worth of the entire middle class in the process.
How the the Fed do this? Certainly not by QE, which did none of these things.
> Just look at the cost of a house in 2012 vs 2018
What did the Fed do during this time? Most of the money printed by QE happened from 2009-2013, and QE was shut down completely in October 2014.
QE bought a lot of long term junk-ish bonds (full of "AAA housing"), no?
QE was the bridge between the two sides of the chasm, hence it's not visible on the graph. We see a rapid fall, a smooth bottom and a nice rise, but it could have been simply a big crash at the bottom and nothing for a decade.
> QE bought a lot of long term junk-ish bonds (full of "AAA housing"), no?
No. QE bought T-bills in order to exchange them for increases in the banks' account balances at the Fed.
TARP funds bought junk-ish bonds back in 2008-2009, but all that did was make banks and financial institutions not go bankrupt from being forced to make subprime mortgages for several decades due to the federal government's policy to "encourage" home ownership.
The “money printing” the Federal Reserve was doing in QE was going straight into reserves the banking system holds, and in exchange the FED received treasury bonds, from my understanding. I think in banking, reserves are not and cannot be lent out to anyone. So it wouldn't enter the economy to circulate. Or at least, this is the MMT perspective.
Another explanation I’ve heard is widespread adoption of new technologies that have a lot of deflationary force behind them. E.g. Amazon giving consumers extreme price discovery, forcing companies to compete on price. Fracking and other new extraction technologies keeping oil prices down. Businesses adopting new tech to lower costs. Globalization (enabled by tech) keeping wage growth in check.
Economist here. With non- zero probability, though the nuance is that inflation is under-reported when housing and energy are excluded from CPI. There is also a claim that hedonic substitution pushes down inflation measures, but that is more of a philosophical argument than a numeric argument.
High for everything, or are you talking about cars and real estate? Please provide an example. The products I see on Amazon are fairly cheap unless you are comparing it to products from CHINA.
I think /mostly/ the 'big ticket' items; anything with a cost over 1000 USD.
However the price of many other items are also quite high, particularly for infinitely replicate-able information (entertainment).
I'd argue that the price of many other things under about 10 USD is largely a land ownership or transportation cost; as a society we've become so effective at producing (even grown things) that the biggest issue is the price of energy and labor associated with managing those products to end users.
> I'd argue that the price of many other things under about 10 USD is largely a land ownership or transportation cost; as a society we've become so effective at producing (even grown things) that the biggest issue is the price of energy and labor associated with managing those products to end users.
This explains some of the discrepancy but I think it's only a tiny fraction of the total. There is just an ever increasing amount of things that are sold for what they can get away with rather than any inherent value. The generic brand stuff has the same transport and labor costs as the fancy brands yet are much cheaper, which rules that out.
I just went shopping so a fresh example is my instant coffee. The one I buy is almost permanently on sale for half price (not today unfortunately), so it seems pretty logical to assume that they make a profit on this sale price and everything else is just a nice fat margin on people that don't "bargain" hunt. I went half way and only got the small jar, but there are a dozen other things in my shopping bag I don't track the price of.
I know there are plenty of other things we pay much more for than we should, if the rest of the world had to pay what I just did for rice (generic brand) then several billion people would starve this year. It seems we have more cartels than competition.
I haven't studied QE specifically so I can't address that directly, but it might be helpful to think about what inflation is and how this behavior changes in a depression. Inflation is an increase in the general price level of all goods and services.
The global economy left to its own devices would likely have entered a full-blown depression, and deflation usually accompanies this. The decrease in demand across the economy puts a great downward pressure on prices, this puts pressure on decreasing costs, this puts pressure on decreasing wages, and so on. You have a real threat of a deflationary spiral as demand further dries up due to people having less money to spend on goods and services.
So, as a lot of economists argued, there was a significant threat of a deflationary spiral facing the economy, more than any threat of inflation getting out of control, which had already been low to begin with.
Why would that be a mystery? QE simply reduced the interest rates on treasuries by introducing artificial demand for existing treasuries from newly printed cash. That's obviously not going to result in increased spending on cabbages, jeans and PS2s. The total level of spending remained static.
It's going to mean people who were getting 3% on their bonds and are now getting 0% will go looking for 3% in whatever other financial assets they can find - San Francisco property, shares, etc.
> inflation happened but it was all concentrated into financial assets, real estate
... because demand remained static while supply (of yield bearing invesment assets) was restricted.
That was basically the whole point of QA. It bailed out the banks without needing to give them taxpayer cash by bumping up asset values until their loanbooks started to look healthy again.
In part because QE was meant to shore up bank balance sheets, it wasn't meant to be lent. If it's not lent, it doesn't cause inflation. In simplistic terms.
It’s simple; a lot of the QE from US left US and went to emerging markets, when there was an interest rate difference between those markets and US’s 0 percent. Overtime, the profits earned from those overseas investments stayed overseas. However, when China’s stock market collapsed in 2015 and more money started flowing back into US, US raise interest rate in late 2015. This prompted more return of money back into US, which prompted more economic slowdowns in emerging markets (enhanced by political instability in turkey, Russia, and rising debt in China). With fed raising rates higher and higher, and emerging markets slowing down even more, more and more of the QE money flew back to US. Thus the real estate boom in Silicon Valley, NY, and Los Angeles. Ironically, a lot of China’s QE resulted in the same flow; lots of money went into US real estate. And now we have dollar strength, rising interest rates, emerging market crisis, US gdp growth at 4% in q2
And why China is in deep trouble because they have 3Trillion (supposedly) in foreign reserves, but IMF said China needs at least 2.5Trillion for normal import/export operations. So really, they only have 500B in foreign reserves. And now they're going through reserves even faster, selling dollars to prop up yuan, since yuan has now fallen 10% within the last few months.
> To me the biggest mystery about the 2008 crisis is why so much QE has resulted in so little inflation.
Inflation doesn't work as simply as you might expect. What people believe is actually a big piece of the puzzle. As proof of this look at the Paul Volcker interest rate hikes, that squashed run-away inflation. While his hikes did eventually work, in the short term they did nothing to combat inflation. Why? Because people didn't believe they would help (in fact many thought it would make the problem worse). You had to get the minds of the the investors and spenders on-board before you actually see results (despite what the math might say).
I think the reason QE hasn't caused much inflation is because people either don't care or don't understand (most likely the latter). I am sure intentionally obscuring "printing shit tons of money" as "Quantitative Easing" also helps with the psychological factor so as to not panic the masses.
Also, QE helped the banks, and banks were not started to offer lower interest rate loans to consumers. (Nor have they decreased other costs of accessing money - such as credit card fees etc.) So no inflation happened.
The cause of inflation is usually described as too much money chasing too few goods.
Economists often use quite narrow definitions of money, counting things like cash and bank accounts, and maybe CD's, but never other valuable liquid financial assets like stocks and bonds and real estate.
But financial decision makers absolutely do consider their full set of assets in deciding how much purchasing they can afford. How much purchasing power is chasing the available goods is really the relevant statistic for causing inflation.
In quantitative easing, the Fed gave new dollars in exchange for existing financial assets (bonds, mortgage backed securities, etc). The exchanges were roughly at market value, meaning the dollars had the same purchasing power as the assets.
The exchange let the Fed control long term interest rates and increase the supply of safe assets (dollars) in the market, which was needed as banks were forced to increase their holdings of safe assets to deleverage.
Since total purchasing power didn't increase, there was no cause for inflation.
"To me the biggest mystery about the 2008 crisis is why so much QE has resulted in so little inflation."
I don't know if this is the correct answer, but a very simple answer would be that we were/are in a massively deflationary environment and (things like QE) have been necessary just to stay in place ...
This is also what I believe. If you look at the US QEs there is a tight correlation to the stock market. This most likely did not happen by chance.
Inflation has simply been confined to some select assets. It's all going to come back into the mainstream economy unless the next recession/depression ends up being extremely deflationary before that happens.
I think the hope is that companies eventually really start to hire more and pay better wages, and then we'll see some actual inflation, and then the Fed will feel safer tightening up.
Currently, we are hitting very low unemployment so wages have nowhere to go but up.
The weird one is housing: as rates stay low, people take on bigger and bigger mortgages leading to 'housing inflation' ... but it's generally not measured as inflation so it's kind another form of stealth inflation.
What confuses me is that low unemployment obviously doesn't lead to real wage increases (currently).
There seems to be something wrong either with the unemployment stats or something else is not quite right.
As long as the money that is confined in housing assets doesn't reach the "lower" market of people who actually need to spend that money, it's perfectly logical to me that it doesn't appear as price inflation in the general economy.
I suspect that's because the nature of "not-unemployed" is changing. Long ago it usually meant either being out of the workforce (retired, student, homemaker) or a full-time job with benefits.
Nowadays we're seeing a decrease in the last category, and an increase in "underemployment" and people holding multiple low-quality jobs to make ends meet. They aren't "unemployed", but they're not in a strong negotiating position either.
Combined with QE were stealth reductions in product quantities for the same price, i.e. the "price remained the same for a package of widgets" and yet there were less widgets per package
some of us were paying attention to the shell game
I think that the Fed's Interest on Reserves (IOR) policy explains the situation pretty well. Back in 2008 when everything was collapsing the most recent inflation data the Fed had showed that inflation was running above target due to oil prices. This wasn't true, inflation had actually nose-dived, but it takes months for the Fed to process all the numbers to figure out what the inflation rate was.
In order to inject lots of money into the economy without causing inflation the Fed went to Congress for permission to pay banks interest on the money that they kept on deposit with the Fed beyond the money they were required to keep. Normally banks keep the minimum required reserves with the Fed and lend out the rest but the Fed hoped that paying interest on the reserves would encourage the banks to sit on the money rather than lending it out where it could chase goods and services and cause inflation.
This was all new territory and the Fed's economic models for how IOR would effect the broader economy weren't validated. That's probably part of the reason the Fed's predictions about inflation and recovery were so off as the crisis progressed.
EDIT: You can see the large effect of the policy in the graph of excess reserves over time. The policy is still in effect.
Also, link something about the Fed going before Congress with regards to the interest on reserves? (I think the Fed can do this without Congressional approval. It always had this power.)
the inflation had already happened in the preceding asset bubble
QE got swallowed up to make the large creditors whole and it ended up being a massive wealth transfer to them, so you see elite real estate, art, etc. being bid up while the rest of the economy flounders around aimlessly
It's essentially related to how the banking system works, and how it's regulated.
QE money is asset money, it sits on the left hand side of the bank's balances. The money that everybody actually uses is bank deposit - liability money, which sits on the right hand side. Liability money dwarfs asset money in modern economies.
The rest is then a question of what happens when you inject asset money into a banking system, and that depends on the regulatory framework. In the modern banking system capital controls have taken over from asset liability money controls, and that is essentially what has stopped the hyperinflation that some people predicted.
If you look at the deposit money quantities, well the normal rate of expansion for the US is approximately 2x decade, and that continues to be the case.
> 2. inflation happened but it was all concentrated into financial assets, real estate...
Real estate prices in Vancouver have spiked since 2008 so sign me up as someone who believes the fincialization of housing and QE is a main component in why Vancouver housing prices suddenly became wildly out of sync with local incomes.
Excess money was absorbed by real estate price increase. It takes time, but this will tricke down to inflation; everybody needs to rent or buy a place to live at some point of the future.
The truth is that monetary policy does little. QE just swapped out high-interest treasury securities for low-interest reserves on private bank balance sheets. This flood of reserves drove interest rates so far down that the Fed had to start paying interest-on-reserves just to maintain a floor.
It didn't do much else. The idea that banks are reserve constrained is a widely held misconception. They are not. If anything, they are capital constrained. Adding to the supply of reserves then does not increase lending.
Another widely held misconception is that interest rates and inflation are inversely correlated. They are not. Interest is the price of money, and the price of money impacts the prices of everything else. Lowering interest rates decreases inflation, not increases. This is called neo-Fisherism.
Fiscal policy is what does work. Increase government spending enough and you will get inflation. This should be entirely noncontroversial.
> Lowering interest rates decreases inflation, not increases.
This is very much context dependent. But since there's enough brave money chasing after even marginally sane investment opportunities, it's not surprising that the interest rate level is not effective.
The Federal Reserve was not happy about using QE; they just didn't see an alternative. It was a consolation prize.
The economy was stuck in a rut and needed some kind of kick in the butt. Congress was unwilling to fund another ARRA-like stimulus (the 1st too small), partly because the federal debt was high. Low interest rates were not doing the stimulus job they used to because it appeared the rich decided waiting out the recession and sitting on cash was a better strategy than suddenly investing in business. Near-zero inflation made sitting on cash not feel so bad. Or, invest in Asia: capital-intensive investments no longer paid off in the USA, as manufacturing was shifting to Asia.
The better solution would be to not run up debt so that the Federal Gov't can issue a big stimulus during slumps: classic Keynes, which is basically Grandmother's advice: save up during good times for rainy days.
But there's insufficient incentive for politicians to avoid debt; they are rewarded for short-term improvements in the economy, not long term. We need something akin to a Balanced Budget Amendment that allows Keynesian stimuluses. The law would probably have to kick in gradually so that politicians wouldn't fear a short-term dampening of the economy that could harm their re-election. (Pension problems have a similar short-vs-long-term feedback glitch.)
"To me the biggest mystery about the 2008 crisis is why so much QE has resulted in so little inflation."
Because what you call money is just a 0% permanent bearer bond to anybody not in your currency area.
QE is just a swap from interest paying savings to non-interest paying savings. If you're scared, you don't need paying interest to save, and anybody without a good index linked state pension to look forward to is scared.
Basically, as the the rate of interest goes down, the demand for money increases (because it becomes cheap(er) to borrow). This is why when the economy tanks, central banks lower interest rates: cheap money encourages people / business to borrow and spend (thus increasing demand, and stimulating the economy).
However, at a certain point the demand for money becomes perfectly elastic. This is the generally when the interest rate is zero, which is where we were at from 2008 and for some years. The interest rates can't go negative (well, mathematically they can, but practically they generally don't (with some exceptions)).
This is called the zero lower bound, and once you're here, IS-LM says that you can print money without worrying about inflation too much:
Once you do see the economy recovering (through un/employment rates and inflation), you stop printing money and start increasing interest rates.
I know some people on HN like to rag on Krugman, but he was saying all of this over the last ten years, and has generally been correct. All of the above is fairly straight forward IS-LM (which he exposes).
The Great Recession has been pretty good as a "scientific" experiment to see whose predictions were accurate: turns out the demand-side Keynesians were pretty good, and the Chicago-school supply-side folks were not.
Ah bloomberg news, understanding that a new economic slowdown is in the cards wants to reassure the public that the economists have learned something. What they've learned is that they are ever more desperate to attempt to coax additional growth out of a slowing machine that increasingly just fails and takes ordinary people with it. Without new markets, the economy will continue to slow and monopolization will continue to increase.
"These are important innovations, and they address glaring deficiencies in the pre-2008 models. But they don’t feel like a big break with the status quo. Most importantly, the basic notion of recessions as driven by rational actors’ responses to unpredictable, sudden events — or shocks, as economists call them — remains in place."
One of the fundamental weaknesses of modern economics is its reliance on un-knowable, extraordinary, incomprehensible "shocks" when faced with evidence that their theories have flaws. One thing it does is to prevent their theories from making progress in understanding...economics.
Do you actually know what economists talk about when talking about 'shocks'? I mean outside popular media.
Economist do actually quite a bit about studying these shocks, and trying to explain what they are, where the come from and so on and so on.
Take a simple example, tomorrow there is war between Iran and Saudi Arabia and there is no more oil coming from the middle east. That would be a supply shock.
It is true that sometime we can only observe that something change and sometimes its hard to say why that happens, but that is a problem you have in all complex systems.
Your asserting that economists invent 'shocks' when the evidence doesn't fit there models is totally incorrect and leads me to believe that you don't know anything about modern economics.
"Take a simple example, tomorrow there is war between Iran and Saudi Arabia and there is no more oil coming from the middle east. That would be a supply shock."
Would it be? One would expect, given that oil prices and the middle east are some of the most watched economic sectors, that there would be a very visible run up to such a war, the effects would be estimated and accounted for, and there would be no economic discontinuity. This is economics working correctly.
As late as 2006 and 2007, we have economists on record as saying "everything's dandy". This was not due to a lack of data; they had most of the information then that we're arguing about now. Instead, it was because their models said what happened couldn't happen.
Tons of war happen without run up. Even if the run-up happened threw-out a period of months, it would still be shock.
A shock is change relative to some trend, not necessarily a fixed thing that happens in the news.
> As late as 2006 and 2007, we have economists on record as saying "everything's dandy". This was not due to a lack of data; they had most of the information then that we're arguing about now. Instead, it was because their models said what happened couldn't happen.
In 2006/2007 everything was more or less ok. While there was a housing crisis, GDP growth was on track and unemployment did not go up. You seem to think that everything after late 2008 was predetermined, witch is false.
No. The point is that the recession happen because of monetary policy mistakes in 2008 and the only way to know if it was gone happen would be to have perfect knowlage of how the central bank is was to respond to monetary demand changes in 2008.
Reading through this thread we have a bunch of theories about what must be right. And there are a few predictable responses of "the government didn't do enough."
Basically, the artificial expansion of bank credit kicks off the boom. The bust must inevitably follow. And the credit expansion is enabled by an unsound fiat money and banking cartel protection, such as the US Federal Reserve system.
One should not that this theory is not incompatible with modern monetarism.
Hayek had a concept called secondary deflation they fit the pattern of 2008.
The problem with ABCT is that Hayek and Mises both made the mistake that they assumed to much correlation between the boom and the bust.
While Hayek had the 'secondary deflation' concept, he failed to realize that this was the far more destructive part (if mishandled by the central bank).
So Hayek did not spend enough time on that and it caused him to misunderstand the Great Depression even when his theory was actually capable of explaining it.
Adjusted household income has been essentially flat since the 70s. The percentage of those households with two earners has gone from 25% to 60% during that time. Productivity has grown nearly every year during that time.
This, combined with our rising income inequality, means that the economy is not okay for most people even if a few widely-watched numbers are high. It should not come as a surprise that such an economy would be more fragile than those high numbers would indicate.
Might just be me but I'm missing the relevance. The point is that a household which has already maxed out its possible number of workers no longer has the option of sending someone else to work to deal with a sudden expense, so a two worker household is more fragile than a single worker household at the same income. The only reason I bring up productivity is to mention that it hasn't come down in proportion, which this graph doesn't show either.
Whatever the truth is about the numbers you present.
The argument that the recession happened because of a fragility of inequality is a highly speculative theory. I have not heard a single economist make that claim.
Also, it fails as an explanation because you are explaining a momentary event with a long term situation.
Please also be aware that by reading pundits like Noah Smith, you are buying into what is basically a historical fanfic of economics "schools" fighting fiercly over who is right.
This sells a lot of articles, but it doesn't really reflect academia (if it ever did).
The god to honest truth is that macroeconomics in aggregated form is an undertaking based on extremely scarce data, and it always was. Traditional statistical inference invariable fails if you basically only do observational studies where you observe everything once, more or less.
This is also why these grand theories have fallen out of style, except of course for those vocal pundits like Noah Smith, who literally has a job because he conjures up debates on political economy.
The gold standard in todays Macroeconomics are either some variation of VAR models, more or less assumptionless vector-autoregressions of whatever flavor, or more structural DSGEs, who are fine-tuned to explain certain mechanisms but are arguably incomplete as models.
Neither of these models are Keynesian, or Austrian, or monetarist, or whatever.
It is also wrong that the mainstream is some sort of monolithic entity. The biggest econ association in Germany is trying to engage "heterodox" scholars, inviting them to conferences and such. Several universities keep clusters for agent-based models, complexity research and even econphysics. The research output, however, has been a bit lacking as of yet.
In Paris, there is an active community of "Post-Keynesians" right in the top-7 econ university in the world. I know that figures like Prof. Keen are invited regularly.
In contrast, it seems to be in the interest of some heterodox scholars to conjure up a hostile "mainstream theory" and then refrain from actually engaging with it in academic channels.
The same is true for those pundits going on about Keynesians vs. Chicago boys in this day and age.
Insofar that academic discussions did occur, they have been extremely productive imo.
I agree that the headline and tone of this article are engaging in unnecessary hyperbole, but this description of Noah Smith's views and arguments are not consistent with what I've read. I don't see him arguing for a Grand Theories perspective of economics, and he grounds his arguments in empirical evidence and is vocal about the need to do this.
I also think you have contrived an exaggerated view, attributed it to him, and are arguing against that. I'd like to see more quotes to back up your argument because it is difficult to find it persuasive.
Doing a quick search I found an older blog post where he touches on a lot of the same points that you just did, so maybe you agree with him more than you think:
You are probably correct that I am not really reasonable in singling out Noah. I apologize for being wrong here.
It's just that he is front and center in in this econ-blog industry that has been often unhelpful in making people with ideas engage the literature in an academic context, which (in other areas) I am a bit bitter about.
I am sure he is a nice guy personally, and switching from his AP position without actually doing research to Bloomberg was probably putting more bread on the table, but still, the whole WAY the debate about economics is lead in the public has been stinted away from scientific context toward hostility and tribe mentality, and I do believe he is partly to blame for that.
But don't get me wrong, I am not defending current Macro. It has been extremely cool&good that everyone, including economists, now believes that the top-of-the-line models are basically garbage and economists are idiots.
It means that people actually doing econ now are rather humble about what they do, and still have to be extremely technical and smart. Indeed, if you bring in a new theory that works, you'll probably be famous very quickly. The bar is pretty high though, your model gotta be inferential and parameters causally identified, while still fitting the data well.
Nevertheless, my macroeconomist buddies got _really_ excited about doing "that machine learning" pretty much years before other fields were even talking about it (until they found out they basically use the same models already), because everyone is looking for the next big idea all the time.
It's exactly the sort of old-style economists who can explain everything with their always-correct theories and basic math and then claim deference by everyone, who don't really have a place anymore - except writing articles for certain business newspapers, that is.
The one thing all the predictors mentioned in the article seem to have in common is that they're all efforts by the financial industry to wring more profit out of the real economy - i.e. the one that produces goods and services of more tangible value than numbers on a balance sheet. Without proper regulation, competing on the basis of investment returns inevitably creates a race to take ever greater real risks, independently of the risks as portrayed to investors, and employ ever more sophisticated tactics to obscure the difference. That's why I and many others who've lived through more than one economic cycle know that when the ratio of finance-industry profits to real productivity takes a sharp uptick it's time to run for cover.
Lots about monetary policy, and very little about what will actually cause the next big recession. Bank executives, shareholders, and creditors have learned well from the last go-round. They can do whatever they want, and unless their interests are opposed to those of Goldman Sachs, the USA government will bail them out. It won't be smaller next time.
This will continue until it brings down the republic.
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[ 2.7 ms ] story [ 204 ms ] threadSo what's new here?
https://en.wikipedia.org/wiki/Austrian_business_cycle_theory
Hayek when he wrote his version in the 20s deliberately did not go outside of the general equilibrium economics.
Actually his mostly in agreement with modern monetarist interpretations of monetary shock being on of the prime problems.
Read George Selgin, Walter White and Steve Horowitz if you are interested.
They are describing it on the page, but no mention that this idea has existed for decades. Meddling in the economy wins out due to politics, but it always leads to gigantic downturn.
> https://www.economist.com/free-exchange/2011/02/11/the-warni...
From that article a choice quote from a referenced report:
> "In the United States, for example, it did not discuss, until the crisis had already erupted, the deteriorating lending standards for mortgage financing, or adequately assess the risks and impact of a major housing price correction on financial institutions…As late as April 2006, shortly before U.S. housing prices peaked, the WEO and the GFSR explained away the rising share of non-traditional mortgages in the United States thus: “Default rates on residential mortgage loans have been low historically. Together with securitization of the mortgage market, this suggests that the impact of a slowing housing market on the financial sector is likely to be limited."
So to say that Economists still "don't get" the 2008 crisis is a somewhat heavy rose-colored embellishment of the actual state of the field.
It sounds like more of the same. It sounds like more "trust us, we won't mess it up this time around." It doesn't sound like a fundamental re-thinking of our economy.
This is one of those pieces where they claim experts don't understand their own field, so they quote experts from that same field to back up that idea.
Have economists actually changed their models, or are they still referring to the 2008 crisis as an unexpected shock?
What are the chances that their "understanding" of the 2008 crisis will prevent them from being surprised by the next one?
For example, the quote from my original comment was from an internal report by the IMF on the IMF's own forecasting/reporting in the period leading up to the financial crisis. It even calls out a presentation made by it's Chief Economist (at the time) which warned against risky behavior that was wholesale ignored by the fund's management (from the Economist article before):
> Even when some of its officials had different ideas, the fund's management seemed not to be listening. Its then chief economist, Raghuram Rajan, concluded a presentation at the annual Jackson Hole conference of central bankers in 2005 by arguing that “we should be prepared for the low probability but highly costly downturn”. But the IMF now admits that:
> "Despite the importance of the Economic Counsellor's position, there was no follow up on Rajan's analysis and concerns— his views did not influence the IMF's work program or even the flagship documents issued after the Jackson Hole speech."
That presentation by Raghuram Rajan is now fairly well known as having fairly accurately predicted the crisis (in 2005) but fell on ears deafened by prosperity (he was the Chief Economist at the IMF and IMF Management completely dismissed it). Here he is on a different list of 6 economists who "predicted the global financial crisis":
https://www.intheblack.com/articles/2015/07/07/6-economists-...
He later went on to be the 23rd governor of the Reserve Bank of India.
I am by no means an expert on the subject so take this all as a layman's loose following of the topic...but it seems to me that the lack of recognition of the dangers by Economists is only part of the problem. It also seems that many major organizations were incentivized to turn a blind eye or even actively downplay concerns in the face of overwhelming financial growth. Even before the crisis, there were Economists writing about the dangers[1] (2006); so to say the entire field of Economics were completely blindsided is itself a bit of an exaggeration. In reality, many large Economic organizations were incentivized to downplay concerns by rampant growth. No one wants to be the one that says, "Hey let's slow down," when the economy is booming.
[1] http://keenomics.s3.amazonaws.com/debtdeflation_media/2007/0...
These ideas were very popular until Great Britain encountered stagflation - conditions under which both economic recession and inflation coincided and traditional Keynesian levers and predictions did not function.
Zero Interest Rate conditions are not normal. Never in this history of humanity have interest rates been held this low for so long.
I strongly recommend taking a long walk through the videos on the Mises Institute, reading Daniel DiMartino Booth and listening to several Peter Schiff podcasts.
I don’t recommend buying gold, but if you want a real critique of what is happening, listen to the leading critics and not this weirdly mangled and factually questionable Bloomberg piece.
There are many better people to learn about this from.
We are living in absolutely extraordinary times which will need with a severe economic implosion.
Interest rates were lower, but with deflation, the real interest rate has been estimated to have been about 7.87% in 1930:
http://www.sjsu.edu/faculty/watkins/dep1929.htm
Deflation is the key to the Great Depression. And why we had deflation was directly a result of the gold standard.
Indeed, Europe saw stronger deflation earlier than we did because the U.S. economy of the 1920s was (like China today) a net exporter of manufactured goods: radios, washing machines, etc. The gold standard meant that the fixed supply of gold moved [on the books] inexorably from Europe to the U.S. That brought deflation in Europe and even inflation in the U.S. (reflected most spectacularly in the stock market and the social excesses of the day).[1] Deflation in Europe accelerated the trade inbalance (increasingly stronger European currencies) until, one day, European consumers found themselves jobless and unable to afford basic necessities because domestic real prices were so high relative to earnings. When European trans-Atlantic trade and investment slowed the whole house of cards came crashing down. And all of this was a direct result of the rigidity of the gold standard. The gold standard created a feedback loop that accelerated the global economy into a brick wall--the brick wall being the reality of the finite supply of gold.
I can't even begin to do justice to the actual history, which is obviously just a little more complicated than I make it out to be above. For that everybody should read the 2010 Pulitzer Prize for History winning book, Lords of Finance (https://en.wikipedia.org/wiki/Lords_of_Finance)
[1] Gold bugs like to point out the hyperinflation of Weimar Germany. But they were deliberately printing currency to spite the U.K. and France, to whom they owed war reparations. Because of the gold standard reparations were nominally fixed, so the strategy didn't work as you might think. But if they hyper-inflated quickly enough (on the order of weeks or months, the time it took to deliver a payment and before exchange rates fully adjusted), they could technically cheat, not to mention blunt the deflationary impact domestically. Of course, this hyperinflation also created an unstoppable cycle domestically. But because of war reparations and the merciless calculus of the gold standard, Germany was screwed either way. They knew what they were doing. The hyperinflation was knowing and deliberate. It was arguably a consequence of the rigidity of the gold standard.
Agreed, though like you said it is pretty complicated. The US had about 45% of world gold reserve in the early 20's and even though was a net exporter by 1929 had dropped to closer to 37% due in part to large capital lending to Europe.
http://library.intellectualtakeout.org/library/chart-graph/w...
A major issue though was the hoarding of gold by France:
>...While the tightening of U.S. monetary policy in 1928 is often blamed for having initiated the downturn, France increased its share of world gold reserves from 7 percent to 27 percent between 1927 and 1932 and effectively sterilized most of this accumulation. This “gold hoarding” created an artificial shortage of reserves and put other countries under enormous deflationary pressure.
https://www.dartmouth.edu/~dirwin/Did%20France%20Cause%20the...
This is not what Keynesian economics is. It's perfectly rational for the government to step up their investment in things like bridges and roads as the private sector weakens for a bit. This restores confidence in markets, and keeps money flowing through the economy.
So long as there are savings during the good times, and the projects are not wasted (even though in some extraordinary cases it would actually make sense to dig holes and fill them) ... it makes sense.
Of course the governments ability to 'save' during the good times and to necessarily spend efficiently is questionable.
"Zero Interest Rate conditions are not normal. Never in this history of humanity have interest rates been held this low for so long."
Central banks as we understand them are a very new phenom. Who's to say 'what's normal' when the very construct of our current version of monetary policy is really only a few decades old?
Maybe this is the actual normal.
Maybe because we are getting older, and working an ever decreasing share of our lives, our net productivity is going down and that's being reflected in rates?
Maybe the amount of debt hanging over every economy is a drag on productivity? (Because debt levels are high and this is new)
Maybe surpluses are being pushed into the real economy and captured by consumers who are getting a good deal, so bonds and stocks just aren't getting the great returns they were before.
Maybe we haven't had a war in a long time, which leads to fixed/stagnated human organizations, and without the opportunity for 'ground up renewal' every once and a while, we can't leap forward.
Maybe the benefits of carbon fuels + industrial revolution have mostly been had, or at least, fully priced into stocks.
Maybe we're just measuring inflation the wrong way.
So many maybes.
This could be very normal.
We probably won't know until another 50 years and then only in hindsight.
How is paying people to dig and fill holes better than just giving them money without requiring the useless activity? Even if "dignity of work" is a real thing, there's no way doing useless work could provide it.
The real irony is that he was actually decrying digging gold out of the ground and burying it in vaults as he wrote that and among his critics, that kind of "digging a hole in a ground and filling it up" is typically considered above reproach.
Be like saying digging a hole and "planting" a fencepost is a wasteful activity because the wood was nearly in the same state to begin with.
It's wasted effort in the same sense that bitcoin mining is wasted energy.
For Keynes it was all about overall spending, Aggregate Demand. If overall Aggregate Demand goes down then you have recession.
Then in some cases monetary policy can not raise AD anymore because of the 'liquidity trap' (interest rate at zero).
In that case the only way to get out of the AD whole is for government to spend more money that they have either saved up, or make debt.
Meaning that government could lower taxes, build roads or even to make his point 'pay people to dig wholes and close them'.
He just tried to make the point that it had nothing to do with the productivity gain of the actual activity.
The reason why Keynes was wrong is that the 'liquidity trap' is not a real thing. Second, even if it were real, the government fiscal policy would be unable by itself to raise AD and keep it raised. Even worse, if you tried to do that you would not only end up with AD shortfall but also with high debt (see Japan).
> The reason why Keynes was wrong is that the 'liquidity trap' is not a real thing. Second, even if it were real, the government fiscal policy would be unable by itself to raise AD and keep it raised.
... is something many people would disagree with, especially as you provided no data to back it up.
It's of course topic for longer discussion, I am just pointing out where is the disagreement.
Also, there are tons of countries who already have successfully eased monetary policy at the ZLB. Switzerland, Denmark, Sweden and so on.
It was also in all monetary textbook before the crisis and was considered standard knowledge by many monetary economist. Even people like Krugman would agree that with setting a higher inflation target the Fed could have been more aggressive.
If monetary policy is not already allowing fiscal policy to expand then 'digging holes and filling them in' has ZERO impact on AD.
And if that is the case then you don't need fiscal policy at all. So no, it never makes sense to 'dig holes and fill them back in'.
The CCC?
A nice article on today’s business schools philosophy: https://www.theguardian.com/news/2018/apr/27/bulldoze-the-bu...
Keynesian economics doesn't cause those things, true. But Keynesian economics does make it much easier to hide their consequences until they are bad enough to cause a meltdown.
Peter schiff and other like him have been predicting crisis, recession, bear market, and inflation since 2008 to no avail. they were wrong and have no credibility as far as I'm concerned.
Then again, "other like him" have always said that the bad things happen when they start to raise interest rates as things that are no longer profitable at the higher rates start to get liquidated and eventually causes the bubble to burst. Don't think anyone could have reasonably predicted the ability to keep interest rates at low as they've been for so long without the "animal spirits" getting restless.
You mean like in the "long" history of modern banking? This is a weak statement. The time during which governments have wielded this much influence over the minutia of the economy is surely small compared to all of the "history of humanity."
That led me to the thought that supply-side economics, as the Republicans have been pressing on us for the last 40 years, is essentially Keynesian, or at least shares with it the belief that fiscal policy can be used to heat up the economy at one point in time, with benefits realized at a later point. The difference is that Keynes's recommendation was for fiscal policy to support the economy in recessions, and then cut back on spending (or equivalently, by the above argument, raise taxes) in boom times, while the supply-siders seem to want to cut taxes irrespective of the state of the economy, and never raise them.
I'm not an economist, so I don't know how accurate this is, but I find it striking, given the degree to which Keynesian economics has come under criticism in recent years.
You are correct that Keynesian share some things in particular situation with supply siders but its very superficial and only in very specific circumstances.
In theory tax cuts during a recession are a Keynesian policy but the WASTE majority of Keynesian prefer INCREASE in spending.
So in terms of the real world, there is almost never any overlap. Keynesian hardly ever actually argue for lower taxes (because they are usually leftists who want more government).
At the same time supply sider do not want tax cuts in order to boost Aggregate Demand in a business cycle but rather have a more competitive economy in the long term.
I would also recommend strongly to not look at these as two types of economic theories. Keynesian is a very specific theory about a specific situation. While supply side economics is a general branch of economics that looks at growth.
The terms here are really misleading, most economists including people who call them-self 'supply side' think that demand is equally important. Language really makes this whole discussion incredible complex.
The von Mises Instiute is a very finge even within the Austrian tradition. They are essentially Hard Core Southern Rothbardians. They mis-characterize Mises as the perfect pre-Rothbard.
Peter Schiff in particular is not even an Austrian economist and he widely mis-characterizes the Austria Business Cycle theory.
If you want to learn actual Austrian Economics monetary economics go read Selgin, White, Horowitz. In general the GMU Austrians are far better then anything that comes out of the Mises institute.
And it makes things more complicated when people start messing around with how they measure things, and messing with formulas. Numbers like China which are inaccurate. Inflation number which are messed with by FEDs. IMF prediction model which has been wrong every time for years and it seems its only job is to please or more accurately manipulate the market mindset.
1. Market makers don't make investment decisions or hold positions. They facilitate trading as counterparties to investing parties, but do not drive prices themselves.
2. Market makers would make a terribly poor shadowy cabal, because the amount of capital they collectively manage is in the high single to low double digit billions. Mutual funds, hedge funds and private equity account for trillions.
Passive investing works thanks to active investing. Funny huh?
If the population grows 3%, we have to produce roughly 3% more, so revenues go up roughly 3%, number of employed goes up roughly 3%, so the economy grows 3%.
If I invent a steel manufacturing process that makes steel 3% cheaper, expenses go down 3%, profits go up, supply goes up, prices go down, the economy grows.
If all you do is passively invest, then over large periods of time you should on average see returns of, roughly, population growth + innovation. Even if everyone is passively investing, it's the same thing. If you actively invest, but still invest in the whole market (as any diversified investor does), you get the same thing, minus ~1% towards. If everyone was actively investing before, and the market grew ~8% per year, and now they passively invested, why would the market not gain the same?
IT would not work. Not poorly, it just wouldn't work at all. This tells me that there is a balance on how much active/passive investment can there be, and at some point they will be balance by some criteria.
Plus, it's not like passive investing causes securities to never be traded, when I buy into a mutual fund I'm buying stock from someone. That someone is probably retiring and selling their securities.
Lastly, most "active traders" just buy a bunch of Blackrock/Vanguard/SPDR index funds anyway and call it a diversified portfolio that only they could deliver.
Why the delay?
This was a decision your 401(k) provider made. The proper person to gripe to is whomever in HR chose a cheap provider. (They make up for reduced administrative costs by (a) being less efficient and (b) capturing float.)
No, but they have different tiers of service. In my account, for example, I can sell and purchase intraday. They do what they do for my personal account, which is credit the cash intraday. TL; DR This is not a legal, but contractual, requirement.
https://www.ally.com/do-it-right/investing/what-are-unsettle...
"When selling a mutual fund to purchase a fund in a different family, you are selling the mutual fund you own and using the proceeds to purchase another fund in a different fund family. Since you are performing a cross family trade, the settlement date for the sale will differ from the settlement date for the purchase. Typically, cross family trades execute over two business days."
In reality, trying to time the market rarely works out, and when it does it can often be attributed to luck. In general, just investing every month is the best strategy.
This selection bias works somewhat like the old sports betting scam:
1. You get 16,000 email addresses from people who want to receive your expert tips to predict NFL games. You send each of them your pick for the Monday Night Football game. You tell 8,000 of them that the home team beats the spread and the other 8,000 that the away team beats the spread. Be sure and include complicated rationales that will seem prophetic after the fact.
2. Of the 8,000 who received the "correct" tip, you send 4,000 of them one pick for Thursday Night Football and 4,000 of them the opposite.
3. Repeat for the Sunday Night game.
4. You now have 2,000 people who think that you can accurately predict who's going to win a football game, because you've done so for three nationally broadcast games in a row, and the odds of that are astronomical! (I mean, they're 1 in 8, but the kind of people who sign up for spammy sports betting tip newsletters aren't necessarily that sharp). Con 10% of them into paying you $50 for your expert tips for the next Monday Night Football game and you've made $10,000 out of 16,000 email addresses and a week's worth of making up shit about football.
(the exception being, with mutual funds, it's the funds themselves that are dropped instead of the poor saps who invested in them).
...
On the one hand, when it comes to active vs. passive investing, you have the Bogleheads and the hardcore efficient-market-hypothesis types who will tell you that every possible rationale you could ever have for ever making an active investment decision is already priced into the market. On the other hand, Warren Buffett spent virtually his entire life overperforming the market. How to reconcile this?
Actually, I think it's entirely possible for active investment to beat the market, but with a LOT of caveats:
1. The market isn't 100% efficient, which is logically equivalent to saying that it's possible for active investment to beat the market. This seems pretty obvious when you put it this way--100% efficiency is fucking magical, it's not a realistic expectation to have of the world--but how efficient is it? 95%? At that point, you're spending a ton of time and effort finding a market opportunity where you can realize a return of $100 instead of $95. That's a lot of work, and if you're smart and diligent enough to make your marginal $5 that way, you're probably smart and diligent enough to make $10 doing real work instead.
2. So let's say you follow your passions, and active investing is it. You work long and hard to find $5 opportunity after $5 opportunity, and nothing else matters to you other than your loved ones, your weekly bridge match, and advocating for tax reform because you think it's ridiculous how low your taxes are. See where I'm going with this? If active investing is hard enough, and lucrative enough, you're not going to go around asking bored salary drones to let you invest their retirement money in exchange for commissions and fees. That's ridiculous. If you know how to beat the market, beat it yourself and keep all the money. In other words, active investing only works if you, personally, are the active investor. It's not a justification for buying mutual funds.
3. So let's imagine that you are literally the single most successful person in the world at active investing. You're a household name, a genius, an "Oracle", you go to the White House and play bridge with Bill Gates and you're in the to...
China’s 2015 GDP Was Exaggerated By Fake Data, Analysis Shows
https://www.bloomberg.com/news/articles/2018-02-01/china-s-2...
China's average GDP growth has been roughly 30% less than reported, based on the measures of its changes in national lighting
https://www.investors.com/politics/editorials/new-study-shin...
Another Chinese city admits 'fake' economic data
https://www.reuters.com/article/us-china-economy-data/anothe...
First, because economics is the study of exchange, which means the exchange between a human being and another one. Understanding human behavior in its totality is like trying to understand our brains or our own consciousness. It suffers from a halting-problem level dilemma.
Second, because the study of economy tends to be about its application, it will always fail to obtain perfectly predictable results because humans are not perfectly predictable. And humans fight back. It is aking to believing you found the perfect method of making someone fall in love with you: as desirable as it is preposterous to believe you can achieve it.
Whatever model of economics you have, if it has room for 1% of human behavior, rest assured that its enough to take it down.
I still remember the moment I realized this. It was on the first day of my first class in Economics 101, when the professor began by telling us that economics was a science built upon the assumption that people are rational actors. I thought about all the people I'd ever known, and all the deeply irrational things I'd seen them do, and got the sinking feeling that I had committed myself to studying a field of thought that had chosen the wrong rock upon which to build its church.
You may have taken a statement made in jest literally. Homo economicus is a known fiction. Just as frictionless, airless physics are a known fiction. They're useful, however, for (a) defining a limit or ideal, (b) pedagogical purposes and (c) starting to think about a problem.
Microeconomics makes falsifiable predictions which can be repeated in experiment. (I'll go ahead and quibble over whether macroeconomics is a science. It's closer to an art, like politics. A field with its own rules and lessons worth learning, but without the capacity to experiment and make falsifiable predictions.)
On the other hand, economics goes on from Homo economicus into a mass of mathiness with very poor empirical correlation except perhaps in very very narrow circumstances.
If by "very narrow circumstances" you mean setting pricing, organizing distribution, predicting the effects of price increases and decreases, determining capital costs, making portfolios, and a whole bunch of other stuff that microeconomics makes precise and in a wide variety of circumstances predictably-correct predictions, sure. There is no economics on the Sun's surface.
Can you give an example?
In terms of micro, yes there are pretty consistent theories as to why and how people use money. Probably the most relevant application thereof are in the microeconomics of banking and in so called microstructure models in finance.
In terms of macro, there is of course also a lot of monetary theory as to why people use money in a certain way.
What does not yet exist is a unified theory linking micro behavior to all aggregates. Such models typically rely on some sort of representative agent, which is known and recognized to be deeply problematic in scientific terms of aggregation. Other approaches exist, of course, such as agent based models. But there is no "theory of everything" yet.
Can economics give rationales? Yes. Peek into any course on the theory of money.
But reasoning from micro behavior to aggregates is difficult in social science. We are currently in the process of figuring out better theories of aggregation, but doing so requires using game theory and decision theory in fully interdependent (so for example networked) contexts trough dynamics, so this as of yet also requires a lot of methodological (read: mathematical) machinery that is not yet developed.
Inverting the question does not obviate the answer to what I asked you. Moreover, as stated your rebuttal question is underspecified: what do you mean by the "dynamics of money" and "stable foundation"? Can I trivially answer this by talking about the relationship between credit and debts, or are you looking for something more specific? You responded to my (very precise and specific) question with a vague, orthogonal dismissal of the entire field.
Why don't you tell me about the "mathiness" in some peer-reviewed economic paper (preferably in a tier 1 journal) that you perceive to only be correlated with real world conditions in "very narrow circumstances"?
So if you want to have some sort of basic theory, any theory at all that really could work with such subjects, you gotta step waaaay back. The rational actor that actually "works" to build a scientific theory is such a general concept that it has literally zero predictive value. It states that actors make consistent choices, but only for identical choice situations. Thus, even if a microsecond passes, we are not in the same choice situation and all sort of rationality is out of the window.
An actor who chooses chocolate first, and then chooses something else the next second while throwing away the chocolate is can still be rational, it's only about the counterfactual of the first choice situation. Yet, one was able to show that this sort of very general rationality is a necessary condition to writing a formal model of human behavior, in other words the homo economicus is just answering the question as to what ground rules we need to model human behavior in the first place. It is truly an immaterial, philosophical object that is used in all science dealing with human behavior.
It's more to the credit of economists that they actually wrote this out axiomatically instead of hiding it in implicit discussion.
Then, economists went and tried to write falsifyable theories based on data and observation. This has been done with more or less success, but let's not forget that economic science still replicates much, much better than something like Psychology or Sociology, also concerned with human behavior.
By the way, applying physical approaches to economics is called econophysics and is a thing that exists. It's not really a thing that is successful, cause if you treat humans as mindless particles who are just behaving according to some ruleset, you are working with hyper-hyper rational actors. But it exists.
It's not billiard physics to general relativity, it's billiard physics to fluid dynamics and predicting the exact route of a stick through a set of rapids.
In economics our biggest complaints are around failure to determine that we're near a singularity and failure to predict behaviour through singularities (in a signal processing sense). It's understandable, as we all strongly care about the path of the stick, yet still unreasonable.
Macro is a decent enough tool most of the time, as are traditional fluid mechanics approaches. What we don't have are ultra precise CFD tools but in our arguments we act like we should/do. Sometimes traders think that they do have a great CFD solution and that's how we get LTCM crashes!
Or to maybe to a more human point, we can carry humans around on airplanes just fine, but don't know how to carry a payload of a nation of humans on a stable and healthy economic vehicle.
That's like saying, well I was reading a programming book about a Ruby and then I laugh at the professor threw the book in his face and said 'One can never make an Operating system with this'.
Honesty, if you truly believe that about economics then you simply have never spent time to actually learn and engage with a wide verity of economics that exists.
Instead, a more narrow view (partly due to difficulties of dealing with uncertainty, partly due to the context of preferences in a dynamic setting) required adding other behavioral theories which are now rightly considered mainstream in economics as well. All these non-rational actors are still rational in the general sense, in that they make choices based on preferences at some point in time.
There is, by the way, no other science dealing with human behavior that does not assume rationality. In business, this is called "bounded rationality" after Simon, but nowadays is basically and excuse to use rational actors even though we know "they ain't". All sociological actors are rational as well, even though you will rarely find a sociologist write this as a statement. Still, choices are made as responses to the environment of social forces.
Quite generally, it would be impossible to theorize about human behavior if it were irrational. That, in the general sense, would mean that it is not consistent and not predictable and thereby inherently not accessible to science.
What you econ Professor told you is basically correct, but the correct formulation of this you will probably see the first time when you take a course on decision theory or graduate microeconomics.
Too many critics focus on pure dollar optimizing rather than value optimizing. We all have different value maximization functions - if you understand that dollars are just one type of value so called irrational behaviour is coldly rational. Dynamic time preferences for money are accepted but dynamic preference functions for other things (status, sense of self, stress level..) are ignored.
thus always to debtors
Recently in Southern California, listening to the local NPR affiliate, they were covering a candidate race where one candidate accused the other of not hearing his constituents: ~"House prices have fallen, and that's bad for our voters. I hear them, and he doesn't."
I feel like housing in California is unsustainable: pricing, development, etc.
What's strange is that the candidate doing the accusation was a Democrat. I assume he benefits from loose borders (more housing demand), but constituents who can't actually vote and get their voices heard (immigrants wanting affordable housing, not what begins to approach slum-lord style ghettos).
There are a few things that are absolutely essential to life: housing, clothing, food are among the most basic. If the price of clothing or food increased at the same rate as houusing, people would be rioting.
huh? where in Southern California? over what time period?
So this oversimplified theory is really just your confirmation bias.
Why Australia wasn't involved is a different question. (http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/1301.0Chapter...)
"...and they didn't have recession."
Yet. How much of Australia's economic growth is made up of financial shenanigans and the housing industry?
Even were that so, why can Australia managed this 'shenanigans' but others can not.
I agree with the Article, the Australian central bank did its job and they didn't have a crisis, the Fed was a disaster and the US suffered the consequences. The Fed however was 10x better then the ECB and that's why Europe is still not recovered.
Basically resources sector was only part of economy still functioning retail, manufacturing etc had huge contractions and we are still feeling the impact most of those lost jobs won't come back. Holden, Ford, Mitsubishi etc all those plants shut and left the country.
The resource boom which was driven by Chinese demand for Iron ore + Coal propped up large parts of the economy. Lookup all the articles from treasury etc at the time "Two speed economy" was real.
To say Australia was not affected by 2008 is a gross misstatement.
The problem with the 'its all resources' is that countries that do have natural resources got hit by the depression as well.
Also, if the NGDP of Australia had dropped, there is absolutely no way Australia could have avoid a recession.
If, on the other hand, Australia's rising housing prices are supported by increasingly sketchy loan practices, the Australian central bank will have another opportunity to practice its skills.
The economy in the US was not based on real estate manuvering and the US had a recession because of bad monetary policy.
Anyway, this is interesting. I'll look up these economists.
On the face of it, I think it's interesting how economists are hesitant to consider money real. Money is fictional to most economists. What's real is consumer surplus, utility or some other abstract way of reasoning about consumption. ...skeptical eyebrow.
I liked David Graeber's book about money. First, because I like his intellectual shit-stirring. Second, because I think he's right about the origin of money. Money evolved from debt. Debt did not evolve from money, as liberal 17/18th century thinkers assumed.
Beyond this relatively simple point, I don't think he had much of anything concrete. But, as he talked about little local revolts and the role debt played... idk. Makes you think.
In any case, from a reactive european perspective in the post financial crisis world... I suspect that what business cycles are is a system wide insolvency. It turns out tat some of the money isn't real. That is, some of the debts floating around the economy are not going to be paid. The dollar isn't worth a dollar, your bank doesn't really have your money, the stock will never pay a dividend, the national debt will never be repaid, someone isn't as rich as they think they are, the mortgages are in arrears.
The crisis, whether it's a on banks, devaluation of assets, currency inflation... this is a bankruptcy proceeding, a negotiation determining who really owes who what, given that not everyone can get paid.
You may like "the great wave: price revolutions..." by david hackett fisher for the role of economic conditions on local revolts and global revolution.
It is as though he proposed the alternative to sugar be starvation. While those are both equally invalid choices, and are arguably the economic models of capitalism and communism respectively, there is no balance to be struck between the two, and they both lead to death, be it from malnutrition or diabetes. It is only barely better to strike a balance[0].
What we need, really, is bread and fasting, and what this would entail is missing from that book.
[0] Before insulin injections, diabetics, universally having developed the deficiency late in life, were indicated to eat very little, and lived ~5 years at most after diabetes developed, IIRC.
Also, a lot of the systemic problem with our debt system (like incrementally stealing value from the labor class) derive from its centralized nature; it's been about 150 or so years since decentralized debt economies (free banking in the US and Sweden) have been around and one wonders if with modern technology - mostly in the field of communication and ease of financial transactions - would enable a more robust, resilient, and just economic system.
https://www.npr.org/sections/goatsandsoda/2018/07/10/6273559...
Federal Reserve Notes represent a proxy for some "work" to be done in the future. Gold represents a proxy for "work" that's already been done.
If what Graeber is getting at is the notion that I'll give you these widgets or perform this service now in exchange for some widgets or work to be done later then I would agree, debt did exist before money.
https://www.youtube.com/watch?v=JUvm9UgJBtg
https://news.ycombinator.com/newsguidelines.html
He also made a pretty good case for gold's intrinsic value and economic importance being driven by war.
He basically wrote two paragraphs with the most oversimplified and honestly often wrong intellectual history of economics.
> First, because I like his intellectual shit-stirring.
You mean you like it if somebody writes a book criticizing another profession even while he clearly has not studied either modern economics or even the history of intellectual thought in economics. I wish more people would do that, sound like a healthy thing for science.
> Second, because I think he's right about the origin of money. Money evolved from debt. Debt did not evolve from money, as liberal 17/18th century thinkers assumed.
That was one of the nice tricks he pulled. If he actually bothered to read the history of economic thought and not the 2min cliff notes he would have found tons of interesting and complex thought about money and its origins.
He later claims that anthropologists had studied gift giving and debt economy then were the once that studied these things, while economist had done so 50 years earlier and were far more nuanced and with greater integration with economics then the the later anthropologists.
However Graeber is so anti-economics that he literally refused to read that literature to such extend he made the incredible embracing mistake and mis-characterizations that I could not take him seriously.
He didn't know the primary economist who wrote about origins of money and when writing about him he claimed 'he only added math to Smith argument'. That is particularly embracing because Carl Menger was known for not using a lot of math. So where did this notion of 'adding math come from'. Well there is another Carl Menger (the son) who was a mathematician.
So quite simply Graeber is so certain that he is correct and all economist are stupid that he never read the most influential economist on the very topic he claims to criticize economist about.
Graeber himself has admitted that money can arrive both from sustained interaction and trade, as well as from debt systems. So his whole me against the economist argument never even made sense, most economist didn't disagree with his main point.
What he did was trying to make this simple point and the argument that debt is not always good (Britain in Madagascar and so on) and then he hoped people would buy the rest wholesale.
You do realize that it's a history book and is not actually about economics at all?
I didn't read much in that book that even discusses modern economic thought. The closest he gets is debunking the story about money arising because of a coincidence of wants. That's hardly a lynchpin of modern economic thought though - it's a story told to 19 year olds in econ 101.
A lot of people don't like him because he's left wing, I suppose.
The book about money and debt guess what discipline has studied this for 500 years. But of course, when he writes a book about money and debt its not economics. Of course it has other components as well but its still a large part of the substantial argument of the book, even if it doesn't cover as many pages as all his case studies.
It is also very specifically target at economist and telling everybody how stupid they are, there are ton's of references to the failures of economics and historical economists. He almost delights in it.
> The closest he gets is debunking the story about money arising because of a coincidence of wants.
Yes and is it not funny that he has never actually read the book by the economist who most popularized this. He literally doesn't know about it and has not read or studied any of the literature.
So he is 'debunking' something that he has not actually informed himself about. He literally didn't read the book by Carl Menger that made this argument. How can you take somebody like that seriously?
> A lot of people don't like him because he's left wing, I suppose.
There are tons of left wing and even communist economist and thinkers that I respect. However he is basically a charlatan who does not even have the decency to inform himself about what he is criticizing and yet writes with such a superior tone because he already knows that he is correct.
I mean, sure, you can can your comment with this. But you're replying to someone who actually gave very specific criticisms of his work. You might not agree with them, but why bring politics into this?
>It is the month of August; a resort town sits next to the shores of a lake. It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.
>Suddenly, a rich tourist comes to town. He enters the only hotel, lays a 100 dollar bill on the reception counter, and goes to inspect the rooms upstairs in order to pick one.
>The hotel proprietor takes the 100 dollar bill and runs to pay his debt to the butcher. The Butcher takes the 100 dollar bill and runs to pay his debt to the pig raiser. The pig raiser takes the 100 dollar bill and runs to pay his debt to the supplier of his feed and fuel. The supplier of feed and fuel takes the 100 dollar bill and runs to pay his debt to the town’s prostitute that, in these hard times, gave her “services” on credit. The hooker runs to the hotel, and pays off her debt with the 100 dollar bill to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.
>The hotel proprietor then lays the 100 dollar bill back on the counter so that the rich tourist will not suspect anything. At that moment, the rich tourist comes down after inspecting the rooms, and takes his 100 dollar bill, after saying he did not like any of the rooms, and leaves town.
>No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism.
That's kind of the point of money.
> However, the whole town is now without debt
And without credit.
I next expect to hear a ingenious story about someone who pays off a car loan in a way that results in an empty bank account.
Or now have access to credit again. Given they were each other's creditors they may not have been willing to extend credit past $100. Now being paid they are likely to offer that same credit again as Thier confidence of being repaid is stenghened.
So this example also shows the requirement for confidence in markets whether the fundamentals support it or not. If one link refused credit it could snowball through the town grinding the flow to a halt.
And to take this full circle, this keeping confidence and flow was the QE program.
This is exactly the sort of reason I enjoyed the book. Its interesting how the story adapts to being told backwards. In most economic stories, the man would spend the dollars and stuff would happen.
For the town to maintain that debt for an appreciable amount of time seems the most precarious of contrived scenarios. It's like contemplating the effects of butterfly wings on a house balanced on a nail. It makes for a great story, but it took a lot of unrealistically meticulous effort to balance the house in the first place.
People talking like this are a strong indicator for a big blow up coming soon from my experience.
I have a real problem with the economists. Take four professors of economics into a room and ask a simple question. A question like "is this a good thing for X to implement Y", like "is this good for the Great Britain to exit the EU" or "is this a good thing to increase taxes for the rich".
Just ask - you will get at least 5 different answers to every question. Those answers will usually exclude each other.
So now me: I listen to those professors and who's right? I'm sure some of them are not. Some of them are simply saying the truth, some are lying.
And now take just one professor - ask him/her something - you will get answers. How should I know that they are right? I simply cannot. I simply don't believe them.
Things like income distribution, freedom of markets and others are value judgements. You first have to agree on these before you can ask an economist.
This is not physics where nature decides what's right or wrong.
Just ask - you will get at least 5 different answers to every question. Those answers will usually exclude each other.
Have you actually done this? Survey results from people who have done this (such as [1]) suggest that economists frequently do come to a majority consensus.
Furthermore, if you ask a group of software engineers how to design or implement complex software. you'll find many conflicting suggestions about which languages, libraries, programming models, databases, etc to use. Does that mean none of them know what they're doing, or does it suggest that complex systems don't have simple, straightforward solutions?
I'd like to gently suggest that you might not know as much about economists and what they know as you think you do.
_______________
1. https://people.uwec.edu/jamelsem/fte/fte/efl/teacher_stuff/a...
IGM Economics Experts Panel is interesting to read example of an expert survey. Economists also self-report their confidence and how strongly they agree with a statement.
http://www.igmchicago.org/surveys/trade-disruptions
Questions such as "What is leaving the EU going to cost the UK economy?" Or "When will we have the next recession and what will cause it?" Are much more nuanced questions. Mostly because markets are predictive, and any new information is immediately incorporated into those predictions. It is like asking "what sort of software failure is going to cause the next major computer breach?" If we knew the answer, we would fix it and our prediction would be immediately invalidated. Computer experts were predicting the rise of cryptolocker variants when Heartbleed & Shellshock happened. Then you had everyone auditing all their OSS stacks, when out of left field we get big news from Intel on Meltdown/Spectre.
That's because you asked a normative rather than a descriptive question.
Admittedly, econ is a field where there can also be a problem with descriptive questions, but blaming the field of economics for the fact that normative questions involve subjective value judgements and every person has a different framework for making those is quite unfair.
THIS, is a complete fabrication and lie to reinforce the status quo.
The Great Depression was caused AND sustained by manipulation of a centrally planned currency by the Fed. Read their deliberations and documents to see.... it didn't "come out of nowhere" but with calmly decided well in advance.
Anyone who studied The Great Depression knows that there was nothing free about it in any sense.
This article is a big proganda peice pushing Keynesian economics and continuing to pretend that the Fed is not a central planner who intentionally caused that depression.
Monopoly over currency and price fixing the interest rate is tantamount to central economic planning, as was done in the earliest Communist countries.
The boom and busts are happening because people have the vanity to think "they know better" to mess with markets and the bust happens as a way to "snap back".
Take away the state's forceful use of currency and manipulation.... and you will take away irregular boom and busts.
Of course I still don't get why the three ratings agencies are allowed to continue without actually doing their jobs or how banks pay the ratings agencies and _tell_ them what their "paper" ratings should be.
It's all a trust game and when one of the players decides (inevitably) to game the game, the house of cards collapses....and those of us that rely on a normalized system of monetary policy are screwed.
If you read through the old monetarist research, you see that change in money supply has a better correlation with recession than basically anything else. This holds true even when you control for the possibility of reverse causation, when you make sure that you're actually dealing with a leading indicator of this cycle rather than a lagging indicator of the next cycle, etc, etc.
Keynesians think that the only measure of how tight or loose monetary policy is comes from interest rates, so they can't wrap their heads around how 1% interest rates can still be tight money. The real story of the economics crisis is that the banking crisis deposit:reserve ratio through the floor. This means that a bunch of money disappeared as banks preferred liquidity. The central bank didn't do enough to replace this money, so people couldn't hold the money balances they wanted and stopped spending. The Fed said they were doing all they could to spur inflation, but that's obviously false. The central bank can always inflate the currency and the fact that they weren't hitting their inflation targets shows that they had tight money.
Keynesians ultimately don't think money is important enough to model and until they change that, they're going to be confused.
The problem with the old monetarists was always that they assumed a constant demand of money (or velocity) how they called it. Now they had some empirical reasons for this (see PhD under Friedman) but they missed something that earlier economists had already figured out. Namely that monetary demand can shift for all kinds of reasons and that any good monetary system needs to adjusts to that.
However they were totally correct on interest rate and that interest rate are a terrible guide for monetary policy.
When you actually study New-Keynesian it is perfectly clear that it is not the interest rate that sets monetary policy (or indicts it) but rather interest rate relative to the natural rate. Why New-Keynesian never explain this to anybody when giving interviews or anything like that boggles my mind sometimes.
So in New-Keynesiansim everything hinges on your assumption of the natural rate. 1% interest rate can be contracting or expeditionary depending on the natural rate.
What happened in 2008 is actually quite simple, the Fed had the interest rate fixed and didn't lower it (inflation fears because of oil prices, see FOMC meeting late 2008).
While in the real economy the natural rate was making the Fed policy more and more contractility.
Modern monetarists (Market Monetarists) like Scott Sumner have been point this out since 2009 of course.
Not being familiar with Anna Schwartz, I went googling and came up with these two links... posting here in case anybody else was wondering as well.
https://library.duke.edu/rubenstein/findingaids/schwartzanna...
http://www.nber.org/people/anna_schwartz
Have you been living under a rock? We've been in continuous quantitative easing for over a decade. The Fed is just now started to raise rates.
I simply don't see the need for a new theory. If you have a monetary contraction its gone cause a huge problem with wages and prices and that has been the most solid empirical result in economic history. It explains tons of stuff that simply could not be explained by this high debt theory.
So lets just look at some basic evidence for that.
As you can see here:
https://marketmonetarist.files.wordpress.com/2014/09/ngdp-ez...
Is is totally clear that in order to go back to the original trend inflation would have to be above 2% for a short time to get back to the level. However the Fed and the ECB were simply not willing to do that. The Fed often repeated that they would do 'everything' but then followed it up with 'but if inflation goes up we stop'
However that policy does not make any sense. The monetary disruption has already happened and then they are massively below trend and are unwilling to go back to the original trend.
This policy however is totally mistaken because it makes macro economic sense to go back to the trend as you want to stabilize long term wages and prices and not force the whole economy to adjust to a new level.
(Btw this is called 'level targeting' and has huge support from many monetary economist)
Now, some New Keynesian agree that this should be the policy, they like the term 'flexible inflation tarting' because they assume perfectly rational central bankers that will figure out the right number but essentially the agree that 'the right number' is going back to trend.
However some of them believe this is not possible because of the 'liquidity trap'. However here is where this recession actually showed that their assumption is simply false. Many countries, like Switzerland have shown that if the central bank is willing boosting NGDP with zero interest rate is no problem. This was actually tough in mainstream monetary macro books before the crisis but somehow this was ignored because 'fiscal stimulus' was the politically favored narrative.
Lets look at one economy that didn't have a recession. Australia is a good example, they never had a drop in NGDP and they didn't have a recession even when their housing 'bubble' and many other things are not that different from many other countries that had a recession.
One more thing:
> other measures are needed. These could include quantitative easing, forward guidance ...
Well, if funny how nobody remembers history. Before the New-Keynesian revolution some of those tools were called 'monetary policy'. This nothing new, but rather the way monetary policy has been practiced for a long time. Central banks that didn't build their entire operational model New Keynesian interest rate theory were perfectly able to act at the Zero Bound.
By the way this is in many way the same problem as in the early 1930s, the theory for this is nothing new. R. G. Hawtrey spend the whole 20s to try to explain people what would happen if there was a nominal contraction and he was exactly 100% on point.
The only convincing arguments I have heard so far is that:
1. at the same time banks were forced to significantly deleverage, so while the fed was pouring money into the systems, banks were effectively pouring money out of the system.
2. inflation happened but it was all concentrated into financial assets, real estate, and salaries for the upper middle class, which expenses (college tuition, luxury flats and houses, restaurants, etc) have seen a double digit inflation (my FT subscription must have doubled in 10 years!). These aren't really measured by CPI indices.
I guess it may also have to do with how the QE was introduced. If it was money printed to pay civil servants it might have had a different effect than introduced in the bond market.
But I don't know if it is reproducible. It feels like we are at the end of the current cycle (it's hard not to be nervous when looking at a 30y chart of the S&P500). QE is pretty much all the way in, rates are low. There isn't going to be much more central banks can do than print even more money. Inflation should show its ugly head sooner or later.
- Economists say "MV = PQ", and QE adds to "M", so shouldn't "P" or "Q" go up?
- But the marginal dollar of added "M" had ~zero "V", so that didn't happen.
("I guess" because I've never taken any macroeconomics and can't pretend to understand it...)
If money isn't directly pumped into the system by receiving banks, then the only direct impact is on those banks balance sheets, which affects their choices and decisions. So the effects to the overall economy are second order, and don't have the same fractional amplification like changing the reserve ratio has.
While I'm an economist, and have training on the model you are mentioning, I'm not speaking from a formal model. Rather from what I've seen in a large bank's treasury while it happened.
Another impact I've not seen considered is what happens when different banks have different effective reserve requirements.
On stocks the V is nonzero, but it will depend on how much of it actually leaves the exchange, instead of just passing from hand to hand there.
When a bond is initially offered someone pays money for it, and the offering party gets the cash, and buys things with it.
That equation is independent of the form of money. Bonds can switch hands easily. Of course, if it turns out that the bond is junk, then it becomes hard to sell, so that slows down V indeed. (Which means the economy takes a moment to think when a lot of things turn out to be shit instead of gold. Credit becomes thin, etc.)
1) High powered money supply produced by the central bank 2) Money held in deposits, available to be increased via the fractional reserve multiplier effect 3) The deposit:reserve ratio, which shows the strength of the fractional reserve multiplier effect
The financial crisis seems to have tanked 2 & 3, such that the Federal Reserve would have needed to do much more QE than it did to keep up with demand for money.
They also found that price growth and wage growth are affected by history: a history of slow money growth predicts an increase in money supply will be absorbed by more output. A history of high money growth suggests that more money growth will lead to modest output changes and an increase in inflation.
Scott Sumner echoes your fear about a coming recession, but thinks that appropriate NGDP growth via the right amount of money printing can lead to a soft landing without inflation. Given that this has been his entire career, I think it is very possible that we won't necessarily see renewed high inflation.
Scott Sumner post here: http://www.themoneyillusion.com/the-next-five-years/
That's not an "argument", it's an observation. Almost all of the QE "new money" was never used by the banks to make loans; it just sat in their accounts at the Fed. Why? Because the banks weren't fools: they knew they had way too little reserves for the loans they already had outstanding, so they just used the QE funds to increase their reserves. That equates to "significantly deleverage".
> I guess it may also have to do with how the QE was introduced. If it was money printed to pay civil servants it might have had a different effect than introduced in the bond market.
Or money printed to pay ordinary people whose retirement savings had collapsed through no fault of their own. And yes, that would have caused inflation, because you would have had a greatly increased quantity of money chasing the same quantity of goods and services. It might also have stimulated some economic growth which could have offset that effect, but that's a chancy thing to rely on.
Which I believe is the entire point of QE. I find the current incarnation of QE (buying bonds) unimaginative at best. I get that helicopter drops are politically hard, but there's gotta be something better than this.
Not really. The point of QE is to stimulate economic activity. Unfortunately, buying bonds doesn't do that either if banks don't use the newly printed money to make loans.
Usually QE allowed banks to roll over mark-to-market assets that turned into garbage into sane cash to satisfy solvency and liquidity requirements. And of course this led to price stability.
We did exactly that. The Fed orchestrated the greatest ordinary person bailout the world has ever seen: it reinflated the US housing market and salvaged the net worth of the entire middle class in the process.
It did cause vast inflation. Just look at the cost of a house in 2012 vs 2018 or the equity situation then vs now:
Average gain on a home sale in 1Q04: positive ~$50,000.
Average gain on a home sale in 1Q12: negative ~$50,000.
Average gain on a home sale in 1Q18: positive ~$55,000.
https://i.imgur.com/SfktmBU.png
Median sales price for homes sold in the US:
1Q06: $247,000 (peak bubble...)
1Q12: $238,000
1Q18: $338,000 (!)
Those recent gains are very heavy with inflation courtesy of the Fed, and they are entering the real economy slowly but surely with every exit. That's also why the Fed is being forced to raise interest rates when it's the last thing the economic party wants.
The artificially juiced stock market (artificial courtesy of the low rates), which has created millions of new millionaires in the last four or so years, is also inflationary. It has also helped to salvage countless pension funds for large numbers of ordinary persons, funds that were badly under water. Every time someone sells their hilariously inflated Netflix stock at 200 times earnings, they can thank the Fed, and when they dump that into the economy (consumer goods or housing) it's inflation in action.
Also 247,000 to 338,000 over 12 years is not a huge gain. An APR of 2.7% doesn't seem crazy
How the the Fed do this? Certainly not by QE, which did none of these things.
> Just look at the cost of a house in 2012 vs 2018
What did the Fed do during this time? Most of the money printed by QE happened from 2009-2013, and QE was shut down completely in October 2014.
QE was the bridge between the two sides of the chasm, hence it's not visible on the graph. We see a rapid fall, a smooth bottom and a nice rise, but it could have been simply a big crash at the bottom and nothing for a decade.
No. QE bought T-bills in order to exchange them for increases in the banks' account balances at the Fed.
TARP funds bought junk-ish bonds back in 2008-2009, but all that did was make banks and financial institutions not go bankrupt from being forced to make subprime mortgages for several decades due to the federal government's policy to "encourage" home ownership.
https://www.advisorperspectives.com/commentaries/2018/07/24/...
I think /mostly/ the 'big ticket' items; anything with a cost over 1000 USD.
However the price of many other items are also quite high, particularly for infinitely replicate-able information (entertainment).
I'd argue that the price of many other things under about 10 USD is largely a land ownership or transportation cost; as a society we've become so effective at producing (even grown things) that the biggest issue is the price of energy and labor associated with managing those products to end users.
This explains some of the discrepancy but I think it's only a tiny fraction of the total. There is just an ever increasing amount of things that are sold for what they can get away with rather than any inherent value. The generic brand stuff has the same transport and labor costs as the fancy brands yet are much cheaper, which rules that out.
I just went shopping so a fresh example is my instant coffee. The one I buy is almost permanently on sale for half price (not today unfortunately), so it seems pretty logical to assume that they make a profit on this sale price and everything else is just a nice fat margin on people that don't "bargain" hunt. I went half way and only got the small jar, but there are a dozen other things in my shopping bag I don't track the price of.
I know there are plenty of other things we pay much more for than we should, if the rest of the world had to pay what I just did for rice (generic brand) then several billion people would starve this year. It seems we have more cartels than competition.
The global economy left to its own devices would likely have entered a full-blown depression, and deflation usually accompanies this. The decrease in demand across the economy puts a great downward pressure on prices, this puts pressure on decreasing costs, this puts pressure on decreasing wages, and so on. You have a real threat of a deflationary spiral as demand further dries up due to people having less money to spend on goods and services.
So, as a lot of economists argued, there was a significant threat of a deflationary spiral facing the economy, more than any threat of inflation getting out of control, which had already been low to begin with.
Money and credit can both can be used to buy goods/services. Role of credit here is/was underestimated by economists.
In 2008, bunch of credit was destroyed. In response, central banks printed money, bought assets These things generally netted out.
It's going to mean people who were getting 3% on their bonds and are now getting 0% will go looking for 3% in whatever other financial assets they can find - San Francisco property, shares, etc.
> inflation happened but it was all concentrated into financial assets, real estate
... because demand remained static while supply (of yield bearing invesment assets) was restricted.
That was basically the whole point of QA. It bailed out the banks without needing to give them taxpayer cash by bumping up asset values until their loanbooks started to look healthy again.
And why China is in deep trouble because they have 3Trillion (supposedly) in foreign reserves, but IMF said China needs at least 2.5Trillion for normal import/export operations. So really, they only have 500B in foreign reserves. And now they're going through reserves even faster, selling dollars to prop up yuan, since yuan has now fallen 10% within the last few months.
https://www.forbes.com/sites/salvatorebabones/2018/05/24/chi...
Inflation doesn't work as simply as you might expect. What people believe is actually a big piece of the puzzle. As proof of this look at the Paul Volcker interest rate hikes, that squashed run-away inflation. While his hikes did eventually work, in the short term they did nothing to combat inflation. Why? Because people didn't believe they would help (in fact many thought it would make the problem worse). You had to get the minds of the the investors and spenders on-board before you actually see results (despite what the math might say).
I think the reason QE hasn't caused much inflation is because people either don't care or don't understand (most likely the latter). I am sure intentionally obscuring "printing shit tons of money" as "Quantitative Easing" also helps with the psychological factor so as to not panic the masses.
Economists often use quite narrow definitions of money, counting things like cash and bank accounts, and maybe CD's, but never other valuable liquid financial assets like stocks and bonds and real estate.
But financial decision makers absolutely do consider their full set of assets in deciding how much purchasing they can afford. How much purchasing power is chasing the available goods is really the relevant statistic for causing inflation.
In quantitative easing, the Fed gave new dollars in exchange for existing financial assets (bonds, mortgage backed securities, etc). The exchanges were roughly at market value, meaning the dollars had the same purchasing power as the assets.
The exchange let the Fed control long term interest rates and increase the supply of safe assets (dollars) in the market, which was needed as banks were forced to increase their holdings of safe assets to deleverage.
Since total purchasing power didn't increase, there was no cause for inflation.
I don't know if this is the correct answer, but a very simple answer would be that we were/are in a massively deflationary environment and (things like QE) have been necessary just to stay in place ...
The most common theory is that this loose equity sloshing around has gone into stocks and bonds.
QE is keeping the stock market up.
Inflation has simply been confined to some select assets. It's all going to come back into the mainstream economy unless the next recession/depression ends up being extremely deflationary before that happens.
Currently, we are hitting very low unemployment so wages have nowhere to go but up.
The weird one is housing: as rates stay low, people take on bigger and bigger mortgages leading to 'housing inflation' ... but it's generally not measured as inflation so it's kind another form of stealth inflation.
There seems to be something wrong either with the unemployment stats or something else is not quite right.
As long as the money that is confined in housing assets doesn't reach the "lower" market of people who actually need to spend that money, it's perfectly logical to me that it doesn't appear as price inflation in the general economy.
Nowadays we're seeing a decrease in the last category, and an increase in "underemployment" and people holding multiple low-quality jobs to make ends meet. They aren't "unemployed", but they're not in a strong negotiating position either.
I am not actually positive on wages increasing. I feel like there is enough information asymmetry in the market that wages will stay depressed.
some of us were paying attention to the shell game
In order to inject lots of money into the economy without causing inflation the Fed went to Congress for permission to pay banks interest on the money that they kept on deposit with the Fed beyond the money they were required to keep. Normally banks keep the minimum required reserves with the Fed and lend out the rest but the Fed hoped that paying interest on the reserves would encourage the banks to sit on the money rather than lending it out where it could chase goods and services and cause inflation.
This was all new territory and the Fed's economic models for how IOR would effect the broader economy weren't validated. That's probably part of the reason the Fed's predictions about inflation and recovery were so off as the crisis progressed.
EDIT: You can see the large effect of the policy in the graph of excess reserves over time. The policy is still in effect.
https://en.wikipedia.org/wiki/File:EXCRESNS.png
https://en.wikipedia.org/wiki/Excess_reserves
Also, link something about the Fed going before Congress with regards to the interest on reserves? (I think the Fed can do this without Congressional approval. It always had this power.)
QE got swallowed up to make the large creditors whole and it ended up being a massive wealth transfer to them, so you see elite real estate, art, etc. being bid up while the rest of the economy flounders around aimlessly
QE money is asset money, it sits on the left hand side of the bank's balances. The money that everybody actually uses is bank deposit - liability money, which sits on the right hand side. Liability money dwarfs asset money in modern economies.
The rest is then a question of what happens when you inject asset money into a banking system, and that depends on the regulatory framework. In the modern banking system capital controls have taken over from asset liability money controls, and that is essentially what has stopped the hyperinflation that some people predicted.
If you look at the deposit money quantities, well the normal rate of expansion for the US is approximately 2x decade, and that continues to be the case.
Real estate prices in Vancouver have spiked since 2008 so sign me up as someone who believes the fincialization of housing and QE is a main component in why Vancouver housing prices suddenly became wildly out of sync with local incomes.
"Monetary policy doesn’t work. What does work are fiscal adjustments" http://antonisoycasals.blogspot.com/2015/10/monetary-policy-...
The truth is that monetary policy does little. QE just swapped out high-interest treasury securities for low-interest reserves on private bank balance sheets. This flood of reserves drove interest rates so far down that the Fed had to start paying interest-on-reserves just to maintain a floor.
It didn't do much else. The idea that banks are reserve constrained is a widely held misconception. They are not. If anything, they are capital constrained. Adding to the supply of reserves then does not increase lending.
Another widely held misconception is that interest rates and inflation are inversely correlated. They are not. Interest is the price of money, and the price of money impacts the prices of everything else. Lowering interest rates decreases inflation, not increases. This is called neo-Fisherism.
Fiscal policy is what does work. Increase government spending enough and you will get inflation. This should be entirely noncontroversial.
This is very much context dependent. But since there's enough brave money chasing after even marginally sane investment opportunities, it's not surprising that the interest rate level is not effective.
The economy was stuck in a rut and needed some kind of kick in the butt. Congress was unwilling to fund another ARRA-like stimulus (the 1st too small), partly because the federal debt was high. Low interest rates were not doing the stimulus job they used to because it appeared the rich decided waiting out the recession and sitting on cash was a better strategy than suddenly investing in business. Near-zero inflation made sitting on cash not feel so bad. Or, invest in Asia: capital-intensive investments no longer paid off in the USA, as manufacturing was shifting to Asia.
The better solution would be to not run up debt so that the Federal Gov't can issue a big stimulus during slumps: classic Keynes, which is basically Grandmother's advice: save up during good times for rainy days.
But there's insufficient incentive for politicians to avoid debt; they are rewarded for short-term improvements in the economy, not long term. We need something akin to a Balanced Budget Amendment that allows Keynesian stimuluses. The law would probably have to kick in gradually so that politicians wouldn't fear a short-term dampening of the economy that could harm their re-election. (Pension problems have a similar short-vs-long-term feedback glitch.)
Because what you call money is just a 0% permanent bearer bond to anybody not in your currency area.
QE is just a swap from interest paying savings to non-interest paying savings. If you're scared, you don't need paying interest to save, and anybody without a good index linked state pension to look forward to is scared.
The IS-LM model has a phenomenon called the "(Hicksian) liquidity trap"
* http://people.ds.cam.ac.uk/mb65/library/boianovsky-2004.pdf
How it applies to quantitative easing (QE):
* https://pro.creditwritedowns.com/2010/10/on-liquidity-traps-...
Basically, as the the rate of interest goes down, the demand for money increases (because it becomes cheap(er) to borrow). This is why when the economy tanks, central banks lower interest rates: cheap money encourages people / business to borrow and spend (thus increasing demand, and stimulating the economy).
However, at a certain point the demand for money becomes perfectly elastic. This is the generally when the interest rate is zero, which is where we were at from 2008 and for some years. The interest rates can't go negative (well, mathematically they can, but practically they generally don't (with some exceptions)).
This is called the zero lower bound, and once you're here, IS-LM says that you can print money without worrying about inflation too much:
* https://en.wikipedia.org/wiki/Zero_lower_bound
Once you do see the economy recovering (through un/employment rates and inflation), you stop printing money and start increasing interest rates.
I know some people on HN like to rag on Krugman, but he was saying all of this over the last ten years, and has generally been correct. All of the above is fairly straight forward IS-LM (which he exposes).
The Great Recession has been pretty good as a "scientific" experiment to see whose predictions were accurate: turns out the demand-side Keynesians were pretty good, and the Chicago-school supply-side folks were not.
Look to Africa for the empire's new concepts: http://www.tomdispatch.com/blog/175567/tomgram%3A_nick_turse...
One of the fundamental weaknesses of modern economics is its reliance on un-knowable, extraordinary, incomprehensible "shocks" when faced with evidence that their theories have flaws. One thing it does is to prevent their theories from making progress in understanding...economics.
One might even call such behavior irrational.
Economist do actually quite a bit about studying these shocks, and trying to explain what they are, where the come from and so on and so on.
Take a simple example, tomorrow there is war between Iran and Saudi Arabia and there is no more oil coming from the middle east. That would be a supply shock.
It is true that sometime we can only observe that something change and sometimes its hard to say why that happens, but that is a problem you have in all complex systems.
Your asserting that economists invent 'shocks' when the evidence doesn't fit there models is totally incorrect and leads me to believe that you don't know anything about modern economics.
Would it be? One would expect, given that oil prices and the middle east are some of the most watched economic sectors, that there would be a very visible run up to such a war, the effects would be estimated and accounted for, and there would be no economic discontinuity. This is economics working correctly.
As late as 2006 and 2007, we have economists on record as saying "everything's dandy". This was not due to a lack of data; they had most of the information then that we're arguing about now. Instead, it was because their models said what happened couldn't happen.
A shock is change relative to some trend, not necessarily a fixed thing that happens in the news.
> As late as 2006 and 2007, we have economists on record as saying "everything's dandy". This was not due to a lack of data; they had most of the information then that we're arguing about now. Instead, it was because their models said what happened couldn't happen.
In 2006/2007 everything was more or less ok. While there was a housing crisis, GDP growth was on track and unemployment did not go up. You seem to think that everything after late 2008 was predetermined, witch is false.
So I'll throw in the Austrian Theory of the Business Cycle to the mix: https://en.wikipedia.org/wiki/Austrian_business_cycle_theory
Basically, the artificial expansion of bank credit kicks off the boom. The bust must inevitably follow. And the credit expansion is enabled by an unsound fiat money and banking cartel protection, such as the US Federal Reserve system.
Hayek had a concept called secondary deflation they fit the pattern of 2008.
The problem with ABCT is that Hayek and Mises both made the mistake that they assumed to much correlation between the boom and the bust.
While Hayek had the 'secondary deflation' concept, he failed to realize that this was the far more destructive part (if mishandled by the central bank).
So Hayek did not spend enough time on that and it caused him to misunderstand the Great Depression even when his theory was actually capable of explaining it.
This, combined with our rising income inequality, means that the economy is not okay for most people even if a few widely-watched numbers are high. It should not come as a surprise that such an economy would be more fragile than those high numbers would indicate.
https://www.financialsense.com/sites/default/files/users/u61...
http://www.pewresearch.org/ft_dual-income-households-1960-20...
If you want to zoom in on more recent events wikipedia has a pretty compelling chart here: https://en.wikipedia.org/wiki/Household_income_in_the_United...
http://i.imgur.com/5mOQARo.png
The argument that the recession happened because of a fragility of inequality is a highly speculative theory. I have not heard a single economist make that claim.
Also, it fails as an explanation because you are explaining a momentary event with a long term situation.
Yes. This is why plate tectonics is widely known to be false.
Just saying, 'there are plates' is not an acceptable explanation of earth quakes.
The god to honest truth is that macroeconomics in aggregated form is an undertaking based on extremely scarce data, and it always was. Traditional statistical inference invariable fails if you basically only do observational studies where you observe everything once, more or less.
This is also why these grand theories have fallen out of style, except of course for those vocal pundits like Noah Smith, who literally has a job because he conjures up debates on political economy.
The gold standard in todays Macroeconomics are either some variation of VAR models, more or less assumptionless vector-autoregressions of whatever flavor, or more structural DSGEs, who are fine-tuned to explain certain mechanisms but are arguably incomplete as models. Neither of these models are Keynesian, or Austrian, or monetarist, or whatever.
It is also wrong that the mainstream is some sort of monolithic entity. The biggest econ association in Germany is trying to engage "heterodox" scholars, inviting them to conferences and such. Several universities keep clusters for agent-based models, complexity research and even econphysics. The research output, however, has been a bit lacking as of yet. In Paris, there is an active community of "Post-Keynesians" right in the top-7 econ university in the world. I know that figures like Prof. Keen are invited regularly.
In contrast, it seems to be in the interest of some heterodox scholars to conjure up a hostile "mainstream theory" and then refrain from actually engaging with it in academic channels.
The same is true for those pundits going on about Keynesians vs. Chicago boys in this day and age.
Insofar that academic discussions did occur, they have been extremely productive imo.
Well I am not an Macroeconomist but there you go.
I also think you have contrived an exaggerated view, attributed it to him, and are arguing against that. I'd like to see more quotes to back up your argument because it is difficult to find it persuasive.
Doing a quick search I found an older blog post where he touches on a lot of the same points that you just did, so maybe you agree with him more than you think:
http://noahpinionblog.blogspot.com/2013/04/the-reason-macroe...
It's just that he is front and center in in this econ-blog industry that has been often unhelpful in making people with ideas engage the literature in an academic context, which (in other areas) I am a bit bitter about.
I am sure he is a nice guy personally, and switching from his AP position without actually doing research to Bloomberg was probably putting more bread on the table, but still, the whole WAY the debate about economics is lead in the public has been stinted away from scientific context toward hostility and tribe mentality, and I do believe he is partly to blame for that.
It means that people actually doing econ now are rather humble about what they do, and still have to be extremely technical and smart. Indeed, if you bring in a new theory that works, you'll probably be famous very quickly. The bar is pretty high though, your model gotta be inferential and parameters causally identified, while still fitting the data well.
Nevertheless, my macroeconomist buddies got _really_ excited about doing "that machine learning" pretty much years before other fields were even talking about it (until they found out they basically use the same models already), because everyone is looking for the next big idea all the time.
It's exactly the sort of old-style economists who can explain everything with their always-correct theories and basic math and then claim deference by everyone, who don't really have a place anymore - except writing articles for certain business newspapers, that is.
Anyway econ sucks, continue please.
"It is difficult to get a man to understand something, when his salary depends on his not understanding it."
Ironically, the incentives for economists to understand booms and busts are much weaker than the incentives not to understand.
This will continue until it brings down the republic.