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Source link: http://archive.mises.org/15357/taking-seriously-the-excess-money-demand-problem-a-reply-to-robert-murphy/

Taking Seriously the Excess Money Demand Problem: A Reply to Robert Murphy

January 18, 2011 by

[David Beckworth offers this reply to Robert Murphy:]

Robert Murphy recently questioned my claim made in a National Review article that there is a conservative case for QE2. He finds my premises and conclusion wanting. Unfortunately, in his analysis Mr. Murphy misses and mischaracterizes some important points I made about QE2. His article, therefore, does not truly represent to readers of Mises.org the case I made for QE2. This note provides as an opportunity for those interested to see what I actually argued. While I do not expect everyone to agree with me, I do hope it will allow for a more productive conservation among all of us about the nature of monetary problems.

Before addressing the concerns raised by Mr. Murphy, let me summarize the key argument I made in my article. During 2008 there emerged a surge in money demand as the housing fiasco began to unfold. This spike in money demand got even more pronounced in late 2008 with the uncertainty created by the financial crisis. Given that we have a central bank — and this is not an endorsement of the Fed — its job should be to offset and stabilize such money demand shocks. The Fed failed on this count and, as a result, what should have been an ordinary recession got turned into the “Great Recession” of 2007-2009. Yes, this Fed failure — like its failure to raise the federal funds to its natural rate level sooner in the 2002-2004 period — is another indication the Fed is flawed. Nonetheless, we are stuck with this monopoly producer of money and have to work with it. This means the Fed should have done more to prevent the surge in money demand. Because it did not, the Fed effectively tightened monetary policy in 2008. Moreover, despite the large increases in the monetary base to date, money demand remains elevated. From this perspective, then, monetary policy is still relatively tight. QE2 is an attempt — a flawed one as I will discuss later — to address it.

Figure 1

So how do we know there is still an excess money demand problem? For starters, various money velocity measures — which indirectly reflect money demand — have fallen and remain depressed as seen in the figure below:

This unchecked decline in velocity is why total current dollar spending has not returned to trend as can be seen here. Another indication of continued excess money demand comes from flow of funds data. This data shows that for the combined balance sheets of households, non-profits, corporations, and non-corporate businesses the percent of total asset that are liquid ones (i.e. cash, checking accounts, saving and time deposits, and money market funds) is still relatively high. In other words, households and firms are still holding a disproportionate share of their assets in liquid form. This can be seen in the figure below:

Figure 2

Since this excess money demand problem is central to the argument made in my article, I found it odd that Mr. Murphy not even once grapples with this issue in his critique. I am not sure why he has ignored it, but the fact is that there are two sides to value of money: supply and demand. Once one realizes this and its implications for monetary disequilibrium — even a pure gold standard can be distortionary if there is sudden spike in money demand — then one has to make a more guarded argument for a commodity standard. Appreciating the importance of money demand shocks also helps explain why conservative economists like Scott Sumner, Bill Woosley, Josh Hendrickson, and I are sympathetic in spirit (if not in form) to QE2. It would do all hard-money advocates some good to wrestle with the monetary disequilibrium literature and its implication for a commodity standard. It is worth noting that there are prominent Austrians like George Selgin and Steve Horwitz who take the monetary disequilibrium seriously.

Let me now turn to the specific concerns raised by Mr. Murphy in his article. His first one is that I have failed to check my premises. Here is Mr. Murphy:

Beckworth gets into trouble early in his article, when he says matter-of-factly, “One reason for this confusion is a failure by some conservative commentators to understand the real purpose of QE2. It is not solely about lowering interest rates, increasing bank reserves, and encouraging bank lending, though all of those will occur.”

I grant that QE2 will increase bank reserves. However, the other two alleged results — lower interest rates and more bank lending — are not so obvious.

The phrase “It is not solely about…” in the above excerpt of mine seems to have been lost on Mr. Murphy. It implies something else will happen. Thus, on the issue of interest rates I actually said that interests will start increasing if QE2 is successful later in the article:

Note that lower long-term interest rates are not the key to QE2 working. Yes, long-term interest rates may initially drop as the Federal Reserve buys up long-term Treasury securities to increase the monetary base. But this effect will be fleeting if QE2 is successful. Once the economy starts recovering, interest rates will start increasing.

Somehow Mr. Murphy missed this and argues that that I said QE2 will only cause interest rates to fall. As regards to bank lending, I also note later in the article that as QE2 unfolds and address the excess demand problem, an economic recovery will take hold and lead to more lending. Though there is some evidence that interest rates are doing exactly what I described above, it is too early in the QE2 cycle to be certain and pass judgment on these so called premises of mine.

Mr. Murphy is also incorrect to assert that I claimed households aren’t spending enough and that there needs to be more consumer spending. What I said is that creditors, who are sitting on their idle money balances and are the cause of the excess money demand problem, need to spend more. I also argued that the debtors, who should be saving more, should not be spending more. Here is what I said:

[F]or every debtor there must be a creditor. Thus, for every debtor who is cutting back on spending in order to pay off his debts, there is a creditor receiving money payments. In principle, these creditors should be increasing their money spending to offset the decline in money spending by the debtors — but if that were happening, there would have been no decline in overall total current-dollar spending.

This is not a Keynesian directive for more mindless spending. This is a description of the monetary disequilibrium problem where creditors are hoarding money and causing an unnecessary disruption to economic activity. I do argue, though, that the Fed could create the right incentives through QE2 for the creditors to quit hoarding their money and help restore stable nominal spending. Again, this is a case of working with the institutions we have. Along these lines, it is worth remembering that stabilizing nominal spending was seen as a desirable policy objective by Frederick Hayek in a second-best world of central banks and fiat money.

Finally, Mr. Murphy fails to acknowledge that though I support QE2 in principle as a means to address the excess money demand problem, I also acknowledge its imperfections in the article. Here is what I said:

Unfortunately, QE2 may not live up to its potential for several reasons. First, QE2 was not implemented in an optimal fashion. It should have been enacted in a rule-based fashion, with a clear, explicit objective…This would have increased long-term certainty about the price level without requiring an explicit dollar commitment up front from the Federal Reserve. Instead, the Federal Reserve did the opposite. It committed to a large, ad hoc amount of $600 billion that will be used to maintain some vague inflation target. Second, the Federal Reserve continues to pay banks to sit on excess reserves, a policy that keeps money demand elevated at banks… Finally, the Federal Reserve is not immune to political pressures. It is possible the current criticism aimed at the Federal Reserve will make it more timid in implementing QE2.

Ultimately, my case for QE2 boils down to a pragmatic desire to fix the excess money demand problem with existing institutions we have. Thus, contrary to Mr. Murphy’s assertions I understand the problems with fiat money and the limits to intervention. Ultimately, though, I would like to see U.S. monetary policy gravitate toward a more market-friendly approach, such as see Scott Sumner’s proposal to have the Fed target the nominal GDP forecast coming from a (yet-to-be-developed) nominal GDP futures market. This approach would go along ways to restoring long-term macroeconomic stability.

{ 99 comments }

Ohhh Henry January 18, 2011 at 3:46 pm

“In analyzing the equation of exchange one assumes that one of its elements–total supply of money, volume of trade, velocity of circulation–changes, without asking how such changes occur. It is not recognized that changes in these magnitudes do not emerge in the Volkswirtschaft [political economy, or more loosely `economy'] as such, but in the individual actors’ conditions, and that it is the interplay of the reactions of these actors that results in alterations of the price structure. The mathematical economists refuse to start from the various individuals’ demand for and supply of money. They introduce instead the spurious notion of velocity of circulation fashioned according to the patterns of mechanics.”

Human Action, p. 399, quoted in Is Velocity Like Magic? by F. Shostak, who continues:

Contrary to popular thinking, the velocity of money doesn’t have a life of its own. It is not an independent entity, and hence it can’t cause anything, let alone offset the effect of an explosion in the supply of money on prices of goods and services.

The apparent simplicity of the equation of exchange and its consequent widespread acceptance by mainstream economists has been instrumental in the erroneous assessments of the true state of the economy. Hence, it is an urgent requirement that this fallacy be removed from the economic literature and from economic textbooks, in order to prevent future theoretical confusions and their practical consequences.

Beefcake the Mighty January 18, 2011 at 3:55 pm

Bagus has nice commentary on the vacuousness of velocity in a footnote here:

http://mises.org/journals/qjae/pdf/qjae12_4_2.pdf

james b. longacre January 18, 2011 at 3:59 pm

how does one have excess demand for something?

DD5 January 18, 2011 at 4:04 pm

The author is implying that there is not enough money going around. A shortage.

loki January 18, 2011 at 9:54 pm

money is not like other commodities. if the amount of economic activity increases, for example, a general increase in real profits, the outcome is a general rise in the purchasing power of money, which will appear first, of course, in the businesses providing capital to the businesses making entrepreneurial profits. money is different from other commodities, whatever the supply of it is, it encompasses the entire marketplace. if the economy expands the units traded per commodity drops, that is, prices fall.

the idea of money velocity is absurd. they seriously think that the economy’s performance is solely indexed upon how many transactions are taking place. an expanding economy that has a goodly amount of profitable business taking place is somewhat deflationary, because the overall trend is for a continuing drop in prices generally, when entrepreneurs are making advances in business by producing more efficiently or capturing a demand previously unrecognised the demand for other goods that less adequately satisfy the same needs must implicitly go down in price.

the market in money, of course increases in size with a real terms growing economy too, as the prices drop deposits rise and thereby the available funds for lending also rises. in essence the fiat money system and the keynesian orthodox economic theory gets the whole phenomena backwards and thinks that pumping more money units into an economy in the form of available funds for the credit market creates the growing economy, when the reality is that the growing economy pumps funds into the pool of available credit. the only possible outcome of inflationary monetary policy is fake booms and their inevitable busts and if the fluctuation of the amount of money in the market was not being engineered and moved about more naturally and was limited by the costs of producing the money the only way that the economy would improve would be if the government stopped punishing the successful entrepreneurs with progressive taxes and stifling the natural equalisation of prices with price controls and cutting into the profits with taxation.

so i guess it naturally occurs that government would then want fiat money so it can pump the credit market up permanently and soak up all of the entrepreneurial profit and put that fair and squarely earned money in the pockets of pompous bureaucrats instead of in the hands of the people who have proven in practise they are the best qualified to improve the economy.

james b. longacre January 19, 2011 at 1:32 am

“they seriously think that the economy’s performance is solely indexed upon how many transactions are taking place. ”

well isnt it??

“an expanding economy that has a goodly amount of profitable business taking place is somewhat deflationary (price or money deflation??), because the overall trend is for a continuing drop in prices(??) generally”

i dont know if any of you really know that or not. you dont trust govt figures and yet you say trends occur based on old less accurate govt figures.
havent the prices of many goods fallen compared to what is used to pay for a price…the wage for instance.

as the prices drop ….

cant this occur with inflating the money supply??

Dick Fox January 19, 2011 at 8:42 am

1. No, an economy’s performance is not dependent on the number of transactions taking place. For example if the government mandated that you could only a unit of one from any store so if you needed 2 you had to go to another store because they wanted to increase the number of transactions taking place does that increase the economy’s performance?

2. Falling prices are not deflation. Prices can fall because of deflation but they can fall for other reasons too. Have computer prices, cell phone prices and a host of other technology prices fallen because of deflation? If you equate these price declines to deflation you are far out in left field.

james b. longacre January 19, 2011 at 1:35 am

do leasers of industry regularly talk with beuracrats??? can it be a mystery to beuracrats as to what major insudtrialists are really trying to accomplish??

do large corps ahve trouble getting money from banks and investors??

james b. longacre January 19, 2011 at 1:37 am

the amount of economic activity increases, for example, a general increase in real profits,…….
performance is solely indexed upon how many transactions are taking place…..

is there a significant difference??

Maurizio Colucci January 19, 2011 at 9:08 am

The author is implying that there is not enough money going around.

Not enough compared to what? How does he know that there wasn’t too much money before?

Maurizio Colucci January 19, 2011 at 9:03 am

Or stated differently: how do you know that the current demand for money is excessive, and that it wasn’t the previous demand for money that was insufficient?

dwhieb January 18, 2011 at 4:01 pm

Two simple points to make:

1. Beckworth overlooks the fact that “surge in money demand” came about as a result of artificially lowering interest rates, a direct product of intervention by the Fed.

2. “Ought” necessarily implies “can”. Beckworth states that the Fed ought to have done more to prevent the crisis, which implicitly assumes that the Fed can in fact prevent such a crisis. By its very nature, however, the Fed necessarily exacerbates market distortions, and can bring about no improvement in the general state of affairs, except by absolving itself.

Chris January 18, 2011 at 8:23 pm

dwheib, Beckworth stated (emphasis added):

“The Fed failed on this count and, as a result, what should have been an ordinary recession got turned into the “Great Recession” of 2007-2009. Yes, this Fed failure — like its failure to raise the federal funds to its natural rate level sooner in the 2002-2004 period — is another indication the Fed is flawed.”

Whether or not one agrees with his take on QE2, Beckworth has long been on record as a critic of artificially low interest rates in the early oughts and as a critic of the fed distorting the monetary market equilibrium, which is why he, Sumner, Rowe, and others are advocating a market-based and rule-based determination of monetary policy in place of vague inflation targets and policy by committee fiat. Whatever one thinks of his views on currency in general, his views on the Fed’s actions are more “sophisticated” than you make them out to be.

Jonathan M. F. Catalán January 18, 2011 at 4:10 pm

Doctor Beckworth,

My reservation with the Neoclassical monetary equilibrium theory, or at least the arguments in favor presently of matching a rise in demand for money, is that it fails to consider the relative price changes which will still occur whether or not there is additional spending to offset the initial fall in spending. There are a number of other inter-related problems, mostly rooted in microfoundations, which are often ignored when advancing MET: why demand has risen, what to do about the unhealthy assets which may still underlie the financial industry (and partially explains why lending has been so low, in addition with the fact that the Federal Reserve has been paying banks to sit on reserves), and what to do about the possibility that future changes in equilibrium may result from a fall in supply (as opposed to a rise in demand). The inevitable conclusion when taking all of this into consideration is that MET is fails at explaining the whole picture, and so we see MET proponents advance simplistic arguments that don’t grapple with the roots of the present crisis.

Will a rise in the supply of money, in response to a rise in the demand for money, lead to price stability? What is price stability? If we’re judging price stability through some type of macro function, how is it relevant? Let me illustrate the point I’m trying to reach. Assume that an increase in money demand effects only one industry, industry A. The fall in nominal expenditure for industry A’s outputs means that there is a consequent fall in the price of its outputs and a mismatch between the price of inputs. In other words, some of industry A’s production is no longer economical. Will a rise in the supply of money prevent this? The only answer is no, because in order to prevent it the new money would have to go to those people who increased their cash balances and would have to be spent in such a way that it restored nominal aggregate demand for industry A. This isn’t the way new money is injected into the economy, and this isn’t the way new money is spent, and so to argue that a restoration of monetary equilibrium will lead to price stability is nonsensical. In fact, any theory that relies on price stability faces the dilemma that prices are constantly changing as a result of a constant change in spending patterns. If these were sufficient to cause economic crises then capitalism would be inherently unstable.

The point behind my mention of answer the rationale behind the rise in demand for money and the possibility in a fall in the supply may be more controversial, as it is based entirely on Mises’ and Hayek’s theory of intertemporal discoordination. If there is still ‘malinvestment’ which had not been liquidated between 2007 and 2009, probably for reasons related to the bailouts and the first round of quantitative easing, then it follows that at some point these investments will go bankrupt. This will cause a fall in the supply of money. A rise in demand for money, in this sense, is equilibrating. It provides savings which may allow certain investments, funded through an overissue of fiduciary media, to stay afloat.

I think it’s fair to be skeptical of the supposed solution to the supposed problem of monetary disequilibrium we faced today based on the fact that nominal aggregate demand has fallen by such a degree. This is why I mention giving the causes behind the rise in demand for money. If an increasing number of people are finding more safety in monetary liquidity, rather than goods or investments, then what makes you think that more money will solve the underlying micro-problems which are causing this rise in uncertainty? Also, if QEII’s purpose was to fund government spending, what makes you think that the government is a better spender than the average entrepreneur, or even consumer?

I think it’s a fair conclusion to say that MET has failed to comprehensively analyze the scope of the present recession. There is more at work than just monetary disequilibrium, because the predominately macro theory fails to consider the micro factors which come together to form the macro picture. Will a rise in money lead to price stability? No. Will a rise in money lead to profitable rise in nominal expenditure? No.

Jonathan M. F. Catalán January 18, 2011 at 4:14 pm

Also, if anybody is interested on the topic, Bill Woosley also provides a response to Robert Murphy: “A Rothbardian Critique of Quasi-monetarism“.

Joe Esty January 18, 2011 at 5:32 pm

Read it, but not sure if it is a put on.

“‘However, we also recognize that in a market system, productive capacity will do no good if firms cannot sell what they produce. And so, real expenditure must grow with the productive capacity of the economy.”

What if there is too much garbage no one wants? Force consumers to buy to fulfill productive capacity?

“If we assume that the prices and wages are at the level where the real quantity of money equals the demand to hold it, then expanding the quantity of money will do no good. But if the prices and wages remain too high for the real volume of expenditure to match the productive capacity of the economy, increasing the quantity of money means that prices and wages don’t have to fall as much as they otherwise would. In the limit, prices and wages don’t need to fall at all and, in fact, can continue to rise at their previous trend.”

Who determines “too high” wages and prices and “real quantity of money”? What’s the productive capacity?

That’s just intellectual gobbledygook of the type Polleit warns against in today’s Daily and Herbert Spencer despised.

The guy writes like Paul Samuelson

Iain January 18, 2011 at 7:01 pm

Yes, people can only ( and sometimes only want to) buy so much.

Captain_Freedom January 19, 2011 at 5:11 pm

…in the proper relative quantities, meaning the production structure matches real consumer demand.

I know that I would like to have another car for $30,000 before I have 30,000 more bags of chips for $30,000.

I want more wealth in general, but the wealth has to be in the right proportions. If the economy’s productive structure is not aligned with the consumer’s scale of subjective preferences and marginal wants, then no amount of money will get me to buy more iPods or GM cars, or houses in the desert, rather than more affordable healthcare, cheaper health foods, and other things I value for my money more than what is currently offered.

Keynesians just want everyone to shut up and consume whatever is being produced, and if they don’t, then they will just advocate for the Fed to steal from their purchasing power until they relent and buy stuff they otherwise wouldn’t buy when they want to buy it.

james b. longacre January 19, 2011 at 2:25 am

‘However, we also recognize that in a market system, productive capacity will do no good if firms cannot sell what they produce.

if they cant sell it would it even be productive capacity?

john January 18, 2011 at 4:48 pm

What a load of garbage just like all the other monetarist nonsense. These people think that the only thing that determines production and prosperity is the number of pieces of paper around. According to this type of analysis, you could shoot all the most productive people in the nation, erect mile high tariffs, raise the minimum wage to $50 an hour, and fully embrace socialism and as long as the central bank overlords put the perfect amount of dollar bills into the system, a number which no two economists could agree on, then everything would be fine.

james b. longacre January 19, 2011 at 2:26 am

What a load of garbage………

the mises sites?

Captain_Freedom January 19, 2011 at 5:13 pm

OH SNAP!

You should do stand up on TV during breaks in 3:00 AM infomercials.

dwhieb January 18, 2011 at 5:00 pm

In a way, reading this is actually kind of encouraging – I was expecting something sophisticated. If this is the worst us Austrians have to deal with, then our futures are looking bright!

TANSTAAFL January 18, 2011 at 5:01 pm

How in the world do you define ‘excess demand for money’ ???
Excess compared to what?

If there is more demand for money today than there was yesterday, shouldn’t the interest rate, the price of money, increase?? Am I missing something here?

But what really has me confused is this:
The way I understand things, when demand rises and the supply is same or less, the price will increase. Applied to the current problem of increased, even “excessive”, demand for a falling, deflating, number of dollars, leads me to believe that interest rates should be rising. With that said can anyone explain how keeping the price for money, the interest rate, low is going to fix anything?

R. January 18, 2011 at 5:10 pm

I wouldn’t argue about Beckworth’s arguments. I just like to point out that he is extremely fair and using a careful tone which is something that we, young intelectualls, should try to use it. The style and the respect for the other side (in this case the respect is mutual-Beckworht to Murphy and Murphy to Beckworth) is always beneficial for the debate.

Jeffrey Tucker January 18, 2011 at 5:19 pm

absolutely!

suo Marte January 22, 2011 at 9:09 am

As a fan of both Beckworth & Murphy, I sincerely appreciate the exchange of views and hope this is just the beginning. Civility and mutual respect are key to continued fruitful dialogue. To those who’ve not read it, Beckworth’s explanation of the Federal Reserve’s causal role in the 2008 financial crisis is excellent. Check out his site.

Captain_Freedom January 18, 2011 at 5:42 pm

>The phrase “It is not solely about…” in the above excerpt of mine seems to have been lost on Mr. Murphy. It implies something else will happen. Thus, on the issue of interest rates I actually said that interests will start increasing if QE2 is successful later in the article:

>”Note that lower long-term interest rates are not the key to QE2 working. Yes, long-term interest rates may initially drop as the Federal Reserve buys up long-term Treasury securities to increase the monetary base. But this effect will be fleeting if QE2 is successful. Once the economy starts recovering, interest rates will start increasing.”

>Somehow Mr. Murphy missed this and argues that that I said QE2 will only cause interest rates to fall.

Mr. Murphy was not challenging your certainty, nor was he ignoring, your later claim that QE2 will eventually lead to rising interest rates in the far future. He was challenging your INITIAL claim that QE2 will lead to lower interest rates. You said that lower interest rates WILL occur, at least initially. Murphy has since shown this to be false, which incidentally matches his questioning of your certainty that they will fall. Long term interest rates started to RISE right after QE2 was announced, and have continued to be heightened since the start of the program. Can you at least concede that you were wrong about the initial effects on interest rates?

Furthermore, he was not ignoring your later comment that at the end of the day, once the economy supposedly picks up again, and QE2 is finished, that interest rates will start to rise (presumably because the Fed will raise the fed funds rate once again). He was only challenging your claim that long term interest rates WILL become lower because of QE2. He was establishing and making explicit a very important component in credible pieces, namely, FIRST IMPRESSIONS. That you started out on such a wrong foot is what Murphy is alluding to.

His questioning and doubts of your certainty that QE2 will (albeit initially) generate lower interest rates was very much warranted, considering how long term rates rose right after QE2! All he implied here was that your claim that there will initially be lower rates “is not so obvious”, contrary to your implied certainty that it is. He rightfully called into question your seeming belief in some sort of omniscience on the part of Fed central planning, that’s all. He even provided a chart that shows interest rates rising “almost to the day that the QE2 program was officially announced”!

It’s simply amazing how you can call Murphy out here when all he did was present data that completely contradicted your call!

>As regards to bank lending, I also note later in the article that as QE2 unfolds and address the excess demand problem, an economic recovery will take hold and lead to more lending. Though there is some evidence that interest rates are doing exactly what I described above, it is too early in the QE2 cycle to be certain and pass judgment on these so called premises of mine.

Huh? So because long term interest rates initially ROSE instead of declining as you predicted, you were therefore right after all, because the existence of rising interest rates must be evidence that the economy is already improving, which was your long term call, even though we are still in the early stages of QE2? That makes no sense whatsoever. If we’re still in the early stages of QE2, then we cannot be where you said you expect long term interest rates to rise! He was even gracious enough to give you the benefit of the doubt and say that in fairness to you, it is “difficult to disentangle cause and effect in something like this”.

Oh, right, it’s still “too early” to make any judgments AGAINST your position, but it is OK for you to make judgments FOR the alleged positive effects of QE2. Convenient, isn’t it?

It looks like you want to have it both ways. If we are still “too early in the QE2 cycle to be certain to pass judgment”, then why did you “pass judgment” so early? Indeed, what WOULD it have looked like if you were wrong about interest rates? I submit that if you were wrong, then things would have looked exactly as they look now, namely, initially rising long term interest rates, continued economic slump, and rising prices. Maybe it’s just me, but I can’t see how interest rates doing the exact opposite of what you said they would initially do can be interpreted as “interest rates are doing exactly what I described above”.

>Mr. Murphy is also incorrect to assert that I claimed households aren’t spending enough and that there needs to be more consumer spending. What I said is that creditors, who are sitting on their idle money balances and are the cause of the excess money demand problem, need to spend more. I also argued that the debtors, who should be saving more, should not be spending more. Here is what I said:

>”[F]or every debtor there must be a creditor. Thus, for every debtor who is cutting back on spending in order to pay off his debts, there is a creditor receiving money payments. In principle, these creditors should be increasing their money spending to offset the decline in money spending by the debtors — but if that were happening, there would have been no decline in overall total current-dollar spending.”

Notwithstanding the fact that Murphy did not actually attribute to you the position that households are not spending enough, but rather than you believe the problem is not enough spending, here you reiterate your argument and assert that you did not say that the problem is not enough spending, but rather the problem is not enough spending?

O.o

NOBODY should be spending more or spending less, according to you or anyone else. The individual decides. The way to “fix the economy” is by allowing individuals to hoard, spend, invest and consume money at whatever proportions their feeble, evil thrifty minds want them to. That’s how you “fix the economy”. The market is a place where people can acquire real goods and services in exchange for other people’s goods and services. It is not a place where individuals are a means to an end.

If people want to “hoard”, then that’s their choice, and does NOT cause general economic calamity. Murphy is spot on regarding your mindset. You think like a Keynesian. You think that the market is supposed to have a deus ex machina level of aggregate demand, controlled by the government, and if that aggregate demand should deviate from a desktop paper mathematical model, then by golly, print money, redistribute wealth from those who receive the new money last to those who receive the new money first, devalue the income of fixed income earners, generate economic distortions through centrally planning interest rates and spending, and then hope for the best.

In your central planning mindset (which is not “conservative” by the way), you want class A to spend more, and class B to spend less, where the individuals in A become this altruistic spending means to the end that is a faceless soulless aggregate number called “aggregate demand”, because what really matters at the end of the day is not how to give people the conservative inspired freedom to engage in free market activity, but rather to treat individual human beings as tools to achieve your anti-social goal of observing an aggregate demand statistic rising along some fake line on a graph?

See, this is why so many rank and file conservatives are flocking away from Monetarism. They see that it is just Keynesianism wrapped in different packaging.

You say that you as well as some other liberals, I mean conservatives, agree with QE2 “in spirit”. And what is that spirit? It’s the spirit of sacrifice on the part of innocent individuals who either have to do what they don’t want to do and spend less (debtors), or do what they don’t want to do and spend more (creditors).

Nowhere in your article do you even hint at individuals DOING WHAT THEY WANT. Is that not the conservative position? Is that not what the conservative position of economic freedom is all about?

>This is not a Keynesian directive for more mindless spending. This is a description of the monetary disequilibrium problem where creditors are hoarding money and causing an unnecessary disruption to economic activity.

Unnecessary? UNNECESSARY? Do you have any idea what voluntary individual behavior in the market implies for necessity? It means that if people find that it is their interests to “hoard” money, then this is NECESSARY, because the economy is precisely where individuals can achieve what they find it necessary for them to achieve that they cannot achieve in isolation!

If there is any “unnecessary disruption”, it is QE2, it is inflation, it is artificially low interest rates, it is the Federal Reserve. Your kowtowing to the Fed, and yes you are kowtowing, no matter how much you claim to be against the Fed, for if you are against the Fed, you must be against what the Fed does, for it is what people do that makes us choose to be friends or enemies with them.

Can you not even consider the “disruption” that QE2 will cause? Or do you attribute it as being a necessary evil but a reluctant good, flawed but needed, sub-par but beneficial, bad but good, up but down, black but white?

Why can’t you be consistently conservative and fight for true economic freedom? Afraid to be labeled a fringe lunatic Austrian? Is THAT why you are so antagonistic?

>I do argue, though, that the Fed could create the right incentives through QE2 for the creditors to quit hoarding their money and help restore stable nominal spending.

You know, your pre-occupation with “hoarding” is straight out of Keynesian economics. You are a proto-typical example of a seeming conservative who cannot escape from a Keynesian mindset by night, but nevertheless attacks Keynesianism during the day. You’re like Batman ridiculing wealth disparity by night, and hosting caviar and champagne parties during the day. When the Sun is up, Keynesianism is bad, because you have to be different. But at night, you dream of little sugar plums being hoarded underneath the evil fat cat’s mansion.

Hoarding is NOT economically destructive, because it is not individually destructive. If A hoards, he can only do so if B spends and thus gives money to A. I don’t see a crime being committed by A, so why claim that the solution is for A to spend money, and if he refuses, devalue his money using a violence based institution of monopoly money production until he does spend?

You are in fact calling for “mindless spending” on the part of the public. It *must* be mindless, because if the minds of individuals right now tell them that they should not spend as much as you want them to, then it must take a mindless zombie to spend so that there is as much spending as your statist Keynesian mind wants them to spend!

Do you not see this? Do you not see that if my mind, my mind right now, tells me not to spend more because I either find the economy to be not conducive for investment right now, or I am satisfied with my current spending and investment pattern, then who are you to say that I should spend more? You are asking me to be a mindless Keynesian spender and just spend for the sake of spending, and by golly, if I don’t, then you aren’t going to counterfeit money to devalue my money, no, you will just call for the magical fairies at the Fed to print money and do the job for you.

>Again, this is a case of working with the institutions we have.

Right. So if there exists a baby killing institution, then instead of renouncing it, and doing everything we can intellectually to fight it, let’s all just accept it, “do what we can”, and use mathematical equations to determine the optimal path of baby killing, where any deviation from it is “unnecessarily disruptive”.

It’s called intellectual capitulation, look into it.

>Along these lines, it is worth remembering that stabilizing nominal spending was seen as a desirable policy objective by Frederick Hayek in a second-best world of central banks and fiat money.

Why are you not ALWAYS in the first best world? How can you even begin to think that your work will make the world a better place if you support policies that can only lead to, at most, a second best world?

>Finally, Mr. Murphy fails to acknowledge that though I support QE2 in principle as a means to address the excess money demand problem, I also acknowledge its imperfections in the article. Here is what I said:

>”Unfortunately, QE2 may not live up to its potential for several reasons. First, QE2 was not implemented in an optimal fashion. It should have been enacted in a rule-based fashion, with a clear, explicit objective…This would have increased long-term certainty about the price level without requiring an explicit dollar commitment up front from the Federal Reserve. Instead, the Federal Reserve did the opposite. It committed to a large, ad hoc amount of $600 billion that will be used to maintain some vague inflation target. Second, the Federal Reserve continues to pay banks to sit on excess reserves, a policy that keeps money demand elevated at banks… Finally, the Federal Reserve is not immune to political pressures. It is possible the current criticism aimed at the Federal Reserve will make it more timid in implementing QE2.”

It’s not a “failure” to not acknowledge what you think can help your case, considering how these points are not central to the “spirit” of your primary position regarding QE2.

Those three “imperfections” you refer to are moot and nothing but attempts at apologizing for an indefensible position.

That QE2 was not implemented in “optimal fashion” is central planning par excellence. You are against socialism, are you not? Why? Don’t you understand that central planning is inherently a mess? No matter how QE2 was implemented, there will be “imperfections”, not only because perfection does not exist in anything human related, but also because central planners simply cannot properly manage the economy, in whole or in part, and that includes money production.

That the Fed is paying banks to “sit on excess reserves”, which leads to less credit expansion in the economy, actually MINIMIZES the negative effects that arise from credit expansion. If the banks made loans by pyramiding on those reserves, then MORE malinvestment will occur, MORE bubble activity will result, MORE booms and busts, and guess what? This is true EVEN IF the economy is depressed, in a depression/recession, if aggregate demand is declined, if unemployment is high. You are essentially calling for more poison to cure the problems that past poison has wrought.

And as for the “political pressures”. Here is where you are completely off your rocker. The Federal Reserve IS a political institution. It is a governmental monopoly. It centrally plans the economy’s money production, interest rates, and thus regulates the entire economy, because money is one half of every single trade. To say that you want the Fed to be “independent” from Congress just means you want the Fed to remain secretive from the public. To bail out friends in Wall Street. To give money to foreign governments and banks. To choose winners and losers. To give Congress the ability to borrow and spend like drunken sailors, fight unjust wars overseas, and finance a large part of the economics profession which results in folks like you who cannot see through the stench because you are taught that the Fed is a business creature with supposed benign market interests in mind, and not a political creature as it really is.

The Fed NEEDS to be pressured, so that they can become “intimidated”, so that they will stop destroying what’s left of the already inflation poisoned economy.

You keep calling for QE2, but your “criticisms” of it are superficial and weak, in fact, only 2 out your 3 criticism are clearly criticisms of the Fed. The third is really a criticism of hard money, anti Fed members of Congress.

>Ultimately, my case for QE2 boils down to a pragmatic desire to fix the excess money demand problem with existing institutions we have.

The quintessentially neoconservative philosophical position. “Pragmatism” which is actually concealing a very idealistic and dogmatic devotion to the power of the state and the desire to turn the American people into tools, a means to the end, of the state. In your case, as tools and means to the end that is an absurd aggregate statistic that must be controlled by a central planning agency, which really means to control people’s economic lives away from where they want them to be in freedom.

>Thus, contrary to Mr. Murphy’s assertions I understand the problems with fiat money and the limits to intervention.

No, it is quite clear you don’t. You don’t see it if your life depended on it. The problems of fiat money and intervention go far, far beyond the crude critical examination you have laid out in your weak attempt at justifying QE2 here.

>Ultimately, though, I would like to see U.S. monetary policy gravitate toward a more market-friendly approach, such as see Scott Sumner’s proposal to have the Fed target the nominal GDP forecast coming from a (yet-to-be-developed) nominal GDP futures market.

HAHAHAHAHA, ah yes, a “free market approach” that doesn’t change anything except the reasons for when the CENTRAL PLANNING AGENCY called the Fed is supposed to depreciate the money slower, and when they are supposed to depreciate it faster, all the while ignoring a real free market approach, which is free banking, abolition of the Fed, and allowing the MARKET to produce money.

But of course, that wouldn’t be “pragmatic”, or “prudent”, and would be “too extreme”, “idealistic”, “moralistic”, wouldn’t it? Hahaha

>This approach would go along ways to restoring long-term macroeconomic stability.

It would go a long ways to pushing the economy over a different section of the cliff. Listen, the world has heard this tune before. “This time it will be different”. “This time, our centrally controlled plan will end the boom bust cycle forever”. “This time, we finally have it figured out”.

Isn’t it high time that you and all the other neoconservatives abandon the Keynesian mindset, abandon your movement away from true American ideas, which is freedom, liberty, individualism, and NO FRIGGIN CENTRAL PLANNING?

Luther Stueland January 18, 2011 at 6:02 pm

Exactly!

George Selgin January 18, 2011 at 6:51 pm

Exactly what?

Bala January 18, 2011 at 7:48 pm

Exactly what makes sense.

Colin Phillips January 19, 2011 at 5:41 am

Nice.

John James February 4, 2011 at 9:31 pm

That was excellent. I enjoyed reading it.

Ned Netterville January 18, 2011 at 6:19 pm

Both Professor Beckworth and Scott Summer, whose proposal to “fix” the Fed Beckworth endorses, believe that if only the Fed would do things the way they think things should be done, everything would bo okey dokey and inflation wouldn’t be a problem. They acknowledge that the Fed is flawed, but think we are stuck with fiat money and central banks forever.

Unfortunately, even if angel-economists comprised the FRB, the Fed would mismanage the money supply and inflation would remain an eternal problem. Like all other commodities, only God’s free market can get the supply and demand for money right;. (God is smarter than angels.) The market is comprised of everyone, and everyone knows what boards, committees and entire governments cannot possibly know. Imagine the chaos that would reign if there was a central food monopoly or a central automobile manufacturing monopoly run by the smartest government officials who ever lived. Cars wouldn’t run, but since most folks would die of starvation, they wouldn’t need cars anyway. Problems solved the statist way.

J. Murray January 18, 2011 at 7:11 pm

Just because there’s “excess demand” doesn’t mean it needs to be supplied. I have a permanent excess demand for money, but that’s no cause to up and send me more just because I ask for it. I have to do something to earn it. The velocity declined not because there weren’t enough pieces of paper floating around, but because people didn’t see something they wanted to buy at a reasonable price.

You treat a metric the same way a government agency does. Do anything it takes to make that line go up instead of down, which usually involves the most barbaric approach imaginable and fails to solve the underlying problem.

You failed to ask the most important question of them all: *WHY* are those metrics falling? Why are people spending less and saving more? I can guarantee you that no one is out there thinking, “Gee, there may not be enough green pieces of paper run out of the Federal Reserve’s printing press. Maybe I’ll hold onto a few more because they may turn into rare collector’s items I can sell at Southeby’s in the future.” Sure, just dumping a bunch of cash into the system and calling it a day can make those pretty line graphs you dumped out change direction, but does that really solve anything?

The entire purpose of an economic system is to make peoples’ lives better, not satisfy your bizarre interest in keeping the peaks and valleys of your various charts in the green zone. Doubling my salary and doubling the national GDP by dumping a ton of cash out of a helicopter doesn’t do me much good when I can only buy as much stuff this year as I did last year. My salary and the prices of things are pretty God Damned meaningless. All I care about is how long I have to work to get what I want. The intermediary trade paper you seem to be obsessing over doesn’t even enter into the equation. And I bet nearly every other person in existence outside the Chicago and Keynesian schools think the same way, just more subconsciously and not as abrasively as I. What gets me mad is when some jackwagon tells me that what I just worked for is now more expensive because some other jackwagon just made that paper I worked for less valuable because he thought there needs to be more in circulation because his graph said so.

Jonathan M. F. Catalán January 18, 2011 at 7:56 pm

I have a permanent excess demand for money, but that’s no cause to up and send me more just because I ask for it.

A minor quip: demand for money is demand to hold money in cash balances; i.e. the demand to hold money.

Beefcake the Mighty January 18, 2011 at 8:06 pm

So you mean reservation demand? According to Rothbard, this is just one component of the overall demand for money (the other being exchange demand), although of course all demand is demand to hold at least for some period.

Kel Kelly January 18, 2011 at 9:28 pm

{Full disclosure: I haven’t read any of the other comments}

I think this note on what money demand actually is changes the entire conversation presented by Beckworth. Bottom line: there is no “demand” that needs addressing.

james b. longacre January 19, 2011 at 2:22 am

major mistake

james b. longacre January 19, 2011 at 2:23 am

Just because there’s “excess demand” doesn’t mean it needs to be supplied….is therean excess demand and not just demand???

J. Murray January 19, 2011 at 6:52 am

That’s why I put it in quotations. There is no such thing as an “excess demand”. There is just a demand. Demand is always unlimited in absence of price. When money is free, the demand will be unlimited. The “price” of getting more money is producing something and then selling it. Just like everything else, money also has a supply-demand component and a price. Money isn’t a special creation that exists outside this mechanic.

If I want more money, I have to produce something to get it. If the holder of that money doesn’t want to give it up, then it’s incumbent upon me to increase the value as the money holder perceives enough for him to part with it. That’s all there is to it. Printing up more is the wrong answer.

Blackadder January 20, 2011 at 2:23 pm

There is no such thing as an “excess demand”. There is just a demand.

This is true in equilibrium, but not if there is a disequilibrium. If demand for apples increases, apple growers will respond either by raising prices or by increasing supply (or both). There is nothing wicked about responding to an increase in the demand for apples by growing more apples, and indeed this will often be the appropriate response.

Likewise, if there is an increase in the demand for money, increasing the supply of money is a perfectly appropriate response. If this doesn’t happen (say, because the government controls the supply of money or apples and doesn’t respond to the demand increase in the appropriate way) then it is perfectly sensible to be of their being an excess demand for money.

The Fresh Prince of Darkness January 20, 2011 at 2:28 pm

Blackadder is the intellectual equivalent of a dirty sanchez.

The Kid Salami January 20, 2011 at 2:39 pm

Blackadder – is this a joke or are you serious?

If the latter, I agree. I was at a party last week. There was a disagreement: i said that when the football is kicked out of the stadium, we don’t all just wait around for it to return. People want a ball, other balls exist and so we use another ball and get on with it. Everyone agreed. I then applied the same thinking to the game we were playing at the time, which was “Musical Chairs”, about which we were having the disagreement. i said that, using the same logic, someone wants a chair and clearly there are other chairs in the house, so why leave someone standing around? It makes no sense!

Everyone thought i was a complete moron. Glad to finally find someone who might agree with me.

J. Murray January 20, 2011 at 2:59 pm

Demand is unlimited absence of price. Federal Reserve Notes don’t have a price, thus the supply will never meet the demand.

Price is what dictates the equilibrium. Without a price associated with money, we can never know if there is “enough”. And a bunch of charts and graphs conjured out of nothing without a single observational or properly tested basis to back it up will never answer that question.

Blackadder January 20, 2011 at 9:06 pm

J. Murray,

The price of an item is what people are willing to give up in exchange for it. If an apple costs a dollar then the price of a dollar is one apple, etc.

The thing to remember about supply and demand is that they are two side of the same coin. Demand is not simply wanting something, it is being willing and able to give something up in exchange for something else. Thus, as Say noted, one man’s demand is another man’s supply, and visa versa.

I’m guessing that you believe that changes in the supply of money affect prices (as well you should). If the supply of money increases that will tend to make prices go up; if the supply of money falls that will tend to make prices go down. If you are mindful of Say’s Law, it should be obvious that changes in the demand for money would likewise affect prices. More demand for money tends to make prices go down; less demand tends to make prices go up. Unless, of course, an increase in demand is matched by an increase in supply or a decrease with a decrease.

Joseph January 23, 2011 at 4:48 am

Backladder, if within a particular exchange the money cost of an apple was $1, it does not mean that the price of $1 is one (1) apple. It means that in that particular exchange, $1 was valued less than one (1) apple. Otherwise, the exchange would not have taken place. People don’t purchase goods because they think what they have to exchange for such goods is equal to the good in question, they do so because they value the good in question higher than what they have to exchange for it.This is pretty elementary stuff, and it pains me that you are so ignorant to it.

Joseph January 23, 2011 at 5:16 am

To leave where I left off, there is the other side of the coin, as you might say. What I stated above is obviously from the buyer’s point of view. So, I must also include the seller’s point of view. If in that particular exchange the price of one (1) apple is $1, then it must also be true that the seller values $1 more than one (1) apple, otherwise the exchange would not have taken place. And, if he is a good entrepreneur, then the difference will necessarily be his profit (assuming the cost of production of one (1) apple are equal to his valuation of one (1) apple in the exchange).If this were not true, not only would the exchange not take place, but the entire purpose of production would be pointless. Why produce something, and at great personal risk, if you do not value the fruits of such effort more than what such effort produces? In such a world that you pose, economy could not exist, rather it would be repetition, with zero progress due to no motivation for progress. It would be the “Static Equilibrium” that the Neo-Classicals have a fetish for, where there is no change and every day is the same as the last.Equilibrium is merely a mental tool, it does not exist in reality. Sure, it helps us understand reality, but it is by no means a representation of real phenomena in an ever-changing world.

Further, it is really insulting when you try to talk about Say’s law and then somehow intermix it with the Quantity Theory of Money. This is incorrect, because Say assumed commodity money, and also assumed market interest rates. So, throwing in Fisher et al’s QTM just shows that you are attempting to twist Say’s law. But, you’re failing at it.

Captain_Freedom January 20, 2011 at 3:46 pm

There is always a positive demand for more money, because it is the most marketable good that is used in one half of all trades, and is (supposed to be) a store of value. That there is a desire for more money does NOT imply that this desire has to be satisfied by producing more money via monopoly central banks and legal tender laws.

There is no such thing as an “excess demand for money”, if by “excess demand” you mean a demand that below a fixed value “X”, such that anything below is an “excess demand” and anything above fixed value “X” is an “excess supply”.

Fiat money is not like apples. Producing more apples because there is a higher demand for them is a consequence of people attaching more value to apples relative to other goods, AND that apples confer an actual benefit to people’s standard of living (according to their subjective preferences). However, for paper money, it is not the same. There is no general benefit to society in printing more money. It does not cause an increase in people’s standard of living. If you doubt this, ask anyone in Zimbabwe, or Weimar Republic descendants.

If there is an increase in the demand for money holding, then increasing the supply of fiat money is not the proper solution, not only because such a solution is based on violence, but it also ignores the fact that it is not money by itself that is wanted, but a greater purchasing power. People want to hold more money because, given the prevailing price level, they would like to own more money for holding. At some point in their increasing demand for money holding, their additional purchasing power will be met, at which time they will stop increasing their cash holdings.

By printing new money, the way it spreads from the banking system and enters people’s pockets, it increases prices, because money exchanges hands via trade of goods and services. If the supply of fiat money is increased, as a solution to satisfy people’s “excess demand” for money, then it would fail to accomplish doing what people really want, which is not more money qua money, but more purchasing power. But inflation robs people of purchasing power by increasing prices.

Thus, if individuals have an “excess demand” for money, that is, a desire for more purchasing power of their cash holdings, then the only way they can do this is by increasing their productivity, earn more money, and then increase their cash holdings and thus increase their purchasing power. Creating more money won’t do it, because what people are in pursuit of is money that has higher value relative to prices. Inflation makes prices rise, thus negating the achievement of more purchasing power of people’s cash holdings. But this of course doesn’t stop the Federal Reserve System from creating new money, which folks like you ignorantly believe can alleviate a non-existent “excess demand” for money.

Now, if we lived in a society where gold is money, then things are radically different. Here, an “excess demand” for more money, i.e. an individual’s desire for increased purchasing power, can only be achieved by increasing one’s productivity. If everyone wanted to hold more gold money, which means if everyone wanted to have greater purchasing power, then this desire can be satisfied by falling prices. People in general will “hoard” more and more, and prices will keep falling around them, until each individual’s purchasing power is increased to the point where they are satisfied according to their subjective preferences. Thus, gold can fully alleviate “excess demand” for money. People just have to work hard and produce, and they can earn more money to “hoard”. While they do this, production goes up, prices fall, and purchasing power goes up. It is additional purchasing power that people want at the end of the day when “excess demand” is spoken about.

Of course, in reality, individuals tend to ALWAYS want more money, for holding and for every other purpose, and so the constant desire for more money for any reason will operate to increase productivity, decrease prices, and increase purchasing power.

The fallacy in the belief that there is such a thing as an “excess demand for money” that makes no mention of purchasing power or subjective preferences is nothing but a dogmatic mechanistic conception of money.

Daniel Hewitt January 19, 2011 at 12:38 pm

J. Murray,

Great commnet. Silas, who has been banned from our “biker bar”, sends his endorsement of your comment:
http://consultingbyrpm.com/blog/2011/01/is-there-a-conservative-case-for-qe.html/comment-page-1#comment-10316

Nikolaj January 18, 2011 at 8:07 pm

The best explanation of why these people who believe that the demand for money can be “excessive” are confused:

“Every piece of money is owned by one of the members of the market economy. The transfer of money from the control of one actor into that of another is temporally immediate and continuous. There is no fraction of time in between in which the money is not a part of an individual’s or a firm’s cash holding, but just in “circulation.” It is unsound to distinguish between circulating and idle money. It is no less faulty to distinguish between circulating money and hoarded money. What is called hoarding is a height of cash holding which—according to the personal opinion of an observer— exceeds what is deemed normal and adequate. However, hoarding is cash holding. Hoarded money is still money and it serves in the hoards the same purposes which it serves in cash holdings called normal. He who hoards money believes that some special conditions make it expedient to accumulate a cash holding which exceeds the amount he himself would keep under different conditions, or other people keep, or an economist censuring his action considers appropriate. That he acts in this way influences the configuration of the demand for money in the same way in which every “normal” demand influences it.”

Ludwig von Mises, Human Action, pp. 401-403.

james b. longacre January 19, 2011 at 2:14 am

“it is unsound to distinguish between circulating and idle money.”does thedoes anyone truly make such a distinction?? current dollar-currency system operate differently?

james b. longacre January 19, 2011 at 10:46 am

does anyone consider excess demand true at all or it it more lies??

Stealyourface January 18, 2011 at 8:16 pm

Nikolaj hits the nail on the head…via Mises.

Walt D. January 18, 2011 at 8:24 pm

The choice seems simple – what is is more likely to provide real economic growth?
-the invisible hand of the market or:
- the visible ass of the central planner?
-

james b. longacre January 19, 2011 at 2:12 am

does unreal growth occur now??

Anthony January 20, 2011 at 9:48 pm

yes?

Karmisking January 18, 2011 at 8:33 pm

This response is so blind to the real underlying problem it’s “hand-slapping-on-forehead” stuff.

First, does Dr B agree with the Austrian view that fraction-reserve banking is a fraudulent activity that counterfeits money via the issuance of debt, and distorts price signals>

If no, why not?

If yes, then does he not agree with ABCT and the argument that excess credit creation will necessarily create Ponzi-like bubbles in the economy?

If no, why not?

If yes, does he then agree that there are only two alternatives when the Ponzi scheme blows up: (1) support Bernie Madoff by bailing him (and his “investors”) out or (2) letting the whole thing collapse?

If Dr B supports (1) by money printing to support “excess demand for money when the bubble bursts”, WHY SHOULD THESE LOSSES BE SOCIALIZED? You participate in a Ponzi scheme, you pay the price.

Dr B wants to bailout Ponzi scheme participants by “ratifying” the counterfeiting activity inherent in FRB.

He is the one who avoids the real issue. The real issue is not excess demand for money. It’s the fraudulent, distorting, destablizing credit-creation process that causes the problem in the first place.

Cleaning up the mess after Madoff has run away with the gold and giving his “investors” useless paper tokens with past Presidents’ pictures on the paper is not a “solution” to the Bernie Madoffs in the world.

The Monetary Act of 1792 had a solution to this problem – a bullet to the head of all the shyster-Madoffs of the world.

Does Dr B support that “economic policy”? If not, why not?

George Selgin January 18, 2011 at 9:08 pm

There’s a lot of argument going on to the effect that, in saying that the Fed needed to expand M, and ought to have done so sooner than it did, David Beckworth and others who take a similar view in effect endorse the central planning of the money stock. That seems to me a complete non-sequitur. After all, many people on this forum, including some who for all I can tell have poster-size pictures of Murray Rothbard in their bedrooms, have (quite rightly) blamed the Fed for expanding the money stock excessively earlier this decade. Hell, even Robert Murphy says it. Does that mean that they implicitly endorse a different but nonetheless central-bank based monetary policy? Not necessarily: they may (and, I think, most do) imagine that a completely different and less centralized monetary system would have come closer to their ideal than any centralized one could be expected to. Well, Beckworth’s view seems of a kind: in his article he doesn’t defend the status quo; he suggests that the money stock could have been better managed by something like Sumner’s GNP futures targeting scheme. Admittedly, that is not the sort of market-based arrangement most Mises-Institute types favor. But it isn’t mere acceptance of the present system either. The more general point, though, is that one can argue that it is sometimes desirable for the money stock to expand without supposing that the state has to make it do so. Heck, even a gold standard involves some tendency for M to grow faster in response to deflation, because deflation in that case means a rising relative price of gold.

Personally I don’t think QE2 was necessary or desirable, because I believe that by the time it was undertaken the economy had largely already adapted to the spending slow-down Beckworth describes, and would moreover continue to adapt further before the expansion began to have its full consequences. However desirable timely M adjustment might be in response to a change in V (yeah, I know–V is endogenous. So what? ” E pur si muove,” exogenously or otherwise), belated adjustment is just more of the same mucking up. But while I don’t agree with his position, I think it is far from unreasonable–and far better than merely saying “let the free market decide,” as if that alternative were on the table in our present fiat-money bound arrangement. For the record: though I wish it were, it ain’t.

Dan January 18, 2011 at 9:33 pm

I have the Rothbard shirt but I haven’t seen where I can get his poster. I had on my Hoppe shirt in Las Vegas on Saturday and another guy made a comment and gave me a thumbs up as he was walking by. We had the rare encounter of running into a fellow anarchocapitalist on the street.

I’m not sure you get your point across to anybody when you ask for people to give Beckworth a more fair hearing on his views when you take a swipe at Rothbardians by implying we are somehow cultists who never deviate from his views. I’m pretty pretty sure most anarchocapitalists favor Kinsellas work on IP, for example. We just believe that the Rothbardian economists offer better answers than you on monetary policy.

Kel Kelly January 18, 2011 at 9:43 pm

There is a big difference between an increase in M under the gold standard vs. under a fractional reserve system. Under the gold standard, when M is increased, so are reserves. There is no money created from nothing, with an absence of anything backing it. The main problem is not money creation per-se; it is instead unbacked credit expansion ex nihilo that causes problems.

“V is endogenous. So what?” So, it means everything that V is mostly determined by the money supply itself.

james b. longacre January 19, 2011 at 2:06 am

is there a fractional reserve system in place now??

james b. longacre January 19, 2011 at 2:11 am

” There is no money created from nothing, with an absence of anything backing it.”

when many at these sited say from thin air, do they mean nothing as you mean it?

does unbacked credit expansion occur now with the fed/banking system??

are credit-dollars backed by promises??? and mostly paid back with what???

Captain_Freedom January 19, 2011 at 11:30 am

>There’s a lot of argument going on to the effect that, in saying that the Fed needed to expand M, and ought to have done so sooner than it did, David Beckworth and others who take a similar view in effect endorse the central planning of the money stock. That seems to me a complete non-sequitur. After all, many people on this forum, including some who for all I can tell have poster-size pictures of Murray Rothbard in their bedrooms, have (quite rightly) blamed the Fed for expanding the money stock excessively earlier this decade. Hell, even Robert Murphy says it.

Hey now, some of us have poster sized Cato Institute pictures in our bedroom. Personally, I use mine as a dart board. Well, that is since Rothbard’s intellectual influence at Cato waned after the Washington beltway mentality took control of it and the power of creating money out of thin air corrupted it like the Ring from Mordor corrupted Smeagol.

>Does that mean that they implicitly endorse a different but nonetheless central-bank based monetary policy? Not necessarily: they may (and, I think, most do) imagine that a completely different and less centralized monetary system would have come closer to their ideal than any centralized one could be expected to.

Question, does “they” include you?

>Well, Beckworth’s view seems of a kind: in his article he doesn’t defend the status quo; he suggests that the money stock could have been better managed by something like Sumner’s GNP futures targeting scheme.

Advocating for more inflation is status quo. Advocating for more central planning from the Fed is status quo. Focusing on a Keynesian aggregate demand statistic, instead of individual preference in a private property free trade society, is status quo. Not wanting a free market in money production is status quo. Using pretty, clean lines on graphs to organize one’s thoughts and form in one’s mind what needs to be done is status quo. Capitulating to, and apologizing for, immoral and economically destructive institutions is definitely status quo, well, at least for neoconservatives.

>Admittedly, that is not the sort of market-based arrangement most Mises-Institute types favor.

Wait, isn’t the Cato Institute a “market-based” think tank? Shouldn’t you guys be leading the intellectual charge regarding ending the Fed? Why does Mises.org have to pick up your slack?

>But it isn’t mere acceptance of the present system either.

Not “mere” acceptance, but *acceptance* nonetheless. If I told you that I think eating bacon fat for breakfast is healthy, you would probably tell me that no, it is unhealthy to do so. But suppose I tell you that I “reluctantly” think so, that I am not “merely accepting” that the eating of bacon fat is healthy, but rather hesitantly, questioningly, with trepidation, think so, does that mean my idea is any better than someone who “merely accepts” it?

>The more general point, though, is that one can argue that it is sometimes desirable for the money stock to expand without supposing that the state has to make it do so.

Not if it requires violence. Remember, the Federal Reserve is a government backed monopoly. Via legal tender laws, myself, you, and everyone else are, ultimately, coerced into it at the point of a gun. Do you ever stop and consider how incredibly immoral and sick it really is? We are coerced, at gunpoint, to use PAPER as money, even though many of us would rather not use it as money. If, in a private property, free trade society, people DESIRE to earn more money, then the way they do so is by producing more, by offering more services, to those who want your goods and/or services. There will ALWAYS be a “shortage” of money between what people want and what they can get. This is because the desire for additional wealth is practically infinite. The problem is how to increase production, REAL production, to satisfy people’s needs. When an individual wants more money for holding, they can only accomplish this is someone else in the economy “dishoards”. If everyone in the economy wants to hold more cash, then this will just make prices for everything fall, costs as well as revenues, and at some point, the value of people’s money will rise to where they don’t feel a further need to hoard more money.

It is one of the most common economic fallacies to believe that hoarding money is an economic evil. It is NOT an economic evil. It is an economic GOOD, if individuals decide for themselves that they want to hold more money, and they are free to do so without being coerced by the violence backed central bank inflation. Nobody is committing any crime by hoarding money, so how in the world could a violence based solution in any way be justified? Would you appreciate it if I observed your spending patterns, considered it to be “unsatisfactory”, because I subjectively believe you aren’t spending enough, and then print dollars off in my basement and then use them to buy the stuff you buy, in order to compel you to use more of your money to buy more? If not, then why then is it “good” for the Fed to do the exact same thing?

In a gold standard, if an individual wants to hold more cash, they can either put effort and resources into mining more, or they can produce goods and services for others who value those goods and services.

>Heck, even a gold standard involves some tendency for M to grow faster in response to deflation, because deflation in that case means a rising relative price of gold.

The problem is not that the money supply increases. It’s more important HOW it increases. If someone holds a gun to my head, and coerces me into using their worthless paper as money, then should they also increase the supply of money at will, at virtually no cost, outbidding me for goods and services unfairly because they acquired more money not through productivity, but through coercion, or political favoritism, then yes, I would be upset, and I think you would be too. But, if I choose to accept gold as money, and nobody puts a gun to my head compelling me to use any money I don’t want to use, and then the supply of gold increases because someone else mined more gold, and they use that money to outbid me for goods and services, then I will NOT be upset, because the events that transpire here are a result of voluntary, peaceful action. It would be like me observing a doctor earning more money and outbidding me for that luxury mansion I want. Yes, I didn’t get what I want, but the limitations on me are a result of peace, of my actual talents and productivity, and the doctor’s peaceful actions and productivity.

>Personally I don’t think QE2 was necessary or desirable, because I believe that by the time it was undertaken the economy had largely already adapted to the spending slow-down Beckworth describes, and would moreover continue to adapt further before the expansion began to have its full consequences.

Do you realize that what you just did is make a case for the abolition of the Fed, and Keynesian inspired government deficits? If you accept that the economy can “adapt” to changing monetary conditions, then congratulations, you are now making a free market, a REAL free market argument.

>However desirable timely M adjustment might be in response to a change in V (yeah, I know–V is endogenous. So what? ” E pur si muove,” exogenously or otherwise), belated adjustment is just more of the same mucking up.

Has it ever occurred to you that the adjustment is “belated” precisely because of government spending, and inflation, both of which are designed to delay necessary corrections, to keep the economy going in the distorted condition it is in? This reminds me of people who while supporting minimum wage, nevertheless scratch their heads wondering why wage rates do not fall fast enough to enable full employment, leading them to believe that in a free market, wage rates are allegedly “sticky”.

>But while I don’t agree with his position, I think it is far from unreasonable–and far better than merely saying “let the free market decide,” as if that alternative were on the table in our present fiat-money bound arrangement. For the record: though I wish it were, it ain’t.

But while I don’t agree with murder, I think it is far from unreasonable–and far better than merely saying “it is absolutely wrong to murder”, as if that alternative were on the table in our present murder infested world. For the record: though I wish it were, it ain’t.

Do you see what I did there?

As a senior fellow at the Cato Institute, you should be someone that I could look up to as a role model, but what I see is intellectual and moral capitulation.

George Selgin January 21, 2011 at 5:50 am

Captain, I can only say that you haven’t understood a thing I said if you suppose that I favor having a central bank. (You also seem to think that I speak for the Cato Institute rather than for myself alone.)

Captain_Freedom January 21, 2011 at 11:07 am

>(You also seem to think that I speak for the Cato Institute rather than for myself alone.)

Oh, well, I was just following your lead that since some of us, for all you can tell, have a poster-sized picture of Rothbard in our bedrooms, implying that we have no thoughts of our own, then you too must have no thoughts of your own, and are just idolizing and repeating whoever it is you appear to be following. I just got thought that since you appear to take pleasure in doling out jabs of that sort, that you would find it funny if it went the other way. I don’t actually believe what I said regarding your thoughts vis a vis Cato. I was trying to be sardonic.

I speak for myself as well, so even if my thoughts regarding central banking appear “Rothbardian”, that does not mean I must have a poster-sized picture of him in my bedroom.

With regards to my understanding of what you said regarding central banking, the only logical position one can take is to either accept it, or reject it. I don’t accept that one can reject it, but then accept it, indeed call for it, to positively act in a way a central bank acts, namely inflation.

I am saying that it is logically contradictory to say one rejects A, but nevertheless advocate for A to take positive action, an action of which actually defines and makes A what it is in nature.

It would be like me saying that while I reject murderer M, I nevertheless call for M to murder more or murder less, according to my subjective preferences, because my mathematical model with my own assumptions shows that the rate of murder is not “correct”, that there is “deviation” from the “optimal rate of murder”.

Now, granted there is a large difference between inflation and murder, the principle is the same. If you reject something, then it makes no sense for you to then turn around and say that they have to do more of what makes them what they are in nature, and, consequentially, GIVING THEM INTELLECTUAL SANCTION.

I become very offended by such intellectual capitulation. I don’t like it when I see people throw their hands up in the air and accept evil, however reluctant, and then, to make matters worse, positively go out and seek to HARNESS and EXPLOIT that evil to achieve their own subjective ends of what they think the world ought to look like. The tool, the means here IS the evil.

That A believes B to be a terrible person because B calls for an evil institution to act in a way A disagrees with, while A himself wants the evil institution to act in a different evil way, the end of which A thinks is “good”, well, A cannot be said to be against the evil institution. He is calling for it to act!

How can you be against central banking if you are for it to positively act to fix a perceived problem?

Wouldn’t a “market-friendly” solution be to be ABSOLUTELY against non-market institutions, and fighting tooth and nail intellectually for the free market to do what it is better at doing than any monopoly institution based on force could not even dream of doing, which is solving complex social problems in a peaceful, rational manner?

You see a gun being used in an aggressive manner, and instead of renouncing it, you accept it, and then try to use the aggression “for good”.

YOU CANNOT SOLVE SOCIAL PROBLEMS BY USING VIOLENCE.

Those of us who observe other people accepting and supporting the actions from a violence based institution is, to put this mildly, incredibly disappointing, immoral, socially destructive, intellectually offensive, and utterly apologetic of evil.

There is no halfway house between good and evil. It must be intellectually attacked with relentlessness, fully and completely denounced, and demonized. ANYTHING LESS will allow it to spread, and 100 years from now people will still be figuring out how to end central banking.

The reason why most people consider slavery as an evil is because it is based on initiations of force. Most people realize this fact and thus fight against it. The Fed is also an evil institution, because it too is based on physical force. The only difference between the Fed and slavery in this respect is that too many people do not hold the Fed as being utterly evil. Many people believe that some good can come out of it, as long as “the right people” are in charge of it, who accept what “the right economists” have to say. To my ears, that is like intellectuals superficially denouncing slavery, but nevertheless accepting that the enforcement of slavery can be used for some “good”, as long as “the right slave masters” are put in charge, as long as they listen to “the right moral philosophers”. Sure, you’re “against slavery”, but if it exists, then let’s try to influence and redirect slavery in a way that achieves some “social good”, perhaps by putting slaves to work in building schools, or bridges, etc. Let us not completely and fully denounce slavery, because we don’t want to “sacrifice” some good that could come out of it, now can we?

There is evil, yes, but the evil is not that aggregate demand is “too low”, or that there is an “excess demand” for money, which SURPRISE! can just so happen to be alleviated by an evil institution, so let’s drag our feet and reluctantly accept that evil institutions can sometimes do some “good” for us, by calling for them to do *more* of what in fact makes them evil!

“Too low aggregate demand” and “excess demand for money” are chimeras, they are figments of monetary crank imagination. They are fallacies. They are like a “too low aggregate demand for slavery” and “excess demand for slavery”.

Yes, by abolishing slavery, many individuals will be hurt, namely, the slave masters, and those who indirectly benefit from slavery. Yes, you may see economic production decline in the short term if the slaves are freed and they seek to assimilate into society and develop skills and find new jobs. Yes, this may mean that school children will, at least initially, learn in dilapidated schools, wear ragged clothes, and yes, bridges may initially crumble. But does the fact that some people will feel “pain” of having an unjust and evil based benefit removed justify calling for the evil to remain, to fix the “problems” that that comes along with the readjustment? NOT AT ALL.

Your position, as is almost everyone else at Cato, a calling for and advocacy of inflation, which is a calling for an advocacy of evil to continue, to keep exploiting innocent people.

Inflation transfers wealth, unjustly, from those who receive the new money last, to those who receive it first. Productivity is not even connected with this transfer, but who can best benefit from the evil, physical forced based institution. If it enters the loan market first, which is what QE2 is all about, then it artificially depresses interest rates, causing the business cycle, and MORE innocent people are going to be hurt.

If you are against the Fed, then DO NOT CALL FOR THE FED TO ACT IN A FED-LIKE MANNER.

Blag the Ripper January 21, 2011 at 11:11 am

Randians. (eyes rolling)

Captain_Freedom January 21, 2011 at 2:06 pm

AntiRandians. (Facepalm).

Julius Seizure January 21, 2011 at 2:23 pm

Randians. (motioning like jerking off)

Daniel Hewitt January 21, 2011 at 2:27 pm

You certainly have John Galt’s long-windedness, Captain Freedom.

George Selgin January 18, 2011 at 9:16 pm

“According to Rothbard, this is just one component of the overall demand for money (the other being exchange demand)”

It’s a mistake to regard “exchange demand” for money, that is, the mere willingness to accept M in exchange for goods or services, as constituting any part of the demand for money in the strict sense of the term. After all, the fed can create any amount of money it likes without fear of creating more than is consistent with this so-called “exchange demand,” provided it only offers the right terms. You can have hyperinflation despite never creating M for which there is a corresponding “exchange demand.”

I am pretty sure, by the way, that Rothbard understood this perfectly well. It was more emphatically driven home, however, by the great Edwin Cannan in his essay “Application of Supply and demand to Units of Currency.” Anyway, the demand for money either really means the reservation demand for it, or it has no practical meaning at all.

Beefcake the Mighty January 18, 2011 at 9:56 pm

Prof Selgin,

Thank you for stating explicitly this point, which I’ve long recognized you held, but which I’ve had trouble convincing other Rothbardians in this debate of the distinction (between you and Rothbard). Now there can be no doubt whatsoever.

George Selgin January 21, 2011 at 5:59 am

Beefcake, I’m quite certain that I’ve never refrained from indicating where I differ from Rothbard. Our views on the desirable behavior of the money stock and (of course) on the desirability of fractional reserve banking are very different. I know that many people on this forum are mainly hard-core Rothbardians and I therefore expect them to disagree with my views on this subject. But I also suppose that some are not unwilling to consider different arguments.

On one matter, though, I don’t disagree at all with Rothbard–and this is where Captain_Freedom and some others seem pretty clueless: I, too, favor a free-market monetary system. The difference is what I think such a system would look like and how I think it would operate.

Beefcake the Mighty January 21, 2011 at 9:09 am

Prof Selgin, I (a “hard-core” Rothbardian, btw) didn’t mean to suggest that you’ve ever been unclear in stating your disagreements with Rothbard, only that I myself have had difficulty conveying this particular point (the differing views [perhaps emphasis is a better word] on the components of monetary demand) to other Rothbardians, and hence that your affirmation here of this point was welcome.

james b. longacre January 19, 2011 at 2:05 am

like you i think it has no practical meaning at all

DD5 January 19, 2011 at 10:10 am

Selgin,

Every exchange of goods or services for money is for the sake of reservation. If not, please specify how long do you have to hold on to your cash for it to qualify as “reservation demand”? 1 day, 1 month, 1year? And please explain how you calculate such a number.

Captain_Freedom January 19, 2011 at 3:08 pm

Until the masters at the Fed and their court intellectuals tell you that you are hoarding money.

No, no, I don’t care if you are intending to spend your money later on in the future, what matters is consumption now. We need to put maximum scarce resources into consumer goods production now, so that all the magical scarcity-free resources used for capital goods production can be maximally invested.

And don’t worry if you have the crazy notion that an increase in consumption and the concomitant redirection of scarce resources into consumer goods production inevitably leads to greater relative scarcity for capital goods and other factor input, thus sacrificing future consumption. The Fed can just inject the banking system with fresh new reserves, allowing the banks to make available money capital on the cheap, making everyone believe that capital is abundant.

See? Anyone can do Keynesian economics.

Captain_Freedom January 19, 2011 at 4:06 pm

>It’s a mistake to regard “exchange demand” for money, that is, the mere willingness to accept M in exchange for goods or services, as constituting any part of the demand for money in the strict sense of the term.

It is not a mistake at all. Money serves as a medium of exchange for goods and services in the present, and as a store of value over time into the future.

When people demand money, that implies a demand to hold money for t > 0. Some of this money may be kept as cash for making future exchanges, and some of this money may be kept as cash for making immediate exchanges.

There is no strict line that separates a demand for money for “exchanges” and a demand for money for “hoarding”. But this does not mean that we cannot interpret the demand for money as being composed of more than one component. Just like there is no clear line drawn as to exactly when a line of reptiles evolved into therapsids, and when therapsids evolved into mammals, even though we can say definitively that “this” is a reptile and “that” is a mammal, so too can we do the same thing with demand for money holding. It is a spectrum.

We cannot definitively say that holding money for less than 1 month is considered “exchange demand”, whereas holding money for more than 1 month is considered “hoard demand”. But we can nevertheless say that money that is intended to be held for 1 year is certainly not exchange demand money (for that one year), call it “hoarding demand”, and we can also say that money held for only 1 day is not the same kind of money demand as “hoarding demand”, so let’s call it “exchange demand” money.

The absence of a clear and definitive line between money hoarding and money spending does not rule out the benefits of at least conceptualizing a difference between various time horizons.

If you consider “demand for money holding” as always being positive, since almost everyone holds SOME money as cash, and then understand the incredible importance of TIME in economic thinking, then you will be able to see that “hoarding demand” is no less a chimera in the real world as is “exchange demand”. For all money is demanded in order to be used AT SOME POINT IN TIME, either in the nearer future or the distant future.

You and the other “monetary disequilibrium”, monetarist folks just like to label those who intend to use money in the distant future as being “hoarders”, and “unnecessarily disruptive”, etc, all pejorative connotations, when in reality they are really acting in a way that is fundamentally similar to those who intend to hold money for the shorter term.

In short, your impatience and exasperation with those whose time horizons, or, in Austrian terminology, “low time preferences”, is foiling and “interfering” with your intended goal, which is to observe an aggregate demand curve rise on paper the way you want it to rise on paper (instead of the individual choosing for themselves), and that is causing you to demonize and look down on those who do not act the way you want them to act.

Your mindset is Keynesian, authoritarian, and riddled with “Do as I say, not as I do”.

Are you spending more money for the sake of spending more money, so that the line in your graph can rise? Or are you trying to coerce and compel those who do not want to act in the way you want them to act, to act in the way you think they ought to act?

For all your sophisticated babbling, you sure have an immoral foundation at the core of your worldview. You won’t even support the individual doing what they think is right for themselves concerning their own time preference! Why should everyone have low time preferences? Why can’t individuals manifest their own time preferences, no matter how long term it happens to be?

Suppose I thought you weren’t spending enough. Would you be OK with me printing off dollars in my basement and then going out and bidding for and thus raising the prices of all the things that are contained in your spending pattern, so that you will spend even more money in order to not lose out? What? You don’t? Why not? Is it because I am not in charge of the Fed and getting “good advice” from “enlightened” economists like you, Beckworth et al? Really there is no difference between me seeking to overrule your economic choices with my own because I say so, and the Fed seeking to overrule your, my, and everyone else’s economic choices because they say so.

Are you a conservative who supports economic freedom or are you a statist Keynesian/Monetarist who wants people to be controlled and used as a means to an end that is not the individuals themselves, but rather the government, or some absurd aggregate demand statistic that is contained on your desktop computer?

Bob Murphy January 18, 2011 at 10:16 pm

Hey everyone,

I appreciate your enthusiasm but let’s please try to be civil. I am impressed that Mr. Beckworth took the time to write this up; a certain NYT columnist wouldn’t have cared whether you guys got an accurate version of his views in my articles.

I’m only mentioning this because the commentary here often gets a bit rough compared to other, academic sites. Mises.org is the biker bar of econ blogs. So when outsiders first come in, and 100% reserve bottles go flying by their heads, they might get scared off.

John James January 19, 2011 at 3:22 am

Mises.org is the biker bar of econ blogs.

You never fail to crack me up.

J. Murray January 19, 2011 at 6:56 am

I was wondering why I was wearing ill fitting black leather boots with spikes on them.

Nikolaj January 18, 2011 at 10:48 pm

Another message from Mr Mises for the quantitative easers, market equilibrators and other elastic currency lovers:

“The presence of unused capacity of inconvertible investments is an outgrowth of errors committed in the past. The assumptions made by the investors were, as later events proved, not correct; the market asks more intensively for other goods than for those that these plants can turn out. The piling up of excessive inventories and the catallactic unemployment of workers are speculative. The owner of the stock refuses to sell at the market price because he hopes to obtain a higher price at a later date. The unemployed worker refuses to change his occupation or his residence or to content himself with lower pay because he hopes to obtain at a later date a job with higher pay in the place of his residence and in the branch of business he likes best. Both hesitate to adjust their claims to the present situation of the market because they wait for a change in the data that will alter conditions to their advantage. Their hesitation is one of the reasons why the system has not reached the state of the evenly rotating economy.

The advocates of credit expansion argue that what is wanted is more fiduciary media. Then the plants will work at full capacity, the inventories will be sold at prices their owners consider satisfactory, and the unemployed will get jobs at wages they consider satisfactory. This very popular doctrine implies that the rise in prices, brought about by the additional fiduciary media, would at the same time and to the same extent affect all other commodities and services, while the owners of the excessive inventories and the unemployed workers would content themselves with those nominal prices and wages they are asking — in vain, of course — today. For if this were to happen, the real prices and the real wage rates obtained by these owners of unsold inventories and unemployed workers would drop — in proportion to the prices of other commodities and services — to the height to which they must drop in order to find buyers and employers.

[…] The new boom encounters a piece of malinvestment of capital and malemployment of labor already effected in a previous boom, which the process of readjustment has not yet absorbed. Thus it becomes obvious how vain it is to justify a new credit expansion by referring to unused capacity, unsold — or, as people say incorrectly, “unsaleable” — stocks, and unemployed workers. The beginning of a new credit expansion runs across remainders of preceding malinvestment and malemployment, not yet obliterated in the course of the readjustment process, and seemingly remedies the faults involved. In fact, however, this is merely an interruption of the process of readjustment and of the return to sound conditions.

The existence of unused capacity and unemployment is not a valid argument against the correctness of the circulation-credit theory. The belief of the advocates of credit expansion and inflation that abstention from further credit expansion and inflation would perpetuate the depression is utterly false. The remedies these authors suggest would not make the boom last forever. They would merely upset the process of recovery.”

(Human Action, pp. 579-580)

james b. longacre January 19, 2011 at 2:02 am

The advocates of credit expansion argue that what is wanted is more fiduciary media. Then the plants will work at full capacity,…….

do they argue with anyone??? does it matter if its more fiduciary media as you claim, or just currency/money in general??

james b. longacre January 19, 2011 at 2:03 am

Another message from Mr Mises for the quantitative easers, market equilibrators and other elastic currency lovers:…..

didnt the mises also call for govt out of money so the above types can do what they wish??

Beefcake the Mighty January 19, 2011 at 3:23 pm
Greg Ransom January 18, 2011 at 11:45 pm

“Frederick” Hayek?

Nikolaj January 19, 2011 at 12:18 am

Robert Murphy:
“the commentary here often gets a bit rough compared to other, academic sites. Mises.org is the biker bar of econ blogs. So when outsiders first come in, and 100% reserve bottles go flying by their heads, they might get scared off.”

This reminded me of the following assessment, given by The Economist, many decades ago:
“Professor von Mises has a splendid analytical mind and an admirable passion for liberty; but as a student of human nature he is worse than null and as a debater he is of Hyde Park standard.”

Hyde park or a biker bar, it’s always the same. :) Therefore, I am sure that Mises would like this blog, much more than those sanitized “academic” websites.

John Voigt January 19, 2011 at 12:33 am

There is an excess demand for money because Bernanke is paying interest on reserves and therefore preventing the monetary aggregates from expanding. He has a contradictory monetary policy which is simultaneously expansionary and contractionary. It seems like he’s interested in inflating asset prices (the wealth effect) and ease deflationary expectations rather than satiating the demand for money as money. Unfortunately, expected inflation can be just as detrimental as deflationary expectations, especially during a fragile recovery.

james b. longacre January 19, 2011 at 1:40 am

” During 2008 there emerged a surge in money demand as the housing fiasco began to unfold.”

fiascos create demand surges???

anyone at any time has a demand for more money, unless they can get what they want without it.

why would this surge be any different than any other?? or is this another lie??

james b. longacre January 19, 2011 at 1:41 am

” This means the Fed should have done more to prevent the surge in money demand.”altered peoples feelings somehow??

when you say money what do you mean??? the dollar…you consider that money??? not a managed currency???

james b. longacre January 19, 2011 at 1:45 am

“This spike in money demand….” can you measure that??

james b. longacre January 19, 2011 at 1:56 am

“Thus, for every debtor who is cutting back on spending in order to pay off his debts, there is a creditor receiving money payments. In principle, these creditors should be increasing their money spending to offset the decline in money spending by the debtors — but if that were happening, there would have been no decline in overall total current-dollar spending.” (dollar = money?)

does the current dollar operate differnt than money in some way??

when the debtor spent their credit dollar/money wasnt that an increase in spending?

why should in principle a creditor increase their spending?

is that necessarily true?? could the creditors be spending dollars on things that right now require less overall tranasactions that will in the future create greater value and wealth???

Karmaisking January 19, 2011 at 2:56 am

If Bob’s comment was directed to me (amongst others) apologies. For a couple of reasons (1) It’s the Coinage Act of 1792, not the Monetary Act. (2) I didn’t wish to impute bad motives on behalf of anyone. (3) I’m tired and that’s not a good time to write down your thoughts. Internal censors are occasionally removed.

The only comment I make in defense is (1) The Coinage Act really did stipulate the death penalty (2) QE really is the ratification of monetary fraud (3) Bad things come to those who tolerate (a) embezzlement or (b) counterfeiting in their society. And sometimes these people can only stopped by forceful means. Rothbard would support action – even violent action – against those who stole property from private citizens. He also wanted to ban FRB. Combine those two and you are back to the re-instatement of the Coinage Act of 1792. It’s not “offensive” to mention this – it’s the truth.

How could it not otherwise be?

Justin T January 19, 2011 at 3:33 am

I think there’s a fundamental observation missing from the overall analysis here. Namely, the particular surge in the demand for money in 2008 was the result of a series of bank runs caused by the inability (or unwillingness) of other financial institutions to extend credit lines to each other. I would imagine that under fractional reserve banking, this risk of “acute increase in the demand for money” is endemic. Meaning, when you loan out money that isn’t yours, you constantly risk that someone might demand it back from you before the loans are paid off.

It’s questionable whether the Fed was aware to what extent investment banks in particular were leveraged. It’s also questionable whether the Fed was aware of how important short term repo and tri-party repo markets were to overall liquidity.

As to whether there exists an excessive demand for money now: I don’t buy it. The chart above shows money velocity from the height of the credit boom to September 2010. On a relative basis, I’m sure 2010 looks like banks are unnecessarily holding on to too much money when the basis is the over-leveraging stage in the cycle. But if only 2 years previous, you were leveraged 50:1 and were within a few well-timed phone calls away from being completely wiped out on collateral calls, illiquid secondary markets for CDOs, and money market redemptions, I’d imagine you’d reconsider leveraging yourself to that level for quite some time. Is that a slowdown in V? Sure. Perhaps Dr. Krugman would call that the Paradox of Nearly Getting Completely Wiped Out Last Time You Took An Obscene Amount of Risk.

james b. longacre January 19, 2011 at 10:22 am

“acute increase in the demand for money”

how do you know there is/was an acute increase in the demand for money??? where did the money the money they had go???

are you saying that the demand increase was due to bad lending …so the demand for money was either for new money to replace bad loans or what was lent to be repaid back quicker??

does fractional reserve banking occur now????

“As to whether there exists an excessive demand for money…” what is excessive demand?? how does one build an excess of demand or ones own personal demand???

geoih January 19, 2011 at 6:59 am

This whole thread is a little like trying to teach Ptolemaic astronomy or phlogiston theory to a modern physicist. Talking about excess money demand and money velocity is worse than trying to convince an Austrian some different or possibly true concept. It’s like talking about something that has been shown to be explicitly wrong. You don’t convince them that your argument could be right. You only convince them that you’re ignorant.

Maurizio Colucci January 19, 2011 at 8:53 am

A question for David Beckworth: how do you know that it is the current money demand that is “excessive”, and not the previous money demand that was insufficient?

Captain_Freedom January 20, 2011 at 3:57 pm

People aren’t working off their debts in prison yet?

Colin The Bear (Australasia) January 19, 2011 at 8:55 am

My comment is that most punters in our respective economies believe (ignorantly) that money is received for PRODUCTION. This is a neat “COMMON SENSE” concept, but given Central Banking and Fractional Reserve Banking is a complete falacy! The unfortunate thing is that the Governments of the world are in bed with the banks and other vested interests and we are stuck with the counterfieting of the Central Banks. When the Central Bank prints up more tickets, there was no product provided for the new tickets. In this way the value of the stock of money in existence before the printing exercise is reduced.
I note that there is one Blogger here who does not believe that money is printed out of thin air. I can only comment on the situation of the money supply in Australia, but between 1984~2007, M3 (the broadest mony measure) increased 10 fold! So in 23 years, M3 + 900%! Population increase would have been 30% max and productivity 30% max. Where did the extra money come from? Printing tickets of course!
Unfortunately, too much knowledge leads to depression!
Remember.
OPTIMISM is born of blissful ignorance.
PESSIMISM is the product of bitter experience!
I remain a hopeful pessimist, perhaps one day money will be a store of value, but until then, go for GOLD, especially holders of USDs.

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