tag:blogger.com,1999:blog-8702840202604739302.post7460610535710297790..comments2024-03-28T03:38:53.734-07:00Comments on MacroMania: Money and InflationDavid Andolfattohttp://www.blogger.com/profile/12138572028306561024noreply@blogger.comBlogger30125tag:blogger.com,1999:blog-8702840202604739302.post-39664556476799190062012-06-12T01:19:32.319-07:002012-06-12T01:19:32.319-07:00Be positive thinking.Be positive thinking.Mesin Fotocopyhttp://www.no1-office.com/about-us.htmlnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-32811818110075596142011-03-21T08:00:26.632-07:002011-03-21T08:00:26.632-07:00Tippit: I am not censoring my blog. I do not know ...<b>Tippit:</b> I am not censoring my blog. I do not know what is happening to your comments. They do not even appear in my spam box. <br /><br />If all else fails, email your comment to me and I will post it for you.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-71508581237926397682011-03-21T01:21:11.075-07:002011-03-21T01:21:11.075-07:00I've responded and yet my comments aren't ...I've responded and yet my comments aren't being posted. Are you now censoring your blog?Tippitnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-59627677405653425072011-03-16T19:20:14.764-07:002011-03-16T19:20:14.764-07:00Tippet:
A transfer of wealth from "money hol...<b>Tippet:</b><br /><br />A transfer of wealth from "money holders" to "bond holders." I repeat, a trivial amount of wealth is held in the form of cash. And while it is true that unanticipated Fed actions on the interest rate can redistribute wealth, the same is true of any shock that hits the economy. And fiscal shocks are much larger than monetary shocks.<br /><br />There is surely a regressive element to the inflation tax, since the poor frequently do not have bank accounts. But up until recently, banks earned zero interest on their cash reserves too. And the underground economy is a huge user of cash; perhaps we do want to tax that activity? And finally, a lot of cash is held by foreigners. All added up though, seigniorage revenue is tiny in proportion to other revenue sources for the US government.<br /><br />On your last point, many modern monetary models suggest that a moderate deflation is a good thing. So no argument there. However, the same models also suggest that the welfare gains are small. <br /><br />Why are you getting your knickers all in a knot over monetary policy? The 800lbs gorilla in the room is the Congress/Treasury.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-35558724561207412262011-03-16T13:05:30.914-07:002011-03-16T13:05:30.914-07:00The problem with not including asset prices in the...The problem with not including asset prices in the inflation metric, is that their absence obscures the punitive effect of Fed-subsidized assets on those who don't own the assets in question. If Goldman Sachs offers me twice for my bond what they would have otherwise because of the Fed's low rate policy, it represents an arbitrary transfer of wealth from money-holders to bond-holders.<br /><br />With regard to point four, conventiontal taxes are no less confiscatory, but the inflation tax is more *regressive*. You have claimed in previous blog posts that few people save non-interest bearing paper. While that is true, where does it all go? It doesn't magically disappear, it's held by someone, somewhere, at all times, even if it is treated like a hot potato. I would submit that it is is the poorest who end up holding the most of this paper, and they are the ones who pay the tax, in the form of depreciated cash and salaries, and in bank accounts with negative real interest rates.<br /><br />Another concept that I think you have confused with regard to the inflation tax, is the idea that its scope is limited to higher consumer prices. In fact, given the productivity of the US economy, even if we had a 0% rate of CPI inflation, and assuming the CPI wasn't manipulated, the tax would still be manifest in the form of an opportunity cost - consumers would have otherwise paid lower prices for consumer goods absent the consumption paid for by the fiat money.<br /><br />This is the source of controversy over what the definition of "inflation" should be, whether it is monetary expansion, or a narrowly measured and contrived index of prices.Tippitnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-85500864082948308272011-03-16T10:03:30.693-07:002011-03-16T10:03:30.693-07:00Tippit: Thanks for the tip!<b>Tippit:</b> Thanks for the tip!David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-53719416075680269652011-03-16T10:02:32.930-07:002011-03-16T10:02:32.930-07:00Tippit:
[1] There may be something to this. I am ...<b>Tippit:</b><br /><br />[1] There may be something to this. I am not an expert on the construction of index numbers. I plan to check that site out, thanks.<br /><br />[2] I would phrase it differently. I would say that one important force that is keeping a lid on US inflation is the rapid growth in the world demand for USD and US treasuries. But so what? The Fed and Treasury are simply accommodating world demand for US debt. Without this accommodation, deflation is the likely scenario. Whether that's good or bad can be debated, of course.<br /><br />[3] Should basic measures of inflation include asset prices? It depends on what one wants to measure. There is an index for every purpose. Economic theory suggests that people care about consumption, now and in the future. CPI is definitely relevant, but may not be the only index of interest.<br /><br />[4] The "confiscatory" nature of the inflation tax. You mean, in relation to other "non confiscatory" taxes levied by Congress?David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-31158100583076905702011-03-16T09:57:08.187-07:002011-03-16T09:57:08.187-07:00In other news, your spam filter appears to be trig...In other news, your spam filter appears to be triggered when someone puts a URL in their profile.Tippitnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-84947603590430633842011-03-16T09:53:54.943-07:002011-03-16T09:53:54.943-07:00There are several reasons that the monetary inflat...There are several reasons that the monetary inflation depicted in that chart haven't manifested in the CPI:<br /><br />1) Both headline and core CPI are "cooked" in order to lower government entitlement checks. Using the pre-Clinton era formula for CPI shows that inflation has been dramatically understated. The government uses hedonic regression to further deflate the index. See http://www.shadowstats.com for more info.<br /><br />2) Much of the inflation is exported as the US dollar enjoys the status of world reserve currency. My theory on this is based on the idea that because the US military, up until recently, enforced the exclusive pricing of oil in US dollars, thereby ensuring a global demand, much like legal tender and income tax serves to create domestic demand. The emergence of the Iranian oil bourse which accepts Euros for oil is another signal of the dollars's demise, in my opinion.<br /><br />3) Basic measures of inflation don't include asset prices. Prices are simply ratios, the antecedent being US dollars. Since we know the law of supply and demand isn't suspended for the consequent as it pertains to the equilibrium price, we can assume it isn't for the antecedent either. The endless cycle of Fed-induced asset bubbles bears this out clearly.<br /><br />4) As your teaching assistant said, "Inflation is caused by too much money chasing too few goods." The United States is not Zimbabwe. The price level doesn't reflect your monetary base chart in part because of the incredibly productive US economy. No matter how much the government can consume by issuing debt and funny money, the country, at least for now, produces more. This doesn't change the confiscatory nature of the inflation tax, but it does serve to obscure it, along with the other three reasons.Tippitnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-76287053368686968772010-10-26T13:36:59.628-07:002010-10-26T13:36:59.628-07:00Inflation was always there. it is and will remain ...Inflation was always there. it is and will remain there always. it is a force in any economic system that we love and hate both in the same era. Sometimes inflation is good and sometimes it is no goods. The situation too decides about the inflation. In some cases inflation is needed and at the same time one wants to avoid it. For it is God and for some it is devilThe Money Paradisehttps://www.blogger.com/profile/07225219545398180222noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-47575635666611905202010-08-15T10:33:39.401-07:002010-08-15T10:33:39.401-07:00gbgasser:
I am not exactly sure what Joan Robinso...gbgasser:<br /><br />I am not exactly sure what Joan Robinson is saying here. It sounds like she is complaining about the problem of defining things like "a unit of aggregate output." (relatedly, the old Cambridge controversy). Of course, the same thing could then be said about M and P. Aggregation into indices constitutes a problem, but whether it is a signficant problem for the question at hand needs to be demonstrated by the critics. <br /><br />What say you?David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-53683276445201656572010-08-10T04:30:04.977-07:002010-08-10T04:30:04.977-07:00I rear lot of articles but yours is the best one i...I rear lot of articles but yours is the best one i have seen forever.I really happy to visit this type of post.<br /><br /><a href="http://borsa.tv" rel="nofollow">milan</a>Unknownhttps://www.blogger.com/profile/06767593960297798547noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-86651130564697622722010-07-27T18:37:42.607-07:002010-07-27T18:37:42.607-07:00David
This comment came in a post on the QTM over...David<br /><br />This comment came in a post on the QTM over at Bill Mitchells place.<br />The comment was a quote of Joan Robinson.<br /><br /><br />“I have found out what economics is; it is the science of confusing stocks with flows” (see Robinson, “Shedding Darkness”, Cambridge Journal of Economics, 6 (1982), 295-6). She adds that “it is this confusion that has kept the Quantity Theory of Money alive until today. By applying V, velocity of circulation, that is turnover say per week or per year, to M, the stock of money used in transactions in a given market, we arrive at the flow of transactions in the market concerned”. She then goes on to point out that there is a mystery about the formula. “MV is the flow of transactions per unit time in terms of whatever currency is used for these transactions, but what is the unit represented by MV/P-transactions in real terms?”<br />Joan Robinson’s question hits the nail on the head. If you can’t name the unit then scrap the formula. And that’s before we get to serious economic objections!"<br /><br /><br />What say you?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-37672635346797224032010-07-25T18:15:01.572-07:002010-07-25T18:15:01.572-07:00David and Nick,
Here is Sargent's latest pape...David and Nick,<br /><br />Here is Sargent's latest paper. I've only just gotten into it, but he's talking about Real Bills doctrine. Thought you might be interested.<br /><br />http://homepages.nyu.edu/~ts43/research/phillips_ver_9.pdfProf Jhttps://www.blogger.com/profile/16539902592080231165noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-24309621868235577592010-07-23T07:48:54.619-07:002010-07-23T07:48:54.619-07:00Two more random thoughts:
I really like your call...Two more random thoughts:<br /><br />I really like your calling it QTP rather than QTM. You are dead right. And my "generalised version of the QT" only reinforces that, because my generalised version is a QTP, but no longer a QTM.<br /><br />Even though I reject the "Real Bills" approach, it really did force me to think far more deeply about money, and the QT. What *was* the difference between money and shares? You can learn a lot from a good clear mistake.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-31123799817949491402010-07-22T19:01:09.610-07:002010-07-22T19:01:09.610-07:00Great post, great comments!Great post, great comments!Erik Poolehttps://www.blogger.com/profile/02442592238782846163noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-85515001119358681802010-07-22T14:42:17.501-07:002010-07-22T14:42:17.501-07:00Sorry!Sorry!Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-67336906303664551872010-07-22T14:38:43.356-07:002010-07-22T14:38:43.356-07:006. Under fixed exchange rates, where Ms is endogen...6. Under fixed exchange rates, where Ms is endogenous, *all* changes in the stock of M must be due to changes in the demand for M. So you cannot use what happens there to disprove the QTM, because the QTM (or QTP, as you validly argue it should be called) is about the effect of a change in Ms. <br /><br />If you want to find the equivalent to the QTM thought-experiment of a doubling of MS, only under fixed exchange rates, this is it: it's a permanent 50% devaluation.<br /><br />Here's my own generalised version of the QT: whatever nominal variable the central bank is fixing (Ms, price of gold, exchange rate, whatever), if you permanently double it, all other nominal variables will double too.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-56841701675592817932010-07-22T14:36:57.198-07:002010-07-22T14:36:57.198-07:00Nick: What are you trying to do with me? I've ...Nick: What are you trying to do with me? I've got work to do here! But seriously, I love your "money as bling" thing...give me some time to absorb the argument fully and mull it over. Thanks!David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-43475637641073757142010-07-22T14:28:17.018-07:002010-07-22T14:28:17.018-07:00My old post on "money as bling": http://...My old post on "money as bling": http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/05/imagine-theres-no-money.htmlNick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-15176800478811913422010-07-22T14:22:08.035-07:002010-07-22T14:22:08.035-07:00David: 3&4. The required rate of return on an ...David: 3&4. The required rate of return on an asset will depend on its liquidity. If the shares in some particular mutual fund are unique in some way, and so provide a special kind of liquidity, and that particular mutual fund has some degree of monopoly power on providing that sort of liquidity, then there will be a downward-sloping demand curve for those shares, so the real quantity demanded is an inverse function of the rate of return differential. So we would need a quantity-theoretic approach to explaining the value of those shares. The NPV approach only works if the demand curve is horizontal. The NPV approach can allow an exogenous liquidity premium, but cannot allow that liquidity premium to vary inversely with the real stock of shares held.<br /><br />Suppose that "bling" is an asset. People get utility from wearing it, but their utility depends on the value of bling worn (because people want to flaunt their wealth). And one firm (De Beers?) has a monopoly on producing bling. I would adopt a quantity-theoretic approach to the value of bling. We could even assume that bling is the medium of account. In which case we would have a bling theory of inflation.<br /><br />7. But we would not have a bling theory of general gluts. An excess demand for bling (suppose prices are sticky in terms of bling) would NOT cause a recession. It would only be if bling were also used as a medium of exchange that an excess demand for bling would screw up all the other markets, because bling would trade in every market. The medium of exchange really is special.<br /><br />I can't remember if I've read that Wallace paper. I read a lot of Real Bills stuff a couple of decades back. Decided it was all about expectations of the future money supply. And their simple models only worked with a perfectly elastic Md curve. (They're liquidity trap guys, just like Paul Krugman ;-) )<br /><br />1. If I assume the increase in M is expected to be permanent, that assumption says all we need to know about "backing" and fiscal policy regime. Backing and the fiscal regime matter only insofar as they affect expectations of future money supply (I'm ignoring payment of interest on money). Once you assume the increase in money is permanent, that takes away a degree of freedom from your assumptions about the fiscal regime.<br /><br />A 2 for 1 stock split is a permanent increase in the supply of shares (with no change in future dividends or buybacks). "Backing" is just a weird way of talking about the future money supply.<br /><br />8. I'm getting too old and tired! Gotta try to lick you kids into shape soon, or it'll be too late!Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-51602625078403505472010-07-22T14:10:39.985-07:002010-07-22T14:10:39.985-07:00AndyfromTuscon:
As Nick Rowe has pointed out, mo...AndyfromTuscon: <br /><br />As Nick Rowe has pointed out, more general versions of the QTM do endogenize velocity.<br /><br />(Although, I'm not sure that velocity, as it's normally defined, has anything intrinsically to do with the "speed with which money circulates." Usually, one defines V = P*Y/M. So anything that increases the demand for money (as an asset) will cause V to drop (even if the asset does not circulate).<br /><br />Also, in reply to your last paragraph, I agree (see my reply to Fernando). Thanks!David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-50136435306813263122010-07-22T13:20:37.381-07:002010-07-22T13:20:37.381-07:00The theory that the money supply determines the pr...The theory that the money supply determines the price level has an even more basic flaw: it ignores the impact of the velocity of money on the price level.<br /><br />The price level is determined by supply and demand. Demand = the total of all spending = money supply * velocity of money. In other words the money supply is only half the equation; the other half is how quickly each dollar gets spent after it is received. If you double the money supply, but the velocity of money drops 50% the price level will be stable. What could cause the velocity of money to drop? People deciding to save more than they did before. Banks deciding to lend less than they did before. Businesses deciding to invest less than they did before.<br /><br />Apply this to the classic helicopter drop example. Imagine that you drop $1,000 in the front yard of every household in America. Aren't prices automatically going to rise? How about if the package with $1,000 comes with a leaflet saying there is a 10% chance the household will become unemployed in the next few months, and that their house just lost 30% of its value? Is the helicopter drop still going to cause the price level to rise? Or are all those packages going to be taken inside and stuffed under the mattress and have no impact on prices at all?AndyfromTucsonhttps://www.blogger.com/profile/15757189063918646808noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-70783007420522855932010-07-22T08:36:52.626-07:002010-07-22T08:36:52.626-07:00Prof J: agreed.
Fernando: I cannot disagree with ...Prof J: agreed.<br /><br />Fernando: I cannot disagree with what you have said here (except, I encourage you to read Wallace more carefully). You asked "why would agents want to hold onto that extra cash?" I left out an important dimension to the current story: there was a massive increase in the demand for that cash (flight to quality). This is related, I suppose, to your comment that it is the increase in money demand that backs the extra cash. That's a loose statement, but I know what you're getting at.<br /><br />Nick:<br /><br />[1] Agreed. Although, I think I'm trying to argue that even if people thought that the increase in M was permanent, that it need not have any effect on the price-level, assuming a bunch of other stuff about backing and fiscal policy, etc. <br /><br />[2] I'm not sure I agree with you entirely here. Imagine that the new acquisition is a giant gold brick (which generates zero income). If Microsoft purchases the gold brick at market price, the new equity issue is neither accretive nor dilutive. Of course, this assumes that Microsoft shares can be redeemed for gold (the new share issue is backed in this manner).<br /><br />[3] I see where you are going with this, and maybe you are correct, but I am not entirely persuaded. Your mutual fund example is correct as a practical matter, but not as a theoretical matter. Imagine, for example, that your fund was the only agency capable of producing non-counterfeitable small denomination paper notes. These notes may still be marketable, even if all profits are remitted to the government.<br /><br />[4] Assets with varying degrees of liquidity are valued beyond their fundamentals. You're not going to disagree with this. I guess you are trying to tell me that money is different than shares; it has a higher liquidity premium. I'm not going to disagree. Have you read the Wallace paper--having a model in front of us would help sharpen the discussion.<br /><br />[5] OK...(I think...I need a coffee!)<br /><br />[6] Not sure if fixed exchange rates has anything to do with the argument (will have to think about it).<br /><br />[7]True, money is a medium of exchange (a tautology, in my view). But money is also an asset and, as such, its value may be influenced, at least in part, by all the sorts of things one normally thinks might influence an asset price.<br /><br />[8] I'm counting on you old fogies to keep us "young" whippersnappers in shape!<br /><br />Great comments everyone. You have made me realize that I need to step back and organize my thinking more clearly on this matter...David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-23644595943998923662010-07-22T04:40:11.860-07:002010-07-22T04:40:11.860-07:00David:
1. The modern (i.e. last 40? years) QTM sa...David:<br /><br />1. The modern (i.e. last 40? years) QTM says that the price level is determined by both the current *and the expected future* supply of money. If the former rises, but the latter falls, the net effect can go either way. Nobody expects the current increase in Ms to be permanent. (Plus it's also determined by the demand for money, of course).<br /><br />2. "Backing" matters only insofar as it influences future money issuance (or interest on money, if applicable). Same for shares of course, where Microsoft's acquisition would lower share prices if the shareholders never expected to see any of the returns from that acquisition in the form of higher dividends or share buybacks.<br /><br />3. But for money, unlike shares, there is no promise or guarantee that the moneyholders, unlike the shareholders, *will* see those returns. Most get handed over to the government. Money is like a closed end mutual fund, *except* all the profits from the assets held by the fund go to the government. Which means it is not at all like a mutual fund. Any normal closed end mutual fund which promised to pay all its profits to the government would find its shares unmarketable.<br /><br />4. The fundamental value of a share equals the NPV of expected returns. The Bank of Canada promises a negative 2% real return on its shares. Do the NPV calculation with a negative r. It's undefined. The little number at the end does not converge to 0 as time goes to infinity.<br /><br />5. The fundamental value of a share equals the NPV of expected returns. But for a share, the r used in the NPV calculation is market-determined, and is exogenous to the quantity of shares outstanding. That is not true for M. The rate of return at which people are willing to hold M varies inversely with M/P. People are willing to hold some M/P even at Zimbabwean rates of inflation. So the NPV calculation cannot even be defined without a money demand function relating M/P to r.<br /><br />6. IIRC (and it was decades ago I read that paper) Bruce Smith was talking about a period with fixed exchange rates. So the supply of M was endogenous. But the QTM is talking about the effects of exogenous shocks to Ms.<br /><br />7. Money, as medium of exchange, really is special. People are prepared to pay to hold it. It is ror dominated by other assets.<br /><br />8. Ahhh! You younger generation of UWO grads (shakes head)!Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.com