tag:blogger.com,1999:blog-8702840202604739302.post3161462536594752722..comments2024-03-12T22:00:25.991-07:00Comments on MacroMania: Monetary policy in a liquidity trapDavid Andolfattohttp://www.blogger.com/profile/12138572028306561024noreply@blogger.comBlogger54125tag:blogger.com,1999:blog-8702840202604739302.post-29888666767374317332013-04-14T07:08:21.713-07:002013-04-14T07:08:21.713-07:00JSeydl,
I agree that economists need to make bett...JSeydl,<br /><br />I agree that economists need to make better use of "natural" experiments. These are few and far between, however. And I do think the deductive approach is useful for exploring the likely properties of untried policies. So I think there is room for both approaches. And yes, I agree, I don't think most macroeconomists (including myself) have a sufficiently good grasp of economic history. <br /><br />Having said this, I'm not sure what motivated you to label what we are doing as "silly" exercises. This is the way science works--it's all part of the package. Thanks. David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-79168734994970804842013-04-14T05:06:25.300-07:002013-04-14T05:06:25.300-07:00David,
As I said, the alternative approach is in ...David,<br /><br />As I said, the alternative approach is in inductive reasoning. This means, among other things, that economists need to make better use of natural experiments and need a better grasp of economic history. It's a shame that we only have non-experimental data in macro, but we can do our best to tease out causality from natural experiments. For example, what was the affect on demand from austerity in 1937? How about on the east Asian economies in the late-1990s? Or what about on Europe today? Many economists are examining such developments for clues about fiscal policy, but we need more economists doing this type of work. If just half the macro guys who spend their time tweaking assumptions in thus-and-such DSGE model paid more attention to history, then the world would be in a better place.JSeydlhttp://www.jseydl.comnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-34431028203659005902013-04-13T21:15:32.724-07:002013-04-13T21:15:32.724-07:00I just hope I never end up in Grandma's liquid...I just hope I never end up in Grandma's liquidity trap.neilvwhttps://www.blogger.com/profile/06102768033385497235noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-41919739864126596342013-04-13T18:53:33.524-07:002013-04-13T18:53:33.524-07:00... even if it only kept the bond proceeds at the ...... even if it only kept the bond proceeds at the bank.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-73632638483123835902013-04-13T18:52:48.159-07:002013-04-13T18:52:48.159-07:00Look forward to it. My intuition is the same. If M...Look forward to it. My intuition is the same. If Microsoft bonds gained a liquidity premium and Microsoft issued a bunch of bonds to satisfy that demand, the liquidity premium would shrink, even if it only kept the bonds at the bank.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-49511632098274656792013-04-13T10:45:43.878-07:002013-04-13T10:45:43.878-07:00My identity doesn't matter, for my points are ...My identity doesn't matter, for my points are fundamental. <br /><br />My principle contribution is a theory of knowledge as the forth factor of production. Frankly, it is beyond your comprehension.<br /><br />You just made the argument that the real interest rate is too low. <br /><br />In making that argument did you consider, at all, that information is a substitute for capital. <br /><br />Consequently, interest rates are being driven down by knowledge. Did you consider that. Did you consider that their is no barrier to how low knowledge can drive interest rates? <br /><br />Look at the chart on Zero Hedge for the correlation between processor speed, since 1982, and interest rates. Or read Cowen on incomes falling 10% due to tech. If incomes fall 10% due to tech, how much does such imply that interest rates will fall? You have no answer. You never saw the question until I posed such, for you do not think in terms of information as a forth factor of production. <br /><br />What matters are a few very hard facts.<br /><br />1. Macro economists are incompetent, being wholly unable to foresee the coming of the present Depression.<br /><br />2. Macro economic policy is hard, much harder than people here will admit, for economic life is a confidence game. We just played a few quarters proving Obama, Summers, et al totally incompetent. Bernanke is also incompetent. People are people. The first book anyone should read on economics is La Russa's new book on coaching baseball, which is all about building confidence in the players. A macro model has to include confidence, but yours doesn't.<br /><br />3. There are only a few people to whom attention needs to be paid. Smith, Hamilton, Keynes, and Soros/Munger/Buffett.<br /><br />4. Hamilton and Keynes are the two that matter now. Hamilton accepted that only Mercantilism produces jobs and laid the conditions and foundations for a nation being successful at Mercantilism. Keynes (best explained by Pettis) was very plain that once you enter a Depression there is no way out---you can tread water---until you establish a current account surplus. That's what is confusing about WWII---it masks the current account surplus factor, but it is there.<br /><br />5. 97% of economists don't have the guts to propose Mercantilism because it doesn't promote harmony and peace. Sorry, but the Real World is brutally competitive and conflict is the permanent fact of life. Read. Col. John Boyd.Anonymoushttps://www.blogger.com/profile/07904132869021579763noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-41356352135103372792013-04-13T08:13:08.798-07:002013-04-13T08:13:08.798-07:00JSeydl:
I think you have a fundamental misunderst...JSeydl:<br /><br />I think you have a fundamental misunderstanding of the philosophy of science. We take (imperfect) measurements and we offer interpretations (theories) of the data. Frequently, there are several equally plausible interpretations of the facts. More data is needed to weed out theories (or models) that make predictions inconsistent with the evidence. It is a slow go, given the limitations of data. If you think you can do better, you are welcome to join in the endeavor.<br /><br />@Alexander Hamilton: the intent is to hide root incompetence? This from a person who chooses to remain anonymous, critiquing a person who lays his ideas and opinions bare for public scrutiny? Sweet. David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-83164091327177465692013-04-13T04:39:50.999-07:002013-04-13T04:39:50.999-07:00only serve to cloud the discussion
1) this is int...only serve to cloud the discussion<br /><br />1) this is intentional, but worse than you state. the intent is to hide root incompetence, which was revealed when none saw this Depression coming.<br /><br />2) there is a second reason. it is widely known in economics that only one national economic model creates jobs: mercantilism. <br /><br />however, none will admit such because they are all interested in lifting China from poverty rather than in what is best for the U.S. That, and they all are so dumb they think that Ricardo said something useful when he talked about comparative advantage, forgetting to mention that the U.S. is large enough that we do not need to trade to gain any benefit from the principle.<br /><br />Cowen, who is an implicit gold bug, alone with DA estimates that US income is down 8/10% due to China, since 2009<br /><br />http://marginalrevolution.com/marginalrevolution/2013/04/another-way-of-thinking-about-the-european-economic-collapse.html<br /><br />Keynes was emphatic that recovery by deficit spending by a country running a current account deficit was impossible; at best, what you do is tread water.<br /><br />economists know what to do:tariffs and other trade barriers here, deficit spending in China. They just will not admit that Hamilton's world economic view was right.<br /><br />http://www.project-syndicate.org/commentary/china-and-the-frontiers-of-innovation-by-william-janeway<br /><br />To the point, Hamilton was the Issac Newton of economics but economists will not admit what a Giant he truly was. <br />Anonymoushttps://www.blogger.com/profile/07904132869021579763noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-46795824628663342542013-04-13T02:34:18.417-07:002013-04-13T02:34:18.417-07:00Andolfatto wrote:
"I also said that what Kru...Andolfatto wrote:<br /><br />"I also said that what Krugman asserts "may or may not be true" (I can write down models where it is, and I can write down equally plausible models where it is not.)"<br /><br />And the academics wonder why the public is outraged by macro. These silly exercises where academics just keep changing such-and-such assumption in their models, arriving at different conclusions to never-ending back-and-forth avail, is madness. McCloskey is right: we need more inductive reasoning in macro, rather than these stupid deductive experiments, which only serve to cloud the discussion and prevent policy action. JSeydlhttp://www.jseydl.comnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-52828807515254728892013-04-12T21:24:40.414-07:002013-04-12T21:24:40.414-07:00David,
Thanks for the reply. And that makes sense...David,<br /><br />Thanks for the reply. And that makes sense that gold might not be considered safe. I guess some people are learning that right now. I am still not sure about this idea that the interest rate is too low. Obviously the Fed has some impact on the rate but there are still a bunch of other buyers as well. Regardless it is an interesting idea to consider.Steve Jnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-6701249410077647412013-04-12T18:17:34.435-07:002013-04-12T18:17:34.435-07:00Diego,
That's right, the general argument app...Diego,<br /><br />That's right, the general argument applies more broadly to banks (narrowly defined) -- for example, the repo market. You say that the problem is "deposit information insensitivity." That is correct, except, I include the "deposit" of MBS as collateral for an overnight loan something analogous to a bank deposit. I think that Gary Gorton does too, if I am reading him correctly.<br /><br />In any case, I don't want to give the impression that I believe that this "asset scarcity" problem is the only or even main problem out there! David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-66181450691466497762013-04-12T16:39:53.361-07:002013-04-12T16:39:53.361-07:00David,
As I read your asset shortage piece, it st...David, <br />As I read your asset shortage piece, it struck me that it is nonbank-centric. We need collateral for payments. Except we don't, because banks traditionally intermediate between credit extension and liquidity provision. The problem is deposit "information sensitivity". This specific problem has existed in the past concurrent with highly positive real rates (Gorton himself gives the GD example). Diego Espinosanoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-49278239152811384382013-04-12T15:21:17.936-07:002013-04-12T15:21:17.936-07:00Diego,
Yes, exactly: "collateral shortage&qu...Diego,<br /><br />Yes, exactly: "collateral shortage" = "something impeding bank maturity transformation" (or lending, in general). In the field, this something is a friction we call a "lack of commitment." I've wrote something on this here: http://andolfatto.blogspot.com/2010/08/asset-shortages-and-price-bubbles-new.html<br /><br />Yes, whether cyclical or structural, I'm not sure. Trust is a funny thing, it can come and go. <br /><br />In fact, we have the real world experiment of private label ABS disappearing altogether from the repo market in the crisis. Yes, this would exacerbate the shortage. Steve talks a bit about this too, see here: http://newmonetarism.blogspot.com/2013/04/liquidity-traps-and-low-real-rates.htmlDavid Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-62107396716474400782013-04-12T15:11:20.697-07:002013-04-12T15:11:20.697-07:00Joseph,
If you read my post carefully, which I do...Joseph,<br /><br />If you read my post carefully, which I doubt very much that you did, you'll see that I made the *conditional* statement "IF this latter view is correct, then..." <br /><br />I also said that what Krugman asserts "may or may not be true" (I can write down models where it is, and I can write down equally plausible models where it is not.)<br /><br />So your claim that "Just saying you agree with one side and don't with the other.." is just plain wrong. I hope that I have explain why it is wrong clearly enough for you.<br /><br />I think you do make a substantive point, however. I certainly could have explained myself much better. But you know, this is a blog, a part time activity, I've explained these things so many times in the past, and it's hard sometimes to realize that new readers are not familiar with the long history of the debate. I will try to do better on this front. David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-5556699572255261052013-04-12T15:11:12.505-07:002013-04-12T15:11:12.505-07:00David,
Collateral is used by holders of s.t. liqui...David,<br />Collateral is used by holders of s.t. liquid assets to disintermediate banks. Saying there is a "collateral shortage" is the same as saying "something is impeding bank maturity transformation". Whether that something is structural or cyclical is open to debate. A thought experiment: If bank capital ratios were raised to 20% immediately, and concurrently banks were forced to recognize losses on underwater mortgages, would there be a "collateral shortage"? Perhaps we should call it instead a "shortage of bank CEO's willing to dilute their shareholders"Diego Espinosanoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-3436227691595671132013-04-12T15:01:56.882-07:002013-04-12T15:01:56.882-07:00You're welcome. The reason I stated my creden...You're welcome. The reason I stated my credentials is solely to let you know that a would not be scared off by numbers, or data, or something concrete to back up your claims.<br /><br />As for my comments:<br />Explain why his interpretation is different from yours, if you have an interpretation worth sharing, and why. If someone has an interpretation, and says why they believe such, it is much stronger to weigh one vs. another.<br /><br />If one's position is correct and you are assertive, then you're right. If one's position is incorrect, and you are assertive about it, shame on you. But being assertive is not a problem of fact. If you disagree, you need to say why; you did not. If you don't like his tone, that's fair, but just say it. However, if he is correct, and your only problem is his tone, that seems trite. <br /><br />Again, if he is misleading, explain why you think so. Just saying he is misleading and not explaining why is intellectually dishonest. If you wish to refer to another's work, published in a respectable journal, then at least say why you support that data and feel Dr. Krugman's interpretation was misleading. <br /><br />Lastly, if I try and publish something that suggests someone else's position is wrong, I will try to convince you of it point by point by point. I would not say someone is wrong and then refer to another publication. If you really want to know what I would expect, it would be to add to the intellectual discourse. Just saying you agree with one side and don't with the other, just doesn't cut it, man.<br /><br />Joseph L. Messina, Ph.D. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-4892930989972921022013-04-12T14:59:49.451-07:002013-04-12T14:59:49.451-07:00Steve J,
First of all, the price of gold varies t...Steve J,<br /><br />First of all, the price of gold varies tremendously--it is not a safe asset. <br /><br />Second, gold is not widely used as collateral in support of credit arrangements, say, in the way that UST are. <br />In this sense, UST are more "liquid" than gold. If really does not have much to do with riskiness.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-59216402265884750412013-04-12T14:43:02.449-07:002013-04-12T14:43:02.449-07:00Melanie, I see that Steve Williamson has posted so...Melanie, I see that Steve Williamson has posted something that may be of some help: <br /><br />http://newmonetarism.blogspot.com/2013/04/liquidity-traps-and-low-real-rates.htmlDavid Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-44601035775617741432013-04-12T14:37:00.651-07:002013-04-12T14:37:00.651-07:00Melanie,
There are many things that might be done...Melanie,<br /><br />There are many things that might be done with the revenues received via additional bond sales, including tax cuts or additional spending. <br /><br />But the additional Treasury supply might have an additional effect of stimulating investment demand. I know this sounds counterintuitive, but the basic idea is that with the availability of more good collateral assets (UST), credit constraints can be made to slacken, and this would have the effect of increasing spending together with real interest rates. <br /><br />I will try to follow up on this idea soon.David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-68961484217926918362013-04-12T14:33:54.609-07:002013-04-12T14:33:54.609-07:00Noah Smith, Noah Opinion and George Soros and, if ...Noah Smith, Noah Opinion and George Soros and, if you have time, Pettis on China.<br /><br />It is all about ChinaAnonymoushttps://www.blogger.com/profile/07904132869021579763noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-59619840061231602962013-04-12T14:33:23.240-07:002013-04-12T14:33:23.240-07:00Anonymous,
Thank you for stating your credentials...Anonymous,<br /><br />Thank you for stating your credentials.<br /><br />[1] Interpretive. All theories are interpretations. So there is nothing "wrong" with this. What I find wrong is the manner in which he presents his theory as if it is "the truth." I do not think we can afford to be so presumptive in economics. Perhaps things are different in the biomedical field, but strangely, I do not feel qualified to comment. <br /><br />[2] Assertive. Again, he is making unqualified claims. I've talked about this before. Things are not as simple as he is making them out to be. As a biomedical researcher, you might have some sympathy for why I feel this way.<br /><br />[3] Misleading. He is suggesting that the easy solution to the problems we face is more government spending. As I said above, this may or may not be true. Here is an example of what he suggests is false: http://ideas.repec.org/a/ime/imemes/v21y2003i4p1-20.html<br /><br />[4] Wrong. I linked to a supporting paper, published in the American Economic Review, one of the leading journals of the profession. What more do you want, man? David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-83014938402488904472013-04-12T14:27:04.971-07:002013-04-12T14:27:04.971-07:00JP, great question.
To be honest, I am not 100%...JP, great question. <br /> <br />To be honest, I am not 100% sure. As always, I'd want to first study an explicit model to make sure I can keep the logic straight.<br /><br />But my intuition is that in some cases, the effect would work in the same way even if the Treasury simply held on to the cash. The general idea is, I think, that the additional supply of UST (or good collateral objects in general) somehow expands spending (for credit constrained agents).<br /><br />Let me work on trying to formalize this idea in a simple way. <br /><br />David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-71418790744480332272013-04-12T13:55:13.510-07:002013-04-12T13:55:13.510-07:00Diego,
I am sympathetic to your comments. One thi...Diego,<br /><br />I am sympathetic to your comments. One thing to keep in mind, however, is that the term "safe asset" is not entirely descriptive of the role it plays in many models (and perhaps even in reality). More precisely, I like to think of these assets as "good collateral assets." Even in a world of no uncertainty, there can be a scarcity of such assets. Risk aversion does not play a role in generating low yields here. David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-10741011556531703512013-04-12T13:50:35.960-07:002013-04-12T13:50:35.960-07:00Anonymous @ 9:23AM,
Yes, it does make sense depen...Anonymous @ 9:23AM,<br /><br />Yes, it does make sense depending on the nature of the shock hitting the economy. A collapse in investment spending owing to binding credit constraints, for example, would produce said result. <br />David Andolfattohttps://www.blogger.com/profile/12138572028306561024noreply@blogger.comtag:blogger.com,1999:blog-8702840202604739302.post-66518542473236427192013-04-12T11:39:52.266-07:002013-04-12T11:39:52.266-07:00"Natural rate" has a clear meaning. It&#..."Natural rate" has a clear meaning. It's the equilibrium rate of interest if policy is optimal, within the class of feasible policies. That's exactly what it is in Woodford's world, for example. For him, the inefficiency is sticky prices, and monetary policy corrects that inefficiency (except a the zero lower bound, of course). For me, and I think David is more or less sympathetic, the inefficiency is due to something else.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.com