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Producer Price Index MoM (Nov)

Survey -2.0%
Actual -2.2%
Prior -2.8%
Revised n/a

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PPI Ex Food and Energy MoM (Nov)

Survey 0.1%
Actual 0.1%
Prior 0.4%
Revised n/a

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Producer Price Index YoY (Nov)

Survey 0.2%
Actual 0.4%
Prior 5.2%
Revised n/a

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PPI Ex Food and Energy YoY (Nov)

Survey 4.2%
Actual 4.2%
Prior 4.4%
Revised n/a

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Advance Retail Sales MoM (Nov)

Survey -2.0%
Actual -1.8%
Prior -2.8%
Revised -2.9%

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Advance Retail Sales YoY (Nov)

Survey n/a
Actual -7.4%
Prior -4.6%
Revised n/a

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Retail Sales Less Autos MoM (Nov)

Survey -1.8%
Actual -1.6%
Prior -2.2%
Revised -2.4%

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Business Inventories MoM (Oct)

Survey -0.2%
Actual -0.6%
Prior -0.2%
Revised -0.4%

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Business Inventories YoY (Oct)

Survey n/a
Actual 4.6%
Prior 5.4%
Revised n/a

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University of Michigan Confidence (Dec P)

Survey 54.5
Actual 59.1
Prior 55.3
Revised n/a

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University of Michigan TABLE Inflation Expectations (Dec P)


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47 Responses

  1. Hey Warren, BUKAKANAMICICS! No comments here yet,

    Just some thaughts, what do yo think?

    I just don’t criticize, how hard is this? The people running the show are out of control and we need to get some system that takes human greed out of the loop!

    Ok how can this not work,

    • First EVERYONE has to realize we are EQUAL!! No matter when or where you were born, what color you are, what sex you are, what ancient cult religion you subscribe to, ECT.
    • The media is freed, not driven by the dollars behind all of our news.
    • Then people would be able to vote in a free and fair election, by this I mean everyone’s Vote would be recorded publicly, this would take the corruption level down, and why would anyone be ashamed of there informed vote?
    • People vote for issues not a leader, we do not need a “LEADER” we should be able to lead our selves. People could be remembered for there ideas and contributions. The people with some of the better ideas would naturally be “kind-of” a leader because people would consider there point of view when deciding what they thought.
    • Nobody can tell anybody they cannot do something unless they are hurting someone else directly, like telling people they cannot smoke or drink because it costs everybody more for health care, Let people do what ever they want! It is called freedom! When they die of lung or liver failure they did it to them selves knowing full well of the consciences, we all still have to go somehow!
    • This would help people to stop all of the idol worship, we will still need some people in government, however they should only be there to see the system is working properly. I believe we could find an honorable person to take the job, no more government driven by money and greed!
    • Education is free for who ever wants it and is going to use it for good.

    As a race of humans we need to clean up our act, stop the suffering of the innocent and weak. Educate people that we are killing our world with our ignorance and greed, find the truth of our situation by uncorrupted science, and adjust. If that means having less children for awhile to let us catch up, or even allowing our population to lower over time to get a balance with nature so be it! Anything short of this is suicide for the entire race (Spices, all of us), easy to see hard to do!

    Ok lets do the top issues with BUKAKANOMICS

    Abortion? This is the first because if we are going to take control of our destiny this is where it has to start. If we get a good education into peoples heads that gives them the ability to know when it is a good time to have children and have control over the process it will stop abortion! I saw a statistic from Planed Parenthood that 60% of the births are unplanned? Talk about DUMB!?

    War? We need to dismantle the Military Industrial Complex first, by realizing the brainwashing of our current government “ They Hate us because of our freedoms” is BS! They are scared of our Imperialistic Corrupt Government Stealing and killing for profit! If we change our ways I believe the rest of the world will follow suit. If you don’t believe it just research the Evil things we have done in Middle Americas just to control the Banana . I was appalled to find out what the US government has done down there, just think of what has been done for bigger and more important resources!

    Trade? Free up the trade, get all of the corrupt evil people out of it who think they should get a cut just because of there title. A free market will even out when we get rid of the corrupt who take advantage of the suppressed. No more children working in sweat shops making nothing while international companies reap huge profits! No more of the CEO of Home Depot making more in 30 minutes than average employee makes in a whole year while struggling to have good health care, and barely getting by! These rich Bastards need to be taken down, they have no respect for anybody except there own! Honor in life and business, it is called free and fair trade LOOK IT UP! It is out there!

    Gay Marriage? Get real! Who can tell people what they can do in there private life! It is called freedom! I think this issue has been dragged out by the corrupt media as a diversion from the truth!

    Drugs? In a world where you lead your self you should be able to do what you want, as long as you do not hurt any else (Including your Children) so do what you want! The war on drugs is a failure, and there is a lot of evidence that the CIA is a major player. Tax the stuff and put it into the health care system. The dumb and weak will gat weeded out, it is no different then the way it is going now. If you OD too bad for you, you did it to your self!

    Health Care? First getting the private sector out of all insurance is crucial. If there were not corrupt Bastards taking all of the money we pay into the system it would work. The insurance system should be run by a un-corrupt government agency, we all pay in and when the money needed it is there. The lobbyists for the insurance and drug industry have raped the people who are in the most vulnerable positions. I believe that there is still some good doctors out there but they are being held back by battling with insurance companies, however some doctors are whores in it for only $$$ AND POWER!

    Education? This should be free, having an educated population is crucial to our advancement! Look how it is now, take out a huge loan to go to school and then work for many years to get it paid off. The bankers are behind the Loans and the Schools if you look! I think if you make teachers work year round it would get rid of the lazy ones who only became a teacher to get the summer off! And as long as they are there they should be teaching too, the only reason they had school out for the summer was to let the kids work on the farm. That is no longer a factor in most cases now anyhow.

    Labor? We should adopt a 4 day work week and people should change their work ethic to Caring about there job and not trying to get away with the minimum like many do!

    Taxes? We need to remember why people came here in the first place, “NO Taxation with out Representation” If we stop all of the corruption in the government we have now we could afford all of the above, just look at the numbers of $$$ wasted by the Pentagon alone!

    Money? See Ron Paul!

    Religion? Something private that should be left to the individual to practice and should never be a reason to hate or kill another being on this planet. Most religions have been responsible for more death and destruction then any other cause, and should recognize this and change. SEE THE GREEDY BASTARDS TO THE DOOR!

    Natural Resources? The Oil companies do not own the oil, it is part of the earth and no group or person owns it, we need to all vote on its best use and how it is distributed. Look at this shortage in the south east, the oil companies say they had “NO Incentive” to keep reserves? Now we have to pay them to have honor and do the right thing? They have held up new resources out of greed and totally taken over governments with there power! Pretty soon they will say the solar and wind power is there’s too!

    This has to be a uncorrupt government agency that will do what is right for the earth and its inhabitants not the evil greedy people who are sucking all life with there greed!

  2. let’s start with the ‘see ron paul’ part about money.

    he’s pushing for a return to the gold standard last i saw?

    I pass on that. we went off it because it went down in flames.

    as it always has done, everywhere. no one went off it because it worked so well.

    have a read of ‘soft currency economics’ and ‘full employment and price stability’ and my Lieberman proposals and let me know what you think.

    That will cover a lot of what you are addressing.

    I’m also just reading Hobbs’ Leviathan from around 1600. Makes the point that man’s natural state is continuous warfare, and one road to a relatively peaceful life giving up personal rights to a sovereign. It has a lot of inciteful points that might result in a revision of some of yours.

  3. Warren,

    Actually he is for ending the FED.

    I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.
    Thomas Jefferson

    This is so true, and we can see it happening now, what is wrong with the government issuing currency, not a private bank?

    I like your Liebermann letter, However I feel it does not go far enough. Right now we have a government By the Dollar for the Dollar, what ever happen to by the people for the people?

    We need to get private GREED out of Natural resources, Banking and the insurance industry (Health Care). I can tell you first hand that the health care industry cares nothing for people and only care for $$$$.

  4. the fed sets interest rates. they could be legislated at 0 and that function eliminated.

    the fed regulates banks. i don’t see how we gain anything by eliminating regulated banking, as that would move all credit back to the private sector, which is even more unstable.

    it’s like trying to eliminate drinking and gambling by closing down the regulated public institutions. it sort of works but many would consider the consequences worse than the initial conditions

  5. I think 0% is too little too late, also “I” cannot get a loan at 0% I don’t see credit card companies dropping rates?

    The fed is a private company? Right? I never said the banking should go to the private sector, it should be run by an uncorrupt government department (If that is possible in the government we have now) I think in the constitution they would refer to it as the treasury department?

    To go with your analogy of the gambling and drinking, it may be like getting Al Capone out though?

  6. Dave,

    Agree on making the Fed a part of Treas. The reason they go through such contortions to separate the functions (and the Fed is, for all intents and purposes, an arm of the Federal government – please don’t be taken in by conspiracy theories concocted by the tin-foil hat brigade) is because there’s this almost mystical belief in the power of monetary policy, and they believe they need an “uncorrupted”, unpolitical hand at the wheel who can do the “unpopular” thing.

    Whereas Warren’s view is that monetary policy is basically ineffective at stabilizing the economy, and should essentially be set in stone – i.e., put the interest rate at 0% and leave it there, and use countercyclical “automatic stabilizer” fiscal policies, that actually do work, to do the job. Making the Fed a part of the Treasury might also allow people to see that the Govt. and the Fed’s balance sheet are one and the same, and maybe be on their way to realizing that there are no financial contraints on the Govt.

    But I would again urge you, as others have, to read through the “essential readings”, starting with “Soft Currency Economics”, and come back and ask questions about anything that is unclear. But do it with an open mind – be prepared to forget everything you think you know about how money works. Once you make the paradigm shift, it seems obvious, but theres a lot of “unlearning” to do to get there. You are in a better position to understand how the economy really works than 99.99% of the people out there: you have chanced on to this site, which is one of the only places on the Internet (or anywhere else) that can give you that knowledge. Take advantage of it – and soon, you , too, will be just as appalled as the rest of us at how clueless our economic policymakers are…

  7. Thanks, Jim.

    Now consider this- the main thing interest rate policy does is move income between savers and borrowers. For example, in the last year or so savers have gone from earing maybe 4.5% to something near 0 today. And borrowers (and lenders making larger spreads) have equally benefited.

    So what I’m getting at is the Fed has the authority to shift mega sums from savers to borrowers, and vice versa. That’s like giving the social security commissioner the authority to raise payroll taxes and pay out more benefits, etc.

    Not to mention the swap line authority where the fed can lend unlimited sums to foreign govts, and on an unsecured basis as well.

    The real ‘power’ of the Fed is with these powers of distribution, which far outweigh the generally perceived power of altering the macro economy via changes in interbank interest rates.

  8. But that raises an interesting question: if the discount rate was set permanently at 0%, wouldn’t that discourage savings? I’m imagining you would lean toward a strictly regulated menu of interest rates, both for borrowing and saving, like we use to have in the bad old days before 23 year olds made $10 million bonuses on Wall Street…

  9. Warren,

    I assume that the more agressive the Fed policy action, the more distorting the distributioinal effects. I’m thinking here of the housing boom that really got going in 2003.

    I understand that deficit spending in 2003 was the heavy lifter on the macro front, boosting AD. But shouldn’t the Fed take much of the blame for where that demand was directed?? Shouldn’t they take the blame for the housing mania, both for keeping rates low for so long, and then ignoring the deterioration in asset quality.

    As a counterfactual, imagine if the Fed had determined that the best course of action was a flat yield curve, at say 3%, in order to balance the interests of savers and borrowers. This action would not only have added to AD, it would have balanced the atractiveness for capital investment between interest-rate sensitive sectors of the economy (such as home building) and those sectors less sensitive to interest-rates (such as education). Perhaps economic growth would have been more sustainable( higher AD, fewer distortions).

    Of course, there is also a psychological component to the housing boom. The consumers, still reeling from the Tech bust, but with plenty of equity in their homes, were perfectly disposed to take advantage of the Fed’s gift to debtors. After that, “animal spirits” took over.

    But given that Fed policy doesn’t do much on the macro side, the least the public should do is hold them accountable for their mistakes on the micro side. Besides, it’s precisely because of animal spirits that the Fed should be less activist!

    I understand the natural rate should be zero. But perhaps as an interim measure the Fed should be given a mandate to target a flat yield curve and just let borrowers and savers fight it out fair and square.

    And with fewer distortions in the macro economy, a flat yield curve would, over time, sink on its own towards zero.

    But the blame for where the demand was directed, the micro-sectoral effect, is perhaps the Feds alone. By keeping rates at 1% and credibly promising to keep them there (for fear of deflation), Greenspan directed AD towards the real estate sector.

    Still reeling from the post Nasdaq blues, and with plenty of equity in their homes, borrowers were psychologically

  10. Jim, why should savings be encouraged?

    Also, Japan has had very high deficits, high savings, and 0% interest rates for many years.

    The innocent fraud that savings is needed to fund investment is one of the central conceptual errors of policy that has resulted in the growth and issues of the financial sector.

  11. I realize that saving is not necessary to fund investment, but I guess I’m hung up on the fact that, if you want to minimize the sort of private-debt fueled bubbles we have had, you want to make it possible for people to pay for consumption out of income, not debt – which means that people would need to have enough savings to, for instance, buy a car with taking out a loan.

    Of course, as I was typing that above, I realized that savings is created by investment, and if we shift to a much greater level of public investment the resulting deficit will create the savings needed – but I guess I”m unclear on the mechanism of how it would translate into how the average person’s paycheck…

  12. agreed with what you are saying. when people can’t/won’t use debt to clear the output more deficit spending is in order to sustain full employment.

    this is called a drop in savings desires of the non govt sectors.

  13. it’s the added govt spending that directly or indirectly finds its way to peoples ‘pockets’ to add to their savings.

    if you give a tax rebate, for example, it can go into ‘savings’ directly and not alter the real economy. if govt pays for goods and services that counts for gdp after which the funds go into the sellers pockets.

  14. There is that tin foil hat words again? Dudes? If everybody knows and admits that the government is lying how can anybody say where the lies stop????

    You guys seem to have a very good veiw on how you think the money should be handled, I know Warren; have worked for and around him, he is a very intelligent guy, he knows allot about ALLOT of things. It seems a shame that you just concentrate on the economics of government. It is you field, however it cannot survive alone and is interconnected with everything.

    Go on Youtube and watch Richard Gage’s presentation on the evidence of explosives at the WTC on 911. You might be getting out the tinfoil! Warren you ran for congress, I would be very interested in your view on this!

  15. Early in this thread there were some references to Leviathan. The central premise of Leviathan is that monarchy, as a form of commonwealth, is the most effective form. As a work it is virtually diametrically opposed to the core principles of freedom and representative commonwealth that undergird the United States. I thought it was ironic to see references to Hobbes work in the same thread where conspiracies were being discounted… because advocacy of Hobbes ideas is, for all intents and purposes, quite conspiratorial in a democratic nation 😉

    I have to say that I object to Hobbes conclusions on many fronts. The most offensive of them are, I think, the key ideas that the governed need and should have no right to change or alter the method of their governance, and second to that the notion that a sovereign cannot logically ever be accused or held accountable for any wrongdoing because as sovereign, they determine right and wrong.

    Leviathan is a carefully constructed logical argument, but the lens of history offers a more accurate appraisal of where monarchy leads. Monarchy was not an efficient mechanism for governance; it concentrated wealth and power into the hands of a few, wasted the talents and skills of the multitude, squelched (or at least failed to foster) innovation, and did not provide for the welfare of the multitude. To be honest, I find most of the central ideas of Leviathan appalling.

  16. By the way, that last message was not meant in the least way to be offensive, I just found the reference t Leviathan fascinating. What strikes you most about the work? Which ideas strike a chord, with you?

  17. tt, only 2/3 through it.

    i like the insights, like one of the problems of govt by assembly (he does recognize an assemble can be the sovereign) is that advisors tend to be those who’ve had economic success. and that was 400 years ago!

    His concern about govt by assemble was that it would tend to generate civil war. Certainly plenty of example of that since his time.

    I also like the discussion of what makes man different from the animals. etc.

    I’m not defending monarchy, by the way. seems totally ridiculous, though it seems deeply ingrained in human nature. There are still kings and queens all over the world. I was somehow at a university of missouri event honoring the king of jordan. how does any public institution see fit to honor an absolute monarch??? and the house was packed with applauding americans.

    don’t get me started, thanks!

  18. Just look at the clamor among the chattering classes for Caroline Kennedy to be appointed to the Senate, based on no other qualification than her last name. I myself think that democracies and republics are always temporary aberations in between the despotism that seems to be mankind’s preferred state.

    It actually, I think, has a lot to do with the inability of people to think rationally about money. When we humans are faced with force that has power over us, whether it be another person or something abstract like accounting, we have a tendency to magnify it, to give it properties beyond what it actually has. So make our rulers into gods, and we turn entries in a spreadsheet into mystical entities with their own wills and desires…

  19. Rereading the above, I think I was unclear – I meant to say “it has a lot ‘in common’ with” instead in “to do with”…

  20. back to 10, by knapp:

    Re the fed and the ‘housing boom’.

    for one thing it wasn’t much of a real boom. a ‘surge’ to an annual rate of 2 mm new houses a year vs 2.6 million in the early 70’s?

    the way i see it is the first part of the housing ‘partial recovery’ was reasonably orderly. It got out of hand later as the sub prime lender fraud expanded and it ended when the fraud was discovered by the lenders.

  21. Warren,

    Please indulge me in a follow-up because this topic gets to the heart of the interest-rate theories (liquidity vs.savings) that divide Keynes and Hayek.

    My understanding is that Keynes believed interest rates were a weak force having no significant effect on the rate of profit for the investment sector in aggregate. But I’m not sure about his, or Post Keynesian, microeconomic views on interest rates.

    Hayek’s focus was on the rate of profit within the investment sector, the micro side, believing that a change in the interest rate means that profit prospects for some industries rise, while profits for others fall. Thus, disturbances and non-market incentives appear when the central bank cuts rates below some natural rate.

    What is the Post Keynesian response to this microeconomic view of capital misallocation? Is it 1) that differences in interest rate elasticities across various industrial sectors do not exist or are overstated by Hayak and others or 2) interest rate elasticities exist but are overwhelmed by other factors, such as fiscal policy and therefore can be safely ignored.

    Is investment across sectors always driven by irrational “animal spirits” just like the economy in aggregate or is there some room for sectoral investment to be driven by rational, policy-induced animal spirits, ala Hayak?

    Is the shape of the yield curve totally irrelevant to the non-financial sector?

    Knapp

  22. yes, i don’t agree with most post keynesians who act as if fed interest rate policy is a serious determinant of agg demand.

    keynes and hayek, i believe (?) were discussing this in the context of a gold standard? with fixed fx/gold standards the interest rate is a function of the ‘demand for ‘money” where ‘money’ is (ultimately) gold or the reserve currency. central banks fooling with ‘market’ interest rates by trying to lower them risked loss of reserves, etc.

    regarding real capital formation, i like to start with idea that consumption can’t crowd out investment. consumption instead results in prices, sooner or later, that incent investment, whereby investment takes the real resources away from consumption and directs them to future consumption.

  23. WARREN: I wanted to get back to an earlier point you made about savings, ie. “what’s so great about savings”?

    People have a real desire to shift consumption to the future, and to take out insurance against interruptions in their income stream. Savings is the vehicle to do that.

    Now, we have no good vehicle for savings, fiat currency certainly is not, but there is real demand for it. Do you have a suggested vehicle, or are you saying that there is to be no way for workers to defer consumption?

  24. Warren,

    You’re right, today’s Austrians don’t have the fixed-rate, gold reserve signal as an indicator of excess, so they (mistakenly) assume exogenous money and attempt to determine whether the interest rate has been pushed below the Wicksellian real rate by looking at indicators such as how much money has been “pumped in”, the shape of the yield curve and the value of the dollar, etc…

    I understand the flaws in this approach but am sympathethic to the idea that the steepness in the yield curve can be extremely suboptimal. You mentioned that “consumption results in prices”, but isn’t the financing cost of consumer goods part of their price? If autos are cheaper because of 0% financing (when the curve is very steep), that affects capital formation today (eating into the future demand for autos as the Big 3 now realize).

    PK’ers say the Fed is impotent, Austrians say the Fed is too potent.
    Both cases argue for the Fed to be less activist. A mandate for a flat yield curve with much less Fed discretion is a nice first start to bring the two sides together, so that everyone can focus on where fiscal spending should be directed.

  25. zanon, how about inflation indexed tsy secs?

    K, agreed that the long end is investment and the short end consumption, so the current term structure of rates, which is under the direct control of the govt/fed whether they know it or not, is ‘encouraging’ consumption over investment, all else equal.

    That’s why my proposals have been for the tsy to stop selling anything longer than 3 mo bills, and stop competing for funds in the long end, as a matter of public purpose.

    I’d also leave the ff rate at 0 bid, and have interest rates reflect only credit risk.

    Japan is an example of near 0 short rates, high savings (due to high budget deficits and high propensities not to spend income for a variety of reasons) and modest consumption. While the macro outcome is far less than ideal, much of that can be attributed to successful export led growth policy, which i of course do not favor.

  26. KNAPP: Austrians want fixed money supply, but they would settle for an end to maturity mismatch (rolling over short term debt to fund long term liabilities). Once you match the maturity of loan to liability, then you do not get these credit collapses. You can also have an actual market drive, supply/demand determine of price for credit instruments, and hence, a real yield curve. How much interest would you *really* need to pay on a 30 year *CD*?

    Within the Mosler Paradigm, matching the maturity of the loan to the term of the liability is also a good idea, although I suspect they would agree on little else.

    Certainly, both Austrians and those in Paradigm would agree that we just don’t need bank runs, and that we should set up a banking system that isn’t susceptible to them.

  27. right, i don’t see a problem with banks funding long term floating rate loans with short term funding, backstopped by the fed.

    it works just fine and eliminates banks failing for liquidity reasons.

    i don’t know the austrian position on that

  28. Zanon, thanks for your insights.

    Warren,

    The Mosler Plan makes perfect sense to me. The Government spends money into existence. No real need for the Fed. Let ff drop to 0. Offer 3mo Treasuries (but even this seems superfluous, as FDIC-insured bank CDs can act as close substitute). But your plan represents a giant step away from the New Consensus similar to a return to gold. Mainstream just isn’t ready. My proposal for a rules-based Fed with a flat yield curve mandate should be seen as a baby step in your direction, as a means to first convince the New Consensus that the Fed is indeed unnecessary. Then the Mosler Plan becomes a much more obvious next step.

  29. a few years back i asked an fomc member and mainstream economist, if, instead of the fed buying 10 year notes, have they considered working with tsy not to issue them in the first place, which would be the same as the tsy issuing and the fed buying.

    he said no, and in fact there was a difference, as when the fed bought it added reserves. clearly no grasp of monetary ops

    in short, i agree with you!

  30. WARREN: We are now at the limit of Austrian thinking, since it’s been a while since they were a serious economic force.

    My feeling is that when Austrians say they want a fixed money supply, they mean a fixed money supply, and even TIPS is not good enough.

    When the size of an economy goes up x%, and money supply also goes up x%, you see no change in CPI but that new money still reduces the value of old money. In the Paradigm (to the degree I understand it), the Fed creates new money to fund investment, and hopefully everything works out (the new money creates enough new economic activity that you do not have an impact on CPI). In the Austrian world, the natural state of an economy with technological innovation would be slow, gentle, deflation (falling CPI) as money supply is constant, but we keep figuring out more and more efficient ways to do things.

    So, TIPS is not good enough because not only does CPI understate inflation, but it does not capture dilution at all.

    WARREN 30: This maturity mismatch works fine so long as it’s all backstopped by the Fed. But we have lots of asset classes that were maturity mismatched, not backstopped by the Fed, but are now backstopped by the Fed by necessity. This situation is clearly not good, and is a key part of the credit crunch.

  31. i’d like to see how the austrians could deny the current monetary system is a (simple) public monopoly.

    seems given that revelation they would change their tune regarding current monetary arrangements.

    Agreed on the Fed ‘backstop’ which would go without saying if the FOMC understood their own monetary operations and reserve accounting.

    instead, they keep demanding collateral when they lend which is both redundant and counterproductive.

    yes, they can’t legally lend unsecured but seems they would at least ask congress for permission if they understood the imperative.

  32. Today’s Austrians would say, well OK, I get it, this just proves that the gov’t has too much (monopoly) power, let’s go back to fixed exchange rates as a way to control fiscal spending, after all, look how big gov’t has become since we left gold. Then they might point out the fact that we are in the midst of the worst financial crises in decades and the gold standard is nowhere to be seen, we have floating fx. Just say’in.

    Austrian’s of tomorrow might say, well OK, we can work with this system. Get rid of the Fed, it’s just a full-employment act for Wall St fat cats anyway. This act alone will help stabilize markets and channel human capital to much more productive uses. Our standard of living will skyrocket. Yes, gov’t spending will be unconstrained operationally, but with so much wealth, the govt sector will have less of a mandate within our democracy to do much damage.

    Either way, idelogocially, the case will be made for smaller gov’t

  33. That would be a bit of progress. Yes, maybe the gov has what they think is ‘too much power’ but at least the issues could be traced back to what the govt did with that power- kept the deficit too small. and the crisis hasn’t gotten anywhere near as bad as the last gold standard crisis, yet!

    that second part about getting rid of the fed sounds a lot like what I’m proposing- set rates at 0 and let them concentrate on supervising and enforcing regulation.

  34. KNAPP & WARREN: While Austrians and Libertarians are similar, they are not the same!

    Austrian Business Cycle Theory is much better than Keynes in its model for how bubbles arise, and the dislocation that happens when they deflate and the economy resets itself. The kicker is that they would let the deflation happen all the way, put us back in the world of 10 cent hamburgers, and say it was all “for our own good.” Their obtuseness on this point closes the discussion, which is sad since their Industrial Organization insights are excellent (and would certainly help Keynesians move on for their “infrastructure” fixation and open them to payroll tax holidays).

    Austrian would also certainly accept that currency is a Government monopoly, and they would say that the Fed mismanages this monopoly by setting interest rates incorrectly. They would have a maturity matched system, and have the yield curve, at each point, set through real supply and demand. I think this fits wt the Paradigm and would be an improvement, actually.

    In this model, savings would be actual savings, and not “investment” and simply sit in a vault wt FDIC (or whatever).

    Radical Austrian goldbugs are waiting for gold to become, de facto, the new reserve currency after the dollar’s value gets inflated away. Outside of the US, Warren, gold and US$ are used as reserve currency, as anyone with money in the local currency gets it converted to gold or US$ ASAP. The US is the currency issuer for the one currency people care most about, US$. Once upon a time, the world ran on the British pound, and before that the French Franc, etc., so reserve currencies do switch. If gold became the true reserve currency, the undilutable store of value, then each country would still demand taxes in rupees (or whatever), there would be some activity in rupees (or whatever) but the demand of savings would be satisfied by switching out of rupees into gold. This is what happens today, except people buy dollars as well as gold.

  35. Regarding Austrians, Keynes, business cycles, industrial organization . . . note that while Minsky was a Keynesian (though not of the orthodox variety), he did his dissertation under Schumpeter. His overall approach thus combines Keynes and Schumpeter, and his own insights. He wrote a number of papers specifically on blending Keynes and Schumpeter, as well.

  36. Scott- fwiw, Mises and other “Austrians” such as Rothbard, considered Schumpeter a Walrasian from Austria, not an “Austrian”. He’s considered an “Austrian” in the popular press, but not by Austrian academics. Besides, Minksy’s institutional methodology is a major Austrian no-no.

    Zanon- Austrians don’t want to be labeled “libertarian” because, like all economists, they’re doing “science”, but in my opinion you can’t extract the politics from political economy. The method you choose is value-laden. Austrians choose a method that starts with no state because they see state institutions as a disruption to the harmoney of markets. That’s libertarian to me. Those “Austrians” who are not libertarian, are typically not really Austrian at some fundamental level (see Gottfried Haberler). Keynes starts his analysis with institutions like the Treasury/ Central bank because he sees them as necessary to temper the inherent instability in markets. It’s all about politics (and epistimology). Keynes was a social democrat.

    Yes, Austrian’s recognize fiat money as legal tender but importantly they reject Knapp’s State Theory of Money. This rejection can be found in Mises’ Theory of Money & Credit. As one Mises Institute scholar (Joe Salerno) put it “Mises demolished Knapp’s State Theory of Money” (with his Regression Theorem). The entire Austrian school was born out of a debate over method with the German Historicists prior to Knapp but can broadly be seen as a rejection of the State Theory of Money.

    So I don’t think it ‘fits the paradigm’, it’s still the same Keynes/Wicksell, nomimal-real, lquidity preference-loanable funds debate.

    My view is that Mises didn’t “demolish” Knapp and that his Regression Theorem makes no sense but was used as a devise to explain away the logic of the State Theory of Money. This, unfortunately, led Austrians down the wrong path.

    If, instead, Mises had said look, I wish money was a “creature of the market”, gold or some other good, but the reality is that through the power of taxation the state determines the value of (credit) money.
    And since the state isn’t going anywhere, the best course of action is to limit its power in the following way: eliminate the central bank as it is a highly inefficient in its stated task and only redistributes wealth in an arbitrary, unfair way. Limit state power by shrinking the size of fiscal spending, and leave it up to the market to set interest rates and allocate capital.

    PKer’s can use the same model and just rachet up fiscal spending according to their social welfare philosophy.

    That said, my proposal for a rules-based flat yield as an interim solution would probably look similar to your matching-maturity real yield curve proposal.

  37. Knapp–all well said. I’m aware that Schumpeter doesn’t fit neatly into any particular camp . . . just pointing out that there is someone (Minsky) who blends an industry-level view of business cycles and finance with a Keynes-like view of macro instability.

  38. Knapp –

    I personally think that you could make a case for a Lerner-type functional finance regime as being the best way to minimize the size and intrusiveness of government. If the government simply makes sure that spending in the economy is enough to balance supply and demand (through taxes and transfer payments) it can leave most of the rest to the market. It doesn’t have to directly employ a huge number of people; Warren’s ELR requires a funding mechanism that could be implemented by non-profits (who would be much freer to fire any worker they wished, since the worker is guaranteed employment, not any specific job), not a specific program. And with full employment, there would be a lot less demand on the part of voters for all those market distorting regulations that Libertarians hate so much…

  39. “Limit state power by shrinking the size of fiscal spending, and leave it up to the market to set interest rates and allocate capital.”

    with floating fx it’s up to the issuer to set the ‘risk free’ term structure of interest rates. the idea of ‘the market’ doing it on its own is inapplicable. the monopolist is price setter, whether he knows it or not.

    as far as allocating real capital, yes, markets do that, but within the ‘box’ of institutional structure set up by the govt.

    and yes, govt just has to fund minimim wage work, not direct it, to let ‘the market’ decide the budget deficit. And recognizing what one has to do, at the margin, to get the funds the sector needs to pay its taxes and net save, determines the ‘value’ of units of that currency, the conditions the govt sets on what needs to be done to ‘earn’ the minimum wage defines the value of the currency.

  40. yes, i meant the market sets risk spreads to allocate capital, ideally govt sets ff at 0, in interim i think it should target a flat yield curve (baby step).

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