Cost push inflation coming in via the fx window?

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  1. Off topic:
    Hey everyone,
    I thought I’d shared some thoughts I’ve been having lately:

    I’ve noticed the following tendencies in the blogosphere and various discussion forums of late:

    The first is the surge of interest in Chartalism/MMT. A lot of economic debates are being directed along Chartalist lines. Though there seems to be a failure to properly distinguish between the descriptive and normative aspects. This will most likely be a point that will need to be repeatedly reinforced.

    The second: is the revival of the Austrian school. Perhaps it’s just a sign of the places I visit but it seems that this school is enjoying a revival/surge of interest. A lot of economic discussions tend to go down Austrian lines.

    These two tendencies I feel will come to a clash in the future. It’s only a matter of time before Chartalism appears on the radar of various Austrian outlets, such as, It’s going to be interesting to see what happens. I’ll briefly discuss two main themes:

    1. Endogenous money:
    I believe that Austrian proponents can be convinced that ‘loans create deposits’ but when they do, they claim it is because of the actions of the central bank. The central bank acting as a lender of last resort and accommodating demand for reserve balances, has created a sort of moral hazard: the conditioning of the market has been removed, and the money supply becomes endogenous, as banks act recklessly, taking on risk which they wouldn’t have taken in a ‘free market’ context. Clearly for Austrians (and some Post Keynesians), the causation for the development of endogenous money is due to the actions of the Central Bank.

    I believe that Chartalists (and some Post Keynesians) reject this causation. The actions of the central bank haven’t caused the money supply to become endogenous. The central bank has no choice but to accommodate because the money supply is and always will be endogenous. The underlying factor I believe is a different concept of what money is.

    This point leads to the two different concepts of money.

    2. Metallism vs state and credit theories.
    Perhaps this is the key point. Austrianism and Chartalism have two different concepts of money. For Austrians it is individual exchange through the market process which selects – based on salability – what will serve as money. Credit insofar as it exists, is only a later development. Here we have two different branches within the Austrian school. The Rothbardian branch claims that credit can exist so long as the bank has that exact amount in storage. A bank is not allowed to engage in fractional reserve banking, as this is fraud. The ‘free banking’ branch claims that banks can create credit, but that due to competition between banks, this ability to extend credit will be limited, as a bank who creates credit, runs the risk of another bank claiming that credit and demanding the credit to be redeemed in money (gold). In terms of whether the money supply is exogenous or endogenous, I believe that the former see the money supply as exogenous, whilst the latter, seems to accept that the money supply is in some way endogenous, but that this market discipline would limit the extent that it could become endogenous.

    The Chartalist concept of money is that money is always and everywhere credit and developed through various social practices, such as, wergild and the actions of public institutions imposing a liability upon a populace. The creation of credit instruments both non-negotiable and negotiable is a naturally occurring process and is not just limited to banks but also the state – the latter can also define what the unit of account is. Within society there exists a credit hierarchy: state money is at the top, with bank money below and at the bottom, other forms of private credit. The money supply is always endogenous.

    The key figures in the Austrian story of money are Menger and Mises, whilst for the Chartalists, Knapp and Innes. Knapp developed his theory in contradistinction to metallism, and later on Mises critiqued Knapp. Innes has been largely left out of the picture and only in the last two decades has his thoughts been revived.

    What I hope is apparent is that both schools cannot function together. Now perhaps I am being optimistic but I believe that there is momentum building behind both the Chartalist and Austrian movements*. These two tendencies will reach a point where we can expect greater debate along Chartalist and Austrian lines. The main points of difference will revolve around the two points I raised: endogenous money and what money is.

    I would love to read any feedback or corrections. I realise most of you will be familiar with what I’ve said, but I believe that we need to become familiar with these points of difference if we are to have any sway.

    *I’d like to stress here that I don’t believe that the movements will reach a point where they will dominate economic discourse. I don’t believe that mainstream economics has been moved from its place. I don’t really have anything to back this claim up other than anecdotal evidence: several of my lecturers have been singing praise for the Efficient Market Hypothesis and other mainstream theories – the GFC (if there even was a GFC) has been largely forgotten and rewritten.

    1. Nice summary, MDM. In my reading of the kerfuffle from the side of the Austrians is that they see “charatlist money,” that is, fiat money whose value depends on taxation, as the essence of statism, and “sound” money, which has a real tether, as required for a free society.

      Austrians tend to be libertarian. Therefore, they hate the very idea of taxation, equating it with state imposed slavery. So I don’t see any way that they are going to come around to seeing common ground with anything resembling Chartalism, or accepting a fiat system that does not mimic a convertible fixed rate currency

      For them, this is not just an economic disagreement. It is political, philosophical, and, in the final analysis, moral. For some, it is even religious.

      1. Fair points Tom. Thank you for the reply

        The main contentions you raise are the normative aspects. The two points I spoke of are -I believe- purely descriptive: What is money, what are the origins of money, how does our monetary system function.

        One points I’d like to make is that I don’t believe there is any condradiction in a right libertarian or anarcho capitalist accepting the descriptive side of Chartalism, but rejecting the normative aspects. They could accept that Chartalists have the correct description of our monetary system, but at the time type boldly state that our monetary shouldn’t be like that.

      2. MDM, most people on the Austrian side that I am familiar with don’t make a clear distinction between the factual and normative. As in other fields, they often attempt to derive norms from facts, that is, provide a rationale based on putative facts for their normative claims, generally about fiat money always and everywhere leading to hyperinflation = bad.

        The Austrians I read are very much aware that we have a fiat currency, and they object to its inflationary bias. They want a system with a deflationary bias, whether it is going back to gold or limiting the ability of the government to print through legislation, constitutional amendment, etc. They are primarily concerned with money as a store of value and they want to minimize inflation. I see the theoretical arguments about money as being in aid of the practical result they aim to achieve. These tend to be the types who are primarily interested in economics and finance. Mish in is the category.

        The Austrians I don’t read are the libertarians who object to the Chartalist view of money as the basis for statism through imposition of taxes to allocate real resources for the use of the state. These are the libertarian political types. The people saying that the government is taking YOUR money are of this type. It’s fundamental to the GOP base.

        Where I think one can get agreement among the Chartalists and Austrians is in the financial world, since we are living under a fiat monetary regime and understanding how it works if going to be a lot more profitable in the markets than not. One may not like it, but that’s the way it is at present, so has to deal with it. That’s why I think someone like Mish, for example, could be reached. Even though I doubt he would change his mind about the underlying philosophy, I also doubt that he would want to go against operational reality as a trader.

  2. the conflict, if any, is about what monetary system we should have.

    regarding endogenous money, i’ve made the point (for a long time) that loans create both deposits and required reserves at the same time as a matter of accounting, since a reserve requirement *is* an overdraft at the cb in the first instance, which is a loan from the cb. so it’s not about ‘accommodation’ and/or the merits thereof.

    fiat money is tax driven as a point of fact and not theory. And austrian is about currencies that are not tax driven, but based on convertibility.

    so what’s the problem?


    1. I make this point always to austrians:

      Yes, we can have exogenous currency, but what problems does that solve? You can still have (hyper) inflation, AND you lose tools to deal with deflation and depression. So you keep all the problems you have with fiat currency and lose real output at same time.

      libertarians, frankly, are nonsense

  3. I’d never really gotten around to understanding what the Austrians were all about. Everytime I ran into one of their fans, I always got the strange feeling I was speaking with someone involved with secret rituals around campfires on moonless nights. It wasn’t at all that they seemed like bad people; rather, Mother’s adage of being known by the company one keeps would always protectively jump to the forefront of my thinking. Yeah, I’ll read that later, I would say, but of course I never did. Still, I always wondered if I was missing out on something.

    So it was with interest when one day I ran into a review by a junior member of the famed Mises Institute of a long (audio) interview with Stephan Zarlanga on the nature of money. Though I liked the interview, it was on a quite obscure site, and so I was kind of surprized that Mises would actually task one of their minions with refuting it. Ah-ha, I thought, at last I’ll get to compare the thoughts of a serious Austrain with other work I actually understood.

    My new-found Austrian immediately set about his task of destroying Zarlenga. No, no, he said. Money is actually naturally occuring. It has an essence that transcends the affairs of men. (I guess this is what you folks refer to as “exogenous”.) It is real, he insisted. Now I have to admit that these thoughts of campfires on moonless nights and the friends I keep came to mind here, but OK, I may not agree with this, but at least it’s something solid for adults to argue about. And then it happened.

    As proof that money was “exogenous” (see, I’m learning), my Austrian friend then proudly pointed to the archeological record where he had found instances of pre-historic peoples who used clam shells as currency. CRASH! It was like someone had suddenly dropped a crystal decanter filled with fine Bordeaux at a black tie event. Didn’t he see that that these clam shells in fact were a FIAT currency? That he had not demonstrated his point, but rather had shown the very opposite? That it was FIAT currencies that actually pre-dated recorded history?

    I was shattered. I had tried to be fair, but now I knew that whenever some Austrian tried to woo me in the future, it wouldn’t be my mother’s caution or visions of secret rituals around campfires on moonless nights that would send me running. It would instead be the image of clam shells; millions of clam shells, that would send me laughing hysterically as I groped for the nearest exit.

    Perhaps if I think of it however, I’ll pause on my way out to ask this new Austrian whether the shells have the clam still inside them or not. Because it really makes a difference to their argument, doesn’t it?

    1. The clam story smells fishy. If these prehistoric people lived in a place with an abundance of clams (USVI?) using such as currency would be like having leaves as currency in a forest – slightly inflationary. On the other hand, say they lived in a land-locked country, then clams represent a finite commodity making them more comparable to gold than to fiat currency. The powers that be would have to buy clams from foreign fishermen (or seafood restaurants?) in order to issue them (or promissory notes thereof) as currency. Maybe Greece should introduce fractional clam banking to replace the Euro ;-)?

  4. MDM –

    If you are looking for a civilized Austrian/Supply-Sider chatboard to discuss your points above, I’d suggest (then go to the Monetary Policy forum within the Discussion Forum section). It’s an economic chatboard initally hosted by economist and rabble-rouser Jude Wanniski.

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