The other day we looked at seomthing else he says a lot-'If you don't think the CB can create inflation than how do you explain 'Zimbabwe?'
http://diaryofarepublicanhater.blogspot.com/2013/08/then-how-do-you-explain-zimbabwe.html
Of course, the right answer to that is to point out that hyperinflation is not caused by Keynesian money printing but political instabliliy-obviously the Weimar Republic was jusift a little unstable and Zimbabwe's hyperinflation came during a civil war-the definition of an unstable regime.
There are other things Sumner says like MM has a transmission mechanism-the Hot Potato Effect and that if worst comes to worst the Fed can just buy up everything-that surely will raise NGDP.
http://jpkoning.blogspot.com/2013/08/give-bernanke-lever-long-enough-and.html?showComment=1376697609184#c6241504686532712372
Another Sumner special is razzing Keynesians about the idea that their totally consumed with interest rates regarding monetary policy whereas Milton Friedman showed the folly of focusing on interest rates as a guide to the stance of monetary policy.
Recently David Glasner really hit him where he lived by agreeing with Krugman that Friedman was a closet Keynesian as he used the IS-LM theory.
http://diaryofarepublicanhater.blogspot.com/2013/08/on-friedmans-keynesianism-sumner-just.html
He wasn't able to win the argument against Glasner-his fellow MMer-so he did what he usually does when he's not winning the argument: he changes the subject. Glasner calls him on this:
"In his gallant, but in my opinion futile, attempts to defend Milton Friedman against the scandalous charge that Friedman was, gasp, a Keynesian, if not in his policy prescriptions, at least in his theoretical orientation, Scott Sumner has several times referred to the contrast between the implication of the IS-LM model that expansionary monetary policy implies a reduced interest rate, and Friedman’s oft-repeated dictum that high interest rates are a sign of easy money, and low interest rates a sign of tight money. This was a very clever strategic and rhetorical move by Scott, because it did highlight a key difference between Keynesian and Monetarist ideas while distracting attention from the overlap between Friedman and Keynesians on the basic analytics of nominal-income determination."
http://uneasymoney.com/2013/08/16/friedmans-dictum/
Yep, vintage Sumner. However, Glasner makes another point: he argues that the focus on interest rates is not peculiarly Keynesian in any case that is was used by pre-Keynesians too and it was actually understandble in the age of the 19th century gold standard.
"Alghough I agree with Scott that Friedman’s dictum that high interest rates distinguishes him from Keynes and Keynesian economists, I think that Scott leaves out an important detail: Friedman’s dictum also distinguishes him from just about all pre-Keynesian monetary economists. Keynes did not invent the terms “dear money” and “cheap money.” Those terms were around for over a century before Keynes came on the scene, so Keynes and the Keynesians were merely reflecting the common understanding of all (or nearly all) economists that high interest rates were a sign of “dear” or “tight” money, and low interest rates a sign of “cheap” or “easy” money. For example, in his magisterial A Century of Bank Rate, Hawtrey actually provided numerical bounds on what constituted cheap or dear money in the period he examined, from 1844 to 1938. Cheap money corresponded to a bank rate less than 3.5% and dear money to a bank rate over 4.5%, 3.5 to 4.5% being the intermediate range."
"If a central bank changed its bank rate, as long as convertibility was maintained (and obviously most changes in bank rate occurred with no change in convertibility), the effect of the change in bank rate was not reflected in the country’s price level (which was determined by convertibility). So what was the point of a change in bank rate under those circumstances? Simply for the central bank to increase or decrease its holding of reserves (usually gold or silver). By increasing bank rate, the central bank would accumulate additional reserves, and, by decreasing bank rate, it would reduce its reserves. A “dear money” policy was the means by which a central bank could add to its reserve and an “easy money” policy was the means by which it could disgorge reserves."
The misunderstanding was understandable then:
"So the idea that a central bank operating under a convertible standard could control its price level was based on a misapprehension — a widely held misapprehension to be sure — but still a mistaken application of the naive quantity theory of money to a convertible monetary standard. Nevertheless, although the irrelevance of bank rate to the domestic price level was not always properly understood in the nineteenth century – economists associated with the Currency School were especially confused on this point — the practical association between interest rates and the stance of monetary policy was well understood, which is why all monetary theorists in the nineteenth and early twentieth centuries agreed that high interest rates were a sign of dear money and low interest rates a sign of cheap money. Keynes and the Keynesians were simply reflecting the conventional wisdom."
After WWII contervertibility to gold was no longer a real issue-Bretton Woods 'gold standard' was just a shell of its former self. This did change things and Glasner credits Friedman with seeing this:
"Now after World War II, when convertibility was no longer a real constraint on the price level (despite the sham convertibility of the Bretton Woods system), it was a true innovation of Friedman to point out that the old association between dear (cheap) money and high (low) interest rates was no longer a reliable indicator of the stance of monetary policy. However, as a knee-jerk follower of the Currency School – the 3% rule being Friedman’s attempt to adapt the Bank Charter Act of 1844 to a fiat currency, and with equally (and predictably) lousy results – Friedman never understood that under the gold standard, it is the price level which is fixed and the money supply that is endogenously determined, which is why much of the Monetary History, especially the part about the Great Depression (not, as Friedman called it, “Contraction,” erroneously implying that the change in the quantity of money was the cause, rather than the effect, of the deflation that characterized the Great Depression) is fundamentally misguided owing to its comprehensive misunderstanding of the monetary adjustment mechanism under a convertible standard."
I'm happy to see that Krugman weighed in on Friedman's 'dictum' about interest rates as well.
"David Glasner continues his meditation on Milton Friedman and all that, this time focusing on Friedman’s insight that nominal interest rates aren’t necessarily a good guide to the stance of monetary policy — basically because even a high nominal rate may amount to very easy money if expected inflation is even higher."
http://diaryofarepublicanhater.blogspot.com/2013/08/then-how-do-you-explain-zimbabwe.html
Of course, the right answer to that is to point out that hyperinflation is not caused by Keynesian money printing but political instabliliy-obviously the Weimar Republic was jusift a little unstable and Zimbabwe's hyperinflation came during a civil war-the definition of an unstable regime.
There are other things Sumner says like MM has a transmission mechanism-the Hot Potato Effect and that if worst comes to worst the Fed can just buy up everything-that surely will raise NGDP.
http://jpkoning.blogspot.com/2013/08/give-bernanke-lever-long-enough-and.html?showComment=1376697609184#c6241504686532712372
Another Sumner special is razzing Keynesians about the idea that their totally consumed with interest rates regarding monetary policy whereas Milton Friedman showed the folly of focusing on interest rates as a guide to the stance of monetary policy.
Recently David Glasner really hit him where he lived by agreeing with Krugman that Friedman was a closet Keynesian as he used the IS-LM theory.
http://diaryofarepublicanhater.blogspot.com/2013/08/on-friedmans-keynesianism-sumner-just.html
He wasn't able to win the argument against Glasner-his fellow MMer-so he did what he usually does when he's not winning the argument: he changes the subject. Glasner calls him on this:
"In his gallant, but in my opinion futile, attempts to defend Milton Friedman against the scandalous charge that Friedman was, gasp, a Keynesian, if not in his policy prescriptions, at least in his theoretical orientation, Scott Sumner has several times referred to the contrast between the implication of the IS-LM model that expansionary monetary policy implies a reduced interest rate, and Friedman’s oft-repeated dictum that high interest rates are a sign of easy money, and low interest rates a sign of tight money. This was a very clever strategic and rhetorical move by Scott, because it did highlight a key difference between Keynesian and Monetarist ideas while distracting attention from the overlap between Friedman and Keynesians on the basic analytics of nominal-income determination."
http://uneasymoney.com/2013/08/16/friedmans-dictum/
Yep, vintage Sumner. However, Glasner makes another point: he argues that the focus on interest rates is not peculiarly Keynesian in any case that is was used by pre-Keynesians too and it was actually understandble in the age of the 19th century gold standard.
"Alghough I agree with Scott that Friedman’s dictum that high interest rates distinguishes him from Keynes and Keynesian economists, I think that Scott leaves out an important detail: Friedman’s dictum also distinguishes him from just about all pre-Keynesian monetary economists. Keynes did not invent the terms “dear money” and “cheap money.” Those terms were around for over a century before Keynes came on the scene, so Keynes and the Keynesians were merely reflecting the common understanding of all (or nearly all) economists that high interest rates were a sign of “dear” or “tight” money, and low interest rates a sign of “cheap” or “easy” money. For example, in his magisterial A Century of Bank Rate, Hawtrey actually provided numerical bounds on what constituted cheap or dear money in the period he examined, from 1844 to 1938. Cheap money corresponded to a bank rate less than 3.5% and dear money to a bank rate over 4.5%, 3.5 to 4.5% being the intermediate range."
"If a central bank changed its bank rate, as long as convertibility was maintained (and obviously most changes in bank rate occurred with no change in convertibility), the effect of the change in bank rate was not reflected in the country’s price level (which was determined by convertibility). So what was the point of a change in bank rate under those circumstances? Simply for the central bank to increase or decrease its holding of reserves (usually gold or silver). By increasing bank rate, the central bank would accumulate additional reserves, and, by decreasing bank rate, it would reduce its reserves. A “dear money” policy was the means by which a central bank could add to its reserve and an “easy money” policy was the means by which it could disgorge reserves."
The misunderstanding was understandable then:
"So the idea that a central bank operating under a convertible standard could control its price level was based on a misapprehension — a widely held misapprehension to be sure — but still a mistaken application of the naive quantity theory of money to a convertible monetary standard. Nevertheless, although the irrelevance of bank rate to the domestic price level was not always properly understood in the nineteenth century – economists associated with the Currency School were especially confused on this point — the practical association between interest rates and the stance of monetary policy was well understood, which is why all monetary theorists in the nineteenth and early twentieth centuries agreed that high interest rates were a sign of dear money and low interest rates a sign of cheap money. Keynes and the Keynesians were simply reflecting the conventional wisdom."
After WWII contervertibility to gold was no longer a real issue-Bretton Woods 'gold standard' was just a shell of its former self. This did change things and Glasner credits Friedman with seeing this:
"Now after World War II, when convertibility was no longer a real constraint on the price level (despite the sham convertibility of the Bretton Woods system), it was a true innovation of Friedman to point out that the old association between dear (cheap) money and high (low) interest rates was no longer a reliable indicator of the stance of monetary policy. However, as a knee-jerk follower of the Currency School – the 3% rule being Friedman’s attempt to adapt the Bank Charter Act of 1844 to a fiat currency, and with equally (and predictably) lousy results – Friedman never understood that under the gold standard, it is the price level which is fixed and the money supply that is endogenously determined, which is why much of the Monetary History, especially the part about the Great Depression (not, as Friedman called it, “Contraction,” erroneously implying that the change in the quantity of money was the cause, rather than the effect, of the deflation that characterized the Great Depression) is fundamentally misguided owing to its comprehensive misunderstanding of the monetary adjustment mechanism under a convertible standard."
I'm happy to see that Krugman weighed in on Friedman's 'dictum' about interest rates as well.
"David Glasner continues his meditation on Milton Friedman and all that, this time focusing on Friedman’s insight that nominal interest rates aren’t necessarily a good guide to the stance of monetary policy — basically because even a high nominal rate may amount to very easy money if expected inflation is even higher."
"I have two reactions. The first is, well, duh. There may have been a time — maybe 50-plus years ago — when Keynesians were confused about this point. But no modern user of IS-LM forgets that the diagram must be drawn for a given expected rate of inflation, and that large changes in expected inflation can make a big difference. In fact, that’s precisely the insight that lies behind calls for a higher inflation target, so as to avoid hitting the zero lower bound!"
"But my other reaction is, what are these inflation expectations you speak of? Oh, wait, I seem to remember — didn’t they come on 5 1/4 inch floppy disks?"
"The fact is that we’ve had low, fairly stable inflation expectations for a generation now."
He then turns it around-while Glasner argues that the interest rate focus had more to do with the gold standard than IS-LM, Krugman argues that in fact interest rates have been a pretty reliable guage since the end of the Great Inflation of the 70s.
Either way it seems that Sumner is making a mountain out of a molehill-not unusual for him especially when he needs to change the subject.
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