Ironically my friend and Diary of a Republican Hater reader/commentator Greg has kept a low profile, perhaps he needs a day off from it all-he does say that he showers after reading Sumner-to spend with the grand kids down in Georgia, or whatever.
I certainly can't begrudge him that but it's rather ironic only because I've spent a lot of ink today trying to litigate a case he's been waging-that Sumner said something wrong and absurdly so in claiming that the price level in Japan is 100 times what it is in the U.S.-and 1000 times greater in South Korea than here.
On the other hand another great and highly valued DRH reader, Tom Brown, doesn't really seem to think there is much beef in this debate.
"I just think it means the decimal place is two slots to the right essentially and that they have a Yen symbol instead of a $."
"Now of course some things in Japan will be truly more expensive in terms of some universal measure... say compared to the price of gold, but price level has to be considered wrt the UOA it's in."
"I probably just don't get the controversy... like I told Greg, I didn't really keep up with all the threads there he had w/ Sumner. And it's quite possible Sumner really did say something stupid and then defended it anyway, but I wasn't that interested... I was more interested in his MOA vs MOE article and his HPE Explained one... I don't know if I agree w/ those, but the point he's trying to make in them doesn't come apart because of any statements he may have made about price levels, IMO. The excerpts I've seen quoted over here don't seem that controversial to me. But maybe I'm missing it. That's why I'm curious how Sadowski would have explained it better. I'd like to see that explanation, to see what I'm missing... but it's really no more than a curiosity to me so I can understand what all the hub-bub is about. Like I say, it's hard to believe it detracts from the broader points he was tryin,g to make."
I certainly can't begrudge him that but it's rather ironic only because I've spent a lot of ink today trying to litigate a case he's been waging-that Sumner said something wrong and absurdly so in claiming that the price level in Japan is 100 times what it is in the U.S.-and 1000 times greater in South Korea than here.
On the other hand another great and highly valued DRH reader, Tom Brown, doesn't really seem to think there is much beef in this debate.
"I just think it means the decimal place is two slots to the right essentially and that they have a Yen symbol instead of a $."
"Now of course some things in Japan will be truly more expensive in terms of some universal measure... say compared to the price of gold, but price level has to be considered wrt the UOA it's in."
"I probably just don't get the controversy... like I told Greg, I didn't really keep up with all the threads there he had w/ Sumner. And it's quite possible Sumner really did say something stupid and then defended it anyway, but I wasn't that interested... I was more interested in his MOA vs MOE article and his HPE Explained one... I don't know if I agree w/ those, but the point he's trying to make in them doesn't come apart because of any statements he may have made about price levels, IMO. The excerpts I've seen quoted over here don't seem that controversial to me. But maybe I'm missing it. That's why I'm curious how Sadowski would have explained it better. I'd like to see that explanation, to see what I'm missing... but it's really no more than a curiosity to me so I can understand what all the hub-bub is about. Like I say, it's hard to believe it detracts from the broader points he was tryin,g to make."
The fact is that there is so much knowledge out there on the Internet, that we obviously have to pick our focus. If he isn't all that interested in what it means when Sumner says the price level is 100 times greater in Japan-and 1000 times greater in SK-then that's his right. Yet I somehow think that is own area of interest-the MOA vs. MOE debate-is at least related to this question of what Sumner meant here.
My impression is that part of it might be that he focuses on MOA rather than MOE which he doesn't see as so important. Now whether or not what Sumner said is 'absurd'-and I apologized today directly to him for calling him absurd in his definition of stagflation-as the Wiki definition backs him up, his definition is at least widely held view, not a wild-eyed libertarian howling at the moon Major Freedom view, I have to admit that while I wasn't familiar with his definition and many others weren't either, it's not absurd and according to Wiki is right; my definition was also right as according to the big W stagflation is high inflation with both high unemployment and low GDP so we were both right but incomplete-I do think that there is a point of interest in getting to the bottom of it. It's at least a 'teachable moment'as Krugman calls such moments.
I think at the end of the day, the trouble is I'm not entirely sure what the 'price level' even is. Tom-or Greg or anyone else-any suggestions? It seems wrong to me to define the price level and the exchange rate between the U.S. and Japan the same thing. What Sumner clearly means is that $1 Us dollar trades for about 100 yen-right now it's a little over 99 yen in the current Forex market. The question is: is the price level and the exchange rate the same thing or are they two different, distinct things which is my-admittedly intuitive-view? Evidently, the question is not so simple as there is considerably more than one definition of the price level:
Sumner for his part, was not any frinedlier in the face of my humbling myself prostrate before him... LOL. Not that it's why I did it. The reason I did it becasue fair is fair-and also I want to see what info I can get from him. As usual, he was basically an ice maiden.
His answer was a textbook illustration of teh definition of the word terse:
"Mike, Obviously I meant that bread costing $3 in the US cost about 300 yen in Japan. What else would I have meant?"
I asked for clarification-is this the rate of exchange or the price level we're taling about, His answer:
"Mike, Both."
What you see, is that he never lets down his guard when talking to me and always tries to convey as little information as possible. Nevertheless, I do get that at least for him the price level and the exchange rate are the same thing. Now, what I want now is some elaboration as to why he thinks this. He's not going to give this. So I''ll have to figure this out elsewhere.
At the end of the day the feeling is mutual-I don't trust Sumner either. Morgan Warstler is surely right at least about his motivations:
"You know why Monetarism exists today? Milton Friedman.You know why Milton Friedman exists today? Because he was elegant and consistent about government being a cancer."
"He didn’t say “do MP and the economy will said” he said “shrink govt. and the economy will soar”
AND THEN, to shrink govt. he was a monetarist. Do you get the same feeling from Scott? No.
BUT, we all know Scot actually feels the same way about govt."
"The only thing I’m asking Scott to do, is say HE INVENTED NGDPLT bc in his estimation, it is the best way to shrink govt. You don’t get to sell monetarism, which is AT ITS CORE an anti-government (anti-fiscal) strategy, without meeting the anti-government crowd and kissing their ring."
"Milton Friedman ONLY exists bc he woke up everyday, found a Paul Krugman, and abused him in public, and he didn’t abuse him for being dumb about MP, he abused them for believing in govt."
Nevertheless, Morgan isn't necessarily right. Sumner may well see that there's less percentage in being too associated with the Republican party than in Friedman's day. Sumner wants what he sees as the correct policies being in place regardless of whether a Democrat or a Republican is in the White House. If he 'kisses the ring' of Rand Paul that's going to limit his influence.
I like Sumner's answer to Morgan here though:
MORGAN: "Everything you write, remember the audience is Rand Paul."
SUMNER: "Morgan, The audience is my fellow macroeconomists. They decide what sort of monetary policy we’ll have, not the junior senator from Kentucky."
UPDATE: Sumner finally gives me a straight answer.
"Mike Sax, No, they are not the same thing."
http://www.themoneyillusion.com/?p=23505&cpage=1#comment-275681
Again, note the terseness. Not even the slightest bit of elaboration. It's not possible to hold your cards closer to your vest. It hardly seems that his interest is in furthering understanding, at least mine. I mean why not explain-it could be brief-what the price level is as opposed to the exchange rate.
UPDATE: Sumner finally gives me a straight answer.
"Mike Sax, No, they are not the same thing."
http://www.themoneyillusion.com/?p=23505&cpage=1#comment-275681
Again, note the terseness. Not even the slightest bit of elaboration. It's not possible to hold your cards closer to your vest. It hardly seems that his interest is in furthering understanding, at least mine. I mean why not explain-it could be brief-what the price level is as opposed to the exchange rate.
Hey Mike!
ReplyDeleteDid you not see my comment this morning on your post about Sadowski?
Would Sumner say the US prices have risen 100X if we started posting our prices in cents instead of dollars? He might but he'd be a fool. A dollar could still buy exactly what it did before but we would just be using fractions of a dollar to list our prices. Why would we do that? I dont know. Why does japan do that? I dont know. Japan and Korea seem to use our equivalent of hecta or kilo cents. We take dollars and divide to list our prices. Maybe they prefer multiplying and we prefer dividing but in the end when you tell an American that prices are 100x higher in Japan, to properly do the comparison you must first convert to a common numeraire if you can, which is very easy to do in this instance.
There are known conversion rates. He's had plenty of opportunities to explain himself but the last thing he said about to me was "Their prices are 100x higher, I was at their airport and noticed it"
When I was in India I used Rupees and a taxi cab ride was 250 (maybe 2500) Rupees, which I could aquire for just under 2 dollars. Not expensive at all. Now how expensive was this for Indian people? How much work did they have to do to acquire 250 Rupees? Thats a different, and relevant question. And how much did they have to do 5 years ago.
Right so in that case we can say that a taxi ride in India is much cheaper than what we pay here.
ReplyDeleteI'm sorry I guess I missed your early post. I'll check. Do you have a link for your exchange with Sumner, I'd be interested to see it.
Again, what Sumner is looking at is the exchange rate of the dollar to yen.
ReplyDeleteThe original context of when he made this claim was in discussing the Quantity Theory of Money (QMT). He claimed that only QMT could explain why prices are 100 times greater in Japan and 1000 times in South Korea.
"So let’s start with an economy that has “normal” (i.e. non-zero) interest rates, and non-interest-bearing base money. How does the price level get determined in that case? I’m told there are some theories of fiat money that suggest it must evolve from commodity money. I don’t agree. I think the quantity theory of money is all we need. Suppose you dump 300,000 Europeans on an uninhabited island—call it Iceland. The ship also drops off some crates of Monopoly money, and they’re told to use it as currency. Assume no growth for simplicity. Also assume no government and no banking system. It’s likely that NGDP will end up being roughly 15 to 50 times the value of the stock of currency. Once you pin down NGDP, then you figure out RGDP using real growth theories, and voila, you’ve got the price level. At this point you might be thinking; “you consider ’15 to 50 times the currency stock’ to be a precise scientific solution?” No, but it gets us in the ball park. It tells us why prices are not 100 times higher than they are, or 1000 times higher. BTW, prices in Japan are 100 times higher than in the US, and Korean prices are 1000 times higher. I don’t see how other theories can even get us into the right ball park."
http://www.themoneyillusion.com/?p=10116
Actually, Greg I still don't see your comment on the Sadowski post. You mean 'Sadowski Responds...' right? Maybe you're omment wasn't published-you just thought it was? Either that or it must be on a different post.
ReplyDeleteIts a response to your short comment where you said you enjoy fanning the flames. I can see my comment on my computers (home and at work) so it might be in your spam filter.
ReplyDeleteNow I have additional thoughts on the whole UOA UOE thing. I did a post a year ago on my blog getting some of my thoughts down on that issue.
ReplyDeleteWhen I buy a stock or bond, UOE is transferred between myself and the seller. Thats what he wants, my dollars. I might be able to exchange a "better" stock with him but this is very atypical for most people. Now that stock has a price attached to it, what I paid for it, and that stock can be used as a form of money in some transactions. Like I could use that stock and go to bank and use it as collateral for a loan. I likely would not get all that I paid for it, I might get more, but that Stock has now become a MOE or UOE. The bank now has an asset that it can use to make certain transactions hoping to create profit. Ultimatley though the only way a profit is realized if someone gives more UOE or MOE for that asset. The ultimate point of buying and selling is UOE.It might be 30 years down the road but someone will want dollars.
So its almost like there are two separate but intertwined money systems ocurring and in my view we run into problems when we try and elevate the UOA system too high. The UOA system is very volatile, prices fluctuate hourly. Additionally, our UOE the dollar also has some UOA properties to it as it gets traded on Fx markets and has its own price too.
So I think Sumner is wrong when he says the UOA function is all important. The UOE function is the one we have some control over (via spending) but the UOA function is affected by outsiders, traders, guys trying to manipulate and corner markets and plain old fear. The UOA finction is easily manipulable, changing interest rates as an example affects the prices of all sorts of bonds and other financial assets.
Ok so we have your comment. Last request: if possible can you get me a link to you and Sumner's dialouge?
DeleteGreg is it's possible could you give me a very simple basic defintion of both these terms-UOE and UOA?
DeleteRegading the bank, it has more money to give out in loans thanks to your deposit?
Of course, as you suggest, when you put money in a stock, you will likely end up with less or more cash when you do decide to sell it.
Well Im using MOA and UOA interchangably as well as UOE and MOE. I probably shouldnt but know when I use either of those they can be substituted for the other. Now Sumner seems to see some difference between MOE, MOA and UOA. His examples are always a currency, a currency valued via something else like gold and exchange rates. I think that is totally unnecessary since we dont have a fixed exchange rate with our currency. We have no other "thing" which we base our currencies value on (so it cant be de-based if its not based to begin with). In Scotts stories the person saving currency is in affect saving gold and monetary authorities messing with either the amount of paper currency or the amount of gold are affecting their savings and prices of everything denominated in that currency. Today he uses "reserves" as gold and seems to see IOR and FFR as sort of equivalent to exchange rates (not international fx exchange rates but like 35$/oz gold exchange rate) Scott seems incapable of understanding pure floating exchange rate fiat currency systems. He has no model to grok it with.
Delete"Regading the bank, it has more money to give out in loans thanks to your deposit?"
Not as I understand it. Remember banks dont need my deposits to make a loan. They prefer deposits beacuse they are cheaper liabilities but they are not necessary.
Yes that's why I asked the question-my impression is that pace the PKers the banks can make money out of thin air. However in what way are deposits cheaper?
DeleteYes, I see it now. Cool, good answer. I need you around you're a good bullshit detector and of course I necessarily have to wade through my share to get at the truth.
ReplyDeleteSpeaking of BS Sumner has a great answer in the comments to someone who criticizes EMH-'I'm not syaing it's true just that it's useful.'
"I don’t argue the EMH is true, I argue it is useful. Your greed/fear maxim is probably true if the EMH is false.'
http://www.themoneyillusion.com/?p=23505
Mike, Greg,
ReplyDeleteCheck this article out:
http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/
The "P" in the exchange equation is what I think of as the "price level." I'm going to guess that's what Sumner means too.
According to Harvey "P [is] the average price of goods and services"
So lets say country A is full of rich sheiks. In terms of gold, their average meal costs 1 oz of gold.
Now say country B is an impoverished 4th world country with few resources. Their average meal costs 1/1000 of an oz of gold.
Now if both countries used oz of gold for money (unit of account), obviously the price levels would be very different (say in both countries, selling meals is the entire economy).
But now let's say country B adopts the B$, which they define as equal in value to 1/1000 of an oz in gold. And enough B$ are issued for all the citizens of B to turn in their gold to the CB in exchange for the far more convenient B$.
Guess what just happened? The price level equalized. A and B now have the same price level! The average price per good or service is now "1" in both countries: oz of gold in A and B$ in B. But the exchange rate from oz to B$ is 1:1000. Exchange rate and price level are thus NOT the same thing!
Now let's say we add another good to the economy of both countries: the Hersey bar. In A the Hersey bar is the lowest form of food and sells for 1/1000 of an oz of gold. In B it sells for 1B$... so a Hershey bar is the same VALUE in both countries on an international absolute scale: both are 1/1000 of an oz, but the PRICE is very different in A compared to B, since it's measure in oz in A and B$ in B.
Now lets say A starts running low on funds and they fire up the oil wells again, and the Bentley dealerships, and diamond shops, etc. Now A is no longer a food-only-economy country... so the AVERAGE price per GOOD jumps up to 2 oz per good or service. Now the PRICE LEVEL (measured in oz of gold, and again here, the AVERAGE price per good or service sold) in country A is twice that of B. But the exchange rate is still 1:1000.
That's my read! Conclusion: the price level is not the exchange rate. The price level is also not the value level in terms of an absolute standard.
So to summarize:
1. Both countries on the gold standard, prior to Bentley dealerships re-opening in A:
Exchange rate A:B: 1:1
(Average) Price Level: A = 1, B = 1/1000
Hershey bar price: A = 1/1000, B = 1/1000
2. After B adopts the B$ as 1/1000 of oz of gold:
Exchange rate: A:B = 1:1000
(Average) Price Level: A = 1, B = 1
Hershey bar price: A = 1/1000, B = 1
3. After A opens Bentley dealerships:
Exchange rate: A:B = 1:1000
(Average) Price Level: A = 2, B = 1
Hershey bar price: A = 1/1000, B = 1
Very interesting Tom.
DeleteOnce again, Sumner proven a fool!
Interesting Tom. I'll need some time to digest this. Ok,the price level is not the exchange rate. What is it? The average price of goods in a country?
ReplyDeleteIf that's true in what way is the average price of goods in Japan 100 times that in the U.S?
ReplyDeleteI would say only in the way our prices of goods would be 100x higher if we started using a penny standard.
DeleteNo he said there price of goods are 100X higher than ours. So as the yen is only about 1/100 of the dollar you get the ratio. But that's the exchange rate which Tom says is not the price level.
DeleteSo the price level and exchange rate swap ratios in 1 and 2. Still trying to wrap my mind around it. Again, in Sumner's example though the exchange rate is 100 to 1 and he says the price level is the same.
ReplyDeleteAlso, I like JP Koning and Bill Woolsey on defining the terms MOA, UOA, and MOE. Say the US is on the gold standard and 1$ = 1/20 oz, but the CB issues paper reserve notes to trade with.
ReplyDeleteMOA = gold (not a particular amount... just "gold" ... like "water" or "electricity")
UOA = (1 dollar = 1/20 oz gold)
MOE = reserve notes
Now what changes if a dollar becomes 1/35 oz of gold instead? ONLY the UOA! The MOA and MOE are the same. Now what changes if $1 coins are introduced... and electronic bank deposits? Now only the MOE changes... it expands to include all three forms of MOE (paper, coins, and deposits). Now what changes if the MOA is defined as electricity? Well, for one, the UOA will have to change to. It could be defined as electric energy equal to 1/35 oz gold (which would not change the price level). If instead it was defined as a kilo-Watt-hour, then unless a kw-hr was worth exactly 1/35 oz gold, then the price level would change:
MOA = electricity
UOA = 1 dollar = 1 kw-hr
MOE = reserve notes, coins, bank deposits
Sumner likes to say that the MOA in our system is "reserves and currency." JP Koning isn't happy with that... but I can see how there's some logic to it. The UOA then for Scott would be the word "dollar." In fact I think I've seen him write that before. And the MOE is what I've written above (plus electronic Fed deposits of course).
So just to complete the sequence, in our current system (using Sumner's definitions):
DeleteMOA = Fed deposits and currency (MB)
UOA = "dollar" and in 1 dollar's worth of Fed deposits & currency
MOE = reserve notes, US notes, coins, bank deposits
"MB: The total of all physical currency plus Federal Reserve Deposits (special deposits that only banks can have at the Fed). MB = Coins + US Notes + Federal Reserve Notes + Federal Reserve Deposits"
http://en.wikipedia.org/wiki/Money_supply#United_States
JP Koning, on the other hand, has argued (with some unwitting help from Nick Rowe) the following:
DeleteMOA = CPI basket of goods/services in the proper proportions
UOA = 1 dollar = certain sized slice of CPI basket of goods/services
MOE = reserve notes, US notes, coins, bank deposits, Fed deposits.
Whoops! I forgot "Fed deposits" from the list with Sumner's "MOE."
DeleteSo I think I get it-kind of. Yet in the case of Japan according to Sumner the exhange rate and price level are virtually the same.
ReplyDeleteThat would be true of countries A and C too, if they were both full of rich sheiks, and the average price (and value!) of goods and services sold were the same.
DeleteThat might be approximately true between the US and Japan.
It would also be true of countries A and D if D were full of rich sheiks and D used the D$ = B$. Now there's a 1:1000 exchange rate between A and D, which is also precisely the ratio of their average price levels.
DeleteYes American and Japan probably have a rough parity, both pretty rich countries. I think I kind of get it. Not saying it's true-I still don't know what the truth is. But I think I get what you're saying.
ReplyDeleteThat Forbes article you linked was good though. It made a totally anti-Monetarist argument.