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Sunday, February 16, 2014

Assuming We Can Should We Try to End Inflation?

     I have no idea if we can or not, I do know that Miles Kimball thinks we can if we follow his proposal and end paper money in favor of all electronic money:

     "make no mistake: Giving electronic money the role that undeserving paper money now holds will only tame the business cycle and end inflation. Fostering long-run economic growth, dealing with inequality, and establishing peace on a war-torn planet will remain just as challenging as they are now. But every time one set of problems is solved, it allows us to focus our attention more clearly on the remaining problems. It is time to step up to that next level."

    http://blog.supplysideliberal.com/post/76196184332/reply-to-bill-woolsey-on-the-possibility-of-ending

   For me this begs two very interesting questions:

   1. Does electronic money really end inflation? It may do so, but if so what is the mechanism? Can anyone educate me here? That certainly includes you Mark if you know as you quite possibly do. Tom with all your opining it would be welcome here-LOL. 

   2. However, assuming we can then a second question is begged. Why should we want to? Sure I get that there are some unpleasant economic and social effects from inflation but are all its effects negative? Again, I'm humbly asking not telling you. As  understand it while there are negative effects from inflation they are often exaggerated by inflationphobes. Also, not all its effects are bad. 

   http://diaryofarepublicanhater.blogspot.com/2013/02/is-inflations-social-menace-overrated.html

   I mean for starters wouldn't this be a real burden for debtors and a real boon to lenders? There are many fascinating points in Miles' post. Like, he argues that there are no Supply side depressions. This often trips me up. Is the idea that a demand side depression is nominal universally agreed by all Keynesians as well as Monetarists? Do the post Keynesians agree with this?

  Also I'm a little sketchy on what a 'technology shock' is. I mean I get the Cowen Great Stagnation idea that our level of technological innovation is now in decline which will lead to a long term drop in our rate of output growth-though-though I don't agree that we are level of technological innovation is now in decline. 

  However, one thing I do think-which I get that mainstream Macro tends to be very skeptical of is that part of the problem lots of Americans have is that the economy has become much less favorable to workers since around about 2001 when the full effects of the data revolution as well as outsourcing jobs to Asia and Latin America really begun to be felt. It seems to me that a large number of the kind of middling white collar office jobs were made redundant and these workers were displaced into the service sector. Would this qualify as a technology shock?

   I'm not the only one who believes this story though I realize that it garners skepticism in mainstream Macro. 

   https://read.amazon.com/?asin=B005WTR4ZI

   P.S. Speaking of technology shocks here's an interesting NK look at it-of course, the idea of a TS originates with RBC first. 

   http://fmwww.bc.edu/ec-p/wp536.pdf

    

62 comments:

  1. Mike since you're begging for some explanation, and specifically mentioned my name, I'm going to jump in and give you one, even though I'll be mostly pulling it straight from my ass (so be warned). I didn't even have the patience to read the whole Miles Kimball article, but I've got to get some exercise (and not just exercise in shooting my mouth off):

    I think all the Miles is saying is that all electronic money, with which we are free to implement negative interest rates, suddenly frees us from the ZLB problems, and thus having a 0% *nominal* inflation target is no problem... since interest rates can be made lower than that, and thus the real inflation rate would thus be higher or lower that the nominal 0% (but like you say, it makes the inflation-phobes happy -- or rather it theoretically makes them happy because I doubt they'll be happy that an all electronic money system will suddenly make all their ammunition purchases easier to track by the NSA/ATF! :D)

    In other words, all electronic = negative rates possible and practical and effective = we can set nominal targets where we like to make the various constituencies happy and it doesn't really matter because it's actually the real rates that are important.

    As you suggest, I think he goes on to say quite a bit more than that (supply side shock, etc) so I'm pretty sure I'm at least partially missing the mark here... but that's all I can pull out of my ass for now. I will point out an article you might be interested in by an amateur Woodford influenced NKer by the name of "DOB" who proposes a monetary system with all electronic money as well, and a central bank that controls two interest rates: essentially the IOR (or more broadly a universal deposit rate) and the FFR (or overnight rate):

    http://catalystofgrowth.com/proposals/

    He makes a lot of restrictive assumptions up front, but then relaxes some of them later on. It's a fairly short piece and easy to understand. I can't say how much overlap there is with Mile's proposal, but I'm pretty sure not 100%. I was struck by DOB's assertion though that this dual interest rate approach would allow the CB to target two things simultaneously: specifically he mentions the quantity of base money and NGDPLT. Perhaps there are other pairs of targets that are conceivable as well (NGDPLT and IT?). I don't really know!

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    1. Let me try one more time (maybe ignore most of the above): one way to view things is as a collection of various rates, and the thing that's important is the difference between rates, not the absolute value of the rates (i.e. the nominal rates). W/o all an all electronic money system, one nominal rate was always fixed at 0%: the return on cash. With an all electronic system, we're suddenly free to move all the nominal rates around however we desire (i.e. add the same offset to all of them), the theory being it's the differential rates that really matter. Thus it's conceivable that we could target inflation to have a nominal 0% rate, but preserve the relative rate structure otherwise.

      What are the other rates? Overnight interest rate, deposit rate, rate of NGDP growth, etc. So again, just making stuff up here, but how does that fit with your interpretation?

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    2. Please don't make a post out of my comments here... I'm probably at my stupidest! :(

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    3. BTW, I have no idea what I meant in my 1st comment here by "nominal inflation target." I wish I could claim I was drunk at the time, but I wasn't. I'm very tempted to erase the entirety of that 1st comment as most of it sounds inane.

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  2. Ok I think I kind of understand a little bit why electronic money would solve the ZLB problem. The other half of my question is why do we want zero inflation presuming we can achieve it?

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  3. What the heck does zero inflation even mean? That prices will never rise? That the rise in money supply will always track the rise in real production of goods?

    I do not agree with the monetarists definition of inflation first off, that its just a money thing. But even if I did the real concern for our economy should be on real outcomes for real people, like getting everyone who can and is willing a way to earn an income by participating in our production system.

    Monetarists, to me, are focusing on the wrong side of the system. They want to play with all the monetary ratios to keep certain numbers where they are comfortable with them instead of dealing with the real side and simply accepting the monetary outcomes.

    Money is simply a scorekeeping device, and every human deserves having their name on the scoreboard without having to go in debt from day one to some fucking banker.

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    1. Greg, you are right to say that monetarists believe in the long term neutrality of money. However, I do think they define inflation correctly as opposed to some Austrians like Peter Schiff. When Kudlow challenged Schiff on why all his inflation predictions were wrong, Schiff tried to argue that his definition of inflation doesn't haven anything to do with the price level: it only is measure of the stock of base money, and that had indeed inflated, and thus he's never been wrong, he was 100% correct in all his predictions. Lol

      MMs and pretty much everybody does not share that definition: everyone else says it's about the price level. I've seen Sumner say it. I've seen Cullen say it. I think Schiff's definition is insane.

      As to what 0% inflation means: I think for everyone except Schiff and people like him, it means that on average, the price level stays fixed.

      That's my take!

      Of course there are differences about how to measure the price level: "core inflation," CPI, CCPI, MIT's billion prices project, Cullen's own measure, ... or John Williams (ShadowStats guy) unique way of doing it: to name a few.

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  4. I guess the idea is that real prices can change but not nominal prices? I don't get what the value is this either.

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    1. I agree: nominal prices stay fixed. We actually have one "good" that we're all familiar with that has always has exactly 0% nominal inflation (over any time period): paper dollars!

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    2. Tom do you want to take a stab at what for me is the most important question here? It's why do we want zero inflaton assuming we can achieve it? Aren't there benefits as well as negatives in inflation? Wouldnd't it be a bonanza for lenders and a terrible deal for debtors for example?

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    3. Mike, I think I should finish reading Kimball's article first... but here are a couple of things off the top of my head:

      1. Placating the 0% inflation crowd (which includes a lot of Austrians BTW I think)

      2. Lenders vs debtors: I don't think it helps either one PROVIDED everyone expects 0% inflation. David Glasner put it best one time in response to a right-wing sounding commenter saying that the ECB had no business even considering raising inflation (David was complaining that they were undershooting their inflation target) as it would amount to stealing from creditors: David responded (paraphrasing) "Would you mind explaining how inflation above expectation is stealing from creditors but inflation below expectations isn't stealing from debtors?" That stuck with me: I thought that was great!

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  5. I don't think that's the only reason Miles-or Bill Woolsey-desires 0% inflation

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  6. I think many people, especially those who have a high level of saving, have very unrealistic views of our economy and their definition of inflation. It seems they see inflation as anything which reduces their share of ownership of the current stock of goods...... or potential claims on these goods. IOW if we see the current stock of goods as a pie, these folks seem to believe a persons piece of the pie should stay the same percentage no matter how big the pie gets, and if it doesn't we have experienced inflation.

    I think this is a very unrealistic expectation of our economy, to keep their share constant. Instead, what should be expected is that as the pie grows, and more people are getting pieces of it, those pieces still provide the same level of nourishment.

    What savers expect form their savings and what new participants need in order to play the game are often at odds. Those that have always seem to think they are having to give up too much to allow the new players to join in.

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    1. Greg, I get the impression that rich people hate inflation for the reasons you touch on here. Certainly inflation below expectation should be good for creditors (and in a sense amounts to stealing from debtors, as David Glasner points out).

      However, regarding the slice of the pie analogy, I don't really see a problem, and here's why: Say Mr. Welltodo, has a dollar and that buys him half a pie (and there's never any more than one pie available in this world at a time), and he understandably wants to be able to continue to buy a half a pie at any time in the foreseeable future. I don't necessarily think that means that Mr. Welltodo expects that his dollar will buy him a WHOLE pie, should two pies become available at the same time. He might be delighted if it did, but I don't blame him for the more modest ambition of wanting to always be able to buy half a pie.

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    2. Thanks for the response Tom.
      What I think is, too often Mr Welltodo doesn't invest his dollar into the production of more and better pies but instead just makes bets on where the prices of pies may go. Those bets have been called investments by the bookies running the bets but in fact do nothing to improve the pies and increase the number of them. Additionally, the idea that his dollar should buy half a pie for the foreseeable future is unrealistic, if the foreseeable future is 20- 30 years. Why should anyone get that guarantee? I think we should encourage people to participate in the improvement of pie quality and number and not just sit back and trade shares or just bet on the prices of shares of existing pies.
      To make matters worse, sometimes Mr Welltodo borrows money to make the bets on margin.

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    3. I agree with Greg. Why should Mr. Welltodo get a guarantee no one else in a dynamic, capitalist economy can get. As a worker I have no guarantee that my company won't change and decide that I'm no longer worth what I've been in the past.

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    4. Greg & Mike: I guess what I'm saying is that you might have to sell that to people. I think there's a powerful psychological desire, for all classes of people (rich and poor) to have their money (mostly conceived of as cash) continue to have the same buying power over time. Most of us have come to accept that paper money, while having a 0% nominal return, actually has a small negative real return: but a certain crowd will never be comfortable with that, and I don't think it matters to much how rich they are. The irony is that to get a practical 0% inflation target, this requires all electronic money, and that means rates of deposit would almost certainly be < 0%. I talk about that more below.

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    5. Tom

      'I think there's a powerful psychological desire, for all classes of people (rich and poor) to have their money (mostly conceived of as cash) continue to have the same buying power over time"

      I think you are right, people do expect the same buying power over time but thats unrealistic, and they need to be told so. As populations grow or more and more people start earning higher wages, those that are sitting on their savings should not expect constant or increasing buying power. Its a condition that can't be met.... mathematically. There are limits to what we can and will produce.

      And monetarists intend to increase buying power via bank credit channels, which when you think about it is not allowing you to buy anything, simply rent it. When they lower rates and give you more purchasing power, you only complete the purchase when you make the last payment. You get lower payments for a longer term and actually pay more. Only if you can increase your payment do you save with lower rates but most people are not looking to increase their monthly loan payments, which is why monetary policy, I think, is mostly worthless in credit crises like the one we had.

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    6. "I think you are right, people do expect the same buying power over time but thats unrealistic, and they need to be told so."

      Actually, although people would ideally like their dollar to have a fixed buying power over time, I do think they grudgingly accept a small inflation rate, which is probably why monetary authorities shoot for that target: it gives them enough "room" (above the ZLB) to implement a workable rate structure, and yet it's still emotionally tolerable for the masses. :D

      "And monetarists intend to increase buying power via bank credit channels,..."

      I don't agree: I don't think monetarists (or at least MMists, but I suspect all monetarists) care about credit channels at all, or very little anyway. Sumner makes that point all the time. Rowe is not as extreme (he thinks credit can be important in the short to mid term), but really there's little day light between them. They really have to struggle to find examples that separate their beliefs. I think Glasner is more in agreement with Scott than Nick. JP Koning too. Woolsey is probably a bit closer to Nick.

      I think all the MMs actually understand how banking works (at least as much as somebody like me does, but probably more than me!), but ultimately it doesn't really matter to them: credit is MOE but not MOA, and the HPE works on MOA not MOE. Thus "never reason from a price change" or an "interest rate change" etc. It's all about the demand for MOA for them ultimately. That's what drives the *long term* neutrality of money. They also all realize that money is NOT short or mid term neutral (which is were they part ways with the RBCers). Sumner's best explanation for HPE had absolutely nothing to do with credit or banks. Rowe often excludes any kind of credit or banking from his simple thought experiments, I think for exactly the same reason: at a fundamental level, to an MMist it doesn't matter: shocks to demand for MOA set up long term changes which result in short term painful transients. Things will be out of order until that long term neutrality is achieved, but until then we can expect trouble. In order to take the driving force away from these harmful short term transients, you need to address that long term pressure (demand for MOA): and the good news is that long term pressure can be removed immediately by offsetting the shocks to demand for MOA. Banking, finance, credit... none of that really makes any difference in terms of forces determining the demand for MOA. That's my take on the MM view!

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    7. ... see the last two paragraphs of this Lars Christensen post as evidence for what I said about the MM view of neutrality and how that compares with RBCers:

      http://marketmonetarist.com/2014/01/29/the-awkward-moment-when-george-selgin-realized-he-agree-with-paul-krugman/

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  7. Tom while it's obvious that lenders an savers see low inflation in their interest, what about debtors? How can a drop in inflation to zero not hurt them? I know you said that if this is expected it won't hurt them though I'm not sure I entirely understand this or buy it.

    I'm still not sure there aren't more hurt than helped by zero inflation. I think it helps bondholders, coupon clippers, lenders, and savers but it harms debtors and I think most of the nonrich.

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    1. Mike, a declining inflation rate will always hurt the debtors. I wasn't specific enough: an inflation rate that has been at 0 and is expected to remain there, and does remain there won't hurt them or the creditors: rates of interest will be based on that expectation.

      Thus rising inflation rates will always hurt the creditors when they are not expected to rise: presumably because all loans have already been made with the expectation of a lower rate of interest.

      Of course this does not apply to adjustable rate loans, in either direction.

      That's my take on David Glasner's statement. I thought it was insightful.

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    2. it gets back to the idea that it's the real rates that matter, not the nominal rates.

      A 5% lending rate with 2% inflation is the same as a 3% lending rate with 0% inflation is the same as a -1% lending rate with -4% inflation.

      In all cases the creditor is essentially making a real 3% on his loan. But of course the last of these cases (-1% with -4%) really only works with all electronic money... otherwise the creditor could do better by just taking his money out in cash (assuming the creditor here is a shadow bank, for example, or an individual that lends money to another individual)... but if he was forced to only have electronic money, well then he'd have to consider the deposit rate. Deposit rates for the three cases might be 1%, -1%, and -5% respectively: those rates would produce the same incentive to lend the money in all three cases: if you don't lend then you make a real rate of return of -1% in all three rate structures. Make sense? (and actually, with a deposit rate of -1% for the 2nd case, then that case only makes sense in a cashless society too, and for the same reason the 3rd case does).

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    3. So we could achieve a 0% inflation rate in a cashless society, but almost certainly deposit rates would then be < 0%, and that's going to cause the same crowd that wanted 0% inflation in the 1st place to go ape shit.

      Not that it would make sense to go ape shit!... it's just that psychology plays a role here: my guess is people would hate the idea that they're forced to lose a nominal amount of money in their deposit every year (because they don't have the cash option) more than they'd love having 0% inflation. What do you think?

      I think people would psychologically be more accepting that they can make a nominal 0% on their deposit or with cash, and put up with a low positive inflation rate: even though the 0% inflation case is EXACTLY the same in real terms.

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    4. In one of my comments above replace this:

      "because all loans have already been made with the expectation of a lower rate of interest."

      with this:

      "because all loans have already been made with the expectation of a lower rate of inflation."

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  8. "I think people would psychologically be more accepting that they can make a nominal 0% on their deposit or with cash, and put up with a low positive inflation rate: even though the 0% inflation case is EXACTLY the same in real terms."

    Tom if this is true then Miles' is mistaken that all electronic money solves the problem. You just go from the inflation rate taking away from purchasing power to the deposit rate

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    1. But the problem with a cash system is that you've always have that one fixed nominal rate that limits your flexibility: 0% nominal return on cash. That's partly what causes us to have a ZLB in the 1st place. That and that people are not used to slowing seeing their bank deposits drain away due to a negative deposit rate. But if we were to institute a negative deposit rate right now, cash would become very popular.

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    2. ... in other words, the existence of cash, with a fixed exchange rate of 1:1 with bank deposits (or for the banks themselves, a fixed 1:1 rate with Fed deposits) would defeat any plans to implement a negative rate on deposits (either bank or Fed), which in turn would defeat a 0% inflation target, IMO.

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    3. ... thus in order for 0% inflation to work, you'd first have to either get rid of cash, or let it float in relation to bank deposits. Miles has talked about both methods. Both would be wildly unpopular in my estimation.

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    4. ... and BTW, both Nick Rowe and Scott Sumner made brief references to the consequences of targeting 0% inflation w/o first getting rid of cash or letting cash float (in one of Nick's posts... w/in the past couple of months). This was a source of amusement to both Nick & Scott because their conclusion (and I'm not sure why) was that in order to achieve 0% inflation over the long run (recession & no recession) the central bank would have to have a HUGE balance sheet. Why did this amuse Scott in particular? Because he said he likes to point that out the conservatives who want a 0% inflation rate... he say he likes to tell them (paraphrasing) "Oh, so you want socialism then?" (i.e. because the central bank would have to own a LOT more than it does not, presumably a lot of what we now consider to be strictly private property)
      (a rare case of Sumner making fun of right wingers)

      I confess that I don't understand the reason why the Fed would have to buy up so much, but it does make sense that with the 0% guaranteed return on cash "escape valve" option always present, that something has to become extreme in order for targeting a 0% inflation rate to work.

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  9. "I think people would psychologically be more accepting that they can make a nominal 0% on their deposit or with cash, and put up with a low positive inflation rate: even though the 0% inflation case is EXACTLY the same in real terms."

    Tom if this is true then Miles' is mistaken in thinking that electronic money would solve the problem. We'd just go from purchasing power decreasing from inflation to it decreasing from the deposit rate

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    1. See above. The problem with the cash system is that you can run into a ZLB: the system loses flexibility right there. Miles says lets fix it by either getting rid of cash or letting cash float against reserves/bank deposits.

      The MMs say that's not necessary: They say we can create higher interest rates through expectations of inflation by doing OMPs (QE). That's what Beckworth's piece was about here:

      http://macromarketmusings.blogspot.com/2014/01/miles-and-scotts-excellent-adventure.html

      Some people say QE should lower interest rates ... but I think the evidence is the other way around: When QE1 and QE2 ended, rates dropped, while they were elevated during those programs. The generally went up with QE3 started too. I'm talking the longer term rates. Seems counter-intuitive? After all, the Fed buying Tsy debt ought to raise it's price and thus suppress the yield right? But not necessarily when you fold in expectations: the expectation of higher inflation in the future pushes up interest rates a bit. I think the idea is to get back to a rate structure that works... there's a lot of possible rate structures that work, but with cash, it limits the set available... it all gets mashed up around zero on the low side. That's why Sumner is always saying low interest rates are a sign that money is tight (i.e. that you've run into that lower bound and you have a rate dysfunctional rate structure).

      But then again, it's difficult predicting rates. That's why Sumner and MMs prefer to think about quantity of money: lets the rates do what they will, they can influence demand for the MOA directly by controlling quantity of base money. That's the core HPE argument. Although you might ask, then why hasn't all this QE done more to lower demand for MOA and get us out of the recession. Well the MMs have an answer for that (surprise surprise!)... and it's that QE (an elevation of the base money stock) has no effect if it's perceived to be temporary. That's where we get into these messy perceptions again. Not that I dismiss the idea, but it sure makes everything a little more mysterious and iffy in my book.

      That's my interpretation.

      BTW, is JKH really Jan Hatzius? I was very confident that was true, but then JKH left a comment saying he has it on good authority that JKH is not Jan Hatzius.

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    2. ... and regarding perceptions, if the Fed isn't crystal clear on the purpose of their QE program, or give any indication of when they'll unwind if ever, then it attenuates the power of QE. That's the argument anyway. I find it to be plausible, but I'm not convinced 100%. Sumner says ideally QE is not necessary, or at least it's not necessary in large doses: The Fed makes it very clear what they are doing, and not nearly as much effort is required. Rowe backs him up on that. But then we're partly down to arguing psychology again... it's such a strange subject for me.

      Regardless: the ZLB does complicate matters in my book, which makes Miles' approach somewhat attractive in comparison (since it obliterates the ZLB). To me, his approach seems less dependent on perceptions: but maybe I'm just fooling myself there! I guess you still need to have some idea what's being targeted, to give you some idea how long rates might be left at any particular level. Having confidence that you understand what the CB is doing with rates is a perception.

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    3. ... and that applies even for I.T.: with no ZLB, I believe it's true that the Taylor Rule would continue to work with negative numbers. Cashless means no ZLB, so no disruption at some arbitrary boundary.

      But I.T. seems to have other problems, making it non-ideal: Nick has some recent posts up on this idea, along with the idea that NGDPLT is also not ideal (but he believes it's still a lot better than I.T.).

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  10. So in theory electronic money could end the ZLB but it could cause other problems-deposit rates.

    The question of QE's impact on rates is very confusing. We had Stephen Williamson saying it's deflationary now we have you saying it actually raises rates.

    On my main question here though you're saying that a zero inflation rate won't hurt debtors once it's hit? In other words a drop in inflation from 5% to 0% would hurt them and help lenders but once we're there and it is expected for the future it won't hurt debtors in the future?

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    1. It's not just me saying it can raise rates: look at the evidence. I forgot where it is now... but Sadowski recently gave me a link to a graph that I've seen before: a clear indication of how rates went up during each QE cycle, and went down again each time they ended. I'll go try to find it.

      Your last question (last paragraph): exactly. That's my take on it. :D

      I was hot on the trail of that graph when suddenly my browser seems to have stopped cooperating ... I can no longer cut and paste or find stuff, so I'll just post this and come back.

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  11. I think his point here Mike is that the initial change would be much the same as you having to pay back a loan of 100$ with the equivalent of 105$. When there is deflation a dollar today can buy more but if you are using it to pay back an old debt you aren't getting full purchasing power for it. But once the 0% is reached and maintained new borrowers are borrowing the same 0% money they are paying back with so debtors aren't hurt. Its the change in inflation, while you still have outstanding debts, that creates the problem.

    I think its also important to remember that at 0% savers aren't gaining anything. There is no financial incentive to save but there is also no charge for paying things off over time.

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  12. So you would support 0% inflation Greg? I just don't trust this idea somehow.

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    1. I know you asked Greg, but the more I think about it, the less I'd support it, just because I think the psychological reaction to it would be very bad. See my comment below!

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    2. I think the psychological "center of mass" is geared towards accepting as normal a very very low (but not negative) deposit rate, a low (few %) inflation rate, etc.

      It's a complete mystery to me how and when the tipping point is reached on what is perceived to be "normal" by large groups of humans.

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    3. No I wouldn't support 0% inflation for a couple reasons; 1) The formula for defining and measuring inflation is flawed. The basket of goods has changed over the years so as to not include some very large drivers of our costs of living. Its completely arbitrary to take housing costs out of inflation calculations 2) The notion that anyone should expect their buying power to stay constant is.........laughable.

      Trying to manipulate our MOA is the backwards way to try and assure prosperity, which is what the inflation fighters are trying to do. We need to put our efforts to real outcomes and let the "financial numbers" go where they may.

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    4. Agreed. What Tom is basically saying is that without inflation rate we'll have negative deposit rates by about the same amount as inflation was so it's basically a chimera

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    5. Right. So instead of having reduced buying power because of some poorly measurable, or vaguely defined thing like inflation, we have liberals like Miles recommending that what we should do is have a system which will automatically reduce your deposit balances when the banking system deems it appropriate. Just leave it up to the banking system, they know whats best................. for THEM!

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    6. Of course, Miles is not really a liberal-he's a 'supply side liberal' which is really a contradiction in terms

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    7. :D ... you guys are fun. But one thing: I think we could remove banks from the equation, and still we might find ourselves in need of negative interest or deposit rates on occasion: but this time administered completely by the Fed. Does that make it any better? Hahaha... I didn't think so. ... BTW, you might want to see if you agree with any of my rambling here by comparing it to Miles' actual posts.

      OK, let's have some fun with "supply side liberal"... is that like

      A well coiffed bald guy?
      A devout atheist?
      A gullible skeptic?
      A unbiased Nazi (with a strong sense of fair play)?
      A charismatic stop sign?
      A clever bag of hammers?

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    8. A supply sider who tries to make himself more sympathetic by claiming to also being a liberal.

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    9. Actually I don't have a strong feeling about it since I'm not really too clear on what is meant by "supply-side" other than I associate that with the Reagan admin, trickle down econ, etc. I was more trying to feel out the level of self contradiction that you feel is contained in that description.

      What does "supply sider" mean to you?

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    10. Someone who believes that only the supply side matters in terms of the economy's performance. A Supply Sider in the pejorative sense means someone who doesn't think the demand side matters.

      In theory you could think both matter. Sumner for instance-and this is certainly not unique to him but is the believe of mainstream macro-ie, Neoclassical Macro as a hole-thinks that demand matters for the short term but that for the long term-'trend output growth'-the supply side is how you could possibly raise this trend.

      When I use it pejoratively I have in mind someone who tells us that the problem in the economy isn't demand-so no stimulus will help, just supply side-'structural reforms' which usually mean things like cutting taxes for the rich-corporate, the capital gains rate, the top marginal rate, etc.-as well as deregulation, cracking down on unions-to make firms more 'competitive' in the global economy-and cutting government spending-ie, fiscal austerity.

      Sumner believes the demand side matters but only in the short term and it can only be remedied with monetary not fiscal policy.

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    11. Now to me, none of these policies I mentioned under 'supply side' policies-busting unions, a low minimum wage, etc-are what most liberals are about.

      So what makes Miles a liberal? He calls himself one. Ok, technically he claims to care about the poor-but he thinks they can eat electronic money and lines of credit through the Federal Reserve. I'm must a little skeptical of this.

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  13. Sometimes I just go by instinct, I got to admit.

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    1. Imagine what your instinct would tell you if the government announced that you had ten days to turn in all your cash because we were going fully electronic, and then within a year the government announced a new 0% inflation target and at the same time your bank announced that you'd be "earning" -2% on your deposit... and not only that, but every other bank had a similar rate: there was no escape!

      You'd probably be out there with the Tea Party folks digging yourself a bunker and investing in your 1st every firearm (which you'd barter for! Ha!). :D

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    2. So really all this talk about ending inflation is overdone. Yes, technically we have '0% inflation' but really we're just paying the 'inflation tax' directly from our deposits

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    3. Yes, that's my thought, but more interesting is what Miles thinks.

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    4. I asked MIles and he didn't answer. Which doesn't make me more well disposed to him...

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    5. In any case, again my instinct tells me 0% inflation is a bad idea. No doubt this may be why Sumner always tried to insult me for not being an economist. Economists I guess aren't supposed be concerned with instinct-how unscientific! Everything should be shown in some model! LOL

      "There’s something irksome about defending micro-founded macro from the attack that it is ‘without merit’. A voice inside me says: if they aren’t doing macro, by which I mean, generating new empirical or theoretical work themselves, who are they to go about proclaiming whether something has merit or not, or how macro should be done? [I'm not singling out Adam here. Lots are at it.] And why should anyone care what they say?"

      "In my time in central banks one definitely encountered a breed of policymaker that behaved as if they were above actually doing macro, but yet seemed to know all the answers for sure, and know how macro should be done [of course by someone else, not them]. It seemed to many of us who observed them as though they had fallen victim to the illusion that since they had done so well in life, their gut feelings about stuff must really be valuable, and that perhaps that’s where macroeconomic truth lay, in what they as great individuals felt and said. Many can tell stories of attempting to advise them, and being met with the condescending twinkle in the eye that translates as ‘Ah, so that’s what’s true in your silly little toy world, is it, tee hee, how quaint that you think such things worth repeating, well, I can only hope that one day you glimmer the real source of truth, namely, the instinctive knowledge of the chosen’. If the meme that microfounded macro has ‘no merit’ were to gain any more traction, I assert that great danger would lie ahead!: theorising that is incomplete and ‘accidental’ [in the sense meant by Krugman]; policy promises that are unverifiable; discretion untamable; and a search for new economic knowledge that is empty and futile (since the truth is already felt by the great policymakers, and the only way to divine it is to draw the few charts they ask us to plot, and sit around and wait until the charts work their inner magic and they are kind enough to write it down in speeches for us)."

      http://diaryofarepublicanhater.blogspot.com/2013/12/tony-yates-inside-mind-of-your-average.html

      http://diaryofarepublicanhater.blogspot.com/2014/01/how-you-know-when-youre-reading.html

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    6. Damn these policymakers who think their own thoughts and logic matter! All that matters are properly microfounded models-otherwise you're just grunting.

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  14. I think there are some benefits to inflation and we lose that by 0% inflation.

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  15. Mike, here's the graph I was trying to find above: it shows how interest rates changed in relation to the periods of time that the various QE programs were implemented (QE1, QE2, QE3):

    http://1.bp.blogspot.com/-BAnvd5XkIkc/UnKFj667RyI/AAAAAAAAAyM/-xbQBsjqcm0/s1600/QE+Rates.png

    Sadowski has posted it several times.

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    1. ... and Sadowski's not the only one: one of Cullen's long time commenters, "John D." (I forget what the D stands for... Daschbach... or something... I could look it up, but I'm feeling lazy), has made exactly the same point that Mark did and has posted a similar plot too. I've never seen any argument from Cullen to the contrary.

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    2. ... yet on the other hand, the overall trend for rates over the period of time encompassing QE1, QE2, and QE3 has been downward. Go figure. ;^)

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