Noah Smith on How to Extract Oneself From the Hive Mind

     The hive mind he has in mind is what he calls the 'Financial Macro Canaon' or 'FMC' what this hive mind mostly does is worry that galloping inflation is right around the corner and thinks that QE will lead to huge inflation if not hyperinflation. He thinks this perspective is endemic in the financial community. 

      "I have heard this basic story from many employees in the financial industry. I have heard it from a large number of finance writers, including some people I like and respect (but also including some who are shameless hucksters). I have heard it from undergrads at Stony Brook and Michigan. I see it on Twitter and on the blogs and on TV, and I hear it in Wall Street bars. I call it the Finance Macro Canon - the basic framework through which a big chunk of Wall Street sees the macroeconomy."

      http://noahpinionblog.blogspot.com/2014/03/the-finance-macro-canon.html
     
     He says there are only two ways he knows of us to extract oneself from this:

     "So how does one extract an individual human mind from this hive mind? That is always a tricky undertaking. But I've found two things that seem to have an effect:

     "Method 1: Introduce them to MMT. MMT is a great halfway house for recovering Austrians."

     "Method 2: Introduce them to the research of Steve Williamson. Williamson is an example of a guy who changed his mind about the most likely effect of QE, after observing its real effects."

     Sumner doesn't like his inclusion of MMT of course. 

      "As is often the case with Noah’s post, I have a hard time figuring out when he is joking.  The MMT explanation he links to suggests that the Great Inflation was caused by fiscal deficits, even though the deficits only became large in 1981-82, when the Great Inflation ended.  But much worse is this statement:

The monetarist Quantity Theory of Money (“QTOM”) is a fallacy, in part because it assumes that a country’s economy is always producing as many goods and services as it possibly can. Advocates of this theory also assume that no worker who doesn’t want to be is *ever* unemployed.

     "I guess the author has never read Friedman and Schwartz’s Monetary History of the US.  The rest of the long post is written at a similar level.  For instance, did you know that the money multiplier (the ratio of money to the base) is an “outright myth.”

     http://www.themoneyillusion.com/?p=26371

     The money multiplier is something that Sumner as with so much else has both ways. He's written about this before and his defense of the money multiplier to the charge of being an outright myth, is that it's not an outright myth just kind of a myth and a very useful one at that-as according to him, so is Rational Expectations and Efficient Markets.  To be technical that's not what he literally says but what he does is play the old 'it can't be wrong at it's an identity' card.

     http://www.themoneyillusion.com/?p=13852

     I do find the MMT piece Noah linked to interesting though I think I disagree with this comment:

     "MMT explores the monetary- and fiscal-policy implications fiat-money. And this is, or should be, a politically neutral line of inquiry. We don’t have one monetary system for Democrats and another one for Republicans. However, there are few areas of policy disputation that are more hotly contested in America today than the ones MMT is most interested in exploring. The top three things that MMT seeks to explain are tax policy, the government’s budgetary and other other fiscal policies, and monetary policy. Enough said. Neutrality isn’t really an option when we will be addressing such unavoidably controversial subjects."

      http://neweconomicperspectives.org/2013/04/modern-monetary-theory-overview-part-1.html

     I think the idea that any thing about monetary and fiscal policy can be politically neutral is a fallacy. It's not just this MMT writer either I make this point all the time regarding Sumner: he wants to sell this idea that this is a purely monetary question that should be handled in a sedate world of enlightened monetary technocrats-this is why he opposes fiscal policy for demand stabilization as this is a political decision. However, the idea that a debate over the budget could ever be politically neutral is an illusion. That's my whole point: the conceit of a purely apolitical study of economics is a fallacy. In any case, you sure don't need to be an enlightened monetary technocrat to realize that Republicans will find the MMT position on fiscal and monetary policy wholly unacceptable. 

      I find Sumner quite insufferable here where he priggishly claims to be doing pure science:

      "The Williamson link is far better, which isn’t surprising as it’s written by Noah Smith himself.  It discusses the long debate over whether QE is inflationary or deflationary.  It also mentions that Noah has a relatively low opinion of the success of modern macro.  The fact that we still debate whether QE is inflationary or deflationary does tend to support Noah’s claim that modern macro has a lot to answer for. That’s because we already know the answer to the question.  QE is inflationary, but far less inflationary than the FMC worries.  And the reason we already know the answer is quite simple, we observe the response of markets to unexpected QE announcements.  The real question is not whether QE is inflationary, or whether it is inflationary but not highly inflationary, but why is it inflationary?  There are two good theories:

      "1.  QE is a signal of expected future policy, a form of forward guidance."

      "2.  Reserves and government securities are not perfect substitutes, even when rates are zero.

Both may be true; I actually have no idea which one is more important.  Indeed it’s very possible that one is more important at one time, and the other at another time.  But that’s what we should be trying to figure out."

      Actually if Sumner is such a scientist why does he here yet again move from a correlation he claims occurs-the markets rally on QE announcements to causation. Even if the market goes up this doesn't cinch it that QE is inflationary. If we look at QE's actual body of word, it's not so impressive as we have an inflation rate barely over 1%. It seems to me that what we have learned after on  6 years of QE is that it's not necessarily very inflationary at all-SW actually seems to think it actually may be deflationary.