He's on a topic he discusses a lot. Interest rates and how low interest rates actually causes deflation. This is an interesting and rather stark claim as it says more than that they are concurrent with deflation or correlate with it but that they cause it. He kind of brings to mind Stephen Williamson-or even Cullen Roche.
http://diaryofarepublicanhater.blogspot.com/2013/11/stephen-williamson-on-zlb-interest.html
http://diaryofarepublicanhater.blogspot.com/2013/12/stephen-williamson-deflationary-qe-and.html
Sumner is now saying the same thing-holding the monetary base constant.
"I was teaching the money multiplier the other day, and showing how lower interest rates tend to reduce the multiplier, and hence M1. A student asked for clarification—they’d been told that lower interest rates were expansionary. I knew how I was going to answer the question, but I sort of wondered how other (less heterodox) money and banking professors would respond to the question. (Let me know in the comments.)"
"A fall in interest rates will increase the demand for base money (here I assume no IOR, or at least a fixed IOR.) As money demand increases the value (or purchasing power) of a dollar bill increases. Here I use the standard 1/price level as the value of money, although I actually prefer 1/NGDP."
http://www.themoneyillusion.com/?p=26400#comments
I say it's a passive aggressive knock as he doesn't give away till the end they're his target though it's obvious.
"In other words, interest rate targeting creates a money supply function that causes quantity of money changes that are exogenous on a “1/P” graph, and hence the normal monetarist assumptions about money still hold. I think that’s a good way to think about the whole “endogenous money” issue (which has spawned more nonsense than almost another other topic in economics.)"
http://diaryofarepublicanhater.blogspot.com/2013/11/stephen-williamson-on-zlb-interest.html
http://diaryofarepublicanhater.blogspot.com/2013/12/stephen-williamson-deflationary-qe-and.html
Sumner is now saying the same thing-holding the monetary base constant.
"I was teaching the money multiplier the other day, and showing how lower interest rates tend to reduce the multiplier, and hence M1. A student asked for clarification—they’d been told that lower interest rates were expansionary. I knew how I was going to answer the question, but I sort of wondered how other (less heterodox) money and banking professors would respond to the question. (Let me know in the comments.)"
"A fall in interest rates will increase the demand for base money (here I assume no IOR, or at least a fixed IOR.) As money demand increases the value (or purchasing power) of a dollar bill increases. Here I use the standard 1/price level as the value of money, although I actually prefer 1/NGDP."
http://www.themoneyillusion.com/?p=26400#comments
I say it's a passive aggressive knock as he doesn't give away till the end they're his target though it's obvious.
"In other words, interest rate targeting creates a money supply function that causes quantity of money changes that are exogenous on a “1/P” graph, and hence the normal monetarist assumptions about money still hold. I think that’s a good way to think about the whole “endogenous money” issue (which has spawned more nonsense than almost another other topic in economics.)"
"PS. I’m never too sure what the MMTers are trying to say, but in comments to my blog they seem to claim that if for some weird reason the Fed were to do an exogenous increase in M, interest rates would fall, we’d go to point b, and just stay there."
Actually there are more than one argument I've heard from MMT types. Richard Koo-though he's not an MMTer-argues that interest rates don't help as the problem is not lack of money supply but lack of demand for credit-as everyone's paying down debt. As for the MMTers on interest rates, they say something quite different than Koo who actually argues that high rates actually encourage foreign direct investment-and low interest rates can discourage it.
They also don' think the Fed can set inflation targets or NGDP rates but they do think it can set interest rates. They also think ideally the rate should be left at zero-Walster Mosler here argues that the natural rate of interest is zero at least in the modern monetary regime-that is post Nixon closing the gold window.
I see that Frances Coppola and our very own Tom Brown get into a comment volley at the end of Sumner's post. Can I call him 'our Tom Brown' as he sounds more and more like his idol Mark Sadowski every day here in the comments.
http://moslereconomics.com/mandatory-readings/the-natural-rate-of-interest-is-zero/
It really is a good little volley:
"Scott, in that post Nick reduces the supply of money to a central bank function only – eliminating commercial banks – and removes the risk factor in lending by making it impossible for borrowers to default. This of course means the money supply is exogenous and the only constraint on lending is the need to control inflation. It’s lovely, but it isn’t what we have. You just can’t write commercial banks and commercial risk out of the equation like that. We don’t have an IMF Chicago Plan revisited banking system (yet)."
"Regarding your own model here: I would venture to suggest that it is the fixed supply of base money that is deflationary, not low interest rates. It’s effectively a gold standard – or the Euro, if you prefer.
It is only possible to maintain low interest rates if the money supply can flex with demand. If it is fixed, increased demand for money would tend to push the interest rate up."
"Frances, keep in mind this quote in the post which Nick put in bold face:
“The supply (function) of money, and the demand for loans, together determine the quantity of money created, and that quantity created (eventually) determines the quantity of money demanded”
"In other words: quantity of (broad sense) money supplied is a function of TWO things:
1. “The supply (function) of money” (determined by the CB in this case)
2. “demand for loans” = supply (function) of loans determined by borrowers.
"I specifically asked Nick who determines the “demand for loans” and he said “borrowers.” So is “exogenous” really a good description here?"
"Frances, Scott I think is saying something similar when he responds to my comment above about the (1+c)/(r+c) form of the money multiplier when he writes:
“Lenders choose r, but obviously the r they choose may be affected by things done in the non-bank sector.”
" … here’s what it comes down to for me: the commercial banks, like the central bank, can “force” money (including broad sense money like bank deposits, which Scott calls “credit”) into existence, however commercial banks have to do this with an eye towards profits and solvency, whereas the central bank doesn’t. So the “force” word used on commercial banks in this context is a little misleading."
I don't call Tom the 'Sumner Whisperer' for nothing.
Frances returns the volley:
"Tom,I specifically read the constraints that Nick put upon his model. He eliminated commercial banks, and he eliminated the risk-return profile. Under these PARTICULAR circumstances money is exogenous and borrowers entirely determine the demand for loans. But that is not how the financial system works in reality. Borrowers may want loans, but banks don’t have to lend to them. The risk function DOES matter – it can’t be simply imagined out of existence."
"Mind you, if all you have is a central bank, then you have a nationalized banking system with all lending implicitly backed by the state – in which case lending risk is actually sovereign risk and we are in a completely different world."
It goes on for some length after-it's worth reading.
Me thinks Dumner needs to actually read some MMT authors because Mosler has been saying lowering interest rates is deflationary for quite some time, not that every MMT author agrees with him.
ReplyDelete* OMG!...... I am such a shitty typist that I still can't see what Im writing til after i write it and I see I hit the "D" instead of the "S" when typing ...you know who's name! I'm gonna leave it.... maybe I subconsciously did mean to?? Thats too funny!
Moslers main argument for leaving interest rates alone at near zero (or AT zero) I believe is that the affects of interest rates are varied in the short term and not nearly as effective at doing what the CB wants to do as CBers think they are. He believes we could pay those people to do something really useful........ which I think he would say is just about anything else ;-)
ReplyDeleteYeah I initially thought you made a typo then assumed it was deliberate. LOL
ReplyDeleteHey Mike,
ReplyDeleteA few things... first check this out.
In that post I try to faithfully represent the example Nick describes at the bottom of his post as best as I can. Sadowski and I actually had a discussion about that. I kept pointing out that the dependence on the "supply of loans as determined by borrowers" or what Nick calls (changing to "normal language" ... but I think misleading language) "the demand for loans." Mark kept trying to point out that the "supply of money determines demand for money and not vice versa" (as Nick had highlighted), but I kept pointing out to him that Nick was very explicit that the supply doesn't exclusively determine it... it determines it "together" ... "in conjunction with" the borrower determined "supply of loans." Eventually Mark put up a smiley face when he again stated the same thing so I knew he was messing with me.
That's all I was getting at here with Frances: Nick draws a sharp distinction between "demand for money" and "demand for loans" AKA supply for loans.
Also, I still don't like the way Scott stated that Nick was saying that the money supply was "fully exogenous." It's only "fully exogenous" if the borrower determined supply curve isn't really borrower determined: instead it's either set in stone for all time, or it's actually CB determined. Nick never said that. He said "the interest rate is set exogenously" .. he stated that twice. Thus the money supply itself will tend to be endogenous.
Frances later wrote that she was probably not using "exogenous" right in relation to that post. I don't think Scott is either.
Here's my earlier back and forth with Sadowski (where he's messing with me... I likened it to "throwing sand in my eyes"... which is unusual for Mark, since I'm usually learning something from him):
http://www.themoneyillusion.com/?p=26355#comment-323881
It goes all the way to the bottom of that post.
Here's Frances, I think getting my point about the "exogenous" business (which was my only issue with her: I think it was **Sumner** not Nick who was pushing the "fully exogenous" line):
http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/03/the-sense-in-which-the-stock-of-money-is-supply-determined.html?cid=6a00d83451688169e201a3fcdbc4ae970b#comment-6a00d83451688169e201a3fcdbc4ae970b
Plus I keep the pragcap types abreast of some of these convos:
http://pragcap.com/forums/topic/sumner-draws-demand-for-money-plot-and-talks-fully-exogenous-i-pounce#post-62602
http://pragcap.com/forums/topic/nick-rowe-marches-into-enemy-territory
And I have another post up you might like:
http://banking-discussion.blogspot.com/2014/03/toms-epsilon-example.html
Glasner thinks he might agree with Nick on that one rather than Scott (in his latest)
Yeah I don't know why Nick seems to distinguish between money and loans. Ive seen him say something similar before.
DeleteYou're doing a great job of making Scott and Nick hone their thinking and it looks from here that they are having a time "using" their models without keeping credit different from loans and loans different from money. Their use of the words exogenous and endogenous do not seem to align with how most PKE use the term.
Your energy in discussing these matters with Nick and Scott is quite impressive Tom. I really have grown weary of many of these discussions myself but I do like to see your distillations of your discussions.
Greg, thanks. Re endogenous/exogenous. I think Nick's position is basically this: say you had a list of variables:
Delete1. Quantity of base money (MB)
2. Overnight interest rate (FFR)
3. Inflation rate
4. NGDP
If the CB picks any one of those to target exogenously, then the other three will NOT be perfectly correlated with that variable, and thus will bounce around, i.e., be "endogenous." That's why I disagree w/ Sumner about that. Even Sumner eventually told me he may not have been understanding Nick about the exogenous issue. Essentially Sumner was saying that Nick demonstrated that two of the variables on that list were perfectly correlated and thus both exogenous at the same time (i.e. control one then you control the other): interest rates and MB (recall in Nick's example MB = M1, as the CB was the only bank and it only loans currency: no bank deposits).
If you look at the upper plot here:
http://banking-discussion.blogspot.com/2014/03/nick-rowes-example-from-sense-in-which.html
To say that interest rates and MB are perfectly correlated is to save that blue downward sloping "supply of loans" curve is absolutely fixed. But of course that won't be the case: it'll bounce around. Borrowers help determine it's shape.
Nick (I think wisely) likes to say that banks buy stuff to make money. In fact I had the same thought independently ... in fact I like to image I influenced Nick to say that. I wrote one time on his blog that it doesn't matter what banks buy: donuts, electric bill, loans, etc, the aggregated banks make their payment by crediting bank deposits. If I recall correctly he wrote something like "Hmm, I *think* that's right"... but now he uses it all the time! (Of course I may not be recalling correctly here and I'm too lazy to go find the quote).
Anyway, he at first was describing to "Dustin" how "it wasn't a typo" the "supply of loans" and the "supply of money" both "interact" to determine the quantity of money. But that in "normal language" we call the "supply of loans" the "demand for loans."
I like the 1st part of that, but the second bothers me too. In fact I think the word "loan" causes the English language to break down and be used in a confusing way. Thus I like to eliminate "loan" and "borrower" and instead substitute "bond" and "bond issuer." Essentially that's what you are when you "take out a loan." You're not "taking out" anything!... you're selling a personal bond to the bank for money.
Thus, "demand for loans" becomes "bond-issuer determined supply of bonds." "Bond-issuer **demand** for bonds" makes NO sense! They're the bond suppliers... why do they have a demand for them?
Likewise "banks supply (curve) for money" becomes "banks demand curve for bonds at an exogenously fixed rate of interest."
Now we're back to the normal world, with buyers and sellers and a demand curve and a supply curve crossing (instead of two supply curves "interacting"). I think it's much more "clear" than either "natural language" or Nick's kind of half-sensible language. :D
"banks demand curve for bonds at an exogenously fixed rate of interest." is specific to Nick's example. The more general statement is just the 1st half:
Delete"bank demand curve for bonds."
Banks make their money buying personal and business issued "bonds" that they (the banks) have the legal authority to draw up.
"You're not "taking out" anything!... you're selling a personal bond to the bank for money."
DeleteMoney they create in the same way the Fed creates money when it buys stuff: created through crediting deposits.
Thus the aggregated banks also accept payments (interest rates, points, fees, principal) in the same way that the Fed does: by debiting bank deposits (i.e. destroying our money). With principal payments, of course, they also destroy an equal measure of their loan-asset too.
In the above
ReplyDelete"A few things... first check this out."
"this" was a link. It didn't show up colored like a link on my screen. Here's it is explicitly:
http://banking-discussion.blogspot.com/2014/03/nick-rowes-example-from-sense-in-which.html
Yes, I read the whole exchange with interest and it did seem to me that here you out Sadowskied Sadowski. I'm not sure though why you think it's misleading to speak of borrowers as demanding loans and lenders as supplying them.
ReplyDeleteYour preference for the opposite confuses me.
I explain that above in response to Greg. Think of who's bringing the money to that market! Of course it is perfectly valid the think of it in reverse, but then you have to make sure the language is consistent. So in the apple market, you could say the apply growers produce the "demand for money" curve while the apple buyers produce the "supply of money curve." More typically we say the apple growers produce the supply for apples curve and the apple buyers produce the demand for apples curve. Usually that's the way we put it when one party is bringing the money.
DeleteSo as I said to Greg, this all becomes crystal clear if we get rid of the word "loan" and replace it with "bond" and get rid of "borrower" and replace it with "bond-issuer." Then it's clear who's supplying and who's demanding and what's being supplied and demanded.
Also I thouht that Nick is actually arguing it is Supply determined-if you let him have his assumptions. If you give those to him he said is is S determined. Then he seemed to be suggesting that based on his analsysis with these assumption it might hold even without them. That was how I read it.
ReplyDeleteNick does say in the comments with Dustin (2nd page of comments) in the previous post (his "to rule them all" post), that the quantity of money is determined by the supply of money and the supply of loans... two supply curves. Dustin thought that was a typo. Then Nick said, well in "normal" language the "supply of loans" is called "demand for loans."
DeleteSo assuming Nick actually prefers the non-natural language "supply (curve) for loans as determined by borrowers" like I do, then he doesn't go far enough. See my comment in response to your above comment. It should be supply and demand, but like this:
"supply (curve) for loans as determined (in part) by borrowers"
"demand (curve) for loans as determined (in part) by lenders"
I qualify each with (in part) because I don't think it's so simple to say that either of them solely determine anything.
"Nick (I think wisely) likes to say that banks buy stuff to make money"
ReplyDeleteWell it might be more accurate to say they sell stuff to make money. Selling is the way you make money in capitalism, not by buying. Actually they usually just broker a sale and take a fee.
I think the most accurate way to describe what happens during a loan, IOW who provides the funds for the loan, is that the borrowers future income is the source of the loan and it is the object of the banks desire. Banks just look for income streams to take cuts from.
Since most bank activity is real estate related they end up holding lots of real estate, they have mine til I make the last payment and they have lots form people who stopped making payments, but the real estate is just a tool of them to access our income streams eventually.
"Well it might be more accurate to say they sell stuff to make money. Selling is the way you make money in capitalism, not by buying. Actually they usually just broker a sale and take a fee."
DeleteThat may well be true: they're middle men: buying and selling. I guess I'm thinking of an old fashioned model where they bought and held the majority of the loans. At least I imagine such a mythical yesteryear existed. :D
I don't think it's clear to the average man in the street. I mean when I take out a loan I'm not concscious of myself as supplying anything, certainly I don't feel like I'm 'issuing bonds.'
ReplyDeleteIt seems like what you're saying in a sense may be technically true but what's the payoff being to here! However, what are we able to udnerstand saying borrowers are supply loans or issuing bonds to just saying they're demanding loans?
The advantage is to have a consistent view of all the money markets (all the markets for which one of the goods being traded is money). But that's a personal thing for me maybe... I like to think of all these things in a one-size-fits-all consistent way whenever possible: fewer special cases to keep track of that way.
DeleteAnd in terms of supplying something... you are: your agreement to pay (written in your signature about 50 times on the equivalent of a small tree of paper usually). :D
Well, I just treat it from a point of logic. If we agree that we are not borrowing from other savers (which is just the loanable funds model) and we are not just borrowing fronted CB money(which is an exogenous money model) then there is only one other place the funds are coming from. I know of no one that has tried to define a fourth possible party. Its either from other people THROUGH the bank, from the Central Bank THROUGH the bank or from ourselves. As far as what the payoff is or what are we able to understand by using this model Id just suggest that if we all realize that it is our own future income streams which are financing loans (not some supply of money that others have saved or the CB has fronted to the banks) we might stop falling for stories by economists which call for austerity as a cure. Additonally if we see ourselves as the source of funds for bank loans we might really fight for our wage share of the economy rather than trying to settle for trying to benefit off the ownership of assets like the stock market/real-estate to substitute for wages. Too many of us are forced to try and get windfalls from the buying and selling of things like stocks/real-estate as replacement for stagnant wages.
ReplyDeleteIts mostly about reunderstanding what a bank is in my view. Banks, like health insurance companies are middle men who make payment FOR us and charge a fee. Yes they have licenses to make markets in other financial instruments but the part of their business which is mostly being discussed is simple consumer lending(credit cards, student loans, car loans etc), real estate lending and moving of deposits.
As far as why its better to say we are issuing bonds rather than demanding loans comes from banks them selves I think They are the ones that have turned our simple mortgage borrowing into some sort of investment vehicle for plutocrats world wide. Why shouldn't we understand it in the fashion they do? The more reliable the re-payer of the loan, the higher grade the bond. If our own retirement portfolio is buying MBSs we should want those repaid and not defaulted on. We should all see that it is better for US if the loans get repaid, for the banks it doesn't seem to matter because they will just sell their busted MBS bonds to the Fed and use their political power to push austerity policies on the rest of us.
You guys are probably sick to death of this, but I tried to walk Nick Rowe through a progression like this, but he wouldn't go for it:
ReplyDeleteSay we had a barter economy with N goods. Then we could draw supply and demand curves for G1 vs G2. Imagine "Quantity of G2" is on the x-axis, and the price in terms of "Quantity of G1" in on the y-axis. Then you have supply and demand for G1 in terms of G2. If you swap the x and y axis (same curves, but now flipped over), then you also have supply and demand for G2 in terms of G1.
Going back to the loan and lending scenario. We could draw a "supply of loans" curve and a "demand for loans" curve, plotting their price on the y-axis and the quantity of dollars borrowed/lent on the x-axis.
But then we could swap x for y, as in G1 vs G2, and talk about "supply of money" and "demand for money."
Nick wouldn't go for that last step. I think it was because I was writing in the comments to his "supply-determined" post, and I think the reason **might** be this: he'd already established a separate "demand for money" curve different than what I refer to above, and he thought I was talking about that "demand for money."
How are these two "demand for money" curves different? Well **I think** one is an aggregate demand for money (that's the one normally plotted against the *average* price level). That's the one Nick was saying passively moves to whatever the supply of money dictates. The other, in my G1 G2 analogy above, is a micro demand for money in the one market: the loan market.
So, that's still a mystery to me actually, and I'd love to resolve all that with Nick, but I have to pace myself: at some point Nick starts to ignore my comments/questions, so that's when I know I'd better cool it for a bit. I have to learn to pace myself. :D
actually it's plotted against 1/P not P (P = average price level). Also, I should specify how an interest rate figures into the above... Hmmm... I have to think on that for a bit.
DeleteI guess in a very simple model, borrowers are selling quantities of principal on which an interest rate is calculated. So "interest rates" per dollar I guess is what's being sold. So interest rate or interest rate per dollar should be on one axis, and on the other, quantity of principal demanded/supplied.
DeleteI like that better, selling principle. The interest is calculated (by bank)to try and make sure the maximum amount of interest is paid in the minimum amount of time, and in turn is calculated (by the borrower)by time that projected income to debt ratio will stay relatively constant.
DeleteYour interest per dollar reminds of Art Shipmans "Debt per dollar" over here;
http://newarthurianeconomics.blogspot.com
Quantity of principle demanded is from income, although its usually structured (with mortgages anyway) that the asset itself + the downpayment covers the principal demanded. IOW if I default on my mortgage after one payment, my down payment + the sale of the house should cover the original mortgage so really from day one the bank is ahead. They start ahead so the borrower is just selling more interest and profit, provided there is no large move down in price of house.
So monetary policy simply is used to get the borrower back on the line. To find that number that gets their income stream accessible again.
Ok Greg so you like this supply of loans concept as well. I mean that tends to make me trust it a little more-as you're kind of a reality check around here. LOL.
ReplyDeleteIf taking about supply of loans rather than demand for loans takes away the rationale for austerity I'm all for it. I get what you're saying about banks being middlemen but you're not suggesting-like some ultra leftists I've talked to that we can fund the same level of investment without banks are ygou? Nothing you said suggests you are but I'm just clarifying. Even if banks are just middlemen they are pretty important in our economy.
Actually I was reading Koo and a point he made was that the modern division of labor would not be possible without money-something that the Walrasian Neoclassical school doesn't understand.