Greg has brought attention to Sumner claiming that the price level in Japan is 100 times what it is in the U.S. a very dubious claim using any kind of commonsense-Sumner has often argued that to think like an economist you have to ignore commonsense but sometimes it defies belief.
It actually all goes back to when I was writing about Sumner and the QTM. He's recently been arguing with Steve Waldman about the Great Inflation of the 70s-Sumner of course thinks it was a monetary phenomena. It's fitting then that his claim about Japan:
"This is sort of a response to some Keynesian/fiscal theory/Post Keynesian/MMT theories I’ve seen floating around on the internet. Theories that deny open market purchases are inflationary, because you are just exchanging one form of government debt for another. But first a few qualifiers:"
It actually all goes back to when I was writing about Sumner and the QTM. He's recently been arguing with Steve Waldman about the Great Inflation of the 70s-Sumner of course thinks it was a monetary phenomena. It's fitting then that his claim about Japan:
"This is sort of a response to some Keynesian/fiscal theory/Post Keynesian/MMT theories I’ve seen floating around on the internet. Theories that deny open market purchases are inflationary, because you are just exchanging one form of government debt for another. But first a few qualifiers:"
1. "If the new base money is interest-bearing reserves, I fully agree that OMOs may not be inflationary. That’s exchanging one type of debt for another. If it does raise inflation expectations (as QE2 did) it’s probably because it changed expectations of future monetary policy."
2. "If nominal rates are near zero, the situation is complex–I’ll return to that case later."
So Sumner starts by ruling out actual real world cases where OMO's have not been inflationary.
So Sumner starts by ruling out actual real world cases where OMO's have not been inflationary.
Next he claims that without believing in the QTM you can't explain why the price level is 100 times larger in Japan than the U.S.-he apparently has ruled out the point that it's not 100 times greater in Japan than the U.S.
"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."
It seems that what he is doing is conflating the exchange rate of the dollar-yen as the price level. Another time he went of the deep end was when he was discussing what he calls 'stagflation'-it turned out to not at all be what most people mean by it.
In another strange thing Sumner has said, see his definition of stagflation. He defines it not as high inflation along with high unemployment but high inflation along with low GDP.
"He later defends this statement by pointing to the relatively high levels of unemployment during that decade. I had thought the word ‘stagflation’ meant high inflation plus slow output growth (due to slow growth in AS.) Karl seems to think it means high inflation plus other bad things, like high unemployment."
http://diaryofarepublicanhater.blogspot.com/2013/09/sumner-vs-waldman-on-great-inflation.html
Tom Brown has been defending Sumner on his argument that the price level of Japan is 100 times the level in the U.S.
"All I think Sumner is saying is that because 100 yen = $1, it's evidence that they've undergone an inflation sometime in the past. I read it as an implicit assumption that $1 = 1 yen at some point in the past (approximately) and that they must have experienced inflation and the effects of stickiness, etc. They may not be experiencing it any longer... and it may have reached equilibrium again and thus the fact that we pay $1 for a candy bar and they pay 100 yen makes absolutely no difference as you point out."
Well, there's no question that on the subject of stagflation Sumner is wrong in his usage. On the price level of Japan question, it all comes down to this: is the exchange rate and the price level the same thing? If so Sumner is right. If not he made-another, along with stagflation-mistake.
I think Greg is right. The price level is one thing, the exchange rate between two currencies is another.
UPDATE: I do decide in a later post after some feedback from Sadowski, that Sumner is apparently not wrong about stagflation-Wiki defines it as actually all three elements: high inflation, high unemployment and low GDP. So Sumner and I were both right but incomplete. However, I was wrong in thinking that his definition was ludicrous.
On the price level, it seems that Sumner is defining the 'price level' here as the exchange rate because he focuses on money as the medium of account rather than the medium of exchange.
In another strange thing Sumner has said, see his definition of stagflation. He defines it not as high inflation along with high unemployment but high inflation along with low GDP.
"He later defends this statement by pointing to the relatively high levels of unemployment during that decade. I had thought the word ‘stagflation’ meant high inflation plus slow output growth (due to slow growth in AS.) Karl seems to think it means high inflation plus other bad things, like high unemployment."
http://diaryofarepublicanhater.blogspot.com/2013/09/sumner-vs-waldman-on-great-inflation.html
Tom Brown has been defending Sumner on his argument that the price level of Japan is 100 times the level in the U.S.
"All I think Sumner is saying is that because 100 yen = $1, it's evidence that they've undergone an inflation sometime in the past. I read it as an implicit assumption that $1 = 1 yen at some point in the past (approximately) and that they must have experienced inflation and the effects of stickiness, etc. They may not be experiencing it any longer... and it may have reached equilibrium again and thus the fact that we pay $1 for a candy bar and they pay 100 yen makes absolutely no difference as you point out."
Well, there's no question that on the subject of stagflation Sumner is wrong in his usage. On the price level of Japan question, it all comes down to this: is the exchange rate and the price level the same thing? If so Sumner is right. If not he made-another, along with stagflation-mistake.
I think Greg is right. The price level is one thing, the exchange rate between two currencies is another.
UPDATE: I do decide in a later post after some feedback from Sadowski, that Sumner is apparently not wrong about stagflation-Wiki defines it as actually all three elements: high inflation, high unemployment and low GDP. So Sumner and I were both right but incomplete. However, I was wrong in thinking that his definition was ludicrous.
On the price level, it seems that Sumner is defining the 'price level' here as the exchange rate because he focuses on money as the medium of account rather than the medium of exchange.
O/T: Just for fun... you might enjoy this regarding Vincent, the happy hyperinflationist:
ReplyDeletehttp://ask-cullen.com/maiden-tossing-vs-heart-cutting/
Hey Tom,
ReplyDeleteI wanted to respond to your defense of Sumners comments to me.
I didnt see you ask me that question about gasman, but I also didnt think you would miss it.
," suppose we make a new case, case 4a, in which the quantity of gold is constant, but the gov changes the UOA on an hourly basis: Since prices and wages are not sticky (let's just assume no debt, or perhaps that there's only indexed debt... indexed to 'inflation'), then nothing changes: all we're doing is changing the yardstick on an hourly basis. Prices and wages change on an hourly basis so that their value remains proportional to gold. We're experiencing massive hourly inflation or deflation, but lack of stickiness makes this irrelevant."
First off, to me, if its irrelevant than its NOT inflation. Inflation is when you actually have lower living standards because of the higher prices. If the living standrad isnt changing its all just a pointless game in seeing how many different ways we can express some ratio. They want to say money doesnt matter, its just a measurement and can be redefined infinite ways.
"All I think Sumner is saying is that because 100 yen = $1, it's evidence that they've undergone an inflation sometime in the past. I read it as an implicit assumption that $1 = 1 yen at some point in the past (approximately) and that they must have experienced inflation and the effects of stickiness, etc."
Well if thats what he's saying he's got it backwards (like most things) because Japanese Yen has never been at 1:1 it was 300:1 about 40 years ago and got to 75:1 at one point (2012) but has been 100-150:1 most of the time since 1989.
http://fxtop.com/en/historical-exchange-rates-graph-zoom.php?C1=USD&C2=JPY&A=1&DD1=01&MM1=01&YYYY1=1953&DD2=14&MM2=09&YYYY2=2013&LARGE=1&LANG=en&CJ=0
This whole monetarist line of thinking depends on too many things which are completely impractical and against human nature. Yes, if contracts, wages ,debts etc could all be flexible and adjusted when the UOA changed there would be less disruptions to our balance sheets. As if the Fed sits their monitoring the pulse of all financial markets and makes these fine adjustmanets to our MOA to keep everything stable and running smoothly, but in fact our MOA changes for things beyond our control (Im using our fx exchange rate as part of our MOA) Other parties, trading on fx markets have some say in our rate. Its sort of Orwellian to me that Scott calls himself a "market monetarist" when he seems to have very little insight into the way actual markets function and how prices are generated in them.
cont
from above
ReplyDelete""Also, implicit in 4a and 4b is that people don't keep inventories of cash. You can think of it as either they get paid every hour and they go spend it or save it immediately (save as in invest in stocks), or they total their hours for the week, and then get paid at the current wage rate, and then go spend or save all of it immediately. Again, debt (mortgages, bonds, etc) really are a major source of "stickiness" I think, so that's why they have to be indexed to inflation/deflation or gotten rid of to make these non-sticky examples work"
Right, when you are able to narrowly define the conditions of reality then IT (the model) "works".... maybe. Except we dont know what works mean. Does work mean keeping our spending power constant? Do we really all expect that? I dont. Do we all deserve that? Why?
I think what most people want is an opportunity to work at something they like and not have to do it 80 hours a week just to get by. They also want their increased efforts at school or other training to translate to increased opportunities. I think most people just want after 30 or so years of working, to have a paid off place to live and the time to travel,visit children and friends and maybe volunteer someplace in their free time and they know they need some deferred income from working years to achieve that. None of that is unreasonable and none of that can be achieved with monetary policy.
Focus, by Scott particularly, on UOA just demonstrates to me that he is a charlatan. willing to just massage numbers to make it look to rubes that they are doing better than they think.