Thursday, April 07, 2011

For love or money

One of the things you discover if you read opposing sides on liberal monetary policy vs gold standard/tight money is that at the very base of the arguments it's just emotional. It's almost like abortion. The arguments of one side are completely irrelevant to the other side because one side sees it as a pragmatic issue and the other as a moral one.

"Real" money has a technical meaning -- which is just $ value adjusted for inflation. So you'll see real CPI and real home price averages and all that. But not for economists who believe in gold or money tied to some unfutzable standard.

For them, there is some sense of Reality to what money is. It is a measure of wealth and so to adjust its value is to undermine the earth. Nothing is solid. Paul Brodsky argues that sure - leverage and inflation have lead to a US Economy that appears to have performed exceptionally since the removal of the gold standard, but is it Real? He doesn't say exactly how it's fake, but wonders where we would stand if all the leverage and inflation were suddenly stamped out. Would all that wealth created still be there or is it all a bubble -- inflated (get it) by credit and generally just more money.

The emphasis is on the worth of things in a snapshot and not on the ongoing flow of the economy. Sure, credit and leverage have created jobs and industries, but is it all just sand castles? When they do talk about the operation of the economy, it's rarely in terms of the nuts and bolts of flow of money and credit, investment, trade, employment etc. Instead there is a lot of talk about "expectations." Expectations (formalized in the 70s as "Rational Expectations") is a way of taking the static thing (like the value of money or the impact of taxes) and turning it inside out to say that if someone has a rational expectation of the effect of the policy, their behavior will follow the expectation rather than the immediate impact. So if a policy is perceived as inflationary, people will think that's bad for the economy and so investment is a bad idea. If taxes are lowered, people will invest more, not just because they have more money but because taxes are bad for the economy so they expect things to get better. They emphasize "confidence" a lot as a signal of people's expectations.

Rational Expectation becomes code for a kind of brutal conservatism - because only tight and real money can create confidence. It hasn't proved true (which you'd think would alter people's expectations of tight money policies - Like H. Hoover's ...)

The other side again and again looks to the operation of the economy. They look at liquidity. How much money does the economy need in circulation to keep things running as smoothly as possible without having an excess (that increases prices but doesn't further expand actual GDP). Krugman is the loudest voice on this side. He will again and again (and again) talk about the liquidity trap. Not enough cash means people won't spend what they have (it will increase in value if they hold it because people will be so desperate for credit for new projects they will pay more for a loan - for example). He has this great example (he repeats) of a Washington Baby Sitting club. Parents in the group were all given 3 scrip. They would baby sit for each other in exchange for one scrip. So it would all be fair. But nobody wanted to give up their scrip so nobody went out. They saved them for when they really needed it. Scrip were too precious. That's deflation. Then they cut the scrip in half. Everyone now had 6 babysitting chits and suddenly things loosened up. They had enough of a buffer to be safe for emergencies plus they could go to movies. Suddenly the system worked.
A liquidity trap. That's what Krugman argues is happening now. Banks aren't lending. People are short on cash (high unemployment, fear of credit, hording money), so people aren't spending. So the economy is trapped.

The liquidity guys favor the Fed circulating enough money to keep things rolling smoothly.
1. Lower interest rates (so now they're near zero, so that can't be done any more)
2. Encourage the banks to loan money by reducing capital requirements.
Or even direct injection of cash into the banks, like during the financial crisis.
3. "Printing Money" aka Quantitative easing where buys treasuries and such (the purchase price is now in the economy).
4. Federal Spending - aka Stimulus.

This point of view is essentially indifferent to wealth. Wealth is a means to an end (the end being a strong economy). Rich people losing money is OK if it helps the economy. Not surprisingly, a lot of rich people don't agree.

So there appears to be no truth. Liquidity guys are right (I think) that you need to do what makes the economy strong. You can't slow the economy down with tight credit just to preserve the current rich. Better to create more future wealth.
Fuck the rich.

But what about the "haves." Is it fair? Is it wise to take away their wealth and so signal to future wealth producers that the Fed Giveth and the Fed Taketh Away? Won't they all just give up and stop producing wealth (c.f. Atlas Shrugged -aka Bible).



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