Schuler on the Ground for Opposing Monetary Easing

On the Free Banking blog, Kurt Schuler kindly takes note of my blogging debut, even throwing in a plug for my book.  Many thanks, Kurt.  But just to show that he is no pushover, Kurt takes exception to my comment about “the groundlessness of right-wing opposition to monetary easing.”

In his first post, Glasner speaks of “the groundlessness of right-wing opposition to monetary easing.” Whoa, fella. You accept Scott Sumner’s argument that the Federal Reserve didn’t respond fast enough to a large, sudden rise in demand for the monetary base in 2008. Eventually it did respond, and now the monetary base is about three times what it was just before the recession. Isn’t it equally conceivable that the Fed won’t respond fast enough if there is a large, sudden fall in demand for the monetary base? If so, the right-wing critics have a concern that may  become valid sooner than you expect. That being said, I look forward to reading further installments of the blog.

Where to begin?  OK, I not only accept Scott’s argument, I thought of it myself.  What is it that they say about great minds?  But actually the argument is slightly more complicated, and the historical component was laid out very nicely by Robert Hetzel in a piece in the Federal Reserve Bank of Richmond Economic Quarterly in the spring 2009 issue.

But Kurt’s main point is that regardless of what happened in 2008, the big increase in the demand for the monetary base is eventually going to be reversed.  And what assurance do we have that all that extra cash sloshing around will not cause a rip-roaring inflation down the road?  I admit that anything is possible, but this is just the reasoning that led to a huge increase in required reserves in 1937 to mop up all that excess liquidity on bank balance sheets, triggering a renewed deflation just as the US economy seemed on the verge of recovery from the Great Depression.  I say let’s worry about the problem that we have now, and then take care of tomorrow’s problem then.  Now Kurt might say that solving today’s problem will inevitably lead to the problem tomorrow.  He might, but that’s not what he did say.  So, following my own dictum, I will not answer an argument he has not yet made.  Moreover, if the Fed would make explicit what price level trajectory it is aiming for, it would not have to worry as much about inflation from a temporary excess supply of base money as it does when its price-level objectives are opaque.

Finally, when I referred to right-wing opponents of monetary easing, I was not referring as much to free banking types like Kurt, who have opposed inflation consistently under more or less all conditions.  I may not agree with that position, but I don’t consider it groundless.  My criticism was directed more at those who are using inflation as just one more political argument in their arsenal, even though they were more than happy to accept a much higher rate of inflation than we now have during an earlier recovery when there was a different president of a different party in office.

15 Responses to “Schuler on the Ground for Opposing Monetary Easing”


  1. 1 David Beckworth July 7, 2011 at 12:42 pm

    So what type of level targeting do you prefer, a price level or ngdp level target?

  2. 2 Lars Christensen July 7, 2011 at 12:53 pm

    This is getting better and better day by day. I highly recommend to everybody to read Bob Hetzel’s paper. In my view it’s a pure monetarist explanation of the Great Recession – so David, I am happy to see you are linking to it;-)

    And a continue – what should central bank’s target? And what instruments should they use?

  3. 3 gabe July 7, 2011 at 3:30 pm

    The instruments the Fed should use are obvious. The Fed should inject money into the economy by buying sham securities from crony-capitalist TBTF banks and politically powerful corporations.

    This way the politically powerful get to use the money before all the populist riff raff does.

  4. 4 Lars Christensen July 7, 2011 at 3:55 pm

    Gabe, I guess you have no serious interest in monetary theory…too bad because it seems like this blog has some interesting inside to provide. I might personally not agree with all of Mr. Glasner’s views, but I have no respect for the “crackpot segment”, which it seems like you belong to. But prove me wrong.

    Could you help me with some questions about US monetary policy? How much have M2 grown since 2008? Do you consider this growth to be inflationary? Do you believe that market expectations of US inflation give good guidance for the actual outlook for inflation? Do you think that velocity is stable over long horizons? Is fractional reserve banking fraud? Are the jews to blame for the banking crisis?.

  5. 5 David Glasner July 7, 2011 at 4:00 pm

    David, I was going to get to level targeting down the road, but since you ask, in my book I advocated Earl Thompson’s idea of a labor standard in which the monetary authority would buy or sell futures contracts to an index of wages whenever the market price of the contract deviated from the target. This mechanism is precisely the one that Scott uses with NGDP futures. At a more naive level, I think, following Hawtrey (and believe it or not Keynes as well in the General Theory no less), that we should aim at stabilizing the money wage rate, though that might be hard to do. But anyway it’s the wage level that we should aim at stabilizing. When the economy expands that means prices would decline and when the economy contracts and unemployment rises, prices would rise.

    Lars,Thanks. You are a great audience. Despite yesterday’s little diatribe about Monetarism, I don’t think that all Monetarists are wrong all the time. As I just wrote to David B., it seems to me that we should aim to stabilize money wages or come as close to that as possible. In my book I spelled out the mechanism in which that could be done (actually it would stabilize the expected money wage). In present circumstances, I suppose we would continue to target the Fed Funds rate. Hawtrey of course was focused entirely on Bank Rate. So I don’t have any particular proposal there. I am against targeting any monetary aggregate.

    Gabe, I’m afraid I can’t quite keep up with your sarcasm, but don’t let that stop you.

  6. 6 Benjamin Cole July 7, 2011 at 4:03 pm

    Yes, I am so afraid of inflation. The core PCE is at 1.3 percent over last 12 months. And some say that measurement is high.

    True story: Office rents in downtown Los Angeles today–in nominal terms–are unchanged from 1980. About $3 sf monthly.

    Add to that, you can run a small biz today sans secretary.

    Unit labor costs have been falling.

    If you ever wonder the Bank of Japan decided to destroy Japan, you do not now have to subscribe to conspiracy theories, such as the BOJ has been bribed by sinister forces on mainland China.

    You just have to look at ourselves. We have met the enemy, and he is us.

  7. 7 Lars Christensen July 7, 2011 at 4:18 pm

    Thanks David, well I guess even I am against targeting monetary aggregates even though I continue to think there is great information in money aggregates.

    The reason I am asking about the instruments is that the debate naturally is very US centric. However, lets take a look at a very small economy like the Icelandic economy (an economy that I have spend a great deal on time studying). Here it might be a better idea to use the exchange rate as an instrument to hit a given target – for example NGDP. Singapore might be an example of how to do it. MAS has been greatly successful in accieving monetary stability over the past couple of decades. I think Benett McCallum believe MAS has followed a modified McCallum rule (or at least a modified Taylor function). I am not entirely sure that that is the case, but nonetheless an exchange rate based McCallum rule in my view could be the way forward for small open economies – especially in Emerging Markets with underdeveloped financial systems. See McCallum’s paper on Singapore here: http://ideas.repec.org/p/ime/imedps/07-e-10.html

  8. 8 David Beckworth July 7, 2011 at 10:26 pm

    David,

    I studied under George Selgin and learned to appreciate his Productivity Norm which in one form–what Selgin calls the labor productivity norm–is effectively targeting the wage level. Makes a lot sense to me.

  9. 9 David Glasner July 8, 2011 at 7:34 am

    David, I remember George when he was a graduate student at NYU in their Austrian program with Larry White, Gerry O’Driscoll and Mario Rizzo. I was teaching at Marquette University in Milwaukee but got a little money to write my first book, which was on energy policy, and came to New York to write it and hung out a bit at NYU. Even then, George was clearly someone with a lot of potential who was very dedicated to the study of economics.

    Benjamin, It is amazing that rentals in downtown LA are the same as in 1980. What about in Beverly Hills or Westwood?

    Lars, Thanks for the reference to Singapore and McCallum. He is very smart and a real scholar. He really knows and understands the literature. Actually for a while I was proposing that the Fed announce a target exchange rate against the euro say $1.60 or perhaps and pledge to maintain the target until the US price level had risen by 10 percent. That would make clear that the ultimate target was the price level and the instrument was the exchange rate. If the ECB didn’t like US currency manipulation they would be free to counter with their own target for the euro in terms of the dollar. The result? Inflation which would be good for us and them. Scott Sumner wanted to know why this was different than simple open market operations. Ultimately it isn’t but I think it would be more effective in raising inflation expectations than simple QE without an explicit price level or exchange rate target. The same applies to BOJ.

  10. 10 gabe July 8, 2011 at 8:49 am

    Velocity is not stable, that is just one reason that any given increase/decrease in M2 doesn’t tell you what will happen to any given price index.

    I think it is commonly acknowledged that the stock market increases since late 2008 are at least aprtly due to a expansionary monetary policy. It is more controversial amongst the mainstream economist to suggest that oil/food and precious metal price increases are also due to easy money. I find it obtuse for people to pretend that silver and gold price increases are not due in part to increased inflation expectations.

    “Market expectations of US inflation ” can be defined many ways…it seems that people who have looked upon the bailouts favorably like to define that term by looking at the implied cpi on TIPS. Most people who didn’t think it was a good idea to give trillions to big banks and people who thought blowing yup serial asset bubbles was a bad idea in the first place are not inclined to use government promises to pay coupons on a government created index(TIPS)…it seems some of this 2nd group believe the conflict of interest makes involved makes TIPS an risky bet and thus not terribly impressed by implied inflation expectations based on TIPS.

    Fractional reserve banking is not a fraud as long as people know what is occurring, however I do not think it is a crime for a person to ask for the money that they think they are asking someone to hold for safekeeping. Do you think people are hoarders if they don’t trust a particular bank and they try to get the money that is legally theirs?

    or do you think that it is possible that monetary policy is not being run by altruistic people trying to help them? is it possible that those who are politically powerful are more likely to have monetary policy and bailouts work in their favor and at the expense of those who are less politically powerful?

    Your small minded attempts at smearing me as a biggot are disgusting. I made a sarcastic comment on the instruments of monetary expansion that have been used…do you have a critique of how i described the “instruments” besides calling be racists?

  11. 11 Lars Christensen July 8, 2011 at 9:21 am

    I agree David. If there was a serious deflationary problem globally – I don’t believe there is even though I think US monetary policy remains too tight – then “competitive devaluations” would certainly not be bad. My view on this issue is pretty much the view expressed by Barry Eichengreen – see here: http://www.guardian.co.uk/commentisfree/2009/mar/17/g20-globalrecession

    In terms of devaluations as a instrument to spur the recovery it should be noted in my view that the important channel is not competitiveness, but rather what a devaluation is doing to money supply growth.

    That said, I don’t think exchange rate targeting is the best-suited instrument for a large economy as the US. But obviously if nothing else works FX intervention will do the job, but so will putting 10 trillion dollars on Time Square every Friday until inflation (forecasts) hit the “right” level. But again I don’t think that we are seriously facing (bad) deflation in US or any other major economy in the world.

    And btw David you “stole” that idea from Lars E. O. Svensson, but I think he will forgive you;-) Svensson call it a “foolproof way” of getting out of deflation: http://people.su.se/~leosven/papers/Tokyo509.pdf

    And to Gabe above. Good seeing you getting into debating economic and monetary issues rather than coming with crackpot comments…I fully respect that.

  12. 12 gabe July 8, 2011 at 11:41 am

    I could be ok with inflation or deflation, I’d just like to see the Fed commit to one so that we could know what to expect. Otherwise we are left guessing with less information than the insiders have.

    It seems from all of Bernanke’s past works that he thinks we should engage in quantitative easing at times like this. In his book on inflation targeting he even suggests that a CPI target of 7% would be ok. However, he is apparently of the opinion that he cannot state this in public. He has indicated that he thinks the Fed should be engaged in managing expectations, apparently not just via policy decisions but via statements designed to fool much of the public. It is troubling to me that the process is so Opaque…has he now changed his mind? should I sell my house and take the loss and start renting before my house goes underwater? The housing slump has almost eaten up my 40% downpayment and if he is really going to allow the deflation to continue I will be underwater by next year or should I count on a inflationary policy and move all my money back to the materials sector that has performed so much better than the other stocks the last decade?

    As for instruments of quantitaive easing.

    Is it more fair
    1)to give everyone the new money equally (via mailing checks for 20 grand to every household) or
    2) have it leak out through primary dealers, GE and GM who are among the most politically powerful entities in the world?

    It seems to me that when someone suggests choice 2 is not fair they are labled conpiracy theorist or even anti-semitic…I do not understand why.

  13. 13 Lars Christensen July 8, 2011 at 11:59 am

    Gabe, that all made perfectly good sense. And no option 2) is not anti-semitic…

    Thanks for an insightful comment – I personally prefer that to the sarcasm.

  14. 14 Scott Sumner July 8, 2011 at 10:48 pm

    Lars, Lots of interesting comments. A few observations.

    1. I totally agree about Hetzel. I’m reading his new manuscript and it’s great.

    2. i know you are half-joking about Svensson, but he was very late to the game. Everyone from Franklin Roosevelt to Irving Fisher to me advocated that policy much earlier.

    3. I favor NGDP targeting, but not for Singapore. They are too small, and the trade shocks are too large. A wage target might work better.

    David, Regarding Schuler (who I like BTW); the monetary base doubled immediately in late 2008, and this did absolutely nothing because of IOR. With IOR it’s no longer an inflationary time bomb. Inflation is the least of our worries, especially with inflation expectations now available in real time (via TIPS spreads.)

    My other argument is that a far more expansionary monetary policy would mean a far SMALLER monetary base. If we had NGDP expectations at 7% growth, you could cut the base back to about a trillion. Who’d want to hold zero rate base money with NGDP rising rapidly? Our big monetary base is a symptom of tight money.

  15. 15 David Glasner July 10, 2011 at 1:24 am

    Scott, What is the Hetzel manuscript that you are reading? Your other comments are, of course, totally correct IMHO.


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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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