u said:
<<Claptrap implies economic laws have changed. Is this coherent?>>
calling the economy "new" is a waste of an adjective...it is still the same old economy, obeying the same laws it has obeyed forever...even though it has become more complex and harbors more industries. clear enough?
i said: <<but deflationary depressions are not amenable to intervention by central bankers anyway.>>
to which u said: <<How would anyone know whether that's true? It's never been tried. You are making the demand management school's error by assuming that interest rates are rigidly inverse to money supply. Japan makes the same mistake. Why should lowering interest rates increase money supply where there's low demand for loanable funds? You are implying that a rich man who has a personal philosophy of paying cash will take a loan if rates are low enough. >>
of course we know it's true...because it HAS been tried, in spades in Japan. i can't make the demand management school's errors, since i don't believe in its arguments. actually your above paragraph contains a contradiction, you present the answer to the question yourself: collapsing loan demand is the very reason WHY deflationary depressions are not amenable to monetary policy intervention. would you look at recent money supply data? the boys are pumping at breakneck speed...all that they will achieve with that is that the malinvestments survive a while longer,and the downturn will last longer as a result (essentially the Japanese experience...loan growth only peaked a full six years after the bubble burst. i expect something similar to happen in the US in coming years...eventually, money supply will contract due to faltering demand for loans, as well as banks unwillingness/inability to supply credit, since they'll be sitting on a truck load of dud loans).
you still refuse to look at the excesses of the boom as being responsible for the predicament...but they are. and to say there is no connection between rates and the money supply is only partly true...it is NOT true while credit demand is high, during the boom. had the rates been left to the free market, the giant money supply and credit expansion that has led us to the current mess would not have taken place, because credit demand would have pushed interest rates higher much earlier in the game, thus restricting credit demand in a timely fashion.
i said: <<..meaning, i don't think it would have made much of a difference had they stood pat in late '31. just look at corporate bond rates, which soared in the early '30's, and are outside of the Fed's ambit.the market priced in the increasing default risk, and in the process made corporate borrowing prohibitively expensive.>>
to which u said:<<Are you saying that aggressive money creation in the form of currency wouldn't have lowered bond yields? I think it would because the currency's effect would be to increase final demand which certainly would have gone a long way to restore confidence. A restoration of confidence would cause bond yields to fall in proportion to the degree of restoration. Instead, the government punished consumption in a myriad of ways in order to chase a wild goose>>
now you're again contradicting yourself. first you say the demand management school is wrong, and now you're saying an artificial increase in the money supply would indeed have an impact on demand. can't have it both ways. you are again overlooking the main problem: too much debt was built up during the boom, and too much overcapacity has been created (the 20's and 90's boom, as well as the Japanese '80's equivalent are all in the same boat with regard to this...only the relative size of the excesses differs). you can't cure that by creating even MORE debt.
u said: <<The FED raised rates in '28 and '29 to 6% and that was the internal cause that made the stock market heights untenable. >>
yes, they did raise rates, but had they not, the speculative boom in the stock market would have eventually self destructed anyway. namely as soon as the LAST BUYER had bought, i.e.,the moment everybody that could be in, was in fact in the market.i hope you are not seriously suggesting that a puny rate hike of 150 bps. spread over a year deters speculators used to 20% annual returns? in fact the experience of the late 1920's in the call money market was exactly the opposite: in spite of broker loan rates trending ever higher due to exploding margin borrowing demand, margin borrowing kept rising geometrically until the very end.
i said: <<note that the Fed AGAIN didn't raise margin requirements in the 90's boom, presumably out of fear that it might actually precipitate a crash and be blamed for it.>>
to which u said:
<<This is your presumption and it's wrong. Margin wasn't that big of an issue in comparison to '29. Institutions dominate our markets and they don't use margin in the way the public did in the '20s. The biggest fault of the FED recently was to allow the M2 money supply to grow too rapidly and it was that which enabled the speculative psychology to rage. Fixed money growth and non-interference in money markets would have kept the cost of money in equilibrium and the fear of god near.>>
well, it is your presumption that my presumption is wrong...and i can of course not prove it, it's just a theory. but a very good sounding one as far as i'm concerned, and i stand by it. or did you really believe the nonsense Greenboink put out for public consumption about not wanting to disadvantage the small investor???
i also believe you might be overlooking a really important factoid when it comes to margin...namely that the game has become more complex in the 90's...it's not just direct broker loans, people took out second mortgages, bought their cars not outright but leased them instead, drew on their credit cards...and put it to work in two ways: a) to play the market and b) consumption. home equity ownership has fallen drastically in the 90's, in spite of a veritable real estate bubble in some areas (e.g. California, where the median house price rose by roughly 30% over the last year alone). so they were margined up a lot more than the pure broker loan data would suggest.
we do agree on the Fed having been WAY too profligate with the money supply...although i don't quite see the case for a 'fixed' growth rate. why not let the market decide?
i said:<<the most important point though is that it was not the mistakes made after the boom ended that were primarily responsible for the severity of the bust - it was the profligate monetary/credit policy DURING the boom that created the imbalances that led to the depression.>>
to which u said: <<Above you make somewhat a counter claim to this.>>
not really...i merely allowed for the fact that once the bust was underway, they kept making mistakes, as is their wont.
i said: <<in a deflationary depression, interest rate policy becomes powerless.>>
to which u said: <<But above you imply no monetary policy would avoid deflationary depression. I think this is wrong. If monetary authority insists on interference, then they have to interfere in both directions. Indeed, this is the cause of the excess amplitude of the business cycle. Interference means not only compensating for the tightening of interest rates to slow speculation with its untowards economic repercussions that was done before the crash, but also compensating for lame Congressional laws which penalized output and final demand before the depression.>>
well, there we have it again...why should anybody want them to insist on interference? they should interfere in neither direction. you seem to say that just because they made the mistake of interfering during the boom, they should continue making that mistake during the bust. surely you can see that this isn't really logical...on the contrary, they should stop their interference, the sooner the better.
you insist on throwing good money after bad seems to me...as mentioned above, trying to 'fix' a bursting credit and asset bubble with even more credit is NOT the proper course of action. allowing the malinvestments to clear out as rapidly as possible, and allowing some savings to build up is.
agreed on the lame Congressional laws...but what do you expect? it's the natural progression of things in the Kondratyev downwave....once the bust arrives, every politician tries to 'fix' things, and that naturally is along the lines of the road to hell being paved with good intentions. the only way of changing that would be to see to it that you or a like minded individual gets elected to a high office, and then show your mettle by unpopularly doing exactly nothing, or even better, by removing as many rules and regulations as you can.
i said, somewhat repetitively,
<<it is the willy-nilly credit expansion of the boom that lays the groundwork for the bust.>>
to which u said: <<Credit expansion is always a self-correcting process and requires no central bank interference to implement. Neither does credit contraction lead to collapsing economy. Why should it? Why should the natural slowing of credit extension lead to chaotic economic outcomes for even those who are not on credit? The economic history of the US since the '30s shows there is no economic chaos during credit contractions. The proof can be seen in C&I loan totals or other summary measures of credit over the last 60 years. At the economic worst point, 1982, all you see is a mild slowing in the rate of growth of credit.>>
ahem...unfortunately we DO have a Fed, so it is clearly NOT a 'self correcting process'. it would be, were there no central economic planning agency artificially holding rates too low and expanding the money supply in its misguided quest for 'stable prices'. this refers specifically to the Fed's conduct during the disinflation boom...if you look at charts depicting credit expansion (the banking system's C&I loans are way too narrow a focus btw...nowadays you have to include the capital markets in your purvey of credit expansion) over the past five years, well it's going off the charts, geometrically.Dr. Richebacher (Austrian economist, in the Austrian school sense) has calculated that last year every dollar in GDP growth required 4,5 times as much growth in outstanding credit...in 1955 for comparison purposes, 30 cents in new credit were required for every dollar of GDP growth. clearly it's completely out of whack...and the correction of this imbalance hurts...no way around that i fear. the last 60 years are also not really a good representative of the current cycle...we are after all in a different stage of the k-wave, and the fundamental differences of the latest boom/bust cycle compared to those generally experienced after the last k-winter ended have been discussed here at length. even the Economist seems to have picked up on this:
economist.com
i said: <<there was disinflation, bordering on deflation in fact.>>
to which u said: <<General prices either rise or fall. Disinflation was a oxymoron term created to diffuse the fact that the central bank has to refrain from interventionism if they wish to achieve 0 inflation. There is no meaningful definition of the term. During the '20s general prices were remarkably stable. If one wishes to claim that disinflation means a deceleration of the rate of growth of inflation, then it isn't applicable to the '20s.>>
but there IS a meaningful definition...why, i even supplied it if i'm not mistaken. disinflation is when there is inflation, the rate of change of which is in a declining trend.
well, that's precisely what happened in the 1990's...in the 20's there was a peak in inflation of nearly 16% p.a. in '20, followed by deflation of roughly minus 10% in '21 and minus 6% in '22, followed by relative price stability (2% inflation in '23, 0% in '24, roughly 2% again in '25 and '26, slight deflation of minus 2% in both '27 and '28, and 0% again in '29...) according to the data gathered then...this relative price stability is very similar to the '90's disinflation. it may not be disinflation in the strict sense of the term, but the parallel between the two periods remains rather obvious. the price declines that one would have expected to occur due to increasing productivity didn't take place due to the Fed attempting to stabilize prices by expanding the money supply at an excessive growth rate.
i said: <<but the Fed made the mistake to fight it, by leaving monetary policy too loose for too long following the '21/'22 recession.>>
then u go on:<<You imply you are non-interventionist and yet you think intervention is right. Did you not say they and the Congress were "laissez-faire" then? Did you not imply that such non-policy helped to create the prosperity of the '20s? Until the market rise of '27 the FED was not involved, but when stock prices were getting untenable, they thought they had to intervene. They weren't reacting to a failure earlier to pro-actively constrain lending when they later tightened. Their sole intent was to reign in the stock market. >>
well, firstly, i agree, they were worried about the stock market speculation which they themselves had made possible, and belatedly tried to reign it in.
you almost got me there, with the 'you claim to be non-interventionist, and yet you say...etc., but not quite. fact is after all that there WAS a Fed...as long as there IS a Fed, it will intervene...whether i like it or not. they intervened way too late, and that was their mistake. by the time they did, the speculative boom was close to self-destructing anyway...it had gotten out of hand already. famous the remark made by a Fed governor in 1928, that their repos were a 'coup de whiskey for the stock market'. they were indeed.
i said: <<in conclusion, we agree of course fully on the meat of it all - namely that interest rates (and consequently the money supply) should be left entirely to the market, not be subject to an arbitrary 'target' deemed appropriate by a central economic planning agency.>>
and u replied: << But we don't quite agree here. It is the central bank's proper responsibility to manage the money supply. Money growth should be fixed at a rate around the 2% added value rate provided by the effort humans. 2% isn't a critical value or necessary value. It could be 0%, but it can be shown that setting it at the added value rate is optimal. You can make great errors with guessing the proper fixing rate of money with little consequence, but you can't do the same with interest rates. So it isn't important at what rate growth of money is fixed. The real issue is the constancy of growth of money supply over time. This allows interest rates to wildly fluctuate instantaneously which results in almost no fluctuation over time, that is, no trends or cycles. The market fully corrects intraday, fully contains all possible rational extrapolations, and thus randomly walks and by so doing achieves the ideal of perfect equilibrium. Economic activity will always cycle because the cycle is the most efficient path of action between two points, but with stable interest rates, the amplitude of the cycle is so small it isn't worthwhile locating it.>>
you got that right, we don't quite agree then. i don't believe it is any central economic planning agency's business to 'regulate' the money supply....why should it be? it can regulate itself, same goes for interest rates. i also don't quite see the case for a 2% 'fixed' rate of money supply growth, although it sure sounds better than the banana republic growth rates we've seen under Greenspan. it is a mistake to believe elimination of cycles is a worthwhile goal imo, because it simply can't be done. cycles are a natural phenomenon...the ups and the downs of the business cycle are a good thing. you need periodic phases of recession to give the market an opportunity to clear out whatever malinvestments have accumulated during the up phase of the cycle. this is the whole point of the argument seems to me: whether interference is a good thing or not. i say it is the monetary authorities interference which has created the fantastic boom with all its attendant imbalances. had the boom not lasted as long, a lot less debt and malinvestment would have accumulated, and the pain of the downturn need not be as great as it now will be, or rather already is. a loss of 5 trillion in stock market cap e.g. has to be painful for every participant (except the shorts of course) and we have more participants than ever before. according to the Fed, last year saw the first fall in household net worth since this data series is kept...and it was close to 900 billion smackeroos, so they say. not exactly small change. in a sense i DO agree that it would be a good thing if the cycle's amplitude weren't as pronounced...and i believe it would not be so pronounced without central bank intervention.
however, empirical evidence suggests that there IS a large cycle underlying capitalist economies, namely the above mentioned k-wave. Greenspan once reportedly made a vow that he would fight the k-winter(the deflation phase) with huge infusions of liquidity, and he seems to be losing this very fight right here and now.
more info on the k-wave to be found here:
csf.colorado.edu
and of course this neat chart that was posted today about the four k-waves the US has so far experienced:
bearforum.com
lastly, you say:<<Probably the current interventionist pretense to knowledge will continue for about 50 more years and then it will die. Not by choice but by becoming superfluous just like the Soviet Union did in the political arena.>>
that's an interesting thought...i'm not sure about the 50 years, that does seem rather arbitrary, but i do like the idea that the "interventionist pretense to knowledge" as you very aptly call it may be doomed a la the Soviet system. i recommend looking at Mike Alexander's work on the k-wave (i gather he has, or is about to, publish a tome on it...in the meantime, he can be contacted at the above longwaves site, and he has invited people to look at his stuff and comment on it)...one of the points he is making regarding how the k-wave reflects in the political arena is most interesting in regard to our debate. namely, that once a k-winter or respectively a k-summer (one a deflation, the other a wild inflation phase) arrive, both of which go hand in hand with economic downturns, the public's thirst for interventionist policies generally rises, and the meddlers are usually also elected to office. see FDR. one may not like the deterministic aspect of the k-wave, and the seeming inevitability of its symptoms, but it seems to eerily play out once again. so if Shrubs ends up a Hoover and one-termer, we know at least why...
cheers! |
