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When it starts to get really burdensome to keep your promises, the idea of breaking them gets really attractive. But that doesn't come for free. It costs credib

When it starts to get really burdensome to keep your promises, the idea of breaking them gets really attractive. But that doesn't come for free. It costs credibility. The cost of central banks breaking their inflation-control commitment when inflation starts running hot, is that the market starts pricing in their unwillingness to raise interest rates. This fuels a whole bunch of other inflation feedback loops, and then before you know it, the central bank wants to get inflation back under control again. But now nobody believes that they'll do what they say they're going to do, so they end up having to work twice as hard. If your goal is stability, it's better to just keep your promises to begin with.

jonnycomputer 5y ago
Stability is a notion that depends on scale. You might have a long slow decline that feels relatively stable, but leaves you in a bad place. It seems to me that was the trajectory we were on.
zozbot234 5y ago
Yup. The kernel of truth behind Austrian theories of macroeconomics/the business cycle is that interest-rate based policy setting is inherently an unstable system. If the central bank makes policy errors that fail to stabilize the underlying target (whether inflation, nominal income, exchange rates, whatever) the whole system starts spiraling away from that unstable equilibrium point, and the subsequently needed correction grows even larger. It's important that errors be promptly corrected, and expectations about future policy remain properly "anchored" to the right target.
- wolpoli 5y ago
  > It's important that errors be promptly corrected, and expectations about future policy remain properly "anchored" to the right target. It would be interesting to know if inflation expectation has become unanchored in the mind of the general public, because, ultimately, inflation expectation causes inflation.
  - nine_k 5y ago
    I don't think that inflation is as easy to cause without a fresh supply of money. And you know who prints fiat money.
    - HWR_14 5y ago
      > And you know who prints fiat money. I imagine you mean the fed, but I don't know what point you're making.
    - wbsss4412 5y ago
      Inflation is easily caused without a fresh supply of money. Destroy your productive capacity => inflation.
      - baryphonic 5y ago
        No, money really is essential. If you destroy your productive capacity but money supply remains the same (which is honestly a bit odd, since real prices are always relative), then you get substitution effects that don't affect the general price level, only the price levels in particular segments of the economy. (I would expect the prices of products, capital goods and human capital to increase, and the price of commodities and goods related to distribution to decrease). Put differently, you'll have less exchange and will shift what you spend on, but the price levels will not show much of a sustained general increase. The tricky part of inflation is that a lot of money exists on paper, and banks and even firms are more constrained by capital than we otherwise might wish to believe. (Though one good casualty of the pandemic has been the realization that banks are almost entirely unconstrained by reserve requirements, only by capital.) So when the money is sitting in some account bearing a small amount of interest at the Fed, that is low velocity and may not cause inflation. However, if that cash enters circulation (via, say, direct payments from the government), then suddenly the velocity is much higher, the money supply goes up and you have "too much money chasing too few goods." Inflation is really always and everywhere a monetary phenomenon.
        girafffe_i 5y ago
- imtringued 5y ago
  No, they completely miss the point. The fundamental problem with money is that you can delay your spending indefinitively thereby breaking the concept of supply and demand. Imagine an economy where you are self sufficient and sell but never buy anything ( cough germany). You keep accumulating more and more money and you could in theory spend it all, thereby cause a huge amount of inflation. That is the core of the deflation inflation paradox. There is never enough money in one part of the economy while the part with too much poses a threat that can deploy instantly without any warning. Selling and selling isn't a free market, it's not even a market.
  - zozbot234 5y ago
    It doesn't break the concept of supply and demand, because demand for money also exists. Money is an asset. When you accumulate it, it increases in value and the central bank+banking sector creates just enough of it to offset your demand. When you later spend it, it becomes a hot potato (the economic actor who got your money doesn't really want to keep it, she'll exchange it for something else) until the central bank drains it away. Or else it will just slosh around until prices rise enough to create enough demand for it in nominal terms.
  - stale2002 5y ago
    > Imagine an economy where you are self sufficient and sell but never buy anything ( cough germany). > Selling and selling isn't a free market, it's not even a market. You are not describing much of a problem. What you are asking is "What if there was an entity, that provided the rest of the world with lots of goods and services, and the only think they accepted for that is green pieces of paper". That sounds pretty good to me. Someone never spending their green pieces of paper, is just doing the rest of the world a favor, by providing all those goods and services.
    - karpierz 5y ago
      The issue isn't the first part; it's what happens when they cash in their green pieces of paper.
- hammock 5y ago
  True to form, since the Fed was created, each new crisis has been bigger and sooner than the last.
  - deleted 5y ago
    [deleted]
  - zozbot234 5y ago
    Wrong, actually. The 1980s and 1990s saw a huge improvement in macro-level stability. The late-2000s crisis was an outlier.
  - colinmhayes 5y ago
    This just isn't true. THe country was pretty much perpetually in economic crisis during the late 19th century, largely because of the lack of ability to perform monetary policy.
  - gumby 5y ago
    Apart from the comments talking about crises under the Fed, look at the 18th century where gold strikes (or the lack thereof) caused several more serious crises, with both inflation and deflation driving crises, due to the money supply being completely uncorrelated with economic activity.
  - Spooky23 5y ago
    Yes, it’s not like the good old days when you’d just hope JP Morgan was still in town to stave off depression.
- didericis 5y ago
  Austrian theories appeal to me/seem correct beyond just a kernel, but I’d consider myself an amateur/haven’t read enough to be confident about my opinion. Specifically, the emphasis on relative value seems correct, the emphasis on the importance of keeping pricing signals pure/unaffected by artificial monetary supply changes to effectively allocate resources seems correct, the argument that market incentives exist for keeping interest levels reasonable without centralization seem correct, and the argument that central banks are incentivized to mismanage monetary policy over time for political reasons seems correct. The counter arguments against Austrian ideas that seem most compelling to me are that having non centralized currencies leads to financial inefficiencies that outweigh any benefits of having market determined interest rates because of exchange friction, and that a lack of planned inflation and adoption of more hard currency would mean the velocity of money would be low and cause the economy to lock up. I’d be very interested in a book advocating the more traditional view in favor of central banking aimed specifically at Austrians and people like myself who find the Austrian arguments compelling. If anyone here has more economic knowledge and thinks I mischaracterized the arguments I found compelling, garbled them, or misattributed them, please correct me.
  - quadrangle 5y ago
    Austrian economics is all anti-empirical say-so internally-consistent models that aren't tested against reality. Traditional economics is stuff that claims to be more empirical but fails to do so and focuses almost entirely on official stats and on its own versions of models that aren't tested against reality. The whole field of economics is overall messed up. It's insular, arrogant, and extremely resistant to outside criticism. And it's dangerous as economics claims are used to justify so much. Random amazing example: In https://www.npr.org/transcripts/980841456 https://www.npr.org/transcripts/980841456 and from "My question is, what is the M1 money supply, and the M2 money supply, for that matter?" last third of it, insanely clear and amazing. In short: Q: more money! does that mean inflation? check with this econ textbook author Author: oh, that's embarrassing, that chapter shouldn't be there Q: so what causes inflation? Author: people buying stuff more, demand going up (unless it's insane money supply like Venezuela or Zimbabwe level insane) Q: so why is the chapter in your textbook? Author: um, publisher said that if we don't say that more money means inflation then econ professors won't use our textbook. They learned that idea in their original studies, so they will only use a textbook that lets them teach it. But it's wrong, and we shouldn't have put it in the book.
- specialist 5y ago
  Tangentially: > unstable equilibrium point Is anyone looking at economics thru the lenses of chaos theory (complex adaptive systems), control theory, or cybernetics? I've foraged a bit, no joy, but really don't know where to start looking. I only ask because... Anthropologist David Graeber's book Debt: The First 5000 Years muses about the fragility of market based systems. Like maybe capitalism contains the seeds of its own destruction. Hence the recurrence of debt forgiveness, jubilees, and revolutions throughout recorded history. Seen from this angle, it sure does seem like some kind of debt crisis always has a role in social upheaval. With economics simulations (modeling) attaining ever more fidelity, it occurred to me they'll inevitably hit "butterfly effect" type phenomenon. Further, what if Graeber is more than right. What if "capitalism" can never be stable? What if market equilibriums will always collapse? That insight would have huge impact on public policy. Instead of trying to keep things afloat indefinitely, we'd anticipate and plan ahead for the endless series of resets. Proactive instead of reactive. Because it sure does seem (to this noob) like crisis and resets are the norm. I'm not saying that real life is just a weirder instance of Dwarf Fortress. But given how hard it is to design stable and predictable closed world game economies, what hope do we have to do better with human economies?
  - hackerfromthefu 5y ago
    Part of the problem is the crises occur infrequently and humans en masse tend to forget the past, in their emotions and actions if not in theory. Another part of the problem is the governments benefit from inflation and again short term the people in power benefitting from it are unlikely to be the same ones in power when the crises eventuates, ie the problems of money printing are externalities. But your central idea of planning ahead for the crises is actually refreshing and excellent, if it is possible to apply it. On a personal level, anticipating and timing the crises is a form of planning for it, to reduce financial leverage before the crisis and have cash available to buy assets cheap from those that didn't anticipate the crisis.
  - jbay808 5y ago
    > economics thru the lenses of chaos theory, control theory, or cybernetics? I'm looking too. In my mind this is absolutely the way to look at the macroeconomic landscape, and as a control theorist, I don't like what I see, which is a widespread lack of respect for delayed responses and positive feedback loops. I'll evaluate what hope we have for stability once I see the control being executed sensibly.
- _lazlo 5y ago
dnautics 5y ago
> If your goal is stability this is the thing to be questioned. Stability, at what cost? Is it worth tearing up the environment, tricking people into buying shitty disposable consumer products, financializing the economy, and stealing from the poor and unborn to give to the rich in the here and now? I don't really see anyone challenging the tradeoffs of stability in the economic discourse, it's just so often given as an unquestionably good thing.
- jbay808 5y ago
  Hmm; all of those things are what I would associate with breaking the stability promise, that is, reneging on inflation control and holding interest rates low. That encourages borrowing and propels the price of assets. I'd expect your objection to be associated with growth at all costs, not with stability.
  - BitwiseFool 5y ago
    I'm not the person you responded to, but to me stability also implies artificially propping up parts of the economy that should otherwise be in-decline. It's not necessarily the same as growth at all costs, but I sense it is related.
    - batshit_beaver 5y ago
      Counter point: maybe prices (including on assets) should be allowed to go up, so that their prices better reflect their value relative to productivity? The fed didn't really prop up any major industry this time around (unlike in 2008), just added fuel to the fire to keep the whole economy going.
      - dnautics 5y ago
        > The fed didn't really prop up any major industry this time around (unlike in 2008), just added fuel to the fire to keep the whole economy going. So, what you are saying, is: they propped up the financial industry.
roenxi 5y ago
> It costs credibility. I enjoy the cut of the jib, but credibility isn't really that important. From memory, Argentina isn't credible. All that means is they have to pretend that they will pay high interest rates before people will lend to them. If the question is "can they pay back all their debts with real value?" angle the US position isn't credible either, the numbers have gotten too large. Doesn't mean much in practice. The real issues with a default are: 1. A country is being run by people who don't believe that written words should decide what they do and who won't keep their promises even in the most watertight of cases. 2. Either the polity or political leadership are incapable of medium term planning. 3. The sort of people who think 10-30 years ahead are being tricked into making bad financial decisions. So on the one hand a default doesn't matter to people who don't directly own the debt. On the other hand, if there is a default, a host of other problems are going to hit and the country won't be ready for them. It is a bad sign.
- jbay808 5y ago
  The credibility I'm referring to is: when Jerome Powell says "we have the tools at our disposal to control inflation, and if it persists, we will not hesitate to use them", how much do you update your expectations of future inflation and interest rates? If statements like that start to sound like a bluff and no longer cause you to update your expectations away from high inflation and low interest rates, then the Fed has lost a certain amount of credibility. And that credibility should be thought of in some sense a conserved value. It's not regained instantly, but rather only by the market being surprised to discover that the Fed wasn't bluffing. And that's an expensive surprise, because by definition, it goes beyond what the market priced in.
  - cma 5y ago
    They have a dual mandate on both employment and inflation, and have to balance.
    - jbay808 5y ago
      For sure, and I strongly believe that a dual mandate was a grave mistake because a single-output controller simply can't control two variables that respond in opposite directions to that output. This allows their policymaking to be politically influenced and pick winners, and is one strong reason their inflation-fighting credibility is low.
clairity 5y ago
an inherently unstable but critical element of an economic system shouldn't be allowed to float on the whims of a few humans, especially with overwhelming corruptive pressure lapping against them incessantly. a central bank should be trying with all its might to precisely match the amount of money in the system exactly with the amount of productivity being generated. it shouldn't be trying to implement 'fiscal policy', but rather have exactly one singular (albeit complex) focus. any significant deviation should trigger immediate investigation, replacement, and (potentially) sanctions.
- jbay808 5y ago
  I agree. As a control theorist, I'd be much more comfortable with a PID controller running the ship, and I think it would do a better job.
  - mountainriver 5y ago
    Yup Denmark recently open sourced a lot of their fiscal policy and it works pretty much like this. Really great idea
    - brandonmenc 5y ago
      I would love some links on this, because it sounds fascinating.
  - bee_rider 5y ago
    I don't know much about either, but being confidently wrong can be a great learning experience so: They call these Automatic Stabilizers in the policy world.
- imtringued 5y ago
  That's impossible without demurrage or negative interest rates.
  - deleted 5y ago
    [deleted]
cool_dude85 5y ago
Why haven't I been reading this kind of hemming and hawing over the lack of full employment for, oh, the last 50 years or so? The fed has a mandate for that too, but somehow when they didn't manage to achieve it, I never heard about how society is going to collapse any minute now. Only when poor people are making income gains. Strange.
- vorpalhex 5y ago
  We are pretty close to full employment. Rising groceries and fuel costs hurt everyone, but that hurt is more so on the poor who have less overall cash flow.
  - adolph 5y ago
    > We are pretty close to full employment. The number of persons not in the labor force who currently want a job was little changed at 5.7 million in January. This measure decreased by 1.3 million over the year but is 708,000 higher than in February 2020. These individuals were not counted as unemployed because they were not actively looking for work during the 4 weeks preceding the survey or were unavailable to take a job. BLS publication "THE EMPLOYMENT SITUATION — JANUARY 2022": https://www.bls.gov/news.release/pdf/empsit.pdf https://www.bls.gov/news.release/pdf/empsit.pdf See also the Labor Force Participation Rate: https://fred.stlouisfed.org/series/CIVPART https://fred.stlouisfed.org/series/CIVPART
    - vorpalhex 5y ago
      > These individuals were not counted as unemployed because they were not actively looking for work during the 4 weeks preceding the survey or were unavailable to take a job. I mean, I suppose we can forcibly employ everyone? Anyone not employed in two weeks gets contracted out to the IRS or whatever.. but that doesn't seem to be the goal. If you aren't looking for a job, and you can't take a job.. you aren't going to be employed. That isn't some kind of "only the strong survive" thing, that's just a tautology - you must in fact apply for jobs to get a job. Why do you think "people who aren't looking for jobs aren't employed!" is a response here?
lumost 5y ago
Counterpoint: Stability is a critical optimization criteria, but should be balanced with the need to maintain "dynamism". New ideas can't win if any time the entrenched hit problems they are bailed out. Maintaining employment is necessary for long-term societal stability, maintaining Goldman Sachs is not. In recent years our definition of stability shifted to one where market winners remain winners indefinitely.
- nickff 5y ago
  >"Maintaining employment is necessary for long-term societal stability, maintaining Goldman Sachs is not." The central banks rely on investment banks and other large institution to translate the low overnight rates into reduced commercial and consumer rates. The low interest rate, high inflation rate policies are extremely beneficial to the Goldmans of the world.
  - oivey 5y ago
    The low interest rate is beneficial to Goldman Sachs, but the high inflation rate is not. They are an investment bank that holds assets, and those assets are devalued by inflation. The the interest rate and inflation may have some correlation, but the last 15+ years have shown the correlation isn’t all that strong.
- jbay808 5y ago
  I fully agree with your counterpoint, except that I don't think it's a counterpoint, because to my mind, such a focus on short-term stability (ie, bailouts) are a major driver of long-term instability! The reasoning for that seems inexorable to me. Once you lop off the deeply negative tail of any risk curve, market actors will gorge themselves on investments that have a positive average payoff but large systemic tail risks, to exactly the degree that they're confident they won't have to bear those costs. (See the Canadian housing market where banks are happy to offer cheap mortgages with just 5% downpayments, a downpayment that represents mere months of price appreciation, knowing that they're government-insured in the event of a widespread market downturn). This will continue until it stops being profitable, which is when the overall level of risk and leverage has increased to the point that even the government can't guarantee those risks anymore. So a small crash gets delayed but magnified into a big one. Long-term stability sacrificed to short term stability. That's the cost of "moral hazard", which is a bad name because it sounds like a random risk that, if we're lucky, we might avoid. But it's actually another costly conserved quantity that accumulates and accumulates.
nimbius 5y ago
absolutely agreed, but the feds also faced with a none too enticing sword of Damocles in raising interest: corporate credit. The fed never acquiesced to its prior commitment to end quantitative easing measures after the great recession of 2008, instead they simply shifted their weight to bond buybacks during covid and shoveled yet more coal into the engines of commerce...the result was a booming stock market during paradoxic unemployment levels and low GDP. the market had become divorced from the concept of anything but money itself earning more money based on its own worth. "transient" inflation became a death-chant in the halls of the fed last year and as christmas sales languished and inflation pushed past five percent eventually the feds bond buyback program which was slated to "taper" in july was signalled to "end" in march. its hard to see that happening however, as using the market as a litmus for policy can never truly happen seeing as it seems entirely removed from the human condition, the worker or any tangible product outside investment itself. the relief is the prime interest rate, but raising it would immediately cause a corporate credit crisis after a major pandemic as companies have for now over a decade enjoyed zero percent, or even negative interest. the ones who are over-leveraged are the ones that cant find chips due to the chip shortage, or cant ship product due to "supply chain." in short, the usual suspects. So my guess is the feds going to try to ride out double digit inflation until somehow supply and demand return to normal, with a tacit nod to the end of high-roller credit being the bond buyback ending and an eventual december...maybe next january interest rate raise. One hopes it worked better than the QE tapering in 2011, which tanked the market six hundred points in a day and was immediately backtracked.
- mring33621 5y ago
  I'm not disputing the whole of your comment, but I don't think "christmas sales languished" was true at all for 2021.
stormbrew 5y ago
> The cost of central banks breaking their inflation-control commitment when inflation starts running hot, is that the market starts pricing in their unwillingness to raise interest rates. I'm pretty sure that's been priced in for quite a while now, really. Interest rates have rarely gone up by much over the last 30 or so years, and for most of the last 20 they've been as close to 0 as they can go and still be called "interest". Honestly, the big problem with this article is it acts like interest rates haven't already been abandoned as a tool of monetary control, and for a long time. The way they 'control' it now is by using a kind of stimulus that keeps the markets from crashing without really adding much most people's income or spending. They just give it right to the finance industry and let it slosh around the market until the next crisis. COVID's big variation on this is that some of that money went directly to people instead of businesses or the stock market, and it both caused some inflation and also kicked employers' asses into actually paying people enough to live on.
- nverno 5y ago
  > They just give it right to the finance industry I don't think this is the whole story. It passes through the finance industry, but when interest rates are low, everyone outside the finance industry (who is taking out loans) benefits as well. Interest rates are levers that the central bankers can use to control the amount of outflow through the dam that is the finance industry.
  - stormbrew 5y ago
    The thing is it wasn't flowing out, except in some specific ways, and in spite of decades of low to virtually zero interest rates. Every QE event has led to a ballooning of the stock market and asset holdings on things that can be mortgaged, which are both things that disproportionately benefit only some of 'everyone'. This is the point I'm making. Interest rates stopped being a lever a long time ago, whether by choice or because the abstractions economists have built up are proving to be less universal than they believed them to be. Either way, the money has largely just sloshed around everywhere but regular people's cashflow. It definitely does also lead to 'easier' lending to those people as well but the interest rates that get paid on consumer debt (ie. credit cards) aren't really related to central banking interest rates, and are often bordering on usurious anyways. Through that, the finance industry effectively collects taxes on the poor that the government is unwilling to (for good reason).
neilwilson 5y ago
Markets can’t price in anything somebody else isn’t willing to pay. Everybody wants a million dollars an hour. The secret to inflation is understanding why you don’t get a million dollars per hour and why a firm doesn’t get a million dollars per car. Call it the disappointment theory of inflation. Prices remain stable only when everybody is scared they won’t get anything if they ask for more money.

jonnycomputer 5y ago

Stability is a notion that depends on scale. You might have a long slow decline that feels relatively stable, but leaves you in a bad place. It seems to me that was the trajectory we were on.

zozbot234 5y ago

Yup. The kernel of truth behind Austrian theories of macroeconomics/the business cycle is that interest-rate based policy setting is inherently an unstable system. If the central bank makes policy errors that fail to stabilize the underlying target (whether inflation, nominal income, exchange rates, whatever) the whole system starts spiraling away from that unstable equilibrium point, and the subsequently needed correction grows even larger. It's important that errors be promptly corrected, and expectations about future policy remain properly "anchored" to the right target.

wolpoli 5y ago
> It's important that errors be promptly corrected, and expectations about future policy remain properly "anchored" to the right target. It would be interesting to know if inflation expectation has become unanchored in the mind of the general public, because, ultimately, inflation expectation causes inflation.
- nine_k 5y ago
  I don't think that inflation is as easy to cause without a fresh supply of money. And you know who prints fiat money.
  - HWR_14 5y ago
    > And you know who prints fiat money. I imagine you mean the fed, but I don't know what point you're making.
  - wbsss4412 5y ago
    Inflation is easily caused without a fresh supply of money. Destroy your productive capacity => inflation.
    - baryphonic 5y ago
      No, money really is essential. If you destroy your productive capacity but money supply remains the same (which is honestly a bit odd, since real prices are always relative), then you get substitution effects that don't affect the general price level, only the price levels in particular segments of the economy. (I would expect the prices of products, capital goods and human capital to increase, and the price of commodities and goods related to distribution to decrease). Put differently, you'll have less exchange and will shift what you spend on, but the price levels will not show much of a sustained general increase. The tricky part of inflation is that a lot of money exists on paper, and banks and even firms are more constrained by capital than we otherwise might wish to believe. (Though one good casualty of the pandemic has been the realization that banks are almost entirely unconstrained by reserve requirements, only by capital.) So when the money is sitting in some account bearing a small amount of interest at the Fed, that is low velocity and may not cause inflation. However, if that cash enters circulation (via, say, direct payments from the government), then suddenly the velocity is much higher, the money supply goes up and you have "too much money chasing too few goods." Inflation is really always and everywhere a monetary phenomenon.
      - girafffe_i 5y ago
imtringued 5y ago
No, they completely miss the point. The fundamental problem with money is that you can delay your spending indefinitively thereby breaking the concept of supply and demand. Imagine an economy where you are self sufficient and sell but never buy anything ( cough germany). You keep accumulating more and more money and you could in theory spend it all, thereby cause a huge amount of inflation. That is the core of the deflation inflation paradox. There is never enough money in one part of the economy while the part with too much poses a threat that can deploy instantly without any warning. Selling and selling isn't a free market, it's not even a market.
- zozbot234 5y ago
  It doesn't break the concept of supply and demand, because demand for money also exists. Money is an asset. When you accumulate it, it increases in value and the central bank+banking sector creates just enough of it to offset your demand. When you later spend it, it becomes a hot potato (the economic actor who got your money doesn't really want to keep it, she'll exchange it for something else) until the central bank drains it away. Or else it will just slosh around until prices rise enough to create enough demand for it in nominal terms.
- stale2002 5y ago
  > Imagine an economy where you are self sufficient and sell but never buy anything ( cough germany). > Selling and selling isn't a free market, it's not even a market. You are not describing much of a problem. What you are asking is "What if there was an entity, that provided the rest of the world with lots of goods and services, and the only think they accepted for that is green pieces of paper". That sounds pretty good to me. Someone never spending their green pieces of paper, is just doing the rest of the world a favor, by providing all those goods and services.
  - karpierz 5y ago
    The issue isn't the first part; it's what happens when they cash in their green pieces of paper.
hammock 5y ago
True to form, since the Fed was created, each new crisis has been bigger and sooner than the last.
- deleted 5y ago
  [deleted]
- zozbot234 5y ago
  Wrong, actually. The 1980s and 1990s saw a huge improvement in macro-level stability. The late-2000s crisis was an outlier.
- colinmhayes 5y ago
  This just isn't true. THe country was pretty much perpetually in economic crisis during the late 19th century, largely because of the lack of ability to perform monetary policy.
- gumby 5y ago
  Apart from the comments talking about crises under the Fed, look at the 18th century where gold strikes (or the lack thereof) caused several more serious crises, with both inflation and deflation driving crises, due to the money supply being completely uncorrelated with economic activity.
- Spooky23 5y ago
  Yes, it’s not like the good old days when you’d just hope JP Morgan was still in town to stave off depression.
didericis 5y ago
Austrian theories appeal to me/seem correct beyond just a kernel, but I’d consider myself an amateur/haven’t read enough to be confident about my opinion. Specifically, the emphasis on relative value seems correct, the emphasis on the importance of keeping pricing signals pure/unaffected by artificial monetary supply changes to effectively allocate resources seems correct, the argument that market incentives exist for keeping interest levels reasonable without centralization seem correct, and the argument that central banks are incentivized to mismanage monetary policy over time for political reasons seems correct. The counter arguments against Austrian ideas that seem most compelling to me are that having non centralized currencies leads to financial inefficiencies that outweigh any benefits of having market determined interest rates because of exchange friction, and that a lack of planned inflation and adoption of more hard currency would mean the velocity of money would be low and cause the economy to lock up. I’d be very interested in a book advocating the more traditional view in favor of central banking aimed specifically at Austrians and people like myself who find the Austrian arguments compelling. If anyone here has more economic knowledge and thinks I mischaracterized the arguments I found compelling, garbled them, or misattributed them, please correct me.
- quadrangle 5y ago
  Austrian economics is all anti-empirical say-so internally-consistent models that aren't tested against reality. Traditional economics is stuff that claims to be more empirical but fails to do so and focuses almost entirely on official stats and on its own versions of models that aren't tested against reality. The whole field of economics is overall messed up. It's insular, arrogant, and extremely resistant to outside criticism. And it's dangerous as economics claims are used to justify so much. Random amazing example: In https://www.npr.org/transcripts/980841456 https://www.npr.org/transcripts/980841456 and from "My question is, what is the M1 money supply, and the M2 money supply, for that matter?" last third of it, insanely clear and amazing. In short: Q: more money! does that mean inflation? check with this econ textbook author Author: oh, that's embarrassing, that chapter shouldn't be there Q: so what causes inflation? Author: people buying stuff more, demand going up (unless it's insane money supply like Venezuela or Zimbabwe level insane) Q: so why is the chapter in your textbook? Author: um, publisher said that if we don't say that more money means inflation then econ professors won't use our textbook. They learned that idea in their original studies, so they will only use a textbook that lets them teach it. But it's wrong, and we shouldn't have put it in the book.
specialist 5y ago
Tangentially: > unstable equilibrium point Is anyone looking at economics thru the lenses of chaos theory (complex adaptive systems), control theory, or cybernetics? I've foraged a bit, no joy, but really don't know where to start looking. I only ask because... Anthropologist David Graeber's book Debt: The First 5000 Years muses about the fragility of market based systems. Like maybe capitalism contains the seeds of its own destruction. Hence the recurrence of debt forgiveness, jubilees, and revolutions throughout recorded history. Seen from this angle, it sure does seem like some kind of debt crisis always has a role in social upheaval. With economics simulations (modeling) attaining ever more fidelity, it occurred to me they'll inevitably hit "butterfly effect" type phenomenon. Further, what if Graeber is more than right. What if "capitalism" can never be stable? What if market equilibriums will always collapse? That insight would have huge impact on public policy. Instead of trying to keep things afloat indefinitely, we'd anticipate and plan ahead for the endless series of resets. Proactive instead of reactive. Because it sure does seem (to this noob) like crisis and resets are the norm. I'm not saying that real life is just a weirder instance of Dwarf Fortress. But given how hard it is to design stable and predictable closed world game economies, what hope do we have to do better with human economies?
- hackerfromthefu 5y ago
  Part of the problem is the crises occur infrequently and humans en masse tend to forget the past, in their emotions and actions if not in theory. Another part of the problem is the governments benefit from inflation and again short term the people in power benefitting from it are unlikely to be the same ones in power when the crises eventuates, ie the problems of money printing are externalities. But your central idea of planning ahead for the crises is actually refreshing and excellent, if it is possible to apply it. On a personal level, anticipating and timing the crises is a form of planning for it, to reduce financial leverage before the crisis and have cash available to buy assets cheap from those that didn't anticipate the crisis.
- jbay808 5y ago
  > economics thru the lenses of chaos theory, control theory, or cybernetics? I'm looking too. In my mind this is absolutely the way to look at the macroeconomic landscape, and as a control theorist, I don't like what I see, which is a widespread lack of respect for delayed responses and positive feedback loops. I'll evaluate what hope we have for stability once I see the control being executed sensibly.
_lazlo 5y ago

dnautics 5y ago

> If your goal is stability this is the thing to be questioned. Stability, at what cost? Is it worth tearing up the environment, tricking people into buying shitty disposable consumer products, financializing the economy, and stealing from the poor and unborn to give to the rich in the here and now? I don't really see anyone challenging the tradeoffs of stability in the economic discourse, it's just so often given as an unquestionably good thing.

jbay808 5y ago
Hmm; all of those things are what I would associate with breaking the stability promise, that is, reneging on inflation control and holding interest rates low. That encourages borrowing and propels the price of assets. I'd expect your objection to be associated with growth at all costs, not with stability.
- BitwiseFool 5y ago
  I'm not the person you responded to, but to me stability also implies artificially propping up parts of the economy that should otherwise be in-decline. It's not necessarily the same as growth at all costs, but I sense it is related.
  - batshit_beaver 5y ago
    Counter point: maybe prices (including on assets) should be allowed to go up, so that their prices better reflect their value relative to productivity? The fed didn't really prop up any major industry this time around (unlike in 2008), just added fuel to the fire to keep the whole economy going.
    - dnautics 5y ago
      > The fed didn't really prop up any major industry this time around (unlike in 2008), just added fuel to the fire to keep the whole economy going. So, what you are saying, is: they propped up the financial industry.

roenxi 5y ago

> It costs credibility. I enjoy the cut of the jib, but credibility isn't really that important. From memory, Argentina isn't credible. All that means is they have to pretend that they will pay high interest rates before people will lend to them. If the question is "can they pay back all their debts with real value?" angle the US position isn't credible either, the numbers have gotten too large. Doesn't mean much in practice. The real issues with a default are: 1. A country is being run by people who don't believe that written words should decide what they do and who won't keep their promises even in the most watertight of cases. 2. Either the polity or political leadership are incapable of medium term planning. 3. The sort of people who think 10-30 years ahead are being tricked into making bad financial decisions. So on the one hand a default doesn't matter to people who don't directly own the debt. On the other hand, if there is a default, a host of other problems are going to hit and the country won't be ready for them. It is a bad sign.

jbay808 5y ago
The credibility I'm referring to is: when Jerome Powell says "we have the tools at our disposal to control inflation, and if it persists, we will not hesitate to use them", how much do you update your expectations of future inflation and interest rates? If statements like that start to sound like a bluff and no longer cause you to update your expectations away from high inflation and low interest rates, then the Fed has lost a certain amount of credibility. And that credibility should be thought of in some sense a conserved value. It's not regained instantly, but rather only by the market being surprised to discover that the Fed wasn't bluffing. And that's an expensive surprise, because by definition, it goes beyond what the market priced in.
- cma 5y ago
  They have a dual mandate on both employment and inflation, and have to balance.
  - jbay808 5y ago
    For sure, and I strongly believe that a dual mandate was a grave mistake because a single-output controller simply can't control two variables that respond in opposite directions to that output. This allows their policymaking to be politically influenced and pick winners, and is one strong reason their inflation-fighting credibility is low.

clairity 5y ago

an inherently unstable but critical element of an economic system shouldn't be allowed to float on the whims of a few humans, especially with overwhelming corruptive pressure lapping against them incessantly. a central bank should be trying with all its might to precisely match the amount of money in the system exactly with the amount of productivity being generated. it shouldn't be trying to implement 'fiscal policy', but rather have exactly one singular (albeit complex) focus. any significant deviation should trigger immediate investigation, replacement, and (potentially) sanctions.

jbay808 5y ago
I agree. As a control theorist, I'd be much more comfortable with a PID controller running the ship, and I think it would do a better job.
- mountainriver 5y ago
  Yup Denmark recently open sourced a lot of their fiscal policy and it works pretty much like this. Really great idea
  - brandonmenc 5y ago
    I would love some links on this, because it sounds fascinating.
- bee_rider 5y ago
  I don't know much about either, but being confidently wrong can be a great learning experience so: They call these Automatic Stabilizers in the policy world.
imtringued 5y ago
That's impossible without demurrage or negative interest rates.
- deleted 5y ago
  [deleted]

cool_dude85 5y ago

Why haven't I been reading this kind of hemming and hawing over the lack of full employment for, oh, the last 50 years or so? The fed has a mandate for that too, but somehow when they didn't manage to achieve it, I never heard about how society is going to collapse any minute now. Only when poor people are making income gains. Strange.

vorpalhex 5y ago
We are pretty close to full employment. Rising groceries and fuel costs hurt everyone, but that hurt is more so on the poor who have less overall cash flow.
- adolph 5y ago
  > We are pretty close to full employment. The number of persons not in the labor force who currently want a job was little changed at 5.7 million in January. This measure decreased by 1.3 million over the year but is 708,000 higher than in February 2020. These individuals were not counted as unemployed because they were not actively looking for work during the 4 weeks preceding the survey or were unavailable to take a job. BLS publication "THE EMPLOYMENT SITUATION — JANUARY 2022": https://www.bls.gov/news.release/pdf/empsit.pdf https://www.bls.gov/news.release/pdf/empsit.pdf See also the Labor Force Participation Rate: https://fred.stlouisfed.org/series/CIVPART https://fred.stlouisfed.org/series/CIVPART
  - vorpalhex 5y ago
    > These individuals were not counted as unemployed because they were not actively looking for work during the 4 weeks preceding the survey or were unavailable to take a job. I mean, I suppose we can forcibly employ everyone? Anyone not employed in two weeks gets contracted out to the IRS or whatever.. but that doesn't seem to be the goal. If you aren't looking for a job, and you can't take a job.. you aren't going to be employed. That isn't some kind of "only the strong survive" thing, that's just a tautology - you must in fact apply for jobs to get a job. Why do you think "people who aren't looking for jobs aren't employed!" is a response here?

lumost 5y ago

Counterpoint: Stability is a critical optimization criteria, but should be balanced with the need to maintain "dynamism". New ideas can't win if any time the entrenched hit problems they are bailed out. Maintaining employment is necessary for long-term societal stability, maintaining Goldman Sachs is not. In recent years our definition of stability shifted to one where market winners remain winners indefinitely.

nickff 5y ago
>"Maintaining employment is necessary for long-term societal stability, maintaining Goldman Sachs is not." The central banks rely on investment banks and other large institution to translate the low overnight rates into reduced commercial and consumer rates. The low interest rate, high inflation rate policies are extremely beneficial to the Goldmans of the world.
- oivey 5y ago
  The low interest rate is beneficial to Goldman Sachs, but the high inflation rate is not. They are an investment bank that holds assets, and those assets are devalued by inflation. The the interest rate and inflation may have some correlation, but the last 15+ years have shown the correlation isn’t all that strong.
jbay808 5y ago
I fully agree with your counterpoint, except that I don't think it's a counterpoint, because to my mind, such a focus on short-term stability (ie, bailouts) are a major driver of long-term instability! The reasoning for that seems inexorable to me. Once you lop off the deeply negative tail of any risk curve, market actors will gorge themselves on investments that have a positive average payoff but large systemic tail risks, to exactly the degree that they're confident they won't have to bear those costs. (See the Canadian housing market where banks are happy to offer cheap mortgages with just 5% downpayments, a downpayment that represents mere months of price appreciation, knowing that they're government-insured in the event of a widespread market downturn). This will continue until it stops being profitable, which is when the overall level of risk and leverage has increased to the point that even the government can't guarantee those risks anymore. So a small crash gets delayed but magnified into a big one. Long-term stability sacrificed to short term stability. That's the cost of "moral hazard", which is a bad name because it sounds like a random risk that, if we're lucky, we might avoid. But it's actually another costly conserved quantity that accumulates and accumulates.

nimbius 5y ago

absolutely agreed, but the feds also faced with a none too enticing sword of Damocles in raising interest: corporate credit. The fed never acquiesced to its prior commitment to end quantitative easing measures after the great recession of 2008, instead they simply shifted their weight to bond buybacks during covid and shoveled yet more coal into the engines of commerce...the result was a booming stock market during paradoxic unemployment levels and low GDP. the market had become divorced from the concept of anything but money itself earning more money based on its own worth. "transient" inflation became a death-chant in the halls of the fed last year and as christmas sales languished and inflation pushed past five percent eventually the feds bond buyback program which was slated to "taper" in july was signalled to "end" in march. its hard to see that happening however, as using the market as a litmus for policy can never truly happen seeing as it seems entirely removed from the human condition, the worker or any tangible product outside investment itself. the relief is the prime interest rate, but raising it would immediately cause a corporate credit crisis after a major pandemic as companies have for now over a decade enjoyed zero percent, or even negative interest. the ones who are over-leveraged are the ones that cant find chips due to the chip shortage, or cant ship product due to "supply chain." in short, the usual suspects. So my guess is the feds going to try to ride out double digit inflation until somehow supply and demand return to normal, with a tacit nod to the end of high-roller credit being the bond buyback ending and an eventual december...maybe next january interest rate raise. One hopes it worked better than the QE tapering in 2011, which tanked the market six hundred points in a day and was immediately backtracked.

mring33621 5y ago
I'm not disputing the whole of your comment, but I don't think "christmas sales languished" was true at all for 2021.

stormbrew 5y ago

> The cost of central banks breaking their inflation-control commitment when inflation starts running hot, is that the market starts pricing in their unwillingness to raise interest rates. I'm pretty sure that's been priced in for quite a while now, really. Interest rates have rarely gone up by much over the last 30 or so years, and for most of the last 20 they've been as close to 0 as they can go and still be called "interest". Honestly, the big problem with this article is it acts like interest rates haven't already been abandoned as a tool of monetary control, and for a long time. The way they 'control' it now is by using a kind of stimulus that keeps the markets from crashing without really adding much most people's income or spending. They just give it right to the finance industry and let it slosh around the market until the next crisis. COVID's big variation on this is that some of that money went directly to people instead of businesses or the stock market, and it both caused some inflation and also kicked employers' asses into actually paying people enough to live on.

nverno 5y ago
> They just give it right to the finance industry I don't think this is the whole story. It passes through the finance industry, but when interest rates are low, everyone outside the finance industry (who is taking out loans) benefits as well. Interest rates are levers that the central bankers can use to control the amount of outflow through the dam that is the finance industry.
- stormbrew 5y ago
  The thing is it wasn't flowing out, except in some specific ways, and in spite of decades of low to virtually zero interest rates. Every QE event has led to a ballooning of the stock market and asset holdings on things that can be mortgaged, which are both things that disproportionately benefit only some of 'everyone'. This is the point I'm making. Interest rates stopped being a lever a long time ago, whether by choice or because the abstractions economists have built up are proving to be less universal than they believed them to be. Either way, the money has largely just sloshed around everywhere but regular people's cashflow. It definitely does also lead to 'easier' lending to those people as well but the interest rates that get paid on consumer debt (ie. credit cards) aren't really related to central banking interest rates, and are often bordering on usurious anyways. Through that, the finance industry effectively collects taxes on the poor that the government is unwilling to (for good reason).

neilwilson 5y ago

Markets can’t price in anything somebody else isn’t willing to pay. Everybody wants a million dollars an hour. The secret to inflation is understanding why you don’t get a million dollars per hour and why a firm doesn’t get a million dollars per car. Call it the disappointment theory of inflation. Prices remain stable only when everybody is scared they won’t get anything if they ask for more money.