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It must be impossible for the Fed to create inflation

Posted by WARREN MOSLER on November 14th, 2011

Hardly an hour goes by without some pundit pushing the possibility of some kind of run away inflation, with Zimbabwe and Weimar rolling off the tongues of ordinary Americans everywhere. And Congressman and candidates of all persuasions continuously lambaste the Fed for debasing the currency.

There’s no question the Fed has been trying to reflate, particularly with regard to housing. They were not going to make the mistake Japan made, so they rapidly dropped the fed funds rate to near 0%, provided unlimited bank liquidity, and then went on to buy $trillions of US government securities in an attempt to support demand and prices by adding more liquidity and further bringing down long term interest rates and mortgages. The stated and obvious intent has been to do everything they can to support a private sector credit expansion that would support prices and the aggregate demand needed to reduce unemployment.

For all practical purposes the Fed has done it all. And yet unemployment remains at depression levels of over 9% (and over 16% the way it used to be calculated not long ago) and the only thing keeping what’s called ‘inflation’ over 1% is a foreign monopolist supporting the price of crude oil.

So if inflation is this ominously lurking around every corner that requires eternal vigilance to keep from suddenly rearing its ugly head, why have all the Fed’s horses and all the Fed’s men not been able to inflate again? And why would anyone still think they can? I mean, we’re talking about college graduates with advance degrees and resources and power up the gazoo doing everything they can to reflate, and still failing after 3 long years? Not to mention the same in Japan for going on 20 years, where they have college grads with advanced degrees as well (though pretty much from the same schools).

Maybe this inflation thing is harder to get going than it looks? And what did go on in the German Wiemar republic, where if you parked a wheelbarrow full of money thieves would take the wheelbarrow and leave the money? Turns out it was those pesky war reparations that caused government deficit spending to soar to something like 50% of GDP annually, with most of that whopping deficit spending used to sell the German currency and buy foreign currency to pay their war reparations. As expected, that drove their currency down the rat hole in short order, and kept driving it down, causing that famous bout of hyper inflation that didn’t end until that policy ended. And when all that ended and policy changed the inflation stopped dead in its tracks. In one day. So how about Zimbabwe? Turns out they had a tad of civil unrest that dropped their productive capacity by about 80%, but government spending stayed high and too much spending power with too few goods and services for sale drove prices through the roof. Not to mention rumors of insiders using the local currency to buy foreign currencies for personal gain (sound familiar).

Applying this to the US to replicate the Wiemar inflation Congress would have to increase the deficit to about $8 trillion a year and then sell those dollars continuously in the market place, using them to buy the likes of yen, euro, and pounds. And replicating Zimbabwe would mean some kind of disaster that wiped out 80% of our real productive capacity and then continuing to spend federal dollars as if that never happened.

But note that it turns out these examples of hyper inflation are traced back to wildly excessive govt. deficit spending, and not actions by the Central Banks. And, in fact, from what I’ve seen those kinds of levels of deficit spending always cause inflation, no matter what the Central Bank does. For example, deficit spending and indexation of prices paid by government to various measures of inflation propagated all the great Latin American inflations of the relatively recent past, even as the Central Banks desperately hiked rates, didn’t buy securities, and, in general, did all they could to promote price stability.

China gives us an interesting contemporary data point to consider. Deficit spending in China has been running over 20% per year when you include state lending to state owned enterprises, local governments, and other entities where repayment isn’t a factor, making that lending, for all practical purposes, pretty much the same as deficit spending. The only time the US deficit spending got that high, with pretty much the same growth rates, was during World War II. And while considered high, China’s inflation seems to have peaked at about 6%, a far cry form hyper inflation, also, interestingly, much like the US during World War II. And note during World War II, the Fed was entirely accommodative, much like the the Fed is today, buying Treasury securities to keep long term rates low.

What all this tells me is that run away inflation, whatever that might mean, isn’t something hiding around every corner waiting to pounce. In fact, it takes a lot of work to get there, and not from the Fed, but from Congress. And not just what we’d call high levels of deficit spending, but ultra high levels of deficit spending.

I have no fear whatsoever of the Fed causing inflation. In fact, theory and evidence tells me their tools more likely work in reverse, due to the interest income channels. That’s because when they lower rates, they are working to remove net interest income from the private sector, and when they buy US Treasury securities (aka QE/ quantitative easing) they remove even more interest income from the economy. Remember that $79 billion in QE portfolio profits the Fed turned over to the Treasury last year? Those dollars would have otherwise remained in the economy.

So what’s the fundamental difference between what the Fed and can do and what Congress can do? The Fed can’t create net financial assets because they only buy, loan, and otherwise traffic in financial assets. Buying a bond or any other security only exchanges one financial asset for another and therefore doesn’t change the nominal (dollar) wealth of the economy. When the Fed buys a security, that security is no longer held by the economy. The Fed gets the security and the economy gets an equal dollar balance in a Fed account. The exchange is done at market prices so for all practical purposes it’s a equal exchange.

When Congress spends, however, it usually buys real goods and services, and not securities and other financial assets. So when the exchange takes place, Congress gets the real goods and services, which are not financial assets, and the economy gets dollar balances at the Fed, which are financial assets. So spending by Congress adds financial assets to the economy, to the penny, making it very different from what the Fed does.

And note that when the economy buys Treasury securities, all that happens is that the dollar balances the economy has at the Fed in what are called ‘reserve accounts’ get move to dollar balances in what are called ‘securities accounts’ at the Fed. Dollars in securities accounts and reserve accounts are all dollar financial assets. So shifting back and forth doesn’t change the dollar nominal wealth of the economy.

In conclusion, theory and evidence tell me it’s impossible for the Fed to create inflation, no matter how much it tries. The reason is because all the Fed does is shift dollars from one type of account to another, never changing the net financial assets held by the economy. Changing interest rates only shifts dollars between ‘savers’ and ‘borrowers’ and QE only shifts dollars from securities accounts to reserve accounts. And so theory and evidence tells us not to expect much change in the macro economy from these primary Fed tools, making it impossible for the Fed to create inflation.

Post Script:

And don’t be fooled by arguments centering around inflation expectations theory. That does’t hold any water either, and under close examination gets no support from theory or evidence. The only support it gets is from fundamentally flawed assumptions, which I’ll save for another discussion.

59 Responses to “It must be impossible for the Fed to create inflation”

  1. Matt Franko Says:

    Warren, Clonal has some related data scatter plots at Arthur’s here:

    http://newarthurianeconomics.blogspot.com/2011/09/energy.html

    Resp,

    Reply

  2. Chris Says:

    Try as they might, the Fed just can’t inflate. No sir. No siree.

    And that inflation certainly wouldn’t lead us to another manufactured boom in the economy. No way.

    http://research.stlouisfed.org/fred2/series/M2

    Reply

    Greg Marquez Reply:

    @Chris,
    Well, I think you have to look at that graph in conjunction with this one:
    http://research.stlouisfed.org/fred2/graph/?g=3l6

    What you’ll see is that, per your graph, there was a veritable explosion in M2 in 2008-2009 and at the same time a decrease in CPI.

    Now you can explain that away with conspiracy theories about CPI not accurately measuring inflation or you can accept that increases in M2 don’t result in the inflation your model predicts.

    Reply

    WARREN MOSLER Reply:

    nor is there any logical reason they should

    Reply

  3. RyanVMarkov Says:

    Nice post! I hope Paul Krugman reads it and manages to get out of the “liquidity trap” he fell in. :-)

    Reply

  4. Ron T Says:

    You have it completely wrong Warren.

    It is enough to define reserves as “money” and bonds as “something else”, and you can believe, like Scott Sumner and the rest of QMs, that the Fed creates a ton of money! A *ton of money* has to make a difference, right?

    Reply

    WARREN MOSLER Reply:

    yes, just give it time…

    Reply

  5. Marcello Says:

    The quote: “Changing interest rates only shifts dollars between ’savers’ and ‘borrowers’”

    I thought that when interest rates are lowered there was more borrowing. When borrowing exceeded the money at Fed banks, reserves were created which essentially make money from nothing. Then loans were created.

    At least that is the way I remember it from a book that I read on banking.

    Reply

    WARREN MOSLER Reply:

    for every dollar borrowed there’s a dollar saved. and the economy is a net receiver of interest from the gov

    Reply

    Adam (ak) Reply:

    @WARREN MOSLER,

    Yes there are higher transfer payments on bonds if interest rates are high but the recipients of these payments usually have a low marginal propensity to spend.

    What may be sensitive to extreme changes of the interest rates (not the MB quantity) is demand for the new loans in the firms sector and the volume of old loans repaid – both determining the investment flow. This gives an illusion that the RBA or Fed can control the economy and specifically the CPI inflation via the monetary policy channel. Yes it can but it only has a brake and the accelerator is operated by the Treasury.

    According to Keynes and Kalecki it is the investment flow what determines the volume of GDP if they are spare capacities in the economy.

    But the interest rates have to go to double digit numbers to actually stop the credit expansion and create an artificial recession.

    This has been shown in Australia around 1991 and in Poland during the disinflation period 1997-2003.

    The Independent Variable Interest Rates (proxied by RBA Home Loan Interest Rates as data for cash rates is not available before 1990)

    http://www.aph.gov.au/library/pubs/bn/2007-08/homeloan-1.jpg

    The Dependent Variable Gross Capital Formation as % of GDP

    http://www.tradingeconomics.com/australia/gross-fixed-capital-formation-percent-of-gdp-wb-data.html

    (this graph is not ideal but I am time constrained and cannot plot and post my own – maybe next time).

    Anyway the mainstream theory describing the “money markets” in terms of “supply vs demand for funds” is not only incorrect but also dangerous to believe in. The IS-LM, the favourite model used by Paul Krugman to explain recessions, is invalid.

    The “liquidity trap” refers to a phase in the economic cycle when investment is low and not sensitive to lowering the interest rates (already close to zero). This is hardly surprising when the businesses struggle to find customers who repay their excessive private debt. The investment is not constrained by the lack of funds or the high interest rates. If you have a negative rate of return on new capital what’s the point of investing even if the credits cost you 0.25% p.a?

    The only way out from this state is to increase the aggregate demand by deficit spending (because the export channel won’t usually work if every country is trying to do the same).

    The only customer left standing is the government (but they seem to be a bit dazzled so that’s why they haven’t done enough).

    I think that monetary policy is also a wrong tool during the boom phase as it works by damaging the productive economy as a whole not by stopping the bubbles developing in some sectors of the economy.

    Reply

    WARREN MOSLER Reply:

    i’ve also noticed high interest rates slowed those economies after the budget deficits came down?

  6. jason m Says:

    the quote refers to the fact that when interest rates are lowered ‘savers’ receive less interest on their savings, thereby reducing net interest payments into the economy.

    Reply

  7. Dan Kervick Says:

    The point about removing interest income from the economy is puzzling to me. If somebody owns interest bearing securities and the Fed is offering to buy those securities, the owner of the security won’t sell them unless the price is right. Now I suppose there are all sorts of reasons why the price might be right under the circumstances, but on average doesn’t the price have to offer the seller adequate immediate compensation for the future interest income the seller is foregoing? The seller is in effect choosing, on economically rational grounds, to take a certain lump sum payment now rather than interest payments spread out over the future.

    So, yes, some interest is removed from the economy over the upcoming months and years, but in exchange the economy is receiving a big up-front injection of immediate term “interest” in exchange. I think looking at it this way just further underlines the MMT perspective that Fed purchases are just asset swaps that have a negligible direct impact on net financial assets.

    Reply

    WARREN MOSLER Reply:

    yes, agreed.

    and if the fed hikes rates enough the cash flow will reverse as well

    Reply

  8. MamMoTh Says:

    It’s Weimar, not Wiemar.

    Reply

    WARREN MOSLER Reply:

    thanks, second typo found!

    Reply

    Oliver Reply:

    @WARREN MOSLER,

    rearing it’s its ugly head

    Reply

    WARREN MOSLER Reply:

    fixing, thanks!

    Oliver Reply:

    @WARREN MOSLER,

    Sorry, not trying to be pesky, but since I’m on a roll:

    college graduates with advanced degrees and resources and power up the gazoo doing everything they can to reflate, and still failing after 3 long years? Not to mention the same in Japan for going on 20 years, where they have college grads with advanced degrees as well (though pretty much from the same schools).

    Maybe this inflation thing is harder to get going than it looks? And what did go on in the German Wiemar Weimar republic

    Reply

    WARREN MOSLER Reply:

    50% annual decifits from spending on fx to pay war reparations

    Oliver Reply:

    @WARREN MOSLER,

    an equal exchange

    Reply

  9. Geoff Says:

    Excellent post, Mr. Mosler. The Fed has very little influence over inflation, yet “price stability” is supposed to be its #1 mandate. Unbelievable.

    Reply

    Matt Franko Reply:

    @Geoff, That popular perception that “price stability” is their highest “mandate” is another falsehood that remains out there:

    FRA; “The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of (#1)maximum employment, (#2)stable prices, and (#3) moderate long-term interest rates.”

    http://www.federalreserve.gov/aboutthefed/section2a.htm

    So it is not a dual mandate, it is a triune mandate. “maximum employment” not ‘full employment’ is the #1 ‘goal’; and it is “stable prices” not ‘price stability’ as #2 and no one even talks about the third one #3 which is moderate LONG-TERM IRs, which would be best implemented via a ZIRP.

    All they have to do is follow the law…. Resp,

    Reply

    Geoff Reply:

    @Matt Franko,

    Interesting, Matt. The poor Fed simply doesn’t have the tools to do much about #1 or #2, nor does it have any real ability target NGDP, as has been discussed by some recently. But #3? Now you’re talking!

    Reply

    WARREN MOSLER Reply:

    but they have to do it by maintaining long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production

    ;(

    Reply

    Matt Franko Reply:

    @Geoff, Looks like Sumner has a related post up that deals with the issue of policy objectives/goals. MMT gets a specific admonition in his post here at his aptly named blog: “The Money Illusion“:

    And here he explains what monetary policy should and should not do:

    “Deputy Governor Lars E.O. Svensson commented on Mr Nyberg’s discussion of macroprudential supervision, that is, financial stability policy, by emphasising that it is important to realise that policy for financial stability is not the same as monetary policy.

    Fiscal policy is not considered to be monetary policy. Fiscal policy has its objectives, primarily efficiency, stability and an even income distribution, and its instruments, primarily taxation and spending. Monetary policy has its objectives, stable inflation and resource utilisation, and its instruments, primarily the policy rate and communication. Fiscal policy influences inflation and resource utilisation. This means that monetary policy must give consideration to the way that fiscal policy is conducted when setting the interest rate, but it does not mean that fiscal policy is monetary policy.

    I hope all MMTers will read this report.

    It reads to me that Sumner believes that MMTers conflate fiscal and monetary policy. Why is it that mainstream economists like Sumner here simply cannot engage MMT without misrepresenting it? Resp,

    Reply

  10. Paul Mineiro Says:

    When the Fed changes the Fed Funds rate, aren’t they changing the minimum criterion of credit-worthiness for a bank to issue a loan (i.e., the cost of creating reserves ex nihilo)? Doesn’t this have some potential inflationary impact (except in a balance sheet recession where there is no credit-worthiness at any non-negative interest rate; but under normal circumstances)?

    Reply

    WARREN MOSLER Reply:

    what they give to the borrower they take from the saver

    Reply

    Paul Mineiro Reply:

    @WARREN MOSLER, ok i’m confused. reserves are created ex nihilo, right? i’m not talking an asset swap like QE, i’m talking about, a bank makes a loan, and then goes to the Fed and says, “i need reserves”. this feels like net creation of money: the asset resides with the Fed, and the liability with the bank, but the bank isn’t reserved constrained in practice, so that liability is almost moot: the real monetary flow is the cost of carry which is the fed funds rate.

    are you saying that, at ZIRP, the fed cannot create inflation? (which I would agree with; reserves do not translate into loans in that case) or are you saying in general they cannot?

    Reply

    WARREN MOSLER Reply:

    in general they can’t create ‘inflation’ though I suspect in most nations massive rate hikes would prove inflationary, but they call that tightening.

    Paul Mineiro Reply:

    @Paul Mineiro, I’ve tried to think about (what I think you refer to as) the interest income channel. Here’s my amateur (literally! i’m not an economist as is probably clear …) thought process.

    It seems to me the interest income could, at different points of history, be net in either direction. In other words, raising interest rates could cause income to flow from the private sector to the public sector (Fed), if the private sector is net short reserves, which it might be if there were an abundance of credit-worthy borrowers causing a lot of loans to be made.

    Currently there is a scarcity of credit-worthy borrowers in the USA (balance sheet recession), so the private sector is net long reserves, so the interest flow would be from the public sector (Fed) to the private sector. So raising interest rates could be inflationary. That’d be a neat experiment to try!

    In 3rd world countries with lots of opportunity and growth (e.g., Brazil), there are lots of credit-worthy borrowers, so I would expect raising rates to be deflationary.

    Does this make any sense?

    WARREN MOSLER Reply:

    it’s a function more of debt/gdp than just reserves.

    the cumulative debt= reserves + tsy secs + cash in circulation.

    the first two channel interest from gov to the economy

    Mario Reply:

    @WARREN MOSLER,

    Warren do you mean to say that with lower lending rates you also have lower saving rates, which creates less business costs but also less of a savings, so inflationary effects are “netted out”? Likewise if you have higher rates you’d have a decrease in investment but an increase in savings income? Is that what you mean?

    If so, couldn’t it be possible that there is a larger amount of investing (or savings) going on such that the net amount of borrowing/saving is not zero? Plus also isn’t there also a weighting factor too? In other words 100,000 of borrowed cash at 0% can have a larger inflationary effect on an economy than the deflationary effect that 100,000 of lost interest savings income has.

    Reply

    WARREN MOSLER Reply:

    ‘monetary inflation’ comes from spending, not ‘stocks of funds laying around’ and yes, propensities to consume from income matter.

    last i asked the fed research people about savers vs borrowers they said they were about the same

  11. Mario Says:

    Warren this is probably one of the best pieces I’ve ever seen you write. This is just awesome man. Great job here. In fact I suggest you do two things with this (at least):

    #1. Put this up on your mandatory readings list, b/c it covers SOOO MUCH ground that is often asked alot and gets people on the right page up front.

    #2. Get this sucker on the Huffington Post ASAP!!!!!!

    Do you know what’s so interesting too….just yesterday I was saying the exact same thing while talking to some friends on Facebook. I was telling them that to get hyper-inflation you have to work REALLY, REALLY HARD to get it. This to me is the scariest thing of all about our current situation, b/c deflation is very easy to accomplish….all you have to do is do NOTHING and you’ll get it. For sure. Just sit in super committee only to cut and slash that much more and we’ll careen right into it.

    In my discussion with them, it was a turning point when I proved and explained to them (Austrians) that with enough austerity you WILL GET HYPER-INFLATION through an appreciated currency that has completely crowded out far too much of the population. With that comes black market currencies, tax revulsion, and of course various a-linear issues like rioting and systemic crime, etc. which again all contribute that much more to the currency revulsion and therefore more likelihood of hyper-inflation. It’s not too difficult to imagine if done deep enough and for long enough with no end in sight while there is HUGE wealth disparity in our faces on the media and with our “leaders” etc.

    When Austrians realize that their “solutions” are literally leading them right into their biggest fear (inflation) they’ll either shut up real freaking quick or they’ll change their tune to (hopefully) achieving a more appropriately weighted sectoral balances.

    Then when the Austrians hear and see our real recommendations on how to end crony capitalism and regulate and control these too big to fail companies and entities they can also see that we too agree with them about how bad the bailouts are and how those things needs to be cleared out of the economy so that the markets can re-stabilize and thrive again. They’ll like to hear that for sure. It’s a combo punch of Bill Black’s recommendations on how to reform the Fed plus an acknowledgement of how the markets do work well and find better prices and productivity than a centrally planned government ever will. Probably at this point the Austrian will be having an orgasm or something (hopefully) and then we (hopefully) should be able to unite under one banner on those terms and be a real freaking force to reckon with.

    Reply

    WARREN MOSLER Reply:

    MMT conference in Vienna!

    Reply

    Mario Reply:

    @WARREN MOSLER,

    TOTALLY!

    Reply

    Jose Reply:

    @Mario,

    Warren’s piece should be made required reading for Harvard econ 10 students, before and after they study Mankiw’s treatise :)

    Mario Reply:

    @Mario,

    @Jose

    yeah!! good one!!

    hamish Reply:

    @Mario,
    Mario, in laymans terms, what you are saying there is if we have enough austerity, it will eventually damage the productive capacity of society so much as to cause hyperinflation?

    Or another way of putting it, prolonged austerity measures become the big socially disruptive event that normally triggers a hyperinflation. Creating the monster they were meant to prevent.

    Reply

    Mario Reply:

    @hamish,

    exactly. The irony is that the Austrians don’t realize this yet. They just think that a stronger currency (no matter how you get there) is good. It’s much easier to reach a riot-society and currency revulsion through austerity than it is through public health care “inflation” and other such comparatively benign fiscal policies…as Warren says China had huge deficits only got 6% inflation. The fears are all bass-ackwards…they are backing into their own worst enemy.

    Plus this line of argument that is outlined here can really be strong to convince them to (hopefully) see another possibility.

    Reply

    hamish Reply:

    @Mario,
    Hopefully we have enough automatic stablisers with welfare payments etc, that a grinding recession is the worst outcome rather than full blown riots and hyperinflation. Not to mention I think most politicians won’t have the political courage to go through with full blown austerity if it starts hurting voters, or their pet programs. I think there’s a lot of macho posturing going on with all the talk of budget cuts, rather than sincere belief.

    Mario Reply:

    @Mario,

    @Hamish

    I’d like you to be right on this one. However the riots have already started if you haven’t noticed. And I can just about guarantee you that this austerity isn’t going away anytime soon.

    Regardless though the point is about how austerity as a form of economic “healing” makes no sense. And that all it does is put us through unnecessary hardship. We’re not going to get hyper-inflation either way, but the Austrians don’t think that! LOL Frankly a deflationary spiral for 10 years isn’t a walk in the park either, so it’s not as if the status quo is somehow more “agreeable” to the palate b/c hyper-inflation isn’t likely.

  12. Ken Says:

    Warren … some of the things the Fed did early in the crisis are like direct state lending? For example, TALF, CPFF? You say in the blog just above this one that state lending in China is just like stimulus …. so did these early things by the Fed (now ended) also have stimulatory effect?

    Ken

    Reply

    WARREN MOSLER Reply:

    it was mostly just bank ‘liquidity’ provision which may have stopped what otherwise might have been a mass contraction/depression/deflation but didn’t add to anything.

    and my main criticism of the Fed was they allowed bank liquidity to be interrupted and contribute to the crash, when they should have been lending to banks unsecured and in unlimited quantities
    at their target interest rate at all times. see: http://www.moslereconomics.com/?p=8968
    it’s the fdic’s job to examine the banks for solvency and shut them down if not
    but allowing any kind of bank stress due to liquidity entirely misses the point of today’s banking.

    Reply

  13. Mario Says:

    In fact Keynes, in his “The Economic Consequences of the Peace” basically predicted Weimar and all that would occur there. He was totally against those severe reparations and wanted to help rebuild things and forgive debts, etc., etc. b/c HE KNEW the dangers of hyper-inflation that would rise from that scenario. This to me is the funniest and most insane thing of all, b/c Austrians…who think Keynes was just some inflation-craving psycho…is THE ONE who predicted and did all that he could to AVOID hyper-inflation from occurring in Weimar…the very example all Austrians go to in order to debunk Keynesian-type policies!?!?!? I mean that’s just the most amazing and ridiculous (and of course totally fallacious and contradictory and misunderstood) thing a person could do!!! Hollywood comedians couldn’t make up better material than this!!!

    Keynes predicted Weimar 10 years before it happened…much like MMT predicted the EU issue 20 years before it happened.

    Reply

  14. Jose Says:

    I was wondering whether Brazil’s economy might be a showcase for demonstrating that high interest rates are compatible with full employment when the budget deficit is sufficiently high to guarantee adequate demand.

    Real interest rates in Brazil are over 5% and the budget deficit stands at about 3% of GDP (surplus of about 3% of GDP before interest payments on the public debt). The economy grew at a 7% plus rate in 2010 and will grow by 3.5 to 4% in 2011.

    And inflation? still almost 7% a year.

    So, it is indeed the case that high interest rates have not:

    a) depressed the economy nor

    b)pushed inflation to low levels.

    MMT vindicated south of the equator?

    Reply

    Unforgiven Reply:

    @Jose,

    What is the main source of the inflation?

    Reply

    Mario Reply:

    @Unforgiven,

    commodity prices?

    Reply

    WARREN MOSLER Reply:

    see ‘a general framework for the analysis of currencies and other commodities’ on this website, thanks

    Reply

  15. Matt Franko Says:

    @Paul Mineiro, Paul, to flip this back around into the monetarists paradigm; does the equation M*V=P*Q have an interest rate variable? I dont see how the policy IR matters in itself. For more on this Clonal sent me this one:

    http://econproph.com/2011/11/11/the-quantity-theory-of-money-and-fears-of-inflation-are-nonsense/

    The monetarist view of so-called “inflation” is dead. This is starting to catch on out there and be noticed at least in the heterodox world, about time.

    Reply

    WARREN MOSLER Reply:

    quantity theory does work. you just have to have the right M, in this case net financial assets, and recognize the govt is the currency monopolist

    Reply

    Anders Reply:

    @WARREN MOSLER, This seems a critical point. MMT and monetarism would both more or less agree that the private sector’s starting endowment is relevant to its effective demand in a given period. But whereas MMT focuses on NFA, monetarism thinks liquidity is all the matters.

    MMT seems a more defensible position because MMT would concede that liquidity is useful up to a point, but that most of the time the private sector liquidity is not the issue. Monetarists just have a blind spot when it comes to NFA.

    Reply

    WARREN MOSLER Reply:

    properly managed, the banking system should always have infinite liquidity at the fed’s target rate

    Anders Reply:

    @WARREN MOSLER, Also – whilst the MMT corpus is good on Weimar and Zimbabwe, I would welcome more discussion on other hyperinflations, eg Brazil, which didn’t on the face of it suffer extreme aggregate supply constraints. The indexation contracts seem a plausible part of the story, I think MMT needs to flesh out the sequence a bit more.

    Reply

  16. dfurlano Says:

    So how does targeting ngdp work? Isn’t it simular to QE but the FED us buying long term bonds?

    Reply

    WARREN MOSLER Reply:

    the fed has tools like rate changes and buying financial assets, and targets like core cpi, ngdp, etc. that it tries to hit.

    but it’s mostly like the kid in the car seat who thinks his steering wheel is steering the car

    Reply

  17. Norme Says:

    “And don’t be fooled by arguments centering around inflation expectations theory. That does’t hold any water either, and under close examination gets no support from theory or evidence. The only support it gets is from fundamentally flawed assumptions, which I’ll save for another discussion.”

    Mr Mosler, nGDP targeting is getting a lot of air play today. I hit this blog looking for some answers on how this all works…not the hype about what it’s supposed to do.

    “…but it’s mostly like the kid in the car seat who thinks his steering wheel is steering the car.” I feel teased by this answer. :)

    I wish some MMT proponents would work this subject explaining how it would function with the same fervor as explaining horizontal money. I have my opinions (against) and voice them, but it’s a difficult concept dealing with asset price and inflation. We’ve raised it on prag cap’s site and we stammer around an answer…the Fed can control price but not inflation. It’s still pushing on a string, even supporting prices in the higher levels of liquidity (securitized debt, derivatives, etc.), no?

    It’s just monetary policy, a blunt tool, with a different target. But how far into QE does the Fed need to venture to hit it’s trend line target, if at all? To me, nGDP targeting sounds like a focus on asset prices, kind of the way the Fed is trying to induce inflation under QE and according to our “New Monetarism” of the financial markets. It seems to be a monetary policy geared to the latter, rather than stimulating lending and agg demand.

    Make sense? Maybe you can tell I am confused, but I rail at any policy that explicitly calls for debasing the currency to repay debt (including US sovereign debt) or turn the US into an exporting Banana Republic.

    Thank you, sir.

    Reply

    WARREN MOSLER Reply:

    The problem is none of the potential targets are functions of interest rates, and the fed’s only tool is the term structure of rates

    Reply

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