Web Name: TheMoneyIllusion






TheMoneyIllusionA slightly off-center perspective on monetary problems.Over the past few years, I ve occasionally done some posts with titles like Inflation of socialism? It s now clear that society has decided on socialism. So how did we get here?I ve recently listened to some excellent discussions in a Cato seminar on reforming the Fed. Many of the participants have suggested that the recent increase in activist credit and fiscal policies is an inevitable and/or desirable outcome, given the severity of the recession. Obviously I don t agree, but just as obviously I m in the minority.By far the most important cause of the rise in credit/fiscal policies is the fact that interest rates have fallen to zero. This impacts policy in two unfortunate ways:1. When rates fall to zero, most people (wrongly) assume that monetary policy is out of ammunition. As a result they advocate fiscal stimulus.2. At zero interest rates there is a large increase in the demand for base money. As central bank balance sheets increase sharply, they begin accumulating a wide range of assets shifting from pure monetary policy toward credit allocation.The supreme irony here is that the tight money policies that put us into this situation are advocated by a variety of right-of-center types (traditional monetarists, Austrians, New Classicals, etc.) that almost universally abhor socialism. That s right, it s the Bob Murphys of the world that are unwittingly pushing us toward socialism.And you can t say I didn t warm you. Ever since I began blogging in early 2009, I repeatedly warned that neoliberalism could only thrive under stable NGDP growth, and that falling NGDP growth always led to statist polices. People wrongly blamed the free market for problems that were actually caused by excessively tight money. (Because money didn t look tight .)That doesn t necessarily mean we need a higher inflation target. It would be worthwhile to first try two other options:Maybe these two options would be enough to get us out of the zero bound trap. But if they are not, then 3% inflation is far, far, far, far, far, far, far, far, far better than socialism. Together, this toolkit masks, testing and tracing and targeted lockdown-lite can control the virus until a treatment or vaccine arrives, while causing minimal damage to the economy.I d replace lockdown lite with voluntary social distancing , but otherwise almost entirely agree. PS. The recent data suggest that, at a global level, the Covid-19 pandemic has taken a turn for the worse. Hopefully it s just a blip.Yes, we all know about Lord Acton s famous aphorism. But power doesn t just corrupt the person who wields it, it also corrupts those who observe power in action.Power causes outside observers to adjust their views in such a way as to make the most powerful men seem more virtuous. When an outsider criticizes a powerful man, many people will naturally gravitate in support of the powerful man, even if their actual views would suggest more sympathy for the attacker. (Perhaps this is true of powerful women as well, I am less sure of that claim.)Most conservatives have outlooks and personalities more aligned with people like Bolton, Sessions, Mattis, Tillerson, Kelly etc. than with Donald Trump. But when Trump is attacked, they instinctively believe that the attacker is lying, and that Trump is an innocent victim. Most importantly, they do not reach this conclusion due to any sort of objective information indeed all the evidence points in the opposite direction. Rather Trump s power subtly warps their minds, causing them to believe things that are obviously not true. Of course the Democrats have exactly the opposite reaction. However theirs is more justifiable (in this case) precisely because all the objective information suggests the attackers are correct. The Democrats don t like the politics of the attackers, but never doubted that they are more honest men than Trump.American presidents have far too much power, and the corruption I describe is just one of the many bad consequences of the imperial presidency.The ideal is a bland president like Coolidge, and Biden is a bit closer to that ideal than Trump.John Bolton has lots to say about the worst president in US history:Mr Bolton wrote that Mr Trump “stunningly turned the conversation to the coming US presidential election, alluding to China’s economic capability to affect the ongoing campaigns, pleading with Xi to ensure he’d win”. The Financial Times reported last year that Mr Trump had told Mr Xi in Osaka that he would tone down criticism of China’s handling of pro-democracy protests in Hong Kong to help revive then-stalled trade negotiations. The White House did not refute the claims at the time.Mr Bolton said Mr Trump did not want to get involved in the debate about China and Hong Kong ahead of the G20 summit in Osaka, telling his adviser that “we have human rights problems too”. He added that the president had refused to issue a traditional statement on the anniversary of the 1989 Tiananmen Square massacre, saying, “That was 15 years ago . . . who cares about it?”Has it already been 15 years since the Chinese government showed real strength in putting down those horrible riots ? How time flies.Mr Bolton said Mr Trump also told Mr Xi to go ahead with its internment of Uighurs — Chinese ethnic Muslims who have been rounded up and placed in facilities that human rights groups compare to concentration camps. Mr Trump on Wednesday signed legislation aimed at punishing China for its treatment of the Uighurs.And we re told that only America can stand up to China s illiberalism. Do you think China cares more about meaningless pieces of legislation on the Uighurs or what Trump tells them behind the scenes in trade negotiations? I ve always been 100% opposed to the authoritarian CCP, and have been rewarded with nonstop accusations of being soft on China , often by the same people who praise Trump. The Washington Post said Mr Bolton described Mr Trump as “erratic” and “stunningly uninformed” about foreign policy. He added that foreign leaders were often successful in manipulating the president. Mr Bolton said Russia’s President Vladimir Putin succeeded in boosting Venezuelan leader Nicolás Maduro by comparing Juan Guaidó — whom Washington recognises as the legitimate leader of the country — to Hillary Clinton, Mr Trump’s opponent in the 2016 presidential election.LOL. Haven t I been telling you all that Trump s as easy to manipulate as a kindergardener? Do you finally believe me?Mr Bolton said Mr Pompeo quipped that he was “having a cardiac arrest” after listening to a phone call about North Korea ahead of Mr Trump’s June 2018 summit with Kim Jong Un in Singapore.According to The Washington Post, Mr Trump expressed surprise in a meeting with Theresa May, then British prime minister, that the UK was a “nuclear power”.Mr Bolton rued that Mr Trump “saw conspiracies under rocks” and was “stunningly uninformed on how to run the White House”. Writing in The Wall Street Journal, he had a warning about how Mr Trump would treat China if re-elected in November.Over at the WSJ, Bolton provides more evidence that Trump respects power more than anything else:Trump was particularly dyspeptic about Taiwan, having listened to Wall Street financiers who had gotten rich off mainland China investments. One of Trump’s favorite comparisons was to point to the tip of one of his Sharpies and say, “This is Taiwan,” then point to the historic Resolute desk in the Oval Office and say, “This is China.” So much for American commitments and obligations to another democratic ally.And why stop at a second term Trump s already dreaming of a third term. Indeed some people say it s a great idea:In Buenos Aires on Dec. 1, at dinner, Xi began by telling Trump how wonderful he was, laying it on thick. Xi read steadily through note cards, doubtless all of it hashed out arduously in advance. Trump ad-libbed, with no one on the U.S. side knowing what he would say from one minute to the next.One highlight came when Xi said he wanted to work with Trump for six more years, and Trump replied that people were saying that the two-term constitutional limit on presidents should be repealed for him. Xi said the U.S. had too many elections, because he didn’t want to switch away from Trump, who nodded approvingly.The Trumpistas will tell you that Bolton, Tillerson, Gary Cohn, John Kelly, General Mattis and all the rest are pathological liars. Of course when Trump appointed these people they were cited as evidence that Trump was hiring the best people .Adam Tooze (who I greatly respect) is presenting a widely held view. And he s technically correct. But is worry about whether your wi-fi will go down actually equivalent to the tough start our pioneer ancestors had?I guess this is why old people like me become reactionaries. A different frame of reference. Were the old also reactionaries on economic issues back in earlier centuries, when we had a steady state economy? I wonder.This FT story reminded me of the opening scene in 2001, where a primitive club turned into a space station:Soldiers battered each other with clubs during fight that claimed at least 20 livesI predict that the hominids currently clubbing each other to death on the China-India border will eventually be capable of sending rockets into space.Tiny Nepal has snubbed its powerful neighbour India by adopting a new political map depicting disputed mountain territory as its own in the latest example of rising geopolitical tensions in strategic areas of the Himalayas. Under the changes, which come as New Delhi and Beijing are vying for influence in the region, the Nepali parliament this weekend passed a constitutional amendment altering the country’s official map to depict the Lipulekh Pass and other disputed areas as definitive parts of Nepal.Welcome to a new blog on the endlessly perplexing problem of monetary policy. You’ll quickly notice that I am not a natural blogger, yet I feel compelled by recent events to give it a shot. Read more...My name is Scott Sumner and I have taught economics at Bentley University for the past 27 years. I earned a BA in economics at Wisconsin and a PhD at Chicago. My research has been in the field of monetary economics, particularly the role of the gold standard in the Great Depression. I had just begun research on the relationship between cultural values and neoliberal reforms, when I got pulled back into monetary economics by the current crisis. Matt Moore: Somewhat related (socialism vs growth), do you have any thoughts on the UK declaring they will seek to... Rajat: Michael, I agree. It seems that the great stagnation has worked its way into everything even down to... Postkey: . . . but demand side inflation raises incomes faster than prices and thus helps the poor, at least... Ray Lopez: Wow. Look at Nic Johnson s post and Sumner s reply. Speaks volumes. Sumner, who amusingly... anon: Noah Smith may be obscuring the actual fact w.r.t to Sweden. The money quote from that NPR link that Noah Smith...


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