Pedal to the Metal

Japan accelerates into Keynesian fiscal singularity. This one is for our honored commenter ‘Kgaard’, who is sure to have some problems with it. (From David Stockman, this blog’s candidate for the most based economic analyst on the planet.)

Let’s not mess around:

Prime Minister Abe is proving himself to be a certifiable madman.

It could all be over a lot sooner than I’d expected.

November 20, 2014admin 97 Comments »
FILED UNDER :Political economy

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97 Responses to this entry

  • Henry Dampier Says:

    So far, Kyle Bass has been on point w.r.t. Japan:

    http://kylebassblog.blogspot.com/2014/09/kyle-bass-thinks-japans-debt-crisis-at.html

    His perspective has been that the Japanese government is going to throw the middle class and the elderly off the side of the boat, financially decapitating the most responsible sections of society. They can keep their rates low by buying all the government bonds that get issued, but they can’t stop that from spilling over into currency devaluation.

    After that, he expects rates to go up, and if Japanese rates go up, their government is instantly in some sort of crisis.

    [Reply]

    Reactionary Expat Reply:

    Kyle Bass has a blog? Why was I not informed of this much sooner?! The floggings must commence immediately for this oversight.

    [Reply]

    Posted on November 20th, 2014 at 6:17 pm Reply | Quote
  • Kgaard Says:

    Ha … why did I know this was going to be a Zerohedge link?

    Well, y’all know my position on this: Zerohedge is insane, Kyle Bass is insane, the ECB is insane, Abe and Kuroda are 100% right in what they are doing, and we should be building statues honoring Bernanke. If southern Europe descends into some sort of anarchy or radical politics we will have ultra-tight money to blame.

    Helpfully, we’ll have a test of what the Japanese think about it all in a few weeks when snap elections are held. I predict that Abe will get through fine and lose a modest number of seats (let’s say 10, which would leave him with 285). This is the opportunity for all the supposedly-oppressed anti-QE’ers in Japan to gang up and throw him out! After all, Abe has promised to resign if he doesn’t get a simple majority (241 seats) in the election. If he doesn’t lose ANY seats, Zerohedge might have to re-think their position (which, of course, they won’t).

    Regardless of what you think of Abenomics, Japan is important to watch because they are dealing with the central economic issue of our times: What to do when your population declines, debt rises and CPI goes negative all at the same time. You can’t square that circle. (Not easily, anyway.) Devaluation is the logical way out.

    Abe was right in not going through with the second part of the VAT hike (to 10%) and Kuroda was right in boosting QE. That’s why I think the election should turn out okay …

    [Reply]

    Hurlock Reply:

    “Well, y’all know my position on this: Zerohedge is insane, Kyle Bass is insane, the ECB is insane, Abe and Kuroda are 100% right in what they are doing, and we should be building statues honoring Bernanke. If southern Europe descends into some sort of anarchy or radical politics we will have ultra-tight money to blame.”

    It still boggles my mind that a person who believes all of that is also a regular commenter at a neoreactionary blog.

    Have you, like, ever read any of Moldbug’s posts on economics? At least one?
    Also, two recent posts by Bob Murphy to help you shake-off the market monetarist kool-aid:
    http://mises.ca/posts/blog/the-vacuity-of-scott-sumners-approach-to-monetary-policy/
    http://mises.ca/posts/blog/ngdp-is-a-concept-constructed-by-economists/

    Yes, if it was about winning the next election, unlimited QE is da bomb. But insofar as long-term economic stability and welfare is concerned…

    And for fuck’s sake cut that bullshit about southern europe being super tight and practicing austerity. I have pointed out about a dozen of times, on this very blog, that since 2008 there has been no such thing as ‘asuterity’ in southern europe. Only someone as full of shit as Krugman can claim that with s straight face.

    [Reply]

    Kgaard Reply:

    Yes the irony of my commenting on a neoreactionary site has struck me as well. Though upon further inspection it is not really inconsistent. My view is that you can’t have a gold standard and 100% participatory democracy. You can’t have the STRONGEST currency in the world and the HIGHEST tax rates in Asia and the WORST demographics all at the same time. Something’s gotta give. I wrote this below but it’s actually more apropos here: If they would cut the tax rates in half they wouldn’t need to do QE. But the deficit obsession is so extreme that they can’t bring themselves to do it. So QE is all they’ve got.

    On Southern Europe, whether the governments are doing austerity is sort of beside the point. The issue is Germanic monetary policy emanating from the ECB, coupled with excessively high tax rates. How much the PIIGS governments spend doesn’t really matter as government spending doesn’t get your economy moving anyway.

    [Reply]

    Lesser Bull Reply:

    Kgaard,
    I don’t have strong opinions about macroeconomics one way or the other. In your mind, what would be a good date and metric for saying that Abenomics had definitely failed, and what would be a good date and metric for saying that it had definitely succeeded?

    Kgaard Reply:

    That is a great question. When will we know Abenomics has failed? I would say the key metrics to watch are bank lending and M2 growth. For all the hand-wringing about hyperinflation, the fact is that M2 growth is currently around 2% and bank lending growth is about the same. These numbers need to get closer to 10%. When that happens nominal GDP will get rocking, stocks will soar, profits will soar, tax revenues will soar and Abe will be a global hero. The hike in the VAT to 8% threw a monkey wrench in the process (which was off to a good start 9 months ago). I think things will start to crank back up in coming months. I would say if you don’t see some good news by the end of next summer you can start to say something has gone wrong. If there’s no recovery by the end of next year feel free to call Abenomics a failure.

    Personally I don’t see how it’s even possible that this will fail if they keep doing what they are doing. But we’ll know in a year. Probably less. Late winter/early Spring tends to be hot for Japanese stocks. If they don’t rally in the Feb-May period that’s also a bad sign.

    Kgaard Reply:

    These Bob Murphy links are pretty weak. In the first one he leads with a chart of monetary base, as if that’s supposed to tell us anything. The flooding of the banking system with new base money post-2008 was absolutely necessary and non-inflationary. It was just the provision of funds to offset panic demand for cash. Over time that base can be drained out to the extent required. That’s what the end of QE is about. The base ramp did its job and isn’t needed to the degree it had been previously. In Europe they tried to end accomodative money too soon and created a double dip recession (a real one — not like what is occurring in Japan, which is a growth pause).

    I think the real knock in NGDP targeting would be that if your economic structure is fundamentally unworkable (i.e. Soviet Russia in the 80s) it’s just not going to be sufficient to save anything. Remember that NGDP targeting doesn’t promise you real growth. If you’ve got ridiculous tax and regulatory policies your 5% nominal growth might equate to 0% real growth. If you have good tax and regulatory policies the 5% nominal growth might equate to 4% real growth.

    [Reply]

    Hurlock Reply:

    “These Bob Murphy links are pretty weak. In the first one he leads with a chart of monetary base, as if that’s supposed to tell us anything.”

    Yes, it tells you that when Scott Sumner claims that the FED is being too tight, he is full of shit.

    “The flooding of the banking system with new base money post-2008 was absolutely necessary and non-inflationary. ”
    Absolute necessary? Only if you want to keep all those overvalued assets overvalued. But since you are a Scott Sumner fanboy, for you nominal accounts are all that matter, right?
    It a banking cycle. The money supply expands at the start and when the cycle comes full circle the money supply contracts and you get deflation. Moldbug described this very well in all of his posts on the bussiness cycle, maturity mismatching and etc. Please go look those up and read them. Maybe some sense will come to you.
    To put is simply for you the only reason there was deflation after the 2008 crash is because there was INFLATION as in EXPANDING THE DAMN MONEY SUPPLY by the FED + banking sector before that. It is the initial inflating of the money supply which always leads to a deflation down the road, there is just no other way around it. You can’t outprint it, if you try you will get hyperinflation. The very policies you recommend to fight massive deflation – massive QE, i.e. massive inflation ARE WHAT ARE CAUSING THE MASSIVE DEFLATION IN THE FIRST PLACE

    Posted on November 20th, 2014 at 8:17 pm Reply | Quote
  • Kgaard Says:

    By the way … the canard about Japan’s debt being 240% of GDP is just flat out wrong. There is a tremendous amount of double counting in there. At the absolute most it’s 140% and by my calcs it’s under 100%. It’s a moot point anyway because it’s all denominated in yen, so default is impossible. Here’s a good piece in the Economist (I don’t like the mag either) explaining the interplay between deficits and QE, as well as a discussion of calculation of debt/GDP.

    http://www.economist.com/blogs/freeexchange/2014/11/japans-economy-0

    [Reply]

    Posted on November 20th, 2014 at 8:39 pm Reply | Quote
  • l0b0t Says:

    While driving my daughter to school this morning, the NPR told me that Japan is a pretty racist place because they don’t import 3rd world labor to compensate for their aging population. The NPR posited that if Japan just opened its borders, all would be fine.

    [Reply]

    Kgaard Reply:

    Aeroguy: your thesis that the productive will “check out” is quite testable: There are many sentiment and other forward indicators in Japan and they are generally very positive (especially the Tankan survey). If entrepreneurs felt put upon by QE then these indicators would be moving south, but in fact they are moving north. Entrepreneurs are far more scared of deflation than any perceived negative effect from QE. You can’t rationally build anything new in yen if you think it’s nominal value will be lower 10 years from today. That is the trap presented by deflation — and that is the psychology that Abe and Kuroda are attempting to break. The Zerohedge article fails to address what is the principle argument in favor of QE.

    [Reply]

    Aeroguy Reply:

    A strong currency in of itself floats and all else being equal brings stability, neither inflation nor deflation. But all else is not equal, there is a slagging economy. Deflation is a symptom not the disease in of itself. Deflation can cause problems, but there are much bigger problems at work. That problem is irresponsible debt and an economy that is built on it. Ending irresponsible debt would ruin the economy and the responsible businessmen who profit from it. That responsible businessmen vested in the system as they are would want to avoid this is obvious. They’re not the people being robbed. It’s the guy with the 401k who just found out his nest egg isn’t worth jack. When there are no dividends because dividends are seized to pay for existing debt, the debt is allowed to choke off new growth.

    Vanguard, BTFATH, we all know where the money comes from that fuels these, but where does wealth come from. We can feel as nominally rich as we want, but perception is not reality. Money is just perception, it’s vapor, wealth, that thing which the FED and the banker can’t create but can only at best act as a catalyst for others to make, is the substance of reality. If a town has a bank apparently it doesn’t need an industry because they can all be loaned the money to buy from the box stores. What happens when every town replaces it’s industry with banks. The banks, the financialization is cannibalizing industry. When money can be printed from vapor only a fool continues acquiring it with the sweet of their brow. That’s the collapse, that’s what I speak of when I say check out.

    You’re clearly smarter than my foolish self. The smartest men don’t become engineers or scientists working for peanuts. If I were a better man I wouldn’t be applying my laid off ass to the aerospace companies. But suppose if I was a genius and could with a loan produce a marketable product that didn’t require rewriting the FAA’s outdated regulations. Why the hell would responsible businessmen loan their money to people like me when they can loan their money to people like you who are closer to the source of money. The sectors that grow most reliably are government and finance, that which is closest to the source of money. The present economy is incapable of nominal growth outside of monetary expansion, but nominal growth is just lipstick on a pig. The present economy must be destroyed if there is to be room for actual growth. If you’re right, at what point does the government and financial sector begin to shrink?

    Eventually the financialization will reach singularity when everybody makes money and nobody makes wealth thus bringing it’s own destruction.

    [Reply]

    Kgaard Reply:

    Oops … That reply went in the wrong place. I am on an iPhone at present … Tricky to navigate.

    [Reply]

    Posted on November 20th, 2014 at 9:41 pm Reply | Quote
  • Pedal to the Metal | Reaction Times Says:

    […] Source: Outside In […]

    Posted on November 20th, 2014 at 10:50 pm Reply | Quote
  • Aeroguy Says:

    What I see is a pattern going back many thousands of years of civilizations getting in debt and devaluing their currencies. Throwing the thrifty under the bus to save the debt ridden governments (who are debt ridden most often because of populism). It does buy them time, but it’s the consumption of seed corn. I can’t dispute that switching to a strong currency would cause a depression, nor that it could lead to destabilizing unrest. But it’s the fault of irresponsible debt, the root cause. Given the nature of our accelerated world, the time bought won’t be as long as the ancients. Eventually the people being robbed (what is monetary expansion but a transfer of wealth from the thrifty to the debtors), the people holding up the system, start checking out, one by one, until too few are left. The methods have gotten complex beyond ordinary human comprehension, but the end result is exactly the same, robbing Peter to pay Paul.

    My main disagreement with Kgaard is that I see collapse as inevitable but he doesn’t. For the doomsters like myself, the question is timing (they may yet be able to sustain more business cycles) and plotting geopolitical outcomes. Like gunpowder, cryptocurrency will have enormous influence on history, regardless of how the PTB feel about it.

    [Reply]

    Posted on November 20th, 2014 at 10:55 pm Reply | Quote
  • Baron von Strucker Says:

    @l0b0t

    Japan is exhibit A of what is happening to proud warrior races in an age dominated by the values of Cathedral Anglofag shopkeepers — they’re dying of what amounts to soul starvation. Something similar is happening to the Germans, and Arabs, Russians and Chinese may be next in line (see some of the propaganda being spread by the usual suspects — it amounts to a tribal death curse being put upon them).

    The more I observe the present world, the more it seems that the Axis ideologues saw it all coming, and waged a heroic, desperate war to stop the destruction of everything strong, proud and noble in mankind by the Atlanticist filth. Islam looks to be starting another round in this ongoing war. The big mystery to me is how the Cathedral motivates warriors and wins wars — how does a civilization with these values convince anyone inclined to fight that its values are worth fighting for? Surely the real Right should side with the left and Islamists in trying to demotivate the Amerikan military, because it’s only the useful idiot white soldiers of Amerika who are propping up this insane regime. WTF are they fighting for? Wall street bankers, mass immigration, gay marriage and pictures of mulatto babies on the walls at Wal-Mart? Let them fight their own wars! This Cathedral/Jew black magic to brainwash Western goyim to fight against their interests is one of the most baffling phenomena in history. What is the secret of their magic?

    [Reply]

    Alrenous Reply:

    I think it’s Prussian school. It’s crippling, it rootkits the mind, which makes Nationalism plausible.
    White is not a race, and your elites are not on your side. These were common sense to Medievals. Races hardly matter, tribes do. Like Angles vs. Normans. Or at least Red/Gray vs. Blue/Pink. Bluck, even plebs knew the patricians were a different tribe.

    [Reply]

    Hurlock Reply:

    It’s really funny how everything in the modern world is tainted by Universalism, even the supposedly tribal ideologies (nationalism).

    [Reply]

    E. Antony Gray (@RiverC) Reply:

    There’s no black magic at work, it’s called fallen humanity. But if you wave your arms and write impressive prose before it happens, people might think you’re a wizard.

    Alrenous Reply:

    It would be ironic. Prussian schools was primarily implemented because Prussia was butthurt about losing to Napoleon and wanted better warriors. Every government program does the opposite of its nominal intent, (Conquest #3) so it isn’t ironic at all.

    Different T Reply:

    It’s really funny how everything in the modern world is tainted by Universalism

    It is QE which is not human friendly as in the long term it only worsens the situation.

    If you are correct, so what? Does the “self-appointed brahmin” now claim to care about being “friendly” to the mass of humanity?

    What is this, ‘Neoreaction’, the political as a forensick ‘free-for all’?
    A discourse of distribution resentments?

    -Artxell Knaphi

    E. Antony Gray (@RiverC) Reply:

    They were idiots, really. Heroic epics are all tragic. Did they stop to consider why that might be? You have to be smart to win, and if you blast out your brains to purify your skull, you’ll crush your enemies only when you fall on top of them.

    After mass media, every mass identity is pure fiction, complete and total nonsense and lies. The best ones have a drop of truth to them so you don’t notice the poison.

    To some extent you must always offer the people what they want – but you offer them what they want that gets you the most useful people. How the US won was simple: when it was still relatively free, it offered everyone crazy opportunities. And many valuable people took it. After that, it was just a game of attrition.

    These people who ‘fight for bankers’ don’t – or they don’t conceive it that way. Given the chance they would shoot every Cathedralite dead on the spot and leave them to the crows – given the chance. Like the axis powers they fight for nothing other than their own sense of honor.

    Your job instead of thinking of them as idiots should be to GIVE THEM THAT CHANCE.

    [Reply]

    admin Reply:

    @ Baron. Perhaps your confusion is a symptom of profoundly deficient analysis? “How could God let the Uebermenschen be defeated by shopkeepers?” — the resounding lament of proud-but-non-too-bright losers throughout modernity. Seems they’re just not very good at playing this game (and its about to go seven-dimensional).

    [Reply]

    an inanimate aluminum tube Reply:

    Sure, the “Cathedral Anglofag shopkeepers” are good at winning, but *this* is the result of their total victory.

    Look around at this trash world and remember that your beloved Atlanteans did this. We tried to stop it.

    [Reply]

    admin Reply:

    You don’t think Bismarckian welfarist Hegelian zeitgeisters had anything to do with the bad stuff?

    Lesser Bull Reply:

    Trying is pointless. If the ‘Anglofag’ winning strategy leads to bad results, the only counter is a better winning strategy.

    Posted on November 20th, 2014 at 11:43 pm Reply | Quote
  • Alrenous Says:

    Abe’s #AAA…so weeaboos can crow about having gone one better, AAAA.

    [Reply]

    Posted on November 21st, 2014 at 1:23 am Reply | Quote
  • sobl Says:

    So the Japanese government has been looting their pension funds to buy up equities, US equities, which is the greatest thing a vassal can do. They literally stole from their people to prop up the Imperial financiers because it gives the Imperial seat a shred of legitimacy to have a rising stock market.

    [Reply]

    Posted on November 21st, 2014 at 1:23 am Reply | Quote
  • Hurlock Says:

    @Kgaard

    “You can’t rationally build anything new in yen if you think it’s nominal value will be lower 10 years from today.”

    Oh please, this is the oldest misdirection in the book. What matters is not the overall nominal value of the final product but the rate of profit. You can still make a profit in a period of deflation, *ding ding* the late 19th century *ding ding*. In fact your rate of profit might even rise in a period of deflation, there is no reason why deflation necessarily means lower profits. Especially if deflation is an overall effect across the whole economy.

    [Reply]

    Kgaard Reply:

    Well don’t forget we had no income tax in the late 1800s. And lots of open land. It was a great combination. Half of Japan’s problem is excessive taxation. I agree that predictable, modest deflation is not a deal-killer provided the tax burden is low enough. But the yen had gone from like 250/USD to 82/USD over 40 years or so. Meanwhile it had enacted the stiffest tax-rate structure in Asia. And the population started to fall. That is about as bad a combo as you can get.

    Certainly one way out of this would be to skip the QE and just cut the tax rates in half. But they are so obsessed with the goddamned deficit that they don’t do it.

    [Reply]

    Hurlock Reply:

    “But the yen had gone from like 250/USD to 82/USD over 40 years or so.”
    I think you are forgetting that in the past 40 years the dollar has been substantially devalued. The yen has been devalued quite a lot too, it’s just that the dollar has been devalued faster in the last 40 years. Speaking of 40 years, I wonder what might have happened roughly 40 years ago that made the dollar plummet? Hmmm. Something something 1971, something something Nixon, something something gold.

    “Certainly one way out of this would be to skip the QE and just cut the tax rates in half. But they are so obsessed with the goddamned deficit that they don’t do it.”

    It’s not just about cutting taxes. You must cut taxes + cut spending. Printing moar money is a tax as well. A real substantial tax cut would reduce the deficit as well, because it would reduce government spending.
    You can only *really* reduce taxes by reducing spending. And if you do that your deficit will become smaller, not bigger.

    [Reply]

    blogospheroid Reply:

    Every deflation that has been positive for the economy has been during a time of increasing nominal GDP. If there ever was a long period where nominal income was reducing and people were prospering, please inform us.

    [Reply]

    Hurlock Reply:

    Nominal income is just numbers.

    Real wages are something completely different.

    You guys are conflating correlation with causation.

    [Reply]

    Hurlock Reply:

    As a matter of fact it is possible for your nominal income to be rising and for your real wage to be decreasing. This is exactly what happens with inflation.

    Nominal income is how much zeroes your bank account has.
    Real income is how much goods and services you can buy with those zeroes.
    There is a massive difference here.

    Kgaard Reply:

    Hurlock this is where you go wrong … in a deflation nominal income is NOT just numbers. In deflations “the nominal becomes the real” because the debt is in nominal terms, and companies sell widgets priced in nominal terms etc etc. Blogospheroid makes some good points on this below. You are stuck in this concept of the cleansing Austrian crash. It just doesn’t work for big crashes like 1929, the Eurozone today and Japan today. Southern Europe is getting de-peopled, and will be re-peopled by immigrants. All thanks to the ECB.

    Vimothy Reply:

    The issue is that *unexpected* inflation *or* deflation functions as a windfall tax on either investors who are long the currency in the case of inflation (i.e., creditors), or on investors who are short the currency in the case of deflation (i.e. debtors). The beneficiary of such a windfall is not necessarily the government, but is rather whoever is on the other side of this relationship. So that (unexpected) deflation redistributes wealth from debtors to creditors, and (unexpected) inflation does the reverse.

    blogospheroid Reply:

    I asked you for examples. Please mention a time from history where the nominal income stream was dropping and people were prospering in most other metrics.

    Posted on November 21st, 2014 at 2:28 am Reply | Quote
  • blogospheroid Says:

    Japan is having to do QE because the BOJ’s attempts at creating increased nominal income are not credible. Scott Sumner has presented data that countries that have a steady nominal income growth path actually have low monetary bases as a percentage of their GDP, i.e they print less money because their central banks’ promises are more credible. Examples are Australia and Israel. It’s a bit weird to a person hearing this for the first time, but a reasonably intelligent person can grasp it after some time. What Kuroda is fighting an uphill struggle against is in changing these expectations.

    I feel that any kind of precious metal standard (including supply limited crypto like BItcoin) has a problem that it’s mode of dealing with recessions is not very human friendly. A steady amount of commerce is happening. Some major firms in a sector fail due to a natural disaster. The people are laid off and the capital stock is sold off. The web of promises has a local collapse and everyone associated with that reduce their consumption. With this reduction in consumption, every industry that is not an absolute necessity suffers slightly and they reduce their investment as well since their income expectations are now lower. The continually lower prices induce the consumption of absolutely necessary perishables, but dissuade the purchase of durables and the deflationary spiral begins. The poorest people are completely out of their savings and were historically, sold into slavery. The rich just wait it out. They don’t have any incentive to step in and stop the fall, since no one wants to be the one to catch a falling knife.

    The above scenario is pretty much your textbook deflationary spiral and it is analogous to the value of a share falling until it reaches its fundamental value. The point is that, as moldbug put it, money is basically entirely a bubble, so it can get valuable until no other storage of value exists. Of course, in human societies, other factors would have stepped in much earlier than that. Gold would flow in from other regions. Mostly the treasury will be forced to feed people or employ people and they will get this by taxing the rich.

    I don’t know if NRx has a monetary position, but if you ever get to creating a city, you are much better off having your money based on a monetary rule like NGDP targeting or if your population is paranoid about having a commodity standard, you’re better off using an electricity standard when compared to a precious metal standard. If there is a danger of a recession, extra production of the monetary commodity can happen.

    [Reply]

    admin Reply:

    Bitcoin is going to eliminate such options, whether people want to cling to them, or not. Given the opportunity to hold savings in a hard currency, no one is going to prefer a soft one. Slow crumbling at first, then precipitous fiat crash. Harsh monetary honesty is going to be mandatory, irrespective of all squeamishness on the subject.

    [Reply]

    spandrell Reply:

    Then they will not be given the opportunity. See? that was easy.

    [Reply]

    admin Reply:

    You think the NWO can coordinate a suppression of Internet-driven decentralization? Seems to me, if they could, they would have already.

    Alrenous Reply:

    I don’t think the lack of a western Great Firewall can be glibly explained by saying they can’t even if they wanted to. E.g, NSA.

    spandrell Reply:

    Moldbug made a pretty good case. People tend to overestimate brains over violence. China killed Bitcoin in their territory in a week. And they could shutdown the internet with the press of a button. They do that in Xinjiang every once in a while.

    USG only keeps the internet on because it believes it benefits them, and for good reason. The day it turns against them, they’ll shut it down unceremoniously. See how easily they’re taking all the Silk Roads down.

    [Reply]

    John Reply:

    > See how easily they’re taking all the Silk Roads down.

    See how quickly new Silk Roads are popping back up?

    > China killed Bitcoin in their territory in a week.

    This statement is simply false, given that bitcoin exchanges are still operating in China legally.

    Even if a particular government does take the drastic actions you propose, that does not “kill Bitcoin”. Unless every nation on earth does this in a coordinated fashion, there will still be places where bitcoin can be traded and it will still retain value.

    Aside from this type of coordination being totally unfeasible, there is a tremendous economic incentive for nations to break ranks and keep bitcoin activity legal while it is made illegal elsewhere.

    Governments also have incentives to keep it legal as well — primarily tax revenue from currency appreciation and increased economic activity.

    Admin is 100% right on Bitcoin inevitably killing fiat because of the hard vs soft currency savings incentive. If you look at what Bitcoin actually is and how it’s developed and combine that with the basic laws of economics it becomes clear that a stampede out of fiat is the only way this can play out.

    blogospheroid Reply:

    2 points about the current design of bitcoin.

    Bitcoin is supply determined, hence it is not possible to place a value easily on it. By design, to find its value, it is dependent on exchanges. And exchanges can be throttled, quite simply. Even if you are going to do OTC, what are you going to base your purchase on, if there are no exchanges?

    Apart from that, bitcoin is reaching a stage where mining is becoming very very unprofitable. This means that mining will centralize in a few places, which will definitely be under the radar of the world’s spying agencies.

    People have seen these and there have been many thoughts about trying to create a stable coin that need not rely on exchanges, and perhaps Proof of Stake coins that don’t rely on mines. But almost every proposed proof of work design for stable coins are ones that are more monetarily flexible than bitcoin. True stealth seems to requires a flexible monetary policy. Chew on that for a while.

    [Reply]

    Hurlock Reply:

    “I feel that any kind of precious metal standard (including supply limited crypto like BItcoin) has a problem that it’s mode of dealing with recessions is not very human friendly.”

    Have you read any book by Mises or Rothbard on depressions? Or Hayek? Or any post on economics by Moldbug for that matter? “Not human friendly”
    It is QE which is not human friendly as in the long term it only worsens the situation. Only an extremely short-sighted person and a total liar can claim that QE is a better “human” option than letting the market readjust.

    This ‘deflationary spiral’ is an utter myth and anyone who repeats that theory is a certified crank. Huge amounts of deflation are only experienced after huge amounts of overvaluation as in bubbles created by central banks expanding the money supply. Moldbug wrote plenty on how the business cycle is a banking cycle, yet although you cite him on his theory of money, you seem to have completely missed those other things he wrote on economics.
    One of the biggest recessions in american history 1920-1921, after WWI, had no QE and it ended it about a year and a bit. Thankfully because it was just around elections and the government was too slow to screw things up.

    [Reply]

    Porphy's Attorney Reply:

    Jim Grant has a new, solid book out on that forgotten 1920-21 depression.

    I tend to think Grant knows a bit about interest rates & their effects. Likely more than MMTers

    [Reply]

    Kgaard Reply:

    Grant is heavily over-rated. His basic problem is that he doesn’t grasp that an increase in monetary base does not mean anything when viewed in a vacuum. This is such a fundamental point and he doesn’t get it. He’s forever warning about hyperinflation just as a function of looking at monetary base figures. This is the sort of error a 3rd grader would recognize. Monetary base is only half the equation. One needs to consider demand for monetary base as well. If commodity prices take off, then we know the central bank has been putting out more monetary base than was actually being demanded in the economy. For the past couple of years commodities have been drifting lower. Ergo, the Fed has not been putting out more money than the economy has been demanding. But Grant will keep going on with his same schtick warning that hyperinflation is just around the corner.

    blogospheroid Reply:

    In the great depression, the economies that got off the gold standard did better in exactly the order that they got off the gold standard.

    [Reply]

    Posted on November 21st, 2014 at 6:56 am Reply | Quote
  • Different T Says:

    @ kgaard

    Yes the irony of my commenting on a neoreactionary site has struck me as well.

    If you consider Admin’s and many of the commenters’ views of economics to be ignorant at best (is this putting words in your mouth?), do you think their commentary on other, more “NRx” issues is more accurate? If so, why?

    [Reply]

    Kgaard Reply:

    Well … I thought about this more last night and this morning and have concluded that the whole notion that the Hurlockian Austrian position is necessarily THE neoreactionary position doesn’t make any sense. This is basically Grover Cleveland economics — but the world is vastly different than it was in the late 1800s or even mid 1900s. IQs are a bit lower and we now have 100% voter suffrage. How can you have a high-IQ, low-time-preference monetary policy when the population has become low-IQ and high time preference? The answer is … you can’t.

    A neoreactionary monetary policy would acknowledge that democracy has run riot and that this impacts the range of realistic options central bankers have. Nominal GDP targeting is pretty much the best thing you can do in such a situation.

    Perhaps the more useful question is, “What does a neoreactionary economic ACTOR look like?” Such a person would be conscious of the systemic decay going on around him and invest accordingly. A good example would involve the recent boom in airline stocks. You could see that as gold was falling this would put a lid on the oil price (since gold is the best measure of the real value of money and oil is pretty money-like as well). One could factor in flattish oil into one’s airline earnings models and then realize that airline profit margins were likely to expand. Recently the gold/oil decline dynamic went into overdrive with gold falling below $1200 and oil falling below $80. This is basically money falling out of the sky for airlines. To me this investing approach is equivalent to an Evola-esque cultural path: It’s a fallen cultural world so we have to pick our own way through the debris. Just as it’s a fallen monetary world and we have to pick our way through THAT debris too.

    The Bitcoin option is interesting, but to me still not mature enough to be useful. Bitcoin s basically your “exit in place” approach. I would be more on board with it except I still don’t understand how the fuck it works and the fact that its value swings wildly is inherently unnerving. Currencies are supposed to fill three purposes: Unit of account, medium of exchange and store of value. Bitcoin doesn’t really do any of these yet. It does, however, give anonymity to transactants (new word there, I think). That’s now a much bigger concern than in the past.

    Last point: Textbook Austrianism is not at all radical today. Recall that in the 2012 Republican presidential debates EVERY SINGLE CANDIDATE said they would fire Bernanke. Gingrich said he’d fire him “tomorrow.” They’re all reading the same books. (Though actually Rothbard, Mises and Hayek are a lot more nuanced on the question of what to do AFTER a crash occurs. They’re not as averse to printing your way out as Hurlock seems to be believe.)

    [Reply]

    Hurlock Reply:

    Firing Bernanke is not necessarily texbook austrianism. There are much more requirements to reach that level than just being mad at the FED chairman. Everyone is mad at the FED chairman anyways.

    Do provide those quotes by Mises, Rothbard and Hayek, where they claim that printing more money is a good idea to get out of a depression.

    [Reply]

    Kgaard Reply:

    I knew you were gonna ask for the quotes. Fact is I can’t find them. Somebody posted a great one (I think on this site or perhaps elsewhere) from Hayak or Mises that basically totally corroborated my view on this. With Rothbard, it’s clear to me that if you read between the lines of Mystery of Banking he advocates that printing your way out of crashes is a reasonable thing to do, but there is no firm quote.

    vimothy Reply:

    I posted this once already, but with a link, so perhaps it got trapped in a spam-queue.

    “That so long as a state of general unemployment prevails, in the sense that unused resources of all kinds exist, monetary expansion can only be beneficial, few people will deny. But such a state of general unemployment is something rather exceptional, and it is by no means evident that a policy which will be beneficial in such a state will also always and necessarily be so in the kind of intermediate position in which an economic system finds itself most of the time, when significant unemployment is confined to certain industries, occupations or localities.”

    — Hayek, “Full, Employment, Planning, and Inflation”, the Institute of Public Affairs Review, Melbourne, vol. IV, 1950

    Few people would deny the benefits of monetary expansion in a state of general unemployment, says Hayek — perhaps with an eye to those who, many years hence, would claim his mantle.

    vimothy Reply:

    “The Hayek-Robbins (“Austrian”) theory of the business cycle did not in fact prescribe a monetary policy of “liquidationism” in the sense of doing nothing to prevent a sharp deflation. Hayek and Robbins did question the wisdom of re-inflating the price level after it had fallen from what they regarded as an unsustainable level (given a fixed gold parity) to a sustainable level. They did denounce, as counterproductive, attempts to bring prosperity through cheap credit. But such warnings against what they regarded as monetary over-expansion did not imply indifference to severe income contraction driven by a shrinking money stock and falling velocity. Hayek’s theory viewed the recession as an unavoidable period of allocative corrections, following an unsustainable boom period driven by credit expansion and characterized by distorted relative prices. General price and income deflation driven by monetary contraction was neither necessary nor desirable for those corrections. Hayek’s monetary policy norm in fact prescribed stabilization of nominal income rather than passivity in the face of its contraction.”

    — Lawrence H. White, “Did Hayek and Robbins Deepen the Great Depression?”, the Journal of Money, Credit, and Banking, Blackwell Publishing, vol. 40(4), 2008.

    Kgaard Reply:

    AWESOME quotes Vimothy. These should be mandatory refrigerator magnets for every Austrian hardhead in the country.

    Different T Reply:

    @ kgaard

    That’s not an answer (which might be an answer).

    [Reply]

    Posted on November 21st, 2014 at 12:50 pm Reply | Quote
  • Hurlock Says:

    @ Different T

    “self-appointed brahmin”
    Umm, what? When exactly did I appoint myself brahmin?

    Do you have something to add or are just here for the snarky comments?
    If the latter, please get the fuck out.

    [Reply]

    Different T Reply:

    Do you consider yourself a brahmin?

    [Reply]

    Posted on November 21st, 2014 at 1:10 pm Reply | Quote
  • spandrell Says:

    I’m gonna go Cochran and sincerely ask: does anyone here have a clue?

    Abe is certainly no genius, and Kuroda is no Feinmann either. But what exactly is Japan supposed to do?

    The debt is there, and it will only get worse. Pensions and healthcare spending will certainly increase, and Japan’s working population is decreasing 1.2% every year.

    Fixing natality wouldn’t work, as babies aren’t working population. If only the dependency rate would get even worse.

    Defaulting on the debt is unthinkable for political reasons, and it would wipe out the savings of most of the country. Not a good sell.

    The only option is to inflate the debt away. And that’s what they’re trying to do. It won’t be pretty, it might wreck the country for good; but there is no other option. None.

    Of course USG is pushing for more immigration but we all know that would only make the problem worse.

    Japan is going to hell but that’s not Abe’s nor anyone’s fault. You can’t grow an economy with less people, worse still with less intelligent people, as it’s likely the case. So the economy is going to hell either way. Inflating the debt away is just a function of democratic politics, where you need to make the decay slow enough so the voters don’t notice.

    And that’s all the story. The US and Europe are all in the same conundrum, with migrants to make the situation worse. So you all better sit tight and watch how Japan will turn out.

    [Reply]

    Hurlock Reply:

    You can’t inflate the debt away. This is what you tell the mass population to keep them calm.
    The more you try to inflate it away the bigger it ends up, so in the end you will have to default on a bigger debt than a smaller one if you chose not to kick the can down the road. But of course, this is democracy, and no one wants to take responsibility.

    But this only makes matters worse as if defaulting now looks scary, after years and years of massive QE it will be positively terrifying. The sane option is to accept reality. Yes you probably wont have growth with a shrinking population, but at least you can try to not make matters even worse in the long term.

    Insofar as the dependency ratio is concerned, well, this is why having a welfare state is retarded. The responsible solution is to freeze the monetary base, cut taxes, cut the spending/deficit and privatize fking everything. Yeah, short-term it’s going to be pretty ugly, especially considering Japan’s current state, but things will stabilize in a few years to a decade and then get progressively better.
    Going the ‘inflate away’ route is essentially slow national suicide. But hey, at least we don’t have to deal with the problem immediately!

    Insofar as fertility is concerned, Jim already has the answer and it is to make women the property of men again.

    Do all of that and in a few decades you will have a growing population + a growing economy once again.

    There is always another option. But of course in a democracy, no one would even think about it.

    [Reply]

    spandrell Reply:

    Bullshit. Debts have been inflated away all the time. 1946 for example. Japan never defaulted on its pre-war debt; it just fooled everyone into thinking they paid it. Worked pretty well given the circumstances; most of the population was close to starvation anyway. A massive wealth tax that decimated the aristocracy made the plebs happy too.

    The responsible solution is to freeze the monetary base, cut taxes, cut the spending/deficit and privatize fking everything.

    Oh yeah, and make Moldbug your king while you’re at it. Please. There are laws to politics the same way there are laws to economics, physics and biology. Japan has a political arrangement which might be more or less retarded, but it’s not going away short term. This is part of the options. This is part of reality. Talking about “what to do” without regards to what is actually feasible is being a child.

    Japan has a choice between short term pain or long term pain, and obviously they chose long term pain. Time preference exists. Shouting on the internet won’t make it go away. You’d make the same choice in the circumstances.

    [Reply]

    admin Reply:

    “There are laws to politics the same way there are laws to economics, physics and biology. ” — I don’t think anyone here disagrees with that. We’re just drawing the obvious conclusions about what these laws entail.

    The fact that an objectively insane action is politically constrained doesn’t give it any additional mileage with Gnon. It’s stupid apes drawing the inevitable hideous consequences from their stupidity.
    “But they’re stupid apes, what else could they do?”
    “Probably nothing.”

    Izak Reply:

    But if your Gnon realizes and wills that the sun will eventually burn itself out 5 billion years into the future or so, why would any time preference, low or high, matter at all? Everyone in this solar system will be dead.

    Seems more logical for me to understand that all things have a time and place and that all of life exists in a continuous state of flux. If unending indefinite survival is all that matters to Gnon, then the humans are beneath the apes, and the apes beneath the cockroaches.

    Alrenous Reply:

    The actual debt itself can’t be inflated away, only moved. Long-term, the ability to move debt encourages more borrowing, meaning much more total debt.

    Lesser Bull Reply:

    Of course you can inflate debt away. It’s deficit that you can’t really dispose of that way. (Though if your deficit consists of a lot of unindexed payments, you can inflate your deficit away too.)

    [Reply]

    Posted on November 21st, 2014 at 1:20 pm Reply | Quote
  • dantealiegri Says:

    @Kgaard

    Nominal income is always numbers. You are *seriously* confusing yourself. Real income is always a DELTA product.

    What this means is: Inflation pushes people to buy now because their money will be worth less later ( the delta ). Deflation pushes people to buy LATER because their money will be worth MORE later ( the delta ).

    [Reply]

    Different T Reply:

    Is this:

    Inflation pushes people to buy now because their money will be worth less later ( the delta ). Deflation pushes people to buy LATER because their money will be worth MORE later ( the delta ).

    referring to this:

    Hurlock this is where you go wrong … in a deflation nominal income is NOT just numbers. In deflations “the nominal becomes the real” because the debt is in nominal terms, and companies sell widgets priced in nominal terms etc etc.

    ?

    The first quote is talking about consumers, the second is not. Is that understood? If so, the concept kgaard is referencing is sticky prices (debt, widget, labor, blah, blah, blah).

    [Reply]

    Kgaard Reply:

    Yes thanks for pointing this out. It’s not clear to me that Dante and I are even in disagreement in any profound way. Stickiness is a real issue. As are expectations of ever-falling prices. Devaluations are a way to deal with these problems in ossified, high-tax, high-regulation, low-fertility economies. The only better solution is to slash tax rates in half, but they are afraid to do that.

    [Reply]

    Different T Reply:

    The only better solution is to slash tax rates in half, but they are afraid to do that.

    Assuming you mean slashing tax rates and not spending, this seems poorly thought out.

    Related to:

    My view is that you can’t have a gold standard and 100% participatory democracy.

    that isn’t the only thing.

    Posted on November 21st, 2014 at 4:08 pm Reply | Quote
  • Kgaard Says:

    @dantealiegri

    Nope, not poorly thought out. You’re focusing on the deficit but that is the wrong target. You need to focus on growth. Japan has a gigantic tax wedge, which reduces the incentive for entrepreneurs to take risks. While their neighbors have been cutting taxes Japan has been doing nothing (and most recently RAISING the VAT, which was dumb).

    [Reply]

    Kgaard Reply:

    That was in reply to Different T. Don’t know how it showed up as a reply to Dante …

    [Reply]

    Different T Reply:

    @ Kgaard

    It seems like the point was not understood.

    ———–

    These numbers need to get closer to 10%. When that happens nominal GDP will get rocking, stocks will soar, profits will soar, tax revenues will soar and Abe will be a global hero.

    It appears you think monetary/fiscal policy is actually going to fix things.

    Here is something you said in an earlier thread:

    What it does is square the circle created by the insatiable desires of a democratic electorate. The solution is that you give them what they demand in nominal terms — but every time shave a little more off the edges of the coins. It’s sloppy but it can work for a loooong time (as evidenced by the 2% interest rates prevailing in the US, Europe and Japan).

    To be clear, is your hypothesis a prolonging or a solution?

    ———–

    And your requested Hayek quote per Blogospheroid:

    Quote from F. A. Hayek
    ““The moment there is any sign that the total income stream may actually shrink, I should certainly not only try everything in my power to prevent it from dwindling, but I should announce beforehand that I would do so in the event the problem arose.” – See more at: http://hayekcenter.org/?p=5047#sthash.SE6FAyEH.dpuf“

    [Reply]

    Kgaard Reply:

    Tough question Different T. The true solution is low tax rates plus fairly stiff capital requirements on banks so you don’t get in the sorts of crashes that lead to the need to do QE in the first place. But again, that’s life in a democracy — particularly a democracy with a central bank that acts as lender of last resort and powerful banking interests buy off legislators. But what are you gonna do? The US is doing about as good a job as can be done given the constraints imposed. Japan is getting on board. ECB still not there. Nice Hayek quote.

    [Reply]

    Posted on November 22nd, 2014 at 3:32 am Reply | Quote
  • blogospheroid Says:

    @ admin at Nov 21, 4:09 PM

    Gnon doesn’t care about human debts being violated. Gnon cares about farms, stores, machines and weapons. Kgaard and I are making a claim that in the current world, with the current money illusion set in, an NGDP level targeting policy around the approx long term productivity rate (around 3%) will lead whichever polity uses it to greater prosperity – more farms, more stores, more machines, more weapons, more science. You believe that a commodity or a faux commodity standard is more conducive to prosperity. Yet, no polity is willing to bite the bullet and peg their currencies to gold. Even the ultra conservative swiss choose to peg their currency to the piss poor Euro, because they were concerned about their factories, their workers and their skills. Real things, kept afloat by a weak(er) currency. What will be Gnon’s verdict – I don’t know, but current evidence leans towards weakening the currency and allowing people’s skills not to degrade.

    http://blogs.wsj.com/economics/2014/11/17/deep-recessions-leave-permanent-scars-fed-research-finds/

    [Reply]

    Posted on November 22nd, 2014 at 7:53 pm Reply | Quote
  • Hurlock Says:

    @blogospheroid and @Kierkegaard

    I do not intend to waste my time with any of you anymore, so I will just leave this here:
    http://unqualified-reservations.blogspot.co.uk/2009/07/urs-crash-course-in-sound-economics.html

    Also, all other posts by Moldbug on economics. Read all of them.
    And his Gentle Introduction Part 3, where he discusses the state of modern economics.

    Ok, I lied, I will waste a little more time, because this was just too laughable to pass up:

    “Please mention a time from history where the nominal income stream was dropping and people were prospering in most other metrics.”

    As I said, there is no necessary connection between the two. If at the same time when the economy was prospering nominal income was also rising, this by itself proves nothing. What is remarkable here is how flawed your reasoning is. Your whole argument is like claiming that because a rooster crows every morning before the sun rises, the rooster is making the sun rise. And then when being told that there is no necessary causal connection between the two, replying with “Show me an example of when a rooster crowed in the morning and the sun didn’t rise”.
    Not that I am surprised that you cannot spot one of the simplest fallacies ever.
    I realize you have a very shallow understanding of logic and economics, but come on, man!

    And as I already said (and you of course completely ignored) we have clear examples of nominal income streams rising, while real income streams were decreasing – as has been happening in the past 100 years with inflation.

    [Reply]

    Kgaard Reply:

    Okay so I read some of the Moldbug piece. I suspected it would be dogmatic and thus wrong, and that’s in fact what it was. Basically, his ideal monetary system is 100% gold backing.

    “In an ideal monetary standard, the stockpile of money would be fixed, and there would be no mining or counterfeiting whatsoever – and thus no leakage.”

    I’m not cherry picking that quote because he says the same thing further down.

    100% gold backing is inherently no good. You’ll recall that there were periods in the 1800s when US monetary base was growing 30% a year. It’s just too much for a gold-backed system to handle. The only realistic gold standard is one wherein a central bank guarantees to buy your notes for gold at a fixed rate, but does NOT have 100% backing of monetary base. In theory such a gold standard could be run with very little gold. If people are coming to the gold window with notes, you (as central banker) soak up the excess liquidity via open-market ops. If they’re coming to you with gold, it means you haven’t put out enough cash and need to print more. This is how real-world gold standards have been run for a couple hundred years.

    The Moldbug model suffers the same weakness as Bitcoin: When you limit the supply of currency to the gold supply, the VALUE of currency must inherently move all over the place depending on the interplay between demand for money and supply of gold in the central bank. In a fast growing economy the value of money will soar because everybody will be dying to get their hands on currency to do transactions, but the central bank won’t be able to meet the demand due to lack of physical gold.

    Nobody takes 100% gold backing seriously anymore as a model for precisely this reason. It’s just unworkable.

    And those quotes from Vimothy and Different T seem to put a spike through your argument that the Austrians were always and everywhere against money printing to get out of depressions, no?

    [Reply]

    Hurlock Reply:

    Look, I do not indend to take you seriously anymore, as it is obviously pointless. This comment of yours once again proves that you are fundamentally clueless and this will be (I hope) the last time I will be pointing out your cluelessness.

    First of all on gold being ”unworkable”. I am not even sure how to respond to that. I will suggest that you stop reading Scott Sumner’s blog for, say, a month and instead read some actual economic history. What real economic history will tell you is that precious metals such as gold and silver have been functioning for millenia, while fiat paper and monetary debasement of precious metals, whenever they were introduced ended up in failure. Every time. But suddenly for some mystical reason they ‘just don’t work anymore’. And I know it’s true, because Paul Krugman and Scott Sumner said so!

    Also you seem to operate under the delusion that there is a need for an ‘elastic supply of money’ for an economy to function well. This is the biggest mainstream delusion nowadays shared by all economists – Keynesian and Monetarist. Moldbug talks about this in his Gentle Introduction Pt3. Moldbug explains very well why that the actual quantity of money is irrelevant, what matters is the stability of the money supply. Hume already explained it almost 300 years ago. But hey, if David Hume and Moldbug can’t convince you, why am I even trying?
    But just for fun, can you explain to me why there is a need for an elastic supply of money?

    Lastly, I never claimed that all austrians that ever lived have never implied that monetary expansion may have some positive function.

    “And those quotes from Vimothy and Different T seem to put a spike through your argument that the Austrians were always and everywhere against money printing to get out of depressions, no?”

    Do point me to where in this comment thread I have claimed that ” the Austrians were ALWAYS and EVERYWHERE against money printing”. This is something you just made up on the spot. What actually happened, and you can check this by just reading the relevant comments in this thread is that you claimed that both Mises, Rothbard and Hayek have claimed such a thing. That is you claimed that ALL OF THEM have said that monetary expansion is a good idea. Then I requested you to provide me with quotes where ALL THREE have said similar things. I got only quotes from Hayek, and from the looks of it largely out of context. But it’s irrelevant either way since I never claimed he didn’t either.

    [Reply]

    Kgaard Reply:

    Well, on the question of gold standards, it’s important to grasp that there are two distinct types: One where the currency in circulation is 100% backed by gold, and the other where the gold price of the currency is guaranteed but not backed by gold behind the counter. Two radically different approaches. The latter is workable, the former is not. Moldbug, from his writing, unless I misunderstand him, is advocating the former.

    In your own words, what do you actually mean by “stability of the money supply.” If an economy doubles in size, are you saying the quantity of money in circulation should not change? Help me out here. If that’s your view it’s patently insane.

    I suppose you could say the quantity of money should only increase at the rate of increase in gold reserves at the central bank. But that’s still kind of ridiculous, as there is no reason an economy should grow at the same pace new gold is discovered.

    Different T Reply:

    From the UR link:

    Thus, the price of a prediction instrument is only as good as the collective intelligence of its participants.

    Why is this being limited to “prediction instruments.” For a farmer; the price he offers on a loan, the price he offers for seed, fertilizer, blah, blah, blah are predicated on his crop expectations correct?

    If so…

    “Barring bizarre and unforeseen real-world phenomena, such as a zillion-ton asteroid of silver landing in Brazil, a sound economy is stable. Supply is always equal to demand, bubbles do not exist in commodities or financial instruments”

    does not follow at all.

    What can “Supply is always equal to demand, bubbles do not exist in commodities or financial instruments” even mean?

    [Reply]

    Different T Reply:

    This seems to fit here:

    [Hurlock] Mal-investment is always bad.

    [Different T] Mal-investment. Mal- according to whom?

    [Hurlock] According to the bust at the end of the boom.

    [Reply]

    blogospheroid Reply:

    My initiation into libertarianism was via reading Ayn Rand, so, yes, I have read pretty much all of the gold bug stuff. I live in India , so am well aware of the lust for gold and how inflation feeds it. I did not ask you for examples of nominal income streams increasing and real income streams decreasing. I asked you for examples of the other way around. If your model is correct, you shouldn’t find it difficult to find examples.

    Money illusion is fundamentally asymmetric. Please try to understand that. People do not feel more prosperous if they draw in less than what they did last quarter, irrespective of the prices they see in the supermarket. They tend to decrease their consumption of {anything not absolutely necessary} and increase their savings. This unravels the division of labour that is prevalent. There are clear causal lines between money illusion , sticky wages and depressions.

    Why does the bible call for jubilees every 7 or 8 years? Because of the phenomena of the occasional drought leading to exactly the kind of spiral I was talking about.

    Vernon Smith’s experiments show that even in a perfect information market , bubbles can occur. In a super hard currency world, the bursting of these bubbles will almost inevitably lead to a depression.

    Last of all, QE is a second best policy, used when the CB’s announcements are not credible. When credibility is established after QE, then announcement of the NGDP-LT path is enough. The markets will self adjust without the CB having to step in again and again. Bailouts are not needed, protectionism is not needed. In an NGDP-LT polity, inflation will occur if either the polity has met with a natural disaster or the government’s policies are not good. Every round of inflation, not caused by a natural disaster will result in people protesting against government spending and regulations.

    It would make a very good breeding ground for capitalist values.

    [Reply]

    Different T Reply:

    @ Kgaard and Blogospheroid

    I do not understand the need to make claims like these:

    “When credibility is established after QE, then announcement of the NGDP-LT path is enough. The markets will self adjust without the CB having to step in again and again. Bailouts are not needed, protectionism is not needed. In an NGDP-LT polity, inflation will occur if either the polity has met with a natural disaster or the government’s policies are not good. Every round of inflation, not caused by a natural disaster will result in people protesting against government spending and regulations. ”

    “The true solution is low tax rates plus fairly stiff capital requirements on banks so you don’t get in the sorts of crashes that lead to the need to do QE in the first place.”

    It all appears very “Austrian-like.”

    [Reply]

    Kgaard Reply:

    It is Austrian like. The Austrians were right about the business cycle and about moral hazard and about excess credit creation leading to booms. What we’re really arguing about here is what you do in BUSTS. After the basic Austrian principles have been violated (via a credit orgy) what do you do then? Sit by and let everything collapse? Or print? Logic says the latter (and Hayek agrees).

    By the way, the notion that printing to keep prices from collapsing leads to hyperinflation has been completely disproven — by Hurlock’s own FRED chart of monetary base. The base exploded, yet CPI is quiescent. You could quibble that this price or that has gone up a few percent, but we’ve had a tripling of monetary base and basically nothing happened. It’s as close to a perfectly controlled experiment of the hyperinflationists’ claims as you’re going to get, and it failed.

    Different T Reply:

    Is the contextual meaning of “Austrian-like” from that post so opaque?

    It is referring to making unsupported claims about the effectiveness of something.

    The true solution is low tax rates plus fairly stiff capital requirements on banks

    And yet in another post you discuss the breakdown of the nuclear family as being a prime economic cause of many “troubles.”

    The italicized line indicates your position is the correct mix of fiscal and monetary policy can “solve” what you perceive as something in need of fixing. This would appear to mean that you do not think the breakdown of the nuclear family (the relations among people) is of first importance, rather it can be corrected thru policy and your desired outcome can be maintained thru the correct prescription.

    blogospheroid Reply:

    MM is basically post-great depression Hayek, correctly understood and policies appropriately formulated. The reason why most market monetarists are not in favour of shifting to a low NGDP growth path immediately, is because that will cause a great upheaval in the labour and capital markets. It will cause great uncertainty and uncertainty is anathema to the conservative.

    But even Scott Sumner is willing to consider a gradual move to low growth NGDP-LT , provided people have to adjust slowly. The following blog post can be very informative.

    http://www.themoneyillusion.com/?p=3059

    Posted on November 22nd, 2014 at 10:12 pm Reply | Quote
  • Hurlock Says:

    @ Kierkegaard

    “If that’s your view it’s patently insane.”

    Yes, that’s exactly my view. How is it patently insane I do not really understand. It is your view that the quantity of money must expand along with the economy which makes no sense. And it has only been in vogue for some 80 years. Before that every serious economist considered the idea pure nonsense. And as in a lot of other subjects, the pre-moderns were right once again.
    Do explain why is it ‘patently insane’, though.

    [Reply]

    Kgaard Reply:

    Well here again I think you are confusing the two types of gold standards. It certainly was not orthodox view 80 years ago that money supply had to be limited to the amount of gold a central bank owned. All that was guaranteed was the exchange rate between gold and currency (i.e. 1 dollar would get you 1/35th of an ounce of gold). You’re forgetting/overlooking/ignoring the role of open market operations in managing the value of money — just as Jim Grant does. Grant assumes that fiat currency is inherently worth nothing, and one day it will be revealed as such (potentially occurring overnight). That’s just wrong. Excess liquidity can be soaked up by central banks selling bonds into the banking system. This is how central banks work. This is how modern gold standards work.

    The problem with the system you propose is that the value of money would be wildly volatile. It would soar and crash constantly, depending on demand for money and supply of gold in the central bank. And central banks would constantly be fighting each other for gold, since they could not grow their economies effectively without it.

    [Reply]

    Kgaard Reply:

    If you want an idea of what the value of currency would do under a Moldbug-style gold standard (i.e. 100% gold backing of all currency in circulation), just look at a chart of Bitcoin. The price of currency would be very volatile, and probably with a sharp upward bias over time.

    [Reply]

    Hurlock Reply:

    I will just say this:

    Look, it’s really simple, it doesn’t matter how much monetary units you have, what matters is what is the percentage of the total supply that you have. That’s what you need to grasp about money.
    You don’t need more monetary units to grow you economy. That’s a fallacy. But it’s remarkable how you keep side-stepping the issue.
    No, the exchange rate wouldn’t be volatile. The exhange rate would be entirely predictable which is all you want from a medium of exchange/store of value. And Bitcoin is a different case.
    Btw, Moldbug wrote quite a bit about Bitcoin too, maybe you should read those as well.

    Kgaard Reply:

    @Hurlock

    What are you talking about if NOT a 100%-gold-backed system? And are you really proposing an economy where the total number of currency units is fixed at the outset, yet the economy triples (or whatever) in size?

    Posted on November 23rd, 2014 at 3:39 am Reply | Quote
  • Hurlock Says:

    @Kiekegaard

    Btw, when in the blue hell, did say say anything of the sort that “money must be limited to the amount of gold that the central bank owned. Where do I even talk about a central bank at all?
    For the last time, stop putting words in my mouth.
    I know I am essentially talking to a wall here, but jesus fucking christ!

    [Reply]

    Hurlock Reply:

    Just for fun, insofar your ‘gold is too volatile’ argument is concerned I will just leave this here:
    http://www-tc.pbs.org/teachers/mathline/concepts/president/prc18991.gif

    [Reply]

    Posted on November 23rd, 2014 at 4:31 am Reply | Quote
  • blogospheroid Says:

    A hard monetary system would channel an immense amount of energy from the economy into the industry that produces the monetary commodity. This is because due to deflation, the industry that produces the commodity is always in demand.

    A super hard monetary system would have a fixed supply.

    A hard monetary system would be very tough.

    A super hard monetary system would completely change the face of the world.

    Living in a super hard monetary system

    Money illusion cannot be entertained, hence nearly everyone has a variable component in their salaries. This continues until the variable drops to zero one day and people have to take a base salary cut. A few more iterations of these and soon everyone’s salary is purely variable. The most successful people having the maximum leverage would probably be the only ones to have fixed salaries.

    Almost every saving instrument would be supplanted by saving of the money. After all, the money acts as an automatic index fund of everything with no charges. There will be many attempts to counterfeit the currency.

    The price of everything keeps dropping. Except for the occasional blip when a rich man comes spending.
    http://en.wikipedia.org/wiki/Musa_I_of_Mali#Islam_and_pilgrimage_to_Mecca

    So it can be said that prices would be volatile with a downward bias. A number of commodities would be produced from plant that was created in the pre-hard money era. As and when these shut down, it will take a much longer time for a new one to come up due to the high opportunity cost of giving up “the automatic index fund of everything”.

    Due to the unduly large importance of big spenders, media attention would be totally focused on how and where are the rich spending, to a much greater extent than today.

    Long lasting corporations would not exist, since almost no one will be able to persistently beat the market. Almost all collaborations with other people will be for short projects, since it would mostly be utilizing an arbitrage opportunity that will be extremely short lived.

    Governments would mostly tax the only wealth there is, the monetary standard. Hence either transactions tax or demurrage will become the tax of choice.

    With every recession, a number of people will enter receivership, which will either be resolved by bankruptcy or slavery, depending on the polity’s rules. My guess is that polities that allow bankruptcy will do better.

    It’s not an impossible world, which is envisaged here. It is weird and very tough on people who don’t own assets. It is not friendly to intelligence amplification as the simple heuristic – save money – beats 99.9% of all other strategies and people don’t form long term corporations.

    [Reply]

    Steve Johnson Reply:

    blogospheroid Says:

    “A hard monetary system would channel an immense amount of energy from the economy into the industry that produces the monetary commodity.”

    In any fiat monetary system all assets are owned by whoever has the authority to print money because they can at will print the money to buy those assets, print money and give it to their friends and allies – their friends and allies can then purchase valuable productive assets or the goods and services from the people who weren’t given fiat money.

    This channels an immense amount of energy from the economy to influencing whoever has the authority to print money.

    That’s the alternative.

    At least gold is nice to look at – nothing that wins the favor of the USG is even pleasant.

    [Reply]

    blogospheroid Reply:

    I agree. Any ruler exercising such extreme options will soon find his land bereft of entrepreneurs. That is why committing to an announced nominal path is smart. Entrepreneurs know exactly where they are placed with respect to the money stock or money flow. Monetary policy without defined nominal targets is scatter shooting.

    In my earlier comment, I mentioned that if you insist on a commodity standard, an electricity standard is better than a gold standard. Did you give that a thought?

    [Reply]

    Posted on November 23rd, 2014 at 6:50 am Reply | Quote

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