Quote notes (#73)

Adam Gurri on Diane Coyle’s new book GDP: A Brief but Affectionate History:

One thing I personally came away from Coyle’s book with is the feeling that NGDP targeting and similar notions are probably a bad bet. Depending on what particular recipe has been agreed upon for calculating GDP, policy can easily end up optimizing to very unproductive ends. For example, Coyle mentions how changes in the recipe ended up far overstating the financial sector’s component. The larger the component of GDP the financial sector makes up, the more likely the government is to bail out big firms to prevent a big collapse — after all, the further headline GDP falls quarter over quarter, the more incumbent politicians sweat about losing their seats.

This blog has already dismissed macroeconomic aggregates as politicized ‘garbage‘ — so I agree.

It’s hard to tell from this short review whether Gurri sees the search for “a better proxy for welfare” as worthwhile or hopelessly Quixotic. Regardless, with utilitarian distractions firmly side-lined, it would be intrinsically valuable to arrive at a realistic measure of economic performance (i.e. improvement in productive capability), to provide guidance for systemic auto-correction. It’s well worth recalling how radically inadequate GDP is for this function.

ADDED: Related conundrums raised in James K. Galbraith’s review of Piketty — measuring capital is difficult.

ADDED: Scott Sumner vs Larry Summers (not an agonizing choice). This is good: “I’m a right wing liberal because I have a counterintuitive view of the world …”

ADDED: Scrap the CPI.

April 15, 2014admin 32 Comments »
FILED UNDER :Political economy

TAGGED WITH :

32 Responses to this entry

  • Adam Says:

    The literal message is that if there’s going to be a politically important metric, there are better approaches than GDP.

    The Straussian message is that any metric that becomes politically important is going to be ruined by the political process.

    [Reply]

    Lesser Bull Reply:

    The Straussian point applies whether or not the metric is an official metric. Case in point: bond ratings.

    [Reply]

    Adam Reply:

    Well said.

    [Reply]

    Lesser Bull Reply:

    Good journalism, by the way.

    admin Reply:

    Thanks for the excellent clarification. (Strauss for me).

    [Reply]

    Posted on April 15th, 2014 at 4:53 pm Reply | Quote
  • Quote notes (#73) | Reaction Times Says:

    […] By admin […]

    Posted on April 15th, 2014 at 8:34 pm Reply | Quote
  • Kgaard Says:

    As a practical matter I don’t know what alternative there is to nominal GDP targeting. Central bankers have been doing it in one form or another since 1933. China itself may be confronted with a very profound challenge along these lines: Let the economy crater due to a credit vortex caused by housing deflation, or pump it back up to keep nominal GDP going. Neither option is particularly good, but the crash option is worse.

    Ultimately the real problems are of course fractional-reserve banking and too-low bank capital ratios.

    So, I agree with the admin’s interest in electronic currencies as a possible way out of this whole mess. The central banking cartel may meet its demise in the same manner as higher education and mainstream journalism. You can’t FIX them — all you can do is build something completely new (i.e. online education, blogging). And that is now happening …

    [Reply]

    admin Reply:

    “I don’t know what alternative there is …” — depoliticized money (as you proceed to suggest).

    [Reply]

    Kgaard Reply:

    @Kgaard

    Right … Going around the central banks. I have to say that the electronic currencies are still quite headache-inducing. I am in a loop of economists and we kick around different ideas all the time. And nobody can really get their head around Bitcoin. It’s neither a medium of exchange nor a store of value. So what is it?

    The effort to create de-politicized money may in fact run into a brick wall right out of the gate. Right now it’s quite simple for two private parties to create a de-politicized contract. They simply need to include the necessary hedges in the deal (i.e. index the contract for inflation, or use gold for the transactional currency).

    But if you want to de-politicize MONEY, well, that means de-politicizing the distribution of social resources — and of course that’s exactly what politics is about (i.e. who gets what).

    Given that fact, electronic currencies would almost by definition have to evolve into black-market currencies for those seeking to do transactions that avoid taxation or legal scrutiny (i.e. for drugs).

    Here is a question that gets to the heart of the problem: Why would Wal Mart agree to take Bitcoin in exchange for a bar of soap if it has to pay sales tax on the transaction in US$?

    [Reply]

    Handle Reply:

    “Here is a question that gets to the heart of the problem: Why would Wal Mart agree to take Bitcoin in exchange for a bar of soap if it has to pay sales tax on the transaction in US$?”

    It doesn’t have to accept Bitcoin. Who cares what the merchants want?

    When I travel abroad, I use an American Credit Card denominated in American Dollars and somehow, without my need to know anything about the magical background process, I can use it to pay for anything, anywhere, in any currency without any hassle.

    Behind the scenes, the merchant is immediately transferred the proper amount in his own desired currency, and the equivalent amount of American Dollars is deducted from my account, exchanged for the foreign currency at the moment’s spot exchange-rate.

    Well, a slight hassle – the foreign exchange, settlement-delay and rate-risk hedge, and processing fee, all amounting to just a few percent of the transaction. That’s a negligible cost for the purchaser of an ultra-convenient way of doing business when conducting occasional, small purchases, and the merchant doesn’t care so long as he gets paid in the form he prefers.

    And what if the credit card is instead a debit card connected to a money-market account? Well, then, also behind the scenes, some bonds and other non-currency financial instruments have to be sold to satisfy the exchanges required.

    In principle, this should be extensible to any form of property for which there is a deeply liquid market, “no significant exchange settlement delay”. If Walmart wants $5, then I swipe my card, they get $5, and I agree to depart with whatever number of Bitcoins was required to immediately front that $5 and support the system that made that fronting possible.

    The only thing the merchant’s acceptance of Bitcoin itself provides for the purchaser is anonymity in purchasing. For this they would have to accept it in some manner without strong authentication and ‘no questions asked’ anonymous accounts.

    Well, guess what. Governments wont let that happen, because anonymity in purchasing, while having plenty of legitimate uses, also has plenty of illegitimate uses, which will flood into any effective, anonymous exchange system, and thus become a gigantic target for shutdown by any government that’s not essentially in league with a certain class of money-laundering criminal.

    The trend is definitely in the direction of stronger and ever stronger strong authentication requirements, and we’re fortunate, for the time being, that this hasn’t been made a requirement for internet communication like it has for bank-enabled money transfer. There’s also the matter of reporting capital gains and paying taxes, which any money transfer company will have to do.

    Blogospheroid Reply:

    @admin – There is no such thing as a depoliticized money. Every government collects taxes. The currency it collects taxes in is the currency it gives value to.

    [Reply]

    Posted on April 16th, 2014 at 12:49 am Reply | Quote
  • Handle Says:

    Gurri should read a Scott Sumner refresher before trying to leap over the chasm between Coyle’s criticism of government methods for estimating various conceptions of GDP, on the one hand, and the market reality of Aggregate Demand (all the spending on goods and services at current market prices, i.e. ‘actual NGDP’) on the other. You can depoliticize money and do all transaction in Bitcoin and it will be tough to estimate GDP or the Price Level, but it is, theoretically, completely straightforward to calculate metrics like Aggregate Demand and Money Velocity from the blockchain.

    In fact, Sumner himself had made many of Coyle’s same points, especially about the price level. So, wisely, he doesn’t recommend that the Fed target any government-concocted equation or estimate of GDP, but instead support and subsidize a market-based, intrade-like NGDP-futures options-exchange market, and, again, that’s just another way of saying ‘Aggregate Demand’, the optimal stabilization of which is how the case for “NGDP level-targeting of the forecast” is made.

    [Reply]

    admin Reply:

    “… it is, theoretically, completely straightforward to calculate metrics like Aggregate Demand and Money Velocity from the blockchain.” — It’s not an excruciating problem to measure money in terms of money, but if you want some grasp on economic fundamentals, it becomes far more of a headache. The ‘merit’ of an NGDP target is the naked admission “screw reality, all we care about is an imposed symbolic quantity consisting of whatever compound of fantasy values and actual production comes out in the wash.” Who cares whether it’s made up out of inflationary hallucination or industrial growth? That strikes me as a symptom of profound socio-economic decadence. It might be unusually intelligent postmodernism, but it’s still postmodernism.

    [Reply]

    Kgaard Reply:

    Well, I think Sumner would look at it differently. He would say that if your fiscal policies are bad, then your nominal GDP growth WILL be composed mostly of inflation (and thus real GDP won’t do much). But if your fiscal policies are good, then the growth will be real as well as nominal. If you have good fiscal policies CPI will be close to zero while real growth will be close to whatever your nominal GDP target is (e.g. 5%).

    This seems like a pretty sensible way to do it.

    It gets a little weirder when we think about Japan, though, because working age population is now falling 1% a year. So, you have to think in terms of nominal GDP per head. Japan is going to be a fascinating case study of what happens to markets and capitalism generally when working-age population aggressively declines. For instance, what P/E should you put on a Japanese retail clothing chain, knowing that its unit sales are gonna be 10% lower a decade from now regardless of what monetary policy does? I’m wrestling with this right now and it’s a tough one.

    [Reply]

    Handle Reply:

    Not my point at all. You are not keeping Monetary and Real considerations separate.

    Real growth comes from capital accumulation, efficient and dynamic reallocation, technological innovation, and a social structure with market-friendly rules and institutions. To the extent that any government can improve any of those factors at all, it is in the realm of ordinary, non-short-term fiscal policy. The emerging view, which I share, is that short-term fiscal policy has no net impact anyway, because Monetary policy will neutralize it. Long-term fiscal policy (i.e. insolvency) is a different matter.

    As Arnold Kling has pointed out, there is never any way to answer the important ‘real economy’ questions, whether ‘politicized’ or not (i.e.whether one is counting in gold, bitcoin, or dollars), without being arbitrary in one’s price-level numeraire, and making certain leaps of faith with regards to consumer surplus, because utility functions and one’s experience of economic changes are inescapably individualized. The best one can do is admit lots of inevitably deviation but try to pick a market-based statistical center-mass metric that tried to minimize those deviations, such as through a least-squares or other technique. Which is exactly what most economics-measuring institutions try to do.

    The monetary authority’s role is distinguishable. It is not to create the conditions for real growth, but to ensure that the network of expectations and obligations where the real economy interacts with monetary nominal instruments is maintained in such a way so as to avoid various detrimental negative and positive vicious cycles upon the occurrence of unexpected shocks and disruptions.

    So, for example, if you and write a contract for debt in terms of Bitcoins, what the hell does that have to do with the ‘real economy’ which is satisfied ten years from today so long as I deliver to you a certain number of Bitcoins, no matter what their exchange rates are, then what the hell does that have to do with ‘economic fundamentals’ such as real production per capita? Nothing at all – it’s a purely nominal consideration.

    Which is the fundamental problem of Monetary Economics. No one is entitled to a nominal instrument untethered from real-world production that is simultaneously a reliable store of real-world value. Such a thing is impossible, but such a thing is also in high demand, and the behavior resulting from that demand results in a lot of folly that the Monetary Authority must attempt to mitigate and suppress without simultaneously suffocating the whole ecosystem.

    What that means is that real-world shocks can propagate through the network of monetary obligations and then rub against rigidities that will not ‘fail gracefully’ when systemic instead of stochastic (i.e. liquidation and reorganization bankruptcy), because debt is the stickiest price and causes cascades of malinvestment-inflation or debt-deflation. It is through this channel that the monetary channel can affect the real economy and economic fundamentals, which is what you don’t want it do.

    That is, the medium of exchange and the medium of account cannot logically be always congruent, and that necessarily requires some mechanism of flexible intermediation if people insist on treating them as such, which they do, and not only because various interactions with the government makes it hard to avoid. It is an illusion, unsupported by historical experience, to think that ‘fixed quantity’ will always do a better job at this than any monetary management strategy.

    The volatility risks are different, but there are risks on both sides. “On the one hand, gold can’t be managed, on the other hand, gold can’t be managed.” Or you can replace ‘gold’ with ‘bitcoin’ or ‘fiat currency’ in that phrase. If a virtual currency were sufficiently well-adopted to become a genuinely competitive medium of exchange and account (i.e. obligations, claims, and debts), it would cause the same cascades upon real shock, but without the possibility of mitigation.

    NGDP level targeting is the best strategy policy I know of to keep the Monetary Authority out of the Real Economy’s business as much as possible, by minimizing the artificial influence of purely monetary phenomena. The fact that it is ‘postmodern’ (in your usage of the term) is indeed a merit, and a step in the direction of de-politicization that someone like you should favor.

    Furthermore, I’ll lay down my market and make a prediction: A second-generation virtual currency regime with an automatic NGDP-expectations level targeting function (or some proxy) built-in (once it reached a certain level of adoption) would both outcompete first generation rivals and its availability would accelerate adoption by addressing fears of volatility.

    [Reply]

    admin Reply:

    “No one is entitled to a nominal instrument untethered from real-world production that is simultaneously a reliable store of real-world value. Such a thing is impossible, but such a thing is also in high demand …” — this is (per expectation) brilliant and deserves either a serious response, or simple acquiescence. I’m kicking that can up the road for the moment …

    Your final paragraph throws me into a state of howling moral anguish that I probably need to work on. Aside from religious objections to the abomination of inflation (which I most assuredly have), however, what I’m not seeing is the attraction of an NGDP-based currency except, perhaps, as a medium of exchange. As a store of value it would surely be inferior to hard alternatives — whether metal or 1st gen crypto-currency?

    Of course, I’d rather see economic reality — as communicated through hard money — train human expectations (with whatever harshness proves necessary), rather than the concessionary reverse (e.g. NGDP targeting, or some worse kind of sloppy Kenynesianism such as the one we’re afflicted by now). Austerity and deflation are aligned with civilization and liberty, from which any deviation is at least mildly depraved. That hard money would “cause the same cascades upon real shock, but without the possibility of mitigation” strikes me as entirely a point in its favor — money is too valuable as an epistemological instrument to be turned into a shock-absorber by populist government.

    Handle Reply:

    @admin:

    “Of course, I’d rather see economic reality — as communicated through hard money — train human expectations (with whatever harshness proves necessary), rather than the concessionary reverse (e.g. NGDP targeting, or some worse kind of sloppy Kenynesianism such as the one we’re afflicted by now). Austerity and deflation are aligned with civilization and liberty, from which any deviation is at least mildly depraved. That hard money would “cause the same cascades upon real shock, but without the possibility of mitigation” strikes me as entirely a point in its favor — money is too valuable as an epistemological instrument to be turned into a shock-absorber by populist government.”

    The problem with this theory is that there are multiple social equilibriums, completely analogous to high-trust and low-risk social equilibriums. A high-trust society provides a better life in almost every way, but it is inherently vulnerable to occasional cheating and fraud. Major and harmful cheating events are always possible in a high-trust equilibrium, but don’t disturb the stability until they become too frequent. The problem is that ‘learning’ from a negative event can easily take the form of tipping into the low-trust equilibrium, which, like a black hole, is much more stable, but also awful and hard to climb out of. Productive Cooperation becomes too unlikely, and expenditures on security rise above the efficient level (security and Efficiency being classic trade-offs). In a low-trust environment, I must use my scarce disposable income to put bars on my windows; in a high-trust environment I can avoid the expenditure and use the capital to increase my wealth (while remaining susceptible to the occasional a glass-breaking hammer-wielding thug.)

    In economics and finance, there are also high-entrepreneurship / risk-tolerance and low-entrepreneurship / risk-averse social equilibriums, and human nature tends toward the latter, not the former, which requires social institutions that encourage people to take entrepreneurial risks and fail gracefully and start over instead of never trying because one is terrified of failing catastrophically. This is the wisdom embedded in bankruptcy codes, which, since they are known in advance to creditors, treat all parties with fairness and flexibility.

    And the problem with that is that ‘learning’ and ‘failure’ is a micro / individualized experience. Micro-level decisions may seem perfectly rational in isolation, but cannot process or incorporate information about possible systemic risks. After a systemic crisis, there is not necessarily any micro-level lesson to be drawn, and the same behavior may have a better result this time around. And there is no way for prudential micro-behavior to accumulate into prudential macro-stability in a nominal system.

    One way around the nominal problem would be for people to deal in something like shares of a mutual or hedge fund that invested in futures contracts with the best guess of weightings of future consumption needs. Which … would track nominal aggregate demand exactly. So the value of these hypothetical ‘new-dollars’ should follow a predictable-path in terms of its share of nominal aggregate demand, which is what NGDP-FLT actually does to actual dollars.

    When nominal aggregate demand falls short of expectation, nominal debtors and creditors are going to fail and fall, and the question is ‘how far, how hard, and with what cascading effects.’ The bankruptcy and foreclosure system is one attempt at ‘social shock absorbers’, but there is no reason to believe it’s less costly than debt-relief by means of small amounts of additional inflation when output falls short of expectations. The inherent problem, however, is that the government is far from a disinterested and transcendent observer, because it is a debtor too.

    Finally, as someone who favors de-politicization, you should favor any rule-based method over a discretionary-method, where the risks of abuse are entirely different. In the first case, the risk is that an announced rule will be violated despite the impact to the Monetary Authority’s credibility (the maintenance of which is of such prime important that it discourages violations except in extremis and the most exigent circumstances). In the second case, the risk is that one can’t even argue that a rule is being broken.
    But the best part of rule-based monetary policy is that the rules can be automated and globalized / de-nationalized. For instance, in future-generations of virtual currency.

    Handle Reply:

    @admin:

    As the late Lawrence Auster would say, ‘Synchronicity!’ Interfluidity, right on cue.

    there was surprising agreement among several panelists that speculative bubbles help support innovation. William Janeway distinguished between bubbles in productive vs nonproductive sectors, financed by banks vs nonbanks, and argued that productive-sector, not-bank-financed bubbles promote socially useful innovation at modest social cost, despite high private costs to investors. …. In an earlier panel, Mariana Mazzucato described the importance of “mission-oriented” investment by the public sector. States determined to gain military advantages or put humans in space accept experimentation and failure that would be intolerable to private venture capitalists (whose enthusiasm for risk, she argues, is in general overstated). The common thread in all these accounts is that too much market discipline can be socially counterproductive. If (nonbank-financed) speculative bubbles create social value that exceeds the costs borne by investors and entrepreneurs, then the fact that market participants fail to impose privately optimal discipline on their own portfolios is beneficial. If revolutionary developments in technology depend upon states accepting large, nonrecoverable expenses, a managerialist insistence on quantifiable performance metrics may be foolish. Even in the private sector, powerhouses of invention like Bell Labs and Xerox PARC thrive primarily within cushy monopolies, where they are sheltered from quotidian fretting over the bottom line, where market incentives are present but blunted.

    That part about an optimal lack of absolute market-discipline is key, and related to contrast I drew between the risk-tolerant vs. risk-averse economic equilibriums.

    Rudolph Valentino Reply:

    In a low-trust environment, I must use my scarce disposable income to put bars on my windows; in a high-trust environment I can avoid the expenditure and use the capital to increase my wealth (while remaining susceptible to the occasional glass-breaking hammer-wielding thug.)

    One of my aesthetic differences with the Monetary Authority is the idea that iconoclasm in general is thuggery. Hammers and screwdrivers are thuggish without imagination, fairness or consideration; but in the right hands they can penetrate and probe the plush, complacent seat of power.

    Whilst I sympathise with the manic monopolist model of memetic production, I think it’s becoming a lost purpose. The original problem was the development of political parties, with very few internal rules in comparison to the existing state, that would eventually compel more obedience. The solution is for the state to protect its evolved, fine structure by having some of its departments, with an institutional interest in defending this state, descend to the level of the herdists.

    The lost purpose is when this state, in order to defend memetic monopoly, begins to destroy its own liberal traditions, or cultivates a population that is unable to pump out entropy, or fails to consider that the Internet might be a communication medium that favours liberals more than filthy herdists.

    Instead of low- and high-trust societies, I would say there’s an uncanny valley between the intellectually corrupt, stagnant society that’s paranoid about anyone doing anything—even Jesus—and one with more wealth, leisure time and freedom that has to be used responsibly. It’s OK to replace Windows with Linux, as long as we’re able to create a flourishing open source community. Maybe I’m biased, but whereas some would see me as a thug who’s going to push us down into that valley, I am predicting that it’s going to happen and building an elevator on the other side.

    I think we are mostly dealing with benign vast, formless things in the 21st century.

    And the problem with that is that ‘learning’ and ‘failure’ is a micro / individualized experience. Micro-level decisions may seem perfectly rational in isolation, but cannot process or incorporate information about possible systemic risks. After a systemic crisis, there is not necessarily any micro-level lesson to be drawn, and the same behavior may have a better result this time around. And there is no way for prudential micro-behavior to accumulate into prudential macro-stability in a nominal system.

    In the context of political macro-stability here is a relevant passage of Foucault, whom I’ve been assimilating recently:

    The importance of economic theory—I mean the theory contructed in the discourse of the économistes and formed in their brains—the importance of the theory of the price-value relationship is due precisely to the fact that it enables economic theory to pick out something that will become fundamental: that the market must be that which reveals something like a truth.This does not mean that prices are, in the strict sense, true, and that there are true prices and false prices. But what is discovered at this moment, at once in governmental practice and in reflection on this governmental practice, is that inasmuch as prices are determined in accordance with the natural mechanisms of the market they constitute a standard of truth which enables us to discern which governmental practices are correct and which are erroneous. In other words, it is the natural mechanism of the market and the formation of a natural price that enables us to falsify and verify governmental practice when, on the basis of these elements, we examine what government does, the measure it takes, and the rules it imposes. In this sense, inasmuch as it enables production, need, supply, demand, value, and price, etcetera, to be linked together through exchange, the market constitutes a site of veridiction, I mean a site of verification-falsification for governmental practice.

    This is not inconsistent with prudential management of the economy. My liberal proposal is also susceptible to management, and it would create a truth system for the quality of government in another certain domain, which I believe we can accomplish. Ideally, there would not be a continuity breach in the management.

    But the best part of rule-based monetary policy is that the rules can be automated and globalized / de-nationalized. For instance, in future-generations of virtual currency.

    As well as rules and discretion, outside economics we can also contrast formal rules and informal, social expectations. If we replace a lot of GUI government with the terminal, or overwrought IDEs with vim, expect a number of benefits. My pet idea which departs most severely from progressivism is that, as long as graphical events aren’t likely to infect the business of government, we can—without coercion—rotate our attitude to health, safety and sensitivity amongst the masses by 180°.

    Blogospheroid Reply:

    Every economist studying monetary policy will gladly admit that monetary policy is only something that balances the short term and the medium term. In the long run, money is neutral. NGDP targeting as a policy will stabilize the economic expectations of your industrialists but it will not generate any industry on its own. Money printing without supply side measures is an invitation to hyperinflation and they know it.

    [Reply]

    Handle Reply:

    Right.

    What admin wants is to completely remove the human and political factor, because there is a definite risk of unreliability and abuse.

    That’s understandable, but any widely-adopted nominal medium comes with a cost (extreme volatility, systemic cascade risk), and that cost should be acknowledged.

    There are two ways to acknowledge that cost: (1) admit it’s a cost but do nothing, or (2) try to do something, which inevitably means somehow, someway, tethering to the real-world market, which is (for the moment) run by humans.

    The point is one should not conflate ‘management’ (NGDP-LT) with ‘politicization’ (fiat currency). One can, in principle, write an optimally-neutral depoliticized-management function into a depoliticized virtual medium of exchange.

    Adam Reply:

    Hah, I forgot about the futures markets he wants. That’s fair. My target was less Sumner specifically and more the NGDP targeting crowd, which has grown (from my vantage point) to be the loudest voice in the room.

    And yeah, I haven’t reread Sumner’s arguments in a while, I must confess.

    [Reply]

    handle Reply:

    And which of these loudest voices doesn’t want a futures market to express market expectations for aggregate demand? I was under the impression they all did, which is why they call themselves market monetarists.

    [Reply]

    Adam Reply:

    Oh no, there’s a whole slew of lefties (or middling righties) who think the futures market idea is bonkers but love NGDP targeting on its technocratic merits, so to speak. People like Brad Delong and Krugman are, at this point, pretty much persuaded of the NGDP targeting for instance (at least last I heard—I don’t read either).

    Posted on April 16th, 2014 at 2:01 pm Reply | Quote
  • Blogospheroid Says:

    Adam conflates two issues here. It’s always possible to imagine any kind of aggregate targeting without bailouts. The money needed to reach the monetary target could literally be given out via a quantum random number generator. No moral hazard with anyone thinking they are going to be bailed out for sure.

    I think GDP is not a bad indicator. It correlates with virtually everything that is valuable. As people get richer, they spend more on goods and services provided by strangers. There is no metric that is free from manipulation. Scott himself favours average nominal wage level targeting. Atleast there is little ambiguity about that metric. I had suggested average nominal wealth targeting or nominal dividend targeting as possible targets for a good view of genuine productive capacity.

    As handle mentions, one can imagine crypto currencies written with almost any kind of monetary policy written in. But even those can be manipulated by the miners. There is no sanctity of fixed amount currencies or pegged currencies.

    Among the pegged currencies, I think the best is energy. Target the price of electricity and manage appropriately.

    [Reply]

    Posted on April 16th, 2014 at 5:20 pm Reply | Quote
  • Kgaard Says:

    @Kgaard

    Okay … fair point that if Bitcoin could be exchanged into dollars like any other currency then Wal Mart wouldn’t have a problem taking it (provided it were legal to do so). But the ultimate demand for Bitcoin — the demand at the margin — still would have to come from something illicit, no? WHY hold Bitcoin if not for tax evasion or purchase of drugs? If you’re just holding it out of expectation that its price will rise due to scarcity then it’s a Dutch Tulip Bubble in the making.

    I don’t see how Bitcoin ever overcomes its disadvantage relative to the dollar in terms of utility in day-to-day transactions. Personally I can’t see any reason to hold even one Bitcoin …

    [Reply]

    Handle Reply:

    “WHY hold Bitcoin if not for tax evasion or purchase of drugs?”

    1. Anonymity and Privacy. Um, hello, we’re almost all using pseudonyms and for good reasons! There are plenty of legitimate, non-illicit reasons to want anonymity and privacy in regards to one’s personal consumption expenditures. Ask some of your more risque internet-order-based commercial establishments how much business they do in untraceable instruments (gift cards, etc.)

    2. Transaction Costs: Bitcoins can be transferred instantly and (nearly) costlessly in any quantity between any two holders, anywhere in the world, without any intermediaries or hassles. The banking system will take its sweet time settling a transactions, sometimes impose a burdensome administrative requirement (fill out a form, see a notary in person, etc.) and also swipe a percent or two (one way or another). I can’t even pay my county taxes online with a debit card without paying a 2% premium, because that’s what the bank charges the county – but with bitcoins it wouldn’t matter.

    [Reply]

    Kgaard Reply:

    @Kgaard

    Okay Fair points. But still this seems like a niche situation with respect to anonymity and privacy. How much porn can one person buy? I do see a real use here for political campaign contributions, though. That’s certainly one area where transactions could be a) big, b) benefit from anonymity and c) legal.

    Regarding transaction costs, some of that is going away due to competition. A good example is Interactive Brokers, which has really taken the hatchet to fees on all sorts of brokerage-related transactions. Seems to me SOME admin fees are probably legit. Aftter alll, wasn’t the Mt Gox situation partly a consequence of insufficient controls/safeguards/guarantees? Isn’t that part of what you are paying a bank or other custodian for?

    [Reply]

    Posted on April 16th, 2014 at 5:25 pm Reply | Quote
  • Ken Brockman Says:

    This blog has already dismissed macroeconomic aggregates as politicized ‘garbage‘ — so I agree.

    This is a case where my rationalist preference for instrumentally useful memes–with all the necessary caveats–rather than idle, floating epistemic beliefs of pure curiosity, is of benefit.

    Take this paragraph from Handle:

    The monetary authority’s role is distinguishable. It is not to create the conditions for real growth, but to ensure that the network of expectations and obligations where the real economy interacts with monetary nominal instruments is maintained in such a way so as to avoid various detrimental negative and positive vicious cycles upon the occurrence of unexpected shocks and disruptions.

    To me, this is a very strong claim that is also hand-waving and unverifiable. If we replace “monetary authority” by Gosplan, does the sense of it change much? Can you imagine some pompous Soviet arse talking like this?

    This is especially true in light of my direct observation of X authority attempting to ensure that stuff don’t go wrong in the thing–to rephrase Handle. I haven’t been impressed.

    As a critic with the spirit of Nullius in verba, my meme-paradigm-vector is simple but not foolish. This book is the most devastating critique of anything I have ever read; absolute victory. Hazlitt, like all Austrian economists, would in general use micro-economic, political and game theoretic reasoning, but not macro-economics, these ridiculous equations and imposed symbolic quantities.

    The critic’s willingness to recognise a counter-intuitive sense in the (neo-, post-autistic-) Keynesian mendancity, instead of clever-silly-aggression, has to be related to the very poor performance of this part of the modern structure in particular. So, the answer is that if someone like Handle wants the public to believe in NGDP targeting: audit the Fed…every week. If that’s difficult, adapt. Show the world what you are doing to their currencies, make it possible for critics to have an informed opinion on this. As it stands, it’s almost impossible for even the most elite intellects to say more than that the official story is shite.

    So, as I–m-m-m-m-m-meeeeeeeeeeee–said: microeconomics good, macroeconomics bad.

    [Reply]

    Posted on April 16th, 2014 at 8:41 pm Reply | Quote
  • VXXC Says:

    “This blog has already dismissed macroeconomic aggregates as politicized ‘garbage‘ — so I agree.” So do I, well put.

    And so is macroeconomic policy.

    [Reply]

    Posted on April 17th, 2014 at 1:03 am Reply | Quote
  • Handle Says:

    “Ditch the CPI”

    And replace it with what?

    So, for example, pension payments, wages (and COLA boosters), minimum-wages, and tax-brackets are adjusted for inflation using the CPI. You can either (1) not adjust them or (2) figure out a fair way to adjust them.

    They didn’t adjust the tax-brackets in the 70 and early 80’s, and the high inflation rates brought ordinary earners into the highest brackets, and it became a ridiculous political fight every time they had to push them up. Finally, Reagan pushed through and signed a law to depoliticize that fight by making the adjustments automatic.

    The same thing happened with minimum-wage fights at the state level in red-leaning states, but notice not at the federal level, where having the fight every few years is reliably useful to the progressives – which is why they kill every attempt at implementing automatic adjustments in subcommittee.

    Now, you could try to get rid of government-calculated CPI, and use market-based metrics like the TIPS-spread. The argument to do this would be a consistent and significant departure of the TIPS-spread vs. CPI.

    Notice: This is never the argument anti-CPI folks make, because is it not true. So government is corrupt and arbitrary with regards to it’s PCE-based weightings, but the markets estimates of price-level changes just happen to repeatedly coincide with it? Yeah, right. Come on. I hope Putin is getting his money’s worth with ZeroHedge.

    [Reply]

    Nick B. Steves Reply:

    The “Not adjust them” option works fine for me. To compensate we could just close the discount window at the Fed.

    [Reply]

    Posted on April 18th, 2014 at 12:27 pm Reply | Quote

Leave a comment