"If money isn't loosened up, this sucker could go down" - George W. Bush warned in September 2008

Monday, November 1, 2010

Really good links - Successful QE - What would Milton Friedman say? - QE for bankers - University macroeconomics

David Beckworth - Successful QE in 1934 - "QE has been done before in the United States and it worked incredibly well. It was initiated in early 1934 when FDR and his treasury officials decided to (1) devalue the value of the dollar relative to gold and (2) quit sterilizing gold inflows. <..>
        But that is exactly what was needed, a big permanent shock to inflation expectations that served to stop the deflationary spiral, end the liquidity trap, and allow a recovery in aggregate demand. Now this policy move was backed up with significant and permanent increases in the monetary base over time: it went from about $8 billion right before the policy change to about $24 billion by the end of the 1930s."

Bill Woolsey - What would Milton Friedman say? - "Friedman believed correctly that money expenditures (nominal income) depends entirely on monetary factors. In the long run, unemployment and ouput depend on suppply side factors. And so, monetary factors only determine money prices and wages in the long run. However, short run fluctuations in money expenditures lead to undesirable fluctuations in real output in the short run.
        He found that the conglomerations of assets that make up M2 was more or less proportional to money expeditures. In other M2 velocity is was pretty much constant. The implication was that if the Fed could vary the monetary base in such a way that the M2 combination of assets stated on a 3% growth path, then money expenditures would stay on that same growth path. The price level would be stable, wages and other incomes would grow about 3%, and fluctuations in supply side factors would result in fluctuations in output and also the price level and inflation as the price level moves.
        But it turned out that the M2 measure of the money supply stopped tracking money expenditures. M2 velocity changed.
        Before he died, Friedman noticed that like everyone else. There was never any reason why that combination of assets should necessarily track money expenditures. When they stopped, Friedman began to change his mind.
        However, he always maintained that money expenditures depend on monetary factors, that interest rates don't tell us much about those factors, and that stable growth in money expenditures are important in both the short run and long run."

Karl Smith - QE explained for bankers - "However, the Fed’s strategy can be summed up succinctly for bankers: get out of long dated nominal Treasuries. In the short run we are pushing down yields, so we are lowering the return you can lock in. In the long run yields are going to pop up so you are going to take capital losses.
        Ergo: find some other place to put your money."

Nick Rowe - University macroeconomics and Barro-Grossman supply-side multiplier - "The supply of seats is determined by the individual department. But the demand for seats is determined centrally, by Admissions. Admissions is ordered to bring in as many students as are needed to pay the profs' salaries. But each individual prof and department wants to reduce the number of bums on seats in his course and his department.
        The result is a classic case of chronic excess demand for seats. Just like in the old Soviet Union. Capitalist economies have chronic excess supply. Communist economies have chronic excess demand. My job as associate dean (because I made it my job) was to persuade, cajole, bribe, threaten, or bully departments into putting on enough seats for the bums that needed or wanted to sit in them. I was what the Russians used to call "the pusher". <..>
       You get hoarding. Students grab a seat in any course that's open, even if they think they will probably not want it, just in case they do want it and can't find a seat.
        What's worse is that you get Clowerian spillovers. Walras' Law is totally false. The sum of the excess demand for seats can add up to anything whatsoever, because the student who can't get a seat in course A, will try to get a seat in course B instead, and if he can't will try for course C,...then maybe try course A again, and so on. So the central planner (that was me) trying to find out how many extra seats in which courses are really needed, hasn't got any idea. A notional excess demand for one seat in one course can create an effective excess demand for hundreds of seats all over the university. I am one of the very few economists who has actually seen the Barro Grossman supply-side multiplier at work, in real time. Create a couple more seats in one course, and seats suddenly start appearing in other courses all over the university."

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