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Thursday, February 05, 2015

The end of monetarism

Keynesian economics is a failure. So, too, is the Keynesian heresy known as Friedmanite monetarism:
The entire theory of monetarism is coming undone in spectacular and empirical fashion, which leaves the entire status quo exposed. All that is left in defense is the same old refrain of “it wasn’t big enough.” That’s great for those in the ivory towers blinding themselves to the reality of a lost generation of Italians, Spaniards, French and now even Germans; a listing to which even the FOMC is worried may yet add Americans.

Why anyone ever expected a different outcome is due solely to unrepentant ideology, since these central banks are following almost exactly the Japanese “model.” The global economy is just following along as money dies. Though Greece will be blamed as contagion, it will ultimately be proved as Japanification by monetary proxy.

For those who don't understand the significance of the graph, both Germany and Italy are subject to the same monetary policy of the European Central Bank. The chart clearly shows that the very low interest rate policy presently being maintained by the ECB is not capable of producing full employment in Italy, contra monetarist theory, thereby indicating that other factors are, as it happens, more significant than the supposedly all-important interest rate.

As I've mentioned in the past, the ironic thing about the economist Milton Friedman is that he was much more sensible with regards to politics than economics.

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45 Comments:

Blogger sykes.1 February 05, 2015 1:30 PM  

The EU is a German colony. And Germany extracts wealth from it just as the Brits, Frogs and Belgians did to their African and Asian colonies a hundred years ago.

The European problem is not Greece, it is Bismarck's monster. For the sake of Europe, Germany must be unstitched and reduced to a gaggle of bickering city states.

Greece will have to default on all its debt, because its economy cannot possibly pay it back. They also will have to leave the euro and possibly even the EU. They simply don't fit. Perhaps their Orthodox brethren in Third Rome will take them in.

Blogger Salt February 05, 2015 1:35 PM  

What? The Italians aren't somehow rolling the unemployed off the rolls? I thought the Italians were good at fudging shit. I mean, damn, look at the Germans.

Blogger Geoff February 05, 2015 1:35 PM  

Agreed. Interest rates are an extremely blunt instrument and are particularly ineffective when the economy is already over-levered. As VD has said before, Central Banks can't print borrowers.

BTW, who was the first to coin that phrase? I've been using it myself on occasion and would like to give credit where it's due.

Anonymous Stilicho February 05, 2015 1:48 PM  

BTW, who was the first to coin that phrase?

I saw it first here, although Steve Keen may have used some variation of it.

Anonymous A. Nagy February 05, 2015 2:01 PM  

At least it's an economic theory that's politically viable unlike Keynseian.

I feel like Friedman's system does work...it isn't, despite what many people wish, a free ticket to do whatever the heck you want but the method seems so effective at preventing a total collapse it allows people to run way farther down the mistake road then ever before, which is looking like a bad thing.

Anonymous Stilicho February 05, 2015 2:05 PM  

You see a similar pattern among U.S. states' unemployment levels with North Dakota at the low end with 2.8% and Mississippi at the high end with 7.2% (as of Dec. 2014 per the BLS). Hell, at least the EU kept the Italian rate at only 200% of the German rate. #winning!

Blogger Vox February 05, 2015 2:08 PM  

At least it's an economic theory that's politically viable unlike Keynseian.

What are you talking about? The only viable aspect of Keynesian theory is political.

Blogger icr February 05, 2015 2:14 PM  

The European problem is not Greece, it is Bismarck's monster.

WTF? BRD has been a US vassal state since the beginning. It only does what Washington allows it to do. In any case, actual Germans are rapidly dying off: births last exceeded deaths in the BRD in 1971, TFR has been at 1.4 or less since the collapse of Communism and about 33% of schoolchildren in Germany are of "foreign background." Ask Dave"Spengler" Goldman, he'll happily confirm all this.

Blogger bob k. mando February 05, 2015 2:22 PM  

Vox February 05, 2015 2:08 PM
What are you talking about? The only viable aspect of Keynesian theory is political.



yes, Keynesian theory gives the politicians a framework to justify unlimited deficit spending and handing monetary policy to the bankstas.

that's why it won't die and 'economists' keep kludging adjustments ( neo-Keynsian ) onto it.

as i've said before though, it's the current GDP formula ( which ignores both entropy and friction, and which is independent of the theories ) that truly allows for this idiocy.

IF you had a GDP formulation which drew distinctions between private spending / public spending / debt funded public spending ( it should probably also consider debt funded private spending as a separate category as well )

THEN it would become far, FAR more difficult to construct the theoretical perpetual motion machine they're trying to run right now.

Blogger bob k. mando February 05, 2015 2:28 PM  

icr February 05, 2015 2:14 PM
WTF? BRD has been a US vassal state since the beginning. It only does what Washington allows it to do


rabbits can't go wrong accusing Germany of fascism. it's the rhetorically perfect argument.

yeah, let's ignore that France, Italy and low countries in the creation of this monster. the EU was made and completely controlled by those nasty, productive Germans.

Blogger Ben Cohen February 05, 2015 2:31 PM  

The EU is not going to collapse suddenly. It'll be like Iraq and Syria broken up by ISIS and defacto splitting off into different countries.

Anonymous Susan February 05, 2015 2:32 PM  

Semi OT, According to some headlines I just saw, Obama's new budget monster is finally coming out of the closet. He is targeting retirement accounts as part of his budget plans. Of course, anyone who was paying attention knew this was coming sometime before the end of his presidency.

After all, $3 million is plenty for a lifetime retirement account according to Obama.

Anonymous Porky February 05, 2015 2:40 PM  

Central Banks can't print borrowers.

NIRP!

Blogger Robert What? February 05, 2015 2:43 PM  

Keynesianism is an abject failure when it comes to creating a thriving, dynamic economy for the largest number of people. But it is a rousing success for the the crony, the connected, the 0.1%. That is why Keynesianism is still hanging in there despite its massive flaws.

Anonymous Lysander Spooner February 05, 2015 2:47 PM  

I realize you( Vox ) and Gary North have had your disagreements, but on this one I think you may agree:
"You're all a bunch of socialists" Mises on Friedman
http://www.garynorth.com/public/13392.cfm

Blogger Kgaard February 05, 2015 2:57 PM  

For what it's worth, you are misinterpreting the data here. What this chart says is that Italy needs a weaker currency than Germany does to generate the same nominal GDP, because Italy's fiscal policy and general competitiveness are not as good. When you force Italy into Germanic monetary policy, you get precisely what this chart shows: Soaring unemployment. The answer is looser monetary policy for Italy -- either within the the ECB context (which is now happening as the ECB moves to QE) or outside of it (where Greece may soon find itself). Friedman was actually right.

Blogger David February 05, 2015 3:05 PM  

Monetarism & Keynesianism share a complete lack of explanation of from where capital forms; for all practical purposes they both just "assume" capital forms.

Friedman was the Progressivists'/Statists' pet libertarian, nothing but hot air to distract liberty-minded people into wasting their energy trying to reform Murder Inc from the inside.

Milton & Rose's "Free to Choose" has to be one of the most meaningless videos ever.

Never forget, Uncle Miltie was a key architect of Federal Withholding, the lynchpin of crushing taxes, and was no more a believer in hard money than is Greenspan.

Blogger Geoff February 05, 2015 3:07 PM  

Liberals have given Keynes a bad name. He was actually a conservative:

“He had two basic motivations,” Drucker explained in a 1991 interview with Forbes. “One was to destroy the labor unions and the other was to maintain the free market. Keynes despised the American Keynesians. His whole idea was to have an impotent government that would do nothing but, through tax and spending policies, maintain the equilibrium of the free market. Keynes was the real father of neoconservatism, far more than [economist F.A.] Hayek!”

http://www.forbes.com/2009/08/13/john-maynard-keynes-conservative-opinions-columnists-bruce-bartlett.html

Blogger Salt February 05, 2015 3:09 PM  

What this chart says is that Italy needs a weaker currency than Germany does to generate the same nominal GDP

Today, that's like saying ~Alabama needs a weaker currency than ~New York.

Blogger bob k. mando February 05, 2015 3:25 PM  

Kgaard February 05, 2015 2:57 PM
The answer is looser monetary policy for Italy


because negative interest rates aren't "loose enough".

https://www.ecb.europa.eu/home/html/index.en.html

and you see, once again, the same old Keynesian argument: "Even though you already tried every single thing we told you to do, exactly the way we told you to do it, you didn't do it HARD ENOUGH. Do it AGAIN, and this time do it twice as hard! It's sure to work on the very next try."




Geoff February 05, 2015 3:07 PM
Liberals have given Keynes a bad name. He was actually a conservative:



Keynes was a child molesting faggot.

he may be 'conservative' in a country club Republican / Tory sense, but not in any way we would recognize.

Anonymous Shibes Meadow February 05, 2015 3:30 PM  

I sure hope the FedLords, the Wolves of Wall Street, and the City-dwellers are turning all that moola into real property...

Blogger Kgaard February 05, 2015 3:34 PM  

Bob Mando -- You are actually confusing low interest rates with loose money. Remember you can have zero interest rates and have that still be too tight if demand for base money is growing faster than supply. Sounds bizarre but it's an important distinction -- especially these days when the whole developed world is wrestling with the problem of the zero bound on monetary policy. Interest rates are the "cost" of money ... monetary base is the "supply." It's only due to the pervasiveness of interest-rate target systems that the two have gotten conflated.

Salt -- There are absolutely times when Alabama could use a weaker currency than New York. The late 90s, was such a period, when too-tight monetary policy caused the commodity states to go into recession while NYC boomed. That said, the difference between Alabama and Italy is that Alabama can influence its monetary policy via its vote for national office. Italy? Can't do so under the terms of Maastricht. That said, things are sort of evolving toward Italy getting its say: the weaker European countries have finally seized control of ECB decision-making from the hard-money Germans, and now are getting what they need -- i.e. QE in Europe.

Anonymous Corvinus February 05, 2015 3:35 PM  

Today, that's like saying ~Alabama needs a weaker currency than ~New York.

Maybe it does, but the main difference between US states and EU countries is that US states are far more closely tied together, and nobody cares if Fedgov redistributes money around the country. Independent EU countries are a different matter.

Blogger Geoff February 05, 2015 3:40 PM  

Porky,

Haha, if the negative rates filter down to household borrowers, you might be on to something!

Blogger David February 05, 2015 3:52 PM  

@ Geoff

Talk about misdirection. Drucker's claim that Hayek was a precursor of Neoconservatives like Bill Kristol is too weird to describe. Neoconservatism's roots are in the teachings of Leo Strauss, with more than a hat tip to Trotsky.

Anonymous Athor Pel February 05, 2015 4:02 PM  

" Kgaard February 05, 2015 2:57 PM
...
What this chart says is that Italy needs a weaker currency than Germany does to generate the same nominal GDP, because Italy's fiscal policy and general competitiveness are not as good. When you force Italy into Germanic monetary policy, you get precisely what this chart shows: Soaring unemployment. The answer is looser monetary policy for Italy -- either within the the ECB context (which is now happening as the ECB moves to QE) or outside of it (where Greece may soon find itself).
..."





When you say "Italy needs a weaker currency", are you meaning that the Lira should be objectively worth less than the Deutsch Mark and that it should be forced to be that way? How would you go about making that happen? Not the separate currencies but the forcing of exchange rates.

How does chopping up an economy into thinner monetary slivers make it run better? I'd really like a coherent explanation of that. Some historical examples would be nice as well.

And when you say "looser monetary policy", what do you mean by that exactly?

Blogger bob k. mando February 05, 2015 4:13 PM  

Kgaard February 05, 2015 3:34 PM
Remember you can have zero interest rates and have that still be too tight if demand for base money is growing faster than supply.



gosh.

sounds an awful lot like Vox saying, "You can't print borrowers."

for such an important problem, i find it quite strange that the ICB can't be bothered to quote their "reserve" or "base" anywhere in their last report.

http://uif.bancaditalia.it/pubblicazioni/rapporto-annuale/2014/index.html

maybe you should give them a ding and let them know? you probably ought to explain to them where "base money" comes from while you're at it.

i, on the other hand, am rather tired of economists inventing new terms and then pretending that these terms actually have application in the real world ... just because they came up with a word for them.


i mean, heck, if the *only problem* is insufficient 'base money', then the answer is that you go to the Treasury, have them print however many billions or trillions are needed, take it over to the Central Bank and deposit it.

voila. 'problem' solved.

only, that wasn't your problem at all.


i particularly enjoy the wiki definition of Monetary Supply. according to them, Supply is the total currency circulating in the public plus the *non-bank deposits* with

...

wait for it

...

commercial banks.

http://en.wikipedia.org/wiki/Monetary_base

you got that? deposits IN A BANK are not "bank deposits" IF the bank in question is "commercial".

because we're economists and we say so.

:facepalm:

anyways, that doesn't directly address your complaint.

why'nt you tell us how large the monetary base of the EU needs to be, in order for Italy to 'be successful', given that EU base money ( which is the Euro, which is Italy's currency ) has never been higher?

http://en.wikipedia.org/wiki/Monetary_base#mediaviewer/File:Euro_monetary_base.png

and, of course, you're also ( conveniently ) ignoring the fact that Germany is 'laboring' under exactly the same currency constraints that Italy is.

IF Italy's monetary base is too small
THEN Germany's is likewise.

hmmm.

there seem to be externalities to your theory.

Anonymous Roundtine February 05, 2015 4:18 PM  

Michael Pettis has a good historical example from the Franc-Prussian War and its aftermath. Syriza and the French indemnity of 1871-73. The Germans forced the French to pay them 20%+ of GDP in reparations. German economy tanked, French economy boomed. With the euro, the "Germans" paid the "Greeks" through the financial system, but the result was similar.

Anonymous A. Nagy February 05, 2015 4:41 PM  

Keynesian theory requires countries to overtax/underspend during good times in order to build up a huge bank of money so that they will have the reserves to spend massive amounts of money and lower taxes when a downturn occurs. This is what I mean by 100% politically not feasible, everyone ignores Keynesian theory until their economy is down and their in massive debt.

Blogger CarpeOro February 05, 2015 4:57 PM  

Kgaard - the problem is that you take as a given that a centrally managed, fiat monetary system is workable in the first place. You need to read more entries on this site and some history, because there are two millenia or so of evidence that it isn't.

Anonymous Daniel H February 05, 2015 5:06 PM  

Related: The Pauls are really getting to the Fed and its supporters. How does it go? First they ignore you, then they laugh at you, then.....

http://thehill.com/policy/finance/231822-fed-fires-back

Blogger Kgaard February 05, 2015 5:07 PM  

Carpe ... Well ... one could argue both sides of that. Remember the word "jubilee" comes from the Roman period where they would periodically have a debt forgiveness. Otherwise the economy would have been sunk under bad debts. What history shows doesn't work is hard money + 100% voter suffrage. Remember most of those gold-standard regimes (basically all) limited voting to only the most successful men (or they were monarchies). When everyone gets to vote fiscal policy invariably gets more anti-growth, in which case you need periodic devaluations to square the circle.

Blogger Kgaard February 05, 2015 5:21 PM  

Athor ... Yes, a larger currency area is more useful than a smaller one. But the one thing you can't have is two political regions under one currency regime, with the stronger one calling the shots AND the weaker one basically unable to default. The result is that industry chokes in the weaker country and they can't do anything about it. The issue is exacerbated by the Maastricht criteria, which make it impossible for the Italians to CUT taxes (since in a static-scoring analysis it would make deficits go up). So the Italians are in a situation where they are supposed to fire people, send them into a purgatory with no hope of getting another job, and have that be fine politically. It can't work. Which is why politics in Italy, Spain and Greece are moving leftward.

Blogger A Martian Warlord February 05, 2015 6:04 PM  

Vox,
I confess that I don't understand your fascination with economics very much. I am putting it down to you being a MUCH more patient man than I am.

My reasoning is somewhat simple on the whole thing, I admit, and goes thus: It is patently obvious from a logical point of view that the whole economic system of fiat money and especially of anything related to the stock market that it's a giant ponzi scheme. I figured this out in my early 20s and haven't traded in shares etc since. I could have made money at it because the few times I did it I scored well, and not by chance either, but the way I saw it then was..."my God...this is all fake...it can't last" I enjoyed the book Liar's Poker because in a much smaller way I recognised the author's feelings in some way. But the thing is it felt so utterly soul-less I could not work or operate in that environment for any length of time.

My only surprise was how long it took for the Ponzi scheme to implode. We are in the end game now but who knows what dead rabbit from a tuba they will pull out to keep it going a few more years.

My question is simply this...what do you find interesting in the specific details of the perversion that is Keynesian economics of Friedman's or whatever...to me it's about as exciting as figuring out the particular type of brain rot that killed a brain-rotting crack addict.

I don't discount the value of understanding the ponzi scheme of course, that is demonstrably useful, but I don't see you as the type to have that be a motivating factor. Is it the strategic gamer in you? I'm just curious. It reminds me of your fascination for Umberto Eco. I find him laboriously slow and over-detailed. I know, de gustibus etc... but I generally can learn something when I grasp a new perspective on something, so if you have the time or inclination to throw a few words as to what interests you so much about economics, it would interest me.

Oh an PS I can't comment on your blog from my laptop on any other combination and this one is not really one I want to use for this. I am just testing it out, but given some issues I had, I'd rather not use this way. I have a firewall up, so am not sure if that is why I can't comment. I asked Markku but he couldn't figure it out either. If you can see something from your side I am doing wrong please let me know.

Il Veneziano

Anonymous jack February 05, 2015 6:48 PM  

Re: Warlord:

Yes, Eco requires your full attention. Of his works I've read it was worth the effort. He is, of course, not everyman's martini, though a good martini makes the reading go down much more smoothly.

Anonymous clk February 05, 2015 6:49 PM  

"Oh an PS I can't comment on your blog from my laptop on any other combination and this one is not really one I want to use for this. I am just testing it out, but given some issues I had, I'd rather not use this way. I have a firewall up, so am not sure if that is why I can't comment. I asked Markku but he couldn't figure it out either. If you can see something from your side I am doing wrong please let me know. "

Yeah ... for some reason voxday has been block by our corp servers recently... something to do with websense (?) Catagories hate speech... if I want to see voxday now I have to use my 3g...this happened a few years ago too and seems to last a few weeks....

Blogger Doom February 05, 2015 9:51 PM  

I just thought something I thought I'd run through the voxificater.

While the central banks do what they do, and employment is decreased, isn't this good for big companies? Between offer them the freedom to automate without sideways glances from the usual suspects, or outsource, it seems like the system is working very much in favor of their bottom line. Now, this might be a shortsighted thing, because as economies crumble, demand will follow. And, of course, the destruction of currency also has it's hard ending.

Still, even so... I think of a calculus problem, where two equations are going to zero. If you can make sure your line goes to zero after the rest, you can be positioned to take advantage of the rebound. If you can't stop the system, might as well use it to your advantage, and be on the line that survives a little, or lot, longer. There are risks, but when aren't there. And these are the biggest risks, but the biggest risks offer the greatest rewards if negotiated smartly.

It just seems that everyone knows it's coming, and the smart money is on pushing it through to the conclusion, but on the right course to pick up after. Big money, not millionaires or even most individuals. Just some... thoughts and questions.

Anonymous zen0 February 05, 2015 10:22 PM  

Doom. I read your whole thing twice, and can't get a handle.

One thing stood out:

If you can't stop the system, might as well use it to your advantage, and be on the line that survives a little, or lot, longer.

The thought that came to mind was people in Auschwitz had the same strategy.

Anonymous Discard February 05, 2015 10:44 PM  

zen0: People in Auschwitz didn't have guns. Guns aren't everything, so it's prudent to have some skills that don't require government/corporate support. Whatever happens, there's a lot of farmland in this country, and things will always need fixing too. Non-parasites can always do something useful to earn their way.

Anonymous Jack Amok February 06, 2015 3:16 AM  

Keynesian theory requires countries to overtax/underspend during good times in order to build up a huge bank of money so that they will have the reserves to spend massive amounts of money and lower taxes when a downturn occurs.

And herein lies one of the failings of Keynesianism. You can't save money (even if you had the political will). Money isn't a thing, it's a measurement. "Saving money" is like "saving" inches or "saving" degrees Fahrenheit. It makes no sense when you really understand it. People run around doing stuff, and the output of that is the economy. Some of that stuff can be saved (usually called "Capital" and "Durable Goods"), but the majority of it is fairly ephemeral and will becomes useless in a short period of time. How do you "save" an hour of medical care from a trained doctor to use it at a later date? How does the Government "save" an hour of a bookkeepers time by not using it today so that it'll be available for use five years from now?

When the government collects taxes, all it is doing is directing that percentage of the economy towards ends it prefers - today. Tomorrow it will collect taxes again and direct whatever percentage of the economy that is - tomorrow.

Money isn't a thing, it's a measurement. Specifically, it's a measurement of productivity. You can't save money for later use unlesss you can figure out how to save productivity for later use. "Saving money" is just making a claim on future productivity, but unless you do something to increase that future productivity, you haven't really done any good.

I expect no Keynesian would ever understand that though.

Anonymous Porky February 06, 2015 8:07 AM  

Haha, if the negative rates filter down to household borrowers, you might be on to something!

It's already begun.

Anonymous Athor Pel February 06, 2015 8:21 AM  

"Kgaard February 05, 2015 5:21 PM
... Yes, a larger currency area is more useful than a smaller one.
..."



What is a "larger currency area"?

Anonymous Fake Herzog February 06, 2015 11:39 AM  

Kgaard knows what he's talking about -- as Scott Sumner likes to say, never reason from a price (interest rate) change:

http://www.themoneyillusion.com/index.php?s=price+change

I'd love to see a formal debate between Vox and Sumner.

Anonymous zen0 February 06, 2015 7:37 PM  

OT but economics:

Steve Keen and Varoufakis have been friends for 25 years

goto 1:44 of the BBC vid

Anonymous Stilicho February 07, 2015 8:04 AM  

@zen0, friendship with Keen will mean that he correctly diagnoses the problem then prescribes even MOAR socialist intervention as the cure.

@Doom, that may be their plan (crash last) but it runs the very real risk of being the one crashing just when others are recovering. Guess who'll end up with all the goodies in that scenario. However, I suspect th real motivation is just to keep themselves at the trough as long as they can before the system disintegrates.

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