Unconventional Monetary Policy

Scott Sumner is great because he's extremely logical and impervious to facts. This makes him the go-to source for the nonsense that is Monetarism, because he will happily make the baldly ridiculous statements. One can then judge the value of the model for oneself.

This recent piece on MMT is a fine example. The key question gets isolated in the comments:

"How can the Fed put money into circulation if the people don’t want it?"

Scott never responds in this post, but in the past he's written about "unconventional monetary policy".

"Unconventional monetary policy" means the Fed targets some level of nominal GDP and keeps buying things until that level is met. Usually, the Fed buys and sells short term Treasuries to influence the clearing price of reserves in the overnight interbank market. The clearing interest rate in the overnight interbank market is the "Federal Fund Rate" and this intervention is the mechanism it uses to manage the level of excess reserves in the system (as it can drain reserves by converting them to Treasuries). Scott argues that the Fed can buy other things, like road repair services, bridge building services, etc. etc. and therefore hit any NGDP target it chooses.

"Road repair services" and "bridge building services" are very unconventional monetary policy instruments indeed -- but they are utterly conventional fiscal policy instruments. Indeed, much of the Obama stimulus (for reasons for politics and ignorant atavism) was focused on lame "shovel ready" projects of exactly this sort. So Scott is advocating what most of us think as "fiscal policy" but renaming it "unconventional monetary policy". Why?

I think most of us think of "monetary policy" as setting "interest rates", but Scott might be thinking of "monetary policy" as policy conducted by the monetary Authority, which is the Fed. Therefore, whatever the Fed does is "monetary policy" because, by Gods, it's being done by the Fed! This kind of makes sense, and at least we now have a transmission mechanism by which the Fed can, actually, hit an NGDP target -- direct purchasing of products and services.

But when stated in this clear way, I don't know how happy people would be if the Fed starts engaging in fiscal policy -- they believe that to be a matter for Congress. The Fed would pay for this by expanding its own balance sheet (the Fed simply marks accounts up and down to buy and sell things) so it would not show up in the Government deficit number, but there's no reason the Fed cannot use this same ability and move Congressional spending "off balance sheet" in the same way if it so chose.

Google: Child of summer

If you've worked at Google, you've probably never felt what it's like to make a mistake in a market, or had to think strategically about a business. "Make it great and make it free" is fun and at Google it also made you rich. Very Googly.

It hasn't worked out well in Android, which is a top 3 priority project at the Googleplex. A series of naive business decisions and strategic blunders meant Google was producing a lot of value, but capturing very little of it. They have now bought a company in Illinois whose last bonafide mobile hit was the StarTac.

This puts Google directly into competition with its partners, and probably will move Android to being a closed system. Asymco has, as usual, excellent analysis.

Krugman is the problem

People like to blame the country's employment woes on Democrats or Republicans or Corporate America. The problem though is the incorrect economic models that hold sway at Harvard University, and are implemented through the Treasury and Fed. Change Harvard, change the world.

While Krugman isn't from Harvard he's close enough, and were he to embrace MMT in the NYTimes you'd see a payroll tax holiday about 14 seconds later. Maybe sooner. But Krugman, even though deeply Progressive, is fundamentally part of the problem:

Regular readers of comments will notice a continual stream of criticism from MMT (modern monetary theory) types, who insist that deficits are never a problem as long as you have your own currency. I really don’t want to get into that fight right now, because for the time being the MMT people and yours truly are on the same side of the policy debate. Right now it really doesn’t matter at all whether the United States issues zero-interest short-term debt or simply prints zero-interest dollar bills, and concern about crowding out is just bad economics.

But we won’t always be in a liquidity trap. Someday private demand will be high enough that the Fed will have good reason to raise interest rates above zero, to limit inflation. And when that happens, deficits — and the perceived willingness of the government to raise enough revenue to cover its spending — will matter

Krugman makes two errors. First, he mentions MMT, giving it respectability. To engage means the thing is worthy of engagement. The second is that fundamentally, Krugman remains trapped in the monetary paradigm. There monetary transmission mechanism, where banks lend out reserves, simply does not exist. So there is no "liquidity trap", there is simply an undercapitalized non-Govt sector which creates idle real resources.

I won't even bring up the strawman that MMT doesn't care about, or recognizes, inflation.

More at Mosler

Zynga on Google+

In the early 2000s, Microsoft had a marketing campaign centered around the question: what do you want to do today?

Unfortunately, nothing they offered could actually help you do anything you might have wanted. Google could, though, and by combining intent with advertising, made the internet safe for B2C companies again. Hooray!

However, Google could not help you if what you wanted to do today was "waste time". If you have no intent, the empty search box is a barrier. Facebook filled this void by offering all kinds of diversions for the directionless, and Zynga built an empire of diversion for the directionless who grew tired of their friends Facebook updates.

I don't know how much of Facebook's "usage" comes from Zynga, but I'm pretty sure it's material. I haven't tried Google+ yet because of the inane way they are currently handling Picasa integration, but if Zynga moves to Google+, then Google can now help you if "what you want to do today" is "kill time".

What about Japan?

Despite what you're reading in the press, the US is not the first major first world sovereign to have its debt rating downgraded. Japan was downgraded in 1998. And then again in 01. And 02. Made no difference to the Japanese economy. You can read details here.

So why are markets tanking today? Who knows. Maybe it's EU, which does not have the institutional structures it needs to run a fiat money system. Maybe it's China. Maybe it's the cognitive dissonance from wanting a lower deficit and knowing that will make the economy worse.

But I don't think it's S&P

Turning Japanese

I cannot comment too much on the debt ceiling deal, because I'm still not sure what's in it, or what will actually come about.

It lets the Treasury continue to spend (which is good) and there don't seem to be too many immediate cuts (which is also good). However, it has codified the current deficit and I think that the non-Govt sector is still at its limit of leverage. So I do not see private sector credit expansion in the near future, and I also don't see a material increase in Government deficit spending either. This will put a lid on AD, which may or may not be sufficient to keep equities subdued.

What has been a good investment in Japan since it's crash in the 1980s? Answer: Nothing.

Warren raises an interesting point here:

Looking back at past cycles it seems the support from private sector credit expansions that ’shouldn’t have happened’ has been overlooked, raising the question of whether what we have now is the norm in the absence of an ‘unsustainable bubble.’ For example, would output and employment have recovered in the last cycle without the expansion phase of sub prime fiasco? What would the late 1990’s have looked like without the funding of the impossible business plans of the .com and y2k credit expansion? And I credit much of the magic of the Reagan years to the expansion phase of what became the S and L debacle, and it was the emerging market lending boom that drove the prior decade. And note that Japan has not repeated the mistake of allowing the type of credit boom they had in the 1980’s, accounting for the last two decades of no growth, and, conversely, China’s boom has been almost entirely driven by loans from state owned banks with no concern about repayment.

So my point is, maybe, at least over the last few decades, we’ve always needed larger budget deficits than imagined to sustain full employment via something other than an unsustainable private sector credit boom? And with today’s politics, the odds of pursuing a higher deficit are about as remote as a meaningful private sector credit boom.

If anyone has first had experience with Japan over the last 30 years, please write in.

Welcome to nothing.