Archivo de la etiqueta: Sound Money Project

SMP: On the Delusions of Price Level Stability

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Breve comentario en Sound Money Project sobre la estabilización del nivel de precios como guiá de la política monetaria.

In a recent column, William White explains how “major central banks’ vigilant pursuit of positive but low inflation has become a dangerous delusion.” The idea that price level stability is both, necessary and sufficient to achieve macroeconomic stability and growth should have been put to rest by the 2008 financial crisis. But conflicting narratives have enabled it to live on.

Since the crisis, the focus of many central bankers has turned to macroprudential policy. The objective is to manage financial risk. Regulatory efforts have increased as a result. On the monetary policy front, price level stability still reigns supreme. New tools have been developed to execute monetary policy, to be sure. But the overall objective has been more-or-less left intact.

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SMP: The War on Cash: What Do You Have to Hide?

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La «guerra contra el efectivo» choca con los principios más fundamentales de las libertades civiles. Breve comentario en Sound Money Project.

Some economists, including Harvard’s Ken Rogoff, want to minimize the circulation of cash. Such proposals are usually justified on the grounds that they would (1) reduce criminal activity and tax evasion while also (2) helping central banks execute monetary policy when interest rates are at the zero lower bound. Both arguments have been challenged on this blog (here, here, and here).

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SMP: Separating the Technology of Bitcoin from the Medium of Exchange

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En este post separo las características tecnológicas del bitcoin de su cualidad de medio de intercambio.

Bitcoin is back in the spotlight as its price has soared in recent weeks. The most enthusiastic advocates see its potential to become a major private currency. But it is important to remember bitcoin is a dual phenomenon: a technological innovation and a potentially useful medium of exchange. One might recognize the technology as a genuine innovation without accepting its usefulness as a medium of exchange.

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Relanzamiento del Sound Money Project

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Este noviembre se ha relanzado el Sound Money Project en el American Institute for Economic Research (AIER) bajo la dirección de William J. Luther.

Aparte de Luther y quien escribe, también habrá posts regulares de Scott Burns, James Caton, Alexander W. Salter, and Brian C. Albrecht.

SMP: Knowledge Problem in Central Banking: Part II

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La segunda parte del comentario sobre problema del conocimiento en la banca central.

The previous post presented Hayek’s knowledge problem in the context of the economic calculation debate under socialism. We discussed the distinction (sometimes overlooked) between information and knowledge . To sum up, information is objective data such as quantities and prices. As a qualitative concept, information can be complete or incomplete. Knowledge is subjective data interpretation. As a qualitative concept, it is neither complete nor incomplete.

This distinction is not only key to understanding the Mises-Hayek argument against socialism, but it is also important in understanding where the central banking knowledge problem falls. Socialism deals with both information and knowledge problems, but central banks deals mainly with knowledge problems, including lack of competition, the big player effect, and the rule of law vs. the rule of experts.

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SMP: Knowledge Problem in Central Banking: Part I

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Primera parte de dos posts sobre problemas de conocimiento en la banca central para Sound Money Project.

In my previous posts, Andreas Hoffmann and I discussed the problem of unintended consequences in monetary policy, particularly as applied to the U.S. Federal Reserve and the European Central Bank in the context of the 2008 crisis. This post tackles a related issue: the so called “knowledge problem.” This term was coined after Hayek’s engagement in the debate on the feasibility of economic calculation under socialism. It has also been applied to central banking; even though banking faces different problems than those Hayek was concerned about, there are some common threads. This first post discusses Hayek’s “knowledge problem.” Our next post extends the problem to monetary policy.

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SMP: The Monetary Policy Blinders

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Mi último post en SMP sobe las anteojeras de la política monetaria.

I just read Ben Bernanke’s “The Federal Reserve and the Financial Crisis.” The book was actually published in 2013, and it contains his 2012 lectures at George Washington University. It contains four well written lectures that cover the history of the U.S. Federal Reserve and the 2008 financial crisis. Some of the complexities of the 2008 are clearly exposed.

However, what called my attention was the strength that monetary policy and theory blinders can have. Some of the blinder’s effects are not new. One example: to depict the gold standard as a system that fixes the price of gold and consists of an international fixed exchange rate regime. This is very common misrepresentation of the gold standard. First, in this monetary regime gold, not the dollar, is money. The dollar, as a convertible banknote is a gold sustitute. Therefore there is no fixing of the price of gold. This is similar to arguing that writing a check is fixing the price of the dollar. For a similar reason there is no fixed exchange rates. This is to confuse what is money and what is a substitute under gold standard. All countries in the gold standard network use the same currency, gold. There is no pegging of the exchange rate in gold standard just as there is no pegging of the Euro in the Euro area. Different would be the case of fixing the exchange rate between gold and silver (two different currencies.) Using again the check example, to argue that the gold exchange means an international fixed exchange rate regime is like arguing that there is a fixed exchange rate between two checks convertible to dollars that were issued by different banks. This is to confuse a price (exchange rate) with a parity or conversion relation.

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SMP: Cantillon Effects and Money Neutrality

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Comentario en SMP sobre qué tan compatible es el Efecto Cantillon con la neutralidad del dinero.

Money neutrality is a key principle in monetary economics. As might seem obvious, the amount of goods that can be produced depends on the availability of factors of production (such as capital and labor) and on technological knowledge. For instance, the fact that more dollars are in circulation does not mean we can produce more tables and chairs. But if we have better technology, more labor, or more wood, then we can produce more tables and chairs.

On the other hand, Cantillon Effects are equally plausible. The Cantillon Effect refers to the change in relative prices resulting from a change in money supply. The change in relative prices occurs because the change in money supply has a specific injection point and therefore a specific flow path through the economy. The first recipient of the new supply of money is in the convenient position of being able to spend extra dollars before prices have increased. But whoever is last in line receives his share of new dollars after prices have increased. This is why when the Treasury’s deficit is monetized, inflation is referred to as a non-legislated tax. In these cases, the government has seized purchasing power (rather than physical bills) from its citizens without congressional approval.

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SMP: Two Tales of Unintended Consequences -Tale 1

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Primera parte de un comentario sobre las consecuencias no intencionadas de dos bancos centrales desde las crisis del 2008. En la primera parte, junto a Andreas Hoffmann (Twitter: @Andhoflei) analizamos al caso de la Reserva Federal. En la segunda parte (aún por publicar), analizaremos el caso del Banco Central Europeo.

Estos análisis son co-blogueados en Sound Money Project y Think Markets

Even when a policy is successful in achieving its desired ends, we have to consider its unintended and unforeseen consequences, resulting from cumulative market adjustments to policy changes that make it hard to judge the overall outcome of a policy in our complex economy. The Federal Reserve and European Central Bank’s monetary policy responses to the 2008 financial crisis offer two tales of major unintended consequences. This post discusses the unintended outcomes of the U.S. Federal Reserve’s crisis policies. In our next post, we will address ECB policies.

TALE 1: THE U.S. FEDERAL RESERVE

One of the major challenges the Fed faced during the 2008 financial crisis, after Lehman was allowed to fail, was the loss of confidence in the financial markets and the resulting increase in money demand that led to a decline in the money multiplier. The scenario was even more delicate from the Fed’s perspective due to the presence of a number of financial institutions that the Fed considered too big to fail.

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SMP: The Rule of Law vs the Rule of Experts

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Comentario en Sound Money Project sobre cómo llevar adelante política monetaria.

Our worldviews shape the ways in which we approach problems, challenges, and questions. Our “worldviews,” as I refer to them in this post, are so deeply embedded in our minds that we don’t usually realize our thoughts are driven by them. Monetary policy is not free from this “worldview” effect.

There is a big debate in monetary policy on whether central banks should follow a monetary rule or have the ability to decide how to perform monetary policy at the policymaker’s discretion. In a world of second bests, the question underlying this debate is how errors would be minimized: by following the right rule (in itself another issue) or by giving central bankers discretionary powers. In many cases, what one side sees as an argument on their side, the opposite side sees as an argument in favor of theirs. For instance, the lack of precise knowledge about the economic situation can be an argument for a rule-based monetary policy or for a discretionary approach. Proponents of a rule-based monetary policy would argue that because our knowledge is limited, we should follow a rule that will, say in average, minimize the errors. However, one could also argue that because our knowledge is limited, a rule will be biased and therefore discretionary policy (if an expert is in charge) is a better option than an imperfect rule.

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