"Inflation is always and everywhere a monetary phenomenon" was Milton Friedman's slogan. It was revolutionary (or counter-revolutionary) when he said it in 1970, but it's now very widely accepted. After all, we make central banks responsible for keeping inflation on target. We do not make fiscal authorities responsible for targeting inflation (unless they happen to control monetary policy too). And we certainly don't give the Competition Bureau or Industry Canada responsibility for targeting inflation (which would make perfect sense if economists believed, as many did in 1970, that inflation was caused by monopoly power).
But nobody strictly believes the full quote from Milton Friedman. I bet hardly anybody even knows the full quote. "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output." Nobody believes that last bit is strictly true.
What about my own slogan (though it might easily have been Friedman's): are recessions always and everywhere a monetary phenomena? And if so, in what sense?
Robinson Crusoe doesn't use money. If Robinson Crusoe has a bad harvest, his GDP will drop. It's conceivable he might even work less, if there is less to harvest. But is that a recession?
Well, you could call that a recession if you like. But it is missing one very distinctive feature that we normally associate with recessions.
In a recession, it gets harder to sell stuff, and easier to buy stuff. It takes more effort to find a buyer, if you want to sell goods or labour; and it takes less effort to find a seller, if you want to buy goods or labour. Most economists look at an economy like that and say that goods and labour are in excess supply. In the olden days, we would say there's a "general glut".
It's the excess supply of goods and labour that makes it a recession. The fall in output and employment is merely a typical symptom of that excess supply. Less stuff usually gets sold when there's less demand than supply.
In fact, I can imagine an economy having a recession even while output was rising, even rising faster than normal. An economy could experience a general glut, and at the same time have a massive oil discovery that causes its output to rise. Unlikely maybe, but I can't see why it couldn't happen. Just have the central bank halve the money supply at the same time as oil production skyrockets. That should do it. If the discovery is big enough, the increased oil production and oil exports could be quite enough to offset the decline in the rest of GDP.
Inflation is a rising price of goods in terms of money. Because money, understood as the medium of account, is what we price goods in. I don't see how anyone could sensibly talk about inflation without mentioning money.
A recession is an excess supply of goods in terms of money. Because money, understood as the medium of exchange, is what we buy goods with. I don't see how anyone could sensibly talk about recessions without mentioning money.
We live in a monetary exchange economy. Sure, some parts of the economy are handled by barter, like production within the household, and exchanges with close neighbours. But the barter parts of the economy seem to do OK during a recession. Maybe even expand when the monetary economy falls, so people are forced to rely on their own production of vegetables, or that of their family, friends, and neighbours.
It's the monetary exchange economy that suffers during a recession. It gets harder to sell stuff for money. It gets easier to buy stuff with money. There's an excess supply of other (non-money) goods, and there's its flip-side: there's an excess demand for money.
I don't see how anyone could sensibly talk about inflation without mentioning money. I don't see how anyone could sensibly talk about recessions without mentioning money.
When it comes to inflation, we are (nearly) all monetarists now. At least in accepting the shortened version of Milton Friedman's slogan. But very few (if any) economists would accept the full version of Milton Friedman's slogan. We turn a blind eye to the bit where he adds "... in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output". OK, we say, he was wrong on that bit, but still right nevertheless. We still say that central banks' monetary policy can be given full responsibility for targeting inflation. We recognise that a change in the money supply will change the price level, other things equal. We recognise that a change in some of those other things can also change the price level, holding the money supply constant. That's OK, we say, because it is the job of the central bank to do whatever is necessary by changing the money supply to offset any changes in any of those other things that would otherwise cause inflation to vary from target.
Similarly, if we accept that recessions are always and everywhere a monetary phenomena, that does not mean that changes in the money supply are the only thing that can cause a recession. That's OK, we should say, because it is the job of the central bank to do whatever is necessary by changing the money supply to offset any changes in any of those other things that would otherwise cause a recession.
There ought to be a symmetry here. We are all (quasi-)monetarists when it comes to inflation. We should all be (quasi-)monetarists when it comes to recessions.
You know, there are non-disequilibrium theories of business cycles... just sayin'.
Posted by: david | August 25, 2011 at 02:25 AM
david: yep. That's what my bit about Robinson Crusoe was about. Those theories fail to address what to me is the essential (defining) feature of a recession. In what we call a "recession", it gets harder to sell stuff and easier to buy stuff. We buy stuff with money and sell stuff for money.
Posted by: Nick Rowe | August 25, 2011 at 02:34 AM
And our talking about "excess supply" is just a crude way of saying "it's hard to sell stuff (find a buyer) and easy to buy stuff (find a seller)".
Posted by: Nick Rowe | August 25, 2011 at 02:36 AM
If you had phrased it slightly differently, you could provoke a horde of angry Austrians to attack that assertion!
But I am not an Austrian. I shall leave it to them (where is Greg Ransom when he is needed?).
In the meanwhile, I think I should again point out that disequilibrium theories don't necessarily need money; there are a number of commodities which occupy prominent positions in the economy without goods being generally priced in their units. Oil, for instance. And one can model sticky prices without money by fixing the ratio of oil-to-units-of-representative-GDP (insert your choice of microeconomic rationalization here). Real relative price stickiness rather than nominal price stickiness, perhaps (compare real wage rigidity).
There are a number of disequilibrium theorists to whom this distinction has no impact on policy recommendations - if you're New Keynesian, and there is an oil shock, you can nonetheless make it go away via monetary adjustment because eventually you can overwhelm menu costs and BAM everything adjusts. Obviously, the crucial detail is not whether there is a disequilibrium, which can happen in any number of ways, but the precise proposed mechanism by which agents are thought to (limited-rationally) set prices.
Posted by: david | August 25, 2011 at 03:07 AM
david: you can have disequilibrium without money. You can have sticky prices without money. Agreed. But you can't have a generalised excess supply without money. You can't have it hard to sell stuff, and easy to buy stuff, without money.
In a barter economy, an offer to sell is an offer to buy. If it's hard to sell one good it must be hard to buy another. If there's an excess supply of one good, there must be an excess demand for whatever it is they are trying to sell that good for. We live in a monetary exchange economy, and one of the 2 goods in every market is money. When we try to sell stuff, and can't, that means we are trying to buy money, and can't. The excess supply of goods that we observe in a recession *is* an excess demand for money.
Posted by: Nick Rowe | August 25, 2011 at 03:29 AM
A couple of points:
- take the concept that a pure barter economy has a market between any pair of goods, and a monetary economy really only has a subset of all possible markets between any pair of goods, because we specify that money must be one of the goods. Fine. But the alternative to a monetary economy is not necessarily a pure barter economy with markets between every pair of goods - incomplete markets can occur for real, non-money-related reasons, like real transaction costs for certain pairs of goods. An economy with apples, pears, bananas, and oranges can simply not have a market between apples and pears or bananas and oranges and presumably it is easy to see how such non-gross-substitutability can cause the price mechanism to jam up along the way.
In the limit of incomplete markets by removing markets not involving money, one achieves the monetary economy, so to speak. But one doesn't need to go all the way to prevent excess demands and excess supplies from finding each other.
- Take a non-monetary pure exchange barter economy with no transaction costs and complete markets - just sticky prices, with no other artefacts. Say that everyone is identical and starts with an endowment of ten apples and ten pears. Say that everyone prefers apples to pears at the margin, but fix the sticky price at one apple to one pear. Therefore: excess supply of pears, excess demand for apples, no trade occurs.
If you think "wait, is it really sensible to have a sticky price if no trade actually occurs at that price?", alter one consumer's endowment so that at the margin she prefers pears to apples; she will trade with the others until she is indifferent. For sufficiently many other consumers, this will not remove the excess demand/supply. One could to arrange preferences for this consumer so that one good is inferior and the other superior, presumably; then tweaking her endowment will achieve the desired example.
- if your objection is that neither of these represent a general excess supply of "stuff", well, "stuff" is heterogeneous. Trivially one cannot have both an excess supply and demand for the same good. But why not for two goods, like "stuff" and labour? Or real estate? Or oil?
Posted by: david | August 25, 2011 at 04:17 AM
(I should point out that I do not disagree with the empirical characterization of the ongoing recession as a disequilibrium one, nor even the argument that observed and future recessions are likely disequilibrium phenomena; I do object to the assertion that it is the only theoretically sensible outlook.)
Posted by: david | August 25, 2011 at 04:24 AM
Didn’t Blanchard say that the price of turnips is always and everywhere a vegetable phenomenon? His point was that Friedman’s pronouncement (minus the erroneous bit) is simply vacuous. Of course inflation is monetary – it’s the rate of change in the value of money.
In a recession, it gets harder to sell stuff, and easier to buy stuff.
Actually, it’s quite easy to sell AAA bonds. The real problem is that it’s hard to sell products and most inputs to production. So perhaps the important distinction is between demand for liquid assets and the demand for output. Or is it between ‘flexprice’ asset markets and ‘fixprice’ goods markets?
But we don’t seem to get anywhere with those questions, so let me put a different question to you: what do I have to believe in order to be a quasi-monetarist in your eyes?
Or here’s another way of putting the same question. I’m currently spelling my way through an excellent textbook on macroeconomics, which briefly discusses Old Keynesian economics in Chapter 2, with a more extended discussion of quantity signals and the short-side rule in Chapter 5. Money is dealt with in a way which would, I’m sure, gladden your heart -- except for one thing: it doesn’t get into the act until Chapter 11. Could the author possibly be a quasi-monetarist? Just what are the entry requirements for this club?
Posted by: Kevin Donoghue | August 25, 2011 at 05:37 AM
Nick - thanks for another educational post – you must be a great teacher.
Could you consider making a post about “money” as well?
I think the term “money” is a bitch, and always have a lot of problems in trying to fill it with content.
If I look at myself, I can´t remember a single time during at least the last two years where I used paper money – and how much money do I have in my account? Is it the number that I already own or is it that number plus the limit of my credit card (given that the banks can lend more and that lending, as now, probably doesn’t have any effect on interest rates)? Are my assets money? Sure, everyone can´t liquidate their assets at the same time but doesn’t the existence of assets make a fixed money supply go much further. Without assets – if you sit on money that you don’t want to use – we are kind of stuck. If, on the other hand, I got assets – I might change my assets against your money and thus we would get them into circulation. Etc. etc. etc.
As you see – I am confused – and I don´t think I´m the only one.
Posted by: Nemi | August 25, 2011 at 05:57 AM
David:
I expect there to be expanding and contracting sectors of the economy all the time. That is how resources are reallocated. This process involves surpluses, shortages, and structural unemployment.
So, telling me that sticky prices in a two fruit barter economy results in fewer transactions is nothing like a recession.
It is more like imagining that reallocation could conceivably occur without unemployment if all prices and wages were perfectly flexible. Sectors losing demand just lower prices and wages so that quantity demanded is maintained. And workers get job offers in the sectors with higher demand, give their notice, and start at the new place of employment. It could happen that way. No structural unemployment involved.
Comparing that world to the real world isn't the same thing as saying there is a recession in the real world always. Or even that if more economic change is occuring, there is a recession. It isn't a recession because there are areas of the economy with growing demand that match (or in an economy with growing capacity, overmatch) the sectors that are shrinking.
As for your oil and GDP business--I am less sure. But I think here Nick's frequent appeal to barter causes the problem. You imagine that there is a shortage of oil (lines at the gas station,) and there are surpluses of everything else. This is still a recession, in your mind, because the shortage of oil is just one market. It is close to a general glut of "stuff." They see the lines at the gas station with people holding various sorts of stuff waiting. They reduce their production of the stuff they would have brought to the gas station.
In a monetary economy, we ask, "what do the frustrated oil buyers do with the money they cannot spend on oil?" The implicit assumption in your story is that they hold it. And quasi-monetarists, say, see... the demand for money has risen. You are assuming a constant quantity of money. There is an excess demand for money matching the general glut of other goods.
I favor GDP targeting, and so in the scenario where there is an increase in the demand for oil and neither price nor quantity increases, the demands for other stuff must be maintained. If the price of oil or quantity of oil rises, (or if it was a decrease in supply, the quantity of oil falls less than in proportion to the price,) then demand in the rest of the economy contracts.
If we imagine price level targeting, and the price and quantity of oil remains unchanged, and there is a shortage, then demand in the rest of the economy is maintained so that the price level doesn't fall. Only when the price of oil rises does demand fall for stuff, so that its price(s) can fall.
I am not so sure what happens if the quantity of money is held constant or worse, some short term interset rate is held constant. Probably something bad with interest rate targeting. Like usual.
Posted by: Bill Woolsey | August 25, 2011 at 07:29 AM
"Similarly, if we accept that recessions are always and everywhere a monetary phenomena, that does not mean that changes in the money supply are the only thing that can cause a recession. That's OK, we should say, because it is the job of the central bank to do whatever is necessary by changing the money supply to offset any changes in any of those other things that would otherwise cause a recession.
There ought to be a symmetry here. We are all (quasi-)monetarists when it comes to inflation. We should all be (quasi-)monetarists when it comes to recessions."
How about we change terminology a little? Recessions have to do with Relative Prices. Depressions have to do with Demand.
This way you can still sensibly talk about a recession when there is a supply shock (oil prices for example), that 'merely' requires an adjustment of relative prices. And depressions, when the increased demand for money is not offset and there is a lack of demand?
Both can occur simultaneously, but it would help if we'd make a distinction in terminology. Depressions are always and everywhere a monetary phenomena. Recessions are always and everywhere about re-allocation ;)?
Or in terms of the New Classicals, Recessions are RBC, Depressions are Lucas 1972?
Posted by: Martin | August 25, 2011 at 08:23 AM
@Bill Woolsey
But telling you that sticky prices in a money/"stuff" economy results in fewer transactions is acceptably a recession?
Central to both is some kind of postulated mechanism for rational price stickiness; I don't see why real and nominal wage rigidity is a respectable concept whereas real real-estate price rigidity or whatever should not be. Yes, it is nothing like the real world, with its stunning history of non-neutral money. My point is merely that it is wholly coherent.
Posted by: david | August 25, 2011 at 08:44 AM
I think Kevin Donoghue has nailed the crucial point. Most people are going to agree that recessions have got something or other to do with money, but is that enough to make them monetarists, or even quasi-monetarists? Nobody (but you) can say until you define those terms.
Posted by: Phil Koop | August 25, 2011 at 09:38 AM
Nick, you're free to specialize terms as you wish but that just shifts the terms of the question to Are we in a recession now?
Whereas before we might have asked is this recession caused by monetary or real factors.
Just because there is reported unemployment does not mean there is a general glut. There could well be reservation wages (in real or nominal terms) that cause people to select leisure over work.
If it's a nominal issue we can go back to monetary policy. If it's a real wage issue, well not without an interest rate transmission mechanism or a way to shape expectations of output.
If it's an issue of hoarding accommodating money demand will be good enough but only in that situation.
Posted by: Jon | August 25, 2011 at 10:10 AM
Oh it's nice to wake up in the morning to see some good-quality comments. Not sure the quality of my responses will be as good, but oh well.
david: "In the limit of incomplete markets by removing markets not involving money, one achieves the monetary economy, so to speak. But one doesn't need to go all the way to prevent excess demands and excess supplies from finding each other."
Interesting. Lets imagine going in the other direction. Start in a pure monetary economy, then move a little bit away from that limit by introducing a very small number of barter markets. The economy should presumably still behave *approximately* like a pure monetary economy. (I would be embarrasses if it didn't; if my (implicit) model were "fragile in the limit"!)
Unemployed workers have an excess supply of labour. They want to sell their labour for money, and then sell that money (or most of it) to buy consumption goods. But since they can't sell their labour, their notional excess demand for consumption goods never shows up in the market for those goods. Now suppose workers' wages can get paid partly in their output. Brewery workers get some beer in their pay packets. Bakers get some bread, etc. If each worker consumes 100 different goods, but produces only one, I don't think this would make much difference to employment and output, though it would help things a little. There would still be an excess supply of all types of labour, and all consumption goods. But in the limit, as each firm produced a greater and greater number of goods that workers consume, the excess supply would be eliminated by those barter markets.
I'm a bit lost by your apples and pears example though. Is there any good (except money) that is *typically* in excess demand in a recession? (Maybe job-search services, or those people whose job is to help you sell stuff?). If recessions empirically had an excess supply of (say) labour, but a roughly equivalent excess demand for (say) output goods, I think I would stop being a quasi-monetarist (at least as far as saying "recessions are always and everywhere a monetary phenomenon"), and start saying instead "recessions are caused by real wages being stuck too high", or something.
(That last point I think also applies to Kevin's very good question.)
Posted by: Nick Rowe | August 25, 2011 at 10:21 AM
Nick:
The recession symptoms you describe can also be explained as the effects of a shortage of money. When money was silver coins, the coins would wear out over time. New coins would weigh 20 grams while old coins weighed maybe 19 grams. The economy needs more coins, but Gresham's law takes hold and new coins are hoarded rather than circulating. The resulting shortage of coins makes it hard to sell stuff, but easy to buy stuff if you're lucky enough to have coins.
Now replace the coins with bits of paper, each of which is convertible into a coin. If we have free banking, then banks can freely issue new bits of paper on fractional reserve principles and there is no shortage of money. Likewise there is no inflation because the bits of paper are backed by enough assets to make them worth one coin each. But if there are restrictions on the issuance of bits of paper, then there can be a shortage of money. This causes a recession, but since each bit of paper is worth 1 coin, the value of a bit of paper does not change.
Posted by: Mike Sproul | August 25, 2011 at 10:28 AM
Kevin: "Actually, it’s quite easy to sell AAA bonds."
Yep. For two reasons:
1. they are very liquid. OK, that's a bit of a tautology. What I mean is that they have all the characteristics that tend to make goods very liquid: thick markets, organised markets, low-information required (unlike used cars they are all the same), etc.
2. Yes, prices that adjust very quickly.
Remember my post on the peanut theory of recessions? Suppose just one good, peanuts, had perfectly flexible prices. We would never see peanuts in excess supply (or demand). It would be very tempting to attribute recessions to something screwing around with the relative price of peanuts. It would be very tempting so say that central banks should control the relative price of peanuts. It would be very tempting to say that we there cannot be an excess demand for money, because you can always get more money by selling peanuts.
Peanuts were an allegory(?) for bonds.
http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/07/the-peanut-theory-of-recessions.html
Posted by: Nick Rowe | August 25, 2011 at 10:40 AM
Kevin: "Didn’t Blanchard say that the price of turnips is always and everywhere a vegetable phenomenon? His point was that Friedman’s pronouncement (minus the erroneous bit) is simply vacuous. Of course inflation is monetary – it’s the rate of change in the value of money."
If we are trying to explain things, we look for what they have in common with other things, and what they don't have in common with other things. If we saw the price of vegetables rising, and other prices not, we would start explaining the rise in the price of turnips by noting that fact. It must be a vegetable phenomenon.
Back around 1970, many economists really did put forward explanations of inflation that had nothing to do with money. (The past really was another world, that is hard to believe once existed). Now, I agree, there is nothing *logically* wrong with such explanations. But they ought at least have some sort of answer to the question: "But if your theory is right, what is happening to the demand and supply of money, and why doesn't that matter? How does the fact that we are talking about a falling value of money fit into your picture?"
Now, right at the beginning of my post, I addressed the question "what does it really mean to say that we all now accept Milton Friedman's slogan?" What does it mean to say that we think it is something more than vacuous? And my answer is that we assign monetary policy reponsibility for inflation. That was what was controversial about what Friedman was saying. That's where the rubber hit the road. Many economists really did believe that that was wrong back in 1970. I can remember it. I was there (just). (OK, I was in the UK, which was further away from monetarism than the US, but read some old stuff by JK Galbraith, or look up "cost-push inflation" to get a flavour.)
This whole post is an argument from symmetry. What does it mean to be a quasi monetarist? When it comes to inflation, someone who does not assign responsibility to monetary policy is not a QM. When it comes to recessions, someone who does not assign responsibility to monetary policy is not a QM.
OK, that's a negative definition of quasi-monetarism, (which makes it necessary, but not sufficient), but it's the best I can do this morning. (And see my point above at the end of my response to david).
Posted by: Nick Rowe | August 25, 2011 at 11:10 AM
Up until 3 years ago, I thought we were all (OK, leaving RBC types aside, because they never had any policy-relevance) quasi monetarists in that sense when it came to recessions. But now there's a crisis, and most of us are off worshipping Baal.
Posted by: Nick Rowe | August 25, 2011 at 11:15 AM
Nick, why doesn't RBC have any policy relevance? Isn't it just as important to show what you can't do as what you can and how an economy looks when you can't?
Posted by: Martin | August 25, 2011 at 11:30 AM
Nomi: Thanks! (Not as good as i should be. I'm feeling old and tired.)
"I think the term “money” is a bitch, and always have a lot of problems in trying to fill it with content."
Yep. You are not alone! Is "money" M1, M2, M3, etc.?
We have to think in terms of a "functional" definition of money. "Money" is whatever we use as money.
There are only 2 functions that matter. (Forget all the textbooks that say there are 3, because money is a store of value. Almost everything is a store of value, sometimes better and sometimes worse than money. Houses are a store of value, but that doesn't make houses money).
1. Medium of account. That good in which prices are quoted is "money".
2. Medium of exchange. That good we buy and sell all other goods for is "money".
(Nearly always, but not always, those two functions refer to the same good).
I'm focussing here on medium of exchange. Currency definitely. What's in your chequeing account definitely. From there it gets more controversial, and so I'm going to stop there, because I would go too far off-topic.
Posted by: Nick Rowe | August 25, 2011 at 11:31 AM
Bill: as you might suspect, I tend to agree with your comment, and have nothing useful to add.
Phil: agreed. I have done my best (for now) above. Not good enough, clearly.
Martin: "How about we change terminology a little? Recessions have to do with Relative Prices. Depressions have to do with Demand."
Well, we *could* do that. But it would mean we would have to go back and say that a lot of things we had previously called "recessions" (like the 1982) weren't really recessions, but depressions. In fact, no obvious example of such a "recession" comes immediately to mind.
Jon: my response would be: "Is it harder than normal to sell stuff, and easier than normal to buy stuff ("stuff" defined very broadly, to include labour and assets, not just output)?" If the answer is "yes", then I would call it a "recession". And I would answer "yes" for the US right now. And Canada a qualified "yes" too.
Mike: I'm with you except for (no surprise) this bit: "Likewise there is no inflation because the bits of paper are backed by enough assets to make them worth one coin each."
But if there's a shortage, so they are not exactly convertible on demand (or an excess), then why aren't bits of paper like shares in a closed-end mutual fund, trading at a premium or discount to the backing assets, even though there is 100% backing? Maybe because shares in closed-end mutual funds are not the medium of account, so have flexible prices relative to the backing assets?
Posted by: Nick Rowe | August 25, 2011 at 11:50 AM
Martin: OK. I should have been clearer. What I meant was that RBC *theorists* have had (as far as I can tell) no impact on economic policy.
Posted by: Nick Rowe | August 25, 2011 at 11:53 AM
"After all, we make central banks responsible for keeping inflation on target. We do not make fiscal authorities responsible for targeting inflation "
I would take this with a grain of salt.
First, we already have an extensive system of income support payments, which are now supplying 1 Trillion of deficit spending per year to the private sector.
Do you really believe that if all of these supports were removed -- no unemployment, no foodstamps (1/6 of households are now on foodstamps), no disability payments, no welfare payments. That inflation would be the same? That the CB could just handle it? There are many examples of the CB utterly failing to control inflation and keep it on target -- e.g. look at the US Fed.
Second, Bernanke immediately called for Fiscal policy in the wake of this crisis. First in the form of TARP, and then with the stimulus. Again, what do you think would have happened to prices if the all the major money center banks failed, if there was no deposit insurance, and if there were no capital injections -- note that none of these activities are monetary policy.
Fiscal policy has done much more to stabilize the price level in this current crisis.
Posted by: rsj | August 25, 2011 at 12:06 PM
I don't think so... I think it is fragile in the other limit, in that a little move away from a pure barter market can behave approximately like a pure monetary economy, in the sense of removing a very small number of goods from most of their markets. You don't have to shut down most markets to achieve the effect, because money is not alone in being a good that turns up often on one side of a transaction. Oil-derived goods turn up on the other side. Most people do not buy crude oil; if there is an excess supply of labour and an excess demand for crude oil, even with a cleared market for money we are still dependent on a network of markets to sort out a series of intermediary prices. The adjustment process is non-obvious, even in modern literature. Pick your choice of microfoundations and one can easily theorize why this might happen only slowly, even in a rational universe (and all we have done is remove a mass of markets related to just two goods: labour and oil).
I reiterate that I have no idea how relevant this possibility might be to Real Life; while I have read several commenters on your previous blog posts mention oil (in the obvious context of the 70s oil crisis), my knowledge of past empirics is not great enough to intelligently comment. If Scott Sumner asserts that the quantity of money & money-substitutes is the key economic actor in modern history, well I have no reason to disagree.
Safe assets? Other stores of value? Where the safety of money is inversely related to its inflation rate, and so right now it is remarkably safe in most developed nations.
Considering recent, post-Bretton Woods non-US countries. Are US dollars nonetheless in excess demand during a domestic recession? This would demonstrate that the medium-of-exchange account is not relevant; what agents are really fleeing to is safety. Many countries seek to influence exchange rates, so the reason for sticky prices there is obvious. Perhaps someone else may be able to answer this.
Conversely, Scott Sumner blames past stagflation on supply-side issues, so perhaps there are some recessions not caused by an excess demand for money.
Posted by: david | August 25, 2011 at 12:07 PM
Nick:
The bits of paper might be convertible into coins on demand, but still in short supply (e.g., if banks face restrictions). And the bits of paper would be valued based on the assets backing them, just like any liability, including closed-end funds. But I don't like the idea of fund shares (or bits of paper) trading at a premium or a discount, since I like to do my theorizing in a no-arbitrage world. Obviously mis-pricing does happen, but not in any systematic way.
Also remember that there are many kinds of convertibility: instant, delayed, certain, uncertain, at the buyer's option, at the seller's option, physical, financial, etc. The suspension of one kind of convertibility (instant and certain physical convertibility at the customer's option) still leaves the bits of paper convertible in many other ways.
Posted by: Mike Sproul | August 25, 2011 at 12:25 PM
DAvid: they are two types of what we call recession , types that are extremely different beasts.
The monoetary one , where we are afraid and want to hold money,whatever it is, for safety reasons.
And the real ones, like the 73-oil shock.. There is a real physical shortage, various stickiness prevent an immediate reallocarion of resources. In both cases we measure unemplyment and concludes they are the same thing. That confusion in 73 , when we tried to solve by monetary expansion what was an oil shortage ( politically motivated, not even a physical one)led to the "Keynesianism no longer works trope." Though the resulting inflation brought back to real price of oil to its previous level. HAd we adhered to pure monetarism we would have kept the cartel price.
Posted by: Jacques René Giguère | August 25, 2011 at 12:33 PM
Nick, are you familiar with Keynes' definition of money in 'A Treatise on Money'?
Do you think it is a good/useful definition?
Posted by: JCE | August 25, 2011 at 12:34 PM
It has been easier to sell government bonds than to buy them -- hence the falling yields. In fact, you can replace *every* occurrence of "money" with treasury security in this blog, and still have it be an accurate description of what happens during demand led recessions.
But alas, the central bank has very limited capacity to cause the stock of privately treasuries to increase.
Posted by: rsj | August 25, 2011 at 12:39 PM
@Jacques René Giguère
No, the policy responses need not necessarily differ - say you are a New Keynesian and blame the failure to adjust to clear labour markets on assorted price-adjustment costs; then as noted earlier, a sufficiently large monetary shock will overcome this cost, even if the root cause of the earlier shock was real.
Fundamentally, to any disequilibrium theory the focus is on finding the least costly way to provoke price or quantity adjustment. In a purely monetary recession, adjusting the quantity of money is least costly. But one can generalize.
Posted by: david | August 25, 2011 at 12:45 PM
rsj: good critique. My guess is you have articulated what many would/should say in response.
"There are many examples of the CB utterly failing to control inflation and keep it on target -- e.g. look at the US Fed."
This would be a more telling critique if the Fed really did have some sort of explicit inflation target (or price-level path, or NGDP-level path, target). It doesn't. If it did, the Fed would be able to communicate what it is trying to do, and the credibility of that communication could itself have helped massively to prevent AD falling, and prevent both inflation falling as well as the recession. Given the amount of disagreement within the Fed, we really don't know what the Fed is trying to do. It's not as bad as citing the failure of the Weimar central bank's failure to prevent hyperinflation. Or the failure of central banks generally to prevent inflation when they don't think it has anything to do with monetary policy. But it's a bit that way.
How much of the financial crisis was itself a consequence, rather than a cause, of the failure of monetary policy? Scott Sumner argues it was mostly the latter. (Unlike me, he also is better at providing empirical evidence in support). If monetary policy fails to prevent expected inflation and expected real growth from falling, that will cause asset prices to fall, and put a lot of banks in queer street.
david: suppose, just suppose, that cows were money. An epidemic that killed off all the goats (or made them go dry) would cause a recession. Unable to drink goats' milk, people would want to hold more cows. Nobody would spend their cows, because they didn't want to lose the milk.
Sure, the goats are the original cause of the problem. But goats only cause a recession because they impact the demand for money. If we could print cows, or even make the cows go dry too, so people started to spend their cows again, the recession would end.
And, the price of goats would rise, relative to cows, in this case. In a normal recession, where some of the cows die off, the price of goats would fall relative to cows. But in both cases the proximate cause of the recession is an excess demand for cows. If we didn't use cows as money, the goat problem wouldn't cause an excess supply everything else.
goats = bonds, or "safe assets".
On stability of GE and gross substitutibility. That is not an area of economics I can get my head around easily. IIRC though, from a long time back, there's a very big difference between the conditions required for stability in a monetary exchange economy than in a Walrasian economy (which is different again from a true barter economy, because in Walras there is 1 big market where all n goods are traded, while in barter there are (n-1)n/2 markets where 2 goods are traded in each.
In a recession though, most stuff is in excess supply and/or its (relative) price falls. Goats (bonds) are the exception in this case. And maybe the price of some inferior goods would rise (or they be in excess demand). But I can't think of any examples. Kraft dinner, because the unemployed demand a lot more??
Posted by: Nick Rowe | August 25, 2011 at 01:06 PM
David: in the fall of 1973, the disequilibrium was outside "economics". And no amount of either money or credit could haveeither stop the arab boycott nor brought new oil productions in non-arab-non-OPEC countries on line faster.Policy responses were not inadequate or slower than we wished. They were irrelevant.
Posted by: Jacques René Giguère | August 25, 2011 at 01:07 PM
JCE: It's ages since I read the Treatise. I don't remember the definition.
Posted by: Nick Rowe | August 25, 2011 at 01:08 PM
Nick:
"In fact, no obvious example of such a "recession" comes immediately to mind."
The oil shock in '73 mentioned by Jacques?
David:
"No, the policy responses need not necessarily differ - say you are a New Keynesian and blame the failure to adjust to clear labour markets on assorted price-adjustment costs; then as noted earlier, a sufficiently large monetary shock will overcome this cost, even if the root cause of the earlier shock was real."
You are assuming that monetary interventions have zero costs. If there is no excess demand for money, you will merely create inflation and inflation is generally a 'bad' thing. Adjusting to a real shock is difficult enough as it is without moving the general price level some more.
Not to mention that this isn't exactly an ethical thing to do. The people living on a fixed income, already facing higher costs of living due to the real shock will now face a general increase in their cost of living. Money belongs to us all. If you are going to use government interference to reduce money wages, reduce those wages that are too high, instead of reducing all wages and all incomes.
Posted by: Martin | August 25, 2011 at 01:16 PM
Elaborating on the 'bad' thing: recall the Friedman-Phelps critique that led to the NAIRU? Instituting such a policy is repeating the mistakes of the past.
Posted by: Martin | August 25, 2011 at 01:21 PM
Martin, Jacques: why would a fall in the supply of oil cause an excess supply of everything else, if it didn't have some monetary impact.
This goes back to one of my recurring thought-experiments. Suppose there is suddenly an increased desire to save, in the form of antique furniture. The paradox of thrift says that could cause a recession, unless the price of antiques rises sufficiently to reduce desired saving back to its original level. No way. Assume the price of antiques is fixed. So there's an excess demand for antiques. So what? People can't buy antiques, so they reformulate their plans in all the other markets, taking that quantity constraint in the antique market into account, and (probably) go on doing exactly what they were doing before. So, there's an excess demand for antiques, and no excess supply of anything else. (And yes, sod Walras' Law, which is false).
Antiques = bonds = oil.
Sure, it's not quite the same, because we use oil to produce other stuff. But that should simply reduce the supply of other stuff, creating an excess demand for other stuff, not a recession.
Posted by: Nick Rowe | August 25, 2011 at 01:27 PM
Ah Nick, you misunderstand me there. I don't see a recession as an excess supply of everything, I see it as a period of negative growth (that's how it is currently defined, isn't it?). That's why I wanted to make a distinction in terminology.
Assume a Meteor hits the earth and the CB is capable and willing to offset the increased demand for money. There is no general glut in such a situation, however there is a substantial contraction in economic activity for a longer period of time as the economy adjusts.
Posted by: Martin | August 25, 2011 at 01:39 PM
Countercyclical assets include guns, or gold, and so on. But being countercyclical is not enough to demonstrate excess demand - excess demand would only occur if the price fails to adjust correctly.
Which is the point. For excess demands/supplies to occur, prices and quantities have to be wrong; otherwise there is a real-business-cycle effect but no surge in involuntary unemployment, etc. So the proximate cause of the recession is a failure of the price mechanism; if people want to hold more cows relative to goats, the price of cows relative to goats should rise enough to reflect this. That cows are the medium of exchange is an irrelevancy in this example, as it happens. The problem is the sticky price (and sticky quantity) for whatever reason.
Is the price of bonds restricted? Conceptually one could have a group of goods that are all readily substitutable with each other, and another group of goods which are ready substitutes, but which don't substitute with the former group - then intuitively within each group prices 'clear' its internal market, but there can be an excess demand for one whole group and and excess supply for the other. Only one member of the group may be the proximate cause. Likewise bonds, the price of which adjusts readily enough. Your earlier peanuts blog comes to mind.
But one can distinguish a flight to safety from a flight to liquidity by assessing safe but not-really-adjusting assets, presumably. Are there any? I did mention US dollars for a non-US state that manipulates its interest rate. How might one conceptualize Mundell-Fleming for a small open economy in the context of a disequilibrium approach, does "excess supply of domestic labour" vs. "excess demand for foreign goods" work for you? Because of the presumed substitutability of money for foreign goods, perhaps.
On stability: my reading of the literature is that a sufficiently imaginative choice of example can make any damn thing happen even under implausibly restrictive conditions, never mind plausible conditions. So we are stuck with handwaving and hoping that the market can sort it out. My intuition here is no better than yours.
On Walras' Law: it behooves me to point out that Walras' Law works if you actually apply the individual budget constraint that it is derived from; if you model people as reformulating their excess supplies, then you should also allow people to reformulate their excess demands and then such consistency makes Walras' Law work just fine. There would be no excess demand for antiques and no excess supply of anything else, as expected.
Posted by: david | August 25, 2011 at 01:54 PM
That should be "US dollars for a non-US state that manipulates its exchange rate".
Posted by: david | August 25, 2011 at 01:56 PM
david: "On Walras' Law: it behooves me to point out that Walras' Law works if you actually apply the individual budget constraint that it is derived from; if you model people as reformulating their excess supplies, then you should also allow people to reformulate their excess demands and then such consistency makes Walras' Law work just fine. There would be no excess demand for antiques and no excess supply of anything else, as expected."
OK. But do you see what you have done if you do reformulate Walras' Law in that way? You have converted an interesting (if false) statement "the sum of the values of the excess demands = 0" to a perfectly useless statement "0+0+0+0+0=0". Because you are saying that the excess demand for antiques is now 0, because people realise they can't actually buy any, so stop asking for them. Similarly, if there's an excess supply of labour, unemployed workers will realise they can't sell any, so stop offering it. Full-bore "discouraged worker" effect, applied to every single market, so that all excess demands and all excess supplies are zero, at all possible price vectors.
Back later.
Posted by: Nick Rowe | August 25, 2011 at 02:11 PM
Here is another thought experiment with some roots in the real world. Say I found pets.com and spend tens of millions of dollars amassing an infrastructure to resell pet food. Investors pour money into my company with what they feel is a plausible business case. I pay employees and consume resources in warehouses and IT infrastructure. Sales fail to materialize and I run out of money, everyone goes home. Investors write off to pennies on the dollar.
In this particular case I produced nothing of value and the recession comes when I lay off my staff and investors write off their losses. So there is a gap there that is real for the investors and employees that is a net detriment to the economy if I instead invested in a business model that worked. I think in that sense it should be no surprise that recessions happen when we make bad decisions. I don't see how the money supply can change that at all.
Posted by: jesse | August 25, 2011 at 02:15 PM
I would rather not pick yet another fight about Walras' Law, honestly... what about the rest of my comment :P
But ok. Excess demands are unmet demands at the prevailing price, and excess supplies are unmet supplies at the prevailing price. This isn't actually well-defined, though, since planned demands and supplies can change. So: you have consumers react to excess demand by moving their excess supply to other markets. But holding the prices at which they do so fixed, if new antique chairs popped into existence, these consumers would simply substitute back along those prices and then swap their excess supply for their antique chairs. Hence: there actually was an excess supply of everything else.
Alternatively, if you define excess supply as requiring that people hold resources directly swappable for antique chairs idle (aka money), then there is no excess supply, because they've all adjusted their plans to take the limited supply into account. But there's also no excess demand, for the same reason that they now no longer have resources directly swappable with antique chairs. People do indeed realize that they can't buy any, so they no longer hold money idle waiting for them. Whether this can still qualify as 'unmet demand' depends on your choice of definition, but then you must be consistent.
In the context of unemployment, if an unemployed work uses their time to productively spring-clean their own house whilst seeking jobs at the prevailing wage, does this qualify as excess supply of labor to you? They can't find a job, so they reformulate their plans and move on. That 24 hour budget has to be allocated somehow! But they would readily undo said reformulation if they could find a job.
Posted by: david | August 25, 2011 at 02:27 PM
Martin: I sometimes hear people say that a recession is defined as 2 consecutive quarters of negative real GDP growth. "By who?". On what authority can they write the dictionary? And is that a *typical symptom* of a recession, or a definition? Even those guys at NBER who are said to "officially" say whether the *US* economy is (i.e. was) in recession look at more things than just GDP. Meaning is use (Wittgenstein). Do we say that Germany and Japan had recessions in 1945? Maybe, but those were weird sorts of recessions. Why not just say that saturation bombing caused GDP to drop?
Sure, I'm putting forward my own definition. You can define it differently. But I would argue that my definition is both: more in accord with common usage; and a more useful definition. But I'm not really hung up on it. (Just a little, I suppose).
Posted by: Nick Rowe | August 25, 2011 at 02:51 PM
david: you know I can't resist a fight over Walras' Law ;-)
(Especially since, I *think* (but I'm not sure), a lot of that stability literature I don't understand assumes Walras' Law!)
"But holding the prices at which they do so fixed, if new antique chairs popped into existence, these consumers would simply substitute back along those prices and then swap their excess supply for their antique chairs. Hence: there actually was an excess supply of everything else."
No there wouldn't be, in aggregate.
1. Suppose the new (LOL, sorry) antique chairs come as a helicopter drop. The excess supply of everything else vanishes, since they have now satisfied their demand for antique chairs by picking up the new ones off the street.
2. Suppose that new antique chairs are produced. The sellers of those new antique chairs will presumably demand goods with the proceeds. It's only if they demand to hoard money that we get a recession.
A simple model: people take their normal income, and their normal holdings of cash, to the antique market. "Got any antique chairs?". "Nope, try next week.". Then they go to all the other markets and spend their normal amount of cash as normal. (If they decided to hold abnormal amounts of cash, just on the off-chance they saw an antique chair they could snap up quick, that would cause a recession.)
Sure, as an accounting identity quantities bought and sold must add up to equal change in stock of money. But, if we visit each market sequentially, we are maximising U in that market subject to the budget constraint and to quantity constraints in every *other* market. That determines excess demand or supply in that one market. Because the set of markets that are *other* markets changes as they visit each market in turn, each excess demand/supply is determined by a different set of constraints. So they don't add up. We buy and sell sequentially, not simultanously.
Here's how I think about excess demands and supplies: what would we observe? Would we observe people making more than normal efforts to try to buy some? Would we observe people making less than normal effort trying to sell some? If we asked people "would you like to buy an antique chair" would they reply "yes! do you have one?". We have a sense that unemployed people want jobs in a recession, even if they have given up looking, and so don't technically meet the Stats Canada definition of "unemployed". What would happen if new antique chairs did arrive on the market? Would there be a bunch of eager buyers? What would happen if new job offers suddenly appeared? Would there be a bunch of eager sellers? If "yes", it's excess demand (or supply).
"In the context of unemployment, if an unemployed work uses their time to productively spring-clean their own house whilst seeking jobs at the prevailing wage, does this qualify as excess supply of labor to you?"
Yes, absolutely.
I'm falling behind.
Posted by: Nick Rowe | August 25, 2011 at 03:18 PM
Nick, I don't necessarily disagree with your definition, what you'd call a recession, I'd call a depression under the scheme mentioned earlier; you'd probably call it a more severe recession. I'd just call negative growth that is not caused by a not-offset increase in the demand for money a recession.
"Meaning is use", how do you think the public calls a period of negative growth? Even if we re-define/define recession according to your scheme, the fact remains that you need a word to denote a period of lower or negative growth that is due to non-monetary causes. What will they write in the newspapers? What will they say on the news? What if the pundits disagree on whether it is structural or nominal?
You're a teacher, how do you call the 73-75 episode when explaining what happened to your students? Do you or did you ever use the r-word when referring to a supply shock? I am open to any scheme and I think you have a very persuasive case in that a recession can be nothing else than a general glut. However how do we call a period of lower/negative growth then, a stagnation/contraction?
Posted by: Martin | August 25, 2011 at 03:20 PM
Martin: "However how do we call a period of lower/negative growth then, a stagnation/contraction?" That sounds good to me.
73-75 was both a recession and a contraction. Oil was at least partly responsible for the contraction.
Posted by: Nick Rowe | August 25, 2011 at 03:23 PM
david: "Which is the point. For excess demands/supplies to occur, prices and quantities have to be wrong; otherwise there is a real-business-cycle effect but no surge in involuntary unemployment, etc. So the proximate cause of the recession is a failure of the price mechanism; if people want to hold more cows relative to goats, the price of cows relative to goats should rise enough to reflect this. That cows are the medium of exchange is an irrelevancy in this example, as it happens. The problem is the sticky price (and sticky quantity) for whatever reason."
Yep. Agreed. If all prices were perfectly flexible, then you couldn't get an excess demand for money lasting longer than an instant. (I don't follow you on the "sticky quantity" bit though.)
You are losing me on the rest though. Maybe because my brain is overloaded. Sorry.
Posted by: Nick Rowe | August 25, 2011 at 03:29 PM
jesse: if you make a bad (ex post) investment decision, you cause GDP to fall below what it would have been. Agreed, we don't need to talk about money to explain that fall in GDP. But is it a recession? Where's the generalised excess supply? Wouldn't there be a *fall* in supply, and excess demand, because you have taken productive resources and produced nothing?
Posted by: Nick Rowe | August 25, 2011 at 03:33 PM
Nick, let me ask you this.
Suppose the government passed a law that said as soon as anyone received a dollar, they must immediately use that dollar to purchase something that isn't a dollar.
In that case, would recessions be impossible?
Posted by: rsj | August 25, 2011 at 03:34 PM
rsj: short answer "yes". Long answer "no", because:
1. You can't make it immediate. That would make velocity infinite. Can't be done.
2. One of the whole points of wanting to use money anyway is the same reason we hold inventories: because it's just too dams hard to do everything at once. (That's why God invented time).
3. Because the supply of real output might increase, causing a recession, even if M and V were fixed.
4. Because there might be a change in the degree of vertical integration over time, so the same flow of income would require a different flow of transactions.
5. People would figure out a way to get around the law.
6. Other stuff I haven't thought of.
But, that said, I *want* to answer "yes".
Posted by: Nick Rowe | August 25, 2011 at 04:10 PM
"But is it a recession"
Yes, I think it would be. Scaling this up, if there are many parallel examples to pets.com, of businesses ultimately producing nothing of value, investors are worse off and the aggregate starts to materially weigh on wealth. I'm simply arguing that a recession comes when investments don't pay off, and if enough investments don't pay off then people will be worse off, even if they're immediately put back to work elsewhere. To use a very simple example, if I'm a bad farmer I starve.
Sorry, I'm not following the supply argument (but that's likely because I don't understand your definitions). I'm going to re-read your post and the comments.
Posted by: jesse | August 25, 2011 at 04:16 PM
Interesting question. I am inclined to argue that this is incredibly easy to evade. Imagine a two currency world. I'd simply sell domestic currency, buy foreign currency, sell insurance on the domestic currency, and use the premium to buy insurance on the foreign currency. Change the example to a closed economy and the foreign currency becomes a financial asset, and the result is the same.
I am assuming complete capital markets and other similarly unrealistic properties and am however slightly puzzled whether a recession is even possible in such a world. For isn't it simply possible to replicate cash balances in such a world? How can there ever be an excess demand for money then?
Posted by: Martin | August 25, 2011 at 04:23 PM
Oh wait, complete capital markets rely on the non-existence of uncertainty. How else can you have a a contract with a pay-off for each state?
Posted by: Martin | August 25, 2011 at 04:25 PM
The world where you have to spend dollars instantly is just called a barter economy. It is identical to a standard barter economy in every way except that sometimes goods may be priced in a common unit of account.
Posted by: Alex Godofsky | August 25, 2011 at 04:46 PM
Okay, how do you know there is a recession?
Posted by: Jon | August 25, 2011 at 05:29 PM
Jon: "Okay, how do you know there is a recession?"
Mostly, I read anecdotes from the newspapers ;-)
We have very little good direct data on how easy it is to buy and sell stuff. The unemployment rate is usually (I hope) a good proxy for how hard it is to buy or sell labour. Survey data from firms can tell us how big a problem demand is, and how easy it would be for them to buy inputs to meet an increase in demand. Months listings for houses. But yes, mostly I just listen to a load of anecdotes about this.
Sure, if there is no other plausible explanation, a decline in output and employment would be a symptom of a recession. But only a symptom, not the thing itself.
Posted by: Nick Rowe | August 25, 2011 at 05:39 PM
Nick,
OK, but one can write down a model in which this is imposed as a constraint on all the actors, right?
Just imagine a discreet model, in which no one in the private sector is allowed to hold any cash balances at the end of each period.
They can borrow cash from the central bank, and they can lend cash to the central bank (by purchasing government bonds). But at the end of each period, they are only allowed to hold bonds or goods.
The central bank ensures that the interest rate charged to those who borrow cash (from it) is the same as the interest rate charged to those who purchase government bonds.
You are saying that in *any* model that has this transactional constraint, that demand-style recessions are impossible? Even if we add price rigidity, disequilibrium, coordination failures, expectations failures, downward nominal wage rigidity, etc?
It will never be the case that it is harder to sell (produced) goods rather than to buy them?
But if your answer to the above is "you can have recessions with this transactional constraint", then there something else going on here other than just a demand for money.
Posted by: rsj | August 25, 2011 at 05:55 PM
Nick;
"Martin, Jacques: why would a fall in the supply of oil cause an excess supply of everything else, if it didn't have some monetary impact."
Production functions are clay-clay. If the price of oil goes up we must reduce production of things-that-use-oil but they themselves are part of some other clay-clay productions that are also reduced. The limited amount of monetary signs goes to the King of Saudi. He doesn't want the goods we no longer buy but something else ( fighter jets in that historical case) that will be available only with a lag.
It is primarily a lack of AD for the less prized goods. You may want to see it as a glut of other things even though the glut is a result not a cause.
And the monetary angle is through the fact that reduced buyiing power is transmitted through having less money than before. But it is not a "monetary recession".
In 73, we encountered such a phenomenon for the first time ( there was a samll similar event for the same causes in Europe in 57 after the Suez affair.) We were spoooked, called it a recession and told the public it was though it wasn't. We then tried to solve it through keynesian means utterly irrelevant to the task and were told that we needed new economics to replace Keynes. We are still suffering the aftereffects.
Posted by: Jacques René Giguère | August 25, 2011 at 06:50 PM
I agree entirely with Jacques. His point is entirely why I say there is more than one type of recession. I will bang on about that one. You can have a supply recession and a demand recession, we are currently having the latter.
I came to this conclusion about two years ago and I'm glad to see at least one genuine economist agrees with me.
Posted by: Determinant | August 25, 2011 at 07:00 PM
rsj: I like the way you have re-posed the question, within a discrete time model, where we can assume away the impracticalities. And your money turns into a pumpkin at midnight.
There's something not quite right in your specification however.
1. You have a perfectly elastic money supply function. Start in full equilibrium. Hold prices fixed (by assumption). Now suppose there's a sunspot, and everybody expects everybody else will withdraw only one half the amount of money from the central bank. The each individual will expect everyone else to spend only one half the normal amount, so expects to get half the income, so only withdraws half the normal amount too, and only spends half as much. Which causes a recession. The model would need the central bank to set M where M=PY*/V, where V=1 by assumption, and Y* is full employment income.
2. In a world of imperfect competition, all goods will tend to *normally* be in excess supply. It's like a permanent 'recession". (Remember my old posts on this). Which is why I was careful to say that stuff is harder to sell *than normal* in a recession (did I remember to say this?).
3. I'm trying to think how I would have prices determined in such a model.
Posted by: Nick Rowe | August 25, 2011 at 07:04 PM
Determinant: "You can have a supply recession and a demand recession, we are currently having the latter."
Nearly all economists would agree with you and Jacques, though most would say that supply recessions are much rarer historically (though, if monetary policy were perfect, the only recessions left would be supply recessions).
I'm the weird outlier here!
Posted by: Nick Rowe | August 25, 2011 at 07:07 PM
OK. If most economists agree with me, or I agree with most economists then the best thing that can be done for economics discourse and for political discussion of economic policy is for the distinction to be made clear and incorporated into ordinary language.
The use of the word "Recession" without qualifier must be eradicated.
The problem here is one of perspective. A shortage of real materials or services is apparent for all to see and almost everyone can agree that such a shortage exists. But a money shortage looks like a general glut of goods, it's counter-intuitive to see one and then examine the underlying causes.
What works in a supply recession, innovating, substituting and investing your way out of it does not work at all in a demand recession. Reduced to its most basic, you have to either let prices fall (people without money or trying to acquire it suffer the adjustment) or inject more money into the economy (people with money or those who try to spend it) suffer.
The question is a political one, which group pays the price of monetary adjustment in a demand recession?
Posted by: Determinant | August 25, 2011 at 07:21 PM
Nick,
In this model, the central bank cannot control M like this.
If it purchases a bond for money, the household will turn around and purchase a government bond, supplying money to the private sector, then they can bid up the price of the government bond, at which point the CB, as it is obligated to keep the yield on the government bond equal to the policy rate, will need to sell more bonds into the market.
The net result of this is that the private sector can undo any OMO, unless it really wanted to use that much money during the period. But if it did, it would have withdrawn that much money in the first place!
And yet this model *will* have well defined prices, so I am urging you to re-consider the notion that the size of the monetary base, rather than the quantity of bonds and the rate of interest, is the key determinant to setting the price level.
Posted by: rsj | August 25, 2011 at 07:38 PM
Sorry, in the above, I meant: CB purchases a bond --> households have too much money--> households bids up price of the government bond --> CB sells a bond --> households have the right amount of money and the OMO is reversed.
The mandate to keep the yield on bonds at the policy rate means that the quantity of money borrowed from the CB each period is no longer a policy variable.
Posted by: rsj | August 25, 2011 at 07:42 PM
Yep. Supply side *contractions* are sort of obvious. The weather, earthquake, war hit, and we can't produce as much stuff as before. Usually (not always) we can understand what's happening as the market doing it's best to play a bad hand it's been dealt. It's the demand-side *recessions* that are harder to understand, where the market just seems to be doing obviously wrong things with an OK hand.
Posted by: Nick Rowe | August 25, 2011 at 07:44 PM
rsj: "And yet this model *will* have well defined prices, so I am urging you to re-consider the notion that the size of the monetary base, rather than the quantity of bonds and the rate of interest, is the key determinant to setting the price level."
No it *won't*. We've known that since Wicksell. Stop trying to lead me down that Neo-Wicksellian garden path! That's the dead-end the rest of the profession has gotten lost in.
Posted by: Nick Rowe | August 25, 2011 at 07:48 PM
OK, then for the dullards, please explain why prices are not well-defined. Does the economy explode? It's a very simple constraint to impose on an economy, so what do the inhabitants of our model do the day after the CB introduces dated cash and simultaneously promises to lend and borrow at the policy rate?
Posted by: rsj | August 25, 2011 at 08:00 PM
Start in equilibrium. Double all prices, double the money supply, leave the interest rate constant, and you are still in equilibrium. It's all to do with units not really mattering.
http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/05/units.html
Posted by: Nick Rowe | August 25, 2011 at 08:09 PM
You are assuming that prices are determined by the money supply, but they aren't. The money supply is determined by prices. Now, you may disagree, but you can't build a case by asserting that it is so.
Posted by: rsj | August 25, 2011 at 08:24 PM
No I am not. If the central bank pegs the rate of interest, it is neither true that M determines P nor that P determines M. P and M are two linked balls on a flat table. Neither determines the other. Which is why the US is in such a mess.
Posted by: Nick Rowe | August 25, 2011 at 08:52 PM
Or, Nick, to be less combative ("garden path" comment notwithstanding :P), you are assuming that the *only* possible mechanism to set prices is a hot-potato of outside money.
And I proposed a simple constraint that, in principle, can be imposed on any economy, in which the hot-potato-ing of outside money is impossible. The constraint should not materially alter anything else happening in the economy.
The proper response is not "well, prices are undefined!", but rather, "the hot potato effect is not operative in this model, and therefore prices are defined by some other mechanism."
Not every model in which there is a medium of exchange has to be forced onto the procrustean bed of paleo-monetarism, even if the latter is your favorite way of thinking about price-determination.
Posted by: rsj | August 25, 2011 at 09:07 PM
Points to rsj simply for his last sentence which just sounds sooooo good phonetically, emotionally and intellectually.
Posted by: Determinant | August 25, 2011 at 10:09 PM
Can all the instances of "money supply" in the post be replaced with medium of exchange supply?
Yes, it is important because lots of people have different definitions of "money supply". The first one I am thinking of is all the people who will say the "money supply" is the monetary base (currency plus central bank reserves).
Posted by: Too Much Fed | August 25, 2011 at 10:47 PM
"There ought to be a symmetry here. We are all (quasi-)monetarists when it comes to inflation. We should all be (quasi-)monetarists when it comes to recessions."
So does the medium of exchange supply trade relative to the amount of goods/services in the economy (meaning if the amount of goods/services starts rising, does the amount of medium of exchange need to increase to keep it from rising in value relative to the amount of goods/services)?
Posted by: Too Much Fed | August 25, 2011 at 10:56 PM
It seems that Nick's basic point is currently being supported by the empirical evidence. See:
http://macromarketmusings.blogspot.com/2011/08/other-side-of-households-balance-sheets.html
Posted by: Ralph Musgrave | August 26, 2011 at 12:56 AM
No, no... after this sequential adjustment, you can have excess demand for something you don't have the money to pay for. Likewise you can have excess supply of something you don't have (because you've allocated it all to other purposes). So in sequentially suppressing the non-chair related markets, you can force the excess supply of money relative to chairs to spread itself out among the universe of goods, less chairs. But you cannot make the excess supply go away. Nobody will have unallocated money or goods but if someone offered them antique chairs for any given basket of non-chair goods at the prevailing price vector, they would swap. It doesn't even have to be money.
Observation of effort to locate transaction counterparties is misleading - there is always excess demand for any number of impossible goods. If presented with a genie-containing lamp I would pay vast sums for it. But that doesn't mean I go out searching for it. The degree of effort also captures the degree of my limited-rational belief of such costly effort actually finding a counterparty, not merely the degree of my unmet demand for it.
The part where RBC is wrong is not where they claim the unemployed take a Great Holiday. That's not wrong, the unemployed really do. There are 24 hours in a day and unemployment doesn't change that, so they HAVE to do being something else. The part where they are wrong is where they claim indifference by the unemployed between non-work and work at the prevailing wage. In sequentially visiting each market for "what someone can spend their time doing", you will observe all of an unemployed worker's hours being allocated, but that doesn't change the existence of excess supply of labour. So why doesn't this apply for a goods market unless people idle money? They don't idle time!
Posted by: david | August 26, 2011 at 01:05 AM
Quantities are normally sticky, in that they are scarce because it is costly to create more of it. One can create more money though, instead of changing the price of money. Regardless, goats don't only cause a recession because they affect the demand for money. They cause a recession because their relative price to cows is sticky!
re: the rest. Okay, try this. Mundell-Fleming, small open economy with a fixed exchange rate. The central bank always stands ready to maintain the rate, and the economy is small relative to the rest of the world, so there is never a (non-small) excess demand for media of exchange: one can readily substitute foreign money.
A recession hits (and you can't really deny that small open economies can have isolated domestic recessions). There is excess supply of domestic goods (or domestic labour to produce domestic goods). There is no domestic excess demand for money; instead there is domestic excess demand for foreign goods. Resolution is achieved by altering the exchange rate so that domestic demand shifts from foreign goods to domestic goods/labour (and, likewise, foreign demand shifts from foreign goods to domestic goods/labour - call centers, maybe). Very textbook M-F.
Would this suffice as a conceptual example of a non-excess-demand-for-money disequilibrium recession?
Posted by: david | August 26, 2011 at 01:23 AM
Hayek sought to prove _exactly_ this: "recessions always and everywhere a monetary phenomena" in his famous 1929/1933 book _Monetary Theory and the Trade Cycle_.
Posted by: Greg Ransom | August 26, 2011 at 02:32 AM
Hayek in 1929 (etc.) shows that this statement "recessions always and everywhere a monetary phenomena" does NOT imply that "a recession is an excess supply of [all] goods in terms of money". In fact, showing that "recessions always and everywhere a monetary phenomena" show something different: "recessions are an excess supply of some goods and a deficient supply of other goods, effected by changes in the liquidity of near moneys, leverage, money demand, credit flows, credit availability & changing the relative values of production & consumption goods".
Posted by: Greg Ransom | August 26, 2011 at 02:43 AM
Let's put some more bones on that:
"Recessions are a systematic value destroying disequilibrium across all relative prices -- including relative prices across time -- expressed in an excess supply of some goods and a deficient supply of other goods, effected by changes in the liquidity of near moneys, leverage, money demand, credit flows, credit availability & changing the relative values of production & consumption goods".
Posted by: Greg Ransom | August 26, 2011 at 02:55 AM
The KEY thing is that the disequilibrium effected by changes in liquidity, credit, money, leverage etc. is an disequilibrium which -- once unavoidably exposed -- inescapably exposes systematic false valuations .. and thereby the less-economic or non-economic status of many prior goods & inputs.
Wishing these to have economic status or more-economic value status doesn't -- and can't -- make it so. The prior "equilibrium" was a leverage / credit / money / mis-valued _disequilibrium_ which only managed to hide itself & maintain itself because it depended on expectations across time that could not be fulfilled and which were hidden from view by all sorts of massive non-transparencies and knowledge problems.
Think of all the leverage, non-transparencies, knowledge problems, across-time expectations, etc. involved in mortgage backed securities, the housing market, Fannie Mae, credit default swaps, Too Big To Fail moral hazards, the Greenspan Put, etc., etc., etc., etc.
Posted by: Greg Ransom | August 26, 2011 at 03:09 AM
Think of old Palm Pilots or tube televisions or tape deck radios.
It's really easy to buy such stuff -- find a seller. But its really hard to sell such stuff -- find a buyer.
Why? Because these things have radically lost their relative economic value in the system of relative prices -- or they completely lost their status as economic goods.
Macroeconomists seem incapable of thinking in terms of things that lose their economic value, or even their economic goods status, due to the ending of an unsustainable money/credit/leverage/liquidity generated dis-coordination across all relative prices and production processes and consumption expectations.
Do sort of magic can give these goods back a status dependent on a structure of relative prices existing only in the past which can never return -- and wasn't viable even when it existed.
Think of the subprime / housing market / mortgage backed security / credit default swap structure of 2006 ...
Posted by: Greg Ransom | August 26, 2011 at 03:21 AM
Make that:
"NO sort of magic can give these goods back a status dependent on a structure of relative prices existing only in the past which can never return -- and wasn't viable even when it existed."
Posted by: Greg Ransom | August 26, 2011 at 03:24 AM
"How about we change terminology a little? Recessions have to do with Relative Prices. Depressions have to do with Demand."
I prefer the term "deflationary recession" (though the 'deflation' can be disinflation rather than absolute deflation).
Posted by: Max | August 26, 2011 at 04:14 AM
The horde of angry Austrians arrive! Well, Austrian.
Why do rational people not hedge against knowledge problems? :D
Are people systematically wrong? Is ratex not justifiable here? How would limited-rational overvaluation of future investment (aka, malinvestment into projects that would be unprofitable at the "correct" rate) be consistent with observed comovement of investment and consumption? Or are we combining these with some Galbraithian notion of a bezzle?
Undoubtly you have seen these attacks before!
Posted by: david | August 26, 2011 at 04:36 AM
Determinant:
"The question is a political one, which group pays the price of monetary adjustment in a demand recession?"
When the recession is monetary one group already paid the price for going off trend and one group gained. Going back to trend would merely reverse the positions of both groups and would restore the economy to the point where the economy would have been without the recession.
Posted by: Martin | August 26, 2011 at 05:27 AM
Does a belief in "inflation is always and everywhere a monetary phenomenon" mean that income doesn't matter? That is, that changes in money drive behavior independent of income?
Did Milton Friedman believe that a helicopter drop of *income* (not accompanied by an increase in money) would not be inflationary?
Posted by: Max | August 26, 2011 at 07:25 AM
david: I like this: "Observation of effort to locate transaction counterparties is misleading - there is always excess demand for any number of impossible goods. If presented with a genie-containing lamp I would pay vast sums for it. But that doesn't mean I go out searching for it."
Did you ever see my old post on how an excess demand for unobtainium must, by Walras' Law, cause a recession?
http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/12/unobtainium-and-walras-law.html
I accept your point there. I think of it as an (extreme) example of the discouraged worker effect. The unemployed make no effort to find a job, because they know they won't find one. There's still an excess supply of labour, but we can't easily observe it. We could only see it by interviewing the unemployed "would you accept a job at wage W if one were offered you?", or by an experiment where we offer them a job and see what happens.
So, when I say "effort to sell/buy" what I should be talking about is the *marginal* amount of effort it *would* take to make an extra sale/purchase, not the average or total amount of effort actually expended. In the case of unobtainium, or Alladin's lamp, the marginal amount of effort needed to buy one would be infinite, while the total amount of effort actually expended is zero.
(And this is one reason why it's so hard to collect useful data on how hard/easy it is to buy/sell stuff. We want the marginal; but we only observe the average, or total.)
That has helped me clarify my thoughts. Thanks.
Posted by: Nick Rowe | August 26, 2011 at 07:38 AM
david again: "No, no... after this sequential adjustment, you can have excess demand for something you don't have the money to pay for. Likewise you can have excess supply of something you don't have (because you've allocated it all to other purposes)"
Let's take a concrete example, for greater clarity.
Start in equilibrium. Then everybody decides they want to buy an old (antique) chair, rather than a new (newly-produced) chair. Hold the prices of both chairs fixed. The Paradox of Thrift says that the increased desire to save will cause a recession. And I say that's false. They can't buy old chairs, so they keep on buying new chairs. No recession.
I say there's an effective excess demand for old chairs, and no effective excess supply for new chairs. You say there *is* an excess supply of new chairs, if I understand you correctly.
I would respond: OK, there is a "notional" excess supply of new chairs ("notional" in the Clower sense of first-best what they would want to buy if there were no quantity-constraints), but no "effective" excess supply of new chairs. It's the *effective* demands and supplies that matter for determination of quantities traded. The new chair producers will still be able to sell their chairs as easily as before. They actually sell as many as before. The market for new chairs continues to operate *as if* there were no excess supply. We would not observe that notional excess supply if we just looked at what was happening in the market for new chairs.
If we look at this economy, and look for queues of buyers and sellers, we will see a queue of buyers at the old chair market, (or at least, people saying they want to buy an old chair but can't), and no queue of sellers in the new chair market. Everything we see would tell us that Walras' Law is violated.
(And the Paradox of Thrift is wrong too.)
Posted by: Nick Rowe | August 26, 2011 at 08:02 AM
david again: on your Mudell-Fleming example. OK. I understand you now.
Go back to my "peanut theory of recessions".
http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/07/the-peanut-theory-of-recessions.html
Assume all prices are fixed/sticky, except for the price of peanuts. So you can always trade peanuts for money. Does that mean there cannot be an excess demand for money? Not in any useful sense of the word. Sure, you can always sell peanuts if you want to hold more money, but that makes no real difference to the economy (assuming peanuts are a small part of the economy). You still get recessions, if the supply of money falls.
Now assume the central bank has a money that is convertible on demand into peanuts at a fixed price. Same as above. If the peanut crop fails, so the equilibrium relative price of peanuts rises, we still get a recession. Why? Because it causes an excess demand for money. Peanuts area tiny part of the economy, so a peanut harvest failure would not cause a recession, if peanuts weren't tied to money.
Now assume that all peanuts are imported. Mundell-Fleming model with fixed exchange rates. Yes, there is still an excess demand for money. The fact that you can always get more money buy selling more or buying less peanuts does not matter (much).
Posted by: Nick Rowe | August 26, 2011 at 08:27 AM
To add to my 8.02: if there were a barter market where new chairs exchanged for old, then we *would* observe an excess supply of new chairs. There would be a queue of people carrying new chairs trying to trade them for old. But there is no such market, so we don't observe it.
Posted by: Nick Rowe | August 26, 2011 at 08:34 AM
Greg: my understanding of Hayek is that his theory is indeed a *monetary* theory of recessions. As you say.
1. But did Hayek ever say (something like): "you can't get recessions in a barter economy"; or "OK, maybe you can get recessions in a barter economy, but they would be so totally different from the recessions we observe in a monetary economy that we couldn't think of them as "recessions" in the same sense"; or "in principle, if a central bank had (un-Hayekian) knowledge, and got monetary policy exactly right, there wouldn't be recessions"?
(My *guess* is that Hayek would have said "yes" to most of the above, but I'm not sure.)
2. One of the reasons I never got my head around ABCT is that it did *seem* to suggest that some goods (some particular sorts of goods) should *normally/typically* be in excess demand in a recession. Take the old metaphor (from von Mises?) about the builder with a pile of bricks and blueprints for a house, and then the blueprints get accidentally expanded, so he tries to build a house twice the size, runs out of bricks, and ends up with a useless half-built house. Shouldn't there be an excess demand for bricks in a recession? But, we don't see that. Why?
Posted by: Nick Rowe | August 26, 2011 at 08:53 AM
Max: "Did Milton Friedman believe that a helicopter drop of *income* (not accompanied by an increase in money) would not be inflationary?"
Two ways of interpreting your question:
1. Assume that productivity doubles overnight, so each worker can produce twice the output as before. Milton Friedman would say that would be *de*flationary. The price level would (roughly) halve.
2. The government borrows $100 per year per person, and gives it out as a transfer payment, increasing their disposable income by $100 per year. Fiscal policy. Most economists would say this would cause a rise in aggregate demand and a rise in the price level. (It's one of those "other things" I mentioned in the post). Milton Friedman was more skeptical about whether it would have an effect.
Posted by: Nick Rowe | August 26, 2011 at 09:05 AM
Nick: I don't agree that recessions are always and everywhere monetary phenomena. I think they are - especially the biggest of them - coordination failures. Many people think RBC is an abject failure at explaining the Great Depression or the Great Recession. It is. But the disequilibium keynesian-cum-monetarist explanation is not the only alternative to RBC! I think the idea that these are the only two choices leads people to put far too much weight on the liquidity trap - weight it cannot bear.
Posted by: kevin quinn | August 26, 2011 at 10:27 AM
kevin: I am never quite sure what people mean when they speak of "coordination failure" models of business cycles.
1. I can think of any simple monetarist (or keynesian) model as being, in some sense, a coordination failure model. E.g. suppose there's a recession caused by an excess demand for money. Take Paul Krugman's babysitter model for example. If everybody could just get together and agree to spend more, our reduce velocity, or try to reduce their desired stock of money, the recession would end. But they can't all get together and make such an agreement and enforce it, so it doesn't end.
2. Then there are coordination failure models to explain why prices are sticky. Even Keynes sort of sketches one in the GT. If everybody cares about his relative price, and doesn't want to cut it, and nobody wants to move first, prices are stuck. If they could only coordinate to all move at once they would all be better off.
3. Then there are Diamond-type search models, with a thick market strategic complementarity, that if big enough will give multiple equilibria. In the bad equilibrium, sellers make little effort to find buyers, because there are so few buyers, and buyers make little effort to find sellers, because there are so few sellers. (But those models don't *look like* recessions as I have described them, because Diamond says it is hard for *both* sellers *and* buyers to find trading partners.)
The sort of coordination failure models that Roger Farmer does seem more promising to me. Actually, I think I would categorise them under 2 above.
What sort of thing did you have in mind?
Posted by: Nick Rowe | August 26, 2011 at 10:58 AM
Nick:
"2. One of the reasons I never got my head around ABCT is that it did *seem* to suggest that some goods (some particular sorts of goods) should *normally/typically* be in excess demand in a recession. Take the old metaphor (from von Mises?) about the builder with a pile of bricks and blueprints for a house, and then the blueprints get accidentally expanded, so he tries to build a house twice the size, runs out of bricks, and ends up with a useless half-built house. Shouldn't there be an excess demand for bricks in a recession? But, we don't see that. Why?"
We do see a whole lot of unfinished buildings/skyscrapers.
There isn't an excess demand for bricks, because in the recession, 'the builder' (which I believe is a metaphor for the economy) finally realizes that he could not afford to finish the project to begin with. Low interest rates, trick 'the builder' in believing that there are more funds available than there really are. The project in the recession then cannot be finished and there exists an excess demand for loanable funds.
Co-incidentally, if you've ever been to Vienna or any other Old World (Power) Capital, what you will notice is that the capital is rather out-sized for the country. The reason is that most of its more elaborate buildings are generally from its Golden Age (Read: Bubble) when the rulers of said empire expected its growth to continue. It obviously didn't and as the empire fell to its more manageable proportions, the out-sized capital remained, essentially ossifying for us what previous generations expected to be the future.
Mises and Hayek both were a product of such a declining empire. Amateur psychology tells me it's understandable that they'd fit the crisis in such a metaphor. It's not even a bad one, given the prominent role expectations play in it.
Posted by: Martin | August 26, 2011 at 11:14 AM
Right, but what I've been getting at is that is a bad reason because leisure preference manifested in a reservation wage can create the same effect. So we must infer the general glut some other way than looking at the employment level. Moreover, with the employment level down, so is output. So output being low or declining is also not evidence per se.
Sounds like you admit this in your later remark: "Sure, if there is no other plausible explanation, a decline in output and employment would be a symptom of a recession. But only a symptom, not the thing itself."
So your statement is not a revelation; its a definitional statement, and so this entire thread is sort of pointless.
Now if you want to discuss whether Peter Orszag's recent essay about declining medicare expenditures is actually evidence of a general glut... well, maybe, maybe.
Posted by: Jon | August 26, 2011 at 11:14 AM
rsJ (while i think of it):
Wicksell said that there exists some (unobservable, unknown) rate of interest he called the "natural rate". If the central bank sets the actual rate below that natural rate, the price level (and money supply) will rise without limit. If the central bank sets the actual rate above that natural rate, the price level will fall without limit.
And you ask: what happens if the central bank sets it exactly at the natural rate? I shrug my shoulders and say: P and M are indeterminate. All levels of P and M are an equilibrium
You press, and say: come on, something must determine them!
I say: maybe, but that is not a question I can be bothered to spend much time answering. Because it ain't going to happen. What happens when a perfectly sharp pinpoint lands exactly on a perfectly sharp knife-edge? What happens when an unstoppable object hits an immovable barrier?
Kocherlakota has an answer. But that's only because he doesn't realise it's a knife-edge. He thinks it's a deep perfectly sharp groove.
Posted by: Nick Rowe | August 26, 2011 at 11:46 AM
Nick Rowe: "Start in equilibrium. Then everybody decides they want to buy an old (antique) chair, rather than a new (newly-produced) chair. Hold the prices of both chairs fixed. The Paradox of Thrift says that the increased desire to save will cause a recession. And I say that's false. They can't buy old chairs, so they keep on buying new chairs. No recession."
First, let me see if I understand one thing. The increased desire to save is the desire to buy an old chair, right?
Second, isn't the question of whether the result would be a recession or whether people would continue to buy new chairs (under the assumption of fixed prices) an empirical one?
To put it another way, without an operational definition of desire, how can we make a prediction?
Posted by: Min | August 26, 2011 at 12:07 PM
Nick, when Wicksell spoke we had the legal gold price to anchor P when the interest rate was floating at the natural rate. It took fisher for us to understand that Wicksell's process really explains how the inflation rate acts always to bring the market rate back into equilibrium with the real rate.
Further, Gold convertibility meant that M would always be adjusted to restore P to the legal gold price eventually. That meant deflation from time to time.
Todays gold peg is the inflation target which Avoids the volatility implicit in a price peg.
You of course know all this. So I'm missing why you are focusing on a 120 year old point of ignorance that we've moved beyond....
Posted by: Jon | August 26, 2011 at 12:26 PM