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"There's the Cournot-Nash equilibrium, where each firm chooses a quantity to maximise profits, given the other firm's quantity. And there's the Bertrand-Nash equilibrium, where each firm chooses a price to maximise profits, given the other firm's price. And the prices and quantities chosen in Cournot-Nash are different from the prices and quantities chosen in Bertrand-Nash. Any upper year economics undergraduate could do the math to prove this. I did it once.

"It matters whether the two firms speak the quantity language or speak the price language. A change in the language in which we talk about and think about the concrete reality changes that concrete reality. We get lower prices and higher output if the duopolists speak P-language than if they speak Q-language."

This sounds like an extreme form of linguistic determinism. In the real world, both firms speak the same language about prices and quantities. And neither is restricted in its choice of strategies.

One of the things I take home form this post and from all MM thinking is that money is a different thing to rich people and poor people. To rich people money comes form asset accumulation while for poor people it comes from income streams (which come from the gracious hearts of the "job creators", bless them). Monetarists, via the central bank, are trying to influence the rich people to behave differently. These rich people are arrogant enough to think they can predict the future and when their crystal ball gets cloudy its the governments fault. The CB know that they control the largest aspect of the future, what the risk free return on money will be. As much as the job creators like to boast otherwise, they also want some sort of "social welfare" , a safe return on their money. They need to know what that safe return will be and they want it to be more than 0.25%.. So now the MMs, seeing that too many job creators are happy with their 2% bonds are trying to scare them by saying that even those will be gone and all that will be left is 0.25%. Trouble is these guys are betting they can scare the CB to raise the rates. They own all the media outlets, all the multinationals all the means of production and all the politicians. Who you gonna bet on?

Me too, I like to tell the market what's going to happen to employment and growth and where inflation is going to be next year. I wonder what would happen to the market if I just said crazy random stuff from one day to the next. Surely the market would no longer be able to read my thoughts. It would be very upsetting. Or is there some difference between me and the Fed that means the market cares more what the Fed says than what I say?

Here's the point. The Fed has instruments. They can use them now and in the future. The most they can do is say what they with do with those instruments in the future contingent on the state of of the world. That's a lot of stuff they can say. Or they can describe some less complete subset of contingencies, that may have offsetting virtues (such as having finite information content). So there's a "complete" language and any number of "sub-languages". But all of them are about contingent *concrete steps*.


Any rules-based regime carries a large payoff to market actors if the rules are abandoned. Look at it from a speculator's viewpoint: I want to short NGDP futures because the payoff is out-sized even though the probability is lower. The bet will work if others begin to adopt the same strategy, as this raises the probability. The Fed has a tool to influence the payoff distribution too: it can raise the negative payoff significantly by promising to be "irresponsible" with future inflation.

As someone short NGDP futures, I am effectively betting that the Fed will NOT adopt such irresponsibility. The more the Fed believes MM's when they insist no change in the l.t. path of inflation is needed, the higher the chance that I will be right in this bet.

Let me put it another way: if I am short NGDP futures right now, what I fear most is that the Fed will raise the path of future inflation to a level where hedging by buying a house is almost a no-brainer. I know I will lose big if this happens. When I hear "4% inflation for two years, and then 2% inflation," I sleep peacefully at night with my short bet: no one will rush out an buy a house under that scenario.

Sounds like FDR and the gold exchange rate in the early 1930s ... FDR used "lucky numbers " he pulled out of his pajamas.

If you don't know what existentialism is, this article gives a really great explanation on it.


Gizzard: "One of the things I take home form this post and from all MM thinking is that money is a different thing to rich people and poor people. To rich people money comes form asset accumulation while for poor people it comes from income streams (which come from the gracious hearts of the "job creators", bless them). Monetarists, via the central bank, are trying to influence the rich people to behave differently."

Indeed. Ahem. We want rich people to spend money. But they won't because they will save against future taxes. But maybe we can lie to them and hope that they believe our lies. Etc., etc.

You want people to spend money? Put money into the hands of poor people. But there seems to be a taboo against that.

I like this post. I think it's a good starting point for seeing why all the Chuck Norris posts were wrong.

The central bank rally can't pre-commit its future actions. Any commitment it has the power to make, it has the power to break. Its future actions can be pre-committed only by someone, or something, out of its own control. To the extent your choices today bind your future actions, you can't freely make those choices, because they are already bound by your choices yesterday.

In a country in which NGDP targeting has existed for a long time, it is credible. The existing history is evidence that the target is not easy to change. And the history itself can't be changed at all. But that doesn't mean that a similar target can be credibly adopted elsewhere, because the mere fact of adopting a new target, shows that the target can be easily changed.

(If it were adopted only after a few weeks of bloody street fighting or a constitutional crisis, that would be different.)

To the extent that a central bank has power through expectations, it has power only via the policies it has the least choice about. Because to the exact extent that it is able to freely choose a policy, it is unable to commit to that policy in the future.

I know. You know I know. I know you know I know. We know Henry knows, and Henry knows we know it.

We’re a knowledgeable family.

— From The Lion in Winter, Prince Geoffrey to his mother, Eleanor of Aquitaine, speaking of her husband, his father, Henry II.


As I understand it, the problem is one of policy symmetry: putting money in the hands of the rich (expansionary monetary policy) is about as acceptable as taking it away from them (contractionary monetary policy). In terms of DIRECT changes in their stock of wealth, changes in the monetary base don't actually affect either*.

Now, consider an expansionary policy, aimed at increasing the money supply, where the poor are given cheques in the mail using underfunded state borrowing; in short, debt monetisation. That's acceptable, I assume. Yet consider a case where you want to reduce the monetary base. Do you go after the poor? It's not like with the rich, where you can change the price of assets by swapping assets for base money.

The converse of an asset swap is the same swap in reverse. The converse of handouts of freshly-printed money to the poor is taking the poor's cash by force. You could call it "taxation".

* Henry Hazlitt would rightly condemn all this reasoning, because we aren't following through the analysis e.g. the effects of monetary policy on assets, equity, and creditworthiness. And the further effects of contractionary monetary policy on interest rates & asset prices are hardly popular.


The rich wont spend on anything in which they arent guaranteed a return. Virtually all spending for them is about "what can I get in return". The poor of course are just trying to have a roof, have some food, have some health care..... and all those things are already owned by the rich. Its an incredibly short sighted person who cannot see that money to the poor will always end up in some owners hands. Where as money to the rich just ends up in some politicians pocket, some think tanks propaganda machine or some trust fund for junior so he can carry on the legacy of buying control of others lives.

@ W. Peden:

The choice of who to give money to and who to take it from is largely political, no?

Aside from the question of symmetry, it makes a kind of sense to aim monetary policy at the rich. After all, who has the most money? OTOH, how does such policy affect the rest of the economy? The recession officially ended in the U. S. over two years ago, and big bankers are enjoying their bonuses again? But does that reflect the condition of the economy as a whole?

Gizzard: "Its an incredibly short sighted person who cannot see that money to the poor will always end up in some owners hands."

As may be, but money tends to circulate, except when it doesn't. See Nick Rowe's hot potato stories.

Right now, money is not circulating well enough for unemployment to come down significantly. Even if putting money in the hands of the poor means that it hits a bottleneck when it gets to the rich, it still results in more movement than otherwise. :)

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