Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Display:
  1. The euro as "the currency of the Union" that all EU member states are supposed to be converging towards (if they are not already in the euro area or have an opt-out).

  2. The eurozone of 17 countries.

  3. The euro.

Of these three, the first is by now a dead man walking. The second can hardly avoid break-up. The third could well survive as the currency of a smaller group of countries.

The prospect of a DM-proxy currency that no longer has even the pretention to universality within the EU fills me with gloom. And I can't see why any country would (should) want the euro under German rules (maintenance of present value of assets, no fiscal transfers, no evolution towards an adequate political system for economic governance), in a single-currency single market dedicated to German trade expansion at the expense of its "partners". Or why the EU itself should be a pole of attraction to candidate countries.

The German ultrahard-money doctrine creates a centrifugal risk that runs counter to the neolib free trade and competition stance of German government and business. What will remain of the latter if the former is religiously upheld is moot. From a pro-European point of view, who cares? We already have sovereigntism without sovereignty, and inter-zone and inter-country squabbles, within a closed system that is not supposed to evolve (except towards tighter limits yet, see "reform" of the Stability and Growth Pact). Something's got to give.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Jun 17th, 2011 at 05:57:23 AM EST
Or to put it another way - you can't build unity by tying rats into a sack and forcing them to fight for scraps.

But my worry is that the eurozone is not the problem.

The problem could easily become the extent to which Wall St decides that euro-instability is a timely excuse for another meltdown.

Meanwhile we have Russia and China threatening NATO with "concerns" over Arab intervention.

None of this is looking good.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Jun 17th, 2011 at 07:35:25 AM EST
[ Parent ]
I really thought that they would manage to get away with the euro-gold standard. No more... it is over.. probably within 2 years.. unless a dramatic change of perceptions regarding what should be done appears.. or a massive crack in the banking system, leading to another recession when even Germany would need loose monetary policy.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Fri Jun 17th, 2011 at 08:11:41 AM EST
[ Parent ]
The other day I was thinking the appointment of a new ECB President was a cause for optimism, since he can change policy with respect to his predecessor without losing face.

However, Draghi takes over from Trichet will start in October/November of this year and I don't think the house of cards will stand that long.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri Jun 17th, 2011 at 08:45:42 AM EST
[ Parent ]
Even within a smaller eurozone, how are you going to account for Italy, Belgium, and even France? How are these three countries in particular to coexist with Germany?
by Upstate NY on Fri Jun 17th, 2011 at 09:49:29 AM EST
[ Parent ]
I think I was suggesting that question by saying that a rigid tight-money union is incompatible with German mercantilism.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Jun 17th, 2011 at 09:57:03 AM EST
[ Parent ]
But if they're going to give up mercantilism they could do it before the Euro-17 blows up.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Jun 17th, 2011 at 10:18:30 AM EST
[ Parent ]
I have it on good authority they're going to give up tight money first.

No, wait...

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Jun 17th, 2011 at 03:01:08 PM EST
[ Parent ]
For a couple of months until the crisis blows over or as a fundamental way of viewing the economics of currency unions?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jun 18th, 2011 at 05:11:38 PM EST
[ Parent ]
More likely over the smouldering ruins of the currency union.

Which can easily be arranged.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jun 18th, 2011 at 05:14:35 PM EST
[ Parent ]
Belgium and France have pretty good productivity, and are more aligned with Germany in its business cycle. This makes a smaller Eurozone, composed of them (and don't forget the Netherlands!) a pretty good proposition. Italy is another issue, but probably stable in a medium run.

ECB has 'low and stable inflation' written into its founding charter. It's actually a law, and before you see them 'printing money', you better start arguing for eurozone governments getting together and changing the charter. Of course, this could only happen after the catastrophe, because Germany would refuse to hear about it otherwise.

by Sargon on Sat Jun 18th, 2011 at 02:51:23 AM EST
[ Parent ]
When this crisis started, Portugal and France had the same debt/GDP ratio (in a few charts it was one data point on top of another). And, by the way, Spain was way better.

A bad year in France, say posting a deficit of 6+% and I think we might revisit your assumption.

You cannot beat the Anglo-Saxon spin machine.

by cagatacos on Sat Jun 18th, 2011 at 03:04:05 AM EST
[ Parent ]
When this crisis started, Portugal and France had the same debt/GDP ratio (in a few charts it was one data point on top of another). And, by the way, Spain was way better.
Thank you for your contribution. Clearly, this was about fiscal irresponsibility, and we need to enforce much stricter rules.

The Growth and Stability Pact didn't pay any attention to private debt. So, in the deficit countries with low debt ratios, private debt exploded. When the bubble popped, the public sector had to pick up the pieces.

Germany and France twice in the decade changed the rules to avoid being sanctioned for excessive debt but in the past couple of years they have attacked countries which have excessive deficits because of the depth of their recessions.

Apparently one of the stumbling blocks of Eurozone reform right now is that France and Germany don-t want sanctions to be automatic so as to retain wiggle room to escape them again. The European Parliament's current proposal is fairly automatic, and so may run into unsurmountable Franco-german opposition in the Council.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sat Jun 18th, 2011 at 03:26:57 AM EST
[ Parent ]
I said nothing of debt/GDP ratio. My argument is more about optimal monetary union area, and the degree to which their shocks are synchronized.
by Sargon on Sat Jun 18th, 2011 at 10:16:52 AM EST
[ Parent ]
That their shocks happen to be synchronised now does not tell you that they will continue to be if the Mediterranean countries reassume their ability to defend themselves from mercantilist attacks.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jun 18th, 2011 at 10:56:23 AM EST
[ Parent ]
In 2010 France imported from Germany for 112 billion USD and exported to Germany for 80 billion USD, making up a large part of France current account deficit of 53 billion USD (fourth largest in the world, third largest in the eurozone). (All figures from CIA)

Belgium has balanced trade and the Netherlands runs a surplus, so Germany and BeNeLux would probably work even with today's rules.

As I see it the only reasons France and Italy are not treated like the Mediterreans they are, are political reasons.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sat Jun 18th, 2011 at 03:13:51 AM EST
[ Parent ]
France and Italy both used to have CA surplus not that far ago, and French productivity is actually pretty high. Italy didn't show up much productivity growth lately (last decade, say), so it's a problematic member of the potential narrowish Eurozone. Comparing with Spain, Portugal, or Greece, who had deficits as far as the eye could see (maybe not in Spanish case, but it's also the safest of the PIGS), the differences could not be missed.

Plus, of course, they are both large countries, and it's much easier to start a speculative attack against a small country, even if fundamentals are weaker in a larger neighbor.

by Sargon on Sat Jun 18th, 2011 at 10:29:18 AM EST
[ Parent ]
The definition of "price stability" is not in the charter.
Quantitative definition

While the Treaty clearly establishes the primary objective of the ECB, it does not give a precise definition of what is meant by price stability.

The ECB's Governing Council has announced a quantitative definition of price stability:

"Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%."
The Governing Council has also clarified that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term.
So they could meet tomorrow and decide to change that to 5%.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sat Jun 18th, 2011 at 03:21:22 AM EST
[ Parent ]
Yes. They could also define the price stability to be anything less than Germany's or Hungary's post-WWI hyperinflations. But they wouldn't.

Typically, for large economies the inflation target is defined within a band of 1 to 3%. Not one economist in their right mind would think of 5% as 'price stability'. There could be arguments that a temporary target of 4% could be useful right now, to generate higher inflation expectations. Or that we should re-evaluate the danger of deflations and move the target higher just to get a bit further away from that abyss. But I doubt we'd be calling that 'price stability'.

And of course, that's not going to happen as long as Germany is in. From their perspective, inflation is so catastrophic (see certain electoral results in 1930s), that almost no amount of data will outweigh their priors.

by Sargon on Sat Jun 18th, 2011 at 10:40:47 AM EST
[ Parent ]
But inflation is never about price stability. If inflation had anything to do with price stability it wouldn't be used as an excuse to raise interest rates - an action which redistributes wealth and only lowers nominal inflation as a second or third order effect. (Assuming it doesn't raise real inflation by increasing asset prices.)

If you want to control prices, you can institute retail price and profit controls. You can tax commodity speculation. You can take steps to increase supplies and reserves of key items. You can wean your economy off commodities like oil and gas which have wild volatiility around a consistent increasing price trend.

The idea that inflation -> increasing interest rates is yet another example of expedient brain rot and mono-mania.

But it not only redistributes wealth by applying an interest tax which is passed to the ownership class, it also fixes the role of the central bank as the central political driver and master of the entire economy.

Hence in the UK we have a bunch of noobs sitting around a table every month deciding what rates should be. These people aren't elected, and in economic terms they seem to be very very serious, which means they're good party apparatchiks.

Why are they making political decisions without democratic accountability? How did this self-serving and flawed model get baked into the system?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat Jun 18th, 2011 at 10:54:09 AM EST
[ Parent ]
If inflation had anything to do with price stability it wouldn't be used as an excuse to raise interest rates - an action which redistributes wealth and only lowers nominal inflation as a second or third order effect.
I can only remain speechless about the 2nd and 3rd order effects. Long and variable lags I agree. No effect? I beg to differ.
by Sargon on Sat Jun 18th, 2011 at 02:54:25 PM EST
[ Parent ]
Why? Wealth redistribution - or more explicitly power redistribution - is the primary effect of an interest rare hike.

Explicitly, people who work have less to spend. Implicitly, they spend more time worrying about how little they have to spend.

Both limit their wealth and power.

But if you happen to own capital - specifically the kind of capital that can be invested in ways that are linked to interest rates - you suddenly find yourself richer without having to do jack.

I think what confuses people is that you can create the same effect by keeping interest rates too low, to inflate an asset or commodity bubble.

The first happened in the UK in the 1990s, where record interest rates created record house prices. The second happened almost everywhere in the 2000s.

The first seems counterintuitive. But because capital owners were making giant piles of money while workers were being made homeless, they had to do something with it, and speculation and "investment" were an obvious choice.

Meanwhile "inflation" is a convenient fiction. The definition varies according to the results you want.

If your aim is to increase spending and productive activity - which is the usual excuse - it makes no sense at all to kick people who are already paying more for basic essentials by also making them pay more for their housing.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat Jun 18th, 2011 at 04:57:38 PM EST
[ Parent ]
That's interesting. In your thinking, both high and low interest rates lead to the same distributional outcome. I guess this is because of an institutional failure?

But, barring social revolution, someone still has to run monetary policy. And yes, it's run to control inflation to a large degree. Try explaining to Germans that inflation is a 'convenient fiction'. They know better, as they should. (Do you see any correlation between the fact that inter-war Czechoslovakia was about the only country in Central and Eastern Europe capable to maintain democracy throughout the whole period, and that it was also an area that has escaped hyperinflation? Just asking.) There's some research showing that inflation aversion in nations is a function of existence of inflation crises in the past. If you aren't German, you can't understand what its monetary policy elite is thinking, just because you grew up in a different environment.

Finally, I don't disagree with the fact that interest rates have distributional consequences. A 'fictional' inflation, however, has them even worse, as poor and those on fixed incomes tend to have higher CPI than middle or upper part of the distribution. In inflation is low, the discrepancy gets much less.  

by Sargon on Sun Jun 19th, 2011 at 05:02:44 AM EST
[ Parent ]
Try explaining to Germans that inflation is a 'convenient fiction'. They know better, as they should.

Inflation and hyperinflation are two fundamentally different beasts, with only the most cursory of relationships.

(Do you see any correlation between the fact that inter-war Czechoslovakia was about the only country in Central and Eastern Europe capable to maintain democracy throughout the whole period, and that it was also an area that has escaped hyperinflation?

Obviously.

Hyperinflation happens when you have hard currency obligations that you are unable to meet, and attempt to meet them anyway. The fact that Czechoslovakia avoided hyperinflation (while being a small country that could not well tell foreign creditors to walk off a cliff) tells me that its economy was a lot less vulnerable to the loss of access to hard currency money markets.

As an aside, I think you display a somewhat rosy view of Czechoslovak governing practises in the Interbellum, but that is a slightly different subject.

Finally, I don't disagree with the fact that interest rates have distributional consequences. A 'fictional' inflation, however, has them even worse, as poor and those on fixed incomes tend to have higher CPI than middle or upper part of the distribution.

Nothing wrong with that you can't solve by indexing public transfers to median income.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 05:47:54 AM EST
[ Parent ]
In your thinking, (TBG), both high and low interest rates lead to the same distributional outcome. I guess this is because of an institutional failure?

This is a rhetorical conflation, at best. The same distributional outcomes were achieved by two different pro-bankster policies. There is nothing at all incompatible with low inflation and stable asset prices, if that is the desired policy outcome. It wasn't.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 19th, 2011 at 02:14:13 PM EST
[ Parent ]
Typically, for large economies the inflation target is defined within a band of 1 to 3%.

That is a political convention which has no basis in empirical reality. There is no documented cost to the productive economy of 5 % or even 7 % yearly inflation.

To the banks, yes. But the banks exist to serve the productive economy, not the other way around.

Not one economist in their right mind would think of 5% as 'price stability'.

This economist in his right mind would beg to differ.

Money - whether in cash or in bonds - exists to facilitate exchange and investment, by lending businessmen a measure of the state's coercive power. It should not be mistaken for a store of wealth, because it is not - it is a token of political power.

As such, it only needs to retain value through a typical transaction period. Which is on the order of weeks or months, not years. Anybody who uses state money (as opposed to real, tangible capital) to accumulate long-term wealth is usurping a tool of sovereign economic policy, and as such I fail to see any issue with having them pay for the privilege.

There could be arguments that a temporary target of 4% could be useful right now, to generate higher inflation expectations.

If you believe that inflation is driven (almost) exclusively by expectations rather than fundamentals, sure.

But that would be a rather peculiar view of inflation.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jun 18th, 2011 at 10:56:06 AM EST
[ Parent ]
I'm sorry but we are getting close to the boundaries where I simply cannot understand your definitions. That inflation to a large extent is driven by inflation expectations is not controversial. What defines expectations is an active area of academic research (including mine).

On why high inflation is bad - the easiest book to read is Gali latest textbook. Besides, inflation variability is also higher when inflation itself is high, making all kinds of production decisions difficult.

I have no problem with money printing being not inflationary in a recession. The problem in the Eurozone at present is that the 'core' seems to be requiring higher interest rates than the 'periphery', and so for the core money printing would be inflationary. How much - opinions could differ, ECB is probably more panicky than the most. That's going back to the argument about shocks synchronization.

It's rather unambiguous that 10% inflation brings bad economic outcomes, and there's some evidence for the lower values as well. Plus, we have pretty damn persuasive theories that tell us exactly why 6 or 8% would be bad, as well. I don't think the opposite is true.

On what could happen to France if the Mediterranean countries move to 'defend themselves from mercantilist attacks' - that's an empirical question. I wouldn't bet any policy on assumption that France would become PIGS in that hypothetical monetary area.

by Sargon on Sat Jun 18th, 2011 at 11:45:07 AM EST
[ Parent ]
Besides, inflation variability is also higher when inflation itself is high, making all kinds of production decisions difficult.

shrug

The output gap is higher when inflation is low, which reduces the rate of real capital investment.

Difficulty I can live with. Hamstringing, not so much.

Besides, that difficulty relates mostly to the fixprice sector, whose fixed expenditures and liabilities are fixed in nominal terms more often than in real.

Indeed there is a case to be made that low inflation policies introduce unnecessary relative price rigidities in the fixprice sector, because high nominal fixed costs increase downwards nominal price rigidity. Basically, when you have fixed nominal costs, it is easier to adjust relative prices by raising nominal prices at different rates than by raising some nominal prices and lowering others. The former eats into your bank's profits - the latter makes your company go tits-up.

The problem in the Eurozone at present is that the 'core' seems to be requiring higher interest rates than the 'periphery',

No, the problem is that Germany needs higher wages and higher inflation, to rebalance the current accounts.

Rebalancing the current accounts by having higher inflation in the surplus countries is almost always less painful - much less painful - than attempting to do so by having deflation in the deficit countries.

It's rather unambiguous that 10% inflation brings bad economic outcomes,

Yes, that's roughly my threshold for acceptable inflation as well.

But I note that this is mostly speculation, because we haven't actually had 10+ % inflation in most Western industrial economies since the War.

Plus, we have pretty damn persuasive theories that tell us exactly why 6 or 8% would be bad, as well.

I sure haven't seen any.

I wouldn't bet any policy on assumption that France would become PIGS in that hypothetical monetary area.

I wouldn't bet any policy on that hypothetical monetary area inheriting the inane Eurozone inflation-targeting mandate, because I don't think France would roll over and play dead. But if it does, Athens on the Seine is very nearly a mathematical inevitability.

Unless you propose that this new currency union would accept payment in Drachma for their exports, in which case it is a little difficult to see what all the current fuss is about.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jun 18th, 2011 at 12:24:10 PM EST
[ Parent ]
The output gap is higher when inflation is low, which reduces the rate of real capital investment.
I really don't understand some of your arguments, sorry. It's hard to speak about output gap and inflation without first specifying a particular model and the shock which is assumed to be hitting the economy. Do you have in mind a classic supply shock here?

Basically, when you have fixed nominal costs, it is easier to adjust relative prices by raising nominal prices at different rates than by raising some nominal prices and lowering others.
Again, this is very hard to evaluate without looking at a model you have in mind.

Rebalancing the current accounts by having higher inflation in the surplus countries is almost always less painful - much less painful - than attempting to do so by having deflation in the deficit countries.
I agree, but that's not the objective function which calls higher interest rates in Germany. From Bundesbank's POV, they have to make sure inflation pressures don't build up on the back of robust recovery they are having right now.

On whether or not France would agree to inflation targeting in any hypothetical monetary union that runs IT - well, Sarkozy could shout all he wants, another Frenchman Trichet isn't going to give in. And that's going to continue. They might negotiate some weight on an output gap, but it's going to be lower than at the Fed, for sure.

Plus, we have pretty damn persuasive theories that tell us exactly why 6 or 8% would be bad, as well.

I sure haven't seen any.

Well, I guess we read the NK Macro differently.
by Sargon on Sat Jun 18th, 2011 at 02:48:21 PM EST
[ Parent ]
It's hard to speak about output gap and inflation without first specifying a particular model and the shock which is assumed to be hitting the economy.

The output gap is the gap between the contemporary output and the output you could achieve at full capacity. I was not aware that this was model-dependent.

To low order, "full capacity" can be approximated by "full employment."

Do you have in mind a classic supply shock here?

No, I'm not talking about a shock. I'm talking about a persistent general glut, due to (a) inefficiencies in private sector capital allocation and (b) the desire to hold an increasing portfolio of sovereign monetary instruments as the economy grows.

Of course, if you're in a neoclassical modelling environment, a persistent general glut is assumed away axiomatically. But I consider that a problem with neoclassical modelling, not with reality.

I agree, but that's not the objective function which calls higher interest rates in Germany.

There is no objective function which does that. See Mig's sig.

From Bundesbank's POV, they have to make sure inflation pressures don't build

But the BuBa should not be making that decision. The ECB should. And from the ECB's PoV, they have to make sure that - since there is no European fiscal transfers budget or Bancor - inflationary pressures do build up in Germany. Because to do otherwise is to imperil the very existence of the Eurozone.

well, Sarkozy could shout all he wants, another Frenchman Trichet isn't going to give in.

Sarko can fire Trichet. Trichet can't fire Sarko.

Plus, we have pretty damn persuasive theories that tell us exactly why 6 or 8% would be bad, as well.

I sure haven't seen any.

Well, I guess we read the NK Macro differently.

I'm pretty sure we don't.

I just don't find a theory of the political economy that implicitly (and occasionally overtly) assumes long-run money neutrality to be particularly convincing.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jun 18th, 2011 at 05:06:51 PM EST
[ Parent ]
The output gap is the gap between the contemporary output and the output you could achieve at full capacity. I was not aware that this was model-dependent.

Two typical gaps that people would use are the difference with potential output, and with 'natural' output. If you simply use HP filter to get at the gap, then yes, it's not model dependent. Otherwise, it is, especially for natural output.

Of course, if you're in a neoclassical modelling environment, a persistent general glut is assumed away axiomatically. But I consider that a problem with neoclassical modelling, not with reality.

OK, I see  - you are speaking about current environment, where, following your own definition, output gap is large in magnitude and negative. I got confused when you spoke about 'higher' gap.

And no, the persistent glut isn't assumed away, not in NK environment for sure. I'd put the finger for the current problems differently - lack of demand, with one of the reasons a desire to re-balance. But no problem with inefficiencies in private capital allocation - people are thinking seriously now about measuring of FIRE output, and what has made it so high, and why it turned out to be socially inefficient.    

There is no objective function which does that. See Mig's sig.

Every social science is politics or could be used for political purposes. So what? More seriously, yes, there is - the one in Walsh, taught to undergrads, even. But of course, if you don't find these theories convincing enough, they don't exist for you.
And from the ECB's PoV, they have to make sure that - since there is no European fiscal transfers budget or Bancor - inflationary pressures do build up in Germany.

You have an implicit model in your head which is very different from the ECB one. I'm not sure any model on fiscal-monetary policy interaction in a monetary union would lead to your prescriptions.
Sarko can fire Trichet. Trichet can't fire Sarko.

Yes. Sarko could do many strange things, but so what? You typically don't rise to the top only to challenge everything the elite believes. Of course, as a professional I'd love to have him do this - this would make identification in papers studying the effect of central bank independence on average inflation so much easier - but, again as a professional, I shall do anything I could to prevent such event, no matter what I might be thinking about the ECB monetary policy at the moment.
by Sargon on Sun Jun 19th, 2011 at 04:48:28 AM EST
[ Parent ]
Two typical gaps that people would use are the difference with potential output, and with 'natural' output.

Well, obviously you use potential output, since there is no convincing theory of "natural" output, let alone a reality-based way to estimate it.

OK, I see  - you are speaking about current environment, where, following your own definition, output gap is large in magnitude and negative.

Yeah, when I talk about "output gap" I talk numerical values, since output can hardly exceed capacity for any length of time together (if it does, you would appear to have misestimated capacity).

And no, the persistent glut isn't assumed away, not in NK environment for sure.

I have a few textbooks that say differently. Highly regarded too. State of the art, used by at least one Very Serious University's department of Economics, which is staffed by Very Serious People, who all swear by long-run money neutrality (at least when they talk to the students).

I'd put the finger for the current problems differently - lack of demand, with one of the reasons a desire to re-balance.

That is a good description of the last few years.

But we have had substantially less than full capacity utilisation for the last thirty or so years. So clearly there is a longer-term problem which is not caused by the panic of 2007, unless cause is no longer required to precede effect.

There is no objective function which does that. See Mig's sig.

More seriously, yes, there is - the one in Walsh, taught to undergrads, even.

This amounts to saying that because you can write a policy with Greek letters, it becomes objective. I think most social scientists would take issue with that.

Be that as it may, the arguments for requiring a hard-and-fast rule for interest rate policy are, well, less than compelling.

You have an implicit model in your head which is very different from the ECB one.

Yes. That fact was established some months ago, when the ECB insisted that the private debts of private Irish banks should be borne by the Irish taxpayer. A decision which it has pursued with a naked blackmail that exceeds even the most generous reading of its mandate.

I'm not sure any model on fiscal-monetary policy interaction in a monetary union would lead to your prescriptions.

As Keynes pointed out at Bretton Woods, any fixed-rate currency regime requires either an automatic mechanism to limit foreign surpluses, an automatic mechanism to recycle them, or both. These requirements arise from simple national accounting relations, so unless you wish to abolish double-entry bookkeeping, they are not particularly negotiable.

Absent explicit fiscal transfers, the easiest way to accomplish the same thing is with implicit fiscal transfers. By printing money for deficit countries to pay the surplus countries with.

None of this should be terribly controversial. We have already had three fixed-rate currency regimes blow up for precisely this reason (four if you count the various Latin American attempts to peg to the US$). It beggars credulity that the ECB is incapable of grasping such a simple fact. But I suppose we'll simply add the Eurozone to the list of cautionary tales one of these months.

but, again as a professional, I shall do anything I could to prevent such event, no matter what I might be thinking about the ECB monetary policy at the moment.

Why?

Central bank independence does not seem to have done anything good for the economies where it has been practised.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 05:36:40 AM EST
[ Parent ]
I'd put the finger for the current problems differently - lack of demand, with one of the reasons a desire to re-balance. But no problem with inefficiencies in private capital allocation - people are thinking seriously now about measuring of FIRE output, and what has made it so high, and why it turned out to be socially inefficient.

When your policy has succeeded in concentrating wealth into a very few hands then, along with wealth, you have concentrated discretionary spending power. If your policy has eliminated consumer manufacturing by shipping it to China or Vietnam so you will be able to keep a larger portion of the sale price from royalties and/or investments in retail and shipping, you have further diminished your domestic demand. Then the goal becomes extracting as much accumulated wealth from the country in which you operate through financial manipulation in the FIRE sector before the whole thing collapses -- and that is where this policy has brought us.  

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 19th, 2011 at 02:27:29 PM EST
[ Parent ]
people are thinking seriously now about measuring of FIRE output, and what has made it so high, and why it turned out to be socially inefficient.

You mean real estate? Why there was a bubble and why the bubble was socially inefficient?

by kjr63 on Sun Jun 19th, 2011 at 04:24:54 PM EST
[ Parent ]
That inflation to a large extent is driven by inflation expectations is not controversial.
Certainly its not controversial. For faith economics, its a doctrine of faith, and for empirical economics, its only holds up if you build it into the model and so beg the question.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sat Jun 18th, 2011 at 06:17:00 PM EST
[ Parent ]
Well in Planet Finance - the FIRE economy - investors buy assets either for income or because they have have inflationary expectations ie they think the asset will appreciate in value. Or both.

In the real world on the other hand Joe Blow does not have inflationary expectations. He asks for a pay rise not because he thinks prices WILL go up, but because he thinks 'Fuck me, prices HAVE gone up. I need a pay rise'. ie he looks back not forward.

But what is happening now at the zero bound of dollar interest rates is that investors are buying assets whether they carry an income or not. Hence the correlated price moves across commodities which have become completely financialised.

So the irony is that in being sold 'inflation hedging' funds and structured products by investment banks etc etc the inflationary expectations of these investors leads their financial purchases of commodities to cause the very inflation they aim to avoid.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Jun 18th, 2011 at 08:22:34 PM EST
[ Parent ]
However, the inflationary expectations that Sargon refers to is not asset price inflation, but price inflation of newly produced finished products. When you assume a model that automatically tends to full employment and also assume the neutrality of money, you remove most of the actual causes of that inflation from consideration, and so must turn to the fiction of inflationary expectations to create a model in which observed product price inflation is plausible.

Certainly for assets sold and resold on secondary capital markets, expectations of asset price inflation are an important part of asset price inflation. Of course, those same mainstream economists who are forced to resort to inflationary expectations are the cause of observed product price inflation were assuring us that the asset price inflation in the housing bubble were reflecting "real" factors, or else the FIRE sector would not have agreed to hold so many assets that would be chickenshit if the housing sector was in an asset bubble with an ever present threat of bursting ~ because that would be riskier than the observed risk premiums were showing.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Jun 18th, 2011 at 08:32:25 PM EST
[ Parent ]
Of course, those same mainstream economists who are forced to resort to inflationary expectations are the cause of observed product price inflation were assuring us that the asset price inflation in the housing bubble were reflecting "real" factors, or else the FIRE sector would not have agreed to hold so many assets that would be chickenshit if the housing sector was in an asset bubble with an ever present threat of bursting ~ because that would be riskier than the observed risk premiums were showing.

Your brush is way too broad. It's as if I looked at the current membership of Eurotribune and called all of them Maoisits or Trotskites or whatever - you see, all three groupings are 'on the left'.

What I find painfully stupid at this forum is that many people just cannot take it that WSJ - especially its editorial page - isn't run by economists but by ideologues.

And BTW, I don't see what's the fuss about 'actual causes' of inflation - there's wealth effect in consumption, for example, which affected demand in 2009 in pretty much measurable ways. Sharp and short deflation was one of the outcomes of a dramatically lower demand.

But anyway, I prefer to discuss alternative model of economy in different fora. Through working papers and conferences. What we have here makes very little sense to me.    

by Sargon on Sun Jun 19th, 2011 at 03:58:11 AM EST
[ Parent ]
But anyway, I prefer to discuss alternative model of economy in different fora. Through working papers and conferences. What we have here makes very little sense to me.

Let us know if our ¨painfully stupid¨ predictive record is worse than that of your serious colleagues.

And what we can't take is the use of economic storytelling to promote political aims, while pretending to scientific objectivity and personal disinterest.

If the above doesn't bother you then yes indeed - ET may not be the right forum for you.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Jun 19th, 2011 at 04:14:18 AM EST
[ Parent ]
That's really funny - I usually find myself to the left of my typical classroom, and here I get hammered as an ultimate right-winger. Punishment for refusal to be ideological, I guess?

And you might be surprised to know that as an outsider I don't have political interests to promote (which makes European political circus so interesting). But yes, I'm trying to be a scientist. Thanks for noticing - perhaps I'm doing something right.

And finally, could you please point out where did I say anything about ¨painfully stupid¨ predictive record? Why do you need to use straw man arguments?

by Sargon on Sun Jun 19th, 2011 at 05:37:45 AM EST
[ Parent ]
I don't see anyone indicting you for being a right-winger.

I do see people indicting you for subscribing to economic models that assume long-run money neutrality.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 06:13:34 AM EST
[ Parent ]
What I find painfully stupid at this forum is that many people just cannot take it that WSJ - especially its editorial page - isn't run by economists but by ideologues.

No, I think most people here get that.

What I find painfully stupid is that when I crack open a Marginalist textbook, it says broadly the same things that the ideologues in the WSJ editorial page say.

You seem to assume that we here are unfamiliar with the orthodox liturgy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 06:04:07 AM EST
[ Parent ]
You seem to assume that we here are unfamiliar with the orthodox liturgy.

That's exactly my point. You are so far away that you probably can't see a difference along the line of, say, Cohrane - Lucas - Zingales - Williamson - Swensson - Woodford - Eggertson - Krugman - Galbraight. Yes, all of the above are 'marginalists'. But not all of them get the same respect on WSJ opinion pages.
by Sargon on Sun Jun 19th, 2011 at 06:36:02 AM EST
[ Parent ]
I think Galbraith would take exception to that claim.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 07:25:37 AM EST
[ Parent ]
He's really marginal 'marginalist' for sure. But in his research works, he's citing the same people I'd mention in a class. He doesn't dismiss the whole research paradigm.
by Sargon on Sun Jun 19th, 2011 at 08:13:17 AM EST
[ Parent ]
What I find painfully stupid at this forum is that many people just cannot take it that WSJ - especially its editorial page - isn't run by economists but by ideologues.

I think we would agree that they are ideologues, though some may also be "mainstream" economists. And does not even begin to address what so many of us here find "painfully stupid" about contemporary received opinion regarding economic matters.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 19th, 2011 at 03:52:52 PM EST
[ Parent ]
... of the WSJ have to do with what I said?

Finding the inflationary expectations story persuasive speaks to susceptibility to the status of the status quo, not to the strength of the story as a cause and effect explanation of real world inflationary processes.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Jun 19th, 2011 at 08:45:21 PM EST
[ Parent ]
There may be a new deck with fewer jokers soon. (I can hope.):

US Seeks to Curtail OTC Highly Leveraged Retail Trading in Paper Commodities and Currencies

Leverage going from 100:1 down to 10:1 on lots of trades, it seems.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 19th, 2011 at 12:52:06 AM EST
[ Parent ]
Why do we hwve to countenance Germany's inability to understand that hyperinflation happens when you try to inflate away foreign or indexed linked liabilities and never domestic denominated liabilities?

Seriously, maybe Mitterrand and Delors just grossly underestimated the depth oof German economic neurosis.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sat Jun 18th, 2011 at 02:19:09 PM EST
[ Parent ]
I guess because they believe in fiscal dominance theory of hyperinflations.
by Sargon on Sun Jun 19th, 2011 at 05:20:58 AM EST
[ Parent ]
Sure, but why do we have to countenance it?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sun Jun 19th, 2011 at 10:04:48 AM EST
[ Parent ]
Because it might be true, perhaps?
by Sargon on Sun Jun 19th, 2011 at 01:12:37 PM EST
[ Parent ]
Inflation is clearly influenced by fiscal policy.

Hyperinflation, however, has never actually been observed outside of a currency collapse or wholesale destruction of a government's ability to control its jurisdiction.

Inflation and hyperinflation are two completely different beasts, and are only superficially related. An important clue that a central bankster has no idea what he's yammering about is that he talks about Eurozone hyperinflation, something that is patently not possible (barring a really messy breakup).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 01:45:36 PM EST
[ Parent ]
OK, good, not only we read NK Macro differently, we also read historical record differently. Governments never tried to finance their operations through seigniorage, losing control of the currency and requiring ever increasing inflation rates to support their revenue streams in the end.

Fine, but I think I'm stopping here - marginal product of this discussion became zero for me.  

by Sargon on Sun Jun 19th, 2011 at 01:59:33 PM EST
[ Parent ]
Sovereigns always "finance" their operations through seigniorage. Spending creates demand, taxes destroy demand.

Obviously, if you generate demand in excess of what your economy can honour, you get inflation. But that is a different beast from Weimar, Brazil, Argentina and so on.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 02:16:04 PM EST
[ Parent ]
But the point we're arguing here is that whether seigniorage leads to inflation or hyperinflation depends on whether the government is attempting to fund domestic or foreign (or index-linked) liabilities.

Lacking academic Neoclassical Economics credentials, let me quote someone who does have them... An analysis of the consequences of seigniorage is contained in Can Central Banks Go Broke? by Willem Buiter. On page 8, there's

even if the resources needed to recapitalise the central bank are less than the maximum amount that can be appropriated through seigniorage (given by the peak of the seigniorage Laffer curve at A in Figure 1), the extraction of these resources may involve an unacceptably high rate of inflation.
Up to here we're talking about politically unacceptable inflation, but still inflation.
Worse than that, even the maximum amount of real resources the central bank can extract though seigniorage may not be enough to close the central bank insolvency gap. This could happen if the central bank had a large stock of foreign-currency denominated or indexlinked liabilities. In that case, without a capital injection from outside the central bank, the central bank cannot meet its funding needs from its own resources. The result would be hyperinflation and/or central bank insolvency.
Weimar experienced hyperinflation because it had unsustainable debt reparations to pay in foreign currencies (or in gold, which under a gold standard regime amounts to the same thing). Domestic debt can always be paid through seigniorage, albeit at a possibly politically unacceptable rate of inflation falling short of hyperinflation (because it is not runaway - a characteristic of hyperinflation is that once it gets started the rate of inflation snowballs out of control).

Also, as argued a long time ago by BruceMcF:

Also note that the [Weimar] Republic ...

... was not "the [Weimar] Republic" of Faith-Based Monetary Theory either.

The hyperinflation of the [Weimar] Republic followed, as Keynes in part predicted in "The Economic Consequences of the Peace", from the collapse of the economies in Germany's former major export trade zone, combined with an increased structural dependency on imports with the French occupation of the Rhineland industries.

Combine that balance of payments position with a demand that the [Weimar] Republic hand over regular reparations payment, and it is quite like a badly governed African nation that has to pay the debts to the World Bank and other transnational corporations incurred with no expectation by the lending agencies that the result of the projects funded would be sufficient foreign exchange earnings to pay off the loans.

It is, of course, possible to interpret both theory and the historical record differently, but then we're in the realm of economics as just-so stories because if you have more than one economist with academic credentials not accepting each other's models then they will characterise each other's readings of the historical record as just-so stories.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sun Jun 19th, 2011 at 05:01:34 PM EST
[ Parent ]
There is an important difference between hard and soft currency.

Any economic model that does not explicitly account for the difference between hard and soft currency is prima facie suspect.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 05:11:33 PM EST
[ Parent ]
could you explain the difference (again?!) between the two?
can you have both at once or is it a strict binary decision?

2 syllables good, one syllable better ;)

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Tue Jun 21st, 2011 at 01:34:59 PM EST
[ Parent ]
Soft currency is your own currency (where "you" are the government of the country in question). Hard currency is everyone else's currency.

You need hard currency to buy stuff other people make, unless they want to give you their stuff for free, as China wants for the US (well, not really for free, since the quid-pro-quo is that China gets the US' capital plant in return).

The neoclassicals treat all currency as being commodities. So when your currency is dropping like a rock, they advise you to destroy some of it, and not print as much of it.

The problem with that advice is that people don't buy your currency because it's shiny. People buy your currency because it lets them buy your stuff. Which means that the reason your currency is losing value is either that you have higher inflation than your trading partners or that you are unable to meet your hard currency obligations.

In the former case, trying to defend the exchange rate is stupid - it will make your companies move to other countries. Eventually you will become unable to defend your exchange rate because you've lost your industries, and then you'll have neither the strong currency nor your industries.

In the latter case, you cannot defend your currency by rationing it. If you have less hard currency than you owe, Mr. Soros and his friends can always squeeze you. Now, there are two possible reasons why you might find yourself in that sort of bind. The first is that you took leave of your senses and borrowed hard currency in order to gamble with it. Like Ireland.

The second possibility is that your economy went tits-up, and that crashed your ability to make stuff to sell to foreigners for hard currency. In that case, you want, seemingly paradoxically, to print more money, because getting your economy running again is the only chance you have of producing enough stuff to cover your hard currency obligations.

Can a currency be both hard and soft? Yes and no. In principle it can't. In practise, the way the BuBa treats the €-Mark is making a pretty convincing case that it can be. In fact, the whole "independent central bank" scam is all about making your soft currency behave like hard currency. Which is stupid, of course. But makes a lot of sense if you are operating in a mental model where all currency behaves as hard currency by assumption.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jun 21st, 2011 at 04:25:11 PM EST
[ Parent ]
thanks Jake... much appreciated.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Tue Jun 21st, 2011 at 06:10:58 PM EST
[ Parent ]
Governments never tried to finance their operations through seigniorage, losing control of the currency and requiring ever increasing inflation rates to support their revenue streams in the end.

What happened is exactly what Keynes predicted in The Economic Consequences of the Peace. The treaty was designed by the French to cripple Germany and it did. The reparations were, essentially, unpayable, requiring, as they did, that Germany export over 1/3 of her annual coal production. As Germany had been, at best, self sufficient in coal this shut down at least a third of her manufacturing, and when Germany became sufficiently in arrears, France sought to act as a "debtor in possession" by occupying the Ruhr. This destroyed the rest of the manufacturing, by design, as France's goal was more to hamstring Germany, than to receive reparations. Having huge foreign obligations and nothing to export to obtain foreign currency was the classic cause of the ensuing hyperinflation.

All of this leads me to wonder if the current policy of Germany towards Greece, Ireland and Portugal is an example on an international level of what Freud referred to as "the repetition-compulsion neurosis", which usually involved a perceived need to do unto others what has been done unto oneself. Of course the French denied that hamstringing Germany was their goal, just as Germany denies that the austerity measures on which they insist are designed to push the countries on which these policies are foisted into a debt deflation death spiral. After all, we all want to think well of ourselves, regardless of the mental contortions required, and the easiest and most effective emotional defense is denial.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Jun 19th, 2011 at 05:54:48 PM EST
[ Parent ]
As far as repetition-compulsion goes, and harming others, hasn't Germany already done enough?

It's a shame that Freud never came up with a reciprocal theory that would analyze how more virtuous actions, say the Marshall Plan, were likewise reciprocated.

by Upstate NY on Mon Jun 20th, 2011 at 09:04:32 AM EST
[ Parent ]
See one of his followers, Melanie Klein's Love, Guilt and Reparation and Envy and Gratitude. My wife bought these back in '75 - '76 and I could not but read them myself. Unfortunately, Freud's hermeneutic approach gets no respect these days.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jun 20th, 2011 at 02:42:50 PM EST
[ Parent ]
As far as repetition-compulsion goes, and harming others, hasn't Germany already done enough?

My sense would be that there is never "enough" of a compulsion until either the physiological basis and/or the process is brought into consciousness and is deliberately controlled by the one experiencing the compulsion. Ideally, both would be brought about in treatment.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jun 20th, 2011 at 02:48:11 PM EST
[ Parent ]
Something's changed. As anyone who stayed in Germany a while and met many Germans of the 80s and 90s can affirm, there was a great deal of self-consciousness, maybe suffocatingly so where hardly a conversation could be had without referencing the political. Jazz, cars, food = politics.
by Upstate NY on Mon Jun 20th, 2011 at 03:51:35 PM EST
[ Parent ]
there was a great deal of self-consciousness, maybe suffocatingly so where hardly a conversation could be had without referencing the political.

I suspect that self-conscious discussions involving political choices was part of what I described above as bringing the pattern of compulsion into consciousness and placing it under rational control. If that process has noticeably decreased, as you suggest, it could indicate a return to conscious repression of awareness of the compulsion, which would allow the compulsion to operate more noticeably.

Part of this may be generational. Even former German leaders have noted that the current leadership has lost sight of common European interests and that the current political situation has little tolerance for actions and expenditures that do not benefit Germany itself. This goes hand in hand with recent economic policy, which has asked sacrifices from the German working class in the name of "competitiveness". So much of the German electorate feels, with some justification, that that they have made sacrifices and now it is time for others to do the same.

Of course there is no discussion of sacrifices by German business elites, who have greatly benefited from German labor's sacrifices, as it is easier to blame the peripherals. Nor is there any appetite to look at the consequences of neo-liberal policies or, especially amongst the media and politicians, for understanding that it was banks in the "virtuous" trade surplus countries that took imprudent risks with loans to the peripherals, that for the surplus countries to have their surpluses there have to be deficit countries or that EU and ECB policies have favored Germany at the expense of the interests and needs of the deficit countries that are now unable to pay the loans that they took on in better times. Nor is there any recognition that the pain that is being inflicted on the peripheral countries far exceeds anything that Germany has itself experienced since WW II and its immediate aftermath.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Jun 20th, 2011 at 04:44:49 PM EST
[ Parent ]
The American Novelist Walter Abish (an American of German Jewish descent) described his trips to Germany as a matter of showcasing a repression of German history in plain sight. This was seen from the early postwar German days as new towns were built over some with bad histories, literally over the bones. But a perfect example may be Paul Celan's Todesfuge which describes a concentration camp. Celan disowned the poem when he realized that German children were discussing and reciting the poem in school in the national curriculum. To be fair to Germany, this is an immensely difficult and monumental task, to put the past in context, commemorate it, and at the same time build a future. Given the 20th century, it seems an incredible task for one to undertake. A pyschoanalytical approach may be one of the last things that's applied to the task itself, and it comes almost as a luxury.

And by the time it comes, we're ready for it to happen again.

by Upstate NY on Mon Jun 20th, 2011 at 05:54:58 PM EST
[ Parent ]
A pyschoanalytical approach may be one of the last things that's applied to the task itself, and it comes almost as a luxury.

And by the time it comes, we're ready for it to happen again.

Well, by now, it is largely considered an unscientific curiosity, as the hermeneutics based approach is rejected. Fortunately, brain science is beginning to reestablish significant parts of what was lost and on firmer foundations. The Skinnerian Stimulus-Response based psychology, which was mostly what was left, really could not resolve the differences between a rat and a man, so it was not too useful for analyzing higher level functions.                          

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jun 21st, 2011 at 02:50:50 PM EST
[ Parent ]
The Skinnerian Stimulus-Response based psychology, which was mostly what was left, really could not resolve the differences between a rat and a man, so it was not too useful

Well - er - actually... :)

The Freudian stuff diverged off into psychodynamic theory, attachment theory and various sort-of-hand-wavey theories of personality.

They're not all completely wrong - some of them make useful predictions - but it's not obvious how formally scientific they are.

The problem for all psychology is that objectively, all you can look at is behaviour. Conscious and unconscious motivations are much more difficult to judge.

But the DSMs are mostly behavioural, and work on the basis that if someone does a lot of A,B,C and D, it's not a surprise if they also do E and F.

I've said before that none of this has worked its way into politics or economics in any useful way.

The Marxists turned Freudianism into a weird intellectual fetish object that was almost completely disconnected from real actions, and completely undermined any contribution it could have made to public debate.

I think at some point in the next century - possibly the next quarter century - psychology is going to explode all over politics and economics, and there may be an outbreak of sanity after that.

Although it's not obvious, the DSMs are all about moral behaviour, and the fact that certain illnesses cause individuals to act in a maladjusted (immoral) way.

Obviously you can debate that, but it would be better to have that debate than it is to live with the current situation, where personal and social morals have almost no connection at all to practical political and economic morality - but almost everyone assumes they're very similar.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Jun 21st, 2011 at 03:27:31 PM EST
[ Parent ]
I think at some point in the next century - possibly the next quarter century - psychology is going to explode all over politics and economics, and there may be an outbreak of sanity after that.

Hope springs eternal! Come the day. And I certainly do not deny that there were abuses by some and bizarre forays by others out of that tradition, but is was far better than nothing but Skinner.

I think a combination of brain science and hermeneutics is essential to the future development of the field. We have to accept that there will be a higher level of uncertainty about human psychology than about many physical sciences. But my inner cynic suspects that it has been very convenient to have most psychological disciplines under a cloud. What remains or has become respectable mostly are approaches that generate cash flows and promote social control. We need to do better.

 

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jun 21st, 2011 at 03:54:10 PM EST
[ Parent ]
As someone in literature, I am not at all bugged by the a-paradigmatic things we study. That we lack empirical data points to the phenomena studied. I'm fascinated by brain and cognitive science (I'm actually "The Power of Music" right now by Elena Mannes) and I think it's very worthwhile but its going to have a great deal of difficulty accounting for a field that is difficult to even describe, never mind touch and measure.
by Upstate NY on Tue Jun 21st, 2011 at 08:52:34 PM EST
[ Parent ]
Hermeneutics is the basis for almost all art and literature, so, when it is dismissed, so are all of the "humanities".

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jun 21st, 2011 at 11:13:12 PM EST
[ Parent ]
Well, Freud and the Freudians did not do themselves any great favours by fudging their research data and generally defending themselves against criticism in the manner of a fundamentalist sect...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Jun 21st, 2011 at 04:00:52 PM EST
[ Parent ]
ThatBritGuy:
I think at some point in the next century - possibly the next quarter century - psychology is going to explode all over politics and economics, and there may be an outbreak of sanity after that.

I just fear it will land in marketing.

by generic on Tue Jun 21st, 2011 at 05:11:31 PM EST
[ Parent ]
Psychology is already heavily used in marketing and advertising.  Go to any Marketing department, start pontificating about "rational consumers" and watch them explode into laughter.  Psychology will only enter Economics in a big way when Economists decide to stop farting around and study how an economy actually functions.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Wed Jun 22nd, 2011 at 08:35:32 PM EST
[ Parent ]
That is a pity. I think discussions about essentials assumption would help. And I think historical examples and case studies are important to answer questions like what causes hyperinflation. Modern economics of all schools don't take historical experience serious enough.

So it be valuable to discuss German from 1919 to 1923 (or 1914 to 1923) or Brazil in the eighties or Zimbabwe in the last few years.

From all I know about Germany during the great inflation, I think the reparation narrative then popular in Germany and now popular among some posters here is wrong.

You on the other hand seen to think that the hyperinflation of the twenties and the somewhat high inflation rates of the western countries in the seventies are qualitatively the same. That isn't right but perhaps I misunderstood you.

by IM on Mon Jun 20th, 2011 at 03:21:47 AM EST
[ Parent ]
The current US incarnation of "mainstream economics" does not really include economic history or history of economics, as several ET contributors and many economic historians have noted. Cynics, myself included, have suggested that this is to reduce the cognitive dissonance that teaching both history of economic thought and economic history would provoke in economics grad schools.

For a scholarly critique of the factors that molded economics in the US from the late 19th century through the '40s see Henry George and Neo-Classical Economics. It is based on a referenced monograph by Mason Gaffney: Neo-classical Economics as a Stratagem against Henry George

A sample from Gaffney:

Neoclassical economics is the idiom of most economic discourse today. It is the paradigm that bends the twigs of young minds. Then it confines the florescence of older ones, like chicken-wire shaping a topiary. It took form about a hundred years ago, when Henry George and his reform proposals were a clear and present political danger and challenge to the landed and intellectual establishments of the world. Few people realize to what degree the founders of Neo-classical economics changed the discipline for the express purpose of deflecting George and frustrating future students seeking to follow his arguments. The strategem was semantic: to destroy the very words in which he expressed himself. Simon Patten expounded it succinctly. "Nothing pleases a ...single taxer better
than ... to use the well-known economic theories ... [therefore] economic doctrine must be recast" (Patten, 1908: 219; Collier, 1979: 270).'


"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jun 21st, 2011 at 03:27:48 PM EST
[ Parent ]
From their perspective, inflation is so catastrophic (see certain electoral results in 1930s), that almost no amount of data will outweigh their priors.

German leaders need to learn that there are ways, other than inflation, to create a social and political catastrophe. They also need to learn that, just because the Nazis did it, it is not automatically bad. The reparations regime, in combination with the gold standard, was crushing Germany. The Nazis saw the power of fiat currency and command control economic policy in pursuit of national power.

Where is it written that fiat currency and an interventionist fiscal and economic policy inevitably lead to world war and genocide? The purposes to which such directed investment are put are policy decisions which, in an economic union such as the euro-zone, could lead to growth, economic resiliency and expanding wealth for all. Perhaps that is the problem. Is the goal ineffable wealth concentration into the hands of a very few? That hypothesis best fits the requirements of Occam's Razor.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jun 18th, 2011 at 05:25:49 PM EST
[ Parent ]
Well, Germany does have a fiat currency. It's called Euro. And the German government did conduct some expansionary fiscal policy at the height of the crisis (it didn't need to do too much because of good automatic stabilizers), accompanied by the ECB's expansionary monetary policy. What these guys don't believe in is that expansionism is warranted at or close to full employment, and they might be acting on that belief too soon.
by Sargon on Sun Jun 19th, 2011 at 05:18:09 AM EST
[ Parent ]
What they fail to account for is the fact that in a currency union, "full employment" means "zone-wide full employment," not "local full employment."

If you stop creating demand as soon as a single jurisdiction has reached full employment, you basically ensure that there will be a persistent general glut when measured zone-wide. It is as silly as assuming that the British government should curtail spending when there are no unemployed left in London, instead of continuing until there are no unemployed left in any major city.

They are the central bank of a currency union, but they act like they're the central bank of Germany. Well, there is no such thing as a free lunch: If Germany wants to reduce exchange rate volatility, it will have to accept higher inflation volatility (and higher baseline inflation). Because you have to have a buffer variable, and there is no reason Germany's trading partners should accept "other people's unemployment rate" as the buffer variable for Germany.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 05:53:59 AM EST
[ Parent ]
Well, it's a currency union but not the fiscal union. German government doesn't have to create demand for other countries whose citizen don't vote in Germany.

ECB does act on eurozone economic aggregates (when you talk to ECB staffers, they swear by anything they never look at individual countries' data, only at the aggregates) - the problem is that Germany is so damn big, its development does carry. You can't see Greece in aggregate inflation data. That why Germany is a big chunk of 'core' while Greece is 'periphery'.

by Sargon on Sun Jun 19th, 2011 at 06:26:02 AM EST
[ Parent ]
Well, it's a currency union but not the fiscal union.

Which means that pretty soon it won't be.

Again, this should not be a terribly controversial point. We've had three or four currency unions blow up just in the last seventy years over precisely this flaw.

It's a good thing the BuBa's economists aren't running nuclear plants. With that sort of record, most of Europe would be a radioactive exclusion zone by now.

the problem is that Germany is so damn big, its development does carry. You can't see Greece in aggregate inflation data. That why Germany is a big chunk of 'core' while Greece is 'periphery'.

But Greek unemployment does show up in the aggregates. Greece has, what, 5 % of the Eurozone's population? With ten percent unemployment, that's half a percentage point in the aggregate. That's measurable.

Of course, if you believe that the Eurozone needs five percent unemployment, because you want to use unemployment to sweep structural inflation under the rug, then Greek unemployment can go clear to 50 % before the ECB feels compelled to act...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 07:34:28 AM EST
[ Parent ]
The last time Fed was trying to achieve full employment in the teeth of mismeasured output gap (they didn't take rapidly changing demography into account), the Great Inflation was the result. You might not care. Many voters did and still do.

I don't 'need' 5% unemployment, I just think it couldn't be much lower consistently.

You can think whatever you wish about the fiscal union; currently, it's not there. It might be desirable, but definitely not politically feasible. I was trying to tell you what the current crop of policymakers is doing (IMHO), and why they are doing it. What's the use of saying that things could be different in a completely different institutional environment?

by Sargon on Sun Jun 19th, 2011 at 08:21:12 AM EST
[ Parent ]
I don't 'need' 5% unemployment, I just think it couldn't be much lower consistently.

The Fordist political economy would like a word with you.

As for what the ECB is doing, I understand perfectly well what they are doing: They are protecting their bankster friends from their own stupidity, the purchasing power of lazy money from the risk of having to actually work for a living and their staff from having to use any higher brain functions than what you could get out of a reasonably sophisticated calculator.

But those are political decisions, not constitutional requirements.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 19th, 2011 at 08:36:25 AM EST
[ Parent ]
The last time Fed was trying to achieve full employment in the teeth of mismeasured output gap (they didn't take rapidly changing demography into account), the Great Inflation was the result.

Nonsense. The Great Inflation had nothing to do with full employment.

I expect you think two oil price shocks - you know, the ones that made everything a lot more expensive - and the costs of a pointless war in Vietnam had nothing to do with it.

You're basically just quoting Samuelson here with no evidence of any kind of critical thinking.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Jun 21st, 2011 at 03:33:05 PM EST
[ Parent ]
The last Nobel Prize winner in Economics was apparently out of his mind.
by Upstate NY on Sat Jun 18th, 2011 at 06:16:57 PM EST
[ Parent ]
Whom exactly do you have in mind here - Peter Diamond, perhaps?
by Sargon on Sun Jun 19th, 2011 at 05:12:43 AM EST
[ Parent ]
Krugman
by Upstate NY on Sun Jun 19th, 2011 at 12:23:51 PM EST
[ Parent ]
a) his Nobel was in 2008, I believe, so he's definitely not the last winner, and b) it's him as well whom I had in mind among proposing a temporary 4% target, see here.
by Sargon on Sun Jun 19th, 2011 at 01:31:02 PM EST
[ Parent ]
He has written on a sustained 6-7% being feasible even optimal in the past.
by Upstate NY on Mon Jun 20th, 2011 at 09:01:29 AM EST
[ Parent ]
I don't know if he's correct but Varoufakis doesn't think any changes to the charter need to be made for the ECB to issue Eurobonds. He also recommends using the EIB for investment.
by Upstate NY on Sat Jun 18th, 2011 at 09:28:32 AM EST
[ Parent ]
ECB has 'low and stable inflation' written into its founding charter. It's actually a law,

Printing money is not inflationary when you are at less than full employment, unless you severely misspend it. There can be no crowding out until you have reached capacity.

Further, "low and stable" can be taken to mean 2 %. It can be taken to mean 4 %. It can be taken to mean 8 %. None of these values has any inherent advantage over any other as far as the productive economy is concerned, so it is not immediately apparent that 8 % inflation is disqualified by the charter.

The "stable" part is more problematic, because inflation is a very handy shock absorber - it would make excellent sense to fix nominal growth at - say - 7 % per year, and let inflation be what it happens to be.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jun 18th, 2011 at 10:43:14 AM EST
[ Parent ]

Display:

Top Diaries

Occasional Series