The Filter^

A couple of thoughts

• "Saying that low bond yields reflect market confidence is like the captain of the Titanic boasting that high demand for lifeboats reflects satisfaction with the overall liner" Discuss
• "Arguing that QE1 had no impact on the economy is like putting up an umbrella before it starts to rain, and then complaining that you're not any dryer" Discuss.

ABC2K update

A few more examples of mainstream attention:

Taking von Mises to pieces, The Ecnoomist

A one-paragraph explanation of the Austrian theory of business cycles would run as follows. Interest rates are held at too low a level, creating a credit boom. Low financing costs persuade entrepreneurs to fund too many projects. Capital is misallocated into wasteful areas. When the bust comes the economy is stuck with the burden of excess capacity, which then takes years to clear up.

Jailed counterfeiters aren't a patch on the Bank of England, Jeff Randall, The Telegraph

The regulators are praying that the rest of us won’t notice. This is a high-wire act. As the economist Ludwig Von Mises noted, when the masses finally wake up, “a breakdown occurs”.

The Hayek Rule

We propose a new policy framework for monetary policy, one that looks at monetary aggregates and factors in the connections between monetary policy and asset prices. Our proposed “Hayek rule” is a symmetrical approach that seeks to stabilize nominal income, in both good and bad times, through a system in which the annual flow of money—what we will refer to as the “circulatingmedium of exchange,” which is equal to nominal spending (MV)—remains at a constant level.

I wonder if this paper - “The Hayek Rule: A New Monetary Policy Framework for the 21st Century”, (pdf) (Marius Gustavson and Anthony Randazzo) - will help to establish "The Hayek Rule" as a key outcome of the second revival in Austrian economics (via Greg Ransom).

Quote of the day

The US did not suffer any sort of financial crisis in 1929

That's Scott Sumner going after Robert Hall. Read the whole thing.

Budget Puzzle: You Fix the Budget - Interactive Feature - NYTimes.com

Today, you’re in charge of the nation’s finances. Some of your options have more short-term savings and some have more long-term savings. When you have closed the budget gaps for both 2015 and 2030, you are done. Make your own plan, then share it online.

via www.nytimes.com

Video for Sound Money Proposal

The video of my recent talk at the LA on sound money is now up. See here for background. Enjoy!

QEII follow-up: why do people hate the idea?

Tyler Cowen, worth pondering...

the libertarian right is having a hard time seeing the Fed as a relative ally over the last three years, which it has been.  That admission implies an unappetizing shift in the goal posts for what is possible, and that sounds like a intellectual surrender to a lot of people I know.  I think they are in denial.  One alternative to acceptance is to view the Fed as sinister, which then leads you to fear anything they do, including QEII, their current major monetary policy initiative.  

via www.marginalrevolution.com

Britain's Trillion Pound Horror Story

As econonomic documentaries go, this was one of the best I've seen in the UK. Once people recognise that it was deliberately polemic, serving to balance out existing biases in the mainstream media (as opposed to provide a grounded, impartial account), I think it should be added as a staple of economics courses up and down the country.

In terms of improving economic literacy through the use of metaphors I think it was highly effective - even The Guardian commentator conceded that "it brought the economic theory brilliantly to life". Using a running bath to show that there's still more public debt being added than is being removed through Osbourne's "cuts" was excellent. Showing an ailing patient and trying to remove blood from one arm only to pump it into another (spilling some on the way) was useful. I even thought the lobbying children - driving home the point that the debt burden is a future taxation and therefore deeply undemocratic, was effective. And indeed exposing politicians for not knowing the difference between the budget deficit and the public debt, was hilarious (and tragic).

Of course there were problems. The interviews with Brendan Barber and Alistair Darling came across more as Ali G style stich ups than revelations. I'm not convinced that public sector spending is now larger than the private sector, and I think a fair rejoinder would be to at least acknowledge that Labour's public spending record might make the debt burdon easier to pay. Debt isn't a problem in and of itself - it depends on what you are using it to fund. If it's comsumption (as much of it undoubtedly was) then indeed you have a problem. If it's investment, then that's part and parcel of economic growth. When Durkin showed how the salaries of front line services are a small fraction of overall spending, he might have pointed out that it is because so much of Labours's spending splurge went on salaries rather than capital investment that we will struggle to pay it off.

And of course it featured Kelvin McKenzie. And for that reason alone critics have a fair criticism.

The "Baxendale" Plan Part II

Stephan Kinsella and Steve Horwitz have both published a suggestion from Toby Baxendale, on a type of bank account that 100% reservers and fractional reservers might be able to agree on the legitimacy of:

This manager says this account is a timed deposit account in nature i.e. your money is locked away for at least a month, 3,6,9 18 months X number of years, but the bank will allow instant access , by exception for the liquidity that it keeps in reserve all the time. However, should there be too much call on liquidity, the bank reserves the right to point out that you the depositor are actually a de jure timed depositor / creditor to the bank for at least a month, 3,6,9 18 months X number of years and are going to he held to the time period you freely signed up to.

In my working paper on the sound money debate I say the following:

In addition to the option clause banks might also offer (and historically did offer) a “notice of withdrawal” clause, specifying that their customers were required to give 























































30 days notice prior to making a redemption claim. The fact that this clause existed (to protect the bank from a legal point of view if it were ever to suffer a liquidity crisis) does not mean it is always invoked, and banks could routinely not enforce this rule and satisfy immediate redemption requests.

(Note that I've received feedback on that paper suggesting that many US fractional reserve savings
accounts still do carry withdrawal clauses.) To repeat what I've said previously:

... in my theoretical working paper about sound money (and the corresponding policy proposal) I talk about how option clauses and notices of withdrawal are examples of contractual provisions that make anti-fractional reserve arguments mute. I intend for this to unite the two schools of thought, and show how 100% reserve arguments can be dealt with seriously. My concern is to find solutions that all Austrian school economists (and indeed all "good" economists) can get behind and support, rather than to further unnecessary antagonism.

I'm glad Toby shares that view, and encourage him to read (and cite) my paper!

Canada's budget triumph

I've just read David Henderon's working paper on the Canadian budget reforms of the 1990s.

the average interest rate on the federal debt was about 8 percent.  The growth rate of nominal GDP was about 4.5 percent.  The ratio of federal debt to GDP was approaching 75 percent.  That meant that in a given year, the government was spending eight percent of 75 percent of GDP, which is 6 percent of GDP, just for interest on the debt. 

So, simply cutting back spending on programs to equal revenue would leave a deficit of six percent of GDP.  With GDP rising by only 4.5 percent, the debt/GDP ratio would rise.  How could the government prevent this ratio from rising? 

You might think that the answer was to have the deficit equal ―only 4.5 percent of GDP.  But remember that the interest rate on this new addition to the debt would be eight percent, which means that the debt/GDP ratio would still rise.  The only way to keep the debt/GDP ratio from rising, it turns out, was to get the deficit down to 2.625 percent of GDP

The Appendix shows the arithmetic - has anyone done this for the UK in 2010?