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Will Wilkinson notes the intuition behind the golden warriors.
"Our currency should provide a reliable store of value—it should be guided by the rule of law, not the rule of men," Mr Ryan informed Mr Bernanke. "There is nothing more insidious that a country can do to its citizens than debase its currency". And who would disagree?
I would disagree.
First, that money is a reliable store of value is not a virtue but a regrettable defect of our economic system. It is extremely difficult to create money that is a workable medium-of-exchange without it having some value-storing properties. This is a fundamental problem that industrious minds work to solve whenever faced with it.
The less fundamental value money has the better. An item that is used as a medium-of-exchange cannot be put to productive use otherwise.
More to Ryan’s point, attempts to store value as money have the potential to collapse our entire economic system.
Money does not create anything. Value stored as money is value lost; lost because it represents resources not directed towards capital. Capital, unlike money, does create things. That people sometimes see it as advantageous to stop investing in capital and start holding money is the source of enormous economic instability.
A sudden hoarding of cash means that businesses at once have fewer customers, fewer investors and fewer creditors. They have no choice but to retrench. They have to lay off good workers and shut down good machines.
Unemployment rises. Capacity utilization falls. We have men that – for lack of a machine – do not work; and machines that – for lack of a man – do not run.
It is economic loss of the highest order. Perhaps attempting to take away the government’s primary tool at alleviating this loss is a more insidious act than two or three percent per year increases in prices?
This problem could be eliminated if the entire economy adjusted as instantaneously as the markets for stocks and bonds. If the prices of everyday things soared and collapsed within seconds. In that world both monetary policy and demand driven recessions would be impossible.
Yet, a world like that would be a world where money as a medium-of-exchange was much harder to use.
Bad news about Russian crop harvests would have you dropping everything to run to the grocery store. The price of bread would be rising the moment the news report hit the AP wire. Stock boys would be sent running at the first mention that Florida frost was to be less severe than expected, lest oranges be for one moment overpriced.
God forbid both things happen at once, for coffee shop patrons should have no idea what to expect when they order orange-wheat scones. People in the back of line might find great deals over those at the front, as orange bears sold-short against wheat bulls.
There would never be a market out of equilibrium, but there would never be a moments peace either. We would all be day traders in our daily lives, worried about what the next moment would bring.
For this reason we tolerate money as a store-of-value. We shouldn’t, however, pretend that it is an unmitigated good.
Scott Sumner makes this point using NGDP. I’ll say it in more mainstream terms.
If you think one of the problems with the New Economy, is that it produced a lot of happiness at low cost, then you are basically saying that the problem is that the US economy experienced massive disinflation and potentially deflation. How far you get depends of course on your estimate of the benefits of the internet.
To the extent that’s the case it makes perfect sense that debtors would be major losers in this game. They were expecting a world with steady growing inflation, they got a world where the cash price of happiness collapsed, but whoops they still owed they bank actual cash.
Add to that the point that this deflation is only benefiting infovores and you have the problem that there is widespread deflation and exploding inequality that puts enormous pressure on the working class.
This is a fairly common story. It’s a modern Cross of Gold, with infovores playing the role of the urbanites and the rest of America the farmers.
I am not saying much here, but there is much in this part of the story that interests me.
Krugman blogs on demand-deniers, those who don’t believe that recessions are caused by a fall in Aggregate Demand.
Third, monetarists — old-style Friedman-type monetarists who focus on monetary aggregates, or the new style which says that the Fed can and should target nominal GDP — are, whether they realize it or not, part of the axis of monetary evil as far as the demand-deniers are concerned. They may believe that they can limit the scope of demand-side reasoning, making it a case for technocratic policy at the central bank but no more than that. But from the point of view of those who can’t see how demand can possibly matter, they’re essentially in the same camp as Keynesians. And you know, they are; once you’ve accepted the idea that inadequate demand is the problem, the role of fiscal as opposed to monetary policy is just a technical detail (albeit one of enormous practical importance).
At first I thought he meant those who focus on monetary policy were inadvertently pumping up the demand-deniers. A re-reading revealed that he meant that the monetarist were on the same side as Krugman – and thus evil in the minds of the demand-deniers.
In a recent email to a fellow economist, I pointed out that as soon as you accept that the Federal Reserve has control over the overnight interest rate almost all of the Aggregate Demand conclusions fall out as a matter of basic intertemporal optimization.
Said more explicitly:
If the Fed tries to increase interest rates by shrinking the money supply then folks will try to buy less and save more.
If the market functions smoothly and perfectly then buying less will drive prices down. Saving more will drive the interest rate back down and almost everything will go back to the way it was before the Fed did anything. The only difference will be lower prices.
Thus the Feds effort to raise interest rates would fail.
For the Fed to even be able to alter interest rates there has to be some frictions in the market.
Now you might think that the distortions involved in monkeying with the money supply are so bad is not worth it, but you are in the technocratic world now. You are debating the merits of various demand side policies – not whether or not they are logically possible.
More or less the same thing is true with deficit spending as well. You could believe that deficit spending today causes people to save more in anticipation of higher taxes tomorrow but it takes some pretty heroic assumptions to get all the way to the idea that deficits can’t possibly spur demand.
At the root, I agree, is the common tendency to deny that something is possible when what you mean is that it is undesirable. You might have a laundry list of reasons to think that deficit financed Aggregate Demand expansions are undesirable but that is different than saying that they are impossible.
Denialism, to be clear, does not market one as a crank or fool. Almost everyone does it. I have heard many people claim that violent crime, prostitution, drug abuse, etc could not be eliminated even if we removed all restraints on the state.
I’ve also heard people say that poverty could not be eliminated with a likewise abandonment of our basic principles of government.
All of these denials are almost certainly wrong.
I am tempted to describe the policies that I am confident would virtually eliminate crime and poverty but their draconian nature is so extreme that the description would cause people to recoil from my general case. Moreover, I adamantly profess that doing these things would make the world a much, much worse place.
And, that’s the point. If you don’t like deficits then you can and shouldmake the case that the ultimate price is too high. You should feel free even to make the moral case that these things shouldn’t be done even if they would improve the economy.
However, what we shouldn’t do is look away from the truth because the weighing of right and wrong is too painful.
