Randoms

As I’ve said before: "If we scrape away the econo-speak, we find that nominal GDP targeting is simply code for ‘let’s stop worrying about inflation and crank up the printing press, baby.’"

Here’s a post from David Henderson on regulation. He notes two things: 1) Greenspan wants to scrap Dodd-Frank because parts of it don’t work; and 2) the SEC has explained that it intends not to enforce part of Dodd-Frank. What’s interesting is that neither Henderson or Greenspan draw the obvious conclusion: part of the law has already been effectively repealed by the SEC. There’s no need to have Congress repeal anything, the bureaucracy has already done so.

– Alexander Boot sounds like my kind of guy. Don’t miss this one either.

Buckethead: "Just to be contrarian here for a moment, what if the new technology does not result in further democratization and libertarian society fertilization?"

– I’ve written before that I don’t think there’s a college education bubble – at least not in the high end. This chart shows that college grads make about $10,000 more per year than those with only a high school education. The present value of a college education then, is about $200,000 (assuming a 5% discount rate). It shouldn’t be surprising that colleges want to take a big chunk of this from their students.

In praise of silence and boredom: "Salvation is possible. Reverse the polarity. Become a quiet-aholic. A noise-ophobic. Bind yourself to the mast such that you may hear the Sirens’ song without succumbing to its allure. The Sirens are not without their charms and increased communication is a net good, but the application of that good is often the opposite. Abjure the elites and the shackles they seek to impose, allow your imagination to flourish rather than atrophy, and relish in a bit of boredom."

– "Modern states manipulate and transform onetime members of families and communities into fragmented subjects addicted to state control. In the name of equality, political authorities reshape the moral development of increasingly isolated individuals." From a book review (HT: here).

Britain.

Detroit and New Orleans

Throwback week: day 1.

Human neurological uniformity.

– "The Gap" is biggest in DC

– In unrelated news, here’s a list of crimes committed at DC schools during the last couple years. It makes for interesting reading.

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4 Responses to Randoms

    • Isegoria says:

      Paul Gottfried’s American Conservative piece is called Root Causes, and it includes some rather reactionary bits:

      Note that Boot, a self-proclaimed monarchist, does not show even the slightest taste for any kind of “real democracy.” He thinks most people are not eager to look after themselves as “individuals,” and democracy in practice leads inevitably to centralization and bureaucratic control. To “today’s conservatives” who gripe that “growing centralization undermines democracy,” Boot responds, “This is like saying that pregnancy undermines sex or bankruptcy undermines fiscal responsibility.” When French or British citizens “meekly hand over half their income (or more) knowing that the only result of this transfer will be an increase in the state’s power to extort even more,” they are being true democrats. Should one expect different conduct from those who have neither the interest nor the talent to rule over themselves?

      As for the neoconservative truism that democracies never seek war, Boot offers a dramatically different take: “There exist only two reasons for modern states to refrain from fighting wars. One, they feel they do not need a war to increase their power at the time. Two, they fear they may not remain in power as a result.” Boot proceeds to point out that America’s great warrior presidents in the 20th century did not have to worry about either of these restraints when they embroiled their country in overseas bloodbaths.

  1. Handle says:

    That’s not an accurate depiction of an NGDP targeting strategy which cares a great deal about controlling inflation and, in fact, if real growth were to experience an unexpected significant boom, it would “throw the printing presses into reverse” and start sterilizing and retiring outstanding currency to create deflation.

    But anyway, here’s the real question: Why do you care about inflation? Thus, to play off Hume’s theory of money, If, in nominal terms, the prices of everything doubled tomorrow, but your income and the value of all your assets and liabilities also doubled, what difference would that make to you? None. If your debts are nominal (which they usually are in our economy, for now), and your savings are in investments that tend to track the price level, then you come out ahead, and rational material self-interest says you should be rooting for more inflation.

    Of course, those that hold those nominal debts as assets “lose” for your gain, but 1. They baked their inflation expectations and inflation-risk assessments into the interest rate, so it was already “priced-in”, 2. They are either banks or the big stupid financial or investment companies the financial firms fed the junk to, and they ought to (and now do) hedge for this risk, and 3. If they didn’t and still flirt with failure, they’ll get bailed out regardless.

    Now there are two inflation-related concerns that might concern you.

    1. If the nominal growth in my assets in mostly inflationary (the best example is the CPI+0% TIPS currently available), then when I go to sell, I’m paying taxes on a “gain” which is imaginary – inflation plus the capital gains tax is a tax on wealth, like a property tax. This is true, and the annual shadow wealth tax is always i*t (currently about 0.3% = 2% * 15%). But here’s the deal, your “nominal debt forgiveness gains” are real but likewise “tax-free” and so work the same way. And the government will adjust t to get the amount of real resources it wants (basically recapturing those gains, though, not from the same people), so in this case, i hardly matters when t will tend to balance it.

    2. Holders of nominal debts as assets get screwed by unexpected inflation. This is true – so if you have a big hoard of cash or government or corporate bonds. or investments in mutual funds or pension plans that invest in nominal debts, or companies that tend to extend very-long-term fixed-price lease contracts (fewer and fewer these days, and again, almost always hedged), then, yes, you will lose some of the anticipated real gain in the value of your wealth by trying to save in these instruments.

    But that’s just the problem. If you are not physically hoarding something that will need in the future – or likely to be valuable and exchangeable for something you desire, then what you actually own is a legal claim to a share in future output and production – the character of which is uncertain and which no one can safely predict. How can we ensure that the total amount of such claims on future output will not actually exceed the actual future productions?

    We can (and should!) do that with equity, but we can’t do that with nominal debt – which in the case of an individual firm must be “written-down” in a bankruptcy-like process, but in the case of the medium of account in an NGDP-regime, becomes “inflation” (or, as I said previously, deflation, if the windfall runs the other way).

    Conservative like to imagine the government is making a kind of sacred promise that its tokens will always be predictably redeemable for a certain basket of real goods and services, and that people rely on that “promise” and that breaking that promise is evil and wrong and corrupt.

    Well, Ok, but: 1. I would say that conservatives in particular should not be so trusting of government ever keeping its word or fulfilling its promises, and neither should they act so surprised and appalled when it predictably doesn’t. 2. It should be obvious that things might happen in the real world in which it would cost the government significant real resources to make good on these promises, and where are they going to get those resources. Oh, that’s right, just back from you. Promise kept, or an illusion? and,

    3. Free-market types should hate the idea of the the government being the monopoly provider of this service. Obviously a whole gaggle of competitive financial firms could develop alternative savings instruments that accomplish exactly the same goal. They could sell “tokens” that promise to be redeemable upon demand and into the indefinite future for the market-price of a certain basket of real goods and services. They could turn around and fulfill an intermediary function and use the cash they got when they sold the tokens and actually buy futures contracts for the commodities they are promising to deliver and equity in firms that produce the products.

    To deal with “bank-run-esque” redemption risk, they might need to charge a 2% annual management fee which gradually diminishes the value of the tokens, but in a predictable way, just like an inflation target. In a different legal regime, these tokens might become so numerous, widely-held, valuable and trustworthy that they might actually circulate as a competitive medium of exchange, and private debts might be written in terms of them.

    Well, you might wonder why such firms (which will have greater continuity of leadership than in politics, and which you might trust to accomplish this job and fulfill these promises more than you do the government) don’t exist and why this “alternative money” product isn’t readily available. If it were, wouldn’t you buy some as part of your portfolio? The bottom line is that there are huge, difficult to hedge, future-price-uncertainty risks associated with trying to offer this service (similar to the vulnerabilities of our FRL banks). Remember, the “alternative money” firm is just an intermediary between the legal claims you hold against it, and the legal claims it holds against the people that sold it futures contracts who might not fulfill those promises.

    These uncertainties could cause the firm to become insolvent and fail, and then you’re really screwed. Or, in the alternative, you’re not screwed, but your claims against the alternative-money firm get written down somewhat are diminish more than you once thought. What’s the source of the problem and how might you prevent this? The source of the problem was that fixed “2% management fee” which is incompatible with the real-world volatility, the neutralization of which the fee is supposed to accomplish. An intermediary cannot always bear all the risk of uncertainty, and must inevitably distribute that risk to its claimants, one way or another. Promises of Predictability are Always Merely Seductive Illusions. We shouldn’t ever be lulled into expecting otherwise.

    Now what you could do is bake that reality into the token contracts in the first place, and instead of a fixed 2% “management fee” you could say “a floating percent, most likely between 1 and 3%, but perhaps occasionally exceeding that envelope, and not at all in our discretion, but dependent entirely on market conditions”. This would just formalize and make automatic the “insolvency and value write-down” that would otherwise require a bankruptcy process (or, more likely, a chain of such liquidation and firm reorganization processes going all the up and down the economy).

    If you think about it a little, the role that the Federal Reserve plays in providing a medium of exchange which is also a popular (or legally required, in the case of banks) form of “savings”, is exactly analogous to this role. The idea of NGDP-targeting is about doing the same thing the hypothetical private, hedged, alternative-money firms I described above would be doing. It isn’t perfect, but the current more flawed system of Monetary Policy is failing in an analogous way too.

    Except, it’s even worse. The firms above are flexible, but have no discretion, and only adjust the “fee” as the markets require it to. They can do nothing conspiratorial or fraudulent, make no secret deals with insiders, have no discretion, and cannot change the terms of the contract at whim. The Fed has its cherished “central bank independence” which, theoretically, gives it the flexibility it requires, but, in practice, allow the Fed to do all kinds of insidious things, which it has done and is doing. An NGDP-targeting regime would bind the Fed the same way in which our hypothetical alternative-money firm is bound. It has the flexibility it needs to stay afloat and respond to market conditions, but only insofar as is required by law and not a single bit more.

    At any rate, as I’ve said before, we should not let the perfect become the enemy of the better. In our real world we have a choice between the current system (awful), and the NGDP system I’m convinced is at least slightly superior in several ways, both economically and politically. That should be preferable over the insidious disaster we have now.

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