November 2015

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« Hayek on Defending the Market Order | Main | How Do People Read Hayek? »


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Where do you think your prediction went wrong? Did the Obama administration fail to do something you expected or did people respond to their actions in ways you had not expected?

1. I think there is some measuring issues.

2. I probably had some miscalculation of the money demand and money supply situation that resulted in my overly pessimistic view of Fed policy

3. The consequences I was thinking about are long term consequences and they haven't worked their way through the system yet.

What I don't see is an issue of the failure of predictability for the reasons that Morgenstern identified so many years ago -- namely that a prediction/warning if heeded is in fact doesn't produce the predicted outcome. I don't think Bernanke et al were concerned with the inflation predictions.

4. I am still puzzling my way through how to understand our recent monetary policy history. I am not persuaded by market monetarism, but I am analytically persuaded by monetary equilibrium theory.

So I can sleep at night, I quite my discomfort by thinking it is some combination of (1) mismeasurement and thus hidden inflation, and (3) the consequences are coming down the pike.


Unemployment even conventionally measured did briefly top 10%. What is going on with monetary policy is indeed very complicated and clearly things are not operating as they used to for a variety of reasons.

Regarding Stiglitz and Krugman, I fully agree that Joe has far more gravitas and credibility than Paul, whatever one thinks of their views.

BTW, I thought this was a very interesting interview with Stiglitz by Russ Roberts.

And Barkley --- Stiglitz to me is still the towering economic theorist of his generation, so I cannot think of him as a hack even when he goes over the top about issues. I don't think of Krugman's actual contributions --- which are not trivial -- in the same light, so to me when he goes off the rails it isn't as surprising (in short, this was always in him). There is probably all sorts of things wrong with my interpretation, but that is how I come down on it. Stiglitz -- listen; Krugman -- cringe.

"I predicted to an economist friend (David Henderson) during the first year of the Obama administration that before he left office in 8 years we will experience 1970s style double digit inflation and double digit unemployment."

Well, that's mid-January 2017. Three more years to go. I see a distinct possibility that you'll win. Kotlikoff is on the money with his debt calculations. This is basically a ponzi game and barring a miracle, the trajectory is downward for US, not upward.

True, you should have agreed not just to unemployment but to some measure of standardised unemployment (that counts for those who drop out). I'd not be too despondent about your chances, though.

Sleep well. Keynesian delusions are just that. Even Keynes would not agree with American policies were he alive today.

I think many of us failed to heed Mises' warning about taking the quantity theory too literally. Of course, the money supply did not expand with the Fed's balance sheet as it had in the past because the Fed paid interest on reserves.

However, inflation failed to appear for similar reasons that caused the Bank of Japan to fail to create inflation for over 20 years. Low interest rates and QE infinity don't work mechanically. For low interest rates to work, someone has to borrow. Consumers are borrowing a little to buy cars and houses, but not enough to ignite price inflation.

To grow the money supply fast enough to ignite inflation, businesses or the state must increase borrowing. Businesses aren't because taxes and regulations make the US a poor place to invest. The state isn't because it had hit its credit limit.

For QE to work, the seller of bonds to the Fed must spend his cash on consumer goods. If he just buys another asset, in the stock market or real estate, he won't cause price inflation.

I don't expect to see price inflation for probably another 20 years unless the feds reduce corporate taxes and regulations dramatically.

The post above is me.

Another problem with predicting price inflation is the fact that the structure of production is fragmented across nations. Raw material production from mining is spread all over the world. The US excels in capital equipment and consumer durable production, but imports most consumer goods from overseas, especially China. Money loosens the joints between the levels of production, but international trade does so even more. So investment in higher order production via credit expansion may not stimulate price increases for consumer goods since those goods come from another country with different fiscal and monetary policies. Someone younger and smarter than me will have to figure out how to adopt the Austrian structure of production to an international one.

Also, if the new money created by the Fed goes into buying consumer goods, for the most part that means buying imports; the money goes overseas. Of course, that should cause the dollar to fall in value and the price of imports rise, but it won’t if the exporting country has a loose monetary policy, too. Much of the new money went overseas as investment and much went into assets such as stocks and bonds.

Your prediction has no been realized yet, probably due to... "In Economics, mistakes are often made by analysts... because the holding of other things constant clause is forgotten, or the magnitude of the consequence is not dutifully noted". (Why are there no Austrian socialists?)

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