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F. A. Hayek was wright but I think that in some ways the US economy is different to day then in his times. The US dollar is still accepted all over the world despite 35 years of trade deficits. The FED and the Treasury have benefited from low cost labor in other countries by trading inflated dollars against very low cost produced goods sold in America.

In a way this as been a free ride for the US.
If the US was still manufacturing most of its goods at the same level of 40 years ago we would have high inflation.

That does not mean there is not a price to pay for the present monetary extravaganza but a lot of it as been offset by the guy in china working like mad at 90% less then in the US.

Deflation can and is often very positive just look at the price of computers and there improved quality. The real reason for purposely maintaining an inflation target as little to do with prices but a lot to do with borrowing cost.

Imagine what the US debt would look like with out inflation. In other words they would have to be responsible and pay lenders back in the same currency they borrowed in. This would mean immediate default or unimaginable hyper Inflation

By the way: Fighting inflation is a joke they are Inflation how can they fight it?

The US gets away with this privilege only because it is the only country in the world that can borrow "only" in its own currency and it also happen to print it. There will soon be an end to this illusion and the longer it take the worst the chock will be.

Such a privilege can only work until the exporting nation agree to receive debased currency against there labor and and value.
As they get richer they will ask for more and more $ and the low inflation magic be gone and inflation will be transfered back to America.

You can't expect to trade paper against good for ever unless the paper as value. There needs to be a valuable benefit for both trading nation.

You can't have a Central Bank such as the FED purchasing 70% of Treasuries such as now and expect to be taken seriously.

Unless the US cleans up its fiscal and monetary policy and regain credibility the US dollar will lose its status as world reserve currency and at that time there will be no back stop on inflation.

Lets hope this madness can be still be stopped but its getting very very late.

Problems with capital allocation? Bah. All we need is a cabinet-level Department of Shmoo. Or maybe it could just be an agency within Obama's new Department of Business.

In the future inflationists will look back on the ever-dropping prices of computer technology, from computers to cell phones, and declare the entire sector was in recession for decades.

George and Larry's piece is very thoughtful. Hayek's analysis gets to the heart of the matter. Fear of mild deflation leads to an inflationary bias.

So-called market monetarists have more in common with neo-Keynesians than traditional monetarists. Real monetarists and Austrians have made common cause against the Fed's easy money policy, before, during and after the housing boom and bust.

When I see a serious academic paper laying out the case for "market monetarism," I'll respond in more detail.

Market Monetarists don't favor targeting inflation. We favor targing spending on output.

This view is symmetrical regarding inflation and deflation.

If some segments of the economy have lower prices, then this would tend to lower the inflation rate. Market monetarists would not favor a monetary policy that increases the rate of spending on output to offset that.

Market monetarism has roughly the same consequence as money supply targeting or a gold standard with regard to shifts in productivity or changes in relative prices.

The difference between a target for spending on output and a money supply rule or gold standard is the response to shifts in the demand to hold money, or equivalently, shifts in velocity. A target for spending on output requires changes in the quantity of money to accomodate changes in the demand to hold money or equivalently, to offset changes in velocity. Such shifts are inconsistent with a money supply rule. As for a gold standard, a rule for spending on output doesn't have a good like gold, where shifts in its particular supply or demand conditions have broad macroecomic effects.

Anyway, Hayek advocated constant spending on output, with is consistent with market monetarism.

Selgin's argument was whether small erros in spending on output might lead to large malivestments.

The free banking camp of Austrians have a good grasp of the problem of monetary disequilibrium in my view. However, I see at least hints of excesive worry about the trend growth path of spending on output. Market monetarists are less worried about that.

While problably most market monetarists favor a 5% growth path (which would generate 2% inflation on average,) it isn't like market monetarists think taht 6%, 3%, or 1% would make that much difference. And so, averaage inflation rates of 3%, 0%, or -2% would be just fine.

Arguments that apply to inflation targeting, however, don't apply. All of those inflation (or defllation) rates are just expected averages. A target growth path for spending means that inflation varies.


Hayek's position on money evolved throughout his long career, NO? Why do we pick a spot and say that is what he thought. He is constantly searching for a way to get a monetary framework which is least distortionary to the economy and least vulnerable to political influence. He was a life-long learner on this issue as well as many other aspects.

So what matters is NOT what Hayek said, but what a Hayekian analysis might lead us to conclude today.

This will seem like a weird reference, but I just read/reviewed Jack Knight and James Johnson's The Priority of Democracy, and in the book they address the Rawlsian issue of ideal theory and the alternative termed non-ideal theory. Prior to reading this I was completely on-board with non-ideal theory and still that is where all my intellectual sympathies lie. But Knight and Johnson make a rather interesting intellectual move by saying that it is not ideal versus non-ideal, but the problem with the WRONG ideal because it is not consistent with human actors. Theoretical musings must be grounded in an understanding of real living human beings (not Inca gods) and a realistic analysis of the operating principles of institutions (not flawless machines).

Back to monetary regimes --- Hayek, Friedman and Buchanan throughout there careers all became increasing frustrated with the operation of the central bank system as it works within a democratic society. They understood that institutional problems require institutional solutions. And those institutional solutions have to fit in an examination of incentives and constraints.

So yes the theoretical framework is provided by monetary equilibrium theory (and sets the ideal), but this ideal is operationalized through institutions and THAT is what we need to examine given what we know about incentives and constraints. This isn't an issue of "second-best" because the "first-best" option was never really an options at all.



I think Free Bankers and Market Monetarist are very close, the only real diffrence is in the insertion effects.

Most Free Bankers agree that a 5% NGDP growth path would be a good solution, the problem is just the (assuming constant V) 2-3% of money growth has insertion effect.

Money insertion by the fed can be made in a good way, equally distributed buying of diffrence stuff (ie the same that would happen in a free banking system), the fed could put that money into pushing down intrest rates of mortgage and creat a bubble or maybe just finance the goverment with this money.

I think Market Monetarist should spend more time on this. Ok to be fair the Sumner future market idea is something in that direction.

In that light I kind of think that the insistence of market monetarist to get back to some ideal trendline is misguided. When a country overexpands with a goldstandard it is better to change the goldstandard then deflating. The same can be said for now, the goverment defalted (relativ to trend) and now we should just stick with it instead of inflating back up.

Also something that is bothering me is that Scott and co. always talk about the 5% and QE in the media without even mentinong that if the fedaral bank would anounce a 0% target, it would be fine within there theory too. QE to get back to the optimal trend Great Ressesion trend is not the only way that the FED could improve the situation. I can understand that they are pushing for QE because thats what is mostly like what the can get.

What Scott rights about George Selgins 'Less then Zero' is really where the diffrence is.

Peter Boettke,

I agree that Hayek changed his mind in terms of money but pointing to what hayek wrote at a given point can still be valuble. I have not read all of hayeks makro in depth but I would clame (correct me if I am wrong) that hayek tought where highly of income targeting (witch is almost the same as NGDP targeting) but that he (as you do) thought a central bank would probebly not act thatway for public choice reasons. This is essentially what lid him to 'Denationalization of Money'.

I think your analysis is valueble and the institutional settings of central banks must be looked at, but something we can look at too is how the central bank acted. Did the central bank not always pretty much do what was in vague? When in the 70s it became apparent that Keynesian economics was wrong and monetarist rose. The started addopting monetarism. When the inflation target came in faver of the markro economic elite the started doing it. Now saving every bank (even when the concept of lend of last resort was never intended that way) the do that.

Seams to me the fed basiclly does what the macro economic elite thinks is right. So intellectual pressur for whatever you think is best seams to have a impact (maybe you will be misinterpreted but you still had a impact).

Is pusing for the 'right' (in your opinion) policy when there is central bank not the right thing to do? If there is not market solution lobbying is your only option. If you can get enougth of the marcro economic elite on your side then you basiclly get what you want.

Having recently returned from a seminar on Denationalization of Money, I must agree with Pete that Hayek was in a lifelong search for monetary institutions and rules consistent with a liberal economic order. In Denationalization of Money, Hayek abandoned any concept of targetting anything and left it to the market.

He was always skeptical about the knowledge problems inherent in conducting monetary policy. I don't think it is right to say, as Bill Woolsey does, that "Hayek advocated constant spending on output." In his Appendix to Lecture 4 of Prices and Production, Hayek clarified that neutral money was an instrument of theorretical analysis. The concept of neutral money was no intended as a maxim of practical policy (pp. 129-30).

In any case, as Pete observes, like Friedman, Buchanan and others, Hayek became increasingly disenchanted with central banks. Let us start from that Hayekian position.

At next week's Cato monetary conference (again at the Jan. 2013 AEA meetings), Tom Cargill and I will present a paper calling into question the literature on central bank indepenece. We call into question whether CBs are or can be independent.

It's because a lot of people don't understand what Keynesianism is actually about. With regards to people I know, a lot of them have heard of Keynes; this alone is enough to make them feel really clever. Problem is they think Keynesianism is about "tax and spend", and that's it.

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