Posted by: graemebird | May 3, 2006

Growth Deflation Capitalism Has Natural Monetary Stabilisers

These natural-stabilisers are so good they would be better then Ben Bernanke even if we gave Ben a time machine and the gift of second sight.

This screed brought over from Gold Is Money:

Under an interventionist monetary policy the central bank tries to run tight money when growth is looking too high and easier money when growth is falling to where it looks like there is a risk of recession. They are always working with yesterdays figures when they do this.

Not only do they have to work with yesterdays figures but under fractional reserve the total effects of their policies are not immediate. If you flush cash into the system there is some immediate effect but the greater part of the effect is going to come from the money multiplier as the new cash works its way through the banking system with extra lending.

So you have this real balancing act where if you saw you were slipping close to recession you would likely not put in enough cash to end that prospect immediately. But on the other hand the amount that you do put in will in time likely overshoot as it takes its effect through the banking system.

In the old days it was thought that growth and inflation ran together. So what you would be trying to do with intervention is to mitigate this relationship if not reverse it.

Its almost as if the ideal interventionist central banker was on a mission to reverse the Phillips Curve. That is its as if they ought aim at having such tight money when there is growth that you actually had lower inflation in this circumstance……

…….And to have such easy money where growth is low that inflation is at the upper level of your low inflation target.

And to carry forward this policy really well what you would want is a time machine. So if you saw unexpected high growth or high inflation two quarters away you woud slam on the brakes now. But if you saw low growth coming up you would flood the place with cash to avoid it.

But all this bullshit is unnecessary because if you are used to Growth deflation you have an automatic stabiliser that is better than any central banker could be and probably better than he could be in theory even with a time machine.

Just suppose that nominal aggregate demand is fixed. Now this does NOT I REPEAT NOT mean that nominal GDP is fixed. The money that circulates around also goes into business-to-business spending. So we are talking about fixing GROSS DOMESTIC REVENUE.

So suppose Gross Domestic REVENUE is fixed. Under such circumstances prices must drop for there to be growth. So already we have a succesfull reversal of the Phillips Curve (as it relates to growth versus inflation rather than unemployment versus inflation).

Now if you wanted very high growth than prices would have to drop a very great deal. And starting real interest rates would have to be really high also.

The economy, as measured by GDR, grows at 8%. For this to have happened you would need to have had the price level drop by roughly this amount and real interest rates would start above 8% so there is your tight monetary policy.

I’m imagining here that we have 100% backed fiat without fractional reserve banking. The country has been working with this system long enough to have ironed out all problems so they are not worried about a sudden increase in hoarding or a sudden drop in velocity.

The natural stabiliser was always there. Sitting right before us. Funny how we can miss these things isn’t it?



  1. check out this fight video…

  2. Graeme
    this is a very difficult topic for a non-economist such as myself and I have been gratified to have learned how to think about this important issue. I didn’t realise how we deal with fractional reserve was so important to our capitalist system.

  3. Yeah well its so important.

    Now its true that not all fractional reserve is fraud even under free enterpirse. You could have total disclosure and massive product differentiation.

    But the fact is that if there was vigilance and no government support, it wouldn’t be an important product.

    And perhaps its better to do away with it for the meantime entirely.

    Because its just too easy for a new government to come in and let the banks cheat as well as pump up the fractional reserve that is there in order to create an artificial vote-buying boom.

  4. I have been reading your arguments about this with Soon and Hill, Graeme.
    I thought Mr Soon and Mr Hill were excellent economists having read their writings for a while. But why then do they disagree with you on this? What is the gist of their disagreement?

  5. What is the gist of their disagreement?

    It’s jealousy Parkos, simple as that. They have worked long and hard to be hot economists and then they are confronted with someone whose intellectual capacities are far beyond their comprehension. So they try and tear him down. Nietzche called these people ‘Torrentials”

  6. They aren’t interested in giving it a fair go. But Mark at least has been sold on some sort of monetary crankery.

    Monetary crankery is a bit like gun crankery in that sometimes you can find yourself in good company and that can bias your outlook. For example the soldier of fortune crowd had the right idea about the communists and a lot of other things as well. You take the good with the bad I suppose.

    I suspect that Soon has been sold on some sort of crankery also. The thing is real bills or 120 day bills might one day become the premier money when we get to a point that we are simply digging up precious metals much faster then what is suitable to maintain the value of any one precious metal.

    Money is an emotional subject for most people.

    I don’t understand really and I suspect bad faith.

    Because you see if they take this approach its pretty easy for them to sabotage the argument to non-economists.

    Viewed from this world and from the point of view of the laity….. its a great put-upon to suddenly bring in what appears to be a new restriction.

    But if you’ve studied… lets say…. Milton Friedmans 1969 theory of the optimal supply of money….. Which by some wild co-incidence I had a booklet of in one of our basements as a kid…

    … Well you have an idea of what a free enterprise setup really looks like.

    Under that scenario the opportunity costs of not going to the banks is not very high. And at the same time the opportunity costs to the banks of keeping high reserves is not very high.

    So once you can sort of see what the natural free enterprise scenario is then it becomes pretty clear that most of the time fractional reserve would not be a big part of the system regardless of whether it was allowed or not.

    But things go wrong. Wars start. Sudden new gold finds come about. A new chemical way of refining silver gets developed. Or a new government starts encouraging fractional reserve.

    And that can totally unwind the situation if you even tolerate a little bit of fractional reserve.

    So we are left with a bit of a conundrum. Insofar as theoretically fractional reserve ought not be a big factor. But the precise time when it might BECOME a product that the public would demand…. well thats the precise time that public policy ought to shun it like vampires consorting with jihadists.

    Marks good with some things. But he’s mentally constipated. I wonder whether Soon is truly a partisan for the cause of individual liberty at all.

    But no human knowledge of any sort could have been put together with their methodology. And thats something I’ve had a hard time trying to convince them of if they would ever care in the first place.

  7. He’s not a fucking partisan of individual liberty he’s a fucking leftist-elitist with a penchant for economics. I reckon if the compass changed he’d be talking up Marx in a minute. There are so many fake pricks in the world. You’re one of the few who knows what he’s talking about and that’s why I write stuff here. I can’t be bothered with most of them.

  8. Mr Bird
    you have some new admirers

    graeme bird – people’s philosopher and responsible for threads of doom on catallaxy and other blogs. rosie was complaining she wasn’t getting enough right wing commentary so i said i would sick the bird of prey onto her. his best post so far was a fictional story addressing the issue of unintended consequences.

  9. I agree with Duncan Mr Bird. Mr Soon is not a true libertarian as he is implacably opposed to our right to carry a concealed handgun in public. Such a position is breathelessly fascistic. Anyone who dares to impugn our right to carry a concealed handgun can only be a witless nincompoop of the utmost knavery with nary a functioning brain cell.

  10. Well you know Parkos.

    I myself are a little bit cagey about too many of the younger gents carrying these handguns in public.

    As I have made pretty clear.

    So I won’t go so far as to condemn Mr Soon on that basis.

  11. Third parties be aware.

    I suspect Parkos to be out of the broader Bird clan. Whereas I myself am a very cautious, careful and moderate gun rights supporter this is probably since I’ve gone native and gotten piss-weak since I’ve been in the big city.

    But our clan, I suspect, is undiluted in their fervour for the new technology in this department.

    I suspect they’d avenge my death with extreme predjudice and choose to forget my shameful backsliding on the question of personal-firepower.

  12. You got that right, Mr Bird. I just read your exchanges with Ilya and I was appalled at your soft cockery. I may have to reassess my evaluations of you. This is extremely disappointing. Especially the way you abused the fine logic of Mr Ilya who bested you in that particular debate 10 times over.

  13. Perhaps spending too long in Sydney turns people into pussies, even Birds.

    Your ancestors would roll in their graves …

  14. I am reading this article second time today, you have to be more careful with content leakers. If I will fount it again I will send you a link

  15. […] […]

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s


%d bloggers like this: