Update 2: Scott got in touch to say he miscommunicated and didn’t mean the suggestion literally nor was he being sarcastic, or for that matter trying to undermine me by alluding to the mean spirited dialogue he linked to (which is really the bit that made me interpret his comments as a Magritte display: “this is not a phoney”.) We have made peace. All is well in the galaxy.
A valuable lesson in communication and thought experiments using people’s reputations has been learned.
Also, I’ve discovered I’m now not sure how to spell phoney. I would have gone with the “e”. But apparently it is just phony.
——
Scott Sumner, of NGDP targeting fame, has accused* me of being a phoney – on account (mostly) of the “is QE deflationary or not?” post I wrote earlier this month. He doesn’t understand what I’m on about, and doesn’t understand why I have a platform at all.
In the post he links to a conversation where he and other like-minded market monetarists collectively agree and reassure each other that Williamson (who modelled the idea of QE being deflationary) is also talking rubbish. They then all agree that they don’t know what I’m talking about either.
Mark Sadowski is embarrassed to share a Polish name with me. (Presumably he’s ok with Roman Polanski) Nick Rowe is particularly annoyed too.
I thought I’d offer a response.
First I’d just like to say I feel much of the misunderstanding comes from the fact that market monetarists tend to ignore the influence of shadow banking and market plumbing in the monetary world. I also think (especially from my conversation with Lars Christensen) that they ignore technological disruption, and the influence this has on wealth distribution and purchasing decisions amongst the wealthy, banks and corporates. Also, as I outlined in the post, my view is slightly different to Williamson’s, it’s based mostly on the scarcity of safe assets and how this can magnify hoarding instincts and fragment store-of-value markets, in a Gresham’s law kind of way. Expectations obviously factor into it, and I think Williamson is absolutely right on that front. But personally I don’t think it’s anything to do with temporary or permanent money expansion expectations. IMO It’s much more about risk expectations, which can — if momentum builds — shift very very quickly, making something deflationary, inflationary very quickly. Though, that doesn’t mean I am worried about inflation (largely because I suspect we may have reached an important productivity inflection point ).
Generally, I’m quite open to the idea of NGDP targeting. That said, I’m just not sure that it solves the structural issues related to velocity or factors in the endogenous nature of money expansion (you can take a horse to water but you can’t make it drink). Also I’m not convinced that higher NGDP can necessarily solve a secular stagnation problem, if that really is what we are experiencing. I think that fiscal approaches may be more effective on this front.
As for not being understood, well I’m happy to join Anat Admati, Manmohan Singh and Gary Gorton in that category (since I’m always hearing from people how they don’t understand what they’re going on about either, whereas I think I do, or at least I think I can see common ground between them).
To the accusation that I am a “phoney”. Well, I’m not really pretending to be something I am not. I am a journalist/blogger. I’ve never suggested for a minute that I’m an economist, or an econometrician. At best one might call me an economic historian. My schooling is in Ancient History, where I studied the Diocletian era (and the price fiasco of that time) as well as Roman numismatics under — amongst others — Prof Michael Crawford. A lot of my time was spent looking at books about hoarded Roman coins. My thesis was focused on the significance of Apollo to Augustus, linking propaganda to power, and power to propaganda, wealth, stability and myth making. I believe I concluded that control of the crowd and influence over crowd expectations/instincts is key. I got a 2:1 despite my dyslexia (which I wasn’t aware of at the time).
I have an MA in journalism, where again I focused on the power of propaganda, and journalists’ tendency to conform to mainstream thinking rather than question obviously contradictory information. My MA submission was a quantitative and qualitative assessment of journalists’ tendencies to parrot each other and to follow official doctrine, using coverage of the London May Day protests in 2001 as my basis.
In terms of economics, I am mainly self-taught. I consider myself curious about most things, and like to learn through direct observation. I am never satisfied with answers that just presume certain things. I am constantly asking “but why do we just presume that?” After finishing my Journalism MA I wanted to understand how the economy really worked, and particularly how the world organises itself when it comes to distribution of scarce resources.
After working for a year as a junior reporter at the Warsaw Business Journal — where I got to see how a country like Poland adjusts to European Union ascension, on a monetary level, subsidy level, investment level and legal level — I decided to do something more adventurous, so as to really see for myself what drives political and economic decision making. At the age of 23 I took a job at the Caspian Business News in Baku Azerbaijan. This was hardly an impressive journalistic outfit, but it did give me the opportunity to witness the makings of a fledgling market economy. Sometimes the best way to learn about economics and finance is to see it bustling into existence around you. This is why at Reuters when they train you, they provide you with a template of exactly such a fledgling market economy. It’s a fictional country called Manchukistan. Later when I went to Reuters I found it very interesting to see how the training examples we were set echoed precisely my experiences on the ground in Baku.
During my time in Azerbaijan, I had the opportunity to interview and speak to all sorts of people, from dignitaries and diplomats to local and international businessmen. I also got to visit offshore platforms in the making, and many other energy related projects. Since I was in Azerbaijan I took it upon myself to learn a lot about the culture, the history of the country, its importance in WW2, the early Rothschilds investments and so on. I also had the opportunity to visit Georgia, saw Edward Shevardnadze and covered the development of the BTC pipeline. I was also sometimes asked to research local companies by due diligence type firms, which wanted colour and local information about certain operators.
Being a bit young and foolhardy at the time, I created an opportunity for myself to visit Kabul independently as a freelancer. I wanted to see for myself the emergence of a new economy. How a country where central banking and government didn’t exist worked. My piece was on the rise of the Afghani economy after “liberation”, and the players involved: looking at the investors, the operatives and the hierarchies which were evolving. I remember haggling for goods with dollars rather than afghan money, noting the clear preference for dollars and the irony given the disdain for America more generally. But I was also shocked and surprised by the variety and availability of goods everywhere around me. This was not like Poland in the communist era. I remember seeing a yellow ferrari come flashing by me in the middle of town. I also remember being shocked (at the time this was not a well known story) by the sophistication and extent of the private security market deployed on the ground. Also the quality of our meals, the fresh towels, the internet. But I digress.
From there I went to work for BP, on the internal communications side. I wanted to see how a real oil major really operated. How it worked. How it felt to be at such a company. I was given the opportunity to speak to all sorts of executives, though I specialised in marketing and refining side, and renewables. I visited refineries, solar factories, gas terminals and got to see and understand how they worked. I got to understand the trouble and challenge associated with employing contractors across so many different projects and in so many countries. I also covered IST stories now. One story was about the company’s internal FX dealing room, and how BP benefited from being classified as a bank. I was there during the era of Lord Browne, and the turtles… Manzoni, Hayward etc. .. as well as the big Russia deal. Anji Hunter was head of comms at that time. I was obviously a nobody, but the experience did give me insight.
To cut a long story short, I then went to Reuters as a graduate trainee, to Platts as a price market reporter (I covered natgas, and my responsibility was assessing markets and creating benchmark figures, so I got to see first how impossible it is sometimes to put a price on something), and then to CNBC where I was a producer. The best thing about being a producer was the breadth of the coverage — you had to be aware of almost everything going on — the timing (2005-2008) and the fact that TV by nature means you have to meet a lot of people. After that I went to FT Alphaville.
I don’t hide any of this, it’s all on my public profile. So I find the accusation that I am a phoney somewhat strange.
But perhaps Sumner is right. I am definitely a phoney when it comes to official economic learning. My observations about markets, banking and money are the result of 20 years of direct observational experience, natural curiosity (which means I read a lot), and surrounding myself with people who work in these fields and questioning what these people tell me. I know the theories, but I couldn’t do the equations.
I tend to play devil’s advocate and whenever a consensus over something builds I like to explore the idea that things are not what we think they are. My main interest is in flagging items or facts that are happening, especially those that seem to contradict the consensus, and which people haven’t yet factored into their mainstream view. I like to challenge that which has been taken for granted.
I’ve found over time that all these people — experts, dignitaries, corporate executives, analysts and academics — offer valuable insights in their particular fields, but sometimes fail to see the big picture. Though of course there are many who do explore things outside their immediate patches. It’s not fair to generalise. I just find that there is a lot of knowledge concentration, and many well established experts fail to look beyond their areas and consequently don’t see the elephant standing in the room until it’s too late. An example of what I mean: commodity traders know little about central banking, central bankers know little about the mechanics of commodity markets, economists rely too much on models, and only look at the world through incomplete datasets, almost nobody seems to understand repo markets, those well versed in repo markets tend to understand more than most. And almost everyone in finance and economics (with the exception of a few) overlooks how technology is disrupting things around them. Collectively we are all muddling through.
I would never suggest I am an expert in any particular field. I am learning myself. What I would say is that my interest in civilisation allows me to potentially see a different picture, one that includes human nature in the puzzle (and not in the traditional economic agent sense). But I agree, most of the time I am just speculating. I also agree I don’t know everything. In fact, I don’t even know a little bit of everything. But I also know there are a lot of people in financial positions who seem to be aware of even less than me.
I propose concepts that seem to make logical rather than illogical sense. This is not based on models and maths, but general pattern recognition, historical analysis and other people’s research. Old books IMO tell you a lot about what’s happening today. I like to flag different ways of thinking about things because I think culturally we suffer from generational and historical myopia. This way I can poke the real experts into thinking about certain things in different ways (or a lot of the time the old ways, now forgotten).
———-
*Update: Sumner has followed up with a weirdly passive aggressive apology. Passive aggressive in the sense that he says he didn’t mean to offend, and if we bothered to read the full post (which I did) it was clear he was using my unintelligibility as an entry point for a discussion about macro miscommunication and the problem with varying macro frameworks.
I’m disappointed that he feels the need to rubbish Noah Smith, who was simply defending me with the argument (I presume) that it’s not nice to slur or undermine anyone’s professional reputation, even as a thought experiment or entry point to a wider discussion.
Also, personally, I was more offended with the link he provided to the sequence of comments between his fellow macro monetarists and him which included comments by M. Sadowski, noting:
As for Kaminska, she embarrasses me for the sake of my father’s country. Everytime I read one of her articles I’m reminded of this scene from Repo Man: http://www.youtube.com/watch?v=4ToUAkEF_d4
I’m willing to accept I’m embarrassing, but to be a national embarrassment?
Even if Sumner didn’t mean to legitimise such low-base comments, it felt very much like he did. It took me by surprise because I’ve never really written much about NGDP or Sumner (leaving the heavy lifting to my colleagues), am relatively agnostic about it all, and am pretty open minded to the idea, and certainly have never criticised it.
Anyway, I don’t think it’s worth losing too much sleep over it. All I will say is that I’m touched by the number of people who sent me reassuring emails/tweets… and that I still think Noah Smith is one of the smartest best econ bloggers out there. Even if he is “young”! Perhaps that’s an indirect compliment as well?
P.S. I will work harder on being more intelligible.
Dizzynomics 
May I just say that, although I have zero economics education or expertise, I find what you write invariably perceptive, intelligent and highly stimulating. Congratulations. Given the current state of professional macroeconomics I wouldn’t have thought that you were at all at a disadvantage if the goal is to understan how the real world works….
Thanks. Very kind.
Very good post. I agree completely with you. MM have not been capable to explain why QE has not translated in an similar increase of monetary supply. The don’t get to at all. Specially when they say that fed was that only responsible of the Great Recession. Absurd.
Market monetarists are getting testy because now that everybody started scrutinizing QE they will be exposed as ignorant. The mechanisms they originally advocated QE would work through will be seen as hopelessly naive. For them the money is like glass beads squirting out of the Federal Reserve, you start talking about stuff like collateral, liquid assets, balance sheets and shadow banking and they are out of their depth.
For laughs: Sumner once tried to defend the childish textbook model of banks lending out reserves and it ended in a colossal embarrassment in the comments section http://www.themoneyillusion.com/?p=5893
For you to defend your credentials in front of such “experts” is absurd. There is a lot more depth to your understanding than to their sandbox vision of the monetary system. And yes, it *is* crazy that journalists and bloggers can talk about these things with more sense than academics. But this the world we live in.
And one more thing, if we are into arguments from authority, Krugman once said “The always interesting Izabella Kaminska…” http://krugman.blogs.nytimes.com/2012/10/05/britains-gap-trap/
Enuf said.
Thanks as well! And I tend to agree with your assessment of the market monetarist view of the world.
FWIW, having spent three decades working in the plumbing (operations/compliance aka back offices) of several stock brokerages, you understand what happens there much better any of those others you mention. They never seem to be able to comprehend that the repo market is/was much more about money renting Treasurys and Agencys as insurance than their owners need to borrow funds. Nor did they understand in the fall of 2008 how the Fed had painted itself into a corner with its then exclusive FOMC counterparties, its Primary Dealers, who seemed to be falling like dominoes. Yes, the plumbing matters and so do the incentives and disincentives of regulation that it is designed around.
I love reading what you write — when I understand it. Please do not let the critics change that.
Thanks very much as well.
It’s weird I was just reading Christensen’s blog and to me the theories are simplistic but presented with needless complexity.
I often wonder how much monetarists know about actual money management. Sad that so few Treasury and Reserve managers blog. No time for it, I guess.
You and your writing are a complete inspiration to me, an ABD graduate student in econ. I came to your writing via Karl Smith, and I have totally valued the uncommon (and uncommonly astute) insights you bring every week.
Thank you! I’m really quite touched so many of u have taken time out to comment 🙂
Anonymous here with no horse in the race: I don’t see how you can read it that way. He states:
“The lazy way out would be to assume that Kaminska is a phony. But lots of smart bloggers do find her interesting, as does the Financial Times, which publishes her columns. So she probably has valuable things to say.”
I cannot comprehend how you can read that in a negative light? Perhaps you’re offended that he said you were hard to understand (which you admitted is something you’re working on via twitter)?
Anonymous, when I originally read that post I wasn’t offended and didn’t think too much of it, because I interpreted the same way as you did. But then I clicked on the link that he directed people to, which was unfortunately much more offensive, and I felt that his post was in a sense legitimising the idea that I could be a phoney. So all I wanted to do in this post was straighten out that I’ve never pretended to be anything other than what I am. As for unintelligible.. yes I get two reactions. Some people really do seem to understand me, others for some reason do not (even though obviously in my head i spell everything out clearly). But I am happy to accept the idea that I need to make things even more plain.. although perhaps that’s the problem? I use a lot of analogies, and I wonder if that’s where it ironically gets confusing.
Just to add to the support. Your blog is likely an anathema to the monetarist cohort, which is fine by me.
And to quote Scott himself from his own comment section:
“Finance is not my area.”
You’re not wrong Scott, you’re not wrong.
Izzy, you have more insight in your mouse finger into how economies operate in the real world than Market Monetarists have between the lot of them.
Keep right on blogging. You’re doing great.
The lazy way out would be to assume Sumner is a patronizing old codger. 🙂
That being said, there is something a little peculiar about saying that increasing the supply of something (money) increases its price (deflation).
The logical conclusion would, the more money one prints, the more deflation there is, until one prints an infinite amount of money and its value is unbounded.
All seems very confidence fairy-ish to say one bids up the price of bonds, bondholders voluntarily sell those bonds for cash because they think the trade makes them better off, and then people turn around and say OMG, we are all in much worse shape because less liquid assets have been changed into more liquid ones, so we have to cut spending, investment, etc.
I agree it is counterintuitive. But it’s really all about the crowding out phenomenon and what it is crowding out. In my opinion it comes down to two things: either it’s crowding out goods and services, then it’s inflationary, or it’s crowding out stores of value, then it’s deflationary. What determines which one it is…. is simply, well, sentiment, fear and momentum.
From my standpoint, have never understood the difference between ‘collateral scarcity’ and ‘excessive leverage’ … ‘safe’ collateral is just collateral against which people are willing to advance money with a next-to-zero haircut at a low interest rate… but for a slightly higher haircut and a slightly higher rate there is generally collateral to be found LOL… ‘collateral scarcity’ just means lack of appetite to lend/borrow more on current balance sheets…
When the Fed comes along and says, I’ll do one better than lend on this collateral, I’ll bid a premium and give you hard cold cash for it… sure it extinguishes the collateral but also the encumbrance, on favorable terms… improves the balance sheets, hard to see it actually making liquidity scarcer.
The picture I have of QE is, the Fed comes along and says they’re going to buy certain assets, which are promptly bid up, as the Fed gets (intentionally) front-run… if assets were being forcibly redeemed it would be one thing, but since the sellers are voluntarily doing the trade, they are happily receiving more perceived value from the cash, and everyone else’s assets are bid up and in fact more liquid, hard to see the channel for reducing real demand/increasing supply, hence deflation.
Of course, barring some perverse confidence fairy stuff where people say if the Fed is pursuing extreme measures things must be awful, low rates imply future deflation, I’d better hold onto my cash, etc., which it seems Williamson et al. propose.
Anyway, your stuff is always interesting but simple explanations are always more persuasive than complex ones!
That is one way of looking at it. But a lack of safe collateral by definition implies a lack of cheap loans, and more importantly (because I look at it from the lending side) not enough low risk returns. I actually don’t think it’s that complex at all. And it matters because of the different agendas and preferences of the collateral owners/collateral seekers.
Also the problem as I see it was mainly linked to the evaporation of the unsecured lending markets after 2008. What used to be plentiful unsecured loan markets became completely obliterated. Funding that used to be sourced on uncollateralized terms had to be secured against collateral. A lot of collateral became completely untouchable even with high haircuts. So there was suddenly a funding gap that could only be met by depositor funds or by having quality collateral. Which then created a run on quality collateral, because there simply wasn’t enough of it. I think now it’s changed. MBS and other forms of collateral what were previously considered suspect will be funded at the right haircuts. But the spreads are still sizeable. In Europe this was the main problem as available collateral became more and more expensive to borrow against. In Europe this fragmented borrowing rates entirely. And the real pressure was generated by the MMFs who were now fussier than ever regarding where they would park their cash. Meaning the cost of money was increasingly being dictated by shadow banks.
WELL SAID. We have suffered enough from theoreticians who call everybody else dumb and stupid
https://twitter.com/nntaleb/status/409796827089612800
Academics actually think that non-academics find them more intelligent than themselves.
Nassim Taleb
I read both you and Scott Sumner and don’t know enough macroeconomics to tell if either of you is a phony, but I think my English comprehension skills are good enough to detect that he did not accuse you of being a phony. He suggested that phony-ness is one possible explanation for his inability to understand your arguments, but then pointed out that plenty of others derive valuable insights from what you have to say (and thus, by implication, the problem is as much with Scott as with you). So, he doesn’t think you’re a phony, he just thinks that you’re difficult to understand.
I appreciate that by merely using the word ‘phony’ he did introduce the idea that you might be a phony, but he did so only in order to dismiss it. After that, he talked extensively about how fragmented vocabulary and conceptual models in macroeconomics explains why he is unable to understand you – viz. the fact that you are saying interesting things using different language and concepts to those used by market monetarists, which prevents the incorporation of your views into the market monetarist world (or perhaps they are not trying hard enough).
As a layperson (who may, one day, time permitting, get to study this stuff in more detail) I do agree that the vocabulary can be confusing, and that a seemingly large proportion of the debate between macroeconomists does seem to consist of trying to explain to each other exactly what particular terms or concepts really mean. Scott was probably being a bit rude by using you as an example of someone that he finds particularly difficult to understand, but then this could also be taken as a compliment – innovative ideas are rarely easy to understand. I don’t think he intended to require you to justify your right to an opinion.
Hi there, No I do appreciate that. And I think this has now largely been blown out of proportion. And like I mentioned already, I was actually going to ignore the whole thing until I clicked on the link he provided, which was much more full of vitriol. In that context, putting across the notion that I am a phoney at all — i.e. just putting that idea out there — was not fair, even as a thought experiment.
What would Niall Ferguson think if I publicly wrote: “I don’t understand anything Niall Ferguson says, perhaps this is because he is actually a phoney. But then evidence suggests he can’t be: why would publications give him a platform to write on? Why would so many people see valuable things in what he says? To say he’s a phoney is the lazy way out”. After reading the comments in the link provided, I interpreted Sumner as suggesting, it’s not just that I’m a phoney, there is a wider problem here. To suggest I’m a phoney is just lazy because clearly the whole world is duped.
(For the record I don’t think Niall Ferguson is a phoney! I think he’s a great historian, though i don’t necessarily agree with him on the current crisis.) I.e. I felt it was an underhanded way of questioning my credibility and passively suggesting the problem wasn’t just that I was a phoney, but that macro-economics itself had lost its way so much, that phoneys like me had found credibility in esteemed quarters such as the FT. And amongst what would otherwise be smart people.
http://delong.typepad.com/sdj/2013/12/day-early-monday-smackdown-of-scott-sumners-izabella-kaminska-and-the-problem-of-communication-in-macro.html
My view echoes DeLong’s who tweets “even though I agree with Scott Sumner on QE & deflation!” As a self-taught amateur I always find Kaminska’s posts informative and entertaining (i.e. never boring!). I’m sort of agnostic about a lot of this macro ultimately because it’s so hard to “prove.” But the debates are fascinating.
Izabella: don’t give these idiots another thought. Market monetarism is not scholarship; it is a big step backward from Friedman, which of course is thoroughly discredited. I thought that MM was a joke, but perhaps it is just the product of the ill-trained. You always bring a breath of fresh air to economics, which sorely needs it. If you’ve angered Sumner, wear that as a badge of honor.
Thanks! Very nice of you to say.
To be honest I find all your “Thank You” replies to post about how Market Monetarists are idiots much more disturbing than their alleged accusations of you being “phony”. I do not know your posts about other things, but this one is clear – your views about monetary policy are unintelligible to me. I was reading two the paragraph where you say how Market Monetarists have it wrong at least 20 times and I am none the wiser.
You say that market monetarists do not understand plumbing, scarcity of safe assets, technological disruption, “fragmentaton of store-of-value markets, in a Gresham’s law kind of way”, secular stagnation, endogenous nature of money expansion etc. All of this should somehow make Quantitative Easing deflationary. How? I simply do not understand your arguments. Can you make an effort and maybe write separate article for every argument that you mentioned? For instance what is “fragmentaton of store-of-value markets, in a Gresham’s law kind of way”? I honestly have absolutely no idea.
Thank you for your constructive feedback. I am sure you can find explanations to all those points in the body of work that is available in the archive of both this blog and FT alphaville. If you would prefer a personalized answer which would involve a lot of repetition on my part and voluntary work I am not drawn to of my own will, i believe the going rate for writers and researchers can be found on any of the writers/journalism association websites. If a compelling offer is made I may feel inclined to draft a bespoke piece for you.
Thank you for your response. I really appreciate that. I kind of hoped that there will already be some existing body of articles that may actually explain what you mean. On the other hand if explaining what you actually want to say requires going through your posts and putting it together from bits and pieces – or alternatively paying you to explain it – then it is no wonder that somebody may say that what you say is “unintelligible”.
Or maybe I am just spoiled by bloggers who either say things using standard econ language in standard context, or at least pointing to some not so well known things in link in the actual article.
What could also help is making things simple – for instance constructing simple model where it would be just “fragmentation of store-of-value markets, in a Gresham’s law kind of way” hat has the largest impact on why QE is deflationary without things like “market plumbing” or “technological disruption” or some additional factors distorting the image.
I’m not an economist so I don’t do models, and I try to put things in layman’s language not Econ language.
I find your unintelligible comment unfair in the context you put it in. Is it fair to ask someone like Paul krugman to outline his previous body of work and all his proofs every time he writes a blog post? Blogging is a continuous medium. For me to restate more than five years of research in every post is simply unreasonable.
And unlike Einstein it’s not something that can be summed up in an equation. I’m sure someone could model it but not me.
I echo almost precisely everything that manmohan Singh, anat Admati and Steve keen say. I also incorporate the views on Gorton.
The plumbing point is easily summed by the point that the central bank has a transmission problem. Repo is its own lending market and repo rates can detach from cbank rates as a result undermining traditional cbank tools. This is why at the Zero lower bound one has to explore alternative mechanisms to distribute money because pure money printing against asset purchases is too dependent on banks which have no interest in passing on liquidity.
Until banks have an incentive to lend, because the risk return favors lending, more money just creates negative interest rate pressure and contracts the wider money supply by channelling it to base money. Inflation is a product of consumption trends, when too much money is chasing too few goods. This is prevented for as long as money distribution is prevented by lax banks.
Hence it is at best asset inflationary and at worst slight deflationary because of the hoarding incentive that creates.
Eventually asset prices rise high enough to encourage jobs servicing those assets. But this is self defeating if the underlying issue is still too much supply of goods and services.
The ultimate point of my work — the clue is in the quote featured on the banner at the top of the blog — that the crisis is fundamentally the product of a labour dump/technological supply shock.
And this has to do with abundance and the nature in which value is changing because of a new boom in technological advances, which were largely being repressed after the dotcom crisis.
See the work of Carlotta Perez and the idea of greenspan’s new economy.
The benign inflation is in my world the product of this. QE is better than nothing as it keeps the banks standing and the system afloat. But it will not help society distribute the wealth.
None of this is left of field. It is the fundamental shock associated with technologically driven secular stagnation. A.k.a the steady state.
I sense JV could be pointing to a language matter as much as an economics matter. I hope you’ll take these comments well from someone who would like to be able to read your pieces better.
Look at your paragraph structure. Topic sentences frequently mislead the reader, forcing the reader to recalibrate their expectations sentence by sentence. When paragraphs fail to set direction, the impression arises that some topics are scattered across paragraphs. Ultimately, this forces the reader to do exactly as you suggest JV do: to search here and there for the various needed bits of information in order to piece together the larger story on their own.
That’s not necessarily a crime in the blogosphere, but when posts get this long on a topic you admit is not your academic concentration, a lot of extra care would be required to avoid what we read on comments that were linked to. Although I’m not a regular reader, my limited experience with your blog is that you do, in fact, seem extremely insightful, but I just don’t have time to fight my way through the texts. The clock is ticking much faster than that when I’m reading blogs. Or perhaps someone could argue I am just weak at reading comprehension.
It is clear that you learned English as a second language outside the anglo-saxon schools where the focus on structuring a text is the dominant element of writing. It’s also my very educated guess as an employer in Warsaw. I hope that this is what you refer to when you say you will try to become more intelligible as it is a perfectly surmountable problem. Good luck.
No I was born in the uk and went to British schools. These are not meant to be stand alone pieces. These are blogs that assume some level of familiarity with the topics. They are streams of consciousness and often written on an iPhone or similarly cumbersome platform, usually whilst I’m doing something else. If I was writing a stand alone piece for the paper it would be more wholesomely formed but also touch upon fewer subject matters.
There is a narrative that forms over the course of multiple pieces. This is blogging.
It’s not hard concept to familiarize oneself with. The basic argument is that abundance (due to technological disruption) is distorting value.
And by the way the paragraph structure here is obviously a response format followed by a mini biography which has no technical density in it whatsoever. The unintelligible accusation relates mostly to the finance section which many economists are unfamiliar with, and which itself is obscured by industry jargon which I try to pull out. My interpretation is counterintuitive because it looks at the plumbing and sees different forces at work than the ones economists usually see. The point of that paragraph was to identify the areas of misunderstandings. It was not supposed to be a justification or explanation of those misunderstandings. I’ve done plenty of that elsewhere. And I am not going to hand hold people through my theories and research when it’s publicly available. It was supposed to say these are the things that market monetarists don’t consider. How those things might impact their view is explained at length elsewhere. Explanation was not the point of the post. The point of the post was to show I don’t go around pretending to be someone I’m not.
And by the way going around “presuming” people’s academic background and schooling on the back of a surname is somewhat prejudiced and very western patronizing. I could have a polish surname for all sorts of reasons.
As for my language skills, I’ve got 10 gcses, 5 a-levels, a foundation course, a BA honors and a masters in journalism — all taken in the English language and all taken in Britain.
In fact I’m angry I even bothered to take the time to reply to you, because your comment is that below the belt.
Ah, I do not want a mathematical model or anything like that. A simple story where things are being put together so that they make sense – maybe something like you did with this reply. Okay, I was reading what you say and it kind of seems internally coherent until this point where you lost me:
“Eventually asset prices rise high enough to encourage jobs servicing those assets. But this is self defeating if the underlying issue is still too much supply of goods and services.
The ultimate point of my work — the clue is in the quote featured on the banner at the top of the blog — that the crisis is fundamentally the product of a labour dump/technological supply shock.”
What does it mean? Is it supposed to be negative real shock that causes structural unemployment – but then why talking about oversupply of goods and services? How is this self defeating? If there are goods and services that nobody wants to buy for whatever reason (oversupply) why pouring money to assets like stocks and real estate that should service goods and services that people want actually to buy should be self defeating?
Please just read Carlota Perez… I don’t have time to hand hold you through the obvious consequences of abundance. See the Gracchi post I’ve just done. Inflating assets is not as effective as distributing income/cashflow to those who need it, but whose productivity is not necessarily needed in the economy. Jobs created to service the production of assets rather than consumption generate an increasingly unequal society, and only exacerbate the demand problem. You can build 100 houses that will be bought by investors, and the price of these will go up. But unless there’s actually someone living in those houses, the job effect is temporary because it lasts for as long as the creation of those assets justifies employment. There is no natural economy. Same goes for a corporate which can’t reinvest the capital it raises from the capital markets, because there isn’t natural demand for its underlying purpose, at least not at a rate that creates a profit. Equity prices can go up, but all this does is create a cheaper funding base for corporates that have no means to generate cashflow, because the underlying demand for their product is lacking. Instead you get the creation of zombie corporates much like in Japan and even in EUropea now, which exist to provide people with jobs and to protect capital, rather than to actually fulfil a needed service.
Like I said, google carlota perez, steady-state. There is plenty written about this.
I am sorry but I am still a little bit confused. Or to be more precise each and every question you answer just produces more questions – and I am putting some stuff that I start getting to understand and that I think is wrong – on the sidelines. Take this one as an example:
“Inflating assets is not as effective as distributing income/cashflow to those who need it, but whose productivity is not necessarily needed in the economy”
This reminds me of a debate about zero marginal product workers between Tyler Cowen, Paul Krugman, Scott Sumner and some other here: http://marginalrevolution.com/marginalrevolution/2011/01/scott-sumner-on-zero-mp-workers.html
However I find it weird being framed in oversupply framework. I can really imagine that we have structural change and some workers are now basically unemployeable. How does this lead or require oversupply of goods and services?
PS: However I at least start to understand your whole bubble part, even though I do not think that it has much to do with depression. However it is interesting topic and here is where I would like to recommend none other than Nick Rowe. You may find this post interesting: http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/03/do-we-need-a-bubble.html
Aggregate oversupply is aggregate oversupply. If you have a factory and it has capacity to create 1000 handbags, but creating those handbags oversupplies the market and pushes prices below breakeven price you have an interest to sack employees and run at a fraction of your capacity. The market cannot absorb all the goods you can create. You’ve crossed a demand threshold, where oversupply is such there is no capital value to these products. The same way you cannot put a price on manna from heaven. If this is happening on an aggregate level, you have a supply shock which either forces all players to collectively become protectionist and under produce, (i.e. louis Vuitton burning excess handbags), buy out competitors (monopolist behaviour), or shut in supply (bankruptcies). If this is happening on an aggregate level across many industries collectively, you have a structural shift which doesn’t necessarily justify redeployment of that workforce in new fields. Schumpeterian creative destruction may create new industries, but they don’t necessarily create as many jobs and/or products which people will fight over or give a damn about. A perfect example is media. Something like Twitter has a social value, but it’s not something you will necessarily pay for. Wikipedia is another example. Costs are covered on a voluntary basis. As leisure time grows, more voluntary collaboration creates more technological advances, which continue to debase value.
I am not going to continue with this debate because all of this has been spelled out in great detail before. Please read the recommended reading before following up with more questions.
I now start to understand what you may trying to say. I would just add two things:
1) I sort of see what may be the problem here: the difference between “supply” and “quantity supplied”. If quantity supplied (and consumed) is lowered due to the change in price (or vice versa or if it is co-determined), it is a movement along the same supply curve. What causes that movement? Change in “demand” – which means that demand curve shifted (left in this case).
So one may say this:
“Decrease in demand for Vuitton handbags paired with inability of factory to decrease price (for instance inability to decrease costs by decreasing wages) caused change in quantity supplied and extra capacity and idle capital”
This instance of “oversupply” is caused by decreased demand given sticky price. Change in “supply” and “demand” means shifting the whole curve left or right, not moving along the curve.
2) Now to aggregates. One really needs to be careful as there is a lot of difference between macro and micro. So for in your example people maybe want less handbags and more cars. But partial equilibrium demand is different from aggregate demand. Parrtial equilibrium is calculated against budget constraints – people want more apples and less bananas for instance.
But aggregate demand is about everything – and its unit is money (for instance dollars)! It is not change in preferences (given budget constraint) that shift the curve – it is nominal spending that shifts it. If central bank runs expansionary monetary policy then that increases aggregate demand (shifts the curve right).
PS: I understand that you do not wish to continue the discussion. But please consider that you really are using a little bit confusing language. For instance am I right that by “oversupply” you mean that decrease in aggregate demand given sticky wages is causing unemployment and loss of potential output? Then this is a standard thing – Krugman, New-Keynesians and Market Monetarists talk about it almost every day.
Or do you mean something completely different? I cannot tell because every time you try to say something I am just confused. Sorry for that, it is not meant like some attack on you or anything like that. It is just what I feel.
I speak literally, not in economist speak. I speak about it as I would do from the perspective of trading goods and services, from a corporate point of view. And from a resources point of view. Oversupply of perishable goods is oversupply of perishable goods. Same goes for durables, though durables can be hoarded and thus consumption can be deferred. Either way, goods that fail to be sold at the desired clearing price (which covers costs and delivers on capital appreciation expectations) encourage decisive responses from corporates, whether it’s by reducing employment, improving margins and efficiency, cutting wages, leveraging themselves or going out of business. Given sticky wages redundancies and efficiencies seem a more natural route for employers. My view is pretty standard Keynesian stuff! And I object to the idea that my terminology is confusing. It’s only confusing to economists who overly married to text-book terms. I speak in lay terms. And it is starting to feel like an attack.
The point is that at current wealth distributions demand for all sorts of goods and services is being saturated. Those who have the wealth can’t support the demand needs of the economy… and those who don’t have the wealth and who would be able to boost demand, can’t because they don’t have the wealth or are being made unemployed. And even those who still have jobs, are largely serving rentier capital assets rather than helping themselves.
The issue is one of abundance. The issue is one of too many goods. This is a “you can buy more stuff” shock (to quote draghi, or do you not understand him either?). And there is no chance for corporates to lift prices, even with higher resource costs (also not happening) because the overall stock of goods and inventory in the system is at saturated levels. On the perishable good front we can see this due to the rising rates of obesity.
And by the way, I engage with economists, analysts, strategists and central bankers all the time — none of whom have a communication issue with me. I advise that you look to your own jargon heavy communication and find a way of communicating in lay person’s language.
Also, since you were never educated about digital communication etiquette, it is usually polite to at least introduce oneself before making excessive demands on people you do not know. I think that’s a major failure in communication on your part.
fmcoppola: Thanks for comments. I would only like to add that it would be really beneficial to clear terms before any discussion just to prevent confusion. For instance in standard macro it goes like this (I think)
Aggregate Demand (curve): describes how demand for real good and services will changes in a hypothetical situation where we suddenly wake up in the morning and all prices change with everything else staying the same (optimism, money in the wallets, employment etc.)
Aggregate Supply (curve): desribes how supply of real demand for real good and services changes in a hypothetical situation where suddenly wake up in the morning and all prices change with everything else staying the same (optimism, money in their wallet, employment etc.)
Increase/Decrease in Aggregate Demand: this is shift of the aggregate demand curve left/right. It happens if people have more money to spend maybe to change in money supply.
Increase/Decrease of Aggregate Supply: this is shift of aggregate supply left/right. Now this is a little bit more tricky because there is short-run and long run aggregate supply.
The lon-rung aggregate supply shows where supply would be without any nominal rigidities. So maybe long-run aggregate supply is not such a good name because there may temporary real shocks (like earthquake etc.) that would affect aggregate supply even perfectly flexible markets without any rigidities. In general LRAS is mostly thought of as being a vertical line and prime example of any lasting shifts of the curve are changes in technology – but there may be other things, possibly lifestyle/cultural change of preferences if for instance people are wealthy enough that they prefer to work less etc.
The main thing about short-run aggregate supply is that it has different shape based on the impact of rigidities on the economy. It may be subject to the same shocks as LRAS but also to some shocks which LRAS is not being subject to.
————————————————————————————
So now if Keynes or anybody else talks about “overproduction” that can be in principle remedied by increasing aggregate demand, then it really means that we are really talking about insufficient demand. Or better yet we can talk about it as an “idle capacity”, “output gap” or in some other terms. It would be strange to say that output gap is “caused” by overproduction.
And I have to not that insufficient aggregate demand is also different from the notion of “underconsumption”. Because it is not only consumption but also investment that is part of aggregate demand. Now I am perfectly OK if somebody wants to explain something about aggregate demand ignoring investment. And this is truly often the case if one wants to study only what is at the core of NK models. But then one has to be careful not to confuse this special case of consumption with other definition of consumption (as in consumption is whatever is left after accounting for investment) and then for instance claiming that since poor people tend to “consume” more (is opposed to investing more) and that is somehow beneficial for aggregate demand.
Now I can see where talking about “overproduction” may make sense. For instance we may say that we are overtaxing some finite resource that may cause collapse. So we may talk about overfishing of the seas or being engaging in other reckless activity damaging to environment that may in fact decrease our long-term productive capacity.
Ok, so you are speaking about standard NK stuff. So let’s go back to where the whole idea of oversupply (which seems to be insufficient demand given sticky prices/wages). Am I correct to translate this:
“Eventually asset prices rise high enough to encourage jobs servicing those assets. But this is self defeating if the underlying issue is still too much supply of goods and services.”
into this:
“Eventually asset prices rise high enough to encourage jobs servicing those assets. But this is self defeating if the underlying issue is insufficient aggregate demand given sticky prices/wages.”
Now this still does not make sense. Because if increased asset prices induce jobs servicing them – which means there is some kind of investment going on, then aggregate demand increases.
But there may be something different going on as seen here:
“Those who have the wealth can’t support the demand needs of the economy… and those who don’t have the wealth and who would be able to boost demand, can’t because they don’t have the wealth or are being made unemployed.”
Now I know that you are using layperson vocabulary, but “demand” has a specific meaning in economics and it would be weird to have it heard from you in its general term like “claim” or “need”. For instance if speaking in context of whole economy demand means “aggregate demand” and aggregate demand curve represents real goods and services purchased given the different price levels. But the point is it does not have to be only consumption goods and services – it can be also investment goods and services.
So the statement in first quote is simply not correct. Servicing assets (like real estate or corporate stocks) with new jobs increases aggregate demand via higher investment.
PS: As for Draghi saying “with low inflation, you can buy more stuff” it is not unintelligible. One can understand what he says, but it is one of the most embarrassing things that anyone in such a high position said. Ever. It is just wrong. Like Economics 101 wrong that would get student fired from an exam. But you don’t have to take it from me, see Krugman here http://krugman.blogs.nytimes.com/2013/06/08/depressing-draghi/
PPS: For additonal better explanation of aggregte demand, how it differs from micro demand see this: https://www.khanacademy.org/economics-finance-domain/macroeconomics/aggregate-supply-demand-topic/aggregate-supply-demand-tut/v/aggregate-demand I would recommend it to Draghi after that terrible claim.
PPP: For various reasons I would rather stick to my nickname. That also means that you have all the right not to engage with anonymous commenters and not to feel in any way bad about it. I fancy myself as a person who wants to examine ideas for their merit and not for credentials of the messenger even if it is ECB governor.
JV,
I think you would find it helpful to read up on Marxian economics. Not that I’m suggesting Izzy is a Marxist – she isn’t – but much of what she says is consistent with the Marxian concept of overproduction. Apologies for quoting from Wikipedia (finding a sensible and SHORT explanation in Das Kapital is needle-in-haystack), but this is a reasonable summary:
“According to Marx, in capitalism, improvements in technology and rising levels of productivity increase the amount of material wealth (or use values) in society while simultaneously diminishing the economic value of this wealth, thereby lowering the rate of profit—a tendency that leads to the paradox, characteristic of crises in capitalism, of “poverty in the midst of plenty,” or more precisely, crises of overproduction in the midst of underconsumption.”
You are approaching this from the other side – namely underconsumption (inadequate aggregate demand). I don’t think you fully appreciate that Izzy is talking about a SUPPLY problem, not (at heart) a demand problem. Perhaps that’s why you are finding her difficult to understand.
Keynes recognised overproduction as a potential problem and suggested that government could intervene to support effective demand. But he acknowledged that this could only be a temporary solution. This is also what Izzy is saying.
I’m really not at all sure that a relentlessly New Keynesian framing of this will adequately explain it. Sometimes we need to borrow from other schools – as I have in this comment.
fmcoppola: Thanks for comments. I would only like to add that it would be really beneficial to clear terms before any discussion just to prevent confusion. For instance in standard macro it goes like this (I think)
Aggregate Demand (curve): describes how demand for real good and services will changes in a hypothetical situation where we suddenly wake up in the morning and all prices change with everything else staying the same (optimism, money in the wallets, employment etc.)
Aggregate Supply (curve): desribes how supply of real demand for real good and services changes in a hypothetical situation where suddenly wake up in the morning and all prices change with everything else staying the same (optimism, money in their wallet, employment etc.)
Increase/Decrease in Aggregate Demand: this is shift of the aggregate demand curve left/right. It happens if people have more money to spend maybe to change in money supply.
Increase/Decrease of Aggregate Supply: this is shift of aggregate supply left/right. Now this is a little bit more tricky because there is short-run and long run aggregate supply.
The lon-rung aggregate supply shows where supply would be without any nominal rigidities. So maybe long-run aggregate supply is not such a good name because there may temporary real shocks (like earthquake etc.) that would affect aggregate supply even perfectly flexible markets without any rigidities. In general LRAS is mostly thought of as being a vertical line and prime example of any lasting shifts of the curve are changes in technology – but there may be other things, possibly lifestyle/cultural change of preferences if for instance people are wealthy enough that they prefer to work less etc.
The main thing about short-run aggregate supply is that it has different shape based on the impact of rigidities on the economy. It may be subject to the same shocks as LRAS but also to some shocks which LRAS is not being subject to.
————————————————————————————
So now if Keynes or anybody else talks about “overproduction” that can be in principle remedied by increasing aggregate demand, then it really means that we are really talking about insufficient demand. Or better yet we can talk about it as an “idle capacity”, “output gap” or in some other terms. It would be strange to say that output gap is “caused” by overproduction.
And I have to not that insufficient aggregate demand is also different from the notion of “underconsumption”. Because it is not only consumption but also investment that is part of aggregate demand. Now I am perfectly OK if somebody wants to explain something about aggregate demand ignoring investment. And this is truly often the case if one wants to study only what is at the core of NK models. But then one has to be careful not to confuse this special case of consumption with other definition of consumption (as in consumption is whatever is left after accounting for investment) and then for instance claiming that since poor people tend to “consume” more (is opposed to investing more) and that is somehow beneficial for aggregate demand.
Now I can see where talking about “overproduction” may make sense. For instance we may say that we are overtaxing some finite resource that may cause collapse. So we may talk about overfishing of the seas or being engaging in other reckless activity damaging to environment that may in fact decrease our long-term productive capacity.
JV,
Thanks for the Econ 101 lesson, but it really isn’t necessary. And yes, I do know that consumption is only one component of aggregate demand, but in this case it is the crucial one.
You completely ignore my point about the inadequacy of a New Keynesian framework, I see. Pity. I had hoped you would come out of your bunker.
Actually I googled for your quote
“In a capitalist economy, technological improvement and its consequent increased production augment the amount of material wealth (use value) in society, whilst simultaneously diminishing the economic value of the same wealth, thereby diminishing the rate of profit — a paradox characteristic of economic crisis in a capitalist economy; “poverty in the midst of plenty” consequent to over-production and under-consumption.”
And I came to wikipedia article of Das Kapital. And I must say that I do not understand. Or to be more precise, I understand that there can be “poverty in the midst of plenty” – that there may be recessions and all that.
So let’s have an example of “n a capitalist economy, technological improvement and its consequent increased production augment the amount of material wealth” . Let’s say that we have a society like China where 40% of the workforce works in agriculture. Now we have a technological inventions that enables us to accumulate capital so that we may produce the same amount of food by 2.5% of workforce as is common in the west.
Now does this mean inevitable “overproduction” or “underconsumption” of food? How did this decrease the rate of profit? What does it mean for “(use value) in society” as is for instance food in my example? So if in hypotethical China of 2050 If there is plenty of food around so that starvation is almost unheard of and thus food has less “value” compared to for instance latest gadget, what does it mean? I really do not get it.
I am looking for simple and coherent story. Take this, assume that and therefore if this changes that happens. For instance:
“Let’s have aggregate demand slope down … just because. Let’s have short run aggregate supply slope up be because of sticky prices. Now let us put negative aggregate demand shock into the picture. Voila lower output and recession.”
You can explain the gist of such an argument it on a napkin. You may discuss why curves slope up or down and what happens if they don’t in more extent and some of it can be explained in 13 minute video on Khan university. It is coherent and conclusions follow.
That increasing material wealth diminishes profits which causes “poverty in the midst of plenty” is not coherent as is written. I can think of an counterargument just as I did with China. There is some information missing that is probably key to make that statement true. Why not telling it? Is there a video on Khan university or somewhere else explaining it in normal words?
Please use another medium to educate yourself. The fact you do not understand doesn’t mean it’s wrong, perhaps the problem is with you. Goodbye. I shan’t be approving any more comments from you. You have taken this ENTIRELY off topic.
I would like to educate but I do not know where. Having simple condensed explanation of key points could also work, but it was not given. Which maybe kind of to the point of miscommunication and being “unintelligible”
PS: And I am not that shut away from things. I spend my fair share of time with Austrians and MMTers to get to know what they want to say even if I don’t agree with a lot of the stuff now that I understand it more,
I also admire the work of Samuel Bowles on microeconomics and I also liked his paper with Gintis on Labor Theory of Value. Ah and I was surprise to find out that they were thrown into the Neo-Marxist buckle. I don’t care, they have good ideas.
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Having been on the receiving end of Sumner’s rants, I appreciate your frustration with his obtuseness. I agree with him on NGDP targeting but believe he is misguided in that he rolls up the windows when he passes wind.
Well, I’m very late to this but I can see how if you don’t read Sumner every day, you could take that the wrong way. He’s surely mocking himself in that passage, as he is wont to do. Glad you guys cleared that up.
NGPLT won’t solve all (or even many of) our ills, but he’s convinced me this is one particular hammer we could stop hitting ourselves in the face with.
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Izzy,
You da bomb.
I don’t have anything insightful to say or any point to argue. I really appreciate the work you do on FTAV, even if (actually, especially when) its liable to step on some toes, like your writings on Bitcoin and goldbugs.
Keep up the excellent work.
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