A link in case the video doesn't work or doesn't embed well (if you see "server application unavailable" the link usually still works), or if you want the original source.
The video starts a little abruptly, as it left out Gideon's thoughtful introduction (it's in the Magazine) and framing question:
Gideon Magnus: I want to discuss the value of money and the idea that money is valued similarly to any other asset. Are there really assets backing money? If so, what are they? John, please explain.
I searched for these Friedman papers on fiscal policy you mentionned but couldn't find them. It would be very appreciated if you put posted a link to them.
ReplyDeleteLoved the video, but it is from June. That was before Mario Draghi announced his unlimited bond buying spree, with Angela Merkel's blessing (and over the objections of Jens Weidmann). Would have loved your and Harald Uhlig's reaction to that development.
ReplyDeleteA bit of reaction in "Bad Hair Day" and "The future of central banks." Pretty much, this is just playing out Harald and my fears. The ECB buys southern debt, selling its stock of German bonds ("sterilized.") Ok, then what happens if it runs out of German bonds, or if it wants to tighten, selling something to buy back euros? Either Germany gives it new bonds -- which means ultimately German taxes -- or the euro inflates. The only hope is for "crisis" to pass and it can undo this operation before it runs out of German bonds or needs to tighten. I think the Europeans are hoping for the confidence fairy to return; the only way I see it passing is if the south passes a shock liberalization and starts growing fast so markets can see it will pay off its debts. In a nutshell.
DeleteI would think that the only possible way out of their problems is a massive devaluation of the Euro. How you say Quantitative Easing in German?
DeleteI think you say it "der unlimited purchase of Greek, Spanish and Italian Debt." Or is that "das"?
DeleteDer unendliche Kauf von griechischen, spanischen und italienischen Staatsanleihen.
DeleteBut, Harald Uhlig may have a better translation....
The fiscal theory of inflation is actually the old view on the matter and only the influence of Keynesian demand management and later Friedman's quantity theory and his pleas for central bank independence allowed for it to be forgotten or discredited. The fact that a national central bank must provide financial assistance to a government in fiscal trouble is explicit in its legal statutes regulating the bank's lender of last resort function. A default - on either foreign or internal debt, or both - is rarely a feasable political option for a government, and it's usually followed by an inflationary wave as well, because the underlying spending crisis is still there and that is the problem to solve. There are, of course, some exceptions to the case - the most important right now being the ECB, which has a more peculiar statute and which doesn't really have a government for which to act as lender of last resort, although the might not be an insurmontable obstacle. Anyway, don't worry, I have a feeling that the Bloomberg people loved your new hair style.
ReplyDeleteJohn,
ReplyDeleteCan you clarify why you think nominal shocks matter to economies? You attack old school Keynesianism often, but I haven't heard your address New Keynesian models (or similar monetarist models), where sticky nominal prices, imperfect competition, nominal contracts or some other friction cause nominal shocks to become real shocks. What frictions do you think are important?
One reason I ask is that when discussing the euro, no one addressed the counter argument that Europe isn't an optimal currency area. The argument says frictions across countries, for instance labor immobility, mean different countries should have different optimal monetary policies, and the PIIGS countries struggled in part, because in order to clear the labor markets in those countries prices and wages had to fall. Due to frictions that is a very difficult adjustment for an economy to make that has sever consequences in employment and output.
You came out quite forcefully in support of the Euro, and I can't tell, if you think these nominal shocks don't have real effects or if you think they do, but the cost is just worth bearing. I'd appreciate your comments.
I thought that stickiness, keynesian ideas, and the notion that every city needs its own currency to wisely offset shocks was the conventional wisdom, and us the outsiders! Nominal shocks surely have real effects. The question is, do you think real-world central banks do a good job of devaluing the currency just enough and just at the right times, and that such habitual devaluation does not impede ex ante trade? Greece under the Drachma was not the optimal currency area either!
DeleteWas Greece under the drachma really a sub-optimal currency area? It had a lot of problems, but I don't know how adjusting the currency area would have fixed any of them.
DeleteI agree that real world central banks don't do a good job of devaluing the currency. The ECB is not devaluing nearly enough right now to keep up nominal GDP growth! Central banks have erred in both directions, which is why a rule like nominal GDP targeting is important. To cite Timothy B. Lee (from your "favorite think tank"), you can't advocate for non-intervention/inactivity in the face of a government monopoly, because in the absence of abolishing said monopoly it's not clear what such a thing would even mean (I guess that last bit is more Nick Rowe).
Also, are you saying you don't believe in stickiness or that existing stickiness doesn't explain much?
This is one of the few areas I disagree with Professor Chochrane. It makes absolutely no sense for such disparate regions as make up Europe to be united in one currency. It is a manifest source of weakness, not strength.
DeleteDear Prof. Cochrane,
ReplyDeleteYour hair is just fine, but more important : when you crossed your leg, your trouser went up so we could see portion of your leg. Prof. Uhlig was fine. But because of that I couldn't watch the interview, I had to read the transcript.
Your reasonning is convincing, and I wholly agree with you on the euro-crisis ; but near the end, after you had warned against promises we can't count upon, you argued for rules, laws, that bind the policymakers to the mast. But if you look at the european crisis, what do you see ? All the laws, and the most fundamental ones (provisions in an International treaty) were violated : the no-bailout clause, the prohibition for the ECB to fund governments.. The Rule of law counts as nothing if the powers see them as an obstacle, and if the public doesn't care. As Anthony de Jasay said somewhere, they are just like chastity wows.
That said, we need something more than a law prescribing the behavior of the central bank. That was the virtue of the gold standard. But as you reminded us, that was also insuficient, for, public opinion willing (espaecially in case of war), the governments could go off. Is not the solution to be found in free-banking, be it à la Selgin-White, or with 100% reserve on deposit à la Salerno ?
Professor Cochrane,
ReplyDeleteEarly in the interview while discussing Friedman's view that inflation is "everywhere......a monetary phenomenon," you indicate that the monetary cause is in reaction to a prior fiscal cause. Thinking about the start of the 1980s inflation taming process largely credited to Volker; what was the fiscal conddition or situation that allowed that to happen? Thanks. Very interesting interview.
Good question, one I'm working on. The end of inflation did roughly coincide with the tax reform, and in the end the US ran big surpluses due to all the growth from the 80s to 90s, so from a fiscal theory point of view, the end of inflation was justfified. But I'm guessing at this point
Deletefrom 1945 on until the Carter presidency the USA debt to GDP ratio was flat or declined, reaching its lowest point when Carter was President.
DeleteThat's right, the opposite of what you assert. High inflation, low debt. How can that be? Inflation isn't a monetary or fiscal problem?
Federal Debt went up and deflation declined under Reagan, showing there is no link between inflation and any fiscal cause.
Obviously, the link between debt and inflation is not so simple as more debt, more inflation. It's debt vs. expectations of the country's willingness and ability to pay it off. A debt built up during a great war, that everyone understands will be paid off by much lower spending for a generation is quite different than a debt built up by itractable entitlements and discretionary spending.
DeleteSince the link between debt and inflation is not simple, how about just sharing with us a simple microfoundation---how, under current economic conditions is what you call "hot money," bank reserves, going to get into the hands of consumers. It can't---they are unemployed.
DeleteIf you wish to remove the 'inflate' option as a means for a government to get itself out of a bad balance sheet situation, there's a much simpler way to do so than tying your central banker to a mast: simply mandate that government debt be linked to inflation (i.e. get rid of all nominal issuance and replace by TIPS). Then the government will just have to increase tax revenue or default if it can't, rather than turn to its central bank for accomodation.
ReplyDeleteHopefully, private sector debt would also follow that pattern too. Once the debtor/creditor conflict is taken out of the equation, then the Central Bank would be free to target a price level path that would achieve other economic mandates.
If you believe price rigidities lead to unemployment when delfationary pressures are present, then there are sensible monetary policies that can be formulated to prevent unemployment. If you don't (and since price stickiness was nowhere mentionned in the article, it sounds like you don't), then it doesn't really matter what the central bank targets: gold standard, oil standard, fixed inflation, fixed money supply increase (Friedman style) with inflation all over the place, throw a dice every year to get your inflation target, etc. in all these cases prices would adjust and the real economy would be indiferrent..
Great comment. Real (indexed), variable coupon (coupons are like dividends, the government can cut them without triggering formal "default"), long term (no more roll over crises) debt would cure a lot of problems. It would also be more "expensive" to governments, but you get what you pay for.
Deletewhat protect creditors? that only leads to Bush style tax cuts.
Deletewhy not give them incentives to be more politically responsible, making sure that they are in the same boat as the rest of us?
A few things I think should be obvious about the fiscal theory of the price level, but apparently are not so obvious:
ReplyDelete1) Money issued by the government is PARTLY backed by future taxes, but also by the rest of the government's assets, like land, gold held by the Fed and in Fort Knox, etc.
2) And of course green paper dollars are only one of the government's liabilities, so if some of the government's other liabilities explode, this is potentially inflationary.
3) Green paper dollars are likely to be a very senior claim on the government's assets--way ahead of foreign obligations, welfare checks, and even bonds, so the government's balance sheet can actually go pretty sour, and the dollar would still hold its value. John had a paper called "Money as Stock", but money is valued more like a corporate bond, in the sense that bonds are senior to stock. You should have changed the title to "Money as Bonds"
4) When you say that deficits force the government to issue more money, and more money causes inflation, you are needlessly giving ground to the quantity theory. Better to say that high deficits mean less backing for money, and this causes inflation whether or not the government issues new money. You wouldn't say that low profits 'force' a corporation to issue more bonds, and that leads to "more bonds chasing the same goods" would you?
Both groups demonstrated the same level of cooperation. Whether the students met face to face or online didn’t change their decisions about how many tokens to give away or keep. But students who met in person were far better at predicting the trustworthiness of the partner; that suggested they were relying on visual cues.
ReplyDeletehttp://well.blogs.nytimes.com/2012/09/10/whos-trustworthy-a-robot-can-help-teach-us/
:<)
John you said:
ReplyDelete"Greece under the Drachma was not the optimal currency area either!"
Why not? Greeks can easily relocate themselves from areas without job opportunities to areas with them within Greece. My guess is the cost to trade that would arise with each city adopting its own currency would be higher than the benefit of Greeks not having to move to different cities to find work.
With the Euro its the other way around since its very difficult to relocate oneself from Greece or Spain to, say Germany.
Well,
ReplyDeletethis is kind of off topicThe Fed is FINALLY begining to move albeit at the pace of a deformed amnesiac tutle crossed with a snail. Any thoughts?
Nice image, but $40 billion of MBS per month and $85 billion of twist, plus a promise not to raise interest rates through the 5th year of the apocalypse suggests to me images of gigantic waterfalls, biblical inundations, etc. We surely will put to the test my view that it's largely irrelevant.
DeleteDear John,
ReplyDeleteWhen reading the transcript it appeared to me that most of your reasoning relate to the "unpleasant arithmetics" rather than the fiscal theory of the price level. For instance, you say
"In a debt crisis, we have very few choices. One choice is we could default, simply tell the bondholders, `We’re not paying. Tough luck.' The other choice is we print up money to roll over the debt. That—you can all pretty clearly see—leads to inflation."
This sounds like unpleasant arithmetics to me, and not FTPL. Wouldn't the argument under FTPL be that the price level will simply jump such that all nominal debt will be dwarfed even without any expansion ("printing up") in money at all.
I was trying to keep it simple. Yes, FTPL does not require money creation, but that's harder to understand in a video.
DeleteJohn,
ReplyDeleteFirst time commenter, I'm a big fan.
You say around the 31:10 mark that in order to stimulate the economy via fiscal stimulus you have to let people know that you don't intend to pay the money back. I don't think anyone really believes that the US Government can actually pay back the $16T+ it has borrowed. Unless my opinion is in err, based on what you've stated, the stimulus package should have had a large stimulating factor. It doesn't seem to have had one. Thoughts?
There are two possibilities. Either markets still think this is a serious country, the problems are not intractable as a matter of economics, and we'll get our act together and pay off our debts (grow, and reform entitlements)...Or, the debt is all being bought by central banks and hot money bubble investors who figure they can get out before it crashes. Either way, markets seem happy to hold our huge debts for the moment despite a not very convincing business play for paying it off.
DeleteDid Milton Friedman really have MVPQ on his plate or was that a joke?
ReplyDeleteThanks, great interview.
The possible outcomes for the EU were impressively argued. Clean the gears and grow, grow, grow, but nobody will do that so sovereign default it is.
ReplyDeleteAnd then? That is, what's the likely future 2-3 years later? At a minimum: first Greece defaults, taking some European banks with it. Maybe Spain goes too and many of the Spanish banks holding Spanish debt join the swirl. Eventually Greece and Spain can borrow again, end of story? Or is there a domino effect where the bank failures take down other national banks and then their countries default, and so on? If Greece, Portugal, Spain, Italy all defaulted could that collectively make others fail?
At the beginning of the interview, you say that "money is short term govt debt." But wouldn't you agree that money originated as a means of simplifying barter exchanges?
ReplyDeleteAncient societies traded massive quantities of goods. Originally, trade occurred via barter, but barter leads to the famous "double coincidence of wants" problem. Over time, astute merchants noticed that certain goods had higher "degrees of marketability" than others. Using these highly marketable intermediate goods greatly simplified the merchants' task (essentially commodity arbitrage) by mitigating the double coincidence of wants problem. "Money" can thus be defined as the commodities that were most widely accepted as media of exchange for indirect barter transactions.
The goods most suited to fulfill this medium of exchange role were, of course, gold and silver (b/c they were uniform, divisible, durable, and portable). And thus, gold and silver emerged as the preferred money of nearly every society in which they were sufficiently available.
Paper money, or banknotes, originated in places such as medieval Italy as privately issued claims to deposits of gold and silver coins. Private banking reached its zenith in Scotland in the 18th and 19th centuries. The system became so sophisticated that gold reserves comprised less than 2% of the money supply. Further evolution would have almost undoubtedly led to increased economization on specie reserves.
The Scottish Free Banking system was extinguished politically by its absorption into the English system built around the Bank of England. However, since the Scottish system was extremely stable and promoted high economic growth (allowing Scots to go from extreme poverty to near parity with English living standards within a century), what economic justification can be made to discredit the Free Banking model? More generally, why should the govt (and central bank) today have a monopoly on money creation instead of allowing the free market to provide it?
Paul Krugman was here.
ReplyDeleteI live in Argentina, so I think I might have an advantage when talking about money and currency. We've destroyed lots of different currencies because we burned people's trust, and we had inflation rates out of this world.
ReplyDeleteSaid this I have to conclude that money is not debt but credit. Credit that "the people" gives to the government. This power is diluted when the government abuses and distributes tons of it.
Inflation is a stress in the relationship of prices, with a firm tendency to rise.
Corruption will put its pressure on inflation as it weakens people trust.
Inflation might be used as a tool by governments that try to impulse people's consumption, but inflation is always a tax on poor, as they are the ones who cannot re-position to the new and higher prices.
A gentleman in suit should not expose his bare leg. It is distracting.
ReplyDeleteDear John,
ReplyDeleteThank you for the excellent post and the video. I enjoy the discussion very much.
The puzzle I have is Japan. Why all the policies failed to ignite inflation despite Japan has the highest debt-to-GDP ratio? It has aging population, shrinking labour force, no immigrants, dire growth prospect. It seems inevitable that inflation will be the only source of funding for Japan, but there is still no sign of any inflation yet. The yield on JGB just keeps falling. Yes, most of the debt are held by domestic investors. Is Japan just different? Would be great to hear your thoughts!
Hi Professor Cochrane - This was really a fascinating interview. In it, you said, "Treasury bills and money are exactly the same thing." Were you referring to the idea that the Fed will be forced to monetize the T-bills at some point (ie that T-bills represent future additional money supply)? If not, I'm not sure I understand why they would be considered the same thing. Thanks!
ReplyDelete