[From Martin Lewitt (2008 1207.0602 MST)
[From Bill Powers (2008.12.06.1335 MST)]
[From Martin Lewitt (2008.12.06.1326 MST]
You mention that you're a skeptic. Good, so am I. We ought to get
along with each other just fine. I asked
> > What would happen if that were done? Do you really know? I suspect
> > you're right, but I don't know how to show that this would work. I
> > can work out the relationships in the system one at a time fairly
> > well (up to the limit of my knowledge, which is not vast), but I
> > can't put them all together and see what the overall result would be.
> > There are too many closed loops, too many things happening at once. I
> > can't solve that many simultaneous equations in my head. Can you?
and you said
>I know that this system would have the power to get the error in price
>stability targeting onto the inflation side, something the current credit
>based system has failed to do ...
So, both of us being skeptics, you'll understand that when you say
the preceding, I have to ask "How do you know that?" Won't giving a
lot of people money have some effects other than causing more goods
to be bought? But whatever the answer, I want to know how you know it's right.
Yes, purchase and consumption of goods won't be the only effect.
People will be free to make mortage payments, save in deposit accounts,
invest in stocks, start new business enterprises, etc. Printing the money
is just replacing the money that has disappeared through deleveraging,
although it is not making any kind of attempt to put the money back in
exactly the same place it disappeared from. It is just an attempt to put
the monetary effect back on the side of inflation. Economies with debt
denominated in nominal terms have a much easier time adjusting to
inflation rather than deflation. Do I really need to supply evidence that
governments have the ability to debase currencies to the extent of
causing inflation? If they didn't, that would imply they have the ability to
create wealth out of nothing and their would be no excuse not to print
enough money to make everyone materially wealthy. They can't make
everyone wealthy but what they can do is impact nominal prices, and
in the current circumstance replace money that has disappeared
through deleveraging to a large enough extent to offset the aggregate
decline in nominal prices of assets and goods. Any wealth created
that in the new circumstance, that would not be created in the current
crisis, comes from employing productive labor and capital equipment
that already exists in the near term, and in the long run the wealth
will hopefully have further compounding benefits.
I think you'd like my late father's book, "Leakage: the bleeding of the
American economy" (Benchmark Publications, see Amazon). He claimed
that there was never any episode of money inflation in the 20th
Century -- that the biggest drag on the economy has been loss of
buying power from the circular flow to the tune of about 7% per year,
according to the historical record. He said that the cure was to
print more money, and that it wouldn't cause inflation. He was a
research chemist who got interested in economics late in life.
Is there more about this leakage theory online, perhaps in the
archives here? The recirculation sounds a bit like monetary
velocity, but I need to know more. Did he not acknowledge
the Carter double digit inflation as inflation?
> And, in a nonlinear system, of course,
>I don't know what would happen, the danger is runaway inflation, and
>perhaps oscillating and overshooting attempts to control it. The Fed
>would be able to push out money on the debit card end and reel it in
>on the interest rate/bank reserve end.
Fine, but if you've been reading my recent posts you know what I'm
going to say. Plug those features into your economic model and let me
see it running on my computer. Then I'll believe you. You haven't
mentioned any effect of this change on things other than inflation
and perhaps economic growth rate. A good model will show all the
important effects and relationships, so when you change anything, it
will show all the important consequences. I'd like to see that.
You might have more faith in models than I do. Humans can have
unanticipated reactions. Sometimes we can just know the sign
and magnitude of the effect but not the result when everything is netted
out. Take climate change for instance, we know the sign of the greenhouse
gas effect is positive and the magnitude of the direct effects appears to
be enough to account for less than a third of the recent warming, as we
know the signs of some of the feedbacks are positive and some are
negative, but we don't currently have models or data good enough to tell us
whether the net feedback is positive or negative. The models are
good enough for insights and hypothesis generation, but can't yet
be validated enough to attribute a 0.7 degree Centigrade warming
to competing external forcings.
In economics too, sometimes we have to make decision while knowing
little more than the sign of effects. Just like we know that unemployment
insurance can help put a temporary floor on how far and fast consumption
can drop, we also know that having a tax system that favors debt financing
and punishes equity financing will result in more debt ridden and highly
leveraged businesses, and that the sign of the effect will be to accelerate
the layoff cycle we have been discussing.
>I wouldn't complicate things further by trying to put money where it is
>most needed, even just distributing it equally would be better able to
>avoid the contraction of the money supply than the current system.
>If one is concerned about fairness, it doesn't seem particularly fair,
>and perhaps even regressive to target people who are in a position
>to purchase a house or auto. When the money is distributed in
>the debit card manner, it is the consumers who pick the winners and
>losers, and banks and auto companies must compete for their
>business.
Yes, I like that and my father would have, too. But I still don't
know if it's right. There are only two ways to find out, other than
with a time machine.
Try it out for real and see what happens, or develop a solid model
that predicts correctly with historical data, and run it to see what
happens without hurting real people. I think it will be politically
easier (and more humanitarian) to develop the model and do it that way.
I don't think the standard needs to be that high. We already have a
Federal Reserve that is trying to inflate the economy but is only
"pushing on a string", so there is a consensus agreeing to their
goal, there is just the lack of a facility able to achieve it.
Printing money will result in that money being saved, invested or
spent. About the only other alternative is burning it or stuffing
it in a mattress, and both of these can be compensated for by
printing more money, in response to monitoring its effects on
the prices of securities, assets and goods. The net effects are
in question, but since many of the costs of businesses are
historical (depreciation, amortization, etc) or nominal (debt
payments) the prospects of businesses will be immediately
improved and the need to layoff workers will be immediately
decreased.
Now the US auto industry is really facing two crises, there was a
change in consumer preferences caused by the gas price shock
that does not immediately revert once gas prices come down, in
addition to the current credit crisis. The have long term cost
structure problems as well, that might have been survivable if
either one of these crises had been happening alone.
>I hope I got the header right.
Perfect.
> I was a triple major in physics, economics
>and philosophy, who has done graduate work in computer science
>and business, and has been published in computational chemistry.
Ah, there's your problem! If you studied economics and business, then
you know a lot of things that ain't so. I assume you don't think that
economists and businessmen got together and worked out how the system
operates, and used this knowledge to put us where we are today. In my
opinion, business and economic principles are based largely on
superstitions (in the technical sense -- belief in causal
relationships that are actually just coincidences or side-effects).
Just testing you, you know.
What I've decided to push for these days is not any economic plan or
proposal about what to do. I'm hoping to take advantage of the
current mess to persuade those in a position to do something that we
need to bear down on trying to understand how the economy really
works, and construct a valid model that we can use to test proposals
about what should be done. I'm trying to take our approach up a level
or two. This means a model that is not based on any current or past
economic theory, but which provides a framework within which any
economic model can be tested.
>I've spent about 30 years in supporting scientific applications on
>parallel computers, currently supporting gene search codes and climate
>models.
Neat. Good stuff. You'll probably appreciate my new book, which is in
press right now -- it's organized around computer models
demonstrating the principles of PCT, with a disk included. My
publisher, who is also my sister, will probably be making the big
announcement on CSGnet any time now.
> I have a long standing interest in the theory of the great depression, and
>was strongly influenced by a dissertation on the history of theory of
>the great depression I read in graduate school, so I am a little
>disappointed that Bernanke hasn't lived up better to his Hellicopter
>Ben reputation.
Oops, there you go again. I'm just a hard-headed physicist/engineer
and don't know any of this economic or political insider stuff.
Before you do that sort of thing, consider explaining it to the unannointed.
When Bernanke was appointed there was a concern about whether he
was really an inflation hawk, because he had once written a theoretical
paper on alternative ways of distributing the benefits of creating money.
His tongue in cheek characterization of one of the ways was to drop
the money from helicopters, thus "Helicopter Ben". In practice this
alternative scheme might look very much like my debit card account
proposal.
It might be very nice to have you aboard, and who knows, you might
enjoy it, too.
>I was introduced to PCT a few months ago, and will come at things
>skeptically if they don't fit into evolutionary and neural network
>paradigms.
We shall see. Get hold of the new book, which not only has the demos
in it, but the source code, too.
Thanx, it sounds interesting.
Best,
Bill P.
[I sign myself Bill P to distinguish myself from other Bills who have been on
CSGnet or might yet show up]
I guess I had better go for --- MartinL
···
-------------- Original message ----------------------
From: Bill Powers <powers_w@FRONTIER.NET>