I'll admit that the WSJ here is not as laughably bad as some quotations from their infamous op-eds had led me to believe. Maybe I was too harsh with them. They seem to do the balance thing, or more correctly here, the common sense and economics thing, at least passably well. Either way, there are some real pieces of work here, misconceptions about economics that were dispelled before, again and again. You're going to have a laugh, I promise.
Of course, let's start about some inflammatory comments about Mr. Leftwing Strawman, as per usual: did you know that hyperinflation is inevitable because ZIMBABWE!?
"I'll use a visual aid," says Mr. Andresen. "He opens his wallet and presents me with a gift: a 10-trillion-dollar bill once issued by the government of Zimbabwe."
Deflation is good, because SAVING! (Here the Calvinist roots of old-school good Flemish capitalism start showing again, with careless disregard to any theory of supply-demand equilibrium. How do I miss Schumpeter/Marx...)
"If prices are falling, he says, it does encourage people to save instead of spend, because the currency will be worth more later. It encourages people to lend instead of borrow. [and that's a good thing]" (Yeah, because as we know, in a given economy at a given time there can be more lending than borrowing. Or that saving > spending doesn't mean a contraction in the economy, by the magic of Austerian Economics. You people...)
A classic: fiat currency is a FAITH! Heathens!
"Federal Reserve Bank of Dallas President Richard Fisher calls the U.S. dollar a 'faith-based currency.'"
(Not pictured: other things based in "faith", like civil oversight over the military, the Constitution, the enforcement of laws, the concept of credit itself, the currently overpriced exchange value of gold... basically anything that isn't enforced by AK-47's, except of course those enforced by the promise of AK-47's)
"[...] what about a digital currency programmed to maintain stable prices, avoiding mischief by central bankers as well as the possibility of deflation? He says the engineer in him likes the simplicity of Bitcoin's fixed money supply."
Yeah, great engineering dude, let's disregard things like, you know, minimal acceptable performance for simplicity ;) You know, Unix was simple, but at least it didn't crash every five minutes. And the Apple II was simple, and it even had color!
I wanted to actually learn something from your post but it reads like a madman wrote it.
I own exactly zero bitcoins, but following the market since 2011 has proven that it is getting easier to use and more prevalent. People will be putting down bitcoin as a serious entity even after PayPal is accepting them.
Have you atudied economics? The OP reads like someone who has and is utterly incredulous at the statements being made by Bitcoin's proponents. In fairness, the gentleman interviewed in this article insisted it was all an experiment. But the WSJ editorial board has a long time habit of being very non-mainstream and almost Austrian with its economic views, so this interview was likely intended to play into a political narrative.
Here is a summary of what he is trying to say:
1. Bringing up hyperinflation in Zimbabwe is a common tactic of right-wing/Austrian economists to warn of the evils of government control over fiscal spending and currency, and that our current course of monetary expansion means that we in the US too are on the same path.
This ignores of course that (a) Zimbabwe had a civil war at the time and the government confiscated or destoyed most private productive capacity; (b) we are in a liquidity trap currently, which in short means that money is nearly free to borrow at 0% interest. Companies are sitting on piles of cash or continuing to unwind their debt from the 2008 crisis, therefore we have not enough people spending. Printing money has had no discernible impact on inflation over the past 5 years. In fact, we could use a bit right now - to encourage spending!
2. The thought that "encouraging saving is good" therefore fixed currency and deflation is good.
An economy is a closed system - if some are saving, others have to spend to keep the music going. If we all stop spending, we get into a depression, where people lose their jobs, and the economy isn't working to its potential - all because the currency is rising in value.
In short, it is arguable the point of an economic system is to make and consume goods and services, not sit and watch your bank balance grow due to the psychological whims of the market.
3. A currency based in faith is not a dangerous thing - basing currency on gold is mostly a form of superstition. and it has real drawbacks (see #2).
Lots of things in the world are based on faith in institutions or theorems. Bitcoin is too - faith in the algorithm, that it works and won't be compromised. Also (blind) faith that a fixed amount of Bitcoin will not lead to destabilization.
Now. Does that help? These arguments lead to exasperation because they seem to happen over and over across decades in slightly different forms.
I really don't get why people who call themselves 'mainstream' economists can't see or choose not to acknowledge the issues the Austrians bring up. It strikes me as quite odd. Not everything the Austrian school preaches is correct, but they do have some valid points that I would expect most smart people to understand.
To bring up just a few big ones:
Printing money and low interest rate policy of the Fed influences many things other than the simplistic lower interest rate=more spending=more growth formula commonly preached.
1) it hurts people with savings. A good example is all the retirees who have saved their whole life and now can't survive on the 1% returns their savings are generating. The Fed is supposedly helping people and business who want to borrow and can do so at low interest rates.. but that does not trickle back to pensioners who should be earning more on their capital if they were not competing with the Fed.
2) monetary expansion stimulates the economy unequally across industries and geographic regions. In the models of the academic economic departments, monetary expansion may apply equally to an economy as a whole.. In the real world short run it is a transfer of wealth from one group (wage earners, people who hold cash or low yield bonds) to another group (banks, government contractors, rich people with lots of land and stocks). Some people benefit from low interest rates and new money, but many people are hurt by those same policies.
There are quite a few other issues that Austrians seems to be correct on, but these seem to be two of the most obvious to me.
Related to (1), there is the moral hazard of bailing out the extreme risk takers and profligate borrowers, but punishing the careful savers. It just encourages future financial gambling (Greenspan/Bernanke put) and Too Big To Fail mentality.
There is also the loss of true interest rate signals for making investment decisions, and consequent mal-investment caused by 'desperately seeking yield'. Economies progress by creative destruction, not protecting sunk costs in old industries and pandering to vested interests. Just look at Apple - biggest corporate cash pile in history, biggest bond issue in history - something is seriously wrong with interest rate signals (over and above the repatriation issue).
The problem of the boom was over-borrowing to consume. The solution for the recession is saving to invest i.e. create lending for building of productive capacity. Printing money to lend to consumers to buy imports does not make the economy any better, especially when you don't give it to the consumers with tax reductions (or wage increases from the corporate cash pile), but give it to the banks and let them inflate financial assets instead - that doesn't even achieve the dumb thing you were trying to do in the first place!
I was following you up to the last paragraph. the issue is that bonds and cash are effectively equivalent now due to low interest and inflation. So we are suck in a liquidity preference trap. Stocks are showing some signs of inflation, but bonds surely are not - everyone is holding US treasuries or cash!
Printing money without associated fiscal stimulus does not help things so long as people expect inflation to remain low. So QE3 is arguably better than nothing but probably will be as ineffective as thr previous attempts. OTOH Japan now is the only country where they are deliberately trying to promote inflation, so it will be interesting to observe if they can pull it off and drag themselves out of deflation.
That all sounds very silly. There is nothing complex about interest or how controlling it can effect an economy. The interest rate is just a knob you can turn to adjust inflation and employment. It's science!
I think you have a point on these two observations, though I would question (or flip) the specific groups helped/hindered by actvist government policy.
The challenge is the broader policy implications of reversing course. For example, if the intent of the economy is to encourage activity and growth, then wealth transfer should be away from savers to spenders in a liquidity trap, for example (through increased inflationary expectations).
"An economy is a closed system" that's not quite true.
The economy is a balance between things that create value and those that destroy it. In a healthy economy more value is created than destroyed so as long as the 'savings' is close to the amount of new wealth created there is no problem. The problem is when people try to store more value than than the genuine amount of new wealth created. Often it's as simple as a bubble created by over-investment followed by a crash back to actual value. However, the special case of people 'investing' in cash cash does strange things which are directly harmful even without a crash.
You're right. I was referring to exchange transactions, to simplify. Ie. you need a buyer and a seller (or an investor and an entrepreneur). It's not closed in the strict sense, because there is growth.
Our current situation is similar to your final sentence - that of heavy liquidity preference - there are a lot of sellers and too few buyers, and investors who are mostly storing wealth in cash or liquid assets.
The difference between the US and Zimbabwe is that if the US had a civil war and inflation ruined the currency, it would send the world into the second dark ages. Civil wars cant happen in the US? thats good to know, but i wont take your (implied) word for it.
What about if China suddenly asked for something in exchange for the tons of american paper currency they have accumulated? It is unlikely anytime soon, but they will only take it as long as it has value. So the more you inflate, the more you have to send to China to maintain the American lifestyle.
Our economy is becoming less rugged over time. A large shock becomes more and more likely to significantly disrupt our system. There is no redundancy or backup operations. Our cpu core's are all at 120% load.
<sarc>Also, its a good thing that stuff like population pressure and infectious diseases are a thing of the past (two of histories best methods for shocking a political/economic systems). You know, because the global population is under control and our climate is capable of withstanding everything we throw at it with complete aplomb. </sarc>
However when everything is going well, Keynesianism works well. I will give it that.
China moving away from US currency implies they don't want to trade with us - unlikely. But if they did do this, they'd sell the currency on the global market, the cost of the dollar would go down, and US exports would likely boom due to increased competitiveness. In other words, it remains in China's interests to keep their US reserves. And in everyone's interest -- as far as the numbers show, the safest asset on earth (as crazy as it sounds) is US government debt.
An economy is a closed system - if some are saving, others have to spend to keep the music going. If we all stop spending, we get into a depression, where people lose their jobs, and the economy isn't working to its potential - all because the currency is rising in value.
Consistently low unemployment, improving productivity, constantly increasing real value of wages, corporations struggling to earn a profit. A Currency that doesn't constantly lose value seems like a not-so-terrible proposition. God forbid, people end up having savings to live from.
Some would say "left-wing" is actually a euphemism for evil. What you read into "*-wing" is in the eye of the beholder.
All I said was these views were non-mainstream, though there are interst groups working to change that such as the WSJ and certain entrepreneurs or business leaders and think tanks. Not that the views are evil.
Please point me to some left wing Austrian-school economists to refute the association.
What? The burden of proof is on you. What examples of non mainstream economics are you citing with the WSJ? Links to actual articles that prove your point, please.
I am not quite sure how one proves an observation on a board like Hacker News. All I can do is provide a few links as examples that clearly won't be enough to prove anything, just illustrate that I am not deliberately making things up.
Also keep in mind that most WSJ articles are behind a paywall.
To be clear, my view is: The WSJ editorial board (not their news dept, which is exemplary) has backed a number of somewhat dubious economic ideas for nearly a century, between their own editorials and op-ed contributors with ideas far from the mainstream whose ideas have lacked empirical support, but are popular among certain interest groups. This also goes for scientific ideas with political implications, such as global warming (which i'll not discuss here).
I am not claiming that they're "wrong" in doing this - people clearly have a right to promote what they believe in - just that I think the many of the ideas themselves are wrong, and damaging to the economy overall but also the middle class. though that is a different and much longer conversation.
Topics include:
Support for "expansionary austerity" - ie. if governments spend less the economy will recover because of "confidence".
Support for hard money (despite evidence that a gold standard was and would continue to be very deflationary and that current policies haven't been inflationary at all)
"An economy is a closed system - if some are saving, others have to spend to keep the music going."
You mean they have to spend more than they can afford? Otherwise, what exactly do you mean by they have to spend? Obviously they have to buy a house, a car, a phone, a computer, electricity, etc. I would think most people save what is left over if you like.
You seriously have to be kidding about the non mainstream stuff. When have they advocated for a gold standard? Several prominent mainstream economists write for their op-eds, including Nobel laureates. I can't recall one Austrian.
> (Not pictured: other things based in "faith", like civil oversight over the military, the Constitution, the enforcement of laws, the concept of credit itself, the currently overpriced exchange value of gold... basically anything that isn't enforced by AK-47's, except of course those enforced by the promise of AK-47's)
You know, you failed to specifically pick out the most relevant thing that is also based on faith: bitcoin.
Like any currency, its value in exchange for anything else is dependent on faith that people will accept in the future.
I liked the anecdote about the delays in wire transfers for renting a house overseas whereas with Bitcoin "the whole world is your market". I'm going go out on a limb and suggest there's a bigger proportion of the world willing to accept rental deposits in dollars than Bitcoins...
Regarding your point about the lending vs borrowing:
The use of the word "encouraged" makes sense to me. If people are "encouraged" to lend vs borrow, that means they will have more desire to lend vs borrow. This has an important effect on the supply vs. demand equation. Supply of loans, ie. people willing to borrow, goes down and the demand, ie. people willing to pay money now for interest later, goes up, causing prices (interest rates) of loans to go up (down).
In other words even though every dollar lent must be a dollar loaned, people's willingness to lend affects supply and demand.
A deflationary currency doesn't encourage people to lend, it encourages them to save.
If currency is deflating at a low, constant rate (say, 2-3%, comparable to the normal rate of inflation), then the interest rate -- in real terms -- must be strictly higher than this. A 0% loan with 2% deflation the equivalent of a 2% real interest rate. But no one will ever lend money in this situation. You take on risk, but have no reward. So the rate of deflation is the minimum real interest rate of any loan in a deflationary currency.
In an inflationary currency, people will lend out money at even a negative real rate of interest and effectively lose money on an investment because the alternative is losing even more money by holding cash. If inflation is 2%, you will consider lending out money at 1% interest (if that is your only choice) because getting 99 cents back on your dollar by investing is better than getting 98 cents back on your dollar by holding cash.
Hence, an inflationary currency encourages both lending and borrowing: lenders lose less real money than holding cash, borrowers pay back less real money than they borrow. A deflationary currency encourages neither: lenders would prefer to hold cash, because it's safer and has decent returns, and borrowers have even higher real interest rates.
Inflation also triggers higher taxes, because you pay on nominal amounts not real amounts. So 2% inflation plus 2% real interest rate, you pay income tax on total 4% rate, not 2%. Same with capital gains, you buy and hold something that keeps its real value, and you end up paying capital gains when you sell it, because inflation has pushed the price up.
I don't think your maths is correct. If the currency is deflating at 2%, it is deflating regardless of whether it is the lender or the borrower holding it. If therefore this is lent at 1%, the real return is 3%, 2% by deflation, 1% through the interest rate. Hence it is more profitable to lend than hold.
Yep, thanks for the clarification, I don't disagree but just taking issue with parent's point that dollars lent = dollars loaned therefore it's impossible for policies to affect lending rate.
famously insane according to who? The founding mantra of the editorial board:
"We are united by the mantra 'free markets and free people', the principles, if you will, marked in the watershed year of 1776 by Thomas Jefferson's Declaration of Independence and Adam Smith's Wealth of Nations. So over the past century and into the next, the Journal stands for free trade and sound money; against confiscatory taxation and the ukases of kings and other collectivists; and for individual autonomy against dictators, bullies and even the tempers of momentary majorities. If these principles sound unexceptionable in theory, applying them to current issues is often unfashionable and controversial."
What is insane about advocating free markets and sound money?
Despite their professed editorial line, in practice they're much more conservative than libertarian. For example, they are strong supporters of the War on Terror, both in terms of an interventionist foreign policy and ramping up domestic security measures. They also lean towards some support for Christian and social conservatism, though that part is weaker.
More problematically from my perspective, their opinion pages are notoriously loose with facts. It's one thing to argue a position, and another to just produce propaganda. For example, here is an exceedingly unsatisfactory treatment of what the Bible says about capitalism and prosperity (an interesting and somewhat complex issue, because the Bible has many things to say about it, which this piece ignores): http://online.wsj.com/article/SB1000142405297020380650457717...
Of course, let's start about some inflammatory comments about Mr. Leftwing Strawman, as per usual: did you know that hyperinflation is inevitable because ZIMBABWE!?
"I'll use a visual aid," says Mr. Andresen. "He opens his wallet and presents me with a gift: a 10-trillion-dollar bill once issued by the government of Zimbabwe."
Deflation is good, because SAVING! (Here the Calvinist roots of old-school good Flemish capitalism start showing again, with careless disregard to any theory of supply-demand equilibrium. How do I miss Schumpeter/Marx...)
"If prices are falling, he says, it does encourage people to save instead of spend, because the currency will be worth more later. It encourages people to lend instead of borrow. [and that's a good thing]" (Yeah, because as we know, in a given economy at a given time there can be more lending than borrowing. Or that saving > spending doesn't mean a contraction in the economy, by the magic of Austerian Economics. You people...)
A classic: fiat currency is a FAITH! Heathens!
"Federal Reserve Bank of Dallas President Richard Fisher calls the U.S. dollar a 'faith-based currency.'"
(Not pictured: other things based in "faith", like civil oversight over the military, the Constitution, the enforcement of laws, the concept of credit itself, the currently overpriced exchange value of gold... basically anything that isn't enforced by AK-47's, except of course those enforced by the promise of AK-47's)
"[...] what about a digital currency programmed to maintain stable prices, avoiding mischief by central bankers as well as the possibility of deflation? He says the engineer in him likes the simplicity of Bitcoin's fixed money supply."
Yeah, great engineering dude, let's disregard things like, you know, minimal acceptable performance for simplicity ;) You know, Unix was simple, but at least it didn't crash every five minutes. And the Apple II was simple, and it even had color!
Had many laughs. Would read again.