Tuesday, August 28, 2012

Another Combatant Enters the Keiser – Woods Arena


John Aziz has thrown his hat into the ring of the recent spat prompted by Max Keiser’s stepping on the work of Ludwig von Mises.  In his contribution, Aziz focuses on the Austrian’s lack of using empirical data to test and confirm theory, and he disagrees with this approach.  This to me is reasonably well settled by Hayek’s lecture delivered on the occasion of his being awarded the Nobel Prize, and this issue is not the one I will address here.

Aziz uses as his main example of demonstrating this shortcoming is the fact that many Austrians predicted rapid and growing inflation in the aftermath of the Fed’s interventions, beginning especially in 2008, and yet this mass (or hyper) inflation has not yet occurred, and in fact inflation (as measured in prices) has stayed relatively benign:

…these predictive failures were symptomatic of deduction-oriented reasoning; Miseseans who forewarned of imminent hyperinflation over-focused on their deduction that a tripling of the monetary base would produce huge inflation, while ignoring the empirical reality of Japan, where a huge post-housing-bubble expansion of the monetary base produced no such huge inflation.

It is true, as Aziz points out – there were several prominent (and not so prominent) Austrians making this prediction – hyper-inflation is just around the corner.  This is certainly not true of all of them – one example would be Dr. North.  This critique of Aziz falls short – as some Austrians rightly recognized that inflation was not coming absent bank lending the fault cannot be in Austrians as a group or as a school.

The reason the Fed money printing has not resulted in inflation as some Austrians have warned has nothing to do with not looking at “the empirical reality of Japan”; instead, it has to do with not considering the reality of the banks holding this increased base money as excess reserves – the money created by the Fed has stayed with the Fed and has not been lent out by the banks.  The significant monetary inflation actions taken by the Fed have certainly increased the supply of money; however the demand for money has fallen as well.  Therefor the impact of prices as measured in dollars has stayed reasonably calm (this, of course, takes the government numbers as is – an assumption that many would consider not valid).

Many Austrians, Dr. North included, have regularly pointed this out.  This “miss” by certain Austrians has nothing to do with ignoring empirical reality and everything to do with ignoring a factor in the deductive reasoning.  The critique of Aziz misses the mark on this count as well – there is nothing in this “miss” that suggests a fault of Austrian Economics, but instead a fault of a complete application of factors in the analysis.

There is no shame in this – Human Action implies that we are, after all, only…human.

4 comments:

  1. "The significant monetary inflation actions taken by the Fed have certainly increased the supply of money; however the demand for money has fallen as well. Therefor the impact of prices as measured in dollars has stayed reasonably calm..."

    There is something confusing to me in this passage, but I'm not sure I can put my finger on it completely. The "Therefore" clause indicates causality of stable prices due to some kind of balance between the increase of the supply of money and the decrease of demand for money. But, to me, for prices to be stable, the increase in money must be countered with an INCREASED demand for money. These would more likely tend to balance than an increased supply of money and a decreased demand for money. With a decreased demand for money, I would expect dishoarding of money (aka spending).

    Still, I think I recognize what you are meaning. There is a decreased demand for 'credit' from consumers and other borrowers.

    The way I'm thinking of this, there was an increased supply of money to the banks, however, by offering to pay interest on deposits at the Fed, the Federal Reserve has created demand for that same money. The banks demand it - they keep it as 'cash' at the Fed. The Fed has in effect sterilized it (temporarily) by causing the banks to 'demand' the money kept as cash.

    If you mean there was a fall in demand for credit (borrowing that money), then I parse your argument correctly and I agree with you.

    Keep up the good work,
    gpond

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    1. gpond

      I always welcome both the possibility of seeing a mistake in my thinking as well as the possibility of understanding when my writing is not clear through feedback such as this, so I thank you.

      I will begin with your last statement, which is more accurate and precise toward my meaning: “If you mean there was a fall in demand for credit (borrowing that money), then I parse your argument correctly and I agree with you.”

      Whether for lack of qualified borrowers, or because the banks have been directed or otherwise motivated not to lend in order to keep price inflation in check, the result as regards to the Fed’s money creation causing significant price inflation would be the same. The created money has not entered the economy to the extent banks hold it as reserves, therefore has no CPI price effect.

      I would like to touch on another of your comments: “there was an increased supply of money to the banks, however, by offering to pay interest on deposits at the Fed, the Federal Reserve has created demand for that same money. The banks demand it - they keep it as 'cash' at the Fed.”

      The demand of the money by the banks is not equivalent to the demand by the market for money (or more clearly, credit), when it comes to being a driver toward price inflation. This is where I was headed with my thoughts, as it was the lack of price inflation being commented on by Aziz. So I wasn’t thinking at all about bank “demand” in this context, other than it is bank holding of excess reserves that is disallowing Fed money creation to cause price inflation.

      But had I used the term credit instead of money in this context, or at least made the connection, this would have come across better in the post.

      Again, thank you.

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    2. Thanks for your clarifying, bm.

      Maybe I have listened to too much Guido Hulsman at Mises. LOL.

      gpond

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    3. gpond, I apologize for not posting your comment sooner - it was hung up in a folder I rarely check...don't ask me why.

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