The thing is, that as long as enough people consider "not real" money as real, it is in fact real !
Because that's the essence of money: people think it is money !
Something is money if people think it is money. 

We're back to my next (or better: same) fool theory :-)

The macro "law" is the macro-economic consequence of a certain postulated type of behavior of individual economic agents.
The theorem that (even mild) deflation will lead to a deflationary spiral, is based upon the idea that individual agents will hoard more, and spend less, today, because they know that they will get "more" for the same money.  That is a postulated behavior that is at the basis of the theorem on the Keynesian deflationary spiral.

We clearly see in specific cases, such as with computers and i-phones, that that behavior is NOT universal. 
That is sufficient to undermine the theorem, which is based upon that hypothesis.

If individual agents do NOT (systematically) defer spending because of *MILD* deflation, then this will NOT induce a deflationary spiral.  The price deflation (versus performance) in the computing market is actually HUGE: it is given grossly by Moore's law, which gives you a 100% deflation in 18 months, or grossly 66% yearly deflation !!!
Moore's law has been observed to hold until very recently for about more than 4 decades.  It starts to level off a bit.

So we have seen a deflationary market (which is btw the BIGGEST ECONOMIC SECTOR ON EARTH - the electronics market) which has been deflationary for about 66% for about 4 decades, without this market to stall totally (that is, without customers stopping to buy stuff that devaluates at a rate of 66% per year !).

So if this is an indication: 66% deflation in the biggest economic sector on earth for 4 decades while it is one of the most fertile sectors economically speaking, then you might start to get a small doubt that a mid deflation of a few percent per year will trigger a deflationary spiral, no ?

Indeed.  Now, belief or confidence in the abstraction of being able to settle FUTURE debts is nothing else but...

a form of speculation !

In other words, money is really a totally speculative asset. 
Totally (that's what your "abstract" means: the money carrier has no usage value as consumption or as capital production good) - its only value resides in speculation.

It is an asset, because you can possess it.

And it has the specific feature that it is accepted very generally to settle debts.  Any asset can settle debts, on the condition that it is accepted by the creditor.  You can pay a debt in apples, you can pay a debt in labor, you can pay a debt in state bonds, you can pay a debt with stocks, but not all creditors accept that.  Money has the peculiar property to be generally accepted.  In fact, with fiat money, this is usually imposed by law ("legal tender").  You are OBLIGED to accept it.

 

In fact, the QE programme will not cause direct inflation because:

- the interest rates are already near zero.  What you say about making lending easier is when the FED could still lower interest rates, but that's already near zero, so that trick doesn't work anymore.  That's why they resorted to QE in the first place:  QE is something you do when the "normal" Keynesian lever arm of interest rates is already near zero.  Also called a liquidity trap.  Usually, lowering interest rates makes people lend more (and spend more according to Keynes).  But when the rates are near-zero, that lever is pushed to its maximum.

QE is buying up stuff from financial markets against freshy issued base money.

The only thing it does in the first place, is to pump up the prices of the things that are bought by the fed (by increasing the demand for it, whatever type of securities it are).  If you hold these things, you get the seigniorage of that printing.  Usually banks and rich people. 

However, the last few years, QE has been going together with a requirement for higher fractional reserves (Baal III act).  Higher fractional reserves lowers the amount of Bank money.  As such, most of this QE money will never really "hit the market" but remain as reserves at the FED.  As such, what the FED *actually* does is to accept certain securities from banks as "bank reserves" and converts them into dollars kept at the FED.  So what happens NET is that certain securities have been taken out by the FED, increasing their market price and making rich the people who owned them before the QE (because their market price increased).

The printing of base money has largely been offset by the increasing requirement for fractional reserves.

I wouldn't even been surprised if this was not a way for the FED to have certain banks with bad paper to let them get rid of that paper by selling it to the FED, but I have to say that I don't know this.

Maybe you should read Keynes' "Theory of money".  It is very well explained in the first few chapters, how Deposits are money.  It is what Keynes calls "Bank Money" (in contrast to State money).  He shows that in the 20ies already essentially all money is Bank Money.

In fact, the instability you point to is discussed, and it is why there is the minimum fractional reserve imposed. 

However, that minimum fractional reserve only limits the amount of money on the upper side.  It doesn't on the lower side.  What we are starting to observe now is exactly that: the impossibility to force the creation of bank money, no matter how much state money one issues.

Where's that ?  Do you know any place on earth where collectivists haven't tried (and succeeded) in taking the power - by their sheer number, or by using force ?

But you're wrong about liberatarians having to live according to their own rules.  I for one, am a libertarian living on purpose off state funds.  Because as a libertarian, my aim is not to improve the world, or impose my vision, but to get the best out of it for myself (which is the definition of a libertarian), with the minimum to contribute to others.  And living on state funds allows me to do exactly that: obtain and not give.

It is because I think most people are like me, that only a libertarian-based system is not going to sink by the egoism which is in my view the characteristic of a conscious individual.  All other systems are going to sink through collectivist corruption.  But of course, I'm the first, in the frame of a collectivist system, to take all advantages that go with that corruption.

As I said, I'm simply more honest about that than others who have their mouth full of "the common good".  I think most if not all people ACT like I do, but many of them delude others (and maybe even themselves) about their caring for the common good - which they don't.


Libertarians usually don't attempt at anything socially.  By definition.  Because they don't want to get involved in other people's business.  They are a-political.  They don't 'want' a specific society (if they do, they would stop being libertarians by definition).
They just propose it intellectually, but they can thrive in just about any society.  Some societies don't allow them to EXPRESS what they think, but they think nevertheless like everybody else: own advantage !
If I would be living in a communist system, I would probably be a member of the communist party.  If I were living in a nazi system, I'd be behaving as a good nazi.  Simply because that's where my advantage is.  But I would openly say that that is totally corrupt (at least, if that wouldn't be in my disadvantage).  That's what I'm saying too.  I don't believe anybody who claims to do anything for the common good.  For me, that is impossible.  I do believe people claiming to do things for the common good, in order to obtain personal advantage by saying so.


Yes.  The libertarian thesis is that everybody is like that, but some don't say so.  That's the difference.


Like everybody else, but they just say so.

The difference between a libertarian and a non-libertarian is simply, that a libertarian:

1) dares to say that he's an egoist just like anyone else
2) dares to say that everybody who's claiming to act for the common good is a lier
3) realises intellectually that any form of power given to individuals "for the common good" will lead to total corruption.
4) realises intellectually that the only "fair" form to have egoistic power-greedy individuals live together, is in a totally free society with the minimum of power given to individuals over others.
5) knows that that will never be the case, given the power-greedyness of individuals faking to care for the common good.

For the rest, like everybody else, the libertarian is an egoist, that lies if he says that he's working for the common good, and will try the maximum, like everybody else, to obtain power "for the common good" to be maximally corrupt.

This is why this worked so well in the Weimar republic :-)

It has nothing to do with barbarism.  In fact, it is what Adam Smith already discovered: a bunch of individuals (each taking care of his own interest) can work together through that link of mutual self-interest to build up quite something.  Nothing barbarism.

The illusion resides in thinking that giving people power over others will make them reduce their desire for self-interest.  You simply have to have a system that is well-adapted to individuals (that is, independent conscious entities that have their own interests).  That excludes the idea that giving power to some people will make those people decide in the interest of others.

Now, I agree with you that there are people that do (seem to) show interest in other people's advantages over their own.  However, these are not the people that climb up to positions where they get the power to decide over other people's matters.  Because those positions are so much looked-for by people who want the power (for themselves) that people having genuine interest in other people's advantages never get there. 

On the other hand, that doesn't mean that someone in power will NEVER take a decision that is in fact "in other people's interest".  After all, sometimes the situation can be such that serving best his own interest colludes (more or less by coincidence, or for reasons of communication, or whatever) with other people's interest.  But it is by far not the rule.

In fact, the idea, by itself, that thinking that people are too egoistic and selfish to be able to live freely together, and then find as a solution to give power to SOME of these people to decide over others, is totally ridiculous if you think about it.

In order to protect rabbits from snakes, the idea would be to give power over rabbits by a snake ?

The problem with that is that "society" is not a conscious being that can take decisions.  It are only individuals that take decisions.  Those individuals just take decisions in their *own* interest, whether they are vested with powers to decide "in the name of the general well-being" or not.  In other words, from the moment that an individual decides "in the name of society", he's *actually* not deciding in the name of society (whatever that might mean), but in his own name, and then just has to lie and manipulate enough to make people believe that he did that "for the general good".
When a politician takes a decision, he does this for his own advantage (electoral, financial,...).  He will make it sound as if it is "according to his views for the general good", but that is never the case.  When a central banker takes a decision, he does that in his own advantage (political nomination, having his favourite politicians win elections, having friends and family members make money from the pre-knowledge, ....) and not for some or other macro-economic reason, although he will pretend to do so.

In other words, giving other individuals *power* to decide "in the name of society" is always going to lead to total corruption, because everybody always takes all of his decisions in the name of his personal advantage. Having other individuals decide over aspects of *your* life from the viewpoint of *their* personal advantage is not something that I would think is positive for anyone, except for the powerful deciders.
The difference between libertarians and collectivists is that libertarians are honest about that, that's all.

The discussion is not whether "a state that would try to achieve the general good" is a good idea, the discussion is whether such a state (made up of individuals) could even exist.  In my opinion, it can't, because individuals always decide first in their own advantage.

BTW, as far as I know, QE is nothing else but a variant on what John Law already invented in the beginning of the 18th century, no ?

 

That's what I'm saying.  One is capable to make "models" that are nothing else but grey box extrapolation from the relatively recent past to the very recent future, all else equal.

The point is that "policy" is just a human action of an economic agent, like any other, and that a genuine model can PREDICT that instead of having it as an input.  The decision to raise or lower rates is a human action in the same way (but by state-related agents) as business people take decisions, and as inventors do inventions.  Human action.
Especially in a global economy, where the policy response of one country (to a specific economic situation) will influence the economy in another country.  It is hence part of the dynamics, and I tell you that that is essentially impossible to model because it is based upon human action.

Of course as a physicist (I'm one) you can say that the human brain is a physical system which we can model.  But my point is that you'd have to go down that kind of road for economy (with human action) to become modelable.  And for all practical purposes, we can't.  

If I would have as an input all individual decisions of all individual economic agents in an economy, I could also "forecast" what's going to happen.  But forecasting means to be able to calculate it !

I'm not talking about the instantaneous inputs, but about the input time series.

Now, of course, if you consider that the state vector does contain the knowledge from economic happenings from 100 years ago for instance, and that this matters now then you ARE modeling human nature, that is, you *are* modeling the fact that humans learn from the past.  But this is what I claim, is essentially impossible.

What you are saying is that, say, in 1935, of course, the effects of the 1929 crisis of course have an influence on economic data, and that just "putting in the actions of 1935 is silly if you do not take into account the inherited state due to the crisis of 1929".
But that's trivially right of course,  that's not what I'm saying.

I'm saying that the crisis of 1929 prompted Keynesianism, and that that has had an influence on state policies, and hence on economic dynamics even in the 1970-ies and even today.

A good "time invariant" model of the economy would have had in its dynamics, the human action which was Keynesianism as an invention after the 1929 crisis.  That is, the model, built in 1918, say, would have not only to foresee the crisis in 1929, but also the fact that due to that crisis, some economists would have invented Keynesianism, and that that would then influence state behavior (which is a special kind of human action, namely human action of people with state privileges) and that that would have made the states react (their dynamics) differently than before 1929.

I'm claiming that that is essentially impossible.  It would mean that the same model that would have foreseen the invention of Keynesianism after the crisis of 1929 (even before Keynes wrote his stuff) and would have foreseen the reactions of states on the 2008 crisis, all this back in 1918.

Because if you want to make long-term predictions in economy, those are the essential dynamics (state behavior included) you have to be able to model.  And those *change* irrevocably after certain happenings, in ways that are essentially impossible to foresee, because they imply advancement of our economic understanding.

No, the comparison doesn't work.  There are perfectly good models for meteorology, but they are chaotic, and so we know that they diverge.  They still allow statistical predictions in fact, and running families of meteorological models for 100 years is exactly what climate modeling does.

What I'm pointing out is something else, and in fact you illustrate it:


But the counteraction is EXACTLY PART of the dynamics too !  Policies are a part of "human action".  Policy goals too.  How do you predict and model that ?

Give a climatologist the following task:

- calculate the number of hurricanes in the years 2070 - 2080.
- calculate me the yearly average temperature in North America in 2070-2080.
- calculate me the amount of snowfall in the northern hemisphere in 2070 - 2080.

He will be able to do so, given enough computing power.  His result will be statistical, but with good enough meteorological models, he will in principle be able to calculate you the statistical distribution of hurricanes in 2070 - 2080.  Similar for the other questions.  *in principle* he knows how to do so. Maybe the computing power is not sufficient, maybe the models are slightly off, maybe the parameters in the model are not known accurately enough etc... .but *in principle* he knows how to do so.  In fact, the only external input he needs is the economic one, of land usage, CO2 emissions, and so on !

Now, give an economist the following task:

- calculate the average evolution of unemployment in the northern hemisphere in 2070 - 2080.
- calculate the energy market in 2070 - 2080: what's the price of a KWhr ?
- calculate the average state deficit in 2070 - 2080.

Do you even know in principle with what model to estimate that ?

Because by definition, time-variant models are not time invariant, and cannot be found out before the time in question has passed !

Do not confuse time-variant models with time-invariant models which contain pre-known time-varying functions, but which are time-invariant models with a time-variant - but KNOWN - input.

For instance, Newton's equation m x d^2/dt^2 r = F is a time-invariant model.
You can put a time-varying force function in there.  But the model is still time-invariant, although the solution set will not be time invariant of course.  

A time-variant model would be something where today, the model is m x d^2/dt^2 r = F, and tomorrow, it will be, say,
m x d^3/dt^3 r = F^2, and the day after, it will still be something different.

If we were going to write that the derivative order is variable (here, going from second order to third order), then the model:

m x d^n(t) / dt^n(t) {r} = F^(n(t) - 1)

would in itself be a time-invariant model with a time-variant input, here n(t).

Unless we can model human action completely, including *understanding of economics* and *learning of the past*, there is no hope to put it into any time-invariant model, and of course, we don't know any time-varying function that could replace it.

So it is impossible to have a time-invariant model (unless we can model human learning and human inventivity).  It is impossible to have useful time-varying functions which would contain part of the future, because we don't know them.
So in the end we can only have true time-varying models.  Which is what econometrists do, but from the moment they have fitted a past model, it only works for the past (and maybe approximately for the very near future as a kind of short-term extrapolation).

Of course you can *write down* time invariant models.  But they will then contain unknown time-dependent functions, which are the "fitting parameters" which change over time, because they change with human learning and human understanding of economics.


By the definition of a model !  A model is a mathematical transformation of the input to the output.  Same input -> same output.
That output can be a stochastic description.  But if the input is the same, the output should be the same.
If we take into account that the *time* is different, then the output should be the same if the model is time invariant and there are no explicit time-dependent functions.


It is not the fact that it is not observable that is the problem.  It is the fact that its dynamics CHANGES over time.
People will react in a totally different way AFTER having seen the 2008 crash, than before.  People will have different economic opinions after learning about the 1929 crisis than before.  Human action (including state action) was totally different before 1929 than after 1929.  I'm not talking about the crash itself.   I'm talking about the learnings from that crash.  Human action and its dynamics has been altered by that learning.  State reactions have been altered by that learning.  Economic textbooks have been altered.  So people act differently now, than they did before.
And that is only one aspect.

The other aspect is the unpredictability of innovation.  By definition, innovation is unknown before it takes place.

Nobody could foresee the internet in 1930.  The economic effects of the internet were hence unpredictable.  I remember a prediction that the UK would have enough with 4 computers in the sixties :-)

So how can one make economic predictions based upon internet technology when you cannot even predict the technology ?

Actually we do have seen this.  Computers !  Computers have been getting cheaper and cheaper the last 15 years.  According to Keynesian logic, nobody is going to buy computers, because next year you get not only a cheaper one, but also a more powerful one !

Turns out that the computer market is one in which the turn-over has been one of the highest.

We observe a similar behavior in cellular phones.  They get cheaper and cheaper (except for i-phones, which are transiting to a luxury item).  And the market explodes.

So no, lower prices in the future do not stop people from spending.

In fact, the Austrian school is so close to neoclassical, that it is difficult to see the difference.  There are theorems linking both.  Both have a differently formulated axiomatic system, and I personally prefer the way the Austrians formulate it.  But it is almost but just another view on neoclassical economics.

http://econfaculty.gmu.edu/bcaplan/whyaust.htm

There is for instance a whole bunch on whether utility is cardinal (neoclassical) or ordinal (Austrian), through the notion of subjective preference.  In fact, both are mathematically equivalent.

It is a bit like the Bohm versus the Bohr interpretation of quantum mechanics.

Mild deflation causes people to put off SOME spending, in the same way as mild inflation causes people to put off SOME saving.

If mild deflation causes a deflationary spiral, then mild inflation causes hyperinflation.  They are each others' dual.

This is exactly knowing the economic future :-)  Which is exactly what is contested.

The avalanche is the effect of the economy slowing down and hitting people also (like triggering wars, famine, and so on), the potential sharp turn is the effect of the climate change on the economy.

This is a nice start of an analogy, but there's a flaw in it: there's no cost in your story for using the gear braking.

Now let us change the story as follows: similar situation but:
they are actually trying to escape an avalanche, so that's why they are going fast.  They want to avoid being crushed by the avalanche.
The guy in the back says that given that the brakes don't work, we have to put small gear, so as to go slower, in case there is a sharp turn.  The guy next to him says that if we slow down, the avalanche will probably hit us, and that we don't know if a sharp turn is ahead.

So what do you do now ?