Here. He summarizes it in this way: "I frame Hayek's liquidationism as wanting to reorganize the pattern of trade, while MV stability is supposed to maintain the volume of trade."
The issue of course being that these two may be at cross-purposes.
And once again - stable MV offers the opportunity for modest counter-cyclicality, but it's still generally speaking a policy of deflation. "Good deflation" maybe, in the sense of it being a productivity norm, but that still can have bad implications in a macroeconomy with frictions. So even Hayek's "anti-liquidationism" is more liquidationist than what most people are talking about.
Wednesday, August 14, 2013
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"The issue of course being that these two may be at cross-purposes."
ReplyDeleteWith stable MV, aren't you still maintaining the volume of trade?
I think this is where the differences come out. People in the Hayek camp would tend to believe that liquidation of malinvestments would change the pattern of trade by more efficiently using resources, thus increasing the total volume of trade.
Even this alleged MV stability amounts to little more than the central bank meeting demand for high powered money when depositors want cash or banks want reserves.
ReplyDeleteSince the broad money supply is mostly credit money anyway, a situation where (1) debtors are repaying debt (and destroying demand deposits) and (2) demand for investment/consumer credit collapses will mean contraction of the money supply and price deflation, even with this Hayekian MV stability.
"Even this alleged MV stability amounts to little more than the central bank meeting demand for high powered money when depositors want cash or banks want reserves."
DeleteThat would be stabilizing the other money quantity equation: MV=PT.
"Since the broad money supply is mostly credit money anyway, a situation where (1) debtors are repaying debt (and destroying demand deposits) and (2) demand for investment/consumer credit collapses will mean contraction of the money supply and price deflation, even with this Hayekian MV stability."
That's very unlikely in practice because there's a large buffer of timed-savings. If you look at the banking data on great recession in Britain you'll see demand for consumer credit and investment credit fall markedly. At the same time the money supply increases, that can happen because banks downscale timed-savings products when the demand for normal account balances rises.
I agree with you that broad money is a real hindrance to the impact of MV stability and assume that plays a big role in the lack of impact of the current monetary expansion. Expanding M1 has little impact on the size of M3. 1) needs to happen for the economy to heal,but definitely forms a drag and debt got so high that I'm thinking a lot of people won't have an appetite for it for a while. 2) My view is that guarding against wage deflation is the important thing. Price deflation in the face of stable wages is not a significant issue.
DeleteCurrent, that's an interesting analysis, but I'm not very familiar with banking. I might be overly simplistic in my outlook, but I always picture that 20:1 leverage implies that loans matter a lot more than holdings with regard to money supply.
ReplyDeletePerhaps I don't understand your argument, but what you seem to be saying above is that if the amount of lending falls significantly then the money supply can't increase. In practice that's not really true.
DeleteI'll explain what I mean using the Bank of England Bankstat's data because I'm familiar with it. The BoE make a balance sheet for all commercial banks. They separate the bank's liabilities into several categories "sight deposits" these are things like bank balances in accounts and "time deposits", things like savings bonds. They also have entries for "sale and repurchase agreements" and "CDs and other paper issued". The sight deposits are money like, and that quantity moves with broad money supply (irritatingly the BoE use different definitions to M3 or M4 so it's never the same as either of them, there's probably a reason for that).
Last month there were £1.3T of sight deposits including money loaded onto cash cards and banknotes issued by commercial banks. There were £1.762T of timed deposits, 327B of sale and repurchase agreements, and 195B of CDs and other paper. The point of this is that there are significantly more timed liabilities than there are sight deposits. That's true even if we take the suspicious view that CDs and repurchase agreements are like sight deposits. This means that banks aren't really limited by their loans books. Banks have assets far exceeding the money supply, by a factor of more than two. These liabilities can be shifted around, if the incentives are right, i.e. a low interest rate and high demand for money, then banks will produce more bank balances and fewer savings bonds. It's possible that practically all timed savings products could be abandoned, in that case the money supply would be affected by the quantity of loans that banks can make, but in practice it's not the limitation.
See table B1.4
http://www.bankofengland.co.uk/statistics/pages/bankstats/current/default.aspx
Current, thanks for the explanation! This is a very grey area for me. It's not really 'my' argument. It's my understanding of an argument that Steve Hanke makes. His view is that M3 is so much bigger than M1 that Fed expansions don't impact the money supply as much as recent changes due to the most recent Basel agreement and Dodd-Frank do. He says increased reserve requirements, IOER and provisions in Dodd Frank that have yet to be written greatly restrict bank lending, resulting in tight money. There is also a lower demand by borrowers and according to people in banking that I've talked to, banks don't like to lend much when interest rates are low due to the risk of rising interest rates.
Delete"Banks have assets far exceeding the money supply, by a factor of more than two. "
That's good to know. I kind of avoid learning about banking. It seems like a big rabbit hole.
Steve Hanke isn't wrong about the effect of some regulations. If reserve requirements are increased then that affects the money supply because that's a regulation that deals with deposits. Other regulations that deal with money-like liabilities can also make a difference. I don't know if these have changed, I don't follow US regulations.
DeleteAlso, if the demand for timed-savings products is high and profits on them are good then banks will use those to obtain funds rather than demand-deposits (i.e. bank accounts). That could happen because although timed-savings generally pay good interest compared to accounts they're much easier for banks to administer. To provide bank accounts banks have to provide many associated services. So, even if reserves are available and banks could expand the broad money supply they may not do it.
The regulations that limit making loans don't really have that much of an immediate impact though for the reasons I mentioned. The more important impact they have is on investment spending. If banks are reluctant to make new loans then businesses can't invest as much as otherwise.