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rumble
16-12-2009, 12:35 PM
I really enjoy K-punk's blog (as well as the other 0 Books related blogs). The cultural analysis is great, but I find that the reliance on cultural studies and philosophy a little bit ineffectual as a means of mounting a serious critique of the capitalist system, or eventually providing alternatives. It seems like an instance of "when the only tool you have is a hammer, every problem looks like a nail".

If I'm interpreting K-punk correctly, he views the main problem as an ontological one: "there is no alternative" (to capitalism). I view ontologies as expressions of underlying economic conditions. While the dominant ontology does reinforce the economic conditions, I view the economic conditions as prior to the hegemonic ontology that they produce. I think that attacking the ontology itself is doomed to fail, so long as the underlying conditions make the ontology "true" persist.

In an important sense, Thatcher was stating an empirical fact (even if she didn't mean it that way, and even if it was not universally true) when she said that there was no alternative. She was right, there was no alternative (for Britain). The economic conditions had fundamentally shifted from a Fordist to Post-Fordist system, and there was no choice but to get with the program. K-punk's comment that woebot highlighted was quite correct IMO: "when the Federal Reserve raised interest rates by 20 points on October 6th 1979, a shift was made to the Post-Fordist industrial climate and employment was increasingly out-sourced."

When the US, the global hegemon, decided to go this route it forced the same decision on all others through its position as producer of the reserve currency and largest market for finished goods. If you wanted to have any economic growth, you had to play by the new rules (neo-liberalism). There was an alternative for the United States itself, the metropole, but for all others there really was no alternative, unless you wanted to end up like Cuba, locked out of the world trade system and consequently impoverished.

Even though people have internalized neo-liberalism to a certain extent, I don't think that is what blocks out alternatives. The alternatives are blocked, at the highest level, by the Federal Reserve and the US Government, which are controlled by the elite for the benefit of the elite. The ideology that they work under is mainstream economics, and it is a sham. The last crisis provided a fairly clear exposition of its faults, and has left the profession in disarray.

The thing that most on the left are unaware of, or ignore, is that free market economics has been completely and utterly debunked for over 20 years now. Joseph Stiglitz won a Nobel Prize for his papers with Greenwald that systematically dismantled the core of free market economics. His arguments have never been disproved, and are even grudgingly respected by mainstream economists. They are just ignored. If you want to watch any top-rate economist squirm, just mention Greenwald-Stiglitz.

Anyways, my point in bringing this up is that k-punk and co. could use some modern heterodox economics to fill out their narratives. It would tie in quite nicely, and probably yield some useful results.

Here's an example of Stiglitz, effortlessly demolishing the entire concept of "the invisible hand":

The Invisible Hand and Modern Welfare Economics - Joseph Stiglitz
http://www.scribd.com/doc/12103054/Stiglitz-Invisible-Hand

In terms of the larger project of providing alternatives, and the implications of his work for modern marxism/socialism, Whither Socialism is the one:

Whither Socialism - Joseph Stiglitz
http://books.google.com/books?id=Bpyq1CK2HgAC&lpg=PP1&dq=stiglitz%20whither%20socialism&pg=PP1#v=onepage&q=&f=false

vimothy
16-12-2009, 01:15 PM
K-punk's comment that woebot highlighted was quite correct IMO: "when the Federal Reserve raised interest rates by 20 points on October 6th 1979, a shift was made to the Post-Fordist industrial climate and employment was increasingly out-sourced."

Could you explain in a bit more detail why you think that this is correct? Also, it looks to me as though the Fed Funds rate only shifted 5 bps in total over the whole of 1979, and about the same in total over 1980:

http://www.frbsf.org/publications/economics/letter/2004/el2004-35b.gif

What is the transmission mechanism you are envisaging here?

EDIT: That looks like percent: so a 50 bps move in '79 and again in '80...

rumble
16-12-2009, 01:24 PM
sorry, yeah that statement isn't entirely correct, it never rose by 20% at any one meeting. I did sort of breeze by it and assume that he was talking about the Fed Funds rate starting its ascent to 20%.

The transmission mechanism is obviously the strangulation of credit through punitively high interest rates (with the aim of eliminating inflation) leading to unemloyment. that's not really controversial at all.

Inflation was the main worry of capital, by which I mean capital in the very concrete sense of the US bond market, while employment was the main worry of workers. Volcker made a clear decision to defend the interests of capital at the expense of workers.

I think that dynamic is fairly well illustrated in the chart you put up.

vimothy
16-12-2009, 01:27 PM
The thing that most on the left are unaware of, or ignore, is that free market economics has been completely and utterly debunked for over 20 years now. Joseph Stiglitz won a Nobel Prize for his papers with Greenwald that systematically dismantled the core of free market economics. His arguments have never been disproved, and are even grudgingly respected by mainstream economists. They are just ignored. If you want to watch any top-rate economist squirm, just mention Greenwald-Stiglitz.

I think that this is a bit of an over-exaggeration...


Anyways, my point in bringing this up is that k-punk and co. could use some modern heterodox economics to fill out their narratives. It would tie in quite nicely, and probably yield some useful results.

Yes, I want to see them reading Hayek, Schumpeter and especially Bohm-Bawerk!

baboon2004
16-12-2009, 01:40 PM
Here's an example of Stiglitz, effortlessly demolishing the entire concept of "the invisible hand":

The Invisible Hand and Modern Welfare Economics - Joseph Stiglitz
http://www.scribd.com/doc/12103054/Stiglitz-Invisible-Hand

In terms of the larger project of providing alternatives, and the implications of his work for modern marxism/socialism, Whither Socialism is the one:

Whither Socialism - Joseph Stiglitz
http://books.google.com/books?id=Bpyq1CK2HgAC&lpg=PP1&dq=stiglitz%20whither%20socialism&pg=PP1#v=onepage&q=&f=false

Thanks for the links. the World Bank didn't like his ideas much though...

rumble
16-12-2009, 01:40 PM
"EDIT: That looks like percent: so a 50 bps move in '79 and again in '80..."

I think you might be reading that chart backwards. Fed Funds rate is the left scale, unemployment is the right scale. Fed funds increased by about 5% each year to go from around 10% to around 20%. 50 basis points is only half of a percent

vimothy
16-12-2009, 01:45 PM
sorry, yeah that statement isn't entirely correct, it never rose by 20% at any one meeting. I did sort of breeze by it and assume that he was talking about the Fed Funds rate starting its ascent to 20%.

The transmission mechanism is obviously the strangulation of credit through punitively high interest rates (with the aim of eliminating inflation) leading to unemloyment. that's not really controversial at all.

Actually, you've not quite got the stylised facts correct. Prior to the Volker era, it was thought that there was a direct trade off between inflation and unemployment. More inflation, less unemployment. In the '70s, this relationship (known as the Philips Curve) broke down, and the US experienced both high unemployment and high inflation. This preceded the attemepts of the Volker Fed to properly anchor inflation expectations. It also did for old school (pre-1978) Keynesianism, and allowed for the rise of monetarist monetary policy (now also largely discredited since everyone figured out how little the aggregates tell you).


Inflation was the main worry of capital, by which I mean capital in the very concrete sense of the US bond market, while employment was the main worry of workers. Volcker made a clear decision to defend the interests of capital at the expense of workers.

No, look, it's more complicated than that. Firstly, interest rates move inversely to bond prices. Everyone holding bonds loses money in the short term when interest rates rise.

Secondly, please supply a quote where Volker (Volker! (http://online.wsj.com/article/SB10001424052748704825504574586330960597134.html)) says that he is defending the interests of "capital" at the expense of workers.

Finally, both you and K-Punk are completely ignoring the structural reasons that caused high inflation, unemployment and the Fed's policy response.


I think that dynamic is fairly well illustrated in the chart you put up.

Yes, but were we to extend the time series data,

http://data.bls.gov/PDQ/graphics/LNS14000000_181203_1260970797899.gif

We can see that unemployment recovered. Does this mean that Volker was bad at his job or that he was really defending the interests of workers?



I think you might be reading that chart backwards. Fed Funds rate is the left scale, unemployment is the right scale. Fed funds increased by about 5% each year to go from around 10% to around 20%. 50 basis points is only half of a percent

No, you're right. I'm trying to figure out what 20 points means. In Spetember they allowed a 50 bps range, and in October they allowed a 400 bps range. From here (http://www.frbsf.org/publications/economics/letter/2004/el2004-35.html). None of that adds up to 20% or 20 bps though.

vimothy
16-12-2009, 01:47 PM
end up like Cuba, locked out of the world trade system and consequently impoverished.

Also, Cuba locked itself out of the world trade system. That's what communism is.

zhao
16-12-2009, 01:51 PM
the reliance on cultural studies and philosophy a little bit ineffectual as a means of mounting a serious critique of the capitalist system, or eventually providing alternatives.

you know what's coming but i'll say it anyway: because those are categorically things he, and theorists like him, is not really interested in.

rumble
16-12-2009, 02:15 PM
"No, look, it's more complicated than that. Firstly, interest rates move inversely to bond prices. Everyone holding bonds loses money in the short term when interest rates rise.

Secondly, please supply a quote where Volker (Volker!) says that he is defending the interests of "capital" at the expense of workers."

It doesn't matter where interest rates on bonds move vs. bond prices, what matters is the PV of the bond, which takes both into account along with the rate of inflation. Volcker ushered in THE golden era of bond trading that brought about the rise of Salomon, Drexel and all of modern structured finance. It's pretty much absurd to argue that high interest rates harm the bond market.

In terms of "defending the interests of capital", of course Volcker never said this explicitly, but it was well understood by all. Have you never heard of the "bond vigilantes"? This isn't even a controversial concept, and in fact it is playing out again today with the deficit hawks and inflation hawks whining that "the bond market is getting nervous".

"Finally, both you and K-Punk are completely ignoring the structural reasons that caused high inflation, unemployment and the Fed's policy response."

Probably because those "structural reasons" were wrong IMO. A supply shock leading to cost-push inflation and unemployment (which makes sense) was misdiagnosed as accelerating demand-pull inflation and unemployment which are two phenomena that cannot coexist, yielding a contradictory non-concept of "stagflation".

As much as the Monetarists wanted to declare the death of the Phillips Curve, it is still the basis of most modern inflation targeting regimes, while monetarism been tossed on the trash heap.

rumble
16-12-2009, 02:27 PM
"Also, Cuba locked itself out of the world trade system. That's what communism is."

No, that's what autarky is. Communism and autarky are not the same thing.

vimothy
16-12-2009, 02:29 PM
It doesn't matter where interest rates on bonds move vs. bond prices, what matters is the PV of the bond, which takes both into account along with the rate of inflation. Volcker ushered in THE golden era of bond trading that brought about the rise of Salomon, Drexel and all of modern structured finance. It's pretty much absurd to argue that high interest rates harm the bond market.

Because he allowed interest rates to float, leading to opportunities to create wealth out of the movements of bond prices.

And PV is the price of a bond. That's why it moves inversely with interest rates [C/(1+i)^t]


In terms of "defending the interests of capital", of course Volcker never said this explicitly, but it was well understood by all. Have you never heard of the "bond vigilantes"?

You said,

Volcker made a clear decision to defend the interests of capital at the expense of workers.


This isn't even a controversial concept, and in fact it is playing out again today with the deficit hawks and inflation hawks whining that "the bond market is getting nervous".

And obviously they all had a really hard time when interest rates were low...


Probably because those "structural reasons" were wrong IMO. A supply shock leading to cost-push inflation and unemployment (which makes sense) was misdiagnosed as accelerating demand-pull inflation and unemployment which are two phenomena that cannot coexist, yielding a contradictory non-concept of "stagflation".

Not enough time to get into this now, but will pick up after my meeting...


As much as the Monetarists wanted to declare the death of the Phillips Curve, it is still the basis of most modern inflation targeting regimes, while monetarism been tossed on the trash heap.

On the contrary, both are present in the most popular model used by central banks (New Keynesian DSGE models).

vimothy
16-12-2009, 02:31 PM
No, that's what autarky is. Communism and autarky are not the same thing.

Pro-trade communists?

http://vimothy.wordpress.com/2008/02/27/castros-legacy/

droid
16-12-2009, 02:46 PM
Also, Cuba locked itself out of the world trade system. That's what communism is.

(cough)Most sustained, punitive and vicious sanctions in modern history.(cough)

Carry on.

vimothy
16-12-2009, 02:57 PM
This probably going to go nowhere except endless hair-splitting. Let's just return to the OT--Volcker was defending the interests of capital against labour. Both inflation and unemployment were rising prior to Volcker's appointment (in '79). Both fell after he rose interest rates. Obviously, some people made out like bandits (I have read Liar's Poker, you know). But it's clear just from looking at the long run unemployment data that the fight against inflation didn't come at the expense of labour. Furthermore, Salmon Bros does not equal "Capital". Plenty of firms in America's protected markets were earning healthy rents from a system that was gradually destroyed by a long trajectory of deregulation and liberalisation (a process that ultimately went to far, alas). But this loss for entrenched interests at the expense of newcomers is, as I've suggested, a complicated thing, more complicated at least than bad guys making out at the expense of the good guys. Finally, to turn to K-Punk, the reasons that America moved to a post-Fordist system encompass far more than any 5bps move or even a 500bps move interest rates. I think that it's insane to think that you can put something of this magnitude on an FOMC meeting. But then I doubt that K-Punk is drawing on any scholarly research here.

vimothy
16-12-2009, 03:05 PM
(cough)Most sustained, punitive and vicious sanctions in modern history.(cough)

Carry on.

Quiet you, I'm still waiting for a response to that post!

droid
16-12-2009, 03:25 PM
:o :D

I think my forum days are pretty much over TBH.

rumble
16-12-2009, 03:26 PM
Because he allowed interest rates to float, leading to opportunities to create wealth out of the movements of bond prices.

And PV is the price of a bond. That's why it moves inversely with interest rates [C/(1+i)^t]

...

You said,

Volcker made a clear decision to defend the interests of capital at the expense of workers.

...

And obviously they all had a really hard time when interest rates were low...


Typed that too quickly, but I think you know what I mean. The discount rate in that equation is determined by the nominal required rate of return on similar assets, which is in turn partially determined by inflation expectations. While higher interest rates at the Fed push up the discount rate, and hence lower the bond price, the lower inflation that high interest rates cause lowers the discount rate and pushes up bond prices, so it's not a simple linear relationship. this is why you see big bondholders like Bill Gross pushing for higher interest rates: rates can go either way, but what they really hate is inflation, and high interest rates kill it. High interest rates and low inflation are in the interest of the bond market, thats just a basic fact.

Vimothy, in another thread, weren't you going on about the idiocy of inflation hawks? I find it surprising that you don't recognize that the bad, self-serving arguments that they are putting out now are basically the same as those in the early 80s.

vimothy
16-12-2009, 04:23 PM
Vimothy, in another thread, weren't you going on about the idiocy of inflation hawks? I find it surprising that you don't recognize that the bad, self-serving arguments that they are putting out now are basically the same as those in the early 80s.

No, I still firmly believe that they are idiots!

However, I just can't get behind an analysis that says that a single Fed Funds rate decision in 1979 was responsible for long-term structural changes in the US economy. I think it was a rhetorical flourish on the part of K-Punk and I don't think he really believes it either.

As for right now, I think that the situation is quite different. There is almost no expected inflation (see forecasts in Joseph Gagnon's recent paper), so no reason to hold back when unemployment is so high. I am 180 degrees from them, but I'm not at all convinced that what Volcker did was wrong. Unemployment was already rising along with inflation. Post Volker, both of those things were brought down and the US entered a long period of stable growth.

vimothy
16-12-2009, 04:37 PM
it's not a simple linear relationship.

I agree with that.


High interest rates and low inflation are in the interest of the bond market, thats just a basic fact.

It's all about stable inflation. Not so sure about high interest rates.

What do you think of Greenspan?

rumble
16-12-2009, 04:51 PM
"Plenty of firms in America's protected markets were earning healthy rents from a system that was gradually destroyed by a long trajectory of deregulation and liberalisation (a process that ultimately went to far, alas). But this loss for entrenched interests at the expense of newcomers is, as I've suggested, a complicated thing, more complicated at least than bad guys making out at the expense of the good guys. "

You're getting towards the key part of this.

Under Fordism, those large rents were being spit up between owners of capital, managers and workers (the entrenched interests) fairly equally via union bargaining, fiscal transfers etc. When Volcker made credit very scarce, and increased the returns to capital holders, he shifted the balance of power to capital. What was really remarkable about it was that for the first time the Fed was willing to cause a serious recession, just to get rid of inflation. That was unprecedented. Workers are expendable, managers are expendable, but you need credit to survive. When interest rates went up to 20% that basically meant that the rents that had been split by workers and managers all went to the owners of capital, forcing the other two into a subservient position. It also weakened the equity market relative to the bond market, meaning that companies who failed to extract enough profits out of their companies to compete with the high rates of return in the bond market would be taken over through a bond-financed LBO. Managers were forced to either put the cuts on workers, or face a takeover and getting fired themselves. Obviously they chose to sack the workers.

The reason it gets pointed to so often is because it marked the end of the worker-friendly post-war compromise between labour, government and capital (Fordism) with capital coming out on top. When the rates were lowered again, capital retained its enlarged share of the profits and extracted it through the equity market, rather than the credit markets, while managers became adept at paying themselves out via large salaries and equity options. Workers just lost out.

vimothy
16-12-2009, 05:08 PM
Nice response. I'm off now but will follow up soon. Can you edit and add the data? Cheers

rumble
16-12-2009, 05:12 PM
"As for right now, I think that the situation is quite different. There is almost no expected inflation (see forecasts in Joseph Gagnon's recent paper), so no reason to hold back when unemployment is so high. I am 180 degrees from them, but I'm not at all convinced that what Volcker did was wrong. Unemployment was already rising along with inflation. Post Volker, both of those things were brought down and the US entered a long period of stable growth."

I'll grant that back then there was at least some plausible explanation for inflation hawks, even though it turned out to be wrong. This time it just exposes their craven self-interest in the face of mountains of empirical evidence to the contrary.

re: inflation & the 70s

I'm no fan of Arthur Burns. He messed up by lowering rates in response to cost-push inflation, but two wrongs don't make a right. I think that both Burns and Volcker should have realized that a supply shock was beyond their realm of responsibility, and should have left it to be dealt with via fiscal measures if anything.

vimothy
16-12-2009, 08:44 PM
Okay, I think that's a pretty compelling narrative. But let me come back to the reason I dismissed it when I read Woebot's review: it pins a lot on Volcker. As a metaphor, it works. You could use the October '79 FOMC meeting to mark the transition between two economic regimes. But in reality, this transition was happening well before Volcker was given chair of the Fed.

For instance, you could think of it like this: If we go back to the start of the Fordist golden era, there was low population growth off the back of the Great Depression (and the effects of WWII), and so upward pressure on wages. Big Industry and Big Labour were assured of their seats at the table and fed a healthy diet of rents. The American economy became stagnant and inefficient and firms in Europe and Japan became relatively better in core industries. Technological innovation was happening elsewhere. This lays the ground work for the later failure of these industries. Because American firms were protected and mollycoddled, other countries like Germany and Japan got much better at making stuff.

Add to this the baby boom--there were nearly four million more young people entering the workforce in 1970 than in 1960--and you have structural problems well before the floating of the dollar, the oil shocks, or the Volcker Fed. By 1970, growth was at 0%, inflation was at 6%.

Along comes Nixon. He doesn't want to raise interest rates to defend the dollar's parity with gold (which underpins the global economy). Instead, he rescinds the commitment to gold and floats the dollar--which then declines in value by 25%--imposes price and wage controls, and has Burns goose the economy with liquidity.

That 25% drop in the dollar does good things for the US economy in the short term, but comes straight out of the dollar holdings of America's trading partners. When OPEC tripled the price of oil, the dollar had lost roughly a third of its value. When OPEC tripled prices for the final time, it was roughly back to where it was in real terms prior to the floating of the dollar. The oil shocks were a direct consequence of Nixon and Burns' policy decisions. They were not exogenous.

And then there's price controls. Their removal causes more inflation. And even though monetary policy is expansive, unemployment is trending up, and hyperinflation is not unimaginable. Enter Volcker, who basically underscores his commitment to combating inflation by throwing the economy into recession.

I don't know who's story is right. Maybe they're not mutually exclusive. I don't tend to think of things in terms of the interests of capital and labour, and I'm not sure I believe that this concept can really explain all these different things. Industrial dysfunctionality and demographic pressures can account for a lot. America was also descending from its post-war highs (when it accounted for half of global GDP). The were some unfortunate policy mistakes (as ever). But it's interesting to think that this liberal era might have been dying from the moment it was born, in the same way that the resultant swing to the right is now being undone by the very factors that brought it into being.

vimothy
16-12-2009, 09:02 PM
This is worth reading: http://www.interfluidity.com/posts/1256656346.shtml

rumble
16-12-2009, 10:57 PM
yeah the Volcker recession isn't the entire story, but it is a useful turning point.

I think you touch on one of the actual structural problems at the time, but get the diagnosis wrong:

"The American economy became stagnant and inefficient and firms in Europe and Japan became relatively better in core industries. Technological innovation was happening elsewhere. This lays the ground work for the later failure of these industries. Because American firms were protected and mollycoddled, other countries like Germany and Japan got much better at making stuff."

Japan's companies were way more protected and mollycoddled than America's. What was actually going on here was a leftover from the Marshall Plan, with Japan and Germany being allowed to run undervalued currencies. That's what was destroying the competitiveness of American companies. The structural problem was misaligned exchange rates and it was the Plaza Accord partially solved it in 1985, despite continued protectionism in Japan. I'd contend that it was that, rather than Volcker's actions that led to the eventual rise in employment.

The same situation is playing out right now with the undervalued Asian currencies.

"That 25% drop in the dollar does good things for the US economy in the short term, but comes straight out of the dollar holdings of America's trading partners. When OPEC tripled the price of oil, the dollar had lost roughly a third of its value. When OPEC tripled prices for the final time, it was roughly back to where it was in real terms prior to the floating of the dollar. The oil shocks were a direct consequence of Nixon and Burns' policy decisions. They were not exogenous."

How was the politically motivated OPEC action a consequence of Nixon and Burns? Isn't it generally considered exogenous?

Price controls were also another bad response at the time.

In general, I think that the problems with the post-war system were emerging in the late 60s, increased throughout the 1970s and were poorly dealt with, then finally came to came to a head with Volcker. Basically, my view of the 70s is that the unemployment was due to undervalued currencies of trading partners, while cost-push inflation was caused by the oil shocks and devaluation of the dollar.

rumble
16-12-2009, 11:31 PM
the Randy Waldman article is good.. I agree with most of his stuff.

I think that the narrative he charts out there is basically consistent with my view.

vimothy
17-12-2009, 03:39 PM
Hmmm, you're right to point out that Japanese firms were also mollycoddled. (And as with the US, many of the factors that seemed to give Japan the edge in the early post-war period later came back to bite them on the ass big time when they entered their protracted downturn). But it also seems to be the case that American firms became more and more inefficient over that period, that they fell behind in the technological innovation stakes, and that American output was restricted. Paul Krugman described the post-war US economy as “socialism without the justice”. But since Japanese firms were also heavily protected, could an overvalued dollar (relative to its trading partners) explain why America fell behind? I don’t know. I can’t see how that would make Japanese manufacturers so much better at making cars, for example, although it obviously has balance of trade implications. But I would like to see some evidence, if you could post links to papers or data.

The issue of the RMB is interesting. I’m not totally convinced that it is all bad, however. I find Scott Sumner’s argument that the global economy also gets a lift off the back of expansive Chinese monetary policy, just like it would get a lift off the back of expansive US monetary policy (here’s hoping), quite persuasive. Clearly, raising rates now would be an unpopular measure domestically for the CCP.

“How was the politically motivated OPEC action a consequence of Nixon and Burns?”

I just mean that OPEC was responding to the devaluation of the dollar—the rises were not unpredictable shocks but measured responses to the falling dollar. Compare the dollar price of oil with the dollar price of gold (apologies for the slightly weird range of dates—I can’t be arsed fiddling around with these any more):

http://research.stlouisfed.org/fred2/graph/fredgraph.png?bgcolor=%23B3CDE7&chart_type=line&drp=0&graph_bgcolor=%23FFFFFF&height=378&mode=fred&preserve_ratio=checked&recession_bars=On&txtcolor=%23000000&width=630&id=OILPRICE&transformation=lin&scale=Left&range=Custom&cosd=1960-01-01&coed=1990-11-01&line_color=%230000FF&vintage_date=2009-12-17&line_style=Solid&mark_type=NONE&mma=0

http://goldprice.org/images/monthly_dollar.gif

You can see that they both increase by a similar factor—which makes sense: the price of oil went up by roughly the amount that the dollar went down, because oil is priced in dollars. Otherwise, oil producers would be losing a lot of money. Monetary policy was ultimately the cause of the oil shocks.

vimothy
17-12-2009, 04:08 PM
Interesting and germaine interview with Paul Samuelson (who died on Sunday): http://www.newyorker.com/online/blogs/johncassidy/2009/12/postscript-paul-samuelson.html

rumble
17-12-2009, 04:19 PM
That's a pretty novel reading of the oil crises that blows the monetary aspect way out of proportion. The largest movements were not in response to the devaluation of the dollar.

If an embargo in response to the Yom Kippur war in 1973, and the second oil crisis caused by the Iranian revolution in 1979 (the two large jumps on your graph) are not examples of an exogenous supply shock, then I don't know what is.

http://en.wikipedia.org/wiki/1973_oil_crisis
http://en.wikipedia.org/wiki/1979_energy_crisis

The decline of oil prices in the 80s was also due to supply exceeding demand, rather than monetary issues:

http://en.wikipedia.org/wiki/1980s_oil_glut

I don't really see the correlation between the price of oil and price of gold as strong evidence of monetary policy being the causal link. The increase in oil prices was inflationary and destabilizing, while inflation and instability increase the price of gold. It seems pretty straightforward to me.

vimothy
17-12-2009, 04:22 PM
And the fact that real prices end up unchanged is a coincidence?

rumble
17-12-2009, 04:31 PM
real prices didn't end up unchanged (from the DOE):

http://upload.wikimedia.org/wikipedia/commons/thumb/5/53/Nominalrealoilprices1968-2006.png/800px-Nominalrealoilprices1968-2006.png

surely you are not using the price of gold as the measure of real prices?

They are correlated, but the price of goods (oil) in terms of gold is NOT the real price.

vimothy
17-12-2009, 04:35 PM
Why is that so strange?

rumble
17-12-2009, 04:41 PM
because this is what real prices are:

http://en.wikipedia.org/wiki/Real_versus_nominal_value_(economics)

and assuming that real value of a good is determined by the ounces of gold it can be exchanged for is just completely arbitrary, and makes no sense at all

vimothy
17-12-2009, 04:44 PM
Jeesus.

vimothy
17-12-2009, 04:53 PM
Look, if you think I'm a gold-bug, we're on different planets. I'm certainly not going to get into an argument about whether Bretton Woods was a good idea. But measuring the price of oil in gold is a function of the gold standard. It is the gold standard.

BTW, your wiki link doesn't even work. Now I'll never know the difference between real and nominal prices!

rumble
17-12-2009, 05:13 PM
" measuring the price of oil in gold is a function of the gold standard. It is the gold standard."

but the gold standard ended in the 30's (or 70s if you want to count BW as a gold standard, even though it differed from a true gold standard in important respects)

Why would you use it after that point? TBH the only people I do hear using it are nostalgic gold-bugs.

vimothy
17-12-2009, 05:33 PM
Not because it's the troof, but merely because it's the relevant discontinuity: yesterday my barrel of oil was worth $P, which means--is exactly the same thing as--a fixed price in gold, say G; today it's worth 0.05 * G, even though the price is unchanged at $P. I'm not saying that the gold value of the dollar (at whatever point) is its true value. That is indeed bollocks on stilts. But consider this: if it isn't an actual, real devaluation, there wouldn't be any gains associated with leaving the gold standard in the Great Depression. Somebody must have lost out when the dollar was floated and dropped.

rumble
18-12-2009, 10:20 AM
"Somebody must have lost out when the dollar was floated and dropped."

The owners of capital, obviously, just like in any devaluation.

The point is that, post-gold standard, gold by itself is useless for measuring the devaluation, since it becomes just another asset. If you use it as the measure of real prices it leads to errors like concluding that real oil prices in the 70s were unchanged, when in fact the opposite is true.

anyways, to get back to an earlier point that I never addressed:

"The issue of the RMB is interesting. I’m not totally convinced that it is all bad, however. I find Scott Sumner’s argument that the global economy also gets a lift off the back of expansive Chinese monetary policy, just like it would get a lift off the back of expansive US monetary policy (here’s hoping), quite persuasive. Clearly, raising rates now would be an unpopular measure domestically for the CCP."

"raising rates"? Based on your last sentence there it is quite clear that you don't know how the Chinese economic system works. Scott Sumner's views on China are so amazingly ludicrous that I find it difficult to believe that he is an actual person and not some sort of elaborate hoax made up by the Yes Men. That's not even taking into account his half-baked NGDP futures targeting theory... All you need to know about Scott Sumner is this: Scott Sumner is a mentalist.

rumble
18-12-2009, 11:27 AM
a good place to start in thinking about Chinese trade politics with the standard Mundell-Flemming trilemma and Dani Rodrik's trilemma. These are models that have explicitly been used by economists in the Chinese government itself while crafting policy.

If you can figure out where in each trilemma China or the US, or the global trade system in general is located, it goes a long way towards explaining the current frictions:

http://www.nps.edu/Academics/centers/ccc/images/si/2003/looneyOct2.gif