Tony and All:
As Bill already did a point-by-point and as i do not think tony offered anything new, i
will be very brief in my response. i will then close with an analogy (and apologies to
Abba).
TA: The immediate or short-run elasticity of output with respect to a monetary injection easily can be imagined less than unity (quantity stickiness, in the upwards direction). So that it is more than possible that in the process, involving lags, inflationary pressures can emerge -- particularly if sellers perceive that there is operating in the product or labour market a purchaser (government) with very deep (or infinitely deep, RW might like say) pockets.
RW: It may be the case that an increase of AggD (from any source) causes some
price index or other to rise--as Keynes said. (As Bill argues, this is highly
improbable but we can imagine it just the same--we are professionals, after all.)
This is not "true inflation",
as Keynes argued. And it is no justification for foregoing employment or output.
Only an ignorant or mean person would argue for unemployment to try to keep
the CPI from rising (paraphrasing Keynes here).
TA: But the more general point (just repeating my earlier argument in ROPE) is that whether private sector agents are willing to receive outside money in exchange for goods and services is not the end of the matter. If I stand outside the Post Office and offer people $100 to shake hands with me, I think many people will trade. But the fact that they are willing to ACCEPT outside money in exchange for this service does not mean that they wish to HOLD outside money -- in their pockets or portfolios.
RW: and so they run to the bank and deposit the excess. Excess reserves cause
overnight interest rates to fall. Central bank can then either drain them or pay
interest on them to hit overnight targets. No worries.
TA: RW's subsequent commentary continues to ignore the need to show that the sum of the growth outside money and government bonds supplied to the private sector is reconciled with the private sector's desired holdings (including the private banks, if one wishes to treat them explicitly).
RW: There is no need at all to sell govt bonds. Can instead pay interest on reserves.
If govt does decide to sell bonds to drain excess reserves, public will always
exchange undesired HPM for them so long as they pay an interest rate marginally
above zero. No worries. Any "sum of growth of outside money and bonds" is an
uninteresting ex post residual. Let's grab that pig by the other end.
TA: RW's argument at the end of his 20 February commentary, concerning how endogenous mechanisms make public deficits "self-limiting" seems to ignore the need to treat the stocks of financial assets resulting from the flow balances (so it's essentially the same problem as stated in my last paragraph). So whatever he means by self-correction in this context, it cannot be about sustainable stocks over time. He concludes that "it is all very simple and clear enough that one supposes maths would be superfluous".
RW: we seem to agree maths would be superfluous. "sustainable stocks
over time" simply makes no sense when speaking of HPM issued by
a sovereign nation. Anyone can always get rid of excess by taking to banks; banks
offer excess in overnight mkts. A sustainable zero overnight rate results. No worries.
A govt deficit on the other hand can be excessive only when it drives economy
beyond full employment. A JG/ELR program by design will not do this. more
generally, because of the impact that govt deficits/surpluses have on
private sector performance, they are eventually self-limiting no matter
how poorly designed.
RW: An analogy. Two families with similarly deep pockets and tastes,
the Lowells and Thomases, arrive at their respective homes after grocery
shopping. They spread the supplies on the kitchen counter
and contemplate cooking dinner. To their horror, each family discovers
they have forgotten to purchase Port. Both families have very strong
preferences for after-dinner port. The Lowells go ahead and cook dinner,
satisfy their hunger, grab some dollars, and go to the bar 'round
the corner to have an after-dinner port. The Thomases, by contrast,
sit in the kitchen staring at their supplies, and attribute their
growing hunger to lack of port. Unfortunately, the lack of port
constrains the Thomases to the extent they starve to death in their
kitchen. The Lowells, satiated by dinner and feeling good after
a few snorts marvel at what they see to be a self-imposed
constraint that killed the Thomases.
Moral of the story: both families have of course correctly assessed
their situation, but one view is more useful for formulating policy
that can relieve hunger.
Received on Thu Mar 6 10:18:15 2003
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