Archive for the ‘life’ category

Quantitative Easing

January 24, 2009 You must be Brave or Foolish to go against UChicago econ

Finally, Robert Lucas. Lucas at least includes price and velocity — thank you for that! — but again misses the key element:

MV = Py

Given that V is going to zero (as people demand more savings) you need to increase M by a large amount so y can stay where it given that P is fixed. In the long term, P will fall and we will return to the 10 cent hamburger, but in practice the US is simply not going to be allowed to enter a 1930s style protracted and deep deflation.

The obvious solution at this point would be to talk about how we can increase M rapidly, in a way that is equally rapid to reverse! The obvious candidate, and it would be obvious to Keynes if he was alive today, would be a payroll tax holiday. It would avoid all the fiscal problems that all three economists mention, while still handling the money supply in a way that gets us to a rebalanced economy without having to do things the hard way and increase the deficit through unemployment.

Nice post.

Here, M is the money supply, V is velocity, P is the price level, and y is real GNP, so that Py is nominal GNP. If V is dropping, then Py must fall.  In one extreme with y fixed, P must fall, or deflation.  In the other, with P fixed, y must fall, or a drop in GNP.    Right now, prices and GNP are falling.  We have to crank up M, and try to get V back up, too (This is all kind of definitional, but to start the Great Depression, the Fed brought M down on purpose.  So there is some bite here.)

I think that effectively buying up new risky assets the way the Fed is doing now is probably the fastest way to crank up M. I hope that is what the lump sum tax cuts in the stimulus are trying to achieve as well.  If we can credibly commit to some future inflation, we can drop V as well.  (I recall that was Professor Krugman’s original prescription for Japan, so maybe it is not so easy to do given what happened there.  One sign it is working might be that our currency depreciates.)

But I don’t think that Professor Lucas missed the point, since he started out his talk pointing out that we can increase nominal spending by cranking up the printing presses and doing the famous helicopter drop of money, or by following Keynes and burying dollar bills in the ground to be dug up.

Cranking up M by buying more assets is the basis of the Fed’s policy of ‘quantitative easing.’  We need some faith, since monetary policy can  have long and uncertain lags.  It probably will act faster than fiscal stimulus by building infrastructure, though.


This week

December 22, 2007
  • I handed my grades in.
  • I got a promotion.
  • We bought a new car—red, and fancy!
  • Major health scare—less scary today—but still of some concern.
  • We saw Santa.
  • L.’s first school play.  She was great.
  • We got better at the Wii.
  • Deposit on a trip to Disney.

Being alive and human is hard.  But soooo worth it.

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Recent cd obsession

October 16, 2007

We listened to Iron and Wine all day on Saturday.

L. is really enjoying that all of us are taking Mandarin; she even wants to practice with us. Though she did tell us ‘Your accent is not as good as mine. And it never will be as good.’

This biggest laugh I have received from a 6 year old recently

September 24, 2007

is when I told her that I took ballet classes as a young man. Gender stereotyping starts way too early.

The power of prices

August 17, 2007

Max Roach, a Founder of Modern Jazz, Dies at 83 – New York Times

I listened to an interview with Max Roach this afternoon on NPR. His hypothesis about how jazz musicians became such good players was based on taxes.  In the 40s, nightclubs paid extra taxes if people danced, or there we singers, or the band was big.  So, the club owners had an incentive to book smaller bands, which lead musicians to respond by becoming virtuoso players.  Thus bebop, eventually.

People reallt respond to incentives; if you can set incentives, you have a huge amount of power.

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Ah, the market moves quickly

June 30, 2007

If people want something enough, they will find a way to get it:  Apple Guerillas!!! | NYCTalk

(I am not sure if this is a scam or not, yet.  If it is, it won’t be long before something like this is legitimate, I bet.)

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You are dead to me.

June 17, 2007

In my opinion, one of the most hurtful things you can say to another person.

That phrase has got me thinking about social networks. One of the most interesting study of relationships versus markets is a study by a sociologist who looked at Hassidic diamond merchants in NY. The economic problem to solve is that you need time to study the diamond to see its value. But then, you will be worried that the examiner would steal the diamond. One way to make sure that the examiner returns it is some sort of collateral system: you put a big deposit down to examine the jewel. But that is not always feasible. So instead, the diamond mechants substitute social capital for financial capital. They are a small tightknit community. If you steal the jewel, you are out, and your children are out, etc, etc. As a consequence, no need for elaborate financial requirements. Of course if the community gets to too big, the social capital will fail.

I wonder if the internet changes the community size.