TGreg, it is clear that you are a true economist; I know that becuase you used the expression...'OTOH.' I agree that the purpose of recent Fed policy has been to push base money expansion, expansion of the Fed Balance Sheet, into the larger 'economy.' This policy is based on Keynesian aggregage demand thinking in that it assumes that increased base money entering the economy will stimulate consumption, which in turn will increase aggregated demand and so stimulate production. You pretty much stated that whole policy thought in your comment and I agree that is what the Fed is trying to do. I think I said as much in my previous comments in this thread. If your read the quote from Dallas Fed Governor, Richard Fisher, from his recent speech at Columbia University (February 27, 2013) that I posted above, you will see confirmed by a member of the FOMC that makes these decisions, that that is precisely what they are trying to do. So, Richard Fisher agrees with you too. But if you look at the point of the Fisher quote, he reveals, as I have been saying here and in numerous othe posts in these threads, that...IT DOES NOT WORK. (Really, TGREGG, I am about to go out an play golf, and I intend to break par; I will let you know how that turns out later too). If you read what I have been writing you should undertand that my analysis is that when there is more 'money' (in my view, 'private credit expansion') chasing fewer assets, the real world response (don't be a schmuck) is to increase leverage ratio on the collateral assets in order to support the excess private credit creation...that is what 'inflation' is. Then, if you understand what I am saying, this is not happening because private credit expansion is not caused by interest rate manipulation or by an increase in the base money supply. It is demand driven by the fiscal context that encourages investment and credit creation. Presently, despite the effort of the Fed we do not have significant inflation because the fiscal context discourages investment in the U.S., and represses credit formation. Lately, there have been signs that private credit formaton my pick up... but is hard to tell if this is a dead cat bounce or not. If it really does pick up...you will see your inflation then.
The idea that an increase in base money will cause equivalent inflation is based on three very large assumptions. The first two are that we are unit elastic in terms of both price and income. If we get 10% more dollars into the system, then aggregate quantity demanded will increase by 10%. Then, if quantity demanded increases by 10%, prices will increase by 10%. But what if the reality is that our economy is actually very price elastic and very income inelastic? A large change in income would have limited effect on demand. And that limited increase in demand would have even less effect on prices. Price and income elasticity together determine whether FED actions are going to cause inflation. If we are income elastic and price inelastic, then a small amount of money printing will cause high inflation. If the opposite is true, then we won't see high inflation regardless of FED actions. The third assumption is what you've been getting at. We are assuming that the base money is getting into the real economy. TGregg is suggesting that at least some of it does. The question is, "How much?" Then, if some does find it's way there, does it increase private credit? In the end, if any one of the three assumptions is incorrect, then FED actions will not cause much inflation until all three become true again. That is; FED stimulus must reach the real economy. Price elasticity must drop. Income elasticity must rise. Then we'll see some real inflation. My contention is that during and immediately following a recession, price elasticity is always elevated, and income elasticity is always depressed. It is the natural result of an economy that switches from consumption mode into save mode.
Isn't this ability ratio told from the velocity of money? Secondly from the 30 year TBond andly other similar "risk free" assets. Operation twist is simply the FED admitting defeat in my view. I distinctly recall a big interview a few years back where Gentle Ben expressed the view that the FED had an exit plan based on understanding what they were doing in QE. He should discuss that for us to lessen market worries. Yet the last market fall was just on the slightest hint of a whiff that they might be looking at exiting. He has handled that with jawboning, meaning that the release timing and his comments explaining that you got the message right or wrong have been tightened. If he was truly not worried, then why react so quickly to nothing in the uptrend?
Epic, reflecting on your comment I am reminded of an old movie, "Oh Luckey Man," and a quote from the sound track by Alan Price, "If knowledge hangs around your neck like pearls instead of chains, you are a luckey man.'' I can also hear a refrain from Steely Dan's "Reeling in the Years": "The things that pass for knowledge I don't understand." Clearly, you have learned a lot of stuff. Now I am remembering Ronal Reagan's observation, "Well, the trouble with our liberal friends is not that they're ignorant, its just that they know so much that isn't so." And like an uninvited guest, I hear an echo of 'Piezoe's' recent marvelous comment in this thread, "You can sometimes find the applied mathematicians playing well with the scientists for much the same reason that you'll find a Zerox machine in Science departments." Then, before I return to your comment, Epic, I return to Richard Fisher's reference to Irving Kristol that I quoted in a comment here previously. Fisher actually got the quote from an homage that David Brooks wrote about Irving Fisher in the NYT on September 22, 2009, Brooks wrote, "âDonât be a schmuck. Donât fall for fantastical notions that have nothing to do with the way people really are.â So, with all these ghosts talking to me Epic, I have to tell you, don't be a schmuck! Do you think elasticty math works? Who made up that crap...Marshall? Did it ever add up? It reminds me of the old addage...shit in yeilds shit out. What is the confidence on the elasticity ratios...and doesn't it bother you that the whole idea is hedged by the pretentious wiggle words, in latin!...'citris paribus'...holding all other variable constant...as if Marshall even knew what the other variables were. The real world is dynamic and economics in the real world is an attempt to describe how real people behave with regard to their work and money....don't you think 'citris paribus' is funny in that context? Have you known people to shut up or even stand still in movies? Really, Epic, don't be a schmuck.
Lol. That's funny. Realize though, I'm not referring to elasticity in terms of exact numbers and precise relationships. That is where it breaks down. But as a general concept referencing a fluid relationship between price, income, and demand the idea of elasticity is quite useful. But if you really feel like making the argument that price has nothing to do with quantity demanded, you have your work cut out for you. I'm all ears.
I don't disagree with the obvious and intuitive notion that when you raise the price of a thing you may likely sell less units of that thing immediately following the price increase. Of course it is a lot more complicated than that, in that it depends on the individual thing and how special it is, and on the available supply of those things, or if there are other things you can use instead, and how the supply of those things changes in response to your pricing. In the price elasticity model you make no allowance for changes in quality or substitutions or dynamic supply reactions that occur in the real world. From a real world basis a producer will strive to develop value added in its products so that they are not treated as commodities in the market place. Theory assumes that all products are commoditized with regard to pricing when in the real world all producers are working against having their products priced as commodities. When products really are commodities the market ends up dominated by the most efficient cost producers who stop competing on price for thier own self interest. When you talk about income elasticity you raise a number of other issues that are too tedious to get into here, since it is really beside the point of my original comments that were about monetary stimulus. When you theorize about demand elasticity I am wondering what your metric is. It looks like one of those things you can only identify after the fact so that it has no predictive value. In any case, returning to Fed monetary stimulus by increasing base money on its balance sheet and reducing interest rates we know that there is no transmission mechanism to translate that into expanded bank private credit or general price change measured by the price change indexes. Serious papers published by the Fed itself (See Seth Carpenter...Fed. Res. Washington, DC) show that there is no money multiplier and no transmission mechanism attributable.
Actually, it is only you who isn't accounting for those "real world" factors in discussion of elasticity. In an effort to completely discredit the concepts you make the mistake of assuming that everyone who uses those terms takes a completely elementary view of them. You are confusing two concepts. You are suggesting that in the real world, elasticity doesn't account for things like quality increases. That might be a good argument except for the fact that it doesn't really matter in a macro context. When you are talking about base money supply and inflation, you aren't referring to the price of a movie ticket at the local theater. You are talking about the aggregate price of all goods and services in the domestic economy. In this context there is no such thing as increased product quality, or substitute goods. The aggregate economy is what it is. It changes very slowly. Your theory is macro and your rebuttal is micro. Demand elasticity (including income) is not at all beside the point of your argument. You are suggesting that the Fed is not capable of causing inflation because, as a result of fiscal policy, there is no expansion of private credit. I'm suggesting that this is only one factor in why an increase in base money hasn't resulted in inflation. According to your argument... Fed revenue is actually income from the aggregate banking system. Income that would've gone to the expansion of private credit. I agree with this concept. What I disagree with is the idea that the ONLY cause is fiscal policy. My argument is that any time an economy goes into a deep recession, the aggregate "consumer" shifts from a spender to a saver to some extent. It isn't just that banks become less willing to lend, it is also that the qualified credit consumer becomes less willing to borrow. So yes, the current climate has demanded that banks limit credit to the less qualified. It has not demanded that they stop lending to the credit worthy. It is still very easy for a credit worthy consumer to consume credit, they are just less willing to do so, even though FED action is making the cost of such credit very attractive. A certain number of them are influenced by tax policy and the like. Many are simply following the natural human tendency to avoid repeated pain while recent trauma is fresh in their minds. If they were willing to consume credit, the banking system would be happy to cut the FED out of the equation. In the mean time, the banks are happy to let the FED prop them up until the worthy consumers become less frugal. This is all part of the demand elasticity argument. Once the elasticity relationship shifts back, private credit expands and you have your demand driven inflation. The concern is that the FED will hold rates low for too long, thus further fueling an already rapidly expanding credit market.
Epic, I will leave the elasticity discussion where it is. I thnk it is mostly beside my point. I think it is a concept that is only useful in an obvious way. You think it is on point becuase it offers another explanation to credit contraction beyond what I suggest. You beflieve the concept is useful and can be applied to predict and explain beyond the obvious. You went on to comment: "My argument is that any time an economy goes into a deep recession, the aggregate "consumer" shifts from a spender to a saver to some extent. It isn't just that banks become less willing to lend, it is also that the qualified credit consumer becomes less willing to borrow. So yes, the current climate has demanded that banks limit credit to the less qualified. It has not demanded that they stop lending to the credit worthy. It is still very easy for a credit worthy consumer to consume credit, they are just less willing to do so, even though FED action is making the cost of such credit very attractive. A certain number of them are influenced by tax policy and the like. Many are simply following the natural human tendency to avoid repeated pain while recent trauma is fresh in their minds. If they were willing to consume credit, the banking system would be happy to cut the FED out of the equation. In the mean time, the banks are happy to let the FED prop them up until the worthy consumers become less frugal. This is all part of the demand elasticity argument. Once the elasticity relationship shifts back, private credit expands and you have your demand driven inflation. The concern is that the FED will hold rates low for too long, thus further fueling an already rapidly expanding credit market." You remain chained to a demand paradigm in that you imply that recovery is an issue of consumption. I reject that. I think if you look at aggregate credit in detail you will see that drag on credit formation is in business investment, and that consumer credit is, and has been in better shape...consumer credit has grown slightly. Most private credit growth has been in Student loans and car loans. Businiess Investment, expecially for plant and facilities has been the big laggard, that the consumer data does not overcome. We seem to agree that the growth of private credit is a demand pull issue and not a supply push issue. If there is no demand for investment, business start ups, expansions, new plant and equiptment, commercial construction, then private credit formation slows or contracts despite attept to jump start that risk taking by increasing the money supply or reducing interest rates. I can't get behind the direct idea that the Fed 'props them up' until the frugal consumer' returns. The Fed has done much to support bank capitalisation, however, QE is not that. My whole point is that demand for credit is driven by a fiscal conext that encourages investment and risk taking and that the Fed has little if any impact on this demand context through money supply and interest rate manipulation. Its not the consumer that needs to return...its new business formations, inward investment, increased spending on plant and equipment. I would not confuse the metrics of consumption with the metrics of production; nor would I pin my hopes on consumption recovery flowing from consumer debt to create any real growth. If you want to explain that lack of risk taking in 'elasticity' terms, well have at it.
Hmmm, it seems that where we are missing each other is partly in the definition of the consumer. When I refer to credit consumers I'm not limiting the definition to individuals. I'm referring to all consumers, including business entities. So it seems that we are in agreement there. There must be a return of "business formations, inward investment, increased spending on plant and equipment." You are suggesting what needs to happen and then claiming that fiscal policy will cause it. I'm suggesting that better fiscal policy might help, but that there has been a fundamental shift in demand elasticity. Consumers (both individual and business) have shifted to a saver's mentality. The household savings rate more than doubled during the recession. Businesses still continue to hold excess cash. The mentality must shift back to consumerism. Without that, your argument in favor of business formation, inward investment, and spending, is really just a recipe for disaster. What happens when a business is formed absent demand for its product? All the inward investment and equipment in the world isn't going to save it. Successful businesses are formed to supply a product AFTER there is a realization of demand for that product. Those businesses expand AFTER their metrics indicate/forecast an demand increase. It's interesting that you continue to assert that in the financial sector there must be a demand pull because a supply push is fruitless. The same is true all the way along the chain. There will not be a demand pull in credit formation only to result in a supply push in production. Again, this is a demand elasticity issue. Lower prices and higher incomes (business and individual) aren't generating higher demand, because elasticity has fundamentally shifted.