Monetary Realism

Understanding The Modern Monetary System…

Businesses Hire When They Are Swamped With Demand

In his post about aggregate demand, David Beckworth posts an updated chart of unemployment vs. business demand concerns. It’s a remarkable match – you could almost substitute one line for the other.

The R2 of this regression is a remarkable 76.93%. I can’t tell, but it sure looks like this would be significant to the 95% confidence interval as well.

Here’s a summary of the fancy math: This is a fantastic, high quality correlation. Very few economic variables have this level of correlation.

It goes to help support a simple idea about jobs and hiring: Businesses hire when they are swamped with demand.  
Over at Davids place, someone very sharp who works with the St. Louis Federal Reserve is commenting, saying in a certain form of an RBC model, business owners would respond in exactly the same way. These business owners would think it’s a lack of demand, even if it was just the economy getting confused or the economy not having enough to do in total.
This might be true – but who cares? Even if the reason is RBC we should be doing everything we can to move that demand upwards! We know we can increase aggregate demand in relatively neutral ways through lowering taxes which hit broad sections of the population.
If the economy is having problems figuring out what to do, make it more obvious what it should be doing. Compel businesses to hire people because they are getting swamped with demand from consumers with more money to spend.
Why aren’t we lowing payroll taxes? Oh, thats right.

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70 Responses

  1. Michael Sankowski says

    Well, the prediction will be up tomorrow. I might extend the time frame to 10 years, which would make the prediction last through 2022

  2. hangemhi says

    if it makes you feel any better I’ll agree, like Cullen just did, that the USD will eventually die. But the sun will also burn out and humans will go extinct. The big money is predicting when and why. To me, the biggest threat is not understanding the monetary system – so we have that in spades.

    But our misunderstanding is CURRENTLY (and in the past) leading us to not enough spending and/or malinvestment in what the gov has spent. It has also led to speculative bubbles the Gov had no idea what to do with, and to our current economic malaise, which the Gov has no idea what to do with.

    Hyperinflation won’t be coming on some statistically flip of a coin. It will come because of a great famine, a great war, or other great productivity killing shock that is met, instead of by fixing, by money printing. Not the Fed kind, the Congress kind. Or it will come if we finally get to full employment and Congress decides to run massive deficits in a booming economy.

    Our low productivity now is with idle productivity sitting on couches waiting to be put to work. Smart Gov spending (or tax cuts) would get them off their sofas and we’d be off to the races with NOT hyperinflation

  3. Robert Rice says

    I appreciate the conversation. Makes us all reflect on these important matters.

  4. Vincent Cate says

    Cullen Roche
    1. MMR is not MMT. They’re very different even though we both understand the basics of fiat money.
    2. I have never said the USD could not die. In fact, I know it will die. I just don’t think your timeline is right….

    They both don’t understand the math for hyperinflation. :-)

    Not you, but several times other people have made comments like the one above. They sort of imply that because I think fiat currencies can die I am some kind of nut. Given the real history of fiat money dying this seems really strange to me.

  5. Vincent Cate says

    Cullen Roche
    Sure, when we stop being the world’s best customer for goods and services then you might be right. Until then, your theory is like Wal-Mart telling the US consumer that they don’t want their dollars anymore. Don’t bet on it.

    Your theory is that when productive capacity goes down you risk hyperinflation. The US productive capacity is down. Sure the US can be a good customer as long as suppliers take newly printed pieces of paper as payments. But if the US had to export as much as they import they would not be such a good customer.

  6. Vincent Cate says

    Robert Rice
    No, no, no…
    …you cannot assume ceretis parabis, and you gave us the reason why. What’s the effect of oil “currency printing” on the price of other goods and services denominated in the dollar? You noted yourself if oil prices go up, prices of all other goods and services denominated in the dollar will also go up. So if oil prices go down, will not prices denominated in the dollar also go down? Hence an increased supply of oil has a deflationary effect on prices denominated in the dollar.
    That’s ironic, all things considered.

    Ok. I see what you mean. In the last 40 years even when oil prices went down other prices did not. But this is because they are always printing dollars. If they did not print dollars and oil prices went down I do agree that other prices should go down as well. And that is a bit ironic.

  7. Vincent Cate says

    Not only is my theory of the delay from when money is added to when price inflation consistent it is backed up by data.
    http://pair.offshore.ai/38yearcycle/#delay

    And my theory of hyperinflation has solid math behind it as well.
    http://pair.offshore.ai/38yearcycle/#hyperinflationmath

    MMT/MMR has the attitude that if the currency fails then the government must be corrupt or something external to the government went wrong. Because they count bonds as money but don’t use bonds as part of the velocity of money they don’t see a problem with paying off bonds with cash. But in the real world, where cash has a far higher velocity than 30 year bonds, when a government monetizes lots of debt they get inflation. You guys don’t have one single historical example of a government monetizing a large part of a big debt without any inflation in the following 5 years. There are many many examples of governments monetizing a large part of a large debt and getting lots of inflation. Every case of hyperinflation (like over 100) is an example of the second type. Yet you guys still think monetizing debt is not inflationary. Wow.

  8. Cullen Roche says

    Sure, when we stop being the world’s best customer for goods and services then you might be right. Until then, your theory is like Wal-Mart telling the US consumer that they don’t want their dollars anymore. Don’t bet on it.

  9. Cullen Roche says

    1. MMR is not MMT. They’re very different even though we both understand the basics of fiat money.

    2. I have never said the USD could not die. In fact, I know it will die. I just don’t think your timeline is right….

  10. Vincent Cate says

    Cullen Roche
    The Russian default and hyperinflation is nothing like the USA.

    The US timeline is far behind, clearly. But after it is finished it will look very similar. When China and the Arabs no longer take newly printed pieces of paper as payment for real goods, you will see the US get into debt in non-dollar currency so they can get oil and stuff. Then you will say the hyperinflation was from that. But the truth is deeper. The printing of money has gutted the US economy since they could just buy stuff from the rest of the world. When Spain brought back gold money from the New World their economy ended up gutted in a very similar way.

    The ability to print dollars or Treasuries and get supertankers full of oil has long term side effects that are not healthy for an economy.

  11. Vincent Cate says

    hangemhi
    i don’t think someone who links to a site called “howfiatdies” has any interest in learning something that would change his view. He’ll just keep grasping for the next straw hoping we’ll see the light, rather than noticing that all his past arguments died in flames.

    It is strange that a theory of money thinks it is absurd that fiat money can die. Most fiat money last less than 50 years. So there is over a 2% change on a random year that a currency will fail, statistically. MMT/MMR people can’t fit this into their theory so they just say it is external to the currency. Wow.

  12. hangemhi says

    i don’t think someone who links to a site called “howfiatdies” has any interest in learning something that would change his view. He’ll just keep grasping for the next straw hoping we’ll see the light, rather than noticing that all his past arguments died in flames.

  13. Cullen Roche says

    The Russian default and hyperinflation is nothing like the USA. http://pragcap.com/the-russian-default-what-happened

  14. Robert Rice says

    Why do I need any more than good theory? Granted empirical data would corroborate the theory, but more to the point is, where’s my mistake in reasoning?

    It isn’t enough for you to have some data which is consistent with your thesis, because it does not follow that this data is therefore inconsistent with my thesis. My thesis also accounts for this same empirical data. Not only this, but my thesis accounts for money creation without subsequent inflation, which yours cannot. All I have to prove is that under some conditions money can be created and desseminated into the hands of spenders without prices rising in any substantive manner. I’d be thrilled if we could set up that experiment as there is no question in my mind we would all benefit.

    However we really don’t even need to set that up for our purposes. Think of this in terms of necessary and sufficient conditions. You believe money creation is a sufficient condition to cause inflation in all scenarios. This is what it means for money creation to be by its very nature inflationary. I don’t agree. In reality not even you agree, as you’ve acknowledged velocity can counteract money creation’s alleged inflationary effect on prices. Your theory is thus inconsistent.

  15. Robert Rice says

    No, no, no…

    …you cannot assume ceretis parabis, and you gave us the reason why. What’s the effect of oil “currency printing” on the price of other goods and services denominated in the dollar? You noted yourself if oil prices go up, prices of all other goods and services denominated in the dollar will also go up. So if oil prices go down, will not prices denominated in the dollar also go down? Hence an increased supply of oil has a deflationary effect on prices denominated in the dollar.

    That’s ironic, all things considered.

  16. Vincent Cate says

    But production collapse and regime change can happen because government spending/taxing/printing gets out of control. It is part of the picture. The trick is to be able to predict it. If you look close you will notice that almost everything in the stores now does not say “made in America”. The problem is that the USA can export treasuries and import oil or goods from China. So the US did not need production of goods, they had production of the world’s reserve currency. So production has shifted overseas.

    As the dollar collapses the central government in the USA will lose power very similar to how the central government in the USSR lost power. You will say “the hyperinflation is due to the regime change” and I will say “the regime change is because the currency lost power”. We will both be right. But I will have seen it coming and you will be surprised by events.

  17. beowulf says

    Oh brother. You really should have kept reading past p. 9. Its like thinking Star Wars is about two robots and their search for Obi-Wan Kenobi. Keynes didn’t get down to brass tacks until Chapter 19.

    “Whilst no one would wish to deny the proposition that a reduction in money wages accompanied by the same aggregate effective demand as before will be associated with an increase in employment, the precise question at issue is whether the reduction in money wages will or will not be accompanied by the same aggregate effective demand as before measured in term of money, or, at any rate, by an aggregate effective demand which is not reduced in full proportion to the reduction in money-wages”.

    http://webcache.googleusercontent.com/search?q=cache:8q9M1jeHhFAJ:econ.as.nyu.edu/docs/IO/8801/DavidsonKeynesMonetary.pdf

  18. Cullen Roche says

    Well, I don’t know what to say Vince. My findings show that hyperinflation tends to occur under very specific circumstances that generally involve loss of war, production collapse, loss of monetary sovereignty, regime change or other unusual and extraordinarily stressful exogenous events. So I guess we’ll just have to shake hands, part ways, and revisit our conclusions in a few years. And trust me, if I’m wrong I’ll be the first to admit it….Until then, arrivederci.

  19. Vincent Cate says

    From page 9 of Keynes “The General Theory” we read, “Now ordinary experience tells us, beyond doubt, that a situation where labour stipulates (within limits) for a money-wage rather than a real wage, so far from being a mere possibility, is the normal case. Whilst workers will usually resist a reduction of money-wages, it is not their practice to withdraw their labour whenever there is a rise in the price of wage-goods.”

    In effect he is saying that when the demand for labor shifts lower it is easier to trick labor by reducing the value of money than to lower peoples nominal wages.

  20. Vincent Cate says

    Cullen Roche
    Even with his confused understanding of monetization Bernholz has not been predicting hyperinflation in the last few years….

    After hyperinflation has started the Fed will of course be funding the full deficit as nobody else will want to buy bonds. But for predicting who will get hyperinflation it is just the deb/GDP and defict/total-spending rations that matter, not how much is currently covered by the central bank. So Bernholz is putting a spin on his own data so as not to scare people.