For a short reply to Murphy's charge, I can't do better than the first commenter to Murphy's post, Tsundere, who writes to Murph:
1/10 for trolling, but I do admire linking to an article that so completely destroys your argumentRead the article of mine that he links to and judge for yourself.
As for the charge of being "mainstream", listen to the economists that NYT records, they all talk about interest rates, without discussing this in terms of the "real" rate or the money supply. Talking about the interest rate without talking about the other factors will simply mislead you and get your analysis all convoluted. Murphy does this all the time. Indeed, he falls into the same camp as Bernanke, who clearly thought he was easing in the summer of 2008, when he cut rates---but the money supply didn't grow because the real rate had to have been even lower (otherwise money supply would have exploded).
For Murphy to charge me as being mainstream, when I consistently recognize the difference between the Fed funds rate, the real rate and the money supply--and he doesn't--and while I also call for the Fed to stop manipulating the money supply-- means only one thing, Murph has to be back in the NYU rec room, on his unicycle chugging Red Bull, again.
I don't understand this idea of a "real" rate.
ReplyDeleteIf the Fed simply declared their rate by fiat, then it would make sense to me that there was some other, actual rate which (if lower) would take precedence in the economy. But the Fed works its mojo via open market operations. Wouldn't the resulting rate therefore not be limited to only Fed lending?
Stewart,
ReplyDeleteThis is the problem with "weak" Austrians and mainstream economists such as Bernanke and Krugman. They focus on interest rates without taking into account the "real" rate. The real is the rate that would exist without money manipulation. Given the way the Fed creates money, generally, you need to know the real rate to determine if the Fed is easing or tightening. If the Fed cuts the Funds rate from 5% to 3%, but the real rate is 2%, then the Fed will not be creating any money. A "weak: Austrian, just like Bernanke this summer, don't get this.
I am not talking about the manipulated rate that the Fed declares.
It's almost the same as any price control, if the minimum wage is set at $1.00 per hour, it will have no impact. If it is set at $500.00 per hour it will cause huge unemployment. It all depends on where "real" wage rates are.
Stewart,
ReplyDeleteI believe that for Wenzel, the "real interest rate" is the rate at which the money supply would not grow. So if the Fed wants the fed funds rate to be lower than this "real" rate, it has to pump in money. If it wants the fed funds rate to be higher than the real rate, it has to suck out money.
(Given our sniping at each other, it will sound as if I'm ripping him right here, and maybe I am, but I must point out that economists already have a meaning for the term "real interest rate" and it means "the nominal interest rate adjusted for expected price inflation." The definition of Wenzel's term is obviously totally different, but he will have to inform us whether the two different meanings are related in his mind.)
@ Stewart
ReplyDeleteSometimes, I just have to yield to other scholars to make my point. Here's an example on another Austrian economist who appears to define the market clearing rate as the "real". He writes:
"However, as I claimed above, this type of model assumes away the thorny issues in capital theory, which only the more sophisticated Austrian analysis attempts to handle... then the market-clearing (real) interest rate must be.."
The author using "real" rate in the same sense that I do: Robert Murphy
Sometimes, I just have to yield to other scholars to make my point. Here's an example on another Austrian economist who appears to define the market clearing rate as the "real". He writes:
ReplyDelete"However, as I claimed above, this type of model assumes away the thorny issues in capital theory, which only the more sophisticated Austrian analysis attempts to handle... then the market-clearing (real) interest rate must be.."
The author using "real" rate in the same sense that I do: Robert Murphy
All right, you have really left me no choice, Wenzel. I'm going to have to play the PhD card here. Do you really think I spent two years writing a dissertation on capital and interest theory, and I can't even keep my definitions straight?
In the quote above, I am talking about the real interest rate that clears the market, i.e. the inflation-adjusted interest rate that would be charged in a free market. I was adding the clarifying "(real)" to show that I wasn't talking about nominal rates; I was NOT putting it in there to mean "(which is to say, the real)."
If someone writes, "The priest showed up naked in front of his large (shocked) congregation," it doesn't mean the person thinks "large" and "shocked" are interchangeable adjectives.
Wenzel, do you really not know what everyone else means by the term "real interest rate"? It's fine if you use an idiosyncratic term, but now you're misunderstanding economists who use it in the conventional fashion?
Bob,
ReplyDeleteYou write:
"In the quote above, I am talking about the real interest rate that clears the market, i.e. the inflation-adjusted interest rate that would be charged in a free market."
So am I.
As for mainstream definitions of the real rate, it is the nominal rate minus the inflation rate--which if you want to define interest rates that way, you can. I just think it is more fruitful to define the "real" rate as the market clearing rate versus the Fed manipulated rate.
I really think you are defining it the way I am. But, hey, if you want to float even more mainstream, then go for it.
I don't get the squabble between the two of you - knowing Bob's economics, and reading your stuff, I don't see any fundamental disagreement.
ReplyDeleteHowever, and I will probably bug Bob about it, I don't understand 'inflation-adjusted interest rate that would be charged in a free market.' If we had a free market for money, there wouldn't be any inflation, right? So, inflation-adjusted only makes sense in a market manipulated by a monopoly issuer of money. However, in such a market, there can be no measure for what the real free-market interest rate would be since there is no free-market interest rate to begin with, as there is no free market.
If we are talking about the CPI-adjusted interest rate, then we are simply talking about the realities of the current unfree market.
Until we have a truly free market for money and interest, we have on way of knowing what the free-market interest rate would be.
Of course, by pure chance, the Money Masters may set an interest rate identical to that prevailing in a free market, but that would be sheer happenstance.
But, as long as there is no free market for money and credit, none of us has any idea what the free-market interest rate would be.
All we DO know with very high confidence is that the rate set by the FED is likely different from what it would be in a free market.
Right? Or not?
I think I'll use this opportunity to share my favourite interest rate quote:
ReplyDelete"Eugen Böhm von Bawerk, declared that the cultural level of a nation is mirrored my its rate of interest: the higher a people's intelligence and moral strength, the lower the rate of interest . He was speaking of free market rates of interest, not controlled rates of interest. ... If Böhm Bawerk had said 'financial strength' instead of 'moral strength' and 'technological level' instead of 'cultural level,' more people today would agree with him, but we think he meant exactly what he said. Indeed, if these substitutions had been suggested to him, he might have responded that moral strength in a nation as a whole is a necessary precondition for financial strength and that a high cultural level is a necessary precondition for a high technological level."
- Sidney Homer, foreword to A History of Interest Rates
I'll let you read the signs for yourself.