Sunday, September 23, 2012

Bob Murphy Still Isn't Getting It Right

Bob Murphy is out with a post where he writes:
 Although there were a few Cassandras (including Nouriel Roubini from the interventionist side and Peter Schiff from the hard-money/deregulate side) who had very prescient descriptions of what was coming, generally speaking most economists had no idea just how bad things would be in 2008.
I'm guessing Bob is putting himself into the group that missed the very obvious oncoming 2008 crisis.  But what is really curious is his current post-crisis commentary. He runs this chart of the monetary base up to May 2010:


Why anyone would run this chart. without major qualifiers, baffles me big time. As any economist who is watching Fed data knows, the monetary base in relation to what entered the economy in early 2010 are two very different things, since major portions of Fed money printing went into excess reserves and didn't impact the economy. Here's the chart on excess reserves through May 2010, the same end point Murphy uses.


And for those who don't think that all those funds flowing into excess reserves didn't have an impact on money supply, here is the erratic quarterly money supply growth with the same May 2010 end point.



Yet, Murphy writes about none of this. He writes as if the monetary base has meaning in and of itself (my bold):
The above picture [the monetary base] isn’t the current one; it shows what the monetary base looked like, as of May 2010. So I’m saying I think most economists had common sense, looked at that chart, and thought, “You know, I just can’t agree with Scott Sumner that that is a picture of the tightest monetary policy since Herbert Hoover. I understand how back in the Depression, M1 and M2 actually fell sharply, and so did prices. But we’ve had rising Ms and CPI since the start of 2009. Sure, CPI growth hasn’t been high by historical standards, but we haven’t had outright deflation. And man, the Fed sure has pumped in a lot of base money. Maybe pushing harder on that particular lever isn’t really the answer. I’m not even sure running up more government debt will help, since we’ve had multiple years of trillion-dollar-plus deficits and that too doesn’t seem to be working very well.”

Murphy completely misses the up and then dramatic downswing in money supply growth because he is looking at only step one of the monetary policy process. It's as though he is putting  food in a microwave, pulls it out after two minutes (without putting the power on) and saying, "These microwaves sure aren't what they are all made out to be." Money needs to get into the system, that means it has  to become part of required reserves with the banks loaning the money out, the power needs to be turned on if you will. Murphy misses all of this.

But he goes on:
So why the turnaround? I think it’s because guys like Peter Schiff, Marc Faber, and (to a much lesser extent, since I’m not famous) me, were going nuts in 2009 warning everybody about Bernanke’s mad plan to debase the dollar. When our warnings didn’t come to pass, Krugman and Sumner (mostly Krugman) were running victory laps, saying “nana nana boo boo, we were right and the critics are idiots.” 
Note, again, he fails to mention the unprecedented increase in excess reserves which Schiff and Faber never discussed, either.

Incredibly, Murphy just buys into the argument that "unprecedented money-creation" occurred and didn't cause major price inflation (my bold):
Seeing that unprecedented money-creation didn’t seem to hurt, economists slowly got convinced to give it another try. In this effort, guys like Sumner were instrumental, because he relentlessly used very cogent arguments and data to show why everything made sense, from his perspective.
This is simply outrageous. Money supply growth has turned incredibly erratic under Bernanke and his new tools, such as his introduction of interest payments on excess reserves, which is resulting in banks placing a trillion dollars plus into excess reserves, making the system even more erratic. For Murphy to cruise through a post discussing the near meaningless monetary base without its relation to other money elements, including the money supply itself(!) is beyond useless it is terribly misleading, dangerous and he has put a dagger in Krugman's hands during any future debate he has with Krugman.

36 comments:

  1. Silly Wenzel, it is bleedingly and excessively obvious that Murphy was not giving his own particular ideas so much as he was giving the typical impression of your average mainstream economist and Joe Sixpack on the street.

    Talk about criticizing a phantom.

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    1. Oh yeah, he references Schiff, that's real maninstream.

      But further to take your point that " that Murphy was not giving his own particular ideas so much as he was giving the typical impression of your average mainstream economist and Joe Sixpack on the street."

      Why is he leaving this view with a dull thud and not explaining what is wrong with it.

      The point is that Murphy, for what ever reason posts some bad economics and does not correct it.

      What the hell is that all about? If we want bad economics we can read Krugman.

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    2. Anonymous:

      No, his paraphrasing of the mainstream view is what I am referring to by referencing the mainstream view, not Schiff.

      Why didn't he correct those views? Maybe because he didn't intend to? Why does a referencing of an argument have to be accompanied by a judgment of it? What, would you say that a professional interpreter at the UN would always have to include their own judgments of that which they are translating?

      Relax a little...

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    3. So your defense of Murphy's post is that he was acting like a " a professional interpreter at the UN," who are you, Murphy's mother?

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    4. George is spot on.

      Murphy writes:
      "We’re kind of at the point where my commentary on the above is superfluous. If you read all that and are nodding your head saying, “Yes, yes, I like what you’ve done here, Nick,” then my criticism will seem crude and irrelevant to you. If, on the other hand, you’re reading that and thinking, “Wait a second. He doesn’t think there are limits to monetary and fiscal policy, even in principle? What exactly does he mean by that? And he’s using the fact that his models don’t have financial sectors as further evidence that we ought to be trusting them right now? Huh?!” then you don’t need me to spell out the problems here.

      So instead of me criticizing Nick, let me be a nice guy and give my own explanation of what happened."

      etc.

      It's an explanation of why mainstream macroeconomists originally lost faith but have gotten it back over time.

      Anonymous and Banacek, maybe you guys should start your own blogs rather than criticizing Murphy for not doing something he explicitly said he wasn't going to do. And then maybe you'll realize sometimes you can make blog posts for purposes other than correcting what you believe to be false economic opinions.

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    5. Nice point to cut off Murphy's quote Bharat. Murphy goes on to say:

      "So instead of me criticizing Nick, let me be a nice guy and give my own explanation of what happened."

      He then goes on to write:

      "Although there were a few Cassandras (including Nouriel Roubini from the interventionist side and Peter Schiff from the hard-money/deregulate side) who had very prescient descriptions of what was coming, generally speaking most economists had no idea just how bad things would be in 2008." Which is not recapping mainstream, since mainstream would never bring up Schiff. That's Murphy talking. not a translation.

      He then goes on to say that economists had common sense and thought the spike in the monetary base was "scary."

      By Murphy laying all this out and not explaining the true elements as to what was going on does nothing but what Wenzel says:

      " For Murphy to cruise through a post discussing the near meaningless monetary base without its relation to other money elements, including the money supply itself(!) is beyond useless it is terribly misleading, dangerous and he has put a dagger in Krugman's hands during any future debate he has with Krugman."

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    6. Banacek:

      No, I am not Murphy's mother. But if there is going to be unsolicited attacks on him, then you should excuse there being unsolicited defenses of him too.

      Maybe English is not your first language, but his post was an interpretation post, not his own ideas of what is right and what is wrong,

      Murphy's statement "let me give my own explanation what happened" is again referring to the mainstream economics view.

      You guys are attacking a ghost.

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    7. It may be the case through a large stretch that Murphy is only playing referee between two opposing wrong views, but what is the point, if clarity and correct economics is not added to the picture?

      Your view might be even more bizarre than Murphy just being wrong. You are essentially saying he knows the correct answer but does not give it to us but instead spends time discussing errors without stating they are errors.

      Bizarre.

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    8. It's not bizarre at all.

      "You are essentially saying he knows the correct answer but does not give it to us but instead spends time discussing errors without stating they are errors."

      This is not bizarre. He's making a BLOG POST. He is not going to write about everything you want him to write.

      It's not that George is acting like Murphy's mother, but you guys are acting like little children, throwing a hissy fit about something that shouldn't be that big of a deal.

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  2. The money supply chart does not show nominal money supply; it shows per cent change. Per cent change from when? The chart doesn't say and neither do you. If it's per cent change from the previous week or month then after the spike in 2009(?) it continues to climb but at a slower rate. We need more details or this chart, too, is meaningless.

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  3. I clearly state its quarterly money supply growth.

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  4. Robert,

    If you are saying that Bob Murphy is agreeing with the 'mainstream' that the massive increase in base money is OK because inflation is still low, I think you need to re-read his post. He is not saying that. The whole reason he wrote the post is because he is troubled by the reasons another monetary economist has given for embracing Bernanke's latest move.

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    1. The point is not that Murphy is agreeing with mainstream on inflation. Wenzel's point appears to be that Murphy is discussing observations about the monetary base, without mentioning what is really going on.

      It's, at best, a recording of two guys arguing over a car that won't start, one says it is the battery, the other says it is a spark plug problem, if you are a scientist recounting this story and know that the problem is really that the car is out of guess, wouldn't you include that instead of ending the story at the way off base point over a nonsensical argument?

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    2. Anon,

      Wenzel's point seemed to be a heckuva lot more than "discussing observations without mentioning what is really going on".

      He did not just say "Gee, what the heck, Bob had a chance to explain why there is no serious inflation right now, and he didn't. That's bad."

      He said Bob doesn't know enough to look beyond the monetary base in when analyzing the effects of monetary policy.

      This does not at all follow from Bob's post.

      It's one thing to say Bob should have explained why inflation isn't happening. It's another thing to say that in not doing so an NYU PhD trained economist who has taught courses on money and banking and written extensively on the topic, doesn't know to look beyond the monetary base when analyzing inflation.

      That "another thing" is wrong.

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    3. You think NYU PhD trained economists look at required reserves. Oh you are one clueless soul.

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    4. Anon,

      Yes, I am pretty sure they do. But, hey, maybe they don't. You have evidence to the contrary that they don't? I mean evidence besides not mentioning the reasons why inflation might not be increasing despite a large increase in the monetary base?

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    5. Sorry, should have been "You have evidence that they don't?"

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  5. Sins of omission are not sins of commission Bob.

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  6. In a recent interview with Scott Horton, Bob Murphy says that the main reason for the lack of massive inflation is the excess reserves.

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    1. So what does that have to do with the current post, where Murphy doesn't mention excess reserves, but posts a chart of the monetary base?

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  7. Why is Robert Murphy an esteemed scholar who is not confined to the Blogosphere? One reason is that he gets the point across without irrelevant nit-picking, sniping and exaggeration.

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    1. Or he is more willing to cozy up to mainstream theories and ignore the truth.

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    2. Nope. He is esteemed among Austrian scholars because he does precisely the opposite of your empty accusation. Nice try though.

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    3. Perry, you're wrong. In his post he is not trying to explain what is going on in the money supply, he is trying to explain why mainstream economists are more willing to do another round of money creation. With that said, he isn't cozying up to them at all, he thinks that they are wrong. However, he is admitting that because a massive increase in MB didn't translate into massive increases in the indicators that mainstream economists look at, that this gives them an excuse to prime the pump even further.

      He knows about excess reserves, interest on those reserves, etc; but that has zero to do with what he is discussing in the post. He's asking why are mainstreamers again optimistic about massive bouts of money creation and borrowing when it is clear that it didn't work the first time? The answer is that their worst fears weren't realized the last time around. Exactly why those fears weren't realized the last time around is irrelevant to the question of why they have a newfound faith in monetary and fiscal policy.

      I've known Bob for a few years, I correspond with him a few times a month, and I read his blog regularly. He's an Austrian through and through.

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    4. Oh please, your response is idiotic. As one poster put it, if a scientist sees two people arguing over why a car is stalled and one says it's the battery and the other says it is a spark plug problem, when the real problem is the car is out of gas, for a scientist to comment on the debate between the battery advocate and the spark plug advocate, but not comment on the fact that the car is really only out of gas is bizarre.

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    5. Idiotic? No, that analogy is idiotic. It's not even applicable to what's taking place. However, to attempt to stick to the analogy, Bob's not looking to find out "why is the car is broken?", he's responding to the question "why did the battery advocate change his mind?". So, if we aren't even talking about mechanics, why discuss mechanics.

      He even starts his main commentary buy saying something akin to, "there's no need to get into the details, we all know what they are, and I'm not going to change anybody's mind. I just want to address this single issue". So, he made it abundantly clear what it was that he was talking about.

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    6. "Bob's not looking to find out 'why is the car is broken?', he's responding to the question 'why did the battery advocate change his mind?'.

      Which is idiotic given that the battery had nothing to do with the car not running.

      Why would you want to discuss the finer points of two views that are completely in error? What is the point? It's nuts.

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    7. Murphy talks with people of different views extremely often. Obviously it is of particular interest to him what they think and why they think it. It's not so much that he's nuts but rather that he has different interests than you do. Being able to understand what people of viewpoints are thinking is one of his strongpoints and specialties, and I'm surprised you think he's "nuts" given that only in understanding different viewpoints can we begin to persuade and change them. Does he have to understand and change them in the same blog post? Absolutely not.

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    8. Steve,

      Yes, I agree. All of this car talk is nuts. However, the question that Bob's asking makes perfect sense, especially when you understand it in context.

      You see, Bob has been debating with the market monetarists for the past few years, and making some really good points. Now all of the sudden they are saying, "hey, we lost "the faith" for a while, but now we're back. We're winning!". Bob's saying back to them, "no, with all of the theory aside, all that really happened is that you guys got spooked by that huge increase in base money, but then your worst expectations didn't happen, so you're all happy to go and pump more money". That's what that post was about, and I think that Bob's right. They aren't "winning", their theories aren't better, they just lucked out that their theories haven't completely wrecked the economy yet.

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  8. You really think Murphy doesn't know that base money went into excess reserves and that's why we haven't seen massive inflation? He's usually a very astute and precise commenter. I feel like he may be trying to preach to the more mainstream masses, and in this case it's sad he doesn't define the True Money Supply. But I hardly think 'he missed it'.

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    1. Of course Murphy knows all of this, he's talked about it many times in the past. However, it wasn't relevant to what he was talking about in this post. He's only trying to answer the question of why is there a newfound "faith" in monetary and fiscal policy by mainstream economists? The reasons why massive increases in base money didn't translate into massive inflation is entirely irrelevant to this question, o he had no reason to mention them.

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  9. I don't care what Murphy was up to.

    The explanation Wenzel gives of the monetary base, excess reserves and money supply growth is very informative that goes well be on the mainstream debate.

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  10. Bob,

    The Fed does not have direct control over M2, and Murphy knows that. He knows that the excess reserves have shot up - he's made that point himself many times. His point was that having the Fed continue to grow the base money stock will only worsen the problem down the road when banks start lending off those reserves.

    Because, once again, the Keynesians and the monetarists have neglected the all-important aspect of TIME.

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  11. Bob, why do you consider the percent change in M2 more significant than the total M2? M2 has been consistently growing, has it not? That's despite how erratic the percent change has been.

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