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This was the title of George Selgin (CFMA, Cato) talk at the Institute of International Monetary Research (IIMR) and the Institute of Economic Affairs (IEA) seminar, ‘Quantitative Easing. Triumph or Folly?’ (3rd Nov. 2016). The title of course evokes Ben Bernanke‘s words at the conference held in 2002 to honour Milton Friedman for his 90th birthday; in his speech Bernanke ended with some words that have resonated everywhere in the midst and the aftermath of the Global Financial Crisis in 2007-09: ‘Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.‘ True, banks’ deposits have not contracted (as it did happened in the early 1930’s) around 30% in the recent crisis, but broad monetary growth (M2) plummeted in 2009 and did have a subsequent impact in the extension, amplitude and the severity of the crisis.

The 1930’s crisis is the historical precedent used by George Selgin to judge the Fed’s response to the two major financial crises occurred since the establishment of the US Fed in 1913; the Great Depression and the Global Financial Crisis. Selgin resorts to well-established monetary theory to recommend an early intervention in monetary markets in case of a banking crisis occurs in order to prevent the payment system and financial markets from falling. And he does so by using Walter Bagehot‘s well-known criteria for central banks to act effectively as the lenders of last resort in a monetary system where the reserves are held by a single bank: (1) the central bank must act promptly and provide loans to illiquid but solvent banks with no limit (2) against collateral (assets that would have been used in normal times) and (3) at a penalty rate; that is an interest rate higher than the normal or policy rate.

Did the Fed abide by those criteria?

As you can surely tell by the title of his talk, Selgin is very critical with the lack of an effective response of the Fed in 2008, which ended up in a drastic fall in monetary growth in the economy in 2009 (see the rate of growth of US M2 since 2007 here). Normally banks’ deposits at the central bank are a sort of a restriction that constraint the potential expansion of their balance sheets. The Fed’s policy of increasing the remuneration US banks’ deposits (or excess reserves) in the midst of the crisis (at a time where there were not many profitable investments options for banks) turned those deposits at the Fed as an asset. In this new policy scenario US banks comfortably sat on a vast amount of cash at the Fed, and did get a profit for doing so; this indeed discouraged them from channelling the money lent out by the Fed to the economy and resulted in an ineffective threefold expansion in the US monetary base. This recent example helps to explain the lack of a mechanical connection between expansions in the monetary base and those in  broader measures of money (such as M2, which hardly grew, if at all, at the time).

Watch out George Selgin’s video with his talk in full here for further details. In a nutshell, according to Selgin it was a combination of bad policy measures which caused the Great Contraction and not an inevitable policy outcome. Enjoy the talk!

Juan Castañeda

 

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The Institute of International Monetary Research (IIMR, affiliated with the University of Buckingham) is holding an international conference on the assessment of Quantitative Easing (QE) in the US, UK, Eurozone and Japan on the 3rd of November (London). In the last few years a return to a more conventional set of monetary policies has been widely heralded, and in particular the return to a monetary policy rule focused on monetary stability and the stability of the overall economy over the long term (see the excellent conference organised by CATO and the Mercatus Centre  (George Mason University, US) on this very question just few weeks ago); but we believe the first priority at the moment is to analyse and clarify the impact of QE on financial markets and the broader economy. Amongst others, the following questions will be discussed: Has QE been instrumental in preventing another Great Depression? If QE is meant to boost asset prices, why has inflation generally been so low in recent years? Has QE increased inequality? Has QE been able to expand effectively broad money growth? Should QE programmes be extended at all? These are all vital questions we will address at the conference.

The conference is by invitation only and there are still (very few) places available, so please send an email to Gail Grimston at gail.grimston@buckingham.ac.uk should you wish to attend. It will be held on Thursday 3rd November 2016, in collaboration with Institute of Economic Affairs (IEA), at the IEA headquarters in London. You will be able to find a programme with all the topics and the speakers here  As you will see we are delighted to have an excellent panel of experts on this field from the US, continental Europe and the UK. There will be of course very well-known academics but also practitioners as well as central bank economists. In particular economists such as George Selgin (CATO), Kevin Dowd (Durham University), Christopher Neely (Federal Reserve Bank of St. Louis), Ryland Thomas (Bank of England) or Tim Congdon (IIMR, University of Buckingham) amongst many other very distinguished  economists will be giving a talk at the conference, which provides a unique opportunity to analyse in detail the effects and the effectiveness of QE in the most developed economies.

For your information you can also follow the conference live/streaming; please visit the IIMR website this week for further details on how to follow it remotely on the day. In addition the presentations (but not the discussion) will be filmed and published on our website later on. Drop us an email (enquiries@mv-pt.org) should you want to be updated on the Institute’s agenda and latest news.

Thank you,

Juan Castaneda

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Estimates of the aboveground stock of gold (1492-2012)

Those of you who regularly follow this blog will find this topic familiar. This is because it is the second paper I have just published on this question; in the first one (2012), “The aboveground gold stock: its importance and size”, published by the GoldMoney Foundation, James Turk and myself mainly focused on the analysis of the available estimates of the stock of gold and concluded that most of them overestimated the stock of gold in 1492; which necessarily leads to a less amount of gold in the present time (the study also includes a very useful and comprehensive statistical annex).

In this one (“New estimates of the stock of gold (1492-2012)”, full text published in Moneta 156), I offer alternative estimates of the stock of gold in 1492 using different sources of (indirect) information, which include the analysis of the research made by economic historians, geologists and economists. As a result, an interval estimate of the stock of gold in 1492 is offered; one which is again much lower (see the table below) than the one implied according to the current estimates of the stock of gold and the data we have on gold production since the discovery of the Americas. Taking these new estimates as a starting point, I also include a full series on gold production since 1492 (a series collected from different sources) and a new series on the stock of gold since 1492 to 2012.

There might be several implications for the analysis of the current gold market as, according to this research, the aboveground stock of gold in our days may be around a 10% lower than the “official” figures (as published by the World Gold Council). Of course, due to the nature of this research and the lack of (much) reliable information on this issue for such a long time period, the results must be interpreted with due cautious; and I would welcome more research on this topic to refine the current estimates.

Anyhow, find below the table with the main results of the paper (in tonnes of gold):

1.World Gold Council aboveground gold stock in 2012
174,147
2.Gold production 1493-2012
157,162
3.Implied World Gold Council estimate of aboveground gold stock in 1492 (1-2)
16,985
4.Our high estimate of aboveground gold stock in 1492
1,275
5.Overstatement of the aboveground gold stock (3-4)
15,710
6.Our high estimate of aboveground gold stock in 2012 (2+4)
158,437
7.Overestimation of the current aboveground gold stock (2012) (1-6)
15,710

More details on the estimates can be found herea video with the presentation of the paper in a recent seminar organised in Madrid last May organised by Prof. G. Depeyrot as part of the activities of the Damin project, which is a world-wide research network of scholars interested in the study of precious metals and monetary issues in the 19th century.

I hope it can be of some interest. Comments very welcome.

Juan Castañeda

PS. Link to the video with the presentation of the research paper and many others: http://www.anr-damin.net/spip.php?article60

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Selgin on deflation(s)

Professor G. Selgin (University of Georgia and Cato) has masterly studied the question of deflations and distinguished those benign deflations, associated with increasing productivity and economic growth, from those recessive deflations associated with stagnation in the economy, increasing unemployment and financial instability, which seems to be the only one mostly considered by all and sundry. As Hayek did it in the 20s and 30s last century, Selgin has studied in detailed this question and has emphasised the notable implications of distinguishing amongst these different types of deflations in the running of a sound monetary policy rule (see his excellent Less than zero. The case for a falling price level in a growing economy, fully available at the IEA website).

One of the main implications of his analysis of deflations for policy making is that price stabilisation (either the price level or the inflation rate) is not a desirable policy criterion if we are committed to achieving monetary stability in the long term: it can lead to excessive money growth in the expansions of the economy (thus, monetary disequilibrium), being a major pro-cyclical policy that will destabilise financial markets in the medium to the long term. Other, both theoretical and operational, critiques to price stability as a policy criterion can be found here. This is by far the main lesson that can be drawn for the recent financial crisis and its precedent years, and it will a be very useful one if we do not want to resume the same policy rules that have contributed to the recent crisis and the monetary and financial chaos in which we are still in.

Enjoy George Selgin’s video, which is a recent CNBC interview; it is an excellent and brief explanation on the nature and consequences of different  deflations: http://video.cnbc.com/gallery/?video=3000171632

Juan Castañeda

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And then we all became economists …

One of the few positive consequences of the recent financial crisis is that people do know now much more about how markets work, on the scope and limits of Government intervention and, even more important, on the unintended consequences of ill-designed policies and bad regulation. We might not be fully aware of it now, but better informed people will be an essential requisite to better monitor and control discretionary and inflationary policies in the future. Those who have a degree in Economics will be familiar with what economists usually call  “rational behaviour” or “rational agents”, who are able to escape from another very important concept, “money illusion”. Let me explain then very briefly.

Being rational in economics means that we make decisions by exploiting all the information and resources at our disposal in order to get a particular outcome (whichever the final goal is: increasing the value of a portfolio or that of a charity). This rational assumption does not necessarily imply that people cannot err; of course they can, but then they will learn by their own experience and incorporate past failures in order to improve how to make their expectations in the future. So the key point is that they cannot be cheated systematically! One example of this is the ability of people to react to anticipated inflation; after suffering substantial losses in the past, as a consequence of recurrent inflationary policies, people have learned that (1) real variables is what really matters in making economic decisions and that (2) printing money is not tantamount to prosperity or economic growth (quite the contrary!). In consequence, in a nutshell, in the face of excessive fiscal spending and money growth, inflation will be expected; so people, instead of keeping on increasing their spending more and more, will be saving part of their income in deposits and other financial assets adjusted to inflation in order to maintain their purchasing power along the time. By doing so they will not have “money illusion” and will act rationally.

People may have finally seen that the expansionary monetary policies conducted before 2007 led to inflation and provoked market distortions and major financial instability. Let´s see if we have learned this important and painful lesson of the recent crisis, so we can counteract these policies should they persist in the near future.

Finally, find here a very brief and funny (fiction) movie that depicts a conversation amongst traditional Spanish housewives (in Andalusia), who wisely discuss on the current policies to overcome the crisis in a typical and beautiful southern spanish “patio”. I wish most economic ministers and Governments´economic advisers had their knowledge and vivid conversation! Enjoy it:

Hablando en Plata (Directed by Mikel Gil, “Producciones Varadas”):

Juan Castañeda

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Keynes and Hayek: A never ending controversy

A classic: what would have J. M. Keynes and F. A. Hayek said in the context of this major financial crisis were they alive? What would these “giants” of Economics suggest to tackle the problems arisen in the recent crisis?

Hayek

Well, we know quite well what Hayek would have probably suggested. Firstly, in relation to the diagnosis of the crisis, his theoretical works on the boom and bust crises fit very well with the current crisis. Moreover, his (Austrian) interpretation of the business cycles is very well-established in his works, mostly written in the 20s and 30s, and they have indeed received much more attention recently. So I do firmly think that he would claim some credit for the Austrian theory of the business cycle. As to his policy measures to overcome the crisis, I am afraid that he would probably suggest that the painful adjustment of the economy (including the liquidation of the so-called mal-investments, those associated with excessive money growth in the expansionary years) would have to take place, one way or another. And he would also possibly claim, as he did in his excellent works on money, central banks and the monetary system, that we should finally reform the nature of the monetary system with the introduction of more competence in the money market; which would imply the abolition of the legal tender clause of the national money(ies). This is exactly what he proposed in his Institute of Economic Affairs excellent “Denationalisation of money” in 1976.

Keynes

In relation to Keynes, we cannot be so positive about what he would have said. We know how pragmatic (and “case sensitive”) and even volatile Keynes could be, so we cannot really predict the policy solutions he would have proposed. This is exactly what Hayek claimed on the academic relation they maintained in the 30s. By the time Hayek was able to reply and contest a Keynes’ book or article, the latter had already launched another work with a different approach and even with a quite different perspective or theory. This was viewed by Hayek as a lack of consistency, something Hayek was not accustomed to and very much unusual for the very systematic Austrian theorist. Anyhow, if it were the Keynes of the General Theory, he would indeed ask the State to take firm steps in the running of the economy by the conduction of the aggregate (effective) demand. In essence, it would imply both (1) lowering nominal interest rates to the minimum and (2) then managing directly aggregate investment.

Another interpretation: some videos proposed

There is an excellent (and much funnier and entertaining) interpretation of their theories, and their application/adaptation to the current scenario, masterly made by John Papola and Russ Roberts in their very interesting and valuable “Econstories.tv” ‘s project. You will find below  several videos on the works and theories of these two economists, as well as interviews with excellent scholars on the works of this two excellent economists (see the interviews with Professor Lawrence White and Lord Robert Skidelsky).

– Video 1: “Fear the boom and bust”, at: http://econstories.tv/2010/06/22/fear-the-boom-and-bust/

– Video 2: “Fight of the century”, at: http://econstories.tv/2011/04/28/fight-of-the-century-music-video/

Enjoy them.

Juan Castañeda

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