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Ray Lopez
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Update: maybe central banks should be writing options on inflation/NGDP, with the target as the strike price, so they would be forced to print and pay big money if inflation/NGDP fell below target? Excellent post on why NGDPLT does not work, at least not as envisioned by Sumners. And if the above proposal is adopted, given, as history has shown, that money is largely neutral, you can bet that a future George Soros will take a central bank 'to the cleaners' and cost some taxpayers a lot of money. Recall on Black Wedneday the Major government had the option of 'unlimited funding' for the Bank of England to defeat Soros, yet it blinked. Do you think the US Fed could take on all of Wall Street, when there's a concerted push betting the Fed will fail to make the strike price? The lesson would be: 'don't fight Wall Street'. It might be a rare event, but the history of markets shows it will happen. So ask yourself: when the US taxpayer is asked to make a payment of, say, $2 trillion USD because the Fed lost a bet vs Wall Street, do you think the Tea Party will get a surge of support? I think so. Audit then abolish the Fed indeed.
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So this is what modern economics has become: a bunch of 'fudge factors': Confidence Fairy, Rational Expectations Fairy, Zombie Confidence Fairy (Krugman), Crony Fairy (Id), Inflation Expectations Fairy. Why not replace these fudge factors with Keynes' Animal Spirits, or just admit that economics is non-linear and cannot be explained with linear models?
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Good post by Nick Rowe, and the date/ time stamps show the arguments made were not in hindsight. Now, four years later, Canadian real estate stands higher than in 2008, unlike the rest of the world. Bubble? Time will tell. That's the problem with bubbles, you only know after the fact. Check this post in four years...
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"The idea that increasing the supply of money must stimulate economic activity, though mistakenly thought to be an idea of Keynes’s, is actually an echo of “Say’s Law,” which Keynes famously attacked, though he was not the first economist to do so. Say’s Law, rather confusingly paraphrased as supply creates its own demand, treats money as a medium of exchange and a standard of value, but nothing more. This is essentially a barter theory of the economy. But modern economies are not barter economists. In a modern economy, receiving money in exchange for some good or service doesn’t dictate that you exchange the money forthwith for some other good or service. You can save the money indefinitely. If you put it under your mattress, it makes no contribution to productive activity. Similarly, money can pile up in Federal Reserve Banks if people are disinclined to spend, without contributing to economic activity. " - this passage is amazingly bad revisionist economics, bad paraphrasing of the liquidity trap, and ignores Keynes Money Illusion short term stimulus argument. This is economic 'science'? Wow.
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Jun 13, 2012