Bernanke appointed US Fed Chairman

Ben Bernanke has been appointed to replace Alan Greenspan, who’s been Chairman of the US Federal Reserve for just about as long as I can remember (the Volcker squeeze was in the early 80s, so he hasn’t been there forever, but it often seems that way).

Bernanke was the obvious candidate, but there was always the possibility that Bush would decide to mend fences with the base by appointing some obscure[1] supply-sider a la Harriet Miers.

Bernanke’s appointment suggests a general bias towards an expansionary monetary policy for the US, and therefore continued low short-term interest rates for Australia. He was prominent in saying that the Fed would not tolerate deflation, and could print money if necessary. More recently, he’s taken a very relaxed view of the US current account deficit, seeing it as the inevitable counterpart to a ‘global savings glut’. I agree with him on the first point but not on the second; there’s a significant risk that the wheels will fall off the entire policy, leading to a rapid depreciation of the dollar and an uncontrolled increase in interest rates, both of which would flow through to Australia.

Market movements were consistent with this analysis (stock prices went up, the dollar fell and the 10-year bond rate rose), but weren’t very big, suggesting that no-one is expecting really big changes.

fn1. This is a redundancy, as there are no prominent supply-siders in the US economics profession. That is, not in the sense of supply-side popularised by Jude Wanniski and Arthur Laffers, although Mundell shares the supply-side liking for a gold standard. Almost all economists are supply-siders in the sense that they think attention should be paid to the supply side of the economy as well as the demand side.

43 thoughts on “Bernanke appointed US Fed Chairman

  1. Re: ” In one sence I don’t understand your question in so far as you draw a distinction between “monetary economiesâ€? and “economies with one object as the nummeraireâ€?. Perhaps you could fascilitate the discussion by explaining the differences that you see.” Terje Petersen.

    Reply: The distinction I made concerned theoretical models of monetary economies versus theoretical models of economies where one physical object serves as a nummeraire.

    The distinction is quite well understood in analytical economics. This is not the same as saying that there is a satisfactory concept of money. It just says, as “he” did, the question has not been answered.

    I like to think that one of my former PhD students has made a big step toward finding a satisfactory definition of a concept of money. But the work is not published as yet, so I won’t tell you what it is.

  2. QUOTE: so I won’t tell you what it is

    In other words you have nothing to contribute to this particular discussion and you like telling the world that you are a smarty pants.

    Almost all economices have one object as the dominant nummeraire. In Australia its a series of plastic notes called Aussie Currency and produced by Notes Printing Australia.

    I don’t know of any economy in history that had an exclusively singular object that served as the universal nummeraire.

  3. Why don’t you actually tell me something instead of speaking in questions? Or do you just want to play at being the Riddler and hope that I turn out to be Batman?

    I have no idea if you respect property rights or not. As I asked previously what is your point? Please make one so that we can have an engaging conversation rather than an endless fiddle.

  4. Terje,

    This is how the communication path looks from my perspective:

    1. This post is about monetary policy. The post is an Economics post.
    2. My information (based on the Economic literature) is that the absence of a satisfactory definition of a concept of money (ie a mathematical definition) causes problems for monetary policy formation (and other areas).
    3. I don’t know whether my information set is outdated or not. So I asked a question.
    4. The answer you gave told me that my information set does not need to be up-dated (for the purposes of this Economics blog discussion).
    5. P.M. Lawrence’s message confirmed that my question was clear.
    6. I confirmed that I understand P.M. Lawrence and I concur.
    7. You left out the word ‘physical’ from my question. So I put it back in again because it is crucial (cf for example the objects of choice in Debreu (1959) versus objects of choice in Radner (1972))
    8. I gave one example of theoretical research (ie developing a concept of money, which incidentally satisfies the tripartite functional definition) about which I know for sure. I said that I can’t tell you the result of this research and I gave the reason. The reason is none other than a respect for ‘property rights’ (suitably adapted to the actual institutional environment that has evolved; it happens to be a solution – I don’t know whether it is the best one but I know it is one – to the market failure for information).
    9. I could not understand your conclusion (your conclusion looked like an assumption to me, which is unrelated to the subject of discussion). So I asked another question. I asked whether you respect property rights.
    10. You told me you do respect property rights.
    11. By this stage it was getting a little difficult to figure out what was going on. You tell me you respect ‘property rights’ but you don’t seem to act accordingly and you don’t seem to act on the assumption that other people respect ‘property rights’. So I asked another question, namely whether you think I respect property rights.
    12. I don’t understand your last message. I thought I had told you a lot. But you don’t agree. I thought I had demonstrated to you that I respect ‘property rights’ but you don’t seem to agree or disagree – you say you don’t know. You ask me to “actually tell you somethingâ€?. So I ask another question:
    13. What is the “something” that you wish me to tell you?

    I don’t know whether you wish to continue from point 13 – fine with me if you wish – or whether you wish to choose a different point or whether you wish to call it enough for the day. It’s your move.

  5. Ernestine,

    Thankyou. I think we might be getting somewhere.

    You asked me a question. I thought I answered it but qualified it by saying that I was not sure if I fully understood the question. You said you might have an answer to your own question but you can’t tell me the answer.

    That was quite frustrating because I thought we were entering into a dialogue, not merely confirming your knowledge set. Maybe that was my mistake.

    The discussion about property rights threw me because I did not see the relevance. I now understand what you were getting at. You were defending the IP relating to the answer to your original question. Thankyou for clarifying the point.

    I am not seeking for you to tell me the answer to your original question. I accept that the answer might be subject to IP. What I am hopeful of is that you might clarify your original question because obviously I did not understand the basis of it.

    You said that:-

    1. I had provided a functional definition of money.
    2. I had not provided a definition of a concept of money.

    I believe that I am not understanding the way in which you are using the language. The barrier is semantics or jargon, I am not sure which. I sought to highlight this when I stated that a functional definition of a rose is the way most things in life are defined.

    QUOTE: The distinction is quite well understood in analytical economics.

    RESPONSE: Yes but not by me.

    If you could clarify for me the basis of your original question then it would be helpful. In the context of your question what is the difference between a “functional definition” and a “definition of a concept”. If you want to point me to an online resource that explains the difference that would certainly suffice.

    Regards,
    Terje.

  6. Yes, I think we might be getting somewhere and I appreciate your reply.

    Before turning to the specific questions (1 and 2), I’d like to say that I agree there is a communication problem. My best guess is that it is methodological in nature. Instead of elaborating on this point in words, it may be more effective for me to answer your questions as good as I can and then wait to see what happens.

    1. Functional definition of money (tripartite definition): Provides three hypotheses (‘reasons’) for the role of money in an economy (society). Having an explanation for the existence of something does not tell us what the something is unless it is a unique empirically identifiable thing (one physical object). For example, if the only form of money in the entire economic history would have been gold (that is only gold could be used as a store of value, as a medium of exchange and as a unit of account) then, at least in my mind, there would not be a need for a concept of money. But this is not the case. Economic historians (whose names I would have to look up in the reference list of an essay I wrote a long time ago) report that ancient Egyptians used a metal (can’t remember whether it was silver or gold) and a grain (can’t remember which type) as ‘money’. You remind that rum and cigarettes have ‘served as money’ in situations recorded in history. Well, rum or cigarettes never functioned as unit of account in Australia, just like the shares issued by company XYZ to acquire a controlling holding of equity shares in company CBA don’t serve as units of account but, like rum in the early history of Australia, the shares issued by XYZ serve as a means of payment. Now shares of either XYZ or CBA serve as a store of value (uncertain, yes, but nevertheless, shares in limited liability companies pay a return greater or equal to – the acquisition price. Making a phone call and entering a sequence of numbers via the phone pad can serve as a means of payment (medium of exchange). So, what is money? Well, exactly, we don’t know because the functional definition of money does not provide us with necessary or sufficient conditions to say whether ‘something’ is money or not. Furthermore, if we wish to talk about even more complex problems such as monetary policy, then we should know what it is that the government should control. We need a theory that is accompanied with an appropriate theory of measurement. Finally, to have a functional definition of money which consists of three components is ‘not elegant’ – in particular when, upon closer examination in an intertemporal theoretical framework, the distinction between medium of exchange and store of value is blurred and, with increasing ‘corporate power’, the emergence of ‘private currencies’ seems to be yet another possible move forward to the past (at least in Europe, local ‘kinglets’ (my word) could issue their own currency and many never paid their debts).

    2. Concept of money. To say something called ‘money’ serves as ‘store of value’, ‘medium of exchange’ and ‘unit of account’ means (at least to me) that we are already in the world of ideas, of theories and hypotheses and not in the world of physical objects, which can be described by the appropriate natural scientists. Analytical economics uses mathematics to define abstract objects, called concepts. So, one wants to have a mathematical definition of an abstract object, called ‘monetary object’ such that all forms of ‘money’ recorded in history and foreseeable in the future (let generations in the distant future do their own work if required) can be represented as special cases of the general definition. This approach is compatible with having a measurement theory at the same time. It may well be that the functional definition of money will give way to some other hypotheses as to the role of monetary objects in a ‘monetary economy’. Indeed there are several approaches in the general equilibrium literature (Walrasian and non-Walrasian), eg Frank Hahn’s and D. Gale’s transactions costs hypothesis. D. Duffie (1990) produced two models of money in analytical economics. The research I hinted at aims at one model. It seemed to us to be sensible to start of with the aim to have a model which does not exclude the tripartite hypothesis of the role of money or the transactions costs hypothesis as possible explanations of ? Exactly, a lot of new questions arise, such as which form of ‘money’ or ‘monies’ emerge under which conditions, etc. It is never boring.

    If you wish to have a closer look at the methodology in analytical economics, I recommend G. Debreu’s (1959) book, The Theory of Value; not because of the specific economic model contained but because it makes the methodology very clear. All words written in italics are names (labels) of concepts defined in the book.

    Good night, or rather good morning.

  7. Thankyou for that most thoughtful of responses.

    I would say that Rum did act as a unit of account, as in “I owe you three barrels of rum for this deal”. If it did not then I would not class it as money. I also take the view that credit is not money exactly because it can not act as a unit of account. Credit is a near substitute for money however as it is certainly useful as a medium of exchange.

    Almost any physical object (including fiat currency) can act as a unit of account. The story from Iraq about the Swiss Dinar is informative.

    I will not respond in detail right now due to time constraints. However I will be back later (hopefully this evening). I am keen to test my thinking against the ideas you have presented.

    In the interum you might like to read the following which I wrote recently in response to a discussion about whether Australia should denationalise its currency. It reflects some of my thinking on this topic.

    Should Australia denationalise its currency?


    Denationalising Australias “unit of account” is not as easy as repealing the laws of 1910 (and 1959).

    http://en.wikipedia.org/wiki/Australian_dollar#Monetary_history

    Repealing those laws and closing down the RBA (and the mint) would denationalise the production of currency, however it would not denationalise the “unit of account”. The distinction is very important.

    Prior to 1910 the national “unit of account” was the British Pound Sterling. Even though local currency was created by private banks and state governments, and none were legal tender (except in QLD) they still all used the standard national “unit of account” (the British Pound).

    The “unit of account” is the unit with which we do book keeping. And due to the mass of tax law, corporations law, public accounting convention etc there will probably always be a national government determined “unit of account”.

    This “unit of account” will generally be the account used to write contracts such as salary and wage agreements, property leases, sales consignments etc. Even if the bits of paper used to honour these contracts are privately issued they will still be defined by some reference that will be dictated by government policy or practice.

    The “unit of account” is more important than the form or nature of the currency. It is changes in the value of the “unit of account” that determines whether we experience inflation or deflation. If we returned to using the British Pound as the “unit of account” then even though our domestic currency may be Westpac and NAB promisory notes we could still experience inflation or deflation. De-nationalising the currency does not fix these problems.

    This is a difficult and subtle distinction for people to get their head around but if you can’t get your head around it then you should not be let anywhere near monetary policy.

    Stability is important because people want to write long term contracts (salaries, property leases, bills of sale) and do so with confidence. Inflation and deflation would be largely irrelevant except for this desire to do business deals that transend anything more than a few days.

    Given that denationalising the currency does not solve the problem of inflation and deflation, and given that it is near impossible to denationalise the “unit of account” it becomes critical that the government selects and manages a “unit of account” as close to stability as possible.

    A gold standard (where the national “unit of account” is defined in terms of some weight of gold) has merit only so long as gold remains a good proxy for stable value. History and lots of empiricle evidence suggests that it does but the point is open to debate.

    The major problem with the existing monetary regime (floating currency, managed interest rates) is that it is a complete c@ck and bull story. I can tell you why in intimate detail but it takes a while to discard the assumptions of a life time that are embedded in the paradigm most people are indoctrinated with. For the moment lets just say that the assumption that economic growth is intrinsically inflationary is totally wrong, it is in fact intrinsically deflationary. And using interest rates to manipulate growth rates and hence inflation is also deeply flawed. We do achieve a form of monetary stability but only in reference to prices for consumer goods. Our system leaves commodities prices and other spot prices highly volatile. This was not the case when we operated on a gold standard.

    In 1966 the Australian dollar was effectively defined as 1 gram of gold. An idealistic transition to metric. Today it is worth under 50 milligrams of gold. We started off well but since then we have had nearly 40 years of poor monetary policy and massive social and economic upheaval simply because people (around the world) don’t understand this topic.

    In conclusion I would support a gold standard or some other fixed exchange rate mechanism; I think interest rates should float; and the RBA should be shut.

  8. Ernestein,

    I have focused on your passage for a while now. Let me attempt to say a few things in response and see if I am grasping the essence of your question.

    QUOTE: To say something called ‘money’ serves as ‘store of value’, ‘medium of exchange’ and ‘unit of account’ means (at least to me) that we are already in the world of ideas, of theories and hypotheses and not in the world of physical objects, which can be described by the appropriate natural scientists.

    RESPONSE: This surprises me a little. I would say that the entire enterprise called economics steps away from the physical to look at the conceptual. For instance trade is not a physical thing but a notion that is mixed up with other notions like good will, reciprocacy, gift giving, coersion etc. More specifically we have the motive for trade which is that most subjective of qualities about objects and services called VALUE. The notion that all market goods have this quality called VALUE and yet this quality called VALUE is residual withing the psycholocical states of the owner or potential owner rather than the object itself leads me to believe that next to nothing of real interest in economics is about physical objects. Or certainly not merely about physical objects.

    QUOTE: So, one wants to have a mathematical definition of an abstract object, called ‘monetary object’ such that all forms of ‘money’ recorded in history and foreseeable in the future (let generations in the distant future do their own work if required) can be represented as special cases of the general definition. This approach is compatible with having a measurement theory at the same time. It may well be that the functional definition of money will give way to some other hypotheses as to the role of monetary objects in a ‘monetary economy’.

    RESPONSE: My formal training is as an electrical engineer. So I am familiar with the notion of relating the concept of things (eg gravity, electrical force, friction) by generalised mathematical equations or relationships. Certainly this is what we endeavour to do when we describe supply and demand using curves and graphs.

    It is my view that almost any physical object that is freely traded has some monetary properties. Certainly the RUM producer will at times account (at least in her head) for the cost of supplies in terms of the number of of RUM barrels that must go to market to pay the bill. At times CEOs of takeover targets will value their business in terms of Microsoft shares. And we all know that an inner city apartment has some ability to store value.

    In the end it is in the market place (actually in the experience/mind of market participants) that society sorts and sifts the objects on offer to establish which objects (by convention) are the most useful, and most universal in serving the functions that we ascribe to money. The fact that the object that subsequently dominates in this role is frequently a set of paper notes created by a central government in limited supply does not change the nature of this process.

    It is my personal view that gold serves as an excellant “unit of account” but that “paper notes” are a far more practical “medium of exchange”. Long distance trade is certainly burdened by the weight of gold. No single market object will necessarily dominate in all three of the functional areas.

    I assert then that all objects that are traded will at times be monetary. It is just that some are more monetary than others. And even things like coins and notes that we might think are purely monetary are often bought and sold for non-monetary purposes (eg coin collectors and currency speculators).

    The follow on from this view is that all economies are barter economies (Says law). It is just that some have coallesed more than others around certain monetary objects. That in some societies the use of one single object as a “unit of account” is more universal than in some other society or time.

    I assert then that there are no “monetary” or “non-monetary” economies, but rather all economies have systems of accounting for values and settling trades. The Aboriginal ochre trade in pre-european Australia looks like ochre behaving monetary to me.

    As I see it, any general definition of money has to capture the behaviour of a wide variety of goods. And not just the ones that our government might point to and call money (legal tender).

    However you try and dice this problem you can not escape the subjective nature of VALUE. VALUE is not waiting to be measured objectively like friction or electrical charge or a particles mass. VALUE is not even within the object to which it relates. It is in our head.

    Regards,
    Terje.

  9. Terje,

    Thanks for your responses. It would take a very long reply (possibly many) to clarify the usage of terminology. May I ask you to tell me where and in which sense you differ from the theoretical model in Debreu, Theory of Value (1959)?

    I refer to Debreu’s book because it contains a completely specified model of a non-monetary economy with complete commodity markets. It makes the intersection of the subject matter of economics with the physical world clear. The model belongs to the class of models I call ‘non-dictatorial resource allocation’ models. In this model there is no need for a ‘gold standard’. This model contains the philosophical ideas of the economic aspects of 18th and 19th century libertarianism. There is no presumption that the author of the model is a “Libertarian”. There is no presumption that this is how the world should look like. There is no presumption that this is how the world looks like. (But, if the world would like as described, then the business people who want to write long term contracts would have a much easier time – all they would need to do is calculate a lot of inner products of 2 vectors and pick the ‘best’ one – in a manner described.) It is, if you like, a formal model of the economic aspects of a philosophical idea on an institutional environment. The model allows the derivation of testable hypotheses. I’ve mentioned the 1980s outcome of this research program in an earlier post.

    When reading your comments I gained the impression you are working on a model of capitalism. I might be totally wrong. I can’t tell. But, it might be a good thing if there would be a precise theoretical model of capitalism because the only theory of capitalism I know is Das Kapital by Karl Marx. But those who promote capitalism vehemently object to Karl Marx and they call him a socialist. (The work by Roemer is, in my opinion, something different all together.) I stay out of these debates because it seems to me they are largely a more sophisticated form of name calling and talking at cross purposes.

    Regards

    Ernestine

  10. For a useful definition of money, I would want something short and punchy that would let me assess, test, whether this or that was money separately from going and observing if it was actually used as money. That is, some collection of characteristics that fit it for use as money, rather than some collection of characteristics that money observably has.

    Now, in analogy to “an asset is a bundle of service potential”, I could accurately state that “money is a circulating medium of exchange”, but that is not nased on the idea of money but on the behaviour of money after the fact. Likewise Terje’s suggestions are after the fact. So I would want to concentrate on those characteristics that at least form a bound on what money is (and is not), to help firm my ideas up to get a workable definition of the concept of money.

    For starters I would suggest that it must have immaterial holding/carrying costs, impose no material additional transaction costs on exchanges, be readily estimated as to value (perhaps by certifying somehow), be splittable or combinable as needed, and have direct and/or derivative value (direct in the case of bullion, from taxes etc. in the case of fiat money, and various combinations thereof). That’s already a mouthful, but I wouldn’t want to “simplfy” it by using words like “fungible”, since the concept has to be widely accessible, not a “term of art”.

    But it’s more than likely that I’ve missed something even in laying that lot out.

  11. QUOTE: May I ask you to tell me where and in which sense you differ from the theoretical model in Debreu, Theory of Value (1959)?

    RESPONSE: Having not read his book I can’t say. Where can I buy his book?

    QUOTE: But, it might be a good thing if there would be a precise theoretical model of capitalism because the only theory of capitalism I know is Das Kapital by Karl Marx. But those who promote capitalism vehemently object to Karl Marx and they call him a socialist.

    RESPONSE: I promote capitalism and I do regard Marxism as being akin to socialism. However Karl Marx had a lot of useful things to say. The supply-side school of economics claims him as one of their own and I am very sympathetic to this school of thought. I don’t think Marx had a good handle on the nature of risk so I don’t know if we could describe his model as complete. However given the era in which he wrote we should not be too surprised by this.

    QUOTE: In this model there is no need for a ‘gold standard’. This model contains the philosophical ideas of the economic aspects of 18th and 19th century libertarianism.

    RESPONSE: I can envisage a world without any official monetary standard, where the market defines what is money and what is not. Preponents of free banking are inclined in this direction. However how can there be no official standard for the “unit of account” and still be things like progressive taxation etc? Or does the Debreu model leave out the public sector?

  12. Reply to Terje Peterson, 2 November

    1. Debreu, G., Theory of Value, Wiley, New York, 1959. Most Uni libraries have a copy. I don’t know who stocks it at present. Amazon might be a good first guess.

    2. Correct, the model in the above book contains a ‘competitive private ownership economy’ with complete commodity markets. There is no government and there are no banks but borrowing and lending in commodities is possible (complete future (not futures) markets). The only institution in this model are markets.

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