[FoRK] Re: Critiquing Alan Greenspan
jbone at place.org
Mon Mar 28 11:40:44 PST 2005
> Which side of the inflation/deflation fence are you on (for the US
That's a deceptively complicated question.
I do believe that inflation --- as it's been handled by the Fed,
particularly over the last decade --- is sometimes more of a bugaboo
than a real threat. It *can* be a real threat, but we're so scared of
it that we overreact.
Inflation is a topic that IMHO is not really well-handled in modern
macroeconomics. By itself, growth (or contraction) of the money supply
is a normal thing, within certain bounds. It's only when that relative
growth or contraction dramatically outstrips similar movements in other
currencies that problems occur.
As an example, look at 1999-2000. What was really increasing wasn't as
much the actual size of the money supply, but rather the velocity of
money. You had a kind of "virtual inflation." The traditional
viewpoint has been that the velocity term in the monetary exchange
equation is constant --- but IMHO that is not (and particularly was
not, in 1999-2000) the case. By assuming that v is held constant, if
follows that we'll almost always think we're seeing inflation (or
deflation) whenever v actually fluctuates. And in fact monetary
control measures are only partially and indirectly effective in
A big part of the problem here is that modern economics / econometrics
is built on a handful of equations ripped off from physics. In
microeconomics the Navier-Stokes equations from fluid dynamics have
proven generally useful (but with some worrisome edge cases) --- but
the economic equivalent of relativity is a lot less well-grounded due
to the vexing lack of something like the speed of light that can be
treated as a universal constant.
> My arm chair economist thoughts...
> World capitalism (and respect for property rights), increasting
> democratization and the internet will prove
> deflationary to the US economy.
I don't know if it will prove deflationary by itself; it may to the
extent that it impacts GDP, but IMHO that's a much more complicated
IMHO, measuring inflation / deflation of a single currency is really a
lost cause; currency exchange rates and commodity prices and flows
need to be globally normalized somehow to get a true macroeconomic idea
of the health of any individual economy. If I have one critique of
Greenspan and others like him it's that they still treat economies as
these things that are linear, deterministic, and independent --- when
in fact they are not. Cycles and feedback loops, martingales and
stochastic fluctuations, interdependencies, and so forth make measuring
such things a frightful mess.
But the short version: yes indeed, more competitive foreign economies
and relatively stronger foreign currencies almost certainly mean a
lower standard of living for all Americans.
> US wages (and consumption) must fall during the global rebalancing
> we're just
> now entering. US workers whose professions can be carried out
> 'remotely' (ie, most of high wage america) are
> the autoworkers of the 21st century. As folks begin to loose their
> homes due to layoffs and 'restructuring',
> we will see a strong shift toward socialism (and trade restrictions)
> in the US.
Yeah, unfortunately. :-/
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