[FoRK] Re: Critiquing Alan Greenspan

Jeff Bone jbone at place.org
Mon Mar 28 11:40:44 PST 2005


Bill writes:

> Jeff,
> Which side of the inflation/deflation fence are you on (for the US 
> economy)?

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 
controlling v.

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 
equation.

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.  :-/

jb



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