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Social Clubs / Deranged Monkey Criticism

URL:  https://boards.fool.com/a-bit-more-specific-question-would-be-do-you-33006661.aspx

Subject:  Re: MyCo Date:  3/8/2018  10:36 AM
Author:  howardroark Number:  26061 of 26241

A bit more specific question would be: do you think a constant money multiplier assumption is
sufficient for a boiled down model? My (possibly incorrect) interpretation of the MyCo model is that
the answer to the latter is yes (but then, am I also interpreting correctly that MyCo wouldn't be
particularly appropriate in dealing with incongruities like QE and the like? Basically, simplifying
model assumption vs. all the ins and outs of reality? Or...?).


Yeah it's easy to see how someone would think this was in there, but it's definitely not. In fact I agree with the post-keynesians (or neo-chartalists or MMTers or whatever) that the money multiplier is not only time-varying but a generally useless concept and undergrads around the world would probably be better off if they never heard the phrase. But most mainstream economists would secretly agree with this, too; there's just a lot of inertia in textbooks and teaching models when people don't have any better ideas.

It may seem like the a money multiplier is implicit in MyCo because of the appearance of base money, but it isn't except in the most literal sense. Base money is in the story not because it bears some critical, fixed relationship to broad money or anything else, but because it historically has been the proximate way the Fed has exercised its unique dominion over the definition of the medium of account. And I think the first-best abstraction of monetary policy is an expectations equilibrium between a government with unique power over the ultimately arbitrary (in a fiat system) nominal anchor and the market. Anyone who gets overly ensconced in any particular hydraulics within that equilibrium, whether it's some false sense of one-way causation through broad money like in the multiplier or meandering aimlessly through the mechanics of the banking system like the endogenous money camp, ends up losing the plot. Whenever you have an arbitrary nominal yardstick, then sure, M3 is endogenous and so is every other nominal variable. Welcome to the soup. The thing that's exogenous is the Fed/Government's ultimate, credible power to enforce its nominal will and its nominal target, and you cannot find the keys to that exogenous factor hidden in the gears.

But there's also such a thing as too much abstraction, especially when it comes to these cute little intuition pumps. I think some kind of hyper-abstract model that focuses only on the game theory equilibria and ignores all details like base money altogether also isn't very useful (or at least runs a lot of risk in missing how the expectations equilibrium is actually set in the real world), and leads you to really weird results like the recently popular "neo-fisherite" camp who have convinced themselves that the Fed raising rates is inflationary by surfing the equilibrium plane for too long.

Just because the fulcrum poses as a noisy soup doesn't mean the lever isn't powerful. Even with mass substitutes like bank deposits and nothing even resembling a fixed multiplier, the Fed still has a monopoly on base money and it usually provides a higher convenience yield than substitutes (i.e. people willingly hold zero interest currency even when checking accounts pay interest). As long as there is some either current or expected future convenience yield the Fed can affect the price level with its conventional tools by changing expectations for the quantity of this monopoly good that it will contingently provide relative to demand. And it doesn't particularly matter how that demand relates to nominal flows (velocities) or stocks (multipliers) because the Fed's reaction function is contingent and based on its larger nominal target. And if the monopoly disappears entirely (both current and expected future base money are equivalent to substitutes), the Fed has alternative ways of exerting its nominal influence. Hidden in the recesses of every fed action, lurking even beneath even what seem to be the legal and operational limits on fed power, are all the strange and unpredictable things the Fed might actually find a way to do when it is desperate to make its nominal voice heard. We saw some of those things not too long ago. Less radically, many central banks (and now the Fed, too), conduct policy with a floor or corridor IOR system that blurs the line on whether it is using its conventional monopoly or covert fiscal levers to conduct policy.

In fact, one of the points of MyCo is show how these two levers -- monopoly on base money ("Flair Value") versus fiscal policy -- can co-exist and interact in form that allows you to think about both the putative institutional limits on the CB (the Flair CEO) but also how those limits might not be fully binding when the entire Company (Government) generally share a larger nominal target. People like to dump on the "signaling" aspect of fed policy, probably because it feels squishy and ethereal and we are used to words being cheap. But when you are dealing with a entity that has many ways of redefining what an inch is you better pay attention to the signals it sends along the way. Similarly if FB reported a great quarter but Mark got on the call mentioned he might start giving 80% of profits to charity sometime soon you'd better step away from the P&L and listen to the signals.

In reality central banks and governments operate in a nether region between platonically lingual omnipotence and Rube Goldberg like models of purely mechanical operations. For this reason, the mechanics can matter, not only because there are some institutional limits to CB power and overall government power, but because some aspects of those mechanics often provide the context for how to interpret what exactly is being signaled. But they only matter so much, and getting lost in the morass of constituent variables several steps removed like how banks "create" deposits is almost certainly a jargon filled dead end. Of course, there is nothing wrong with understanding how the banking system works, but more often than not it leads to making prescriptive or normative assumptions about money and prices that are actually not at all implicit in the normal equilibrium factors that determine the endogenous banking quantities like bank deposits and loans. To me the nominal anchor in a fiat system is like a special case of a Schelling point dance with a uniquely powerful but still limited communicator. Anything that takes you too far from understanding the context of that coordination game and its limits is probably a red herring.
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