Wednesday, August 1, 2012

Lachmann and Post Keynesianism on Prices

Ludwig Lachmann wrote the following on the nature of prices that is of some interest:
“In different markets prices are formed in different ways. Not all pricefixing agents have the same interests. Here historical change plays its part. The decline of the wholesale merchant, whose dominating role Marshall took for granted, for instance in textile markets, and who naturally aimed at setting such prices as would permit him to maximize his turnover (a short-run consideration), reduced the range of markets with flexible prices. The rise of the industrial cost accountant as a pricefixer, with his interest in ‘orderly marketing’ (a long-run consideration) and his aversion to frequent price changes, has made most prices of industrial goods in our world Hicksian fixprices. In all markets dominated by speculation of course prices must be flexible. On the other hand, all bureaucracies, including those concerned with production planning in large industrial enterprises, naturally abhor flexible prices.” (Lachmann 1994: 166).
In Classical economics (from Smith to Mill), the equilibrium value of prices in the long run was essentially the cost of production. With the marginalist revolution, value was held to be subjective, and prices a consequence of the marginal utilities of market participants (Lachmann 1994: 165).

Yet, with the existence of “fixprices” in many markets, it is obvious that cost of production plus the profit markup must explain how prices are set in the real world.

That nobody can sell a product for which there is no subjective demand is obviously true, but after that the subjective theory of value has its limitations.

While economic “value” defined simply as the pleasure, utility or satisfaction we derive from commodities is subjective, it is a mistake to think that prices are therefore all subjective, or just determined by subjective utilities. One has to distinguish “price theory” from “value theory,” but curiously modern neoclassical economics has largely dispensed with “value theory.” As I. A. Kerr has pointed out,
“[m]ore recently, the attitude of neoclassical economists to the value/price distinction has been one of indifference, rather than hostility … value theory is virtually synonymous with price theory and many economists would be hard pressed to explain the difference between the two. In fact, the two terms are widely conflated by neoclassical economists” (Kerr 1999: 1218).
Yet that conflation is a mistake.

The existence of price setting/price administration is real.

You might wonder: where does this leave the idea held by neoclassicals and some Austrians of an economy with a strong tendency to a general equilibrium, in which prices gravitate to their equilibrium, market clearing levels? It leaves the idea looking highly suspect, to say the least.

From the perspective of Walrasian general equilibrium theory, all real world prices are “disequilibrium prices” (Lachmann 1994: 165).

While one can point to certain flexprice markets where eliminating excess stock leads to some flexibility in price, and we regularly see “clearance sales” by retailers to liquidate unsold stock, the notion of a general “market clearing, equilibrium price” in many other markets with fixprices/administered prices must be judged a myth. The empirical reality is discussed by F. S. Lee:
“Where reported … business enterprises stated that variations in their prices within practical limits, given the prices of their competitors, produced virtually no change in their sales and that variations in the market price, especially downward, produced little if any changes in market sales in the short term. Moreover, when the price change is significant enough to result in a non-insignificant change in sales, the impact on profits has been negative enough to persuade enterprises not to try the experiment again … The absence of any significant market price-sales relationship in the short term has also been noted in various industry studies … Consequently, business enterprises do not utilize an inverse price-sales relationship when making pricing decisions and nor do they set their prices to achieve a specific volume of sales. Instead, the prices they set are maintained for a variety of sales volumes over time.” (Lee 1994: 319–320).
Lee concludes that this “necessarily means that administered prices are not market-clearing prices and nor do they vary with each change in sales (or shift in the virtually non-existent market or enterprises ‘demand curve’)” (Lee 1994: 320, n. 18).

The inference from this and empirical reality is, of course, that with really large falls in demand, businesses fire workers and cut production. Prices are not adjusted to clear markets with excess volume.


Kerr, I. A. 1999. “Value foundation of Price,” in P. A. O’Hara (ed.), Encyclopedia of Political Economy, Routledge, London and New York. 1217–1219.

Lachmann, L. M. 1982. “The Salvage of Ideas: Problems of the Revival of Austrian Economic Thought,” Journal of Institutional and Theoretical Economics 138.4: 629–645.

Lachmann, L. M. 1986. The Market as an Economic Process. Basil Blackwell. Oxford.

Lachmann, L. M. 1994. Expectations and the Meaning of Institutions: Essays in Economics (ed. Don Lavoie). Routledge, London.

Lee, F. S. 1994. “From Post Keynesian to Historical Price Theory, Part 1: Facts, Theory and Empirically Grounded Pricing Model,” Review of Political Economy 6.3: 303–336.


  1. I do not think there is a contradiction between the tendency to general equilibrium and prices being equal to cost of production plus the profit markup. Indeed in a state of general equilibrium this would be true of all prices.

    One can derive this result with little more than an assumption that investors will always look to invest in the most profitable lines of business (leading to a tendency to a uniform rate of profit, adjusted for risk) and that businesses will expand supply to match demand at the "cost+markup" price.

    Of course when analyzed properly (and I have seen no evidence that such analysis is even possible in the PK model) it turns out that rather than prices being equal to costs, it is costs that are imputed backwards from the strength of consumer demand for the end product. (For example: If the demand for good A is strong then consumers will pay a relatively high price for it, this will mean that its producers will be able to pay a high price for its factors to bid it away from other uses. Assuming a uniform rate of profit the price of good will indeed be costs + markup but not for the reason that PKs seem to think).

    It is true that in markets where supply and demand do not tend to change much over the short-term then there will not be spot markets prices for these goods and one will observe the kind of pricing phenomena that are described in the post - as validated by the empirical reality of sticky prices. However one needs a model capable of looking beyond the surface to understand what is really happening.

    I don't disagree too much with the conclusion that "The inference from this and empirical reality is, of course, that with really large falls in demand, businesses fire workers and cut production. Prices are not adjusted to clear markets with excess volume."

    However that large falls in demand have this kind of effect has has got more to do with the broken mechanism in central bank monetary systems for adjusting the supply of money to changes in demand that anything wrong with the market process itself.

  2. "However that large falls in demand have this kind of effect has has got more to do with the broken mechanism in central bank monetary systems for adjusting the supply of money to changes in demand that anything wrong with the market process itself."

    The only normal way the central banks can pump up broad money supply aggregates is indirectly by private bank debt.

    The central bank can pump up the amount of excess reserves into the private banking system via QE, but when the private sector is overloaded with private debt and business expectations are shattered, that wouldn't increase lending/broad money stock.

  3. I think a CB could increase the money supply to any level it wanted to via QE-type activities even in a situation where the private sector is overloaded with private debt - why wouldn't it be able to?

    Under free-banking it would likewise always be possible (and profitable) for a private currency issuer to stabilize the value of its money by increasing the supply and this should prevent sudden decreases in AD of the sort that cause recessions, even if debt being payed down is the cause of the fall in AD.

    Of course the high-debt levels themselves can be traced back to CB policy that also would be unlikely to occur under free banking.

  4. "I think a CB could increase the money supply to any level it wanted to via QE-type activities even in a situation where the private sector is overloaded with private debt - why wouldn't it be able to?"

    I have already explained why: the private banks expand broad money stock via private debt/debt money.

    (1) if private households are already drowning in debt (as they are now), why would they take on even more private debt? By definition people who have lost jobs are a big credit risk (no income). Whose going lend them money even they want to take on more debt?

    (2) if business expectations are poor and demand for their products is weak, why would they take out more debt, to create output that will not be bought?

    (3) "Of course the high-debt levels themselves can be traced back to CB policy that also would be unlikely to occur under free banking."

    I disagree.
    My rebuttal: Australia from the 1880s-1890s:

  5. The CB doesn't have to expand the money supply via debt (and indeed it can't at the ZLB). Foe example with QE it expands the money supply by buying assets with newly created money - no debt necessarily involved.

    On the second point: One can use the Australian depression of that period to support either side of the free-banking argument - so I question its value in that discussion. Free Banking episodes in Scotland and Canada seem much more instructive and generally support the stabilizing influence of Free banks on the money supply.

  6. "The CB doesn't have to expand the money supply via debt (and indeed it can't at the ZLB). For example with QE it expands the money supply by buying assets with newly created money - no debt necessarily involved."

    QE involves creation of excess reserves: they just sit at the Fed, unless they are drawn down by the banks to pay new debtors who have taken out loans from banks.

  7. The question under discussion is whether a "CB could increase the money supply to any level it wanted to". Just review the recent monetary history of Zimbabwe for empirical evidence that it can. Not only can it increase the money supply but it can also get NGDP to any level it wants to - if necessary by bypassing the banking system and engaging in "helicopter drop" operations.

  8. Rob Rawlings,

    In Zimbabwe, the government engaged in massive, massive monetised budget deficits.

    That is not what central banks in the West do.

    In addition, Friedman's helicopter metaphor was always a load of nonsense.

    That would only be a useful analogy if central banks printed money and gave it to people to spend. But that is not what happens in normal central bank operations.

  9. Randall Wray categorizes any govt/CB policy that affects the money supply but doesn't operate via interest rates targeting as Fiscal.

    When MMist suggest that the CB buys financial assets direct from the public or buys foreign currency with newly created money - are you saying that these policies will not have the intended effect of increasing NGDP?

  10. @RR

    If the CB bought foreign currency with newly created cash then, cet. par., NGDP would rise. However, this is simply devaluation. And if one country started engaging in it then other countries would likely follow as they began to see their trade deficits open up. Thus , offsetting the action and causing possible diplomatic incidents.

    As for replacing private sector financial assets with newly issued cash, this has somewhat complex effects. Primarily it is a net drain on aggregate demand because the cash earns less interest income than the assets. So, holders of the assets will see their income fall and they will decrease spending. This puts downward pressue on inflation and NGDP.

    The second channel is less discussed. People and institutions holding the newly issued cash may seek out yield. With equities looking shaky they may turn to commodities markets. Many investors do this by buying into commodity indexed Exchange Traded Funds (ETFs). This, I strongly believe, puts upward pressure on commodities prices. This leads to an increase in inflation. BUT it leads to a decrease in aggregate demand because more of consumer income is channeled toward paying higher commodities prices. (E.g. If I must spend one and a half the amount I would usually spend on petrol then I will have less to spend on new clothing etc.).

  11. @LK

    I think it's about time we did away with the idea of 'value' altogether. Here I'll quote Joan Robinson before making further comment:

    "One of the great metaphysical ideas in economics is expressed by the word
    "value" ... It does not mean market prices, which vary from time to time
    under the influence of casual accidents; nor is it just an historical
    average of prices. Indeed, it is not simply a price; it is something that
    will explain how prices come to be what they are. What is it? Where shall we
    find it? Like all metaphysical concepts, when you try to pin it down it
    turns out to be just a word.( Joan Robinson, An Essay on Marxian Economics,
    2nd Ed., New York, St. Martin's Press, 1977, 20)"

    I agree entirely. Value is a metaphysical concept which is completely tautological. Thus, Marxists use value as a tautological expression of their belief that workers are getting screwed at a metaphysical level by the capitalist system -- that is, they are not simply being paid too little wages (exploitation) but they are being "alienated" from their essence. Thus, only under Communism will "values" be channelled in any acceptable manner.

    Austrians, of course, use the concept to buttress their own ideological agenda -- by claiming that entrepeneurs move prices in line with value-creation. While neoclassicals take a less metaphysical and more mechanistic view of the process and basically ignore value in favour of price. However, every undergrad is still brainwashed with concepts of marginal utility and this gives a metaphysical justification for the market system that the neoclassicals claim exist -- so, while at the upper-levels of the profession it may be prices that are focused on, every neoclassical economist still implicitly believes in a spectral entity called "utility".

    (If you're interested I wrote a satirical piece on utility theoy here: -- basically, the problem is that utility theorists need to imagine a consumer frozen in time with perfect knowledge of all prices and a static regime of fixed preferences. If you get rid of either of these tautological assumptions, utility theory becomes pretty much impossible.)

    1. And yet, by the time of her open letter to Meek, Robinson seems to have changed her tune on the matter:

      "For Ricardo the Theory of Value was a means of studying the distribution of total output between wages, rent and profit, each considered as a whole. This is a big question. Marshall turned the meaning of Value into a little question: Why does an egg cost more than a cup of tea? It may be a small question but it is a very difficult and complicated one...

      "Keynes turned the question back again. He started thinking in Ricardo’s terms: output as a whole and why worry about a cup of tea? When you are thinking about output as a whole, relative prices come out in the wash – including the relative price of money and labour. The price level comes into the argument, but it comes in as a complication, not as the main point. If you have had some practice on Ricardo’s bicycle you do not need to stop and ask yourself what to do in a case like that, you just do it. You assume away the complication till you have got the main problem worked out. So Keynes began by getting money prices out of the way. Marshall’s cup of tea dissolved into thin air. But if you cannot use money, what unit of value do you take? A man hour of labour time. It is the most handy and sensible measure of value, so naturally you take it. You do not have to prove anything, you just do it."

      Looking forward to reading your send-up of utility theory.

  12. "If the CB bought foreign currency with newly created cash then, cet. par., NGDP would rise."

    Only if the foreign entity then spent it. Otherwise it's just an asset swap again.

    Foreign currency is just a private sector asset receiving an interest rate while stationary.

    "People and institutions holding the newly issued cash may seek out yield."

    They were selling anyway. They got perhaps a bit more money than they were expecting for their assets perhaps a bit earlier than they were expecting.

    So their intentions are unlikely to have changes.

    It's not them you need to worry about. What about those people who were outbid on the market who were looking to *buy* the assets that the central bank now has hold of?

    It's what they did instead that matters. And since they were looking to save it is unlikely they will go for something more risky instead.

    1. Neil,

      If a CB intervenes in the foreign exchange markets they can devalue their currency at will. And it doesn't matter if the currency is spent or not. This is what the Swiss have been doing to maintain their export markets:

      And yes, the euros they buy just sit there for the most part:

      As for people getting lower yield on cash seeking out higher yield, most people in the markets agree that this is happening. At the very least it drives equities rallies in the short-term, props up the stock market in the medium-term and, I suspect, drives commodities prices up.

      The lost interest income almost certainly negatively affects consumption decisions too. Just look at pension funds in Britain, for example:

      Joan Robinson put it nicely in The Accumulation of Capital -- t:he following is interspersed with commentary from something I wrote a while ago:

      Of the investor Robinson writes:

      --If he has been successful in the guessing game (on the advice of his broker or backing of his own fancy) and made [investments] which have risen in price so that his capital has appreciated, he has to debate with his conscience whether he has a right to realise the appreciation and spend it, and his decision turns very much upon whether he may expect similar gains in the future, so that they are properly to be regarded as a continuing income.--

      The point that Robinson is making is that investors have a peculiar morality – she calls it a ‘peasant morality’ – which leads them to separate in their own mind their capital and their income. Investors tend to prefer to spend based on income – that is: dividends, interest etc. – and preserve their capital intact. It’s a bit like the drug dealer’s street wisdom: “Never get high on your own supply”. Spending out of capital – even if this capital has accumulated in the short-to-medium run – is seen by the investor as being somehow immoral. And for this reason investors tend not to dip into their outstanding capital lest their net worth fall as a result.

      Robinson then goes on to make a point that would certainly resonate with bond traders today who are, due in large part to the Fed and the Bank of England’s easy monetary policies, seeing value increase and yields (which are essentially interest income) fall.

      --If the value of [the investor’s] holdings has risen, not because of his personal skill as [an investor], but because of a general fall in the level of interest rates which is expected to be permanent, he is faced with a different problem. For the time being his receipts are unchanged and the value of his [investments] has risen, but, unless all his holdings are in very long-dated bonds, or in shares in whose future capacity to pay dividends the market has great confidence, he will later have to replace money at a lower return, so that his prospect of future income has fallen.--

      Robinson’s point is that in the investor’s mind his income has fallen. And such a fall in income leads him to retract consumption spending. This leads, as Mosler points out, to a dampening of effective demand in the economy.

      It also, I should think, affects investor psychology in that a lack of future income leads them to see the future as being all the more bleak. Their prospect of future income having fallen, this could well lead to a far greater propensity to hoard. It could also make investors more edgy as they try to preserve their capital in what has come to seem like a very uncertain environment. This could lead them to seek out what they think to be safe investments – such as gold and other commodities – thereby inflating bubbles that further exacerbate consumer spending power."

    2. When the CB buys assets with newly created money here is a simplified version of what happens:

      The people who sell assets receive the new money and they can in turn hold it, spend it on other assets , or spend it on end products. The money spent on end products will directly increase NGDP.

      (and then people who sell their own assets to people from the initial group who decide to buy new assets will have the same set of choices as the first group, and so on backwards)

      So increasing the money supply by purchasing assets will

      1) directly lead to increased NGDP by encouraging spending on end goods.
      2) make business borrowing cheaper by reducing yields on bonds
      3) encourage both investment and consumption spending as expectations about future NGDP and inflation tale hold.

      And back to my original point: It will do so irrespective of the level of debt in the economy.

    3. @RR

      You're just making assertions. And those assertions are simply wrong, as can be seen from looking at the underlying relationships in any cursory detail. For example, you say:

      "The people who sell assets receive the new money and they can in turn hold it, spend it on other assets , or spend it on end products. The money spent on end products will directly increase NGDP."

      You assume that former holders of assets will increase consumption despite the fct that their future income streams have dried up because assets with decent yields have been replaced with cash which yields close to zero. Anyone with even a passing knowledge of the investment community knows that when financiers see their future income decrease they decrease consumption accordingly.

      Personally, I know enough bond traders and investors to know FOR A FACT that this is true. That the economists assert otherwise is testiment to the fact that they continue to live on a planet different to our own.

      And frankly, the failure of the QE programs in three countries has proved this -- together with the rest of your points -- completely wrong. No sustained investment is encouraged by ZIRP. Everyone trading in the markets knows that new QE programs cause temporary rallies in the equities markets that pan out within a few weeks or months and have little to no effect on real investment. They also cause temporary downward pressue on the dmestic currency -- which also evaporates fairly quickly.

      I'm coming think more and more that self-styled economic commentators should be forced to put their money where mouth is and actually enter the markets. Those that can prove that they can manage a portfolio properly can be taken seriously, the rest can be ignored.

    4. TheIllusionist,

      We can also add Japan's experiment with QE from 2001–2006 to the failures of modern monetary policy.

      While Japanese QE did cause depreciation of the yen to some degree (a good thing for an export led growth economy like Japan), its failure to do much of real significance for domestic investment and consumption was stark.

      This comes back to Richard Koo's balance sheet recession/Minsky and Keen's dynamics of debt deflation.

    5. @The Illusionist.

      I am not supporting these kind of asset buying programs - I'm just explaining the conventional view of how they work. You seem to be challenging the idea that people who sell assets may increase consumption. I think you will find that empirically you are simply wrong - QE does increase consumption spending during the period the period the programs run. The economic theory for this is pretty simple. People have a choice between the part of their holding they consume v the part they save. The price and yield of assets is one of the things that they will take into account in deciding whether to consume or save. A rise in the price/yield of assets will cause marginal savers to switch to consumption. If you disagree with this then you supporting a view that no matter how high the CB drives the price of assets and no matter what commitment they make to future assets prices then no-one will ever decide to sell and consume part of their holding. That does not seem a tenable view.

      I do agree however agree that QE type activity will have an unknown and possibly dangerous effect on asset prices and that is why I do not full support this policy.

      I'm not disagreeing that debt has played a large part in the current recession - it has. I'm just asserting that while debt is being paid down there is no theoretical reason why AD cannot be maintained by the appropriate monetary policy to stabalize the value of money by varying its supply.

    6. "If you disagree with this then you supporting a view that no matter how high the CB drives the price of assets and no matter what commitment they make to future assets prices then no-one will ever decide to sell and consume part of their holding."

      Don't put words in my mouth. It all depends on the level of aggregate demand in the economy. If there is sufficient demand falls in the interest rate may lead to increased consumption and investment. If there is not the interest rate policies will not work. They have clearly not worked in the US, Japan and the UK. I think it is fairly well recognised in the markets that the QE programs have been fairly dismal failures.

      As for the empirical evidence: show me it. And prove to me directly that it was QE driving the increased consumption.

    7. Here we go. I did a bit of Googling and found an empirical research paper on Japan's QE program:

      "Fourth, as for the QEP’s effects in raising aggregate demand and prices, the effects solely from increasing the monetary base under the zero bound constraint on interest rates were not detected or were small, if any, compared with the periods without
      the zero bound constraint on interest rates. When gauging the effects of the QEP broadly, many studies show that the QEP had a greater monetary easing effect than that stemming from merely lowering the uncollateralized overnight call rate to zero percent, while the effects of raising aggregate demand and prices nevertheless turned out to be limited. Analytical results and interpretations are presented to indicate that, in addition to the zero bound constraint of the interest rate, major roles were played by the substantial decline in responsiveness to monetary easing on the part of corporations and financial institutions resulting from their deteriorated core capital due to a plunge in asset prices."

      Personally, I think that paper is being too general. But if you want to (actually) cite empirics, there you go.

    8. I'm not sure if you nit-picking about the specifics of individual QE programs or challenging my overall assertions which is that a CB could increase the money supply and NGDP to any level it wanted to - even if a period of debt/deflation.

      In as much as QE programs try to boost the economy by encouraging bank lending (as seems to be the case in japan) - then I agree with the endogenous money theorists that it won't work.

      But different more direct policies ("helicopter drops" , or even a different form of QE) could have been used to boost NGDP and these would have worked (by "worked" I mean achieved whatever NGDP target was set).

    9. I'm not nit-picking. You said, and I quote:

      "I think you will find that empirically you are simply wrong - QE does increase consumption spending during the period the period the programs run."

      And I have provided two quotes citing empirical studies which point strongly in the direction that the net impact of QE on consumption has either been minimal or perhaps even negative.

      As for helicopter drops, this is a complete cop-out by the MM crowd and their intellectual supporters. A helicopter drop would be fiscal policy and would not be in the realm of the central bank. It would have to be undertaken by the government and would be included as part of their spending. The central bank has NO authority to engage in helicopter drops. It was just some half-thought through nonsense that Friedman cooked up in one of his half-baked papers. It is meaningless. It simply means that fiscal policy can boost GDP/NGDP. That has been obvious since well before Keynes.

      Could we change the institutional structures to allow the CBs to engage in fiscal operations? Politics aside, this is conceivable. Is it the current setup? Categorically: no. Hence, QE cannot be undertaken via helicopter drops by CBs.

      All this MM stuff is just rubbish. Like Friedman's pile of hokum it rests on the fact that many economists are not comfortable with actual CB operations and the laws surrounding them. It also bends the meanings of terms -- so, for example, 'devaluation' becomes 'NGDP targeting' or, as above, 'fiscal policy' becomes 'NGDP targeting'. The only thing MM has shown is how vague and airy economic thinking is after the monetarism devolution.

    10. Here is a chart of Japanese NGDP. See how the trend line changes during the period of QEP

      This is the empirical evidence I was talking about that is consistent with my claim that QE has an effect on NGDP.

      I'm a bit confused about the rest of your post - what difference does it make who implements any given policy on its effectiveness? Also , just because a policy is not likely to be implemented for political reasons is irrelevant to what effects the policy would have if implemented.

      I agree with you about MM. It is is very vague and wooly in its analysis and policy proposals. It s bit like Post-Keysianism in this respect.

    11. Oh dear. Japanese QE began in 2001, right after NGDP started flattening (due to a recession induced by fiscal contraction in 1997, if you actually care about accurate economic history at all). A simple Google search could have told you that:

      This is pretty basic stuff. Seriously.

      And if you're confused about the rest of my post I suggest you learn to distinguish by monetary policy -- which the central bank undertake -- and fiscal policy -- which the government undertake. You might try an undergraduate textbook.

      The difference is enormous: NGDP targeting cannot use helicopter drops because NGDP targeting is a central bank policy, not a government policy. CBs control monetary policy. Not fiscal policy. Helicopter drops ARE FISCAL POLICY.

      As for PK theory being vague and woolly in its analysis, while I disagree with that, at least we get our facts straight. Sheesh.

      This is getting childish. I'm done. Fudge facts elsewhere. Thanks.

      (P.S. I know the next rhetorical maneuver. You're going to pretend that you meant the era of low interest rates when you referred to QE. Try that elsewhere, I'm not buying it. But as regards interest rates, as I said before the reason NGDP falls off after 1997 is because of this:

    12. As far as I can tell (there was no "official" dates available ) Japanese QE started earlier than you state and had the limited aim of stopping deflation which it appears to have succeeded in doing before being ended in 2006.

      I'm not really sure why you are so hung about this - since I already agreed with you that CB programs trying to work mainly via interest rates will have limited effectiveness at ZLB - and that is exactly what Japanese QE seems to show.

    13. QE in Japan extended from 2001–2006.

      Yet price deflation (which began in 1999) continued until 2005.

      If monetary policy were really all that is needed to prevent price deflation, then why did Japan’s zero interest rate policy (ZIRP) in the 1990s prevent the fall into deflation in 1999?

      Even when QE began in 2001 price deflation persisted in Japan for years until 2005.

  13. "If a CB intervenes in the foreign exchange markets they can devalue their currency at will."

    They can, unless the opposite CB intervenes to stop that. The Swiss get away with it because the ECB is a pussy.

    And that doesn't necessarily mean that your NGDP will rise.

    It's more complex than that.

  14. "The people who sell assets receive the new money and they can in turn hold it, spend it on other assets , or spend it on end products. The money spent on end products will directly increase NGDP. "

    But you've missed the other half of the bargain.

    People who sell assets would have got their money *anyway* from other people in the economy who were saving.

    So there is *no change* to the behaviour of those that were selling. There can't be. The CB intervening hasn't got them to do anything different to what they would have anyway.

    So I believe you are looking at the wrong set of people and therefore your causality is just incorrect.

    The people who are left with cash on their hands that wouldn't have before the CB's intervention are those the CB outbid. And their expectation was to *save* in some asset or other.

    So they are much less likely to spend on end products. They will be looking for a saving product no more risky than the one the CB extracted out of the economy by its intervention.

    It's the frustrated buyers that you should be focussing on.

  15. The CB intervention will cause some people to sell who would not have done at a lower price and some who would have bought at a lower price not to at the higher post-intervention price.

    In both cases people now hold more cash than they otherwise would and have to decide what to do with it.

    As some point as asset prices get driven higher there must be increased spending on end goods due to the wealth effect if nothing else.

    1. You're still just making assertions based on a theory you hold of how the economy supposedly functions. Your theory is wrong.

      While I doubt I will actually convince you of that -- and have little interest in trying to argue with a brick wall -- I will continue citing the empirics you alluded to earlier without following up.

      Credit Suisse have recently done a sober-minded analysis of the US QE program (which, by the way, reflects the fact that the markets have become skeptical of the programs).

      "The side-effect of the Fed’s near-zero interest medicine – the collapse in personal interest income over the last few years. The decline in interest income actually dwarfs estimates of debt service savings. Exhibit 2 compares the evolution of household debt service costs and personal interest income. Both aggregates peaked around $1.4 trillion at roughly the same time – the middle of 2008. According to our analysis of Federal Reserve figures, total debt service – which includes mortgage and consumer servicing costs – is down $206bn from the peak. The contraction in interest income amounts to roughly $407bn from its peak, more than double the windfall from lower debt service."

      So, it looks like in the aggregate the QE/ZIRP programs are -- UNDER PRESENT CONDITIONS (I stress this so you will not make assertions about what I supposedly believe based on your mechanistic ideas about the economy) -- actually a net drain on financial assets. This is not surprising given that the savings rate in the US has increased so dramatically.

      Now, we know well what the markets are beginning to think of all this. But the economists continue to deny the reality of the situation and make assertions based on faulty models. Who am I going to listen to? I don't think I need to tell you...

    2. Apparently economists, since you're relying on a paper written by.. economists. *facepalm*

  16. The reason that ZIRP failed to end deflation is that it was based on conventional monetary policy targeting a 0% tnterest rate. As Post-Keynsians have correctly identified this policy will fail during a debt/deflation episode.

    The reason QE ended deflation by 2005 is that it used unconventional monetary policy (policies that MMTers would with some logic define as "fiscal"). The reason these policies ended deflation is because they were able to increase the money supply by means other than increasing banks reserves (via asset purchases not aimed at providing reserves needed by banks to fund lending that has already taken place) and hence increase AD.

    This link contains some useful charts: