But if you want to believe in Keynesianism and Santa Claus and the Boogeyman, you can study "multiplier effects."
I find the chart interesting on two accounts. One, the general decline in the M1 money multiplier (suggesting electronic payments are taking over physical cash transactions) and two the cliff during this last recession. It is here I believe is one of the reasons why the stimulus package has failed and is a vital flaw in Keynesian economics. When you mortgage the future of the country to the point of insolvency, people tend to close up their wallets. Therefore the more you "prime the pump" at the expense of mortgaging the future, the more people tighten their wallets in fear of worse economic times ahead, negating any effects of the stimulus.
Ultimately though what this teaches us is that Keynesian intervention (or any government intervention) into an economy is simply social engineering. As the US has aged, it's gone from a people telling the government what they want it to do (for better or worse) to a government telling the people what they are going to do (for worse). It won't be until the people who head up the government realize they do not control the $14 trillion beast that is the US economy.
9 comments:
So what is capitalistic about monetarism?
http://en.wikipedia.org/wiki/Monetarism
Can't people choose what they want to use for money?
(which brings up a question the Captain has had for a while "Why doesn't the Fed just aim for 0% inflation?").
Because they are desperately afraid of deflation, negative inflation, so they think they need a couple of percent of inflation to make sure they avoid the horror of deflation.
Of course the Fed's double mandate to ensure economic growth and preserver the value of the currency are in conflict too, and the latter has suffered horribly, because well politicians who appoint the fed leaders want growth much more than a stable currency.
I am not clear why electronic payments would have any effect on the multiplier. I do understand that uncertainty about the future is causing people to avoid spending.
"Why doesn't the Fed just aim for 0% inflation?"
Because it's run by guys who are appointed by politicians, and politicians don't want 0% inflation.
(It could be argued that what they want is irrelevant, since 0% inflation is not achievable without the sort of perfect market knowledge that Hayek proved decades ago was impossible even in theory, let alone in practice. But they could, did they but want to, get a hell of a lot closer to 0% than they ever have in actual history.)
Cap, I got a question, maybe OT.
Why is the stock market so high? It looks like we are going into a double dip recession, Europe could meltdown at any moment, China is going to a hard landing, and the SP500 is over 1300. Any idea what gives?
I can answer the why not 0% inflation with one simple word: optics.
Politicians can't show people that their lives are getting better, that they are doing better, if those people don't see their pay cheques increase, even incrementally.
Not the Captain, but responding to Insight as best able
The stock market has a technical component of valuation and a psychological component of valuation. When the stock market valuation is much higher than the technical fundamentals indicate, the market is in a bubble - this is driven by psychological factors.
There are measures of valuation such as Tobin's q and Shiller's CAPE which are long term measures based upon long term P/E ratios of the market.
Since, I'm not a professional economist, nor a investment expert, you shouldn't take this as advice, but I'm thinking the market is probably 40-50% over valued. I'm stopping short of calling it insane, but it surely isn't entirely rational.
I think part of the reason the market is overvalued is that it's the only game in town that appears to be giving any returns. Bonds aren't returning squat and there's a real danger you can lock in a low rate for a long time. A lot of the bubble can be attributed to simple greed.
The problem with bubbles is that while you can make some good money on the way up, you have no idea when the bubble will burst. The one thing for certain is that bubbles almost always burst and when they do the market correction is swift and painful. If you're still in when it bursts, you can get badly hurt.
why no Share button?
The expansion coefficient doubled from 1947 to 1975 (28 years). It doubled again from 1975 to 2003 (28 years). From 2003 until today (8 years), it has almost doubled again (.88%). I.e., contrary to the pundits, the money multiplier hasn't contracted, it has expanded (i.e., the denominator has fallen).
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