Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Clown Economist Mankiw Defends Policy of Theft of Private Property

Economics / Economic Theory Apr 21, 2009 - 10:09 AM GMT

By: Mike_Shedlock

Economics

Best Financial Markets Analysis ArticleIn case you are new to this story, Gregory Mankiw, professor of economics at Harvard, proposed negative interest rates in It May Be Time for the Fed to Go Negative.

At one of my recent Harvard seminars, a graduate student proposed a clever scheme to [make holding money less attractive].


Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.

Of course, some people might decide that at those rates, they would rather spend the money — for example, by buying a new car. But because expanding aggregate demand is precisely the goal of the interest rate cut, such an incentive isn’t a flaw — it’s a benefit.

My reply can be found in Time For Mankiw To Resign.

The Cash Economy Would Grind To A Halt

What exactly would vending machine operators do? Would owners program all machines to stop accepting dollar bills with a certain digit? What about the bills already accepted? On that line of thinking, I propose a complete shutdown of all vending machines that accept dollar bills would occur several days to a week before the drawing date.

What about merchants? On the date of the drawing and even a few days before, would any merchant accept anything but credit cards, debit cards, checks, or coins? I think not.

No one in their right mind would hold or accept any digit denominated currency. However, quarters would be hoarded! Think of the mounds of quarters people would be hold. A quarter, nickel, and dime shortage would be 100% guaranteed under such a "clever scheme".

Other than buying candy with quarters, the cash economy would literally grind to a halt. And given that people would be carrying less cash than before, spending would actually decline if such a bill were passed.

Thus Mankiw's proposal would do the exact opposite of what he intended.

Addendum Added

Yesterday I added this addendum to Time For Mankiw To Resign.

In Is inflation the answer? Paul Krugman agrees with Mankiw "in principle".
Greg Mankiw says yes. Since that was the answer I arrived at for Japan more than a decade ago, I have to say that it makes sense in principle.

But here’s why it won’t work now, at least not yet: we’re talking about making a credible commitment to fairly high inflation over the medium term, yet you still have distinguished central bankers appalled at the Fed’s 2 percent inflation target.

Failed Models

Both Mankiw and Krugman have their economic models and they stick with them no matter how silly those models look in the real world.

On the other hand, I prefer common sense over economic models any day of the week. And common sense dictates that loose lending practices and a cheaper dollar got us into this mess so loose lending standards and a cheaper dollar cannot possibly get us out of this mess. Logically it is as simple as that.

Moreover, even if the Fed could orchestrate inflation, there is no guarantee jobs would come with it or wages would rise with those jobs even IF the jobs came. Both Mankiw and Krugman are ignoring the macro picture, including but not limited to global wage arbitrage.

Home prices and asset prices in general rose much faster than wages during Greenspan's great experiment. Cash out refinancing, and rising consumer credit supported consumption during this experiment as real wages shrunk. Now consumers are cash strapped and Mankiw proposes a method to force consumers to spend more. Any eighth grader would immediately see that such a policy cannot possibly work.

Nixon Shock

The Fed is not in control of wages, and president Nixon, the last clown that tried Wage and Price Controls failed spectacularly.

Mankiw and Krugman Shock

Greenspan's liquidity experiment failed spectacularly in the biggest bubble implosion since the great depression. I am wondering how long it will be before the words "since the great depression" are replaced by the single word "ever".

All interventions fail sooner or later (and history shows the bigger the experiment the bigger the failure), yet Mankiw and Krugman want to try it again!

Mankiw has a Monetarist theory. His theory suggests that throwing money at problems cures them. And so when a student proposes a novel way of forcing cash strapped consumers to spend, Mankiw thought that it was "clever" without doing even so much as a cursory look at the ramifications.

Mankiw should have flunked his student and asked him to produce a paper why such idiocy could not possibly work. Instead, Mankiw praised it.

Mankiw Responds

In an attempt to defuse criticism, Mankiw responded with Observations on Negative Interest Rates.

Most of Mankiw's response was an attempt to defend negative interest rates with mathematical formulas. Moreover, Mankiw did not attempt to rebut any of my arguments about the complete ridiculousness of his original proposal. He did say ...

If people are feeling poorer and want to save for the future, why should we stop them? Unless we think their additional saving is irrational, it seems best to try to funnel that saving into investment with the appropriate interest rate. And given the available investment opportunities, that interest rate might well be negative.

Blatant Arrogance

And who is Mankiw (or any economist) to decide what is best for anyone else? That Mankiw thinks that he or the Fed can decide that it is "irrational" for consumers to want to save is not only blatant arrogance but preposterous.

This is what happens when economists get married to mathematical formulas instead of using common sense.

Mankiw Proposes Theft

Even more galling than his blatant arrogance, Mankiw has no problems with theft. Because confiscating or expiring 10% of someone's money at will is theft of property, and would (at at least should) be a violation of the 5th amendment and due process of law. How anyone cannot see that is beyond me.

However, let's assume such a law was passed, and upheld by the courts. How would people react? Simple, they would pay off every debt they could as they would get an immediate 10% return on their money to do so! Thus credit would implode.

I repeat my call for Mankiw to resign or be fired. Mankiw is unfit to teach economics anywhere, let alone Harvard.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2009 Mike Shedlock, All Rights Reserved

Mike Shedlock Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules