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The BIS quotes Mises

January 9, 2006

BIS Chief Economist, William White, starts a newly-posted working paper contrasting Keynes' egregious 'long-run' quip against Mises' measured counter.

Indeed, once we set aside certain libertarian and other objections to central banking, per se, this whole piece, from a high priest of the inner sanctum, is very pro-Austrian and is tacitly disparaging of both "orthodox" economics and Greenspan-Bernankism. It is also a tightly reasoned and comprehensive indictment of our current parlous global monetary order.

By way of example, consider the following excerpts:

'The principal impediment to using monetary policy to resist financial excesses is that it can be seen to conflict with the desire to stabilise inflation at a low positive level. Perhaps the first heretical point to raise is whether this should always be the objective of policy, given the reality of ongoing positive supply side shocks. There was a lively debate about such issues prior to the First World War, and the issue needs to be addressed again. As noted above, resisting a "good deflation" (supply-driven) could over time rather result in fostering conditions that might lead to a "bad deflation" (demand-driven).'

...and, again:-

'It must also be noted that the prices of many assets, both financial and real, also looked high as of mid-2005 against the benchmark of historical valuations....

'With respect to [these], idiosyncratic arguments have been presented to justify what is being observed in the light of underlying fundamentals in that particular market. However, a complementary but simpler explanation also suggests itself. All these prices are high because of strong demand for assets induced by very low global policy rates.

'In effect, existing ample liquidity is being used to purchase "illiquidity".... In practice, liquidity is being sold in the form of put options by those eager to receive premia inflow in an environment of very low interest rates.

'However, if this is part of the explanation for higher asset prices, it must also be asked why recent moves to tighten policy in the United States have not had more effect.

'One explanation is that "measured tightening" lowers rather than eliminates the expected rates of excess return from purchasing such assets. Indeed, it is not inconceivable that well anticipated tightening of this sort might even reduce risk premia and encourage more leverage to maintain expected rates of return.

'If so — and this is highly speculative — the eventual reversion of valuations to levels closer to historical norms would be sharper, and the interaction with higher debt levels more contractionary.'

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