Archive for February 2017


Basil Halperin’s critique of NGDP targeting

Lots of people have tried to find flaws in NGDP targeting, but most of these posts are written by people who have not done their homework.  Basil Halperin is an exception.  Back in January 2015 he wrote a very long and thoughtful critique of NGDP targeting.  A commenter recently reminded me that I had planned to address his arguments.  Here’s Basil:

Remember that nominal GDP growth (in the limit) is equal to inflation plus real GDP growth. Consider a hypothetical economy where market monetarism has triumphed, and the Fed maintains a target path for NGDP growing annually at 5% (perhaps even with the help of a NGDP futures market). The economy has been humming along at 3% RGDP growth, which is the potential growth rate, and 2% inflation for (say) a decade or two. Everything is hunky dory.

But then – the potential growth rate of the economy drops to 2% due to structural (i.e., supply side) factors, and potential growth will be at this rate for the foreseeable future.

Perhaps there has been a large drop in the birth rate, shrinking the labor force. Perhaps a newly elected government has just pushed through a smorgasbord of measures that reduce the incentive to work and to invest in capital. Perhaps, most plausibly (and worrisomely!) of all, the rate of innovation has simply dropped significantly.

In this market monetarist fantasy world, the Fed maintains the 5% NGDP path. But maintaining 5% NGDP growth with potential real GDP growth at 2% means 3% steady state inflation! Not good. And we can imagine even more dramatic cases.

Actually it is good.  Market monetarists believe that inflation doesn’t matter, and that NGDP growth is “the real thing”.  Our textbooks are full of explanations of why higher and unstable inflation (or deflation) is a bad thing, but in almost every case the problem is more closely associated with high and unstable NGDP growth (or falling NGDP).  In most cases it would be entirely appropriate if trend inflation rose 1% because trend growth fell by 1%.  That’s because what you really want is stability in the labor market.  If productivity growth slows then real wage growth must also slow.  But nominal wages are sticky, so it’s easier to get the required adjustment via higher inflation (and steady nominal wage growth) as compared to slower nominal wage growth.

I said “most cases” because there is one exception to this argument.  Suppose trend growth slows because labor force growth slows.  In that case then in order to keep nominal wages growing at a steady rate, you’d want NGDP growth to slow at the same rate that labor force growth slows.  As a practical matter it would be very easy to gradually adjust the NGDP growth target for changes in labor force growth. I’d have the Fed estimate the growth rate every few years, and nudge the NGDP target path up or down slightly in response to those changes.  Yes, that introduces a tiny bit of discretion.  But when you compare it to the actual fluctuations in NGDP growth, the problem would be trivial.  I’d guess that every three years or so the expected growth rate of the labor force would be adjusted a few tenths of a percent.  Even if the Fed got it wrong, the mistake would be far to small to create a business cycle.

Say a time machine transports Scott Sumner back to 1980 Tokyo: a chance to prevent Japan’s Lost Decade! Bank of Japan officials are quickly convinced to adopt an NGDP target of 9.5%, the rationale behind this specific number being that the average real growth in the 1960s and 70s was 7.5%, plus a 2% implicit inflation target.

Thirty years later, trend real GDP in Japan is around 0.0%, by Sumner’s (offhand) estimation and I don’t doubt it. Had the BOJ maintained the 9.5% NGDP target in this alternate timeline, Japan would be seeing something like 9.5% inflation today.

Counterfactuals are hard: of course much else would have changed had the BOJ been implementing NGDPLT for over 30 years, perhaps including the trend rate of growth. But to a first approximation, the inflation rate would certainly be approaching 10%.

[Basil then discusses similar scenarios for China and France.]

Basil’s mistake here is assuming that there is a 2% inflation target.  As George Selgin showed in his book ‘Less than Zero”, deflation is appropriate when there is very fast productivity growth.  Isn’t deflation contractionary?  No, that’s reasoning from a price change.  Deflation is contractionary if caused by falling NGDP.  But if NGDP (or NGDP/person) is growing at an adequate rate, then deflation is an appropriate response to fast productivity growth.  Indeed if you kept inflation at 2% when productivity growth was high, then the labor market could overheat. (See the U.S., 1999-2000).

Let’s suppose that the Japanese decide to target NGDP growth at 3% plus or minus changes in the working age population.  In that case, the target might have been 5% in the booming 1960s, and 2% today (assuming labor force growth fell from 2% to minus 1%.  Or they might have chosen 4% per person, in which case NGDP growth would have slowed from 6% to 3%.  In the first scenario, Japan would have gone from minus 2.5% inflation to about 1%, whereas in the second scenario inflation would have risen from minus 1.5% to about 2%.  Either of those outcomes would be perfectly fine.

As an aside, I recommend that countries pick an NGDP growth target higher enough so that their interest rates are not at the zero bound.  But that’s not essential; it just saves on borrowing costs for the government.

Basil does correctly note that New Keynesian advocates of NGDP targeting don’t agree with market monetarists (or with George Selgin):

Indeed, Woodford writes in his Jackson Hole paper, “It is surely true – and not just in the special model of Eggertsson and Woodford – that if consensus could be reached about the path of potential output, it would be desirable in principle to adjust the target path for nominal GDP to account for variations over time in the growth of potential.” (p. 46-7) Miles Kimball notes the same argument: in the New Keynesian framework, an NGDP target rate should be adjusted for changes in potential.

Basil points out that this would require a structural model:

For the Fed to be able to change its NGDP target to match the changing structural growth rate of the economy, it needs a structural model that describes how the economy behaves. This is the practical issue facing NGDP targeting (level or rate). However, the quest for an accurate structural model of the macroeconomy is an impossible pipe dream: the economy is simply too complex. There is no reason to think that the Fed’s structural model could do a good job predicting technological progress. And under NGDP targeting, the Fed would be entirely dependent on that structural model.

Ironically, two of Scott Sumner’s big papers on futures market targeting are titled, “Velocity Futures Markets: Does the Fed Need a Structural Model?” with Aaron Jackson (their answer: no), and “Let a Thousand Models Bloom: The Advantages of Making the FOMC a Truly ‘Open Market’”.

In these, Sumner makes the case for tying monetary policy to a prediction market, and in this way having the Fed adopt the market consensus model of the economy as its model of the economy, instead of using an internal structural model. Since the price mechanism is, in general, extremely good at aggregating disperse information, this model would outperform anything internally developed by our friends at the Federal Reserve Board.

If the Fed had to rely on an internal structural model adjust the NGDP target to match structural shifts in potential growth, this elegance would be completely lost! But it’s more than just a loss in elegance: it’s a huge roadblock to effective monetary policymaking, since the accuracy of said model would be highly questionable.

I’ve already indicated that I don’t think the NGDP target needs to be adjusted, or if it does only in response to working age population changes, which are pretty easy to forecast.  But I’d go even further.  I’d argue that the Woodford/Eggertsson/Kimball approach is quite feasible, and would work almost as well as my preferred system.  The reason is simple; business cycles represent a far great challenge than shifts in the trend rate of output.  Because NGDP growth is what matters for cyclical stability, it doesn’t matter if inflation is somewhat unstable at cyclical frequencies.  That’s a feature, not a bug.  And longer-term changes in trend growth tend to be pretty gradual.  In the US, trend growth was about 3% during the entire 20th century.  Since 2000, trend growth has been gradually slowing, for two reasons:

1.  The growth in the working age population is slowing.

2.  Productivity growth is also slowing.

Experts now believe the new trend is 2%, or slightly lower.  I think it’s more like 1.5%.  But I fail to see how this would add lots of discretion to the system. Imagine if the Fed targets NGDP growth at 5% throughout the entire 20th century, using my 4% to 6% NGDP futures guardrails.  No Great Depression, no Great Inflation, no Great Recession.  Then we go into the 21st century, and the Fed gradually reduces the target to 4.5%, then to 4.0%.  And let’s use the worst case, where the Fed is slow to recognize that trend growth has slowed.  So you have slightly higher than desired inflation during that recognition lag.  But also recall that only NKs like Woodfood, Eggertsson and Kimball think that’s a problem.  Market monetarists and George Selgin thin inflation should vary as growth rates vary.

Who’s opinion are you going to trust?  (Don’t answer that.)

Seriously, even in the worst case, this system produces macro instability that is utterly trivial compared to what we’ve actually experienced.  Or at least if we hit our targets it’s highly successful.  And Basil is questioning the target, not the Fed’s ability to hit the target.  You would have had 117 years with only one significant alteration in the target path.  Yes, for almost any other country, the results would be far worse.  But that’s why you don’t want to adjust the NGDP target for changes in trend RGDP growth.

Further, level targeting exacerbates this entire issue. . . . For instance, say the Fed had adopted a 5% NGDP level target in 2005, which it maintained successfully in 2006 and 2007. Then, say, a massive crisis hits in 2008, and the Fed misses its target for say three years running. By 2011, it looks like the structural growth rate of the economy has also slowed. Now, agents in the economy have to wonder: is the Fed going to try to return to its 5% NGDP path? Or is it going to shift down to a 4.5% path and not go back all the way? And will that new path have as a base year 2011? Or will it be 2008?

Under level targeting there is no base drift.  So you try to come up to the previous trend line.  In 2011 you set a new 4.5% line going forward, but until you change that trend line, the existing 5% trend line still holds.  If you drop the growth path to 4.5% in 2011, then by 2013 the target for NGDP will be 1% less than people would have expected in 2008, and by 2015 it will be 2% less.  In fact, NGDP was more like 10% less than people expected.  So even if a gradually adjusting path is not ideal, it’s a compromise worth making to satisfy the NKs who are far more influential than I am, but have yet to read Less Than Zero.  (George may not agree with the compromise, he’s less wimpy than I am.)

Before I close this out, let me anticipate four possible responses.

1. NGDP variability is more important than inflation variability

Nick Rowe makes this argument here and Sumner also does sort of here. Ultimately, I think this is a good point, because of the problem of incomplete financial markets described by Koenig (2013) and Sheedy (2014): debt is priced in fixed nominal terms, and thus ability to repay is dependent on nominal incomes.

Nevertheless, just because NGDP targeting has other good things going for it does not resolve the fact that if the potential growth rate changes, the long run inflation rate would be higher. This is welfare-reducing for all the standard reasons.

The “standard reasons” are wrong.  The biggest cost of inflation, by far, is excess taxation of capital income.  That’s better proxied by NGDP growth than inflation. Things like “menu costs” are essentially unrelated to inflation as measured by the government.  The PCE doesn’t measure the average amount that the price of “stuff” changes; it measures the average amount by which the price of “quality-adjusted stuff” changes.  Hedonics.  If the government were serious about targeting inflation, they’d need to come up with an inflation measure that actually matches the supposed welfare costs of inflation in the textbooks.  We don’t have that.  We have nonsense like “rental equivalent”. The standard welfare costs also ignore the massive costs of nominal wage stickiness.  And Basil mentions the incomplete financial markets problem.  Please, can macroeconomists stop talking about inflation, and use NGDP growth as their nominal indicator?  It would make life much simpler.

2. Target NGDP per capita instead!

You might argue that if the most significant reason that the structural growth rate could fluctuate is changing population growth, then the Fed should just target NGDP per capita. Indeed, Scott Sumner has often mentioned that he actually would prefer an NGDP per capita target. To be frank, I think this is an even worse idea! This would require the Fed to have a long term structural model of demographics, which is just a terrible prospect to imagine.

Actually, it’s pretty easy to predict changes in working age population, because we know how many 64 year olds will turn 65, and we know how many 17 year olds will turn 18.  And immigration doesn’t vary much from year to year.  The Fed doesn’t need long range forecasts; three years out would be plenty.  As long as the market understands that the NGDP target path will be gradually adjusted for population growth, they can form their own forecasts when making decisions like buying 30-year bonds.

I want to support NGDPLT: it is probably superior to price level or inflation targeting anyway, because of the incomplete markets issue. But unless there is a solution to this critique that I am missing, I am not sure that NGDP targeting is a sustainable policy for the long term, let alone the end of monetary history.

I still think that NGDPLT, combined with guardrails is the end of macroeconomics as we know it.  All that would be left is discussions of supply-side policies to boost long-term growth. The freshman econ sequence could be reduced to one semester. Or better yet a full year, with a more in depth discussion of micro.

PS.  In this new Econlog post I make some forecasts.

What’s the matter with Seymour, Indiana?

[Commenters have complained about a lack of posts on monetary policy.  What specific issues do you want me to address?  Also, keep in mind that most of my monetary policy posts are over at Econlog.  Otherwise, Trump posts will continue until morale in the comment section improves.]

For many years now, progressives have been asking “What’s the Matter with Kansas?”  That is, why do the lower income residents of places like Kansas vote against their economic interests? (It’s simply assumed that voting for the GOP is “obviously” against their interest, although it not clear to me why.  Nor is it clear why they don’t ask “What’s the Matter with the Upper East Side?”  Maybe they assume that rich Democrats are supposed to be idealistic while poor Republicans are not.)

For the past year we’ve been told that Trump’s 2.9 million vote loss to Hillary “proves” that most Americans don’t like trade (although polls show that they do.) Yes, it is true that Trump did well in areas that face import competition.  But what about areas that are the winners of globalization, such as Seymour, Indiana?

Demonising NAFTA helped Mr Trump to the presidency. But in reality millions of American jobs are supported by that pact. One of them belongs to Chris Gambrel, who builds vast diesel engines in Seymour, Indiana. It would be odd to think of Mr Gambrel, a skilled and brawny employee of Cummins, an engine-maker, as ignored or “forgotten”. He is proud of the “world-class” engines that he produces: 95-litre behemoths powerful enough to pull a cargo train. Three-quarters of them are exported to foreign customers for up to $1m apiece.

Free-trade rules, notably those provided by NAFTA, helped persuade Mr Gambrel’s bosses to build the giant engines in Seymour, rather than at a Cummins plant in India which almost won the work. America offered lower shipping costs and less red tape when exporting the engines, and—vitally—lower and fewer customs duties when components are imported from cost-effective suppliers around the world. Add on quick access to American engineers, and the Midwest was the most competitive site. Mr Gambrel’s job involves installing cylinder-heads made in Mexico, a task he carries out with a surgeon’s care.

Elsewhere at the Seymour plant, which employs 1,300 workers, whole assembly lines are kept profitable by supply chains that run to and from Mexico, a manager says; one of the lines “remanufactures” 16-litre engines from parts stripped, cleaned and repaired at a Cummins plant in Ciudad Juárez. Experienced workers in Seymour can earn $28 an hour or more. Cummins pays up to $7,000 a year for employees to study for college degrees. The manager proudly notes that in ten years he can count hourly workers who left of their own accord “on one hand”.

So obviously this area would have no interest in Trump, right?

In 2012 Jackson County, of which Seymour is part, gave the Republican presidential candidate, the stiffly patrician Mitt Romney, 62% of its votes. In 2016 the county swung hard to Mr Trump, giving the NAFTA-bashing populist 73%.

Mr Gambrel suggests that Seymour was ready to take a gamble: “People were tired, they wanted change.” Asked if he fears that Trumpian brinkmanship may imperil his job, the engine-maker shrugs. “Trade deals come and go. There probably is a price to pay,” he says. “But I’m far enough away that I’m insulated. And the press blows everything out of proportion.” As for the Mexican components that Mr Gambrel installs, he would like to see them made in America. At root he trusts Mr Trump: “The man’s a billionaire, he’s made some shrewd moves.”

Another Cummins worker, Lew Findley, concedes that cheaper Mexican components may save some American jobs. But still his hunch is that workers like him are safer under President Trump, who he feels shares his values on other questions, from guns (good) to abortion (bad). Seymour’s Republican mayor, Craig Luedeman, says that issues such as gun rights and immigration explain much of Mr Trump’s support. But unlike the Cummins workers, the mayor fears what a trade war could do to his city: “We’re not in a regional economy any more, we’re global.”

I cringe whenever I hear average voters tell reporters that Trump must be smart because he’s a billionaire.  George Soros is far richer—is he far smarter?  (Bad example, he is.  But you get my point.)

PS.  You’ve probably been wondering where Trump gets his real news from:

Way back on Friday, President Trump declared that several news organizations — ABC, CBS, CNN, NBC, The New York Times — were “the enemy of the American people.” You know who’s not the enemy, in his book?

Alex Jones.

Mr. Jones, in case you aren’t aware, is the conspiracy-theorizing, flame-throwing nationalistic radio and internet star who’s best known for suggesting that Sept. 11 was an inside job, that the Sandy Hook school shooting was “completely fake” and that the phony Clinton child-sex trafficking scandal known as Pizzagate warranted serious investigation (which one Facebook fan took upon himself to do, armed with an AR-15).

Mr. Jones, 43, has been around for a while. Like every media outfit in the Trump era, his platforms have gotten record traffic and, he told me last week, seen increases in revenue, with ads for water purification systems and for supplements to enhance “brain force” and virility.

But he is apparently taking on a new role as occasional information source and validator for the president of the United States, with whom, Mr. Jones says, he sometimes speaks on the phone.

Oh wait, this story is from the NYT, so it’s obviously fake news.

PPS.  Trump no longer relies on the daily intelligence briefing that other presidents received.  Why should he trust the CIA, which is out to get him?  Better to get reports on Sweden from Fox News.

PPPS.  I do agree with America’s conservatives on one issue—it was outrageous for Berkeley to disinvite Milo Yiannopoulos just because he holds controversial views. It’s great to see America’s conservative movement stand up for free speech. Seriously, it’s good to know that America’s conservatives have zero tolerance for sexual predators.

PPPPS.  Under any other president, would this even have to be said?

U.S. Defense Secretary Jim Mattis said Monday the United States does not intend to seize Iraqi oil, shifting away from an idea proposed by President Donald Trump that has rattled Iraq’s leaders.

PPPPPS.  Here’s one Republican I can’t criticize:

President Donald Trump’s “constant fear-mongering’’ about terrorism is “irresponsible and dangerous.’’ He needs to “stop attacking the legitimacy of the judiciary.’’ He picked an attorney general with “anti-liberty” positions on surveillance and police seizure of property.

Those tough assessments come not from one of the president’s critics in the Democratic Party, but from a conservative Republican House member whose district decisively backed Mr. Trump in the election.

Rep. Justin Amash of Michigan has emerged as one of the leading Republican critics of the president, using a tool Mr. Trump himself often employs—an assertive presence on Twitter—to challenge and even taunt the president. While other House Republicans who were skeptical of Mr. Trump during the presidential campaign have since toned down their criticism, Mr. Amash, who has 100,000 Twitter followers, has remained a vocal critic.

Mr. Amash says his opposition is based on principle, as a libertarian concerned about government overreach and adherence to the Constitution.

 Pity there are so few like him.

Occam’s Razor and Trump

Andrew Sullivan’s post is far better than this one; read his instead:

As far as I can tell:

1.  About 100% of liberal pundits think Trump’s a buffoon

2.  About 100% of moderate pundits think Trump’s a buffoon

3.  About 50% of conservative pundits (and more of the elite ones) think Trump’s a buffoon

4.  Some conservative pundits think Trump’s being unfairly maligned.

I’m not opposed to contrarian positions; I’ve taken them myself (as in my view of the Fed’s role in the Great Recession.)  But monetary policy is a highly specialized field, and popularity contests aren’t of much use when evaluating the truth of propositions related to the liquidity trap, or the many worlds interpretation of QM.

But while most people are not well informed on arcane economic issues, they are hard wired to be pretty good at reading their fellow human beings.  You didn’t need a PhD in psych to notice that Jimmy Carter was more honest than Richard Nixon.

Many of my commenters are ignoring Occam’s Razor, and are making a highly improbable claim.  They seem to think that the small number of conservative pundits who respect Trump are the only ones not blinded by ideology.  Liberals are blinded by bias and moderates are blinded by bias and me and George Will and Jonah Goldberg and all the other right of center people who see Trump for what his is are simply “hallucinating”.  That’s certainly possible; people who hallucinate don’t know they are hallucinating.  But think about what your claim means.  If it’s possible for me to hallucinate and not know it, then it’s equally possible for you to do so.

I’ll go with the simpler explanation; the few pundits who don’t see Trump for what his is are the one’s with a “bias” problem.  After all, did 100% of conservative pundits and 100% of moderate pundit and 50% of liberal pundits think Obama was a buffoon?  I didn’t like the guy’s economic policies, but he seemed no worse than the run of the mill politician in almost any given human attribute, and better in some (like ability to speak).  So I’ll go with the simplest and most logical explanation for why so many pundits think Trump is a buffoon, until I see evidence to the contrary.

One more thing.  Late night talk show hosts latch on to the president’s attributes that everyone can easily recognize.  Gee, I wonder which “obvious” Trump attributes they are latching on to?

I see that Trump’s choice to head the NSC was as impressed with his press conference as I was:

The top pick to be President Donald Trump’s national security adviser, retired Adm. Robert Harward, reportedly declined the offer after seeing Trump air his grievances in a 77-minute press conference on Thursday.

MSNBC host Chris Hayes on Friday cited a former national security official familiar with Harward’s decision who said Harward asked that several demands be met as a condition of accepting the offer:

“Harward wanted to undo the fairly large changes the president had made to the NSC that had inserted Bannon into the process,” Hayes reported.

Citing his source, Hayes said “The White House did not offer Harward sufficient assurances that he would have such autonomy.” Harward wrote a letter declining the offer.

The White House reportedly sought to negotiate with Harward on the matter, which Harward was initially open to, Hayes said, but that changed a short time later.

“After watching the president’s press conference [Thursday], he decided to stick with his decision to decline the offer,” according to the source cited by Hayes.

And if you are going to spend most of your press conference bashing the press for fake news, you might not want to spew one lie after another.  You might not want to claim that you won the biggest victory since Reagan.  Or claim that you are the least racist person, right before asking a black reporter if she knows the Congressional black caucus, and could she set up a meeting with them.

And if you are concerned about leaks, you might not want to avoid firing Flynn for several weeks after finding out that he lied to Pence, and then fire him only after it was reported by the Washington Post, through a leak. And then lie about it at your press conference.  If you are a White House staff person who sees a “bad hombre” you want gone, would you tell Trump about what he did wrong, or the WaPo?

I know, I know, people like Scott Adams explain how all this seeming stupidity is part of the Master Plan.  Trump knows he didn’t have the biggest victory since Reagan, but claims it because his supporters don’t care about the truth.  We are all missing the point.  And the supporters won’t care when he fails to deliver on Obamacare repeal, jobs, immigration, and all the other issues.  Nothing matters.  It’s all about bluster.  He looks tough.

But I’m sticking with Occam’s Razor.  When someone consistently acts like a buffoon, over and over again, the least implausible explanation is that he actually is a buffoon.

PS.  Another defense is, “Yes, he’s a stupid, mean, vindictive, boorish, dishonest, sexist, bigot, but none of it matters because he’ll pick the right people for the Supreme Court and he will sign tax cuts.  I’m actually slightly more sympathetic to that argument, as I think the power of Presidents is very overrated.  (But notice the Trumpistas who point to the stock market rally were silent when stocks rallied under Obama.)

I predict that things will actually improve over time, as the bad guys like Flynn will gradually get replaced by grown-ups, just as Reagan brought in James Baker at some point and Bush pushed Cheney aside. Trump doesn’t know what he’s doing, and so the power of the “establishment” will gradually grind him down.  But it would have been much simpler if the GOP had nominated a non-buffoon in the first place.  And he’d have an easier time getting competent replacements for people like Flynn if he didn’t scare them off with a press conference where he looked deranged.

PPS.  Look at the bright side, at least Trump hasn’t yet adopted Maoist “Enemies of the People!” rhetoric.  Oh wait . . .

PPPS.  I will actually give credit to Trump on one point, he’s a no excuses kind of guy.  He never said “I’ll do all these things if Paul Ryan agrees to the proposals”; he said he’d definitely accomplish all this stuff.  If Paul Ryan stood in the way, then Paul Ryan would be gone.  No excuses, Trump is a winner.  Of course when he fails his supporters will whine about how the Washington establishment tries to undercut him (partly true), but none of the matters.  Trump ran as a sort of superman.  The bad hombres from Mexico?  Day one, they are gone.  Trump knew the establishment was totally against him from the beginning, and none of it matters—Trump claimed he will perform miracles, and that’s the standard that we should all hold him to.  I know that I will.  It’s more fun that way.

PPPPS.  Trump’s right about one thing—a lot of fake news is being peddled these days.



Nothing to see here folks, just move right along

The Constitution:

No Title of Nobility shall be granted by the United States: And no Person holding any Office of Profit or Trust under them, shall, without the Consent of the Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State.

And in today’s news:

According to ABC News, Trump received a big, fat gift from China this week in the form of a 10-year trademark on his name for construction. . . .

The award marks a sudden reversal of fortunes for Trump, who had reportedly been trying to win the valuable rights to his name for a decade. Interestingly, the Chinese government came through for him one month after he took the oath of office and a week after his conversation with Chinese president Xi Jinping during which he endorsed the One China policy. After years of battling to take back the rights to his name from a man named Dong Wei, Trump’s registration was made official on Tuesday and announced by China’s trademark office on Wednesday.

There are going to be some Trump critics who are so unhinged in their hatred for the man that they’ll see a link here.  But as Trump’s lawyer points out, in China legal decisions involving heads of state of the world’s greatest superpower are made my honorable judges, with no interference from the leadership of the Chinese Communist Party:

Trump’s attorneys in China say the ruling in his favor was made on the strength of his legal claim, not his position. “It is not possible that President Trump got favors from Chinese government,” Zhou Dandan of Unitalen Attorneys at Law in Beijing told The Washington Post. Alan Garten, chief legal officer at the Trump Organization, told the Associated Press that Trump’s trademark application predated the election.

It’s pure coincidence that a legal battle Trump was fighting for 10 years got resolved a week after he caved on the One China policy.  Why are you people so cynical?

I’m also increasingly sickened by the biased new media.  Take Shepard Smith, from the king of fake new outlets, Faux News, I mean Fox News:

He took his disapproval to new heights on Thursday, deriding Trump shortly after his first solo presidential press conference.

“Your opposition was hacked and the Russians were responsible for it and your people were on the phone with Russia on the same day it was happening and we’re fools for asking the questions? No, sir,” Smith said on air.

“It’s crazy what we’re watching every day… It’s absolutely crazy. He keeps repeating ridiculous, throwaway lines that are not true at all and sort of avoiding this issue of Russia as if we’re some kind of fools for asking the question. Really?”

He added: “We have a right to know… You call us ‘fake news’ and put us down like children for asking questions on behalf of the American people.”

Why can’t Fox find some unbiased reporters?  Trump won the greatest election victory since Reagan (except for Bush, Clinton and Obama), please show some respect!

Trump’s pal Duterte is also being treated rudely by the press:

Policemen from the national drug squad, including senior officers, falsely accused a South Korean businessman of involvement in narcotics. They hauled him off to the national police headquarters in Manila, demanded ransom from his family, pocketed the money and then strangled him, burning his body and flushing the ashes down a lavatory. . . .

Mr Duterte reacted to the scandal in typical fashion, holding a press conference in which he revealed a vague plan through a rambling monologue punctuated by coarse exclamations. “You son of a whore!” he said, addressing himself to the drug-squad officer suspected to be the mastermind of the kidnapping. The president offered a reward of 5m pesos ($100,000) for his capture. “Dead or alive,” Mr Duterte said. “If you bring him dead, the better.” Mr Dela Rosa leant in to whisper to the president that the officer was already in custody. Mr Duterte ploughed on, inveighing against the police force in general, which he described as corrupt to the core. “You use the power to enforce the law and arrest people for shenanigans,” he said. “Almost 40% or so of you guys are habituated to corruption.”

This is the 21st century folks.  Don’t you understand that press conferences are now “performance art”?  Truth is so 20th century.  Boring.

PS. I can’t even imagine what SNL is like in the Philippines.

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Asset prices are always wrong, in retrospect

One argument against market efficiency is that asset prices are subject to speculative bubbles, where prices rise (or perhaps fall) more than can just justified by fundamentals. Today I’ll discuss why this theory is so hard to evaluate.

During my lifetime, I’ve seen three major asset price movements that looked, in retrospect, rather irrational:

1. The 1987 stock market boom and crash.

2. The late 1990s NASDAQ boom and crash

3. The housing “bubble” of 2006.

During the first 8 months of 1987, the Dow soared by about 40%, and then fell by a roughly equal amount late in the year, with a notable 22% decline on a single day (a record, by far).

After the crash, the pre-crash prices were widely viewed as a bubble, and not justified by fundamentals. Today those prices seem quite reasonable, and if anything it’s the post-crash levels that seem too low. On the other hand, the size of the price change, particularly the 22% decline in a single day, is hard to square with fundamental theories of asset prices, where stocks move only on new information. Nothing occurred on October 19, 1987, that would justify such a large price move. So in one of two respects, 1987 still looks bad for the efficient markets theory.

2. In the late 1990s, the tech-dominated NASDAQ soared from below 1000 to a peak of 5048 in March 2000. Then it fell 1114 in October 2002. During the 21st century, the March 2000 levels have been almost universally viewed as an insane bubble, whereas the October 2002 levels have received little comment. And yet a good case can be made that it is the October 2002 levels that are far out of line with fundamentals, at least based on today’s NASDAQ (over 5800 as I write this post.)

In fairness, the (PCE) price level is up 35% since March 2000, so the real NASDAQ is still considerably lower than at the 2000 peak. Still, even in real terms the NASDAQ is higher than it was just a couple months before or after the March 2000 peak. It should also be noted that the dividend yield on NASDAQ was lower than the real interest rate back then, so investors considerably over-estimated the returns they could expect from buying tech stocks at those lofty levels. I’m not claiming that the March 2000 prices look correct, in retrospect. But then if you go back in time and cherry pick the day when valuations were at their absolute peak, then of course it’s not going to look like the optimal time to buy that asset.

I’d also point to the 1114 low in October 2002, which looks, in retrospect, even more “wrong”. Obviously if I wrote this post in 2002, I would have reached very different conclusions about the 2000 “bubble”. The point here is that in retrospect, previous asset prices will almost always look “wrong”. And since we never reach the end of time, we don’t ever get a definitive reading on what asset price level would have been correct, at any given point in time.

3. As far as the 2006 housing bubble, two subsequent events have cast doubt on whether the prices actually were irrationally high in 2006. First, housing prices in many other countries with similar price run-ups, such as Canada, Australia, Britain and New Zealand, did not crash, and indeed are as high as in 2006, or even higher, even in real terms. (Ireland did crash like the US, to round out the English speaking countries.) Second, home prices in many coastal cities like New York, Boston and coastal California have soared back up to “bubble levels”, and even higher. Many central US regions like Texas never saw a price bubble. Yes, some cities never did recover, but Kevin Erdmann has many posts that provide further evidence that the so-called bubble was not as irrational as it now seems, given what people knew at the time.

This post is also very provisional. In two years, asset prices might be much higher than today and the idea of a 2000 NASDAQ bubble and a 2006 housing bubble may be almost completely discredited. (Just as the 1987 stock bubble was later discredited.) Or asset prices may fall sharply and this post may seem mistaken. That’s why I always try to take a pragmatic approach to bubble theory. What’s in it for me? How do bubble theories help me to live my life more effectively as an investor, as an academic, and as a voter? So far I don’t see much use for bubble theories, but I’ll keep an open mind.

Off topic:  I watched part of Trump’s press conference this afternoon, which reminded me the the “strawberries” scene in The Caine Mutiny.  I’ve got news for Trump—this is your honeymoon period.  It will get far worse.  If Trump’s already showing signs of being mentally unstable after a few minor flare-ups, what’s it going to be like when his administration gets into serious trouble?  Anyone who watched the press conference and still doesn’t understand why I think Trump is a spoiled, immature brat, then, well then I have nothing to say to you.

(Not that I could care less, but the rest of the world is laughing at us.  We elected a right-wing version of Chavez, or if you prefer a Duterte or a Berlusconi.  I feel bad for the reporters who had to sit through that clown show.  And thank God that there are a few GOP senators who are willing to tell the truth.)

PS.  I also recommend this FT article on bubbles:

The background history to these booms confirmed what historians of bubbles had already shown: that they always have at least some backing from the fundamentals. Bubbles may end up being irrationally expensive, but they are not stupid. They arrive when an exciting new development — canals, railways, the internet — creates confusion over the future value they will create. As he puts it, “there was at least some method to the madness of investors”.

He found 72 cases of a market doubling in a year. In the following year, six doubled again, and three halved, giving back all their gains: Argentina in 1977, Austria in 1924 and Poland in 1994.

For doubling in three years, he found 460 examples. In the following five years, 10.4 per cent of them halved. The possibility of halving in any three-year period, regardless of what had come before, was lower than this but not dramatically so: 6 per cent.

On this basis, arguments made by many (including me) that central banks should concentrate more on pricking bubbles before they get too big begin to look threadbare.