Archive for the Category Misc.


Quick update on NGDP futures

No one told me it was going to be hard to give away money!  Seriously, there are a few more complications than I anticipated, and I am now waiting for specific instructions from iPredict and Hypermind about how to proceed.  But it will get worked out.

Meanwhile the early Hypermind Q3 futures contract, with 100 euros in prize money, has now been upgraded to a combined Q3 and Q4 with 1000 euros in prize money. So it just became much more attractive.  Recall that at Hypermind, traders do not have to put up their own money–it’s not “gambling.”  But you do need to register first.  

Eventually we will deliver much more money for prizes at Hypermind.

Update:  I was sent the following information:

The real-time forecasts are published on this page, which requires the password: “illusion“.

The contracts are at about 34/35 right now, which means 3.4% to 3.5% annualized growth.  That seems like an opportunity.  :)

PS.  Super busy this week.  All I have time for is to point out that the collapse of the Chinese economy, predicted for 20 years, once again failed to materialize in Q3.  Now some brave souls are predicting Chinese growth will slow over time.  You mean they won’t keep growing at 10% as they become highly developed?  I never would have guessed.

Tyler Cowen on exports

Tyler Cowen has a wonderful new post pointing out that all countries can increase their exports at the same time, and this may boost global output.  I’m going to try to make it even wonderfuler (is that a German word?)

[Update: When I say "exports" I mean "exports", not "exports minus imports" (a category no one should pay any attention to.)]

Let’s avoid reasoning from an export change, and ask why exports might increase:

1.  Supply-side reforms that boost the efficiency of the export sector, perhaps by removing tax/regulatory barriers.

2.  Monetary stimulus aimed at currency depreciation.

3.  More government saving, which depreciates the real exchange rate.

My claim is that if these things are done on a global scale, the first two are expansionary in net terms, and the third is neutral.

Supply-side reforms boost output under either an inflation target, or a dual mandate.  If you want to use the Keynesian model, these reforms boost the Wicksellian equilibrium interest rate, which makes NGDP grow faster, even at the zero bound.

For years I’ve been pointing out that a (mild) international currency war would be great.  All currencies can depreciate at the same time, against goods and services. We know that monetary stimulus in the US makes European stocks go up, and vice versa.  But it isn’t just market monetarists; Keynesians like Barry Eichengreen have also noted that a currency war would be expansionary, as it was in the 1930s. These first two points are probably what Tyler had in his mind when he criticized the mercantilist mindset.

As far as government saving (fiscal austerity), I’d say it’s a net wash, for monetary offset reasons.

PS.  Roughly 100% of the time when people blame virtue in one country (Germany, China, Japan, etc.) for problems in the global economy, they are working with a flawed model.  Classical economics (Hume’s Of the Jealousy of Trade) was supposed to be about overcoming that xenophobia.  We still have work to do.

PPS,  I once published a paper claiming that IS-LM was essentially a gold standard model.  Here’s Tyler:

It sometimes feels like the IS-LM users have a mercantilist gold standard model, where the commodity base money can only be shuffled around in zero-sum fashion and not much more can happen in a positive direction.




Another NGDP futures market

Things are progressing quite nicely with iPredict, and I hope to be able to ask donors to send their checks out within a couple of days.  We have found a branch of Victoria University in the US, which is registered to accept donations that are tax deductible for Americans (I believe it’s called a 501(c)3 organization?)  Right now I am trying to determine exactly how much I will ask each person to contribute to that entity (i.e. what fraction of their original offer is needed.)  The money will all go to the iPredict NGDP markets.

Americans won’t be able to trade in iPredict, but another site I’ve been in communication with has listed a NGDP growth rate contract for the 3rd quarter of 2014 (a NGDP number that won’t be announced until October 30, 2014.)  This site is called “Hypermind,” and differs from other prediction markets in that traders do not put up their own money.  Instead their accounts are measured in “Hypermoney” (H), however at the end of a specified period the best performers do get monetary rewards, such as Amazon gift certificates. Here is the description of the new contract:

What will be the annualized growth rate of U.S. Nominal GDP in Q3 2014?

The value of each NGDPUS14Q3 share will be determined as follows:

10ℍ * (annualized 2014:3 rate of nominal GDP growth, expressed as a percentage)

Or: 0ℍ if nominal GDP falls in 2014:3.

Or: 100ℍ if the annualized nominal GDP growth exceeds 10% in 2014:3.

The final share price will be based on the “advance estimate” of nominal GDP growth. This nominal GDP announcement will occur at 8:30am on October 30, 2014. All of the information used to calculate the growth rate will appear in the BEA website, Table 1.1.5, line 1:

The growth rate will be calculated in two steps. First the quarterly growth rate will be calculated, using October 30, 2014 estimates of both Q2 and Q3 nominal GDP:

QGR = (Nominal GDP in 2014:3 – Nominal GDP in 2014:2)/(Nominal GDP in 2014:2.

The quarterly growth rate will be annualized as follows:

Annualized nominal GDP growth equals [(1 + QGR)^4 – 1] * 100

Note that the annualized nominal GDP growth rate is expressed as a percentage (not decimal.) It is then rounded off to the nearest tenth of a percent.

For example, if nominal GDP grew from $17.328 trillion (in Q2) to $17.5 trillion in Q3, then the annualized growth rate (including compounding) would be 4.03%, rounded to 4%, and the final price of the NGDPUS14Q3 share would be 40ℍ.

Finally, beware that the Q2 estimate that will be used in the calculation is the one that will be published on October 30, which may be different from the current estimate of $17.328 trillion.

They also sent me the following description of Hypermind:

About Hypermind


Hypermind is a US-based prediction market that features mostly geopolitical, political and economy/business questions. It is not a gambling venue because participation is free (play-money), but significant rewards are given out based on performance. Questions are grouped into contests that feature their own reward amounts, so one may choose to participate in all contests, or in just those that appeal to their narrow interests. Currently, the total reward amount in play is over $17,000.

Hypermind is a pure Continuous-Double-Auction market, with a trading engine similar to Intrade, except that there are no trading fees. Trading is zero-sum and frictionless. Contracts are priced [0,100] (in play money) with payoffs that can be continuous (e.g., vote-share) or binary (e.g., winner-take-all).

Participation to Hypermind is by invitation only. There are upwards of 500 participants, most of which have been recruited among the top traders in various prediction markets operated in France and the USA by NewsFutures and Lumenogic between 2000 and 2014. It is an elite panel of expert prediction traders recruited and rewarded solely based on performance. It is a highly educated group of professionals in all walks of life, with 65% Masters or Ph.D. degrees, and another 20% college degrees.



I propose to implement your NGDP contracts on Hypermind in a dedicated contest, or series of contests, featuring its own cash prize of an amount of your choosing. Hypermind will operate the market for free, so you only have to put up the prize money.

For distributing the rewards themselves, based on a performance ranking at the end of the contest, there are 2 possibilities: (1) you take care of it; (2) Hypermind takes care of it. In the second case, you would give us the money and we would distribute it, when the time comes, in the form of Amazon Gift Certificates. If Amazon GC is unpalatable to your traders, we can explore other forms of rewards – TBD.

For your readers to participate, they will have to register to the Hypermind website. This means providing personal information such as email address, name,  etc., and some basic demographic info such as education level, year of birth, gender, etc. But no financial or banking info of any kind. Since participation is invitation-only, they will first have to request an invitation, then they will receive an account activation link by email. Filling out the registration form just takes a minute.



The Nominal GDP 2014:3 contract that you specified is now live on (please use this exact address) with a dedicated contest featuring a minimal $126 prize (100 €). There is already some trading going on. But to check out this market, your readers will need to register to Hypermind first.  [I fixed the link]

They used Skype to show me the site, and it really is very easy to register, despite requiring two steps (request for invitation, then filling out a short form.) And of course no financial info needed.

I was thinking of starting off with 6 contracts at Hypermind; quarterly NGDP growth rates for 2014:3, 2014:4, 2015:1, 2015:2, and 2015:3, as well as an annual growth rate contract for 2014:4 to 2015:4.  There would be $1000 prizes for each quarterly market, and a $5000 prize for the one year contract. Total cost would be $10,000.  Unfortunately, everything in America is absurdly complicated.  In this case there is just one problem—there is no non-profit for donors to donate to. Hypermind is a for-profit entity. Does anyone know a method by which donors could contribute to this sort of experiment in a way that was tax deductible in the US and also 100% shielded from liability?  Or at the very least 100% shielded from liability?

The 2014:3 contract is already up and running, but we could obviously do much better with more than 100 euros in prize money.

Once I figure out what we are going to do with Hypermind, I’ll be able to tell each donor how much of their donation would be needed for iPredict.  If we can’t resolve this in a couple days, we may just go ahead with iPredict, and try to resolve Hypermind later.  My long term goal is to encourage Americans to trade NGDP at Hypermind, and non-Americans to trade NGDP at iPredict.


Are the doves dishonest?

During the 1970s, the doves were consistently wrong, and for the most part denied they were wrong, even after the fact.  Inflation (they said) was caused by “non-monetary” factors.  Now we all know that was hogwash; NGDP was rising at 11% per year.  And non-monetary factors like oil shocks and strong unions have no impact on NGDP.

Since 2008 it’s been the exact opposite, the hawks have been consistently wrong.  There is no shame in being wrong, but it is shameful not to admit you were consistently wrong in the past, when the facts clearly suggest you were.  Oddly, Benn Steil and Dinah Walker now think it’s again the doves who are at fault.

Do Fed doves and hawks get their aviary classifications based on their cold, hard analysis of data, or is it the reverse – do they select data points to justify their dovish or hawkish perspectives?

The history of the Fed’s post-crisis focus on unemployment suggests the latter.  After June of 2013, as the figure above shows, the Fed’s estimate of the natural long-term unemployment rate begins declining in sync with the decline in the actual unemployment rate.  This suggests that FOMC members are lowering their estimates of the natural rate of unemployment to justify keeping interest rates at zero longer than they could if they stuck by their initial estimates, the 6% consensus upper bound of which is now above today’s actual 5.9% rate.

We cannot test this hypothesis directly, by checking each member’s estimate history, because the estimates are anonymous.  But we can check whether the phenomenon can be explained merely by a change of FOMC composition: it cannot. The distribution of participants’ estimates shows conclusively that some of them have indeed revised their estimates lower.  Given that these are supposed to be estimates of the long-term natural unemployment rate, this is more than curious.

With core PCE inflation, the Fed’s preferred inflation measure, running at 1.5%, still comfortably below the Fed’s 2% long-run target, there is little compelling reason to begin hiking rates immediately.  But given its upward trajectory from 1.2% at the start of the year, there is surely now reasoned cause for bringing forward the Fed’s old September 2012 calendar-guidance of zero rates through mid-2015 – which the Fed doves are still strongly wedded to.

Our observations suggest that monetary dovishness and hawkishness are often fixed states of mind, rather than artifacts of a consistent approach to data analysis.  If so, there is reason to fear that the Fed’s exit from monetary accommodation will be too late and too tepid – with the result being higher future inflation than the market is pricing in right now.

Obviously it’s possible they are right, but it seems extremely unlikely.  The doves have good reason to delay their estimate of the optimal time to raise rates; the markets are suggesting that we are not approaching the Fed’s multiple policy targets as quickly as the unemployment numbers would suggest.  If 5.4% really was the natural rate of unemployment, then there is no way the 5-year TIPS would be plunging rapidly below 2%, and the 10 year T-bonds would be 2.3%.  After all, we will be at 5.4% unemployment in about 5 months.  Once we fall below the natural rate, the standard model (i.e. the Fed’s model) says inflation should rise.  But there are no signs that inflation will rise.  Steil and Walker cite historical data, but market inflation expectations are much better.  It’s not a good idea to try to steer the car by looking in the rear view mirror.  It’s not wise to second guess market forecasts.

Unfortunately we lack a NGDP futures market, which would have made it much easier for me to make this argument.  The government and the economics profession deserve ridicule for the fact that this market does not exist.

I do agree with the first sentence of their final paragraph, and have a new post on that topic over at Econlog.  But I draw the opposite conclusion—it’s the hawks we need to fear.

Great minds think alike

This is me back in 2010:

The EMH is approximately true; indeed it’s almost impossible for me to imagine any other model of financial markets.  But it’s not precisely true, again, just as you’d expect.  After all, if the EMH were perfectly true then no one would have any incentive to estimate fundamental values.  We know people are imperfect and hence that any real world human institution, including markets, will be at least slightly imperfect.

A smart person like Eugene Fama should have been able to come up with both the EMH, and its limits, by just sitting in a room and thinking.  Much as David Hume got the QTM by imagining what would happen if everyone in England woke up one morning with twice as much gold in their purses.  Or Fisher’s theory of inflation and nominal interest rates.  Or Cassel’s purchasing power parity.  Or Friedman/Phelps’ natural rate hypothesis.  Or Muth and rational expectations.  Certain ideas are simply logical, and that’s why I have no doubt that despite all those economists on the left arguing the EMH has been discredited, it will still be taught in every top econ/finance grad program 100 years from now, whereas fiscal stimulus will be long gone from macro textbooks.

PS.  Why will fiscal stimulus be gone?  Because even Krugman admits it only makes sense at the zero bound.  And we are rushing headlong into a world of all electronic money–probably within 50 years.  There is no zero lower bound with electronic money, and hence the Taylor Rule is all you need.  Old Keynesian economics will vanish, leaving only new Keynesianism.

And here’s my doppelganger Noah Smith 4 years later:

Now, the analogy between the EMH and Newton’s Laws is far from perfect. Newton’s Laws are wrong in a finite set of ways, under conditions that are predictable and well-known. The EMH, in contrast, is wrong in an infinite number of ways, and the set of the most important ways in which it’s wrong is constantly changing, as old anomalies are traded away and new ones crop up. Also, the EMH is actually a family of hypotheses, since you need a model of risk to specify it properly.

But like Newton’s Laws, the EMH is deep and fundamental. If you went through a wormhole and visited an advanced alien civilization, what would they think about financial markets? Chances are, they wouldn’t use the Capital Asset Pricing Model, or the Fama-French 3-Factor Model, or the Shiller CAPE. But I bet they would have some version of the Efficient Market Hypothesis.

This is because the EMH doesn’t emerge from any peculiarity of the way our market system is set up, or the way human beings behave. The EMH comes from something much deeper than that, something that probably has to do with information theory. It comes from the fact that when you exploit information to make a profit in a financial market, you decrease the amount that others can exploit that information. In other words, the financial value of information gets used up. That sounds simple and obvious, but so are the principles that give rise to Newton’s Laws.

In any case, the anomalies that make the EMH not quite right may also have deep explanations, but we don’t know what those are yet. When we do, that will be a big advance in finance theory. But the EMH will still be the jumping-off point for any theory of financial markets, on this planet or any other. It will always be wrong, but never useless.

Noah reached this insight 4 years after I did.  But don’t be fooled, he’s much more than 4 years younger than me.  He reached enlightenment at a younger age because he’s also much smarter than me.