Archive for the Category Misc.


Layoffs reach the lowest level EVER

A few weeks ago I pointed out that new claims for unemployment (4 week average) as a share of total employment had reached the lowest level since April 2000.  I predicted it would soon beat that record.  Now it has; they are at the lowest level ever.  Here’s what we know (or at least I suspect) about the new economy:

1.  Low interest rates are the new normal.

2.  Low layoffs are the new normal.

3.  High stock prices are the new normal.

4.  Greater income inequality is the new normal.

5.  Fewer people moving between states is the new normal.

6.  Slow RGDP growth is the new normal, probably due to both slower employment growth and lower productivity growth.

7.  The Great Moderation is back after a one year hiatus (mid-2008 to mid-2009).  This expansion may last a record 10 plus years, but will still be a lousy expansion.  Don’t call it the Great Moderation, call it the Mediocre Moderation.  Mediocre labor markets are the new normal.

8.  Just as overall economic growth reflects deep institutional realities, the quality of macro policy reflects the quality of institutions doing macro teaching and research.  A small country like Canada can easily outperform a big region like the eurozone, if its macroeconomists (Laidler, Rowe, Carney, etc.) are better informed about the realities of monetary economics and AD than those macroeconomists of the eurozone, who don’t even seem too sure of what AD is.  But these differences are not carved in stone—Germany was ahead of the English-speaking world in their understanding of monetary economics during the 1970s.  As the issues change, the relative strength of each country changes.

Update:  The Nikkei Asian Review has published a phone interview of me.  I’m told this is a major Japanese paper.

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.