“How can you claim the problem is tight money?”

Here’s today’s headline:

Strong Dollar, Weak Jobs Outlook Fuel Market Plunge

But no worries, the 5 year bond yield is down to 1.14% and falling fast.  If the Fed continues this “easy money” policy much longer, it will soon be just as stimulative as the Bank of Japan!

(Still on vacation, so no replies to comments until I return.  If there is still an economy to return to at that time.)


Tags:

 
 
 

96 Responses to ““How can you claim the problem is tight money?””

  1. Gravatar of Jim Glass Jim Glass
    4. August 2011 at 11:13

    Negative interest rates come to US commercial banking (as the stock market falls 400 points at this writing).

    Bank of NY Mellon will gladly hold your cash, for a fee.

    “Over the past two weeks, money-market funds, corporate treasurers and investment houses have pulled money out of securities that mature in more than one day in favor of stashing their cash in bank accounts at BNY Mellon and other banks with custodial operations like J.P. Morgan Chase Co. that earn no interest, but which are insured by the Federal Deposit Insurance Corp…

    “BNY Mellon’s move shows concern about the cost of taking large deposit flows at a time when interest rates are near zero. The bank pays about 0.10% to the FDIC to insure deposit accounts, and if its deposits swell massively it could face capital charges…”

    Well, at least it’s reassuring to know Bernanke still has many options left to use should the need ever arise … and that Bullard is ever focused on the danger of rising inflation.

  2. Gravatar of effem effem
    4. August 2011 at 11:20

    Strong dollar? The USD is cheap vs all major currencies on a PPP basis (in some cases 40% cheap). Gold is at $1600. Oil is $115 with 9% unemployment. In my opinion the market is screaming that money is too loose – but what do i know? I’m just an investor.

  3. Gravatar of Jeff Jeff
    4. August 2011 at 11:31

    Hey, weren’t you on vacation the last time the market crashed? Is there a pattern here?

  4. Gravatar of Silas Barta Silas Barta
    4. August 2011 at 11:36

    As long as you can get loans for good business plans, money isn’t tight.

  5. Gravatar of Liberal Roman Liberal Roman
    4. August 2011 at 11:52

    effem,

    I am sorry for my shrillness, but how can you be so INSANE!

    For the past THREE years, every day the market goes up, the dollar goes down. And vice versa. For the past THREE years, any stretch of good economic performance has been met with lower dollar.

    The best performance for the dollar was during the 2008 crash. And days like today. Perhaps effem, today is a good day for the economy.

    People like effem take the last 80 years of economic knowledge, crumple it up, spit on it and flush it down the toilet.

  6. Gravatar of Benjamin Cole Benjamin Cole
    4. August 2011 at 11:53

    Perhaps Bernanke-san has outsourced monetary policy to Tokyo. It has worked so well there.

  7. Gravatar of W. Peden W. Peden
    4. August 2011 at 11:56

    Re: the dollar- if the Americans want a strong currency, they have to earn it. Britain found that out, to our cost, in 1992.

  8. Gravatar of Benjamin Cole Benjamin Cole
    4. August 2011 at 11:57

    Effem:

    Too bad you missed the opportunity to invest in Japanese stocks and property in 1990, when they went to fighting inflation vigorously. They have crushed inflation in Japan. They have stuck to tight money, regardless of consequences. Real heroes!

    Oh, btw, since then Japanese stocks and property are down 80 percent, and still falling for property. Wages are down too, in real terms. The population is shrinking too.

    Next investment opp for Effem: The USA?

    Bernanke-san is your man.

  9. Gravatar of Richard A. Richard A.
    4. August 2011 at 12:06

    All of this year’s gain in the Dow Jones Industrial Average have been wiped out in the last 2 weeks.

  10. Gravatar of Liberal Roman Liberal Roman
    4. August 2011 at 12:30

    Ben,

    The problem is effem probably thinks Japan has had a loose monetary policy these past 20 years, their low inflation not withstanding.

    Remember, in the minds of the idealogues, it’s not the results of the policies that matter, it’s the policies thesmelves. If effem thinks that Bernanke has run a loose monetary policy and hyper-inflation is just around the corner, then that’s what the TRUTH is in his mind. All other contradicting facts can be ignored.

  11. Gravatar of effem effem
    4. August 2011 at 12:30

    One thing is clear, there are not a lot of professional investors on this board. If there is one thing you learn trading markets it’s that things change. In fact, they often flip. Expectations are tremendously important.

    Economic actors are very good about incorporating the “status quo” into their decisions. In other words, the people of the world know the macro playbook and have created a structure designed to maximize profits in that environment. As a result that set of policies is now counterproductive.

    Since Greenspan took the helm, we have had an implicit policy of cheap money (negative real rates), short recessions (any dip immediately greeted with easing), and bailouts of systemtic risks (LTCM, Bear, etc). Given that as a backdrop what would you expect to happen? Let me take a stab – organize the economy around businesses that benefit from asset inflation that have fixed or semi-fixed costs and can add huge amounts of low-cost leverage. Further I would do my best to concetrate risk such that everyone becomes systemic. In other words, you would expect the finance industry to grow massively. Hmmm – exactly what happened.

    The Achilles heel of that system is inflation as it would cause the Fed to rethink negative real rates. The market figured out the solution here as well – peg the Chinese currecny and move all manufacturing there. Done.

    Ok, so now we have the second largest global economy (which I would argue has a disproportionate impact) with its currency pegged to the USD. Further, we have reached a point of leverage where banks are not comfortable taking on more. In the past, the Fed would ease, the economy would recover, and inflation would set in slowly over the course of the next few years. Now, the second the Fed gives a signal that it is easy commodities move right in tandem with the economy. Monetary easing is immediately met with a loss of purchasing power and real wealth by the consumer – both US and abroad. Wages dont move, homes dont move – just goods.

    There is no doubt that a weak USD has some benefit on stock prices as stocks are priced in USD but generate income outside the US. Further many companies have semi-fixed costs. But this is short sighted. Just because corporate margins may expand a bit temporarily it doesn’t outweigh the loss of purchasing power that is occurring.

    If you want to look at a market-measure I suggest the SPX priced in gold. It is making multi-decade lows. Yes, all of corporate America is rapidly losing value relative to a useless chunk of metal sitting in a vault collecting dust. That is a dangerous state of affairs. Not sure how else you spin that one.

    Just my 2 cents.

  12. Gravatar of effem effem
    4. August 2011 at 12:37

    You guys are crazy to even bring up Japan. Behind China today, that is probably the grossest example of capital misalloation in history. They are lucky to have escaped with just a few lost decades.

    Misallocation of capital is a huge problem. It is not something you can just paper over. You can come up with all the theories you want as to how you can paper over it but throughout thousands of years of history capital misalloation has always had disastrous results.

  13. Gravatar of effem effem
    4. August 2011 at 12:47

    I would also like to point out TIPs implied inflation breakeven rates:

    5-year: 1.78%
    10-year: 2.21%
    30-year: 2.55%

    Where is the deflation risk? The larger falls (by far) have been occurring in the real yield component of yields. Money is rapidly getting easier.

    TIPs implied real yields:
    5-year: -0.80%
    10-year: 0.20%
    30-year: 1.10%

    So money is FREE. Since when is FREE too tight?

  14. Gravatar of W. Peden W. Peden
    4. August 2011 at 12:48

    effem,

    How would you explain the relatively slow growth in the financial industry during the Bretton Woods period, during which there were no significant recessions at all and very cheap money?

  15. Gravatar of MikeDC MikeDC
    4. August 2011 at 12:51

    Effem,
    If you take a broader step back, however, all of corporate America (and corporate Europe and wherever) is rapidly losing value relative to those useless little green bits of paper as well.

    I agree it’s dangerous and expectations have a lot to do with it. But at its heart, money just buys things, and the thing people want to buy right now is safety. If the dollar were “strong” in the sense it provided more safety than, say, gold, that’d mean we have a “stronger dollar”, I suppose, but wouldn’t the fundamental problem still be that people prefer to buy safety by holding dollars rather than buying the goods, services, and assets that actually represent economic activity?

    In my mind, that’s a clear yes. And in the short run, satiating that demand for safety requires making dollars available, because otherwise people are going to substitute away from using them for all the things we’re actually supposed to be using them for.

  16. Gravatar of W. Peden W. Peden
    4. August 2011 at 12:54

    Anyway, we are in total nuttersville now. I imagine that over 80% of economists believe that QE3 would boost inflation, but not growth. Joan Robinson has truly won: her “disciples”, the Vulgar Keynesians and the Vulgarer Keynesians, have taken over. The lunatics are running the asylum: the left believes that only nationalisation and fiscal stimulus will work, the right believes that liquidationism is the way to go. I’m amazed and relieved that Karl Marx is being kept on the bookshelves (for now). The left has given up its grudging respect for markets and the right hates markets even more (the idea that markets know better than sages has been totally dismissed by the neo-Austrians).

    The terrible state of modern macroeconomics is reflected in macroeconomic policies throughout most of the world that are neither coherent nor sound. It’s looking bleak and it’s all so painfully avoidable. This must have been what monetarists felt like in the early 1970s.

  17. Gravatar of effem effem
    4. August 2011 at 13:02

    Peden,

    I dont think it matters. that was a long time ago. I believe it’s the combination of regulation & the lack of an implied government backstop. I also believe there is a large cultural component: a) the need to feel productive by “making” something and b) an aversion to credit on the part of the US consumer. None of those are the case now.

    Once again i’d like to point out to every that the bond market is saying inflation will average 2.2% over the next 10 years (and yes, that is after today’s market rout). Real yields are 0% for 10 years. Gold is the strongest asset in the world. Oil is $110 with 9% unemployment. Money is simply not tight. It is in fact too loose.

  18. Gravatar of W. Peden W. Peden
    4. August 2011 at 13:08

    effem,

    “I dont think it matters. that was a long time ago. I believe it’s the combination of regulation & the lack of an implied government backstop. I also believe there is a large cultural component: a) the need to feel productive by “making” something and b) an aversion to credit on the part of the US consumer. None of those are the case now.”

    Wasn’t there a government backstop during that period? As I understand it, FDIC and such are products of the 1930s, not the 1980s.

    So you’re saying that government regulation would be a workable path to stability?

    (I dismiss your points (a) and (b) as obvious tosh, since (1) people produce on the basis of what consumers want to get, not what they want to make/do, and (2) people generally take on credit whenever they think they can afford it (and companies always do- it’s a jungle out there) in all times and all places, hence the strong connection between credit booms and asset booms that push up people’s nominal wealth.)

  19. Gravatar of bertusmaximus bertusmaximus
    4. August 2011 at 13:14

    most people dependent on transportation somehow. lower crude prices good for most people. easing of conditions? yes.

    most people live in houses. houses financed by lower rates. easing of conditions? yes.

    most people use after tax wages to purchase goods. cheaper goods better for most people. easing of conditions? yes.

    most people save money and store cash. higher value of cash implies greater future claim on labour and goods. easing of (forward) conditions? yes.

    i can hear the belly roars now …

  20. Gravatar of effem effem
    4. August 2011 at 13:18

    Wasn’t there a government backstop during that period? As I understand it, FDIC and such are products of the 1930s, not the 1980s.

    I mean a govt backstop when your assets fall and you become insolvent (think LTCM or Bear Stearns).

    As for credit, I disagree. I think it has taken many decades to develop the infrastructure and social mindset to be willing to lever ourselves up. Also, the business cycle was more volatile then, which would make leverage a less interesting proposition. Part of our comfort level with leverage now stems from the fact that we were able to engineer some of the volatility out of the global economy in the 90s. Stability breeds instability. Those days appear to be over.

    I would like to repeat once again (or at least until someone enlightens me)…

    The bond market is saying inflation will average 2.2% over the next 10 years (and yes, that is after today’s market rout). Real yields are 0% for 10 years. Gold is the strongest asset in the world. Oil is $110 with 9% unemployment. Money is simply not tight. It is in fact too loose.

  21. Gravatar of Justin Justin
    4. August 2011 at 13:29

    Nope. The economy’s gone. Just stay on vacation.

    Cheers!

  22. Gravatar of W. Peden W. Peden
    4. August 2011 at 13:37

    effem,

    “I mean a govt backstop when your assets fall and you become insolvent (think LTCM or Bear Stearns).”

    Were asset movements more downwardly volatile during the Bretton Woods era?

    “As for credit, I disagree. I think it has taken many decades to develop the infrastructure and social mindset to be willing to lever ourselves up. Also, the business cycle was more volatile then, which would make leverage a less interesting proposition. Part of our comfort level with leverage now stems from the fact that we were able to engineer some of the volatility out of the global economy in the 90s. Stability breeds instability. Those days appear to be over.”

    But what about the huge credit booms of the 1970s and 1980s? Was stability breeding instability then?

    “The bond market is saying inflation will average 2.2% over the next 10 years (and yes, that is after today’s market rout). Real yields are 0% for 10 years. Gold is the strongest asset in the world. Oil is $110 with 9% unemployment. Money is simply not tight. It is in fact too loose.”

    I’m more worried about NGDP than inflation. As I see it, the US is looking at a lost decade and it’s because of weak demand. Also, money is not loose. Broad money growth is sub-5%, after a deep contraction and a fall in velocity.

  23. Gravatar of W. Peden W. Peden
    4. August 2011 at 13:38

    Also, you didn’t answer my question about government regulation. Are you pining for the days when the Man in Washington knew best when it came to finance?

  24. Gravatar of effem effem
    4. August 2011 at 13:42

    “I’m more worried about NGDP than inflation.”

    That doesnt make sense to me. NGDP=RGDP+Inflation. If you are saying you dont care if inflation is all of that or none of that then I disagree. Not only do I care about inflation but I care about the composition of inflation (wages vs goods, etc.).

    My personal belief, which is impossible to prove, is that the growth issues we are having now is precisely because people expect 2% annual inflation for the next 10 years and that it will primarily be composed of the wrong type of inflation. That hurts wealth, which hurts growth.

    Why don’t you propose a policy whereby the Fed simply bids up the price of oil until we hit your NGDP target? Seems like that’s a lot more direct than playing games with rates. Problem solved.

  25. Gravatar of W. Peden W. Peden
    4. August 2011 at 14:23

    effem,

    “That doesnt make sense to me. NGDP=RGDP+Inflation. If you are saying you dont care if inflation is all of that or none of that then I disagree. Not only do I care about inflation but I care about the composition of inflation (wages vs goods, etc.).”

    So if inflation is at around 2% and RGDP is at 0.4% and the long-term trend of NGDP growth is around 5%, what does that say about demand?

    “My personal belief, which is impossible to prove, is that the growth issues we are having now is precisely because people expect 2% annual inflation for the next 10 years and that it will primarily be composed of the wrong type of inflation. That hurts wealth, which hurts growth.”

    I’d say there is a much easier explanation that is provable or falsifiable: demand, as measured by NGDP, is way off its long-term trend and the US economy is stuck in a classic monetary disequilibrium. And it may be stuck there for some time: Japan is still basically in a disequilibrium and it has been for around 20 years. Government monopolies aren’t good at ending disequilibriums, so we may well see the US economy in this state long enough for “American Greatness” to be gone. Forever.

    “Why don’t you propose a policy whereby the Fed simply bids up the price of oil until we hit your NGDP target? Seems like that’s a lot more direct than playing games with rates. Problem solved.”

    Sounds stupid, like targeting gold. A better proposal is that the Fed adjusts the supply of money in line with the demand to hold money, just like a business. Or even better: we get a free market in money. Either would solve the problem.

    (Or apparently we could just get some government bureaucrats to regulate the financial sector. That’s the road to stability! The Man in Washington knows best! While we’re at it, wouldn’t it solve a lot of instability if we started to direct the course of industrial production on a stable long-term path… We could call it “planning”…)

  26. Gravatar of Richard W Richard W
    4. August 2011 at 15:20

    I think it is a bit misleading to just say ‘ strong dollar. ‘ Stronger than what? Certainly the Dollar Index has appreciated over the last two days, but the dollar is still weaker than a month ago. I buy the adjustment and repricing to a lower growth environment story. Lob 1% off potential RGDP and everything is going to go down to adjust to that rate of growth.

  27. Gravatar of Steve Steve
    4. August 2011 at 15:30

    effem, you wrote: “One thing is clear, there are not a lot of professional investors on this board.”

    Well, I am a professional investor and I think you are an idiot. Sorry for my shrillness.

    effem, you wrote: “Misallocation of capital is a huge problem.”

    Please do tell us where capital is being misallocated. Where is there too much, and where is there too little? If you can’t give examples for both cases you have no business making such a statement (nor any business being a professional investor).

    effem, you wrote: “Oil is $110 with 9% unemployment. Money is simply not tight. It is in fact too loose.”

    WTI Oil closed today at $86.35. Ok fine, Brent is at $107. But all that tells you that investment is needed to arbitrage the difference. And it won’t happen with Brent in the toilet which is what you would get with your liquidationist policy preferences.

  28. Gravatar of Bryan Willman Bryan Willman
    4. August 2011 at 15:52

    Mechanical question – what would the Fed do to make money looser, and in particular, looser past the ring of banks?
    (It seems right now that the fed is sort of pushing on a string that balls up inside the banks, since they can’t or won’t lend it to the next tier out.)

    In some sense, it would seem that lenders (banks and others) would have to be willing to take on riskier loans (make more risky bets) to have more capital actually flow into investment.

    And it would seem that consumers and investors would have to be willing to take on more debt to buy more things (investment goods and regular goods) in order for loose/cheap money to matter.

    So maybe to really “loosen” the fed needs to do something like simply send cash to every person or household, with some letter about “please retire debt or go buy something with this”. That is, only printing money to retire debt will actually loosen? (That would normally be a way to make hyperinflation, but that seems for some reason impossible now.)

  29. Gravatar of W. Peden W. Peden
    4. August 2011 at 16:16

    Bryan Willman,

    “It seems right now that the fed is sort of pushing on a string that balls up inside the banks, since they can’t or won’t lend it to the next tier out.”

    Banks don’t lend their reserves. Instead, the Fed increases the creditworthiness of the public by boosting asset prices, which would also incidentally make deleveraging a lot easier.

  30. Gravatar of flow5 flow5
    4. August 2011 at 16:42

    Just like in 1937 the FED is too tight (except now we face stagflation). The inflation indices should be divided into supply-side inflation (the scarcity of resources- i.e., 7 billion people are now on the planet), & demand-side (monetary) inflation. The FED can’t do anything about the supply-side so its inflation target should be HIGHER.

    Low interest rates alone are not indicative of a tight money policy.

  31. Gravatar of Cameron Cameron
    4. August 2011 at 16:49

    This whole mess with tight European money leaking over to tight US money is reminding me of French gold hoarding during the Great Depression.

    I don’t want anymore posts that don’t mention how tight money will inevitably result in another Hitler.

    I’m keeping my fingers crossed the Fed will do something other than another round of QE this time. QE3 doesn’t make sense, especially from a publicity stand point. Anyone have any strong opinions on whether the Fed will try something else this time?

  32. Gravatar of Steve Steve
    4. August 2011 at 16:59

    Cameron,

    I’ve always been a fan of QE and would welcome a QE3.

    However, I’m coming around to the idea that a level targeting commitment, even if it’s merely implicit, would be perhaps more beneficial.

    One of the problems I see is that oil prices in 2011 are lower on average than oil prices in 2008, yet the masses are screaming about commodity inflation because the Y/O/Y looks bad (and Libya, not monetary policy, is the cause). It’s a very dangerous situation; three years of deflation yet every price uptick is an excuse for the raving lunatics to scream about inflation. An indirect hint about level targeting could be as helpful as a QE3.

  33. Gravatar of Full Employment Hawk Full Employment Hawk
    4. August 2011 at 17:55

    “BNY Mellon’s move shows concern about the cost of taking large deposit flows at a time when interest rates are near zero. The bank pays about 0.10% to the FDIC to insure deposit accounts, and if its deposits swell massively it could face capital charges…”

    But if they just hold the money as excess reserves, the Fed pays 0.25% interest on them. A .15% margin on large deposits can be quite lucrative. Competition for such deposits should cause banks to pay a small amount of interest on them.

  34. Gravatar of Full Employment Hawk Full Employment Hawk
    4. August 2011 at 17:59

    If the reactionary Federal Reserve Presidents, like Fisher and Plosser can prevent QE III, it is time for the Fed to stop paying interest on excess reserves. This requires only the actions of the BOG, not the FOMC, and 4 out of the 5 current members are Obama appointment. This will also reduce the fear that a large amount of excess reserves may cause serious inflation in the future, since it will cause banks to reduce their excess reserves, which will be an effective stimulus for the economy.

  35. Gravatar of Morgan Warstler Morgan Warstler
    4. August 2011 at 18:49

    Inflation Hawk, you are a terrible conversationalist.

  36. Gravatar of johnleemk johnleemk
    4. August 2011 at 21:33

    Ken Rogoff is on the right track (linked from Mankiw’s blog): http://www.project-syndicate.org/commentary/rogoff83/English

    He’s figured out that both the Great Depression and Great Recession can be ameliorated (I initially wrote fixed but hesitated because there are supply-side issues in both cases) by monetary policy. He thinks it’s something special about financial crises, but as we know, it’s simply what happens when the public expects an NGDP growth trend to continue but the central bank refuses to duly accommodate. Still, on the right track! Who says convincing the economic establishment is a completely lost cause…

  37. Gravatar of Mike Sandifer Mike Sandifer
    4. August 2011 at 21:49

    It seems that Scott and Krugman continue to be vindicated…

  38. Gravatar of Rien Huizer Rien Huizer
    5. August 2011 at 01:14

    @ Cameron,

    “I don’t want anymore posts that don’t mention how tight money will inevitably result in another Hitler”

    Look what Kantoos writes today:

    http://kantooseconomics.com/

  39. Gravatar of Martin Martin
    5. August 2011 at 02:23

    @Effem,

    The fact that bonds, gold and the dollar are increasing in value relative to the real economy in a crisis is a sign of a flight to safety. Bonds, gold, and money (USD) are then ‘tight’ as demand for them increases without a corresponding increase in supply. The result is an excess demand for these assets and an excess supply for goods: a general glut.

    There are two ways out, either the producer of money, bonds and gold produces more of these, or the relative prices of real goods declines. The trouble however is that declining real prices of goods creates a negative spiral when it is caused by an increase in the demand for safe assets. It therefore ‘serves no function’.

  40. Gravatar of Lorenzo from Oz Lorenzo from Oz
    5. August 2011 at 04:48

    Inflation (CPI) in Oz is 3.6%.

    Unemployment is 4.9%.

    The cash rate is 4.75%, the $A/US$% is 1.0476

  41. Gravatar of Lorenzo from Oz Lorenzo from Oz
    5. August 2011 at 05:02

    The link for the cash rate and exchange rate figures is here. If the US is suffering from “easy money”, the $A must be really easy. Yet, somehow, is trading higher, this being the currency that bottomed at 0.4833 ($A/$US) in April 2001.

  42. Gravatar of effem effem
    5. August 2011 at 05:04

    Peden,

    “(Or apparently we could just get some government bureaucrats to regulate the financial sector. That’s the road to stability! The Man in Washington knows best! While we’re at it, wouldn’t it solve a lot of instability if we started to direct the course of industrial production on a stable long-term path… We could call it “planning”…)”

    I am no fan at all of beurocrats. In many cases the regulation IS the problem. You need to let banks fail. You need to let the market set the price of money (long and short). You need to let the market set the CNY-USD exchange rate. I’m all for the market making decisions. How can you believe in the market but also believe that the 2 most important variables in the world – US short-term rates and the CNYUSD – are supposed to be set by fiat??

  43. Gravatar of Bill Woolsey Bill Woolsey
    5. August 2011 at 05:52

    Martin:

    Outside of a gold standard, the money and relative price of gold can freely increase, and the nominal and real wealth represented by gold stocks can freely increase. Since the price of gold can freely fall too, it is a speculative commodity.

    While this process also works to clear the market for bonds generally, when the price rises to par and the yield falls to zero, a barrier is hit that doesn’t apply to gold. People can hold currency rather than bonds. While the real value of currency can fluctuate, bonds denominated in that currency will be subject to the same fluctuations.

    I will grant that increasing the nominal and real quantity of these bonds should help, and increasing the quantity of money by using newly created money to buy these bonds is of doubtful use, the key problem remains money.

  44. Gravatar of W. Peden W. Peden
    5. August 2011 at 06:11

    effem,

    “I am no fan at all of beurocrats. In many cases the regulation IS the problem. You need to let banks fail. You need to let the market set the price of money (long and short). You need to let the market set the CNY-USD exchange rate. I’m all for the market making decisions. How can you believe in the market but also believe that the 2 most important variables in the world – US short-term rates and the CNYUSD – are supposed to be set by fiat??”

    So you DON’T think that these government bureaucrats were responsible for the absence of asset price bubbles during the Bretton Woods system?

    I’m all for the market setting the price of money, but interest rates aren’t the price of money, they’re the price of credit. The price of money is the price level. The market setting the price of money would be stable NGDP growth at the trend-rate of real output i.e. the price level changes in line with production.

  45. Gravatar of effem effem
    5. August 2011 at 06:59

    Peden,
    I think at times govt policy could help lessen bubbles and at times feed bubbles. I also think policies have to take into account the expectations of economic actors – so the right policy at one time may well be the wrong policy at another.

    I disagree that NGDP growth is the price of money. The price of money is the price level. The market is telling us the price of money will depreciate 2% annually for the next 30 years. That seems reasonable although it is almost meaningless to me – if that 2% comes entirely from commodity inflation we have a big problem.

    Let me run you through a quick thought exercise…

    You have a business where revenue grows at NGDP, costs grow at 50% of NGDP, and you can get unlimited leverage at 25% of NGDP growth. The Fed guarantees to target NGDP with 90% accuracy and the goverment commits to help you out in the other 10% of times. What is the optimal business strategy? Grow like crazy, and add as much leverage as humanly possible. That’s exactly what has happened in our economy – we have funneled vast amounts of resources towards industries that rely on asset appreciation. When they fail the whole country gets poorer.

  46. Gravatar of Mark C Mark C
    5. August 2011 at 08:54

    Effem you said

    “I would also like to point out TIPs implied inflation breakeven rates:

    5-year: 1.78%
    10-year: 2.21%
    30-year: 2.55%

    Perhaps you failed to mentioned that 1yr BE is less than 1%?

  47. Gravatar of effem effem
    5. August 2011 at 08:58

    “Perhaps you failed to mentioned that 1yr BE is less than 1%?”

    Asking the Fed to maniupluation inflation on a yearly basis is a bit unrealistic. Plus, every business I know makes decisions based on a 5-10 year timeframe.

  48. Gravatar of Morgan Warstler Morgan Warstler
    5. August 2011 at 09:39

    More proof I am right:

    “Stocks rebounded strongly in a heavily volatile session Friday, following a report that the ECB could purchase Italian and Spanish bonds if Italy commits to certain reforms.”

    http://www.cnbc.com/id/44032861

    Some of you will not like the comparison, so moan all you want.

    The economists that Scott says inform the Fed’s opinions simply DEMANDING reforms of the government:

    1. Pay public employees less.
    2. Reduce regulations.
    3. Favor small businesses.

    As such, when Rick Perry is President, or when Obama ACTS LIKE RICK PERRY the Fed will find the unconventional easier to stomach.

    The ECB is explicitly forcing the southern European to be more conservative, and the stock market rallies.

    That’s HOW you buy yourself some QE, you aim your guns at Democrats and fire.

  49. Gravatar of CA CA
    5. August 2011 at 09:56

    What if the Fed went out and bought massive amounts of student debt?

  50. Gravatar of Morgan Warstler Morgan Warstler
    5. August 2011 at 09:58

    More proof I am right II:

    Matty FINALLY says out loud what i have been saying all along, that when fiscal tightening is occurring THEN Monetary is acceptable.

    http://thinkprogress.org/yglesias/2011/08/05/288741/fiscal-consolidation-requires-monetary-accommodation/

    He doesn’t want it to add up that way, he’d prefer to say we must have monetary since fiscal is tightening, but that pretends politics do not exist.

    Politics do exist.

    It means the good guys will be stingy with monetary until they see the bad guys in full retreat.

    And since the good guys PAY FOR STUFF and OWN THINGS, and the bad guys don’t, we (meaning you readers) should adopt an explicit threat guarantee to the progressives.

    The faster they dismantle the regulatory state, the more QE there will be.

  51. Gravatar of Morgan Warstler Morgan Warstler
    5. August 2011 at 10:00

    CA, they would be tarred and feathered.

  52. Gravatar of Martin Martin
    5. August 2011 at 10:47

    @Bill, I don’t disagree. My point was more that gold, bonds and money are saved out of uncertainty and that loose money is not the sole explanation for high prices of gold and bonds. I agree that tight money is underlies these.

  53. Gravatar of Morgan Warstler Morgan Warstler
    5. August 2011 at 12:13

    whaddayaknow? It works:

    “The measures included a plan to amend the constitution to make a balanced budget mandatory, a second constitutional change that would force “closed professions” to liberalise services, a speeding up of welfare reforms, and other structural reforms designed to boost Italy’s stagnant economy.

    Cuts in the “cost of politics” – including salaries of elected officials and subsidies to political parties – were also on the agenda, which had been agreed in outline with leaders of employers’ associations and trade unions on Thursday.”

    http://www.ft.com/intl/cms/s/0/33c589d8-bf7b-11e0-90d5-00144feabdc0.html#axzz1UBeRQjjC

    ——

    HOLY COW!!!!

    It’s like OMG, a central bank is forcing a government into submission! And those stupid Italians are EATING IT!

    It is unimaginable!

    Wait, hmmm…. isn’t that what the IMF does to broken governments all the time?

    WOW! Wait a minute! What if the Fed is doing that implicitly right now?

    You can lead eggheads to water, but apparently if their theories are subservient to the will of the asset holders, they will not drink.

  54. Gravatar of W. Peden W. Peden
    5. August 2011 at 13:01

    effem,

    “I disagree that NGDP growth is the price of money. The price of money is the price level.”

    Oddly enough, I didn’t say that NGDP is the price of money. In fact, I said that the price of money is… The price level.

    “You have a business where revenue grows at NGDP, costs grow at 50% of NGDP, and you can get unlimited leverage at 25% of NGDP growth. The Fed guarantees to target NGDP with 90% accuracy and the goverment commits to help you out in the other 10% of times. What is the optimal business strategy? Grow like crazy, and add as much leverage as humanly possible. That’s exactly what has happened in our economy – we have funneled vast amounts of resources towards industries that rely on asset appreciation. When they fail the whole country gets poorer.”

    But the Fed doesn’t target NGDP. It has never targeted NGDP. Its implicit target, for ages, has been 2% inflation (on whatever measure it chooses!).

  55. Gravatar of Jim Glass Jim Glass
    5. August 2011 at 13:25

    Asking the Fed to maniupluation inflation on a yearly basis is a bit unrealistic.

    In the third quarter of 2008 deflation arrived in the USA, and in the fourth quarter it accelerated to a 13% annual rate. In response, in the fourth quarter the Fed overtly and publicly intervened with a big show to stop it, and in the first quarter of 2009 the price fall was successfuly reversed back to inflation.

    Thus we see that the Fed certainly *can* move the price level within a year. And as unreversed 13% deflation is the stuff that the collapse of the Great Depression was made of, you should be very grateful that it *has*.

    Plus, every business I know makes decisions based on a 5-10 year timeframe.

    As a business owner I find this amusing. The first four years count too, believe me. *Especially* year one, as only the portions of the business that survive it get to year two…

  56. Gravatar of Liberal Roman Liberal Roman
    5. August 2011 at 14:01

    The Fed can change the price level expectations within seconds. Bernanke can come out say, I’m implementing an open ended QE program until the price level reverts to something I am comfortable with.

    1,000 point DOW rally and recovery guaranteed.

  57. Gravatar of W. Peden W. Peden
    5. August 2011 at 16:13

    Further thoughts on “Do Great Moderations cause asset bubbles?”

    If they do, then the Great Moderation took its sweet time in doing so. In the UK and US, things didn’t start to get overheated until around the middle of the decade, when broad money began to undergo an unmistakably OTT trend. The crash killed off that proto-inflation, but it seems reasonable to conclude that monetary policy was too loose in 2006 and 2007 (in the UK at least) before becoming too tight in 2008.

    I would go so far as to say that general asset bubbles (as opposed to particular bubbles in the stock market or housing) only come when the economy is overloaded or is expected to be overloaded with money. This is because assets can be a superior substitute to money when it comes to accumulating wealth.

  58. Gravatar of Morgan Warstler Morgan Warstler
    5. August 2011 at 17:03

    This is why Sumner’s Fairy Dust plays second fiddle to fixing structural problems:

    http://www.youtube.com/watch?v=uKwWa1h7Sd4&feature=player_embedded

    Watch it. Technocrat crushed by reality.

    It is because Ezra is a second class citizen, it is because Ezra has to be fixed.

    Main Street HATES Ezra. So the quicker you tear him and his good causes down, the quicker Main Street will listen to you.

    What he has to see is that the guys with money have it for a reason, and since they are able “move it around” (and are smarter than Ezra), there is only one kind of “unfair” and everyone knows it….

    It is unfair when institutions are not allowed to fail.

    Letting things fail is the ONLY kind of economic justice any of us, including the left can actually enjoy.

    If you fight that, there will no justice of any kind.

  59. Gravatar of Morgan Warstler Morgan Warstler
    5. August 2011 at 17:16

    And then please, for me, would all of you also read the comments at YouTube.

    This is what you face. This is the public mind.

    The A power wants you QE champions to put Ezra’s head on a pike, they want you to sacrifice he and all of his friendlies until the progressive blood runs red in the streets.

    So if you aren’t ready to deliver the ends you seek, by any means necessary, everyone will assume that you ARE Ezra.

    It isn’t enough to say pox on both their houses, if you want the real QE baby, I mean the “holy shit they are serious QE” you are going to have to earn it.

    You are going to have to END EZRA.

  60. Gravatar of Mark C Mark C
    5. August 2011 at 18:13

    Effem,

    I think you didn’t really answer my question, perhaps it’s my fault. Shortly after you put all those 5yr, 10yr BE numbers, you asked where’s the deflation risk? So do you think a 1yr BE which dropped from around 150 bps less than 1 wk ago to less than 100 bps is market signalling of higher near term deflation/ disinflation risk or not?

    Furthermore, as an investor and my father a business person, I couldn’t recall him ever asking me where’s market’s 5yr inflation expectation is, as long as a country doesn’t have hyperinflation, businesses don’t really look at inflation, instead they look at earning potential and consumer demand, though they tend to consider 5-10 yr time frame, but like what Jim said the first yr does matter.

  61. Gravatar of Bonnie Bonnie
    5. August 2011 at 21:05

    Isn’t the discussion of whether inflation expectations matter to business a little off the point of making a judgement call regarding the stance of monetary policy?

    The listing of current TIPs does little to prove the point either way given that nothing is presented that shows a comparison over time and the original point is premised on NGDP being below historical trend. The trend is what matters considering many contracts established before the various plunges in NGDP have those past expectations baked in. When the Fed allows NGDP to plunge and does not attempt to make it up, or tries to establish a new lower trend, it is contractionary, even if current inflation expectations are mildy positive. If they are not far enough in the positive territory to at least make a start to a return to trend, money is tight until new contracts replace enough of the old ones to make a difference.

    To me, it seems there is a choice to be made between returning to the old NGDP trend or going through the pain of adjusting to a new, lower trend over time. Of course the Fed didn’t hold a referendum on the matter or ask us if we thought their plan to squeeze us down to not quite 2% inflation was worth what it has ended up meaning. If they had to honestly sell this policy to an informed public before doing it, my guess is that we’d all wake up and the realize these past few years was nothing but a really bad dream.

  62. Gravatar of W. Peden W. Peden
    6. August 2011 at 00:47

    Bonnie,

    I think that it’s easy to forget the NGDP expectations bit, because patently businesses don’t have NGDP expectations as such. What they do have is expectations of demand for their product/service, and NGDP is a measure of demand.

    It’s not like we need to invent any new models or make any instrumentalist claims about businessmen to know that expectations of demand matter. There are a few trogdolytes (who shall remain nameless) who don’t think that expectations matter, but the rest of us know that they very much do matter and have known since at least Friedman & Lucas.

  63. Gravatar of Jack T. Jack T.
    6. August 2011 at 08:30

    What’s up with everyone calling each other idiots?

    I get the sense that some folks on this board are in the economy (i.e. business) and others are in education (i.e. have studied historical aspects of marco) are on the sidelines watching the economy.

    I appreciate the different viewpoints. I am not interested in who has the best peacock feather display or is the ‘best’ economist.

  64. Gravatar of Full Employment Hawk Full Employment Hawk
    7. August 2011 at 08:31

    “Strong dollar?”

    The dollar is about where is was under Bush before the bottom fell out of the economy. I don’t recall conservatives criticising the Bush adminstration for the fact that the dollar was weak.

    “The USD is cheap vs all major currencies on a PPP basis (in some cases 40% cheap).”

    If PPP were valid in the short run (which can be quite long), the United States would be experiencing a surplus in the balance on current account.

  65. Gravatar of Full Employment Hawk Full Employment Hawk
    7. August 2011 at 08:36

    “I imagine that over 80% of economists believe that QE3 would boost inflation, but not growth.”

    This shows what sorry state economics is currently in. I would conjecture that a major reason is that they were taught by New Classical Economists, according to whose models markets are continuously clearing and unemployed workers are choosing leisure. Since the current state of the economy is supposed to be an optimal response to technology shocks, any increase in the money supply must raise the price level.

  66. Gravatar of Full Employment Hawk Full Employment Hawk
    7. August 2011 at 09:00

    “Misallocation of capital is a huge problem.”

    Having a huge amount of economic resources, both capital and labor standing idle is a much bigger problem. Using capital and labor to produce things that are not their most efficient uses is less bad than not using them at all. As long as the use of the capital and labor creates some utility, using it for those purposes is better than not using them.

    The output and income that are not created when an economy is depressed is not stored somewhere to be used some time in the future. It is lost forever.

  67. Gravatar of Full Employment Hawk Full Employment Hawk
    7. August 2011 at 09:00

    “Misallocation of capital is a huge problem.”

    Having a huge amount of economic resources, both capital and labor standing idle is a much bigger problem. Using capital and labor to produce things that are not their most efficient uses is less bad than not using them at all. As long as the use of the capital and labor creates some utility, using it for those purposes is better than not using them.

    The output and income that are not created when an economy is depressed is not stored somewhere to be used some time in the future. It is lost forever.

  68. Gravatar of Full Employment Hawk Full Employment Hawk
    7. August 2011 at 09:06

    “What’s up with everyone calling each other idiots?”

    When you have lost an argument on the merits of the issue, all is not lost. You can still call your opponent nasty names.

  69. Gravatar of Full Employment Hawk Full Employment Hawk
    7. August 2011 at 09:14

    Obama’s single most important mistake is that he did not promptly fill the vacancies on the BOG with full employment hawks and has, since then, not tried of overcome Republican obstructionism with recess appointments. Having more people on the FOMC who take the Fed’s congressional mandate to achieve maximum employment seriously would have resulted in a less contractionary monetary policy and a better performance for the economy. I consider myself a 2/3 Keynesian, but Scott is right on about monetary policy.

    And, looking at things with the benefit of hindsight, the smart thing to do when Bernanke’s term expired would have been to replace him with Christina Romer. I admit that I was in favor of reappointing Bernanke at the time. My bad.

  70. Gravatar of W. Peden W. Peden
    7. August 2011 at 09:59

    FEH,

    Actually, the main people I’ve heard putting forward that view on QE have been Vulgar Austrians and Vulgar Keynesians. But, then again, I don’t know many New Classicals.

  71. Gravatar of Morgan Warstler Morgan Warstler
    7. August 2011 at 10:30

    Inflation Hawk, I asked you real questions, you refuse to answer.

    I answer yours directly, I explain my arguments.

    What’s wrong with you?

  72. Gravatar of johnleemk johnleemk
    7. August 2011 at 17:04

    The only New Classicals I can think of off the top of my head are Lucas and Solow. After thinking a bit more, I suppose more recent freshwater folk like Kocherlakota are arguable “intellectual heirs” to the New Classicals; Kocherlakota has been an inflation hawk but even he recently has seen at least some of the light, calling for accommodative monetary policy: http://online.wsj.com/article/BT-CO-20110803-712731.html

    I would still say New Classicals are not part of the problem (or constitute a very small part of the problem); the vulgar Keynesians/neo-Keynesians and vulgar Austrians are. Public opinion has to shift away from misguided populist nonsense. A demand shortfall leading to deflation, as Scott has repeatedly emphasised, is terrible for labour and capital alike.

  73. Gravatar of Liberal Roman Liberal Roman
    7. August 2011 at 17:58

    So, question. Is the market seeing ECB bond buying as non-expansionary? Is it creating new money to buy these bonds with??

    And why isn’t the ECB lowering rates if it wants to help the Euro zone?

  74. Gravatar of Full Employment Hawk Full Employment Hawk
    7. August 2011 at 18:03

    “Inflation Hawk”

    I really don’t see anybody using the nickname “infltation hawk” on this site. An inflation hawk makes fighting inflation his/her highest priority and is perfectly willing to depress employment to achieve this objective. Traditional monetarists like Meltzer are inflation hawks. Since you are leaving messages to someone who does not appear to be posting any messages, you should not be surprised that your messages are not being answered.

  75. Gravatar of MikeDC MikeDC
    7. August 2011 at 18:11

    Liberal Roman,
    I can’t speak for the market, but the name of the game is credible expectations. I don’t see it as expansionary because it’s clearly an ad-hoc plan thrown together to prevent massive losses, panic and capital flight.

    The money it’s creating is a firebreak while the politicians figure out how to flood the magazines of their completely intractable debt problems. Which they can’t do, because the problem is completely intractable (at least for politicians).

  76. Gravatar of Full Employment Hawk Full Employment Hawk
    7. August 2011 at 18:13

    “The only New Classicals I can think of off the top of my head are Lucas and Solow.”

    The New Classical Economics is about short-run macroeconomics, not long-run. Solow is a Keynesian in the short-run. Lucas is definitely a New Classical and others following his approach are. Even more important are the Real Business Cycle Theorists. People like Prescott and Plosser. The first generation of DSGE models was New Classical, although New Keynesians, by putting epicycles into them, like sticky prices, are now also using them. The New Classicals were dominant at the graduate and publications level in the 1980′s and 1990′s and, as a result, what Krugman has correctly described as a dark age, during which much of what had been learned before in the area of short-term macro after the Great Depression was forgotten. Short-term macro is now struggling to recover the old knowledge, but as long as the DSGE straightjacket dominates, this will be difficult to do.

  77. Gravatar of Full Employment Hawk Full Employment Hawk
    7. August 2011 at 18:14

    Since I will be moving, I expect to be off this site for about 3 week. So if I do not answer anyone’s questions, I am not ignoring you.

  78. Gravatar of Doc Merlin Doc Merlin
    7. August 2011 at 23:20

    @Liberal Roman
    “So, question. Is the market seeing ECB bond buying as non-expansionary? ”

    No its quite expansionary, on this news the euro crashed and the dollar rebounded and US dollar securities crashed. Thats consistent with euro expansion.

    “Is it creating new money to buy these bonds with??”

    Yes.

    “And why isn’t the ECB lowering rates if it wants to help the Euro zone?”

    They did. Unlike the US the ECB doesn’t have a short term rate target, they generally have an inflation target instead. So, they just expanded money supply and rates dropped, but they don’t call it “lowering rates”, they call it “providing liquidity.”

  79. Gravatar of Doc Merlin Doc Merlin
    7. August 2011 at 23:22

    Well USDX has fallen from the recent peak of about 88 last summer to around 75 now. And the general trend was downward until rumors of the ECB printing extra euros got into the market.

  80. Gravatar of Rien Huizer Rien Huizer
    8. August 2011 at 03:30

    Looks like the Germans are going to get their cake and eat it: weakish Euro plus a solution that keeps the EUR crisis on the boil without too much of a burden on Germany itself. That’s masterclass political economy.

  81. Gravatar of W. Peden W. Peden
    8. August 2011 at 04:08

    johnleemk,

    It’s not just the neo-Keynesians, it’s the New Keynesians as well, because New Keynesianism as an intellectual paradigm is about shielding Keynesianism from money by eliminating money as a causally significant part of the model. Consequently, a New Keynesian cannot understand how monetary economics works, which is why even a pro-QE New Keynesian like Paul Krugman can give no better argument for QE in a “liquidity trap” than “It can’t hurt”.

  82. Gravatar of johnleemk johnleemk
    8. August 2011 at 04:51

    W. Peden,

    I think it’s harder to generalise about New Keynesians. Mankiw is an avowed New Keynesian who is very sympathetic towards accommodative monetary policy. My impression of New Keynesianism has always been that it combines the best insights of Keynesian and monetarist macro — which is why it is, or I should say was, the dominant stream of mainstream economic thinking. Unfortunately, we seem to have regressed — though I am not sure regressed towards what.

  83. Gravatar of Richard W Richard W
    8. August 2011 at 05:24

    Liberal Roman
    7. August 2011 at 17:58

    ” So, question. Is the market seeing ECB bond buying as non-expansionary? Is it creating new money to buy these bonds with??

    The ECB sterilise their bond market interventions through absorbing the liquidity in seven-day deposits. They specifically rule out increasing the monetary base through buying the periphery bonds. Whether they can sterilise expanded purchases on the scale that might be required with Italy and Spain remains to be seen. Moreover, the liquidity is not fully sterilised as the banks can use the seven-day deposits as collateral in CB lending operations, a move that effectively allows them to reborrow the money.

  84. Gravatar of W. Peden W. Peden
    8. August 2011 at 05:31

    johnleemk,

    I agree that New Keynesianism is the dominant paradigm; I disagree that it combines the best features of monetarism and Keynesianism.

    Take the Woodford model of monetary policy, which is designed to protect New Keynesianism from having to deal with money: money has no function (except an endogenous demand function!) and money is ALWAYS in equilibrium. This is the kind of monstrosity that New Keynesians will use to justify keeping money out of the picture.

    What, specifically, is Mankiw’s actual argument for QE?

  85. Gravatar of Morgan Warstler Morgan Warstler
    8. August 2011 at 06:42

    Rien,

    “Looks like the Germans are going to get their cake and eat it: weakish Euro plus a solution that keeps the EUR crisis on the boil without too much of a burden on Germany itself. That’s masterclass political economy.”

    Nothing that couldn’t have been solved if Greece’s huge political class had no vacations and spent the last 10 years eating hotdogs.

    They made choices, let them sell islands.

  86. Gravatar of Rien Huizer Rien Huizer
    8. August 2011 at 07:06

    Morgan,

    Right, the Greeks created the problem. The Germand are turning it into an opportunity for mercantilist politics..Maybe

  87. Gravatar of John Brennan John Brennan
    8. August 2011 at 07:47

    Hey, you need to get to work. For as much as I disagree with Krugman on many issues, he takes his blogging seriously. If you want to be part of the debate, you need to engage the events as they arise. Otherwise, give it up. You do all of us, and yourself, a disservice.

  88. Gravatar of Morgan Warstler Morgan Warstler
    8. August 2011 at 09:03

    Yeah Scott, and when you get down blogging today, I want a free massage.

    Rien, this isn’t a moral hazard thing for me, altho I agree there 100% is one, this is a “who has the hard assets?” thing.

    Unlike Scott and other here who like to pretend the issue is money, I focus on who gets to own the land, buildings, utilities and businesses?

    The game can only be played if the system forces the losers to LOSE the hard assets – to have them sold off cheap.

    Greeks will all still have a place to live, but more of them will be renters. The public employees will become second class citizens, paid less than the private sector (finally). The public sector will shrink.

    These are all GOOD things. They are healthy outcomes, that bode well for the future of Greece.

  89. Gravatar of johnleemk johnleemk
    8. August 2011 at 09:53

    W. Peden,

    Interestingly, that’s not what I learned in my macro classes or from Wikipedia: http://en.wikipedia.org/wiki/New_Keynesian_economics

    “New Keynesian economists fully agree with New Classical economists that in the long run, the classical dichotomy holds: changes in the money supply are neutral. However, because prices are sticky in the New Keynesian model, an increase in the money supply (or equivalently, a decrease in the interest rate) does increase output and lower unemployment in the short run.”

    This is the best I could dig up in a 20-second Google search on Mankiw’s views w.r.t. QE: http://gregmankiw.blogspot.com/2010/11/qe2.html

  90. Gravatar of johnleemk johnleemk
    8. August 2011 at 09:55

    W. Peden,

    Darn, my response triggered the moderation filter. What I said:

    Interestingly, that’s not what I learned in my macro classes or from Wikipedia: http://en.wikipedia.org/wiki/New_Keynesian_economics

    “New Keynesian economists fully agree with New Classical economists that in the long run, the classical dichotomy holds: changes in the money supply are neutral. However, because prices are sticky in the New Keynesian model, an increase in the money supply (or equivalently, a decrease in the interest rate) does increase output and lower unemployment in the short run.”

    I will omit the link to Mankiw’s views on QE, but if you Google “Mankiw QE” he has written a brief blog post on why he supported QE2.

  91. Gravatar of W. Peden W. Peden
    8. August 2011 at 10:44

    johnleemk,

    As I understand New Keynesian models, the focus is on the interest rate, not the money supply. Otherwise, they’d just be old monetarists (though I’ve heard people describe New Keynesians in that way and there might be some people who like the label who indeed do attribute active effects to the money supply).

    I struggle to work out, from what he’s written, WHY Mankiw expects QE to have an impact on interest rates, but at any rate he’s miles away from the kind of New Keynesian model which has any Keynesian implications. If QE works at the zero-lower bound, then who cares about Keynes?

  92. Gravatar of johnleemk johnleemk
    8. August 2011 at 11:10

    1. I think there’s no disputing the point on interest rates versus money supply — easily one of New Keynesianism’s biggest failings, perhaps the #1 reason I’ve moved away from New Keynesianism.

    2. On the other hand, I always believed that mainstream macro/New Keynesianism rejected the zero-lower bound (and found it very perplexing that this belief had a resurgence during the crisis). The distinction I drew and still draw between New Keynesianism and neo-Keynesianism (which admittedly very well could be mistaken, since I try not to read too much neo-Keynesian writings lest I go mad) is that New Keynesians don’t believe in the zero-lower bound, while neo-Keynesians do, and I base this distinction in large part on Mankiw and the textbook macro which he in particular has been quite responsible for.

  93. Gravatar of W. Peden W. Peden
    8. August 2011 at 13:18

    I thought that the difference between New Keynesians and other Keynesians is that they (a) accept the neutrality of money, (b) believe in a NAIRU and a short-term Philipps Curve, (c) reject the Keynesian consumption function, (d) reject the exogeneity of wages, and (e) see monetary policy as effective, at least usually.

    Anyway, these differences are largely academic, since Keynesianism seems to have regressed back to liquidity trap-land, except that instead of the Keynesian liquidity trap they tend to have a Krugmanite analysis, but they like to keep the name “liquidity trap”. It’s like certain philosophers who argue that our ordinary concept of knowledge or truth should be replaced, yet are very anxious to keep the names.

  94. Gravatar of Why Is the Stock Market Plunging? | The Crotch Shot Radio Show Why Is the Stock Market Plunging? | The Crotch Shot Radio Show
    8. August 2011 at 23:06

    [...] course, those economists who believe Bernanke is engaging in a tight-money policy would point to the above as evidence in their favor — the Fed just needs to print more, [...]

  95. Gravatar of Perché la Borsa sta Affondando? | Perché la Borsa sta Affondando? Perché la Borsa sta Affondando? | Perché la Borsa sta Affondando?
    9. August 2011 at 01:11

    [...] quegli economisti che credono che Bernanke sia impegnato in una politica di ristrettezza monetaria punterebbero al grafico qui sopra come prova che hanno ragione — la FED ha solo bisogno di [...]

  96. Gravatar of Scott Sumner Scott Sumner
    10. August 2011 at 18:16

    Everyone, I’m not going to answer 95 comments here as the post is too old. If there is a question you want answered, ask again, and I’ll come back and address it.

    I will say that John Brennan’s comment is idiotic, as I’m one of the two or three hardest working econ bloggers in the blogosphere.

Leave a Reply