The Atlantic breaks the “unassailable rule” of journalism (and gives market monetarism a big boost.)

This is from an excellent article by Matt O’Brien at The Atlantic:

There’s one unassailable rule when it comes to writing about the housing bubble: you must criticize Alan Greenspan for keeping interest rates “too low for too long.” Once you get past this ritual invocation, you can talk about whatever else you’d like, whether it’s securitization, too lax regulation, or even Fannie Mae. But first: toolowfortoolong!

But what if the unassailable rule is wrong?

The conventional wisdom goes something like this. In 2003, Greenspan cut the benchmark interest rate to 1 percent, and was too slow to begin hiking. Lulled by historically low mortgage rates, home-buyers took on way more house than they could afford. Prices, of course, went into the stratosphere. By the time Greenspan belatedly raised rates to 5.25 percent in 2006, the damage was already done.  

So it seems clear that we can blame the artist-formerly-known-as-the-Maestro, right? Well, wait a second.  While it’s undeniable that rock-bottom mortgage rates — at least rock-bottom for the pre-2009 world — helped fuel the subprime frenzy, it’s not true that these low rates meant monetary policy was excessively loose. That’s a common fallacy when it comes to the Fed: low rates do not necessarily mean policy is easy, nor do high rates necessarily mean that it is hard.

Nobody thinks the Fed ran a tight policy in the 1970s. And with good reason. Inflation spiraled out of control throughout the decade, despite interest rates that would qualify as exorbitant today. Compare that to our situation now.  Rates are currently barely hovering above zero, yet inflation remains subdued. (No, really). As Ben Bernanke would tell you, looking at interest rates alone can be a misleading guide to the Fed’s stance.

Bernanke said this back in 2003. The future Fed governor explained that inflation and nominal GDP — which just refers to the total size of the economy — are the best indicators for monetary policy. And looking at them totally vindicates Greenspan’s low-interest rates in the 2000s. Here’s a look at core inflation from that period.

The argument that I bolded seems vaguely familiar—where have we seen that before?

Part 2:  “Stance of monetary policy” bleg. 

I’ve begun a paper on the subject of how economists think about the “stance” of monetary policy.  By ‘stance,’ I mean whether they describe it as expansionary or contractionary, easy or tight.  I’m sorry I have to define the term, but 5 years ago a journal referee told me he had no idea what the term meant, so please don’t be insulted it if was obvious to you. 

So we all know that the stance of policy refers to its expansionary or contractionary nature, but my question is how do we define those terms?  It’s well known that interest rates were discredited long ago, people like to mock how Joan Robinson said (in 1938) that easy money couldn’t have caused the German hyperinflation, after all, interest rates weren’t low.  We know that Friedman and Schwartz showed that the monetary base wasn’t a good indicator during the 1930s.  And we all know that the economics profession as a whole almost entirely abandoned the broader aggregates on the early 1980s.  Even real interest rates have been shown to be an unreliable indicator in IS-LM models featuring rational expectations.  So my question is this:  Where is the profession today?  I don’t even know where to start my literature search.  Are there articles that discuss how the term “stance of monetary policy” should be measured?  Is there general agreement among mainstream economists on some sort of reasonable metric?  I’d greatly appreciate any help that people could offer, especially from younger grad students who see how it’s being taught today in PhD departments.

My current rough outline relies on many things discussed here: Bernanke’s 2003 speech where he said NGDP is the right measure.  Svensson’s “target the forecast” approach and what that implies.  Friedman’s dismay at the profession believing Japanese policy was easy during the late 1990s.  Mishkin’s textbook, which says low rates are not easy money.  (BTW, I have a post on Mishkin coming soon that will make the Inside Job interview seem like a love-fest by comparison.  Stay tuned.)

My tentative hypothesis is that the profession made a cognitive error somewhere along the way.  Many economists seem to have confused the terms “short run effect” with “what’s happening right now.”  In fact, what’s happening right now is just as likely, indeed more likely, to represent the long run effect of earlier policies.  That’s because long run effects last much longer than short run effects, and hence are much more ubiquitous.

For instance, we teach our students that the short run effect of tight money is higher interest rates (liquidity effect) whereas the longer run effects are lower interest rates (income, price level, and expected inflation effects.)  Since the liquidity effects are quite brief, any current changes in interest rates are far more likely to reflect the longer run effects.

But searching my brain, I cannot recall ever hearing an economist say the following:

Interest rates are falling today as a result of a tight money policy adopted by the Federal Reserve three years ago. 

Rather they always seem to assume the “right now” of interest rates is somehow equal to the “short run effect of policy.”  That, despite the fact that in economics the term ‘short run’ has nothing to do with “right now,” and ‘long run’ has nothing to do with “in the future.”  They refer to time lags between policy changes and the response of the macroeconomy.

If any of you know of an occasion where a well known economist, pundit, commenter, etc, actually described the stance of monetary policy using the correct definitions of short and long run, I’d greatly appreciate it.  My hunch is that it would look “odd,” which would tend to confirm the near universal misuse of these concepts.

I’d also be interested in hearing about any journal articles that discuss what economists mean by the “stance” of monetary policy.

PS.  Matt O’Brien’s article also discusses the Fed’s real mistake—bad regulation of banking.

PPS.  Several people sent me a recent Arnold Kling post—I left a comment over there.

PPPS.  I hope people realize that the real point of this post isn’t whether Fed policy was easy in 2003 (even David Beckworth might slightly disagree with me on that point), but rather the amazing sight of the press discussing the stance of monetary policy correctly.


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35 Responses to “The Atlantic breaks the “unassailable rule” of journalism (and gives market monetarism a big boost.)”

  1. Gravatar of Barry Barry
    8. March 2012 at 13:40

    First you need to explain what tight money means verbally, before trying to measure it. What does it mean in the most simplest sense?

  2. Gravatar of Major_Freedom Major_Freedom
    8. March 2012 at 13:56

    ssumner:

    So my question is this: Where is the profession today? I don’t even know where to start my literature search. Are there articles that discuss how the term “stance of monetary policy” should be measured? Is there general agreement among mainstream economists on some sort of reasonable metric? I’d greatly appreciate any help that people could offer, especially from younger grad students who see how it’s being taught today in PhD departments.

    I remember in my academic days that “stance on monetary policy” metric was almost always price inflation, like the CPI. My profs universally said monetary policy is loose when price inflation is high, and tight when price inflation is low.

    If you want my opinion (don’t laugh!), then I will say the best metric for “stance of monetary policy” is not necessarily what the Fed is intentionally targeting (as I am sure you will agree), but rather what best represents how loose MONEY really is. Well, why not start with the meaning of MONEY? If we look at money, then logic dictates we should look at the aggregate money stock measures like M2 and M3, and if you’re like me you’ll also look at other aggregate measures like TMS (True Money Supply).

    I go by the “you can lead a horse to the water, but you can’t make it drink” dictum when it comes to monetary policy. The Fed can bring people to more money, but they can’t make people spend it. If the Fed doesn’t succeed in getting people to spend a particular fraction of their money balances, but is printing money like gangbusters anyway, such that aggregate cash balances are increasing, then I will say that the “stance on monetary policy” is still “loose”, where “loose” is a relative term that must be put into context in comparison with other periods of monetary growth.

  3. Gravatar of dwb dwb
    8. March 2012 at 14:42

    hey, once again excellent billing on FT alphaville.

    http://ftalphaville.ft.com/blog/2012/03/08/915191/further-further-reading-317/

    People in London actually do read these on the tube, on the commute home! I used to be one. awesome!!

  4. Gravatar of marcus nunes marcus nunes
    8. March 2012 at 14:42

    Scott
    Goes to show that blogs can be a powerful tool!

  5. Gravatar of Lars Christensen Lars Christensen
    8. March 2012 at 14:52

    Scott, Matt is turning in to one of our strongest allies in the US media…I commented on his comments on “currency war” a couple of days ago: http://marketmonetarist.com/2012/03/05/bring-on-the-currency-war/

  6. Gravatar of dtoh dtoh
    8. March 2012 at 15:06

    Scott,
    It’s easy to measure how accomodative monetary policy is.

    Growth rate of NGDP minus nominal interest rates. The bigger the number the more accomodative the policy.

    In a rough and aggregate way that’s how businesses look at investment as well. How much sales growth will I get versus what is the cost of capital.

  7. Gravatar of ssumner ssumner
    8. March 2012 at 15:07

    Barry, I know what I think it means, and Ben Bernanke seems to agree. But everyone else in the world seems to have a different definition. That’s what I’m trying to figure out–how do others define the term?

    I define it as low NGDP expectations (relative to target.)

    Major Freeman, I don’t find the money supply to be a useful definition, but at least it’s something. Many economists don’t seem to have any definition. I’d prefer CPI inflation, and even better NGDP growth, and even better expected NGDP growth relative to target.

    dwb, Thanks for that link. I like the one about the JofUR journal.

    Marcus, Yes, we are making progress.

    Lars, Yes, he is very good.

  8. Gravatar of ssumner ssumner
    8. March 2012 at 15:09

    dtoh, I’ve argued that if we are going to talk about real interest rates, it should be i – NGDP growth, not i – inflation. My formula is like your, with a negative sign.

  9. Gravatar of Luis H Arroyo Luis H Arroyo
    8. March 2012 at 15:37

    Scott, on your own rule, NGDP growth around 2003-07 at a very higher rate than the 5% that is Your optimal pace. So, there were some leakage that is a robust suspiction of one (at least) reason of the bubble.

    See
    http://research.stlouisfed.org/fred2/graph/fredgraph.pdf?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23b3cde7&graph_bgcolor=%23ffffff&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=GDP&transformation=pc1&scale=Left&range=Custom&cosd=2003-02-01&coed=2007-10-31&line_color=%230000ff&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=1&vintage_date=2012-03-08&revision_date=2012-03-08&mma=0&nd=&ost=&oet=&fml=a&fq=Quarterly&fam=avg&fgst=lin

  10. Gravatar of George Selgin George Selgin
    8. March 2012 at 16:01

    Scott, allowing that the point of the post is to celebrate the media’s recognition of the fact that low rates don’t necessarily imply easy money, the fact remains that the article wrongly attempts to get Greenspan off the hook. Yes, low rate do not necessarily mean easy money; but easy money does necessarily mean rates that are low relative to their natural levels; and when, in the midst of a boom mind you, real rates are persistently negative, that’s downright unnatural.

    So by all means let’s welcome having more people understand that you can’t judge the tightness or easiness of M-policy by merely looking at interest rates; but let’s not permit ourselves in so doing to toss the Wicksellian baby out along with the Keynesian bathwater.

  11. Gravatar of Luis H Arroyo Luis H Arroyo
    8. March 2012 at 16:11

    … Most part of it in inflation, higher of 3,5%, face to a real GDP

    http://research.stlouisfed.org/fred2/graph/fredgraph.pdf?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23b3cde7&graph_bgcolor=%23ffffff&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=GDP,GDPC1,GDPDEF&transformation=pc1,pc1,pc1&scale=Left,Left,Left&range=Custom,Custom,Custom&cosd=2003-02-01,2003-02-01,2003-02-01&coed=2007-10-31,2007-10-31,2007-10-31&line_color=%230000ff,%23ff0000,%23006600&link_values=,,&mark_type=NONE,NONE,NONE&mw=4,4,4&line_style=Solid,Solid,Solid&lw=1,1,1&vintage_date=2012-03-08,2012-03-08,2012-03-08&revision_date=2012-03-08,2012-03-08,2012-03-08&mma=0,0,0&nd=,,&ost=,,&oet=,,&fml=a,a,a&fq=Quarterly,Quarterly,Quarterly&fam=avg,avg,avg&fgst=lin,lin,lin

  12. Gravatar of Barry Barry
    8. March 2012 at 16:13

    “Barry, I know what I think it means, and Ben Bernanke seems to agree. But everyone else in the world seems to have a different definition. That’s what I’m trying to figure out–how do others define the term?”

    From wiki:

    “monetary policies are described as follows: accommodative, if the interest rate set by the central monetary authority is intended to create economic growth; neutral, if it is intended neither to create growth nor combat inflation; or tight if intended to reduce inflation.”

  13. Gravatar of Bill Woolsey Bill Woolsey
    8. March 2012 at 16:29

    During the period of exceptionally low interest rates, nominal GDP was well below the 5% trend growth path.

    If nominal GDP is to ever catch up to the trend growth path, and it is currently below, it must grow faster than trend.

    I will grant, however, that it would help to actually make a target growth path for nominal GDP explicit and interest rate targeting probably doesn’t help.

    With floating interest rates and an explicit target, it isn’t at all clear that low short term interest rates would be necessary to get nominal GDP back up to trend after a downward deviation.

  14. Gravatar of Luis H Arroyo Luis H Arroyo
    8. March 2012 at 16:49

    Woolsey, I´m affraidyour are wrong, as you see in my graphs… NGDP growth was higher than 6%,near 6,5% un various quarters.
    And deflactor grew more than real GDP.

  15. Gravatar of marcus nunes marcus nunes
    8. March 2012 at 18:15

    Luis
    Woolsey is right. Between 2001-03, NGDP fell BELOW trend so there must be a period of HIGHER growth to return to trend. That´s what happened in 2004-05, and by 2006 NGDP was back on trend!
    You are confusing a pure growth target with a LEVEL target.

  16. Gravatar of Anon1 Anon1
    8. March 2012 at 20:04

    Woolsey and Marcus, your trends are arbitrary. I am sure Luis could come up with a trend that fit his story too.

  17. Gravatar of John John
    8. March 2012 at 20:31

    except it was the housing bubble (rise in house prices) it was a debt explosion, with private debt exploding

  18. Gravatar of Jeff Jeff
    8. March 2012 at 21:05

    This is too easy. The stance of monetary policy is that adjective which best absolves the Fed of responsibility for anything that goes wrong.

    In the 1970s, as inflation rose higher every year, all we ever heard about was how tight money was. That’s what the Fed always said, and they should know, shouldn’t they? Inflation was “cost-push” or due to oil price shocks.

    In late 2008 and 2009, when the Fed started paying interest on excess reserves, the dollar appreciated sharply and market-based measures of expected inflation dropped into negative territory, we were extremely lucky to have a Depression expert cushioning the blows with easy money. Clearly, nominal output remaining ten percent below trend couldn’t be due to tight money. If it were, the Fed might actually be responsible for some unemployment, and that just couldn’t be.

    There’s a long list of things that can disturb aggregate demand, like bank capital requirements, financial crises, deficient saving, excess saving, excess saving by people with funny eyelids, oil prices, great stagnations, and disturbances to the Force, err, the PSST. While the Fed can never really counter any of them, they always deserve great credit for trying.

    Every monetary economist knows this stuff, Scott. When are you going to get with the program?

  19. Gravatar of 123 123
    9. March 2012 at 01:43

    The ECB has sometimes described its stance in Svenssonian terms. This was yesterday:

    http://www.ecb.int/press/pressconf/2012/html/is120308.en.html
    “Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. The information that has become available since the beginning of February has confirmed our previous assessment of the outlook for economic activity. Available survey indicators confirm signs of a stabilisation in the euro area economy. However, the economic outlook is still subject to downside risks. Owing to rises in energy prices and indirect taxes, inflation rates are now likely to stay above 2% in 2012, with upside risks prevailing. Nevertheless, we expect price developments to remain in line with price stability over the policy-relevant horizon. The underlying pace of monetary expansion remains subdued, consistent with contained inflationary pressures over the medium term.

    Looking ahead, we are firmly committed to maintaining price stability in the euro area, in line with our mandate. To this end, the continued firm anchoring of inflation expectations – in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term – is of the essence.”

    This was Draghi’s first decision last November:

    “Based on its regular economic and monetary analyses, the Governing Council decided to reduce the key ECB interest rates by 25 basis points. While inflation has remained elevated and is likely to stay above 2% for some months to come, inflation rates are expected to decline further in the course of 2012 to below 2%. At the same time, the underlying pace of monetary expansion continues to be moderate. After today’s decision, inflation should remain in line with price stability over the policy-relevant horizon.”

  20. Gravatar of Luis H Arroyo Luis H Arroyo
    9. March 2012 at 02:52

    well, Marcus, and Wolsey, I don´t know exactly if your theory of NGDP level is correct. For example, in 2003-06, Following you, a NDDP growth of 6,5% during so much time was justified because it was to reach the ancient level of … what?
    The 1% monetary policy of Greenspan was designed to elude a deflation risk, risk wich after time was not so evident. Mistake of the Fed.
    At the same time, the house bubble began roaring.
    I´m not saying that the 1% was the cause of the bubble; I´m saying that a 6,5% growth for NGDP should have some relation with it. Sure, there were some other terrible mistake in ragulation & supervision, But I cannot say how not to relate an excessive NGDP growth and a ongoing bubble.

  21. Gravatar of Bill Woolsey Bill Woolsey
    9. March 2012 at 04:55

    The trend growth rate of nominal GDP between 1984 and 2008 was 5.4%.

    This allows a growth path do be defined. Of course, it wasn’t all that ancient. In 2000, it was only 16 years old. It started with the end of Reagan/Volcker disinflation which followed the great inflation of the seventies.

    Anyway, Arroyo, your approach assumes growth rate targeting, which is very similar to inflation targeting. While our current regime isn’t even strictinflation targetting (being flexible,) the general approach is that the CEP delfator is supposed to go up 2% from its current level, wherever that happens to be.

    Under price level targeting, there is a defined series of price levels, perhaps growing at 2%. If the price level is below the path, the goal is to get it back up, which requires more than 2% growth. (And if it is above the growth path, then inflation would need to be less than 2% to get it back down.)

    During the period of this supposed excessively loose policy nominal GDP was well below the 5.4% growth path. With level targeting, it needs to grow faster to get back up to its trend level. In my view, that is what should happen, though it would have been helpful if the Fed had actually been explicitly attempting it.

    With nominal GDP targeting, deflationary pressure or whether real GDP grows faster or slower than inflation is irrelevant.

    While I think interest rate targeting is rarely a good idea, looking at interest rates and comparing them to past “normal” rates is pretty worthless.

    If the economy started on the target growth path, and extra rapid productivity growth had been causing slower inflation, and interest rates were lowered to cause inflation to rise, and this caused nominal GDP to grow faster than the rate of the growth path, which would push it above the trend growth path, then I would agree that the policy was creating monetary disequilibrium.

    You error is to entirely ignore the growth path. This makes sense if you assume that the economy always immediately adjusts to changes in the level of nominal GDP. But with that assumption, how could there ever be any problem with any growth rate for nominal GDP?

    The actual excessive growth in nominal GDP (above the growth path) occured before the period when interest rates were so low. Basically, it was the Clinton boom.

  22. Gravatar of Bill Woolsey Bill Woolsey
    9. March 2012 at 05:24

    Here are some graphs:

    http://monetaryfreedom-billwoolsey.blogspot.com/2012/03/gdp-and-trend-1995-2006.html

  23. Gravatar of ssumner ssumner
    9. March 2012 at 05:53

    Luis, No, that isn’t my “own rule.” I favor 5% NGDP targeting, level targeting, not growth rate targeting. If you look at trend lines from about 1990 the level of NGDP in 2003-07 was close to target. You can certainly argue it was a point or two above target, but nothing remotely significant enough to cause a massive housing bubble. If you want to see massive rates of NGDP growth go back to 1964-84, when the rates averaged close to 10%.

    And no housing bubbles or stock bubbles. Go figure.

    The excesses in NGDP you are describing are TINY.

    George, I’m happy to use Wicksell here. He argued the natural rate was the rate that kept prices stable. I take that (in the modern context) to mean the natural rate is the interest rate that keeps inflation and or NGDP growth on target. So Wicksell argued that the only way to tell if money was easy or tight is to look at inflation. The article discusses both inflation data and NGDP data that suggests monetary policy was close to being on target—not perfect (see my previous answer to Luis) but close enough where one can’t very well argue that it was far off course.

    So I still think faulty regulation (creating boat loads of moral hazard) was the main cause of the housing/banking fiasco.

    Barry, That’s obviously hopelessly vague (what rate of RGDP growth, for instance) but in spirit it’s actually pretty close to my view. I’d prefer NGDP targeting, and consider easy money to be policy expected to create above target NGDP. Keep in mind NGDP includes both inflation and real growth, which makes it similar in spirit to that definition.

    I’d also prefer “expected” to “intended”.

    Bill and Marcus, I agree.

    Anon1, I agree that any trend line is arbitrary. But if you fit the best line from 1990 to 2007 the entire period is shockingly close to the line, much more so that earlier periods of US history. And that’s the period where the Fed was targeting roughly 2% inflation.

    Jeff, Well put!

    123, One big mystery in Europe is those inflation rates. The PIGS are supposedly doing savage austerity cuts, slashing everyone’s wage sharply. Yet I see 3% inflation figures for many of those countries. What gives? Are the supply-side problems in the eurozone much worse than in the US?

  24. Gravatar of Luis H Arroyo Luis H Arroyo
    9. March 2012 at 09:31

    Scott, Bill, Marcus, thanks very much for your comments.
    I’m monetarist, but there are other things.
    Other things are that in some times we got a bubble and in other times we got inflation.
    In 2003-2004 we got some inflation (more than 3% but not much) and a bubble. Some things don’t work fine.
    During that times, I worked in US economy. I saw some things that changes between Dom-com bubble and the following years.
    1) I saw that the MP exceptionally expansive
    2) that US US economy, that run very well and got solid financial flows of found before the Dom-com crisis, began to finance its current account deficit with short-term capital. No more direct investment, that was so important between 1995-2000.
    3) that this CC deficit reached 7% of GDP.
    But Greenspan used to say that that was not worriisome, because the globalization of saving/investment.
    At the end all was important. And monetary Policy contributed a lot to disequilibrium that trigger the inflows of capital that bought all the stuff of made in banks to sell of the stuff of subprime.
    In that times I admired Greenspan a lot. He was my hero. But now I think that he commit some mistakes.
    I think that not to watch external disequilibrium was a mistake. Not because it’s level, but for the type of capital inflow that was entering in US.
    .

  25. Gravatar of marcus nunes marcus nunes
    9. March 2012 at 10:29

    Luis
    On the external “disequilibrium”, remember the Asia crisis. The “equilibrating” mechanism was for the US (the strong growing economy) to be a “buyer of last resort”, therefore generating the CA deficits to accomodate the nedded asian surpluses. Something that the EZ “core” should do to help the “periphery”.

  26. Gravatar of Barry Barry
    9. March 2012 at 11:20

    “Barry, That’s obviously hopelessly vague (what rate of RGDP growth, for instance) but in spirit it’s actually pretty close to my view. I’d prefer NGDP targeting, and consider easy money to be policy expected to create above target NGDP. Keep in mind NGDP includes both inflation and real growth, which makes it similar in spirit to that definition.”

    But then this makes it impossible to actually diagnose whether monetary policy is loose or tight in certain situations. You don’t know exactly what they expected from the policy, and the outcome of the policy is not necessarily what was expected, in other words you cannot assume that the Fed’s expectation will be accurate.

  27. Gravatar of Luis H Arroyo Luis H Arroyo
    9. March 2012 at 11:53

    Marcus, I would not say that is extaly the same problem. EZ is a complete disaster, because is not a Mundellian OCA. Asia and US have not a monetary Union. The problem eso that China is not a fair player in its international trade.
    The EZ is a monetary problem, but not only a monetary policy problem. Ther is a problem of lack of price adjustment channel. As Scott said one time, we, European have very different economic culture, and we never be exactly as Germans. It is not so easy to change all things in a nation to reach some competitive level. It is easier to have a free exchange rate, as Friedman said in 1953.
    In EZ we wil not have growth whereas there are not free ER. Worse, things are not improving I’m afraid.

  28. Gravatar of Morgan warstler Morgan warstler
    9. March 2012 at 14:05

    Let’s say out loud 2003 was too loose

    Good! now the point is how brutal can the futures market be in crushing the will of govt policy when it tries to use up the allotted 4% growth each year.

    Why I’m the only person who correctly views the level target as a cap as something the public will soon come to see as RATIONING and then demand that the rationing seve the interests of the top 99 to 80 percent first and foremost.

    Think of the parents whose kids go to the top 20% of the schools in every community in america

    Transparency means they SEE far more clearly.

  29. Gravatar of 123 123
    9. March 2012 at 14:55

    Scott: “One big mystery in Europe is those inflation rates. The PIGS are supposedly doing savage austerity cuts, slashing everyone’s wage sharply. Yet I see 3% inflation figures for many of those countries. What gives? Are the supply-side problems in the eurozone much worse than in the US?”

    Almost all the answers are here: http://www.ecb.int/press/pressconf/2012/html/is120308.en.html
    1. Inflation is above 2% due to temporary factors – oil and VAT increases “Looking ahead, inflation is now likely to stay above 2% in 2012, mainly owing to recent increases in energy prices, as well as recently announced increases in indirect taxes.”
    2. In the future inflation will be on target owing to LTRO ” LTRO, both operations, I would say, are an unquestionable success” and “But we can also see downside risks to staff inflation projection coming from an environment which remains weak, from a labour market which, as you can see, remains slack with unemployment actually going up.”
    3. Supply side factors are important for the real growth. “Equally important are structural reforms to increase the adjustment capacity and competitiveness of euro area countries and to strengthen growth prospects and job creation. In this area, more progress is desirable”

    The main reason supply side problems are worse in the Eurozone than in the US is the Cowenesque wealth shock. No US state has lost so much wealth as Greece, Ireland or Portugal had. No matter what is the level of Eurozone-wide NGDP, BMW dealerships will never have good business in Greece again.

  30. Gravatar of Major_Freedom Major_Freedom
    10. March 2012 at 08:02

    ssumner:

    Major Freeman, I don’t find the money supply to be a useful definition, but at least it’s something. Many economists don’t seem to have any definition. I’d prefer CPI inflation, and even better NGDP growth, and even better expected NGDP growth relative to target.

    Why should I, or anyone, care whether you find the money supply “useful” or not? If I find it HIGHLY useful. It was HIGHLY useful for me in spring/summer 2008 when the rate of M2 money growth published by the Fed went from double digits down to 1% annualized, after which I knew a crash was coming. I used that knowledge to put ALL of my investments, my parent’s investments, my friend’s investments, into low risk money market securities, thus enabling them to completely avoid the crash, while you monetarist yahoos who only look at “aggregate demand” type metrics were left scratching your heads on why the initial crash should have occurred in the first place.

    If you look at the chart I linked to, the rate of M2 money growth is currently running at a 9% clip annualized. This is somewhat down from a just over 10% rate 3 months ago.

    There is serious price inflation coming, and if you keep an eye out for what’s happening to the rate of aggregate money growth, you too can glean what is going to happen to the economy soon after.

    NGDP is an ex post metric that is a function of money supply growth. NGDP falls after money supply growth falls. When the Fed reduced its rate of money supply growth from double digits to just over 1%, in such a quick period of time, a crash was inevitable.

    If I listened to you monetarist yahoos, I would incurred huge losses to my investments, my parents would have lost, my friends would have lost. It is precisely because I am not listening to you monetarists that I was able to succeed.

  31. Gravatar of ssumner ssumner
    10. March 2012 at 09:00

    Luis, I agree Greenspan made mistakes, but don’t think money was all that easy.

    Barry, You raise a good point, which is why it’s hard to evaluate Fed policy. What is their target? However, I’m a pragmatist, and everyone I talked to in late 2008 seemed to agree that whatever their nominal target was, NGDP and inflation were going to fall below it. In 2009 we had the biggest fall in NGDP since the 1930s, and the first deflation since 1955. Almost everyone agrees that the Fed’s implicit target was higher, so money was tight by that definition. Other cases are more debatable. But you can also argue their target has been too low at times.

    123, You said;

    “The main reason supply side problems are worse in the Eurozone than in the US is the Cowenesque wealth shock. No US state has lost so much wealth as Greece, Ireland or Portugal had. No matter what is the level of Eurozone-wide NGDP, BMW dealerships will never have good business in Greece again.”

    I don’t agree that wealth matters, but if it did I’d expect it to cause deflation, not inflation. Why didn’t the US have lots of inflation in the 1930s? We saw a big fall in wealth? Why aren’t these huge wages cuts bringing down inflation in the PIGS? Are the cuts not really occurring? What does the wage data show for these countries?

    Major, If you like money, you’ll like my new post.

  32. Gravatar of Major_Freedom Major_Freedom
    10. March 2012 at 12:22

    ssumner:

    Major, If you like money, you’ll like my new post.

    In that latest post, you are

    1. Only focusing on base money. I focus on aggregate money stocks like M2. They provide a far more accurate picture of the extend of MONETARY inflation. After all, base money is not the only money that is used to buy assets, goods and services.

    2. Only focusing on post-2008. I focus on the times before and after economic crashes, like when the rate of M2 reduced to a crawl in spring/summer 2008, after being in double digits previously. That is when I knew a massive correction was coming. NGDP changes are a derivative of this.

  33. Gravatar of 123 123
    10. March 2012 at 14:52

    Scott, instead of describing it as a wealth shock, one can also decribe it as a terms of trade shock. Imported commodities, imported financial intermediation services are much more expensive. Then there is VAT.

    Instead of looking at ex post inflation in these countries, you should look at inflation expectations instead. Have you seen the Athens stockmarket index?

  34. Gravatar of ssumner ssumner
    11. March 2012 at 08:01

    123, Why would I look at the stock market for inflation expectations? Stocks are hurt by both very low and very high inflation.

    I’m actually more interested in wages in the PIGS, that would be the best indicator of “inflation” in my view. I don’t have that data.

    I do know that real hourly wages rose 4% in Spain in 2009, which suggests that nominal wage growth was extremely high.

  35. Gravatar of 123 123
    12. March 2012 at 10:25

    Scott,
    “Hurt” is the wrong word to describe the collapse of the Athens stock exchange. And it is quite obvious that there will be no very high inflation in Greece unless Greece drops out of the Eurozone.
    It is still too early to examine the ex post wage data, as the the crisis really reached Spain only last summer. But if you are interested, I could collect the data when I return back home, right now I am in the middle of my vacations.

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