Fed fail: The implosion of a policy regime

Everyone from Paul Krugman to Steve Waldman to Yichuan Wang is giving their spin on the plunging nominal interest rates.

It’s beginning to look like Keynes was wrong about liquidity traps, at least when he argued that there’s a certain minimum nominal yield that government bond investors demand, and that long term rates can be reduced no further.  Wherever people draw a line, bond yields just seem to plunge right through, to one record low after another.  And we know from Japan that they can go even lower.  But what does this mean?

It probably means multiple things.  For instance it suggests that the Keynesian/market monetarist AD pessimists and the Great Stagnation AS pessimists are both right.  We are looking at BOTH low inflation and low real GDP growth for many years to come.  Why don’t I think AD explanations are enough?   Partly because even the 20 year T-bond now has a negative real yield. Indeed it suggests the Bernanke “global savings glut” hypothesis is also correct, a point I’ve argued previously.  Japan is the future of the world.

But I’m more interested in what it means for Fed policy.  Even if the Fed does something semi-bold on August 1st, it most likely won’t be enough to change the underlying dynamic.  And the reason is pretty basic; the Fed simply doesn’t have a grip on what went wrong.  They had a policy regime that targeted short-term interest rates as a way of targeting inflation.  Both of those decisions were flawed, and now the regime has collapsed.  Markets are saying that the Fed may never again be able to using its preferred interest rate targeting mechanism.  Let me emphasize that I still believe interest rates are more likely than not to eventually rise above zero.  But these low yields are consistent with a non-zero probability of the US essentially becoming Japan.

This reminds me a lot of the end of Bretton Woods.  When Bretton Woods collapsed the central banks of the world were in a completely new policy environment, with the price level having no nominal anchor.  It took them a decade to figure this out, and come up with a new policy regime that could operate in a world with no gold price peg.  When they finally did it was something close to the Taylor Rule.  And its was actually a pretty decent monetary policy regime, as long as short term nominal rates were not zero.

But if they were zero, then things got much trickier.  Now it was only a workable policy regime if the rate was expected to rise above zero in a reasonable period of time.  In that case, the Fed could do a sort of Woodfordian policy, steer the economy by making explicit or implicit promises about what circumstances would lead them to raise interest rates.

Unfortunately, it turns out the Fed was too conservative, too cautious, to adopt the Woodfordian policy.  They weren’t willing to commit to a future path of the price level or NGDP.  Instead they simply hoped that things would somehow get better.  And although I’ve been pretty harsh in my criticism, let me express a tiny bit of sympathy.  The rate of nominal GDP growth in the US over the past 3 years has been above 4%, which is considerably higher than in Japan.  I would have thought that might well be enough.  (The fact that it wasn’t makes me think Japan is light years away from exiting the zero bound.)

But things didn’t turn out as the Fed hoped.  Instead of gradually approaching the date when we would exit the zero bound, and resume normal monetary policy, that date is receding ever further out into the future.  Indeed the bond markets are now signaling that there’s a non-zero risk that we’ll never exit.  Again, I think that unlikely.   But the difference between “never” and “in 27 years” is actually pretty unimportant here.  If we don’t exit for 27 years, then we are in big trouble . . . unless . . .

The Fed really needs to face up to the fact that their policy regime has failed.  It’s crashed and burned.  They are like a ship captain holding steering wheel that is detached from the rudder, blandly assuring the passengers that all is well.  In fact all is not well.  There is no steering mechanism for the US nominal economy, and no sign that there will be one for the foreseeable future.

Yichaun Wang argues that NGDP futures contracts are our only hope:

However, one form of nominal GDP targeting seems to sidestep these problems:nominal GDP futures targeting. This would allow market participants to instantly improve estimates of future inflation by bidding on futures contracts. Their bidding one way or another would immediately translate into changes in central bank open market operations such that nominal GDP always stays on track. This approach sidesteps the non-linearity of expectations because it allows the market to aggregate all the necessary information and automatically has the central bank adapt to the new found information. Even if expectations did shift in response to unforecasted shocks, the policy response would be immediate and taken in decentralized steps as individual investors bid on futures contracts. In this case, mechanics-credibility theorem is satisfied because the mechanic by which the Fed earns its nominal GDP credibility directly interacts with market expectations while avoiding the circularity problem. Market expectations of nominal GDP feed into futures market volumes, which directly changes the monetary base. The market answers the questions of “how much” with the level it thinks is “just right”.
.
This is one of the key advantages of an nominal GDP futures targeting regime relative to a conventional “wait-and-see” regime. It cements in credibility, and rolls with the waves of external volatility. In a sense, it floats like a butterfly and stings like a bee. It takes monetary policy from the world of “Bernanke Smash” to “Sumner Slice”, and allows for greater accuracy and precision in the control of a central nominal aggregate: nominal GDP.

I’m more optimistic.  We aren’t going to see futures targeting in the near future, but if things get bad enough I see a slim possibility that a consensus might develop in favor of level targeting.  Then the key questions become:

1.  How much base money does the public want to hold if the future expected price level or NGDP is on target?

2.  And is the Fed willing to supply that much base money, or do they consider it too risky?

The key question is not whether some desultory gesture by the Fed will “work.”  It won’t.  We already know that.  It’s a question of how long it now takes the Fed to figure out that its entire policy regime has collapsed.  So far I have not seen a single comment by any Fed official that suggests they have even a clue as to how far off course they’ve drifted, and the challenges they face ahead.

Indeed many don’t even seem to understand that the Fed steers the nominal economy, and that the steering mechanism is broken.  They are like a ship captain complaining that he constantly has to “rescue” the ship by nudging the steering this way and that.  Why can’t the ship steer itself!  Why do I always have to intervene?  Um, because that’s your job?

[Or to use more technical language:  Because NGDP moves inversely to 1/NGDP.  And 1/NGDP is the share of national income than can be purchased with a single dollar, one definition of the value of money.  And because the share of national income that can be purchased with a single dollar is going to be strongly influenced by a monopoly supplier of dollars that has nearly unlimited ability to print money.  Deal with it.]


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117 Responses to “Fed fail: The implosion of a policy regime”

  1. Gravatar of Tomasz Wegrzanowski Tomasz Wegrzanowski
    24. July 2012 at 02:56

    I’ve asked this question like a hundred times in various places – why isn’t anybody setting up a website where one can bid on future NGDP, RGDP, inflation, unemployment and other such statistics for world’s largest economies, even with toy money?

    Is stagnation so severe we cannot even get that little done…?

  2. Gravatar of marcus nunes marcus nunes
    24. July 2012 at 04:48

    Recently I wrote that Japan was “The poster child for NGDP Targeting”. In a few years the US will also move into that category, where you teach students how it could all have been avoided if only…
    http://thefaintofheart.wordpress.com/2012/07/08/japan-poster-child-for-ngdp-targeting/

  3. Gravatar of Benny Lava Benny Lava
    24. July 2012 at 04:51

    “Indeed many don’t even seem to understand that the Fed steers the nominal economy, and that the steering mechanism is broken.”

    This is also my sentiment, but for other reasons. Not just that growth targets are missed, but inflation as well. They set a target for inflation and miss. Why? They don’t seem to know or even care.

    Goldbugs complain that we will inflate our way out of debt. So far we haven’t and we are worse off for not having tried.

  4. Gravatar of Saturos Saturos
    24. July 2012 at 05:03

    Time to start the helicopters…

    In all seriousness, Tyler never said TGS was that bad. The long run net marginal product of capital is still +ve. Wages and prices should adjust; we will escape the liquidity trap eventually. So NGDP level targeting would still work as always, especially if we’re prepared to buy a wider range of assets. This only means that conventional policy is expected to be useless for a longer period of time. But I hardly think we needed more justification to ditch the conventional framework. But it does seem more inevitable now that the Fed will not be able to “wing it” past Congress forever, that they will in fact have to adopt an alternative regime within the next few years – perhaps as soon as Romney is elected if Morgan Warstler is to be believed.

  5. Gravatar of zbicyclist zbicyclist
    24. July 2012 at 05:40

    “Japan is light years away”

    How about just “years away”? A light year is a measure of distance, not a measure of time.

  6. Gravatar of Ram Ram
    24. July 2012 at 05:44

    At this point, I think the only hope for the Fed in the near-term is for Bernanke to officially endorse the Evans proposal. In explaining the 2% inflation target, Bernanke has sometimes sounded Evansian by suggesting that deviations of unemployment and inflation from their targets receive equal weight, but clearly the markets have not believed that. The minimum they can do relative to their current position and their political constraints is to fully get behind the Evans proposal. It’s not ideal, but I think it would get a lot of the (demand-side) job done. It’s time for AD advocates to get more pragmatic.

    As for the supply side, I think what we’re seeing is also a gradual loss of faith from the markets in the ability of the US political system to deal with the aging of the population. They were not afraid before because they thought we’d ease immigration policy, or pursue other supply side reforms, under the pressure of shrinking labor supply. But our political system just isn’t responding to this development with any urgency, and seems caught up in polarized debates that are mostly irrelevant. So now it looks like monetary policy isn’t going to be the only problem going forward, but the supply side too. And it’s not high taxes or regulations though those may not help. It’s our failure on immigration policy and to reform old age benefits.

    Notice Japan’s crisis came on the heels of the aging of their population. Coincidence?

  7. Gravatar of James Oswald James Oswald
    24. July 2012 at 05:53

    “There is no steering mechanism for the US nominal economy, and no sign that there will be one for the foreseeable future.”

    I actually disagree with this. While the Fed’s policy has failed, to me it seems like they are rate targetting NGDP, and only failing a little in the downward direction. While I would prefer level targetting, I think at least they have a target, and are getting somewhat close to it.

  8. Gravatar of Benjamin Cole Benjamin Cole
    24. July 2012 at 06:06

    Terrific blogging. I have been thinking about Japan as the role model for a long time.

    Tim Duy recently posted that a Fed erred when it had QE1 and QE2 as absolute amounts on timelines, rather than announced sustained efforts until NGDP targets were hit, and I thoroughly concur.

    The futures market is a nice idea, but I do not think essential. What is essential is a central bank that says it will do QE until it sees the results it wants to see, and maybe wiping out IOR. The Fed needs credibility not only as inflation-fighter, but as economic spark-plug. If everyone knows Bernanke will turn pansy at the first blush of perceived inflation, then we will not have a sustain recovery.

    We have go to stop talking about QE is exotic and unconventional; it is a standard policy tool, just like cutting interest rates. We have to change the argument away from “it didn’t work, why try again?” That is like saying the Fed has lowered rates and it didn’t work, so why ever lower rates again?

    Again, very thoughtful blogging.

  9. Gravatar of Brian Donohue Brian Donohue
    24. July 2012 at 06:24

    Isn’t 4% nominal GDP growth a sign that the Fed is not completely rudderless?

  10. Gravatar of libertaer libertaer
    24. July 2012 at 06:45

    Prof Sumner,

    if Japan is the future, wouldn’t it be better to have a higher NGDP target than 5%? Like 10%?

    The lower your target, the bigger the central banks balance sheet, the higher your target, the less expansionary monetary policy has to be, right?

  11. Gravatar of dwb dwb
    24. July 2012 at 06:51

    ” Indeed it suggests the Bernanke “global savings glut” hypothesis is also correct, a point I’ve argued previously. ”

    I tend to discount the global savings glut hypothesis. Its not like there are no good projects to improve the standard of living in emerging markets. Mostly this is a phenomenon that is one-and-the-same with too high unemployment and too tight money, pursued by a whole bunch of developing economies trying to hold down world demand simultaneously with inflation targeting, except that a key determinant of the inflation they are targeting is oil prices, aka the gold standard.

    If there is a “glut of savings” the way to eliminate it is to tax it, via inflation. When oil prices go back up i bet that we will find new projects to invest in, manufacturing kerosene and diesel from shale gas, or some such thing.

  12. Gravatar of dwb dwb
    24. July 2012 at 06:53

    ^^”developing economies” should be “developed economies”

  13. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2012 at 06:56

    Let’s all pretend there’s not an election coming up that is far more important than what happens to Fed policy before the election…

    No let’s not.

    Scott, IF Romney wins and we see a new Fed suddenly optimistic about Business growth WHILE we see deflationary forces from

    ACTUALLY CUTTING GOVT SPENDING ON PUBLIC EMPLOYEES AND REDUCING REGULATIONS

    Then we would expect to see Fed easing, right?

    And if Fed easing happens, it won’t be because a Repub is in, it will be because the Fed is comfy with the direction of things = they have a rational reason that fits with their old story line.

  14. Gravatar of J Mann J Mann
    24. July 2012 at 06:56

    Scott,

    I had meant to ask Tomasz’s question too. (I apologize if I have asked and if you’ve answered it).

    Would an NDGP market on intrade provide useful data or do you need the Fed to act as a market maker? If you didn’t need the market maker, it doesn’t seem like it would be a hugely expensive endeavor to set up a demo project.

  15. Gravatar of Major_Freedom Major_Freedom
    24. July 2012 at 07:11

    ssumner:

    Talk about a textbook example of misreading empirical data on the basis of faulty theory!

    I will use this chart in my explanation.

    Wherever people draw a line, bond yields just seem to plunge right through, to one record low after another. And we know from Japan that they can go even lower. But what does this mean?

    It probably means multiple things. For instance it suggests that the Keynesian/market monetarist AD pessimists and the Great Stagnation AS pessimists are both right. We are looking at BOTH low inflation and low real GDP growth for many years to come.

    1. Higher real productivity and the consequent falling prices does not reduce interest rates. Thus, low interest rates do not “suggest” low real GDP growth. Market interest rates are a function of profits, and profits are a function of two nominal demands, demand for factors of production and demand for production output. If a business innovates and sells twice the output at half the price, then this does not change the rate of profit, and so does not change the rate at which it is willing to borrow and lend. There is no reason why interest rates will fall for this company. What you are doing is invoking the fallacious productivity theory of interest. See 19th century economist Böhm-Bawerk and his refutation of this doctrine in his book “Capital and Interest”. He writes:

    “I grant without ado that capital actually possesses the physical productivity ascribed to it, that is to say, that more goods can actually be produced with its help than without. I will also grant…that the greater amount of goods produced with the help of capital has higher value than the smaller amount of goods produced without it. But there is not one single feature in the whole set of circumstances to indicate that this greater amount of goods must be worth more than the capital consumed in its production. And that is the feature of the phenomenon of excess value which has to be explained.”

    2. What we are looking when we observe low interest rates on treasuries at is not confirmation of the AD drives interest rates theory or of the AS drives interest rates theory. What we are looking at is almost certainly a bond bubble brought about by the Fed. We are almost certainly looking at the treasury market front running the Fed, for the Fed is now buying 5, 10, and even 30 year bonds.

    [Or to use more technical language: Because NGDP moves inversely to 1/NGDP. And 1/NGDP is the share of national income than can be purchased with a single dollar, one definition of the value of money. And because the share of national income that can be purchased with a single dollar is going to be strongly influenced by a monopoly supplier of dollars that has nearly unlimited ability to print money. Deal with it.]

    I cannot help but notice that MM “technical language” appears very similar to how my 4 year old niece constructs sentences.

  16. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2012 at 07:14

    Ok, one other thing that is bugging me…

    WHY aren’t we going with my plan on NGDP futures.

    1. Only open to US citizens, not Wall Street / Corporations.

    2. You can only bet the under.

    3. If we run over the target by X, Fed keeps Y money from bets to slow down economy.

    4. If we run under, Fed prints money and doles it out.

    5. Your pay off is based on coming closest to the under # without going under.

    It is like FOREX for SMB owners and top 1/3 to HEDGE AGAINST downturns.

    WHY not use Monetary Policy to specifically favor the SMB class?

    Does my plan not work?

    After the first month of game play when the Fed hands out a couple Billion dollars to get things moving, the SMB guys will line up and REALLY PREDICT where they think the market is going.

    They will want trading advice, they will use their own business boots ont he ground to predict things.

    But they aren’t price setters.

    They aren’t WalMart / Amazon / Exxon that can actually speed up / slow down the economy.

    And it isn’t just a shitty little information market, it is the WAY the new money comes into the system, and money gets taken out.

    Don’t be afraid of new thinking…

    And you can’t hurt my feelings…

    why doesn’t it work better politically?

    why doesn’t it work economically?

  17. Gravatar of Mike C Mike C
    24. July 2012 at 07:16

    Anybody notice this from Krugman today? “You might think that by now people would have gotten the conditional nature of the claim: fiscal expansion has a positive effect if the economy is depressed and monetary policy won’t move to offset it — typically, if the economy is in a liquidity trap. ”

    Is this the first time he actually has come out and added the whole “if monetary policy won’t move to offset it” part? How can he in good conscience make that statement, and then keep ragging on about fiscal stimulus spending. Has he even taken note of the Fed’s unwillingness to have inflation above 2%?

  18. Gravatar of ssumner ssumner
    24. July 2012 at 07:27

    Tomasz, Marcus, Benny, Saturos, Good points.

    zbicyclist, Language evolves. Deal with it.

    Ram, I agree, especially on the demographics. Here’s another coincidence, Australia is the only major developed country that averages 2% population growth.

    James, A ship without a rudder will usually drift in the same direction for a little while, but when a storm blows over from Europe . . .

    Let’s see Q2 NGDP before we jump to conclusions. Having said that, I think there’s a significant probability that you are right. I’ve often argued that Bernanke does’t want things to get worse, and won’t push hard to make them better. We’ll see.

    Thanks Ben.

    Brian, See my response to James.

    libertaer, I think 5% is enough. If we’d had 5% over the past 4 years, instead of 2%, we’d be far better off. I had more to say in an earlier thread in response to a similar question by you.

    dwb, Well China is spending over 40% of GDP on those good projects, and still has a big saving surplus they they invest over here.

    J Mann, The sort of market Intrade does (binary) doesn’t give you the point estimate you need. Yes, a private market could help a bit, but a subsidized market would be much better.

  19. Gravatar of ssumner ssumner
    24. July 2012 at 07:30

    Morgan, I don’t care about the election.

    You need to be able to bet both sides of the market to make it work.

    I agree that you are not sensitive to criticism.

    Mike C, I’ve been making this point forever, and have pretty much given up.

  20. Gravatar of Steve Steve
    24. July 2012 at 07:58

    Scott,

    I have a secret indicator that I use to measure the degree of FOMC cluelessness. I look at the “Longer Run” column from the “Appropriate pace of policy firming” table and compare meeting/meeting.

    Here’s the breakout:
    ——JAN–APR–JUN
    3.00—-0—-0—-1
    3.25—-0—-0—-0
    3.50—-0—-1—-1
    3.75—-1—-1—-1
    4.00—-7—-6—-6
    4.25—-3—-2—-5
    4.50—-6—-7—-5
    MED—425–425–425
    MEAN–421–419–411

    Clearly, one or two participants are in the early stages of “getting it”, cutting long-run fed funds projections to 3.00 and 3.50. I view the 3.00 projection as wrong (too high!), but bold nonetheless for a consensus driven organization. On the other hand, the number of participants forecasting 4.25 jumped when the new Board members joined…a worrying sign.

  21. Gravatar of Mike Sax Mike Sax
    24. July 2012 at 08:01

    “Scott, IF Romney wins and we see a new Fed suddenly optimistic about Business growth WHILE we see deflationary forces from”

    “ACTUALLY CUTTING GOVT SPENDING ON PUBLIC EMPLOYEES AND REDUCING REGULATIONS”

    “Then we would expect to see Fed easing, right?”

    “And if Fed easing happens, it won’t be because a Repub is in, it will be because the Fed is comfy with the direction of things = they have a rational reason that fits with their old story line.”

    Morgan, my friend, I have just one complaint: you’re too subtle and off message.

    If doing NGDP is all about a Republican in the White House why didn’t it happen back in 2008? According to Scott that was when the real failure of the Fed was.

  22. Gravatar of Jim Crow Jim Crow
    24. July 2012 at 08:21

    So I apologize if this is one of those brain dead obvious questions that everybody already knows the answer but the goof asking it. Is Bernanke for or against fiscal stimulus himself? I would think his opinion matters a helluva more than Krugman’s. Has he ever commented on it? Has no one bothered to ask?

  23. Gravatar of dwb dwb
    24. July 2012 at 08:33

    “Well China is spending over 40% of GDP on those good projects, and still has a big saving surplus they they invest over here.”

    true, sort of: if they were investing more here wouldn’t we see higher gdp growth? If we think there is too much foreign investment cant higher US domestic inflation or a weaker dollar can tax that savings too, to the point where it makes more sense for foreign economies to invest it elsewhere?

    in the hard-asset economic sense of savings, its hard for me to see how we can have a “savings glut” i.e. low real return on capital investments, without assuming future demand will also be low (hence the low return, but then why are we building these assets in the first place?).

    In the financial sense of savings glut, where there is too much money chasing too few opportunities, that either results in (hard asset) price inflation (because of AS constraints), or safe haven demand (because of insufficient AD).

    Seems to me, we have in our minds the idea that there is a savings glut because we have some notion of what the real rate of interest is, or think we do. Back in 2005 we thought yields were too low because foreign investors were pouring money into mortgages (i was there for that) making them “too rich” (spreads too low) – in turn fueling inflationary housing (investment) demand, because nominal rates were probably too low (monetary policy too loose). Now we see too much safe haven demand because monetary policy is too tight.

    Sorry but it seems to me that concluding that there is a savings glut is just one more version of the fallacy that we cannot judge the stance of monetary policy from interest rates – because we have no idea what the real rate of interest is, because its not a constant and changes over the business cycle.

    I don’t really know if BBB or mortgage spreads were “too low” in 2005, or are too high now. What i do know, is that they were and are conditional on the stance of Fed policy, i.e. future AD.

    I think “global savings glut” has been an indicator for monetary policy is not appropriate. the only way to really know the “right” amount of savings is to have a known fixed path of nominal income growth.

  24. Gravatar of Mike Sax Mike Sax
    24. July 2012 at 08:37

    By the way, Morgan, just in the interest of equal time here is a poll that shows Obama’s attacks on Bain are working, unlike your USA today poll:

    http://www.politico.com/politico44/2012/07/poll-obama-attacks-working-129886.html

    “particularly worrying for Romney is that a large slice of independent voters — whom he needs to win the November 6 election — are also buying into the Obama campaign’s portrayal of him as a ruthless businessman who may be hiding something in his taxes.”

    “With three-quarters of registered voters saying they’ve heard at least a little about these issues, I would say the Obama campaign has been successful in raising them to the national conscience,” said Ipsos pollster Julia Clark.”

    “After weeks of accusations from Obama and his allies that Romney cut U.S. jobs and sent them overseas while he headed Bain, 36 percent of registered voters said the issue had made them see Romney less favorably, compared to 18 percent who said they were now more favorable toward the former governor of Massachusetts.”

    “Among independents, 26 percent regarded him less favorably and 13 percent more favorably after hearing about his business tenure.”

    Then there is the Gallup poll that shows by a 54-37 margin Americans want him to release his taxes.

    http://www.gallup.com/poll/election.aspx

    Look, we both know that polls depend a lot on how you phrase the questions. That’s why Rasmussen always has the Republcians winning no matter what.

    But the fact that Romney had to do his news blitz a few weeks ago shows that this is hitting its mark. It’s Swift Boat 2.0.

    It’s right out of Karl Rove-your strength is your weakness. Your strength is my strength. I will take your biggest asset and make it your biggest liability.

    Romney’s whole campagin is based on his personal biography. And here all he wants to do is talk about Bain. He doesn’t talk about Massachusetts, wonder why…

    Now that this is becoming a liability he has no Plan B. He’s like the French with their Maginot line. Now that the Obama team have just walked around it, what next?

    Even Ruper Murdoch’s WSJ said Romney’s biography campaign is just not working.

    He’s John Kerry 2.0

  25. Gravatar of Major_Freedom Major_Freedom
    24. July 2012 at 08:47

    ssumner:

    dwb, Well China is spending over 40% of GDP on those good projects,

    And who doubted me that Sumner is a central planning intellectual?

    China has vast quantities of malinvestment. Good projects? China has ghost cities.

    http://www.youtube.com/watch?v=rPILhiTJv7E

  26. Gravatar of Russ Anderson Russ Anderson
    24. July 2012 at 08:49

    Scott wrote Indeed many don’t even seem to understand that the Fed steers the nominal economy, and that the steering mechanism is broken. They are like a ship captain complaining that he constantly has to “rescue” the ship by nudging the steering this way and that. Why can’t the ship steer itself! Why do I always have to intervene? Um, because that’s your job?

    Scott, are you unaware of political conservatives/tea party republicans/Ron Paul libertarians that DON”T WANT THE FED TO STEER THE SHIP? It’s not that the “steering mechanism is broken” (or that the Fed does not have the ability to provide more monetary easing). It’s that for ideological reasons THEY DON”T WANT TO.

    Admitting that the ship can’t steer itself is admitting that capitalism is not self regulating and that government needs to “steer” it. They believe their job is not only to not steer the ship, but prevent anyone else from steering it, too.

    I can never tell if you are unaware of what political conservatives are doing or just providing cover for them.

  27. Gravatar of Philo Philo
    24. July 2012 at 08:51

    @zbicyclist

    Distance can be, and often is, a metaphor for time.

    (@ Scott

    Yes, “language evolves”: it gets misused, and some of the misuses eventually get established as standard. But, I should say, that has not happened with ‘light year’ as a measure of *time*. I agree with zbicyclist that, literally, that is still a misusage, and is likely to remain so.)

  28. Gravatar of Major_Freedom Major_Freedom
    24. July 2012 at 08:52

    “A property bubble like which I don’t think we’ve ever seen.”

    “There are 64 million empty apartments in China.”

    ———-

    But leave it to western intellectuals to do the same thing they did during the 1960s-1980s USSR: herald state planning as a wonderful economic system.

  29. Gravatar of Major_Freedom Major_Freedom
    24. July 2012 at 08:55

    “It’s essentially the modern equivalent of building pyramids. It doesn’t really add to the betterment of people’s lives, all it does it promotes GDP growth.”

    This is why Austrians don’t take GDP seriously.

  30. Gravatar of Major_Freedom Major_Freedom
    24. July 2012 at 09:00

    Interviewer: “Isn’t all this construction a good thing? It’s creating jobs, it’s getting the economy moving. That’s good isn’t it?”

    “People forget that it’s not the quantity of GDP that matters, it’s the quality of GDP, and essentially they’re just building stuff for which there is no demand, and ultimately that means they’re creating a large problem for the future.”

    Of course this all means China isn’t printing enough money, hahaha.

  31. Gravatar of Opinion: Fed Fail: The Implosion of a Policy Regime | iBC_FN | iBankCoin Financial News Opinion: Fed Fail: The Implosion of a Policy Regime | iBC_FN | iBankCoin Financial News
    24. July 2012 at 09:29

    [...] Full Article Tweet [...]

  32. Gravatar of Saturos Saturos
    24. July 2012 at 09:36

    Becker on marginal tax rates:
    http://www.becker-posner-blog.com/2012/07/is-raising-marginal-tax-rates-on-higher-income-individuals-a-good-idea-becker.html

    Final sentence:

    The trend toward lower marginal tax rates during the past 50 years was perhaps mainly the result of interest group pressure from higher income individuals, but it also receives support from a benefit-cost analysis of the expected effects of tax increases on behavior.

  33. Gravatar of Bill Ellis Bill Ellis
    24. July 2012 at 09:55

    One of the arguments among left leaning economists for elevating the focus on monetary policy solutions was that they were doable while fiscal solutions had hit a political wall.

    Seems like monetary solutions are just as not doable as fiscal ones.

    Why “we” don’t act has nothing to do with the fact that “we” are too stupid.
    Why “we” don’t act is because “we” are too timid. Because “we” can live with long term high unemployment and low to no income growth for most…indefinitely.

    If “we” were uncomfortable enough “we” would be acting.

    Even if you don’t think wealth redistribution is the right economics, It would make “us” uncomfortable.

    Wealth redistribution is the right politics.

  34. Gravatar of Joe2 Joe2
    24. July 2012 at 10:01

    Scott

    and yet , yet real estate prices seem to be doing better.

  35. Gravatar of Doug M Doug M
    24. July 2012 at 10:21

    Professor Sumner,

    As I am fairly new to this blog, would you be so kind as to either review or point me to the links that suggest that Milton Friedman was wrong in suggesting that the Fed should target the growth rate in the money supply?

    It seem that this is a number that the Fed can actually control.

    Could you also tell me why the Fed no longer reports M3?

  36. Gravatar of Doug M Doug M
    24. July 2012 at 10:27

    I can’t say that the Fed is failing.

    M2 growth is 9.3% — hardly tight.

    NGDP growth is 4%.

    Unemployment is falling about as fast as it did commming out of the last two recessions.

    Industrial Production is growing.

    It appears to me that by 2014 we may actally agree that we are in a recovery.

  37. Gravatar of Fed fail: The implosion of a policy regime « Mktgeist blog Fed fail: The implosion of a policy regime « Mktgeist blog
    24. July 2012 at 10:52

    [...] July 24, 2012 by mktgeistmike Leave a comment   [...]

  38. Gravatar of Saturos Saturos
    24. July 2012 at 10:56

    Doug,

    *sigh* *activate Sumnerbot*

    Both interest rates and the money supply are highly misleading indicators of the stance of monetary policy.
    The only coherent way to evaluate the stance of monetary policy (and fiscal stimulus is also “monetary policy”, which only works when the Fed allows it to) is relative to the level which is expected to lead to the fulfillment of the central bank’s objectives.
    The Fed’s own forecast indicates it will miss its 2% inflation target, as it has continually done for the past several years, which represents policy failure even if the Fed did not have a dual mandate. As it is, unemployment is well above the Fed’s own official estimate of the natural rate.
    In NGDP terms, what matters is not only the growth of spending, but its level relative to trend. Even if we adjust that trend downwards, assuming the economy has adjusted for the nominal shock of 2008, there remains the shock of 2009. Inadequate spending encourages extended UI, hysteresis, etc., further compounding the problem.
    The growth out of the recovery is tepid and worse than precedent (as Marcus Nunes will gladly show you). We fell into a hole and started digging sideways.
    Monetary policy works with long and variable leads. If either QE or stimulus were going to succeed, we wouldn’t have to wait and see, asset prices would be higher right now.
    So your last point is actually a condemnation of both past and present Fed policy.

    The supply of money doesn’t tell you anything about policy alone, demand for money matters too. It can fluctuate wildly in the short run due to interest on reserves, disanchored expectations, temporary injections and the liquidity trap problem. In the long run there are “real” shocks, such as technology, which alter the demand for it. Thus promising stable supply growth in the long run does not provide an anchor for expectations, destabilizing demand in the short run as well.

    I recommend you read the posts Scott links to in the sidebar to get a better idea of where he’s coming from.

  39. Gravatar of Saturos Saturos
    24. July 2012 at 10:57

    I feel I’ve done all I can on this blog, and in the future will mostly respond to what others have to say.

    - Scott Sumner, April 20 2009

  40. Gravatar of Mike Sax Mike Sax
    24. July 2012 at 11:02

    Doug M by that time it’s a six year slowdown. I hope you’re right about 2014, I’d like to think so too.

    However, what has to worry you right now is Europe. Krugman nailed it yesterday about Germany is fooling itself to think that Greece leaving the euro is no big deal.

  41. Gravatar of Saturos Saturos
    24. July 2012 at 11:09

    Sebastian Mallaby (http://www.ft.com/intl/cms/s/0/72845f10-d4d2-11e1-bb88-00144feabdc0.html) and Tim Duy (http://economistsview.typepad.com/economistsview/2012/07/fed-watch-a-missing-ingredient.html) have suggestions.

  42. Gravatar of Bill Ellis Bill Ellis
    24. July 2012 at 11:27

    Did anyone else read the link from Scott’s Waldman link to Chris Dillow’s blog ?

    http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2012/07/unemployment-a-brief-history.html

    2. The idea that free market policies can generate sustained full employment lacks any historical foundation, unless you want to argue that there were severe labour market regulations that caused mass unemployment in the 19th century; “Damn those Factory Acts!”

    3.Claims that the welfare state has created a culture of dependency in which folk don’t want to work look silly. High unemployment was the norm in the pre-welfare state era. (he has a nifty graph at the link)

    Does anyone think he is wrong ?

  43. Gravatar of Saturos Saturos
    24. July 2012 at 11:30

    Scott, think this will be any good?
    http://www.ropeofsilicon.com/movie/anna-karenina/

  44. Gravatar of Doug M Doug M
    24. July 2012 at 11:32

    “The Fed’s own forecast indicates it will miss its 2% inflation target, as it has continually done for the past several years, which represents policy failure even if the Fed did not have a dual mandate. As it is, unemployment is well above the Fed’s own official estimate of the natural rate.”

    CPI is 1.7%. The 2 year average is 2.5% and the 5 year average is 2.2%. Core PCE is 1.8, 1.8, and 1.5%. Is this a gross miss?

    One of my problems with NGDP targeting are the lag times. Numbers are released quarterly with a 2 month lag. That means that it is as long as 5 months before we have a read on current conditions. I suppose this is why there is so much discussion about the need for a futures market.

    I think my frustration with monitary policy these days is that monitary policy depends upon a healthy banking system and the banks are still f-ed.

  45. Gravatar of Bill Ellis Bill Ellis
    24. July 2012 at 11:33

    “There were 18.4 million vacant homes in the U.S. in Q4 ’10 (11 percent of all housing units vacant all year round)”

  46. Gravatar of Mike Sax Mike Sax
    24. July 2012 at 11:41

    Bill, I don’t think he’s wrong but I’m sure there are some here who do.

  47. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2012 at 11:43

    Scott, why does the market need bets on both sides?

    Doesn’t a large swath of predictors saying the odds (good or bad) they expect the economy hitting the NGDPLT number down give you a true snapshot of market confidence.

    Why do they have to WIN on the economy improving? Why not just LOSE when they are wrong about it growing to fast?

    It confuses things – the Fed needs to take money out of the system when the economy is running hot.

    Can someone explain how if you have 100K SMB bidders, you don’t get an accurate snapshot?

    Some logic, math, something?

  48. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2012 at 11:49

    Bill,

    don’t be daft.

    EVERYONE can ALWAYS have a job.

    The issue is that MANY people are not worth what it takes to cover their own nut.

    That’s why my auction works so well.

    It separates the amount the citizen needs to survive, from the issue of people only having to pay what the guy is actually worth.

    What don’t you get here Bill?

  49. Gravatar of Doug M Doug M
    24. July 2012 at 11:59

    Morgan,

    “Why does the market need bets on both sides?”

    Because every transaction needs a buyer and a seller.

  50. Gravatar of Bill Ellis Bill Ellis
    24. July 2012 at 12:10

    Doug M.

    Because every transaction needs a buyer and a seller.

    Good point…econ 101 stuff.

    …It even applies to auctions.

  51. Gravatar of Major_Freedom Major_Freedom
    24. July 2012 at 12:22

    Doug M:

    I think my frustration with monitary policy these days is that monitary policy depends upon a healthy banking system and the banks are still f-ed.

    You’re in luck, Doug. Market (don’t laugh!) monetarism does not preclude Bernanke actually dropping money from helicopters. In fact, that is essentially what is called for when we’re at the zero bound. If banks won’t lend more, then the Fed should print so much money that bankers raise NGDP 5% through declaring dividends and consuming wealth for themselves. That ought to make others wealthier!

  52. Gravatar of Doug M Doug M
    24. July 2012 at 12:55

    MF,

    Yes, and the treasury can bury boxes of cash, which will provide employment for both those who bury the boxes and those who go hunting for buried treasury. Never mind that it employs resources by wasting them.

    George Bush tried mailing a $600 check to every taxpayer in America. I don’t remember that doing much.

  53. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2012 at 13:25

    GAH!

    Did you even read my plan?

    The buyer is ALWAYS the FED.

    When NGDP runs too high they destroy the money that has bet – reducing the money supply.

    When it runs to low, they print money and hand it to the winners.

    This is MY CLAIMED ADVANTAGE over Scott’s plan – it is actually the transmission mechanism, not just a prediction market.

    The point is SINCE mine can be HUGE, you get better information too.

    Now does anyone have a specific answer as to why this inflation can be used

    I’m not saying I’m right, I’m asking for a real gamed out critique.

  54. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2012 at 13:26

    Bill you are a tard. Think for yourself.

  55. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2012 at 13:27

    Now does anyone have a specific answer as to why this information can not be used, it is not as valid, as information where the Fed is not the buyer?

  56. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2012 at 13:32

    What’s the line on Scott Brown:

    http://www.youtube.com/watch?v=oqDIjGsBEP8&feature=youtu.be

    A real smash mouth bit of advertising there… EVEN In MA!

  57. Gravatar of Doug M Doug M
    24. July 2012 at 13:52

    Morgan,

    I read your plan and it made no sense…. So, I will try to say back to you what I think you are suggesting.

    The Fed will hold an auction. The Fed will pay the auction winners X – NGDP. If NGDP comes in low, the bidders will receive money from the Fed. If NGDP is higher than what the bidders expected they will pay the Fed. This action will provide monitary stimulus. If the market expectations are weak, the bid price will be high. The Fed will read the high bid price as a signal to increase the auction ammounts, thus further increasing the amount of stimulus created in these acutions…

    How often will these auctions be held? Will they all settle on the days that the BEA releases GDP data? i.e. 2 months after the period in question?

  58. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2012 at 14:14

    No auction.

    You deposit your cash into an account.

    You are only betting that NGDP will come in at $X, where is X is some amount lower than 4.5% annualized for growth monthly.

    If you are correct – you get newly printed money – determined by how close you came to number in your bid.

    But the amount you receive is ALSO part of the exact amount that needs to be injected to keep right at 4.5% annualized growth month to month.

    So IF in month one, the Fed need to print $1B, the $1B is split (like a lottery) amongst the winners – REGARDLESS of how many bets were made.

    That first month there is a miss is Marketing Publicity – suddenly this is a serious god damn payday, and no one want sot let just a few people win all that cash – even if it is a long shot bet.

    So the “prize” (the amount that needs to be injected) increases the shittier the economy is doing.

    This is EXACTLY what MM all want to happen.

    If you lose – if the economy comes in too hot, you lose as much of your money as the Fed need to extract to cool the economy off.

    —–

    The real first question is, does the first big payday drive BILLIONS into the betting market?

    I think it does.

    But that isn’t this exact question.

    I’m asking – under this system, where the Fed can see:

    1. how many are betting.
    2. what kind of betters are betting – they are tons of SMB owners.
    3. how far off they think the system is

    Can’t that information be normalized back to describe exactly where the buys all think NGDP is going to go?

    I KNOW they are all only betting one way, what I don’t know is why this can’t be extrapolated to to a FAR MORE accurate guess on NGDP – because the the players are aren’t just analysts, they are the boots on the ground SMB guys.

    There’s a much bigger playing set, since the payoff is so god damn sick.

    The outsized returns quickly go away, but guys keep playing for not wanting someone else to get the big payday.

    I have other advantages – I’m just trying to find out WHY the information just as valid.

  59. Gravatar of Doug M Doug M
    24. July 2012 at 14:28

    Morgan,

    Still unclear…

    The Fed says, we are going to give some ammount of money away to anyone who says that they want it so long as NGDP comes in below X. However, there is a catch, if GDP comes in above X we will need you to pay us. We can’t tell you ahead of time the ammount that you might owe.

    How will the Fed determine the amount of money that they will be distributing or taking in each of these acutions?

    If there is a widely held opinion that NGDP will be low, you would see a broading in the number of participants in this game. However, there will still not be a market consensus price. If GDP growth is expected to be anywhere near the Fed’s target, no one will play.

  60. Gravatar of Major_Freedom Major_Freedom
    24. July 2012 at 14:54

    Morgan:

    If you are correct – you get newly printed money – determined by how close you came to number in your bid.

    Aren’t all the futures prices FIXED? How can anyone’s bid price come “close” to NGDP, when they are all the same price?

  61. Gravatar of Major_Freedom Major_Freedom
    24. July 2012 at 15:03

    Doug M:

    Yes, and the treasury can bury boxes of cash, which will provide employment for both those who bury the boxes and those who go hunting for buried treasury. Never mind that it employs resources by wasting them.

    Yes, let’s just bypass all labor and let a select group of people consume directly at the expense of others, and lose the pretense that they’re doing something productive.

    George Bush tried mailing a $600 check to every taxpayer in America. I don’t remember that doing much.

    That’s because the checks weren’t large enough, silly. If they were $60000 each, THEN we would have avoided the great recession.

  62. Gravatar of Michael Michael
    24. July 2012 at 15:10

    I think we need to consider that the Fed is getting exactly the “recovery” that it wants. Steve Waldman pointed out a while ago that keeping a lid on inflation – at all costs – is great for creditors and secure workers, and costly to debtors and marginal workers. Creditors are getting exactly what they think they want.

  63. Gravatar of Mike Sax Mike Sax
    24. July 2012 at 15:10

    Morgan so before I’ve even pulled the lever for Scott’s plan I got to make the jump to yours?

    What you are saying basically is that everyone is betting against the economy, specifically betting against NGDP?

    So everyone is short. And you anticpate that those who get in willl be mostly small business owners?

    I know you said something about “no price setters” so you’re ruling out big money.

    However, beyond that can anyone get in theoretically? I mean is it literally like a lottery where you can buy as many tickets as you like?

    Or, even a better analogy, like where you can buy as many shares of stock as you like-as many futures ie.

    To Doug’s question:

    “The Fed says, we are going to give some ammount of money away to anyone who says that they want it so long as NGDP comes in below X. However, there is a catch, if GDP comes in above X we will need you to pay us. We can’t tell you ahead of time the ammount that you might owe.”

    Is the amount you owe kind of like the margin you owe when you bet any other futures and lose?

    You antiicpate a big market? Like how many could you imagine doing this.

    IF there was a real palatable pay day for this then people would certainly get in. But it has to, like any lottery deliver enough real winners to keep interest in it.

  64. Gravatar of Negation of Ideology Negation of Ideology
    24. July 2012 at 15:17

    Saturos -

    “The only coherent way to evaluate the stance of monetary policy (and fiscal stimulus is also “monetary policy”, which only works when the Fed allows it to) is relative to the level which is expected to lead to the fulfillment of the central bank’s objectives.”

    Correct. This is the key point. In the old days of metal standards, the target was the nominal price of one or more metals. So if the target price of gold was $20.00 per Troy ounce, and the money supply had to increase to maintain that price, no one would have called that a “loose” monetary policy. And if interest rates fell, no one would have called it loose fiscal policy. It would only be called loose if the nominal price of gold rose above $20.

    Likewise, if the target is a nominal price of GDP of $16 Trillion, and the money supply has to increase to hit that target, then no one should call it loose monetary policy. It should only be called loose if the nominal price of GDP rises above $16 Trillion.

    Obviously, just reverse everything for what should be considered “tight” monetary policy.

  65. Gravatar of Mike Sax Mike Sax
    24. July 2012 at 15:18

    And when NGDP is at or above 4.5 the money all the betters lose amounts to cooling down the economy through monetary reduction.

    And when NGDP falls short all the money the betters pocket is the stimulus for the econommy.

    Yet you indicate you only win if you guess how short of 4.5 it is? So if someone predictes 4.1 and it’s 3.9 they get nothing?

    So it’s like picking the right numbers in the lottery?

  66. Gravatar of Doug M Doug M
    24. July 2012 at 15:26

    MF,

    If the Treasury gave everone in America $60,000, I would be the “idiot” who would save it rather than spend it because I would fear that they real value of my savings was falling and I needed to save every penny until I was back to where I started.

  67. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2012 at 15:39

    Jesus, I don’t think this is that hard.

    NGDP for Sept 2012 is supposed to be $16.455T, it comes in at $16.451T

    The Fed is going to hand out $4B.

    That is ALL doled out to the bettors, based on how much they bet, and HOW CLOSE they were to $16.451T

    I repeat for Saxie, HOW CLOSE matters to the payoff.

    IF, NGDP comes in too high (say $2B), the accounts are debited so to remove $2B from the economy.

    —–

    Doug, since I am biased to SMB owners, I’m not letting Fortune 1000 place bets.

    Only individuals and they are limited to a set amount they can bet each month.

    YES, I expect that first $4B (perhaps $40B!) payoff to bring lots of folks to the table, and with lots of folks at the table, I expect there to be billions and billions that can be removed.

    To me this is a SMB owner’s hedge against a slow down.

    And since the Fortune 1000 aren’t involved, there is not ability for anyone to alter their pricing etc. to effect their NGDP bets.

    OK, so do you understand the idea?

  68. Gravatar of Mike Sax Mike Sax
    24. July 2012 at 15:54

    I mean I think I get the real basics in that the NGDP betters get paid if NGDP is below target which acts as a spur to the economy.

    If it’s above target they lose but at least the economy is juiced up.

    It’s interesting trying to give a futures market a populist slant.

    Does it work like any futures market works-you put in your margin like buying oil or gold?

  69. Gravatar of Doug M Doug M
    24. July 2012 at 16:51

    Hmmm, still not sure how puts there name in when the expectations are for NGDP to be above target.

    Now, the Fed will be abandoning open market opperations when it goes to this model. Money injected into the system will me money created by the Fed out of the aether. Certainly, they have to power to do this. However, there are a few people who think it is necessary for the Fed to actually hold an asset on its ballance sheet against any money that it creates, even if this asset is a peice of paper issued by another entity of the government.

  70. Gravatar of JimP JimP
    24. July 2012 at 17:38

    One has to wonder if Bernanke reads anything outside Fedspeak. I presume other Fed staffers read this blog – and they must understand the contempt with which the Fed is now viewed, by at least most people here and other places on the web. Does Bernanke understand this? One has to wonder.

    What will he think of himself after he leaves the Fed. Will he be proud of the fact that he is the worst central banker in all of American history?

    Worst in that he knew what he had to do (many didn’t) – but lacked the simple courage to do it.

  71. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2012 at 17:39

    Doug M,

    Yep, the idea is that BEFORE the Fed even buys a single US BOND, it first lets SMB owners self insure against econ downturns.

    Why should it be holding assets? The goal is to keep the economy going at 4.5% NGDP.

    “still not sure how puts there name in when the expectations are for NGDP to be above target.”

    If Doug has deposited money to bid, and placed a bid for next month, he can win or lose that bet.

    If Doug hasn’t – he doesn’t gain or lose anything.

    Does this make sense?

  72. Gravatar of JimP JimP
    24. July 2012 at 17:50

    Can anyone even imagine Volcker acting – or not acting – as Bernanke has? Or Roosevelt? Or Hamilton?

    America turns into Japan – because of the failed monetary policy of one person. That is beyond sad. And it says something about us that there are not people in the street rioting about this. Perhaps we do really deserve this. No one is doing much about it – and in particular not the man who pretends to be our president.

  73. Gravatar of Major_Freedom Major_Freedom
    24. July 2012 at 18:42

    Doug M:

    If the Treasury gave everone in America $60,000, I would be the “idiot” who would save it rather than spend it because I would fear that they real value of my savings was falling and I needed to save every penny until I was back to where I started.

    Dear Doug M,

    If you hoard the cash we send you, then we will keep increasing the size of the checks until you spend WHAT WE GODDAMN SAY YOU SHOULD SPEND!!!!

    Sincerely,

    The Government.

  74. Gravatar of ZeroHedge ZeroHedge
    24. July 2012 at 18:46

    “This market isn’t real. The 2% on the 10-year, the 90 bps on the 5-year, 30 bps on a 1-year – those are medicated, pegged rates created by the Fed and which fast-money traders trade against as long as they are confident the Fed can keep the whole market rigged. Nobody in their right mind wants to own the 10-year bond at a 2% interest rate. But they’re doing it because they can borrow overnight money for free, 10 bps, put it on repo, collect 190 bps a spread, and laugh all the way to the bank. And they will keep laughing all the way to the bank on Wall Street until they lose confidence in the Fed’s ability to keep the yield curve pegged where it is today. If the bond ever starts falling in price, they unwind the carry trade. Then you get a message, “Do not pass go.” Sell your bonds, unwind your overnight debt, your repo positions. And the system then begins to contract… The Fed has destroyed the money market. It has destroyed the capital markets. They have something that you can see on the screen called an “interest rate.” That isn’t a market price of money or a market price of 5-year debt capital. That is an administered price that the Fed has set and that every trader watches by the minute to make sure that he’s still in a positive spread. And you can’t have capitalism if the capital markets are dead, if the capital markets are simply a branch office – branch casino – of the central bank. That’s essentially what we have today.”

    http://www.zerohedge.com/news/david-stockman-capital-markets-are-simply-branch-casino-central-bank

  75. Gravatar of Joe2 Joe2
    24. July 2012 at 19:20

    Zerohedge

    That’s just nonsense.

  76. Gravatar of Steve Steve
    24. July 2012 at 19:50

    That ZeroHedge quote, besides being pure garbage, is from David Stockman. Here’s a little on David Stockman:

    “I invest in anything that Bernanke can’t destroy, including gold, canned beans, bottled water and flashlight batteries,” David Stockman tells Jennifer DePaul of the Fiscal Times.

    Stockman rose to fame as a Hayek quoting Congressman who became Ronald Reagan’s budget director.

    http://www.cnbc.com/id/39539248

  77. Gravatar of dwb dwb
    24. July 2012 at 20:05

    Tyler Durden feels the need to get some of Sumners eyeballs. Progress!

    the only real question is whether Zerohedge is recyled MF garbage, or vice versa. i tend to think the latter. heh.

  78. Gravatar of Morgan Warstler Morgan Warstler
    24. July 2012 at 20:21

    JimP,

    huh?

    dude, there are two kind of people who riot..

    1. the OWS crowd who no one cares about.

    2. The Tea Party which cleans up garbage after their events which OWNS EVERYTHING.

    Now here you sit, asking yourself why the people that matter aren’t out rioting?

    Et tu, Jim?

    You too wnat to spend the next 4 months acting like Nov 2012 is not a BIGGER DEAL to the future of the US economy?

    Look, drinking to Kool-aid isn’t RATIONAL YET.

    If it was rational I’d do it.

    But the rational observer is too impressed with what the right has done to recover, grow strong, and destroy so much of the 1960-70′s danger – the true chance that America would forever topple into the shitty worthless mindset of the Europeans.

    We could have been France!

    And we were saved… we walked through the fire and we came out with burned feet and the knowledge that we could live with burned feet… for the sheer adrenaline rush of walking through fire.

    Do we not remember the wise words of the The Meatmen???

    “French people suck
    I just gotta say
    Made the jet fighters
    Go out of their way
    Hating Yankees too much
    Those beret-headed nuts.
    They can stick the Eifell Tower
    Straight up their butts.

    Last time I flew Air France
    Played a tune on my Uzi
    And made the sissies dance.
    Killed a hundred or more
    And I had a ball.
    Those freakin’ frog suckers
    Be the death of us all.

    French people suck.
    French people suck.
    French people suck.
    French people can suck my… ”

    This is what our nation was raised on, JimP, how can the defeat of our first French President NOT be more important than goosing NGDP in the next 4 months?

  79. Gravatar of acarraro acarraro
    25. July 2012 at 01:06

    How do you see the fixed income market evolving after a NGDP target being adopted?

    My main concern is that I think fixed income markets have discounted inflation risk for the last 25 years. Central banks have proved that they do care about their inflation targets and that a Goverment bond will maintain its value (at least for countries with an independent central bank).

    I think a NGDP target adds significant inflation risk to a nominal bond and changes its nature quite substantially. Real and nominal bonds are not that different with inflation targeting.

    One possible solution would be to shift more and more issuance from nominal to real bonds. People value safety and I don’t think you could just change their risk profiles without them fighting back. Maybe even consumer products, like mortgages would start being indexed (as the nominal kind would require large risk premiums)…

    But isn’t that scary in itself? Once a large part of liabilities become indexed, what would happen to monetary policy? Would it be as bad as with wage indexation? Let’s say you get a shock, NGDP expectation go down, the central bank issues more money, but now debt burdens go up. Wouldn’t that render the monetary move less potent?

    Such an economy would effectively be in a gold standard like state, with the CPI consumption basket acting as gold. I guess it’s still much better since there is no fixed quantity of the CPI basket, but it’s still worries me…

    Is it a reasonable concern?

  80. Gravatar of Morgan Warstler Morgan Warstler
    25. July 2012 at 01:25

    Ya know I formed my first opinion of Conservative Econ strategy to defeat Democrats in the mid 1980′s (I was like 16) when David Stockman went apeshit and started explaining that conservatives were no longer worrying about deficits.

    He didn’t like that it was happening, so I didn’t either…

    BUT then I watched Bill Clinton throw his party overboard and it changed my mind.

    And I have held to that theory until this day. If Obama loses, Stockman is wrong about debt, just as Scott is wrong about NGDPLT.

    Both might be good ideas, but both must be slaves to the greater good – ending “vote to get free shit” for Dems.

    So now let’s see what Stockman is saying…

    “David: Yeah, there is a paper blueprint. People who believe in sound money and fiscal responsibility, that you create wealth the old-fashioned way through savings and work and effort and not simply by printing money and trading pieces of paper – there is a plan that they could put together. One would be to put the Fed out of business. You don’t have to “end the Fed,” although I like Ron Paul’s phrase. You have to get them out of discretionary, active, day-to-day meddling in the money markets. Abolish the Open Market Committee.

    The Fed has taken its balance sheet to $3 trillion. That’s enough for the next 50 years. They don’t have to do a damn thing except maybe have a discount window that floats above the market, and if things get tight, let the interest rate go up. People who have been speculating will be carried out on a stretcher. That’s how they used to do it. It worked prior to 1914. That’s the first step: abolish the Open Market Committee. Abolish discretionary monetary policy.

    Let the Fed, if you’re going to keep it – I don’t even know that you need to do that, but if you are going to keep it – be only a standby source. As Badgett said (Walter Badgett, the great 19th-century British financial thinker): provide liquidity at a penalty rate to sound collateral.

    Now, that’s what J.P. Morgan did in 1907, in the great crisis of 1907, from his library. He didn’t have a printing press. He didn’t bail out everybody. He didn’t do what Bernanke did and say: “Stop the presses, freeze everybody, and prop up Morgan Stanley and Goldman Sachs and all the rest of the speculators.” The interest rate, the call-money interest rate, which was the open-market interest rate at the time, some days went to 30, 40, 70% – and they were carrying out the speculators left and right, liquidating margin debt, taking out the real estate speculators. Eight or ten railroads went bankrupt within a couple of months. The copper magnates got carried out on their shields.

    This is the only way a capital market can work, but it needs an honest interest rate. And we have no interest rate, so therefore we solve nothing and we have the kind of impaired, incapacitated markets that we have today. They’re very dangerous, because they’re all dependent on twelve people. It is what I call “the monetary Politburo of the Western world,” and they are just as dangerous as the Politburo in Beijing or the Politburo of memory in Moscow.”

    Gonna be a super interesting November.

  81. Gravatar of Morgan Warstler Morgan Warstler
    25. July 2012 at 01:27

    And then this!

    “David: Well, it’s very tough, and they were lured into it by bad monetary policy when Greenspan panicked in December 2000. The interest rate was 6.5%; we had an economy that was threatened by competitors around the world. We needed high interest rates, not low. He panicked after the dot-com crash, and as you remember in two years they took the interest rate all the way down to 1%, and they catalyzed an explosion of mortgage borrowing, which was crazy.

    When they cut the final rate down to 1% in May, June 2003, in that quarter – the second quarter of 2003 – the run rate of mortgage borrowing was $5 trillion at an annual rate. That was nuts! There had never been even a trillion-dollar annual rate of mortgage borrowing previously. In that quarter the run rate was $5 trillion, 40% of GDP. Why? Because the Fed took the rate down to 1%. Floating-rate product got invented everywhere. Anybody that had a pulse was being given mortgage loans by the brokers. The mortgage brokers didn’t have any capital or funding. They went to Wall Street. They got warehouse lines, and the whole thing got out of control. Millions of households were lured into taking on debt that was insane, and now we have a generation of debt slaves.

    There are 25 million households in America who couldn’t move if they wanted to, because their mortgages are under water. They cannot generate a down payment and the 5% or 6% broker fee that you need to move. So we’ve got 25 million households immobilized, paralyzed, and worried every day about when they are going to lose property, because of what the Fed did. It’s a terrible indictment.

    Alex: Mobility itself is the American dream, isn’t it? It’s the ability to pick up and find work and then move and do all that. So now we have people who are slaves to their debt. How do we get ourselves out of this? Is this just a matter of personal financial discipline? Is there a policy move that can happen?

    David: It’s policy. If we don’t do something about the Fed, if we don’t drive the Bernankes and the Dudleys and the Yellens and the rest of these lunatic money-printers out of the Federal Reserve and get it under the control of people who have at least a modicum of sanity, we are just going to bury everybody deeper.

    It’s unfortunate. The American people are as much a victim of the Fed’s massive errors as anything else. People were not prudent when they took on debt at 100% of the peak value of their property at some moment in 2004 and 2005. They were lured into it. But now we’re stuck with something that didn’t need to happen.”

  82. Gravatar of Morgan Warstler Morgan Warstler
    25. July 2012 at 01:43

    The NYT tries to play both sides of my game “Ben get sone shot to save Obama when does he do it?”

    http://www.nytimes.com/2012/07/25/business/economy/fed-leaning-closer-to-new-stimulus.html?_r=1

  83. Gravatar of Mike Sax Mike Sax
    25. July 2012 at 01:46

    “The Fed has taken its balance sheet to $3 trillion. That’s enough for the next 50 years. They don’t have to do a damn thing except maybe have a discount window that floats above the market, and if things get tight, let the interest rate go up. People who have been speculating will be carried out on a stretcher. That’s how they used to do it. It worked prior to 1914. That’s the first step: abolish the Open Market Committee. Abolish discretionary monetary policy”

    See this is what I don’t get. The pre-1914 status quo was not as rosy as you make it seem. We had bank panics every 3 to 5 years.

    We also had a lot more recessions. Of course the biggest thing that stopped the bank runs was FDIC which libertarians claim causes moral hazard and they want to do away with it. But the historical record is what it is.

  84. Gravatar of Mike Sax Mike Sax
    25. July 2012 at 01:47

    Above comment was yours Morgan

  85. Gravatar of Mike Sax Mike Sax
    25. July 2012 at 01:56

    “Well, it’s very tough, and they were lured into it by bad monetary policy when Greenspan panicked in December 2000. The interest rate was 6.5%; we had an economy that was threatened by competitors around the world. We needed high interest rates, not low. He panicked after the dot-com crash, and as you remember in two years they took the interest rate all the way down to 1%, and they catalyzed an explosion of mortgage borrowing, which was crazy.”

    You know 2001 was not a skip in the park, It was more than just a drop in the Dow and Nasdaq with no real effects.

    A lot of people lost their job at that time and in truth never recovered. Yes, eventually the 3 million jobs lost were gained back-though George W. Bush’s job creation numbers would end up being the worst in the postwar era-but these were mostly crummy service sector jobs.

    It was a “white collar recession” too, the first one that really had legs-technically the first white collar recession was 1990-91 with the first Bush-many people with good college educations were condemned to flipping burgers.

    It wasn’t so much a structural unemployment story but a structural undermployment story. And to this day the problem hasn’t solved itself. Now we have the last 4 years on top of that.

    As far as the Fed actions at the time I don’t claim that what it did was necessarily optimum.

    But the only reason that recession in 2001 technically ended so quickly was because of the real estate bubble. No real estate bubble and maybe we would have become Japan sooner.

  86. Gravatar of Browsing Catharsis – 07.25.12 « Increasing Marginal Utility Browsing Catharsis – 07.25.12 « Increasing Marginal Utility
    25. July 2012 at 04:03

    [...] There is an aggregate demand shortfall AND a great stagnation AND a global savings glut. [...]

  87. Gravatar of mike mike
    25. July 2012 at 04:30

    mr sumner: i have enjoyed reading your blog for over 4 years. would you please point me to a post or post an analysis of why you might be wrong or why the austians might be right?

  88. Gravatar of Major_Freedom Major_Freedom
    25. July 2012 at 04:57

    Mike Sax:

    See this is what I don’t get. The pre-1914 status quo was not as rosy as you make it seem. We had bank panics every 3 to 5 years.

    They were not that often.

    We also had a lot more recessions.

    We had smaller recessions. The top four worst recessions following bank panics occurred after 1913.

  89. Gravatar of Is he right that "The Fed’s policy/regime is dead"? « Economics Info Is he right that "The Fed’s policy/regime is dead"? « Economics Info
    25. July 2012 at 05:00

    [...] Source [...]

  90. Gravatar of jt jt
    25. July 2012 at 05:43

    Dumb question: as an alternative to an NGDP futures market, why not just enact a new law allowing the Fed to obtain economic data from private entities so they can calculate/estimate NGDP in real time. Seems more straightforward and has wider application. In the internet age it seems ridiculous that Dell’s supply chain is 1000x more modern than our economic (and financial regulatory) pulse measurement. (There are similar laws for wiretapping, census taking etc.)

  91. Gravatar of Mike Sax Mike Sax
    25. July 2012 at 06:16

    Major, we had more recessions prior and regular bank panics.

    We haven’t had an old fashioned bank panic since FDIC. As for the Depression there is more to it than simply pointing to a correlation and presuming causation.

    There is a whole cottage industry of such specious arguments in determining causes of the Depression.

  92. Gravatar of Negation of Ideology Negation of Ideology
    25. July 2012 at 06:26

    Wow, I didn’t realize David Stockman was that much of an idiot.

    “The only solution is a long period of debt deflation, downsizing and economic rehabilitation, … ”

    The cure for prosperity is poverty!

  93. Gravatar of Doug M Doug M
    25. July 2012 at 07:50

    http://en.wikipedia.org/wiki/List_of_bank_runs

  94. Gravatar of Major_Freedom Major_Freedom
    25. July 2012 at 07:59

    Mike Sax:

    Major, we had more recessions prior and regular bank panics.

    More relative to what? During the 19th century there were two experiments of central banking, and as many economic historians have shown, each recession was marked by a previous state sanctioned and/or state controlled inflation.

    We haven’t had an old fashioned bank panic since FDIC.

    We’ve had two of the worst economic calamities ever since FDIC.

    As for the Depression there is more to it than simply pointing to a correlation and presuming causation.

    Who is inferring causation from correlation? Not me.

    There is a whole cottage industry of such specious arguments in determining causes of the Depression.

    You are a believer of them.

    —————–

    Propagation of Ideology:

    “The only solution is a long period of debt deflation, downsizing and economic rehabilitation, … ”

    The cure for prosperity is poverty!

    Is that how you view increasing your health via exercise? “Health gurus are idiots! They actually believe PAIN is the cure for bad health!”

  95. Gravatar of Major_Freedom Major_Freedom
    25. July 2012 at 08:01

    mike:

    mr sumner: i have enjoyed reading your blog for over 4 years. would you please point me to a post or post an analysis of why you might be wrong or why the austians might be right?

    Yeah, I don’t see that happening.

  96. Gravatar of Major_Freedom Major_Freedom
    25. July 2012 at 08:05

    Mike Sax:

    Oh, and your claim that we haven’t had an “old fashioned bank panic since FDIC” is meaningless, because it is merely a definition for post-FDIC banking.

    If however we take “old fashioned bank panics” to mean bank runs, then you’re wrong, because the US has indeed experienced bank runs since the introduction of FDIC.

  97. Gravatar of Nick Rowe Nick Rowe
    25. July 2012 at 10:34

    Scott: “Why don’t I think AD explanations are enough? Partly because even the 20 year T-bond now has a negative real yield.”

    Maybe it’s because the market thinks the Fed will keep monetary policy too tight for the next 20 years.

    I sure hope the market has got this one wrong!

  98. Gravatar of dwb dwb
    25. July 2012 at 11:07

    ” Scott: “Why don’t I think AD explanations are enough? Partly because even the 20 year T-bond now has a negative real yield.”Maybe it’s because the market thinks the Fed will keep monetary policy too tight for the next 20 years.I sure hope the market has got this one wrong!”

    you have to be careful with statements like that. 20 year or the 10 year is an .average. 1.5 percent on a 10 year could mean 3 years of sub par growth followed by 7 years of normal growth. the 5 year forward break even tips implied inflation rate is 2.43%. 20 you’re being an average could just mean 3 to 4 really bad year is followed by 15 normal years

  99. Gravatar of Major_Freedom Major_Freedom
    25. July 2012 at 12:38

    Nick Rowe:

    Scott: “Why don’t I think AD explanations are enough? Partly because even the 20 year T-bond now has a negative real yield.”

    Maybe it’s because the market thinks the Fed will keep monetary policy too tight for the next 20 years.

    Or maybe it’s because the treasury market is front running the Fed, and investors don’t plan on holding the bonds until maturity, but rather they plan to flip them to the next higher bidder in a Ponzi like fashion until the Fed is forced to buy them at those inflated prices. The Fed has created a treasury market feeding frenzy when it announced and then enacted, treasury buying sprees (QEs).

    Why are so many people believing that the low yields in the treasury market are signalling low expected inflation? What’s the theory behind it? If I knew I could buy a 30 year treasury that nominally yields 250 bps, but then flip it to the Fed for a 50-100 bps risk-free profit, why should I care what inflation expectations will be 30 years from now? I could believe there will be hyperinflation, and I’ll still be willing to pay a price that yields a nominal 250 bps.

    ————

    I think there needs to be a little bit of improvement in the whole “let’s interpret treasury yields” game. I think it’s a little outdated to believe low yields implies bond investors expect low inflation. When the game turns into a Ponzi scheme headed by the Fed, all bets to traditional bond valuation pricing models are off.

  100. Gravatar of Mike Sax Mike Sax
    25. July 2012 at 12:47

    “If however we take “old fashioned bank panics” to mean bank runs, then you’re wrong, because the US has indeed experienced bank runs since the introduction of FDIC.”

    No we haven’t. Not on a national level.

    “Who is inferring causation from correlation?”

    You are. “The top four worst recessions following bank panics occurred after 1913.”

    You’re pointing out a correlation and presuming this makes your point of causation.

    And that claim is not true anyway. 1837 was defintely one of the top recessions. As was the 1870s. As they happened after the central banking experiement was ended you could plausibly argued that what caused it was abolishing the central bank.

  101. Gravatar of Major_Freedom Major_Freedom
    25. July 2012 at 13:20

    No we haven’t. Not on a national level.

    So you’re defining “old style bank panics” as “pre-FDIC banking where there were national scale bank runs.”

    OK, define national scale bank runs. Does that mean 100% of all banks? Or 51%? Or some other arbitrary in the sky floating concept that you can’t bring down to Earth?

    “Who is inferring causation from correlation?”

    You are. “The top four worst recessions following bank panics occurred after 1913.”

    How is stating an empirical fact a conflation of correlation and causation?

    And that claim is not true anyway.

    It is true. See Romer.

    http://emlab.berkeley.edu/~cromer/JEP_Spring99.pdf

    1920, 1929, 1937, and today’s slump are the worst on record.

    Real GDP didn’t even decline after 1837.

    The 1870s was a time of real growth. The long depression is a myth because too many conflate falling prices with recession.

    As they happened after the central banking experiement was ended you could plausibly argued that what caused it was abolishing the central bank.

    Or caused by central banking prior, collapses which would not have been as severe had central banking not existed.

  102. Gravatar of Mike Sax Mike Sax
    25. July 2012 at 13:25

    “OK, define national scale bank runs. Does that mean 100% of all banks? Or 51%? Or some other arbitrary in the sky floating concept that you can’t bring down to Earth?”

    At this point your just quibbling. It doesn’t have to be 100% but certainly we haven’t seen a situation where a bank holidy had to be called nationally to stop mass withdrawals of deposits.

    I know Rothbard claimed this gave people a “false sense of security” but to the contrary it is quite real.

  103. Gravatar of Mike Sax Mike Sax
    25. July 2012 at 13:28

    “Or caused by central banking prior, collapses which would not have been as severe had central banking not existed.”

    Right that’s my point about causation-correlation. You can interepret it multiple ways.

    “How is stating an empirical fact a conflation of correlation and causation?”

    You meant to draw an inference. You think you’ve proven that central banks cause worse recessions and you haven’t even scratched the surface of substaniating that claim.

  104. Gravatar of ssumner ssumner
    25. July 2012 at 16:29

    Steve, Good find. They don’t seem to be watching the 30 year bond yields.

    Jim Crow, I’d say he has mixed feelings.

    dwb, Good point–savings glut’s probably a bad term. More likely it’s low investment demand.

    Russ, Capitalism IS self regulating. Money is not.

    Philo, I think it’s misused so often now that it’s accepted.

    Saturos, Thanks for the link.

    Joe2, Pay no attention to sectors, focus on NGDP.

    Doug, The Fed has no more control over M2 than over NGDP. If banks hoard reserves neither M2 or NGDP go up.

    Morgan, I still don’t see the point.

    Saturos, How do you find that stuff from 2009?

    Michael, I’m a creditor and I’m getting hurt with low interest rates due to the weak economy.

    JimP, Good point.

    ZeroHedge, 15 years ago the same people were saying the low rates in Japan couldn’t last. A couple years ago they were saying don’t buy T-bonds. How many times do they have to be wrong before no one listens?

    acararro, No, it doesn’t add risk it reduces it. The bond markets don’t care at all about inflation, they only care about NGDP growth, because in the long run NGDP drives interest rates.

    Mike, Read George Selgin, he’s one of my most thoughtful critics.

    jt, I’ve thought about that too, but I don’t know how feasible it is. There’s also the monetary policy lag issue to think about.

    Nick, That’s possible, but even I can’t imagine the Fed could screw up that badly. But then in the late 1990s I thought the same of Japan . . .

    dwb, I do realize it’s an average, but still, the implied forward real rate is awful low (compared to normal.) What’s the 10 year real yield, 10 years forward? Something like 1/2%, isn’t it?

  105. Gravatar of ssumner ssumner
    25. July 2012 at 16:33

    Saturos, I need to finally read that novel before the film ruins it for me.

    He’s decent director, but I’m not a big fan of illustrated novels. (Unless they are trashy novels like The Godfather.)

  106. Gravatar of Major_Freedom Major_Freedom
    25. July 2012 at 16:45

    Mike Sax:

    As they happened after the central banking experiement was ended you could plausibly argued that what caused it was abolishing the central bank.

    Who’s arguing correlation is causation now? Actually, that’s post hoc ergo propter hoc.

    At this point your just quibbling. It doesn’t have to be 100% but certainly we haven’t seen a situation where a bank holidy had to be called nationally to stop mass withdrawals of deposits.

    I’m not quibbling. I’m just figuring out what you mean by “national” bank runs and why bank runs since FDIC “don’t count”.

    I know Rothbard claimed this gave people a “false sense of security” but to the contrary it is quite real.

    Then explain bank runs since FDIC.

    “Or caused by central banking prior, collapses which would not have been as severe had central banking not existed.”

    Right that’s my point about causation-correlation. You can interepret it multiple ways.

    Not if you have a good theory that eliminates bad ideas.

    “How is stating an empirical fact a conflation of correlation and causation?”

    You meant to draw an inference.

    Oh, so you’re a mind reader. Nice. I make an empirical statement, you want to infer boogeymen.

    You think you’ve proven that central banks cause worse recessions and you haven’t even scratched the surface of substaniating that claim.

    I didn’t know I needed to write even longer novels here, haha.

  107. Gravatar of Mike Sax Mike Sax
    25. July 2012 at 18:09

    “Oh, so you’re a mind reader. Nice. I make an empirical statement, you want to infer boogeymen”

    No inference of bogeymen. You obviously had a point in saying this but your argument is flawed. If you admit you have no point then maybe you can stop jabbering so much.

    If you deny that bank runs have been eliminated since FDIC then it’s your usual trick of denying reality. When was the last time we had anywhere near the problems that would make us have to declare a bank holiday?

    If you claim that we’ve had bank runs since 1933 on the level of 1929, 1908, 1896 0r 1837, then you don’t know what your’e talking about. Name me the bank holidays whe’ve had since FDR’s in 1933?

    Like when you claimed that Jim Rogers didn’t lose his shirt trying to short the imaginary “treasury bubble” as did Bill Gross. Your asnwer was “where? where?”

    Again, I’ll glady take the other side of that trade with you anyday. Maybe you can get in with Donald Trump, he believes we’re about to have some terrible trouble because of a collapsing dollar.

  108. Gravatar of Full Employment Hawk Full Employment Hawk
    25. July 2012 at 20:00

    “and the Great Stagnation AS pessimists are both right.”

    If there is a savings glut so that people want to save more than they want to (physically) invest, that leads to deficient AD, not AS. Keynesian economics is perfectly consistent with this result. And if monetary policy cannot offset this, then we really ARE in a liquidity trap. In that case increases in government spending is effective. The government borrowing soaks up the excessive savings causing the glut.

    If the stagnation came from deficient AS, we would get inflation.

  109. Gravatar of Full Employment Hawk Full Employment Hawk
    25. July 2012 at 20:00

    “and the Great Stagnation AS pessimists are both right.”

    If there is a savings glut so that people want to save more than they want to (physically) invest, that leads to deficient AD, not AS. Keynesian economics is perfectly consistent with this result. And if monetary policy cannot offset this, then we really ARE in a liquidity trap. In that case increases in government spending is effective. The government borrowing soaks up the excessive savings causing the glut.

    If the stagnation came from deficient AS, we would get inflation.

  110. Gravatar of Saturos Saturos
    25. July 2012 at 22:34

    Scott, I use the links in the sidebar to the monthly archives, then navigate.

    Also, could you explain how you think the “global savings glut” thing is supposed to hold back growth? Because it’s never made any sense to me; I always thought America didn’t have enough savings (Solow growth model). You’ve effectively refuted the standard “interest rates too low for too long” line that I had constantly been hearing, and the notion that the Fed should have pricked the asset bubble. So what exactly is the problem with a savings glut? Is it the old China-bashing current account wars again?

  111. Gravatar of Major_Freedom Major_Freedom
    25. July 2012 at 23:44

    The savings glut hypothesis Ma href=”http://mises.org/daily/3556″>is utterly fallacious.

  112. Gravatar of Major_Freedom Major_Freedom
    25. July 2012 at 23:48

    Agh, bad formatting.

    Try again.

    The savings glut hypothesis is utterly fallacious.

  113. Gravatar of Major_Freedom Major_Freedom
    25. July 2012 at 23:50

    Holy crap. One more time.

    http://mises.org/daily/3556

  114. Gravatar of dwb dwb
    26. July 2012 at 08:41

    the implied forward real rate is awful low (compared to normal.) What’s the 10 year real yield, 10 years forward? Something like 1/2%, isn’t it?

    nominal 10 yr fwd in 10 yrs, 3.5%; real .7% (which makes BE inflation about 2.8%). I still am not sure why i should expecy any real yield at all from a risk-free bond, but lets say i do, whats the right # for “normal”?

  115. Gravatar of Full Employment Hawk Full Employment Hawk
    26. July 2012 at 09:20

    “It’s beginning to look like Keynes was wrong about liquidity traps, at least when he argued that there’s a certain minimum nominal yield that government bond investors demand, and that long term rates can be reduced no further.”

    Keynes did not make this argument. See page 207 of THE GENERAL THEORY. Keynes argued that THERE IS A POSSIBILITY that this may happen. He also argued that while this limiting case MIGHT become practically important in the future, he knew of no example up to now. He wrote this in 1935, after the trough of the Great Depression had passed.

  116. Gravatar of It’s easier to just blame it on too little NGDP (and would be correct too) « dajeeps It’s easier to just blame it on too little NGDP (and would be correct too) « dajeeps
    26. July 2012 at 17:18

    [...] the realm of Japanonomics. I’ll refer you to Scott Sumner’s post from Tuesday: “Fed Fail: The implosion of a policy regime” for an explanation. 43.098674 -77.441938 Share this:TwitterFacebookLike this:LikeBe the [...]

  117. Gravatar of ssumner ssumner
    26. July 2012 at 18:35

    Saturos, I regret using the term savings glut, that was Bernanke’s term. I meant it was a function of S and I globally, not monetary policy, which has been causing low rates in recent years.

    And I certainly wasn’t suggesting that a savings glut would reduce growth, I claimed it would reduce i-rates.

    dwb, What I meant is that these rates are ultra low by historical standards. T-bonds usually offered significant real returns in the past.

    FEH, I believe he made the argument elsewhere. Keynes was on both sides of virtually every issue at one time or another in his career–you can find Keynes quotes to support almost any point of view.

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