The mysterious Japanese stock market rally

Each day I check out the major stock markets.  This morning I saw that Hong Kong and Singapore were down over 1%.  Britain, Germany and France were also down.  But the Japanese market, which tends to move with the other Asian markets, was up by 1.90%.  That’s a surprisingly large divergence.  Is there any news?  It turns out that there is news, but only if you don’t believe in “liquidity traps.”  Travis Allison sent me the following:

The yen slumped to the lowest in more than six months against the dollar on prospects Japanese elections next month will hand power to an opposition party that advocates more aggressive monetary easing.

.   .   .

Japan’s currency weakened to almost a two-week low versus the euro on speculation the vote will favor Shinzo Abe, who called for the central bank to provide unlimited stimulus.

.   .   .

“The leader of Japan’s opposition is coming down quite heavily, saying what he would like the Bank of Japan (8301) to do in terms of easing and that’s pressuring the yen,” said Jane Foley, a senior currency strategist at Rabobank International in London.

.   .   .

The yen dropped 1.4 percent to 81.39 per dollar at 8:47 a.m. New York time, after touching 81.46, the weakest level since April 25. It depreciated 1.7 percent to 103.92 per euro.

.  .  .

Japanese Prime Minister Yoshihiko Noda will dissolve parliament tomorrow, triggering an election that polls show his Democratic Party of Japan will lose. The vote for the lower house will be held on Dec. 16, acting DPJ secretary-general Jun Azumi said yesterday.

“The biggest economic problem is prolonged deflation and a strong yen,” Abe, the head of the largest opposition Liberal Democratic Party, said in a speech in Tokyo today. “Markets will only start to react once unlimited monetary easing is conducted.”

The Bank of Japan must cut its benchmark interest rate to zero or even lower to boost lending, Abe said. The rate is currently set at a range of between zero and 0.1 percent. Earlier this month, Abe said the BOJ should conduct monetary easing until the nation achieves 3 percent inflation. Consumer prices excluding fresh food fell 0.1 percent in September, declining for a fifth month.

Of course if you are one of those Keynesians who do believe in liquidity traps, then you’d have to conclude that this speech had no impact on the Japanese exchange rate, or the Japanese stock market.

And if you believe in liquidity traps then you also must believe that the fact that the Swiss franc has been stable at 1.20 per euro for the past 14 months is just an amazing coincidence, having nothing to do with the fact that in September 2011 the Swiss government announced a policy of pegging the SF at 1.20 per euro.

And yet most economists do seem to believe in liquidity traps.  In future decades people will look back on this era and just shake their heads.

PS.  In 2 days I will be in Japan, for my first time ever.  But only for 2 hours.


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62 Responses to “The mysterious Japanese stock market rally”

  1. Gravatar of Doug M Doug M
    15. November 2012 at 09:08

    I would appreciate some further explanation regarding how an FX peg is incompatible with liquidity traps.

    Is the BoJ not independent from the MoF? Does the prime minister of Japan have the power to institue a change in monitary policy?

    Shinzo Abe is a known quantity — he was Prime Minister just a few years ago. Abe and the LDP (his party) are as conservative as it gets. (conservative as meaning cautious — maintaining the status quo — as opposed to “small government” or traditional values)

    Every day the fincancial press writes a narrative to explain the previous days market moves. Frequently, these stories are contradictory from day to day. Market sells off over fears of X. The next day X happens and the market rallies.

  2. Gravatar of Ben Abbott Ben Abbott
    15. November 2012 at 09:17

    While you’re in Narita, you may have time to try out some of its nice facilities and services.

    http://www.narita-airport.jp/en/guide/service/list/svc_37.html

  3. Gravatar of Tom Hannaford Tom Hannaford
    15. November 2012 at 09:31

    Buy some McD’s first thing when you are in Japan; Japanese fast food is lightyears better!

  4. Gravatar of Bonnie Bonnie
    15. November 2012 at 09:56

    “The Bank of Japan must cut its benchmark interest rate to zero or even lower to boost lending, Abe said.”

    That will do it. /sarc

    They say it can’t rain forever; but I am sure to some Japanese, it seems like it has been raining forever. It certainly seems that way for me here in the States, and we’ve only been through a 5th of the bad monetary policy they have.

  5. Gravatar of Saturos Saturos
    15. November 2012 at 10:16

    Excellent, I’ve always wanted to go there! Scott, make sure you try some of these: http://www.oyatsubreak.com/
    and this: http://www.spoon-tamago.com/2012/11/09/worlds-first-3d-printing-photo-booth-to-open-in-japan/
    And, if you’re brave enough, have a go with this: http://priceonomics.com/toilets/#japanese

    HT Tyler Cowen for all his awesome links.

  6. Gravatar of Steve Steve
    15. November 2012 at 10:37

    Next time you do a post on liquidity traps, make sure to call it a “zombie idea” in your headline. Preferably of the brain eating variety.

  7. Gravatar of Bob Murphy Bob Murphy
    15. November 2012 at 11:39

    Scott, I really don’t get this post. (I hope you were sitting down for that.) You’re saying Paul Krugman has no way of explaining why the promise of future monetary expansion by the BoJ could be expansionary today? How can you possibly say that?

  8. Gravatar of Kenneth Duda Kenneth Duda
    15. November 2012 at 13:30

    I second Bob Murphy’s request for more of an explanation. I thought “liquidity trap” meant a situation where interest on excess reserves was at zero, yet more monetary stimulus is deemed necessary — the “trap” is that you are unable to get there in the usual way, by lowering interest rates, because of the zero nominal lower bound. If an economy is in a liquidity trap, promises of future inflation and unconventional monetary easing absolutely have impact, even in the world view of liquidity-trap-believing Keynesians.

    Where do you see inconsistency between “belief in liquidity trap” and “recognition that raising inflation expectations and deploying unconventional monetary tools can boost the economy”?

    Maybe the term “liquidity trap” means something different than I thought it did?

    -Ken

  9. Gravatar of JP Koning JP Koning
    15. November 2012 at 13:52

    I think that the idea here is Wallace neutrality. This link gives a good rundown:

    http://www.bruegel.org/nc/blog/detail/article/885-blogs-review-wallace-neutrality-and-balance-sheet-monetary-policy/

    Basically, the Fed can’t change asset prices (or decrease the price of dollars) because maximizing traders will take the other side of the trade. These ideas are “baseline” in macroeconomics, they aren’t just Krugman’s.

    This is also a good post:

    http://blog.supplysideliberal.com/post/31921965714/pedro-da-costa-on-krugmans-answer-to-my-question

  10. Gravatar of Liberal Roman Liberal Roman
    15. November 2012 at 14:22

    OT:I have a new model in my head. Scott has said that poor supply side policies do not usually cause crashes.

    However, in the real world, I think the following happens. Poor supply side economic policies are enacted. Prices must increase and more inflation must be accepted. The central bank acts to crush the inflation or at the very least doesn’t set the expectations that higher inflation will be tolerated. Economy crashes.

    I think this is what happened in 2006-2008 (crackdown on immigration, increase in minimum wage) and I think it’s about to happen again (Obama’s tax increases, full implementation of Obamacare, numerous local tax increases passed around the country). I am officially worried.

  11. Gravatar of Scott Sumner Scott Sumner
    15. November 2012 at 14:28

    People should look at my second link if they wish to understand Krugman’s views.

    Thanks for the Japan info.

    Liberal Roman, That’s possible.

  12. Gravatar of Lars Christensen Lars Christensen
    15. November 2012 at 14:39

    Scott,

    Our friend Britmouse comments on the same topic: http://uneconomical.wordpress.com/2012/11/15/memo-to-the-dangerous-voices-remember-japan/

    In my view there is a relatively large change in monetary policy under way in Japan and it has been under way since the BoJ changed it’s inflation target from 0-2% to 1-2% earlier this year.

  13. Gravatar of Benjamin Cole Benjamin Cole
    15. November 2012 at 17:46

    In Japan for only two hours?

    I have done that many times. Osaka. I have never been in Japan proper. That is, had my passport stamped.

  14. Gravatar of W. Peden W. Peden
    15. November 2012 at 18:00

    Thanks to generations of abuse, the term “liquidity trap” is now generally useless-

    http://critical-reaction.co.uk/3010/05-02-2012-the-pathologies-of-capitalism

  15. Gravatar of Scott Sumner Calls My Bluff on Krugman Scott Sumner Calls My Bluff on Krugman
    15. November 2012 at 18:34

    [...] in a hibachi restaurant, or more about Swedish apartments, I won’t bat an eye. But in this post (HT2 Daniel Kuehn) he tried to make fun of Krugman…that’s my job. Look at [...]

  16. Gravatar of Saturos Saturos
    15. November 2012 at 22:46

    Bob, Krugman thinks central banks can only get out of a liquidity trap by “promising to be irresponsible”, and that that’s unlikely to work, hence fiscal stimulus is required. Both Bernanke and Krugman mysteriously seem to believe that advice they gave Japan is inapplicable to the US today. Krugman of course still regularly responds to this blog, when deigning to acknowledge the existence of Scott Sumner, by saying, “Yeah, I covered all that stuff ages ago with my paper on Japan”. Then he goes back to castigating Republicans for blocking fiscal stimulus.

  17. Gravatar of Exust Exust
    15. November 2012 at 23:31

    I’m, like Bob Murphy and Kenneth Duda, also puzzled why this would be inconsistent with a liquidity trap point of view. In the world view of liquidity-trap-believing Keynesians a regime change such as a higher inflation target/NGDPLT obviously has an impact. See for instance this Krugman post:

    http://krugman.blogs.nytimes.com/2010/08/31/japan-1998/

  18. Gravatar of Scott Sumner Calls My Bluff on Krugman – Unofficial Network Scott Sumner Calls My Bluff on Krugman - Unofficial Network
    16. November 2012 at 00:01

    [...] in a hibachi restaurant, or more about Swedish apartments, I won’t bat an eye. But in this post (HT2 Daniel Kuehn) he tried to make fun of Krugman…that’s my job. Look at [...]

  19. Gravatar of ChargerCarl ChargerCarl
    16. November 2012 at 02:36

    What 20 years of zero NGDP growth looks like:

    http://www.youtube.com/watch?v=7_l5b6lZ0mM&feature=related

  20. Gravatar of Major_Freedom Major_Freedom
    16. November 2012 at 04:37

    What 20 years of zero NGDP growth looks like:

    Everyone in Japan lives like that? OMG

  21. Gravatar of Saturos Saturos
    16. November 2012 at 04:59

    Jon Hilsenrath has further coverage of the Yellen speech: http://online.wsj.com/article/SB10001424127887324556304578117284139682350.html

    And Bob Hetzel has a new paper out: http://www.richmondfed.org/publications/research/economic_quarterly/2012/q2/hetzel.cfm

    HT Josh Hendrickson on Twitter.

  22. Gravatar of Jim Crow Jim Crow
    16. November 2012 at 05:00

    Sarturos, I’m curious. Why do you believe that Bernanke thinks his old Japan advice is not applicable to the US right now?

  23. Gravatar of Tom Tom
    16. November 2012 at 05:11

    Scott, what I don’t quite understand, especially at the zero-bound, is the lack of desire to monetize the deficit.

    Why doesn’t the BoJ just print the money the Japanese gov’t has been promising its voters in benefits, rather than increasing the debt load? Why not in the USA?

    I’m well aware of the claim that this will lead to inflation, but don’t believe that is much of a problem now, and if it did become a problem, increasing interest rates would rapidly stop the inflation from getting too high.

    The “helicopter drop” would then be (slightly) more directed — those getting gov’t checks would get real, fiat, created out of thin air, money. Which they could spend and buy stuff with, or save, or use to pay off debts.

    Just do more money printing, rather than QE III.
    Why not?

  24. Gravatar of ssumner ssumner
    16. November 2012 at 05:30

    I’m leaving in a few minutes so I’ll just say the following:

    In the post I link to Krugman basically says something to the effect:

    “Lot’s of people think you can devalue your way out of a liquidity trap. Not true. The Swiss tried to devalue their currency and failed. ”

    What Krugman said elsewhere has no bearing on this post, I never even mentioned Krugman’s name. Just the link.

  25. Gravatar of ssumner ssumner
    16. November 2012 at 05:32

    Japan up another 2.2% today–I will arrive in Japan just as their people are getting richer following MM advice. :)

  26. Gravatar of Saturos Saturos
    16. November 2012 at 05:39

    Josh Hendrickson also has a post on Peter Ireland’s new paper:
    http://everydayecon.wordpress.com/2012/11/12/re-focusing-the-federal-reserve/

    And here is an interesting interview on the Euro (audio):
    http://econjwatch.org/podcast/roland-vaubel-on-the-euro-a-political-narrative

    Safe flight Scott!

  27. Gravatar of Saturos Saturos
    16. November 2012 at 05:41

    Jim Crow, Bernanke famously responded to claims he was ignoring his own advice on Japan, by saying ‘that was different, they had deflation there’. Similarly Krugman (who castigated Bernanke for leaving it at that) nonetheless thinks that the only way to get out is for the Fed to be “progressive” and sacrifice the interests of bondholders via promising irresponsible inflation, so as to lower real interest rates. (He agrees that it’s possible to create inflation even at the ZLB by permanently expanding the money supply.)

  28. Gravatar of Saturos Saturos
    16. November 2012 at 05:43

    Tom, tell that to Draghi and Weidemann…

  29. Gravatar of Major_Freedom Major_Freedom
    16. November 2012 at 09:06

    ssumner:

    Japan up another 2.2% today–I will arrive in Japan just as their people are getting richer following MM advice.

    Maybe you can stop by the library and pick up an economics book that explains the difference between more money and spending and more real goods and services.

    Or, maybe they have internet access and you’ll find web articles that discuss how rich Zimbabweans weren’t.

  30. Gravatar of ChargerCarl ChargerCarl
    16. November 2012 at 12:29

    “Everyone in Japan lives like that? OMG”

    More than in the 80′s.

  31. Gravatar of Japan’s LDP Proposes 3% Nominal GDP Target « uneconomical Japan’s LDP Proposes 3% Nominal GDP Target « uneconomical
    16. November 2012 at 15:59

    [...] It gets better!  Bloomberg reports: Abe advocates increased monetary easing to reverse more than a decade of falling prices and said he would consider revising a law guaranteeing the independence of the Bank of Japan. (8301).  In an economic policy plan issued yesterday, the LDP said it would pursue policies to attain 3 percent nominal growth. The party governed Japan for more than half a century until ousted by the DPJ in 2009. Share this:TwitterFacebookLike this:LikeBe the first to like this. Categories: Japan Comments (0) Trackbacks (0) Leave a comment Trackback [...]

  32. Gravatar of Britmouse Britmouse
    17. November 2012 at 00:54

    http://www.bloomberg.com/news/2012-11-16/abe-hits-noda-s-economic-record-as-japan-election-gets-under-way.html

    Abe advocates increased monetary easing to reverse more than a decade of falling prices and said he would consider revising a law guaranteeing the independence of the Bank of Japan. (8301) In an economic policy plan issued yesterday, the LDP said it would pursue policies to attain 3 percent nominal growth. The party governed Japan for more than half a century until ousted by the DPJ in 2009.

    !

  33. Gravatar of Saturos Saturos
    17. November 2012 at 02:05

    What are the odds of this actually happening?

    http://www.washingtonpost.com/blogs/wonkblog/wp/2012/11/16/for-conservative-tax-wonks-x-marks-the-spot/

  34. Gravatar of Saturos Saturos
    17. November 2012 at 03:26

    Free Exchange covers the Cato Monetary Policy conference: http://www.economist.com/blogs/freeexchange/2012/11/monetary-policy-1

  35. Gravatar of Saturos Saturos
    17. November 2012 at 03:40

    Ryan Avent has some self-doubts… http://www.economist.com/blogs/freeexchange/2012/11/monetary-policy-0

    … but then comes through with this beautiful piece: http://www.economist.com/blogs/freeexchange/2012/11/long-slump

  36. Gravatar of Saturos Saturos
    17. November 2012 at 03:41

    William Dudley on Too Big To Fail: http://www.ritholtz.com/blog/2012/11/solving-the-too-big-to-fail-problem/

  37. Gravatar of W le B W le B
    17. November 2012 at 04:25

    At the B of E’s Inflation Report press conference last week Mervyn King was asked: ‘Governor, in your opening statement I think you said something like a slow and protracted recovery absent a further exchange rate adjustment or depreciation, it was something like that. Are you implying that you would welcome a further adjustment of sterling downwards?

    He replied, “Well I never call for changes in exchange rates; they are things which are given by the market to central banks. But I think it’s fair to say that the increase in the effective exchange rate of sterling – after all in the last year, just over, 15 months, since the middle of 2011 when the euro area crisis intensified, the effective exchange rate of sterling has risen by 8% and against the euro by 12%. That is not a welcome development.”

    L**d have mercy on Your servants gathered over here.

  38. Gravatar of Saturos Saturos
    17. November 2012 at 04:31

    Scott, did you see this from Morgan Stanley? “Fiscal Policy is the Right Way to Tackle Inflation” http://www.morganstanley.com/views/gef/archive/2011/20111021-Fri.html#anchor14be48f3-fbd7-11e0-98cc-1b5d6a100344

    Lots there for you to respond to, if you feel like it.

    I sometimes get the stupid feeling that you need help coming up with material for new posts…

  39. Gravatar of Saturos Saturos
    17. November 2012 at 09:40

    Who else agrees with this? http://blogs.reuters.com/anatole-kaletsky/2012/11/15/confessions-of-a-deficit-denier/

  40. Gravatar of Negation of Ideology Negation of Ideology
    17. November 2012 at 11:33

    Following Saturos’s link led me to the following:
    http://blogs.reuters.com/anatole-kaletsky/2012/10/25/is-a-revolution-in-economic-thinking-under-way/

    which references a new IMF working paper on Irving Fisher’s Chicago plan:

    “In a research paper that has gone viral among economists, Jaromir Benes and Michael Kumhof, two senior IMF staffers, describe a reform of monetary management that could potentially restore all the output lost in the Great Recession and simultaneously eliminate the government debt burdens of the United States, Britain and most European countries.”

    http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

    Scott, have you seen this paper, and if so, what do you think?

  41. Gravatar of Adrian Gabriel Adrian Gabriel
    17. November 2012 at 16:23

    The last link by Negation of Ideology is hilarious. It’s basically promoting Fisher’s plan that would allow for a government controlled form of inflation. Yup, right out of the Friedman ballyhoo statist book. Rothbard was right, Friedman and Fisher did like to use those macro models to keep the statist matrix in tact. They want to coerce in their own way. 100% reserves with the creation of government debt. This means they will inflate or tax to issue their own money to banks, thus having it still be the funding of bank credit by the very people that are trying to deposit the money into the banks they are providing credit to. What? Why not allow the free market to dictate which banks have a certain amount of credit by the people that deposit their funds there (through the amount of savings), free of central banks, and free of government. Gosh these Chicago guys really want to somehow allow for their coercive credit expansion even if it’s as hidden as Fisher and Friedman make it.

  42. Gravatar of Scott Sumner Scott Sumner
    17. November 2012 at 18:03

    Negation. I disagree with all 4 assertions in the abstract.

  43. Gravatar of Saturos Saturos
    17. November 2012 at 21:24

    Wait, but wouldn’t 100% reserve banking end bank runs? I thought that bit was right.

  44. Gravatar of Bob Murphy Bob Murphy
    18. November 2012 at 00:17

    Saturos (if you’re still reading), right, I know that’s what Krugman’s position is–I read him religiously. And I don’t deny that Krugman is a slippery fellow, and that he’ll use one assumption on Monday to justify bigger government, but the opposite assumption on Wednesday to justify bigger government.

    My modest point here is that Krugman quite famously said that because Japan is in a liquidity trap, its central bank needs to promise to raise future inflation. So Scott points to an official promising future inflation in Japan, and this helps Japan in the present, then thinks this somehow should embarrass Krugman. That makes no sense.

    You’re right Saturos, Krugman thinks that trying to debase your currency *today* won’t do the trick. But that’s what Scott Sumner and David Beckworth think too, right? That the Fed buying assets right now doesn’t do much, if the public expects the Fed to sell them back once prices start rising? (I’m not saying that’s how they would word it, but I think that’s their position.) This is why Scott et al. say the Fed probably wouldn’t even have such a bloated balance sheet right now, if it convinced the public it was targeting NGDP growth.

    So Scott and Krugman are quite similar on this point. They are both saying the Fed buying assets now, without convincing the public to change their expectations about future variables (inflation for Krugman, NGDP for Scott), will be largely pointless.

    I know they disagree on Switzerland, but when you’re pointing to a news story about Japan literally doing exactly what Krugman recommended, I think that takes precedence on what “someone who believes in a liquidity trap” thinks about the issue.

  45. Gravatar of Major_Freedom Major_Freedom
    18. November 2012 at 01:04

    ChargerCarl:

    More than in the 80′s.

    Obviously it’s because the BOJ is not devaluing the incomes of poor people by enough to bring them out of poverty.

    If only their costs of living increased by more. Then they would be rich.

  46. Gravatar of Scott Sumner Scott Sumner
    18. November 2012 at 17:49

    Bob Murphy, You need to read the link I provided, as you are mischaracterizing my remark on Krugman. I never denied that Krugman has proposed techniques for escaping from a liquidity trap.

    Krugman has argued that countries are incapable of depreciating their currencies at the zero bound. Do you deny that, given I linked to a post of him saying that about Switzerland?

  47. Gravatar of Scott Sumner Scott Sumner
    18. November 2012 at 17:51

    Saturos, The bank runs of 2008 had little to do with deposits, they were associated with other forms of bank debt, which are not insured by FDIC. Think about banks like Lehman Brothers and Bear Stearns.

  48. Gravatar of Bob Murphy Bob Murphy
    18. November 2012 at 18:21

    Scott, I did read your link, and tonight (because of your latest comment) I went further and read the Krugman post that your link, links to. I still maintain Krugman isn’t contradicting himself, and this latest news from Japan should be a feather in his cap, not an embarrassment.

    In that post (where he made the offhand remark about Switzerland), Krugman was focused on Japan. He said for the nth time in his career, that *conventional* monetary policy at the zero lower bound doesn’t do much, and that’s why central bankers need to get “adventurous.”

    He concluded his post like this:

    “So what’s the moral of this discussion? I take two lessons from Japan:

    1. Deflationary traps are real, because fighting deflation is really hard — just printing money doesn’t do it.

    2. In the face of deflation, central bankers are remarkably creative at finding reasons to tighten. That doesn’t mean that they actually prefer deflation.”

    That first statement is crucial. Krugman was saying the BoJ wasn’t getting people to change their long-run forecasts of inflation, and presumably he believed the Swiss weren’t doing enough to change people’s long-run forecasts.

    In contrast, the news article you link in this post, quotes the Japanese official as saying he is going to conduct “unlimited” monetary easing until they hit a 3% inflation rate. So it’s not just “printing money,” it’s printing money with a specified target impact on the inflation rate. This is just what Krugman has recommended they do.

    The irony in this (to me at least) is that this is in the same ballpark as what you are saying. E.g. the Austrians and I flipped out when we saw what Bernanke did to the monetary base, right? But you were Cool Hand Luke because you thought Bernanke would suck it out all out in the future; it wasn’t a *permanent* shift in monetary policy. I.e. you agree with Krugman that “just printing money” won’t do it. It depends on the expectations context in which that money printing occurs.

  49. Gravatar of Scott Sumner Scott Sumner
    18. November 2012 at 19:44

    Bob, You are reading way too much into this. Here’s what I quoted:

    “Oh, and about the exchange rate: there’s this persistent delusion that central banks can easily prevent their currencies from appreciating.”

    I say a central bank can easily prevent its currency from appreciating, and Krugman says they can’t. So don’t keep insisting that we have the same views. We don’t. And the fact that the Swiss and Japanese have shown they can easily keep their currencies from appreciating, demonstrates to me that they are not “trapped,” and hence there is no such thing as a liquidity trap. On the other hand almost every day Krugman insists that the liquidity trap is real. Obviously I may be wrong, but one can hardly claim that we have the same views.

    On the other hand Krugman keeps insisting that:

    1. We need to “end this depression now”

    2. Only a crazy right wing economist thinks the government could have ended this depression quickly, as recoveries from financial crash recessions are slow.

    So perhaps Krugman’s views are just too nuanced for me to understand.

  50. Gravatar of Negation of Ideology Negation of Ideology
    19. November 2012 at 17:37

    Thanks for the reply Scott. I understand your point on bank runs, and it wouldn’t stabilize business cycle fluctuations because velocity would still vary (that’s why NDGPLT is necessary), but wouldn’t it reduce the net public debt?

  51. Gravatar of Negation of Ideology Negation of Ideology
    19. November 2012 at 17:48

    Adrian Gabriel -

    I’ve made this point before on this forum, but I’ll repeat it since you commented. The government, if it’s going to exist at all, has to make some decision as to what it will use for money. It has to say something like “we will accept gold, salt and pork bellies for taxes, but not tobacco and silver.” Or something like “we will pay government workers with Bank of the United States Notes, US Notes, or Federal Reserve Notes, but not Citibank Notes.” Or whatever. That is what we call monetary policy.

    The Chicago Plan of Fisher (later supported by Friedman) did not propose to ban private trading of gold, or private investment accounts unbacked by the government. It only dealt with the public monetary system which any government must have. It is a contradiction is terms for the government to have a private monetary system.

  52. Gravatar of JP Koning JP Koning
    20. November 2012 at 07:36

    Bob (and Scott),

    I left a long reply over at Bob’s blog that tries to dehomogenize Sumner/Krugman. No sense in repeating it twice. See here.

  53. Gravatar of ssumner ssumner
    21. November 2012 at 18:03

    Negation, Yes, but only in the sense that it is a tax. There is no “free lunch” way to reduce the debt.

  54. Gravatar of ssumner ssumner
    21. November 2012 at 18:06

    Thanks JP, I hope Bob reads that.

  55. Gravatar of Bob Murphy Bob Murphy
    21. November 2012 at 20:50

    JP and Scott, let me post just one more comment and I’ll drop it:

    (1) You guys seem to be stressing that if we did a big map of Paul Krugman’s worldview, there would be an inconsistency in his post about Switzerland and other stuff he’s written. Yes I agree with the general claim; I think Krugman’s policy recommendations are horrible, on a whole host of things. It would be proof that God didn’t exist if Krugman could spout off so many (in my opinion) awful policy recommendations on a variety of subjects, if his logic were internally consistent across the board.

    (2) Not only do I think Krugman is wrong on 90% of his policy recommendations at the NYT blog, but he can be a jerk about it and also he is slippery, assuming one thing on Monday but the opposite thing on Tuesday, in order to always get the outcome he needs so he can make fun of whatever conservative is his punching bag that day.

    (3) Nonetheless: My very modest point on this is that it is odd for you to point to an example of the BoJ doing literally exactly what Krugman has famously recommended it do *because it’s stuck in a liquidity trap*, and then when it works, to say, “Aha! Krugman has no explanation for why this worked.” At best you are showing me that Krugman’s thoughts on Switzerland contradicted his famous views on Japan; there’s no way you are ever going to convince me that when the BoJ does exactly what Krugman said it should do, and then it works, that this should be embarrassing to Krugman.

  56. Gravatar of Max Max
    22. November 2012 at 00:04

    The point of “liquidity trap” analysis is not that central banks can’t inflate. Krugman says the opposite, that the CB can inflate if it makes the right kind of credible commitment.

    The point is that in order to inflate, the CB may have to abandon inflation targeting. Not just change tactics, but change the fundamental objective that 100% of central bankers have embraced (perhaps foolishly, but still). And it can’t be a secret change in the fundamental objective, since it only works if it’s a public, irrevocable commitment.

    Alternatively, a CB can try to get out the “trap” by bluffing – talking big without actually committing to anything. QE is a kind of bluff. “See all that money out there? Isn’t that really scary? We can inflate if we want to, you know!” It can work. Bluffs work sometimes.

  57. Gravatar of Max Max
    22. November 2012 at 00:27

    “Wait, but wouldn’t 100% reserve banking end bank runs? I thought that bit was right.”

    Yes it would, but it wouldn’t end bank funding crises (since they could still fund themselves with short term debt).

  58. Gravatar of ssumner ssumner
    22. November 2012 at 12:21

    Bob and Max, In my previous response I said:

    “I say a central bank can easily prevent its currency from appreciating, and Krugman says they can’t.”

    That claim is indisputable. I reflects the core difference in our worldviews. The question of who is right is an entriely different issue.

    Max, I don’t agree that the Fed has to abandon inflation targeting to hit its inflation target. It can peg the price of CPI futures at its target.

  59. Gravatar of Max Max
    22. November 2012 at 15:48

    “I don’t agree that the Fed has to abandon inflation targeting to hit its inflation target. It can peg the price of CPI futures at its target.”

    I think if a central bank tried that, it would go bankrupt. Pegging the futures contract doesn’t force the underlying prices to change. The CB can avoid such losses by promising future price levels, but that’s a change from inflation targeting to price level targeting.

  60. Gravatar of TheMoneyIllusion » Been there, done that. TheMoneyIllusion » Been there, done that.
    19. January 2013 at 14:10

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    [...]  In case I have any Japanese readers, here’s what I posted on November 15, 2012: Each day I check out the major stock markets.  This morning I saw that Hong Kong and Singapore [...]

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