Want a slow recovery? Then 2001-07 is your ideal policy

I’m getting whiplash from reading Free Exchange.  Soon after Matthew Klein posted “Scott Sumner is Wrong,” Ryan Avent posted “The Wisdom of Scott Sumner.”  (At least I’m told it was Matthew Klein, someone correct me if that’s wrong.)

At one point Ryan Avent responds to this statement by Klein:

[T]he evidence suggests that the Fed and other central banks can in fact use monetary policy tools to restrain credit growth without crushing the economy—if they want to…In practice, this approach would likely trade somewhat slower GDP growth during booms for much milder downturns and brisker recoveries. I suspect that most people today would have gladly taken that deal had it been offered to them in 2001.

You should read Ryan Avent’s very good response to this, but I will offer a slightly different take.  Just one day after criticizing Krugman’s “Keynesian counterintuitive cleverness” I’m going to engage in the market monetarist equivalent.  But first a bit of history.  When I was younger the recovery from recessions was quite rapid.  Both RGDP and NGDP grew far more rapidly in the initial recoveries from recessions of the 1920s through the 1980s, than during the recoveries from 1991 and especially 2001.  Indeed if you’d like the Fed to be cautious, if you’d like for a slow rate of demand growth during the recovery, so that the recovery can last longer, then 2001-07 is your model.  It was one of the slowest recoveries I’ve ever seen.  So slow that the unemployment rate in early 2003 was still going up, despite the fact that the recession trough was in November 2001.

If we use the Bernanke/Sumner benchmark for the stance of monetary policy (NGDP growth and inflation) then monetary policy was unusually contractionary during these last two recoveries.  So if you want a slow recovery to prevent the buildup of bubbles, then 2001-07 is close to an ideal.

What about the low interest rates?  The low nominal interest rates reflected the slow recovery in NGDP.  Interest rates are mostly endogenous.  However other factors also reduced rates during this period, particularly the high rates of saving in Asia.

If the Fed had adopted an even tighter monetary policy, resulting in even lower NGDP growth, then US interest rates might well have resembled those in Japan—in other words they might have been even lower.  Of course in the very short run a more contractionary policy would have raised rates in early 2002, but by 2003 and 2004 the rates might have been even lower than otherwise.

Ryan begins his post quoting me, and then responding:

“The young people today have grown up in a world dominated by two giant bubbles… Any thoughtful person today can predict that the macroeconomics policy failures of 2040 will be produced by a generation of late middle-aged policymakers obsessed with preventing bubbles.”[me]

One should be careful to note his point: it is not that concern over financial excess (like concern over demand- or supply-side disaster) is improper. It’s that our simian brains will naturally worry most about the last disaster to strike, effectively overweighting its potential costs in cost-benefit calculations and underweighting those of other possible macroeconomic troubles. [Ryan]

I’m already seeing this happen.  I see increasing concern that the current low interest rate policy will lead to bubbles, and indeed concern that bubbles are already forming in everything from gold to stocks to farmland to Phoenix real estate.  (Not Klein and Stein, but others.)  This despite the lowest NGDP growth (mid-2008 to today) since Herbert Hoover was president.  It’s very easy to see how people wedded to the interest rate view of policy (which is most people) could mistake low interest rates being caused by a weak economy, for low interest rates caused by easy money.  This could lead to even tighter money, even weaker NGDP growth, and (over time) even lower interest rates.

Don’t think this can happen?  Check out the data for Japan over the past 22 years . . . and counting.

And then notice that Japan recently faced criticism from the Very Serious People of Europe for its “easy money” policy.  I kid you not.

PS.  I was asked about this Tyler Durden post, which claims that depreciation of the yen hurts the US stock market.  I’d be inclined to file this under “don’t reason from a price change.”  There’s no doubt that depreciation of the yen caused by tighter than expected monetary policy in the US (which reduced expected NGDP growth) would reduce US stock prices.  But I’d like to see data showing that depreciation of the yen caused by easier money in Japan also causes falling US stock prices. In not convinced.  One policy reduces global output and the other raises global output.  Macro is not a zero sum game.

PPS.  Over the years I’ve argued that the Japanese let the yen get too strong.  I got lots of push-back from commenters who suggested the US government wouldn’t allow the BOJ to run non-deflationary policies, because it would depreciate the yen.  I’ve always been skeptical that the US was that evil, but now the essential goodness, the sweetness, the kindness of the US government has been confirmed:

Japan’s Nikkei (Nihon Kenzai Shinbun: .N225-JP) share average gained 1.9 percent on Tuesday and the yen weakened to a 33-month low against the dollar after a U.S.Treasury official seemed to voice support for Japan’s aggressive policies to combat deflation and bolster growth.

The U.S. Under Secretary for the Treasury for International Affairs, Lael Brainard, said that that U.S. supported proposals by the Bank of Japan (BoJ) to introduce anti-deflation policies that weaken the yen.

The market reaction suggests that a bit of uncertainty on the issue was dismissed by the kind-hearted Mr. Ms. Brainard.  But let’s face it; the yen had already appreciated depreciated strongly without any US complaints–so I really don’t see much evidence that the US was the cause of Japan’s 20 year deflation.

HT:  Saturos, TravisV

Update:  Britmouse sent me a report that “clarifies” the US comments on Japan.  It seems we want them to adopt an easy money policy to end deflation, even if this causes the yen to fall.  We just don’t want them publically talking about their policy:

Lael Brainard, the top US Treasury official for international affairs, sent the yen plummeting on Monday evening after commenting publicly that the US supported “the effort to reinvigorate growth and end deflation in Japan”.

The dollar gained further ground after the G7 statement was published in London on Tuesday. The statement – from finance ministers and central bank governors in the US, Japan, UK, France, Germany, Italy and Canada – said they would “consult closely” on any action in foreign exchange markets.

“We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates,” the ministers and governors said. “We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability.”

But an unidentified official from a G7 country later said the statement had been misinterpreted. “The G7 statement signalled concern about excess moves in the yen,” the official told Reuters in Washington. “The G7 is concerned about unilateral guidance on the yen. Japan will be in the spotlight at the G20 in Moscow this weekend.”

The dollar promptly gave back its earlier gains against the yen, falling back to Y93.2 in a volatile day on the currency markets.

In private, the US has been pressuring Japan’s new government to refrain from mentioning the yen as it attempts to revive growth and end deflation. The US Treasury refused to comment.

Of course monetary policy is less effective without communication.  But what do you expect from an administration that has been brain dead on monetary policy from day one?

And for a few minutes I thought America really was a kind-hearted country.  Silly me.


Tags:

 
 
 

37 Responses to “Want a slow recovery? Then 2001-07 is your ideal policy”

  1. Gravatar of Steve Waldman Steve Waldman
    12. February 2013 at 16:11

    “When I was younger the recovery from recessions was quite rapid.”

    OK! My new macro policy idea: a yogurt and granola diet for Scott!

  2. Gravatar of Britmouse Britmouse
    12. February 2013 at 16:18

    You misunderestimated them.

    http://www.ft.com/cms/s/0/2c69751c-74fd-11e2-8bc7-00144feabdc0.html

    The yen initially fell, as the statement appeared to support Japan’s efforts to reinvigorate growth. But the currency later rebounded after a G7 official was quoted in Washington as saying the statement had been “misinterpreted” and was instead intended as a warning to Japan.

  3. Gravatar of marcus nunes marcus nunes
    12. February 2013 at 16:52

    Scott, two things:
    1. RA´s piece ‘confirms’ my view about the ‘cat fight’ between him and MCK. Now you´re not the ‘sparring’ but have become the ‘goalpost’.
    2. I see Britmouse put an addendum, but 30 years ago Japanese devaluation was VERBODEN! Now Japan has been on it´s knees for more than 20 years. No more talk of “Rising Sun’!

  4. Gravatar of Want a slow recovery? Then 2001-07 is your ideal policy | Fifth Estate Want a slow recovery? Then 2001-07 is your ideal policy | Fifth Estate
    12. February 2013 at 16:57

    [...] See full story on themoneyillusion.com [...]

  5. Gravatar of Andy Harless Andy Harless
    12. February 2013 at 17:05

    I believe it would be Ms. Brainard, not Mr. Brainard. Her gender doesn’t really matter, of course, but the language demands a gendered title. Maybe we need to develop a gender-neutral version of Mr/Ms.

  6. Gravatar of ssumner ssumner
    12. February 2013 at 17:06

    Steve, It’s about time.

    Thanks Britmouse, I did a update.

    Marcus. Japan’s big mistake was letting the yen rise from 115 back in 2008 to 75. They would have done better with a milder appreciation, and the US wouldn’t have objected if it was appreciating slowly instead of fast.

    I feel like the football! :)

  7. Gravatar of ssumner ssumner
    12. February 2013 at 17:08

    Andy, Thanks, I corrected it.

  8. Gravatar of Steve Steve
    12. February 2013 at 17:31

    “Of course monetary policy is less effective without communication.”

    True, but the realpolitik is that the Yen depreciation can be sustained longer and deeper if it happens gradually and quietly.

  9. Gravatar of Geoff Geoff
    12. February 2013 at 18:22

    Dr. Sumner:

    “What about the low interest rates? The low nominal interest rates reflected the slow recovery in NGDP.”

    Not if the contractionary effect on interest rates from credit expansion outweighs the inflationary effect on interest rates from the side of higher prices and rates of profit.

    I would say interest rates aren’t only a function of nominal demand. They are also affected by the supply of loans. The supply of loans can increase quite significantly for a time while the inflationary effect on consumer prices is delayed. There can be inflation in portions of the market before other portions. The nominal demand for consumer goods is largely dependent on wage payments, and if wage prices do not increase as much as stock prices, bond prices, real estate prices, commodities prices, and so on, then the contractionary effect on interest rates due to credit expansion can outweigh the inflationary effects from higher consumer prices.

    Wage payments do not instantly increase when the Fed expands, and wage payments do not instantly decrease when the Fed contracts. But asset prices, such as stocks and commodities, they do tend to move in response to changes in the rate of money supply (e.g. credit expansion) inflation.

    “Of course in the very short run a more contractionary policy would have raised rates in early 2002, but by 2003 and 2004 the rates might have been even lower than otherwise.”

    I think you are vastly underestimating the duration that these “short runs” can take. Inflation can literally create entire industries with relatively little effect on prices elsewhere, if the value judgments of individuals given the new monetary conditions is such that they prefer to continuously speculate more rather than consume more. If inflation in the form of credit expansion is used to continuously speculate in stocks, bonds, real estate, and so on, then we can observe significant periods of time where there are low interest rates and low consumer price inflation, which SEEMS to be evidence that low NGDP growth (which does not include speculative financial instruments such as stocks and derivatives) is the cause for the low interest rates.

    Never reason from an NGDP change.

    “However other factors also reduced rates during this period, particularly the high rates of saving in Asia.”

    This can be conclusively rejected, because if savings rates in Asia increased, then, ceteris paribus, the nominal demand for and prices of consumer goods in Asia should have decreased. But they didn’t. So the savings from Asia were also significantly affected by expansionary monetary policy in Asia.

    “I see increasing concern that the current low interest rate policy will lead to bubbles, and indeed concern that bubbles are already forming in everything from gold to stocks to farmland to Phoenix real estate. (Not Klein and Stein, but others.) This despite the lowest NGDP growth (mid-2008 to today) since Herbert Hoover was president. It’s very easy to see how people wedded to the interest rate view of policy (which is most people) could mistake low interest rates being caused by a weak economy, for low interest rates caused by easy money. This could lead to even tighter money, even weaker NGDP growth, and (over time) even lower interest rates.”

    I see increasing confidence that the current low NGDP policy will prevent bubbles, and indeed confidence that bubbles are not forming in gold or stocks or farmland or Phoenix real estate. (Not Klein and Stein, but others.) This despite the lowest interest rates (mid-2008 to today) since Julius Caesar was emperor. It’s very easy to see how people wedded to the NGDP view of policy (which is most MMs) could mistake low interest rates being caused by easy money, for low interest rates caused by low NGDP growth. This could lead to even looser money, even lower interest rates, and (over time) even bigger bubbles.

    See what I did there? You’re doing the same thing you’re chastising your contemporaries for doing.

  10. Gravatar of Edeast Edeast
    12. February 2013 at 18:59

    Phoenix is the Florida of Alberta.

  11. Gravatar of Suvy Suvy
    12. February 2013 at 20:27

    Here’s another theory on the concept. I think it’s much better.
    http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf

  12. Gravatar of Benjamin Cole Benjamin Cole
    12. February 2013 at 22:16

    Excellent blogging, per usual.

    If you scroll around the ‘net on econ sites, you find a lot of chatter about “when rates go back up.” Like they ever will.

    People still do not get it. We could very well hit another recession, while rates are still “low.’

    ZLB dudes. See Japan.

    The only way out of ZLB is to print (digitize) a lot money, then print even more, then get real GDP growth up to 5 percent per year, and print a lot more money, and then maybe—maybe—think about cutting back a bit on printing even more money.

    Asset bubbles? Why all the sniveling about oil, or gold—and not about natural gas? Or the fact that six out of the last CPI reports are down, not up. How about the price of color TVs?

    And in prosperity, should not assets—such as rental properties or equities–go up in value? That’s a bubble? If the new goal is no bubbles, then is also the new goal no prosperity?

    The Fed is being run by sadistic lunatics.

  13. Gravatar of TravisV TravisV
    12. February 2013 at 23:10

    Prof. Sumner,

    Obama proposed raising the minimum wage! Are you excited??????????????????????? :) :)

  14. Gravatar of Kenan Kenan
    13. February 2013 at 00:32

    The article by Irving Fisher that Suvy linked to really does hit the nail on the head and I think it’s very consistent with the market monetarist view. Fisher compares the debt deflation problem to a cold pneumonia problem, i.e. over-indebtedness is like having a cold that turns into pneumonia when combined with deflation. We can prevent the pneumonia by maintaining the price level, or NGDP, then we are just left with a bad cold. Preventing the cold is an entirely different problem, and by trying to use monetary policy to control debt we run into iatrogenic problems, negative effects from the treatment.

    As Fisher explains, the problem of over-indebtedness is more complex than low interest rates, and the most common cause is “new opportunities to invest at a big prospective profit, as
    compared with ordinary profits and interest, such as through new inventions, new industries, development of new resources, opening of new lands or new markets”, as opposed to monetary policy. And of course, if we use monetary policy to try and cure the cold, we disrupt a lot of the good things that might come from new inventions, industries, markets, etc.

    Most of the negative effects of debt come from moral hazard anyway. Why don’t these guys get rid of the moral hazard problem that causes banks to become systemically fragile in the first place?

  15. Gravatar of Phil Phil
    13. February 2013 at 02:35

    I am confused by this argument. As Scott is fond of pointing out the money supply is endogenous under interest rate focused regimes. I.e if you do monetary policy via the interest rates. This is because people invest in things if the think that the marginal return is greater than the interest rate plus a risk premium.

    Inflation rate targeting and NGDP targeting do not have to be Interest rate focused. As Scott is also fond of telling us control of the medium of account (base money) makes the bank all powerful. For example, when the economy improves and inflation expectations start to rise, the Fed will have two choices. Either raise interest rates or decrease the size of its balance sheet (reducing the monetary base).

    Balance sheets also have a ZLB, but theirs works in the opposite direction to interest rates. It seems therefore, that I could raise interest rates and still support NGDP by printing base money and buying things that aren’t treasuries. This would, trivially decrease the amount of credit, because it would change the ration of base money to credit.

    So if you think low interest rates cause bubbles, you can do NGDP targeting with rates as high as you like (but not as low as you like). It’s a bit odd but seems like it works. I can always expand the fed balance sheet as an alternative to lowering rates.

  16. Gravatar of Geoff Geoff
    13. February 2013 at 03:38

    Phil:

    “As Scott is fond of pointing out the money supply is endogenous under interest rate focused regimes. I.e if you do monetary policy via the interest rates.”

    I don’t understand this argument. The Fed alters interest rates under interest rates targeting regimes via OMOs, and OMOs add to and subtract from the aggregate money supply (reserves count!). Thus, money is both exogenous and endogenous.

    As long as there is not laissez faire in money, money is necessarily part exogenous, since exogenous means exogenous to the market.

  17. Gravatar of Daniel Daniel
    13. February 2013 at 04:10

    low interest rates being caused by easy money

    Geoff,

    Would you be so kind as to provide a non-circular definition of “easy money” ?

    And this time, could you do it without rolling your eyes and saying “it’s obvious” ?

  18. Gravatar of Phil Phil
    13. February 2013 at 06:14

    Geoff. That is manifestly not what happens. Usually the fed just announces the move and because the market believes that the fed can move the market traders arbitrage away the difference between the current and future yields without the fed trading desk needing to be involved. The Swiss central bank even managed to sell vast quantities of fx into its own floor. Which manifestly disproves your thesis that it is omo’s which move the curve.

    Secondly, money = everything that can be traded for cash readily, including most stocks and bonds. When interest rates fall more debt is taken out for investment which expands the money supply even in the supply of base money is fixed.

    If you expand base money, ie currency, you must print it and spend it. If the economy has no desire for this new base money this only causes velocity to fall and it finds its way back to excess reserves at the Fed – just like we are seeing now. This functionally removes it from the money supply.

    However printing money and spending it adds to demand. When demand is suppressed it raised output, when demand is not suppressed it raises the price level. When output is raised it will generally be the case that the multiplier is other than zero, in which case demand for base money (spending) is raised and money is pulled off the sidelines. If instead it generates inflation, we must have mores spending on account off higher prices and wages and so again there is more spending=more demand for base money.

    So, for a given interest rate and demand (ngdp) the money supply is endogenous. Hence if I target ngdp by changing interest rates that sets the money supply subject to real factors the central bank does not control. However, you can target ngdp by adding to demand directly rather than by changing the interest rate, by printing and spending base money. This will lead to a different money supply, but it is still endogenous. Just like in the ideal gas equation: pv=nrt, for given n, I can choose p,v and get some T. As long as I control p,v T is endogenous, that does not mean it is always the same.

  19. Gravatar of ssumner ssumner
    13. February 2013 at 07:45

    Geoff, You said;

    “This can be conclusively rejected, because if savings rates in Asia increased, then, ceteris paribus, the nominal demand for and prices of consumer goods in Asia should have decreased. But they didn’t. So the savings from Asia were also significantly affected by expansionary monetary policy in Asia.”

    You really need to stop reading Keynes. I’m talking about long run savings trends.

    Kenan, Looks like I’ve been plagiarizing Fisher for 4 years without know it.

    Phil, I’m afraid I don’t follow that.

  20. Gravatar of TallDave TallDave
    13. February 2013 at 08:05

    I think maybe the best argument for NGPLT is that CPI is just not a sound basis for monetary policy, it’s just too hard to boil down a multivariate multidimensional concept that means something different to everyone into one meaningful number.

    If I can grossly overgeneralize from my own experience… in 2005 I bought a townhouse for about $400K, and the place I live now was then listing at $1M. In 2012 I sold that townhouse for $250K and bought this place for $500K. That is profoundly deflationary.

    I think it’s pretty easy to argue living standards are higher today at the same “real” incomes of 10, 20, or 30 years ago, especially when you look at hedonics and the interesting choices being made by people in developing countries (such as preferring cellphones to indoor plumbing).

  21. Gravatar of TallDave TallDave
    13. February 2013 at 08:09

    “When I was younger the recovery from recessions was quite rapid.”

    I assume everyone has seen the comparison graph of all the modern recoveries, but if you haven’t it’s quite striking.

  22. Gravatar of TallDave TallDave
    13. February 2013 at 08:17

    Suvy,

    Thanks, that Fisher piece is a great read. As it happens I live a stone’s throw from the old mansion built by Insull, who he mentions in passing — they still give tours, the Insull scandal was sort of the Enron of its day. There was overinvestment in what could be termed the “electricity bubble” and when it popped I believe Insull actually went to prison over the promises he’d made to investors. Easy to forget there have been bubbles for a long time.

  23. Gravatar of Becky Hargrove Becky Hargrove
    13. February 2013 at 08:17

    TallDave,
    Good points, although the living standards aspect still can depend somewhat on how localities define overall housing access. CPI is a “now you see it, now you don’t” scenario in many ways. And as for preferring cellphones to indoor plumbing, maybe technology just needs to be set loose on outdated notions of plumbing which some municipalities can no longer realistically afford.

  24. Gravatar of Doug M Doug M
    13. February 2013 at 08:26

    It is politically acceptable to jawbone for easier money, and an end to deflation. It is not politically ecceptable to jawbone for a weaker currency, even though you are talking about the same policies.

    The first comes across at trying to strengthen oneself. The other comes across as attempting to undercut your trading partners.

  25. Gravatar of Doug M Doug M
    13. February 2013 at 08:35

    There were twin bubbles that popped between 2000 and 2003. Dot-com popped in 2000. Telecom popped in 2002. The telecom bubble deflating was not sufficient to trigger its own recession, but it was sufficient to stall the recovery.

  26. Gravatar of TallDave TallDave
    13. February 2013 at 08:59

    Doug,

    Well, the telco bubble was directly dependent on the dotcom bubble, I would argue they were essentially the same thing. Remember all the semi-crooked “vendor financing deals?”

    Haha, those were fun times. I was actually a late investor in arguably the greatest telco bubble stock of them all, a little outfit called Corvis which at one point had a $1B valuation — and zero customer orders. I bought them near book value, and still only broke even in the end.

  27. Gravatar of Suvy Suvy
    13. February 2013 at 09:42

    I just want to make one point about low interest rates. If you take a look at it from a balance sheet perspective, high growth in the prices of assets combined with both low interest rates for borrowing and high expectations for returns of assets(whether they be expectations of yields or capital gains) will result in a creation of an asset bubble where capital could potentially be misallocated and destroyed. We also have to remember that the only way for a society to get richer in the long run is by an accumulation of capital. Ergo, it is critical to make sure that the financial sector is financing the accumulation of capital and genuine growth instead of asset bubbles and Ponzi growth.

  28. Gravatar of phil_20686 phil_20686
    13. February 2013 at 10:15

    All i am saying is the following:

    The Fed can go out and buy assets with printed money to raise NGDP. It can do this irrespective of the interest rate curve. They could right now decide to set the interest rate at 6%, and still hit 5% NGDP by printing money and buying equities and MBS and…stuff. Agree? (-Obviously could not buy treasuries…).

    If you are one of those economists (i kinda know you arent though) who believe that bubbles are caused by `low’ interest rates, ok. Lets just choose 4% as the new lower bound for interest rates. When rates get to 4% we just move to “non traditional tools”. There is nothing at all special about having zero as the lower bound. That is just a bias which is not in the maths. If I said that interest rates could never for any reason fall below four percent, is there any reason the Fed could not target NGDP anyway? MM’s don’t care about the ZLB, we know that does not hamper monetary policy. That would be equally true for any “lower bound” that I might choose.

    Its not clear to me that low interest rates cause problems. Then again, its not clear to me that they don’t. Is it not possible that low interest rates favor the certainty of marginal improvements in productivity over long term investment? A lot of capital is being spent on projects with very low returns (that is pretty much the reason interest rates are low – lack of sufficient higher yielding investments), when there are lots of infrastructure projects that offer much higher returns over the long term, which are not being built. And I don’t know why, especially as low interest rates should spur investment. 100 years ago the railroad coorperations were investing in american rail road in a way that seems unthinkable now.

    If I was pushed for a reason why low interest rates are a problem, I would say something like this: The raise the relative importance of the future. If the value of an investment is the present value of the future discounted cash flows, then low risk free returns mean that a greater part of the present value is far in the future. Since I cannot predict the future, this raises investors sensitivity to risk. (As an EMH devotee you will note that the risk premium in the S&P 500 is still way above historical norms, given earnings. Obviously this is sensitive to how you calculate it ).

    Its a bit of an odd thing, but the higher interest rates are, the more short term the market should be, since the future matters less and less as the discount factors become so large.

    Trying to understand why other people think low interest rates are “obviously” a problem, is too hard for me. I think some people maybe think asset prices should rise monotonically and smoothly. I mean, if NGDP expectations and risk premium are stable, then the stock market should decline as interest rates rise, and so should house prices etc. I need a higher yield to compensate for the availability of a better yeilding risk free asset. IS that a “bubble”? I have seen the tech bubble, but almost everyone I know who knew anything about stocks avoided that one. It went on for so long and it was so obvious that it seemed like everyone was out of tech stocks. The housing bubble doesn’t even seem like a bubble really. Housing has declined like 20% in the UK peak to trough, and is more than half way back up to its peak. That is like a correction, not a bubble. If it falls less than 50% it probably wasn’t a bubble I guess.

  29. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    13. February 2013 at 11:07

    Here are three European economists who think the Fed was too Taylored-to-fit (it was too contractionary) from 2001-06;

    http://www.voxeu.org/article/influence-taylor-rule-us-monetary-policy

    ‘…we find that the weight on the Taylor rule did not decrease in the period after 2003, contrary to what Taylor (2012) argues. When decomposing the various shocks hitting the US economy, we find that in the period 2001 – 2006, large negative demand-side shocks were dominating. As noted above, this is the type of disturbances that should make policymakers deviate from the Taylor rule. Indeed, the optimal policy response to these shocks implied an even lower interest rate than the actual Fed Funds Rate. We thus find that in the period 2001 – 2006 the Fed conducted a more contractionary policy than what would be implied by their historical reaction pattern.’

  30. Gravatar of Geoff Geoff
    13. February 2013 at 18:12

    Dr. Sumner:

    “If we use the Bernanke/Sumner benchmark for the stance of monetary policy (NGDP growth and inflation)”

    I don’t get this. NGDP and inflation are two different things. NGDP and inflation can theoretically move in opposite directions.

    I am not sure how that “and” is justified.

  31. Gravatar of Geoff Geoff
    13. February 2013 at 18:14

    Dr. Sumner:

    ““This can be conclusively rejected, because if savings rates in Asia increased, then, ceteris paribus, the nominal demand for and prices of consumer goods in Asia should have decreased. But they didn’t. So the savings from Asia were also significantly affected by expansionary monetary policy in Asia.””

    “You really need to stop reading Keynes.”

    I didn’t get that from Keynes.

    “I’m talking about long run savings trends.”

    So was I.

  32. Gravatar of Geoff Geoff
    13. February 2013 at 18:32

    Daniel:

    “Would you be so kind as to provide a non-circular definition of “easy money”?”

    My definition of “easy money” is money creation in excess of what would have otherwise taken place in a private, competitive, for profit money production market.

    “And this time, could you do it without rolling your eyes and saying “it’s obvious”?”

    I don’t recall rolling my eyes or saying it’s obvious a first time.

    Phil:

    “Usually the fed just announces the move and because the market believes that the fed can move the market traders arbitrage away the difference between the current and future yields without the fed trading desk needing to be involved. The Swiss central bank even managed to sell vast quantities of fx into its own floor. Which manifestly disproves your thesis that it is omo’s which move the curve.”

    This is wrong. Mere threats to act are not sufficient to move rates. If the ONLY thing the central bank did was talk, or threaten to act, then eventually their talk would have no effect at all. The reason rates move on mere talk is because the talk is actually backed by action. That action is what I am referring to.

    OMOs are indeed what “move the curve” to the extent the Fed moves the curve.

    What you are saying is akin to saying that government threats of enforcing the laws are sufficient to coaxing people into obeying them. But like the OMOs, if the threats aren’t backed by action, then eventually the threats will have no effect. So it really is actual enforcement of laws that gives value to the talk.

    Talk is talk. Talk backed by action is something else.

    “Secondly, money = everything that can be traded for cash readily, including most stocks and bonds.”

    No, money is what buys stocks and bonds. Cash is money. Stocks and bonds are not money.

    “When interest rates fall more debt is taken out for investment which expands the money supply even in the supply of base money is fixed.”

    Incorrect. It is not true that more or less investment occurs with higher or lower interest rates. What does change is what is invested in.

    “If you expand base money, ie currency, you must print it and spend it.”

    Tautology. Expanding base money IS printing money.

    “If the economy has no desire for this new base money this only causes velocity to fall and it finds its way back to excess reserves at the Fed – just like we are seeing now. This functionally removes it from the money supply.”

    There is no such thing as functional removal of money supply, short of destruction of money.

    There is practically no limit to the desire for more base money in the aggregate. Every base money dollar the Fed has ever printed, has been accepted and held by subsequent base money owners over time.

    Per person the desire is limited, and it is limited to the extent that a person spends it.

    “However printing money and spending it adds to demand. When demand is suppressed it raised output, when demand is not suppressed it raises the price level. When output is raised it will generally be the case that the multiplier is other than zero, in which case demand for base money (spending) is raised and money is pulled off the sidelines. If instead it generates inflation, we must have mores spending on account off higher prices and wages and so again there is more spending=more demand for base money.”

    This isn’t really related to the issue being discussed.

    “So, for a given interest rate and demand (ngdp) the money supply is endogenous.”

    This doesn’t follow. If the Fed has to print money to bring about an NGDP it wants, as opposed to what would prevail in the market, then money is both endogenous and exogenous.

    “Hence if I target ngdp by changing interest rates that sets the money supply subject to real factors the central bank does not control.”

    The central bank cannot change interest rates unless it makes good on engaging in OMOs.

    “However, you can target ngdp by adding to demand directly rather than by changing the interest rate, by printing and spending base money. This will lead to a different money supply, but it is still endogenous.”

    Printing base money is not endogenous. That is the definition of exogenous.

    “Just like in the ideal gas equation: pv=nrt, for given n, I can choose p,v and get some T. As long as I control p,v T is endogenous, that does not mean it is always the same.”

    Humans aren’t atoms.

  33. Gravatar of Daniel Daniel
    14. February 2013 at 02:33

    Geoff,

    And since we don’t have privately issued money, your definition is useless. But hey, guess it’s neat to operate with such concepts – you can never be proven wrong.

    PS Spare me another condescending lecture on “the use of force”.

  34. Gravatar of Saturos Saturos
    14. February 2013 at 23:41

    Carola Binder has a relevant post: http://carolabinder.blogspot.com.au/2013/02/overheating-and-fed.html

  35. Gravatar of Saturos Saturos
    15. February 2013 at 01:34

    Yichuan Wang weighs in on this debate, http://synthenomics.blogspot.com.au/2013/02/what-would-stein-do-monetary-policy-and.html?showComment=1360920663047#c7194278970206501901 (also see his previous post on Market Monetarism and finance).

    And Noah Smith linked to this Japanese paper on QE and stock prices on Twitter: http://www2.econ.osaka-u.ac.jp/library/global/dp/0708.pdf

  36. Gravatar of Geoff Geoff
    15. February 2013 at 07:22

    Daniel:

    “And since we don’t have privately issued money, your definition is useless.”

    ???

    So because we don’t actually have NGDP targeting, it means the definition of NGDP targeting is “useless”?

    How about you spare me with your commentary of what you believe the motivation is behind what I am saying, and instead address, if you so choose, what I am actually saying? You asked me what my definition is, remember. If you don’t like it, fine, but you should have realized before you asked me that my definition may not be to your liking. If you ask someone what they think, then it is highly uncouth to then chastise them for their answer.

    Furthermore, it is absurd to suggest that my definition is useless just because we don’t have a particular component that would make it fully empirical. We don’t always need empirically existing events before we can understand the related concepts.

    Privately issued money, since it has meaning, since it could exist, since it has existed, it is therefore a perfectly legitimate component to defining “loose money” and “tight money.” I don’t care if you don’t find it “useful.” My job is to not provide you with arguments or concepts that you find “useful.” I find my definition extremely useful for me, and many others also find it useful for them. Your opinion on this matter is irrelevant to the validity or usefulness of the argument.

    “But hey, guess it’s neat to operate with such concepts – you can never be proven wrong.”

    You actually believe that it is by design, as if it is some intellectual trick or ruse?

    Do some self-reflection bub, and you’ll see that if you define easy or loose money in terms of NGDP growth numbers, then you’ll never be wrong either. If NGDP is above it, then you define it as loose, and below, as tight. You’ll never be wrong either.

    “PS Spare me another condescending lecture on “the use of force”.”

    Please. Spare me with another condescending lecture on why I can’t bring up the fact that you condone it. Note that I condone the use of force, and I am not afraid to admit it. I want innocent people to suffer and be harmed in the process of me attaining my desired end of my particular rule for monetary policy. Please don’t mistake my mere identifying you condone the use of force as some sort of snarky holier than thou insinuation that I believe you should feel guilty about it and say you’re sorry to me.

    I fully recognize that not everyone in this world willingly abstains from, or even fully understands, the use of force. I am not about to believe that you are any different. The fact that you support central banking, which rests on the use of force, is sufficient for me to know that you are “one of us”, wink wink, and that you are willing to benefit yourself and those you care about at the expense of those you don’t, through the use of force of the state for something other than protections against force.

    You want force to be used to ensure that there is a particular aggregate spending total over a period of time. So do I, but I just differ slightly from you in terms of who I desire to be in control of this. You want to be controlled by others, whereas I want to be the controller myself. You’re on the side of being exploited, and I am on the side of exploiter. And I fully accept that. I simply do not care enough about you or others I don’t know, to find it useful to refrain from advocating for such force.

    PS Next time you ask someone what their definition is, it would be more useful for you to first accept the possibility that you might not like it.

  37. Gravatar of ssumner ssumner
    18. February 2013 at 07:36

    Phil, The Fed can’t independently target both interest rates and NGDP.

    Saturos, Thanks, those links are quite interesting.

Leave a Reply