Hollande needs to talk to Nicolas Goetzmann—immediately

As bad as the monetary debate has been in the U.S., it’s even worse in Europe.  In the eurozone even the left doesn’t seem to understand that easier money is desperately needed.  Ryan Avent points to a depressing new report:

Latest Flash PMI data indicated that the downturn in French private sector output deepened in February. January’s Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, slipped from 42.7 in January to 42.3, its lowest reading since March 2009.

The steeper fall in overall output was driven by an accelerated decline in the service sector, where activity contracted at the fastest pace in four years. Manufacturers signalled a slightly slower decrease in production compared with one month previously, albeit still sharper than signalled in the service sector.

New business placed with private sector companies in France fell again in February, extending the current sequence of contraction to one year. The rate of decline quickened slightly since January and was only marginally slower than December’s 45-month record.

NGDP growth is far slower than in the US; almost non-existent.

A recent Neil Irwin article showed that the Fed has been consistently over-optimistic over the past 5 years.  There have been nearly 40 Fed meetings since mid-2008, and the FOMC decision turned out to be excessively contractionary in every single meeting.  Nearly forty in a row!  If policy is efficient, errors should be symmetrical.

Both Paul Krugman and the market monetarists have been warning the Fed that their policy was inadequate.  Krugman has focused on the difficulties of monetary stimulus at the zero bound, and that policy needs to move expectations.  Market monetarists have focused on the need to target the forecast, and the fact that market signals tell us that money is too tight.  Both of us have pointed to the US in the 1930s, and Japan since the 1990s, as showing that errors were far more likely to be made in one direction than the other.

In contrast, the Richard Fishers of the world have been wrong every single day, every single week, every single month, for nearly 5 years.  Who should the Fed be listening to now?

PS.  Here’s Nicolas Goetzmann’s blog, which is the primary market monetarist blog in France.  I took three years of French—but it was back in the 1960s.  And I got a C.

PPS.  Hollande also needs to talk to Art Laffer.

PPPS.  Policy decisions were far too contractionary in the second half of 2008, when we were not at the zero bound.  So fear of “unconventional policy” is no excuse.  Of course that’s doubly true in Europe, where the ECB has raised rates on several occasions during the Great Recession.


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14 Responses to “Hollande needs to talk to Nicolas Goetzmann—immediately”

  1. Gravatar of Hollande needs to talk to Nicolas Goetzmann—immediately | Fifth Estate Hollande needs to talk to Nicolas Goetzmann—immediately | Fifth Estate
    21. February 2013 at 09:33

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

  2. Gravatar of Steve Steve
    21. February 2013 at 10:12

    The combination of tight money and high MTRs completely destroys the incentive to invest: Why risk $1.00 for $0.50 of upside and $1.00 of downside in a zero NGDP world?

  3. Gravatar of Steve Steve
    21. February 2013 at 10:20

    Also, to the folks who complain that QE drives up gas prices, consider this:

    Gas costs $4.99 per gallon at the 76 in Needles, CA.
    Drive (2) TWO miles to Arizona City, AZ, and gas is only $3.37 at the AMPM.

    I guess the Fed is buying too many Calibucks while contracting its Zonabucks.

  4. Gravatar of ssumner ssumner
    21. February 2013 at 10:47

    Steve, Good points.

  5. Gravatar of Geoff Geoff
    21. February 2013 at 11:24

    “Market monetarists have focused on the need to target the forecast, and the fact that market signals tell us that money is too tight.”

    This is really only true if “tight” means “below my subjective judgment of what inflation should be.”

    The market doesn’t “decide” that inflation should be that which generates 5% NGDPLT. There is little to no “market” in the monetary system.

  6. Gravatar of marcus nunes marcus nunes
    21. February 2013 at 11:40

    And inflation is ‘right on target’!
    http://thefaintofheart.wordpress.com/2013/02/21/inflation-day-what-to-say/

  7. Gravatar of Jim Crow Jim Crow
    21. February 2013 at 19:09

    “The ECB has raised rates on several occasions during the Great Recession.” Greatest unforced error I have ever personally witnessed that negatively impacted the lives of millions…..and they did it MORE than once. Boggles the mind.

  8. Gravatar of ssumner ssumner
    22. February 2013 at 08:58

    Geoff, MMs pay no attention to inflation.

    Marcus, Yes, “right on target.”

    Jim, I agree.

  9. Gravatar of Geoff Geoff
    22. February 2013 at 09:13

    Dr. Sumner:

    “Geoff, MMs pay no attention to inflation.”

    Inflation as in an increase in the supply of money, which is necessary for MMs to get what they do pay attention to, which is NGDP growth.

    If you don’t like the term inflation, then I’ll restate:

    “This is really only true if “tight” means “below my subjective judgment of what NGDP should be.”

    The market doesn’t “decide” that inflation should be that which generates 5% NGDPLT. There is little to no “market” in the monetary system.”

  10. Gravatar of ssumner ssumner
    22. February 2013 at 14:38

    Geoff, Policymakers pick the target, the market should implement the policy once a target has been chosen.

  11. Gravatar of Rien Huizer Rien Huizer
    23. February 2013 at 01:34

    Scott,

    Most important statement in Goetzmann’s piece (final para) is that “.. the word growth must be inserted into the ECB’s charter..” but “that requires unanimity..”

    In other words completely unfeasible to change the charter and from there to develop dual mandate policies. So it does not matter to whom mr Hollande listens, the EUR zone is not comatose, it has committed itself to mummification.

    There are mistakes that cannot be corrected. HJowever, so far I had believed that German official behaviour in the EUR crisis was simply to milk it because it was depressing the external value of the EU, which would benefit the important constituency of export oriented businesses. Basically the condition that Mr Hollande would like to exist (and did, for a while, because the JPY was strong and the EUR was weak, both in real terms if applied only to the EU economies that count in international competitiveness (Nordics, Germany, Benelux, Austria (AKA Greater Germany) and in historic terms. But now the Japanese have decided to return to the bad old days of the Developmental State with gvt dominating the CB, Mr Hollande wants policy. What he should do, is to suggest that France’s finances are completely unsustainable and confront mr Rehn (the Dutch have done that that last week – in a very friendly and disarming way of course- and already obtained some sympathy. Which could achieve in a completely different way than with explicit MM policies, a short term result similar to that achieved by allegedly MM-worshipping mr Svensson and his mates a couple of years ago. Of course I am not suggesting that waving matchsticks around a gas station and causing predictable behaviours is the same as rigorous (long term stable) MM-based policy. But for a politician, the long term is the idiot’s resort.

  12. Gravatar of ssumner ssumner
    23. February 2013 at 09:05

    Rien, Never say never. If the BOJ and Fed adopted NGDPLT, and it worked, the ECB would eventually follow. I can’t say the Fed and BoE and BOJ will move in that direction, but it’s certainly possible that it will occur over the next few decades.

  13. Gravatar of Rien Huizer Rien Huizer
    24. February 2013 at 02:59

    Scott, as I said, the long term is…

  14. Gravatar of Geoff Geoff
    24. February 2013 at 10:59

    Dr. Sumner:

    “Geoff, Policymakers pick the target, the market should implement the policy once a target has been chosen.”

    Right. The market doesn’t determine NGDP in MM by definition. It’s a subjectively decided target that is ultimately settled by brute force of obedience to government dictat.

    The “tight” and “loose” follows from the subjectively decided target. Whereas MMs conclude the market is signalling money is “too tight” or “too lose”, on the basis of the subjective target, the market may really be signalling the opposite.

    For example, 5% NGDP growth could very well be “super duper loose” IF the market of a given territory engaged in a huge trade deficit that would have significantly decreased the money supply and spending there. But MMs would conclude money was neither loose nor tight because they observed their subjectively decided number, and by definition ignore all market determinations.

    I think the problems of NGDP targeting in big, diverse economies are magnified, precisely because they don’t appear as significant. I think 2008 was the acute result of decades of relatively stable NGDP. I think healthy economies need fluctuating everything, including spending, even if that means occasional increases in unemployment. Bankruptcies and unemployment are necessary in a healthy economy. They are especially necessary in significant quantities if economies are significantly unhealthy, which I think was the case by 2008.

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