Deutsche Bank is mugged by reality

Suppose a big investment bank went into 2013 as a Keynesian institution, believing that “fiscal headwinds” would lead to a growth slowdown, and then was mugged by reality.  What would it sound like if they came to the conclusion that monetary policy would offset fiscal austerity, indeed more than offset fiscal austerity.

This is what it would sound like.

They’ve just raised their Q1 growth forecast from 1.5% to 3.0%, and full year growth forecast to 3.5%.

Market monetarists:  Keynesians and Austrians who have been mugged by reality.

PS.  I do not think growth will be as strong as they do, but I do think the recent fiscal austerity will have almost no impact on growth, as it will be offset by monetary stimulus.


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25 Responses to “Deutsche Bank is mugged by reality”

  1. Gravatar of Bill Ellis Bill Ellis
    18. March 2013 at 08:51

    Once again….We are on basically the same growth path that everyone predicted… before QE ∞.

    We all knew that even if nothing at all were done… the American economy would eventually recover. Right ?
    Things wear out…

    As the economy gets to its new normal… everyone is going to claim that their point of view was the right one. But the truth is we never got a good experiment. Every government action was weak medicine… ( according to the economist that prescribed it. )

    At least some Econ folks made actual measurable predictions about what would happen when their policies were adopted, ( Like the Keynesian’s who were disappointed with the stim. ) M&M’s would not even make any predictions as to what would happen after QE∞. They only would announce that the effect was “instant “; that it already happened.

    Now M&Ms see every positive signal as validation of QE∞ and by extension NGDPT. You guys would have had a lot more credibility if you would have actually stuck your necks out and made some predictions.

  2. Gravatar of Michael Michael
    18. March 2013 at 10:05

    “Now M&Ms see every positive signal as validation of QE∞ and by extension NGDPT. You guys would have had a lot more credibility if you would have actually stuck your necks out and made some predictions.”

    Scott, of course, did exactly that when QE3 was announced.

  3. Gravatar of TravisV TravisV
    18. March 2013 at 10:07

    Prof. Sumner,

    Steve Randy Waldman has written an intiguing new post arguing that it might be a good idea to increase taxes on capital gains. You might be interested in it.

    http://www.interfluidity.com/v2/4218.html

  4. Gravatar of marcus nunes marcus nunes
    18. March 2013 at 14:14

    Talking about predictions:
    http://thefaintofheart.wordpress.com/2013/03/18/wish-i-had-kept-my-mouth-shut/

    Bill Ellis, take note.

  5. Gravatar of TravisV TravisV
    18. March 2013 at 15:14

    I’ve thought of a good blog post that might generate controversy and interest:

    Talk about how the Fed led Greenspan was much much much much much better than the Fed led by Bernanke.

  6. Gravatar of marcus nunes marcus nunes
    18. March 2013 at 15:26

    TravisV
    This one does some comparison:
    http://thefaintofheart.wordpress.com/2011/02/02/appropriate-monetary-policy/

  7. Gravatar of TravisV TravisV
    18. March 2013 at 17:16

    Marcus,

    PHENOMENAL post, thank you very much! I read your book and I remember in part of it, you speculated that Bernanke might have been very motivated early in his tenure to demonstrate just how much he truly hates excess inflation and is serious about price stability.

  8. Gravatar of ssumner ssumner
    18. March 2013 at 17:29

    Bill, I’ve consistently said I expect a slow recovery, and I’ve consistently been right. But I actually agree that it’s not about forecasting, it’s about coming up with sensible policies. We’ll do that more quickly if we can get everyone to agree that the Fed drives the nominal econmy.

    I don’t see every positive sign as a validation of QE, indeed I said at the time that QE was only a slight positive. And I still think that. My point is that the “fiscal multiplier” is unreliable–little more than a question of faith.

    Marcus, I’m sure Taylor would like to forget that prediction.

    Travis, I can’t follow his post. Is he saying S doesn’t equal I? If not, precisely what is he saying? Talk about “financial investments” is extremely unhelpful. It confuses the individual with the aggregate, and it confuses financial investment with physical investment. I’m not saying he doesn’t have some good ideas (he’s very smart) it’s just that I can’t understnad what those ideas are. Maybe if I re-read it a couple times.

    It’s obvious that the Greenspan Fed was far better, but it’s not at all obvious that Greenspan himself was better than Bernanke–indeed I’d argue the opposite.

  9. Gravatar of OhMy OhMy
    18. March 2013 at 17:46

    I think anyone believing you that austerity in the periphery of the Eurozone would be harmless because the fiscal multiplier is zero would be mugged by reality.

  10. Gravatar of TravisV TravisV
    18. March 2013 at 18:28

    Prof. Sumner,

    You wrote:

    “It’s obvious that the Greenspan Fed was far better, but it’s not at all obvious that Greenspan himself was better than Bernanke-indeed I’d argue the opposite.”

    Fascinating! I’m curious what this is based on.

    (1) What does Greenspan deserve criticism for?

    (2) I sense that Marcus Nunes is distinguishing between a pre-crisis Bernanke and a post-crisis Bernanke. The pre-crisis Bernanke was very bad and motivated the FOMC to worry too much about excessive inflation. The post-crisis Bernanke has been pushing hard to make most FOMC members worry more about unemployment and less about excessive inflation.

    Is that your take on Bernanke as well?

  11. Gravatar of John John
    18. March 2013 at 20:13

    I laugh at these projections. Projections for the future just tell you what is happening right now. I remember seeing a graph of 5 year inflation projections where inflation projections for the next 5 years went negative in late 2008 exactly when the economy started deflation. What a coincidence!!

    What are the projections of the most eminent economists for the rest of the year going to say? Just tell me what the market did in the last two weeks.

  12. Gravatar of John John
    18. March 2013 at 20:23

    I actually think the fact that predictions for the future are just statements about the present has to do with the efficient market hypothesis and random walk theory. Since markets are good at pricing in all the relevant data about future expectations and stock prices are basically predictions about the future health of businesses just like economist’s projections, stock prices and the predictions of economists end up bouncing around with incoming news. Incoming news being impossible to forecast for any great length of time means that everything is going on a random walk.

    P.S. The real task of economists is to explain why the last 200+ years has seem a random walk with an upward direction punctuated by occasional crashes. Check out Robert Schiller’s class about the EMH. He does a great illustration of the random walk on stock prices starting at the 53:00 mark. Over the past 150 years, the value of stocks in real terms has been on a random walk with occasional crashes. The crashes do not occur in a true random walk and are a byproduct of human irrationality.

  13. Gravatar of John John
    18. March 2013 at 20:24

    Here’s the link for Schiller’s talk on the EMH. Like I said, the 53:00 mark onwards is the most interesting discussion of the random walk that I’ve ever seen.

    http://www.youtube.com/watch?v=3EzdvkRgToY

  14. Gravatar of Cameron Cameron
    18. March 2013 at 21:39

    “I do not think growth will be as strong as they do”

    Just curious, because of supply or demand?

  15. Gravatar of John John
    18. March 2013 at 23:20

    TravisV,

    Waldman’s article was a little bit silly. The idea of an unlimited potential human capital (no one really defines human capital meaningfully) compared to limited physical capital driving growth ignores the obvious point that increasing savings (physical capital as Waldman strangely calls it) are the only way to implement technological changes. In other words, if some genius starts inventing more productive equipment, you still need capitalists to fund the production of the new machines and the upgrading of production processes.

    Also, the idea that human capital is unlimited is a strange. Sure human knowledge in totality can grow but as I mentioned before, savings is the only possible vehicle for transforming that knowledge into tangible results. Second, human characteristics are limited. Unless we start developing genetic mutations like X-Men, people can only move so quickly, learn so much, work so hard, etc.

  16. Gravatar of Morgan Warstler Morgan Warstler
    19. March 2013 at 04:05

    cross posted because it dawned on me I wanted Scott to confirm I remember his position correctly – is this right Scott:

    Though complicated, I think you can argue that I work for an after tax $10. I invest the $10, sell at $50, and the $40 in profit has never been taxed.

    So far so good.

    But, after I pay the Capital gains tax on that $40, say $10, the remaining $30 is basically like my muscles, it goes out in field and labors day in day out, and the fruits of its labor, have never been taxed. Essentially my money is my muscles, so every new dollar made by my money is taxed once.

    Funnily, Scott Sumner, he likes to argue “double taxation,” when confronted with the above $40 example, he doesn’t argue that I paid the tax already, he says profits like that are totally unusual, and then he assumes inflation happened, and he basically views the inflation as a tax.

    Of course, he’s a guy arguing for inflation, so since he favors inflation tax, and he thinks EMH is true, so routine big gains are off the table, he comes down at “double taxation.”

    Say a woman, take her income and invests it get lots of plastic surgery and that increases her income…

    The investment is paying dividends, it’s hard to argue she wasn’t “saving” = investment.

    Final reason I think the Capital Gains tax has to be higher: SMB revenues passthough and distort incentives.

    The top 2% of SMB owners generate 50% of SMB revenue, these are a certain type of guys, from their pool of investments, ALL newco start up job growth BOOM occurs.

    Like college athletes, we don’t know WHICH of these guys is going to go PRO, but we know its one of them. The thing is, these are the same guys OVER AND OVER throughout their life.

    So, in a medium sized town, you’ve got a bunch of buddies you play poker, all successful SMB owners. They all decide to open a HOOTERS franchise, it goes well, maybe they open another.

    The thing is, the current tax system, since they are currently getting their payday via passed through incomes tax, they have a distorted incentive to KEEP BUILDING HOOTERS.

    But the town doesn’t need more HOOTERS, and they don’t get along great anymore. And Steve, he’d like to take his tax free profits from HOOTERS and put it into his nephews 3D printing biz.

    Steve is a SMB wild catting cowboy. He’s our lifetime big man on campus, who at anytime might, blow a newco right into stratosphere.

    Meanwhile, in US we have 1031 rule that lets a building owner sell at profit, and if he reinvests in a new building, he pays ZERO taxes.

    Obviously, we ought to be letting Steve move pre-tax income from HOOTERS to 3D printing, the moment he thinks more HOOTERS isn’t best idea.

    And doing that means treating the top 2-3% of serial entrepreneur SMB owners as if they should move money freely, and only pay income tax on their consumption.

  17. Gravatar of Mike Sax Mike Sax
    19. March 2013 at 07:18

    Morgan Warsler is that you or has someone hacked your account arguing for a higher capital gains tax? All I can say is “welcome home.”

  18. Gravatar of Morgan Warstler Morgan Warstler
    19. March 2013 at 08:33

    Sax,

    I argue for FAVORING the tp 2-3% of SMB owners in the tax system over everyone else.

    Because 100% Big Biz = Big Govt. We therefore have to favor the top tier SMB class to encourage distributed government. Big fish in small ponds > Big fish in big ponds.

    So if capital gains is X what matters is SMB gets say 30% less than X.

    Read that anyway you want. It hasn’t changed.

  19. Gravatar of Greenspan´s Fed vs Bernanke´s Fed – A picture post | Historinhas Greenspan´s Fed vs Bernanke´s Fed – A picture post | Historinhas
    19. March 2013 at 11:19

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  20. Gravatar of ssumner ssumner
    19. March 2013 at 14:14

    OhMy, Yes, if I’d said that it would have been rather stupid. Of course those countries are broke, so fiscal stimulus is a moot point.

    TravisV, I don’t recall Greenspan having anything intelligent to say about the recession, but maybe I missed it.

    John, Yes, I’m equally skeptical of projections.

    Cameron, Both, but mostly because there still isn’t enough demand.

    Morgan, If you invest after tax funds, you’ve already been taxed, and should not have to pay further taxes on capital gains.

  21. Gravatar of Morgan Warstler Morgan Warstler
    19. March 2013 at 15:14

    Gah, this again!

    I work for an after tax $10. I invest the $10, sell at $50, and the $40 in profit has never been taxed.

    Now you say, nobody routinely makes $40 on a $10 investment overnight, over long term there is inflation and smaller gains, right?

    You never outright say the $40 was already taxed.

    If I’m wrong and you do feel the $40 has been taxed, pls tell me so.

  22. Gravatar of Greg Ransom Greg Ransom
    19. March 2013 at 19:24

    Scott, name one ‘Austrian’ macroeconomist mugged by reality other than the Misesian outlier Robert Murphy, and then explain what reality did the mugging.

    Steve Horwitz — not mugged.

    Larry White — not mugged.

    Roger Garrison — not mugged.

    Gerald O’Driscoll — not mugged.

  23. Gravatar of ssumner ssumner
    20. March 2013 at 19:27

    Greg, I’ve had commenters here who were former Austrians.

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    21. March 2013 at 10:36

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