Further comments on interest rates and monetary policy

People are still confused about my views on monetary policy and interest rates.  First of all, no one should assume that they understand what I’ve said in the past on these issues.  This stuff is very nuanced, very counterintuitive, and I’m not a very talented writer.  So let’s try to first see what is actually true, and then think about what I’ve said:

1.  Interest rates are not a reliable indicator of monetary policy.  I’ve said that 100 times.

2.  NGDP growth is a reliable indicator of monetary policy.  I’ve said that 100 times.

3.  Long term nominal interest rates are strongly correlated with both the growth rate of NGDP, and the level of NGDP relative to trend.  I also make this point quite often.  So if NGDP is reliable, and long term rates are strongly correlated with NGDP, why are they not reliable?  Because other factors also affect long term rates.  Trends in global savings/investment, etc.  Still, long term rates are often a good indicator of whether money has been tight.

4.  Here’s where some of the confusion creeps in.  I might say that the high interest rates of the 1970s were caused by easy money, which raised NGDP growth.  If bond yields are 15% it’s a good bet than money is easier than if bond yields are 1%. I make that point often.  People might assume that means high interest rates always and everywhere indicate easy money.  Not so.  They usually indicate easy money, because interest rates are correlated with NGDP growth (and levels), but the correlation is far from perfect.

So far I’ve discussed long term trends.  A completely different set of issues crops up when we look at instantaneous market responses to monetary policy announcements.

5.  I’ve always claimed that easy money surprises can raise or lower long term bond yields.  Perhaps if I do a numerical example, this will be easier to see:

Suppose an announcement of a big bond purchase by the central bank would tend to lower bond yields by 20 basis points via the liquidity effect.  If there are no other effects, then bond yields will fall.  But the policy might also increase expectations of NGDP growth.  How much would that factor increase bond yields?  Anywhere from 1 basis point to a 1000, or more.  Thus the total effect could be rates falling 19 basis point, or rising 980 points.  Nominal rates would likely fall if the bond purchases are viewed as an ineffective gesture by the central bank, which will not be pursued aggressively enough to dramatically change the expected path of NGDP.   I.e. if it’s not likely to raise rates at least 20 basis points because of faster NGDP growth.  Bond yields would rise if the action is expected to lead to 1979-81 type double-digit inflation.  We all know how high T-bond yields got in the late 1970s.  If the Fed engineered very fast NGDP growth expectations, it could happen again.

6.  Even worse, when at the zero bound things get even more complicated.  The Wicksellian equilibrium rate may be well below zero in Japan, and hence modestly higher NGDP growth expectations may simply push the number closer to zero, and hence nominal rates would not increase.

So there is a frustrating level of ambiguity in this picture, but I’m afraid that’s the way the world is.  Neither I nor the Japanese bond market has a very good fix on how determined the BOJ is to raise NGDP growth.  There is likely to be some confidence on the size of the liquidity effect, and massive uncertainty on the income and inflation effects.  And given that radical uncertainty, you’d expect bond yields to be quite volatile, reacting to hints of future policy intentions coming out of the government.  And that seems to be what is happening.  Bond yields first fell sharply on the expansionary move, and then rose even higher, presumably on expectations of stronger NGDP growth.  I don’t know what news they are looking at, but it wouldn’t take much when there is so much uncertainty.  Think bitcoin.

7.  In this blog I tend to emphasize cases where interest rates have gone the “wrong way” in response to monetary policy, because I am trying to get people to see things in a different way—shake up their undeserved complacency that easy money always means low rates.  But I have never, ever, argued that bond markets always react one way to policy announcements.  I emphasize the perverse reactions (Jan. 2001, Sept. 2007, Dec. 2007) in order to show that rates don’t always fall with easy money announcements, not to claim that rates always rise following easy money announcements.  That would be absurd.

To summarize:

1.  Over long periods of time long term bond yields do tend to track GDP growth (and levels) pretty well.  So I’m likely to have made some generalizations in that area equating low rates and tight money.  Japan still has tight money! They have low expected NGDP growth.  And they still have low rates.

2.  As far as the immediate market reaction to monetary announcements, I’ve always argued that it is highly unpredictable, but that there are certain principles that seem useful.  An announcement likely to dramatically change the future path of policy is more likely to lead to a “perverse” reaction in bond yields, than would a one-time injection of money.  I wish I could say more, but I’m often just as confused as you are.

PS. I try to make very precise statements when I write posts, but often I fail to be precise enough.  So it’s partly my fault.  But some burden also falls on the reader.  I have readers who think I am “pro-China” based on the “feeling” they get from reading my China posts, even though I am strongly opposed to government policies there, and say so.  I’m sure some of my posts left the “feeling” that an expansionary monetary policy surprise will always raise bond yields.  But I’m quite certain that I’ve never made that claim.

PPS.  James Alexander sent me a very good article by Ben Southwood in the British publication “CityAM.”  I’m told that “City” workers often read it on the train while going to work.

PPPS.  I’ve recently had lots of problems with my blog.  It crashes quite often.  I don’t know why.  My tech support hasn’t been able to figure out a way to limit the lengths of comments, so Geoff is still free to ramble on interminably.  My spell check no longer works–it says “no spelling errors” when the post is full of errors (spelling errors, not content!!)  So you may notice even worse spelling than usual.  Feel free to send in any suggestions, I use WordPress.

PPPPS.  My prediction on the next shoe to drop—-the ECB!


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37 Responses to “Further comments on interest rates and monetary policy”

  1. Gravatar of Ritwik Ritwik
    5. April 2013 at 07:34

    Scott

    Fair enough, but pts 5 & 6 mean that there is no reason to have a particularly market monetarist view on things – standard New Keynesian-ism + central banker-ism ala portfolio balnce effects, reach for yield yada yada will do just fine, thank you.

    Say there are three possible outcomes to an expansionary monetary shock(whatever it be – an announcement, commencement of bond buying, whatever)

    1. Nominal yields and real yields rise.

    2. Nominal yields rise but real yields fall.

    3. Nominal and real yields both fall.

    I’d score 1 as an uncontested victory for market monetarism – evidence for an upward sloping IS curve, so to speak.

    I’d score 2 as a victory for market monetarist inflected New Keynesian-ism, say ala Svensson, Posen et al.

    I’d score 3 for a conventional downward sloping IS curve view of the world, and score it as a victory for ‘monetary’ Keynesians, whether old or new. Say, Tobin.

    You seem to claim here that 3 is also compatible with your view of the world. Fair enough, you are of course allowed to have a more measured/mainstream view of the world than we give you credit for. But then the particular Scott Sumner brand of market monetarism – interest rates are low because expectations of growth are low, when anyone else buys bonds the price of bonds rises when the central bank buys bonds the price of bonds falls yada yada – is unnecessary.

    So, I’d go as far as score a 2 as a victory for market monetarist view of the world. But 3 is sneaky scope creep. A little bit like how Brad De Long now likes to sneak in nominal GDP level paths as if he’d been talking about it always while he and Krugman were howling liquidity trap when the short rate was still around 2%.

    1 and 2 for Sumner-ism, 3 for Tobin-ism. Fair?

  2. Gravatar of John John
    5. April 2013 at 08:18

    What I find interesting about your views Scott is that you are the first person I’ve read to tie interest rates to GDP (nominal or real). I’ve typically seen interest explained through time preference (or time value of money) with a premium for inflation and risk.

    Would you agree that your view is different because “correct” interest rates are whatever sets NGDP at a stable trend while in most other views, the correct interest rate is whatever clears the market? Even Krugman argues that the correct rate is what clears the market, he simply thinks that the Fed can’t hit that rate because of the ZLB.

  3. Gravatar of John John
    5. April 2013 at 08:26

    Sorry I have other questions. Do you think that in the absence of a central bank setting rates, market rates would tend towards the hypothetical Wicksellian equilibrium with due allowance for inflation and risk? Do you think central banks or markets are more likely to be on target with this rate?

    I find this confusing because defining rates in terms of NGDP seems to be setting a lot of economic theory on its head. My understand is that higher savings rates (due to time preference) lead to lower interest rates and higher real GDP growth. The effect of changes in the supply and demand for money, i.e. inflation and deflation and hence NGDP, are of secondary importance for determining REAL interest rates.

    Sorry to be capitalizing words, but I couldn’t think of a better way to highlight real which I though was key to the statement.

  4. Gravatar of ssumner ssumner
    5. April 2013 at 08:34

    Ritwik, Actually my views haven’t changed at all. In 1990 I published a paper explaining why expansionary monetary announcements lower long term bond yields. I am certainly aware of the data, I follow the effects of policy announcements on bond yields very closely. The “scoring” you suggest makes no sense, there’s really nothing to debate, it is what it is. The facts about money announcements and interest rates are not disputed, and no new information coming along this year is likely to change that fact. The results are and have always been ambiguous

    But I mostly agree with your comment. I’ve often said (and so did Arnold Kling) that much of my thesis is nothing but the NK dogma we’ve been teaching our grad students for 20 years (before 2008):

    1. Zero fiscal multiplier.

    2. Monetary policy drives NGDP

    3. Low rates don ‘t mean easy money.

    4. Highly expansionary monetary policy is likely to raise long term rates.

    5. Fed is never out of ammo, even when rates are zero.

    So why did I start blogging? BECAUSE ALMOST THE ENTIRE ECONOMICS PROFESSION SUDDENLY SEEMED TO FORGET WHAT WAS IN MISHKIN’S TEXTBOOK IN EARLY 2009. That’s why I got into blogging. But yes, nothing new here. There are other aspects of MM that are genuinely new, but not the fact that easy money can raise rates.

    John, No, I think others agree with me that the correct interest rate is the one that leads to good macro outcomes. It’s just that others usually look at inflation and unemployment, while I look at NGDP (which is inflation and output.) Where I differ is that I don’t believe that interest rates have much effect on the economy, I think the economy has a huge effect on interest rates. Instead, I see monetary policy (supply and demand for base money) as having the effect on the economy that others think interest rates have.

    The Fed does not use price controls, so the fed funds market does clear–that’s not the issue. I suppose the zero bound is a sort of artificial barrier, however.

  5. Gravatar of ssumner ssumner
    5. April 2013 at 08:36

    John, If there is no central bank, then what’s the medium of account? If gold, then no, interest rates would not be even close to the Wicksellian equilibrium rate. Not even close.

  6. Gravatar of John John
    5. April 2013 at 08:56

    I don’t get what you’re trying to say. The medium of account has nothing to do with the central bank, right? It could be precious metals or unbacked pieces of paper issued by individual banks. It wouldn’t really matter as long it was commonly accepted in exchange and hence performed the functions of money.

    Ignoring the problems with going below zero for a second, the Wicksellian rate is supposedly the free-market price of credit/borrowing money which matches the supply of loanable funds with the demand for loans correct?

    If so, my response to your statement is to ask, why can’t you have market interest rates with a market chosen currency (such as gold)?

    I’m not trying to debate or score points and I sincerely appreciate you answering my questions.

  7. Gravatar of Geoff Geoff
    5. April 2013 at 09:02

    >But I have never, ever, argued that bond markets always react one way to policy announcements.

    >I’m sure some of my posts left the “feeling” that an expansionary monetary policy surprise will always raise bond yields. But I’m quite certain that I’ve never made that claim.

    I’m even more certain that you did.

    Remember when you said to me “No, inflation hurts the initial receivers”? That was a one way ticket type argument that suggests bond yields will always rise. I mean, just imagine someone else saying that, and then ask how you would interpret it. I think any reasonable person would consider that the kind of argument you say you’ve never made.

    Just to be clear then, that despite this statement’s universal one way character, what you really had in mind were the specific instances (however frequent) of when the theory that interest rates rise with inflation is true, not the specific instances when the theory that interest rates fall with inflation is true?

    You probably wrote that comment in haste and had in your mind the inflation premium effect, but to be fair to your readers, it’s comments like that that are a big reason why I tend to “misunderstand” you quite often. Maybe I am lazy in other walks of life, but for arguments, I like to think I’m pretty detailed oriented (which is why my comments often get rather lengthy). It’s also probably why you often see me making comments that don’t gel with what you are actually thinking, which gives the appearance that I’m being unfair, nit picky, etc. It’s also in part due to the fact that we’re on different ends of the ideological spectrum, and when that happens, sometimes even trivial things are exaggerated, like grammar.

    Having said that, regarding China, I strongly insist that it isn’t “feeling” that is guiding me on it. When I see a post dedicated to what seems to be a defense/apologia/rationalization of many of China’s boondoggle state planned infrastructure projects, where one by one you suggest that the ghost cities are for the most part not a waste, because at some point in the future they’ll be utilized, it’s almost impossible not to take that as a defense of China’s policies. I mean, they’re not market driven projects we’re talking about. They’re state projects. Defending those state projects is, to me at least, a defense of China’s policies. It’s not like you were as harsh on China as you are on Keynesians, and Keynesians are less central planning oriented than China!

    >My tech support hasn’t been able to figure out a way to limit the lengths of comments, so Geoff is still free to ramble on interminably.

    Always trying to make this personal, huh? :)

  8. Gravatar of Geoff Geoff
    5. April 2013 at 09:12

    “Where I differ is that I don’t believe that interest rates have much effect on the economy, I think the economy has a huge effect on interest rates. Instead, I see monetary policy (supply and demand for base money) as having the effect on the economy that others think interest rates have.”

    You don’t think that the low, sub-2% fed funds rate (and low mortgage rates) during 2002-2005, had any significantly different effect on the housing and real estate market, than what a 10% fed funds rate would have generated?

  9. Gravatar of Bill Woolsey Bill Woolsey
    5. April 2013 at 09:34

    I think the natural interest rate is the interest rate where saving equals investment.

    Saving is that part of income not spent on consumer goods and services. Investment is spending on capital goods.

    All in real terms.

    The the real quantity of money always adjusts to the demand to hold money, either due to perfectly flexible prices or a monetary regime that changes the nominal quantity of money appropriately, the the interest rate that clears credit markets is the natural interset rate?

    Of course, saving and investment both depend on income and output (also in real terms.) The natural interest rate equates saving and investment when income matches productive capacity.

    This is equivalent to the interest rate that keeps aggregregate real expenditure equal to productive capacity.

    I don’t think a gold standard always keeps “the” market rates equal to the natural interest rate, but the market interest rate can equal the natural interest rate with a gold standard. And I think there are market forces that tend to cause it to move there.

    Sumner’s “not even close” seems odd to me. Is it the price level stabliity version of natural interest rate.

    I think expectations of future real income and output impact both saving and investment and so the natural interest rate.

    Growth of output (and income) impacts saving, and so the natural interest rate, in a pretty direct way.

    It also impacts investment. And while it depends on what is causing the growth exactly, it is mostly pretty direct.

    More rapid growth in real income tends to lower saving, raise investmnet, and increase the natural interest rate.

    Now, if people decide to save more because of a change in preference, and that leads to an increase in the growth path of the capital stock and that leads to higher output, then I don’t think that higher transitory real output growth will result in a higher natural interest rate.

    It is like a change in supply/ change in quantity supplied issue.

    I think there is a tradition that focuses growth being caused by increased saving, and while it is possible, there are better ways to look at it.

    The simple “modern” model of growing population and technological improvement, and a pretty much constant saving rate is probably a better place to start than thinking of the growth implications of “more” saving. (That isn’t to say that a higher saving rate one result in more rapid growth for a time and a higher growth path of real income and output in the future.

  10. Gravatar of John John
    5. April 2013 at 10:08

    Bill Woosley,

    I agree with what you wrote there.

    Scott,

    I’m not sure if Bill here agrees with me but I think it is strange to define correct interest rates in terms of macro outcomes, no matter how you want to measure macro outcomes. Things like inflation, unemployment, and NGDP are the results of literally thousands of different factors operating at the same time. Interest rates are only one of these factors.

    I guess my big question for you is this: Is it possible in your framework for a central bank policy to produce good (good defined as stable NGDP right?) macro outcomes and bad micro outcomes at the same time?

    Another way of looking at this question would be to imagine a commodity money world with no central bank; the most laissez-faire economy possible. If changes in consumer demand for money, changes in money supply (like a big gold discovery), and/or changes in preferences for saving caused fluctuations in inflation and output (NGDP obviously), would you be doing these people a favor by establishing a fiat money central bank that uses futures markets to target and produce a stable NGDP path?

    Does society need an institution to override the voluntary decisions of individuals for the sake of economic prosperity? I’ll grant that central banking is a less coercive method of doing this than others, but let’s not be fooled about what’s going on.

  11. Gravatar of ssumner ssumner
    5. April 2013 at 11:16

    John, You need to know what the MOA is before you can predict the macro effects.

    You said;

    “Ignoring the problems with going below zero for a second, the Wicksellian rate is supposedly the free-market price of credit/borrowing money which matches the supply of loanable funds with the demand for loans correct?”

    Not even close, it’s the interest rate that leads to a stable macroeconomy.

    Geoff, You said;

    Remember when you said to me “No, inflation hurts the initial receivers”? That was a one way ticket type argument that suggests bond yields will always rise. I mean, just imagine someone else saying that, and then ask how you would interpret it. I think any reasonable person would consider that the kind of argument you say you’ve never made.”

    I would hope my readers would understand the difference between the effect of money announcements on interest rates and the effects of inflation on interest rates. I guess at least one doesn’t.

    And of course I never said ghost cities are not a waste. The Chinese government wastes vast quantities of money on boondoggles.

    Geoff, Yes, I don’t think low rates contributed to the housing boom. I think it was caused by weakness in business investment.

    Bill, You said;

    “Of course, saving and investment both depend on income and output (also in real terms.) The natural interest rate equates saving and investment when income matches productive capacity.”

    Yes, that’s a common definition.

    John, I puzzled by your statement that you agree with Bill.

    You said;

    “If changes in consumer demand for money, changes in money supply (like a big gold discovery), and/or changes in preferences for saving caused fluctuations in inflation and output (NGDP obviously), would you be doing these people a favor by establishing a fiat money central bank that uses futures markets to target and produce a stable NGDP path?”

    Yes. In the early 1930s extra demand for gold led to the Great Depression, which brought Hitler to power. I wish we had switched to a fiat money central bank in 1930 and stopped the horrific deflation from getting worse.

    Macro instability is really harmful, and we should prevent it if we can. Any micro side effects would be tiny by comparison.

  12. Gravatar of Geoff Geoff
    5. April 2013 at 11:24

    Dr. Sumner:

    “I would hope my readers would understand the difference between the effect of money announcements on interest rates and the effects of inflation on interest rates. I guess at least one doesn’t.”

    I didn’t think you had the gusto to actually try to explain that one away, but good one.

    Money announcements are inflation announcements, and inflation announcements are money announcements.

    Sending checks to primary dealers is inflationary, and inflation is sending checks to primary dealers.

    Nice try though. You almost had it.

  13. Gravatar of Geoff Geoff
    5. April 2013 at 11:38

    Dr. Sumner:

    “Geoff, Yes, I don’t think low rates contributed to the housing boom. I think it was caused by weakness in business investment.”

    Business investment was booming 2002-2008 at the very same time that the housing market was booming:

    http://research.stlouisfed.org/fredgraph.png?g=he3

    After the Fed lowered the fed funds rate, both business and housing boomed.

    I know you don’t like to reason from interest rates, but this is pretty compelling evidence, wouldn’t you say?

  14. Gravatar of Geoff Geoff
    5. April 2013 at 11:52

    Dr. Sumner:

    “Yes. In the early 1930s extra demand for gold led to the Great Depression, which brought Hitler to power. I wish we had switched to a fiat money central bank in 1930 and stopped the horrific deflation from getting worse.”

    Wow, the rhetoric is being amped to 11.

    Fascism arose in Germany because of stingy central bankers.

    Nothing to do with the philosophers Nietzche, Fichte, Rousseau, or Carlyle.

    Nothing to do with long standing cultural anti-semitism.

    Nothing to do with Germany being forced to pay for war reparations, which painted the German people as self-imagined enemies of mankind.

    Nothing to do with the state propaganda throughout the 1920s that Jews and Communists stabbed the Germans in the back with the Versailles Treaty.

    Nothing to do Weimar hyperinflation which wreaked havoc on people’s lives and destroyed their life’s savings, which fomented revolutionary spirit.

    Nothing to do with nationalistic furvor.

    Nothing to do with the merging of government and corporate interests.

    Nothing to do with Hitler already garnering power throughout the 1920s and being regarded as the Overman.

    ————-

    Hitler came to power because….[drum roll]….there was a lack of enough pieces of paper with the word Reichsmark written on them.

    I’m speechless.

  15. Gravatar of John John
    5. April 2013 at 12:22

    Scott,

    My experience of Wicksell comes through Mises who incorporated his ideas into a business cycle theory. He doesn’t explain the Wicksellian rate like that at all not surprisingly. Wikipedia doesn’t agree with your take either.

    “The money rate of interest, to Wicksell, was merely the interest rate seen in the capital market; the natural rate of interest was the interest rate that was neutral to prices in the real market, or rather, the interest rate at which supply and demand in the real market was at equilibrium – as though there were no need for capital markets.”

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

    I think you have to be careful in distinguishing monetary regimes here since the international monetary system in 1930 was very different than pre-WWI. Here are Mises’ very prescient comments on the interwar gold exchange standard compared with to the classical.

    “The gold exchange standard must at last mean depriving gold of that characteristic which is the most important from the point of view of monetary policy- its independence of government influence upon fluctuations in value.”

    Countries attempted a discretionary monetary policy and failed causing the Great Depression. The gold exchange standard of the interwar period was only slightly more binding than fiat currency and a far cry from the classical gold standard. Nothing surprising there, active monetary policies usually fail.

    Final question. Do you believe that it is possible for a monetary policy to produce stable macro outcomes and bad micro results?

    For instance, while hitting 5% NGDP the Fed’s asset purchases lead to a great deal of uneconomic investments in housing or stocks that have to be liquidated compared to a situation where NGDP had fallen to 3% but those bad investments didn’t happen. As a result, real GDP growth might be higher in the second scenario where the Fed let NGDP fall.

  16. Gravatar of John John
    5. April 2013 at 12:24

    I should clarify that in that scenario I mean that real GDP growth might be higher over say a 10 year period where the 5% NGDP economy has to struggle to liquidate bad investments and gets slowed down. I’ll agree that in the short term, over two to three years, a higher NGDP country will probably have higher real growth other things equal.

  17. Gravatar of John John
    5. April 2013 at 12:37

    Scott I know it’s your blog and all but I’d appreciate if you weren’t rude by saying I wasn’t even close on the Wicksellian equilibrium rate. Here’s another quote on Wicksell talking about the natural rate matching the supply and demand for loans.

    “This contribution, called the “cumulative process,” implied that if the natural rate of interest was not equal to the market rate, demand for investment and quantity of savings would not be equal. If the market rate is beneath the natural rate, an economic expansion occurs, and prices, ceteris paribus, will rise.”

    A handbook of alternative monetary economics, by Philip Arestis, Malcolm C. Sawyer, p. 53

    You’re take on the equilibrium rate virtually implies that the market rate should always be below the natural rate!!

  18. Gravatar of Edward Edward
    5. April 2013 at 12:58

    “Nothing to do Weimar hyperinflation which wreaked havoc on people’s lives and destroyed their life’s savings, which fomented revolutionary spirit.”

    Right! Hitler didn’t come to power during the hyperinflation n 1923. he came to power ten years later. And what revolutionary spirit are you talking about? It was… drumroll.. stingy central bankers, who after fighting the last war, and terrified of hyperinflation, allowed the economy to tank, making germans miserable, and THEN fomenting revolutionary spirit, thus allowing Hitler to come to power.

    All the rest are valid reasons why Hitler came to power. but they would not have crystallized had the economy been booming and the German’s lives more pleasant. There would have been nothing to blame the Jews FOR.

    “Im speechless.”

    You should be, your worldview keeps getting refuted again and again. I was pleased that you were courteous enough to respond, and also pleased by the fact that you didn’t muster quality arguments to rebut me. Its clear you don’t understand level targeting. Or natural experiments. Or supply side versus demand side problems. its really sad that what might have been a bright mind gets corrupted by Austrian nonsense. :-(

    Scott.

    How about this:
    In yet another example of the dichotomy between the short and the long run, central bank purchases lower short term rates and may lower long term rates via the liquidity effect if they are expected to be temporary., But if they are expected to be permanent, the long term effect is to raise rates dramatically via NGDP and inflation effects

  19. Gravatar of Brian Brian
    5. April 2013 at 13:04

    Geoff,

    Re:

    “Nothing to do with the philosophers Nietzche…”

    “Nothing to do with Hitler already garnering power throughout the 1920s and being regarded as the Overman”

    It was Nietsche’s sister’s selective editing of her late brother’s works that created the unfortunate association of his ideas with fascism. Nietzsche himself (IMO) would have been horrified by such a development, imploring future generations not to misinterpret his writings with this very fear in mind in “Ecce Homo”. Hitler was about as far from Nietzsche’s conception of overman as one can get. Also, Nietzsche expressed great distress over the state of German culture and values throughout his writings, and the nationalistic element that was growing while he was sane and writing.

    Walter Kaufmann goes to great lengths to dispel the notion that Nietzsche was a proto-fascist in his book “Nietzsche: Philosopher, Psychologist, Antichrist”. I am not sure how much Nietzsche you have studied, but I think libertarians unfamiliar with his work (pardon the crude characterization — if it does not apply, I apologize) would find much of interest in there. I am just a hobbyist with no scholarly background, but I believe Nietzsche’s name should be cleared of the charge that he caused the rise of the Nazi’s in Germany.

  20. Gravatar of Edward Edward
    5. April 2013 at 13:12

    Can we please, please, please stop talking about the anti-concept of the “natural rate of interest.” Both Wicksell and the Austrians have different conceptions of this so-called natural rate, and both are vague, undefinable nonsense. Since the economy is always changing what is one months natural rate might not be anothers and the whole concept falls apart

  21. Gravatar of Mike T Mike T
    5. April 2013 at 13:37

    Brian:
    ” but I believe Nietzsche’s name should be cleared of the charge that he caused the rise of the Nazi’s in Germany.”

    >> I agree with pretty much all of what Geoff is writing here, but you’re absolutely correct about Nietzsche. To associate his work with anything related to fascism, Hitler, or anti-semitism is a tacit admission to have never read his work. He was vehemently opposed to the rising German nationalism and anti-semitism that was spreading during the 19th century. I think his break with Wagner had much to do with this as well.

  22. Gravatar of Bill Woolsey Bill Woolsey
    5. April 2013 at 14:34

    Edward:

    I don’t agree.

    Why can’t the natural interest rate change month to month?

    Why can’t the equilibrium price of wheat change month to month?

    The reason for the concept of the natural interest rate is that people can save by accumulating money or dissave by reducing money balances. Further, they can dissave by borrowing newly created money. Firms can purchase capital goods by reducing money holdings or accumulate larger money holdings by reducing purchases of capital goods. And firms can borrow newly created money to purchase capital goods.

    If the money prices of all goods and services, including labor, instantly adjusted so that the real quantity of money equals the demand to hold real money balances, then this wouldn’t matter.

    If the monetary regime adjust the nominal quantity of money so that the real quantity of money equals the demand for real money balances, it also doesn’t matter. Of course, this has implications for the saving by accumulating money, borrwing newly created money to fund capital goods.

    If some prices are more or less sticky, and the nominal quantity of money fails to adjust appropriately, then the market interest rate that clears credit markets can be different from the natural interest rate.

    If, on the other hand, the real quantity of money adjusts to the real demand to hold money, one way or the other, the market interest rate that clears credit markets equals the natural interest rate.

    Shifts in saving supply or investment demand will cause the natural interest rate to change.

    I don’t think that keeping nominal GDP growing 5% requires either an excess supply of money or a market interest rate below the natural interest rate.

  23. Gravatar of Daniel Daniel
    5. April 2013 at 14:35

    Geoff

    Regarding this http://www.themoneyillusion.com/?p=20549#comment-239467

    You can’t actually believe what you said.

    I mean, you’re rewriting history at this point. You can’t possibly by that stupid (at least I hope so).

  24. Gravatar of TravisV TravisV
    5. April 2013 at 15:04

    Bob Murphy,

    How can you tell if interest rates are “artificially low”? How can you tell if they’re “artificially high”?

  25. Gravatar of Geoff Geoff
    5. April 2013 at 15:09

    Daniel:

    Please don’t tell me that you’re THAT historically ignorant.

    Rewriting history? You’re insane.

  26. Gravatar of ChargerCarl ChargerCarl
    5. April 2013 at 15:21

    Scott do you have any posts on the 1973-75 recession?

  27. Gravatar of ssumner ssumner
    6. April 2013 at 07:59

    Geoff, You said;

    “Money announcements are inflation announcements, and inflation announcements are money announcements.”

    The world is a very simple place for people like you. God knows what would happen if you had to take a course in multiple regression. Why would anyone ever need more than one variable to explain a phenomenon? In a previous post you said in the mining boom boosted Australia’s GDP then that means no other factor could have also boosted Australia’s GDP. I thought it was temporary insanity. I guess not.

    And no, business investment was not booming during the housing boom. Rates fell to 1% in 2003 because business investment was quite weak.

    And yes, The Great Depression brought the Nazis to power, as anyone with even a passing knowledge of German history knows.

    John, That definition you provide is the same as mine, except that Wicksell defines macro equilibrium as stable prices. So the natural rate is the interest rate that produces price stability in Wicksell’s view. Today we tend to think in terms of price and output stability–something like the Taylor Rule.

    I’ve spend my entire adult life studying the interwar gold standard, and the problems of the interwar period could just as well have occurred under the prewar gold standard. It was nothing like a fiat money regime. More gold demand creates deflation–that can occur under any version of the gold standard. By the way, there was plenty of discretionary monetary policy under the pre-war gold standard as well, the idea that there wasn’t is a myth.

    You asked:

    “For instance, while hitting 5% NGDP the Fed’s asset purchases lead to a great deal of uneconomic investments in housing or stocks that have to be liquidated compared to a situation where NGDP had fallen to 3% but those bad investments didn’t happen. As a result, real GDP growth might be higher in the second scenario where the Fed let NGDP fall.”

    I strongly disagree, a housing boom is just as likely to occur with 3% trend NGDP growth as 5% NGDP growth. Money is approximately superneutral. I completely reject the notion that Fed policy is mostly to blame for the housing bubble–it was bad public (regulatory) policies plus stupid decisions by private actors. I’m not saying Fed policy had no effect, but it was a minor factor.

    You said;

    “Scott I know it’s your blog and all but I’d appreciate if you weren’t rude by saying I wasn’t even close on the Wicksellian equilibrium rate.”

    Sorry about that. I confused you with a different John

    Edward, That’s close, but even a permanent increase can have a dominant liquidity effect if it is viewed as a one time increase. Consider the Japanese case. There’s a difference between a one-time depreciation in the currency, and moving to a higher inflation regime where markets expect the yen to continually depreciate over time. So far all they’ve done is the one-time depreciation. Unless I’m mistaken the market still expect the yen to appreciate over the next 10 years–is that right?

    But I completely agree that we should get rid of the natural rate–it’s a useless concept.

    Chargercarl, I have brief comments on 1974 elsewhere–it’s a mixture of negative supply and demand shocks–and distortions caused by the removal of price controls.

  28. Gravatar of Geoff Geoff
    6. April 2013 at 09:38

    Dr. Sumner:

    ““Money announcements are inflation announcements, and inflation announcements are money announcements.””

    “The world is a very simple place for people like you. God knows what would happen if you had to take a course in multiple regression. Why would anyone ever need more than one variable to explain a phenomenon? In a previous post you said in the mining boom boosted Australia’s GDP then that means no other factor could have also boosted Australia’s GDP. I thought it was temporary insanity. I guess not.”

    And as expected, you completely dodged the issue, and chose the route of insults and tu quoque. Wonderful.

    You agree that increasing the money supply always makes prices higher than they otherwise would have been had the increase not taken place.

    You agree that the CB buying bonds is inflationary, because it increases the supply of money, and that increase leads to prices being higher than they otherwise would have been. Not that prices will rise over time, but that they are higher than they otherwise would have been.

    You said before “the initial receivers are harmed”. So you can’t use the excuse that you really meant that increasing the money supply is different from inflation. You can’t go off on a tangent that money in the abstract is different from inflation in the abstract. Saying that initial receivers are harmed clearly suggests that you had inflation of prices and thus higher interest rates and thus lower bond prices when you made that comment.

    For you would agree that if OMOs lead to a rise in bond prices (liquidity effect), that this would BENEFIT the initial receivers, right? That would make your previous comment about initial receivers being harmed, a false comment, wouldn’t it?

    “And no, business investment was not booming during the housing boom. Rates fell to 1% in 2003 because business investment was quite weak.”

    I just showed you a graph that shows business was booming 2002 – 2007 WHILE housing was booming as well. I wasn’t talking about 2003. I was talking about the 2002-2007 period that saw virtually all sectors booming.

    “And yes, The Great Depression brought the Nazis to power, as anyone with even a passing knowledge of German history knows.”

    You mean only those with a passing knowledge.

  29. Gravatar of Daniel Daniel
    6. April 2013 at 10:58

    Geoff,

    http://en.wikipedia.org/wiki/Nazi_Party#Federal_election_results

    http://media.tumblr.com/tumblr_mdkkctZjsV1qfre4v.gif

  30. Gravatar of Geoff Geoff
    6. April 2013 at 11:10

    Daniel: Low quality analysis. Do better.

  31. Gravatar of Daniel Daniel
    6. April 2013 at 11:15

    I’m a priori right, you’re a priori wrong about everything.

  32. Gravatar of Geoff Geoff
    6. April 2013 at 11:17

    Daniel:

    “I’m a priori right, you’re a priori wrong about everything.”

    I’m a priori wrong about *everything*? Including the idea, that is now in my mind, that you are right and I am wrong?

    Well, if you say so.

  33. Gravatar of TravisV TravisV
    6. April 2013 at 13:01

    I’m having fun with Bob Murphy within the comments section of this post:

    http://consultingbyrpm.com/blog/2013/04/the-japanese-experiment.html

  34. Gravatar of TravisV TravisV
    6. April 2013 at 13:03

    Geoff,

    Do you believe that the Fed is pushing interest rates to “artificially low” levels?

    If so, the 1970′s is a major problem for your story. Back then, the Fed bought tons and tons of treasuries and long-term interest rates soared. Today, the Fed is buying lots of treasuries and long-term interest rates are ultra-low.

    Prof. Sumner’s explanation for this discrepancy? Expectations. Your explanation? I’m not sure if you even have one.

  35. Gravatar of Geoff Geoff
    7. April 2013 at 16:00

    TravisV:

    “Do you believe that the Fed is pushing interest rates to “artificially low” levels?”

    Yes.

    “If so, the 1970′s is a major problem for your story. Back then, the Fed bought tons and tons of treasuries and long-term interest rates soared. Today, the Fed is buying lots of treasuries and long-term interest rates are ultra-low.”

    I think you may have confused “artificially low interest rates” with “below X%”.

    The interest rates that existed in the 1970s would have been even higher had the Fed bought consumer goods instead of bond, because rates would not have contained as great a liquidity effect discount.

    If the Fed brings down interest rates, in the “below X%” interpretation, via inflation, it can only do so temporarily, because at some point, the inflation is going to raise the prices of consumer goods, such that the inflation premium effect will dominate.

    But if you understand my theory as concerning interest rates that otherwise would have prevailed on the market, it is not wrong to argue that the Fed can and has lowered them below those rates via inflation.

    “Prof. Sumner’s explanation for this discrepancy? Expectations. Your explanation? I’m not sure if you even have one.”

    Whatever makes you feel better about your shaky theory.

    The theory of expectations is not excluded from what I am saying. It just isn’t explicit, because I hold expectations as grounded on and constrained to reality, not the other way around. Expectations alone are insufficient to bringing about certain real world effects. It is in this context that my theory is constrained.

    E.g. There is no doubt that expectations alone are sufficient to increasing aggregate spending and prices somewhat. The key word is “somewhat”. For expectations of higher future inflation cannot bring about any aggregate spending and prices whatever that would physically require more money in existence.

    The argument “It’s all about expectations” is false. Expecting a year after year after year increase in NGDP of 5%, is not sufficient for actually bringing about a year after year after year increase in NGDP of 5%. There is the physical requirement of more money to be created. Without that inflation, the expectation of 5% NGDP growth will be proven wrong again and again and again.

    Make sense?

  36. Gravatar of Tom Brown Tom Brown
    8. April 2013 at 11:22

    Here’s another thought on what happened with housing pre-2008:

    http://www.bloomberg.com/news/2013-04-07/beware-of-economists-peddling-elegant-models.html

  37. Gravatar of Free Banking » Booms, Bubbles, Busts, and Bogus Dichotomies Free Banking » Booms, Bubbles, Busts, and Bogus Dichotomies
    3. September 2013 at 05:57

    [...] asserting that NGDP per capita fell during that decade, though that isn't my understanding); and he denies that it played any part in the recent housing boom. With respect to the latter boom he observes, in [...]

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