“There is very little else that matters at the moment”
“The trend is still in principle a sell-off in markets, a sell-off in riskier assets on the expectations that the Fed might signal further readiness to maybe slow down the rate of purchases,” said Daiwa Securities economist Tobias Blattner.
“So all eyes are on the FOMC meeting next week. There is very little else that matters at the moment”
There is very little else that has mattered for the past 5 1/2 years.
Younger readers might wonder how many times the Fed can keep making the same mistake. Removing the punch bowl before the party even begins. Unfortunately, the evidence suggests that the answer is “quite a few.” In the 1966-81 period the Fed had 15 straight years of continually making the same mistake. Continually refusing to tighten money because the inflation bubble was “temporary,” and would soon pass. Respectable opinion said that those foolish monetarists who blamed it on printing too much money just didn’t understand that the real problem was a bad food harvest, or higher oil prices, or a union wage contract. And those problems were easing. And in any case, interest rates were high, so how could monetary policy be considered “expansionary.”
Let me guess, we just have a mild growth pause, but we’ll get that vigorous recovery in 2010, er 2011, make that 2012, 2013? I just picked up an issue of The Economist, and they assure us that although US growth this will will be only 2%, next year it will speed up to 2.8%. European growth in 2013 and 2014? You don’t want to know. Let’s just say that my rule of thumb that Europe’s about 75% as rich as America is going out the window. By 2015 it will be about 70% as rich. Soon we’ll need a new development category—upper middle income, mixing Greece and Portugal with Chile and Poland.
When you have central bank officials that see inflation everywhere, even as we experience the lowest core PCE inflation in history, then it’s pretty hard for them to change their ways. Eventually a younger generation of policymakers arrives. They’ve noticed that the old folks running the show were wrong, wrong, and wrong again. Inflation? What are those old farts talking about? A new regime takes over, and (after a relatively good period) a new set of mistakes start getting made.
Japan’s been making the same mistakes for 20 years, and the ECB is determined to follow in Japan’s footsteps.
This is what happens when a political system delegates power without responsibility. Central banks have the power to determine the path of NGDP, but don’t get blamed when the path disappoints. That’s a recipe for disaster.
Question: If German savers hate low interest rates, why do they insist on a monetary policy that will insure near-zero interest rates for the next 20 years? Wouldn’t faster NGDP growth lead to higher interest rates?
And here’s another question for you hawks at the ECB; did you see what 20 years of near-zero NGDP growth did to the Japanese public debt/GDP ratio?
PS. Matt Yglesias has a great new post quoting an EU official making not one but two mind-bogglingly stupid errors in a single sentence. I didn’t even think that was possible.
Tags:
13. June 2013 at 05:50
“The fate of all mankind I see
Is in the hands of fools.”
Epitaph, King Crimson
13. June 2013 at 05:55
My hunch is that we get a statement from the Fed that is very little changed from last meeting, and every pundit will read their own point of view into the minutia.
I will feel much like the days of the Greenspan Fed.
The real answer is that the Fed doesn’t know when they are going to start to cut back on QE. But it will not be today.
13. June 2013 at 06:00
You might find this interesting http://ftalphaville.ft.com/2013/06/13/1533782/a-blogospheric-taxonomy-of-the-fiscalist-vs-monetarist-debate/
Though since you believe fiscal policy is contingent on central bank incompetence, and 75% of your posts describe… central bank incompetence, we might be led to believe you’re a strong proponent of… fiscal policy 😉
I wish FOMC was incentivized by a fine in proportion to the extent by which they missed their forecast misses the target + the extent by which reality misses the forecast.
13. June 2013 at 06:02
“There is very little else that has mattered for the past 5 1/2 years.”
Yeah, screw economic calculation, screw the end consumers, screw capital structure sustainability, screw coordination, screw every rational reason why we produce and trade in the first place.
What is “important” is investing in projects that can only be sustained via continued misleading of investors by accelerating CB money supply inflation.
——————-
“In the 1966-81 period the Fed had 15 straight years of continually making the same mistake. Continually refusing to tighten money because the inflation bubble was “temporary,” and would soon pass. Respectable opinion said that those foolish monetarists who blamed it on printing too much money just didn’t understand that the real problem was a bad food harvest, or higher oil prices, or a union wage contract.”
Interesting since you yourself have repeatedly blamed the 1970s stagflation on higher oil prices.
“And those problems were easing. And in any case, interest rates were high, so how could monetary policy be considered “expansionary.””
Because easy money doesn’t always predominantly reflect in higher final goods prices and higher interest rates. Sometimes it reflects predominantly in credit expansion, persistently lower interest rates, and expansion of the financial and capital goods sectors.
During the 1990s and 2000s, the money inflation that might otherwise have resulted in higher final goods prices and higher interest rates, as in the 1970s, instead resulted in an expansion of the financial sector, which put a damper on final goods price inflation.
Inflation does not simply result in higher prices. It can also bring about the creation of new economic sectors, or expansion of existing sectors, which limits aggregate price inflation.
“Let me guess, we just have a mild growth pause, but we’ll get that vigorous recovery in 2010, er 2011, make that 2012, 2013?”
Let me guess. With continued over 4% NGDP growth, the vigorous and rapid recovery should occur in 2010, make that 2011, make that 2012, make that 2013, any now?
“When you have central bank officials that see inflation everywhere, even as we experience the lowest core PCE inflation in history, then it’s pretty hard for them to change their ways.”
Earth to MMs: It is totally unjustified to gauge the stance of monetary policy by the price inflation of, or personal expenditures of, consumer goods.
NEVER REASON FROM A PRICE CHANGE, ESPECIALLY A CONSUMER PRICE CHANGE.
“Eventually a younger generation of policymakers arrives. They’ve noticed that the old folks running the show were wrong, wrong, and wrong again. Inflation? What are those old farts talking about? A new regime takes over, and (after a relatively good period) a new set of mistakes start getting made.”
So let’s continue to advocate for non-market solutions to money production. Let’s advocate for a free market in iron, copper, aluminum, cotton, rice, oil, wheat, plastics, sugar, salt, precious metals, wood, bricks, gasoline, potatoes, carrots, shoes, windows, concrete, stoves, houses, cars, despite the fact that we don’t have laissez-faire markets in these commodities, but money? You goddamn ideologues. We don’t have a free market in money, and so you better shut your mouth. We have to figure out how money can be monopolized as close as possible to a free market, because we’re all chicken liver’d cowards who were educated in the art of money inflation, and we’ll be damned if we throw away thousands of dollars of tuition, and decades of intellectual investment, by advocating for money what we advocate for 99,999 other commodities.
Let’s continue to complain about monetary policy until the day we die, because it’s boring never have to complain about money on a daily basis the way we don’t complain about computers on a daily basis.
Nobody complains about the “tight computer policy” or “tight car policy”.
“Japan’s been making the same mistakes for 20 years, and the ECB is determined to follow in Japan’s footsteps.”
Japan has not been making any more mistakes than the Fed or ECB has been making mistakes. ALL OF THEM have been making mistakes, if we realize the standard of mistake making are the additional mistakes made due to the fact that money production is not free market.
“This is what happens when a political system delegates power without responsibility.”
You mean this is what happens in a socialist economy, in money production for example.
It would make no difference whatsoever if the power was “delegated” with responsibility. The core issue is not character flaws being “allowed” to run rampant. It is the lack of knowledge that the money monopolists are subject to. No amount of ethical or economic education can solve what can only be solved via the messy, trial and error, dynamic market process where the subject matter (humans) constantly learn and change and adapt. No constant “rule” can do better.
“Central banks have the power to determine the path of NGDP, but don’t get blamed when the path disappoints. That’s a recipe for disaster.”
The CB also has the power to determine the path of spending on stocks or pizzas if they really wanted to do so. It is foolish to believe that NGDP is “the” path for them to follow. NGDP is not the source of economic growth. NGDP is an abstract statistic that is the result of valuations and calculations. It is not a cause. It is an effect.
“Question: If German savers hate low interest rates, why do they insist on a monetary policy that will insure near-zero interest rates for the next 20 years?”
Nonsense. German savers are not insisting on a monetary policy that will bring about low interest rates. They are insisting on a monetary policy that will RAISE interest rates through the liquidity effect, which is the predominant effect in monetary regimes that consist of inflation that takes the form of primarily credit expansion into the banking (and lending) sector.
Tighter money would likely raise interest rates, just like tighter money during 2005-2006 in the US raised interest rates, and removed the fuel for the housing boom.
“Wouldn’t faster NGDP growth lead to higher interest rates?”
Who ever said that more monetary inflation necessarily leads to higher spending on final goods that NGDP tracks? Money can be spent on financial assets, repeatedly, while spending on final goods rises only modestly in comparison.
The S&P 500 grew by leaps and bounds 2009-2012, and yet NGDP grew by only 4% or so per year.
“And here’s another question for you hawks at the ECB; did you see what 20 years of near-zero NGDP growth did to the Japanese public debt/GDP ratio?”
You mean what did massive discretionary borrowing do? Yeah, we all saw that.
13. June 2013 at 06:13
This is getting ridiculous. Our policy makers, even post-QE, are dealing with an economy with below-trend inflation and very high unemployment (still higher than the 25 years before 2008).
Of course, the proper course of action in this economy is for Bernanke to go to Congress and say “Remember when we talked about 2.5% inflation and 6.5% unemployment? Well, what we’re really worried about is financial stability, and we might taper early.”
And what are the effects of those remarks?
Evan Soltas posted the following graph on twitter.
http://t.co/UL9tETcOyJ
13. June 2013 at 06:18
@Ashok
I think that Scott’s “fiscal multiplier is an estimate of central bank incompetence” phrase is much narrower than it seems.
For fiscal policy to work, you need a very specific type of central bank incompetence: i.e. a central bank that is unwilling to tolerate increased inflation when its generated by the central bank, but willing to toletare increased inflation when its the result of budget deficits. For a central bank like the Fed, which is obsessed with <2% inflation and no level targeting, fiscal policy will never work.
13. June 2013 at 06:22
ssumner wrote: “Soon we’ll need a new development category””upper middle income, mixing Greece and Portugal with Chile and Poland.”
“Greece First Developed Market Cut to Emerging at MSCI”
“It is unclear yet what the weight of the MSCI Greece will be on emerging markets, but in any case it will be significantly higher than that it has on developed markets,” Constantinos Zouzoulas, an analyst at Axia Ventures Group, a brokerage in Athens, wrote in a note. “This could be positive news for the Greek market as it could attract more interest, although there could be pressure in the short term.”
http://www.bloomberg.com/news/2013-06-11/greece-first-developed-market-cut-to-emerging-as-uae-upgraded.html
13. June 2013 at 06:44
SG, as I’ve argued here (http://ashokarao.com/2013/05/31/by-the-law-of-noncontradiction/) that is the kind of incompetence that afflicts the ECB.
Perhaps even with the Fed. Also note inflation from fiscal policy is low when AS is near flat..
13. June 2013 at 06:51
Speaking of mind-bogglingly stupid errors, I was just reading one from a former Chairman of the Council of Economic Advisers:
‘I really don’t understand how the scarcity of any commodity can be gauged without referring to its price…how the scarcity of money can be gauged without referring to interest rates. ….To insist that the behavior of the price of money (interest rates) conveys no information about its scarcity is, as [James] Tobin has noted, an “odd heresy.”‘
As fallacies go, that’s about as close as one can get to the Ivory Soap standard–yes, I’m in sixties-mode for a reason.
13. June 2013 at 07:42
“If German savers hate low interest rates, why do they insist on a monetary policy that will insure near-zero interest rates for the next 20 years?”
Which is that monetary policy that will insure zero rates for next 20 years? And why is that?
13. June 2013 at 07:44
So to avoid a sell off the FED needs to print more money… isn’t that a form of centralized price fixing? Why is that desirable?
13. June 2013 at 07:48
Doug, The real problem is that they should obviously be increasing QE, and they are not doing so. Why?
Ashok. That’s the whole point of NGDPLT futures targeting.
Geoff, You really are an idiot. I have lots of posts saying the 1970s inflation was not caused by oil.
Patrick, He doesn’t know the difference between money and credit. Between the rental cost of money and the price of credit. Yikes.
13. June 2013 at 07:51
Ivan, Current ECB policy.
And no, don’t confuse price fixing (individual goods) with fixing the value of base money, of which the Fed is the monopoly supplier. Thus “central planning” in base money is built into the system.
Not sure what you mean by “avoid a sell off.” The Fed should be targeting NGDP.
13. June 2013 at 08:04
Why can’t they simply say that >5% 10 year Treasury bond yields are expansionary, and <5% is tight money? (And act appropriately?)
It's really quite simple without all the exogenous-one-time-special-factor hand waving.
It almost looks like they are actively avoiding Occam's razor. The Fed clearly prefers embracing opaque, mysterious, discretionary, need-an-expert-to-possibly-understand monetary policy over simplicity and effectiveness. The question is: why?
Bluntly, central banks are behaving as if they see Nick Rowe's "already dead" scenario as their policy goal and target.
http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/06/is-japan-already-dead.html
13. June 2013 at 08:41
This is what happens when a political system delegates power without responsibility.
Well they do have responsibility for “employment and price stability”, you can’t blame legislators for not knowing the correct theoretical and pragmatic framework beforehand. And if you say that even the inflation target has been sorely missed, well how is that the fault of those who wrote the mandate for price stability? Maybe the problem is power without responsibility, but how to hold central bankers responsible must be non-trivial. I mean, shall we follow Ben Cole’s advice and elect the FOMC, or what? (Of course the ideal would be to have NGDP futures targeting and put everyone on the FOMC, but again, legislators didn’t know about that.)
foosion, they’re a good band.
13. June 2013 at 08:43
Or perhaps futarchy is the only adequate way of combining power and responsibility?
13. June 2013 at 08:44
Thanks Scott, avoid a sell off comes from the first quote in your post: “The trend is still in principle a sell-off in markets… So all eyes are on the FOMC meeting next week”
I still don’t understand why current ECB policy will insure near-zero interest rates for the next 20 years.
13. June 2013 at 09:02
Ivan, because tight money leads to low interest rates. Only the prospect of growth can increase the real rate of interest. Tight money raising the short nominal rate doesn’t help long term savers.
13. June 2013 at 10:07
“15 straight years of continually making the same mistake”
Money grew at less than a 2 percent rate in the decade ending in 1964. In the nine subsequent years money supply grew at a rate in excess of 6.5 percent…
The problems stemed from using the wrong criteria (interest rates, rather than member bank legal reserves) in formulating & executing monetary policy. Net changes in Reserve Bank credit (since the Accord) were determined by the policy actions of the Federal Reserve. But William McChesney Martin, Jr. changed from using a “net free” or borrowed reserve approach to the Federal Funds “Bracket Racket” c. 1965. Note: the Continental Illinois bank bailout provides a spectacular example of this practice.
The effect of tying open market policy to a fed funds bracket was to supply additional (& excessive) legal reserves to the banking system when loan demand increased. Since the member banks had no excess reserves of significance, the banks had to acquire additional reserves to support the expansion of deposits, resulting from their loan expansion. If they used the Fed Funds bracket (which was typical), the rate was bid up & the Fed responded by putting though buy orders, reserves were increased, & soon a multiple volume of money was created on the basis of any given increase in legal reserves. This combined with the rapidly increasing transaction velocity of demand deposits resulted in a further upward pressure on prices. This is the process by which the Fed financed the rampant real-estate speculation that characterized the 70’s, et. al.
And this May’s recent rise in rates & fall in bond prices is related to the lagged method of calculating bank legal reserves – which enables bankers to act on the valid premise that they can make & keep any loan commitment, knowing that their legal reserve requirements will be accommodated by the Fed.
I.e., Keynes’s liquidity preference curve is a false doctrine. Interest is the price of loan-funds & not the price of money.
13. June 2013 at 11:49
Dr. Sumner:
“Geoff, You really are an idiot. I have lots of posts saying the 1970s inflation was not caused by oil.”
You have lots of posts saying stagflation was caused by oil.
I guess this makes you not only clueless, but contradictory as well.
13. June 2013 at 12:59
“Soon we’ll need a new development category””upper middle income, mixing Greece and Portugal with Chile and Poland.”
I find this overly optimistic wrt Greece & Portugal; overly pessimistic wrt Chile & Poland. I don’t think Lisbon was ever as fashionable for business is right now. Maybe if they join the Euro, they’ll screw up their economy.
13. June 2013 at 14:10
Geoff: “[Sumner has] lots of posts saying stagflation was caused by oil.”
This seems like a simple factual question. Perhaps you wouldn’t mind citing some specific posts, in support of your wild-ass opinion?
We all await your actual real-world evidence!
13. June 2013 at 14:43
Don Geddis,
It’s true a priori.
13. June 2013 at 15:32
W. Peden: Ah! Thanks for the clarification. Of course, how foolish of me, to ask for evidence. What was I thinking?
13. June 2013 at 16:08
Regarding Yglesias:
Is Yogi Barra working for the EU now?
14. June 2013 at 08:41
Saturos, I think you missed my point. A specific target like NGDP is easily monitored. The Fed would have to explain any deviations. Vague boilerplate about price stability and high employment means nothing. Nobody in Congress expects the Fed to magically produce utopia. So they have no specific duties, and hence aren’t held responsible.
Ivan, Because tight money keeps rates near zero, and they have very tight money.
Geoff, NGDP grew 11%, RGDP grew 3%, and prices rose 8% between 1972 and 1981–there was no stagflation in the 1970s. The stagflation just occurred in 2 years–1974 and 1980.
Kebko, You mean no one goes there anymore, it’s too crowded?
15. June 2013 at 00:31
“And in any case, interest rates were high, so how could monetary policy be considered “expansionary.””
It took me a while to recognize this, but the best way to see whether monetary policy is too easy or tight is not to look at what interest rates are, but to look at the shape of the yield curve. If you have inverted yield curves, monetary policy is extremely tight. If you have a flat yield curve across the ZLB, monetary policy is extremely tight. The greater the convexity on the yield curve, the more easy the monetary policy.
With that being said, this is what’s happening to the Chinese yield curves:
http://www.istockanalyst.com/finance/story/6455995/china-s-short-term-rates-spike-to-multi-year-highs-shibor-and-repo-curves-become-inverted
18. June 2013 at 16:43
Dr. Sumner:
“Geoff, NGDP grew 11%, RGDP grew 3%, and prices rose 8% between 1972 and 1981-there was no stagflation in the 1970s. The stagflation just occurred in 2 years-1974 and 1980.”
This is not true. From 1973 to 1975, both consumer prices and unemployment were rising, which is stagflation, and after a short period from 1975 to 1977 of consumer price deflation and over 6% unemployment, from 1970 to 1980 there was another period of rising prices and rising unemployment.
I fail to see how we can’t describe this as “1970s stagflation”, meaning “the stagflation that occurred during the 1970s.”
But the argument is that before you blamed these events on oil shocks, and then you called me an idiot for pointing that out.
18. June 2013 at 16:44
Sorry, I meant “from 1979 to 1980 there was another period of rising prices and rising unemployment.