MOAR!

People keep asking me why we need to do more.  ”Yes, monetary stimulus was needed back in 2009, but hasn’t the Fed done enough?  Don’t we need to return to normal?”  Yes, we need to return to normal NGDP growth, and normal interest rates, and you do that with a more expansionary monetary policy.

The concepts of “easy” and “tight” money only have meaning in reference the policy goal. We’ve been falling short of the policy goal since 2008, and we’re still falling short. That means we have tight money. Or perhaps I should say we have tight money unless you want to argue that 200% interest rates during hyperinflation shows that money is “tight” and that zero rates during the 1930s showed that money was “easy.”

What many people don’t grasp is that there is no such thing as “not using monetary policy.” A commenter recently noted that most progressives don’t favor using monetary policy because they see it as favoring the rich. I think that’s right, but it actually shows muddled thinking on two different levels. Progressives care a lot about inequality.  If they thought monetary policy was worsening inequality then they should care a lot about monetary policy. But it’s even worse; many progressives seem to think there’s such a thing as “not doing monetary policy.” Yes I suppose there is but only in the sense that there’s such a thing as not steering the ship, just letting the steering wheel float around at random.  But even that’s a policy decision, isn’t it?

And right now the ship is heading in the wrong direction, and needs more stimulus:

The era of easy money is shaping up to keep going into 2014.

The Bank of Canada’s dropping of language about the need for future interest-rate increases and today’s decisions by central banks in Norway, Sweden and the Philippines to leave their rates on hold unite them with counterparts in reinforcing rather than retracting loose monetary policy. The Federal Reserve delayed a pullback in asset purchases, while emerging markets from Hungary to Chile cut borrowing costs in the past two months.

“We are at the cusp of another round of global monetary easing,” said Joachim Fels, co-chief global economist at Morgan Stanley in London.

Policy makers are reacting to another cooling of global growth, led this time by weakening in developing nations while inflation and job growth remain stagnant in much of the industrial world.

Let’s suppose that after allowing nominal GDP to fall 9% below trend between mid-2008 in mid-2009, the Fed had started a new and lower trend line with 5% growth. That would’ve been an unconscionably contractionary monetary policy by any reasonable standard. That would’ve meant no trend reversion at all. And yet I believe that if they had done this unconscionably contractionary monetary policy beginning in mid-2009 the recession would now be over and the unemployment rate would have fallen to below 6%. Nominal hourly wages have done their job. Think about the fact that monetary policy has been much more contractionary than the unconscionably contractionary policy I just sketched out, and it’s getting increasingly contractionary as NGDP growth continues to slow.

So when will I stop asking for “MOAR”? When it’s no longer needed. But so far people like me and Lars Svensson have been consistently right and my critics, even inflation hawks that say the Fed should ignore unemployment and focus like a laser on 2% inflation, have been consistently wrong. Officials within the Fed and Riksbank and ECB have also been consistently wrong.  I see no reason to change my views as long as events continue confirming the validity of the market monetarist approach to policy.

BTW, one of the central banks that needs to do much more is the BOJ.  They are not going to hit their 2% inflation target in a sustained way (beyond sales tax distorted figures) without further yen depreciation.  On the plus side, inflation is a lousy target anyway.

PS.  My unemployment claim is based on NGDP in 2013 being about 4% higher, RGDP being about 3% higher, and unemployment being about 1.5% lower, or 5.7%.

PPS.  Off topic, but I just noticed that Paul Krugman provides one more good example of why the monetary base is the most useful definition of “money.”  When people talk about “dollars” going overseas, it’s really only the base that matters:

And even if the dollar loses some of its dominance, why should we get bent out of shape? There is no evidence that America is able to borrow dramatically more cheaply because of the dollar’s role (and anyway more foreign borrowing is not necessarily a good thing.) You often hear claims that we’ve only been able to run persistent trade deficits because of the special role of the dollar; this is just false, since other countries like Britain and Australia have been able to do the same thing.

What is true is that the large holdings of US currency outside the United States — largely in the form of $100 bills, held for obvious reasons — represent, in effect, a roughly $500 billion zero-interest loan to America. That’s nice, but even in normal times it’s only worth around $20 billion a year, or roughly 0.15 percent of GDP. And anyway, the euro has done well on that front too. If you like, South American drug lords hold dollars, Russian beeznessmen hold euros, and in both cases it’s a trivial subsidy to rich, huge economies.

The bottom line is that while saying “the international role of the dollar” sounds very sophisticated and important, the more you know about all this the less you care. This is simply not a big deal.


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60 Responses to “MOAR!”

  1. Gravatar of Saturos Saturos
    24. October 2013 at 08:52

    Of course, as time passes “stagnant” NGDP growth becomes normal, and there is nothing to return to, unless the growth rate keeps falling. More important is to bind the Fed to a single goal variable that it clearly and unabiguously level targets in advance, so that we can all unambiguously hold it to account when it fails, every time.

    And the whole problem is that the way everyone thinks of monetary policy is as putting your foot on the gas, not steering a ship.

  2. Gravatar of foosion foosion
    24. October 2013 at 08:54

    >>What many people don’t grasp is that there is no such thing as “not using monetary policy.”>>

    Believing there’s such a thing is a major failing across the political spectrum. An annoying common example is to hear arguments about where interest rates would be if the Fed didn’t act.

    If nothing else, progressives should realize that if conservatives are arguing strenuously about monetary, then maybe they should focus on the issue too.

  3. Gravatar of Andy Harless Andy Harless
    24. October 2013 at 09:06

    Well, I favor a 5% NGDP (or preferably NNDI) level path target retroactive to the last time we had a zero output gap (which would be roughly 2007, though people can disagree on the details), so obviously I agree that moar is better. But I’m not sure how there is a general case, unless you make an argument for a particular base date and a particular growth rate of the target path. If someone thinks the target should be 3% and the base date should be 2011, then monetary policy needs to tighten. Why is one growth rate better than another, and why is one base date better than another? To me, “the last time we had a zero output gap” seems like the most obvious choice for a base date, and it sets the right precedent that we should either fully recover from recessions or allow inflation to make up the difference. The path growth rate is somewhat arbitrary, but 5% is a the closest integer fit (and a surprisingly good fit at that) to the historical experience in the two decades before 2007. But if you’re not making a case for a particular target and base date, I don’t see how there’s any way to distinguish between “too tight” and “too easy.”

  4. Gravatar of TravisV TravisV
    24. October 2013 at 09:26

    You wrote:

    “many progressives seem to think there’s such a thing as “not doing monetary policy.” Yes I suppose there is but only in the sense that there’s such a thing as not steering the ship, just letting the steering wheel float around at random. But even that’s a policy decision, isn’t it?”

    I talked with a buddy of mine about monetary policy for months and that is EXACTLY the mistake he kept making!

  5. Gravatar of Six years after the start of the Great Depression, time for the Fed to start easing monetary policy | AEIdeas Six years after the start of the Great Depression, time for the Fed to start easing monetary policy | AEIdeas
    24. October 2013 at 09:29

    [...] Scott Sumner offers a thought experiment: [...]

  6. Gravatar of Joe C Joe C
    24. October 2013 at 09:45

    Scott,

    “Yes, we need to return to normal NGDP growth, and normal interest rates, and you do that with a more expansionary monetary policy.”

    Along with the above quote, is it also correct to say the fed’s balance sheet, in the LR, would actually be smaller than if they continue plodding along at their current pace of QE?

    If true…then this is the point many of my conservative family and friends don’t understand.

  7. Gravatar of ssumner ssumner
    24. October 2013 at 09:51

    Saturos, Good point about the gas pedal. Note that if NGDP growth had stagnated at 5% after the slump, we’d be out of recession by now. So although I think partial bounce back would have been desirable, the self-correctly mechanism does work, as you say. Shockingly, unemployment has fallen from 10% to 7.2% despite FURTHER CONTRACTIONARY MONETARY SHOCKS after 2009. That tells me that the self-correcting mechanism is quite strong, not weak as many seem to assume.

    Andy, Yes, it depends on your policy goal. Money’s been way too tight in terms of Ben Bernanke’s policy goal. Money’s been way too tight from my perspective, (although I don’t favor returning to the pre-2008 trend line). It’s been too tight from your perspective. Money’s been too tight from the perspective of people like Richard Fisher, who would prefer we focus like a laser on 2% inflation. That’s a pretty wide range of people for whom money has been too tight.

  8. Gravatar of ssumner ssumner
    24. October 2013 at 10:08

    Joe, Yes, In Australia the base is only 4% of GDP.

  9. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. October 2013 at 10:20

    “What many people don’t grasp is that there is no such thing as “not using monetary policy.””

    Case in point. I came across this paper yesterday at Economist’s View:

    http://ec.europa.eu/economy_finance/publications/economic_paper/2013/ecp506_en.htm

    The paper argues that coordinated fiscal austerity in eurozone has made things worse for the periphery members of the euro area through “spillovers” and that fiscal stimulus programs in the core eurozone countries could help the whole of the currency bloc.

    The first thing that occured to me was to check to see how they characterize monetary policy. On page 20 the EU paper says the following:

    “The simulations assume no monetary policy response to the fiscal consolidation in the first two years (ZLB), after which the ECB reacts according to the normal Taylor rule based on monetary union aggregates.”

    In other words the results of the paper are conditional on the ECB being at the zero lower bound (ZLB) for two years and doing nothing else. Has the ECB ever been at the ZLB? Has the ECB ever done absolutely nothing for two whole years?

    The ECB’s current policy rate is 0.5% and it has been quite clear that it could lower the rate further if it chose to. So the ECB is not currently at the ZLB. Also, the ECB has already been engaging in unconventional monetary policy even though it is not at the ZLB. (It has never done QE, and has no plans to ever do any.)

    As recently as April and July 2011 the ECB raised its policy rate from 1.0% to 1.25% to 1.5%. But wasn’t that because the European Commission’s estimates of the output gap had closed and inflation was elevated?

    Here’s what the European Commission’s Spring 2011 Quarterly Report on the Euro Area had to say about the output gap and inflation on the eve of the interest rate increases in April and July 2011 (Page 16):

    http://ec.europa.eu/economy_finance/publications/qr_euro_area/2011/pdf/qrea1_en.pdf

    “The economic and financial crisis of 2007-2009 has resulted in a large output gap that is only gradually closing. According to the Commission’s autumn 2010 forecasts, the output gap of the euro area reached a trough of -3.8 % in 2009 and is projected to remain sizeably negative for some time, reaching -1.6 % in 2012. For comparison, the OECD Economic Outlook of November 2010 sees the euro-area output gap at -4.9 % in 2009 and -2.7 % in 2012. (13) Yet, euro-area core inflation area has been remarkably stable. From a peak at 2.7 % in March 2008 it has fallen to a trough of 0.8 % in April 2010 and since then gradually climbed back to 1.1 % in February 2011.”

    So the ECB chose to raise rates in 2011 despite the fact that the European Commission’s estimates showed the output gap would “remain sizably negative for some time” and despite the fact core inflation was only 1.1% in February 2011.

    In short, this is yet another paper in which the estimated effects of fiscal austerity are based on absurdly unrealistic assumptions about monetary policy. The real problem in the eurozone is and always has been bad monetary policy.

  10. Gravatar of jknarr jknarr
    24. October 2013 at 10:46

    You got at the US’s monetary dilemma when you mentioned “yen depreciation”. The US runs tight money in order to maintain USD strength. So PKs thing is not so off-topic. And PK is his usual misdirecting self: the reserve currency focusses immense economic- and political- power, and it’s not all about seignorage.

    Unemployment rates have improved mostly because the labor force has shrunk. Population has expanded, and lower employment-population ratios are a clear symptom of below-trend RGDP.

    Population, capital, technology increase at a LR steady pace, and monetary policy has been tight. This has wasted resources, created financial bubbles, low yields, and below trend NGDP.

  11. Gravatar of Dan W. Dan W.
    24. October 2013 at 11:32

    Scott,

    In 2006 the US economy was heavily distorted by the real estate bubble and by the consumer borrowing against such overpriced assets. You may recall, as I do, a particular TV ad where a middle aged man is riding his lawnmower and talking about all his material possessions – his new SUV, his boat, his vacations – and then he declares: “And I am in debt up to my eyeballs”

    So I ask you. If 2006 is to be our economic baseline does that not require consumers to releverage until, once again, they are in debt up to their eyeballs?

    What if consumers don’t want to do that? What if consumers decide to do what the depression era generation did which is to focus on saving rather than consumption?

    In all your promotion of greater economic spending does it not matter what the money is spent on? A consumption based economy is one that gives the appearance of national wealth but it is a mirage. Sure, the elite capitalists make their buck but the masses are left to churn away spending what little money they earn today to pay off the debts incurred the day before.

    Put simply, how long can a mass market last if the masses can only shop the market with borrowed money that is perpetually being devalued?

  12. Gravatar of TravisV TravisV
    24. October 2013 at 11:46

    Morgan,

    What did you think of this ambitious post from Yglesias?

    http://www.slate.com/blogs/moneybox/2013/10/23/how_to_fix_everything.html

    Which of his proposals do you dislike the most?

  13. Gravatar of James in London James in London
    24. October 2013 at 12:31

    Mark Sadowski
    Good comment. At least we have Draghi over Trichet at the ECB. Imagine how bad it would be in the EuroZone if Trichet was still there. Policy is still too tight, of course, but at least it’s more pragmatic and responsive to crises, rather than causing them.

  14. Gravatar of ssumner ssumner
    24. October 2013 at 13:02

    Dan, You said;

    “So I ask you. If 2006 is to be our economic baseline does that not require consumers to releverage until, once again, they are in debt up to their eyeballs?”

    I’m afraid you misunderstand what I am proposing. I’d recommend my paper on NGDP targeting at National Affairs. You can google it, or there’s a link in the right margin. I agree it would be idiotic to try to recreate 2006.

    Travis, I broadly agree with those ideas, although differ on a few details. I’d add legalize drugs and end occupational licensing laws.

    jknarr, You said;

    “lower employment-population ratios are a clear symptom of below-trend RGDP.”

    Absolutely not. I did a post a while back showing it is a horrible indicator, just horrible. I think the ratio was lower in the 1969 boom than the 1982 recession.

    Mark and James, I agree.

  15. Gravatar of TravisV TravisV
    24. October 2013 at 13:14

    Market Monetarists,

    Will any of you publicly accept Richard Koo’s challenge?

    Richard Koo: I Can’t Find Anyone To Refute My Argument That America Is In A ‘QE Trap’

    Read more: http://www.businessinsider.com/koo-says-no-one-can-refute-the-qe-trap-2013-10#ixzz2ieXE37Ux

  16. Gravatar of W. Peden W. Peden
    24. October 2013 at 14:08

    TravisV,

    Does he want people to refute his argument or his assertion? It’s not clear he has an argument (or even a model) and his assertion is a hypothetical regarding the future path of interest rates, so the burden of proof is on his shoulders. It seems like the sort of superneutrality hypothesis that was popular in some quarters in the 1980s, but with the added implication that QE is superneutral with the price level as well.

  17. Gravatar of TravisV TravisV
    24. October 2013 at 14:33

    Art Carden asks a question:

    “Where are there examples of people changing their minds as a result of the events of the last 5-7 years? Richard Posner is probably the most prominent example of someone who changed his mind. Where are there other examples of scholars and public intellectuals who have changed their minds in response to the financial crisis and ensuing recovery?”

    http://econlog.econlib.org/archives/2013/10/macroeconomic_t.html

    I can think of Kudlow, Avent, Yglesias, Ponnuru, Pethokoukis. Who else?

    Tyler Cowen (maybe)?

    Bryan Caplan (maybe)?

    Josh Barro (maybe)?

  18. Gravatar of TravisV TravisV
    24. October 2013 at 14:36

    Is there anything out there illustrating that the Board members of the Federal Reserve are paying more and more attention to Market Monetarism?

    I’ve heard it pointed out several times as if it’s a fact.

  19. Gravatar of jknarr jknarr
    24. October 2013 at 15:11

    E-P versus RGDP/trend is not so very bad since the “last good year” of 1973. (Coincidentally hand-in-hand with the end of Bretton Woods.)

    http://research.stlouisfed.org/fred2/graph/?g=nId

    Koo has it backwards, like most of wall street. Tight money causes low NGDP, and so causes low rates, and requires a higher base/NGDP ratio. Low rates are a symptom of excess reserves that don’t do a darn thing in a already highly leveraged economy, as few creditworthy borrowers exist at the given level of NGDP, hence little lending alongside a low cost of borrowing.

    http://research.stlouisfed.org/fred2/graph/?g=nIf

    On the flip side, Koo does not differentiate between TIPS and nominal yield markets. The recent higher-yield “trap move” was almost 100% TIPS, and inflation breakevens declined: the opposite of effective monetary stimulus. Lower inflation is death for a highly leveraged economy.

    Yet, if nominal yields and breakevens rise, this spells NGDP deleveraging, and would not be a trap as the growth effect overwhelms the debt/yield effect, by definition: when NGDP expands faster than base money, yields rise.

  20. Gravatar of Wonkblog: The best sentences we read today – Badly Spelt Words Wonkblog: The best sentences we read today - Badly Spelt Words
    24. October 2013 at 15:24

    [...] “‘What many people don’t grasp is that there is no such thing as ‘not using monetary [...]

  21. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. October 2013 at 15:43

    TravisV,
    You can find a large section of the original Koo note “US faces QE ‘trap’” here:

    http://fabiusmaximus.com/2013/09/27/fed-qe-taper-55812/

    In particular this section caught my eye:

    “No country has injected so much liquidity and lived to tell about it

    If the Fed’s purchases were small enough that the funds supplied to the market thus far could be mopped up in one or two painful operations, “shock treatment” would be one option. But the excess reserves supplied by the Fed now amount to 19 times statutory reserves, and putting them back in the bottle, so to speak, will be a difficult undertaking to say the least.

    When a balance sheet recession is addressed with the monetary policy tool of QE, repeated applications are almost assured because monetary policy is largely impotent during such downturns, forcing the central bank to inject ever-larger amounts of liquidity in a hope of seeing some improvement down the road. That is why excess reserves in the US financial system are now equal to 19 times statutory reserves.

    If the balance sheet recession is addressed using fiscal policy, on the other hand, it will lead to a significant increase in the national debt no matter how skilfully done. But at least there is historical precedent for a nation surviving a 250% debt-to-GDP ratio — that of the UK following the Second World War. In no case has a central bank injected as much liquidity as the Fed and lived to tell about it. All nations that did something similar experienced hyperinflation and a serious currency re-denomination, with tragic results for workers and savers.”

    Chilling, isn’t it? It’s also wrong, at least with respect to the US (and the UK).

    The US monetary base reached 18.7% of GDP in 2013Q2. The the UK’s monetary base was 22.0% of GDP in 2013Q2, and Japan’s is currently about 38% of GDP.

    Japan’s monetary base reached 22.1% of GDP in 2005Q1, 2005Q4 and 2006Q1 under their original QE (March 2001-March 2006) and they lived to tell about it. They even reduced the monetary base by about 24.4% between January and November 2006, which I think was a huge mistake, and yet 10-year bond yields barely budged, remaining below 2%:

    http://research.stlouisfed.org/fred2/graph/?graph_id=143035&category_id=0

    And there is more…

  22. Gravatar of Geoff Geoff
    24. October 2013 at 16:04

    “The concepts of “easy” and “tight” money only have meaning in reference the policy goal.”

    Incorrect. Easy and tight money have meaning in reference to a free market in money alternative. The fact that this is not observable is irrelevant. If the government monopolized the production of food, or energy, or everything, then it would be incorrect to argue that it be “meaningless” to reference tight and easy production to a free market in food, energy, etc.

    The argument that money only has meaning to a policy goal is stright up, 100% socialist ideology. Wake up and smell the roses.

  23. Gravatar of benjamin cole benjamin cole
    24. October 2013 at 16:15

    Excellent blogging. And right: The Fed is always “doing something” even if it just asleep at the switch…watching your nrighbor’s house burn down and “doing nothing” is not doing nothing…

  24. Gravatar of Geoff Geoff
    24. October 2013 at 16:17

    “What many people don’t grasp is that there is no such thing as “not using monetary policy.””

    Sure there is. Not using monetary policy is defined as abolishing central banking in favor of a free market in money.

    This “exists” in the sense of being possible, having meaning, and having historical precedence.

  25. Gravatar of Geoff Geoff
    24. October 2013 at 16:21

    “Let’s suppose that after allowing nominal GDP to fall 9% below trend between mid-2008 in mid-2009, the Fed had started a new and lower trend line with 5% growth. That would’ve been an unconscionably contractionary monetary policy by any reasonable standard.”

    Incorrect. A reasonable standard is what a free market in money would have otherwise produced. The change in the quantity of money the Fed brought about 2008-2009 was likely very much higher than the quantity of money a free market would have brought about.

    You are just saying that NGDP is the only “reasonable” standard, and hence “by any standard” a fall in NGDP is “unconscionable”.

    Take off your blinders.

  26. Gravatar of Geoff Geoff
    24. October 2013 at 16:22

    “So when will I stop asking for “MOAR”? When it’s no longer needed.”

    So never then, because the very inflation you call for causes distortions in the economy of which only further inflation can delay and give the appearance of a “solution.”

    It would be like someone claiming “When will I stop asking for more alcohol? When I no longer get a hangover.”

  27. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. October 2013 at 16:25

    TravisV,
    The US monetary base (blue) was over 18.7% of GNP from 1939Q2 through 1941Q2, and 1945Q2 through 1946Q4, peaking at 22.8% of GDP in 1946Q1:

    http://research.stlouisfed.org/fred2/graph/?graph_id=143034&category_id=0

    Moreover there was never any need to exit from the more than six-fold increase in the monetary base that took place in 1932-48. The most that the monetary base decreased was from $48.413 billion in December 1948 to $42.960 billion in April 1950, or by 11.3%. And even that decrease probably had only minimal negative consequences because of the expected decline in real output following World War II.

    Instead what happened was NGDP grew faster than the monetary base. The return to the level it had been before the Great Depression took many years, with the monetary base not falling to 6.5% of GDP until 1975Q4. And if you look at US long term bond rates (green) they didn’t rise above the 3.7% rate they had been before the Great Depression until 1959.

    The bottom line is there are precedents for what the US is doing and in these previous incidents long term bond rates simply did not surge. In fact in the case of the US QE during the 1930s/1940s it took three decades before long term bond rates recovered.

    I wrote four blog posts for Marcus Nunes in June, all on the errors of fact and interpretation Koo made in just one of his notes. I’m sure this note is no different. One could probably make a career out of critiquing Koo’s many mistakes if one were so inclined.

    P.S. I haven’t researched it, but Koo’s claim about hyperinflation is very likely wrong by this measure. The velocity of money and the money multiplier soar during hyperinflations so I suspect that the monetary base as a percent of GDP declines to an unusually low level.

  28. Gravatar of Geoff Geoff
    24. October 2013 at 16:28

    “But so far people like me and Lars Svensson have been consistently right and my critics, even inflation hawks that say the Fed should ignore unemployment and focus like a laser on 2% inflation, have been consistently wrong.”

    Incorrect.

    Your critics have been warning for many years that the Fed’s inflationary response to the crisis would delay recovery in the positive sense, and not the “not enough inflation” sense, and that unemployment would remain sluggish due to economic calculation errors persisting and preventing a recovery.

    They have been exactly right, and you have been exactly wrong. Whether or not one predicts sluggish growth is irrelevant. What matters is WHY that occurred. We can’t solely rely upon historical data to settle this, since both sides predicted the same sluggish growth. What matters is how each theory stands up against one another. Market monetarism loses this battle, which is why most market monetarists try to focus attention on the very historical data we all agree upon. It’s to divert attention away from critical analysis of market monetarism. Most market monetarists know they will lose the battle of ideas abstracted from history.

  29. Gravatar of Geoff Geoff
    24. October 2013 at 16:30

    “I just noticed that Paul Krugman provides one more good example of why the monetary base is the most useful definition of “money.””

    Krugman vastly underestimates just how much of our standard of living depends on “zero interest” money being exported in exchange for real goods. He is clueless.

  30. Gravatar of jknarr jknarr
    24. October 2013 at 16:37

    You only get higher short end rates when NGDP expands faster than the monetary base. The Japan case.

    http://research.stlouisfed.org/fred2/graph/?g=nIq

  31. Gravatar of jknarr jknarr
    24. October 2013 at 17:14

    Russia too.

    http://research.stlouisfed.org/fred2/graph/?g=nIv

  32. Gravatar of ssumner ssumner
    24. October 2013 at 17:19

    Travis, I must have 100 posts that refute that argument.

    I think everyone changes their mind, it’s a question of how often, and on which issues. I used to think European sovereign debt was essentially risk free. I don’t any longer. I’m sure there are many other areas like that.

  33. Gravatar of Geoff Geoff
    24. October 2013 at 17:24

    “I see no reason to change my views as long as events continue confirming the validity of the market monetarist approach to policy.”

    There is no reason for a creationist to stop believing that a creator is responsible for all events, if he only depended on observable data. For observable data, on its own, is consistent with many different, and mutually exclusive, theories.

    Market monetarism, like other economic frameworks, are not actually empirically grounded, but rather they are a priori, that is, a way in which to view the external world.

    Every single event that has transpired is perfectly consistent with anti-market monetarist thoery. Austrians for example have argued that economies do not recover when the central bank does what the Fed has already done. And I don’t mean this in a “the Fed has not inflated enough.” I mean this in a “the Fed by its very existence, its very activity, hampers economic growth and recovery.”

    Everything the Austrians argue a priori is entirely consistent with historical events. Market monetarists have argued the same, and I won’t disagree.

    Market monetarists must accept that economic theories are made or broken on the basis of self-reflective reasoning, not history. History has proven correct a virtual infinite number of mutually exclusive theories. History alone cannot possibly be the only standard of reference to verify or confirm a particular theory.

  34. Gravatar of Morgan Warstler Morgan Warstler
    24. October 2013 at 18:32

    First off, glad to help Scott, BUT….

    Dammit man, 6+ months ago here I must of looked like a crackhead, with as much as I moved my lips trying to get you to say:

    NO MAKEUP is still far more effective, than waiting around to have makeup.

    It’s the rule, that’s the magic.

    We start in a weak stream economy. We say 4.5%, not even 5%, hell we could say 3% – and we come in weak, BAM! 30 days in machine takes over, nobody believes it, they poo poo it, BAM here’s more liquidity again.

    Then…

    Sh*t! we hit the LT so soon, there’s still unemployment.

    Let’s do fiscal!

    BAM! rates higher! BAM! rates higher! BAM! rates higher!

    We can’t do moar fiscal?!?

    Let’s cut the bejesus out of fiscal spending (axe a military program)

    BAM BAM BAM moar liquidity.

    NGDPLT is a free market task master, and it treats the govt. like a pitbull on a chain.

    It won’t feed the govt. until after it is fat and happy.

    And the very moment the govt and its supporters understand the beat of the music, the tone of masters voice….

    growth is unleashed.

    WHY is growth unleashed?

    BC govt on the leash has learned the rules. New govt. spending will ALWAYS be counted as inflation… private sector growth is RGDP.

    Travis,

    Matty should just say Morgan has the best idea: GI / CYB

    Watching him ignore it is sad. He’s one of my neo-progressive converts (the cause of govt. is SO IMPORTANT, we’ll run it like a modern Internet company (fire most of the drones), so people LIKE it.

  35. Gravatar of Geoff Geoff
    24. October 2013 at 18:43

    If the government nationalized everything, we can guarantee full employment.

    Why is it that we have to listen to market monetarists who promise low unemployment with their central plan?

    If money was solely privately produced, then any clamoring for more money production must be weighed against production of other goods, since resources are scarce and we must choose.

    If individual property owners want to produce X quantity of money, but you want them to produce X+x quantity of money, what is the justification for initiating violence against innocent people in order to monopolize money such that the production of fiat money achieves your personal preference for employment?

  36. Gravatar of Ralph Musgrave Ralph Musgrave
    24. October 2013 at 20:07

    Scott says, “we need to return to normal . . . . interest rates”. I doubt whether so called normal interest rates actually are normal. Reason is that governments the world over borrow vast amounts to fund not just capital spending (like infrastructure), but to fund CURRENT spending as well.

    The latter type of borrowing makes no sense: its not “normal” so to speak. It makes sense for me to borrow to buy a larger house, but it does not make sense for me to borrow to pay for my electricity or food.

  37. Gravatar of Sebastian Sebastian
    25. October 2013 at 00:56

    “If they thought monetary policy was worsening inequality then they should care a lot about monetary policy.”

    Monetary policy in itself doesn’t worsen inequality, that’s a particularly inane straw man. But easy monetary policy does, right now.

    What market monetarists like the writer just don’t get is that inequality doesn’t merely worsen when the rich get richer, but also when the poor get poorer.

    So easy monetary policy makes the rich get richer by reflating asset prices. But the poor also get poorer, because inflation in a high unemployment environment causes downward pressure on wages.

    Since wealth is entirely relative, inequality is rising from both sides. This should all be very obvious except for market monetarists. These callous model fetishists are a disgrace to their profession, and a danger to society as a whole.

  38. Gravatar of JN JN
    25. October 2013 at 01:19

    Scott, you said:
    “But so far people like me and Lars Svensson have been consistently right and my critics [...] have been consistently wrong.”

    Be careful with this kind of argument: it’s what Krugman also uses all the time…

    http://www.huffingtonpost.com/niall-ferguson/paul-krugman-euro_b_4060733.html

  39. Gravatar of Prakash Prakash
    25. October 2013 at 03:16

    Prof. Sumner,

    What in your opinion is a good policy for a developing nation like India to follow?

    GDP is not trustworthy due to informal markets. We are not export dependent either, so not sure we can use the export price policy that Lars suggests for Ukraine.

    People of India absolutely love gold. Should India shift to a gold standard?

  40. Gravatar of Philip George Philip George
    25. October 2013 at 03:42

    The present unbridled monetary expansion will result in eventual catastrophe.

    An analogy will make my point clearer. There is a large water tank into which water flows through a large pipe. The NGDP targeters see the water level in the tank rising very slowly and conclude thereby that the water flow into the tank is not sufficient and should be increased. What they do not see is that the water tank has pipes at the bottom through which water flows into other tanks called the stockmarket, the housing market and so on. When the water overflows one of these tanks we will have a catastrophe as in 1929 and 2007.

    To put it plainly, money expansion makes its effects felt not only in nominal GDP but also in asset markets. There is only way of determining when there is too much money and that is not by watching nominal GDP but by accurately measuring Money.

  41. Gravatar of ssumner ssumner
    25. October 2013 at 05:28

    Sebastian, No, easy money doesn’t worsen inequality. And by the way, current Fed policy is not “easy money.”

    JN, True, but I’ve been more right that Krugman.

    Prakash, Gold would be a disaster, don’t even think about it. NGDP targeting is probably fine for India, but slightly different targets like aggregate wages and salaries would probably be a bit better.

    Philip, No, money is contractionary right now.

  42. Gravatar of TravisV TravisV
    25. October 2013 at 06:59

    Mark Sadowski,

    YOU DA MAN! THANKS!

    I had totally forgotten you wrote all those posts on Koo at Marcus’s site.

  43. Gravatar of Sebastian Sebastian
    25. October 2013 at 08:07

    Mr. Sumner, do you object to any of my arguments in specific concerning the escalating effects of easy money – by which I mean LSAP and also NGDP targeting – on inequality?

    Or should I interpret you apodictic denial as somehow an argument in and of itself?

  44. Gravatar of jknarr jknarr
    25. October 2013 at 08:19

    Sebastian, I’ve looked at this wealth distribution question. Low tax rates, low yields, slow NGDP, and high debt is the coinegrated and correlated inequality cocktail: low tax rates appear to go hand in hand with rising debt levels and tight monetary policies.

    Think of it as tight monetary policy/loose fiscal policy as creating inequality: boosting financial assets and crushing household incomes.

    Loose monetary policy/tight fiscal policy would reduce inequality. Note that you can’t really have one without the other, so I’d ditch the left-right political framework that you seem to be working with: monetary policy can’t be viewed in isolation.

  45. Gravatar of Prakash Prakash
    25. October 2013 at 08:25

    The issue with pegging with anything other than gold is that a lot of inflation happens and the gold bugs are vindicated. That has been the history of india. Many rulers/kings have debased their currencies and Indians have developed an affinity to gold. In the modern era also, they are being proven right as gold prices continue to rise in Indian rupees. Indians don’t have too many long term saving options.

  46. Gravatar of Sebastian Sebastian
    25. October 2013 at 08:46

    jknarr

    I argued that loose monetary policy buoys asset prices, which disproportionally favors the wealthy. Since loose policy is inflationary, and since pressure on wages is downward during periods of high unemployment, such policy simultaneously reduces real incomes for the vast majority of people. Ergo, inequality rises from two sides, i.e. escalates.

    I don’t see how loose fiscal policies – which I support – worsen inequality. In our current environment, only the government’s redistributive powers can prevent a descent towards plutarchy.

  47. Gravatar of jknarr jknarr
    25. October 2013 at 09:14

    Seb, you seem to have some priors at work that may not be empirically well-rooted. The evidence is that tight money lowers bond yields and boosts the present value of financial assets; while also damaging household incomes via slow growth.

    You’re concerned about tight money, not loose. By your standard, the 1970s should have been great for stock and bond asset prices.

    The US has been running a tight-monetary/loose-fiscal since the 1980s: high debt, low tax rates, slowing NGDP and low yields. You are (inadvertently) supporting the status quo.

    Red pill time: plutocracy can be reversed with loose money, high NGDP, high yields, less debt, high taxes, and less fiscal spending. (You’ll hopefully note that your views dovetail with the one-party-system we have, which countenances none of these things: i.e. plutocracy already, and you’re supporting it.)

  48. Gravatar of Sebastian Sebastian
    25. October 2013 at 09:16

    Addendum: I don’t view these issues within any left-right political framework. I couldn’t even place my own views in such a simplistic matrix, and I don’t believe concern for inequality belongs there, either.

  49. Gravatar of Sebastian Sebastian
    25. October 2013 at 09:34

    I’m confused. Doesn’t tight money equal higher yields? The 70s were of course unique due to the dollar and oil shocks, as well as high wage demands, creating what we called the wage-price spiral.

    Again, I don’t see how loose money and high NGDP in a slack labor market could not worsen inequality. This kind of inflation eats into people’s spending power. Or doesn’t it?

  50. Gravatar of jknarr jknarr
    25. October 2013 at 09:46

    Today’s discussion is good, then: loose money=higher yields. Think NGDP growth: were the 1970s loose or tight money?

    http://www.themoneyillusion.com/?p=24397

    Friedman takes you down the rabbit hole. Everything else follows.

    “Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

    After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.”

  51. Gravatar of Sebastian Sebastian
    25. October 2013 at 10:20

    Well that’s quite unorthodox. I think the apparent illogic in these statements comes from the writer employing the past perfect, thus adding a chronological dimension to a static model.

    Yes, low rates may signify tight money in the past but generally, when rates are lower at any point in time compared to another, money is said to be easier. So this all sounds like sophistry to me.

    In the 80s, didn’t Volcker dramatically increase rates to bring down inflation? Once inflation was tamed, the economy picked up and rates were lowered and yes, there was disinflation, but only because of the exorbitant inflation before. By later standards, it remained high well into the 90s.

  52. Gravatar of Lorenzo from Oz Lorenzo from Oz
    25. October 2013 at 12:54

    On Koo, the principle is simple: no one who is as clueless as he is about the 1930s can possibly understand contemporary conditions.

    The same principle applies to internet-Austrians, paleo-Keynesians, etc.

    (And we really need a term for “Austrians” which excludes sensible folk like Steve Horowitz, et al.)

  53. Gravatar of ssumner ssumner
    26. October 2013 at 06:41

    Sebastian, I disagree on inequality and have done a number of posts explaining why. Again, current policy is not expansionary. If we did have an easy money policy it would dramatically boost employment, which would help the poor. In any case, inequality is a secular issue and money is neutral in the long run. It makes no sense to mix them up.

    You said;

    “Yes, low rates may signify tight money in the past but generally, when rates are lower at any point in time compared to another, money is said to be easier. So this all sounds like sophistry to me.”

    That’s a very common misconception. Exactly the opposite is true. In general, lower interest rates usually mean tighter money, and vice versa. I’m amazed by how many economists miss this very basic point. Tight money leads to low NGDP growth (US 1930s, Japan 1990s, America today) and this leads to low interest rates. Easy money leads to fast NGDP growth, and higher interest rates. Interest rates are strongly correlated with NGDP growth (and the level relative to trend), although no one claims the correlation is perfect.

    Long term bond yields rose when the Fed eased in January 2001, and again in September 2007. Long term yields fell when they tightened in December 2007.

  54. Gravatar of Sebastian Sebastian
    26. October 2013 at 07:14

    First chart I found on search: http://www.economics.utoronto.ca/jfloyd/modules/evin.html

    Interest rates seem to lag inflation rates by a couple of months, which is consistent with policy response latency, but not with any other correlation per se.

    My point about inequality and monetary policy is that, yes, probably easy money raises employment in the medium term, but in the short run that really counts, it quickly eats into common people’s spending power (if not accompanied by wage and benefits increases), while lifting asset prices for the wealthy.

    So no, money is not neutral. Nor is economics in general as ‘amoral’ as some in the profession would have us believe.

    Which is not to say that I don’t see your point concerning tight money and low NGDP growth. But when asset prices are deflating post-bubble, even the loosest monetary policy will look ‘tight’. How exactly do you propose to reflate – or target NGDP – without increasing the suffering of the multitudes living on fixed or sticky wages, or declining benefits?

  55. Gravatar of Sebastian Sebastian
    26. October 2013 at 07:15

    Sorry, the latter post refers to Mr. Sumner’s – much appreciated – response.

  56. Gravatar of Min Min
    26. October 2013 at 09:36

    I agree that the Fed should do more, but what more can it legally do now? Penalize banks for not lending? Buy municipal bonds? Where is the Fed’s accelerator?

  57. Gravatar of ezra abram ezra abram
    26. October 2013 at 12:17

    I can’t speak for all liberal (a notoriously disputative bunch) but i think to say they ignore monetary policy isn’t quite right, although your point that we see MP as the domain of the right is spot on.
    Rather, liberals like myself see other things as having a bigger effect: raising (a lot) taxes on the rich
    Throwing a few bankers and mortgage lenders into jail
    etc

  58. Gravatar of Min Min
    26. October 2013 at 12:29

    Ralph Musgrave: ” governments the world over borrow vast amounts to fund not just capital spending (like infrastructure), but to fund CURRENT spending as well.

    “The latter type of borrowing makes no sense: its not “normal” so to speak.”

    I think that it makes sense as a subsidy to creditors.

  59. Gravatar of ssumner ssumner
    26. October 2013 at 13:21

    Sebastian, You said;

    My point about inequality and monetary policy is that, yes, probably easy money raises employment in the medium term, but in the short run that really counts,”

    I think that every one who studies inequality agrees that it’s the long run that counts. And you seem confused on monetary policy. It’s completely symmetrical, and yet you talk as if “using monetary policy” has a unidirectional effect in the short run. Not true, monetary policy can be both expansionary and contractionary. There is no plausible monetary rule where it can only be used for contractionary purposes. You also ignore that fact that an expansionary monetary policy raises real income.

    There’s a reason why brilliant macroeconomists like Krugman who care a lot about inequality favor monetary stimulus. I’d strongly encourage you to rethink your position, it’s not coherent.

    Min, There are many ways they can do more, but the best would be to set a higher NGDP target, level targeting. If they don’t know how, put me in charge and I’ll show them. But seriously, they do know (as Bernanke keeps insisting.) They simply don’t want to.

    ezra, You said;

    “Throwing a few bankers and mortgage lenders into jail”

    I presume you are referring to the subprime bubble. In fact, their actions were not illegal. I thought liberals favored the rule of law. Yes, there are a few individual bankers who broke laws, but in my town several teachers recently broke the law and are going to jail. Does it make sense to say we should “throw teachers in jail” because our schools don’t educate as well as we’d like?

    Alternatively, why not throw 100,000s of mortgage borrowers in jail. Didn’t lots of borrowers commit fraud when they filled out their income data, etc?

  60. Gravatar of interfluidity » Why (and when) interest on reserves matters… interfluidity » Why (and when) interest on reserves matters…
    5. November 2013 at 10:25

    [...] rate changes, so it is not irrational of market participants to respond to rumors of tapering or moar QE. Perhaps there are institutional quirks related to the fact market participants can only hold [...]

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