QE: A view from the trenches

Several people have asked me to comment on a new WSJ article by Andrew Huszar, who managed the Fed’s bond-buying program:

It wasn’t long before my old doubts resurfaced. Despite the Fed’s rhetoric, my program wasn’t helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn’t getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.

The Fed should not be trying to affect the supply of credit or the price of credit, so I’m glad to hear that it didn’t seem to have those effects.  The goal should be to stabilize the growth rate of NGDP.

From the trenches, several other Fed managers also began voicing the concern that QE wasn’t working as planned. Our warnings fell on deaf ears. In the past, Fed leaders—even if they ultimately erred—would have worried obsessively about the costs versus the benefits of any major initiative. Now the only obsession seemed to be with the newest survey of financial-market expectations or the latest in-person feedback from Wall Street’s leading bankers and hedge-fund managers. Sorry, U.S. taxpayer.

Huszar doesn’t seem to realize that financial-market reactions are the best indication of how these programs are working, indeed the only reliable indication. Everything else (such as borrowing costs) is meaningless without a counterfactual.

Trading for the first round of QE ended on March 31, 2010.  .  .  .

You’d think the Fed would have finally stopped to question the wisdom of QE. Think again. Only a few months later—after a 14% drop in the U.S. stock market and renewed weakening in the banking sector—the Fed announced a new round of bond buying: QE2. Germany’s finance minister, Wolfgang Schäuble, immediately called the decision “clueless.”

If you are going to criticize Fed policy, you really ought not mention any eurozone policymakers, especially German policymakers.  The Germans were the ones pressing the ECB to adopt a tighter monetary policy. How did that work out?  Well back in 2009 and 2010 the eurozone and the US had almost identical unemployment rates (close to 10%).  Since then the eurozone rate has risen to 12.2% while the US rate has fallen to 7.3%.  And what explains that vast difference in performance?  Mostly differences in NGDP growth, i.e. monetary policy.

[See David Beckworth and Lars Christensen for excellent posts on the US/eurozone divergence.]

And what explains the difference in monetary policy?  The Fed was doing one QE after another, with the avowed intention of boosting aggregate demand.  The ECB was raising short term interest rates in 2011 with the intention of reducing aggregate demand.  Both “succeeded.”

It’s certainly fair to point out that the US recovery has been weak, despite QE. But if you are going to criticize QE you need a counterfactual policy.  What should the Fed have done to boost NGDP growth? Huszar doesn’t say.  Quoting eurozone hawks isn’t going to convince anyone outside the WSJ editorial page, over on this side of the pond.  FWIW, I would have preferred NGDPLT and elimination of IOR, as an alternative to QE.

The article contains a lot of discussion about how QE is a subsidy to banks. There’s s tiny bit of truth in that claim, as the Fed does pay 0.25% interest on reserves.  And they should not do so.  But the $5 billion or so that flows to the banking industry via QE is peanuts compared to the $100 billion the Feds are taking from banks through extortion.

Others argue that low interest rates are a subsidy to banks, which makes no sense.  Interest rates are set in the free market.  Back in the old days when central banks did tight money the progressives cried that it was a subsidy to big bankers.  Now when the Fed does “easy money” progressives and many conservatives cry that it is a subsidy to big bankers.  Neither is a subsidy.

And the impact? Even by the Fed’s sunniest calculations, aggressive QE over five years has generated only a few percentage points of U.S. growth. By contrast, experts outside the Fed, such as Mohammed El Erian at the Pimco investment firm, suggest that the Fed may have created and spent over $4 trillion for a total return of as little as 0.25% of GDP (i.e., a mere $40 billion bump in U.S. economic output). Both of those estimates indicate that QE isn’t really working.

Actually if the bump is only $40 billion then QE is working.  Huszar makes the mistake of assuming the “cost” is the amount of bonds purchased.  But that’s not a sensible definition of cost, as the Fed is simply swapping one government liability for another.  A better measure of cost is the interest on reserves program, which has cost about $5 billion per year on average.  And even that is an exaggeration; earnings on the Fed’s bond portfolio offset it.  BTW, “a few percentage points” might be a million jobs, or more. Does Huszar think unemployment is not a big problem?

And how is Mr. El Erian an “expert” on the macroeconomic impact of QE?  What model does he use? Where does his expertise come from? When I went to grad school we were never taught how to model a QE/IOR program.  Did he study how to model these programs in grad school?  If so, which one?  I’m not trying to pick on Mr. El Erian, who I don’t know, my point is that it is not at all clear where one would get expertise in this area.  It’s very possible that El Erian knows more about QE than anyone else in the world, but is still not an expert.

In my view there is only one expert—the market.

HT:  Frank McCormick, Caroline Baum


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107 Responses to “QE: A view from the trenches”

  1. Gravatar of Jeffrey Dane Jeffrey Dane
    12. November 2013 at 09:16

    The ignorance in this “response” to Andrew is stunning. The “markets” determine success? The market hasn’t spoken yet and won’t until QE has been withdrawn. Then to have the gall to challenge El Erian? The point is this – economists live with theory not in the real world. Which is EXACTLY why no economist should have a vote at the FZed. Advisors at BEST. You don’t NEED studies – this is common sense. You don’t NEED an education in economics. It’s common sense. Low rates caused the Internet bubble. Low rates CAUSED the housing bubble. Low rates have now CAUSED the MASSIVE stock and bond bubbles. And QE has completely FAILED to stimulate the economy. In fact it is a hindrance as companies have no reason to hire when the can financially engineer their stocks higher.

  2. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 09:49

    “And how is Mr. El Erian an “expert” on the macroeconomic impact of QE? What model does he use? Where does his expertise come from?”

    His “model” of the economy appears to be made of plastic held together with Testor’s cement. His macroeconomic “expertise” is clearly attributable to his bushy eybrows and Omar Sharif-like accent.

    http://krugman.blogs.nytimes.com/2011/06/10/the-decline-of-pimco-macro/

    June 10, 2011

    The Decline of Pimco Macro
    By Paul Krugman

    “I first talked to the Pimco people in, I think, 1991, when I was asked (and paid) to talk to them about economic issues; don’t remember the subject. It was a striking experience, sartorially: I showed up in Newport Beach in my gray business suit, and they were all in casual shirts and slacks, some (as I remember it) with fashionable stubble.

    Since then, of course, Pimco has continued to be a huge success; Bill Gross is without doubt a great investor. I have often found the economic analyses coming out of Pimco deeply enlightening. And in 2009-2010 the firm won big by betting, correctly, on interest rates staying low.

    For the past year or so, however, Pimco seems to me to have been making less and less sense. Gross bet big on the idea that rates would spike when quantitative easing ends; I guess he has three weeks to be vindicated, but it sure doesn’t look like it. And the economic logic was all wrong. Now Mohamed El-Erian is claiming that inflation in China and Brazil is Bernanke’s fault; again, the economic logic is all wrong.

    What’s strange about this is that nobody was better at laying out the logic of deleveraging and its consequences than Pimco’s Paul McCulley. But maybe that’s the explanation: McCulley has moved on.

    Anyway, El-Erian’s latest sort of shocked me; it sounds as if he’s making up his own version of macroeconomics. And that’s not something you should do unless the existing models have failed — which they haven’t.”

  3. Gravatar of RyGuy Sanchez RyGuy Sanchez
    12. November 2013 at 09:50

    @jeffery

    El Erian isn’t infallible, remember 2011 when Total Return dumped all of their treasury holdings only to miss out on yet another rally. B-Gross publicly had to offer a mea culpe of sorts for his poor foresight. The low rates / easy money fallacy has been debunked over and over by Sumner. Interest rates just aren’t a good indicator of the stance of monetary policy.

  4. Gravatar of MG MG
    12. November 2013 at 09:52

    The model ought to start with establishing the implicit amount of risk capital the Fed is running through Duration/Credit/Liquidity Asset-Liability mismatches. This trade is effectively a carry trade, so the least one could expect is that it yields positive carry until it is closed. To date, they could very easily be in the black, but I am not sure the profits are enough on a risk-adjusted basis. This may be part of what Huszar and El Erian could be talking about.

  5. Gravatar of Typhoon Jim Typhoon Jim
    12. November 2013 at 10:10

    Every time I hear “common sense” I reach for my gun.

  6. Gravatar of Morgan Warstler Morgan Warstler
    12. November 2013 at 10:11

    I know Scott tried to do this with the CATO article…

    But this is only going to continue bc we are not putting the meat in the window. MM suffers from major messaging issues.

    This is Beckworth talking about GOP:

    “Some of us on the right have been trying for the past few years to awaken the GOP to this golden opportunity. We write op-eds, articles, and even travel to Capitol Hill. But sadly, the GOP continues to sabotage itself on monetary policy.”

    http://macromarketmusings.blogspot.com/2013/11/the-gops-golden-opportunity-on-monetary.html

    As a debate coach, the difference between the newbies and middlers and the teams that whip them week after week was always the same:

    The losers are ALWAYS blaming the judges, the winners would blame every loss, no matter who the judge was on themselves.

    We sit and insist the Fed can lift any rock, and as these arrows and barbs arrive from the right, we tisk-tisk and tut-tut.

    —–

    Guys NGDPLT:

    1. shrinks government. it literally leads to public employees being fired, and getting raises based solely on delivering productivity gains…. like the private sector.

    2. ends fed discretion. it’s friedman’s PC.

    3. delivers LESS INFLATION compared to history.

    4. would have stopped the sub-par housing bonanza. Killed in its crib in 2005.

    5. since #4, would have averted the worst of the financial crisis, as the more conservative MBS loans would be getting paid.

    6. And under NGDPLT, WE WOULDN”T HAVE TO BAIL OUT BANKS.

    7. and OH BY THE WAY, if we started NGDPLT in 2008 that would have ALSO worked….

    To conservatives, #7 is the least interesting by a long shot. It frankly flies in the face of conservative morality: people should suffer for bad decisions.

    So, let’s admit something to ourselves…

    Scott can say he only cares about the opinion of a handful of Fed economists.

    but those people CARE what Huzar and PIMCO have to say.

    —–

    Ok, now we have a real personal Q to ask ourselves.

    How important is our baby?

    Why isn’t our goal to to convince the conservatives with 1-6, to speak their language?

    Why aren’t we saying:

    NGDPLT makes it super easy to shrink public sector and to tell rich bankers to eat sh*t.

    One a continuum between Rand Paul and Paul Krugman, NGDPLT is 4x closer to Rand Paul.

    And we do ZERO reach out to Rand Paul.

    Meat. In. The. Window.

  7. Gravatar of effem effem
    12. November 2013 at 10:25

    Would much rather you comment on Dalio’s thoughts…

    http://www.zerohedge.com/news/2013-11-10/ray-dalios-bridgewater-feds-dilemma-were-worried-theres-no-gas-left-qe-tank

    Hard to argue that many people understand the economy better than Dalio…he’s been beating the market consistently for a very long time…

  8. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 10:38

    Scott,
    Off Topic.

    Well, apparently I’ve been blocked from making comments at Pragmatic Capitalism. To my knowledge this is only the second time a website has blocked my comments and the first time was at Real Clear Politics during the 2008 election and that was clearly my fault. (At the time I think I said all Republicans were !@#$%^&* or something to that effect.)

    In this particular case I don’t think I did anything except provide my usual level of debate. The post is here.

    http://pragcap.com/scott-sumner-declares-keynesianism-dead/

    The main reason why I bring this up is I wanted someplace to publicly post the following which is a response to a question concerning fiscal balances in Ireland and Finland in 2008 and 2012. One thing this revealed is that Trading Economics has significant errors in its database.

    I have discouraged people from using Trading Economics as resource in the past, not because I thought its data was incorrect, but because 99% of the time either Trading Economics does not provide a full description of the data, or when they do, people fail to read the description and hence fail to realize it is not relevant.

    Now that I have found significant errors I think it’s important to document what I have found so people are aware that Trading Economics is an unreliable source of data. I strongly encourage people to rely on government and international sources of data such as the BEA, the BLS, the OMB, the CBO, FRED, the Census Bureau, the IMF, the World Bank, the OECD, Eurostat, AMECO, etc. and to avoid private sources of data whenever possible. (Socialism!)

    In any case here is the text of my response, which shows where to find these specific errors in the Trading Economics website.

    —————————————————————

    JK,
    “At this point Sadowski should either 1) admit to being mistaken about that, or 2) demonstrate that the evidence I provided is wrong, or not what he meant.”

    As I said in the original comment the data can be found in the IMF Fiscal Monitor. Here’s the October 2013 edition:

    http://www.imf.org/external/pubs/ft/fm/2013/02/pdf/fm1302.pdf

    Now turn to Table 1 on page 69, the one labeled

    “Advanced Economies: General Government Overall Balance and Primary Balance”

    We want overall balance so we’ll stay on the top half of the table.

    Let’s do Ireland first. Its balance was (-7.3%) of GDP in 2008. and (-7.6%) of GDP in 2012. The change in fiscal balance is thus (-0.3%) of GDP.

    Now, let’s do Finland. Its balance was (+4.3%) of GDP in 2008 and (-2.3%) of GDP in 2012. The change in fiscal balance is thus (+6.6%) of GDP.

    If you turn to my original comment on this data:

    http://pragcap.com/scott-sumner-declares-keynesianism-dead/comment-page-1#comment-160495

    You’ll see the figures listed for the change in balance for Ireland and Finland are (-0.3%) and (-6.7%) of GDP.

    Why the tenth of a percent difference for Finland? Because to be technical I downloaded the IMF Excel data file with the precise figures here:

    http://www.imf.org/external/pubs/ft/fm/2013/02/fmindex.htm

    Look on the left hand side and you’ll notice it says “More Resources’ and “Data”. “Data” is a link to an Excel file.

    Now, why are the Trading Economics figures different? Well let’s see if we can figure out why. If I turn to the link for Ireland:

    http://www.tradingeconomics.com/ireland/government-budget

    We see that the balance is (+0.1%) of GDP in 2008 and (-7.6%) of GDP in 2012. So the figure for 2012 is identical to the IMF. Only the 2008 figure is dramatically different.

    Now, let’s do the same for Finland:

    http://www.tradingeconomics.com/finland/government-budget

    It says the balance is (+5.3%) of GDP in 2008 and (-0.8%) of GDP in 2012. But notice that balance figures are similar to the IMF figures but are lagged by a year (that is the figure for 2009 is very similar to the 2008 IMF figure). More on that in minute.

    In both cases Trading Economics says its data comes from Eurostat so let’s see what they say. I’ve bookmarked the data:

    http://appsso.eurostat.ec.europa.eu/nui/show.do?query=BOOKMARK_DS-053864_QID_453728AF_UID_-3F171EB0&layout=TIME,C,X,0;GEO,L,Y,0;UNIT,L,Z,0;SECTOR,L,Z,1;INDIC_NA,L,Z,2;INDICATORS,C,Z,3;&zSelection=DS-053864INDICATORS,OBS_FLAG;DS-053864SECTOR,S13;DS-053864INDIC_NA,EDP_B9;DS-053864UNIT,PC_GDP;&rankName1=SECTOR_1_2_-1_2&rankName2=INDIC-NA_1_2_-1_2&rankName3=INDICATORS_1_2_-1_2&rankName4=UNIT_1_2_-1_2&rankName5=TIME_1_0_0_0&rankName6=GEO_1_2_0_1&sortC=ASC_-1_FIRST&rStp=&cStp=&rDCh=&cDCh=&rDM=true&cDM=true&footnes=false&empty=false&wai=false&time_mode=NONE&time_most_recent=false&lang=EN&cfo=%23%23%23%2C%23%23%23.%23%23%23

    Eurostat says that Ireland’s general government fiscal balance is (-7.4%) of GDP in 2008 and (-8.2%) of GDP in 2012. It says that Finland’s general government fiscal balance is (+4.4%) of GDP in 2008 and (-1.8%) of GDP in 2012. So the figures are very similar to the IMF figures.

    And this brings me back to what I said earlier about the Finnish figures. It appears to be that the Trading Economics numbers are off by one year. Furthermore, what about the huge difference in the Irish fiscal balance for 2008?

    Could it be the data in Trading Economics is for just the central government and not general government? We don’t know because Trading Economics doesn’t say. It’s a possibility but I’ve already checked and according to Eurostat the Irish central government deficit accounts for most of the deficit in 2008.

    So, the bottom line is the Trading Economics figures have a huge error for Ireland in 2008 and are off by a whole year for Finland when compared to the source which they cite which is Eurostat. Furthermore both Eurostat and the IMF show that the Irish fiscal balance barely changed between 2008 and 2012 and the Finnish fiscal balance became much worse between 2008 and 2012.

  9. Gravatar of kebko kebko
    12. November 2013 at 10:58

    In George Will’s recent column against QE, within a couple column inches he managed to claim both that QE created a “wealth effect” among rich stockholders and also that it punished savers.

    Maybe QE stands for Quantum Economics since its failings don’t even confine themselves to the known laws of the Newtonian universe.

    It lowers interest rates, but the effect disappears when you try to observe it.

  10. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 11:16

    kebko,
    “It lowers interest rates, but the effect disappears when you try to observe it.”

    That reminds me of the following post:

    http://pragcap.com/euthanasia-of-the-economy

    The author is Neils Jensen, friend and business partner of John Mauldin. The basic narrative of the post is that QE lowers interest rates and that this will have all sorts of nasty side effects such as causing male-pattern baldness, tooth decay and impotence.

    But Chart 1 is on asset prices and it clearly shows 10-year T-Notes have fallen (yields have gone up) in each QE:

    http://pragcap.com/wp-content/uploads/2013/11/arp1.png

    The cognitive dissonance of anti-QE people must be such that it’s hard for them to keep their heads from exploding.

  11. Gravatar of Aidan Aidan
    12. November 2013 at 11:16

    I especially like how Huszar fails to make the connection between QE1 ending and a 14% drop in the U.S. stock market and renewed weakening in the banking sector.

  12. Gravatar of Morgan Warstler Morgan Warstler
    12. November 2013 at 11:35

    Aidan, I don’t think he’s not making connection.

    I think he’s OK with the 14% drop.

    And as Scott will tell you, under NGDPLT we are too.

    NGDPLT is not QE.

    NGDPLT will be as much a task master to the Govt. Spending as Huzar wishes.

    Huzar gets EXACTLY what he wants, what he says he wants, and what he really wants from NGDPLT, the fact that refuse to tell him, that’s the odd part.

  13. Gravatar of Philippe Philippe
    12. November 2013 at 12:01

    Mark,

    I’ve just had a look at Ireland government budget on Trading Economics. This is what I can make out from the chart, which isn’t very clear as the bars overlap from one year to the next:

    2008: -7.4
    2009: -13.9
    2010: -30.8
    2011: -13.4
    2012: -7.6

    The IMF numbers:

    2008: -7.3
    2009: -13.8
    2010: -30.5
    2011: -13.1
    2012: -7.6

    So not that much difference in the numbers really.

    By the way if you become a member of Tradingeconomics you can export their data to excel. The charts aren’t very clear sometimes, but maybe that’s because they give them out for free?

  14. Gravatar of Philippe Philippe
    12. November 2013 at 12:06

    Mark,

    “The change in fiscal balance is thus (-0.3%) of GDP”

    that ignores the fact that Ireland’s budget balance went from 0.1% surplus in 2007 to 30.5% deficit in 2010, then back to 7.6% in 2012 (according to tradingeconomics). Those seem like pretty big changes to me.

  15. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 12:12

    Philippe,
    “This is what I can make out from the chart, which isn’t very clear as the bars overlap from one year to the next:”

    I beg to differ. The figures are very clearly off by a whole year.

    In my above comment I evidently failed to notice that Trading Economics the Irish fiscal balance listed as (-13.4%) for 2012, not (-7.6%). In fact their figures are off by a whole year just like the Finnish figures. (Just click on the links I provided above and you’ll see.)

    I wonder, do they make the same mistake in their Excel downloads?

  16. Gravatar of OhMy OhMy
    12. November 2013 at 12:16

    “The Fed should not be trying to affect the supply of credit or the price of credit, so I’m glad to hear that it didn’t seem to have those effects. The goal should be to stabilize the growth rate of NGDP”.

    “The actions of the CEO should not effect in more efficiency and better products. The goal should be to grow the company’s stock”.

    It is apparent that you now know that QE has no effect on anything that matters, like credit growth, so apparently it now works through magic, stabilizes NGDP growth without touching incomes and the credit channel. Memo: most production and a lot of consumption are financed with credit. Credit money is more correlated to NGDP than anything else:

    http://www.voxeu.org/article/myth-phoenix-miracle

  17. Gravatar of Philippe Philippe
    12. November 2013 at 12:20

    “The figures are very clearly off by a whole year.”

    I don’t think so, it’s just the presentation which looks odd at first. In the chart each bar starts in one year and ends in the next. For example the bar for year 2007 straddles the 2008 mark, i.e. it starts in 2007 and ends in 2008. So what it’s actually showing is year 2007-08. Make sense?

  18. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 12:20

    Philippe,
    “that ignores the fact that Ireland’s budget balance went from 0.1% surplus in 2007 to 30.5% deficit in 2010, then back to 7.6% in 2012 (according to tradingeconomics). Those seem like pretty big changes to me.”

    Not really. The figure for 2010 represents the nationalization of the debt of Ireland’s too big to fail banks. It was a one year only event representing a simple, if huge, transfer of liabilites.

  19. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 12:25

    Philippe,
    “I don’t think so, it’s just the presentation which looks odd at first. In the chart each bar starts in one year and ends in the next. For example the bar for year 2007 straddles the 2008 mark, i.e. it starts in 2007 and ends in 2008. So what it’s actually showing is year 2007-08. Make sense?”

    No, it makes no sense. The bar dead center above the year 2008 clearly states that there is a surplus of 0.1% of GDP. Moreover that’s how commenter JK interpreted it. That’s how anybody will interpret it. It’s wrong.

  20. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 12:28

    Philippe,
    “By the way if you become a member of Tradingeconomics you can export their data to excel.”

    So let me get this straight. People pay good money for error filled data when they can download the data totally error free and totally free of charge from the very places Trading Economics claims to get its data from? That’s quite a scam they’ve got going there.

  21. Gravatar of Philippe Philippe
    12. November 2013 at 12:30

    Mark,

    30% deficit is huge but you want to ignore it, right. Anyway if you started your analysis in 2007 instead of 2008 you would get a very different result: a change of -7.7% for Ireland, and -7.2% for Finland.

  22. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 12:34

    Philippe,
    “So what it’s actually showing is year 2007-08. Make sense?”

    These are calendar years, not fiscal years.

  23. Gravatar of Philippe Philippe
    12. November 2013 at 12:38

    “The bar dead center above the year 2008 clearly states that there is a surplus of 0.1% of GDP”

    The bar is dead centre above the 2008 mark, which means that the bar is half in 2007 and half in 2008. You can tell this means the bar shows 2007-08 because the data matches up almost exactly with the IMF data if you read the chart in that way.

    Tradingeconomics offer other things to members, not just downloadable data. I’m not a member by the way.

  24. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 12:39

    Philippe,
    “Anyway if you started your analysis in 2007 instead of 2008 you would get a very different result: a change of -7.7% for Ireland, and -7.2% for Finland.”

    I chose 2008 as the base year intentionally to take into account Roche’s claim that corporate profits didn’t fall in the US after 2008 due to fiscal policy. I chose 2012 as the final year in order to capture as much of the effect of fiscal consolidation as possible. This meant there was a set of 16 nations to work with.

  25. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 12:43

    Philippe,
    “The bar is dead centre above the 2008 mark, which means that the bar is half in 2007 and half in 2008. You can tell this means the bar shows 2007-08 because the data matches up almost exactly with the IMF data if you read the chart in that way.”

    THESE ARE NOT FISCAL YEARS.

    They are calendar years. The IMF clearly labels these observations under their respective years. Trading Econcomics has all of the years off by a year. It’s wrong.

  26. Gravatar of rbl rbl
    12. November 2013 at 12:49

    Morgan,
    How do you figure that Rand Paul, who has at least flirted with a gold standard and warns about the dangers of inflation in the immediate future, is much closer to NGDPLT than Krugman, who wants the Fed to do more monetary expansion, since AD is below where it should be? Rules-based automatic monetary policy based on an NGDP futures market is still government macroeconomic stabilization policy, and that’s anathema to a certain portion of the GOP base.

  27. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 12:54

    Cullen has a response:

    http://pragcap.com/scott-sumner-declares-keynesianism-dead/comment-page-1#comment-160666

    “Senor Sadowski,

    I see you’re very upset over at Scott Sumners and complaining about “cognitive dissonance” of those who disagree with you. A recommendation:

    before accusing others of cognitive dissonance consider the fact that you are essentially defending a very small fringe belief set (Market Monetarism) that adheres to an extremely narrow set of policy proposals and rejects almost all other schools of economics or policy. This is in addition to rejecting banking, accounting and many of the core principles that account for a basic understanding of economics and finance.

    If there is a definition for “cogniitive dissonance” (most of) the followers of Market Monetarism certainly apply. David Beckworth and Nick Rowe appear at least somewhat open-minded unlike many of the regulars at Sumner’s site. And unlike you, I am willing to be open-minded about the efficacy of monetary policy and QE. You, on the other hand, are being extremely narrow minded in your views. That’s fine, but you should at least make yourself aware of this because it is painfully obvious to everyone who reads your views. If you want to engage people and be taken seriously then you have to be more willing to accept the fact that you haven’t wandered upon some economic holy grail in Market Monetarism. Unless of course, you’re interested in economic religions and the idea that faith is somehow a part of economics. Which I guess is probably a necessary part of Market Monetarism since its entirely unproven and has no foundation in any stylized fact at all.

    Take care,

    Cullen”

  28. Gravatar of Philippe Philippe
    12. November 2013 at 13:05

    “Trading Econcomics has all of the years off by a year. It’s wrong.”

    Ok. On the chart the 2008 mark shows the beginning of 2008, the 2009 mark shows the beginning of 2009, etc. If the Ireland budget deficit for 2008 was 7.4%, that doesn’t mean it was 7.4% right at the beginning of the year, does it? If you look at the line version of the chart, the line hits the budget figure for that year at the very end of that year. I’ve often found the Tradingeconomics charts are not very clear and are very basic, but the data isn’t wrong as you said, it’s just not presented very well.

  29. Gravatar of Geoff Geoff
    12. November 2013 at 13:08

    “The Fed should not be trying to affect the supply of credit or the price of credit, so I’m glad to hear that it didn’t seem to have those effects. The goal should be to stabilize the growth rate of NGDP.”

    Those two are not unrelated. Changing the one implies changing the other, in our credit expansion based monetary system.

  30. Gravatar of Philippe Philippe
    12. November 2013 at 13:08

    (I think they have very basic standardised charts as freebies, and then better charts for subscribers)

  31. Gravatar of Geoff Geoff
    12. November 2013 at 13:10

    “In my view there is only one expert—the market.”

    This is a lie, because you want non-market “experts” not only in charge of money, but in charge of various forms of “social welfare” as well.

  32. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 13:12

    Philippe,
    If you have to fiddle with the presentation of the Trading Economics data before it’s accurate then it’s wrong. Period.

  33. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 13:15

    The interesting thing about this is Cullen Roche is claiming to be open minded and yet he blocks me from commenting despite telling me several times in that very post that “you are a very nice person but…”

    What’s galling is:
    1) He accused me several times of making basic errors. I’ve never been accused of that by any blog host, ever. I guess this means Cullen Roche is genius above all the rest.
    2) His accolytes accused me of posting erroneous data when it’s obvious that it is they who posted error filled data.

    What does one call a group that shuts down debate in order to maintain ideological purity? A religious cult.

  34. Gravatar of Philippe Philippe
    12. November 2013 at 13:21

    I’m not fiddling with it, just pointing out that the data is almost exactly the same as the IMF data if you just take into account that tradingeconomics charts are very very basic and thus crappy. They use exactly the same template charts for all sorts of data. All you have to do is realize that, realize that the bars start in the year that they are referring to, and then you can see that the data matches up with the IMF data almost exactly.

  35. Gravatar of Philippe Philippe
    12. November 2013 at 13:23

    I think you can generally use the tradingeconomics charts to get a basic general view, but not to do detailed analysis.

  36. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 13:27

    Philippe,
    “If you look at the line version of the chart, the line hits the budget figure for that year at the very end of that year. I’ve often found the Tradingeconomics charts are not very clear and are very basic, but the data isn’t wrong as you said, it’s just not presented very well.”

    If you convert the Trading Economics presentation of the Irish fiscal balance to a line chart it plots lines between data points representing the fiscal balances for the calendar years. It still shows that the budget was more or less balanced in calendar year 2008 which is false. Ireland had a deficit of over 7% of GDP in 2008. The data is quite simply wrong.

    There is no way to make Trading Economics show the correct data because it is off by a year.

  37. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 13:29

    Philippe,
    “I think you can generally use the tradingeconomics charts to get a basic general view, but not to do detailed analysis.”

    I don’t think anyone should use Trading Economics data because it is wrong.

  38. Gravatar of Philippe Philippe
    12. November 2013 at 13:37

    “It still shows that the budget was more or less balanced in calendar year 2008″

    On the chart the 2008 mark shows the beginning of the year 2008. At the beginning of 2008 the line is at 0.1, but then it slopes downwards throughout 2008, reaching the -7.4 figure (the budget deficit for 2008) at the end of 2008.

  39. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 13:45

    Phillipe,
    Why would you put the data point for 2008 over the year 2009? It’s ludicrous.

  40. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 13:47

    http://pragcap.com/scott-sumner-declares-keynesianism-dead/comment-page-1#comment-160666

    Cullen Roche:
    “Actually, I regularly write blog posts about how I get things wrong. If you were even remotely familiar with my work (which you’ve refused to read) you’d know that. It’s you who has refused to ever admit being wrong even though you’ve now been caught in more than a handful of basic accounting errors. I would add that you’ve probably never been called out for these errors because you tend to hang out on blogs by economists who reject accounting. So why would this even surprise you?

    Mark, if you want to engage me then engage me on the merits at hand and not on the points you created out of thin air because you weren’t familiar with my work. Otherwise, there’s really no point complaining in internet comments sections about how I’ve treated you unfairly when in fact, it is you who has been responding in an unfair manner.”

    The interesting thing is I have read some of his work.

    More importantly though is the fact that evidently the first time he was ever exposed to a mainstream text on the Monetary Transmission Mechanism was when I posted materials related to Mishkin’s number one selling intermediate textbook on money, banking and finance.

    And yet he’s the one who’s open-minded and has mainstream views on economics and banking? And that’s why he blocks people he’s terrified of debating on his blog?

  41. Gravatar of Philippe Philippe
    12. November 2013 at 13:50

    it shows the data point for 2008 at the very end of 2008 and the very beginning of 2009. That might be ludicrous, but then showing the data point for 2009 at the very beginning of 2009 (January 1st) would also be ludicrous.

  42. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 13:59

    Philippe,
    Here’s a line graph for annual NGDP for the US in 2007-2009:

    http://research.stlouisfed.org/fred2/graph/?graph_id=145582&category_id=0

    NGDP was $14,720.3 billion dollars in 2008. FRED puts the data point over the year 2008. It does *not* show the data point for 2008 “at the very end of 2008 and the very beginning of 2009″.

    FRED is hardly unique. Nobody makes line graphs so the data point is over the following year.

  43. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 14:21

    http://pragcap.com/scott-sumner-declares-keynesianism-dead/comment-page-1#comment-160673

    Cullen Roche:
    “The accounting error he made with regards to dividends was just icing on the cake in a series of misleading, misconstrued points he was trying to make. When I informed him that he was wrong he just continued to press the same points as if he hadn’t even read what I wrote.”

    This refers back to earlier in the post. The thread starts here:

    http://pragcap.com/scott-sumner-declares-keynesianism-dead/comment-page-1#comment-160528

    He claimed I made an accounting error. I pointed out I was using James Montier’s methods which in an earlier post he had said (which I quote and link to there):

    “…it turns out that Montier has done all the heavy lifting for me. And he’s done it from the exact same approach I was describing.”

    Nevertheless he claimed that this was wrong (because it’s NIPA?) So I asked him what measure of profit he was using and he responded:

    “Mark, you have to sort this stuff out on your own. If you don’t understand it then you need to do more research. I am generally happy to help people better understand my positions and the foundations of my thinking, but you’re not here to learn. You’re here to use my understandings against me and at times, you’ve egregiously misrepresented those positions. While you seem like a nice guy it’s also clear that you don’t support anything I write and only comment here when you are trying to tear something apart. That’s fine. I am all for alternative perspectives and productive debate. But don’t expect me to arm you with knowledge that might help you in the pursuit or arguing against me.”

    So I’m wrong but it’s a secret why I’m wrong because to reveal why I’m wrong would reduce his power to lord over people the fact that he has superior secret knowledge.

    That smells very much like a religious cult to me.

  44. Gravatar of Philippe Philippe
    12. November 2013 at 14:23

    I just noticed that if you set the tradingeconomics chart to show only one year, you can see what the data point for that year is without any of the potential confusion of the longer period chart. For example if you set the Ireland government budget chart to show only 2008 – 2009, it shows the deficit for 2008 to be 7.4%.

  45. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 14:29

    Philippe,
    So it shows the data incorrectly unless you know ahead of time to set it it only one year? Terrific.

  46. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 14:34

    http://pragcap.com/scott-sumner-declares-keynesianism-dead/comment-page-1#comment-160678

    Cullen Roche
    “Yes, this is a big scary cult over here. You better avoid us at all cost for fear of being exposed to something that’s outside of your comfort zone….”

    I’m not trying to avoid you. You blocked me from commenting at Pragmatic Capitalism.

  47. Gravatar of Philippe Philippe
    12. November 2013 at 14:38

    I think it has to do with the frequency of the data. If there’s only one data point for the whole year you get this unusual presentation. If there is monthly data then it’s much clearer.

  48. Gravatar of paul Einzig paul Einzig
    12. November 2013 at 14:47

    ” In my view there is only one expert—the market.”

    Scott, I know you like movies, and in reading your final thought I was reminded of something I read in college.

    A hollywood mogul said ” Individual theatre goers may be idiots, but the audience is a genius! ”

    Looking forward to your movie comments over the holidays

  49. Gravatar of ssumner ssumner
    12. November 2013 at 14:49

    Jeffrey, Common sense? Why didn’t I think of that? You’ve convinced me.

    No I don’t have the gall to challenge a great man like El Erian. I was just meekly asking for his qualifications. Nevermind.

    Mark, So El Erian thinks Fed policy causes inflation in Brazil? Their inflation rate averaged 80% per year between 1960 and 1990. I wonder if that was the Fed too? China doesn’t even have high inflation.

    And I see that Roche thinks I don’t believe in “accounting” or “countercyclical policy” I wonder where he gets these interesting ideas?

    MG, The Fed is part of the government, so there’s no risk to doing QE.

    effem, You said:

    “Hard to argue that many people understand the economy better than Dalio…he’s been beating the market consistently for a very long time…”

    And what does “beating the market” have to doing with understanding the economy?

    kebko, Will is a great columnist, but he’s certainly not a monetary economist.

    Morgan, Of course if we do NGDPLT the market wouldn’t drop 14% on the announcement (it might later drop for other reasons.)

    OhMy, You said:

    “Credit money is more correlated to NGDP than anything else”

    And your point is?

    Here’s a variable even more closely correlated: NGDP minus the toaster industry. NGDP minus toasters is really, really closely correlated with NGDP.

  50. Gravatar of ssumner ssumner
    12. November 2013 at 14:52

    Paul, That’s a good line.

  51. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 14:59

    Scott,
    Here’s one more choice Cullen quote:
    “I don’t pay thousands of dollars a year to host sites where people put words in my mouth and then declare that I am wrong.”

    Scott, how many thousands of dollars a year do you pay to host this site? I’m just curious. (sarcasm)

  52. Gravatar of Geoff Geoff
    12. November 2013 at 15:09

    ““Credit money is more correlated to NGDP than anything else”

    “And your point is?”

    “Here’s a variable even more closely correlated: NGDP minus the toaster industry. NGDP minus toasters is really, really closely correlated with NGDP.”

    Except the toaster industry doesn’t output that which NGDP is composed.

    Credit money is.

    Bad attempt at scoffing. Try harder.

  53. Gravatar of Philippe Philippe
    12. November 2013 at 15:48

    “I don’t ban people. They become counterproductive commenters thereby banning themselves. People who get banned are just trolling and serving some ulterior motive… And the idea that you think that’s okay or that I am the bad guy because I banned you, is just another misleading view.”

    He doesn’t ban people except when he bans people because they argue with him.

  54. Gravatar of Philippe Philippe
    12. November 2013 at 15:51

    Mark, do you think that Kalecki’s profit equation is wrong, or were you making a slightly different point?

  55. Gravatar of Mike Sax Mike Sax
    12. November 2013 at 16:24

    Regarding Cullen I must say I don’t like the idea of banning people. While Scott probably would be glad if I didn’t comment at his blog again he has never gone this route-he has never banned anyone, not even Major Freedom.

    While I like Cullen I don’t like that move. I think it’s better to engage even ideas you think are wrong.

    I’ve actually been banned from a number of places-and they were all allegedly liberal blogs.

    http://diaryofarepublicanhater.blogspot.com/2011/08/banned-from-big-liberal-blogsophere.html

    Actually my biggest complaint with Cullen is that this post of his was clearly borrowed from me-at least the title was.

    http://diaryofarepublicanhater.blogspot.com/2013/11/there-sumner-goes-again-announcing-that.html

    http://diaryofarepublicanhater.blogspot.com/2013/11/sumner-is-at-it-again-after-latest-job.html

    I don’t get it. I have no problem with Cullen or other post Keynesians using my ideas-indeed I’m flattered by it. However, cmon, Cullen-would it have been too much to admit that you got this idea from reading about it on Mike Norman-who had linked to my post there?

    http://diaryofarepublicanhater.blogspot.com/2013/11/now-were-talking-mike-norman-and-walter.html

    Randall Wray did the same thing last week-though it was inadvertant and he corrected it by linking to me when it was pointed out to him.

    http://diaryofarepublicanhater.blogspot.com/2013/11/ok-i-love-randall-wray-again.html

    Listen, I love you guys. I have no problem being a major public resournce for the post Keynesian blogs-just admit where you got the stuff ok? I mean I’ve been writing about Sumner for ages. Now you’re finally getting it that’s great. still, attribution is the right thing to do. c’mon.

  56. Gravatar of CA CA
    12. November 2013 at 16:26

    Cullen isn’t the most ingratiating individual is he.

  57. Gravatar of Mike Sax Mike Sax
    12. November 2013 at 16:29

    Here’s the irony. In the above comment I praised you Scott for not censuring anyone. Yet I notice that last comment of mine is actually not been posted but is ‘awaiting moderation’-I ddin’t speak to soon did I?

  58. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 16:32

    Philippe,
    Kalecki’s profit equation is an accounting identity, so it’s not “wrong”, and like all accounting identities it can be useful.

    What I object to is the way Cullen Roche uses Kalecki’s profit equation to infer causation. To figure out causality you need a lot more than just accounting identities.

    My basic point was that, when one looks at the international evidence, there is no evidence of a positive relationship between changes in fiscal deficits as a percent of GDP and after-tax profits as a percent of GDP. Furthermore there is no evidence of a positive relationship between changes in after tax profits as a percent of GDP and real GDP growth.

    Cullen implicitly makes both of these claims.

    In particular, between 2008 and 2012, Ireland, Italy, Portugal and the US all had a smaller than average decrease in the fiscal balance and a larger than average increase in the corporate profit margin. Denmark, Ireland, Italy, Portugal and Spain all had a larger than average increase in the corporate profit margin and a smaller than average increase in RGDP.

    In other words, Euro Area periphery countries are overepresented among countries that have had tight fiscal policy, above average profit growth, and poor economic growth. The basic story is corporate profits in many of these countries have come at the expense of labor compensation with almost nothing to make up for it.

    This is not the impression Cullen wants to portray, hence that is why he found what I was saying to be so objectionable.

    My general impression of Monetary Realism is that it is weird blend of fiscalist-commercial-banking-centric-corporatism with Republican leanings. In short it is a sort of right-wing MMT, which in my opinion makes it the worst of both worlds.

    And to crown it all off, MR is led by a small-brained hyper-aggressive power hungry egoist who welcomes comments provided you agree with everything he says and lather him with praise.

  59. Gravatar of Iván Iván
    12. November 2013 at 16:37

    Scott, you claim that: “Interest rates are set in the free market.”

    Is that true?

    From the definition by the Federal Reserva Bank of St. Louis: “negotiations is called the effective federal funds rate.(2) The effective federal funds rate is essentially determined by the market but is influenced by the Federal Reserve through open market operations to reach the federal funds rate target.(2)”

  60. Gravatar of Iván Iván
    12. November 2013 at 16:39

    Link here: http://research.stlouisfed.org/fred2/series/FEDFUNDS/downloaddata?cid=118

  61. Gravatar of LVG LVG
    12. November 2013 at 16:44

    Sadowski, you misrepresented Cullen Roche’s position on multiple occasions even after he corrected you and you acknowledged it. You can’t just spread lies on other people’s websites and then run off screaming like a child and complain that he banned you for no reason.

  62. Gravatar of Geoff Geoff
    12. November 2013 at 16:44

    Mike Sax, please quit being a drama queen.

  63. Gravatar of Philippe Philippe
    12. November 2013 at 17:01

    hehe. no comment ;)

    “The basic story is corporate profits in many of these countries have come at the expense of labor compensation with almost nothing to make up for it”

    That makes sense. Where do you get the profits data from?

  64. Gravatar of Cullen Roche Cullen Roche
    12. November 2013 at 17:10

    “Cullen implicitly makes both of these claims.”

    I actually wrote, in huge bold letters, that I didn’t make this claim. The only reason I banned you was because I explained to you, 3 or 4 times, that I never made these claims. When you continued to press the point I banned you because you weren’t arguing in good faith. Now you’ve come here to spread the myth that I claim fiscal deficits always correlate with RGDP. I never made any such claim yet here you are calling me names and getting upset with me when it’s obvious that you’ve misrepresented my position from the start.

    Anyhow, you’ve now made it abundantly clear that banning you was the right decision as you continue to spread outright lies about my position and have nothing to resort to but personal attacks. Thanks for confirming my thoughts.

  65. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 17:14

    Philippe,
    Coming up with corporate profit figures for other nations that are equivalent to the measure used by the Montier version of the Kalecki profit equation, that is corporate profits after tax (CPATAX), was not an easy matter. The rest of the planet uses the System of National Accounts (SNA), whereas the US uses the National Income and Product Accounts (NIPA). The closest equivalent measure can be computed by adding gross disposable income to the non-interest net-distributed income of corporations and subtracting consumption of fixed capital for both the non-financial and financial corporate sectors and then summing the results together. The only real difference between my estimates and the US data is that government enterprises and partnerships are part of the corporate sector under the SNA.

    This data is available for 27 nations via Eurostat and four nations via the OECD. In addition Eurostat has such data for the 17 nation Euro Area as a whole. I have been able to come with annual estimates for 31 nations and the Euro Area as a whole, and quarterly estimates for 13 nations and the Euro Area as a whole.

  66. Gravatar of Mike Sax Mike Sax
    12. November 2013 at 17:35

    Mark and Cullen, you’ll be happy to know that I looked this skirmish between you and have gotten to the bottom of the problem. I don’t want to spoil the ending here however.

    Mark Sadowski vs. Cullen Roche on fiscal policy http://diaryofarepublicanhater.blogspot.com/2013/11/cullen-roche-takes-on-mark-sadowski.html

  67. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 17:41

    Cullen Roche:
    “I actually wrote, in huge bold letters, that I didn’t make this claim.”

    At the beginning of Cullen’s post he says:

    http://pragcap.com/scott-sumner-declares-keynesianism-dead

    “[Snark on] Bad news Keynesians – you’ve been declared dead by Scott Sumner. And that means counter-cyclical policy of any type doesn’t work. Yes, it’s true. Just look at the evidence:

    By accounting identity, the government deficit has contributed enormously to corporate profits in recent years, but there’s no way that increased corporate profits help the economy…”

    [Snark on] Bad news Monetarists – you’ve been declared a fringe belief by Cullen Roche. And that means counter-cyclical monetary policy doesn’t work. Yes, it’s true. Just look at the evidence:

    By accounting identity the Finnish government deficit has contributed enormously to corporate profits, and there’s no way increased corporate profits haven’t helped the Irish economy…

  68. Gravatar of Cullen Roche Cullen Roche
    12. November 2013 at 17:52

    Sigh. Mark, we’ve been over this. I corrected you in the comments stating clearly that I was referring ONLY to the USA. You said “why didn’t you say that several comments ago” in a clear acknowledgement of that point. Yet you continued to press the point even after that and after several more clarifications from me. And here you are still continuing to press the myth that I claim fiscal deficits = RGDP.

    What does it take for you to process the fact that you’re blatantly misconstruing my point? I feel like I am taking crazy pills…. Am I writing in Chinese? Is that it?

    I am sorry the post wasn’t crystal clear and that you spent a lot of time running a regression proving a point that no one was disputing. But it’s water under the bridge. Time to move on.

    Anyhow, this has all gotten pretty silly and blown out of proportion. Have a good one.

    Oh, by the way, I am hyper-aggressive and small brained, but I am not an egoist or power hungry. Just so we’re clear.

    :-)

  69. Gravatar of Mike Sax Mike Sax
    12. November 2013 at 18:27

    ” Bad news Monetarists – you’ve been declared a fringe belief by Cullen Roche. And that means counter-cyclical monetary policy”

    So to me that’s a problematic statement. Most Keynesians don’t claim that counter cyclical monetary policy can’t work or certainly are not dogmatically opposed to trying it.

    MMers on the other hand are the ones who are dogmatically against trying fiscal policy as part of countercylcial policy effort. I have no trouble with doing both monetary and fiscal policy.

    For the record at least some Monetarists agree with me

    http://diaryofarepublicanhater.blogspot.com/2013/10/scott-sumner-vs-david-glasner-on-fiscal.html

  70. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 18:32

    Cullen Roche,
    “Sigh. Mark, we’ve been over this. I corrected you in the comments stating clearly that I was referring ONLY to the USA. You said “why didn’t you say that several comments ago” in a clear acknowledgement of that point.”

    You know Cullen, when you lie it easy to confirm (at least for now). That conversation is in response to this comment:

    http://pragcap.com/scott-sumner-declares-keynesianism-dead/comment-page-1#comment-160494

    What I said was specifically in reference to Japan. You said:

    “In order to really understand the credit crisis and why we didn’t turn into Greece or Japan, it’s helpful to look at the components of corporate profits and why the business sector didn’t crater after 2008.”

    At first you denied ever saying any such thing. After I quoted you *again* you said it was not the same as saying Japanese corporate profits are going to decline. When I pointed out there really isn’t any other interpretation, you then came up with this cock-and-bull story that it was really about Japan from 1990-95, and that if I had more consistently read your posts I would have known this.

    And so *that* is when I said “why didn’t you say that several comments ago”, when all you needed to do was read my initial comment, as it was crystal clear that I was talking about Japan post-2008. Instead you chose to be a real dick about it and morph your argument several gazillion times.

    And to be clear, nothing rubs me the the wrong way more than liars. And you are truly gifted at crafting slick as axle grease lies, even when you lie about lying.

    Cullen Roche:
    “Yet you continued to press the point even after that and after several more clarifications from me. And here you are still continuing to press the myth that I claim fiscal deficits = RGDP.”

    Dude, read your own post.

    Cullen Roche:
    “Oh, by the way, I am hyper-aggressive and small brained, but I am not an egoist or power hungry.”

    You’re half right.

  71. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 18:36

    LVG,
    “Sadowski, you misrepresented Cullen Roche’s position on multiple occasions even after he corrected you and you acknowledged it.”

    Prove it. Quote me. Link to it. Because that is a bald faced lie.

    “You can’t just spread lies on other people’s websites and then run off screaming like a child and complain that he banned you for no reason.”

    Says someone who just lied. Unbelieveable.

  72. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 18:41

    Mike Sax,
    “So to me that’s a problematic statement.”

    The problematic statement is the one that implied Scott thinks counter-cyclical policy of *any type* doesn’t work.

  73. Gravatar of Benjamin Cole Benjamin Cole
    12. November 2013 at 18:42

    “And the impact? Even by the Fed’s sunniest calculations, aggressive QE over five years has generated only a few percentage points of U.S. growth.”—Andrew Huszar, anti-QE author.

    1. This is called shooting off your own nuts in before making love.

    “only a few percentage points?” Oh, gee, is that all? Is Huszar aware that US GDP is growing in very low single digits, as in 2 percent?

    2. Other statements Huszar makes are dumbfounding. QE costs taxpayers money? You mean when the Fed transfers hundreds of billions of dollars to the Treasury? Or when it wipes out trillions in US debt through QE (which, it looks, could be a permanent action). Or, when QE stimulates growth, thus reducing federal social welfare outlays?

    3. Banks are making big money on the spread between borrowing and lending, somehow thanks to QE–Huszar. This calls for more competition perhaps. Fat spreads should induce capital into the banking sector.

    4. The Fed spent more than $4 trillion.–Huszar. Actually, the Fed printed $4 trillion and then spent it. The taxpayers did not have to come up with the dough.

    Huszar is another example why central banking cannot anymore be left in the hands of central bankers. They simply do not like to aggressively use the tools they have to stimulate the economy. Central bank culture has become obstructionist.

    First we heard that QE was hyper-inflationary, then inert. Now we hear QE boosts bank profits and “only” boosts GDP by a “few” percentage points.

    What next?

  74. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 18:50

    “What next?”

    I read at Pragmatic Capitalism that QE makes your penis fall off.

  75. Gravatar of Cullen Roche Cullen Roche
    12. November 2013 at 18:52

    Mark, try to stop insulting people and getting all angry. It’s just the internet.

    Mike, I wholeheartedly agree. We should be looking for places where we can agree. I don’t think these attempts to squash one another are productive. The truth, as is usually the case, lies in the middle. No one has all the answers and any attempt to argue that monetary policy or fiscal policy is useless, is likely to be filled with misleading assumptions (and, as we’ve seen, outright misrepresentations). No one’s “putting nails” in anything and really shouldn’t even bother trying.

    I’ve found David Beckworth and Nick Rowe particularly agreeable here and we’ve agreed that NGDP targeting with tax cuts would be a good approach going forward. I am totally in for that. But what I don’t agree with is this subset of MM believers who seem totally against trying fiscal policy of any kind or argue emotionally and at times dishonestly, about its efficacy.

    In my opinion, it’s better to have a tool and not need it than to need it and not have it. These extremist positions argued by some people are counterproductive and don’t push the policy discussion forward. I am all for acknowledging that monetary policy can and does work if implemented correctly.

  76. Gravatar of Philo Philo
    12. November 2013 at 18:56

    [Off the Sadowski-Roche topic:]

    “The Fed should not be trying to affect the supply of credit or the price of credit, so I’m glad to hear that it didn’t seem to have those effects.” Don’t you mean you don’t care whether or not it had those effects?

  77. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 19:05

    Fiscal policy can never make up for bad monetary policy. Japan has proven that.

  78. Gravatar of LVG LVG
    12. November 2013 at 19:32

    “Fiscal policy can never make up for bad monetary policy. Japan has proven that.”

    One data point in a sea of millions of random data points gives you the confidence to make such a bold and ideological statement?

    Between this comment and your childish insult laced rants above you’ve pretty well proven what kind of thinker you are.

    “It takes 20 years to build a reputation and five minutes to ruin it.”

  79. Gravatar of Mike Sax Mike Sax
    12. November 2013 at 19:38

    Cullen David Glasner-whom I linked to above is also excellent. Who’s one of the few Neoclassical economists with any sense of the history of ideas-that includes Krugman as well who freely admits to not knowing much about this history and not thinking it matters very much

  80. Gravatar of Mark A. Sadowski Mark A. Sadowski
    12. November 2013 at 19:57

    LVG,
    “One data point in a sea of millions of random data points gives you the confidence to make such a bold and ideological statement?”

    And statements that accounting identities prove government deficits contribute enormously to corporate profits, and that increased corporate profits always help the economy aren’t ideological? That’s quite a bubble you live in.

    By the way, your reputation as a liar is well established.

    Any proof, as in quotes with links for your earlier lies about what I’ve said?

  81. Gravatar of CA CA
    12. November 2013 at 20:00

    The title of Mike Sax’ blog is “Diary of a Republican Hater,” and he wants to be taken seriously as an arbiter of truth??? Bwahahahaha!!!

  82. Gravatar of paul Einzig paul Einzig
    12. November 2013 at 20:03

    Scott,

    You say: Fed does pay 0.25% interest on reserves. And they should not do so.

    I understand that you are not a fan of IOR, and in NY fed staff report 380 your Delong commentary is cited as proposing Tax on ER. In 2008 that may have been the way to go….but, according to that same report now that 4 trillion dollars of ER have been created , keeping this liquidity corralled by means of IOR is the only option.

    Have I got this wrong?

  83. Gravatar of lxdr1f7 lxdr1f7
    12. November 2013 at 21:00

    “The Fed should not be trying to affect the supply of credit or the price of credit, so I’m glad to hear that it didn’t seem to have those effects. The goal should be to stabilize the growth rate of NGDP.”

    If the fed affects credit it affects NGDP right? Credit markets affect gdp and gdp also affect credit markets.

  84. Gravatar of Benjamin Cole Benjamin Cole
    12. November 2013 at 21:53

    Mark Sadowski–

    Well, you gave me a great laugh with that one. Thanks.

    So Huszar does not have to shoot himself in the balls after all—QE will do it for him.

  85. Gravatar of OhMy OhMy
    13. November 2013 at 04:09

    SS,

    “Here’s a variable even more closely correlated: NGDP minus the toaster industry. NGDP minus toasters is really, really closely correlated with NGDP.”

    Thank you for proving my point.

    Yes indeed, if you have no handle on NGDP minus toasters you have no handle on NGDP. So saying “so what that my variable has no bearing on NGDP minus toasters, I am only interested in NGDP!” makes zero sense.

  86. Gravatar of Brian Donohue Brian Donohue
    13. November 2013 at 04:33

    Wow. Reality TV- Ivory Tower Edition.

  87. Gravatar of Mark A. Sadowski Mark A. Sadowski
    13. November 2013 at 05:23

    http://www.businessinsider.com/heres-why-that-story-about-the-fed-guy-apologizing-for-qe-is-total-nonsense-2013-11#ixzz2kSIDyJ6M

    November 12, 2013

    Here’s Why That Story About The Fed Guy Apologizing For QE Is Total Nonsense
    By Jow Weisenthal

    “The big story today is that a former Fed employee involved in operating the QE program has published an “apology” saying that the program did nothing for the economy, and that it was just a big bailout for Wall Street.

    The argument is silly.

    First of all, the author, Andrew Huszar is not an economist or anyone who helped design the program. He was just brought in to be a trader.

    More importantly, his argument doesn’t stand up and that can be established in a few charts…”

  88. Gravatar of QE: A view from the trenches « Economics Info QE: A view from the trenches « Economics Info
    13. November 2013 at 06:00

    [...] Source [...]

  89. Gravatar of ssumner ssumner
    13. November 2013 at 06:05

    Mike Sax, You said;

    “Here’s the irony. In the above comment I praised you Scott for not censuring anyone. Yet I notice that last comment of mine is actually not been posted but is ‘awaiting moderation’-I ddin’t speak to soon did I?”

    More evidence that you are a complete moron.

    Ivan, Yes, Fed policy influences interest rates, and it influences lots of other variables like the price of apples. Does that mean apple prices are not set in a free market?

    Cullen. For someone who is sensitive about being mischaracterized you are remarkably sloppy about mischaracterizing my views.

    Philo, yes.

    Paul, No, a better option would be to prevent hyperinflation by reducing the base.

    lxdr, If the Fed affects apple prices it affects NGDP. But they shouldn’t be targeting apple prices.

    OhMy, I plead being not interested in NGDP minus toaster prices. Yes, credit usually goes along for the ride, as do all other nominal variables–but no reason to focus on credit.

  90. Gravatar of lxdr1f7 lxdr1f7
    13. November 2013 at 06:46

    ssumners

    If the transmision mechanism doesnt matter why do you advocate ndgp futures targeting? Is that not a transmision mechanism?

  91. Gravatar of lxdr1f7 lxdr1f7
    13. November 2013 at 07:03

    “lxdr, If the Fed affects apple prices it affects NGDP. But they shouldn’t be targeting apple prices.”

    Isnt that like saying if the fed targets ngpd futures it affects ngdp but they shouldnt be targeting ngdp futures? The credit markets are the means by which ngdp is affected just like affecting base through ngdp futures.

  92. Gravatar of Do Fed critics really think the US economy would be stronger with tighter monetary policy? | AEIdeas Do Fed critics really think the US economy would be stronger with tighter monetary policy? | AEIdeas
    13. November 2013 at 08:03

    [...] What does Warsh make of this observation by Scott Sumner: “In 2009 and 2010 the eurozone and the US had almost identical unemployment rates (close to [...]

  93. Gravatar of Morgan Warstler Morgan Warstler
    13. November 2013 at 15:26

    Saxie, if you put in too many links, Scott’s spam settings, which I’m not sure he even knows about go off.

    Sadowski and Cullen, at least we all agree that GI / CYB is the best possible unemployment policy ever crafted for today’s economy, right?

    Let GiI / CYB solve unemployment.

    Let NGDPLT keep the economy on s steady boring track and shrink the government.

    We all agree!

  94. Gravatar of Cthorm Cthorm
    13. November 2013 at 15:45

    Kudos Scott. Kudos.

    A former IMF official I might add.

  95. Gravatar of Mike Sax Mike Sax
    13. November 2013 at 16:16

    “More evidence that you are a complete moron.”

    Scott you’re a classy guy. I give you a compliment and that’s what you come up with. Is that what your advanced Marco degree taught you?

  96. Gravatar of Mike Sax Mike Sax
    13. November 2013 at 17:04

    I should also credit you with never worrying about sounding like a pompous jerk. Cause that’s exactly how you sound and I’m far from the only one who notices this.

  97. Gravatar of ssumner ssumner
    13. November 2013 at 19:44

    Mike, Some day you’ll learn that when you insult other people, they will respond in kind. Perhaps you never learned that in grade school.

  98. Gravatar of dtoh dtoh
    14. November 2013 at 00:10

    Two things.

    1. Mark is wrong when he says Huszar is a trader not an economist. Huszar is not even a trader, he’s just an order execution clerk.

    2. Keep the model simple.

    Target – NGDPLT
    Tools – IOR and OMO
    Mechanism – Expectations and Asset Prices (or HPE if you want to be stubborn and unconvincing)

    When the Fed uses one tool (IOR) to offset the other tool (OMO aka QE), then it is not at all surprising that the effect is dulled. No need for a long post to explain it.

  99. Gravatar of effem effem
    14. November 2013 at 08:34

    “And what does “beating the market” have to doing with understanding the economy?”

    I should clarify…I would argue that there are three basic ways to “beat the market.”
    1) Identify some form of inefficiency and exploit it. I would argue this accounts for the vast majority of those who “beat the market.”
    2) Wait for “fat pitches” that the market periodically generates (e.g., all those who were able to cheaply buy asymmetric downside bets on subprime).
    3) Understand gyrations in the economy better than the market itself and make money over and underweighting various asset classes accordingly. If you can do this across multiple asset classes (stocks, bonds, FX) and across the business cycles it’s all the more impressive.

    Ray Dalio (Bridgewater Associates) may be the only investor I can think of that has accomplished #3. It’s as though he knows the economic future (around the world, and across asset classes) better than anyone. I would argue if you can do that, you understand the “machine” extraordinarily well (i.e., you are using the correct models) and are therefore uniquely positioned to diagnose it.

  100. Gravatar of ssumner ssumner
    15. November 2013 at 12:33

    effem, OK, but you won’t be surprised to hear that I doubt he actually knows the future of the economy. Even in a world where no one knows the future, some investors will have Dalio-like success.

  101. Gravatar of maynardGkeynes maynardGkeynes
    16. November 2013 at 07:53

    FWIW, speaking as a fairly devoted follower of this outstanding blog, I do not find the tone of much of the commentary in this thread terribly edifying. Just one person’s reaction….

  102. Gravatar of ssumner ssumner
    16. November 2013 at 17:24

    Maynard, Agreed.

  103. Gravatar of Geoff Geoff
    17. November 2013 at 13:03

    “The Fed should not be trying to affect the supply of credit or the price of credit, so I’m glad to hear that it didn’t seem to have those effects. The goal should be to stabilize the growth rate of NGDP.”

    No, the Fed should not be stabilizing anything, for it should not exist.

  104. Gravatar of Johnny Evers Johnny Evers
    18. November 2013 at 06:09

    I’m a new member of the ‘Cullen Roche banned me from his site for asking uncomfortable questions. The two points that make him lose his mind:
    1. A Treasury bond is a money equivalent. There are many good reasons that people call short term Treasuries ‘cash.’ QE illustrates this because the Fed redeems T-bonds for deposits. I don’t know why this is such an incendiary concept. I suspect it’s because if you subscribe to this, then the government is in fact printing money though deficit spending.
    2. We should look at fiscal and monetary policy as a whole. Again, if you do this, the government is funding spending though the deficit/QE cycle. T-bond is sold, government spends proceeds. QE turns the bond back into a deposit. Net result: One deposit becomes two. Why is this idea so incendiary? Again, it shows QE is money printing.
    The strange thing is that Cullen insists that debt is not a problem because we’re sovereign. We can ‘print.’ But when you point out that we are printing, he bans you.
    Lastly, people may very well disagree with these points and show me where I am wrong. But banning posters because you insist on a particular orthodoxy is a sign of professional insecurity.

  105. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. November 2013 at 05:34

    Andrew Huzsar was employed on the Agency MBS portion of the QE1 program by the FRBNY. Recall that at the time that QE1 was announced on November 25, 2008 spreads on Agency MBS had opened up and one of the primary goals of the Agency MBS portion of QE1 was to narrow those spreads.

    Normally there is a very strong correlation between 10-year T-Note yields and 30-year mortgage rates. Here’s graph that will give you an idea of what the Fed was thinking about with respect to mortgage rates. The blue line is the actual 30-year conventional mortgage rate.

    To construct the red line I did the following. I regressed mortgage rates on the 10-year T-Note yield over April 1971 through 2006 (before mortgage spreads increased) in order to find the equation of the line of best fit. The red line thus consists of the fitted values. In other words it is what is “normal” for mortgage rates. The green line is the difference, or residual. Positive values suggest that there are problems in the mortgage market:

    http://research.stlouisfed.org/fred2/graph/?graph_id=128825&category_id=0

    Note that the residual started increasing around mid-2007 and reached its widest point (1.61 points)in December 2008, just after QE1 was announced. By the conclusion of QE1 in March 2010 it had fallen to (-0.16) points. So in my opinion QE1 was highly successful in restoring mortgage rates to their normal values.

    (Incidentally the standard deviation of the residual is about 51 basis points meaning anything more than 1.02 points difference is statistically significant at the 5% level.)

    Here’s a paper on the effects of the Agency MBS portion of QE1 on mortgage markets that suggests that, contrary to Andrew Huszar’s opinion, it was successful in reducing mortgage spreads and boosting mortgage market activity.

    http://www.bos.frb.org/economic/ppdp/2010/ppdp1004.pdf

    $1.25 Trillion is Still Real Money: Some Facts About the Effects of the Federal Reserve’s Mortgage Market Investments
    Andreas Fuster and Paul S. Willen
    November 2010

    Abstract:
    “This paper measures the effects on the primary U.S. mortgage market of the large-scale asset purchase (LSAP) program in which the Federal Reserve bought $1.25 trillion of mortgage backed securities in 2009 and 2010. We use an event-study approach and measure the movements in both prices and quantities around the initial announcement of the LSAP and subsequent changes to the program. We use a new dataset to document the changes in the menu of rates and points offered to borrowers and show that there was wide dispersion in the rate changes generated by the announcement of the LSAP program, with some borrowers seeing immediate rate reductions of up to 40 basis points and other borrowers confronting rate increases. We show that the LSAP program led to a substantial boost in market activity, with discontinuous increases in searches, applications, and originations for refinance mortgages but not for purchase mortgages. Finally, we show that more creditworthy borrowers were significantly more likely to benefit from the improved credit availability.”

  106. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. November 2013 at 05:39

    Johnny Evers,
    “But banning posters because you insist on a particular orthodoxy is a sign of professional insecurity.”

    Exactly.

  107. Gravatar of Randy B Randy B
    4. December 2013 at 11:53

    Hey Scott, Could you please provide some support for the $5 billion number you quoted that banks benefit directly from asset purchase. I don’t see anything in the article or readily available. Would like to have a source handy for the future.

    Thanks!

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