Confirmation bias and bubbles

I’ve done a number of posts pointing out that people are hard-wired to find patterns where they don’t exist.  Studies have shown that people will see “bubbles”, even in data that is generated to follow a random walk.

Now of course just because most people would believe in bubbles even if they did not exist, does not in any way prove that they don’t exist.  Maybe they do.  But we always have to be on guard against cognitive bias.

Bob Murphy had some fun earlier today commenting on a post I did on China.  His post is entitled Chinese Stock Market Crashing”:

Details here. It’s down about 25% in the last two weeks, and 11% in the last two days.

Meanwhile, Scott Sumner is running victory laps, over those broken records who called it a “bubble” but didn’t give the precise timing.

So it sounds like I did a post mocking Chinese stock market bubble theories, and then the market crashed right after my post.  That wouldn’t really prove anything, but even I have to admit it would be pretty funny.  Chalk one up for Bob.

The only problem is it never happened.  My post was put up on June 27th, and when Bob did his post the Chinese market was actually higher than it was when I did my post.

Does this prove anything about the Chinese market?  No, for all I know it might collapse 20% tonight.  Who knows? It’s certainly been extremely volatile in recent weeks.

What it does show is that people are very receptive to data that supports their preconceived bubble theories.  And this is a part of my anti-bubble theory.  I’ve done posts on how the Economist magazine once bragged that it correctly predicted a bunch of housing bubbles, whereas the article it cited was actually totally, spectacularly WRONG about the future course of house prices in a number of countries.  Prices actually rose in markets where they predicted declines.  And yet the Economist put their “successful” prediction into an ad for the magazine. Someday China will have a big crash, and the people who have been predicting it for a long time will say, “I told you so.”  And I’ll say, “Market prices rise and fall, that’s what markets do.”

Economies have booms and recessions.  If talking about bubbles makes you feel good, go for it.  But don’t think it’s telling us anything useful about the world. When prices are high they might crash, or they might go higher.  That’s what history shows.

 


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96 Responses to “Confirmation bias and bubbles”

  1. Gravatar of Major.Freedom Major.Freedom
    30. June 2015 at 17:34

    It doesn’t take a whole lot of thinking in order to refute the Sumnerian view, because all you have to do is use his own “logic” against his own view.

    To wit, if what the bubble predictors (he calls them bubble “mongers” as if they are selling the bubbles that others created; he may want to check the definition of the word monger in the dictionary) say is to be dismissed on the basis that it hinges on a dubious “just you wait, at some point we’ll be proved right” heads we win, tails you lose type argument, then his own claims which have consisted of “Aha, we just needed to wait to observe that what you bubble mongers have called a bubble, has since been eclipsed by new historical high prices” can be dismissed on the same exact grounds.

    Over the last couple of weeks the Chinese stock market has “crashed”, but according to the Sumnerian view, the story is “Just you wait you bubble mongers, for at some point in the future the Chinese stock market will rise back up and eclipse the current low, and I’ll be there to “refute” all of you once again as what you guys called a bubble, which requires a bust, is ancient history, as the index is again at a higher peak than the one that just passed.”

    That’s the thing about irrationalists. They rarely if ever engage in self-reflective reasoning. They rarely practise what they preach about the logic and method they use to critique other people’s views.

    ——–

    I recommend paying no attention to the lip service arguments of the type “does this prove anything? No.” For when the above argument is used over and over again to “prove” anti-EMH wrong, as it was again used in this post, then that is very much what Sumner is using to prove his own EMH view right.

    Just you wait bubble mongers! What you called a bubble will at some point be eclipsed by a new high!

    Amazing “prediction” in a world with socialist institutions that print money out of thin air, isn’t it?

  2. Gravatar of benjamin cole benjamin cole
    30. June 2015 at 17:37

    Excellent blog.

    Yes, the Shanghai index is up about 130 percent in about the last year. Does that mean there was a reverse bubble last year or the year before that?

    Are those who said China was in a reverse bubble now vindicated?

    By the way, China oil consumption is now up YoY.

    Where are the reverse bubble mongers?

    We need a good word for a reverse bubble.

  3. Gravatar of Major.Freedom Major.Freedom
    30. June 2015 at 17:54

    It is also worth pointing out that the anti-EMH, pro-market argument about bubbles never included “What we call a bubble and bust will never be subsequently eclipsed by a new high”.

    So any thoughts like ” We’re only referring to the subsequent highs to point out that the anti-EMH argument doesn’t work on its own grounds” is a rank straw man.

    The anti-EMH credit circulation business CYCLE theory is a theory of CYCLES, not a Up swing and then a once and for all Down movement.

  4. Gravatar of Scott H. Scott H.
    30. June 2015 at 17:55

    What’s a bubble?

  5. Gravatar of benjamin cole benjamin cole
    30. June 2015 at 18:08

    Add on: was there anybody in the West a year ago who advised buying into the Shanghai stock market? You would have more than doubled your money in the last year.

    Even if only from a cynical perspective, that is a great return.

    Why did none of the China bashers advocate even a cynical bet on the Shanghai Stock Exchange a year ago?

  6. Gravatar of NotTheUsualSteve NotTheUsualSteve
    30. June 2015 at 18:12

    Major Freedom it’s very clear that you didn’t really read his post

  7. Gravatar of Ray Lopez Ray Lopez
    30. June 2015 at 18:35

    Sumner doesn’t believe in bubbles, unless the world comes to an end. But that’s not the layman’s understanding of a bubble. The fact that the US stock market recovered it’s 1929 highs sometime in the 1950s is cold comfort to those that bought at the top of the 1929 bubble.

  8. Gravatar of Ray Lopez Ray Lopez
    30. June 2015 at 18:36

    Its not it’s. and this:

    Sumner: “I’ve done a number of posts pointing out that people are hard-wired to find patterns where they don’t exist” you mean like the coincident or even lagging pattern between Fed activity and the economy, that some mistake as being leading?

    Keen: “what Kydland and Prescott found in their empirical analysis of the timing of economic variables: There is no evidence that either the monetary base or M1 leads the cycle, although some economists still believe this monetary myth. Both the monetary base and M1 series are generally procyclical and, if anything, the monetary base lags the cycle slightly… The difference in the behavior of M1 and M2 suggests that the difference of these aggregates (M2 minus M1) should be considered… The difference of M2-M1 leads the cycle by even more than M2, with the lead being about three quarters… (Kydland and Prescott 1990, p. 4)”

  9. Gravatar of Ray Lopez Ray Lopez
    30. June 2015 at 19:03

    @myself – I wish to state I don’t believe M2-M1 is any sort of predictor of the economic cycle, and is a mere data mining artifact. But certainly M1 nor the monetary base don’t predict anything, as Kyland and Prescott found.

    Sumner mentions elsewhere that “endogeneity” is at play, but a careful review of the literature, and the blog by David Glasner, excerpt below, shows that Sumner’s endogeneity is not accepted by the economics profession, and Nick Rowe appears to take the opposite position, that money is exogenous*. It’s metaphysics writ large, a fig leaf to cover the emperor Sumner’s new clothes. Furthermore, it’s not clear if Sumner even believes the Fed moves the economy via open market operations, or whether it’s the Fed member banks. A clarifying post by Sumner is kindly requested. -RL

    *Exogenous money (Glasner): “the mechanism causing this reduction in nominal income presupposes that the fixed amount of inside money in existence is exogenously determined; once created, it stays in existence. Since the amount of inside money can’t change, it is the rest of the economy that has to adjust to whatever quantity of inside money the banks have, in their wisdom (or their folly), decided to create. This result is often described as the hot potato effect. Somebody has to hold the hot potato, but no one wants to, so it gets passed from one person to the next. (Sorry, but the metaphor works in only one direction.)”

    David Glasner, November 25, 2012:
    “So whether Nick Rowe and Bill Woolsey are right that inflation and recession are caused by a monetary disequilibrium involving an excess demand for, or an excess supply of, the medium of exchange, or whether Scott Sumner is right that monetary disequilibrium is caused by an excess demand for, or an excess supply of, the medium of account depends on whether the supply of inside money** is endogenous or exogenous. ” **inside money: money that is created by banks or by bank-like financial institutions (money market funds) that can be used to settle debts associated with the purchase and sale of goods, services, and assets

  10. Gravatar of TallDave TallDave
    30. June 2015 at 19:03

    I’ll accept that markets don’t really have bubbles, they just have trends that can be self-reinforcing over certain periods.

    Governments, otoh, I think can create “bubbles,” simply because governments’ spending is constrained by various factors and so can end in a collapse for reasons other than preference changes. It happened in Greece. It’s probably not happening in China yet, but the catastrophic pollution levels in some of the industrial areas suggest GDP is now rising unsustainably faster than living standards and they may run into problems soon.

  11. Gravatar of Bob Murphy Bob Murphy
    30. June 2015 at 19:59

    Oh shoot, sorry Scott you *did* (slightly) misunderstand me. I wasn’t saying the Chinese market had crashed further since you posted, I meant:

    ==> People say Chinese market is in a bubble.

    ==> Guys like Sumner mock these doomsayers.

    ==> The Chinese market crashes.

    ==> Yglesias and Sumner say, “Whatever clowns, you didn’t give a specific date so you got lucky.”

  12. Gravatar of Bob Murphy Bob Murphy
    30. June 2015 at 20:03

    Scott in this newest post you wrote:

    Someday China will have a big crash, and the people who have been predicting it for a long time will say, “I told you so.”

    Why are you making it in the future tense?

    Look, did the stock market crash in 1929? Wasn’t it higher than it had been at some point far enough back in US history?

    In order to answer, “Did the stock market crash in 1929?” you don’t need to know the predictions of people beforehand. It is a simple fact, yes or no, did it crash.

    So it’s weird that even in this post you write, “Someday China will have a big crash…” when–at least as of Monday’s close–it was down 25% in two months.

  13. Gravatar of Tom Brown Tom Brown
    30. June 2015 at 20:05

    The way I’ve heard Michael Shermer (skeptic & popular science writer) explain the human predisposition to see patterns where none exist is that perhaps this was an evolutionary advantage. Better to set the detection threshold fairly low and have to deal with an abundance of false alarms rather than miss a detection on that tiger hiding in the tall grass (which is more likely to be a fatal mistake).

    Unfortunately this isn’t optimal for an environment where missed detections and false alarms can be equally damaging.

  14. Gravatar of Major.Freedom Major.Freedom
    30. June 2015 at 21:26

    NotTheUsualSteve:

    You seem new here. You have to privy to the ongoing writings dating way back.

    Give it time.

  15. Gravatar of Major.Freedom Major.Freedom
    30. June 2015 at 21:43

    “Economies have booms and recessions. If talking about bubbles makes you feel good, go for it. But don’t think it’s telling us anything useful about the world. When prices are high they might crash, or they might go higher. That’s what history shows.”

    Bubbles caused by central banks are not a one time event. They are recurring. It is why it is called the business CYCLE.

    Bubbles and busts are not price trends, but if talking about bubbles as price trends makes you feel better, then go for it. But don’t think it’s telling us anything useful about bubbles.

    Bubbles do tell us something useful. They tell us that governments are capable of not only reducing the extent of inflation and exposing malinvestment caused by previous inflation to corrections, but also that governments are capable of increasing the extent of inflation and causing the malinvestment.

    Nobody has the intellectual wherewithal to know what true time preferences in the market are when there is a central bank erasing all evidence of relative market prices and interest rates!

    Booms and busts don’t just happen for no reason.

  16. Gravatar of M.C. M.C.
    1. July 2015 at 01:13

    > People say Chinese market is in a bubble.

    People say this and that is in a bubble all the time, but you don’t get non-trivial predictions from such observations. The trivial prediction would be, at some unspecified date d2 in the future it will be some unspecified amount lower than at some other unspecified other date d1 in the future. Scott’s point is correct, most bubble talkers aren’t even willing to set d1 to the time of writing d0, let alone specify both d1 AND d2 at the time of writing. They’d rather set both d1 (at some peak after d0) and d2 (at some trough after d1) retroactively, long after d2 has passed.

    It is a straw-man to say that anti-bubble writers are only satisfied with very specific dates for d1, d2. Some date ranges, in months for instance, would already make predictions non-trivial. Of course, writers are willing to attach date ranges to their predictions, because unless the date ranges are very wide there’s a pretty high probability of being completely wrong, so they’d need to specify very very wide ranges (measures in years, if not decades) which makes it easy for the reader to recognize the triteness of their bubble observations.

    No, for writers and analysts it’s much better to keep writing about bubbles with in terms of suggestions, hints, insinuations, but leave outright predictions to the reader’s own inference.

  17. Gravatar of William William
    1. July 2015 at 04:41

    @Bob Murphy

    “Whatever clowns, you didn’t give a specific date so you got lucky.”

    But Bob, isn’t it obvious why giving a specific date, or in fact a specific price level, is important in showing that Sumner is wrong about bubbles? If all you want him to do is admit that the price of a stock can fall by a lot in a short time, and you call that a bubble in se, then I suppose he’d have to admit that’s true.

    But if you are offering a comprehensive theory of bubbles, then it’s really important to establish that traded securities have some fundamental value x, and so as soon as the price rises above x, we can expect the price to fall at some point in the future to reflect fundamental value.

    Sumner says you can’t identify a better way, ex ante, to predict the price of something in the future than to use the current market value of that thing. Is that wrong? How do you know?

  18. Gravatar of ssumner ssumner
    1. July 2015 at 04:53

    Ben, Good point.

    Ray, Given that no one can predict the business cycle, it’s not surprising that M1 can’t predict the business cycle.

    You said:

    “Sumner’s endogeneity is not accepted by the economics profession, and Nick Rowe appears to take the opposite position, that money is exogenous*”

    Now I’m supposed to be a fan of endogenous money? You are in so far over your head that it’s hilarious. (Whatever Nick says about endogeniety, I agree.)

    Talldave, By “catastrophic” pollution levels I presume you are referring to the fact that life expectancy in Beijing is 81, vs 78 in the US.

    Bob, So you are just pointing out that markets occasionally crash? But everyone already knew that, how does it relate to the EMH? How does it relate to my blog post, and why cite the 11% drop in just two days? I think most people would read the post as the market somehow contradicting something I predicted, or at least seeming to contradict.

    BTW, if someone predicted a crash 1 year ago they were wrong, as the Chinese market has roughly doubled in the past year.

    Tom and M.C., Good points. The key question is whether the bubble proponents offer useful predictions. And the evidence suggests they do not.

  19. Gravatar of ssumner ssumner
    1. July 2015 at 04:54

    William, Exactly.

  20. Gravatar of Dan W. Dan W.
    1. July 2015 at 05:23

    Given the inability to predict them, it would not appear there is a scientific basis for “bubbles”. That said, given the difficulty in making accurate economic predictions it would appear science is lacking in the field of “macro-economics”.

  21. Gravatar of Major.Freedom Major.Freedom
    1. July 2015 at 05:52

    M.C. and William,

    You guys keep insisting that all predictive theories of bubbles must fit into your personally assumed narrow band of allowable statements, where any statements that fall outside that band are not valid.

    You will never get what you are asking for with that approach. Usefulness presupposes a subjective goal. There is no such thing as usefulness without a subjective goal, yet you and Sumner are always talking about what is useful and not useful, without ever explaining just what your goals are that makes it useful or not useful. No, “explaining how the world works” is not the goal you have in mind, because that begs the question. It is circular. When you’re addressing people who believe they are explaining how the world works, and you have your explanation of how the world works, telling them that what they believe is not useful is nothing but you saying you disagree with their theory. You are not saying anything about usefulness as such.

    Summer goal is to make the Fed “optimal”, which means a semi-permanent if not permanent stabilizing institution. Of course any theory that undercuts he very foundations of the existence of said institution will not be “useful” for his (really other people’s) goals. This is why Sumner spends so much time “refuting” the theory of bubbles that negatively implicates central banks, rather than the million other “useless” economic theories.

    What you are demanding itself requires justification which neither of you have ever shown by the way. Claims of what is and is not useful, or non-trivial, these are subjective preferences for you personally that has nothing to do with the theory that you don’t seem to want to engage.

    What is useful or not useful to you personally is not also an established fact that it is not useful per se. You are not humanity’s representatives or judges of usefulness. Usefulness is a personal experience with an object to achieve a subjective, not objective, goal. Usefulness presupposes a subjective goal is in mind. Your goals are not my goals.

    The theory of bubbles being presented to you is not a theory of the movements of prices through history. It is not a theory that says the price of something must follow a particular pattern or a general pattern, nor is it a theory that says the timings of the changes must follow a particular pattern or a general pattern.

    It is a theory of the CAUSE of bubbles ex ante, and EXPLAINS why events occurred the way they did ex post. There is nothing sneaky or trivial about this. Sumner himself does this all the time. He claims the cause of the other side of bubbles prolonged, I.e. recessions, is insufficient inflation from central banks, and gives a (flawed) explanation for why events took place the way they did.

    M.C. you say it is a straw man that you want “specific dates”. That you would be in a position to be convinced if you are given “date ranges.” But nobody is telling you that there has to be any dates whatever. To assume that particular or ranges of dates are involved is itself a straw man. It is important to note that what you call a “specific date” is subjective, as it is actually a “range” (choose day X and you’re talking about a range of time spanning 24 hrs, or at least 6.5 hours during a trading day), and what you call a “range” of dates is also subjective, as it is also a “specific date” (choose the second half of a year and you’re talking about one particular period in history). If you insist a “particular date” is a day, you’re just saying you define a particular date as a day and that the accuracy must be within a day. Same with “date range”. You are arbitrarily asserting some range of time of accuracy that there is no reason for choosing. It happens all the time. Thoughts like “Since a trillion years is longer than a pico second, I demand to be the judge of the proper date range of accuracy!”

    This is not a semantics point, it is merely showing you that in economics, it is a flawed approach to cram every conceptualization, theory, and argument into the narrow band of orthodox empiricism based on the behaviors of quantifiable objective observable values.

    William, you suggested that all Murphy is saying is that stock prices sometimes fall a lot in a short period of time. But that again is not a bubble. If a big meteor crashes on Earth and people respond by selling most stocks at a fraction of their pre-meteor prices, if at all, then Murphy would not say that stock market price trends suggest there was a bubble.

    A bubble is a very specific thing according to folks like Murphy. To them, a bubble is at minimum caused by governments (or any other institution) using non-market means to force the quantity of money to expand more than what would otherwise have occurred in the market. It is more than mere price movements, it includes the cause for those movements.

    This certainly does not require them to present to you any “intrinsic” or “fundamental” price of a security or prices of securities, such that if the prevailing prices deviate above it, that there is a bubble, at those prices neither bubble nor bust, and below those prices a bust.

    When they point to the stock market and say “we’re in a bubble” they aren’t actually saying anything about what those stock prices should instead be. What they are doing is pointing to the stock market prices as one result of central banks meddling in markets by expanding money more than what would otherwise have occurred.

    The stock market is very much capable of rising 10 fold in a matter of minutes even in a purely laissez faire world. This would occur if people’s time preference and desire for (more) future consumotion over (less) present consumption rises to such a degree that they reduce their consumer spending and increase their investment spending that much that quickly. If this new savings pattern is “sustained”, then the stock market would not be in any bubble, and neither would the economy.

    Yet if that same exact rise in stock market prices took place in our non-laissez faire world of central banking, it likely would be representative of a bubble.

    ———-

    Dan W.

    You are talking about empiricism, not science as such. Mathematics is a science (it is the science department at most colleges and universities), yet it makes no predictions. It helps us understand the world. Same thing with the bubble theory.

    I admit that the theory is not ” useful” to Summer’s personal goal. It is useful to mine.

  22. Gravatar of Major.Freedom Major.Freedom
    1. July 2015 at 06:01

    A “useful prediction” (theory) presupposes a subjective goal is being sought after using that prediction.

    The credit circulation theory of the business cycle is incredibly useful to the goal of understanding the causes of the business cycle and explaining why past events took place they way they did. So useful that it remains unchallenged by 100% of Summer’s writings. Well, maybe not all that useful.

  23. Gravatar of Major.Freedom Major.Freedom
    1. July 2015 at 06:06

    William, you wrote:

    “Sumner says you can’t identify a better way, ex ante, to predict the price of something in the future than to use the current market value of that thing. Is that wrong? How do you know?”

    Where are these “market prices” taking place that you speak of? We don’t live in a world with market prices! We live in a world with hampered market prices. Market prices are in this age only a thought of possibility.

    What do you mean “use” here? Do you mean exclusively? There is more to forming one’s thoughts about the world, there is more to learn about the world, than a good’s exchange ratios against a government’s currency. Ex ante and ex post.

  24. Gravatar of Major.Freedom Major.Freedom
    1. July 2015 at 06:14

    Sumner wrote:

    “How does it relate to my blog post, and why cite the 11% drop in just two days? I think most people would read the post as the market somehow contradicting something I predicted, or at least seeming to contradict.”

    The lack of honesty is astounding. You know and your bubble theorist readers knew that by citing Yglesias’s article you were thumbing your nose at those who predicted a correction is coming. You cited him saying that China is all roses and sunshine, for your personal goal of “proving the bubble mongers wrong” yet again. They kept chirping, and yet you saw the data just keep rising and rising.

    Then after the Chinese stock market crashed, thus confirming those predictions, you fall back on the “This is expected”. “I never said stock markets can never crash.” Blah blah blah.

    Totally inconsistent. Krugman has his Kontradictions, and Sumner has his Shuffles.

  25. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    1. July 2015 at 06:37

    Not too far off topic; a friend just informed me that he’ll be teaching a freshman seminar on economics next fall. He’s going to use ‘Capitalism and Freedom’ AND Michael Sandel’s best-seller of a couple years ago, ‘What Money Can’t Buy: The Moral Limits of Markets’.

    http://www.amazon.com/What-Money-Cant-Buy-Markets-ebook/dp/B00633PFQC

    My first reaction was, How can you expose babes in the woods to a poseur like Sandel! But now that I’ve had time to re-read a little of Sandel, I see that if this be madness, there’s a method to it. Pitting relentlessly logical economics v. its opposite.

    Now why would this come to mind in this thread.

  26. Gravatar of Ray Lopez Ray Lopez
    1. July 2015 at 06:41

    Sumner: “Ray, Given that no one can predict the business cycle, it’s not surprising that M1 can’t predict the business cycle.” – no, that’s not the issue. The issue is can base money, which is (I believe in your view) created by the central bank say most of the MM, lead the business cycle? It does not. And if base money is created by banks, not by the Fed, in response to bank customer demand, then by definition the Fed is impotent.

    Sumner: “Now I’m supposed to be a fan of endogenous money? You are in so far over your head that it’s hilarious. (Whatever Nick says about endogeniety, I agree.)” – Sorry, but your pal D. Glasser said, I repeat: “So whether Nick Rowe and Bill Woolsey are right that inflation and recession are caused by a monetary disequilibrium involving an excess demand for, or an excess supply of, the medium of exchange, or whether Scott Sumner is right that monetary disequilibrium is caused by an excess demand for, or an excess supply of, the medium of account depends on whether the supply of inside money [money created by banks]is endogenous or exogenous. “- got that doctor? You cannot have it both ways. This is your colleague talking, not some layperson loon. He puts you on the opposite side of Rowe.

    More questions than answers with Sumner, by design I’m sure. Seems Dr. Sumner is like Duran Duran’s “Reflex”, as the song says: ‘Every little thing the reflex does leaves you answered with a question mark?’

  27. Gravatar of DF DF
    1. July 2015 at 06:56

    Scott Sumner is the kind of economist that yells at his doctor when told about his poor diet and lifestyle choices, claiming that the doctor cannot predict the exact moment of his heart attack and rambling about how everyone dies at some point.

  28. Gravatar of TallDave TallDave
    1. July 2015 at 07:16

    Talldave, By “catastrophic” pollution levels I presume you are referring to the fact that life expectancy in Beijing is 81, vs 78 in the US.

    Pollution isn’t that bad in Beijing, relatively speaking, because they’re taking away people’s cars and shutting down coal plants, but in fact the health-adjusted life expectancy numbers for Beijing are also horrific.

    The true size of the gap, however, was shocking. While life expectancies have continued to grow, HALE numbers have gone backward. According to a summary published to the Beijing CDC’s website, the data showed that an 18-year-old male Beijinger now has a life expectancy of 80 years, and a shockingly low HALE of 61.4. Far worse, and almost defying believability, an 18-year-old female Beijinger has a life expectancy of 84, and a HALE of 56.06. In other words, she should expect to spend 28 years — or roughly 41 percent of her remaining life — in ill health.

    Imagine how much worse they are in, say, Yinchuan where the air pollution index pegs the meter at 999. Also, comparing Beijing to the entire United States is obviously silly, you would want to compare it to, say, New York. And of course Asian-American life expectancy is higher than the American average.

  29. Gravatar of TallDave TallDave
    1. July 2015 at 07:26

    I haven’t seen a number for NYC, but here’s state-by-state LE (itself a fascinating subtopic). New York is at 80.5.

    https://en.wikipedia.org/wiki/List_of_U.S._states_by_life_expectancy

  30. Gravatar of TallDave TallDave
    1. July 2015 at 07:27

    Oh, and Asian-Americans in America’s largest city? Life expectancy is 88.6 years, about 8 years longer than Beijing.

  31. Gravatar of Bubble-monger Bubble-monger
    1. July 2015 at 12:10

    Yep. Here we go again. It’s the usual claptrap.

    I suspect, one Scott Sumner can’t see a bubble even when it got written “bubble” on it.

    I would like to quote Mark Twain: “History doesn’t repeat itself, but it rhymes”.

    There’re a number of very smart people who have looked at financial history (from say the 1600s up to the recent & current past) and have seen that history DOES repeat itself. And the recent past (2007 – 2015) is no exception in that regard.

  32. Gravatar of Urstoff Urstoff
    1. July 2015 at 12:25

    So I guess the question is (to all sides), what counts as evidence for Bubble vs. Normal Business Cycle? Unless Scott is making the stronger claim that the concept of a bubble is conceptually incoherent.

  33. Gravatar of Scott Freelander Scott Freelander
    1. July 2015 at 12:48

    Scott,

    This bubble talk is getting boring for your long time readers. You’ve spent years now waiting for a return to your serve and you may be waiting a long time to come. I still haven’t seen anyone come forward with a rigorous definition for what a bubble is and a model to predict something specific about their rise and fall, rather than just saying that markets that go up will eventually come down.

    What those on the other side say is the equivalent of saying that earthquake-prone areas are prone to earthquakes. They make completely empty statements. Even in the field of geology, we at least can define earthquakes rigorously and have good models for what causes them, even if prediction is more difficult. But, I venture that even earth quake prediction might be more reliable than many bubble-bursting predictions.

  34. Gravatar of o. nate o. nate
    1. July 2015 at 13:30

    I think that often when people talk about a “bubble” they do mean something fairly specific. They mean that there is an imminent risk of a sharp fall in prices. There are various reasons why they might think that, such as:
    – The market is becoming dominated by short-term trend-followers rather than investors with a longer-term fundamental view. These investors are not likely to show fortitude if prices move against them, which will lead to widespread panic selling.
    – Increased use of leverage is making the market fragile – ie., margin calls will lead to accelerated selling in a downturn.

    Certainly people can be wrong about calling a bubble, but that doesn’t mean that the term is meaningless.

  35. Gravatar of Scott Freelander Scott Freelander
    1. July 2015 at 13:39

    o. nate,

    The problem is, how many of he people who claim that, for example, “short-term trend followers” are feeding bubbles, actually present evidence for their claims? Normally, these seem to be just-so stories that come out of thin air.

  36. Gravatar of Scott Freelander Scott Freelander
    1. July 2015 at 13:59

    Scott can let me know if I’m wrong, but I think his perspective is that many, if not all of these seemingly extreme rises and falls in various markets are largely or entirely due to unpredictable events, sometimes coupled with mistakes in monetary policy.

    And, if we take the tech “bubble” of the late 90s and early 00s, for example, is it necessarily irrational that a lot of capital flows into a lot of new companies in a new industry, even knowing ahead of time that most will not ultimately be successful? From the EMH perspective, long-term investors should choose a somewhat diversified portfolio of high beta stocks in such industries and just ride them out. Remember, that for every several pets.com, or similarly failed companies, there are the Ebays, Amazons, and Googles, all of which from that time to the present have offered extraordinary rates of return. And it’s obvious most people didn’t know how successful these companies would be in the beginning, given how low their stock prices once were. Does that mean they were in negative bubbles? Or does it just mean that winners and losers in new markets are very hard to predict, at least for most?

  37. Gravatar of cbu cbu
    1. July 2015 at 14:01

    TallDave, Asian-Americans have a relatively good socioeconomic status even in the U.S., they probably have much better socioeconomic status than an average Beijinger, which explains a lot of the difference in life expectancy

  38. Gravatar of ssumner ssumner
    1. July 2015 at 14:12

    Ray, You said:

    “And if base money is created by banks, not by the Fed, in response to bank customer demand”

    You do know that counterfeiting is a felony, don’t you?

    And I didn’t say I agreed with David, I said I agreed with Nick.

    TallDave, I’ve spent a lot of time in Beijing, and I assure the pollution is not catastrophic. There is no health model where people live to 81 on average and still suffer horrible health. Don’t believe everything you read. There’s another paper widely cited in the press that said pollution took 5 years off life expectancy in the north, and it’s been discredited.

    Pollution in China is bad, as it was in America in the 1960s. But China faces lots of more severe problems.

    My mother-in-law lives there, despite being able to live here. I assure you she’d move here if the pollution was “catastrophic.”

    O. Nate, I don’t think the term is meaningless, I just don’t see any empirical evidence supporting the hypothesis.

    Scott, It’s not just the EMH, everything in my comment sections has been said 100 times before. I feel like Sisyphus.

  39. Gravatar of Scott Freelander Scott Freelander
    1. July 2015 at 14:12

    I should point out that I think that both Scott and the bubble proponents are right, but most claims about the existence of specific bubbles are wrong.

    Why do I think this? First, Milton Friedman and Robert Shiller have both pointed out that if markets were truly close to perfect relative efficiency, there wouldn’t be incentives for the very activities that make them efficient. So, there must be arbitrage opportunities.

    Second, mean reversion, at least given my looks at data over many years, seems to be a real tendency, and it can yield benefits for both fundamentalists, and perhaps even some technical traders.

    But, like any other endeavor in life, especially those that occur in wide, deep, relatively efficient markets, being above average is very hard and very rare, and especially being able to sustain such performance.

    So, we can regularly expect most money managers to fail, while keeping a somewhat anti-EMH understanding in tact.

    In other words, EMH is true to a degree, but only a degree, and perhaps even a strong degree.

  40. Gravatar of ssumner ssumner
    1. July 2015 at 14:16

    Scott, Yes, the term bubble is usually used where there is enormous uncertainty as to what an asset, or class of assets, is worth. Bitcoin is a perfect example. No one has even a clue as to what it’s worth, so of course the price fluctuates sharply.

    cbu, Exactly, the two groups are totally different. It would make more sense to compare Beijing to Korea or Taiwan, which I believe have similar life expectancies, but no “catastrophic” pollution.

  41. Gravatar of ssumner ssumner
    1. July 2015 at 14:17

    Scott, You said:

    “In other words, EMH is true to a degree, but only a degree, and perhaps even a strong degree.”

    That’s always been my claim.

  42. Gravatar of Scott Freelander Scott Freelander
    1. July 2015 at 14:45

    Scott,

    So you see, some of us are learning by reading this blog. 6 years ago, I would have said the tech boom and crash was an obvious bubble, but now it seems more likely that it was, at least much more the result of rational behavior and the Fed not providing sufficient stimulus in the recession that helped bring down the tech sector.

  43. Gravatar of Beefcake the Mighty Beefcake the Mighty
    1. July 2015 at 16:48

    The two Scotts are taking the conventional rationalization that bubbles do not contradict EMH because sudden arrivals of new information can lead to sudden re-evaluations of the fundamantals, and hence potentially price crashes. So then, what sudden information led to the popping of the early 00’s tech bubble and the more recent housing bubble?

  44. Gravatar of Carl Carl
    1. July 2015 at 17:18

    And some of us, including myself, are probably not learning. The farthest I’ve gotten is to think of the market as a system for discovering value and to think of anyone claiming to detect bubbles as someone making the claim that he has a better system for discovering value.

  45. Gravatar of Ray Lopez Ray Lopez
    1. July 2015 at 17:24

    Sumner: ” Ray, You said: “And if base money is created by banks, not by the Fed, in response to bank customer demand”
    You do know that counterfeiting is a felony, don’t you? ” –

    The thesis is that the Fed accommodates member banks with base money by buying their commercial paper, *after* the paper is created, not by creating base money before. Got it? This blog format is not good for making fine points, and you’re stubborn too.

    More importantly, can you point to Nick Rowe’s blog to support your views on endogenous money? I need it for ammunition later when I attack you. Thank you in advance. It’s interesting btw that D. Glasner characterizes your views one way and you disagree. Must be a topic that a scholastic Aristotelian quoting medieval monk would enjoy understanding, akin to angels on a pinhead. Why don’t you do the honorable thing and just throw up your hands and say: “I was wrong?” Longtime diehard Republican conservative economist Bruce Reeves Bartlett did just that a few years ago, and the world is better for it. Time for you to make the change too.

  46. Gravatar of Beefcake the Mighty Beefcake the Mighty
    1. July 2015 at 18:53

    Re. “truth to a degree”: please quantify this notion, and provide a testable/falsifiable version.

    Thank you.

  47. Gravatar of TallDave TallDave
    1. July 2015 at 21:12

    cbu — Hispanic-American life expectancies are also longer than the U.S. average, despite lower than average incomes.

    Scott — As I said, Beijing is relatively clean. Did you visit Yinchuan, where the air pollution metric was pegged at its highest possible value? Is “catastrophic” not a fair assessment of pegging the air pollution meter?

  48. Gravatar of Kevin Erdmann Kevin Erdmann
    1. July 2015 at 21:13

    Carl, I agree with you. Markets like western financial markets can generally take a population of flawed individual investors and produce a price level that is relatively informative. Given the sort of miracle of aggregated information that markets generally perform, if a given market is populated with investors so universally lacking in sense that the market doesn’t find an efficient price, a new investor is likely to make matters worse.

    They say that efficient markets mean you should invest passively. I say, even more so, if markets are inefficient you should invest passively, because the odds would have to be very high that you’re out of your mind like everyone else.

    I agree with you that some of the ABC proponents seem to act like everyone else is out of their minds, but that they have some special perspective that alerts them to the right prices.

    The fact that many of them are claiming that we are in a bubble now because of perpetually loose monetary policy seems to be strong evidence to me that they are only an example of my rule.

    I say this even though I am a speculator myself, and that probably makes my point ironic.

  49. Gravatar of TallDave TallDave
    1. July 2015 at 21:18

    “It would make more sense to compare Beijing to Korea or Taiwan”

    I agree. The article explains: Nonetheless, it’s important to note that of the more than 100 countries surveyed by the Lancet in 2012, there isn’t a single one that exhibits a gap between HALE and life expectancy as wide as Beijing’s.

  50. Gravatar of benjamin cole benjamin cole
    1. July 2015 at 21:57

    I will concede that the word “bubble” might apply to gold. What is the yellow metal worth? Why? And are unsophisticated investors duped into buying gold?

    But other markets are more rational and go up or down as circumstances change.

    If housing in L.A.was in a bubble in 2008, was it in a reverse bubble in 2010? Prices have recovered

  51. Gravatar of Postkey Postkey
    2. July 2015 at 03:27

    The term ‘bubble’ may apply to the Japanese property market in the 80’s?

    “During the height of the 1980s Japanese property bubble, the palace grounds were valued by some as more than the value of all the real estate in the state of California.”

    https://en.wikipedia.org/wiki/Tokyo_Imperial_Palace

  52. Gravatar of benjamin cole benjamin cole
    2. July 2015 at 05:17

    Postkey—
    You might be onto something there….

  53. Gravatar of Scott Freelander Scott Freelander
    2. July 2015 at 05:44

    Carl,

    It basically works like this: Dumb investors in the market create arbitrage opportunities for relatively smarter ones. The more dumb decisions made, the greater the arbitrage opportunities. This helps put a limit on inefficiencies in the marketplace, especially in the case of a very wide, deep, and liquid market like the stock market.

    So, those who claim, that especially frequently, there are huge bubbles here and there, in the stock market, for example, have a more difficult argument than they realize. The more overvalued an asset or asset class, the greater the reward for being contrarian, if correct.

  54. Gravatar of Scott Freelander Scott Freelander
    2. July 2015 at 05:54

    beefcake,

    My guess is that recession caused the extreme fall in the Nasdaq circa 2000,and looser monetary policy would’ve helped cushion the blow. Nasdaq could have taken a bigger hit than the Dow or S&P, due to having a larger number of new firms in new industries. These firms would reasonably be expected to be more vulnerable to sudden drops in expected earnings.

    But, I haven’t researched this.

  55. Gravatar of Scott Freelander Scott Freelander
    2. July 2015 at 06:04

    beefcake,

    Efficiency “to a degree” can be measured in many ways. For example, you can look at how closely stock price movements follow a random walk.

    Actually, the best pro-EMH presentation I’ve ever seen was, ironically, given by Robert Shiller in a Yale lecture you can find on Youtube. And for those not familiar, he’s perhaps the best known critic of EMH, but his treatment of the theory in the classroom is very fair.

    Other potential ways to estimate the efficiency of markets would be to look at the proportion of investors who regularly beat the market on average, and by how much. And is the rate above that of chance? Are there enough George Soros and Warren Buffett-type investors?

    Then, you can look at average returns. Are they commensurate with risk, etc, in the context of other investment options.

    You can look at volatility. Shiller argues that stock price movements are more volatile that economic theory would predict if markets are strongly efficient.

    I haven’t studied the issue in any detail, so I can’t claim to be expert at all, but as mentioned it does seem to me that mean reversion is a real phenomenon, allowing for at least enough arbitrage to reward enough investors to keep them in the game.

  56. Gravatar of Scott Freelander Scott Freelander
    2. July 2015 at 06:11

    benjamin cole,

    Gold of course moves retail and industrial demand, of course, relative to supply, and also in response to changes in negative real interest rates. This is key to understanding the movement of gold prices during the Great Recession, for example. During the financial crisis, initially gold significantly fell in price,and the dollar rose dramatically. After the Fed started easing, pushing real rates negative, the opposite occurred. Gold started to rise in price and the dollar started to fall.

    This isn’t complicated, but the gold bugs miss this. Perhaps one of the reasons they’re called “bugs” is because they often get crushed.

  57. Gravatar of Scott Freelander Scott Freelander
    2. July 2015 at 06:24

    Ray,

    The Fed completely controls reserve ratios. You have no argument. This is obvious to anyone with a brain who’s actually bothered to inform themselves at all.

  58. Gravatar of Ray Lopez Ray Lopez
    2. July 2015 at 08:04

    LOL, “Scott Freelander” trying to answer every comment, Sumner-style, with a simple answer as if he knows it all, but gets it wrong. What a joker, just like his namesake.

  59. Gravatar of cbu cbu
    2. July 2015 at 08:12

    TallDave, in the U.S., Hispanics probably still have better socioeconomic status than African-Americans and Native Americans, which are the two main factors that drag down the average life expectancy in America.

    “Nonetheless, it’s important to note that of the more than 100 countries surveyed by the Lancet in 2012, there isn’t a single one that exhibits a gap between HALE and life expectancy as wide as Beijing’s.”

    You cannot claim that pollution is the main cause of the difference without careful evaluation of most of the risk factors. For example, Chinese including Beijingers have one of the highest rate of smoking in the world. On the other hand, in Hong Kong, where air quality is heavily influenced by the Pearl River Delta industrial area, and all its water supplied from the mainland, now has the highest life expectancy in the world.

    At least from the life expectancy point of view, Chinese pollution is not catastrophic. In fact, probably all the industrialized nations passed a similar phase in their development.

  60. Gravatar of Carl Carl
    2. July 2015 at 08:37

    Scott Freelander:
    That seems right to me. In an efficient market, the better bubble spotters will regularly be sticking little pins in the balloon and sucking out air. To believe that there are better bubble spotters uninvolved in the market is to believe also that these better bubble spotters are uninterested in profit-making or more interested in fame are altruists or have an interest in hurting those in the market or just have no access to a market in which they have developed deep expertise. These explanations are all plausible;you could, for example, posit that regulators have deep expertise but no access or that foreign countries have a stake in tanking other countries’ markets. I just think they all have scalability problems as an explanation.

  61. Gravatar of ssumner ssumner
    2. July 2015 at 10:03

    Scott, Thanks.

    Beefcake, You have to be kidding?

    1. The 2006 crackdown on immigration, which slowed population growth in the key subprime states.

    2. After that came the biggest NGDP crash since the 1930s.

    BTW, if it was a “bubble” why did similar price run-ups in Canada, Australia, NZ and Britain not crash? No one has ever answered that question.

    And why are house prices in many coastal markets back at record highs?

    Ray, What makes you think I’d waste my time searching Nicks’ blog, when someone like you who’s time has no value at all could do the same, just as easily? You want ammo? Bullets are no good without a gun, and you don’t have a gun.

    And the Fed injects the vast majority of the money via Treasury purchases, not commercial paper. Usually more than 99%. Check the data.

    You said:

    “This blog format is not good for making fine points”

    I see, now you are blaming the blog format for your ignorance.

    TallDave, I don’t believe the HALE data. The life expectancy in Beijing is longer than Taiwan. That would not be possible if their health were as horrible as people claimed. It would be the only city in the world where emphysema and lung cancer disable without killing. I don’t buy it.

    And no, Beijing is not a relatively clean city, Shanghai and most other coastal cities are far cleaner. There may be a few cities in China with catastrophic pollution, but you were characterizing the entire country.

    And read cbu’s excellent comments. He’s right, if the Chinese didn’t smoke at a very high rate, their life expectancy would be even higher. beijing would probably be around 83, nearly the highest in the world.

  62. Gravatar of Britonomist Britonomist
    2. July 2015 at 10:25

    “why did similar price run-ups in … Britain not crash?”

    They did.

  63. Gravatar of Tom Brown Tom Brown
    2. July 2015 at 10:31

    Scott, in your opinion, is it possible to find any evidence of this in macro blog comments sections?

  64. Gravatar of Ray Lopez Ray Lopez
    2. July 2015 at 10:45

    Sumner: “And the Fed injects the vast majority of the money via Treasury purchases, not commercial paper. Usually more than 99%. Check the data.” – I did check the data, and you apparently are unaware that the Fed has increased its balance sheet from less than a trillion pre-2008 to $4.5T today–by buying commercial paper (mortgages, even toxic mortgages).

    OT- Google this, it’s Sumner’s prose: A Beginner’s Guide to Esoteric Reading by Arthur M. Melzer, Econ Journal Watch

  65. Gravatar of TallDave TallDave
    2. July 2015 at 11:41

    cbu — Wrong, Hispanic-Americans have longer LE than American whites. I guess no one reads the links.

    China is average in cigarette consumption — in fact they are behind Japan. So no dice there, either.

    https://en.wikipedia.org/wiki/List_of_countries_by_cigarette_consumption_per_capita

    Scott — I don’t know why you think Lancet, the WHO, and CDC Beijing would all be lying to us. Taiwan is well ahead of China in LE.

    https://en.wikipedia.org/wiki/List_of_countries_by_life_expectancy

  66. Gravatar of TallDave TallDave
    2. July 2015 at 11:48

    Also, I’m not arguing the pollution is dragging down LE, I’m arguing it is dragging down living standards. People don’t like living in areas with a lot of air pollution.

    The rise of China is a great humanitarian story, but the flipside of rising living standards is that the lagging aspects start to be a bigger problem. How much does China’s, yes, catastrophic (pegging the meter is very bad!) pollution reduce living standards? Hard to quantify, but the answer is surely some value of “signficantly.”

  67. Gravatar of Scott Freelander Scott Freelander
    2. July 2015 at 11:58

    Ray,

    Mortgage-backed securities are not commercial paper. For starters, commercial paper normally doesn’t have maturities of beyond 270 days.

    You can’t even define the terms you’re throwing around and you’re trying to say you know more about monetary policy than a PhD economist who’s studied it for decades.

  68. Gravatar of TallDave TallDave
    2. July 2015 at 12:00

    Also Scott, if we’re going to parse what I said as “characterizing the entire country,” here’s my exact words in the first comment:

    It’s probably not happening in China yet, but the catastrophic pollution levels in some of the industrial areas suggest GDP is now rising unsustainably faster than living standards and they may run into problems soon.

    Obviously these problems aren’t nearly as bad in Shanghai or Beijing, to say nothing of Hong Kong, but look at that air quality map — if it’s even remotely accurate, then pollution is a serious national issue.

  69. Gravatar of TallDave TallDave
    2. July 2015 at 12:18

    Correction above — I should have said Chinese cigarette consumption is average for the region (behind Japan and Korea, ahead of the rest). Eastern Europe seems to the highest, but China is well ahead of the OECD generally. Obviously it is still hard to argue smoking is dragging down China LE but not Japan and Korea. Also, the effects don’t show up for decades — it’s known to be a lagging effect (explains higher US lung cancer rates despite lower current consumption) and Chinese cigarette conupmption — like their consumption of everything else — has risen fast recently.

  70. Gravatar of Morgan Warstler Morgan Warstler
    2. July 2015 at 12:20

    Ray, yeah that’s wrong.

    But it reminds me, Scott, what’s your porblem with Farmer”s idea that the Fed buys / sells stocks – say a random basket.

  71. Gravatar of cbu cbu
    2. July 2015 at 15:59

    TallDave, Japan has substantially lower smoking rate than China and South Korean. But South Korean has a per capita income about 4x greater than China, it makes comparison of life expectancy or life quality difficult.

  72. Gravatar of Major.Freedom Major.Freedom
    2. July 2015 at 16:55

    Sumner wrote:

    “Scott, Yes, the term bubble is usually used where there is enormous uncertainty as to what an asset, or class of assets, is worth. Bitcoin is a perfect example. No one has even a clue as to what it’s worth, so of course the price fluctuates sharply.”

    Yikes! That is so wrong.

    As economists know, and have known since at least the 1870s, what an asset is worth on the market at any given time, place and by which people, IS the market price at that time and that place and by those buyers and sellers.

    The presence of fluctuating price of an asset does not at all mean anything like “nobody knows what the asset is worth”. There is no such thing as an intrinsic price around which the market price “deviates” from it.

    It seems like old myth that Aristotle pushed about prices is still plaguing the minds of people even today.

    The reason why Bitcoin exchange ratios against the dollar are fluctuating, is not because the buyers and sellers are ignorant of the “fair” or “intrinsic” price of Bitcoins. It is because there is a healthy disagreement among the buyers and sellers of what Bitcoins are worth to each of them as individuals. But this is always the case on all exchanges. That is why exchanges take place at all, because of disagreement about the values of the things being exchanged. The buyers value what the sellers are selling more than the sellers value it, and the sellers value what the buyers are selling more than the buyers value it.

    A exchanges a Bitcoin from B for $600 because A and B disagree about how valuable a Bitcoin is relative to $600.

    All individual exchanges of all goods for money are all in perfect equality in terms of validity and legitimacy of the exchange ratios (prices). No price is “more valid” or “more fair” than any other price. Period. End of story. Does this mean that nobody ever has any regrets? Of course not. But what it does mean is that when two people exchange an asset for money, the only thing valid about it is that at that precise moment in time, at that precise place, with those two precise people, that is what “the” valuations were for the asset and the sum of money.

    The doctrine of “fair value” is a myth. A left over from antiquity. Read your history of economic thought please.

    Disagreements about values are the backbone of markets. Without disagreements, there would be no exchanges.

    A wildly fluctuating price, such as the S&P 500 index since the early 1980s, does not mean people are lacking knowledge of what it is “really” worth. It just means the extent of disagreements between people have been higher rather than lower.

  73. Gravatar of Ray Lopez Ray Lopez
    2. July 2015 at 17:46

    @Scott Freelander – OK, then I stand corrected. Was that so hard for Scott Sumner to do? Apparently though he likes heat not light. But my wider point stands: the Fed responds to the market, not the other way around. The burden of proof is for Sumner to show the opposite. The ball is in his court. He can do so with an econometrics study (hard to do) or by carefully explaining his “exogenous”/ “endogenous” theory (metaphysics? Fed economist and econ expert David Glasner apparent disagrees with Sumner on this issue). On both counts Sumner has failed to deliver. Instead he relies on the hoary technique of esoteric writing (see my previous post upstream) to convey his message. That’s rhetoric, not science. Granted, he’s not practicing science on this blog but some of us actually come here to learn something.

  74. Gravatar of ssumner ssumner
    3. July 2015 at 04:48

    Britonomist, You are wrong and I’ve done many posts on this. After 2006 housing prices in the UK went sideways, and are still up at very lofty levels. They never crashed. The bubblemongers were wrong, as they were wrong in Canada, Australia and NZ, and lots of European countries. And China. And Hong Kong And Singapore. And Dubai.

    Yes, they guessed right in America, but even a broken clock is right twice a day.

    Ray, Wrong again. They bought T-bonds and MSEs that have been backed by the Treasury, and hence are 100% safe. Nice try, better luck next time.

    Why not just google my old posts on MMT and endogenous money?

    TallDave, I compared Beijing to Taiwan, not China to Taiwan. The latter comparison (underdeveloped vs developed country) makes no sense.

    Yes, the patient was cured from cancer, but he got a mosquito bite. Yes, China rose out of abject poverty, but it ended up with smog, like big cities in America had in the 1960s.

    You said:

    “then pollution is a serious national issue.”

    Finally we agree on something—indeed it is one of many serious national issues.

    You may be right about cigarettes, I was under the impression that the Chinese are very heavy smokers, but it may be too soon to show up in the data.

  75. Gravatar of ssumner ssumner
    3. July 2015 at 04:50

    Tom, I wish I saw more of that? 🙂

  76. Gravatar of Ray Lopez Ray Lopez
    3. July 2015 at 05:36

    @ssumner: You seem to think the Fed is somehow separate from the Treasury, when in fact both are exposed to toxic paper that has to be unwound someday (unless you think they can keep it forever). But let’s leave that aside, and re: “Why not just google my old posts on MMT and endogenous money?”

    – I did that, and found this post: “Banking theory disguised as monetary theory?” (March 2014) and this one by Rowe: “One general theory of money creation to rule them all!” – is this your main post on endogenous money? It’s laughable if so: you take issue with the Bank of England (in a paper they published) on how money is created. In fact, the BoE has it right, and you and Rowe have it wrong, namely, the BoE responds to customers, not the other way around when expands the money supply, and, ‘new money’ is created by the interest rate the BoE pays (logically this is the only way new money is created, short of the UK treasury illegally printing money, which I assume they cannot do, like the US Treasury cannot do).

    But back to my question: is this your great post on endogenous money? Why not link to this theory in your home page if it’s the backbone of your NGDPLT? A future blog post on this topic is requested.

  77. Gravatar of Britonomist Britonomist
    3. July 2015 at 10:20

    “Britonomist, You are wrong and I’ve done many posts on this. After 2006 housing prices in the UK went sideways, and are still up at very lofty levels. They never crashed. ”

    With all due respect, you don’t live here. I have personal experience of prices crashing. The data shows that prices fell, you’re just being extremely contrarian here.

    Yes, prices eventually recovered but they certainly fell. Take this data for instance: http://www.nationwide.co.uk/about/house-price-index/download-data#xtab:uk-series (nationwide is one of the biggest building societies)

    I created a graph with it: http://i.gyazo.com/f5e41ccdbc4102613f8300148d19b541.png

    What happened after 2007 Q3 was clearly not prices going sideways.

  78. Gravatar of Beefcake the Mighty Beefcake the Mighty
    4. July 2015 at 03:58

    2006 immigration “crackdown”? Scott, you are just being ridiculous here.

  79. Gravatar of ssumner ssumner
    4. July 2015 at 07:07

    Ray, If you aren’t smart enough to even critique Nick’s arguments, why even bother? Just saying “Nick is wrong because the BoE disagrees”, is saying nothing. And anyway, a paper written by some low level staffers at the BoE does not represent their official view.

    You said:

    “‘new money’ is created by the interest rate the BoE pays”

    Very funny.

    Britonomist, How could 2007 have been a bubble if UK prices are even higher today? In any case, I said prices moved sideways after 2006, and they did. There were ups and downs, but no sign at all that houses were overpriced in 2006. If you could buy a British house today at 2006 prices, would you? I would.

    Obviously if you cherry pick and go back in time and find the highest price in any 5 year period, then by definition prices will fall after that peak. But people were claiming “bubble” in 2003, so it makes no sense to point to 2007 prices.

    The highest stock prices from 2005 to 2010 were in 2007, but no one today would claim 2007 stock prices were a bubble. The claim (which I don’t agree with) is that 2006 US housing prices were a bubble is based on the fact that prices are still lower today.

    Beefcake, It happened, regardless of whether you never heard about it.

  80. Gravatar of Britonomist Britonomist
    4. July 2015 at 10:01

    “Britonomist, How could 2007 have been a bubble if UK prices are even higher today? ”

    Because they eventually recovered? A bubble isn’t a price level that is so high that prices will never surpass it again, it’s just where the price surges beyond its intrinsic value. Many behavioural economists have done work to show how irrational exuberance in financial markets is in fact a thing sometimes, so why dismiss it?

    ” There were ups and downs”

    The amplitude of the decline in late 2007/2008 was hardly within your normal price volatility range. The reason people were saying it was a bubble is because many investors had their head in the clouds acting as if this recent surging price trend was long term and would last for the foreseeable future, while others were rightly expecting that prices were due for a correction back to the longer term trend, which lo and behold happened in late 2007. 2007 prices were only reached again in 2014.

  81. Gravatar of Brian Donohue Brian Donohue
    4. July 2015 at 14:17

    Good post.

    William wins the comments, hands down.

  82. Gravatar of Maurizio Maurizio
    5. July 2015 at 01:10

    @William

    A theory of bubbles as you describe it cannot exist. If we could really identify, as you require, “some fundamental value x, [such that] as soon as the price rises above x, we can expect the price to fall”, then the price would fall right now, falsifying the premise.

    In other words: if a theory of bubbles, as you define it, existed, then bubbles would not exist. But then a theory of bubbles could not exist, contradicting the premise.

    So you are defining a theory of bubbles in such a way as to rule out the possibility of a theory of bubbles in the first place. And then you criticize Bob Murphy for not giving you one. 🙂

    For what it’s worth, here’s my take on bubbles:

    Of course bubbles are unpredictable. If they could be predicted, they would not become bubbles in the first place. But this does not mean bubbles don’t exist. Bubbles can simply be defined as situations that cannot go indefinitely because producers have formed incompatible beliefs. Situations where each producer individually believes he will be able to complete his own project, but in reality only some of them will be able to, because the real resources to complete them all do not exist. The point is that their beliefs, taken together, are inconsistent. And the job of a theory of bubbles is to explain _why_ they came to form incompatible beliefs; not to forecast _when_ the bubble will pop (which, as I said, is impossible).

    Note: another way to say “producers have incompatible beliefs” is to say “the structure of production is unsustainable”. These are two different ways to say the same thing; and this is the only sensible definition of a bubble.

    Now you might ask: if a bubble is (by definition) a situation where producers have incompatible beliefs, then can it be identified? Yes, why not? We can certainly analyze the structure of production and conclude it is unsustainable. A bubble can be identified. But then, why can’t you also say _when_ it will pop? Because we have a discretionary central bank. Isn’t it obvious? How on earth are we supposed to predict when the central bank will stop creating money to postpone the bust? If we had a theory to predict the whims of central bankers, then yes, probably bubbles would not exist. Or if the central bank were not discretionary, probably bubbles would not exist. (Unless some other similar disturbance to prices were to exist that led producers to form incompatible beliefs.).

  83. Gravatar of ssumner ssumner
    5. July 2015 at 05:28

    Britonomist, Your definition of bubble implies that UK prices are again in a bubble. It’s a definition with no utility at all. It’s just saying “There was a period where prices were more volatile than usual.” But when you have shocks like the Global Financial Crisis then assets will be more volatile than usual. That’s how rational, efficient markets work.

    When people talk about “bubbles” they usually mean prices that were clearly too high. That’s obviously not the case for the UK, unless you think prices today are also clearly too high, which I strongly disagree with. They may be too high today, but there are not clearly too high today.

    Maurizio, You said:

    “A theory of bubbles as you describe it cannot exist. If we could really identify, as you require, “some fundamental value x, [such that] as soon as the price rises above x, we can expect the price to fall”, then the price would fall right now, falsifying the premise.”

    I disagree. In the case you describe prices would fall today if the market was rational. But bubblemongers say that this is exactly the problem, markets are not irrational. They say US house prices were clearly above fundamental value in 2006.

  84. Gravatar of Maurizio Maurizio
    5. July 2015 at 06:09

    @ssumner

    “I disagree. In the case you describe prices would fall today if the market was rational. But bubblemongers say that this is exactly the problem, markets are not irrational.”

    Ok, but what about the kind of bubblemonger who thinks that markets are rational? I.e. the one who says “we are in a bubble, and the reason why prices don’t fall today is that we have a discretionary central bank, so even for rational individuals it is impossible to predict when the bubble will burst” ?

  85. Gravatar of flow5 flow5
    5. July 2015 at 10:31

    “Keen: “what Kydland and Prescott found in their empirical analysis of the timing of economic variables: There is no evidence that either the monetary base or M1 leads the cycle, although some economists still believe this monetary myth”
    ————-

    Idiots seeking publicity. The “big boys”, or fund managers, are selling based on the y-o-y deceleration in M1. A 4th qtr. economic recession is imminent without added gov’t or Fed intervention. And that won’t happen until preliminary 4th qtr. #’s are released.

    Economic prognostications within a year are infallible. All boom/busts since the Great-Depression were both predictable and preventable. Economics is a hard science.

  86. Gravatar of flow5 flow5
    5. July 2015 at 11:06

    Percent change at seasonally adjusted annual rates

    M1……….M2

    3 Months from Feb. 2015 TO May 2015
    -0.8….. 3.8

    6 Months from Nov. 2014 TO May 2015
    7.7….. 6.5

    12 Months from May 2014 TO May 2015
    7.3….. 5.8

    When’s the last time you saw negative money growth? There will be a seasonal downswing that will usher in another recession/depression.

  87. Gravatar of flow5 flow5
    5. July 2015 at 11:15

    The Fed just pulled the rug out from under equities. The bubble is about to pop.

  88. Gravatar of ssumner ssumner
    6. July 2015 at 05:27

    Maurizio, I don’t view that as a bubble.

  89. Gravatar of Maurizio Maurizio
    6. July 2015 at 05:30

    @ssumner

    Thank you prof., I’ll think more about it.

  90. Gravatar of Maurizio Maurizio
    6. July 2015 at 05:37

    @ssumner:

    “Maurizio, I don’t view that as a bubble.”

    However, I guarantee to you that this is what Murphy and other Austrians mean by bubble. i.e. simply a situation where the economy is producing above the PPF (production possibilities frontier). A situation which, by definition, cannot go on indefinitely.

  91. Gravatar of ssumner ssumner
    8. July 2015 at 06:25

    Maurizio, Fair point, but that suggests we need more precise language, as that sort of case is radically different from a bubble in asset prices.

  92. Gravatar of flow5 flow5
    9. July 2015 at 17:23

    Recession in the 4th qtr. now a given (without intervention). A depression is becoming more likely.

    Commodities to “flash crash” in Dec.

    – Nostradamus

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