No walls, no limits
[This post will make more sense if you first read my new Econlog post.]
Zimbabweans have shown that there are no limits to the amount of inflation that a central bank can create. BOJ Governor Kuroda agrees:
Bank governor Haruhiko Kuroda said things were looking brighter as exports and factory output gather steam — the bank said they were “sluggish” in a November statement.
That was its first upgrade to its view on the economy since May 2015.
The negative impact of a slowdown in emerging economies and Britain’s vote to exit the European Union were fading, Kuroda said.
“There were headwinds in the first half of the year, but they’ve now disappeared,” he added.
Japan has been on an unsure recovery path and the central bank remains way behind reaching a two percent inflation target that is a cornerstone of government efforts to revive the economy.
There are also questions about whether the BOJ can keep buying government bonds at the current pace without shocking debt markets.
Kuroda on Tuesday brushed aside talk about tapering the BOJ’s massive 80 trillion yen annual asset-purchase scheme and suggested there was no limit to what measures the BOJ can take. “We have to press on with strong monetary easing to reach the inflation target as early as possible,” he said.
“I do not subscribe to the view that policies face limits, like walls standing in the way.”
The metaphor I like is a prisoner sitting for years in his cell, assuming the door is locked. Then one day he tests the door, and finds that he can walk out any time he wishes. His imprisonment was all in his mind.
Some central banks see iron bars, others see no limits.
Tags:
23. January 2017 at 05:59
Serious question – how can you get someone to grasp an idea, when his/her brain is wired against it ?
If the human mental toolkit is mostly the same as it was in the Stone Age – and since fiat money wasn’t a thing back then – it might be that human brains simply don’t have the hardware to understand it.
The obvious solution would be a computer algorithm, but how do you get central bankers to give up their powers, when their brains are wired against that, too ?
23. January 2017 at 06:40
The locked in a cell with an unlocked door was used to great effect in the 50th anniversary Doctor Who special. I also recall that in “Support your Local Sheriff”, James Garner kept a prisoner in a cell without bars by painting a line and telling the prisoner that he would be shot if he crossed the line.
23. January 2017 at 08:17
Daniel, That argument could have been used against abandoning the gold standard, but it happened. It could have been used against abandoning Bretton Woods, but it happened. It could have been used against adopting inflation targeting, but it happened. It could have been used against negative IOR, but it happened.
Things change, and they’ll keep changing. You want to be there with the right ideas, when society is ready for a change.
Thanks David.
23. January 2017 at 08:35
Did you know? He recently wears “no-frame” so-called “2 point glass”
https://www.google.co.jp/search?q=kuroda+boj&client=opera&hs=og4&biw=1920&bih=971&tbm=isch&source=lnms&sa=X&ved=0ahUKEwjV5v732NjRAhVFkJQKHT5NBf0Q_AUICSgC&dpr=2#q=kuroda+boj&tbm=isch&tbs=qdr:w
23. January 2017 at 09:40
I love that this sentence is written in the passive voice:
“There are also questions… without shocking debt markets.”
The people with those questions should be embarrassed to be identified.
23. January 2017 at 10:22
Daniel wrote:
Serious question – how can you get someone to grasp an idea, when his/her brain is wired against it ?
If the human mental toolkit is mostly the same as it was in the Stone Age – and since fiat money wasn’t a thing back then – it might be that human brains simply don’t have the hardware to understand it.
Daniel, how did you figure out how to communicate your question to Scott? There were no keyboards on the Serengeti.
23. January 2017 at 10:25
Scott, nice metaphor. I would add that the hallway leading out of the prison keeps expanding by one foot, for every step the prisoner takes. (Prices go up when you print more money.)
23. January 2017 at 10:52
Scott,
Japan has such severe supply side problems, I’m not sure the traditional transmission mechanism works anymore. Mostly what’s happening is the market is selling yen assets to the BoJ and then replacing them with foreign assets, which drives up the dollar and boosts Japanese exports and growth. It might be easier for Kuroda to just buy US Treasuries.
23. January 2017 at 11:07
@Bob Murphy: “the hallway leading out of the prison keeps expanding by one foot, for every step the prisoner takes.”
That sounds like a criticism of the post, a sort of Sisyphean futility to taking action. Yet … did you read Scott’s linked Econlog post? Bernanke makes the point: “my claim has two parts: First … monetary policymakers retain the power to increase nominal aggregate demand and the price level. Second, that increased nominal spending and rising prices will lead to increases in real economic activity. The second of these propositions is empirical but seems to me overwhelmingly plausible … The first part of my claim will be, I believe, the more contentious one.”
You seem to agree with Bernanke’s first (“contentious”) point, since you say: “Prices go up when you print more money.” So perhaps this post was not for you. Sumner (and the BOJ) were addressing critics who think that central banks are “out of ammunition”, and don’t have the power to hit their inflation targets. That doesn’t seem to be you.
You seem to be criticizing Bernanke’s second claim (that nominal shocks have real effects), but that’s not what this post was about.
23. January 2017 at 14:15
I always found it really weird that Bernanke writes such conflicting essays. It doesn’t make much sense. Sure, Scott got a theory why he behaves in this way: Bernanke doesn’t really believe what he is writing – but in the end that’s just wild speculation. And it still does not explain why Bernanke is writing this conflicting stuff in the first place.
23. January 2017 at 16:01
Nice post.
BTW Japan may have trouble hitting its 2% IT as it is building housing, thus lowering inflation ss reported.
http://ngdp-advisers.com/2017/01/22/american-macroeconomists-ossify-uselessness/
Add this observation to Scott Sumner’s previous post period, in which we see growth is in those U.S. cities with property zoning constraints.
Perhaps a better solution to fighting inflation than suffocating the economy and unemploying people is to simply build a lot more housing.
23. January 2017 at 16:43
Question for Sumner: leaving aside the fiction that debt is never a problem because ‘we owe it to ourselves’ (whatever is wasted by the government sector running up deficits is saved by the private sector, in a closed economy), do you or don’t you think that when debt is owned by foreigners, as is the case in the USA (15% of debt I think is owned by foreigners) that running up perpetual deficits is a problem? Because you either have to default on the foreigners held debt or somehow hyperinflate it away. So how is Abenomics good for Japan long term, seeing it has not worked to increase demand?
23. January 2017 at 16:49
@Ben Cole – OT – “The Fed Wears the Pants: Why Confidence Doesn’t Matter ” – from M. Nunes website. Jesus man, if you don’t believe in the confidence fairy (animal spirits) how are you going to explain when your NGDP targets predicted are so wrong? You have no Plan B for your subscribers. So essentially you don’t plan on being in business long term? OK.
Here’s a better business plan: start three stock forecasting newsletters, on different sites, different names. One is bearish, one is neutral, one is bullish. Fold two of the three that fail to predict the future and promote the one that was right on. (Disclaimer: this practice is illegal under SEC rules)
23. January 2017 at 17:11
Scott,
I was being tongue in cheek. I have no idea what the status of the art collection is.
But…. how about a value added toll on trucks coming across the Ambassador Bridge from Canada.
23. January 2017 at 19:07
Ray Woepez:
You actually have the germ of a good idea. One should issue doomsday forecasts every year under a new banner. Sooner or later you will hit, and then be a media star for a while, and cash in. Only takes one good year.
A couple of years back, I said I would become your valet for $200k a year. The offer stands.
24. January 2017 at 06:37
Thanks Bob.
dtoh, Supply-side factors are irrelevant, I’m talking about NGDP, not RGDP.
I think the toll would be unconstitutional (trade barrier)
Ray, Abe has increased AD.
24. January 2017 at 07:07
That argument could have been used against abandoning the gold standard, but it happened.
People still act as if you can’t JUST PRINT more money.
And whenever someone points out that you can in fact do just that, the usual morons (hello there, Bob Murphy) get all emotional.
But maybe I’m underestimating the power of a few well-placed autistics.
24. January 2017 at 08:53
@Sumner – professor, please do a column on why you think Abenomics has increased AD and worked. It has not, and you don’t have to be Edward Hugh to admit this, see the sympathetic articles below. The only thing Abenomics has done is increase inflation a bit. And in fact the very idea that inflation has increased but AD has not seems to defeat your ideas of monetarism, though perhaps the inflation generated is not sufficiently high for your satisfaction.
RL
https://shreysfinanceblog.com/2016/09/30/shinzo-abes-abenomics-has-failed-but-why/
http://www.economist.com/news/finance-and-economics/21702756-abenomics-may-have-failed-live-up-hype-it-has-not-failed-and
24. January 2017 at 13:43
Scott,
You said; “I’m talking about NGDP, not RGDP.”
Me too. But outside of a hyper-inflationary environment, changes in the price level don’t happen without a change in the expected balance of real supply and demand. Expectations have to be about something so unless there is a realistic expectation of a change in real supply or demand, you’re not going to get any inflation. The BoJ simply buying assets (issuing money) is not going to effect the price level except through real effects. If you have sufficiently serious supply side problems, then the real effects are muted and the money simply gets used as a store of value rather than as a medium of exchange, i.e. no hot potato. (Or it’s used to buy external assets.)
I haven’t fully thought through the external/ trade effects, but from a purely domestic viewpoint, I don’t think Japan could get anywhere close to 2% inflation unless they can push real growth north of 4 or 5%.
24. January 2017 at 13:51
Scott,
There’s already a toll on the Ambassador Bridge and funnily enough the bridge is privately owned.
24. January 2017 at 17:19
@dtoh – “but from a purely domestic viewpoint, I don’t think Japan could get anywhere close to 2% inflation unless they can push real growth north of 4 or 5%” -not sure what you mean here, but I hope it’s not the mistaken popular idea that real growth follows inflation (in fact real growth and inflation are not tightly correlated).
Go here: http://www.tradingeconomics.com/japan/inflation-cpi then also click here: http://www.tradingeconomics.com/japan/gdp-growth-annual and notice in 2014 Japan had nearly 4% inflation and almost zero (even negative) GDP (nominal) growth during that time. So much for “Abenomics”. Again, inflation and real growth (NGDP = RGDP + inflation) are not strongly correlated, especially in these times.
Are you a Sumner supporter? Like a Trump supporter, on this blog it’s a badge of honor, not lunacy, lol.
24. January 2017 at 17:25
My follow-up comment on the econlog post is stuck in a spam filter or something.
I’m sure no Keynesian denies that a central bank with absolutely no political or legal bounds couldn’t create inflation. Zimbabwe printed money non-stop to enrich political insiders at the expense of money holders.
I’m worried about norms with America under Trump, but I’m not worried our central bank will become Zimbabwe’s. Inflation has to be created by some mechanism allowed legally and acceptable politically.
I know Scott’s preferred mechanism is Fed being a counterparty in an NGDP futures market. Barring that, Scott seems to support OMO’s of private, risky assets. I personally think private ownership is the most problematic solution of the ZLB, compared to restrictions on cash printing and denominations or compared to helicopter drops.
24. January 2017 at 17:32
Ray
Read my post again. I said from a domestic viewpoint. I did not say anything about inflation from higher import prices.
I agree with most of Scott’s views on monetary policy. Less so on some other issues.
I’m cautiously very optimistic about Trump. I think Hillary would have been a disaster for mankind.
24. January 2017 at 17:45
@Dtoh – you’re not making any sense, but perhaps you are a bit more knowledgeable about Japan than me? Or you’re just a Trump supporter. First, click on the links, play around with the years, and notice the surge in JP GDP as well as inflation in late 2013 and into early 2014 petered out. Even after inflation went to over 3%/yr in mid 2014 in JP, the GDP collapsed. Are you claiming this was due to ‘higher import prices’? Of what? Oil? It can’t be higher oil, since oil was $100/bbl in 2012, and JP’s inflation until mid 2013-2014 was low. It was something else, what?
I wish our host would blog on Japan’s mid-2013 to mid-2014 surge in inflation, that caused no long term surge in NGDP. I know he has said in one-line passages something along the lines that the JP central bank ‘lost nerve’ and did not follow through on money creation (or something), but I wish he’d do a detailed post on this episode, with real numbers from the JP central bank. It seems to me the JP episode in a surge of inflation from mid-2013 to mid-2014 that did not cause a surge in even nominal GDP is a direct refutation of NGDPLT. Paging Dr. Sumner!
24. January 2017 at 18:42
Ray,
Imports are generally priced in dollars. Inflation is measured in yen. Aggressive OMP by BoJ caused investors to buy foreign assets which drove down the yen causing the price of imports as measured in yen to rise. When the BoJ backed off on OMP, the yen rose.
25. January 2017 at 01:15
“Zimbabweans have shown that there are no limits to the amount of inflation that a central bank can create.”
Lots of Q.E.?
25. January 2017 at 05:50
OT:
1/25/17
On the mainland, the Shanghai Composite 0.22% to 3,149.55. Gains were limited after the central bank raised interest rates on a key funding tool to curb borrowing, said analysts. However, five initial public offerings hit their daily increase limits, up 44%, shortly after the market opened.
Five IPOs all going up 44% on debut?
Perhaps we should be asking for macroeconomic advice from China, rather than trying to give it.
25. January 2017 at 07:45
@dtoh 24. January 2017 at 18:42 – perhaps, but I wish our host would do a column on what he believes happened to Japan from mid 2014 to mid 2014, and why the momentum failed to carry on. If he did, we might learn something about how he thinks about economics, rather than more stuff about the idiot populist Trump.
25. January 2017 at 09:15
Ray,
You can Google it. Scott did a lot of posts on the subject at the time.
25. January 2017 at 09:39
@dtoh: you can’t possibly believe Clinton would have been “a disaster for mankind” and if you do you are as stupid as the people who think Trump will be a disaster for mankind. This kind of rhetoric is why we can’t have nice things.
25. January 2017 at 15:49
@msgkings
You’re correct. I don’t believe Clinton would have been a disaster for mankind. To be more precise, I believe there was a high risk and probability that she would have been a disaster for mankind.
No it’s not rhetoric.
By most measures, I’m not stupid.
Ad hominem arguments (e.g. calling people stupid) is the reason we can’t have nice things.
25. January 2017 at 16:20
@dtoh – “You can Google it. Scott did a lot of posts on the subject at the time [on the increase of JP inflation from mid-2013 to mid-2014, and the subsequent increase in NGDP, then the sudden collapse of NGDP despite inflation being high]
Cite please? Or what was the conclusion? What you said about import prices rising? Sumner says a lot of things, and you can read whatever you want from his numerous ambiguous postings. Part of his ‘charm’.
25. January 2017 at 18:38
@Ray
Sorry I got a day job, but you can probably Google as good as me…. try “MoneyIllusion BoJ Kuroda” or something like that.
I wouldn’t try to speak for Scott, but he has slightly different views than mine on the transmission mechanism for monetary policy. It’s basically money-centric (I think financial assets play a more important role.) His views IMHO are predicatively very accurate for the US economy, but I don’t think they work quite as well for completely explaining what’s gone on in Japan.
25. January 2017 at 18:38
dtoh, You said:
“But outside of a hyper-inflationary environment, changes in the price level don’t happen without a change in the expected balance of real supply and demand. ”
I don’t know what any of that means. Real demand? You mean real aggregate demand? What is that?
You said:
“There’s already a toll on the Ambassador Bridge and funnily enough the bridge is privately owned.”
So? What bearing does that have on your previous comment? You were describing a tariff, not a toll.
Ray, I’ve done 100 Abe posts, how many do you want?
25. January 2017 at 19:48
Scott,
No I think I said a “value added toll.” I’m only half serious, but it might be an interesting idea. Many mainstream ideas start off as crazy ideas. Right there is a private citizen who by virtue of a geographic monopoly is able to collect an effective tariff on goods brought into the U.S. Because of the revenue stream, the bridge is apparently worth nearly as much as the art collection.
Changes in real demand is when people buy more (or less) stuff. In other words you can’t get inflation just by printing more money, people have to actually buy more stuff (or be expected to do so.)
Clear now?
26. January 2017 at 21:13
Learned helplessness
https://en.wikipedia.org/wiki/Learned_helplessness
Happy 2017!
27. January 2017 at 07:02
dtoh, A value added toll is a tariff, not a toll. Calling it a “toll” does not change that fact. It’s illegal.
Statsguy, Thanks, and come back more often!
27. January 2017 at 18:44
Scott,
You sure? I think only the States are prohibited from imposing tariffs. I don’t think there is any restriction on private individuals or companies effectively imposing a tariff if they have the means to do so. (Not sure about municipalities, but certainly there is nothing in the Constitution about it.) Price discrimination statues might prevent a company from imposing value based charges on imports, but these statutes are pretty weak in the U.S.
28. January 2017 at 07:50
dtoh, The bridge revenue is private? In any case, if it is, how does that benefit Detroit? Wouldn’t that help the owners of the bridge?
28. January 2017 at 08:27
Scott,
Detroit controls road access to the bridge, they could impose their own tolls on the access roads or they could extort the bridge owner into paying a fee for continued connectivity between the bridge and the roads on the Detroit side, or they could build a new bridge and charge their own tolls or they could sell a concession for a secondary bridge. (Politically it’s a mess.)
BTW – Why are we talking about Detroit infrastructure in a post about BoJ policy? 🙂
Anyway I think the problem for Detroit is not building new infrastructure but decommissioning existing infrastructure.