AS/AD, now more than ever

Someone please tell Nick Rowe to take his meds before reading this post.

This morning Draghi held a press conference to explain why the ECB had decided not to cut rates, despite 5 years of near-zero NGDP growth:

The bank sees no deflation, nor risk of deflation in any eurozone country.  And lower inflation was not of itself a big problem. “With low inflation, you buy more stuff,” Mr Draghi explained.

Just shoot me.

HT:  Petar

PS.  The eurozone Q1 NGDP data FINALLY came out.  Up 2.7% in 5 years.  Not 2.7% per year; 2.7% TOTAL.  (That’s basically zero per capita.)  And it’s flat over the past 2 quarters.

PPS.  Draghi also bragged about how he had avoided doing the foolish QE that Bernanke is engaged in.  BTW, American NGDP is up 12.1% in 5 years, which is still too little.  Commenter Barry says:

QE is doing great for the top 20% who own 80% of the financial assets, but the bottom 80% who are wage earners, not so much.

Oh really?  Compared to what?  Check out wages and salaries in the eurozone.


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34 Responses to “AS/AD, now more than ever”

  1. Gravatar of marcus nunes marcus nunes
    6. June 2013 at 10:39

    Making the elementary error of ‘reasoning from a price change’. But these days central bankers will ‘flip’ anything to justify the unjustifiable!

  2. Gravatar of jknarr jknarr
    6. June 2013 at 10:48

    The first step to understanding Draghi, or any central banker for that matter, is look what they do (tight money), not what they say (whatever).

    Until you do that, you will want to pull the trigger. Anybody who trusts these guys should anyway.

  3. Gravatar of ChargerCarl ChargerCarl
    6. June 2013 at 11:14

    How the eff did this guy receive a doctorate from MIT in the 70’s?

  4. Gravatar of J J
    6. June 2013 at 11:20

    Professor Sumner,

    That complaint that QE helps only rich people is constantly repeated. Poor and middle class workers have not had much real wage growth for a long time. Is monetary policy a failure if it doesn’t boost employment/output AND fix long-term inequality problems? It seems like people are searching for any reason to advocate monetary tightening.

  5. Gravatar of Bob Bob
    6. June 2013 at 11:28

    Prices staying low is no relief for those whose income drops to zero.

  6. Gravatar of jknarr jknarr
    6. June 2013 at 11:37

    Tight money boosts the power and wealth of bankers and politicians — it’s an old observation, ask William Jennings Bryan. Loose money benefits “farmers and workers”.

    Financial assets — mostly owned by the wealthy — benefit from tight money and lower rates. That is, the price of cash flow generating assets rises when you make cash flows scarce by constricting NGDP. What is NGDP today? 3.4%

    You want to boost income equality? Adopt LR NGDP targeting and scrap the central banks.

  7. Gravatar of Michael Michael
    6. June 2013 at 11:39

    Here’s another critique (from Cato’s Steve Hanke):

    http://www.cato.org/blog/federal-reserve-vs-small-business-0

    “With the availability of such a market, banks can lend to their clients with confidence because they can cover their commitments by bidding for funds in the wholesale interbank market.

    At present, however, the interbank lending market is not functioning as it should. Indeed, one of the major problems facing the interbank market is the so-called zero-interest-rate trap. In a world in which the risk-free Fed funds rate is close to zero, there is virtually no yield be found on the interbank market.

    In consequence, banks with excess reserves are reluctant to part with them for virtually no yield in the interbank market. As a result, thanks to the Fed’s zero-interest-rate policies, the interbank market has dried up (see the accompanying chart).”

    This doesn’t make sense to me. Are there some banks that DON’T have excess reserves? Assuming that there are such banks, why can’t they just send some treasuries to the Fed in exchange for reserves? Or offer to pay higher interest to banks on borrowed reserves? If credit is a limiting factor for businesses, banks should be able to get away with charging more interest rate regardless of what the Fed funds rate is at.

  8. Gravatar of ChacoKevy ChacoKevy
    6. June 2013 at 11:41

    RE: Monetary stimulus and income inequality: Did this paper get any discussion?
    http://www.imf.org/external/pubs/cat/longres.aspx?sk=26174.0

    Seems something that an Occupier would be cheering.

  9. Gravatar of Michael Michael
    6. June 2013 at 11:44

    J Knarr wrote:

    “Tight money boosts the power and wealth of bankers and politicians “” it’s an old observation, ask William Jennings Bryan. Loose money benefits “farmers and workers”.”

    I agree with you on tight money, and I think that is a big part of the reason why we still have tight money – I think demands for tight money are just another form of rent-seeking. (Of course there is a point where overly loose money would not benefit farmers and workers… but appropriate monetary policy would certainly do so).

  10. Gravatar of Gregor Bush Gregor Bush
    6. June 2013 at 11:47

    As Nick Rowe would say: Oh Christ!! The second most powerful sentral banker in the world has no idea what inflation is. Oh Christ!! The euro zone recession will never end.

  11. Gravatar of Steve Steve
    6. June 2013 at 11:48

    “”With low inflation, you buy more stuff,” Mr Draghi explained.”

    This is a product of the MIT PhD Class of 1976.

    (The liquidity trap revival came from the MIT PhD Class of 1977)

  12. Gravatar of Steve Steve
    6. June 2013 at 11:53

    This week has been a Murderer’s Row of speakers:

    Esther George
    Richard Fisher
    Mario Draghi

    Anybody think the markets had a freakout starting last Friday just because someone looked at the event calendar for this week?

  13. Gravatar of jknarr jknarr
    6. June 2013 at 11:56

    Michael, the hardest problem before us is not even that money is tight — it’s that the entire economics profession (present company excluded) refuses to call Wall Street and DC on it. In my case, Friedman freed-my-mind, and I then found Scott, who convinced me that I was not crazy, although the jury’s still out on that.

    As he says, its freakishly insane when 99% of the “profession” thinks money is loose at 3.4% NGDP and a 2% 10y. Economists that know otherwise are likely paid to shut up, most are sheep, and quite a few are very likely stupid.

  14. Gravatar of Becky Hargrove Becky Hargrove
    6. June 2013 at 12:12

    Mr. Draghi??

    I’m not even an economist – just a concerned citizen…still I have to say, this one’s for you:

    http://monetaryequivalence.blogspot.com/2013/06/good-and-bad-deflation-good-and-bad.html

  15. Gravatar of Doug M Doug M
    6. June 2013 at 12:14

    If you can’t afford everything you want to buy, it must be because prices are too high! Everyone knows that!

  16. Gravatar of Saturos Saturos
    6. June 2013 at 12:15

    Mario Draghi got his PhD under Modigliani and Solow at MIT. He was director general of the Italian treasury from 1992-2001, where he wrote fundamental Italian financial regulation, and then managing director of Goldman Sachs from 2002-2005.

  17. Gravatar of Saturos Saturos
    6. June 2013 at 12:16

    And he never read an econ 101 textbook? Or he’s just lying and probably evil?

  18. Gravatar of jknarr jknarr
    6. June 2013 at 12:28

    If we presume central bank good faith, then we are victims of the “streetlight effect”. I’d suggest that most economist’s assumptions are flawed: bad faith may be Occam’s razor here.

    The streetlight effect is a type of observational bias where people only look for whatever they are searching by looking where it is easiest.

    The parable is told several ways but includes the following details: A policeman sees a drunk man searching for something under a streetlight and asks what the drunk has lost. He says he lost his keys and they both look under the streetlight together. After a few minutes the policeman asks if he is sure he lost them here, and the drunk replies, no, that he lost them in the park. The policeman asks why he is searching here, and the drunk replies, “this is where the light is.”

  19. Gravatar of joe joe
    6. June 2013 at 12:50

    “That complaint that QE helps only rich people is constantly repeated. Poor and middle class workers have not had much real wage growth for a long time. Is monetary policy a failure if it doesn’t boost employment/output AND fix long-term inequality problems? It seems like people are searching for any reason to advocate monetary tightening.”

    A lot of the studies being cited recently regarding this subject come to the conclusion monetary tightness increases inequality. Therefor, a lot of the literature is actually endorsing “looser” monetary policy, in the current environment. Where truly following the Taylor Rule would lead to negative interest rates.

  20. Gravatar of Saturos Saturos
    6. June 2013 at 14:32

    Barry Poulson is skeptical of Japanese QE: http://www.project-syndicate.org/online-commentary/quantitative-easing-and-the-silent-run-on-the-yen-by-barry-w-poulson

  21. Gravatar of ssumner ssumner
    6. June 2013 at 14:34

    Marcus, Yes, reasoning from a price change.

    ChargerCarl, Good question.

    J, You said;

    “Is monetary policy a failure if it doesn’t boost employment/output AND fix long-term inequality problems? It seems like people are searching for any reason to advocate monetary tightening.”

    Yes, the current monetary policy is a failure, which is why we need to switch to an expansionary policy. (I know what you meant, but I think lots of people don’t understand that money has been tight.)

    Michael, I’m as confused as you are.

    Saturos, That’s the question–does he really believe this stuff? I have no idea.

  22. Gravatar of 123 123
    6. June 2013 at 14:56

    In the context of price level targeting, negative oil price shock is a good thing. Most likely this is what Draghi had in mind.

  23. Gravatar of jknarr jknarr
    6. June 2013 at 15:01

    Draghi should be under house arrest with a work release to care for these people. He might learn that bad faith has consequences:

    http://preview.reuters.com/2013/6/5/gallery-down-and-out-in-athens

  24. Gravatar of Geoff Geoff
    6. June 2013 at 15:39

    Just like there is no law of the universe that says my income, or my household’s total income, or my city’s total incomes, must grow at 5% each and every year regardless of what we do, so too is there no law of the universe that says it must occur for enough people that constitutes a country or OCA.

    This incredible fetishizing over demanding that total incomes for an arbitrary group of people must grow at a certain rate come high or hell water, is mentally unhealthy, and flawed reasoning.

    QE is doing great for the top 20% who own 80% of the financial assets, but the bottom 80% who are wage earners, not so much.

    “Oh really? Compared to what?”

    Compared to a QE that sees the CB purchase assets from the 80% instead of the 20%.

    Compared to no QE that would not have increased the nominal incomes of the 20% more so than the 80% such that the relative resulting difference is otherwise smaller.

    Compared to a free market in money.

    There are countless comparisons that can be made, but these are all besides the point. QE did in fact help the 20% far more than the 80%, which of course is not a product of individual productivity, but simply the legal nature of the inflationary system. This point is not refuted by pointing to some fire and brimstone alternative one has imagined in one’s mind.

    ————

    Draghi’s statement “With low inflation, you buy more stuff” is true in the proper context. In the context of an individual’s nominal income growth outpacing price inflation, which does exist by the way, low price inflation does indeed allow the individual to buy more stuff as compared to if the prices were higher.

  25. Gravatar of ssumner ssumner
    6. June 2013 at 15:43

    Becky, Thanks for educating people on the difference between good and bad deflation.

    Saturos, I gave up after a few paragraphs. I just can’t read that sort of stuff anymore.

    123. If it was low inflation caused by a positive supply shock then output would be increasing, so I think we can safely rule out that possibility.

    jknarr, Yes, that is partly on the ECB, although it’s also partly on the last few Greek governments.

  26. Gravatar of 123 123
    6. June 2013 at 15:52

    Scott, my reading of Draghi is that the lower oil prices today will cause larger NGDP in the future in the context of quasi-PLT.

  27. Gravatar of Saturos Saturos
    6. June 2013 at 16:03

    Not good: The yen just soared and Nikkei futures are dropping, according to the FT.

  28. Gravatar of Simon Simon
    6. June 2013 at 16:04

    “With low inflation, you buy more stuff,” Mr Draghi explained.

    And there was much rejoicing.

    http://m.youtube.com/watch?v=yciX2meIkXI

  29. Gravatar of ssumner ssumner
    7. June 2013 at 06:12

    123, You can’t have it both ways. You can’t say you are targeting inflation, and then be happy when you miss your target. It makes no sense. In any case, they expect 1.3% inflation next year, so they expect to keep missing their target. That’s policy failure even if you think inflation is the right target (which it isn’t.)

    Inflation is falling due to weak demand. That may well be true of oil as well. Weak demand reduces the public’s ability to buy more stuff.

    Saturos, I’ve suggested they probably need to sustain around 120yen/dollar to be confident of getting inflation. Things are getting better, but Japan is not out of the woods yet.

  30. Gravatar of 123 123
    7. June 2013 at 06:59

    Scott, they are targeting inflation 3-5-10 years ahead, and looking through the short term inflation volatility. Still, in such framework, a below-forecast inflation print due to oil price drop is good news.

  31. Gravatar of TallDave TallDave
    7. June 2013 at 08:53

    That complaint that QE helps only rich people is constantly repeated.

    I’d argue that can only be true if it doesn’t help employment. Because low income earners tend to be marginally employable, small changes in the labor market have an outsize effect on them.

    I’d also argue what matters is whether the distribution of foregone consumption (savings) is being allocated efficiently (which mostly means “not coerced”), not how flat the distribution of income/wealth is. That’s why rich countries develop inequality — allocating wealth to value creators makes everyone better off.

    In any case, they expect 1.3% inflation next year, so they expect to keep missing their target.

    Their target seems to be “below 2%” rather than 2%.

  32. Gravatar of TallDave TallDave
    7. June 2013 at 09:10

    Still, in such framework, a below-forecast inflation print due to oil price drop is good news.

    Yes and no. It’s good oil is available more cheaply, it’s not good that the Fed isn’t maintaining their target.

    Imagine Rossi’s crazy nickel-fusion concept pans out and world energy prices drop ~80% over the next couple decades. That would clearly be a huge boon to humanity, but central banks would have to work a lot harder keep us out of ZLB.

  33. Gravatar of ssumner ssumner
    8. June 2013 at 06:45

    123, That “short term volatility” is the worst depression since the 1930s. Maybe they should not be ignoring it.

    If, as you claim, they have a flexible inflation targeting regime, the inflation rate should be higher than 2% during recessions and lower than 2% during booms. They are doing the opposite. That’s not good.

    TallDave, 1.95% is also below 2%. And contrary to what people have been told, the ECB was not given a single mandate to target inflation. They are told to focus on other variables as well, it’s just that inflation is the primary target. Thus they should probably be aiming for 2.2% inflation next year, as that would help in terms of their secondary targets.

  34. Gravatar of TheMoneyIllusion » Draghi: High eurozone unemployment is causing low AD TheMoneyIllusion » Draghi: High eurozone unemployment is causing low AD
    10. June 2013 at 11:20

    […]  Remember, this is the same guy who said lower than target inflation is good news, as people will be able to consume more.  One could construct an entire principles of macro text […]

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