Archive for the Category Market monetarism


Under blogger eyes

I’m noticing that a lot of people don’t understand what I’m trying to do with this blog (Econlog they get).  Generally, I don’t like to analyze my own behavior, but in this case I’m going to have to make an exception.

The first thing you need to understand is that I’m superstitious about one thing.  I feel like horrible things won’t happen if everyone expects them to happen.  In late 2008, I was very frustrated over the fact that almost no one was talking about monetary policy, whereas I thought monetary policy was both far off course, and also the key to the Great Recession.  Even worse, I felt like I was mute—I had no voice in the conversation.

Eventually I started a blog, and wrote hundreds of histrionic over-the-top posts about how utterly brain dead Fed policy was in late 2008.  I mocked the September 2008 meeting, where they refused to cut interest rates.  I mocked the October 2008 decision to institute IOR.  I mocked Fed people who suggested that fiscal stimulus would help, at a time the Fed was not doing all it could.  And most of all, I relentless mocked the utter stupidity of allowing NGDP growth to plunge from positive 5% to negative 3%.  I became a proud member of a group known as “monetary cranks.”

My superstitious mind led me to believe that if everyone began paying attention to monetary policy, and particularly if everyone started paying attention to NGDP growth, then we would not repeat the mistake of 2008.  And it worked in the US—so far.  Now of course that doesn’t mean I had anything to do with it; I suspect if I had never been born things would have played out roughly the same way.  After all, lots of other market monetarists and even NKs were making some of the very same arguments.  But maybe I had a tiny role in reviving interest in the importance of monetary policy, and NGDP more specifically.  And that’s good enough for me. (And they did make the same mistake again in Europe (in 2011), where MM and NK ideas are less often discussed.)

I have the same sort of superstition about Trump.  I feel like if I write one absurd over-the-top post after another pointing out how utterly insane his views are on everything from the trade deficit to our One China policy, I can play a small role in making certain ideas seem disreputable.  I want to make it so that people are embarrassed, or feel a sense of shame, when they claim that trade deficits reduce GDP.  Or when they claim we should not lift a finger to prevent Russia from invading a foreign country, but should risk WWIII to prevent China from invading China.

Sometimes commenters ask me if I’m willing to bet on my predictions, or they ask why I am being so over the top in my criticism.  That misses the point entirely.  I’m doing these posts precisely in the hope that I’m wrong.  In fact (and here’s the superstitious part) I’m doing these posts in the hope that they cause the predictions to be wrong.  (Of course I mean these posts, and similar pieces by 100s of other pundits.)

They say that a watched pot never boils.  I feel like if the entire world of punditry were to focus like a laser on the utter stupidity of people like Ross and Navarro, then it would make their jobs a bit harder.  That spotlight might chasten them slightly.  Maybe a reporter will ask Ross if “He really believes EC101 teaches us that trade deficits reduce growth, because ya know, all the authors of those textbooks say it teaches exactly the opposite.”  Or “What grade did you get in your EC101 course, and how long ago was it.”  I want the idea that trade deficits reduce GDP to become as toxic, as laughable, as disreputable, as the idea that the Fed should stand idly by as NGDP falls by 3%.

This is all superstition, so I don’t expect anyone to see things the way I do.  All I can do is tell you that I find that when society as a whole focuses really hard on the utter stupidity of doing something, we actually almost never do that specific stupid thing.  We do lots of other stupid things, which we never saw coming, but not the one we obsessed about.  Or at least that’s how it seems to me.  (It also seems like I’m always in the slowest line at grocery stores.)

That doesn’t mean this is all an act on my part, I really believe that the views of Trump and his henchmen are borderline insane.  But I have no idea what Trump will actually do, because over the course of my life I rarely observe governments doing things that are widely viewed as obviously insane.  What about late 2008? Yes, I viewed that period as obviously insane, but the profession as a whole certainly did not–so that doesn’t violate my generalization.

Every time a respected economist says, “Maybe the anti–globalization people have a point” or “Maybe China trade really did decimate our working class”, it makes a Trump disaster more likely.  It weakens the intellectual wall of resistance to insane protectionist policies, by making them seem slightly less insane.  “Well even economists don’t agree . . . “.  We need a wall of strong opposition to the Trump program, or we risk a repeat of late 2008, with a global trade war replacing a global monetary policy failure.  That’s not my prediction of what will happen, but rather my prediction of what will happen if we fail to create the right zeitgeist.

I appreciate those who worry about my sanity, but my writing style actually has nothing to do with my mood.  I’m not like Paul Krugman; I don’t lose sleep over Hillary not winning.  Indeed I would have found a Hillary presidency to be dismal. This is a freak show, but a damn entertaining one.  Most of my real passion is focused on my book project, or the film I saw last night (2 episodes of a Polish TV show from 1988, called Dekalog—magnificent) or how Giannis Antetokounmpo and Russell Westbrook are doing. That’s “real life” for me, not politics.  I really do think the Trump phenomenon is an appalling freak show; but deep down I don’t think any of it will really happen—again, a watched pot never boils.

Of course there’s Germany in 1933 . . . no don’t go there. . . .

So the hysterical posts will continue until the morale in the comment section improves.

PS.  You may wonder about my earlier snobby claims that I don’t watch TV.  I saw the 1988 Polish TV show at the movie theatre.

PPS.  Some of you people who are attempting to be trolls—you are so far behind where the discussion is, you really ought to do something else with your time. There’s no shame in not being smart enough to follow the discussion.  But if you do insist on continuing to click on this blog, I’m going to keep cashing the advertising checks.

PPPS.  I probably won’t respond to any comments here, as I’m smart enough to know that my superstition is not intellectually defensible—so why bother trying to defend it?

PPPPS.  One commenter asked why I don’t leave the country.  What other country allows me to watch Polish TV shows one night, and NBA League pass games the next?  America will be fine; presidents have very little power.  R.E.M. put it best.

PPPPPS.  Off topic, but have you noticed that the moment we get a Republican president the pundits are full of discussion of “monetary offset”?  I may have lots of faults, but I do the exact same analysis regardless of who’s in office.

Did Kuroda luck out?

Most people will think this post is sour grapes on my part, but I’ve never cared what most people think.  I simply offer my honest opinion.  I was skeptical of Kuroda’s plan to peg bond yields.  (In this post I suggested that it was a positive step, but likely to have only a very small impact.)  But as of today the policy seems to be working.  The yen has lost about half of the ground gained over the last year. Recall it moved from about 125/dollar a year ago to 100 in late summer.  Now it’s plunged to 112.8.


So was I wrong?  I still don’t think so; rather I think that Kuroda got lucky.  Just after the policy shift, US bond yields started rising, in both real and nominal terms. Rates in some other important countries also started increasing.  This made the pegged 0% yield on 10-year JGBs look increasingly unattractive.  The yen depreciated.  If that change in global debt markets had not occurred, I doubt the policy would have had much impact.  Still, give Kuroda credit, as he was right and I was wrong.  (The markets were also wrong, and I’m a market monetarist.  Hence my incorrect prediction.)

If there’s a silver lining, it’s that I was less wrong than NeoFisherians who think a policy of lowering bond yields is disinflationary (I say never reason from a bond yield).  Keynesians who thought the BOJ was out of ammo were also wrong.  I always thought they had plenty of ammo, I just saw other tools as being more promising.

I’m not going to totally change my views based on this one data point, but I’ll file it away as one argument in favor of Ben Bernanke’s view of monetary policy.  (He’s the one who suggested this idea to Kuroda.)

PS.  If Japan were to hold the yen at around this level, then in the long run Japan would have about the same 2% inflation as the US is likely to have.  Markets currently don’t think the Japanese will do so, and thus they expect lower inflation in Japan.  But it’s entirely up to the Japanese where they want to set the exchange rate, and their inflation rate.  That’s a lesson I hope we can all agree on, except Noah Smith.

PPS.  Here’s another way of explaining my “lucky” argument.  The yen has fallen only slightly against the euro.  Europe also got lucky.


Another Market Monetarist Advisory

A few weeks ago I alerted readers to NGDP Advisers, which features Marcus Nunes, James Alexander, Benjamin Cole and Justin Irving.  Now we are about to see another MM advisory firm.  Lars Christensen will launch Markets and Money Advisory early next year.  Lars has a new post on the Riksbank, which provides an example of the sort of analysis he will be doing:

Believe it or not – there is a country in the world where I now believe that monetary policy is becoming (moderately) too easy. Yes, that is correct – I will not always say that monetary policy is too tight. The country I talk about is Sweden. More on that below.

Assessing monetary conditions

I strongly believe that the assessment of the monetary stance of a country should not be based on for example looking at the level of nominal interest rates, but rather on whether or not the country is on track to hitting the central bank’s nominal target in lets say 12-18 months.

A way of assessing that is of course to look at market inflation expectations (if the central bank targets inflation as in the case of Sweden’s Riksbank). If inflation expectations are below (above) the target (for example 2%) then monetary conditions are too tight (easy).

An alternative to this approach is to look at other monetary indicators – for example money supply growth, nominal GDP growth, interest rates and the exchange rate. And this is exactly what we are doing in our (Markets & Money Advisory’s) upcoming publication on Global Monetary Conditions.

Policy consistency  

Hence for all of the nearly 30 country we analyse in the publication we look at the four monetary indicators mentioned above and compare the development in these indicators with what we believe would be consistent with the given central bank’s inflation target.

I don’t know enough about Sweden to comment, but it certainly is an interesting case.  Here’s Bloomberg:

As the Brits worry about the ramifications of a weakening pound, Sweden’s central bank has happily driven down its currency to the lowest level in more than half a decade.

Defying fundamentals – strong economic growth, a big current account and trade surplus and rising employment – the Swedish krona was the second-worst performing currency in the world last month after the British pound.

Those “fundamentals” may be interesting, but they are not the sort of fundamentals that a central bank should focus on.  Instead, inflation and NGDP growth are what matter.  Just because you have a big current account surplus does not mean that money is too easy.  Indeed Japan experienced both deflation and a CA surplus at the same time.  Sweden’s surplus merely reflects its high saving rate; it tells us nothing about whether the exchange rate is at the wrong level.  For that, you need to look at NGDP growth.  Thus the Japanese yen is too strong because NGDP growth is too slow.  Lars suggests that Sweden’s NGDP growth is excessive, and that’s why he thinks they are too easy right now.

Sweden has other important lessons.  Compared to Denmark (4.2%) and Norway (5.0%), Sweden has a rather high unemployment rate–currently 6.6%.  But that probably reflects a higher natural rate of unemployment, which cannot be fixed with monetary policy.  Again, monetary policy cannot be used to “solve problems”—instead it should aim at steady NGDP growth rates to avoid creating problems.  But don’t go to the other extreme and “oppose monetary policy”.  There is no such things as not using monetary policy, and any attempt to refrain from using it will merely create bad (highly unstable) monetary policy.  I say this because I’m seeing this mistake more and more often.  This headline made me cringe:

Buiter: Forget Monetary Policy, It’s Had Its Day

Yes, and eating food won’t solve your problems, so STOP EATING FOOD YOU IDIOT!

Or perhaps I should say. “You may not care about monetary policy, but monetary policy cares about you.”

PS.  The Bloomberg article on Sweden suggests that current policy is turning the krona into “play money”.  That might be a bit strong, given that Sweden’s inflation rate is currently 1%.  That’s a tad below Zimbabwe 2008 levels.

Bernanke on the Fed’s new view of the economy

Ben Bernanke has a post discussing the Fed’s evolving view of the economy:

I’ll focus here on FOMC participants’ longer-run projections of three variables—output growth, the unemployment rate, and the policy interest rate (the federal funds rate)—and designate these longer-run values by y*, u*, and r*, respectively. Under the interpretation that these projections equal participants’ estimates of steady-state values, each of these variables is of fundamental importance for thinking about the behavior of the economy:

  • Projections of y* can be thought of as estimates of potential output growth, that is, the economy’s attainable rate of growth in the long run when resources are fully utilized

  • Projections of u* can be viewed as estimates of the “natural” rate of unemployment, the rate of unemployment that can be sustained in the long run without generating inflationary or deflationary pressures

  • Projections of r* can be interpreted as estimates of the “terminal” or “neutral” federal funds rate, the level of the funds rate consistent with stable, noninflationary growth in the longer term

He then explain how over the past few years the Fed has tended to consistently overestimate these variables:

Why are views shifting?  The changing views of FOMC participants (and of most outside economists) follow pretty directly from persistent errors in forecasting economic developments in recent years:As the table shows, FOMC participants have been shifting down their estimates of all three variables—y*, u*, and r*—for some years now.

Notice that there is no mention of the fact that the markets, and hence market monetarists, have generally been more accurate than the Fed.  We take financial market predictions seriously, and thus immediately discounted the Fed forecast of 4 rate increases in 2016, made back in December.  Indeed for years I’ve been arguing that the Fed’s dot plot is too optimistic about the Fed’s ability to raise interest rates under its current policy regime.

More than two years ago I suggested that 3% NGDP growth and 1.2% RGDP growth were the new normal, at a time when the Fed was still forecasting considerably higher rates.  Bernanke says the lower natural GDP growth rate is partly due to surprisingly low productivity growth.  Back in 2011, I suggested that we were having a “job-filled non-recovery“, just the opposite of the jobless recovery being discussed by many pundits.  Since then we’ve continued to have a job-filled non-recovery, with faster that expected job creation and a fast falling unemployment rate, accompanied by slower than expected RGDP growth.  This is just another way of saying that productivity growth has been lousy (indeed negative for three quarters in a row.)

It’s nice that the Fed is finally seeing the light on issues that market monetarists have been emphasizing for many years.  But I’d feel better if they took this as a lesson that they need to change their entire operating system, and start relying much more on market forecasts.

Back in 1997, Bernanke published a paper with Michael Woodford (in the JMCB) suggesting that market forecasts could be useful to policymakers, if they revealed information about the impact of different monetary policy instrument settings.  OK, so why doesn’t the Fed take Bernanke’s advice and create a set of prediction markets for inflation and output, one for each plausible instrument setting.

PS.  By “job-filled non-recovery” I did not mean that we were not getting closer to the natural rate, I meant we are not recovering in the sense of going back to the old trend line.  Clearly the labor market has been gradually recovering.

HT:  Bill Beach, Patrick Horan


Tim Duy discusses the evolving views of Fed Governor Powell

Tim Duy has a very good new post, showing how Jerome Powell is moving in a more dovish direction.  The following quotation is Powell, with the remark about the flat Phillips curve being Tim:

When I was first exposed to macroeconomics in college, more than four decades ago, the view was that inflation was strongly influenced by the amount of slack in the economy. But the relationship between slack and inflation has weakened substantially over the years.

Or, in other words, the Phillips Curve is flat. Not quite flat as a pancake, but pretty darn flat. More important:

In addition, inflation depends importantly on the inflation expectations of workers and firms. A widely shared view among economists today is that, unlike during the 1970s, expectations are no longer heavily influenced by fluctuations in inflation, but are fairly constant, or anchored. For both these reasons, inflation has become less responsive to cyclical changes in the economy.

I’d go even further.  The Phillips curve is not useful because it is NGDP, not inflation, that best explains how nominal and real variables are related. And the causation goes from the nominal to the real (NGDP to unemployment) not the real to the nominal (unemployment to inflation).

Once again, here’s Powell, with a follow-up comment by Duy:

I am often asked why rates remain so low now that we are near full employment. A big part of the answer is that, at least for the time being, the appropriate level of rates is simply lower than it was before the crisis. As a result, policy is not as stimulative as it might appear to be. Estimates of the real interest rate needed to keep the economy on an even keel if it were operating at 2 percent inflation and full employment–the “neutral rate” of interest–are currently around zero. Today, the real short term interest rate is about negative 1-1/4 percent, so policy is actually only moderately stimulative. I anticipate that the neutral rate will move up over time, as some of the headwinds that have weighed on economic growth ease.

The Fed increasingly recognizes that policy is not highly accommodative simply because rates are zero. The stance of policy is relative to the real interest rate, and a lower real rate means that policy is actually only “moderately” stimulative. Translation: There is no need to hike rates soon because policy is not particularly accommodative.

Of course market monetarists have been saying  that low rates don’t mean accommodative policy ever since 2008.  I’d go even further.  Not only is the current policy not as accommodative as it seems, it’s not accommodative at all.  NGDP growth (or inflation) are likely to undershoot the Fed’s goals.

Over the period since 2009, we’ve seen macroeconomic discourse evolve as follows:

1.  NGDP may be a more useful indicator of nominal conditions than inflation.

2.  The Phillips Curve is not very useful.

3.  Low interest rates do not imply that money is easy.

4.  Expansionary fiscal policy may be offset by an inflation targeting central bank.

5.  The zero lower bound does not prevent negative IOR.

6.  At the zero bound, a premature increase in interest rates will lead to lower interest rates in the long run.

Of course no one has a monopoly on these views, but which set of bloggers were most forcefully making these points in early 2009?

With the post-Brexit vote plunge in global bond yields, any doubts that low rates are the new normal are gone.  The Fed’s been much slower than the markets to understand this new reality, but they aren’t stupid.  At some point the Fed will realize that its preferred (“conventional”) policy tool simply doesn’t work.  Rates will immediately fall to zero in all future recessions, so “conventional” monetary policy will be useless.  How will the Fed react:

1.  NGDP targeting

2.  A higher inflation target

3.  Level targeting

4.  Miles Kimball’s negative IOR plan

5.  Throw up their hands and ask for support from fiscal policy

I hope and pray they don’t choose option #5. Because it won’t work.

PS.  Tyler Cowen just reported that Swiss yields are negative out to 50 years.  That’s why I opposed the Swiss decision to revalue the franc upward last year.  The upward revaluation was motived by a fear of inflation (and no, I’m not kidding.)

HT:  David Levey