David Beckworth vs. the Zero Sum pessimists

David Beckworth has an excellent new piece on a theme he first developed a while back:

The ECB Needs the Fed Now More Than Ever

And it is not because the ECB needs more currency swaps.  It is because the ECB needs the Fed for cover.  Here is why.  The Fed is a monetary superpower.  It manages the world’s main reserve currency and many emerging markets are formally or informally pegged to dollar. As a result, its monetary policy gets exported to much of the emerging world. This means that the other two monetary powers, the ECB and Japan, have to be mindful of U.S. monetary policy lest their currencies becomes too expensive relative to the dollar and all the other currencies pegged to the dollar. So, to some extent U.S. monetary policy also gets exported to the Eurozone and Japan too.

Here’s a prediction.  If the Fed moves aggressively enough to sharply boost US stock prices, then eurozone stock prices will also rise even if the euro appreciates.  In other words, when it comes to macroeconomics, the income effect is way more important than the substitution effect.  Forget about all that CA deficit stuff.  The developed world doesn’t need a weaker dollar or a weaker euro.  It needs both, i.e. higher NGDP.

PS.  At least I think the ‘monetary superpower’ concept was David’s idea.  It’s possible he stole it from Krugman.



38 Responses to “David Beckworth vs. the Zero Sum pessimists”

  1. Gravatar of james james
    16. November 2011 at 21:40


    Where is the Fed’s mandate to boost stock prices? Nowhere. So, stop trying to argue that all our economic problems will be solved by the Fed targeting the stock market. It won’t.

  2. Gravatar of Bogdan Bogdan
    16. November 2011 at 22:02

    The David Beckworth paper on Great Liquidity and Monetary Superpower is really good!

    As to Paul Krugman, I lately read a blog post of his trashing, via Brad Delong, a “liquidationist” quote by Ludwig von Mises in which neither made even the slightest effort to qualify their statements at least in regard to the historical institutional setting to which Mises was refering.

    Whatever one thinks about his view now, Mises was actually refering to what constituted business as usual under the “automatic” pure gold standard system, in which excess money issues eventually lead to a gold drain and a price level deflation, which was transmitted both through the external balance of payments, i.e. gold capital outflow, and through the internal balance, i.e. gold bank withdrawals and/or increased gold hoardings. Overall, the system worked pretty well back, probably due to other institutional factors, like lower price rigidities. Mises – and later Hayek – might have been mistaken to push for this maximalist view in the new institutional environment of the interbellum period, with the complicated gold and foreign currency exchange standard on the monetary side and collective bargaining and generally more rigid prices on the market side of things. Mises (not to mention other Austrians like Strigl or Machlup) was quite aware that deflation due to higher demand for money created its own problems (in fact his career-launching book, “The Theory of Money and Credit” was important partly because of his analysis of this issue), but given the institutional setting he was assuming he considered the problem of less, or of secondary importance (whence Hayek’s later change of mind about the importance of secondary deflation).

    So, even though one might think that Mises misjudged the situation in the 1930s, his views and underlying theory are not those of a monetary cranck as he was pictured in those posts, but actually straightforword mainstream monetary and macroeconomic analysis, at least from a non-specifically Keynesian perspective.

    Anyway, his has nothing to do with the post but I had to make a comment on this somewhere and 🙂

  3. Gravatar of Bob Murphy Bob Murphy
    16. November 2011 at 23:08

    Scott wrote:

    The developed world doesn’t need a weaker dollar or a weaker euro. It needs both, i.e. higher NGDP.

    Just to make sure I have the Sumnerian mindframe down, a weaker US dollar is neither necessary nor sufficient for higher NGDP, right?

    I mean, in practice it might be, but strictly speaking both a weaker dollar and a weaker euro can only mean that prices in both dollars and euros are rising, i.e. “inflation” (as if that word meant something). And theoretically we could have rising prices but falling RGDP, so that NGDP is flat or falling too, right?

    Note I’m not saying you made a mistake, I just want to make sure I understand your leap from a weaker currency to rising NGDP. You’re relying on an underlying assumption that RGDP doesn’t fall, right?

  4. Gravatar of Doc Merlin Doc Merlin
    16. November 2011 at 23:54

    “Why did the Fed and other banks allow credit creation in excess of GDP for so many years in a row? Partly because nobody wants to stop a bull market before its time — there is more or less no better way to piss people off — but also because the usual signal for too much credit — consumer products price inflation — was masked by the one-time migration of the world’s production to China.”

    Another reason for NGDP targeting!

  5. Gravatar of W. Peden W. Peden
    17. November 2011 at 03:10

    Doc Merlin,

    I was looking at the stats on http://www.measuringworth.com and I noticed that NGDP growth was well above 5% in 2004, 2005 and 2006 (and above 6% in 2003 & 2004). A 5% NGDP target would have suggested considerably tighter money in 2004 and 2005, and tighter money in 2006 (assuming that the dip of the early 2000s had been smoothed out from the trend).

    That wouldn’t have prevented a bubble that was to a large degree a result of a flawed socialist/corporatist (taxpayer liability for the liabilities of the banking sector) model of finance. It would, however, have reduced the distortions for the rest of the economy.

  6. Gravatar of Morgan Warstler Morgan Warstler
    17. November 2011 at 05:20

    Doc, that’s the ONLY reason for NGDP targeting…

    Who cares about unemployment UNLESS it is forcing the government to try and drive wages down…. destroying sticky wage polices wherever it goes.

    Government / Democrats have to be made to hate sticky wages.

  7. Gravatar of Morgan Warstler Morgan Warstler
    17. November 2011 at 05:22

    W Peden, welcome to the winning argument!!!!!

    If Scott just had the cojones to keep saying that over and over and over, the Tea Party – the only people that matter – would love NGDP targeting.

  8. Gravatar of Jason Odegaard Jason Odegaard
    17. November 2011 at 05:33


    I agree with you that sticky government wages are a problem, but it’s also a private sector problem too. Government wages are “stickier” than most, but private wages are sticky too.

    Heck that’s what allows NGDP targeting to help with the sticky wage problem so much – if the economy needs adjustment between industry, or wage levels, NGDP targeting would permit the inflation to keep the nominal wages steady, but a decline in the real wages for those needing to adjust.

    And to the industries or wage levels where there is greater demand, their wages would go up both nominal and real terms.

    Now that I wrote the above, this seems to be less about “breaking” the sticky wages than letting their real value erode relative to other rising wages, thus approaching market clearing rates – but overall nobody’s wages go down *nominally*.

  9. Gravatar of ssumner ssumner
    17. November 2011 at 05:36

    James, Not only do I not think all our problems can be solved by targeting the stock market, I’ve never once in my entire life advocated that the Fed target the stock market.

    Bogdan, Very good point.

    Bob, I’m not making any assumptions about RGDP. I’m saying the foreign exchange rate doesn’t matter, what matters is NGDP.

    Doc Merlin and W. Peden. The question of NGDP growth in 2004-06 is a difficult one. If you do growth rate targeting it was too fast. If you go with level targeting then it is unclear–depends on your starting point.

    Morgan, Remind who the Tea party candidate is for 2012.

  10. Gravatar of Gregor Bush Gregor Bush
    17. November 2011 at 06:09


    Watching Bullard on CNBC this morning did not fill me with optimism. He basically made five points:

    1) Because the data have been stronger than expected, the recession fears that materialized at the end of the summer have dissipated and therefore there is no need for additional stimulus. (because the economy was doing so great before that)

    2) The Fed may have OVERREACTED – ie. may have been TOO simulative- in initiating operation twist (this won him great praise from the CNBC hosts who think that monetary stimulus makes us all poorer by pushing up commodity prices)
    3) The impact of the euro zone crisis on the US economy is unknown. (hey, maybe the impact of a financial crisis will be a good thing. Who can say?)

    4) The natural rate of unemployment rose dramatically in Europe in the 1990s and the same thing may have happened in the US. (This is the Plosser argument against more stimulus -perhaps there is no spare capacity in economy).

    5) The Fed should focus on headline CPI inflation because there is a long-term upward trend in commodity prices.

    I find it very odd that he seems to be uncomfortable saying that the unemployment rate is above its natural rate or that the euro zone debt crisis weakens the US outlook but he’s perfectly comfortable saying the current futures prices of commodities are wrong – that commodity prices will move up much more sharply than futures markets are suggesting.

  11. Gravatar of Morgan Warstler Morgan Warstler
    17. November 2011 at 06:53


    you are a man whose entire philosophy BANKS on Obama winning. If you lose that bet, you bow before my analysis of how we put your toolset to work. I am the boss of you.

    If he wins, you are the boss of me.

    It is a good bet. I am banking on memetics, that we essentially learn and alter strategies overtime, you are banking on fatalism…. a bad economy ushers in the state.

  12. Gravatar of Morgan Warstler Morgan Warstler
    17. November 2011 at 07:08

    Jason, its only public employees that have sticky wages.

    With 5M job starts and breaks per month, and an end to minimum wage, and removing healthcare from wages, etc… people will see market clearing in a short enough time frame.

    Job based contracts are the near future.

  13. Gravatar of StatsGuy StatsGuy
    17. November 2011 at 08:33

    “Morgan, Remind who the Tea party candidate is for 2012.”

    Apparently, it’s Romney… Who actually did a decent job in Massachusetts.

    “Who cares about unemployment UNLESS it is forcing the government to try and drive wages down….”

    Wages are not the major problem. It’s unfunded retirement obligations – that is, intergenerational transfers.

  14. Gravatar of StatsGuy StatsGuy
    17. November 2011 at 08:38

    Scott, I’m increasingly of the view that the central bank officials know what needs to happen, but are gunning for concessions from the fiscal authority to get it – except that the fiscal authority doesn’t believe the monetary authority will carry out its part of the bargain if they offer those concessions.

    Europe is even worse, the ECB has specifically stated the concessions it wants, but the mechanism it offers will help Germany (with low cost investment funding and an equally low exchange rate) far more than Greece. However, now that France is (unfairly?) under attack from the Bond Vigilantes, the ECB is looking for workarounds to its “legal constraint” (latest, funding the IMF which would then buy sovereign debt in the open market). The IMF, of course, effectively being backed by the dollar.

    It’s all deeply political right now.

  15. Gravatar of Benjamin Cole Benjamin Cole
    17. November 2011 at 09:00

    BTW, Krugman’s latest post about inflation and wage and price stickiness just cries out for Market Monetarism.

    Krugman put up a nice chart. It seems Market Monetarism is the solution—wage and prices are sticky, demand is soft. You can lead a horse to water….

  16. Gravatar of Steve Steve
    17. November 2011 at 09:51

    Scott, I agree that an aggressive Fed move would help Europe, but I’m not sure I agree with Beckworth’s view that Europe follows the US. The US engages in forward looking inflation targeting (based on the forecasts of staff economists) while the ECB engages in backward looking inflation targeting (based on last 12 month changes). That is sufficient to explain why the ECB follows the Fed.

  17. Gravatar of Steve Steve
    17. November 2011 at 09:58

    To put it differently,

    market NGDP expectations LEAD market inflation expectations (due to sticky prices)

    market inflation expectations LEAD Fed staffer inflation expectations (due to sticky forecasts)

    Fed staffer inflation expections LEAD LTM inflation reports (the ECBs sticky mandate)

  18. Gravatar of Cthorm Cthorm
    17. November 2011 at 10:28

    >”Morgan, Remind who the Tea party candidate is for 2012.”

    Apparently, it’s Romney… Who actually did a decent job in Massachusetts. >

    StatsGuy, I hope you’re joking. The Tea Party is scrambling for anyone BUT Romney. The core of the Tea Party are Ron Paul diehards, but there are even more people who affiliate with the Tea Party but don’t like Paul’s foreign policy ideas. Paul and Romney are the only candidates that aren’t imploding; Paul because of his dedicated base and consistency, Romney because it’s “his turn.” He has a deep mistrust of the Fed but I think he accepts its existence as part of the status quo and would like to implement reforms that reduce it’s discretionary power. Reforms like currency competition and (hopefully) an extremely clear policy instrument like NGDP targeting.

  19. Gravatar of Becky Hargrove Becky Hargrove
    17. November 2011 at 12:13

    Who do you think would deal with the Fed more reasonably, Paul or Romney? In Paul’s book about the Fed, he had been influenced by William Greider’s earlier research, not exactly the influence one would expect.

  20. Gravatar of StatsGuy StatsGuy
    17. November 2011 at 12:26

    “StatsGuy, I hope you’re joking.”

    …yes on the Tea Party. It’s hilarious how they are running out of options. First Perry implodes (how, I don’t know, but spectacularly and unnecessarily). Then they find their man Cain has some baggage. They’re having misgivings about Bachman. And so, the latest polls say they’re moving to Newt Gingrich (you know, the guy on his third marriage who made one wife sign the divorce papers on her hospital bed when suffering from cancer, and took 1.6 million in “history consulting” fees from Freddie Mac). They don’t like Ron Paul’s goddlessness.

    Not joking about Romney doing a decent job in Mass.

  21. Gravatar of StatsGuy StatsGuy
    17. November 2011 at 12:28

    “Reforms like currency competition and (hopefully) an extremely clear policy instrument like NGDP targeting.”

    I wouldn’t hazard to guess what Romney really wants.

  22. Gravatar of Cthorm Cthorm
    17. November 2011 at 12:50

    >”Reforms like currency competition and (hopefully) an extremely clear policy instrument like NGDP targeting.”

    I wouldn’t hazard to guess what Romney really wants.>
    Poor sentence structure on my part, I was referring to Ron Paul there.

    >…yes on the Tea Party. It’s hilarious how they are running out of options. First Perry implodes (how, I don’t know, but spectacularly and unnecessarily). Then they find their man Cain has some baggage. They’re having misgivings about Bachman. And so, the latest polls say they’re moving to Newt Gingrich (you know, the guy on his third marriage who made one wife sign the divorce papers on her hospital bed when suffering from cancer, and took 1.6 million in “history consulting” fees from Freddie Mac). They don’t like Ron Paul’s goddlessness.>

    I agree, and Gingrich would be lucky to last a month at the top of the polls. There is literally nothing appealing about him that Romney doesn’t have, and he has significantly more baggage (even more than Cain imo). I’d hardly call Paul godless, but conservatives clearly have mixed feelings about his desire to cut back our foreign troop presence and stop the War on Drugs altogether.

    >Not joking about Romney doing a decent job in Mass.>

    Romney did do a decent job in Mass. but the mechanism he used was antithetical to the entire existence of the Tea Party. He is very moderate and clearly capable of working with Democrats, but I don’t think the Tea Party wants that (the RNC does though). The Tea Party is going to run out of options, and I think they’ll ultimately take the plunge for Paul rather than nominate a status quo guy like Romney.

    @Beck Hargrove
    I don’t think reasonable is an objective adjective to describe either’s positions. I think Romney would be completely hands-off. I think Paul would encourage more transparency, but he’d be too busy with all of his budget cutting agenda to really mettle with the Fed. He has a good relationship with the Dallas Fed Chairman (one of the most Hawkish members).

  23. Gravatar of Morgan Warstler Morgan Warstler
    17. November 2011 at 16:03

    Romney wouldn’t be bad, but since ANYONE can beat Obama, I favor Perry, Newt, Paul, Cain before him.

    I will be less concerned about this thinking if SCOTUS tosses Obamacare.

    I love the Newt as Nixon meme, the old limo hippies I know would get to truly relive the 60’s.

    I just don’t think he’s got a strong grasp on BIG BUSINESS = BIG GOVERNMENT, so if you want smaller government you must FAVOR small business over big business.

    I think Perry actually gets it in his bones.

    But again, I think America is ITCHING to end Obama, I think once the GOP machine fires up against him ANYONE with ANY PAST whips Obama’s ass.

    Of course I expect the Fed to play along.


    Glad to have you aboard StatsGuy!

    The logic of Fed moves last MEANS they also can force the fiscal guys to cut long term spending.

  24. Gravatar of ssumner ssumner
    17. November 2011 at 18:10

    Gregor, Yes, and his point about commodity prices is actually an argument against relying on the CPI.

    Morgan, You need to check out Free Exchange–they recently did the exact Mundellian argument you make. The ECB is using this crisis to bring down “irresponsible” governments in Greece and Italy.

    Statsguy, You may be right–see my reply to Morgan.

    Ben, I thought the same.

    Steve, That’s possible. I’d need to think a bit about how you test the two hypotheses. One thing that makes the Fed so powerful is that a number of other big countries are linked to the dollar–notably China.

    Morgan, No it’s not true that “anybody” can’t beat Obama. Indeed I’m not sure “anyone” can.

  25. Gravatar of Mike Sax Mike Sax
    17. November 2011 at 19:38

    Scott I thought I left a comment before but it seemed to disappear. One more try. It’s a good thing if the Fed can help the EU by helping America as the EU wants us to bail them out anyway.

    The only way to get the ECB to do its job is to somehow deny Germany a vote.

    Incidentally I tried to sort out the debate you and Mike Kimel got into

    See it here


  26. Gravatar of dtoh dtoh
    17. November 2011 at 21:53

    “Statsguy, You may be right-see my reply to Morgan.”

    Scott, if I’m not mistaken this is the first time you have admitted this could be a possibility. If you were the Fed, how many months of additional high unemployment would you endure if it meant getting rid of Obama (which would presumably lead to some reforms leading to higher long term RGDP growth).

  27. Gravatar of Morgan Warstler Morgan Warstler
    18. November 2011 at 05:26


    WELCOME to my argument!

    Scott, you too.

    We have now come full circle boys, and how long as it taken me to pull ALL OF YOU over the tug of war line???

    Yer welcome.

    Scott, its actually very interesting that you are so deluded about Obama, I think it is because you live in MA.

    And I think I now have a winner….

    Just, as a thought exercise, imagine you are the Fed, you assume that Obama IS 80% likely to lose, and you WANT HIM TO LOSE… what is optimal economic policy the Fed would establish to try and land on that 80% – and not hit the far reaches?

    Make that prediction, and lets see if the Fed follows it.

  28. Gravatar of Jason Odegaard Jason Odegaard
    18. November 2011 at 06:57

    Hi Morgan,

    I can see that government wages are stickier, but private wages are too. Why? People do not like to see their wages cut. It is still more likely that businesses will let 10% of people go rather than a 10% pay cut across-the-board.

    Friend of mine went through something like this. Company he works for does mechanical engineering designs for engine parts, the business had two rounds of layoffs before people were convinced to take the 20% pay cut across-the-board to avoid another round of layoffs.

    People tend to become disgruntled when their pay is cut, and I think that is why businesses generally lay off employees rather than cut nominal pay.

  29. Gravatar of Morgan Warstler Morgan Warstler
    18. November 2011 at 10:37


    That’s just not the case.

    20% do 80% of the work, if that offends you I’ll give you 30% do 70% of the work.

    The reality is even more complicated… in normal growth times, inside most firms A’s hire A’s, and many B’s will hire C’s.

    A’s are very hard to find. Think the top 10% of the workforce across industries – maybe 15% if you want to be kind.

    The C’s (the shittiest workers) get fired first when times are tough, and more importantly the firm stops letting B’s near hiring.

    The REALITY of things is that we should not be tryingt o run the economy AS IS, we should ACCEPT that we have global competition, and that means we have to be FAR FAR TOUGHER on Cs.

    We need a cultural shift that shames C’s….

    I’d say the best way to solve for this is my Guaranteed Income Plan:


    We ought to just Auction the Unemployed. They need the signalling, not working just means the economy sucks, when you are forced to work for a boss, and you see yourself EARNING LESS than everyone else being forced to work, then you know that we know that YOU SUCK.

    We need to shame Cs.

    That’s the solution.

  30. Gravatar of dg dg
    18. November 2011 at 16:03

    Stats Guy, In writing “…yes on the Tea Party. It’s hilarious how they are running out of options. First Perry implodes…”

    I think you are erroneously conflating the republican party and the tea party. From my perspective, while the tea party does share the fiscal conservatism the republican party pays lip service to, they are generally uncomfortable with the social conservatism of the religious right. Many of the tea partiers I know oppose Perry b/c of his overt play to the religious right.

    Ron Paul’s problems are less with the tea party than the republican party.

    Gingrich is an interesting candidate. He is intelligent, knowledgeable and articulate. He was also a very pragmatic politician when he served as speaker of the house. For all his radical rhetoric, he readily negotiated with the democrats, especially Pres. Clinton, to get legislation that was not overly divisive. If he carried that pragmatism to the White House, he could actually make a decent president.

    As you point out, he has some heavy baggage, which may be an even bigger obstacle in a general election than in the primaries. I suspect he will be remembered more for his polarizing rhetoric than his quiet negotiations, which would help in the primaries but hurt in the general election.

    When I look at Pres. Obama’s popularity, I am inclined to agree with Morgan that “Anyone can beat Obama.” Then I look at the slate of republican candidates and am incline to amend that to “Anyone can beat Obama, except the current slate of republican candidates.” I wonder if people will be voting not FOR a particular candidate, but AGAINST the other guy.

  31. Gravatar of ssumner ssumner
    18. November 2011 at 18:42

    Mike Sax, Mike Kimel and I are not having a “debate.” I’m explaining to him what happened in the 1930s. Once he figures that out, then perhaps we can have a debate.

    dtoh, I assumed statsguy was talking about the ECB. I doubt the Fed is playing that game, otherwise why let NGDP collapse when McCain was running for president?

    I think it’s possible that there is someone at the Fed with those views, but I doubt the FOMC as a whole is trying that tactic.

  32. Gravatar of Jim Glass Jim Glass
    18. November 2011 at 20:43

    Speaking of Eurozone monetary policy, have we all seen the picture of the money supply in Italy?

  33. Gravatar of dtoh dtoh
    18. November 2011 at 21:08

    Maybe they were stupid then…. political now.

    At some point, when you are only talking about a few months difference, don’t you think even the least political FOMC members start thinking about which President is best for the long run health of the U.S. economy?

  34. Gravatar of ssumner ssumner
    19. November 2011 at 18:37

    Jim Glass, Yes, that’s pretty scary.

    dtoh, God I hope not, that would be a disgrace. I certainly wouldn’t act that way.

  35. Gravatar of dtoh dtoh
    20. November 2011 at 11:56

    Suppose you had complete control of the Fed, and you had two options.

    A) Loosen monetary policy now. Unemployment comes down right away. Obama get re-elected. No other changes.

    B) Loosen money in month. Unemployment comes down a month later. A Republican gets re-elected. Taxes on capital are permanently eliminated. RGDP growth gets boosted by 2% per annum for the next 30 years.

    Which you would pick? Be honest.

  36. Gravatar of Scott Sumner Scott Sumner
    21. November 2011 at 14:08

    dtoh, Loosen money now. I look at things diferently than others. I certainly have policy views, but my belief in the democratic process trumps those views. If given a choice I’d rather the country enact the policies of democratically elected governments, than my policies. If I was made dictator I would immediately step down and call for elections.

    It all goes back to the wisdom of crowds. I feel the Fed people should do their jobs, and not worry about who wins. If I’m wrong then this country is far more messed up than I imgane. We’d have an important institution trying to intentionally sabotage the economy roughly 50% of the time (when their party was out of power) God help us if that’s true. And of a course it would be another reason why we need an explicit policy rule.

    By the way, one month might not sound like a lot to you or I, but when multiplied by millions of human beings it represents aggregate suffering beyond human comprehension.

    I would add that after 8 years of Bush I see no reason to expect sound economic policies under a new GOP adminstration.

    Of course a cynic might say this is easy for me to say because I never vote Democratic or Republican. 🙂

  37. Gravatar of dtoh dtoh
    21. November 2011 at 18:01

    Wow. That’s a refreshing response!

  38. Gravatar of Scott Sumner Scott Sumner
    22. November 2011 at 07:05

    dtoh, Thanks. Another way of stating that point is that countries with civic minded cultures (like Denmark) behave the way I suggested (most of the time.) We need to try to inculcate those values in America. If we start viewing the other side as the enemy we’ll end up like a third world country, one tribe fighting another.

Leave a Reply