I predict that Steve Keen will eventually look correct . . .
. . . without actually being correct.
For years I’ve pointed out that whereas the huge house price run-up in the US was reversed after 2006, house prices in Britain, Canada, Australia, and New Zealand remained at lofty levels, after a similar rise in prices. Indeed Australian house prices moved still higher.
Commenters kept insisting “you just wait, the Australian housing bubble will burst one of these days.” Australian economist Steve Keen was so sure the bubble would burst that he bet his reputation on it:
Mr Keen is a long time bear on Australian house prices, who famously lost a bet with an economist at Macquarie Bank in 2008 over his claim that prices would soon reverse sharply. Two years later he walked 225km from parliament house to Mount Kosciuszko wearing a T-shirt saying “I was hopelessly wrong on house prices – ask me how” to honour the wager.
That’s why I like Aussies, they have an honesty that is increasingly rare in our world. Now Australian housing prices are soaring higher again. Is it a bubble on top of a bubble?
And in Australia too, foreign buyers, together with cheap money and supply constraints, have helped push up house prices, prompting some commentators to warn of an emerging housing bubble in some of the country’s bigger cities.
(Read more: Are fears of an Australian housing bubble overblown?)
Prices in Sydney jumped 15.1 percent last year, pushing the median house price to A$763,169. In Melbourne and Perth, property prices increased 8 percent, according to Australian Property Monitors, an information provider to the banking and property industries.
“I think we are seeing the creation of a spectacular bubble on top of a spectacular property bubble,” says Steve Keen, a professor of economics and author of a blog called Debtwatch.
Keep in mind that although Australia has 23 million people (same as Shanghai) squeezed into an area the size of the continental US, almost all of them live in “the country’s bigger cities,” which feature California-style restrictive zoning. So prices may or may not stay high.
Since I’ve been proved right on the fact that the earlier run-up in prices was not a bubble, I’ll take my chips from the table and go home. No further predictions; I’ve proved my point that “bubbles” are not a useful concept for Australia. OK, just one more prediction. I predict that if Steve Keen continues to predict bubbles in Australia there will come a time when it will look like he is correct, and he’ll be feted as the greatest seer since Nouriel Roubini.
Of course he won’t have been correct about there being a bubble, as bubbles don’t exist. Asset markets move up and down unpredictably. That’s the whole point of the EMH. Ex ante there was no way of knowing in 2006 that Australian prices would keep going up while US prices would reverse and fall. It could have been the other way around.
BTW. Australia’s been running big current account deficits for decades, and they can continue doing so for many centuries to come. (When I lived there in 1991 one pundit told me that Australia had a bleak future because of its CA deficits.) Australia gets some cars and TVs built with Chinese labor, and China gets some retirement condos on the Gold Coast built with Australian labor. Believe it or not economists call that sort of mutually beneficial business deal a “deficit.” I’m not kidding. Don’t be fooled by words, focus on reality.
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13. February 2014 at 13:48
‘Australia gets some cars and TVs built with Chinese labor, and China gets some retirement condos on the Gold Coast built with Australian labor. Believe it or not economists call that sort of mutually beneficial business deal a “deficit.” I’m not kidding. ‘
Back in the nineties I used to try to make people realize that our ‘trade deficit’ with Japan was just Japanese visiting Disneyland, or, better yet, their buildings and factories in the USA that we got to use.
It was a hard sell.
13. February 2014 at 13:49
Come to think of it, I had a few conversations with Steve Keen himself, along the lines of the above.
13. February 2014 at 14:38
Scott, that’s a bold claim, but I’m still trying to figure out how to put you on the hook for it… so if you lose you have to walk from Bently to… um, maybe Albany, NY? (~225km) with a big message on your T-shirt saying “I was hopelessly wrong on Steve Keen – ask me how” to honour the wager. 😀
Really it doesn’t have to be about Steve Keen… anything will do. I just think that should be a standard part of attaining tenureship in econonomics. On the day it’s granted, they issue you your T-shirt, saying “I was hopelessly wrong on __________ – ask me how” and inform you where you’ll be walking to once it’s clear how to fill in the blank.
13. February 2014 at 14:47
Am I missing something? Why doesn’t this analyst say anything about tight money?
“No One On Wall Street Is As Bullish About China As Deutsche Bank’s Jun Ma”
http://www.businessinsider.com/deutsche-bank-jun-ma-china-gdp-up-86-2014-2014-2
13. February 2014 at 15:01
Patrick, It’s surprising how few people understand this stuff, it’s really simple.
Tom, I have already won; I have nothing left to prove. I’m done with predictions.
Travis, I have no idea how China will do in 2014–long term I am optimistic about China, and have been for 35 years. Oops, I just made another prediction.
13. February 2014 at 15:08
“Oops, I just made another prediction”
… I’m getting your T-shirt made up now.
13. February 2014 at 15:15
Incidentally Steve Keen has a new paper out.
http://www.debtdeflation.com/blogs/wp-content/uploads/2014/02/Keen2014ModelingFinancialInstability.pdf
The most interesting thing about his new paper is that it revises the aggregate demand equation from his Berlin paper
http://ineteconomics.org/sites/inet.civicactions.net/files/keen-steve-berlin-paper.pdf
That many found so bizarre, namely the following one:
AD = Y + deltaD
Where AD is aggregate demand, Y is nominal income and D is bank lending. (Delta means “change in”.) Note the obvious accounting problem, that is that expenditures does not equal income.
Keen’s new AD equation is:
ADt = Yt-1 + VtdeltaDt
Where V is velocity of circulation. Note that Keen has added subscripts representing time. By referring to income in the previous period rather than the current, Keen avoids setting expenditures not equal to income in the contemporaneous period.
Note also that in order for this equation to be true, velocity needs to be a constant, otherwise an additional term would have to be included to reflect changes in velocity on bank lending in the previous period.
This new equation has some interesting implications.
Assuming ADt-1 = Yt-1 then:
ADt = ADt-1 + VtdeltaDt
or:
deltaADt = VtdeltaDt
Since Vt is a constant this further implies that:
ADt = VtDt + constant
Dropping the subscripts (they no longer are useful, are they?), and assuming the constant is equal to zero, yields:
AD = VD
Now, for the sake of simplicity, let’s assume that bank lending is equal to bank deposits. Let’s further assume (for further simplicity) that broad money (M) consists only of bank deposits. Then substitution yields:
AD = VM
Now let P represent the aggregate price level and Y real output. Then:
AD = PY
Substituting yields:
PY = VM
Or:
PY = MV
Looks familiar doesn’t it?
In short, Keen’s new paper indicates to me that he is now a monetarist. And not only is he now a monetarist, since his new AD equation implies that velocity is a constant, he is an old school monetarist.
At this rate, perhaps he’ll be in the 21st century within our lifetimes.
13. February 2014 at 15:22
Mark, that’s funny!
13. February 2014 at 15:50
Thanks for the post Scott. There’s nothing we Aussies love more than people from other countries (particularly the USA and Britain) paying attention to us. In 2012, the local media went into a frenzy when the “Jezebel” website (which I doubt most Americans have even heard of) described our then (female) PM as “one badass motherf*cker” after what it called her “epic speech on sexism”. Suddenly, Jezebel was the arbiter of international opinion on our domestic political shenanigans.
BTW, Keen is an old-style Aussie with some integrity. He was good bloke enough to do the walk even though he said he had been verballed a bit about the bet. Many Australian economists are just as slippery as Krugman. Quiggin is certainly one (he recently tweeted that government spending cuts in 1986 helped cause the early 1990s recession), but there are many others. In September 2011, economics commentator Chris Joye said “I will run around Martin Place naked if the RBA’s official cash rate is at 3.5% in June next year.” It was and he didn’t.
http://christopherjoye.blogspot.com.au/2011/09/officially-australias-biggest-dove.html
Anyway… I agree with just about everything you’ve said about bubbles, but in saying that Keen will one day be ‘right’, are you implying that the RBA will one day get it extremely wrong? Because although Australian house prices fell about 10% from 2010-2012, Keen was saying it was just the beginning. He has been predicting a US or Japanese-style house price bust, in the order of 40% nominal, caused by an unwinding of the ratio of private debt to GDP to 1970s levels. Surely you wouldn’t bet on that happening in your lifetime?
13. February 2014 at 16:36
Rajat,
“Many Australian economists are just as slippery as Krugman. Quiggin is certainly one (he recently tweeted that government spending cuts in 1986 helped cause the early 1990s recession), but there are many others.”
Back in late August John Quiggin cited the early 1990s Australian recession as evidence that monetary policy is ineffective even away from the zero lower bound:
http://johnquiggin.com/2013/08/26/a-note-on-the-ineffectiveness-of-monetary-stimulus/
My comments to that post led to several major changes in the post (most of which there is no evidence, since he made most of those changes without noting the edits). Consequently I thought some progress had been achieved.
Unfortunately, by early January he was back to making related claims about the very same recession (this time it was caused by the extraordinary lagged effects of an earlier fiscal consolidation):
http://johnquiggin.com/2014/01/02/austerity-in-australia-1980s-style/
It was almost as though our conversation from only a few months before had never taken place.
I once had a great deal of respect and admiration for John Quiggin, and I still make a point of checking his blog nearly every day. But I have finally come around to agreeing with the “slippery” appellation.
13. February 2014 at 16:39
How is housing affordability in Australia? Are wages rising along with housing prices? Are rents?
I made a lot of money on my house during the Arizona bubble because sale prices of housing were all out of whack with both rents and wages. It was easy to see it coming.
13. February 2014 at 16:46
Mark, yes that’s the post (the second one) I had in mind. He habitually makes an outrageous claim and when his BS is pointed out, he quietly backs away without acknowledging error, and then makes a similar claim sometime later when he thinks people have forgotten. I think he has really just become a political warrior. Another similarity to Krugman, perhaps.
13. February 2014 at 17:26
I get the general gist of the argument. I could get on CNBC yelling that the market will be up exactly between 2 and 3% this year, for a number of years, and eventually the distribution will happen to hit between 2 and 3%. Saying that the market will crash for a number of years, say down by >10%, will have the same exact property. It will eventually happen.
But I don’t like how this argument seems to also suggest non-falsifiability. Under the guidelines of this post, what evidence would falsify the statement “bubbles do not exist.” The best possible evidence is Buffett’s ex ante reasoning of the market collapsing after 1999.
http://money.cnn.com/magazines/fortune/fortune_archive/1999/11/22/269071/
To be fair, the tech, uh, bubble was the perfect scenario for calling such a bubble. Stocks are purely financial assets, meaning their only truly fundamental quality is their eventual cash dividends. By “fundamental,” I mean a quality not dependent on a Keynesian beauty content, i.e. not dependent on re-selling alone. The cash thrown off by stocks through dividends are no better than cash thrown off by bonds or other purely financial assets.
So if one bought the market in early-2000, the cash it would accumulate would only be about 2.2% a year at consistent return on equity. 10-year Treasuries were at 7% and, if one doesn’t want interest rate risk, 3-month Treasuries at this point were 5%. In 1999, the math for where the future dividend yield of stocks was greater than bonds just didn’t make sense for any scenario of earnings, interest rates and economic growth in America’s history.
It’s worth noting too that Buffett also wrote an editorial to buy stocks in October 2008 and the S&P’s value has since doubled. Going further back, he liquidated his partnership in the late-60’s when the market was at its peak because every stock looked overvalued. Then, in the 73-74 bear market, he actually leveraged himself to buy stocks because the market was so undervalued. Simple, fundamental measures would bear all four of these “market timings” out and all four were correct. Furthermore, most of the time, he was mum on the general direction of the stock market. He only was clear about the market’s direction when it was clearly over or undervalued. Dogmatic EMH would say it’s pure happenstance that when bonds yielded much more than stocks the stock market later tanked and vice versa for stocks yielding more than bonds. That’s pure silliness which flies in the face of common sense and math.
Now, houses and real property are harder to call a fundamental bubble because home ownership, in and of itself, has many more truly fundamental qualities compared with stock ownership. A home owner versus a renter enjoys more stability, the forced savings aspect of building equity and more freedom to do what they want with the property. A change in consumer tastes for these fundamentals would yield an increase in house/rent ratios which does not depend on later finding another buyer. In other words, I could say there’s a bubble in Miley Cyrus albums because I see little reason to buy them, but those who do buy them enjoy the “fundamentals.” I have no idea what fundamental qualities would get people to buy Miley Cyrus albums, but I do know the buying does not depend on the prospect of later selling the album at a profit.
So, one could say any large change in house/rent ratio is simply a change in consumer tastes. But this is intellectual laziness, because it is in fact still possible for people to be buying houses merely for the prospect of reselling. I honestly have no idea on non-American housing markets without having a deep knowledge of the type of housing activity and possible legitimate changes in policy or consumer tastes to increase house/rent ratios. I will just say it is possible, and shouldn’t be discarded completely out of hand with a non-falsifiable framework.
13. February 2014 at 17:46
On another note, I decided to actually read the article after my comment and I would agree that I’m fairly underwhelmed by their argument. There is no mention of rent in comparison to buying, just that there’s “foreigners” (cough…Chinese…cough) with “cheap money” who are bidding up the housing market. There are rich Chinese who would rather live in Sydney than the most polluted cities on the planet? Absolutely shocking.
If house/rent ratios are consistent, then the “bubble” argument becomes far more convoluted and indirect. If one knows for certain that the rich Chinese aren’t really that rich, as Roubini would say, then it would be fairly certain that both housing prices and rents would go down in Australia. But really then Chinese investment would be the bubble where the fundamental capital misallocation happens. I would only say such overinvestment in China is theoretically possible and not disproven as such by the EMH, but I have no idea because the article didn’t give evidence for the Chinese being unsustainably rich.
13. February 2014 at 17:57
Dear Commenters,
See links below. Doesn’t the recent trend in China’s PPI indicate that aggregate demand is stabilizing?
http://www.aastocks.com/en/forex/market/dbindepth.aspx?country=1&theme=6
http://www.businessinsider.com/january-chinese-inflation-2014-2
http://marketmonetarist.com/2013/07/09/pboc-governor-zhou-xiaochuan-should-give-jeff-frankel-a-call-he-is-welcome-to-call-me-as-well
13. February 2014 at 18:03
House prices in nice places are sui generis.
Everywhere in the world, housing in great places has shot through the roof.
It has to do with globalization and rising incomes and a new super upper class.
Los Angeles, SF, NYC, Perth, Vancouver, Aussie-land, you show me a great place to live or play, and I will show you soaring house prices. (BTW, for some people NYC or London is tops).
Housing in Dayton or Ft. Worth or Bochum, Germany?
Probably normal, and maybe will get cheaper in years ahead.
Monetary policy always plays a role, and there are fads–is Sante Fe in or out now?
But housing may just get more expensive in the world’s great spots from now on.
13. February 2014 at 18:20
This blogpost contains arguments inconsistent with previous blogposts.
“Since I’ve been proved right on the fact that the earlier run-up in prices was not a bubble, I’ll take my chips from the table and go home. No further predictions; I’ve proved my point that “bubbles” are not a useful concept for Australia.”
If those who do accept “bubbles” cannot claim to be proven right when housing prices fall, as they did in 2008, then Sumner cannot claim to be right when housing prices rise, as they are doing now.
Sumner is trying to have it both ways. On the one hand, he wants to appear to be a correct predictor on the basis of a price change (in the upwards direction). On the other hand, he wants the bubble acceptors to appear to not be right predictors on the basis of…wait for it…a price change (in the downwards direction)!
If I cannot claim to be right about whether or not there was a housing bubble in 2008 on the basis of what happened to housing prices, then you cannot claim to be right about whether or not there is a housing bubble in 2014 on the basis of what is happening to housing prices!
Is Krugman ghost writing on this blog?
13. February 2014 at 18:38
MF,
There isn’t a logical contradiction there. In a dogmatic EMH view, prices are always correct given the mean outcome of the current conditions. That means the market puts a certain probability on monetary policy becoming looser or tighter and the market gives the average future stance of monetary policy based on a central bank’s signals.
According to Sumner, he does not know more than the market on how the central bank will exactly act. But when the central bank does act unexpectedly, then the market will update with this new information.
Despite my intellectual misgivings on there never being a bubble, the profit motive does mean that market prices GENERALLY reflect all publicly available information about the real value of a security. So if a security’s price changes clearly in response to a Fed announcement, the EMH view sees the Fed announcement clearly adding to the real value of the security.
A security’s price jumping in response to a Fed announcement should also be clearly different, even to you, than somebody like Roubini proclaiming doom for many years and the doom eventually coming to pass. Due to pure randomness of circumstances around asset prices, eventually somebody’s pronouncement will come to pass.
13. February 2014 at 19:11
Benjamin Cole: nice places also tend to have positional goods which well-connected folk protecting by zoning restrictions. Aggravated by the fact that nice places have more foreign migrants who are not citizens, do not vote and so housing market entrants are even more politically discounted.
Texas lacks positional goods and its migrants tend to be voting US citizens or Hispanics connected to existing Hispanic political networks, hence the lack of restrictive zoning despite lots of migrants.
13. February 2014 at 19:13
Apropos Mark Sadowski’s wonderful takedown of Steve Keen, he and Richard Koo have exactly the same problem. They both attempt to apply Irving Fisher’s Debt-Deflation analysis without paying attention to the Deflation part of the analysis. With asset prices and debt holdings, income expectations really matter.
13. February 2014 at 19:43
Matt:
There is a contradiction. Sumner is claiming that because of housing prices following a particular trend, he has been proven correct about his prediction. That is not EMH.
“A security’s price jumping in response to a Fed announcement should also be clearly different, even to you, than somebody like Roubini proclaiming doom for many years and the doom eventually coming to pass. Due to pure randomness of circumstances around asset prices, eventually somebody’s pronouncement will come to pass.”
Sure, future knowledge, choices and actions cannot be scientifically predicted. But that does not mean we have to fall back on pure randomness. Humans do not act purely randomly. Pure randomness would mean every possible outcome has exactly the same probability of occurring as every other possible outcome. If that were true, then planning would be impossible.
Sure, you can’t model the stock market using constants that enable you to predict its future path. Sure, the stock market follows a “random walk.” But that doesn’t mean individuals are incorrect for claiming to know that a correction is inevitable. We can know corrections are inevitable on the basis that the mere existence of central banks and inflation makes booms and busts inevitable.
Why do I have to prove to you that I am Nostradamus, before the argument that central banks cause the business cycle can be regarded as true? Knowledge about how the market works vis a vis central banks does not require us to predict future events in the form of definite times.
I like to use the example of a master builder. I don’t have to be able to predict exactly when the master builder will realize he has fewer bricks than he believes he has. For he could choose to go on vacation for 10 years and leave the project half finished. But I can argue, correctly, that his errors will be exposed sooner or later, given that the house project activity is moving forwards towards completion. It’s only a matter of time.
The weak form of EMH holds that only the knowledge we all know together is fully reflected in the value of the housing project.
The strong form of EMH holds that even my “insider” knowledge that he is wrong is fully reflected in the value of that housing project.
The argument that all prices always and everywhere reflect all known information, public and private, is the strong form of EMH, or what you call the dogmatic form. Of course, the reason you called it dogmatic is because it is rather absurd to believe that all prices everywhere fully reflect all known information. If that were true, then there would be no reason for anyone to trade any securities.
Trading securities presupposes a heterogeneous set of knowledge and values are present. In other words, not all knowledge is reflected into current prices. Knowledge of course includes valuations.
But back to the point. A person who believes in the dogmatic form of EMH cannot claim to be making correct predictions on the basis of price changes, if they are going to claim that others are not correct for making correct predictions on the basis of price changes. Sumner has said that those who predicted the housing bust cannot be regarded as making correct predictions of those bubbles. We’re supposed to believe they were lucky. Chance. Well, if that’s true, then he can’t claim to have made a correct prediction based on housing boom prices either. He must be regarded as not correct the same way he regards others as not correct, because the same premises apply to his allegedly correct prediction.
Market prices of securities do not reflect all knowledge. The existence of prices themselves implies not all knowledge is reflected.
I have a good anecdote. Last month I found out that one of our vendors was goosing their revenue recognition. I learned this from an insider in the company. Guess what? The law holds that I was not allowed to sell their equity on that information, because it wasn’t publicly known at the time. Now why would there have to be a law against me trading, if according to the dogmatic form of EMH the equity prices already reflected that insider information? Obviously the law wouldn’t have to be enforced if all securities prices reflected all knowledge.
If I decided to sell short based on that information despite the insider trading law, and then after I sell short I further acted in such a way that the knowledge becomes known by the other shareholders, such that they sell, which leads to a decline in the stock price, which allows me to gain, is this not a perfect refutation of dogmatic EMH?
Stock prices do not reflect all knowledge. They only reflect the knowledge of those who are actually trading in it right now at this moment. They don’t include the knowledge that has not yet been acted upon vis a vis those securities.
13. February 2014 at 20:03
Another good refutation of EMH is that Congressmen routinely beat the market. They do so because they are not subject to insider trading laws, and because they have the power to pass laws that benefit their own pockets.
http://themonkeycage.org/2011/05/25/abnormal-returns-from-the-common-stock-investments-of-members-of-the-u-s-house-of-representatives/
If you are a professional Congressman for life, then you can persistently and routinely beat the market.
13. February 2014 at 21:27
OFF TOPIC :
Barry Eichengreen just tweeted this out and I immediatly thought of the gang here at Money Illusion. Right up your alley…..
http://onlinelibrary.wiley.com/store/10.1111/jmcb.12102/asset/jmcb12102.pdf?v=1&t=hrn06xyw&s=e564f1cb4d0e7c5ad11a7f420294c3056bd9fc1f
In case the link doesn’t work,
Journal of money banking and credit vol 46 issue 1
Who Anticipated the Great Depression? Gustav Cassel versus Keynes and Hayek on the Interwar Gold Standard
DOUGLAS A. IRWIN
13. February 2014 at 21:45
I meant “dogmatic” in terms of the semi-strong EMH always being true. I said specifically that the EMH says “prices reflect all public information.” You spend much of your posts arguing against something I never said. I have no idea how anyone holds the strong form to be true, considering the obvious price jumps on earnings or acquisition news. Since insiders knew about the news, either the price didn’t reflect insiders’ knowledge before the news or the public’s knowledge after the news.
The weak form of the EMH is actually that past prices cannot predict future prices, in other words charting or technical analysis. The semi-strong form is that prices reflect all publicly available information.
In fact, I don’t disagree with you that mispricings based on publicly available information can exist. A “bubble” is simply an extreme version of a mispricing. I gave four examples of such mispricings.
My point was that, given the semi-strong EMH was true in all cases, then Sumner’s views are not logically inconsistent. Logical consistency does not mean correctness. In the view where the semi-strong EMH always holds, then a price at any moment in time takes into account all possibilities weighted by their probability.
Randomness does not say the probabilities are uniform. Rolling a 7 with two dice in craps is more likely than rolling a 2, but whether a 7 or 2 is rolled is still random despite unequal odds.
Randomness in monetary policy is of course far less clear than a simple craps game, but nevertheless many somewhat random factors develop the stance of monetary policy over time. I certainly didn’t predict Kocherlakota”Ž’s huge intellectual shift, for example. Furthermore, there were many somewhat random factors which went into whether Summers or Yellen would become the chairman. It didn’t seem random at the time, to the people making the decision, but the public does not have access to all things insiders do. So when an announcement is made that, say, Obama is nominating Yellen, the market gives its reaction to the new news. Yellen may have been rolling a 7 vs. Summers rolling a 2 at that point, but the market still increased stock prices once they found out a 7 was rolled. It was hard to tell, before it was official, whether Obama would stick strong with Summers.
If the semi-strong EMH always applies, then the change in stock market price is an indicator of true value addded to corporations. Sumner himself does not have the view that the semi-strong EMH always holds for every market everywhere every time, but I agree with him that market reaction to news is pretty good evidence for effects of policy changes on the real economy. The buyers have real money on the line, which can’t be realized in the long-term if they have to rely on reselling securities versus actually realizing increased value.
13. February 2014 at 23:10
How Not To Do Forward Guidance: http://qz.com/176430/the-bank-of-england-has-confirmed-that-economic-forecasting-is-basically-impossible/#176430/the-bank-of-england-has-confirmed-that-economic-forecasting-is-basically-impossible/
13. February 2014 at 23:10
Also, Aus jobless rate just hit 6%, and our monetary policy is defs too tight, someone help.
14. February 2014 at 05:13
As a fan of prediction bets, this one is a lot of fun.
– There was a suprising amount of uncertainty about what the bet was. Robertson understood it as whether the then-current dip would reach 40% at any time before rising to its prior peak (“peak to trough”, apparently), and Keen understood it as whether the market would drop 40% from its then peak during a given time period. Keen was a good sport and paid off on Robertson’s understanding.
– Robertson is also a good sport, and has promised to do the walk if Australian house prices drop 40% peak to trough at any point in his lifetime.
14. February 2014 at 06:40
For reference, Australian NGDP growth since 1960-
http://research.stlouisfed.org/fred2/graph/fredgraph.png?height=600&width=1000&id=AUSGDPDEFQISMEI_AUSGDPNQDSMEI&scale=Left&range=Custom&cosd=1960-01-01&coed=2013-07-01&line_color=%230000ff&link_values=false&line_style=Solid&mark_type=NONE&mw=4&lw=1&ost=-99999&oet=99999&mma=0&fml=b&fq=Annual&fam=avg&fgst=pc1&transformation=lin_lin&vintage_date=2014-02-14_2014-02-14&revision_date=2014-02-14_2014-02-14
14. February 2014 at 06:53
“Increases in house prices over the past year is unsettling Australia’s central bank as they bring with them the potential to destabilize the economy if the real-estate market runs too hot.”
– from-
http://www.marketwatch.com/story/australia-house-price-index-rises-2014-02-10-204851237
It sounds like Australia is at risk of allowing monetary policy to get too tight, in order to deflate a housing bubble.
Where have I heard THAT before?
14. February 2014 at 08:44
W. Peden,
Imagine if bonds were specified by a set interest payment with fluctuating face values, instead of by set face values with fluctuating interest payments….
Central banks would apparently say, “The bond bubble is threatening to overheat the economy. We need to tighten the money supply.”, repeat until bond prices reflect a sizeable default premium….
This is basically what they are doing/have done with housing. Maybe that gives us a working definition of EMH. Can Central Banks act like they know better than the market without screwing everything up?
14. February 2014 at 08:45
I have to say that Matt Waters gives a great breakdown of some pretty compelling examples of equity market bubbles and also why it’s so hard to call a bubble in housing. I have had thoughts a long these lines and he does a great job of expressing the view.
Regarding the equity markets, I have never understood why economists stick to their guns on various forms of the EMH when there is an industry of people who make money keeping the market more effecient than it would otherwise be. Yes, casual investors cannot make money on managed funds due to fees. And? A portion of those fees represent the value that the professional investor class can get out of the market. The rest is how much they can get out of their own investors…
14. February 2014 at 09:10
Scott,
Off Topic.
The WSJ pointed me to the following commentary by Steve Ambler on Price Level Targeting (PT) today:
http://www.cdhowe.org/pdf/Commentary_400.pdf
NGDP Targeting (NGDPT) is mentioned in the conclusion:
“PT has disappeared recently from academic
discussions and from central bank working
paper series, and it has all but disappeared from
discussions on the blogosphere. The main alternative
monetary policy framework discussed actively
today is nominal GDP targeting (NGDPT), which
replaces a target price level path with a target path
for nominal income.29 Nominal income becomes
the long-run anchor for monetary policy rather
than the price level.
Under NGDPT, deviations of nominal income
from the target path are the only measure of the
need for tightening or loosening, so it is potentially
simpler.30 In contrast, under PT the need for
tightening or loosening of monetary policy is
measured not only by deviations of the price level
from target but also on measures of the output gap,
which is not directly observable. NGDPT with
a level target is a framework in which bygones
are not bygones and deviations from target must
be corrected. In this respect, it is a rules-based
approach to monetary policy similar to PT. Time
will tell if NGDPT gains enough traction to
overcome central bankers’ reluctance to accepting
limits on their discretion. The active discussion
concerning NGDPT will keep alive the debate over
rules versus discretion.”
Here are the relevant footnotes:
“29 See Christensen (2011), Sumner (2011) and Beckworth (2010) for summaries of the ideas behind NGDPT.
30 NGDPT has the added advantage of ensuring an appropriate response to a supply shock that moves real output and the
price level in opposite directions. A PT rule would lead central banks to expansionary monetary policy in booms and
contractionary policy in downturns, while NGDPT would not force the central bank to magnify changes in real output to
offset the changes in prices.”
And here are the relevant references (without links):
“Beckworth, David. 2010. “Target the Cause not the
Symptom.” Macro and Other Market Musings (blog).
Available at:…”
“Christensen, Lars. 2011. “Market Monetarism: The
Second Monetarist Counter-Revolution.” The Market
Monetarist (blog). September 13. Available at:…”
For some reason the references stop at the letter R and consequently it’s not clear to what “Sumner (2011)” refers.
14. February 2014 at 09:46
Mark said: “In short, Keen’s new paper indicates to me that he is now a monetarist.”
I believe he has always been this way. His M has included demand deposits. That is why he has been focusing on banking.
And, “Let’s further assume (for further simplicity) that broad money (M) consists only of bank deposits. Then substitution yields:
AD = VM
Now let P represent the aggregate price level and Y real output. Then:
AD = PY
Substituting yields:
PY = VM
Or:
PY = MV”
1) I believe Keen includes financial assets in AD. He probably should not do that.
2) Assume M = demand deposits, P = is flat (0% growth), V is constant or falling, and the economy is supply constrained. Real AS grows by 3% per year. Now demand deposits have to grow by at least 3% per year. Are there any problems with demand deposits growing by 3% per year?
14. February 2014 at 11:59
Patrick Sullivan,
The Japanese sell us a car. We sell the Japanese a piece of paper. Who is on the better end of that trade?
14. February 2014 at 14:11
Kevin Erdmann,
Well put.
Doug M,
That’s an obvious trick question.
14. February 2014 at 14:21
“Also, Aus jobless rate just hit 6%, and our monetary policy is defs too tight, someone help.”
SUMMON: Lars Svensson
14. February 2014 at 14:31
Mark, Thanks for saving me the effort.
Rajat, Thanks for that info on Australia. You are probably right that a 40% drop is unlikely.
Matt, You raise a good point about the EMH being hard to test. But one way you definitely do NOT want to test it is by examining the predictions of the most successful investor in history. That’s data mining on steriods. It might make more sense to look at billionaires as a group. Once they cross over the one billion line, how do their future investments perform?
As far as the Chinese being rich, you ain’t seen nothing yet. In 30 years the number of very rich Chinese will be extraordinary.
Ben, Your comments about LA depress me, as I’ll be moving there when I retire.
Lorenzo, Good observations.
Saturos, Funny how everyone is misinterpreting the British situation. We MMs knew unemployment was the wrong variable from the beginning.
I suspect Australia also has some supply-side problems. As in the US, their two political parties have deteriorated in recent years.
W. Peden, Good catch.
Mark, Glad to see NGDPLT is a picking up attention.
14. February 2014 at 14:37
Saturos, Did the BoE say it would raise rates when U fell below 7%, or did they say they would not raise rates before U fell below 7%. There is a big difference.
14. February 2014 at 14:48
Big argument between Casey Mulligan, Paul Krugman and Jonathan Gruber……
http://krugman.blogs.nytimes.com/2014/02/14/stupidity-in-economic-discourse
14. February 2014 at 14:56
Scott,
Off Topic.
A couple of closely related notes.
The paper (see comment by Paul Einzig above):
“Who Anticipated the Great Depression? Gustav Cassel versus Keynes and Hayek on the Interwar Gold Standard”
By Douglas Irwin
Has been addressed in recent posts by both Econbrowser and Historinhas (Marcus Nunes) in honor of the fact that it just was published in the “Journal of Money, Credit, and Banking”. This paper has actually been available in an unpublished version since 2011 and was addressed by Uneasy Money (David Glasner) in a post called “In Praise of Gustav Cassel” at that time.
David Glasner’s most recent post
http://uneasymoney.com/2014/02/13/what-does-keynesian-mean/
Responds to Simon Wren-Lewis’ assertion that the major division in macroeconomics is between Keynesians and anti-Keynesians.
In comments you’ll find Jim Caton whose replies are worth reading. Caton has a new post that points out that demand side macroeconomics, and even a form of the AD-AS Model, well predated Keynes:
http://moneymarketsandmisperceptions.blogspot.com/2014/02/were-all-mostly-monetarists-now-not-new.html
He points to Nick Rowe observing in comments at Mainly Macro that consequently the main division in macroeconomics should be considered between monetarists and anti-monetarists. Rowe also makes some short but excellent points in comments at Caton’s post.
Incidentally, Scott pointed out in a post called “When legend becomes fact, print the legend” back in 2011 that the only thing original about Keynes was his invention of the zero rate trap, which then served to usher in the long dark night of macroeconomics.
Is it me, or do you too notice the glimmer of dawn’s early light?
14. February 2014 at 16:04
An unfortunately characteristic left-wing view by Jared Bernstein:
“Are Ever Larger Global Booms and Busts Really Inevitable?”
http://jaredbernsteinblog.com/are-ever-larger-global-booms-and-busts-really-inevitable
14. February 2014 at 18:19
Lorenzo: Good comment on my comment.
Scott Sumner: Too bad, I have moved away. Well, I would have advised you to buy a condo in Long Beach a year back for $130k or so, there are actually some nice ones in a historic building there. That’s a long drive from L.A. proper.
With your credentials, you might try to set up a house-sitting arrangement. Free housing in exchange for sitting still.
Another option (that your wife will hate) would be to buy a 10,000 sf warehouse, carve out 2k sf to live in, rent out the rest.
Buying a house? Very expensive. Renting? Not so, so bad, but expensive….
14. February 2014 at 19:30
Lorenzo: great observation!
14. February 2014 at 20:10
Matt Waters:
“I meant “dogmatic” in terms of the semi-strong EMH always being true. I said specifically that the EMH says “prices reflect all public information.” You spend much of your posts arguing against something I never said. I have no idea how anyone holds the strong form to be true, considering the obvious price jumps on earnings or acquisition news. Since insiders knew about the news, either the price didn’t reflect insiders’ knowledge before the news or the public’s knowledge after the news.”
“The weak form of the EMH is actually that past prices cannot predict future prices, in other words charting or technical analysis. The semi-strong form is that prices reflect all publicly available information.”
“In fact, I don’t disagree with you that mispricings based on publicly available information can exist. A “bubble” is simply an extreme version of a mispricing. I gave four examples of such mispricings.”
First, I never said or implied that you believe in the strong form of EMH. Perhaps I was not clear, but it certainly wasn’t my intent.
Second, and something I should have stated before, is that the EMH Sumner is advancing presupposes the strong form. He literally denies any possibility that an individual can make above market returns based on superior knowledge and skill. To him it’s all luck. That is what I was responding to, in part. The other part is related to this error you keep repeating:
“My point was that, given the semi-strong EMH was true in all cases, then Sumner’s views are not logically inconsistent.”
Yes, they are, because he is claiming to have made correct predictions based on past price changes. That is not consistent with his other statements against those who claim to have been proven correct based on the same foundation of past price changes.
In other words, what I am saying is that if you are going to say that people claiming to have made correct predictions based on knowledge and skill that violates EMH assumptions, are somehow not correct but only lucky, then you can’t also claim to have made a correct prediction based on the fact that housing prices have risen in the recent past. You are denying EMH when you make that argument.
“Randomness does not say the probabilities are uniform. Rolling a 7 with two dice in craps is more likely than rolling a 2, but whether a 7 or 2 is rolled is still random despite unequal odds.”
You said “pure” randomness.
“I certainly didn’t predict Kocherlakota”Ž’s huge intellectual shift, for example.”
Same thing is the case for people in charge of the monetary system.
“Furthermore, there were many somewhat random factors which went into whether Summers or Yellen would become the chairman. It didn’t seem random at the time, to the people making the decision, but the public does not have access to all things insiders do.”
Somewhat random? You mean you don’t know ALL the facts, right? That does not imply randomness, but rather uncertainty concerning teleological events.
I agree that the public does not have all the information. In a division of labor society, indeed any society, total information known exceeds the information that any one individual knows. There will always be information known by some but nobody else, and more importantly there will always be new information that has not yet been reflected by existing prices.
“So when an announcement is made that, say, Obama is nominating Yellen, the market gives its reaction to the new news. Yellen may have been rolling a 7 vs. Summers rolling a 2 at that point, but the market still increased stock prices once they found out a 7 was rolled. It was hard to tell, before it was official, whether Obama would stick strong with Summers.”
Pure randomness would have Pee-Wee Herman having an equal probability of being nominated.
“If the semi-strong EMH always applies, then the change in stock market price is an indicator of true value addded to corporations. Sumner himself does not have the view that the semi-strong EMH always holds for every market everywhere every time, but I agree with him that market reaction to news is pretty good evidence for effects of policy changes on the real economy.”
Assuming correlation implies causation.
“The buyers have real money on the line, which can’t be realized in the long-term if they have to rely on reselling securities versus actually realizing increased value.”
Securities cannot have a price unless they are resold.
14. February 2014 at 20:51
Prof. Sumner,
One topic that needs more discussion:
Why Volcker didn’t try to drive inflation down to 0% and then why Greenspan didn’t try to drive inflation down to 0%.
15. February 2014 at 01:08
Gosh, does everyone know how bad our political parties are? That’s embarrassing.
15. February 2014 at 07:10
Scott. In the UK some are now calling it Forward Guidance 2. FG1 last six months.
In FG1 he said he would only “start” considering raising rates if u fell below 7%. Now he won’t. So far, so good. He’s changed his mind as inflation remains benign and economic slack remains considerable.
Under FG2 he is now going to use 18 economic indicators to decided whether to “consider” raising rates. The one he now says is most important is “economic slack”.
Trouble is, spare capacity, as we know, is one of the least measurable indicators. He thinks we are 1.5% below full capacity and that it will take two years to use up. Obviously,1.5% doesn’t sound very considerable at all. Forward markets think he will raise rates within a year. The pound strengthened. A slight monetary tightening, all in all, but within a context of confidence that Carney will not tighten too early.
15. February 2014 at 07:21
Steve Keen is absolutely right. Australian home price WILL come down. And there’re a number of reason why they haven’t come down yet:
– Demographics: The australian Baby Boom started some 10 years later than in the US. And that has MAJOR economic implications.
– Chinese capital is fleeing China and moving to e.g. Australia & New Zealand.
– China increased money (credit) supply by 30% in 2009 whereas it was only 9% in the US. When (NOT IF) the chinese economy collapses then Australia WILL get hurt.
– It will be the australian consumer that determines whether or Australia will contimue to run a Current Account Deficit (CAD).
– The CAD of australia is the result of other countries running CA surplusses.
– Demgraphics in Australia will be a drag on australian home prices in the future and will shrink the CAD.
15. February 2014 at 07:37
BTW: Running a Current Account Deficit simply means that there’s an net outflow of money. Nothing more, nothing less. But a country with a CAD must wait and see whether or not that money is returned to that country.
Running a CAD also means that a country effectivley is living beyond its means. Whereas a country with a CA Surplus is actually living under its means. So, China is actually living “under its means”.
I would recommend the readers of this thread to regularly visit the australian website MACROBUSINESS
http://www.macrobusiness.com.au/
http://www.macrobusiness.com.au/2013/12/the-great-australian-shock/
15. February 2014 at 07:38
And this:
http://www.macrobusiness.com.au/2014/02/pickering-australian-jobs-in-budding-nightmare/
15. February 2014 at 11:38
don’t be too hard on the profession they will also call it a current account surplus 😉
15. February 2014 at 13:39
Scott,
Off Topic.
Have you read this paper yet?
http://www.econ.brown.edu/fac/gauti_eggertsson/papers/BES.pdf
Is Increased Price Flexibility Stabilizing?, Redux
Saroj Bhattarai, Gauti Eggertsson, and Raphael Schoenle,
February 2014
NBER Working Paper No. 19886
Abstract:
“We study the implications of increased price flexibility on output volatility. In a simple DSGE model, we show analytically that more flexible prices always amplify output volatility for supply shocks and also amplify output volatility for demand shocks if monetary policy does not respond strongly to inflation. More flexible prices often reduce welfare, even under optimal monetary policy if full efficiency cannot be attained. We estimate a medium-scale DSGE model using post-WWII U.S. data. In a counterfactual experiment we find that if prices and wages are fully flexible, the standard deviation of annualized output growth more than doubles.”
Some observations…
By construction, if prices are more flexible, and thus the aggregate supply (AS) curve is more inelastic, then obviously output volatility is amplified for supply shocks, for any given monetary policy function. Similarly, if monetary policy does not respond strongly to inflation, a more inelastic AS curve may result in an inflationary or deflationary spiral with persistent deviations from the efficient output level.
But if monetary policy targets a unit elastic aggregate demand (AD) curve (i.e. Nominal GDP Targeting), without using shorter term interest rates as the instrument of its policy, increased price flexibility cannot result in either of these destabilizing extremes.
The welfare function of this paper is quadratic in inflation and deviations in output from the efficient output level. This of course assumes, without any apparent justification, that variations in inflation are detrimental to welfare. (This also assumes that a zero inflation rate is optimal, but let’s ignore that for now.) But if the welfare function excludes inflation, then more flexible prices need not reduce welfare, especially if changes in inflation are the result of efficient AS shocks and monetary policy targets a unit elastic AD curve.
15. February 2014 at 16:07
Scott,
Off Topic.
Have you read this paper yet?
http://research.stlouisfed.org/wp/2014/2014-004.pdf
How Persistent are Monetary Policy Effects at the Zero Lower Bound?
Christopher J. Neely
February 2014
Abstract:
“Event studies show that Fed unconventional announcements of forward guidance and large scale asset purchases had large and desired effects on asset prices but do not tell us how long such effects last. Wright (2012) used a structural vector autoregression (SVAR) to argue that unconventional policies have very transient effects on asset prices, with half-lives of 3 months. This would suggest that unconventional policies can have only marginal effects on macroeconomic variables. The present paper shows, however, that the SVAR is unstable, forecasts very poorly and therefore delivers spurious inference about the duration of the unconventional monetary shocks. In addition, implied in-sample return predictability from the SVAR greatly exceeds that which is consistent with rational asset pricing and reasonable risk aversion. Restricted models that respect plausible predictability in asset returns are more stable and imply that the unconventional monetary policy shocks were fairly persistent but that our uncertainty about their effects increases with forecast horizon. Estimates of the dynamic effects of shocks should respect the limited predictability in asset prices.”
Pages 2-3:
“…Despite this profusion of research on the immediate effects of asset purchase programs on asset prices, there has been much less work and less certainty about the effect of QE on macroeconomic variables (Baumeister and Benati (2010), Gambacorta, Hofmann and Peersman (2012), and Gertler and Karadi (2013)). Aside from the usual difficulties of estimating the counterfactual path for macro variables, there is a second problem with estimating the effects of QE: the macro effects of QE depend on the persistence of the asset price effects of QE. Transient QE shocks to interest rates presumably imply that QE is a much less effective policy than do persistent QE shocks to interest rates. Thus, the estimated persistence of QE announcement effects is very important.
Indeed, many market observers concluded that QE 1 failed because long yields did not remain low after the March 18, 2009 QE1 buy announcement (Woodhill (2013)). Figure 1 shows that long-term nominal Treasury yields rose fairly steadily from late April through June, gaining more than 100 basis points (b.p.) overall by mid-June 2009. Long-term, local currency, nominal, sovereign yields from Australia, Canada, Germany, and the U.K. similarly rose during this March-to-June period.
Estimating the persistence of unconventional policy shocks is very difficult because it implicitly requires a counterfactual path for asset prices. Wright (2012) offers a clever solution to determine said persistence in the form of a structural vector autoregression (SVAR), in which heteroskedasticity in interest rates on days of unconventional monetary policy shocks identifies the contemporaneous effects of unconventional monetary shocks (Rigobon and Sack (2004) and Craine and Martin (2008)). The VAR data include 6 daily U.S. interest rates: the 2- and 10-year nominal Treasury yields, the 5-year and 5-10 year forward TIPS breakeven inflation rates, and the Moody’s Baa and Aaa corporate bond yield indices, from November 3, 2008 to September 30, 2011. Wright’s impulse responses imply that unconventional monetary policy shocks have large, but very transient effects on U.S. interest rates; most of the LSAP effects on 10-year Treasury, Aaa and Baa yields dissipate within 6 months…”
Neely’s paper of course extends Wright’s analysis.
Most highly publicized academic studies on QE seem to come in one of four flavors: 1) event studies on changes in security yields on the days of announcement (e.g. Krishnamurthy and Vissing-Jorgensen, 2011), 2) panel data studies on flow and stock effects of QE on daily security yields during the programs (e.g. D’Amico and King, 2010) , 3) times series studies on the effect of open market operations on security yields during normal times (e.g. Hamilton and Wu, 2011) and 4) studies on the macroeconomic effects of QE using major models calibrated to normal times (e.g. Fuhrer and Olivei 2011).
Neely and Wright’s studies are hard to pidgeonhole into one of these four categories, but they have a lot in common with the first two categories in that they try to estimate the effect of QE on security yields.
The underlying assumption of nearly all these studies is that the primary Monetary Transmission Mechanism (MTM) channel is the Traditional Real Interest Rate Channel, which is almost certainly not the case at the zero lower bound (ZLB).
Notably, there’s very few empirical studies on the macroeconomic effects of QE. Of the three studies Neely mentions that look at the effect of QE on macroeconomic variables, Baumeister and Benati (2010) probably belongs in category #4, and Gertler and Karadi (2013) is hard to categorize, but it relates to that category as well. Only Gambacorta, Hofmann and Peersman (2012) is an empirical study:
The Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound: A Cross-Country Analysis
Leonardo Gambacorta, Boris Hofmann and Gert Peersman
August 2012
Abstract:
“This paper assesses the macroeconomic effects of unconventional monetary policies by estimating a panel VAR with monthly data from eight advanced economies over a sample spanning the period since the onset of the global financial crisis. It finds that an exogenous increase in central bank balance sheets at the zero lower bound leads to a temporary rise in economic activity and consumer prices. The estimated output effects turn out to be qualitatively similar to the ones found in the literature on the effects of conventional monetary policy, while the impact on the price level is weaker and less persistent. Individual country results suggest that there are no major differences in the macroeconomic effects of unconventional monetary policies across countries, despite the heterogeneity of the measures that were taken.”
http://www.bis.org/publ/work384.pdf
(continued)
15. February 2014 at 16:09
(continued)
To my knowledge there are only three other such studies:
AN INJECTION OF BASE MONEY AT ZERO INTEREST RATES:
EMPIRICAL EVIDENCE FROM THE JAPANESE EXPERIENCE 2001-2006
Yuzo Honda, Yoshihiro Kuroki, and Minoru Tachibana
March 2007
Abstract:
“Many macroeconomists and policymakers have debated the effectiveness of the quantitative monetary-easing policy (QMEP) that was introduced in Japan in 2001. This paper measures the effect of the QMEP on aggregate output and prices, and examines its transmission mechanism, based on the vector autoregressive (VAR) methodology. To ascertain the transmission mechanism, we include several financial market variables in the VAR system. The results show that the QMEP increased aggregate output through the stock price channel. This evidence suggests that further injection of base money is effective even when short-term nominal interest rates are at zero.”
http://www2.econ.osaka-u.ac.jp/library/global/dp/0708.pdf
Quantitative easing works: Lessons from the unique experience in Japan 2001-2006
Eric Girardin and Zakaria Moussa
February 2010
Abstract:
“The current financial crisis has now led most major central banks to rely covertly or overtly on quantitative easing. The unique Japanese experience of quantitative easing is the only experience which enables us to judge this therapy’s effectiveness and the timing of the exit strategy. This paper provides a new empirical framework to examine the effectiveness of Japanese monetary policy during the “lost” decade and quantify the effect of quantitative easing on Japan’s activity and prices. We combine advantages of Markov-Switching VAR methodology with those of factor analysis to establish two major findings. First, we show that the decisive change in regime occurred in two steps: it crept out from late 1995 and established itself durably in February 1999. Second, we show for the first time that quantitative easing was able not only to prevent further recession and deflation but also to provide considerable stimulation to both output and prices. If Japanese experience is any guide the quantitative easing policy must be seen as a symptomatic treatment; it must be accompanied with a dramatic restructuring in the financial framework. The exit from quantitative easing must be postponed and decided within a clear program and according to clear numerical objectives.”
http://hal.archives-ouvertes.fr/docs/00/45/93/84/PDF/DT-GREQAM-2010-02.pdf
(continued)
15. February 2014 at 16:11
(continued)
Monetary Transmission via the Central Bank Balance Sheet
Stefan Behrendt
November 2013
Abstract:
“This paper estimates the effects of unconventional monetary policies on consumer as well as asset price inflation, economic activity and bank lending at the hand of a VAR analysis, covering episodes of balance sheet policies of 9 countries over the last 20 years. While recent episodes of unconventional monetary policies have been extensively analysed, this paper reduces deficiencies about long-run implications following central bank balance sheet policies in Scandinavian countries, Australia in the 1990s and Japan in the early 2000s. Results of this study are that balance sheet policies, in response to a collapse of asset price bubbles, can ensure a short run stabilisation of economic activity but are not able to lift the economy out of the ensuing deflationary slump alone. Additionally, they do not pose severe problems associated with inflation, as laid out in several theories such as the static monetarist interpretation of the quantity theory of money, or towards newly created asset price bubbles.”
http://pubdb.wiwi.uni-jena.de/pdf/wp_hlj49-2013.pdf
Honda et al estimate four variable VARs (industrial production, core CPI, reserve balances and various financial variables) and find that the effect of QE on the yields of 5, 7 and 10 year Japanese bonds is significantly *positive*.
I have VAR Granger causality tests that show that since December 2008 the US monetary base Granger causes nominal 10-year T-Note yields at the 5% significance level and that the impulse response is *positive*.
I also find that since December 2008 the US monetary base Granger causes 5-year inflation expectations as measured by TIPS at the 1% significance level, and that the since April 2009 the UK monetary base Granger causes 5-year inflation expectations as measured by inflation-linked gilts at the 1% significance level.
The effect on inflation expectations is as expected in each case, that is positive. And since theoretically the effect of QE on inflation expectations should be positive, why anyone would expect QE to reduce long-term yields is beyond me.
So “market observer” Louis Woodhill is both right and wrong. QE does raise long term yields, but this is a sign that it is a success.
http://1.bp.blogspot.com/-BAnvd5XkIkc/UnKFj667RyI/AAAAAAAAAyM/-xbQBsjqcm0/s1600/QE+Rates.png
15. February 2014 at 18:04
Thanks Travis, I have a post over at Econlog.
Mark, Yup, the AS/AD model was basically the standard model of elite macroeconomists, before Keynes wrote the General Theory. (Not the graph, but the basic idea.) See Hawtrey’s book on the Gold Standard in Theory and Practice. It’s all AS/AD.
Ben, If only there was a low cost index fund for LA land
James, You said:
“In FG1 he said he would only “start” considering raising rates if u fell below 7%.”
If this is right (and it sounds right) then Carney has not reneged on any promises, he’s simply clarified the forward guidance. To be sure, the policy is very far from being optimal, but not quite the disaster portrayed in the press.
He said he wouldn’t raise rates before hitting 7% U, and kept that promise.
Willy2, You said;
“BTW: Running a Current Account Deficit simply means that there’s an net outflow of money. Nothing more, nothing less. But a country with a CAD must wait and see whether or not that money is returned to that country.
Running a CAD also means that a country effectivley is living beyond its means. Whereas a country with a CA Surplus is actually living under its means. So, China is actually living “under its means”.
No, it has nothing to do with outflows of money, or living beyond one’s means. Don’t believe what you read.
Mark, They (Eggertsson, et al) seem to focus on output and price volatility (which don’t matter) and ignore employment volatility, which is what does matter.
The Neely paper looks interesting—what do you think?
15. February 2014 at 18:13
Scott,
“The Neely paper looks interesting””what do you think?”
I’m somewhat in awe of it mostly because the econometrics is over my head. But I’m concerned that it implicitly assumes that the purpose of QE is to lower longer term interest rates.
15. February 2014 at 19:01
Off Topic.
Here’s something not only of specific interest to me, but hopefully of general interest to Market Monetarists (and maybe even to all non-nihilists).
Here’s a recent post by Detroit Dan:
http://mikenormaneconomics.blogspot.com/2014/02/economic-discourse-focus-on-problem-not.html
“This post is inspired by two observations:
Phil Pilkington is onto something important in recent posts regarding the utility of macro-economic modeling. Specifically, he observes that macro-economics is an open system in which precise experiments and firm conclusions are impossible.
Personally, I have observed good economic discussions devolve into overly wordy, time-wasting theoretical slogs. In my experience, this happens when either:
–Tangential economic models are introduced, and the frame of reference for the discussion is changed inappropriately.
OR
–The discussion is based upon unrealistic assumptions…”
I’ve had a few debates with Philip Pilkington lately, but mostly they have been over what I would describe as factual errors on his part, not over anything that I would construe as matters of models, or even of opinion. Moreover I would say that recently Pilkington has verged beyond mere skepticism, and into out and out nihilism. But don’t take my word for it:
http://fixingtheeconomists.wordpress.com/2014/02/12/proud-to-be-a-nihilist-bill-mitchell-on-econometrics-and-numerical-prediction/
In any case, In Part I Detroit Dan discusses the “Inappropriate Use of Math and Statistics” and quotes Pilkington from several of his blog posts extensively.
In Part 2 Detroit Dan says the following:
“Timewasting Discussions
There are two specific topics which drive me crazy:
1.Any discussion about the IS/LM model. Krugman is a big proponent of this, but he generally labels his columns discussing IS/LM as “nerdy”. I have concluded that this is because the IS/LM model only makes things much more complicated than they need to be.
2.Any discussion with Market Monetarists. These inevitably start with the unrealistic assumption that the “Fed” can do whatever it wants in terms of controlling the economy. Managing expectations by making pronouncements is generally the means by which they can exercise this power. Any conversation discussing such a mythical economy goes in circles.
Here are some examples:…”
So in Detroit Dan’s opinion, any discussion with Market Monetarists is a waste of time.
For an example of #2 he links to an Interfluidity post from early September entitled “Terminal demographics” and says the following:
“Here, Interfluidity attempts to discuss the causes of inflation in the 1970s. He engages with several Market Monetarists, and the results are an extremely long discussion that will make your head spin. The problem is that the Market Monetarism uses 100 sentences where 1 will do. Here is an exchange I had with a Market Monetarist in the comments of the referenced post:
“Me: To say that the macro-economy can or should be managed through this one tool (interest rates) is not reasonable. We could just as well say that the inflation of the 1970s could have been prevented by raising taxes, or decreasing public expenditures, or wage and price controls, or breaking OPEC, etc…
Market Monetarist:…”
The Market Monetarist in question is me. In the quoted section I provide detailed quantitative evidence, complete with my usual links to sources, that contradict Detroit Dan’s long string of totally unsubstantiated opinions, after which Detroit Dan concludes his post by huffily saying:
“This is not a productive discussion. It’s more like a filibuster, and fits a dysfunctional pattern I’ve observed.”
Evidently empirical reality just leaves Detroit Dan just too plum tuckered out to even put up a fight.
P.S. Note that in comments several people speak out in defense of economic models and of quantitative evidence.
15. February 2014 at 19:20
Yglesias vs. Mankiw:
http://www.slate.com/blogs/moneybox/2014/02/15/superstar_effects_and_inequality.html
http://gregmankiw.blogspot.com/2014/02/defending-one-percent-again.html
17. February 2014 at 07:06
mpowell,
Thanks, I appreciate it. Sorry, I’ve been away for awhile and couldn’t respond.
The issue on fees is interesting, because I actually think many people do not add societal value proportional to their fees. I expound on this some more down below. It’s interesting because investors pay those fees out of free will and both Scott and I would agree those fees generally do not increase returns by more than their cost. Some practices to get those fees are borderline fraud to hide or obfuscate such fees, but most of the time people just happen to be irrational even with their own money.
Scott,
“Matt, You raise a good point about the EMH being hard to test. But one way you definitely do NOT want to test it is by examining the predictions of the most successful investor in history. That’s data mining on steriods. It might make more sense to look at billionaires as a group. Once they cross over the one billion line, how do their future investments perform?
As far as the Chinese being rich, you ain’t seen nothing yet. In 30 years the number of very rich Chinese will be extraordinary.”
This is a pretty decent point. There is clearly a difference between what Buffett could see in a market ex ante and what an “average” person would see in a market ex ante. That difference is not necessarily merely intelligence. Though intelligence plays a role, a lot of it is lack of very common emotional biases towards buying high and selling low.
In these terms, I do generally recommend simple index funds. 90+% of people, at least, could not reliably beat the market after transaction costs or fees. Maybe only 5% or so of any large money managers (for mutual funds, hedge funds, pensions and foundations) beat the market reliably, with most winners being coin-flipping.
Now Buffett’s (and some others’ IMO) success does nearly disprove the following formulation of the EMH: “Prices reflect all publicly available information.” In other words, not just somebody like Buffett but somebody omniscient about all publicly available information and how to interpret it could not reliably beat the market. I don’t think it’s really that difficult if one simply managed one’s own money in a vacuum or had investors very unlikely to leave. In the real world though, most mutual funds and hedge funds have incentives centered around maximizing funds under management rather than maximizing long-term returns. The optimum course for fund management to maximize investors is quite different than one to maximize returns, especially given the common emotional biases.
17. February 2014 at 10:55
Nope.
Running a CAD DOES mean “living beyond its means”. But then you have wrap your mind around how the balance of payments works and how it’s all tied to commodities (e.g. oil) priced in USD.
There’re a number of folks who DO have a good grasp on this kind of things. Like Michael Pettis, Michael Hudson (www.michael-hudson.com).
Or don’t you like the fact the US has a CAD and therefore by definition is living beyond its means ?
China & Japan have been running CAS for decades and that allowed & FORCED the US to run CADs. It also meant that foreigners have been paying for all those foreign US wars.
Seems you need to beef up your knowledge of how these things work.
17. February 2014 at 11:02
On top of that: I think Keen has a much better understanding of how an economy works than A LOT OF other economists.
17. February 2014 at 17:05
Mark, But at least Neely seems aware that if QE is expected to be successful then it might well raise rates.
Matt, When people decide what mutual funds to buy they tend to look at past performance (big mistake) Given they do, you’d think that mutual finds would try to earn high returns, so that they’d attract more customers.
Willy2, If you aren’t even going to respond to the points made by the post, then you don’t have any hope of convincing anyone. I gave an example of a CA deficit for Australia that did not imply they were living beyond their means. You have no response.
I’m quite sure Michael Pettis understands that deficits don’t mean a country is living beyond its means.
17. February 2014 at 23:59
– Don’t you like to hear that running a CA deficit means “living beyond one’s means” ? Because it applies to the US as well. The US suffered under a housing crisis in 2006-2009. Remember ? Because foreigners ditched their MBS bonds in 2007 & 2008. That’s why Lehman blew up. They were the largest sellers of MBS to foreigners and those foreigners balked at buying more MBS in 2007 & 2008.
– Then you didn’t read the articles Michael Pettis wrote. He wrote and spoke many times about Balance of payments issues and the impact of that on economies. (Spain, Germany, China, US)
– Housing in Sydney is priced – on average – at 6 times annual income. 4 times annual average income or more is a lofty valuation. 6 times or more is bubble.
– One also have to take Demographics into consideration. Both the US and Australia saw their CA deficit rise after 1990. The driver was demographic development in the US & Australia. Now with both the US & Australian population aging that CA deficit WILL shrink.
– Running a CA deficit simply means a country is living “beyond it means”. And the US is also running a CA deficit and living beyond its means. But it’s my experience that A LOT OF people here in the US feel insulted when I say that.
– Running a budget deficit is another signal a country is living beyond its means. (US, Australia, ……. )
– Take a look at Turkey today. They were running a large CA deficit (like Australia). All was well until investors pulled their money out of the country. Turkey raising interest rates is simply a signal they’re in panic. Is Australia next ?
18. February 2014 at 08:10
Michael Pettis didn’t literally say it but when one takes the gist of his story/read between the lines then he’s saying the running a CA deficit equals living beyond its means.
18. February 2014 at 08:50
Matt, When people decide what mutual funds to buy they tend to look at past performance (big mistake) Given they do, you’d think that mutual finds would try to earn high returns, so that they’d attract more customers.
This is sort of like a first order true thing, but missing some important 2nd order effects.
It’s not just equity markets where a small perc of players can beat the market (but a larger perc than random luck would suggest). Poker and other gambling activities (like sports betting) function the same way. There was a study on day traders a while back that reported the same thing. Statistically speaking, there are consistent winners. The thing I would say to amateur investors (which I am one) is, if you’re going to try to invest the time to beat the market why not make that your career? Because it’s going to require huge investments of your time…
And doesn’t Scott talk about making great returns investing in certain specific developing markets like Singapore? Doesn’t this kind of contradict your views on EMH? Maybe not the great returns part, but the fact that you actually pursued this strategy would suggest that you don’t really believe it. Maybe you could explain otherwise.
19. February 2014 at 19:01
Willy2, When you don’t respond to what others say it’s pretty hard to have a conversation.
MPowell, I’ve never earned any returns that would disprove the EMH.
21. February 2014 at 07:18
I simply don’t see what I did wrong. I gave a number of reasons/facts that were – IMO – valid reasons why Steve Keen is right and why I disagree with your view(s) on the issue raised.
E.g. I cited the fact that home valuations in Sydney are at 6 times annual income (=bubble). How is real estate valued at that nose bleed level good for households and small businesses.
Others come up all kind of silly replies & “off topic” replies. And you’re surprised that I won’t reply to that ?
21. February 2014 at 09:21
Steve Keen did acknowledge he was was wrong. He wrote an excellent article on why the australian continued to be strong. Hint: Australia didn’t deleverage as much as the US did.
http://www.businessspectator.com.au/article/2014/2/18/economy/australia-asleep-wheel
23. February 2014 at 13:40
Willy, I explained why a CA deficit does not mean a country is living beyond its means. And you simply replied that I was wrong, without rebutting my argument at all.
23. February 2014 at 15:24
No, your explanation is and keeps missing the point.
1. When a country (US, Australia, UK, Turkey, India, ….) has a CA Deficit then that country has a net outflow of money. Nothing more, nothing less.
2. This is VERY deflationary (See e.g. Turkey, India today) unless those foreigners are WILLING to re-invest that money back into e.g. Australia, Turkey, US or UK (by buying US, UK or Australian stocks, bonds or real estate.).
3. When foreigners are buying e.g. T-bonds, US stocks or US real estate then those foreigners are effectively subsidizing the US.
24. February 2014 at 00:15
We saw a similar story in Spain. Spain had a CA deficit. For a long time they were able to live beyond their means because foreigners (e.g. Germany) were willing to recycle the money they received from Spain back into e.g. spanish government bonds.
But in 2011 & 2012 those foreigners didn’t recycle that money back into Spain any more. Hence the crisis in Spain.
The crisis has pushed/crushed spanish consumption lower and (dramatically) reduced the CA deficit.
That kind of “rebalancing” (Michael Pettis) will sooner or later hit Australia as well.
And when I look at the situation here in the US then I see a similar development as in Spain in 2011.
16. March 2014 at 06:55
Yes, running a CA deficit does mean that a country lives beyond its means. The US is running a CA deficit and living beyond its means. That’s why in the US consumption is at ~70% of GDP whereas in China (with CA surplus) consumption is at an eye popping low of ~35% of GDP.
In more normal countries in e.g. Europe consumption is at 55% to 60% of GDP.
In 2006 the US had a CA deficit of ~ $ 880 billion and a budget deficit of ~ 200 billion. So, the US was subsidized by foreigners to the tune of ~ $ 600 billion.
If you don’t like it then ask/read Michael Pettis. He has written extensively on this issue.