Trump will appoint Authur Burns to head the Fed and has an innovative plan to pay off the national debt

Here’s MarketWatch:

Presumptive Republican presidential nominee Donald Trump on Thursday positioned himself on the far left of the political spectrum on fiscal issues, coming out for low interest rates, against a strong dollar and a more aggressive managing of U.S. debt.

In a wide-ranging phone conversation with CNBC, Trump said he would replace Federal Reserve Chairwoman Janet Yellen when her term expired, though he didn’t really offer up any criticism of her.

“I have nothing against Janet Yellen whatsoever, she’s very capable person. But she’s not a Republican,” Trump said. “When her time is up I would most likely replace because of the fact it would be appropriate.

“She is a low interest rate person, she’s always been a low-interest-rate person, and let’s be honest, I’m a low-interest-rate person,” Trump added.

Translation:  Yellen’s fine, but she wouldn’t kowtow to Trump in quite the same way that Burns was Nixon’s lapdog.  Let’s give Trump credit for being honest.  The only time I believe what Trump says is when he acknowledges his own corruption. Ever since 1980, Presidents have been willing to reappoint Fed chairs that were first picked by the opposing party.  Now Trump wants to end that.  Of course the other amusing aspect of this is Trump’s assumption that the sort of “Republicans” who are distinguished enough to be approved by the Senate are also economists who favor keeping rates low, as a way of holding down the cost of Treasury debt.  I’d love to see the list.  Hasn’t Mr. Burns passed away?

Trump also fretted about the impact on the U.S. debt if rates were to climb.

“I am the king of debt, I love playing with it, but now we’re talking about something very, very fragile,” he said.

One thing Trump advocated that the U.S. Treasury has resisted is a more active management of the debt. The U.S. Treasury hasn’t taken advantage of current low interest rates to issue more longer-term debt.

“I think there are times for us to refinance debt with longer term, we owe so much money,” Trump said.

While at times Trump seemed to link a conversation of refinancing with a situation where “the bubble popped” — at one point even suggesting a buyback of U.S. debt — he also made clear that he wanted to refinance now, to rebuild infrastructure.

When pointed out that the current Republican-led Congress has resisted calls to spend more on infrastructure, Trump said his expertise in that area could change minds.

Yes, when people discover Trump’s “expertise” some minds will change.

I don’t think any of this necessarily means anything, we won’t know what Trump plans to do until he becomes President.  I merely report the news for entertainment value. Some commenters pointed out that Trump favors easy money right now. That’s fine, but Presidents don’t determine monetary policy, they determine whether monetary policy will be politicized.  Nixon/Burns might be a good comparison for Trump, except that Nixon was far smarter, and also had a more pleasant personality.

PS.  No, if Trump came out favoring NGDPLT tomorrow I would not change my view of him.  It’s not about his views on this or that issue, it’s about what he is.  He’s ignorant, he’s a bully, a demagogue, a nationalist, a bigot, a xenophobe, a sexist, a buffoon.  He’s trying to remake the GOP in his image. NGDPLT would not change any of that.

You say Hitler was a vegetarian?  That’s nice, but I’m not changing my opinion of him.

(Of course I’m not equating Trump and Hitler, which would be ridiculous.)

PS.  It’s on, the race brought to you by Rush, Fox and Drudge.  The candidate who really likes Nancy Pelosi vs. the candidate who really likes Pelosi, except for the fact that she didn’t impeach Bush.

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Market monetarism is on the march

Cardiff Garcia quotes from a recent report by James Sweeney at Credit Suisse:

Many commentators point to high debt levels as a major driver of the [2008] crisis. However, high debt levels signal vulnerability, not imminent crisis. Crisis occurs when highly leveraged entities suddenly cannot service their debts. This is most likely when nominal growth suddenly slumps, or when asset prices fall sharply.

Of course, those two things often happen together. And what’s most likely before a sharp decline in nominal growth and asset prices is a boom in both.  .  .  .

We believe policymakers are so scarred by the events of 2008 that they live in constant fear of anything resembling a recurrence. The simplest way to prevent recurrence has little to do with achieving 2% inflation and much to do with minimizing the variance of nominal growth, preferably while maintaining full employment.

Macroprudential policy and financial stability monitoring may help with these goals, but ultimately monetary policy is the tool most likely to prevent large cyclical swings in nominal growth.

We’re winning.

Banana republic watch

Here’s The Economist:

Siren song of the strongmen

In a presidential race, a thuggish mayor leads the polls

AT MID-AFTERNOON in Dagupan City, hundreds of people sweat and jostle politely in an arena awaiting Grace Poe, one of five candidates vying to be elected president of the Philippines on May 9th. When she arrives, the crowd surges to greet her. But during her well-rehearsed stump speech, attention wavers. People shift in their seats. Some leave. Afterwards, some clamour for T-shirts she tosses from a truck, but the overall response seems more dutiful than passionate.

Ms Poe needs to do better than this to win. As the vote approaches, she appears stuck in second place; she must energise her supporters and attract more. But she seems too much of a trapo—a pun on “traditional politician” and a Tagalog word meaning “old rag”—for an electorate in an anti-establishment mood. This year, the more experienced candidates are doing worse in the polls. Battling for third and fourth position are Jejomar Binay, the vice-president, and Mar Roxas, a former cabinet minister who has been endorsed by the outgoing president, Benigno Aquino. Behind them is Miriam Defensor Santiago, a former judge who has served in all three branches of government.

The front-runner is Rodrigo Duterte (pictured, in striped shirt) a vulgar, impolitic mayor who has never sought national office, is not backed by any big party and appears wilfully ignorant on policy. His simple line—the system is broken; I’ll fix things—resonates with millions of people.

What would make Filipino voters reject traditional politicians, and go for a thug with no experience who makes empty promises to fix things?

Because the trapos are polished and cautious, Mr Duterte’s rough bluster gives him an air of authenticity. His emphasis on crime and the difficulties of urban living appeals to ordinary folk. But he has a darker side. He reportedly forced a tourist who violated Davao’s anti-smoking ordinance to eat a cigarette butt. He called the pope “a son of a bitch” and, in speaking of an Australian missionary who had been raped and murdered during a prison riot, lamented that he had not been first in line to abuse her sexually. When American and Australian authorities tweeted their disgust at the “joke”, he dared both countries—allies the Philippines needs to counter Chinese assertiveness—to cut ties.

More worrying than Mr Duterte’s boorishness is his contempt for democracy and the rule of law. He has spoken approvingly of the extrajudicial killing of suspected criminals, and sneers at Westerners who “want to rehabilitate instead of just killing” criminals. He promises to end crime within six months of his election, and says his presidency is “going to be bloody. People will die.” People who fret over human rights, he said at an event on April 27th, are “cowards”. He praised Ferdinand Marcos, a longtime dictator who was overthrown in 1986, for his ability to “change the system”. (Mr Marcos’s son is near the top of the vice-presidential polls.)

To supporters, such talk shows that Mr Duterte will get things done. “Voters don’t care about process,” says Alan Peter Cayetano, Mr Duterte’s running mate: they just want things to work. Another Philippine politician once said something similar: “The times are too grave and the stakes too high for us to permit the customary concessions to traditional democratic processes.” That was Marcos in 1973, months after he declared martial law. He went on to torture and kill thousands of his countrymen.

Contempt for the rule of law?

Fake “authenticity”?


Arguing with the Pope?

Threats of violence?

Tasteless sexist jokes?

Mindless nationalism and bluster?

Wilfully ignorant of policy?

Simplistic claims that he’ll fix things?

What’s wrong with Filipino voters?  Is the Philippines some sort of banana republic? Maybe we should cut off immigration from the Philippines.  We wouldn’t want that sort of person moving here to vote, messing up our wonderful democracy.

PS.  The Economist also has an editorial on the subject, in the same issue:

Ahead of the ballot on May 9th, the field is narrowing to two leading candidates. One is Grace Poe, a foundling, adopted daughter of an action-man actor (the late Fernando Poe junior, a failed presidential candidate), and now a telegenic senator. She promises continuity with Mr Aquino’s pro-business policies, but her CV is thin and her campaign lamentably vacuous.

The front-runner, Rodrigo Duterte, is downright alarming. The mayor of the southern city of Davao, he likes to play the hard man.  .  .  .

If he does not get his way within a year of being elected, he says he will declare a “revolutionary government”.  .  .  .

The leading candidates thus present voters with a ghastly choice between vapidity and vigilantism; neither shows any sign of being up to tackling the many serious issues facing an archipelago of some 100m people.  .  .  .

President Aquino (the son of a former president) has endorsed Mar Roxas, the competent interior minister (and grandson of an ex-president), in an attempt to institutionalise some sort of party system. Alas, Mr Roxas is a hopeless campaigner and is far behind in the polls.

What should Filipinos do? This newspaper’s view is that the dull but diligent Mr Roxas would make the best next president. But if on May 9th he obviously has no chance of winning, then they should swing behind Ms Poe. Better the novice foundling, surely, than the beast of Davao.

I agree.  If the best man has no chance, voters need to hold their noses and vote for the vacuous woman.  The beast must be stopped, at all costs.

PS.  Niall Ferguson has some very interesting comments about populism around the world, I particularly liked his remarks on how Latin America seems to be coming out of the populist nightmare, just as the rest of the world is flirting with the idea.  Interestingly, he finds one of the US candidates to be right on the borderline between populism and fascism.  But hey, Ferguson obviously doesn’t know much about history.  Not like my commenters.

Print the legend

As I get older, I become increasingly interested in the mythological folktales that are believed by most economists.  For instance the idea that LBJ refused to pay for his guns and butter program, ran big deficits, and kicked off the Great Inflation.  All you need to do is spend 2 minutes checking deficit data on FRED to know that this is a complete myth, but apparently most economists just can’t be bothered.

Screen Shot 2016-05-04 at 10.23.16 AMDuring the 1960s, the budget deficit exceeded 1.2% of GDP only once, in fiscal 1968 (mid-1967 to mid-1968.  LBJ responded with sharp tax increases in 1968, and the deficit immediately went away.

The LBJ guns, butter and deficits story is too good to drop now, it’s in all the textbooks. It would be like admitting that the textbooks were wrong when they tell students that the classical economists believed that money was neutral and that wages and prices were flexible.  We can’t do that, it’s too confusing.

Another one I love is that monetary policy impacts the economy with “long and variable lags”.

I’ve talked about this before, but today I have a bit more evidence.  The idea that monetary policy affects RGDP with long and variable lags has three components, one or more of which must be true for the theory to hold:

1.  Monetary policy affects NGDP expectations with a long and variable lag.

2.  Changes in NGDP expectations affect actual NGDP with a long and variable lag.

3.  Changes in actual NGDP affect actual RGDP with a long and variable lag.

All three are false.  The third claim is obviously false; NGDP and RGDP tend to move together over the business cycle.  So the entire theory of long and variable lags boils down to the relationship between monetary policy and NGDP.

The first claim is also obviously false, as it would imply a gross failure of the EMH. Now the EMH is clearly not precisely true, but it’s also obvious that market expectations respond immediately to important news events.  Even EMH critics like Robert Shiller don’t claim that an earnings shock hits stocks two week later; it hits stock prices within milliseconds of the announcement. That part of the EMH is rock solid.  There is no lag between policy shocks and changes in expectations of future NGDP growth.

So the entire long and variable lags theory rests on the second claim, that NGDP responds with a lag to changes in future expected NGDP.  Unlike the first and third claim, that’s possible.  But it’s also highly, highly unlikely.  While we don’t have an NGDP futures market, the markets we do have strongly suggest that markets (and hence expectations) move with the business cycle, not ahead of the cycle.

Perhaps the best period to test this theory is the 1930s.  That decade saw massive RGDP and NGDP instability, which was clearly linked to asset price changes.  Put simply, the Great Depression devastated the stock market.  Here’s the correlation between stock prices and industrial production, from my new book:

Screen Shot 2016-05-04 at 10.42.33 AMThe stock market is clearly not a leading or lagging indicator; it’s a coincident indicator.  And that’s not just true in the 1930s; it’s also true today:

Screen Shot 2016-05-04 at 10.48.03 AMThe onset of the recession lines up, as does the steep part of the recession.  The stock recovery in 2009 did lead by a few months, but the recent slump in IP led stocks by a few months.  In any case, there are no long and variable lags; it’s basically a roughly coincident indicator when there are massive changes in NGDP.

If there actually were long and variable lags between changes in expected NGDP and changes in actual NGDP (and RGDP), then forecasters would be able to at least occasionally forecast the business cycle.  But they cannot.  A recent study showed that the IMF failed to predict 220 of the past 220 periods of negative growth in its members.  That sounds horrible, but in a strange way it’s sort of reassuring.

Suppose that the business cycle is random, unforecastable, as I claim.  And suppose that declines in GDP occurred one out of every five years, on average.  In that case, the rational forecast would always be growth.  As an analogy, if I were asked to forecast a “green outcome” in roulette, I never would.  Each spin of the wheel I’d forecast red or black.  I’d end up forecasting 220 consecutive “non-greens” outcomes.  And yet, there would probably end up being about 11 or 12 green outcomes during that period, and I’d miss them all.  A 100% failure to predict greens.  Because I’m smart.

Of course if there really were long and variable lags, say 6 to 18 months, then there would be occasions where the IMF would notice extremely contractionary monetary policy, and accurately predict recessions a year later.  I’m not saying they’d always be accurate. The lags are “variable” (a cop-out to cover up the dirty little secret that there are no lags, just as astrologers cover their failures with the excuse that their model is complicated, and doesn’t always work.)  No, they would not always be successful, but they’d nail at least some of those 220 recessions.  But they predicted none of them. And that’s because there are no lags.  Because recessions begin immediately after the thing that causes recessions happens.

That’s the message the markets are sending loud and clear.  But economists can’t be bothered; they have their comforting stories. Who can forget this line from The Man Who Shot Liberty Valance:

Ranson Stoddard: You’re not going to use the story, Mr. Scott?

Maxwell Scott: No, sir. This is the West, sir. When the legend becomes fact, print the legend.

Current account deficits don’t matter

There are many things that we teach our undergrads, which then get forgotten (or rejected, if I must be polite) by professional economists.  The minimum wage costs jobs, low interest rates don’t mean easy money, trade with China benefits the US, monetary policy remains highly effective at zero rates, etc., etc.  I taught all these ideas right out of the textbooks I used, because I believe them.  And here’s one more: current account deficits are not a problem; they merely represent an imbalance between saving and investment in a particular region.  If we abolished CA deficits for all regions, down to the individual level, we’d have to abolish banks.  You want a house?  Save up some money.

A recent report by the Peterson Institute at least avoids the worst sort of mistake:

In the latest chapter of the saga over countries that seek unfair trade advantages from currency manipulation, the US Treasury has released a new report aimed at curbing the practice. Treasury is correct not to indict any countries for “currency manipulation” at this time but also to create a “monitoring list” of five major countries—China, Germany, Japan, Korea, and Taiwan—that could become “manipulators” in the future and thus require close surveillance. The objective is to deter countries from returning to past practices of manipulation, and the new Treasury report should be quite helpful in that regard. . . .

However, Congress should not have focused on countries that have a bilateral trade surplus with the United States. All that matters for the impact of currency manipulation on the United States is the multilateral current account balance of the manipulators. In today’s world of distributed production, country X may buy materials from the United States, process and sell them to country Y, which then assembles the final goods for shipment to the United States. Country X would have a bilateral deficit with the United States and country Y a bilateral surplus, yet either or both might be guilty of currency manipulation that distorts the overall US current account balance and economy.

That’s half right, the bilateral surplus doesn’t matter, but neither does the multilateral surplus.  There is no plausible harm that could come to the US from other countries running CA surpluses.  There are some vulgar old Keynesian models that claim that high saving policies, which can as a side effect lead to CA surpluses, could hurt the US by reducing global AD. Paradox of thrift. I hope no reader of this blog takes those theories seriously.  And as for the theory that current manipulation is a “beggar-thy-neighbor” policy, it is refuted every time an expansionary monetary policy move in Japan or Europe leads to a rise in global stock prices “despite” the accompanying currency depreciation.

We would underline the importance of Treasury’s decision to limit “allowable” current account surpluses to 3 percent of a country’s GDP. We at the Peterson Institute for International Economics have analyzed “fundamental equilibrium exchange rates” for years and have concluded that any imbalance above 3 percent of GDP, on either the surplus or deficit sides, is excessive and probably unsustainable; Treasury itself has often cited our estimates in its semiannual reports as authoritative. The staff of the International Monetary Fund has developed norms for current account positions that are even tougher, suggesting that both China and Japan should run no surpluses at all. There has been some discussion of defining a “material” (global) current account surplus at a higher level, perhaps 4 percent of GDP, and Treasury itself sought international agreement on such a norm at the G-20 meetings in Korea in 2010. Hence they are to be commended for concluding that “allowable” surpluses should not exceed 3 percent.

I find these proposals to be frightening, as they are based on a misunderstanding of basic international economics.  CA surpluses should be welcomed, as they suggest the surplus country probably has sound fiscal policy, and is not engaged in the sort of ruinous debt run-up that led Greece and Italy and Portugal into their current mess.  Most tax regimes strongly distort the saving/investment process, and hence even switching to a neutral treatment of saving and investment would often lead to a big CA surplus.  The rest of the world should try to copy Germany and Singapore.  We obviously won’t all end up with CA surpluses, but we’ll have more saving and investment, and hence faster economic growth.  If the zero rate bound is a problem, then raise the inflation target high enough so that it doesn’t bind.

To see what’s wrong with the 3% proposal, let’s look at the eurozone, which currently runs a 2.8% CA surplus.  That’s slightly under the proposed Peterson Institute limit, and hence not a problem.  But what about individual eurozone members, should we look at their CA balances?  Well, are they engaged in currency manipulation?  At first glance it would appear the answer is no, they don’t even have their own currency to manipulate. It would be as crazy to complain about the CA surpluses of an individual eurozone member as it would be to complain about the CA surplus of Massachusetts, (which is not actually measured (AFAIK) but would probably be at German proportions if it were.)

And yet, the report does name Germany as a country to watch, probably because its CA surplus is 7.7% of GDP.  But then why not pick on the Netherlands, at 9.7% of GDP? And why focus on individual eurozone countries, but not individual US states?  Believe it or not, it’s no longer enough to stop all “currency manipulation”, the CA surplus opponents now want to stop the sensible countries from being sensible, they want them to start running up large budget deficits.  After, all the recent Chinese case proves that this is not about currency manipulation.  China is working hard to prevent the yuan from falling, despite their large CA surplus.  Germany doesn’t even control their currency, and at the ECB they always push for a stronger euro.

It’s a myth that CA surpluses are some sort of “imbalance” that markets would correct if only governments would stop manipulating the currency.  Is Massachusetts manipulating the US dollar?  Indeed, without recent Chinese “manipulation”, the yuan would fall and their CA surplus would expand even further.  To their credit, the smarter Keynesians understand that the CA surpluses actually reflect saving/investment differentials, and can only be attacked with government policies aimed at reducing that imbalance, i.e. with tax cuts and/or higher government spending.

But in that case, Massachusetts is just as guilty as the Germans or the Dutch.  Maybe someone should put sanctions on Massachusetts’s products until my home state starts running a Puerto Rican-style fiscal policy.

In Australia they use Australian workers to build $400,000 condos on the beach, and then trade the condos to the Chinese in exchange for 400 HDTVs made by Chinese workers.  If both sides agree to this transaction, what possible harm could it do?  Can someone explain that to me?  But in the world in international economics, there is something sinister about this voluntary exchange, as it leads to a $400,000 CA “deficit” for Australia, and a “surplus” for China. What does that even mean? In America we might trade the mortgages on homes built with American labor, for Chinese goods. Again, there is supposedly something sinister about this normal business transaction. I don’t get it.

Of course it could be worse, in the world of American politics the transaction would be described as China “raping” the US.

PS.  Commenter HL suggested that Japan’s recent problems with an appreciating yen flow from the passage of this new law:

The latest step by Treasury was required by the Trade Enforcement and Trade Facilitation Act (the “customs bill”), which became law in February 2016.

I’m not sure if that’s true, but it’s interesting that Japan’s recent problems began in February.  In fact, the BOJ needs to drive the yen far lower, and thus they should say “to hell with the US”.  Unfortunately, they probably need to wait until mid-November to make that move.  And even then, the Japanese are too polite.  The others can ignore us, however.  We can’t touch the Germans as they are in the EU.  And China now has the world’s biggest economy; it’s too late to kick them around.  If Trump’s elected he’ll find himself kissing Xi’s ring.

Screen Shot 2016-05-02 at 4.31.19 PMPPS.  Over at Econlog I have a new post discussing the recent moves in the yen.