Is the Fed behind the curve?
Quick follow-up to my previous post. The 30-year T-bond yield just fell to 2.22%, the lowest ever. Meanwhile Fed officials are itching to raise rates because the economy is in danger of overheating.
Is the Fed behind the curve? Yes. The real question is how many curves. I say the Fed is just entering the first curve at Indy, while the asset markets are heading down the final stretch toward the finish line. The markets get it—low NGDP growth and low nominal interest rates as far as the eye can see. Let’s predict how long it will take the Fed to catch up with the markets. What do you think?
On another note, the Hypermind Q4 contracts concluded today. The 4th quarter NGDP growth rate was 2.544%, which meant the contracts ended at 25. I have heard about several winners. And remember, you can’t lose any money at Hypermind.
For the last month we’ve been working on getting the Hypermind price embedded into this blog. I guess it’s extremely difficult to do, given how long it is taking. And iPredict should be up pretty soon. I hope. The frustrations of always having to wait for other people to act . . .
HT: Brian Donohue
PS. Ken Duda asked about the “audit the Fed” bill. Does anyone know precisely what data the Fed critics want, that the Fed currently doesn’t provide?
Tags:
30. January 2015 at 16:06
Professor,
The fed’s official stance has been that they will be data dependent and patient on raising rates but the rhetoric from individual fed officials keeps hinting at a mid year rate hike while date keeps coming in weaker than expected, equity markets seem to have shifted into a downtrend and yields keep falling and flattening.
Do you believe the markets are pricing in a fed error by hiking rates mid year, or will the fed conform to the market?
30. January 2015 at 16:07
Hey Scott,
Lot of good posts lately. Not time to comment individually so here goes:
– you make a good showing of the Fed not doing enough to loosen monetary policy in 2008. Do you have any examples of an industrialized nation doing enough during this time? What was Canada and Australia up to? I know about the EU causing a depression with tight money but they also had a weird mix of bank bailouts, stimulus, and austerity.
– will your new trading index be regulated? Will one need to have a broker to trade? Is that good or bad?
– do you think that low gas prices coincide with the drop in unemployment? To what effect is a drop in gas prices a stimulus to consumers?
– I had a few other thoughts on demographics and housing and the labor market but no time sorry.
Cheers
30. January 2015 at 18:20
“The markets get it””low NGDP growth and low nominal interest rates as far as the eye can see.”
Fallacious reasoning from a spending change.
Interest rates are determined by more than just NGDP growth. Low interest rates do not necessarily imply low NGDP or low inflation of the money supply.
We can discern the intensity of free market forces by observing the intensity of state intervention, which is considerable. State laws cannot break economic laws. It can only bend them. The more the state presses, the more the free market forces push back.
Monetary policy is one such intervention that bends but does not break market forces. But as with all market phenomena, history never repeats. Not once in human history has there been a repetition. Low interest rates MAY be indicative of low inflation. But this is not necessarily the case.
(By the way, Sumner is always convoluted on this. Sometimes we read low interest rates are complex and we cannot precisely rule out the liquidity effect from increasing inflation. In this post however we’re told it is definitely not the liquidity effect, but too low NGDP. Sumner is acting as the NGDP guy.)
It is entirely possible for market forces to bend in such a way that what used to be “enough” money printing to result in “sufficient” NGDP growth, is now “insufficient”. Or, it could be the case that significant money supply inflation that would have resulted in say 10% NGDP growth 15 or 20 years ago, is now associated with “only” a 3% NGDP growth. MMs seem to understand this. Unfortunately what they do not understand is that it is unwise to perceive the central bank as being obligated to bend the market to whatever extent is necessary to bring about the central bank’s desired goals, instead of the market’s goals.
Just like in a healthy market there are occasional individual firm declines in revenues, so too in a healthy market are there occasional declines in aggregate revenues. There is zero difference in principle.
It makes sense that an individual firm’s customers mighty occasionally prefer more cash instead of more of that individual firm’s products, such that lower revenues are earned by that firm. We can all agree this is desirable because it encourages that firm’s owners to not invest in more of that firm’s products, in accordance with that individual firm’s customers. This is the case even if that firm has to lay off some of its employees. Consumers should not have to be denied more efficient use of resources and labor simply because it might result in temporary unemployment and resource idleness. To argue that the firm “should” earn fewer revenues if the consumers prefer cash to that firm’s current output, is not, I repeat not, equivalently or any other way an argument that the consumers, former or current, of that individual firm, are purposefully seeking for some of that firm’s employees to be laid off. Consumers should not be regarded as less important than workers. This is the case even if we take into account the fact that every worker is also a consumer. Thus, we are saying that consumption should not be regarded as less important than working. Consumption is more important than working. Consumption is the goal of working. Working is not the goal. Working is a means. Employees should be at the mercy of consumers, even if doing so will result in temporary worker idleness.
Market monetarism switches consumption and employment. NGDPLT is advocated in order to prevent “unemployment”, even if the employment that results is not in line with absolutely unhampered consumer preferences.
Again, there is no difference in principle between this, and the economy as a whole. Sometimes whole economies become invested in products that the population of all consumers do not find desirable. I am not talking about employment, but output. Sometimes the output is not what consumers want. To argue then that occasionally a healthy economy requires declining revenues and temporary unemployment, is not a presumption that people want unemployment. It is an argument that people want different output that only a market driven decline in NGDP can bring about.
If you can understand how someone might prefer 1 more car instead of 30,000 more pizzas, even if according to MM theory that utilizes crude “GDP”, or other aggregated total wealth concepts, that a person would be “wealthier” with the additional 30,000 pizzas versus the car, and even if choosing the car will result in more “workers” (pizza workers in this case, but you can substitute any type of skill) going temporarily unemployed, it is still the case that this consumer would become better off with the car, since that is what he chooses.
Now enter MM. At this point MM theory requires us to turn face and introduce the assumption of innate human stupidity. Here were are supposed to think of humans as stupid morons for wanting that which will result in their own temporary unemployment. You see, employment is in MM more important than individuals deciding what gets produced on their own. Therefore, if MMs believe people are making choices on money and goods that causes others to become temporarily unemployed, as they plan for producing different goods that consumers will actually buy with their money, then here were are supposed to view humans as stupid morons who deserve to have monetary freedom taken away from them, or kept away from them, by…necessarily stupid (if logic is respected) human central bankers.
Milton Friedman agreed with me that the central bank should be abolished:
http://www.youtube.com/watch?v=m6fkdagNrjI
Hey Sumner, given that you love to name drop Friedman to promote your ideology, then surely you’ll welcome people doing what I just did. Right? Haha, oh who am I kidding. We can only whore out prestigious economists to promote NGDP targeting. Silly me.
30. January 2015 at 18:51
“It makes sense that an individual firm’s customers mighty occasionally prefer more cash instead of more of that individual firm’s products”
We are not talking about individual firms but about the whole aggregate of them and it doesn’t make sense on the aggregate for people, banks and businesses to save for the future through building up stockpiles of idle money above the level that is needed for the economy to have smooth contract negotiations and transactions. Cash does not have intrinsic value. It is artificially propped up government pieces of paper. Building up cash does not build the economy’s ability to produce. It is an illusory form of saving on the aggregate. When cash gets a better risk adjusted returns than private stores of value and investment, it distorts the private markets.
I have more here: http://bessiambre.tumblr.com/post/105464554152/consistently-over-restrictive-monetary-policy-is-a
30. January 2015 at 19:20
Benoit, I pre-addressed your response in the latter portion of my post. I encourage you to read and address it.
You wrote:
“We are not talking about individual firms but about the whole aggregate of them and it doesn’t make sense on the aggregate for people, banks and businesses to save for the future through building up stockpiles of idle money above the level that is needed for the economy to have smooth contract negotiations and transactions.”
The economy does not in fact need “smooth contract negotiations and transactions”. The economy needs to be what individual consumers want it to be in terms of output, and consumer preferences are not ideally “smooth” but erratic, especially if the economy is not structured in accordance with consumer preferences.
You are presuming your solution of central banks stabilizing aggregate spending, as a means to itself. And necessarily so. Free markets are external to “smooth” anything. Stability is something you are presuming as a universal moral duty/ideal that all individuals must be forced into living.
If you as a consumer are not obligated to keep increasing your spending on apples or TVs or pants in a “smooth” manner, then why should individuals as a group be so obligated?
“Cash does not have intrinsic value. It is artificially propped up government pieces of paper.”
To value cash for holding does not require or imply “intrinsic value” of money. Money is valued for holding in part because it enables future purchases of goods. If the present supply of goods are not in line with consumer preferences, where only a reduction in total revenues can reveal to what extent each firm should experience a reduced (and even increased, when NGDP declines) relative quantity of revenues, so that resources are shuffled about to be more in line with consumer preferences, then it would be wrong to believe that a non-market series of activities should be carried out to change revenues to be “smooth” in the aggregate.
All NGDP targeting schemes are relative spending change schemes, and thus affecting relative resource allocation schemes. A central bank that raises NGDP is a central bank that brings about different spending changes on different goods. NGDP change policies are not individual firm revenue change policies.
“Building up cash does not build the economy’s ability to produce.”
It is not meant to. You are slipping in a moral position that total output MUST increase. Again, read the part of my post about in the single car and the 30,000 pizzas. It is simply not true that advocating for consumers to decide total spending changes given a particular money supply, is somehow also am advocacy that increasing cash holding times and lower goods spending must immediately bring about an increase in the abstract concept of “total output”.
Sometimes total output is not what consumers want it to be, such that ONLY a temporary replanning and recalculation, which necessitates a temporary reduction in “total output”, is the solution.
It is a fallacy to believe that total employment and total output must always be increasing (with increasing population) regardless of what is actually being produced.
Employment is a means, not an end. Even output is a means. Output is a means to achieve individual utility. Sometimes individual utility maximization requires that which requires a temporary aggregate reduction.
“It is an illusory form of saving on the aggregate. When cash gets a better risk adjusted returns than private stores of value and investment, it distorts the private markets.”
No, it fixes private markets when the forces bringing them about at market driven. You are arrogating your own personal preferences for what other people should be doing with their money, and advertising it as non-distortionary, indeed a solution to distortions, when in reality it is THAT very anti-market ideology that brings about more distortions.
If market forces deem total spending to be too high, such that NGDP falls, then it would cause distortions for central banks to print more money to reverse it.
——-
At least Charles Plosser does not view the Fed as omnipotent:
“It may work out just fine, but there’s a risk to that strategy… we’re in some sense distorting what might be the normal market outcomes at some point, we’re going to have to stop doing it. At some point the pressure is going to be too great. The market forces are going to overwhelm us. We’re not going to be able to hold the line anymore. And then you get that rapid snapback in premiums as the market realizes that central banks can’t do this forever. And that’s going to cause volatility and disruption.”
30. January 2015 at 19:52
“A central bank that raises NGDP is a central bank that brings about different spending changes on different goods. NGDP change policies are not individual firm revenue change policies.”
I will expand on this point. MMs falsely envision the economy as a singular machine. They envision NGDP as an abstracted quantity of dollars available in the “earning dollars” market. The dollars are “out there” to be earned – the size of that pool determined by the central bank – and it is up to “the market” to produce goods and services “into” that total revenue. The better of a producer you are, the higher a “share” of those revenues you will earn.
The real side of the MARKET economy is totally and completely ignored. The real side is only tangentially mentioned in connection to regulatory and fiscal “reforms”. EMH is used as justification to ignore the real side of the market process. And necessarily so. For if the real side were understood, then it would be only a matter of time before the whole monetary approach in MM is understood as untenable.
A central bank that targets aggregate final goods spending, or wages, is not doing so independent of the real side in terms of dependency. NGDP can only increase if the sum total of spending on specific goods and services increases. Without those goods and services being produced and sold, NGDPLT is impossible. A seemingly trivial and trite comment, but one that nevertheless is not truly appreciated in MM theory. MM theory starts and stays with NGDP guy talk.
Central banks that target NGDP, or prices, are always affecting relative spending and relative prices as long as they are not the sole buyer of final goods. Importantly, this relative change in spending brings about relative changes in resource and labor allocations. Central banks stretch the capital structure. The market cannot fix this without the forces opposing the increase in NGDP or prices being allowed to function. Those counter-forces, those market forces, are accepted as a real and true phenomena by MMs. They may not understand why that is, but they do. The very reason they advocate for central banks to act to affect NGDP, is proof they accept that market forces make NGDP go another way. But it is those market forces that MMs want to either eliminate, pretend do not exist, or worse, interpret as forms of communications to the central bank to act oppositely to the market. If the market wants NGDP to decrease, MMs identify this as a signal from the market that the market wants more NGDP.
“Pshaw!” we are told. MMs tell us that the market can never want lower NGDP. The market wants growing NGDP regardless of what it does to the real side of the market. Again we go back to the idea that the market is stupid, too stupid to be able to control NGDP. This is just an embarrassingly self-contradictory admission that the market does not actually want stable NGDP at all. The market wants NGDP to fluctuate in accordance with individual consumer preferences.
Market monetarism is actually anti-market monetarism. But some people have taken Orwell as a manual rather than a warning, and we’re told that a socialist institution, a central bank, can act in accordance with market principles. Oscar Lange tried the same nonsense in the 1930s, only he believed that socialism in other industries can also be called market socialism as long as the state affects the economy in such a way that the statesmen and their shameless prestige seeking court intellectuals believe the market would have otherwise behaved in their absence.
30. January 2015 at 20:02
Rodrigo, My best guess is that the markets are pricing in a Fed error. But I’m not good at predicting what the Fed will do.
Benny, Australia and Canada were in a better situation, and hence didn’t need to do as much. Australia was never close to the zero bound, so they simply continued to do their version of the Taylor Rule.
30. January 2015 at 20:03
Stable growth in states requires stable state controlled growths in money and spending. If you advocate for the latter, you make possible the former. You become in part responsible for the growth in the state if it occurs. You cannot claim non-responsibility, any more than you cannot claim non-responsibility for the increase in power of an individual person who you wanted to be given the power to print money in his basement with monopoly privilege, after which the person turns out to be someone you did not expect or advocate him to be: a tyrant instead of a benevolent philanthropist.
It is not an exaggeration to put partial responsibility on MMs for the deaths of innocent people at the hands of state armies who are in large part financed indirectly by government debt monetization. Yes, it requires more than just money, but the money was necessary to bring about the extent of deaths that it did. Being pragmatic in money, pragmatic as defined by MMs, is washing your hands of human blood.
30. January 2015 at 20:09
But Scott there is no zero bound right?
30. January 2015 at 20:10
The correct response to the above is not “Wars and deaths have taken place under gold standards, so inflation is not a factor.”
The correct response to the above is “The wars and deaths would have been even greater had states been unconstrained to gold and free to finance the wars by paper money inflation.
Sometimes it baffles my mind how monetarists of any kind can sleep at night. Perhaps that is why there is the crutch of human stupidity. Maybe it’s a cry for help.
30. January 2015 at 20:39
Benny, Not sure what you mean:
1. Sometimes people mean zero rates don’t prevent monetary stimulus. I agree.
2. Sometimes people mean market interest rates can fall well below zero. Not in an economy with cash.
Regarding point #1, central banks seem to find it harder to steer the economy at zero rates, because they are used to using the interest rate target as a signaling tool.
30. January 2015 at 21:01
@Sumner – “central banks seem to find it harder to ***steer the economy*** at zero rates…” – did you not say earlier that cb’s cannot steer the economy? Houdini strikes again! You change colors like a chameleon.
re the Duda PS–see below.
@Sumner – read the contents of Rand Paul’s Federal Reserve Transparency Act of 2015 here: http://www.paul.senate.gov/files/documents/GRA15012.pdf
The bill is actually reasonable. It does not compromise Fed independence, contrary to the alarmist WaPo spin, but merely audits the Fed to make sure there’s transparency of their mortgage inventory, which is about 38% of the total Fed balance sheet now (contrary to historical precidents, where the Fed balance sheet had just goverment paper).
The bill asks in Section 3 that these mortages in the Fed inventory be audited to see if they were procured as ‘liar loans’ or with false pretences. On this last note, Jorda et al (2014) in their paper “Betting The House” say that mortages have become much more important to banks than ever before. At the start of the last century they were 33% of bank balance sheets (for all banks) whereas now they are 66%. The Fed has followed this trend after 2008, by taking on an astonishing 38% of their balance sheets in toxic mortgages, many of which were procured fraudently and hence illegally. Paul’s bill attempts to redress this balance.
30. January 2015 at 21:04
“Do you believe the markets are pricing in a fed error by hiking rates mid year, or will the fed conform to the market?”
The mere fact that we have to ask this question, indicates that we have the wrong policy regime.
30. January 2015 at 22:27
OT- https://thefaintofheart.wordpress.com/2015/01/19/ngdp-level-targeting-james-meade-understood-it-almost-40-years-ago/ (“NGDP Level Targeting? James Meade understood it almost 40 years ago!” Posted on January 19, 2015 by Marcus Nunes) – Ouch! Slap on the face! Oh the sting!
30. January 2015 at 22:36
Ray
1st Comment: Difference between the real and nominal economy is really important to understand when you’re trying to prove someone is being inconsistent when talking about monetary policy. You don’t understand this (as usual), and so you have once again made a monumental fool of yourself. You should use your super mega duper genius IQ to research this.
2nd comment: Incredibly, even more stupid. Your memory has failed you this time. Do you have a learning disorder of some sort? Scott has *personally* told you in previous comments that NGDP targeting is not an idea unique to him. He told you that even Hayek proposed it.
I reiterate my claim that you are either the dumbest economics blog commenter ever, or the greatest Sokal hoax ever.
31. January 2015 at 00:02
The economy is overheating, steaming with deflating unit labor costs and record low Treasury rates.
31. January 2015 at 00:02
“While the asset markets are heading down the final stretch toward the finish line. The markets get it””low NGDP growth”
Scott, are you including equity markets in your definition of asset markets? If so, it is worth bearing in mind that there is no correlation between GDP growth and stock returns.
31. January 2015 at 00:36
Hi everyone. I was the top Hypermind forecaster for the Q3 and Q4 GDP markets, and I’ve been trading on other prediction markets for years. If anyone is curious about my experience or how it all works or anything else, feel free to ask.
31. January 2015 at 03:33
@Ben J – you fail to make your point. In all those words wasted you could have explained yourself better. Try again or run away? Your call Ben J. Remember, if you try and explain your thinking, you risk the chance of making a fool of yourself…so best stick to one liners and ad hominem, which is safe ground for a low-IQ guy like you…
31. January 2015 at 04:43
Ray,
My comments are unambiguous. Use your incredible super mega massive hyper genius astonishing IQ to learn the basic definitions required to clearly understand the simple economic ideas being communicated. You can find the difference between real and nominal in any good textbook, although I don’t know if they make an edition for incredible super mega massive hyper geniuses like your good self.
31. January 2015 at 06:50
No MF, you have it all upside down. If you want the government and fiat money to not interfere in the markets too much, you have to have it devalue money sufficiently so that mere pieces of government paper don’t replace stocks, bonds, and production as savings and investment.
The intrinsic value of paper is close to nil. When the government props it up above that too much, the markets get distorted. Private currencies would never keep risk adjusted value as well as government sponsored ones can. They would either have more volatility or inflation. In places like Europe, a gold standard would probably be better right now, gold volatility would push people into real investment, but that’s just because the current monetary regime is so terrible, they don’t have enough inflation and stable overvalued fiat is displacing their investment market.
31. January 2015 at 07:11
Scott, I’ve been reading the book ‘House of Debt’ recently and it essentially agrees that bank disintermediation can’t account for the free-fall or slow recovery of the economy; if I understand it correctly, they’re saying high levels of household debt cause slow recoveries as consumer spending drops and people pay off their obligations.
Now, you’ve shown before that debt surges cannot cause *Recessions*, but is it possible they can contribute to the slow recoveries following Recessions?
31. January 2015 at 07:51
Ashton,
Ken Rogoff has written quite a bit about the difference in financial recessions versus others. Here is an interview he did for McKinsey a few years back:
http://www.mckinsey.com/insights/economic_studies/understanding_the_second_great_contraction_an_interview_with_kenneth_rogoff
“Kenneth Rogoff: It’s not easy, because a postfinancial-crisis recession is characterized by an overhang of private and public debt that is much more severe than it is after a normal recession. There are many mortgages still under water””perhaps 25 percent””and people are more cautious about extending their borrowing than they were before 2007. That leads to slower consumption growth. Businesses in turn invest more slowly.”
I think elsewhere (maybe his old blog) he thought a good policy would be to swap income taxes for consumption taxes to encourage savings and quicker reduction of debt overhang and lowering corporate and employer payroll taxes to encourage hiring and investment.
31. January 2015 at 07:54
Anthony,
If I’m not mistaken, Marcus Nunes posted on his blog firing back against this idea by R&R that post-financial crisis recessions are unusually severe.
Let me see if I can find it. . .
https://thefaintofheart.wordpress.com/2012/10/12/the-big-lie-recoveries-following-financial-crises-induced-recessions-are-slow/
There. It would seem if debt overhang does result in reduced consumption, monetary policy has the capacity to offset it.
31. January 2015 at 08:16
I’m trying to think about where the most optimal place is for capital if the Fed will raise rates in June. Part of my assumption is that if the Fed will raise rates in June despite evidence that this is a detrimental then the Fed will probably raise rates again in subsequent meetings.
Europe: 7 years after the crisis it still doesn’t appear that the EU has a good plan to grow which limits the potential returns on capital. The best possibilities here would be in countries in the north with their own currencies: Sweden, Denmark, UK.
Asia: China is clearly slowing down but a drop in oil and other commodities should help. Australia is going to hurt with the drops in commodities but a country that hasn’t had a recession since Hall and Oates were still a thing is still attractive. Japan. It seems like the closest proxy for a US treasury: you won’t get rich but you probably won’t lose money either.
Emerging markets: maybe. Capital flows will hurt them in the short run as capital goes to the US to achieve really high returns. This movement should make them cheaper. Risky though.
Commodities: Um, no.
Stocks: not in the short run until after the inevitable drops when the bad news starts to roll in. Buy on the drops and hope the Fed reverses course.
Bonds: Kevin Erdmann’s research has convinced me that these are not really for investors and little better than cash. I’ll let the pension funds have them.
So to sum up if there were market instruments available for countries I’d probably move money to equity markets in Japan and Australia with some small allocation for emerging markets for the high Beta. A contrarian might invest in the US hoping that the Fed surprises and instead of tightening actually loosens policy, but this feels like little more than betting on red 19 at the roulette wheel.
The “audit the Fed” people are today’s equivalent of Geraldo opening Hoffa’s safe. There is no there there.
31. January 2015 at 08:20
Ashton:
“There. It would seem if debt overhang does result in reduced consumption, monetary policy has the capacity to offset it.”
Agree but not if the tool remains in the toolbox unfortunately. I think Rogoff recommended loose policy aiming for an inflation target in the 3-4% range. This would help both consumption and reduce real interest rates helping with debt reduction. Ken’s preferred policy feels similar to Scott’s but with inflation targeting instead of nominal output.
31. January 2015 at 08:57
The Fed should not raise the remuneration rate as the bond bubble bursts beginning in May. The remuneration rate should be lowered and the desk should simultaneously sell securities.
This would provide an outlet for savings.
The Gospel is worth trillions of economic dollars and is a political “weapon”. It should be classified as top secret by the U.S. gov’t.
The Fed is not presently “behind the curve” and has the tools, e.g., the RRP facility, to immediately drain the money stock.
Yellen’s current policy will be to produce stagflation (business stagnation accompanied by inflation). I.e, the roc in short-term money flows has flattened and the roc in long-term money flows has turned up (coinciding with the bottom in the oil market).
31. January 2015 at 09:00
Anthony McNease: ETFs. Easy. You can buy ETFs for almost anything. Japan ETFs.
31. January 2015 at 09:18
Lending by the CBs is inflationary (CBs create new money when they lend/invest). Lending by the NBs is non-inflationary (matches savings with investments), ceteris paribus.
The CBs could continue to lend even if the NB public ceased to save altogether. And money (savings), flowing thru the NBs never leaves the CB system. The NBs are the CB’s customers.
Lowering the remuneration rate will not reduce the size of the commercial banking system, the volume of earnings assets held by the banking system, the income received by the system, or the opportunities of the banks to make safe and profitable loans.
By promoting the welfare and health of the most important sector of the economy, the health and vitality of the whole national economy will improve. The aggregate demand for loan funds will expand, the volume of “bankable” loans will grow, and so will the banking system, – the Federal Reserve being willing. I.e., the welfare of the economy and the CBs, is dependent upon the welfare of the NBs.
31. January 2015 at 09:45
Ray, You said:
“@Sumner – “central banks seem to find it harder to ***steer the economy*** at zero rates…” – did you not say earlier that cb’s cannot steer the economy? Houdini strikes again! You change colors like a chameleon.”
They can steer the nominal economy but not the real economy.
You said:
“(“NGDP Level Targeting? James Meade understood it almost 40 years ago!” Posted on January 19, 2015 by Marcus Nunes) – Ouch! Slap on the face! Oh the sting!”
I apologize for my earlier mocking tone, mental illness is nothing to laugh at.
Thomas, I was referring to bond markets.
Congratulations Ted.
Ashton, You said:
“I understand it correctly, they’re saying high levels of household debt cause slow recoveries as consumer spending drops and people pay off their obligations.”
Why would more saving slow economic growth?
31. January 2015 at 10:03
@Sumner: “They [the central banks, by printing money] can steer the nominal economy but not the real economy.”
OK fine. We finally agree on something (and I’m certifiably insane). So the next question is: so what? If the steering of the nominal economy is not the steering of the real economy, then what’s the point? Surely you don’t believe that money illusion and the absence of sticky prices/ wages in an inflating nominal economy will somehow positively affect the real economy? You’re not that crazy are you? Are you? Can anybody speak for Sumner on this point? Is Sumner’s NGDPLT simply a convoluted version of ‘print money, a little inflation never hurt anybody?’
31. January 2015 at 10:15
Scott, you said: “Why would more saving slow economic growth?”
Presumably through weak demand, as people aren’t buying as many things.
31. January 2015 at 10:19
I’m also a little puzzled by the point of steering the nominal economy but not the real one.
Also by the game in which we will all devalue our currencies.
…
The game is to destroy debt, or at least allow people to pay it off easier, right? So they can spend and invest and hire.
Of course that’s a real loss to bond holders or depositers, not a nominal one, isn’t it.
31. January 2015 at 10:21
Ray Lopez asked:
“If the steering of the nominal economy is not the steering of the real economy, then what’s the point.”
The point is that we don’t want nominal (monetary) factors to drive decisions about the deployment of real resources. If you want to hire me, and I want to work for you, then a monetary system that makes it harder for you to hire me is a bad idea.
31. January 2015 at 10:22
Ray, No.
Ashton, That’s the Keynesian model, which is wrong. Savings equals investment, so more savings implies more investment.
Charlie, No.
31. January 2015 at 10:36
Scott, I’m obviously missing something here then.
Just *how* does aggregate demand collapse then? Hoarding could be one obviously, but other than that is it literally only tight money due to the amount of money not being enough to service the needs of the economy?
31. January 2015 at 10:42
OK, but if to reduce the value of debt instruments and deposits is not the goal or the intent, at the very least it will be the result.
That result has some political opposition. People who hold bonds and deposits will resist, and these people are very powerful politically.
31. January 2015 at 11:31
Ashton, You asked:
“Just *how* does aggregate demand collapse then? Hoarding could be one obviously, but other than that is it literally only tight money due to the amount of money not being enough to service the needs of the economy?”
Yup.
Charlie, I hardly think they are powerful, the Fed’s been debasing the dollar for 100 years, except a brief period between the wars.
31. January 2015 at 13:31
I am in the Camp that there is a reasonable probability economy is headed back into recession in 2016 / 2017. Since all of the “behind the curve” talk is that the fed needs to be tightening money.
If the fed does nothing, they are a little bit ahead of the curve.
31. January 2015 at 15:41
Charlie,
In business, when you make a long term loan and you’re determining the nominal rate of return you want the debtor to pay, you add expected inflation (say, the CB’s target), or if the CB is less credible, you say it will be indexed by the CPI directly.
Low and stable nominal growth does not ‘destroy’ debt contracts. It is highly variable nominal growth and large, unexpected shocks to nominal growth that destroys debt contracts. Kind of like the nominal shock we saw in late 2008 and early 2009.
31. January 2015 at 15:47
The Fed keeps dismissing market-based measures of inflation expectations as due to inflation compensation. I don’t agree with them. What do you think? Curious to read your argument on this topic.
31. January 2015 at 19:20
@Sumner: “No”? That’s your answer to my compound question? As an educator I give you an “F”. You must enjoy yanking the chain of the board crazy person (says you)?
Michael Byrnes 31. January 2015 at 10:21
Ray Lopez asked:
“If the steering of the nominal economy is not the steering of the real economy, then what’s the point.”
The point is that we don’t want nominal (monetary) factors to drive decisions about the deployment of real resources. If you want to hire me, and I want to work for you, then a monetary system that makes it harder for you to hire me is a bad idea.
@Brynes – what is your theory behind this? Sticky wages? Is that the lynchpin of this assertion? You still feel we have sticky wages after at least 5 years of inflation, as well as a recovery from all the lows to new highs? You don’t think structural factors are at work? You feel your hypothesis is better than mine? What data do you have to support your sticky wages hypothesis as a factor holding back the US economy today? How does your ‘sticky wages’ hypothesis account for the US recovery since 2010 (go here: http://www.tradingeconomics.com/united-states/indicators) Check out GDP per capita, now at all time highs. Why would that be if there was sticky wages holding back the economy? What is your belief the US economy is performing below potential? A trend line from pre-2008? You are a chartist? Is that it?
I’ll give you credit though, at least you are willing to debate more than Sumner, who gives one word answers and disappears, like Houdini.
31. January 2015 at 20:57
Ray,
I have never read anything as incoherent as the comments you write. You should consider writing Sokal hoaxes a a job – you are really that good.
Please clearly demonstrate that you understand the distinction between real and nominal. If you can’t, we can only assume you are asking questions in bad faith (quickly asking them so you smirk about your own cleverness while rushing back to your piles of money and Philipino mistresses).
1. February 2015 at 09:00
Randy, The Fed is embarrassed by the fact that the markets have been correct and the Fed has been wrong.
Ray, You asked a question, I answered it. Perhaps you don’t understand what the word “no” means.
1. February 2015 at 11:31
I wrote another spoof ‘Shadow FOMC Statement’, offering a broadly market monetarist critique of the latest statement. A sample:
Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power, though we worry they may have been caused by a fall in global aggregate demand. Business fixed investment is advancing, though recent profitability among industrial companies has been disappointingly weak. The recovery in the housing sector remains slow. House prices remain well below the net present value of avoided future rent payments, probably due to regulation hindering the supply of mortgage financing, though recent data there has been encouraging. Inflation has declined further below the Light Committee’s longer-run objective, as predicted by the Shadow FOMC, and they should not blame energy: while energy prices have fallen dramatically, inflation ex. shelter has been running below target for years, due to the unconsciously tight monetary policy the light committee has followed. Market-based measures of inflation expectations have declined substantially in recent months, and are now indicating that the Light Committee will miss its target for the next 10 years. We are highly disappointed that the Light Committee chose the Orwellian step of renaming them ‘inflation compensation’ instead of ‘inflation expectations’, ignoring the enormous predictive power the market gives us. Yes, survey-based measures of longer-term inflation expectations have remained stable, but who cares? These surveys have been awful forecasters in the past.
https://effectivereaction.wordpress.com/2015/02/01/20150128-shadow-fomc-statement/
1. February 2015 at 21:06
Anthony McNeese,
Thanks for the shout-out. I’m glad you found my asset allocation posts useful. There are a couple of options:
1) Inflation protected bonds probably will prove to be a decent hedge for stocks, although they aren’t paying anything right now.
2) Right now, for low-risk relatively fixed income, some sort of investment in real estate for rent is the clear choice, because the market is out of equilibrium. If you invest for income, you’ll be getting killer risk-adjusted returns. And, if the regulators let the mortgage market function for a while, houses should appreciate smartly and total returns on real estate will probably outpace equities for a little while.
I’m in the middle of a multi-post series on real estate, and I’m really having fun digging into the numbers and the concepts. There are a lot of conceptual issues there to chew on, and possible profitable positions to take.
2. February 2015 at 08:11
Thanks Kevin. I’ve read every one of your posts on housing and real estate. You make a very compelling case for rental income. I know you showed that the mortgage deduction might not have much impact on home prices, but I’m not sure about that. The potential for tax reform concerns me about its effects on real estate.
2. February 2015 at 11:20
Dale, Well done.
2. February 2015 at 14:39
“Why would more saving slow economic growth?”
Contrary to the Keynesian economics, savings are impounded within the commercial banking system. From a systems viewpoint, commercial banks (DFIs), as contrasted to financial intermediaries (non-banks): never loan out, & can’t loan out, existing deposits (saved or otherwise) including existing transaction deposits, or time/savings deposits, or the owner’s equity, or any liability item.
The FDIC’s unlimited transaction deposit insurance induced dis-intermediation (resulting in negative cash flows and outflows of funds), i.e., it attracted savings from the non-bank financial institutions, indeed from all over the world. This was deflationary. It’s expiration, as I predicted, resulted in my “Market Zinger”. It offset the deflationary impact of QE3 – where liquid assets were swapped for non-liquid, non-tradable assets.
Contrary to all the pundits (who know nothing about money and central banking), the CBs outbid the NBs during OMOs.