Money illusion on steroids

Stephen Kirchner sent me the following from the Financial Times:

As economic growth returns again to Europe and Japan, the prospect of a synchronous global expansion is taking hold. Or, then again, maybe not. In a recent research piece published by Bank of America Merrill Lynch, global economic growth, as measured in nominal US dollars, is projected to decline in 2015 for the first time since 2009, the height of the financial crisis.

In fact, the prospect of improvement in economic growth is largely a monetary illusion.

I actually had to read this several times to make sure that my eyes were not deceiving me.  After all, this is the Financial Times, the world’s leading financial newspaper.  So we are to believe that even though real GDP is expected to rise, this isn’t actually “growth,” because output in Europe and Japan measured in US dollars is expected to decline.  OK, that’s pretty weird, and you wonder why he didn’t choose to measure Japanese output in terms of Brazilian reals or Indian rupees, but we’ll let that pass. What floored me was the next sentence, that measuring economic growth in real terms rather than nominal terms was an example of money illusion.

It seems like that since 2008 people can just say anything.  There are no rules anymore.  You can say that a good way to reduce inflation is cutting interest rates.  You can say that monetary policy is ultra-expansionary in countries suffering from deflation.  Say whatever you want, the lunatics have taken over the mental asylum.  It’s like the Chinese Cultural Revolution—all the old orthodoxies are discredited.  Anything goes.

One argument is that if central banks were not created to execute fiscal policy, then why require them to maintain any capital at all? Capital is that which is held in reserve to absorb losses. If losses are to be anticipated, then a reasonable inference is that a certain expectation of risk must exist. Therefore, central banks must be expected to take on some risk for policy purposes, which implies a function beyond the creation of a monetary base to maintain price stability.

Umm, how about bond price risk due to interest rate changes, not bond defaults?

In response to those who argue against the metamorphosis of monetary policy into fiscal policy, one need only point toward the impact of quantitative easing on interest rates. The depressed returns available on fixed income securities, largely as a result of QE, are acting as a tax on investors, including individual savers, pension funds and insurance companies.

Let’s see, the Fed did lots of QE over the past 6 years and is expected to raise rates later this year.  The ECB did none until a few weeks ago, and is expected to hold rates at zero for the next . . . well, basically forever.  Oh, and despite all the QE done by the Fed, the quantity of T-bonds held by the public has soared dramatically higher in recent decades.  But heh, whatever, go ahead and keep saying that QE is holding rates down.  Nobody cares about reality anymore; it’s all about throwing out catchy sounding observations.

Essentially, monetary authorities around the globe are levying a tax on investors and providing a subsidy to borrowers.

Yes, causing the biggest crash in NGDP growth since the 1930s sure helps borrowers.  They should all thank the Fed, and thank the ECB even more.

In the long run, however, classical economics would tell us that the pricing distortions created by the current global regimes of QE will lead to a suboptimal allocation of capital and investment, which will result in lower output and lower standards of living over time.

Which classical economists is he referring to?  I don’t recall that argument in any of the classical writers I read.  I do recall reading classical economists say that the sort of deflationary monetary policy that we see in Europe could reduce output and living standards. But QE? I must have missed that.

I sure wish America could go back to the boom year of 2009, when “living standards” soared much higher.  You remember, the year when America’s GDP soared higher at double digit rates (when measured in terms of euros.)


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92 Responses to “Money illusion on steroids”

  1. Gravatar of foosion foosion
    25. March 2015 at 07:19

    Alas, the claims from that FT column are widely believed.

    I find it surprising that a UK paper would write about the economy without emphasizing that the overriding importance of the deficit. In UK media macro, the deficit is usually the only thing worth mentioning in an economics story.

    Economics journalism is appalling.

  2. Gravatar of Njnnja Njnnja
    25. March 2015 at 07:22

    Re your econlog post: you should trademark terms like “money illusion” and “global economic growth” so that when they get misused like this you can make them cease and desist. And yes I am kidding, but only a little.

  3. Gravatar of W. Peden W. Peden
    25. March 2015 at 07:42

    The measuring GDP in dollars to get the answer you want is a trick I haven’t seen before. That said, it’s similar to (and not actually any less silly than) measuring things in gold to get the answers you want.

  4. Gravatar of Charlie Jamieson Charlie Jamieson
    25. March 2015 at 07:52

    The FT is saying that Europe and Japan are ‘growing’ by devalueing their currencies — hence, the monetary illusion.
    The U.S. dollar is the global currency, so it’s makes sense to use the dollar as the measuring point.

  5. Gravatar of foosion foosion
    25. March 2015 at 07:55

    @Njnnja, perhaps the Irving Fisher’s estate will sue Scott. After all, Fisher published “The Money Illusion” in 1928.

  6. Gravatar of Ray Lopez Ray Lopez
    25. March 2015 at 08:09

    I don’t trust anything Sumner says, because he’s a very bellicose and unorthodox economist. And he missed the obvious comment here: (FT): “One argument is that if central banks were not created to execute fiscal policy, then why require them to maintain any capital at all? ” – indeed, some central banks, I think it’s New Zealand without Googling it, require no capital reserves at all.

  7. Gravatar of Brian Donohue Brian Donohue
    25. March 2015 at 08:11

    Some days you must feel like Sisyphus.

  8. Gravatar of Kevin Erdmann Kevin Erdmann
    25. March 2015 at 08:12

    What’s amazing is that the Fed has such voodoo power that they have artificially pushed short term rates from 5% to 0% and held them there for 7 full years. And they did it buy SELLING all their T-Bills. Some people say the Fed is just swapping assets and can’t really control the money supply. But, their voodoo is so strong, they can clearly simply will rates to their target, because selling all their T-Bills couldn’t possibly have anything to do with rates being low, could it?

    http://research.stlouisfed.org/fred2/graph/?g=15pw

  9. Gravatar of foosion foosion
    25. March 2015 at 08:26

    Kevin, compare Fed holdings of all treasuries http://research.stlouisfed.org/fred2/graph/?g=14MI

  10. Gravatar of Anthony McNease Anthony McNease
    25. March 2015 at 08:33

    “In response to those who argue against the metamorphosis of monetary policy into fiscal policy, one need only point toward the impact of quantitative easing on interest rates. The depressed returns available on fixed income securities, largely as a result of QE, are acting as a tax on investors, including individual savers, pension funds and insurance companies.”

    I read and here comments like these all the time, and I can’t for the life of me make them stop. Savings rates are low, because the supply of deposits far outweighs what banks can lend out. Banks can offer a few bps on a CD and get all they want. The Fed has little to nothing to do with this.

    Benoit said it very well yesterday: the people asking for higher rates for savers are asking for a state subsidy they don’t deserve.

  11. Gravatar of benjamin cole benjamin cole
    25. March 2015 at 08:47

    Egads. Of course, interest rates have been falling since the early 1980s, globally.
    Ergo, tight money has been hurting savers.
    Wait…but if QE results in lower interest rates, then it has been a boon to existing bondholders who have seen capital appreciation. Ergo, QE helped savers who purchased bonds…wait.
    Stop! I hate QE because I hate QE.
    And what about those large central bank balance sheets? I suppose you’re going to say there is no harm in that!

  12. Gravatar of Njnnja Njnnja
    25. March 2015 at 08:47

    @foosion
    But the estate never made the trademark filing and anyways a case could be made that it has not actively protected its use anyways since apparently anybody can use the term in a newspaper, or even register a domain name like “www.themoneyillusion.com”.

    Bring ’em on!

  13. Gravatar of ssumner ssumner
    25. March 2015 at 08:48

    Charlie, Why am I not surprised you defended this laughable mistake.

    Ray, I only seem unorthodox to those who don’t have any idea what orthodox economics looks like.

  14. Gravatar of Charlie Jamieson Charlie Jamieson
    25. March 2015 at 09:05

    QE has helped savers, in that it’s driven up bond prices and equity prices.
    It’s also important to recognize that savings are largely in the hands of the wealthy. We like to talk about savers as being the little old lady buying CDs, but most savings are in the bond and stock markets and are held by the wealthy and by financial institutions.
    QE has been very, very good for them.
    Whether these high valuations can be maintained is another question.

  15. Gravatar of Anthony McNease Anthony McNease
    25. March 2015 at 09:10

    Ugh. Sorry my earlier post should obvs read “hear” not “here.” I apologize for posting while attempting to wolf down lunch.

  16. Gravatar of TravisV TravisV
    25. March 2015 at 09:27

    The New York Times really played to its audience with its book review section last weekend (“The Secret Life of Money”)…..

  17. Gravatar of foosion foosion
    25. March 2015 at 09:40

    >>QE has helped savers, in that it’s driven up bond prices and equity prices.>>
    Higher rates are better for bond holders, other than those selling in the short term. Longer term holders get a higher total return with higher rates.

    >>It’s also important to recognize that savings are largely in the hands of the wealthy.>>

    Yes. All savers, and especially the wealthy, should have diversified portfolios. Stocks have been doing very well.

    A serious question is why so many are pushing the Fed to tighten. Who benefits? I’m guessing corporate executives see immediate benefits from the lower wages associated with tight money (margins are very high) and ignore other considerations. There’s also a very good chance those pushing the Fed to tighten don’t have a clue.

  18. Gravatar of TravisV TravisV
    25. March 2015 at 09:47

    Brad DeLong, Paul Krugman and Mark Thoma are excited about this David K. Levine guy arguing that money doesn’t matter…..

    http://economistsview.typepad.com/economistsview/2015/03/anti-keynesian-delusions.html

  19. Gravatar of Charlie Jamieson Charlie Jamieson
    25. March 2015 at 10:01

    ‘A serious question is why so many are pushing the Fed to tighten. ‘

    Various theories:
    – Low rates in the past have fueled dangerously fast credit expansion.
    – Low rates may be fueling a bubble in asset prices.
    — Japan’s rates have been low for a long time and Japan is usually viewed as a sick economy.
    — Inflation fears. It’s easy to scoff at this, but the inflation of the 70s occurred when many commentators were in their formative years and they experienced a) the negative consequences of inflation, and b) learned not to trust people who claim inflation can be put back in the bottle once it starts.

  20. Gravatar of marcus nunes marcus nunes
    25. March 2015 at 12:37

    Yes, there´s a lot of crap being said. Even by “luminaries”:
    https://thefaintofheart.wordpress.com/2015/03/24/crap-from-fomcers/

  21. Gravatar of Doug M Doug M
    25. March 2015 at 12:51

    In the long run, however, classical economics would tell us that the pricing distortions created by the current global regimes of QE will lead to a suboptimal allocation of capital and investment, which will result in lower output and lower standards of living over time.

    Which classical economists is he referring to?

    Hayek? Perhaps, not a “Classical Economist”, but certainly one that is well known.

    Although Hayek would not argue that easy money it times of high unemployment isn’t benficial. But easy money during times of full employment is potentially very bad.

  22. Gravatar of TallDave TallDave
    25. March 2015 at 14:03

    Something for Scott to enjoy.

  23. Gravatar of ssumner ssumner
    25. March 2015 at 14:13

    Doug, Where did Hayek criticize QE? Oh yes, it was in the early 1930s. Then in the 1970s he admitted that his criticism was wrong.

    And no, Hayek is not a classical economist, he’s an Austrian.

    TallDave, Yes, that’s a famous pair of pictures.

  24. Gravatar of Ray Lopez Ray Lopez
    25. March 2015 at 14:20

    @Anthony McNease- you are correct Sir. Indeed the Fed follows the market, and often has no effect on the market. And nobody else than Christopher A. Sims, Nobel Prize in Econ 2011 winner says this (explicitly), in his work, which you can get a sample of online. Sims found a lag between Fed action and an economy’s response, with two key points: often the action and response were uncorrelated (had no effect), and the Fed *reacted* to the market in setting rates. BTW Sims is NOT a ‘real business cycle’ advocate, so you cannot say he is blinded by this framework. Source (because unlike Sumner I do source my opinions): sims.princeton.edu/yftp/bpea/bpeaf.pdf – Leeper, Sims, and Zha (1996). “2 Another robust conclusion, common across these models, is that a large fraction of the variation in monetary policy instruments is attributable to systematic ***reaction*** by policy authorities to the state of the economy. This is of course what we would expect of good monetary policy, but it is also the reason why using the historical behavior of aggregate time series to uncover the effects of monetary policy is difficult. The size of effects attributed to shifts in monetary policy varies across specifications of economic behavior. We show, though, that most of the specifications imply that ***only a modest*** portion (or in some cases, ***essentially none***) of the variance of output or prices in the US since 1960 is attributable to shifts in monetary policy. Furthermore, we point out substantive problems in the models that imply large real effects, and argue that correcting these problems lowers the implied size of the real effects.”

  25. Gravatar of Numawan Numawan
    25. March 2015 at 14:24

    Please that this article is an opinion piece, namely from Scott Minerd, global chief investment officer and chairman of investments at Guggenheim Partners. This is not an FT article.

  26. Gravatar of Major.Freedom Major.Freedom
    25. March 2015 at 15:37

    The definition of insanity according to Einstein was doing the same thing over and over again expecting a different result.

    Another perhaps more common definition of insanity is a mental disorder that manifests in being a danger to oneself and/or others.

    Market monetarism is a theory that presupposes a belief that Socialism (in money) imposed on society over and over again can lead to a result other than long term destruction, abnormal instability and impoverishment, counter-factually.

    Market Monetarism is a theory that also presupposes a psychological urge or apology in favor of aggressive force to be introduced in society by some people (usually labelled as government or the state, but I prefer the more apt label of mafia gang writ large) against others (usually labelled as citizens).

    Market Monetarism leaves zero room for compromise or live and let live. It is accept what we want for you, or else you will be kidnapped at gunpoint, thrown into a cage, and likely sexually assaulted, and if you defend yourself from that with equal and opposite defensive force, then you will be murdered. That is the CORE of Market Monetarism. Without that senseless violence and threats thereof, it is nothing but an insane thought akin to the delusions of psychopaths.

    Definitionally speaking, market monetarism is an acute form of insanity. If any Market Monetarist were to percieve academics or authors writing about the Socialist money system as insane, then what has actually occurred, again strictly definitionally, is that Market Monetarists who all live in the insane asylum, have noticed that a few other patients have escaped solitary confinement and are now wandering the halls, making Market Monetarists nervous.

  27. Gravatar of Major.Freedom Major.Freedom
    25. March 2015 at 15:40

    And no, a particular thought pattern or behavior does not cease to be insanity if the number of sufferers rises to some large number. Whole swaths of human beings can be, and have in the past, been insane.

  28. Gravatar of benjamin cole benjamin cole
    25. March 2015 at 15:49

    Numawan: Excellent point. In other words Minerd/Guggenheim is short bonds. I have ghostwritten such op-eds myself.

  29. Gravatar of benjamin cole benjamin cole
    25. March 2015 at 15:56

    Major Freedom: Should the government regulate reserves, even under a gold standard? Or should banks be free to set the level of reserves they want? Or even no reserves, if the market accepts it? So, government regulations and no reserves is an acceptable result?

    If your unhinged neighbor—not an Austrian—stores lethal nerve gas in his basement, do you have any right to stop that?

  30. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    25. March 2015 at 16:26

    Major Freedom,
    I think you don’t really grasp what is Market Monetarism. But before we argue on that, could you please state in few words what is your understandig of what Market Monetarism is ?

  31. Gravatar of Benjamin Cole Benjamin Cole
    25. March 2015 at 17:36

    “Market Monetarism leaves zero room for compromise or live and let live. It is accept what we want for you, or else you will be kidnapped at gunpoint, thrown into a cage, and likely sexually assaulted, and if you defend yourself from that with equal and opposite defensive force, then you will be murdered. That is the CORE of Market Monetarism. Without that senseless violence and threats thereof, it is nothing but an insane thought akin to the delusions of psychopaths.”—Major Freedom.

    Maybe Scott Sumner should define MM this way, on a bronze plaque outside his office at George Mason. It does have a ring.

    The part of sexual assaults I confess is intriguing. Where would one sign up to be a Market Monetarist Myrmidon?

  32. Gravatar of ssumner ssumner
    25. March 2015 at 18:04

    Numawan, Are you saying that the FT has no editorial control over the stuff they publish in their newspaper?

  33. Gravatar of marcus nunes marcus nunes
    25. March 2015 at 19:02

    Doesn´t Martin Wolff, the FT´s Chief Economics commentator, have any saying on economic opinion pieces? He should

  34. Gravatar of Edward Edward
    25. March 2015 at 22:27

    Ben Cole,
    Major Freedom is obsessed with sex. He’s referenced rape a lot in his rants. Didn’t you know?

  35. Gravatar of benjamin cole benjamin cole
    25. March 2015 at 23:25

    One purpose of a good newspaper is to present many points of view. Providing space for a point of view does not mean agreement with same.
    FT runs many op-eds on its site and paper. One could even argue that it is an advantage to know what other people are thinking and believe.

  36. Gravatar of benjamin cole benjamin cole
    25. March 2015 at 23:30

    Edward: Well, in that case Major Freedom should be allowed to post pictures with his comments.

  37. Gravatar of Major.Freedom Major.Freedom
    26. March 2015 at 03:36

    Benjamin Cole:

    “Major Freedom: Should the government regulate reserves, even under a gold standard? Or should banks be free to set the level of reserves they want? Or even no reserves, if the market accepts it? So, government regulations and no reserves is an acceptable result?”

    If you ask me what people “should do” and what they “should not do”, then my answer is always the same. Individuals should do whatever they want instead of what others want to do to them. That means no aggression against another’s person or property. Everything else is legal, including defense against aggression, which is not itself aggression.

    “If your unhinged neighbor””not an Austrian””stores lethal nerve gas in his basement, do you have any right to stop that?”

    First, Austrian economics is value free. There is no “you ought” or “you ought not” in it. It is just that when people know why we have booms and busts, since most people are good, they learn that liberty solves a lot of problems and thus begin to advocate for it.

    To answer your question, there is only one legitimate use of force and that is in defense of aggressive force.

    It would be up to you and your unhinged neighbor to deal with him having nerve gas in his basement. There is no one overall solution for what you can do, you just can’t aggress against one another.

    Jose Romeu Robazzi:

    “Ithink you don’t really grasp what is Market Monetarism. But before we argue on that, could you please state in few words what is your understandig of what Market Monetarism is ?”

    Because you fail to understand what Market Monetarism advocates from statesmen, because you fail to understand that central banks are not free market institutions, because you fail to understand the ultimate backstop for its existence, I am afraid that it is you who does not “grasp what is Market Monetarism”.

    Without the threats of force, there is no substance for Market Monetarist morals, which are contained in the “the Fed ought” claims.

    The Fed is a government institution that seeks to monopolize money. Do you not even know how such an institution is maintained? It is not by free competition. It is by naked aggression. It is subtle, because people are used to it, being born with it already existing.

    You just don’t know any better, much like many German people did not know any better during the 1930s and 1940s. The only difference is that you don’t know any better when the majority doesn’t know any better.

    Benjamin Cole:

    “Maybe Scott Sumner should define MM this way, on a bronze plaque outside his office at George Mason. It does have a ring.”

    Joking about it is a typical response from the weak minded who don’t know how to deal with the resulting anxiety from the weakness any other way. Hahaha! Look at those poor wretches being marched into the ovens! Hahaha!

    Unlike you I take ideas seriously.

    Edward:

    “Major Freedom is obsessed with sex. He’s referenced rape a lot in his rants. Didn’t you know?”

    Right, because you don’t want to soil your hands with what you yourself advocate. So you distance yourself from it and try to paint the reality of what you advocate as some sort of flaw on my part.

    Outstanding.

    The more you show your deep beliefs, the more I realize why you feel terrified at reality.

    Benjamin Cole:

    “Edward: Well, in that case Major Freedom should be allowed to post pictures with his comments.”

    The supporters and true believers on this blog obviously cannot psychologically handle the implications of their own pronouncements. Still too immature.

  38. Gravatar of Major.Freedom Major.Freedom
    26. March 2015 at 03:46

    Benjamin Cole:

    Before asking a zillion questions of how liberty is to deal with the many potential problems that may arise, always always always first ask yourself what you would do if that same suspect behavior were supported by the majority of people in the world, and they “elected” people to enforce its legality everywhere, despite the minority wanting to opt out of it.

    Then once you answer that, then see how individual property rights driven behavior could deal with it.

  39. Gravatar of Dan W. Dan W.
    26. March 2015 at 05:11

    Scott,

    In a previous post you asked for data that showed GDP increased at greater than 5% from 2002 through 2007. Here are the links. This level of increase was true for GDP, GNP and “National Income”. For each series the compounded, annualized increase is between 5.5% and 5.8%. Per the same FRED data, since 2009 GDP has increased at a 3.85% annual rate.

    https://research.stlouisfed.org/fred2/series/GDPA
    https://research.stlouisfed.org/fred2/series/GNPA
    https://research.stlouisfed.org/fred2/series/A032RC1A027NBEA

    If you disagree with these numbers what is the disagreement? What data do you recommend and why?

    As it concerns the economic collapse of 2008/2009 can you present an argument for how monetary policy could have sustained continued growth in the housing construction, selling and financing markets? If consumers were saturated in housing consumption, how could policy get them to buy more of it? If you have had 3 bagels this morning, is there any way I could get you to eat another one? Maybe if I paid you! But there is little chance I could get you to pay me for another bagel if you were full of bagels.

    So if the housing market was overextended, what new industry was going to replace the lost economic activity? We don’t know until it happens. But what we do know is structural deficiencies in the economic system can prevent that new industry from growing. Monetary policy can push on the string all it wants but until there is real demand and real opportunity to supply that demand the real growth engine will falter.

    Your NGDPLT plan may be well meaning but it has the very strong negative effect of covering up structural deficiencies and delaying the correction of them. For how can a deficiency be detected if monetary policy allows economic actors to pretend there is no problem? Pain killers are helpful in the short term but a dependency on them ruins one’s life. In a healthy economy one would expect to see a regular pattern of liquidation and capitalization. Without liquidation the price of capitalization increases and real returns on investment decline.

  40. Gravatar of Benjamin Cole Benjamin Cole
    26. March 2015 at 05:14

    Major Freedom:

    So the majority of people keep lethal nerve gas in their basements, and many millions die every year from leaks.

    I am against that.

    A community or society has the right to protect itself, and that social or communal right sometimes trumps individual rights and property rights.

    As it is, I am libertarian-ish. Sheesh, I would legalize push-carts in every city, brothels, drug-dens, the whole works. Gun ranges and pot-farms in every backyard. I would even go so far as to say nail beauticians do not need to be licensed, nor lawyers.

    But who has the right to pollute the air that other people breath? How about the right to pollute your land and water? Spread carcinogens? Drive drunk?

    Life is tough and then you die. Don’t take it so seriously. A flash of light between two eternal granite slabs of oblivion, that’s all life is. A few billions years of nothingness on both sides.

    So, we had paper money and prosperity while you were alive. Enjoy!

  41. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    26. March 2015 at 05:59

    Major Freedom,
    You wrote 692 words, none of them tried to explain to the other readers what is your understanding of MM. That’s ok. Let’s just focus on what we can get out of your writing: 1. You seem to dislike central banks. I dislike them either, and Professor Sumner here made clear many times his criticism of the current setup of the FED. Let’s then agree that the current monetary system need some kind of reform, ok? 2. From some of your writing, you probably like the gold standard, or free-banking, or both. Will it happen in the near future ? I don’t dislike free banking (in the austrian view). Will it happen in the near, foreseeable future? Unlikely. Given this state of things, what can be done ? Professor Sumner here has a proposal, it may not be perfect, but it is something workable. If you were to reform the monetary system, in practical world, how would you go about it? Can you write that down in less than 692 words ?

  42. Gravatar of Charlie Jamieson Charlie Jamieson
    26. March 2015 at 06:17

    Great points, Dan W.
    NGDP Targeting proponents need to explain two things, imo:
    1. Do they agree that credit expansion great faster than was sustainable, thus causing the reckoning.
    2. How would NGDP Targeting have prevented this? What would the mechanism be to prevent the reckless expansion of mortgage related securities?

    Credit is the key to understanding the monetary system, imo. Most money is creating in the private economy, by banks. I am just a layperson but am interested to see if there are formulas that measure the quality and *quantity* of credit created and the resultant economic expansion. It does seem to me that credit expansion is creating less and less growth and I am interested in the reasons why this is happening.
    In the 00s, for example, credit expansion in the mortgage security industry created problems — so how do we avoid such bad credit creation while encouraging good credit creation.

  43. Gravatar of Derivs Derivs
    26. March 2015 at 07:49

    Scott,
    It is possible to have more than one metric for measuring growth and wealth. I am very conscious of my global purchasing power since I don’t reside in any one country.
    I wonder how Jose or Marcus feel on this issue, hopefully both their wages increase by more than the price level of Brasil, which you would suggest is all that should matter to them. Argument over!! Since many Brasilians seem to do an incredible amount of their shopping in Miami and Orlando, I wonder how they feel about GPP vs domestic real wage growth. Should they be thrilled if they beat inflation in their home country?? Think 2015 was a great year? Why can’t both metrics be respected (subset and set). I am conscious of both. Are they?

    Mjr Fredum.. just remember “It rubs the lotion on its skin or else it gets the hose again” Nerve gas?? WOW!!

  44. Gravatar of ssumner ssumner
    26. March 2015 at 09:42

    Dan, You don’t even know what GDP is. Unreal.

    Derivs, Yes.

  45. Gravatar of Dan W. Dan W.
    26. March 2015 at 10:10

    Scott,

    Can you respectfully clarify your comment?

    Thank you.

  46. Gravatar of Ray Lopez Ray Lopez
    26. March 2015 at 10:11

    @ssumner – nobody understands you, not even your fellow economists like Tyler Cowen, who discovered you. Poor boy.

    More importantly, I’d like to see you address the two points made by Leeper, Sims, and Zha (1996) cited upstream. It guts monetarism as a policy tool.

  47. Gravatar of TravisV TravisV
    26. March 2015 at 10:16

    On the one hand: “Goldman cuts year-end 10-year Treasury forecast”

    http://www.businessinsider.com/goldman-cuts-government-bond-yield-forecasts-2015-3

    On the other hand: “10Y Treasury Yield Tops 2.00% Following Consecutive Weak Auctions”

    http://www.zerohedge.com/news/2015-03-26/10y-treasury-yield-top-s-200-following-consecutive-weak-auctions

  48. Gravatar of Liberal Roman Liberal Roman
    26. March 2015 at 14:09

    Scott,

    Have you see this article? http://www.reuters.com/article/2015/03/26/us-usa-fed-liftoff-insight-idUSKBN0MM2JG20150326

    Fed is worried at its ability to control nominal variables like interest rates so its trying to coordinate with private actors to make sure that it can do what it doubts it can do.

    Seems crazy to me.

  49. Gravatar of Major.Freedom Major.Freedom
    26. March 2015 at 15:45

    Benjamin Cole:

    “So the majority of people keep lethal nerve gas in their basements, and many millions die every year from leaks.”

    Then that would constitute an aggression, and it would be justified to use force to stop the neighbor.

    This is not rocket science. You’re imagining a world of fire and brimstone just like the old scholastics did at he prospect of the church losing its power.

    It doesn’t work any more.

    “I am against that.”

    Wow. Glad you’re here to tell me you’re against millions of people being killed by nerve gas. You must feel so proud.

    Now try to defend the individual and not just millions of people. Then you and I will be on the same page.

    “A community or society has the right to protect itself, and that social or communal right sometimes trumps individual rights and property rights.”

    There is no such thing as a community or society that thinks, acts, or have rights.

    What you are really saying is that you believe some individuals, namely those you call statesmen, somehow have a right to initiate violence against other individuals, who you call citizens, who themselves must receive such aggression in the name of that non-existent abstract thought of “society” or “community”.

    Individual people think, act and have rights.

    No individual has the right to initiate violence against other individuals. That includes those individuals with badges that you believe are divinely different from everyone else and can or should initiate such violence.

    Tell me, what the heck did you think allows and causes the rise of totalitarianism? It is that precise ideal you hold.

    The only reason why the world does not resemble totalitarianism, is because your ethics have been beaten back long enough and far enough so that individual liberty could rise.

    “As it is, I am libertarian-ish. Sheesh, I would legalize push-carts in every city, brothels, drug-dens, the whole works. Gun ranges and pot-farms in every backyard. I would even go so far as to say nail beauticians do not need to be licensed, nor lawyers.”

    Do you really think I should sanction you in calling for me to be kidnapped, and assaulted, if I should engage in civil disobedience and refuse to participate in the state’s dollar socialism? That is, not accept dollars, and not pay dollars, and not threaten or engage in aggression against your person or property? You have no beef with me. I do not hold nerve gas in my basement. I simply do not want to participate in the money socialism you falsely believe is inevitable.

    And for that, if I were to actually act on it, I am to be put in jail. That is what you want from me.

    How in the heck am I supposed to respect you or your other socialist ilk? You certainly don’t practise what you preach, no, you want the state to do your dirty work. So that means not only do you have ideas which when acted upon lead to violence against peaceful behavior, but you’re all refusing to act by example. What you believe is just and ethical, is something you also believe is unjust and evil if the wrong people, those without badges, engage in that same exact behavior.

    Is that what you wanted respect for? Is that what you believe gives you the moral high ground?

    “But who has the right to pollute the air that other people breath?”

    Nobody. Pollution that harms another’s person or property is prohibited. However the pollution must be not only proved as causing harm, but it can’t be what the vocalizing victim are themselves engaging in, like say breathing.

    Pollution is just another word for chemicals. Some are harmful, others are not. Good thing we have science to determine the effects of chemicals on the human anatomy and on physical objects.

    “How about the right to pollute your land and water? Spread carcinogens? Drive drunk?”

    Again, I don’t want to waste time answering every conceivable social problem as if I am a state, as if none of you have to explain how to deal with them by saying something more than “let the government protect us”.

    I say, let individuals protect each other.

    “Life is tough and then you die. Don’t take it so seriously. A flash of light between two eternal granite slabs of oblivion, that’s all life is. A few billions years of nothingness on both sides.”

    Ah, so I am supposed to feel insignificant and worthless. What a great way to convince me to accept the violent world you want thrusted on me! Just accept it and shut up MF, you’re nothing but a tiny speck “in the grand scheme of things.”

    Right out of Lenin. Beautiful.

    “So, we had paper money and prosperity while you were alive. Enjoy!”

    You sound like the state’s marketing PR.

    I do enjoy my life, but I need liberty to do that. You try to take it away from me.

    Prosperity? Is that what you call billions of people living a much poorer life than they otherwise would have lived?

  50. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    26. March 2015 at 15:50

    @Dan W.
    you wrote: “Your NGDPLT plan may be well meaning but it has the very strong negative effect of covering up structural deficiencies and delaying the correction of them.”

    Quite the opposite, monetary policy tries to make NGDP constant, no matter the sector the AD comes from, so, if you have a lot of structural problems, you will get more inflation and zero growth. NGDP targeting will actually reveal structural deficiencies. Today, under inflation target, when you get less growth, somebody can blame monetary policy. Nobody will know for sure. But if you get NGDP at the target rate, people will be forced to look somewhere else than monetary policy.

    @Derivs
    The real just lost some 20%, I am feeling poorer, although I did bet against the Real in my portfoiio :-) .. But on your question, If you are going to convert currencies, take care when you converting balances or flows… NGDP is a flow, you can’t convert an entire year flow by a spot rate at the end of the period. And as Sumner has pointed out, if you want to measure wealth, you measure comsumption, wich is also a flow …

  51. Gravatar of Major.Freedom Major.Freedom
    26. March 2015 at 15:58

    Jose Romeu Robazzi:

    “You wrote 692 words, none of them tried to explain to the other readers what is your understanding of MM.”

    Jose, you wrote a few words less, but none of them showed you understand the core of MM. That’s OK, it’s OK, there there, it will be alright, let us go through the steps.

    1. Does market monetarism, as a practised theory, require or does not require a state?

    Answer that, and you’ll be one step closer.

    “1. You seem to dislike central banks. I dislike them either, and Professor Sumner here made clear many times his criticism of the current setup of the FED.”

    I am not talking about criticizing something like you criticize what you believe is necessary or inevitable.

    Criticizing something, but defending its existence, is superficial criticism. It is still a sanctioning of it.

    “Let’s then agree that the current monetary system need some kind of reform, ok? 2. From some of your writing, you probably like the gold standard, or free-banking, or both. Will it happen in the near future ?”

    I always chuckle when I read people on this blog telling me they know the future as if they hold the key to Geist. Karl Marx had the same psychological God complex. He wanted to be God, I am not kidding. His professors have stated that he had a God complex, that he wanted to have a mind on the universe, and everyone. Psychiatrists understand that to be a form of neurosis.

    I believe you and other market monetarist supporters are to a degree neurotic. It’s derived from Kant’s ethics. The ideal is Godman. Every individual has a duality where they are supposed to strive to be God.

    “I don’t dislike free banking (in the austrian view). Will it happen in the near, foreseeable future? Unlikely.”

    Did you know that socialism rose in the early 20th century precisely on the pillar of its alleged inevitability? You say unlikely, but I don’t believe you. Nobody should believe you. You don’t have the requisite knowledge to be able to predict entire human civilizations. You and Krugman are like Hari Seldon wannabes.

    “Given this state of things, what can be done ?”

    It is not a “given” to the future. That’s where you’re wrong.

    The Fed, as all other human institutions, are contingent, not necessary. You don’t know that they will exist in the future. You can only guess, and your guess is as good as anyone else’s, until after the fact, when it is realized who guessed right.

    It’s ridiculous for you and others here to constantly refer to EMH and the inability of anyone to predict and beat the market, and yet here you all are telling me you can predict whole friggin societies. It is jaw dropping how much schutzpa that takes.

    “Professor Sumner here has a proposal, it may not be perfect, but it is something workable.”

    It is not workable.

    “If you were to reform the monetary system, in practical world, how would you go about it? Can you write that down in less than 692 words ?”

    I can do it in ONE:

    Liberty.

  52. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    26. March 2015 at 16:13

    @Ray
    I found this copy of the paper, have you read the Bernanke comment? I think it answers your questions…

    http://www.brookings.edu/~/media/Projects/BPEA/1996%202/1996b_bpea_leeper_sims_zha_hall_bernanke.PDF

  53. Gravatar of Steve Steve
    26. March 2015 at 17:27

    “global economic growth, as measured in nominal US dollars, is projected to decline in 2015”

    I prefer using health insurance deductibles as my numeraire. Money is tight, way too tight.

    :(

  54. Gravatar of Ray Lopez Ray Lopez
    26. March 2015 at 18:46

    @Jose R. Robazzi – Yes, Bernanke’s response was awesome. I agree with most of it, but keep in mind Bernanke is not Sims, who won the Nobel Prize in 2011. And keep in mind Bernanke said this: “monetary policy responds strongly to the economy-that is, there is a large endogenous component to policy”. Simple translation: the Fed *follows* the market, does not lead the market. Hence monetarism is impotent.

    From Bernanke’s response, you can tell he is straining (and clearly uncomfortable) with the main problem of monetarism: there’s no predictive effect between what the Fed does and what the economy does. Only by using VAR techniques can a weak ‘effect’ be teased out of the data, and it’s clearly not what textbooks teach. Despite this, Sumner has: (1) never discussed the work of Sims on this blog (I challenge him to), and, (2) thinks in a simple ’cause-and-effect’ between what the Fed does and what the economy does, contrary to Sims teachings. Only simpletons, knaves, the brainwashed, the ignorant, and Kenneth Duda believe in (2), to their and society’s discredit.

    C’mon Sumner, be a man and discuss the Sims et al paper. You can fool the bumpkins reading your personal blog, but you can’t fool the whole world. Quit piping Piper.

  55. Gravatar of Don Geddis Don Geddis
    26. March 2015 at 19:56

    @Ray Lopez: “there is a large endogenous component to policy”. Simple translation: the Fed *follows* the market, does not lead the market. Hence monetarism is impotent.

    Your logic is horrifyingly stupid. The evidence you cite, doesn’t establish your preconceived conclusions.

    there’s no predictive effect between what the Fed does and what the economy does

    You also seem to be wholly unaware of Friedman’s thermostat.

    P.S. Please clarify again, what happened to your promise to quit posting comments on this blog? The hunger strike that occurred between lunch and dinner?

  56. Gravatar of Major.Freedom Major.Freedom
    26. March 2015 at 20:38

    Don Geddis:

    Friedman’s thermostat analogy does not, and was not meant to, show that there is a predictive effect of what the Fed does and what the economy does.

    The whole analogy depends on the crucial assumption “IF the Fed is doing its job”. If you take that to mean if the Fed can predict what you think it can predict, then you would of course be begging the question by invoking that analogy as a means to attempting to convince people of that very assumption.

    You should quit posting here, because your posts degrade the quality of the blog. So much vitriol and next to zero critical thinking or contributions. Merely citing websites and acting off is not helpful.

  57. Gravatar of Major.Freedom Major.Freedom
    26. March 2015 at 20:50

    Jose:

    “Quite the opposite, monetary policy tries to make NGDP constant, no matter the sector the AD comes from, so, if you have a lot of structural problems, you will get more inflation and zero growth. NGDP targeting will actually reveal structural deficiencies.”

    You missed the point. The point was regarding NGDPLT causing structural deficiencies. It would not “reveal” them.

    NGDPLT would affect relative spending and relative resource allocation away from that which is sustainable. By believing it would only “reveal” structural problems, that would lead to looking everywhere else but the monetary system.

    Is that what you desire? To cease wanting to think about money via the non-market driven arbitrary rule for a statistical sum of separate individual expenditures?

  58. Gravatar of Kevin Erdmann Kevin Erdmann
    26. March 2015 at 21:19

    Dan W.,

    “If consumers were saturated in housing consumption, how could policy get them to buy more of it?”

    You’re begging the question, as does practically everyone who claims that the bust was inevitable. By what means have you determined that housing consumption was saturated? There is a tremendous amount of confusion about the difference between home ownership and housing consumption.

  59. Gravatar of Bob Murphy Bob Murphy
    26. March 2015 at 21:39

    I don’t see why you’re shocked, Scott. I just assumed the FT writer read this post and this post, and thought you were serious?

    (I’m half trolling. But half serious.)

  60. Gravatar of Ray Lopez Ray Lopez
    26. March 2015 at 22:04

    @Don Geddis- you will stoop at nothing to win an argument? Did you even read the paper? MF is right. Do you understand that VARs, which Sims won the 2011 Nobel Prize for, expressly take into consideration “Friedman’s Thermostat”? The VAR analysis is saying that after accounting for all parameters, it’s often the case the Fed is reacting to the economy. If you want to post more, let’s take it elsewhere, go here: http://raylopez99.blogspot.com/2015/03/fed-has-no-effect-on-economy.html

    I really want somebody who matters–that would be Sumner, not Don Geddis–to make a detailed post on Sims paper. But it’s best for NGDPLT propaganda if Sumner ignores it.

  61. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    27. March 2015 at 05:00

    @Major Freedom
    If you set the target of you NGDPLT system to ZERO, it looks to me that this system is better than the gold standard, simply because nobody “found” a way to estimate workable money demand functions. And monetary policy will not “cause” any problems. I think that printing money for which there is no demand creates conditions under which bubbles may occur, but printing money per se don’t cause them. Under a “free” world, competing currencies that have strong demand will appreciate, and its providers will find ways to produce more or it. If gold becomes a currency, and starts to rise, people will find ways to produce more gold. That is no different than NGDP targeting where monetary policy is governed by a futures market. And NGDP targeting has many operational advantages: there is no need to measure monetary aggregates and estimate velocity of money, no need to estimate RGDP potential, no need to estimate NAIRU, all these nice concepts that are difficult do use in practice and that renders central bank so controversion in the way they are set up today. Just measure NGDP and try to make its rate of growth constant, even if that rate is zero…

  62. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    27. March 2015 at 05:13

    @Ray
    I did not read the entire paper, I intend to, but that will take time. From the Bernanke critique I take a few points:
    1. He praises the paper for its methodological contribution, no the conclusions
    2. Bernanke makes it very clear that the way the authors model the economy has flaws. I can’t judge those just yet, but that is a fair criticism, these types of models don’t answer causality, only correlation.
    3. Which leads us to the point I am trying to make: Bernanke says that both monetary policy and the economy may be responding to something else, and if I were to answer what that “thing” is I would say Expectations. Those are the “Long and Variable Leads”, Scott likes to mention so often … If people believe in it, any monetary system will be very good.

  63. Gravatar of Benjamin Cole Benjamin Cole
    27. March 2015 at 05:15

    Dan W:

    What do you mean by “structural deficiencies?”

    Let’s take the federally mandated and subsidized ethanol program. A bad idea. 10% of the your gasoline, by diktat.

    So we go to tight money. We still have the ethanol program.

    I can name many structural impediments deeply embedded into our economy, that tight money will not dislodge. The VA, DoD, USDA, state licensing of lawyers, nail beauticians, etc, food stamps, Social Security, Medicare. The DHS.

    Egads, most cities have planning departments that will drive you nuts. And incredible arrays of anti-commercial laws. One cannot be a push-cart peddler or restaurateur anymore in America, a basic structural impediment invariably overlooked. You think tight money will mean I can start up a push-cart hamburger stand on the sidewalks of Milwaukee or L.A.?

    Orane County, Ca. recently voted down a new international airport for a park. Tight money to the rescue?

    You can’t buy a drink after 2 am most places. Most of the blue laws are gone, but there are still places commerce must end by a certain hour. In Oregon there must be gas station attendants who pump your gas.

    You think tight money will get rid of any of these structural impediments?

    How about the home mortgage interest tax deduction? FDIC insurance?

    So, with tight money we gain zero reduction of structural impediments–they are embedded–and less growth.

    As for crappy companies or dying industries, they will not survive anyway. The American commercial scene is more competitive than ever–not due to tight or loose money, but international trade and the Internet.

    I have never heard anyone explain what they mean by “tight money gets rid of structural impediments.”

    Is that code language for “beat up on unions”?

    Relax then. You won that battle already. Unions are a sliver of the US workforce anymore.

  64. Gravatar of Josh Josh
    27. March 2015 at 06:25

    Is this a fair characterization of the difference between the FT view and the Market Monetarist view?:

    1. The FT is looking at the “i/current-NGDP-growth-rate” ratio (nominal interest rates are lagging NGDP growth!) while MM’s are concerned with expected NGDP growth.

    2. Markets are unconvinced that NGDP growth will continue apace.

    3. If/when markets are persuaded of continuing NGDP growth, nominal interest rates will equilibrate closer to that expected NGDP growth rate.

  65. Gravatar of ssumner ssumner
    27. March 2015 at 06:50

    Dan, You talk about “GDP” with no distinction made between real and nominal. That’s silly. Some RGDP growth rates may not be sustainable, but all NGDP growth rates are sustainable.

    You cite figures for nominal, but talk about the concept as if you are discussing real.

    Ray, I don’t put any weight on VAR studies, and in any case I agree that old monetarism is wrong.

    I don’t think anyone seriously believes that Sims has solved the identification problem. Do you?

    But I want to talk about blue rectangles. When the blue rectangle goes behind the brown rectangle, it is still there. It does not magically disappear, as you claim.

    Liberal Roman, Thanks, and that makes me think they should unwind QE first, then raise rates later.

    Bob, Of course I was serious.

    Josh, The main difference is that I know what money illusion is and they don’t.

    Those views you present are plausible, but I can’t tell what the FT author believes.

  66. Gravatar of Britmouse Britmouse
    27. March 2015 at 07:05

    “FT View” on the UK hitting 0% inflation, super stuff:

    http://www.ft.com/cms/s/0/7b398b40-d3b1-11e4-99bd-00144feab7de.html

    Yet neither of these should be worrying the Bank of England. There is no special causal significance in a particular inflation printout. A change in a price index is uninformative, without knowing what brought it about. When it is weak macroeconomic demand there are reasons to worry. Otherwise, there are none. Rising demand renders debts more serviceable, consumption more attractive, and higher wages affordable. Data from retail sales, tax revenues and nominal GDP all indicate that UK demand is doing just fine. British workers have even recovered the pluck to ditch their jobs to seek a better one.

  67. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    27. March 2015 at 07:05

    ‘By what means have you determined that housing consumption was saturated? ‘

    Tim Taylor seems to be addressing that here;

    http://conversableeconomist.blogspot.ca/2015/03/the-rise-of-mortgages-too-much-house.html

    ‘Let me offer a speculation: Say that the rules for taking our a mortgage had been tighter over time. Imagine the standard was that banks would decide what you can afford based on 25% of your income, not 30%, or that mortgages were typically available for 15 or 20 years, not 30. My guess is that bank lending for mortgages would be smaller. The size of homes might well have increased, but not as quickly. Less of US capital investment would be allocated to housing, which would make it possible for more to be allocated to investments that can raise the long-term standard of living. The US economy would be less vulnerable to recession. People who were less stretched in making their mortgage payments would be less likely to face default or foreclosure. And my guess is that many of us would have adapted perfectly well to living in smaller homes, because the smaller size would be usual and typical and what we expect. The money we weren’t spending on housing would easily be spent on other forms of consumption.’

    Then, this week-end on C-Span’s Afterwords, I’m sure Peter Wallison will further explain, I’m sure;

    http://www.c-span.org/video/?324300-1/words-peter-wallison

  68. Gravatar of Dan W. Dan W.
    27. March 2015 at 07:39

    Scott,

    I’ll get to the question of “structural deficiencies” in a moment. Before that I ask for your indulgence to answer the first question I asked so I can know if you and I are even speaking the same language.

    Concerning economic growth in the 2000s I presented data from “FRED” and asked: If you disagree with these numbers what is the disagreement? What data do you recommend and why? From this data I calculate that GDP was growing at a annualized compound rate of approximately 5.5% between 2003 and 2007, inclusive. If you have a different number in mind or a different measurement what is it?

    Concerning “structural deficiencies” I agree that the list of market inefficiencies is endless. But are not some more important than others? The impact of extended unemployment relief has been researched. One paper claims this policy contributed to an additional 1 million workers not participating in the work force. Is this significant?

    How much impact has liberal foreclosure policy had? Many homeowners have lived years in homes without making payments. What is the economic cost of this inaction? How much has this phenomenon slowed “velocity”? This “structural deficiency” has greatly disrupted the healthy operation of the real estate market. At what cost?

    If we are to believe in a bubble-free economy then this faith needs to go both ways. This means that the Federal Reserve stands aside while debt rapidly increases, but it also must stand aside as debt contracts. Do you accept this bargain?

    The Federal Reserve does not accept this bargain. The contraction of debt greatly concerns it and leads the Bank to intercede in the market. Can you appreciate why this asymmetry is a problem?

  69. Gravatar of Ray Lopez Ray Lopez
    27. March 2015 at 07:57

    @ssumner – like Dan W. says, you seem to speak your own language, and that’s fine, since you are a specialist.

    Sumner: “Ray, I don’t put any weight on VAR studies, and in any case I agree that old monetarism is wrong.”

    Me: Economist and Top 100 in some poll thinker Tyler Cowen seems to agree with you, saying in a private email to me that in 2008-9 your NGDPLT would work, but not so much now (if I recall his email correctly) and, importantly, the auto-regressions might not show any effect (somehow they wash out with time), which seems to support your “any weight on VAR” comment. What is ‘old monetarism’? Please do a post on this.

    Sumner: “I don’t think anyone seriously believes that Sims has solved the identification problem. Do you?”

    Me: What ID problem? Please identify the ‘identification problem’. You trying to talk over my head? It’s working but that does not prove your case necessarily.

    Sumner: “But I want to talk about blue rectangles. When the blue rectangle goes behind the brown rectangle, it is still there. It does not magically disappear, as you claim.”

    Me: Oh my, you got me on that. I concede blue behind brown does not make brown disappear, and all my brown brothers would agree on dat. This is what you want to talk about to me? You have low expectations of your readers it seems.

  70. Gravatar of Kevin Erdmann Kevin Erdmann
    27. March 2015 at 08:12

    Patrick, that’s all well and good, and I generally agree. But the main difference between 2008 and previous corrections wasn’t in those policies, it was that there was a collapse in credit and currency along with an unprecedented decline in home prices.
    People used to blame epileptic spells on witchcraft. Even if there is a witch in the room. Even if she is performing an incantation about seizures, you and I would not blame the witch without some serious details about causation. Bankers are the witches in these narratives about the crisis. Nobody demands those details. You’re leaving a lot of unconnected circuits in causation and hardly anyone will demand more.

  71. Gravatar of Don Geddis Don Geddis
    27. March 2015 at 08:28

    @Ray Lopez: “You have low expectations of your readers it seems.

    False generalization from a single example.

  72. Gravatar of Charlie Jamieson Charlie Jamieson
    27. March 2015 at 09:19

    Some people here appear to favor loose money (what I would define as rapid credit expansion) at all times.
    Times are slow — expand the money supply.
    Times are good — let’s keep it rolling, expand the money supply.
    All the credit expansion goes into unproductive loans that can’t be paid back — no matter, expand credit contraction some more and give federal guarantees to the failed loans.
    Our central bank has in practice gone down this road, as Dan W. suggests.
    Its policies can only expand credit contraction, but it doesn’t have the tools or the will to head off credit-fueled bubbles.

  73. Gravatar of TallDave TallDave
    27. March 2015 at 10:09

    Interesting that NGDPUS15Q1 is trending downward.

    https://hypermind.com/hypermind/app.html#welcome

    I really hope this prediction market survives and thrives, I like to imagine a Fed governor contemplating a rate cut watching NGDP expectations collapse and thinking to himself “Do I really want 1% NGDP growth?”

  74. Gravatar of TallDave TallDave
    27. March 2015 at 10:11

    “…really?”

  75. Gravatar of TravisV TravisV
    27. March 2015 at 12:53

    New speech by Janet Yellen:

    http://federalreserve.gov/newsevents/speech/yellen20150327a.htm

    “Normalizing Monetary Policy: Prospects and Perspectives”

  76. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    27. March 2015 at 14:25

    @TallDave
    Yes, I was going to comment on it. 2,5% Q12015. But let’s face it, even after the FED raise rates, monetary policy will still be very accomodative, don’t you all think?

  77. Gravatar of Ray Lopez Ray Lopez
    27. March 2015 at 20:53

    @Myself- about my last post, I think Sumner refers to ‘identification problem’ as what Sims et al reference in the first paragraph: “THERE IS A long tradition in monetary economics of searching for a single policy variable-perhaps a monetary aggregate, perhaps an interest rate-that is more or less controlled by policy and stably related to economic activity”.

    Sumner correctly states that nobody to date has come up with this variable. So question for the reader: why do you think Sumner’s NGDPLT framework is that variable? If you have 1000 doors and only one door leads to a golden prize, and the rest are booby prizes (a goat), why does Sumner know which door is golden? Is he Monte Hall? Nobody to date has figured out what is this “single policy variable”, so what are the chances Sumner has? About 1/1000 = 0.1% Yet you people ‘pound the table’ with certainty that NGDPLT is it. And it could be that the variable does not exist. After all, if the Fed follows the market the majority of the time, and in the early 80s *lowered* interest rates and inflation *fell*, as I showed from the data in another post, you can surmise money is largely neutral and super-neutral.

    Seems the Pied Piper of Hamelin, the Monte Hall of Monetarism, Dr. Scott Sumner, has your goat dear reader!

  78. Gravatar of Ben J Ben J
    27. March 2015 at 21:19

    Ray

    That’s not what an identification problem is

    You could try looking it up on wikipedia – with you enormous IQ, you could probably figure it out super fast

  79. Gravatar of Ray Lopez Ray Lopez
    27. March 2015 at 23:43

    @Ben J – thanks, I did look it up, and it is exactly as I said it was, you just don’t see the forest for the trees. Google Parameter identification problem.

    OT- Finland suffers from a structural problem that cannot be cured by Krugman style fiscal spending nor my Sumnerian monetarism. See today’s post at Tyler Cowen’s MarginalRevolution entitled ‘The working age population in Finland is now shrinking’

  80. Gravatar of Ben J Ben J
    28. March 2015 at 01:22

    No – you don’t understand the identification problem as it relates to nominal aggregates. Telling us all the phrase you googled isn’t very convincing – maybe you could convince your Philipino girls, but we hold a slightly higher bar here

  81. Gravatar of Ray Lopez Ray Lopez
    28. March 2015 at 03:46

    @Ben J – regardless of what I don’t understand–and I probably understand better than you–the issue is how confident we should be of Sumner’s NGDPLT given the known identification problem, the known unknown effect of the Fed on the economy (i.e., money neutrality in the short and long term), Sims et al’s paper, which raises questions as to how much power the Fed really has (i.e., not much) and the failure of Abenomics (JP has deflation, again, see also the Finland post of Edward Hugh referenced by T. Cowen on his blog today, Marginal Revolution). You keep making assumptions, dodging the big questions, and throwing in red herrings (sorry to hear about your lack of a love life and envy of mine). And Sumner is not much better with his one-liners. Ball back in your court, as it seems to always be.

  82. Gravatar of Blue Eyes Blue Eyes
    28. March 2015 at 05:30

    Jose Robazzi: if NGDP is stalling, it shows that monetary policy is too tight!

  83. Gravatar of ssumner ssumner
    28. March 2015 at 05:48

    Britmouse, Good quote.

    Dan, You still don’t get it. Saying “GDP” just isn’t enough when you need to distinguish between real and nominal GDP. From the context of your quote you are using NGDP data for an RGDP argument.

    Ray, I’ve never seen Tyler say he opposes NGDP targeting, when he does I’ll respond.

    You say the Fed follows the market 80% of the time, and I want them to follow 100% of the time. So we are just 20% apart.

    And you seriously think you can talk about Sims VAR studies without understanding the identification problem? That’s like talking about the theory of relativity without understand mass and energy.

  84. Gravatar of Ray Lopez Ray Lopez
    28. March 2015 at 07:48

    @Sumner – Tyler does not oppose NGDP targeting, he just thinks its time has come and passed. It would have been effective in 2009, not now. Just ask him, don’t take my word for it.

    Sumner: “You say the Fed follows the market 80% of the time, and I want them to follow 100% of the time. So we are just 20% apart.” – I wish. If you could explain how the Fed printing money and buying paper ‘follows the market’ I would love to convert to NGDLT. In a sense, you may be thinking of the ‘real bills doctrine’ which back in the day said any Fed purchase of commercial paper freely offered cannot be bad. There is some logic to this pro-cyclical proposal–is that what you are referring to?

    Sumner: “And you seriously think you can talk about Sims VAR studies without understanding the identification problem?” – yes, I cited the Sims paper for the proposition that the Fed has little or no influence over the economy, not for the identification problem. See also this: ‘King and Levine (1993) did not find evidence to support the hypothesized relationship between real interest rate and economic growth in a cross-section of countries. Taylor (1999) found that the link between real interest rates and macroeconomic aggregates such as consumption and investment is tenuous.’ (from a paper by Richard A. Werner). Granted interest rates are not NGDPLT, but go to IS-LM model analysis, but if they have no influence in the economy, with dozens of years of analysis vested in them, why would the unstudied and more complicated proposal of NGDPLT have influence? Ockham’s Razor dictates otherwise. Can’t you see your proposal is bogus? Have you vested so much of your time in promoting NGDPLT that you cannot let go, no matter what the fact say? The power of confirmation bias, as Haidt wrote about.

  85. Gravatar of Major.Freedom Major.Freedom
    28. March 2015 at 10:07

    It is true that NGDPLT must answer for the identification problem. Aggregate targeting, which is always presented as a means to do something in the economy, namely keep employment from falling due to sticky wage rates, is most assuredly a single variable of which the identification problem arises.

    How many times has Sumner and his followers on this blog posted charts of NGDP and employment/output and said these correlations are “strong evidence” that the single variable NGDP is the cause?

  86. Gravatar of Ben J Ben J
    28. March 2015 at 16:34

    Time and time again it must reassure Scott that the criticisms in this comments section are so poor. A classic case above me – the brilliant minds above who think the identification problem is about what effect some particular variable has on the economy. Come on guys, the hint is in the name…

  87. Gravatar of TallDave TallDave
    28. March 2015 at 20:08

    Jose,

    But let’s face it, even after the FED raise rates, monetary policy will still be very accomodative, don’t you all think?

    Interest rates are low, but that’s mainly because people expect low inflation, i.e. they expect money to be tight.

    Even allowing for dynamic feedbacks like the above, it’s hard to describe the stance of monetary policy because one can always ask “compared to what?”

    Probably the most proper description of the stance of monetary policy is how it relates to the trinity of RGDP growth, employment, and purchasing power. Obviously the government could set a negative 20% inflation target (perhaps even running surpluses to fund the Fed’s buying of dollars) and absolutely crush RGDP and employment while increasing purchasing power; we would all agree that is suboptimally tight. They could also set a positive 20% inflation target and that might help maximize RGDP and employment, but would certainly impair purchasing power.

    (I’m extremely skeptical that monetary policy is intrinsically superneutral in the long run, I suspect that’s just usually the practical effect of how CBs react to events.)

    So where are we today? Well, the optimal monetary policy seems to be to have NGDP growth of around 4-5%, that seems to best promote the trinity of economic welfare. If NGDP growth is outside that range, monetary policy is either too accommodative or not accommodative enough.

  88. Gravatar of Jeff Jeff
    29. March 2015 at 05:02

    The identification problem:

    Suppose you observe two series: (i) Q, the quantity of X bought and sold and (ii) P, the price of X. Econ101 tells us that in a plot with P on the vertical axis and Q on the horizontal axis, there is a demand curve for X that slopes down and a supply curve that slopes up. Where the curves intersect determines price and quantity simultaneously. If this equilibrium always holds, then it follows that the only way the P or Q ever change is if one or both of the curves move or change somehow.

    For simplicity, imagine both “curves” are actually straight lines that are completely characterized (as is any straight line) by their slopes and intercepts. Furthermore, we will simplify things even more by assuming the intercepts can change over time, but the slopes never do. When the intercept on the demand curve increases, we call this a rightward shift of demand, and if the intercept of the supply curve increases, that’s a leftward shift of supply.

    We don’t observe the curves, all we see are observations of P and Q. The identification problem is this: From observations alone, we can make only limited inferences about those slopes and intercepts.

    For example, if we observe a period in wherein the P went up and Q went down, we can infer that the supply curve shifted left, but since there may also have been a demand curve shift, we can’t say much more than that. It could be that the demand curve is steeply sloped and it also shifted left, but by a bit less than the supply curve did, or it could be that the demand curve shifted right and is not very steep. If we want to use the data to estimate the slope of the demand curve, we have to make some further assumptions.

    One simple assumption we could make is that the demand curve never shifts or changes in any way, i.e., all the changes in P and Q are due to changes in the intercept of the supply curve. If that’s true, we only need two observations that are not identical to know everything about the demand curve, as two points in the P-Q plane are enough to determine a straight line.

    If the intercept of the demand curve is actually a bit random, we can still estimate the slope and intercept of the demand curve by regressing price on quantity, and our estimates should get more accurate with more observations. But we still have to make some kind of identifying assumptions to do so. There isn’t any way around this.

    Note also that even if we get a decent estimate of the demand curve, without further assumptions we still can’t say much about the supply curve. For example, suppose we see both P and Q increase. We know that this can only happen if the demand curve shifts right, but whether the supply curve also shifted or not we can’t tell.

  89. Gravatar of ssumner ssumner
    29. March 2015 at 09:44

    Ray, Sort of like saying “Just because I don’t know what mass and energy are, doesn’t mean I can’t talk about the theory of relativity.

    You said:

    “Tyler does not oppose NGDP targeting, he just thinks its time has come and passed. It would have been effective in 2009, not now. Just ask him, don’t take my word for it.”

    You don’t even know what “effective” means. He probably said that right now it wouldn’t have much impact on unemployment, unlike 2009. But I believe that! If he supports it then he supports it all all times. NGDP targeting is not something that you just do in certain years and not others.

    Jeff, Thanks, but your attempt to educate Ray reminds me of this link:

    http://www.metmuseum.org/collection/the-collection-online/search/484972

  90. Gravatar of Jeff Jeff
    29. March 2015 at 20:27

    Scott, my comment wasn’t really aimed at Ray. He doesn’t appear to be interested in learning anything, just trolling. But I thought a simple explanation might help some other readers who might not know what economists are referring to when we talk about identification problems.

  91. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    30. March 2015 at 10:17

    @Blue Eyes
    Immediately after I pressed the submit button on my last comment that thought occurred to me, but instead of correcting myself I waited to see what others thought. Except for the eternal skeptics, I think most people that comment on this blog think the same. The level of rates don’t represent monetary policy stance!

  92. Gravatar of Scott Sumner Scott Sumner
    31. March 2015 at 05:19

    Thanks Jeff. I do appreciate that, despite my “joke.”

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