Obama tries to force deflationary monetary policies on Japan
After Hiroshima you’d think we’ve inflicted enough damage on Japan, but now we are trying to force them to abandon their attempt to climb out of deflation:
The Obama administration used new and pointed language to warn Japan not to hold down the value of its currency to gain a competitive advantage in world markets, as the new government in Tokyo pursues aggressive policies aimed at recharging growth.
I’m sure the administration defenders will insist that the target is not monetary stimulus, but rather “competitive devaluation.” But of course there’s no way Japan can escape from deflation without a large currency depreciation. Even after cutting the yen from 76 to 99, their long term bond yields still suggest lower NGDP growth expectations than almost anywhere else in the world. They need significant further currency depreciation.
BTW, Lots of people confuse policies aimed at nominal exchange rate depreciation (monetary stimulus) with policies aimed at real exchange rate depreciation (high government saving.) The two policies are so different that they ought not even be covered in the same course. To say the Japanese government is not engaged in excessive saving would be an understatement.
PS. I may not have any time for comments over the next week.
Tags:
13. April 2013 at 04:41
How DARE they beggar thy neighbor! Mercantilism was supposed to be OUR plan!
Seriously, though, why is it good for Japan to pursue inflationary policy now? They don’t have high unemployment. Aren’t they already on their 20 year NGDP trend (I could be wrong about that)? Surely Japanese long-run expectations and wage contracts have adjusted to flat NGDP by now, no?
13. April 2013 at 04:49
John, I’d prefer NGDP targeting. But while the Wicksellian equilibrium nominal rate is far below zero, a modest amount of monetary stimulus will increase NGDP growth without raising nominal interest rates, which makes their debt situation better.
Also, if you believe that there is money illusion in nominal wages near zero percent increases (I.e. workers are irrationally resistent to nominal wage cuts,) then the labor market NEVER adjusts to ultra-low NGDP growth. There is some evidence to support that sort of money illusion.
13. April 2013 at 06:14
I wouldn’t take the statement at face value. The US has to say something since many other US allies are concerned becuase of the weaker yen (South Korea, Germany, among others). There are also domestic interest groups in the US, including the automakers I would presume, that wouldn’t be happy to see the yen go to 150 in 6 months.
The US can’t be seen as completely siding with Abenomics in the face of opposition by other allies.
This is more a matter of diplomacy than economics. Bernanke has welcomed Abenomics, after all… but then again many in the US political system dislike his policies to put it mildly…
13. April 2013 at 06:40
Mikio, Yes, I presume they don’t really mean it, but nonetheless it puts Japan in a slightly more difficult position–creating the impression that currency depreciation is opposed by most countries. That does at least slightly restrict their ability to use the yen as a policy instrument. Most articles on Japan say this is a problem.
13. April 2013 at 06:58
Yes, it an ideal world, everyone would support everybody else’s policies when they are doing the right thing to improve their economy.
But I think, so far, so good.
It could have been much worse. Look at what the European are doing to each other.
On balance, the US and the G7 have backed Japan on this by as much as it is politically possible in the real world…
13. April 2013 at 07:08
“BTW, Lots of people confuse policies aimed at nominal exchange rate depreciation (monetary stimulus) with policies aimed at real exchange rate depreciation (high government saving.) The two policies are so different that they ought not even be covered in the same course. To say the Japanese government is not engaged in excessive saving would be an understatement.”
*Thank you.* This point is almost never mentioned, even by very distinguished economists.
If Japan exited the liquidity trap, it’s real exchange rate would probable appreciate, due to a stronger economy,higher interest rates, and possibly lower saving rates.
13. April 2013 at 07:24
Funny, didn’t Bernanke dismiss complaints from Japan and China when the Fed announced QE, by saying something like “My job is to help Americans, not the world”, or something like that?
Bernanke has not only been wrong about virtually everything, he’s a hypocrite as well.
13. April 2013 at 07:27
It´s the ‘hot buck’ model. Brazil complains about the US ‘beggar thy neighbor’ policy, the US complains about China´s and now Japan´s… and so it goes.
13. April 2013 at 07:55
Ugh, I heard an NPR story about the possibility of a “currency war,” and just about wanted to punch my arm through the windshield. I have a question for those who talk about currency wars: how exactly does currency depreciation enable a so-called competitive advantage?
If wage markets clear, then there’s absolutely no effect of currency depreciation or Dutch disease. Employment is full no matter what and a pure currency depreciation changes nothing. Due to theoretical arbitrage, there is no way to make currency cheaper in foreign markets without inflation in domestic markets. The net result is the real economy stays the same.
The only competitive advantage comes from a lack of clearing in labor markets. That explains any increase in RGDP, which is very, very different from real exports. Nominal currency depreciation simply does not change real exports. Real saving, either through wealth government expropriates to saving or through private taste for delayed consumption, is what tilts the make-up or RGDP to real exports. RGDP can only have its make-up changed by real savings. The overall level is constrained by the fundamental productive capacity of the population.
13. April 2013 at 10:05
The Yen is overvalued at 100.
It probably had 20% more to go and may overshoot.
13. April 2013 at 10:38
‘The Obama administration used new and pointed language to warn Japan not to [offer useful products like autos to the American people at low prices]’
Because if they sold a lot of their products they would earn a lot of dollars which they could use to purchase American products and services.
13. April 2013 at 11:33
It is laughable to think that “just devalue your currency, bro” will fix Japan’s problems. Default on 100% of JGB’s and start from scratch.
13. April 2013 at 11:59
Scott: Say some more about this, please.
13. April 2013 at 13:31
Obama and his team obviously do not know what to do. They should check some blogs once in a while. Their decisions are not only stupid, they are even dangerous!
But the power of media, which is constantly reporting that everything is so ok (which is a powerful tool as you can see on the Canadian Real Estate)! Obama is not representing a change, he represents the same stubborn belief that pouring more money into the economy will save it from recession.
13. April 2013 at 20:05
Scott Sumner: “But of course there’s no way Japan can escape from deflation without a large currency depreciation.”
What if the whole world is experiencing deflation? Can it not escape it because there’s no one to depreciate against?
13. April 2013 at 20:35
I try not to sound like a sniveling left-winger, but really…telling Japan what to do, troops in Iraq/Afghanistan, sailing ships around North Korea and off the coast of China, lecturing Mexico on drugs, long-faced talking and some intervention on Syria, Libya, Egypt, etc etc etc.
Do the people in DC ever go abroad?
And do you think we might be getting stretched thin?
Besides that, this is stupid policy on Japan by Obama, who never had a clue about monetary policy anyway.
13. April 2013 at 20:35
So I only read this and Marginal Revolution, but based on that, it sounds like a substantial fraction of the econoblogosphere knows this is completely mad. Should there be a Statement of US Economists Supporting Japanese Reflation or something?
13. April 2013 at 20:45
Prof. Sumner,
Yglesias has a good new post that’s addressed to supply-siders like you:
“Promoting Efficiency And Promoting Innovation Are Different Things”
http://www.slate.com/blogs/moneybox/2013/04/13/efficiency_and_innovation_two_roads_to_growth_but_they_re_not_the_same_and.html
13. April 2013 at 22:40
Benjamin, you don’t have to be a “sniveling left winger” to think that those things are bad!
14. April 2013 at 06:49
‘but really…telling Japan what to do….’
When he ignored what they do that didn’t work out too well.
14. April 2013 at 18:58
Askok:
You are right—-and non-interventionism used to be a conservative trait, and a trait recommended by our founding fathers….
Patrick:
Japan is a sovereign nation, suffering from deflation. Their monetary policy is their business. We have our own monetary policy—-what would be the reaction if Japan pressured us on our policy? Indeed, as Beckworth has pointed out, we are probably injuring the whole world with sado-monetarism, but I bet no one in DC/Fed welcomes foreign intrusion…..;
14. April 2013 at 19:46
Benjamin, probably the same thing that the U.S. does when countries like Brazil complain about or MP, or what BOJ did the past 20 years: ignore it.
14. April 2013 at 19:46
*our
15. April 2013 at 00:36
Paul Krugman, librettist: http://globalpublicsquare.blogs.cnn.com/2013/04/14/an-opera-out-of-a-molehill/
15. April 2013 at 10:48
The number and extents of unsustainable investments that are almost certainly being made now, and have been since at least 2008, on the basis of the Fed reversing the benevolent, corrective effects of cash holding (liquidation of unsustainable investment, labor re-allocation, etc), are being overlooked and minimized by those wedded to focusing on aggregate spending and prices.
15. April 2013 at 12:00
It’s funny, the A-bombs are of course what everyone remembers, but the firebombings and aerial minings of Tokyo and other Japanese cities were considerably more destructive — LeMay remarked at the time he would surely be tried as a war criminal if the Allies lost. And prior to Japan’s surrender, we were moving chemical weapons to Luzon to prepare for the invasion, including phosgene, mustard gas, tear gas and cyanogen chloride.
15. April 2013 at 13:35
Geoff,
“The number and extents of unsustainable investments that are almost certainly being made now, and have been since at least 2008, on the basis of the Fed reversing the benevolent, corrective effects of cash holding (liquidation of unsustainable investment, labor re-allocation, etc), are being overlooked and minimized by those wedded to focusing on aggregate spending and prices.”
Wow.. just wow [face palm 🙁 ] of course, the mindless misiean rothbardian nonsense rises again. Just repeat the word “unsustainable’ without any proof, and live peacefully [A word you and major freedom overuse, as if we aren’t in favor of peace!. What arrogance!] in your echo chamber.
And “benevolent effects of cash hoarding” wow! Benevolent, like, the rise of Adolf Hitler on the basis of bruning’s hard money policies in 1933? Unlike your Austrian nonsense, there is proof to support that, because it actually occurred.
15. April 2013 at 13:40
Geoff,
The liquidationist argument!
Purge the weakness…
15. April 2013 at 16:03
Edward:
Since when did intellectual meltdowns constitute sound arguments? I am not sure how to approach your blathering.
Ben J:
It’s more about purging bad investments, which enables the weak to compete in a more sustainable economy.
The market is one of individuals working in partial ignorance of one another, where the price system regulates what would otherwise be chaotic production. By changing interest rates, the Fed is preventing investors from knowing how capital intensive projects should be, given how much real resources people are actually saving.
The problem with looking at aggregate prices, aggregate spending, and other aggregate statistics, is that they mask the underlying processes that can only be discerned within the aggregates.
15. April 2013 at 16:31
Geoff:
It’s more about purging bad blood, which enables the weakened immune system to compete in a more healthy body.
The body is one of individual cells working in partial ignorance of one another, where the immune system regulates what would otherwise be chaotic disease. By attempting an aggregate cure, a Doctor is preventing the immune system from knowing how immune cells should coordinate, given how much disease the body is actually facing.
The problem with looking at aggregate cures, aggregate treatments, and other aggregate statistics, is that they mask the underlying processes that can only be discerned within the aggregates.
15. April 2013 at 18:08
Ben J:
The economy isn’t an organism. Humans aren’t cells in some greater living being with its own ends and desires. Individual humans have their own ends.
15. April 2013 at 19:42
Edward,
Geoff is hardly in an echo chamber commenting on this blog.
It’s reasonable as a believer in private enterprise as the prime generator of growth, to see any private company being propped up by government as unsustainable.
By that definition, there are plenty of examples.
“Wow.. just wow [face palm]” – whenever I see comments like this I assume they are covering up weaknesses in the commenter’s rational arguments.
Despite your frustration, there are reasonable, rational arguments that lead many to believe that your viewpoint is incorrect. Let’s hear your rational points and try to find some common ground.
As a start, how would you define unsustainable? Where would you draw the line on government assistance to certain private corporations?
15. April 2013 at 20:06
Paul Andrews,
how would I define unsustainable? Simple. A private company that is being propped up by the government FISCALLY, like Fannie mae or Freddie Mac or Solyndra A company that’s losing money or has a vanishing profit margin, and yet is being supported by the government. There’s your common ground Paul. But when Geoff and Major Freedom talk about ‘unsustainable” they mean something entirely. They mean unsustainable according to the dogmatic, rigid, and mindless doctrines of ABCT, which has been refuted dozens of times.
Geoff,
It’s clear you are a humorless lump, and take yourself way too seriously. You might not find me funny, but thats irrelevant. What’s sad is that you didn’t even understand that I was making fun of you in the first part of my paragraph. My “argument” as it were, is in the second part. If the policies of the Austrians/Austerians, were put into practice in any PRACTICAL matter in the real world (i know Austrianism is different from contemporary neoliberal “austerianism”, but despite the issue of balancing the budget through tax increases, both have an obsession with hard money) nightmares would result
15. April 2013 at 21:41
Edward,
“how would I define unsustainable? Simple. A private company that is being propped up by the government FISCALLY”
OK. So a private company that is being propped up by central bank activity would not be unsustainable by your definition?
15. April 2013 at 22:11
Geoff,
My analysis is a priori correct.
15. April 2013 at 22:33
paul Andrews.
A central banks activity is less heavy handed and interventionist than keynesian fiscal policy or industrial policy. Typically, central banks dont buy the bonds of distressed companies and keep buying to prop them up. A rising tide lifts all boats, winners and losers, and those dont typially change when the CB does its stuff, at least if it does its stuff correctly
15. April 2013 at 23:21
Edward,
“A central banks activity is less heavy handed and interventionist than keynesian fiscal policy or industrial policy.”
Agreed.
“Typically, central banks dont buy the bonds of distressed companies and keep buying to prop them up.”
I agree typically they don’t. Would you agree sometimes they do?
I think there are other ways for the central bank to prop up distressed companies, such as emergency loans. This has happened recently in the US in large amounts.
Another way for the central bank to prop up distressed companies is to buy their illiquid assets. This has also happened recently in the US in large amounts.
Would you agree with the last two paragraphs or do you have a different understanding?
15. April 2013 at 23:45
Dear Market Monetarists,
Could someone please post a chart comparing gold prices to the Nikkei over the past eight months? This represents a huge defeat for those who claim that inflationary policies are enormously dangerous!
15. April 2013 at 23:51
Joe Weisenthal:
“Goldenfreude: Here’s Why People Are So Glad That Gold Is Crashing”
http://www.businessinsider.com/goldenfreude-2013-4
16. April 2013 at 00:10
Hahaaaaaa, I didn’t realize this: Bill Gross recommended gold IN JANUARY!
http://www.businessinsider.com/bill-gross-i-would-buy-gold-here-2013-4
16. April 2013 at 00:36
You should never ever ever ever ever listen to Bill Gross. In mid-2011, as QE2 wound down, he sold off U.S. debt right before it skyrocketed in value:
http://www.businessinsider.com/bill-gross-mea-culpa-2011-10
16. April 2013 at 06:09
“Typically, central banks dont buy the bonds of distressed companies and keep buying to prop them up.”
I agree typically they don’t. Would you agree sometimes they do?
Yes
“I think there are other ways for the central bank to prop up distressed companies, such as emergency loans. This has happened recently in the US in large amounts.
Another way for the central bank to prop up distressed companies is to buy their illiquid assets. This has also happened recently in the US in large amounts.
Would you agree with the last two paragraphs or do you have a different understanding?”
If you’re talking about Bear Stearns, or AIG there was a reason behind thta. It was because those institutions threatened the health and safety of the entire financial system
16. April 2013 at 06:29
those institutions threatened the health and safety of the entire financial system
If it’s too big to fail, it’s too big to exist.
In other words – you do realize you’re defending moral hazard, right ? (at least that’s how it sounds)
There was no sound reason to bail out the likes of AIG. What central banks should have done was keep nominal spending on track – and that’s it.
If the likes of Paul Andrews (“the CPI is an accurate measure of monetary policy”) or Geoff (“falling wages is good”) don’t like it – tough breaks.
16. April 2013 at 06:49
Daniel,
You’re probably right,
Apologies.
Keep nominal spenidng on track WOULD probably have ensured that Bear Stearns or AIG would not have gotten in trouble in the first place, or at least not have brought down the entire financial system when they would’ve imploded
16. April 2013 at 07:00
And then there’s this
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2248128
16. April 2013 at 10:26
“Researchers Finally Replicated Reinhart-Rogoff, and There Are Serious Problems.”
APR 16, 2013, by Mike Konczal
http://www.nextnewdeal.net/rortybomb/researchers-finally-replicated-reinhart-rogoff-and-there-are-serious-problems
16. April 2013 at 10:32
Could the “inflation is a round the corner crowd” finally be right ?
Tom E in comment above asked what happens if everyone is trying to devalue their currency at the same time.
Is there a classic answer ?
16. April 2013 at 10:35
Ben J,
You sound like my Chiropractor nephew.
16. April 2013 at 10:44
what happens if everyone is trying to devalue their currency at the same time.
The whole point of “devaluation” isn’t to export your way out of trouble – it’s to restore balance in the labor markets (sticky wages and all that jazz) and return the economy to full employment.
16. April 2013 at 10:58
Geoff,
Are you Familiar with E.O. Wilson?
http://www.edge.org/3rd_culture/wilson03/wilson_print.html
16. April 2013 at 12:11
Reinhart and Rogoff say they’re covered;
http://blogs.wsj.com/economics/2013/04/16/reinhart-rogoff-response-to-critique/
———–quote———–
The 2012 JEP paper largely anticipates and addresses any concerns about aggregation (the main bone of contention here), The JEP paper not only provides individual country averages (as we already featured in Table 1 of the 2010 AER paper) but it goes further and provide episode by episode averages. Not surprisingly, the results are broadly similar to our original 2010 AER table 1 averages and to the median results that also figure prominently.. It is hard to see how one can interpret these tables and individual country results as showing that public debt overhang over 90% is clearly benign.
The JEP paper with Vincent Reinhart looks at all public debt overhang episodes for advanced countries in our database, dating back to 1800. The overall average result shows that public debt overhang episodes (over 90% GDP for five years or more) are associated with 1.2% lower growth as compared to growth when debt is under 90%. (We also include in our tables the small number of shorter episodes.) Note that because the historical public debt overhang episodes last an average of over 20 years, the cumulative effects of small growth differences are potentially quite large. It is utterly misleading to speak of a 1% growth differential that lasts 10-25 years as small.
By the way, we are very careful in all our papers to speak of “association” and not “causality” since of course our 2009 book THIS TIME IS DIFFERENT showed that debt explodes in the immediate aftermath of financial crises.
———–endquote————–
16. April 2013 at 12:18
Bill Ellis:
“Could the “inflation is a round the corner crowd” finally be right?”
Bond prices, stock prices, commodity prices, there is lots of price inflation. We just don’t see as much of it in consumer prices.
16. April 2013 at 12:20
Bill Ellis:
Re: O.E. Wilson…
Biology deals with phenomena other than teleology.
16. April 2013 at 12:35
Edward:
“It’s clear you are a humorless lump, and take yourself way too seriously.”
According to what standard? Yours? I tend not to set them so low.
“You might not find me funny, but thats irrelevant. What’s sad is that you didn’t even understand that I was making fun of you in the first part of my paragraph.”
When the troll does not get the emotional reaction he was looking for, the fault is obviously not with the troll, but with his target. Yes, it’s a flaw in *my* character to not take your blathering seriously. Did that upset you? Did you want me to acknowledge bad jokes? Is that what you need, to fill some emptiness or something?
“My “argument” as it were, is in the second part. If the policies of the Austrians/Austerians, were put into practice in any PRACTICAL matter in the real world (i know Austrianism is different from contemporary neoliberal “austerianism”, but despite the issue of balancing the budget through tax increases, both have an obsession with hard money) nightmares would result”
I am not calling for either tax increases or tighter money. Your nightmare is based on a straw man.
Speaking of nightmares, it is precisely inflation advocated by you and your ilk that generates booms that inevitably end in recessions, no matter how many times you can delay it with more inflation. Even with NGDP targeting, as people adapt more and more to the new artificial rule the errors from non-market monetary signals will still accumulate.
The 20th century should have been a lesson on the nightmare of central planning. Did you think the problems of communism didn’t apply to money as well? Did you think that central planning problems only exist if the projects only concern cars or computers or food?
The world’s central banks are, and have been, leading the world through a nightmare of high volatility, market distortions, growing government, and shakier more weaker financial systems. There is no way for there to be a permanent harmony and balance between communism (central banks) and market economies. One or the other must be eliminated in the long run, because there is no way for private property owners to know of all of their mistakes, vis a vis the consumer preferences, when the price signals are constantly interferred with by the central bank.
And no, these distortions don’t magically disappear over the long run if the central bank is persistent in an arbitrary “rule.” The rule itself covers up the errors that otherwise would be revealed.
Ben J:
“My analysis is a priori correct.”
Troll harder. You’ve already shown you don’t even know what a priori means, so repeating the same boring joke just reflects poorly on you.
16. April 2013 at 13:41
Edward,
Geoff said:
“The number and extents of unsustainable investments that are almost certainly being made now, and have been since at least 2008, on the basis of the Fed reversing the benevolent, corrective effects of cash holding (liquidation of unsustainable investment, labor re-allocation, etc), are being overlooked and minimized by those wedded to focusing on aggregate spending and prices.”
You said:
“Wow.. just wow [face palm ] of course, the mindless misiean rothbardian nonsense rises again. Just repeat the word “unsustainable’ without any proof, and live peacefully [A word you and major freedom overuse, as if we aren’t in favor of peace!. What arrogance!] in your echo chamber.”
I said:
“Geoff is hardly in an echo chamber commenting on this blog. It’s reasonable as a believer in private enterprise as the prime generator of growth, to see any private company being propped up by government as unsustainable. By that definition, there are plenty of examples. …how would you define unsustainable? Where would you draw the line on government assistance to certain private corporations?”
You said:
“how would I define unsustainable? Simple. A private company that is being propped up by the government FISCALLY, like Fannie mae or Freddie Mac or Solyndra A company that’s losing money or has a vanishing profit margin, and yet is being supported by the government. There’s your common ground Paul. But when Geoff and Major Freedom talk about ‘unsustainable” they mean something entirely. They mean unsustainable according to the dogmatic, rigid, and mindless doctrines of ABCT, which has been refuted dozens of times.”
I said:
“OK. So a private company that is being propped up by central bank activity would not be unsustainable by your definition?”
You said:
“A central banks activity is less heavy handed and interventionist than keynesian fiscal policy or industrial policy.”
I said:
“Agreed”
You said:
“Typically, central banks dont buy the bonds of distressed companies and keep buying to prop them up. A rising tide lifts all boats, winners and losers, and those dont typially change when the CB does its stuff, at least if it does its stuff correctly”
I said:
“I think there are other ways for the central bank to prop up distressed companies, such as emergency loans. This has happened recently in the US in large amounts. Another way for the central bank to prop up distressed companies is to buy their illiquid assets. This has also happened recently in the US in large amounts. Would you agree … or do you have a different understanding?”
You said:
“If you’re talking about Bear Stearns, or AIG there was a reason behind thta. It was because those institutions threatened the health and safety of the entire financial system”
Daniel said:
“If it’s too big to fail, it’s too big to exist. In other words – you do realize you’re defending moral hazard, right ? (at least that’s how it sounds) There was no sound reason to bail out the likes of AIG. What central banks should have done was keep nominal spending on track – and that’s it.”
You said:
“You’re probably right, Apologies. Keep nominal spenidng on track WOULD probably have ensured that Bear Stearns or AIG would not have gotten in trouble in the first place, or at least not have brought down the entire financial system when they would’ve imploded”
(As an aside, Bear Stearns and AIG were not the only companies to receive emergency loans. Many of the big banks received emergency loans. Also you didn’t respond regarding the Fed’s purchase of illiquid assets from financial insitutions. The Fed is currently purchasing MBS at the rate of $40 billion per month. Between 2007 and today the Fed’s holdings of MBS have increased from zero to $1.1 trillion.)
OK – it seems you now agree that the Fed propped up certain institutions. However you seem to be saying that if the Fed had “kept nominal spending on track” those companies might not have got into trouble. Or if they had imploded, that this would not have brought down the system.
I think you would agree that it’s not possible to tell which companies would have survived if the Fed had solely kept nominal spending on track. Some may have and some may not – is that fair? What you do believe is that keeping nominal spending on track would have prevented a systemic meltdown.
I think what is fairly certain is that the outcome would have been different if the Fed had simply focused on keeping nominal spending on track instead of propping up specific institutions. So some companies that survived would not have, and some that failed may have survived. Is that a fair statement?
If so, then I believe that the companies that survived but would have failed can reasonably be considered to have been unsustainable, and it’s certainly possible that they continue to make unsustainable investments now. Would you agree with that?
16. April 2013 at 16:37
Krugman responds to R&R’s response :
http://krugman.blogs.nytimes.com/2013/04/16/reinhart-rogoff-continued/
16. April 2013 at 22:17
Geoff,
You said,
“Speaking of nightmares, it is precisely inflation advocated by you and your ilk that generates booms that inevitably end in recessions, no matter how many times you can delay it with more inflation.”
You keep saying this, and I always look forward to seeing the evidence that supports your assertion. Sadly, it is only then I remember that you feel you don’t need to provide any evidence for your arguments. After all, they are correct because… because of what again?
Presumably you’re going for the “say it enough times and it comes true” method.
16. April 2013 at 23:10
Ben J,
Imagine two economies, Economy A which has a constant level of base money per citizen, and Economy B in which base money per citizen grows at 2% per annum, via central bank purchase of government debt. Everything else is equivalent between economy A and B.
Do you believe that exactly the same investment decisions would be made in economy A as in economy B?
16. April 2013 at 23:56
gentlemen, prepare to have your jimmies rustled:
http://www.spiegel.de/international/business/interview-with-harvard-economist-carmen-reinhart-on-financial-repression-a-893213.html
17. April 2013 at 04:42
Paul Andrews,
I’m looking for evidence, not the Socratic method.
17. April 2013 at 07:10
ChargerCarl, Great link.
Got to love how frank Carmen Reinhart is in it. It sure makes the way they presented the results of the their paper and their response to the criticism of it seem disingenuous.
17. April 2013 at 07:14
Paul Andrews askes… “Do you believe that exactly the same investment decisions would be made in economy A as in economy B? ”
No. Economy B supplies more incentive to invest.
17. April 2013 at 07:54
Does Krugman really want to go here;
‘And they behaved badly by digging in when critiques surfaced, rather than responding with a good-faith effort to sort out what was really happening.’
17. April 2013 at 08:29
Ben J:
“You keep saying this, and I always look forward to seeing the evidence that supports your assertion.”
If by “evidence” you mean historical data, then the “evidence” that supports my “assertion” is 100% of all of economic history that has ever transpired.
If instead by “evidence” you mean theory grounded on a priori logic, then it is precisely this foundation that supports my “assertion”.
“Presumably you’re going for the “say it enough times and it comes true” method.”
I think you’re only perceiving that is the case because that is the tactic you are using. Everyone else must be using that same tactic too, right?
You won’t even subject your theory to internal consistency and self-reflective analysis. How can you possibly claim to have any evidence other than pointing to history and claiming to have a monopoly over it?
You said to Paul: “I am looking for evidence, not the Socratic method.” This is proof that you are intellectually unwilling to grasp the basic fact that you can’t run controlled experiments in the economy. You can’t run the US economy 1900-2013 twice, first with state monopoly over money, and the second without state monopoly over money, and then compare and contrast both economies. You can’t do that because not only is there only ever one dataset of history (meaning the evidence you are asking for IS history, so look!), but also any time a theory is “tested” in the market, it fundamentally changes the very dataset being studied, and so you can’t isolate the data you think you want, from the data that you think is undisturbed.
The only way to answer the question of whether or not inflation affects investment, is to do what you are refusing to do, namely, logical analysis.
You are a priori rejecting a priori analysis. You’re contradicting yourself.
————–
Bill Ellis:
“No. Economy B supplies more incentive to invest.”
How are you coming to that conclusion? Why are you saying there is no incentive to consume more when people earn a higher nominal income?
Oh that’s right, you’re saying the incentive is to invest more, because you want to advance the theory that inflation grows economies. After all, it would be pretty inconvenient and uncomfortable if inflation encouraged consumption, wouldn’t it?
17. April 2013 at 12:57
Ben J
“I’m looking for evidence, not the Socratic method.”
In building our mental models of the world we rely on both evidence and logic, wouldn’t you agree?
I think there is plenty of evidence out there but we all interpret it in the light of our current mental models, leading to widely different opinions based on the same evidence.
Geoff has given plenty of evidence but you don’t interpret it the way he does.
I am curious about the logic you use to form your mental model, hence the question about inflation above.
17. April 2013 at 13:17
Bill Ellis
“No. Economy B supplies more incentive to invest.”
OK. By “invest” I assume you mean lend to others, deposit at banks (as opposed to cash hoarding), and purchase securities – is that right? If not could you please clarify?
If you do mean those things, do you mean that economy B would have increased levels of these for everyone equally? Or on average across the economy?
Would each of the three types of investment activities be uniformly higher in economy B than in A – e.g. would lending and depositing increase the same?
Also for clarification, do you believe economy B would have increased levels of these things in real terms, or just in nominal terms?
17. April 2013 at 17:04
Geoff
“you can’t run controlled experiments in the economy.”
Really? Never heard of these things called “natural experiments?”
“When the troll does not get the emotional reaction he was looking for, the fault is obviously not with the troll, but with his target. Yes, it’s a flaw in *my* character to not take your blathering seriously. Did that upset you? Did you want me to acknowledge bad jokes? Is that what you need, to fill some emptiness or something?
”
HELL no! 🙂 I just find you funny
“Speaking of nightmares, it is precisely inflation advocated by you and your ilk that generates booms that inevitably end in recessions, no matter how many times you can delay it with more inflation. Even with NGDP targeting, as people adapt more and more to the new artificial rule the errors from non-market monetary signals will still accumulate.
Again with the statments without eveidence or even good reasoning. And how exactly? (for the second sentence) how will errors accumulate? How can their be misallocations of capital during a boom when capital goods sectors make money? And as usual with brain dead cultish Austrains, you misunderstand scotts’s proposals Scott wants the CB TO TARGET THE FORECAST. that means the CB is passively buying and selling based on what the ngdpf markets are saying. Its the CB that is adpating to what the market is doing not the other way around.
“The 20th century should have been a lesson on the nightmare of central planning. Did you think the problems of communism didn’t apply to money as well? Did you think that central planning problems only exist if the projects only concern cars or computers or food?
”
Unless you are an ancap, I dont see how you can’t avoid SOME distortion. And NGDPLT isn’t central planning. Its central nudging. Know the difference. 😐 |
Anarcho-capitalism ISNT going to happen any time soon. the next best thing to a free market in money in NGDPLT.
“. One or the other must be eliminated in the long run, because there is no way for private property owners to know of all of their mistakes, vis a vis the consumer preferences, when the price signals are constantly interferred with by the central bank.”
<:-| <:-| <:-|
Again with the phony calculation arguments. look! Consumer prefernces are being served if the COMPANY IS MAKING MONEY AND HAS FAT MARGINS!
17. April 2013 at 17:13
Yikes! I really need to spellcheck!
Apologies,
But that doesn’t change the rightness of what Im saying. :-))
17. April 2013 at 17:58
Nice graph from Evan Soltas:
“Austeritythink”
http://esoltas.blogspot.com/2013/04/austeritythink.html
17. April 2013 at 23:04
Guys, this is GOLD: https://twitter.com/DLin71/status/323779028190384131
Explicit Tyler parody?
17. April 2013 at 23:16
Travis, speaking of which, has everyone seen this Evan Soltas piece on carbon futures (similar to Scott’s idea)?
http://www.bloomberg.com/news/2013-04-11/the-carbon-tax-is-overrated.html
Also, is Scott planning on weighing in on R&R at some point?
17. April 2013 at 23:50
Scott,
“I’m sure the administration defenders will insist that the target is not monetary stimulus, but rather “competitive devaluation.” But of course there’s no way Japan can escape from deflation without a large currency depreciation. Even after cutting the yen from 76 to 99, their long term bond yields still suggest lower NGDP growth expectations than almost anywhere else in the world. They need significant further currency depreciation.”
The administration does exactly what one would expect and the effect is that mr Abe is confirmed in his approach.
Both politicians play to their home audiences (the only ones that count). This despite Japan and the US being complementary, rather than competitive economies (speaking as a mercantilist, which is the relevant persuasion among politicians in the main manufacturing countries, Germany, Korea, Japan and (in a different way, China)) There are two groups that should like a lower Yen: traditional Japanese home market suppliers (agriculture, tourism, specialised manufacture) who have seen unexpected competition in a previously highly oligopolistic, rent seeking system (garlic, vegetables, confectionery, even Japanese style garments). The other group is export manufacturers (and prefectural authorities) who want to keep some manufacturing in Japan (for security reasons in the case of the firms, avoiding ghost towns in the case of the prefectures) rather than let all go abroad and, anyway want to reduce some of the Korean cost advantages. As you know, Japanese economists are a rare breed and of very low status (unlike lawyers and engineers)
The stock market response may be the result of monetary policy (i.e. economics) but may also be a traditional pattern of investor response: large stocks go up when the JPY goes down, especially in the not-so-efficient markets in Nihon. Everyone knows this happens all the time, so it becomes self fulfilling. Anyway, Washington, very angry responses from Korea and Europe, plus the stock market, all reinforce the image of mr Abe as a true patriotic leader and relief that the LDP has finally returned to power in its old developmentalist image. Out with the reformers..
18. April 2013 at 19:17
Saturos,
That is an AWESOME idea, thanks for sharing!!!!
18. April 2013 at 22:12
Fascinating observation by Lars Christensen:
“Should PBoC be blamed for the collapse in gold prices?”
http://marketmonetarist.com/2013/04/19/should-pboc-be-blamed-for-the-collapse-in-gold-prices
My question: how much influence on the global economy does China’s central bank have compared to the Federal Reserve and the ECB? I recall that David Beckworth has suggested that everyone pales in comparison to the Fed, which is the “monetary superpower”………
http://macromarketmusings.blogspot.com/2011/05/is-ecb-still-in-feds-orbit-of-influence.html
18. April 2013 at 22:25
Dear Blog Commenters,
Is anyone familiar with China’s economic policies? How long will we have to wait before they allow faster inflation or NGDP growth?
18. April 2013 at 23:57
Oh man Scott. From a recent ft article.
http://www.ft.com/intl/cms/s/0/4fe3455c-a849-11e2-8e5d-00144feabdc0.html#axzz2QtTatXwH
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/4fe3455c-a849-11e2-8e5d-00144feabdc0.html#ixzz2QtU8HTGy
Mr Carney said central banks could provide conditions for growth and financial stability but could not deliver long-term growth. “That needs to come from true fiscal adjustment and fundamental structural reforms,” he said
“Central banks take fiscal policy as given and Treasuries take monetary policy as given – that’s the separation,” he added. “I’m not going to wade in [on fiscal policy] positively or negatively … except in the most extreme circumstances when growth threatens financial stability.”
18. April 2013 at 23:58
Oh boy, I guess delete that previous post. Didn’t realize ft was that serious about their stuff. My apologies.
19. April 2013 at 02:00
We are driven into these contortions because we can’t get nominal rates below zero. The long-run solution is to tie money itself to the market valuation of real assets. The monetary unit should be defined as a constant fraction of the total of tradable equity claims on real assets. If it were fixed in terms of the market portfolio, its value would increase/decrease with growth/decline in economic activity. See
http://www.themoneytrap.com/2013/04/the-new-global-monetary-standard/
19. April 2013 at 09:38
“Lots of people confuse policies aimed at nominal exchange rate depreciation (monetary stimulus) with policies aimed at real exchange rate depreciation (high government saving.)”
Since domestic goods prices are *sticky*, or at least stickier than Fx rates, the two are indistinguishable in the short run.
Nominal Fx depreciation invariably involves reserve accumulation by the central bank – or government saving – at the margin.
20. April 2013 at 01:30
Paul Krugman: “I can’t think of any cases where I took a stronger position than my actual beliefs warranted.”
http://krugman.blogs.nytimes.com/2013/04/19/lack-of-nuance-is-not-the-problem/
Also, Greg Mankiw linked to this IMF conference on “Rethinking Macro”: http://www.imf.org/external/np/seminars/eng/2013/macro2/
20. April 2013 at 02:37
Could someone please explain how Taiwan is able to achieve such consistently low rates of unemployment with such a low rate of inflation year after year after year?
http://blogs.ft.com/beyond-brics/2011/02/10/taiwan-inflation-what-inflation/#axzz2Qzxj7oaK
http://www.dgbas.gov.tw/ct.asp?xItem=12092&ctNode=1558
20. April 2013 at 04:44
R&R are exposed…. putting dogma above data. So what do we get from the right ?
‘B-b-b-b-but Krugman is a big Jerk ! ”
Krugman derangement syndrome… blinding conservatives since 2001.
20. April 2013 at 06:02
Wanna bet when Scott comes back one of his firsts posts will be about how he never thought R&R made their point well… but that their point still stands ?
Some anecdotal cherry picking will be in order.
20. April 2013 at 08:34
‘Paul Krugman: “I can’t think of any cases where I took a stronger position than my actual beliefs warranted.”’
Beautiful! Whoever claimed he did? Now, what about all those strong positions that turned out to be based on fantasies?
Say, his jihad against Thomas White–for which his NYT editors ordered him to apologize.
That Fannie and Freddie couldn’t have had anything to do with the housing bubble because it was illegal for them to deal in subprime. His enthusiasm for Piketty and Saez–clearly a case of looking for your car keys under the streetlight.
And, as no one will be surprised by, ‘The Economics of QWERTY’ in ‘Peddling Prosperity’. Which strong position by Krugman was based on Paul David’s AER article. Which itself was, it turned out, based on old wives’ tales.
Which is a little more embarrassing than making a mostly unimportant error in using Excel. Since, David’s piece–with its 5,500 citations, according to Google Scholar–helped create the dot.com mania, and led to a very unwise anti-trust case from which Microsoft hasn’t recovered.
20. April 2013 at 08:38
‘R&R are exposed…. putting dogma above data. So what do we get from the right ?’
How so? They made an error using Excel, which only slightly changes one of their conclusions.
The Excel error is entirely unnecessary to criticize their causation/correlation position.
20. April 2013 at 09:43
Patrick… you are not keeping up. The spread sheet error was nothing.
It was the data they chose to omit combined with getting causation backwards that is the damming thing. Their paper is junk.
The slimy way they claimed causation in the popular press has seriously damaged their reputations and their weally response to thier worke being sown to be garmabge (sure They admitted in their own paper that it did not did not show causation. But their conclusions in that same paper acted as if it did. )
20. April 2013 at 09:51
Sorry… Spelling corrected… And a bit of coherence added…
“The slimy way they claimed causation in the popular press and their weasely response to thier work being shown to be garbage has seriously damaged their reputations. (sure They admitted in their own paper that it did not did not show causation. But their conclusions in that same paper acted as if it did. )
Dyslexics untie !
One of about a million articles taking R&R apart.
http://www.washingtonpost.com/blogs/wonkblog/wp/2013/04/20/reinhartrogoff-gate-isnt-the-first-time-austerians-have-used-bad-data/
20. April 2013 at 12:11
‘The spread sheet error was nothing.’
As I said, but that was what was needed to get attention for re-criticizing their position. Now everyone is saying, “Nevermind…but….’
‘It was the data they chose to omit combined with getting causation backwards that is the damming thing. Their paper is junk.’
The data ‘they chose to omit’ in 2010, didn’t exist then. In their later paper they did include it. Hard to see what difference it makes either.
So, what you have left is the correlation/causation issue, which was there in the first place (and almost always is). I.e., back to square one.
20. April 2013 at 12:25
‘One of about a million articles taking R&R apart.’
Konczal has a few problems of his own with bad stats. For one he’s still heavily promoting Piketty and Saez long after people like Burkhauser exposed their silliness;
http://www.econtalk.org/archives/_featuring/richard_burkhau/
And, he appears to be a Housing Cause Denialist. Now there’s a case of supposedly reputable academics who ought to be shunned;
http://www.utdallas.edu/~liebowit/mortgage/mortgages.pdf
For a good time, scroll down to Appendix 1 and see some of the double talk from Munnell et al defending those whoppers.
A guy with a net worth of about NEGATIVE $8 million, and a stated income of $30K got a home loan? Oh, probably a doctor recently graduated from med school, that’s all.
20. April 2013 at 20:32
TravisV,
“Nice graph from Evan Soltas:
“Austeritythink”
http://esoltas.blogspot.com/2013/04/austeritythink.html ”
I has a long(ish) comment thread with Evan that he has now deleted. Luckily I’ve kept a copy:
http://pastebin.com/yd2LaFyY
I wonder why he deleted the thread?
Now I don’t agree with most of what Scott writes on this blog but at least he has the decency to leave the comment threads in place, even if they poses serious challenges to his point of view.
21. April 2013 at 00:57
Danish welfare reform: http://www.nytimes.com/2013/04/21/world/europe/danes-rethink-a-welfare-state-ample-to-a-fault.html?partner=rss&emc=rss&smid=tw-nytimes&_r=0
And Bernanke will not be at Jackson Hole this year: http://www.reuters.com/article/2013/04/20/us-usa-fed-bernanke-idUSBRE93J0JX20130420
21. April 2013 at 01:26
And then… there is this: http://ofa.fas.harvard.edu/wordpress/?p=14773
21. April 2013 at 01:28
Oh; and I just saw this piece by Robert Solow on Ben Bernanke: http://www.newrepublic.com/article/112679/how-save-american-finance-itself#
21. April 2013 at 09:42
The heavy artillery comes out to support Krugman;
http://krugman.blogs.nytimes.com/2013/04/21/destructive-creativity-2/?comments#permid=5
‘MMT’s founder Mosler offered 1 Millon dollars to anyone who shows a sovereign coutry issuing its own currency can be forced to default. Are R-R up to the challenge? Are”most economists”?’
21. April 2013 at 12:11
Am I alone in not having heard of the Reinhart & Rogoff until about a week ago, despite following debates about austerity?
21. April 2013 at 19:53
come back scott!
i need my money illusion crack fix
21. April 2013 at 20:29
“NYT Uses News Story to Express Dislike of Danish Welfare State.” by Dean Baker.
“The NYT appears to be following the pattern of journalism practiced by the Washington Post in openly editorializing in its news section. Today the news section features a diatribe against the Danish welfare state that is headlined, “Danes Rethink a Welfare State Ample to a Fault.” There’s not much ambiguity in that one. The piece then proceeds to present a state of statistics that are grossly misleading and excluding other data points that are highly relevant.“…
Read more…
http://www.cepr.net/index.php/blogs/beat-the-press/nyt-uses-news-story-to-express-dislike-of-danish-welfare-state
22. April 2013 at 06:05
Liquidity effect of monetary stimulus:
http://research.stlouisfed.org/fredgraph.png?g=hJ6
Bond prices up, stock prices up.
22. April 2013 at 07:14
Paul insists this all about him;
http://krugman.blogs.nytimes.com/2013/04/22/very-sensitive-people/
‘This is a curious thing for him [Anders Aslund] to say, because it’s an outright lie; as anyone who has been reading me, Martin Wolf, Brad DeLong, Simon Wren-Lewis, etc. knows, our case has always been that fiscal stimulus is justified only when you’re up against the zero lower bound on interest rates. I can’t believe that Aslund doesn’t know this; why, then, would he discredit himself by repeating an easily refuted falsehood?’
The title of the post, ‘Very Sensitive People’, does show a little lack of self-awareness, no?
22. April 2013 at 07:44
And, if we’re going to talk about easily refuted falsehoods, how about this from Krugman and Wells textbook;
“Government can play a useful role both in helping an industry establish a standard and helping it avoid getting trapped in an inferior standard known as the QWERTY problem” (p.536)
Which is defined in the glossary as;
“QWERTY problem: an inferior industry standard that has prevailed possibly because of historical accident” (p. G-12)”
I can’t count the number of stakes driven through the heart of QWERTYcula, but it keeps coming back for more.
22. April 2013 at 08:11
W Peden
I had heard of R&R, and had the book, but gave up reading it as the data sets looked so scrappy I couldn’t take it seriously.
22. April 2013 at 08:12
James in London,
Yes, to be fair, I have a general policy of dismissing bivariate correlation studies, especially those with data sets like the R&R paper.
22. April 2013 at 09:27
Edward:
“you can’t run controlled experiments in the economy.”
Really? Never heard of these things called “natural experiments?
Natural experiments are not controlled experiments.
Again with the statments without eveidence or even good reasoning.
Again, it has a plethora of evidence, and the reasoning is sound. Merely denying them does not constitute an argument that they don’t exist.
And how exactly? (for the second sentence) how will errors accumulate?
By the fact that non-market monetary manipulation falsifies market calculations.
Market forces are not allowed to reveal profit and loss signals in money production itself, when it comes to centralized control over money, and so the harmony between money production and non-money goods production becomes increasingly stressed and strained. The individuals in control of the centralized money system cannot know if they are over or under producing money, because they don’t experience profit and loss signals constrained to property rights and exchanges.
How can their be misallocations of capital during a boom when capital goods sectors make money?
You are begging the question. It is not a sufficient argument against the concept of economic miscalculation due to non-market money management, to point to the fact that money is being made in the general sense. The key is not that money is or is not made in general, but rather which specific projects get the green light and thus which projects get shelved.
Since we live in a division of labor society, the producers of nails, for example, cannot know how many nails to produce, relative to wood, for example, unless their money making is constrained to that which is able to reveal market preferences that can only be manifested if private property owners are in full control of money production itself and are subject to the same profit and loss signals.
And as usual with brain dead cultish Austrains, you misunderstand scotts’s proposals Scott wants the CB TO TARGET THE FORECAST.
As is so often typical for economically illiterate ignoramuses such as yourself, you are completely oblivious to the fact that under Dr. Sumner’s proposal, the central bank is forcing its own NGDP preference. The Fed would only be targeting its own preference.
This doesn’t solve the problem that non-market money production generates. You’re just repeating the same nonsense over and over as if it is a substitute for the market. Only a fool would claim that a centralized money system, where the individuals in charge of it set their own target for NGDP, obliterate the NGDP that a market in money production would have generated, and then sit back and claim that the Fed is some sort of passive, helper of the market.
that means the CB is passively buying and selling based on what the ngdpf markets are saying. Its the CB that is adpating to what the market is doing not the other way around.
No, the CB is not passive, because it is overruling the rate of money production and the rate of spending that the market otherwise would have generated had the money system been completely under the control of private property owners in a context of economic competition.
The central bank is enforcing a money target, and then it is using the market as a means to achieve that end. It isn’t allowing individuals to set their own ends when it comes to money production.
“The 20th century should have been a lesson on the nightmare of central planning. Did you think the problems of communism didn’t apply to money as well? Did you think that central planning problems only exist if the projects only concern cars or computers or food?”
Unless you are an ancap, I dont see how you can’t avoid SOME distortion.
First, that’s inherently false, since money production can be controlled and owned by private property owners in an otherwise state controlled society. Those in the state can tax people in whatever money they choose to produce and earn. Logistics aside, your logic is flawed.
Second, my political preferences are independent from whether or not central banking distorts economic calculation. Even if I supported central banking (which I do, as long as I am in control of it), then my and other’s ability to economically calculate would still be hampered and distorted.
And NGDPLT isn’t central planning. Its central nudging. Know the difference.
NGDPLT is central planning, not nudging. The means of producing money are controlled/owned by the state. Know the reality.
Anarcho-capitalism ISNT going to happen any time soon. the next best thing to a free market in money in NGDPLT.
A productivity rule of inflation is much closer to a free market in money than NGDPLT.
Again with the phony calculation arguments. look! Consumer prefernces are being served if the COMPANY IS MAKING MONEY AND HAS FAT MARGINS!
THE COMPANY CANNOT KNOW IF ITS RESOURCE USAGE IS ECONOMICALLY SUSTAINABLE IN RELATION TO OTHER PROJECTS, IN REAL TERMS, DESPITE THE FACT THAT IT CAN MAKE MONEY IN NOMINAL TERMS.
22. April 2013 at 10:15
Lawrence, I’ve done other posts on that distinction (try searching) and I will do more in the future.
Eliezer, That sounds like a good idea–but I fear many economists would disagree. I hope I’m wrong.
Travis, That’s a good Yglesias post.
Saturos, Not sure I’d want to see that opera.
Good Soltas piece. I haven’t had time to catch up with the R&R debate, I’ll try to. Based on what I’ve heard, I’m skeptical of their claims.
Ritwik, You said:
“Nominal Fx depreciation invariably involves reserve accumulation by the central bank – or government saving – at the margin.”
Helicopter drop?
Bill Ellis. You said;
“Wanna bet when Scott comes back one of his firsts posts will be about how he never thought R&R made their point well… but that their point still stands ?”
You really are an idiot. I’ve been consistently critical of R&R. Use my search box if you don’t believe me.
22. April 2013 at 12:07
Scott, I am sorry to offend.
I was not trying to say that you agreed with them in particular…. just generally. You have been pro austerity combined with NGDPT. Right ?
The R&R dressing down is being used to bolster the case for Fiscal stim. I did not imagine that you would let that pass. Guess I was wrong.
Apologies.
23. April 2013 at 08:08
Bill, No worries. I’ll do a post explaining my views on austerity.