Stop talking about interest rates

W. Peden directed me to this article:

Andy Haldane said low rates kept some “zombie” firms alive, but the trade off was far more people stayed in work.

A Bank modelling scenario found that years of 0.25% rates probably kept 1.5 million in jobs, he said in a speech.

He would not have sacrificed those jobs for an extra 1% or 2% productivity.

This sort of thing makes me want to pull my hair out.  Start with the fact that he’s reasoning from a price change.  I suppose his defenders would claim he meant “an easy money policy that caused low interest rates also tended to hurt productivity”. But of course that’s not what happened.  In fact, UK interest rates fell to very low levels because of extremely low NGDP growth after 2008, which was in turn caused by tight money.  In a counterfactual where the BoE adopted ECB style policy, NGDP growth would have been even slower, and interest rates would have been ever lower (indeed negative.)

Although BoE policy was far better than ECB policy, it was still too contractionary. But for simplicity let’s assume it was about right—that will make it easier to explain what’s wrong with Haldane’s comments.

Suppose NGDP growth in the UK were appropriate.  And suppose you saw falling interest rates and falling productivity growth in that environment.  How would you interpret those facts?  I’d make the following claims:

1.  The UK was probably hit by an adverse supply shock.  I can think of at least three components; falling North Sea oil output, a big decline in banking jobs in “The City” after the crash of 2008, and a drop in manufacturing jobs because of the collapse in world trade in 2008-09.  Of course the 2008-09 shock is a demand shock at the global level, but at the UK level it shows up as a supply shock.

2.  In oil, banking, and manufacturing, worker productivity is much higher than for the economy as a whole.  So when those sectors suddenly decline, overall productivity will take a hit. This has nothing to do with monetary policy.

3.  If monetary policy is sound (reasonable NGDP growth), then the workers losing jobs in those three sectors will initially re-allocate into less productive sectors, mostly in the service sector.  Again, overall productivity will suffer.

4.  I also suspect that the UK is suffering from some of the same “Great Stagnation” problems that are affecting the US and other developed countries.

If the BoE had adopted a very tight money policy, causing a big drop in NGDP, then the re-allocation of workers from declining sectors to growing sectors would have been less complete.  This might have actually raised productivity slightly, as the least productive workers often are the ones who have the hardest time getting re-employed.

To summarize, neither a low interest rate policy nor monetary policy more generally reduced UK productivity.  Rather productivity fell as part of the natural adjustment process in a free market economy, as workers get re-allocated out of high productivity sectors into lower productivity sectors.  To its credit, the BoE refrained from the sort of tight money policy adopted by the ECB, which would have led to much more unemployment, but which also might have led to slightly higher productivity in the short run.

The BoE is not a fireman that rescued the UK labor market at the cost of lower productivity; rather the ECB is an arsonist who trashed the eurozone labor market.



52 Responses to “Stop talking about interest rates”

  1. Gravatar of Ray Lopez Ray Lopez
    21. March 2017 at 11:01

    Sumner once again confuses correlation with causation: ” In fact, UK interest rates fell to very low levels because of extremely low NGDP growth after 2008, which was in turn caused by tight money.” Tight money does not “cause” anything. It’s a by product of lack of demand. Central banks follow the market, they don’t create the market. If anything the last nearly 30 years has shown in Japan, central banks cannot even raise nominal prices (much less real).

  2. Gravatar of Britonomist Britonomist
    21. March 2017 at 11:15

    Last I checked the BoE has an approach where changes in interest rates explicitly lead changes in monetary aggregates, and not the other way around.

  3. Gravatar of Britonomist Britonomist
    21. March 2017 at 11:15

    A modelling approach that is.

  4. Gravatar of ssumner ssumner
    21. March 2017 at 11:15

    Ray said:

    “If anything the last nearly 30 years has shown in Japan, central banks cannot even raise nominal prices (much less real).”

    Wait, I thought money was neutral? When money is neutral then prices rise in proportion to M.

  5. Gravatar of ssumner ssumner
    21. March 2017 at 11:16

    Britonomist, How does that relate to this post?

  6. Gravatar of George Selgin George Selgin
    21. March 2017 at 12:58

    Most central banks are both firemen and arsonists. It’s more convenient that way.

  7. Gravatar of W. Peden W. Peden
    21. March 2017 at 13:32

    George Selgin,

    I suppose an analogy might be a cook who puts in too much of one ingredient, compensates with another, possibly overdoes it, and has to deal with the occasional fly in the soup.

    Just as most cooks need recipes most of the time, so most central bankers need rules most of the time. (Occasionally someone can be gifted/lucky, like Alan Greenspan in the 1990s.)

  8. Gravatar of ssumner ssumner
    21. March 2017 at 15:10

    W. Peden, I wouldn’t say Greenspan was particularly gifted, as other central banks were also successful during that period.

  9. Gravatar of Major-Freedom Major-Freedom
    21. March 2017 at 15:18

    “In fact, UK interest rates fell to very low levels because of extremely low NGDP growth after 2008, which was in turn caused by tight money.”

    Sumner you just defined tight and loose money in terms of money supply there, not NGDP itself, which goes against everything you have said for many years

  10. Gravatar of Benjamin Cole Benjamin Cole
    21. March 2017 at 15:50

    Excellent blogging.

    I would add that property zoning, and consequent much higher housing costs, also restrict labor market adaptations.

  11. Gravatar of David de los Ángeles Buendía David de los Ángeles Buendía
    21. March 2017 at 16:38

    Dr. Sumners,

    You quoted Andy Haldane as saying:”…low rates kept some ‘zombie’ firms alive…”

    You then wrote in response to that quote:”This sort of thing makes me want to pull my hair out.”

    I agree with the nature of your response but I think I disagree with Andy Haldane for (perhaps) entirely different reasons. Dr. Haldane would appear to believe that low interest rates somehow support marginal firms but there is no evidence for this. If one were to plot the rate of establishments going out of business over time and the Effective Federal Funds Rate, if Dr. Haldane were correct, there ought to be a positive correlation. As interest rates increase, businesses should collapse and vice versa. However the opposite is observed, there is a negative correlation. The Bureau of Labor Statistics recorded the number of business “deaths” per quarter [1] while of course the Federal Reserve Bank (FRB) records the Effective Federal Funds Rate [2]. In the 85 quarters between 1993 and the first quarter of 2014, if a Pearson Product Moment Correlation (PPMC) were run, there would be a negative correlation (R2 = -0.343, p= 0.00131). In other words, as interest rates rose, the “death rate” of businesses declined and vice versa. A prima facie reading would be that raising interest rates prevent business deaths, not cause them. Conversely it is falling interest rates that are more generally associated with increases in business death.

    Now of course this is non-sense. In reality interest rates are strongly influenced by market forces. When demand for credit increases, the price of credit – interest rates – increase an vice versa. When more businesses are dying than being born, demand for credit is low and when new business formation rates exceed the extinction rate, demand for credit is high.



  12. Gravatar of Ray Lopez Ray Lopez
    21. March 2017 at 18:40

    Readers of this blog: note the reasoned reply, complete with footnotes, by David who lives in Buendia street, Mission Viejo, CA (not to be confused with Gil Puyat Avenue in Manila) but who will be ignored by our host, who instead likes to knock down strawmen. David is making the same point as I am.

    Sumner instead tries to shift the conversation to ‘money neutrality’ which is not my point at all. When I say “Central banks follow the market, they don’t create the market” it says nothing about money neutrality. In fact, economist Deirdre N. McCloskey has said the same thing: the Fed has very little power to change the money supply [1].

    [1] Deirdre McCloskey pointed out in 2000 that the Fed’s open market operations constitute a very small part of the world’s capital markets. McCloskey highlighted that, in a capital market of approximately $300 trillion, the Greenspan Fed typically increased or decreased its bond holdings in the neighborhood of $40 billion per year.

  13. Gravatar of Benjamin Cole Benjamin Cole
    21. March 2017 at 20:55

    Claremont the right-wing redoubt of serious thinkers east of Pasadena, is home to Trumpism. Sort of.

    The blubbery article does not talk much about international trade, unfortunately.

    Still nice to see a thoughtful, non-knee-jerky piece about Trumpsters, whether for or against.

  14. Gravatar of W. Peden W. Peden
    22. March 2017 at 02:41


    I suppose that we can go with “lucky” then. The best central banker is probably some generally unknown German or Swiss from the 1970s; as you’ve said before, good central banking is very boring.

  15. Gravatar of flow5 flow5
    22. March 2017 at 04:55

    @ Ray:

    “the Fed has very little power to change the money supply”

    That’s quite insane. Can’t you think for yourself?

  16. Gravatar of flow5 flow5
    22. March 2017 at 05:14

    Interest is the price of loan-funds (the market’s bailiwick). The price of money is the reciprocal of the price-level (the Fed’s bailiwick).

    See: Dr. Daniel L. Thornton, Vice President and Economic Adviser: Research Division, Federal Reserve Bank of St. Louis, Working Paper Series, “Monetary Policy: Why Money Matters and Interest Rates Don’t”

    Keynes’ liquidity preference curve (demand for money), is a false doctrine. I.e., the Fed’s monetary transmission mechanism, interest rate manipulation, presumes that a “liquidity preference” curve exists which represents the supply of money. In this system, interest is the cost which must be paid, if lenders are to forgo the advantages of liquidity… all of which has little or nothing to do with the real world – a world in which interest is paid on checking accounts (elimination of Reg. Q ceilings).

    The Wicksellian Natural Rate of interest and the Fisher hypothesis are both non sequitur. Dr. Richard G. Anderson, world’s leading authority on bank reserves (Anderson should be the next Fed Chairman):

    “The Fed’s staff are all very sensitive to the Fisher equation and its implied spread between nominal market rates and “real” rates. Every economics class has taught about the Fisher equation for decades. But, of course, there are open issues — which maturity of nominal rate to use? And which price deflator? Some folks would use an overnight rate, some a 90 day rate, some a government rate, some a private sector rate, some would use the 10-year bond rate, etc……”

    The money supply (& DFI credit or their loans and investments), can never be managed by any attempt to control the cost of credit (i.e., thru a series of temporary stair stepping or cascading pegging of policy rates, the return on government marketable securities; or thru “spreads”, “floors”, “ceilings”, “corridors”, “brackets”, IOeR, etc.].

    Economists should have learned the falsity of that assumption in the Dec. 1941-Mar. 1951 period. That was what the Treas. – Fed. Res. Accord of Mar. 1951 was all about.

  17. Gravatar of flow5 flow5
    22. March 2017 at 05:46

    William McChesney Martin Jr. version of reserve targeting worked well until the Chairman and the FOMC abandoned their net free, or net borrowed, reserve targeting position approach – in favor of the Federal Funds “bracket racket” beginning in c. 1965 (coinciding with the rise in chronic monetary inflation & in anticipated inflation). I.e., accommodating all requests for IBDDs at its pegged policy rate is tantamount to using a price mechanism to ration Reserve Bank credit.

    Net changes in Reserve Bank credit (since the 1951 Treasury-Reserve Accord) were previously determined by the policy actions of the Federal Reserve. Note: the Continental Illinois bank bailout provides a spectacular example of this practice.

    In other words the Fed allowed the commercial bankers to change their own operating procedure, and usurp their power to regulate properly, our money stock. I.e., the FRB-NY’s “trading desk” accommodated all requests at their pegged rate.

    That is, additional & costless excess reserves were made available to the banking system whenever the bankers and their customers saw an advantage in expanding loans. As long as it is profitable for borrowers to borrow and commercial banks to lend, money creation is not self-regulatory.

    The fact is that monetarism has never been tried. The fact is that Volcker never changed monetary policy. The Fed Funds “bracket racket” was simply widened (not eliminated). And then the cigar smoking icon targeted non-borrowed reserves when at times 10 percent of all reserves were borrowed (the exact approach Paul Meek described in his 1974 booklet “Open Market Operations”).

    Even the President of the Fed’s Maverick bank, Lawrence Roos disputed the claim. E.g., the New York Times spread “fake news”. The overriding and prevailing fake news become widespread enough to re-write economic history. And then in his reconstruction of the monetary base, Dr. Richard Anderson “cooked the Fed’s books”.

    I.e., one dollar of borrowed reserves provides the same legal-economic base for the expansion of money as one dollar of non-borrowed reserves. The fact that advances had to be repaid in 15 days was immaterial. A new advance could be obtained, or the borrowing bank replaced by other borrowing banks.

    That’s also before the discount rate was made a penalty rate in January 2003 (see: Walter Bagehot in his book Lombard Street: “lend freely and at a penalty rate). And the Federal funds “bracket racket” was simply widened, not eliminated. No, Volcker simply let the economy burn itself out.

  18. Gravatar of flow5 flow5
    22. March 2017 at 05:55

    Lets see rates, rate hikes, exchange rate, & if stock averages peak this month, then I will be batting 100 percent.

    The only tool at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be controlled is legal reserves. The first rule of reserves and reserve ratios should be to require that all money creating institutions have the same legal reserve requirements, both as to types of assets eligible for reserves, as well as the level of reserve ratios.

    Monetary policy should limit all reserves to balances in the Federal Reserve banks (IBDDs), and have uniform reserve ratios, for all deposits, in all banks, irrespective of size (something Nobel Laureate Dr. Milton Friedman advocated, December 16, 1959).

    Manmohan Singh, Peter Stella papers on this are disingenuous. See: “Central Bank Reserve Creation in the Era of Negative Money Multipliers” S& S say that from 1981 to 2006 total credit market assets increase by 744%, while inter-bank demand deposits, IBDDs, owned by the member banks, held at their District Reserve banks, fell by $6.5 billion.

    The BOG’s reserve figure fell by 61% from 1/1/1994-1/1/2001. The FRB-STL’s figure remained unchanged during the same period – all because the CBs ceased to be reserve “e-bound” c. 1995

    By mid-1995, legal (fractional) reserves ceased to be binding (simultaneously unravelling the money multiplier as the Fed’s credit control gauge) – as increasing levels of vault cash/larger ATM networks, retail deposit sweep programs (c. 1994), fewer applicable deposit classifications (including allocating “low-reserve tranche” & “reservable liabilities exemption amounts” c. 1982) & lower reserve ratios (legal requirements dropping by 40 percent c. 1990-91), & reserve simplification procedures (c. 2012), combined to remove reserve, & reserve ratio, restrictions.

  19. Gravatar of flow5 flow5
    22. March 2017 at 05:59

    Contrary to Nobel Laureate Dr. Milton Friedman, reserves are not a tax. They are “manna from Heaven”, cost-less and showered on the system. Bank lending/investing, or the exclusive sovereign right given to the “go-for-broke” bankers to create new money, is costless to all the participants (for the bankers and the interest recaptured by the Treasury).

    A brief “run down” will indicate just how costless, indeed how profitable – to the participants, is the creation of new money. If the Fed puts through buy orders in the open market, the Federal Reserve Banks acquire earning assets by creating new inter-bank demand deposits. The U.S. Treasury recaptures about 98% of the net income from these assets. The commercial banks acquire “free” legal reserves, yet the bankers complained that they didn’t earn any interest on their balances in the Federal Reserve Banks.

    On the basis of these newly acquired free reserves (prior to the remuneration of IBDDs), the commercial banks created a multiple volume of credit & money. And, through this money, they acquired a concomitant volume of additional earnings assets.

    How much was this multiple expansion of money, credit, & bank earning assets? Thanks to fractional reserve banking (an essential characteristic of commercial banking) for every dollar of legal reserves pumped into the member banks by the Fed, the banking system acquired about 93 (c. 2006), dollars in earning assets through credit creation.

  20. Gravatar of flow5 flow5
    22. March 2017 at 06:41

    The non-neutrality of money is indisputably and unambiguously proven by using math (and observed constants with respect to some variables constants, e.g., like Planck’s constant in Physics, Archimedes’ constant in geometry, etc.), viz., as Yale Professor Irving Fisher envisaged in his “dance of the dollar”.

    Rates-of-change, roc’s, in volume X’s velocity are always measured with the same length of time as the specific economic lag (as its influence approaches its maximum historical impact (not an arbitrary date range); as demonstrated by the clustering on a scatter plot diagram.

    And Friedman became famous using only half the equation (the means-of-payment money supply), leaving his believers with the labor of Sisyphus.

    Professor Irving Fisher was a pioneer in the distributed lag effect of money flows: “The theory of distributed lags is that any cause produces a supposed effect only after some lag in time, and that this effect is not felt all at once, but is distributed over a number of points in time (as demonstrated by a scatter plot diagram). Irving Fisher initiated this theory and provided an empirical methodology in the 1920’s.” See: Fisher’s ‘Note on a Short-Cut Method for Calculating Distributed Lags’

    In ‘The Theory of Interest’ (1930), Fisher claims that the high correlation coefficient between the actual and computed series shows that ‘…the theory…conforms closely to reality…’ (p. 425).

    Some people prefer the “devil theory” of inflation: “It’s all Peak Oil’s fault”, or ”Peak Debt’s fault” (viz., economic “shocks” or Nassim Nicholas Taleb’s “black swans”). These approaches ignore the fact that the evidence of inflation is represented by “actual” prices in the marketplace. The “administered” prices would not be the “asked” prices, were they not “validated” by M*Vt, i.e., “validated” by the world’s Central Banks.

  21. Gravatar of flow5 flow5
    22. March 2017 at 06:55

    @ Major-Freedom:

    “defined tight and loose money in terms of money supply there, not NGDP itself, which goes against everything you have said for many years”

    Roc’s in M*Vt = roc’s in aggregate monetary purchasing power, AD. Roc’s in M*Vt = roc’s in P*T, not how the Keynesian economists define it as N-gDp in National Income Accounting procedures.

    Monetary policy objectives should be formulated in terms of desired roc’s in monetary flows, AD, relative to roc’s in R-gDp.

    Roc’s in N-gDp (though “raw materials, intermediate goods and labor costs, which comprise the bulk of business spending are not treated in N-gDp”), can serve as a proxy figure for roc’s in all transactions, P*T, in Professor Irving Fisher’s truistic: “equation of exchange”. Roc’s in R-gDp have to be used, of course, as a policy standard.

  22. Gravatar of flow5 flow5
    22. March 2017 at 07:27

    Saver-holders never transfer their savings out of the commercial banking system – unless they hoard currency, or convert to other national currencies. The only way to activate savings (put savings back to work), is thru non-bank conduits. And all savings originate within the commercial banking system. Thus, $10T + is idled, un-used and un-spent (can you say “arrested development”? or stagflation? or secular strangulation?).

    This results in a double-bind for the Fed, esp. in the latter stages of any business expansion (and is exacerbated by remunerating IBDDs). As rates rise, a higher proportion of savings become ensconced and impounded within the confines of the commercial banking system.

    Thus money velocity falls, R-gDp falls, and the Fed is confronted with FOMC schizophrenia (e.g., 3rd qtr. 2008 when inflation accelerates relative to real-output), do I stop? (because inflation is accelerating) or do I go (because the economy is slowing)?

    If it pursues a restrictive monetary policy, interest rates tend to rise in concert. This places a damper on the creation of new money, but, paradoxically drives existing money (voluntary savings) out of circulation into the stagnant savings deposits (destroying savings velocity and creating disequilibria / instability).

    In a twinkling, the economy begins to suffer (as evidenced by a deceleration in R-gDp during the same period), and / or with a monetary offset, subsequently generates higher levels of stagflation (drop in incomes).

    The recent rate hike by the Fed is prima facie evidence – as the FRB-ATL’s GDPNow model’s forecasts have been repeatedly revised downward. I.e., large CDs on the H.8 release increased by 16.9 percent in January.

    There was also a dramatic contraction in credit velocity (actually confined to savings velocity, the transfer of title of non-bank assets within the commercial banking system), following the rate hike on 12/15/16 (which swallowed up R-gDp). Same for the hike on 12/17/15 (which swallowed up R-gDp). There should be another dramatic contraction in DD Vt following Yellen’s latest rate hike (again swallowing up R-gDp).

    The bond market has already foreseen this. Haven’t you noticed the U.S. 10yr yielding 2.403% today?

  23. Gravatar of Ray Lopez Ray Lopez
    22. March 2017 at 08:31

    @flow5 – I keep my posts short, basing my ‘money is neutral’ on sources (FAVAR 2002 Bernanke paper), and my thesis that central banks have difficulty changing the money supply–velocity changes too–on history, see Japan over the last 30 years. By contrast, for your ramblings you cut and paste War & Peace.

  24. Gravatar of flow5 flow5
    22. March 2017 at 12:28

    FAVAR 2002 Bernanke paper? Bernanke doesn’t know money from mud pie. Is that short enough?

  25. Gravatar of Christian List Christian List
    22. March 2017 at 13:53

    It’s like Ray says. Stop ruining every thread with your endless copy- and-paste ramblings ffs. Not one person on earth is reading your overlong posts, evidently not even yourself.

  26. Gravatar of Benjamin Cole Benjamin Cole
    22. March 2017 at 15:41

    House price explosions in nations running trade deficits.

    Yet The Economist magazine cannot mention the words “property zoning” in the entire article.

  27. Gravatar of flow5 flow5
    22. March 2017 at 17:09

    @ Christian List:

    I am the greatest market and economic timer in history. I am the only one that knows the Gospel.

  28. Gravatar of flow5 flow5
    22. March 2017 at 17:15

    There are 7 + billion people on the planet. How come no one else can get a forecast right? Yeah, you’ve learned your catechisms. Ben Bernanke was the sole cause of the Great Recession. And the remuneration of IBDDs will cause a world-wide protracted economic depression. But you have no idea why that could even be a possibility. None of you know a debit from a credit. None of you can forecast. None of you can trade. It’s not me that’s worthless.

  29. Gravatar of flow5 flow5
    22. March 2017 at 17:27

    Like the Treasuries’ conclusion: “Diminishing market depth and a surge in volatility were both on display Oct. 15, when Treasuries experienced the biggest yield fluctuations in a quarter century in the absence of any concrete news. The swings were so unusual that officials from the New York Fed met the next day to TRY AND FIGURE OUT WHAT ACTUALLY HAPPENED”
    From: Spencer (
    Sent: Thu 9/18/14 12:42 PM
    To: FRBoard-publicaffairs@… (frboard-publicaffairs…
    Dr. Yellen:
    Rates-of-change (roc’s) in money flows (our “means-of-payment” money times its transactions rate-of-turnover) approximate roc’s in gDp (proxy for all transactions in Irving Fisher’s “equation of exchange”).
    The roc in M*Vt (proxy for real-output), falls 8 percentage points in 2 weeks. This is set up exactly like the 5/6/2010 flash crash (which I predicted 6 months in advance and within 1 day).
    [2] Or maybe how I denigrated Nassim Nicholas Taleb’s “Black Swan” theory 6 months in advance and within one day:
    Subject: As the economy will shortly change, I wanted to show this to you again – forecast:
    Date: Wed, 24 Mar 2010 17:22:50 -0500
    Dr. Anderson:
    It’s my discovery. Contrary to economic theory and Nobel Laureate Milton Friedman, monetary lags are not “long & variable”. The lags for monetary flows (MVt), i.e., the proxies for (1) real-growth, and for (2) inflation indices, are historically, always, fixed in length.
    Assuming no quick countervailing stimulus:
    jan….. 0.54…. 0.25 top
    feb….. 0.50…. 0.10
    mar…. 0.54…. 0.08
    apr….. 0.46…. 0.09 top
    may…. 0.41…. 0.01 stocks fall
    Should see shortly. Stock market makes a double top in Jan & Apr. Then real-output falls from (9) to (1) from Apr to May. Recent history indicates that this will be a marked, short, one month drop, in rate-of-change for real-output (-8). So stocks follow the economy down.
    flow5 Message #10 – 05/03/10 07:30 PM
    The markets usually turn (pivot) on May 5th (+ or – 1 day).
    I.e., the May 6th “flash crash”, viz., the second-largest intraday point swing (difference between intraday high and intraday low) up to that point, at 1,010.14 points.
    [3] POSTED: Dec 13 2007 06:55 PM |
    The Commerce Department said retail sales in Oct 2007 increased by 1.2% over Oct 2006, & up a huge 6.3% from Nov 2006.
    10/1/2007,,,,,,,-0.47,… -0.22 * temporary bottom
    11/1/2007,,,,,,, 0.14,,,,,,, -0.18
    12/1/2007,,,,,,, 0.44,,,,,,,-0.23
    1/1/2008,,,,,,, 0.59,,,,,,, 0.06
    2/1/2008,,,,,,, 0.45,,,,,,, 0.10
    3/1/2008,,,,,,, 0.06,,,,,,, 0.04
    4/1/2008,,,,,,, 0.04,,,,,,, 0.02
    5/1/2008,,,,,,, 0.09,,,,,,, 0.04
    6/1/2008,,,,,,, 0.20,,,,,,, 0.05
    7/1/2008,,,,,,, 0.32,,,,,,, 0.10
    8/1/2008,,,,,,, 0.15,,,,,,, 0.05
    9/1/2008,,,,,,, 0.00,,,,,,, 0.13
    10/1/2008,,,,,,, -0.20,,,,,,, 0.10 * possible recession
    11/1/2008,,,,,,, -0.10,,,,,,, 0.00 * possible recession
    12/1/2008,,,,,,, 0.10,,,,,,, -0.06 * possible recession
    Trajectory as predicted:
    Bankrupt u Bernanke SHOULD HAVE SEEN THIS COMING. IN DEC. 2007 I COULD.

  30. Gravatar of flow5 flow5
    22. March 2017 at 17:28

    @ Christian List:

    Tell me your most important contribution to this blog.

  31. Gravatar of flow5 flow5
    22. March 2017 at 17:51

    There are elephant tracks demonstrating the disastrous impact of the last 3 rate hikes. But the ignorant and arrogant won’t ever see them.

  32. Gravatar of Britonomist Britonomist
    22. March 2017 at 18:28

    “Britonomist, How does that relate to this post?”

    That’s why they talk about interest rates.

  33. Gravatar of flow5 flow5
    23. March 2017 at 04:00

    “Will Somebody Please Tell Me Why The Federal Reserve Has Embarked On A Tightening Cycle Again?” – Brad DeLong

    Money is not neutral! And Paul Krugman probably still thinks the Fed’s caught in a liquidity trap:

  34. Gravatar of George George
    23. March 2017 at 09:03


    Your very need to boast about your forecasting abilities is quite telling of what worth they are. You are no better forecaster than anyone else here. You only see things after they come. Your posturing is just a manifestation of your mental issues.

    A cherry on top of this, here is something you said back in June 2008. You were insisting that Fed was too easy whereas they were too tight. We now know that. Of course you will eloquently prevaricate yourself out of this in a long copy and paste rambling but I felt a need to point it out.

    Can you tell us when the bond bubble finally bursts? Bonds are still gaining…

    If I went through all your posts and predictions, you would be, as you say, eh, denigrated…

  35. Gravatar of Scott Sumner Scott Sumner
    23. March 2017 at 14:22

    David, Yes, I think we both are on the same track on this one.

    Britonomist, OK, but remember that the fact that one variable leads another tells us nothing about causation.

  36. Gravatar of Benjamin Cole Benjamin Cole
    23. March 2017 at 19:50

    How not to practice macroeconomics (or maybe this is the right way, conventionally).

    Rising rents in major cities? Yes. Soaring rents? Yes.

    But the words “property zoning” are entirely absent.

    You know, there is this new concept called “supply and demand.”

    Evidently, I thought this idea up myself (at least in relation to housing costs in cities where supply is artificially crimped).

    Maybe Ray “El Greco” Lopez can sent a tickler to Tyler Cowen.

    Sad! Bad!

  37. Gravatar of James Alexander James Alexander
    24. March 2017 at 00:56

    If monetary policy can cause the Great Depression, why not the Great Stagnation?

  38. Gravatar of Benjamin Cole Benjamin Cole
    24. March 2017 at 04:36

    What James said.

    BTW, here is the Fed’s Labor Market Conditions Index:

    It shows labor markets getting looser since 2010.

    Yes, looser.

    Yes, the Fed’s Index.

  39. Gravatar of flow5 flow5
    24. March 2017 at 06:00

    @ George:

    Thanks for that confirmation. I am not just the GREATEST market/economic timer in history. There is literally no one even close to being as good (& you have to recognize how I qualify my calls). Naysayers always talk that way. Do you even have anything worthwhile to contribute? You’re obviously stupid.

    Unlike QE “interest rate” operations, with the Fed’s new facility tool, which Zoltan Poszar dubbed the proverbial “Death Star”, (which targets “RPDs”, see: Paul Meek, FRB-NY Assistant V.P. of OMOs and Treasury issues “Open Market Operations”, Federal Reserve Bank of New York, May 1973): it’s un-necessary to hike policy rates (in order to “tighten”).

    Under the remuneration of IBDDs, the bifurcation of FRB-NY “trading desk” trading counter-parties produces unpredictable settlement outcomes between the DFIs vs. NBFIs. This emasculates the Fed’s “open market power” & broke its tenuous “money multiplier”, viz., the power to create digital $s, at gigahertz speed (overnight tenor), ex-nihilio (or the injection / supplying & draining / absorbing of $s based on repo bids at an auctionable “stop out” rate). Remunerating IBDDs gives way to spurious Depression Era charges of “pushing on a string”.

    Paul Krugman probably still thinks the Fed’s caught in a liquidity trap. See NY Times: “The Fed Does Not Control the Money Supply”:

    Poszar’s “Death Star” is the unification in the clout of amalgamated and targeted “expanded” counter-parties (less eligible SOMA securities retained for trading with foreign official and international accounts securities & lending operations).

    Remember, when Yellen raises the remuneration rate: “in a twinkling” ->Atlanta’s GDPnow forecasts are subsequently always revised lower.

    Make absolutely no mistake about the ramifications of remunerating IBDDs (we will in the long run eventually enter a protracted economic depression). Remunerating IBDDs destroys savings-investment money-mechanics. And my forecasting model is a busted projection when hiking rates under the payment of interest on excess reserve balances.

  40. Gravatar of flow5 flow5
    24. March 2017 at 06:09

    @ George:

    Those quotes were in June. Money flows didn’t fall until after July.

  41. Gravatar of flow5 flow5
    24. March 2017 at 07:00

    @ George:

    There are people that have known me for over 5 years. And they will swear that I am literally mentally retarded. One of my psychiatrists made that mistake too. And my roommate in college for 5 years will say that I’m the smartest person they ever met. Neither is right.

    I’m like the exchange value of the $, – a moving target. Whether the public accepts the dictum that high interest rates are prima facie evidence of a restrictive monetary policy depends on whether the time frame of your economy policy is 24 hours rather than 24 months. Have you ever even traded the financial markets?

  42. Gravatar of flow5 flow5
    24. March 2017 at 07:26

    End your bigotry George. Give me one of your forecasts.

  43. Gravatar of flow5 flow5
    24. March 2017 at 09:21

    We knew this already: In 1931 a commission was established on Member Bank Reserve Requirements. The commission completed their recommendations after a 7 year inquiry on Feb. 5, 1938. The study was entitled “Member Bank Reserve Requirements — Analysis of Committee Proposal”

    It’s 2nd proposal: “Requirements against debits to deposits”

    After a 45 year hiatus, this research paper was “declassified” on March 23, 1983. By the time this paper was “declassified”, Nobel Laureate Dr. Milton Friedman had declared RRs to be a “tax” [sic].

    See my calculations:

    These are not ex-post realizations, viz., “Taylor like”.

    They are ex-ante extrapolations; defined as: “is based on ‘forecasts’ rather than actual results”.

    It actually is based on the lag event, so it is a “forward looking” extrapolation defined as: “the action of estimating or concluding something by assuming that existing”…”trends will continue or a current method will remain applicable”.

    I thought that it would differentiate and emphasize my avant-garde, modeling technique. So I concatenate the terms.

    I.e., my modeling beats the Hell out of all other modeling.

  44. Gravatar of flow5 flow5
    24. March 2017 at 09:32

    Nothing’s changed in spite of the Fed’s propaganda:

  45. Gravatar of Ray Lopez Ray Lopez
    24. March 2017 at 19:43

    What’s happened to flow5? Head injury? I remember he was more reasonable weeks ago. Maybe off his meds.

    @Ben Cole- not sure about what I’m supposed to comment on, but I did see a stat today on rents, on Bloomberg, to wit: “Fifty-two of the 100 largest U.S. cities were majority-renter in 2015, according to U.S. Census Bureau data compiled for Bloomberg by real estate brokerage Redfin. Twenty-one of those cities have shifted to renter-domination since 2009. These include such hot housing markets as Denver and San Diego and lukewarm locales, such as Detroit and Baltimore, better known for vacant homes than residential development. ” And about one-third of these ‘formerly landlord now renter’ cities were in the US South. Looks to me that most of these ‘now renter’ cities are in fiscal trouble (or stagnant) which belies your “they’re not building anymore” thesis. It’s more like they’re not building in Detroit anymore, since nobody wants to live there.

  46. Gravatar of ssumner ssumner
    25. March 2017 at 05:51

    James, Monetary policy caused the Great Contraction, it was New Deal labor policies that caused the slow recovery.

    Monetary policy slows the recovery by increasing the unemployment rate. There is no other mechanism. We don’t have high unemployment.

  47. Gravatar of flow5 flow5
    25. March 2017 at 10:05

    As I said on 2/17/17: “stocks peak in March”

    And as I also called:

    “Oil is definitely a short at some point in late January. It will bottom at some point in March”.

    Jan 5, 2017. 05:52 PMLink

    These aren’t well researched estimations. They just track money flows. But Houston, we have a problem – money velocity. MZM velocity fell for 2 qtrs. after the 12/17/15 rate hike. And we’ve now had 2 back-to-back rate hikes on 12/15/16 & 3/15/17.

    FRB-ATL’s GDPNow model’s iterative downward revisions are no happenstance. Under the remuneration of IBDDs, a hike in the inter-bank remuneration rate (outside money), either induces non-bank dis-intermediation, or impedes the S=I brokering channel (increases leakages from the main income stream).

    I.e., the payment of interest on IBDDs, destroys savings velocity by driving existing money (voluntary savings) out of circulation into the stagnant savings deposits (where savings velocity is a subset of both money & credit velocity).

    And it was savings velocity (all non-bank activity clears thru the payment’s system), that spawned the U.S. “Golden Era” in economics. Economic policy is perverse, one where the majority of policies are regressive (backsliding models leading to “arrested development”).

    A hike in the remuneration rate swallows up successive prints in R-gDp. It decreases the demand for durable consumer goods, and then in the longer-term->business’s demand for new capital goods (a reflection of also, Alfred Marshall’s “cash-balances equation”, where “K” becomes the reciprocal of “V, and Larry Summers’: an excess of savings over investment outlets).

    Oil and inflation will be lower in 2018. But I have to question as to whether bonds will follow suit (as there is now a snowballing demand side factor in the supply of and demand for loan-funds (gov’t deficit financing).

  48. Gravatar of ChrisA ChrisA
    25. March 2017 at 22:45

    Measurement of productivity is very hard, especially in services, because of the quality problem. So I don’t think we should be trying to target a certain productivity through monetary policy, so in that respect Haldane is correct, the BOE should ignore productivity in terms of its decision making.

    As an aside to Scott’s view on causes of productivity slowdowns in UK my view is that the slowdown is UK productivity post 2008 is mainly due to skilled immigration from Europe, which is due to overly tight ECB policy. Skilled people are leaving mainland Europe for jobs in the UK. What company invests in productivity improving mechanisms if there is plenty of cheap labour available?

  49. Gravatar of ChrisA ChrisA
    26. March 2017 at 00:37

    Haldane’s speech is here, it is much better than the short BBC report;

    His explanation for the productivity slowdown is slower rates of diffusion of good productivity practices, both nationally and globally. He shows that there are firms that are improving productivity at a good rate, but most firms are not. The puzzle is therefore why don’t the less productive firms copy the more productive ones? This is not a new puzzle though, we have had the IR going now for more than 200 years, and there are still places in the world that have not industrialised. In my native middle east for instance I can still see people living as substance farmers, using oxen to plow, and weaving at home. Why are they not working as IT professionals in a software company? Or at least in a car plant, or in an industrial plant?

    Haldane’s argues this problem is about supply of information, the low productivity firms just don’t know there are better methods out there. This is strange to me, if anything access to information has increased in recent years, and why isn’t someone picking up this low hanging fruit by creating a consultancy to do just this work? And a bigger question, why are the more productive companies just driving out the less productive ones? If they have lower costs of production, surely they can simply sell more at lower prices?

    It makes me wonder if cognitive ability is actually the critical factor here, in both international and recent productivity issues. This is back to the smart fraction theory, and Garett Jones’ recent work. The twist I am proposing though is that the new technologies are incremental more challenging than in the past, so the smart fraction effect is getting worse. To take an example, there are probably only a few thousand people in the world who are clever enough to design new computer chips, so the rate of which a country or company grows depends on how many of these folks it has, not the size of the market. Slower growing firms can’t copy the faster growing firms, because their people just are not smart enough (in aggregrate).

  50. Gravatar of flow5 flow5
    27. March 2017 at 07:05

    The welfare of the CBs is dependent upon the welfare of the NBs (where savings are put back to work). Forcing savings back through the non-banks reduces bad debt, increases bankable opportunities (the loan pie), and increases the commercial bank’s profits.

    From the standpoint of the system, the monetary savings practices of the public are reflected in the velocity of their deposits and not in their volume. Whether the public saves, dis-saves, chooses to hold their savings in the commercial banks or to transfer them to a non-bank will not, per se, alter the total assets or liabilities of the commercial banks, nor alter the forms of these assets and liabilities.

    The commercial banks could continue to lend even if the non-bank public ceased to save altogether.

    See: Domestic “Net Interest Rate Margins”:

    See: International “Net Interest Rate Margins”:

    The earning assets held by the commercial banks, from a system standpoint, are not the result of the growth of time/savings deposits. The sequence is not from time/savings deposits to earning assets, rather the sequence is from earning assets, and new demand deposits, these two come into being simultaneously, and from “old” demand deposits (which the public has saved) to time deposits. Never are the DFIs intermediaries in the savings-investment process.

    And a direct comparison of return on assets with cost of savings is only valid for non-bank conduits. It is not a valid comparison for DFIs. Time/savings deposits are not a source of loan-funds, rather they are the indirect consequence of prior bank credit creation (as all savings originate and are ensconced and impounded within the DFIs). The source of time deposits is almost exclusively demand deposits – and the source of demand deposits can largely be accounted for by the expansion of bank credit. An increase in time/savings accounts depletes DDs by the same amount.

    Unless savings are expeditiously activated through non-bank conduits (the funds never leave the system), a contractionary economic drag and decay is perpetually exerted. This is the direct cause of stagflation and secular strangulation. The remuneration of IBDDs exacerbates this phenomenon. The 1966 S&L credit crunch is the economic prologue and paradigm.

    The upshot will be a prolonged and pronounced lowering of real-rates of interest (a protracted flattening of the yield curve). Thus, bank stocks will get hit every time the Fed raises its remuneration rate.

  51. Gravatar of ssumner ssumner
    27. March 2017 at 12:54

    ChrisA, That may be part of it. I suspect that any change that is so pervasive probably has powerful causes that are not specific to any one country.

  52. Gravatar of Postkey Postkey
    28. March 2017 at 03:31

    “Andy Haldane said low rates kept some “zombie” firms alive, but the trade off was far more people stayed in work.”

    “The Institute for Turnaround, says that many ‘zombie businesses’ will fail if interest rates start to rise. But that pre-supposes these businesses are benefiting from the Bank of England’s ultra-low rate policy.
    According to this chart from the Bank of England, you’ll see that that’s not exactly true…

    Here we have a rather handy comparison of how much the banks charge borrowers for different types of loans. It goes all the way back to 2001.

    The dark blue line shows the base rate. Running in lock-step is the infamous pink line showing the three-month Libor rate.

    Above that we see what you can expect to pay for various types of borrowing. Basically, a bank profits by borrowing from the money markets at Libor (low) and lending to borrowers for mortages and credit cards (high).

    Say back in 2007 when Libor was 5%, the bank made a nice little profit on overdrafts (orange line) that cost the punter about 10%. And for riskier loans like credit cards, the profits were greater.

    Now, what’s interesting is that following the 2008 crisis, even as Libor slumped from 5% to 0.5%… the banks barely changed what they charged customers!

    Today the average overdraft rate is still 10%. Funding costs are down to practically zero, meaning nearly double the profit per loan!”

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