Vindication?

Bob Murphy is too kind, suggesting in a new post that today’s events provide vindication for my views.  It’s true that I’ve been saying for some time now that the Fed should not raise rates, and that this is now becoming the conventional wisdom.  It’s true that I’ve been saying that low interest rates and low inflation are the new normal of the 21st century, and the bond market is coming around to that view as well.  But Bob is really being too kind, singling out a promise that was not at all difficult to fulfill.  He quotes this non-prediction from 9 days ago:

I’m a bit more optimistic [about the Chinese economy], as I think the reform process will continue. They’ll avoid the middle-income trap. But they haven’t yet even reached the trap””a lot more growth is ahead. If you want to know when that day of reckoning will finally arrive in China, don’t come here looking for answers. I will miss the collapse, blinded by the EMH, just as I missed every other dramatic economic shock in my entire lifetime. My predictions are boring, and always the same:

“More of the same ahead”

My predictions are usually right, but they get no respect, and don’t deserve any.

Yes, my claim that my Chinese predictions deserve no respect has clearly been vindicated.  It’s easy to claim that asset prices follow a random walk and can’t be predicted; even a kindergartner could do so.  Let me return the favor with a few comments on the bubble-mongers of the world, both real and phony:

1.  If you are real bubble-monger and predicted the Chinese stock market collapse and shorted the Hong Kong market and got rich, then I offer you my congratulations.

2.  If (like me) you failed to predict the collapse, then I offer you my sympathy.

3.  If you are a phony bubble-monger who predicted the China crash, but did not get rich shorting the Hong Kong market, then I have contempt for you.

I think that pretty much covers all the bases.

PS.  Unfortunately in this day and age I must add on a “just kidding” disclaimer.  (Jokes are no laughing matter.)  I actually have contempt for no one and sympathy for everyone.

PPS.  The views of Ben Bernanke pre-Fed were very different from the actions of the Fed under his leadership.  The views of Janet Yellen pre-Fed were very different from the actions of the Fed under her leadership.  I have no idea what Larry Summer’s actions would be if he were currently chair of the Fed.

PPPS.  A brief comment on TIPS spreads.  There is one factor that leads TIPS spreads to underestimate inflation expectations—conventional bonds have more liquidity, and this reduces their yield relative to TIPS.  There are two factors that lead to the TIPS spreads overestimating inflation expectations, the fact that they are indexed to the CPI and not the Fed’s preferred PCE, and the fact that TIPS bond principal only indexes upward over the life of the bond, not downward (during deflation).

PPPPS.  I have a new Econlog post.

PPPPPS.  My claim about not having contempt for anyone is only true about 1% of the time, when I reach Robin Hanson/Scott Alexander/Scott Aaronson/Tyler Cowen/Bryan Caplan/Razib Khan/Miles Kimball levels of dispassionateness.  The other 99% of the time I’m closer to Donald Trump, and hate almost everyone.  But I was in a good mood when I wrote the first PS.


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38 Responses to “Vindication?”

  1. Gravatar of Rajat Rajat
    24. August 2015 at 17:19

    I’m loving the PS’s. The best stuff is always hiding there.

  2. Gravatar of foosion foosion
    24. August 2015 at 17:38

    PPS: Do you subscribe to the Fed Borg theory, under which members, especially chairpersons, are assimilated and therefore abandon the more sensible views they previously held. If so, any idea what the mechanism might be?

    PPPS: another factor is that TIPS are less risky than nominals, in that they essentially provide insurance against inflation. This should affect pricing.

  3. Gravatar of Ray Lopez Ray Lopez
    24. August 2015 at 18:14

    OMG, excuse me Dr. Sumner, but I think Bob Murphy is poking fun at you, not praising you. I invite the reader to read Murphy’s post and decide from themselves. At first, I thought Murphy was praising you, but a more careful reading seems to be he is being sarcastic.

    PS-“I actually have contempt for no one and sympathy for everyone” – says the man who regularly calls his readers “morons” and “idiots” in the comments section. It’s OK though.

  4. Gravatar of E. Harding E. Harding
    24. August 2015 at 18:19

    Reading that last PPS, it looks like I’ve entered the matrix.

  5. Gravatar of Ray Lopez Ray Lopez
    24. August 2015 at 18:19

    Vindication? as Sumner writes in the title is correct. Note for Murphy to be vindicating Sumner assumes that Murphy is clueless, or living in Australia (which sometimes is the same thing, lol, as they are so removed from the world economy), as you’ll note Murphy posted this “congratulatory” note on the same day the US DJIA stock market opened over 1000 points down and closed over 500 points down, and the Chinese stock market is crashing. “Congratulations” – you just won the lottery…to ride on the Titanic.

  6. Gravatar of E. Harding E. Harding
    24. August 2015 at 18:22

    Also, Razib only sounds dispassionate in his lengthy analytical discourses; he’s rarely dispassionate in his introductions or his conclusions.

  7. Gravatar of ssumner ssumner
    24. August 2015 at 18:23

    Thanks Rajat.

    Foosion, I think there’s some truth to the theory. (As with all similar organizations)

    Ray, You are so far behind on the jokes that it’s no longer fun to even pick on you.

    You said:

    “says the man who regularly calls his readers “morons” and “idiots” in the comments section.”

    I mean that in an affectionate way.

  8. Gravatar of ssumner ssumner
    24. August 2015 at 18:24

    E. Harding, I don’t know, he seemed pretty dispassionate when the NYT “fired” him after one day on the job.

  9. Gravatar of ChacoKevy ChacoKevy
    24. August 2015 at 20:59

    The Onion’s China predictions seem as solid as anyones:
    http://www.theonion.com/video/onion-explains-rise-china-50855

    Sorry about Jordy Nelson, Scott.

  10. Gravatar of Major.Freedom Major.Freedom
    24. August 2015 at 21:15

    A fish monger sells fish.

    A bubble monger does not sell bubbles. Bubbles are not for sale by those predicting a correction. In order to sell something, that something must be property.

    Calling people who predict a correction “bubble mongers” shows lack of insight and understanding. It is clear that the motivation stems from contempt and hostility, even though predicting a correction is not a hostile act. Therefore the term is one of hate.

    I don’t believe this post is a joke. I think the hostile words are intended to be hostile, but framed as all a joke so that the lack of returned contempt will make it seem like your contempt is unchallenged and thus justified. Sounding off and then flipping the metaphorical bird to anyone who rejects it.

    All the above was a joke. So there.

    Does Summer have any explanation at all for why the sudden worldwide increase in cash over assets? NGDP has not tanked. What gives? Is it God, I mean animal spirits? It is Zeus, I mean irrational fears caused by the fish mongers? Is it Odin, I mean a lack of sufficient interest being paid by lenders to borrowers? Is it Vishnu, I mean random chance?

    Could it be, oh I don’t know, the ridiculous amounts of monetary stimulus since 2009, that has been so ridiculous that massively wasteful projects that should have been liquidated according to free market forces, and replaced with better, more coordinated projects, have been propped up, thus turning the capital structure even more weak and wasteful?

    It can’t be, can it? A socialist money that is set according to Summer’s rule of printing unlimited quantities of currency to make some arbitrary statistic rise by some arbitrary amount, simply cannot cause such widespread increases in preferemces for cash over assets.

    One last one point. Why in Odin’s name does a prediction have to be accompanied by a person who placed a money bet, in order for that prediction to be a valid one, otherwise we are supposed to divert our attention away from the ideas, and towards the person’s character? Ad hominem much?

    Why is it so hard to focus on the ideas?

  11. Gravatar of Major.Freedom Major.Freedom
    24. August 2015 at 21:21

    I did not get rich from the ongoing correction, but I did liquidate my entire portfolio in March and put 100% of the proceeds into short term paper.

    While I did not get rich, I did not go poor.

    This has absolutely no bearing whatsoever on the veracity of the expectation. Zippo. Nada.

  12. Gravatar of rtd rtd
    24. August 2015 at 22:12

    PPS is the money.

    I think Larry is happier where he is – able to critique without true consequence. His recent FT piece and ‘debate’ with Bernanke as prime examples.

  13. Gravatar of benjamin cole benjamin cole
    24. August 2015 at 22:19

    Gadzooks— when will central banks get it? The battle now is against deflation and recession, and not against inflation.

    I hope the next FOMC meeting has 378 mentions of recession, 412 mentions of deflation and seven mentions of inflation.

    In other words the reverse of previous FOMC meetings.

  14. Gravatar of rtd rtd
    24. August 2015 at 22:24

    Is PPS due to committee consensus (something Bernanke & Yellen are thought to be advocates of), moral hazard arising from becoming chairman/chairma’am, a type of adverse selection where one merely says what it is others want to hear on an ex-ante power basis, or other political pressures?

  15. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    25. August 2015 at 03:52

    Yanis Varoufakis tried to be the same after office appoitment, he got ousted in less then 6 months … (not that I agree with the guy, just making a point that in office people are different, or …)

  16. Gravatar of collin collin
    25. August 2015 at 04:53

    On course if you are right 80%, that is fairly good percentage. (Maybe stop with the Krugman 2012 Keynesian point of $50B having a major effect of a slowdown.)

    1) Experiencing the dotcom and housing bubbles, it is very easy for a nation to caught up within the bubble especially if your paycheck depends upon it. FT has been predicting a Chinese crash since February and China’s stock market is still higher than 12 months ago.

    2) This is a stock market crash not financial nor society crash. There are ramaifications but China can still move forward. This is not Ukraine, Greece or Valenzuela. (I am a little less confidence about China avoiding the Middle Income Trap as they don’t have name brands to capture Producer Surplus. In reality, Apple is getting nearly all the surplus.)

    3) With the stock market fall, lower rates and possibly lower currency values, Chinese inflation rates and pork prices should be watched carefully.

    4) Are Krugman/Rogoff claiming there is too much Savings/Debt two sides of the same coin? How can monetary policy have strong effects if this true? What are the causees of lack of investment opportunities? Capital and IT investment are extremely productive but has massive diminishing returns, population slowdown?

  17. Gravatar of ssumner ssumner
    25. August 2015 at 05:18

    Chacokevy, Great Onion video, thanks. (And Wisconsin sports fans are used to injuries.)

    rtd, Good point, but isn’t Larry happier with POWER.

    Jose, Good point.

    Collin, I’d say so far I’ve been right much more than 80% of the time. Recall I don’t predict asset prices. Are there any obvious macro forecasts where I’ve been wrong? It’s still not obvious (to me) that China is in recession.

    In fairness, if I’d been blogging in 2006 I would have been very wrong about some big turning points. But I wasn’t blogging. 🙂

  18. Gravatar of rtd rtd
    25. August 2015 at 06:05

    Dr Sumner,
    Just a wildly speculative thought, but your question might be answered by my second comment. Particularly that it is possible the POWER isn’t real. This might explain why (as you noted) pre-Fed & post-Fed Bernanke/Yellen are different. Summers might have more realized POWER now than as chair.

  19. Gravatar of Beefcake the Mighty Beefcake the Mighty
    25. August 2015 at 07:05

    @MF

    I predict Scott will come up with some absurd rationalization, like he did when I pressed him on the causative event for the 08 crash, and he concocted an imaginary “crackdown” in 2006 on immigration into the sand states.

  20. Gravatar of Don Don
    25. August 2015 at 09:06

    We are approaching the end of a Lost Decade (R). The Fed has succeeded in stabilizing the big banks, but not much else. Honest economists will judge it that way. Perhaps they will gather in a phone booth and put out a statement.

    When I look at millennials, I do not see measurable growth. No job, no problem. No job and no kids means no need for a car, cloths, other costly things. Delivered tacos, online gaming, and blogging fill the time. What is the measured GDP contribution of a trillion hours spent on Reddit/Facebook??

  21. Gravatar of Liberal Roman Liberal Roman
    25. August 2015 at 09:24

    “The views of Janet Yellen pre-Fed were very different from the actions of the Fed under her leadership. I have no idea what Larry Summer’s actions would be if he were currently chair of the Fed.”

    Scott, if you ever become Fed chair please promise us you won’t come out with vague, “responsible” statements like “future policy will be ‘data-dependent'”. Resist the FedBorg!!

  22. Gravatar of ssumner ssumner
    25. August 2015 at 10:07

    rtd, Maybe, but I think Larry Summers would have been a pretty powerful leader, or at least he thinks he would have been.

    Beefcake, I never claimed the 2008 crash was caused by a crackdown in immigration, which would be an absurd claim. The fact that you say I did speaks volumes about your honesty. It was caused by tight money, as I’ve said over and over again.

    The crackdown on immigration was one of many factors slowing housing after January 2006 in the sand states, but of course that housing slowdown didn’t stop the US economy from growing over the next few years. It certainly didn’t cause the 2008 crash.

    Liberal Roman, I don’t think we need worry about what I’d do as Fed chair.

  23. Gravatar of Bob Murphy Bob Murphy
    25. August 2015 at 14:27

    Scott,

    Sorry for the confusion, but I said in my post how you generalized. I was referring to your prediction that you miss economic shocks because you’re blinded by the EMH. The US market has tanked like “bubblemongers” and “inflationistas” have been warning, and so I ironically said your prediction that you would miss it, has been vindicated.

    I am sure you got the gist of my post, but the people reading you here aren’t sure.

  24. Gravatar of Bob Murphy Bob Murphy
    25. August 2015 at 14:29

    To put it another way: If the US market were up 10% in the last month and 20% over the past 18 months, you would be pretty smug and laughing at guys like me.

    So it’s weird that when the market drops 10% in a month, you are still running victory laps.

  25. Gravatar of ssumner ssumner
    25. August 2015 at 14:44

    Bob, Yes, I got the joke, don’t a pay attention to the commenters who did not.

    As far as “victory laps” I only make predictions about the economy, not the direction of asset prices. Since I don’t predict asset prices, I can’t be wrong in my predictions. And my economic predictions have been pretty accurate, wouldn’t you say?

  26. Gravatar of ssumner ssumner
    25. August 2015 at 14:45

    BTW, I wouldn’t be smug if the US market was sharply higher, because I never predicted such an outcome.

  27. Gravatar of ssumner ssumner
    25. August 2015 at 14:52

    One other thing. I doubt the inflationistas and bubblemongers predicted the recent price decline. But I have to admit I no longer pay attention to anyone’s stock market predictions, or to soothsayers. Life’s too short.

    When I did pay attention I found that people usually took credit for predictions that were so vague as to be useless “You just wait and see, stocks will eventually have a correction.” That sort of thing.

  28. Gravatar of Cory Hoffman Cory Hoffman
    25. August 2015 at 15:28

    “You just wait and see, stocks will eventually have a correction.”

    It is sort of like my friends who say that the Browns or Buckeyes are going to return a kickoff for a touchdown every time. Eventually they run one back and they say “I called it!”

  29. Gravatar of Ray Lopez Ray Lopez
    25. August 2015 at 15:42

    @sumner: “Bob, Yes, I got the joke, don’t a pay attention to the commenters who did not.” – no, in your writings you did NOT get the joke. Murphy was ambiguous in his criticism, though a careful reading, as I made, showed he was being sarcastic. Your original post indicated you honestly thought Bob Murphy was praising you (which prompted my comment upstream). Bob, who was also as incredulous as I was, now came to the comments section to make clear he was not praising you. If your reaction was clear he would not have felt compelled to come here to comment. Realizing your mistake, you attempt to pretend that you understood his “joke”–but the joke’s on you. Good thing your writings are esoteric and occult (like the witchcraft called macro that you also practice), so nobody can understand what you really mean. Years of honing your ‘craft’ of the dismal science has made you into a crafty purveyor of snake oil disguised as science.

  30. Gravatar of Kevin Erdmann Kevin Erdmann
    25. August 2015 at 16:10

    “The US market has tanked like “bubblemongers” and “inflationistas” have been warning, and so I ironically said your prediction that you would miss it, has been vindicated.”

    Bob? A market that is falling while TIPS spreads collapse toward 1% is what “bubblemongers” and “inflationistas” have been warning about? TIPs are pricing in sharp deflation over the next 6 months as we approach the possible rate hike. This is what you have been predicting?

  31. Gravatar of Major.Freedom Major.Freedom
    25. August 2015 at 18:03

    Kevin Erdman,

    TIPS spreads are not one for one or even positively correlated with inflation expectations.

    How many times does it need to be mentioned that TIPS securities contain an implicit inflation option that raises the present value and reduces yields?

    If inflation expectations go up, it could very well be the case that the TIPS spread falls.

    There is more than one factor.

  32. Gravatar of Major.Freedom Major.Freedom
    25. August 2015 at 18:10

    Sumner wrote:

    “I only make predictions about the economy, not the direction of asset prices”

    That is not true. You made a tacit prediction when you blamed the US stock market double dip crash in 2008-2009 on falling NGDP.

    That is a tacit prediction of asset prices as the dependent variable and NGDP as the independent variable.

    Unless of course you want to argue that what you stated about the causation relationship 2008-2009 between stock prices and NGDP was unique to the past and will never repeat, which your ahistorical model doesn’t even allow anyway.

  33. Gravatar of ssumner ssumner
    26. August 2015 at 05:27

    Ray, You said:

    “Your original post indicated you honestly thought Bob Murphy was praising you”

    Priceless!!

  34. Gravatar of flow5 flow5
    26. August 2015 at 09:35

    It’s all Yellen’s fault. Yellen’s desecrated our trading partner’s currency pegs, decimating FX petro reserves, and dropped Bloomberg’s commodity index to 1999 levels.

    I.e., contrary to Donald Trump, China isn’t bringing the U.S.A down, China is catching Yellen’s cold.

  35. Gravatar of Charlie Charlie
    26. August 2015 at 11:01

    From Bob Murphy’s “Why Is the Stock Market Plunging?” Aug 8, 2011
    https://mises.org/library/why-stock-market-plunging

    “In this environment, someone relying on fixed-income investments (such as private annuities or, heaven forbid, government retirement checks) could be wiped out by massive price inflation. As awful as the US real-estate and stock markets might be in the short and medium run, holding a portion of one’s wealth in assets not denominated in fiat currency may turn out to be a very wise defensive move. (The problem with shooting the moon on precious metals is that for all we know the dollar will crash next year and Obama will make it illegal to buy and sell gold.)”

    Since the article:

    S&P 500 is up 60%
    Gold ETF (GLD) is down 33%
    Silver ETF (SLV) is down 64%

    “In this environment, someone relying on fixed-income investments (such as private annuities or, heaven forbid, government retirement checks) could be wiped out by massive price inflation.”

    Oops!

    “Knowledge of Austrian economics doesn’t render someone an expert investor”

    Bob Murphy, Vindicated?

    “but it certainly gives advance warning of the major trends in the economy.”

    …err, not so much.

  36. Gravatar of Britonomist Britonomist
    26. August 2015 at 15:31

    I believe it’s fairly difficult for a foreign investor to make any money from a Chinese stock bubble no? The Chinese stock market is not very accessible to foreigners as far as I’m aware, plus didn’t they ban short selling?

  37. Gravatar of ssumner ssumner
    27. August 2015 at 06:06

    Charlie, That’s funny.

    Britonomist, Read my entire post before commenting. You short HK.

  38. Gravatar of Britonomist Britonomist
    27. August 2015 at 09:20

    Apologies, not sure how I missed that.

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