Were market monetarists wrong about Japan?
If there has been any blogger more accurate than me in their claims about Japan in recent years, please send me all his/her relevant posts, so I can can give him/her some praise.
Just to review:
1. I predicted the BOJ would be able to depreciate the yen, if it choose to do so. I’ve been proved right again and again. Paul Krugman had doubts.
2. I predicted monetary stimulus would boost inflation, but that they’d fail to hit their 2% target (excluding taxes). I was right. Krugman’s been all over the map, hostile to fiscal stimulus in the late 1990s, then too pessimistic about the possibilities for monetary policy before Abe, then (perhaps) too optimistic. And now? I can’t tell.
3. I predicted the monetary stimulus would boost growth, but that growth would remain low as the working age population is falling fast. I was proved right. (Krugman agrees it boosted growth.)
4. I predicted a growth surge before the April 1 tax increase and a growth slump afterwards. I was right. BTW, this has nothing to do with “monetary offset.” And Japan is not in a “recession.”
I mention this in response to a recent post by Paul Krugman, who has totally forgotten about the outcome of his earlier 2013 “test” of market monetarism, and started claiming that monetary offset doesn’t hold:
The bad growth news shows, pretty clearly, that the consumption tax hike was a big mistake. It also shows, by the way, how weak the market monetarist argument “” which is that fiscal policy doesn’t matter, because central banks can always achieve the nominal GDP they want “” really is; do you seriously want to contend that Kuroda likes what he sees, that he isn’t trying as hard as he can to boost Japan out of deflation?”
This is Krugman being Krugman—making it seem like his opponents are making idiotic claims.
BTW, Kuroda is engaged in monetary offset (the yen has recently fallen from 109 to 118), just as market monetarists would expect, and no, he is not doing all he can. For instance, he could do MORE, and in all likelihood will do MORE when he discovers that he needs to do MORE to hit his target.
Perhaps some day Krugman can explain to us how events that we predicted accurately somehow disprove the market monetarist view. Does he believe that market monetarists claimed that Japanese consumers would be indifferent between buying a car on March 31 and April 1st, after the tax rise? It sounds like an April Fools Day joke.
The real problem with the sales tax increase is that the money is being used to finance additional government spending. A few years back the Keynesians told us that taxes didn’t matter very much, it was all about spending. Well Japan is ramping up its government spending. Now Keynesians seem to have suddenly discovered that it’s taxes that matter, not spending.
PS. Just three weeks ago Krugman did a post showing that inflation expectations in Japan have risen to almost 2%. I doubt that, but let’s say Krugman’s right. If inflation expectations have risen to close to 2%, then how could the tax increase have had a major impact on the prospects for growth going forward? Is Krugman making an Art Laffer-style supply-side argument that tax increases reduce growth without reducing inflation? Is he now an inflation optimist and a growth pessimist for Japan? Where’s the model? When conservatives used to make that argument he would ridicule it. BTW, I’m a moderate on this question—call me a supply and demand-sider.
HT: Michael Darda
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19. November 2014 at 12:53
If you rule out stupidity, I think that just leaves mendacity.
19. November 2014 at 13:03
Im affraid that this time you are wrong. Calm dawn, nothing last forever, including this strange school of thoughts. But you had your moments. :))
19. November 2014 at 15:39
Given the assumption of economic health is the goal…
Market monetarism proves Keynesianism flawed because market monetarism is more free market than Keynesianism.
Free market thinking is the clearest thinking because the logic is grounded on methodological individualism. It is individuals who actually make up the subject matter of economics.
But because market monetarism is still plagued by aggregations, and still advocates for government to manage macro statistics, market monetarism is in turn proved flawed by more extremist free market theory.
19. November 2014 at 15:40
At this point in history, does Japan just represent a new reality? I still don’t see the very core of the economic slowdown is simply the society is losing people and especially working age people. And there is nothing to make families secure enough to start larger families. With a decrease in the population it is the one variable that major impact on both AD & AS and makes the debt per worker increase. Krugman showed the per capita work GDP is still increasing but the increase is no longer covering the population slowdown.
What I find most interesting from all the various Japanese editorials is that nobody can quite nail what needs to be done here? And the other point is this going to happen to all other developed nations?
19. November 2014 at 15:50
“The real problem with the sales tax increase is that the money is being used to finance additional government spending.”
If a core Japanese problem is deflation, disinflation, or not enough inflation, this is likely to helpful, no? They have a sovereign currency and can print all the money they want.
19. November 2014 at 17:31
Excellent blogging.
Also, Japan is fighting 20 years of monetary asphyxiation, and the cultural and commercial effects thereof.
The Bank of Japan needs to conduct QE and to pay down the national debt…maybe for the next 20 years.
19. November 2014 at 18:52
Scott, you were right about a lot, but….
What about the desirability of the consumption tax increase.
I don’t want to dig up old posts, but I also seem to recall you had periods of doubt when the economy stalled after the tax increase.
If you were really right, you’d be pushing for a 4% level target from a 1990 baseline.
19. November 2014 at 21:45
I’ve a lot of sympathy to the MM view, but don’t think this post settles the debate. It’d be much more interesting if you and Krugman bet on some measurable outcomes within a specific timeframe going forward (e.g. inflation at X%, USDJPY to weaken by X%, etc.).
As usual, there are a lot of moving variables and politics play a big role, so perhaps scenario analysis or conditional forecast is fine. But to avoid justifying everything ex-post, it’s much more interesting to bet ahead on measurable outcomes that you can agree on.
19. November 2014 at 23:33
It’s been less than 2 years since “Abenomics” began, with four quarters of positive growth, and three quarters with negative growth, one of which was caused by inventory changes, and which is up for revision.
And there are so many out there that claim “Abenomics” has failed.
My attitude on this matter is: BE PATIENT, for Christ’s sake.
20. November 2014 at 02:34
Paul Krugman Hopes You’ll Tell Him If He’s Defending a Position Irrationally:
All five things that Paul Krugman has ever gotten wrong
http://www.businessinsider.com.au/big-things-paul-krugman-got-wrong-economy-2014-11
20. November 2014 at 03:45
Prof Sumner,
As a regular reader, I’ve found your commentary on Japan to be excellent. Krugman certainly has not made as clear predictions. And you have said repeatedly that Kuroda and Abe will have to do more to hit their nominal targets.
I’m a little less clear on why they keep having to do more, though. I see that the market moves each time they announce stimulus suggest that it’s helpful but not enough. So I understand why you keep predicting that their stimulus will be somewhat effective but not enough. This is just a descriptive read of predictions markets, though. It doesn’t explain why.
Isn’t Kuroda saying the monetary injections are permanent? Haven’t they said they want a higher ngdp level? I feel like you often claim fewer extraordinary OMOs would be necessary if the fed made those sorts of noises. So why does Japan need so many of them?
20. November 2014 at 04:03
Saturos: Krugman and other prominent Keynesians are totally silent on many issue repeatedly raised by Market Monetarists. We can start with most obvious ones:
1) “Unconventional” monetary policy once ZLB is hit. This has to be one of the worst. Japan hit ZLB over 20 years ago. FED hit it 6 years ago, ECB hit it last year (more on that later).
So in words of prominent Keynesians all central banks around the world are doing “unconventional” monetary policy for years, sometimes decades. How useful is it saying that Central Banks use “unconventional” monetary policy such as QE when it is actually now a standard monetary policy tool that will probably remain with us for years to come?
Additionally some of those central banks – like Bank of Japan – were miraculously able to keep inflation literally at 0% over decades. What do New Keynesians think about this? Is it just sheer luck since monetary policy is impotent? Do they believe in fiscal theory of price level. Or could it be result of decades of practice of “unconventional” monetary policy? They are silent on this important question.
2) What is actually the ZLB? It took me few seconds to look up this article from Krugman: http://krugman.blogs.nytimes.com/2011/12/10/lessons-from-europe/
Look at the date – December 2011. The main message is that Eurozone is savaged by fiscal austerity, in his own words
“Basically, European experience is very consistent with a Keynesian view of the world, and radically inconsistent with various anti-Keynesian notions of expansionary austerity and flexible prices.”
One has to wonder – what else happened in Eurozone in 2011? Was it not a year of ECB interest rate hikes from 1.75% to 2.25%? How come Krugman in December 2011 – months after disastrous tax hike and when it was clear what impact it had on Eurozone – blames everything on fiscal austerity? Which leads me to the next point.
3) What is Keynesian model of fiscal stimulus? Nick Rowe had series of incredible blogposts explaining that it cannot be result of New Keynesian model: http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/07/new-keynesian-neo-fiscalists-for-increasing-austerity.html
The reason (or intuition) why fiscal stimulus works in Old Keynesian framework is completely different from why it is supposed to work in New Keynesian one. Yet this difference is regularly glossed over with some remark about returning to wisdom of our forefathers or some such.
PS: also what Scott is saying here about Japan is very similar to what he was saying before when talking about UK in the past: http://www.themoneyillusion.com/?p=12891
It is a tendency of some prominent Keynesians to look at RGDP growth slowdown, call it a [demand side] recession (not looking at inflation or unemploument) and promote fiscal stimulus. And it is not a new discussion!
The very same thing is happening now for Japan. Unemployment goes down and inflation expectations grow fastest for last decades. And yet Keynesians point to RGDP decline and blame it on fiscal austerity. What is their model?
PPS: All these ideas are not new. Every single point here was repeatedly raised by Market Monetarists without serious response from the “other side”. This is how it has to look like when fighting zombie ideas .
20. November 2014 at 05:54
Collin, Birth rates tend to fall as countries get richer–there is nothing special about Japan, except they got there sooner. East Asia, Germany, etc will follow. It is not due to economic insecurity.
Maynard, Why would you want to combine higher taxes and higher spending?
Dtoh, I meant right about positive questions. We’ll never be able to resolve the normative questions. But yes, I originally thought the tax increase was needed to reduce the deficit, I had no idea they were going to spend the extra money.
Nick, I’ve consistently said it was better than nothing but what they really needed was level targeting, of P or NGDP. That would allow them to do less QE.
JV, Lots of good points. BTW, Japanese NGDP is up so far this year. The trend rate over the previous two decades was negative. So if you believe those people saying Japan is in recession, their NGDP has risen above trend during a recession. I predict that next year people will realize Japan did not have a recession in 2014. And I will remind everyone what I predicted. 🙂
Sorry, everyone, traveling today, not much time for responses.
20. November 2014 at 06:31
Scott,
You said; “I had no idea they were going to spend the extra money.”
Yeah you did. I told that’s what they were going do. Just like I’ve been telling you that you need to adjust your explanation of the transmission mechanism and I’ve been telling you that you need to completely ignore ER whenever you are talking about the money supply. You just need to listen.
20. November 2014 at 07:05
Probably one issue is, if BOJ policy was to depreciate Yen or not to the extend observed.
PK is smart, although he characterise terrible the numbers from Japan, he avoided saying if are indicative of a recession or more. He accepted part of logic here, but to the second part of his argument has a point:
“Can central banks achieve NGDP they want? (and also targeting a short term period?)
The quality of projections do not answer to this question.
Another point is if after successive QE’s the mechanics of QE’s work or do not respond. If assume that BOJ makes the half QE, inflation will fell dramatically?
My sense is not.
So a question for NGDP theory is how to predict or to deal with something like a recession, as it is evolved and how specifically to solve that.
While eg expenditures evolution is considered as a % of GDP to a macroeconomic model the -1.6% of GDP is explained with short term optic.
http://online.wsj.com/articles/japans-keynesian-recession-1416270498
http://www.tradingeconomics.com/charts/japan-productivity.png?s=japanpro&d1=20070101&d2=20141231&forecast=4
So a model could be: NGDP LONG TERM TARGETING + PCE (TREND Y2Y AND MONTLY) + PRODUCTIVITY (TREND Y2Y AND MONTLY) = SHORT TERM NGDP TARGETING.
20. November 2014 at 07:43
What are the NGDP numbers for Japan — that’s what is going to show whether monetary policy was fully effective or not.
And what has been the overall budget deficit — that’s the real measure of fiscal stimulus.
I think you are saying that monetary offset has been partially effective, but the central bank still needs to do more. Krugman is saying they can’t, you are saying they can but didn’t or won’t.
20. November 2014 at 08:06
I just found your blog today, but I have been following the market monetarist argument for years, and I think it is ultimately the most consistent, logical, and credible theory. Ironically I am a fan of Krugman also, but I agree that he (perhaps willfully) misunderstands the market monetarist argument. The U.S. political spectrum is difficult to navigate because the main division seems to be between Democratic Keynesians and Republican Austrians. Of the two, however, the Austrians seem to be much more dangerously wrong when it comes to economic contractions. Their theories would be almost certain to replay the great depression in any sizable downturn.
20. November 2014 at 08:07
Jeremy: I think the situation is more akin to what we had in Eurozone some time back: http://www.themoneyillusion.com/?p=15257
Fears of deficits caused sales tax increases which increased inflation which made central bank to (passively) pursue tighter monetary policy as it would otherwise have which worsened deficit situation which caused …. in a spiral.
I think something like this may be the case in Japan. Sales tax hike had some adverse impact on supply side but it also made an already announced monetary policy passively tighter – as this increase would have one time effect on inflation. So you have both: bad supply and bad demand effects in one package. So even more aggressive monetary policy would be warranted in this situation.
20. November 2014 at 09:20
I think that’s a very good point that isn’t made often enough. If a central bank is targeting the inflation rate, then the proper response to a one-time change in the price level (from, say, a sales tax) is to ignore it.
20. November 2014 at 09:26
Naive question: couldn’t Japan monetize the debt until inflation (or, even better, NGDP) reaches its target? What is the drawback of such a policy? Thanks
20. November 2014 at 09:29
There have been good predictions on Japan, and a lot of bad ones – though that is not say the latter applies to you or MM’s in general.
But, at the same time many are not asking the right questions, and are getting some things very wrong, which leads to a lack of correct prescriptions for Japan – if Japan is in bad need of one.
1) I would ask if Japan’s slow growth is really a problem? Their unemployment rate is low, country is pretty safe etc… Are Japanese worried about job security? Are they not getting health care? I don’t know the answer here, only can see some numbers – I have never even been to Japan. Seems like a worthwhile question.
2) The thing I think people are getting wrong is thinking that Japan’s debt/deficit are a problem (widow makers trade). So the prescriptions seem to be part stimulation, and part tightening. For example, stimulative policy offset by huge sales tax increases. The reason for the latter is of course Japan’s debt/deficit are a problem. Until people can get past the mechanics of the latter, then Japan will plod along, or worse someone really deals with their debt and crushes the economy. But , Japanese hyperinflation is around every corner. I do not think their debt and deficit are problems so long as their population can produce what is needed.
20. November 2014 at 10:48
Japan has already monetized its debt, in the sense that holders of debt can easily sell their debt — the central bank is making the market. Also lots of new spending is being financed by the issuance of new debt (new money.)
It’s an interesting experiment. Can it continue for however many years the Japanese need to get through their demographic circumstances?
20. November 2014 at 11:38
Charlie J,
I believe it can continue, and possibly for many, many years. It can continue until such time you actually have an inflation problem, which Japan does not have right now. If you did have an inflation problem, then that is when Japan can raise taxes and the BoJ can use monetary policy to slow inflation. With essentially a 0% target rate the BOJ can just hold the bonds as new reserves issued via governmnet spending won’t affect the policy rate – technically with a 0% target Japan does not even need to issue bonds in the first place.
This paper “Interest Rates and
Fiscal Sustainability? explains the operations quite well, and anyone thinking of shorting Jpanese bonds should read it:
http://www.cfeps.org/pubs/wp-pdf/WP53-Fullwiler.pdf
20. November 2014 at 11:56
Matt, not sure if that can work in a practical way.
If you have inflation, you have to reduce the money supply, right? You’re saying that higher taxes would replace public bond issuance and higher rates would reduce private bond issuance?
But I suspect that Japan (and the U.S., too) have large segments of the population that depend on public spending and would be devastated if the spending was reduced.
My hunch is that presently for every dollar we create, 90 cents goes to the very wealthy. So if we have inflation, we’d have to somehow re-direct that to the rest of the population. That would be laudable, even now, but I think the very wealthy will bring down the economy rather than go along with that.
20. November 2014 at 12:36
Charlie yes, if you have price inflation you reduce the money supply, and/or can reduce spendable income via higher taxation, which would also reduce bond issuance – assuming you keep spending relatively stable.
Yes, Japan has people dependent on public spending as the US does. But it is a two way street. Both the buyer of the good and the seller suffer if you remove that spending – assuming the buyer cannot obtain money for that service from another source, such as borrowing or other savings which has constraints from a consumer perspective. If we cut Medicare by 100% tomorrow, a lot of seniors would not be able to purchase medical care, and the health providers would see deflation and/or job loss.
Regrading dollar creation are we talking government spending or Fed monetary operations?
20. November 2014 at 13:15
Matt, appreciate you responding. The discussion is a bit over my head, to be honest. I don’t speak the language well enough to communicate, I fear.
To me, inflation would be prices rising faster than wages — which feels like it is happening right now for most people. I also see inflation is the rise of the price of financial assets, which the wealthy then exchange for spendable dollars.
If you want to reduce the money supply, you’d have to do it in a highly targeted way — not sure that is possible.
20. November 2014 at 13:44
What I find hard to do deal the basic contradiction of the 1970 – 1990 Japanese economy of incredible animal instincts and the 1994 – 2014 Japan where the animal instincts are all gone. Reading Paul Krugman’s blog, I get the sense that can try Keynesian economic solution but evidently there will be some kind of crisis. On the opposite, Peter Schiff is going to create a complete Depression in the country. And even Money Marketism has issues, because Japan seems completely unable to create inflation no matter what they do. At the basic point is Japan is unable to enact any policies because with a falling population is impacting with AD (People don’t want to buy more) & AS (companies & workers lose their competitiveness.) too much for the policies to work. (Note the difference of Singapore & Japan is Singapore immigrant policy solves the falling population.) So in 10 – 20 years are all the European nations, except France!, be stuck in this trap.
And it appears to me the developed nations are trapped. Most people are working harder and focusing more on their resume and work that they put off families. (Basically what I mean by economic insecurity in the developed world is they are comfortable settling for marriage until 30 and having kids at 33.) And the people with the most time with part time jobs are not making enough to have families.
20. November 2014 at 13:49
Without going very deeply into this… On your post-script you essentially make your model of 100% monetary offset for fiscal policy as the default position… I think, though, that your degree of certainty may be misplaced. If QE IS an uncertain policy instrument, then it would only be logical to maintain a relatively loose fiscal policy as a back-stop policy stance where, if things turn out better than one expects, one can simply pull back somewhat on QE. If we were talking about a laboratory experiment, it may be more interesting to rely solely on QE, but we’re talking about trying this out in the real world, with real costs should the policy fail.
20. November 2014 at 14:15
Scott,
what do you think of this latest from David Beckworth:
“My calls for level targeting are implicitly calls for permanent expansion of consolidated gov’t balance sheet…”
“So all my talk about the need to permanently expand monetary base are assuming fiscal policy doesn’t offset…”
http://macromarketmusings.blogspot.co.uk/2014/11/another-look-at-neo-fisherism.html
20. November 2014 at 14:20
the above is related to this recent post from David Andolfatto (and his paper with Stephen Williamson):
http://andolfatto.blogspot.co.uk/2014/11/a-dirty-little-secret.html
“The reconciliation I seek is based on what Eric Leeper has labeled a dirty little secret; namely, that “for monetary policy to successfully control inflation, fiscal policy must behave in a particular, circumscribed manner.” (Pg. 14. Leeper goes on to note that both Milton Friedman and James Tobin were explicit about this necessity.)”
20. November 2014 at 14:39
the Andolfatto/Williamson paper:
http://www.artsci.wustl.edu/~swilliam/papers/carnegiepaper3.pdf
20. November 2014 at 14:57
This post makes it sound like you stepped back your certainty in the EMH.
The market was never certain that Kuroda would follow through with his policies, but this post is making it seem like the yen sell off was really obvious from when Kuroda started his policies.
(For the record, many macro hedge funds have been short yen/long Japanese equities on the expectation that Kuroda would follow through and implement his policies as stated.)
20. November 2014 at 15:09
@Charlie Jamieson: “To me, inflation would be prices rising faster than wages”
That’s not a definition that anyone else uses. For almost all economists, “inflation” means a rise in the price level, so that more units of currency are required to purchase “the same” commodity. Some (wacko) Austrians want to define “inflation” as growth in the money supply, even though that doesn’t always result in a change in the price level. But essentially nobody uses the word to refer to a change in prices, only relative to any change in wages. That would be something more like “real purchasing power”.
20. November 2014 at 15:46
“That would be something more like “real purchasing power”
I think you mean real purchasing power of wages…?
20. November 2014 at 16:45
Philipe, Thanks for those links. Good stuff. I have been reading “A History of the Federal Reserve” by Meltzer, there were lots of instances of coordination between Fed and Treasury, and a lot of uncoordinated arguing as well.
20. November 2014 at 17:38
dtoh, You told me that fact after I had already endorsed the tax increase.
Alex, The way you deal with recessions is to adopt NGDPLT. That’s it. Don’t think in terms of QE–it’s not the issue.
Jeremy, NGDP has grown faster under Abe than over the previous two decades. But they need a bit more.
Adam, You’ve been following MM for years and just found out about my blog? That makes me happy–it indicates MM is bigger than I thought.
Maurizio, That would work.
Collin, It makes no sense to claim they are completely incapable of creating inflation when they have done so. And given the recent sharp fall in the yen, more inflation is coming–not a lot more, but some. They are no longer in deflation. But they need to do more to get to 2% inflation.
Julian, That’s exactly why we should not do fiscal stimulus. Monetary stimulus is costless. Do we want to experiment with 100s of billions in taxpayer money on unproven Keynesian ideas?
Philippe, It’s more complicated than that–money demand can change–but I don’t have time today to get into the details.
Jeff, Then that was my error. Early on I thought the BOJ had done something, but not as much as they would ultimately do. My view was:
1. They could depreciate the yen if they wanted to. (Here I differed from Keynesians.)
2. If they did sharply depreciate the yen, they would get inflation.
But I was never certain they would do enough. When it was about 100/$ a year ago I suggested they needed something like 120 or 130 to have confidence that they’d get close to their policy target of 2% inflation.
If my posts ever seem to violate the EMH it’s because I’ve done a poor job explaining my views–my actual views are always 100% EMH consistent. Just to be clear I did not expect the yen to get to its current level. I hoped it would, but didn’t expect it.
20. November 2014 at 17:50
Scott,
” You told me that fact after I had already endorsed the tax increase.”
Maybe. Not sure. I thought I said it right after the issue came up.
Anyway, I’m increasingly of the view that while monetary policy is important, structural issues (especially tax rates on capital) can have a much larger impact on growth. I’m not sure you get that, and also I’m not sure you fully understand the implications that asymmetric returns have on the impact of tax rate changes.
20. November 2014 at 17:51
And… BTW….I do agree with most of everything else you say.
20. November 2014 at 18:04
Scott,
“It’s more complicated than that-money demand can change”
I’m not sure how that relates to the point highlighted by David Andolfatto, that “for monetary policy to successfully control inflation, fiscal policy must behave in a particular, circumscribed manner”, and David Beckworth’s similar argument that “calls for level targeting are implicitly calls for permanent expansion of consolidated gov’t balance sheet…So all my talk about the need to permanently expand monetary base are assuming fiscal policy doesn’t offset…”. In both cases the issue is the interrelated nature of monetary and fiscal policies.
20. November 2014 at 18:08
Adam Platt:
“The U.S. political spectrum is difficult to navigate because the main division seems to be between Democratic Keynesians and Republican Austrians. Of the two, however, the Austrians seem to be much more dangerously wrong when it comes to economic contractions. Their theories would be almost certain to replay the great depression in any sizable downturn.”
Adam, you seem to not understand Austrian theory. Austrian theory does not assert or predict that recessions will not occur if the Fed refrains from additional inflation of the money supply during correction periods. They consider recessions as cures for the actual problem, which is a distorted intertemporal capital structure that was caused by prior undue inflation, which includes amounts of inflation that Keynesians and Monetarists believe was “normal”.
Austrian theory of the business cycle is actually a theory of booms. It explains why booms occur, which by implication is at the same time an explanation of how to avoid them. Austrians believe recessions are not, at root, nothing but periods of insufficient inflation. They regard the market driven deflationary forces the central bank is called upon by market monetarists to reverse, to be a consequence of past inflation. Austrian theory holds that the only true cure for inflation caused malinvestment is to allow cash preferences to rise and spending to fall by more than what Keynesians and Monetarists can tolerate. Strictly speaking, Austrians believe that the only permanent cure is to allow free markets to control the production and distribution of money.
A tight central bank during recessions can approximate a market driven cure, but because central bankers destroy profit and loss signals in the production of money, and because of the strong urge to print money, central banks cannot truly cure recessions even if they try to tighten and try to mimic what the market would have done.
If you do more research on the subjects of which you are comparing and contrasting, instead of making judgments on which are logical and which are not, then you’ll be in a better position to use the words you are using correctly. Emotions are not the basis of logic and reason.
20. November 2014 at 18:25
Scott,
David Beckworth:
“Below the fold is a recent Twitter discussion I had with David Andolfatto and Noah Smith on Neo-Fisherism. The big takeaway from this conversation is that we all view the expected path of the consolidated government balance sheet as being a key determinant for current aggregate demand growth. This understanding has been implicit in Market Monetarist’s calls for level targeting and explicit in our calls for a permanent expansion of the monetary base in a depressed economy. The fact that we have not seen rapid aggregate demand growth is strong evidence that the Fed’s QE programs are not expected to permanently alter the consolidated government balance sheet.
The key difference between us that I see is that Neo-Fisherites question our assumption that fiscal policy would not offset a central bank attempting to permanently expand the monetary base. My reply is that if in a depressed economy monetary policy did go to some kind of level targeting (or a higher inflation target for folks like Paul Krugman) it would be a big regime change that would require political consensus and have Treasury’s backing. Nick Rowe goes further and argues that even in a normal economy fiscal policy typically responds in a supportive role to monetary policy, not the other way around.”
http://macromarketmusings.blogspot.co.uk/2014/11/another-look-at-neo-fisherism.html#more
Beckworth is basically saying that NGDP level targeting advocated by market monetarists implicitly depends on the stance of fiscal policy.
20. November 2014 at 18:33
Scott,
By the way, in a recent post Brad DeLong advocates “aggregate spending targeting”:
http://delong.typepad.com/sdj/2014/11/over-at-equitable-growth-night-thoughts-on-martin-wolfs-shocking-shifts-daily-focus.html#comments
20. November 2014 at 19:30
It appears Krugman got Abe’s ear, and then some:
http://www.bloomberg.com/news/2014-11-21/abe-listening-to-krugman-after-tokyo-limo-ride-on-abenomics-fate.html
20. November 2014 at 22:35
Scott, you’ve said the fiscal multiplier is just a measure of central bank incompetence.
Has Kuroda been incompetent?
Or is there a limit to monetary offset?
It seems like the Japan data puts an upper bound on the power of monetary offset. A sufficiently large tax policy change, despite being long anticipated by the central bank, had dramatic effects.
How much help should we expect NGDP targeting to be, if even Kuroda’s efforts are so easily overcome by fiscal choices?
It’s fine if the answer is “Well, monetary policy can only do so much for the post-2008 economic troubles.” But then we should think carefully about what else Europe needs now, and the United State might need later, if NGDP targeting isn’t going to be enough.
21. November 2014 at 02:57
Philippe: I stopped reading after this quote from Wolf
“over more than six years is pathetic by historical standards–occurred despite the most aggressive monetary policies in history….”
I then skimmed the rest of DeLong’s post, did not find any rebuttal of that sentence so I stop caring about what he says about debt or investment or whatever.
It now seems as if the debate is if it was last 6 years or early 30ies of last century where we lived through the “most aggressive monetary policies in history” – as measured by low interest rates and high reserves /sarcasm
21. November 2014 at 03:33
Professor Sumner,
You said, ‘I’ve consistently said it was better than nothing but what they really needed was level targeting, of P or NGDP. That would allow them to do less QE.’
Does ‘P’ mean only ngdp now? Because my understanding is that Kuroda says he has a 2% inflation level target. Of course he has in no way hit that goal. But, for example, Reuter’s recent article on abandoning the sales tax hike noted how short they were of their 2% level target and quoted Kuroda as saying the recent stimulus was intended solely to defend that target and not to support the tax hike.
They say they have a 2% ILT and do tons of OMOs to defend it. It helps, but it’s not enough. How is there any other way to defend that target exept many more OMOs? A mechanical rule that seems to guarantee many more OMOs could result in fewer in practice, I think, but that’s harder than saying ‘they should do level targeting’. I want more specifics.
21. November 2014 at 03:43
You can also achieve fiscal policy via tax cuts versus increased spending, and let people decide where to spend their extra income.
21. November 2014 at 05:30
“The way you deal with recessions is to adopt NGDPLT. That’s it. Don’t think in terms of QE-it’s not the issue.”
A different way to see things.
http://www.reuters.com/article/2014/11/21/us-japan-economy-abe-idUSKCN0J50RB20141121
He is right or wrong? Yen in 1985 was 1 to 250 to $ and in 1990 125, this change export dynamics in Japan or deteriorate external balances?
No.
Unemployment rate from 1980-2000 was between 2.5-5%
In 2012 Japan make QE’s but the exhange rate $/yen was near 85 yen for 1 $. Today is 117. So is the effectiveness of QE in 2014 of the same dynamic compared this of 2012?
No. My point, as long as the value of yen will depreciated to a great speed, the extended QE will push Japan to deeper recession in long run.
In short run the 4th QE may be positive.
See it from another view, what will be the effectiveness of 2014 QE if yen was appreciated at 85 to 1 $?
(I m not a trader, to clarify that.)
21. November 2014 at 06:38
Dtoh, Of course structural reforms are much more important than monetary policy, I’ve never said otherwise. But 7 percent is simply not going to happen. Zero chance.
Philippe, In the US the fiscal policymakers must adjust to whatever the Fed is targeting. In Zimbabwe it’s different. But I’m not sure what you are asking me. The Fed doesn’t need fiscal policymaker to agree to its actions, they will have to fall in line due to the budget constraint.
Beckworth is saying (I think) that monetary policymakers need to look at fiscal policy when setting their policy instruments. That’s what monetary offset is all about.
Daniel, You are mixing up several unrelated issues. No one here claims that most of the world’s problems are demand side. The problems in Europe, the US and Japan are mostly structural, and there is nothing monetary or fiscal stimulus can do about it. However, monetary policy can 100 percent offset fiscal austerity in terms of its demand side effects, and no recent data from Japan contradicts that. I’ve always claimed the tax increase would temporarily slow growth for supply side reasons, that’s obvious.
Nick, I’m pretty sure the BOJ does not have a price level target. Please let me know if this was wrong, as I’d need to reconsider reverything I said about Japan.
Alex, I have absolutely no idea what you are trying to say. Can you re-write that in simple English?
21. November 2014 at 06:53
Scott,
” But 7 percent is simply not going to happen. Zero chance.”
I agree but only because the complete elimination of taxes on capital is never going to happen. If did, however, you would have 7% growth….maybe more.
21. November 2014 at 07:26
“Daniel, You are mixing up several unrelated issues. No one here claims that most of the world’s problems are demand side. The problems in Europe, the US and Japan are mostly structural, and there is nothing monetary or fiscal stimulus can do about it. However, monetary policy can 100 percent offset fiscal austerity in terms of its demand side effects, and no recent data from Japan contradicts that. I’ve always claimed the tax increase would temporarily slow growth for supply side reasons, that’s obvious.”
Superb nutshell.
21. November 2014 at 07:35
“The problems in Europe, the US and Japan are mostly structural”
We are more than a half decade past the beginning of the magneto trouble so I could concede that much of the present problems are likely structural. However, mostly is a bit of a stretch. I don’t see mostly anywhere in any wage data I have looked at.
“… monetary policy can 100 percent offset fiscal austerity in terms of its demand side effects”
Can offset; and have offset; are two very different things. When the majority of central banks around the world hit their own targets, I will buy that. Until then….
21. November 2014 at 07:47
Scott Sumner wrote:
“Does [Krugman] believe that market monetarists claimed that Japanese consumers would be indifferent between buying a car on March 31 and April 1st, after the tax rise? It sounds like an April Fools Day joke.”
Scott, I’m here just to clarify your own position on this. I think there is definitely a prima facie problem here, and you are being too glib in responding.
No, Krugman isn’t saying that Market Monetarists thought Japanese consumers would ignore sales taxes. But, Krugman is saying someone who is committed to “offset” would have believed that if Japanese consumers pulled forward their spending to 1Q, then the BOJ would have rearranged its own stimulus to counterbalance it.
Let me put it like this: Krugman believes that if the sales tax hadn’t happened, then Aggregate Demand would have been higher in Japan in 2q and 3q, and that real GDP growth would have been better.
Do you agree with that or not? If you agree, then you don’t believe in offset after all.
21. November 2014 at 07:59
@Bob Murphy
There is no doubt in my mind Scott believes in offset. He has been extremely consistent that CB’s can offset fiscal policy 100% of the time. My beef, is that, ok, the can do it… but they don’t. So if they don’t for whatever reason, who cares if they can.
21. November 2014 at 08:01
My father had a wonderful way of putting it… If I wish in one hand and shit in the other, which one is going to fill up first.
21. November 2014 at 08:13
Student, Hitting targets and doing monetary offset are two totally different things. The BOC would not be hitting its inflation targets with or without the tax increase.
Bob, I can’t help it if Krugman pays no attention to anything I say. I have consistently said the spring 2013 sequestor would reduce growth in the US in 2013 Q2, and that the 2014 sales tax increase in Japan would reduce growth in 2014 Q2. I’ve said this a number of times. We know the sequestor did not reduce growth in 2013 overall, and I don’t believe the sales tax increase will signficantly reduce growth in 2014 overall. I say “significantly” because we’ve always acknowledged that sales tax increases (unlike spending cuts) can have modest negative supply side effects.
In any case, the BOJ is targeting inflation, not RGDP. Those are the numbers Krugman should be focusing on, unless he’s suddenly become a supply-sider.
I’m not sure why it’s “glib” to accurately point out what any well informed reader knows I believe.
BTW, Did you notice that Krugman did not say Japan is in “recession?” Nobody can accuse Krugman of being stupid–he knows those claims will look silly in a few months. People are going to get sick of me reminding them of that fact.
Yes, growth would have been higher in Q2, just as it would have been much lower in Q1. We don’t even know Q3 yet, the early Japanese figures are garbage.
21. November 2014 at 08:25
If Japan needs more than 2% inflation then how do you cause that? It has been 20+ years and they still don’t have that inflation rate. The US and Europe have all kinds Fed and government programs to create over 2% inflation and that has not happened either since 2008.
With the Japan yen dropping a lot, one expects higher inflation within the economy. While that makes sense, but will we see this 3% inflation? Oil dropped a lot, although the fall appears to have stopped, and dollar has increased. Will these control Japanese inflation? (Didn’t these realities control Japanese inflation in the 90s?) And finally, will Japan’s animal instincts take over with 3 – 4% inflation? At least after the US bust and enormous short term economic stimulus back in 2009, the economy did change course and was able drilling for more oil and gas. (No I am not saying it was perfect but it followed Keynes theory high level.)
21. November 2014 at 08:36
I don’t want to drone on on this, its not my area, but…
“Hitting targets and doing monetary offset are two totally different things. The BOC would not be hitting its inflation targets with or without the tax increase.”
I must admit, I don’t understand. Isn’t the point of offset to attempt to hit one’s targets? If not, what are they attempting to offset and how do the know whether or not they have offset it?
“We know the sequestor did not reduce growth in 2013 overall”
Who has established a reliable counter-factual on this issue?
21. November 2014 at 08:43
Professor Sumner,
Im sure you are right. Sadly I don’t speak Japanese. Searching the web in English for recent commentary on Japan leaves a lot of things vague. And I’ll repeate that I end up finding most useful stuff on this site or through here.
21. November 2014 at 09:24
Prof Sumner, you have been more right than just about anybody over the last 5+ years, and so to see this kind of thing is really discouraging. But blaming Japan on market monetarism is just a small taste of what you are going to see next.
As soon as there is a hiccup in the US economy, you can be sure that it will be blamed on the Fed being too loose for too long. It will usher in a dark age of monetary economics and market monetarism advocates will have a tough time getting any airing in the policy realm at all.
To make things worse, the hiccup will most likely be some sort of asset crash (probably in leveraged loans). Although there is some “froth” in asset markets now, I believe that bubbles can’t be recognized as such ahead of time (and am sympathetic to your view that there are no such things as bubble anyways). The regulations and stress tests that have been promulgated after the last financial crisis have caused banks to shift away from their traditional market making duties in many markets, since they don’t want to hold more risk. It used to be that banks would step up to smooth out shortfalls in asset demand as part of their market maker role, but not anymore. What this means is that when there is even a moderate amount of pressure by sellers, there will be no additional demand for securities to slow the decline until real money buyers can catch up. But with no banks to step in, and a bit of a lag before new entrants can spot underpriced assets, prices will come crashing down, with all sorts of bad repercussions.
But of course, all the outside world will see is a price that went really high and then came crashing down, and will immediately claim that it was a bubble. And the blame for inflating the bubble will fall on the “loose” monetary policy the Fed has followed for years now. And so more economic research will focus on finance and the “transmission mechanism,” because financial panics are highly visible, not because they have a lot to do with the quality of monetary policy.
I highly recommend that you begin to inoculate market monetarism against this accusation by somehow incorporating the possibility of significant price declines into the theory of a “not too loose” monetary policy. Since unfortunately, trying to convince people that there is no such thing as bubbles by itself is probably not going to be very effective.
21. November 2014 at 09:55
“ECB Moves a Step Closer to BOJ”
http://online.wsj.com/articles/ecb-moves-a-step-closer-to-boj-heard-on-the-street-1416587433
21. November 2014 at 10:37
Great points J.V.
Njjna — I think “those people” will say that no matter what, irrespective of what happens, and unfortunately way too many of “those people” are influential in politics (especially on the GOP side). Fortunately the Fed is starting to understand what they did wrong in 2008, and I think it’s likely they will respond to the next recession with a de facto NDGP target.
Maybe the greatest irony of market monetarism is that most market monetarists are libertarians, but most libertarians seem to be “sound money” advocates — even worse than Keynesians!
Good news Travis! Thanks for sharing. Have to renew my subscription one of these days. Europeans are needleesly suffering excessive recession.
21. November 2014 at 10:41
collin If Japan needs more than 2% inflation then how do you cause that?
Step 1: Announce a higher inflation target (or an NGDP target).
Step 2: Do enough to make it happen — cut rates, buy assets, etc.
I think at this point markets have detected the “unconventional” trap J.V. referred to — knowing the CBs are hesitant to engage in asset purchases, they see a real target slightly below the announced target.
21. November 2014 at 10:52
Instead of buying assets, which creates asset price inflation and helps those who own financial assets, why not buy ‘labor’, which would put money in the hands of those who need it.
Not sure how a central bank would do that. Perhaps by buying student loan debt and forgiving payments,
21. November 2014 at 10:59
Hey Scott,
Your buddy John Carney seems to be raising the alarum From MR link:
http://ftalphaville.ft.com/2014/11/21/2047922/the-liquidity-monster-that-awaits/
Do things look different from the inside? This feels like a step backwards, forward-guidance wise.
21. November 2014 at 13:58
I wish Krugman would have capitalized Market Monetarist.
21. November 2014 at 14:24
Collin, I have trouble following the drift of your comment. What does the 20+ years refer to? For 18+ years they had a contractionary monetary policy explicitly aimed at preventing 2% inflation. Why should it be surprising they didn’t have 2% inflation? In the past two years they’ve gone from deflation to inflation–that’s certainly signficant progress. Not sure it matters if they get exactly 2% inflation, but I do believe they’d be better off with a bit higher inflation.
Student, Let me give you a specific example. Suppose Japan has a 2% inflation target, but their current policy is only generating 1% inflation. Then a sudden tax increase comes along which threatens to drop them to zero inflation. They do enough monetary stimulus to go back to one percent inflation. In that case you have 100% offset but failure to hit the target.
Njnnja, Yes, there are always people who react that way, who confuse a fall in RGDP with a fall in AD, for instance. Many are Keynesians, but you see that sort of silliness on the right as well.
Another silly example is when people call for inflation, and then complain when real wages fall. Some people will never be satisfied.
22. November 2014 at 09:49
Prof. Sumner,
Krugman has a new post that you might enjoy:
http://krugman.blogs.nytimes.com/2014/11/22/the-wisdom-of-peter-schiff/?src=twr
Maybe I’m misinterpreting but Krugman seems to be making the Keynesian argument that advanced economies can only get high inflation if unemployment is low.
Of course market monetarists see it differently. Even if you have high unemployment, it’s quite possible to create high inflation. Consider 1933, for example, when unemployment was very high and FDR created rapid inflation (although RGDP growth was much, much more rapid).
22. November 2014 at 12:08
TravisV,
The key question is the degree to which the SRAS curve is horizontal or vertical. An extreme Keynesian view would be that it is horizontal. A less extreme Keynesian view would be that it is horizontal when AD is far to the left i.e. unemployment is very high relative to the LRAS curve. An extreme New Classical or RBC view would be that the SRAS curve is vertical.
Market Monetarists, along with Old Monetarists and sensible Keynesian/NC/RBC folk, realise that the SRAS curve is downwards sloping, so that prices can increase as a result of a rise in AD even when one is very far from full employment, like the historical case you mention.
22. November 2014 at 12:39
Idea for a blog post:
Intelligent people study New Keynesian economics, find significant flaws with it and are (unfortunately) drawn to the siren song of Austrian economics…..
22. November 2014 at 12:46
I thought these posts by Matt Bruenig were interesting…..
http://mattbruenig.com/2014/11/22/higher-education-the-nordics-and-the-matthew-effect
http://mattbruenig.com/2014/11/22/deeply-serious-procedural-justice-question
22. November 2014 at 13:09
W Peden, I assume you mean upwards sloping.
22. November 2014 at 13:34
Scott, I’m a big fan and consider myself something of a market monetarist (based on what little I know of economics). However, both you and Ben Bernanke (at least in ’03) have claimed that interest rates are not a reliable indicator of monetary policy and I basically agree with this and your criticisms of the IS-LM model.
However, I was wondering, if it’s not too broad a request, you could explain exactly why this is? What’re the economic mechanisms at work which mean low interest rates are only sometimes indicative of easy money, and sometimes not? I’ll be heading to University in just under a year’s time to study Policy, Politics and Economics, so I want to go in with a good understanding of why interest rates aren’t especially reliable.
Also, out of interest, if you had to rank Volcker, Greenspan and Bernanke from best to worst in their position as Fed Chair, how would you rank them?
22. November 2014 at 14:31
Scott that makes sense, well put. But this still leaves the question of what to do if a CB refuses to do what it takes to hit their target. In the US case, should we sit around shitting in our hands wishing the fed would get its act together? If they won’t act, should other tools be used?
22. November 2014 at 16:06
Scott,
A couple of thoughts.
1. I think the focus in Japan on the inflation target is wrong. It comes from a lack of understanding of the transmission mechanism of monetary policy. Inflation comes from an expected (or real) imbalance in expected supply and demand. Without an increase in real demand, you will not get inflation. Especially in Japan with it’s 20 year history of stable or declining prices. IMHO without at least 2 or 3% real growth over the short run, I don’t think there is any way they will get to 2% inflation.
2. Which brings us to the transmission mechanism. Monetary policy IMHO works primarily through an expectations mechanism and an asset price mechanism. In Japan, the expectations channel has been neutered by a lack of consensus on the effectiveness of monetary policy, a history of 20 years of poor monetary policy, and the simultaneous implementation by the same government of tax increases which are clearly at odds with the stated goals of monetary policy. Further, economic players react primarily to expectations of future NGDP…not inflation. An inflation target alone provides insufficient signalling to the market. The 2% inflation target (and the government’s jawboning of businesses to raise wages) should be replaced with a clear NGDP target.
3. With a defective expectations channel (not to mention the increased taxes on capital which have been implemented), this leaves a lot of heavy lifting for asset prices. Which, probably explains the fairly dramatic changes which have been seen in equity prices.
22. November 2014 at 17:58
Philippe,
Yes.
22. November 2014 at 20:11
Unfortunately, Krugman doesn’t concede the market monetarists were right in this video:
Video: Here Are 5 Big Things Paul Krugman Says He Got Wrong Over The Years
http://www.businessinsider.com/big-things-paul-krugman-got-wrong-economy-2014-11
22. November 2014 at 20:21
1. No matter what the value of Japan’s currency is, either $1 / 250 or even $1 / 12 yen, balance of payments and current account don’t change.
2. From 2012 – 2014 yen depreciated from 82 to 117 yen / 1 $ although US make 3 rounds of QE’s. Depreciation from BOJ policies and consumption tax, reduce the value of yen considerably to foreign currencies.Private demand for the first 6 months, but also REER which determines Japan’s currency value, relative to other major currencies, are indicative.
http://www.docdroid.net/file/view/lpcg/b.pdf
https://www.boj.or.jp/en/mopo/gp_2014/gp1411b.pdf
3. Inflation expectations are of relatively less importance, because core inflation seems to be near to 3%.
http://www.tradingeconomics.com/charts/japan-core-inflation-rate.png?s=jpncorecpirate&d1=20100101&d2=20141231
4. PCE, productivity data and unit labor costs can give indications for possible NGDP targeting.
Productivity is influencing the “surpessed” level of wages and labor costs?
Labour costs, manufacturing
http://www.jil.go.jp/kokunai/statistics/databook/2014/05/p178_t5-6.pdf
Wages, manufacturing
http://www.jil.go.jp/kokunai/statistics/databook/2014/05/p174-175_t5-2.pdf
Hourly wages, manufacturing
http://www.jil.go.jp/kokunai/statistics/databook/2014/05/p173_t5-1.pdf
5. The QQE’s have a meaning if are scheduled to increase inflation expectations and AD.
Japan has to consider some fiscal issues, stabilizing expenditures trend or promoting more public & private investments. Differently, QQE’s only service in the long run will be to decreasing the purchasing power of yen.
Q4 2014 will be possibly positive for Japan.
http://www.reuters.com/article/2014/11/20/us-japan-economy-trade-idUSKCN0J402620141120
22. November 2014 at 20:26
dtoh,
Mainly agree, but always dangerous to suppose equity price changes don’t reflect changes in the actual value of equity.
22. November 2014 at 20:31
1. No matter what the value of Japan’s currency is, either $1 / 250 or even $1 / 12 yen, balance of payments and current account don’t change.
2. From 2012 – 2014 yen depreciated from 82 to 117 yen / 1 $ although US make 3 rounds of QE’s. Depreciation from BOJ policies and consumption tax, reduce the value of yen considerably to foreign currencies.Private demand for the first 6 months, but also REER which determines Japan’s currency value, relative to other major currencies, are indicative.
http://www.docdroid.net/file/view/lpcg/b.pdf
https://www.boj.or.jp/en/mopo/gp_2014/gp1411b.pdf
3. Inflation expectations are of relatively less importance, because core inflation seems to be near to 3%.
http://www.tradingeconomics.com/charts/japan-core-inflation-rate.png?s=jpncorecpirate&d1=20100101&d2=20141231
4. PCE, productivity data and unit labor costs can give indications for possible NGDP targeting.
Productivity is influencing the “suppressed” level of wages and labor costs?
Labour costs, manufacturing
http://www.jil.go.jp/kokunai/statistics/databook/2014/05/p178_t5-6.pdf
Wages, manufacturing
http://www.jil.go.jp/kokunai/statistics/databook/2014/05/p174-175_t5-2.pdf
Hourly wages, manufacturing
http://www.jil.go.jp/kokunai/statistics/databook/2014/05/p173_t5-1.pdf
5. The QQE’s have a meaning if are scheduled to increase inflation expectations and AD.
Japan has to consider some fiscal issues, stabilizing expenditures trend or promoting more public & private investments. Differently, QQE’s only service in the long run will be to decreasing the purchasing power of yen.
Q4 2014 will be possibly positive for Japan.
http://www.reuters.com/article/2014/11/20/us-japan-economy-trade-idUSKCN0J402620141120
22. November 2014 at 23:29
Major.Freedom,
I do understand the Austrian theory, and nothing I said would suggest that my understanding of it is any different from yours. Indeed, I understand it exactly as you just explained it. And those are exactly the ideas that prevailed in U.S. policy in 1930-1932, the worst years of the Great Depression, because they utterly failed to account for the effects of deflation and crushing nominal GDP declines (in particular the cascading financial crises). Instead of assuming that I couldn’t possibly understand your ideology, accept that most objective people that have learned and understood it have rejected it due to its obvious failures.
22. November 2014 at 23:35
Scott,
I learned about market monetarism by reading Lars Christensen, probably around 2011, when it was clear that the “recovery” felt a lot more like the 1930’s than the 1980’s. What he was saying meshed very well with what I’d heard from Ken Rogoff, which is that while financial crises are generally followed by very slow recoveries, the one thing that tends to speed up the process is temporarily elevated inflation. It struck me that what he was really saying there was that central bankers need to go beyond merely fighting off deflation, and go to the next step of offsetting the decline in real GDP by monetary means. I’m glad I found this blog, it’s a real gem.
Have you considered posting these entries on Facebook? It would make it easier to share these ideas with others.
23. November 2014 at 08:15
Travis, Good point.
Ashton, The dominant factors affecting interest rates are economic growth and inflation. Monetary policy also has an impact via the liquidity effect, but it’s very small.
I don’t think it’s possible to rank Fed chairs, as they faced such different situations.
Student, The Fed is always acting, even if they miss their targets. And that’s why the other tools don’t work. Monetary offset.
dtoh, I agree they shouldn’t focus on inflation. But Zimbabwe has proved that you can get 2% to 3% inflation w/o real growth. Indeed even a bit more than 3%.
I don’t follow your comment about the expectations mechanism. If that were not working then their policy announcements would not be having a strong impact on asset prices.
Alex, Not sure what you are trying to say. Core inflation represents the tax increase, which will eventually fade from the data.
Ada,. Thanks for the support. I’m afraid I don’t do Facebook, Twitter, etc, as I already have my hands full with two blogs and a very busy life in other areas. I basically have almost no free time.
23. November 2014 at 08:56
Adam Platt:
“I do understand the Austrian theory, and nothing I said would suggest that my understanding of it is any different from yours.”
But I just showed you that your understanding is incorrect. What you said was indicative of an understanding very different, indeed opposite, understanding. You said that Austrian theory put into practice would almost certainly result in another Great Depression. But Austrian theory put into practice would have prevented the highly inflationary 1920s, which was the cause of the crash, and Austro-libertarian theory put into practice would have prevented the 1930s depression because it would have prevented the government intervention that caused the economy to be depressed for almost 15 years.
Austrian theory is misapplied if you only consider what a central bank should or should not do after there has already been a prolonged period of anti-Austrian government intervention. In other words, you can’t just start right after the stock market collapse and then ask OK, what would Austrian theory suggest we do? That is like saying OK, after I drive a car off the cliff, what would Toyota engineers suggest we do about that car’s safety?
You don’t understand the theory “exactly as I have explained it.” The question is not how much or how little a central bank should inflate after it has already distorted the economy through previous inflation and made corrections inevitable. The question is how to prevent these booms that are the cause of the busts.
If a central bank continues to exist, then Austrian theory cannot be applied. Austrian theory applied is incompatible with central banks and government intervention in money, IF the subjective value or goal of “I want to stop depressions” has already been chosen. In other words, if you want to stop depressions, but you don’t want to stop socialist money, then you cannot put Austrian theory in practice.
So contrary to your claim that “Austrian theory applied post 2008 would have led to another Great Depression”, which falsely presumes it can be applied as some new central banking rule of money printing, what the theory actually applied would entail is a prevention of the highly inflationary 1990s and 2000s, which was the ultimate cause of the 2008 crash.
Also contrary to your claim, Austrian ideas were absolutely not put into practice 1930-1932. I suggest reading Rothbard’s “History of Money and Banking in the United States: The Colonial Era to World War II” if you want to learn just how far gone practice was from Austro-libertarian theory.
I don’t mind you making a mistake in your history and in your understanding of Austrian theory. We all make mistakes. But you have a problem of misplaced arrogance. Be arrogant when it is deserved.
23. November 2014 at 09:17
Major.Freedom,
I have heard the exact same argument you just made a hundred times from other “Austrians”, and it is simply not persuasive and has exactly the same flaws I pointed out in the first place. I’ll also go a step further and say that it is based on a very understandable and human misunderstanding of currency, but also a fatally flawed one. There is absolutely nothing arrogant about pointing that out.
23. November 2014 at 09:20
Professor, i m trying to say that supply side policies doesn’t shaping NGDP at 100%, fiscal policy, currencies strategies do have a role.
Even the increase in taxation is mirrored at 100% in core inflation?
Sorry for posting so many times. Won’t happen again.
23. November 2014 at 09:25
money supply i meant
23. November 2014 at 10:15
Scott,
I definitely don’t want you to sacrifice the little free time you have, but keep in mind that Facebook is really a force multiplier. Even if you simply use a Facebook page to re-post the entries that you’re already writing on here, it can be a great tool for those who want to spread your ideas. You’re on to something very important and it’s a travesty that very few people have even read them. Compare that to Peter Schiff who just re-states the same false ideas on enough outlets that he has a huge following, and Paul Krugman who has some semi-right ideas, but gets to mis-characterize everyone else’s because he has a lot more media reach. Just some food for thought.
23. November 2014 at 14:58
Scott,
Zimbabwe did not get 2% inflation. It got much higher inflation. As I said, inflation will depend on the expected balance of supply and demand so it depends on the structural characteristics of the specific economy and the economy’s capacity for growth. Do you think the U.S. economy could have sustained and steady inflation at 2% with no growth?
The interesting question with respect to Japan is why the big difference in the change of prices for equities (and to a lesser extent real estate) versus fixed income assets. EMH tells us that the price changes should reflect differences in expected after tax returns. Normally you would look to expected improvements in corporate profits as the cause for equity prices rising faster than fixed income prices, but IMHO this fails to fully explain the difference in Japan. I think you need to look at is the marginal supply curve for equities which appears to be very steep….a result, I think, of very low or negative expected after tax returns on incremental investments available to corporations. Essentially a very inelastic supply of equities means that small changes in demand will cause large price movements in the equity market.
23. November 2014 at 16:47
Alex, Sorry, I still don’t understand what you are saying. Perhaps another commenter can translate it.
Adam, Also recall that I am trying to reach a niche audience. Most of the people who read Schiff would not be able to understand the technical discussions in this blog. That’s not a criticism of them, I can’t understand physics blogs or French literature blogs.
dtoh, I’ve made a similar argument about stock prices over here, especially given the barriers to entry resulting from IP laws.
24. November 2014 at 03:09
Professor, the new text you posted answers many questions.
My perception: projections about policy events do not necessarily confirm a model or reject that model.
My view for monetary offset does not follow the logic of Kuroda or Paul Krugman’ either.When the REER as i posted is near to 35 year low levels
that means-for my view again- that the current price of yen is much more depreciated from markets evaluation.
What the relationship with QQE -yen and NGDP?
In the long run the effects of monetary policy would “compete” in a way the loss of yen’s value when one target unemployment rate is very low. So it is possible in the long run Japan not to have sustainable growth.
The targets (inflation and uneploymend???) that BOJ has set in the long run (because in short term monetary policy working relatively well) are going to fulfilled without considering fiscal issues, debt evaluation etc? You are saying that.
PS1: I have had the same view with PK about inflation expectations to almost 2% the example of UK before few years.
PS2: My approach is 100% ideological.
25. November 2014 at 04:40
I find your blog so entertaining.
Krugman is the popular kid at school. He’s smart, handsome and gets all the girls. And you’re just the wimpy, pimpled teen that no one but your own little motley circle of fellow whiny exiles pays attention to.
But GOD do you want to be the popular kid, so you whine and moan and groan and stomp your little feet in the mud and say “hey, me too!”
But year after year… the popular kid just keeps rising, and year after year still no one cares about or even notices you. 🙂
I just love it!
25. November 2014 at 06:56
Hank,
Yes, Krugman is popular and I’m the wimp.
No, I would hate to become famous.
You noticed me!
And I’m always happy to get these comments, as they re-assure me that I’m on the right track. Now if the Krugman cultist actually had any arguments against my claims, then I might get worried. But they never do.
26. November 2014 at 07:44
dtoh: I think you need to look at is the marginal supply curve for equities which appears to be very steep
I don’t think the phrase “supply curve for equities” is meaningful. As abstract creatures of government creation, the potential supply of equities is infinite — I could form a thousand new corporations today at my desk if I wanted to, and so could anyone else.
But, one might object, those aren’t “real” equities! Why, very few if any of them would even be profitable! — Oops, we’re back to real values again.
Here’s an illuminative gedanken — suppose the supply of bananas is radically decreased (banana blight). The price of bananas goes way up; people want bananas and there are far fewer of them. Now suppose a government dissolves 90% of the equities in a country. It’s hard to imagine the value of the remaining equities would skyrocket, even ignoring the second-order effects of such an action. The only utility of an equity is its expected returns.
26. November 2014 at 10:23
Question about inflation:
The CW seems to be that if we see inflation rising too fast, then we take action.
But what if future inflation is caused by today’s policies, and if the future we can’t go back and change the policies.
..
I say this because I get the sense that economists and policy makers believe that policy actions are immediate. For example, we hear that Fed tightening in 2008 caused the crisis, even though the Fed was very loose in the years preceding.
So which caused the crisis — the loose policy that created certain conditions, or the tight policy that was a response to those conditions? Let’s say Fed policy had gotten looser in 08 — wouldn’t that have just sparked more bad lending and made the eventual crisis even worse?
28. November 2014 at 05:36
Charlie, Suppose you are targeting inflation (bad idea, BTW). In that case you simply target inflation expectations—keep them on course—but don’t worry about actual inflation. Monetary policy affects expected inflation with no lag.