Xenophobia plus cognitive illusions = mass ignorance

Don’t be offended by the title of this post.  I’d guess 99.9999999% of people don’t understand currency manipulation or quantum mechanics.  So I’m using the term ‘ignorance’ loosely. And of course since I’m in the tiny minority (of seven people, based on the percentage above), there’s always the small chance that I’m the stupid one.  This post is to organize my thoughts, as I’m going to be interviewed on “currency manipulation” tomorrow.

Let’s start with the term ‘currency manipulation.’  That’s what central banks do.  They manipulate the nominal value of currencies.  Period. End of story.  On the other hand:

1.  Monetary policy has no long run effect on real exchange rates.  Once wages and prices adjust, real exchange rates go back to their equilibrium values.

2.  In the short run, central banks can reduce real exchange rates via easy money, however . . .

a.  There is little evidence that this creates a more “favorable” trade balance, for standard income and substitution effect reasons.

b.  The term “favorable” is misleading, as trade surpluses do not steal jobs from other countries, they do not depress AD in other countries, for standard monetary offset reasons.

3.  Real and nominal exchange rates are so different that they should not even be covered in the same course.  And yet 99% of the discussion of exchange rates doesn’t even make clear which concept is being discussed.

4.  Currencies can be manipulated equally well under fixed and floating exchange rates.  That distinction has no importance for any policy issue that I know of.  The fact that a country “pegs” an exchange rate doesn’t mean it manipulates it, except in the sense that all central banks manipulate the value of their currencies.

5.  Many people focus on long run chronic current account (CA) surpluses, and regard those currencies as “undervalued”.  If that’s your concern then you should focus on the real exchange rate, as the nominal exchange rate doesn’t matter in the long run.  (Here I’m thinking about complaints of chronic CA surpluses in Germany, China, Japan, etc.)

6.  There is no theoretical justification for assuming that long term CA surpluses imply undervalued currencies.  None.  At the cyclical frequency there is a Keynesian argument against CA surpluses, which I regard as beyond lame, bordering on preposterous.  But for long run surpluses in China or Germany, there is no argument at all.  The idea that CA surpluses help a country “develop” is laughable.

7.  Monetary policy can’t generate a “undervalued currency” in the long run.  It’s not clear if any government policy could, but the best argument would be that pro-saving policies could lead to lower real exchange rates and CA surplus.

8. This means that in the long run it makes no difference whether a country has its own currency or not. Germany and the Netherlands can “manipulate” their real exchange rate just as easily as Britain, even though they lack their own currency.  They can do so (if at all) by implementing pro-saving policies.

9.  Any pro-saving policy will do, it makes no difference whether the government buys foreign bonds, domestic bonds, or domestic stocks.  If Germany stops taxing capital gains, that will boost domestic saving.  If Singapore and Norway create sovereign wealth funds for future retirees, that’s pro-saving.  And of the PBoC buys lots of Treasuries bonds at a fixed currency peg, that’s pro-saving.  It’s impossible to say that one country “manipulated” its currency more than the other.  But that doesn’t stop 99.9999999% of people, including most economists, from pointing at China.

So basically nobody knows what currency manipulation is, or how to identify it. Almost no one understands the crucial difference between real and nominal exchange rates. No one seems to understand that all central banks manipulate nominal exchange rates, and in the short run, real exchange rates.  No one understands that currency manipulation has nothing to do with fixed vs. floating rates.  No one understands that (in the long run) eurozone countries can manipulate their currencies (real exchange rate) just as easily as countries with their own central bank.  No one understands that currency manipulation may not even affect the CA in the short run, or that changes in the CA don’t affect AD in other countries.

And yet there is room for hope!  Despite this tale of woe, all is not lost. It turns out that complainers are paper tigers.  Countries are often falsely accused of currency manipulation, but no one ever does anything about it.  Is that because they secretly know I’m right?  Don’t make me laugh.  They are cowards, thank God.  The Great Depression and WWII made countries more passive.  I hope they stay that way.

PS.  The real exchange rate is the nominal rate (value of domestic currency) times the domestic price level, divided by the foreign price level.

PPS.  Do I still believe in the wisdom of crowds, despite 99.9999999% being wrong? You bet I do!  I believe that if the Fed “manipulates” the dollar lower at the next FOMC meeting, foreign stock markets will rise, despite our “beggar thy neighbor” policy. People are stupid but markets are very, very wise.


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39 Responses to “Xenophobia plus cognitive illusions = mass ignorance”

  1. Gravatar of Blue Eyes Blue Eyes
    6. May 2015 at 13:17

    Is that still true when one member of a currency union has pro-saving policies but another cannot, because its economy is already in a depression?

  2. Gravatar of Sam Sam
    6. May 2015 at 13:24

    Off-topic, user @devriesjaap on Hypermind made an astute comment in the forum there: “Implied NGDP for the fourth quarter is around 6% I think. With these kind of subcompetitions we should make trade ticks in front/back months incorporated in the full ngdp year score. I think back month predictions are not reliable at all, but spreading now seems profitable (short the full year) and long the back months. However, you are evaluated seperately in each comptetion.”

    Arbitrageurs, start your engines. We could use some more liquidity over there.

  3. Gravatar of E. Harding E. Harding
    6. May 2015 at 14:06

    Year-over-year, the first quarter of this year was the third-best since the Great Recession.

  4. Gravatar of Zack Zack
    6. May 2015 at 17:24

    Terrific post. It astounds me how often the difference between Nominal and Real exchange rates is misunderstood.

  5. Gravatar of Major.Freedom Major.Freedom
    6. May 2015 at 17:28

    I will address each point one by one:

    “1. Monetary policy has no long run effect on real exchange rates. Once wages and prices adjust, real exchange rates go back to their equilibrium values.”

    Since goods and services produced and sold in the past differ from goods and services sold in the present, there is no such thing as equilibrium values of goods in general of which the concept of “real exchange rates” is meant to refer.

    “2. In the short run, central banks can reduce real exchange rates via easy money, however . . .”

    It would be better if you held that thought a little longer than your comfort level seems to permit. Follow through on all the evidence and implications of this. It is not good to pay lip service to its mere occurrence, only to immediately follow it with a “but”.

    “a. There is little evidence that this creates a more “favorable” trade balance, for standard income and substitution effect reasons.

    b. The term “favorable” is misleading, as trade surpluses do not steal jobs from other countries, they do not depress AD in other countries, for standard monetary offset reasons.

    3. Real and nominal exchange rates are so different that they should not even be covered in the same course. And yet 99% of the discussion of exchange rates doesn’t even make clear which concept is being discussed.”

    You should consider what effect artificially low interest rates have on the temporal trajectory of investment, how capital structure can be made sustainable versus unsustainable, and the propensity for future bouts of sudden increases in cash preferences and switches to different saving to consuming ratios.

    I hope you don’t brainwash your interviewer with claims that artificially low interest rates prior to 2007 had nothing to do with the sudden increases in cash holding post 2007.

    “4. Currencies can be manipulated equally well under fixed and floating exchange rates. That distinction has no importance for any policy issue that I know of. The fact that a country “pegs” an exchange rate doesn’t mean it manipulates it, except in the sense that all central banks manipulate the value of their currencies.”

    Agreed. But I think you intended to say “…doesn’t mean it doesn’t manipulate it…”

    “5. Many people focus on long run chronic current account (CA) surpluses, and regard those currencies as “undervalued”. If that’s your concern then you should focus on the real exchange rate, as the nominal exchange rate doesn’t matter in the long run. (Here I’m thinking about complaints of chronic CA surpluses in Germany, China, Japan, etc.)”

    How about debt?

    “6. There is no theoretical justification for assuming that long term CA surpluses imply undervalued currencies. None. At the cyclical frequency there is a Keynesian argument against CA surpluses, which I regard as beyond lame, bordering on preposterous. But for long run surpluses in China or Germany, there is no argument at all. The idea that CA surpluses help a country “develop” is laughable.”

    Agreed, but it is important to note that growing CA surpluses or deficits MAY be associated with international imbalances. That is, not all movements are innocuous.

    “7. Monetary policy can’t generate a “undervalued currency” in the long run. It’s not clear if any government policy could, but the best argument would be that pro-saving policies could lead to lower real exchange rates and CA surplus.”

    Don’t forget long run money illusion.

    “8. This means that in the long run it makes no difference whether a country has its own currency or not. Germany and the Netherlands can “manipulate” their real exchange rate just as easily as Britain, even though they lack their own currency. They can do so (if at all) by implementing pro-saving policies.”

    That is overextending the logic. It does matter.

    “9. Any pro-saving policy will do, it makes no difference whether the government buys foreign bonds, domestic bonds, or domestic stocks. If Germany stops taxing capital gains, that will boost domestic saving. If Singapore and Norway create sovereign wealth funds for future retirees, that’s pro-saving. And of the PBoC buys lots of Treasuries bonds at a fixed currency peg, that’s pro-saving. It’s impossible to say that one country “manipulated” its currency more than the other. But that doesn’t stop 99.9999999% of people, including most economists, from pointing at China.”

    Much like how you point at cash hoarders, really. That is why you always put “criminals” in the same sentence.

    “So basically nobody knows what currency manipulation is, or how to identify it.”

    Manipulation can make sense if we understand the proper standard.

    We can all understand what gambling manipulation means, and what insurance manipulation means, to name a few.

    Why is it so difficult with currency? It is because the currency is a socialist one. It is manipulation from a standard of private property rights and protection.

    Same thing goes for the courts, law making, and enforcement. These are socialist as well. It has gotten to the point where manipulation is accepted, expected, and in some cases flaunted. Whole new schools of thought have arisen to accommodate this. We call it “political science.” It is intellectual manipulation to backstop the keep the manipulative power relations intact.

    “Almost no one understands the crucial difference between real and nominal exchange rates.”

    That is because economists by and large have a shallow vocabulary. They say “real interest rates” that are neither real, nor even rates.

    Common people use the common definitions of words. It isn’t that people are stupid, it is that economists speak a badly formed language.

    “No one seems to understand that all central banks manipulate nominal exchange rates, and in the short run, real exchange rates. No one understands that currency manipulation has nothing to do with fixed vs. floating rates. No one understands that (in the long run) eurozone countries can manipulate their currencies (real exchange rate) just as easily as countries with their own central bank. No one understands that currency manipulation may not even affect the CA in the short run, or that changes in the CA don’t affect AD in other countries.”

    The problem is the communication. You say “nominal” distinguished from “real”, and yet both concepts utilize numerical percentages.

    “And yet there is room for hope! Despite this tale of woe, all is not lost. It turns out that complainers are paper tigers. Countries are often falsely accused of currency manipulation, but no one ever does anything about it. Is that because they secretly know I’m right? Don’t make me laugh. They are cowards, thank God. The Great Depression and WWII made countries more passive. I hope they stay that way.”

    Except for countries controlling money. Then the guts and glory that you always encourage out of the murderous gangs is the important thing.

    The government’s counterfeiters should have been less passive…

    “PS. The real exchange rate is the nominal rate (value of domestic currency) times the domestic price level, divided by the foreign price level.”

    Supersymmetry between forces and matter, with only closed strings; no tachyon; massless fermions are non-chiral.

    “PPS. Do I still believe in the wisdom of crowds, despite 99.9999999% being wrong? You bet I do! I believe that if the Fed “manipulates” the dollar lower at the next FOMC meeting, foreign stock markets will rise, despite our “beggar thy neighbor” policy. People are stupid but markets are very, very wise.”

    Define markets.

  6. Gravatar of ssumner ssumner
    6. May 2015 at 18:52

    Blue Eyes, Is what still true?

    Sam, Interesting.

    Thanks Zack.

  7. Gravatar of Ray Lopez Ray Lopez
    6. May 2015 at 20:09

    @Sumner – it would profit you to answer MF with his detailed analysis. My only thought is that you are right about the long term, the short term equals the long term, and right about not needing your own money to influence the real exchange rate. Further, it’s well known that governments smile upon hedge funds that ply the ‘carry trade’ that takes advantage of savings and interest rate discrepancies across countries, which reinforces the point that governments are cowards (and follow the market, Soros proved that vs the BofE). But carry your analysis one step further, and consider that if what you say is true, a return to the gold standard, even with central bank sterilization of gold outflows, would not be such a bad thing.

  8. Gravatar of Jason Jason
    7. May 2015 at 01:13

    @Ray, how does your “follow the markets” hypothesis hold up to the case of Denmark at the beginning of this year?

  9. Gravatar of ssumner ssumner
    7. May 2015 at 05:12

    Ray, I wasted many hours answering MF’s idiotic comments, and he never paid any attention to what I said. Just kept on misrepresenting my views.

    Your mistakes are more amusing, which is why I’m still answering them.

  10. Gravatar of A A
    7. May 2015 at 06:01

    When you say, “At the cyclical frequency there is a Keynesian argument against CA surpluses, which I regard as beyond lame, bordering on preposterous” are you referring to monetary offset also?

  11. Gravatar of mike smitka mike smitka
    7. May 2015 at 06:31

    Currency manipulation is clearly a political charge made for political reasons that need have no relation to economic analysis (good, bad or indifferent). In the same vein the International Trade Commission has never had an economist as a member, while the defintion of “dumping” they use is a legal one that is designed to facilitate guilty verdicts. The bottom line is that those making such charges are uninterested in hearing the explanations of economists. But I’m sure you know that!! — as long as we blog about economics, well, we have to speak from our strengths. And if we don’t blog as economists, well, who will?

  12. Gravatar of Doug M Doug M
    7. May 2015 at 08:01

    I’d guess 99.9999999% of people don’t understand currency manipulation or quantum mechanics.

    99.9999999% means 1 in a billion do understand currency manipulation or quantum mechanics. I think there are more than 8 in each group.

  13. Gravatar of TD TD
    7. May 2015 at 11:28

    Currency manipulation, in the context of the fast-track trade legislation currently on the floor, is mostly a poison pill intended to kill the TPP/TTIP, imo. Most of the lawmakers/lobbyists/union leaders bringing it up don’t do jack about this issue in any other context, and anyone knowledgeable about the FTAs knows that neither the Obama administration nor the partner countries in Asia/Europe would sign trade legislation with the “anti-manipulation” mechanisms proposed attached.

  14. Gravatar of Federico Federico
    7. May 2015 at 12:35

    Hi Scott, I think I got all of your points except for one (does that mean there’s more than seven people, or does that justify it?): “pro-saving policies could lead to lower real exchange rates and CA surplus.”. What’s the argument for pro-saving leading to lower real effective exchange rates?

    [I can understand the CA surplus argument, if you assume that S and I are somewhat separately determined]

  15. Gravatar of Justin Irving Justin Irving
    7. May 2015 at 13:14

    Yes. It is sad that you always hear about how being in the Euro artificially weakens Germany’s exchange rate. The implication is that Germany ‘wins’ and gets to sell more BMWs to outlanders because it shares monetary policy with Portugal. No, in the long run Germany exports a lot because they make good products and save. For all the blogging and teaching economists do, journalists and business types are still going to make shit up on the fly.

  16. Gravatar of mark mark
    7. May 2015 at 18:02

    “There is no theoretical justification for assuming that long term CA surpluses imply undervalued currencies.”

    Does the same hold the other way?

    Long term CA shortages do not imply overvalued currency?

  17. Gravatar of ssumner ssumner
    8. May 2015 at 06:47

    A, That’s just one of many factors. Don’t forget that many US states run CA surpluses with other states. Is that a problem? Clearly not. It’s no different internationally.

    Mike, Good point.

    Doug, 7 actually.

    TD, Good point.

    Federico, More saving can lead to a CA surplus, since the surplus equals domestic saving minus domestic investment. That saving is used to buy foreign assets, which reduces the exchange rates, facilitating the CA surplus.

    Justin, The “good products” explains Germany’s exports, but not its CA surplus. That’s linked to a high level of domestic saving relative to investment, which is caused by factors such as declining population.

    Mark, That’s right.

  18. Gravatar of Shaun Shaun
    8. May 2015 at 08:24

    Hey Professor Sumner. Long time listener, first time caller. I was curious if you ever read Michael Pettis. He’s written on this topic many times and I think he would share your views in a lot of ways and in other ways he would disagree. Anyways, you might check him out if you haven’t read him. Very good stuff.

  19. Gravatar of Kenneth Duda Kenneth Duda
    8. May 2015 at 09:51

    On the topic of current account balances, I found Kevin’s latest (and the paper it points to) to be eye opening:

    http://idiosyncraticwhisk.blogspot.com/2015/05/equities-always-earn-more-than.html

    http://www.cid.harvard.edu/cidpublications/darkmatter_051130.pdf

    Basically, the mediamacro interpretation of the current account deficit is all wrong. The mediamacro people would have you believe that if our trade deficit is $500B, then we’re $500B poorer and foreigners are $500B richer and we are sinking deeper into debt and this is unsustainable etc. It’s *not true*. National income accounting rules are just rules, and they don’t capture everything, like, for example, the fact that US residents do a lot of creating of businesses in foreign jurisdictions that pay their US owners a handsome income stream, whereas foreigners tend to buy low-yielding treasuries. When those US residents spend that income on imports, we see a current account deficit, because the US resident’s income is capital income, not income from trade. We are all being tricked by an accounting fiction that captures the value of the goods we buy, and not the value of the income we generate overseas, in the “current account”.

    Amazing. The more I learn about this stuff, the more depressed I get about the state of the media and reporting. It’s just all so wrong. When they report on technology issues, I expect them to be wrong, they’ve always been wrong, I’ve known that since I was a teenager. Now I am realizing it’s not just technology. Turns out they’re always wrong about economics and finance. I wonder if there’s anything they report correctly.

    -Ken

    Kenneth Duda
    Menlo Park, CA

  20. Gravatar of Sumner on "currency manipulation" « Economics Info Sumner on "currency manipulation" « Economics Info
    8. May 2015 at 14:00

    […] Source […]

  21. Gravatar of Federico Federico
    8. May 2015 at 14:33

    Hi Scott — Just wanted to say I’m pleasantly surprised and thankful that after so many years you still respond to comments, even when they’re basic!

  22. Gravatar of Joe Eagar Joe Eagar
    8. May 2015 at 17:08

    Trade surpluses do not depress global AD? I don’t understand; if a government forcibly suppresses consumption to generate a trade surplus, won’t global AD fall? My understanding of the literature is that the central banks in the other countries are rarely in a position to offset this. I remember reading one of the FOMC meetings from 2005 or 2006, where Bernanke quipped that the Fed could not unwind global current account balances. That seems basically correct to me.

  23. Gravatar of Joe Eagar Joe Eagar
    8. May 2015 at 17:20

    Kenneth, just because we don’t measure the current account correctly doesn’t mean it doesn’t matter. We clearly had a big problem in 2005 (or was it 2006?), for example, when the CA deficit hit 6% of GDP and the net savings rate turned negative.

    I suppose that might prove your point, though, since in that case there were a lot of other economic indicators raising red flags, not just the CA. It may well be the case that we shouldn’t pay much attention to changes in the CA balance if other variables stay the same.

  24. Gravatar of Kevin Erdmann Kevin Erdmann
    8. May 2015 at 17:23

    Kenneth:

    You have it exactly right, by my reckoning. I hope to go deeper into the topic specifically relating to international flows. I think in today’s context, it is actually more appropriate to measure US economic activity with Gross Domestic Purchases than with GDI or GDP, because we are earning those imports with our capital gains that come out of this complex risk trade.

    Conceptually, I wish we thought of capital income as if we start with at-risk income, so for instance, corporate bond holders conceptually make 8%, but then pay 4% back to the equity holders as a payment for cash flow certainty.

    I also think this is partly why it looks like the finance sector isn’t adding value to the US economy. It is facilitating this international flow of risk and credit, so all of those extra imports are created by the finance sector, but we don’t count those imports as production, and, thus, the finance sector doesn’t get credit for the benefit to US income.

    Eventually, I think all of this feeds back to the recent paper by Selgin, et al. about monetary policy in the 2000s, because a new understanding of these flows should change the way we think about interest rates and national income during that period. Rising real estate values were just another piece of the puzzle in these complicated international risk exchanges.

  25. Gravatar of Kevin Erdmann Kevin Erdmann
    8. May 2015 at 17:29

    And, I agree with you about how wrong we all are so much of the time. I think it’s forgivable, because the world is complicated. The problem is that, while people might be wrong about tech., they don’t usually go into the voting booth with the idea of legislating a new protocol for network communication. But, they feel perfectly justified about voting to stick it to the banks or to change the price of something because the current price doesn’t satisfy their intuition.

  26. Gravatar of Joe Eagar Joe Eagar
    8. May 2015 at 17:48

    I just realized I missed a lot of context. I hadn’t realized there was a proposal to enact new currency manipulation provisions. I don’t support that, or rather, I support *talking* about these provisions *as a negotiating tactic* if it advances our interests to do so, and it sounds like that isn’t the case here. It would be a huge disaster if one of these provisions were actually used. Can you imagine what would happen if we tried to, say, get Germany to reduce its trade surplus by bringing lawsuits *against the ECB*?

  27. Gravatar of Joe Eagar Joe Eagar
    8. May 2015 at 17:57

    Kevin, by definition you cannot have a CA deficit that isn’t funded by foreign capital. Said capital does not “pay for” the CA deficit as it is usually contingent. BTW, the current account is supposed to capture cross-border financial transfers (that’s why we call it the “current” account and not the “trade” account). I wouldn’t be surprised if Kenneth is correct and the formula used to do so is off, but at the end of the day if an American borrows money from a bank which then sells a debt security to a foreign investor, the value of that security is not “income” to the bank.

  28. Gravatar of Kevin Erdmann Kevin Erdmann
    8. May 2015 at 19:33

    Joe, what’s happening is that Americans build KFC restaurants in China that have ROI of 15% and Chinese buy treasuries that return 3%. There is a notion that over time those returns will revert to a similar mean, but that is wrong. In fact, most of our imports aren’t funded by the income, but because when we reinvest $1 in high return foreign assets, foreigners have to reinvest a dollar in low return debt plus they have to sell us something to get another dollar to add to their holdings to keep up with our growing foreign income. They are running to stand still. Because our safe assets are valuable to them.

  29. Gravatar of Joe Eagar Joe Eagar
    8. May 2015 at 20:10

    I don’t deny that happens to some extent and is probably the case now. But it certainly wasn’t true in 2006.

  30. Gravatar of ssumner ssumner
    9. May 2015 at 07:01

    Shaun, Yes, I do read Pettis on occasion, and indeed once met him in Beijing. He’s very knowledgable about the Chinese economy. I usually don’t agree with his views in international imbalances.

    Ken, Very good points about CA deficits.

    Federico, I have no reply to your comment. :)

    Joe, You said:

    “I remember reading one of the FOMC meetings from 2005 or 2006, where Bernanke quipped that the Fed could not unwind global current account balances.”

    Yes, but I very much doubt that Bernanke would have argued (in 2005-06) that the Fed was unable to hit its AD target. There is no good economic theory showing a CA surplus in one country creates demand side problems in other countries.

    And don’t forget that consumption is not AD, nor is depressing consumption equivalent to suppressing AD.

    Kevin, I agree that finance is underrated in some respects.

  31. Gravatar of Joe Eagar Joe Eagar
    9. May 2015 at 07:53

    “And don’t forget that consumption is not AD, nor is depressing consumption equivalent to suppressing AD.”

    That makes more sense. I admit, I was making that mistake of equating consumption with AD. I do think that state-induced surpluses are not a good thing as they distort the markets (I tend to blame Chinese consumption policies for the U.S. housing bubble, for example), however that isn’t the topic of this post, which is currency manipulation. Sorry about that.

  32. Gravatar of emerich emerich
    9. May 2015 at 17:32

    Scott,
    Can you recommend any textbooks or books that do a good job exploring and explaining the points you made in this post?

  33. Gravatar of Jack’s Links | The Zeitgeist Log Jack’s Links | The Zeitgeist Log
    9. May 2015 at 22:20

    […] People are bad at understanding currencies and exchange rates. […]

  34. Gravatar of Johannes Fritz Johannes Fritz
    10. May 2015 at 05:43

    Ashok Rao shares similar observations as Kevin Erdman & Kenneth Duda:
    “The more simple description of the entire argument is that US treasuries provide a liquidity service to foreign governments and there is an inefficient shortage thereof. Or, even simpler, the US is a classical bank earning a profit on the spread between its borrowing and lending rates.”
    http://ashokarao.com/2015/05/04/12753/

  35. Gravatar of ssumner ssumner
    10. May 2015 at 06:56

    emerich, I doubt whether there are any books that explain all of these points. Mankiw’s principles text explains some of them.

    Johannes, I’m not sure what the term ‘shortage’ means here—is he saying supply doesn’t equal demand at the current price? That seems odd.

  36. Gravatar of Kevin Erdmann Kevin Erdmann
    10. May 2015 at 09:10

    Scott, I’m not sure what Ashok means, but there is a shortage in the technical sense. The shortage is on housing, where $20 trillion in nominal investment demand went “poof”. The market is clearly in disequilibrium, building limitations and credit limitations are preventing building and funding of homes and the appreciation of existing homes. Treasury yields are low because they are a substitute for real estate investment.
    This is all pretty obvious, but nobody can say so because if you say home prices should be higher you risk losing credibility.

  37. Gravatar of ssumner ssumner
    11. May 2015 at 06:02

    Kevin, I think that’s a misuse of the term “shortage.” The real argument is that the quantity is below the socially optimal quantity.

  38. Gravatar of Kenneth Duda Kenneth Duda
    11. May 2015 at 17:19

    Kevin:

    > they don’t usually go into the voting booth with the
    > idea of legislating a new protocol for network
    > communication.

    Mostly that’s true (thank goodness!) But see also the OSI versus TCP/IP wars of the late 1980’s. The Europeans did exactly what you said. They didn’t like the idea of a bunch of hippie American academics defining the standards for the global Internet, so they committee-designed a bunch of competing protocols and put laws in place that network equipment had to implement them. So, implement them we did, only to rip most of them out later because they mostly never got used.

    Of course I am showing my tribal affiliation. For a more balanced view:

    http://spectrum.ieee.org/computing/networks/osi-the-internet-that-wasnt
    http://en.wikipedia.org/wiki/OSI_protocols

    (I’m setting a new standard for “off topic”, but you pushed a button :-)

    -Ken

  39. Gravatar of Kevin Erdmann Kevin Erdmann
    13. May 2015 at 12:10

    Scott, you’re right about housing before 2007. But since then the income generated by real estate assets has not been arbitrage to levels reflected in longstanding alternatives because of a number of shocks and frictions. The price of homes is below the intersection of supply and demand. IMHO. At some level I suppose this is only a semantic point.

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