There seems to be some confusion about yesterday’s rally in the dollar.  Here is Kate Mackenzie and FT.com/Alphaville:

As Sumner adds, the dollar rose along with short-term Treasury yields on the news.

Stock markets are also reflecting a big risk-off sentiment.

Of course, it’s debatable how much of this is due to the Twist launch itself, and how much to the mention of “significant downside risks to the economic outlook”, and how much just to the general despair that this type/scale of action will be adequate in the face of a looming slowdown and contractionary fiscal policy.

Each of those sentences is individual correct, but together they create a slightly misleading impression.  The falling stock prices could have been due to a forecast of downside risks, but fears of a weaker US economy would make the dollar fall.  The dollar rally was produced by tighter than expected money, just as in late 2008.  Here’s Pablo Gorondi of Associated Press:

“The dollar’s reaction to Operation Twist has been the opposite of what we would have predicted; the dollar looks stronger after it, which makes little sense,” said analysts at U.S. energy consultancy Cameron Hanover. “It seems to be telling us that investors had already discounted a larger quantitative easing program. That would go a long way toward explaining the resilience of oil prices over the last few months.”

That’s right, it wasn’t Operation Twist, which was priced in (but ineffective), it was the lack of even a hint of anything more, of a backup plan.  Bye bye Bernanke put.

As far as I can recall, I’ve never had more than about 10,000 hits in one day.  Yesterday I had 36,718.  To show you how insane that is, at that rate I have 65,000,000 over 5 years.  Mankiw just announced he had passed 20,000,000 over 5 years.  Indeed Iwonder if there might be a mistake somewhere. Could someone’s computer be set to visit over and over?  Anyway the graph below shows that when I’m not on vacation I’m generally in the 3,000 to 5,000 a day range.

I’ve also received a flood of comments.  Some of them I’ll get to later, as there are important issues that need to be discussed this morning.

I will say that many comments seem to object to my throwaway line “Obama is obviously very bright.”  I don’t plan to respond to each comment, as that observation is subjective and has nothing to do with the post (which complains Obama isn’t very smart about economics.)  I will just say that he’s certainly smart enough to be President in a country where Ford/Quayle/Bush/Biden etc are considered presidential material.

For some reason I am getting a flood of comments.  I won’t be able to approve new ones until tomorrow morning, but they will be approved and I’ll respond to as many as I can (on economic issues.)

Some articles point out one “bright spot” in this dismal day—the Fed succeeded in lowering long term yields.  They also raised short term yields, making the yield curve flatter.  You might want to get out your money textbook to find out what type of monetary policy causes a flatter yield curve.  According the an article by Sharon Kozicki at the Kansas City Fed:

The yield spread reflects the stance of monetary policy. According to this view, a low yield spread reflects relatively tight monetary policy and a high yield spread reflects relatively loose monetary policy.

The yield spread is the long rate minus the short rate.  Kozicki says the conventional view is that a lower yield spread means tighter money.  Today the Fed made the yield curve flatter.  You might think; “They know what they are doing; surely they wouldn’t tighten monetary policy.  Sumner must have things backward.”

OK, how would tight money affect the dollar?  Here’s the euro/dollar (the fall means the dollar soared after 2:15, or 6:15 London time):

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And here’s the Dow:

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So what do you think, monetary stimulus or monetary tightening?  The only thing that’s “twisted” is the Fed’s logic.  They are so obsessed with the Keynesian low interest rate approach to stimulus that they’ve completely lost their bearings and ended up tightening monetary policy.

PS.  I forgot to mention one other piece of “good news,” the Fed action sharply reduced oil prices.  Less inflation “worries.”

As far as I can recall my record number of comments is about 10,000 in one day.  I’m at 15,000 and it’s not even 4:00.  And I haven’t done any posts yet (before this one.)

I’m sure I don’t have to tell my long time readers what I think.  I’m on record that the Fed’s goal should be much higher long term interest rates (achieved through monetary stimulus.)  The econ textbooks rarely even discussed the original operation twist (from the 1960s), except occasionally to note that it probably had no effect.  There’s a reason it was tried and then abandoned.  So I thought it worse than nothing—something that diverted the Fed’s attention, and made effective moves less likely.

But the markets already had that priced in.  What really shocked me was the accompanying statement from the Fed.  With the world situation now so precarious, I thought surely they’d have something to say about future possible policies.  Something like; “There are significant downside risks and the Fed is prepared to adopt more aggressive techniques if needed.”  Perhaps even mention a few more aggressive options like level targeting, at least as a fall back if things keep going downhill.  But there was nothing, absolutely nothing in the statement to reassure the markets.  It read like the Fed was out of ammunition, even though (elsewhere) Bernanke insists it isn’t.  I’m no mind-reader, but if I had to guess it would be that the market reaction was so negative because of what they didn’t say—Operation Twist was already priced in, and understood to be purely symbolic.

This looks more and more like the Hoover Administration.  Initially his initiatives were greeted with big stock rallies.  But by mid-1932 the stock market reacted to his speeches with big declines.  Not because we were “out of ammunition;” the minute FDR got in things turned around.  Well that’s not quite right, the stock market did nothing until the April 1933 dollar devaluation, when it began rocketing upward.   Symbolism isn’t enough, you need level targeting.  Ben Bernanke understood this when he recommended the Japanese show “Rooseveltian resolve.”  What happened to that Bernanke?

Lars Christensen sent me a message about the falling euro.  Of course it isn’t really the euro that’s falling; it’s the dollar that’s rising.  Nothing happened at 2:15 that would affect the value of the euro, but at 2:15 the Fed did adopt a tighter than expected monetary policy, which did appreciate the dollar.  The “traitors” got the strong dollar they demanded; now we’ll see how their constituents like this policy.  Economics is not a zero sum game.  Falling nominal incomes hurts a lot of people, both blue and red.

PS.  My definitive statement on NGDP targeting just came out in National Affairs.  (In the first version I erroneously said National Interest.)  I plan a post in the next few days that organizes my views, as commenters keep asking for a go-to place where they can read my views on the key issues.  This article will be one of a number linked to in that post.

PPS.  I knew there’d be lots of reaction to my “treason” post.  A few comments:

1.  Obviously I meant the term somewhat ironically–I assumed readers would understand that Perry has debased the term to near meaninglessness.  To the modern GOP, it’s like saying someone has bad breath.

2.  Despite point one, I was sincerely outraged by the letter.  The GOP leaders have made it clear that they want Obama to fail.  Some commenters say I am naive about politics, that it’s hardball.  I don’t agree.  It’s expected that pols will do special favors for farmers or teachers to get elected.  That’s softball.  It’s not OK to vote for or against a nuclear weapons treaty on anything but idealistic grounds.  I put monetary policy in with the nuclear weapons, not the special interests.  It’s not OK to oppose policies because they’ll create millions of jobs and get the incumbent re-elected, unless you’d also oppose them if your own party was in charge.  I know that in some less developed parts of our globe politicians are willing to almost destroy their country to maintain power.  They play hardball.  But scorched earth policies are not acceptable in America.

3.  I obviously wouldn’t have brought up the term “treason” if Perry had not already done so.  His use was outrageous because with all Bernanke’s faults (and you can see I oppose his policies) it’s absurd to accuse a Republican of doing monetary policies aimed at getting a Democrat re-elected.  I don’t question Bernanke’s motives.  I wish I could say that about his accuser.

4.  BTW, this is nothing like the old gold/silver fights.  Those people were principled.  The gold side favored the same tight money to help creditors, regardless of which party was in power.  The modern GOP only favors tight money when the Dems are in office.  They called for easy money when Reagan/Bush were in office.