Tyler Cowen has a new post on “The Chinese Credit Crunch.”  At one point he makes this off-hand comment:

This economy was addicted to cheap credit in the first place, so that’s a big deal.  (By the way, promising to print more currency won’t solve the core problem here, with apologies to Scott Sumner.)

This is a bit puzzling, as I doubt in the entire blogosphere there’s a stronger opponent of mixing monetary policy and credit policy than me.  Just a few days ago I did a post entitled “Please, keep finance out of macro.”

Not only do I oppose using monetary policy to solve the “core problem” in China, but I oppose using it to solve ANY problems, anywhere.  Monetary policy should be neutral, aimed simply at avoiding the creation of problems, such as unstable NGDP growth.

I’d guess that Tyler Cowen and I have pretty similar views on what China’s core problems are, and they aren’t anything that can be fixed with monetary policy. Fortunately the new government seems committed to accelerating economic reforms.

Now suppose I’m wrong, and Tyler wasn’t referring to the credit crunch as the core problem in China, but rather insufficient NGDP growth.  Then he would be wrong. Tyler has (correctly) argued on numerous occasions that the US isn’t stuck in a liquidity trap, and obviously that’s even more true of China. I don’t know the current Chinese NGDP growth rate (I believe it’s close to 10%) but if it was slowing faster than desirable (as Lars Christensen suggests may be occurring) it would not represent a problem that monetary policy could not solve. Obviously with “money printing” the PBoC could speed up NGDP growth to 100% or 1000% if it so desired. In any case, I think it’s pretty clear Tyler is referring to the credit crunch, not low NGDP–and on that issue I entirely agree.

I haven’t followed the Chinese situation very closely, but I’d guess that monetary policy failures (if they exist) constitute less than 2% of China’s problems, the rest are structural.

PS.  Commenters: Don’t say; “Monetary policy and credit policy in China are linked.”  I doubt it.   Don’t confuse nominal policies with real policies. But even if true it would have no bearing on my argument.  I’d simply recommend de-linking them.

So I go to a monetary conference in Italy for a few days and everything falls apart. Actually that’s an exaggeration–if we think in terms of levels, the stock market is still doing fine.

In any case there’s an extraordinary amount of news, and I haven’t been able to keep up.  These are initial reactions:

1.  I have no idea why real T-bond yields are soaring—no idea at all.  However given the rise in real bond yields, the stock market setback is quite small, indicating that the market doesn’t expect significantly slower growth.  That also confuses me.

2.  I’ve been heavily criticized for claiming “monetary offset,” as Bernanke himself says the Fed can’t offset the negative effects of fiscal austerity.  Make that Bernanke used to say that; now he talks like a market monetarist:

Bernanke said the quantitative-easing program could end in the middle of next year. The chairman was upbeat about the outlook, saying housing was strong and the recovery seemed to be brushing aside any headwinds from fiscal policy.

3.  I’ve had issues with James Bullard in the past, as he seems to focus too much on short term movements in inflation, which are often transitory.  But given the current low level of inflation, and low 5 year TIPS spreads, I can’t disagree with this:

In a statement elaborating his dissent from the Fed policy decision issued Wednesday, Bullard noted that the central bank announced that less-accommodative policy was in store at the same time that it marked down its forecasts for 2013 growth and inflation.

. . .

Bullard, who is most often classified as a hawkish member of the Fed’s leadership team, dissented for dovish reasons: He thinks the Fed might have to ease more to get inflation higher.

Remove the word “more” and he’s exactly right.

In a separate interview with the Washington Post, Bullard said the Fed was more hawkish today than it was one week ago.

He attributed the volatility in financial markets not to Fed communication, but to perceptions of upcoming “tighter policy.” “You can communicate it one way or another way, but the markets are saying that they’re pulling up the probability we’re going to withdraw from the QE program sooner than they expected, and that’s having a big influence,” Bullard said.

The Fed would like inflation to average 2% over time. But the central bank’s favorite inflation target has fallen to 0.7% over the past 12 months.

Prior to this week’s Fed meeting, Bullard had raised a red flag about the inflation data, saying he thought the Fed might stand pat until it better understood the factors behind the trend. He stressed the issue in his dissent, saying the Fed “should have more strongly signaled its willingness to defend its inflation target of 2% in light of recent low inflation readings.”

The Fed “must defend its inflation target when inflation is below target as well as when it is above target,” the Friday statement said.

In more general terms, Bullard said he was concerned the Fed is making decisions based on calendar dates and not incoming economic data.

Bullard is saying that at the current policy setting we are likely to undershoot on inflation, and hence we should ease.  But Bernanke just tightened policy.  Bullard is just as frustrated as Svensson used to be at the Riksbank, and for exactly the same reason.

4.  And then I find out that Obama just fired Bernanke.

5.  And the Greeks are still causing market turmoil.

So year after year the markets, and market monetarists, are right, and the Fed is wrong.  How long before the Fed figures out that money’s been too tight since 2008?

PS.  I haven’t had a chance to look at the old comments, but will do so tonight and tomorrow.  I’ll be increasingly busy over the next year, and will have to cut back in some areas.  If you email me, don’t recommend I look at some paper.  Tell me why it’s interesting, including page numbers.  I’m going to have to learn to say no to many requests, as I’m overextended on many fronts.  But the blog will continue.

PPS. In the previous email I mentioned my frustration with my iPad.  In Italy I tried to answer emails, but every time I typed a word it automatically converted it into another word–perhaps Italian (some words I didn’t recognize.)  So I eventually gave up.

That’s all I got. ( Blame my crummy iPad, not me.)

As you may have guessed from the previous post, I’m not a fan of inflation, which also makes me doubt the validity of “real GDP.”  To consider just one example, let’s look at the output of “office work.”  I gather from shows like Mad Men and The Office, that office work has always involved a lot of downtime.  But in the pre-internet era what was one to do with that downtime?  You can’t just go golfing, they won’t pay you unless you are on site.  Mad Men suggests the three martini lunch can kill the boredom.  But that’s not good for one’s health.  The Office suggests childish pranks—but do you really want to hang out with Dwight?  Fortunately, modern office work offers much better possibilities: the internet.

My theory is that the workweek has been inverted, people play Monday through Friday, and work on Saturday and Sunday.  This is just the opposite of the world my dad lived in.  And I have proof.  Take a look at a typical graph of my blog readership.  The most recent day (Saturday) is not yet over, but will come in around 3000 hits.  If you look closely you will see that the hits rise sharply on M-F to around 5000/day, and drop sharply on Saturday and Sunday.  I’d guess other bloggers see a similar pattern.

In standard economic models Monday through Friday are workdays, and then people take the money they earn and have fun on the weekends; “consumption.”  If that model was correct, you’d expect blog reading to drop-off sharply when people are working, and then rise sharply on weekends, when people have “free time” to read blogs.  But we observe just the opposite.

My theory is that lots of men secretly look forward to Monday.  Saturday and Sunday are a steady stream of “family fun” activities, the sorts of things politicians look forward to doing more of after they’ve been caught with their mistress.   But family fun today is simply one scheduled event after another.  When I was young we’d just hang out.  At night we’d go downtown to collect railroad flares, to get material for making explosives (hope the NSA doesn’t read this.)  In those days parents had fun on weekends, sitting around drinking with other adults while the kids roamed around the neighborhood.  Now kid’s lives are over-scheduled, everything is waaaaaay more complicated.  You don’t pick up a quart of milk, it needs to be hormone-free organic soy milk.  After a full weekend of all this modern “family fun,” many men are anxious to get “back to work” and start surfing the internet.

Yes, my dad’s generation had some advantages, they dealt with real people.  But in the real world the ratio of “Dwights” to “Jims” is simply too high.  I rather see what Tyler Cowen has to say.  Yes, I’ll take my fantasy electronic world over the real thing.  Nozick was wrong, utilitarianism wins.  We are all much happier this way.

PS.  A lot of this post is made up, I’ve never even seen Mad Men.  The railroad flares story is true, however.

PPS.  I have several conferences and also some “family time” coming up.  Expect less posting for a while.

PPPS.  Has anyone else noticed that Yglesias has stopped posting on weekends?  🙁

Karl Smith recently made the following offhand comment:

To give meat to the idea – its conventional wisdom to deny the existence of race. Scott Sumner has denied the existence of inflation. I assert the existence of both.

I agree about race, but have two problems with inflation.  First, the term has never been clearly defined by economists.  Is it the increase in nominal consumption that an American would need to maintain a constant flow of utility?  If so, then we shouldn’t be using price indices to measure it.  If happiness surveys show no rise in the reported happiness of Americans (on average) over the past 65 years, then inflation roughly equals median wage growth.

But I’m a philosophical pragmatist, happy to live with fuzzy concepts that are useful.  The problem is that inflation isn’t even useful, as whenever people talk about inflation they are actually talking about something else.

1.  Does inflation impose a tax on capital?  No, rising nominal returns on capital impose a tax on capital.  And those are caused by faster NGDP growth (and rising levels).

2.  Are eurozone officials correct when they say inflation hurts consumers?  No, supply shocks hurt consumers, and if the ECB prevents the supply shock from leading to inflation, consumers will be hurt EVEN MORE THAN IF PRICES DO RISE.  The harm to consumers has NOTHING TO DO with prices rising.

3.  Does inflation lead workers to demand higher wages?  No, rising NGDP leads workers to demand higher wages.

If you are talking about inflation, you are talking about the wrong variable.

Britmouse sent me some data showing that nominal wage growth in the UK has fallen below zero by the end of 2012:

At the same time that wage growth has been slowing to zero, the BoE has been worried about high inflation–you know, the stuff that’s supposed to trigger high wage growth.  Lars Christensen sent me the following:

U.K. inflation expectations risk becoming dislodged because consumer-price growth has been elevated for such a long time, Bank of England economists said.

“The prolonged period of above-target inflation could cause inflation expectations to become less well anchored,” the researchers wrote in an article in the central bank’s Quarterly Bulletin, published in London today. “That could trigger changes in the nominal exchange rate, and affect consumption and investment decisions, as well as wages and prices, and could cause inflation to persist above the target for longer.”

No, high inflation does not feed into high wage growth, as wages follow NGDP.  British NGDP has been very weak; rising a total of 3.6% in the 7 quarters leading up to 2012:4, or 2% per annum:

Slow British NGDP growth has led to slow nominal wage growth.  Indeed in one respect Britain is doing fairly well—employment has risen to record levels in recent months, unlike the US.  What explains the difference?  It appears that British wages are more flexible than US wages, which are still rising at about 2% per year.

Most people focus on British inflation and real GDP numbers.  If these numbers are to be believed (and I have my doubts), all they tell us is that British productivity has fallen for some mysterious reason.  British workers today are simply not as productive as British workers of 2007.  The data tell us nothing about demand-side conditions in the economy.  Inflation is a nearly worthless concept, and should be discarded from business cycle analysis.  NGDP, hours worked, and wage inflation are the key concepts to focus on.  The musical chairs model.

And Osborne is right:

Inflation has exceeded the BOE’s 2 percent target every month since December 2009, and Chancellor of the Exchequer George Osborne revamped its mandate in March to give it more flexibility to set policy.

I suspect that in private Osborne would agree with the analysis in this post, but holds back from NGDP targeting because of the innate conservatism of central banks and the financial establishment.  Perhaps he also fears being bashed by Labour, and the Tory voters that are high savers.  Maggie Thatcher got in hot water for saying there is no such thing as society.  If I was advising Osborne I would recommend he NOT say; “Sumner’s right, there is no such thing as inflation.”

HT:  Advisor to the British government