Archive for February 2016


Random notes

Got home at 3am, another Logan airport nightmare.  Lots of catching up to do.  Here are a few items of interest:

1.  Fiscal back-up?  David Beckworth had a piece in the Financial Times, Alphaville:

As noted above, a NGDP growth path target should create its own self-fulling expectations of stable demand growth. One way to reinforce this tendency and insure against central bank incompetence is to have the U.S. Treasury Department provide an automatic backstop for the spending target. This would make the system foolproof.

The way it would work is that once a year the Treasury Department would check to see if the Fed was keeping total dollar spending on target. If it fell below target, the Treasury Department would automatically deposit bonds at the Fed and send the new money created by those deposits directly to households. It would continue to do so until spending got back up to its targeted growth path.

If total dollar spending were above target, the Treasury Department would again deposit bonds at the Fed. But this time the Fed would be required sell the bonds to the public, which would take money out of circulation. The Treasury Department and the Fed would continue doing this until spending fell back down to its targeted growth path.

The Treasury backstop would further reinforce the public’s expectation that the NGDP target would be hit at all times. With this expectation, however, the Treasury Department would rarely if ever need to provide an actual backstop. The target, in other words, would become a self-fulling outcome where the public did the actual heavy lifting by adjusting their spending patterns.

The Treasury backstop would also provide a strong incentive for the Fed to do its job well. The public humiliation of having someone else doing their job would make Fed officials work very hard to stabilize spending the first place. This would reinforce the credibility of the target.

I’m generally skeptical of fiscal stimulus.  But I think this plan might work, with one modification.  If at any time the Treasury had to come in and rescue monetary policy, and the Fed was not 100% out of ammunition at the time, then the entire FOMC would be immediately fired, with no pension, and replaced with new people.  That’s the sort of compromise monetary/fiscal coordination I could support.

What would it mean to not be out of ammo?  In my view it should mean that interest rates on reserves are above negative 10%, and the Fed does not own some marketable investment grade bonds, somewhere in the world, that are being actively traded.  The Treasury may prefer a different set of criteria.  But wherever the Fed’s boundaries are, they need to be clearly spelled out.  Ambiguity hurts the effectiveness of monetary policy.

I agree with David that this plan (with the modification I suggest) would eliminate the need for the Treasury to intervene. The Chuck Norris effect would be enough.  David’s much wiser than me, realizing that self-indulgent tirades against the stupidity of helicopter drops are foolish, and that one can win more friends through policies that provide the reassurance of fiscal backup, without actually needing that backup in 99.999% of the cases.  That’s why he gets invited to write for the New York Times.

I’m very pleased to announce that David Beckworth will be joining the Program on Monetary Policy at Mercatus during the first half of this year.  He has lots of exciting plans, including podcasts involving interviews with monetary policy experts.

2.  Profiles in cowardice:  Chris Christie:

He said on “Morning Joe” afterward that Bush “had a chance to take on Donald Trump on Saturday night, and I don’t think really effectively delivered that punch.”

Could you? I asked Christie.

“Of course I could,” the New Jersey governor responded, mildly annoyed at even being asked about the limits of his sparring talents.

So why hadn’t he?

“I do so at a time and place of my choosing. There’s no need for me to do that now,” Christie said.

The next day, Christie dropped out. And the Republican Party said goodbye to the only presidential candidate with the combination of quick wit, charisma and gravitas necessary to stand up to Trump one on one.

Whenever I don’t know a person’s motives, I always like to assume the best.  Since I don’t know Christie’s motives for not going after Trump, I am going to assume the least bad interpretation, cowardice, and not something far worse, like hoping for a VP slot, or secret sympathy with his demagoguery.  If you think I’m being too kind to Christie, explain why.  If you think I’m being too mean, just go away.

3.  Banning bad commenters:  I’ve always had an uncanny ability to predict a person’s character just based on their name.  I know this seems hard to believe, but you’ll just have to take my word for it.  My “sixth sense” smelled a rat when a commenter named “Shmebulock, Crusher of Pussy” entered the scene a few days ago.  I’ve never banned a commenter in 7 years of blogging, and almost never banned a comment.  But there’s a first time for everything.  This cat smasher had an almost Trump-like mix of boring, juvenile and stupid, which led to him (I’m also pretty good at guessing gender) being awarded the first lifetime ban.  Congratulations to Crusher.  He wasn’t even able to mimic the humor of Ray’s inanities.  Of course there are many others that richly deserve banning, and would be banned in a classier venue than this one.  So consider the banning of Crusher to be a shot across the bow.  Once I’ve taste blood, it might become a habit.  Who knows how many people I’ll ban?

And to any potential commenter who says “You banned Crusher but not X, so you must find X’s racism, sexism, homophobia, etc., acceptable” my only response is . . . actually I can’t give you my response, it’s so rude I’d have to ban myself.

Ask me anything!

Tomorrow at 1pm EST, I am scheduled to do a Reddit, “ask me anything”.  I don’t know much about this concept, but I guess I will find out tomorrow.  The following is the information provided to potential Reddit participants:

I am Scott Sumner: monetary economist, blogger at Money Illusion, and author of The Midas Paradox, a book advancing a bold new explanation of what caused the Great Depression. AMA

I am the director of the Mercatus Center’s monetary policy program and a professor at Bentley University. I write about monetary policy, the gold standard, the Fed, and nominal GDP targeting—one of the reasons The Atlantic wrote that I was “The Blogger Who Saved the Economy.” My life’s work is captured in the new book published by the Independent Institute The Midas Paradox: Financial Markets, Government Policy, and the Great Depression, which Tyler Cowen called “one of the best on the economics of the Great Depression ever written.” In short, I explain why the current narrative of the Great Depression of the 1930s is wrong, why there are startling similarities to the crisis of the 2000s, and why we are doomed to repeat previous mistakes if we fail to understand the role of central banks and other non-monetary causes. I blog at The Money Illusion and EconLog.

I’m here to answer any questions on economic crises, my NGDP targeting work, the Fed, gold standard, and other economic questions you may have.

I hope it’s obvious I didn’t write that part about saving the economy.  🙂


Ignore the media, look at the election odds

I rarely watch TV, but I watched a bit of cable news this evening in my hotel.  Holy cow, I had forgotten how bad it was. Here are the actual election odds, as of tonight:

Screen Shot 2016-02-20 at 10.09.34 PMWhy do they treat us like children, telling us that Rubio and Cruz are neck and neck for second place in the race for the nomination?

It’s a two person race between Trump and Rubio, with Trump leading for the nomination while Rubio is more likely to be elected president.  That reflects the fact that Trump’s chances of being elected, conditional on getting the nomination, are abysmal, far below Rubio’s.

The other candidates should just get out.  The main question of interest now is who would win between Trump and Rubio on a head to head, with no one else in the race.

I’m surprised that Sanders didn’t fall even more.  He did horribly among black voters, and they make up a huge share of the Democratic electorate in the primaries coming up next.  He’s about to lose a lot of races.  (He won among whites and Hispanics in Nevada, but black voters are the swing group that determines the Democratic nominee.)

Tonight was a disaster for Cruz, as South Carolina is one of his very best states, and he came in third.  Rubio will destroy him in big, non-evangelical states like California, New York and Illinois.  I think Trump’s best hope is that other non-Rubio candidates stay in the race.  He may stop attacking Cruz.

I feel a bit sorry for Jeb.  In 1994 he was expected to win Florida and “W” was expected to lose in Texas.  On election night it flipped, and Jeb narrowly lost while George Bush won.  Florida was trending purple while Texas was trending red.  Thus the lesser brother was elected president in 2000, and we know how that turned out.  This time Jeb wanted to run on a campaign aimed at grown-ups, but the GOP voters had other ideas.

From the beginning, I’ve thought that Hillary would be the next president, and still believe that.  But as you can see, it’s far from a sure thing.  Still I’d bet on her; I think the GOP will come out of this badly damaged, and in no position to win.

But then what do I know, I’ve been totally wrong about this race so far.

Those poor central banks, they tried so hard

This sort of thing (from The Economist) makes me want to tear my hair out:

Despite central banks’ efforts, recoveries are still weak and inflation is low. Faith in monetary policy is wavering.

Seriously?  After the Fed raised rates in December, despite “low” inflation and a “weak” recovery, people are still claiming that the poor central banks tried hard to inflate, but that it was just too difficult?  This sort of thing is beyond clueless, it almost leaves me speechless.  What world is the Economist living in?  How hard is it to understand that the Fed raised rates to prevent inflation from rising?  This is not rocket science.

And “effort”?!?!?  How much effort does it take to print currency and buy assets? We aren’t talking about storming the beaches of Normandy, or sending a man to the moon, or building the transcontinental railroad. I know that modern governments have almost completely lost the ability to produce substantive physical infrastructure (except for China.)  But are we to believe that even printing money now requires too much “effort”, and that we need to give those poor souls a break from their arduous duties?  My God! No wonder Trump is doing well, the entire technocratic class in the West is a bunch of worthless lazy bums.  Can’t they do anything?  Even debasing a currency is beyond their ability?

I’m reminded of an old Monty Python routine:

Screen Shot 2016-02-18 at 10.15.21 PM

But it gets worse.  The line I quoted might just be a slip of the tongue.  But consider this:

The time has come for politicians to join the fight alongside central bankers. The most radical policy ideas fuse fiscal and monetary policy. One such option is to finance public spending (or tax cuts) directly by printing money—known as a “helicopter drop”. Unlike QE, a helicopter drop bypasses banks and financial markets, and puts freshly printed cash straight into people’s pockets. The sheer recklessness of this would, in theory, encourage people to spend the windfall, not save it.

So let’s see.  We print up a zillion dollars, or euros, or whatever.  What are we going to do with all this money?  Well, we could buy assets.  Perhaps create a sovereign wealth fund, like those lucky countries have, you know, Singapore, Norway, UAE, etc.  Or, we could just give it all away, and continue down the road toward being a bankrupt, debt-ridden economy like Greece.  Hmm, decisions, decisions . . .  don’t rush me . . .

I know, let’s do a helicopter drop, because the sheer recklessness of it sounds neat.  Isn’t that what we were taught in grad school back in the 1970s, just print lots of money and give it away?  Sovereign wealth funds are so boring, and we’d have to keep track of the financial markets.  Giving away money is so much more fun.

PS.  I hope it’s clear I’m not advocating printing up money to create a sovereign wealth fund, I’m just trying to figure out why even that moronic idea (and it is certainly stupid) would not be superior to a helicopter drop.

HT: Jason

Update:  As usual, Tyler is much more polite than me:

So if in a monetary policy or macroeconomic analysis you read the phrase “out of options,” you would do well to substitute in “governments do not wish to pursue their remaining options.”

Perhaps the Bank of Hungary took Krugman’s “promise to be irresponsible” thing too literally

Here’s one way to credibly inflate:

The National Bank of Hungary bought 200,000 rounds of live ammunition and 112 handguns for its security company, according to documents posted on a website for public procurements.

Additional protection is needed due to the rise of “international security risks” including bomb and terror threats and migration, central bank Governor Gyorgy Matolcsy said . . . The central bank’s assumption of the role of financial regulator and the related increase in the number of its properties also contributed to the need for further defenses, he said.

The security measures added to public scrutiny of the running of the bank, which under Matolcsy earmarked 200 billion forint ($718 million) to set up foundations to teach alternatives to what he called “outdated neoliberal” economics. Another $108 million fund used for buying fine art including a painting by Titian also drew criticism from opposition parties, as did a series of investments in office buildings and villas.

Matolcsy, an ally of Prime Minister Viktor Orban, has argued the central bank has the right to spend its profits, which have been boosted in recent years as the weaker forint increased the value of its foreign currency reserves. The central bank has traditionally paid its profit into the government budget, while taxpayers are required to cover any losses by the regulator.

Titian?  Well at least they have good taste in art.  And every central bank needs a few villas.

Interesting that the new left and the Hungarian fascists share a distaste for neoliberalism.

PS.  James Alexander sent me an interesting series of tweets on how Sweden is rapidly becoming a cashless economy. But the more interesting story may be the tax change that brought household work out of the underground economy.

James also has a very interesting post, showing how NGDP targeting keeps making more and more progress.  The idea seems unstoppable to me, unless some unexpected flaws are found.

HT:  Marcus Nunes