“Currency wars” are one of those topics about which almost everything you read is wrong.

1.  The media often confuses changes in nominal exchanges rates (determined by monetary policy) with changes in real exchange rates (determined by national saving/investment policies).

2.  The media often draws meaningless distinctions between policies explicitly aimed at reducing exchange rates, with other policies (such as QE and negative IOR) that have the effect of reducing exchange rates.  For instance, the US dollar price of euros rose from $1.31 to 1.37 on the day QE1 was announced in March 2009.  Is that currency manipulation?

3.  The media tends to assume a zero sum game, but currency depreciation by one country will often boost stock markets all over the world, by boosting global AD.

4.  The media has a “pro-international agreement” bias.  International agreements made by highly educated public servants seem like responsible policymaking.  If the media knows little about the issue, they’ll defer to the experts.  And “war” sounds like a bad thing.  But recall that these are the same experts who pressured the Japanese NOT to devalue in the 1990s, as they were sliding into deflation.  How’d that advice work out?

In my view, things get even worse if central banks are perceived to have run out of ammo.  (Put aside the question of whether they have actually run out of ammo, which seems impossible.)  Suppose the Fed has room to raise and lower interest rates, but the BOJ and ECB have no room. Of course, they can still devalue if they wish.  Now assume an international agreement to avoid “currency wars”.  So they can’t devalue either.  In that case, you’ve resurrected Bretton Woods, at the worst possible time.  The US becomes central banker to the world.  (David Beckworth has shown that the Fed is already a “monetary superpower”, and a currency agreement under these circumstances would make them even more of a superpower—controlling the fate of not just China, but also Japan and the eurozone.

I hope you can see the obvious problem here.  The Fed insists that its mandate is to control American inflation, not Japanese and eurozone inflation.  But if we have an agreement to ban currency wars, then the Fed has a moral obligation to stabilize the average inflation rate in the US, Japan, and Europe.  I think it goes without saying that current policy is too tight, under that mandate.

And this blog post suggests that there already may be an implicit currency stabilization agreement:

More so, what if central banks think they’re at the limits of monetary policy anyway? If you combine that thought with pressure from the G20 you get to de facto agreement anyway, right? Or at least the behaviour of central banks can be explained, and predicted to an extent, by assuming the existence of a de facto agreement.

Here’s Citi’s Steven Englander saying just that:

It is probably better to think of G20 as similar to Friedman and Savages’s billiards player (link, page 12,13), G20 may not have made a deal but they are behaving as if they did, so we may as well analyze the consequences from that perspective. One question to ask is why they would agree to setting aside currency as a macroeconomic weapon the likely answer is that the winners of the currency war battles may have decided that they were not benefitting enough to offset the negative impact of the ancillary asset market volatility that emerged. Basically they were acknowledging policy ineffectiveness or at least monetary policy ineffectiveness, and the Statement pretty much admitted that.

So we now find ourselves in a situation where G3 has trouble cutting rates. The ECB and BoJ are reluctant because of the strains it is putting on their financial institutions and political unpopularity. The Fed is reluctant for similar reasons and because it seems unlikely that one cut would do great things for the US economy and it would certainly raise a suspicion that negative rates were beckoning. An already unpopular institution would become politically toxic. Bottom line, easing is hard to do. An ECB or BoJ hike is unlikely, needless to say. The Fed has already indicated its reluctance to hike and is very unlikely to hike to defend the currency if anything they seem to be cheering any weakness the USD encounters.

Put this all together and you have an extremely high bar for any G3 central bank cutting rates and an extremely high bar to them raising (and an even higher bar to any of them raising rates in response to currency weakness).

The point being that the FX market is now discounting the chances of aggressive central bank reaction in opposition to short term directional moves. Like, you know, they would if a deal had actually been agreed.

The new reality is one in which FX is being dictated by market forces rather than central banks. Or more so, we suppose, one in which some market participants can push exchange rates around without coming up against a central bank pushing back.

Of course, this could all go out the window when Japan pulls the trigger at its next monetary policy meeting on April 27th. Or they could opt for intervention (since mon pol might be exhausted, goes the theory while another theory says any intervention would have to be short and sharp considering the G20 once again) and surprise our inboxes. Inboxes that have already been surprised by this move in JPY, of course.

I would add that it is not “market forces” pushing the yen much higher; it’s a dramatically tighter monetary policy out of Japan.  You might wonder, “How did that happen?”  Expectations fairies—people have stopped believing that Kuroda will ease as needed to hit the BOJ’s inflation target.  Even though the BOJ did nothing “concrete” in the past few weeks, the future expected path of BOJ policy has become much tighter.

Pay attention to the April 27 BOJ meeting, and then a few days later to the Q1 GDP for the US, which might be negative.

David Beckworth just announced a new series of interviews with monetary economists and journalists. I am honored to be the first podcast released, but bigger names are upcoming:

Today is the launch of a new podcast series on macroeconomics called Macro Musing and I am privileged to be the host. Each week, with the help of a special guest, we will get to explore in depth various macroeconomic topics. If want to go all wonky on macro this is the podcast for you!So far I have recorded podcasts with the following guests: Scott Sumner, John Taylor, John Cochrane, Cardiff Garcia, Miles Kimball, Ramesh Ponnuru, and George Selgin. There have been a lot of interesting conversations covering topics such as the origins of the Great Recession, the safe asset shortage problem, negative interest rates, the fiscal theory of the price level, the Eurozone Crisis, Abenomics, the Great Depression, China’s economic problems, and alternative monetary regimes. In addition to these interesting topics, I have enjoyed learning how each guest got into macro, either as an academic or as an journalist, and how they see the field changing over time as new ideas and new technology emerge. I think you will find it fascinating too.

More guest are scheduled, including some Fed officials, but I would love to hear from you on what guests and topics you would like to see on the show. My first guest is Scott Sumner with whom I discuss his views on the Great Recession, NGDP targeting, and his new book on the Great Depression, The Midas Paradox.

I hope to make this a long-term project, but it success depends in part on you subscribing. So please subcribe via itunes or your favorite podcast app (update: here is the soundcloud link) and spread the word. Let’s make this podcast a success together and who knows, maybe we can help make the world a better place.

This podcast is part of the new Program on Monetary Policy (POMP) at the Mercatus Center at George Mason University. I am grateful for all their support in making the podcast happen.

The model here is of course Russ Robert’s excellent EconTalk series. Don’t forget that you need to sign up first.

Here’s a FT editorial on macro policy options:

Ms Lagarde, perhaps inhibited by her German hosts, was less forthright than the IMF has been of late in calling for fiscal stimulus. She avoided direct criticism of countries whose excessive austerity has held back global growth, and chose instead to focus on the scope for structural reforms. But it is worth noting that the measures she pinpointed — including a higher federal minimum wage in the US and active labour market policies in the eurozone — are ones that would give an immediate boost to demand, as well as supply.

So now we’ve reached the point where not only do higher minimum wages not cost jobs, they actually create more jobs.  And remember that the FT is easily one of the top 5 business publications in the world. Combine this with the recent flood of articles that free trade might actually be bad, and you are left with a profession that is literally destroying itself. People used to mock economists by saying that it wasn’t a science, that it didn’t know anything.  Economists would reply that they knew a few things.  For instance, they knew that free trade is good and that price floors create surpluses.  Now they’ve even abandoned those EC101 ideas, and admitted that their critics are correct.  The field has trashed its own reputation. Economists are implicitly admitting that their profession is an empty shell, completely devoid of knowledge.

An even greater irony is that many of the leading arsonists also mock people who don’t believe their “fiscal multiplier” theories, which have always been far more controversial than free trade. Yeah, after being told by economists that they were wrong about free trade and price controls for the past 200 years, we’re supposed to believe them when the tell us that Greece can become more prosperous by borrowing more money. Where is our modern day Mencken?

PS.  I’m in a bad mood because it’s tax week.  I just saw an article pointing out that the government’s income limits on Roth IRAs do not apply to people who do not have tax deductible IRAs.  Apparently you just set up a non-deductible IRA, and then a day later convert the entire sum into your Roth.  How weird is that?  Are the Congressmen who write our tax laws really that stupid, or just in hock to the financial services industry?

PPS.  I have a new post of the world’s most secretive tax haven, over at Econlog.

PPPS.  Don’t miss the biggest regular season game in NBA history, tonight.

I am seeing more and more articles, even at respectable outlets such as the Economist and the Financial Times, suggesting that the rise of right-wing and left-wing populism shows that something is wrong with the neoliberal model. Nothing could be further from the truth. The past two decades have been by far the best two decades in human history, and that’s what really matters.

Naysayers will sometimes acknowledge that hundreds of millions of people have recently risen out of poverty, but then claim that living standards have stagnated in America. That’s also nonsense, as I explained in this post. The next fallback position is that while real incomes in America have risen, the gains of gone to corporations, not workers. That’s also nonsense, as I explained in this post. The share of national income going to workers today is the same as it was 50 years ago, the supposed heyday of the working class.

The next fallback position is that while wages have done fine, even in real terms, wage income is becoming less equal. Bingo! Finally we get to an accurate statement. Fifty years ago, blue-collar workers at General Motors often made more than college professors. People with short attention spans sometimes act like this period was “normal”, ignoring 10,000 years of human history. They seem to suggest that our most pressing problem is that young men who don’t study in school and just shoot rubber bands across classroom should be able to earn an income that (in relative terms) was never possible in any period of world history before the 1950s and has never been possible in any period of world history after the 1970s. It reminds me of when farmers used to set the “parity” of farm prices with other goods prices based on the relatively high levels of 1909-14, treating that ratio as normal for purposes of farm subsidies.

Don’t get me wrong;  I have nothing against blue-collar workers. I’m relatively intellectual, and even I found the public schools to be mind-numbingly boring. I could hardly stay awake. I can’t even imagine how students less interested in ideas than I am could’ve gotten through the day. Nor am I one of those conservatives that will trash low-income whites for their lifestyle choices. As far as blue-collar workers are concerned, I wish them well. But I wish everyone well (except Trump), and the unfortunate truth is that the set of economic policies that is best for the world right now is probably not optimal for a subset of American blue-collar workers.

When I point out that the most important factor in trade policy is the impact on the poor in developing countries, some of my commenters tell me that the US shouldn’t have to import from China or India, they have lots of other countries to sell to. As Marie Antoinette might’ve said “let them sell to Canada.” That’s right, progressives ease their conscience by claiming that other developed countries won’t follow the same evil trade policies that progressives like Sanders want the US to follow, so things won’t actually be that bad for poor people in Bangladesh.  More often, they entirely ignore the issue.

I know that progressives like to think of themselves as the good guys, but the honest truth is that on trade they are increasingly becoming the evil ones, right along with Trump.

And here’s what else people don’t get. Not all the problems in the world are caused by neoliberal economic theories, for the simple reason that not all economic policies reflect neoliberal economic theories. Even if everything people say about inequality quality is true, there’s nothing wrong with the neoliberal model, which allows for the EITC, progressive consumption taxes, and sensible reforms of intellectual property rights, occupational licensing, and zoning laws.

I can’t help it if Democratic politicians oppose reforms of intellectual property rights. I can’t help it if progressives that once favored progressive consumption taxes now oppose progressive consumption taxes. I can’t help it if Democrats voted to repeal the luxury tax on yachts soon after having enacted a luxury tax on yachts. I can’t help it if progressives suddenly feel that a $15 an hour minimum wage is not a loony idea.

The simple truth is that neoliberal economic policies work, as we’ve seen in Denmark and Switzerland and Singapore, and socialism doesn’t work, as we’ve seen in Venezuela. So I’m asking all those wavering neoliberals in the respectable press (Thatcher called them “wets“) to stop your handwringing and get out there and boldly defend the neoliberal model. It’s not just the best model; in the long run it’s the only model that really works.

PS.  And don’t anyone insult my intelligence by telling me that Sanders favors the Danish model.

PPS.  And don’t tell me the GOP is just as bad—I know that.  But right now they aren’t the biggest critics of neoliberalism (except for Trump, obviously).

PPPS.  The Huffington Post thinks Kasich will be the nominee.  In other words, they think the GOP is a non-insane political party.  Meanwhile the betting markets currently assign a 5.3% probability to the GOP being a non-insane political party.  (BTW, I don’t like Kasich; I want Ryan.)

Meanwhile, Drudge has linked to a copy of next year’s Boston Globe:

I suppose that’s obvious:

For Americans of nearly every race, gender, political persuasion and location, disdain for Donald Trump runs deep, saddling the Republican front-runner with unprecedented unpopularity as he tries to overcome recent campaign setbacks.

Seven in 10 people, including close to half of Republican voters, have an unfavorable view of Trump, according to a new Associated Press-GfK poll.

It’s an opinion shared by majorities of men and women; young and old; conservatives, moderates and liberals; and whites, Hispanics and blacks — a devastatingly broad indictment of the billionaire businessman.

Even in the South, a region where Trump has won GOP primaries decisively, close to 70 percent view him unfavorably. And among whites without a college education, one of Trump’s most loyal voting blocs, 55 percent have a negative opinion. . . .

A survey conducted by Gallup in January found Trump’s unfavorable rating, then at 60 percent in the their polling, was already at a record high level for any major party nominee in their organization’s polling since the 1990’s.

Candi Edie, a registered Republican from Arroyo Grande, California, is among those whose views on Trump have grown more negative.

“At first, I thought he was great. He was bringing out a lot of issues that weren’t ever said, they were taboo,” Edie said. Now the 64-year-old feels Trump’s early comments masked the fact that he’s “such a bigot.”

“I don’t know if he’s lost it or what,” she said. “He’s not acting presidential.”Trump’s unpopularity could provide an opening for Cruz, though he is loathed by many of his Senate colleagues and other party leaders. After a big win Tuesday in Wisconsin, Cruz is angling to overtake Trump at the July GOP convention. . . .

Andrew Glaves, a “hard core” Republican from Bothell, Washington, said he might have to side with Clinton if Trump becomes the nominee, even though she’s out of step with his views on gun rights, his top election issue.

“I’d be willing to take that as opposed to doing so much harm to the country’s reputation,” said Glaves, 29.

More than 60 percent of all registered voters and 31 percent of Republicans said they definitely would not vote for Trump in the general election.

So why keep repeating the obvious?  Because lots of articles keep trying to explain why Trump is so popular.  They cite trade, even though polls suggest that most Americans view trade as an opportunity, not a threat.  They cite de-industrialization, even though Trump’s best state was (high-tech) Massachusetts, and one of his worst was Wisconsin, which is America’s second most industrial state, after Indiana.  (This week, I’m proud to call myself a cheesehead.)

So if Trump is really unpopular, maybe there’s no reason to try to explain his popularity.  Maybe he’s just another Pat Buchanan, but getting 35% instead of 25%, because he is a TV celebrity.

Nor has he picked up strength as others have dropped out:

(The pink lines are territories.  Note to myself: When vacationing in the southern Pacific, stick to the Southern Mariana Islands.) In fairness, Trump’s expected to do very well in New York, and still has a 50% chance of getting the nomination, and a 12.7% chance of winning the White House. That’s more than any other man (although he’s not that far ahead of Sanders.)

Even so, Trump is really, really unpopular.  His success in politics can be explained in many ways, but there no evidence that we can learn anything about what policies the voters want by looking at his primary wins.

But what about the minority that do like Trump?  Surely we can learn something about their policy views?  Here’s Jonah Goldberg:

I often read the Twitter profiles of the Trump supporters who pester me. Sometimes I discover they’re phony “TrumpBots” created by some marketing firm. Sometimes I see that they’re members of the coprophagic phylum of white supremacists using Trump as a blocking tackle for their repugnant cause. But just as often, I see these people describing themselves as “classical liberals” or “constitutionalists” or “Goldwater Republicans,” and my heart weeps. There’s nothing classically liberal about Donald Trump. To the extent he’s a conservative at all, he’s a throwback to a time when a Herbert Hoover and Richard Nixon were “conservatives.” Nixon’s politics of resentment led to his impeachment. Hoover’s “best practices” gave us the Depression and Franklin Roosevelt (whose policies made the Depression Great).

Scott Alexander recently produced one of his routinely brilliant posts (not about Trump, BTW), explaining the strange phenomenon of tribalism:

My title for this post is also my preferred summary: the ideology is not the movement. Or, more jargonishly – the rallying flag is not the tribe. People are just trying to find a tribe for themselves and keep it intact. This often involves defending an ideology they might not be tempted to defend for any other reason. This doesn’t make them bad, and it may not even necessarily mean their tribe deserves to go extinct. I’m reluctant to say for sure whether I think it’s okay to maintain a tribe based on a faulty ideology, but I think it’s at least important to understand that these people are in a crappy situation with no good choices, and they deserve some pity.

Read the whole thing—you’ll learn a lot.  For instance, I finally understand the Sunni/Shia split.

PS.  I did a couple posts at Econlog.  Check out my post on the minimum wage; I’d be interested in feedback.  I also did a post on Sanders and trade, and Jonah Goldberg makes similar points, much more effectively:

Sanders says that he believes in “fair trade.” What he means is that we can’t be expected to do business with countries that pay their workers a lot less than we pay our workers. He suggested to the New York Daily News this week that we should have free trade only with countries that have the same wages and environmental policies as us, which is another way of saying we shouldn’t trade with poor countries.

In practical terms, Sanders wants to keep billions of (non-white) people poor — very poor. If America were a flea market, his policy would be akin to saying, “Poor people of color cannot sell their wares here, even if customers want to buy them.”

International trade, led by the United States, has resulted in the largest, fastest decrease in extreme poverty in human history. Roughly 700 million Chinese people alone have escaped extreme poverty since 1980, and most of that is attributable to China’s decision to embrace the market economy and international trade. Want to keep Africa as poor as possible? Throw up as many trade barriers as you can.

If China’s embrace of international trade was (in utilitarian terms) one of the best things that’s ever happened in human history, then enacting a Sanders/Trump trade policy might be one of the worst.  If you care about the welfare of the world’s poorest people, I implore you not to vote for either individual.

PPS.  The always interesting Robin Hanson had this to say:

Today a big chunk of the U.S. electorate feels neglected by a political establishment that they don’t especially respect, and is tempted to favor political bad boy Donald Trump. The main response of our many establishments, especially over the last few weeks, has been to constantly lecture everyone about how bad an idea this would be. Most of this lecturing, however, doesn’t seem to tell Trump supporters anything they don’t think they already know, and little of it acknowledges reasonable complaints regarding establishment neglect and incompetence.

By analogy with these other cases, the obvious conclusion is that all this tone-deaf sanctimonious lecturing will not actually help reduce interest in Trump, and may instead increase it. But surely an awful lot of our establishments must be smart enough to have figured this out. Yet the tsunami of lectures continues. Why?

My tone-deaf sanctimonious lecturing will continue, as I see it as a way of annoying Trump commenters.  I could pity them (as Scott Alexander recommends), but I’m doing them a favor by insulting them instead.  I pity the Trump supporters who aren’t smart enough to read blogs about monetary policy.  More importantly, I see my tone-deaf sanctimonious lecturing as a way of making Trump seem more toxic.  The goal is not to turn Trumpiacs away from him, but to stop others from being seduced.  So far this seems to have worked, as his popularity has topped out.  As long as 70% of Americans hate him, I don’t need to move to Australia.