Archive for May 2016


Lacker on the June meeting

Richmond Fed president Jeffrey Lacker was interviewed by Ylan Mui, of the WaPo:

I never completely make up my mind before a meeting, but at this point it looks to me as if the case for raising rates looks to be pretty strong in June. Inflation is moving decidedly toward 2 percent. Labor markets have tightened very significantly. The concerns, the downside risks that we saw at the very beginning of this year, have dissipated. And we’re very far away from the benchmarks that we have to guide where rates ought to be. To me that adds up to a pretty strong case for a June move. But as I said, I don’t make up my mind until the meeting comes.

Lacker may be right about the need for a rate increase in June, but I don’t see these reasons as being persuasive:

1.  Market forecasts call for under 2% inflation over the next 5 to 10 years.  Those forecasts may be biased, but even Fed forecasts don’t show any overshooting.

2.  Yes, “downside risks” have dissipated, but only because the Fed held off raising rates this year.  Early in the year, the markets were very concerned about the impact of a rate increase on both the US and global economy.  One of the reasons that markets are calm right now is that they view a June rate increase as very unlikely.  I’m not sure that Janet Yellen would like to risk this outcome.

3.  Yes, rates are very far below the levels called for by famous “benchmarks”, but that merely proves that those benchmarks are not reliable in the 21st century.  The Wicksellian equilibrium rate has fallen sharply.  If that were not the case, and the benchmarks still held, we’d be in the midst of another Great Inflation by now.

At the end of the interview Lacker talks about productivity:

I’m optimistic about productivity growth in the longer run. I think productivity growth generally depends on the generation of ideas and the implementation of those ideas. I think we have all the ingredients for generating very useful ideas here. This continues to be a relatively good place to implement good ideas.

I’m less optimistic than Lacker.  Ironically, the strongest argument for a rate increase in June is if you assume that 1.2% RGDP growth is the new normal, as I’ve claimed.  In that case, overheating is more likely to occur with even 3.5% NGDP growth.  In contrast, were RGDP growth to return to the 3% of the 20th century, then current NGDP growth would be too slow, and easier money would be needed going forward, to hit the Fed’s inflation target.

Everybody Must Get Stoned (Two cultural revolutions)

[Most readers will want to skip this annoying exercise in boomer nostalgia.  If you are a Zhangke Jia fan then go see “Mountains May Depart” instead, my favorite film of the past year.]

I sometimes think the last half of the 1960s was the most interesting period in my lifetime.  I was a bit too young to have “been there” in a Woodstock sense, but I do recall quite a bit of what happened, especially in 1968.  Since the post will be almost entirely subjective, let me start with a few objective facts.  Here’s a graph of world population growth rates:

Screen Shot 2016-05-12 at 2.33.42 PMUnfortunately I was not able to find a much more interesting graph that I once saw, which went from 10,000 years BC to 10,000 years AD.  It was flat as a pancake near 0% growth for thousands of years, then a very narrow spike up to 2.1% in the late 1960s, and then flat as a pancake near 0% growth for thousands of years into the future.  When people from 10,000 AD look back at this period, it will be seen as the demographic explosion.  (I believe the “notch” right before the peak is the Chinese Great Leap Forward, when 30 million starved to death.  Otherwise the early 1960s would have been the peak 5-year period.)

The late 1960s was also interesting from a political perspective.  Student movements erupted all over the world in 1968.  Back at home, the worst race riots in US history occurred during 1967 and 1968.  The assassinations of Robert Kennedy and Martin Luther King occurred in 1968.  The Tet Offensive in Vietnam occurred in 1968, and pushed LBJ out of office.  Man first visited the moon in 1968, and the first moon landing would have occurred that year, if not for the tragic fire of 1966.  The best sci-fi movie was made in 1968.  The biggest airplane that most of you have ever flown on was first produced in 1968.

The political craziness of 1968 didn’t just come out of nowhere.  I believe that 1966 was the year of “peak idealism” in American history.  A whole raft of highly influential liberal Republicans were elected in 1966, just two years after the Goldwater debacle (Rockefeller, Romney, Scranton, Percy, Lindsey (in 1965), Chafee, Brooke, etc.)  Middle class white men, in both parties, actually believed liberal ideas provided the answer to America’s problems.

We could end poverty, go to the moon, and make Southern California a paradise for drivers.  Truly anything seemed possible.

Today is the 50th anniversary of two important cultural revolutions.  At least important to me and my wife, maybe not to you.  (OK, tomorrow is the anniversary, but it’s already tomorrow in China.)

The late 1960s saw a flood of very innovative pop music albums (Sergeant Pepper, Pet Sounds, Beggars Banquet, Are You Experienced, Led Zeppelin, and an album with a banana on the cover, among others.)  One of the most important, and my all-time favorite studio album, is Blonde on Blonde, released May 16, 1966.  Between 1962 and 1966 Dylan created a lifetime’s worth of musical styles, in 7 studio albums, plus non-album hits (Positively 4th Street) plus unreleased masterpieces (She’s Your Lover Now).

I didn’t start seriously listening to music until the early 1970s, when I was in high school.  What surprised me is that you could generally figure out when a song was produced to within a year of so, just based on the sound.  Styles were changing that fast.  And Dylan’s music always seemed to come out a bit before the rest of the world caught up. I actually think his earlier “Bringing it all Back Home” was his most influential album, and perhaps his best—compare it to other pop music from early 1965—but I love the sound of Blonde on Blonde. (Dylan suggested “The closest I ever got to the sound I hear in my mind was on individual bands in the Blonde on Blonde album. It’s that thin, that wild mercury sound. It’s metallic and bright gold, with whatever that conjures up.”)

BTW, Dylan created that lifetime worth of music before he turned 25.

At the same time that Americans were producing great pop music while getting stoned, the Chinese people were literally getting stoned, at least if they were well educated or if their ancestors were landlords. On the very same day that Blonde on Blonde was released, the Chinese Cultural Revolution began. The eventual death toll is unknown, but certainly an order of magnitude lower than the Great Leap Forward. Nonetheless, in “utility terms” it was one of the most awful things to ever happen. Mao created perhaps the worst society imaginable—at least in urban China.  People were put under enormous psychological stress to inflict great cruelty on their friends and family.  Society doesn’t get much more perverse than that. Even today, China has not fully recovered, and remains a low trust society relative to the US, although things are certainly improving.

Earlier I talked about 1966 representing “peak idealism” in America.  In China, 1966 represented a year when idealism was raised to such a pitch that it ended up being twisted into the exact opposite.  In Chinese culture, losing face is about the worst thing that can happen, and the Cultural Revolution was all about public humiliation.

While my wife was suffering through that period, I was listening to Dylan, who shaped my adolescent mind more than any other artist, in any medium:

While one who sings with his tongue on fire
Gargles in the rat race choir
Bent out of shape from society’s pliers
Cares not to come up any higher
But rather get you down in the hole
That he’s in

But I mean no harm nor put fault
On anyone that lives in a vault
But it’s alright, Ma, if I can’t please him

Old lady judges watch people in pairs
Limited in sex, they dare
To push fake morals, insult and stare
While money doesn’t talk, it swears
Obscenity, who really cares
Propaganda, all is phony

PS.  I vividly recall wanting to move to California after reading the following National Geographic article, in 1966.  I hated the cold weather in Wisconsin.  When I dug up the article today I was surprised by the date:

Screen Shot 2016-05-12 at 3.39.26 PMOh yeah, this is supposed to be a monetary blog.  OK, 1966 is when the Great Inflation began, the defining economic event of my life.

The 1960s and 1970s made me a monetarist, and the 1980s made me a market monetarist.

Screen Shot 2016-05-12 at 4.04.06 PM

Is Trump becoming a SJW?


This is an awkward thing to admit: I actually took Donald Trump at his word about something.

Big Mistake.

Not much, mind you. Just two things. As much as he might flip-flop with abandon, and lie with ease, about most campaign issues, I figured that two things would remain: He would promise to build a border wall and make Mexico pay for it, and he would promise to ban Muslims from entering the US “until we figure out what’s going on.”

But now he’s showing signs of softening on the Muslim ban. He told multiple interviewers on Wednesday night and Thursday morning that the ban is “just a suggestion” — that “it hasn’t been called for yet.”

Of course, it has been called for. By Donald Trump. Explicitly and repeatedly. For pete’s sake, it was the focus of his very first television campaign ad.

It’s not that I’m surprised Trump is lying about something. (If I were, I should probably be either checked for memory loss or fired.) But I’m really surprised that one of the two things I thought he’d never back down on is one of the first things that, as he “pivots” to the general election, he’s signaling a willingness to move away from.

My Trumpista followers also believed that he would not back down on immigration. I told them they were fools.

And I’m left to wonder: Who is Donald Trump even running as anymore?

.  .  .

Even if Donald Trump doesn’t end up backpedaling on the Muslim ban from a literal, policy-oriented perspective, he’s already started softpedaling it from a communications perspective. And communications is what is most important to Trump anyway. Faced with just a teensy bit of resistance from Paul Ryan, the establishmentiest establishment Republican of them all, he’s already couching one of his boldest truths as something people maybe shouldn’t take so seriously after all.

It is, quite literally, an act of political correctness.

Trump’s becoming PC because he’s frightened of Paul Ryan?  How’s he going to stand up to this man?
Screen Shot 2016-05-14 at 9.51.00 PMNote to Trump supporters.  I know that you think Putin is a really cool guy, but there is a small chance that the picture is photoshopped.

Hail Caesar!

For 7 years, I’ve listened to Republicans complain about President Obama’s abuses of power.  The way he issues executive orders when he cannot get the (GOP) Congress to enact his preferred legislation.  Of course this shift of power to the executive has been going on for decades.  I don’t know how to quantify it, and hence don’t know how much different Obama is from other recent presidents.

I actually share the GOP’s outrage, with the exception that my outrage is sincere whereas the GOP outrage was mostly fake.  They were not upset about an imperial presidency; they were upset that they didn’t have their own imperial president going after the people on the other side.  We see this as the GOP leaders fall all over themselves trying to embrace this guy:

Screen Shot 2016-05-13 at 2.34.12 PM

Matt Yglesias points out that Trump already has an enemies list, and he hasn’t even taken office yet:

Obviously, if Donald Trump had started talking about a proposal to change antitrust law in a way that would be bad for Amazon, and then suddenly a legion of Washington Post reporters showed up covering Trump, that would be suspicious.

But the actual sequence of events has been backward. The Post, located as it is in the nation’s capital, has long been deeply invested in covering American politics. It is staffing up to cover Trump because Trump just locked up the nomination of a major American political party. It’s only in response to critical coverage in the Post that Trump has started talking about using antitrust policy against Amazon, and he’s doing so in a totally nonspecific way with no reference to what aspect of antitrust policy he wants to change.

Before Trump, presidents usually tried to hide their vindictiveness.  Trump proudly tells us whom he’s going to go after.

There’s a (probably apocryphal) statement attributed to FDR, describing Nicaragua’s President for Life:

Somoza may be a son of a bitch, but he’s our son of a bitch.

For the “small government” GOP, it’s becoming apparent that their view is that, “Trump may be a tyrant, but he’s our tyrant.”

This article suggests that most Republicans don’t care at all about ides:

Most Republican politicians have fallen in line behind Donald Trump. Paul Ryan just moved in that direction but still hasn’t endorsed him. Why not? The most important reason is simple. Ryan cares about policies and ideas more than most politicians do. There’s a pattern to opposition to Trump within the GOP. It’s strongest among those motivated by the policies and ideas that characterize the modern conservative movement: limited government, low taxes and free markets.

I’ve noticed the same.  The ideas people hate Trump, whereas the tribalists love him.  Most Republicans are tribal. In Trump they’ve found a guy who (they think) will fight for their tribe. “If he’s against political correctness he must be on my side.” I’m actually not at all convinced that that’s true; I think Trump will fight for what’s in the best interest of Trump.  But the perception is that he will fight for their tribe.  And that’s why controlling the borders is such an important issue.  It’s the one issue that is affects the size of their tribe, relative to the other tribes.

Commenters have told me that they understand that Trump is not sincere on most issues, such as economic policy, but they insist that he’s sincere on immigration. Actually he’s not even sincere on immigration, which should be obvious to anyone who spent 5 minutes checking his record:

(TRUMP) . . . these (illegal aliens) can be some great people– but, you either have laws or you don’t have laws. I would get them back, I would get them back where they are, and I would try to work out a process where they can come in legally. But, they have to come in legally, it’s about laws, it’s about borders. If we don’t have a border, we don’t have a country. So, I get them out, and if they were really outstanding, because some of these people have been here for a long period of time, I’d let them back legally. They have to come through a legal system, and I’d make that system much faster, much quicker. I want people to come into the country. I love the fact that people come into the country, but they have to come in legally. Not only them, other people. We welcome people, I mean, my parents and my grandparents, they came from different parts of the world, too. We all sort of did when you get right down to it. . . .

I would expedite [the process], because some of these people (illegal aliens) are fantastic people. I’ve been to the border, I was there a few days ago. I met some people, these are fantastic people and they have great reputations within the community. So what I’d do is that I would expedite it. You have to have laws. If you don’t have laws, you don’t have a country. I would get them out, and I would try, the good ones — the bad ones, they’re gone, they never come back. They’ll never get back into this country. But, the good ones, of which there are many, I want to expedite it so they can come back in legally.

Like Obama, Trump wants to expel the bad ones and keep the good ones.

But humans have an innate urge to project their hopes and fears onto a powerful leader.  They want to believe that Trump is being straight with them, all evidence to the contrary.

PS.  Please don’t tell me that so and so is just as bad as Trump.  That’s off topic, and in any case they aren’t as bad.  This post is about GOP hypocrisy, nothing else.

PPS.  Here’s how to tell is a Trump hater is intellectually honest.  Check out their position on releasing tax returns.  I strongly support Trump’s refusal to release his taxes, because the income tax system is an immoral monstrosity, and demanding the release of tax forms implicitly legitimizes that system.  In contrast, Trump people would support him on this point, but would be outraged if he released his tax returns and Hillary refused to.  With Trumpistas, it’s all tribal.

Liquidity traps and obesity traps

I once compared liquidity traps to obesity traps, but I can’t find the link.  The basic idea is that a person is stuck in an “obesity trap” if they cannot reduce weight without doing one of the following three things:

1.  Diet

2.  Exercise

3.  Surgery

Experts agree that those three steps would lead to weight loss, but they may require too much self control (diet, exercise) or expensive and painful surgery.  The obesity “trap” results from the fact that it’s difficult to lose weight if you rule out taking one of those three steps.

Similarly, there are steps that experts agree would eliminate the liquidity trap problem:

1.   A higher inflation target

2.  Level targeting (P or NGDP)

3.  Chuck Norris approach (promise to buy whatever it takes)

4.  Currency depreciation

Paul Krugman prefers #1, I prefer both #2 and #3.  But for various reasons central banks generally don’t want to do any of those 4 things. Instead they prefer to do two things that, while being mildly effective, may still fall short of what’s required to hit their target.  Those two things are QE and negative IOR.

Over at Econlog, Bryan Caplan added a 5th idea to the list of things that would work, but that the Fed does not want to do.  He suggests that we could convert all public debt into consols.  Then interest rates would never hit the zero lower bound, because it would imply an infinite price of consols.  This might well work, but central banks would not want to do this because it might expose them to a high level of asset price risk.  Indeed concern about asset price risk is what led Switzerland to switch to a much tighter monetary policy back in early 2015.  So add Bryan’s idea to the list of things that would work, but that central banks do not want to do.

PS.  Over at Econlog, I have a piece discussing Hillary’s views on Fed restructuring.