Back in January 2015, the SNB foolishly allowed the SF to suddenly appreciate against the euro (by roughly 14%), after capping its value at 1.2 for about 3 years. Soon after, the SNB realized its mistake, and now the SF is up by only about 8% compared to the period just before the revaluation (the graph shows the inverse of the SF’s value):

Another lucky break was that the euro weakened in 2015, and so the SF has actually been relatively weak against the dollar over the past year (again, graph shows the inverse of the SF’s value):

Switzerland fell into mild deflation, although that may have partly reflected falling oil prices:

Fortunately, unemployment rose only modestly, as the Swiss economy has always been more flexible than other European economies:

(Sorry, I could not find seasonally adjusted data, but you can see the mild upswing in unemployment.)

The other bullet dodged was a proposed Universal Basic Income, of roughly $30,000/year for each adult, and about $8000/year for each child. That is, about $76,000/year for a family of four.  There may come a time when a UBI is appropriate, but this proposal was way too soon, and way too generous.  It was rejected overwhelmingly:

Projections by the GFS polling outfit for Swiss broadcaster SRF showed nearly four out of five voters opposed the bold social experiment launched by Basel cafe owner Daniel Haeni and allies in a vote under the Swiss system of direct democracy.

Trump is the gift that keeps on giving.  Hillary will be able to run any attack ad she wishes against Trump.  All she needs to do is find the most unpopular side of any issue, and then claim that Trump supports that unpopular position.  But wouldn’t that be lying?  No, lying is when Trump accuses Hillary of lying about his record. Here’s an example:

Washington (CNN) Donald Trump on Wednesday night charged Hillary Clinton was misrepresenting his position by saying he wants nuclear arms for Japan — but the presumptive Republican nominee previously has said exactly that.

At a rally in Sacramento, Trump said that Clinton “made a speech, she’s making another one tomorrow, and they sent me a copy of the speech. And it was such lies about my foreign policy, that they said I want Japan to get nuclear weapons. Give me a break.”

He added, “See they don’t say it: I want Japan and Germany and Saudi Arabia and South Korea and many of the NATO states, nations, they owe us tremendously, we’re taking care of all those people and what I want them to do is pay up.”

But in an April interview with Chris Wallace on Fox News, Trump said, “It’s not like, gee whiz, nobody has them. So, North Korea has nukes. Japan has a problem with that. I mean, they have a big problem with that. Maybe they would in fact be better off if they defend themselves from North Korea.”

Wallace asked, “With nukes?”

“Including with nukes, yes, including with nukes,” Trump responded.

I keep pointing out that Trump’s been on both sides of every issue, that he’s the least “authentic” person ever to run for President of the United States.  And yet his deluded fans support him precisely because they think he’s the only authentic candidate.  Or they admit that all his non-immigration views are fake, but at least he’s sincere on immigration, which is what really matters.  OK, do these Trump immigration views seem sincere?

The Republican Party will continue to lose presidential elections if it comes across as mean-spirited and unwelcoming toward people of color, Donald Trump tells Newsmax.

Whether intended or not, comments and policies of Mitt Romney and other Republican candidates during this election were seen by Hispanics and Asians as hostile to them, Trump says.

“Republicans didn’t have anything going for them with respect to Latinos and with respect to Asians,” the billionaire developer says.

“The Democrats didn’t have a policy for dealing with illegal immigrants, but what they did have going for them is they weren’t mean-spirited about it,” Trump says. “They didn’t know what the policy was, but what they were is they were kind.”

Romney’s solution of “self deportation” for illegal aliens made no sense and suggested that Republicans do not care about Hispanics in general, Trump says.

“He had a crazy policy of self deportation which was maniacal,” Trump says. “It sounded as bad as it was, and he lost all of the Latino vote,” Trump notes. “He lost the Asian vote. He lost everybody who is inspired to come into this country.”

The GOP has to develop a comprehensive policy “to take care of this incredible problem that we have with respect to immigration, with respect to people wanting to be wonderful productive citizens of this country,” Trump says.

Amen, I couldn’t have said it better.

(For those who don’t know, “comprehensive” is a code word in the immigration debate.  And if you are an anti-immigrant Trumpista, then you don’t want to find out what it implies.)

If you want to see some amusing work by master contortionists, just read how the gullible Trumpistas spin this in the comment section.  Some will insist the unfair press is making up quotes.  Others will claim Trump’s had a since road to the White House, err, I mean road to Damascus conversion on immigration.  Remember, even Trump has acknowledged that he can shoot someone in the middle of 5th Avenue and it doesn’t matter to his supporters.  The only question is whether his supporters will constitute 50.1% of the electorate in November.  Right now there’s a 24% chance of that happening.

The Republican candidates who opposed Trump were even more incompetent than they appeared.  All they had to do during the debates was read out Trump’s actual view so immigration, every time the question came up.  If they had done this early in the campaign, before he got momentum, the xenophobes never would have flocked to his campaign.

PS.  Ross Perot was a colorful, populist, protectionist business tycoon, with weird conspiracy theories, who ran for President in 1992.  Perot’s high point occurred in June, when he actually led the field, polling at 39%.  It was all downhill from there, as voters got serious about the fact that we were actually electing a President, and that having a crazy person in charge of foreign policy might not be a good idea.

PPS.  And hot off the press:

Donald Trump sought to tout his support among African-Americans on Friday by pointing out a black man in the crowd and calling him “my African-American.”

“Oh, look at my African-American over here. Look at him,” Trump said. “Are you the greatest?”

HT:  Tyler Cowen

Over at Econlog I have a post criticizing Olivier Blanchard’s suggestions for improving the way we teach macro.  Blanchard wants to focus on the IS relationship, and pretty much discard LM:

The LM relation, in its traditional formulation, is the relic of a time when central banks focused on the money supply rather than the interest rate. In that formulation, an increase in output leads to an increase in the demand for money and a mechanical increase in the interest rate. The reality is now different. Central banks think of the policy rate as their main instrument and adjust the money supply to achieve it. Thus, the LM equation must be replaced, quite simply, by the choice of the policy rate by the central bank, subject to the zero lower bound. How the central bank achieves it by adjusting the money supply should be explained but can stay in the background. This change had already taken place in the new Keynesian models; it should make its way into undergraduate texts.

I’d rather get rid of IS/LM entirely, but if we insist on using the model, then I’d prefer we keep LM.  Even with the complete IS/LM model, economists often fall into the trap of reasoning from a price change.  For instance, they often assume that a fall in interest rates represents an easy money policy, even though the IS/LM model clearly suggests that it might also reflect a leftward shift in IS:

Now suppose we get rid of the LM curve, as Blanchard proposes, and instead assume that the interest rate represents monetary policy.  Won’t students be even more likely to make this mistake?

My favorite example is the period from August 2007 to May 2008, when the growth in the monetary base (which had averaged a bit over 5% in the previous decade, came to a halt.  This led to a sharp slowdown in NGDP growth, triggering the recession (albeit not yet a “Great” recession.)  Indeed it appears the Fed triggered the Great Recession regardless of whether you accept my NGDP view of the stance of monetary policy, or whether you prefer the old “concrete steppes” approach—was the Fed injecting new money into the economy. My worry is that people will confuse the following two graphs:

The graph on the right shows what actually occurred during the onset of the Great Recession. But if we eliminate the LM curve, as Blanchard suggests, then most students will assume the graph on the left shows what happened during late 2007 and early 2008.  It will look like monetary “stimulus”. They won’t even consider the possibility that tight money might have triggered the Great Recession, as money “obviously wasn’t tight”.

What I find so maddening about all this is that we already have a macro misdiagnosis problem, and the changes proposed by Blanchard will make that problem even worse.

PS.  Although I often talk about 2007-08, there are lots of other examples.  Both the monetary base and nominal interest rates fell sharply in 1920-21 and again in 1929-30.  In both cases money was clearly tight, as the reduction in the monetary base caused NGDP to plunge sharply.  But those who focused on interest rates saw policy as being “accommodative”.  If you misdiagnose the cause of the Great Depression, how likely is it that you’ll come up with effective remedies?

HT:  Marcus Nunes

Before getting into today’s post, a few notes:

1.  Bad jobs report, no June rate rise.  Low rates as far as the eye can see.  What else is new?

2. I was interviewed by Cloud Yip of Hong Kong, and the entire interview is here.  I apologize if some of my answers are a bit rambling, I am used to reporters just using one or two sentences from an interview, and didn’t expect the entire interview to be posted.  In any case, it’s mostly about The Midas Paradox and my views on Keynesian economics.

Here’s a list of countries that the UN expects to lose population, between 2015 and 2050.  Notice that the ten fastest declining countries are all in Eastern Europe:

Here’s something that surprises me even more.  Every single Eastern Europe country is expected to lose population, including Armenia and Georgia, which aren’t technically in Europe, but are “culturally” European.

So what about Western Europe?  Let’s leave aside Germany for the moment.  The other Western European countries expected to lose population are Greece, Italy, Spain, Portugal and Malta.  So if we go by Wikipedia’s definition of “Europe” (which oddly excludes Cyprus) every single Eastern and Southern European country is expected to lose population.

OK, so we all know about Europe’s bad demographics (or good, if you are a misanthrope.)  But as we move away from Eastern and Southern Europe, only one country is expected to lose population—Germany.

Suppose you had seen population data for all the other countries in Western Europe, north of the Alps, and saw that every single one except Germany was expected to gain population.  The UK is expected to gain over 10 million; France will gain over 6 million.  Would you expect Germany to look more like Southern and Eastern Europe, or northwestern Europe?  All the other Nordic countries gain.  All the other German-speaking countries gain. All the other affluent countries gain. Housing is cheaper in Germany than the UK.  All the characteristics that fit Germany point to gains, often large gains (as in Switzerland).

But Germany is expected to see its population plunge by more than 6 million. Why?

The only thing I could think of was eastern Germany, but that region is far too small to explain such a massive expected population decline.

It’s also kind of fun to look at the UN projections in other areas:

Iran  79.1 million (2015)   69.6 million (2100)

Iraq   36.4 million  (2015)   163.9 million (2100)

And my favorite:

Japan/Russia combined  185.0 million (1950)   200.6 million (2100)

Niger   2.6 million (1950)  209.3 million (2100)

In 1950, Niger had less than 1/3 as many people as Belgium, by 2100 it will have more than Russia and Japan combined.  Can we trust these predictions? Of course not, but a couple points.  These forecasts are based on the assumption that Niger’s fertility rate, currently about 7.6 kids per mom, will fall to 2.5 in 2100.  In recent years the UN has actually been increasing its 2100 forecast for Africa, as fertility is not dropping as fast as earlier anticipated.  So this might just as well be an underestimate.

Here’s another way of looking at UN predictions.  They forecast a growth in total world population of 2,712 million between 2030 and 2100.  They forecast growth in Africa’s population of 2,708 million between 2030 and 2100–that’s two Chinas.  Which means the UN thinks the world’s non-African population will basically not change at all between 2030 and 2100 (although they actually do see a rise from 2030 to 2050, then an equal decline from 2050 to 2100).

BTW, the UN projects that China’s population will fall to about a billion in 2100, but I believe that it will fall much faster.  They forecast that Chinese fertility, which has been falling, will rise from 1.55 today to 1.81 in 2100, despite the fact that China is likely to be much richer in 2100, and despite the fact that in China’s richer cities the fertility rate is already well below the national average.  Even worse, look at the countries with the world’s lowest fertility rates.  People often talk about Japan’s low fertility (1.43), but it’s actually the highest in developed East Asia:

I know what you are thinking, what country does the UN call “other non-specified areas”.  That charming name is given to a place formerly called Formosa.  So the four countries, sorry “areas” with the lowest birth rates are all ethnically Chinese, urban, and rich.  But somehow the UN sees China’s fertility rate rising from 1.55 to 1.81 as it gets more urban and rich. What am I missing here?  I could easily see China having fewer people than Nigeria by 2100.  (And don’t confuse Niger, which will have “only” 209 million, with Nigeria, which will have 752 million.)

Where does all the time go?

I just noticed that I’ve fallen behind on the set of podcasts by David Beckworth, so I will work through the ones I’ve missed, starting with the Greg Ip, one of our best economic journalists.  Here’s my favorite comment by Ip:

And it actually may be better to have lots of small financial disruptions than one big financial disruption.

In Greg’s recent book he discusses this idea in more detail.  In the interview, Greg uses analogies such as the danger of continually preventing small forest fires, and thus building up fuel for a catastrophic fire.

Over the past 50 years the government has prevented financial crises about every decade or so, by either bailing out depositors of large banks, or arranging assistance in the case of LTFC (1998).  And this had the effect of storing up fuel (moral hazard) for an even bigger crisis in 2008.  But I would go much further that Ip, who approves of FDIC.  It’s not politically possible to abolish FDIC, but perhaps we could create a two-tier system where insured deposits are backed by safe assets, so that taxpayers are not put at risk.  Deposits used for lending to businesses and homebuyers would not be insured, but would offer higher interest rates to depositors.  Let bank depositors choose how much risk they are willing to take.  Ip also is appropriately critical of the regulatory overreach of Dodd-Frank. BTW, banks would hate my FDIC reform proposal, but it could be combined with the complete repeal of Dodd-Frank.

There are also a few areas where I disagreed with Ip.  At one point he wondered why there was so much discussion of the need for monetary stimulus. After all, unemployment in the US and Japan is relatively low, and the unemployment rate in the eurozone is now declining at a decent clip.  This is a good argument, but I think he’s also missing something important.  Monetary policy must be judged as a regime, not in terms of day-to-day considerations of macroeconomic stability.

For better or worse, central banks now focus most of their effort on inflation targeting, with some attention also paid to keeping unemployment close to the natural rate. Recall that the natural rate hypothesis predicts that the public will eventually adjust their expectations to match any inflation rate, and unemployment will eventually move back to the natural rate.  When viewed from this perspective, I think what Greg’s really asking is what difference does it make if the Eurozone has 1% inflation, or 1.9% inflation, as long as it is reasonably steady and as long as unemployment seems to be adjusting back to the natural rate.

I see two problems with the ECB allowing 1% inflation to be the new normal:

1.  If this were to occur, the public would lose faith in the ECB’s inflation promises. This would make ECB policy less effective in the next crisis.  If central banks are going to set inflation targets, then those targets should mean something.  If they decide not to target inflation (as I’d prefer) then it’s essential that they set some other target, such as NGDPLT.

2.  If 1.0% inflation, rather than 1.9% inflation, becomes the new normal in the ECB, then nominal interest rates will move to a permanently lower track.  And since real interest rates seem to be entering a new normal which is well below the rates we saw in the 20th century, a lower trend rate of inflation would mean that the ECB will be stuck at the zero bound for a much greater percentage of the time.  Indeed financial markets are already quite pessimistic about the future course of eurozone rates, especially for safe assets like German and Swiss long-term bonds.

Notice that points 1 and 2 relate to each other; both make it more difficult for the ECB to achieve its goals in the future.  So there is real value in taking an announced inflation target seriously, and trying to hit it.  BTW, the US is doing much better than the eurozone and Japan on the inflation front, but just today Kocherlakota warned that even the US is likely to fall short of 2% inflation going forward.  (I’m a moderate on this question—I think they’ll probably fall a bit short, but perhaps not as much as Kocherlakota and some of my fellow MMs believe.  I see something around 1.8% as the new normal.)

At one point Ip asked David the question of what should the Fed actually do to implement an NGDPLT policy regime.  I hate these “concrete steppes” questions, but we need to face the fact that this is what everyone wants to know.  The reason why I hate these questions is because I know the sort of answer people are looking for:

Desired answer:  Some big bazooka of a monetary policy instrument that is so powerful that it can clearly move NGDP to the desired policy path.

My answer:  NGDPLT is the big bazooka, and once implemented you merely need to do tiny little OMOs, like we did back before 2008.

And I know that this answer won’t satisfy anyone.  They think money has been very easy, and if we’ve fallen short then we must need very, very, very easy policy.  We MMs think money has been tight, and that a NGDPLT target could be hit with the sort of moderate policy we had before 2008.  In other words, if 5% NGDPLT were adopted in 2007, or right now, the policy would look pretty much like what you saw in Australia after 2007, or what you see in Australia today.  Positive interest rates.

But yes, you do need a big “instrument” bazooka lurking in the background, just in case.  That makes the system credible, so that you don’t actually have to use it. For David the big bazooka is the Treasury, promising to do a coordinated fiscal/monetary expansion if the Fed runs out of ammo.  For me the big bazooka is a Fed promise to buy any and all financial assets, anywhere in the world, until market expectations of NGDP growth are equal to 5% (or whatever the target chosen.)

And the other point I always make is that the lower the NGDP target (i.e. the lower the trend inflation rate) the bigger the Fed balance sheet as a share of GDP.  If NGDP growth is so low that nominal rates fall to zero, then the Fed balance sheet can get very large.  If the NGDP target rate is set high enough where rates stay above zero, then the Fed balance sheet stays small.  I prefer a small Fed balance sheet.

Inflation or socialism?  It’s your choice.