Archive for June 2018


Irving Fisher and George Warren

I am currently a bit over half way through an excellent book entitled “American Default“, by Sebastian Edwards. The primary focus of the book is the abrogation of the gold clause in debt contracts, which (I believe) is the only time the US federal government actually defaulted on its debt. But the book also provides a fascinating narrative of FDR’s decision to devalue the dollar in 1933-34.  I highly recommend this book, which I also discuss in a new Econlog post. Later I’ll do a post on the famous 1935 Court case on the gold clause.

Edwards has an interesting discussion of the difference between Irving Fisher and George Warren.  While both favored a monetary regime where gold prices would be adjusted to stabilize the price level, they envisioned somewhat different mechanisms.  Warren focused on the gold market, similar to my approach in my Great Depression book.  Changes in the supply and demand for gold would influence its value.  Raising the dollar price of gold was equivalent to raising the nominal value of the gold stock.  Money played little or no role in Warren’s thinking.

Fisher took a more conventional “quantity theoretic” approach, where changes in the gold price would influence the money supply, and ultimately the price level.  Edwards seems more sympathetic to Fisher’s approach, which he calls a “general equilibrium perspective”.  Fisher emphasized that devaluation would only be effective if the Federal Reserve cooperated by boosting the money supply.

I agree that Warren’s views were a bit too simplistic, and that Fisher was the far more sophisticated economist.  Nonetheless, I do think that Warren is underrated by most economists.

To some extent, the dispute reflects the differences between the closed economy perspective championed by Friedman and Schwartz (1963), and the open economy perspective advocated by people like Deirdre McCloskey and Richard Zecher in the 1980s.  Is the domestic price level determined by the domestic money supply?  Or by the way the global supply and demand for gold shape the global price level, which then influences domestic prices via PPP?  In my view, Fisher is somewhere in between these two figures, whereas Warren is close to McCloskey/Zecher.  I’m somewhere between Fisher and Warren, but a bit closer to Warren (and McCloskey/Zecher).

There’s a fundamental tension in Fisher’s monetary theory, which combines the quantity of money approach with the price of money approach.  Why does Fisher favor adjusting the price of gold to stabilize the price level (a highly controversial move), as opposed to simply adjusting the money supply (a less controversial move)?  Presumably because he understands that under a gold standard it might not be possible to stabilize the price level merely through changes in the domestic quantity of money.  If prices are determined globally (via PPP), then an expansionary monetary policy will lead to an outflow of gold, and might fail to boost the price level.  Thus Fisher’s preference for a “Compensated Dollar Plan” rather than money supply targeting is a tacit admission that Warren’s approach is in some sense more fundamental than Friedman and Schwartz’s approach.

Warren’s approach also links up with certain trends in modern monetary theory, particularly the role of expectations.  During the 1933-34 period of currency depreciation, both wholesale prices and industrial production soared much higher, despite almost no change in the monetary base.  Even the increase in M1 and M2 was quite modest; nothing that would be expected to lead to the dramatic surge in nominal spending.  That’s consistent with Warren’s gold mechanism being more important that Fisher’s quantity of money mechanism.  In fairness, the money supply did rise with a lag, but that’s also consistent with the Warren approach, which sees gold policy as the key policy lever and the money supply as being largely endogenous.  You might argue that the policy of dollar devaluation eventually forced the Fed to expand the money supply, via the mechanism of PPP.

A modern defender of Warren (like me) would point to models by people like Krugman and Woodford, where it’s the expected future path of policy that determines the current level of aggregate demand.  Dollar devaluation was a powerful way of impacting the expected future path of the money supply, even if the current money supply was held constant.

This isn’t to say that Warren’s approach cannot be criticized. The US was such a big country that changes in the money supply had global implications.  When viewed from a gold market perspective, you could think of monetary injections (OMPs) as reducing the demand for gold (lowering the gold/currency ratio), which would reduce the value of gold, i.e. raise the price level.  A big country doing this can raise the global price level.  So Warren was too dismissive of the role of money.  Nonetheless, Warren’s approach may well have been more fruitful than a domestically focused quantity theory of money approach.

Screen Shot 2018-06-07 at 12.15.35 PM

PS.  Because currency and gold were dual “media of account”, it’s not clear to me that the gold approach is less of a general equilibrium approach, at least under a gold standard.  When the price of gold is not fixed, then you could argue that currency is the only true medium of account, and hence is more fundamental.  During 1933-34, policy was all about shaping expectations of where gold would again be pegged in 1934 (it ended up being devalued from $20.67/oz. to $35/oz.)

PPS.  There is a related post (with bonus coverage of Trump!) over at Econlog.

Obama was bad, Trump was worse

Update:  This Dean Baker post suggests the WSJ article is highly misleading, in which case I was too hard on Obama.

The WSJ has an article discussing some comments made by President Obama, back in February 2009.  While speaking to Senator Reid, he indicated that the next day’s jobs report would be bad.  It was bad, unemployed rose to 7.6%.  Reid later mentioned these comments on the Senate floor.

That’s clearly something that Obama should not have done.  So why do I think Trump’s actions were worse?

If you go back to that period, everyone knew the jobs number was going to be horrific.  We’d recently been losing a massive number of jobs every month.  No, that doesn’t excuse the action; the leak did remove a tiny tail risk that the numbers would be OK.  But basically it would be pretty hard to profitably trade on the Obama leak.  If you could go back in a time machine, how would you trade on that inside information?  Sell stocks and buy Treasuries?  Sorry, but stocks soared dramatically higher after the jobs report, and Treasuries fell as bond yields rose strongly.  So Obama wasn’t really giving away any useful information:

Analysts said they were cheered that financial markets seemed to shrug off a government report showing that unemployment climbed to 7.6 percent in January as the recession deepened, a sign the job market was still far from hitting bottom.

“It’s a good sign that we’re trading up in the face of bad news,” said Ed Hyland, global investment specialist at JPMorgan Private Bank. “That’s one of the signs that you look for in the bottoming of a bear market.”

Although the statistics were grim, the so-called whisper numbers representing the most pessimistic estimates on Wall Street guessed that unemployment could have spiked to 8 percent last month, given the mass layoffs announced by employers.

Basically, Obama was leaking common knowledge that the jobs market sucked in January 2009.

Again, that’s not to defend his action; he should have kept his mouth shut.  But Trump’s action was worse.  Anyone who knows how Trump thinks would have interpreted his comment as an indication that a pretty decent jobs number was likely to occur.  Why would Trump do that tweet if the number was going to come in worse than expected?  Unlike with the Obama leak, traders who were lucky enough to see his tweet at 7:21am could have profited from the leak.

Of course the WSJ knows all of this, but chose not to publish the information.  To use David Henderson’s terminology, that’s “unforgivable“.

PS.  With Trump there are two types of people, those who see the elephant in the room, and those that cannot see it.  Almost every day there is a new Trump outrage.  When it occurs, some people dig up some sort of similar event with one of America’s previous 44 presidents.  They fail to see the pattern here, the uniquely outrageous nature of Trump.  It’s like a dot picture of an elephant:

Screen Shot 2018-06-06 at 1.48.59 PMSome people see the elephant, while others just see a bunch of individual dots–none of which look like an elephant.

None of Trump’s individual outrages make him look particularly awful.  It’s the daily drumbeat that paints the true picture.  You either see it or you don’t.  For those who cannot, I can’t help you.

Interestingly, America’s white nationalists do see the picture accurately.  They get it.  They see how all the points fit together.  That’s why they love Trump.

HT:  Viking



Should the Fed worry about dollar debts?

Here is the Financial Times:

The US Federal Reserve is often buffeted by fierce cross-currents but investors caution that balancing the strong domestic economy and rising turbulence in emerging markets — and now Europe — will require a particularly adept hand at the tiller this year.

Although Argentina and Turkey have been the focus for their own idiosyncratic reasons, Urjit Patel, India’s central bank governor, argued that emerging markets are suffering a broader bout of “upheaval” caused by the “double whammy” of the Fed’s balance sheet shrinkage and the US Treasury’s borrowing binge.

“Given the rapid rise in the size of the US deficit, the Fed must respond by slowing plans to shrink its balance sheet,” Mr Patel wrote in the FT on Monday. “If it does not, Treasuries will absorb such a large share of dollar liquidity that a crisis in the rest of the dollar bond markets is inevitable.”

Borrowers in emerging markets need to understand that interest rates are volatile.  If they cannot afford to repay dollar-denominated debts when the dollar is strong, then they shouldn’t be borrowing dollars in the first place.  Borrow in your local currency.

Worries about an EM debt crisis are not a good reason to refrain from raising the target interest rate.  On the other hand, the following is not a good reason to raise interest rates:

Indeed, given the robust US economic outlook, some analysts even caution that it runs the risk of overheating. The 10-year “breakeven” rate, a market measure of investors’ inflation expectations, remains above the Fed’s target 2 per cent at 2.07 per cent, despite recent declines, and inflation is expected to continue to accelerate into the summer.

Arrgggh!  I can’t believe that in 2018, respectable publications are still making this basic error.  The Fed does not target the TIPS spread at 2%, as that spread is based on CPI inflation, not the PCE inflation rate that is the actual target of Fed policy.  When CPI inflation is running at 2.07%, PCE inflation runs around 1.8%.


I was pleased when Larry Kudlow was picked as head of the CEA.  I don’t agree with him on everything, but his heart is in the right place.  Unlike Trump, he’s a strong advocate of free markets.  Thus I was quite disappointed by this:

Kudlow added that the chairman of the Council of Economic Advisers usually gets the jobs numbers late in the afternoon or the evening before jobs Friday. He then shares them with the NEC director, who decides whether to forward them to the president.

“His tweet basically said, like everybody else, we wait [sic] the jobs report,” Kudlow said. “You can read into that 10 different things if you want to read into it … I don’t think he gave anything away.”

That’s just absurd, as even many of Trump’s defenders admit.  (Most of Trump’s defenders argue there was no harm in the information coming out early.)

Unfortunately, government officials are almost forced into making these sorts of statements.  This is what happens when a good man like Larry Kudlow is put in a difficult position.  It’s also the likely reason that Gary Cohn left the Trump administration.

One thing that advisors can do is try to prevent the president from making a fool of himself, by controlling the information that he has access to.  Sometimes that’s impossible, as Trump watches a lot of Fox News.  Recall their recent (misleading) photo supposedly showing a Philadelphia Eagles player kneeling during the national anthem, which may have influenced Trump’s decision to disinvite the team to the White House.  But in other cases this sort of control is more effective, as when Gary Cohn denied sensitive information to Trump, knowing that he could not be trusted to keep it secret:

The former National Economic Council Director Gary Cohn kept the monthly jobs report away from President Donald Trump, worried he would be compelled to comment on them early, Politico’s Ben White and Aubree Eliza Weaver reported Monday.

As far as the “no harm, no foul” claim, consider this:

Current NEC Director Larry Kudlow followed the usual protocol in calling Trump on Air Force One on Thursday and gave him Friday’s figures. Kudlow did nothing wrong here. But Trump did, even if it wasn’t a direct disclosure of the numbers.

He’s now created a scenario in which traders will be looking for Trump tweets each jobs Friday. Does no tweet mean a bad number is coming? He’s inserted a new variable where none should exist.

And he’s raised the question of whether he’s dishing on the numbers in his regular late night calls to friends from the White House. And if he is, what are those friends doing with the numbers?

Must be nice to be one of Trump’s friends.  I wish I got late night calls from a man with sensitive market information, who is unable to keep his mouth shut.

PS.  I always wondered why so many anti-Trump pundits suddenly switched to support for Trump during 2016.  Now I know:

One high-profile Salem talker did a dramatic about-face on Trump in June 2016 after being schooled by Salem management. Hugh Hewitt said on his radio show on June 8, 2016 that the GOP had to dump Trump at the convention, arguing: “It’s like ignoring stage-four cancer. You can’t do it, you gotta go attack it.” But within a week, on June 15, Hewitt had penned a pro-Trump op-ed in the Washington Post, saying: “For the good of the country, Republicans have to be clear about the binary choice in front of us [and] close ranks around Trump.” What on Earth just happened? people wondered. Hewitt says he changed his mind independently, but emails from a Salem executive boasted that the CEO had written Hewitt and Michael Medved with “a very well stated case for supporting the GOP nominee because we have to beat Hillary.” After Hewitt’s op-ed appeared, the executive quoted Salem’s CEO as saying: “Wow he took a lot from my email to him and turned it into an article.”

Medved, for his part, didn’t take the hint. And he suffered for it, said CNN: “Medved’s time slot in several major markets—including Washington D.C., Dallas and Chicago—was changed from the prime afternoon hours to the late evening.”

Personally, I’d rather quit my job.

PPS.  I avoid blogging on the Russia collusion story, mostly because I find it boring.  Why is it even being debated, given that the collusion was completely open and public?  This is what it’s like living in a banana republic.  If the president says the sky is green, his supporters fall right into line.

PPPS.  The official policy of the US government is that there is only one China, and Taiwan is a part of China.  Given this official Trump administration policy, this demand takes a lot of chutzpah.

The fine line between corruption and stupidity

I’ll say this for Trump, he’s far and away the most entertaining president in history.  Hardly a day goes by without a new outrage:

Mr Trump said in a tweet at 7.21am US eastern time that he was “looking forward to seeing the employment numbers” which were due for release at 8.30am. His decision to refer to the numbers before the release prompted a backlash, given that he had advance sight of the one of the world’s most market-sensitive pieces of economic data and was discussing it publicly.

First of all, the jobs report is not one of the most market sensitive pieces of information, it is the most market sensitive. On average, the jobs report moves the bond market more than any other piece of government data.  Second, why is any president given this sort of inside information?  It increases the chance that the data will leak out before the official release.  Third, why is it given to Trump of all people, who has already shown an inability to keep highly confidential information secret?

Asked if the tweet was appropriate, Sarah Sanders, the White House spokeswoman, said that it was. “He didn’t put the numbers out,” she said. The president had been briefed on the number on Thursday night, she said.

Can I use that excuse if the Feds ever prosecute me for conspiracy to trade on inside information?

Every time I see Sarah Sanders talk I wonder whether she’s actually as clueless as she looks or if she is just pretending to be a moron.  I guess we’ll have to wait for her memoir to find out.

Screen Shot 2018-06-01 at 11.30.20 AMI’d be very interested if a commenter could explain to me why the President needs to know this information before 8:30am.