Archive for January 2019


Like an ox

Six years ago, I wrote a post that reflected my view of the proper relationship between the Fed and the markets:

That’s not Bullard’s job.  He hasn’t been hired to outguess the markets.  If he wants to do that he should go run a hedge fund.  His job is to be led around by the markets like a stupid ox with a steel nose ring being dragged along by a farmer.

Here’s a Bloomberg headline, reacting to today’s Fed decision:

Congratulations, Market. The Fed Is Officially at Your Mercy.

So am I ready to declare victory for market monetarism?  Not quite.  We still need a NGDP market.  TIPS spreads and stock market indices are better than nothing, but there’s no substitute for a NGDP futures market.

But we are making real progress.  The Fed is not using macro “models” to set interest rates.

What is a foul, and what is not a foul

I recently did a post complaining about the modern NBA.  For those who haven’t watched any games since the 1990s, I thought you might be interested in knowing how games are refereed today.  This link shows a play from last night, which is not considered a foul.

And this link shows another play, where a foul is called.

Nothing more exciting that watching skilled actors pretending to be fouled on three point shots.

The biggest Mafia Don of them all

In Hollywood films, the term “protection money” refers to money that organized crime extorts from a business, ostensibly for providing protection.  In fact, the Mafia is not protecting business at all; they are threatening them and then extracting money in exchange for not carrying out their threats.

In the 21st century, the US government has become one of the world’s largest criminal gangs, extorting money from weaker countries.  Our government claims the moral high ground, insisting that our rules are based on ethical principles when we put sanctions on rogue nations like North Korea and Iran.  But that’s not what’s actually going on; the foreign policy excuses merely provide a fig leaf for the US to use its muscle to steal money from other countries.

President Donald Trump thinks America is being ripped off. “We have spent $7trn—trillion with a T—$7trn in the Middle East,” he told a crowd last year, exaggerating slightly. “You know what we have for it? Nothing. Nothing.” To right this perceived wrong, Mr Trump has long favoured seizing Iraq’s oil. But after he hinted at the idea with the Iraqi prime minister (who demurred), his aides admonished him. “We can’t do this and you shouldn’t talk about it,” said H.R. McMaster, the national security adviser at the time, according to reports. Still, Mr Trump may be getting what he wants from Iraq in other ways.

I’ve often been critical of Trump, but I must grudgingly give him credit here for being honest, unlike his advisors.  While we are no better than the old-fashioned imperialist powers that tried to loot resources from weaker nations, Trump’s advisors have found more subtle ways to achieve his mercenary objectives:

When America reimposed sanctions on Iran last year it gave some countries extra time to stop buying Iranian oil before they would lose access to the American market. Most were given 90-day exemptions. In November Iraq, which shares a long border with Iran, was given half that time to cut off electricity and gas imports. As it negotiated for extensions, American companies made a push for Iraqi contracts. In December, Rick Perry, the energy secretary, led America’s largest trade delegation to Iraq in over a decade. “It was a quid pro quo,” says an oilman. “You give us priority and we’ll give you an exemption.”

The strategy seems to be working. General Electric, an American company, has muscled in on a big contract to upgrade Iraq’s decrepit electricity grid, which had been earmarked for Siemens, a German firm. American companies have also signed deals to supply Iraq with grains and poultry, important Iranian exports. Chevron and Exxon, American oil giants, have avoided the inconvenience of a bidding process by negotiating directly with Iraq’s oil ministry for large concessions. A previous Iraqi government put off a decision on Exxon’s bid to help boost Iraq’s oil export capacity and build a desalination plant. Now it is said to be a priority.

We claim that these sanctions are necessary to prevent Iran from developing nuclear weapons.  But while its (supposedly) essential that Iran not get nukes, it’s even more crucial that the lucrative deals available in Iraq go to US companies, not German companies.

The NYT reports that the same process is going on with 5G networks, where the US is trying to pressure foreign countries to avoid using Huawei equipment:

The White House’s focus on Huawei coincides with the Trump administration’s broader crackdown on China, which has involved sweeping tariffs on Chinese goods, investment restrictions and the indictments of several Chinese nationals accused of hacking and cyberespionage. President Trump has accused China of “ripping off our country” and plotting to grow stronger at America’s expense.

Mr. Trump’s views, combined with a lack of hard evidence implicating Huawei in any espionage, have prompted some countries to question whether America’s campaign is really about national security or if it is aimed at preventing China from gaining a competitive edge.

Administration officials see little distinction in those goals.

“President Trump has identified overcoming this economic problem as critical, not simply to right the balance economically, to make China play by the rules everybody else plays by, but to prevent an imbalance in political/military power in the future as well,” John R. Bolton, Mr. Trump’s national security adviser, told The Washington Times on Friday. “The two aspects are very closely tied together in his mind.”

Tied closely together?  I’m no fan of Bolton, but give him credit for honesty.  And Trump also chimed in on the issue.  After Meng Wanzhou was arrested by the Canadians (at our behest), we stabbed Canada in the back by hinting that she might be released if China gave us a better trade deal:

President Donald Trump has linked Ms Meng’s legal fate to the prospects of America getting a good deal in trade talks with China.

Unfortunately, no one told Trump he was supposed to keep his mouth shut; that the US wasn’t supposed to admit to our actual motives:

US officials argue that their criminal case against Huawei, which erupted when Ms Meng was detained by Canadian officials late last year, and the trade talks are on two separate tracks and have nothing to do with each other.

Western media outlets were then shocked and horrified that the evil Chinese had the temerity to arrest Canadian citizens in retaliation.  How dare they politicize this important national security issue!  Of course the Chinese government was wrong in this case, but where is the outrage against the US government?  “That’s right Canada, go out on a limb and arrest this important Chinese executive for us, but we’ll let her go if the Chinese do a trade deal where they promise to buy our goods instead or yours.”

The French firm Alstom was involved in bribing countries such as Indonesia to get lucrative deals selling power equipment.  That’s unfortunate, but it’s certainly none of our business.  Of course that didn’t stop the US from arresting a French executive and throwing him in jail.  What happened next is interesting:

According to executives there at the time, Alstom first explored a deal with GE just after Mr Pierucci’s guilty plea in July 2013. Legal pressure on Alstom, and on Mr Pierucci, seemed to ease once it became possible that much of his employer would come under GE’s ownership. For one thing, the arrest of executives stopped. The fourth to be detained in the case, while in the American Virgin Islands, was seized one day before news of the deal became public on April 24th 2014. Two months later, in the same week that Alstom’s top brass signed off on the sale to GE, Mr Pierucci’s long-standing bid to be released on bail was approved, after 14 months inside.

There is no suggestion of wrongdoing by GE itself, merely that American supremacy in imposing anti-corruption norms globally may have given American firms an advantage. GE had an edge over non-American firms vying to buy Alstom’s assets, such as Siemens of Germany and Mitsubishi of Japan, insofar as their legal departments may have been less well-versed in negotiating American legal settlements.

That mattered. In the purchase agreement, GE agreed to pay whatever fine was meted out to Alstom Power for past wrongdoing, even though the fine the French firm faced also related to past activities of other parts of the group. Foreign rivals interested in joining the bidding would also have to gauge the size of that potential legal liability, but may have been at a disadvantage: GE, like other American firms, employs multiple former DOJ staffers, according to their LinkedIn profiles. . . .

An American group such as GE could also help Alstom navigate judicial waters. Lawyers for GE conferred with the French firm’s lawyers ahead of its agreement with the DOJ, long before the deal formally closed. The DOJ settlement mentions how GE promised to “implement its compliance programme and internal controls” at Alstom. In American courts, such assurances may carry more weight coming from well-known local firms, not foreign ones.

The US is becoming increasingly effective at using its financial and military clout to extract resources from other countries.  Look for the Europeans to retaliate with huge fines imposed on our tech firms.  More than one country can play the nationalism game.

PS.  When did it become OK to endorse nationalism?  During the first 60 years of my life, nationalism was pretty universally viewed as evil, by both the left and the right.  It was seen as a cause of both WWI and WWII, not to mention destructive trade wars and lots of other bad things.  Now we suddenly have a president who is a self-avowed nationalist:

In Berlin, meanwhile, diplomats have been poring glumly over The Virtue of Nationalism, a book by the Israeli writer Yoram Hazony, which Mr Mitchell had told them was the key to the Trump administration’s Europe policy.

Mr Hazony’s book — published in 2018 to fervent applause from conservative commentators in the US — purports to provide the theoretical gloss on Mr Trump’s tweets: nationalism as the cure to “liberal imperialism”. The two main “empires” he has in mind are post-cold war, liberal-interventionist America and the EU.

Teutonic brows are furrowing presumably at passages from the book such as this: “The European Union is a German imperial state in all but name . . . Should the United States ever withdraw its protection . . . a strong European executive will be appointed by Germany.” Mr Hazony goes on to write that a “German-dominated EU” is an “imperial order”, that “will work to delegitimise and undermine the independence of all remaining national states”.

Never mind that this is spectacularly misinformed about the status of nation states in Europe or Germany’s power over them and the EU. Repress, if you can, the realisation that Mr Hazony thinks the EU could succeed where the Nazis failed. And try to ignore the question implied by both Messrs Pompeo and Hazony: to what imaginary golden age of nationalism exactly should Europe’s clock be turned back? 1989? 1945? 1918?

But the nationalism “bench” in DC still seems pretty thin, and hence Trump ends up stocking his administration with lots of traditional Republicans like CIA National Intelligence director Dan Coats, who just informed Congress that Trump’s views on Iran, Syria and North Korea are deluded:

North Korea is unlikely to abandon its nuclear weapons because the regime views the bombs and their missile delivery systems as critical to its survival, according to the worldwide threat assessment from the US intelligence committee. . . .

In justifying his decision in December to remove military forces from Syria — which prompted the resignation of defence secretary Jim Mattis — Mr Trump said the US had “defeated Isis in Syria”. But the intelligence community made clear in its assessment on Tuesday that the threat from the terrorist group remained.

“While Isis is nearing territorial defeat in Iraq and Syria, the group has returned to its guerrilla warfare roots while continuing to plot attacks and direct its supporters worldwide,” Mr Coats told the committee. “Isis is intent on resurging and still commands thousands of fighters in Iraq and Syria.”

Mr Coats also said the intelligence community “do not believe Iran is currently undertaking activities we judge necessary to produce a nuclear device” even after Mr Trump withdrew the US from the 2015 nuclear agreement.

Trump keeps appointing what he himself calls the “best people”, like Dan Coats and Jerome Powell, and then keeps telling us what idiots they are:

Donald Trump has accused his own intelligence services of being “naive” about Iran after top US security officials contradicted his statements about the dangers of the nuclear threat posed by both Iran and North Korea.

Naive?  Say what you will about Trump, we’ve never had a funnier president.


Explaining Fed accountability

I frequently get questions about my recent proposal to increase Fed accountability and transparency.  Thus I thought it might be useful to make another attempt to explain the idea, based on some of the misconceptions that I have come across in conversation.  Here are 9 important points to keep in mind:

Point #1:  The Fed already does what I am asking them to do, but not in a systematic way.

All sound organizations will evaluate past decisions, in order to learn from mistakes.  Because the Fed is clearly a sound organization, Fed officials do evaluate and critique past policy decisions, but only on an ad hoc basis.  Thus when Ben Bernanke was at the Fed, he occasionally criticized Fed policy decisions made during the Great Depression (too contractionary) and the Great Inflation (too expansionary).  Bernanke was able to determine that policy mistakes had occurred by looking at outcomes—demand was too low in the 1930s and too high in the late 1960s and 1970s.  Most famously, at Milton Friedman’s 90th birthday Bernanke famously said, “You’re right, we did it.  We’re very sorry.  But thanks to you, we won’t do it again.”  Here Bernanke is also alluding to the purpose of evaluating past policy errors, to avoid similar mistakes in the future.

You might say, “Ah, but it’s easy to criticize the errors of your predecessors, not so easy to admit to your own failings.”  Yes, but Bernanke is a better man than you or I, and in his memoir (p. 280) he did exactly what you are saying is not so easy (discussing the Sept. 15, 2008 meeting):

At the end of the discussion we modified our planned statement to note market developments but also agreed, unanimously, to leave the federal funds rate unchanged at 2 percent.

In retrospect, that decision was certainly a mistake.  Part of the reason for our choice was lack of time—lack of time in the meeting itself, and insufficient time to judge the effects of Lehman’s collapse.

Bernanke doesn’t say why he now believes the decision was certainly a mistake, but I am 99.99% sure that I know why, even though I’m not a mind reader.  Bernanke believes that, in retrospect, a more expansionary monetary policy stance in September 2008 would have pushed the economy at least a tiny bit closer to the Feds inflation/employment objectives in 2009.  Maybe not a lot closer, but at least a tiny bit.

Point #2:  Monetary policy evaluation is implicitly an evaluation of whether previous policy was too easy or too tight.

One can imagine a universe where monetary policy evaluation is extremely complicated.  Where the Fed uses QE to try to control inflation and IOR to try to control employment.  But that’s not the universe we live in, or at least both the Fed and I believe things are much simpler than that.  The Fed basically works from a simple AS/AD framework, where their key policy tools all impact demand, which then impacts the various goal variables of Fed policy (PCE inflation and employment.)  That’s why in any evaluation of previous policy, one can simplify things by boiling it all down to one question:  Were previous policy settings too easy, too tight, or about right?  That’s the framework Bernanke used when discussing previous policy errors.

Point #3:  Policy self-evaluation does not constrain the Fed, or limit their ability to conduct appropriate monetary policy.

There is no good reason why the Fed would want to oppose my proposal for self-evaluation of previous policy decisions.  This is something they already do; I am merely asking for a more systematic process.  Thus under my plan the Fed might report to Congress every 6 months.  The only other requirement is that they be as specific as possible in explaining why they evaluated previous policy as being too easy or too tight.  They don’t even need to use that language; they could talk in terms of too expansionary or too contractionary.  But they should provide as much relevant data about the recent performance of the economy as possible, to make it easier for Congress to see how they reached their conclusion.  Presumably they would talk about inflation, and also various labor market indicators.

Point #4:  The evaluation process will actually be more rigorous if the Fed is given more flexibility.

This is counterintuitive, and requires some explanation.  Let’s take the example of how far back they should look, when evaluating previous decisions.  If Congress were to mandate a one-year look back, it would actually give the Fed more wiggle room.  The Fed could say, “We haven’t yet hit our targets, but that’s because it takes about 18 months for monetary policy to fully impact inflation and employment.”  Instead, Congress should let the Fed decide these technical questions.  Let them decide how long it takes, and then have the Fed look back at decisions that the Fed itself believes have most strongly impacted the current condition of the economy.  Thus the Fed might say, “Inflation is a bit too high, and we believe this reflects excessively expansionary decisions made between 12 and 24 months previously.”  They get to choose the impact lag, which prevents them from dodging blame by saying there’s not yet enough time to evaluate the decisions.

Similarly, let the Fed decide what constitutes success.  They would probably include 2% PCE inflation as one component, but also include data on employment in their report.  If you specify what metrics the Fed is to use, then they can always play a shell game.  Overall PCE inflation is too high?  “We focus on core PCE inflation”.  Etc.  Better to let the Fed tell us what metrics they use to decide if policy had been too stimulative.  Then they have no place to hide.  Sure, they could suddenly claim that the inflation target is 5% or 0% (to match reality), but would that be credible?  What if they suddenly said (in a recession) that the natural rate of unemployment is 8%?  Would Congress go along with the view that more jobs would be a bad thing if the actual unemployment rate were also 8%?  It’s not as easy for the Fed to dodge responsibility as you might imagine.

Of course it’s also vastly easier to get a bill through Congress if you give the Fed more flexibility, as the Fed would then have less ability to characterize the proposal as an unwise constraint on Fed independence. (Recall the opposition to the previous monetary policy rule proposal.)

Point #5:  This is not NGDP targeting.

I am often associated with NGDP targeting, because that’s what I advocate.  And NGDP is a natural way to think about things like “demand” or “spending”.  And Fed policy certainly affects its goal variables by impacting the level of demand, or spending, or NGDP, or whatever you want to call it.  But I now generally try to avoid mentioning NGDP while discussing accountability, as I don’t want the proposal to be wrongly viewed as a sort of NGDP targeting program.  The Fed decides what targets will best achieve the Congressional mandate.

Point #6:  Reports should work backward, from the goals to the tools. 

Thus the Fed might start its report with some metrics on inflation and employment.  This data would help Congress to understand the variables the Fed used to decide whether it had achieved its mandate.  Then the Fed would make an overall judgment (taking all these variables into account) as to whether they had undershot or overshot their target.  They would presumably talk about their inflation target (currently 2%) and their estimate of the natural rate of unemployment (currently about 4.3%) At this point, the Fed would say something like, “Spending was too high (or low)”.  Or, “Demand was too high (or low)”.  Or, “Policy was too expansionary (or contractionary)”.  I’d let the Fed choose the language it preferred.

Point #7:  The Fed may have good reasons for missing its target, but that would still be very useful to know.

Thus the Fed might say that demand ended up being too low to hit their targets, and attribute that policy error to an unforeseen shock such as a banking crisis or trade war.  Alternatively, they might cite real or imagined constraints on Fed policy.  They might say, “We are not authorized to do negative IOR.”  Or they might say, “The zero bound limits our ability, and we believe that Congress does not favor us raising the inflation target to solve the zero bound problem.”  Or, “If we had done enough QE we could have hit the target, but Congress seemed very apprehensive about our QE program, and we were reluctant to push it too far.”  Put aside your personal view of these “excuses”, the point is that it would be useful to have a better understanding of exactly why the Fed fails to achieve its mandate, in cases where even at the time they set their policy instruments the Fed already expected to fall short, but were reluctant to do more.  Let’s have that conversation.

Point #8:  Accountability actually helps the Fed.

The Fed wants to achieve its policy goals.  You can debate whether they treat 2% inflation as a ceiling or a symmetrical target, but whatever it is the Fed wants to hit the target.  Their life is much, much easier when the economy is doing well, and the Fed chair is widely lauded as a “maestro”.  Accountability makes it easier for the Fed to achieve its goals, in several ways.  First, it will give the markets a more precise sense of exactly what the Fed is trying to achieve, which will help to stabilize expectations.  More importantly, it will give the Fed “cover” for controversial decisions that it believes are necessary to achieve the mandate.  Thus in the next recession the Fed may decide to adopt both substantial QE and the level targeting of prices.  That’s pretty aggressive.  Even so, it’s likely that for at least 2 or 3 semiannual reports (during the recession and early recovery) the Fed will be admitting that, in retrospect, its previous policy stance was a bit too contractionary to hit the dual mandate.  Those reports will help to deflect criticism from politicians and pundits who say they are doing too much.

Point #9:  Accountability could usefully educate the public, making good policy more popular.

Right now it is probably the case that lots of people, including many politicians, view Fed policy goals as sort of vague aspirations.  Stable prices and high employment sound wonderful, sort of like “Scott Sumner winning the Nobel Prize in Economics” sounds wonderful.  But that’s not the right way of thinking about monetary policy.  We need people to view policy as like steering a large ship.  If you are headed for New York, you better have an awfully good excuse if the ship ends up in Boston. Because of wind and waves you’ll go off course for brief periods, but you have the tools to get back on course reasonably quickly.  And the destination of a ship is crystal clear.

I’d like to see politicians spending less time asking Fed officials about income inequality or the budget deficit and 100 other issues that are beyond their control, and spend a lot more time discussing exactly how they are doing in terms of achieving the Congressional mandate of stable prices and high employment.  I don’t recall many occasions where Congressmen or women asked Fed officials to explain whether policy decisions taken a year or two ago were, in retrospect, too expansionary or too contractionary to hit the target.  But that’s exactly what they should be asking.

PS.  Question:  Did anyone in Congress ask Bernanke during 2009 or 2010 why the Fed had decided not to cut interest rates right after Lehman failed in Sept. 2008?

The actual problem

The global media seems endlessly fascinated by the question of whether monetary policy in the US is too easy or too tight, even as the Fed comes amazingly close to hitting its targets.  I suppose this interest can be partly justified by the size and influence of the US, which David Beckworth calls a “monetary superpower”.  Nonetheless, there should be more discussion of the fact that monetary policy in the Eurozone and Japan is way off course, and that these policy mistakes are a danger to the global economy.

Core inflation in the Eurozone is 1.0%, far below the ECB’s roughly 1.9% target:

Screen Shot 2019-01-23 at 12.20.01 PMAnd growth in the Eurozone is slowing as we go into 2019.

Core inflation in Japan is even further below the BOJ’s 2% target:

Screen Shot 2019-01-23 at 12.20.32 PMAnd growth in Japan is also slowing.

My suggestion is that both central banks consider switching to level targeting and adopt a “whatever it takes” approach to hit their targets.  These changes might require legislation, and I’m not expert on the political barriers to getting this done, which I presume are formidable.  Fortunately, these two changes might well be enough; I doubt they’d need to take any additional “concrete steps”.

PS.  Commenter LK Beland constructed a monthly series of wage income for the US, by multiplying average hourly earnings, average hours per week and payroll employment.  In some respects, this data is superior to NGDP as an indicator of the appropriateness of monetary policy. Interestingly, the graph shows even greater stability than NGDP growth, mostly hovering around 4% to 5%:

Screen Shot 2019-01-23 at 12.24.28 PMThis is what I’ve been advocating as a long run policy ever since I started blogging in early 2009.  However I would have liked to have seen faster “catch-up” growth in the early years of the recovery.  Even so, this is a good sign.  If they can keep roughly 4% growth going forward then . . . . we win.