Archive for February 2020


Really dumb arguments

In any crisis situation you find some really dumb arguments. One of the dumbest of all is the claim that cutting interest rates can’t help if no one is going shopping, eating out, or taking vacations, and if supply chains are shut down.

I’ve already done lots of posts here and at Econlog exposing the stupidity of this argument. But here’s another reason:

Unless I’m mistaken, fed funds futures for January 2023 are down to about 0.7%, far lower than 10 days ago. Two things are very clear:

1. The coronavirus is the proximate cause of that decline (sorry Trump).
2. The decline did not occur because markets fear that the coronavirus will prevent people from shopping in January 2023. By that time, the health problem will likely be addressed in some way.  Either the virus naturally burns out, a treatment is developed, a vaccine is developed, or something else. The coronavirus is not likely to still be preventing shopping in 2023.

But let’s say I’m wrong and it is still a huge problem in 2023.  It’s not like the markets got any new information over the last 10 days making it more likely that we’ll face a problem in 2023; rather markets got information that it’s more likely the virus will spread outside of China this year. But that new information has no bearing on the likelihood of the virus eventually burning out, as did SARS, nor does it give us any new information on treatments or vaccines.

So what is the new information over the past 10 days?

1. Increased probability of a major supply shock this year (not in 2023.)
2. Increased probability that monetary policymakers will not be aggressive enough to prevent a recession, and if the recession occurs then demand will still be rather sluggish in January 2023 because the Fed will be too hawkish in the recovery.

This means that while the stock and bond market’s bearishness about 2020 might be for exactly the “people won’t shop” reasons that are often cited in the media, the increased bearishness about conditions in 2023 are almost certainly due to a loss of confidence in monetary policy.

In other words, we need adequate NGDP in 2023, and if we don’t get it then it will be the Fed’s fault.

PS.  Don’t take this as me predicting a recession.  There’s still a lot we don’t know about the virus (it seems to be slowing in China.)  The level of stock prices is still fairly high, and if the virus doesn’t get too severe in the US then we may avoid a recession.  But based on what we know now, a 50 basis point cut is needed ASAP.

PPS.  Why is the media argument about shopping and interest rates so dumb?  We cut interest rates to prevent policy from tightening.  Imagine if you doctor said, “No point in eating food, as your real problem is pneumonia.  Just go ahead and starve yourself, as food won’t solve your “real problem.””

PPPS.  Hypermind NGDP market’s been somewhat bearish all year.  What did they know that the experts did not?

Sanders Derangement Syndrome?

Yes, I have it.

But here’s my question. What about all those people who accused me of “Trump Derangement Syndrome”, and are now becoming completely hysterical about the prospects of a “commie” like Sanders in the White House? Do you still believe that claiming a presidential candidate is a complete disaster proves that one is mentally ill? Or does the “derangement” term only apply to criticism of people that you like?

Just asking.

NBA coaches may be “forced” to go small

The world’s coming to an end, hence it’s time to talk NBA basketball.

In recent years, the Houston Rockets have pioneered a new style of basketball, focusing on the three point shot. Now Houston is innovating again, with small ball.

In the past, small ball was mostly used around the NBA during the last few minutes of close games, when playing well is particularly important. Big, slow, lumbering centers like Rudy Gobert were often ineffective at those times, and sat on the bench.

At the same time, coaches like Gregg Popovich don’t like to adopt these sorts of changes. A game focused on three point shooting is ugly, at least compared to the well-rounded offenses of the past, which incorporated a wide variety of shots. And relying overwhelmingly on the long ball seems intuitively “irresponsible”.

Furthermore, basketball has traditionally been dominated by big men at the center position. The last thing that coaches want to do is go against tradition with small ball.

[BTW, I hope it’s obvious that this post is talking about monetary policy.]

But when other NBA teams have success with a new strategy, then eventually even stubborn coaches must give in and follow along. They may not want to, but they will be forced to.

Here’s an interesting question: Why should coaches ever be reluctant to adopt a new strategy, just because they don’t like it? Isn’t success all that matters? You’d think so, but coaches are conservative by nature. If the tradition is to punt on fourth and one in football, that’s what you do. No one ever got fired for following tradition.

Just as coaches may be reluctant to rely on the three point shot or small ball, central banks may be reluctant to cut interest rates. You might think that the level of interest rates would be a matter of complete indifference—all that matters is whether the policy produces good outcomes. If so, then you are being naive. Central banks have a fondness for certain levels of interest rates, or at least certain expected paths of change, and will only move those rates unexpectedly if “forced” by overwhelming pressure. This leads to inertia in monetary policy, and results in recessions every few years after a long expansion is suddenly interrupted by a sharp drop in equilibrium interest rates.

Check this out:

Recent global developments, including the more rapid spread of the coronavirus outside of China, make it more likely the Federal Reserve will be forced soon to cut interest rates to respond to growth concerns, according to economists gathered for a top policy conference on Monday.

The media’s use of the term ‘forced’ is correct, and is the “tell” that monetary policy is inefficient.

Are there systems that would avoid this damaging inertia? Yes, and we are slowly getting there. Unfortunately, however, we are not quite there yet.

On the plus side, recessions are like airliner crashes; each time one occurs we learn a bit more about safety.

Will Japan also lead the way on phony recessions?

In recent decades, Japan has been a pathbreaker for the rest of the world. It led the way on slowing population growth (and then falling population), secular stagnation, and zero interest rates. Will Japan’s frequent “phony recessions” also begin to occur in the US? I suspect the answer is yes.

As you can see from this graph, the US hasn’t had any phony recessions. Each time there is an official recession, unemployment rises by at least 2%:

In contrast, Japan has lots of phony recessions. After a big actual recession in 2008-09, Japan has had three phony recessions (maybe 4, if they are in one now), defined as brief periods of falling RGDP and a booming labor market:

I’m not certain that the US will begin having phony recessions. But given that we’ve adopted so many other recent Japanese trends, I think it’s fairly likely that it will happen in the US before too long.

It’s certainly something to keep an eye out for.

PS. If the Fed wants a V-shaped recovery from Covid-19, consider level targeting. That’s what it’s for.

Process is (almost) EVERYTHING

When I do a post on process, people often ignore the content and sound off on what they think of this or that political issue, or this or that candidate. I don’t care what you think about those topics. If the post is on process, all I care about is what you think of process.

If a candidate with identical views to mine, favoring kidney markets, NGDP targeting, drug legalization, carbon taxes, consumption taxes, deregulating housing, ending occupational licensing, etc., etc., were elected president, it would still be an unmitigated disaster if that candidate also corrupted the country and turned it into a banana republic.

If you don’t believe me, look at what’s happening in India after they elected a guy that was supposed to be “good for business”.

Countries with a sound political system, say Denmark or Switzerland, will generally do fine regardless of who is elected president. Countries that are banana republics, like Guatemala or Iraq, will be a mess regardless of who is elected. Countries rarely move from one category to the other, but it can happen.

It’s fine to talk about economic issues when the political system is not under threat. But when it is, the only issue that matters is process. Heraclitus said “character is destiny”. For entire countries, you might say “Transparancy International Ranking of Corruption is destiny.”

PS. I do understand the risk that bringing lots of immigrants from banana republics might change the political culture. But in case you didn’t notice, Trump was put into office by descendants of Western Europeans.

PPS. BTW, Don’t worry about the following, as Trump assures us that everything is under control. The stock crash was caused by the Democratic debate:

One day after painting a dire picture at a Wednesday news conference at the White House about the possible effects of the infection, Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, was directed by the Trump administration to not say anything further about the virus without clearing it first, the New York Times reported.

Fauci first needs to talk to Mike Pence, the resident science expert in the White House.