Archive for March 2020


There are no mask opponents in a foxhole

On March 1st, I asked why masks don’t help average people. In the comment section, I was shot down by people who assured me that masks are not appropriate for the general public.

If the NYT represents the conventional wisdom, then I think it’s fair to say that the tide is turning on this question:

More Americans Should Probably Wear Masks for Protection

Experts have started to question whether masks may offer at least some protection to healthy individuals and essential workers.

“Started to question”?  I started to question 4 weeks ago.

I’d also like to get something else off my chest.  Please remember that observations are not predictions and also that observations are not endorsements.  If I observe a surprisingly low death rate in Japan, or Germany, or China, or Taiwan, or anywhere else, it is not an endorsement of their public policies.  How could it be, given that these countries pursued radically different policies (with tight controls in China and more laissez-faire in Japan.)

Nor are observations equivalent to predictions of the future course of the epidemic.  South Korea, Iran, and Italy all had the epidemic under control in mid-February.  In all three countries the epidemic was out of control by the end of February.  I have no crystal ball.

I still think some of my observations (such as the mortality gap between southern and northern Europe) are interesting, and I’ve noticed other people discussing the same data points.

If I talk about the data from a particular country, it does not mean I believe the data is accurate; rather that it’s accurate enough to make my point.  I’m sure that both Italy and South Korea have missed a number of cases, but the data is accurate enough to see that South Korea has been doing much better than Italy in recent weeks.

If I harshly criticize the new fiscal stimulus, that does not mean I would have voted against it.  While it contains many objectionable components, such as $1200 checks to people who are still employed and corporate bailouts, it also has good features such as improved unemployment insurance and a Treasury backstop for the Fed.  I probably would have held my nose and voted for it.

If I say that I’m not convinced that warm weather will solve the problem, it doesn’t mean I don’t believe that warm weather will help moderate the problem.

When a pundit says that a huge number of people would die if no precautions are taken, it doesn’t mean he’s prediction a huge number of people will actually die.


The Atlanta Fed produces occasional estimates for GDP, using the most up to date government data sources. They call this forecast “GDPNow“, and the New York Fed produces a similar forecast. Before proceeding further, let me emphasize that this post is not bashing these two Fed banks, indeed the latest Atlanta Fed forecast comes with this disclaimer:

GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 beyond its impact on GDP source data and relevant economic reports that have already been released. It does not anticipate the impact of COVID-19 on forthcoming economic reports beyond the standard internal dynamics of the model.

The Atlanta Fed issued an updated forecast today, showing 2.7% RGDP growth in Q1.  The New York Fed forecast 1.7% RGDP growth in Q1 and 0.3% in Q2.  Now you see why they put in the disclaimer.

It’s clear that these models are not actually giving us “GDPNow” in the sense of the optimal forecast given today’s information.  They are giving us the optimal forecast given publicly available macro data released by the government.  But the rational expectations model says that optimal forecasts are based on all publicly available information.

As of today, Hypermind forecasts 0.1% NGDP growth in Q1 and minus 3.6% in Q2.  Presumably their implicit RGDP forecasts are even a bit lower, at least for Q1.  Even so, I don’t believe Hypermind is deep and liquid enough to provide an optimal forecast, and for weeks I’ve viewed that market as being somewhat behind the curve in recognizing the severity of the oncoming slump.

Nonetheless, it would be nice for at least one of the Fed banks to produce a true NGDPNow and RGDPNow forecast, given all publicly available information.  That’s not easy, but I imagine that if you look back throughout history you’ll find that periods with multiple back to back stock market crashes in the 6% to 12% range, a sudden collapse on T-bond yields, plunging oil prices, and (especially) enormous weakness in assets like junk bonds, are usually associated with a sudden and sharp drop in the broader economy.

[Someone correct me if I’m wrong–Perhaps 1987 was an exception, but how did other markets besides stocks do in 1987?]

So how about it?  Which Fed will step up to the plate and produce a truly cutting edge forecast?  The St Louis Fed used to be monetarist—how about trying market monetarism?

PS.  I do understand that this crisis is unique, and no mathematical model would be expected to perform all that well.  (Imagine trying to forecast yesterday’s weekly jobless claims).  But I still believe that more reliance on market indicators would improve GDPNow.

PPS.  David Levey sent me this video of a guy imitating Trump.  Even if you like Trump, you got to admit he’s a talent mimic.

PPPS.  A couple of years ago, I said I would not blame Trump for any recession, and I’m sticking with that.  I’m not even blaming him for more than small portion of the surge in cases in the US, despite him being behind the curve on preparedness.  I’m sticking with the “Presidents only explain 3% of outcomes” worldview.  I try to avoid motivated reasoning, much as I’d enjoy blaming Trump for everything.

PPPPS.  I see Boris is doing his part to build up the UK’s “herd immunity”.  I don’t like his politics but I wish him well.

Stating the obvious, twice

Kudos to Chair Powell. The following is obvious, but unfortunately must be repeated ad nauseam in order to push back against the vast sea of ignorance out there:

Federal Reserve Chairman Jerome Powell made a rare appearance on national TV Thursday morning, telling NBC’s “Today” that the central bank still has plenty of tools left to support a U.S. economy that may already be in recession amid the novel coronavirus pandemic.

“When it comes to this lending we’re not going to run out of ammunition, that doesn’t happen,” Powell said.

And this is also pretty obvious, but needs to be said:

“We may well be in a recession,” Powell said. “But I would point to the difference between this and a normal recession. There is not anything fundamentally wrong with our economy. Quite the contrary. We are starting from a very strong position.”

I wonder if the tide is turning in our favor on the phony “out of ammo” myth. Let’s hope so. I feel like I’ve been fighting a lonely battle.

PS. People often wrongly assume they know my views on the epidemic. I’ve never offered an opinion of the effectiveness of chloroquine (just on Trump giving advice), and don’t have one. (Unlike many people, I don’t form my views on REALITY based on what Trump thinks.) I’ve never offered an opinion on whether we should do “lockdowns”. I’m not even sure what a lockdown is. If you want some opinions on how to address the epidemic, you’d be better off reading my good blog today.

PPS. Today’s weekly unemployment claims report is sometimes compared to the previous record, 695,000 in 1982. But if viewed in terms of the increase relative to normal, it’s actually more like 10 times worse than we’ve ever seen. It is more than 3 million above normal, vs. a bit over 300,000 above normal in previous bad recessions.

PPPS. Italy and the US will pass China in total cases by tomorrow. A few days later, China will fall to 4th (behind Spain.)

HT: Frank Fuhrig

Living in a dream world

Here’s the NYT:

The sheer size and scope of the package would have been unthinkable only a couple of weeks ago. Administration officials said they hoped that its effect on a battered economy would be exponentially greater than its $2 trillion cost, generating as much as $4 trillion in economic activity.

Really? Four trillion more in economic activity in a $21 trillion economy? At a time when firms are closing down due to social distancing, and consumers will not be out spending money? How is this magic supposed to work?  Why not claim $40 trillion?  Or $400 trillion?

The legislation, which is expected to be enacted within days, is the biggest economic relief package in modern American history, dwarfing the $700 billion Wall Street bailout in 2008 and the $800 billion stimulus bill passed in 2009.

Dwarfing?  Really?  Nominal GDP in early 2020 is 50% larger than back in 2008.  How does a $2 trillion (loan plus spending) package in 2020 “dwarf” a $1.5 trillion dollar (loan plus spending) package in 2008-09.  Maybe I’m not too good at math.

I’ll have more posts when I’ve had time to digest this package.  No doubt there are a few good provisions (especially beefed up unemployment compensation and aid to hospitals), but sending $1200 checks to everyone is a crazy waste of money.  And exactly how is the aid to small businesses supposed to work?

On a more upbeat note, the mainstream media finally seems to be waking up to the fact that the Fed never runs out of ammunition. Devan Stormont sent me this David Ignatius piece from the WaPo:

When the Fed cut interest rates to zero on March 15, some analysts thought the Fed had exhausted its arsenal. But that turned out to be wrong. Ten days of creative policy followed, as the Fed demonstrated that in backstopping the markets by buying debt, it never runs out of bullets.


And this is a more subtle point, but equally important:

One measure of success for Powell will be if people decide in retrospect that his crisis moves were unnecessary. They’ll have the luxury of not understanding how much worse things could have been if the central bank hadn’t taken strong action.

Unfortunately, I don’t expect us to have that “luxury”.

I previously congratulated the Fed for indicating a willingness to buy unconventional assets such as corporate bonds.  The actual policy news is both better and worse than I assumed.  Worse in the sense that this is being done under a program where any Fed losses must be backstopped by the Exchange Stabilization Fund, which limit show much they can buy.  Better in the sense that Congress seems about to dramatically increase this fund, so that the Fed will be free to buy a much larger quantity of risky assets if necessary.  (I’d still prefer they not do so until conventional ammo is exhausted.)

For years I’ve argued that Congress should allow the Fed to buy a much wider range of assets in an emergency, and that Congress should also tell the Fed not to let fear of losses on its portfolio of bonds hold it back from doing whatever it takes to achieve its Congressional mandate.

Update:  Early last week I asked why anyone who was investing for the long run (and didn’t need to sell) would prefer a 10-year Treasury to a 10-year TIPS.  At the time, the TIPS spread was 0.63%.  Today it’s 1.04%.

You’re welcome.

And I still wonder, as even 1.04% seems really low.

HT:  TravisV.

Yes, it’s tight money

It’s always useful to revisit Frederic Mishin’s three lesson on monetary policy, from the number one money textbook:

1.  It is dangerous always to associate the easing or the tightening of monetary policy with a fall or a rise in short-term nominal interest rates.

2.  Other asset prices besides those on short-term debt instruments contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms.

3.  Monetary policy can be highly effective in reviving a weak economy even if short term rates are already near zero.

Other asset prices?

We have plunging bond yields. Plunging TIPS spreads. Plunging Hypermind NGDP prediction prices. Plunging stock prices. Plunging commodity prices. Widening risk spreads. What more do you want?

How about a soaring dollar?

Yes, we need to avoid reasoning from a price change. Sometimes the dollar appreciates because another currency is weak. But now the dollar is appreciating against almost all currencies. Sometimes the dollar appreciates because the US economy is strong (as during the tech boom of 1998-2000.) Does the economy seem strong today?

We are seeing a replay of almost every single market reaction from late 2008.

PS. We have lots of pundits telling us that this crisis shows that libertarianism doesn’t work and that we need big government. (Do they know that Italy has one of the biggest governments in the world?)

In fact, our government has spent months twiddling its thumbs when it wasn’t using regulations to actively prevent the private sector from responding. And now I see this:

Thank God for globalization.

That’s not to say there aren’t a few areas where smart governments can contribute. Pity we don’t have one.