Archive for May 2021


Be careful what you wish for

When the ECB was founded, it adopted inflation targeting with the implicit assumption that the purpose of the policy was to hold down inflation. In fact, the policy regime has mostly forced the ECB to try to raise inflation.

In 2020, the Fed adopted an average inflation targeting policy with the implicit assumption that it would be used to push inflation higher when at the zero bound. In fact, the policy may end up forcing the Fed to push inflation lower at the zero bound.

One commenter suggested that stocks were declining because of the fear that high inflation would lead to tight money. But the evidence doesn’t really support that view:

Notice that the rise in 10-year yields this year is all inflation premium, the real yield has not risen, and remains deeply negative. Nominal interest rates are rising due to the Fisher effect, not fear of tighter money. Admittedly, even real yields are not a foolproof indicator of changes in monetary policy (they can reflect growth expectations), but they are less unreliable than nominal yields. Whatever is causing the recent drop in stock prices, it is not a fear of tight money.

The real yield on 5-year bonds is even more sensitive to monetary policy than the 10-year yield, and it’s falling even more sharply:

And 5-year TIPS spreads have risen sharply, to 2.72%. That implies about 2.4% PCE inflation over 5 years, more than enough to make up for the recent shortfall.

Monetary policy is either about right or too easy; it’s certainly not too tight.

PS. Notice that people investing in 5-year TIPS are guaranteed a negative 2% annual return. But it’s even worse. They have to pays taxes on their nominal return, so the actual after-tax return is even lower. What happened to equalizing tax rates on wage and investment income?

Yes, the Fed is serious about creating inflation

In 2020, I got a great deal of grief from people who thought I was naive when I suggested the Fed’s new AIT regime was a big deal, and that it would lead higher inflation going forward. When TIPS spreads were 0.6% last March, I suggested that TIPS might be a good investment.

What do you people say today?

10% more democracy

This Matt Yglesias tweet from a few months back caught my eye:

A left-winger goes to Chicago

Tyler Cowen linked to an article discussing an interesting study of how philosophical views correlate with other traits. This caught my eye:

Additionally, they found that being more politically right-leaning was associated with several philosophical views, such as theism, free will libertarianism, nonphysicalist views in philosophy of mind, and the correspondence theory of truth.

I reject all four of those views, which I guess makes me a left-winger in a philosophical sense. So why am I perceived as being on the right?

Perhaps it was my University of Chicago education, which taught me that regulations aimed at helping consumers and workers almost always make them worse off, that imports are good for the economy, that bubbles don’t exist, that there is no useful trade-off between inflation and unemployment, that consumption taxes are more progressive than investment income taxes, and lots of other counterintuitive stuff.

My Chicago education had no impact on my basic philosophical views, but did impact my views on causal relationships.

And it left me in a very lonely spot. But I am perfectly content being out on the fringe.

“The Jobs Report No One Saw Coming”

Here is today’s FT headline:

The jobs report no one saw coming

Actually, one person did see this coming. Here’s what I wrote three weeks ago:

Because millions of unemployed workers in low pay service sector jobs earn more on unemployment than they did on their previous jobs, and because most of those jobs are unpleasant, employment will likely remain quite depressed all summer, before bouncing back in the fall. That’s not to say the economy won’t grow.  The end of Covid makes it likely that sectors such as travel will pick up, but the quality of service will be lousy, perhaps the worst of my entire life.

Here’s the FT:

Knightley does pick up on the important trend that employers are struggling to find workers: . . .

This, he tells us, means there is huge demand for workers, but job gains will be held back in the next few months because of a lack of supply.

The reason for that is two fold in Knightley’s opinion: childcare issues and benefit incentives.

Most economists don’t understand supply side economics, and hence most never saw this coming.

PS. I’m on vacation, experiencing some of that lousy service that I predicted.