Archive for October 2021

 
 

Schrödinger’s inflation

There’s a lot of debate about whether the current burst of inflation is transitory or permanent. I worry, however, that many people misinterpret the question, thinking it’s about the nature of the inflation itself. Sort of like asking their friend whether an animal that they saw walking in the distance is a dog or a coyote.

But the transitory inflation question is not like that at all. The question is not whether this current bout of inflation is transitory or permanent, the question is whether the inflation surge will be transitory or permanent. No one asks whether that animal walking in the distance will be a dog or a coyote—they assume that that reality has already been established.

NGDP growth has been running at a bit below 4% over the past couple of years. That’s about right. If NGDP growth runs at about 4% over the next 3 or 4 years (as it should) then the inflation will be transitory. If it runs at 7% or 8% over the next few years then the inflation will be permanent, or at least relatively persistent. It’s that simple. (During 1971-81, NGDP growth averaged 11%. God help us if that occurs again.)

It is the Fed that will determine the rate of NGDP growth over the next few years, not housing shortages or labor shortages or supply chain disruptions, etc. The Fed will decide whether the inflation is transitory or permanent.

The current surge in inflation is like Schrödinger’s cat; it’s neither transitory or permanent until the FOMC meets and chooses a policy path for NGDP over the next 3 or 4 years. Let’s hope they choose wisely.

PS. Of course I’m a “many worlds” guy, so I’m going to claim that my prediction (and what is my prediction?) is correct in at least one universe. 🙂

Random articles

According to the state of Texas, 18-20 year olds are “children“:

Texas counters that it has “long used age restrictions on employment to reduce young people’s exposure to perceived social ills.”

Senate Bill 315 redefined 18- to 20-year-olds as children, making it a violation of the state’s ban on “employment harmful to children” to employ or induce adults younger than 21 to work nude, topless, or in any “sexually oriented commercial activity.” 

So it’s not just rebel armies in Africa that rely on child soldiers?

At long last, we have evidence of fraud in the 2020 election:

The lieutenant governor of Texas cut the check on his first bounty for voter fraud evidence to a poll worker in Pennsylvania, but it wasn’t the proof he was expecting.

Almost a year after Texas Lt. Gov. Dan Patrick announced that he would pay for evidence of voter fraud in the 2020 presidential election, someone has received their payout. Patrick sent a $25,000 check to Eric Frank, a Democratic poll worker from Chester County, Pennsylvania, who reported a 72-year-old Republican for voting twice.

You probably woke up this morning wonder what the far right thinks of left wingers. Here’s your answer, from a thoughtful website called “Breitbart“:

The organized left is deliberately putting unvaccinated Trump supporters in an impossible position where they can either NOT get a life-saving vaccine or CAN feel like cucks caving to the ugliest, smuggest bullies in the world.

In other words, I sincerely believe the organized left is doing everything in its power to convince Trump supporters NOT to get the life-saving Trump vaccine.

I’m sorry, but people willing to drone strike seven children and who are eager to unleash terrorists like Antifa and Black Lives Matter into our cities are sociopaths. The left’s morality is guided only by that which furthers their fascist agenda, and so using reverse psychology to trick Trump supporters NOT to get a life-saving vaccine is, to them, a moral good. The more of us who die, the better.

Politico has an article discussing whether Biden should declassify certain Trump documents. This made me laugh out loud:

A precedent for such broad use of the president’s declassification power comes from the Trump years. Famously, as president, Trump employed this power cavalierly to disclose classified information to Russia’s foreign minister and ambassador. Trump also pushed law enforcement and intelligence agencies to declassify details about the Russia investigation. Having so recklessly used that power, he’s hardly in a position to complain about it now.

Is that final sentence a joke? Trump’s been on the political scene for 6 years; has Politico still not figured him out?

BTW, did you see that Trump will name his new social network “Truth”. The name sounds better in Russian.


Monetary policy: Levels and Growth Rates

In a recent Mercatus working paper, I argued that monetary policy works in two dimensions, by changing levels of key macro variables and by changing expected future growth rates of those variables.

This is easiest to see when looking at the impact of monetary policy announcements on the spot and forward exchange rate. A monetary policy announcement might cause the spot exchange rate to depreciate while also reducing the expected future appreciation in the currency. Or, it might cause the spot exchange rate to depreciate while raising the expected future appreciation in the currency. There are different kinds of “easy money” policies, and the actual outcome depends in part on “forward guidance”.

After writing this paper, I came across an interesting 2005 paper by Refet S. Gürkaynak, Brian Sack, and Eric T. Swanson. Here is the abstract:

We investigate the effects of U.S. monetary policy on asset prices using a high-frequency event-study analysis. We
test whether these effects are adequately captured by a single factor—changes in the federal funds rate target—and find that they are not. Instead, we find that two factors are required. These factors have a structural interpretation as a “current federal funds rate target” factor and a “future path of policy” factor, with the latter closely associated with Federal Open Market Committee statements. We measure the effects of these two factors on bond yields and stock prices using a new intraday data set going back to 1990. According to our estimates, both monetary policy actions and statements have important but differing effects on asset prices, with statements having a much greater impact on longer-term Treasury yields.

I like the way they look at policy shocks in two dimensions—immediate effects and changes in the expected future path of policy. It’s interesting that the impact on the future expected path of policy comes mostly from the policy statements that accompany the interest rate announcement.

Of course signals are only effective to the extent that they credibly describe future concrete actions by the central bank:

We emphasize that our findings do not imply that FOMC statements represent an independent policy tool. In particular, FOMC statements likely exert their effects on financial markets through their influence on financial market expectations of future policy actions. Viewed in this light, our results do not indicate that policy actions are secondary so much as that their influence comes earlier—when investors build in expectations of those actions in response to FOMC statements (and perhaps other events, such as speeches and testimony by FOMC members).

This is what I’ve been calling “long and variable leads”.

They also suggest that the findings support claims that monetary policy is still quite effective at the zero bound:

This finding has important implications for the conduct of monetary policy in a low-inflation environment—in particular, even when faced with a low or zero nominal funds rate, our results directly support the theoretical analysis of Reifschneider and Williams (2000) and Eggertsson and Woodford (2003) that the FOMC is largely unhindered in its ability to conduct policy, because it has the ability to manipulate financial market expectations of future policy actions and thereby longer-term interest rates and the economy more generally

What is Xi trying to hide?

The New Yorker has a very good article on the origins of Covid. They don’t take a definitive stand on the question, but along the way make some important points:

Before the pandemic, President Xi Jinping promoted wildlife farms as a means of poverty alleviation, and the industry, which was largely unregulated, employed more than fourteen million people. “There’s this incredible network of people involved in farming and raising animals and trying out new ideas,” Daszak told me last year. “It’s entrepreneurial, it’s chaotic, it’s the sort of farms that are half falling apart, with mixed species in them.” The W.H.O. report stated that some wild-meat suppliers to Wuhan were located in south China, where horseshoe bats that host sars-like coronaviruses primarily reside. Perhaps that is where the virus crossed from bats to animals, and those sickened animals were brought to Wuhan, where they were sold in Huanan and the city’s three other known live-animal markets. . . .

From one perspective, proving the virus has a natural origin is even worse for China. If wildlife farms were responsible for the pandemic, that would implicate the policies of President Xi Jinping. If there was a lab leak, just one, or a few, scientists are culpable of an accident. Either way, it is likely that the Chinese government prefers a storm of swirling theories, within which they can continue to push their own: that U.S. soldiers brought the virus to Wuhan in October, 2019, during the World Military Games, or that the American government manufactured the virus in Fort Detrick, Maryland. Or they can blame imported frozen food. The conspiracy theories branch out from there, in their own kind of evolutionary tree.

I’ve made the same point. The animal market theory should be worse for China’s reputation than a lab leak. Do you think Xi Jinping is more worried about the cause of Covid being his grand plan to develop an animal wildlife industry employing 14 million people that threatens to create repeated global pandemics, or more worried about a lab leak from an obscure Chinese scientist doing research funded by the US government? I don’t think people are looking at this from the Chinese point of view.

Or perhaps Xi doesn’t know the source of Covid and is engaged in a cover-up because he’d be embarrassed by either a wild animal market or a lab leak source for Covid. He just wants to confuse the issue with crazy theories of a US origin.

In the end, human beings are probably to blame either way:

Still, humans have changed the equation. Calling viruses zoonotic obscures the role we play in their evolution, whether in the wilderness, a wet market, or a lab. What is an ecological niche when humans have their hands in everything? 

PS. WaPo has an interesting piece on the discovery of a huge cave system with horseshoe bats in Hubei province, with wild animal farms nearby:

A reporter observed human traffic into Enshi caves, including domestic tourism, spelunking and villagers replacing a drinking water pump inside a cave. Defunct wildlife farms sat as close as one mile from the entrances.

But the Chinese government is covering this up:

Beijing has been less than eager to find answers in Hubei, as it touts its own theory that the virus may have originated overseas. One foreign scientist who worked for years with the Wuhan Institute of Virology, and who spoke on the condition of anonymity to discuss sensitive matters, said the institute’s field research in bat caves has been suspended since the pandemic began. . . .

A person with knowledge of the Wuhan market supply chains, who spoke on the condition of anonymity to protect his contacts, told The Post that live animals sold at markets in Wuhan were sourced from Hubei, particularly Enshi and Xianning prefectures, as well as from Hunan and Jiangxi provinces.

Chinese authorities have deflected questions about the presence of live wild animals at Wuhan markets before the outbreak. A Scientific Reports study in June that catalogued illegal sales of live wildlife at the markets has not been covered by China’s state-run media. The two Chinese authors did not respond to requests for comment about what they knew about those supply chains.

Why was the evidence from the crime scene destroyed? What is Xi trying to hide?

A bad economy doesn’t mean monetary policy is off course

The economy is currently beset by all sorts of problems, mostly related to supply-side problems. And yet, I see no evidence that monetary policy is significantly off course.

There are some reasons to worry that monetary policy is too expansionary. Inflation is above target and wage inflation (a far more important indicator than price inflation) is at 4.6% over the past 12 months. And yet NGDP growth over the past 18 months is running at an annual rate of roughly 3.6% and TIPS spreads are still reasonable, so there’s not much evidence of wildly excessive monetary expansion.

There are some reasons to worry that monetary policy is too contractionary. Employment is still down by 5 million compared to pre-Covid levels. But the unemployment rate has plunged from 14.8% to only 4.8%, a far faster recovery than from any other recent recession. And the solid growth in NGDP and strong TIPS spreads provides no indication of dramatically insufficient monetary stimulus. Total employment seems inhibited by supply-side factors.

A bad economic outcome is not evidence of a bad monetary policy. The economy is influenced by many factors, and monetary policy is just one of those factors.

That’s not to say that monetary policy is perfect; the distortions caused by Covid make it much harder than usual to “read the tea leaves”. But we are not far off course.

Off topic: While on vacation in the Pacific Northwest I read an article about a big surge in baby boomers retiring. An hour later in a small town coffee shop I heard someone say, “Boy, people are retiring right and left.”