Archive for April 2022


Yikes! We are growing way too fast

Another day, another data point showing an economy dangerously overheating. The economy grew at a 6.4% annual rate in the first quarter, a rate far too high to achieve the Fed’s inflation goals. Given that we are already overheating, we need a period of below trend NGDP growth. Over the past 12 months, NGDP grew by 10.6%.

Some bureaucrats working at a place called the “Bureau of Economic Analysis” came up with a different estimate of economic growth—minus 1.4%—using a murky and hard to understand set of statistical manipulations. But real people don’t spend BEA data points, they spend current US dollars. And that spending is rising way too fast.

In the past, I’ve argued that the health of the labor market depends more on NGDP growth relative to trend than on so-called “real” GDP. The first quarter was an almost perfect example. Notice that (payroll) job creation was at a blistering pace in the first quarter of 2022, growing by almost 1.7 million. Who are you going to believe, me or the BEA (and the economic establishment that supports them?)

How many times to I have to say this: It’s all about the NGDP.

How do we know that money is getting looser?

We don’t know for certain, but the evidence points that way.

Ideally, we’d have a highly liquid NGDP futures market. Unfortunately, we are still in the Stone Age of macroeconomics. (Future generations will laugh at our ineptness, just as we laugh at 1930s and 1970s policymakers.)

Without the NGDP future market, I usually start with 5-year TIPS spreads, which have been rising during 2022. They might be distorted by rising oil prices, so then I look at 5-year, 5-year forward TIPS spreads, which have also been rising. They are not affected by commodity prices. Check that, they might be affected (I’ve never studied the issue), but they are not distorted by commodity prices, which follow something close to a random walk.

If you put a gun to my head, and forced me to come up with an argument that money is getting tighter, despite all of this evidence, here’s what I’d say:

The stance of monetary policy is not a single number; it’s a vector. There’s the 12-month expected NGDP growth rate, the expected NGDP growth rate from 12 to 24 months out, the expected NGDP growth rate from 24 to 36 months out, etc., etc.

It’s theoretically possible that near-term expected NGDP growth is slowing, despite rising TIPS spreads, while longer run expected NGDP growth is rising. It’s possible that short run money is getting tighter while long run money is getting looser. In the near term, the Ukraine supply shock might have caused inflation expectations to rise even as NGDP growth expectations fell.

But I like Occam’s Razor. The simplest explanation for what’s going on is that the Fed is gradually losing credibility, which means money is getting easier. That’s my current view.

PS. If you want a concrete example of a monetary policy change that would make money tighter in the short run and easier in the long run, consider what would happen if Japan pegged the yen to the dollar. Japanese interest rates would immediately rise to US levels, but inflation in Japan would move closer to US levels in the very long run.

Why do they hate us?

When I travelled to China in the 1990s, America was highly respected. In a sense, they looked up to the US as a sort of model. Now many Chinese detest America.

Many people are surprised when I tell them about this dramatic change. “What have we done to make them hate us?” I get very discouraged when I hear that response. How can well-educated people not know about all the things the US government has done to anger the Chinese people? Consider:

1. A former (and possibly future) secretary of state recently declared that Taiwan should declare independence from China, even though the US policy for decades has been that China and Taiwan are part of a single country. How would you expect the Chinese people to react to our trying to break up their country?

2. President Trump imposed blatantly illegal tariffs on China, completely disregarding international trade rules when doing so. We demand the Chinese follow international rules, but we treat those rules with complete contempt when they inconvenience us. Biden has continued these idiotic trade policies. How would you expect the Chinese people to react to our hypocrisy?

3. In the 1990s, the US encouraged China to welcome more foreign investment. Now we not only restrict that investment, we bully all other nations to stop investing in China’s high text sector. We have government officials stating publicly that our goal should be to prevent China from developing an advanced tech sector. We are trying to destroy one of China’s leading tech companies. How would you expect the Chinese people to react to our bullying?

4. You have the US government complaining about genocide in Ukraine, and then former National Security advisor John Bolton tells the media that Trump privately told Xi Jinping that he supports the Xinjiang concentration camps. And you wonder why the Chinese people think we are hypocrites?

5. In February 2020, Trump issues no fewer than 14 statements praising China for the way it handled Covid. Then when Covid hits the US and it becomes apparent that Trump did absolutely nothing to prepare us for the epidemic, US officials start blaming China for the pandemic. At one point they even claimed to have evidence that the virus escaped from a Chinese lab. The evidence did not exist; it was all a lie. How would you expect the Chinese people to react to our lies?

6. Until recently, the death toll in China has been extremely low (although that might change soon). In contrast, the US handled the virus with extreme incompetence, leading to more than a million deaths. That’s not just far worse than China, it’s three times worse (per capita) than even a democratic nation like Canada. How would you expect the Chinese people to react when they hear about our cavalier disregard for human life?

7. A US president claims that almost every Chinese student studying in America is a spy. (Does this include my wife?) How would you expect the Chinese people to react to our bigotry?

8. The US has a close relationship with Saudi Arabia, despite a horrific human rights record in that country, not to mention Saudi war crimes in Yemen. China also has a horrific human rights record, but we don’t need their oil and they aren’t funneling billions into Jared Kushner’s pockets. How would you expect the Chinese people to react to our hypocrisy?

9. In WWII, we put Japanese Americans into concentration camps but German Americans remained free. Gee, I wonder why? In the 1980s, we had trade barriers on Japanese cars but not German cars. Gee, I wonder why? Today our foreign policy experts suggest we should not use our military to protect Ukraine from Russia, but should use our military to protect Taiwan from China. Gee, I wonder why? The Chinese people aren’t stupid, they see what’s going on.

People will respond by telling me all sorts of awful things about the Chinese government. And guess what, all of that is true. But that hasn’t changed since the 1990s. But that’s not why the Chinese people hate us. Yes, you can cite examples in the Chinese media of lies about the US, as when they suggested that Covid escaped from a US lab. But even those cases are generally retaliation against previous US government lies.

In the late 1940s, both of these claims were true:

1. The Soviets started the Cold War.

2. The Soviet government was far worse than the US government.

Lots of people believe these two statement are true:

3. The Chinese started the new Cold War.

4. The Chinese government is far worse than the US government.

Point #4 is true. But point #3 is not.

PS. Yes, a portion of anti-American sentiment in China might come from Chinese government lies, such as claims that our policies led to the Ukraine War or that Covid escaped from a US lab. But my sense is that the Chinese people heavily discount CCP propaganda. The Economist recently pointed out that the Chinese public reads Chinese propaganda “backwards”. Thus if their government says there’s no need to hoard food, everyone understands that to mean that there’s a need to hoard food. I suspect the Chinese public understands why some of their government officials respond to accusations that Covid escaped from a Chinese lab with accusations that it escaped from a US lab.

Why we need shock treatment

When it looked like the Fed would cut raise rates by 25 basis points last month, I favored 50. Next meeting they are leaning toward 50, and so naturally I favor 75.

My views might seem inconsistent, but I am consistently favoring tightening policy by more than markets expect, because the expected rate of raising interest rates is not expected to achieve on-target average inflation.

When the economy is in equilibrium, shock treatment risks pushing the economy into recession, and hence is a bad idea. When the economy is severely overheated, shock treatment risks pushing the economy back to equilibrium, and hence is a good idea.

Committing suicide in slow motion

Naturally I’m referring to the Democrats. Have you ever seen a political party so bound and determined to lose power?

1. Bloomberg has an article on how the Democrats are trying to destroy the highly popular and effective charter school movement.

With this year’s midterms looming and control of Congress hanging in the balance, Republicans are making inroads with voters by focusing on education, portraying Democrats as out of touch with the concerns of parents and captive to teachers unions.

Unfortunately, the Department of Education risks playing into their hands with a proposal to restrict funding for public charter schools that’s bad politics and even worse policy. It’s critical that the White House intervene before it’s too late.

As if voters weren’t already disgusted with the Dems for shutting down the public schools for far too long during Covid.

2. Josh Marshall points out that the Dems are missing an opportunity to hang Ukraine around the GOP’s neck:

But the first, second and third most important thing about this poll is that this is what you get when you’re not reminding Americans every day — and I mean every god-damned day — that the GOP has spent the last 7 years boosting, allying with and even conspiring with Russia. . .

This is so obvious I don’t see the need to even rehearse all the details and the bill of particulars. This is just losing the game because you didn’t put a team on the field. Political messaging, political storytelling isn’t a one and done or binary thing. You don’t seize on the silver bullet message and then the waters part in front of you. But there’s only so many hours in the day. In a setting like this, when Republicans are attacking Democrats 24/7 you need to carve out some of those hours for Republicans to explain why just three years ago they were helping Presidents Trump and Putin conspire against Ukraine and the United States. Only four years ago eight Republican Senators decided to spend July 4th making fealty to Vladimir Putin in Moscow. The list is endless.

I recall seeing videos of conservative groups literally chanting Putin’s name.

3. Matt Yglesias points out that the Dems are failing to go after Trump on the corruption issue:

4. Meanwhile, Biden keeps promoting policies that raise the cost of living, at a time when inflation is the number one issue. I warned you people that Biden was a buffoon.

Political parties are large organic groups of people with a life of their own. There is no central direction–they evolve according to murky social science laws that no human understands. For some unknown reason the Dems are sleepwalking into electoral suicide, and there doesn’t seem to be anything that anyone can do about it.