Archive for December 2022


Titian’s helicopter drop

Now that I’m retired, I’m playing around a bit with the layout of my blog. For the past 13 years, I’ve been annoyed that the narrow central column of text made it hard to read graphs, and made pictures smaller than I would like. But I didn’t know how to fix the issue and was too busy to research the subject.

A few weeks ago, I had a tech guy widen the central column and add an attractive old dollar bill on top. More recently, I experimented with a new banner on top using a screenshot from a famous old painting by Titian, which shows a “helicopter drop” of gold coins onto the Greek princess Danaë. I’ll say a bit more about the painting below, but first a few comments on helicopter drops, which are widely misunderstood.

In order to be a helicopter drop in the traditional sense of the term, the new money being injected must be zero interest base money, and it must be given away rather than sold. Thus the creation of interest bearing reserves doesn’t count, as most “QE” programs merely exchange one interest bearing government liability for another. A true helicopter drop involves showering the public with new zero interest currency notes.

A combined fiscal–monetary expansion can have the effect of a helicopter drop even if the new cash is not given away. Thus, assume the government sends a $1000 check to each citizen, financed with interest-bearing debt. At the same time, all of that new debt is purchased with new currency. Although the new cash is not literally given away in this case, the combined effect of this fiscal/monetary action is the same as simply giving each citizen $1000 in cash.

Again, this doesn’t apply to real world QE programs combined with fiscal stimulus, such as the various Covid relief bills. Those mostly involved new debt being purchased with interest bearing reserves. However, a small portion of the QE did constitute a helicopter drop, as currency held by the public also increased somewhat during Covid.

In most cases, currency injections merely accommodate changes in the public’s real demand for cash. When this occurs, inflation stays near the 2% target. But during 2021-2022, prices rose about 8% above target, and the extra currency demand associated with that higher price level is a true “monetization of the debt”, in the classic sense of the term. In this case, we are talking about roughly $200 billion in “helicopter drop” money over the past few years.

Economists often assume that helicopter drops are a foolproof method of stimulus. But if the public is rational then the expansionary effects are no greater than for an ordinary open market purchase of bonds, without any accompanying fiscal stimulus. When the Fed buys bonds with a permanent increase in the currency stock (an open market operation), the public’s future expected tax liabilities fall by an equal amount. In a world of 3% interest rates, a gift of $1,000 is worth exactly as much as a permanent reduction of taxes by $30/year.

PS. Titian is perhaps my fourth favorite painter, and probably my favorite among what I’d call the non-miraculous artists. Here is the Prado version of Danaë, from which the new header is taken:

This link shows a better image.

While the one in the Prado is probably the best version, there are at least 6 others, with the prettiest being the one in the Wellington Collection:

This link shows the Wellington version before its recent restoration. The difference is stunning. (Unfortunately, the top portion is lost.)

PPS. There’s a certain type of person that I find very annoying. They’ll make claims about whether or not economics is a science, as if the statement told us something useful about the world. These intellectual mediocrities are the sorts of people that engage in tiresome debates about whether something is “art or pornography”. For them, words have a sort of mystical power.

Titian’s paintings of Danaë are clearly pornographic, and were intended to be pornographic when he painted them. (Discerning viewers will notice that the Prado version is more pornographic than the Wellington version.) So the only sensible way of responding to the “art or pornography” question is, “Why not both”? Because these works of pornography were intended for the elites, a more polite term is generally employed, say “erotica”.

To conservatives, the term “stimulus” has a negative connotation, suggesting a search for immediate gratification without any thought of future consequences. Both monetary stimulus and sexual promiscuity are “irresponsible”.

PPPS. Justin E.H. Smith had this to say about artists that were bad people:

Lest you conclude in light of what I have said so far that I must be a “bad” person, a “garbage human being” as they love to say on Twitter, perhaps this is the moment to assure you that, if I could, I would not hesitate to call Child Protection Services on these monsters I have admitted to valuing as artists. . . .

But it is annoying to have to provide these assurances, as to do so implies acceptance of the general frame in which art, and its relationship to morality, are understood in our society. This frame, whether its upholders know it or not, shares with socialist realism, and with earlier nineteenth-century nationalist attitudes towards arts and literature, the presumption that to value a work of art must at the same time be to wish to give the person who made it a medal, when he still lives, or to build him a statue when he dies, or to name a prize after him or even a university.

And concludes:

So he’s problematic? Jerry Lee [Lewis] could have told you that himself. In fact he has been doing so, in his art, on stage, in the public eye, before the world, presumably before his God, for the past seventy years.

PPPPS. For me, the miraculous painters are Velázquez, Vermeer, and Cézanne. The ones where you can’t figure out how they did it.

Merry Christmas

A couple images from two of the best early Renaissance painters. First, a detail from The Annunciation, by Fra Angelico:

And a detail from Piero della Francesca’s Nativity:

The myth of Japanese policy ineffectiveness

Yesterday provided another example of how Japan is not stuck in a “liquidity trap”, and never has been. Here’s Bloomberg:

Bank of Japan Governor Haruhiko Kuroda shocked markets by doubling a cap on 10-year yields, sparking a jump in the yen and a slide in government bonds in a move that helps pave the way for possible policy normalization under a new governor.

The BOJ will now allow Japan’s 10-year bond yields to rise to around 0.5%, up from the previous limit of 0.25%, while keeping both short- and long-term interest rates unchanged, according to a policy statement Tuesday. 

The move caused a sharp appreciation in the yen, clear evidence that the effect was highly contractionary:

This action makes it even more likely that Japan will undershoot its 2% inflation target over the next decade. It was an obvious policy mistake, an unforced error.

But this is nothing new:

1. In 2000, the BOJ raised interest rates after years of deflation, insuring that the deflation would continue.

2. In 2006, the BOJ raised interest rates and sharply reduced the monetary base (quantitative tightening) after years of deflation, insuring that the deflation would continue.

In this case, it’s misleading to blame the BOJ. Kuroda probably opposed the move, at least in private. But he’s scheduled to be replaced by a more hawkish bank president in early 2023, and the bond price targeting program is likely to be abandoned. Ironically, in the long run the new BOJ president may well deliver even lower nominal interest rates than Kuroda.

The Japanese government may claim that it wishes to achieve 2% inflation, but is unable to do so. Their actions make it quite clear that this is not their actual policy goal, they are content with near-zero inflation. And yet most American macroeconomists will continue to believe in the myth that Japan is “stuck” in a liquidity trap, unable to achieve inflation.

“This is the west sir. When the legend become fact, print the legend.”

Does the US set global interest rates?

Of course not. But many people seem confused on this point. Here’s The Economist:

The world’s biggest co-ordination problem, however, may be less one of every-central-bank-for-itself and more one in which a single dominant central bank—America’s Federal Reserve—calls a tune which others must follow, like it or not. The dollar’s outsized sway in the global financial system grants it a powerful role in driving global financial cycles. A recent paper from Mr Obstfeld and Haonan Zhou of Princeton University notes that monetary tightening in America is strongly associated with an appreciating dollar and a deterioration in a number of global economic and financial measures.

“Others must follow”? Without any apparent embarrassment, in the very next article in the same issue of The Economist, this claim is contradicted:

There have been few months in monetary history as consequential as this September. Countries everywhere have tightened the screws on borrowers to smother inflation. But there has been a notable holdout. The Bank of Japan (BOJ), the pioneer of modern zero-interest rate and bond-buying operations, is standing firm. . . . On September 22nd Kuroda Haruhiko, the BOJ’s governor, reiterated that the bank would hold rates down.

It’s pretty obvious that central banks with freely floating currencies do not have to follow the Fed. (Places like Hong Kong, which pegs its current to the US dollar, do need to set rates in line with the Fed.)

Countries with very high inflation often have interest rates that are far higher than in the US. Those with lower inflation tend to have lower rates, on average. Interest rates tend to reflect macroeconomic conditions in each country. In the late 2010s, for instance, the Fed raised its target rate nine times, while the ECB did not raise rates at all.

It might seem like the Fed is forcing other countries to raise rates, but any correlation is due to the fact that much of the world was hit by an inflation problem at roughly the same time. (Over at Econlog, I explain why Japan doesn’t have an inflation problem despite 4% inflation.) In addition, when capital can flow freely between countries, real interest rates will tend to be highly correlated.

Even though the ECB is raising rates this year, the level of nominal interest rates in Europe remains far below the US. This reflects the fact that while headline inflation in the eurozone is extremely high at the moment (due to the Ukraine War), the underlying trend rate of inflation in Europe has been lower than in the US during recent decades.

Random articles

1. With all of the bad news coming out of China (especially the zero Covid idiocy), it’s nice to see a ray of hope. Here’s The Economist:

Meanwhile, China’s regulatory regime has become more friendly. Not long ago, onerous reviews were required for new listings. This led to a backlog, sometimes stretching to thousands of firms, and prevented private-equity investors from exiting investments. A new system, trialled in the star and ChiNext exchanges, is currently being rolled out to others. It is more in line with international standards, setting requirements for listings, but dropping the arduous inspections. Liquidity and stability have also improved. Over the past five years, reforms have encouraged the professionalisation of investment. Volatile retail trading has been reduced. All this fits with Mr Xi’s publicly outlined vision for Chinese finance, in which markets are freer from meddling, operating more like ones in America.

2. The recent increase in anti-Chinese racism in America has consequences:

Racism is another impediment to the spread of liberal values. In a paper published in 2020, scholars at Stanford University in California and Sun Yat-sen University in China argued that Chinese students in America are “more predisposed to favour liberal democracy than their peers in China.” But anti-Chinese discrimination “significantly reduces” the belief among Chinese students in America that political reform is desirable, while increasing their support for authoritarian rule.

3. And another China story:

According to recent analysis of industry data by Chad Bown of the Peterson Institute for International Economics, a think-tank, China’s share of America’s imports rose from 36% to 39% this year in goods not covered by tariffs. For goods subject to a 7.5% tariff, however, China’s share sank from 24% to 18%. And for those hit by a whopping 25% tariff, which covers lots of it equipment, China’s share of imports fell from 16% to 10%. . . .

This change is more nuanced than it appears at first glance. It seems likely that many of the components used to make goods in India or Vietnam are themselves produced in China. Although the detailed supply-chain data needed to say for sure will not be published for several years, Chinese export figures are certainly suggestive. The two-percentage-point drop in the share of China’s total exports destined for America over the period from 2018 to 2022 is exactly matched by the increase in China’s exports to ASEAN economies.

4. One overlooked downside of a large welfare state is that it crowds out essential government functions such as public safety:

Britain is a libertarian’s nightmare, with the state expanding to 45% of gdp; the tax burden is likely to creep towards levels not seen since Clement Attlee, the Labour prime minister who put Beveridge’s plan into practice. Yet it also manages to be a social democrat horror show, achieving little despite its vast size.

Increasingly the Conservative government provides a welfare state in name, but a bare bones night-watchman state in practice. The police will probably find your killer but they will make no effort to find your stolen bicycle. If you’re hit by a car, the nhs is likely to save your life. But if you require a hernia operation, you may wait a year or two (or give up and go private). A 19th-century concept of the state has collided with a 20th-century vision to create an intolerable 21st-century chimera.

Left wing American cities such as San Francisco have the same problem.

5. On a related note, when the government provides crappy public services, people will have lower expectations for the government. Here’s The Economist:

Yet the Modi government is devoting a much smaller portion of India’s bumper tax revenues to social spending, including health care and education, than its predecessor (see chart 2). In 2018-19 government spending on health represented 3.2% of GDP, down from 3.9% the year before it came to power. Spending on education, at 3.1%, is far below its target of 6%. . . .

The long-abysmal state of public services—and proliferation of private alternatives—have downgraded Indians’ expectations of them. Less than a third rely on public health care. In an international survey in 2016, just 46% of Indians agreed that “the primary responsibility for providing school education rested with government”, the lowest of any country polled. Meanwhile, the BJP’s infrastructure projects, and relentless efforts to put Mr Modi’s imprimatur on them, have made the projects and prime minister alike powerful symbols of national progress.

6. People often ask me what I mean by “wokeness”. The Economist describes its two key attributes:

What links these developments is a loose constellation of ideas that is changing the way that mostly white, educated, left-leaning Americans view the world. This credo still lacks a definitive name: it is variously known as left-liberal identity politics, social-justice activism or, simply, wokeness. But it has a clear common thread: a belief that any disparities between racial groups are evidence of structural racism; that the norms of free speech, individualism and universalism which pretend to be progressive are really camouflage for this discrimination; and that injustice will persist until systems of language and privilege are dismantled.

7. People from a foreign country often have a perspective that is lacking in domestic residents. The clarity of distance. This Razib Khan tweet doesn’t surprise me at all:

My wife experienced China’s Cultural Revolution and noticed the parallels with cancel culture even before I did.

And yet I often see American progressives say, “Cancel culture? I don’t see any cancel culture.” If you don’t see it, there’s a good chance that you are a part of the problem.

8. The Economist has a good article about how East Asian countries are reluctant to go along with US sanctions on China:

Nearly all the countries of the region have deep economic ties with China that they are loth to rupture.

That even goes for Taiwan, the world’s pre-eminent semiconductor powerhouse, which is firmly in the Western camp and subject to relentless Chinese bullying. . . .

Many Taiwanese view the semiconductor industry not only as a source of jobs and prosperity. They see it as Taiwan’s security guarantee: without it, they say, America and its allies would be less likely to defend the island if it is attacked by China. The industry is known locally as the huguo shenshan—the magic mountain that protects Taiwan. President Tsai Ing-wen calls its semiconductors “democracy chips”.

Biden wants to remove that magic mountain. Can the Taiwanese trust America to defend them?