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.

Tyler’s test now has an answer

In January 2015, the Swiss made the foolish decision to allow the franc to appreciate strongly, ending a highly successful 3 1/2 year peg with the euro. The Danish krone was also pegged to the euro, and came under intense pressure from speculators. The Financial Times had this to say at the time:

It’s been a long time since so many developed central banks were tested by free market forces. And free market forces aren’t finished yet.

Hot on the heels of the SNB giving up on its euro ceiling policy, the market is zoning in on the Danish central bank and its ability to maintain its euro-peg.

As Dan already pointed out, the Danes have had to cut rates three times in in the last two weeks: January 19, January 22 and January 29.

If that looks and feels desperate, perhaps that’s because it is?

After discussing speculators buying the krone, the FT suggested:

All that, say the analysts, increasingly puts the Danes in the position of the Swiss National Bank: having to gobble up euro-assets they may not want or care for.

The economics world is divided up into two groups. Mainstream economists believe the Swiss National Bank (SNB) was having to buy so many assets because of its weak franc policy, and that allowing the franc to appreciate would reduce this problem, allowing them to buy fewer assets. Many suspected that the Danish central bank would eventually be forced to follow suit.

I argued that this was exactly backwards. A strong franc policy merely whets the appetite of speculators, and the franc is popular partly because speculators correctly anticipate that it will gradually appreciate over the long run. If you don’t like having to “gobble up” so many euro assets, the right policy is to maintain the peg, not allow the franc to appreciate.

At roughly the same time, Tyler Cowen had this to say:

And if the Danes cut their peg, I am loathe to call this [Swiss franc appreciation] a “mistake” (even though it likely will hurt their economy), rather it would be an inevitability.

After more than 6 years, we have a pretty definitive answer to Tyler’s test. It wasn’t inevitable. The Danes did not allow the krone to appreciate. As a result, after a brief surge in early 2015 their central bank balance sheet returned to normal:

Switzerland didn’t do nearly as well. Their monetary base soared right before the revaluation, as markets anticipated that the SNB was about to allow the franc to appreciate, and then continued to grow over time. Countries with the lowest inflation rates (Switzerland, Japan, etc.) tend to have the largest central bank balance sheets.

I’ve talked about this issue before, and long time readers might think I’m beating a dead horse. But I find it maddening that the conventional wisdom still seems to assume that the SNB was forced to revalue the franc under speculative pressure back in 2015. This feeds into the (false) perception that central banks are powerless to inflate, that Lars Svensson’s “foolproof” way of escaping the liquidity trap won’t work. And that’s just wrong. Central banks are never unable to depreciate their currencies.

When people have their minds made up, no amount of empirical evidence seems to budge them.

PS. Ever meet someone who worries about countries engaging in competitive devaluations, and yet also believes that monetary policy doesn’t have any effect on inflation? If monetary policy is powerless, then how can a central bank devalue its currency?