A savage battle is being waged on the concrete steppes
[Check out map of the battle at the bottom of post before reading]
Initially the people of the concrete steppes had the upper hand. Emboldened by the cry of “taper now!” they charged Woodford’s army and pushed them back. It looked like the battle was over, as the initial push in these economic battles usually determines the final outcome. Indeed this pattern is sometimes called “the efficient battle hypothesis.”
But Woodford’s army regrouped and charged to the call for Forward Guidance!! They pushed back and regained all of the lost ground, and then some. By 2:30 in the afternoon it was the people of the concrete steppes who were on the run. It looked like nothing could stop the NKs.
But wait, a third army suddenly swept onto the field! Sensing that Woodford’s army was weakened by the long battle, the market monetarists rallied to the cries of “income effect” and “Fisher effect.” Woodford’s early successes actually helped the market monetarists, by convincing everyone to be more bullish. That meant Woodford’s army was over extended, as it relied exclusively on the liquidity effect and was mired in bearish territory. His soldiers became confused by cause and effect. Which way do we go Mr. Woodford!?!?!?!
By late afternoon it began it look the like the Korean peninsula in 1953. The battle had raged back and forth, and the front lines ended up little changed from the beginning. One can only imagine the mood swings of the spectators. When stocks shot up Mr. Williamson had sudden visions of a Nobel Prize in economics. But those hopes were quickly dashed by the charge of Woodford’s army. He had forgotten about the forward guidance. Mr. Krugman was able to maintain an upbeat mood by continually revising his analysis, from “taper talk” to “promise to be irresponsible,” to “none of this really matters because we are at the zero bound stupid.” He was much more clever than the other spectators, and was prepared for any outcome. He was determined to be proved right, whatever happened.
I thank Nick Rowe for the concrete steppes metaphor.
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18. December 2013 at 13:18
What a waste of time and money, though, this QE. Just like real battles. With the right guidance in the first place there’d have been no need for QE.
18. December 2013 at 13:26
Brilliant!
18. December 2013 at 13:37
awesome
18. December 2013 at 13:53
The Ryan-Murray budget deal is announced on December 10, somewhat alleviating near-term sequester cuts.
Bernanke announces the taper on December 18.
Any questions?
18. December 2013 at 14:03
James, Exactly.
SG, Yes, good point. Monetary offset too.
18. December 2013 at 15:18
Considering that we’re running under the inflation target, using a monetary offset doesn’t make a lot of sense. Combine today’s forward guidance with a lower bound on the inflation target rather than a taper and we’d have a real rally.
18. December 2013 at 17:01
This quote from Bernanke today: In answering why job growth has not been stronger in recent years, Bernanke says, “People don’t appreciate how tight fiscal policy has been.”
18. December 2013 at 17:21
So did monetary policy loosen or tighten? What was it offsetting? Is the Fed getting the growth it wants or is it indicating it wants something else?
18. December 2013 at 17:34
Randomize, I agree that there was no need to taper, but they did loosen today.
Bernanke is wrong, but I understand his frustration. He’s working with a monetary regime that is very inertial. It would be hard for him to do what I favor, even if he agreed with me. Given that reality I’d probably be frustrated by fiscal policy too. I’m not trying to change Bernanke’s mind, I’m trying to change the reality he is working with. If NGDPLT was the accepted norm, his job would have been easier.
Saturos, My next post will address that, but policy clearly became looser today. The stock market reaction is the one to watch.
18. December 2013 at 18:34
Fantastic! I wonder if further taper decisions will play out, especially if decoupled from adjustments to forward guidance.
18. December 2013 at 21:05
Scott – the 10yr yield rose 4 bps today. Looks like the fisher effect dominated the liquidity effect. Don’t be so hard on the contrarian view it’s been largely vindicated!
19. December 2013 at 07:00
It’s insane that a firm 2% inflation target would actually be more inflationary than the discretionary policy we actually have!
19. December 2013 at 08:53
JJ, Yes, I did an entire post on that a few months back. It’s insane.