Another Market Monetarist Advisory
A few weeks ago I alerted readers to NGDP Advisers, which features Marcus Nunes, James Alexander, Benjamin Cole and Justin Irving. Now we are about to see another MM advisory firm. Lars Christensen will launch Markets and Money Advisory early next year. Lars has a new post on the Riksbank, which provides an example of the sort of analysis he will be doing:
Believe it or not – there is a country in the world where I now believe that monetary policy is becoming (moderately) too easy. Yes, that is correct – I will not always say that monetary policy is too tight. The country I talk about is Sweden. More on that below.
Assessing monetary conditions
I strongly believe that the assessment of the monetary stance of a country should not be based on for example looking at the level of nominal interest rates, but rather on whether or not the country is on track to hitting the central bank’s nominal target in lets say 12-18 months.
A way of assessing that is of course to look at market inflation expectations (if the central bank targets inflation as in the case of Sweden’s Riksbank). If inflation expectations are below (above) the target (for example 2%) then monetary conditions are too tight (easy).
An alternative to this approach is to look at other monetary indicators – for example money supply growth, nominal GDP growth, interest rates and the exchange rate. And this is exactly what we are doing in our (Markets & Money Advisory’s) upcoming publication on Global Monetary Conditions.
Policy consistency
Hence for all of the nearly 30 country we analyse in the publication we look at the four monetary indicators mentioned above and compare the development in these indicators with what we believe would be consistent with the given central bank’s inflation target.
I don’t know enough about Sweden to comment, but it certainly is an interesting case. Here’s Bloomberg:
As the Brits worry about the ramifications of a weakening pound, Sweden’s central bank has happily driven down its currency to the lowest level in more than half a decade.
Defying fundamentals – strong economic growth, a big current account and trade surplus and rising employment – the Swedish krona was the second-worst performing currency in the world last month after the British pound.
Those “fundamentals” may be interesting, but they are not the sort of fundamentals that a central bank should focus on. Instead, inflation and NGDP growth are what matter. Just because you have a big current account surplus does not mean that money is too easy. Indeed Japan experienced both deflation and a CA surplus at the same time. Sweden’s surplus merely reflects its high saving rate; it tells us nothing about whether the exchange rate is at the wrong level. For that, you need to look at NGDP growth. Thus the Japanese yen is too strong because NGDP growth is too slow. Lars suggests that Sweden’s NGDP growth is excessive, and that’s why he thinks they are too easy right now.
Sweden has other important lessons. Compared to Denmark (4.2%) and Norway (5.0%), Sweden has a rather high unemployment rate–currently 6.6%. But that probably reflects a higher natural rate of unemployment, which cannot be fixed with monetary policy. Again, monetary policy cannot be used to “solve problems”—instead it should aim at steady NGDP growth rates to avoid creating problems. But don’t go to the other extreme and “oppose monetary policy”. There is no such things as not using monetary policy, and any attempt to refrain from using it will merely create bad (highly unstable) monetary policy. I say this because I’m seeing this mistake more and more often. This headline made me cringe:
Buiter: Forget Monetary Policy, It’s Had Its Day
Yes, and eating food won’t solve your problems, so STOP EATING FOOD YOU IDIOT!
Or perhaps I should say. “You may not care about monetary policy, but monetary policy cares about you.”
PS. The Bloomberg article on Sweden suggests that current policy is turning the krona into “play money”. That might be a bit strong, given that Sweden’s inflation rate is currently 1%. That’s a tad below Zimbabwe 2008 levels.
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2. November 2016 at 11:55
By “forgetting” monetary policy, the Fed managed to bring about a “lovely depression”
http://ngdpadvisers.co.uk/2016/11/01/never-just-recession/
2. November 2016 at 12:59
Right after Buiter claims that monetary policy has had its day, he calls for a fiscal policy THAT IS MONETIZED.
When did the remove the requirement for a degree in economics that you had to have mastered logic?
2. November 2016 at 13:01
Make that ‘a fiscal stimulus…’ that is monetized, in the above.
2. November 2016 at 13:06
Back to the Future (1968);
https://fraser.stlouisfed.org/docs/meltzer/monetary_fiscal_friedman_1969.pdf
It’s a good read! Too bad everyone seems to have forgotten it.
2. November 2016 at 13:16
From the opening round of the Friedman-Heller debate;
‘…the economic policy of the 1960’s, the “new economics” if
you will, assigns an important role to both fiscal and monetary
policy. Indeed, the appropriate mix of policies has
often been the cornerstone of the argument: It was, for
example, early in the Go’s, when we feared that tight money
might stunt recovery, might thwart the expansionary impact
of the 1962-64 income tax cuts. It was again, in 1966, when
in strongly urging a tax increase, we put heavy emphasis on
avoiding the ill effects of imposing too much of the burden
of restraint on Federal Reserve policy. It was once again,
in 1967-68, when we sought the surtax in considerable part
to insure against a repetition of the monetary crunch of
1966. And it will be in the future, when full employment
surpluses in the federal budget may be the only defensible
way to buy the monetary ease that commitment to rapid
economic growth implies.’
Ah, yes, the ‘new economics’, Walter.
2. November 2016 at 13:29
Of course, there’s my favorite Helleracy;
‘… if we look at money stock alone for 1948, it would indicate the tightest money in the post-war period.3 Yet, the rate on Treasury bills was 1 per cent, and on high-grade corporates 2% per cent. (That does sound like ancient history.) But isn’t it curious that
we had tight money by the money-supply standard side by side with 1, 2, and 3 percent interest rates? We were swamped with liquidity— so interest rates do seem to have been telling us something very important.’
Yes, that monetary policy was too tight (non-expansionary). Heller continues;
‘Or, if we look at 1967 only in terms of the money stock,
it would appear as the easiest-money year since World War
II. M1 was up 6 per cent, M2 was up 12 per cent. Yet
there was a very sharp rise in interest rates. Why?’
Inflationary expectations, anyone? Back to Heller for the coup de grace;
‘I really don’t understand how the scarcity of any commodity
can be gauged without referring to its price— or,
more specifically, how the scarcity of money can be gauged
without referring to interest rates. It may, strictly speaking,
be wrong to identify any market interest rate as the price
of money. In the U. S., no interest is paid either on demand
deposits or on currency. But this is quibbling. The point
is that a change in the demand for money relative to the
supply, or a change in the supply relative to demand, results
generally in a change in interest rates.4 To insist that the
behavior of the price of money ( interest rates) conveys no
information about its scarcity is, as Tobin has noted, an
“odd heresy.” ‘
When it is really an odd fallacy; interest rates are the price of money. And Buiter is resurrecting it in that clip on Bloomberg.
2. November 2016 at 13:36
The clincher in as few words as possible:
…So far as I know, there has been no empirical demonstration that the tax cut had any effect on the total flow of income in the US. There has been no demonstration that if monetary policy had been maintained unchanged…the tax cut would have been really expansionary on nominal income….
2. November 2016 at 13:42
This was also a bit unfortunate, from Heller, as it turned out;
‘Milton has heard all of this before, and he always has an
answer— flexible exchange rates. Parenthetically, I fully understand
that it’s much easier to debate Milton in absentia
than in person! Yet, suffice it to note that however vital they
are to the workings of his money-supply peg, **floating exchange
rates are not just around the corner**.’
[my **, above]
2. November 2016 at 13:44
A Buiterism from Heller;
‘The 1964 tax cut pointedly illustrates what I mean. While
the “new economists” fully recognize the important role
monetary policy played in facilitating the success of the tax
cut, the monetarists go to elaborate lengths to “prove” that
the tax cut— which came close to removing a $13 billion
full-employment surplus that was overburdening and retarding
the economy— had nothing to do with the 1964-65
expansion. Money-supply growth did it all. Apparently, we
were just playing fiscal tiddlywinks in Washington.’
2. November 2016 at 14:23
Compare this from Milton Friedman almost half a century ago;
‘The fascinating thing to me is that the widespread faith
in the potency of fiscal policy— this is flying straight in the
face of some words that Walter Heller spoke a few moments
ago when he talked about the proven effectiveness of fiscal
policy— rests on no evidence whatsoever. It’s based on pure
assumption. It’s based on a priori reasoning.’
To what Marcus quote above.
2. November 2016 at 14:33
Friedman follows what I just quoted above with;
—————–quote————–
The one that is most dramatic and that Walter Heller
emphasized most is, of course, the 1964 tax cut. Now let me
point out to you that, so far as I know, there has been no
empirical demonstration that that tax cut had any effect
on the total flow of income in the U. S. There has been
no demonstration that if monetary policies had been maintained
unchanged— I’ll come back to that in a moment— the
tax cut would have been really expansionary on nominal income.
It clearly made interest rates higher than they otherwise
would have been. But there is no evidence that by itself
it was expansionary on income.
Arthur Okun wrote a paper in the summer of 1965 that
he presented at the Statistical Association Meeting that fall
which gave a statistical analysis of the effect of the tax cut.4
It’s a very interesting paper; it’s a fine thing to have done.
I think we ought to have more such examinations. But if
you examine what he did, you will find that what he has
is an illustrative calculation of, not evidence on, the importance
of the tax cut.
What Okun did was to assume away the whole problem
because he looked only at the effect of fiscal policy without
asking what role monetary policy played during that period.
What he did was to say that we could put monetary policy
aside, because interest rates didn’t change during the period
and that, therefore, we could suppose that monetary policy
was neutral. As I’ve just made clear, that really begs the
fundamental issue. If monetary policy were really neutral,
you would have expected interest rates to go up, not stay
constant. You had a tax cut. That meant the government
had to borrow more, which would have raised interest rates.
If, despite that effect, interest rates didn’t go up, monetary
policy must have been doing something.
What Art Okun did in that paper was to say: Let us
assume that the theory underlying fiscal policy is correct.
Then what do the figures say about the numerical value
of the multiplier in this episode. He did not present evidence
on whether that theory is correct.
To do that, you need to see what happened to money
separately. If you look at what happened to money, you
will find that the temporal pattern of money supply conforms
much better to the temporal pattern of nominal income
than does the tax cut. There was a decided tapering
off in the growth of money supply in early 1962 through
about the first three-quarters of ’62. This was reflected in
the last part of ’62 and early ’63 by a tapering off in the
economy. You then had a switch in monetary policy. It
became more expansive— the quantity of money started
growing— and lo and behold, about six or nine or ten
months later, before the tax cut had taken effect, income
started to rise at a more rapid rate.
In order to make the tax cut responsible for that, you
have to argue that anticipation of the tax cut produced an
increase in income, and that then, after you had the tax
cut, despite the fact that it had been anticipated, it had its
full effect all over again. So that episode, while it’s a nice
dramatic episode, does not, as it has so far been analyzed,
provide much evidence.
—————-endquote————-
2. November 2016 at 14:44
Sumner shills Nunes et al, and his apparent ex-student L. Christensen, but says: “I don’t know enough about Sweden to comment, but it certainly is an interesting case.” – well in art critique ‘interesting’ is a euphemism for ‘awful’. As for the Bloomberg link, chief economist Buitler of Citigroup is no fool, a former professor, and wisely advocates fiscal not monetary policy. Buitler, heard and respected by millions if not 1000s, or Sumner, heard and respected by 100s if not a half dozen losers on this site? I know who I’m voting for this November.
2. November 2016 at 15:13
Marcus, I agree.
Patrick, I especially like the comment from Heller about flexible exchange rates not being around the corner.
Ray, You said:
“and wisely advocates fiscal not monetary policy.”
So you favor returning to barter?
And yes, I’m sure that the man who’s name you cannot spell is respected by “millions”
2. November 2016 at 15:26
I will invite him to Japan
2. November 2016 at 15:36
There are embarrassments aplenty for Heller. This one, say;
‘…when full employment surpluses in the federal budget may be the only defensible way to buy the monetary ease that commitment to rapid
economic growth implies.’
2. November 2016 at 15:46
And;
‘The correlation is unmistakable: the more active, informed, and self-conscious fiscal and monetary policies have become, by and large, the more fully employed and stable the affected economies have become.
Casual empiricism? Perhaps— yet a powerful and persuasive observation.’
and;
‘Perhaps an even more telling testament to the effectiveness
of active modern stabilization-policy is the change in
private investment thinking and planning not only in the
financial sense of sustained confidence in the future of corporate
earnings and stock market values, even in the face
of temporary slowdowns in the economy— but more important,
in the physical sense of sustained high levels of plant
and equipment investment which seem to be replacing the
sickening swings that used to be the order of the day.
‘Why? In good part, I take it to be the result of a constantly
deepening conviction in the business and financial
community that alert and active fiscal-monetary policy will
keep the economy operating at a higher proportion of its
potential in the future than in the past; that beyond short
and temporary slowdowns, or perhaps even a recession—
that’s not ruled out in this vast and dynamic economy of
ours— lies the prospect of sustained growth in that narrow
band around full employment.’
2. November 2016 at 15:51
Bliss was it to be alive in the late 60s;
‘As we near a five-year perspective on the [1964] tax cut, we
begin to see it as an economic watershed, the end of one
era and the beginning of another. It ended an era in which
the country felt it could afford to tolerate— or, given the
available economic tools and understanding, needed to tolerate—
chronic unemployment and underutilization of its
resources (which characterized eight of the ten years between
1955 and 1965). It ushered in a new era in which
the avowed and active use of tax, budget, and monetary
instruments would keep the economy operating in the vicinity
of full employment, with all the pleasures and pains that
the management of prosperity involves ( a state that most of
our partners in the industrial world have enjoyed and suffered
for some time).’
2. November 2016 at 16:05
I’ve always suspected that Paul Volcker was in the audience back then.
2. November 2016 at 16:32
Re food and monetary policy: ” We were feeding the patient, a 200 -pound male, 1000 cal a day and noticing weight loss. We increased consumption to 1100 cal per day, but still weight loss occurred and patient remained weak. We conclude increasing caloric consumption is not solution.”
We
3. November 2016 at 04:16
@Ben Cole,
Great analogy!
5. November 2016 at 14:32
Patrick, Hellers part is so verbose I, embarrassingly, find it quite difficult to understand. Could you give me an abridged version of what exactly his point is? What is this “new economics” he refers to? Is it what we’d call Old Keynesianism?