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You’re welcome

On March 18, I asked these questions:

PS.  If you are in an investment area where liquidity doesn’t matter, say a company investing for insurance or pension obligations 10 years out, why wouldn’t you prefer TIPS over Treasuries right now? Isn’t PCE inflation likely to exceed 0.3% over 10 years?  I’d be interested in responses from someone in the investment community.

Just to be clear, TIPS spread were 0.63% that day; I was referring to the implied prediction of roughly 0.3% PCE inflation, as PCE inflation runs a few tenths of a percent below the CPI inflation used for TIPS compensation.

Today, 10-year TIPS spreads are up to 1.88%.

To America’s insurance and pension industry I say, “You’re welcome”.

I’m trying to defend the EMH, and you financial market people are making it so hard for me.

Section 230 bleg

Trump is at it again:

Trump, with less than two months remaining in office before he’s replaced by president-elect Joe Biden, stepped up his campaign seeking to revoke Section 230 of the Communications Decency Act. The law grants internet companies broad legal protections for content shared on their services and allows companies like Facebook, Twitter and YouTube to moderate content on their services as they see fit.

Matt Yglesias says he couldn’t continue with his moderated blog without section 230:

Here’s my question. If Section 230 is repealed, could I be sued for statements made by random people in the comment section of this blog?

(BTW, I certainly don’t want the government to “address” either big tech or little tech.)

Off topic, the Biden win margin is up to 4.3%, and continues to widen. That means the Electoral College bias, which I predicted would expand to 3.5% in this election, is already up to 3.7%, and may hit 4%. The national vote margin is up to 6.9 million, and will widen further as more and more votes get counted. And BTW, isn’t it kind of embarrassing for America still to be counting votes a month after the election?

PS. General Flynn was one of the criminals that Trump hired to run his administration. Today he shared an interesting tweet:

Of course sharing a tweet doesn’t mean one endorses it. Nonetheless, there’s a side of me that would kind of like to see Trump do this. Let’s have the public vote once and for all on whether people prefer America remain a constitutional republic or become an authoritarian state. And let’s have a vote done using a method with no possibility of fraud.

It might “clarify” things. Which is of course is why its proponents don’t actually favor this idea, and are promoting it with the knowledge that there is zero chance it will be implemented.

It’s like the Ukraine thing. Obviously Trump didn’t want Ukraine to investigate Biden; they would have exonerated him. Trump wanted Ukraine to say they were investigating Biden. Similarly, Trump knows who won, which is why he won’t do this. But he wants people to believe that only a re-vote would establish who actually won.

Alternatives to interest rate targeting

[Over at Econlog, I have a post explaining 3 MMT fallacies.]

In my recent Mercatus paper I criticized interest rate targeting and also suggested an alternative. One problem with interest rate targeting is that it doesn’t work well when nominal rates fall to zero, or slightly below zero. Fortunately, there are many possible alternatives.

One famous alternative is money supply targeting, as proposed by Milton Friedman. But even Friedman moved away from this idea late in his career. Here I’d like to focus on alternative asset price targets. After all, if you target short-term interest rate then you are also implicitly targeting the price of assets such as one-month T-bills. Here are some better options:

1. Exchange rates: This is the system that Singapore uses:

Fourth, the choice of the exchange rate as the intermediate target of monetary policy implies that MAS gives up control over domestic interest rates (and money supply). In the context of free capital movements, interest rates in Singapore are largely determined by foreign interest rates and investor expectations of the future movements in the Singapore dollar.

The downside of the policy is that it probably doesn’t work for big economies—the trading partners would object.

2. A stock price index: This is the system that Roger Farmer advocates. The downside is that stocks can move for reasons unrelated to changes in NGDP, such as a corporate tax cut that increases the share of after-tax GDP going to corporations.

3. A gold price target: This was the method used by FDR during November 1933. The problem is that it worked because markets understood that movements in gold prices were an indicator of the future path of monetary policy, once convertibility was restored (in February 1934). That’s not the case today.

4. A commodity price basket: Supply siders used to occasionally advocate targeting the price of a basket of actively traded commodities. The problem is that even a diversified basket of commodities can have a very unstable relative price.

5. The TIPS spread: First proposed in 1989 by Robert Hetzel, this idea was recently revived by John Cochrane. One problem is that there might be a time varying risk premium on TIPS spreads. Another is that it doesn’t address the Fed’s dual mandate.

6. NGDP futures targeting, guardrails version: This is my preferred policy, with no IOER and OMOs used as the policy instrument. It doesn’t really have any downsides (as you’d expect of a policy that I favor) except that central banks are reluctant to adopt such a radical policy.

7. Hybrid model/market-based policy; The central bank targets the NGDP forecast, with 50% weight given to a prediction of NGDP based on basket of asset prices and 50% weight given to a prediction of NGDP from Fed models and private forecasters. Once the non-asset price part of the forecast is established, policy targets the basket of asset prices at a level expected to produce on-target NGDP, when averaged in with the non-asset price NGDP forecast.

All these approaches should use level targeting.

For some reason, MMTers often seem to think that the Fed can’t target anything but interest rates. Singapore shows that’s not the case. In Singapore, both money and interest rates can be viewed as endogenous, as it should be.

An even greater achievement

Tyler Cowen recently linked to this tweet:

Topol describes this as a great achievement, and he’s right. (My wife used to work in vaccine development, so I’m well aware of how long this usually takes.) At the same time, I can’t help thinking that the following would have been an even greater achievement, one that would have saved the lives of 100,000 Americans and also prevented many small business bankruptcies. (Yes, Trump would have been re-elected, but that’s a price worth paying):

Mar 16: Moderna phase 1/2/3 challenge trial begins.

May 2: Pfizer/BioNtech phase 1/2/3 challenge trial begins.

July 14: Moderna phase 1/2/3 published in NEJM.

July 31: FDA approves Moderna vaccine.

August 12: Pfizer/BioNtech phase 1/2/3 published in Nature.

August 31: FDA approves Pfizer/BioNtech vaccine.

PS. Tyler also linked to an article on the developer of Novavax’s promising new vaccine candidate, created by a team led by Nita Patel:

Patel has come a long way from her beginnings in Sojitra, a farming village in India’s Gujarat state. There, when she was 4 years old, her family fell into poverty after her father nearly died from tuberculosis (TB). He never worked again and told Patel she should become a doctor and find a cure.

Patel set about doing that, wearing the same ragged dress to school day after day. She had no shoes. She begged bus fare from a neighbor—at whose house she also devoured the newspaper because her family couldn’t afford a subscription.

Her academic excellence propelled her through college on government scholarships. She later picked up two master’s degrees, in India and the United States, in applied microbiology and biotechnology. 

Moderna’s Pfizer’s vaccine was developed by the children of Muslim immigrants to Germany, and this one by an immigrant from a “shithole country”. Funny how things work out.

Why money matters

Some commenters who are sympathetic to MMT seem unfamiliar with the standard view of why money matters. They argue that swapping base money for an equal dollar value of bonds doesn’t matter, because the recipient of the new money is no better off than before. It’s true they are (approximately) no better off, but that’s NOT why economists think money matters. It would be nice if commenters showed they understood the traditional view, and then explained why it’s wrong and MMT is right.

Conventional economists believe that an injection of new base money creates a situation of excess cash balances. Keynesians believe the attempt to get rid of these excess cash balances causes bond prices to rise (i.e. interest rates to fall), and this boosts AD. Monetarists believe that the attempt to get rid of excess cash balances causes the price of a wide range of assets to rise, not just bond prices. Thus the Fed announcements of January 2001 and September 2007 caused only a small decline in short-term interest rates, but a big rise in stock prices. (BTW, long-term rates actually rose both times due to the Fisher effect—a factor ignored by MMTers.)

Monetary stimulus boosts the prices of T-bills, stocks, commodities, real estate and foreign exchange. I.e., it depreciates a currency. During normal times such as the 1990s, the difference between Keynesians and monetarists is just a theoretical curiosity. They both agree that monetary policy drives NGDP; they merely differ in how they see the transmission mechanism.

When rates fall to zero, however, the monetarist model is clearly superior. In March 2009, the Fed announced a QE program and as a result stocks rose and the dollar sharply depreciated against foreign currencies. That’s consistent with the monetarist model and inconsistent with the (extreme) old Keynesian view that monetary injections don’t matter at zero rates. (In fairness, New Keynesians have a more nuanced view.) MMTers seem to think money never matters, even at positive interest rates, although as I pointed out in this post it’s hard to be sure, as their statements are so contradictory.

Here’s an analogy. When there’s a big apple crop, the new apples are sold at market prices. The wholesalers who buy the apples do so at competitive prices and thus don’t feel any richer. They see no need to go out and spend more. But they do have excess apples, which puts downward pressure on the value of apples.

Inflation is a fall in the value of cash. A big crop of new money puts downward pressure on the value of cash. If the government sells me a briefcase full of $1 million cash in exchange for an equal value of bonds, I’m no richer than before. I won’t go out and buy a new Ferrari. But I will have much more cash than I prefer to hold, and I’ll get rid of that extra cash.

And here’s where the fallacy of composition comes in. While I can get rid of the extra cash by purchasing bonds, stocks, commodities, real estate or foreign exchange; society as a whole cannot get rid of the excess cash by purchasing other assets. Doing so is merely “passing the buck”.

But the public’s attempt to get rid of excess cash balances will drive up the price of a wide range of assets, leading to more total spending, more NGDP. Eventually NGDP will rise high enough so that people are willing to hold the larger cash balances, and a new equilibrium is established.

All of this is ignored by MMTers. They seem to think that swapping cash for bonds is “irrelevant”, even when interest rates are positive.

In fact, an exogenous and permanent increase in the money supply of X% will cause prices and NGDP to rise by X% in the long run. Money is neutral in the long run; just as changing a country’s measuring stick from feet to meters doesn’t change the actual (“real”) length of objects.