Bernanke on Brexit

Scott Freelander recently asked me about a Bernanke post, which appears to be guilty of reasoning from a price change:

The U.K. economic slowdown to come will be exacerbated by falling asset values (houses, commercial real estate, stocks) and damaged confidence on the part of households and businesses. Ironically, the sharp decline in the value of the pound may be a bit of a buffer here as, all else equal, it will make British exports more competitive.

Here I’d probably cut Bernanke a bit more slack than Scott, as the phrase “all else equals” seems a nod in the direction of the dangers of reasoning from a price change.  The pound fell sharply when the Brexit vote was announced, because of an anticipated decline in the demand for pounds.  Brexit will reduce the foreign demand for British goods, services and assets.  Since one needs pounds to buy British stuff, this reduces the value of the pound, as well as the quantity of exports. Think of it as a leftward shift in the demand for pounds, on an S&D diagram. Bernanke presumably meant that British exports fall by less than if the BoE had pegged the pound, while demand was shifting left.  That is correct.

One other point.  I recall one recent example where the pound fell a couple of cents on expansionary talk from Mark Carney.  That can be viewed as a positive shift in the supply of pounds, which would indeed boost exports.

Here’s another example that Scott noticed, from the same post:

In the United States, the economic recovery is unlikely to be derailed by the market turmoil, so long as conditions in financial markets don’t get significantly worse: The strengthening of the dollar and the declines in U.S. equities are relatively moderate so far. Moreover, the decline in longer-term U.S. interest rates (including mortgage rates) partially offsets the tightening effects of the dollar and stocks on financial conditions. However, clearly the Fed and other U.S. policymakers will remain cautious until the effects of the British vote are better sorted out.

Long-term rates probably fell due to a decline in expected NGDP growth after Brexit (or maybe a greater preference for safe assets).  Presumably Bernanke meant that the drop in long-term interest rates would be more expansionary than if the Fed had pegged those rates by selling T-bonds, right as expected NGDP growth in the US was declining.  Again I’m cutting Bernanke some slack, as he’s obviously a brilliant economist and in his memoir I recall him saying that rising long-term interest rates during QE could actually be a sign that it was working.  So I think his views are not far apart from mine.

Nonetheless, I’m pretty fanatic on the “never reason from a price change issue”, and I feel that even while Bernanke is aware of all the points I just made, talking about the effect of lower interest rates and lower exchange rates can tend to mislead the public.  In another recent post I said:

I certainly agree with the 38 out of 40 economists who view anti-trade deficit arguments as reflecting ignorance of the most basic ideas in EC101. And yet, according to the Council on Foreign Relations, guess who else is ignorant of EC101?

Since April, Treasury has been applying a quantitative framework to determine if a country is managing its currency inappropriately for competitive advantage–that is, keeping it undervalued. Japan already meets two of the three criteria–a bilateral trade surplus with the U.S. over $20 billion, and a current account surplus greater than 3 percent of GDP–and will meet the third if intervention exceeds ¥10 trillion in a twelve-month period. This is not a high threshold historically–Japan sold ¥14 trillion in 2011 and ¥35 trillion in 2003-4.

So apparently those highly educated bureaucrats at the Treasury, with their 6 figure incomes and their posh DC lifestyles, are actually a part of the ignorant masses that are pushing Trump-style populism. And in fact they are pushing nonsense, the “quantitative framework” has no more support in economic theory than astrology has in high-level physics. So if the public has been reading articles for decades and decades about how our Treasury officials valiantly try to protect us from evil Asian exporters, is it any wonder that the now are susceptible to the arguments of right and left wing populists?

I worry when experts talk about the expansionary impact of a lower exchange rate, or a lower interest rate.  This recent Forbes piece is an example of what may result:

After Friday’s market close, people remarked that both the bond market and the stock market were at all time highs.

It’s not supposed to work that way.  Now, it is a common misconception that bonds always are negatively correlated with stocks.  Actually, over the long term, they have a correlation of zero with stocks.  But they spend most of their time in one of two regimes, either strongly positively correlated or strongly negatively correlated.  Over time it works out to be zero.  Yet here we are, with stocks and bonds on the highs.

David Zervos, market strategist at Jefferies, commented that “Central banks may finally be taking this too far.”  I think central banks started taking things too far in 1913, but yes, with nearly every financial asset in the stratosphere, you could easily come to the conclusion that there has been too much monetary easing.  I am not the first to say that central banks are addicted to higher asset prices.  It’s hard to imagine a scenario where they willingly let the markets deflate.

We’ve been having a lot of bubbles in recent years (a feature of a world populated with central banks), from the dot-com bubble in 2000 to the housing bubble in 2007 to what people are calling the “central bank bubble” or “the everything bubble” now.  Chances are, this could be the biggest bubble of all, and perhaps the most dangerous.

A few years ago, I predicted that in the future there would be almost non-stop complaints about bubbles.  People would see them everywhere.  That’s because low interest rates are the new normal, and thus P/E ratios, price to rent ratios, etc., will be higher than in the past.  It will look like there are bubbles everywhere, but of course bubbles don’t actually exist.

Part of the problem is that the public thinks it’s been told that low rates are easy money, which should boost asset prices.  So they see this as a central bank phenomenon, even though the lowest rates are in places (like Switzerland) where money has been tightest, and the higher rates are in easier money places like Australia.  The public misreads posts like the Bernanke example I just cited, and learns the wrong lesson.  That why I want economists to stop talking about the causal impact of a change in interest rates, inflation or exchange rates, and start talking in terms of the causal impact of changes in NGDP growth, where expected NGDP growth represents the stance of monetary policy.

Let me remind you of some earlier words of wisdom from Bernanke:

The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it. As emphasized by Friedman (in his eleventh proposition) and by Allan Meltzer, nominal interest rates are not good indicators of the stance of policy, as a high nominal interest rate can indicate either monetary tightness or ease, depending on the state of inflation expectations. Indeed, confusing low nominal interest rates with monetary ease was the source of major problems in the 1930s, and it has perhaps been a problem in Japan in recent years as well. The real short-term interest rate, another candidate measure of policy stance, is also imperfect, because it mixes monetary and real influences, such as the rate of productivity growth. In addition, the value of specific policy indicators can be affected by the nature of the operating regime employed by the central bank, as shown for example in empirical work of mine with Ilian Mihov.

The absence of a clear and straightforward measure of monetary ease or tightness is a major problem in practice. How can we know, for example, whether policy is “neutral” or excessively “activist”? I will return to this issue shortly. . . .

Do contemporary monetary policymakers provide the nominal stability recommended by Friedman? The answer to this question is not entirely straightforward. As I discussed earlier, for reasons of financial innovation and institutional change, the rate of money growth does not seem to be an adequate measure of the stance of monetary policy, and hence a stable monetary background for the economy cannot necessarily be identified with stable money growth. Nor are there other instruments of monetary policy whose behavior can be used unambiguously to judge this issue, as I have already noted. In particular, the fact that the Federal Reserve and other central banks actively manipulate their instrument interest rates is not necessarily inconsistent with their providing a stable monetary background, as that manipulation might be necessary to offset shocks that would otherwise endanger nominal stability.

Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation. On this criterion it appears that modern central bankers have taken Milton Friedman’s advice to heart.  [emphasis added]

That last sentence seemed true in 2003, but obviously not today.  What happened?

 


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70 Responses to “Bernanke on Brexit”

  1. Gravatar of E. Harding E. Harding
    10. July 2016 at 19:23

    “but of course bubbles don’t actually exist”

    -How would you know if they actually did?

    “So they see this as a central bank phenomenon, even though the lowest rates are in places (like Switzerland) where money has been tightest, and the higher rates are in easier money places like Australia.”

    -And Brazil, don’t forget.

    “That why I want economists to stop talking about the causal impact of a change in interest rates”

    -Isn’t one of your talking points that higher interest rates boost money velocity?

    “What happened?”

    -A failure of central bank leadership, as well as failure to look at international examples, like Brazil and Belarus’.

  2. Gravatar of Scott Freelander Scott Freelander
    10. July 2016 at 19:48

    Scott,

    Thanks for addressing those questions. Perhaps I jumped on Bernanke too quickly. I’ve become conditioned to jump on these things due to even the supposedly best economists, like Shiller, Stiglitz, Feldstein, etc., reasoning from price changes.

    I wonder sometimes what I’m to think of the economics profession as a non-economist.

  3. Gravatar of Kevin Erdmann Kevin Erdmann
    10. July 2016 at 19:58

    The funny thing is price/rent isn’t particularly high outside of a few urban centers. Mostly home prices are going up because rents are rising, for lack of homes. So the bubble mongers just say there is a bubble for housing that’s making the rents go up. I think with the Fed balance sheet large, there are many people who will find bubbles in whatever rorshock test they are presented with.

  4. Gravatar of James Alexander James Alexander
    10. July 2016 at 22:04

    “What happened?”
    Central banks were captured by “financial stability” types who believe ultra lowflation is the epitome of financial stability.

  5. Gravatar of Scott Freelander Scott Freelander
    10. July 2016 at 22:43

    Harding,

    Scott doesn’t say higher interest rates boost money velocity. That’s the neo-Fisherian perspective. It’s a claim people like Stephen Williamson make. Scott’s claim is that higher expected NGDP growth causes interest rates to rise.

    I interpret this as saying that, referring to conventional monetary policy, for example, that if the Fed buys short-term Treasuries sufficiently to lower short-term interest rates on Treasuries, long-term rates should rise to the degree the Fed is successful, steepening the yield curve in what is traditionally seen as a predictor of economic recovery and/or too much NGDP growth(if the Fed overshoots).

    Of course, Scott doesn’t think we should focus on interest rates for understandable reasons, so he might take issue with the example of and language “lowering interest rates”.

  6. Gravatar of Postkey Postkey
    11. July 2016 at 01:29

    A bubble?

    “During the height of the 1980s Japanese property bubble, the palace grounds were valued by some as more than the value of all the real estate in the state of California.”[1][2]
    http://en.wikipedia.org/wiki/Tokyo_Imperial_Palace

  7. Gravatar of Adam Adam
    11. July 2016 at 02:35

    Wait a minute, isn’t the “reasoning from a price change” the bit about asset prices? E.g. asset prices have fallen precisely because of the lower future growth prospects, part of which includes the risk of a near-term recession.

    The slowdown won’t be “exacerbated” by the declining asset prices – it caused them.

  8. Gravatar of Tom Brown Tom Brown
    11. July 2016 at 03:53

    @E. Harding,

    Great news! Brexit worked!!!
    http://www.cnn.com/2016/07/11/europe/britain-politics-may-leadsom/index.html
    Enjoy. =)

  9. Gravatar of Tom Brown Tom Brown
    11. July 2016 at 04:11

    … you could call that a post-menopausal hot [news] flash, Lol

  10. Gravatar of Philo Philo
    11. July 2016 at 04:29

    From Bernanke (2003): “The absence of a clear and straightforward measure of monetary ease or tightness [means that] . . . we [cannot] know, for example, whether policy is ‘neutral’ or excessively ‘activist’.” Of course, you (Scott) have proposed such a measure; and in your view ‘neutral’ monetary policy is *good*, while non-neutral = “activist” policy is *bad*. A slogan you might embrace is: “All activism is excessive activism.”

  11. Gravatar of Benjamin Cole Benjamin Cole
    11. July 2016 at 04:54

    Excellent blogging.

    No bubbles—that is, unless you also believe in frequent reverse bubbles.

    Which then starts to look like, “As circumstances change, then values change.”

    You mean markets work?

    There seems to a fresh crescendo of chatter about poor dimwitted investors and business guys, overvaluing everything as interest rates are too low.

    These is capitalism: a platform on spindly stilts, ready to tumble at every drop in interest rates. The captains of industry and banking lose their marbles when interest rates go too low. What a bunch of weak-minded weenies. They need to consult with hard-headed pundits and academics on how to take risks.

    Lately, the inflation-mongers have given up a bit, and now the bogeyman is “future financial instability.” Usually of the unforeseeable variety. That’s a great bogeyman.

    If anything, there might be an argument that the Fed is artificially keeping short-term rates elevated. Without IOER and reverse re-pos, I wonder what would be short-term rates?

  12. Gravatar of ssumner ssumner
    11. July 2016 at 05:08

    Harding, You said:

    “How would you know if they actually did?”

    Asset prices would be predictable.

    Good point about velocity—higher interest rates boost velocity, regardless of why rates rose.

    Kevin, Good point.

    James, Even worse, they want ultra lowflation combined with higher interest rates. Good luck with that!

    Scott, No, I do believe higher i-rates boost velocity, by increasing the opportunity cost of hoarding currency. Here I would probably use short term rates.

    Postkey, No one was offering that much for the palace grounds, so the “value” was meaningless.

    Adam, That’s my view too, but one can also argue that asset prices are a transmission mechanism for monetary policy.

    Philo, Yes, I’ve proposed one of the two that Bernanke also proposed, NGDP growth.

  13. Gravatar of Tom Brown Tom Brown
    11. July 2016 at 05:22

    @Benjamin, you write:

    “Lately, the inflation-mongers have given up a bit,…”

    Yes, my favorite hyperinflationista (Vincent Cate) predicted 2.5 years ago that Japan would be experiencing low-grade “hyperinflation” by January of this year (at least 26% per year, or 2% per month for at least two months in a row). Once in a while I visit his blog to see if there have been any updates… not for a bit:
    http://howfiatdies.blogspot.com/2016/04/keynesian-leaches.html?showComment=1467504504387#c7511782241088615215
    He seems to have gotten interested in other things perhaps?:
    https://www.blogger.com/profile/06502618776820144289
    I kept pestering Vincent with the question “How will you know if you’re wrong?” and to his credit he ponied up that prediction. IMO, he gets a LOT more credit that most in that regard, putting his ideas (models?) to the test against reality like that (How else can you possibly learn anything?).

  14. Gravatar of Ray Lopez Ray Lopez
    11. July 2016 at 05:27

    Scott humors Scott by citing him by name, ensuring another loyal reader. I wonder however when Sumner will read another work by B. S. Bernanke et al, Google “Bernanke 2002 favar” first cite. It’s an eye opener, will Sumner ever read it?

  15. Gravatar of rayward rayward
    11. July 2016 at 05:37

    George Will has come up with the “best” excuse for increasing interest rates: low rates are redistributive upward (because low interest rates increase asset prices and the wealthy own most of the assets). Following that logic means that raising interest rates will be redistributive downward. Who would object to that since it’s the poor, near poor, and middle class who have borne so much of the cost of the great recession while the wealthy have enjoyed (a return to) prosperity. Everyone, it seems, is an economist. I’m not one, but I will point out that economists don’t help their cause with arguments that defy logic, or what passes as logic. When an economist argues that up means down, and down means up, I will suggest that eyes will roll and ears (and brains) will close.

  16. Gravatar of Dan W. Dan W.
    11. July 2016 at 05:55

    Is there any knowledge to be gained by the observation that bond & stock prices are positively correlated and at record levels? From a rational investor perspective how does one explain this? The yield on the S&P matches the yield on 30 year treasuries. Why would one buy bonds when one can get the same return plus appreciation with stocks?

    The answer seems to be that the rational investor is confident in one thing: That if stock prices were to decline then the correlation with bonds would reverse. So bond prices go up when stocks rally and they will go up if stocks decline. Buying bonds is the can’t lose trade of our time!

    When will the buying of bonds stop working as a trade?

  17. Gravatar of Scott Freelander Scott Freelander
    11. July 2016 at 06:48

    Scott,

    Thanks for the correction. I’d missed, misunderstood, or forgotten that point you’d made earlier about velocity.

    I found a post on it here: https://www.themoneyillusion.com/?p=18812

    Should we care about velocity? I think I’d implicitly had a model in mind like:

    NGDP = (Sm/Dm)RGDP, where Sm = Supply of Money, and Dm = Demand for money.

    Is that too simplistic a view?

  18. Gravatar of james elizondo james elizondo
    11. July 2016 at 07:04

    Scott

    I recently read an article in the WSJ (can’t find the link) talking about the possibility that the stock market has more room to go up since interest rates have been decreasing boosting PV of future Cash Flows. I think this is a good example of reasoning from a price change. Sure all else equal, lower discount rates boots PV of CF but the value of those CF’s are affected by growth as well. If lower interest rates reflect low growth expectations then how can you assert that lower interest rates will boost the stock market? Correct?

  19. Gravatar of LK Beland LK Beland
    11. July 2016 at 08:06

    james elizondo

    A part of the decrease in interest rates is due to lower inflation. You could argue that inflation should lower the rate of growth of CF and the discount rate by the same amount.

    If the growth rate of CF is lower than the discount rate, then a decrease in inflation decreases equity prices. If the growth rate of CF is larger than the discount rate, then a decrease in inflation increases equity prices.

  20. Gravatar of james elizondo james elizondo
    11. July 2016 at 08:31

    LK Beland

    But is what I said that an example of reasoning from a price change?

  21. Gravatar of Scott Sumner Scott Sumner
    11. July 2016 at 09:36

    Rayward, Yes, there are a lot of amateur economists out there.

    Scott, You said:

    “NGDP = (Sm/Dm)RGDP, where Sm = Supply of Money, and Dm = Demand for money.”

    I hadn’t seen it written that way before, but it looks right.

    James, Yes, I agree with you. The only exception would be a decline in rates not due to a decline in future expected cash flow. I can’t rule out that factor also playing a role.

  22. Gravatar of flow5 flow5
    11. July 2016 at 10:26

    Yeah, after the sell off I said use buy stops to initiate a long trade.

  23. Gravatar of Brexit devaluation is monetary offset in action | Historinhas Brexit devaluation is monetary offset in action | Historinhas
    11. July 2016 at 10:52

    […] Scott Sumner wrote: […]

  24. Gravatar of E. Harding E. Harding
    11. July 2016 at 11:51

    “Asset prices would be predictable.”

    -By whom? Most Americans thought housing was in a bubble in 2006.

  25. Gravatar of jj jj
    11. July 2016 at 12:43

    Falling asset values aren’t a cause of slowdown, but they are a transmission mechanism for the slowdown. “Never reason from a price change” is fantastic but maybe we could expand on that with a new saying: like in basketball they say “Hate the game, not the player”, we can say “Hate the NGDP drop, not the transmission mechanism”.

  26. Gravatar of Gary Anderson Gary Anderson
    11. July 2016 at 14:57

    I remember my daughter being told that with a meager income, she could buy a no money down 800 thousand dollar house in Las Vegas. The real estate lady said, “everyone’s doing it”. So, at some point, this was probably one of the few states, Nevada, that really was in a bubble. It was pure speculation.

    That does not mean that the whole nation was in a bubble. The whole nation was suffering from the Fed tightening. I think it is misleading for anyone to say there are no bubbles, but I do think much of what is considered a bubble really is not.

    For example, bonds are in massive demand for use in clearing houses as collateral for derivatives bets. That demand is increasing. It is difficult for me to see how the bond market is a bubble based on this reality. Stocks are high based on buybacks. If those end, then we could see a bubble. But if companies want to buy back their stock, to have less stock outstanding, it is not necessarily bubble behavior. It could be just good business. However, if it gets in the way of R&D, it could be a problem.

    Tesla stock could be in a bubble because Tesla was selling billions of dollars stock without divulging that a driver died while trusting the auto pilot. The SEC has opened an investigation.

  27. Gravatar of Gary Anderson Gary Anderson
    11. July 2016 at 15:05

    @Scott Sumner: “That last sentence seemed true in 2003, but obviously not today. What happened?”

    I think I know what happened. The demand for bonds has exploded, and Bernanke and the Fed are essentially bond salesmen. They do buy bonds when needed but their goal is to sell, sell, sell. And if demand for bonds is massive, all is well in the central banking world, Scott.

    I can almost guarantee this is true. And I am not an economist. If you really listen to Larry Summers, all he worries about is the shortage of bonds. All the rest is fluff. What happens when bonds are in a shortage, in great demand? Yields go down.

    What I am wondering is if the world could really could run out of collateral. What happens then?

  28. Gravatar of Gary Anderson Gary Anderson
    11. July 2016 at 15:35

    Jamie Dimon said the very same thing as Larry Summers. He said this:

    Government-backed Treasury bonds are in short supply — a problem that will grow markedly worse in the next economic crisis, warned JP Morgan Chase CEO Jamie Dimon.

    “In a crisis, everyone rushes into Treasuries to protect themselves,” Dimon said in a letter to shareholders issued this week. “This will be even more true in the next crisis. But it seems to us that there is a greatly reduced supply of Treasuries to go around.”

    Dimon, 59, pointed to a day last October when normally stable Treasury bonds moved 40 basis points, or .04 percentage points, in one fell swoop. Dimon called the move — promoted by fears that the Federal Reserve would slow its program to stimulate lending by buying large banks’ assets — “unprecedented.”

    It was “an event that is supposed to happen only once in every 3 billion years,” the outspoken CEO said.

    Underlying the warning are the 59-year-old CEO’s ever-ready concerns about the impact of regulation on banking. By highlighting last October’s dramatic move in Treasuries, Dimon was seeking to underscore the impact stricter capital requirements could have on demand for safe assets, like Treasuries, in the event of a downturn.

    “In effect, there may be a shortage of all forms of good collateral,” Dimon said. http://www.usatoday.com/story/money/2015/04/09/jamie-dimon-letter-treasuries-liquidity/25512091/

  29. Gravatar of Benjamin Cole Benjamin Cole
    11. July 2016 at 16:06

    Tom Brown—Even Martin Feldstein seems to be giving up on the inflation bogeyman.

    What is the politico-economic reason for such an emphasis on inflation?

    Spooky thought: Hillary Clinton has become the favorite of the foreign-policy neo-con crowd and she blames 2008 on loose money.

  30. Gravatar of Major.Freedom Major.Freedom
    11. July 2016 at 17:12

    Sumner wrote:

    but of course bubbles don’t actually exist

    E. Harding asked:

    How would you know if they actually did?

    Sumner replied:

    Asset prices would be predictable.

    The lack of being able to predict a particular class of events, does NOT imply that the class of events do not exist.

    Sumner is making an epistemological error, based on a very common scientistic bigotry that he unquestionably adopted from the positivist wing of the natural sciences. It can be summarized as “If we humans cannot predict it using the methods of physics and chemistry, then it does not exist!”

    Winning lottery numbers cannot be predicted, but that does not imply the lottery does not exist, or that winning lottery numbers do not exist.

    Human knowledge cannot be predicted, but that does not imply that human knowledge does not exist.

    The most popular musical album next year by sales cannot be predicted, but that does not imply that the most popular music albums by sales do not exist.

    Sumner is just your regular member of the public who has been told that the only reality is that which can be predicted. So he of course misreads and misunderstands the theory of bubbles.

    Economic bubbles do not need to be predictable before they exist. They exist AND they cannot be predicted. The causes of the errors can be known, and the time when people LEARN about the errors need not be known, before the causes are known.

    I can know that the cause of your economic errors is bad education, but that doesn’t mean I have to also know when you will learn of those errors. You, just like Keynes before you, could in principle go to your grave without ever learning of your errors.

    This is why it is important that the next generation of students get exposure to Economics, and praxeology in general. You and your colleagues have shown yourselves to be lost causes. The fact that a better theory is at your fingertips, for free, at the click of a button and a few keyboards clicks, and yet you still spew falsehoods almost every day, is another example of knowing something to be true, namely you believing on falsehoods, and not knowing when you will learn of it by serious study.

    ——————

    Part of the problem is that the public thinks it’s been told that low rates are easy money, which should boost asset prices. So they see this as a central bank phenomenon, even though the lowest rates are in places (like Switzerland) where money has been tightest, and the higher rates are in easier money places like Australia. The public misreads posts like the Bernanke example I just cited, and learns the wrong lesson. That why I want economists to stop talking about the causal impact of a change in interest rates, inflation or exchange rates, and start talking in terms of the causal impact of changes in NGDP growth, where expected NGDP growth represents the stance of monetary policy.

    You are just begging the question. You are a priori defining “tight” and “easy” money in terms of NGDP, and then you are saying Switzerland’s low interest rates are a reflection of “tight” money there, and that the higher interest rates in Australia are a reflection of “easy” money there.

    Defining “tight” and “loose” in terms of absolute levels of NGDP is just as problematic as defining them in terms of the absolute level of interest rates, or prices, or any other absolute level of observable nominal variables.

    If people saying “low rates show money is loose in Switzerland” is wrong because of NGDP, then saying “low NGDP rates show money is tight in Switzerland” is equally wrong because of X. What is X? Well, if we used the same approach as Sumner, then X is just another arbitrary variable that is used to define “tight” and “loose” money. And then we would say “You say money is tight because of NGDP, but the reality is that money is loose as defined by X.”

    That is literally what you just did your quote there. You reasoned from your own definition.

    Money is not tight or loose based on any absolute level of prices, or interest rates, or NGDP.

    Money is tight or loose when those words have real world meaning in a world of money. By real meaning, we are not referring to what YOU believe, or what I personally believe, or what any one individual personally believes. The real meaning of tight and loose money is when each and every individual is free to act on what they each think is enough money or not enough money. A dictator does not determine when the production of food is too high or too low. You Sumner are just thinking like a dictator. You are trying to dictate what is enough and not enough money and spending for everyone else. All you have is your arbitrary definition. Hitler had his arbitrary beliefs about Jews and markets, and he too wanted to have his definitions apply to everyone else. Don’t be like Hitler, Sumner. Yes we get it that you derive great pleasure in believing yourself the standard for what is enough spending and what is not enough spending for billions of other people. Yes we get it that this is how you fill the emptiness in your life.

    For those of us who believe the market is most right, we know that the real meaning of tight and loose money is what would otherwise have taken place in a world where individuals have the same choice in money by law as they do in computers and other goods. The market decides and is most right about how many computers are to be produced and exchange hands. Yet for money you balk at this. Here the mere fact that should the government have a monopoly on computers, that this somehow makes you feel entitled to join in the madness and declare that the Gods have spoken to you and that you know how many computers are to exchange hands, where fewer than this is “tight” and more than this is “loose”.

    When are you going to wake up? You have been asleep for decades.

  31. Gravatar of Tom Brown Tom Brown
    11. July 2016 at 17:25

    Spooky thought: Hillary Clinton has become the favorite of the foreign-policy neo-con crowd and she blames 2008 on loose money.

    I suspect you’re right about the “neo-con” crowd (based on #NeverTrump support concentrations in that quarter, and journalists like Jennifer Rubin, who’s basically been endorsing her for some time now). Though she’s a “favorite” only in comparison to their other option. (It’s kinda fun watching Jen have to eat cold pig lard straight from the tub).

    Don’t know about 2008 and loose money (although I’ve seen you suggest something along those lines before). Neither particularly bothers me at this point. In fact, I wouldn’t even be bothered if she were a secret gold bug (and I find gold buggery to be very “spooky” in general)… only because I believe she’s a normal enough of a politician to be talked back from the tail of the bell curve more towards the center. In fact, considering what the other side has to offer, I wouldn’t even be that bothered if she were secretly a perverse mash up of a gold-buggering Feldstein on monetary policy and George W. Bush on foreign policy… and more realistically I’d guess she’s not actually even half that bad on either score. Let’s face it: normal pols are mostly interested in getting re-elected and leaving a legacy that’s not too catastrophic, and thus they long ago took measure of their own limitations, and therefore don’t even begin to believe half of their own bullshit. Is that too much to ask?

  32. Gravatar of Gary Anderson Gary Anderson
    11. July 2016 at 19:46

    Apparently in Scott Sumner’s system, if I understand him correctly, there can be no separate demand for bonds other than demand based on fear. He refuses to talk about it. But Jamie Dimon said plainly, though veiled, “In effect, there may be a shortage of all forms of good collateral.”

    This is all about collateral, and Scott has no way of dealing with it in his system. It creates demand for bonds far greater than anything seen before, and causes yields to crater.

    The word for the ’60’s, as Dustin Hoffman was told in the Graduate, was “plastics”. The word for the teens of this millennium is “collateral”.

  33. Gravatar of Ray Lopez Ray Lopez
    11. July 2016 at 23:22

    @Gary Anderson- Scott, as in Sumner, not the more ignorant other Scott, is indeed clueless about collateral. Scott once made the astonishing statement that any junk mortgages and commercial paper that the Fed bought, and put in its inventory, magically becomes AAA rated and guaranteed not to default paper, akin to (in theory) US government bonds. This struck me as ludicrous but then again most of what Scott pens does.

  34. Gravatar of Postkey Postkey
    11. July 2016 at 23:34

    “Postkey, No one was offering that much for the palace grounds, so the “value” was meaningless.”

    Really?

    No one was making an offer for all the real estate in the state of California?

    What was being compared was an ‘estimate’ of the value of the ‘palace grounds’ with an ‘estimate’ of the value of ‘all the real estate in the state of California’.

    Comparing the two ‘estimates’ leads to the conclusion that there was a bubble in Japanese land prices?

  35. Gravatar of Benjamin Cole Benjamin Cole
    12. July 2016 at 05:01

    Tom Brown:

    On some levels I agree with you.

    Then I wonder if outrages persist long enough, they become norms. A pleasant demeanor masks insane policies.

    Hillary and the neo-cons plan to spend about $1 trillion a year on “national defense.” We have no military adversaries. No one plans to invade the USA (except people looking for jobs). The “threat” we face is from terrorist groups who have no armies, navies or air forces. In short, a minuscule threat. Drunk drivers are a much larger threat.

    I guess Hillary will continue to spend tax dollars in Syria, Iraq, Afghanistan, and at more than 1000 military installations globally, as well as at 234 military golf courses.

    As this is a monetary policy blog, I will note that Hillary thinks loose money caused the 2008 housing boom, and that the problem with the Fed policy-making is that it is too white and male. I guess Hillary has not noted the tight money under Janet Yellen.

    http://www.businessinsider.com/hillary-clinton-wants-to-shake-up-the-fed-2016-5

    Hillary’s globalist vision of a worldwide US military posture and tight-money…is Hillary running for ‘Phant or the Donk nomination?

    It looks like Hillary is in. Trump will have to pull a rabbit out the hat, and yet he seems to have lost his wand.

    How will Hillary policies be any different from George Bush jr? Another 2008 in the cards?

    With Yellen at the monetary helm, maybe.

    http://www.c-span.org/video/?411393-1/hillary-clinton-delivers-remarks-economy

  36. Gravatar of Art Deco Art Deco
    12. July 2016 at 05:09

    I suspect you’re right about the “neo-con” crowd (based on #NeverTrump support concentrations in that quarter, and journalists like Jennifer Rubin, who’s basically been endorsing her for some time now). Though she’s a “favorite” only in comparison to their other option. (It’s kinda fun watching Jen have to eat cold pig lard straight from the tub).

    There are no ‘neocons’. ‘Neocon’ is a six letter word for ‘Jew’ peddled by anti-semites and people associated with the Rockford Institute who adhere to rather fanciful conceptions about the evolution of political discourse in the last 30-odd years (some of whom are also anti-semites). It’s also used by the most vulgar sort of partisan Democrat, who cannot converse with the opposition but can process thoughts about caricatures of them with clue terms like ‘neocon’ and ‘Koch brothers’.

    Over the years running from about 1977 to 1992, there was a circle of opinion journalists and academics who had an identifiable set of takes on topical questions and typically a personal history of affiliation with the Democratic Party and even red organizations. These people are nearly all dead or quite elderly and retired. The very youngest among them is Michael Lind, who is 54 years old. They were dubbed ‘neoconservatives’, but it does not define a distinct tendency in latter-day political discussion. William Kristol is pretty much a standard issue Republican and always has been in the course of his public career. Jennifer Rubin is a tedious business Republican of the sort who are a dime a dozen where I grew up. She did some contract work for John Podhoretz a dozen years after the senior Podhoretz was out to grass.

    One of the things which distinguishes the circle around John Podhorets (other than about a third of them are at retirement age, half over 55, and only one < 45), is an advocacy of open borders. Jeb Bush, Paul Ryan, Jack Kemp's old pal Vin Weber, Donohue of the Chamber of Commerce, Grover Nordquist, the entire Mercatus crew, the Libertarian Party, the Cato Institute, La Raza, Lindsey Graham, John McCain, the entire corps of Democratic Party office-holders, &c. are theoretical or practical advocates of open borders. The reasons Rubin and the Podhoretz circle do are likely less mercenary than these others (the disreputable Mr. Sailer calls it 'Ellis Island schmaltz'), but the practical application is not much different.

  37. Gravatar of Art Deco Art Deco
    12. July 2016 at 05:13

    Hillary and the neo-cons plan to spend about $1 trillion a year on “national defense.” We have no military adversaries. No one plans to invade the USA (except people looking for jobs). The “threat” we face is from terrorist groups who have no armies, navies or air forces. In short, a minuscule threat. Drunk drivers are a much larger threat.

    Back in the real world, military expenditure as a share of national product is near to a 75 year low. And, yes, we do have adversaries. They’re just not very active right now outside the Near East. Might have something to do with our dry powder.

  38. Gravatar of Tom Brown Tom Brown
    12. July 2016 at 07:08

    There are no ‘neocons’. ‘Neocon’ is a six letter word for ‘Jew’ peddled by anti-semites and people associated with the Rockford Institute who adhere to rather fanciful conceptions about the evolution of political discourse in the last 30-odd years (some of whom are also anti-semites).

    Yes, we’ve all heard your lecture before on why we shouldn’t use “neocon” (essentially because it isn’t politically correct), which is precisely why I put it in quotes after Benjamin first used it in his comment to me (Ben, please spare us all and be more PC next time, or at least give Art a “trigger warning”). And Art, next time why don’t you just give us a link to one of your last lectures on the subject?

  39. Gravatar of Tom Brown Tom Brown
    12. July 2016 at 07:20

    @Benjamin,

    Well the dump Trump forces are getting more and more optimistic (from what I can tell). Maybe they’re smoking the good stuff, or maybe they’re onto something:

    http://theresurgent.com/the-truth-about-dumping-trump/

    https://www.washingtonpost.com/blogs/right-turn/wp/2016/07/12/five-signs-trumps-campaign-continues-to-fizzle/

    IMO, even if they manage it, it’ll be a train wreck because that will free the much put upon and victimized Trump to go on cable news 24/7 with a legitimate complaint and moan about how the “rigged system” trashed GOP votes in favor of a Stalinist coup against him and those trying to Make America Great Again. In other words, I don’t think it’s going to work out like the the dump Trumpers imagine.

    But since I still likely won’t be thrilled with Trump’s replacement (should it actually happen) (Cruz? I agree he’s better than Trump, but still…), … it’ll be popcorn time for me either way. It couldn’t happen to a nicer party.

  40. Gravatar of Tom Brown Tom Brown
    12. July 2016 at 07:43

    TRIGGER WARNING!: The following uses the politically incorrect term “neocon”

    Benjamin, a suggestion: some months back I substituted the term “warmonger” for “neocon” and it seemed to have prevented any … ah… incidents. =)

  41. Gravatar of flow5 flow5
    12. July 2016 at 08:03

    “Tight” and “easy” refers to the rate-of-change in real-output relative to the roc in money flows, M*Vt, i.e., aggregate monetary purchasing power, or AD.

    There is a hierarchy of influence to money flows. Long-term predominate, then short-term, then the 6 seasonal inflection points.

    Whether interest rates reflect “tight” or “easy” money policies thus depend upon whether long-term money flows are falling, neutral, or increasing in concert.

    When Paul Volcker tightened reserves initially, there was at first, a temporary rise in rates (because long-term M*Vt was still accelerating). But as reserves tightened (and money and money flows tightened), interest rates then fell in the 1st qtr. of 1980.

    For example, Greenspan never “tightened” monetary policy during the 2002-2005 period. I.e., even though the FFR was raised on 17 different occasions, none represented monetary “tightening” (as money flows roc’s never contracted).

    Then Bernanke never eased. Bankrupt U Bernanke caused the world-wide GR entirely by himself.

  42. Gravatar of Art Deco Art Deco
    12. July 2016 at 08:18

    Yes, we’ve all heard your lecture before on why we shouldn’t use “neocon” (essentially because it isn’t politically correct),

    No, because it’s not a descriptor which actually distinguishes one strand of thought from another. It’s just an inane epithet favored by asinine people.

  43. Gravatar of Gary Anderson Gary Anderson
    12. July 2016 at 08:44

    “There are no ‘neocons’. ‘Neocon’ is a six letter word for ‘Jew’ peddled by anti-semites”

    Wrong, Art Deco. I agree with much of what you say about sovereignty. But understand, neocons are not all Jewish. Neither are Zionists. Neocons are one group of Zionists. Joe Biden said he is a Zionist. He probably would deny that he is a neocon. But he isn’t Jewish. He said you don’t have to be Jewish to be a Zionist. Zionism, and neoconservatism, are not Judaism. They are a political cabal with a doctrine of colonialism thought up by Theodore Herzl in the late 1800’s. Zionism, and Dispensationalism, or Christian Zionism, are very late doctrines in the history of man. They have no validity.

  44. Gravatar of Carl Carl
    12. July 2016 at 12:29

    Major Freedom:

    I’m glad you’re criticizing Scott for the existence of the Federal Reserve. I can’t believe he allowed it to be created. And now that you’ve pointed out the problems with it, he has no excuse for allowing it to stay open.

    Much better that he focus on getting that done then propose ways to align its policies better with economic indicators.

  45. Gravatar of Scott Freelander Scott Freelander
    12. July 2016 at 15:18

    Ray,

    I’m not ashamed of being relatively ignorant on economics vis-a-vis PhD economists, and Scott strikes me as a particularly good economist, along with other market monetarists and many of the GMU crowd. It does’t make me feel like a fool.

    However, someone who continues to defame an economist on his blog while failing to demonstrate an even rudimentary understanding of the ideas he’s criticizing is someone I would call a fool. I also wonder what kind of life that person must have to spend so much time doing this.

    My guess is that you choose this blog, in particular, because Scott allows you to comment. There are plenty of other market monetarist blogs after all, and also plenty of non-market monetarists that have endorsed ideas like NGDP targeting, for example.

    Further, to go around claiming that Bernanke concluded that inflation has such slight effects stands contrary to many, many public statements he’s made since the paper you mention was published in 2004. You know, the paper that you clearly don’t understand.

  46. Gravatar of Benjamin Cole Benjamin Cole
    12. July 2016 at 16:28

    Tom Brown: the GOP establishment still does not get it. The right-wing votor has repudiated the right-wing economist and policy elites, and visions of globalism, free trade and wide open borders. If they dump Trump they will have no voting base left.

  47. Gravatar of Major.Freedom Major.Freedom
    12. July 2016 at 16:30

    Carl,

    That is an excellent explication of the status quo fallacy.

    Is that really all you got? X arises for whatever reason, and now the only permitted range of debate and discussion is taking X for granted?

    Geez, by your logic if you were living in Germany in the late 1930s, you’d admonish to only debate and discuss how to make evil totalitarian fascism as efficient as possible.

    I learned a word the other day, that I think applies to a lot of people. The word is “cuck”.

  48. Gravatar of Tom Brown Tom Brown
    12. July 2016 at 18:42

    @Benjamin,

    You think the never-compromise, social conservative extremists at RedState.com and TheResurgent.com (the Erick Erickson gang) are “GOP establishment?” They rag on “the establishment” and compromisers all the time. They are not open borders there either, and in fact are deeply suspicious of Marco Rubio because of his “gang of eight” activity.

    They’re just also extremely anti-alt-right and anti-racist and anti-authoritarian, and thus anti-Trump. That’s what they say anyway.

    Some establishment people (like former speaker of the house John Boehner) clearly preferred Trump to “lucifer in the flesh” Ted Cruz (the favorite of the Erickson gang, and Mark Levin, and #NeverTrumper Glenn Beck as well).

    I don’t think it’s true to say “The establishment is the same as #NeverTrump.”

  49. Gravatar of Jim S. Jim S.
    12. July 2016 at 18:44

    I’ve been hoping you would have post addressing this:
    http://zacharydavid.com/2016/07/ngdp-futures-targeting-is-a-pretty-goofy-idea/

  50. Gravatar of Tom Brown Tom Brown
    12. July 2016 at 18:47

    … I guess Roger Stone pushed Levin into the #NeverTrump camp. He says he won’t vote for him “no matter what.” Says he’ll urge millions of his listeners to refuse to vote for Trump as well should Trump get the nomination. But that was back in April, and I think Levin’s word is probably as good as any other form of fecal matter, so I don’t suppose he carried through with that. But I don’t know: I don’t keep up with him really.

  51. Gravatar of Saturos Saturos
    12. July 2016 at 23:07

    So what you are saying is… America is run by incompetent people?
    “Really incompetent, that I can tell you.”

  52. Gravatar of Ray Lopez Ray Lopez
    13. July 2016 at 00:22

    @Scott Freeloader – did you even read the FAVAR paper? Like Sumner, I bet you haven’t. The FAVAR paper is about Fed policy shocks, not inflation, and the last draft is about the price puzzle observed by Sims. You don’t have to be an expert on VAR to understand it: 3.2% to 13.2%, embarrassing low numbers. Instead of your pseudo-psychology analysis of me, try reading and commenting on the FAVAR paper. You write like a woman: all about soap opera issues involving personalities and nothing about substantive issues. Scott are you a girl?

  53. Gravatar of Dan W. Dan W.
    13. July 2016 at 04:54

    Jim S.,

    These critiques of an NGDP futures market confirmed my sense of why it is a faulty idea. Sankowski in particular really hits some key points in his discussion. Sankowski also indicates that Sumner has read his criticisms and responded to them, so Sumner may not feel the need to respond again.

  54. Gravatar of Gary Anderson Gary Anderson
    13. July 2016 at 05:15

    So, monetarism was formulated before massive bond demand as collateral was just a twinkle in the eye of Alan Greenspan. Perhaps monetarism, now that demand for bonds is insatiable, simply cannot work. Scott Sumner won’t even speak to the issue of collateral, bonds as collateral. It is like this whole process has passed him by.

    On a slightly different subject, it appears that the bankruptcy of New Century in 3/2007, was a key to the subprime disaster, as the collateral was shown to be no good. Once the collateral was shown to be no good, it was just a few months later that the subprime crisis hit in August, 2007, where the commercial paper market cratered. But as Marcus Nunes has said, Heloc destruction and loss of wealth and access to wealth through borrowing, in mide 2008, really took the economy down. Between 2007 and 2008 a whole year went buy and the Fed did nothing. So MM analysis is correct, except that there were 4 states where the bubbles of speculation were real, Florida, California, Nevada and Arizona. They may have been hurt no matter what the Fed did.

  55. Gravatar of Brent Buckner Brent Buckner
    13. July 2016 at 05:37

    O/T

    Prof. Sumner:

    Robert Waldmann wrote, “I have been intending for years to apologize to Scott Sumner for being very very rude in a post to which I will not link — I really am sorry — ”
    at http://angrybearblog.com/2016/07/the-stagnation-capitulation-and-the-taper-tantrum.html#more-35925

  56. Gravatar of Carl Carl
    13. July 2016 at 09:02

    Major Freedom:

    “Cuck”. Thanks for teaching me that cool new urban slang. As long as we’re helping build each other’s vocabulary, here are a couple of terms for you: “Nirvana fallacy” and “Godwin’s Law”.

  57. Gravatar of flow5 flow5
    13. July 2016 at 09:11

    “monetarism, now that demand for bonds is insatiable, simply cannot work”
    ————

    Monetarism has never been tried.

  58. Gravatar of msgkings msgkings
    13. July 2016 at 10:13

    @Carl:

    ‘Urban slang’? Uh, no. That word is the calling card of alt right neckbeard laptop warriors.

  59. Gravatar of Gary Anderson Gary Anderson
    13. July 2016 at 11:43

    That may be true, Flo5. Good point. NGDP targeting and Helicopter money have not been tried. I am concerned about the effects, now that bonds have their own little world of massive demand.

    If nothing pushes bond yields up, then something different is going on. Or, like I believe, the Fed will not want anything to allow bond yields to go up or all the collateral will go bad. Lol.

  60. Gravatar of Major.Freedom Major.Freedom
    13. July 2016 at 15:26

    Carl:

    “As long as we’re helping build each other’s vocabulary, here are a couple of terms for you: “Nirvana fallacy” and “Godwin’s Law”.”

    Sorry, I think you mistook me for Sumner on that one, in both cases there.

    That’s funny.

  61. Gravatar of Major.Freedom Major.Freedom
    13. July 2016 at 15:31

    msgkings:

    Everyone is a “neckbeard laptop warrior”.

  62. Gravatar of Benjamin Cole Benjamin Cole
    13. July 2016 at 16:53

    Tom Brown: from what I see, the GOP establishment either can’t or won’t lay a glove on Hillary, but they can and do stab Trump in the back.

    This is the strangest election in the postwar era.

  63. Gravatar of Tom Brown Tom Brown
    13. July 2016 at 17:47

    Tom Brown: from what I see, the GOP establishment either can’t or won’t lay a glove on Hillary

    I think that’s what eight Benghazi hearings over the last four years were about… plus White Water, Travel Gate, etc, back in the 90s. There’s a 25-year old cottage industry in laying many gloves on the Clintons.

    Don’t you recall this slip by Kevin McCarthy that brought the wrath of the GOP down on him for being stupid enough to explicitly say out loud and in public what already obvious to most people possessing at least a rudimentary brain stem?

  64. Gravatar of Tom Brown Tom Brown
    13. July 2016 at 17:53

    … I mean if the hours spend on various Benghazi commissions were about right and we were to go back and scale up the hours of hearing time to be proportional to the body count of the incident, how many centuries should the 9/11 commission have met for? How many millennia should the WMD “intelligence failures” commission have met for?

  65. Gravatar of Benjamin Cole Benjamin Cole
    14. July 2016 at 03:26

    Ben Bernanke is talking helicopter drops in Japan. Ben gets his bearings and nerve when offshore….

    Tom Brown: That’s what I mean. The GOP has not laid a glove in Hillary in all this Benghazi crap. Americans think Benghazi is a hair-jell.

    And the GOP establishment is cutting Trump’s knees out from under him.

    This is a strangest election since when…ever?

  66. Gravatar of msgkings msgkings
    14. July 2016 at 07:56

    @Ben Cole: Don’t look now but Trump is surging in swing state polls. This election is going to be close. In fact there’s a very plausible scenario for an electoral college TIE: If Trump takes Florida, Ohio, Nevada, Iowa, and New Hampshire (all places he’s ahead or close) it’s a tie. Then the House picks (probably Trump).

    I agree it’s the strangest election since at least 1992 with Perot, and maybe the strangest since 1968. Also the worst 2 candidates ever offered.

  67. Gravatar of Carl Carl
    14. July 2016 at 08:02

    Major Freedom:

    That was an impressive debating sequence on your part. You opened by missing the key point about the predictability of bubbles, climbed up on your soap box to indulge in some idealistic bloviation about praxeology and the inability to know anything about the market for money if that market is not completely free, sprinkling in some spiritually enlightening statements about the spiritual emptiness of market monetarists, trotted out the status quo fallacy when a quick application of the reversal test would have shown the fallacy did not apply, proved Godwin’s law, followed that up with some name-calling and then topped off your performance with a variant of the “I know you are but what am I” defense.

  68. Gravatar of Art Deco Art Deco
    14. July 2016 at 08:51

    And the GOP establishment is cutting Trump’s knees out from under him.

    They’re armed with butter knives.

    What this election has revealed is that the Capitol Hill nexus and the Republican commentariat has quite attenuated influence with their own base. About 70% of the ballots cast went to candidates the Capitol Hill nexus despises among which 45% went to a candidate which the bulk of the Republican commentariat dislikes as well.

  69. Gravatar of ssumner ssumner
    17. July 2016 at 06:48

    Jim, It’s weird, he links to my Mercatus paper, but doesn’t seem to realize that that paper already addresses his criticisms. Maybe I’ll do a post.

    Thanks Brent.

  70. Gravatar of Tom Brown Tom Brown
    17. July 2016 at 11:35

    45% went to a candidate which the bulk of the Republican commentariat dislikes as well.

    What was his percentage up until Indiana (when the others dropped out)?

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