Bond yields are not particularly low, conditional on NGDP growth

Matt O’Brien has a good article on low bond yields, in the Washington Post:

Bond yields aren’t always the most exciting thing in the world, but they are right now.

In fact, you’ll probably be telling your grandkids about them one day. That’s because the yield on the benchmark 10-year U.S. Treasury bond plunged to an all-time low of 1.37 percent on Tuesday. Not only that, but it’s done so at a time when unemployment is a relatively normal 4.7 percent. This isn’t, to say the least, what’s supposed to happen. But it is what’s happening, here and everywhere else, because the world economy is turning Japanese. Which, as we’ll get to in a minute, means that future generations might have a harder time believing that rates were ever this high rather than this low.

Let’s compare bond yields to a previous period when unemployment was this low, the first quarter of 2006 (which was the peak of the housing boom).  In February 2006, 10-year bond yields were about 4.55%, more than 300 basis points above the current level.  So why are bond yields now so low?

Everything is relative.  Most of us were taught that nominal variables don’t matter; you need to look at real variables.  With interest rates you need to normalize by subtracting NGDP growth.  Back in the first quarter of 2006, NGDP had grown at a 6.51% over the previous 4 quarters.  The most recent data shows a 3.29% growth over the past 4 quarters.  So NGDP growth has slowed by over 300 basis points.  Hmm, does that sound familiar?

To be fair, by 2006 interest rates were already pretty low by historical standards.  In the distant past the 10-year bond yield was often closer to the NGDP growth rate.  By the early 2000s, however, we were already in the new world of low interest rates.  The declines since then reflect slower NGDP growth, nothing more.  If you want higher interest rates, ask the Fed to give us higher NGDP growth.  It’s that simple.

The rest of the world has only made this more true. That’s because zero interest rates in one country exert a kind of gravitational pull on interest rates in another. They’re “contagious,” as economists Gauti Eggertsson, Neil Mehrotra, Sanjay Singh and Larry Summers put it. Here’s why: if you have zero interest rates and are expected to for a while, then capital will flow into my economy every time I even consider raising my own. Money, after all, moves to where it thinks it can get the best return. But on a less happy note, this will push my currency up so much that my exports will start to lose competitiveness. And that, in turn, will slow my economy down enough that I won’t actually have to raise rates. Instead, I’ll keep them around zero — just like yours. The same kind of thing happens any time there’s any financial turbulence in the world. Investors stampede into the safe haven that is U.S. government debt, pushing down yields and pushing out expectations of rate hikes.

If you try to raise rates with a tight money policy, it will fail for the reasons outlined in Eggertsson, et al.  If you try to raise interest rates with an easy money policy that raises NGDP growth up to 5%, then you will succeed.

The yield on the 10-year U.S. Treasury bond has fallen 0.3 percentage points since Britain voted to leave the European Union two weeks ago, and almost a full percentage point since the Fed raised rates last December.

Last December, there was a vigorous debate between those who wanted the Fed to raise rates because low rates could lead to asset price bubbles, and those of us who said that argument was wrong.  Can we now all agree that those who favored raising rates because a low rate environment could lead to excessive risk taking were wrong?  Put aside the question of whether low rates lead to asset price bubbles, the entire premise of the argument was that the Fed’s action would lead to higher rates over time.  We now know that this was false, longer term rates are far lower than in December, as are expected future short-term rates.

The paradox is that the economy can only handle higher rates if the Fed says it won’t raise them. Anything else will create so much turmoil that the Fed won’t even be able to pretend it’s going to increase interest rates as much as it was before. That’s why long-term rates actually fell after the Fed raised short-term rates at the end of last year.

If you want peace, prepare for war.

If you want to be happy, don’t try to be happy.

If you want higher interest rates, tell the Fed to cut interest rates.

When Janet Yellen retires, how about appointing a Zen Master to chair the Fed?  (I propose Nick Rowe.)

PS.  I was recently interviewed by the French magazine Atlantico.

PPS.  I also have a new Econlog post.




53 Responses to “Bond yields are not particularly low, conditional on NGDP growth”

  1. Gravatar of Gary Anderson Gary Anderson
    8. July 2016 at 09:00

    Kyle Bass just said Helicopter Money is the only way. He said there is no other way. I hope he defines it correctly along the lines of Eric Lonergan.

  2. Gravatar of rayward rayward
    8. July 2016 at 09:05

    If capitalism loses David Brooks, have the populists won? Here’s what Brooks wrote in today’s columns: “Now economic, utilitarian thinking has become the normal way we do social analysis and see the world. We’ve wound up with a society that is less cooperative, less trusting, less effective and less lovely. By assuming that people are selfish, by prioritizing arrangements based on selfishness, we have encouraged selfish frames of mind. Maybe it’s time to upend classical economics and political science. Maybe it’s time to build institutions that harness people’s natural longing to do good.” [More relevant to Sumner’s Econlog post but relevant here too.]

  3. Gravatar of E. Harding E. Harding
    8. July 2016 at 09:31

    Why were bond yields so high between 1980 and 2003?

  4. Gravatar of Benjamin Cole Benjamin Cole
    8. July 2016 at 09:51

    Quit tweetybirding around.
    Send in the helicopters.

  5. Gravatar of msgkings msgkings
    8. July 2016 at 10:23

    “the world economy is turning Japanese” is the money quote. That’s quite true, and it explains most of what we are seeing. And there’s no way to stop it, because demographics.

    Japan is a wealthy, healthy, safe place so this doesn’t have to be a disaster. But we all have to get used to low rates, low growth, low inflation, low returns ‘forever’

  6. Gravatar of ssumner ssumner
    8. July 2016 at 10:29

    Rayward, That’s pretty sad, as it’s actually statism that makes people selfish.

    Msgkings. It’s tight money that is giving us low inflation, not demographics.

  7. Gravatar of E. Harding E. Harding
    8. July 2016 at 10:31

    “Lots of clichés that tell us little about why this is happening here and now. Is it the poor performance of the economy in recent decades? Then why is South America moving toward neoliberalism, and away from populism? And why is right wing populism on the rise in Australia, despite their economy performing brilliantly over the past quarter century? And why did Trump do so well in Massachusetts, which is booming? (There are poor people in Massachusetts, but they are mostly Democrats.) Would Trumpism go away if we enacted nationwide rent controls and trade protection and $15 hour minimum wages, and as a result went into a recession? And when discussing how neoliberalism did over the past several decades, how about a comparison with anti-neoliberal policies in Venezuela, Greece, Russia, Argentina, Burma, Cuba, Italy, Brazil, the Arab world, and many other places. How are those populist policies working out so far?

    And how do we know it’s not some factor other than neoliberalism, such as immigration and Islamic terrorism? After all, that would explain outliers like South America where (AFAIK) immigration is not a big issue, and Australia, where it is.

    Is it stagnating real wages? Then why is nationalism on the rise in China, where real wages (even for the lower classes) have been soaring at double-digit rates in recent decades?

    I don’t claim to have any answers for the rise of nationalism, but I do think we need to try to avoid easy explanations that have little predictive power.”

    -I 100% agree with this criticism of yours. The reason Trump did so well in Massachusetts is obvious: it’s the Irish. The most Yankee county in Massachusetts was also the most anti-Trump (and, for obvious reasons, pro-Sanders). The truly wealthy neighborhoods in Massachusetts, BTW, were all Kasich/Clinton.

    Here’s my U.S.-specific attempt to answer the question of the causes for rising nationalism:

    And I think the biggest reason nationalism is rising all around the globe is obvious: international trade as a percentage of world GDP is stagnating or going down. This is an environment conductive for the rise of nationalism (cf., the Great Depression, where the main exception was the U.S., due to the seeming failure of protectionism of the Republicans).

    Immigration is important, too, but not the entire issue.

    Russia doesn’t have “populist” policies; it has popular policies. Putin is about as establishment as you can get.

    South America is moving toward the right because of the following: in the 1990s, the establishment was doing badly, so lots of left-wing figures were elected (Stiglitz wrote a book in the late 1990s on this). Now, due to weaker trade growth, the left-wing figures are doing badly, too, so they’re being replaced.

    “And why is right wing populism on the rise in Australia, despite their economy performing brilliantly over the past quarter century?”

    -China’s, Australia’s, America’s RGDP growth rates from 2008 to today are much lower than they were from 2000 to 2008.

  8. Gravatar of E. Harding E. Harding
    8. July 2016 at 10:34

    “And there’s no way to stop it, because demographics.”


    Demographics are obviously going to lead to lower headline RGDP growth; maybe even lower headline RGDP growth per worker-hour. But monetary policy is purely in the hands of the state.

  9. Gravatar of Scott Freelander Scott Freelander
    8. July 2016 at 10:44


    My thinking for quite some time now has been that perhaps the primary reason why interest rates have been heading downward for so long, even years prior to the Great Recession, is because the Fed doesn’t do any form of level targeting.

    I understand that there may be(perhaps probably are) secondary factors at work, but even the long term trend of lower rates is primarily about the Fed.

    Do you agree?

  10. Gravatar of Ray Lopez Ray Lopez
    8. July 2016 at 11:10

    Sumner’s koans are a form of ‘mystery writing’ that’s to be avoided. Notice this strawman: “last December, there was a vigorous debate between those who wanted the Fed to raise rates because low rates could lead to asset price bubbles, and those of us who said that argument was wrong. Can we now all agree that those who favored raising rates because a low rate environment could lead to excessive risk taking were wrong?” – no. It’s ludicrous to say this: since rates hit all time lows, the best that can be said is that the neo-Fischer argument is wrong, nothing more. Arguably rates are still too low and if demand were to pick up, once balance sheets are restored (ignoring demographics) then we’ll have more bubbles.

    @Scott Freelander – level targeting won’t work since it’s too moderate (see the interview with “Joe” by David Beckworth the other day), and the Lucas critique means people will anticipate the Fed will cut back their efforts, hence they won’t spend their money. Only ‘helicopter drop’, which is aggressive and ‘credibly irresponsible’, works. In this sense the Thai turkey farmer B. Cole is right: if you want inflation you must put the pedal to the medal, full blast.

    Not to say any of this makes any difference (money is neutral, history shows).

  11. Gravatar of Ray Lopez Ray Lopez
    8. July 2016 at 11:17

    @E. Harding – shorter Harding: ‘nationalism on the rise since the world economy is in the doldrums’ . BTW, thanks for the Belarus link. It shows that having high inflation and high NGDP (NGDP = Inflation + RGDP) means nothing. Belarus is a basket case despite having high inflation. What does Sumner say about this? (“The inflation rate in Belarus was recorded at 12.40 percent in May of 2016. Inflation Rate in Belarus averaged 267.68 percent from 1992 until 2016, reaching an all time high of 2795.63 percent in August of 1994 and a record low of 5.85 percent in February of 2010”)

  12. Gravatar of Scott Freelander Scott Freelander
    8. July 2016 at 11:42


    Has it occurred to you that if money were neutral in the short-run, then inflation would have no real effects? Do you believe inflation has no real effects? Only a kook would think that. More specifically, monetary shocks have short-term real effects.

    We know that wages are both upward and downwardly sticky, but that many other prices have much more flexibility. There’s plenty of data to support this, but we can even casually observe that hourly wages are not cut during recessions. Instead, labor hours and jobs are cut, necessarily reducing output.

    So, there’s a demand shortfall, due to sticky wages. We know it’s a demand shortfall, because both aggregate quantity demanded and prices fall.

    So, how can increasing the money supply help but lower real wages, spur spending, and increase employment, which of course translates into higher output?

  13. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    8. July 2016 at 11:59

    ‘When Janet Yellen retires, how about appointing a Zen Master to chair the Fed?’

    How about just someone who understands that interest rates are NOT the price of money. That’s all it would take.

  14. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    8. July 2016 at 12:28

    ‘Rayward, That’s pretty sad, as it’s actually statism that makes people selfish.’

    Exactly. A market system is a cooperative system, because to get what someone else has, that you want, you have to give up something that you have. I’ve recently stumbled on the writings of a guy who clearly understood that, Nevil Shute–who wrote the novels ‘On The Beach,’ ‘A Town Like Alice,’ and several others.

    The above is a link to his fascinating memoir of his days as an aviation engineer in the 1920s-30s in England. Here’s an excerpt;

    ‘Much has been written in recent years about the provision of risk capital for industry, but few of the authors who pronounce so learnedly upon this subject have ever had the job of looking for the stuff. Men who start businesses upon a shoe string and battle through to success are frequently reluctant to recall and publicize their early disappointments and rebuffs, or if they have the will they may not have the knack of writing. There seems to be a tendency in England nowadays to consider that risk capital for new companies can be conjured up by civil servants and economists waving a sort of magic want over the bankers. In my experience nothing could be further from the truth. Risk capital is gambling money such as might be staked upon a horse race….’

    Luckily for his fledgling airplane design company, he found such a guy, Lord Grimthorpe;

    ‘Years later I was told by one of his close friends why he did this [backed Shute and his fledgling company]. At a time about a year after the company began operations when he was becoming very deeply involved, his friend asked him why he did not cut his loss and get out of so unprofitable a speculation. His reply was that the business interested him and he thought it would do well in the end As regards the money side of it, he said that he realized the likelihood that he might lose the whole of his investment. The money was, however, being wholly spent in wages in his district of Yorkshire, where there was then a great deal of unemployment. In times of depression he felt it to be his duty to hazard his money in an effort to create employment in his part of the country; if finally the money was lost he would take satisfaction from the fact that through his agency nearly a hundred working men had had employment through the years of the depression.

    ‘…I do not think that Lord Grimthorpe was exceptional in the altruistic view he took of his investment in our company. I think his conduct could be paralleled in many other little companies with many other wealthy chairmen. I have no doubt that the inheritance of great fortunes has led in the past to much money being spent frivolously and foolishly and in a way which irritates less fortunate men, but it has also led to much money being spent generously and wisely for the benefit of the same men. If Lord Grimthorpe was one of a long line of wealthy men who helped pre-war British industry to come into being he was also one of the last, because death duties and high taxation have no so reduced the resources of these people that they can no longer function as they used to.

    ‘….I think that be excessive taxation in the higher brackets the British people have destroyed a class of chairmen for small companies without whom much industry in Britain could hardly have come into being, and without whom fresh industry in England is unlikely to be initiated again.’

    Shute emigrated to Australia after WWII, frustrated by the Socialist government’s impoverishing policies. He wrote several novels, such as ‘The Far Country’ extolling the freedom there, contrasting it with England’s statism. Quite effectively.

    In his ‘Trustee From the Toolroom’ the plot starts with currency controls forcing a couple to cash in their stocks and bonds and buy diamonds with the proceeds, so that they can emigrate to Canada. They conceal the diamonds under the floorboards, encased in concrete, of a 28 foot sailboat, to smuggle their own wealth out of England. The ship is wrecked and the couple loses their lives; casualties of socialism.

    Lorenzo, know anything about Shute?

  15. Gravatar of rayward rayward
    8. July 2016 at 12:45

    I spent the early part of my career as a tax lawyer, so I can appreciate minutiae (sticky wages, demographics, “confidence”). But it misses the big picture. Globalization has increased productive capacity many times over. Yet here we are facing stagnation. Why? Rising levels of inequality in the west is a problem but it’s compounded by the shift of so much global income to countries (such as China) with much higher levels of inequality. I’m no social reformer but I’m no blind ideologue either. As I’ve expressed before, I’m impressed with Sumner’s (market monetarism) solution for monetary stability, but that doesn’t solve the stagnation problem (or the much larger problem of recurring bubbles and financial instability). Some of Sumner’s colleagues at Mercatus would solve it by letting asset prices collapse in the next financial crisis. Of course, letting asset prices collapse solves the underlying problem of excessive inequality: collapsing asset prices mitigates inequality since most assets are owned by the wealthy. Sumner’s colleagues at Mercatus find that an efficient solution to several problems, but I’m not convinced (not convinced not only because I don’t have tenure). Of course, globalization will eventually produce an earth that is flat, as wages rise and fall. In the meantime, we are faced with a rising potential of trade wars (especially during the emerging phase of globalization – in which firms in China produce goods for firms in China (rather than firms in the west) to compete with firms in the west) and real wars often triggered by trade wars. That politicians on both the left and the right ignore the emerging phase of globalization is worrisome. There are two Chinas: the political China that is Beijing and the economic China that is Shenzhen (often referred to as the Silicon Valley of China). We can choose to collaborate with with our partners in Shenzhen or we can choose to fight with our political enemies in Beijing. I would choose the former. But that’s a big picture.

  16. Gravatar of Brian Donohue Brian Donohue
    8. July 2016 at 12:59

    Great post, Scott.

    I’m no economist, but someone should trace the correlation between QE and real (TIPs) long-term yields.

    I note that in February 2006, long-term TIPs were yielding 2.0%-2.5%. I don’t have good long-term TIPs data prior to 2004, but I think the idea that long-term real yields were higher than this in the 1980s and 1990s.

    Arguably, that is the new normal. That’s were long-term TIPs yields were post-crisis during QE1. Ever since then, they’ve failed to reach those levels, although the pattern of QE accompanying higher yields is plain to see in the data (as is the 2011/2012 Operation Twist effort at pushing down long-term yields and flattening the yield curve). It’s all right there in the record. QE pushes real long-term yields up- withdrawal means yields fall.

    There should be no surprise that the Fed’s increase in rates in December has helped produce lower long-term real rates today.

  17. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    8. July 2016 at 13:11

    ‘…collapsing asset prices mitigates inequality since most assets are owned by the wealthy.’

    Actually collapsing asset prices would probably exacerbate inequality. Just because ‘the wealthy’ own assets doesn’t mean that they are the major beneficiary of the productive capacity of those assets.

    Workers and consumers enjoy the fruits of capital to a far higher degree than do the owners of the means of production. Probably about 90% of the benefit goes to the former.

    ‘Queen Elizabeth had silk stockings….’, as Schumpeter put it. As Seinfeld paraphrased it; ‘Today every woman lives like Cleopatra.’:

  18. Gravatar of flow5 flow5
    8. July 2016 at 13:27

    “If you want higher interest rates, ask the Fed to give us higher NGDP growth.”

    Interest is the price of loan-funds. The price of money is the reciprocal of the price-level.

    Higher N-gDp growth will only be at the expense of higher inflation and lower real-rates of interest. Wrong answer.

    All bank-held savings (those of the DFIs: S&Ls, CUs, MSBs, and CBs), represent an un-recognized leakage (theoretical abstraction error), in Keynesian National Income Accounting procedures. These DFIs do not loan out existing deposits – saved or otherwise. The DFIs always create new money when either they lend/invest.

    As such, bank-held savings (funds held beyond the income period in which received), are not, and can’t be, a source of
    loan-funds to the system. Thus, the DFIs pay for what they already own.

    From the standpoint of the System, Time/savings deposits:

    (1) reduce CB and NB profits – ROE and NIMs;
    (2) arrest the flow of monetary savings into non-inflationary real-investment;
    (3) reduce the supply of loan-funds;
    (4) increase long-term interest rates (in the short-run, but lower them as AD declines in the long-run);
    (5) reduce money velocity;
    (6) retard the growth of non-banks (where savings are “activated”, “funded”, “matched”, and “put-to-work”
    –> with non-inflationary real-investment outlets);
    (7) accentuate unemployment;
    (8) act as a depressant, slowing down economic activity and retarding economic growth.

  19. Gravatar of flow5 flow5
    8. July 2016 at 14:04

    Targeting N-gDp is stupid. That policy simply un-necessarily increases inflation. R-gDp is a product of money flows (for over 100 years). The Fed can always hit R-gDp projections. And targeting N-gDp caps real-output.

    The golden era in U.S. economics will never be replicated until the CBs are driven out of the savings business (as the Great Depression accomplished).

    Economists are mentally retarded. And the ABA (and its most powerful lobby)is public enemy #1.

    Virtually nothing in economic literature is correct. Both the Phillips curve and Say’s law have been denigrated.

    The only thing Milton Friedman herald, was when he was studying Keynes’ two volume “Treatise on Money” in Mints’ class at Chicago in 1933, and discovered some not so fundamental equations (math errors). Mints wrote Keynes on Friedman and the classes behalf and that, in part, was the impetus for Keynes to write the General Theory.

  20. Gravatar of Lorenzo from Oz Lorenzo from Oz
    8. July 2016 at 16:04

    Patrick: sorry no, Nevil Shute was a bit before my time and not my sort of fiction reading.

    Scott: your comment section has got worse, commiserations.

  21. Gravatar of Ray Lopez Ray Lopez
    9. July 2016 at 00:32

    @Scott Freelander – “Has it occurred to you that if money were neutral in the short-run, then inflation would have no real effects? Do you believe inflation has no real effects?”- I used to think like you, until I researched the topic. Money is largely neutral. It has 3.2% to 13.2% effect (out of 100%) on a wide range of economic variables. Says who? Says Ben S. Bernanke, in his 2002 FAVAR econometrics paper. Google it, it’s free on the web. Says also Fischer Black, the finance guru. Sumner refuses to read the FAVAR paper (from an earlier post), as he’s afraid, akin to ignorant medieval Catholics, of reading the Bible in case they learn about contradictions therein. When pressed, I recall Sumner mentioned in passing that 3.2% to 13.2% is ‘big’. I am guessing (he never elaborated) that he’s using a sort of “Roman Scales” analogy, in that a single gram of weight extra on one side will tip the scales. However, the US economy is not that ‘fragile’ and history has shown that money is neutral not just long term (which Sumner admits) but short term too. Brazil had high teens inflation for 40+ years after WWII and to no ill effect. Likewise, going the other way, the USA had a “Long Deflation” in the late 19th century and prices adjusted, GDP growth was roughly about the same as the late 20th – early 21st century (data: Angus Maddison).

    But it’s up to you if you wish to open your eyes. Religion is powerful and people cling to it for security. I don’t mind religion, but not in the secular world. It’s fine to believe the earth is only 6000 yrs old if you’re a fundamentalist Baptist, but it’s not fine if you’re a teacher of geology. Sumner is a teacher but is spreading lies about NGDPLT as a panacea, to gratify himself and keep his name in the limelight. It’s sad.

  22. Gravatar of Beniamin Cole Beniamin Cole
    9. July 2016 at 01:37

    BTW— since the mid-1980s the consensus view in US macroeconomics has been (in any year) that inflation and interest rates would likely be higher in a year or two and that inflation could be a threat.

    Perhaps this is an un-self-fulfilling prophesy.

    Sumner has correctly pointed to lower rates.

  23. Gravatar of flow5 flow5
    9. July 2016 at 04:42

    Gresham’s law is a statement of the “principle of substitution” as applied to money: that a commodity (or service) will be devoted to those uses which are the most profitable. That it is one of the paradoxes of money, that the bad drives out the good. And, the more valuable money, is held as a “store of value” and the less valuable, will be used as a “medium of exchange”.

    Alfred Marshall’s “cash-balances” approach is complementary, viz., all motives which induce the holding of a larger amount of money will tend to increase the demand for money – and reduce its velocity (which requires a differentiation between ex ante expectations and ex post realizations).

    Interest is the price of loan-funds, not the price of money (as the FRB-NY’s “trading desk” operations has assumed c. 1965). The price of money is the reciprocal of the price-level. Therefore Keynes’ liquidity preference curve (demand for money) is a false doctrine.

    I.e., the “demand for money” should not be confused with the “demand for loan-funds”. The demand for loan-funds is not a demand for money, per se, but a demand which reflects the advantages of spending borrowed money. And the equilibrium effect will never be reached if new and disturbing factors are continually being introduced.

    The GR, etc., introduced:

    (1) a world-wide “flight-to-safety” and to “safe-assets”
    (2) a flight to Sheila Bair’s “unlimited” FDIC transaction deposits
    (3) an increase in the money stock of the preferred funding currency in the “carry trade”
    (4) a self-reinforcing, “safety-net” boost in a national currencies’ exchange rate
    (5) massive debt monetization thru sterilization (reducing the demand for loan-funds)
    (6) a reduction in money velocity by the destruction of non-bank lending/investing
    (7) a reduction in money velocity due to the further impounding of savings in the CBs
    (8) increases in bad debt associated with a higher proportion of CB financing vs. NB financing
    (9) countercyclical increases in bank capital
    (10) the long-term corrosive impact in the demand for capital goods and thus inevitably CapEx

  24. Gravatar of ssumner ssumner
    9. July 2016 at 05:20

    And so Ray thinks I like high inflation . . .

    Scott, The part of the decline in rates that is due to slower NGDP growth is the Fed, the rest is other factors.

    Patrick, Good anecdote.

    Rayward, You said:

    “I’m impressed with Sumner’s (market monetarism) solution for monetary stability, but that doesn’t solve the stagnation problem (or the much larger problem of recurring bubbles and financial instability).”

    Yes, but NGDPLT would reduce the size of asset price fluctuations.

    I do agree about how to engage with China.

    Brian, You are right about TIPS, although I’d focus more on nominal rates minus NGDP growth.

    Lorenzo, Yes, the comment section has gotten worse. Partly due to the Trump phenomenon.

  25. Gravatar of flow5 flow5
    9. July 2016 at 05:28

    QE also demonstrated that some of these Central Bank operations resulted in lower overall interest rates and a flattening of the yield curve.

    Each QE program should be examined separately as a multiplicity of unique factors are involved.

    But the principal reason why a so-called increase in the “supply of money” was not inflationary, was because it was offset by countervailing forces: – viz., dis-intermediation of the un-backstopped NBs (where the size of the NBs shrink, but the size of the CBs remains unaffected). I.e., QE was marginally offset by a decline in money velocity. The 1966 S&L credit crunch is the paradigm.

    Remunerating IBDDs (interbank demand deposits), emasculated the Fed’s “open market power”, the power to simultaneously, and ex nihilo, create new money and credit. It’s no happenstance that even with QE operations there were 2 negative qtrs. in R-gDp (1st qtr. 2011 and 1st qtr. 2014).

  26. Gravatar of flow5 flow5
    9. July 2016 at 05:31

    “Yes, but NGDPLT would reduce the size of asset price fluctuations.”

    Why be satisfied with poor economic performance?

  27. Gravatar of flow5 flow5
    9. July 2016 at 05:41

    Not Trumpism – but the “Holy Grail”.

    Rates-of-change in monetary flows, M*Vt, or our means-of-payment money supply times its transactions rate-of-turnover = roc’s in all transactions in Yale Professor Irving Fisher’s truistic “equation of exchange”: where M*Vt = P*T; and not M*Vi = P*Q (as on Milton Friedman’s license plate).

    There are 6 seasonal inflection points each year (within the distributed and ever constant lag effect of money flows). And these seasonal factors are determined by monetary policy. The seasonal factors are scientific proof that the “Member Bank Reserve Requirements — Analysis of Committee Proposal” published 2/5/1938 was correct (but contrary to the wishes of public enemy #1, the ABA).

    The 5th seasonal inflection point this year is 7/20/2016. But there is an anomaly this year at Nov. month-end. Inflation crashes for one month (sell commodities and buy bonds), in Dec. And then the trajectory for inflation, and thus the bond proxy, is lower in 2017 than 2016.

  28. Gravatar of flow5 flow5
    9. July 2016 at 05:44

    My analysis is inviolate and sacrosanct. It is worth trillions of economic dollars. It should be classified as “top secret” by the CIA. It is the greatest discovery since the invention of the wheel.

  29. Gravatar of flow5 flow5
    9. July 2016 at 06:01

    And why does everyone talk about interest rates instead of aggregate demand?

  30. Gravatar of Gary Anderson Gary Anderson
    9. July 2016 at 09:37

    @Scott Sumner you have said that interest rates are two high. You have said that pushing nominal rates up when real rates are low or even negative hinder economic growth.

    However, wouldn’t banks lend more if rates were higher and they could make a better return? Couldn’t that drive real rates up because it increases economic activity? Just wondering.

  31. Gravatar of Gary Anderson Gary Anderson
    9. July 2016 at 09:37

    Sorry, too high.

  32. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    9. July 2016 at 10:10

    ‘Lorenzo, Yes, the comment section has gotten worse. Partly due to the Trump phenomenon.’

    Speaking of Gresham’s Law….

  33. Gravatar of engineer engineer
    9. July 2016 at 12:57

    As long as we have days like Friday more often…life is traffic. I mean everything in my IRA was up…US stocks, International Bond funds, US REITs, all up…whatever is going on…it’s terrific….More days like Friday and I will be getting tired of winning, winning, winning…

  34. Gravatar of ssumner ssumner
    10. July 2016 at 05:29

    Patrick, A good application.

  35. Gravatar of Scott Freelander Scott Freelander
    10. July 2016 at 06:32


    Off-topic, did you see this Bernanke post?

    He makes some absurd claims, reasoning from price changes. I think this may give some great insight into why he didn’t favoreally looser policy.

    Bernanke claims, for example, that the pound now being lower will at least help the UK with exports, and that the fact that longer term interest rates are falling in the US will help spur some demand. These are merely symptoms of slowing economies. Or, am I missing something?

  36. Gravatar of Scott Freelander Scott Freelander
    10. July 2016 at 06:35


    That Bernanke paper is what you’re basing your entire assumption about monetary effectiveness on? How many potential problems do you see with that approach, and with the paper itself, for that matter?

  37. Gravatar of Scott Freelander Scott Freelander
    10. July 2016 at 06:40

    Rqy, your sloppy references to history, and failure to distinguish between monetary shocks and expected high inflation, for example, don’t give me much confidence in your perspective.

  38. Gravatar of Scott Freelander Scott Freelander
    10. July 2016 at 06:40

    Ray, rather

  39. Gravatar of Ray Lopez Ray Lopez
    10. July 2016 at 08:22

    @Scott Freelander – please Scott, quit foaming, calm down. The high inflation = Brazil is not a failure to note monetary shocks but simply an observation that with high inflation nothing bad often happens, contrary BTW to what Sumner says above. Money neutrality. As for the FAVAR paper, it’s short and easy to read, and it’s not the only bit of evidence but it’s telling that: (1) Sumner refuses to read it, afraid of the truth?, and (2) the commentators who are monetarists who have read it and commented on the net seem to be shocked by the small 3.2% to 13.2% effect of Fed policy shocks from 1959 – 2001. In fact, one commentator said that the methodology should be revised to artificially give a larger number. This is clear evidence that monetarists are embarrassed by what Bernanke–a true scholar–has found. Clear evidence therefore monetarism largely does not work (money is neutral).

  40. Gravatar of Scott Freelander Scott Freelander
    10. July 2016 at 19:38


    How much have you actually examined the Bernanke paper? I doubt many non-economists are familiar with VAR, much less FAVAR. I certainly wasn’t. I am familiar with R and AR.

    What are your comments for how monetary shocks are identified, or how lags are modeled, for example?

  41. Gravatar of Christian List Christian List
    11. July 2016 at 00:39

    It’s also a bit dishonest to tie this in with Trumpism. Trump is all about “Making America Great Again” by going back to the 1960s, when there were lots of jobs for blue collar Americans building interstate highways and shopping centers and housing developments. He’s the world’s biggest fan of using eminent domain so that he can build as many Trump Towers as possible. So if people really are opposed to change, then Trump should be absolutely the last person they would want to support, he’d like to bulldoze right over their house. Just like omelets, Making America Great Again is impossible with breaking a few eggs.

    Compared to all the other statements you made about Trump and his supporters this is basically a quasi-endorsement, isn’t it? At least you are headed in the right direction. =)

  42. Gravatar of flow5 flow5
    11. July 2016 at 05:26

    Speaking of Gresham’s law:

    The deregulation of interest rates (Reg. Q ceilings for the commercial bankers), impounded savings within the commercial banking system:

    time/savings vs. transaction deposits:

    1939……..15~~~~~~ 33
    1954……..47~~~~~ 121
    1964……126~~~~~ 156
    1974……421~~~~~ 274
    1979……676~~~~~ 401
    1986…1,215~~~~~ 491
    1996…1,271~~~~~ 420
    2006…3,696~~~~~ 317

    The ratio of TD/DD in 1939 = 0.45
    The ratio of TD/DD in 2016 = 6.67

    Never are the CBs conduits (financial intermediaries), in the savings-investment process. The CBs, as a system, do not loan out existing deposits, saved or otherwise. Bank-held savings are lost to investment, consumption, indeed to any type of expenditure or payment. As such, bank-held savings represent a totally unrecognized leakage in Keynesian National Income Accounting procedures. Therefore money velocity will continue to decrease and gDp will eventually flat-line.

  43. Gravatar of Ray Lopez Ray Lopez
    11. July 2016 at 05:36

    @Scott Freelander – first, learn to walk, then we can learn to run. Do you agree with the conclusion of the Bernanke et al FAVAR paper? You don’t even have to understand math to read and understand the conclusion. If so, then we can discuss mechanics. A good first step for mechanics is to read Wikipedia on VAR. I’ve taken courses in applied mathematics and am familiar with some of the concepts. From what I can tell, Bernanke takes a conservative approach that gives a low number for Fed policy shocks, but, if money was not short term neutral, regardless you’d see a much bigger effect than 3.2% to 13.2%. VAR that the sun rises in the east and you’ll get 100%. VAR that the best paid team in baseball will win the World Series and you’ll get a big number, closer to 100% than 0%. If money were not short-term neutral, Bernanke would find a range closer to 25-75%, not 3.2% to 13.2%. 3.2%! Even 13.2% is almost trivial. Wake up Scott. I did. Money is neutral. Don’t believe the Pied Piper of Monetarism, S. Sumner. He’s staking out his claim and tooting his own horn for his own aggrandizement, not for the benefit of society.

  44. Gravatar of flow5 flow5
    11. July 2016 at 05:39

    Long-term interest rates will be lower yet again next year (unless we get QE4).

    There’s not a single commenter on this blog that can beat my forecasts. I’m the best timer in history. So who really knows more about what’s driving our economy. It’s not Patrick.

  45. Gravatar of Ray Lopez Ray Lopez
    11. July 2016 at 05:45

    @myself, @Scott F – oh, btw, Sumner will claim that the reason the Fed’s VAR numbers are so low in the FAVAR paper is because…drum roll… the Fed “got it wrong” over all these years (1959-2001), citing people like Arthur Burns. But this is metaphysics, and akin to diehard believers in communism who say communism has never been tried, since the USSR, China, Vietnam, etc were not ‘true communists’. This argument depends on parsing history and for monetarism taking a very ‘brittle’ approach. For example, if the Fed cut rates by 300 basis points and it did nothing, but, using Sumner’s logic, if it bought bonds / printed money so that rates fell 310 basis points, and the economy soared, then you can say that extra tiny effort by the Fed ‘worked’, and Sumner’s NGDPLT is the reason why. But a moments reflection will tell you that this is metaphysics, it’s an ‘alternative universe’ understanding of history. Put another way: if Sumner’s own NGDPLT doesn’t work, Sumner will claim the Fed was not aggressive enough it targeting the ‘proper’ NGDP. Only ex post, when something works, will Sumner claim it is a proper application of his NGDPLT. This is a dishonest argument, again, like a communist claiming communism would work ‘if only they did it right, which so far nobody has been able to do’. Metaphysics.

  46. Gravatar of ssumner ssumner
    11. July 2016 at 05:46

    Christian, No, I’m not a fan of eminent domain abuse.

    Scott, Bernanke said that the Fed caused the Great Depression with tight money, and Ray thinks that means Bernanke believes money is neutral. We keep him around for laughs.

  47. Gravatar of ssumner ssumner
    11. July 2016 at 05:49

    Ray, You said:

    “Sumner will claim that the reason the Fed’s VAR numbers are so low in the FAVAR paper is because…drum roll… the Fed “got it wrong” over all these years (1959-2001)”

    It’s cute watching you play with VAR studies. I’d actually claim these numbers reflect the fact that the Fed got it right.

  48. Gravatar of flow5 flow5
    11. July 2016 at 05:54

    The lending equation applicable to non-banks is the same as the equation for a single commercial bank as a consequence of a given primary deposit (where excess reserves can be exploited by bankable opportunities and that all new deposits flow to other CBs in the system).

    But this comparison is superficial (but not to pundits, laymen, Congress, et. al.), since any expansion of CB credit enlarges the money stock – whereas any extension of credit by a non-bank simply transfers the ownership of existing money.

    I.e., when Dr. Alton Gilbert, senior monetary economist, FRB-STL, wrote “Requiem for Regulation Q. What it Was and Why it Passed Away”, Gilbert asked the wrong question: His implicit and false premise was that savings are a source of loan-funds to the banking system.

    Thereby in his analysis, Gilbert assumes that every dollar placed with a non-bank deprives commercial banks of a corresponding volume of loanable funds.

    Gilbert asked: Was the net interest income on loans/investments derived from “attracting” these savings deposits greater than the interest attributable to the direct and indirect operating expenses of this “funding”?

    I.e., the CB’s earning assets, which are erroneously regarded as being derived from savings, actually were already in existence before the deposits credited to the borrower even came into being!

    CBs, as a system, simultaneously pay for all their new earning assets with new deposits. Deposits are the result of lending, and not the other way around.

    The complete deregulation of interest rates simply means that the banks, which pay for something that they already own, are now, collectively, much less profitable.

    Savers never transfer their funds out of the commercial banking system (unless they are hoarding currency). The source of all time/savings deposits is other bank deposits, directly or indirectly via the currency route or thru the CB’s undivided profits accounts. And the growth of bank deposits can be largely accounted for by the expansion of bank credit.

    My point? The golden era in U.S. economics was principally due to an explosion in non-bank lending/investing. The NBs matched voluntary savings with non-inflationary real-investment (mainly mortgages).

    In contrast today, a much greater proportion of savings are impounded within the CB system. But the CBs, from the standpoint of the entire system, do not loan out existing deposits, saved or otherwise. I.e., bank-held savings are lost to investment, to consumption, indeed to any type of payment.

  49. Gravatar of flow5 flow5
    11. July 2016 at 05:57

    This isn’t rocket science. Money flows will already be on a lower trajectory after the election (not because its over).

  50. Gravatar of Scott Freelander Scott Freelander
    11. July 2016 at 06:01


    It seems highly probable that you misunderstand the Bernanke paper. I’m starting to doubt you ever deeply read it. Just reading the conclusion doesn’t mean you even understand the conclusion. You’ve ignored two simple questions I had. Simple, that is, for someone actually familiar with FAVAR.

    I don’t see why I should invest in learning FAVAR if you haven’t. It’s not as if I ever plan on doing forecasting or model-testing using time series. I don’t plan on writing a paper in economics, since I’m not an economist.

    Why should I believe you know more than people like Sumner, Rowe, or Beckworth, who, you know are actually economists?

  51. Gravatar of flow5 flow5
    11. July 2016 at 11:49

    It’s going to be very uncomfortable when you have to admit that N-gDp targeting is dead wrong.

  52. Gravatar of Ray Lopez Ray Lopez
    11. July 2016 at 23:17

    @Scott Freelander – I see you like drama. Sorry I won’t play that game with you. Either read the FAVAR paper or, like Sumner, refuse to read it. What I know or don’t know about FAVAR is irrelevant to what you may learn.

    @Sumner: I’m glad you agree with the FAVAR paper, and I remind you of one finding: FAVAR: “Apart from the interest rates and the exchange rate, the contribution of the [Fed] policy shock is between 3.2% and 13.2%. This suggests a relatively small but still non-trivial effect of the monetary policy shock. In particular, the policy shock explains 13.2%, 12.9% and 12.6% of capacity utilization, new orders and unemployment respectively, and 7.6% of industrial production”. Relatively small says the Princeton guru of monetarism.

    BTW, the latest revised version of Bernanke’s FAVAR paper discusses Sims’ “price puzzle”: “A standard illustration of this potential problem, which we explore in this paper, is the Sims (1992) interpretation of the so-called “price puzzle”, the conventional finding in the VAR literature that a contractionary monetary policy shock is followed by a slight increase in the price level, rather than a decrease as standard economic theory would predict” – I’d like to see your neo-Fisherian (?) interpretation of this phenomena.

  53. Gravatar of ssumner ssumner
    18. July 2016 at 13:15

    And so Ray doesn’t even know when we are making fun of him.

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