TravisV directed me to Narayana Kocherlakota’s newest Bloomberg essay:

What drove this increase in inequality? It wasn’t the result of the Fed propping up housing or stock markets, which declined sharply from 2007 to 2010. Rather, it seems that the poor would have been better off if the Fed had done more to support asset prices — and particularly home prices. In other words, inequality rose because monetary policy was too tight, not because it was too easy.

There are two ways to read this.  If Kocherlakota means the Fed should target house prices, then I obviously disagree.  I think a more plausible reading is that Kocherlakota thinks money was too tight during 2007-10, and that excessive tightness had many side effects including declining asset prices.

Of course that’s “the real problem is nominal” story I’ve been peddling since 2009.  In early 2009, most people thought I was crazy.  Money was clearly “extraordinary accommodative” or so I was told.  And even if if was tight, the fall in home prices was “obviously due to factors unrelated to tight money”.  And now we have a former member of the FOMC espousing a very market monetarist view of the Great Recession.

We’re winning.

Cardiff Garcia quotes from a recent report by James Sweeney at Credit Suisse:

Many commentators point to high debt levels as a major driver of the [2008] crisis. However, high debt levels signal vulnerability, not imminent crisis. Crisis occurs when highly leveraged entities suddenly cannot service their debts. This is most likely when nominal growth suddenly slumps, or when asset prices fall sharply.

Of course, those two things often happen together. And what’s most likely before a sharp decline in nominal growth and asset prices is a boom in both.  .  .  .

We believe policymakers are so scarred by the events of 2008 that they live in constant fear of anything resembling a recurrence. The simplest way to prevent recurrence has little to do with achieving 2% inflation and much to do with minimizing the variance of nominal growth, preferably while maintaining full employment.

Macroprudential policy and financial stability monitoring may help with these goals, but ultimately monetary policy is the tool most likely to prevent large cyclical swings in nominal growth.

We’re winning.

A few weeks back I pointed out that the Japanese yen plunged in value in response to news of negative IOR.  Much of the media and blogosphere seemed to have the opposite reaction.  A few days after the announcement, the yen appreciated strongly on news that the BOJ was backing off from further rate cuts.  The media interpreted this as evidence that negative IOR led to currency appreciation.  Who was right?  And how would we know?

In the long run, you want to rely on a worldview that allows you to make sense out of the myriad news events that are reported each day.  I believe that framework is market monetarism.  Let’s take an example, a headline from today’s FT:

Yen dives on talk of negative rates on loans

If you relied on the mainstream media, that headline would make no sense.  “Wait, weren’t we told on Twitter that Sumner was foolishly attached to the notion that negative IOR was expansionary, despite all indications to the contrary?  If so, how are we to understand this headline?”  On the other hand if you relied on market monetarism, there would be no cognitive dissonance to deal with.  It would all make perfect sense.

Do yourself a favor and start relying on MM for your worldview, it makes life much less painful.

PS.  Nick Rowe has a very good new post on some odd claims made by the Bank of Canada.  They suggested that fiscal stimulus by the new Trudeau government would have an expansionary impact.  The BOC governor suggests it will work because inflation in Canada is “low”.  But it’s not clear why that matters, as interest rates in Canada are not at the zero bound.  Just one more example of the creeping advance of old Keynesianism—something I expected to happen, but hoped would not.

HT:  Benn Steil

I was listening to some speakers on Bloomberg discussing the Malaysian and Chinese credit markets, and this comment (by David Stubbs) caught my attention:

Default cycles tend to come when you get that weaker nominal GDP and certainly when expectations of nominal GDP are not met—indeed the expectations that were embedded in the lending contracts themselves, which drove the credit expansion.

Bank in 2009, this argument was viewed as borderline “crackpot”.  I was told that it was “obvious” that the debt problems were due to reckless subprime mortgages, highly leveraged banks like Lehman and irresponsible Greek deficit spending, and that falling nominal GDP was the result.  Now the heterodox (market monetarist) view seems to be going mainstream.

It wasn’t expected by everyone, but MMs have been predicting this for quite some time (although they are even lower than I expected):

World markets may have recovered their poise from a torrid start to the year, but their outlook for global growth and inflation is now so bleak they are betting on developed world interest rates remaining near zero for up to another decade.

Even though the U.S. Federal Reserve has already started what it expects will be a series of interest rate rises, markets appear to have bought into a “secular stagnation” thesis floated by former U.S. Treasury Secretary Larry Summers.

Of course Summers was a latecomer to this idea; I’ve been talking about slower trend growth and low interest rates as the new normal for many years.  Tyler Cowen’s book entitled “The Great Stagnation” also preceded Summers.

If you believe the press (and many economists), this period of low interest rates represents “easy money”,  That’s right, the implied claim is that the “liquidity effect” (normally very transitory) has now lasted for a decade. And there’s more to come:

Take overnight interest rate swaps. They imply European Central Bank policy rates won’t get back above 0.5 percent for around 13 years and aren’t even expected to be much above 1 percent for at least 60 years.

Japan‘s main interest rate won’t reach 0.5 percent for at least 30 years, they suggest, and even U.S. and UK rates are set to remain low for years. It will be six years before U.S. rates return to 1 percent, and a decade until UK rates reach that level.

“Although interest rates are low, they’re not accommodative,” said Harvinder Sian, global rates strategist at Citi in London. “The era of zero rates will be with us for years and years, it wouldn’t surprise me if we’re looking at another five to 10 years.”

Sixty more years!?!?!  At least there is one guy dissenting from the view that low rates mean easy money.  It will be interesting to see how long it takes the others to figure this out.  Let’s hope it’s not 60 years.

Update:  Commenter BC pointed out that the US interest rate data looks fishy, given that 5 year T-notes currently yield well over 1%.  So the article I cited may not be accurate.

And as predicted by MMs, the Swiss decision to revalue the franc has backfired. Now that markets understand that the Swiss are willing to let the SF appreciate over time, Swiss interest rates are forced below the already very low eurozone rates (due to the interest parity condition.)  In contrast, the Danes fought the speculators off, and are now reaping the (admittedly small) benefits, of having slightly higher bond yields than Germany:

The five countries or economic blocs currently with negative deposit rates have yields below zero on all their bonds from a minimum of five years’ maturity (Denmark) to a maximum of 20 years (Switzerland).

The pro-revaluation crowd thought that the SF would no longer be expected to appreciate, if speculators could be placated with a revaluation upwards.  But that was like feeding meat to sharks, it just increased their appetites.

PS.  Here’s what Tyler Cowen said 13 months ago, about the ability of the Danes to fight off speculators:

I would bet against them [the Danes], in any case this will be a neat test case for our judgments of Switzerland.

PPS.  Lars Christensen says the US may be about to enter a recession.  Possibly, but I’m less confident than he is.  BTW, here’s the track record of IMF economists in predicting downturns:

As The Economist noted, between 1999 and 2014, the International Monetary Fund, in its April forecasts, failed to predict every one of the 220 instances in which one of its members suffered negative annual growth in the next year.

Ouch!  I wonder if they ever predicted anyone will have negative growth?  Kudos to Lars for going out on a limb.

PPPS.  Tyler Watts sent me a music video on “Tall Paul” (Volcker), which might be fun to use in undergrad money/macro classes.

Update:  Timothy Lee has a great post on Draghi’s screw-up today.