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Lessons from Greece

Over the past 4 years, I’ve been questioning the conventional wisdom that Greece’s debts were unpayable. In May 2017, after a sharp decline in Greek bond yields, I did a post at Econlog entitled:

Is the Greek public debt actually “unpayable”?

At the time, yields on Greek 10-year bonds had plunged to 7.4%. Today they are down below 3.3%:

Who knows, Greek bond yields might eventually fall below the yield on US Treasury bonds.

My argument was not that Greece was not at some risk of defaulting, rather that their national debt (roughly 180% of GDP) was certainly not “unpayable”. Whether bondholders actually got paid depended on whether the Greek public was willing to service the debt, or (as in 2012) whether they were unwilling to do so. Today it looks like the Greeks have stepped up to the plate and the public debt looks sustainable. Of course if there were another deep recession then things could change fast.

Bloomberg has a new piece pointing to lots of incorrect predictions from back in 2015:

Greece reached its bailout deal with European creditors in the summer of 2015 after some of the smartest people earlier that year predicted default and exit from the European Monetary Union.

Former U.S. Federal Reserve Chairman Alan Greenspan told the British Broadcasting Corp. then that it was “just a matter of time” before Greece abandoned the shared currency and the euro disintegrated. George Soros, the billionaire chairman of Soros Fund Management, said in an interview with Bloomberg Television a month later that “Greece is going down the drain.” Marcel Fratzcher, the Oxford- and Harvard-educated former head of policy analysis at the European Central Bank and president of the German Institute for Economic Research, went so far as to characterize Greece as a “political and economic catastrophe.” Amid predictions that Greece would abandon the euro and revert to the drachma in a desperate ploy to reassert control over its economic future, Fratzcher declared: “A Grexit is and remains the worst option for Greece. It is becoming more and more likely.”

There’s no shame in these false predictions, indeed I was not at all certain what Greece would end up doing. My point here is that it’s dangerous to predict economic crises. If the crisis were fairly certain to occur, it likely would have already happened. You can certainly observe that a given situation is very precarious, just as one might notice that a certain mountain road is susceptible to accidents. But just as it is difficult to predict that a specific auto will crash, it’s hard to predict which countries will default on their debt.

PS. Technically those predictions cited by Bloomberg were about leaving the euro. But a Grexit would have made default on Greek euro-denominated public debt virtually 100% certain. Indeed, claims that the Greek debt was unpayable continued long after 2015.

“Everyone does it”

I don’t generally hang out with lowlife punks, but that sort of interaction is inevitable when you are young. I recall that they had a very cyclical view of the world. They didn’t exactly deny that they lied, cheated and stole, rather they claimed that everyone did it, and only naive chumps failed to see through the phony hypocrisy of so-called “good people”. As I’ve gotten older, I often see people accusing others of having the exact flaw that they have. (Presumably I have the same blind spot.)

If I point to some flaw in President Trump, people will say, “Don’t be naive, all politicians do it.” Of course the same people will insist that Trump is a refreshing change of pace, not at all like other politicians.

A recent piece in The Economist has proven remarkably prescient, after just a week.  Here’s the title:

Donald Trump is a pro wrestler masquerading as commander-in-chief

Here’s an excerpt:

The president also employs the wwe’s new stagecraft. Mixing family, business and politics infuriates sticklers for the law, but makes his fans think he is somehow more real—or “authentic”—than his rivals. He is also a master of shifting between degrees of make-believe. “I’m not supposed to say this,” he interjects into his speeches, “but what the hell?” And then there are his constantly distracting micro-dramas, breathlessly echoed by a commentariat every bit as emotionally invested in the drama as the press gallery at WrestleMania, which often erupted into spontaneous gasps or applause. How much of Mr Trump’s behaviour is concocted is debatable; private Trump is also pretty pantomime. But that uncertainly merely adds, wwe style, to the reality-tumbling effect.

Electoral royale

Mr Trump’s ham performance has been endangered by its own success—represented by two years of unified Republican government. A wweperformer without an adversary would be a pitiful spectacle. It is therefore testament to the president’s genius that he was able to fill the void, not with policies, obviously, but rather a parade of new enemies: immigrant children, black football players, the late John McCain. Yet with the Democrats soon to choose a new champion, his performance may be about to get easier.

AFAIK, people like professional wrestling because they like heroes inflicting pain on bad guys. Many voters like that too. The Dems seem hopelessly outmatched right now, and if I were a betting man I’d put money on Trump winning again in 2020.

What makes the Economist piece so prescient is two news stories within just the past week. In one story, Trump threatened to place illegal aliens in “sanctuary cities”. In another, he is having his negotiators pressure the Chinese to remove tariffs on products exported from (Republican) farm states, and replaced with tariffs on products exported by blue states.

Of course commenters will tell me that I’m naive, and that all presidents do this. It’s “refreshing” to have a president finally admit that he is trying to impose suffering on the parts of America that didn’t vote for him.

But if we all lie, cheat, and steal, then why should I care whether you think I’m naive? After all, you don’t really believe what you are writing, you’re just placing those comments to get attention, to be a troll. Belief in truth is for suckers, so I can safely ignore your comments.

The good news is that just as professional wrestling is fake fighting, Trump is a fake right-wing authoritarian nationalist. Just imagine if he were a real fighter, another Muhammad Ali.

Why Biden might be the Dems least bad choice, despite being a bit of a buffoon and a relic of the 20th century.

What lessons do conservatives need to learn?

The Financial Times has a mildly critical piece on the monetary policy  views of US conservatives, which still ends up being too generous:

Governing parties naturally gravitate towards lower rates as they seek re-election, and the change in mood within the broader party is in part a reflection of Mr Trump’s ability to make the political weather, said Michael Strain, director of economic policy studies at the conservative American Enterprise Institute.

“The president is an easy-money guy. That has an effect,” he said.

This is followed by a long list of examples of Republican politicians and pundits (like Moore and Cain) bashing the Fed’s so-called easy money policies under Obama, and then recently flipping the other way.

Then the excuse making:

Mr Strain and other analysts think there is more afoot than simply politics.

Ike Brannon, a senior fellow at the Jack Kemp Foundation in Washington, said conservatives who had warned of inflation during the great recession are now being forced to re-evaluate. . . .

“Steve [Moore] has figured out like the rest of us that inflation is no longer the spectre and we need to think about monetary policy with a different context,” Mr Brannon said. “People have learnt from mistakes that were made — including by people in the GOP a decade ago.” . . .

Doug Holtz-Eakin, who advised the late John McCain’s presidential campaign, said the post-crisis experience had been a salutary one for conservatives.

“Inflation dynamics are not what they used to be,” he said.

Actually, inflation dynamics are exactly what they used to be.  Herbert Hoover’s QE did not cause high inflation, nor did the Japanese QE of the early 2000s.  This was all clearly explained by market monetarists back in 2009, but conservatives were too attached to their outdated models to pay any attention.  And why did this conservative reappraisal of monetary policy suddenly occur the moment Trump was elected?

In a few places the truth slips through:

Alabama senator Richard Shelby was among the Republicans who opposed Ms Yellen’s nomination to be Fed chair five years ago because he believed she was displaying a bias towards inflation and backed QE.

In February, however, Mr Shelby lavished praise on Jay Powell, Ms Yellen’s successor, saying it was “the best economy I’ve seen in my lifetime”. . . .

At the same hearing Patrick Toomey of Pennsylvania was the only Republican member of the Senate banking committee to raise concerns about a potential overhaul of the Fed’s inflation target under which the central bank could sometimes shoot for higher-than-target inflation.

In earlier times such a policy might have prompted far more anxiety among inflation hawks.

It’s not just that the GOP wrongly thought QE and low rates would create high inflation; in the early 2010s they actually favored low inflation.  Now Toomey seems to be just about the only one left who is strongly committed to a policy of low inflation.

If the conservative movement were serious about learning from their mistakes in the early 2010s, they’d be looking at the group that provided the most accurate description of what was likely to happen, especially given that this group has a number of people with right-of-center views on economic policy issues.  They’d be embracing market monetarism and encouraging Trump to nominate David Beckworth to the Fed, not Herman Cain and Steve Moore.  Don’t hold your breath, as this not about getting to the truth.

PS.  Off topic, I have a (probably stupid) question for those who know more physics than I do.  The picture of a black hole that was recently released looks like a donut.  Actual donuts only look like donuts when viewed from a certain angle.  Does the black hole in M87 always look like a donut from any angle, or only from our perspective?  For example, AFAIK the Ring Nebula only looks like a ring because we are viewing it down one of its poles.

PPS.  Now that I realize just how big M87 is (a trillion stars, and presumably roughly as many planets), it makes our current debate over level vs. growth rate targeting seem rather unimportant.  I’d guess there are already about 379 planets within M87 using NGDP level targeting.  I’m assuming that 1/1000th of their star systems have life, and 1/100 with life have animal life, and 1/1000 with animal life have civilizations with monetary policy, and 3.79% of those with monetary policy have NGDP level targeting.

Qualifications for the Fed

I have a new post up at The Bridge, which discusses the qualifications we should look for in a nominee for the Board of Governors:

There are at least five possible criteria for judging a candidate for the Fed:

1. Does the candidate agree with one’s own views on monetary policy?

2. Does the candidate have educational or work experience and credentials indicating an adequate background in monetary economics?

3. Does the candidate exhibit knowledge of monetary economics in their public comments and writings on the subject?

4. In retrospect, do previous policy recommendations by the candidate seem to have been correct?

5. Would the candidate avoid partisan bias when making decisions?

There is some reason to worry that Mr. Moore and Mr. Cain fall short in these areas, although in my view the first two criteria should carry relatively little weight. . . .

I’m in no position to judge motives, but the case for appointing Moore and Cain to the Federal Reserve Board runs into obstacles however one views their attitude toward Fed independence. If their change of heart was motivated by political considerations, that would be inconsistent with the Fed’s traditional independence from the rest of the government. When politics influences Fed decisions, it can destabilize the economy.

If we assume that their evolution from hawkish to dovish doesn’t reflect political considerations, that raises another question: do the candidates have good judgment on policy? I am not aware of any coherent economic model, liberal or conservative, which would justify calling for tighter money in the early 2010s and easier money today.

Read the whole thing.

Update: Tyler Cowen had this interesting observation:

My personal preference is for a nominal GDP rule, but the irony is this: At the end of the day, the advocates of the gold standard, and their possible presence on the Federal Reserve Board, are themselves the best argument for … the gold standard.

The internal contradictions of nationalism, example #249

Here’s the Financial Times:

A trip to Jerusalem has become almost compulsory for today’s ‘strongman’ leaders . . .

Israel is benefiting from the rise of a new generation of nationalist-populist political leaders — from Washington to Delhi, and from Budapest to Brasília — who ardently admire the Jewish state. This change in the international political atmosphere has created new breathing space for a country that has long feared international isolation and trade boycotts.

In one sense this is not surprising, as Israel’s current leader is highly unpatriotic, in a fashion similar to that of other leading nationalists. Just as Orban has a low opinion of Hungarian Roma, and Modi doesn’t like Muslim and Christian Indians, and Trump doesn’t like Americans from “shithole countries”, Netanyuhu doesn’t like Israelis who happen to be Arabs. Indeed his coalition government relies on the support of the Jewish Power group, who want to encourage Israeli Arabs to leave their own country. (Sort of like the way Trump himself doesn’t say and do the worst stuff, but frequently praises those who do. The art of the “dog whistle”.)

In another sense, however, this is all rather jarring, as one important theme of Jewish history is opposition to nationalism and support of liberal internationalism. Again, this long proud tradition is not surprising, given that throughout most of history Jews have been a minority targeted by nationalist politicians. That’s why these modern trends make my head spin:

Another leader who loves to stress his friendship with Mr Netanyahu is Jair Bolsonaro, the new president of Brazil, who is currently visiting Israel. . . .

Indeed, a trip to Israel has become almost a compulsory stop for a new generation of “strongman” leaders, who revel in defying liberal opinion. Last September, Rodrigo Duterte, the leader of the Philippines, came to Jerusalem and told Mr Netanyahu: “We have the same passion for human beings” — a double-edged compliment, given that Mr Duterte is under investigation by the International Criminal Court for encouraging extrajudicial killings.

Another strongman cultivated by Mr Netanyahu is Viktor Orban, the prime minister of Hungary and champion of “illiberal democracy”, who visited Jerusalem last year. This relationship is controversial in Israel because Mr Orban launched a poster campaign in 2017 that used anti-Semitic imagery portraying George Soros, a Jewish philanthropist, as a puppet master intent on flooding Hungary with refugees. 

Today’s Israeli leaders pal around with foreign leaders who embrace torture, mass murder, and traditional anti-Semitic tropes.

Perhaps this shouldn’t surprise me. Progressives used to encourage white artists to add black characters to their work, they used to favor a color blind society, they used to oppose the prudery of the Victorian era, they used to favor free speech. Now they tell artists to stick to their own race, they oppose free speech, they consider advocacy of a color blind society to be racist, and they are the worst sort of prudes.

I guess we all just have to accept that, “the times they are a’changing”

But I don’t plan to change; I’ll go to my grave opposing identity politics.

PS. I wouldn’t vote for him, but in fairness to Netanyahu he is far better than Trump on economic policy–as I explain in this new Econlog post.

PPS. The FT has another story suggesting that British patriotism is being replaced with English nationalism.

PPPS. Just when we need a sound Democratic Party to defeat Trump in 2020, they begin to self-destruct:

Former President Barack Obama warned on Saturday that progressives risk creating a “circular firing squad” at a time when prospective presidential candidates are competing fiercely against one another to run against President Trump.

I hope I’m wrong, but right now the party looks like a slow motion traffic accident, playing out right before our eyes. Once again, Trump will benefit from the unpopularity of his opponents.

PPPPS. Don’t forget to order Bryan Caplan’s new book advocating open borders:

https://www.amazon.com/gp/product/1250316960/ref=as_li_tl?ie=UTF8&camp=1789&creative=9325&creativeASIN=1250316960&linkCode=as2&tag=bryacaplwebp-20&linkId=1ed2cdfe4a1c0cd2a62e942a39f87b9d