Fix monetary policy; there are no alternatives
The annual Fed meeting at Jackson Hole will soon begin. I hope they discuss how to fix monetary policy. I fear they will be distracted by impractical fiscal/monetary schemes.
The recent discussion about monetary policy has been horribly confused. Here are a few examples:
1. Prior to adopting a 2% inflation target, there was lots of discussion about where to set the target. I recall almost universal agreement that the target had to be at least high enough to prevent a zero bound problem. Now that we have experienced a zero bound problem, has that view changed? If so, why?
2. I see a lot of discussion to the effect that the Fed is unable to hit its inflation target, because it’s out of ammunition. That’s not just wrong, it’s a freshman economics level error. The Fed raised rates in December (and refused to cut them a few weeks ago), precisely because they are worried about overshooting their inflation target. Indeed at least since the taper tantrum of 2013, the Fed hasn’t believed the US economy needed any more monetary stimulus than they are already providing. This discussion of the Fed being out of ammo shows a profession that is deeply confused on some of the most basic ideas in monetary economics. It’s not a pretty sight.
3. When I discuss the possibility of reforms such as level targeting, or NGDP targeting, the response is often that the proposal is “politically unrealistic”. Then the naysayers turn around and recommend fiscal/monetary coordination, which shows an almost laughable naïveté about the actual way that fiscal policy is implemented in the US. And even if by some miracle the GOP Congress would agree to countercyclical policy, the proponents don’t even seem to know what it is. They propose fiscal stimulus right now, even though doing so at a time of 4.9% unemployment would constitute a procyclical policy, and hence would make the US economy even more unstable.
I hope the economists at Jackson Hole discuss possible ways to fix monetary policy, and don’t get distracted by hopeless fiscal/monetary chimeras, but what I read in the opinion sections of elite media and blogs makes me very pessimistic.
Anand sent me to a post by Paul Krugman:
And I realized something not too flattering about myself: I’m feeling nostalgic for 2011 or so.
Liquidity-trap macroeconomics — which I didn’t invent, but did play a role in bringing back into the mainstream — had become the story of the day. And the basic message of the models — that everything changes when you hit the zero lower bound — was being overwhelmingly confirmed by experience.
The thing is, it was all beautifully hard-edged: a crisp boundary at zero, a sharp change in the impact of monetary and fiscal policy when you hit that boundary. And the predictions we made came out consistently right.
Yes, except for all the things they got wrong, which the market monetarists got right. Like the 2013 austerity. Or the removal of extended UI in 2014. Or whether the BOJ would be able to devalue the yen.
But now things have gotten a bit, well, murky.
Now Krugman is being much kinder than I was at the top of this post. Since we exited the “liquidity trap” the discussion has been borderline incoherent.
The zero lower bound is not, it turns out, quite as hard a boundary as we thought.
Does “we” include the guy who twice recommend negative IOR in published papers in early 2009, and was scoffed at?
More important, probably, is the fact that two of the major advanced economies — the US and, believe it or not, Japan — are arguably quite close to full employment. We don’t know how close, because we don’t know how much pent-up labor supply is still waiting on the sidelines. But you can no longer argue that supply limits are no longer relevant.
Correspondingly, you can also no longer argue with confidence that there can be no crowding out, because the Fed won’t raise rates.
Yes, before you had to argue they’d do less QE to crowd out the fiscal stimulus.
We are, if you like, half-out of the liquidity trap, with one foot on dry land — but the other foot is still hanging over the edge, and it wouldn’t take much to topple us right back in.
What I would argue is that in this murky, fragile situation we should be conducting policy largely as if we were still in the trap — because we badly need to get both feet firmly on dry land with some distance between us and the quicksand.
(The link advocated fiscal stimulus.) He seems to be arguing that we need fiscal stimulus because we need to raise rates so they we can cut them again if we get into trouble in a few years. That’s 100 times better than arguing the Fed should raise rates so that it can cut them again (an insane idea you sometimes see in the business press), but I still don’t quite buy it.
Fiscal stimulus is a demand-side policy. It’s not going to have a significant impact on trend RGDP or trend NGDP. So if we do more fiscal stimulus when unemployment is 4.9%, we probably won’t see dramatically higher nominal interest rates. I will concede that it’s possible the Fed would have a bit more “conventional” ammo the next time a recession hit (from rates being a bit higher), but that additional monetary ammo would come at the expense of less fiscal ammo. In Krugman’s view, fiscal stimulus doesn’t come from high G, it comes from rising G. If we already have high G when we go into the next recession, it’s going to be that much harder to get rising G. If fiscal stabilization policy is to work it must be countercyclical, that means don’t do it now. This new “fiscal stimulus forever to put sand under the tires of monetary policy” (my words, not his) seems more than a bit ad hoc to me, a proposal from people who want shiny new airports and high speed rail, and will grasp any half way plausible model to justify that preference. I put Larry Summers in that camp, maybe even more so that Krugman.
So I don’t think more fiscal stimulus today would make the US economy any more stable in the long run. Instead we’d just be:
Another day older and deeper in debt
Tags:
10. August 2016 at 09:02
“If we already have high G when we go into the next recession”
Is there a commonly accepted definition of “high G”?
For that matter, is there a commonly accepted definition of “austerity”?
Would low GDP growth justify countercyclical policy, or is it only high unemployment?
10. August 2016 at 09:05
Foosion, You asked:
“For that matter, is there a commonly accepted definition of “austerity”?”
It all depends on whether the outcome fits the Keynesian model. They seem to make up definitions as they go.
You asked:
“Would low GDP growth justify countercyclical policy, or is it only high unemployment?”
Only high unemployment—demand stimulus can’t do much for productivity. That’s not to say you might not want to fund research or infrastructure for cost/benefit reasons, but then it’s not countercyclical policy.
10. August 2016 at 09:43
I always thought procyclical behavior is what banks do to protect themselves, even though it often results in a bigger disaster. I looked up the concept, wrote an article, that quoted Lars Christensen:
“Concluding, central banks during booms tend to take on more risk – they overweight risky assets – while they during busts tend to reduce risk – underweight risky assets. Hence, central banks consistently act in a procyclical fashion.
This is of course is not only bad in terms of ensuring the highest and most stable return at the lowest possible risk, but it also adds to the swings in the economy as the central bank will add liquidity to the financial system during booms and redraw liquidity during crashes.”
So, we are in a situation where they are withdrawing liquidity some, as if we are in a continual crash, or so it seems. It is like a recovery that isn’t really a recovery. I still go back to the belief that it is because structured finance (bond hoarding) has literally taken over the financial sector, and it is the driving force now.
10. August 2016 at 10:23
Krugman wants high and rising G unless inflation is also high AND rising. For a brilliant guy, he’s become a caricature of himself.
10. August 2016 at 10:28
So, Sumner, do you now admit my correctness in claiming Krugman is advocating fiscal stimulus now, and was doing so in late 2015?
10. August 2016 at 10:34
Can you please expand on the “laughable naïveté about the actual way that fiscal policy is implemented in the US?”
Do you mean the fact that there’s very little discretionary spending in the budget? The fact that the constant election cycle of House members means they will never support anything countercyclical in nature? Or excess budget revenues will get spent to the dime (and then some) on pork barrel projects for the same reasons? What precisely?
10. August 2016 at 11:47
Sorter of breath and one day closer to death.
10. August 2016 at 11:57
I’m a NGDPLT enthusiast, so I’m with Sumner. I would qualify my enthusiasm with a reference to the definition of “inflation”, which is “a general increase in prices”. How can there be a “general increase in prices” if wages are flat, or rising no faster than increases in productivity? Sure, bubbles will come and go, but bubbles are not “inflation”. Even Larry Summers knows that.
10. August 2016 at 12:23
Harding, Yes, you were right about that.
Lazy, There are all sorts of problems. Start with the fact that the GOP Congress has no interest in doing fiscal policy, at least demand-side fiscal policy. Even if they did it takes years to do an environmental impact statement for a big project, so infrastructure spending would come way too late to help with the recession.
And of course all this assumes no monetary offset, which is a false assumption, as we saw in 2013.
In Europe, the countries that need stimulus are broke.
Rayward, Actually, wages are rising at 2.6%, while productivity is hardly rising at all.
10. August 2016 at 12:59
Wages are still below 2009 levels (adjusted for inflation).
10. August 2016 at 13:08
Forget my qualification, which has nothing to do with Sumner’s very good idea. If “inflation” isn’t measured accurately, that has nothing to do with NGDPLT. Indeed, if “inflation” isn’t measured accurately, then NGDPLT may mitigate the error.
10. August 2016 at 14:36
“Fiscal stimulus is a demand-side policy. It’s not going to have a significant impact on trend RGDP or trend NGDP.”
One reason cited for low productivity growth is inadequate demand. If there were more demand, businesses would invest more in things that increase productivity, thereby increasing GDP growth.
10. August 2016 at 15:09
“If there were more demand, businesses would invest more in things that increase productivity, thereby increasing GDP growth.”
-Worked in the 1970s! Also working very well for such fine countries as Belarus’, Brazil, and Russia!
10. August 2016 at 15:10
“Wages are still below 2009 levels (adjusted for inflation).”
-No, they’re not.
10. August 2016 at 15:10
Krugman knows there is a shortage of collateral. That is why he wants more fiscal stimulus. In fact he said this very thing. I wonder is Scott Sumner read this piece. I put part of it in brackets:
[That is, bonds issued by the U.S. government would provide a safe, easily traded asset that the private sector could use as a store of value, as collateral for deals, and in general as a lubricant for business activity. As a result, the debt would become a “national blessing,” making the economy more productive.
This argument anticipates, to a remarkable degree, one of the hottest ideas in modern macroeconomics: the notion that we are suffering from a global “safe asset shortage.” The private sector, according to this argument, can’t function well without a sufficient pool of assets whose value isn’t in question — and for a variety of reasons, there just aren’t enough such assets these days.]
http://www.nytimes.com/2016/04/22/opinion/in-hamiltons-debt.html?_r=0
I have been arguing that this is what Krugman, Kotcherlakota and all the other anti helicopter, fiscal debt seekers want, more sovereign bonds!!!!!!!!!!!!!!!
So, they don’t give a damn about the nation, main street, or anything only the vague hope that all these bonds as collateral will somehow trickle down.
I wonder what Scott Sumner things about that version of Trickle Down. Somebody else ask him, he doesn’t read what I write most times, and it is passing him by.
10. August 2016 at 15:11
They want bonds and they want them with low yields. They seek bonds as a store of value, meaning price stability, IMO.
10. August 2016 at 16:02
Central banks are not out of ammo.
However, there are concerns that the Bank of Japan will run out of government bonds to buy. They are already buying equity ETFs. Some of this “out of ammo” talk stems from the lack of liquidity in government bond markets.
I think there is a great deal of discomfort with the idea that QE could become a conventional program, and probably should.
It may be that a move to helicopter drops rather than QE is the right choice. The Fed would not interfere in asset markets with straight chopper dumps.
10. August 2016 at 16:05
Fear not too much on foreign trade:The most ferocious protectionist in recent U.S. history was….Ronald Reagan. Said Cato Institute in 1988 (before hagiographers set in): “By this standard, the Reagan administration has failed to promote free trade. Ronald Reagan by his actions has become the most protectionist president since Herbert Hoover, the heavyweight champion of protectionists.
“http://www.cato.org/pubs/pas/pa107.html
In fact, Reagan may have been a bigger protectionist than Hoover. The famed Smoot-Hawley tariffs were often toothless. “Partial and general equilibrium assessments indicate that the Smoot-Hawley tariff itself reduced imports by 4-8 percent (ceteris paribus),” wrote Doug Irwin, a free trader.
In contrast, Reagan put a 100% tariff on Japanese electronics, and 50% tariff on other goods, and numerical ceiling on Japan auto exports the US, among many, many other measures. At the Plaza Accords in 1986, Reagan pushed down the official exchange rate of the US dollar. He was a currency manipulator and above-board about it!
The US did fine under Reagan.
10. August 2016 at 16:38
Sumner’s small ‘victories’: “Yes, except for all the things they got wrong, which the market monetarists got right. Like the 2013 austerity. Or the removal of extended UI in 2014. Or whether the BOJ would be able to devalue the yen”
The austerity was a small victory that 185 economists missed, no big deal, it only shows the economy’s GDP growth is largely random with a small upward bias.
Removal of extended UI in 2014: a news hound like me never even knew this was an issue, so how important can it be?
Whether the BOJ could devalue the yen: who says whatever the BOJ did had any effect on the Yen? The BOJ, like China, probably wastes billions trying to defend their currency against market forces too powerful to contain; George Soros proved that with the BofE.
Sumner is like a kid who applies to Harvard and declares victory since his application package was not rejected by the US Postal Service but delivered.
10. August 2016 at 21:12
Prof Sumner,
Great and thought-provoking post, as usual, though I find myself in disagreement with a few elements. I’d love if you could clear a few things up for me.
First, you wrote: “Indeed at least since the taper tantrum of 2013, the Fed hasn’t believed the US economy needed any more monetary stimulus than they are already providing.”
I agree that the “taper tantrum” reduced expected NGDP growth and thus tightened monetary policy. I also agree that, since then, the Fed has been so anxious to talk up rate increases that this has also constituted a de-facto tightening of policy. But I would disagree somewhat with the notion that they never thought or implemented “further stimulus.” I just pulled up, for instance, the Fed’s SEP from March 2015: seven participants anticipated two rate increases and seven anticipated even more. I’m sympathetic to Jim Bullard’s position that projecting higher rates is effectively a tightening of policy that would, again, reduce expected NGDP growth. Obviously the Fed didn’t follow through on this, nor did they follow through on their very bold projection of four increases this year as of last December. Even if those projections were unrealistic (and I completely agree with you that market forecasts were the go-to on this), doesn’t holding off on rate increases and talking down the prospect of rate hikes as a general rule (not in May-June for sure, but certainly after Brexit, until this last statement that was a tad more hawkish) qualify as “more stimulus”? If I understand your past arguments correctly, concrete steps–more QE, a rate cut, etc.–need not be the only or even primary way through which the Fed adjusts the stance of policy. By this logic, I think these shifts in their communication policy and projected rate path–even if they’re arguably at fault for lower future rates through overly tight policy and/or inertia in their reaction function–would constitute relatively easier policy than if they had hiked regardless of the behavior of asset prices earlier this year.
Second, you wrote: “Fiscal stimulus is a demand-side policy. It’s not going to have a significant impact on trend RGDP or trend NGDP.”
Two points here. First, you may have seen this interesting paper by Summers and Delong on the impact of fiscal stimulus at the ZLB:
http://delong.typepad.com/20120320-conference-draft-final-candidate-delong-summers-brookings-fiscal-policy-in-a-depressed-economy-1.32.pdf
It makes the case for hysteresis effects, which I find increasingly plausible by the large literature on negative duration dependence. I take it you don’t find these arguments compelling. Would you mind explaining why? I find myself increasingly sympathetic to your monetary offset arguments, especially under an NGDP rule (you might be interested in knowing you’ve swayed me on this point quite recently), but I have some faith that fiscal stimulus could raise trend growth even if it doesn’t raise actual growth today.
Second, this is mostly ignorance on my part, but I’m not quite following the distinction you made between trend RGDP and trend NGDP. The only change in trend NGDP that I can think of that’s independent of RGDP is if the central bank is willing to tolerate higher inflation or inflation expectations were to become unanchored. What am I missing?
Thanks, and great post.
11. August 2016 at 01:15
http://www.propertyobserver.com.au/financing/interest-rates/56617-outgoing-reserve-bank-governor-glenn-stevens-highlights-limitations-and-constraints-of-a-super-low-interest-rate-environment.html
Please see the link for a parting speech from Glenn Stevens – ‘Had anyone, a decade ago, accurately forecast all the international events and simultaneously predicted that things would turn out in Australia as they have, they would not have been believed. But here we are.”
I have been humbly reading your blog for some years now. Where are we going to be ten years from now??
Cheers
11. August 2016 at 04:25
Way off topic, but this woman deserves a wider readership;
https://sanukriti.wordpress.com/2016/08/10/female-prisoners-in-the-united-states/
‘As of 2009, nearly “25.7% of women in prison were serving time for drug offenses,” as compared to 17.2% of men. Another reason why more women than men are incarcerated for drug crimes is something called the “girlfriend” problem. It seems that “the only means of avoiding a mandatory penalty is generally to cooperate with the prosecution by providing information on higher-ups in the drug trade.” However, these women are in most cases involved in the drug trade because of a partner who is a drug seller and these “girlfriends” have relatively little information to trade in exchange for a more lenient sentence. “In contrast, the “boyfriend” drug seller is likely to be in a better position to offer information, and so may receive less prison time for his offense than does the less culpable woman.”’
11. August 2016 at 04:55
Another day older and deeper in debt—
Tennessee Ernie Ford, btw. A great song…but there is something odd about the genteel Ford, with a terrific voice, singing that song…
16 tons
11. August 2016 at 05:11
Excellent series of posts, Scott. Island of sanity.
Krugman is good. He can start with any set of facts and end up with “MOAR government spending” as the solution. Can anyone point to anything the guy has written this century to the contrary, as the national debt has grown by $15 trillion?
(Also,”I have been right about everything, and those who disagree are not merely wrong but dishonest”, as if he doesn’t realize that his many whoppers this century have been empixellated forever.)
Lesser Keynesians ape Paul, but without his virtuosity.
11. August 2016 at 05:13
As far as Paul Krugman’s comments, if you believe that large fiscal are needed should you push hard to cut the size of the Federal Government budgets in the good years maybe all the way down to 15% of GDP? So then you can easily do fiscal stimulus up to 10% of GDP in bad years?
11. August 2016 at 05:24
@Fred, hysterisis from 2008 is plausible. 8.7 million jobs lost in just over two years, followed by a steady but slow improvement in the employment picture.
Since the trough, the economy has added 2.3 million jobs per year, on a pretty remarkably consistent basis. Some of these jobs have gone to the 8.7 million idled during the recession. No one is sure how many, but every month of 200,000 new jobs includes another slug of these guys. I suspect 50-75% of these folks are back at work now, and some others have been bridging their way toward retirement. As the job growth keeps coming, hysterisis seems less compelling, and a painful and arduous but ultimately successful readjustment moreso.
11. August 2016 at 06:52
Rayward, Wages have been rising faster than inflation, since 2009.
foosion, I think that effect is overrated, and it’s not going to significantly impact long term trend growth.
Ben, The BOJ has plenty of gov. bonds to buy. And Reagan would be horrified by Trump.
Ray, You said:
“who says whatever the BOJ did had any effect on the Yen?”
Umm, the markets?
Fred, I think you misunderstood my comment. I did not mean to say they did not enact further stimulus, rather that the stance of policy was not more contractionary than they wished, at least for any period of time extending past a single meeting. They put policy where they wanted it, each meeting.
I’ve always been a skeptic of the hysteresis hypothesis. It was created by left leaning economists to explain the failure of Keynesianism during the 1970s and 1980s. They did not want to accept that the welfare state had dramatically raised the natural rate of unemployment in Europe, so they blamed a lack of demand. That hypothesis was refuted when German unemployment fell sharply after the 2004 labor market reforms.
I’m not saying hysteresis effects are precisely zero, there is some of that in programs like disability benefits. But it’s hard to reverse those specific effects once people have exited the labor force.
Tony, Thanks, interesting speech.
Patrick, Very interesting, and sad.
Brian, Good points.
Floccina, Good point.
11. August 2016 at 08:21
So Scott, is creating more bonds to ease the price, through fiscal spending, as Krugman wants, a blessing or a curse? Krugman said it would be a blessing. That was the main point of his article I will post again:
http://www.nytimes.com/2016/04/22/opinion/in-hamiltons-debt.html?_r=0
Anyone got an opinion?
There is only one way to increase the amount of sovereign bonds, and that is through more deficit spending. I seriously want to know if people think it is a blessing or a curse.
11. August 2016 at 09:15
Brian Donohue
“He can start with any set of facts and end up with “MOAR government spending” as the solution. Can anyone point to anything the guy has written this century to the contrary, as the national debt has grown by $15 trillion?”
Most of his stuff about going to war in the Middle East. He seemed quite a bit against that type of government spending.
11. August 2016 at 10:18
Not sure if you’ve seen this, but a recent post by Antonia Fatas has been making the rounds:
http://fatasmihov.blogspot.ca/2016/08/you-can-lower-interest-rates-but-can.html
_You can lower interest rates but can you raise inflation?_
“Something is fundamentally not working when it comes to monetary policy and it is either the outcome of some forces that the central banks are unable to counteract or the fact that central banks are not getting their actions and communications right.”
11. August 2016 at 13:28
Scott, Narayana Kocherlakota suggests fiscal stimulus for more demand to increase productivity: https://www.bloomberg.com/view/articles/2016-08-11/let-s-be-optimistic-about-productivity
11. August 2016 at 13:28
@ Gary Anderson,
The trouble I have with the Gorton thesis of a “shortage of safe assets” is that Federal debt instruments (i.e., the national debt) is larger than ever. How did the Republic survive when the national debt was stable or declining as a percent of NGDP?
The financial industry adapted their business models to high and growing debt in the last decade. Then it all came tumbling down when it turned out that some of that debt wasn’t safe. The business that wants a lot of collateral to enable lots of financial transaction is one that merely moves money around to generate fees for the financial industry. Along the way, it generates a great deal of moral hazard and takes advantage of taxpayer-funded guarantees, both explicit and implicit. It does little or nothing to promote growth in the rest of the economy. Indeed, you could argue that the high incomes on Wall Street pull smart people away from more productive jobs where they would actually do a lot of good.
11. August 2016 at 14:05
JP, Koning, I’m going to do a related post tomorrow over at Econlog. My view is that central banks are too reactive. They are reacting to falls in the Wicksellian equilibrium rate, they are not getting out ahead of the curve. it looks like they are “doing something” but they aren’t.
Foosion, That Kocherlakota piece makes zero sense. If he really believes that we can somehow boost demand without boosting inflation, then why not have the Fed do so? And why wouldn’t the Fed simply offset any stimulus? You can say they “shouldn’t” But if we assume they do what they “should” then they’d do more monetary stimulus right now.
It simply doesn’t make any sense.
11. August 2016 at 15:00
@Jeff, sorry I was out and I am old. 🙂 But structured finance, as the article linked to my name points out, really started in the modern era in the 1980’s. So bond hoarding started there. Salomon Bros was the first to get caught. While debt seems larger than ever, Gorton, as you cite, and Kocherlakota and Larry Summers and Krugman and the tantrum people all want more bonds available. The tantrum people may not admit that there is as shortage of bonds but K,K,S and G all say there is massive bond shortages.
The demand for bonds as collateral AND as tier one capital actually increased due to the FAILURE of asset backed securities. The sovereign bonds are the NEW GOLD backed by the faith in government, which is considered a higher standard than applied to gold itself! And it is of a higher standard than MBSs which failed.
So, the new gold is sovereign debt, and Salomon no doubt understood that back in 1991 when they were caught hoarding. And clearly, Greenspan was behind this, using these very tools to put risk off to hedge funds and leave the banks with less risk.
That was his plan. That is the plan. That is why the Fed acts the way it acts. 🙂
There is a quote from Greenspan in the article by my name that shows his intent. It is unmistakable. He saved banks by changing what debt is and what wealth is and what risk should be put on the populace and on the counterparties.
11. August 2016 at 15:23
@foosion Kocherlakota is not telling the whole truth, only part of the truth. Yes, he wants more economic growth, and more government spending is his way of accomplishing that, although Scott Sumner has pointed out brilliantly that that does not always work.
No, Kocherlakota has one desire, the creation of more sovereign bonds to stem the tide of massive demand by increasing supply.
Krugman said this increased deficit fiscal spending would be a blessing, a way of businesses to use collateral to do more deals.
That is their position, and Summers’ position as well. I am still waiting to see if anyone thinks it is a blessing or a curse or something else.
Here is a hint, choices are limited.
1. We can have bonds go below zero, relentlessly.
2. Or we could bust out a few more bonds and maybe it would help the economy but it would certainly help the Fed cronies who fear margin calls and want more bonds and debt would increase.
3. Or, we could get off the Zero bound by NGDP targeting.
4. Or we could have real, non fiscally based, helicopter money, that would create real wealth without government debt.
5. Or we could freeze up like a Popsicle, which is the current policy of the Fed.
I will offer my own opinion. The demand for bonds is so insatiable, that no matter how much we spend on fiscal policy, there won’t be enough treasuries to bring yields significantly up. I hope I am wrong.
So, I think the system that Greenspan established, is not a blessing. It may not yet be a curse. It seems unshakeable. But who knows?
11. August 2016 at 17:20
Gary,
If Gorton and the others were right, we’d see increasing spreads between the yields on “safe” assets and other assets. But if you look at something like this, there’s not much evidence of that.
People are looking at Treasuries yields and prices and saying “Wow, there must be some great demand for Treasuries, else they would be cheaper and their yields higher.” But the fact that other, non-safe bond yields are also low points to something else. Scott would say it’s low expected NGDP growth, and it appears you and I both agree with him.
11. August 2016 at 18:41
Sumner thinks the BOJ caused a change in the Yen/USD ratio. But since the BOJ is constantly intervening in the market, it’s hard to tell exactly what effect it had. His opinion is about as good as mine. In fact, since the BOJ constantly intervenes to keep the ratio high (the Yen weak), to help JP exporters, arguably there’s been no change in this ratio due to the BOJ.
Here is my proof, from an expert in this field: (April 2016) https://snbchf.com/monetary-fiscal-policy/history-boj-interventions/ “As opposed to the Swiss National Bank, the Japanese only talk, they do not fight”, ““All investors know that intervention will not stop the yen strength,” Yuuki Sakurai, chief executive officer at Fukoku Capital Management Inc. in Tokyo, which manages $7.3 billion of assets, said in a telephone interview on May 30. “Intervening at this stage would be unwise and a waste of money..”
Who to believe? Sumner, a penniless ex-professor of textbook economics, or Fx experts with lifelong experience and $ billions of assets under their management? I know where my money is riding…
11. August 2016 at 18:53
Ray’s Thoughts for the Day (RTFTD) (OT)….
Imagine Sumner’s world where the US Fed actively is battling against traders on NGDP futures. You would think that the Fed is the “house” and can set NGDP to whatever target they want. But that’s only if you’re a diehard monetarist. Now imagine that money is neutral (just pretend if you’re a diehard). Can you imagine the money the Fed will lose when it finds that printing money is like pushing on a string? How many trillions will the Fed have to lose before Sumner strikes the white flag and surrenders? I’m sure Sumner is willing to go down with the ship (it’s not his money) but the American taxpayer will balk at paying several trillion to cover Fed losses, when the US economy stubbornly refuses to oblige and rise in NGDP. Well, say you, that’s easy to solve: just print more money and spend it. But who is to spend it? If you advocate the US gov’t spending this extra Fed money, then you’re no longer advocating monetary policy but fiscal policy (not to mention setting new rules, as presently the Fed cannot give the US gov’t money to spend). Think about it.
11. August 2016 at 19:52
Scott Sumner:
Would Reagan back Trump? Is Trump a reincarnated Reagan?
As you know, the decades have rolled by, and many Reaganauts have passed on, including Reagan himself.
But there is this headline from Bloomberg:
“Reaganomics Band Gets Back Together to Advise Trump on Plan”
Evidently, Stephen Moore, Art Laffer and Larry Kudlow—Reaganauts all—are on the Trump team.
Reagan’s protectionism heavily targeted Japan, then our largest trading partner. Reagan’s protectionist actions make Trump’s proposals regarding China look tame.
So I guess on protectionism, Reagan would advise Trump to “take off the kid gloves.”
On immigration, there is a clear difference.
Reagan did not want even a fence between Mexico and the U.S., and called for an “open border,” due to the “labor situation” in the U.S. Unemployment would reach 9.7% in 1982, annual average.
And Reagan was 100 times the public speaker Trump is, and a much, much, much nicer guy (from what I can see, sitting in the distant bleachers).
I actually liked Reagan, and he avoided foreign entanglements. The tax cuts were good. The idea that government cannot solve everything is also good (I wish that sense would be used in our foreign policies). He wore nice suits, had an excellent demeanor.
Reagan’s military build-up was a gigantic waste of money.
11. August 2016 at 20:00
Lol Ray, helicopter NGDP, you just thought of it, with no fiscal involvement.
@Jeff, please be advised, even with your awesome chart, that corporate bonds appear to acceptable collateral. And while they scrap the bottom, they are not as good as treasuries, being subject to a 20 percent haircut.
You can imagine the Uber rich wanting to bypass that 20 percent through the issuance of treasuries.
You gotta read this Jeff, it will blow you away, meaning it will help explain a pretty strong demand for these bonds, often in the absence of enough treasuries: https://www.cmegroup.com/clearing/files/corporate-bonds-as-collateral.pdf
This is the title: “Corporate Bonds as Collateral for Cleared Interest Rate Swaps and Futures”
Now, Jeff, why do you think the Fed helps the big companies the most. Well, they have the A- rated bonds, they have the approved collateral though it is a tad expensive.
This is a rich get richer plan on steroids.
12. August 2016 at 04:51
Benjamin Cole
Don’t forget, however, that Reagan did help many jihadist groups organize themselves to fight communism (of course, Afghanistan, but also, e.g. Algeria). Would communism have won the Cold War without this propping-up of these fanatics? Most likely not. Would the world be a better place today without this propping-up of these fanatics? Most likely so.
12. August 2016 at 06:00
Ray, it’s been well known for decades that sterilized interventions are not very effective. The same is true of actions that are perceived to be temporary. The BoJ actions consistently fail on one or the other counts.
12. August 2016 at 06:09
Jeff you didn’t address my proof that corporate bonds are being gobbled up as collateral too. I like your response to Ray, as it is against the law in Japan to offer interventions that are not sterilized. So BOJ is just talk.
Here is my question to you and others. I believe that Krugman is wrong when he says that fiscal spending on a large scale, producing more treasuries, will cause yields to go up. The reason I think this is the case is because once prices go down, the treasuries will be gobbled up like a new gold rush and ultimately, scarcity will prevail again.
The derivatives market is huge, and wouldn’t people buy treasuries instead of corporate bonds and save that 20 percent haircut? I don’t see yield going up significantly if we increase deficit spending.
Krugman says yields will go up. What do you guys think? How is supply and demand for collateral even measured?
It would be nice if yields would go up. 🙂
12. August 2016 at 06:29
I started to wonder about baby steps. Breaking down the change to NGDPLT with NGDP futures into 3 steps.
1. Change the target to NGDP growth instead of PCE inflation. Target 4.5%?
2. After a couple years, change rate targeting to level targeting.
3. At any point along the way, get the NGDP futures market going. Build data to see how well the market works (not for my sake, for theirs).
Or would a better baby step be to get them to change the current inflation target to a level target? Or a higher inflation target?
Personally, I see the higher inflation target as the least attractive baby step. PCE LT would be much better than the status quo, but only if the chance of its adoption greatly exceeded the chance of changing over to NGDP(LT). I’m somewhat surprised that after watching the last 8 years unfold that the Fed still wants to use IOR to manage its hoped for asymptotic approach to NAIRU and 2% inflation.
12. August 2016 at 08:40
Kocherlakota followup: https://sites.google.com/site/kocherlakota009/home/policy/thoughts-on-policy/8-12-16
@Scott, the Fed is either unwilling or unable to do more, hence fiscal policy. The Fed may want more, so wouldn’t counteract fiscal.
@Gary Anderson, what’s the downside of issuing treasuries if it won’t cause rates to rise? If nothing else, perhaps we’d get some useful infrastructure or better govt services.
12. August 2016 at 08:53
@foosion Those bonds are gold. The government would be better off using them as collateral to make money for the people instead of making a few people fabulously rich. The government owns the gold, and sells it to people who use it to make big money.
People used to be angry with the government selling its real gold. Well, they should be angry that the government sells sovereign bonds which are gold, when the government could use that gold to prosper main street.
If we are going to rein in Greenspan’s structured finance monster, the government can simply keep the gold and use it for all of us rather than sell it to derivatives gamblers.
12. August 2016 at 09:00
“That’s 100 times better than arguing the Fed should raise rates so that it can cut them again (an insane idea you sometimes see in the business press), but I still don’t quite buy it.”
That’s almost as bad as the argument you sometimes read that the Fed shouldn’t cut rates, because that would signal to markets that the economy was lousy.
12. August 2016 at 10:34
@Jeff – “Ray, it’s been well known for decades that sterilized interventions are not very effective.” – well if true, that’s also true of the (managed) gold standard of the late 19th century (it was sterilized).
Just to be clear: I believe, unlike Sumner, that printing money and having it available (helicopter drop or no) will not raise NGDP in a predictable manner. Like superheated water that will not boil, or like the eraser on your book that won’t slide off even though you increase the angle of incline, the US economy is non-linear. Maybe the money printing will raise NGDP, or maybe NGDP will be flat, or maybe even decline (!, recall in the early 1980s when the Fed lowered interest rates, inflation *fell*, a sort of ‘Fisher effect’). And this is aside from the fact money is neutral (hence no real effect from NGDP targeting). The US taxpayer will lose money with Sumner’s NGDPLT.
12. August 2016 at 11:45
Ray, You said:
“But since the BOJ is constantly intervening in the market, it’s hard to tell exactly what effect it had. His opinion is about as good as mine. In fact, since the BOJ constantly intervenes to keep the ratio high (the Yen weak), to help JP exporters, arguably there’s been no change in this ratio due to the BOJ.”
Wrong, wrong and wrong. Event studies. And the BOJ does not constantly intervene to keep the yen down–it’s been appreciating for about a year now.
Bill, Good comment.
foosion, You said:
“Scott, the Fed is either unwilling or unable to do more, hence fiscal policy. The Fed may want more, so wouldn’t counteract fiscal.”
I think it’s fair to say that if the Fed wanted to do more, they would do more. After 2013, It’s pretty hard to argue against monetary offset.
Ray, You said:
“recall in the early 1980s when the Fed lowered interest rates, inflation *fell*, a sort of ‘Fisher effect”
Love that “a sort of” Fisher effect.
12. August 2016 at 11:53
@Gary,
I have a day job, so I can’t always reply right away. But suffice it to say that I think the chart would qualitatively look the same if it used a riskier bond index, one that no one would call a “safe” asset. Feel free to try it yourself on the FRED site. If I have time this weekend, I may take a look at it.
12. August 2016 at 14:28
Maybe there is hope?
http://www.bloomberg.com/news/articles/2016-08-12/fed-officials-challenge-decades-of-accepted-wisdom-on-inflation
Sad though that after a decade of supposedly more open communication we’re still mostly in the dark as to how the Fed is trying to achieve its stated target.
12. August 2016 at 15:03
@Jeff, the history of structured finance clearly shows that as it came into vogue in the 1980’s, bond yields began their relentless decline.
Even David Beckworth gets it. Link to the article is at my name.
“This downward march of interest rates has occurred prior to and after QE programs and is therefore not the result of central bank tinkering. Rather, it is the result of far bigger global market forces. One interpretation of this movement (based on the expectation theory of interest rates) is that the market expects future short-term interest rates to be increasingly lower. As Tim Duy notes, the Fed is fighting against this force and is unlikely to win. Put differently, interest rates are being suppressed by market forces despite the Fed’s best efforts. The Fed will not be able to raise interest rates this year and maybe even next year”
All bonds are used as collateral. Even junk bonds are used in structured finance in the oil and gas industry, Jeff. That is the driving force for those bonds, and why many of them have yields that in no way reflect risk.
14. August 2016 at 08:34
The theory that the Fed “offsets” any “stimulative” spending by the Treasury has always been a politically motivated theory rather than an economically motivated theory, because the Fed depends on the Treasury to keep making available Treasury bonds in the market for the Fed to monetize, which is to say the Fed depends on the Treasury to keep borrowing and spending.
The choice of the Fed and Treasury to monetize Treasury debt is not only a “fiscal” policy itself, but is also a mechanism that benefits the Treasury at the expense of everyone else. It benefits the Treasury at the expense of everyone else because the Treasury’s existence is predicated on force not consent. The Treasury can issue bonds and tax people to pay the interest, knowing the Fed will monetize those bonds and thus keep rates lower than they otherwise would have been had the inflation of the money supply gone to the monetizing of other securities or goods. Geopolitical pressures and blackmail can “convince” foreign governments to keep purchasing the Treasuries at higher prices, which translates the costs onto the citizens of foreign countries directly, and everyone indirectly through reduced productivity.
Once those geopolitical pressures shift, a correction would of course be brought about by virtue of the choices citizens can make, but because those are painful, more political pressure in general tends to be encouraged. In Japan for example the BOJ is now a top 10 holder in 90% of the companies in the Nikkei 225!
What is happening in Japan is the logical path that the anti market ideology underlying how much money people “should” spend, will go.
Sumner wants us all to be working for central banks. He says don’t worry they will pay us money. However they add no real value back in because we cannot value these dollars or Yen in a market setting. We cannot value these dollars or Yen in a market setting because we are not free to abstain from dollars or Yen, as we are forced to pay taxes in dollars or Yen. That coercion underlies the entire movement in Japan to the Saint-Simonian version of socialism. The Saint-Simonians, who were the first users of the word ‘socialism’, repudiated capitalists and entrepreneurs, on behalf of their favoured bankers and intellectual classes. Sound familiar? Repudiating capitalists and entrepreneurs, in favor of bankers and intellectual classes, by government decree? Sumner’s last name also starts with an S.