Further thoughts on Switzerland

The recent Swiss devaluation has led to some interesting reactions in the blogosphere.  But one angle that I haven’t seen discussed is the relationship of the Swiss action and bubble theory.  I’m a believer in the EMH and hence skeptical of the idea of bubbles, a least as the term is usually interpreted.  But I’m in the minority, the vast majority of people think bubbles exist.  And if they do, then the recent move of the Swiss franc to near parity with the euro was surely a major bubble–as the currency appeared to be at a level that was unsustainable in the long run.

If the Swiss franc is wildly overvalued, then what should the Swiss do?  Because I don’t believe governments can identify bubbles, I’d be inclined to say they should do nothing.  But most people think bubbles are identifiable–indeed that’s a sine qua non for the existence of bubbles.  In that case the policy implications are clear–the Swiss government should buy massive quantities of foreign exchange, and then sell off the assets at a future date when the real exchange rate is at a more “reasonable” level.  The very rich Swiss would become even richer.  And because governments last indefinitely they can afford to wait out market irrationality, no matter how long it takes to dissipate.  BTW, this action need not involve monetary policy at all.

Now suppose Switzerland faces the threat of deflation, either due to an overvalued currency, or some other problem like currency hoarding.  What should the Swiss government do?  They should sell massive quantities of SF, until deflation is no longer expected.  BTW, this action need not involve the foreign exchange market at all.

As a practical matter the two actions I just describe will often be combined.  The Swiss will sell massive quantities of SF, and buy lots of foreign assets.  This would be appropriate if they think that Switzerland faces a threat of deflation and its currency is hugely overvalued.

Given my belief in the EMH, you might ask why I endorsed the Swiss intervention.  I don’t care at all about the overvaluation of the SF, my support was solely based on the assumption that the Swiss do face an actual risk of deflation.  I would also have supported a policy of price level targeting, or NGDP targeting.  I don’t much care if the Swiss end up winning or losing their bet on the SF.  The EMH says it’s a coin toss, and Switzerland’s a very rich country.  If they plan this game frequently, they’ll win as many as they lose.  Or if I’m wrong about the EMH, they’ll win way more than they lose.

Tyler Cowen had this to say about the action:

I am not unhappy but I am nervous.  Keep in mind the Swiss tried such pegs before, in 1973 and 1978, and neither lasted.  At some point limiting the appreciation of the Swiss franc implied more domestic price inflation than they were willing to tolerate (seven percent, in one instance, twelve percent in another).  You can argue about whether they should be, or should have been, nervous about seven percent price inflation but the point is that they were and indeed they might be again.

Fast forward to 2011.  It’s the Swiss saying “we can create money more decisively and more quickly than the speculators can bet against us, and keep it up.”  If the flight to safety continues, the Swiss can reap seigniorage by creating money but also there may be spillover into price inflation.  You can fix a nominal exchange rate but the market sets the real exchange rate through price movements and so Swiss exports could end up growing more expensive anyway, through the price adjustment channel.  If you’re holding and trading euros, and the Swiss central bank keeps churning francs into your hand at a good rate, at some point you will consider buying a chalet in Schwyz.

If the speculators sense less than a perfectly credible commitment from the central bank, they will continue to bet on franc appreciation.  In other words, the Swiss are putting their central bank credibility on the line, at least in one direction.  And even if they stay credible, they may not much lower their real exchange rate over a somewhat longer run, so why should they be fully committed to credibility?

I think I understand Tyler’s argument, but am not sure quite what to make of it.  It might help to slightly change the policy, and then see how it affects things.  Suppose the SNB says they will buy foreign exchange in order to drive down the value of the SF until inflation expectations rise to 2%.  In that case, it wouldn’t be much of a problem if inflation started rising, the SNB could simply abandon the program and declare “mission accomplished.”  This suggests that the real problem is a specific commitment to peg the SF at 1.20.  The SNB might have to abandon the peg if inflation started moving in a direction that conflicted with their macro policy goals.

In another post Tyler Cowen makes this comment:

And here is Scott on the Swiss unlimited pledge, a real test of credibility theories.

Just as with QE2, it’s not clear what is being tested.  QE2 was certainly credible—markets reacted powerfully to the news.  But the policy didn’t pan out as the had hoped.  And the Swiss announcement yesterday was certainly credible.  If it wasn’t markets would not have reacted so strongly.  It’s important not to confuse credibility and fidelity.  For instance a Don Juan may be credible, but not faithful.

It might be instructive to compare the ways in which QE2 might fail, with the ways in which the SNB policy might fail.  QE2 might have failed because it was not credible, because it didn’t increase NGDP expectations.  In fact, it did not fail for that different reason.  The real problem was that Fed didn’t commit to enough QE to hit a particular NGDP target, they committed to $600 billion in QE2.  Both the Fed and the markets initially thought that would be enough to significantly boost NGDP growth.  If it did (which is unclear) all it did was to prevent an even steeper slowdown than what actually occurred.  On the other hand if the Fed had promised to do whatever it takes in the form of QE, and if it was believed, it might have failed because it later reneged on that promise.  The Don Juan problem.  That’s a problem some people worry about, but not me.  Central banks aren’t Don Juans.  They don’t have fidelity problems, they have commitment problems.

In my view people are making too much of an issue of the risk that the SNB may not end up adhering to the 1.20 currency peg.  The SNB frequently intervenes in the forex market, as described in this recent post.  During recent years there were several interventions that seemed to achieve the SNB’s objectives, and then were abandoned when no longer needed.  Mission accomplished.  The macro aggregates in Switzerland are about where the SNB wants them, but there is concern about future trends.  Thus they are taking a pre-emptive action.

This recent action may be abandoned because the SNB’s macroeconomic goals are achieved.  But I don’t see how that would be a source of embarrassment for the Swiss.  It’s inflation and NGDP that matter, not the exchange rate–which is merely a means to an end.

Here’s Matt Yglesias:

I continue to be fascinated by the fact that lots of issues in monetary policy that are controversial when you talk about “monetary policy” become uncontroversial when the subject switches to exchange rates. Everybody knows that currency depreciation expands aggregate demand. This is what the Swiss are talking about. This is what Americans are talking about when they complain about Chinese “currency manipulation.” And everyone agrees that a determined central bank can achieve whatever exchange rate goals it sets. So despite the apparent disagreement over whether or not a determined central bank can boost aggregate demand, everyone in fact seems to agree that it can””but only if we agree to talk about exchange rates rather than “aggregate demand.”

I’d hope “everyone agrees.”  But here’s Paul Krugman (from last year):

Oh, and about the exchange rate: there’s this persistent delusion that central banks can easily prevent their currencies from appreciating. As a corrective, look at Switzerland, where the central bank has intervened on a truly massive scale in an attempt to keep the franc from rising against the euro “” and failed:

PS.  The other quasi-monetarists have had excellent posts on the Swiss move (Beckworth, Hendrickson, Glasner, Nunes, etc.)  I’m still jet lagged and struggling to catch up with all the news I missed, and what other bloggers have been saying.


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47 Responses to “Further thoughts on Switzerland”

  1. Gravatar of ScottN ScottN
    7. September 2011 at 18:37

    Scott, what do you think of the ideas that the fed is currently considering.

    http://www.calculatedriskblog.com/2011/09/wsj-fed-prepares-to-act.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29&utm_content=Google+Reader

  2. Gravatar of marcus nunes marcus nunes
    7. September 2011 at 19:13

    ScottN
    I just did a post on that:
    http://thefaintofheart.wordpress.com/2011/09/07/%E2%80%9Ctwist-shout%E2%80%9D/

  3. Gravatar of Scott N Scott N
    7. September 2011 at 19:32

    Marcus, nice post. I agree that operation twist is a dud. I’m more interested in the other two alternatives discussed by the WSJ. I would like to know what you, Scott, and others think would happen if the Fed cut the IOER or “us[ed] their words to make their economic objectives and plans for interest rates more clear,” whatever that means.

  4. Gravatar of Benjamin Cole Benjamin Cole
    7. September 2011 at 20:12

    Years of ineffective government have sapped people’s determination that anything, even monetary policy, can be effective.

    We have now reached the fantastic point that if a central bank says it will print money until there is inflation or exchange rates go down, people say they cannot obtain those goals. You know–like how can we win in Afghanistan?

    Some goals are unrealistic and should not be governmental goals.

    But on monetary policy, really? Some people want to say a central bank cannot print enough money to cause inflation or its exchange rate to go down? Really?

    Really? How hard is it to print money?

    Oddly enough, the same people in a few days will be braying that the Fed is likely to cause an unintended runaway inflation.

    So a central cannot lower the exchange rate, or boost growth, or cause inflation, except perhaps in an unintended fashion, or by doing nothing.

  5. Gravatar of marcus nunes marcus nunes
    7. September 2011 at 20:13

    ScottN
    The IOER is a “cancer”, introduced in 2008 to “block out any spillover from the increase in base money (to shore up banks)into prices”. Make it zero or even “charge” the banks. But that should be done together with the announcement of a level target (preferably NGDP). The “interest rate option” – taken to mean low rates for “eternity” is a dud.They should (but won´t) stop talking about “low rates” and inflation!
    In sum, nothing much different from recent experience is likely to happen!

  6. Gravatar of Andy Andy
    7. September 2011 at 20:26

    This is a few years out of date, but the Reserve Bank of Australia has made a profit from its FX intervention.

    http://www.rba.gov.au/publications/rdp/2004/pdf/rdp2004-06.pdf

    They made a killing throughout the crisis as well – although that was more managing the liquidity in the market than trying to limit depreciation.

  7. Gravatar of Bob Murphy Bob Murphy
    7. September 2011 at 20:38

    Did you revamp your site to host more ads? In any event, the one at the top right now is touting the need to return to a gold standard. That freaks me out, since I am probably your only reader who thinks that is a cool ad.

  8. Gravatar of james in london james in london
    7. September 2011 at 21:56

    Very clever the internet entrepreurs, the one on my (wife’s) laptop is suggesting the best internet savings acount. Ha. ha. I wonder what Scott’s is advertising? Best restaurants in Padua? Jobs at “premier” universities?

  9. Gravatar of Lorenzo from Oz Lorenzo from Oz
    7. September 2011 at 21:57

    I still think it is possible to clearly identify bubbles after the fact, that expectations of capital gain are part of the information feeding into asset prices, but asset price bubbles can only exist because we cannot systematically and reliably identify price turning points ahead of time. (Hence all the folk insisting that there is no bubble.) I wonder how small a group that puts me in?

  10. Gravatar of joe joe
    7. September 2011 at 22:11

    Tyler Cowan says
    “I am not unhappy but I am nervous. Keep in mind the Swiss tried such pegs before, in 1973 and 1978, and neither lasted.”

    I think Tyler misses the point though. The Swiss have no intention of keeping a ceiling in the Franc against the Euro forever. They simply want to be able to get through the crisis and then most likely after they’ve sold the Euro over the next several years they accumulated through previous interventions will revert to a regular float.

    They will succeed too as the Swiss printing presses can be switched on 24/7 as they can intervene as much as they like on that side.

    As usual Krugman gets this wrong. This is not an intervention like the Swiss were doing previously. It’s a semi peg putting a ceiling on the Swiss with the promise they will print as much currency as people want. The previous interventions were sterilized for the most part and therefore din’t change the quantity of Swiss sloshing about the system.

    It will succeed, however it will not be a permanent fixture.

    I’m a currency long Euro/Swiss since the intervention with a stop at 1.1800 well away from any danger.

  11. Gravatar of Sometimes TVHE does raise points » TVHE Sometimes TVHE does raise points » TVHE
    7. September 2011 at 23:01

    […] 8, 2011 Over at Money Illusion Scott Sumner states: The recent Swiss devaluation has led to some interesting reactions in the blogosphere.  But one […]

  12. Gravatar of Edwin A. Edwin A.
    7. September 2011 at 23:34

    Bob, that’s do to third party cookies. Advertisers put these files on your computer that track your web surfing habits so they can target advertisements to your tastes. They’re watching you.

  13. Gravatar of Tomasz Wegrzanowski Tomasz Wegrzanowski
    7. September 2011 at 23:36

    Your reasoning about EMH here is pretty silly.

    Central bank has insider knowledge about future exchange rates, because it has insider knowledge about their future monetary policy. Market simply tries to guess their future policy.

    Next thing you’ll be saying Microsoft cannot set Windows 8 prices.

  14. Gravatar of Martin Martin
    8. September 2011 at 00:26

    Tomasz, you’re assuming that demand does not change. Neither Microsoft nor the Swiss have insider knowledge when it comes to the future demand for their product.

    Scott:
    Whilst I do not agree with Tomasz fully here, why should this policy lead to inflation? There is an increase in demand for CHF, the Swiss supply that demand, so where is the inflation supposed to come from, if people are merely hoarding? (I assume they are, it’s not an excess demand for Swatch and Swiss chocolate the bank is offsetting.) The only way I can see inflation coming is when the new normal is below 1.20. I however fully expect, once the crisis is over, that the CHF goes back to 1.60 and that their central bank will have made a handsome profit. Then again this is your point about the EMH, isn’t it? The market expects the new normal for the CHF to be higher against the EUR.

  15. Gravatar of Morgan Warstler Morgan Warstler
    8. September 2011 at 00:27

    Mundell wins this argument hands down:

    “”So you think a fixed exchange-rate system is more conducive to global free trade and global economic recovery than floating rates?” I ask.

    Mr. Mundell registers surprise that I would even inquire. “The whole idea of having a free trade area when you have gyrating exchange rates doesn’t make sense at all. It just spoils the effect of any kind of free trade agreement.”

    Coming from the man who helped design Europe’s single currency, it makes perfect sense. Since its introduction in 1999, the euro has eliminated exchange-rate fluctuations among the 16 trade partners who have adopted it. In just over a decade, the euro has become the world’s second largest reserve currency after the dollar, and the second most-traded currency in foreign-exchange markets.

    Which brings to mind another question. “What do you think about the rise in currency trading by banks, with some $4 trillion now turning over daily in global currency markets?”

    Mr. Mundell thrusts out his arms. “It’s part of the sickness of the system! These currencies should be fixed, as they were under Bretton Woods or the gold standard. All this unnecessary noise, unnecessary uncertainty; it just confuses the ability to evaluate market prices.””

    http://webcache.googleusercontent.com/search?q=cache:Y9XgzO1-sxcJ:online.wsj.com/article/SB10001424052748704361504575552481963474898.html+&cd=2&hl=en&ct=clnk&gl=us

  16. Gravatar of Lars Christensen Lars Christensen
    8. September 2011 at 01:28

    Scott, the argue made by some commentators that SNB’s actions is inflationary only holds if the growth of the money supply outpaces growth in money demand. The reason the Swiss franc has strengthened so dramatically is exactly because the money demand has exploded recently. Said in another way foreign investors’ hoarding of Swiss franc in response to the euro crisis is deflationary if SNB passively accept it with out increasing the money supply. I think this demonstrate that a lot of people have a very hard time understanding that the value of money is determined the supply AND the demand for money. SNB as old-school monetarists naturally do understand that and as the central bank in the world with the best track record on nominal stability I have a hard time seeing a real long term inflationary problem emerging.

    Obviously, when the demand for Swiss franc at some stage falls back (velocity increases) then the SNB easily can announce that it has abandoned the temporary one-sided peg of the franc against the euro.

    I think the SNB is showing a lot of operational flexibility here, but the bank has not in anyway created any doubt in the market place about it inflation target of 2%. In fact it has just demonstrated in a very powerful way that the target is symmetrical. It will not allow inflation above 2%, but neither will it accept deflation. This is how credibility is created.

    Finally I would also remind that a lot of the comments on this on US blogs reflect some lack of inside into European economic and monetary issues. No commentators who follow SNB’s actions on regular basis would doubt SNB’s commitment to monetary and nominal stability. But maybe that could be a lesson for US based economist – the world is large and not everything can be explained within a purely US context. The European gold hoarding during the Great Depression illustrates this – most US economist missed that story…and similarly the Great Recession can in my view not be understood without understanding the spike in dollar demand from none-US investors both in 2008 and in 2011. But that’s another story…

  17. Gravatar of Vic Vic
    8. September 2011 at 03:12

    Scott: “I don’t much care if the Swiss end up winning or losing their bet on the SF. The EMH says it’s a coin toss, and Switzerland’s a very rich country. If they plan this game frequently, they’ll win as many as they lose. Or if I’m wrong about the EMH, they’ll win way more than they lose”.

    Actually, the game has been played one time before (1978), so the law of big numbers might not apply here.

    If the SNB purchases hundreds of billions of foreign assets in order to keep the franc above 1.20€ but ends up letting the CHF srongly appreciate before selling back these foreign assets , this effort to temporarily stabilize the franc will cause huge losses to the SNB, losses that will directly impact the Swiss fiscal policy. That is the reason why contrary to what you said, the Swiss really care of winning this bet on the Swiss franc.

  18. Gravatar of StatsGuy StatsGuy
    8. September 2011 at 03:53

    Tyler Cowen, for all his usual insight, is missing something quite significant in the SF case. The SF is NOT appreciating rapidly because the Swiss are suddenly discovering a huge increase in productivity. The SF is increasing precisely because investors have collectively decided to use it as a store of value that is independent of the productivity of the Swiss economy.

    IN OTHER WORDS, if the Swiss start to experience 4% inflation, then they can back off of their commitment to intervention without losing credibility, because THEIR GOAL WAS ACHIEVED. The Swiss could just as easily say “we’re going to devalue the SF until we start to see significant inflation, but right now we’re expecting deflation due to export collapse if we don’t intervene…” However, central banks are kinda funny about saying stuff like that even if that’s what they mean.

    If SF appreciation is being driven by real long term relative improvement in swiss output vs. EU output, then this sort of intervention is neither productive nor sustainable.

    The question is simply this, does the CB care more about the currency for its own sake, or the real economy. The Swiss made their decision. I think that answer is pretty clear for the ECB too:

    http://www.businessinsider.com/ecb-rate-decision-2011-9

  19. Gravatar of John John
    8. September 2011 at 04:29

    “If it [QE] did (which is unclear) all it did was to prevent an even steeper slowdown than what actually occurred.” This is exactly like the Obama administration’s projection that unemployment would hit 8% without the stimulus and 7% with it then saying that the stimulus worked, the problem was that they underestimated the strength of the slowdown. The macroeconomists have these models that insist that fiscal and monetary stimulus works, then when real world experience contradicts their assumptions, what do they do? Instead of reworking the models and questioning their assumptions, they just say; “Oh well we know that fiscal and monetary policy work, it’s just that the economy was worse than we thought and we need to do more.” Where does it end?

  20. Gravatar of Morgan Warstler Morgan Warstler
    8. September 2011 at 04:43

    Stats,

    Let’s say the SF is an investment, and the Swiss don’t mind it so much…

    But they do have a fiat currency, and since everyone else is devaluing, and the SF is increasing in value, the Swiss have some wiggle room to take some of the gains off the table, because “hey, what’s everybody going to do?”

    Do you like this thinking? And the rule making it establishes?

  21. Gravatar of Britmouse Britmouse
    8. September 2011 at 05:30

    Welcome back, Scott, hope the pasta was good.

    When idly searching through the archive of Bank of England speeches I came across this nice quote from the Deputy Governor, Charlie Bean, which I thought I’d share; more evidence they are willing to “covertly” target a 5% NGDP growth rate (except when they were… distracted… in 2008/9).

    Moreover, the ultimate aim of [QE] is to get the annual rate of growth of nominal spending in the economy back to the 5% or so that it averaged during the first decade of the Monetary Policy Committee’s existence and which is consistent with inflation at target and growth at trend.

    http://www.bankofengland.co.uk/publications/speeches/2009/speech405.pdf

  22. Gravatar of SHocking SHocking
    8. September 2011 at 05:53

    Scott,

    Here’s my big problem with the way the EMH is typically framed. I do believe that markets are generally efficient but I DO NOT believe that implies that markets are systematically rational, and I certainly don’t believe that such efficiency precludes the existence of bubbles. The problem is a fallacy of composition; rational decisions by individuals do not together mean the market as a whole moves rationally.

    Let’s take a look at the Swiss Franc. Assume that the run up in its value implies a deviation from “normal” fundamentals (admittedly hard to define). However, I’ll provide some conditions. Were the world not facing a shortage of safe financial assets that could function well as a store of value, they would not be purchasing Francs en mass. However, because everyone understands that this is the case not just for them, but for the market more broadly, investing in Francs is a sensible bet, because the market perception shows essentially a lop-sided favorability towards this type of asset. That does not mean price has no bearing on their decision, but it does importantly mean that appreciation appears to be a natural feature of the Franc under existing conditions.

    THE SAME THING WAS TRUE OF HOUSING. Under the conditions before the collapse of the bubble, a shortage of safe liquid assets led AAA-rated MBS to be overvalued along with houses. Then a Minsky correction (either a sudden shift in risk understanding by investors or realization of a coming secular price decline) led to a sharp reversal. The market was efficient within a particular phase, but the appetite of investor for a certain asset can clearly be kinked, contingent on other conditions.

    That does not preclude efficiency, especially when it’s informationally impossible for any one actor to determine the location/timing of the “kink.” However, it clearly means that market incentives can lead to huge errors in capital allocation. Read some of Marcus Brunnermeier’s work on bubbles.

  23. Gravatar of Rien Huizer Rien Huizer
    8. September 2011 at 06:05

    Lars,

    Spot on!

  24. Gravatar of mbk mbk
    8. September 2011 at 06:16

    SHocking, +1 on your interpretation of the EMH. The EMH says nowhere that prices reflect the true underlying value of an investment, in my reading. In at least one lengthy review paper Fama even explicitly says that prices simply reflect the average opinion of the market participants, which include facts, data, rational expectations…. and irrational ones.

    So prices may be our best average guesses at true value, but this does not guarantee that this best guess must always be particularly good.

    In this framing bubbles can happen whenever the market participants engage in groupthink of some kind, when the normal variance in opinion starts to correlate, and instead of averaging out, extreme opinions lead to a spike in the aggregate “opinion”, a correlated outlier in what normally is an ocean of chaos.

  25. Gravatar of Morgan Warstler Morgan Warstler
    8. September 2011 at 06:29

    Douglas Rushkof goes where you fools won’t…

    http://www.cnn.com/2011/OPINION/09/07/rushkoff.jobs.obsolete/index.html

    I’m telling you, here it comes…

    It is going to be about auctioning people’s labor for whatever it is worth in the private market.

    Whether it is a 75 year old lady or 18 year old stone, a 40 year old on disability, or a 57 year old ex-secretary….

    The question can NO LONGER be: how do we make these people WORTH enough to take care of themselves?

    The question is: Since we will take care of them, DOES ANYONE want to have them do anything, for any amount of money, so we can reduce the tax burden they impose?

    Why does it take so much out of you people to think like this?

    Stats? Inflation Hawk? W Peden? mbk? lorenzo? nunes?

  26. Gravatar of mbk mbk
    8. September 2011 at 07:00

    Morgan, if you read Jaron Lanier there’s a similar line of thought (e.g. here
    http://edge.org/conversation/the-local-global-flip , or in his book “You are not a gadget”). On one hand I am all sympathetic to the idea that the distribution of income creation is suffering with a new classes of jobs rendered obsolete through IT / internet wizardry / robots. Only a few really get rich in the process, while the masses just get to create content for free.

    But there are a few snags in this line of thought:
    – money made must be money spent. If anything is to be sold there’s got to be someone around to buy it (someone with an income). So the affluence of your beloved few money holders depends in the long run on the existence of buying masses who will generate their profits.
    – the line of thought of the obsolescence of the worker has been around since the mechanical loom. Karl Marx is basically built around this. And capitalism kept on chugging along nonetheless, 200 years on.
    – finally, if this crisis creates some angst and soul searching about the end of normal economics, how bad must it have been in the 1930’s, when the seemingly more efficient model of Russia was right in front of their eyes while Americans suffered much more severe economic mayhem than they do now. It must have seemed that capitalism was truly finished. And it still kept on chugging on for another 80 years.

    At the end of the day, to me, if there’s an economic crisis it is always created by some failure to coordinate supply and demand. “We” don’t have “enough” stuff as Rushkof says, especially when “we” is all of humanity, including Zimbabwe and North Korea. Even in the US there is a lot of demand for real things, not more e-mails, that can’t be met because the income just isn’t there. That income should normally come from satisfying someone else’s demand for similar things. If it doesn’t it is a problem of economic coordination, not of absence of (real) demand.

  27. Gravatar of Wonks Anonymous Wonks Anonymous
    8. September 2011 at 07:58

    Why does anyone listen to Rushkoff? A “media theorist” who doesn’t know anything. “until the advent of the corporation in the early Renaissance, most people just worked for themselves” is the dumbest thing I’ve read all year. Slavery, serfdom, tenant farming, what’s that? And of course both corporations (the word is latin-derived for a reason) and chartered monopolies have a much older history than he believes, with the latter being the favored tool of pre-modern “natural states” unable to easily raise tax revenue.

  28. Gravatar of JimP JimP
    8. September 2011 at 08:02

    RA nails it – as per usual.

    http://www.economist.com/blogs/freeexchange/2011/09/expectations

  29. Gravatar of JimP JimP
    8. September 2011 at 08:10

    Scott

    I don’t know if you saw this – or commented on it – but did you see this from Charles Evans?

    “Another possibility might be to target the level of nominal GDP, with the goal of bringing it back to the growth trend that existed before the recession.”

    http://www.chicagofed.org/webpages/publications/speeches/2011/09_07_dual_mandate.cfm

  30. Gravatar of Martin Martin
    8. September 2011 at 08:28

    Some interesting news over at reuters:

    “And the SNB here, is maximizing the amount it has to lose if the market wins.”

    http://blogs.reuters.com/felix-salmon/2011/09/08/the-swiss-national-bank-plays-the-fx-options-market/

    How’s that for a credible committment? The SNB has basically backed itself into a corner, a corner that everyone knows they can defend.

  31. Gravatar of Morgan Warstler Morgan Warstler
    8. September 2011 at 08:28

    mbk,”I am aware of all internet traditions” including lanier.

    All these guys are just lefties struggling where I do not struggle.

    In fact, the new polling shows that people want the unemployed to be paid to do internships at private corporations, this is just because they haven’t been polled on my option – but it is close.

    Look, EVERYONE is going to have to get up and do something at the direction of someone else, even if they don’t like and/or aren’t worth much.

    It is just the fact. It is what everyone does work wants to see happen. It is a basic puritan instinct. It is what polling shows, it is what likely voters think. It is a moral good.

    So accept it.

    Next, it is not likely these people can work for the public good, because the government will overpay, undermining the private pricing system of human talent.

    So all of them have to work for someone else, very likely their neighbors.

    HOWEVER, ALL your concerns, and mostly Wonks, about the serfs, slaves, etc.

    All those issues are solved for with increasing the amount of $ in Guaranteed Income.

    With a Guaranteed Income system, the vast majority of REALLY ANNOYING bits about welfare are gone. No one gets to be lazy. The system is set up to punish lazy people.

    With that concern out of the way PROGRESSIVES have a far easier time arguing for a higher level of Guaranteed Income.

    Finally, the market benefits of locally pricing all human excess capacity in a low regulatory environment are ginormous for the lowest amongst us.

    It REALLY is about $1 hair cuts, $5 lawn mowing, $25a day babysitting – that is what will lead to improving the lives of poor.

    And you aren’t going to get $1 hair cuts in the SoCo neighborhood (Austin). You are going to get them in the ghetto, where the labor is available.

    It will mean MORE haircuts. More mommies able to take jobs. Better property values.

    If you can’t think of something you personally could and would pay someone $80 per week to do for you, you really can’t call yourself an economist.

  32. Gravatar of Richard W Richard W
    8. September 2011 at 08:43

    ” I don’t much care if the Swiss end up winning or losing their bet on the SF. The EMH says it’s a coin toss, and Switzerland’s a very rich country. If they plan this game frequently, they’ll win as many as they lose. Or if I’m wrong about the EMH, they’ll win way more than they lose. ”

    It is not quite as simple as an orthodox central bank suffering capital losses. The SNB is unusual in that 45% of their stock is owned by private shareholders. The cantons and banks own the rest and the central bank earnings are distributed between them.

  33. Gravatar of Scott Sumner Scott Sumner
    8. September 2011 at 09:13

    ScottN, I oppose the first (unless done with the other two.) The other two are fine, although the devil is in the details. There are many forms of clarification.

    An explicit target for P or NGDP above current forecasts is my number one favorite option.

    Benjamin, Yes, how hard is it to debase a currency? I could do it if they put me in charge. Bernanke says they can do it anytime they want. So why do people have so much trouble taking him at his word–they don’t want to do it.

    Andy, Good for them.

    Bob and James, I just switched companies–still trying to work out the bugs. My blog title disappeared.

    Lorenzo, That which has no practical implications, has no theoretical implications. You can define it that way, but it’s indistinguishable from the EMH.

    Joe, I agree.

    Edwin, Is that why I see a lot of ads for porn?

    Tomasz, I’m well aware of that argument, and did a post on that early on (google money illusion and Fed insider trading–you might find it.) I argued the market often knows what the Fed will do next better than the Fed. The Fed’s a big institution, not a single person. Less sure about the SNB.

    Martin, You misunderstood me. I’m saying it prevents deflation. If they don’t accommodate the demand for francs they get deflation. They do just enough to hit their (very low) inflation target. It’s actually probably more like 1%, I’d guess.

    Lars, I agree, the action certainly seems credible. See my answer to Martin.

    Morgan, Mundell is the last economist on Earth who thinks the euro is working out just fine.

    Vic, Sure the Swiss want to win, but I see it as a side issue. If they aren’t confident of their ability to spot an overvalued currency–then buy domestic assets instead.

    Statsguy, I agree.

    John, You said (quoting me):

    “If it [QE] did (which is unclear) all it did was to prevent an even steeper slowdown than what actually occurred.” This is exactly like the Obama administration’s projection that unemployment would hit 8% without the stimulus and 7% with it then saying that the stimulus worked, the problem was that they underestimated the strength of the slowdown. The macroeconomists have these models that insist that fiscal and monetary stimulus works, then when real world experience contradicts their assumptions, what do they do? Instead of reworking the models and questioning their assumptions, they just say; “Oh well we know that fiscal and monetary policy work, it’s just that the economy was worse than we thought and we need to do more.” Where does it end?”

    I’m not sure where it ends, but it begins with a course in logic. I said the effects were “unclear”, the Obama administration said stimulus clearly worked. How’s that the same? In your Obama example the unemployment rate moved in the opposite direction from what they expected. If we are going to use the unemployment rate as the criteria for success (as you do), you might note that it was 9.8% on the date QE2 was announced, and is now 9.1%. I fail to see the similarity. If you want to argue unemployment is a lousy indicator, I’d agree–but you used it to look at the success of Obama.

    In addition, QE2 clearly led to some dollar depreciation–everyone seems to accept that. I know of no model where dollar depreciation induced by monetary stimulus does not boost NGDP. It boosts it in the Keynesian model, the monetarist model, the Austrian model, the RBC model. So how plausible is it that QE2 had no effect on NGDP?

    Britmouse. That’s a nice quotation.

    Shocking, I don’t see how the actions you describe would be rational.

    mbk, That which has no practical implications has no theoretical implications. I deny the practical implications of various anti-EMH models.

    JimP, Great links.

  34. Gravatar of Scott Sumner Scott Sumner
    8. September 2011 at 09:18

    Martin, Very interesting link. Where is the moral outrage form fans on insider trading laws? (I am opposed to laws banning insider trading.)

    Richard, See my response to Vic.

  35. Gravatar of David Pearson David Pearson
    8. September 2011 at 09:19

    Scott,

    “It’s inflation and NGDP that matter, not the exchange rate-which is merely a means to an end.”

    The SNB’s statement talks about avoiding deflationary risk. Lars tells us they would abandon the SWF target if inflation exceeded 2%. Thus, the Swiss seem less eager to target higher-than-trend NGDP growth or inflation. In this regard, they seem to be similar in thinking to Bernanke: deflation should be avoided, but that doesn’t mean an above-trend inflation rate would be welcome.

  36. Gravatar of Morgan Warstler Morgan Warstler
    8. September 2011 at 09:31

    “Morgan, Mundell is the last economist on Earth who thinks the euro is working out just fine.”

    Please elaborate.

  37. Gravatar of marcus nunes marcus nunes
    8. September 2011 at 09:40

    Pitiful:
    Interest rates are now close to zero throughout the developed world (the United States, Europe, and Japan). But the global economy is slowing down, and financial markets went into a tailspin during the summer. This suggests that the problem is more profound than one of insufficient monetary stimulus.
    http://www.project-syndicate.org/commentary/gros26/English

  38. Gravatar of Lars Christensen Lars Christensen
    8. September 2011 at 09:44

    David, if the Fed had been aggressive in ensuring the a symmetrical inflation target around 2% as the SNB then we would never have seen the kind of deflationary pressures which were allowed to develop during 2009. But you are right – the SNB does to target the NGDP level. The SNB targets inflation, but it is also clear that it has a lot more leeway to act aggressively because it has a lot of credibility both on the upside and on the downside. The Fed no longer has that credibility in my view.

  39. Gravatar of David Pearson David Pearson
    8. September 2011 at 09:56

    Lars,

    “…it is also clear that it has a lot more leeway to act aggressively…”

    My point is its not clear they are “acting aggressively”. Yes, just as the Fed, they will fight deflation at all costs. Beyond that, they seem quite passive.

    Kocherlakota similarly argued today that you cannot achieve temporarily high inflation without risking the unanchoring of long-term inflation expectations:

    “Moreover, I believe that the FOMC could only have systematically lowered the unemployment rate further by generating inflation rates higher than 2 percent over a multiyear period. Such an outcome could well lead the public to lose faith in the credibility of the FOMC’s inflation objective and thereby increase the probability that the FOMC would lose control of inflation. As I stressed earlier, this scenario would require a policy response that would generate substantial losses of employment.”

  40. Gravatar of Lars Christensen Lars Christensen
    8. September 2011 at 10:24

    David,

    I sure think the SNB has been very reluctant in undertaking this operation and in that sense they have been passive. However, the actual action once they stepped up I think is pretty aggressive – just look at the intraday move in EUR/CHF. But clearly they have no intention of increasing inflation to lets say 10%. In that regard, it should also be noted that then need “to do something” is much smaller in Switzerland than in for example the US or the euro zone.

    Marcus Nunes have some good graphs on the Swiss economic situation here: http://thefaintofheart.wordpress.com/2011/09/06/the-“william-tell-strategy”-aim-and-shoot/

    Marcus shows that there is much less of an “NGDP problem” in Switzerland than in the US.

    Anyway, to me the Swiss story is mostly interesting because it clearly demonstrate the power of monetary policy.

  41. Gravatar of Martin Martin
    8. September 2011 at 11:49

    “Martin, Very interesting link. Where is the moral outrage form fans on insider trading laws? (I am opposed to laws banning insider trading.)”

    Scott, Scott, insider trading is only bad when someone else gets richer than you by doing it.:P

    Would be funny though, I just wonder who has jurisdiction there. Probably the SNB can sit out its punishment in Switzerland. 😛

  42. Gravatar of mbk mbk
    8. September 2011 at 15:34

    Morgan,

    huh?
    More generally: Think of the economy as a set of double entry ledgers. Everyone’s credits have got to appear on somebody’s debits. You can’t just grow one side and shrink the other.

    Scott: I am arguing the built-in tautology at the heart of the EMH makes it more theoretically interesting than practically useful as a tool for decision making.

  43. Gravatar of Morgan Warstler Morgan Warstler
    8. September 2011 at 18:40

    mbk,

    My plan puts 16M into a “weekly online $ deposit from the gvt” system. Think Paypal with a dbeit card.

    And the same system auctions their labor starting at $40 per week. Think Ebay.

    End UI after 90 days and end minimum wage.

    —-

    This is based on assumptions no different the Lanier or Ruskof, except my plan doesn’t give anyone a pass. My plan makes everyone keep working, even though as Ruskoff and Lanier note, some people are not WORTH ENOUGH to care for themselves.

    I don’t care, I’ll still sell their time for $40 a wekk and let some entrepreneur make a profit on it.

    Making ROI is the key.

    The only difference between them and me, is I’m for real. I’m not esoteric theory.

    There are two sets of books:

    16M x $10,400 per year = $208B paid by taxes. More if you increase it.

    Minus 50% of however much we auction those man weeks for… the worker keeps their GI + 50% of their labor.

    The difference is the US GVT welfare expenditure, but what isn’t counted is the PPP value from the folks in the ghetto getting super cheap services.

    I’m sorry I thought by now everyone here had mad ehtmeselves familiar with my GI plan:

    Part I:

    http://biggovernment.com/mwarstler/2011/01/04/guaranteed-income-the-christian-solution-to-our-economy/

    Part II:

    http://biggovernment.com/mwarstler/2011/01/31/guaranteed-income-part-ii-a-real-end-to-illegal-immigration/

  44. Gravatar of Morgan Warstler Morgan Warstler
    8. September 2011 at 20:07

    20M

  45. Gravatar of Scott Sumner Scott Sumner
    9. September 2011 at 17:14

    David, I agree. But Switzerland is is pretty good shape, they don’t have high unemployment like we do.

    Morgan, You know what I mean. I don’t buy your “it’s great if everything collapses, because then we get free market reform” argument.

    Marcus, Thanks, I just did a short post.

    Martin, I know it can’t be evil, as Congressional staffers are immune from insider trading laws. They wouldn’t be allowed to inside trade if it was evil.

    mbk, I don’t see it as a tautolgy. If the same mutual funds outperformed the market year after year, it would refute the EMH. But they don’t.

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