Goldman Sachs and the “hall of mirrors”
Here’s Bloomberg:
As well as uncertainty over the U.S.-China trade war, [Goldman Sachs economists Jan Hatzius and Sven Jari Stehn] rationalize their call by arguing the central bank is in a “hall of mirrors” in which officials place greater weight on bond-market pricing when making decisions than historically.
That’s because policy makers “worry more about the consequence of disappointing market expectations for cuts and partly because some of them put a significant amount of weight on bond-market signals (such as the slope of the yield curve and breakeven inflation) in gauging the outlook for growth and inflation,” according to the report.
The result is a “positive feedback loop” as bond traders push for looser monetary policy which prompts a more dovish central bank, they said, adding that the pattern only ceases when economic data suggest further easing is inappropriate.
The hall of mirrors is what Bernanke and Woodford (1997) called the “circularity problem”. The central banker looks at asset prices for guidance, and the asset markets set prices in anticipation of how the Fed will respond to those prices.
Note that Bloomberg says that “bond traders push for looser monetary policy”, when in fact they don’t “push”, they predict the Fed will want to lower rates in the future. Markets still get no respect; they are seen as bullies.
If Goldman Sachs believes the Fed is becoming more market monetarist, then that’s a good sign. But in my view the Fed still pays far too little attention to market forecasts.
In other news, I have a piece in the Washington Post that defends Trump from charges that he would be to blame for a 2020 recession. Some of my commenters (George, etc.) could only dream of writing such an unbiased piece.
Update: Also check out David Beckworth’s piece on the strong dollar, at National Review.
Speaking of unbiased people, Tyler Cowen is also skeptical of all this talk of a recession:
Do note, however, that I am not currently expecting a recession, I just don’t see enough pointers in that direction, and furthermore most of the time recessions do not happen.
That’s why you might never see me predict a recession until it has already begun. My goal here is to promote monetary regimes that sharply reduce the number of recessions, not to create magic formulas to predict them.
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22. August 2019 at 15:34
Congrats on getting a piece in such a widely read publication. Obviously, many in DC will have opportunity to see it.
22. August 2019 at 15:37
IMO, the Fed taking market prices which relate to inflation or NGDP, such as TIPS and stocks, is a good thing.
The Fed should not take into account bond prices, because bonds seem to be pricing in the Fed acting too slowly to prevent a recession. Bonds are very likely to be correct, as the Fed was also too conservative in lowering rates the past three recessions. But the Fed should go ahead and surprise the bond market with higher-than-expected cuts.
22. August 2019 at 15:46
“In other news, I have a piece in the Washington Post that defends Trump from charges that he would be to blame for a 2020 recession. Some of my commenters (George, etc.) could only dream of writing such an unbiased piece.”
For a foreign controlled Operation Mockingbird Fake News outlet that intentionally publishes lies and gaslights the public to keep them fighting each other instead of those who control it?
That would be a NIGHTMARE.
“I have an extremely negative view of Trump and his policies. The current trade war with China is unnecessary and counterproductive. Trump’s fiscal policy is perhaps the most reckless in U.S. history.”
That’s the only reason they published your crap article.
Try submitting one without the anti-Trump bias and then come back when they publish it.
They won’t.
LOL, ‘unbiased’.
You just kowtowed to the TDS fake news narrative.
Congrats, you just helped evil spread.
22. August 2019 at 15:47
Excellent WaPo editorial.
The bulk of the orthodox macroeconomics profession in the US is misdiagnosing current threats to prosperity. They keep jibber-jabbering about minor adjustments in trade between just two nations, the United States and China, instead of talking about the approach of global central banks to gathering economic doldrums.
The dialogue going forward should be about how monetary authorities can promote growth without promoting even more debt. Interestingly, BlackRock, Pimco, and Ray Dalio have all called for some form of money-financed fiscal programs. These are the big boys of Wall Street. This would have been heresy on Wall Street just a few years ago, and is still heretical in some academic circles.
I think the narrative about macroeconomics has been stolen by the multinationals, who use China as a manufacturing base and want access to undeniably huge Sino market. They can say what they say, but wiggles in trade between the US and China can hardly cause a global recession.
President Xi can put a million people in concentration camps and Apple will never run an ad with a sledgehammer smashing an image of President Xi.
22. August 2019 at 15:48
https://thehill.com/opinion/criminal-justice/458478-the-road-not-taken-another-fbi-failure-involving-the-clintons
Another truth the Washington Compost won’t touch.
They protect criminals by lies and omission.
22. August 2019 at 15:50
Good WaPo piece, Sumner.
Indeed, Sumner, Cowen is very biased, and thus cannot be trusted.
22. August 2019 at 16:41
https://politicalcalculations.blogspot.com/2019/08/what-dickens-is-going-on-with-recession.html#.XV80cewxVTs
The above link is an interesting take on the Federal Reserve and its dubious quantitative tightening program.
22. August 2019 at 17:14
Some proponents of Elliott Wave Theory show us pointing towards a recession around 2023/2024 (basically a major, near depression like, stock market crash starting around 2022/2023).
I’m not saying it’s going to happen, but I’ve already made some money (mostly for my parents) off their calls on long bonds and I’m keeping an eye on it as the theory sounds at least somewhat plausible. (Human collective sentiment following wave patterns and recessions mostly being caused by these drops in human sentiment.)
That agrees with us not having a recession for the next couple of years, like seems to be evident in the data.
22. August 2019 at 20:10
Scott,
nice WaPo piece, though I made the mistake of reading the comment section…. oh dear, the left wing nutters are just as incapable of reading comprehension as the right wing nutters a la George in your comments section here… SAD!
22. August 2019 at 20:17
“Fed’s George: Rate cuts ‘not likely to resolve’ trade uncertainty”
Yeah, it is not central banks suffocating growth again, It is Trump tariffs on China.
Esther George is 100% a creature of Fed; her entire career spent inside the walls. This is like asking a DoD high official should the defense budget be bigger.
22. August 2019 at 20:32
https://www.theepochtimes.com/ohr-302-notes-prove-fbi-tried-to-hide-true-source-of-trump-russia-allegations_3051582.html
Ohr 302 Notes Prove FBI Tried to Hide True Source of Trump-Russia Allegations
Fake News orgs, such as THE WASHINGTON COMPOST, lied about this for OVER TWO STRAIGHT YEARS.
22. August 2019 at 20:36
http://investors.overstock.com/news-releases/news-release-details/overstockcom-ceo-comments-deep-state-withholds-further-comment
Overstock CEO resigns over relationship with Russian “spy”.
Claims a deep state intel operation spied on Trump/Rubio. Same operation set Hillary up for a blackmail plot.
He was used as a honeypot.
Says it goes up to Obama’s WH.
Has given the info to the DOJ/Barr.
22. August 2019 at 20:40
OT, but the “trade war” (actually, presently a “small trade skirmish”) over the years might enlarge into a general disentanglement of the US economy from that of China’s.
From Bloomberg:
“Strong-Arming
China is taking “aggressive steps” to coerce Southeast Asian nations into halting work with international oil and gas firms in energy-rich waters off Vietnam, a State Department spokeswoman said. The deployment of a government-owned survey vessel with armed escorts “is an escalation by Beijing in its efforts to intimidate other claimants out of developing resources in the South China Sea,” she said.
—30—
Beijing may present increasingly untenable options to Westerners. Concentration camps in Tibet, gunboats off Vietnam, pending hobnailed boots in Hong Kong, intrusive intelligence services operating globally though coerced Chinese nationals….
Making predictions is hard, especially about the future, but we may see a parting of the ways….do not look for SE Asians to embrace the Sino Dragon….and US leadership needs to at least ponder a route to prosperity with less China trade….
22. August 2019 at 20:53
POTUS retweeted it:
https://twitter.com/MariaBartiromo/status/1164728339187273733
Has the President EVER made a statement that turned out false?
Nope. Fake news makes shit up, citing ‘according to people familiar with the matter’, and dumbass leftist bloggers fall for it because they are so f’ing vain they’d rather see their names in the publications than for TRUTH to reign.
23. August 2019 at 00:06
Matthew, I agree.
mbka, Maybe I should avoid reading their comment section.
23. August 2019 at 03:37
Looking at the size of stock market movements related to Trump trade announcements, there has to be some significant indirect effects that the market sees. Something more than a $25 billion decrease in US exports (which I agree would be relatively trivial).
Possibly related: the Fed would have an easier job offsetting a particular policy if they knew what it was. Does anyone even know what Trump views as a “great deal” in this case?
23. August 2019 at 04:12
Is ‘mbka’ the blog author?
23. August 2019 at 04:14
Has anyone asked themselves where did ISIS and Al Qaeda go? And why?
https://imgur.com/ZDhqSwr
When the Satanist Hussein was in the WH, him and fake news were saying it will be a ‘generational war’.
Pure evil.
23. August 2019 at 04:18
Notice how ‘mbka’ never provided any rebuttal or counterpoint to what I posted?
The WaPo article was BIASED and that is the only reason that fake news evil rag published it.
What is the REAL reason for that?
WHEN YOU CANNOT ATTACK THE MESSAGE YOU ATTACK THE MESSENGER
Sad!
23. August 2019 at 04:31
I wonder how many alter egos the blog author has on this site.
23. August 2019 at 05:21
Bill, Yes, the stock market reaction is almost all the indirect effects.
23. August 2019 at 05:34
Sumner got it wrong here:
“…between January 2006 and April 2008, residential construction in America plunged by more than 50 percent, with very little impact on the overall unemployment rate. Then, in mid-2008, monetary policy became too contractionary… As a result, nominal GDP… starting falling. Now unemployment soared much higher as the problem spread beyond housing …”
Unemployment rate:
April 2008 5.0%
May 2008 5.4%
That was a very large one month jump prior to the Fed’s actions in mid 2008.
23. August 2019 at 05:44
Very good post, excellent WP article (those comments tho), outstanding piece by Beckworth. Happy Friday.
23. August 2019 at 06:12
Hey Scott, this Summers thread seems like exactly the kind of thing you’d want to rant about:
https://twitter.com/LHSummers/status/1164490326549118976
Just dropping it in.
23. August 2019 at 07:11
Following up on Paul, thoughts on this doozy from Summers?
“The one thing that was taught as axiomatic to economics students around the world was that monetary authorities could over the long term create as much inflation as they wanted through monetary policy. This proposition is now very much in doubt. 8/”
https://twitter.com/LHSummers/status/1164490342529478656
23. August 2019 at 07:12
https://www.washingtonexaminer.com/news/cnn-hires-former-fbi-official-andrew-mccabe-fired-for-leaking-to-media
“B-b-b-but you can’t charge McCabe with a federal crime, because that would mean the DOJ is targeting ‘journalists’!
Fake News = Enemy of the People.
Clear yet? Or still sheep?
23. August 2019 at 07:21
Goldman is a very well run firm, and has been for a long time. But the one area, where they seem to stand out as being off base, is when they discuss “markets”, which sounds bizarre, of course. I almost view them as a (willful?) negative indicator, e.g, (two peak oil predictions, calling for S&P up strong in Aug 2000, the above quote you cite—-Countless examples).
The quote you site is typical of those who anthropomorphize markets as if it were a single being negotiating.
We have gone through very long periods of low interest rates before. From the post deflation year of 1934 to 1960 the annualized nominal total return of the 10 year was 2.28%, real return -.81% annualized.
Many recessions are preceded by long periods of rate hikes, but that feels like circular reasoning, and the evidence is inconsistent.
While several recessions have occurred as the Fed Funds rate has been hiked to “chase the 10 year”, not all recessions have been preceded by that, nor have recessions always occurred when FF have exceeded the 10 year when FF was hiked (although the t-bill rate, a market rate, does track better in that regard).
Do you have a view on T-Bill/10 year relationship and recessions?
23. August 2019 at 07:27
Trump is putting out some really crazy tweets today, even by his standards. LOL I wish I could do more about it than laugh. I will more involved in the next election than usual.
23. August 2019 at 07:49
Powell doesn’t get it. Markets don’t want to hear about a nuanced lawyer threading the needle, they want Chuck Norris on the podium.
23. August 2019 at 08:47
I wonder if this George guy is actually a Democrat, and perhaps Muslim, and is just posting here to try to make Trump supporters look bad.
23. August 2019 at 09:54
Scott,
Very good piece at the WaPo. Very well done.
The comments in the most respected (and dominant) media outlets of the western world always make me kind of depressed. You’d expect these maniacs on conspiracy theory pages, but that’s not the case, it’s the readership of the supposedly brightest media outlets in the Western world. One has to ask oneself: is this pure coincidence or do the media outlets themselves have anything to do with it?
I don’t understand how this can be a grammatically correct sentence. Shouldn’t it be expressed differently, for example “started falling”? Nevertheless a very good piece.
Michael,
Nice idea. You know I’m a bit supportive of Trump, too. Not all over, but in parts. But I strongly suspect that this fanboy is very real. Some of the hardcore Trump supporters really tick like that. Scott’s tolerance goes too far. Not to mention that Wolfie steals my first place as “stupidest commentator”. I earned this place, so please Scott, give me my spot back. He’s in my spot! =)
23. August 2019 at 10:06
“Those policies help to explain why Silicon Valley is in San Jose, not in Oxford, Paris, or Dusseldorf.”
Nonsense, Sumner. Silicon Valley being in San Jose rather than Boston might have something to do with policies. Silicon Valley being in San Jose rather than Paris has nothing whatsoever to do with policies. The key factor behind the dominance of Silicon Valley is simply market size. This is also why Russia and China have larger Silicon Valley-type firms than richer Western Europe.
It sounds great.
It’s also worth pointing out that stereotypical “industries of the future” (space travel, nuclear power) are much more developed in Russia and China than the U.S. Yet, they are still poorer than the U.S. (and will be so for a long, long time).
23. August 2019 at 10:23
I do not understand how respected economists like Summers can seriously believe that the central banks cannot generate more inflation. For example, the central banks could create X billion dollars out of nothing and hand them over to me. I think we’ll see some inflation then. And if that doesn’t work, we just repeat the game until the inflation is there.
I would voluntarily “sacrifice” myself to this difficult task. You have to make sacrifices for the Western world now and then, so please Powell and Larry Summers write me a billion dollar check.
Scott,
To your piece about industrial policy on Econlog: the general idea is good, but do you discuss what kind of industrial policy the US already has? I’m not an expert but does the US really have so much less subsidies, location policy, and industrial policy than for example Europe? Thinking about General Motors and all that. That’s not industrial policy?
23. August 2019 at 10:32
Christian wrote:
“I do not understand how respected economists like Summers can seriously believe that the central banks cannot generate more inflation”
It’s because they’re Keynesian dopes who believe in economic fallacies like the deflation spiral.
“Respected” less for their intellectual acumen than for the POWER of those backing their narratives, the way Mao was ‘respected’.
23. August 2019 at 10:45
Christian List wrote:
“The comments in the most respected (and dominant) media outlets of the western world always make me kind of depressed”
The WaPo is part of the propaganda arm of the D Party.
You sound like a soviet gulag prisoner shouting praises of Pravda.
Get a grip. It’s not a newspaper of journalism, but of deliberate social brainwashing.
WAKE UP YOU STUPID SHEEP
23. August 2019 at 11:09
Christian List,
I was just being facetious.
23. August 2019 at 14:06
“I do not understand how respected economists like Summers can seriously believe that the central banks cannot generate more inflation.”
I would hesitate to attach that view to him, although this thread does seem revealing. Even I don’t deny that monetary policy can do something, but I don’t believe it could create hyperinflation or hyperdeflation almost at the snap of a finger, if they only committed themselves to it, like Scott believes.
Of course, there has never been a pure liquidity trap in the sense that no increase in the money stock, no matter how large, would only be hoarded. But market participants that aren’t used to unconventional actions like operation twisting, QE, and helicopter money might not see it that way, and that might explain some of the failure of central banks to stimulate spending in the 2009-2014 period.
23. August 2019 at 14:08
(And of course, when central banks behave passively, as they almost always do, then monetary policy has no impact. Central banks can depart from that model occasionally as a last resort, but it rarely works.)
23. August 2019 at 14:11
Monetarists will have all kinds of problems with Summers’s assertions about Japan, however. They would say that, with an appreciating currency, near zero broad money growth and NGDP growth, and low inflation expectations, it would be absurd to say money was easy. This ends up a bit axiomatic (“easy money causes inflation, and inflation means money is easy”), but it is a falsifiable claim, at the very least. All we have to know is whether the connection between NGDP and RGDP runs from nominal to real (the monetarist hypothesis) or real to nominal (the Post-Keynesian, MMT, and RBC – for all very different reasons – view).
23. August 2019 at 15:08
Todd, Fair point, but WaPo space constraints prevent one from getting into too much nuance. I’d say money was slightly too tight in early 2008 and far too tight after June. By the way, even in the summer of 2008 the Fed was not expecting a recession, despite the 5.4% May figure you cite.
Michael Rulle, I’m skeptical of all recession predicting tools, but the yield spread is less bad than most.
Christian, Maybe not now, but in the 1970s Europe did a lot of “industrial policy”.
Paul, You said:
“but it is a falsifiable claim,”
This is a key point that many people miss. If the Japanese peg the yen at 300 to the dollar, and don’t get inflation, then I’ll throw in the towel. I will abandon market monetarism and become a MMTer.
23. August 2019 at 16:03
In your WaPO article you say “Central Banks cannot cut interest rates much below zero … because investors would simply choose to hold currency as an alternative.”
How would an investor who holds millions of dollars in treasuries convert them into cash? I will assume that she has somewhere to store the cash once she gets it.
23. August 2019 at 18:33
Scott, many people will not be convinced by your reductio ad absurdium, even if you think it’s useful for illustrating your logic. Of course, there would be an economic effect if central banks bought every asset on Earth, but the point they make is that central banks buy and sell securities at market prices in OMOs – so the receivers of money have to be willing ones. If inflation started to get out of hand due to monetary stimulus, then, presumably, people would just turn around and buy government securities back with the base money they had. If the central bank took money out of the system, people would just retire some of their existing asset holdings to increase the money stock.
So, in that sense, the central bank acts passively, not actively, towards nominal variables.
23. August 2019 at 19:03
The Fed could make recessions a rarer phenomenon. But for this to happen on a sustained basis, they would have to change their policy regime, stop using models based on the Phillips curve and, as you write, use market predictions more wisely. Unfortunately, the current setting allows the Fed to give the blame for a policy failure to some ‘market failure’, when in fact it is the opposite. If, as you write, they use markets as predictions, there would be no more place to hide for them. I am convinced that it is this simple, somewhat ugly and for them convenient feature that is an important reason why they prefer the status quo.
30. August 2019 at 13:19
Scott, regarding Beckworth’s article, couldn’t the Fed counter the excess demand for the dollar by just printing more of them? So why is this a ‘cross we have to bear’.