Hooters, Sarah Palin, and the smart money

There’s something about inflation targeting that causes otherwise sensible people to become slightly deranged.  On one side you have Bloomberg.com warning that no amount of money can cure Japanese-style deflation:

Yes, Hooters Inc. has made its way to Tokyo. Normally when hundreds of Japanese men huddle in line it’s for a new iPhone or video game. These days, it’s to be served beer and chicken wings by waitresses in white tank tops and orange short-shorts. The American chain is gaining popularity in Japan.

It’s also an unlikely sign that deflation will be with Japan for a long, long time.

Anyone who still thinks falling prices are a cyclical phenomenon isn’t looking closely. It’s secular, and the sudden ubiquity of discount outfits shows how Japanese consumption has become a race to the bottom of the pricing spectrum.

Japan used to be an automated-teller machine for brands like Prada, Gucci and Louis Vuitton. Women thought little of plopping down $2,000 for the latest fashions from Milan and Paris. Men didn’t blink at paying $200 for a tie. That’s all fashion-industry history now. Sliding wages and rising job insecurity brought budget-shopping into vogue.

No matter how much yen the Bank of Japan pumps into the economy, deflation deepens. It’s all about confidence, of which there is virtually none.

The hard core Keynesians say QE can’t work, because their models tell us it can’t work.  It’s just exchanging one zero rate asset for another.  Unfortunately their models are flawed, and we are seeing inflation expectations rise in response to QE, something that’s not supposed to happen.

At the other extreme you have Sarah Palin comparing Bernanke unfavorably to Ronald Reagan:

I’m deeply concerned about the Federal Reserve’s plans to buy up anywhere from $600 billion to as much as $1 trillion of government securities. The technical term for it is “quantitative easing.” It means our government is pumping money into the banking system by buying up treasury bonds. And where, you may ask, are we getting the money to pay for all this? We’re printing it out of thin air.

.   .   .

We shouldn’t be playing around with inflation. It’s not for nothing Reagan called it “as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.”

First of all, I think Reagan did a pretty good job on inflation.  Contrary to what some Democrats argue, it was Reagan, not Jimmy Carter that is responsible for the drop in inflation from about 10% in 1981 to about 4% in 1982.  He supported Volcker’s second attempt at tight money, whereas the first attempt was abandoned during the run-up to the 1980 presidential elections.  But let’s not overdo things.  After inflation was reduced to 4% in 1982, Reagan administration officials and conservative newspapers like the Wall Street Journal pressured the Fed to ease its monetary policy, and no further reductions in inflation were achieved.  Indeed inflation was closer to 5% by 1989 when Reagan left office.  In contrast, Bernanke has reduced core inflation to little more than 1%, and the TIPS market suggest inflation is likely to remain well under 2% over the next 5 years.  If low inflation is Sarah Palin’s goal, then Bernanke should be her hero, not Reagan.

Palin is echoing the views of many freshwater economists.  Their models tell them that Bernanke’s policies will produce high inflation.  Of course they also claim to believe in efficient markets, except when those markets tell them that their models are wrong.

So which is it, deflation or high inflation?  The smart money says neither:

Goldman Sachs Group Inc., which warned a month ago that the U.S. economic outlook was “fairly bad” at best, said the Federal Reserve’s decision to increase bond purchases will spur growth.

“Downside risks to the economic outlook have declined significantly,” Jan Hatzius, the New York-based chief U.S. economist at the company, wrote in an e-mail to clients. “As we move through 2011, the lagged effects of the renewed monetary easing combined with a gradual slowdown in the pace of private deleveraging should result in a substantial pickup in GDP growth.”

The Fed’s decision will lower the risk of deflation, Hatzius wrote. The Institute for Supply Management manufacturing index and the government’s employment report last week also show the economy is moving in the right direction, according to the report.

Hatzius defended Fed Chairman Ben S. Bernanke when others including E. Gerald Corrigan, former president of the New York Fed, have voiced concern that the central bank actions will lead to a surge in costs for goods and services. Bernanke on Nov. 6 dismissed the idea the central bank will increase prices to higher levels than it prefers.

There’s a reason GS makes more money that other banks, they use reality-based models, not faith-based models.  I am not sure why so many economists are predicting either no effect from QE, or high inflation.  This isn’t rocket science.  The Fed’s had an implicit inflation target of about 2% for decades.  When it’s too high they nudge it down, when it’s too low (as in 2002) they try to nudge it up.  I happen to support a NGDP target, but I’m not running the show.  Given their target, it’s no surprise they are trying to nudge inflation a little bit higher.  Markets currently expect only 1.7% inflation over the next 5 years, even given the recently announced QE.  Before rumors of QE started circulating, the expected inflation rate was only about 1.2% over 5 years.  Given how much we’ve undershot the Fed’s target over recent years; I’d like to see higher than 2% inflation.  But even I don’t think we’d need to go above 3% to get a robust recovery.  The markets and GS are telling us the same thing.  Trust the smart money, not the left and right wing ideologues.

QE has a modest positive impact, contrary to Keynesian models.  But it won’t produce high inflation, contrary to monetarist models.  Targeting the forecast—call it the Goldilocks model.

PS.  A year ago I talked to Bob Murphy about advertising.  He said he’d know I’d started taking ads when I put Sarah Palin in the title.  So I’m counting on a lot of hits—what could be better than combining Sarah Palin and Hooters!  I’ve only earned about $300 so far in Google Ads.  About $100 of that will go to pay down our national debt.  So if you want to help promote economic recovery and address our nation’s intractable fiscal problems, please tune in more often.


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44 Responses to “Hooters, Sarah Palin, and the smart money”

  1. Gravatar of Joe Joe
    7. November 2010 at 21:02

    Non Sequitor….

    Can you please give me a recommendation for one or more undergraduate level readings explaining the monetarist transmission process. Maybe something you’d give to your students. Mankiw and Mishkin don’t cover it as a separate theory. I ask because I just realized today why those macro books were of no use in understanding what you’re writing about….

    Thank you,

    Joe

  2. Gravatar of Ram Ram
    7. November 2010 at 21:16

    Of course, QE works in Bernanke’s model, otherwise he wouldn’t keep proposing it (first for the BOJ, now for the Fed). Bernanke is hardly a heterodox macroeconomist, which makes me wonder why so many reputable economists have expressed skepticism about QE. Do they work with fundamentally different models from Bernanke, or do they merely disagree about parameter values? Or is there no there there? I thought that Bernanke & Woodford were the foremost representatives of contemporary business cycle theory, prior to Bernanke’s appointment. Why so much dissent now, when there appeared to be so much consensus then?

    Krugman is the oddest of the skeptics (though he’s only a quasi-skeptic), because he has said that the way out of the liquidity trap is to raise inflation expectations, and then when the Fed succeeded in doing just that, his response was that the market was overreacting. Overreacting to what? Wasn’t getting precisely that reaction the point?

    I understand that economists disagree about a lot of things, but the sense one gets from the pre-crisis literature is that there was a lot more agreement than we’re now seeing. For whatever reason, it seems like the crisis caused everyone to throw everything they believed out the window and revert to their own pet models. Now that the Woodford-style models have turned out to have been the best of the lot, I think what we’re seeing is denial, because it is easier to explain away these apparent successes than to admit that one’s very public deviation from the conventional wisdom proved unnecessary.

  3. Gravatar of Lee Kelly Lee Kelly
    7. November 2010 at 21:34

    In order to satisfy inflation targets, whether 0% or 1000%, central banks will sometimes have to engineer monetary disequilibrium. That is, central banks need to intentionally create an excess or shortage of money. Since this is primarily done by increasing the supply of credit, it usually entails discoordinating the plans of borrowers and savers. Inflation should never be the target; its rises and falls (unless extreme), are poor indicators of underlying conditions — inflation is like an epiphenomena.

    By the way, there is something about NGDP targeting that causes otherwise deranged people to become slightly sensible.

  4. Gravatar of Greg Ransom Greg Ransom
    7. November 2010 at 22:22

    What, no cheesecake pictures of Palin? .. secular default is assured.

  5. Gravatar of The Window Washer The Window Washer
    7. November 2010 at 23:02

    “Palin is echoing the views of many freshwater economists. Their models tell them that Bernanke’s policies will produce high inflation. Of course they also claim to believe in efficient markets, except when those markets tell them that their models are wrong.”

    It’s succinct writing like this that makes me want to give you a kiss. You do a great job hitting both sides. I channel you when I want to make someone think outside their dogma on macro issues. If you taught in denver I’d be crashing your classes once a month in my free time.

  6. Gravatar of Jlonsdale Jlonsdale
    8. November 2010 at 00:32

    Just a quick note – the economists at these banks are very smart guys. However, they are not by any means the smart money. They just work at the same place as the smart money. They are the marketing side of the bank, and often will publish research in reaction to market movements rather than predict the markets themselves (Although they have also been known to occasionally move markets when they radically change their forecasts). Since you also like using markets to forecast, it is no wonder that you’ll often agree with them but you should be wary of thinking that their agreement bolsters your argument by very much.

  7. Gravatar of marcus nunes marcus nunes
    8. November 2010 at 03:57

    Kevin Warsh has become a “supply sider”:
    “Monetary policy also has an important role to play. However, the Federal Reserve is not a repair shop for broken fiscal, trade or regulatory policies. Given what ails us, additional monetary policy measures are poor substitutes for more powerful pro-growth policies. The Fed can lose its hard-earned credibility””and monetary policy can lose its considerable sway””if its policies overpromise or under deliver”.
    http://online.wsj.com/article/SB10001424052748704353504575596762375409760.html?mod=WSJ_Opinion_LEADTop

  8. Gravatar of JTapp JTapp
    8. November 2010 at 04:33

    Looks like Palin gets her talking points from Glenn Beck. (“QE3, QE4, when does it stop,” “artificial recovery”). I’m sad you besmudged your blog with her, it totally ruined my breakfast this morning.

  9. Gravatar of James in London James in London
    8. November 2010 at 04:39

    “There’s a reason GS makes more money that other banks, they use reality-based models, not faith-based models.”
    Scott, no surprise to see you eventually lining up with Goldman Sachs. They are experts at winning the confidence of those they most need. They need the intellectual case for printing money, and you are amongst the best at providing it.

    They are the epitome of corporate capitalism: control the state and you control your future. They have their key men in so many positions of power they can exploit their TBTF’ness and take risks knowing 100% they will get bailed out if it goes wrong and they can keep 100% of the profits if it goes right. As Martin Wolf of the FT memorably wrote of modern bankers ability to “privatise the gains and socialise the losses”.

    When the current monetary experiment fails, or rather succeeds too well, they will blame and discard you, and then jump on the next fashionable bandwagon and ride that one to destruction.

  10. Gravatar of Paul Johnson Paul Johnson
    8. November 2010 at 05:48

    I thought GS made lots of money because it had exceptional political influence. Smart in spreading the money around…

  11. Gravatar of scott sumner scott sumner
    8. November 2010 at 06:59

    Joe, Actually, Mishkin’s money textbook has a pretty good chapter on the various transmission mechanism, listing about 10 of them (other than nominal interest rates.)

    I don’t know of any monetarist textbooks, but you might look at old writings by Friedman, Meltzer, Brunner, etc.

    Ram, You said;

    “Why so much dissent now, when there appeared to be so much consensus then?”

    This is precisely what got me into blogging. I had thought all elite macroeconomists understood that monetary policy was really powerful at the zero bound. There had been so many studies pointing this out. And then in late 2008 people just completely ignore monetary policy, there was hardly even any discussion of using monetary stimulus rather than fiscal stimulus. It struck me as really weird. of course now there is lots of discussion of monetary stimulus. It’s gone from being totally ignored to being fought over. I guess that’s progress.

    You said:

    “Krugman is the oddest of the skeptics (though he’s only a quasi-skeptic), because he has said that the way out of the liquidity trap is to raise inflation expectations, and then when the Fed succeeded in doing just that, his response was that the market was overreacting. Overreacting to what? Wasn’t getting precisely that reaction the point?”

    Great line!

    Lee, I agree that inflation is an epiphenomena, and I think that NGDP is the driving force.

    Greg, This blog is for the whole family, it’s rated PG.

    The Window Washer, You said:

    “It’s succinct writing like this that makes me want to give you a kiss. You do a great job hitting both sides. I channel you when I want to make someone think outside their dogma on macro issues. If you taught in denver I’d be crashing your classes once a month in my free time.”

    Thanks. BTW, most window washers are men, I’m going to assume you are a woman. 🙂

    Jlonsdale, I think that’s a fair point, it doesn’t really prove my argument at all. I actually put more weight on the market reaction, than on the spokesman for GS. But I have noticed they’ve often been pretty accurate.

    Marcus, He fails to see that we need both. We need adequate NGDP growth, and that will allow for better supply side policies (like reducing UI below 99 weeks) once unemployment falls to more normal levels. I certainly also favor doing supply side reforms.

    JTapp, Sorry to ruin your breakfast. How about if I included Hooters pictures? (Apologies if you are female.)

    James, GS is the least of our problems; they avoided massive losses in MSEs, and didn’t even need the bailout the Feds forced on them. But I do agree with your basic argument–they are a part of the cozy corporate capitalism that has socialized far too many risks.

  12. Gravatar of mlb mlb
    8. November 2010 at 07:11

    Scott, I will continue to try to persuade you via the thoughts of investors who have proven (via outperformance over many cycles) that they understand the economy better than the collective wisdom of the market.

    John Hussman is one such investor and is worth reading for a view from someone who actually allocates large amounts of capital…

    http://www.hussmanfunds.com/wmc/wmc101108.htm

  13. Gravatar of Mike Sandifer Mike Sandifer
    8. November 2010 at 07:12

    Scott,

    I’m a bit curious as to what you think of Goldman’s investment record, such as their trading desk beating the market daily for 3 straight months, as I recall, and long stretches at other times. What, if any, are the implications for EMH?

    I realize this may have little to do with EMH, perhaps because Goldman has some unusual advantages.

  14. Gravatar of OGT OGT
    8. November 2010 at 07:13

    I am pretty sure Hatzius uses the more or less the exact same New Keynesian model Paul Krugman does. Krugman occasionally quotes Hatzius, and always approvingly.

    His call here is slightly more favorable than PK here though, obviously. Interestingly, he is expecting a “slow down in the pace of private sector delevering.” I assume that means a stabilization of the net private savings rate?

  15. Gravatar of Morgan Warstler Morgan Warstler
    8. November 2010 at 07:14

    My goodness… how can Ben and Scott make Sarah happy?

    Hmmm…

    Ah ha! Perhaps they are going to need to become top of the mountain cheerleaders for austerity!

    “Governor Palin, we absolutely understand your concerns, but please give us some time to prove our mettle. We are GIANT FANS of your effort as to make deep long term cuts in Public Employees – and to help, while you are making these cuts, we’re going to do just a modicum of QE targeted to keep the stock market growing. AND AS SOON AS, inflation hits 2%, we’re going to STOP!”

    She just might forgive you.

  16. Gravatar of Aidan Aidan
    8. November 2010 at 07:30

    Wasn’t it Volcker, not Carter or Reagan, who should be given the credit for the drop in inflation?

  17. Gravatar of scott sumner scott sumner
    8. November 2010 at 07:45

    mlb, I’ve read some other stuff by Hussman, I conclude either:

    1. Knowledge of macro is not required for investment success.

    or

    2. He’s been very lucky.

    Mike, My hunch is that it is partly luck and partly skill. I don’t know of any tests that show it is skill. The tests for mutual funds show it is almost all luck, but then investment banks are different from mutual funds–so there may be a bit of skill involved. In any case, I don’t think that affects the EMH very much, as it doesn’t provide any useful implications for me as an investor, or me as a voter (i.e policymaker.) The policymakers clearly can’t beat the market, and hence should rely on the EMH. I’d say the same about academics who do economic modeling. The EMH is still the best modeling assumption, as any superior skill GS has is not public knowledge.

    OGT, Yes, I know that Krugman cites Hatzius approvingly, which is why I thought it was interesting that Hatzius is basically saying Krugman is wrong.

    Morgan, You said;

    “She just might forgive you.”

    Nothing would please me more.

  18. Gravatar of Mike Sandifer Mike Sandifer
    8. November 2010 at 08:35

    Scott,

    You replied:

    “The policymakers clearly can’t beat the market, and hence should rely on the EMH.”

    I’ll just say that relying on the market does not require a belief in strong or semi-strong EMH.

  19. Gravatar of James in London James in London
    8. November 2010 at 09:19

    It’s always hard to know whether to blame the addict (the US government), the drug (the deficit) or the dealer (GS). But when the dealer is also taken seriously as the doctor you have quite a problem.

    I still don’t get why QE is such a wonderful thing when it is merely “free” fiscal stimulus. Stripped of the monetary theory, all the Fed is doing is providing a fig leaf to the printing of money to pay for half (or so) of the deficit spending anticipated over the next 12 months. Of course, it’s not “free”, but will be paid for by inflation over the next few years.

    The scariest thing for me is when you and your supporters will say “do more” if QE2 doesn’t work, and do more until inflation rips, and then stop. All us ordinary mortals need to have such huge faith in the wisdom of such a policy being successfully implemented that it seems to me I would prefer the risk of a bit of deflation over the high likelihood of politics interfering with the smooth working of this theory. Especially, as it is so clear you are all so unhappy with the quality of the policies implemented so far.

  20. Gravatar of Bob OBrien Bob OBrien
    8. November 2010 at 09:31

    Scott said:

    “mlb, I’ve read some other stuff by Hussman, I conclude either:

    1. Knowledge of macro is not required for investment success.

    or

    2. He’s been very lucky.”

    This is the kind of conversation I expect from wacky politicians. If you don’t want to argue on the merits then attach the qualifications of the other person.

    There are many mainline economists who are presenting similar arguments to Hussman and, while their arguments do not agree with this blog and they may turn out to be wrong, they can hardly be accused of not knowing macro.

  21. Gravatar of Morgan Warstler Morgan Warstler
    8. November 2010 at 10:05

    James, your opinion is exactly why Scott / Ben have to begin taking sides…

    Their whole theory crumbles if the Fiscal Austerity measures are not brutal, the true expectation has to be that the future is brighter EVEN though Scott/Ben are printing money.

    It isn’t enough to shoot spitwads at Krugman for not getting his monetary right – they have to drag Paul into the streets and burn him as an Obamawitch, or failure looms more likely, and IF there is failure – Krugman/Scott/Ben will be indistinguishable from each other…

    Arguing, “well I wanted to print money – but for totally different reasons,” will not keep necks from being stretched.

  22. Gravatar of Benjamin Cole Benjamin Cole
    8. November 2010 at 10:57

    I dunno how Reagan fought inflation. He ran deficits–see Stockman.

    Volcker, it is long forgotten, was appointed by Jimmy Carter.

    Yes, Reagan tolerated Volcker for a while, but then the Reaganites wanted him out. They floated as proposals such as “Volcker for World Bank.”

    As Sumners points out, inflation was running at 5 percent and rising when Reagan left office–a level that today would be denounced in some circles as positively decadent and destructive. And it happened after Reagan had been President for eight years.

    Reagan the inflation fighter? It is hagiographers, not biographers, that limn that caricature.

  23. Gravatar of spencer spencer
    8. November 2010 at 12:21

    Interest rates and or tight money policy peaked less than six months after Reagan took office and for the next seven and a half years he enjoyed one of the largest declines in interest rates in recorded history.

    Tell me, what President wouldn’t have supported this policy?

  24. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    8. November 2010 at 12:25

    ‘Wasn’t it Volcker, not Carter or Reagan, who should be given the credit for the drop in inflation?’

    In his book, Volcker pointedly thanks Reagan for supporting him–which he had promised to do when Volcker met with him in January of 1981 to explain what he was about to do. Reagan used to carry around with him a paperback copy of ‘Capitalism and Freedom’, so he knew that inflation was ‘always and everywhere, a monetary phenomenon’, and having a degree in economics, Reagan knew what the side effect of the cure for inflation was going to be.

    You get the impression Volcker was also taking a swipe at Carter for not supporting him in 79-80.

  25. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    8. November 2010 at 12:31

    ‘Tell me, what President wouldn’t have supported this policy?’

    You mean, with the benefit of hindsight?

    History matters; LBJ, Nixon and Carter could all have supported such a policy–and it would have been less costly earlier to do so–but they weren’t up to ‘staying the course’. Reagan did.

  26. Gravatar of Matt Flipago Matt Flipago
    8. November 2010 at 13:20

    What does the EMH say about the price difference between Precious Metals and Tips. Why is it they seem to have completley different investors predicting opposite things. Isn’t looking at only the TIPS for inflation prediction like looking at a house of cards from one angle? I’m just wondering why is seems like Gold/Silver and TIPS are in disequilibrium, they both can’t be priced well in my mind, so why only look at one?

  27. Gravatar of Morgan Warstler Morgan Warstler
    8. November 2010 at 15:39

    I think liberals say things like “it was Volcker, not Reagan” because their Presidents are meek little mice who would be cowed by dumping a Fed Chair.

    Of course Fed chairs are all Republicans, so there is that…

  28. Gravatar of Full Employment Hawk Full Employment Hawk
    8. November 2010 at 17:31

    “It’s just exchanging one zero rate asset for another.”

    This is obviously wrong. When the Fed buys long-term bonds, which have a rate significantly above zero, and pays for it with base money (M0), which pays .25% if held as reserves and zero if held as currency, it is certainly not exchanging one zero rate asset for another.

  29. Gravatar of Full Employment Hawk Full Employment Hawk
    8. November 2010 at 17:33

    “because their Presidents are meek little mice who would be cowed by dumping a Fed Chair.”

    Presidents cannot dump a Fed chair until his 4 year term is up, and Reagan, in fact, did not reappoint Volker.

  30. Gravatar of Full Employment Hawk Full Employment Hawk
    8. November 2010 at 17:48

    Why on earth is Meltzer shouting inflation when M2 has grown at less than 3% on average in 2010 (percent change from a year ago)? And the rate of growth in M2 has dropped sharply from where it was at the beginning of 2009. According to Milton Friedman’s theory, this should predict another recession.

    Note: I do believe that M2 targeting works. Friedman was wrong about that. Krugman has correctly poited out that during the Great Moderation the rate of growth of M2 has fluctuated widely.

    Except when there are genuine supply shocks, which are relatively rare and easily identified, the PROXIMATE cause of business cycles is fluctuations in aggregate demand. (Of course there is a lot of disagreement about what causes the fluctuations in AD.) But in light of this, targeting NGDP growth, which is actually targeting AD growth, does appear to be the best policy.

  31. Gravatar of Morgan Warstler Morgan Warstler
    8. November 2010 at 20:34

    Hyper Inflation Hawk, I read somewhere where Volcker said, you serve under the political pressure of the President…. something I made note of as non-written policy subservience.

    Do I have to go try to find it? Maybe my brain invented it, it does happen, but I’m pretty sure I read it.

  32. Gravatar of Joe Calhoun Joe Calhoun
    8. November 2010 at 20:36

    Reagan was at least partially responsible for ending the inflation of the late 70s/early 80s because his policies affected the demand for money. Volcker only controlled supply; other policies (tax cuts and deregulation) affected demand. When Volcker became Fed chair in the summer of ’79 he embarked on his monetarist experiment; gold roughly doubled from August 79 to January 80. Gold started to fall in early 80 when it looked more likely Reagan would win the election. Volcker didn’t finally ease policy until he was forced to by the Mexican crisis. The story is that Jude Wanniski and a few others basically had to beg him to ease before he killed the banking system. Volcker didn’t then and doesn’t now have a clue.

    Scott, I wouldn’t be betting much with the public pronouncements of Goldman strategists or economists. I’ve been doing this a long time and as someone above pointed out, their track record ain’t very good. As a firm, their trading results have been outstanding but that isn’t investing, it has nothing to do with EMH and is completely unrelated to anything Hatzius tells the public. When Wall Street firms like Goldman talk about trading for their own account they usually aren’t making directional bets and if they are you can bet they’ve got a huge margin for error built in. What they put out for public consumption has nothing to do with their internal trading results.

    And one last item. I agree with the poster above who said you shouldn’t so lightly dismiss Hussman. He may not agree with your view of the world but he isn’t dumb and his results aren’t luck. You diminish yourself by dismissing him. He’s a serious man in an industry dominated by non-serious people.

  33. Gravatar of Morgan Warstler Morgan Warstler
    8. November 2010 at 20:37

    Yeah I was right…

    Even stopping the nation’s money supply growth wasn’t difficult for Reagan, despite the supposed independence of the Federal Reserve Board. “It took only one visit at the end of April 1981, when President Reagan finally called Volcker to the White House and in no uncertain terms asked Volcker whether he intended to control the money of America. . . the Fed officials froze money growth for six months to October 1981, thus precipitating the current recession.” What’s more, adds the reporter, “The President should have pinned Voicker’s ears back long before April 1981. “(44)

    http://www.psychohistory.com/reagan/rp62x67.htm

  34. Gravatar of Cameron Cameron
    8. November 2010 at 20:38

    China, Germany, Russia, Brazil, Krugman, Rajan (I could go on of course) and now Palin? Everyone seems to be jumping on the bandwagon.

    I feel like there should be some counter-movement to anti-QE2 policy. How about we all stop shaving(and grow Bernankesque Beards) until Bernanke can raise inflation expectations to 2.5%?

    Seriously though, has there ever been a time when Fed policy was so controversial outside the US? I guess the US deserves it for pressuring China so bunch, but this is insane. Maybe conservatives will get angry that other countries are telling us what to do and liberals will support the opposite of whatever Palin says and both sides will support further monetary easing! A guy can dream.

  35. Gravatar of Lorenzo from Oz Lorenzo from Oz
    8. November 2010 at 21:44

    Hussman lost me when he claimed that
    Bernanke is essentially operating from this playbook, despite the fact that it has done Japan no good at all. This does not describe what Japan has actually done, as has been much discussed on this blog.

    I find suggestion that the Fed has caused financial bubbles a little odd. As if the “destruction of prudence” that, for example, Russ Roberts discusses had nothing to do with what has happened. Bubbles occur when folk massively discount downside risk. There really has to be some supply constraint (e.g. in housing) or other implicit guarantee (e.g. the pattern of bailouts going back decades or “walk away” mortgages) operating as well as a plentiful supply of credit. That is why some places had housing bubbles and others didn’t, for example, even though credit was plentiful everywhere.

    I keep going back to Australia’s experience of monetary policy, which makes the whole “inflation is looming, it is such a threat!” line seem just bizarre to me.

    The other shoe has not dropped down here in housing — our housing stock is currently 3.5 times GDP in value, which seems somewhat overpriced: the Economist recently rated our housing 63% overpriced. But that is a result of regulatory supply constraints, perhaps aggravated by credit availability.

  36. Gravatar of 123 123
    9. November 2010 at 04:36

    Scott, you said:
    ” I’ve read some other stuff by Hussman, I conclude either:

    1. Knowledge of macro is not required for investment success.

    or

    2. He’s been very lucky.”

    Hussman’s views are very close to Cochrane’s and Barro’s, so I don’t agree with #1.

    #2 – The outperformance of his largest fund can mostly be attributed to two things – he avoided the dot com and telecom bubble, and he did not believe the Fed during the current crisis, except for the brief period in October or November 2008. These two things are not pure luck.

    His greatest mistake was avoiding stocks in March-June 2009 – this is a combination of bad luck, risk preferences and negative skill.

    I was quite proud when I was right in not believing Hussman in October-November 2008 and in March-June 2009.

  37. Gravatar of Mattias Mattias
    9. November 2010 at 05:11

    It would be interesting to know how popular the “Austrian ideas” (ABCT, low interest rates = easy money, liquidate everything in a quick recession and solve the problems) were among all these investment gurus before say 2000.

    I understand these ideas got pretty discredited after the GD but how could they pop up so quickly again half a century later. It’s almost like there was a hidden sect spreading the ideas, biding their time. Or were they as popular in the 70s as they are today?

  38. Gravatar of Mike Sandifer Mike Sandifer
    9. November 2010 at 06:06

    Mattias,

    I wonder how many of those supposed ABCT people would support liquidationism, including the elimination of unemployment compensation, while unemployed. Are there any Austrians on the unemployment line?

    Part of this movement, and the anti-tax movement in general, is motivated by shear selfishness. Get some of them in private, and not only does racism sometimes pop out(I live in the south, for what it’s worth), but also statements that they simply don’t want their money going to help anyone else.

  39. Gravatar of scott sumner scott sumner
    9. November 2010 at 07:27

    Aidan, Yes, But Reagan gave him more support than Carter. Political pressure matters.

    Mike, I guess so.

    James, The Fed is not monetizing the debt, the reserves now earn interest.

    Bob, I gave several longer responses to Hussman in the past few weeks, and I don’t have time to keep writing those long replies over and over gain. Go back and read my critique of Hussman, and then defend him if you can. The stuff people sent me was 1938 vintage pushing on a string Keynesianism.

    Benjamin, Carter appointed Volcker in August 1979. As of January 1981 there had been no significant moves to restrain inflation–it was as high as it had ever been. Reagan publicly supported Volcker’s tight money policy of late 1981. In 1984 many Reagan officials started pushing the Fed toward easy money. So I don’t see how my post can be viewed as arguing Reagan was an inflation hawk–it was a very mixed picture.

    Nevertheless the fact remains that inflation was defeated during the Reagan administration because of actions taken during the Reagan administration which were supported by Reagan.

    I’m glad you mentioned fiscal stimulus–just another example of how powerless it is. And once again we have seen fiscal stimulus fail to boost growth above the level forecast when the fiscal stimulus was adopted.

    Spencer, You said;

    “Interest rates and or tight money policy peaked less than six months after Reagan took office and for the next seven and a half years he enjoyed one of the largest declines in interest rates in recorded history.

    Tell me, what President wouldn’t have supported this policy?”

    That just shows what Milton Friedman and I have been arguing for years—that falling interest rates are a sign of tight money. The same occurred during the Hoover administration. Do you think most presidents would have approved of Fed policy during the Hoover administration?

    Patrick, Thanks, that’s also what I recall.

    matt, It could indicate a bi-modal distribution of forecasts, but the TIPS have been far more accurate. Gold prices are affected by many things, and are set in world markets. Do high gold prices also indicate that high inflation is coming to Japan? Some people make the mistake of assuming gold reflects US conditions, whereas it affects world conditions. I’ve also read that there has been a recent decline in new gold discoveries, and massive central bank gold accumulation. Many factors go into gold prices.

    Morgan, In Carter’s defense, he dumped Miller for Volcker.

    Full employment hawk, You said;

    “This is obviously wrong. When the Fed buys long-term bonds, which have a rate significantly above zero, and pays for it with base money (M0), which pays .25% if held as reserves and zero if held as currency, it is certainly not exchanging one zero rate asset for another.”

    I agree. Just to be clear, I was parroting left wing arguments. BTW, it would also be wrong if they were buying zero rate T-bills

    Presidents can find ways to dump Fed chairs, and Carter did. And Reagan reappointed Volcker once, but not twice.

    I agree about Meltzer, Krugman, M2, etc.

    Joe, I don’t think GS can see the future either. I believe in the EMH. Rather I think they understand how the economy works, and in particular they understand that monetary stimulus can work.

    I didn’t mean to imply Hussman was dumb, but I formally apologize if that was the implication. I meant that the stuff from Hussman that people keep sending me is very non-impressive. He was basically arguing that monetary stimulus doesn’t boost AD. So if he’s has investment success, I don’t think it is based on his macro model–that was my point.

    As you may know, I am supremely unimpressed by claims that so and so is a successful investor.

    Morgan, Interesting, April 1981 was roughly when the tight money started. I think that was probably an important factor. As of April 1981 I think annual inflation had been running near 10%, by September 1982 I think it was around 4%. (I’m sure I’m slightly off, this is from memory.)

    Cameron, You said:

    “Seriously though, has there ever been a time when Fed policy was so controversial outside the US?”

    Yes, 1933, another time we were right to stimulate.

    Lorenzo, Yes, all good points. The Economist has been so consistently wrong about the housing bubble that it is ridiculous, and yet they run ads bragging about how right they’ve been. How much has housing in Australia risen since The Economist claimed it was overvalued around 2003 or so? Yes, someday it will fall, but that’s how markets operate.

    123, See my reply and apology above. But I don’t agree about Barro. Hussman said monetary stimulus doesn’t boost NGDP (in the passage I read), Barro would never say that.

    I say it was luck, and his errors prove it. You see things differently. If you’ve been with him when he is right, and not when he is wrong, you must be super rich! BTW, I was 100% invested in March-June 2009.

    BTW, Assume my 401k was $X in April 1, 2003. I’ve added another $X since in new contributions. The current balance is more than $(7*X.) How does that compare to Hussman? I’m too lazy to do the complicated math. I don’t think I can beat markets, even though I’ve out-performed buy and hold, so why should I be impressed by others? I’ve been lucky. (To be fair, I’ve mostly been in Asia, which has greatly outperformed the US. So it’s not that impressive. But isn’t regional weighting also a choice?)

    Mattias, You might want to google my old post entitle We’re all Austrians Now (add the money illusion to the google bar.) I discuss this issue.

  40. Gravatar of 123 123
    9. November 2010 at 08:54

    Scott, you said:
    ” See my reply and apology above” and “So if he’s has investment success, I don’t think it is based on his macro model-that was my point.”
    But his second important success (almost completely avoiding 2008 market crash) was clearly based on macro.

    “But I don’t agree about Barro. Hussman said monetary stimulus doesn’t boost NGDP (in the passage I read), Barro would never say that.”
    Hussman’s views are a mix of Cochrane and Barro. He agrees with Cochrane on ineffectiveness of monetary policy and with Barro with ineffectiveness of fiscal policy. Here’s what Hussman once said about Barro: “This is also why Robert Barro, not Eugene Fama nor Kenneth French, ought to receive the Nobel Prize in economics.”

    “BTW, Assume my 401k was $X in April 1, 2003. I’ve added another $X since in new contributions. The current balance is more than $(7*X.) How does that compare to Hussman?”
    Hussman would strongly disagree with such comparison period, he always says a fair comparison period should start at market top and end at market top, or it should start at market bottom and end at market bottom, so only full cycle performance should be measured.
    For the period you gave Hussman achieved approx 2.7X. But this excludes his most successful period – he achieved 50% gain in 2000-2003.
    But the most important difference is preference for risk. His fund is tailored for people with low or medium job security who cannot afford significant drawdown risk, so Hussman’s portfolio was much less volatile than yours. If we take apples to apples comparison and eliminate his hedging activities, you would get a 3.5X – not bad for a domestic portfolio.

    You said:
    “To be fair, I’ve mostly been in Asia, which has greatly outperformed the US. So it’s not that impressive. But isn’t regional weighting also a choice?”
    He recently started an international fund, but he recommends that investors allocate only 10% to international securities. It must be that he sees some kind of risk in international securities that he wants to avoid.

  41. Gravatar of JTapp JTapp
    9. November 2010 at 09:08

    It gets worse. The WSJ editorial board sides with Palin instead of its journalists. Someone please make it stop.

  42. Gravatar of James in London James in London
    9. November 2010 at 10:09

    “The Fed is not monetizing the debt, the reserves now earn interest.”

    The US Treasury is projected to borrow from the markets a net $1.3tn in fiscal 2011. The Fed will be buying back c$800bn from the markets in fiscal 2011, or a net $500bn-600bn ex the reinvestment of the MBS repayments. QED, or the one helps offset the other. A large chunk of the $1.3tn doesn’t really have to be borrowed, or a large chunk of Federal spending comes from the Fed printing money.

    Interest on reserves is a red herring.

  43. Gravatar of Bob OBrien Bob OBrien
    9. November 2010 at 10:16

    Scott said:

    “BTW, Assume my 401k was $X in April 1, 2003. I’ve added another $X since in new contributions. The current balance is more than $(7*X.) How does that compare to Hussman? I’m too lazy to do the complicated math. I don’t think I can beat markets, even though I’ve out-performed buy and hold, so why should I be impressed by others? I’ve been lucky. (To be fair, I’ve mostly been in Asia, which has greatly outperformed the US. So it’s not that impressive. But isn’t regional weighting also a choice?)”

    Scott, if you decide to go into the money management business I will be your first client. I would put my high risk money with you but keep my must have retirement money with Hussman. This would be the best of both worlds.

  44. Gravatar of scott sumner scott sumner
    11. November 2010 at 09:19

    123, I partly (not completely) avoided the 2008 crash–and that certainly wasn’t based on macro.

    I think overseas markets have a much brighter future than the US market–and recently they have done better.

    I’m completely unimpressed by investment success. For every million investors, one will achieve once in a million success just based on luck. And the record you describe for Hussman is far from once in a million.

    JTapp, Yes the WSJ thought money was too tight in 1984 when we had 4% inflation.

    James, Monetizing the debt means high inflation–where is the inflation?

    Bob, I’m tempted, I’m guessing those guys on Wall Street earn more than a teacher’s salary. 🙂

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