How to avoid a recession

This comment in the WSJ caught my eye:

Fed officials will have to decide whether or when to raise interest rates to restrain inflation. If they move too little or too late, they risk letting inflation get worse for longer. If they move too much or too soon, they risk causing an economic downturn.

Actually, the bigger risk is that moving too late will cause a recession. Right now, the labor market is quite strong and the economy has a lot of upward momentum. Inflation expectations remain modest. Modestly slower NGDP growth will not raise the unemployment rate. The economy has a lot of upward momentum. Inflation expectations remain modest. Thus it is a good time to slow inflation.

Recessions tend to occur later in a cycle, when growth has slowed and inflation expectations have risen to unacceptably high levels. The biggest risk is not a recession in 2022, it’s a recession in 2024 or 2025.


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90 Responses to “How to avoid a recession”

  1. Gravatar of Rajat Rajat
    22. November 2021 at 12:02

    Not disagreeing, but I guess people look back at periods like 1994 when the Fed raised in February causing a bond market ‘bloodbath’ and slower growth in the first half of 1995, without perhaps realising that helped prolong the expansion until 2000. Probably it’s more an overhang of a frustration with the Fed over 2013-2016 when they were too conservative with allowing growth to run. Also, one could draw a parallel with Trichet and the ECB in 2011. Obviously, unemployment was a lot higher in Europe then than in the US now but inflation was high possibly due to one-off price rises.

  2. Gravatar of Nathan Nathan
    22. November 2021 at 12:14

    Scott, readers.

    Scott, readers, how do you like economic mysteries? I believe I’ve solved one. Are you aware of the divergence between the U.S lfpr and that of every other country since 2000? Well, there is another divergence, which has been completely overlooked, and that is the duration of unemployment. At the end of 2019, the U.S duration of unemployment was 50% higher than the level in 2000. But the U.S is alone in having an elevated duration of unemployment. I have a post that ties these two things together. You can read it here https://strangetidings.substack.com/p/americas-mysterious-labor-market

  3. Gravatar of ssumner ssumner
    22. November 2021 at 14:16

    Rajat, I completely agree that the 1994 policy was successful.

  4. Gravatar of ssumner ssumner
    22. November 2021 at 14:24

    Nathan, You are saying the labor market is currently weak?

  5. Gravatar of Michael D Sandifer Michael D Sandifer
    22. November 2021 at 15:07

    You make very good points, but I prefer to see the economy run a bit hot for at least a few years, because I strongly suspect we’ll get more sustained RGDP growth than commonly expected.

  6. Gravatar of Nathan Nathan
    22. November 2021 at 16:05

    Scott, I’m only looking at the period ending in 2019, before the pandemic began.

  7. Gravatar of Michael D Sandifer Michael D Sandifer
    22. November 2021 at 17:05

    In line with my prediction that sustainable RGDP growth will exceed expectations, I think the S&P 500 will end up in the range of 5300 to 5800 by the end of next year or so, and probably closer to 5800. I don’t expect long-term inflation expectations to rise much in the process. That translates into roughly 1% higher-than-expected sustainable RGDP growth.

    Consistent with this notion are pretty tame inflation forecasts in the 5 and 10 year breakevens, the 4.8% NGDP growth Hypermind forecast for Q4 of 2022, and S&P 500 earnings expectations consistent with a 4.7% index discount rate, which is about the right time frame to expect convergence with the nominal economic growth rate. Also, the VIX is still high relative to pre-recession, indicating there are still significant potential gains from reduced risks for stocks going forward.

    In my view, the Fed may finally allow for the temporary spike in inflation that is required to allow the economy to finally return to full employment, after decades of slack. Yes, even 3.5% was still too high. See the SRAS/SRAD curves for part of my reasoning here.

    Consistent with this, nominal wage growth has been lagging NGDP growth since the early 80s, when money started becoming tighter. It’s not that inflation didn’t need to come down, but that it did not need to come down as quickly as it did.

    I still reject the notion that most of the decline in real interest rates was secular. I don’t buy the savings/investment equilibrium model economists present to students. I think that nominal rates should probably equal NGDP growth, in equilibrium. I simply don’t believe that an economy with expected real GDP growth should have negative real interest rates going forward.

  8. Gravatar of Ray Lopez Ray Lopez
    22. November 2021 at 17:37

    Absurd. As Keynes pointed out about Sumner (i.e. about monetarists) they confuse cause and effect, as if somebody wishing to get fat buys a bigger pants belt.

    OT: Sumner once criticized Fed chair Arthur Burns, but from the below he seems a good man, who did not believe either fiscal or monetary theory (and in fact neither one is really true): from B. Appelbaum – The Economists Hour (2020) on Arthur Burns: But Burns did not believe in Keynesianism or monetarism. He came from an older tradition that viewed the economy as a complex organism irreducible to stable formulas. His was the economics of the age of biology, and he did not regard the age of physics as an improvement. “Subtle understanding of economic change comes from a knowledge of history and large affairs, not from statistics or their processing alone — to which our disturbed age has turned so eagerly in its quest for certainty,” Burns wrote in 1969.11 The world was nuanced and confusing, and the work of a central banker was necessarily judgmental. He loved to gather data, but in the entrails he saw answers to specific problems, not eternal verities. “The argument between the Friedmanites and the Keynesians is a false argument,” he told a friend in the 1970s. “It’s an argument about how well this or that group of economists can forecast the future. They cannot do so, and thank God they can’t.”12

  9. Gravatar of ssumner ssumner
    22. November 2021 at 22:40

    Nathan, OK, that’s better. But I wouldn’t even call the labor market in 2019 “weak”. Labor force participation rates are affected by all sorts of factors, and are hard to interpret.

    Also, I find the prime age comparisons between countries to be quite misleading. Why only prime age, why not total hours worked per adult? By that measure, the US is far above Europe.

    Ray, LOL. How did that Arthur Burns approach work out when he ran the Fed? (1970-78)?

    I can’t believe you are citing Burns on monetary theory. It would be like citing President Bush “W” on Middle Eastern policy.

    And Keynes was saying that money is non-neutral—is that your point?

  10. Gravatar of rinat rinat
    23. November 2021 at 04:24

    “the labor market is quite strong and the economy has a lot of upward momentum.”

    Sumner, again, fails to include the millions of Americans who have stopped looking for work.

    The unemployment rate is exceptionally high; hence, the crime, violence, looting, number of americans looking for work abroad, etc, etc.

    Instead of trying to ‘impose your will” upon others, I suggest calling for the end of the fed, the end of micro managing the supply of money, and getting your entire profession to apologize profusely for indebting future generations. History will look at your generation as the most selfish, and keynesians in particular as the most disgusting.

  11. Gravatar of bill bill
    23. November 2021 at 06:42

    Today’s situation is another highlight of the benefits of NGDP over trying to hit a natural rate of unemployment. It’s always hard to estimate when we’ve hit NAIRU. But even harder when the labor force is being hit with so many unique situations (fear of covid, reduced daycare availability due to covid, supply constraints on inputs, lots of deficit spending, and more). That said, if the number of people willing to work in the next 12 months increases by say 3% (a one-time change) because those concerns resolve, then an NGDP target of 4% could lead to less than optimal results.

  12. Gravatar of Nathan Nathan
    23. November 2021 at 06:47

    Scott, the reason I say the labor market in 2019 was weak, is because the duration of unemployment was at recessionary levels, i.e. equal to the level in 2003 when unemployment was 6%+.

  13. Gravatar of nick nick
    23. November 2021 at 07:15

    https://www.infowars.com/posts/federal-reserve-encourages-americans-to-replace-thanksgiving-turkeys-with-soybean-products/

    Fuck you Sumner.

    I’m going to buy two Turkey’s, and throw away the other one just to piss off your communist federalist reserve.

    Don’t tell me what to buy.

  14. Gravatar of David S David S
    23. November 2021 at 09:33

    Rajat’s comment also made me wonder about Fed actions prior to and during 2000. Did that cause the mild recession of 2001? I’m probably indulging in chartism looking at FRED, but there seem to be some parallels to the actions taken just before the Great Recession–but policy moves from 2000 through 2002 were expansionary and unemployment rates were a lot milder.

  15. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    23. November 2021 at 10:06

    Professor Pritchard used to read Arthur Burn’s correspondence to the class. Burns was clueless. The problems stemmed from using the wrong criteria (interest rates, rather than member bank legal reserves) in formulating & executing monetary policy.

    Net changes in Reserve Bank credit (since the Accord) were determined by the policy actions of the Federal Reserve. But William McChesney Martin, Jr. changed from using a “net free” or “net borrowed” reserve approach to the Federal Funds “Bracket Racket” c. 1965. Note: the Continental Illinois bank bailout provides a spectacular example of this practice.

    The effect of tying open market policy to a fed funds bracket was to supply additional (& excessive) legal reserves to the banking system when loan demand increased. Since the member banks had no excess reserves of significance, the banks had to acquire additional reserves to support the expansion of deposits, resulting from their loan expansion. If they used the Fed Funds bracket (which was typical), the rate was bid up & the Fed responded by putting though buy orders, reserves were increased, & soon a multiple volume of money was created on the basis of any given increase in legal reserves. This combined with the rapidly increasing transaction velocity of demand deposits resulted in a further upward pressure on prices. This is the process by which the Fed financed the rampant real-estate speculation that characterized the 70’s,

    re: “Recessions tend to occur later in a cycle, when growth has slowed and inflation expectations have risen to unacceptably high levels.”

    link Philip George: “The Riddle of Money Finally Solved”
    http://www.philipji.com/riddle-of-money/

  16. Gravatar of ssumner ssumner
    23. November 2021 at 10:07

    bill, I’d say the opposite. If employment gets back to trend, then 4% NGDP growth (the previous trend rate) is appropriate. If employment doesn’t get back to trend then we will probably overshoot the Fed’s 2% inflation target with 4% NGDP growth.

    Nathan, I’d be inclined to look at that differently. We have strong reason to believe the labor market was strong in 2019, from a variety of indicators. If the duration of unemployment indicator doesn’t show that, then maybe it’s not a good indicator of labor market strength.

    David, I’d say the Fed did contribute to the 2001 recession.

  17. Gravatar of Nathan Nathan
    23. November 2021 at 10:22

    Scott, the duration of unemployment rises in literally every single recession. It’s a very good indicator of how easy or not it is to find a job.

    A job market weaker than the unemployment rate would imply, can also explain the low level of single family house construction. Because the job market is weak, people are reluctant to take out a mortgage to buy a house. Instead they prefer to rent. This is the cause of the shift towards apartment building and away from single family home construction.
    In 2000, single family home construction was 1.2 million. In 2019 it was only 900%. Apartment building, meanwhile was slightly higher in 2019 than the level in 2000.

  18. Gravatar of Nathan Nathan
    23. November 2021 at 11:02

    I meant to say 900k not 900%.

    But Scott, I think one reason you are not seeing what I am seeing is that you are looking at indicators that suggest unemployment and nominal demand was strong in 2019. And I agree that aggregate demand was at a good level in 2019. The cause of the weak labor is not a lack of aggregate demand. It’s something else entirely, though it does create similar conditions to recessions – higher than normal levels of involuntary unemployment.

  19. Gravatar of Michael D Sandifer Michael D Sandifer
    23. November 2021 at 11:16

    Nathan,

    You’re not wrong to think money was tight before the last recession, as many indicators show. Monetary policy still wasn’t quite loose enough before the trade wars, and it certainly tightened during and after, just before the pandemic came on.

    From a conventional econ perspective, Scott has very good arguments, as-per-usual, but I think conventional econ theory is wrong in some important respects.

    Most economists accept the idea that it can be perfectly reasonable to think monetary policy is on track, despite negative real rates going out into future years coupled with anemic, but positive NGDP growth expectations, stock prices appreciating by 25%-per-year, and the return on capital and NGDP growth out of equilibrium. What economists call a “savings glut” in this case, I call “hoarding”.

    Also, looking at the labor market, the unemployment rate went much lower, even with under-target inflation, than most economists thought possible during the recovery from the Great Recession. Many economists originally estimated the natural unemployment rate at about 5.5%, but it reached a low of 3.5%. Many more people came off the sidelines to find jobs than most economists predicted. Why were they sidelined, if not for tight money?

    I also consider that real wages had been falling since the Great Moderation began, meaning nominal wages weren’t rising as fast as NGDP. Why should that be the case, if there wasn’t slack in the labor markets over that entire period? (Yes, real wages were also falling during the Great Inflation, but that was obviously due to the opposite problem). The data shows that the employment level tends to grow at the rate of the price level, while strong real wage growth tends to depend on real GDP growth.

    One explanation that explains the above facts is that there has been a shortage in the medium of account since about 1983. The inflation rate needed to come down during the Great Moderation, but not as quickly as it did.

    This is similar to a disagreement I had with Scott about Raghuram Rajan’s time running India’s central bank. We both agree that inflation had to come down, but it did not need to come down as quickly as Rajan wanted. Rajan couldn’t read the room, so he was an easy political casualty.

  20. Gravatar of Michael D Sandifer Michael D Sandifer
    23. November 2021 at 11:19

    I meant to say there’s been a shortage in the medium of exchange, which in the case of the US, is also the medium of account.

  21. Gravatar of Nathan Nathan
    23. November 2021 at 11:39

    Michael, you have misunderstood what I am saying. I don’t think money was too tight in 2019. I think it was about enough to result in the lowest level of unemployment without stoking above target inflation.

    The cause of the weak labor market in 2019 was something else. I invite to read more here: https://strangetidings.substack.com/p/americas-mysterious-labor-market

  22. Gravatar of Michael D Sandifer Michael D Sandifer
    23. November 2021 at 12:03

    Nathan,

    Thanks for the correction. You make some interesting observations, but trying to tie so many disparate negative trends together empirically will be very difficult.

    I have no doubt there are supply-side issues, including in the US labor market, but I think the biggest problem is with monetary policy. The US is unique in the degree to which the rest of the world demands dollars, particularly during periods of tumult. I think this has caused the neutral interest rate to be lower than even commonly recognized, hence money is tighter in the US than commonly recognized.

    The US has done relatively better than the Europe or Japan in terms of NGDP growth, but is sicker economically than commonly recognized, due to unrecognized potential.

  23. Gravatar of bill bill
    23. November 2021 at 13:43

    Scott,
    I agree under the terms of a Fed with an AIT (which is what we have, Lol).
    I was thinking of a Fed with an NGDPLT. In that case, the issue is mostly resolved over time, though I personally hate to see a target that leads to any periods of deflation.

  24. Gravatar of ssumner ssumner
    23. November 2021 at 19:54

    Nathan, You said:

    “It’s a very good indicator of how easy or not it is to find a job.”

    Why do you think that? That’s not at all obvious to me. I’d expect the unemployment rate to be a better indicator.

  25. Gravatar of dtoh dtoh
    23. November 2021 at 20:05

    Scott,

    IMHO you can change inflation with interest rates or expectations of interest rates alone…. but not much.

    The way to change inflation is by changing the balance of supply and demand (and/or the short term expectation of that balance.)

    To me, current inflation seems more of a supply issue. I’m not sure how much tighter money would help that.

    I’m in the Michael Sandifer camp on the potential for higher real growth for a couple of reasons. Labor is the only hard cap on growth and it’s much less of a cap than it used to be because a) a lot of investment actually reduces the amount of labor used, and b) there’s potentially a lot of room for growth in the lfpr.

  26. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    24. November 2021 at 08:16

    re: “I’d say the Fed did contribute to the 2001 recession”

    No, Greenspan was the direct cause of the 2001 recession. As Dr. Richard G. Anderson told me: “Spencer, this is an interesting idea. Since no one in the Fed tracks reserves”

    The idea the legal reserves were not binding is spurious. Greenspan jacked up the volume of required reserves in fear of Y2K’s possible repercussions.

  27. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    24. November 2021 at 08:20

    re: “can also explain the low level of single family house construction”

    Bernanke turned otherwise safe assets into impaired assets. Then he defunded the nonbanks (introduced the payment of interest on interbank demand deposits). This bankrupt half the home builders.

  28. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    24. November 2021 at 08:23

    re: “money was tight before the last recession”

    As I said: Post by flow5 on Nov 26, 2019 at 6:45pm
    The 1st qtr. R-gDp in 2020 will be negative.
    And again, as I said: “The 4th qtr. 2019 is not the problem. The 1st qtr. 2020 will be negative.”
    Nov 26, 2019. 07:19 PMLink

  29. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    24. November 2021 at 08:25

    re: “What economists call a “savings glut” in this case, I call “hoarding”.”

    Yes, it is stock vs. flow. That’s our specious accounting system. An expansion of commercial bank time deposits (savings) is prima facie evidence of a leakage which collects in the form of unspent balances. With time deposits in our payment’s System now exceeding $15 trillion, it is undeniable that this is an important factor retarding the growth of the economy.

    The stoppage in the flow of monetary savings (funds held beyond the income period in which they are received, income not spent), which is an inexorable part of time-deposit banking, has a longer-term debilitating effect on demands, particularly the demands for capital goods (CAPEX).

  30. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    24. November 2021 at 08:35

    re: ” I think this has caused the neutral interest rate to be lower than even commonly recognized”

    Sure. Interest rates are determined by the supply of, and demand for, loanable funds. Loanable funds include bank credit and foreign portfolio investment. The monetization of debt increases the supply of loan funds, and decreases the demand for loan funds. And the sterilization of QE (impoundment of savings), destroys the transaction’s velocity of funds, prompting more QE.

  31. Gravatar of harry harry
    24. November 2021 at 09:18

    “lot of upward momentum”.

    Really? 30 trillion in debt is “upward momentum”. Well, I suppose it is “upward”….

    Sumner reminds me of the ministry of magic; i.e., the institution is always correct, even willing to silence their critics through decrees, until they realize that those critics were right. Then they stand there looking like morons, attempting to deflect blame on others. They will say things like “that is not what I said”, or “I didn’t mean it that way”, or “I just stated what everyone else was stating at the time”, or “my crystal ball isn’t working”, or “someone gave me wrong information”, etc, etc.

    It really does get old.

    A better blog article would say something like this:

    “Sorry folks, but I have no idea what I’m doing, what I’m talking about, and my models are shit because I cannot account for all of the variables – it’s impossible, you see, because there are too many variables to count.”

    That would at least be honest.

  32. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    24. November 2021 at 09:36

    And we knew this already:

    In 1931 a commission was established on Member Bank Reserve Requirements. The commission completed their recommendations after a 7 year inquiry on Feb. 5, 1938. The study was entitled “Member Bank Reserve Requirements — Analysis of Committee Proposal” its 2nd proposal:

    “Requirements against debits to deposits”
    http://bit.ly/1A9bYH1

    After a 45-year hiatus, this research paper was “declassified” on March 23, 1983. By the time this paper was “declassified”, Nobel Laureate Dr. Milton Friedman had declared RRs to be a “tax” [sic].

  33. Gravatar of Nathan Nathan
    24. November 2021 at 10:46

    Scott, I skipped over a comment of yours above, you said:
    ” Also, I find the prime age comparisons between countries to be quite misleading. Why only prime age, why not total hours worked per adult? By that measure, the US is far above Europe.”

    But in 2000, both the hours worked per adult and the lfpr was higher in the U.S than in Europe. So why is the U.S lfpr now lower? It’s not a small difference: the U.S lfpr is now 2% lower than Canada, 5% lower than the U.K, 5% lower than Germany and 6% lower than Japan. On average the U.S is 4-5% lower than the baseline of its peers.

    If the lfpr was the only divergence then you could perhaps just throw ones hands in the air and say “oh the lfpr is affected by various factors” but there’s three divergences, three mysteries. So now you have to say well there’s some unknown factor causing the lfpr divergence, there’s a second unknown factor causing the duration of unemployment divergence and a third unknown cause resulting in a decrease in single family construction (obviously it can’t be NIMBYism, because single family construction is down and apartment building is up relative to 2000 levels).

    It’s much more sensible, in my view, to bundle up these three divergences and say they are all the result of a strange labor market.

  34. Gravatar of Michael D Sandifer Michael D Sandifer
    24. November 2021 at 11:19

    Spencer Bradley Hall,

    Do you have a link to a summary of your perspective on monetary policy, or perhaps summarize it here? I only pick up bits and pieces, especially since I don’t read the comments of every post here.

  35. Gravatar of ssumner ssumner
    24. November 2021 at 13:50

    dtoh, Tighter money always reduces inflation, even if the inflation is due to a supply problem. I have several posts on that at Econlog.

    Nathan, I’m not sure that something being a mystery makes it a good indicator of labor markets. And Kevin Erdmann would argue that we do know why housing construction is down.

    Michael, Umm . . . do you really want to engage with Spencer?

  36. Gravatar of Ray Lopez Ray Lopez
    24. November 2021 at 14:24

    @SS: “And Keynes was saying that money is non-neutral—is that your point?” – no, the opposite, that monetarists and Keynesians are quite similar, that they believe in money non-neutrality. In fact, as I posted in another thread, some people accuse Friedman of appropriating Keynes’s ideas on monetarism and making them his own. Keynes believed in monetarism, but as a greatly weaker form of state intervention to jump start the economy than fiscal policy.

    Tell us, do you believe a mixed free-market economy like the USA’s is self-correcting, or is it inherently unstable and prone to settle in states of sub-optimal output? I suspect you are a statist who believes in government intervention in the business cycle, not unlike Keynes, Friedman, or dare I say it, Stalin or Mao Zedong (in a different context, as they had a command economy). And that includes your friends at places like the Hoover Institute who believe in monetarism, de facto statists through and through with libertarian leanings.

    Confess Scott Sumner, you like Big Brother and control over the money supply.

  37. Gravatar of Michael D Sandifer Michael D Sandifer
    24. November 2021 at 15:58

    Scott,

    I ask Hall, because I haven’t read enough of his posts to know better, if I should. It has occurred to me that he might be another MajorFreedom-type in a sense, but I thought I’d find out for sure since I’ve been seeing his name in the comments section for a long time and don’t really know much about the perspective.

    Besides, if he’s a crank, can I really claim to be better? I’m a guy who views and thinks about macroeconomic data a great deal, but only took a handful of relevant classes in college a generation ago. I’ve certainly had many more wrong ideas than correct ones, I read slowly, and have to be really careful not to be clumsy with numbers. I’ve had to work hard to try to overcome implicit assumptions when looking at research, as if I was starting from scratch, despite having developed some research skills in college.

    In fact, while my confidence in some of the ideas I express has slowly grown over time, I still may be wrong about everything. Metacognitively, I know this is likely the case, but I do, nonetheless, believe what I write.

  38. Gravatar of Michael D Sandifer Michael D Sandifer
    24. November 2021 at 16:31

    Perhaps I should add in my defense that, some of the questions I raise touch on outstanding mysteries in economics, such as why stock prices are more volatile than one would expect given conventional economic and finance theory. Also, economists aren’t good at forecasting, and I don’t know of a single one who even claims to be able to estimate the starred variables with much confidence, even in hindsight. The subjects of productivity growth and economic development are also full of mysteries, so there’s no doubt that macro theory is woefully incomplete. I just recognize that I don’t necessarily have anything useful to say, despite my views to the contrary.

  39. Gravatar of Matthias Matthias
    24. November 2021 at 17:49

    David S, one of the big mistakes during the Great Recession was interest on excess reserves.

  40. Gravatar of David S David S
    24. November 2021 at 18:49

    Matthias, I agree–Scott did a nice job of explaining that in his book–and pointing out how negative interest would have been the appropriate policy (and oh how the bankers would have screamed even though it would have probably shortened the downturn). BTW, my previous comment was about the 2001 recession, which was disproportionate in its impact compared to the Great Recession–and overshadowed by other events that year.

    I stopped in to thank Michael for his recent comments because I feel the same way. Economic forecasting is about as easy as predicting earthquakes. The only thing I know for sure is I’m making zero money from my 2021 Hypermind bet.

  41. Gravatar of bill bill
    25. November 2021 at 03:30

    @Matthias,
    I agree. Increasing IOR in October 2008 is incomprehensible. A very big mistake. Yet it continues. The banks get more from the Fed in IOR than they could holding 6 month T-bills.

  42. Gravatar of Nathan Nathan
    25. November 2021 at 04:54

    “Nathan, You said:

    “It’s a very good indicator of how easy or not it is to find a job.”

    Why do you think that? That’s not at all obvious to me. I’d expect the unemployment rate to be a better indicator.”

    The problem with using the unemployment rate is that if employment falls and jobs become more scarce then people can give, at least temporarily from job search. In that case the unemployment rate will also fall, along with the labor participation rate. This will be especially true job scarcity lasts for a long while, which has been the case for the last two decades.

    The average duration of unemployment gets around that issue (at least partly) because at any given time there are a large fraction of job searchers who have searched for a long time.

  43. Gravatar of Jeff Jeff
    25. November 2021 at 08:35

    Michael S: “In my view, the Fed may finally allow for the temporary spike in inflation that is required to allow the economy to finally return to full employment, after decades of slack.”

    Really? “Just a little bit of inflation” will reverse a decades-long trend? Wouldn’t it be more reasonable to posit that the demand for human labor has gone down over the years? Humans used to be required for a lot of things that they aren’t needed for anymore.

    Why would you even think that increasing labor force participation is a good thing? If you drastically increase the cost of living, so people who would otherwise be able to spend their time at leisure or caring for their families are forced to return to work, in what sense is that good?

  44. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    25. November 2021 at 09:40

    The idea of N-gDp level targeting, or even a “make up” policy is completely backwards. Sumner’s idea is unsubstantiated. And Sumner provides no connection between his theory and its implementation.

    Sumner doesn’t trade futures. What makes Sumner think that a futures market is the answer to accurate forecasting? How do you deliver GDP?

    #1 The St. Louis Fed Economic News Index: Real GDP Nowcast (STLENI) nowcast is now @ 3.96%
    #2 Atlanta GDPnow’s forecast is now @ 8.6 percent
    #3 New York Fed Staff Nowcast: “The uncertainty around the pandemic and the consequent volatility in the data have posed a number of challenges to the Nowcast model. Therefore, we have decided to suspend the publication of the Nowcast while we continue to work on methodological improvements to better address these challenges.” (September 3, 2021)

    #4 Bankrupt-u-Bernanke in his book “The Courage to Act”: “Monetary policy is a blunt tool” and “Unfortunately, beyond a quarter or two, the course of the economy is extremely hard to forecast”.

    The FED shouldn’t target N-gDp, the FED should target the roc in monetary flows, 2-3 percentage points greater than the roc in R-gDp.

  45. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    25. November 2021 at 09:52

    Bank lending is inflationary (expands the volume and turnover of new money). Non-bank lending is non-inflationary (activates existing savings, a matching).

    All monetary savings (saved deposits), originate within the payment’s system. Bank-held savings represent a transfer from transaction deposits. Unless monetary savings are expeditiously activated, a dampening impact is generated.

    Rather than bottling up existing savings, the authorities should pursue every possible means for promoting the orderly and continuous flow of monetary savings into real investment. That implies driving the banks out of the savings’ business (which doesn’t reduce the size of the payment’s system).

    The expansion of time deposits is deflationary, not inflationary. Monetary savings represent the publics’ shifting from demand (transactions) to time deposits (un-used or saved deposits). I.e., Contrary to Dr. Daniel Thornton, banks don’t attract savings. Contrary to all economists, from a system’s perspective, banks can’t use savings.

    Since time deposits originate within the banking system, there cannot be an “inflow” of time deposits and the growth of time deposits cannot, per se, increase the size of the banking system.

    George Selgin is also one dimensionally confused:

    “This is nonsense, Spencer. It amounts to saying that there is no such things as ‘financial intermediation,’ for what you claim never happens is precisely what that expression refers to.”

    There’s no transfer from saver to borrower. The granting of loans and investments creates new money. It does not transmit existing savings. What happens at the micro level is overridden at the macro level. Economists simply have not been able to fashion bank credit in a system’s context.

    Dr. Philip George’s equations prove this: ( the old ratio of M1 to the sum of 12 months savings )

  46. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    25. November 2021 at 10:01

    There’s no connection between M2 and inflation. M2 includes saved deposits. Economists are vacuous.

    See: “Other Banks”, the Annual Rate of Deposit Turnover for Demand Deposits, vs. Other Checkable Deposits, vs. Savings Deposits. The differences are striking. The conclusion is obvious.

    See: G.6 Debits and Deposit Turnover at Commercial Banks
    https://fraser.stlouisfed.org/files/docs/releases/g6comm/g6_19960916.pdf

    But Chairman Powell has dismissed the idea that money is important. As Martin Armstrong says: the FED “changed the publishing frequency on M1 and M2 money supply from weekly to monthly which is a direct result of the collapse in economic theory”.

  47. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    25. November 2021 at 10:27

    Michael D Sandifer:

    No summary. My time series was eliminated by Powell. I used required reserves to forecast with (legal reserves were always binding).

    That’s how I denigrated Nassim Nicholas Taleb’s “Black Swan” theory (unforeseeaable event), 6 months in advance and within one day. I predicted both the flash crash in stocks on May 6, 2010 and the flash crash in bonds on October 15, 2014.

    #1 The Stock Market Was Rocked by a Mysterious ‘Flash Crash’ Five Years Ago. What You Need to Know. | Barron’s
    https://www.barrons.com/articles/the-flash-crash-was-five-years-ago-tomorrow-could-it-happen-again-51598197215

    #2 “Diminishing market depth and a surge in volatility were both on display Oct. 15, when Treasuries experienced the biggest yield fluctuations in a quarter century in the absence of any concrete news. The swings were so unusual that officials from the New York Fed met the next day to try and figure out what actually happened”
    Link: “Diminished Liquidity in Treasury Market” or:
    https://acrossthecurve.com/?p=19499

    “(Bloomberg) — Trading Treasuries keeps getting tougher and tougher.
    For decades, the $12.5 trillion market for U.S. government debt was renowned for its “depth,” Wall Street’s way of talking about a market’s ability to handle large trades without big moves in prices. But lately, that resiliency has practically vanished — and that’s a big worry.”

  48. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    25. November 2021 at 10:43

    Who would want to trade Hypermind when they can short the CRB index in January?

  49. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    25. November 2021 at 10:48

    We knew the precise “Minskey Moment” of the GFC:

    AS I POSTED: Dec 13 2007 06:55 PM |
    The Commerce Department said retail sales in Oct 2007 increased by 1.2% over Oct 2006, & up a huge 6.3% from Nov 2006.

    10/1/2007,,,,,,,-0.47 * temporary bottom
    11/1/2007,,,,,,, 0.14
    12/1/2007,,,,,,, 0.44
    01/1/2008,,,,,,, 0.59
    02/1/2008,,,,,,, 0.45
    03/1/2008,,,,,,, 0.06
    04/1/2008,,,,,,, 0.04
    05/1/2008,,,,,,, 0.09
    06/1/2008,,,,,,, 0.20
    07/1/2008,,,,,,, 0.32 peak
    08/1/2008,,,,,,, 0.15
    09/1/2008,,,,,,, 0.00
    10/1/2008,,,,,, -0.20 * possible recession
    11/1/2008,,,,,, -0.10 * possible recession
    12/1/2008,,,,,,, 0.10 * possible recession
    RoC trajectory as predicted.

  50. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    25. November 2021 at 10:56

    In the U.S., the FDIC reduced transaction deposit insurance from unlimited to $250,000. This caused the “Taper Tantrum”, which I predicted in Dec. 2012 with my “market zinger” forecast. This dramatically raised the real rate of interest for saver-holders.

    In my application of this theory, the regulatory release of monetary savings, was as I commented on 12-16-12, 01:50 PM (and again on Dec. 15th 2012) – when the FDIC’s unlimited transaction deposit insurance was reduced to $250,000 on 12/31/2012.

    “We’re close to seeing the real power of OMOs. R-gDp is likely to accelerate earlier and faster than anyone now expects. The roc in M*Vt before any new stimulus is already above average.

    With low inflation (given some deficit resolution), Jan-Apr could be a zinger”

    Thus, we got the “taper tantrum” and subsequently above average R-gDp and N-gDp growth rates by putting savings back to work (simply by increasing money velocity).

    Zinger – a surprise, shock, or piece of electrifying news.

    Link: “Fact Check: Was 2013’s ‘Taper Tantrum’ Actually So Tumultuous?”
    https://www.fisherinvestments.com/en-us/marketminder/fact-check-was-2013s-taper-tantrum-actually-so-tumultuou

  51. Gravatar of ssumner ssumner
    25. November 2021 at 11:04

    Ray, You asked:

    I suspect you are a statist who believes in government intervention in the business cycle”

    Wrong!! (as usual)

    Nathan, But why would anyone have given up on looking for a job in 2019, when the economy was clearly booming?

  52. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    25. November 2021 at 11:10

    Using Dr. Philip George’s equation:

    “October 9, 2018: “At the moment, one can safely say that the Fed’s plan for three more rate hikes in 2019 will not materialise. The US economy will go into a tailspin much before that.”

  53. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    25. November 2021 at 11:13

    Sumner, were you Phi Beta Kappa at Chicago like Pritchard?

  54. Gravatar of Nathan Nathan
    25. November 2021 at 12:19

    “Nathan, But why would anyone have given up on looking for a job in 2019, when the economy was clearly booming?”

    You are assuming your conclusion.

  55. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    25. November 2021 at 13:26

    I cracked the code 42 years ago. When is the economics profession going to catch up?

  56. Gravatar of dtoh dtoh
    25. November 2021 at 17:50

    Scott,

    “Tighter money always reduces inflation, even if the inflation is due to a supply problem. I have several posts on that at Econlog.”

    It depends on how you define tighter money. If you mean a reduction in the money supply or a reduction in the rate of growth, then not necessarily. There has to be reduction of demand or an expectation thereof.

    Also even if you define “tighter money” as being a policy change (or announcement) that reduces demand, then I think you still have to make some assumptions about the symmetry (or lack thereof) across different sectors of the economy in the imbalance between supply and demand, in order for tighter money to be a sufficient condition to reduce inflation.

  57. Gravatar of ssumner ssumner
    25. November 2021 at 22:32

    Nathan, If you don’t think I have good reasons for believing the economy was booming in 2019, then I’m not sure what else I can say. I could cite dozens of reasons.

    dtoh, You said:

    “It depends on how you define tighter money. If you mean a reduction in the money supply or a reduction in the rate of growth”

    That’s not how I define tighter money, as I’ve indicated many times on this blog. The money supply is not a good indicator of the stance of monetary policy. Nor are interest rates.

    I don’t follow your final paragraph. Less aggregate demand leads to less inflation, ceteris paribus.

  58. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    26. November 2021 at 06:13

    D.L. Thornton Economics LLC

    “the close relationship between the growth rates of required reserves and total checkable deposits reflects the fact that reserves requirements apply only to checkable deposits”

    A tight monetary policy is where the rate-of-change in monetary flows, money X’s velocity, is less than 2 percentage points relative to the RoC in R-gDp.

  59. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    26. November 2021 at 06:18

    “More than one-third of U.S. residents rent their home. Most are under 45 years old and have attended college. 44.1 million or 35.9% of U.S. households rent their homes”

    “PERSONAL FINANCE – When your rent goes up 40%. As pandemic fades, many tenants see big hikes”
    https://www.cnbc.com/2021/11/01/rents-are-bouncing-back-what-to-do-if-you-expect-a-big-increase-.html

    FAIT or N-gDp level targeting stokes asset bubbles, inflates at a faster rate than income growth.

  60. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    26. November 2021 at 06:20

    “https://www.cnbc.com/2021/11/01/rents-are-bouncing-back-what-to-do-if-you-expect-a-big-increase-.html

    “The Commerce Department reported that U.S. consumer spending rebounded by 1.3% in October. That was despite inflation that over the past year has accelerated faster than it has at any point in more than three decades.”

  61. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    26. November 2021 at 06:29

    “Transitory Is Dead: Goldman Now Expects Fed To Double Pace Of Tapering In December, Hike Three Times In 2022”
    https://www.zerohedge.com/markets/transitory-dead-goldman-now-expects-fed-double-pace-tapering-december-hike-three-times-2022

    The FED’s liable to cave in. And the FOMC shouldn’t panic. The FED can prick any bubble – just like Bernanke over did it.

    2006 jan ,,,,,,, 45496 ,,,,,,, 0.04
    ,,,,, feb ,,,,,,, 43084 ,,,,,,, 0.01
    ,,,,, mar ,,,,,,, 41242 ,,,,,,, -0.02
    ,,,,, apr ,,,,,,, 42920 ,,,,,,, -0.03
    ,,,,, may ,,,,,,, 43648 ,,,,,,, -0.02
    ,,,,, jun ,,,,,,, 43278 ,,,,,,, -0.01
    ,,,,, jul ,,,,,,, 43328 ,,,,,,, -0.03
    ,,,,, aug ,,,,,,, 41162 ,,,,,,, -0.06
    ,,,,, sep ,,,,,,, 40865 ,,,,,,, -0.08
    ,,,,, oct ,,,,,,, 40088 ,,,,,,, -0.08
    ,,,,, nov ,,,,,,, 40543 ,,,,,,, -0.06
    ,,,,, dec ,,,,,,, 41461 ,,,,,,, -0.07
    2007 jan ,,,,,,, 43113 ,,,,,,, -0.11
    ,,,,, feb ,,,,,,, 41214 ,,,,,,, -0.09
    ,,,,, mar ,,,,,,, 39159 ,,,,,,, -0.11
    ,,,,, apr ,,,,,,, 41072 ,,,,,,, -0.09
    ,,,,, may ,,,,,,, 42699 ,,,,,,, -0.05
    ,,,,, jun ,,,,,,, 42034 ,,,,,,, -0.05
    ,,,,, jul ,,,,,,, 41164 ,,,,,,, -0.08
    ,,,,, aug ,,,,,,, 39906 ,,,,,,, -0.07
    ,,,,, sep ,,,,,,, 40460 ,,,,,,, -0.07
    ,,,,, oct ,,,,,,, 40161 ,,,,,,, -0.04
    ,,,,, nov ,,,,,,, 40331 ,,,,,,, -0.04
    ,,,,, dec ,,,,,,, 41048 ,,,,,,, -0.04
    2008 jan ,,,,,,, 42398 ,,,,,,, -0.07
    ,,,,, feb ,,,,,,, 41070 ,,,,,,, -0.05
    ,,,,, mar ,,,,,,, 39731 ,,,,,,, -0.04
    ,,,,, apr ,,,,,,, 41642 ,,,,,,, -0.03
    ,,,,, may ,,,,,,, 43062 ,,,,,,, -0.01
    ,,,,, jun ,,,,,,, 41616 ,,,,,,, -0.04
    ,,,,, jul ,,,,,,, 42083 ,,,,,,, -0.03
    ,,,,, aug ,,,,,,, 42055 ,,,,,,, 0.02
    ,,,,, sep ,,,,,,, 42456 ,,,,,,, 0.04
    ,,,,, oct ,,,,,,, 46930 ,,,,,,, 0.17
    ,,,,, nov ,,,,,,, 50363 ,,,,,,, 0.24
    ,,,,, dec ,,,,,,, 53723 ,,,,,,, 0.30

  62. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    26. November 2021 at 07:04

    Transitory doesn’t mean prices will come down. The damage is already done. Transitory means prices won’t continue to rise as fast.

    re: “Mr. Powell continues to state that he believes that the higher inflationary numbers will begin to drop off around the middle of next year.”

    If Powell can’t tell us exactly when inflation will subside, then he should be fired. I figured that out 42 years ago.

  63. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    26. November 2021 at 07:09

    “CHAIRMAN GREENSPAN. I must say that I have not changed my view that inflation is fundamentally a monetary phenomenon. But I am becoming far more skeptical that we can define a proxy that actually captures what money is, either in terms of transaction balances or those elements in the economic decision-making process which represent money. We are struggling here. I think we have to be careful not to assume by definition that M1, M2, or M3 or anything is money. They are all proxies for the underlying conceptual variable that we all employ in our generic evaluation of the impact of money on the economy. Now, what this suggests to me is that money is hiding itself very well.”

  64. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    26. November 2021 at 07:11

    At the height of the Doc.com stock market bubble, Federal Reserve Chairman Alan Greenspan initiated a “tight” monetary policy (for 31 out of 34 months).

    Note: A “tight” money policy is defined as one where the rate-of-change in monetary flows (our means-of-payment money times its transactions rate of turnover) is no greater than 2% above the rate-of-change in the real output of goods and services.

    Greenspan then wildly reversed his “tight” money policy (at that point Greenspan was well behind the employment curve), and reverted to a very “easy” monetary policy — for 20 consecutive months (i.e., despite 14 raises in the FFR (June 30, 2004 until January 31, 2006), – every single rate hike was “behind the inflationary curve”, behind RoC’s in long-term money flows). I.e., Greenspan NEVER tightened monetary policy.

    And as soon as Bernanke was appointed to the Chairman of the Federal Reserve, he immediately initiated, his first “contractionary” money policy for 29 contiguous months (coinciding both with the end of the housing bubble, and the peak in the Case-Shiller’s National Housing Index in the 2nd qtr. of 2006 @ 189.93), or at first, sufficient to wring inflation out of the economy, but persisting until the economy plunged into an economic wide depression).

    For > a 2 year period, RoC’s in M*Vt, proxy for inflation (for speculative assets), were NEGATIVE (less than zero!).*

    Unfortunately, when long-term money flows peaked in July, which was reported with a lag on Aug 14, 2008 · when the government announced that the annual inflation rate surged to 5.6% in July – the highest point in 17 years; after July, both the RoC in short-term money flows and long-term monetary flows, simultaneously, fell off a high cliff (because of the lag effect of money flows).

    Money market and bank liquidity continued to evaporate despite the FOMC’s 7 reductions in the target FFR (which began on 9/18/07 until 4/30/08). Bernanke didn’t initiate an “easy” money policy, continuing to drain liquidity, despite Bear Sterns two hedge funds that collapsed on July 16, 2007, and immediately thereafter filed for bankruptcy protection on July 31, 2007 — as they had lost nearly all of their value.

    Bernanke’s 29 contiguous months of a massive contraction of American Yale Professor Irving Fisher’s price level, the massive tightening of monetary conditions in the US. caused a sharp rise in E-$ money, in E-$ demand. Foreign central banks did not have direct access to dollar liquidity swaps from the Fed (as illustrated by the sharp drop in EUR/USD from close to 1.60 in July 2008 to 1.25 in early November 2008).

    BuB didn’t even begin to try and ease monetary policy until Lehman Brothers later filed for bankruptcy protection (it was one the Federal Reserve Bank of New York’s primary dealers in the Treasury Market, disrupting the primary dealer system), on September 15, 2008. The next day AIG’s stock dropped 60%.

    I.e., BuB maintained his “tight” money policy [i.e., credit easing, or mix of assets, not quantitative easing –injecting new money and excess reserves]. BuB literally didn’t ease monetary policy until March 2009 (when the rate-of-change in money flows finally reversed, when stocks turned).

    The FOMC’s “tight” money policy was due to flawed Keynesian dogma (using interest rate manipulation as a monetary transmission mechanism), rather than by using open market operations of the buying type so as to expand legal reserves and the money stock — and thus counteract the surgically sharp fall in AD, esp. during the 4th qtr. of 2008.

    On January 10, 2008 Federal Reserve Chairman Ben Bernanke pontificated: “The Federal Reserve is not forecasting a recession”.
    Bernanke subsequently initiated the economy’s coup de grâce during July 2008 (his second ultra-contractionary money policy). The 3rd contractionary policy was the introduction of the payment of interest on excess reserves, which destroyed non-bank lending/investing (the 1966 S&L credit crunch, where the term was first introduced, is the economic antecedent and paradigm).

    Note aside: the 2 year rate-of-change, RoC in M*Vt (which the FED can control – i.e., the RoC in N-gDp), peaked in the 2nd qtr. of 2006 @ 12%. Bernanke let it fall to 8% by the 4th qtr. of 2007 (or by 33%). N-gDp fell to 6% in the 3rd qtr. of 2008 (another 25%). N-gDp then plummeted to a -2% in the 2nd qtr. of 2009 (another – 133%). That’s what created the cry, epitomized by Scott Sumner, for targeting N-gDp.

    By withdrawing liquidity from the financial markets (draining legal reserves and the money stock), risk aversion was amplified, haircuts were increased, additional and/or a higher quality of collateral was required, liquidity mis-matches were magnified, funding sources dried up, long-term illiquid assets went on fire-sale, non-bank deposit runs developed (the ECB, which routinely conducts open-market operations “with more than 500 counterparties throughout the Euro Zone), withdrawal restrictions were imposed, forced liquidations lowered asset values, counterparties’ credit default risks mushroomed– all of which contributed a general crisis of confidence & frozen financial markets (regulatory malfeasance was a subordinate factor). I.e., BuB turned Yale Professor Irving Fisher’s “price level”, or otherwise safe-assets, into impaired and unsaleable assets (i.e., upside down and under water).

    I.e., Alan Greenspan didn’t start “easing” on January 3, 2000, when the FFR was first lowered by 1/2, to 6%. Greenspan didn’t change from a “tight” monetary policy, to an “easier” monetary policy, until after 11 reductions in the FFR, ending just before the reduction on November 6, 2002 @ 1 & 1/4% (approximately coinciding with the bottom in equity prices).

    I.e., Greenspan was responsible for both high un-employment (June 2003, @ 6.3%), & high inflation (rampant real-estate and commodity speculation).

    And BuB NEVER eased. BuB then relentlessly drove the economy into the ground, creating a protracted un-employment, & under-employment rate, nightmare.

  65. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    26. November 2021 at 11:47

    “CHAIRMAN GREENSPAN. I must say that I have not changed my view that inflation is fundamentally a monetary phenomenon. But I am becoming far more skeptical that we can define a proxy that actually captures what money is, either in terms of transaction balances or those elements in the economic decisionmaking process which represent money. We are struggling here. I think we have to be careful not to assume by definition that M1, M2, or M3 or anything is money. They are all proxies for the underlying conceptual variable that we all employ in our generic evaluation of the impact of money on the economy. Now, what this suggests to me is that money is hiding itself very well.”

    The turnover ratio in other checkable deposits to transaction deposits is .05. The turnover ratio in savings deposits to transaction deposits. is .017.

    Only a moron would claim M2 is somehow relevant. Bank-held savings represent a shift in deposit liabilities, from transaction to savings. Inflation is a product of money flows, volume times transaction’s velocity. The peak in the rate-of-change (distributed lag effect), is not until January 2022.

  66. Gravatar of Michael D Sandifer Michael D Sandifer
    26. November 2021 at 20:02

    Jeff,

    You wrote:

    “Really? “Just a little bit of inflation” will reverse a decades-long trend? Wouldn’t it be more reasonable to posit that the demand for human labor has gone down over the years? Humans used to be required for a lot of things that they aren’t needed for anymore.

    Why would you even think that increasing labor force participation is a good thing? If you drastically increase the cost of living, so people who would otherwise be able to spend their time at leisure or caring for their families are forced to return to work, in what sense is that good?”

    I don’t see any reason to think secular demand for labor’s gone down , though that may happen one day. I have no reason to believe it will happen in my lifetime. The historic pattern has been that new jobs get created to replace the ones that are destroyed by innovation. I see no indication that has changed.

    Regarding wanting more inflation, it is because inflation is associated with changes in the employment level, which makes sense when you consider it lowers real wages.

    I model the change in the employment rate as being a function of the difference between NGDP growth and nominal wage growth. Hence, more inflation is needed the closer wage growth gets to NGDP growth to close the employment gap as quickly as possible. I suspect this is why the SRAS/SRAD model shows inflation increasing as RGDP approaches potential.

    https://www.khanacademy.org/economics-finance-domain/macroeconomics/aggregate-supply-demand-topic/macro-changes-in-the-ad-as-model-in-the-short-run/a/shifts-in-aggregate-supply-cnx

    The challenge, of course, is to avoid running NGDP growth too high, such that the output exceeds a sustainable level, which reverses when sticky wages adjust, causing a recession. I think it might be possible to judge the appropriateness of monetary policy by looking for an equilibrium between NGDP growth, the nominal interest rate, the nominal return on capital, and nominal wage growth. There are some forward and frequent current and past indicators that can be applied.

    But, one doesn’t actually have to think one can judge the stance of monetary policy with much precision if one simply adopts NGDP level targeting and sets a target high enough to try to return employment to potential as quickly as possible, without having too high of a permanent inflation rate.

    Because it would be less risky, if I ran the Fed, I’d set a 5-5.5% NGDP level target, and probably opt for using Scott’s idea to use NGDP futures to facilite the policy. I think using the S&P 500 would work, but it would not be quite as reliable as using an NGDP futures market.

    So, in effect, I would adopt the exact policy Scott recommends, except the level target would be a bit higher.

    I often push the idea of using the S&P 500, in conjunction with forward inflation expectations, to level target NGDP, because there is no NGDP futures market, and no explicit prospects for one on the horizon.

  67. Gravatar of dtoh dtoh
    27. November 2021 at 00:23

    Scott –

    “That’s not how I define tighter money, as I’ve indicated many times on this blog. The money supply is not a good indicator of the stance of monetary policy. Nor are interest rates.”

    So if you’re defining tighter money as policy which results in a reduction of nominal demand, then I agree with you that it will result in a reduction in inflation most of the time, but…if the supply demand imbalance is in a sector where the curves are inelastic in the short term, tighter money may not have an effect on aggregate inflation. You could have zero inflation and elastic supply/demand in product A, but if all the inflation is coming from Product B where supply and demand are inelastic, then tighter money might have a very limited or nil effect on inflation.

  68. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    27. November 2021 at 07:04

    Secular stagnation is a fall in velocity. The fall in velocity stems from the impoundment of monetary savings. Keynesian economists have succumbed to the erroneous proposition that banks are intermediaries.

    Secular stagnation was predicted in 1961 in “Should Commercial Banks Accept Savings Deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43.

    Sumner doesn’t know a credit from a debit, money from mud pie.

    Sumner: “The Fed conducts monetary policy by adjusting the supply of and demand for the most highly liquid of all types of money—base money. Base money (or the monetary base) consists of the currency in people’s wallets as well as the reserves that banks have on deposit at the Fed.”

    The monetary base obviously doesn’t include currency outside the banks. An increase in the currency component was contractionary. And all currency gets into circulation, directly or indirectly, through the liquidation of time deposits, by the cashing of demand deposits. The currency component comprised 92 percent of the “monetary base” prior to Oct. 6, 2008.

    As I demonstrated, the monetary base was required reserves.

  69. Gravatar of ssumner ssumner
    27. November 2021 at 12:26

    dtoh, You said:

    “if the supply demand imbalance is in a sector where the curves are inelastic in the short term, tighter money may not have an effect on aggregate inflation.”

    Suppose all the inflation comes from oil, and suppose monetary policy cannot affect oil prices. Even in that case, tighter money reduces inflation by reducing non-oil prices.

    (BTW, monetary policy does affect oil prices. If the supply of oil is perfectly inelastic, then tighter money will cause oil prices to fall sharply, as oil demand will decline.)

  70. Gravatar of dtoh dtoh
    27. November 2021 at 13:58

    Scott,
    It doesn’t necessarily reduce non-oil prices. If the supply of non-oil products drops simultaneously and in an equivalent amount to the drop in demand for those products, then assuming no change in V, there is no change in P. All you get is reduced output (and… this argument is easily extended to the rate of change in P as well.)

    So as I said, I think some caution is warranted in assuming that tighter monetary policy will easily solve inflation caused by a supply bottleneck, because it requires some assumptions about symmetry of the supply/demand curves across sectors that may not be warranted.

  71. Gravatar of dtoh dtoh
    27. November 2021 at 14:19

    Scott,
    Just to amplify a little.

    1. If you have a supply chain problem, the best way to accelerate the resolution of the problem is through higher prices. Reducing demand will slow the resolution of the problem.

    2. The pressure to curb inflation is political and has nothing to do with good economic or monetary policy.

    3. If you care primarily about aggregate utility, reducing output unnecessarily (even if it is “modestly”) is not a good thing. LFPR is down 1.8% from 2019. (That’s 6.3 million people.) To use the the technical term, that’s a shitload of lost utility.)

  72. Gravatar of Jeff Jeff
    27. November 2021 at 21:19

    Michael:

    “I model the change in the employment rate as being a function of the difference between NGDP growth and nominal wage growth. Hence, more inflation is needed…”

    I don’t see how that follows. f(NGDP growth – nominal wage growth) = f( (RGDP growth + inflation) – (real wage growth + inflation) ) = f(RGDP growth – real wage growth). Inflation just cancels out.

    In any case, you never addressed the other part of my question, which was why we should even consider higher employment or labor force participation a worthy goal.  Work takes the place of other worthwhile activities, such as leisure or family time, so it’s hardly self-evident that increasing it is a good thing.

  73. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    28. November 2021 at 05:44

    Sumner maybe you need a refresher course:

    Link “Modern Money Mechanics”

    https://www.community-exchange.org/docs/ModernMoneyMechanics.pdf

    You will then see that an increase in the volume of currency held outside the banks decreases reserves, is contractionary. So, your definition of the monetary base is wrong.

  74. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    28. November 2021 at 05:53

    Sumner: “If the claim is that high inflation is an indicator of excessive aggregate demand, then why not focus on NGDP?”

    Because AD ≠ N-gDp.

  75. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    28. November 2021 at 06:09

    Sumner: “The second idea was basically trashcanned after Paul Volcker attempted a variant of it beginning October 1979,”

    Complete myth. Monetarism has never been tried. Monetarism involves more than just watching the aggregates, it involves controlling them.

    Volcker advised the Congressmen to watch the non-borrowed reserves — “Watch what we do on our own initiative.” The Chairman further added — “Relatively large borrowing (by the banks from the Fed) exerts a lot of restraint.”

    Volcker targeted non-borrowed reserves (@$18.174b 4/1/1980) when at times over 200 percent of total reserves (@$44.88b) were borrowed.

  76. Gravatar of Michael D Sandifer Michael D Sandifer
    28. November 2021 at 13:11

    Jeff,

    Inflation lowers real wages temporarily. Wages adjust more slowly than other sticky prices, and sticky prices adjust more slowly than RGDP. You have to consider both short- and long-run effects.

    I did address your other point. I don’t think you characterize the situation with the labor market correctly. That said, I favor a UBI in conjuction with a wage subsidy, which would give workers more flexibility to work fewer hours.

  77. Gravatar of ssumner ssumner
    28. November 2021 at 13:20

    dtoh, Yes, I agree that we should not really care about inflation, what matters is NGDP. But I don’t follow your claim that a drop in spending would reduce output but not prices. That would require a horizontal AS curve, which is not the case.

    The Fed should simply set a target and stick with it, instead of trying to “solve problems”.

  78. Gravatar of Lizard Man Lizard Man
    28. November 2021 at 16:19

    @SSumner, @Nathan

    I think that it is a weird phenomenon that the duration of unemployment was so long in 2019, when other measures of the job market were so strong. I don’t know what all of those numbers taken together mean, but it is an unexpected combination.

    My first guess at an explanation would be a boom in jobs in metros with really expensive housing, and something of a bust in large areas of the US. So people in small towns, rural areas, small cities, third tier cities, etc., wouldn’t have been moving to the jobs, and looking for a long time for their next job, but people in first tier and second tier cities in the US were finding jobs relatively easily.

  79. Gravatar of Nathan Nathan
    28. November 2021 at 17:54

    Lizard Man,

    If you want to know what has been going on these last two decades, visit my site.

  80. Gravatar of dtoh dtoh
    28. November 2021 at 18:01

    Scott,
    AS is certainly not horizontal, but the supply curve may be (or may be close to) horizontal in some sectors. So if you have a horizontal supply curve in the sectors where the inflation level is not high, and vertical (or near vertical) supply curves in the sectors where you have too high inflation. Then monetary policy will not do anything to solve the inflation problem. Obviously those are extremes, but it’s certainly possible to envision inflation caused by supply bottlenecks in certain sectors such that the ability to lower inflation through tight money is rendered significantly less effective then were the case where inflation is being driven by excess AD.

    So I think the push for tighter money may potentially be less effective than anticipated, and as you and I seem to agree is misguided in the first place.

  81. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    29. November 2021 at 04:59

    The markets have never fallen without a drop in M*Vt. The FED’s classification of O/N RRPs is an accounting error.

  82. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    29. November 2021 at 07:27

    O/N RRPs aren’t considered a subtraction from the money stock:

    See: WSJ Aug 5th, 2021
    “The notion that a trillion dollars in reverse repos has reduced the money supply by even one dollar is nonsensical. Reverse repos are a liability of the Fed and an asset of the banks and money-market mutual funds (MMMF) that loan funds to the Fed via reverse repos. Deposit liabilities of both banks and MMMFs are constituents of the money supply. These liabilities remain unaffected by the choice banks and MMMFs make about whether to place their assets in the Fed’s reverse-repo facility, Treasury bills or elsewhere. Contrary to the Gramm-Saving analysis, the Fed’s reverse-repo program has no effect on the money supply.”

    Guess what’s wrong with this explanation?

  83. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    29. November 2021 at 08:55

    So much for the 1st qtr. of 2022.

  84. Gravatar of ssumner ssumner
    29. November 2021 at 16:32

    dtoh, If “push for tighter money” means slowing NGDP growth down to 4%, then I’m all for it.

  85. Gravatar of dtoh dtoh
    29. November 2021 at 16:49

    Scott, if we were measuring inflation correctly then yes maybe 4% NGDP target, but with the way we currently measure inflation, a 4% target would leave a lot of real growth on the table and result in a lot of lost aggregate utility.

    Or maybe the economy is moving away from sticky wages in which case, any target is fine…or no target because there is no longer any need for monetary policy.

  86. Gravatar of Michael D Sandifer Michael D Sandifer
    30. November 2021 at 04:25

    dtoh,

    Would you like to see a 5-to-5.5% NGDP level target, as I would?

    Given that such a level targeting regime would be close to optimal, my differences with Scott are mostly “academic”.

    I personally doubt that inflation is mismeasured in any significant way. I do think that more advanced macro theory and practice is possible. I don’t think the starred variables have to be so difficult to estimate.

  87. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    30. November 2021 at 09:13

    Powell’s going to make the same mistake Paul Volcker did: “Powell open to discussing faster taper of asset purchases”

  88. Gravatar of dtoh dtoh
    30. November 2021 at 13:47

    @Michael Sandifer

    Yes. I think 5 to 5.5% is about right in the current environment. If the government reduced taxes on capital gains and stopped subsidizing higher education, you could set an even higher target.

  89. Gravatar of Ray Lopez Ray Lopez
    30. November 2021 at 15:45

    @SSumner who says: “Ray, You asked: I suspect you are a statist who believes in government intervention in the business cycle” Wrong!! (as usual)”

    You impeach yourself. How can you not be a statist if you believe in a central bank? Unless–and this is the only logical way–unless you believe the central bank has really no ability to affect the economy, that is, money is neutral.

    So which is it Sumner? Are you a statist or do you believe money is neutral? Pick one. Kind of like the Impossible Trinity of Robert A. Mundell, who died earlier this year at age 88 and deserves an obituary from you, since presumably you are schooled in his works, right? Right? I wonder about how much you know btw, but that’s a flame for another day.

  90. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    1. December 2021 at 04:21

    Open market operations should be divided into 2 separate classes (#1) purchases from & sales to, the commercial banks; and (#2) purchases from, and sales to, others than banks:

    (#1) Transactions between the Reserve banks and the commercial banks directly affect the volume of bank reserves (outside money) without bringing about any change in the money stock (inside money). The trading desk “credits the account of the clearing bank used by the primary dealer from whom the security is purchased”. This alteration in the assets of the commercial banks (the banks’ IBDDs), increases – by exactly the amount the PD’s government securities portfolio was decreased.

    (#2) Purchases and sales between the Reserve banks and non-bank investors directly affect both bank reserves and the money stock.

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