In a better world
It’s weeks like these that clearly expose that the world’s central banks are still living in the 20th century—the world of long data lags for GDP and crude Keynesian models. Eventually they will arrive in the 21st century, and it will all be about asset prices.
One problem is what might be called “central banker hours”. Even when they make a serious error, they don’t bother to correct it until much later. Partly because they meet only once every six weeks (and why is that?), and partly because they don’t like to admit errors.
In a better world the risk of recession and the risk of the economy overheating would always be evenly balanced. And I mean always, every single day of the year. Does it sound like the risks are balanced today?
As the global economy falters, sapping demand for everything from consumer electronics to cars to commodities, investors are anxiously awaiting surveys on the services sector in China and the Unites States – the world’s biggest two economies – due later in the day.
If we hooked Janet Yellen and Stanley Fischer up to a lie detection machine, do you think that in their heart of hearts they are equally worried about a recession and a 1960s-style inflationary boom in the near future?
Or how about 10-year bond yields plummeting to 1.83%, from about 2.2% when they “raised” interest rates in December. I hope all you Austrians who whined about “artifically low rates” being set by the Fed are pleased to have gotten your way.
In a better world our central bankers would not tell us that a 0.5% interest rate is “still very accommodative”, when our intro to money textbooks tell us that low interest rates do not mean money is accommodative. Here’s Mishkin’s textbook:
1. It is dangerous always to associate the easing or the tightening of monetary policy with a fall or a rise in short-term nominal interest rates.
2. Other asset prices besides those on short-term debt instruments contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms.
I expect more than EC101 errors from the elite economists at the Fed.
In a better world the Fed, ECB, BoE and BOJ would not wait six weeks. They’d get together next week to discuss a coordinated plan to reflate the global economy. Just the announcement of such a meeting would do wonders.
In a better world the Fed would not raise rates after a year of 2.9% NGDP growth, and then mumble something about a “strong dollar” hurting manufacturing. Gee, I wonder why the dollar is so “strong”?
In a better world the Fed would not try to arrogantly tell the markets where rates should be, but rather would meekly take its marching orders from the markets. In other words, I don’t agree with Tyler:
If I were at the Fed, I would consider a “dare” quarter point increase just to show the world that zero short rates are not considered necessary for prosperity and stability. Arguably that could lower the risk premium and boost confidence by signaling some private information from the Fed.
I’m increasing doubtful of the view that the Fed knows something the markets don’t and increasingly accepting of the exact opposite view.
In a better world the Fed would take off its blindfold, and create and subsidize NGDP, RGDP, and unemployment rate prediction markets.
In a better world we’d have level targeting.
In a better world the people who argued for a rate increase would not assume that it’s necessarily the first step toward pushing rates higher one, two, and three years in the future. Instead they would understand that a more expansionary monetary policy would be a better way to promote durably higher rates.
In a better world people would not ask how a measly 1/4% interest rate increase could have major effects, they’d understand that interest rates are not monetary policy, and that a huge change in the stance of monetary policy might be accompanied by a tiny change in interest rates. Recall the US in 1937, the ECB in 2008, and the ECB in 2011, all tiny increases in interest rates, all accompanied by much tighter monetary policy.
PS. I added election odds to the “Sites I Visit” at right, for you political junkies. As I predicted late last night, Rubio surged higher. Indeed he surged by much more than I expected, and is now the strong favorite to win the nomination. Of course Hillary Clinton is still the most likely to win the election.
PPS. Tomorrow we finally cut the cord, so if you are someone who knows me then throw away the phone number. In a better world I would not have to pick up the phone every 15 minutes to deal with telemarketers who ignore the fact that I’m on the do not call list, and then have to tell them what I think of their operation. From now on, cell phone and email are the only way to reach me.
PPPS. In a better world the NBA would move out the three point line so far that only Curry could hit them.
Tags:
2. February 2016 at 19:50
Relax Scott, money is neutral and nothing a central bank can do will harm the real economy.
“I’m increasing doubtful of the view that the Fed knows something the markets don’t and increasingly accepting of the exact opposite view.” – if this was true, then central banks would be a useful forecasting tool, as you could make money in the market by doing the opposite of what they do.
“PPPS. In a better world the NBA would move out the three point line so far that only Curry could hit them.” – ??? is this a comment from a GS Warrior fan, or you just being whimsical? Whimsical, like NGDPLT. We’re all in on the joke Scott, don’t worry (that it’s a cure-all, wink, wink).
2. February 2016 at 20:13
And in the not-better world we actually live in, a crazy like the radical right-wing Presidential candidate Ted Cruz actually makes more reasonable statements about monetary policy and central banks, than the current Chair of the Fed herself, Janet Yellen.
2. February 2016 at 20:13
I was yelling at my radio in December when I heard, over and over again, that the best argument brought about by supposedly “smart” economists was “if not now, when?”. What the hell kind of argument is that? How about, not now because all economic indicators don’t point to now being the right time?
And so now here I am, not a “smart” economist, but just someone who apparently reads the right blogs and knows that “when” should have been “when there is actual inflation”…
2. February 2016 at 20:17
It’s like telling a pilot after an 18-hour flight, “hey, look, you’ve been at a high altitude for so long now, when are you going to descend? I mean, c’mon, if not now, when?” And the pilot would obviously say, “when I’ve reached my destination”. Isn’t economics supposed to at least pretend to be a science?
2. February 2016 at 21:30
Good post, except for
“Recall the US in 1937, the ECB in 2008, and the ECB in 2011, all tiny increases in interest rates, all accompanied by much tighter monetary policy.”
-Sure, maybe the mini rate hikes were a signal of central banker intentions for the future, but I consider the idea they in themselves created a much tighter monetary policy to be highly dubious.
I don’t trust prediction markets on elections any more any more than I trust my intuition.
2. February 2016 at 21:32
If I were President Trump, I would move as quickly as possible to put monetary policy decision-making into the hands of the President. Would be more fun and less harmful for the economy.
2. February 2016 at 21:38
I don’t know if this feature is available for cell phones. I don’t get a lot of junk calls on the cell phone number. But, on our land line, we have a feature where, if you call us, you get a little recorded message saying that solicitors should hang up and others should press 1 or stay on the line in order to actually ring our phone. It’s helped a lot.
2. February 2016 at 22:07
“Tomorrow we finally cut the cord, so if you are someone who knows me then throw away the phone number.”
Uh oh, you have just joined the world of Sanders and Rubio supporters, who do not have landlines. In contrast to the Trump supporters, who live in areas not served by cell phones. Polling 101 😉
2. February 2016 at 23:40
@Scott
Assuming the following statements, comments and responses that you have made are correct.
1. The markets are right.
2. Real expected risk adjusted returns on assets reflect expected NGDP.
3. Treasury rates equal expected risk adjusted returns on assets.
4. The split between real and nominal growth is not a function of monetary policy.
Then I would submit for your consideration that
1. The Fed merely needs to target Treasury rates. If the rates go above target, the Fed sells assets. If they go below, the Fed buys assets.
2. The FOMC can be replaced with an iPhone app.
2. February 2016 at 23:59
Over at Historinhas I called for global summit of central bankers, and a solid front in targeting NGDPLT of 7%, perhaps higher for India, China.
The idea of independent central bankers has never been less compelling.
3. February 2016 at 02:59
@Benjamin Cole
I just noticed you were at the 国際学部. Small world.
3. February 2016 at 03:08
Maybe the Fed has learnt a lesson of 2008 in the sense that they then overestimated the inflation risks due to the commodity boom and kept rates too high too long. Now they’re afraid to underestimate the inflation risks due to the commodity collapse and want to avoid getting behind the curve again.
Maybe it’s the wrong lesson to learn from 2008 but it’s certainly possible that it influences their thinking.
3. February 2016 at 03:40
In a better world, the court could be widened by 10 feet to accomidate a completely circular 3 point arc of 25′. Also the extra space would allow more flow and less three point attempts increasing the value of centers. Of coarse, then Jack and Spike would be in the first row of regular seats instead of on the floor, so I’m not optimistic. While I’m being radical, let’s ditch the clock and play first to 100 (or whatever number). Then a team is never incentivized to foul late, which becomes unwatchable. Of coarse, there are always tradeoffs: no more buzzer-beaters in my world. Just a thought.
3. February 2016 at 04:29
“I’m increasing doubtful of the view that the Fed knows something the markets don’t and increasingly accepting of the exact opposite view.”
What could they plausibly know and why wouldn’t they share it when justifying policy or publishing research?
3. February 2016 at 04:36
You should try nomorobo.com on your phone. Has improved my situation.
3. February 2016 at 04:37
dtoh: I am barely fluent in English, and even less so in Spanish. I cannot read what you wrote. But hey, it is a small world.
3. February 2016 at 05:10
“@Benjamin Cole..I just noticed you were at the 国際学部. Small world.”
How do you not remember dtoh From the African Education Conference! He was Director of Cultural Activities at the Haile Selassie Pavilion. We had big fun there!
3. February 2016 at 05:39
“Eventually they will arrive in the 21st century, and it will all be about asset prices.”
So it’s not about the stability and integrity of the banking system. And it’s not about the stability and integrity of the currency. Nope. It’s all about asset prices.
Who knew that at the end of it all what really mattered to Scott was the balance in his 401k (smiley face)
3. February 2016 at 05:53
Great post! Love this:
“Or how about 10-year bond yields plummeting to 1.83%, from about 2.2% when they “raised” interest rates in December. I hope all you Austrians who whined about “artifically low rates” being set by the Fed are pleased to have gotten your way.”
Along with your EconLog post, really top-notch stuff.
Kangaroos can fly!
3. February 2016 at 06:15
Steve, Good point. I also saw that Trump did best among the uneducated. Surprise!
dtoh, I strongly disagree. Bond yields are correlated with expected NGDP growth, but the correlation is far from perfect. And don’t forget that easy money sometimes makes bond yields fall, I have a post on that at Econlog.
BTW, I always try to put my best posts at Econlog, and yet get few comments over there.
Benjamin Cole, You are always ahead of me.
Matthias, That’s possible.
Joe, Good ideas, it would also reduce the “garage time” problem, as even a team trailing 98 to 85 would still have shot of winning.
Foosion, Good point.
Ben, Too late, it’s gone.
Dan, You are in so far over your head that you can’t even see the sky. Just give up.
Thanks Brian.
3. February 2016 at 06:16
Agree with most of these.
Might add, in a better world monetary policy wouldn’t fuel political volatility and calls for socialism.
Seems short-sighted to win the battle but lose the war.
3. February 2016 at 06:22
@benjamin cole
Must have been someone posing as you. Thought you had an Japan/Asia connection.
3. February 2016 at 07:17
I’ve been reading your blog for almost a year now and I really enjoy it, keep up the good work and greetings from Slovenia
3. February 2016 at 07:17
@scott
“Bond yields are correlated with expected NGDP growth, but the correlation is far from perfect.”
Expected and correct (I think) answer.
So consider further..
1. Is the imperfect correlation a result of a) Fed action lacking credibility, and b) the resulting unpredictable fluctuations in the NGDP growth rate?
2. Re-frame the proposed policy prescription as the Fed removing money from the economy when Treasury rates exceed the target and injecting cash when rates fall below target.
Assuming the Fed had strong credibility, would you expect substantially different results from a Treasury rate target versus an NGDP level target and if so why?
3. February 2016 at 07:18
Ray,
Is this what you mean?
“Further there is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation. For example, in spite of massive central bank asset purchases in the U.S., the Fed is currently falling short of its 2% inflation target. Further, Switzerland and Japan, which have balance sheets that are much larger than that of the U.S., relative to GDP, have been experiencing very low inflation or deflation.” P9
https://research.stlouisfed.org/wp/2015/2015-015.pdf
3. February 2016 at 07:43
Scott,
You admit you don’t understand finance and that you don’t believe in asset bubbles and then you claim you understand asset pricing and that changes in asset prices are a valid indicator of monetary policy. In other words, you have no idea why prices are what they are but you believe they can be useful for guiding policy? That’s crazy talk.
In the world I live we solve problems by understanding how system works and how each components of a system interact. We don’t simplify complex systems down to a few charts and rules and claim this gives us an understanding of the system and knowledge of how to fix it.
Let’s say you board an airplane and the pilot announces to the passengers:
“Good morning folks. Wanted to make you aware that I do not know how airplanes fly and I do not know how jet engines work. But I promise you that if our plane encounters any trouble I will increase the throttle because my model shows that planes fly better with more power. ”
Would you have any confidence this pilot could correctly diagnose and correct a problem during flight? Would you want to stay on a plane flown by this pilot?
So it is with you and economics. Every stumble in the economy and in the financial markets is because money it too tight and so the answer is always the same – more monetary stimulus. Does it ever cross your mind that the ZIRP and NIRP global condition might be the consequence of excessive monetary intervention? Could it be possible that the current global financial structure has been so greatly distorted by monetary intervention that it cannot be sustained? If you are unwilling to ask this question then are you not choosing to be ignorant of what is true?
3. February 2016 at 08:01
“In other words, you have no idea why prices are what they are but you believe they can be useful for guiding policy? That’s crazy talk.”
Dan.. give it a rest. Krugman said take a gazillion in debt on the U.S. balance sheet and his qualification for being a debt expert is that he once had a home loan.
It’s all good!!!! Who needs finance and accounting?? Just gotta get yo’self some rose colored NGDP glasses… everywhere you look you see NGDP…
interest rates = NGDP
recession = NGDP
Stock market up today = NGDP
Hemorrhoids acting up = NGDP
3. February 2016 at 08:03
“BTW, I always try to put my best posts at Econlog, and yet get few comments over there.”
-It’s not “yet”, it’s “therefore”. Econlog has a really stupid comment moderation system.
3. February 2016 at 08:12
So Brazil now is about 10% inflation. 0 to negative NGDP groth and yields at about 15%. WHich one is the market tracking?? Why? A: Because I can arb the hell out of everything if interest rates don’t track inflation.
Mock Ray all you want, but he followed this.. he gets extra credit for that.
See all those discount and forward price formulas with r in all of them. That stands for rates, not NGDP.
3. February 2016 at 08:25
In a better world, we would not have governors saying things such as “he would not accept a further increase in QE unless the eurozone was once again in deflation” (FT story).
In a better world central banks governors would not say that we (at the central bank) have to be better that the markets (somehow, people at the central bank have to beat the markets – I just don’t understand why would anyone who can beat the markets be on a central bank and not making huge amounts of money).
I’m deeply sad today with the state of the major central banks in the world.
3. February 2016 at 08:44
It’s time to add a four-point line.
3. February 2016 at 09:40
@Postkey -nice paper, also check out the below.
OT – who to believe, Sumner, Timberlake (the U of GA predecessor of G. Selgin), or neither (money is neutral)? Certainly Timberlake is knowledgeable on monetarism, as he wrote several books on it, as opposed to Sumner’s one. Does Sumner even cite Timberlake in his book? I would doubt it.
Wikipedia: Timberlake does not reject the gold standard. While many economists blame the gold standard for the monetary collapse, Timberlake cites data that refutes the validity of their complaints. He shows that the Fed Banks and U.S. Treasury had plenty of gold in the 1929–1933 period. Timberlake concludes that government interference with gold standard adjustments caused most of the trouble in the past, producing cycles of money growth and deflation, panic and depression.
3. February 2016 at 09:42
https://en.wikipedia.org/wiki/Richard_Timberlake is the Wikipedia link I cited
3. February 2016 at 09:51
“Or how about 10-year bond yields plummeting to 1.83%, from about 2.2% when they “raised” interest rates in December. I hope all you Austrians who whined about “artifically low rates” being set by the Fed are pleased to have gotten your way.”
People should not be surprised by this. Demand for long bonds is massive.
Dan said about Sumner:
“You admit you don’t understand finance and that you don’t believe in asset bubbles and then you claim you understand asset pricing and that changes in asset prices are a valid indicator of monetary policy. In other words, you have no idea why prices are what they are but you believe they can be useful for guiding policy? That’s crazy talk.”
If you believe, as Bank of America does, that the Fed misprices assets, then you could see them blowing bubbles all the time. The crazy part of Sumner and the MMers is the idea that there are no asset bubbles but I think they make that claim by saying that if the Fed didn’t tighten after asset bubbles they would no longer be bubbles. But they were bubbles, and when prices cratered, wealthy people hoarded their money (and the borrowers didn’t apply for no money down liar loan credit, or maybe the liar loans disappeared) and stopped buying houses. Perhaps Scott would have wanted the banks to prop up the housing market earlier, as they did after the crash. But then, the banks wouldn’t have made as much money and wouldn’t have got a gazillion houses back for resale. Scott may not realize that the Fed is a private organization that exists to protect its client banks and gives a rats behind about the economy as a whole.
3. February 2016 at 10:16
I’m reading Courage to Act. I wish I could re-find the citation. But my recollection is that Bernanke talks about “losing control of monetary policy” when what he really means is that they felt compelled to sterilize their special lending or the Fed Funds Rate would fall below 2%. This is shortly before the Lehman collapse.
3. February 2016 at 11:04
Bill, I wrote about that. The Fed believed a floor must be set under the Fed Funds Rate. The link is at my name. I wrote and quoted the Fed:
Many don’t realize that the Fed says it gave interest on banks’ reserves in order to put a floor under the Fed Funds Rate. The Fed is worried that banks would loan money between each other at lower rates than the Funds rate, perhaps leading to negative rates. Of course, the Funds rate has hovered under 1 percent, so you wonder what bank would actually do that. But here is what the Fed says:
“Essentially, paying interest on reserves allows the Fed to place a floor on the federal funds rate, since depository institutions have little incentive to lend in the overnight interbank federal funds market at rates below the interest rate on excess reserves.”
3. February 2016 at 11:19
Then the Fed flat out lied, IMO:
“A steep rise in excess reserves cannot be interpreted as evidence that the central bank’s actions have been ineffective at promoting the flow of credit to firms and households.”
Market Monetarists cannot work with a mafia style organization, IMO.
3. February 2016 at 11:32
Thanks Jure.
dtoh, Interest rates are probably the single worst target. Sometimes easy money makes long rates rise, and sometimes it makes them fall. That’s not the characteristic of a good target variable.
Dan W, Still giving your typing fingers a good workout. That’s great, they must be in excellent shape.
Derivs, You said:
“So Brazil now is about 10% inflation. 0 to negative NGDP groth”
I very much doubt that Brazil’s expected RGDP growth is lower than negative 10%. Most forecasters predict about minus 2% or minus 3% growth this year.
PMSAP, That’s right.
Talldave, Very funny.
Ray, You said:
“Does Sumner even cite Timberlake in his book? I would doubt it.”
Still perfect, even more consistent than the Philadelphia 76ers.
And so Gary returns and cites Dan.
3. February 2016 at 12:27
Ray,
Your opening comment is one of your worst. Scott says he trusts the market over the Fed and you say that means you can profitably trade on the Fed by betting the opposite of what the Fed says against the market. Completely, completely illogical and nonsensical.
3. February 2016 at 12:33
“I very much doubt that Brazil’s expected RGDP growth is lower than negative 10%. Most forecasters predict about minus 2% or minus 3% growth this year.”
1- Nice deflection!! What Brasils NGDP was is not the point. Interest rates to NGDP was, but I complement you on a nice deflection.
Fact is that last year NGDP was down 2.5% and inflation was over 10%, so it is quite possible.
As for forecasters, they are morons that are now predicting 6.5-7% inflation for ’16. I’d buy that from any one of them that want to sell me 7%, just find me one. I’m good for quite a large bet at that level. I bet I would get a room full of ‘experts’ without a pair of balls in the room. An economic glee club singing castrati.
3. February 2016 at 13:41
I haven’t had a phone-accessed landline for years: it is purely for computers.
The other solution to the Fed is outsource it to the RBA.
Or better yet, copy the RBA. If NGDP level targeting is too big a leap, how about “an average of 2-3% inflation pa over the business cycle”?
I know (1) we are irrelevant colonials who sell to China and (2) it just looks like a tweak and not a transformation even though it is because suddenly you are also anchoring income expectations.
3. February 2016 at 13:55
In a better world we wouldn’t have one S. Sumner who is obsessed with the monetary policy of the FED. The FED is only ONE of MANY players in the economy.
E.g. the amount of credit during the Bush administration (2000-2008) has grown from about $ 24 Trillion to about $ 56 trillion and one Scott Sumner is worried about the increase of the FED’s balance sheet from $ 900 billion to over $ 4 trillion since late 2008.
Who was responsible for that doubling of US debt during the Bush administration ? The FED ? Come on, give me a break. It was the “monetary policy” as “executed” by US commercial banks.
Did one Scot Sumner never studied/read the works of one Steve Keen (http://www.debtdeflation.com/blogs/) and one Harry S. Dent (https://en.wikipedia.org/wiki/Harry_Dent) ? Dent’s work on demographics is TRULY EXCELLENT and foretold the demise of Japan in the 1990s and the US after 2008.
3. February 2016 at 14:10
Derivs, You said:
“Nice deflection!!”
It’s bad enough when someone wastes my time with data that’s totally inaccurate, and then asks me to comment on it. Why should I care about your interest rate to NGDP data, if the data is totally inaccurate?
And when they act like it’s my fault for pointing it out, I pretty much write them off.
Lorenzo, That would be an improvement.
Willy2, Oh yes, Keen’s work on Japan has been really accurate.
3. February 2016 at 14:18
BTW, I (and Arnold Kling) think that Scott Alexander has a particularly perceptive take on Trump’s appeal:
http://slatestarcodex.com/2016/01/30/staying-classy/
“Donald Trump appeals to a lot of people because despite his immense wealth he practically glows with signs of being Labor class. This isn’t surprising; his grandfather was a barber and his father clawed his way up to the top by getting his hands dirty. He himself went to a medium-tier college and is probably closer in spirit to the small-business owners of the upper Labor class than to the Stanford MBA-holding executives of the Elite. Trump loves and participates in professional wrestling and reality television; those definitely aren’t Gentry or Elites pastimes! When liberals shake their heads wondering why Joe Sixpack feels like Trump is a kindred soul even though Trump’s been a billionaire his whole life, they’re falling into the liberal habit of sorting people by wealth instead of by class. To Joe Sixpack, Trump is “local boy made good”. ”
Here’s a question — who else in the race actually represents the interests and articulates the concerns of that group?
3. February 2016 at 15:33
On representing the interests and articulating the concerns of working/middle class US, two recent papers casts doubt on the “trade and immigration, it’s all good” line.
http://www.ddorn.net/papers/Autor-Dorn-Hanson-ChinaShock.pdf
http://www.hks.harvard.edu/fs/gborjas/publications/working%20papers/Mariel2015.pdf
Australia has a proportionately much larger immigration policy than the US, but we both cherry pick better and have border control, so our immigration debate hasn’t gone feral. (It did for a while, but PM Howard realised border control was the necessary trade off). Without border control, the people who bear the highest costs from immigration get no say, and they hate it. With border control, and a sensible migration policy justified by national interest concerns, and the US could manage higher levels of immigration than it currently has quite happily.
I think the “open border” folk are just nuts. Successful societies are much “thicker” cultural and institutional creations than they give any credit for, as Europe is currently experiencing. (Though I concede that a world without Islam would be a better prospect for open borders.)
So, my prescription for the US would be strong border control and more immigration more intelligently targeted. Which seems to put me somewhat orthogonal to the current debate.
3. February 2016 at 16:15
I think from a holistic standpoint Lorenzo’s link is on the money. It’s definitely true that college is part “finishing school” where you learn not to offend anyone, because professional jobs are largely social where you depend on references and reputation. Blue collar in contrast you can say what you think because labor is mostly commodity so mildly crude and offensive behavior isn’t disqualifying.
That said, I dislike denigrating Trump supporters. As someone in a state where he is a front-runner, I can see the type of people supporting him, like landscaping contractors. These people have to compete against immigrant labor, including illegals and under-the-table tax evading payments. It isn’t just about HOW they communicate, but also WHAT their interests are. I think they deserve a voice. Maybe there is a better voice than Trump, but they should be heard.
3. February 2016 at 18:40
@Scott,
You said, ” Interest rates are probably the single worst target. Sometimes easy money makes long rates rise, and sometimes it makes them fall. That’s not the characteristic of a good target variable.”
That’s only because of poor fed policy. Typically insufficient easing when the economy is doing poorly. I think you would be hard pressed to find an example of rates falling when the Fed did a larger than expected easing. (I think you did a post on this a while back.)
Also the Fed is schizophrenic, they can’t decide whether interest rates are a target or a tool.
3. February 2016 at 18:52
@scott
Also if the fed targeted rates and had perfect credibility, there would be no difference between short and long rates.
3. February 2016 at 18:57
“when someone wastes my time with data that’s totally inaccurate”
“http://g1.globo.com/economia/mercados/noticia/2015/12/mercado-aumenta-previsao-de-queda-do-pib-de-2015-para-370.html”
2015 PIB from IBGE is down 3.7% in Reais
and
Inflation 10.7%
Wow, how inaccurate!!! I was being generous. So are 15% current interest rates closer to your precious GDP or Taylors 1.5 times inflation??
Go take a class from Cochrane, and then answer me on pricing GOOG for delivery 9 months from now. It’s something that trades all day every day… Insist to him how you want to use NGDP in the formula.
3. February 2016 at 19:12
PaddyPower has interesting odds for the NH Primary:
4/9 Trump
11/4 Rubio
5/1 Cruz
12/1 Kasich
20/1 Bush
22/1 Christie
It’s interesting, because these prices are *mostly* efficient, IMO, however this is a *slight* bias toward name recognition (Trump, Bush) and a slight undervaluation of the candidates who are surging (Rubio, Cruz, Kasich). There’s probably a slightly positive EV for a bet $4 Rubio $2 Cruz $1 Kasich.
This is the same phenomenon of horse races; the favorite and the longshot are overbet, but the professional handicappers correctly rank the strong horses 2-3-4.
I got back from a Ted Cruz town hall, where the venue was above capacity and the people next to me were defecting from Rand Paul and Donald Trump.
3. February 2016 at 19:31
Steve, Agreed, But anyone smart enough to read this sort of blog should not be supporting a demagogue like Trump. And yet some of my commenters defend Trump.
Thanks for the Town Hall info.
dtoh, You said:
“I think you would be hard pressed to find an example of rates falling when the Fed did a larger than expected easing.”
Actually it would be easy, happens quite often.
derivs, You said:
“2015 PIB from IBGE is down 3.7% in Reais”
Speak English and I might respond. And please just admit that your data is wrong.
Taylor Rule in Brazil? What does that have to do with anything? And by the way, if you are right then Brazil is not following a Taylor Rule, which is much closer to NGDP than to inflation, because it includes both prices and output.
3. February 2016 at 20:52
@Cliff 3. February 2016 at 12:27, who says: “Ray,Your opening comment is one of your worst. Scott says he trusts the market over the Fed and you say that means you can profitably trade on the Fed by betting the opposite of what the Fed says against the market. Completely, completely illogical and nonsensical.”
You do realize Cliff that what you are saying is that the Fed has no power over the market? Think it through and when you see what I mean post here for a pat on the back.
@Sumner: I just might buy your book, if you cite Timberlake, which shows you are a scholar and a gentleman. Or at least a scholar, since you cite somebody that disagrees with you.
3. February 2016 at 21:20
Ray,
How do you draw that conclusion?? The market takes into account what the Fed does faster and better than you could. Where is the profit opportunity??
4. February 2016 at 01:16
Cruz has reportedly been talking like a market monetarist, I think Lars wrote on this. I don’t know where Rubio stands.
Cruz or Rubio would both be good, infinitely preferable to Trump, the felon, or the socialist. Cruz is a little less interventionist, stronger on civil liberties, and less willing to play nice in Washington.
Market monetarism may become mainstream in the GOP if they take executive power, much to the horror of some of their constituents, because as popular as anti-inflationism still is on the right, like Obamacare it’s one of those issues that they’d rather much rather campaign on than do policy for.
4. February 2016 at 01:28
Can’t tell if this is loving or hating Curry. I think the former. Instead, I’d propose a 4-pt line whose apex would be the half-court line.
4. February 2016 at 04:14
TallDave,
Cruz has a potent “Constitutional Sermon”. His appeal will go beyond Evangelicals; he could fill a sports stadium with a law school lecture. The libertarians, constitutionalists, freedom caucus, states rights, 2A crowds will give him at least a passing glance.
Cruz said the best way to save social security is with economic growth, criticized IOR, criticized the Fed for instability.
Cruz also says repeatedly that Bernie Sanders is half right; Bernie has the correct diagnosis, Washington special interests, but the wrong solutions, curing government corruption with even more government.
Like many shiny new objects, Cruz may disappoint when inspected closely. He may fail to reconcile the evangelical conception of gays with the libertarian conception. He may also fail to connect ideological economic policy with pragmatic economic policy.
However, as a candidate, I feel Cruz is underrated as he still exists under a negative media shadow. Rubio is the odds-on favorite, but Cruz deserves a chance to prove himself.
4. February 2016 at 04:27
“And please just admit that your data is wrong.”
My first comment I pulled a rough estimate out of my ass without thinking I needed 4th decimal accuracy to make a point to someone I don’t consider a 4th decimal accuracy individual.
You said it was wrong without showing me why, just “saying it is wrong”.
So then I linked to an article with specific numbers, and once again, like an obstinate 4 yr old, without showing anything, “you say it is wrong”.
In 2013 NGDP was R$ 5,316 trilhões
In 2014 NGDP was R$ 5,521 trilhões
In 2015 NGDP expectations are R$ 5,315 trilhões (not yet published)
Inflation was 10.67% in 2015, as reported by The Instituto Brasileiro de Geografia e Estatística (IBGE).
I am one of those people you refered to that has absolutely no problem admitting when they are wrong, I wouldn’t have made it one week if I didn’t know how to do that. But you have to show me some real numbers. THE CORRECT DATA. Just saying “you are wrong” when I am quoting from the IBGE is a little weak.
As for Taylor I just like the rates = 1.5 times inflation expectation part. I had no idea who he was but I once reverse engineered the bond market and came up with that number, so i found it humorous that he did too. The other part of his formula appears more a correcting prescription on output and I never cared (nor do i now), to look at that part. Relevancy to Brasil is that I rarely have seen, what you refer to as accounting identities, not work due to language barriers. My algos worked wonderfully whether we were transacting on the NYSE vs TOPIX, NYMEX vs Dubai…etc..etc..etc…
And please show me the “correct” data ASAP. Tonight XCOM2 unlocks and I only have 3 weeks to figure it out and get through Ironman Impossible… (a brutal task). Otherwise I won’t be able to spend my March skiing in peace and thinking about the CHF/USD while imbibing myself at Chez Vrony.
4. February 2016 at 04:36
“Can’t tell if this is loving or hating Curry. I think the former. Instead, I’d propose a 4-pt line whose apex would be the half-court line.”
How can anyone hate that guy??? It was like Jordan always beating my Knicks. Even as a life-long season ticket holder, I just watched in awe as he pissed on my dreams of a championship.
4. February 2016 at 06:38
1.It looks like you think central bankers are dopes, so why would you think that having them meet more frequently, or in larger groups, would produce better decisions?
2. “Or how about 10-year bond yields plummeting to 1.83%, from about 2.2% when they “raised” interest rates in December.” That’s easy. People anticipated four rate rikes this year in Dec. 2015, now they anticipate none.
3. You’re not being clear about what you think this better world entails. What should the Fed do right now, short of implementing your NGDP targeting utopia? Should IOER go negative? Should there be more QE? You have to translate this into a rule for contingent actions that relate to actual powers of a central bank.
4. February 2016 at 07:13
I love this pithy statement which I believe is correct “The FOMC can be replaced with an iPhone app.” from dtoh’s post.
It is about time that FOMC (and the rest of the country) is instantly provided with unbiased data but instantly changes policy without scheduled delays of meetings and delayed actions. The only thing they should be meeting for is coffee.
4. February 2016 at 07:51
@Cliff- I’m not doing your homework; no pat on the back 4U. This is the target quote, not something in your mind’s eye, but in Sumner’s: (Sumner) “I’m increasing doubtful of the view that the Fed knows something the markets don’t and increasingly accepting of the exact opposite view.” – so the markets know something the Fed does not. Since the Fed does things to affect the market (else why else?), but cannot (since the market knows more than the Fed), it follows the Fed is impotent. I can’t spoon feed you Cliff, you have to take at least some baby steps.
4. February 2016 at 09:54
@Steve Williamson
You say Scott isn’t clear about what this better world entails, and you ask him to describe what policies he thinks the Fed should enact now. However, unconventional policy like negative IOER and EQ aren’t necessary for the Fed to correct course. All the Fed has to do is either stop raising rates or to cut them back to zero.
I don’t get what’s so controversial here. Fed announced interest rate rises in December, indicating that they believed that the risks between a recession and inflation were well balanced. Since then, inflation expectations and asset prices generally have slumped badly, indicating that the Fed is likely going to fail to hit its purported 2% inflation target for the forseeable future.
What’s the case for staying the course on interest rates?
4. February 2016 at 11:00
@derivs
Can you link to the 5,315 NGDP number for 2015? I agree with ssumner, that with real GDP declining by about 3%, and inflation running at 10%(ish), then NGDP growth should have been mid-high single digits. I’m definitely not looking at a 10%+ decline in real Brazil GDP. Maybe the 5,315 has a change in methodology in there?
4. February 2016 at 13:20
Scott, great post by Kocherlakota: https://sites.google.com/site/kocherlakota009/home/policy/thoughts-on-policy/2-4-16
Basically, the Fed’s hawkish talk has greatly diluted its dovish actions given importance of expectations and the effects of talk on expectations.
4. February 2016 at 14:07
Cliff, Talking to Ray is like trying to explain something to a rock.
Talldave, No one should pay any attention to the views of Presidential candidates on monetary policy.
Larry, Four point line? Why not 50 point line? I hope you are joking.
Derivs, You said:
“In 2013 NGDP was R$ 5,316 trilhões
In 2014 NGDP was R$ 5,521 trilhões
In 2015 NGDP expectations are R$ 5,315 trilhões (not yet published)”
Sorry, this is wrong. And no, I’m not going to dig up the correct data, that’s your job. (I’d guess the data you provided is RGDP, which fell about that much in 2015.)
Steve, No, I don’t think they are dopes, nor did I say that. But when people say silly things, I will point out that they said silly things. What do you do? Having read your blog, I’m pretty sure I know the answer.
You said:
“That’s easy. People anticipated four rate rikes this year in Dec. 2015, now they anticipate none.”
Yes, “people” at the Fed anticipated 4 rate hikes, but “people” in the markets most certainly did not, even in December. On the other hand, Kocherlakota certainly understood what was going on.
As far as specific actions, ideally I’d like a new target. If they insist on sticking with this target then I’d have them abolish IOR and adjust the monetary base as needed to produce roughly 1.8% to 2.2% inflation expectations in the TIPS markets. (say the zero to 5 year TIPS forecast). I have no idea whether the base would have to rise or fall (without IOR)
Foosion, Yes, Kocherlakota is certainly no “dope”.
4. February 2016 at 16:08
Scott – not sure if you saw, but Kocherlakota quoted you on Twitter re: Fed, ECB, BoE and BOJ getting together next week. Definitely put a smile on my face.
4. February 2016 at 17:19
In a better world…
…central bankers would have some forecasting skills instead of just abject failure (Sweden, UK, US, Eurozone, Japan).
It’s not like they didn’t know what their respective CBs were up to, right? Can’t one you smart people come up with a better macro theory, chart the forecasts now, and put these guys to shame? Say over the next 5 years or so? Be sure to share your expressions so other people can replicate your results… a macro-theory known by just one person (gut feelings?) is kind of useless.
Looks like the field is wide open to me, ready to be taken by storm! 😉
4. February 2016 at 18:01
Well, if nobody else will step up, I will. 🙂
4. February 2016 at 18:02
As SD00 points out above,we now know Kocherlakota reads this blog. I bet many other prominent economists do as well.
4. February 2016 at 18:39
If the Fed did not believe in the ZLB, then wouldn’t we be in an, effectively, 3-4% NGDP regime? ZLB faith implies that the Fed will passively tighten at low rates, in the self-fulfilling belief of ineffectualness. Otherwise, monetary neutrality should be kicking in, with less and less labor slack as people grow more comfortable with low and steady nominal growth.
4. February 2016 at 20:06
Scott, I ust started reading your book. Ray Lopez, pages 148-149 discuss Timberlake. Mind you I’ve only made it to page 50 so far so I can’t comment on that passage. Anyway, I didn’t figure you for an Austrian.
4. February 2016 at 22:53
[…] reason I bring this up is that in reality, here is what Scott Sumner recently wrote on his […]
5. February 2016 at 03:23
Njnnja,
I wrote “not yet published”, fairly certain it is published in March.
I agree with your doubts on the methodology comment, as for some reason when the numbers get posted in the journals, they always fail to state real or nominal (as you can see in the first article I linked to) and I have to look it up. The numbers for 2013 and ’14 are definitely nominal despite what lazy Mr. “I don’t understand opportunity cost” says…
The following link shows nominal growth from ’12 to ’13 of +10% and column 2 shows real as +3% so I assume what I posted earlier, from column 1 is correct, Summers is wrong, and that the word nominal in Portuguese ‘does’ translate to nominal in English. Beyond that, the data never was in my hands to check it further so blame the IGBE is it is wrong.
(https://pt.wikipedia.org/wiki/Evolução_do_PIB_do_Brasil)
From what I am seeing I expect ’15 to be nominal as well. Even my apartment here is WAY DOWN in Nominal this year. I don’t even think I could sell it if I wanted to. But it went from equivalent of a really really nice apartment on the Upper East Side to 1/2 a timeshare on a parking spot in Astoria in 1 year 🙂
These numbers came out on autos yesterday. Use 10% inflation on avg cost of vehicle(???) and see where that gets you… it’s an absolute disaster.
Sales of vehicles in Jan fall 38.8% y/o/y….
http://www.valor.com.br/empresas/4424404/vendas-de-veiculos-recuam-quase-40-em-janeiro-aponta-anfavea.
But who cares!!! It’s Carnaval, it’s over 100 degrees, beer is cold, girls are fit and strolling the streets in bathing suits or in costumes, the music is upbeat, I’m not sure what day of the week it is, and my only plans for today are going to go play tennis and then have sushi and an açai… All good! Very very good!!!
Peace Out!
5. February 2016 at 07:51
@ derivs:
Wikipedia is not trustworthy about tricky things like this and you should always trace back actual data points if you want to use it.
The wikipedia 2013 number is from here, and your 2014 number is here. Those are inconsistent data sources, and you should go to a centralized source that does not go stale. God only knows where it’s 2015 # would come from.
So this is where you want to look: Central Bank Data
or here: IBGE Data
2013.I 1,240,187
2013.II 1,320,768
2013.III 1,350,088
2013.IV 1,405,412
2013 5,316,455
2014.I 1,368,454
2014.II 1,400,631
2014.III 1,435,568
2014.IV 1,482,657
2014 5,687,309
2015.I 1,434,823
2015.II 1,456,502
2015.III 1,481,380
So your 2013 looks right at 5316 but 2014 s/b 5687.
Note that IBGE is quarterly, so you can also see that in order to have a drop in annual NGDP for 2015 to (your estimate of) 5315bn, the last quarter would need to come in at 942bn, which would be a drop in quarterly NGDP of about 36% (!). It would be like a drop in quarterly real GDP of 40% (!). Brazil is going through problems right now but are you sure you want to stand by that data?
I would trust Prof. Sumners “gut” on questions of GDP/NGDP, PPPGDP, etc etc 99% of the time (certainly more than I would trust #’s on wikipedia).
That reminds me of an old joke about an engineer who worked much of his career with a certain kind of mainframe computer. He retired, and a few months later the computer had a hardware error that the new engineers couldn’t solve. So they asked him to come back and work as a consultant to fix it. They agree to a fixed fee of $10,000 for his services. They walk him through the problems they are having, and he asks for the technical schematics of the machine. About an hour later, he circles one of the integrated circuits and says “replace this one.” They do, and it is up and running fine.
A month later, he still hasn’t been paid, so he calls the firm and asks why there is a delay. The new engineers say they are having trouble expensing $10,000 for one hour of work, and the accountants need a detailed bill justifying the cost. So the engineer sends in the following itemized bill:
Piece of chalk: $1
Knowing where to make the mark: $9,999
Ps yeah Brazil is great until some corrupt senator makes a hearsay accusation against you and the government sends you to jail because of it :P. You must be in Rio instead of SP lol. Commercial bank or IB?
5. February 2016 at 08:21
Njnnja,
Timely article today… http://www1.folha.uol.com.br/mercado/2016/02/1737138-industria-de-sp-cai-11-em-2015-e-regride-a-niveis-de-producao-de-2003.shtml
So it says industrial volumetric production was down 11% in Sao Paulo and 8.3% nationwide. Fast and dirty math here, but we are looking at 91.7% of y/o/y production nationwide. We take annual inflation at 10.67%, assume linear change throughout the year, so we take avg price of goods to be 1.05335 and get nominal production of 91.7 units * 1.05335 price = .965922 which looks a lot like that -3.5% nominal.
5. February 2016 at 09:36
Central bankers can’t manage the money stock using interest rates as their monetary transmission mechanism. The Treas-Fed Reserve Accord proved that.
CBs do not loan out existing money. From the System’s perspective, the lending capacity of CBs fractional reserve (or prudential reserve), banking is a function of the velocity of centralized bank deposits. Money creation is not a function of the volume of its deposits.
In the U.S., there are 10 trillion dollars of voluntary (monetary) savings impounded within the confines of the commercial banking system (which includes the MSBs, CUs, and S&Ls).
As such, funds held beyond the income period in which received, are lost to investment, to consumption, indeed to any type of payment or expenditure (until their owners so decide to use them). This same logic applies to eliminating hand-held currency as well.
I.e., all interest bearing deposits are derived deposits. The source of time/savings deposits to the CB system is other bank deposits, directly or indirectly via the currency route (in the short-term), or thru the CB’s undivided profits accounts. I.e., time/savings deposits are not a source of loan-funds for the system, rather they are the indirect consequence of prior bank credit creation. The source of time/savings deposits is almost exclusively, non-interest bearing DDs, and the growth of DDs can be largely accounted for by the expansion of bank credit. That there is a close connection between aggregate bank credit and the aggregate volume of bank deposits (demand and time), can be verified by comparing the net changes in bank credit to the net changes in total demand and time deposits for any given period. (Bank credit proxy (surrogate for loans and investments), used to be an FOMC target (as “loans create deposits”); “from Sept 66, when the committee first began including a bank credit proviso clause in its directive until Dec 1969.”
The 5 successive rate hikes in Reg. Q ceilings for just the CBs was the direct cause of stagflation.
And the remuneration of excess reserves will eventually cause an economic depression (if not rescinded).
– Michel de Nostradame
5. February 2016 at 09:49
Macro-economics is pre-supposedly a predictive, i.e., “hard” science. A “NGDP futures markets” won’t correct any such metamorphous in “animal spirits” (human or social behavior).
No, the maniacal temporization of empiricism has failed so-called econometric forecasting. The laws of physics, once identified, rarely have to be revised. God doesn’t play dice with the universe. So too with economics. Nothing’s changed in over 100 years.
N-gDp (which the press neglects to publish to the public), is reported by the Department of Commerce’s BEA, too far in arrears, and it’s revised and reconstructed too many times. It would be more like gambling (not hedging – not insurance). And the biggest problem with targeting N-gDp is that it caps non-inflationary real-output.
Monetary policy objectives should be formulated in terms of desired rates-of-change, roc’s, in monetary flows, M*Vt, relative to roc’s in R-gDp.
Roc’s in N-gDp (though “raw materials, intermediate goods and labor costs, which comprise the bulk of business spending are not treated in N-gDp”), can serve as a proxy figure for roc’s in all transactions, P*T, in Professor Irving Fisher’s demonstrative: “equation of exchange”. Roc’s in R-gDp have to be used, of course, as a policy standard.
– Michel de Nostradame
5. February 2016 at 10:51
SDOO, Thanks, I mentioned it in a new post.
Tom, I agree with your interest rate forecast, but not your inflation forecast. Inflation will rise, but not necessarily up to 2%.
A, Sorry, I don’t follow that.
Mark, You said about Ray:
“Anyway, I didn’t figure you for an Austrian.”
Ray’s only ideology is anti-me, his views are not even internally consistent.
Derivs, Come back when you get some decent data. My hunch is that Brazilian NGDP is up close to 5% in 2015.
5. February 2016 at 13:07
“My hunch is that Brazilian NGDP is up close to 5% in 2015.”
Wouldn’t surprise me if it is. Like I said, never sure what PIB they are talking about because they never say Nominal or Real in the damn articles. Personally not worth arguing, as I don’t care, just wish if someone had the data they would share.
Now the inflation at 6.5-7% for 2016, that one I would bet on.
5. February 2016 at 14:05
“Tom, I agree with your interest rate forecast, but not your inflation forecast. Inflation will rise, but not necessarily up to 2%.”
Ok Scott, it’s ON!
6. February 2016 at 17:36
Njnnja,
Was having a complicated day yesterday and missed your post. Thanks for the data, why it was so hard for someone else to just post it I have no idea, other than their being a little bitch.
“I would trust Prof. Sumners “gut” on questions of GDP/NGDP, PPPGDP, etc etc 99% of the time”
I do like the joke that accompanied the comment but I highly doubt it is “gut”. You commenting that “I’m definitely not looking at a 10%+ decline in real Brazil GDP” or me saying “spreads suggest storage is full”, that is gut!!!! Scott, definitely was specific in saying I had the wrong data, which means he had the correct data but was probably enjoying deflecting away from the only point I was attempting to make in my original comment, which is….
*******that if NGDP is +4 to +5% (which I gladly accept as the correct estimate), inflation is 10.67%, and 1 yr paper is near 15%. That interest rates are MUCH closer to inflation than they are to NGDP**********
But explaining this to you is pointless. I’m fairly certain if, using the above numbers, You offered to buy a non depreciating asset from Scott, possesion taken in Brasil for 50,000 reais payable tomorrow, and I jumped in (knowing Scott likes this NGDP thing for asset pricing) offered him R$52,500 payable in 6 months, and he sold it to me. I would like to believe that you would want to punch me in the face.
I actually do believe there is a very important element to maintaining positive NGDP, but long run it is no replacement for RGDP as we can only consume what is ‘really’ produced. But if everyone wants to target 5% NGDP growth as some panacea, is Brasil now the poster child for that campaign??
As for myself, live in Rio but it is not my primary home, wife taking care of mother with dementia keeping us here for now, very sad situation. Been gainfully unemployed for just over 13 years, was very early into a uber boutique cutting edge options firm that eventually partnered with a very big bank and became one of the worlds largest program trading and derivative trading firms. Also was very into valuing and extrication of extrinsic value into real and synthetic assets. No one that deals with assets understands extrinsic value, they all look at it in a very binary intrinsic manner of + or 0. Explaining to someone that they have a slightly out of the money piece of machinery that has enormous positive value just does not click. So why explain? Just contract the rights.