Is it time for the Fed to cut rates?
This is a rather shocking data point:
The ECI is widely viewed by policymakers and economists as
one of the better measures of labor market slack. It is also
considered a better predictor of core inflation.
Wages and salaries, which account for 70 percent of
employment costs rose 0.2 percent in the second quarter. They
had increased 0.7 percent in the first quarter.
Private sector wages and salaries also rose 0.2 percent
after gaining 0.7 percent in the prior quarter.
In the 12 months through June, labor costs rose 2.0 percent, the smallest 12-month increase since last year, and slipping further below the 3 percent threshold that economists say is needed to bring inflation closer to the Fed’s 2 percent medium-term target.
Is it the reason stocks rose a few minutes ago? Nominal wages are probably the single best indicator of whether money is too easy or too tight. It’s one that Janet Yellen pays a lot of attention to. If the fed funds target was currently 3.75%, this data point might push the Fed to cut the target rate. Should the IOR rate now be cut to zero, or even to negative 0.25%?
I’m not quite sure what the Fed should do, because I don’t know what they are trying to achieve. But if you assume their goal is a labor market that is neither unusually loose or tight, and 2.0% PCE inflation, then the new wage numbers suggest a rate cut is probably appropriate.
PS. It was the slowest reported wage hike since records began 33 years ago.
Tags:
31. July 2015 at 06:01
What do you make of the unemployment rate? Can it fall even lower without causing excess inflation? Why?
31. July 2015 at 06:18
If productivity is zero, then 2% labor cost growth will do the job.
31. July 2015 at 06:51
There is really only one way to decide and that is by measuring money.
And the money supply graph (admittedly a private one) shows that money supply growth has been falling for a year and a half. See http://www.philipji.com/item/2015-05-15/the-monetary-contraction-continues-at-a-slower-clip
And that was in March. Since then it has fallen further to about 5%.
If it continues at the current rate I can safely say that 2016 will be a repeat of 2007 in that a few financial sector firms will go under. And 2017 will be a repeat of 2008 in that there will be a big crash, though I am inclined to think it will be a spectacular one.
31. July 2015 at 06:53
Michael, The unemployment rate is certainly an indicator that can be looked at, but wage growth is far more informative. My concern is that the Fed may be losing credibility on the inflation front.
Neil, Good point, but I suspect productivity is about 0.5% trend, meaning we need at least 2.5% wage growth as a trend rate.
31. July 2015 at 07:32
Scott, I do wonder how quickly these numbers can turn. The ECI today was a bit of a fluke with a sharp drop in incentive based pay after a sharp rise the quarter before. Average hourly earnings are up 2.7% SAAR so far this year while the Atlanta Fed Wage Growth Tracking is running a tick above 3.0%. Extracting a signal across all these measures points to the 2.5% wage benchmark you’ve outlined, maybe slightly higher. Recent revisions were not very good; weaker growth, firmer inflation. The corporate earnings commentary has been more about margin pressure recently. What do you think the risk is of a much flatter yield curve this cycle? Short rates rise quickly to a much lower terminal point.
31. July 2015 at 07:33
Their goal is to appease the “Fedborg” which wants higher rates because it is more “normal”.
31. July 2015 at 07:35
It does look like the PCE has picked up in recent months. Their preferred measure is the Trimmed Mean PCE, correct? Still, the PCE is a lagging indicator compared to the ECI.
http://www.dallasfed.org/research/pce/
31. July 2015 at 07:35
How much does the very large pool of people who dropped out of the labor force have to do with the slow increase? Do employees think, “I don’t want to end up like them, so I better take this small raise and not complain.”
31. July 2015 at 07:56
Sumner: “PS. It was the slowest reported wage hike since records began 33 years ago.” – this stat is about as useful as the one that said an automobile has 10000 moving parts, which was widely considered a useless statistic that marketing thought up.
Money is neutral. Prices are not sticky. Wages are not sticky. In any event, wages are taking a smaller and smaller portion of GDP over time, so employment is a dated statistic increasingly becoming more and more irrelevant.
31. July 2015 at 07:59
Thank you, Scott.
Since 2008 you have been the voice in the wilderness willing to call out tight money, when all the talking heads (“VSP’s”) try to convince us hyperinflation is just around the corner.
31. July 2015 at 08:23
I guess I am wondering what you think the natural unemployment rate is. I would think the wage data suggests it is well below 5.3%. Which I find strange.
31. July 2015 at 08:38
It’s strange. I read the September Fed statement as indicating that there was no way the Fed would be raising rates in September. Maybe I’m wrong.
31. July 2015 at 09:15
Michael, it seems likely that the headline unemployment rate will hover near its current level while the new hiring comes out of the underemployed & discouraged worker pools.
31. July 2015 at 09:16
well if the Fed actually cared if employment was good, they might note the low wage increase as being a problem. but its more o a PR goal than a real one. course with a consumer based economy, it becomes rather important, that wages grow, otherwise the economy will stagger and then shrink. we have tied the non consumer based economies. they are actually much smaller and even more prone to economic collapses.
31. July 2015 at 09:25
Off-topic as to the USA, but I can’t help myself…
Krugman today:
http://www.nytimes.com/2015/07/31/opinion/paul-krugman-chinas-naked-emperors.html
The China’s leaders “are in the process of demonstrating that, China’s remarkable success over the past 25 years notwithstanding, the nation’s rulers have no idea what they’re doing.”
Hmmm… ???
(And of course he can’t avoid bashing Jeb Bush in a column about China, his tics really are entertaining in their way.)
31. July 2015 at 09:28
I think the FED is trying to do a reverse of monetary policy since Volker. Since then every recession was used to lower inflation.
Right now the economy is fine, but not booming. I think they hope they can hike a little now and then hope the economy gets hotter and let inflation rise at slightly higher rates than here.
31. July 2015 at 09:32
Neil, Good points. But also note that average hourly earnings are up only 2 percent over twelve months, and at a less than 2% rate over the past 3 months. So it’s also that the 6 month rate is a fluke. If the second quarter was distorted by the first quarter incentives, consider that the ECI rate over that last 6 months is also sub-two percent.
I’m afraid I don’t know much about the Atlanta index.
Michael, The natural rate might well be 5.3%. But what the Fed and many economists don’t realize is that wages can grow at a trend of 2% or 20% or 200% when unemployment is at the natural rate. There is no mechanism for wage increases to rise just because we are at the natural rate. Monetary policy controls nominal wages.
31. July 2015 at 09:37
Randomize, I’m not sure, but the core rate is supposed to be a good predictor of future trends, and it’s quite low right now.
31. July 2015 at 09:41
Jim, And as the Greek case shows, Krugman’s an expert on judging the competence of governments. But yes, the Chinese intervention in the stock market is silly, as are 1000s of destructive policies of the Obama administration.
31. July 2015 at 10:02
I’m not sure why the Fed is so keen to hike rates.
Core CPI is up 1.8% over the past year. Core PCE is up 1.2%. Average hourly earnings are up 2.0%. Nominal GDP is up 3.4% (2.6% pace over the past 6 months). U-6 unemployment of 10.5% remains (just) above the last recession’s peak of 10.4% in 2003. The employment to population ratio for 25-54 year olds is 77.2%, vs. 80.0% in Jan2008 and 78.6% at the lowest point (late 2003) after the 2001 recession. Equities are a little pricey but not drastically so (S&P is 18.4x earnings, which is similar to 1995 and 2005), especially given the low rate environment. There are potential problems looming with Greece and China.
If it were up to me, I’d hold off on rate hikes and if anything let the balance sheet run off for awhile first.
31. July 2015 at 10:59
https://drive.google.com/file/d/0B6l3H5GezmzebHZVUmhkMjBRRGc/view?usp=sharing
Here’s the TIPS spread.
31. July 2015 at 12:03
I find the Fed to be disingenuous. If it really wanted to “normalize”, the first thing to do would be to end IOR. As long as I can remember, IOR was zero. The 25 bps of IOR is not “normal” and it is also contractionary – meaning that it delays the day they can do their favorite normalization which is to raise the Fed Funds rate. So not only is the current IOR not normal, it’s counter-productive to the Fed’s most obvious desire.
31. July 2015 at 14:14
“There is no mechanism for wage increases to rise just because we are at the natural rate. Monetary policy controls nominal wages.”
The ironic thing is that politicians on the left keep complaining about the lack of wage growth. But then these same politicians don’t want the Federal Reserve to engage in any sort of monetary stimulus because they think it contributes to inequality. Sadly, politicians on the right aren’t any better about understanding the need for competent monetary policy.
31. July 2015 at 14:26
R-gDp goes into a recession beginning Oct 2015. But N-gDp craters. Fisher’s “price-level” drops by 62 percent in 3 months. Commodity “flash crash” in DEC.
Anyone that responsible for this debacle should be fired. That means Yellen has to go.
31. July 2015 at 14:55
Vt collapsed as remunerating reserves initially induced dis-intermediation among just the non-banks (83 percent of the lending market pre-GD 2.0). NB’s liabilities, viz., repo, ASB securities, MMMFs, CP, and GSE pools rose from 2 trillion in 87 to 21 trillion by Sept 2008 (a 12 percent compounded annual rate for 21 years, Stockman “Great Deformation”).Then during GD 2.0 they contracted by 3.6 trillion.
Dis-intermediation for the CBs isn’t predicated on the level of interest rates since they ultimately became backstopped during 1933. And the CBs could continue to lend/invest even if the non-bank public ceased to save altogether.
Essentially the same credit crunch took place during the S&L crisis in 1966. After 5 successive rate hikes beginning in 1957 (the NB’s savings deposits were already deregulated), the CBs eventually began to outbid the NBs for loan funds. As the NBs assets were predominately longer term, they couldn’t compete after Dec. 1965’s quarter of a percent rate hike (and rates were much higher at that time).
I.e., Bankrupt U Bernanke destroyed NB lending/investing (40-to-1 leverage). The remuneration rate inverted their wholesale funding yield curve (the NB’s liabilities), funded/brokered almost entirely by short-term borrowings (the regulatory induced inversion decimated all wholesale funds with 1 year durations, and after rates dropped – up to 2 years).
I.e., there was a policy induced modern day NB bank run (killing Bear Sterns and Lehman Brothers), and severely wounding Merrill Lynch, Morgan Stanley, and Goldman Sachs (and investment banks owned by Citigroup and JP Morgan). In other words, the NBs had to sell assets to meet withdrawals at fire sale prices (cascading contagion).
The repo and CP funding they used completely dried up as a direct result of introducing the payment of interest on reserves (because the 300 Ph.Ds. on their technical research staff don’t know money from mud pie). E.g., Bear Sterns was rolling over 100 billion, of overnight maturities, each day. And almost all their wholesale funding liabilities had less than 30 day maturities.
So it was a fatal flaw to remunerate reserves @ .25 percent. That’s what forced the regulators to make investment banks BHCs, and enlarge the alphabet soup of the Fed’s lending facilities.
It was all for not. The NBs are the CBs customers. Savings flowing thru the NBs never leaves the CB system. As OMO expanded and IBDDs grew, the NBs shrank. That’s what severely curtailed the circuit income and transactions velocity of funds – a monetary policy theoretical blunder.
31. July 2015 at 15:01
I am the greatest market timer in history. I discovered the Gospel 37 years ago.
There are now 10 trillion dollars of savings impounded within the confines of the CB system. These savings are lost to investment, consumption, indeed to any type of payment or expenditure. I.e., the CBs always create new money when they lend/invest, they do not loan out existing deposits, saved or otherwise.
That’s why NIMs have eroded. The welfare of the CBs is dependent upon the welfare of the NBs. U.S. policy makers are creating an economic depression.
31. July 2015 at 15:25
Interest rates are determined by the supply of and demand for loan-funds – not the supply of and demand for money. Interest is the price of loan-funds; the price of money is the reciprocal of the price level. Given that since the Great-Recession, foreigners bought 3.3 trillion dollars of Treasuries, the Fed bought 3.6 trillion dollars of debt, and the “flight-to-safety”, there was only one way for rates to go – down.
The recent rise in rates has nothing to do with the strength of the economy. Their rise is due to the irresponsible fiscal practices of the Federal Government (crowding out).
Keynes’ liquidity preference curve (demand for money) is a false doctrine. And even if Bernanke did distinguish between the demand for money and the demand for loan-funds, it is an understatement to say that using the yield curve’s Archimedes’ fulcrum (term premium, i.e., ever distorted interest rate “spreads”, between differing structured types and varied risks of public-sector vs. private-sector debt securities), is the “blunt instrument” mechanism of monetary transmission (channel).
By using the wrong criteria (interest rates, rather than member bank legal reserves) in formulating and executing monetary policy, the Federal Reserve has always been (since c. 1965), and will always be, stagflation’s engine, viz., Greenspan never tightened monetary policy and Bernanke never eased
31. July 2015 at 15:53
“bill”– my new hero.
Yes, indeed why not normalize interest on excess reserves? It is like when the Fed tightens upon seeing higher commodity prices (2008) but then does not loosen when they sink.
The Fed talks about raising interest rates the way a crackhead talks about the next coke fix. It seems to be the only topic in the room.
Actually, I think it is time to consider QE as a conventional and ongoing program. At worst we would pay off the entire national debt and cut onerous taxes on productive citizens. At best it would stimulate the economy, which is perfectly fine and desirable result.
This hypersensitivity and squeamishness about microscopic rates of inflation, this peevish fixation on price control is something new.
In 1992 Milton Friedman bashed the Fed for being too tight, when inflation was at 3 percent.
31. July 2015 at 16:00
I suppose everyone has seen this – but if not – Scott just got quoted directly in a FT opinion piece (maybe an editorial – I cant tell) – as an “influential monetary thinker” – with a link back to this blog.
http://www.ft.com/intl/cms/s/0/90f5d7d6-36d5-11e5-bdbb-35e55cbae175.html
congratulations scott.
Now if only someone would listen to you.
31. July 2015 at 16:23
In fact, not even the FT listens.
Scott is quoted in a paragraph pumping, in the quiet FT way – for a rate rise. Charming. They should read this blog about why the Fed should lower rates. But they wont.
31. July 2015 at 16:39
“I’m not quite sure what the Fed should do, because I don’t know what they are trying to achieve.”
Don’t worry, there is no good reason for you to be sure of what it should do even if you knew what they were trying to achieve. Socialism doesn’t work!
31. July 2015 at 16:45
Ray,
“Money is neutral.”
Money is not neutral. A neutral money is a contradiction in terms.
Why do you keep repeating the same falsehood over and over even after I corrected it, explained it, and provided you with a citation from which you can explore?
If money were neutral, then the Fed would not even have a negative effect on the economy, but you’ve already claimed that the Fed does have a negative effect.
How can you continue on like this when you have been shown it is wrong so many times?
How do you possibly expect to improve and grow and learn? You’re stagnating yourself.
31. July 2015 at 18:45
@MF – as the Ben S. Bernanke et al (2003) FAVAR paper points out, the Fed has between 3.2% to 13.2% effect on output, the rest is due to non-monetary factors. While 3.2%-13.2% is not trivial, and is statistically significant, it’s not worth much time to dwell upon for anybody but those with vested interests (professional economists who know better but are trying to sell their usefulness to society by making a big deal over this range), or the ignorant (is that you? That is, those that think monetarism is important).
If I stop reading this blog and posting here, you’ll know why. 😉 Not worth my time. The only danger of Sumner is that in his lust to achieve fame (after being highlighted by Tyler Cowen a few years ago) and believing he’s the ‘blogger that saved the world’ (not unlike Paulson, Bernanke being so labeled as saving the world), that others will pick up on the meme that the Fed must do NGDPLT, and inadvertently this will lead to hyperinflation. I do think hyperinflation (not just mere high inflation) has a ruinous cost to society, and Sumner’s NGDPLT can lead to hyperinflation at the limit. Far sounder is a limit to money creation like in the Taylor Rule.
But more money printing is not bad; it’s good either, it’s neutral. That’s what econometrics science says MF.
31. July 2015 at 19:40
And to think the commentariat here once accused you two of actually being the same person.
The actual reason not to comment here is that you can’t have a productive conversation with the commenters. For evidence of which, I refer you back to my opening statement.
31. July 2015 at 21:04
My comment is off topic so, sorry in advance but, it looks like you can add Dean Baker to the list of people who think: 1) exchange rates cause trade surpluses and 2) a current account surplus benefits the economy. http://www.cepr.net/blogs/beat-the-press/steve-rattner-is-right-baby-boomers-failed-millennials
A slice:”baby boomers let incompetent Wall Street types run the economy for their own benefit. This crew gave us the stock bubble in the 1990s and the housing bubble in the last decade. They also have given us an over-valued dollar. This creates a trade deficit that makes it virtually impossible to get to full employment without bubbles.”
31. July 2015 at 23:08
flow5, didn’t all the investment bank collapses happen before IOR was implemented?
1. August 2015 at 03:26
Ray:
You continue to contradict yourself. Wow.
If you believe that 2003 paper, which I do not, that the effects of monetary policy can be summarized into a single number whose range is between 3.2% to 13.2%, then you cannot logically believe that money is neutral! A neutral money would require that number to be 0.0%.
How can you possibly believe otherwise if it weren’t for irrational, emotional based reasons?
But besides that, that isn’t even the right test. A non-neutral money does not have to manifest in a modelled singular positive or negative percentage variable that supposedly moves the entire economic output up or down. All it needs is for real output to be affected at all.
Do you actually believe that when states finance their wars by inflation, which redirects real resources away from civilian uses to governmental uses, that there is zero changes to real production? That we’re supposed to believe that more tank and aircraft carrier factories and fewer civilian goods factories, does not constitute a change to output?
Then you say that hyperinflation is ruinous to economies. That cannot occur if money were neutral either!
Ray, the econometrics from Bernanke’s paper not only tells you that money is not neutral, as greater than 3.2% is certainly not 0%, but such a paper could not actually show money neutrality or money effectiveness because money does more than affect aggregates. It affects the relative allocations.
1. August 2015 at 05:02
“The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack.”
Assuming “labor market slack” is another way of saying AS >> AD I don’t see how monetary policy is a solution. For if rates are lowered then it follows that companies are able to invest more on technology that substitutes for labor. Let us all remember that businesses are NOT in the business of paying wages, but rather in the business of deploying capital.
Also, it seems to be a great error to assume AD would equal AS. AD is limited by population and time. There is only so much a person can do each day. There is only so much product that can be demanded. On the other hand, with machines and continuous optimization, the limit on what goods can be supplied can scarcely be fathomed.
All evidence I see says that the only way to eliminate labor market slack would be to eliminate elements of production, or in other words, to force AS downward. As it currently stands the growth rate in supply exceeds the growth rate in demand and there is no reason not to expect this to be the case for a long time. Further monetary easing will only compound the difference and amplify inequality (for those that care about such things).
1. August 2015 at 06:11
Ray, Please don’t leave. We will miss your comments like the Taylor rule is a limit on money creation.
Kevin, Congrats on the post at MR.
Dan, I wouldn’t even know where to begin with your comment.
1. August 2015 at 06:51
@MF – as I said, any monetary effects are a very small part of the change in output (3.2% being an example from Bernanke’s paper). It’s not zero, but effectively it’s close enough to zero for one to assume money neutrality.
@sumner – “Ray, Please don’t leave. We will miss your comments like the Taylor rule is a limit on money creation.” yes it is. Wikipedia informs us: ” In particular, the rule stipulates that for each one-percent increase in inflation, the central bank should raise the nominal interest rate by more than one percentage point. This aspect of the rule is often called the Taylor principle.”
Why is that hard to understand? Instead of, as in your rule, trying to hit an artificial NGDP figure by printing more and more money (pushing on a string since money is neutral), Taylor’s rule simply says the nominal interest rate should be inflation plus 1% + epsilon. Since almost always, except in an inverted yield curve, interest rates are greater than inflation, this should not be hard to do except in a recession. During a recession indeed the Taylor rule calls for potentially infinite money creation, but likely inflation will fall in a recession so de facto a central bank will not be constantly printing money.
1. August 2015 at 07:24
Kevin Erdmann
31. July 2015 at 23:08
flow5, didn’t all the investment bank collapses happen before IOR was implemented?
Default preceded total destruction. Bernanke drained legal reserves for 29 consecutive months (the proxy for inflation). I.e., he drained liquidity. Rates-of-change in money flows were not just decelerating, they were contractionary, or negative (less than zero).
Then when the recession was Imminent (just like the 4th qtr. of 2015’s recession is Imminent), in the 4th qtr (2 consecutive negative qtrs. of R-gDp), he dropped the roc in the proxy for real-output by 166 percent from July to Oct.
1. August 2015 at 07:28
Ray, you continue to contradict yourself again and again.
First, 3.2% is not effectively zero. It is strictly non-zero and is sufficient evidence in your framework that money is affective, and not neutral.
Saying “effectively” neutral is just another way of denying the conclusion and pretending it wasn’t made.
More importantly, the stat is not 3.2%. It is BETWEEN 3.2% and 13.2%, which means on average over time it would be higher than 3.2%, and lower than 13.2%. That means it might sometimes be 13.2%.
And again, money neutrality cannot be proved by referring to some singular statistic representing aggregate production levels. Money neutrality means that the ONLY effect of inflation is on prices, and has NO effect on relative and absolute production levels.
If is not zero, then defining money neutrality based on that stat being zero, means you are logically obligated to conclude money is not neutral. Any other conclusion and you are being illogical.
You don’t want to be illogical do you?
Even if Bernanke found the stat to be exactly zero, that would not prove money neutrality. It is false to claim that keeping the same total output in dollars spent, but totally changing the makeup of what is produced and sold in the relative sense, that this means money is neutral. If money inflation changes what is produced, but does not result in any higher total output as crudely quantified by total dollars spent on goods, such that prices for stuff on general rises 2% on average in both worlds, this means money is not neutral.
Surely you are aware that inflation is used to finance war, and that war has profound effects on what is produced during the war and what will forever be produced thereafter because of sequentialism, right?
Stop being illogical and wake up and smell the roses. You are wrong and you are only hurting yourself by not admitting it. You are not even throwing spitballs at Sumner with your prattling.
1. August 2015 at 08:23
See John Mason:
The $130 billion increase in reserve balances in the banking week ending July 29, 2015 was primarily achieved by a reduction of almost $110 billion in the Fed’s reverse repurchase agreements, the short-term tool it has been using to modestly reduce bank reserve balances since the end of the quantitative easing.
The evidence that there might be some liquidity issues in the Treasury markets is that the yield on the 2-year Treasury issue rose during July from about 0.55 percent on July 8, to near 0.75 percent at the end of the month.
The term structure of interest rates became much flatter, going from a spread between the yield on the 10-year and the yield on the 2-year from near 175 basis points at the end of June to around 150 basis points at the end of July.
This implies that the financial markets were experiencing some “tightening”, some feeling of limited liquidity, during the month of July.
Since October 15, 2014, the date at which “excess reserves” in the banking system reached a peak near the ending of the Fed’s QE3, reserve balances at the Fed have dropped by almost $190 billion, and this after accounting for the almost $130 billion increase in this reserve balances during the past week.
I.e., the FED backed out 41 percent of their “exiting”, or balance sheet “normalization”.
1. August 2015 at 09:07
@Dan W: “AD is limited by population and time.” You’re confusing real demand, with nominal demand. Aggregate demand is a nominal quantity, and can be changed by changing the supply of fiat money. It can easily go up, even if population goes down.
“There is only so much product that can be demanded. On the other hand, with machines and continuous optimization, the limit on what goods can be supplied can scarcely be fathomed.” Now you’re talking about real demand, but the whole point of economics, is how to allocate resources under scarcity, when (as the usual case), there isn’t enough to provide everyone with everything they want (if the price were zero). If you were right, economics wouldn’t be necessary. But, alas, it turns out that people’s real demands are essentially infinite; far, far greater than any society’s ability to provide. Hence, the need for allocation decisions about scarcity.
“it seems to be a great error to assume AD would equal AS” Do you have any background in microeconomics? Do you understand, in an ordinary market, how free market prices adjust, so that quantities exchanged balance the desires of both supply and demand, at the point where the supply curve intersects the demand curve? (If not, you should go study micro, before attempting macro.) AD and AS work much the same way, and the aggregate price level adjusts for the whole economy, in much the same way that an individual market price adjusts in micro.
1. August 2015 at 09:19
Sine the economy is performing at subpar levels, it only takes a small drop in AD to result in a recession. The FED could easily pump us out of this predicament as a lot of deleveraging as already stabilized.
From: “Putting Economic Issues In Perspective”
“The typical post-WWII recovery is led by autos, housing, and financials. The Great Recession ended nearly 6 years ago. But, these three sectors are just now taking off, indicating that the real (typical) recovery has just begun. (Auto sales averaging more than 17 million units at an annual rate over the past 4 months; housing starts up 9.8%; building permits up 7.4% – best since ’07; the National Association of Home Builder’s Index at a cycle high in both June and July.) The Fed’s Flow of Funds report for Q1 showed a much healthier consumer with debt/asset and debt/equity ratios at 15-year-lows, the consumer’s ability to service debt the best it has been since the ’80s, and home equity on consumer balance sheets the best since ’06″ And the FOMC is discussing raising rates today.
1. August 2015 at 12:30
The monthly volatility in repo rates is due to the rotation in the payment’s System – where the CB’s TT&L accounts contract and the Treasury’s General Fund Account expands.
This can be demonstrated by the FRB-NY’s “trading desk” use of reverse repurchase agreements to tweak reserves.
It is inaccurate (for the cataloguer of economic statistics) to exclude the Treasury’s General Fund Account from the assets included in M1 (with the exception of WWII).
No one has established any unique price effect of federal outlays, as compared to state and local government outlays, or expenditures by the private sector. Of course, the shifting of funds to and out of the Federal Reserve banks has a dollar for dollar effect on member bank reserves 9which is now a major problem), but that is another problem that can be, and is dealt with through open market operations (exacerbating money market volatility).
1. August 2015 at 12:34
Scott, thanks. The commenters over there aren’t having it, though…. Sometimes, I wonder if Tyler is using me as a stand in for Tyrone when he feels like trolling…..
Flow5, by IOR I meant interest on reserves. In earlier comments, you seemed to blame the failure of the investment banks on that in 2008, but they had all collapsed before IOR began. Is there something you have in mind that I’m missing?
1. August 2015 at 12:34
It is axiomatic, given nominal rigidity (limited upward and downward price and wage flexibility), unless monetary flows (our means-of-payment money times its transactions rate-of-turnover), exceed the roc in real-output by 2-3 percentage points (at least the roc of “asked prices”), output can’t be sold, production will be cut back, incomes will decline, and jobs will be lost.
1. August 2015 at 12:36
Kevin, insolvency leads to liquidation (cascading contagion). Can’t you read?
1. August 2015 at 13:08
Kevin:
I denigrated Nassim Taleb’s general theory of the “black swan” (the failure of circuit breakers and limits on high frequency trading) of May 6th 2010. I.e., I predicted the “flash crash” 6 months and within one day of the 1000 point swing.
Then as I predicted:
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,… -0.22 * temporary bottom
11/1/2007,,,,,,, 0.14,,,,,,, -0.18
12/1/2007,,,,,,, 0.44,,,,,,,-0.23
1/1/2008,,,,,,, 0.59,,,,,,, 0.06
2/1/2008,,,,,,, 0.45,,,,,,, 0.10
3/1/2008,,,,,,, 0.06,,,,,,, 0.04
4/1/2008,,,,,,, 0.04,,,,,,, 0.02
5/1/2008,,,,,,, 0.09,,,,,,, 0.04
6/1/2008,,,,,,, 0.20,,,,,,, 0.05
7/1/2008,,,,,,, 0.32,,,,,,, 0.10
8/1/2008,,,,,,, 0.15,,,,,,, 0.05
9/1/2008,,,,,,, 0.00,,,,,,, 0.13
10/1/2008,,,,,,, -0.20,,,,,,, 0.10 * possible recession
11/1/2008,,,,,,, -0.10,,,,,,, 0.00 * possible recession
12/1/2008,,,,,,, 0.10,,,,,,, -0.06 * possible recession
Trajectory as predicted:
As my favorite economist Dr. Richard Anderson always emphasizes: “All analysis is a model” – Ken Arrow
1. August 2015 at 13:43
Now I know why everyone else ignores you, flow5. You seem to have some interesting ideas, but you’re hard to follow. You said something that seemed factually inaccurate so I asked you to explain it. I was hoping you had a reasonable explanation so that I could learn something from you. But twice now you have avoided answering the specific question while being rude about it. I will assume that means you made an error and don’t have the balls to own it.
1. August 2015 at 17:14
Kevin, is this the post to which Scott referred?
http://marginalrevolution.com/marginalrevolution/2015/08/from-the-comments-26.html
1. August 2015 at 17:32
Tom, Yes.
1. August 2015 at 17:35
flow5, is that this Nassim Taleb? Most of what he says (there at least) is anti-scientific nonsense. He babbles about how empiricism sucks.
1. August 2015 at 19:15
@MF – “More importantly, the stat is not 3.2%. It is BETWEEN 3.2% and 13.2%, which means on average over time it would be higher than 3.2%, and lower than 13.2%. That means it might sometimes be 13.2%.”
True enough, but even if it averages say 8% of the total effect (the midpoint), for most people something that has only 8% effect is de facto trivial. Recall that in Brazil, with inflation in the high teens over 40 years, the drag on the economy was estimated by Calomiris in his book “Fragile by Design” as around 5% a year (and the economy still slowly grew). Money is (de facto) neutral since people adjust to inflation. Prices, wages are not that sticky. I would worry more about the 92% (which monetarists ignore but fiscalists like Krugman correctly don’t) than the 8%.
As for ignoring aggregate statistics, that’s Austrian nonsense that I’ve seen before. When I was at the Mieses site, I got banned for trying to understand why Austrians don’t believe in AD/AS (and I was very polite, unlike my usual provocative self).
1. August 2015 at 20:14
-Historical experience suggests it has to fall a percentage point lower to cause excess inflation:
http://againstjebelallawz.wordpress.com/2015/08/01/nairu-the-natural-rate-of-unemployment-and-full-employment/
If I were in the Fed’s position, I’d hold off on rate hikes until inflation gets back on trend:
http://againstjebelallawz.wordpress.com/2015/06/02/the-tightwad-fed/
Or, at the very least, I would wait for CPI inflation to hit 2%.
2. August 2015 at 05:22
“But twice now you have avoided answering the specific question while being rude about it”
————-
Disingenuous. No, I don’t educate bad students, esp., those without any prerequisites. You want to sling mud. Come on with it.
2. August 2015 at 06:46
“Being rude about it”
————-
Your profile’s all to prevalent. I’m sorry I spoke up after keeping it secret for 37 years. That no one caught on after so many years just shows how retarded people like you are.
2. August 2015 at 08:10
Hey flow5, chill out, I think Kevin Erdmann is as idiosyncratic as you are. For example, he’s apparently a 80s-style rational expectationist, which went out of style with the mullet cut hairstyle but that don’t stop Erdmann from making posts like this: “The housing market is efficient” on his blog. A fifty (50) part series, and growing, no less! Like Cool Hand Luke eating the fifty eggs, you got to admire his tenaciousness, but I’d not follow him.
Truth is, economics is nonlinear, which means it has discontinuities and often no explanation. The price puzzle in monetarism is but one example of many. That’s why Sumner’s monetarism–which Bernanke’s 2003 paper says has a mere 3.2% effect– is irrelevant. The only issue with Sumner is whether his NGDPLT could lead to hyperinflation, since it’s so vague and imprecise it’s hard to say, but I would not want to run a 16T $ economy on it to find out. Best that Sumner be humored by his peers as a great economist and then the powers-that-be, such as the ones in Congress that follow John Taylor, quietly let NGDPLT die stillborn. Better safe than sorry with monetarism. That 3.2% could blow up into 99.9% if you get reckless printing money.
2. August 2015 at 09:10
Speaking of supply side issues, and since Scott seems determined to move to California, he should be aware of the underground economy;
http://www.sfgate.com/realestate/article/Bay-Area-basements-are-getting-a-luxury-makeover-6418404.php
‘”Most cities and towns limit the size of a home, but don’t count underground space in that square footage. Basements are typically built on expensive lots, often after a smaller house has been razed, where the owners have maxed out their above-ground space. Adding a basement maximizes the value of the property,” the Chronicle’s Kathleen Pender notes.’
2. August 2015 at 10:58
More cause for optimism about what better monetary policy might accomplish in the United States? If wage growth is this low and we’re in (at worst) a minor slowdown, imagine the potential growth if the economy weren’t pinned down by sticky wages.
A little concerned about whether the methodology is really capturing income, but wouldn’t be shocked if the US could achieve 7% RGDP growth for a year or two. Sounds crazy, but perhaps no more so than someone suggesting in the mid-1970s that the Fed would someday routinely miss its own 2% inflation target on the downside.
2. August 2015 at 17:31
OT- evidence that monetarism (this time by way of varying bank deposits) is de facto trivial. Again. I wonder what our resident Great Depression historian economist’s forthcoming book says about this 1937-8 episode? Sumner wrong. Again.
http://onlinelibrary.wiley.com/doi/10.1111/jmcb.12235/abstract;jsessionid=6BA3E5276104C4C1C1F36C91E363DED8.f02t04
We analyze the impact of contractionary monetary policy through increases in reserve requirements on bank lending. We compare the lending behavior of banks that were subject to the requirement increases in 1936-37, Federal Reserve member banks, to a group of banks that were not subject to the reserve increase, Federal Reserve nonmember banks. After implementing the difference-in-difference estimators, we find that the increases in reserve requirements did not create financing constraints for member banks and lead them to reduce lending. Therefore, the actions of the Federal Reserve concerning the required reserve ratios cannot be blamed for instigating the economic downturn of 1937-38.
2. August 2015 at 20:40
OT – more evidence monetarism = {}. Like Oakland, or seeing patterns in short term stock market data, there’s no ‘there there’.
Quantity theory of money–the basis for monetarism, whether in setting the base money supply or trying to control the interest rate–is false for most open economies says econometrics.
“The quantity theory of money is based on two propositions. First, in the long run, there is proportionality between money growth and inflation, i.e., when money growth increases by x% inflation also rises by x% …. We subjected these statements to empirical tests using a sample which covers most countries in the world during the last 30 years. Our findings can be summarised as follows. First, when analysing the full sample of countries, we find a strong positive relation between the long-run growth rate of money and inflation. However, this relation is not proportional. Our second finding is that this strong link between inflation and money growth is almost wholly due to the presence of high-inflation or hyperinflation countries in the sample. The relation between inflation and money growth for low-inflation countries (on average less than 10% per year over 30 years) is weak, if not absent” (De Grauwe and Polan 2005: 256).
http://socialdemocracy21stcentury.blogspot.com/2010/07/quantity-theory-of-money-critique.html
2. August 2015 at 20:44
@myself – you will note the ‘high-inflation or hyperinflation’ language of the abstract, as an exception to the rule that the quantity theory of money is largely irrelevant. I (and MF) would agree on this point: that given hyperinflation (off-the-chart inflation, expressed in exponents of 10), or very high inflation (even arguably greater than Brazil’s 40 year high-teens inflation), say inflation of 1000%/yr, indeed a central bank then becomes important. But most of the time a central bank is irrelevant because money is largely neutral everywhere and always. Not me talking, but econometrics.
3. August 2015 at 03:19
Ray I don’t think you realize that 8% or even ‘only’ 3.2% is not trivial in a $11 trillion dollar economy.
It’s the same in all science. For instance there is much less than a 8% variation between humans and other primates yet clearly the difference between us and them is hardly trivial.
If tomorrow there were 3.2% less oxygen in the air this would be noticed to say the least. Or if the Sun were 3.2% hotter or colder-in either case we’d be dead.
3. August 2015 at 05:00
Ray Lopez,
To my knowledge no market monetarist has ever blamed the 1937 recession on the raising of reserve requirements. The cause was gold sterilization (i.e. the cessation of the QE of its day):
http://www.dartmouth.edu/~dirwin/1937.pdf
Thus the paper you cite supports the preferred market monetarist explanation. Thanks.
The second paper you cite debunks a form of monetarism that nobody to my knowledge has supported in at least 30 years. Furthermore, its coauthor, Paul de Grauwe, is a prominent advocate of Euro Area QE.
http://www.voxeu.org/article/quantitative-easing-eurozone-its-possible-without-fiscal-transfers
If you didn’t already exist, Scott would have to invent you.
3. August 2015 at 06:34
Germany is far more exposed to a Chinese economic meltdown than any other Eurozone country
Read more: http://www.businessinsider.com/germanys-exposure-to-china-2015-8#ixzz3hlLL5Yun
3. August 2015 at 06:34
“Huge chunks of the Chinese economy are actually in decline”
http://www.businessinsider.com/chinas-economy-is-fragile-statistics-2015-8
3. August 2015 at 08:18
TravisV — Interesting link, thanks for sharing. The railway freight and power consumption numbers are particularly interesting.
I wonder how Macquarie gathers the information? I assume these are not official state numbers.
3. August 2015 at 08:54
TallDave,
Thanks, glad you liked it! I asked Prof. Sumner some more questions about China’s NGDP problem in the comments section of his latest ExonLog post.
3. August 2015 at 08:55
Excuse me, EconLog.
3. August 2015 at 16:12
Ray:
“True enough, but even if it averages say 8% of the total effect (the midpoint), for most people something that has only 8% effect is de facto trivial. Recall that in Brazil, with inflation in the high teens over 40 years, the drag on the economy was estimated by Calomiris in his book “Fragile by Design” as around 5% a year (and the economy still slowly grew). Money is (de facto) neutral since people adjust to inflation. Prices, wages are not that sticky. I would worry more about the 92% (which monetarists ignore but fiscalists like Krugman correctly don’t) than the 8%.”
Again you contradict yourself. The reason 3.2% implies money affectuality (in the fallacious view you seemed to have adopted) is the same reason 8% would imply affectuality.
All these weasal words like “effectively” and “de facto” are just you denying what the fallacious view you adopted actually argues, that money is not neutral precisely because it has effects on production beyond aggregate price levels.
“As for ignoring aggregate statistics, that’s Austrian nonsense that I’ve seen before. When I was at the Mieses site, I got banned for trying to understand why Austrians don’t believe in AD/AS.”
Austrian do not “ignore” aggregates like AD and AS. They do not “disbelieve” it. What they are actually saying is that the actual events taking place in the world, the sole motive driver for all aggregates, are the individual actions. The fact that you can mathematically add all these separate events to get a singular number does not mean they somehow believe that the aggregate sums do not exist.
Money is not neutral even in your own fallacy filled view.
Why do you insist on being illogical and wrong? You are not even coming close to challenging Monetarism. Don’t make shit up. It only hurts you.
3. August 2015 at 16:14
Sadowski:
“Thus the paper you cite supports the preferred market monetarist explanation. Thanks.”
A paper explicitly rejecting a particular theory does not mean a paper “supports” that theory.
3. August 2015 at 16:15
A paper NOT explicitly rejecting a theory…
Sorry typo.
4. August 2015 at 07:07
Kevin, Commenters will be commenters.
Talldave, Keep in the mind the important distinction of whether a burst of 7% RGDP growth is possible, and whether it is possible with monetary policy alone.
Mark, Maybe I did invent Ray.
Travis, Thanks for the links.
4. August 2015 at 07:39
“Truth is, economics is nonlinear, which means it has discontinuities and often no explanation”
————
Nope.
Upcoming buying panic in both bonds as well as a selling panic in commodities (viz., Yale Professor Irving Fisher’s “price-level”, explained as: the truistic “equation of exchange”), or the transactions velocity approach to money flows. Oct 2015 recession dead ahead. Commodity flash crash in Dec.
An early American neoclassical economists (“focusing on the determination of prices, outputs, and income distributions in markets through supply and demand”), who dissected debt deflation, a pioneer of a theory of capital and interest rates. A pioneer of econometrics, index numbers, the “Fisher equation” and the quantity theory of money (“inaugurated the school of macroeconomic thought known as “monetarism”).
It is axiomatic, given nominal rigidity (limited upward and downward price and wage flexibility), unless monetary flows (our means-of-payment money times its transactions rate-of-turnover), exceed the rate-of-change, roc, in real-output by 2-3 percentage points (at least the roc of “asked prices”), output can’t be sold, production will be cut back, incomes will decline, and layoffs will ensue.
I.e., the scientific evidence for the last 100 years is irrefutable (even absent the preferred economic metric, debit and demand deposit turnover figures from the G.6 release, discontinued in Sept 1996).
I.e., the trajectory in the rate-of-change (proxy for inflation indices), for M*Vt (scientific method), projected a top in the inflation indices in May 2015 and an economic downswing beginning in July 2015 (signal to sell commodity ETF’s and buy bonds).
Every year, the seasonal factor’s map (SCIENTIFIC PROOF), is demonstrated by the product of money flows.
My Gospel is worth trillions of economic dollars. The model eliminates the business cycle, ceteris paribus.
But there are still 10 trillion dollars of savings impounded within the confines of the CB system. Allowing the CBs to buy their liquidity instead of following the old fashioned practice of storing their liquidity creates all sorts of economic distortions.
4. August 2015 at 07:42
@Mike Sax who says: “Ray I don’t think you realize that 8% or even ‘only’ 3.2% is not trivial in a $11 trillion dollar economy.” .. no Mike, it’s not 3.2% of $11T (actually $16T) but 3.2% of the yearly increase of the economy. So a much smaller number.
@ Mark A. Sadowski who says: “to my knowledge no market monetarist has ever blamed the 1937 recession on the raising of reserve requirements” – wow your knowledge is deficient. And you post under your real name? At least when I say something stupid I can brush it off as ‘just being a troll’ or nobody cares since my real name is not being used. I suggest you start using a pseudonym. A play on your name (from an analgam mixer) might be: “Karma Ass Kid Ow”. Ow. Start using it, it’s so you.
Do you know former Georgia U prof and monetarist Timberlake, who G. Selgin replaced? Timberlake wrote a whole book on the Fed Reserve (which I read, how about you?) and here is what he wrote in 1999. You’re welcome, Ow.
The Reserve Requirement Debacle of 1935-1938 – By Richard H. Timberlake, Jr. | Posted: Tue. June 1, 1999 Also published in The Freeman – “The Fed Board, under the urging of the Fed Bank of New York, raised reserve requirements by 50 percent in August 1936…The magnitude of this change is understood best when it is viewed in equivalent dollar value to an open-market sale of government securities. As Friedman and Schwartz point out, $3 billion “amounted to nearly one-quarter of total high-powered money.” …since the horrendous blunders in their implementation during the 1930s, the Federal Reserve has used them less and less for monetary control purposes…Even if not used, however, legal reserve requirements should be abolished completely so that the Federal Reserve Board could not blunder again into the monetary catastrophe it fostered in the 1930s.” Ow.
Sadowski then says: “The second paper you cite debunks a form of monetarism that nobody to my knowledge has supported in at least 30 years. Furthermore, its coauthor, Paul de Grauwe, is a prominent advocate of Euro Area QE.” – I don’t take your word for it, but for the sake of argument what will people say about Sumner in 30 years? Think about that, Ow. Whatever bad things you say about your opponents now, will come back to haunt you later. That’s karma, Ow.
@MF – convince yourself that 8% of a 100% effect is nearly trivial. Once you get to that point, we can have a rational debate. 92% >> 8%, it’s not rocket science.
4. August 2015 at 07:57
“Best that Sumner be humored by his peers as a great economist”
———–
Targeting N-gDp is not submission, it’s political compromise. No scientist would ever target N-gDp. A scientist would target R-gDp (because it can be easily measured in advance and the proper roc hit). Sumner’s “on point”.
4. August 2015 at 12:55
” no Mike, it’s not 3.2% of $11T (actually $16T) but 3.2% of the yearly increase of the economy. So a much smaller number.”
Ray the exact number doesn’t matter. 3.2% of the yearly increase in the economy is a large amount-what ever that number is. Let’s look at this another way: what magnitude would it have to be for you to consider it important?
The point is that a mature economy is mostly effected at the margins of policy. Seemingly small magnitudes have large marginal effects.
4. August 2015 at 17:14
@Mike Sax – 3.2% to 13.2% is statistically significant, but common sense tells you that you need to get past the teens to have any real ‘move the needle’ impact. What is more real world significant to you Mike, 3.2% or 96.8%? We’re arguing here over nothing (monetarism). If I stop posting here you’ll know why; it’s a waste of our time.
23. August 2015 at 22:02
[…] Rate cuts? QE IV? I don’t know – been seeing some smart people get confused on this lately. […]
27. July 2016 at 19:55
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