It was not “inability”

Over at Econlog, I have a post discussing Bernanke’s views on price level targeting.  Here I’d like to nitpick a couple passages from Bernanke’s post:

As price-level targeting and “make-up” policies are closely related, they could be combined in various ways. For example, by promising to return the price level to trend after a period at the zero lower bound, the Fed could use the language of price-level targeting to make precise its commitment to make up for its inability to respond adequately during the period when rates are at zero.

It was not inability to cut rates that prevented the Fed from acting after Lehman failed in September 2008.

It was not inability that caused the Fed to raise the interest rate on reserves in October 2008.

It was not inability that caused the Fed to refuse to cut rates to zero in November 2008.

It was not inability that caused the Fed to refuse to do negative IOR, when Sweden adopted the policy in 2009.

It was not inability that caused the Fed to prematurely end QE1 in late 2009.

It was not inability that caused the Fed to prematurely end QE2 in mid-2011

It was not inability that caused the Fed to prematurely talk about tapering in 2013.

It was not inability that caused the Fed to prematurely raise rates in 2015.

Now Fed policy is roughly appropriate.  But it was obviously too contractionary for many, many consecutive months and years, just as had been the case in Japan.  Just to refresh your memories, Bernanke’s paper that criticized the BOJ on almost precisely the same grounds as I criticized the Fed was entitled:

Japanese Monetary Policy:  A Case of Self-Induced Paralysis?

And the answer he gave was a resounding yes.  That’s not to say the Fed’s job is easy.  I might have done no better than Bernanke, if I were in his shoes.  There are all sorts of political pressures within the Fed and also from the outside.  It’s a very hard job.  But it’s never about inability; it’s about the Fed’s willingness to do whatever it takes.  It’s willingness to show what Bernanke once called “Rooseveltian resolve”.

One other quibble:

Support for a higher inflation target seems to be increasing along with worries about the ZLB. In a recent post entitled “The case for a higher inflation target gets stronger,” Stephen Cecchetti and Kermit Schoenholtz cite four arguments in favor:

  1. the persistent decline in normal interest rates;

  2. findings (like those of KR) that the frequency and severity of future ZLB episodes may be worse than previously thought, even given the low level of normal interest rates;

  3. some evidence, drawn from a study of the 1970s, that the costs of higher inflation might be less than previously believed; and

  4. calculations that suggest that standard inflation measures may overstate actual increases in the cost of living by more than had been understood.

I don’t have a big problem with this, but I don’t really like point four.  If higher inflation is a good idea, it has nothing to do with the fact that “standard inflation measures may overstate actual increases in the cost of living”.  There are several theories about the welfare cost of inflation, but none of them hinge in any way on the question of whether the BLS properly accounts for quality changes, or the substitution effect, or the new product effect.  The welfare costs of inflation have to do with things like menu costs for adjusting prices, or excess taxation of capital income when inflation is high.  Point four creates the misleading impression that economists want to control inflation so that consumers will benefit from a dollar that loses 2% of its purchasing power each year in terms of . . . what?  Utility?

I also disagree with this:

Second, although quantifying the economic costs of inflation has proved difficult and controversial, we know that inflation is very unpopular with the public. This may be due to reasons that economists find unpersuasive—e.g., people may believe that the wage increases they receive are fully earned (that is, not due in part to prevailing inflation), while simultaneously blaming inflation for eroding the purchasing power of those wages.

The thing that is unpopular with the public is called “inflation” by the man on the street, but it has nothing to do with inflation as defined by economists.  I talk a lot about how the American public in 1990 thought inflation was higher than in 1980.  But an even better example occurred in Europe, where polls showed that Europeans believed that inflation jumped dramatically after the euro was introduced.  I had European students tell me this with a straight face, back when I taught at Bentley.  I’m not sure what Europeans were annoyed about in 2002, but it was not “inflation” as the concept is understood by economists.  We need to stop trying to please a deeply confused public that doesn’t understand our terminology, and instead produce a macroeconomic environment with stable NGDP growth, stable growth in incomes, and stable employment growth.  They liked it in the 1990s, and they would like it now.

I vaguely recall reading that there were more complaints about inflation than deflation during the Great Depression.  (Can someone confirm?)

PS.  Here’s today’s headline from the FT:

Sign ‘Trumpflation’ sputtering as consumer prices fall

I’m still skeptical of the Trump reflation story.  Monetary offset is still in place, and supply side gains are likely to be a couple tenths of a percent at best, assuming he can get anything through Congress.

HT: rtd



53 Responses to “It was not “inability””

  1. Gravatar of H_WASSHOI H_WASSHOI
    14. April 2017 at 07:31

    (memorial comment)

  2. Gravatar of Michael Michael
    14. April 2017 at 07:31

    Thank you! Please keep rubbing it in. Maybe, on the margin, it will seep into some closed minds

  3. Gravatar of Randomize Randomize
    14. April 2017 at 09:55

    You may be a little too hard on Bernanke’s use of the word “inability.” Even if they were physically able, they were clearly not politically able.

  4. Gravatar of marcus nunes marcus nunes
    14. April 2017 at 09:55

    It was inability to avoid the huge drop in NGDP in 2008!
    (To read, sign up for a free trial)

  5. Gravatar of Christian List Christian List
    14. April 2017 at 10:29

    I tend to agree with Randomize. Maybe Bernanke meant “inability” in the sense of “ineptitude”?

    And Kermit Schoenholtz won the Name of the Day award. I hope he gave his parents hell for that.

  6. Gravatar of ssumner ssumner
    14. April 2017 at 10:44

    Randomize, You said:

    “they were clearly not politically able.”

    Yes, I recall people marching in the streets after Lehman failed, saying “don’t cut the fed funds target”. And then there weas that groundswell for the Fed to pay interest to gangsters, I mean bankers.

    Seriously, there was some pressure at times, but nothing the Fed could not have overcome. In any case, if that’s what Bernanke meant, he should have said so, not use the term ‘inability’.

    Christian, Bernanke’s a smart guy, he knows those two words have completely different meanings.

  7. Gravatar of dtoh dtoh
    14. April 2017 at 16:17


    Wow. That’s the most critical post you’ve written on Bernanke. Way to go!

    My only quibble is your characterization of the Fed job as “very hard.” It’s only hard if the practitioner has no actual practice of getting things done in a committee or board.

    Asking Bernanke to run the Fed would be like asking you to direct a movie. (BTW – I really like your film commentary.)

  8. Gravatar of ssumner ssumner
    14. April 2017 at 16:37

    dtoh, Don’t get fooled by mood affiliation. All my Bernanke posts are equally critical/laudatory.

  9. Gravatar of Benjamin Cole Benjamin Cole
    14. April 2017 at 16:56

    Great post!

    Now…if we can just fire up Scott Sumner about central-bank asphyxiation of the present-day global economy…

  10. Gravatar of Dtoh Dtoh
    14. April 2017 at 21:23

    There is nothing to be laudatory about. The guy was a total disaster.

  11. Gravatar of Major-Freedom Major-Freedom
    15. April 2017 at 10:58

    Nearly 95% of all new jobs during Obama era were part-time, or contract,-contract-work-449057

  12. Gravatar of flow5 flow5
    16. April 2017 at 03:09

    Any economist that supports the idea of remunerating excess reserve balances should have their degree stripped (because they just flunked basic economics – not knowing a debit from a credit).

    There will be an economic recession beginning in the 4th qtr. of 2017 without countervailing gov’t intervention. So don’t expect another policy rate hike.

  13. Gravatar of flow5 flow5
    16. April 2017 at 03:16

    BuB said in his memoirs: ~Money is fungible. One dollar is like any other~. (a theoretical blunder, which of course, destroyed the non-banks, contracting non-bank credit by $6.2 trillion).

    Then he said: ~Unfortunately, beyond a quarter or two, the course of the economy is extremely hard to forecast~ (but he only needed to forecast that in the next qtr. the economy would go under the knife, where R-gDp subsequently dropped by -3.7%, which included a bounce in July, followed by -8.9% in the 4th qtr.).

  14. Gravatar of flow5 flow5
    16. April 2017 at 04:52

    Interest is the price of loan funds. The price of money is the reciprocal of the price level. So, if savings are transferred through non-bank conduits (strictly a velocity relationship), then there is an absolute increase in the outstanding supply/volume of loan-funds (but no change in the money stock), and vice versa. There is just a shift in the title to commercial bank deposit ownership (the funds never leave the commercial banking system, i.e., ->where ALL savings originate).

    This vacuous theoretical blunder is the sole cause of both [1] stagflation, c. the 5 successive Reg. Q ceiling rate hikes beginning in 1957 -which caused the S&L credit crunch, the GR’s prologue and paradigm (for exclusively Ron Chernow’s: “go-for-broke-bankers”…“sworn foe of bureaucrats”, and public enemy #1, the ABA), and [2] secular strangulation, coterminous with the end of Professor Lester V. Chandler’s presupposed monetary offset, viz., the saturation of DD Vt financial innovation, the widespread introduction of ATS, NOW, and MMDA accounts in 1981.

    The remuneration of IBDDs exacerbates this pertinacious phenomenon. Thus, “in a twinkling…”, viz., 3 successive rate hikes in the remuneration rate, R-gDp is swallowed up (as I predicted . Aug 3, 2016. 02:48 PMLink: “And if the Fed continues its madness, i.e., every time the Fed raises the then the economy will flat line”).

    So Bankrupt u Bernanke actually tightened monetary policy during the sharpest surgical decline in U.S. economic growth during the 4th qtr. of 2008. And everyone jumped on the bandwagon. There was a world-wide flight to FDIC flim-flam promotional savings, funds held beyond the income period in which received, impounding and ensconcing savings within the commercial banking system (thereby destroying money velocity, destroying money flows, M*Vt, destroying aggregate monetary purchasing power, AD, and thereby lowering the standard of living for the vast majority of Americans).

    There was a counter-cyclical increase in bank capital requirements (destroying existing deposits, dollar for dollar).

    And unlike U.S. Treasury legislatively targeted issuance options, the “trading desk” did not specifically target non-bank counter-parties as Paul Meek, FRB-NY assistant V.P. of OMOs and Treasury issues described in his Fed booklet: “Open Market Operations”, Federal Reserve Bank of New York, May 1973. No, BuB speaking with a “forked-tongue”, instead of couching the “desk’s” instructions in terms of reserves available for private non-bank deposits (RPDs), as the FOMC did in 1972, FOMC policy was bifurcated, and this subsequently emasculated the Fed’s “open market power”, ”, viz., the Central Bank’s sovereign right to promulgate the creation of new money and credit: at once and ex-nihilo.

    And monetary policy is impossible without the cooperation of the U.S. Treasury. The Fed requires “grist for its mill” as if the Great Depression didn’t teach anyone, including BuB, anything. There was a blatant lack of coordination between the Federal Reserve and the Treasury Dept. (e.g., necessitating the Treasury Supplementary Financing Program -SFP), etc.

    BuB should be held accountable for his mistakes. He should not go down as the “savior of Rome”.

  15. Gravatar of ssumner ssumner
    16. April 2017 at 05:20

    Dtoh, It’s absurd for you to suggest that Trichet was no worse than Bernanke.

  16. Gravatar of flow5 flow5
    16. April 2017 at 07:04

    Steve Keen doesn’t understand macro, viz., “but at some time between 1945 and America’s first post-WWII financial crisis in 1966 (Minsky 1982, p. xiii), it passed this level.”

    No, the U.S. Golden Era in economics was where savings were “activated”, FSLIC promoted, and “put back to work” (completing the circuit income and transactions velocity of funds), by encouraging saver-holder’s outlets (both higher and firmer *real* rates of interest, and ROI), through non-bank conduits, thrifts, e.g., MSBs, CUs, and S&Ls, via residential *real-investment*, i.e., “new” starts in real-estate.

    In “The General Theory of Employment, Interest and Money”, John Maynard Keynes’ opus “, pg. 81 (New York: Harcourt, Brace and Co.), gives the impression that a commercial bank is an intermediary type of financial institution (non-bank), serving to join the saver with the borrower when he states that it is an “optical illusion” to assume that “a depositor & his bank can somehow contrive between them to perform an operation by which savings can disappear into the banking system so that they are lost to investment, or, contrariwise, that the banking system can make it possible for investment to occur, to which no savings corresponds.”

    In almost every instance in which Keynes wrote the term bank in the General Theory, it is necessary to substitute the term non-bank in order to make Keynes’ statement correct.

    Thereby, in stark contrast to Keynesian economists, e.g., Ben Bernanke: his neutrality of money as evidenced by his FAVAR 2002 Bernanke paper, and Bankrupt u Bernanke wrote in his book/memoirs: “The Courage to Act” said: “Money is fungible. One dollar is like any other”, or in other words, there is no difference between money and liquid assets (the Gurley-Shaw thesis).

    Money, and money flows, are robust, not neutral (“Neutrality of money is the idea that a change in the stock of money affects only nominal variables in the economy such as prices, wages, and exchange rates, with no effect on real variables, like employment, real GDP, and real consumption”).

    As Professor Leland James Pritchard, Ph.D., economics 1933, from “The Chicago School”, alone prophesized:

    “The revolutionary & disastrous implications of the DIDMCA of March 31st 1980 are clearly not recognized”…” Under this Act, the means-of-payment money supply (then designated as M1A by the Board of Governors) will come to approach approximately M3” (as it subsequently did during the real-estate “bubble”)…” One of the principal purposes of this Act was to provide the housing industry with a reliable source of funds.”…”this might be achieved through various governmental & quasi-governmental corporations (note: “Freddie, Fannie and the Federal Housing Administration together now guarantee about 90 percent of all new mortgages, far above their historic level” 2013’s figures)., but the role of the S&Ls in housing finance will be diminished significantly. By becoming commercial banks & having a larger spectrum of loans to choose from, the S&Ls began to act like banks & whenever possible, eschewed “borrowing short & lending long”…”Sources of mortgage funds shifted from the subsidized rates formally provided by the small saver to “bond-backed” sources which reflecting the interest rates prevailing in the longer-dated loan-funds markets”.

  17. Gravatar of Matthew McOsker Matthew McOsker
    16. April 2017 at 07:20

    I still do not see how monetary offset is in place – what is the tangible mechanism being implemented?. Increasing short rates (FFR), to the extent it pushes rates on longer maturities up increases the deficit (fiscal expansion). It also can increase prices for commodities because of a higher risk free rate used in pricing forward contracts. Anyone with a savings account will earn more income. Never mind the fact that no tax cuts or stimulus have been implemented, and may not get implemented.

  18. Gravatar of Matthew McOsker Matthew McOsker
    16. April 2017 at 07:43

    Also, in 2013 any austerity was offset by credit growth. Now, if the argument is that the FED did X, which triggered the credit growth, then that is a tangible offset mechanism that is worth exploring.

    Credit is a huge component that can drive GDP.

  19. Gravatar of WleB WleB
    16. April 2017 at 08:56

    Scott,Today Professor @t0nyyates has published the following 12 tweets:

    “As the 2009-2017 zero lower bound episode drags on, there is no sign of the authorities thinking properly about the future of mon pol.
    There’s a blog by an ex Fed chair, a few stray thoughts by FOMC members about raising the inflation target, thinking aloud by Haldane in UK
    ..about -ve rates. All seemingly cold-shouldered by the median policymaker content for the impression that framework/target/tools are.. for purpose to live on. But given likely very persistent low nominal interest rates, something, in fiscal / mon surely has to change.
    Higher inflation target / systematic discretionary stimulus triggered at the zlb / reform to lower effective floor to central bank rate.
    Treasuries ought to be evaluating these carefully and openly, soliciting narrow, technical analyses if necessary from central banks.
    In the EZ, any kind of EZ-wide coordinated discretionary fiscal seems politically impossible, zlb or no; ditto raising the inflation target
    In the UK, all options cd be on the table, but currently we have the fiction that none really need to be and all is fine with the toolkit.
    In the US, as Bernanke hinted, raising the target politically dangerous, fiscal framework for the zlb unlikely to say the least.
    Canada/Oz/Swe/Norw/NZ regimes all forward-thinking and open in the past, so I’d hope for more innovation there that could encourage the rest
    Tackling it properly in UK wd require decent amount of very senior govt time that may well not exist given Brexit bottlenecks.
    Of course, another option is to sit back and just hope there is no need for a substantial further loosening of policy in the next 10 years.”

    (His tweets on this end here.)

    Yet not a mention of your or of fellow Market Monetarists’ ideas on NGDP targeting and the reconfiguration of Monetarism for the C21st.

    Such a shame. And frustrating.

  20. Gravatar of W. Peden W. Peden
    16. April 2017 at 14:28

    Great post! The gap between the mythology of “central banks trying desperately hard to raise inflation” and the reality of central banks’ erratic policies cannot be stressed enough. Just think of how people’s views monetary policy in the 1930s were distorted, and the consequences that this distortion had for macroeconomics…

  21. Gravatar of Matthew Waters Matthew Waters
    16. April 2017 at 17:49

    “Nearly 95% of all new jobs during Obama era were part-time, or contract”

    Pretty basic data error here. Part-time/contract work is much more short-term than full-time work. So that will describe most “new jobs.” If from two unemployed people, 1 gets a full-time job for 3 years and another has 9 part-time jobs, 90% of “new jobs” is part-time.

  22. Gravatar of Matthew Waters Matthew Waters
    16. April 2017 at 17:55

    “I still do not see how monetary offset is in place – what is the tangible mechanism being implemented?”

    The tangible mechanism is how rates are raised. The Fed doesn’t arbitrarily set the Fed Funds rate. It doesn’t participate in the Fed Funds market. It destroys money by selling bonds until the rate goes up.

    Increased interest on savings is not inflationary because somebody else pays the interest. Total income between debtor and creditor is unchanged after creditor gets higher interest rates.

    Since excess reserves exist that are sitting idle, higher deficits would be inflationary as newly printed Treasuries move money that was idle. The increased velocity would be offset by the Fed destroying money and paying more interest on excess reserves, keeping those reserve idle.

  23. Gravatar of dtoh dtoh
    17. April 2017 at 00:43


    You said,

    “Dtoh, It’s absurd for you to suggest that Trichet was no worse than Bernanke.”

    I don’t think I said anything about Trichet.

  24. Gravatar of Scott Sumner Scott Sumner
    17. April 2017 at 04:27

    WieB, Thanks.

    Dtoh,, You said Bernanke was a “total disaster”. How could anything be worse? And yet Trichet was far worse.

    Matthew, See Matthew.

  25. Gravatar of dtoh dtoh
    17. April 2017 at 06:44


    Bernanke was a total disaster, and Trichet was an even worse total disaster. In fact Trichet may have been a complete and utter disaster whereas Bernanke was merely a total disaster. 🙂

  26. Gravatar of Matthew D McOsker Matthew D McOsker
    17. April 2017 at 12:12

    Matthew – thank you for response. Still not clear on that process offsetting deficit (or fiscal stimulus) spending.

    When the government deficit spends they simultaneously add reserves (the spending) and the bond issued drains the same amount. If interest costs on the deficit go up as the result of a higher FFR, then savers get more money from the government – higher rates increase fiscal spending in a deficit scenario. Banks may also have to pay more interest, but that is a separate operation. Using IOR to manage the FFR just adds more excess reserves. Using OMO to sell bonds just drains reserves. I don;t see how that offsets fiscal stimulus.

  27. Gravatar of Alex S. Alex S.
    17. April 2017 at 14:41

    Fischer may be closer to seeing the light, although his former student Ben Bernanke may be moving further from it.

    Stanley Fischer gave a speech today on central bank communications. Most interesting parts are copied and pasted below.

    Briefly, he says it is best for the Fed to reveal as much of its reaction function as it can. But since he equates rules with using historical data to determine future policy (e.g., Taylor rule), he doesn’t want to adopt a policy rule, because he wants to account for more forward-looking data. Therefore, his concept of “discretion” seems to be equivalent to “targeting the forecast.”

    Is the rules versus discretion debate just a matter of semantics rather than of substance (at least, if central bankers assume that their information is as good as the markets)?

    I think Fischer is a market monetarist but he just doesn’t realize it yet. He wants monetary policy done by committee (albeit he hasn’t made the stretch from FOMC to NGDP futures), and he wants to target the forecast (his notion of discretion).

    Excerpts from Fishcer speech 4/17:
    In theory, clarity about the central bank’s reaction function–that is, how the central bank adjusts the stance of monetary policy in response to changing economic conditions–allows the market to alter financial conditions smoothly. This typically helps meet the bank’s policy targets, with the result that the markets are working in alignment with the policymaker’s goals. Under this theory, repeated market surprises that raise questions about the central bank’s reaction function could threaten to disrupt the relationship between the central bank and the markets, making the central bank’s job more difficult in the future.3

    First, a question: Can the Fed be too predictable?… With regard to whether the Fed can be too predictable, it is hard to argue that predictability in our reaction to economic data could be anything but positive. To reference the beginning of my talk, clarity about the Fed’s reaction function allows markets to anticipate Fed actions and smoothly adjust along with the path of policy.

    But there is a circumstance where it might be reasonable to argue that the Fed could be too predictable–in particular, if the path of policy is not appropriately responsive to the incoming economic data and the implications for the economic outlook. Standard monetary policy rules suggest that the policy rate should respond to the level of economic variables such as the output gap and the inflation rate. As unexpected shocks hit the economy, the target level of the federal funds rate should adjust in response to those shocks as the FOMC adjusts the stance of policy to achieve its objectives. Indeed, it is these unexpected economic shocks that give rise to the range of uncertainty around the median federal funds rate projection of FOMC participants, represented through fan charts, which was recently incorporated into the SEP. The Federal Reserve could be too predictable if this type of fundamental uncertainty about the economy does not show through to uncertainty about the monetary policy path, which could imply that the Federal Reserve was not being sufficiently responsive to incoming data bearing on the economic outlook.

  28. Gravatar of Benjamin Cole Benjamin Cole
    17. April 2017 at 15:13

    OT: China Q1 GDP up 6.9%

    For the last 20 years, U.S. orthodox macroeconomists have been predicting higher inflation and interest rates in the United States, and a collapse of China.

    There was a collapse in 2008, but in the U.S.

    Are there strengths in China’s mercantile system, backed by a combination investment bank-central bank PBOC, not understood in the West?

  29. Gravatar of dtoh dtoh
    17. April 2017 at 16:19

    @Benjamin Cole
    My read on China.

    1. It’s very easy to boost output by moving people off the farms into textile and steel factories. USSR did it in the 20’s. Japan did it in the 60’s

    2. The initial growth gets you some tailwind, but resource allocation gets much tougher after you grabbed the low hanging fruit.

    3. There is a risk of too much regulation and too much taxes as government gets bigger and more capable at regulating and taxing. This killed Japan. Who knows with China. They’ll probably have their own unique set of problems. My view is they have a low trust quotient which makes it harder to do business.

  30. Gravatar of Benjamin Cole Benjamin Cole
    17. April 2017 at 20:41


    1. I think this is true. Many nations have rapidly developed in the post-war era, though usually export-driven.

    2. Obviously, huge improvements from better infrastructure happen once. Also, people at some point start trading leisure time for higher incomes. Two-day weekends, not working on Saturday etc begins to be accepted.

    3. Japan practiced monetary asphyxiation. It may be the PBoC is Westernizing, and there have been whole books written that the CCP is not sure how control the PBoC as they do not understand monetary policy. Thus, if the PBoC become typical central bankers, they will suffocate China. Indeed, as we speak, China is well below inflation targets. Why is the PBoC undershooting inflation targets?

    Still, the PBoC has successfully deployed capital many times, and bought up bad loans, to much positive effect. I wonder if the CCP wants to give that up.

    I am not sure about trust. In Japan, businesses honor contracts. China is such a large nation, and majority Han. There is rapidly escalating repression in free speech and legal rights. Moreover, every large company is controlled through board seats by the CCP. Add on, companies are now obligated to form CCP committees within the company.

    With the advent of the Internet, the ability to monitor and control thought is beyond Orwellian—and Xi Jinping says the purpose of media to instruct the population by CCP lights.

    My guess is if China stalls it will be from political repression or a Westernized PBoC.

  31. Gravatar of dtoh dtoh
    18. April 2017 at 01:23

    @Benjamin Cole

    Monetary policy was not that great in Japan, but that’s not what killed the economy. It was definitely taxes and regulation.

    I think you’re probably right on what could undercut China’s growth, but I also think repression combined with corruption could lead to a dystopian future where large chunks of the population withdraw from participation in the official society/economy.

  32. Gravatar of Benjamin Cole Benjamin Cole
    18. April 2017 at 01:48

    “It was definitely taxes and regulation.”–dtoh

    Boy, in the 1980s, everyone raved that Japan had the formula, and less taxes and regulation and a pro-business government etc etc etc.

    So, what taxes and regulations in Japan changed between the 1980s and the 1990s?

    We do see a change in their monetary policy in that very period, from perhaps overly expansionary to contractionary.

    Also, I gather a hefty fraction on Japan’s economy is off the books. In cash.

    Re China:

    “where large chunks of the population withdraw from participation in the official society/economy.”–dtoh

    Well, anything is possible, but if the Han Chinese hung together through Mao, I think they will hang together now. They just may find their best people leaving and the economy slowing.

    The big threat is a Westernized PBoC, and also government property zoning in major cities. The supply of housing land is so tight that values are exploding. But perhaps local governments benefit somehow—land ownership in China is another story. Maybe you know.

  33. Gravatar of Matt McOsker Matt McOsker
    18. April 2017 at 03:12

    DTOH – Japan has had anemic credit growth too.

  34. Gravatar of Bonnie Bonnie
    18. April 2017 at 05:07

    On the other hand, a discussion about “make up” policy may show a sign of some real progress toward recognition that bygones being bygones isn’t the ideal policy. I really don’t expect perfection out of the Fed, but any movement to make better policy choices than the ones it made during the Great Recession is a positive development.

  35. Gravatar of msgkings msgkings
    18. April 2017 at 07:45

    @Matt Mc and dtoh: you can’t discuss Japan’s economy without mentioning the extreme demographics.

  36. Gravatar of Matthew D McOsker Matthew D McOsker
    18. April 2017 at 09:29

    msgkings – agree. There are several factors converging. But, Japan has maintained a low unemployment rate, which usually keeps the masses from rioting. What is the riot threshold? Don’t know much higher as several Euro countries have been docile with higher rates, but they may be at the tipping point/

  37. Gravatar of msgkings msgkings
    18. April 2017 at 11:30

    @Matt Mc: sure, but demographics is the answer there too. Old people really don’t do much rioting. Japan is almost completely a story of what happens when your population shrinks and ages.

    And it may be a harbinger of the whole world’s economy later this century.

  38. Gravatar of dtoh dtoh
    18. April 2017 at 19:11

    The aging population is the result (not a cause) of the bad economy and high tax rates

    @Benjamin Cole –
    “Japan had the formula and less taxes in the 80s” ??? What are you smoking dude? My marginal income tax rate was 85%.

    @Matt McOsker
    “Japan has had anemic credit growth too.” Of course! If taxes are too high and no one is investing, credit growth will be anemic.

    “Japan has maintained a low unemployment rate.” But there’s been a huge shift to part time work, AND they measure differently in Japan. If they use the same metric in Japan that they use in the U.S., male unemployment goes up 60% and female unemployment doubles.

  39. Gravatar of morgan s warstler morgan s warstler
    20. April 2017 at 04:50

    Scott, I don’t understand why you let even the Bernanke get away with this stuff…

    You are always so damn mean to these folks on politics where you are an amateur… but on MP, you have the Bernanke by the short hairs and you are not really going in for kill.

    Where’s the Chuck Norris stuff?!?

    It would take exactly ONE BRUTAL example where the price shock forced them to raise rates even when the Economy was slowing down….

    (And hey sure the next month, price might be going the other other way)

    BUT, once the Fed proves that it runs by machine, that the LT is actual policy…. it will be factored into the rest of the market decisions WON’T IT?!?

    If not, what part of EMH do I not understand here?

    The market, including the oil traders, suddenly groks thats YES rates are going up next month bc the price level is trending higher bc of the shock…

    And suddenly shocks themselves become less frequent, there is less mania in market… no?

    I’m happy to be wrong, but for years here I took the lesson that a new market mindset takes hols when the rules of the game change….

    It’s the same way with that post a couple months ago and about maybe 10 years in future some future POTUS blah blah – and the big brain you were quoting was acting as if a new reality would not ALSO in place when MP changes…

  40. Gravatar of flow5 flow5
    20. April 2017 at 09:51

    R*, or the Wicksellian “Natural Rate of Interest”, Swedish economist Knut Wicksell’s economic pendulum’s “equilibrium” rate, is compete tripe (& its “Taylor Rule” application is ex-post). Interest is the price of loan funds. The price of money is the reciprocal of the price level. And base-line investment hurdle rates, MARR, are idiosyncratic (demand being incentivized, by e.g., MACRS).

    Boston Fed President Eric Rosengren’s recommendation: “adopt balance sheet exit strategies that reinforce the primacy of interest rate policy”…“should allow policymakers to focus on gradual increases in the federal funds rate target as the primary mechanism for normalizing monetary policy and calibrating the economy.”

    No thanks.

    The money stock (& DFI credit, where: loans + investments = deposits), can never be managed by any attempt to control the cost of credit [or thru a series of temporary stair stepping or cascading pegging of policy rates, the ROI, or ROA, on government marketable securities; or thru “spreads”, “floors”, “ceilings”, “corridors”, “brackets”, IOeR, etc.].

    Economists should have learned the falsity of that assumption in the Dec. 1941-Mar. 1951 period. That was what the Treas. – Fed. Res. Accord of Mar. 1951 was all about. Keynes’ liquidity preference curve (demand for money) is a false doctrine. Secular strangulation (chronically deficient aggregate demand), can be self-reinforcing, a Fisherian debt-deflationary protracted contraction (leading to a permanent low *real* rates of interest, and an excess of savings over investment opportunities).

    Qui Vive. You have to be able to observe ->to track. What’s happened is obvious. FDIC insurance was increased and the proportion of time (savings) deposit, commercial bank deposit classification ratios, have increased. Every time the ratio increases, gDp falls (and economic recoveries are stalled).

    Historical insurance limits
    • 1934 – $2,500
    • 1935 – $5,000
    • 1950 – $10,000
    • 1966 – $15,000
    • 1969 – $20,000
    • 1974 – $40,000
    • 1980 – $100,000
    • 2008 – $250,000

    Thus, “in a twinkling…” R-gDp is swallowed up.

  41. Gravatar of msgkings msgkings
    20. April 2017 at 11:31

    @flow5: if you believe FDIC insurance is a good thing, and here to stay, doesn’t it have to increased over time because of inflation?

    Of course you may be advocating that FDIC insurance should be abolished.

  42. Gravatar of flow5 flow5
    20. April 2017 at 13:05

    FDIC deposit protection is good up to some point. But FSLIC insurance of the non-banks / thrifts (MSBs, CUs, and S&Ls), was inherently better (incentivizing the matching of savers with borrowers). Now non-bank gov’t guaranteeing largely occurs with the Fannie and Freddie behemoths. It is an accounting truism, never are the DFIs intermediaries in the savings-investment process (savings ≠ investments).

    All savings originate within the confines of the payment’s system. Time (monetary savings) deposits are not a source of loan-funds for the commercial banking system, rather pooled bank-held savings are the indirect consequence of prior bank credit creation (so all monetary savings are temporarily idled, lost to both consumption and investment, ensconced and impounded within the DFIs).

    From the standpoint of the economy and the banking system, commercial banks always create new money whenever they lend/invest. DFIs never loan out existing deposits, saved or otherwise. The DFIs could continue to lend even if the non-bank pubic ceased to save altogether. “Monetary savings” is defined as income held beyond the income period in which received.

    The source of time (savings) deposits is other bank deposits (demand deposits), directly or indirectly via the currency route, or thru the DFI’s undivided profits’ accounts. And the source of demand deposits can largely be accounted for by the expansion of Reserve and commercial bank credit.

    In other words, an increase in time/savings accounts depletes DDs by the same amount. And time deposits represent the largest expense entry on the bank’s income statements. Thus, the size of the DFI system is not synonymous with individual bank’s profitability, ROA & ROE (not consequently NIMs).

    Savings are never “activated” or “put back to work” unless saver-holders invest/spend directly, or indirectly through non-bank conduits. And unless savings are put to work outside of the payment’s system, a dampening economic impact is perpetually exerted (the cause of both stagflation and secular strangulation).

    And savings are never transferred to the non-banks, rather savings are always transferred through the non-banks, as money flowing through the non-banks never leaves the payment’s system.

    I.e., shifts from savings accounts, TDs, to transaction accounts, TRs, within the DFIs & the transfer of the ownership of these deposits to the NBFIs, involves a shift in the form of the DFI’s liabilities (from TD to TR) & a shift in the ownership of existing TRs (from savers to NBFIs, et al). The utilization of these TRs by the NBFIs has no effect on the volume of TRs held by the DFIs, or the volume of their earnings assets.

    I.e., the non-banks, NBFIs, are customers of the deposit taking, money creating, DFIs. As custodians of stagnant money, an expansion of commercial bank savings accounts adds nothing to the bank’s liabilities, assets, or earning assets, nor makes any contribution to R-gDp.

    In the context of their lending operations, it is only possible to reduce the DFI’s assets, & TRs, by retiring bank-held loans, e.g., for the saver-holder to use his funds for the payment of a bank loan, interest on a bank loan for the payment of a bank service, or for the purchase from their banks of any type of commercial bank security obligation, e.g., banks stocks, debentures, etc.

    Up until 1981, increasing the ratio of time to transaction deposits was a non-problem (AD was unaffected), as there was a monetary offset – in that the remaining turnover of transaction type deposits offset this bottling up of savings.

    Note: the 5 successive increases in Reg. Q ceilings for the commercial bankers, the non-banks were unrestricted and unregulated up until 1966, created stagflation.

    The saturation / plateau of commercial bank deposit innovation, the widespread introduction of ATS, NOW, and MMDA accounts in 1981 – was the advent of secular strangulation (chronically deficient AD, decline in money velocity), and subsequently the bull market in bonds (excess of savings over investment outlets).

  43. Gravatar of flow5 flow5
    20. April 2017 at 17:53

    My “market zinger” forecast of Dec. 2012 is prima facie evidence and foretold of the expiration of unlimited transaction deposit insurance (counter-cyclically putting savings back to work), not a “taper tantrum, not budget “sequestration”.

  44. Gravatar of flow5 flow5
    20. April 2017 at 18:34

    Bankrupt u Bernanke inverted the yield curve two different times, once:

    and then again when he introduced the payment of interest on excess reserve balances on Oct 9th 2008 (thereby destroying the non-banks).

  45. Gravatar of flow5 flow5
    20. April 2017 at 19:00

    Remunerating excess reserve balances, IBDDs, has emasculated the Fed’s “open market power”, viz., the Central Bank’s sovereign right to promulgate the creation of new money and credit: at once and ex-nihilo.

    Under monetarist guidelines, there’s no such phenomenon as “zero bound”. I.e., “pushing on a string” should have only applied prior to the nominal legal adherence to the fallacious “Real Bills Doctrine” which was terminated in 1932 – due to a paucity of eligible (hopelessly impaired), commercial and agricultural paper for the 12 District Reserve bank’s discounting purposes.

    Unlike the FRB-NYs “trading desk” operations, not only may the Treasury exercise important monetary powers through the timing of their borrowing, but specific monetary objectives may be achieved through a choice of the types of issues to float (viz., short-term “safe-assets”). Within board limits the Treasury can plan on the types of securities to be sold and decide whether they should be short-term, long-term, marketable, or redeemable, eligible or ineligible for bank investment, etc. I.e., the Treasury can decide who will buy a given issue (targeting the non-bank public).

    Treasury Secretary Jack Lew: “Treasury’s decisions about how to manage government debt are made independently of the Fed’s monetary policy choices, he said”

    And unlike U.S. Treasury legislatively targeted issuance options, the “trading desk” did not specifically target non-bank counter-parties as Paul Meek, FRB-NY assistant V.P. of OMOs and Treasury issues described in his Fed booklet: “Open Market Operations”, Federal Reserve Bank of New York, May 1973. No, BuB speaking with a “forked-tongue”, instead of couching the “desk’s” instructions in terms of reserves available for private non-bank deposits (RPDs), as the FOMC did in 1972, FOMC policy was bifurcated.

    And monetary policy is impossible without the cooperation of the U.S. Treasury. The Fed requires “grist for its mill” as if the Great Depression didn’t teach anyone, including BuB, anything. There was a blatant lack of coordination between the Federal Reserve and the Treasury Dept. (e.g., necessitating the Treasury Supplementary Financing Program -SFP), etc.

  46. Gravatar of flow5 flow5
    20. April 2017 at 19:18

    Between 1942 and Sept. 2008 the member commercial banks (but not the non-member banks), remained “fully lent up”, i.e., prior to the biggest monetary policy blunder in history, the introduction of the payment of interest on excess reserve balances (& remunerating IBDDs was imposed illegally, above the level of short-term money market rates).

    Note that the “money multiplier” is correctly defined as M1 divided by the truistic monetary base, or required, legally “complicit” reserves. Note also one shouldn’t confuse liquidity reserves with legal reserves.

    The reserve assets that all money creating institutions are required to hold should be of a type the monetary authorities can quickly ascertain and absolutely control. The only type of bank asset that fulfills this requirement is inter-bank demand deposits, IBDDs, in the District Reserve Banks owned by the member banks (aka the ECB’s definition). This was the original definition of the legal reserves of member banks beginning in 1917, under the Federal Reserve Act of Dec. 23, 1913 –(Owen-Glass Act) and it is still the only viable definition (pre-Dec 1959 requirements pertaining to assets).

    Dr. Milton Friedman, so-called “monetary base” has never been a base for the expansion of new money and credit. And Nobel Laureate Dr. Milton Friedman declared RRs to be a “tax” [sic], when RRs are “Manna from Heaven”, costless to the banks and showered on the system.

    Even Nobel Laureate Dr. Milton Friedman asserted that all types of deposits classifications should have uniform reserve ratios, in all banks, irrespective of size (December 16, 1959 Carol A. Ledenham’s Hoover Institution archives)

    See SA author’s Charles Hugh Smith: “Bank Reserves And Loans: The Fed Is Pushing On A String”


    “Potential for Higher Inflation?” Daniel L. Thornton
    See the multiplier:

    Between Dec. 1990 & April 1992 the BOG under Chairman Alan Greenspan reduced reserve requirements by 40%, etc. Today, 85% of legal reserves are satisfied using their applied vault cash (i.e., by using their prudential or liquidity reserves as defined prior to 1959).

    Manmohan Singh, Peter Stella papers on this are disingenuous. See: “Central Bank Reserve Creation in the Era of Negative Money Multipliers” S& S say that from 1981 to 2006 total credit market assets increase by 744%, while inter-bank demand deposits, IBDDs fell by $6.5 billion.

    The BOG’s reserve figure fell by 61% from 1/1/1994-1/1/2001. The FRB-STL’s figure remained unchanged during the same period – all because the CBs ceased to be reserve “e-bound” c. 1995

    By mid-1995, legal (fractional) reserves ceased to be binding (simultaneously unravelling the money multiplier as the Fed’s credit control gauge) – as increasing levels of vault cash/larger ATM networks, retail deposit sweep programs (c. 1994), fewer applicable deposit classifications (including allocating “low-reserve tranche” & “reservable liabilities exemption amounts” c. 1982) & lower reserve ratios (legal requirements dropping by 40 percent c. 1990-91), & reserve simplification procedures (c. 2012), combined to remove reserve, & reserve ratio, restrictions.

    And, contrary to the pundits, the elimination of the payment of interest on demand deposits didn’t eliminate retail and wholesale sweep accounts – as economists’ theorized.

    The validity of the “money multiplier as a predictive device is predicted on the assumption that the commercial banks will immediately expand credit and the money supply (invest in some type of earning asset), if they are supplied with additional excess reserve balances. The inconsequential volume of excess IBDDs held by the member commercial banks during 1942 and Sept. 2008 provides documentary proof that they undoubtedly did.

    Between 1942 and Oct 2008 the commercial banks always minimized their non-earning assets, always remaining fully “lent up”. They held no excessive volume of excess legal lending capacity to finance business (or consumers). They utilized their excess reserves to immediately acquire a piece of the national debt (zero-risk weighted assets absent any capital requirement), or other short-term creditor-ship obligations that were eligible for bank investment.

    In other words, without the alternative of remunerating excess reserve balances, it’s virtually impossible for the CBs to engage in any type of activity involving its own non-bank customers without changing the money stock.

    Thus, the CBs counter-cyclically expanded the money stock, depressing short-term interest rates, steepening the yield curve, and obviating the need for inordinate gov’t intervention; whenever there was a paucity of credit worthy borrowers; pending a longer-term, and presumably more profitable disposition of their legal lending capacity.

    After the introduction of the payment of interest on IBDDs, the CBs obtained higher rates of return by accepting a riskless, policy floating/chasing remuneration rate. I.e., the remuneration rate inverted the short-end segment of the wholesale funding yield curve (and in a twinkling the economy suffered).

    Remunerating reserves emasculated legal reserve management, and its power to regulate properly, the money stock – instantly, and in whatever volumes were needed). Indeed, the CBs were no longer incentivized to invest in short-term debt (i.e., as opposed to lend).

    Since the distribution of sales and purchases of debt by the FRB-NY’s trading desk, its open market operations (among banks and their customers) is largely unpredictable, now so is the volume and rate of expansion in the money stock.

    Thus, the payment of interest on excess reserve balances represents the loss of control of the money aggregates on even a month-to-month basis, higher money market volatility, and breeds less certainty surrounding any new business commitments.

  47. Gravatar of flow5 flow5
    21. April 2017 at 01:55

    Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

    “All this adds up to a pessimistic conclusion — recessions just aren’t very predictable from economic data. The reason economists couldn’t foresee the Great Recession isn’t that they’re blinkered or closed-minded or arrogant or stupid — it’s because no one could predict it, at least not with the kind of macroeconomic data that now exist.”

    As forecast in December 2007:
    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:

  48. Gravatar of msgkings msgkings
    21. April 2017 at 12:10

    @flw5: interesting, and now you say a recession is coming 4Q17?

  49. Gravatar of flow5 flow5
    22. April 2017 at 04:38

    @ msgkings:

    It’s just very close (growth will fall unless there is intervention). The Fed will have to ease, esp. in 2018, not tighten.

    Bloomberg’s Noah Smith: “Different models work better at different time horizons, for different historical time periods, and for different variables.”

    Nothing’s changed in 100 + years. Roc’s in M*Vt = Roc’s in P*T (where N-gDp is a proxy for all transactions in Yale Professor Irving Fisher’s truistic “equation-of-exchange”).

    Remember that in 1978 (when Vi rose, but Vt fell) all economist’s forecasts for inflation were drastically wrong. Put into perspective: There were 27 price forecasts by individuals & 9 by econometric models for the year 1978 (Business Week). The lowest (Gary Schilling, White Weld), the highest, (Freund, NY, Stock Exch) & (Sprinkel, Harris Trust & Sav.).

    The range CPI, 4.9 – 6.5 percent. For the Econometric models, low (Wharton, U. of Penn) 5.7%; high, 6.6% U. of Ga.). For 1978 inflation based upon the CPI figure was 9.018% [and Leland Prichard, in his Money and Banking class, predicted 9%].

    See: G.6 Debits and Deposit Turnover at Commercial Banks

    And we knew this already:

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

    It’s 2nd proposal: “Requirements against debits to deposits”

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

  50. Gravatar of KARL W SMITH KARL W SMITH
    22. April 2017 at 10:35


    Not sure about your assertion that nothing about the costs of inflation have anything to do with whether the BLS properly calculates it. For example, there are menu costs both in adjusting for the relative and economy-wide price changes. In theory the firm will adequeately internalize the former cost but not the latter.

    So, to the extent that say real menu costs at IHOP are high because technology is causing people to spend a greater portion of their entertainment budget on eating out than on Cable TV then this represents a real internalizable cost to information. However, to the extent that it is simply the Fed printing money faster than productivity + population, it is not internalizable.

    What am I missing here?

  51. Gravatar of ssumner ssumner
    22. April 2017 at 11:51

    Karl, Maybe I expressed myself poorly. Let’s suppose the aggregate menu costs of inflation are $X. Also suppose that the BLS calculates CPI inflation as 3.2%. Now the BLS revamps their approach to calculating inflation, to better take into account quality changes. Their new estimate is 2.7% inflation, not 3.2%.

    What I am saying is that the aggregate menu costs of inflation are still $X. The fact hat the BLS now believes “actual inflation” (whatever that is) is only 2.7%, not 3.2%, has no bearing on what’s going on in the real world, including the actual menu costs of inflation.

    Menu costs are the costs of adjusting prices on menus. The unobservable rate of underlying quality improvement in products (or the existence of new products not being counted) has no bearing the the actual physical costs of changing prices on menus, catalogues, labor contracts, etc.

    Everyone, I’ll get to the other comments later.

  52. Gravatar of ssumner ssumner
    23. April 2017 at 18:00

    Alex, Thanks, but where does Fischer suggest targeting the forecast?

    dtoh, You said:

    “My view is they have a low trust quotient which makes it harder to do business.”

    That’s a plausible argument, but oddly it doesn’t seem to hurt HK, Singapore or Taiwan very much, as all three have very higher GDP/person (PPP). Chinese culture seems to have some factor (entrepreneurship?) that makes up for the lack of trust outside the family. Also, when I visit China I experience less of what one might call “petty corruption” than when I visit Mexico.

  53. Gravatar of dtoh dtoh
    23. April 2017 at 19:31

    I said China…. not Chinese… and not greater China.

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