Monetary policy is becoming too tight

The escalating trade war seems to be sharply depressing the Wicksellian equilibrium interest rate. Here are some recent headlines, from Bloomberg:

The 5-year bond yield is down to 2.10%, a pretty clear indication that significantly lower interest rates lie ahead. Trump may or may not have been right that lower interest rates were called for in 2018 (I doubt it, as NGDP growth has been quite strong), but if the trade war keeps escalating then he will almost certainly be right about the need for lower rates in 2019.

[Yes, a determined President can “force” the Fed to cut rates, if he’s willing to wreck the economy.]

Just a month ago, the main argument for lower rates was that trend inflation was a few tenths of a percent below the Fed’s target; now the justification is much stronger—increasing risks of a global slowdown.

Given that the Fed has been “behind the curve” for most of the past decade, I’d strongly suggest that they try to get ahead of the curve. Cutting interest rates won’t work if they remain behind the curve, i.e., if rates are cut more slowly than the equilibrium rate falls. That was their mistake in 2007-08. Cut them sharply enough so that 30-year yields rise.

Short term interest rates are going to fall either way, but you’d like a “good fall” in rates (expansionary monetary policy) not a “bad fall” in rates (recession.) It’s like someone who is genetically predisposed to get colon cancer. They are definitely going to go to the hospital. But it would be better to go for a colonoscopy than wait until later and go for surgery on a softball-sized tumor.

PS. Off topic, this interesting article relates to my recent post on the Aussie election:

The result has dumbfounded the inner urban elites of government, the bureaucracy, media and industry, many of whom are in denial or seeking therapy. Most important, it has helped draw a new geography of political boundaries based not on long standing ideologies of labour or capital, or of class, but of location and privilege. A more complete reversal of traditional party allegiances would have been impossible to imagine before last weekend. As observed by The Sydney Morning Herald, “The Queensland seat of Capricornia is a perfect illustration. It has many coal-mining workers and was held almost steadily by Labor from the 1960s until 2013, yet as of today it is a much safer Coalition seat than Josh Frydenberg’s well-heeled Kooyong, which was (conservative Prime Minister Robert Menzies’ old electorate.”

Crazy. As if a long time Democratic state like West Virginia were to go Republican.

PPS. Apologizes that I have recently been slow to approve new comments. Travel, bad cold (fever), etc.

PPPS. Conservatives used to say that low rates should not be provided to bail out Obama’s bad economic policies. What do they say today?



46 Responses to “Monetary policy is becoming too tight”

  1. Gravatar of rayward rayward
    23. May 2019 at 09:36

    John Cochrane suggested that raising interest rates is expansionary. That generated ridicule from more than a few critics. What he meant is that by raising interest rates, the Fed created the belief of economic growth not yet evident – why else would the Fed raise interest rates. Sumner is suggesting that the Fed cut interest rates to such an extent that long term rates rise, rise because of belief of future economic growth as a result of the cut in interest rates. Cochrane and Sumer may not be on the same page, but they are reading from the same book. I do appreciate their belief that it’s belief that actually produces the comic future not so much the theory we were taught. Economics and religion have a lot in common. Believe it.

  2. Gravatar of ssumner ssumner
    23. May 2019 at 09:40

    Rayward, I’ve done many posts on NeoFisherism, feel free to read them.

  3. Gravatar of LK Beland LK Beland
    23. May 2019 at 09:46

    I’ll try to use your George Warren post’s rationale.

    CME Fedwatch is predicting a 25-50 bps cut by February 2020. 5-year breakeven CPI inflation is at 1.75% (say 1.5% PCE inflation). In other words, the Fed will likely miss its 5-year inflation target even if it cuts rates once or twice in the next 6 months.

    If I understand George Warren’s logic, in order to hit its inflation target, the Fed should signal a 75-100 bps cut. Is that right?

  4. Gravatar of John hall John hall
    23. May 2019 at 10:58

    I must have absorbed about all the Scott Sumner I can because I’ve been arguing the same thing recently!

  5. Gravatar of Kgaard Kgaard
    23. May 2019 at 11:55

    I agree Scott … Rates obviously need to fall.

    I am curious how you feel about Japan here. Your call 5 years ago that Abenomics would get CPI up to 1% was brilliant. I still don’t know how you arrived at that figure. Now the BoJ is buying up everything in sight — to the point that they are having new custom-made stock ETFs built for them every day so they can buy those too.

    It seems to me that policymakers, investors and businesses are all unsure about the endgame here. Japanese companies may be starting to hoard cash again because they do not trust that this can continue indefinitely and that the BoJ will retain the will to keep buying assets.

    Meanwhile the BoJ may be looking at the 2% unemployment rate and saying, “Why do more? Companies can’t find enough workers as it is!”

    Do you have a thought of where this goes? Is there a limit to what the BoJ can buy? Or at some point are they forced to just start printing money — which I know they don’t want to do.

  6. Gravatar of ssumner ssumner
    23. May 2019 at 12:02

    LK, That’s right.

    Kgaard. Japan should probably raise its inflation target to 3%, and then buy up as many assets as they need to in order to drive market inflation expectations up to 3%. If they did so, they could actually sharply REDUCE their balance sheet, as the demand for zero interest yen currency would be much lower at 3% inflation. Take one step backwards to take two steps forward.

  7. Gravatar of bill bill
    23. May 2019 at 13:42

    I couldn’t agree more.
    I’d be interested in your thoughts on why the Brexit vote (2016) experience went so differently (if I’m recalling correctly).
    To what extent is the size of the US and importance of the dollar impacting matters?

  8. Gravatar of Michael Rulle Michael Rulle
    23. May 2019 at 13:58

    Scott—-I enjoy when you either write about politics or monetary policy——but I don’t like it when you toss in silly political junk in the midst of an important topic. Just expressing myself. Re:Fed—-I do not get these guys——it is as if whatever the market wants they want to resist it——Powell has already announced “tightening” as he says he does not see a need to change rates this year. I believe the December contract has close to a full cut built in. It is exasperating watching “experts” set rates.

  9. Gravatar of Benjamin Cole Benjamin Cole
    23. May 2019 at 15:14

    Yes, the Fed should cut rates and buy assets.

    But remember, the Fed is but one central bank in global capital markets. There are hundreds upon hundreds of trillions of dollars of assets in the world—- remember, property is an asset.

    Will the Fed be bailing with a gallon-bucket while an ocean liner takes on water?

    Central banks need to give up the ghost and bring out the heavy equipment.

    Of course, helicopter drops are what is needed, it is obvious.

    Forward guidance and expectations? Well, those are nice ideas, but please explain how Wall Street has been screaming for 40 years that inflation and hyperinflation are right around the corner, but instead we are on the cusp of entering yet another deflationary recession.

    Ray Dalio recently offered that investors should go long on sovereign bonds. So far, he is right. Dalio also suggests that helicopter drops are inevitable.

    Let us hope sooner rather than later.

  10. Gravatar of Lorenzo from Oz Lorenzo from Oz
    23. May 2019 at 15:35

    On the Oz election, it was the climate change election, just not the way the fashionable folk thought. The regional/provincial working class is beginning to not only realise the inner city elites want to sacrifice regional/provincial working class jobs on the altar of climate change, they are beginning to vote accordingly.

    Nothing Australia could do on climate change would make a lick of difference (we are not a big enough economy and no one pays attention to what we do) so it is sin and salvation politics, not practical trade-off politics.

    The sacking of a star (Pacific Islander origins) rugby league player (Israel Folau) for quoting a biblical verse on social media probably did not help either. When the diversity totalitarians start coming for sporting heroes, folk you would not otherwise expect are likely to take notice.

  11. Gravatar of Benjamin Cole Benjamin Cole
    23. May 2019 at 19:26


    I recently authored a white paper on Asian Pacific commercial real estate. As a writer I try to avoid repetitive phrases, so rater than beat “Asian Pacific” to death I inserted the words “Far East” here and there to describe the region, particularly if I was writing about China, Japan, Korea, Taiwan HK and not SE Asia.

    I was rebuked by an Aussie, who corrected me that the phrase “Far East” is an ethnocentric term to be avoided. Of course, I complied with the editing, and happily so.

    I guess we can no longer say “Down Under,” or the Chinese must give up their expression the “Central Kingdom.” Even SE Asia is not SE to the people who live there. For that matter, one should print the globe upside down or sideways.

    And a Pacific Islander has no right to appropriate religious writings from the Middle East. I am still offended when Asian Pacific business dudes and leaders appropriate Western-style suits. (Actually, I thought the Mao jackets and matching pants were very sensible. Why couldn’t fashion trends go in the other direction?)

  12. Gravatar of Christian List Christian List
    23. May 2019 at 20:50

    So in short: Trump was right before Scott was right.

    I did not expect the Australian election result though, but it sounds promising for the European Parliament election this weekend.

  13. Gravatar of Michael J Clifford Michael J Clifford
    23. May 2019 at 21:33

    I get the point you’re making, Scott, but your reference to movements in the natural rate of interest as determining the stance of monetary policy strikes me as very New Keynesian – and goes against your monetarist background.

    Wouldn’t forecasts of expected future NGDP be best for this?

  14. Gravatar of BC BC
    24. May 2019 at 01:35

    A trade war is a supply shock. I know Scott posted recently on why tariffs can be deflationary, but I am still confused. The argument is that a slower (real) growth rate leads to a lower natural rate. But, a supply shock shouldn’t lead to lower *nominal* growth, should it? If AS shocks can lead to changes in AD (NGDP), then what is the point of differentiating between AS and AD?

    So, shouldn’t a negative supply shock lead to lower real growth and lower real rates but higher inflation, leaving nominal rates and NGDP unchanged? The higher inflation offsets the lower real rates.

    For tariffs to be deflationary when money supply (or policy rates) stay constant, don’t the tariffs need to cause an increase in money demand (which would also decrease inflation and lower nominal natural rate)? In this case, tariffs would be a demand shock too, but why would tariffs raise money demand / lower velocity? Is it because people fear that an inflation-targeting Fed will tighten in response to inflation caused by a negative supply shock?

  15. Gravatar of Mark Mark
    24. May 2019 at 04:59

    It seems like the trade war is both a supply shock and a demand shock (due to factors such as retaliation, export controls, decreased business investment, and decreased consumer confidence particularly when the stock market is down).

  16. Gravatar of LK Beland LK Beland
    24. May 2019 at 08:04

    Interestingly, market signals in the Euro zone point to a similar situation. The market expects Euro area inflation to miss the ECB’s 1.9% target. The market expects the ECB to hold rates, or perhaps cut them by 15bps over the next year.

    The ECB should cut its (negative) rate by 50 bps and launch an aggressive QE program.

  17. Gravatar of Matthew Waters Matthew Waters
    24. May 2019 at 09:38


    A supply-side shock reduces NGDP if the Fed is targeting inflation. If AS curve shifts left, the price (y-coordinate) goes up. The only way to maintain the same price is to also shift AD to the left.

  18. Gravatar of derek derek
    24. May 2019 at 11:56

    Good with a rate decrease, but only if the Fed commentary is that Trump is screwing things up and that they are cleaning up his mess.

  19. Gravatar of Benjamin Cole Benjamin Cole
    24. May 2019 at 15:33

    OT but hmmmmm…..

    Measured in GDP per person or national income per adult, U.S. growth since 1980 is hard to distinguish from the pace in France, Germany, or Japan. —-Bloomberg

  20. Gravatar of BC BC
    24. May 2019 at 16:19

    Matthew Waters, yes, that makes sense. However, I think Scott is claiming that tariffs can cause the Fed to “passively tighten”. Even though the Fed is not raising rates to combat the supply-side inflation of tariffs right now, the tariffs are lowering the natural rate or, equivalently (?) tariffs are causing velocity to fall so that the Fed is passively tightening even if it doesn’t do anything to money supply or IOR.

    My question is, why would tariffs lower the natural rate or money velocity? Expectations that the Fed will raise rates in the future once tariffs start causing inflation? If the Fed were to credibly promise not to offset tariff-induced inflation, say labeling such inflation as “transitory” in Fed speak, then would that stop the passive tightening?

  21. Gravatar of Matthew Waters Matthew Waters
    25. May 2019 at 02:57


    I may be out of my element a bit here.

    In the very short-term, the tariffs may act like any tax increase. To make a couple of very simplifying assumptions, demand for tariffed goods is perfectly inelastic and base money is set completely in stone. Say tariffs raise $10bil:

    1. Without tariffs: $10bil ultimately goes to buy $10bil of Treasuries at auction.

    2. With tariff: $10bil comes from consumers also to Treasury’s account.

    In the latter case, $10bil less in bonds exist. If the Fed did *nothing*, rates would go down due to a lower supply of bonds. With the Fed not changing base money, money velocity and NGDP is constant but rates go down.

    However, the Fed targets interest rates and will “replenish” the stock of bonds by selling its bonds (i.e. destroying money). NGDP goes down as Fed maintains same rate until the next FOMC meeting.

    Past the very short-term, inflation and NGDP feed back in to FOMC decisions. If the Fed accepts higher inflation due to tariffs, then Fed would reduce rates. If the Fed has a resolute inflation target, then the Fed may keep rates the same or even raise rates. To hit constant inflation despite tariffs, the Fed has to hurt overall NGDP.

  22. Gravatar of Matthew Waters Matthew Waters
    25. May 2019 at 03:54

    The flaw in my analysis is that $10bil also is taken from demand in the bond market. I’ve assumed the natural rates goes up and down in response to fiscal policy. I now have doubts. Does a straight tax increase reduce the natural rate?

    The medium-term AD/AS framework is much easier to think through, especially with inflation targeting.

  23. Gravatar of Patrick R Sullivan Patrick R Sullivan
    25. May 2019 at 06:49

    ‘It seems like the trade war is both a supply shock and a demand shock ….’

    That’s Say’s Law (via Geo. Stigler); Supply is (implicit) demand.

  24. Gravatar of Patrick R Sullivan Patrick R Sullivan
    25. May 2019 at 06:58

    ‘The regional/provincial working class is beginning to not only realise the inner city elites want to sacrifice regional/provincial working class jobs on the altar of climate change, they are beginning to vote accordingly.’

    Which is what elected Donald Trump in the USA. Though it wasn’t only climate change, it was the entire ‘progressive’ agenda.

    I believe it was Debreu who explained that, ‘In the real world, when you push people, they push back.’ So, Oz, welcome to the club.

  25. Gravatar of ssumner ssumner
    25. May 2019 at 12:27

    Bill, I’m not sure what you are asking. The Brexit vote sharply depreciated the pound, presumably on lower RGDP growth expectations.

    Michael Rulle, I like to annoy you. 🙂

    Christian. You really must be my dumbest commenter. Read the post again. Trump was not right.

    Michael Clifford. Yes NGDP expectations is definitely better.

    BC, Tariffs are a supply shock if the central bank targets NGDP. If they target interest rates then tariffs are a supply shock combined with an even bigger demand shock. Tariffs reduce the equilibrium interest rate. If the policy rate is not cut, policy tightens.

  26. Gravatar of TravisV TravisV
    27. May 2019 at 09:40

    Arnold Kling in his latest post: ???

    “My view is that the central bank is just another bank. It can no more hit an inflation target than Citibank can. If the government wants to really print money sufficiently to get people to notice, it has to use something like Modern Ponzi Theory.

    I know that mine is an outlier view. Everyone else pays great heed to the Fed. If I am correct, then some day what everyone else claims to “know” about the importance of the central bank will eventually be understood to belong in the same category as astrology or 18th-century medical theory.”

  27. Gravatar of Benjamin Cole Benjamin Cole
    27. May 2019 at 18:14


    Arnold Kling is elliptical in his commentary.

    Seems like Kling is endorsing helicopter drops, but maybe not.

    I do wonder what can a lone central bank accomplish—if we posit globalized capital markets? There is perhaps $400 trillion or so of assets globally (equities, bonds, property).

    So Country A Central Bank does QE. It digitizes and sends $3 trillion into globalized capital markets. How does that stimulate the domestic economic of Country A? Seems like a rather weak link.

    There is an interesting side effect: When Country A does QE, it is monetizing the national debt, evidently without inflationary impact. This is theoretically not true, but is empirically true.

    As they say, “What you say may be true in fact, but more importantly, is it true in theory?”

  28. Gravatar of dtoh dtoh
    27. May 2019 at 20:17

    Kling is right and wrong. Yes, the central bank IS just another bank, but wrong because the CB CAN in fact easily hit an inflation (or NGDP) target.

    We happen to implement monetary policy through a CB that issues money, but it would be just as effective to have money issued through private banks with the banks required either by a regulatory body (or self regulation) to continually adjust the amount of money they issue (i.e. their asset/equity ratios) in order to meet an inflation, RGDP, NGDP or other target.

  29. Gravatar of dtoh dtoh
    27. May 2019 at 21:09

    When thinking about Japan, you need to remember that the BOJ is not actually monetizing the debt. It is, for the most part, simply exchanging reserves for assets with other financial institutions. If it were actually buying assets from and issuing currency to the Non-Banking Sector, then Japan would have experienced massive hyper-inflation.

    As I have noted elsewhere you need think about monetary policy as a two box model. One box is the Banking Sector (CB plus private financial institutions) and the Non-Banking Sector (everything else – firms, individuals, governments). Anything that takes place solely within the Banking Sector has no impact on the real economy.

    The BOJ buying JGBs (or other assets) in exchange for a deposit from the Mizuho Bank is no different than if the St Louis Fed were to exchange Treasuries for a deposit with the NY Fed.

    Monetary policy only has an impact when the Banking Sector exchanges cash for assets with the Non-Banking Sector.

  30. Gravatar of Dtoh Dtoh
    27. May 2019 at 21:19


    BTW – I was in your neck of the world earlier today surrounded by a gaggle of generals. What happening with the economy over there?

  31. Gravatar of Pyrmonter Pyrmonter
    27. May 2019 at 23:57

    If AS has moved left (ie trade war is an adverse supply shock) won’t constant NGDP targetting just lead to higher inflation in the short term, and likely higher inflation in the longer term, and with that the usual problems with inflation working through the tax system/menu costs/distorting price signals, amplifying the reduction in growth of AS?

  32. Gravatar of Pyrmonter Pyrmonter
    28. May 2019 at 00:02

    Oh, on the Aussie election. I disagree somewhat with Lorenzo – there were two prominent issues, one was climate (which tended to split along class lines) but the other was tax policy, where Labor (social democrats) had a list of ‘loopholes’ they sought to close that, in fact, amounted to selective taxes on Liberal (conservative)-leaning voting groups. That formed the basis (rightly in my view, I’m a Liberal activist) for a warning (aka ‘scare campaign’) directed at what else Labor would tax when ‘closing the loopholes’ didn’t raise as much as they forecast. The tax issue helped the Liberals in many of the areas in which their vote has traditionally been strong but has been fading as they’ve swung somewhat more to the ‘right’ on ‘social’ views – think up-market suburbs, upmarket retirement areas etc.

  33. Gravatar of Matthew Waters Matthew Waters
    28. May 2019 at 04:52

    Benjamin Cole,

    “How does that stimulate the domestic economic of Country A? Seems like a rather weak link.”

    At least some of US debt is held outside either banks or shadow banks. The sellers get “stuck” with deposits in place of their bonds and will spend down some of the new deposits.

    There is also the expectations piece. If you look at NGDP and *private* spending levels as multiple Nash equilibria, then the “Fed put” shifts the equilibrium chosen by private actors.

    Expectations becomes fraught in banking panics. But even in 2008, long-term Treasuries did not close to zero. 10-year Treasuries traded at 2%. If the Fed bought any 10-year Treasuries at 0%, a pension fund with $100mil in Treasuries would suddenly get $120 million in bank deposits instead. To me, that looks like real stimulus.

    Not that the Fed would have to buy all long-term Treasuries at 0% rates. But they didn’t even try to such large-scale, one-way buying until 2009. It was not until QE2 and QE3 that buying really picked up. Almost all monetary stimulus in 2008 was “two-way,” with the Fed holding a legal right to be paid back.

  34. Gravatar of Benjamin Cole Benjamin Cole
    28. May 2019 at 18:19


    You may have been surrounded by a gaggle of generals, but remember in the Siam military the generals outnumber the foot soldiers. The global gold-brocade industry is sustained by Thai official uniforms.

    The Thai economy seems okay. Land is surprisingly expensive, and labor markets tight (a huge positive which tends to limit social strains). Inflation subdued. I think Thailand does okay going forward as manufacturing hub and tourism spot, and can obviously feed itself. Thailand outlaws gambling but should ponder some gaming resorts. Maybe Thailand should outlaw plastic and everyone throws plastic on the ground. Battery cars will help cut pollution and cut Thailand’s fuel bills.

    I think I agree with your sentiments regarding banks, although I remind you that in macroeconomics no one is ever wrong.

    Yes, I think BoJ should go to helicopter drops, which were the reason there was no Great Depression in Japan. You would think the topic of there being no Great Depression in Japan would be of keen and abiding interest to Western economists, but it is not. Nearly a verboten topic, from what I can gather.

    I suspect this is because the US establishment prefers to fight a recession by inflating global asset-values through QE, rather than, say, cutting taxes on US wage-earners who would spend the money immediately inside the US. Say, declare a tax holiday on onerous Social Security taxes, and have the Fed print money and put it in the Social Security trust fund to make up the difference.

    The Fed’s method for stimulating US economic activity is laughably indirect, Rube Goldberg-ish and ineffective—well, laughable if you are safely employed at the Fed, or senior on Wall Street, or in academia.

    BTW, here is a headline for you:

    Global Bond Yields Fall Near Multiyear Lows”


    So the Fed in every Beige Book exhibits a squeamish hysteria about wages and inflation, and “worker shortages” (the Fed writes papers that read as if written by office-bound anthropologists) but now global bond yields are falling and are already at zero in Japan, Germany, Switzerland and a few other places.

    An independent Fed is a menace to prosperity.

  35. Gravatar of dtoh dtoh
    29. May 2019 at 02:37


    “You would think the topic of there being no Great Depression in Japan would be of keen and abiding interest to Western economists, but it is not. Nearly a verboten topic, from what I can gather.”

    Well not entirely. Believe it or not I actually wrote a thesis on Japan’s financial system in the interwar period, which my prof cribbed (although I think he credited me in the footnotes) and which was and continues to be cited and republished from time to time.

    That said, it’s a dreadfully boring topic and about the only thing I remember is that while the financial policy of the time was successful it didn’t end well for its principal architect, Korekiyo Takahashi, who was slashed to death in his bed by irate army officers when he tried to cut their funding.

  36. Gravatar of Michael Rulle Michael Rulle
    29. May 2019 at 04:17

    Scott—-Much appreciated!😇

  37. Gravatar of dtoh dtoh
    29. May 2019 at 04:46

    One other thing. I think it’s a misnomer to call it a helicopter drop. In the 30s it was just plain old fiscal stimulus…tax cuts plus increased government spending.

    If by helicopter drops you mean tax cuts or outright payments to residents, I heartily agree …at least about tax cuts. Japan’s primary problem right now is confiscatory tax rates.

  38. Gravatar of Brian Donohue Brian Donohue
    29. May 2019 at 06:26

    The Fed should seriously be considering a rate cut in June. Bond market is screaming, listen up.

  39. Gravatar of Matthew Waters Matthew Waters
    29. May 2019 at 07:43

    “I suspect this is because the US establishment prefers to fight a recession by inflating global asset-values through QE, rather than, say, cutting taxes on US wage-earners who would spend the money immediately inside the US.”

    But you could see this about regular old monetary policy outside the zero-bound. If the FOMC makes unexpected rate cuts in the next meeting, it will “inflate” some asset values. The asset value increase ultimately stems from the threat of the Fed buying short-term Treasuries.

    So why is buying long-term Treasuries different? QE2 and QE3 gave the US far better NGDP results than Europe, despite some austerity. Draghi implemented massive QE and negative rates, and it also increased Euro area NGDP.

    What I WOULD change is the Fed’s mechanism for buying Treasuries. The Fed should have public reverse Treasury auctions or a simple Treasury rate peg, like the Fed had in the 40’s. Only buying or selling Treasuries through primary dealers looks horrible.

  40. Gravatar of Benjamin Cole Benjamin Cole
    29. May 2019 at 19:22


    “Well not entirely. Believe it or not I actually wrote a thesis on Japan’s financial system in the interwar period, which my prof cribbed (although I think he credited me in the footnotes) and which was and continues to be cited and republished from time to time.

    That said, it’s a dreadfully boring topic and about the only thing I remember is that while the financial policy of the time was successful it didn’t end well for its principal architect, Korekiyo Takahashi, who was slashed to death in his bed by irate army officers when he tried to cut their funding.”—dtoh


    Yes, that is what happened.

    What is remarkable (and interesting to me as this late date, if not you in a long drawn-out thesis format) is that Japan prospered even while wasting money (macroeconomically speaking) on hideous occupations and armaments—a picture repeated in America when the US entered WWII.

    The sensible question remains: Should not such helicopter drops be part of the macroeconomic policymaking tool-kit? Obviously, I would say. I prefer prosperity to recessions.

  41. Gravatar of dtoh dtoh
    29. May 2019 at 20:56

    A few things.

    I’m not sure why you want to call it a helicopter drop. How is this different than fiscal stimulus or are you just using two different words for the same thing.

    Now – go back to my two box model. When output is below capacity you want the Non-Banking Box (individuals plus firms plus the government) to spend more money. Quantitatively it doesn’t matter who spends the money, but from a qualitative perspective, as a conservative, I believe it’s much better if individuals and firms decide through free markets how to spend the money rather than letting the government decide what to spend it on or who gets to spend it. For this reason, I strongly favor monetary solutions rather than fiscal solutions, although either can be equally effective from purely an output standpoint.

  42. Gravatar of Benjamin Cole Benjamin Cole
    30. May 2019 at 19:11


    Egads, I am going back to gardening after this long and fruitless digression into macroeconomics.

    Okay, Japan in the Great Depression: The government did not just issue bonds, they also just printed money. You know, pay government employees with freshly printed paper money.

    I call it a “helicopter drop” when a government prints (digitizes) money and spends it. No issuing bonds, no building or shrinking of reserves in banks, no reverse repos or interest-rate wiggles and corridor-floor systems, or genuflecting to totems inside secret rooms in the Fed, etc etc etc.

    Just print the money and spend it. Japan did that in the Great Depression, and there was no Great Depression in Japan. Draw your own conclusions.

    I call it “deficit spending” when a government issues bonds, and then spends the money.

    No, here is where it gets confusing. Sit down with a cup of tea (or maybe a shot of bourbon).

    Michael Woodford (credentialed and deferred to Columbia University prof) says that QE, when run concurrently to a federal deficit, is a helicopter drop. I want to put italics on the preceding word “is,” but I don’t know how in this format).

    Woodford is holding that money is fungible, so why pretend, and the US government was both issuing and buying bonds during the QE days, and that effectively is a helicopter drop. We done sent in the choppers already, dude.

    Just so we can toast each other, I am with you 101% on reducing government spending. I would finance tax cuts—preferably a Social Security tax holiday—by having the Treasury buy bonds and placing the bonds into the Social Security trust fund to offset lost revenue. The money quickly gets spent in the domestic economy, accomplishing the goal.

    Now here is a sneaky question: Okay, maybe the Social Security trust fund will run out of money in a few decades. What would be the real-world result if the Fed digitized cash, and then bought, say, $300 billion a year in sovereign or high-grade bonds globally in a low-key fashion, and deposited the bonds into the Social Security trust fund? So in 10 years there is another $3 trillion in the SS fund and no worries.

    Side note: The Swiss National Bank has been piling up sovereign bonds for a while. They managed to hold down the Swiss franc a little.

  43. Gravatar of dtoh dtoh
    30. May 2019 at 21:27


    Bourbon is not a bad idea, and I’m not far right now. If you can get over to Mui Ne this evening, I’ve got a half finished bottle of Jim Beam sitting on the table in the garden.

    So first, why don’t we agree to use the term of art… Overt Monetary Financing (OMF.) That way we will know exactly what we are talking about. Can I assume that is what you refer to when you say helicopter drops?

    As to Japan, if I recall correctly, the government actually did issue bonds. It’s just that they were underwritten directly by the BoJ. To may way of thinking that’s no different than if government sells bonds to third parties and then the BoJ buys the bonds from the third parties. It’s just a mechanical difference and there is zero difference in economic impact. Which is why I think OMF (or helicopter drops if you still want to call it that) is just smoke and mirrors.

    I gather though that you have a different opinion on this and I would like to understand why.

  44. Gravatar of Michael Sandifer Michael Sandifer
    31. May 2019 at 03:57

    Trump suddenly wants to hit Mexico with a 5% tariff, unless they make themselves responsible for stemming immigration to the US, all as the ratification process for the NAFTA replacement was set to begin.

    Anyone want to defend this stupidity? Is there any reason for any country to negotiate with us at all? Trump is too stupid and/or dishonest to honor his own stupid deals.

    Everyone should just either use negotiations as stalling tactics or, just respond tit-for-tat, particular targeting must win states and wait for the next President.

  45. Gravatar of Benjamin Cole Benjamin Cole
    31. May 2019 at 20:05


    If you are still reading….

    I think I need more than one bottle of bourbon to get through this. Are thre liquor supermarkets in Mui Ne?

    Here is a paper by Adair Turner. I think he is a smart guy. I am just a wag who likes public policy.

  46. Gravatar of dtoh dtoh
    1. June 2019 at 01:14


    Yes. As a matter of fact there is one right across the street from the resort where I’m staying. Unfortunately though, I’m headed back to HCMC first thing in the morning.

    I’ll read the Turner paper and then get back to you on a future post. Thanks for sending.

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