Negative IOR is an OK idea, negative bond yields are a really bad idea

I find that when things go bad with the economy, the level of discourse seems to suffer.  Here are a few items I keep bumping up against:

1.  Why not do a helicopter drop?  Because there are no free lunches in economics, and any fiscal stimulus will have to be paid for with future distortionary taxes.  What if they promise to never remove the money injected in the helicopter drop? Then we either get hyperinflation or perma-deflation, neither of which is appealing.  Won’t it help to achieve the Fed’s inflation target?  The Fed already thinks it’s achieved its target, in the sense that expected future inflation is 2%, in the Fed’s view.  That’s why they raised rates in December.  You and I may not agree, but helicopter drops are a solution for a problem that the Fed doesn’t think exists.  If we can convince the Fed that market forecasts are superior to Philips curve forecasts, then the solution is not helicopter drops, it’s a more expansionary monetary policy.

2.  Are negative interest rates good for the economy?  That’s not even a question.  I don’t even know what that means.  For any given monetary base, lower levels of IOR are expansionary (for NGDP), and lower levels of long term bond yields are contractionary. So there is no point in even talking about whether negative rates are good or bad, unless you are clear as to what sort of interest rate you are discussing.

People often debate whether the problem is that interest rates are too high, or whether the problem is that interest rates are too low.  Neither.  The problem is that we are discussing interest rates, which means we are talking nonsense.  We need to talk about whether NGDP growth expectations are too high or too low.  We need to create a NGDP futures market (which I’m trying to do, but not getting much support) and focus on getting that variable right.

Tyler Cowen’s recent post on negative rates is not helpful, because it fails to distinguish between the fact that negative bond yields are bad and negative IOR is mildly helpful.  The eurozone has negative bond yields because it raised IOR in 2011.  That was a really bad move.

3.  If market monetarism is so smart, how come you guys can’t predict recessions?  The point of economics is not to predict recessions (which is impossible, at least for demand-side recessions) the point is to prevent recessions.

4.  What’s the optimal rate of NGDP growth, or the optimal rate of inflation?  It depends.  If the central bank plans to hit the target you can get by with a lower growth rate than if they plan to miss the target.  If they use level targeting then the optimal growth rate is lower than if they target the growth rate.  If capital income taxes are abolished then the optimal rate of inflation/NGDP growth is higher than otherwise. So I can’t give you a specific number, except to say “it depends.”

5.  What do we make of the fact that the yen depreciated when negative IOR was announced, and later appreciated?  The depreciation that occurred immediately after the announcement was caused by the negative IOR.  The later appreciation was caused by other factors.  The EMH says the market responds immediately to new information.  BTW, talk about a new headline not matching the accompanying article, check out this bizarre story from Bloomberg.

6.  Thomas Piketty recently claimed:

Whatever the case, however, the failures to make such [structural] reforms are not enough to explain the sudden plunge in GDP in the eurozone from 2011 to 2013, even as the US economy was in recovery. There can be no question now that the recovery in Europe was throttled by the attempt to cut deficits too quickly between 2011 and 2013—and particularly by tax hikes that were far too sharp in France. Such application of tight budgetary rules ensured that the eurozone’s GDP still, in 2015, hasn’t recovered to its 2007 levels.

No question?  Anyone making that claim has clearly paid no attention to the recent debate over fiscal and monetary policy. His claim is not just wrong, it’s patently absurd.  I question the claim.  Hence there is a question.  QED.

Seriously, Piketty himself points out that the US kept growing during 2011-13.  And the US did even more austerity than Europe.  And the only significant policy difference was that the US monetary policy was much more expansionary than the eurozone monetary policy.  The logical inference is that the eurozone recession was caused by tighter money in Europe. I’m tempted to say that there is “no question” that tight money in Europe caused the double-dip recession, as eurozone fiscal policy was more expansionary than in the US.  But I won’t, because Piketty clearly questions this claim.

Are there any Keynesians out there who are willing to debate me on this point?  I’d love to see the argument as to how fiscal austerity clearly caused a double dip recession in Europe, even though the US did even more austerity and kept growing. It seems to me as if Keynesians live in some sort of intellectual bubble, where they aren’t even aware of the arguments made by people on the other side.  That’s not helpful if you have to debate the other side.


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98 Responses to “Negative IOR is an OK idea, negative bond yields are a really bad idea”

  1. Gravatar of Giles Giles
    12. February 2016 at 06:56

    Hi Scott (enjoying the book btw)

    Question: earlier you wrote “And just as causation went from falling interest rates to higher demand for gold to deflation under the gold standard, causation went from falling interest rates to higher demand for base money to recession in 2007-08.”

    I know I’ve got something confused: why would negative IOR not also cause higher demand for base money in the form of currency and therefore also be contractionary? Trying to get my head round why low bond yields are contractionary, negative IOR not so much

    best

    Giles

  2. Gravatar of Giles Giles
    12. February 2016 at 07:14

    Scrap that, I have just read this https://www.themoneyillusion.com/?p=31372

  3. Gravatar of Dennis Dennis
    12. February 2016 at 07:17

    From the Bloomberg article: “The adoption of negative interest rates reeks of desperation to me,” Wang said. “It’s akin to an admission by the BOJ that conventional monetary policy is ineffective in hitting their 2 percent inflation target.”

    I suppose he would rather pretend an ineffective policy is working or that it’s all they can do than actually use their God-like powers to fix the actual problem?

  4. Gravatar of jonathan jonathan
    12. February 2016 at 07:21

    Since my preferred policy since ~2011 has been helicopter drops, I want to defend this position from your critique.

    > Why not do a helicopter drop? Because there are no free lunches in economics,

    There are when the economy is operating below capacity due to an aggregate demand shortage.

    > and any fiscal stimulus will have to be paid for with future distortionary taxes.

    Not if it boosts AD and therefore employment, which raises tax revenue. And even if it does, the distortions from future taxes may be less than the distortions from low AD today.

    > What if they promise to never remove the money injected in the helicopter drop? Then we either get hyperinflation or perma-deflation, neither of which is appealing.

    A promise to allow hyperinflation would be foolish and noncredible. But a promise to allow higher GDP growth + moderate inflation (2-3%) seems eminently believable. Just because a tool could be used incorrectly doesn’t mean it shouldn’t be used at all, and I think it would be fairly easy to use helicopter drops correctly.

    > Won’t it help to achieve the Fed’s inflation target? The Fed already thinks it’s achieved its target, in the sense that expected future inflation is 2%, in the Fed’s view. That’s why they raised rates in December. You and I may not agree, but helicopter drops are a solution for a problem that the Fed doesn’t think exists.

    That the Fed (incorrectly) doesn’t want to achieve goal X is not an argument against helicopter drops as a good tool to achieve goal X. It’s an argument that the Fed is incompetent.

    > If we can convince the Fed that market forecasts are superior to Philips curve forecasts, then the solution is not helicopter drops, it’s a more expansionary monetary policy.

    I think of helicopter drops as a means of implementing “more expansionary monetary policy”. And a very one good one at that.

  5. Gravatar of jonathan jonathan
    12. February 2016 at 07:24

    “I’m tempted to say that there is “no question” that tight money in Europe caused the double-dip recession…Are there any Keynesians out there who are willing to debate me on this point?”

    I think that’s pretty much the standard view. I certainly hold it. And I know or suspect that many leading Keynesians do as well.

  6. Gravatar of Dan W. Dan W.
    12. February 2016 at 07:31

    Scott,

    (1) Since you believe there are no free lunches then what is the cost of a “expansionary monetary policy”?

    (2) What is the implementation of this “expansionary monetary policy”? I read so much about it but where is it?

  7. Gravatar of Matt McOsker Matt McOsker
    12. February 2016 at 07:43

    I always look at three things, credit growth (which is certainly influenced by monetary policy stance), fiscal policy, and trade balance (channeling Wynne Godley). You can have austerity and still have growth if credit is expanding investment, and/or trade surplus. While the fiscal stance may have been a bit tighter, credit was growing and seems investment too, and trade was relatively stable and improved some.

    https://research.stlouisfed.org/fred2/graph/?g=3ryq

  8. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    12. February 2016 at 07:45

    ‘We need to create a NGDP futures market (which I’m trying to do, but not getting much support) and focus on getting that variable right.’

    Maybe you should contact Robert Shiller for some assistance. On page 62 of his ‘Finance and the Good Society’ he writes:

    ‘I often encounter resistznce to the notion that we should expand our array of derivatives markets and that we need more active trading of derivatives for such things as consumer prices, GDP [my bold]…. Many of those who object seem to think that such new markets would only create opportunities for bad behavior. But I find it ironic that no one…advocates shutting down trading in the major markets that already exist, like the stock market or the bond market. …. If trading of claims on corporate profits (trading stocks) is a good thing, then why isn’t trading for claims on GDP likewise good? Corporate profits are, after all, just a (small) component of GDP.’

  9. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    12. February 2016 at 08:04

    @Prof. Sumner, you lost me here “If capital income taxes are abolished then the optimal rate of inflation/NGDP growth is higher than otherwise”
    Could you please elaborate on this? Thanks.

  10. Gravatar of Njnnja Njnnja
    12. February 2016 at 08:18

    I don’t think that one can be quite so agnostic about negative interest rates. Negative interest rates are perceived as being bad for banks, and with banks, the perception of health is a prerequisite for actual health. So regardless of the merits of negative interest rates, the possibility of causing a liquidity crisis for otherwise solvent banks has to be carefully considered. To get back to normal growth, I wouldn’t start from here

  11. Gravatar of Inigo Montoya Inigo Montoya
    12. February 2016 at 08:29

    Prof. Sumner,

    The NGDP futures market is a compelling idea. To what extent could you use the E-mini S&P futures market as a proxy variable? Or even the S&P ETF?

    Please excuse if discussed before. New follower.

  12. Gravatar of Matt Waters Matt Waters
    12. February 2016 at 08:36

    Why are negative bond yields, per se, bad? Banker borrows at -3% and lends at -2%, and still makes a 1% difference.

    The Wicksellian rate may never be so low for that to have it happen. But I don’t see how it’s a bad thing.

  13. Gravatar of Market Fiscalist Market Fiscalist
    12. February 2016 at 08:36

    “Why not do a helicopter drop? Because there are no free lunches in economics, and any fiscal stimulus will have to be paid for with future distortionary taxes. What if they promise to never remove the money injected in the helicopter drop? Then we either get hyperinflation or perma-deflation, neither of which is appealing.”

    Why would failure to remove a one-time helicopter drop lead to hyperinflation ? Surely when velocity recovers we would just get a one time bump in the price level, then back to normal ? Can’t see why it would ever lead to deflation hyper or otherwise.

  14. Gravatar of E. Harding E. Harding
    12. February 2016 at 08:48

    Good post, except for the following:

    “The eurozone has negative bond yields because it raised IOR in 2011. That was a really bad move.”

    -I see no evidence for this. It was clearly an attempt to get back to the inflation target, which was being wildly exceeded by the existing stance of monetary policy.

    “(which is impossible, at least for demand-side recessions”

    -Nonsense.

    “The logical inference is that the eurozone recession was caused by tighter money in Europe.”

    -Contributed to, but not caused on its own. See my post

    https://againstjebelallawz.wordpress.com/2016/01/03/europe-the-real-problem-is-real/

    But I’m not a Keynesian, so I guess I don’t count.

    @ Jose

    -Higher inflation/NGDP growth leads to higher nominal asset values, leading to higher taxes when those assets are sold.

    @Patrick

    “But I find it ironic that no one…advocates shutting down trading in the major markets that already exist”

    -Well, there is David Stockman.

    @Dennis, good point. I’m still surprised why Sumner hasn’t, to my knowledge, discussed Canada’s recent rate cut.

  15. Gravatar of Market Fiscalist Market Fiscalist
    12. February 2016 at 08:50

    Also, I have a question (semi-serious).

    Lump-Sum taxes are said to be non-distortionary. Why don’t Market Monetarist support adjusting the money supply via lump-sum taxes /subsidies if avoidance of distortions is the policy aim (since buying and selling of assets also cause some distortion to the economy).

  16. Gravatar of Kgaard Kgaard
    12. February 2016 at 08:58

    Njnnja … I have the same concern regarding the banks. They are getting smeared for a reason, and that reason is concern that negative IOR will lead to deposit flight — unless cash is taxed. But what government wants to tax cash?

    Just last night PM Abe came out and said deposit rates wouldn’t go negative. That to me means they didn’t grasp Scott’s point #5 above — that negative IOR DID weaken the yen but then other factors strengthened it. Bit of bad luck there for the policy trajectory in Japan.

  17. Gravatar of bill woolsey bill woolsey
    12. February 2016 at 09:02

    Whether or not negative long term bond rates are good or bad depends on what causes them. More generally, they are better than higher rates if they are needed to equate quantity supplied and demanded.

  18. Gravatar of jknarr jknarr
    12. February 2016 at 09:23

    Scott, Keynes vs Monetarism is a vicious ideological battle over resources. Keynesians want the taxpayer/government to leverage up and take the private sector out of their debt positions; while Monetarists want the central bank to leverage up and take the private sector out of it’s debt position.

    Under Keynes, tax rates ultimately go to 95%. Under Monetarism, currency purchasing power drops by 95%. Keynes means tight money and centralization of political power; Monetarism means an impoverished fiscal authority and a loss of imperium.

    So guess which option the Washington banking-surveillance-military state wants?

    Because of these high stakes, there is very little good faith (a la Krugman) among the contenders, i.e. just keep on making your arguments. If you want your view to actually win out, you need to read “rules for radicals” — market monetarism is radical, and Alinsky outlines methods of winning the fight (again, if you’re interested). Get personalizing and polarizing!

    A good first step would be to provide/clarify/separate/
    provide-the-lexicon. The debate over monetary policy is utterly impoverished, because the monetary definitions are so muddled.

    I think that you view base money (that which the Fed creates) is different than debt money (that which banks & bonds create).

    Base money is effectively infinite, zero-counterparty, and has a zero marginal cost of production — it’s the ultimate deliverable for all contracts. Debt money extinguishes upon maturity, has counterparty risk, and is produced in return for interest — it’s a derivative of base money.

    Going back to your velocity = rate insights, the monetary base is equivalent to NGDP at a fixed rate of interest. Hence, the MB(i)=NGDP — it’s just that the price of money (rates) obscures the central bank’s control over NGDP.

    Insufficient MB = negative interest rates = more debt. Low interest rates are a desperate call out for less debt and more base money in circulation, i.e. deleveraging.

    re:3), I find that an overlooked insight of market monetarism is the clear separation between overshoot and reversion, i.e. the interpretation of a recession as healthy and inevitable or unhealthy and curable.

    Given a NGDPLT, a period of above-LT NGDP growth could be a 1) recovery from prior LT undershoot; or 2) overshoot of the LT that will have to be unwound later. Right now, there is no distinction. A given recession might revert after a period of NGDP overstimulus; or a recession could an undershoot of the LT that will revert to the upside later. There’s no distinction at present, not even a vocabulary for this. Please provide!

    BTW, Keynes vs Money is a 1930’s-era bumfight between crippled pygmies. It’s a old-timer nostalgia sideshow. The bull elephant in this circus is the valuation of some $500 trillion in interest rate swaps: that’s what keeps the ringmasters up at night (I’m looking at you, DB).

  19. Gravatar of ssumner ssumner
    12. February 2016 at 09:46

    Giles, I also responded in the PS to my newest Econlog post.

    Jonathan, You said:

    “A promise to allow hyperinflation would be foolish and noncredible. But a promise to allow higher GDP growth + moderate inflation (2-3%) seems eminently believable.”

    But in that case ordinary QE is equally effective, and less costly. Indeed that’s my problem with all your points. Whatever helicopter drops can do, QE can do more cheaply.

    Matt, So you agree with my criticism of Piketty?

    Patrick, The lack of cooperation I am receiving is from New Zealand.

    Jose, When inflation rises then taxes on capital become more distortionary.

    Njnnja, You said,

    “I don’t think that one can be quite so agnostic about negative interest rates.”

    I don’t know what you mean. It’s clear that low market rates are contractionary if caused by lower NGDP growth expectations and expansionary if caused by QE or lower IOR. I’m not so much agnostic, as saying that the question is meaningless without more specificity.

    Inigo, That’s better than nothing, but often unreliable, as in 1987.

    Matt, I said contractionary for a given monetary base. Lower bond yields reduce V, which reduces NGDP. Bank lending has nothing to do with any of this.

    Market Fiscalist, But the base is many times higher than normal, so the “one time bump” would be hundreds of percent inflation. Yes, that’s technically short of hyperinflation, but it would feel that way to many people.

    E. Harding, You said:

    “It was clearly an attempt to get back to the inflation target, which was being wildly exceeded by the existing stance of monetary policy.”

    Wildly?? No it wasn’t, and in any case inflation targeting should be forward looking. In addition, they should target the deflator, not the CPI. The ECB is clueless.

    Market Fiscalist, Lump sum taxes are not politically feasible. How do you make the homeless pay?

    Kgnaard. It’s amazing the Japanese have achieved 2% inflation per year in recent years, given the confusion there.

    Bill, I agree. My point was that lower bond yields reduce velocity, and thus are contractionary for a given monetary base. Since the base is currently held constant, that assumption is quite plausible. So anything the central bank does to lower bond yields (other than QE or lower IOR) is contractionary.

  20. Gravatar of Doug M Doug M
    12. February 2016 at 09:56

    The European problem as I see it.

    It is far from an “optimal currency area.” There is not the capital mobility, labor mobility, and risk sharing necessary.

    This makes it quite likely for part of the euro-zone to be booming and another part failing. What is the central bank to do? Money creation may be ideal for Germany and too tight for everyone else. But the politics of it let one country block drive the system. If France engages in austerity, and Germany is growing, there is not necessarily a monetary offset.

    The obvious first step would be to do away with the local banks. There is no reason why Greece needs its own Greek banking system.

  21. Gravatar of E. Harding E. Harding
    12. February 2016 at 10:06

    @ssumner

    “In addition, they should target the deflator, not the CPI.”

    -Totally agreed that it would be superior monetary policy, but the deflator was rising too (though not above 2%).

    “No it wasn’t, and in any case inflation targeting should be forward looking”

    -It totally was forward-looking and wildly above target: HICP inflation peaked when Trichet left office, more than one percentage point above target. And GDP deflator inflation during the double-dip recession peaked in Q2 2013, despite Draghi coming in and messing everything Trichet did up.

    https://research.stlouisfed.org/fred2/graph/?g=3rFU

  22. Gravatar of Britonomist Britonomist
    12. February 2016 at 10:47

    “What if they promise to never remove the money injected in the helicopter drop? Then we either get hyperinflation or perma-deflation, neither of which is appealing.”

    It’s not about permanence, it’s more just making the conditions for removing the money more clear (i.e. if and when inflation/NGDP rises substantially), rather than how the central banks are currently communicating these injections, which are temporary and will eventually be removed UNCONDITIONALLY, regardless of the strength of demand. Do you agree that tying the removal of this money to certain conditions is superior to the current situation? You could tie it to an expected NGDP growth target if you like.

  23. Gravatar of Tyler Cowen Tyler Cowen
    12. February 2016 at 11:00

    I see growing *market* evidence that the “tax on intermediation” effect, and the “this shows we are not going to do more, such as target ngdp” effect, outweigh the possible expansionary effects of negative interest. I don’t think you have rebutted the data being served up by markets right now.

  24. Gravatar of Njnnja Njnnja
    12. February 2016 at 11:15

    My point is that regardless of why rates are negative, negative rates call into question the entire business model of banking. And once that happens, you can expect runs on banks. Even if the negative rates are caused by good things and have good effects, it is likely that they will put great pressure on the liquidity of banks.

  25. Gravatar of Inigo Montoya Inigo Montoya
    12. February 2016 at 11:17

    Prof. Sumner,

    The 1987 point is a bit of a stretch. Obviously, you cannot rule out an event like that happening. But the point ignores the advent of electronic trading and algorithmic trading. So the adverse events that you should worry about these days are flash crashes. Flash crashes happen in individual securities nearly every day in addition to the significant ones like May, 2010 and Aug, 2015.

    Putting into perspective, an electronically traded NGDP futures market will still run into these issues, likely more so given it will bound to have low trading volume initially. You may be able to get around this by having something like 1 second auctions within the market, but then you’ll have a lack of market makers as they would want to trade in continuous time.

    Hypothetically, I would be surprised if a highly liquid NGDP futures market would not be significantly correlated to the stock market in real time.

  26. Gravatar of Matt Waters Matt Waters
    12. February 2016 at 11:26

    “Matt, I said contractionary for a given monetary base. Lower bond yields reduce V, which reduces NGDP. Bank lending has nothing to do with any of this.”

    I’m still confused. Do lower bond rates cause lower V or does lower V cause lower bond rates? Europe seems like the latter. Europe’s expected inflation is so low that some bond investors think it’s fine to lose money in a bond. The negative yield is also less than the cost of holding cash. A greater negative yield could still happen if cash-holding is penalized.

    Theoretically, it’s also possible to a 5% NGDP growth rate with negative bond rates. The markets would have to HEAVILY favor saving over consumption for real rates to go that negative. But it is possible and negative rates on bonds wouldn’t necessarily be a bad thing.

  27. Gravatar of Britonomist Britonomist
    12. February 2016 at 11:29

    “But in that case ordinary QE is equally effective, and less costly. Indeed that’s my problem with all your points. Whatever helicopter drops can do, QE can do more cheaply.”

    It’s like I’m living on another planet. I take the exact opposite position, I regard QE as incredibly less effective, indirect and hated by the public (seen as a bung to the bankers, and perceptions *do* matter). When rates are at zero, QE simply exchanges cash for a very near cash substitute – these holders are indifferent between the two, the expansionary effects of this are marginal, their net worths do not improve. Helicopter drops do not give cash to people in exchange for a cash substitute, it gives people cash directly unconditionally as far as the cash holder is concerned (if it didn’t it would violate the analogy). This increases broad money as there is no offsetting effect where near cash substitutes are taken out of the economy, people’s net worths are improved.

    It doesn’t increase higher future tax expectations any more than conventional monetary policy, only debt fueled spending does that. The entire point of helicopter drops are that it is not debt financed, if it is debt financed it is not a helicopter drop, period. It might indirectly increase higher tax expectations from higher inflation expectations, but so would any monetary policy that causes inflation. Again, ‘debt fueled’ spending can include what I call pseudo helicopter drops, where the government explicitly promises to remove this money in the future – in that case it’s not a helicopter drop, it’s just another form of debt financed spending. And this ignores the fact that there are extremely good arguments against Ricardian Equivalence anyway.

    Further, QE as is framed today is *unconditionally* temporary, that makes it a loan not a money injection. This includes previous experiments such as Japan’s supposed helicopter drop a decade or so ago – because of the way QE was framed, it wasn’t actually a helicopter drop, it was simply debt fueled fiscal stimulus where the government happens to be borrowing from the CB.

    I like to quote Cochrane on QE:

    “This fact is why the Fed is buying long-term debt in the first place. The Fed knows that its usual open-market operations – buying short-term debt from banks, and giving the banks more reserves in exchange – have no effect whatsoever. This is like taking your red M&Ms, giving you back green M&Ms. It has no effect on your diet.”

    ” All that quantitative easing (QE) does is to restructure the maturity of US government debt in private hands. Now, of all the stories you’ve heard why unemployment is stubbornly high, how plausible is this: “The main problem is the maturity structure of debt. If only Treasury had issued $600 billion more bills and not all these 5 year notes, unemployment wouldn’t be so high. It’s a good thing the Fed can undo this mistake.””

    QE is extremely complicated and operates through the banking system and involves an asset swap rather than true monetary injection, this makes it much harder to apply conventional monetary models to this policy. Helicopter drops bypass all these technical stumbling blocks and just directly injects money into the economy, we can now directly apply monetary models to this policy and reduce uncertainty.

  28. Gravatar of Britonomist Britonomist
    12. February 2016 at 11:36

    “5. What do we make of the fact that the yen depreciated when negative IOR was announced, and later appreciated? The depreciation that occurred immediately after the announcement was caused by the negative IOR. The later appreciation was caused by other factors. The EMH says the market responds immediately to new information. ”

    This is exactly what I meant about there being no clean tests in economics. In a previous post I argued that EMH doesn’t apply when information and knowledge is highly uncertain and disputed (such as with negative interest rates), I said that once more information and data comes out markets might reverse course and the yen might increase in value again. This explains the current data perfectly, but so would simply blaming “other factors” and not tying this to negative interest rates. Since we now have two theories that explain the data, and we can’t do controlled experiments on an economy, we have no way to distinguish which one is correct – hence there being no such thing as a clean test.

  29. Gravatar of E. Harding E. Harding
    12. February 2016 at 15:26

    Cowen, you mediocre thinker, the Yen went down and stocks went up when Japan implemented negative interest rates. Ergo, negative interest rates in Japan were stimulative.

    http://www.bloomberg.com/news/articles/2016-01-29/japan-stocks-rise-ahead-of-boj-decision-on-busiest-earnings-day

    http://econlog.econlib.org/archives/2016/02/why_doesnt_a_mo.html

    Only bank stocks went down due to the decision. You’re not even good as a news junkie.

    I hope when Trump becomes President he smacks the Fed out of its stupor and forces it to do a few trillion in QE to stabilize the economy in his first hundred days.

  30. Gravatar of Britonomist Britonomist
    12. February 2016 at 15:46

    E. Harding, see my post immediately above yours.

  31. Gravatar of E. Harding E. Harding
    12. February 2016 at 16:05

    Britonomist, I didn’t find that comment persuasive. It might be right, but I don’t see evidence in favor of it in this particular situation.

  32. Gravatar of Dan W. Dan W.
    12. February 2016 at 16:05

    E. Harding,

    But a few trillion in QE is not enough. What is apparent in the US economy and those around the world is continual monetary intervention is necessary to prevent financial stress and a market correction. Yet there is a limit in assets that can be purchased. So there is no exit strategy but the strategy must end! The only questions to be answered are when will monetary intervention end and will it be voluntary?

  33. Gravatar of Britonomist Britonomist
    12. February 2016 at 16:28

    E. Harding – the point is, the fact that I ‘might be right’ means you can’t justifiably call Cowen a ‘mediocre thinker’ or claim the immediate devaluation as some kind of slam dunk when it *might* have been just a knee-jerk.

  34. Gravatar of Don Geddis Don Geddis
    12. February 2016 at 17:00

    Dan W.: “Yet there is a limit in assets that can be purchased.

    It will be a wonderful world, if the Fed can buy up ownership of all of planet Earth, in exchange for zero-cost pieces of paper, and not even cause significant inflation in the value of those pieces of paper. Then the entire US population can simply retire, and live off the rents of the whole rest of the world continuing to work. I eagerly await this future outcome that you predict.

  35. Gravatar of Benjamin Cole Benjamin Cole
    12. February 2016 at 17:15

    Scott Sumner: would helicopter drops in the form of FICA tax cuts by either hyperinflationary or perma-deflationary? I confess your view puzzles me in more than one way.

    David Beckwith contends that QE should be permanent. That is, the increase to the Fed’s balance sheet is permanent. I do not believe that QE, even if permanent, is hyperinflationary. The Fed presently is maintaining its balance sheet, without any signs of hyperinflation.

    Why would financing a portion of the annual federal budget with money printing be anything but mildly inflationary and wonderfully stimulative?

    Suppose that Fred printed up $1 and gave Iit to the Treasury? How about $2? Hyperinflation? Okay obviously no result from $1. There should be a sweet spot somewhere.

  36. Gravatar of E. Harding E. Harding
    12. February 2016 at 17:25

    Britonomist, I’ve considered Tyler a ‘mediocre thinker’ for quite a while. I just consider this recent totally unjustified and unsubstantiated assertion of Cowen’s another coin on top of the pile. The immediate market reaction seems to be more connected with the monetary policy action than something that happens a week later.

    Don is more correct than Dan.

  37. Gravatar of Christian List Christian List
    12. February 2016 at 18:02

    @E. Harding
    “I hope when Trump becomes President he smacks the Fed out of its stupor and forces it to do a few trillion in QE to stabilize the economy in his first hundred days.”

    This sounds a lot like wishful thinking to me. Since at least August 2015 Trump said several times that money is too loose and that the FED should raise rates.

    From what I read the only GOP candidate who thought that money might be too tight was Ted Cruz.

  38. Gravatar of E. Harding E. Harding
    12. February 2016 at 18:14

    @Christian List

    -Well, the recession of 1982 wasn’t a huge hit on Reagan’s reputation. And Trump did say “The reason they’re keeping the interest rate down is Obama doesn’t want to have a recession-slash-depression during his administration.” and “Janet Yellen for political reasons is keeping interest rates so low that the next guy or person who takes over as president could have a real problem. Keeping these interest rates at this level, Stephanie, this is a political thing, when they get raised, perhaps with the next president, we’re going to see some bad things happen.”, so I think he understands the basics of what’s happening and will not support tighter money during his administration. The reason he supports raising rates now is that he doesn’t want to make Obama look good. I support raising rates now for exactly the same reason. However, I suspect any non-Cruz, non-Trump Republican would be inferior to Clinton in all but Supreme Court appointments, so I will change my stance in the remote chance such a Republican would get the nomination.

  39. Gravatar of Tom Brown Tom Brown
    12. February 2016 at 18:18

    @Christian List,

    I agree about the wishful thinking. I remember when I voted for W (even after hearing him speak). I was telling myself that he’d surround himself with smart people, so it’d probably be OK. You know, people like Cheney.

    “From what I read the only GOP candidate who thought that money might be too tight was Ted Cruz.”

    True, but he’s made contradictory statements on that. He’s also complained that poor housewives are faced with out of control prices, and also that he would like to stabilize our money by “tying it to gold.”

  40. Gravatar of Christian List Christian List
    12. February 2016 at 18:19

    @SSumner

    Whatever helicopter drops can do, QE can do more cheaply.

    Maybe you did not consider PR and politics. Helicopter drops might be easier to sell to the public than more and more QE.

    Another thing: Under the three QEs the US und Europe still missed their goal of 2% inflation. Of course you can always say: Well the QE wasn’t big enough then. But with such an approach the theory might become harder and harder to falsify. It’s a little bit like with Keynesians. Stimulus didn’t work?! Well, that can only mean that the stimulus wasn’t big enough.

  41. Gravatar of Major.Freedom Major.Freedom
    12. February 2016 at 18:38

    “Why not do a helicopter drop? Because there are no free lunches in economics, and any fiscal stimulus will have to be paid for with future distortionary taxes.”

    Sumner it is mindboggling how after all these years you still remain in such a clueless framework.

    For the millionth time, the whole idea of a central bank inflation the money supply and raising prices and/or spending by ANY means, is based on the premise that there is such a thing as a free lunch in economics.

    It is not the case that this premise suddenly vanishes when the helicopter drops are accompanied by a reduction in the par value of government bonds.

    Would helicopter drops become something else if for each helicopter drop there was a reduction in the quantity of anything at all? Of course not! The helicopter drops remain helicopter drops. The only difference between nothing but helicopter drops, and helicopter drops plus a reduction in the par value of government bonds, is who receives the helicopter drops.

    Your insane vision of the counterfeiters engaging in helicopter drops that are accompanied by a reduction the par value of outstanding government debt, is nothing but helicopter drops that benefit the “member” banks.

    That is why the member banks do not want to become non-member banks.

    That is why non-member banks want to become member banks.

    Obviously there is a benefit to receiving the new money first, even if there is a requirement to reduce the quantity of government bonds. With a central bank printing money out of thin air to buy unlimited quantity of government bonds, there is an incentive to be able to sell to such an institution rather than institutions whose cash is finite. That in itself raises the price of the bonds from what they otherwise would have been, regardless of any inflation effect that adds to the required rate of return.

    Government bonds rates are so low because the Fed is promising to buy unlimited quantities of them. The inflationary effect is not enough to offset this huge liquidity effect. Hence you say “Fed policy is too tight”.

    If helicopter drops won’t make the general public better off because there is no such thing as a free lunch, then neither will helicopter drops accompanied by a reduction in government debt make the general public better off.

  42. Gravatar of E. Harding E. Harding
    12. February 2016 at 18:40

    @Christian List

    -We could look at stock prices to see if a certain policy action was expansionary or contractionary. And QE did work in Japan, 2013-today. And, yes, helicopter drops would be easier to sell to the public.

  43. Gravatar of Major.Freedom Major.Freedom
    12. February 2016 at 19:32

    “What do we make of the fact that the yen depreciated when negative IOR was announced, and later appreciated? The depreciation that occurred immediately after the announcement was caused by the negative IOR. The later appreciation was caused by other factors.”

    BZZZZZT wrong.

    The market does not in fact instantly or quickly react to any news. The market is a process that includes the actions of millions, billions of individuals.

    What you are doing is merely seeing in the data your a priori theory. Why would the USD/JPY exchange rate not keep changing on the basis of the news, as the news is learned by more and more individuals, including learning about the initial reaction, and the broader market reactions?

    There is more to learn than simply the announcement itself. The more important things to learn are how people adjust. That takes time. Sorry, but the central bank’s activity is not the only important activity to pricing, as much as your antiquated models depend on that assumption.

    What, did you actually believe that the only people who effect the USD/JPY exchange rate on the basis of the IOR announcement, are those whose FX trades took place during the depreciation phase? What about the actual IOR itself? Is that not supposed to have any further effects? Effects by the way that cannot predicted scientifically beforehand.

    Have you even asked why the depreciation phase lasted longer than a few seconds? If as you pretend exists there are FX traders with their fingers on the trigger, who are the only people who influence the exchange rate on the basis of the IOR announcement, why did it take them so long to depreciate the Yen to the bottom? Why did the Yen not immediately reach the bottom on the news?

    Why did NGDP gradually decline over a period of MONTHS during 2008-2009? Why didn’t spending immediately decline to a bottom?

    You’re stuck in a general equilibrium framework that lacks the concept of the market process. Of TIME.

    This weakness is what is leading you to insist in your own mind that the market process itself is as instant as your models are structured. That is so irresponsible. Change your models, rather than pretending the world acts in accordance with them.

    The announcement of IOR was not spread across the whole population of individuals instantly. We’re not living in the Matrix. It takes time for any announcement to be learned by those whose actions effect the USD/JPY exchange rate, and for the initial reaction itself to be learned, and for that reaction to be learned. What, are we to believe that the only announcement related effect is the initial reaction? Not even close. You’re so in over your head it’s not funny.

    The appreciation phase could very well have been a result of more informed fx traders reacting to the IOR announcement. More informed because of the knowledge of the initial reactions, and who have a better theory of long run market processes. The traders who reacted initially guessed wrong, and those who took more time to figure out the efficient pricing, which could very well include traders from the first group, guessed more correctly. The appreciation phase, in other words, could very well have been the result of traders learning that IOR is in fact deflationary. They could not know this until other investors reacted accordingly. We can’t know when traders will know anything.

    The reason you can’t see this in the data is because your theory tells you that IOR is inflationary, period. So you are compelled to blame the appreciation phase on “other factors”.

    This same phenomena exists with your interpretations of bond rates after Fed announcements. You ignore those cases where investors guess in the short run the way your theory does not predict, and you emphasize those cases where investors guess in the short run the way your theory does predict. In other words, your theory does not actually predict anything. And that’s OK! Just stop believing you can predict fx movements.

    What is IOR? IOR is a tax. The central bank reduces the quantity of reserves held by the member banks. Your theory says that taxing reserves results in more lending and more spending, but economic theory says that even if a bank tried to rid itself of an amount of reserves, it would end up right bank in the banking system after being redeposited. And it will again be taxed very soon after the first bank tried to avoid the tax.

    Think of it like a hot potato that is slowly shrinking. That is IOR in a nutshell. We cannot predict what the resulting “velocity” will be. There could be more frequent lending, but a lower quantity of dollars lent. The net effect cannot be predicted.

    Could it be that the initial FX traders whose actions led to the depreciation, were investors who did not guess correctly on what the broader MARKET reaction would be? That they thought the IOR would be inflationary when in fact it would be deflationary by the market, which took more investors to show as a temporal trend, the same trend you claim is due to “other factors”?

    Reacting quickly to news is not synonymous with efficient pricing on the basis of such news. You should read the book Thinking Fast and Slow, by Kahneman. Quick decisions tend not to be as rational, because they tend to be made on the basis of fewer facts and more emotional bias. Your blog posts are clearly based on thinking fast.

    As more and more JPY get sucked out of the banking system via the IOR tax, it is likely that the JPY will continue to appreciate, as long as the other factors don’t overwhelm, such as the corrective forces that set in with the reduction in artificial stimulus. That also cannot be predicted scientifically. It depends on what investors will learn and think in the future given reserves are being taxed.

  44. Gravatar of Major.Freedom Major.Freedom
    12. February 2016 at 19:36

    When I say “IOR”, I of course was referring to NEGATIVE IOR.

  45. Gravatar of Ray Lopez Ray Lopez
    12. February 2016 at 21:24

    Sumner’s logic is un-testable metaphysics, based on unmeasured “expectations”. No sane Keynesian or anybody else would want such a debate.

    E. Harding was kicked off of Tyler Cowen’s blog for his immature posts. Hence his bitterness towards TC.

    TC destroyed Sumner with a few choice words, just like a chess grandmaster would destroy an amateur with a few subtle moves.

    As many others have pointed out, the failed NGDP futures market is due to no long felt need for such data. If it’s a ‘trillion dollar bill lying on the sidewalk’, nobody has bothered to scoop it up. The Efficient Market Theory, even if imperfect, should thus inform you as to the value of Sumner’s proposal. Contrast this to the public’s stance on IP and open borders, which is hostile from ignorance and stupidity. Hostile is an active choice (like being pro-slavery) while indifference means there’s no recognized need for something.

  46. Gravatar of Gary Anderson Gary Anderson
    13. February 2016 at 00:42

    Northern Trust says clearinghouses are making demand for high quality collateral, namely government bonds, soar with possible shortfalls of bonds. Got that Scott? This is not the old bond market, scott, as quality government bonds are now in short supply. Therefore, negative bond rates would simply be a reflection of the new demand, so if more loans and deals are done, how could this be a contraction of the money supply? I realize people buy bonds for different reasons, and some just hide in bonds. But not everyone.

    “The regulation means that ‘central clearing houses’ will soon act as central counterparties for the majority of derivative transactions. This is already under way in the US, as a number of market participants have begun trading certain derivative products via the clearing houses.

    Similar changes are in place in Europe and eventually, as clearing becomes mandatory over time for the various categories of investors and instruments, all market participants trading OTC derivatives will be subject to the rules.

    Key market impacts
    Together, these regulations constitute a significant shake-up of the derivatives market, which will have a number of implications and impacts. At Northern Trust, we feel the following will be foremost:

    • Infrastructure
    The regulations will necessitate new infrastructure to manage the new process of central clearing. When making a trade, assets affected by the regulations must be cleared by an authorised clearing member responsible for the clearing, matching and settling of the trade and for the collection and delivery of initial margin payment.

    A new derivative central clearing party (CCP) will then be responsible for the safekeeping of initial margin, the valuation of all of the derivatives trades that it holds and the ‘calling’ and management of the variation margin. Both sides of the cleared derivative trades must provide details of all open positions to a trade repository. This will enable monitoring of market exposure and allow regulators to act if they decide the market is at risk due to the exposures being taken by market participants.

    • Increased collateral requirements
    As mentioned, investors using derivatives will be required to put capital aside to ensure initial margin requirements can be met. As a result of the move to a cleared environment, it has been estimated that global regulations will create an additional demand for collateral of around $4 trillion2. However, regulations are expected to emerge that will also require bilateral trades to be fully collateralised, and the need for collateral may therefore be even greater than has been anticipated.

    Initial margin will need to be in the form of high-grade and liquid assets such as [high-grade] government bonds, gold, cash and bonds issued by some government agencies. The possibility of having a shortfall in these eligible assets is therefore a concern for market participants.”

  47. Gravatar of Gary Anderson Gary Anderson
    13. February 2016 at 00:45

    So, collateral needs for government bonds will exceed 4 trillion dollars, at least, and maybe much more.

  48. Gravatar of Saturos Saturos
    13. February 2016 at 01:50

    Eliezer Yudkowsky makes a clever analogy between efficient financial markets and Omega from Newcomb’s Problem in decision theory – https://www.facebook.com/yudkowsky/posts/10153950393369228?pnref=story

    (https://en.wikipedia.org/wiki/Newcomb%27s_paradox)

  49. Gravatar of Anand Anand
    13. February 2016 at 02:59

    Scott,

    This is related to helicopter drops and I see Keynesians like Simon Wren-Lewis make the point.

    Suppose you increase fiscal spending. And suppose monetary policy is neutral or expansionary – i.e., there is no monetary offset. Or at least, suppose monetary policy is NO MORE contractionary that it would have been otherwise. Would that not increase AD compared to the counterfactual of no fiscal measures?

    Now, you make the point that this is not efficient: whatever one can do with this, one can equally well do with pure monetary policy. I won’t argue with this, you might well be right. But consider the following:

    Fiscal policy is carried out by government, which is theoretically under popular control or at least understanding (however bad it is in practice). This means that groups can pressure to government to address their problems, and can visibly see how they are being helped or not.

    Monetary policy is rather abstract and invisible. It is hard to make people pay attention, let alone evaluate the effects. And it is very hard for popular groups to influence an independent central bank.

    In this, as in most other policies, the politics is important. People do what they can.

  50. Gravatar of Negation of Ideology Negation of Ideology
    13. February 2016 at 04:25

    “But in that case ordinary QE is equally effective, and less costly.”. . . “Whatever helicopter drops can do, QE can do more cheaply.”

    This is the key point in my view. Take three options:

    1. The Fed buys $1 Trillion in bonds with new money and the Treasury does nothing.
    2. The Fed buys $1 Trillion in bonds with new money and the Treasury increases spending by $1 Trillion.
    3. The Fed buys $1 Trillion in bonds with new money and the Treasury cuts taxes by $1 Trillion.

    Option 1 is the cheapest. All 3 increase the monetary base by the same amount. You might argue that 2 and 3 increase velocity, but all that means is you’d need more than $1 Trillion for option 1, saving even more money. So the true options for a given NGDP=M*V target would be:

    1. The Fed buys more than $1 Trillion in bonds with new money and the Treasury does nothing.
    2. The Fed buys $1 Trillion in bonds with new money and the Treasury increases spending by $1 Trillion.
    3. The Fed buys $1 Trillion in bonds with new money and the Treasury cuts taxes by $1 Trillion.

  51. Gravatar of Benjamin Cole Benjamin Cole
    13. February 2016 at 04:50

    I understand that the name “Michael Woodford” is spoken in hushed tones in macroeconomic circles.

    http://www.voxeu.org/article/helicopter-money-policy-option

    See above. Evidently, Woodford is at least open to the idea of FICA tax cuts married to QE. So is Bernanke (a little less hushed tones these days).

    “Adair Turner has recently put a different option on the table (Turner 2013): “helicopter money” or permanent money creation. This is an idea that was originally discussed by Milton Friedman (Friedman 1948) and more recently by Bernanke in relation to the zero lower bound problem in Japan (Bernanke 2003). As Bernanke has suggested it can be implemented via transfers to households and businesses via a tax cut coupled with incremental purchases of government debt, so that the tax cut is in effect financed by money creation.”

    Effing yes to the moon and back!

    This is what I have been saying! I mean, did Jimmy Durante have a big nose, did Dolly Parton have big tits, and can we do QE and FICA tax cuts?

    Dudes, bring out the heavy artillery. We don’t need helicopter money drops, we need the B-52s.

    Please, no more sermonettes by little boys in short pants. Time to eat lightening and crap thunder.

  52. Gravatar of Dan W. Dan W.
    13. February 2016 at 05:07

    E. Harding,

    You need to look at reality and not base your claims on what you wish would happen. Every nation that has done QE has failed to unwind that QE. Of course they could unwind it but there would be a recession and in today’s “failure is not an option” psychology recessions are not allowed. So QE is not unwound.

    But it is worse than that! Capitalism is destructive of capital. Capitalism is always seeking better and more efficient ways of doing things. In short, new capital devours old capital or, as Schumpeter put it: “Creative destruction describes the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

    Monetary intervention interferes with the creative destruction process that is essential to Capitalism. It artificially sustains old capital while flooding the economy with new capital. The consequence is stark: Real returns on investment dwindle as the excess capacity in the economy is never cleared! But, and this is key, the lower cost of all capital creates the illusion that the economics are sustainable.

    But the economics are not sustainable. The current economic structure can only continue AS LONG AS THE COST OF CAPITAL CONTINUES TO DECLINE!!! I am shouting this because it is the central point on which the Monetarists are oblivious. Interest rates cannot rise because doing so would bust the current economic structure. But worse. Interest rates cannot even stay level because doing so would bust the economic structure.

    The global economic structure, as it currently stands, requires ever decreasing costs of capital. Without it the structure will fail. That is the situation we are in. To sustain the status quo the only solution is QE infinity. And QE infinity is not possible. So the question to those who do not want the current economic structure to fail is simple: When will it fail? Because fail it will for there is a limit to monetary intervention. The limit is when the structure of Capitalism morphs into economic Socialism and the “state” owns all capital. Which is what Schumpeter said would happen.

  53. Gravatar of Dan W. Dan W.
    13. February 2016 at 05:20

    All,

    To be enlightened, search “Schumpeter and the end of Western Capitalism” by William Kingston

    Money quote (pun intended):

    “For Schumpeter, capitalism rightly meant, not just individual property rights, but the ability to ‘create money from nothing.’ This is such an enormous and dangerous power that it obviously has to be subject to the strictest constraint, which was traditionally provided, however imperfectly, by denial of incorporation with limited liability to those who dealt in money. The decline of capitalism began when financiers were released from this discipline, and it ended with the catastrophe caused by belief that bureaucratic control could replace it. The cause of the change was the progressive capture of democratically elected politicians by interests.”

  54. Gravatar of Ray Lopez Ray Lopez
    13. February 2016 at 07:15

    @ Anand 13. February 2016 at 02:59 – a short while go Sumner claimed the government cannot decrease unemployment if money was neutral. So I doubt he’ll go for your hypothetical. Then again, Sumner is inconsistent, so, like a roulette wheel, anything can happen.

  55. Gravatar of ssumner ssumner
    13. February 2016 at 07:34

    E. Harding, No, a forward looking regime would have seen that inflation would probably soon fall sharply, and not tightened money.

    Britonomist, Yes, but if you make the conditions for withdrawal clear, then a helicopter drop is superfluous. In your next comment you confuse two things, actual real world QE, and QE that was intended to be permanent. It would be like confusing actual Japanese helicopter drops in recent years with your ideal system. Compare ideals to ideals or actual to actual. You are comparing ideal helicopter drops to actual QE.

    Tyler, You said:

    “I don’t think you have rebutted the data being served up by markets right now.”

    The markets responded very positively to the recent BOJ announcement. There is no reason to believe the subsequent plunge was related to the negative IOR, as it was a global decline. That’s not to say that it’s impossible the Japanese markets had second thoughts, just that there is no clear evidence. The only clear evidence in an event study comes immediately after the initial announcement.

    The rest of your comment is possible, but I’d like to see more evidence. More broadly, I certainly agree with your overall view that the markets lack confidence that the BOJ will hit its macro targets (NGDP or inflation, they have both.)

    And finally, it isn’t just this one Japanese case, we have data on market responses to negative IOR in many European countries.

    Njnnja, I obviously believe that negative rates are bad for banking, but I see negative IOR as speeding the exit from negative rates, compared to doing nothing.

    Inigo, You said:

    “I would be surprised if a highly liquid NGDP futures market would not be significantly correlated to the stock market in real time.”

    Look, almost all macro variables are correlated with each other, that’s not the issue. The question is how closely correlated. Stocks are not closely correlated with expected future NGDP. The S&P nearly tripled between March 2009 and the peak, and yet obviously NGDP expectations didn’t triple, or even rise by 50%. Correlation is not enough, as we found with money supply targeting.

    Matt, You said:

    “I’m still confused. Do lower bond rates cause lower V or does lower V cause lower bond rates? Europe seems like the latter.”

    Both.

  56. Gravatar of ssumner ssumner
    13. February 2016 at 07:51

    Christian, You said:

    “Helicopter drops might be easier to sell to the public than more and more QE.”

    Good luck selling that to the GOP Congress.

    I prefer a third option, monetary stimulus by setting a NGDP target.

    Thanks Saturos, That may be worth a post.

    Anand, There are two big assumptions there, neither of which I accept.

    1. The GOP Congress is easier to budge than the Fed? I don’t think so.

    2. No monetary offset? Sure, fiscal works in that case, but in the real world there is monetary offset.

  57. Gravatar of Gary Anderson Gary Anderson
    13. February 2016 at 08:26

    Negation says: “1. The Fed buys more than $1 Trillion in bonds with new money and the Treasury does nothing.”

    Why would the Fed continue to buy bonds when there is going to be a shortage of them in the derivatives markets? If Scott Summner is serious about negative interest rates being bad, why would the Fed cause rates to go down even more and price go up even more,and make treasury bonds even more scarce? Again, Northern Trust has said the need for treasury bonds in the derivatives markets for use as collateral will exceed 4 trillion dollars in the CCP (clearinghouses) and quite likely much more than that because of the non CCP derivatives transactions that will need bonds, or gold or some pristine collateral for the derivatives to be grounded.

  58. Gravatar of E. Harding E. Harding
    13. February 2016 at 09:44

    @ssumner

    “No, a forward looking regime would have seen that inflation would probably soon fall sharply, and not tightened money.”

    -“would probably soon fall sharply” under what monetary policy regime? It probably wouldn’t have fallen to below 1% by October 2013 -and stayed there- if Trichet stayed as ECB President. How could Trichet have predicted Draghi would mess things up so badly by failing to sufficiently expand the monetary base? And when does Draghi become responsible for his own failures? One month after Trichet leaves? One year? Two years? Three? Four? The worst phase of the EZ recession (outside of Greece) happened under Draghi, in late 2012. EZ HICP inflation fell a percentage point below target only two whole years after Trichet left office. And it continues to stay there even unto this day. It seems that the longer the EZ is with Draghi, the tighter its monetary policy gets, relative to target. I don’t think Trichet could have been so forward-looking as to prevent EZ HICP inflation from falling below 1% two years after he left office even if he tried.

    Ray, [facepalm].

    Dan, this is nonsense. “QE infinity is not possible”. -Why not? Fed runs out of green ink?

  59. Gravatar of Dan W. Dan W.
    13. February 2016 at 09:47

    E. Harding,

    Did the Soviet Union run out of green ink? Then why did it fail?

  60. Gravatar of jonathan jonathan
    13. February 2016 at 09:54

    Agree with the comments above — I think QE is less effective at boosting demand than helicopter drops.

    To a first approximation, long-term bonds are priced off the expected future path of short-term rates, and so in a liquidity trap long-term bonds and reserves are close substitutes. Thus QE must work entirely through expectation and market segmentation channels, which are very indirect and uncertain.

    By contrast, if you give people money this will boost spending directly through wealth and liquidity effects. You are also directly increasing the governments’ balance sheet, which should boost inflation expectations.

    Give me the tool with a clear direct effect any day over one that operates through uncertain indirect channels. If the Fed had such a tool, any commitment to a path of inflation/GDP will be much more credible.

    (Though I agree that QE is much easier to do given Congress, and don’t fault the Fed for using what it can.)

    (Also, as a libertarian type, I like the idea of giving people the choice of what to spend money on, rather than a government agency deciding which assets to bid up.)

  61. Gravatar of JimP JimP
    13. February 2016 at 10:40

    Well Janet – read this then:

    From the ever happy A E-P

    http://www.telegraph.co.uk/finance/economics/12150909/This-is-a-global-stock-market-rout-worth-celebrating.html

    The backdrop to the current worldwide angst has been fifteen months of monetary tightening by the Fed, first by tapering bond purchases and then with the first rate rise in December. The combined effect has in one sense been equal to a full tightening cycle of 325 basis points – or thirteen rate hikes – according to work by the Atlanta Fed.

    The shock has been doubly potent in a world more “dollarized” than ever before, with offshore dollar debts up fivefold since 2000 to $9.8 trillion, and with global debt ratios 36 percentage points of GDP higher than before the Lehman Brothers crisis.

    Fed chief Janet Yellen took a huge risk raising rates at a time when spreads on US high-yield debt were flashing red, manufacturing was in recession, and US nominal GDP had been trending down for eighteen months.
    It was especially risky given that the Fed model appeared to be relying on a Phillips Curve concept of the labour market – little changed from the 1970s – when the historical evidence tells us that jobs data are a lagging indicator, and notoriously fickle at an inflexion point.

    Michael Darda from MKM Partners compares the global effects to Fed tightening in the 1930s under the Gold Standard. It has transmitted a contractionary impulse worldwide, this time informally through dollar hegemony.

    The Fed was clearly caught off guard by the effects of its handiwork, just as it was after the Taper Tantrum in 2013, repeatedly failing to adjust its “closed-economy” model to the realities of the modern world.
    Mrs Yellen was wise to back off a little in her testimony to Congress on Wednesday, and we can now hope that the worst of this storm has passed.

    The ferocious dollar squeeze is at last ebbing. The currency has dropped 4pc since early December on the DXY index, and has even cooled a little against the Brazilian real, the Turkish lira, and other recent casualties. This is the reprieve that half the world has been praying for.

    We now have a little wind in our sails. The oil dividend is coming through, and with luck China is over the worst.

    So cover your ears and shut out the market noise.

  62. Gravatar of E. Harding E. Harding
    13. February 2016 at 11:12

    Dan W., the Soviet Union failed because its leaders began believing the propaganda the West fed them.

  63. Gravatar of Major.Freedom Major.Freedom
    13. February 2016 at 11:21

    Ray,

    “As many others have pointed out, the failed NGDP futures market is due to no long felt need for such data. If it’s a ‘trillion dollar bill lying on the sidewalk’, nobody has bothered to scoop it up. The Efficient Market Theory, even if imperfect, should thus inform you as to the value of Sumner’s proposal.”

    The NGDP futures market has not “failed.” There is an NGDP futures market today. It is just regarded as relatively unimportant by individuals when they are able to choose how to allocate their savings.

    This is why Sumner wants the government (he says the Fed but no difference) to “subsidize” the NGDP futures market. He knows his ideology is not compatible with the market process, so he advocates for people shielded from market forces, thugs with guns, to impose it by law. The existing fringe NGDP futures market is not enough. This politicking characterizes all socialist ideals.

  64. Gravatar of Don Geddis Don Geddis
    13. February 2016 at 11:54

    Speaking of Eliezer Yudkowsky, he also recently wrote a long dialogue informally summarizing the stupid reasoning of modern central bankers, and promoting the good cause of Market Monetarism.

  65. Gravatar of Mark Mark
    13. February 2016 at 12:07

    E. Harding: “Dan W., the Soviet Union failed because its leaders began believing the propaganda the West fed them.”
    I think this is like saying someone who had only rocks to eat starved because he started to believe the people who told him rocks were not bread. All the belief in the world won’t make the Soviet economic model viable or make rocks edible.

    Maybe you’re saying that the regime could have survived like North Korea’s, but I would say that North Korea is a failing country and that ceasing to exist was the most successful thing the soviet union ever did as far as far as the countries that composed it are concerned.

  66. Gravatar of msgkings msgkings
    13. February 2016 at 12:12

    @E Harding: “the Soviet Union failed because its leaders began believing the propaganda the West fed them.”

    HAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA

    BWAHAHAHAHAHAHAHAHAHAHAHAHAHA

  67. Gravatar of msgkings msgkings
    13. February 2016 at 12:13

    @E Harding:

    One more thing, HAHAHAHAHAHAHAHAHAHAHAHA.

    And finally, BWAHAHAHAHAHAHAHAHAHA

  68. Gravatar of dtoh dtoh
    13. February 2016 at 12:49

    @Scott
    Great post. However, I’d stop talking about the NDGP futures market. IMHO, it’s a distraction. With a strict regime of NGDPLT, the market will be self correcting, under/over shooting will be minor, and who cares if the Fed misses the target by a little bit. Supply shocks that need correction will be obvious from asset prices.

    Right now, I’d be focusing on IOR/ER. The efficacy of monetary policy is still questioned. In particular it’s questioned because massive asset purchases seem to have had limited efficacy in the last recession. In fact, asset purchases will always be ineffective if the Fed simultaneously sterilizes them by accumulating excess reserves thereby withdrawing the money created from the economy.

    Now that’s there some focus on negative rates on IOR, I’d be pounding the drums about the role of ER in neutering monetary policy.

  69. Gravatar of E. Harding E. Harding
    13. February 2016 at 12:50

    @Mark

    “All the belief in the world won’t make the Soviet economic model viable or make rocks edible.”

    -Ppft. The Soviet economy grew faster than the American from the USSR’s founding to the 1980s. It almost certainly would never have caught up to the West, and would have very likely found it extremely difficult to continue catch-up from the 1980s onward under a planned economy, but nobody considers the Mexican economy to be a reason Mexico should have fallen apart in the 1990s, even though its 1980s economic stagnation was even worse than the USSR’s. If the leaders of the USSR never started believing the Western propaganda, Soviet real GDP per capita today would be higher than former Soviet real GDP per capita in the present, though it would have been composed of a whole lot more useless stuff. Just look at Ukraine, the second-most populated Soviet Republic. Even before the recent war, it had a substantially lower real GDP per capita than under Gorbachov, and most Ukrainians admitted that the USSR’s breakup did more harm than good to Ukraine.

    http://www.gallup.com/poll/166538/former-soviet-countries-harm-breakup.aspx

    Same for most Russians, except, thanks to Putin’s wise leadership, Russian real GDP per capita is higher today than it was under Gorbachov.

    “I would say that North Korea is a failing country”

    -No one doubts that. But if the USSR was, would you say Mexico is a failing country, too?

    @Don, great find. Yudkowsky is an extremely smart guy, even smarter than Sumner, and is clearly a fan.

  70. Gravatar of ssumner ssumner
    13. February 2016 at 13:00

    E. Harding. The slump began under Trichet.

    Jonathan, Then why did it fail in Japan? No one has ever answered that question for me. If you do, I’ll change my mind. And “Japan didn’t do enough” is not an answer, their helicopter drop was far, far bigger than anyone could have imagined any central bank doing.

    Don, Soon I’ll do a post on Yudkowsky over at Econlog.

    Thanks for the link, I’ll take a look.

    dtoh, Level targeting and futures markets are both good solutions. We need to press forward on all fronts.

  71. Gravatar of ssumner ssumner
    13. February 2016 at 13:01

    Don, Do you have a link directly to the Yudkowsky post? I’m not registered at Facebook.

  72. Gravatar of E. Harding E. Harding
    13. February 2016 at 13:03

    @dtoh

    -I’d actually focus more on the NGDP futures market. I believe both the NGDP futures market and the IOR are distractions. Base velocity probably wouldn’t rise significantly if there were no IOR. Did Japan have IOR? What’s really needed is a larger monetary base. But I prefer to wait on that until Trump gets into power.

  73. Gravatar of E. Harding E. Harding
    13. February 2016 at 13:12

    @ssumner

    “The slump began under Trichet.”

    -True, but the ECB targets HICP inflation, and HICP inflation was above target and rising under Trichet in 2011. NGDP targeting was not yet popular enough to significantly affect anything at the ECB. Hod Trichet gotten any looser, the inflation hawks would have been thoroughly enraged.

    And here’s a link to the screenshot of the Yudkowsky post:

    https://againstjebelallawz.files.wordpress.com/2016/02/fireshot-screen-capture-005-3-eliezer-yudkowskys-essays-www_facebook_com_groups_674486385982694_permalink_896559330442064.png

  74. Gravatar of ssumner ssumner
    13. February 2016 at 13:36

    E. Harding, Thanks for the screenshot, but even with maximum magnifcation the print is still tiny. Am I doing something wrong?

  75. Gravatar of E. Harding E. Harding
    13. February 2016 at 13:53

    @ssumner

    -I don’t know. Works just fine for me in Firefox, IE, and Chrome. When you hover over the image in all these with your mouse you should see a magnifying glass with a plus button. When you see it, click. That’s it.

  76. Gravatar of dtoh dtoh
    13. February 2016 at 14:11

    @Scott,
    I’d focus on NGDPLT. Futures are a distraction… and hard. I know. I’ve tried to set up a futures contract in the past. I got to the point where I was negotiating face to face with the Chairman of Chicago Mercantile Exchange. I had a former CEA member and former CFTC Commissioner sitting at the table backing me up. Lot’s of issues. Lot’s of problems.

  77. Gravatar of Don Geddis Don Geddis
    13. February 2016 at 14:38

    Sumner: Unfortunately, Yudkowsky posts directly on Facebook, it isn’t a link to a blog somewhere. I’ll email the text directly to you, separately.

  78. Gravatar of Ray Lopez Ray Lopez
    13. February 2016 at 17:30

    LOL, Sumner is so clueless that he can’t click on a link and have enough sense to click again, which will automatically magnify the link. Yet he has grand ideas on how to change the world!

    The verbose Yudkowsky post is simply this: “print more money until good things happen”, written in Galileo Simplicio style. Yet it ignores: (1) money is largely neutral, (2) there is no money illusion, nor price stickiness, nor much wage stickiness, and, (3) printing a ‘quadrillion’ dollars, as this bizarrely named individual (“E-LIE-zer”) wants, would arguably create hyperinflation. The history of hyperinflation shows that you cannot ‘put the genie back in the bottle’ easily, unlike what Mr. LIE says. Hence the possibility in his and Sumner’s scheme of ‘print more money until something good happens’ is ruinous hyperinflation.

  79. Gravatar of E. Harding E. Harding
    13. February 2016 at 17:54

    Ray, for a guy so clueless that he can’t click on a link, either, (see the comments in Krugman on Reich: Then and Now), you sure have massive chutzpah to comment on a subject you know virtually nothing about.

  80. Gravatar of Benjamin Cole Benjamin Cole
    13. February 2016 at 19:36

    Side note on Trump-Kasich (since Trump is a reoccurring topic in this pages):

    Paul Krugman points out that Kasich is another tight-money nut, who wants higher interest rates. I have pointed out that Kasich wants expand the US Navy 16 aircraft carrier based “strike forces,” from the 11-12 the US has now. These are offensive weapons systems.

    Why do we have 11-12 now? Ossification, and also the Gerald S. Ford aircraft carrier, a $13 billion vessel, cannot be activated for a number of years as support vessels are not ready. So I guess we are very vulnerable right now to foreign occupation.

    In truth, there are entirely reasonable arguments that we need 2 aircraft carrier strike forces, or maybe zero, as surface vessels are rather easily sunk in any real war.

    And why does the USA sail fleets armed with nuclear weapons up and down the coast of China? This helps matters how?

    But Kasich is presented as Mr. Reasonable, and Trump as the lulu.

    Trump is a lulu, probably. But Kasich proves that conventional wisdom is nutty.

    President Kasich: A suffocated economy, and a few more trillion dollars in defense spending.

    Does Trump look worse than that?

    And no, the Dems are no better.

    You can vote for the socialist (Sanders), or the national socialists.

  81. Gravatar of E. Harding E. Harding
    13. February 2016 at 20:03

    “But Kasich is presented as Mr. Reasonable, and Trump as the lulu.”

    -Bingo. Kasich supports a no-fly zone in Syria to help al-Qaeda (oops, the “moderate opposition”, which is the same thing), believes Assad “has to go”, wants to “punch Russia in the nose”, and wants to order Japan to launch a strike on North Korea for the North’s ballistic missile testing. Trump would deal with North Korea by pressuring China, supports Russia’s actions against the Islamic State (in the past few days, Syrian forces have moved to within 42 miles of Raqqa), and remains “the only Republican candidate who does not favor increased military spending”. Who’s Mr. Reasonable here? Who’s the lulu?

  82. Gravatar of Bonnie Bonnie
    13. February 2016 at 20:39

    I am unsure about your point number two. BoJ went to negative rates on the 29th of January and Japanese gov’t bond yields hit -0.007 on February 8. If I am understanding your point correctly, the the BoJ’s announcement of a negative rate policy is a kin taking a knife to a gun fight, as MP is naturally tightening?

  83. Gravatar of Bonnie Bonnie
    13. February 2016 at 20:44

    I should have stated that it was the Japanese gov’t. 10-year bond yield that went into negative territory.

  84. Gravatar of E. Harding E. Harding
    13. February 2016 at 21:15

    “If I am understanding your point correctly, the the BoJ’s announcement of a negative rate policy is a kin taking a knife to a gun fight, as MP is naturally tightening?”

    -Seems like it.

  85. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    14. February 2016 at 05:51

    @Gary Anderson
    Cash is the best collateral. If there is a shortage of bonds because the fed bought them all, there is excess cash. And the fed should buy a broad basket of assets, not only T-bonds and bills. Imagine a world without government: how would a monetary authority effectively mange the monetary base? By trading a broad basket of assets …

    A lot of people here talking about helicopter drops. But a helicopter drop not financed by money printing is meaningless. So, it is not a matter of QE vs helicopter drops. The actual problem is how to make the cash injection arrive at the hands of the public and how to make them spend a little more because they are awash in cash…

  86. Gravatar of Ray Lopez Ray Lopez
    14. February 2016 at 06:03

    @E. Harding -what is the link? I did read this interesting piece on Krugman, written in 1996: http://www.pkarchive.org/others/28kutt.html (Krugman comes off, reading between the lines, as surprisingly reasonable, at least pre-1996)

  87. Gravatar of Gary Anderson Gary Anderson
    14. February 2016 at 10:14

    Jose said: @Gary Anderson
    Cash is the best collateral. If there is a shortage of bonds because the fed bought them all, there is excess cash.

    Jose, for the borrower, bonds are the best collateral because they are held in trust, unlike gold and cash which are lost to the borrower. Once loans are paid off, the borrower gets the bonds back.

    And Scott probably won’t answer this, but his NGDP futures markets would require a massive supply of bonds, of which there are shortages even now. So, that would either not work or drive bond prices even higher and negative rates even lower.

  88. Gravatar of John Barton John Barton
    14. February 2016 at 10:30

    You write: ” The point of economics is not to predict recessions (which is impossible, at least for demand-side recessions) the point is to prevent recessions.

    Two responses:

    1) If you concede the obvious, that we cannot predict recessions, why would you make the larger claim that the point of economics is to prevent them?

    2) That’s quote a claim. It’s the sort of hubris that offends minor gods and invites a humbling. The point of economics is to better understand a very complex and dynamic system about which we will always have limited knowledge, over which we have limited control, and from which efforts to control provoke endless unintended usually negative consequences.

    I’d laugh at meteorologist who claimed his field’s purpose was to prevent bad weather. Economists, unfortunately, make such claims, occupy the temples of their religion such as central banks, and do all sorts of mischief sustained by such beliefs.

  89. Gravatar of ssumner ssumner
    14. February 2016 at 10:56

    E. Harding, Thanks, but in any case Don Geddis emailed it to me.

    dtoh. I want the Fed to set up the market.

    Thanks Don.

    Ray, Finally a useful post!

    Ben, It’s not a question of what he wants, it’s what he is. If Trump agreed with me 100% on everything he’d still be unqualified to be President. Why do people have trouble seeing that?

    E. Harding. N. Korea is ruled by a lunatic with nukes, who could easily smuggle one into LA inside a bale of marijuana. Trump publicly threatens to take him out, or have the Chinese do it. Heh, what could go wrong!!

    Bonnie. That might be a reasonable analogy, but knives are still weapons, which can kill.

    John, Bad weather is not caused by humans (putting aside global warming), so the analogy seems weird. Reckless monetary policy causes recessions; why shouldn’t we encourage the government to reduce the number of recessions by having a less reckless monetary policy? I don’t see your point. Are you in favor of destabilizing monetary shocks?

  90. Gravatar of E. Harding E. Harding
    14. February 2016 at 13:17

    @ssumner

    “If Trump agreed with me 100% on everything he’d still be unqualified to be President.”

    -??? I don’t get this. What makes a person qualified to be President?

    “N. Korea is ruled by a lunatic with nukes, who could easily smuggle one into LA inside a bale of marijuana. Trump publicly threatens to take him out, or have the Chinese do it. Heh, what could go wrong!!”

    -??? I don’t get this, either. This is just weird.

    Ray still remains incapable of clicking links, it seems.

  91. Gravatar of ssumner ssumner
    14. February 2016 at 19:31

    E. Harding, You said:

    “I don’t get this, either.”

    Nor does Trump—which is the problem. The point is that if you threaten to take out a lunatic with nukes, he just might go down fighting.

  92. Gravatar of TallDave TallDave
    14. February 2016 at 19:58

    Piketty is part of the crowd that assumes we can never have enough government spending, and merely attempts various explanations of varying cleverness as to why we should have more.

    President Kasich: A suffocated economy, and a few more trillion dollars in defense spending. Does Trump look worse than that?

    Far worse. Trump’s election could easily result in a constitutional crisis perhaps even culminating in a military coup, given his total lack of compunction or principles. Is it really very hard to imagine President Trump implementing executive actions without any regard to Congress or the courts, ordering the arrest of his critics, giving the military orders they cannot constitutionally obey? Fortunately it’s unlikely Trump could break 35% in a general election given his crudeness, his unconstitutional bigotry against Muslims, and his “take their oil!” foreign policy nuttery, even before we start talking about the scam that was Trump University and the records Democrats will probably unseal of his acrimonious divorces, but countries go off the deep end with these populists all the time, and there’s no reason it can’t happen here.

  93. Gravatar of TallDave TallDave
    14. February 2016 at 20:22

    Mark — I think this is like saying someone who had only rocks to eat starved because he started to believe the people who told him rocks were not bread. All the belief in the world won’t make the Soviet economic model viable or make rocks edible. That’s exactly right. People forget the difference between East and West Germany was almost immediately so vast they had to build a wall to keep people from leaving the Soviet side. South Korea is ten times wealthier than North Korea, which is almost unfathomable (the US is only about three times richer than Mexico).

    People also tend to forget the Eastern Bloc contained a lot of countries that were outside the Soviet Union itself — not many in East Germany or Poland are pining for the USSR.

    My favorites Cold War story, possibly apocryphal but funny either way, is that he Soviets’ own propaganda films showed poor American slums where there were lots of cars and everyone was well-fed.

  94. Gravatar of E. Harding E. Harding
    15. February 2016 at 04:52

    @ssumner

    -Yeah, that’s my problem with Bush+Kasich’s proposals.

    @TallDave, you’re as nuts as the people on WND. Obama does this all the time (except ordering arrest of critics); nobody cares. Get over your Trump Derangement Syndrome.

  95. Gravatar of E. Harding E. Harding
    15. February 2016 at 10:46

    “People forget the difference between East and West Germany was almost immediately so vast they had to build a wall to keep people from leaving the Soviet side.”

    -Meaning the difference was about as large as that between Mexico and New Mexico, or China and Vietnam, or Russia and Ukraine.

    “not many in East Germany or Poland are pining for the USSR”

    -“Die Link”? But, yes, the Polish are very anti-Communist.

    “My favorites Cold War story, possibly apocryphal but funny either way, is that he Soviets’ own propaganda films showed poor American slums where there were lots of cars and everyone was well-fed.”

    -Everyone in the USSR was well-fed, too, but virtually no one had cars. Yes, Soviet propaganda loved showing the state of urban U.S. Blacks.

  96. Gravatar of TallDave TallDave
    16. February 2016 at 06:33

    E. Harding — Sorry, I’m not wasting my time on people who think “take their oil” is a sane strategy and or that everyone in the USSR was well-fed. Seriously, even in 1989 we knew that wasn’t true. Won’t bother reading or responding to anything else from you.

  97. Gravatar of E* Harding E* Harding
    16. February 2016 at 15:42

    @TallDave

    “take their oil” is a sane strategy”

    -It is, for numerous reasons. After this comment, I won’t waste my time anymore with people who think Salma is on the Syrian coast.

    “Seriously, even in 1989 we knew that wasn’t true.”

    -It wasn’t true in 1989 because, as I said, Soviet leaders at the time were implementing re-forms encouraged by Western propaganda:

    “Soviet citizens complain uniformly that the economic restructuring Mr. Gorbachev is trying to implement has so far led only to shortages in the stores and a rise in prices. No one has felt these changes more drastically than the poor, who find that inexpensive goods, ranging from food to soap, are nearly impossible to come by.”

    -See, the Soviet Union only fell because its leaders began believing the propaganda the West fed them. And instead of plenty, they created hunger. Do you even read the articles you throw at me?

  98. Gravatar of E. Harding E. Harding
    16. February 2016 at 15:47

    @TallDave

    “take their oil” is a sane strategy”

    -It is, for numerous reasons. After this comment, I won’t waste my time anymore with people who think Salma is on the Syrian coast.

    “Seriously, even in 1989 we knew that wasn’t true.”

    -It wasn’t true in 1989 because, as I said, Soviet leaders at the time were implementing reforms encouraged by Western propaganda:

    “Soviet citizens complain uniformly that the economic restructuring Mr. Gorbachev is trying to implement has so far led only to shortages in the stores and a rise in prices. No one has felt these changes more drastically than the poor, who find that inexpensive goods, ranging from food to soap, are nearly impossible to come by.”

    -See, the Soviet Union only fell because its leaders began believing the propaganda the West fed them. And instead of plenty, they created hunger. Do you even read the articles you throw at me?

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