Noah’s snark?

I’ve consistently made the following arguments about Abenomics:

1.  The data suggests that the new BOJ policy has raised inflation, and inflation expectations.  There is a mountain of evidence on that point.

2.  Japanese inflation is likely to fall short of 2% (except for the sales tax bounce) unless the BOJ takes further steps.  That’s less clear than the first point, but seems a reasonable way to read market indicators such as long term bond yields.

3.  It really doesn’t matter whether they hit 2% inflation, they shouldn’t even target inflation. Rather what matters is if they can move NGDP growth into positive territory–at least 2% to 3%.  It’s still unclear if they will achieve that, but they’ve made progress.

Many commenters sent me a Noah Smith post that correctly pointed out that the more reliable “core-core” inflation rate is only running about 0.7%.  Mark Sadowski pointed out that just three weeks back Noah Smith had a post that showed the core-core rate had recently risen, and was at the highest rate since the 1990s.

Noah concluded with this odd assertion:

So basically, Abenomics has not yet shown that a central bank can hit a 2% inflation target after a long period of deflation. That proposition remains an article of faith. Perhaps the target will be hit…perhaps not. (Of course, if it’s not hit, expect a few supporters of monetary easing to say that the Bank of Japan was just not committed enough to hitting it…)

As I said, I never expected Japanese inflation to hit 2%, but I’m more interested in the question of whether the failure to do so would indicate that the BOJ did not do enough.  Hmmm, let me think about it.  Let’s see . . . I’m probably not a complete moron.  So yes, I guess I’d have to say that if inflation falls short of 2.0% then the BOJ would not have done enough to hit 2.0%.  After all, if doing X moved inflation up to the highest levels since the 1990s, then it stands to reason that doing 10X or 100X would boost inflation even more.  If moving the yen from 80 to 100 to the dollar boosted inflation, then it stands to reason that pegging the yen at 100 million, or 100 trillion to the dollar would do the job.  If not, how about 100 quintillion yen to the dollar?  (I stole this argument from John Locke–I only steal from the best.)

Or maybe I made a mistake somewhere.  The NK model says “overheating” causes inflation.  So if a currency peg of 100 quintillion to the dollar didn’t lead to overheating, then I guess it could not boost inflation above 2%.

Perhaps I’m overreacting to an italicized word (enough), but I couldn’t help thinking that there was a bit of snark directed at those who would claim that a failure to hit 2% inflation was due to insufficient monetary stimulus.  What else could it be due to?  Japan has the world’s largest budget deficit outside Egypt and Venezuela.

Perhaps a more interesting question is whether the reason Japan did not do enough (should it fail to hit 2% inflation) was that there were political barriers to currency debasement.  Say they worried that the US would send in the Marines if the yen was pegged at 100 quintillion to the dollar.  But as far as technical barriers, I’m pretty sure that if the Zimbabweans found a way, the Japanese could as well.  They aren’t morons.

PS.  The earlier Noah Smith post that Mark linked to ends as follows:

Monetary policy skeptics will doubtless still find no end of reasons to denigrate Abenomics, but so far their warnings have not been borne out.

Yes, that’s MUCH better.

PPS.  Just want to make it clear that Noah is not a moron–indeed he’s smarter than me.  Nor is he a phony.  I always try to inject a bit of humor into Noah Smith posts, and the Batman reference was already used.  Keeps me sane.

PPPS.  John Locke is definitely not a moron.



26 Responses to “Noah’s snark?”

  1. Gravatar of Noah Smith Noah Smith
    25. February 2014 at 11:41

    Bat *Boy*. 😉

    And the jury’s still out on Abenomics. It seems to have had an effect, but not yet as much effect as was hoped for…so we’ll see.

  2. Gravatar of Dan Dan
    25. February 2014 at 11:53


    I think that you haven’t really thought through the implications of what you’re saying. So monetary stimulus is capable of getting Japan from outright deflation up to 0.7% inflation, but no more? Like….why? Monetary stimulus decided to just be a dick and stop working at 0.7%? I think that upon acknowledging that Abenomics was successful at getting inflation up to where it is, you need to either a) acknowledge that MOAR would have done more, or b) speculate as to why it might suddenly stop being effective at such an arbitrary level, unrelated to pre-existing anchors or real interest rates or anything. (test test comment problems)

  3. Gravatar of ssumner ssumner
    25. February 2014 at 12:29

    Noah, All humans are fallible, including Abe. So yes, the jury’s still out in that sense. Can fiat money central banks debase currencies? The jury has already returned a verdict on that one.

  4. Gravatar of W. Peden W. Peden
    25. February 2014 at 12:29

    Does the BoJ target “core-core” inflation?

  5. Gravatar of TravisV TravisV
    25. February 2014 at 12:57

    Greenspan actually said this in 2007?????

    “Many economists in fact credit central bank monetary policy as the key factor in the last decade´s reduction in inflation worldwide. I would like to believe that…But I very much doubt that either policy actions or central bank anti-inflationary credibility played the leading role…That decline (and the conundrum) can be accounted for by forces other than monetary policy. In fact…I was struck by how relatively easy it was to bring inflation down…”

  6. Gravatar of Lorenzo from Oz Lorenzo from Oz
    25. February 2014 at 14:19

    I must have missed the original John Locke post, but just for the record, the Indians invented/discovered the concept of zero and Arabic numerals are really Indian (i.e. Sanskrit) numerals, we Westerners just got them from the Arabs. Hence, while Arabic is written from right to left, Arabic-Sanskrit numerals go from left to right (as does Sanskrit).

    Austrian school economists and Keynesians (including New Keynesians) all worship at the altar of interest rates. It’s why they get both the Great Depression and Great Recession wrong, since interest rates are not the key story in either case. If you think of it as a price set by central banks, you can reason from a price change all you want. (E.g., cutting interest rate[s] will increase investment/keeping interest rate[s] below the natural rate will lead to malinvestments.)

    If you think the official interest rate is a policy signal whose effects depend on the policy regime (i.e. the structure of expectations) it is embedded in, you are led to different places. That, for example, the RBA changing interest rates is in fact not the same as the Fed/BoJ/BoE/ECB cutting interest rates, though recent changes have meant that the first three doing so is becoming more like the RBA doing so.

    So, even in the case of the official interest rate you should not reason from a price change; at least not without placing it within its relevant structure of expectations.

  7. Gravatar of Willy2 Willy2
    25. February 2014 at 14:52

    Pegging the yen/USD rate at 100 quintillion pushes Price inflation “through the roof”, Yes. But then we’re talking Hyper-Inflation. And both Hyper-Inflation & Deflation have one in common: it’s destroy the bond market and that’s EXTREMELY Deflationary.

  8. Gravatar of benjamin cole benjamin cole
    25. February 2014 at 15:01

    This has been the risk of the Fed’s and the BoJ’s QE programs all along—they would be timid, lack resolve to accomplish the goal, and then the critics would say “See? QE doesn’t work.”
    In part this failure to do QE big enough reflects central bank culture…even ti get of of the worst recession since the Great Depression, they are not going to risk “runaway” inflation of 3 percent…

  9. Gravatar of Willy2 Willy2
    25. February 2014 at 15:01


    Abenomics is destined to fail. Because the japanese public won’t buy into it. Anyone who thinks central banks can obliterate deflation doesn’t understand the mechanics of deflation.

    Some recommended reading is the work of Robert Prechter & Harry S. Dent.

  10. Gravatar of Major_Freedom Major_Freedom
    25. February 2014 at 15:06


    “Austrian school economists and Keynesians (including New Keynesians) all worship at the altar of interest rates. It’s why they get both the Great Depression and Great Recession wrong, since interest rates are not the key story in either case.”

    This is just flat wrong. Interest rates (and credit expansion which affects them) are the key story. Aggregate demand falling is a consequence, an effect, from the fall-out of manipulated interest rates and credit expansion.

    You worship at the altar of NGDP, but NGDP cannot explain why it is that higher order stages of production experience relatively more losses and unemployment than the late stage and consumer stage of production during the busts. Interest rates and credit expansion can. NGDP also cannot explain why it is that during the boom, certain stages of production are typically expanded relatively more than other stages. Interest rates and credit expansion can.

    Monetarists are wrong about both the Great Depression and the Great Recession. It’s been shown enough times to make your claim inexcusable.

  11. Gravatar of Major_Freedom Major_Freedom
    25. February 2014 at 15:07

    Never reason from a spending change.

  12. Gravatar of TravisV TravisV
    25. February 2014 at 15:36


    The Austrian story is unrealistic. See this comment by Bill Woolsey:

    “to understand where Austrians go wrong, assume interest rate targeting (not money supply growth, inflation or nominal GDP targeting.) Further, suppose the interest rate is being targeted an a very unrealistic level. For example, a zero nominal interest rate. Further, imagine this is a public policy that is supposed to be maintained permanently. With our new monetary policy, we will keep nominal interest rates at zero forever…….this “keep interest rates absurdly low as a monetary regime and then give up just before hyperinflation” tells us next to nothing about what happens in the real world.

    Errors in an inflation targeting regime or a nominal GDP regime are nothing like this. Even shifts from a constant quantity of money to a slow growth in the quantity of money, or from modest deflation to modest inflation, or contstant nominal GDP to modes nominal GDP growth, happen nothing like this.”

  13. Gravatar of Max Max
    25. February 2014 at 16:58

    “After all, if doing X moved inflation up to the highest levels since the 1990s, then it stands to reason that doing 10X or 100X would boost inflation even more.”

    Well, that might generate 2% inflation – momentarily – and then blast through to much higher inflation. So bad idea to blindly “do more” without understanding why the policy failed.

  14. Gravatar of TravisV TravisV
    25. February 2014 at 17:01


    Tarullo: Fed must ‘actively’ plan for fighting bubbles

    Monetary policy not off the table as a response

  15. Gravatar of lxdr1f7 lxdr1f7
    25. February 2014 at 19:00

    “After all, if doing X moved inflation up to the highest levels since the 1990s, then it stands to reason that doing 10X or 100X would boost inflation even more.

    It just depends whether a change in M causes a change in NGDP for supply and demand reasons. The M that doesnt get used on spending wont affect demand. The M that goes toward asset purchases will affect asset prices and wealth of asset holders and hence spending by those people (many people dont hold many asset though). An increase in M will also bring down rates and increase lending but this also depends on demand for credit.

    All those things depend on how widely assets are held to experience the wealth effect, who gets newly created money to determine spending, and demand for credit to determine lending.

  16. Gravatar of ssumner ssumner
    25. February 2014 at 19:33

    Ben, I think everyone can see that monetary stimulus in Japan has worked, the data is overwhelming. Whether inflation hits 2% is not important. Inflation in 2014 will run well ahead of 2%. After that it’s hard to say.

    Willy, I’m just going to assume you are joking. If not, I’d like to buy some stuff from you with yen when they print 100 quintillion of them. What do you have to sell? Since there’ll be deflation, you should give me low prices.

  17. Gravatar of ssumner ssumner
    25. February 2014 at 19:52

    Lorenzo, Yes, I think someone told me that after the post. Since then I’ve been citing the Indians.

  18. Gravatar of Daniel Daniel
    26. February 2014 at 04:11

    I guess it takes an advanced degree in economics to believe that printing money does not cause inflation.

    What does that say about the state of the profession ?

  19. Gravatar of willy2 willy2
    26. February 2014 at 09:47


    No, I am not joking.
    Hyper-Inflation (HI) is deflationary because then the REAL value of credit is destroyed, in Deflation the NOMINAL value is destroyed/lowered (=rising interest rates)

    In Deflation producers are forced to lower their prices in an attempt to rescue their turnover.
    In Hyper-Inflation producers are forced to increase their prices because their input costs rise.

    In Deflation credit dies. In Hyper-Inflation both money & credit die. In both cases the purchasing power of consumers deflates. Hence the deflationary impact of both. Sounds simple to me.

    Abenomics is – in the long run – very deflationary because Abenomics equals monetizing japanese government debt. It increases the amount of debt. The japanese government still has to pay principle & interest on the monetized debt.

  20. Gravatar of willy2 willy2
    26. February 2014 at 09:50

    Lower prices doesn’t equate to deflation. It’s the RESULT of decreased purchasing power as a result of Deflation.

  21. Gravatar of Daniel Daniel
    26. February 2014 at 10:54

    willy2 must be smoking the good stuff

  22. Gravatar of willy2 willy2
    26. February 2014 at 15:27

    So, in both Hyper-Inflation & Deflation consumers feel the pain. And that also means producers see their profit margins dwindle. And that leads to more bond defaults. VERY Deflationary.

  23. Gravatar of Dwight Monson Dwight Monson
    26. February 2014 at 23:19

    When someone says, “A is smarter than me,” I think they may be right; but when they say, “A is smarter than I,” I’m not so sure. Best regards, Dwight Monson

  24. Gravatar of Mikio Mikio
    27. February 2014 at 06:04

    My sense is that – ceteris paribus – two domestic political events need to happen before the BoJ can do more.

    1) The “shunto” (spring offensive wage negotiations) need to produce an agreement on the first wage rises in decades. In this process, thousands of labor unions negotiate wages, starting in March. Abe is backing the unions, who are demanding higher base wages for the first time in a gazillion years (or so it feels). Policy responses are likely to depend on that process plays out.

    2) Also depending on the resulting forward-looking general wage outlook, the government then needs to decide on corporate tax cuts, which so far have been used as a “carrot” by the government to get corporate Japan to play along.

    So, two important unknowns need to be set politically: wages, and taxes. Until then, the BOJ is likely to prefer to keep its powder dry.

    Best M

  25. Gravatar of Jason Jason
    27. February 2014 at 13:56

    I’m not sure the graph you link to in point (1) really shows any inflation:

    I get the same inflation with a model that assumes Abenomics has done nothing, and the data seems to be in line with a trend that begins in 2010. (Graphs at link.)

  26. Gravatar of ssumner ssumner
    28. February 2014 at 05:11

    Thanks for the info Mikio.

    Jason. Fiscal stimulus causes the yen to appreciate. The yen has just depreciated from 80 to 102 to the dollar. That’s inflationary. That’s monetary policy.

    Japan’s been running some of the world’s largest deficits for 20 years, and their AD had fallen over 20 years, something you never see in a modern country. That’s the worst possible outcome you could imagine for a fiscal experiment. The absolute worst. There’s simply no evidence that fiscal policy matters.

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