Out of the Dark Ages: The first step

I’m finally ready to announce the first step in creating an NGDP future market.

[Update:  I won’t say much now other than that some very generous offers have been received. Tomorrow I speak with an organization that helps fund innovative projects like this, so perhaps I’ll be able to report more in the near future.  I plan to list the names of the people making offers, but will wait until tomorrow, as I’m checking to see who wants to remain anonymous.  The task is slightly more complicated than usual with two different funding targets, but I’ll just say at this point that I am very pleased with how things have gone today.]

Future generations of economists will look back on our era with disbelief. Respected economists like Robin Hanson and Justin Wolfers clearly explained how prediction markets could generate all sorts of valuable information for policymakers, at an absurdly low cost.  And they were totally ignored by both policymakers and the economics profession.  The Fed continued to blunder into errors costing hundreds of billions of dollars (like their decision not to ease policy in the meeting 2 days after Lehman failed, on fear of inflation) partly because they weren’t willing to spend a few thousand dollars setting up and subsidizing prediction markets to gather real time investor forecasts.

The biggest problem by far was the lack of an NGDP futures market.  TIPS spreads are fine, but in a world of 2% inflation targeting much of the variation in inflation represents supply shocks, such as unstable commodity prices.  Interest rates are almost useless as a measure of the stance of monetary policy, and the money supply is only marginally better.  We need real time data on the single most important macroeconomic variable in the universe, expected US NGDP growth, which also happens to be the best indicator of the stance of US monetary policy. (Ben Bernanke once suggested that interest rates and the money supply are not reliable, and that only NGDP growth and inflation can reliably indicate the stance of policy.  But inflation is distorted by supply shocks, whereas NGDP is not.)

In recent weeks I have been working with Eric Crampton at the New Zealand Initiative and Robert Quigley-McBride at iPredict.  Robert put together the following proposal, with input from Eric and myself:

iPredict is a real-money prediction market run by Victoria University of Wellington. With over 8000 traders, iPredict is operated by students of the University with the purpose of forecasting social, economic and political events. iPredict has designed contracts for trading to allow forecasting of nominal GDP (NGDP). Traders will be able to buy and sell contracts paying $1 if NGDP falls within a particular range in a particular quarter.

An example contract would pay $1 if the US GDP for Q1 2014 were greater than or equal to $17,250 Billion and less than $17,500 Billion, based upon the [initial estimate for quarterly nominal GDP from] BEA Table in Section 1 – Domestic Product and Income, Table 1.1.5, Line 1. We would establish similar contracts spanning the intervals $250 Billion above and below the example contract, with two open ended intervals beyond those for outcomes above or below the ranges.

The set of contracts, for each quarter, will generate probability estimates for the different levels of NGDP, as well as providing a gauge of the traders’ uncertainty, or margin of error, on this estimate.

To support the accuracy of the forecasting, we wish to provide the market with an injection of liquidity. This will help by ensuring there is sufficient incentive for traders with beneficial information to bring it to the market. To support contracts for forecasting NGDP for the next 3 years, we will need to raise $1500. This will be used to provide a market maker on the contracts, which will ensure there is always a reasonable bid-ask spread, and that any trader wanting to bring information to the market can do so even if there is not necessarily another trader to take the other side in the trade.

An additional option to improve the accuracy of these contracts would be to pay interest on the value of the contracts to any traders holding shares over a long period of time. This would reduce trader reluctance to engage in the long term contracts because of the cost of the capital invested. This option would require substantial back-end system development to track the funds that traders have invested in the contracts, and so it would require funding in the region of $30,000.

iPredict is an authorised futures dealer in New Zealand under the Financial Markets Authority. However, they must strongly discourage Americans from trading on iPredict due to US laws. Anyone wishing to trade on iPredict should take note of the Terms of Service 1.5 “Nothing on this Website constitutes an offer or invitation to trade with any person who is under 18 years of age and/or outside New Zealand. In trading on iPredict, traders warrant that they are complying with all laws in the jurisdiction in which they are present. [bracketed portion added by me]

A few comments:

Obviously the proposal can be tweaked with further input from commenters.  They think a 5-contract setup is best, and I’d be inclined to go something like:

below 2.5% NGDP growth

2.5% to 3.5%

3.5% to 4.5%

4.5% to 5.5%

5.5% or more.

The actual contracts would have dollar amounts specified, however, as the percentages change with revision to NGDP at the starting point.

We would use initial estimates of NGDP, as the later revisions are unforecastable before the initial announcement, so we’ll get an unbiased forecast.  The advantage is that investors don’t have to wait as long for the payoff.

We have to exclude Americans because . . . well because America is no longer a free country.  More specifically there are two problems.  First, iPredict does much more than the Iowa Electronics Market, and hence doesn’t have their waver from the Feds.  And second, there are now incredibly burdensome “know thy customer” rules that America imposes on foreign financial firms dealing with US citizens.  A small entity like iPredict (run by the Victoria University of Wellington) obviously doesn’t have the funds to meet all these burdensome regulations.  Now when I travel around the world almost everyone I talk to in the financial area regards US citizens in roughly the same way they view the Ebola virus.  They see our government has being a sort of madhouse.

You will notice two sums mentioned.  The $1500 figure is the cost of setting up the market.  If that’s all we can raise the market will still go ahead.  However it would be nice if we could raise an additional $30,000, so that the market can be subsidized with interest-bearing margin accounts, which will help insure more trading, more liquidity.

The market may well fail.  There is currently no NGDP market in the private sector, presumably because there is little market demand.  That’s the whole point of prediction markets. Corporations setting up internal prediction markets to forecast next year’s sales don’t do so to meet “market demand;” they want information, the wisdom of crowds.

The market is only a first step.  The goal is to shame the economics profession and policymakers into to setting up a better funded market in the US, with government funds supporting the market.  I’m not normally a fan of big government, but consider:

1.  Market NGDP expectations are a pure public good.

2.  The cost of a superb market would be trivial, a few millions.

3.  The benefit would be in the hundreds of billions, if not trillions.

4.  The trivial cost could easily be more than recouped by cutting the Fed budget for economic forecasting.

It’s a no-brainer for libertarians, but also for thoughtful liberals who agree with people like Christy Romer and Michael Woodford on the importance of NGDP, and the need for wise policymaking.  I see no good arguments against creating an even better market than we will be able to establish.

My initial inclination was to try something like Kickstarter.  But I’m no good with computers, and very busy.  So first I’m going to try to raise all the funds from one or two rich people.  This really shouldn’t be hard.  It should appeal to everyone from liberals like George Soros, to moderates like Michael Bloomberg, to libertarians like the Koch brothers and Peter Thiel.  I recall a few years back that someone sent me a youtube of a west coast billionaire (Valve Corp?) giving a talk, and suddenly casually mentioning the need for a NGDP futures market.  The startup cost ($1500) is pocket change for a billionaire, and even the $30,000 is very affordable.  If that doesn’t work, we’ll try Kickstarter.

As a reward I’m willing to name the market after the big donor when I write about it in my blog. So if Mr. Jones donates $1500, I’ll call it the “Jones NGDP market,” unless they prefer anonymity. If Mr. Smith later kicks in $30,000, I’ll rename it the Smith/Jones NGDP market.  Extra typing for me.  And I still type with two fingers!

This could be a history making initiative.  I implore potential donors to think about what this might lead to, and to consider whether they want to be seen as the visionary who began the long process of modernizing economic policymaking.

Don’t send me money; contact me and I’ll set you up to talk directly to the people in New Zealand. If we do get the market set up, I hope my non-American readers will participate, at least in a small way. It would help to make the market a success.  But again, the real goal is to shame the people in power into stopping all this Nostradamus nonsense, and move economics and economic policymaking into the 21st century.  It’s long past due.

I can respond to comments, or you can email me directly at ssumner@bentley.edu.



54 Responses to “Out of the Dark Ages: The first step”

  1. Gravatar of Dan Dan
    2. October 2014 at 07:43

    Any reason not to put this on kickstarter?

  2. Gravatar of Brett Brett
    2. October 2014 at 07:50

    I’m glad to hear it! I wish we could set this up in the US as well, if only the FTC wasn’t so bad about anything resembling a futures market.

  3. Gravatar of John Hall John Hall
    2. October 2014 at 08:16

    Scott, every five years they rebase GDP. They need to correct for this.

  4. Gravatar of JoeMac JoeMac
    2. October 2014 at 08:31


    This is very exciting. I hope you succeed. Two questions.

    Will this only be for USA NGDP?

    Will the only participants be the 8000 university students, or anyone in the (non-USA) world?

    Also, next up should be a market for climate trade predictions! It would settle a lot of debates.

  5. Gravatar of Saturos Saturos
    2. October 2014 at 08:33

    @Dan, I was literally just thinking that. I mean, if potato salad can get $40,000… of course, Scott would have to reward contributors with personalized autographed t-shirts with “NGDP” printed on them, or something.

  6. Gravatar of Saturos Saturos
    2. October 2014 at 08:40

    Wait, Gabe Newell supports NGDP targeting?

  7. Gravatar of Bill Woolsey Bill Woolsey
    2. October 2014 at 08:59

    Why do interest bearing margin accounts require a subsidy?

    What does iPredict do with the funds deposited in margin accounts? Don’t they earn interest?

  8. Gravatar of Prakash Prakash
    2. October 2014 at 09:01

    Congratulations Scott. Best of luck with this initiative.

  9. Gravatar of John T John T
    2. October 2014 at 09:12

    This sounds less like a futures contract and more like a predictions market. You use the two terms interchangeably but they are different things just as market efficiency and the wisdom of crowds are different things. NGDP is fat-tailed and this prediction market will only have binary exposure for participants. This could undermine the value of information provided to policy makers by this market. Short paper by Nassim Taleb and Philip Tetlock on this exact issue:

  10. Gravatar of @YoungEcon @YoungEcon
    2. October 2014 at 09:17


    I think this is the video in quesiton:

    Do Kickstarter, because I want a NGDP T-shirt.

  11. Gravatar of Luis (Miguel) Luis (Miguel)
    2. October 2014 at 09:43

    GDP Is not a so accurate measure of activity. In the best case is the sum up of indirected estimations and subjective estimations of Value added, not always directly observable (services & financial activities). I suspect that a future market on a so ambiguous estatsitics will not be a so decisive step. If economy would be so easy, the trick would have be discovered long time ago.

  12. Gravatar of Andrew Piskorski Andrew Piskorski
    2. October 2014 at 09:56

    Since they are New Zealand corporations, the IRS rules seem very clear that donating directly to Victoria University of Wellington or iPredict would NOT be deductible on US income taxes:

    But if there was an associated US charity that would properly accept the money, then it would be deductible. I’ve read that services like globalgiving.org do that, but I’ve no idea how much overhead there is to setting up and qualifying a new overseas charity.

  13. Gravatar of Matt Waters Matt Waters
    2. October 2014 at 10:31

    I don’t think the problems representing NGDP are that significant. Far more contracts depend on LIBOR, which has been shown to have its issues. Even if the banks start using actual rate data versus survey data (the cause of Barclays’ rate manipulation), there still isn’t one “true” interbank overnight offered rate.

    My concrete steppes hat does have some questions concerning a possible NGDP market. My experience has been three different ways that a financial market could exist:

    1. The market is in real assets, such as stock markets and bond markets or commodity markets. Some critics of markets have said that the primary market is a very small part of stock markets. They say stock markets only exist for the secondary market. But the primary market couldn’t be there without the secondary market.

    2. The market is a zero-sum derivatives market, where one side wins and one side loses. Over all participants, they lose money to transaction costs. However, one or both sides may have an interest in hedging. Their utility function may mean that their expected utility is higher with the hedging even though their numerical expectation is lower with the hedge.

    3. Then there is what I will call the casino or more appropriately “poker” model. Rational people may only be attracted to such a market like poker if there are irrational players. The logic is that if you don’t know who the fool is at the table, then the fool’s you. Everybody knows the zero-sum nature of the market (negative-sum after transaction costs). But players may stick around in the market because they’re actually better than everyone else, or variance, Lake Webogen effect and attribution bias makes all players sure they’re above average. Many EMH theorists argue that this is the basic nature of most managed fund investing, and I agree. There’s a small handful like Buffett who truly beat the market, but the vast majority don’t over the long-term.

    It’s important to show what a market can’t be. It can’t be a zero-sum market where all participants are rational. If all participants had true rationality, then they would all agree on the correct price. Why would they bother trading with each other? If there’s some non-trading use for the market like #1 or #2, then the market could exist. But the market couldn’t exist for purely trading reasons.

    So it’s tough to see where an NGDP futures market fits in to this. Either the contracts provide some sort of hedging, which creates the volume to speculate in the market, or the market attracts irrational money. Maybe if central bank’s participate directly to do their NGDP targeting puts the market in #2. Or maybe banks put together hedges against recessions for corporations.

    Without a hedging function, the market could only exist in #3. But then if there irrational and rational players in the market, why would the price agreed on be the expected NGDP growth? Why would rational players get the money to outweigh irrational players? As Larry Summers said, “there are stupid people, look around.” The experience of the stock market has been mispricings are fixed, but only in some really lumpy, dumb ways. Mispricings aren’t fixed in some sort of asymptotic equation towards the true price. Eventually the irrational people are overwhelmed by cognitive dissonance and agree with the rational people, which fixes the mispricing.

    If the NGDP market actually gets traction, it would be interesting how its mechanics look over many years and, hopefully, many countries. It’s just really hard to track in a concrete steppes way, without using “the market price is always the expected value of NGDP growth” as an axiom.

  14. Gravatar of ssumner ssumner
    2. October 2014 at 10:45

    Dan, You asked:

    “Any reason not to put this on kickstarter?”

    I don’t know how. So I thought I’d first shoot for one big donation, and learn how to use Kickstarter as a backup.

    So far I have received one email offering $500.

    John, We will target the initial release. Unless revisions are forecastable there is no need to account for rebasing. (I think.) But I’ll try to get more information on this issue. Comments on this issue from expeets would be appreciated.

    JoeMac, I once wrote a paper (with Aaron Jackson) advocating climate futures and CO2 concentration futures. That would be a great idea. Anyone who can presently trade on iPredict will be able to buy this contract. I believe that applies to any non-American, but perhaps there might be a few other exclusions for similar countries to the US, like North Korea.

    Saturos, Thanks, I was trying to remember Newell’s name. And t-shirts are the last resort, unless someone else volunteers to organize the distribution—I’m too busy to start mailing out 100s of t-shirts.

    Bill, The subsidy is aimed at boosting trading volume, liquidity. Recall that no market currently exists, so volume is a concern.
    I will try to get an answer to your other question, and post an update.

    John T. All valid points. This is sort of a demonstration project to get the ball rolling. They said that later we might be able to add more contracts. I’m hoping that it can grow more sophisticated over time, giving us better real time point estimates of expected NGDP. But even this crude market would have been EXTREMELY valuable in 2008-09. When NGDP is chugging along at 4%, less so.

    Thanks YoungEcon.

    Luis, You said:

    “If economy would be so easy, the trick would have be discovered long time ago.”

    Not based on what I’ve seen from the ECB. NGDP has flaws, but it picks up demand shocks quite well.

    Thanks for the info Andrew.

  15. Gravatar of Joel Aaron Freeman Joel Aaron Freeman
    2. October 2014 at 10:56

    Matt that is a very lucid explanation, and it conforms with my experience as well.

    In this case I don’t think it matters how Scott goes about this, because he’s just working on a prototype. But it’s worth noting that TIPS bonds perfectly predicted the Great Recession, and TIPS are “Real Assets” in your terminology. I can’t think of any downsides to a real asset market, but pure betting markets or derivative markets are, in my opinion, greyer areas with possible drawbacks.

    I also would add that, theoretically, it might make sense for a bank to hedge with an NGDP contract. It’s the ultimate hedge.

  16. Gravatar of Dan W. Dan W.
    2. October 2014 at 11:12


    “subsidized with interest-bearing margin accounts”

    I take it the reserves won’t be kept in the Blackrock ICS Europe Government Liquidity Fund. Otherwise you would have wrote “interest-taking margin accounts …”

  17. Gravatar of ssumner ssumner
    2. October 2014 at 11:13

    Matt, Good points. There is a big literature on prediction markets that can answer your questions better than I can. I’d recommend reading Robin Hanson, who says these markets are pretty efficient, more than you’d expect given their small size. My hope is that trading subsidies would reduce the negative sum game aspect of the market.

    If we can get volume, even from irrational people, it gives the liquidity necessary to draw in the smart money any time price significantly deviates from the optimal forecast.

    Joel, Yes, even a poor quality NGDP market would have easily outperfomed the Fed in late 2008.

  18. Gravatar of ssumner ssumner
    2. October 2014 at 11:14

    Dan, I’ll recommend they use a government insured bank account.

  19. Gravatar of Kevin Erdmann Kevin Erdmann
    2. October 2014 at 11:50

    Great news!

  20. Gravatar of Eric Crampton (@EricCrampton) Eric Crampton (@EricCrampton)
    2. October 2014 at 12:04

    Hi Matt,

    It’s worth checking iPredict out. They don’t charge trading fees for market makers, though there is a small fee for traders who accept the current bid or ask. So you can seed the order book either side as thickly as you like while incurring no fees.

    And since the market maker is subsidised (hence Scott’s funding request), and since the market maker expects to lose roughly the difference between the seeded starting price and the best ex ante starting forecast, traders should expect to do ok even though it’s zero-sum across traders. And if we can get funding to set the back end up to be able to make the securities traded be interest-bearing, so much the better!

  21. Gravatar of Peter K. Peter K.
    2. October 2014 at 12:38

    As a thoughtful liberal, I wish the project the best of luck. Exciting news!

  22. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    2. October 2014 at 13:45

    Congratulations, Scott!


    Non-ironic comment follows:

    This is very clearly a public good which does not exist yet, so it needs to be provided by the private sector (either for-profit or non-profit). The government doesn’t do this kind of thing.

    Afterwards, it might be taken over by the government, which will spend 300 million a year on it to ensure that the public has access.

  23. Gravatar of Rajat Rajat
    2. October 2014 at 14:29

    Bravo, Scott, Eric and Robert! Can we at least establish whether contributions from NZ residents are eligible for NZ tax credits?

  24. Gravatar of Doug M Doug M
    2. October 2014 at 14:41

    You suggest 5 contracts each struck at a different growth range.

    Is each contract for one quarter? If I want to express an outlook for the next 2 years or 5 years, do I need to buy 8 (or 20) contracts?

    Rather than 5 contracts for the different ranges of NGDP growth, I would suggest 1 contract that pays 1/trillionth of NGDP.

    e.g. US NGDP was $17.3 T as of 6/30/2014.
    the December 2014 contract might be priced at $17.70
    June 2015 @ $18.00
    Dec 2015 @ 18.50
    and June 2016 @19.00
    If I thought that NGDP would average below 4% over the next 2 years, I would sell the June 2016.

    This gives you greater flexibility to express your view while at the same time greater liquidity, because there are fewer contracts trading for any given date.

  25. Gravatar of Nick Rowe Nick Rowe
    2. October 2014 at 15:05

    Well done Scott, Eric, and Robert!

  26. Gravatar of Don Don
    2. October 2014 at 15:11

    You don’t kickstarter, you just need a paypal account and grad students to ship T-shirts. Put me down for $50. That New Zealand only thing is a bummer:(

  27. Gravatar of Gordon Gordon
    2. October 2014 at 15:51

    I’m not certain Kickstarter would work unless you’re willing to invest quite a bit of time in this. The typical Kickstarter project involves some sort of social media or other marketing campaign. The project information would need to clearly (and ideally briefly) state why the funding is needed and what it will produce. Also, the backers expect to receive regular updates while the fund raising continues. Lack of such updates could cause backers to complain to Kickstarter and they in turn can suspend your campaign.

  28. Gravatar of dtoh dtoh
    2. October 2014 at 16:09

    As I have said before, I don’t think a futures market is the way to go. A note with redemption tied to GDP is much better for a bunch of reasons (and equally useful from a predicative point of view.) That said, I think it’s an interesting exercise. I did a bunch of this stuff in the past (not easy). If you’re serious about it, I’d be happy to chat offline.

  29. Gravatar of Miami vice Miami vice
    2. October 2014 at 16:21

    What Doug M said.

    Also, is there any risk in particular you think this product would be good as a hedge?

    Have you ever created an econ department pool/book for this sort of thing? I can’t imagine you wouldn’t have done so by now.

  30. Gravatar of benjamin cole benjamin cole
    2. October 2014 at 16:33

    Wait. The Fed has 700 PhD economists, maybe more. You don’t think they know what they are doing?

  31. Gravatar of Major.Freedom Major.Freedom
    2. October 2014 at 16:56

    I always encourage entrepreneurial activity such as this, and wish the person good luck. Innovation is after all activity based on ideas that the great bulk of people are too dimwitted to understand at that time.

    I wish good luck, but I’m definitely one of the dimwitted common people who has little faith that this will work:


  32. Gravatar of cassander cassander
    2. October 2014 at 16:58

    Scott, you are such a fool! If you want to know whether or not you will succeed in this market, just set up a betting market for the question…..

    I kid, of course.

  33. Gravatar of Major.Freedom Major.Freedom
    2. October 2014 at 17:00

    In case no access to link:

    “Dealer resource constraints and an apparent lack of demand from the buy side have derailed CME Group’s efforts to launch two new US inflation futures contracts, according to market participants

    CME Group has shelved plans to launch a futures contract linked to US inflation, after roughly two years of exploratory talks, according to market participants – a decision said to have been taken late last year, but which has only come to light now. Disappointed would-be traders of the contract say a launch may now be off the agenda for years.

    Related articles
    The 10 biggest energy risk management disasters of the past 20 years
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    Europe set for swap futures shoot-out
    Search for new OTC underlyings gets tougher
    Specifications for a Consumer Price Index (CPI) futures contract and a deliverable Treasury inflation protected securities (Tips) futures contract were agreed in early 2013, say sources familiar with the initiative. But after failing to receive sufficient pledges of support from fund managers and dealers, CME is said to have put the plans on ice.

    That decision was unpopular with some firms, with one fund manager calling the move “very disappointing”. Dealers also backed the proposed contracts and are frustrated with the failure to launch.

    I think it’s a great product and I hope CME will still launch it at some point

    “I think it’s a great product and I hope CME will still launch it at some point. I guess there weren’t enough people ready to trade them for the exchange to put in the effort to launch the contracts. There is some investment in infrastructure that is required to trade these products and that may have been prohibitive for some firms,” says the head of inflation trading at a bank in New York.

    CME Group declined to comment.

    Demand for inflation-linked futures products has grown amid fears that new regulations might constrain liquidity in the inflation bond and swap markets – a liquid listed product could give pension funds a cheaper way to hedge their inflation exposures, for example. In August last year, Risk reported that three exchanges, including CME Group, were exploring the product.

    “All successful markets have three legs: cash, swaps and futures. The inflation markets currently only have cash bonds and swaps. Introducing a third leg of liquidity with futures contracts is hugely important for the asset class,” says Michael Ashton, managing principal at Enduring Investments, a boutique investment firm in New Jersey specialising in inflation-linked markets.

    The Tips market experienced its worst-ever annual performance in 2013 – with the average bond falling 8.6% – after investors sold the securities heavily following the Federal Reserve’s warning it might taper its quantitative easing measures later in the year.

    The resulting distortions in liquidity, volatility and price have convinced some market participants that futures are necessary.

    “We may need to see new tools for risk transfer in this market. A futures contract on the 10-year Tips would be very helpful. The market is big enough to warrant some consideration of that,” says Cedric Scholtes, head of global rates at FFTW, a subsidiary of BNP Paribas Investment Partners, which specialises in fixed-income investments.

    However, getting an inflation futures product off the ground has long proven challenging. The Chicago Board of Trade launched Tips futures in 1997 only to delist them four years later, concluding the cash market was not liquid enough to support the contracts. The CME’s first attempt at launching CPI futures in 2004 also faltered due to a lack of support from the sell side.

    However, market participants that were involved in the CME’s proposals claim the contracts addressed many of the problems seen in earlier versions.

    For instance, the CPI contract was modelled on equity futures and would have settled to an index value, rather than monthly or quarterly inflation rates, as was the case with previous iterations – a step designed to ensure there was enough volatility to make it tradable. The design of the Tips futures contract, meanwhile, was modelled on regular bond futures. The 10-year Tips futures contract called for the physical delivery of a notional quantity of Tips with a remaining maturity of between eight and 10 years on the first day of the delivery month.

    “Everyone agrees these contracts are properly structured and there was considerable support from the buy- and sell-side,” says Enduring Investments’ Ashton, who followed the development of the contract specifications closely.

    Ashton says Tips futures would enable market participants to pursue basis and forward trading strategies and enhanced liquidity in off-the-run Tips.

    The New York bank’s head of inflation trading agrees. “It would have allowed us to trade inflation in a slightly different way,” he says.

    Despite the claimed benefits, the contracts ultimately fell victim to resource constraints and regulatory pressures facing market participants, according to one New York-based inflation trader.

    “There was a lot of interest in the product, but the fact is a lot of the banks’ resources are tied up with preparing for new regulations. The CME was not convinced the contracts would attract enough volume, and that is primarily because firms are not in a position to make the necessary investments to trade the product. Resources are just tied up with other things at the moment. It will come up again, but the timeframe is now probably years rather than months,” says an inflation trader at a bank in New York.”

  34. Gravatar of Major.Freedom Major.Freedom
    2. October 2014 at 17:02


    EMH says Sumner should just invest money in diversified securities like ETFs.

    What does he think he is doing with this active investment strategy?

  35. Gravatar of Justin Irving Justin Irving
    2. October 2014 at 17:20

    You can’t beat a real market. But you can hold yourself over with: http://www.EfficientForecast.com

    I believe I’m showing changes in NGDP expectations. I could be off by a small, constant amount in each quarter though.

  36. Gravatar of Don Geddis Don Geddis
    2. October 2014 at 17:46

    Off topic: Ben Bernanke turned down for mortgage refinancing.

  37. Gravatar of Cameron Cameron
    2. October 2014 at 18:38

    I think you should set up a kickstarter, it’s actually remarkably easy. Certainly do it if you can’t reach the $30,000 goal. If(I should really say WHEN, $1500 is a small sum even for me) you reach $1,500 it would actually make the kickstarter a little more effective as the project would be guaranteed to go ahead no matter what. You could also consider Patreon, which allows people to donate on a per month basis. People could give $1-$x which could presumably used for interest subsidies.

    If you want write up a list of the exact steps to set up a kickstarter (or patreon) I would be happy to. I would also be happy to send out shirts if you want. It would look good on my grad school applications :D. You could also offer things like email updates on the project, a blog post about any subject a donor of $XXX+ wants, etc.

    All that being said, if you still don’t want to do a kickstarter, I’d be happy to give you a couple hundred dollars anyway as I am an American who won’t be able to participate in the forecasting. I’m sure I would lose it in the market anyway!

    P.S. Can anyone find me that video of Gabe Newell mentioning NGDP futures? I’m a big fan of him so it’s interesting to hear he’s interested in NGDP futures.

  38. Gravatar of Cameron Cameron
    2. October 2014 at 18:43

    nevermind, I found it. Hearing him say “Nominal GDP level targeting” gave me goosebumps!


  39. Gravatar of Ray Lopez Ray Lopez
    3. October 2014 at 01:02

    I hope Prof. Scott does well with this. As for the Taleb et al paper referenced upstream, it was interesting, but most of the time fat tails don’t exist so Scott’s product will be useful for some hedging even though the payoff is bounded. I think Scott is saying only non-US citizens can bet on these contracts, which is a legal constraint (I have a non-US passport and will participate). Finally, Case-Schiller had a hard time getting their futures market started, and the Chicago Bd had a hard time selling futures for inflation, but I predict this product will be a better seller since GDP changes are more volatile (short term they are almost non-linear), hence will attract trader interest. Good luck!

  40. Gravatar of Dan W. Dan W.
    3. October 2014 at 04:07


    Do you consider this an experiment? Meaning, do you expect the results from this market to influence your theoretical understanding of NGDPLT policy?

    How familiar are you with the work of Vernon Smith? Smith used market experiments to demonstrate that bubbles exist. You profess a disbelief in bubbles, yet it is possible, if not likely, bubbles may appear in your NGDP market. Do you anticipate this might happen? This link from Alex Tabarrok’s blog provides additional context. Thanks!


  41. Gravatar of John Hall John Hall
    3. October 2014 at 05:28

    I was thinking about it more and I think the point I brought up applies to real GDP more than nominal GDP. It’s been a while since such a rebalancing, so I can’t really remember.

    That being said, I do remember that the annual and 5 year revisions/rebalancings occur in July, which is the same time as an initial release, FYI.

  42. Gravatar of John Becker John Becker
    3. October 2014 at 07:16

    Congratulations on taking this big step forward. I think an NGDP futures market will provide enormously useful data and I’ll be happy to contribute once things have been ironed out a little more.

  43. Gravatar of TallDave TallDave
    3. October 2014 at 09:41

    Good luck! I suspect the market will fail for lack of participation.

  44. Gravatar of Gabe Newell Gabe Newell
    3. October 2014 at 13:49

    Hi, Scott.

    Put me down for $20,000.

    As I mentioned a couple of years ago, if there’s a way for us to help make this happen, let me know.

    We have lots of servers, bandwidth, and attorneys. We also think making prediction markets easy to create is a good idea for our customers.


  45. Gravatar of Larry Larry
    3. October 2014 at 14:19

    Excellent news. The revolution continues apace. Excelsior!

  46. Gravatar of ssumner ssumner
    3. October 2014 at 15:45

    Everyone, It’s been a very busy day as I try to address a lot of issues. So I just have time for a few brief comments right now. I plan to proceed slowly to make sure we get the best possible system. I’m not having people send checks until we get everything worked out to the donors’ satisfaction. The donations have been very impressive. Any suggestions for using funds to encourage trading volume (most bang for the buck) would be appreciated.

    Luis, Excellent!

    Doug, We did consider that, but worry that the variation in price will be so small that there would be little trading. They tried various types of election contracts and found the ones with the point estimates did more poorly than the win/loss contracts.

    dtoh, The constraint here is that we have a market (iPredict) but no one else has come forward willing to do any other approach. It would be great if someone would issue bonds or some other security linked to NGDP, but I just don’t see that happening. This is just a first step.

    Miami, Shiller recommended the creation as a hedging market, but it hasn’t happened.

    Cassander, That’s a good one.

    Justin, Interesting. Is that recent drop due to falling commodity prices?

    Dan, There is a small element of test here, but it’s mostly a demonstration project that hopefully will eventually lead to much bigger NGDP markets in the US, which will provide a much greater test. But it will tell us something about interest in the concept, and how much subsidy is needed. Perhaps something about accuracy, but that will take some time to be statistically significant.

    I’m not too worried about bubbles, as they would allow smart traders to get rich.

    Thanks for all the comments, not much time today!

  47. Gravatar of ssumner ssumner
    3. October 2014 at 15:57

    Gabe, Thanks! That’s extremely generous. It’s clear to me that we are going to go well over the minimum needed to set up the market. There is one other very big donor and multiple other fairly large donations. I think at this point we need to spend a few days considering various options that will be feasible for the iPredict people in New Zealand, and will be acceptable to the donors. I will spend much of the day tomorrow with a new blog post that discusses various options for insuring that there is adequate trading/liquidity. Comments will be welcome, and hopefully the “wisdom of the crowd” will result in a good final product.

    You said:

    “We have lots of servers, bandwidth, and attorneys.”

    Is this the modern hi tech version of the line from the old Warren Zevon song?

    (“Send lawyers, guns and money”, if I recall correctly.) 🙂

  48. Gravatar of Cameron Cameron
    3. October 2014 at 18:26

    Well, this is going well. 🙂

    Congratulations Scott. This is well overdue.

  49. Gravatar of Ray Lopez Ray Lopez
    3. October 2014 at 20:52

    Everybody, you have to admire Scott. An obscure college professor in economics who was discovered by Tyler Cowen of GMU first gives the idea of targeting money supply to NGDP (sorry, that’s my understanding if I’m wrong), which was later, say some, adopted by the Federal Reserve (though they seem to have been slow in implementing it lately, instead sticking to traditional public pronouncements of targets), then, he is about to single-highhandedly found a predictions market in NGDP, akin to Noble-Prize winning economist Schiller. On top of that, this blog is now widely read by the econ literati, who hang on every word like they used to do with Allan Greenspan. Wow, you can’t make this stuff up!

  50. Gravatar of ssumner ssumner
    5. October 2014 at 07:12

    Thanks Cameron.

    Ray, You are probably being too kind, but thank you anyway.

  51. Gravatar of c8to c8to
    6. October 2014 at 16:36

    US readers should ring up all those binary trading firms in the US (pick one together) and say they are willing to put $500 into an account if they list an NGDP futures market…

    I’d say you could get 100 odd readers to do that, and that $50K would be enough to get one of those firms to list the market…

    Then you could spruik that market continously here…and send emails out to krugman, tyler et al and get one of them to write about it…then you could probably get 1K readers with $500

  52. Gravatar of Scott Sumner Scott Sumner
    7. October 2014 at 09:00

    C8to, That sounds like a good idea.

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