Yes, it’s tight money

It’s always useful to revisit Frederic Mishin’s three lesson on monetary policy, from the number one money textbook:

1.  It is dangerous always to associate the easing or the tightening of monetary policy with a fall or a rise in short-term nominal interest rates.

2.  Other asset prices besides those on short-term debt instruments contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms.

3.  Monetary policy can be highly effective in reviving a weak economy even if short term rates are already near zero.

Other asset prices?

We have plunging bond yields. Plunging TIPS spreads. Plunging Hypermind NGDP prediction prices. Plunging stock prices. Plunging commodity prices. Widening risk spreads. What more do you want?

How about a soaring dollar?

Yes, we need to avoid reasoning from a price change. Sometimes the dollar appreciates because another currency is weak. But now the dollar is appreciating against almost all currencies. Sometimes the dollar appreciates because the US economy is strong (as during the tech boom of 1998-2000.) Does the economy seem strong today?

We are seeing a replay of almost every single market reaction from late 2008.

PS. We have lots of pundits telling us that this crisis shows that libertarianism doesn’t work and that we need big government. (Do they know that Italy has one of the biggest governments in the world?)

In fact, our government has spent months twiddling its thumbs when it wasn’t using regulations to actively prevent the private sector from responding. And now I see this:

Thank God for globalization.

That’s not to say there aren’t a few areas where smart governments can contribute. Pity we don’t have one.

“Warm, humid weather will take care of the problem”

Maybe, but that’s not obvious to me:


Off topic: A while back, I was hammered in multiple comment sections for daring to ask whether it’s possible that surgical masks actually do work for average people. Scott Alexander reviews a great deal of literature, and its very much an open question. Anyone who tells you they definitely don’t work, or even “they definitely don’t do very much good”, is lying. We don’t know if they work, but there are plenty of studies suggesting they might. I expect apologies from all of you smarty pants that suggested I was peddling nonsense.

This reopens the question of whether the low community transmission rate in East Asia might be partly a function of widespread mask wearing.

PS. Trump suddenly re-labels coronavirus as the “China virus” while his aides prefer “Kung flu”, and a few days later we see this headline:

New York Is Fighting A Surge Of Hate Crimes Against Asian-Americans Due To Coronavirus

(Watch somebody mention “German measles” in the comment section. I would hope that people who spend hours in comment sections of blogs could recognize trolling when it’s right in front of their eyes.)

And then a few days after our president decides to give out medical advice on TV, we see this story:

An Arizona man has died after ingesting chloroquine phosphate — believing it would protect him from becoming infected with the coronavirus. The man’s wife also ingested the substance and is under critical care.

The toxic ingredient they consumed was not the medication form of chloroquine, used to treat malaria in humans. Instead, it was an ingredient listed on a parasite treatment for fish.

The man’s wife told NBC News she’d watched televised briefings during which President Trump talked about the potential benefits of chloroquine

After a previous post, I had multiple people claiming that I was suggesting chloroquine is ineffective against coronavirus. I never said that and don’t believe that. Call me crazy, but I just don’t think the President should be recommending that people ingest specific chemicals. Please, leave that to the experts.

In general, if I believe X is true then I’ll tell you that I believe X is true. If not, then don’t assume it.

PPS. Don’t forget that this is my bad blog. If you want to read some good blogging then read George Selgin’s new post.

PPPS. I also highly recommend this Matt Yglesias post, which gave me a better understanding of the Fed’s legal authority (a confusing issue.).

Good news! The Fed’s moving toward “whatever it takes”

I have recently been emphasizing two policy recommendations:

1. Level targeting
2. A “whatever it takes” approach to asset purchases.

The second recommendation is that the Fed stand willing to go beyond purchasing just Treasuries and MBSs, although I’m not sure that additional purchases would actually be necessary.

Today, the Fed announced some new policies that edge us closer to “whatever it takes”:

The Fed announced that it was suspending its previous guidance on quantitative easing, which sought to buy “at least” $500 billion in U.S. Treasuries and $200 billion in agency-backed mortgage-backed securities “over coming months.” The Fed now says it will purchase securities “in the amounts needed,” and will also expand the scope of those purchases to include agency commercial mortgage-backed securities.

The central bank also unveiled a Primary Market Corporate Credit Facility (PMCCF) that would directly purchase eligible corporate bonds from investment grade issuers in addition to a Secondary Market Corporate Credit Facility (SMCCF) that would buy corporate bonds in the secondary market, which could include some eligible investment grade corporate bond exchange-traded funds.

Both programs will last until September 30, 2020.

Excellent work Mr. Powell!

The next step should be for the Fed to make clear that its “in the amounts needed” phrasing refers to bringing the PCE price level back up to a 2% trend line from December 2019, not just stabilizing financial markets.  And add stocks as well.

And the next step (no hurry) should be to switch from price level targeting to NGDP level targeting.

And the final step should be to use market “guardrails” to guide policy.

And then we’re done, and macroeconomics can close up shop.

PS.  I’ll take this as an admission from the Fed that MMs were right and the Fed was wrong during 2009-13 when it failed to so “whatever it takes” QE.

Update:  This headline caught my eye:

Fed’s Bullard: Coronavirus shutdown not a recession but an investment in survival

I’d rather call it a recession.  I’d rather claim that the vast majority of recessions are monetary and a few are caused by real shocks, then to be forced into an argument with RBC-types who say “well of course you don’t believe real shocks can cause recessions, you’ve defined ‘recession’ to exclude real shocks.”

Having said that, I don’t really care what people call it.  It will be obvious to all that it’s an unusual case.

Update #2:  Monday morning Beijing traffic was finally back to normal!.  PM traffic still down a bit.

Wait for some clarity?

Have you noticed that:

The same people who a month ago failed to predict that the Western world would go into a coronavirus crisis and the stock market would crash . . .

And the same people who a month ago failed to predict that China and some other parts of East Asia would see community transmission quickly fall close to zero . . .

Are now confidently telling us how things will be in 6 months, and also that life will be radically different 10 years from now?

I wonder if it makes sense to wait another month or so to get some clarity on whether the pace of new cases will fall sharply (due to recent social distancing), before passing multi-trillion dollar “stimulus” that might look wildly excessive or wildly inadequate a few months from now? Why not just pass a bill that addresses needs for a month or two, and then revisit the situation when we know more?

Why send 100 million people who still have jobs a check for $1000? The cost of living will fall this year, so I don’t see how people who are employed need a huge bailout. (The unemployed are different—yes, throw money at them.)

Monetary policy is a bit different. Unlike fiscal policy, it is not costly. If the Fed buys $10 trillion in bonds, it can sell them a month later if the situation improves unexpectedly. The long run commitment we need is level targeting; the rest is just a means to an end.

The bills now being debated in DC only make sense if the US is not able to do what China has done.  I’m willing to concede that we might not be able to achieve the same success.  I’m even willing to concede we probably won’t be able to achieve the same success.  But is it impossible that we could achieve a similar outcome?  You’d have to have a pretty low opinion of the United States to assume we could not possibly achieve a public health outcome that China has already achieved in a very short period of time.

PS.  I’m one of those people who failed to predict how things would play out.  But at least I’m smart enough to be agnostic on what things will look like in 6 months.

Underestimating China

As America was hit by one popped “bubble” after another, we were frequently told that the Chinese bubble would burst any day now.

It still hasn’t burst.

Then we were told that the trade war would hurt China more than the US. The opposite appears to have been the case:

Trump’s Tariffs Were Supposed to Ding China, But the U.S. Economy Is Getting Hit 2.5x Harder

Then we were told that the coronavirus epidemic would hit China much harder than the US.  Just the opposite is likely to be true; it will hit the US harder than China.  China is like one of those cockroaches that are hard to kill.

Some of my commenters are so anti-China that they use any argument they can muster to convince themselves that there cannot possibly be any good news out of China.  They tell me the data is all faked, even though international medical experts say that it’s broadly correct (and least in terms of the downward trajectory of new cases), albeit missing some new cases and mischaracterizing some deaths.

Some of this is innumeracy, an inability sort sort the wheat from the chaff in data.  China probably had at least 300,000 cases, not 81,000.  But the trend is still downward.  Others seem to have a wildly conspiratorial worldview; perhaps even satellite data showing traffic getting back to normal is being faked.  Stories of coronavirus hospitals being closed down are fake.  Ditto for stories of employees returning to work.  Some of it is motivated reasoning, because the Chinese leadership is evil (one of the few points on which we agree), they’d like to believe that the Chinese situation is much worse than reported.  

Sorry to disappoint you, but the recent coronavirus data out of China is promising, and at least roughly correct.  That doesn’t mean there won’t be new outbreaks, I expect there will,  But I also believe the new outbreaks will be controlled more effectively than Wuhan, which was criminally mishandled by government authorities. Of course criminal negligence by government authorities is not exactly in short supply in the world today.

The China example also doesn’t mean we need to shut down the entire economy.  Japan seems to be doing well (so far) with its economy still up and running.  But will that last?  They did shut down their school system, which seems wise to me, but not their workplaces.  We still have a lot to learn about what sort of changes are required to keep R0 below 1.0.

We need to study the democratic East Asian countries closely, to find out what works and what doesn’t work.  It’s still too soon to know.