Solve for the equilibrium price of real estate

This caught my eye:

In the world’s biggest covered-bond market, a Danish bank says it’s now ready to sell 10-year mortgage-backed notes at a negative coupon for the first time.

Imagine a world where you didn’t pay interest on mortgage loans, rather the bank paid you interest to reward you for borrowing money from them.  How big a home would you buy? Yes, I understand that these are MBSs, not actual mortgages.

Still . . .

As Tyler Cowen might say, “Solve for the equilibrium price of real estate.”

Don’t look now, but monetary policy is tightening dramatically

While most of the economics profession seems to assume that a Fed cut in interest rates means money is getting easier, policy has dramatically tightened in recent weeks.

Perhaps the most startling data point is the expected level of interest rates in the fed funds futures market, which has plunged to barely over 1% in 2021. Consider that figure to be a prediction that NGDP growth in 2021 will be weak enough to justify such a low policy rate. Sorry, no more “one and done”.

Yes, it’s likely that the low expected rate partly reflects some factors unrelated to US NGDP growth, say global weakness, but I wouldn’t count on that explaining all of the drop.  Lots of other indicators also point to slowing growth in NGDP. Five year TIPS spreads are down to 1.41%, consistent with roughly 1.15% PCE inflation. Again, TIPS spreads are somewhat biased, but do contain at least some information about inflation expectations. Stocks are also selling off, albeit from a fairly high level.  While no single indicator is definitive, the overall picture is of a decline in aggregate demand (and aggregate supply as well.)  We are seeing the income and Fisher effects in action.

It’s now pretty clear that the Fed should have cut rates by 0.5% last week.  In fairness, the latest demand shock came from the renewed trade war, which occurred after the meeting.

The lesson here is that the Fed should adopt my proposal to adjust its fed funds target daily, to the closest basis point. Time to join the 21st century.

Update:  When the news starts to look like this:


It’s not a good sign. Oh, and Boris Johnson seems determined to drive the UK into a hard Brexit, while the Eurozone continues to be dysfunctional.

Have a nice day!

Trump has failed at almost everything

Trump has failed at almost all of his major campaign promises, from repealing Obamacare to boosting GDP growth to 4% to rebuilding our infrastructure to reducing the budget deficit to building a wall to bringing manufacturing jobs back to America.  Even his tax cut for average Americans is being offset by higher taxes on imported goods.  He did put a couple people on the Supreme Court.

But there were only two issues that really mattered to Trump, trade and immigration. Let’s compare his record to that of Obama on those two issues. Here’s the trade deficit:

The trade deficit has become “worse”under Trump, as I predicted.

Here’s deportations of illegal immigrants:

Trump’s performance is worse than Obama’s first term and roughly the same as the last half of his second term.  I did not predict this.

How about stopping new illegals from entering the country?

Again, Trump’s record is worse than Obama’s, particularly over the past 6 months (red line).  Some might argue that this is the wrong metric, but it’s the statistic chosen by the Trump people in 2017, when it seemed to be showing some success in slowing illegal migration.

Thus Trump has failed at almost everything.  In the three key issues that are most important to Trumpism—trade deficits, removing illegals, and stopping new illegals from entering—he’s failed spectacularly.  It’s not just that’s he’s failed to improve these situations, as he promised, he’s made them much worse.

So why is Trump widely seen as having succeeded?  Partly because he repeatedly says he’s succeeded.  From almost day one, Trump has insisted that America is great again and that the economy is doing wonderfully.  He started saying this just weeks after describing he economy as a disaster, in his inaugural address.  Some people believe him.  (BTW, if this is true then I guess trade deficits don’t matter.)

Second, because the US economy is in the expansion phase of the business cycle, which is a phenomenon over which Presidents have little control.  If you don’t believe me, think about the three recessions that began under the two Bush administrations and the zero recessions that began under the Clinton and Obama administrations.  Does anyone seriously believe that’s because Democratic policies are more effective at preventing recessions than Republican policies?  And if you do believe that weird hypothesis, then you ought to welcome my claim that Trump has played no role in the fact that the last 25% of this long expansion happened to occur during his administration—because you’re obviously a Democrat.

Nonetheless, the voters will give Trump credit for the strong economy, and might well re-elect him.  His supporters do not care about all of the policy failures. Heck, they may not even know about them.  He talks a good game.  He “owns the libs”.  And that’s all that matters.

German attitudes toward the euro

Here’s the Financial Times:

German media habitually refer to negative interest rates as penalty rates — a fine levied by the ECB to punish German savers. Tagesthemen, Germany’s top evening news programme, casually reported last week that the ECB was planning to use German taxpayers’ money to fund its asset purchase programme. Die Welt refers to the “expropriation” of the German saver — a phrase with alarming historical connotations. Even liberal newspapers, like the weekly Die Zeit, accept the view that the ECB is the cause of low interest rates.

While a number of factors have led to low eurozone interest rates, by far the most important is low rates of growth in NGDP.  Eurozone NGDP growth has averaged only 1.8% over the past 11 years.   Prospects going forward are not much better.

Germany is the country most responsible for this state of affairs, as it demanded that the ECB be set up as a hawkish central bank, and it has consistently lobbied for a tight money policy.

And yet I don’t blame the German public for this confusion, rather the economics profession is to blame.  For years, economists have been talking about easy and tight money in terms of interest rates.  Is it any surprise that the German public has come to believe that low interest rates in the eurozone represent an easy money policy by the ECB?

Going forward, this false belief about interest rates is likely to lead to a great deal of friction within the eurozone.  It will also lead to bad policies.  There is a danger of a feedback loop where bad policy leads to misconceptions about how things work, which leads to even worse policies.  Thus the eurozone might push for a coordinated fiscal stimulus, which would likely be ineffective (as it was ineffective in Japan during the 1990s and 2000s.)

Ideas have consequences.

American nationalism and American greatness

Is America great again? Trump says yes. But Trump also describes Baltimore as follows:

disgusting, rat and rodent infested mess . . .

very dangerous & filthy place.

You might argue that Baltimore is just one city.  But are Trump’s views on other old industrial cities any different?  What about Detroit, St. Louis, Cleveland, Memphis, Buffalo, Philadelphia, Pittsburgh, etc.  The elephant in the room is that Trump is obviously not talking about the nicer areas of metropolitan Baltimore, rather the poorer African-American neighborhoods throughout all of America.

So can America actually be great again if many of its older industrial cities are doing as poorly as Trump describes?  (And just to be clear, I think he somewhat exaggerates some very real and serious problems.)

If you viewed “nationalism” through the rose-tinted glasses of certain right wing intellectuals, then Trump’s views on American greatness would seem to make no sense.  How can a rat infected country be great?  But these intellectuals are either naively or willfully ignoring the reality of nationalism.  It’s not about pride in your country.  For nationalists, the plight of minorities don’t even enter the picture.  This is true in America, in Hungary, in Italy, in India, in China, in Burma, or anywhere else where authoritarian nationalism is on the rise.  Trump’s nationalism is white nationalism.  If you are uncomfortable with that fact, I’d suggest you look for an alternative ideology.

Even defined as white nationalism, Trump hasn’t really addressed the problems in places like West Virginia.  But at least from that perspective his comments on Baltimore no longer seem so illogical, so out of tune with his claim of renewed American greatness.

PS.  While Trump keeps railing about murderous Mexicans and Muslims, and rat-infested African American neighborhoods, we keep experiencing one mass shooting after another.  Have you noticed how many of these shootings involve white males, often right-wing nationalists?  I don’t see Trump talking about the evils of nationalism.  Maybe that’s because Trump himself is a white nationalist, the ideology that sparks so many of these shootings.