Robert Perli on QE

Politico has an interesting piece discussing the Fed’s current QE program. Some pundits correctly point out that the economy probably doesn’t need any more demand stimulus at the moment. Robert Perli responds that the Fed might want to continue QE in order to insure that its policy announcements continue to be credible:

The effect of the Fed’s purchases is also misunderstood, argued Roberto Perli, founding partner of research firm Cornerstone Macro and a former Fed economist.

Perli said the benefit to the Fed’s asset purchases — or “quantitative easing,” as it is known — is entirely front-loaded: Markets react to the central bank’s initial announcement that it will conduct massive amounts of buys over an unspecified period of time, and rates adjust accordingly. The rest of the process is just the Fed following through on those purchases, which have already been factored in by investors.

“If there was no QE today, and the Fed was considering, ‘OK, do we need to do it?’ Probably the answer is no,” Perli said. “But QE was necessary a while ago, like a year ago, and nobody ever thought that QE was going to end after a month or two months or six months, so the market built expectations of how much QE there would be.”

“In fact, those expectations were all that mattered,” he added. “And at the time that was why QE was so effective, because people expected QE to be large.”

I wouldn’t say that the expectations are all that matters, but like Nick Rowe I think they are 99% of monetary policy.

Just to be clear, I’m not a fan of the Fed promising to do X amount of QE. I’d rather they commit to do just as much QE as necessary to maintain adequate market expectations for inflation or better yet NGDP growth. But given that they have decided to engage in instrument-based forward guidance, there’s something to be said for carrying through with promises that were effective only because at the time they were made they were believed by the markets.

This also caught my eye:

But George Pearkes, macro strategist at Bespoke Investment Group, said it’s a misconception that the Fed’s mortgage-backed security purchases have a targeted effect on mortgages. Because those types of securities are already backed by the government, he said, the calculus for a lender on whether to sell a mortgage to housing giants Fannie Mae and Freddie Mac isn’t going to be much different.

“I absolutely detest this argument,” he said. “I think it’s nonsense.”

I don’t know if the view he criticizes is “nonsense”, but I also have trouble seeing how the Fed buying MBSs that have been guaranteed by the Treasury is much different than buying actual Treasuries. Obviously the two bonds are not perfect substitutes, but I doubt whether any differences are large enough for Fed purchases to have a major distortionary effect on the economy.

Nonetheless, it probably makes sense to mostly focus on buying Treasuries, and only shift over to MBSs if there is an actual need to go beyond Treasury purchases.



66 Responses to “Robert Perli on QE”

  1. Gravatar of Garrett Garrett
    26. July 2021 at 12:52

    Is this related to the Lucas Critique? The current QE was “priced in” already, so the actual purchases won’t influence inflation relative to what was priced into market instruments at the time of the announcement.

  2. Gravatar of msgkings msgkings
    26. July 2021 at 13:01

    @ssumner I have a question and I hope it doesn’t make me sound too ignorant:

    After 2008 even with all the easing and QE the Fed did, the M2 money supply measure didn’t increase very much, and neither did inflation.

    After the easing resulting from Covid, M2 has gone up a great deal (like over 30%?) and so has inflation.

    My question is, there’s a lot of talk that the current burst of inflation is supply chain and labor shortage related and thus temporary. But is the M2 increase a factor as well, and thus is inflation likely to be persistently higher than we’d like?

  3. Gravatar of ssumner ssumner
    26. July 2021 at 13:31

    Garrett, There could be some influence from not doing the purchases, as that would be new information, based on current market expectations.

    Msgkings, Yes, it’s not just supply side inflation. It’s also true that NGDP growth has been much faster during this recovery.

  4. Gravatar of Rajat Rajat
    26. July 2021 at 18:22

    I agree that it would be better for the Fed to advise it will do “whatever it takes” to hit its nominal target and then change its purchase program as and when needed. But let’s assume they’re stuck with the current approach for now. I’m not sure what guidance about QE was originally given. But presumably that guidance was – or should be regarded as – condition-dependent. As such, if the Fed had said a year ago, “we will buy $X billion every month for Y months” (where Y>12), then that would be based on data from a year ago. If conditions change, why can’t they update their asset purchase intentions? The alternative would be for them to stick to their announced QE plan, but now say that when it is over, they will sell (more) assets (than they would otherwise). That would lead to time-overlapping asset purchase and sale commitments made on different dates that need to be netted out to satisfy all of them – very messy. The market should just view LSAP announcements like they do forward guidance about interest rate as reflecting a policy stance as at the date they are announced (or reaffirmed).

  5. Gravatar of Nick S Nick S
    26. July 2021 at 20:02

    The comment from George Pearkes is extremely misguided. Firstly, mortgage lenders do not sell their new origination to Fannie/Freddie. Instead these GSEs simply provide an insurance wrap on the originated mortgages prior to being sold to investors. This implicitly government guaranteed insurance only mitigated a portion of buying an MBS (credit risk). The investor is still exposed to prepayment risk, as a very large majority (with the exception of 1.5% coupon MBS) trade at a substantial premium to par. When mortgage borrowers refinance their loan at par, an MBS holder who bought the bond at 104-00 loses 4 points. Therefore, in a market that is not manipulated by the Fed, investors demand a higher yield to account for the prepayment/refinance option that they essentially are selling to the borrower. Currently, with the massive Fed intervention, this option is not priced appropriately as indicated by negative option adjusted spreads present in many MBS (the credit spread of a MBS after removing the fair value of the prepayment option). As a result, mortgage originators can underwrite new loans at lower and lower rates because they are able to sell these loans into Fannie/Freddie wrapped MBS pools to the Fed at levels a rational investor would not buy.

  6. Gravatar of postkey postkey
    27. July 2021 at 00:17

    “But is the M2 increase a factor as well, and thus is inflation likely to be persistently higher than we’d like?”

    ‘Someone’ is not optimistic re inflation?

    “The FOMC is obviously wrong. In the video I explain why annual CPI inflation of over 5% is virtually certain at the end of 2021, while figures of 6% or even 7% are not to be ruled out.”

  7. Gravatar of Michael Rulle Michael Rulle
    27. July 2021 at 04:50

    Re: follow up to msgkings question

    I assume velocity of money matters. If FRED is to be believed, not only is M2 (M1+(M2-M1)) and M1 at all time highs but velocity is at all time lows——in fact velocity has virtually strait lined down. I assume the FED tries to manage this relationship——Of course this has happened during the supply side shortages of the pandemic.

    AIT has arrived just in time. Not sure how high short term inflation needs to go——since by end of August the extra payments will stop. For the first time I read an essay in WSJ that said inflation fears “should” be and are lessening (using breakeven rates).

  8. Gravatar of Todd Ramsey Todd Ramsey
    27. July 2021 at 04:59

    Scott, I didn’t mean to imply that Flynn Robinson was in the Abdul-Jabbar/Dandridge draft. Just that he was a star on the pre-Oscar team.

    I don’t want you to think I am as ignorant about sports trivia as I am about economics. 😉

  9. Gravatar of Spencer Hall Spencer Hall
    27. July 2021 at 06:11

    “expectations…are 99% of monetary policy”

    Complete myth. Rates-of-change in monetary flows, volume times transactions’ velocity, equal Roc’s in P*T in American Yale Professor Irving Fishers’ truistic: “equation of exchange”, where N-gDp is both a proxy and subset.

    Thus, it simply isn’t possible. And anyone who talks about M2 as a monetary metric is stupid. Yeah, that’s the status of all the Ph.Ds. in economics. 95 percent of all demand drafts still clear thru DDs.

  10. Gravatar of Spencer Hall Spencer Hall
    27. July 2021 at 06:31

    And we’re not talking about QE pre-GFC. We’re referring to LSAPs conducted in conjunction with the payment of interest on IBDDs. Completely different dynamics.

    Remunerating IBDDs allows the banks to outbid the nonbanks for loan funds, i.e., it destroys the velocity of circulation. It induces nonbank disintermediation.

    The transfer of savings through the nonbanks increases the supply of loan-funds, but not the supply of money. And this is paradoxical, since the NBFIs are some of the DFIs’ best customers. It’s the absolute adoption of the Gurley-Shaw nonsense.

    “Commercial Banks and Financial Intermediaries: Fallacies and Policy Implications” Joseph Aschheim

  11. Gravatar of rayward rayward
    27. July 2021 at 07:38

    Dow tops 35,000! That’s all one needs to know about “monetary policy”.

  12. Gravatar of ssumner ssumner
    27. July 2021 at 08:35

    Rajat, I’m a bit puzzled by what you are asking. It seems like you are saying that condition depending policies are presumably politically infeasible, so they should do condition dependent policies. What am I missing?

    Nick, That’s for that info, you know more than I do about this subject. But I don’t entirely follow your logic. Aren’t most MBSs owned by the public, not the Fed? If so, why are large quantities of MBSs held by the public, if they aren’t good investments?

    Todd, Thanks, that what I recall as well. I think he was on the Bucks their very first year.

  13. Gravatar of rinat rinat
    27. July 2021 at 12:12

    Remember when the highly partisan Sumner used to write hundreds of blog posts about CNN’s opinion pieces alleging Trumps corruption?

    I wonder if this highly partisan Sumner will write endless, poorly written blog posts, about Biden’s son collecting 500K for an art painting which, by the way, is 3x more than a Picasso sells for. Who was the buyer of this amateurish painting? Of course, the White House won’t tell us.

    If that was Donald Trump jr, Sumner would have already posted a hundred articles condemning Trump, the family, Putin, and all of the other fictitious enemy’s who are a figment of his imagination.

    Dershowitz’s “shoe on the other foot test” clearly doesn’t apply to the highly partisan, radical liberal, Scott “CCP” Sumner.

  14. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    27. July 2021 at 12:17

    re: “That’s all one needs to know about “monetary policy”.

    That’s about right. Short-term money flows peaked in July. Long-term money flows, proxy for inflation, hasn’t peaked yet. Inflation won’t peak until January 2022. And that’s a crime against humanity.

  15. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    27. July 2021 at 12:26

    re: “I referred to a strong statement made in 1969 by Anna Schwartz, who was Milton Friedman’s co-author in two celebrated books. To quote Schwartz, “The correlations between the level or rates of change in interest rates, on the one hand, and rates of change in nominal income, prices and output, on the other, are considerably worse than those between rates of change in the quantity of money and these magnitudes.”

    Neither Schwartz nor Friedman understood the distributed lag effect of money flows. They are mathematical constants, and have been for more than a century.

  16. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    27. July 2021 at 14:17

    The money stock has risen 36% since the beginning of 2021 (albeit with most of the 3rd $1,400 stimulus checks already issued).

    NBER: “US households report spending approximately 40 percent of their
    stimulus checks, on average, with about 30 percent saved and another
    30 percent used to pay down debt.”

  17. Gravatar of Rajat Rajat
    27. July 2021 at 15:29

    Scott, I meant that the Fed does or can do condition-dependent QE but that in the presentation of that, the Fed seems constrained to announcing fixed dollar amounts or periods of QE (say, $100 billion purchases per month for 12 months) rather than saying, “we will buy as much and for as long as it takes, and we will ramp up and down as needed, to hit our target”. If the Fed announces a 6-month $100bn per month program at time t, it is free to extend that to 12 months at t+1 if it then considers the 6 months wasn’t enough. So why shouldn’t the Fed be able to reduce the period to 3 months (ie stop purchases early) if the economy is responding more strongly than it expected? Likewise, why shouldn’t the Fed be able to increase purchases to $200bn per month or reduce them to $50bn per month if conditions change? When the Fed makes an announcement, the market should (and does seem to) regard that as the Fed’s view at that time of what it thinks is appropriate given the then-current outlook. If the outlook changes, the market expects the Fed’s purchases to change; or if it doesn’t, the market would infer a change in stance.

  18. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    27. July 2021 at 17:40

    re: “constrained to announcing fixed dollar amounts”

    It’s not QE that moves the economy. “It’s the money supply stupid” -Steve H. Hanke

    Sumner can’t forecast. Why are you asking him?

  19. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    27. July 2021 at 17:49

    This is what the Keynesian economists have accomplished since 1970:

    Shares of gross domestic income: Compensation of employees, paid: Wage and salary accruals: Disbursements: to persons (W270RE1A156NBEA)

  20. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    27. July 2021 at 17:56

    Post by flow5 on Nov 26, 2019 at 6:45pm
    The 1st qtr. R-gDp in 2020 will be negative.

    We knew the precise “Minskey Moment” of the GFC:
    AS I POSTED: Dec 13 2007 06:55 PM |
    The Commerce Department said retail sales in Oct 2007 increased by 1.2% over Oct 2006, & up a huge 6.3% from Nov 2006.
    10/1/2007,,,,,,,-0.47 * temporary bottom
    11/1/2007,,,,,,, 0.14
    12/1/2007,,,,,,, 0.44
    01/1/2008,,,,,,, 0.59
    02/1/2008,,,,,,, 0.45
    03/1/2008,,,,,,, 0.06
    04/1/2008,,,,,,, 0.04
    05/1/2008,,,,,,, 0.09
    06/1/2008,,,,,,, 0.20
    07/1/2008,,,,,,, 0.32 peak
    08/1/2008,,,,,,, 0.15
    09/1/2008,,,,,,, 0.00
    10/1/2008,,,,,, -0.20 * possible recession
    11/1/2008,,,,,, -0.10 * possible recession
    12/1/2008,,,,,,, 0.10 * possible recession
    RoC trajectory as predicted.

    I predicted both the flash crash in stocks on May 6th, 2010 and the flash crash in bonds on October 15th, 2014 (6 months in advance and within one day).

  21. Gravatar of Nick S Nick S
    27. July 2021 at 20:20

    Scott – RE: “ Aren’t most MBSs owned by the public, not the Fed? If so, why are large quantities of MBSs held by the public, if they aren’t good investments?“

    The fed owns about $2.4 trillion MBS in a market that is about $7 trillion or so in size. The next largest holders are banks who are incentivized to hold for favorable capital treatment (HQLA).

    My point is not at all centered around whether MBS is a good investment or not, but rather, that if you removed the Feds $2.4 billion in demand, the price of MBS would decline —> mtge originators can’t sell their new origination at high prices —-> mtge originators raise primary mortgage rates

  22. Gravatar of David S David S
    28. July 2021 at 07:03


    Thanks for these explanations, although my rodent/troll brain is inspired to ask by how much are current 30 year rates “underpriced” given Fed actions? Have homebuyers and builders been conditioned to expect rates in the 3% range and is this unsustainable?

  23. Gravatar of ssumner ssumner
    28. July 2021 at 07:48

    rinat, I’ve never denied that Hunter Biden is sleazy. Who cares? He’s not the president. Trump was profiting from his own decisions, such as having government officials stay at his expensive hotels. Joe Biden is a lousy president (as I correctly predicted), but he’s not that corrupt.

    Rajat, You said:

    “If the Fed announces a 6-month $100bn per month program at time t, it is free to extend that to 12 months at t+1 if it then considers the 6 months wasn’t enough. So why shouldn’t the Fed be able to reduce the period to 3 months (ie stop purchases early) if the economy is responding more strongly than it expected?”

    What if the only reason the economy is strong is that the markets expected a 6 month program? Should you stop taking an antibiotic early if you feel fine?

    I’m not saying the Fed should not stop its current bond buying program–it’s quite possible it should. My point is that there’s a time inconsistency problem here that needs to be considered.

    Nick, So 2/3rds of MBSs are held by the private sector. I don’t believe that Fed bond purchases are holding down interest rates to any significant extent. In the 1960s, Fed bond purchases pushed nominal rates much higher.

  24. Gravatar of Ralph Musgrave Ralph Musgrave
    28. July 2021 at 07:56

    MMTers and Milton Friedman claim/ed the ENTIRE national debt should be QEd in the sense that they both advocate a zero rate of interest on govt liabilities.

  25. Gravatar of Michael Sandifer Michael Sandifer
    29. July 2021 at 03:09


    I’m curious as to why you think Fed actions, including forward guidance statements, can have such seemingly large effects on very long-term nominal rates.

    Correct me if I’m wrong, but reading comments from you and other economists over the years, I get the impression that there’s the expectation that wages adjust sufficiently after periods of tight money within 4-6 years or so, such that economies return to monetary equilibrium, even if the permanent expected growth in the money supply versus GDP growth is permanently below the pre-tighter money baseline.

    If this is true, why should 20 and 30 year rates be affected?

    And more generally, if the downward trend in real rates in the US has been mostly due to secular factors, why do they change on 10, 20, and 30 year bonds in response to perceived changes in monetary policy?

  26. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    29. July 2021 at 05:44

    R-gDp as a percent of N-gDp

    01/1/2020 ,,,,, 0.883462
    04/1/2020 ,,,,, 0.882124
    07/1/2020 ,,,,, 0.878925
    10/1/2020 ,,,,, 0.875526
    01/1/2021 ,,,,, 0.862806
    04/1/2021 ,,,,, 0.848374

    QE is becoming less effective. Stagflation here we come

  27. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    29. July 2021 at 06:02

    re:”both advocate a zero rate of interest on govt liabilities”

    That was what the Treasury-Federal Reserve Accord of 1951 was all about. The Fed’s 5 billion dollar original “overdraft” borrowing privilege was not extended by Congress, as historically, Treasury-Federal Reserve collaboration resulted in the FED subordinating its responsibilities to the Treasury’s – triggering intolerable rates of inflation.

    MMT is Marxist. It does not put savings back to work.

  28. Gravatar of ssumner ssumner
    29. July 2021 at 06:49

    Ralph, I’d encourage you to read Ed Nelson’s book on Friedman, his views were the complete opposite of MMT.

    Michael. I presume it works mostly through the Fisher effect.

  29. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    29. July 2021 at 07:25

    What’s missing with monitoring QE is the percentage of purchases by the banks vs. the nonbanks, i.e., the money multiplier.

    As Paul Meek’s (FRB-NY assistant V.P. of OMOs and Treasury issues), described in his 3rd edition of “Open Market Operations” published in 1974 the trading desk targeted RPDs, reserves for private deposits (targeting the nonbanks).

    This adds up to an obdurate apparatus that the Fed cannot monitor, much less control, even on a month-to-month basis. What the net expansion of the money stock will be, as a consequence of any given addition or subtraction in Federal Reserve Bank credit, nobody can forecast until long after the fact.

    Treasury and Agency Securities, All Commercial Banks (USGSECNSA)

    2021-01-01 3851.9098
    2021-02-01 3911.2837
    2021-03-01 3987.1835
    2021-04-01 4054.0529
    2021-05-01 4130.7148
    2021-06-01 4177.1947

    Treasury and Agency Securities: Mortgage-Backed Securities (MBS), All Commercial Banks

    2021-01-01 2587.2585
    2021-02-01 2641.1822
    2021-03-01 2694.4432
    2021-04-01 2739.4113
    2021-05-01 2786.0064
    2021-06-01 2796.1742

  30. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    29. July 2021 at 07:36

    What you need to read is Friedman’s Carol A. Ledenham’s Hoover Institution archives. His correspondence with other economists.

  31. Gravatar of Michael Sandifer Michael Sandifer
    29. July 2021 at 07:41


    You replied:

    “Michael. I presume it works mostly through the Fisher effect.”

    Thanks for answering that question. There’s a lot of plausibility to that answer, but what about my second question, about real rates? Why do real rates show the cyclical patterns they do, if the primary causes of them falling are secular?

    For example, here’s some history of the 10 year Treasury rate minus the 10 year breakeven inflation rate:

    That’s not a lot of data, but notice real rates are relatively flat or rising before the last two recessions, and then begin falling dramatically in the initial phases of recovery, while most of the adaptive wage adjustment is expected to occur. Real rates leveled up and the downward trend stopped for years before the last recession, but the mean rate was much lower than before the Great Recession.

    Maybe it’s just me, but that doesn’t look mostly secular.

  32. Gravatar of Effem Effem
    29. July 2021 at 10:49

    Curious about your latest thoughts on monetary policy. Looks increasingly likely to me that they have abandoned AIT.

  33. Gravatar of nick nick
    29. July 2021 at 18:11

    Sumner is trying to destroy us.
    He wants no tariffs, and no subsidies, so that U.S. farming land is purchased by Chinese conglomerates.

    6% inflation! Two months ago he told us “don’t worry about inflation”.

    Debasement is here. Inflation is here. BLM and ANTIFA commies have arrived in the western hemisphere. There goal: a one world dystopian government.

    War is peace.
    freedom is slavery.
    ignorance is strength.

    Say no to Sumner’s policies.

  34. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    30. July 2021 at 05:45

    150 year real, nominal, against inflation

  35. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    30. July 2021 at 05:50

    re: “Looks increasingly likely to me that they have abandoned AIT”

    They’re stuck with AIT. You can’t decelerate that fast without price controls. AIT is about long-term money flows. R-gDp will now fall while inflation is still rising.

  36. Gravatar of ssumner ssumner
    30. July 2021 at 09:25

    Michael, There are both secular and cyclical forces impacting real rates. The secular forces determine the long run trend, whereas the cyclical forces explain the ups and downs over the business cycle.

    Effem, It’s way too early to conclude the Fed has abandoned AIT—we’d need much more data to reach that conclusion. I think monetary policy is in a pretty good place right now, but I see more tail risk of high inflation than low inflation.

  37. Gravatar of Michael Sandifer Michael Sandifer
    30. July 2021 at 13:50


    Yes, secular factors affect real rates, but in the case of the US, real rates are flat or even rising during periods of relative monetary stability over the past 40 years. That’s what makes a big difference in my eyes.

    Also, maybe it’s just my stubborn ignorance again, but I see no reason why a growing economy should have short-term negative real rates for many years at a time, sans a monetary policy problem. I could understand in terms of longer-term real rates, if coupled with negative GDP growth expectations, but in the US case, I think it means money is tight. Stock prices tell the same story. They shouldn’t often average gains of multiples of GDP growth if the economy is not so often recovering from tight money mistakes.

  38. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    31. July 2021 at 04:25

    Not too early:,reverse%20repo%20operations%20conducted%2C%20including%20small%20value%20exercises.

  39. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    31. July 2021 at 04:31

    Interest is the price of credit. The price of money is the reciprocal of the price level. The money stock can never be properly managed by any attempt to control the cost of credit.

  40. Gravatar of ssumner ssumner
    31. July 2021 at 08:00

    Michael, Again, monetary policy doesn’t affect real rates in the long run. And I don’t understand your point about the data, which looks EXACTLY like what you’d expect if you overlay a cyclical pattern over a downward secular trend.

  41. Gravatar of Michael Sandifer Michael Sandifer
    31. July 2021 at 10:22


    Yes, I know you think monetary policy doesn’t affect real rates in the long run, and I agree, but we don’t always agree on whether given periods represent tight, easy, or near equilibrium policy. Also, we see the patterns in the data differently.

    Why were real rates so stable, even having increased a bit, from 1985 to 2000, except for the 1990 recession and it’s slow, tight money recovery period? This also happened to roughly be the period known as the Great Moderation, in which there’s wide concensus that macro stability was pretty good, except for that recession.

  42. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    1. August 2021 at 05:55

    re: “monetary policy doesn’t affect real rates in the long run”

    That’s wrong.

    Obviously, an increase in money products decreases the real rate of interest.

  43. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    1. August 2021 at 06:57

    Economists just can’t comprehend it. Banks don’t loan out deposits. Deposits are the result of lending. Money products decrease the real rate of interest. Savings products increase the real rate of interest.

    Look at Japan. The Japanese save more and keep more of their savings impounded in their banks. Japans’ lost decade has an obvious explanation. “Japanese households have 52% of their money in currency & deposits, vs 35% for people in the Eurozone and 14% for the US.”

  44. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    1. August 2021 at 08:02

    Some people are real idiots, saying inflation is transitory. People forget that the administered oil price increase in 1973 was validated by the FED (forcing a reduction in the speed limit to 55mph). Today, the specific prices of used cars and lumber are being validated by the FED (therefore inflation cannot be transitory).

  45. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    1. August 2021 at 08:15

    Whose responsible? The banks aren’t. They aren’t expanding commercial bank credit. Only the Reserve banks are creating new money.

    2021-01-01 15131.3464
    2021-02-01 15201.2577
    2021-03-01 15317.7830
    2021-04-01 15418.3603
    2021-05-01 15539.1486
    2021-06-01 15602.9938

  46. Gravatar of ssumner ssumner
    1. August 2021 at 10:37

    Michael, You’d expect rates to be roughly flat during expansions if rates normally rose during expansions but also had a downward secular trend.

  47. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    1. August 2021 at 12:21

    Capital is not homogeneous. It’s stock vs. flow. Mal-investment (“impacts resource allocation”), stems from the fact that adding infinite, artificial, and misdirected money products (blunt LSAPs on sovereigns) while remunerating interbank demand deposits, IBDDs (inducing nonbank disintermediation, destroying velocity), generates negative real rates of interest; has a negative economic multiplier (doesn’t increase income streams); stokes asset bubbles (results in an excess of savings over real investment outlets); exacerbates income inequality, produces social unrest, and depreciates the exchange value of the U.S. $.

    (“It is the real interest rate that affects spending”, pg. 19 Marcus Nunes and Benjamin Cole’s “With Market Monetarism – a Roadmap to Economic Prosperity”).

    How do you explain real yields continuing to fall at the same time the economy is “slowing”? Link “Fed Leaves Interest Rates Near Zero as Economic Recovery Slows” – NYT

    Interest is the price of credit. The price of money is the reciprocal of the price level. An endogenous increase in the utilization / activation of savings products, the discharge of $15 trillion of finite savings products (near money substitutes), via targeted real investment outlets has a positive economic multiplier, a ripple effect (increases productivity and real wages), while increasing both the real rate and nominal rates of interest. The regulatory release of savings invokes a spontaneous chain reaction, an expanding sequence of reactions, a self-propelling and amplifying chain of events (in other words, propells income streams) and increases the exchange value of the U.S. $.

  48. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    1. August 2021 at 12:42

    “The only relevant test of the validity of a hypothesis is comparison of prediction with experience.” – Milton Friedman

    “Fact Check: Was 2013’s ‘Taper Tantrum’ Actually So Tumultuous?”

    In my application of this theory, the release of savings, was as I commented on 12-16-12, 01:50 PM #1 when the FDIC’s unlimited transaction deposit insurance was reduced to $250,000:

    “We’re close to seeing the real power of OMOs. R-gDp is likely to accelerate earlier and faster than anyone now expects. The roc in M*Vt before any new stimulus is already above average.

    With low inflation (given some deficit resolution), Jan-Apr could be a zinger”

    Zinger – a surprise, shock, or piece of electrifying news.

    So we had a “taper tantrum” and a temporary rise in gDp:

    2012-01-01 5.8
    2012-04-01 3.3
    2012-07-01 2.6
    2012-10-01 2.5
    2013-01-01 5.3
    2013-04-01 1.7
    2013-07-01 5.2
    2013-10-01 5.7
    2014-01-01 0.5
    2014-04-01 7.8
    2014-07-01 6.9
    2014-10-01 2.7
    Implicit price deflator
    2012-01-01 2.5
    2012-04-01 1.6
    2012-07-01 2.1
    2012-10-01 2.1
    2013-01-01 1.6
    2013-04-01 1.2
    2013-07-01 1.9
    2013-10-01 2.4
    2014-01-01 1.5
    2014-04-01 2.5
    2014-07-01 1.9
    2014-10-01 0.8
    2012-01-01 3.2
    2012-04-01 1.7
    2012-07-01 0.5
    2012-10-01 0.5
    2013-01-01 3.6
    2013-04-01 0.5
    2013-07-01 3.2
    2013-10-01 3.2
    2014-01-01 -1.0
    2014-04-01 5.1
    2014-07-01 4.9
    2014-10-01 1.9
    That’s called a “predictive success”.

    It’s like Athenian philosopher Plato — whose “first fruits of his youth infused with hard work and love of study” said: “We seem to find that the ideal of knowledge is irreconcilable with experience”

  49. Gravatar of Michael Sandifer Michael Sandifer
    1. August 2021 at 21:57


    Okay, thanks for the clarification. I think I understand your perspective, except that one period of basically flat real rates lasted 15 years. That was two recovery cycles, before and after the 1990 recession. It’s not absolutely inconsistent with your point, but certainly seems to leave room for other intepretations. The 90s can be explained by what most see as a temporary productivity boom, so it could easily be coincidence that explains why real rates failed to permanently fall for so long, in what is claimed to be a 40 year secular trend.

    You see stock market data as much less precisely indicative of what’s going on in terms of NGDP growth and monetary equilibrium at any particular moment, once having said you think the clearest messages stocks send is when the market crashes. I see the empirical evidence as very clear that one could use the S&P 500 as a proxy to level target NGDP.

    Do you doubt that, in monetary equilibrium, a representative stock index should appreciate at about the same rate as NGDP grows? I say that under a 5% NGDP level target, for example, the S&P 500 growth rate would also be 5%.

    Just doing the math, using the earnings yield to translate changes in the level of the S&P 500 into changes in NGDP, it adds up. And so, it shouldn’t be surprising that, over multi-year periods, the earnings yield and NGDP growth means are very close, including over the entire period since 1962.

    So, how seriously should we take stock gains above the rate of NGDP growth as an indicator of monetary disequilibrium, ceteris paribus? And how does that change one’s perspective on falling real rates over the past 40 years?

  50. Gravatar of Carl Carl
    2. August 2021 at 07:32

    I’m probably just having a moment of money disillusion, but it seems wrong to me to say that this or that Fed security purchase will not have a distortionary effect on the economy when the whole point of QE seems to me to be to distort the economy. Isn’t the question whether the distortion will seem beneficial or deleterious. If Fed purchases didn’t cause distortions, why do them at all? And while I’m in this temporary state of disillusion, can I ask how we’ll know when we’re seeing evidence of fiscal dominance.

  51. Gravatar of ssumner ssumner
    2. August 2021 at 08:26

    Michael, No, I don’t think the stock market is a reliable indicator–it moves around for all sorts of reasons.

    Carl, Monetary policy (including QE) is distortionary when it causes unstable NGDP, otherwise it isn’t.

    If QE makes NGDP more stable, it’s not distortionary.

  52. Gravatar of Carl Carl
    2. August 2021 at 11:21

    Fair enough. I think I’m just having one of my periodic bouts of doubt that stabilizing NGDP through
    QE is preferable long term to letting the government feel a greater squeeze from less demand for treasuries.

  53. Gravatar of Michael Sandifer Michael Sandifer
    3. August 2021 at 03:14


    Yes, you’ve mentioned reasons other than changes to economic growth expectations for changes in stock prices, but what are those reasons, how common do you think they are, and what evidence leads you to your conclusions?

    As I see it, non-macro-based changes in stock index values are relatively rare, and price changes due to tax or regulatory changes, for example, have very predictable, recognizable, and mostly temporary effects on prices. Evidence suggests such changes only affect the forward p/e to the degree they impact economic growth itself. Otherwise, I expect one-time level changes.

  54. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    3. August 2021 at 08:26

    The stealth tightening of the money stock should reduce the rate of increase in prices faster than anyone is expecting.

  55. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    3. August 2021 at 08:28

    re: “Monetary policy (including QE) is distortionary when it causes unstable NGDP”

    Very timely.

  56. Gravatar of agrippa postumus agrippa postumus
    3. August 2021 at 16:09

    sumner and spencer bradley hall & oates should collaborate on a mashup of the orestia and prometheus in chains.

  57. Gravatar of nick nick
    4. August 2021 at 00:13

    There is a beautiful and wonderful concept called a BUDGET!

    If you succeed at budgeting, you don’t have to print more money.

    Seems like a second grade concept, but clearly too difficult for the economists to grasp. The Fed was a HUGE mistake. It has become their church, and Ricardo their savior. Except Ricardo was a doofus, and their Church is Satin.

    Replace economist losers, with businessmen, and this country would be in great shape.

  58. Gravatar of ssumner ssumner
    4. August 2021 at 07:34

    Carl, QE does nothing to let the government off the hook for financing Treasuries. Nothing at all. I can’t emphasize that enough.

    Michael, I’ve already answered your question. Interest rates are one of many other factors. And the 1987 stock crash is a great example—growth didn’t change at all.

    Nick, You said:

    “Replace economist losers, with businessmen”

    Under Trump we had the slowest GDP growth since Hoover, who was also a successful businessman.

  59. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    4. August 2021 at 07:47

    Trump’s removal of some reporting regulations greatly helped small businesses. Don’t you know anybody that owned a business?

  60. Gravatar of Michael Sandifer Michael Sandifer
    4. August 2021 at 09:08


    I appreciate you taking the time to reply with more detail. You’re as good of an economist of which I’m aware, and I respect what you do a great deal, but your answer indicates you haven’t taken the time to understand my perspective.

    Using the S&P 500 earnings yield to make the calculations I do takes the discount rate, and hence interest rates into account. The earnings yield is the discount rate.

    Regarding 1987, we’ll continue to agree to disagree. The fact that we didn’t see the drop in NGDP growth that such a crash would predict is due primarily to the unexpectedly strong reaction by the Fed under new Chairman Greenspan. Markets aren’t perfect, but they’re relatively efficient.

  61. Gravatar of ssumner ssumner
    5. August 2021 at 07:55

    Micheal, Ten year bond yields didn’t do much in 1987 (at the end of October they were higher than at the end of July), which suggests there was no sudden fear of a huge drop in NGDP.

  62. Gravatar of Michael Sandifer Michael Sandifer
    5. August 2021 at 15:52


    I’m not sure what you mean about the 10 year rate in late ’87.

    The 10 year Treasury yield fell further during the 1987 stock crash than during the actual recession in 1990. Here’s 1990:

    That’s a 1.43 during the ’87 crash versus 1.28 during the ’90 recession.

    Also, stock market indices and bond yields around the world fell in synch with the American markets, just as one would expect when a potential recession is averted. We should expect to see this sort of thing from time-to-time. 1987 is just a rather extreme example of the market misjudging a new Fed Chairman.

  63. Gravatar of Michael Sandifer Michael Sandifer
    5. August 2021 at 15:54

    And for those unfamiliar with the history, Greenspan cut the Fed Funds rate by 50 basis points during during the ’87 crash, which is about twice as large a change in interest rates as the Fed normally makes.

  64. Gravatar of ssumner ssumner
    6. August 2021 at 08:50

    Michael, Wait, Are you saying I was wrong in claiming the 10-year rate was higher in late October (after the crash) than in July? I hope not. Yet stocks were down almost 40%. Why did long term bond yields rise?

    The Fed cut rates by 100 basis points after the 1929 crash. That means nothing.

  65. Gravatar of Michael Sandifer Michael Sandifer
    6. August 2021 at 13:55


    The 10 year rate was significantly higher in late October ’07 than in July, but that’s irrelevant. All that matters is where the rate was relative to the neutral rate in late October. The neutral rate can obviously move around quite a bit.

    And, as you would normally point out, it’s not the size of the rate cut that matters so much as the overall signal the Fed is sending. Greenspan sent a sufficiently strong signal with his 50 basis point rate cut to calm the markets in late ’07.

    Also, I don’t claim that predicted tight money was the only problem in October of ’07, but it was the most important one. There was also the prospect of new taxes that could affect stock prices, Treasury Secretary Baker’s stupid mercantilism, and some trouble in the Persian Gulf, threatening on oil price shock. Since only the Fed can guarantee on target NGDP growth, I give them most of the responsibility here.

    On this ’87 question, I think you often argue against your own principles.

  66. Gravatar of Michael Sandifer Michael Sandifer
    6. August 2021 at 16:46

    If your point was that we weren’t close to recession NGDP-wise, true, and the stock crash only reflected a fall in NGDP growth of around 2.2%. The S&P 500 discount rate was around 6% at the time. Recession talk was common at the time, and the combination of tight money and multiple potential real shocks meant that the economy was very vulnerable.

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