Some recent links

Here’s a piece I wrote for The Economist, By Invitation.

A nice article on NGDP targeting by Ramesh Ponnuru (mentions Beckworth.)

Michael Darda mentions David Beckworth and I.

A mention at FrumForum

David Wessel of the Wall Street Journal.  (A ten year old quotation, which sounds clumsy.)

And a nice comment at FreethinkingEconomist (who advises the UK government):

The US blogosphere – in particular Scott Sumner – was a major influence in getting my thick head around the advantages of Nominal Growth Targeting as an answer to the world’s problems.    Hey, if I had not started on Sumner’s blog I would never have written Credit Where It’s Due.

So our views are gaining increasing acceptance among the movers and shakers.  But we still have our work cut out for us.  This morning I woke up to NPR announcing that falling interest rates should help the economy.  Now if only we could top it off by generating deflation, to boost consumer spending.

I’ll be travelling in late August and early September, but I plan to come back with guns blazing after Labor Day (not much to celebrate this year.)  I should have a long piece on NGDP targeting coming out in September, and I’m working on some other interesting possibilities–I’ll let you know.  Obviously with the Jackson Hole meetings coming up there may be movement on the policy front and/or a decisive turn in the business cycle.  But please, for the sake of  God, don’t do “Operation Twist.”  We need higher long term rates, much higher.  The Fed needs an explicit target, even a QE3 is like to disappoint.  Buying 2 year T-notes yielding 0.19% with reserves yielding 0.25% might trigger a brief rally, but only because it signals a change in Fed intentions.  It would peter out quite rapidly.



18 Responses to “Some recent links”

  1. Gravatar of Adam Adam
    19. August 2011 at 12:24

    Professor Sumner,

    Would you say at this point that getting rid of the interest on reserves would be a more effective move than additional quantitative easing?

  2. Gravatar of Andy Harless Andy Harless
    19. August 2011 at 12:44

    What’s wrong with “Operation Twist” (or more precisely, sterilized LSAP’s)? I agree that optimal Fed policy would likely result in higher long-term interest rates, but that doesn’t mean that bidding down long-term rates directly wouldn’t be part of that policy. Don’t reason from a price change, even when the price change is paradoxical. Sterilized LSAP’s of long-term Treasuries wouldn’t be my preferred policy, but it would beat the hell out of doing nothing — and from what I’m hearing (somewhat incredulously), doing nothing is a real possibility.

  3. Gravatar of Morgan Warstler Morgan Warstler
    19. August 2011 at 12:55

    I second Adam’s question…

    And I would add, to play to Perry, you should be screaming about IOR – he’ll agree with you.

    And if he speaks, people will listen.

  4. Gravatar of Morgan Warstler Morgan Warstler
    19. August 2011 at 13:06

    “Most importantly, the Fed needs to set a much higher NGDP growth target (or a modestly higher price level target) and engage in “level targeting” to make up for any shortfalls or overshoots. After this is done, we need to scale back the maximum period of unemployment insurance to more normal levels.”

    Scott, man just step over the line! You are SO CLOSE!

    Just say, “The Fed should agree to level NGDP if, and only IF Congres / Obama passes structural unemployment reforms.”

    That small change although you don’t like making it, makes the chance of you getting so much stronger.

    It’s them almost a negotiation between the GOP Congress and the Fed.

    If Obama fights it, and you don’t get what you want – the GOP REMEMBERS.

    The GOP will love to have the cover to cut back unemployment KNOWING they can pour gasoline on the economy. Then, they have the Fed lined up.

    NOW SINCE Obama knows all this, and the best possible chance he has to win is to choose between economic improvement and angry liberals.

    We all see his one last chance to prove who he really is…

  5. Gravatar of Gregor Bush Gregor Bush
    19. August 2011 at 13:27

    Scott and Andy,

    Suppose the Fed, instead of promising to leave the Fed funds rate at zero until mid-2013, promised to pin the 10-year yeild at 2.0% until mid-2013 conditional on thier 2-year ahead forecast of inflation remaining below 3.0%. Would that be stimulative? Stimulative enough?

  6. Gravatar of John John
    19. August 2011 at 13:31


    You know I agree with you about the need to deregulate. I feel strongly that any attempts to deal with this crisis should push in the direction of economic freedom and away from central planning. Besides deregulation, another plan that could swiftly end the crisis would be a multi-year income tax holiday. It would create incredible incentives to work and hire and make the economy much more efficient as a whole. Also, once in place, it would be difficult to take back. It would give us smaller government in the future.

  7. Gravatar of JimP JimP
    19. August 2011 at 13:34

    An interesting article on who the S&P people are that made the downgrade decision – and why they might have done so:

    [A]fter the market close on Friday August 5th, we received word that S&P CEO Deven Sharma had taken control of the ratings agency and personally led the push for a U.S. downgrade. There is a lot of evidence that he has deliberately tried to trash the U.S. economy. Even after discovering that the S&P debt calculations were off by $2 trillion, Sharma made the decision to go ahead with the unethical downgrade. This is a guy who was a key contributor at the 2009 Bilderberg Summit that organized 120 of the world’s richest men and women to push for an end to the dollar as the global reserve currency.

    [T]hrough his writings on “competitive strategy” S&P CEO Sharma considers the United States the PROBLEM in today’s world, operating with what he implies is an unfair and reckless advantage. The brutal reality is that for “globalization” to succeed the United States must be torn asunder…

  8. Gravatar of John John
    19. August 2011 at 14:51


    And the cause of the fever is the thermometer (in this case government sanctioned rating agencies).

  9. Gravatar of Scott Sumner Scott Sumner
    19. August 2011 at 15:58

    Adam, Probably, but it’s hard to be sure until we try it. If they do so, we’ll quickly learn from the market reaction. At this point an explicit nominal target is the only policy I’d have much confidence in. But other policies like lower IOR are worth a shot.

    Andy, If the policy is expected to work then long term rates will rise. So a policy that bids them down would be expected to fail, wouldn’t it?

    Morgan, I’d love if Bernanke made that offer to Obama in private at their last meeting. But if Obama turns it down, I’d want Bernanke to do the stimulus anyway.

    Gregor, I don’t think that would work.

    Thanks JimP,

    John, Those markets sure showed a lot of confidence in S&P’s judgment, didn’t they? Rates have soared on T-bonds in response.

  10. Gravatar of Morgan Warstler Morgan Warstler
    19. August 2011 at 18:22

    A good link:

    “But too much of the debate is still around financial valuation, as opposed to the underlying intrinsic value of the best of Silicon Valley’s new companies. My own theory is that we are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy.”

    Ten years from now you will all be finally ADMITTING the effect of FREE on the “theory” of Macro.

    As in, ANY AND ALL price supports of any kind must hunted down and killed in order to grow your economy.

    We’ll use a NGDP level target of 2%, and we’ll race to deflate prices at every possible step.

    We’ve got to meet China in the middle.

  11. Gravatar of jc jc
    19. August 2011 at 20:52

    Also you and your blog were mentioned on todays Left Right and Center by KCRW by a guest host from the weekly standard.

  12. Gravatar of james in london james in london
    20. August 2011 at 04:07

    “Mentions David Beckworth and me” (not “I”). Clue to remembering the rule: See how it sounds with out the other fella.

  13. Gravatar of Andy Harless Andy Harless
    20. August 2011 at 06:19

    If the policy is expected to work then long term rates will rise. So a policy that bids them down would be expected to fail, wouldn’t it?

    There’s a couple of problems with this logic. First of all, it’s not necessarily true that “long term rates will rise.” What you can say is that private sector demand for long-term bonds, at any given interest rate, will decline. Ceteris paribus, this would mean that interest rates rise. However, since the Fed’s demand for long-term bonds is increasing, it may be sufficient to offset the effect of changes in private sector demand. Now this wouldn’t be true in a world of homogeneous agents, because private sector demand for long-term bonds would simply disappear below the interest rate consistent with expectations. However, agents are heterogeneous, and many will still be willing to hold bonds even at yields that are inconsistent with the average agent’s expectations. So it’s possible that rates would decline in spite of a successful policy. This possibility should be clear from examining the late 40’s and early 50’s, during which the Fed was pegging bond yields. The expectation of inflation was not sufficient to prevent the Fed from pegging yields at a level too low to be consistent with that inflation.

    Second, “a policy that bids them down” doesn’t necessarily imply that yields will ultimately be lower. It’s partly a question of semantics: when I talk about bidding down yields, I mean a policy that, given a certain private sector demand curve for bonds, would result in lower yields. In my terminology, since this policy can also result in a change in expectations and therefore a shift in the private sector demand curve, bidding down yields can result in yields going up. But even if you define bidding down yields such that yields actually necessarily go down, this decline in yields can be temporary. As we saw with QE2, yields fell as the policy was being anticipated in the bond market, but as people came to appreciate the implications, expectations changed, and yields rose.

  14. Gravatar of Andy Harless Andy Harless
    20. August 2011 at 06:29

    Maybe our problem is just with the semantics of “operation twist.” I would agree that literally “twisting” the yield curve would not be a likely characteristic of a good monetary policy. But to the extent that “operation twist” merely refers to any sort of sterilized LSAP’s, I think it is a good idea (at least within the space of ideas that the Fed is likely to be considering). Are you against sterilized LSAP’s? And if so, why?

  15. Gravatar of John John
    20. August 2011 at 07:48

    I can’t see the point in getting upset at the ratings agencies. Rating bonds is always a subjective judgement call and ultimately markets consider the input of ratings agencies and continue what they were doing. It’s not that the ratings agencies know a bunch of stuff other people don’t.

  16. Gravatar of Scott Sumner Scott Sumner
    20. August 2011 at 14:06

    Morgan, Sounds nice.

    JC, Thanks for the tip.

    James, I’ll try to remember, but I’m absolutely horrible at grammar. My brain is not wired for words. Only numbers and images and abstract models.

    I agree that lower yields are possible (heterogeneous agents), I just think that outcome is unlikely. But that doesn’t mean I oppose buying lots of long term bonds. I would do so with the (publicly expressed) hope of raising yields. I might even say “we’ll keep buying long term bonds till the yield hits 5%–or we run out of bonds to buy.”

    If by “sterilized” you mean purchases that don’t raise the base, then yes, I am opposed. The reason is that I don’t think it would work, and it would (falsely) discredit monetary stimulus. We need to do more than that, so let’s not waste a lot of political capital on something that will discredit monetary stimulus. That even happened to some extent with QE2, although at least in that case the market response indicated it helped compared to the no-QE alternative.

    John, It’s not so much that I hate ratings agencies, I just don’t see much value added–especially for sovereign debt.

  17. Gravatar of Andy Harless Andy Harless
    21. August 2011 at 08:29

    Why don’t you think sterilized LSAP’s will work? Given that the Fed’s procedures prevent it from forcing currency on people, monetary policy operations in general consist of swapping assets that are closer substitutes for currency with those that are less close substitutes. Historically, when short-term interest rates have been significantly above zero, zero-yielding bank reserves have been a closer substitute for currency than are T-bills, so traditional OMO’s consisted in swapping between these two types of assets. Now we have very-low-yielding bank reserves, which are very close substitutes for both currency and T-bills. And we have short-term T-notes that are closer substitutes for currency than are long-term T-bonds. While swapping reserves for long-term T-bonds would obviously be one way to proceed, why wouldn’t swapping short-term T-notes for long-term T-bonds have a similar effect? Naturally the effect of a given quantity of sterilized LSAP’s wouldn’t be as strong as the effect of the same quantity of unsterilized LSAP’s, but one could adjust the overall size of the operation to make them equivalent.

    For a given duration swap, the only problem I see is that long-term bonds in the Fed’s portfolio give it an incentive to avoid future inflation, which might mean that long-term bond holdings would have less impact on expected inflation than equivalent duration holdings of shorter-term assets. So if I had my druthers, I would also prefer unsterilized LSAP’s (and I’d prefer extremely large LSAP’s in the 3-5 year range rather than smaller, equivalent duration LSAP’s further out on the curve). But the political resistance to increasing the monetary base is extremely strong, and I’ll take what I can get.

  18. Gravatar of Scott Sumner Scott Sumner
    21. August 2011 at 13:44

    Andy, You might be right, it’s just with IOR I don’t see any likely Fed moves as having much direct impact on the price level–it seems to me it will almost all work through expectations. And I don’t see twist as doing much for expectations of future monetary policy (although I’d expect a slight bump upward if the Fed does more than expected.) I’ll keep an open mind on the issue, but I’m having trouble seeing whether the difference between how close a substitute T-bills are for cash, vs. how close a substitute for cash T-bonds are, will make enough difference to have a big effect. Remember that the Fed recently added $600 billion in reserves, by purchasing longer term debt. That would seem much more powerful than twist–and yet although it had some effect, the effect wasn’t nearly as powerful as we needed.

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