The black hole

Here’s the cover of this week’s Economist:

What’s at the center of the black hole?  Is it fear?  Financial contagion?  Fiscal austerity? 

Actually those are all effects of the black hole.  (BTW,  I hope I don’t even have to mention “structural problems,” surely no one believes a sudden fear of Obama regulations is causing the current financial market meltdown.)

There is only one force in the economic universe powerful enough to cause trillions in asset values to suddenly disappear, for no apparent reason.  To cause nominal incomes to plunge further and further below trend, causing massive job loses.  The center of the black hole sees itself as a force for good, helping to solve the problems it is actually creating.  Others see it as a potential source of help, which is not acting forcefully enough.  Both are wrong.  It’s the center of the black hole.  It’s pulling down the things we see disappear over the event horizon.  But we can’t see it, and hence most of us don’t understand the problem.  It’s the only force capable of determining NGDP growth over time.  It’s the force that several decades ago decreed that henceforth NGDP will grow at about 5%, not 11% or 3%.  It said “let there be 2% inflation.”  And the force saw the 2% inflation, and saw that it was good.  Only one force in the universe could pick a 2% inflation rate out of thin air, and make it happen.  Is it God?  No, it’s much more powerful than that.  And since mid-2008 the force has decided that 1.4% annual NGDP growth is good enough.  Which means ever more asset values and ever more jobs will disappear over the event horizon.



35 Responses to “The black hole”

  1. Gravatar of Dontwanttogivemyname Dontwanttogivemyname
    4. October 2011 at 10:55

    “surely no one believes a sudden fear of Obama regulations is causing the current financial market meltdown.”

    I was at an event last week with an educated large business CEO, very large GOP donor, well connected to other large GOP donors. He told me in no uncertain terms that he definitely believes it. “The market is horrified because we know Obama really is determined to turn us into Socialist Europe.” I tried the “it’s actually the Fed’s fault” argument on him and he gave basically a Rick Perry answer.

  2. Gravatar of John John
    4. October 2011 at 10:59

    The real black hole is the danger that governments backstop financial companies, central banks backstop governments, and the currency is the only thing left backstopping central banks. If more governments in Europe go down, the ECB and Fed will intervene and put the EUR and USD on the line.

    The second danger is that a persistent bailout mentality continually rewards inefficiency and punishes savings leading to a squandering of productive capacity over time.

  3. Gravatar of Scott Sumner Scott Sumner
    4. October 2011 at 11:23

    Dont, There is no limit to the extent to which people can be blinded by ideology. Look at the Chinese Cultural Revolution. I also oppose big government and over-regulation. But the fact is that markets are plunging even as the prospects of Obama being re-elected fade away. LBJ was far more of a big government guy than Obama, and millions of jobs were created during the Johnson boom. That guy’s ideas are just nuts.

    John, If that was the danger we’d be seeing hyperinflation, and stocks would be soaring. The markets are more worried about deflation. Don’t assume the markets care about what you care about–look at what they are actually telling us.

  4. Gravatar of StatsGuy StatsGuy
    4. October 2011 at 11:52

    Gold got crushed again today after a false start. West Texas Crude is at $75. Brent, however, has been incredibly stubborn. It’s hovering 5 cents above $100. I’m guessing when it cuts below 100, it will dive more quickly, and that will give the Fed the room it (thinks it) needs to begin to soften its stance on monetary policy. (Not that I’ve invested in alignment with my expectations – I started shifting cash into stocks a month ago (early)… will probably move a bit more soon, but overall I’d have been better off if avoided investing altogether over the years – as would most people my age)

    Also, Trichet is gone at the end of this month. GONE GONE GONE. And Hoenig already gone, so it’s a twofer. Hah hah. I will buy you a beer to celebrate. You get to Moody Street often? Anyone else in Waltham area at the end of this month? I’ll buy a round, Brit style.

    Draghi is from Italy, and so there’s an outside chance he’s a bit more balanced in his outlook. It’s amazing just how much Trichet was like his gold-loving French predecessors of 80 years ago.

    I have to wonder whether there are some games being played. Imagine you owned investable assets worth $2 trillion dollars. It’s not hard to do the following: Buy up Brent to keep oil prices high (it’s a thin and inelastic market), then buy a massive Put (or sell short) on every stock market in the world. When oil price inflation forces the world central banks to move to tight money (which simply requires that they be paralyzed due to the overwhelming deleveraging that is occurring), then you cover the stocks and sell the oil.

  5. Gravatar of StatsGuy StatsGuy
    4. October 2011 at 12:11

    I wrote too soon – oil just decoupled from stocks today, dropping below 100, stocks reversed, gold still down. I’m guessing we will see a sharp move down in oil over the next several weeks, followed by increasing talk of QE3 and reductions in headline inflation. With Trichet’s last meeting almost over, wherein he will refuse to drop rates just so he can finish out his term with his honor (idiocy?) intact, stage will be set for Draghi to drop rates as his first move, and rumors will begin circulating about QE3 for real, which may become reality late this year or early next. But, Brent still needs to come down to 70-80. Wow, it was stubborn, holding onto 100.

  6. Gravatar of MikeDC MikeDC
    4. October 2011 at 12:16

    Scott, have you ever addressed John Goodman’s argument that Obamacare will effectively add about $6/hr to the cost of unskilled labor?

    Worse still, it’s $6/hr that can’t be offset by monetary policy since it’s real compensation rather than a nominal price floor.

    Yes, I think AD and monetary policy are important, but that’s an incredibly massive structural change ~ basically an 80% increase in the minimum wage.

  7. Gravatar of pct pct
    4. October 2011 at 12:29


    You must know more about oil markets than I do. I don’t understand how it is technically possible for WTI to decouple from Brent. Aren’t they relatively interchangeable? Why is there not an obvious arbitrage opportunity?

    Re end of month: Watch City Brewing. Oct 29. A toast to Trichet’s departure.

  8. Gravatar of pct pct
    4. October 2011 at 12:35


    At the center of the black hole is a superdense collapsar of Conventional Wisdom. POTUS and everyone else but a few eccentrics know the Fed has “shot its wad” and is helpless at the zero bound.

  9. Gravatar of John John
    4. October 2011 at 12:40


    Even granted that market prices represent an efficient aggregation of all available information and the responses to that information, markets can still get blindsided. I actually think that economists should try to be more farsighted about potential dangers than the average guy.

  10. Gravatar of Cthorm Cthorm
    4. October 2011 at 12:52


    WTI and Brent are not the same. WTI is “light sweet crude” with very low sulfur concentrations. Brent has a higher sulfur content, but is more plentiful and widely traded internationally. WTI is much more limited in use, primarily concentrated in North America.

  11. Gravatar of Morgan Warstler Morgan Warstler
    4. October 2011 at 13:10


    Obamacare is done. EVn NOW, Scott finally shifts a bit more saying “even as the prospects of Obama being re-elected fade away”

    And when it is done, the upside will be immense. It is IMPERATIVE that the left KNOW they are not allowed to drive.

    This is Ezra:

    This is Matty:

    BOTH these tools are going to learn once and for all, the guys who PAY the bills, RUN the show.

    And the left, and their aggregated aggrieved are going to learn to PROVE in every conversation how frugal they are being with the customer’s money.

    That will be change we can believe in… a public sector desperate to prove their frugality.

    And under those conditions, we can provide some kind of “pretty good” care for the have-nots.

    It all works out very nicely.

  12. Gravatar of Morgan Warstler Morgan Warstler
    4. October 2011 at 13:31


    Here’s a good example:

    FINALLY, a green policy I can get behind. How long did that take???

    It took forever to force the hippies into doing it how the guys paying want to do it.

    “You think there is a greenhouse effect? great lets see if we can control mother nature, and make sure we the businessmen stay in charge of this planet.”

    It’s a simple rule really, anytime the left wants to get some action taken, they just create a policy that doesn’t benefit the left relative to the guys paying.

  13. Gravatar of Cthorm Cthorm
    4. October 2011 at 14:08


    A bit off topic, but I just rediscovered an excellent quote (from Nicholas von Hoffman to Milton Friedman) that succinctly shows your policy prescriptions as the successors to Friedman’s Monetarism.

  14. Gravatar of Silas Barta Silas Barta
    4. October 2011 at 15:26

    Am I the only one who wishes Morgan_Warstler would stop cluttering the comments section? And no, it’s not because I disagree with him.

    Can we vote him off the blog or something?

  15. Gravatar of Benjamin Cole Benjamin Cole
    4. October 2011 at 15:35

    You wonder why the Bank of Japan did nothing for 20 years? It seemed inexplicable, it seemed self-destructive…well, now I am beginning to understand.

  16. Gravatar of StatsGuy StatsGuy
    4. October 2011 at 16:39

    Watch City Brewing. Oct 29.

    You’re on – let’s see if we can get Scott out of the office.

  17. Gravatar of StatsGuy StatsGuy
    4. October 2011 at 17:05

    Re WTI/Brent

    The argument is that the pipeline infrastructure in Cushing Oklahoma does not allow easy shipment to zones served by Brent – they’re to some degree separate markets. Until 2007 or so, WTI was higher priced, but this reversed a few years back, and Brent has been higher priced (and considered a better barometer of world oil prices). Storage at Cushing OK is near capacity, production in the west is surging (particularly at the Bakken fields) and total US production has increased something like 25% in the past few years with more production projected to come online.

    You know, if you consider the 3 years post 2008, we had a major oil blowout and psychological crisis in the gulf, and then Fukushima, and then the wars in the mideast (and loss of 1.8 million barrels of oil per day over the summer from Libya), which was a convenient excuse for a spike in oil prices that probably had as much to do with accelerating core inflation (even after QEII ended) than the Fed. Macondo (bp gulf) was a 50k barrel per day well, and its blowout cut off development of several similar wells for a couple years.

    Gives some perspective on the notions of black swans and externalities. Doesn’t excuse the Fed, though.

  18. Gravatar of Scott Sumner Caricatures Himself Scott Sumner Caricatures Himself
    4. October 2011 at 17:15

    […] in a recent post Scott continues to astound me. Now, not only does Scott still maintain that Bernanke has been […]

  19. Gravatar of Managing monetary policy ain’t like dusting crops, boy. Without precise calculations, we’d fly right through a star, or bounce to close to a supernova, and that would end your trip real quick, wouldn’t it. « Free Radical Managing monetary policy ain’t like dusting crops, boy. Without precise calculations, we’d fly right through a star, or bounce to close to a supernova, and that would end your trip real quick, wouldn’t it. « Free Radical
    4. October 2011 at 17:20

    […] From Scott Sumner. Like this:LikeBe the first to like this post. Categories: Uncategorized Comments (0) Trackbacks (0) Leave a comment Trackback […]

  20. Gravatar of Claudia Sahm Claudia Sahm
    4. October 2011 at 17:34

    Interesting post (+1 on the graphics).

    You got me thinking about two questions:

    1. What stops an increase in inflation target from 2 percent to say 5 percent (which I should boost NGDP, right?) from creating stagflation (like the kind Chairman Volcker fought)?

    2. Couldn’t overconfidence about income prospects (as argued by Tyler Cowen in TGS) and short-term thinking (as argued by Sheila Bair, be the spark of this financial crisis/recession/ongoing malaise and not the Fed.

    BTW: I personally like the Hoover vacuum analogy better for the Fed. As in “hoovering up” all kinds of information (with varying signal-to-noise ratios) and trying to make sense of it all. There are a lot of people who just work (hard) at trying to figure out what’s going on in the economy and financial markets. The question of the spark (and not just the symptoms) is a very important one.

  21. Gravatar of Claudia Sahm Claudia Sahm
    4. October 2011 at 17:37

    Sorry, still have not learned how to properly post web links. The Bair article is at:

  22. Gravatar of Morgan Warstler Morgan Warstler
    4. October 2011 at 17:51

    Silas, wimpy libertarians intellectualizing against theft bore me.

  23. Gravatar of Scott Sumner Scott Sumner
    4. October 2011 at 18:32

    I’m running late and will answer these tomorrow night–but I think I can do Watch City Brewing on Oct. 29th–give me a reminder as we get closer.

    BTW, Are US gas prices a linear combo of WTI and Brent, or just Brent. If a combo, what proportions?

  24. Gravatar of Edwin A. Edwin A.
    4. October 2011 at 21:18

    “surely no one believes a sudden fear of Obama regulations is causing the current financial market meltdown.”

    The regime uncertainty multiplier is zero when the Fed is targeting inflation!

  25. Gravatar of Steve Steve
    4. October 2011 at 22:07

    “BTW, Are US gas prices a linear combo of WTI and Brent, or just Brent. If a combo, what proportions?”

    The short answer: Brent

    The medium answer: it depends on where you are relative to infrastructure. Partially WTI if you live in the middle of the country, but even there some gas has to be imported from coastal refineries so Brent is often the marginal price setter. Most refineries are on the coasts.

    Also, it’s worth noting that futures contracts are traded all the way out to 2019. In 2019, Brent is $85 and WTI is $88. Since Brent is the marginal price setter for most consumers right now, that implies 2% annual DEFLATION in oil products over the next 8 years. People around here still believe in utilizing market expectations, right?

  26. Gravatar of Britmouse Britmouse
    5. October 2011 at 01:26

    Epic Fail: revisions to UK NGDP out today. NGDP growth over four quarters to 11Q2 has been 3.0%. Real growth 0.5%.

    GDP data has revised back to 1997 using new deflators (so affecting the parts of nominal spending data which is extrapolated from the volume-only surveys + deflator guesswork).

    In the new data, NGDP was falling from 08Q2 (previously only falling from 08Q3).—qna-2011-q2.html

    Second sheet, YBHA column for NGDP:

    I tried looking for good news in here, but it is all depressing.

  27. Gravatar of StatsGuy StatsGuy
    5. October 2011 at 03:32

    I suppose oil prices should be a linear combo, but I don’t know they are. Here’s a map of the domestic pipeline infrastructure:

    More or less covers something similar to the Mississippi river basin. Refineries are clustered along this infrastructure, in the gulf coast, and on the eastern and western seaboards. Brent, arguably, has more influence on the seaboards, although I’m sure at some price difference it makes sense to conduct physical arbitrage by shipping/trucking from one location to another.

    EIA has a map of the US refineries if you want to see how they are clustered (but can’t post a second link).

  28. Gravatar of Gabe Gabe
    5. October 2011 at 08:32

    Refinery utilization is another factor and then state by state regulations on what % of what additives have to be mixed in with the gas are also a big factor along with the state by state tax differences.

  29. Gravatar of Gabe Gabe
    5. October 2011 at 08:35

    Refineries can also shift the percentages of a barrel of crude that gets turned into a dozen or so different categories, so the shifting of prices of these different outputs can have a influence on the price of gasoline.

  30. Gravatar of Neal Neal
    5. October 2011 at 10:52

    Nitpick: A stationary observer at infinity in a Schwarzschild spacetime never sees any objects falling into a black hole cross the event horizon. 🙂

  31. Gravatar of Scott Sumner Scott Sumner
    5. October 2011 at 17:23

    Statsguy, Is the oil market really that thin? And wouldn’t we see those positions unwind, if they were artificial?

    MikeDC, I don’t think that number is right, but I’m not an expert. It certainly isn’t true in Massachusetts, where we already have Obamacare, and a relatively low unemployment rate.

    pct, There is a pipeline bottleneck in Oklahoma, I think.

    John, I trust the markets far more than I trust the government, far more than I trust you, and far more than I trust myself.

    Cthorm, What is the quote?

    Silas, No you aren’t the only one.

    No, you can’t vote him off. Morgan bought me off by sending me $100,000,000,000 in a plain white envelope. (True story)

    Claudia, I don’t agree that Volcker fought against stagflation. He fought against inflation. Reagan fought against stagnation. In combination, they killed stagflation. If Obama produced low real growth, then 5% NGDP might give you 4% inflation. The Fed can’t solve that problem, but it’s NGDP growth that matters, not inflation, which is a meaningless number.

    Claudia, The factors Tyler talks about cannot explain the recession, but they can help understand the financial crisis. People don’t take long vacations because they are poorer, they work harder. Unemployment is caused by low NGDP, not falling asset values.

    I don’t think Bair understands how much of the housing crisis was caused by falling NGDP. But I agree with much of her critique of our financial system.

    Edwin, Don’t know if you are joking, but the issue isn’t the multiplier, it’s that nothing happened in the last month (regulation wise.)

    Steve, Thanks, the oil numbers are scary–as they suggest a weak economy to me. On the other hand; “never reason from a price change”

    Britmouse, Thanks.

    What in the world is a volume only survey plus deflator estimate? Do apples and jet planes each count as one unit of volume? What am I missing?

    Statsguy and Gabe, Thanks for the info. In other words . . . it’s complicated.

    Neal, I was assuming a moving observer at infinity in a Schwarzschild spacetime. 🙂

    Looks like the UK has a bit of stagflation, but perhaps that’s a temporary VAT effect.

  32. Gravatar of Claudia Sahm Claudia Sahm
    6. October 2011 at 02:54

    The connection between the financial crisis and the recession might be close. Mian and Sufi show an empirical correlation between areas in the US that levered up in the boom as the ones with the earliest, sharpest entries in to the recession. Leverage amplifies shocks (good and bad)…not a new lesson from finance. So maybe overconfidence or ignoring the future got people to lever up and then they got slammed. Can a jump in NGDP really heal a crisis of confidence? Would it get the protesters off Wall Street?

  33. Gravatar of Claudia Sahm Claudia Sahm
    6. October 2011 at 02:56

    Thanks for the stagflation discussion. I am brushing up on economic recent history for a research project on sentiment. Your response was helpful on many dimensions.

  34. Gravatar of Scott Sumner Scott Sumner
    6. October 2011 at 15:53

    Claudia, The regional correlations you cite actually strongly support my view. We know the subprime states lost lots of residential construction jobs in 2006-08, and yet the unemployment rate nationally remained low. Only when NGDP fell and the job losses spread to services and manufacturing and commercial construction did we suffer high unemployment.

  35. Gravatar of Edwin A. Edwin A.
    8. October 2011 at 18:41

    Yes, it was supposed to be a lame joke. Nevermind then. 🙂

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